Fairfax 2024

[vinod1]

A different take on "If there is one cockroach..." is "if you find a few gold nuggets, you have probably run into a gold mine".

 

I think the more likely mistake we are likely to make is sell too soon. If it goes up to 1.5x tomorrow, selling out I think would likely be a mistake. 

 

The slower it revalues upward the better off we might be. I firewalled off a big portion of FFH into accounts just with very long hold periods that I would not need to touch. Active part with shorter hold periods moved to different account.

 

Vinod

[Gregmal]

The stock should be trading at ~$1300 USD with that figure increasing about $150 per share per year. Until it’s there, who cares about the short term minutiae?

[nwoodman]

21 minutes ago, vinod1 said:

I think the more likely mistake we are likely to make is sell too soon. If it goes up to 1.5x tomorrow, selling out I think would likely be a mistake. 

 

The slower it revalues upward the better off we might be.

This.  I want any forced decision making deferred as long as possible.  The current price +/- 10%,  growing around 1% per month , for the next 10 years or so, is fine.  If it turns out to be 0.25%/week even better. 

[MMM20]

On 2/17/2024 at 5:02 PM, StubbleJumper said:

I would say that what you are describing is the business.  The actual asset is the statutory capital that the insurance company maintains on its balance sheet, and it is that asset which enables the insurance company to write policies.  That definitely is an asset.  The float itself and the financing differential is the mechanism to generate profit from that statutory capital.  If you want to argue that $100m of statutory capital is actually worth $150m or $200m as long as the business is a going-concern, then I guess that's okay as it's akin to arguing that an insurer should trade above book.

Just wanted to circle back to this after ruminating on it excessively . I came to FFH from a “publicly traded investment vehicle” sort of lens and that’s still my primary framework. My sense after following the company for a few years is that for others with a similar perspective, the capitalized value of the structurally cheap borrowing gets overlooked - lost in the shuffle in the analysis despite being a big chunk of intrinsic value. Whichever way you approach it, it’s hard to see how fair value isn’t at least 30% higher and probably more like 50-100% higher - if not even well beyond that as @Hamburg Investor did a good job laying out.  
 

Edited February 21 by MMM20

[dartmonkey]

2 hours ago, MMM20 said:

My sense after following the company for a few years is that for others with a similar perspective, the capitalized value of the structurally cheap borrowing gets overlooked - lost in the shuffle in the analysis despite being a big chunk of intrinsic value. 

My feelings exactly. The difference between Berkshire's 1.5x book and Fairfax's 1.1x book is not so immense, until you consider that Fairfax has a huge float position and Berkshire has a relatively small one (about 130% of Fairfax's market cap, and 20% of Berkshire's.) Siince by definition float contributes nothing to book (it is essentially future insurance liabilities, along with present cash that can be invested), book is only part of the picture for Fairfax. Because of the huge float position, Fairfax is able to obtain a much higher earnings yield, which is why Fairfax is trading at an earnings yield of about 15% and Berkshire is more like 5% (when you back out the stock holdings and their income).

Edited February 21 by dartmonkey

[SafetyinNumbers]

6 minutes ago, dartmonkey said:

My feelings exactly. The difference between Berkshire's 1.5x book and Fairfax's 1.1x book is not so immense, until you consider that Fairfax has a huge float position and Berkshire has a relatively small one (about 130% of Fairfax's market cap, and 20% of Berkshire's.) Siince by definition float contributes nothing to book (it is essentially future insurance liabilities, along with present cash that can be invested), book is only part of the picture for Fairfax. Because of the huge float position, Fairfax is able to obtain a much higher earnings yield, which is why Fairfax is trading at an earnings yield of about 15% and Berkshire is more like 15% (when you back out the stock holdings and their income).

You both make great points.

 

We all have different assessments of intrinsic value but ultimately passive and active investors benchmarked to the S&P/TSX Composite and S&P/TSX 60 will determine where in the IV range we trade. I have personally made the mistake of selling too soon in a rerating more times than I can count because I was afraid of a drawdown. I’m determined not to let that happen again but I assume it will become more difficult once we are in the IV range especially for shares held in registered accounts where there are no tax consequences.
 

Currently, it’s easy to own or buy FFH given the set up. My current strategy is to wait until my forward ROE estimate is less than 10% to sell any. Because as long as it’s higher than that, FFH’s weight probably keeps going up in the index drawing in more institutional buyers.

[MMM20]

1 hour ago, dartmonkey said:

My feelings exactly. The difference between Berkshire's 1.5x book and Fairfax's 1.1x book is not so immense, until you consider that Fairfax has a huge float position and Berkshire has a relatively small one (about 130% of Fairfax's market cap, and 20% of Berkshire's.) Siince by definition float contributes nothing to book (it is essentially future insurance liabilities, along with present cash that can be invested), book is only part of the picture for Fairfax. Because of the huge float position, Fairfax is able to obtain a much higher earnings yield, which is why Fairfax is trading at an earnings yield of about 15% and Berkshire is more like 15% (when you back out the stock holdings and their income).

Right and by extension the best comp for FFH might not be BRK, MKL, WRB or IFC but actually an old school, early 2000s era Yale-backed LBO fund buying private businesses at like ~3x EBITDA with ~50% ring-fenced leverage on each position. That’s a different sort of structurally advantageous leverage profile but probably a similar risk/reward to Fairfax’s nowadays. I’m not sure how many people think about it that way.

 

Edited February 21 by MMM20

[gfp]

23 minutes ago, SafetyinNumbers said:

I’m determined not to let that happen again but I assume it will become more difficult once we are in the IV range especially for shares held in registered accounts where there are no tax consequences.
 

Currently, it’s easy to own or buy FFH given the set up. My current strategy is to wait until my forward ROE estimate is less than 10% to sell any.

 

The best selling decisions are usually when a new opportunity comes into your life that is so good you start scouring the couch cushions for more capital to buy more.  That's when your mature investments trading around intrinsic value get trimmed.  It doesn't have to be all or nothing of course.  Until that happens or something changes with the firm just let it ride and enjoy the tax deferral.

 

A great lesson from Buffett's partnership days when he actually had more ideas than capital - he was willing to sell out of undervalued positions quickly if another idea came along that was juicer.

[ValueMaven]

No one mentioned that FFH just received (2/15) $150M from Blackberry for the convert note they issued.  Prem also resigned from the board.

[jbwent63]

9 minutes ago, ValueMaven said:

No one mentioned that FFH just received (2/15) $150M from Blackberry for the convert note they issued.  Prem also resigned from the board.

I was just looking at the filing. Gurufocus states that FFH also acquired additional BB shares which appears to be false. It looks like one of the Watsa holding companies (The Second 810 Holding Co) acquired 129,000 shares and then Prem was awarded 296,571 shares upon leaving the board. I might be wrong but I don't think FFH has more BB shares and the note was repaid.

[Munger_Disciple]

1 hour ago, gfp said:

 

The best selling decisions are usually when a new opportunity comes into your life that is so good you start scouring the couch cushions for more capital to buy more.  That's when your mature investments trading around intrinsic value get trimmed.  It doesn't have to be all or nothing of course.  Until that happens or something changes with the firm just let it ride and enjoy the tax deferral.

 

A great lesson from Buffett's partnership days when he actually had more ideas than capital - he was willing to sell out of undervalued positions quickly if another idea came along that was juicer.

 

The most important thing to remember is that the alternative has to be far superior to an existing good holding because (1) tax drag when selling the current position takes away a good chunk of 2-3% per year assuming one is holding the new investment for a decade and more if holding for a shorter period, and (2) there is a possibility one doesn't understand the new position as well as the prior holding, so this creates additional risk. 

[gfp]

On 2/8/2024 at 10:16 AM, gfp said:

Might be lost in the news of the morning, but Prem resigned from the Blackberry board of directors today (as of 2/15)

 

"in connection with the Company's repayment at maturity of its $150 million principal amount convertible debentures held by Fairfax"

 

1 hour ago, ValueMaven said:

No one mentioned that FFH just received (2/15) $150M from Blackberry for the convert note they issued.  Prem also resigned from the board.

 

I mentioned it back when it was announced but there was a lot other stuff going on that morning.

[SafetyinNumbers]

Fairfax has quite a few catalysts over the next 6 months that could help increase Social Value or increase Intrinsic Value. 
 

I use the formula Market Value = Intrinsic Value + Social Value. As I noted above, I think Fairfax trades well below its IV range implying that its SV must be negative.
 

I thought it would be interesting if we could brainstorm the upcoming catalysts and what impact they might have on either SV or IV with as much or as little specificity as desired. 

 

I’ll start and please add your own.

 

1. Annual Report and Shareholder’s Letter (early March?) - SV impact could be big. Fairfax will restate its 2022 financials when they file which will repopulate every database quants use to analyze the company. IFRS 17 has smoothed out earnings which quants and the casual quality investor will appreciate. Prem also writes a great letter with lots of tidbits to appreciate the value of some of Fairfax’s most opaque holdings. That might convince investors to pay more increasing SV.

 

2. Eurobank earnings and dividend announcement (mid March) - This could impact both SV and IV. EUROB is worth about $100/sh to Fairfax and our share of dividends could be $5/share. The SV impact could come from investors appreciating dividend income more than our share of income from associates. Eurobank stock could also rise as yield buyers are one of the few investor groups willing to buy on upticks. 
 

3. I have more but my train is getting into the station. Please add yours. Thanks!

[Hamburg Investor]

has no longer been lagging behind the market since 2011, but is ahead of it

On 2/20/2024 at 10:57 AM, jeyfox said:

Fairfax did a great job on improving the combined ratio since 2004 on all of its insurance entities.

 

Wow, that's a great work!

Attached please find a screenshot and an .xls sheet. Maybe it finds your interest?

The question I wanted to find an answer to: How has Fairfax CR developed over the years? What is the trend?

In the centre you'll find a comparison of FFH to the US PC market and to Markel (on a 5 year average basis):

• In the years 2001 to 2011 Fairfax summed up combined ratio was 30 points worse than the markets. Since than it performed 38 points better than the market. It's remarkable how harsh and abrupt this improvement happened.
• In principle the same development can be watched when comparing FFHs 5 year average CR against that of Markel. Fairfax historically performed poorly from the beginning. The worst 5 year performance against MKL (excluding 1992 and 1993) can be found in 2011: On average FFHs CR was 8.1% higher than MKLs. Than from year to year it goes down:
  2011: -8.1%
  2012: -7.5%
  2013: -4.4%
  2014: -2.6%
  2015: -1.5%
  2016: +0.8%
  2017: +1.1%.
  
  Since than FFHs lost 2.5% but seems to stay in a range having a CR 1% to 2% above MKL over 5 year timeframes.
• There's one exception: After 2001 until 2004 FFHs CR ratio improved. My best guess is, that FFH changed its insurance portfolio after 9/11; but I am pretty sure others here know better than me.

What are the effects? What is the overall message?

1. Since 2011, Fairfax has developed from a very unprofitable insurance company into a very profitable one. The intrinsic value of the insurance business has thus increased enormously; not only because of the premium growth. But above all because of an enormous increase in profitability.
2. It is often pointed out that lower interest rates mean that all insurers have to work more profitably; so FFHs CR ratio getting better would not indicate an improvement in the business. This seems logical, but can't neither be watched at Markel nor at the US PC Insurance industry. Which I find astonishing; does anybody have better numbers for comparison? Have I taken the wrong numbers?
3. What is evident, however: Fairfax caught up with Markel from 2011 to 2017 and has barely slowed down since then.
4. What is evident, too: Fairfax has no longer been lagging behind the market since 2011, but is ahead of it. Until 2011 FFH was around 2.5% worse than the US PC Insurance market per year on average (which is not perfect as an "index" to compare FFH with; but what would be better, where we get numbers easily?! I have been searching for a long time and would be grateful for any tips). Since 2011 FFH is 3% better on average than this index. That's a differential of 5.5% per year pre-2011 to after 2011.

Sorry, if the way I show numbers is not like you do in the US. In Germany we sometimes use "," where you use ".", we use "+" (positive number) and "-" (negative number). etc. On top of that some numbers I use might be wrongt (e. g. the CR change years after they are presented first time; so I tried to find the best I could get). I don't think better CR numbers would change the general direction; I am a bit unsure regarding a better comparison than the US PC market, as I am not an insurance guy.

@jeyfox: If you want to add some numbers to your excel, please feel free. Maybe the consolidated CR would fit? And would be intersting to see the 2023 update.

 

 

20240221_CR_VergleichFFH_MKL_BRK_Zahlen.xlsx

Edited February 22 by Hamburg Investor
there was a tipper; some improvements in textlayout, so it can be consumed better..

[Phoenix01]

40 minutes ago, Hamburg Investor said:

has no longer been lagging behind the market since 2011, but is ahead of it

Wow, that's a great work!

Attached please find a screenshot and an .xls sheet. Maybe it finds your interest?

The question I wanted to find an answer to: How has Fairfax CR developed over the years? What is the trend?

In the centre you'll find a comparison of FFH to the US PC market and to Markel (on a 5 year average basis):

• In the years 2001 to 2011 Fairfax summed up combined ratio was 30 points worse than the markets. Since than it performed 38 points better than the market. It's remarkable how harsh and abrupt this improvement happened.
• In principle the same development can be watched when comparing FFHs 5 year average CR against that of Markel. Fairfax historically performed poorly from the beginning. The worst 5 year performance against MKL (excluding 1992 and 1993) can be found in 2011: On average FFHs CR was 8.1% higher than MKLs. Than from year to year it goes down: -8.1% -7.5% -4.4% -2.6% -1.5% +0.8% 1.1%. Since than FFHs lost 2.5% but seems to stay in a range having a CR 1% to 2% above MKL over 5 year timeframes.
• There's one exception: After 2011 until 2004 FFHs. CR ratio improved. M y best guess is, that FFH changed its insurance portfolio after 9/11; but I am pretty sure others here know better than me.

What are the effects? What is the overall message?

1. Since 2011, Fairfax has developed from a very unprofitable insurance company into a very profitable one. The intrinsic value of the insurance business has thus increased enormously; not only because of the premium growth. But above all because of an enormous increase in profitability.
2. It is often pointed out that lower interest rates mean that all insurers have to work more profitably; so FFHs CR ratio getting better would not indicate an improvement in the business. This seems logical, but can't neither be watched at Markel nor at the US PC Insurance industry. Which I find astonishing; does anybody have better numbers for comparison? Have I taken the wrong numbers?
3. What is evident, however: Fairfax caught up with Markel from 2011 to 2017 and has barely slowed down since then.
4. What is evident, too: Fairfax has no longer been lagging behind the market since 2011, but is ahead of it. Until 2011 FFH was around 2.5% worse than the US PC Insurance market per year on average (which is not perfect as an "index" to compare FFH with; but what would be better, where we get numbers easily?! I have been searching for a long time and would be grateful for any tips). Since 2011 FFH is 3% better on average than this index. That's a differential of 5.5% per year pre-2011 to after 2011.

Sorry, if the way I show numbers is not like you do in the US. In Germany we sometimes use "," where you use ".", we use "+" (positive number) and "-" (negative number). etc. On top of that some numbers I use might be wrongt (e. g. the CR change years after they are presented first time; so I tried to find the best I could get). I don't think better CR numbers would change the general direction; I am a bit unsure regarding a better comparison than the US PC market, as I am not an insurance guy.

@jeyfox: If you want to add some numbers to your excel, please feel free. Maybe the consolidated CR would fit? And would be intersting to see the 2023 update.

 

 

20240221_CR_VergleichFFH_MKL_BRK_Zahlen.xlsx 16.15 kB · 1 download

Prem kept the insurance companies independent of each other prior to 2011.  When they were placed under a single leadership umbrella, they shared best practices and there was a huge improvement.  Each company remains independent, but accountable to the single leadership team.

[Phoenix01]

We all owe Andy Benard a massive amount of gratitude for his leadership in turning around the FFH insurance subs.

[Hamburg Investor]

12 hours ago, Phoenix01 said:

Prem kept the insurance companies independent of each other prior to 2011.  When they were placed under a single leadership umbrella, they shared best practices and there was a huge improvement.  Each company remains independent, but accountable to the single leadership team.

 

12 hours ago, Phoenix01 said:

We all owe Andy Benard a massive amount of gratitude for his leadership in turning around the FFH insurance subs.

I could not agree more. I just became aware of that mangement change with Andy Benard here at cobf, so this was like an important mosaic for me for getting a deeper understanding.

Regarding returns the question appears: If FFH made with, say, 5.5% worse CR that performance of the 1990ies and they had those headwind with low interest starting from 2011 - what will be the "new normal returns", when they manage to hold the quality in insurance and having much less headwind from interest rate etc. And yes, they are bigger today, so that's worse in comparison to the 1990ies, but still - to me that looks more like a tailwind and not like additional risk.

I don't think Buffett would have made that strong returns in the 1970ies and 1980ies, if interest rates and inflation were like in the low interest years of the last decade.

[SafetyinNumbers]

15 hours ago, SafetyinNumbers said:

Fairfax has quite a few catalysts over the next 6 months that could help increase Social Value or increase Intrinsic Value. 
 

I use the formula Market Value = Intrinsic Value + Social Value. As I noted above, I think Fairfax trades well below its IV range implying that its SV must be negative.
 

I thought it would be interesting if we could brainstorm the upcoming catalysts and what impact they might have on either SV or IV with as much or as little specificity as desired. 

 

I’ll start and please add your own.

 

1. Annual Report and Shareholder’s Letter (early March?) - SV impact could be big. Fairfax will restate its 2022 financials when they file which will repopulate every database quants use to analyze the company. IFRS 17 has smoothed out earnings which quants and the casual quality investor will appreciate. Prem also writes a great letter with lots of tidbits to appreciate the value of some of Fairfax’s most opaque holdings. That might convince investors to pay more increasing SV.

 

2. Eurobank earnings and dividend announcement (mid March) - This could impact both SV and IV. EUROB is worth about $100/sh to Fairfax and our share of dividends could be $5/share. The SV impact could come from investors appreciating dividend income more than our share of income from associates. Eurobank stock could also rise as yield buyers are one of the few investor groups willing to buy on upticks. 
 

3. I have more but my train is getting into the station. Please add yours. Thanks!

3. Q2 and Q3 results (May and August) - Each will likely increase BV 3-5% having a direct impact on IV. Consistent earnings helped by the smoothing of IFRS 17 might increase SV as well.

 

4. Digit IPO (H124) - The Digit IPO should allow for recognition of an additional gain in BV assuming its higher than the current mark which seems more likely than not. This would increase IV directly but also offset some of the doubt caused by the MW report thus helping SV as well. It’s not out of the question to think Digit could be bigger than FFH some day given the growth profile, perhaps the IPO, will put that in perspective.

 

5. S&P/TSX 60 add (anytime) - Passive ownership is one of the biggest drivers of SV. After all stock prices are just supply and demand. A spot might open up because of M&A or the committee decides, they don’t want to remain short FFH vs the Composite as its weight continue to increase. March and June are both live.

 

6. ?

 

 

[Cigarbutt]

13 hours ago, Hamburg Investor said:

The question I wanted to find an answer to: How has Fairfax CR developed over the years? What is the trend?
 

There's one exception: After 2011 until 2004 FFHs. CR ratio improved. M y best guess is, that FFH changed its insurance portfolio after 9/11; but I am pretty sure others here know better than me.

...the US PC Insurance market per year on average (which is not perfect as an "index" to compare FFH with; but what would be better, where we get numbers easily?! I have been searching for a long time and would be grateful for any tips). 

20240221_CR_VergleichFFH_MKL_BRK_Zahlen.xlsx 16.15 kB · 3 downloads

Do you mean from 2001 to 2004?

[gfp]

1 hour ago, SafetyinNumbers said:

The Digit IPO should allow for recognition of an additional gain in BV assuming its higher than the current mark which seems more likely than not.

 

It seems like approval for Fairfax to own a majority interest in Digit would result in their conversion of the preferred and they would then own 74% and Digit would become a consolidated subsidiary.  Currently the 49% interest in Digit is held on the books for about $130 million and is equity accounted and the preferred that could convert to another 25% ownership interest has been marked to the Sequoia Capital valuation.  Then presumably Fairfax would sell some Digit in the IPO?

 

I don't know what the accounting treatment is when a hybrid equity method / market to market ownership interest becomes consolidated but it may be a one-time adjustment to book value at the IPO event.  I don't see it continually being marked to market at Digit's share price.

 

I guess the 49% will be written up once sort of like Gulf Insurance was just treated upon consolidation.  One and done.

[Dinar]

I think BIAL will be IPOed this year, may be via Anchorage, but it should generate several billion dollars of book value increase or at least show how undervalued it is on the company's books.  

[valuesource]

Short interest on TMX actually increased slightly.  I'd also like to hear @sleepydragon's take.

 

[Viking]

How Does Fairfax’s Valuation Compare to Other P/C Insurers?

 

There are lots of methods an investor can use to value a company and its stock price. In this post, we are going to use a method called ‘relative valuation.’ We are going to try and see what we can learn about Fairfax’s current valuation by comparing the company to a group of other P/C insurers.

 

We are going to keep the analysis very top line. In terms of time-frame, we are going to use the last 5 years. This is a good length of time to get a reading on the performance of the management teams for each company. And it also smooths out the impact of large short term events like catastrophes, Covid and the big swing in interest rates.

 

Who are we going to look at?

 

Below is the list of the seven P/C insurers we will compare (listed in alphabetical order):

• AIG: the fallen star; a turnaround play today.
• Berkshire Hathaway: historically, the gold standard; now more of a conglomerate than P/C insurer. We include it for fun.
• Chubb: big, traditional insurer; international in scope.
• Fairfax Financial: a turnaround play; about 30% of investments are in equities; international in scope.
• Intact Financial: largest P/C insurer in Canada; expanding globally.
• Markel: baby Berk; US focus
• WR Berkley: traditional insurer; US focus

To state the obvious: all P/C insurance companies have unique business models. Berkshire Hathaway has not released Q4, 2023 results so for them I have used an estimate for 2023YE book value and 2023 EPS.

—————

 

The most important metric used by investors and analysts to value a P/C insurance company is book value. Yes, it has its flaws. However, it is a good place to start.

 

5-Year Change in Book Value

 

“In other words, the percentage change in book value in any given year is likely to be reasonably close to that year’s change in intrinsic value.” Warren Buffett

 

We are going to look at the change in book value for the 5-year period from Dec 31, 2018 to December 31, 2023. We have sorted the results in the table below from the best to the worst performers.

 

So which company has increased BVPS the most?

 

Fairfax Financial.

 

Fairfax has increased BV by 117% over the past 5 years, a CAGR of 16.8%.

 

Were you expecting that? I bet you weren’t expecting that.

 

The second surprise is the size of the outperformance by Fairfax over all peers. For example, Fairfax’s BV CAGR is 10% better than that achieved by Chubb - that is serious outperformance. Don’t get me wrong, Chubb is a quality company.

 

In the quote above, Warren Buffett suggests investors should use the annual change in book value as a rough approximation of the change in intrinsic value for a company. Using Buffett’s quote as a guide, I think we can safely say that Fairfax has increased intrinsic value over the past 5 years at a much faster pace than its P/C insurance peers.

 

 

Note: five of the seven companies pay a dividend (and WR Berkley has also paid special dividends).

 

Why has Fairfax’s performance been so strong?

 

The management team at Fairfax has been executing exceptionally well over the past 5 years. Especially when it comes to capital allocation. I recently wrote a long post on this topic so I am not going to repeat it here.

 

How have shareholders been rewarded?

 

5.13-Year Change in Share Price

 

We are going to look at the change in the share price for the 5.13-year period from Dec 31, 2018 to February 16, 2024. Once again, we have sorted the results in the table below from the best to the worst performers.

 

Which company has seen their share price increase the most?

 

Three companies are bunched together as the top performers - WR Berkley, Fairfax Financial and Intact Financial. Including dividends, these three companies have delivered a CAGR of around 20% to investors over each of the past 5.13 years. That is outstanding.

 

Berkshire Hathaway, Chubb and AIG can be grouped in the next performance band. Including dividends, they have delivered a CAGR of about 14% which is quite good. And Markel has been the clear laggard with a CAGR of about 7%.

 

Another key takeaway is the performance of the group as a whole has been very good. Six of the seven companies listed have delivered a very good return to investors over the past 5.13 years. For reference, over the same 5.13 years, the S&P500 increased 100%, which was a CAGR of 14.4% (not including dividends).

 

 

Now let’s put book value and share price together and see what we can learn about valuation.

 

Current Price to Book Value (P/BV)

 

At 2.8, Both Intact and WR Berkley trade at the highest P/BV multiple. This is not surprising given they also saw the biggest increases in share price over the past 5 years.

 

Does anything in the chart below jump out?

 

Yes. Fairfax looks out of place.

 

Fairfax has been compounding book value at the highest rate over the past 5 years. So how can it also be trading at the lowest P/BV (i.e. the cheapest) valuation? That makes no sense.

 

 

Let’s look at another valuation measure and see what it tells us.

 

Price to Earnings Ratio (PE)

 

To keep things simple, I used reported EPS from 2023 for each of our seven companies. For Berkshire, who has not yet reported, I took the estimate from Yahoo Finance. For Intact Financial, who reported restructuring charges in Q4, I was generous and used the 2023 number in Yahoo Finance (which looks like it nets out the restructuring charges).

 

Does anything in the chart below jump out?

 

Yes. Fairfax looks out of place (again).

 

Fairfax has been compounding book value at the highest rate over the past 5 years. So how can it also be trading at the lowest PE (i.e. the cheapest) valuation? That makes no sense.

 

 

So what can explain the disconnect between Fairfax’s past performance (top-tier) and its valuation (bottom tier)?

 

To be fair, as we learned earlier in this post, Fairfax’s stock price has been one of the top performers over the past 5 years. So investors clearly have been warming to the company. However, even with the strong performance in recent years, the stock’s valuation continues to be at the bottom when compared to peers. Why is that?

 

Lack of understanding of the company.

 

Fairfax is still not a well understood company. Few investors (or analysts) have followed it in recent years. Yes, this is changing. But it will take time for people to get back up to speed with the company.

 

Fairfax is also a turnaround. And turnarounds are exceedingly hard to value - especially at the point when their business results hockey stick and turn higher.

 

The interesting thing with Fairfax though is the turnaround was actually completed back in 2021. But because the company was not followed back then pretty much no one noticed (well, except for a bunch of investors on the investing forum ‘Corner of Berkshire and Fairfax’).

 

Operating earnings and the future.

 

Over the past 5 years, Fairfax has quietly completed one of the of great turnarounds in recent Canadian business history. Operating earnings at Fairfax have exploded - and that is not hyperbole.

 

Operating earnings averaged $1 billion ($39/share) at Fairfax for the 5-years from 2016 to 2020. In 2023, operating earnings were $4.4 billion ($193/share). Per share, operating earnings have increased 395% over their baseline from just a couple of years ago.

 

Importantly, this new level of operating earnings, around $200/share, is sustainable. This was discussed on Fairfax’s Q4 conference call. Operating earnings are considered the highest quality type of earnings a P/C insurance company can deliver. Think about what this new development means for Fairfax’s future results - earnings, ROE, book value and multiple.

 

 

What did we learn in the post?

 

Warren Buffett tells us that the change in book value per share is a good approximation for change in intrinsic value. Over the past 5 years, Fairfax has delivered a cumulative increase in BVPS of 117%, which is a CAGR of 17.8%. Simply outstanding. This is best-in-class performance compared to peers.

 

We also learned that operating earnings have spiked at Fairfax by close to 400% over the past 3 years from $39/share to about $200/share today - and that the higher amount is durable. This suggests Fairfax should be able to continue to deliver top-tier performance when compared to peers in the coming years.

 

We also learned that Fairfax currently has the cheapest valuation - its P/BV is 1.09 and its PE is 5.9. Fairfax’s valuation is significantly below peers.

 

So an investor today is able to buy the top performing P/C insurance company - with among the best future prospects - at the cheapest valuation. In short, the risk/reward set-up for Fairfax has rarely looked better. I think that guy in Omaha would call Fairfax a very fat pitch.

 

"The way of the successful investor is normally to do nothing -- not until you see money lying there, somewhere over in the corner, and all that is left for you to do is go over and pick it up." Jim Rogers

 

Edited February 22 by Viking

[Hamburg Investor]

3 hours ago, Cigarbutt said:

Do you mean from 2001 to 2004?

Yes - thanks, I changed that.

[Hamburg Investor]

1 hour ago, Viking said:

How Does Fairfax’s Valuation Compare to Other P/C Insurers?

 

There are lots of methods an investor can use to value a company and its stock price. In this post, we are going to use a method called ‘relative valuation.’ We are going to try and see what we can learn about Fairfax’s current valuation by comparing the company to a group of other P/C insurers.

 

We are going to keep the analysis very top line. In terms of time-frame, we are going to use the last 5 years. This is a good length of time to get a reading on the performance of the management teams for each company. And it also smooths out the impact of large short term events like catastrophes, Covid and the big swing in interest rates.

 

Who are we going to look at?

 

Below is the list of the seven P/C insurers we will compare (listed in alphabetical order):

• AIG: the fallen star; a turnaround play today.
• Berkshire Hathaway: historically, the gold standard; now more of a conglomerate than P/C insurer. We include it for fun.
• Chubb: big, traditional insurer; international in scope.
• Fairfax Financial: a turnaround play; about 30% of investments are in equities; international in scope.
• Intact Financial: largest P/C insurer in Canada; expanding globally.
• Markel: baby Berk; US focus
• WR Berkley: traditional insurer; US focus

To state the obvious: all P/C insurance companies have unique business models. Berkshire Hathaway has not released Q4, 2023 results so for them I have used an estimate for 2023YE book value and 2023 EPS.

—————

 

The most important metric used by investors and analysts to value a P/C insurance company is book value. Yes, it has its flaws. However, it is a good place to start.

 

5-Year Change in Book Value

 

“In other words, the percentage change in book value in any given year is likely to be reasonably close to that year’s change in intrinsic value.” Warren Buffett

 

We are going to look at the change in book value for the 5-year period from Dec 31, 2018 to December 31, 2023. We have sorted the results in the table below from the best to the worst performers.

 

So which company has increased BVPS the most?

 

Fairfax Financial.

 

Fairfax has increased BV by 117% over the past 5 years, a CAGR of 16.8%.

 

Were you expecting that? I bet you weren’t expecting that.

 

The second surprise is the size of the outperformance by Fairfax over all peers. For example, Fairfax’s BV CAGR is 10% better than that achieved by Chubb - that is serious outperformance. Don’t get me wrong, Chubb is a quality company.

 

In the quote above, Warren Buffett suggests investors should use the annual change in book value as a rough approximation of the change in intrinsic value for a company. Using Buffett’s quote as a guide, I think we can safely say that Fairfax has increased intrinsic value over the past 5 years at a much faster pace than its P/C insurance peers.

 

 

Note: five of the seven companies pay a dividend (and WR Berkley has also paid special dividends).

 

Why has Fairfax’s performance been so strong?

 

The management team at Fairfax has been executing exceptionally well over the past 5 years. Especially when it comes to capital allocation. I recently wrote a long post on this topic so I am not going to repeat it here.

 

How have shareholders been rewarded?

 

5.13-Year Change in Share Price

 

We are going to look at the change in the share price for the 5.13-year period from Dec 31, 2018 to February 16, 2024. Once again, we have sorted the results in the table below from the best to the worst performers.

 

Which company has seen their share price increase the most?

 

Three companies are bunched together as the top performers - WR Berkley, Fairfax Financial and Intact Financial. Including dividends, these three companies have delivered a CAGR of around 20% to investors over each of the past 5.13 years. That is outstanding.

 

Berkshire Hathaway, Chubb and AIG can be grouped in the next performance band. Including dividends, they have delivered a CAGR of about 14% which is quite good. And Markel has been the clear laggard with a CAGR of about 7%.

 

Another key takeaway is the performance of the group as a whole has been very good. Six of the seven companies listed have delivered a very good return to investors over the past 5.13 years. For reference, over the same 5.13 years, the S&P500 increased 100%, which was a CAGR of 14.4% (not including dividends).

 

 

Now let’s put book value and share price together and see what we can learn about valuation.

 

Current Price to Book Value (P/BV)

 

At 2.8, Both Intact and WR Berkley trade at the highest P/BV multiple. This is not surprising given they also saw the biggest increases in share price over the past 5 years.

 

Does anything in the chart below jump out?

 

Yes. Fairfax looks out of place.

 

Fairfax has been compounding book value at the highest rate over the past 5 years. So how can it also be trading at the lowest P/BV (i.e. the cheapest) valuation? That makes no sense.

 

 

Let’s look at another valuation measure and see what it tells us.

 

Price to Earnings Ratio (PE)

 

To keep things simple, I used reported EPS from 2023 for each of our seven companies. For Berkshire, who has not yet reported, I took the estimate from Yahoo Finance. For Intact Financial, who reported restructuring charges in Q4, I was generous and used the 2023 number in Yahoo Finance (which looks like it nets out the restructuring charges).

 

Does anything in the chart below jump out?

 

Yes. Fairfax looks out of place (again).

 

Fairfax has been compounding book value at the highest rate over the past 5 years. So how can it also be trading at the lowest PE (i.e. the cheapest) valuation? That makes no sense.

 

 

So what can explain the disconnect between Fairfax’s past performance (top-tier) and its valuation (bottom tier)?

 

To be fair, as we learned earlier in this post, Fairfax’s stock price has been one of the top performers over the past 5 years. So investors clearly have been warming to the company. However, even with the strong performance in recent years, the stock’s valuation continues to be at the bottom when compared to peers. Why is that?

 

Lack of understanding of the company.

 

Fairfax is still not a well understood company. Few investors (or analysts) have followed it in recent years. Yes, this is changing. But it will take time for people to get back up to speed with the company.

 

Fairfax is also a turnaround. And turnarounds are exceedingly hard to value - especially at the point when their business results hockey stick and turn higher.

 

The interesting thing with Fairfax though is the turnaround was actually completed back in 2021. But because the company was not followed back then pretty much no one noticed (well, except for a bunch of investors on the investing forum ‘Corner of Berkshire and Fairfax’).

 

Operating earnings and the future.

 

Over the past 5 years, Fairfax has quietly completed one of the of great turnarounds in recent Canadian business history. Operating earnings at Fairfax have exploded - and that is not hyperbole.

 

Operating earnings averaged $1 billion ($39/share) at Fairfax for the 5-years from 2016 to 2020. In 2023, operating earnings were $4.4 billion ($193/share). Per share, operating earnings have increased 395% over their baseline from just a couple of years ago.

 

Importantly, this new level of operating earnings, around $200/share, is sustainable. This was discussed on Fairfax’s Q4 conference call. Operating earnings are considered the highest quality type of earnings a P/C insurance company can deliver. Think about what this new development means for Fairfax’s future results - earnings, ROE, book value and multiple.

 

 

What did we learn in the post?

 

Warren Buffett tells us that the change in book value per share is a good approximation for change in intrinsic value. Over the past 5 years, Fairfax has delivered a cumulative increase in BVPS of 117%, which is a CAGR of 17.8%. Simply outstanding. This is best-in-class performance compared to peers.

 

We also learned that operating earnings have spiked at Fairfax by close to 400% over the past 3 years from $39/share to about $200/share today - and that the higher amount is durable. This suggests Fairfax should be able to continue to deliver top-tier performance when compared to peers in the coming years.

 

We also learned that Fairfax currently has the cheapest valuation - its P/BV is 1.09 and its PE is 5.9. Fairfax’s valuation is significantly below peers.

 

So an investor today is able to buy the top performing P/C insurance company - with among the best future prospects - at the cheapest valuation. In short, the risk/reward set-up for Fairfax has rarely looked better. I think that guy in Omaha would call Fairfax a very fat pitch.

 

"The way of the successful investor is normally to do nothing -- not until you see money lying there, somewhere over in the corner, and all that is left for you to do is go over and pick it up." Jim Rogers

 

What else can you say but: Thank you!
The picture gets richer every time thanks to the different perspectives you offer and which are necessary for a deeper understanding.

What strikes me when watching your last chart: Every single "Non-Berkalike" (I don't like the term, but still...) exploded in valuation, meaning the Price CAGR exceeds the book value CAGR in that 5 year view by miles:

Non-Berkalikes:
- Intact: 6.8% (17.7% minus 10.9%)
- WRB: 11.7%
- Chubb: 7.8%
- AIG: 11.9%

While the Berkalikes (including the original):
- BRK: 1.0% (14.3% minus 13.3%)
- MKL: (4.0%)
- FFH: 1.0%

On average the non-Berkalikes Price increase exceeded Book value growth by 9.6%, while the Berkalikes performed (0.6%) in that category. And Apart from AIG, the non-Berkalikes are currently all valued higher (PB ratio). And AIG should certainly be excluded for other reasons. Is this simply coincidence, as its only seven data points? Or is it due to the unorthodox, difficult to understand structure with "owned businesses" and the high level of involvement in publicly traded companies? A different shareholder structure? Mr. Market is going nuts again?

Anyhow I would be quite happy if the share price could stay where it currently is and Prem would buy back the company with the profits from the next few years. In less than a decade, the company would belong to the readers of cobf...

Edited February 22 by Hamburg Investor