Fairfax 2024

[Viking]

5 hours ago, 73 Reds said:

@Viking, while I largely agree with you, it is a stretch to suggest that those who did not invest in Fairfax got it wrong.   It was, and frankly still is completely rational to look at management responsible for the company's stagnation in the 2010s and compare them to present management.  Looks like mostly the same folks.  Personally, management is the number one factor in any investment I make.  Without management, i.e., decision-making, companies don't generate anything.  My choice to invest in Fairfax was due solely to how cheap the price had become; I initially invested IN SPITE OF (not because of) management.  Has management done better in the 2020s?  Well yes, for many of the reasons of which you so eloquently write.  But even so, I'd hardly be willing to give the same management a pass for 10 years of poor decision-making and don't blame prior shareholders at all for taking a pass on this stock.  Unlike Berkshire, where for 40+ years I've never questioned management (even while admittedly not understanding many decisions, past and present) Fairfax is, and always will be on a relatively short leash.      

@73 Reds  Thanks for the comment - it is great to get the opportunity to discuss/debate.
 

My point was more about the importance of trying to be as rational as possible as an investor at all times - especially during times of great stress. As opposed to letting emotion be the primary driver the investment decision. 

 

As we all know, in practice, that is an exceptionally difficult thing to do. Lots of investors fail. 

 

In 2020 when Fairfax was trading for most of the year at a P/BV of 0.7 (and as low as 0.6x) even after financial markets had rebounded - that had nothing to do with rational, fact based analysis. 

Concerns about management? 

 

Truth be told, Fairfax fixed their biggest issue (dragging down their long term performance) back at the end of 2016 when they removed the equity hedge. That was public knowledge.
 

And it was possible to see the improvements they were making in their investing framework by late 2019. I did a ‘Top 10’ on Fairfax at the end of 2019 and at the time i titled it ‘the supertanker is turning’. 
 

So why did Fairfax get so cheap and stay so cheap for most of 2020? I don’t think there is a reason based in rational analysis. Fear (not greed) was driving most investors investment decisions back then (when it came to Fairfax). This bias against the company persisted into 2023.

 

The time to sell Fairfax was back in 2012/2013. Not 2020 after it had fallen to 0.7x P/BV. That was the time to buy - and hand over fist.

Edited September 8 by Viking

[Viking]

5 hours ago, 73 Reds said:

@Viking, while I largely agree with you, it is a stretch to suggest that those who did not invest in Fairfax got it wrong.   It was, and frankly still is completely rational to look at management responsible for the company's stagnation in the 2010s and compare them to present management.  Looks like mostly the same folks.  Personally, management is the number one factor in any investment I make.  Without management, i.e., decision-making, companies don't generate anything.  My choice to invest in Fairfax was due solely to how cheap the price had become; I initially invested IN SPITE OF (not because of) management.  Has management done better in the 2020s?  Well yes, for many of the reasons of which you so eloquently write.  But even so, I'd hardly be willing to give the same management a pass for 10 years of poor decision-making and don't blame prior shareholders at all for taking a pass on this stock.  Unlike Berkshire, where for 40+ years I've never questioned management (even while admittedly not understanding many decisions, past and present) Fairfax is, and always will be on a relatively short leash.      

@73 Reds Here is perhaps another way to look at it. If an investor buys a stock and then the ‘story’ changes for the worse (for whatever reason) and they choose not to sell that investment. And then it drops precipitously in value 5 or 10 years later.
 

Who is primarily to blame? Is it:

1.) management of the company?

2.) or the investor - for not selling as soon as they knew the story had changed?

 

My view is the blame primarily rests with the investor. 

Edited September 8 by Viking

[73 Reds]

12 hours ago, Viking said:

@73 Reds Here is perhaps another way to look at it. If an investor buys a stock and then the ‘story’ changes for the worse (for whatever reason) and they choose not to sell that investment. And then it drops precipitously in value 5 or 10 years later.
 

Who is primarily to blame? Is it:

1.) management of the company?

2.) or the investor - for not selling as soon as they knew the story had changed?

 

My view is the blame primarily rests with the investor. 

Absolutely, the investor is responsible for all his/her decisions.  But so is management.  My point is the same management responsible for the equity hedge/short position is still in charge.  Have they learned?  We hope so.  But that doesn't make folks wrong to ignore their history.  Besides, who knows what people who passed on Fairfax did with their investment dollars; there have been other great performers and everyone's criteria for evaluating potential investments is different.  You (and I) saw a stock that was too cheap to pass up.  But that doesn't make not buying it (i.e. acts of omission) wrong.   

[Spekulatius]

On 9/4/2024 at 7:21 AM, 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?

Unexpected / accelerating inflation is a problem for insurance, especially longer tail, but stable or decelerating inflation should not be a problem..

[cwericb]

Viking asked "But how many board members actually invested in Fairfax in 2020? Or 2021? Or 2022? Or 2023?" 

 

Perhaps there are a fair number of board members like myself who have passed on the opportunity to buy more Fairfax shares simply because we have watched our present shares grow in value to a point where Fairfax now form an increasingly larger and larger percentage of our stock portfolios. Personally I am slightly over 50%. 

 

However, as a small investor, I might be more tempted to add if shares would split to a more reasonable price per share. For instance a ten for one split would reduce share price to around the level of Canadian banks. JMHO

[gfp]

1 hour ago, Spekulatius said:

Unexpected / accelerating inflation is a problem for insurance, especially longer tail, but stable or decelerating inflation should not be a problem..

 

What really hurts the long tail / retroactive businesses is "social inflation" - which I take to mean the general increases in average jury awards.  This type of inflation has been substantial and certainly isn't 1:1 with official CPI or other traditional inflation measures.  Court system delays around the pandemic years pushed jury decisions and settlements out further as court systems slowed way down.  More time before resolution might have increased the duration of that "float" but I'm sure that positive was more than undone by the extra year or two of social inflation in the US.

[Saluki]

It's already a big position for me, but i picked up a few shares in my retirement around US$1000 when it dipped briefly a few months ago and sold it for a quick hit.  I think we may get another opportunity here and there, particularly next quarter. 

 

OXY is FFH's biggest equity investment, and the new accounting rules which make you take mark-to-market losses and gains and treat them as earnings, not just adjustments to book value.  This will surely make FFH's GAAP earnings look terrible this quarter, no matter how good the other stuff is doing. If that happens, I wouldn't mind adding more again in my retirement account and selling when it bounces back, since those moves aren't taxable. 

[gfp]

14 minutes ago, Saluki said:

It's already a big position for me, but i picked up a few shares in my retirement around US$1000 when it dipped briefly a few months ago and sold it for a quick hit.  I think we may get another opportunity here and there, particularly next quarter. 

 

OXY is FFH's biggest equity investment, and the new accounting rules which make you take mark-to-market losses and gains and treat them as earnings, not just adjustments to book value.  This will surely make FFH's GAAP earnings look terrible this quarter, no matter how good the other stuff is doing. If that happens, I wouldn't mind adding more again in my retirement account and selling when it bounces back, since those moves aren't taxable. 

 

If OXY closed the quarter where it is now, it would be a $65m pretax hit.  Less after taxes.  That doesn't seem like a big factor

[SafetyinNumbers]

1 hour ago, gfp said:

 

If OXY closed the quarter where it is now, it would be a $65m pretax hit.  Less after taxes.  That doesn't seem like a big factor

Great point GFP. Also, there are lots of equity positions bigger than OXY. The three biggest are EUROB, Poseidon and the TRS. We already know EUROB and Poseidon will contribute more than they did last quarter. The TRS also has  gains more than the OXY loss if the quarter closed today. 

[Viking]

Here is a summary of Fairfax's largest equity holdings from June 30, 2024. Given its proposed sale, Stelco has jumped into the top 7 (and will be replaced by Sleep Country). Quess has been on fire QTD so it is now a larger position than OXY (CIB too?).  

 

[dartmonkey]

27 minutes ago, Saluki said:

It's already a big position for me, but i picked up a few shares in my retirement around US$1000 when it dipped briefly a few months ago and sold it for a quick hit.  I think we may get another opportunity here and there, particularly next quarter. 

 

OXY is FFH's biggest equity investment, and the new accounting rules which make you take mark-to-market losses and gains and treat them as earnings, not just adjustments to book value.  This will surely make FFH's GAAP earnings look terrible this quarter, no matter how good the other stuff is doing. If that happens, I wouldn't mind adding more again in my retirement account and selling when it bounces back, since those moves aren't taxable. 

 

Actually, those mark to market changes have been in effect for more than 5 years now.

 

Q2 to Q3 OXY is indeed down a bit, from $63.03 June 28 to about $52 now. Since Fairfax owns 6 million shares, that represents a loss of about $66m pretax, as gfp mentions, and maybe $53m after tax, and that is in the context of total earnings of about $1b per quarter. In the same time period, GODIGIT is up from 338 to 387, a 49 rupee gain. Fairfax owns 49% of Go Digit shares, through Digit (which also owns other things besides Go Digit,) and 68%, if one includes the convertible preferred shares Fairfax owns, so this represents 68%*923.33m shares= 627.9m shares; 49 INR = 0.58 USD, so this represents a Q2-Q3 gain of $366m, 6 times the OXY loss. I expect that only the preferred shares are market to market (they are worth 19% of Digit), whereas the 49% of Digit's common shares are accounted for as an associate (20-50%) and share gains will not show up as earnings, but even the preferreds would represent a bigger mark to market gain than the OXY loss. And there are many other gains, such as Poseidon and Eurobank (also associates, so gains would be because of their earnings, which are substantial).

 

OXY only appears to be their biggest position because it is now the biggest position that is declared to the SEC in a 13-F, compiled on sites like Gurufocus and Dataroma. Those do not include holdings like Go Digit, Eurobank, Poseidon or of course their preferred shares or their big bond portfolio. So the OXY position, worth $379m at the end of Q2, was the biggest position in the $1.2b 13F portfolio, but total Fairfax common stocks were $7.3b, all stocks including preferred stocks were $9.9b, and all investment assets combined were $57.5b, so OXY is worth less than 1% of that. 

[Saluki]

14 minutes ago, dartmonkey said:

 

 

OXY only appears to be their biggest position because it is now the biggest position that is declared to the SEC in a 13-F, compiled on sites like Gurufocus and Dataroma. 

 

Yes,  I forgot about that. Thanks.

[dartmonkey]

2 hours ago, Viking said:

Stelco has jumped into the top 7 (and will be replaced by Sleep Country). Quess has been on fire QTD so it is now a larger position than OXY (CIB too?).  

 Sleep Country should be higher than #7, I would think: 33.9m shares times C$35, so C$1.2b = $875m US. I presume this will be carried at that acquisition value? 

 

Thomas Cook is down a bit, from $871m to something like $760m; Quess is up a lot, from $370 to $471. Fairfax India is heading for a quarter close about level, from $827m to $837m by my calculation. So if Sleep County is at $875m as I expect, it looks like it would be #4, or #3 if you don't include the Fairfax swaps.

 

[SafetyinNumbers]

9 minutes ago, dartmonkey said:

 Sleep Country should be higher than #7, I would think: 33.9m shares times C$35, so C$1.2b = $875m US. I presume this will be carried at that acquisition value? 

 

Thomas Cook is down a bit, from $871m to something like $760m; Quess is up a lot, from $370 to $471. Fairfax India is heading for a quarter close about level, from $827m to $837m by my calculation. So if Sleep County is at $875m as I expect, it looks like it would be #4, or #3 if you don't include the Fairfax swaps.

 

They could also lever ZZZ more when it’s private. If they take that out as a return of capital, it will reduce the equity position size.

[value_hunter]

Bought back 61,553 share in Aug.

https://ceo.ca/api/sedi/?symbol=ffh&amount=&transaction=&insider=

[SafetyinNumbers]

14 minutes ago, value_hunter said:

Bought back 61,553 share in Aug.

https://ceo.ca/api/sedi/?symbol=ffh&amount=&transaction=&insider=

looks like bought back ~65k and cancelled ~61k so far. Great to see especially during hurricane season. It will be interesting how much it steps up in Q4, if the multiple is still down here.

[Viking]

1 hour ago, SafetyinNumbers said:

looks like bought back ~65k and cancelled ~61k so far. Great to see especially during hurricane season. It will be interesting how much it steps up in Q4, if the multiple is still down here.

 

So here is my question. Fairfax are value investors. They are able to value Fairfax better than anyone. Historically, they usually buy back shares when they are cheap. They have been buying hand over fist this year. They are on pace to reduce effective share outstanding by more than 1 million in 2024. Given the hard market in insurance is nearing its end - the insurance subs will likely be generating a significant amount of excess capital moving forward. It is likely that Fairfax will continue to prioritize stock buybacks over the near term. The stock is not very liquid. 

 

Knowing this, why would an investor sell their shares right now?

Edited September 9 by Viking

[LC]

To play devil's advocate:

 

What if we see a soft market + lower rates + equity market drawdown? 

 

Pretty much the 3 things that Fairfax had as tailwinds the last few years?

 

I'd imagine that would put a damper on the share price. On the flipside I imagine it would provide Fairfax opportunity to go buying (re-coiling the spring so to speak)

 

All that said I haven't sold a share. In fact I picked up a few shares on Friday.

[Viking]

24 minutes ago, LC said:

To play devil's advocate:

 

What if we see a soft market + lower rates + equity market drawdown? 

 

Pretty much the 3 things that Fairfax had as tailwinds the last few years?

 

I'd imagine that would put a damper on the share price. On the flipside I imagine it would provide Fairfax opportunity to go buying (re-coiling the spring so to speak)

 

All that said I haven't sold a share. In fact I picked up a few shares on Friday.

 

You pose good questions. The answer to each is 'it depends.' Each of those things could be both good or bad (or some combination) for Fairfax. Here are some thoughts:

1.) A soft market in insurance will give Fairfax the opportunity to re-deploy capital to better opportunities. Fairfax is not like other P/C insurers in this regard - they have more good options.

2.) Lower rates will likely extend the hard market in insurance. What will cause lower rates? A recession? This might give Fairfax the opportunity to shift to corporates. If lower rates cause volatility in financial markets Fairfax could be a big winner. As I have said before, they have made their best investments over the past 4 years when volatility was high.

3.) Equity market drawdown - Fairfax's mark to market exposure to a fall in equity markets is much less today than in past years - the majority of their equity holdings are now associate/consolidated. In the 2020 and 2022 they used the sell off in equity markets to buy lots of what they already owned on the cheap (Fairfax, Recipe take-out, small purchases of Fairfax India, investments in Thomas Cook India and John Keells etc).

 

The silver lining are stock buybacks. I think this might be the key to understanding Fairfax as an investment today. Fairfax wants to buy back a bunch of shares. They should have the cash for the next couple of years. A low stock price? That is called a big, big opportunity. And would be very beneficial for long term shareholders. 

 

I don't expect the Disney version of the Fairfax movie to keep playing out indefinitely... I don't think the last 4 years are the new normal (where everything goes close to perfect for the company). However, I am also not going to go to the other extreme and assume that management is suddenly going to start to mess up again (and deliver returns like the 2010 to 2020 period). My guess is we will likely get something in between moving forward - which should be very good for shareholders. 

 

 So we will see  

Edited September 9 by Viking

[LC]

You know, I think we had the same conversation over private message maybe a year ago? The concern was the same and the potential pros/cons are the same. I think that goes to show that Fairfax is doing a great job (and has done a great job) providing themselves with a lot of optionality in case X, Y, or Z happens. It's good to see as a shareholder.

 

Part of what I didn't like about the big hedges years ago was that it kind of locked them in. They had one way to win. These days when I look at Fairfax I see a few ways they can "win" - and at least a few ways they can prevent losing.

[Viking]

1 hour ago, LC said:

You know, I think we had the same conversation over private message maybe a year ago? The concern was the same and the potential pros/cons are the same. I think that goes to show that Fairfax is doing a great job (and has done a great job) providing themselves with a lot of optionality in case X, Y, or Z happens. It's good to see as a shareholder.

 

Part of what I didn't like about the big hedges years ago was that it kind of locked them in. They had one way to win. These days when I look at Fairfax I see a few ways they can "win" - and at least a few ways they can prevent losing.

+1 

 

With Fairfax people tend to spend a lot of time thinking about lots of bad things that might happen. They don’t spend an equal amount of time thinking about good things that might happen. Therefore their ‘analysis’ tends to be skewed one way. Is that simply being ‘conservative.’ I am not sure that is how i would characterize it. 

[UK]

It is very nice to see these continuing buybacks YTD. Makes sense and also supports/confirms a lot of things too: 1. Seems Prem really does walk his Singletone talk 2. They still think stock is of good value (to which I wholeheartedly agree, despite the sometimes scary looking stock price chart) 3. This is a 'safety valve' against the soft market/nothing to do market/etc in slow action and kind of preview of the possible future or not so pretty times in the market. I think at this valuation levels shareholders of FFH still have not much to fear about and I continue to be very exited about the situation:)

[Jaygo]

The pace of buybacks is really impressive. At some point maybe 6 years ago someone mentioned an ( possibly Norwegian ) insurance co who bought back 90% of shares over time. Anyone remember? I think it was in the BRK thread, anyway I believe the setup was similar. Great company that people were just indifferent to and it allowed them to slowly take in the majority of shares over time at reasonable prices. 

 

I wonder if one day well look at our portfolios and FFH will be like 10k a share but the market cap will be still in the same neighborhood. I'm guessing WB would love to have a lower valuation right now to make his transition easier.

 

[dartmonkey]

14 hours ago, SafetyinNumbers said:

looks like bought back ~65k and cancelled ~61k so far. Great to see especially during hurricane season. It will be interesting how much it steps up in Q4, if the multiple is still down here.

 Those 65,243 shares were repurchased from August 2 to August 30. All but 6000 were purchased in the second half of the month. And only 8500 were repurchased in July. June was much more active, but we already had those numbers in Q2, when we were told that 854,031 shares were repurchased for cancellation in Q1 and Q2. 

 

Before we get too excited, 73,743 shares in 2 months is actually a pretty slow pace - that pace would give us 221k in Q3 and Q4,  a much slower pace than the first half of the year, and only barely getting us over 1m shares for the year, a little less than 5% of the 23.1m implied shares outstanding.

 

If they really want to move the needle, they may have to make a substantial issuer bid (SIB). As you say, maybe they are waiting for more confidence about the rest of the hurricane season, after what has turned out to be a very mild first half.

 

We haven't discussed the 2% tax on repurchases in Canada; it seems this has not slowed down Fairfax very much.

[TwoCitiesCapital]

16 hours ago, Viking said:

2.) Lower rates will likely extend the hard market in insurance. What will cause lower rates? A recession? This might give Fairfax the opportunity to shift to corporates. If lower rates cause volatility in financial markets Fairfax could be a big winner. As I have said before, they have made their best investments over the past 4 years when volatility was high.

 

I still don't understand this argument. Sure it makes sense in theory - but then why was insurance so morose in the 2010s when interest rates were also at 0% for most of the decade? 

 

Why did the hard market were seeing now start post-covid when interest rates were rising to a highest level they've been since pre-GFC? 

 

Overall, the theory may be true - but it seems the lags in effects on profitability are so long as to be meaningless in forecasting anything in the next 1-3 years in terms of hardness/softness and earnings. 

 

16 hours ago, Viking said:

3.) Equity market drawdown - Fairfax's mark to market exposure to a fall in equity markets is much less today than in past years - the majority of their equity holdings are now associate/consolidated. In the 2020 and 2022 they used the sell off in equity markets to buy lots of what they already owned on the cheap (Fairfax, Recipe take-out, small purchases of Fairfax India, investments in Thomas Cook India and John Keells etc).

 

My main concern isn't a mark to market loss on equities in a down market, but a liquidity drain from the TRS if Fairfax gets sold off in tandem. 

 

That didn't happen in 2022. It DID happen in 2020 and 2018 and 2007. 

 

Perhaps the leverage is worth the quarterly liquidity risk. But I'd feel more comfortable if Fairfax didn't own the TRS in a down market.