Fairfax 2024

[sleepydragon]

Just now, SafetyinNumbers said:

It all depends on the extant shareholders and where the marginal sellers are whether they are basing their decisions on price or value. 

This is a very good point. 

[Xerxes]

In Q4 of 2016, Prem Watsa and team sold off their bond portfolio and shorten its duration. That was around the election of President Trump. 
 

Today, the bond portfolio is already short (shorter than 4 anyways), the hedges are already off. And the size of the overall business is just bigger than 2016. 
 

Do you believe that there is an event-driven trade with the U.S. election this time around that FFH has up his sleeve. 

 

ref: 2016 investor letter 

[Haryana]

 

[Hoodlum]

Berkley is suggesting at best flat pricing for renewals.  It sounds like Hurricane Milton losses will come under what was initially thought, which will be good for Q4 earning but not so good for 2025 pricing and future earning.

 

https://in.investing.com/news/stock-market-news/earnings-call-w-r-berkley-reports-robust-q3-results-amid-market-shifts-93CH-4481988

 

Quote

Rob Berkley: I think it is a little bit early to reach a conclusion on that. I think we are going to -- at this stage, the outcome of both storms you referenced, and particularly Milton, I don't think that has really come into a very sharp focus, and we are going to just have to see where things settle out. I think the reinsurance marketplace is doing what it can to position itself as I understand it, for flat and my expectation is that unless Milton proves to be uglier, it is going to be a challenge for them to actually achieve flat. As far as the insurance marketplace goes, we'll see how it unfolds, and we are going to have to see what the losses are.

 

Edited October 22 by Hoodlum

[gfp]

18 minutes ago, Hoodlum said:

Berkley is suggesting at best flat pricing for renewals.  It sounds like Hurricane Milton losses will come under what was initially thought, which will be good for Q4 earning but not so good for 2025 pricing and future earning.

 

https://in.investing.com/news/stock-market-news/earnings-call-w-r-berkley-reports-robust-q3-results-amid-market-shifts-93CH-4481988

 

 

 

Here is today's newsletter out of the Baden-Baden conference of international reinsurers for those interested in more color (no paywall)

https://pdf.static.prod.wbm.infomaker.io/c80c8f7a-cdbf-57a6-9364-adb3617297fc?utm_source=listrak&utm_medium=email&utm_term=Download+issue+three%3a+22+October&utm_campaign=Welcome+to+our+Baden-Baden+Day+Three+edition%3a+Tuesday+22+October

[Viking]

Below are a few of the things i will be watching for when Fairfax reports Q3 earnings. The order of items reflects my level of interest - not how important they are to Fairfax and its performance over the long term.

 

Anything missing from my list?

 

1.) Impact of substantial decline in interest rates in Q3

 

When Fairfax reports Q3 results the 800lb gorilla will likely be the impact of the big decline in interest rates that we saw in Q3. Rates were down significantly across the curve.

 

This will have two big impacts of Fairfax:

1. Change in value of the fixed income portfolio - resulting in a big unrealized gain.
2. Impacts of IFRS accounting - resulting in a big loss.

My guess is the two impacts will net into a nice unrealized gain for Fairfax. How big? No idea. What do other board members think?

 

Of interest, so far in Q4 we have seen bond yields spike higher. Should this hold, this will reverse some of the net effect that happens in Q3.

 

Fairfax also tends to be pretty active in how they manage their fixed income portfolio (from an historical perspective). It will be interesting to see if they are able to find a way to take advantage of the extreme volatility we have seen in the bond market over the past 3 months.

 

 

2.) Capital allocation

 

Update on effective shares outstanding

• Under 22 million?
• any commentary? Still view shares as being significantly undervalued? (Are they still holding FFH-TRS position?)

Asset sale / purchase: any commentary?

• Purchase of Sleep Country. What will it deliver pre-tax to non-insurance consolidated bucket?
• Sale of Stelco. Pre-tax investment gain = $397 million, expect Q4 close?

3.) Insurance

• What is growth in net premiums written?
• What is CR?
• What is level of catastrophe losses? In line with expectations?
• What is level of reserve releases?
• Commentary on hard market?

4.) Interest and dividend income

• Is it still growing? Flat? Declining?
• Interest and dividend income was $590 million in Q1 and $614 million in Q2.
• Is Fairfax’s investment in Kennedy Wilson’s debt platform continuing to increase in size?

5.) What is share of profit of associates?

• Eurobank? Chug, chug, chug?
• Poseidon? Are we seeing green shoots?

6.) Equities

• What are investment gains from equities? The equities I track suggests mark to market gains from equities will be solid in the quarter.
• For Associate holdings, what is the excess of market value to carrying value? This is value that is not being captured by book value.

 

7.) What is book value per share?

• At June 30, 2024, BVPS = $979.65

8.) Miscellaneous topics

 

Some notes from 1H 2024 results:

• Tax rate looks elevated. Q3?
• Amount of earnings accruing to non-controlling interests looks elevated. Q3
• Currency has been a headwind to BV in 1H. Tailwind in Q3?
• Life-ins/runoff costs look elevated. Does trend continue in Q3?

 

Due to new issuance, the interest cost has popped higher. What is the new run rate?

Edited October 22 by Viking

[TwoCitiesCapital]

 

2 hours ago, Viking said:

1.) Impact of substantial decline in interest rates in Q3

 

When Fairfax reports Q3 results the 800lb gorilla will likely be the impact of the big decline in interest rates that we saw in Q3. Rates were down significantly across the curve.

 

This will have two big impacts of Fairfax:

1. Change in value of the fixed income portfolio - resulting in a big unrealized gain.
2. Impacts of IFRS accounting - resulting in a big loss.

My guess is the two impacts will net into a nice unrealized gain for Fairfax. How big? No idea. What do other board members think?

 

 

I don't have a great understanding of the IFRS rule other than to recognize its some discounting mechanism that fluctuates with rates. Fairfax has previously benefitted from underweight duration as rates rose on a net basis. I would actually expect that this will go the other way now that rates are falling - though they've still locked in some relative benefit by extending duration to be less underweight their liabilities in recent quarters. 

 

Should be another $600+ million in interest income and perhaps an $800-$1B unrealized gain on rates (though 1/2 of that has likely reversed post quarter end). I'm going to guess most of that gain, if not more than all of it, gets wiped out by the IFRS adjustments. I'm thinking best case scenario is the rate move is neutralized and we keep the interest. 

Edited October 23 by TwoCitiesCapital

[SafetyinNumbers]

4 hours ago, Viking said:

 

5.) What is share of profit of associates?

• Eurobank? Chug, chug, chug?
• Poseidon? Are we seeing green shoots?

 

FFH reports Eurobank and Poseidon on a lag so we know these numbers already for Q3. 

[nwoodman]

@Viking good list as always, you have covered it nicely.  I am looking forward to:
 

1. Any color on fixed income.  I can’t help but feel Bradstreet is going to look like the superior allocator he is….again.

2. Underwriting margins (as always) and claims inflation.  

3. Any moves to repurchase Omer’s positions in subs

4. I hope they stick with the format from last qtrs CC, it worked well.  Would love to hear Wades’s thoughts on Ensign as well as their other commodity (gold ) positions.  Perhaps it would be accretive to point 1 above.  Conversation may be muted given the coming election

 

To be honest, as time goes on I am far less on the edge of my seat for the quarterly reports than a couple of years ago.  The position is now a much larger % of the portfolio, but the handwringing is less not more. 

 

 

 

Edited October 23 by nwoodman

[UK]

1 hour ago, nwoodman said:

To be honest, as time goes on I am far less on the edge of my seat for the quarterly reports than a couple of years ago.  The position is now a much larger % of the portfolio, but the handwringing is less not more. 

+1

[SafetyinNumbers]

1 hour ago, UK said:

To be honest, as time goes on I am far less on the edge of my seat for the quarterly reports than a couple of years ago.  The position is now a much larger % of the portfolio, but the handwringing is less not more. 
 

+1

Pretty sure this is how multiple expansion happens. 

[UK]

25 minutes ago, SafetyinNumbers said:

Pretty sure this is how multiple expansion happens. 

[nwoodman]

48 minutes ago, SafetyinNumbers said:

Pretty sure this is how multiple expansion happens. 

I will take continued compounding of book and EPS if it’s all the same to you sir

[SafetyinNumbers]

42 minutes ago, nwoodman said:

I will take continued compounding of book and EPS if it’s all the same to you sir

Luckily they usually come hand in hand!

[MMM20]

On 10/23/2024 at 5:20 AM, nwoodman said:

To be honest, as time goes on I am far less on the edge of my seat for the quarterly reports than a couple of years ago.  The position is now a much larger % of the portfolio, but the handwringing is less not more. 

 

Could you share more? Maybe I'm the opposite as I get uncomfortable when things start trading closer to fair value and I feel like I have a decision to make, which is probably why I sold some at ~$1,200 to bring it down to ~30% position (even though I think the risk/reward has gotten better and we're still nowhere near fair value - yes, I know that makes little sense on its face). Maybe it's a constitutional defect but I'm always looking what could go wrong and get no inherent joy from concentration in best ideas. It's constant tension between discomfort with the sizing and confidence in the analysis. The "sleep at night" test is all I've got. Any thoughts?

 

Edited October 24 by MMM20

[LC]

My stance is similar to @MMM20

Fairfax has been on a 2-3 year tear, and trades at 1.2-1.3x BV.

 

Could it go to 1.5x, 1.7x, 2x book? Sure - and probably deservedly.

But to push back: Do we also think many of the easy hurdles have already been cleared?

[giulio]

8 minutes ago, LC said:

Fairfax has been on a 2-3 year tear, and trades at 1.2-1.3x BV.

Is this adjusted for their NON mark to market investments?

What about earnings multiple? 

I still think it's cheap, I have been adding recently.

G

[nwoodman]

1 hour ago, giulio said:

I still think it's cheap

This is my conclusion as well. Presently  I am hard pressed to find any other idea that comes close even after the gains of the last couple of years. I just make sure I don’t look at the share price chart (most uninstructive) and try to think in terms of multi year returns.
 

There is a price and set of circumstances I would exit but  we are some way from that. As I have said previously I hope the share price appreciation, multiple expansion actually slows.  I would be much happier to have a low double digit return that I know and understand that I can hold for a decade or more  than a quick 30-50% gain and a serious tax bill.

Edited October 23 by nwoodman

[LC]

1 hour ago, giulio said:

Is this adjusted for their NON mark to market investments?

 

No it is not - frankly I am just estimating a BV (1000-1050 USD) at end of quarter.  

 

On earnings: need to have a sense of where earnings will go from here. Where growth will come from, where (perhaps) there will be some hit to earnings. 

 

I am certainly no expert like Viking - but I just think it was easier buying in the 4-5-6-700s looking out to 2022-23-24, than in the 1200s looking out into 2025-26-27. 

 

[SafetyinNumbers]

19 minutes ago, LC said:

No it is not - frankly I am just estimating a BV (1000-1050 USD) at end of quarter.  

 

On earnings: need to have a sense of where earnings will go from here. Where growth will come from, where (perhaps) there will be some hit to earnings. 

 

I am certainly no expert like Viking - but I just think it was easier buying in the 4-5-6-700s looking out to 2022-23-24, than in the 1200s looking out into 2025-26-27. 

 

I think we can make some pretty good guesses on underwriting income, investment income and profit from some of the big holdings like Eurobank, Poseidon and the TRS for the next three years assuming no multiple expansion. Multiple expansion will only help the TRS. It also helps the company is buying back stock at these levels providing a floor for the multiple and that the 60 add is in front of us. 
 

If the multiple does expand, the excess capital will go from buying back stock to buying back the minority interests in the insurance subsidiaries. That could add another ~$25/sh in earnings. If there is a market correction or a widening of credit spreads that would also returns as capital could be allocated from treasuries to higher returning investments. Digit could also be sold down and reallocated to higher yielding investments (not necessarily higher returning).
 

There is a lot of right tail optionality in the portfolio although we don’t know which levers they will pull and when.

[Viking]

Super interesting to read the comments on Fairfax on the board today. They get to lots of important questions for an investor:

- Valuation?

- Prospects?

- Concentration / portfolio weightings?

Of course, there are two more important inputs:

- How is a person is wired?

- What is there life situation?

 

And i would add one more input:

- What are the alternatives?

What each of us does will depend on how we answer each of the questions above.
 

i think the key to valuing Fairfax is getting a good handle on:

1.) What is underlying book value today?

- Reported book value + excess of FV to CV + hidden value

- As more assets get taken private (a clear trend in recent years) the ‘hidden value’ bucket will continue to grow and more quickly. Fairfax will find a way to surface this value over time.

- ‘Hidden value’ examples: BIAL is probable the best. Grivalia Hospitality. Peak Achievements (this will likely be surfaced with the take private deal). There are more (i.e. what is Recipe worth today?).

2.) What is the ‘normalized’ earnings power of the company today?

- What number should get plugged in for realized/unrealized investment gains?
- What is the ‘normalized’ ROE today?
3.) How much will earnings grow over the next 3 to 5 years (from normalized level)?
- This will be driven primarily by the capital allocation decisions made by the management team today and in the coming years. Their track record the past 6 years has been stellar (Does this matter?).

- It looks to me like Mr Market expects little to no earnings growth from the company over the next 3 to 5 years.

- Of course, earnings per share is what matters. (Mr Market appears focussed on earnings.)
4.) How should the company be valued today?

- What price to (true) book value multiple is appropriate?

 

Two other inputs for me are the following:

1.) Share buybacks: Is the company buying back shares? If so, how much?

- Fairfax has been very aggressive with buybacks in 2024. Does this continue?

- Fairfax is on pace to reduce effective shares outstanding by around 5% in 2024. All things being equal, this by itself will drive per share growth of 5% in 2025. What matters are investments per share, float per share and earnings per share. Materially lowering the share count matters. A lot. 

2.) FFH - TRS position: Is the company continuing to hold this position?

 

The truth is Fairfax has seen such a significant transformation in its earnings power over the past 3 years we are still learning what the answers are to the questions i posed above.

Edited October 23 by Viking

[SafetyinNumbers]

17 minutes ago, Viking said:

 

- It looks to me like Mr Market expects little to no earnings growth from the company over the next 3 to 5 years.

I think now more than ever, the consensus earnings estimates reflect what Mr. Market thinks about forward earnings as most market participants treat money management as a big data exercise.

A unique quirk for FFH is that it doesn’t report adjusted EPS so Mr. Market thinks it trades at ~10x FTM with very low earnings predictably. The adjusted earnings is a composite of Morningstar and RBC’s core earnings estimates which exclude equity earnings from what I can decipher. Of course, Morningstar also expects earnings collapse in 2027 and 2028.
 

I find it difficult to model earnings that low with the contributions from Eurobank, Poseidon and the TRS. Even in the IFRS/GAAP EPS it seems like analysts are assuming nothing else from the equity portfolio contributes any earnings for the FTM estimate of ~$155. 
 

We should get the rest of the street coming out with 2026 estimates over the next quarter or two which might help give Mr. Market more comfort on earnings power.

 

[Viking]

24 minutes ago, SafetyinNumbers said:

I think now more than ever, the consensus earnings estimates reflect what Mr. Market thinks about forward earnings as most market participants treat money management as a big data exercise.

A unique quirk for FFH is that it doesn’t report adjusted EPS so Mr. Market thinks it trades at ~10x FTM with very low earnings predictably. The adjusted earnings is a composite of Morningstar and RBC’s core earnings estimates which exclude equity earnings from what I can decipher. Of course, Morningstar also expects earnings collapse in 2027 and 2028.
 

I find it difficult to model earnings that low with the contributions from Eurobank, Poseidon and the TRS. Even in the IFRS/GAAP EPS it seems like analysts are assuming nothing else from the equity portfolio contributes any earnings for the FTM estimate of ~$155. 
 

We should get the rest of the street coming out with 2026 estimates over the next quarter or two which might help give Mr. Market more comfort on earnings power.

 

@SafetyinNumbers, thanks for posting. Earnings expectations look like a pretty low bar to me (putting it mildly). It basically says one of two things (or some combination of the two):

1.) Fairfax is massively over-earning today.

2.) When it comes to the near record earnings that Fairfax is delivering, when it comes to capital allocation, the management team will destroy capital moving forward. 
 

Really? I love that set up. Looks like we are at the ‘climbing the wall of worry phase’… Definitely no where near the ‘euphoric, blow off top’ stage. 

Edited October 23 by Viking

[Parsad]

Francis had an interesting update on Loggerhead's losses in Florida due to Milton.  He expected Loggerhead to have losses between $20M and $80M.  But they had excellent reinsurance coverage and their net loss will only be $7M.

 

But he expects a lot of insurers, reinsurers and captives to be in financial trouble as Milton went over densely populated areas unlike Helene.  He thinks it was one of the worst storms in the last century.

 

I'm hoping Prem and Andy buy reinsurance like Francis...or preferably, he buys reinsurance like them!    Cheers!

[giulio]

15 hours ago, nwoodman said:

I would be much happier to have a low double digit return that I know and understand that I can hold for a decade or more  than a quick 30-50% gain and a serious tax bill.

Couldn't agree more! 

@LC at YE 23, my estimates of look-through earnings were around 135USD per share. This excludes investments gains (both derivates and sales). 

LOts of moving parts of course, especially this year. I think 10x is too low but I am comfortable using 13x given their Indian exposure, fixed income allocation, growing income from consolidated subs and associates, the possibility of repurchasing minorities stakes and ongoing buybacks.

 

This is why I think it is still cheap. At USD1800 maybe I'll need to do more work 

 

Best,

G