Fairfax 2024

[Xerxes]

12 hours ago, valueseek said:

Calcium score for over 45 i think

thank you. will look into this. 

Those few words could end up be the most important part of this investment/insurance AGM.  

[Santayana]

10 hours ago, petec said:

But the things that have really moved the needle are outside management's control: higher interest rates

Being positioned to take advantage of the higher rates was completely in management's control, and there was really only one direction rates could move.

[Viking]

11 hours ago, petec said:

Unlike you, I don't see that as super cheap. It is certainly good value, and allows for solid compounding from here, but insurance companies don't generally sustain multiples *much* higher than this. I mean, it's not like they trade at 2x or 3x book long term. 1.4-1.5x, maybe.

 

@petec I really appreciate the opportunity to discuss/debate Fairfax. 

 

One of the keys to valuing Fairfax today is your assessment of two things:

1.) How good is their insurance business?

- Is it average or above average (compared to peers)? 

2.) How good is their investment team at Hamblin Watsa?

- Is it average or above average (compared to peers)?

 

Here is my quick assessment:

 

I think the insurance business is above average (compared to peers). Not best-in-class yet but definitely better than average. Importantly it appears to be improving in quality; trend is important when looking forward.

 

I think their investment team (at Hamblin Watsa) is best-in-class (compared to peers). Especially in a high interest rate environment (versus a zero interest rate environment) with lots of volatility in financial markets. This is important because Fairfax generates about 80% of their income streams from investments and only 20% from insurance underwriting. (I think most insurers are about 55-60% from investments and 40-45% from insurance underwriting - don't quote me on this split). 

 

Fairfax is currently earnings about 7.5% on its investment portfolio and this is significantly more than P/C insurance peers. This outperformance will likely continue for the next couple of years (one reason being the average duration of the fixed income portfolio has been extended to about 3 years). There is a very good chance Fairfax's average ROE over the next three years will be 15% or higher (it could easily be in the high teens).

 

Fairfax has been the best performing P/C insurance company over the past 5 years (in terms of BV growth). It also has the best prospects looking out three years (given its significant leverage to investments and their current positioning). And it is by far the cheapest today.  

 

It is within this context that I think Fairfax trading today at a P/BV = 1.1 is crazy cheap. Especially when compared to P/C insurance peers today. Most trade at a P/BV of 1.4 x or higher. The set-up today at Fairfax looks an awful lot like a much younger Berkshire Hathaway. In that context I think a P/BV multiple of 1.1 x is nuts. 

[petec]

47 minutes ago, Viking said:

 

@petec I really appreciate the opportunity to discuss/debate Fairfax. 

 

One of the keys to valuing Fairfax today is your assessment of two things:

1.) How good is their insurance business?

- Is it average or above average (compared to peers)? 

2.) How good is their investment team at Hamblin Watsa?

- Is it average or above average (compared to peers)?

 

Here is my quick assessment:

 

I think the insurance business is above average (compared to peers). Not best-in-class yet but definitely better than average. Importantly it appears to be improving in quality; trend is important when looking forward.

 

I think their investment team (at Hamblin Watsa) is best-in-class (compared to peers). Especially in a high interest rate environment (versus a zero interest rate environment) with lots of volatility in financial markets. This is important because Fairfax generates about 80% of their income streams from investments and only 20% from insurance underwriting. (I think most insurers are about 55-60% from investments and 40-45% from insurance underwriting - don't quote me on this split). 

 

Fairfax is currently earnings about 7.5% on its investment portfolio and this is significantly more than P/C insurance peers. This outperformance will likely continue for the next couple of years (one reason being the average duration of the fixed income portfolio has been extended to about 3 years). There is a very good chance Fairfax's average ROE over the next three years will be 15% or higher (it could easily be in the high teens).

 

Fairfax has been the best performing P/C insurance company over the past 5 years (in terms of BV growth). It also has the best prospects looking out three years (given its significant leverage to investments and their current positioning). And it is by far the cheapest today.  

 

It is within this context that I think Fairfax trading today at a P/BV = 1.1 is crazy cheap. Especially when compared to P/C insurance peers today. Most trade at a P/BV of 1.4 x or higher. The set-up today at Fairfax looks an awful lot like a much younger Berkshire Hathaway. In that context I think a P/BV multiple of 1.1 x is nuts. 

 

I don't disagree with any of that. I perhaps ought to clarify that when I say 1.1x isn't crazy cheap, what I mean is I don't necessarily expect the market to value it a whole lot higher. However I do think that at 1.1x (and even 1.5) FFH can compound at a very attractive rate for a long time (which I define as 5 years minimum and really 10+ years).

 

In other words, I kind of expect this to stay "cheap", and that's one of the things I like about it, because I think that allows it to compound nicely for me.

[petec]

52 minutes ago, Viking said:

The set-up today at Fairfax looks an awful lot like a much younger Berkshire Hathaway.

 

This will be a controversial post, but I have 5 core holdings which make up 60% of my liquid net worth. One is Berkshire itself. One is Microsoft. Three are things that I think one way or another look like younger Berkshires: FFH, PSH, and BN. I'm just waiting for the silver fox to buy and insurance company 

[petec]

4 hours ago, giulio said:

To say that FFH worked out as an investment ONLY because JPow hiked rates is UNFAIR to the great work done by Watsa and the team.

 

That is certainly not what I meant. What I said was that FFH in 2020 had macro options embedded within it. In other words, IF rates rose it would benefit mightily. The price reflected nothing for this, but it seemed highly likely to me. 

 

As a result, it is fair to say that rising rates NOT management action has driven much of the recent increase in earnings. 

 

Management action, however, has determined earnings POWER over time. In particular their willingness to wait rather than chase premiums and yield. They deserve a TON of credit for that. But those decisions were taken years ago.

[petec]

2 hours ago, Santayana said:

Being positioned to take advantage of the higher rates was completely in management's control, and there was really only one direction rates could move.

 

Exactly. The money they are making now was earned years ago, when everyone thought they were idiots.

[Viking]

What do people on the board feel are the biggest risks when investing in Fairfax today? Let’s spend some time discussing/debating these as a group - it is important that we live in the real world. So please post your thoughts. 

 

When I was at Fairfax’s AGM a number of people I talked to identified interest rates/lower bond yields as a big risk. So let’s start here. 

 

Fairfax risk: “What if interest rates/bond yields are much lower in 4 or 5 years time. Causing interest income to fall precipitously?”

 

Interest rates/lower bond yields were a watch out for me at Fairfax when the average duration of the fixed income portfolio was 1.6 years at the end of 2022. But in Q1 2023 we learned Fairfax had pushed this out to 2.5 years. And in Q4 2023 we learned Fairfax had pushed it out again, this time to about 3 years. 

 

Fairfax has locked in interest income of about $2 billion for each of the next 3 to 4 years. Significantly extending duration is a big deal. So ‘much lower’ interest rates/bond yields, if that happens, is really a potential problem looking out 4 or 5 years. 

 

Predicting macro

 

Trying to predict macro looking out 1 year is pretty tough… buy trying to predict macro looking out 4 or 5 years? Good luck with that. 

 

I think we will see persistently higher inflation in the coming years. Perhaps an average of around 3% to 3.5% per year. As a result, i think Fairfax will be given lots of opportunities in the coming years to keep the average duration of their fixed income portfolio at around 3 years if that is what they want to do. Just like what we are seeing today (mid-April), where bond yields have spiked and Fairfax is being given a nice opportunity to extend duration if they want. 

 

Alignment

 

When investing in Fairfax over the last 2 decades, i find it is helpful to be aligned with the positioning of their investment portfolio (it allows that ‘sleep well at night’ thing). From around 2011 to 2018 i did not like how Fairfax was positioned with their investment portfolio so i did not own the stock. Today? I like how Fairfax is positioned with their investment portfolio; it is a good fit for me.
 

Given i think it likely that inflation remains higher than expected in the coming years:

• Fixed income: I like that they have extended the average duration to 3 years. And i am comfortable they will be able to reinvest at an acceptable rate in the coming years.
• Equities: I like the exposure to commodities and industrials.

I think paying attention to macro is useful mostly at inflection points. The rest of the time, it is probably best to just ignore it.

Edited April 17, 2024 by Viking

[TwoCitiesCapital]

5 hours ago, giulio said:

FFH did not need higher interest rates to work out well as an investment in 2020-2021.

If you held everything the same, the stock was easily worth 2x.

 

I agree with this. I was one of the few pounding the table on FFH back in 2020/2021 after having sold out in 2018. 

 

Fairfax didn't recover with the rest of the market, DIGIT has done superbly well over the prior 2-years, and it became clear FFH was incredibly cheap even with very modest assumptions. I was guestimating $500-600 USD/share was a reasonable valuation, but it was reading for like $250-450 USD for much of that time. 

 

But it WAS interest rates that changed things. Interest going from 0 to 5.5% allowed Fairfax to capture billions in interest income in 2022/2023/2024 and lock that in with visibility for the next 3-4 years.

 

That, paired with float exploding in a hard market, are what we're thinking game changers to justify the move to $1000 and still make it look like a reasonable value here. 

 

5 hours ago, giulio said:

To say that FFH worked out as an investment ONLY because JPow hiked rates is UNFAIR to the great work done by Watsa and the team.

 

It's what made a 2-3x and 4-7x. Prem deserves credit, but it's not without luck. 

There was no guarantee, or foresight, that we'd have a hard market this strong for this long. Also, the fastest rate hikes in history was basically on nobodies bingo card in 2021. 

 

The team executed very well on it, but that doesn't mean that the environment/beta wasn't the huge portion of the tailwind. 

 

2 hours ago, Santayana said:

Being positioned to take advantage of the higher rates was completely in management's control, and there was really only one direction rates could move.

 

It was - but if you're going to give them credit for that then you also have to ding them for the opportunity cost of sitting at 0 for 5-years waiting for it and missing the turn in 2019/2020 when rates reverted back to 0. 

 

How many billions were left on the table from 2016 - 2021 as we waited in short-bonds earnings practically nothing? What would those billions have compounded into if redeployed at covid lows? Or used to increase share repurchases? Or invested into treasuries that could've been sold at massive premiums near the covid lows? 

We'll never know - but there was a huge cost to shareholders for waiting.

 

Perhaps it paid off - but it paid off because we got lucky with the steepest hiking cycle in history paired with an incredibly strong insurance markets allowing a greater weight of portfolio to be reinvested at high rates versus what was invested/missing interest at low rates. Those didn't have to happen in tandem and isn't what Fairfax was prepared for when they went to 0 (you'll recall they did it under Trump expecting higher rates due to economic growth - not inflationary animal spirits under Biden). 

 

 I'm happy with the outcome. But I'm not judging the process by the outcome. Ultimately they got one interest rate call wrong and then they got one right. And it just so happened the portfolio was significantly larger for the right call then the wrong one which is the only reason that panned our so well. And that portfolio size was luck

Edited April 17, 2024 by TwoCitiesCapital

[Viking]

25 minutes ago, petec said:

 

That is certainly not what I meant. What I said was that FFH in 2020 had macro options embedded within it. In other words, IF rates rose it would benefit mightily. The price reflected nothing for this, but it seemed highly likely to me. 

 

As a result, it is fair to say that rising rates NOT management action has driven much of the recent increase in earnings. 

 

Management action, however, has determined earnings POWER over time. In particular their willingness to wait rather than chase premiums and yield. They deserve a TON of credit for that. But those decisions were taken years ago.

@petec perhaps were you and i differ: i agree with you that rising interest rates was a big opportunity for Fairfax. But opportunity means nothing without proper execution. And the execution at Fairfax has been excellent. And as a result we now have $2 billion a year of interest income.

 

I think it is incredibly difficult to do what Fairfax did with their fixed income portfolio over the past 3 years. 
1.) they took the average duration down to 1.2 years in Q4 2021. Sold a bunch of corporate bonds at a yield of 1%. 
2.) they were then super disciplined as interest rates started to rise - they waited all through 2022. It wasn’t until Q1 2023 that they started to meaningfully extended the average duration (to 2.5 years). And having the discipline to wait until Q4 to get really aggressive extending duration (to 3 years) was, in hindsight, sheer brilliance.
 

I remember when everyone thought the 10 year US Treasury yield would peak at 3%. The fact the fixed income team did not meaningfully extend duration earlier and at much lower yields is amazing. 

[Hamburg Investor]

54 minutes ago, Viking said:

 

@petec I really appreciate the opportunity to discuss/debate Fairfax. 

 

One of the keys to valuing Fairfax today is your assessment of two things:

1.) How good is their insurance business?

- Is it average or above average (compared to peers)? 

2.) How good is their investment team at Hamblin Watsa?

- Is it average or above average (compared to peers)?

 

Here is my quick assessment:

 

I think the insurance business is above average (compared to peers). Not best-in-class yet but definitely better than average. Importantly it appears to be improving in quality; trend is important when looking forward.

 

I think their investment team (at Hamblin Watsa) is best-in-class (compared to peers). Especially in a high interest rate environment (versus a zero interest rate environment) with lots of volatility in financial markets. This is important because Fairfax generates about 80% of their income streams from investments and only 20% from insurance underwriting. (I think most insurers are about 55-60% from investments and 40-45% from insurance underwriting - don't quote me on this split). 

 

Fairfax is currently earnings about 7.5% on its investment portfolio and this is significantly more than P/C insurance peers. This outperformance will likely continue for the next couple of years (one reason being the average duration of the fixed income portfolio has been extended to about 3 years). There is a very good chance Fairfax's average ROE over the next three years will be 15% or higher (it could easily be in the high teens).

 

Fairfax has been the best performing P/C insurance company over the past 5 years (in terms of BV growth). It also has the best prospects looking out three years (given its significant leverage to investments and their current positioning). And it is by far the cheapest today.  

 

It is within this context that I think Fairfax trading today at a P/BV = 1.1 is crazy cheap. Especially when compared to P/C insurance peers today. Most trade at a P/BV of 1.4 x or higher. The set-up today at Fairfax looks an awful lot like a much younger Berkshire Hathaway. In that context I think a P/BV multiple of 1.1 x is nuts. 

That's a terrific discussion between both of you, @Viking and @petec, that really resonates to me.

I think both of you really hit it.

Fairfax was under pressure on several levels during the low-interest phase:
- Low interest rates are not good for the insurance business. BRK, MKL and FFH (also Geico) were not only stronger compounders in earlier years because they were smaller; interest rates were also higher. This discussion has been held many times and you can disagree.
- Low interest rates = low, eroding moats. I'll take Blackberry as an (absurd?) example. Blackberry was a bad idea (no discussion about it!). But in times of 10% interest rates, competitors would probably have invested less quickly and heavily in tech; Blackberry's moat and brand would have eroded more slowly; maybe it wouldn't have turned out so badly. Eurobank and other investments haven't exactly benefited economically from low interest rates either.
- Stock market valuations: = Growth beats value. Strong sales growth led to high stock market valuations in times of low interest rates, regardless of how profits developed. Was that exactly Prem's investment style? Probably not. So were FFH's stock market investments valued rather low on average during the low-interest phase? I think so.

And at the same time, this should not be overestimated: Prem made many mistakes. Hedges are one of them (he has sworn off them - I call that improvement) If you look at how Fairfax's CRs have developed compared to Markel or the PC market as a whole, you will see that Fairfax was a below-average profitable insurer until 2011. Since 2011, Fairfax has been catching up relative to Markel and the market; massively so. That is a difference in quality between then and now. India is new. TRS is new and smart etc.
 

I think FFH has gotten a really good bit better in recent years; there's good evidence of that. But they were also never as incredibly bad as they looked; they were just always "speculating" that interest rates would become "normal" (whatever that means; 0% doesn't mean it) and that growth wouldn't outperform value for all eternity.
 

But for me this also means: FFH was always better than it looked for many years after 2009; the visible compounding in these years always suffered from an unusually deep and long headwind; and not only from this, but - yes, of course - also from the mistakes of the management. But that's just it: Not only. Now it is more "normal": interest rates are more normal than they were at 0% to 2% for so long. The hard market is still a tailwind - but in contrast, "growth beats value" is still active, i.e. a headwind. One normal, the other a tailwind, the other a headwind - this is certainly not an extreme scenario but a balanced one altogether.

However - and that's what I want to add - I think that many still underestimate or have forgotten how well insurers like FFH (and BRK and MKL) can, indeed have compounded in normal times due to the "decade of headwinds". The combination of cost-free, growing float, a value investor at the top, diversification of corporate assets was a good idea and remains a good idea. But float was almost worthless and value was dead. But now interest rates are becoming normal. And there is the fact that the rest of the market is historically highly valued with a P/E ratio of 27 or so and we have higher interest rates; but insurers are historically rather lowly valued; so the spread is enormous. And Fairfax has gotten better. Yes, it's more about compounding now, but I can't find anything that should be 15+% (my best guess is more like 18%) compounding and buyable at a P/E below 7.

[MungerWunger]

@Viking Big fan of your fairfax posts! Just curious what % of your portfolio is allocated to the company if you don't mind sharing

[Viking]

1 hour ago, MungerWunger said:

@Viking Big fan of your fairfax posts! Just curious what % of your portfolio is allocated to the company if you don't mind sharing

@MungerWunger given my visibility on this board and Twitter when it comes to Fairfax, i am hesitant to post on position size. For a whole bunch of reasons. But let me try and answer in a different way. My goal is to get my Fairfax weighting down to 33% of my total portfolio - it is higher than that today. 
 

Context is important when discussing weightings. Today, i own no real estate. I do not have a day job. All i have are financial assets. So having even 33% in one stock is probably a dumb idea. Most of my financial assets are held in tax free accounts - so i can move in and out of positions easily with no tax consequences.
 

I also sometimes flex my stock positions up and down to take advantage of volatility. As an example, i doubled my small Canfor position today when the stock fell to C$14.55. I was adding to my Telus and BCE positions 2 weeks ago when they sold off. When these stocks move higher i will likely sell some and reduce my position size. So my position weightings will bounce around depending on volatility. 
 

Why 33% for Fairfax? That feels like a reasonable position size given its prospects today (which i like a lot). But i remain open minded. Importantly, I might change my mind tomorrow.
 

If Fairfax starts to allocate capital in a way that i do not like i might shrink my allocation. Or when i get to 33% i might decide that my weighting is still too high (i use my gut to help me with position size - so i won’t know until i get there). Or i might decide my weighting is too low.
 

Perhaps something else happens (my health? … knock on wood) that causes me to want to reduce my position size. Perhaps another investment i understand really well gets even cheaper than Fairfax and i decide to shift some funds.
 

One more example: In Q1 2020 when Covid was coming (and before equity markets crashed), i moved 100% of my portfolio to cash.
 

Bottom line: lots of variables are at play that determine position size for me - for all my holdings. 
 

The important thing is people need to do find an investment strategy that fits their personal situation and how they are wired. Position size of any one holding is part of this. And concentration is usually a terrible idea for most investors. 
—————

Broad based index funds are now 30% of my portfolio (XIC, VO and VOO - 1/3 in each). I am really enjoying this 2H 2023 decision. My goal is to get my index fund weightings to over 50% over the next year or two. I want to get a big chunk of my portfolio into ‘set and forget’ mode. 
 

As i get older i am shifting from ‘build wealth’ to ‘preserve wealth’. Index funds today seem like a good option. Getting started with index funds also seems to make sense from an estate planning perspective (my spouse is not a financial person). And i have suggested to my kids that they invest exclusively through index funds (when i am not around to help them out).

 

Edited April 17, 2024 by Viking

[Dinar]

I think the big risks are the northeast wind that Prem referred to (what is that by the way?), general major catastrophe - say massive earthquake in NY, 5-10% annual inflation that causes reserves to be inadequate, and lousy performance on the investment side.   While everyone is cheering for Prem, I remain a skeptic on the investment side.  (Tyku/Davos Brands, Shawkei, BDT, Blackberry - none of these were any good, and Eurobank was not exactly a home run.)  Their equity and quasi-equity - BDT has massively underperformed S&P while taking much greater risk - Shawkei is clearly quite levered, so is Eurobank, and Tyku/Davos from what I heard, could be a mistake, was never profitable, and without a greater  fool - Diageo could have been a zero.  

[Viking]

25 minutes ago, Dinar said:

I think the big risks are the northeast wind that Prem referred to (what is that by the way?), general major catastrophe - say massive earthquake in NY, 5-10% annual inflation that causes reserves to be inadequate, and lousy performance on the investment side.   While everyone is cheering for Prem, I remain a skeptic on the investment side.  (Tyku/Davos Brands, Shawkei, BDT, Blackberry - none of these were any good, and Eurobank was not exactly a home run.)  Their equity and quasi-equity - BDT has massively underperformed S&P while taking much greater risk - Shawkei is clearly quite levered, so is Eurobank, and Tyku/Davos from what I heard, could be a mistake, was never profitable, and without a greater  fool - Diageo could have been a zero.  

@Dinar If Fairfax has performed so poorly on the investment side, how did they compound book value at 18.4% over 38 years? Insurance/underwriting?

Edited April 17, 2024 by Viking

[Santayana]

2 hours ago, TwoCitiesCapital said:

How many billions were left on the table from 2016 - 2021 as we waited in short-bonds earnings practically nothing? What would those billions have compounded into if redeployed at covid lows? Or used to increase share repurchases? Or invested into treasuries that could've been sold at massive premiums near the covid lows? 

We'll never know - but there was a huge cost to shareholders for waiting.

 

Perhaps it paid off - but it paid off because we got lucky with the steepest hiking cycle in history paired with an incredibly strong insurance markets allowing a greater weight of portfolio to be reinvested at high rates versus what was invested/missing interest at low rates. Those didn't have to happen in tandem and isn't what Fairfax was prepared for when they went to 0 (you'll recall they did it under Trump expecting higher rates due to economic growth - not inflationary animal spirits under Biden). 

But they were mostly right 2016-2018 when we did have a rising rate environment, and then 2019-2020 may have been the steepest cutting cycle in history, and I don't think it was very easy to see that was coming.   Given how much lower the float was in 2016 vs. now, how much do you really think they could have made by taking on duration when the 10yr was trading at ~2%?

[hasilp89]

3 hours ago, Viking said:

What do people on the board feel are the biggest risks when investing in Fairfax today?

 

32 minutes ago, Dinar said:

 

I think the big risks are the northeast wind that Prem referred to (what is that by the way?), general major catastrophe - say massive earthquake in NY, 5-10% annual inflation that causes reserves to be inadequate,

 

For me it’s on the insurance side. It’s part of the business, but the unknown unknowns especially with global operations (1 in a 100 year flood happening right now in the UAE - hopefully Gulf doesn’t have a bunch of flood policies).
While I understand the culture of the management and generally trust them one. poor decision layered on one misprinted risk can hurt. Unlikely it puts a large hole in the business but it could slow things down.

 

Additionally I think it’s worth considering how strong the underwriting market has been. It can’t be this strong forever and premiums won’t go up in a straight line. Again doesn’t mean they drop 20% but it’s not out of the realm of possibility to see some declines.

[MMM20]

43 minutes ago, Viking said:

@Dinar If Fairfax has performed so poorly on the investment side, how did they compound book value at 18.4% over 38 years? Insurance/underwriting?

Some people believe that Fairfax has performed poorly on the investment side and won’t be convinced otherwise by any amount of data or examples.
 

[TwoCitiesCapital]

1 hour ago, Santayana said:

But they were mostly right 2016-2018 when we did have a rising rate environment, and then 2019-2020 may have been the steepest cutting cycle in history, and I don't think it was very easy to see that was coming.   Given how much lower the float was in 2016 vs. now, how much do you really think they could have made by taking on duration when the 10yr was trading at ~2%?

 

They were wrong for 2015/2016, neutral in 2017, right 2018/2019, and wrong in 2020. All that benefit of missing unrealized losses from 2016-2019 was reversed to missing out on billions of unrealized gains in 2020 making the outcome  moot. The cost of that round trip to nowhere? 2-3% a year minimum in interest income in billions so 10-12% minimum. 

 

And what happened to any 10-year bond bought in 2015/2016? They were 4-5 year bonds in 2022 when rates really started rising. You'd have lost roughly 8-10% at most in 2022. So you'd still be a positive  net on those bonds even after the rise. 

 

What saved them and made the trade work was float exploding as rates rose. The cost of 2-3% a year was borne on a much smaller portfolio than the benefit of being short duration as rates rose 5% on a much larger portfolio. But they couldn't have known/planned for that. It was luck that insurance pricing exploded post-covid. 

 

And we're still only considering a buy/hold scenarios. Fairfax has a history of being savvy with rates - I really think the most likely scenario, had they actually had duration on, would've been them selling it for huge gains to redeploy elsewhere. 

 

Point is - if you're giving them credit for being short duration in 2022, we also have to net that against under-earning from 2016-2021. 

 

 

 

Edited April 18, 2024 by TwoCitiesCapital

[Dinar]

1 hour ago, Viking said:

@Dinar If Fairfax has performed so poorly on the investment side, how did they compound book value at 18.4% over 38 years? Insurance/underwriting?

Leverage in a bull market, coupled with a good insurance business.  

[Dinar]

30 minutes ago, MMM20 said:

Some people believe that Fairfax has performed poorly on the investment side and won’t be convinced otherwise by any amount of data or examples.
 

O'k, wise guy, what has been the return on the equity & quasi equity portfolio over the past 5, 10, and 20 years and how does that compare with the S&P?  Then adjust for the fact that Shawkei, Tyku/Davos Brands and Eurobank where way riskier investments than the S&P 500, and that Fairfax should have earned liquidity and risk premiums above the S&P.  

[SafetyinNumbers]

18 minutes ago, Dinar said:

O'k, wise guy, what has been the return on the equity & quasi equity portfolio over the past 5, 10, and 20 years and how does that compare with the S&P?  Then adjust for the fact that Shawkei, Tyku/Davos Brands and Eurobank where way riskier investments than the S&P 500, and that Fairfax should have earned liquidity and risk premiums above the S&P.  

I think Fairfax is an absolute return investor and not a relative return investor. They aren’t trying to beat the S&P/500.

[Dinar]

26 minutes ago, SafetyinNumbers said:

I think Fairfax is an absolute return investor and not a relative return investor. They aren’t trying to beat the S&P/500.

And they should be, however what is then the appropriate benchmark?  In other words, how do you judge the performance of the portfolio?

Edited April 18, 2024 by Dinar

[Cigarbutt]

14 hours ago, UK said:

Is it fair to conclude that their duration of insurance liabilities decreased quite substantially in last six years, from this info bellow?

This line of reasoning raises the possibility that one comes to an incorrect conclusion.

The first issue is that float is based on net (not gross) insurance reserve liabilities (when premiums are ceded to another party of the reinsurance type so is the "float"). In 2017, FFH retained 81.8% of gross premiums and in 2023, 78.6% of gross premiums. So this partly explains why the growth in float was slower than the growth in gross premiums and is an issue unrelated to the "duration" of insurance liabilities.

The second and more important issue is more conceptual (and even mathematical). To assess the validity or signal when comparing the growth of premiums and float, one would have to assume some kind of steady state (for example, constant growth over time). Think of an insurer which decides to significantly curtail new business or even move to run-off. Then the negative growth in gross premiums would happen faster than the decline in float because of the lag effect and the shape of the payment distribution over time, an issue not linked to a change in the "duration" of insurance liabilities. 

Recently, FFH has grown ++ the gross premiums component:

The relative float growth will catch up over time especially if the growth in gross premiums written settles down (it's just a timing issue at this point) and this temporary decoupling is essentially unrelated to a hypothetical change in the "duration" of insurance liabilities.

One way to support the above is to observe, over time, the composition and distribution of the insurance product lines. This appears to be quite constant. On a recent conference call, the CFO mentioned an insurance liability duration of 3.8 years and i would suggest that this duration hasn't changed much in the last few years.

-----

Reading the above, i'm not sure it makes sense? Being simple minded (thinking along first principles is above my capacity), i always try analogies. So, for example, if you try to be more friendly to others around you, eventually, people around you will become more friendly to you (no guarantee of course) but there is a lag effect and your rate of growth of being nicer to others will precede the rate of growth of others being nice to you. The opposite obviously can occur but there may be a lag effect in the other direction as well due to the accumulation of social capital. Makes sense?

[SafetyinNumbers]

19 minutes ago, Dinar said:

And they should be, however what is then the appropriate benchmark?  In other words, how do you judge the performance of the portfolio?

I use 10% as my hurdle rate since that’s an estimate of long term equity returns. I’m not sure what they use.