Fairfax 2024

[SafetyinNumbers]

39 minutes ago, nwoodman said:

Ok I’ll play

 

1.  Weak Hands

    (i) Margin,  WTF it goes down!
     (ii) changes in margin policy, bugger I got a call/email

2. Margin debt  at 2.8% of GDP, I don’t have any margin but aware of #1

3. Price=value,  great run, lock it in, October generally sucks, hurricanes etc

4. Rate cuts, hard market is done, earnings after 3 years or so will be permanently impaired

5. Hmmm, Berkshire sold half their Apple, cashed to the gills, cool, will rotate given their conservative positioning and taking into account 1-4. Share price alone (ignore divs on the returns chart) this might be an even race
6. Not aware of the IDBI possibility,  WTF

7. Aware of IDBI, hoped they wouldn’t make the list,  here we go again

8. They are going to buy a Canadian mattress company, again WTF

 

Point #2 was a bit of a revelation for me with 3% being a true red flag. Very easy to beaver away and collect positions on margin at appropriate valuations but get the rug pulled.  During deleveraging there is no safe haven, your fellow shareholder  may be getting called, tax matching, or simply panicking.  Valuation may well be secondary consideration or not even feature.
 

In order to not get shaken out I took some measures to ensure it couldn’t happen.  Selling Fairfax would cause some significant tax implications that are not warranted given price to IV.  Not adverse to paying tax at some point but not when this is still a <70 cent dollar and my best idea.

 

https://www.gurufocus.com/economic_indicators/4266/finra-investor-margin-debt-relative-to-gdp

 

https://www.owenanalytics.com.au/margin-lending?t&utm_source=perplexity

 

 

I’ll add low premium growth.
 

Had a few institutional PMs tell me it’s down because growth is down without appreciating that means excess capital is up and this is just FFH once again being tactical with capital allocation. 
 

Quants have trained the market to reward growth and so its participants are trained to chase it.

[nwoodman]

13 minutes ago, SafetyinNumbers said:

I’ll add low premium growth.
 

Had a few institutional PMs tell me it’s down because growth is down without appreciating that means excess capital is up and this is just FFH once again being tactical with capital allocation. 
 

Quants have trained the market to reward growth and so its participants are trained to chase it.

Interesting.  I see that as disciplined and not a negative.  Go figure.

[SafetyinNumbers]

37 minutes ago, nwoodman said:

Interesting.  I see that as disciplined and not a negative.  Go figure.

I thought Peter was pretty clear what they were doing with the excess capital not reinvested in premium growth (the non-highlighted part!).

 

[StubbleJumper]

I find it interesting how the sentiment on this board has swung wildly over the past week or 10 days.  Immediately following the Q2 release, posters in this forum were almost euphoric about the EPS numbers, the CRs, and interest income.  A short week later, some are almost despondent about Mr. Market suddenly spurning FFH's shares!

 

Whatever.  The hard market had to abate eventually and the central bank tightening process was always likely to stop and potentially reverse.  In the mean time, the shares closed yesterday at US$1050, which is pretty much bang-on with BV adjusted for the excess of fair value over carrying value.  Barring some sort of outrageous growth in the CR, we know that FFH will earn a tonne of money for the next 2 or 3 years, and somebody holding the shares at 1x BV today will likely do perfectly well if those shares are still valued at 1x adjusted BV on Dec 31, 2026.

 

The nice thing about this market pull-back is that FFH actually seems to be serious about repurchasing its shares.  I am a cheap bastard and have always been so.  When I saw the level of repurchases in Q2, I had a few migivings about it because I didn't view FFH's shares to be table-pounding cheap during the quarter.  We can all debate about exactly how high intrinsic value is for FFH - some will suggest 1.2x, BV some will be ballsier and suggest 1.4x or 1.5x - but in any event, we are back down to a share price that strikes me as a no-brainer for repurchases.  Even the cheapest bastards (like me) know that FFH is likely worth at least 1.2x adjusted BV.  It's nice to see that the company once again has a target for deploying potentially significant amounts of capital in a manner that will create value for continuing shareholders.

 

Just like the Muddy Waters kerfuffle, this is an opportunity rather than a problem.

 

 

SJ

[Thrifty3000]

15 hours ago, Junior R said:

The “bad” reasons why FFH is down in no particular order:

-IDBI deal

-ZZZ deal

What was the gut instinct on the pet insurance business back when FFH entered that one? Personally, as far as business concepts go, I assumed pet insurance ranked right up there with tanning beds for babies. Turns out the FFH investment team saw something I didn’t. 

Edited August 8 by Thrifty3000

[Viking]

Financial Market Volatility - is it good or bad for Fairfax? (And no, this is not a trick question.)

 

“Everyone has a plan until they get punched in the mouth.” Mike Tyson

 

After a long absence, volatility in financial markets is picking up. The next bear market in stocks is coming - we just don’t know when or how nasty it will be. A big chunk of Fairfax’s investment portfolio is in equities (25% to 30%). Therefore, extreme volatility has to be bad for Fairfax… right? Well, maybe not. In this post we will dig into the volatility thing to see what we can learn.

 

We will look at volatility in two very different ways:

1.) Fairfax’s ability to profit from volatility.

2.) The impact of volatility on Fairfax’s short term reported results.

 

Given the importance of the topic, we are going to break our analysis into two posts. Part 2 should be published in the next couple of days (I have some family in town so it might be delayed).

—————

Volatility - Part 1: Fairfax’s ability to profit from volatility

• Introduction
• Is extreme volatility in financial markets good or bad for a Fairfax investor?
• Active management matters again
• How has Fairfax performed aver the past 4.5 years?

Volatility - Part 2: The impact of volatility on Fairfax’s short term reported results.

• 'New Fairfax'
• To come in the next couple of days.

—————

Introduction

 

Wall Street defines risk in terms of volatility - the higher the volatility, the greater the risk.

 

Warren Buffett thinks how Wall Street looks at risk/volatility is nuts. Buffett defines risk very differently - he defines it in terms of permanent loss of capital. Importantly, Buffett’s definition is also largely focussed on the long term.

 

Buffett looks at volatility through the lens of Mr. Market - he views volatility over the short term as opportunity. Volatility is something to be exploited by an investor. And extreme volatility? Well, that is usually where you find the really fat pitches (that ‘back up the truck’ thing).

 

Fairfax and volatility

 

If history can be used as a guide, long term shareholders of Fairfax should be praying for a shitstorm in the coming months (in the markets in general) and for the company’s stock to get taken out behind the woodshed.

 

Volatility in Fairfax's stock price (in both directions) has historically been a gift for long term investors. 

 

Now don’t get wrong… I loved the relentless move higher in the share price that we have seen since October 2022, when the stock was trading at $450. We saw an increase of +150% in 22 months. Fairfax’s stock was like a goat climbing straight up a steep mountain.

 

But investing isn’t a Disney movie. Nothing goes straight up forever.

 

Given its dramatic move higher, Fairfax will likely trade more like a regular stock moving forward. And the average stock fluctuates about 50% (lows to highs) over the course of a year.

 

As of today (August 7, 2024), Fairfax’s stock is down about 11% over the past week or so. ‘Investors’ are trying to read the animal entrails to determine what is going on (what is causing the short term volatility).

 

Me? I have no idea what is causing the sell off. But I love it. Why? That is what we will explore in this post.

 

 

—————

Is extreme volatility in financial markets good or bad for a Fairfax investor?

 

Now this is a great question. With lots of interesting layers.

 

How you answer this question really depends on your time frame:

 

Are you a short term or a long term investor in Fairfax?

 

For example, if Fairfax’s stock dropped 20% - well, that would likely be a terrible result for a short term trader(note I did not say investor). Who wants to own a stock as a short term investment that drops 20%? No one.

 

But is a 20% drop in Fairfax’s share price bad for a long term investor?

 

No, I don’t think it is.

 

But more than that, given the current set-up, I think it would likely end up being a very good thing for a long term investor.

 

Why?

 

Because Fairfax would be able to take out a meaningful number of shares at a very low price.

 

Today Fairfax is generating a record amount of free cash flow. And as the hard market in P/C insurance slows, the P/C insurance subsidiaries are generating excess cash  - and they are now sending it to Fairfax (as growth in P/C insurance is slowing). Fairfax is all cashed up. And this look like the case for the next 3 years or so (3 years is as far out as our crystal ball can see).

 

What will Fairfax be doing with all that cash?

 

On the Q2, 2024 conference call Fairfax provided an update on their capital allocation priorities:

• Priority #1 - maintain a strong financial position.
• Priority #2 - buying back a meaningful amount of stock (that Henry Singleton thing we wrote about last week).

Priority #2 used to be funding the growth of the P/C insurance companies (this has been the case since late 2019). With the hard market slowing this is no longer the case. This is a big change in priorities.

 

So far in 2024, Fairfax has reduced effective shares outstanding by 820,000 (3.5%) at an average price of US$1,098/share.

 

Fairfax are value investors. As a result, they only buys back shares when they can be purchased at a discount to their intrinsic value. So Fairfax thinks its shares trading at $1,100 are cheap.

 

Fairfax’s stock closed today at $1,050. It is down 11% over the past week (after hitting an all-time high of $1,178 on July 31, 2024). If it continues to fall from here, Fairfax will get a wonderful opportunity to take out a meaningful number of shares at a very low price.

 

Buying back a meaningful quantity of shares on the cheap is a great ‘use of capital’ for long term shareholders. When it comes to share buybacks, the lower Fairfax’s share price goes the better.

 

The timing of buybacks

 

Does this mean Fairfax is going to buy back a massive amount of shares in Q3, 2024? No, of course not. They might. And they might not. It is impossible to predict how many share Fairfax will repurchase in any given quarter. Fairfax has lots of good uses for its free cash flow. But i think it is a good bet that if Fairfax’s shares remain at a very low valuation that Fairfax will buy back a meaningful quantity over the next 12 to 24 months.

 

Of course, this assumes the long term fundamentals of Fairfax’s business are not deteriorating. And I don’t think they are.

 

But there is much more to this story - it gets even better.

——————

Active management matters again

 

When it comes to capital allocation, Fairfax is an ‘active manager.’ And they use all the tools in the capital allocation toolkit (sources and uses of cash).

 

As we learned from Warren Buffett, fat pitches usually come at times of extreme volatility. Over the past 4 years we have had 2 bear markets in stocks (2020 and 2022) and an epic bear market in fixed income (2022/2023).

 

How did Fairfax perform over the past 4.5 years - when Mr. Market was panicking?

 

Fairfax made many of their best investments in ‘shit storm’ type of environments:

• In 2020, initiated the TRS position (getting exposure to 1.96 million Fairfax shares) at $373/share).
• In 2021, took the average duration of their fixed income portfolio to 1.2 years.
• In 2021, bought back 2 million Fairfax shares at $500/share.
• In 2022, took Recipe private at a very attractive price.
• In 2023, invested $4 billion (with Kennedy Wilson) in PacWest real estate loans (with a total return of about 10%).
• In 2023, extended the average duration of their fixed income portfolio to about 3 years.

Fairfax also made many smaller moves from 2020 to 2022, taking advantage of very low prices, to increase their ownership in well run companies they already owned (including Fairfax India, Thomas Cook India and John Keells).

 

The bottom line, over the past 4.5 years Fairfax has been able to exploit periods of extreme volatility, making many outstanding investments that have generated wonderful returns for Fairfax and its shareholders over time.

 

Importantly, Fairfax was able to do this when they were cash poor. That is no longer the case. Fairfax is currently generating a record amount of free cash flow - and this looks set to continue for the next 3 years (as far out as my crystal ball looks).

 

Now when the stock market sells off 20% it generally doesn’t feel great. And we will not know in advance with certainty what moves Fairfax will be making. But if history is any guide, extreme volatility in financial markets will likely provide Fairfax with many wonderful opportunities that they can aggressively exploit. As I said earlier, long term Fairfax shareholders should welcome extreme volatility and the opportunities it presents to Fairfax - this is often when Fairfax makes its best investments.

—————

How has Fairfax performed aver the past 4.5 years?

 

We can evaluate management by looking at a simple, yet highly instructive, metric: increase in book value per share.

 

Change in book value per share (BVPS)

 

As a reminder, we had bear markets in stocks in 2020 and 2022 and a historic bear market in bonds is 2022/23. This should have been terrible for Fairfax shareholders... right? This is Fairfax after all...

 

Despite the extreme volatility in financial markets over the past 4.5 years, Fairfax was able to increase BVPS by 103%. Impressively, the volatility was heavily skewed to the upside (the biggest annual decrease in BVPS was only 2%, in 2020).

 

Given the volatility in financial markets over the past 4.5 years, are these the annual or total results you would have expected for Fairfax?

 

No, of course not. Fairfax’s performance over the past 4.5 years was much, much better than expected. I think there is an important lesson to be learned from this - extreme volatility is not the devil that many Fairfax watchers think it is.

 

 

Change in share price

 

In 2020, Fairfax’s share price was down 28%. This was what I like to call ‘old Fairfax.’ Fairfax had just started executing its turnaround but it was not yet recognized by Mr. Market. Sentiment in Fairfax hit rock bottom in 2020.

 

But look at what happened to Fairfax in 2021, 2022, 2023 and so far in 2024. Fairfax’s absolute and relative performance has been outstanding (putting it lightly).

 

The management team at Fairfax has been executing exceptionally well - among other things, they have been feasting on extreme volatility in financial markets. And this strong performance is being rewarded by Mr. Market.

 

-----------

Part 2: The impact of volatility on Fairfax’s short term reported results

 

To come in the next couple of days...

Edited August 8 by Viking

[73 Reds]

6 minutes ago, Viking said:

Financial Market Volatility - is it good or bad for Fairfax? (And no, this is not a trick question.)

 

“Everyone has a plan until they get punched in the mouth.” Mike Tyson

 

After a long absence, volatility in financial markets is picking up. The next bear market in stocks is coming - we just don’t know when or how nasty it will be. A big chunk of Fairfax’s investment portfolio is in equities. Therefore, extreme volatility has to be bad for Fairfax… right? Well, maybe not. In this post we will dig into the volatility thing to see what we can learn.

 

We will look at volatility in two very different ways:

1.) Fairfax’s ability to profit from volatility.

2.) The impact of volatility on Fairfax’s short term reported results.

 

Given the importance of the topic, we are going to break our analysis into two posts. Part 2 should be published in the next couple of days (I have some family in town so it might be delayed).

—————

Volatility - Part 1: Fairfax’s ability to profit from volatility

• Introduction
• Is extreme volatility in financial markets good or bad for a Fairfax investor?
• Active management matters again
• How has Fairfax performed aver the past 4.5 years?
• New Fairfax

Volatility - Part 2: The impact of volatility on Fairfax’s short term reported results.

• To come in the next couple of days.

—————

Introduction

 

Wall Street defines risk in terms of volatility - the higher the volatility, the greater the risk.

 

Warren Buffett thinks how Wall Street looks at risk/volatility is nuts. Buffett defines risk very differently - he defines it in terms of permanent loss of capital. Importantly, Buffett’s definition is also largely focussed on the long term.

 

Buffett looks at volatility through the lens of Mr. Market - he views volatility over the short term as opportunity. Volatility is something to be exploited by an investor. And extreme volatility? Well, that is usually where you find the really fat pitches (that ‘back up the truck’ thing).

 

Fairfax and volatility

 

If history can be used as a guide, long term shareholders of Fairfax should be praying for a shitstorm in the coming months (in the markets in general) and for the company’s stock to get taken out behind the woodshed.

 

Volatility in Fairfax's stock price (in both directions) has historically been a gift for long term investors. 

 

Now don’t get wrong… I loved the relentless move higher in the share price that we have seen since October 2022, when the stock was trading at $450. We saw an increase of +150% in 22 months. Fairfax’s stock was like a goat climbing straight up a steep mountain.

 

But investing isn’t a Disney movie. Nothing goes straight up forever.

 

Given its dramatic move higher, Fairfax will likely trade more like a regular stock moving forward. And the average stock fluctuates about 50% (lows to highs) over the course of a year.

 

As of today (August 7, 2024), Fairfax’s stock is down about 11% over the past week or so. ‘Investors’ are trying to read the animal entrails to determine what is going on (what is causing the short term volatility).

 

Me? I have no idea what is causing the sell off. But I love it. Why? That is what we will explore in this post.

 

 

 

—————

Is extreme volatility in financial markets good or bad for a Fairfax investor?

 

Now this is a great question. With lots of interesting layers.

 

How you answer this question really depends on your time frame:

 

Are you a short term or a long term investor in Fairfax?

 

For example, if Fairfax’s stock dropped 20% - well, that would likely be a terrible result for a short term trader(note I did not say investor). Who wants to own a stock as a short term investment that drops 20%? No one.

 

But is a 20% drop in Fairfax’s share price bad for a long term investor?

 

No, I don’t think it is.

 

But more than that, given the current set-up, I think it would likely end up being a very good thing for a long term investor.

 

Why?

 

Because Fairfax would be able to take out a meaningful number of shares at a very low price.

 

Today Fairfax is generating a record amount of free cash flow. And as the hard market in P/C insurance slows, the P/C insurance subsidiaries are generating excess cash  - and they are now sending it to Fairfax (as growth in P/C insurance is slowing). Fairfax is all cashed up. And this look like the case for the next 3 years or so (3 years is as far out as our crystal ball can see).

 

What will Fairfax be doing with all that cash?

 

On the Q2, 2024 conference call Fairfax provided an update on their capital allocation priorities:

• Priority #1 - maintain a strong financial position.
• Priority #2 - buying back a meaningful amount of stock (that Henry Singleton thing we wrote about last week).

Priority #2 used to be funding the growth of the P/C insurance companies (this has been the case since late 2019). With the hard market slowing this is no longer the case. This is a big change in priorities.

 

So far in 2024, Fairfax has reduced effective shares outstanding by 820,000 (3.5%) at an average price of US$1,098/share.

 

Fairfax are value investors. As a result, they only buys back shares when they can be purchased at a discount to their intrinsic value. So Fairfax thinks its shares trading at $1,100 are cheap.

 

Fairfax’s stock closed today at $1,050. It is down 11% over the past week (after hitting an all-time high of $1,178 on July 31, 2024). If it continues to fall from here, Fairfax will get a wonderful opportunity to take out a meaningful number of shares at a very low price.

 

Buying back a meaningful quantity of shares on the cheap is a great ‘use of capital’ for long term shareholders. When it comes to share buybacks, the lower Fairfax’s share price goes the better.

 

The timing of buybacks

 

Does this mean Fairfax is going to buy back a massive amount of shares in Q3, 2024? No, of course not. They might. And they might not. It is impossible to predict how many share Fairfax will repurchase in any given quarter. Fairfax has lots of good uses for its free cash flow. But i think it is a good bet that if Fairfax’s shares remain at a very low valuation that Fairfax will buy back a meaningful quantity over the next 12 to 24 months.

 

Of course, this assumes the long term fundamentals of Fairfax’s business are not deteriorating. And I don’t think they are.

 

But there is much more to this story - it gets even better.

——————

Active management matters again

 

When it comes to capital allocation, Fairfax is an ‘active manager.’ And they use all the tools in the capital allocation toolkit (sources and uses of cash).

 

As we learned from Warren Buffett, fat pitches usually come at times of extreme volatility. Over the past 4 years we have had 2 bear markets in stocks (2020 and 2022) and an epic bear market in fixed income (2022/2023).

 

How did Fairfax perform over the past 4.5 years - when Mr. Market was panicking?

 

Fairfax made many of their best investments in ‘shit storm’ type of environments:

• In 2020, initiated the TRS position (getting exposure to 1.96 million Fairfax shares) at $373/share).
• In 2021, took the average duration of their fixed income portfolio to 1.2 years.
• In 2021, bought back 2 million Fairfax shares at $500/share.
• In 2022, took Recipe private at a very attractive price.
• In 2023, invested $4 billion (with Kennedy Wilson) in PacWest real estate loans (with a total return of about 10%).
• In 2023, extended the average duration of their fixed income portfolio to about 3 years.

Fairfax also made many smaller moves from 2020 to 2022, taking advantage of very low prices, to increase their ownership in well run companies they already owned (including Fairfax India, Thomas Cook India and John Keells).

 

The bottom line, over the past 4.5 years Fairfax has been able to exploit periods of extreme volatility, making many outstanding investments that have generated wonderful returns for Fairfax and its shareholders over time.

 

Importantly, Fairfax was able to do this when they were cash poor. That is no longer the case. Fairfax is currently generating a record amount of free cash flow - and this looks set to continue for the next 3 years (as far out as my crystal ball looks).

 

Now when the stock market sells off 20% it generally doesn’t feel great. And we will not know in advance with certainty what moves Fairfax will be making. But if history is any guide, extreme volatility in financial markets will likely provide Fairfax with many wonderful opportunities that they can aggressively exploit. As I said earlier, long term Fairfax shareholders should welcome extreme volatility and the opportunities it presents to Fairfax - this is often when Fairfax makes its best investments.

—————

How has Fairfax performed aver the past 4.5 years?

 

We can evaluate management by looking at a simple, yet highly instructive, metric: increase in book value per share.

 

Change in book value per share (BVPS)

 

As a reminder, we had bear markets in stocks in 2020 and 2022 and a historic bear market in bonds is 2022/23.

 

Despite the extreme volatility in financial markets over the past 4.5 years, Fairfax was able to increase BVPS by 103%. Impressively, the volatility was heavily skewed to the upside (the biggest annual decrease in BVPS was only 2%, in 2020).

 

Given the volatility in financial markets over the past 4.5 years, are these the annual or total results you would have expected for Fairfax?

 

No, of course not. Fairfax’s performance over the past 4.5 years was much, much better than expected. I think there is an important lesson to be learned from this - extreme volatility is not the devil that many Fairfax watchers think it is.

 

 

 

Change in share price

 

In 2020, Fairfax’s share price was down 28%. This was what I like to call ‘old Fairfax.’ Fairfax had just started executing its turnaround but it was not yet recognized by Mr. Market. Sentiment in Fairfax hit rock bottom in 2020.

 

But look at what happened to Fairfax in 2021, 2022, 2023 and so far in 2024. Fairfax’s absolute and relative performance has been outstanding (putting it lightly).

 

The management team at Fairfax has been executing exceptionally well - among other things, they have been feasting on extreme volatility in financial markets. And this strong performance is being rewarded by Mr. Market.

 

 

-----------

Part 2: The impact of volatility on Fairfax’s short term reported results

 

To come in the next couple of days...

Viking, always enjoy your posts - thanks.  To me the issue is a simple one, provided you are a long term investor with available capital.  Market driven price volatility is always welcome.  However, if price volatility is company-specific, the phrase "know what you own" is all that matters.  

[Viking]

24 minutes ago, 73 Reds said:

Viking, always enjoy your posts - thanks.  To me the issue is a simple one, provided you are a long term investor with available capital.  Market driven price volatility is always welcome.  However, if price volatility is company-specific, the phrase "know what you own" is all that matters.  

 

@73 Reds thanks for the feedback. I am going to dig into the 'company specific' part of your comment with my next post. My guess is lots of Fairfax's current shareholders are still seeing the ghosts of Fairfax's past. This will lead them to manufacture 'company-specific' issues that don't actually exist (and lead them to sell their position). This is one of the reasons why I expect Fairfax shares to be more volatile going forward (particularly to the downside). And as I said, that will likely provide Fairfax with a wonderful opportunity to take out a meaningful amount of shares in the coming years.

 

"know what you own" - bingo! That is the key that unlocks the treasure chest.

Edited August 8 by Viking

[Luke]

"Know what you own"-> Cant know a stock without holding it for a certain amount of time and as Pabrai said: Once the stock goes down -40% then you start to REALLY understand and learn what the business is about xD 

[hardcorevalue]

Only 29% more drawdown to go I guess

 

That would certainly fine tune some of our thinking!

[UK]

https://www.ft.com/content/80abe7c0-e722-4224-8bf2-77bacab195f5

 

The head of Munich Re, the world’s biggest reinsurer, expects the benign conditions that have powered record profits for the industry, but increased costs for businesses and households, to be sustained in coming months.

Munich Re was one of a string of companies to report bumper profits on Thursday, helped by a steep increase in the cost of both insuring and reinsuring properties against natural catastrophes in recent years.

This has fed through to more expensive cover for consumers and businesses, contributing to an affordability crisis in some parts of the world.

The boom in profits had led to expectations that prices would begin to fall as new providers were drawn to the market.

But Munich Re chief executive Joachim Wenning said on Thursday that he does not anticipate any “softening” in the reinsurance market ahead of the key policy renewals that happen at the end of the year, of which property catastrophe cover is a major part.

“We are very confident that the market environment . . . will be unchanged, meaning highly attractive,” he said. 

Munich Re, a heavyweight in the property catastrophe reinsurance market, reported a record €3.8bn of post-tax profits in the first half, helped also by a strong performance from other areas. Beazley and Lancashire, two Lloyd’s of London firms that offer property insurance and reinsurance, alongside other types of cover, also made record profits. 

Executives argue that the reinsurance sector is still playing catch-up after years of underwriting losses before prices began to pick up in 2022. Reinsurers “have to earn now what they couldn’t earn for so long,” Wenning said.

Reinsurers have also recently benefited from a quieter period for major disasters such as hurricanes, and by tightening their policies to reduce their exposure to events such as storms and floods. Those events have weighed more on mass-market home insurers, particularly in the US where many state regulators cap pricing for local providers. 

London-listed Beazley reported pre-tax profits doubled to a record $729mn in the first half, lifted by a strong underwriting performance and higher returns on its investment portfolio.

Its combined ratio — a measure of claims and expenses as a proportion of premiums — improved from 88 per cent to 81 per cent. Beazley said it would probably hit around 80 per cent for the full year, sending its shares up 11 per cent in London.

Chief executive Adrian Cox said the performance was a mixture of good risk selection and higher prices.

The property reinsurance segment was likely to soften first, given that insurers have paid out significant claims for extreme weather, he said.

“There are lots of losses [for insurers]. It might get a bit more competitive but I think it’ll be less so than the reinsurance,” Cox said.

Lancashire’s post-tax profits, also published on Thursday, were up a quarter from the prior period to $201mn in the first half.

Chief executive Alex Maloney said he expected any softening in the property insurance market to be gradual.

“You don’t go from a great market to a terrible market in a year,” he said. “It never happens that way.”
 

[Parsad]

5 hours ago, StubbleJumper said:

I find it interesting how the sentiment on this board has swung wildly over the past week or 10 days.  Immediately following the Q2 release, posters in this forum were almost euphoric about the EPS numbers, the CRs, and interest income.  A short week later, some are almost despondent about Mr. Market suddenly spurning FFH's shares!

 

Whatever.  The hard market had to abate eventually and the central bank tightening process was always likely to stop and potentially reverse.  In the mean time, the shares closed yesterday at US$1050, which is pretty much bang-on with BV adjusted for the excess of fair value over carrying value.  Barring some sort of outrageous growth in the CR, we know that FFH will earn a tonne of money for the next 2 or 3 years, and somebody holding the shares at 1x BV today will likely do perfectly well if those shares are still valued at 1x adjusted BV on Dec 31, 2026.

 

The nice thing about this market pull-back is that FFH actually seems to be serious about repurchasing its shares.  I am a cheap bastard and have always been so.  When I saw the level of repurchases in Q2, I had a few migivings about it because I didn't view FFH's shares to be table-pounding cheap during the quarter.  We can all debate about exactly how high intrinsic value is for FFH - some will suggest 1.2x, BV some will be ballsier and suggest 1.4x or 1.5x - but in any event, we are back down to a share price that strikes me as a no-brainer for repurchases.  Even the cheapest bastards (like me) know that FFH is likely worth at least 1.2x adjusted BV.  It's nice to see that the company once again has a target for deploying potentially significant amounts of capital in a manner that will create value for continuing shareholders.

 

Just like the Muddy Waters kerfuffle, this is an opportunity rather than a problem.

 

 

SJ

 

+1!  Cheers!

[MMM20]

5 hours ago, StubbleJumper said:

I find it interesting how the sentiment on this board has swung wildly over the past week or 10 days.  Immediately following the Q2 release, posters in this forum were almost euphoric about the EPS numbers, the CRs, and interest income.  A short week later, some are almost despondent about Mr. Market suddenly spurning FFH's shares!

 

Whatever.  The hard market had to abate eventually and the central bank tightening process was always likely to stop and potentially reverse.  In the mean time, the shares closed yesterday at US$1050, which is pretty much bang-on with BV adjusted for the excess of fair value over carrying value.  Barring some sort of outrageous growth in the CR, we know that FFH will earn a tonne of money for the next 2 or 3 years, and somebody holding the shares at 1x BV today will likely do perfectly well if those shares are still valued at 1x adjusted BV on Dec 31, 2026.

 

The nice thing about this market pull-back is that FFH actually seems to be serious about repurchasing its shares.  I am a cheap bastard and have always been so.  When I saw the level of repurchases in Q2, I had a few migivings about it because I didn't view FFH's shares to be table-pounding cheap during the quarter.  We can all debate about exactly how high intrinsic value is for FFH - some will suggest 1.2x, BV some will be ballsier and suggest 1.4x or 1.5x - but in any event, we are back down to a share price that strikes me as a no-brainer for repurchases.  Even the cheapest bastards (like me) know that FFH is likely worth at least 1.2x adjusted BV.  It's nice to see that the company once again has a target for deploying potentially significant amounts of capital in a manner that will create value for continuing shareholders.

 

Just like the Muddy Waters kerfuffle, this is an opportunity rather than a problem.

 

 

SJ

Great post. Yeah this little drawdown has me missing the good ol’ days a few years ago where everyone just knew Fairfax was shit so didn’t bat an eye when the stock went down, b/c of course it would - Prem was a bum and rates would be at 0 forever and they’d keep losing hundreds of millions shorting. Some might need to lighten up their position a bit and/or touch grass!
 

Edited August 8 by MMM20

[Thrifty3000]

IDBI Bank

 

IDBI Market Cap: $12 billion USD (FFH Market Cap: $25 billion USD)

IDBI Net Earnings: $670 million USD

Market Cap at time the sale was announced in 2022: Approx $8 billion

Amount being sold: 61% (Currently worth $7.3 billion)

 

Fairfax India Total Assets: $3.6 billion

 

IDBI 3 Year Net Earnings Trend:

 

 

^ feels like this is way bigger than Fairfax India and I have a hunch Prem is going to want all he can eat of this one. This is an example of a deal with a high probability of being a better use of funds than share buybacks.

 

If bank performance is largely a reflection of the region's economic performance, then I'd love to own a good bank in the world's fastest growing economy.

 

 

Edited August 8 by Thrifty3000

[glider3834]

https://www.thestar.com/business/sleep-country-earnings-rise-as-direct-to-consumer-brands-help-buffer-softer-spending/article_6c9e8dbc-f16d-587a-b4b0-99dc40230440.html

[SafetyinNumbers]

44 minutes ago, glider3834 said:

https://www.thestar.com/business/sleep-country-earnings-rise-as-direct-to-consumer-brands-help-buffer-softer-spending/article_6c9e8dbc-f16d-587a-b4b0-99dc40230440.html

Looks like a good sized beat on revenue, EBITDA and EPS for  

[nwoodman]

1 hour ago, glider3834 said:

https://www.thestar.com/business/sleep-country-earnings-rise-as-direct-to-consumer-brands-help-buffer-softer-spending/article_6c9e8dbc-f16d-587a-b4b0-99dc40230440.html

Cheers.  
 

This stood out from the release

 

“Despite the strong overall performance in Q2, we have been seeing a trend with our customers trading down to lower priced mattresses at SCC/DV with double digit declines in units in our highest price band.  This trend has continued into Q3 2024, with the SCC/DV network experiencing negative (8.4%) SSS¹ for the month of July, our biggest monthly decline seen this year, while our DTC SSS¹ metric grew 30.0% in July 2024 tied to promotional discounting and accessory bundling," continued Schaefer. “
 

Metrics - quick and dirty.  For me 1x’s sales 2x’s book would be the starting point based on 6% NM.  Their margins are pretty tidy for this type of business.

 

The net margins are:

• Q2 2024: 6.81%
• YTD 2024: 5.56%

Based on Fairfax's takeover price of $35 per share:

1. Transaction Value:
   • Offer price: $35 per share
   • Total shares outstanding: 33,901,254
   • Equity value: $1.19 billion (33,901,254 * $35)
   • Enterprise value: Approximately $1.7 billion (as stated in the announcement)
2. Price-to-Earnings (P/E) Ratio:
   • Based on Q2 2024 diluted EPS of $0.46, annualized to $1.84
   • P/E Ratio = 35 / 1.84 = 19.0x
3. EV/EBITDA:
   • Using Q2 Operating EBITDA of $50.9 million, annualized to $203.6 million
   • EV/EBITDA = 1,700 / 203.6 = 8.35x
4. Price-to-Sales (P/S) Ratio:
   • Based on Q2 2024 revenue of $232.5 million, annualized to $930 million
   • P/S Ratio = 1,190 / 930 = 1.28x
5. Price-to-Book Value:
   • Total Shareholders' Equity (as of June 30, 2024): $463.8 million
   • Price-to-Book Ratio = 35 / (463.8 / 33,901,254) = 2.56x
6. EBITDA Margin:
   • Q2 2024 Operating EBITDA margin: 21.9%
7. Revenue Growth:
   • Q2 2024 vs Q2 2023: 7.0% increase
8. Same Store Sales (SSS) Growth:
   • Q2 2024: 4.8% increase
9. Dividend Yield (based on last declared dividend):
   • Annual dividend: $0.948 ($0.237 * 4 quarters)
   • Dividend Yield = 0.948 / 35 = 2.71%

Edited August 9 by nwoodman

[UK]

9 hours ago, MMM20 said:

Great post. Yeah this little drawdown has me missing the good ol’ days a few years ago where everyone just knew Fairfax was shit so didn’t bat an eye when the stock went down, b/c of course it would - Prem was a bum and rates would be at 0 forever and they’d keep losing hundreds of millions shorting. Some might need to lighten up their position a bit and/or touch grass!
 

 

Perhaps I am getting a little bit to excited / to early excited (maybe because also of this general market volatility), but I sold some extra shares I bought during MW attack, earlier, mainly only because of the position size (which still remains and will continue to be very large in any case) and now already thinking about buying them back. But perhaps I also should wait for some weather event to do this. Most likelly this is just a silly, immaterial and unnecessary trading, because of some more free time in a summer:)

 

Edited August 9 by UK

[value_hunter]

15 hours ago, nwoodman said:

Cheers.  
 

This stood out from the release

 

“Despite the strong overall performance in Q2, we have been seeing a trend with our customers trading down to lower priced mattresses at SCC/DV with double digit declines in units in our highest price band.  This trend has continued into Q3 2024, with the SCC/DV network experiencing negative (8.4%) SSS¹ for the month of July, our biggest monthly decline seen this year, while our DTC SSS¹ metric grew 30.0% in July 2024 tied to promotional discounting and accessory bundling," continued Schaefer. “
 

Metrics - quick and dirty.  For me 1x’s sales 2x’s book would be the starting point based on 6% NM.  Their margins are pretty tidy for this type of business.

 

The net margins are:

• Q2 2024: 6.81%
• YTD 2024: 5.56%

Based on Fairfax's takeover price of $35 per share:

1. Transaction Value:
   • Offer price: $35 per share
   • Total shares outstanding: 33,901,254
   • Equity value: $1.19 billion (33,901,254 * $35)
   • Enterprise value: Approximately $1.7 billion (as stated in the announcement)
2. Price-to-Earnings (P/E) Ratio:
   • Based on Q2 2024 diluted EPS of $0.46, annualized to $1.84
   • P/E Ratio = 35 / 1.84 = 19.0x
3. EV/EBITDA:
   • Using Q2 Operating EBITDA of $50.9 million, annualized to $203.6 million
   • EV/EBITDA = 1,700 / 203.6 = 8.35x
4. Price-to-Sales (P/S) Ratio:
   • Based on Q2 2024 revenue of $232.5 million, annualized to $930 million
   • P/S Ratio = 1,190 / 930 = 1.28x
5. Price-to-Book Value:
   • Total Shareholders' Equity (as of June 30, 2024): $463.8 million
   • Price-to-Book Ratio = 35 / (463.8 / 33,901,254) = 2.56x
6. EBITDA Margin:
   • Q2 2024 Operating EBITDA margin: 21.9%
7. Revenue Growth:
   • Q2 2024 vs Q2 2023: 7.0% increase
8. Same Store Sales (SSS) Growth:
   • Q2 2024: 4.8% increase
9. Dividend Yield (based on last declared dividend):
   • Annual dividend: $0.948 ($0.237 * 4 quarters)
   • Dividend Yield = 0.948 / 35 = 2.71%

Can someone explain to me why it's better to buy a business (PE:19, PB: 2.5) than buy its own share (PE 7, PB 1.1)? 

[gfp]

5 minutes ago, value_hunter said:

Can someone explain to me why it's better to buy a business (PE:19, PB: 2.5) than buy its own share (PE 7, PB 1.1)? 

 

Well it is not better, but it could be smart to do both.  And don't fret over the price to book value of the mattress retailer - I don't think the book value matters at all and it will be written up to 1x book value once the acquisition goodwill is assigned anyway.  Book value is just an accounting construct.

 

Repurchasing shares at a discount is great capital allocation and also shrinks your capital base and earning power.  Buying profitable businesses that don't correlate with insurance in order to build out the type of diversified non-insurance income that has benefited Berkshire over time increases your earning power, increases your diversity of earnings, and builds long term strength of the enterprise.  Returning capital to shareholders might be great and accretive on a per-share basis for your owners, but it doesn't do a lot to increase the long term strength of the enterprise.  It's a return of capital after all.

[73 Reds]

18 minutes ago, value_hunter said:

Can someone explain to me why it's better to buy a business (PE:19, PB: 2.5) than buy its own share (PE 7, PB 1.1)? 

Well, the business may prefer growth over shrinkage and there ain't too may PE 7, PB 1.1 other businesses available (?)

[Munger_Disciple]

11 minutes ago, gfp said:

 

Well it is not better, but it could be smart to do both.  And don't fret over the price to book value of the mattress retailer - I don't think the book value matters at all and it will be written up to 1x book value once the acquisition goodwill is assigned anyway.  Book value is just an accounting construct.

 

Repurchasing shares at a discount is great capital allocation and also shrinks your capital base and earning power.  Buying profitable businesses that don't correlate with insurance in order to build out the type of diversified non-insurance income that has benefited Berkshire over time increases your earning power, increases your diversity of earnings, and builds long term strength of the enterprise.  Returning capital to shareholders might be great and accretive on a per-share basis for your owners, but it doesn't do a lot to increase the long term strength of the enterprise.  It's a return of capital after all.

 

+1

I would just add that repurchasing shares also increases a shareholder's proportionate ownership of Fairfax's existing businesses. So management has to be sure that buying a mattress business is a better use of capital than repurchase of shares. A buyback is functionally equivalent to a (mostly) tax-free dividend that is automatically reinvested in the company by purchase of shares by the owner in the public markets. 

Edited August 9 by Munger_Disciple

[LC]

Yeah I don't like the acquisition much - even if everything goes right and they are able to improve the mattress biz. 

 

19x earnings for Mattresses vs. 8x for Fairfax.

[StubbleJumper]

41 minutes ago, value_hunter said:

Can someone explain to me why it's better to buy a business (PE:19, PB: 2.5) than buy its own share (PE 7, PB 1.1)? 

 

On buybacks

 

Well there's a couple of factors that matter for the repurchases.  The first is the price that you are able to repurchase at (ie, 1x, 1.1x, 1.3x, etc) and the second is the volume that you are reasonably able to obtain.

 

On the question of price, a buyback is only a good thing for continuing shareholders if it is priced lower than intrinsic value.  So, you kinda need to think about what your evaluation of IV is for FFH.  If you are in the camp that believes that FFH is truly worth 1.5x, then every share bought back at 1.1x is probably one of the best investments that FFH can make (it would be roughly a 73-cent dollar).  But, if you are in the more conservative camp and you aren't sure that the market will ever give you more than 1.2x BV, then a buyback at 1.1x probably isn't the best investment as it would be a 92-cent dollar.  At a 92-cent dollar, you'd probably hold the view that FFH would be better to use the excess capital to buy out the minority positions held by OMERS, which tend to give OMERS that 8-9% guaranteed annualized return...  

 

The second factor is volume, which eventually becomes a problem.  Through the NCIB, FFH can only buy back 25% of the daily volume.  To conduct a large buyback, you'd probably need a SIB, which usually requires that you offer a premium over the prevailing market price.  With a prevailing market price of 1.1x, you'd probably need an SIB price of at least 1.2x to attract shares.  And, then at 1.2x, you have to reflect on just how high IV is and whether the SIB is providing an adequate return to continuing shareholders.

 

I was pleasantly surprised that FFH's prevailing market price dropped to about 1.0x earlier this week.  At that price, most shareholders will hold the view that a buyback is being conducted at a considerable discount to IV.  But, at 1.2x, I'm not sure that you'd have a consensus on that view.

 

 

On other investments

 

The other thing to keep in mind is that usually purchases like Sleep Country are shared out among the insurance subs (so NB buys XX%, C&F buys YY%, and Odyssey buys ZZ%).  The insurance subs need to maintain a certain level of reserves and you need to invest those reserves in something other than FFH's own shares (but there's room for debate about whether Sleep Country is the best investment available).  

 

 

SJ

Edited August 9 by StubbleJumper

[hardcorevalue]

Let’s just all agree that if this company was called "Sleep Country USA” Fairfax would never have touched it...

 

It’s not the best use of shareholder capital in my opinion but doesn’t change the FFH thesis over the long term.