Fairfax 2024

[dartmonkey]

4 hours ago, SharperDingaan said:

 

You might want to rethink this; as we recently exited our swing trade at > CAD 1500, and typically swing trade around the dividend record date. We trade FFH because it's well run; but our trades themselves are just about being opportunistic, and acting on value when we see it. We act like insurance; additional buy side demand when the sh1te hits the fan, that quietly exits later when everybody is positive.

 

SD

I'm not saying that anyone who sold FFH was necessarily an example of weak hands. I am saying it sounded like weak hands when one particular instance of a seller said this:

 

With such nice gains in a very short period, and no idea of the impact of the short report, I sold. That could be an error to react quickly, because it looks like it is a good quality company. Anyway, with the proceeds I added to existing ones.

 

I am not an expert on insurance, but it’s clear that the book value is aggressively noted, with some assets benefiting from an epic bubble in Indian equities and overvalued US real estate, as well as temporary high interest rates. It does seem that earnings are above the normal trend.

 

The writer acknowledges that he knew little about the company, and proved this when he said that earnings seem to be above the normal trend.

 

You, on the other hand, if your strategy involves taking up shares when they are not in demand, were probably a buyer, not a seller, when the short report came out. If so, you have done well, and it might make perfect sense to have sold back those shares with a quick gain when the share price recovered.

 

But for me, hoping for 100-200% gains from this investment over the next 5-10 years, I would not sell because of a 10% move up or down. It is a lot easier for an investor to hang on if she knew a bit more about Fairfax, and was thus not scared off by the Muddy Waters allegations or fears about their impact.

[dartmonkey]

1 hour ago, SafetyinNumbers said:

The boost in the book value is only for the portion that is sold. Valuations are also surely done by the counterparty to justify the multiple paid. If the prime motivation is to increase book value, it’s not a very effective technique.

Ok, I see this is true for the book value gains for Odyssey and Allied stakes sold to OMERS in 2021 to raise money for buybacks (what a spectacular trade, by the way!)

 

I'm not sure wh OMERS would really care what price they paid, if they have a side deal that Fairfax is going to repurchase the shares at the same multiple. 

 

I'm not saying this is what motivated Fairfax to do the deal; clearly, it was great to get a billion and a half of cash and repurchase Fairfax shares, at a third of today's price. But if you are Muddy Waters and you set out to see the negative side of every trade, the OMERS sales were not really sales, they were loans (an idea that has been discussed here frequently), the price makes no difference if they are just loans, and the impact of the price on Fairfax's book value is sure to be seen as book value manipulation, even if it is only icing on the cake for Fairfax.

 

And for Gulf Insurance in 2023, the book value gain was because the purchase price for the remaining shares was applied to the existing shares:

 

In December, Fairfax Continues its Gonzo Mode by Buying out the Portion of Gulf Insurance it Did Not Already Own at a Very Rich Multiple of ~2.4x Book Value, Taking a ~$300 Million Gain on Existing Shares

https://www.muddywatersresearch.com/wp-content/uploads/2024/02/Fairfax-Financial_FFH_MW_20240208.pdf

 

 

This seems to be confirmed by Fairfax's 2023 AR:

 

Gain on sale and consolidation of insurance subsidiaries of $549.8 in 2023 principally related to the consolidation of Gulf Insurance, which required the company’s previously held equity accounted investment in Gulf Insurance to be remeasured to fair value resulting in a pre-tax gain of $279.9

https://www.fairfax.ca/wp-content/uploads/FFH_Fairfax-Financial-2023-Annual-Report.pdf

 

 

[SharperDingaan]

"But for me, hoping for 100-200% gains from this investment over the next 5-10 years, I would not sell because of a 10% move up or down. It is a lot easier for an investor to hang on if she knew a bit more about Fairfax, and was thus not scared off by the Muddy Waters allegations or fears about their impact."

 

To each his own, and may it work out for you.

We only point out that there is the buy/hold return on FFH itself, AND the swing trade returns from volatility. Global warming is generating bigger Super-Cat losses, and the FFH insurance business has a seasonality to it, that is just part of doing business; nothing wrong in that, but it will generate opportunities from time to time. If you able to make a success of them, you will get to your 200% a lot quicker 

 

SD

[Viking]

Earnings Estimates – Two Year Summary for 2024 & 2025

 

Below is an update to my two-year earnings estimate for Fairfax. Please note, forecasts are a guess at a point in time. To state the obvious, things are constantly changing. As a result, my earnings forecasts quickly become outdated. These forecasts are intended solely for entertainment purposes – please keep this in mind. 

 

Since my last update, Fairfax has released both Q4 earnings and their 2023 annual report. This allows us to finalize results the 2023 year and update our forecasts for 2024 and 2025. 

 

Summary

 

My current estimate is Fairfax will earn about $160/share in 2024 and about $165/share in 2025. For reasons outlined further below, I think both of these estimates have been constructed using mildly conservative assumptions. 

 

 

2024 & 2025 Forecast

 

A hard piece to forecast with Fairfax is capital allocation. Fairfax is currently generating a significant amount of earnings. But we don’t know today how the future cash flows will be invested:

• Grow insurance (continuation of hard market)
• Buy out minority partners in insurance?
• Equities or fixed income?
• Buy back a meaningful amount of Fairfax stock? 
• Other?

Looking at the last 5 years, the management team has done an outstanding job with capital allocation. My guess is they will continue to make good decisions (on balance) and this will benefit shareholders – likely providing a tailwind to my forecasts for 2024 and 2025.

 

Using Yahoo Finance as a guide, analysts are collectively estimating that Fairfax will earn about US$148/share (C$200) in 2024 and US$157/share (C$211) in 2025 (using $0.742 US$/C$ exchange rate). Why are analyst estimates below my forecast? From what I can see, most analysts are assigning little benefit to future earnings and Fairfax’s proven capital allocation skills. Most analysts will include these benefits into their earnings estimates after Fairfax has announced something.

 

I am assuming interest rates remain roughly at current levels (at March 10, 2024). Of course, this will likely not be the case. But given the duration of the fixed income portfolio is now closer to the duration of the insurance liabilities, changes in interest rates (up and down) might kind of balance out (in ‘net gains/losses on investments’ and ‘effects of discounting and risk adjustment- IFRS 17’)

 

Below is an 8-year snapshot for Fairfax. It communicates in a concise manner the dramatic transformation that has happened at the company, beginning around 2021. There has been a spike in operating income per share – it has increased from an average of $39/share over the 5-year period from 2016-2020, to $192/share in 2023. This much higher amount now looks like the new baseline for the company. For 2024, my estimate has operating income increasing to $197/share, which is a 400% increase from the average from 2016-2020. Normalized earnings at Fairfax have moved to a much higher level – and, importantly, this level looks sustainable.

 

 

What are the key assumptions?

 

1.) Underwriting profit: Estimated to come in at $1.24 billion in 2024.

• Net written premiums growth of 12% in 2024 and 3% in 2025. This is being driven by:
  • Continuation of the hard market, which we estimate will add $1 billion of NWP. 
  • The Gulf Insurance Group (GIG) acquisition, which will add $1.7 billion of NWP.
• Combined ratio (CR) of 95% in both 2024 and 2025.
  • Catastrophe losses: 2024 will be a more normal year (higher than 2023).
    • Fairfax continues to modestly shrink their total catastrophe exposure.
  • Reserve releases: continuation of the positive trend observed in 2023.

2.) Interest and dividend income: Estimated to increase to a record $2.2 billion in 2024 and 2025

• Interest and dividend income in Q4 2023 was $536.6 million; this provides a good baseline (starting point).
• GIG adds about $2.4 billion to the total investment portfolio in 2024. A tailwind.
• Eurobank will start paying a dividend in 2H 2024. A tailwind.
• Rate cuts by global central banks would be a headwind in 2H.

3.) Share of profit of associates: Estimated to increase to a record $1.03 billion in 2024.

• Earnings at Eurobank, Poseidon, Stelco and Fairfax India, in aggregate, should continue to grow nicely. EXCO (nat gas prices) could be a headwind.
• GIG will be a small headwind as it is now consolidated.

4.) Effects of discounting and risk adjustment (IFRS 17):

• The two key drivers for this bucket are the trend in net written premiums of the insurance business and changes in interest rates.
• Net written premiums growth of 12% in 2024 should be a tailwind. 
• I am modelling for interest rates to remain flat. 
• This bucket is among the most difficult to model – therefore, my confidence level in my estimates is low. 

5.) Life insurance and runoff:

• This combination of businesses lost about $348 million in 2023. 
• I expect earnings in 2024 to be a little better – a lower loss of $250 million - with life insurance being a modest tailwind.

6.) Other (revenue-expenses) - non-insurance subsidiaries: 

• Recipe, Dexterra, AGT, Grivalia Hospitality, Boat Rocker, Farmers Edge etc.  
• This combination of businesses earned $46 million in 2023. 
• I expect earnings to be better in 2024, coming in at $150 million.
• This bucket is poised to grow nicely for Fairfax in the coming years. It could surprise to the upside. Yes, the results will be lumpy.

7.) Interest expense: At $520 million, a modest increase to prior year of $510 million.

8.) Corporate overhead and other: At $435 million, a modest increase to prior year of $430 million.

 

9.) Net gains on investments: Estimated to come in around $1 billion in 2024.

• The big driver will be the FFH-TRS position. $250 x 1.96mn shares = $500 million?
• Remaining mark to market holdings of $7 billion x 7% return = $500 million?

10.) Gain on sale/deconsol of insurance sub: This is where I put the large asset sales/revaluations. 

• In 2023, it was the sale of Ambridge and the revaluation of GIG for a total of $550 million.
• In 2024, I am modelling a gain of $300 million. Perhaps Fairfax (finally) gets approval from regulators in India to move their ownership in Digit from 49% to 68% and this generates a sizable gain. A Digit IPO might also result in a write up of Fairfax’s position. 

Bottom line, this bucket is a wild card. But Fairfax has a long history of surfacing significant value hidden on its balance sheet. $300 million per year seems like a conservative average estimate. I am including insurance and non-insurance here together (even though the title says insurance).

 

11.) Income taxes: estimated at 19% (historical average rate)

 

12.) Non-controlling interests: I am expecting Fairfax to take out one of its minority partners in 2024. The leading candidate is Brit. My second choice would be increasing their ownership in Allied World to 90% (from 83.4%). 

• In the past, I used an average rate of 11% (amount of net earnings that was allocated to non-controlling interests). This has been reduced to 9.5% in 2024 and 7.5% in 2025. 
• This change increases the amount of net earnings going to Fairfax shareholders.

13.) Shares Outstanding: Estimated that effective shares outstanding will be reduced by 300,000 shares per year for 2024 and 2025. This is the same amount as 2023. 

 

Notes:

• ‘Underwriting profit’: Includes insurance and reinsurance; does not include runoff or Eurolife life insurance.
• ‘Interest and dividends’ and ‘share of profit of associates’: Includes insurance, reinsurance and runoff.

—————

Return on Equity Calculation

 

Return on equity (ROE) is calculated below using ‘average equity’ which is:

• (PY ending BV/share + CY ending BV/share) / 2

I think most of the industry (other P/C insurance companies, analysts) calculate ROE using an average number for equity. So, this likely makes my ROE estimates more comparable with industry numbers.

Edited March 16 by Viking

[gfp]

Thanks for sharing your work Viking.  On Eurobank dividends, if we are already recognizing our entire pro-rata share of Eurobank's earnings, why would we benefit from their dividend?  Cash in FFH's hands is different than cash retained at Eurobank, but it should not be double counted.  

[wisowis]

14 minutes ago, Viking said:

6.) Other (revenue-expenses) - non-insurance subsidiaries: 

• Recipe, Dexterra, AGT, Grivalia Hospitality, Boat Rocker, Farmers Edge etc.  
• This combination of businesses earned $46 million in 2023. 
• I expect earnings to be better in 2024, coming in at $150 million

 

Thanks for the post, Viking. Question: Why will earnings from this bucket more than triple?

[Viking]

1 hour ago, wisowis said:

 

Thanks for the post, Viking. Question: Why will earnings from this bucket more than triple?

 

@wisowis good question. The "Other (revenue - expenses)" bucket has had significant noise the past couple of years. In 2023 Consolidated investments produced pre-tax income of $271 million but the 'reported' number was $46 million. Losses from Grivalia, Boat Rocker and Farmers Edge were $204 million in 2023. There was a significant write down on Farmers Edge of $133.4 million in 2022. I don't think these one-time losses will continue at this level moving forward.

 

Consolidated investments produced revenue of $6.6 billion in 2023, up from $5.6 billion in 2022. This bucket of holdings is growing like a weed.

 

There is likely a little more pain coming from Farmers Edge but once Fairfax takes it private my guess is they will do something to (finally) stop the losses/bleeding. Boat Rocker has a carrying value of $84 million and a market value of $24 million so we could see another modest write down here. The past couple of years, Grivalia Hospitality has been spending heavily to build ultra-luxury resorts with minimal money coming in; I think this may have changed late in 2023 as they now have 5 resorts (I think) open for business = revenue.

 

Thomas Cook India is smoking. Recipe, Sporting Life, AGT Food Ingredients and Dextera all look to be chugging along.

 

Once the significant bleeding stops I think people will be pleasantly surprised by the earnings that this bucket will be able to deliver in the coming years.

 

Regardless of reported earnings in recent years, I think significant value is building in the holdings in this bucket. At some point in will show up in reported earnings. And it will likely 'surprise' people like what happened a couple of years ago with the spike in earnings from the 'share of profits of associates' bucket.

 

Therefore, I think my estimate of $150 million in 2024 and $200 million in 2025 is quite conservative.

----------

FFH 2023AR: "As the table on page 15 shows, the consolidated investments include the following: Recipe, Fairfax India, Grivalia Hospitality, Thomas Cook India, Dexterra Group and Boat Rocker Media. Our consolidated investments are significant, producing total revenue of $6.6 billion and pre-tax income of $271 million in 2023. Fairfax India had pre-tax income of $380 million, Recipe $38 million, Thomas Cook $27 million and Dexterra $29 million. Those were offset by losses at Grivalia of $66 million, Boat Rocker $26 million and Farmers Edge of $112 million which included impairments of $64 million."

 

FFH 2022AR: "As the table on page 13 shows, consolidated investments include the following: Recipe, Fairfax India, Grivalia Hospitality, Thomas Cook India, Boat Rocker Media, Dexterra Group and Farmers Edge. Our consolidated investments are significant, producing total revenue of $5.6 billion, EBITDA of $743 million and pre-tax income of $303 million (excluding a $133 million writedown of Farmers Edge) before minority interest in 2022."

 

FFH 2022AR: "Operating income of the Non-insurance companies reporting segment increased to $184.9 in 2022 from $78.2 in 2021. Excluding the impact of the non-cash goodwill impairment charges on Farmers Edge recorded during 2022 of $133.4, operating income of the Non-insurance companies reporting segment increased significantly by $240.1 to $318.3 in 2022, principally reflecting higher share of profit of associates at Fairfax India, higher business volumes at Thomas Cook India, and improved margins and higher business volumes in the Restaurants and retail operating segment and at AGT. This significant improvement of $240.1 from the Non-insurance companies reporting segment reflected the easing of COVID-19 restrictions that had previously negatively impacted this reporting segment with the increase in operating income in 2022 driven by increases reported in all underlying operating segments."

 

Edited March 16 by Viking

[Thrifty3000]

1 hour ago, Viking said:

Earnings Estimates – Two Year Summary for 2024 & 2025

 

Below is an update to my two-year earnings estimate for Fairfax. Please note, forecasts are a guess at a point in time. To state the obvious, things are constantly changing. As a result, my earnings forecasts quickly become outdated. These forecasts are intended solely for entertainment purposes – please keep this in mind. 

 

Since my last update, Fairfax has released both Q4 earnings and their 2023 annual report. This allows us to finalize results the 2023 year and update our forecasts for 2024 and 2025. 

 

Summary

 

My current estimate is Fairfax will earn about $160/share in 2024 and about $165/share in 2025. For reasons outlined further below, I think both of these estimates have been constructed using mildly conservative assumptions. 

 

 

2024 & 2025 Forecast

 

A hard piece to forecast with Fairfax is capital allocation. Fairfax is currently generating a significant amount of earnings. But we don’t know today how the future cash flows will be invested:

• Grow insurance (continuation of hard market)
• Buy out minority partners in insurance?
• Equities or fixed income?
• Buy back a meaningful amount of Fairfax stock? 
• Other?

Looking at the last 5 years, the management team has done an outstanding job with capital allocation. My guess is they will continue to make good decisions (on balance) and this will benefit shareholders – likely providing a tailwind to my forecasts for 2024 and 2025.

 

Using Yahoo Finance as a guide, analysts are collectively estimating that Fairfax will earn about US$148/share (C$200) in 2024 and US$157/share (C$211) in 2025 (using $0.742 US$/C$ exchange rate). Why are analyst estimates below my forecast? From what I can see, most analysts are assigning little benefit to future earnings and Fairfax’s proven capital allocation skills. Most analysts will include these benefits into their earnings estimates after Fairfax has announced something.

 

I am assuming interest rates remain roughly at current levels (at March 10, 2024). Of course, this will likely not be the case. But given the duration of the fixed income portfolio is now closer to the duration of the insurance liabilities, changes in interest rates (up and down) might kind of balance out (in ‘net gains/losses on investments’ and ‘effects of discounting and risk adjustment- IFRS 17’)

 

Below is an 8-year snapshot for Fairfax. It communicates in a concise manner the dramatic transformation that has happened at the company, beginning around 2021. There has been a spike in operating income per share – it has increased from an average of $39/share over the 5-year period from 2016-2020, to $192/share in 2023. This much higher amount now looks like the new baseline for the company. For 2024, my estimate has operating income increasing to $197/share, which is a 400% increase from the average from 2016-2020. Normalized earnings at Fairfax have moved to a much higher level – and, importantly, this level looks sustainable.

 

 

What are the key assumptions?

 

1.) Underwriting profit: Estimated to come in at $1.24 billion in 2024.

• Net written premiums growth of 12% in 2024 and 3% in 2025. This is being driven by:
  • Continuation of the hard market, which we estimate will add $1 billion of NWP. 
  • The Gulf Insurance Group (GIG) acquisition, which will add $1.7 billion of NWP.
• Combined ratio (CR) of 95% in both 2024 and 2025.
  • Catastrophe losses: 2024 will be a more normal year (higher than 2023).
    • Fairfax continues to modestly shrink their total catastrophe exposure.
  • Reserve releases: continuation of the positive trend observed in 2023.

2.) Interest and dividend income: Estimated to increase to a record $2.2 billion in 2024 and 2025

• Interest and dividend income in Q4 2023 was $536.6 million; this provides a good baseline (starting point).
• GIG adds about $2.4 billion to the total investment portfolio in 2024. A tailwind.
• Eurobank will start paying a dividend in 2H 2024. A tailwind.
• Rate cuts by global central banks would be a headwind in 2H.

3.) Share of profit of associates: Estimated to increase to a record $1.03 billion in 2024.

• Earnings at Eurobank, Poseidon, Stelco and Fairfax India, in aggregate, should continue to grow nicely. EXCO (nat gas prices) could be a headwind.
• GIG will be a small headwind as it is now consolidated.

4.) Effects of discounting and risk adjustment (IFRS 17):

• The two key drivers for this bucket are the trend in net written premiums of the insurance business and changes in interest rates.
• Net written premiums growth of 12% in 2024 should be a tailwind. 
• I am modelling for interest rates to remain flat. 
• This bucket is among the most difficult to model – therefore, my confidence level in my estimates is low. 

5.) Life insurance and runoff:

• This combination of businesses lost about $348 million in 2023. 
• I expect earnings in 2024 to be a little better – a lower loss of $250 million - with life insurance being a modest tailwind.

6.) Other (revenue-expenses) - non-insurance subsidiaries: 

• Recipe, Dexterra, AGT, Grivalia Hospitality, Boat Rocker, Farmers Edge etc.  
• This combination of businesses earned $46 million in 2023. 
• I expect earnings to be better in 2024, coming in at $150 million.
• This bucket is poised to grow nicely for Fairfax in the coming years. It could surprise to the upside. Yes, the results will be lumpy.

7.) Interest expense: At $520 million, a modest increase to prior year of $510 million.

8.) Corporate overhead and other: At $435 million, a modest increase to prior year of $430 million.

 

9.) Net gains on investments: Estimated to come in around $1 billion in 2024.

• The big driver will be the FFH-TRS position. $250 x 1.96mn shares = $500 million?
• Remaining mark to market holdings of $7 billion x 7% return = $500 million?

10.) Gain on sale/deconsol of insurance sub: This is where I put the large asset sales/revaluations. 

• In 2023, it was the sale of Ambridge and the revaluation of GIG for a total of $550 million.
• In 2024, I am modelling a gain of $300 million. Perhaps Fairfax (finally) gets approval from regulators in India to move their ownership in Digit from 49% to 68% and this generates a sizable gain. A Digit IPO might also result in a write up of Fairfax’s position. 

Bottom line, this bucket is a wild card. But Fairfax has a long history of surfacing significant value hidden on its balance sheet. $300 million per year seems like a conservative average estimate. I am including insurance and non-insurance here together (even though the title says insurance).

 

11.) Income taxes: estimated at 19% (historical average rate)

 

12.) Non-controlling interests: I am expecting Fairfax to take out one of its minority partners in 2024. The leading candidate is Brit. My second choice would be increasing their ownership in Allied World to 90% (from 83.4%). 

• In the past, I used an average rate of 11% (amount of net earnings that was allocated to non-controlling interests). This has been reduced to 9.5% in 2024 and 7.5% in 2025. 
• This change increases the amount of net earnings going to Fairfax shareholders.

13.) Shares Outstanding: Estimated that effective shares outstanding will be reduced by 300,000 shares per year for 2024 and 2025. This is the same amount as 2023. 

 

Notes:

• ‘Underwriting profit’: Includes insurance and reinsurance; does not include runoff or Eurolife life insurance.
• ‘Interest and dividends’ and ‘share of profit of associates’: Includes insurance, reinsurance and runoff.

—————

Return on Equity Calculation

 

Return on equity (ROE) is calculated below using ‘average equity’ which is:

• (PY ending BV/share + CY ending BV/share) / 2

I think most of the industry (other P/C insurance companies, analysts) calculate ROE using an average number for equity. So, this likely makes my ROE estimates more comparable with industry numbers.

Amazing analysis as always. Many thanks!

 

Another datapoint investors should probably keep in mind is the fully diluted EPS.

 

Looks like the fully diluted version of your estimates would land around:

 

$146 per share for 2024

$149 per share for 2025

 

Fairfax’s share-based plans have a longer vesting period than most companies. So it’s less of a near-term concern, but something to be aware of.

[Viking]

5 hours ago, gfp said:

Thanks for sharing your work Viking.  On Eurobank dividends, if we are already recognizing our entire pro-rata share of Eurobank's earnings, why would we benefit from their dividend?  Cash in FFH's hands is different than cash retained at Eurobank, but it should not be double counted.  

 

@gfp good question. I have some questions of my own as to how Eurobanks dividend will flow through Fairfax's income statement and balance sheet when it starts.

 

But before I get into the accounting, here is a general thought. I am hoping Fairfax continues to grow the 'interest and dividend' bucket. I think it is generally viewed by investors to be the most important income stream for a P/C insurer (with underwriting profit being a close second) because it is usually not very volatile year to year. As more of Fairfax's earnings come from 'low volatility' sources we should see multiple expansion.

 

My assumption is when Eurobank starts paying a dividend it will drop into 'interest and dividends' for Fairfax. If this is not the case, someone please let me know. As I have said many times before, I am not an accountant - so there will be errors in how I look at things. And that is a real strength of this board - we are all to learn from each other and improve our understanding/analysis.

 

What happens to 'share of profit of associates' for Eurobank? Is this number each quarter affected by the dividend payment? The short answer is I don't know. Perhaps you or someone else can enlighten me?

 

Is share of profits of associates an income statement item (share of pre-tax net income)? And the dividend a balance sheet item (return of capital)?

 

My understanding is Fairfax's carrying value for Eurobank will get updated each quarter as follows:

• Eurobank prior quarter carrying value + share of profit of associates - dividend amount paid to Fairfax. 

If this is not accurate, please let me know. 

 

The other question I have regarding the Eurobank dividend is, once approved, how will it be paid out... quarterly? or will it be in a lump sum?

 

Thanks again for the question.   

Edited March 16 by Viking

[Viking]

4 hours ago, Thrifty3000 said:

Amazing analysis as always. Many thanks!

 

Another datapoint investors should probably keep in mind is the fully diluted EPS.

 

Looks like the fully diluted version of your estimates would land around:

 

$146 per share for 2024

$149 per share for 2025

 

Fairfax’s share-based plans have a longer vesting period than most companies. So it’s less of a near-term concern, but something to be aware of.

 

@Thrifty3000 you bring up a very good point. As you are aware, I only ever look at (use) 'effective shares outstanding'. I have not spent much time looking at (or thinking about) fully diluted shares. And that is because I don't know how to think about fully diluted shares at Fairfax. 

 

Do you have a mental model / framework for how to understand fully diluted share count at Fairfax and what it all means for Fairfax investors?

 

I do notice that each year Fairfax buys back shares and not all of them are retired. 

 

Lot's of good questions / comments on Fairfax today. Keep them coming!

[Maverick47]

6 hours ago, Viking said:

Earnings Estimates – Two Year Summary for 2024 & 2025

 

Below is an update to my two-year earnings estimate for Fairfax. Please note, forecasts are a guess at a point in time. To state the obvious, things are constantly changing. As a result, my earnings forecasts quickly become outdated. These forecasts are intended solely for entertainment purposes – please keep this in mind. 

 

Since my last update, Fairfax has released both Q4 earnings and their 2023 annual report. This allows us to finalize results the 2023 year and update our forecasts for 2024 and 2025. 

 

Summary

 

My current estimate is Fairfax will earn about $160/share in 2024 and about $165/share in 2025. For reasons outlined further below, I think both of these estimates have been constructed using mildly conservative assumptions. 

 

 

2024 & 2025 Forecast

 

A hard piece to forecast with Fairfax is capital allocation. Fairfax is currently generating a significant amount of earnings. But we don’t know today how the future cash flows will be invested:

• Grow insurance (continuation of hard market)
• Buy out minority partners in insurance?
• Equities or fixed income?
• Buy back a meaningful amount of Fairfax stock? 
• Other?

Looking at the last 5 years, the management team has done an outstanding job with capital allocation. My guess is they will continue to make good decisions (on balance) and this will benefit shareholders – likely providing a tailwind to my forecasts for 2024 and 2025.

 

Using Yahoo Finance as a guide, analysts are collectively estimating that Fairfax will earn about US$148/share (C$200) in 2024 and US$157/share (C$211) in 2025 (using $0.742 US$/C$ exchange rate). Why are analyst estimates below my forecast? From what I can see, most analysts are assigning little benefit to future earnings and Fairfax’s proven capital allocation skills. Most analysts will include these benefits into their earnings estimates after Fairfax has announced something.

 

I am assuming interest rates remain roughly at current levels (at March 10, 2024). Of course, this will likely not be the case. But given the duration of the fixed income portfolio is now closer to the duration of the insurance liabilities, changes in interest rates (up and down) might kind of balance out (in ‘net gains/losses on investments’ and ‘effects of discounting and risk adjustment- IFRS 17’)

 

Below is an 8-year snapshot for Fairfax. It communicates in a concise manner the dramatic transformation that has happened at the company, beginning around 2021. There has been a spike in operating income per share – it has increased from an average of $39/share over the 5-year period from 2016-2020, to $192/share in 2023. This much higher amount now looks like the new baseline for the company. For 2024, my estimate has operating income increasing to $197/share, which is a 400% increase from the average from 2016-2020. Normalized earnings at Fairfax have moved to a much higher level – and, importantly, this level looks sustainable.

 

 

What are the key assumptions?

 

1.) Underwriting profit: Estimated to come in at $1.24 billion in 2024.

• Net written premiums growth of 12% in 2024 and 3% in 2025. This is being driven by:
  • Continuation of the hard market, which we estimate will add $1 billion of NWP. 
  • The Gulf Insurance Group (GIG) acquisition, which will add $1.7 billion of NWP.
• Combined ratio (CR) of 95% in both 2024 and 2025.
  • Catastrophe losses: 2024 will be a more normal year (higher than 2023).
    • Fairfax continues to modestly shrink their total catastrophe exposure.
  • Reserve releases: continuation of the positive trend observed in 2023.

2.) Interest and dividend income: Estimated to increase to a record $2.2 billion in 2024 and 2025

• Interest and dividend income in Q4 2023 was $536.6 million; this provides a good baseline (starting point).
• GIG adds about $2.4 billion to the total investment portfolio in 2024. A tailwind.
• Eurobank will start paying a dividend in 2H 2024. A tailwind.
• Rate cuts by global central banks would be a headwind in 2H.

3.) Share of profit of associates: Estimated to increase to a record $1.03 billion in 2024.

• Earnings at Eurobank, Poseidon, Stelco and Fairfax India, in aggregate, should continue to grow nicely. EXCO (nat gas prices) could be a headwind.
• GIG will be a small headwind as it is now consolidated.

4.) Effects of discounting and risk adjustment (IFRS 17):

• The two key drivers for this bucket are the trend in net written premiums of the insurance business and changes in interest rates.
• Net written premiums growth of 12% in 2024 should be a tailwind. 
• I am modelling for interest rates to remain flat. 
• This bucket is among the most difficult to model – therefore, my confidence level in my estimates is low. 

5.) Life insurance and runoff:

• This combination of businesses lost about $348 million in 2023. 
• I expect earnings in 2024 to be a little better – a lower loss of $250 million - with life insurance being a modest tailwind.

6.) Other (revenue-expenses) - non-insurance subsidiaries: 

• Recipe, Dexterra, AGT, Grivalia Hospitality, Boat Rocker, Farmers Edge etc.  
• This combination of businesses earned $46 million in 2023. 
• I expect earnings to be better in 2024, coming in at $150 million.
• This bucket is poised to grow nicely for Fairfax in the coming years. It could surprise to the upside. Yes, the results will be lumpy.

7.) Interest expense: At $520 million, a modest increase to prior year of $510 million.

8.) Corporate overhead and other: At $435 million, a modest increase to prior year of $430 million.

 

9.) Net gains on investments: Estimated to come in around $1 billion in 2024.

• The big driver will be the FFH-TRS position. $250 x 1.96mn shares = $500 million?
• Remaining mark to market holdings of $7 billion x 7% return = $500 million?

10.) Gain on sale/deconsol of insurance sub: This is where I put the large asset sales/revaluations. 

• In 2023, it was the sale of Ambridge and the revaluation of GIG for a total of $550 million.
• In 2024, I am modelling a gain of $300 million. Perhaps Fairfax (finally) gets approval from regulators in India to move their ownership in Digit from 49% to 68% and this generates a sizable gain. A Digit IPO might also result in a write up of Fairfax’s position. 

Bottom line, this bucket is a wild card. But Fairfax has a long history of surfacing significant value hidden on its balance sheet. $300 million per year seems like a conservative average estimate. I am including insurance and non-insurance here together (even though the title says insurance).

 

11.) Income taxes: estimated at 19% (historical average rate)

 

12.) Non-controlling interests: I am expecting Fairfax to take out one of its minority partners in 2024. The leading candidate is Brit. My second choice would be increasing their ownership in Allied World to 90% (from 83.4%). 

• In the past, I used an average rate of 11% (amount of net earnings that was allocated to non-controlling interests). This has been reduced to 9.5% in 2024 and 7.5% in 2025. 
• This change increases the amount of net earnings going to Fairfax shareholders.

13.) Shares Outstanding: Estimated that effective shares outstanding will be reduced by 300,000 shares per year for 2024 and 2025. This is the same amount as 2023. 

 

Notes:

• ‘Underwriting profit’: Includes insurance and reinsurance; does not include runoff or Eurolife life insurance.
• ‘Interest and dividends’ and ‘share of profit of associates’: Includes insurance, reinsurance and runoff.

—————

Return on Equity Calculation

 

Return on equity (ROE) is calculated below using ‘average equity’ which is:

• (PY ending BV/share + CY ending BV/share) / 2

I think most of the industry (other P/C insurance companies, analysts) calculate ROE using an average number for equity. So, this likely makes my ROE estimates more comparable with industry numbers.

Appreciate the update @Viking, and I like the historical data as well.  As I scan the years columns from left to right, I appreciate the growth in interest rate and dividend income relative to underwriting results as well as the share of profits of associates and gains on investments.  Rough mental math indicates it would take quite a severe worsening of underwriting results to offset completely the expected normalized income from the other sources given current expectations for them.   Something like a Combined Ratio of 115 or so might result in no income (but also no loss) for a future year.  Given attention to managing cat exposure, and the fact that a good portion of the premium volume is related to reinsurance, which ought to be able to react somewhat faster to poor underwriting results  than a typical primary insurer, as well as the global spread of exposures among a number of independent insurance providers, it’s unlikely in my opinion for that kind of underwriting result to occur, but I do like to get some sense of how bad something might get for the companies I invest in, and a 115 CR is about a 20% worsening from the ideal target of 95.  That’s a pretty poor underwriting result, not very likely in my opinion, but a reasonable worst case scenario, and it comes nowhere near to damaging the future viability of the company.

 

I continue to believe we have significant upside for the company, and limited downside

[Viking]

1 hour ago, Maverick47 said:

Appreciate the update @Viking, and I like the historical data as well.  As I scan the years columns from left to right, I appreciate the growth in interest rate and dividend income relative to underwriting results as well as the share of profits of associates and gains on investments.  Rough mental math indicates it would take quite a severe worsening of underwriting results to offset completely the expected normalized income from the other sources given current expectations for them.   Something like a Combined Ratio of 115 or so might result in no income (but also no loss) for a future year.  Given attention to managing cat exposure, and the fact that a good portion of the premium volume is related to reinsurance, which ought to be able to react somewhat faster to poor underwriting results  than a typical primary insurer, as well as the global spread of exposures among a number of independent insurance providers, it’s unlikely in my opinion for that kind of underwriting result to occur, but I do like to get some sense of how bad something might get for the companies I invest in, and a 115 CR is about a 20% worsening from the ideal target of 95.  That’s a pretty poor underwriting result, not very likely in my opinion, but a reasonable worst case scenario, and it comes nowhere near to damaging the future viability of the company.

 

I continue to believe we have significant upside for the company, and limited downside

 

@Maverick47 I agree. I think underwriting profit at Fairfax is about 20% of its various income streams. I think most P/C insurance companies are closer to 40% or more. So moving forward, a really bad year for catastrophes will affect Fairfax much less than peers. In fact - counterintuitively - long term Fairfax investors should probably be hoping for a really bad cat year. It would likely extend the hard market and Fairfax would likely be a big net winner over time. This is a big difference from 'old Fairfax' and 'new Fairfax.' New Fairfax looks like it is becoming a much more financially resilient company.

 

In terms of financial stability, Fairfax is getting to a very good place. The different earnings streams are growing meaningfully in size and new streams are getting built out. I think Fairfax has been executing a strategic plan that we are just now starting to fully grasp.  

Edited March 16 by Viking

[Hoodlum]

2 hours ago, Viking said:

 

@Maverick47 I agree. I think underwriting profit at Fairfax is about 20% of its various income streams. I think most P/C insurance companies are closer to 40% or more. So moving forward, a really bad year for catastrophes will affect Fairfax much less than peers. In fact - counterintuitively - long term Fairfax investors should probably be hoping for a really bad cat year. It would likely extend the hard market and Fairfax would likely be a big net winner over time. This is a big difference from 'old Fairfax' and 'new Fairfax.' New Fairfax looks like it is becoming a much more financially resilient company.

 

In terms of financial stability, Fairfax is getting to a very good place. The different earnings streams are growing meaningfully in size and new streams are getting built out. I think Fairfax has been executing a strategic plan that we are just now starting to fully grasp.  

But wouldn’t Fairfax’s larger float at least somewhat negate this advantage during a really bad cat year. 

[Maverick47]

13 hours ago, Thrifty3000 said:

Fairfax’s share-based plans have a longer vesting period than most companies. So it’s less of a near-term concern, but something to be aware of.

@Thrifty3000 :  I’m not aware of how Fairfax’s share-based plans work.  Is this something you can educate me on?  Are they based on options grants or are shares given directly?  Many companies do purchase sufficient shares to offset dilution resulting from share-based compensation, but Fairfax has been reducing share counts outstanding, and given the highlighting of Henry Singleton’s example of reducing Teledyne’s share count outstanding by something like 90% over his tenure, I think we can safely assume that the only way share counts might increase would be if additional shares were issued to help pay for an acquisition like Allied World in the future.  Absent that possibility, I’m not personally worried about diluted per share earnings.

[petec]

19 hours ago, Viking said:

My understanding is Fairfax's carrying value for Eurobank will get updated each quarter as follows:

• Eurobank prior quarter carrying value + share of profit of associates - dividend amount paid to Fairfax. 

If this is not accurate, please let me know. 

 

I think this is correct. So over time, the carrying value is quite likely to diverge from the market value to a greater degree. 

[petec]

19 hours ago, Viking said:

 

@Thrifty3000 you bring up a very good point. As you are aware, I only ever look at (use) 'effective shares outstanding'. I have not spent much time looking at (or thinking about) fully diluted shares. And that is because I don't know how to think about fully diluted shares at Fairfax. 

 

Do you have a mental model / framework for how to understand fully diluted share count at Fairfax and what it all means for Fairfax investors?

 

I do notice that each year Fairfax buys back shares and not all of them are retired. 

 

Lot's of good questions / comments on Fairfax today. Keep them coming!

 

I would just use the FD SHO in the annual report. I do think FFH are a bit naughty using basic shares as their denominator for reported bvps.

[Cigarbutt]

^About the share-based compensation aspect,

FFH's program is quite unique and includes several shareholder-friendly features: share-based not option-based, pre-funded in substance, long vesting period but the program has been growing significantly; one has to determine if this manager-friendly posture is (and will be) shareholder-friendly. Opinion: a qualified yes.

To be 'fair' (@Thrifty3000), if one uses the diluted share count, one should add back the amortization of share-based payment awards to the operating income (found in the operating section of cash flows). Note: this line item is included in corporate expense.

The long term trend (in M USD):

2010 3.2     2011: 11.3     2012: 16.6     ...     2020: 84.3     2021: 104.1     2022: 146.1     2023: 147.0

 

Edited March 17 by Cigarbutt
minor addition

[SafetyinNumbers]

18 minutes ago, petec said:

 

I would just use the FD SHO in the annual report. I do think FFH are a bit naughty using basic shares as their denominator for reported bvps.

I think they do it appropriately. BVPS calculation is based on basic net shares outstanding and EPS is based on fully diluted EPS. Fairfax owns the ~1.8m shares that will eventually go to employees but just like stock options until they vest they don’t increase the share count for BV purposes. I think they are included in the float as well which is nice for weighting in the index.

[petec]

On a separate topic, is anyone else bemused as to why they took the FIH fee in cash? If it is so undervalued should they not (given the FFH board's fiduciary duty is to FFH shareholders) have taken it in shares?

[SafetyinNumbers]

3 hours ago, petec said:

On a separate topic, is anyone else bemused as to why they took the FIH fee in cash? If it is so undervalued should they not (given the FFH board's fiduciary duty is to FFH shareholders) have taken it in shares?

I think they were trying to be good partners and from a long term perspective it would likely hurt FIH from a fund raising perspective in the future if FFH is seen as punishing FIH for the discount. Forever is a long time.

 

They had to take the first two performance fees in stock and have discretion going forward. I still hope they will use the cash to tender for FIH shares so we can get some price discovery.

[A_Hamilton]

4 hours ago, petec said:

On a separate topic, is anyone else bemused as to why they took the FIH fee in cash? If it is so undervalued should they not (given the FFH board's fiduciary duty is to FFH shareholders) have taken it in shares?

I would argue that reputationally it is very poor form to fleece one's asset management clients by foisting material dilution on them because of a formula that was set ex-ante and with a stock that has traded very poorly. In the long term I think doing the right thing will lead them to much better opportunities here, heck maybe FIH trades at a premium to book one day and they can issue a bunch of stock and drive more fees to say nothing of all of the other relationships FFH has.

[TwoCitiesCapital]

4 hours ago, petec said:

On a separate topic, is anyone else bemused as to why they took the FIH fee in cash? If it is so undervalued should they not (given the FFH board's fiduciary duty is to FFH shareholders) have taken it in shares?

 

They can take it in cash and buy the shares at the same discount and end up with the roughly the same number of shares. 

 

The difference being float/tradable shares decreases (as opposed to increases) which may help close the NAV gap in the future AND is does NOT adversely impact FIH shareholders (including the existing balance of FIH shares Fairfax holds) via unnecessary dilution. 

[gfp]

8 minutes ago, TwoCitiesCapital said:

 

They can take it in cash and buy the shares at the same discount and end up with the roughly the same number of shares. 

 

The difference being float/tradable shares decreases (as opposed to increases) which may help close the NAV gap in the future AND is does NOT adversely impact FIH shareholders (including the existing balance of FIH shares Fairfax holds) via unnecessary dilution. 

 

That's true in theory but in practice it is not easy to buy $110 million worth of FIH.U shares without drastically moving the price.  I think it just comes down to 'fair and friendly' and doing the right thing and it comes back around over and over when you always try to behave that way.

[Hamburg Investor]

On 3/16/2024 at 4:58 PM, Viking said:

Earnings Estimates – Two Year Summary for 2024 & 2025

 

Below is an update to my two-year earnings estimate for Fairfax. Please note, forecasts are a guess at a point in time. To state the obvious, things are constantly changing. As a result, my earnings forecasts quickly become outdated. These forecasts are intended solely for entertainment purposes – please keep this in mind. 

 

Since my last update, Fairfax has released both Q4 earnings and their 2023 annual report. This allows us to finalize results the 2023 year and update our forecasts for 2024 and 2025. 

 

Summary

 

My current estimate is Fairfax will earn about $160/share in 2024 and about $165/share in 2025. For reasons outlined further below, I think both of these estimates have been constructed using mildly conservative assumptions. 

 

 

2024 & 2025 Forecast

 

A hard piece to forecast with Fairfax is capital allocation. Fairfax is currently generating a significant amount of earnings. But we don’t know today how the future cash flows will be invested:

• Grow insurance (continuation of hard market)
• Buy out minority partners in insurance?
• Equities or fixed income?
• Buy back a meaningful amount of Fairfax stock? 
• Other?

Looking at the last 5 years, the management team has done an outstanding job with capital allocation. My guess is they will continue to make good decisions (on balance) and this will benefit shareholders – likely providing a tailwind to my forecasts for 2024 and 2025.

 

Using Yahoo Finance as a guide, analysts are collectively estimating that Fairfax will earn about US$148/share (C$200) in 2024 and US$157/share (C$211) in 2025 (using $0.742 US$/C$ exchange rate). Why are analyst estimates below my forecast? From what I can see, most analysts are assigning little benefit to future earnings and Fairfax’s proven capital allocation skills. Most analysts will include these benefits into their earnings estimates after Fairfax has announced something.

 

I am assuming interest rates remain roughly at current levels (at March 10, 2024). Of course, this will likely not be the case. But given the duration of the fixed income portfolio is now closer to the duration of the insurance liabilities, changes in interest rates (up and down) might kind of balance out (in ‘net gains/losses on investments’ and ‘effects of discounting and risk adjustment- IFRS 17’)

 

Below is an 8-year snapshot for Fairfax. It communicates in a concise manner the dramatic transformation that has happened at the company, beginning around 2021. There has been a spike in operating income per share – it has increased from an average of $39/share over the 5-year period from 2016-2020, to $192/share in 2023. This much higher amount now looks like the new baseline for the company. For 2024, my estimate has operating income increasing to $197/share, which is a 400% increase from the average from 2016-2020. Normalized earnings at Fairfax have moved to a much higher level – and, importantly, this level looks sustainable.

 

 

What are the key assumptions?

 

1.) Underwriting profit: Estimated to come in at $1.24 billion in 2024.

• Net written premiums growth of 12% in 2024 and 3% in 2025. This is being driven by:
  • Continuation of the hard market, which we estimate will add $1 billion of NWP. 
  • The Gulf Insurance Group (GIG) acquisition, which will add $1.7 billion of NWP.
• Combined ratio (CR) of 95% in both 2024 and 2025.
  • Catastrophe losses: 2024 will be a more normal year (higher than 2023).
    • Fairfax continues to modestly shrink their total catastrophe exposure.
  • Reserve releases: continuation of the positive trend observed in 2023.

2.) Interest and dividend income: Estimated to increase to a record $2.2 billion in 2024 and 2025

• Interest and dividend income in Q4 2023 was $536.6 million; this provides a good baseline (starting point).
• GIG adds about $2.4 billion to the total investment portfolio in 2024. A tailwind.
• Eurobank will start paying a dividend in 2H 2024. A tailwind.
• Rate cuts by global central banks would be a headwind in 2H.

3.) Share of profit of associates: Estimated to increase to a record $1.03 billion in 2024.

• Earnings at Eurobank, Poseidon, Stelco and Fairfax India, in aggregate, should continue to grow nicely. EXCO (nat gas prices) could be a headwind.
• GIG will be a small headwind as it is now consolidated.

4.) Effects of discounting and risk adjustment (IFRS 17):

• The two key drivers for this bucket are the trend in net written premiums of the insurance business and changes in interest rates.
• Net written premiums growth of 12% in 2024 should be a tailwind. 
• I am modelling for interest rates to remain flat. 
• This bucket is among the most difficult to model – therefore, my confidence level in my estimates is low. 

5.) Life insurance and runoff:

• This combination of businesses lost about $348 million in 2023. 
• I expect earnings in 2024 to be a little better – a lower loss of $250 million - with life insurance being a modest tailwind.

6.) Other (revenue-expenses) - non-insurance subsidiaries: 

• Recipe, Dexterra, AGT, Grivalia Hospitality, Boat Rocker, Farmers Edge etc.  
• This combination of businesses earned $46 million in 2023. 
• I expect earnings to be better in 2024, coming in at $150 million.
• This bucket is poised to grow nicely for Fairfax in the coming years. It could surprise to the upside. Yes, the results will be lumpy.

7.) Interest expense: At $520 million, a modest increase to prior year of $510 million.

8.) Corporate overhead and other: At $435 million, a modest increase to prior year of $430 million.

 

9.) Net gains on investments: Estimated to come in around $1 billion in 2024.

• The big driver will be the FFH-TRS position. $250 x 1.96mn shares = $500 million?
• Remaining mark to market holdings of $7 billion x 7% return = $500 million?

10.) Gain on sale/deconsol of insurance sub: This is where I put the large asset sales/revaluations. 

• In 2023, it was the sale of Ambridge and the revaluation of GIG for a total of $550 million.
• In 2024, I am modelling a gain of $300 million. Perhaps Fairfax (finally) gets approval from regulators in India to move their ownership in Digit from 49% to 68% and this generates a sizable gain. A Digit IPO might also result in a write up of Fairfax’s position. 

Bottom line, this bucket is a wild card. But Fairfax has a long history of surfacing significant value hidden on its balance sheet. $300 million per year seems like a conservative average estimate. I am including insurance and non-insurance here together (even though the title says insurance).

 

11.) Income taxes: estimated at 19% (historical average rate)

 

12.) Non-controlling interests: I am expecting Fairfax to take out one of its minority partners in 2024. The leading candidate is Brit. My second choice would be increasing their ownership in Allied World to 90% (from 83.4%). 

• In the past, I used an average rate of 11% (amount of net earnings that was allocated to non-controlling interests). This has been reduced to 9.5% in 2024 and 7.5% in 2025. 
• This change increases the amount of net earnings going to Fairfax shareholders.

13.) Shares Outstanding: Estimated that effective shares outstanding will be reduced by 300,000 shares per year for 2024 and 2025. This is the same amount as 2023. 

 

Notes:

• ‘Underwriting profit’: Includes insurance and reinsurance; does not include runoff or Eurolife life insurance.
• ‘Interest and dividends’ and ‘share of profit of associates’: Includes insurance, reinsurance and runoff.

—————

Return on Equity Calculation

 

Return on equity (ROE) is calculated below using ‘average equity’ which is:

• (PY ending BV/share + CY ending BV/share) / 2

I think most of the industry (other P/C insurance companies, analysts) calculate ROE using an average number for equity. So, this likely makes my ROE estimates more comparable with industry numbers.

Regarding TRS you are actually calculating share price being nearly flat (or up 25 dollars, so 2.5%) until end of 2024 for the next 3 quarters and two weeks, or do I misunderstand how the TRS works? 

Of course the share price could be higher or lower within such a short timeframe, but of course you have to assume something. But what’s the rational behind $250 for 2024? Wouldn‘t it be rational to e. g. assume a share price end of 2027 (whatever that would be) and than draw a straight (or compounding) line to that point? Than it would maybe be rational to readjust that line each time you recalculate your forecast? Otherwise you maybe would come to the point, where you would have to assume a negative return to the end of the year, if you assume a fixed return per calendar year and the share price gets above that?! 
 

I am just asking
 

Why are net gains in investments lower in 2025 than in 2024? Intuitively I‘d think one would assume Fairfax to get 7% again but on 107% of 2024 equity, so it should be higher. Same with the TRS: If shareprice goes up algorithmic, than it should be higher 2025 than 2024; or is this a function of the good start of Fairfax share price in 2024, so you adjusted 2024, but not 2025?

 

In general I totally understand, that you have to be conservative with your assumptions the longer you look into the future (that’s what all good investors do - margin of safety) at the same time looking at the numbers I ask myself:

 

If Fairfax just manages a roe around 15% in 2024 and 2025 like in your foecast (so for times with a hard market, good hand with equity investments and bonds, very good crs…) and Prem at the same time gives out the goal of a roe of 15% on average (he said stock return or book value compounding should be 15%; but roughly that’s the same as having a roe of 15% as a goal. Or am I wrong?), than the question occurs: Is that goal doable if he just manages 15% as a roe in such good times, where not only management performs near perfection, but the circumstances (hard market etc.) give an extra tailwind?

 

If Prem doesn’t manage 18%, or 20% or more on average in such good times, he won‘t make 15% over time.
 

My best guess is, that this difference to 18% or 20% or even more is just a function of you being conservative with your estimates (which is very fine!). What do you think?

[dartmonkey]

18 hours ago, petec said:

On a separate topic, is anyone else bemused as to why they took the FIH fee in cash? If it is so undervalued should they not (given the FFH board's fiduciary duty is to FFH shareholders) have taken it in shares?

 

There has been some talk about Fairfax (FFH) 'doing the right thing' here by not diluting shareholders of Fairfax India (FIH) by 'taking advantage' of the fact that FIH shares are trading so far below book value, given FFH's 'fair and friendly' motto. As a shareholder of both firms, and given the fact that I own a much higher percentage of FIH than I do of FFH, I have every reason to be happy about this decision, but petec's point has not been addressed, I feel, and that, does FFH not have a fiduciary duty towards FFH shareholders to maximize what goes into FFH shareholders' pockets?

 

I suppose legally they have some wiggle room here, and could plausibly say that it is in the best interests of FFH to preserve FIH shareholders' trust in FFH, and to maintain FIH as a viable investment vehicle for its Indian operations. After all, FFH owns half of FIH, and get a hefty fee (1.5% of book value plus 20% of annual book value gains above 5%.) Feeding the golden goose well is in the interest of making sure they keep getting all these golden eggs.