Fairfax 2024

[Hamburg Investor]

1 hour ago, Hektor said:

Given the magnitude of such an event, will governments (in US, Canada and/or elsewhere) step in to bail out the industry, depriving prudent businesses of opportunities?

In Germany government oftentimes steps in, if the economy gets hit badly (covid…). My gut feeling is, that in the US they are more market oriented and let things go without too much intervention; but at some point they would I guess. But I am not an expert, any thoughts from someone else?

[dartmonkey]

25 minutes ago, Hamburg Investor said:

2 hours ago, Hektor said:

Given the magnitude of such an event, will governments (in US, Canada and/or elsewhere) step in to bail out the industry, depriving prudent businesses of opportunities?

In Germany government oftentimes steps in, if the economy gets hit badly (covid…). My gut feeling is, that in the US they are more market oriented and let things go without too much intervention; but at some point they would I guess. But I am not an expert, any thoughts from someone else?

 

Western governments often step in to provide financing, preventing bankruptcy, but they don't just give money to companies to wipe out a big loss. Many of the 'bailouts' of public companies (like GM and Chrysler, for instance), came at a pretty high cost to shareholders. Competitors like Ford who were adequately financed did not get all that market share for themselves, but then, that was not really a realistic prospect anyways - if governments had let GM and Chrysler fail (as I feel they should have), then new competitors would have sprung up from their ashes pretty quickly, as their factories, technology, dealership network etc. were purchased out of bankruptcy. 

[glider3834]

20 hours ago, SafetyinNumbers said:

Definity and Intact preannouced big CAT losses for Q3. Fairfax will get hit hard in Northbridge but Canada is ~10% of premiums so it shouldn’t be as bad.

 

While IFC has hardly moved on the announcement, I find it hard to believe FFH wouldn’t be down big if they pre-announced a $68 hit to pretax earnings for Q3 on CAT losses.

 

Thoughts?

 

future results may deviate the past but Northbridge had lower cat losses in combined ratio (CR) % points than Intact & Definity in 2022 & 2023. Having said that, we will have to wait for Fairfax's Q3 results to know how Northbridge has been impacted.

 

 

Intact Canada P&C               C$ 14.9 (cat loss 2023 7.5 CR pts;  2022 4.1 CR pts)

Definity                                  C $ 4.0 (cat loss 2023 6.2 CR pts;  2022 3.7 CR pts)

Northbridge                           C$ 3.2  (cat loss 2023 1 CR pts; 2022 2 CR pts) * Fairfax rounded out the CR pts in the ARs

 

 

 

Edited August 27, 2024 by glider3834

[UK]

14 hours ago, SafetyinNumbers said:

That’s my point, there wouldn’t necessarily be a 30% hit. IFC could probably raise money to cover the hole, down < 2%. The higher the multiple, the easier and cheaper it will be to raise money. As a business owner, it’s a much better position to be in. Owners of liquid securities on the other hand that use value as a factor especially are deathly afraid of drawdowns no matter their cost base.

 

I agree with you with a prospective of a business/never sell owner! But I am looking at the situation as an owner of tradable security though and decission not to sell, at least something we could agree to call 'crazy well valued', is also a decission. Something like KO for WB in 2000 or AAPL today? I mean this hit from a too high valuation is a very valid risk by itself, even if the underlying business is perfectly fine, and usually, sooner or later (like bigtech in 2022?) it comes seemingly out of nowhere. I am not sure how to manage these risks (also of selling to early) preciselly and this could be a mistake, but I am sure I would began to lose some of my sleep owning 30+ percent position in FFH, as we know the circumstances today, at >2 BV. Perhaps I would not sleep if it is under 10 percent though. I think the cost base is one of the most dangerous things in such considerations and should be irrelevant in any case, no mater if it is a big winner or loser (except maybe somewhat for a tax purposes), at least I try to hide it from my eyes and thinking as much as possible. I think the real possibility why FFH is still atractive today is that too many market participants have a cost basis or remember to well the price of FFH of some 10 years before 2023. His (I hope) will pass:)

 

Edited August 28, 2024 by UK

[UK]

13 hours ago, 73 Reds said:

Exactly!  Moving the discussion beyond insurance, those are the companies to own in any industry where a catastrophe, crisis, bad recession, etc.. will wipe out the weak and make the strong that much stronger.  If investing for the long run and there is a clear leader, I've never understood why anyone would choose 2nd best.

 

+1. Just would like to add, that in my thinking it is companies with a very good and long term oriented management (which is very rare by itself) or operated by the shrewd owner/investor/family you can trust (and who then picks the right managment, if they are not running the business themselves, in the first place), which are able to do smart things during the crises and to become even stronger/more valuable. Then you can also leave such investments on autopilot / for long term more easily etc. It is a must have condition for me for most companies for a big investment, as all five I currently own do, but especially for an insurance company, where I definitelly have less ability to check and trust numbers myself. It is almost unthinkable for my to even consider something without the owner or if it is of the second class in this industry. While academia or MW may consider or scream this is a problem and reason not to own or short them:))). This is also how I ended up investing in BRK some ~12 year ago, despite the fact, that I started by doing research of the different insurance company at that time.

 

Edited August 28, 2024 by UK

[MMM20]

On 5/13/2024 at 9:35 AM, MMM20 said:

This is still my biggest position by a lot. It has gotten up to about half my retirement accounts. I’m talking about taking it down to 30-40%, still my biggest by ~2x. Still think it’s easily worth $2-3K and I would not sell if this were close to a normal core position.

 

I wanted to close the loop. I sold ~10% of my FRFHF around ~$1,200 to close the margin from buying HIFS then (and to buy SILA now which looks like a fat pitch to me). FRFHF remains my biggest position by ~3x, and I'd keep a large core position at ~$2,500 if it went there overnight. This still looks like the best thing out there, but I'm probably too conservative with sizing and it's a risk management decision that I hope I'll regret.

 

Edited August 30, 2024 by MMM20

[Junior R]

all time high hit today again

[SafetyinNumbers]

12 minutes ago, Junior R said:

all time high hit today again

We’ll find out Sept 6 after the close if FFH is going into the 60. I think the odds are 50-50. I think the street is less than 25% so I don’t think there is much prepositioning. Given the weight keeps going up, I think it’s inevitable but the street doesn’t think that long term.

I assume sellers will be catalyst driven hedge funds and retail investors who have oversized positions. 
 

What does everyone else think?

 

Edited August 30, 2024 by SafetyinNumbers

[dartmonkey]

9 minutes ago, SafetyinNumbers said:

We’ll find out Sept 6 after the close if FFH is going into the 60. I think the odds are 50-50. I think the street is less than 25%... 

 

What does everyone else think?

I'd go with the street. Algonquin must be below 20 basis points now, but the Financial sector is already too big, because of all our bank concentration. I guess it depends which criterion is more important, since you can't do both. So my guess is they'll punt.  

[gfp]

Change the name to "Fairfax Mattresses and More!" and they get in sure thing

[Hektor]

31 minutes ago, gfp said:

Change the name to "Fairfax Mattresses and More!" and they get in sure thing

[SafetyinNumbers]

1 hour ago, dartmonkey said:

I'd go with the street. Algonquin must be below 20 basis points now, but the Financial sector is already too big, because of all our bank concentration. I guess it depends which criterion is more important, since you can't do both. So my guess is they'll punt.  

It’s the reason most of the street doesn’t think FFH goes in too. I showed a couple of them that financials were more overweight in March 2022 when IFC went in (at a slightly lower weighting in the index than FFH is now) they shrug their shoulders. Seems like an important precedent to me.

Edited August 30, 2024 by SafetyinNumbers

[UK]

7 hours ago, gfp said:

Change the name to "Fairfax Mattresses and More!" and they get in sure thing

 

This is really good idea. Also "Fairfax and Sleep Well" or maybe "Fairfax and (just go to) Sleep" could be nice:)

 

PS. Or better yet: "Fairfax and Relax":)

 

Edited August 31, 2024 by UK

[wondering]

Article about speculation of Fairfax being included in S&P/TSX 60

 

https://www.theglobeandmail.com/business/article-this-goose-could-fly-south-straight-out-of-canadas-main-stock-index/

 

• because of lower trading volumes/float several companies could be delisted from the S&P/TSX 60
• names mentioned in delisting Canada Goose, Ballard Power Systems, Africa Oil Corp, Westshore Terminals, Algonquin Power according to Jean-Michel Gauthier, analyst at Bank of Montreal
• names mentioned as possible inclusion into the index include Bird Construction and Fairfax
• article discussed the fact that the index is already heavily weighted towards financials and natural resource companies

"S&P has a degree of discretion in decisions around which stocks go in its indexes. The key criteria it uses is known as “float” – the value of shares that aren’t held by insiders and that therefore trade frequently and are easily available to the public. The index provider does not release its proprietary float calculations.

To stay in the composite, a company’s float must not drop below 0.025 per cent, or 2.5 hundredths of a percentage point, of the total value of the index"

 

 

[SafetyinNumbers]

1 hour ago, wondering said:

Article about speculation of Fairfax being included in S&P/TSX 60

 

https://www.theglobeandmail.com/business/article-this-goose-could-fly-south-straight-out-of-canadas-main-stock-index/

 

• because of lower trading volumes/float several companies could be delisted from the S&P/TSX 60
• names mentioned in delisting Canada Goose, Ballard Power Systems, Africa Oil Corp, Westshore Terminals, Algonquin Power according to Jean-Michel Gauthier, analyst at Bank of Montreal
• names mentioned as possible inclusion into the index include Bird Construction and Fairfax
• article discussed the fact that the index is already heavily weighted towards financials and natural resource companies

"S&P has a degree of discretion in decisions around which stocks go in its indexes. The key criteria it uses is known as “float” – the value of shares that aren’t held by insiders and that therefore trade frequently and are easily available to the public. The index provider does not release its proprietary float calculations.

To stay in the composite, a company’s float must not drop below 0.025 per cent, or 2.5 hundredths of a percentage point, of the total value of the index"

 

 

There is nothing quite like price insensitive buying to help with price discovery. It would be interesting to know how much liquidity will be provided by retail shareholders when FFH goes in. Entry does seem inevitable but not necessarily September although I think the odds are better than 50-50.

 

Two notes : think Gauthier is from Scotia not BMO and the article suggests GOOS is getting kicked out because it trades more in NY but it’s actually because its float cap is under 2.5bps. There is no such rule for the 60 but 20bps has been the rule of thumb. AQN closed at 19bp on Friday but they increased the float a reasonable amount since the last measurement period so it might bounce back above 20bp. But it’s still just a rule of thumb.

[gfp]

I thought this article on Verisk's recent modeling was interesting.  I don't think it has a paywall.  Not sure where to post it so seems like Fairfax is as good as any.  

 

https://www.theinsurer.com/reinsurancemonth/industry-should-now-expect-average-annual-cat-losses-of-151bn-verisk/

[UK]

14 hours ago, gfp said:

I thought this article on Verisk's recent modeling was interesting.  I don't think it has a paywall.  Not sure where to post it so seems like Fairfax is as good as any.  

 

https://www.theinsurer.com/reinsurancemonth/industry-should-now-expect-average-annual-cat-losses-of-151bn-verisk/

 

So does this suggest, that insurance is quite a growth industry with a continuously expanding TAM:)?

[gfp]

15 minutes ago, UK said:

 

So does this suggest, that insurance is quite a growth industry with a continuously expanding TAM:)?

You could kind of see Ajit and Warren let out a little gleeful grin when Ajit pointed out that inflation isn’t necessarily bad for the insurance business. 

[UK]

35 minutes ago, gfp said:

You could kind of see Ajit and Warren let out a little gleeful grin when Ajit pointed out that inflation isn’t necessarily bad for the insurance business. 

 

Sorry, my bad. Inflation resistant growth industry with ever growing TAM:))

[dartmonkey]

8 hours ago, gfp said:

Ajit pointed out that inflation isn’t necessarily bad for the insurance business. 

How does this work? I would not have expected that inflation would be necessarily bad for most insurance, since rates are readjusted every year, but maybe long-tailed insurance (asbestos for instance) might be hurt by unexpectedly high inflation. Did Jain explain his thinking?

[gfp]

43 minutes ago, dartmonkey said:

How does this work? I would not have expected that inflation would be necessarily bad for most insurance, since rates are readjusted every year, but maybe long-tailed insurance (asbestos for instance) might be hurt by unexpectedly high inflation. Did Jain explain his thinking?

 

That's right - it's not great for long tail and retroactive business.  And Berkshire certainly has some of that business. But most insurance is repriced each year and auto policies are generally repriced twice a year.  As the linked article does a good job of illustrating - the value of everything needing to be insured continues to march upward.  Inflation is only part of that.  Fairfax should do well with their global insurers just from the development of those economies and the current low penetration of insurance coverage in many of those places.

 

This chart is average annual losses, not size of market - but this illustrates the growth, and it is over a relatively short time.  Even better for an AJG or BRO.

[Cigarbutt]

^Just to add, increasing expected costs are based on past historical experience and of course the future could vary (outliers, changing trends).

From the report above and other references, the underlying drivers of previous trends have been:

-cost inflation

-climate volatility (...)

-and (often underrecognized?) the growing concentration of 'inflated' asset values in at-risk areas (urban and wildland-urban interface)

[gfp]

With everything going on with US Steel, Cliffs and the rest of the steel and iron ore stocks - you really have to appreciate how well played the Stelco situation was for Kestenbaum and Fairfax.  This one is looking pretty smart.

 

[UK]

I just hope FFH will have opportunity to participate in the next Kestenbaum's venture:)

 

Edited September 8, 2024 by UK

[dartmonkey]

11 hours ago, gfp said:

you really have to appreciate how well played the Stelco situation was for Kestenbaum and Fairfax.  This one is looking pretty smart.

 

 

 

Just to flesh this out, Stelco accepted a buyout bid from Cleveland-Cliffs in July, at $70 a share (a 87% premium to the previous price of Stelco shares, $37.36). Payment is to be $60 in cash, $10 in CLF shares. Those CLF shares have lost almost 30% of their value in the 2 months since then, so when the deal closes, Stelco may get shares that are worth about $7, if CLF shares are still around $11.50 when the deal closes (expected in Q4). Competitor US Steel, not involved in the deal, is down 21% in the interim; I might add that SLX, a steel ETF, is down too, about 11%.

 

I love it when Fairfax opportunistically accepts a nosebleed offer, like the pet insurance bid by JAB Holdings a couple of years ago or this Stelco bid. When I heard they were shopping Bauer/Maverik/Peak, which seems to have been a modestly successful investment (about 10% CAGR I think), I wondered why they don't just hold onto it, hoping someone develops an irresistible craving for a hockey/lacrosse equipment company. What's the hurry?

 

Anyways, this Stelco sale is just one more happy ending in what seems like a charmed period for Fairfax. Presuming it works out, of course; the breakup fee is only 3% of the value of the transaction.