Fairfax 2024

[SafetyinNumbers]

12 minutes ago, Redskin212 said:

I don’t think they will take FIH private. The insurance subsidiaries get much better treatment holding a public security vs a private company.

 

Only reason FIH exists and likely the reason it will continue to exist.

Lots of optionality from staying public too including access to cheaper leverage which offsets a lot of the fees that drive investors away,

[hardcorevalue]

The stock has negative returns for almost a decade and at a time when the Indian markets have been the hottest in the world. 

At this stage Fairfax India is a bit of a nuisance to the renaissance at Fairfax Financial and with FFH's improving balance sheet it just becomes easier to take out FIH.u shareholders at a premium to book value and acquire the crown jewel BIAL holding rather than keep this public. 

 

I don’t think it’s a coincidence that they changed the AGM to the day before the Fairfax Financial one. Who wants to end their week with a bunch of disgruntled shareholders' at this tiny vehicle when there is so much to celebrate at the far more significant parent!

 

I keep a position because I believe in Fairfax’s investment skills in India and trust their stewardship. I’m not optimistic that the discount will ever close in its current form. However, I think there is value and the Anchorage IPO will surface this or Fairfax will take this private at book value at some point (an outcome I am ok with even though I think book value is understated).

Edited March 28 by hardcorevalue

[Viking]

13 hours ago, ICUMD said:

This is the billion dollar question.

 

Fairfax has said aside from insurance, Fairfax India will be the vehicle for all other investments in India. They have recently placed an all cash offer for IDBI bank.  Where does the cash come from?

 

If they aren't issuing new shares at discounted market prices as previously stated, their only other option is to find an investment partner, like Omers. 

 

Alternatively, could money laden Fairfax opt to buyout Fairfax India and take it private? They would then have deep enough pockets to chase IDBI. It would also optically solve their issue of discount.

 

Pretty sure Prem wants to close that IDBI deal badly.

@ICUMD below are some thoughts building on your post.
 

1.) prior to Modi’s election, Fairfax’s vehicle for investing in India was Thomas Cook India. That is why Quess started out there. After Modi was elected Fairfax decided they wanted to get much more aggressive investing in India. But they had a problem… Thomas Cook was the wrong vehicle / structure. Solution? Do what any rational actor does in investing - when the facts change - you pivot your strategy. And Fairfax India was born. 
 

Today Fairfax has an opportunity to make what could be a once in a generation purchase of a massive bank in India. But they have a problem. Fairfax India is likely the wrong vehicle / structure (as it exists today). What to do? What any rational actor does - pivot/update the strategy to fit the facts/reality as they exist today. 
 

2.) i have long thought the ‘solution’ to Fairfax India’s big discount in recent years is for Fairfax to take it private. Step one - approach the remaining large shareholders and see if they are interested - and what price. Step two - take out remaining small shareholders - perhaps at BV. 
 

To fund a big price of the takeout, Fairfax India could sell down some assets. The real prize for Fairfax would be getting 100% of Fairfax India’s position in BIAL. 
 

As @Redskin212 notes, the perspective of insurance regulators likely matters.

 

Regardless, India is shaping up to be a super interesting geography for Fairfax in 2024:

- rumours regarding bid for big bank

- Digit IPO

- possible Anchorage IPO / next steps for BIAL

- what all this means for Fairfax’s strategy in India 

- what all this means for Fairfax India

Edited March 23 by Viking

[ICUMD]

56 minutes ago, Viking said:

 

2.) i have long thought the ‘solution’ to Fairfax India’s big discount in recent years is for Fairfax to take it private. Step one - approach the remaining large shareholders and see if they are interested - and what price. Step two - take out remaining small shareholders - perhaps at BV.

Speculative, but Fairfax taking Fairfax India private is the best and most likely play.

 

Consider:

 

• Recent all cash offer for IDBI by Fairfax - the are serious bidders.
• BIAL is a jewel company with guaranteed return and growth. I suspect they view IDBI as another diamond in the rough. It probably is.
• They only coinvest with select pasive investors like OMERS.  (They weren't too happy with GMR and paid a premium to kick them out of BIAL).  Coinvestment only helps them manage their risk at the expense of their ownership and control. I doubt they will be keen to be part of a consortium to purchase IDBI when then can do so easily via FFH. Plus, they will need to share ownership with the government and LIC as it is.
• Fairfax India has performed poorly in North America, but Anchorage will truly value their Indian asset base.  This I think will occur after they take Fairfax India private, since doing so before risks inflating the share price and increasing the price of a buyout.
• The only advantage I can see of Fairfax India trading publically is it's ability to raise capital through sale of shares. Ironically, due to depressed share price x 10 yrs now, they are now capital constrained to make large purchases, such as IDBI.  
• They have used their 200M in the bank to back stop IIFL.  They will need a billion or two in short order if they get IDBI. 
• When your kid needs money in short order for a worthy venture, who is most likely to offer it? 

[Viking]

46 minutes ago, ICUMD said:

Speculative, but Fairfax taking Fairfax India private is the best and most likely play.

 

Consider:

 

• Recent all cash offer for IDBI by Fairfax - the are serious bidders.
• BIAL is a jewel company with guaranteed return and growth. I suspect they view IDBI as another diamond in the rough. It probably is.
• They only coinvest with select pasive investors like OMERS.  (They weren't too happy with GMR and paid a premium to kick them out of BIAL).  Coinvestment only helps them manage their risk at the expense of their ownership and control. I doubt they will be keen to be part of a consortium to purchase IDBI when then can do so easily via FFH. Plus, they will need to share ownership with the government and LIC as it is.
• Fairfax India has performed poorly in North America, but Anchorage will truly value their Indian asset base.  This I think will occur after they take Fairfax India private, since doing so before risks inflating the share price and increasing the price of a buyout.
• The only advantage I can see of Fairfax India trading publically is it's ability to raise capital through sale of shares. Ironically, due to depressed share price x 10 yrs now, they are now capital constrained to make large purchases, such as IDBI.  
• They have used their 200M in the bank to back stop IIFL.  They will need a billion or two in short order if they get IDBI. 
• When your kid needs money in short order for a worthy venture, who is most likely to offer it? 

@ICUMD thanks for sharing… your take makes a lot of sense. 

[SafetyinNumbers]

54 minutes ago, ICUMD said:

Speculative, but Fairfax taking Fairfax India private is the best and most likely play.

Consider:

• Recent all cash offer for IDBI by Fairfax - the are serious bidders.
• BIAL is a jewel company with guaranteed return and growth. I suspect they view IDBI as another diamond in the rough. It probably is.
• They only coinvest with select pasive investors like OMERS.  (They weren't too happy with GMR and paid a premium to kick them out of BIAL).  Coinvestment only helps them manage their risk at the expense of their ownership and control. I doubt they will be keen to be part of a consortium to purchase IDBI when then can do so easily via FFH. Plus, they will need to share ownership with the government and LIC as it is.
• Fairfax India has performed poorly in North America, but Anchorage will truly value their Indian asset base.  This I think will occur after they take Fairfax India private, since doing so before risks inflating the share price and increasing the price of a buyout.
• The only advantage I can see of Fairfax India trading publically is it's ability to raise capital through sale of shares. Ironically, due to depressed share price x 10 yrs now, they are now capital constrained to make large purchases, such as IDBI.  
• They have used their 200M in the bank to back stop IIFL.  They will need a billion or two in short order if they get IDBI. 
• When your kid needs money in short order for a worthy venture, who is most likely to offer it? 

 

I disagree with this analysis almost 100% but that’s what makes a market.
 

I don’t share this framing of FFH in an adversarial position with respect to FIH. Nothing they have done thus far suggests that is the case. There are lots of other reasons to be public besides issuing shares. One of them is buying them back accretively which they have taken advantage of. It also makes it easier to issue debt (leverage increases the returns) and we have already discussed the benefit to capital of being listed for the insurance companies. If thinking in forever terms it makes no sense to give up this optionality. That’s what the original shareholders paid 5% front end load for, why throw it away for free?

 

With respect to IDBI, why is a sidecar structure not considered a possibility? Shouldn’t that be a giant catalyst for the shares as the fees generated offset a lot of the other fees paid to FFH? It’s probably the most popular reason I hear for avoiding FIH. I think that’s much more likely than FIH being taken private. Either way, shouldn’t either possibility be a reason to buy the stock at current levels? I’m dismissing outright the odds of an equity issue below BV.

 

Further, I find the comments around BIAL and coinvestment confusing. If we think BIAL is cheap then how did they pay a premium to buy out partners? I think it’s more likely the partners didn’t want to wait out an IPO process for liquidity and informed FIH, who responded with a bid. If you have some back up for your thesis, please share. You may be right but I’m just going with what I think is more likely. If FIH was to structure this purchase through a sidecar, FFH would be an LP like any other. OMERS and any other institutional investors who participate would be the same. 
 

The share discount started in 2018. Anyone who mainly invests outside of the benchmarks will tell you that the shift to passive, quant and crypto really accelerated at that point. 5-6 years is a long time but it’s not 10 plus they did take advantage of it by buying back a giant portion of the float.
 

FIH is certainly not popular for a lot of heuristics that have nothing to do with intrinsic value. The impact of passive (ETFs) and quants (screens) especially means that stocks that the number of opportunities has increased in stocks that don’t screen well while the population of investors willing to buy them has shrunk. As Viking pointed out also liquidity isn’t great. To me that’s more about a desire for immediate liquidity which has become much more important to investors since the GFC.
 

Active investors simply have what they think are better options to meet their hurdle rate and they may very well be right. My hurdle rate is 10% which is about what FIH has compounded at before IPO fees. I get to buy that at a ~30% discount plus I think there is a good chance they have undervalued the two thirds of the portfolio that doesn’t trade. Plus there are near term catalysts to close that discount.
 

It’s the timing that is uncertain which is why active investors prefer to buy things with defined catalysts. Over the past 5 years investing without defined catalysts has meant underperforming. Anyone still doing it has learned that lesson. FIH does have catalysts but the timing is uncertain and it’s possible no one will care because no matter how positive the catalysts, it will never be a “quality” stock i.e. a stock that screens well. 
 

By the way, that might also be the case for FFH except that it’s in a major benchmark. FFH also has the benefit of analyst coverage but because its earnings are volatile it doesn’t screen well. It’s hard for sh!tcos to get multiple expansion unless they are meme stocks. The buying is coming from passive and index huggers who are price insensitive. It’s the existing shareholders that decide what FFH is worth by where they choose to sell it. That’s how multiple expansion can get out of hand like it did in the late 90s.

 

FIH doesn’t have these advantages but I think Trevor Scott turned me on to the idea that if FFH got serious multiple expansion then the FIH discount will turn into a premium. That still might happen but if BVPS growth is strong annually then I will easily beat my hurdle rate and I still get to keep all of the right tail optionality that includes a go private which I still believe has an almost zero percent chance of happening but would offer a very nice return nonetheless.

[ICUMD]

6 minutes ago, SafetyinNumbers said:

 

With respect to IDBI, why is a sidecar structure not considered a possibility? Shouldn’t that be a giant catalyst for the shares as the fees generated offset a lot of the other fees paid to FFH? It’s probably the most popular reason I hear for avoiding FIH. I think that’s much more likely than FIH being taken private. Either way, shouldn’t either possibility be a reason to buy the stock at current levels? I’m dismissing outright the odds of an equity issue below BV.

You raise lots of great points, and I'm just presenting one scenario for arguments sake.

 

I'll address your Sidecar thesis:

Fairfax India has no money now after their 200M has been earmarked to back stop IIFL, if my accounting is correct. Yet they have soon thereafter confidently placed an all cash bid for IDBI.

 

They must already have a source of money lined up.

Seems to time well with their outperformance at FFH.

 

I personally doubt that they will find investors who will foot the majority of the bill for IDBI, and then pay heafty fees to FFH for management, based on an estimated BV, while trading at depressed values on the N. Amercan market.  

 

The only investor to do so would be FFH.

Even Omers would be out.

Abu Dhabi investment fund or Siemens?  Not a chance.

Dealing with these guys on such a large purchase would be a nightmare.

 

FFH buying IDBI directly is a possibility, but then they would be going back on their word that FIH is their non insurance investment vehicle in India.

 

In any case, I could be wrong, but buying out Fairfax India to make it private is what I would do under the circumstances.  Once the Indian investment portfolio is more developed with acquisitions, option is always there to take it public again when it can act more favorably for raising capital.

 

[SafetyinNumbers]

9 minutes ago, ICUMD said:

You raise lots of great points, and I'm just presenting one scenario for arguments sake.

 

I'll address your Sidecar thesis:

Fairfax India has no money now after their 200M has been earmarked to back stop IIFL, if my accounting is correct. Yet they have soon thereafter confidently placed an all cash bid for IDBI.

 

They must already have a source of money lined up.

Seems to time well with their outperformance at FFH.

 

I personally doubt that they will find investors who will foot the majority of the bill for IDBI, and then pay heafty fees to FFH for management, based on an estimated BV, while trading at depressed values on the N. Amercan market.  

 

The only investor to do so would be FFH.

Even Omers would be out.

Abu Dhabi investment fund or Siemens?  Not a chance.

Dealing with these guys on such a large purchase would be a nightmare.

 

FFH buying IDBI directly is a possibility, but then they would be going back on their word that FIH is their non insurance investment vehicle in India.

 

In any case, I could be wrong, but buying out Fairfax India to make it private is what I would do under the circumstances.  Once the Indian investment portfolio is more developed with acquisitions, option is always there to take it public again when it can act more favorably for raising capital.

 

I’m not sure why you think fees will be hefty. It’s $6b so even if the fees are small, it’s material to FIH. Why do you frame an investment as a bill for OMERS or other parties interested in Indian bank exposure? Why do you assume they are overpaying?
 

As for funds available, they did provide a backstop LOC for IIFL but that is being refinanced via a rights issue and convertible debentures. So it’s likely they ultimately write a much smaller check. They could tap into the revolver if necessary or sell another asset.
 

They could also contribute their CSB stake which was marked at $400m at year end. This could also be done at a premium given IDBI is the much bigger entity. A $600m investment would be over $4 share for FIH plus there might be leverage in performance fees. 
 

it’s a lot of fees to pay to take private and public again with seemingly no benefit in the long term. Again, you might be right but I think the odds are extremely low.

 

 

[ICUMD]

@SafetyinNumbers

Appreciate the counterarguments. I've been too optimistic previously so its good to have expectations tempered.

 

Still not convinced the sidecar model is the way Fairfax will go since I think ultimately they will want to outright own BIAL and IDBI, which can most swiftly accomplished with FIH going private.  

 

Potential investment partners will face regulatory hurdles possibly scuttling a deal or introducing delays.

 

FIHs market cap of 2 B means they are going elephant hunting for a 6 B IDBI with a pistol.  Yes, they can use credit lines and sell assets, but still will fall considerably short.

 

Some reports say IDBI will sell expensive, maybe around 2x BV.  Government of India needs to make this look like a good deal on their end. Indian markets are strong, so not expecting a fire sale here.

 

Yes privatization will mean FFH will have to give up the management fees that Fairfax India generates for them.  So that is the negative and maybe the reason why privatization won't happen.

 

Long run, my wager is outright ownership outweighs the fee structure benefits for FFH. Prem outright owning two prized Indian assets will be a tremendous source of pride for him.

 

I think we can agree the next 12 months will be interesting none the less.

 

 

[nwoodman]

I think the only thing that matters to Prem is control not outright ownership.  I have thought for a long time that the minority stakes are there purely to provide something to do for the next generation or if they run out of ideas.  I think he sees a nominal carry cost of 10% for the minority stakes as a no brainer 10% return idea if there aren’t better opportunities i.e. pay it down and your return is 10%.  Goes without saying that it only works for non-wasting assets.

 

Edit: The tantalising question is what does he see?  I think you have to frame any answer through a lens of BoI, Eurobank, CSB and Indian Macro. Unfortunately as it is play, I think it will be off limits at the AGM but please give it a crack

Edited March 24 by nwoodman

[SafetyinNumbers]

1 hour ago, nwoodman said:

I think the only thing that matters to Prem is control not outright ownership.  I have thought for a long time that the minority stakes are there purely to provide something to do for the next generation or if they run out of ideas.  I think he sees a nominal carry cost of 10% for the minority stakes as a no brainer 10% return idea if there aren’t better opportunities i.e. pay it down and your return is 10%.  Goes without saying that it only works for non-wasting assets.

 

Edit: The tantalising question is what does he see?  I think you have to frame any answer through a lens of BoI, Eurobank, CSB and Indian Macro. Unfortunately as it is play, I think it will be off limits at the AGM but please give it a crack

As a hypothetical, what if he did start buying more Eurobank this quarter assuming he was allowed to from a regulatory perspective and management was ok with it. 
 

Would that be cheered by investors as adding to something he knows really well or will it be seen as propping up an already big holding? 
 

Personally, I would love to see it. Eurobank can only benefit from having a lower cost of capital. There are likely accretive acquisitions to be had that would diversify the bank. 
 

If they were allowed do you think they would? 

 

[Hoodlum]

Today’s trading volume in the US and CA was double the average and much higher than last week.  I wonder if more shorts are getting added.  

[nwoodman]

On 3/24/2024 at 12:53 PM, SafetyinNumbers said:

As a hypothetical, what if he did start buying more Eurobank this quarter assuming he was allowed to from a regulatory perspective and management was ok with it. 
 

Would that be cheered by investors as adding to something he knows really well or will it be seen as propping up an already big holding? 
 

Personally, I would love to see it. Eurobank can only benefit from having a lower cost of capital. There are likely accretive acquisitions to be had that would diversify the bank. 
 

If they were allowed do you think they would? 

 

I still think Eurobank is a good deal today.  You will need to remind me why they can't buy more?

 

FWIW, MS downgraded them a smidge, but it is more of a rounding error. If their forward estimates are correct, then you pretty much get a P/E 6 machine, which gets Fairfax their 15%. It's very boring, but there's nothing wrong with that.

 

 

[MMM20]

16 hours ago, Hoodlum said:

Today’s trading volume in the US and CA was double the average and much higher than last week.  I wonder if more shorts are getting added.  

 

Why does higher volume imply shorts adding?

[Hoodlum]

27 minutes ago, MMM20 said:

 

Why does higher volume imply shorts adding?

While it doesn’t necessarily equate, but shorts need to sell borrowed share to add to their position.  It could also be some large blocks trading for another reason.  

Edited March 26 by Hoodlum

[SafetyinNumbers]

10 hours ago, nwoodman said:

I still think Eurobank is a good deal today.  You will need to remind me why they can't buy more?

 

FWIW, MS downgraded them a smidge, but it is more of a rounding error. If their forward estimates are correct, then you pretty much get a P/E 6 machine, which gets Fairfax their 15%. It's very boring, but there's nothing wrong with that.

 

 

I don’t know if they can or not but given it’s a bank, I figure there might be some regulatory restrictions like there are in other countries or it’s possible management wants it to be more wildly held thinking that’s the best way to a rerate.

 

I’m surprised they cut 2025 estimates following the guidance which seemed conservative.

Edited March 26 by SafetyinNumbers

[glider3834]

https://www.canadianunderwriter.ca/announcements/onlia-acquired-by-pe-firm-focused-on-canadian-pc-distribution-1004244415/

[Hoodlum]

25 minutes ago, glider3834 said:

https://www.canadianunderwriter.ca/announcements/onlia-acquired-by-pe-firm-focused-on-canadian-pc-distribution-1004244415/

it looks like Fairfax invested a total of $24M US in 2018/19 for their 50% ownership of Onlia.  I have not found any other mention of this investment since then so I have no idea of its current value. 

[Viking]

4 hours ago, Hoodlum said:

it looks like Fairfax invested a total of $24M US in 2018/19 for their 50% ownership of Onlia.  I have not found any other mention of this investment since then so I have no idea of its current value. 

Looks to me like Fairfax is exiting an investment was probably not working out as hoped/expected. Time to move on.
 

From Achmea’s website:

 

- https://news.achmea.nl/achmea-and-fairfax-sell-canadian-start-up-onlia/

 

“Achmea and Canada's Fairfax Financial Holdings Limited have reached an agreement on the sale of online insurance agency Onlia to Southampton Financial Inc.  (“SHFI”). Both parties expect that healthy growth and further development of the start-up will be better guaranteed outside the Achmea Fairfax combination. The financial impact of this transaction is limited.

 

“Onlia was founded in 2018 as a joint venture between Achmea and Fairfax (both 50% shareholders). The online IT platform of InShared, Achmea's digital non-life insurer, served as the basis for this. Onlia now has around 24,000 customers and a premium turnover of €44 million with home and car insurance. Southampton will take over the entire customer portfolio, while respecting and continuing the existing contractual agreements regarding Onlia's services to customers.

 

“SHFI is a holding company backed by strategic value-adding  investors in the Canadian property and casualty distribution space. It provides strategic guidance and oversight, access to capital, new markets and back-end support services, including a leading-edge insurance technology platform to its portfolio companies, allowing them to focus on organic growth and to develop market leading insurance propositions serving the needs of a variety of consumers. SHFI shareholders are a group of industry veterans, (i.e. insurance companies, MGUs and brokerages) who benefit from an exceptional network and deep operational experience.”

 

Edited March 27 by Viking

[glider3834]

https://www.reinsurancene.ws/lloyds-syndicate-ki-expands-digital-follow-capacity-with-beazley-partnership/

 

'Ki’s partnership with Beazley, alongside the existing multi-year partnerships with Travelers and Aspen, and growth plans for Ki Syndicate 1618, will see Ki materially increase the follow capacity it is able to offer in 2024, the firm claimed.'

[Viking]

How to value Fairfax - a shorthand method

 

There is usually no one ‘right way’ to value a company. Using multiple methods can provide for a more robust analysis. Weighting the different methods can also be helpful. For the past 3 years i have been valuing Fairfax primarily through the lens of a turnaround.

 

What about today?

 

Much has changed at Fairfax over the past 3 years.

• Most importantly, the company stopped doing the things that were causing its underperformance.
• It has also fixed most of the problems that were residing in its equity portfolio.
• The management team/Hamblin Watsa has been putting on a clinic in capital allocation.
• The insurance business has been quietly chugging along.

Weave it all together and Fairfax’s two businesses - insurance and investment management - are now performing at a high level and delivering record earnings. And they both look very well positioned for the future.

 

Bottom line, the turnaround at Fairfax is over. Mission accomplished. Truth be told, the turnaround at Fairfax was probably completed a year ago.

 

So what is the best way to value Fairfax today?

 

I think we can start to value Fairfax not primarily as a turnaround but more like a normal P/C insurance company.

 

Historical results are starting to become useful for investors as an indicator of future performance. The picture of the earnings power of ‘new Fairfax’ is slowly coming into focus for investors.

 

What are the key metrics we should be looking at to value a P/C insurance company?

 

The two most important metrics are:

• Return on equity (ROE)
• Price to book value (P/BV)

ROE tells us how the company is performing. P/BV tells us how Mr. Market is valuing that performance. Looked at together, these two metrics can provide us with a great deal of insight into how Mr. Market is currently thinking about a company and how it is being valued.

 

We can unpack ROE. ROE can be looked at as the product of two components:

• Combined ratio (CR)
• Total return on the investment portfolio (TRIP)

In this post we will explore Fairfax’s CR, TRIP, ROE and P/BV to see what they tell us about how the company’s stock is currently being valued by Mr. Market.

————

In 2019, Woodlock House Family Capital wrote an article on Fairfax that i have always liked. At the time, it provided a fair assessment of the company. It also provided a short and concise way to  value the company using estimates of the combined ratio, total return on investments, ROE and P/BV.

 

And i love ‘the horse story’ as a useful mental model when it comes to both life and investing.

• https://www.woodlockhousefamilycapital.com/post/the-horse-story

—————

So let’s apply the simple framework outlined by Woodlock and see what we can learn about Fairfax’s valuation today.

 

First, let’s start by looking at the past.

 

How did Fairfax do from 2018 to 2022 (average over the 5 year period)

1. CR = 96.3%
2. TRIP = 5.3%

That combination of results delivered an average ROE of 10.1%. The ROE was very volatile. This is because investment gains (losses) was the biggest component of Fairfax’s various income streams from 2018 to 2022 (on average). We had bear markets in stocks in 2018, 2020 and 2022 and an epic bear market in bonds in 2022. Of interest, despite the crazy volatility in financial markets Fairfax still delivered an average ROE of 10.1% - this performance is likely much better than most investors would have guessed.

 

 

How did Fairfax do in 2023?

1. CR = 93.2%
2. TRIP = 9.6%

That combination of results delivered an ROE of 22%

 

Fairfax’s performance in 2023 (CR, TRIP and ROE) was a significant improvement from the company’s 5-years average (2018-2022).

 

Was this outperformance a simply the result of a bunch of one-time events? Or is something else going on? Are these much better results sustainable?   

 

To answer these questions, let’s review what happened in 2023 at a very top-line level.

 

Insurance operations:

• The hard market in insurance that started in late 2019 continued to be a tailwind.
• The quality of Fairfax’s collection of insurance companies continued to improve.

Investment management:

• The yield of the fixed income portfolio increased from an average of 2.5% from 2018-2022 to 4.4% in 2023. This is  massive increase in yield. In 2023, Fairfax increased the average duration of its $45 billion fixed income portfolio from 1.6 to more than 3 years. This locks in the much higher yield for the next 3 or 4 years. Interest income has exploded higher and the higher amount is sustainable.
• At $2.4 billion, Fairfax’s largest equity holding is Eurobank. The Greek economy is now one of Europe’s top performing economies. Eurobank has increased substantially in value over the past 36 months and the company looks very well positioned. It is trading today at 6 x EPS - despite the big move higher the stock is still cheap.
• At $2.1 billion, Fairfax’s lsecond largest ‘equity’ holding is FFH - Total Return Swaps (giving Fairfax exposure to 1.96 million Fairfax shares). This position has been an exceptional performer for Fairfax over the past 36 months - and it looks very well positioned looking forward. Despite the big move higher the stock is still cheap (more on this below).
• The overall quality of Fairfax’s remaining collection of equity holdings ($14.5 billion) has improved considerably over the past 6 years.

Bottom line, Fairfax’s insurance businesses and investment portfolio has never been better positioned in its history than it is today. This suggests the exceptional results Fairfax delivered in 2023 (driven by the CR and TRIP) are not one-time in nature. Rather, it appears Fairfax is entering a period where it could earn a ROE over the next couple of years that is structurally higher than the one it delivered in the recent past (2018-2022).

 

What is my forecast for Fairfax for 2024?

1. CR = 95%
2. TRIP = 7.4% (details are provided at the end of the post).

This combination of results would deliver an ROE of about 15.8%.

 

Over the next couple of years, Fairfax is positioned to deliver an average CR of about 95% and a TRIP of around 7.4%. That combination of reported results should result in an ROE that averages a little better than 17% (2023 to 2025).

 

Importantly, the volatility of this ROE should be less than what was seen from 2018-2022. This is because interest and dividend income has become the largest income stream for Fairfax. Share of profit of associates has also become a very important income stream. Importantly (from a volatility perspective), gains (losses) from investments is no longer the most important driver of earnings for Fairfax.

 

 

What multiple should a consistent 15% ROE be valued at?

 

Something starting at around 1.3 x book value seems like a low but reasonable target multiple to use for Fairfax looking out 12 to 24 months.

 

How is Fairfax valued today?

 

Fairfax is trading today at a P/BV of 1.15 x (book value at Dec 31, 2023).

 

For Q1 analysts estimate Fairfax will earn C$59.56/share = US$44.00/share (from Yahoo finance). If we subtract the $15 dividend that was paid by Fairfax in January we can estimate Fairfax’s BVPS at March 31, 2024 = $969/share. This puts Fairfax’s ‘real time’ P/BV at about 1.10 x.

 

Is a P/BV multiple of 1.10 x reflective of a company that is delivering an ROE of 15% per year? No, a 1.1 x multiple is usually assigned to P/C insurance companies that are poorly managed and expected to deliver poor results in the future (an ROE of less than 10%).

 

 

What is the disconnect?

 

Yes, Fairfax delivered an exceptional ROE of 22% in 2023. Mr. Market is beginning to grasp the fact that Fairfax’s earnings have materially increased. But it looks to me like Mr. Market does not yet believe the higher earnings (and ROE) are sustainable. Mr. Market likely expects Fairfax’s ROE to quickly return to its historical level of 10%. And for the ROE to be very volatile.

 

It also should be pointed Fairfax’s stock has increase 216% over the past 3.25 years. Clearly Mr. Market has been warming to the Fairfax story over the past couple of years.

 

 

Let’s look into the future.

 

My current estimate is for Fairfax to earn $160/share in 2024 and $165/share in 2025. I view these estimates as being a reasonable base case (being not overly aggressive or overly conservative).

 

Using my earnings estimate, it is straight forward to calculate an estimated 2024 year-end book value for Fairfax (we will subtract Fairfax’s $15 dividend that is paid in January of each year). We can then add a P/BV multiple to the year-end BV to come up with an estimate of where the shares could trade looking out 12 months. We can compare this estimate to Fairfax’s current share price to calculate the potential return for the stock.

 

Below, we will look at four different P/BV multiples: 1.1, 1.2, 1.3 and 1.4

We will also use two different time frames: 12 months and 24 months.

 

As stated earlier, I think Fairfax is poised to deliver an average ROE of about 15% over the next couple of years (high and consistent). Therefore, I think a P/BV multiple of 1.3 is a reasonable and conservative multiple to use to value Fairfax - looking out 12 and 24 months. But a range of multiples have been provided so readers can see multiple scenarios.

 

Estimating the 1-year (12 month) potential return for Fairfax’s stock

 

If Fairfax earned $160/share in 2024 and the stock traded at a P/BV of 1.3x in March of 2025, the stock would deliver a return of about 31% over the next 12 months.

 

 

Estimating the 2-year (24 month) potential return for Fairfax’s stock

 

If Fairfax earned $160/share in 2024 and $165/share in 2025 and the stock traded at a P/BV of 1.3x in March of 2026, the stock would deliver a return of about 49% over the next 24 months. Adding in the dividend of $15/share and the total return for shareholders would be about 50%. Not too shabby.

 

 

Valuing Fairfax through the lens of a P/C insurer

 

In 2023, Fairfax delivered a CR of 93.2% and a total return on investments of 9.6%. In turn this delivered an ROE of 22%. In the coming years the company looks poised to deliver an average  CR of 95% and a total return on investments of 7.4%. This should enable the company to deliver an ROE of around 17% (2023-2025) with less volatility than past years.

 

Today, Fairfax is trading at a P/BV multiple of about 1.10x (to estimated BV of $969/share at March 31, 2024). Given its past results and future prospects, this multiple looks very low. Bottom line, despite its monster run the past 3.25 years, the valuation of Fairfax’s stock continues to look very cheap.

 

As Fairfax delivers on its potential, my guess is Mr. Market will continue to warm to the Fairfax story and slowly push the P/BV multiple the company trades at higher.

 

As a result, future returns for investors in Fairfax will be driven by two factors:

• Earnings
• Increase in multiple

And as we learned earlier, that is a great set-up for patient investors.

—————

Fairfax: My three questions for 2024:

 

To value a P/C insurance company, in addition to important objective criteria like ROE and P/BV, there are also important subjective criteria to consider:

1. What is the quality of the insurance business?
2. What is the quality of the equity holdings?
3. How good is Fairfax at capital allocation?

The answers to the three questions above will provide important inputs that feed into future earnings and ROE estimates.

 

I have three separate theses:

1. Fairfax’s insurance business is higher quality than investors generally think today. If correct, this suggests Fairfax’s future CR could come in better than is currently expected.
2. Fairfax’s equity holdings (as a group) has improved markedly in quality over the past 6 years. I don’t think this fully recognized by investors today. This suggests to me that future results from the equity portfolio could come in higher than is currently expected. This suggests Fairfax’s TRIP could come in better than is currently expected.
3. Fairfax is better at capital allocation than investors generally think today.

If one or more of my theses outlined above proves true that would be a tailwind for future earnings at Fairfax. As Fairfax releases results each quarter in 2024 we will be given important clues. 

 

Bottom line, I think Fairfax is a higher quality company that is generally understood today.

 

The good news is my ‘quality’ thesis for Fairfax is not priced into the shares today. Remember, Fairfax currently trades at a P/BV multiple of about 1.1 x. So if my thesis above is wrong there is likely limited downside. However, if my thesis is correct then there is significant upside as the shares get re-rated to a higher multiple. The risk/reward set-up today looks heavily skewed to the upside.

—————

Estimating the total return on the investment portfolio

 

Below is a chart that estimates the total return on Fairfax’s investment portfolio going back to 2018. It also has an estimate for 2024 and 2025.

 

The key take-aways?

 

Bigger + higher return:

• The investment portfolio increased in size from $39 billion in 2018 to $65 billion in 2023, which is an increase of 66%.
• Fairfax averaged a total return of 5.3% from 2018-2022. In 2023 the return was 9.6% and the estimate for both 2024 and 2025 is 7.4%. Fairfax is poised to earn a rate of return on its investment portfolio that is 40% higher than what it earned from 2018-2022.

More consistent (less volatile): interest and dividends is now driving more than 40% of the total return. Share of profit of associates is now driving more than 20%. This will greatly reduce the volatility of investment returns in the coming years. In turn, this will greatly reduce the volatility of the ROE (compared to the past).

 

2024 Investment Portfolio Estimates  - Key Assumptions:

1. Interest and dividends: average fixed income portfolio = $46m x 4.7% yield
2. Share of profit of associates: Eurobank = $440m; Poseidon = $180m; Fairfax India = $160m
3. Other - non-insurance consolidated companies: includes Recipe, Thomas Cook India, Grivalia Hospitality, AGT, Dexterra, Sporting Life.
4. Net gains (losses) on investments: FFH-TRS = $500m (1.96m x $250); mark-to-market equities = $500 million ($7b x 7%). Assume no change in fixed income portfolio.
5. One time gain (sale/revaluation): $300m. This will be lumpy from year to year.
6. Associates/consolidated holdings - YOY change in FV vs CV: Eurobank, Thomas Cook India, Stelco etc.

 

The list above is not all-inclusive. Therefore, it likely understates the actual increase in intrinsic value that will be building at Fairfax’s various holdings over time (insurance and non-insurance).

 

 

A Short Note on Volatility

 

The past 2 years there has been a meaningful structural shift at Fairfax in total investment return towards what are considered higher quality sources.

 

From 2018-2022, two items, interest and dividends and share of profit of associates, represented 48% of the total investment return each year. In 2024, the same two items now represent 66% of the estimated total investment return. It is the same (66%) for 2025.

 

Bottom line, there should be significantly less volatility in Fairfax’s total investment return moving forward when compared the past. For most investors lower volatility = higher quality. And higher quality earnings deserves a higher multiple (P/BV).

----------

What does Fairfax's historical P/BV look like?

 

Fairfax's stock trading today at a P/BV multiple of 1.1 x; this looks to be near the lower end of its historical range. Does this make sense given what we know about the company today?

 

 

Source: COBF @MMInvestor0

Edited March 31 by Viking

[MMM20]

https://www.valueinvestorsclub.com/idea/FAIRFAX_FINANCIAL_HOLDINGS/8951778558

 

Fairfax write-up on VIC from Feb 14th. Sorry if this has already been posted. 

 

"MW never discusses the earnings power of the business.  Why?  Because it makes a mockery out of the short thesis.  In my opinion, the company, helped by higher interest rates and a hard insurance market, will be able to generate north of $200 per share in EPS per annum for at least the next three to five years. 
 
"Muddy Waters never states what the company is worth and why.  It ignores all disconfirming evidence and ignores the elephant in the room – the earnings power of the business.  When a company is trading at five times net income, MW must expect earnings to collapse, and if they don’t how will the short work?"

 

Edited April 2 by MMM20

[Hamburg Investor]

On 3/31/2024 at 8:07 PM, Viking said:

How to value Fairfax - a shorthand method

 

There is usually no one ‘right way’ to value a company. Using multiple methods can provide for a more robust analysis. Weighting the different methods can also be helpful. For the past 3 years i have been valuing Fairfax primarily through the lens of a turnaround.

 

What about today?

 

Much has changed at Fairfax over the past 3 years.

• Most importantly, the company stopped doing the things that were causing its underperformance.
• It has also fixed most of the problems that were residing in its equity portfolio.
• The management team/Hamblin Watsa has been putting on a clinic in capital allocation.
• The insurance business has been quietly chugging along.

Weave it all together and Fairfax’s two businesses - insurance and investment management - are now performing at a high level and delivering record earnings. And they both look very well positioned for the future.

 

Bottom line, the turnaround at Fairfax is over. Mission accomplished. Truth be told, the turnaround at Fairfax was probably completed a year ago.

 

So what is the best way to value Fairfax today?

 

I think we can start to value Fairfax not primarily as a turnaround but more like a normal P/C insurance company.

 

Historical results are starting to become useful for investors as an indicator of future performance. The picture of the earnings power of ‘new Fairfax’ is slowly coming into focus for investors.

 

What are the key metrics we should be looking at to value a P/C insurance company?

 

The two most important metrics are:

• Return on equity (ROE)
• Price to book value (P/BV)

ROE tells us how the company is performing. P/BV tells us how Mr. Market is valuing that performance. Looked at together, these two metrics can provide us with a great deal of insight into how Mr. Market is currently thinking about a company and how it is being valued.

 

We can unpack ROE. ROE can be looked at as the product of two components:

• Combined ratio (CR)
• Total return on the investment portfolio (TRIP)

In this post we will explore Fairfax’s CR, TRIP, ROE and P/BV to see what they tell us about how the company’s stock is currently being valued by Mr. Market.

————

In 2019, Woodlock House Family Capital wrote an article on Fairfax that i have always liked. At the time, it provided a fair assessment of the company. It also provided a short and concise way to  value the company using estimates of the combined ratio, total return on investments, ROE and P/BV.

 

And i love ‘the horse story’ as a useful mental model when it comes to both life and investing.

• https://www.woodlockhousefamilycapital.com/post/the-horse-story

—————

So let’s apply the simple framework outlined by Woodlock and see what we can learn about Fairfax’s valuation today.

 

First, let’s start by looking at the past.

 

How did Fairfax do from 2018 to 2022 (average over the 5 year period)

1. CR = 96.3%
2. TRIP = 5.3%

That combination of results delivered an average ROE of 10.1%. The ROE was very volatile. This is because investment gains (losses) was the biggest component of Fairfax’s various income streams from 2018 to 2022 (on average). We had bear markets in stocks in 2018, 2020 and 2022 and an epic bear market in bonds in 2022. Of interest, despite the crazy volatility in financial markets Fairfax still delivered an average ROE of 10.1% - this performance is likely much better than most investors would have guessed.

 

 

How did Fairfax do in 2023?

1. CR = 93.2%
2. TRIP = 9.6%

That combination of results delivered an ROE of 22%

 

Fairfax’s performance in 2023 (CR, TRIP and ROE) was a significant improvement from the company’s 5-years average (2018-2022).

 

Was this outperformance a simply the result of a bunch of one-time events? Or is something else going on? Are these much better results sustainable?   

 

To answer these questions, let’s review what happened in 2023 at a very top-line level.

 

Insurance operations:

• The hard market in insurance that started in late 2019 continued to be a tailwind.
• The quality of Fairfax’s collection of insurance companies continued to improve.

Investment management:

• The yield of the fixed income portfolio increased from an average of 2.5% from 2018-2022 to 4.4% in 2023. This is  massive increase in yield. In 2023, Fairfax increased the average duration of its $45 billion fixed income portfolio from 1.6 to more than 3 years. This locks in the much higher yield for the next 3 or 4 years. Interest income has exploded higher and the higher amount is sustainable.
• At $2.4 billion, Fairfax’s largest equity holding is Eurobank. The Greek economy is now one of Europe’s top performing economies. Eurobank has increased substantially in value over the past 36 months and the company looks very well positioned. It is trading today at 6 x EPS - despite the big move higher the stock is still cheap.
• At $2.1 billion, Fairfax’s lsecond largest ‘equity’ holding is FFH - Total Return Swaps (giving Fairfax exposure to 1.96 million Fairfax shares). This position has been an exceptional performer for Fairfax over the past 36 months - and it looks very well positioned looking forward. Despite the big move higher the stock is still cheap (more on this below).
• The overall quality of Fairfax’s remaining collection of equity holdings ($14.5 billion) has improved considerably over the past 6 years.

Bottom line, Fairfax’s insurance businesses and investment portfolio has never been better positioned in its history than it is today. This suggests the exceptional results Fairfax delivered in 2023 (driven by the CR and TRIP) are not one-time in nature. Rather, it appears Fairfax is entering a period where it could earn a ROE over the next couple of years that is structurally higher than the one it delivered in the recent past (2018-2022).

 

What is my forecast for Fairfax for 2024?

1. CR = 95%
2. TRIP = 7.4% (details are provided at the end of the post).

This combination of results would deliver an ROE of about 15.8%.

 

Over the next couple of years, Fairfax is positioned to deliver an average CR of about 95% and a TRIP of around 7.4%. That combination of reported results should result in an ROE that averages a little better than 17% (2023 to 2025).

 

Importantly, the volatility of this ROE should be less than what was seen from 2018-2022. This is because interest and dividend income has become the largest income stream for Fairfax. Share of profit of associates has also become a very important income stream. Importantly (from a volatility perspective), gains (losses) from investments is no longer the most important driver of earnings for Fairfax.

 

 

What multiple should a consistent 15% ROE be valued at?

 

Something starting at around 1.3 x book value seems like a low but reasonable target multiple to use for Fairfax looking out 12 to 24 months.

 

How is Fairfax valued today?

 

Fairfax is trading today at a P/BV of 1.15 x (book value at Dec 31, 2023).

 

For Q1 analysts estimate Fairfax will earn C$59.56/share = US$44.00/share (from Yahoo finance). If we subtract the $15 dividend that was paid by Fairfax in January we can estimate Fairfax’s BVPS at March 31, 2024 = $969/share. This puts Fairfax’s ‘real time’ P/BV at about 1.10 x.

 

Is a P/BV multiple of 1.10 x reflective of a company that is delivering an ROE of 15% per year? No, a 1.1 x multiple is usually assigned to P/C insurance companies that are poorly managed and expected to deliver poor results in the future (an ROE of less than 10%).

 

 

What is the disconnect?

 

Yes, Fairfax delivered an exceptional ROE of 22% in 2023. Mr. Market is beginning to grasp the fact that Fairfax’s earnings have materially increased. But it looks to me like Mr. Market does not yet believe the higher earnings (and ROE) are sustainable. Mr. Market likely expects Fairfax’s ROE to quickly return to its historical level of 10%. And for the ROE to be very volatile.

 

It also should be pointed Fairfax’s stock has increase 216% over the past 3.25 years. Clearly Mr. Market has been warming to the Fairfax story over the past couple of years.

 

 

Let’s look into the future.

 

My current estimate is for Fairfax to earn $160/share in 2024 and $165/share in 2025. I view these estimates as being a reasonable base case (being not overly aggressive or overly conservative).

 

Using my earnings estimate, it is straight forward to calculate an estimated 2024 year-end book value for Fairfax (we will subtract Fairfax’s $15 dividend that is paid in January of each year). We can then add a P/BV multiple to the year-end BV to come up with an estimate of where the shares could trade looking out 12 months. We can compare this estimate to Fairfax’s current share price to calculate the potential return for the stock.

 

Below, we will look at four different P/BV multiples: 1.1, 1.2, 1.3 and 1.4

We will also use two different time frames: 12 months and 24 months.

 

As stated earlier, I think Fairfax is poised to deliver an average ROE of about 15% over the next couple of years (high and consistent). Therefore, I think a P/BV multiple of 1.3 is a reasonable and conservative multiple to use to value Fairfax - looking out 12 and 24 months. But a range of multiples have been provided so readers can see multiple scenarios.

 

Estimating the 1-year (12 month) potential return for Fairfax’s stock

 

If Fairfax earned $160/share in 2024 and the stock traded at a P/BV of 1.3x in March of 2025, the stock would deliver a return of about 31% over the next 12 months.

 

 

Estimating the 2-year (24 month) potential return for Fairfax’s stock

 

If Fairfax earned $160/share in 2024 and $165/share in 2025 and the stock traded at a P/BV of 1.3x in March of 2026, the stock would deliver a return of about 49% over the next 24 months. Adding in the dividend of $15/share and the total return for shareholders would be about 50%. Not too shabby.

 

 

Valuing Fairfax through the lens of a P/C insurer

 

In 2023, Fairfax delivered a CR of 93.2% and a total return on investments of 9.6%. In turn this delivered an ROE of 22%. In the coming years the company looks poised to deliver an average  CR of 95% and a total return on investments of 7.4%. This should enable the company to deliver an ROE of around 17% (2023-2025) with less volatility than past years.

 

Today, Fairfax is trading at a P/BV multiple of about 1.10x (to estimated BV of $969/share at March 31, 2024). Given its past results and future prospects, this multiple looks very low. Bottom line, despite its monster run the past 3.25 years, the valuation of Fairfax’s stock continues to look very cheap.

 

As Fairfax delivers on its potential, my guess is Mr. Market will continue to warm to the Fairfax story and slowly push the P/BV multiple the company trades at higher.

 

As a result, future returns for investors in Fairfax will be driven by two factors:

• Earnings
• Increase in multiple

And as we learned earlier, that is a great set-up for patient investors.

—————

Fairfax: My three questions for 2024:

 

To value a P/C insurance company, in addition to important objective criteria like ROE and P/BV, there are also important subjective criteria to consider:

1. What is the quality of the insurance business?
2. What is the quality of the equity holdings?
3. How good is Fairfax at capital allocation?

The answers to the three questions above will provide important inputs that feed into future earnings and ROE estimates.

 

I have three separate theses:

1. Fairfax’s insurance business is higher quality than investors generally think today. If correct, this suggests Fairfax’s future CR could come in better than is currently expected.
2. Fairfax’s equity holdings (as a group) has improved markedly in quality over the past 6 years. I don’t think this fully recognized by investors today. This suggests to me that future results from the equity portfolio could come in higher than is currently expected. This suggests Fairfax’s TRIP could come in better than is currently expected.
3. Fairfax is better at capital allocation than investors generally think today.

If one or more of my theses outlined above proves true that would be a tailwind for future earnings at Fairfax. As Fairfax releases results each quarter in 2024 we will be given important clues. 

 

Bottom line, I think Fairfax is a higher quality company that is generally understood today.

 

The good news is my ‘quality’ thesis for Fairfax is not priced into the shares today. Remember, Fairfax currently trades at a P/BV multiple of about 1.1 x. So if my thesis above is wrong there is likely limited downside. However, if my thesis is correct then there is significant upside as the shares get re-rated to a higher multiple. The risk/reward set-up today looks heavily skewed to the upside.

—————

Estimating the total return on the investment portfolio

 

Below is a chart that estimates the total return on Fairfax’s investment portfolio going back to 2018. It also has an estimate for 2024 and 2025.

 

The key take-aways?

 

Bigger + higher return:

• The investment portfolio increased in size from $39 billion in 2018 to $65 billion in 2023, which is an increase of 66%.
• Fairfax averaged a total return of 5.3% from 2018-2022. In 2023 the return was 9.6% and the estimate for both 2024 and 2025 is 7.4%. Fairfax is poised to earn a rate of return on its investment portfolio that is 40% higher than what it earned from 2018-2022.

More consistent (less volatile): interest and dividends is now driving more than 40% of the total return. Share of profit of associates is now driving more than 20%. This will greatly reduce the volatility of investment returns in the coming years. In turn, this will greatly reduce the volatility of the ROE (compared to the past).

 

2024 Investment Portfolio Estimates  - Key Assumptions:

1. Interest and dividends: average fixed income portfolio = $46m x 4.7% yield
2. Share of profit of associates: Eurobank = $440m; Poseidon = $180m; Fairfax India = $160m
3. Other - non-insurance consolidated companies: includes Recipe, Thomas Cook India, Grivalia Hospitality, AGT, Dexterra, Sporting Life.
4. Net gains (losses) on investments: FFH-TRS = $500m (1.96m x $250); mark-to-market equities = $500 million ($7b x 7%). Assume no change in fixed income portfolio.
5. One time gain (sale/revaluation): $300m. This will be lumpy from year to year.
6. Associates/consolidated holdings - YOY change in FV vs CV: Eurobank, Thomas Cook India, Stelco etc.

 

The list above is not all-inclusive. Therefore, it likely understates the actual increase in intrinsic value that will be building at Fairfax’s various holdings over time (insurance and non-insurance).

 

 

A Short Note on Volatility

 

The past 2 years there has been a meaningful structural shift at Fairfax in total investment return towards what are considered higher quality sources.

 

From 2018-2022, two items, interest and dividends and share of profit of associates, represented 48% of the total investment return each year. In 2024, the same two items now represent 66% of the estimated total investment return. It is the same (66%) for 2025.

 

Bottom line, there should be significantly less volatility in Fairfax’s total investment return moving forward when compared the past. For most investors lower volatility = higher quality. And higher quality earnings deserves a higher multiple (P/BV).

----------

What does Fairfax's historical P/BV look like?

 

Fairfax's stock trading today at a P/BV multiple of 1.1 x; this looks to be near the lower end of its historical range. Does this make sense given what we know about the company today?

 

 

Source: COBF @MMInvestor0

Thank you, @Viking, again a great perspective. „I have nothing more to add“, but I have one question.

 

With a roe of 15% for the next two years (and probably some more… and maybe for the very longterm, if Prem finishes his outspoken goal) and using the pb ratios from 1.1 to 1.4 you use in your analysis - what pe ratios would that be? PE Ratios of 7 to 9 (1.1 divided through 0.15…)

 

Are those typical pe ratios people pin on the wall, when analysing other companies with a 15% roe in the last years? PE Ratios of 7, 8, 9? I don‘t think so.

 

Why is that? When looking at Berkshire, it has been valued above a pb ratio of 2.0 since 1985 only in very rare cases; and that time, when that hallend (until mid 1990ies) were times, when BRKs roe was well above 15%. The picture would be similar for Markel I think and for Fairfax (there were higher valuations at some points; but since over 2 decades valuations above 2.0 were really rare). 
 

How can this be? The average S&P500 company has been valued at pe ratios of around 15 to 30 most of the time since the 1990ies (https://www.multpl.com/s-p-500-pe-ratio). And the strong insurance growers, outgrowing over 90% (99%?) of stocks since the 1980ies with roes between 15% and 19% since the mid 1980ies (or longer) have nearly never been valued as the average S&P500 company. How can that be? Why is that? A PB Ratio of 1.3 feels normal for an insurance company. But it shouldn‘t. Are we all biased due to a „pb ratio anchor effect“.
 

So something like  „PB Ratios between 1.0 and 1.5 is normal for an insurance company“ Even though that‘s like saying „insurance companies should be valued at a pe ratio of 8; that’s less than a third of the average S&P500 company, which is valued at a PE Ratio of 27 these days. Insurance companies are not worth more, even though insurers have higher roes. Somehow this doesn‘t make any sense to me, but that’s how insurers are seen over decades. I can live with that, as I jever feel any pressure selling an insurance stock for its rich valuation and it helps the company to buy back stocks on the cheap site.

 

Still it doesn‘t feel consistent that insurers often don’t get compared to other investements on an apples to apples basis. 

[Viking]

17 hours ago, Hamburg Investor said:

Thank you, @Viking, again a great perspective. „I have nothing more to add“, but I have one question.

 

With a roe of 15% for the next two years (and probably some more… and maybe for the very longterm, if Prem finishes his outspoken goal) and using the pb ratios from 1.1 to 1.4 you use in your analysis - what pe ratios would that be? PE Ratios of 7 to 9 (1.1 divided through 0.15…)

 

Are those typical pe ratios people pin on the wall, when analysing other companies with a 15% roe in the last years? PE Ratios of 7, 8, 9? I don‘t think so.

 

Why is that? When looking at Berkshire, it has been valued above a pb ratio of 2.0 since 1985 only in very rare cases; and that time, when that hallend (until mid 1990ies) were times, when BRKs roe was well above 15%. The picture would be similar for Markel I think and for Fairfax (there were higher valuations at some points; but since over 2 decades valuations above 2.0 were really rare). 
 

How can this be? The average S&P500 company has been valued at pe ratios of around 15 to 30 most of the time since the 1990ies (https://www.multpl.com/s-p-500-pe-ratio). And the strong insurance growers, outgrowing over 90% (99%?) of stocks since the 1980ies with roes between 15% and 19% since the mid 1980ies (or longer) have nearly never been valued as the average S&P500 company. How can that be? Why is that? A PB Ratio of 1.3 feels normal for an insurance company. But it shouldn‘t. Are we all biased due to a „pb ratio anchor effect“.
 

So something like  „PB Ratios between 1.0 and 1.5 is normal for an insurance company“ Even though that‘s like saying „insurance companies should be valued at a pe ratio of 8; that’s less than a third of the average S&P500 company, which is valued at a PE Ratio of 27 these days. Insurance companies are not worth more, even though insurers have higher roes. Somehow this doesn‘t make any sense to me, but that’s how insurers are seen over decades. I can live with that, as I jever feel any pressure selling an insurance stock for its rich valuation and it helps the company to buy back stocks on the cheap site.

 

Still it doesn‘t feel consistent that insurers often don’t get compared to other investements on an apples to apples basis. 

@Hamburg Investor i don’t have a lot of insight as to why P/C insurers trade at the multiples they do compared to other industries and the market as a whole.
 

P/C insurance is a pretty small sector and i don’t think it is followed all that closely by most investors. 
 

But i think i can spot cheap. Fairfax is trading at about 1.1 x BV (est March 31, 2024) or at a PE of 6.5 x (est 2024 earnings). 
 

Of all the valuation measures, P/BV appears to be the most important. Multiple expansion has been happening for Fairfax over the past couple of years - investors are warming to the Fairfax story. If Fairfax continues to deliver solid results in 2024 and 2025 my guess is we will see multiple expansion continue.

 

Edited April 3 by Viking

[Hoodlum]

44 minutes ago, Viking said:

@Hamburg Investor i don’t have a lot of insight as to why P/C insurers trade at the multiples they do compared to other industries and the market as a whole.
 

P/C insurance is a pretty small sector and i don’t think it is followed all that closely by most investors. 
 

But i think i can spot cheap. Fairfax is trading at about 1.1 x BV (est March 31, 2024) or at a PE of 6.5 x (est 2024 earnings). 
 

Of all the valuation measures, P/BV appears to be the most important. Multiple expansion has been happening for Fairfax over the past couple of years - investors are warming to the Fairfax story. If Fairfax continues to deliver solid results in 2024 and 2025 my guess is we will see multiple expansion continue.

 

 

I think PE has become a more useful measure of the valuation for Fairfax once they locked in the treasuries for the next 4 years.  Also, their equity investment side of the business should provide fewer gyrations to the BV going forward.  This all provides some stability to the earnings.  I think there are still a couple of historical factors that have held back the valuation of Fairfax. 

 

Most investors don't spend the time needed to properly evaluate a P&C company and so a lot of their valuation is based on historical context (ie. Blackberry investment, book value not being stable, poor running Insurance businesses).  In some ways we may need a bad hurricane season for investors to recognize just how well our insurance businesses are operating in comparison to other P&C companies.  The PE will eventually be reflected in the stock price and while I have no idea as to when that will occur, it will likely happen quickly once it gets started.

Higher inflation and interest rates is another area where many investors/analysts are still looking a more recent (past 15+ years) for historical precedence and are expecting both to come back down to some degree.   It will take some time but eventually the market will realize that the Supply Chain issues and the US printing money are not going away and this will help drive the higher inflation/interest rates.  This will then get reflected in higher valuations for Fairfax and other P&C companies as they will benefit from this. 

 

Edited April 3 by Hoodlum