Fairfax 2024

[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

[nwoodman]

13 hours ago, Parsad said:

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!

Interesting data point.  I realise Fairfax has a history of donating to Disaster relief, so I am not reading anything in to their $1m donation either. We will find out soon enough. I expect Berkshire to have a bit of a hit based on the comments at the AGM.

[gfp]

15 hours ago, Parsad said:

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!

 

Here are some private insurance loss estimates from Milton - quite a range of outcomes.  As always, keep in mind that a lot of the flood losses shown on television are not covered by private insurance.  There will be substantial commercial insurance losses.

 

 

[Haryana]

My two observations during Milton - 

 

1. On landfall, one side of the storm was actually pulling water out of the land and back into the sea. 

 

2. Midway across the width of Florida mainland, it had fallen to Category 1 (funny media anticlimax). 

 

Edited Saturday at 01:06 AM by Haryana

[Junior R]

Stelco Deal completed...Should see gains in Q4 results

[Viking]

FFH Q3 Earnings Summary. I apologize in advance for posting this in the 'Fairfax 2024' thread. I just think this is the better place to put my long-form posts (so they don't get lost). 

 

Summary: 9 months into 2024, Fairfax has:

1.) Increased book value per share from $940 to $1,033, an increase of $93.

2.) Paid a dividend of $15/share.

3.) For non-insurance associate and consolidated holdings, increased excess of FV over CV from $1 billion to $1.9 billion, an increase of $900 million (pre-tax). This is significant value that has been created that is not captured in book value. 

• Also, the 'fair value for some of these holdings looks stupidly low (meaning book value is even more understated).
• Their stake in Fairfax India has a fair value of $857 million? It should be much more than this (driven by BIAL).
• The fair value for Poseidon, at $2 billion, has not changed in 2024. Sokol at Fairfax's AGM in April said the cost to build new containerships had increased 30%. Atlas is just taking delivery of the last of its newbuilds as part of its massive expansion strategy executed over the past 3 years - the value of which has just increased by around 30%. Yet the 'fair value' on Fairfax's balance sheet has not changed?
• There are more good examples.

4.) Effective shares outstanding have been reduced by 1 million = 4.3%.

• Much lower share count boosts investment per share, float per share and future earnings per share.
• As Buffett teaches us, to properly evaluate a management team, investors should be following and focussed on the change in per share metrics over time and not simply the change in the total $ metrics. 

Bottom line 2024 is shaping up to be another very good year for Fairfax and its shareholders. Fairfax has not done anything flashy. Just lots of solid execution. Boring. Kind of like watching paint dry. Expect more of the same in the coming years. (PS: That is what a compounding machine looks like.)

----------

Below is a summary of some of the key learnings from Fairfax’s Q3 results. They are based primarily on the company’s news release and conference call (as I have not had time to go through the interim report). The conference call was one of the better ones in recent years. The commentary from the management team at Fairfax was concise and informative. And the analyst Q&A session was also very informative.

 

1.) Insurance

• What is growth in net premiums written? Excluding Gulf, +3.2%.
• What is CR? 93.9% = $390 million in underwriting profit.
• What is level of catastrophe losses? $434 million = 6.8 combined ration points.
• What is level of favourable development? $130 million (was $56 million in Q3 2023).

Commentary on growth in Q4 and 2025:

• Odyssey and Brit have been headwinds over the past 12 months. They could flip to modest tailwinds in Q4 and moving forward. Perhaps we see Fairfax grow at 4 or 5% (ex Gulf) moving forward.

“In Q4, Odyssey will have lapped the exited quota share contract: “Odyssey’s gross premiums written were down 4.7% due to the previously disclosed non-renewal of a large quota share in the fourth quarter of 2023. Excluding the quota share contract, Odyssey’s business was up 7.2% in the third quarter, driven by its reinsurance operations.” Peter Clarke

 

“Our international operations excluding Gulf are growing quite nicely as well - they are up 9%, and then you have Odyssey that were down 5%, but as I mentioned, that includes that one-off quota share treaty, that the effects of that will unwind in the fourth quarter, so it will be more normalized growth going forward, and Brit then were down 4% in the third quarter, and I think you’ll see that turn around as well as they’ve been--you know, they’ve been really focusing on the margins in their business and cutting back and reallocating capital to more profitable lines, so I would expect that you’ll see Brit on the positive side of premium growth going forward.” Peter Clarke

 

Commentary on Milton and potential impact on Q4 results:

• Losses from Milton look to be manageable.

“I can’t give you an exact number, but we can point you in the right direction. We’re still collecting the information. We had our model losses, but it’s been slow, the reported losses coming in. We really think that it will easily come within the cat margin for the fourth quarter, and so it should not have a significant effect on the combined ratio.” Peter Clarke

 

Commentary on reserving trends:

• Reserving continues to be an under appreciated strength for Fairfax.

“As… I said in my opening remarks, we’re just going through the full actuarial review at all our companies in the fourth quarter, and we’ll have more to report on our year-end call and in our annual report. But for the year, we’ve had $300 million of favorable development, so our reserves continue to run off well - 130 of that was in the third quarter, and we really believe we have a great process in place instilled within the companies for conservative reserving - it’s very important. This is our--you know, last year was our 17th year in a row that we’ve had favorable development, and for the first nine months we’ve had $300 million."

 

“But in regards to the U.S. casualty, it’s an industry--the industry is feeling the effects of these social inflation and nuclear verdicts. Our companies are seeing it as well, as I said in the past, mainly Crum & Forster and Allied, and they have been strengthening some of these accident years, 2014 to 2018 in particular, but more or less have had IB&R up or offsetting redundancies in other lines of business, so in total we’ve--you know, our reserving has been quite strong.”

 

“In the third quarter, there was no--on these years, there’s been no significant strengthening on the U.S. casualty reserves, so overall we think our reserves are in really good shape.” Peter Clarke

 

2.) Investments

• Total investment portfolio = $69 billion
• Fixed income = $49 billion
• Equities = $20 billion

“Of the $49 billion in fixed income, $35 billion are in U.S. treasuries, other government bonds and cash. There is another $5 billion in mortgages and $9 billion in short dated investment-grade corporates. Including cash, average maturity is 3.7 years and the yield is 4.7%.” Wade Burton

 

3.) Interest and dividend income

• Interest and dividend income came in at $610 million in Q3. This was down slightly from $614 million in Q2.
• With the Fed (and global central banks) cutting, short term rates are coming down. As a result, Fairfax will be earning less on its short term investments. So Q2 is likely the peak in interest and dividend income for now (at least in terms of total $).
• However, there are a couple of factors that will support this important bucket of earnings:
  • Fairfax continued to add to its investment in the Kennedy Wilson’s debt platform - it is now at $5 billion. This portfolio yields well above the 4.7% average for Fairfax.
  • Fairfax continues to grow the size of its fixed income portfolio.
  • Fairfax continues to aggressively buy back its shares (4.3% year to date). 
• Bottom line, after 3 years of being a strong tailwind, interest and dividend income has now shifted to being a modest headwind (for now). But interest and dividend per share, which is what really matters to investors, might hold up better than expected moving forward.
• The average duration of the fixed income portfolio increased significantly in Q3 to 3.5 (3.7?) years. The average yield is a very healthy 4.7%

Of note, Fairfax did receive a dividend of $128 million from Eurobank. Eurobank is equity accounted. Therefore the dividend is not reported in ‘interest and dividends’. The carrying value of Eurobank was reduced by this amount.

 

4.) Share of profit of associates

• Share of profit of associates came in at $260.2 million, driven primarily by Eurobank and Poseidon.

5.) Non-insurance consolidated companies

• Given the acquisitions in recent years, and the acquisition of Sleep country and Peak Achievements in Q4, earnings from non-insurance consolidated companies should grow considerably from current levels and be a solid tailwind in the coming years.

“As Wade noted, with our recently announced Sleep Country and Peak Achievement transactions, we expect the operating income from our non- insurance companies reporting segment will grow in the future periods, reflecting the operating income diversity these investments will add to the segment.” Jen Allen

 

6.) Investment gains

 

• “Net gains on equity exposures of $322.9 million principally reflected a net gain of $229.5 million on the company's continued holdings of equity total return swaps on 1,964,155 Fairfax subordinate voting shares… and net gains on common stocks of $99.2 million.”
• “Net gains on bonds of $828.6 million principally reflected net gains of $502.5 million on U.S. treasuries as interest rates declined during the quarter.”
• “Net gains on other of $135.8 million principally reflected unrealized gains of $184.0 million on the company's holdings of Digit compulsory convertible preferred shares.” FFH Q3 news release.

 

7.) Excess of fair value over carrying value for associate and non-consolidated equity holdings

• This 'bucket' of holdings has created significant value for Fairfax shareholders over the past 4 years. YTD 2024 (Sept 30) it has created $900 million in value, and now totals $1.9 billion, or about $87/share pre-tax. This value is not captured in Fairfax’s earnings or book value.
• But much of it will get captured and reflected over time. The most recent example is Stelco. The sale is expected to close in early November - and when it does - Fairfax will realize a gain of $366 million. This will be a nice boost to earnings and book value.
• This 'bucket' is only going to get more important for Fairfax moving forward - the holdings in Fairfax's equity portfolio have been slowly shifting from mark-to-market holdings to associate and increasingly consolidated holdings. It will be important for investors to understand the changes over time in 'excess of FV to CV for associate and non-insurance consolidated holdings' to properly evaluate Fairfax's performance and to value the company's stock.

“At September 30, 2024, our excess of fair value over carrying value of our investments in the non-insurance associates and market traded consolidated non-insurance subsidiaries was $1.9 billion compared to the $1 billion at December 31, 2023. That pre-tax excess of $1.9 billion or $87 per share is not reflected in our book value per share but is regularly reviewed by management as an indicator of the underlying investments’ performances, and included in that $1.9 billion is an approximately $366 million gain anticipated to be recognized by the company in the fourth quarter of 2024 relating to our sale of Stelco’s common shares.” Jen Allen

 

 

8.) Capital allocation Part 1: Asset sales / purchases

 

Purchase of Sleep Country

• Fairfax paid a total of $881 million to purchase Sleep Country. It is interesting that Fairfax had Sleep Country take on $318 million in debt to help finance the acquisition. This reduced Fairfax’s actual cash outlay to $563 million. This is a similar strategy Fairfax used when they took Recipe private. Like Fairfax did with Recipe, the plan will likely be for Sleep Country to use free cash flow in the coming years to pay down some of the debt taken on to finance the purchase.

“On October 1, 2024, the company through our insurance and reinsurance subsidiaries acquired all of the issued and outstanding common shares of Sleep Country Canada for purchase consideration of US $881 million. That total purchase consideration was comprised of cash of $563 million and new non-recourse borrowings to the holding company of $318 million by a newly formed purchasing entity which amalgamated with Sleep Country upon close.” Jen Allen

 

Stelco sale. Expected to close in early November. Will result in a pre-tax gain of $366 million.

• Asset sales are an important part of Fairfax’s capital allocation framework. Fairfax sold Stelco to Cleveland Cliffs at a significant premium (Fairfax did something similar in 2022 when they sold Resolute Forest Products at the top of the lumber cycle). In 7 short years, Stelco has turned into a stellar investment for Fairfax. It is a great example of Fairfax beginning to harvesting the rewards of what I like to call ‘new Fairfax’ (beginning in 2018, Fairfax started making much better purchase decisions with its new equity investments).

Peak Achievements purchase (bought out majority partner)

• On the Q3 conference call, Wade Burton went into a little detail on Fairfax’s purchase of Peak Achievement. His commentary gives investors good insights into the framework that Fairfax is using today when it makes large equity investments:
  • Very good management team.
  • Solid track record.
  • Solid prospects (highly consolidated industry).
  • Willing to pay a fair price.

“We did make one significant announcement in the quarter. We bought out our main partners in Peak Achievement, an athletic wear and equipment company focused on hockey and lacrosse. It is an outstanding business operating in a highly consolidated industry, well run by Ed Kinnaly and his team, incredible track record, and we paid a fair price. We think we will make a very good return over the long run for our shareholders, and importantly, Ed runs the company very much in tune with the Fairfax culture.” Wade Burton

• In the quote below, Wade expands further on Fairfax’s equity investment framework:
  • Dominate in their respective markets/industries.
  • Focus on earnings generation - over the long term.

“Looking back over the last two years, we’ve made three significant long term equity investments, one in Meadow Dairy, a dominant milk ingredients company in the U.K. that is doing very well; another in Sleep Country, a dominant mattress distributor and retailer in Canada; and now a third, Peak, a dominant sporting goods company focused on hockey and lacrosse. All immediately are or will contribute to our earnings, and we believe all will continue to contribute more and more as their businesses progress.” Wade Burton

 

9.) Capital allocation Part 2: Share repurchases

• Share buybacks: ‘Effective shares outstanding’ have fallen by 1 million shares YTD 2024 (from 23 million at Dec 31, 2023 to 22 million at Sept 20, 2024.
• Stock buybacks, YTD at $1.1 billion, has been Fairfax’s largest capital allocation decision in 2024. The average price paid is $1,113/share which is slight premium to current BVPS of $1,033/share. If we include excess of FV to CV of associate and non-insurance consolidated holdings, Fairfax has been buying back shares at about 1 x BVPS, which is exceptional value. Buying back a meaningful amount of shares at a low valuation continues to deliver solid value and be a good decision for long term shareholders.

“In the first nine months of ’24, we’ve purchased for cancellation a little over one million subordinate voting shares principally under our normal course issuer bid at a cost of $1.1 billion, or US $1,113 per share, of which 159,000 subordinate voting shares at a cost of $181 million were completed in the third quarter of 2024.” Jen Allen

 

10.) Tax rate

• The tax rate has increased. From a little over 20% in 2023, it is currently tracking in the 25% range. Fairfax says to use 22% to 25% as a guide moving forward.   

“As Peter indicated, there are a lot of moving parts within the global tax regime. As you indicated, our effective tax rate is sitting at 25.1%, elevated over 2023. A couple things driving that - in 2024, we now are under the global minimum tax, where there is a 15% mandated tax in certain jurisdictions that we didn’t have prior, primarily being in Bermuda, so on a YTD basis included in that number is about $107 million, about $30 million expense in the quarter. We also have a change in the tax rate legislation in India, where they changed their long term capital gains rate - that also cost us another about $50 million in the quarter.”

 

“There’s a couple of other things we’re still closely watching, which is the interest limitation tax rule that’s in place - currently no impact materially on our financials, but there could be, that’s where the 30% limitation rule could come into play at the holding company, and then we’re still tracking quite closely the capital gains rate, the inclusion rate change that’s coming in Canada as well, so as Peter indicated, a lot of moving parts on tax. I think trying to normalize what that effective tax rate would be is a little difficult, but I would say it is going to be elevated from prior year. If you kind of put in maybe a 22% to a 25%, you’re probably going to be in the ballpark where we’ll land.” Jen Allen

 

11.) Book value per share

• At Sept 30, 2024, BVPS = $1,033/share (from $980/share at June 30).

12.) Impact of change in interest rates of Fairfax’s reported results

• The substantial decline in interest rates in Q3 resulted in a mild net benefit of $64 million to Fairfax’s reported results.
  • Loss on discounting (IFRS 17) was $765 million
  • Mark to market gain on bond portfolio was $829 million.
• The duration of Fairfax’s fixed income portfolio is now roughly equal to the duration of their insurance liabilities (at 3.5 to 3.7 years). This means changes in interest rates will have a minor impact on Fairfax’s reported results. This will remove a potentially significant source of volatility to Fairfax’s earnings - as long as the durations remain roughly matched.

“The duration on our bond liabilities are around 3.5 years, so it’s a little longer than it was last quarter, and if you look at our liabilities, it’s relatively close. We don’t match on purpose, but where we sit today, our liability duration is close to our asset duration. You can sort of see that in the IFRS 17 numbers, that we had a big loss on the discounting, about $750 million, $760 million that was offset almost--very closely with the $800 million-plus of gains on our bond portfolio, so we’re pretty much matched where we are today.” Peter Clarke

 

13.) Succession planning

• Fairfax continues to demonstrate that they executing very well when it comes to succession planning.
  • Bob Sampson will be appointed CEO of RiverStone effective Jan 1, 2025. Nick Bentley will transition to/remain as Chairman of RiverStone.
• This is just another, in a long list of examples, of how the senior team at Fairfax has been effectively grooming and then transitioning the management of their various business units to the next generation of leaders.

Edited yesterday at 01:43 AM by Viking

[TwoCitiesCapital]

On 10/22/2024 at 8:03 PM, TwoCitiesCapital said:

 

 

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. 

 

QED

 

Slightly better than expected given another extension if duration, but basically all but totally offset. 

 

The duration on our bond liabilities are around 3.5 years, so it’s a little longer than it was last quarter, and if you look at our liabilities, it’s relatively close. We don’t match on purpose, but where we sit today, our liability duration is close to our asset duration. You can sort of see that in the IFRS 17 numbers, that we had a big loss on the discounting, about $750 million, $760 million that

was offset almost--very closely with the $800 million-plus of gains on our bond portfolio, so we’re pretty much matched where we are today.” Peter Clarke

 

[Hoodlum]

1 hour ago, TwoCitiesCapital said:

 

QED

 

Slightly better than expected given another extension if duration, but basically all but totally offset. 

 

The duration on our bond liabilities are around 3.5 years, so it’s a little longer than it was last quarter, and if you look at our liabilities, it’s relatively close. We don’t match on purpose, but where we sit today, our liability duration is close to our asset duration. You can sort of see that in the IFRS 17 numbers, that we had a big loss on the discounting, about $750 million, $760 million that

was offset almost--very closely with the $800 million-plus of gains on our bond portfolio, so we’re pretty much matched where we are today.” Peter Clarke

 

I found this enlightening when I initially read this.  I have a much better understanding of how this works and why it was implemented. 

[Hoodlum]

3 hours ago, TwoCitiesCapital said:

 

QED

 

Slightly better than expected given another extension if duration, but basically all but totally offset. 

 

The duration on our bond liabilities are around 3.5 years, so it’s a little longer than it was last quarter, and if you look at our liabilities, it’s relatively close. We don’t match on purpose, but where we sit today, our liability duration is close to our asset duration. You can sort of see that in the IFRS 17 numbers, that we had a big loss on the discounting, about $750 million, $760 million that

was offset almost--very closely with the $800 million-plus of gains on our bond portfolio, so we’re pretty much matched where we are today.” Peter Clarke

 

@Viking  Another great summary as usual.  The more I think about it, I believe we may never see the share price of FFH fully reflect its intrinsic value.  Most investors don’t spend the time necessary to fully understand how the value is being built. But that is fine as I will continue to hold while averaging double digit returns. 

Edited yesterday at 03:08 AM by Hoodlum

[SafetyinNumbers]

1 hour ago, Hoodlum said:

 The more I think about it, I believe we may never see the share price of FFH fully reflect its intrinsic value.  Most investors don’t spend the time necessary to fully understand how the value is being built. But that is fine as I will continue to hold while averaging double digit returns. 

I agree with you that most investors don’t spend the time to understand how the value is being built but that has nothing to do with if FFH will ever fully reflect its intrinsic value. Multiple expansion takes aggressive buyers and reluctant sellers. The buying is coming from the 60 index add and all of the Canadian active funds that are underweight which is value insensitive . Meanwhile, share buybacks and the TRS have cleaned up 7m shares since 2019 from the weakest (read value investor) hands.
 

For those remaining, 2024 will be the fourth year with ROE north of 15%. I think anyone who has a rudimentary understanding of the business model can predict the next 4 years will also be north of 15% on average. If I’m right, the shareholders left will be reluctant sellers by the end of 8 years and the multiple could challenge something like Intact Financial at 3x BV despite recent poor returns. That’s why my plan to sell is based on forward returns and not valuation. 
 

Call me a reluctant seller.

Edited yesterday at 03:03 AM by SafetyinNumbers

[Haryana]

Fairfax is just about 5% from overtaking Intact to be the top P&C of Canada, that could make people notice and dig deep.

[mananainvesting]

4 hours ago, SafetyinNumbers said:

I agree with you that most investors don’t spend the time to understand how the value is being built but that has nothing to do with if FFH will ever fully reflect its intrinsic value. Multiple expansion takes aggressive buyers and reluctant sellers. The buying is coming from the 60 index add and all of the Canadian active funds that are underweight which is value insensitive . Meanwhile, share buybacks and the TRS have cleaned up 7m shares since 2019 from the weakest (read value investor) hands.
 

For those remaining, 2024 will be the fourth year with ROE north of 15%. I think anyone who has a rudimentary understanding of the business model can predict the next 4 years will also be north of 15% on average. If I’m right, the shareholders left will be reluctant sellers by the end of 8 years and the multiple could challenge something like Intact Financial at 3x BV despite recent poor returns. That’s why my plan to sell is based on forward returns and not valuation. 
 

Call me a reluctant seller.

 

Turnover in cad is low, not sure what it was few years ago . Currently 1% lower than intact. 

 

[SafetyinNumbers]

4 hours ago, Haryana said:

Fairfax is just about 5% from overtaking Intact to be the top P&C of Canada, that could make people notice and dig deep.

Float cap matters more than market cap. The 60 add will make them dig deep. I’m also sure IFC will be issuing more equity soon to increase its weighting.

 

 

[LC]

Adding back the 87$ in fair value increase, we still trade at about 1.2x BV.

[MMM20]

Has anyone seen a version of this chart that adjusts for fair value in excess of carrying value over time? If not, I'll probably create it myself. My sense is that when you look at it that way, the multiple hasn't changed much over the past few years. 

 

 

 

Edited 22 hours ago by MMM20

[MMM20]

FWIW, more support for the idea that FFH should trade in the 2-2.5x book range.

 

[MMM20]

Here's Cormark playing devil's advocate, or something like that.

 

[Hoodlum]

7 minutes ago, MMM20 said:

Here's Cormark playing devil's advocate, or something like that.

 

 

I believe this is the first admission that the book multiple needs to be increased (1.1x to 1.25x).  While still a ways off from where I think it needs to be (I am not selling at 1.5x book), I think we will see further increases of the book multiple from other analysts.