Fairfax 2024

[Cigarbutt]

2 hours ago, Tommm50 said:

Looks to me like they"re flat or down each year. They have favorable development every year but one, by $200k.

Can you elaborate, especially concerning trends including what is referenced to by @jfan, from 2022 to 2023 calendar years?

[Cigarbutt]

22 hours ago, jfan said:

I was just looking at their reserve triangles and it seems they are reporting a number of years of adverse developments (gross undiscounted calendar numbers). I've attached 2022's and 2023's triangle. Just wondering if someone can provide me so insight and whether this is something to watch more carefully (percentage-wise it doesn't seem to be very large relative to their policy liabilities)

 

@jfan

Your line of questioning is quite reasonable and, since there's not much action here, i will give it a shot (btw thank you for the crypto links that you had provided after i asked a question or two in that thread).

-----

Disclosure: i have no formal training in reserve triangles but it is a fascinating topic and a relevant one for FFH and when an adolescent, i was told that i had what it took to become an actuary, an avenue not considered for various reasons including the deep desire to reach financial independence as soon as possible.

-----

-If FFH wants to reach the 15% ROE goal, a key input is the underwriting return over the complete cycle.

-Historically, despite many rational attempts to deal with this, there is the underwriting cycle and the associated (and correlated) reserve cycle that happens with a lag.

-When looking at triangles such as the ones included above, one has to remember that what happens (recognition of inaccurate reserves) in an older year will work like a domino and change all the reported numbers for the subsequent years. So looking at trends is important.

-----

Tentative conclusions

-Like the overall P+C (re)insurance market, FFH's numbers (and present trends revealing how wrong previously reported numbers were) reveal that the 2018 and 2019 (+ or - 2020 or even 2021) were written in quite a soft market and eventually recognized reserves have become more than the initially recognized objective for profit.

-While it is impossible to be precise, FFH continues to report overall positive net favorable development which means that the adverse development from softer and older years are more than being compensated by favorable from harder and more recent years.

-While it is impossible to be precise, FFH appears to have done better than the market in general as a result (combination of skill and luck; likely more skill than luck) of 1-focus on more specialized lines, 2-opportunistic growth ++ during hardening and maybe/likely of 3-better underwriting discipline.

-To specifically answer your question (needs to be watched carefully?), FFH has shown for some years the nonspecific strategy to be simply conservative in their reserving overall (choose the conservative side in the range given). Also, the poor years are now quite some time away and more than their typical reserve duration of around 3.8 years. In addition, if history is any guide, the more recent and significant growth in reserves during a hard market should continue to compensate and more for the net favorable development.

-Now, it's always possible that the underwriting culture has deteriorated and this may take years to figure out but i would offer a fairly substantiated opinion that this is quite unlikely.

If interested for more granular info at subsidiaries, look at the supplemental info:

FFH - Annual Financial Supplement (2023 Q4) (fairfax.ca)

OdysseyRe continues to be a star performer.

 

[Tommm50]

The reserve triangles show current reserves for each calendar year are less than the original reserves put up that year except 2018.  JFan may be referring to the penultimate (I don't often get to use that word) line which shows negative development for several years. This is the current calendar year's change for those prior year's reserves. These years are relatively young and I kinda expect younger years to show increased reserves as they mature. To me the more important comparisons are the what are current reserves for that year vs the initial reserves. By this metric only 2018 shows a modest deterioration.

 

If several years start to show current reserves are more than the initial reserves then that bears watching. Loss reserving has always been the Achilles Heel of P&C insurance companies. You've got to estimate your products cost when you won't know the actual cost for 5 or more years down the road. If you find out you're wrong at the end of that time you not only lose money for that year but possibly for all the intervening years you've made the same mistake.

 

An average insurance company may get some years right and some years wrong but as long as it averages out they continue merrily on their way as they also collect investment income on those reserves. A company that is conservative in their reserving will get all or almost all years where their initial reserves are more than their ultimate payouts. Like Fairfax.

[Viking]

What do board members think… Do we collectively have a good handle on Fairfax today? How about the more general investment community? Or, in another 12 months will we look back and say… ‘boy, was i ever off in my analysis of the company.’ Just like what has happened in each of the past 4 years. 
 

 

—————

 

Fairfax - 4 Years Later - Are We Really Any Smarter?

 

Fairfax’s stock has compounded at 40.1% for each of the last 4 years. Lots of investors missed participating in the run-up of the stock because they misunderstood and mis-judged the company. 

 

Fast forward to today. Most investors think they have a much better understanding of Fairfax and the opportunity it currently presents. 

 

I am not so sure. I think Fairfax remains a misunderstood company. And that is because:

• The fundamentals at Fairfax have been improving at a faster rate than investors generally understand or recognize.
• Driven by the reinvestment of $4 billion in annual earnings, profit growth over the next couple of years will likely exceed investors expectations.

So investors continue to materially underestimate the potential of the company and the growing earnings it will be able to generate in the coming years. 

 

—————

 

At the 15th Annual Fairfax Financial Shareholders Dinner on Wed April 10 there were a number of different events. One event was a Q&A on Fairfax moderated by Trevor (Tidefall Capital) with 2 panelists: me and Asheef @SafetyinNumbers. 

 

Below are my opening comments:

 

I want to start by saying thanks to Rob and the rest of the people involved for getting this event organized on short notice. It is a real privilege for me to be here.

 

I also want to give thanks to the board members of the investing forum ‘Corner of Berkshire and Fairfax’. Much of what I have written on Fairfax over the past 3 years was inspired and augmented by members on this investing forum.  A special thanks to Tarn for making the trip all the way from Australia.

 

Thanks to Asheef and Trevor for joining me for this session.

 

A quick message from the legal department

 

Nothing discussed tonight is intended to be financial advice. It is intended to educate and entertain. Consult your financial advisor before buying any stocks. 

 

————

 

OK, let’s get at why we are all here… to discuss that scrappy, unloved, misunderstood P/C insurance company called Fairfax Financial. Yes, make no mistake, it is still unloved and misunderstood.

 

————

 

Let’s start with a quick review of a few things. 

 

Over the past 4 years Fairfax’s stock has delivered a total return of 286%. 

 

That is a 4 year CAGR of 40.1%.

 

How does that compare to the market averages? 

• The S&P500 is up a total of 89%.
• The TSX is up a total of 60%.

Bottom line, over the past 4 years Fairfax’s absolute and relative return has been outstanding.

 

Ok, with a show of hands… 4 years ago, who in this room saw Fairfax delivering a CAGR of 40% per year over the following 4 years? Don’t be shy… 

 

No one. (No one in the room raised their hand.)

 

That, I think, is super interesting.

 

—————

 

Let’s fast forward to today. We are all so much smarter now when it comes to understanding Fairfax. Right? 

 

Me? I am not so sure. 

 

—————

 

So where are we at with Fairfax today? That’s what everyone here really wants to know.

 

The stock is up 286% over the past 4 years… so it must be overvalued today… right? 

 

What’s the problem with this ‘analysis’? Well, it’s not actually ‘analysis’. The fact that Fairfax is up 286% tells us very little about the current valuation of the stock. 

 

And that is because price, on its own, is a terrible way to value a stock.  

 

—————

 

Ok. So what measures should we use to value Fairfax?

 

Let’s look at two simple ones: PE and P/BV

 

Fairfax’s:

• PE is under 7 x my estimate of normalized earnings, which is about  $160/share
• P/BV is 1.1 x my estimate of book value at March 31, 2024

What do both of these two valuation measures tell us?

 

Fairfax’s stock is crazy cheap. Yes, even after a 286% increase over 4 years. That is nuts. 

 

—————

 

How is this possible?

 

First: Starting point matters. Fairfax was a hated stock in back in April of 2020. So Fairfax’s stock was much, much cheaper than any of us realized back in 2020. 

 

Second: Since 2018 the management team at Fairfax has been executing well. And since 2021 their execution has been exceptional. 

 

Here are 5 examples:

• Hard market in insurance. Over the past 4 years, net premiums written have increased from $13.3 billion to $22.9 billion or 73%. The CR has averaged 95.2%.
• The purchase of total return swaps in late 2020/early2021 has so far delivered about $1.4 billion in investment gains.
• The buyback of 2 million shares of Fairfax in December 2021 at $500/share. That is almost a 50% discount to current book value. And we know intrinsic value is much higher than book value.
• Sale of the pet insurance business in 2022 - which delivered a $1 billion after tax gain. This was like finding a pile of gold in your back yard - no one even knew they owned this business.
• Active management of the average duration of the fixed income portfolio. The move to 1.2 years in late 2021 and then the pivot to more than 3 years in late 2023. The financial benefit to Fairfax from these two moves can be measured in the billions.

 

I’m just scratching the surface with these 5 examples. I could easily list another 10 examples of decisions made by Fairfax in recent years that have had a positive and meaningful impact on their financial results. 

 

Bottom line, the fundamentals at Fairfax have been not just getting better - they have been literally exploding higher. I have never seen anything like it in my 25 years of investing.

 

As Peter Lynch would say ‘The story just keeps getting better’. But kind of on steroids.

 

—————

 

Let’s try and summarize things:

 

Where are we at with Fairfax today? 

 

The stock trading at a crazy cheap valuation.

 

Fairfax has three of economic engines:

• Insurance
• investments - fixed income
• Investments - equities

All three are performing at a high level at the same time - for the first time in the company’s history.

 

As a result, Fairfax is poised to generate historically high earnings of $4 billion (more?) in each of the next 3 years. It should also deliver an average ROE of about 15%.

 

The management team is best-in-class. When it comes to capital allocation, in Buffett’s words, the management team at Fairfax is hitting the ball like Ted Williams. In Druckenmiller’s words, the management team at Fairfax is on a hot streak. 

 

This highly performing team is about to get $12 billion in earnings over the next 3 years. Think of the value creation that is coming.

 

—————

 

OK. So after all that… What is an investor to do?

 

If you don’t know the answer to this question… well, you might want to stick to investing in index funds. 

Edited April 15, 2024 by Viking

[gfp]

55 minutes ago, Viking said:

OK. So after all that… What is an investor to do?

 

Go short because IFRS is confusing?

[Cigarbutt]

7 hours ago, Tommm50 said:

The reserve triangles show current reserves for each calendar year are less than the original reserves put up that year except 2018.  JFan may be referring to the penultimate (I don't often get to use that word) line which shows negative development for several years...By this metric only 2018 shows a modest deterioration.

If several years start to show current reserves are more than the initial reserves then that bears watching...

...Like Fairfax.

Interesting. Let's build on that using net reserves (ie where reserve development stays with the company instead of being ceded to another party):

So using the same line of reasoning, FFH has reserves reported (as of end of 2023) at higher levels than initially reported for the 2018, 2019, 2020 and 2021 years. And up to the 2019 year included, the end-2023 number is 410.5 M higher than the initial estimate. Also, the adverse movement from 2017 to 2018 was 1165.1 M ((254.6)-910.5). Not exactly catastrophic and not remotely as horrific as the late 1990s and early 2000s years (Ranger (ouch!), generic Crum, nauseating TIG etc) but still quite significant. No wonder (now), the late 2010s years were ripe for hardening.

So, the same conclusion applies but (opinion) the net reserves trend smooth out significant older and softer adverse development as a result of more recent and harder favorable development.

i'd simply add that this appreciation may help to guess the kind of underwriting contribution to the ROE of future years.

@jfan, the best thing now would be that someone comes along and tries to establish an opposing view.

 

 

[Crip1]

The question of whether or not we we fully understood Fairfax is complicated to say the least. Below are a few aspects of Fairfax along with some commentary:

 

·         Did we foresee the interest rate environment? I don't think so.

·         Did we foresee the hard market continuing as long as it has? Again, I don't believe so.

·         Did we think Fairfax was executing well and was well positioned? For the most part, yes, we did. We may have under estimated how well they were executing, but we did see that the company was in a much better place.

 

Many things have gone well for the company over the past four years, some of those things were within their control and some of other things were outside of their control. To the question of whether or not we understood what Fairfax was four years ago, we likely didn't. Part of the reason was the exogenous factors that, as investors, we never want to assume that everything's going to be wonderful because that doesn't always work out. To your point about underestimating the company, we likely did, but healthy pessimism was part of the reason.

 

While typing this, something else popped into my head. Viking, you've been commended many times over for your analysis of Fairfax, and said commendations were definitely deserved. One other aspect of your posting that was really impactful is talking me out of being "grounded" to a stock price from months past. Many times in my investing life I've sold part of a position with the theory that a recent run-up was temporary and that I could re-buy at a price 10% of so lower than the current price. I was tempted to do that with Fairfax, but you reasoned me out of it. I really appreciate that.

 

-Crip

 

 

[Tommm50]

2 hours ago, Cigarbutt said:

Interesting. Let's build on that using net reserves (ie where reserve development stays with the company instead of being ceded to another party):

So using the same line of reasoning, FFH has reserves reported (as of end of 2023) at higher levels than initially reported for the 2018, 2019, 2020 and 2021 years. And up to the 2019 year included, the end-2023 number is 410.5 M higher than the initial estimate. Also, the adverse movement from 2017 to 2018 was 1165.1 M ((254.6)-910.5). Not exactly catastrophic and not remotely as horrific as the late 1990s and early 2000s years (Ranger (ouch!), generic Crum, nauseating TIG etc) but still quite significant. No wonder (now), the late 2010s years were ripe for hardening.

So, the same conclusion applies but (opinion) the net reserves trend smooth out significant older and softer adverse development as a result of more recent and harder favorable development.

i'd simply add that this appreciation may help to guess the kind of underwriting contribution to the ROE of future years.

@jfan, the best thing now would be that someone comes along and tries to establish an opposing view.

 

 

I tend to think in terms of gross reserves as the overall test of reserving performance but I take your point, the net reserves are not quite as rosy. Putting the negative adverse development you cite in context of the size of the book however ($130M over 6 years, $110M leaving out the excellent 2017) being about $1M off is less than 1% of the total reserves and, in my view, pretty damn good at predicting the future.

 

[LC]

The million Canadian dollar question: are investors here buying, holding, or selling? 
 

What % if your portfolio is Fairfax compared to say, 6 or 12 months ago?

 

Partly rhetorical - but is Fairfax as easy of a “buy” today, versus 6, 12, 24 months ago? 

[MMM20]

14 hours ago, Viking said:

As Peter Lynch would say ‘The story just keeps getting better’. But kind of on steroids.

What do we make of the argument that, like a bodybuilder on steroids who ends up popping a bicep tendon, such rapid growth might inherently introduce fragility into their operations? Is it too much too fast for a staid insurance biz? Is Fairfax more susceptible to a black swan event than they were five years ago?

 

Edited April 15, 2024 by MMM20

[Cigarbutt]

10 hours ago, Tommm50 said:

I tend to think in terms of gross reserves as the overall test of reserving performance but I take your point, the net reserves are not quite as rosy. Putting the negative adverse development you cite in context of the size of the book however ($130M over 6 years, $110M leaving out the excellent 2017) being about $1M off is less than 1% of the total reserves and, in my view, pretty damn good at predicting the future.

Yes, i think this is correct.

It's becoming clear that the 2017-9 years were written with a semi-conscious expectation that premiums were insufficient to meet profit objectives and the shortfall could be compensated by investment income. In the industry, they call this cash flow underwriting and this is based on the same foundation as the need to remain fully invested at all times at the individual level.

For the industry, it appears that the eventually realized underwriting losses for those years were compensated by float investment income. See the following graph showing the yield on invested assets. For the industry, add a median 0.5% per year for realized gains:

For FFH:

It's interesting to note (it's becoming clear now) that, for those years, FFH did better (relatively) than the industry both for the reserves management and the float management. 

-----

Nuff said about triangles i guess. The relevant uncertain questions about the future are bound to be related to the asset side, i would venture to say, but what do i know?

Edited April 15, 2024 by Cigarbutt
spelling

[jfan]

Thanks @Cigarbutt and @Tommm50 for your replies and insight. The idea of writing policies in a soft market with just adequate pricing (with the expectation of some adverse loss developments) when there are good opportunities to use those premiums to invest in their portfolio for more attractive returns was helpful. 

 

Spending the morning watching videos on insurance triangles, paid/case reserves/incurred but no reported, basic methodologies to estimate of IBNR to derive loss reserves (case reserves + IBNR), and how to interpret loss development trends was particularly stimulating. 

 

Looking back at the 2 tables that I posted. A few amateur observations were made:

 

1) looking down the columns for each calendar year:

 

a) It appears that ~ 70% of cumulative paid losses occur within 6 years (6-year cumulative payment divided by 6-year re-estimated reserves)

b) Unfortunately, they don't report the entire table in 2023 AR, in the 2022 AR, after 8-9 years, the proportion of cumulative payments is mid-to-high 70% of re-estimated reserves). This suggests to me a fairly long-lag of actual payout to claimants. I'd assume this is because of the longer-tail nature of their specialty insurance focus.

c) Eyeballing the re-estimated reserves down each calendar year, there is little variability year-to-year as time goes by, within ~ $500 M at most up or down (in the range of $100 - 300 M most the time). Coupling what was said earlier about the soft market, it seems that there is not much pricing power, or too much social/judicial/cost inflation to be able to adjust reserves in a favorable manner.

 

2)  Looking at the diagonals for cumulative payments (gross table, not net)

 

a) The sum of diagonal (latest) minus the sum of the diagonal (previous year) = the payment made for losses in the most current calendar year. Using the 2022 AR, they paid out $25.5 B and had a final year end reserve of $38.3 B (ie ~ 66% or for every $1 of reserves set aside, they paid ~ $0.66 that year). Using the 2023 AR (which of there are only 6 years), they paid out $28.1 B and had a final year end reserve of $41.2 B (ie ~ 68%). This seems to me that their baseline underwriting assumptions are that 2/3 of their reserves will be paid out ~ 6 - 9 years. 

 

     I have not compared to their prior years nor other insurance companies, but is this in the opinion of the experts here, conservative? 

 

     I would imagine that if their underwriting deteriorated and they were not re-estimating their reserves properly, then these ratios should deviate from their baseline over time. I think this might be more useful than just looking at the reported magnitude of adverse/favorable loss reserve developments which is more retrospective than prospective.

Edited April 15, 2024 by jfan

[Hoodlum]

It looks like the loan to IIFL is for 3 years @ 9.5% 

https://economictimes.indiatimes.com/industry/banking/finance/fairfax-arm-infuses-rs-500-crore-into-iifl-finance/articleshow/109323304.cms

[Hoodlum]

Private Equity firm Birch Hill Equity is going to sell CCM and expects to sell it for a significant multiple of the $110M they paid for it in in 2017.   This is interesting as CCM own 40% of the hockey equipment market and Fairfax through Bauer at Peak Achievement also own 40% of the hockey equipment market.  This could provide an interesting valuation for the 43% of Peak Achievement that Fairfax has on their books for $129M ($226 Market value according to shareholder letter).  Peak investment is also a minority shareholder of Rawlings that was valued at $395M in 2018, but I cannot determine the percentage of their ownership in Rawlings.

 

https://www.theglobeandmail.com/business/article-hockey-gear-ccm-sale-private-equity/

 

Quote

On the eve of the NHL playoffs, private equity fund manager Birch Hill Equity Partners has placed CCM Hockey on the auction block. CCM, one of two dominant hockey-gear companies, is expected to fetch a price that is a significant multiple to the $110-million Birch Hill paid for the business seven years ago.

Toronto-based Birch Hill recently hired U.S. investment bank Robert W. Baird & Co. Inc. to run the potential sale, according to two sources involved in the process. The Globe and Mail is not naming the sources because they are not permitted to speak for the companies.

Birch Hill decided to shop Montreal-based CCM after receiving several unsolicited offers for the gear maker from private equity funds, the sources said. They said there is no guarantee the process will result in a sale. Spokespersons for Birch Hill, CCM and Baird declined to comment.

CCM’s potential buyers include sports equipment manufacturers and large private equity funds, according to the sources. One said Birch Hill expects to conclude the process, with or without a sale, by the summer, to avoid a prolonged period of uncertainty around ownership. According to a recent press release, CCM has 500 employees.

 

Edited April 15, 2024 by Hoodlum

[Cigarbutt]

7 hours ago, jfan said:

Thanks @Cigarbutt and @Tommm50 for your replies and insight. The idea of writing policies in a soft market with just adequate pricing (with the expectation of some adverse loss developments) when there are good opportunities to use those premiums to invest in their portfolio for more attractive returns was helpful. 

 

Spending the morning watching videos on insurance triangles, paid/case reserves/incurred but no reported, basic methodologies to estimate of IBNR to derive loss reserves (case reserves + IBNR), and how to interpret loss development trends was particularly stimulating. 

 

Looking back at the 2 tables that I posted. A few amateur observations were made:

 

1) looking down the columns for each calendar year:

 

a) It appears that ~ 70% of cumulative paid losses occur within 6 years (6-year cumulative payment divided by 6-year re-estimated reserves)

b) Unfortunately, they don't report the entire table in 2023 AR, in the 2022 AR, after 8-9 years, the proportion of cumulative payments is mid-to-high 70% of re-estimated reserves). This suggests to me a fairly long-lag of actual payout to claimants. I'd assume this is because of the longer-tail nature of their specialty insurance focus.

c) Eyeballing the re-estimated reserves down each calendar year, there is little variability year-to-year as time goes by, within ~ $500 M at most up or down (in the range of $100 - 300 M most the time). Coupling what was said earlier about the soft market, it seems that there is not much pricing power, or too much social/judicial/cost inflation to be able to adjust reserves in a favorable manner.

 

2)  Looking at the diagonals for cumulative payments (gross table, not net)

 

a) The sum of diagonal (latest) minus the sum of the diagonal (previous year) = the payment made for losses in the most current calendar year. Using the 2022 AR, they paid out $25.5 B and had a final year end reserve of $38.3 B (ie ~ 66% or for every $1 of reserves set aside, they paid ~ $0.66 that year). Using the 2023 AR (which of there are only 6 years), they paid out $28.1 B and had a final year end reserve of $41.2 B (ie ~ 68%). This seems to me that their baseline underwriting assumptions are that 2/3 of their reserves will be paid out ~ 6 - 9 years. 

 

     I have not compared to their prior years nor other insurance companies, but is this in the opinion of the experts here, conservative? 

 

     I would imagine that if their underwriting deteriorated and they were not re-estimating their reserves properly, then these ratios should deviate from their baseline over time. I think this might be more useful than just looking at the reported magnitude of adverse/favorable loss reserve developments which is more retrospective than prospective.

The prospective measure you're looking for may be an elusive goal. The diagonal measure you describe could reveal some info but IMO not more than the current accident year combined ratio and the ratio you compute could be influenced by recent growth in premiums written which, in itself, would increase the ratio as the payment curve is not bell-shaped with more payments early on and then a long tail to the right. Example:

The idea is to try, for each years and trend-wise, to identify a deviation from the expected trajectory. This is not easy and insurers may be slow to recognize developing issues. For example, look at the following which is a significant pattern that started to develop in the late 90s for medical malpractice claims:

Over time, it became clear that developing trends would become very costly. BTW, this cumulative payment curve is sort of representative for the average long-tail type of lines that FFH carries (duration and shape).

Up to 2013, FFH reported accident year reserve development and that was helpful but it's not a requirement and is no longer reported by them. It's possible to figure it out but it takes some effort.

 

 

[giulio]

7 hours ago, Hoodlum said:

It looks like the loan to IIFL is for 3 years @ 9.5% 

https://economictimes.indiatimes.com/industry/banking/finance/fairfax-arm-infuses-rs-500-crore-into-iifl-finance/articleshow/109323304.cms

Thanks for sharing. Interesting because Odyseey is providing the loan, not fih.

I guess fih will subscribe their portion of the rights issue.

[petec]

On 4/14/2024 at 11:00 PM, Viking said:

What do board members think… Do we collectively have a good handle on Fairfax today?

 

Personal view but I think the board has a good handle on the facts, but the psychology has swung about 70% of the way from focussing on the bad to focussing on the good.

 

We aren't talking much about the risks (big ones for me would be falling interest rates, which impact the terminal value of float and which I believe are correlated with lower combined ratios for a double hit to earnings, and a major cat loss).

 

We are talking lots about how good the investments are, forgetting (maybe?) that these are often the same investments we dissed 5 years ago, but they're more expensive now (Eurobank and Stelco come to mind here - I am not sure the earnings power of either business has improved much over the last few years, but the share prices sure have).

 

None of this is a criticism - there's some great work on the board. But the mood has swung, as it so often does, procyclically. We have got more exited as the stock has got closer to intrinsic value, not less. Weird how the human brain works.

 

You can argue that the risks have fallen because the certainty of outcomes has risen. I agree, to a degree. But 5 years ago FFH was a Faberge egg, with value inside value inside value. All it needed was patience. Now, it needs things to keep going right. I am fairly sure they will, and this remains my biggest position at 17%, but I am shifting into the "when do I reduce" mode rather than "how can I buy more". 

[thowed]

Thanks @petec, I am relatively new to Fairfax, and am excited for the future, but agree that it's good to have a balanced view on things (or just that we should always keep trying to 'kill' our favourite investments?).

 

On the other hand, I suppose my other question would be - what does one replace Fairfax with?  I struggle to find assets of such quality that are any cheaper?  But of course always interested in ideas to look at.

 

A tiny bit of scuttlebutt for Eurobank & Greece: I was talking to some Greeks recently, and things are certainly booming there, and of course they started from a low point in 2011.  However the smart view seemed to be that things were already starting to get out of hand, as they do, particularly with the property market, and so while things always last longer than one expects, there is the feeling that at some point things will turn from boom to bust.

Edited April 16, 2024 by thowed

[Viking]

On 4/15/2024 at 5:26 AM, MMM20 said:

What do we make of the argument that, like a bodybuilder on steroids who ends up popping a bicep tendon, such rapid growth might inherently introduce fragility into their operations? Is it too much too fast for a staid insurance biz? Is Fairfax more susceptible to a black swan event than they were five years ago?

@MMM20 My steroid comment was directed more at the growth that we are seeing in earnings, particularly operating income. Probably the wrong way to phrase it.

 

In terms of fragility, i don’t think Fairfax is more susceptible today to a black swan event than they were five years ago.

 

The hard market in insurance has likely given Fairfax (and all insurers) the opportunity to get their reserves more in order (from the soft market years pre-2019). Terms and conditions on policies have also likely improved on business written over the past 4 years.

 

The fixed income portfolio is locked and loaded with about $2 billion in interest income coming each year over the next 4 years.  That is a big, big shock absorber.

 

Within the equity portfolio, most of the holdings have moved up the quality ladder. At the same time, mark to market holdings are now less than 50% of the holdings - this will significantly reduce volatility moving forward. 

 

Bottom line, today Fairfax’s looks much better positioned today to deal with any future adversity / black swan event than they were 5 years ago. 

Edited April 16, 2024 by Viking

[Viking]

On 4/14/2024 at 7:01 PM, LC said:

Partly rhetorical - but is Fairfax as easy of a “buy” today, versus 6, 12, 24 months ago? 

@LC This is a great question. 
 

Your answer will depend of your assessment of three things:

1.) what Fairfax has accomplished over the past year

2.) what the company is worth today

3.) how the company should be valued. 
 

Fairfax earned $189/share in 2023. My view is intrinsic value went up by more than that. The earnings visibility of Fairfax has improved markedly (with extending the duration of the fixed income portfolio). I think the quality of the company is better today than it was a year ago - we had another 12 months to grade management.
 

One of the reasons i go to the AGM i get the opportunity to talk to really smart investors. Most people i talked to said they felt Fairfax was probably worth about 1.5x book value. This is a higher multiple than last year. 
—————

“is Fairfax as easy of a “buy” today, versus 6, 12, 24 months ago?” That depends on whether or not you view Fairfax as a higher quality company today than what you thought a year ago (use whatever time-frame you want here). And whether it deserves a higher multiple than you thought a year ago. 
 

Fairfax trades today at a P/BV of about 1.1 (to my estimated March 31 BV) and a PE of 6.6 x (my estimated 2023 earnings of $160). Is it cheap? Yup.

Edited April 16, 2024 by Viking

[Viking]

16 hours ago, petec said:

 

Personal view but I think the board has a good handle on the facts, but the psychology has swung about 70% of the way from focussing on the bad to focussing on the good.

 

We aren't talking much about the risks (big ones for me would be falling interest rates, which impact the terminal value of float and which I believe are correlated with lower combined ratios for a double hit to earnings, and a major cat loss).

 

We are talking lots about how good the investments are, forgetting (maybe?) that these are often the same investments we dissed 5 years ago, but they're more expensive now (Eurobank and Stelco come to mind here - I am not sure the earnings power of either business has improved much over the last few years, but the share prices sure have).

 

None of this is a criticism - there's some great work on the board. But the mood has swung, as it so often does, procyclically. We have got more exited as the stock has got closer to intrinsic value, not less. Weird how the human brain works.

 

You can argue that the risks have fallen because the certainty of outcomes has risen. I agree, to a degree. But 5 years ago FFH was a Faberge egg, with value inside value inside value. All it needed was patience. Now, it needs things to keep going right. I am fairly sure they will, and this remains my biggest position at 17%, but I am shifting into the "when do I reduce" mode rather than "how can I buy more". 

@petec great comment. Lots of interesting ideas to discuss/debate. 

 

“Personal view but I think the board has a good handle on the facts, but the psychology has swung about 70% of the way from focussing on the bad to focussing on the good.”

 

I agree that the psychology of people on the board has shifted. My view is the shift has happened because execution, fundamentals and results have been steadily improving at Fairfax.

 

Most of the discussions on the board are focussed on what has been happening at Fairfax - the facts. Fairfax has been executing exceptionally well. The fundamentals keep getting better every year. Reported results have been excellent. As a result most of the posts in recent years have had a positive spin.  

 

Now i don’t expect this to continue forever. I do expect at some point the Disney movie called ‘Fairfax Financial’ will end - and Fairfax will become a regular boring company. And the posts on the board will reflect that reality and become a little more balanced. 

 

I am trying to find the bad. But it is really hard right now. Yes, that is a bizarre statement to make. Especially when it comes to Fairfax. But today, the important tailwinds greatly outnumber the important headwinds. Still.

 

Importantly, i am not going to make bad stuff up. So i can tick the ‘bad stuff’ box in my analysis of the company. When you make stuff up (both good and bad) it gets into your head. And likely warps your valuation of the company - and position size. Making stuff up is dangerous - i know this from personal experience. 

 

Following Fairfax right now is like watching Michael Jordan in his prime. Now back in the day, when watching Jordan play, i could have tried to find a bunch of things that he was doing poorly. Would that have been helpful?

 

I have two questions:

 

1.) If investors understand the facts so well today why does Fairfax trade at a P/BV of 1.1 x (ext. March 31 book value) and a PE of 6.7 x (est 2024 earnings)? 

 

For the past 3 years, Fairfax has been playing like Michael Jordan in his prime. But Fairfax’s stock is being valued today like they are a bench player. That makes no sense.

 

2.) If investors understand the facts so well why are so many people thinking/discussing selling down their position? 

 

Now i do understand that people only buy a stock for one reason - they think it’s going to go up in price. And yes, people sell a stock for a multitude of reasons:

• It is fully valued
• They find another stock they like more (offers better value)
• They are way overweight
• Tax reasons
• Need the cash
• Take profits - “That suckers gone up a lot”

But i think a lot of people are thinking about selling just because the stock has gone up a lot. Their mental process has less to do with facts and more to do with fear/greed/psychology. 

—————-

Now i do have a long list of risks for Fairfax that i am monitoring/managing. I have discussed many of these risks over the past 3 years. My biggest risk owning Fairfax today is my concentrated position. But that risk has much more to do with me than it does with Fairfax. This post is long enough already. Let’s leave the discussion of risks to another day.

Edited April 16, 2024 by Viking

[jfan]

https://www.cbc.ca/news/politics/federal-budget-2024-main-1.7175052

 

This might have an impact on Fairfax....

[Daphne]

They put a special tax on insurance cos and banks in last years budget

[Mick92]

Just pay your "fair" share, that's all the government wants.  

[Junior R]

how does the capital gains inclusion rate change Fairfax Investments