Fairfax 2024

[SafetyinNumbers]

1 hour ago, jfan said:

@SafetyinNumbers Great podcast! Thank you!

Thanks for listening!

[Viking]

Share Buyback History - Fairfax

 

The big picture

 

Three factors drive stock returns over the long term:

• Earnings
• Multiple
• Shares outstanding

The last factor is often ignored by investors.

 

Capital allocation

 

Capital allocation is the most important function of a management team and stock buybacks are one of many options that are available. Share buybacks can be very beneficial for shareholders if they are done in a responsible manner (purchased at attractive prices) and sustained over many years.

 

It is counterintuitive, but for long term shareholders a low share price can be a big benefit - if the company is buying back shares and in a significant quantity. Especially if it persists for years.  

 

How does Fairfax approach buybacks?

 

Prem laid out Fairfax’s strategy regarding share buybacks in the 2018 annual report:

 

“I mentioned to you last year that we are focused on buying back our shares over the next ten years as and when we get the opportunity to do so at attractive prices. Henry Singleton from Teledyne was our hero as he reduced shares outstanding from approximately 88 million to 12 million over about 15 years.” Prem Watsa – Fairfax 2018AR

 

Fairfax approaches share buybacks from the framework of a value investor: buy back shares when they are cheap and back up the truck when they are really cheap.

 

What has Fairfax been doing in recent years?

• 2015 to 2017 – Issue shares to fund international P/C insurance expansion. 
  • Fairfax’s year-end ‘effective shares outstanding’ peaked in 2017 at 27.75 million. Fairfax issued a total of 7.2 million shares in 2015, 2016 and 2017 to help fund its aggressive international expansion. The new shares were issued at an average price of about $462/share.
• 2017 to today – Aggressively buy back shares. 
  • At September 30, 2024, the ‘effective shares outstanding’ at Fairfax had fallen to 22.0 million shares. Over the last 6.75 years (2018-Q3 2024), Fairfax has reduced effective shares outstanding by approximately 5.67 million shares or 20.8%.  The average price paid to buy back shares was about $595/share.

That is a significant reduction in shares outstanding. 

 

Did Fairfax get good value with its buybacks?

• From 2018 to 2022, Fairfax was able to buy back 4.4 million shares at an average price of $464/share. The average price paid was the same as the average price of the shares that were issued at from 2015-2017 ($462/share). 
• Fairfax’s book value at September 30, 2024 was $1,033/share.
• Fairfax’s intrinsic value is well above its book value. 

Fairfax has been able to buy back a significant number of shares at a very attractive average price – at a significant discount to book value and intrinsic value. 

 

Is Fairfax done with buybacks?

 

In the first 9 months of 2024, Fairfax has reduced effective shares outstanding by 1.01 million or 4.4%. That is more than the average for the past 6.75 years of 3.2%. So far in 2024, Fairfax has accelerated the pace of share buybacks.

 

Why is the pace of buybacks picking up?

 

Likely for three key reasons:

1. Robust cash generation: Fairfax is generating an enormous amount of free cash flow.
2. The hard market in P/C insurance is slowing: The P/C insurance companies no longer need capital to grow. In fact, the opposite is happening – the P/C insurance businesses are generating excess capital, which is being sent to Fairfax. 
3. Cheap stock: Fairfax’s stock trades at a big discount to its intrinsic value. 

For the stock repurchased to September 30, 2024, Fairfax has paid an average price of $1,113/share. This price is a slight premium to current book value ($1,033/share). Importantly, book value does not include the following: 

 

• “At September 30, 2024 the excess of fair value over carrying value of investments in non-insurance associates and market traded consolidated non-insurance subsidiaries was $1,921.4 compared to $1,006.0 at December 31, 2023. The pre-tax excess of $1,921.4 is not reflected in the company’s book value per share, but is regularly reviewed by management as an indicator of investment performance.” Fairfax Q3-2024 Interim Earnings Report
• This is $1.9 billion, or $87/share (pre-tax), in value that is not captured in book value.

Bottom line, in 2024 Fairfax has bought back more than 1 million shares, or 4.4%, at $1,113/share. Which is less than 1 x 2024 year-end ‘adjusted’ book value (if we include excess of FV over CV). That is delivering exceptional value to long term shareholders.

   

 

—————

 

Fairfax’s total return swaps (TRS) on 1.96 million Fairfax shares

 

Some investors consider this investment to represent a buyback of sorts. Over the past 4 years, the TRS-FFH has increased in value by about $1.9 billion (before carrying costs). This is turning into one of Fairfax’s best investments ever.

 

 

 —————

 

What does Warren Buffett have to say about share buybacks? 

 

----------

 

Tracking the Per Share Change in Net Premiums, Investments and Float - Fairfax

 

Three of the most important metrics to measure the growth of a P/C insurance company over time are net premiums written, total investment portfolio and float. The change in the total values is important. But what is much more important, is the change in per share values over time.

 

How has Fairfax performed? 

 

Over the past 9 years, growth at Fairfax across all three metrics has been very strong. Especially when measured per share.

• Net premiums written CAGR per share = 15%
• Investment portfolio CAGR per share = 12.3%
• Float per share CAGR = 12.5%

The growth from 2016 to 2018 was driven by acquisitions (and share issuance). The growth from 2019 to 2024 has been driven by the hard market in insurance (and share repurchases). 

 

It should be noted that Fairfax has achieved this impressive growth in both soft and hard P/C insurance markets.

 

Perhaps surprisingly, given the slowdown of the hard market, the per share growth in 2024 across all three metrics has continued at a robust pace:

• Net premiums written YOY growth estimate per share = 17%
• Investment portfolio YOY growth estimate per share = 13%
• Float per share YOY growth estimate per share = 13%

The per share growth in 2024 is being driven by acquisitions (GIG), a continuation of the hard market and meaningful share buybacks. Fairfax has many levers it can pull to continue to grow its business in the coming years – even if the hard market in insurance slows further. 

 

This is further proof of how well the management team at Fairfax has been performing for long term shareholders. 

 

Edited Monday at 04:53 PM by Viking

[73 Reds]

1 hour ago, Viking said:

Share Buyback History - Fairfax

 

The big picture

 

Three factors drive stock returns over the long term:

• Earnings
• Multiple
• Shares outstanding

The last factor is often ignored by investors.

 

Capital allocation

 

Capital allocation is the most important function of a management team and stock buybacks are one of many options that are available. Share buybacks can be very beneficial for shareholders if they are done in a responsible manner (purchased at attractive prices) and sustained over many years.

 

It is counterintuitive, but for long term shareholders a low share price can be a big benefit - if the company is buying back shares and in a significant quantity. Especially if it persists for years.  

 

How does Fairfax approach buybacks?

 

Prem laid out Fairfax’s strategy regarding share buybacks in the 2018 annual report:

 

“I mentioned to you last year that we are focused on buying back our shares over the next ten years as and when we get the opportunity to do so at attractive prices. Henry Singleton from Teledyne was our hero as he reduced shares outstanding from approximately 88 million to 12 million over about 15 years.” Prem Watsa – Fairfax 2018AR

 

Fairfax approaches share buybacks from the framework of a value investor: buy back shares when they are cheap and back up the truck when they are really cheap.

 

What has Fairfax been doing in recent years?

• 2015 to 2017 – Issue shares to fund international P/C insurance expansion. 
  • Fairfax’s year-end ‘effective shares outstanding’ peaked in 2017 at 27.75 million. Fairfax issued a total of 7.2 million shares in 2015, 2016 and 2017 to help fund its aggressive international expansion. The new shares were issued at an average price of about $462/share.
• 2017 to today – Aggressively buy back shares. 
  • At September 30, 2024, the ‘effective shares outstanding’ at Fairfax had fallen to 22.0 million shares. Over the last 6.75 years (2018-Q3 2024), Fairfax has reduced effective shares outstanding by approximately 5.67 million shares or 20.8%.  The average price paid to buy back shares was about $595/share.

That is a significant reduction in shares outstanding. 

 

Did Fairfax get good value with its buybacks?

• From 2018 to 2022, Fairfax was able to buy back 4.4 million shares at an average price of $464/share. The average price paid was the same as the average price of the shares that were issued at from 2015-2017 ($462/share). 
• Fairfax’s book value at September 30, 2024 was $1,033/share.
• Fairfax’s intrinsic value is well above its book value. 

Fairfax has been able to buy back a significant number of shares at a very attractive average price – at a significant discount to book value and intrinsic value. 

 

Is Fairfax done with buybacks?

 

In the first 9 months of 2024, Fairfax has reduced effective shares outstanding by 1.01 million or 4.4%. That is more than the average for the past 6.75 years of 3.2%. So far in 2024, Fairfax has accelerated the pace of share buybacks.

 

Why is the pace of buybacks picking up?

 

Likely for three key reasons:

1. Robust cash generation: Fairfax is generating an enormous amount of free cash flow.
2. The hard market in P/C insurance is slowing: The P/C insurance companies no longer need capital to grow. In fact, the opposite is happening – the P/C insurance businesses are generating excess capital, which is being sent to Fairfax. 
3. Cheap stock: Fairfax’s stock trades at a big discount to its intrinsic value. 

For the stock repurchased to September 30, 2024, Fairfax has paid an average price of $1,113/share. This price is a slight premium to current book value ($1,033/share). Importantly, book value does not include the following: 

 

• “At September 30, 2024 the excess of fair value over carrying value of investments in non-insurance associates and market traded consolidated non-insurance subsidiaries was $1,921.4 compared to $1,006.0 at December 31, 2023. The pre-tax excess of $1,921.4 is not reflected in the company’s book value per share, but is regularly reviewed by management as an indicator of investment performance.” Fairfax Q3-2024 Interim Earnings Report
• This is $1.9 billion, or $87/share (pre-tax), in value that is not captured in book value.

Bottom line, in 2024 Fairfax has bought back more than 1 million shares, or 4.4%, at $1,113/share. Which is less than 1 x 2024 year-end ‘adjusted’ book value (if we include excess of FV over CV). That is delivering exceptional value to long term shareholders.

   

 

—————

 

Fairfax’s total return swaps (TRS) on 1.96 million Fairfax shares

 

Some investors consider this investment to represent a buyback of sorts. Over the past 4 years, the TRS-FFH has increased in value by about $1.9 billion (before carrying costs). This is turning into one of Fairfax’s best investments ever.

 

 

 —————

 

What does Warren Buffett have to say about share buybacks? 

 

----------

 

Tracking the Per Share Change in Net Premiums, Investments and Float - Fairfax

 

Three of the most important metrics to measure the growth of a P/C insurance company over time are net premiums written, total investment portfolio and float. The change in the total values is important. But what is much more important, is the change in per share values over time.

 

How has Fairfax performed? 

 

Over the past 9 years, growth at Fairfax across all three metrics has been very strong. Especially when measured per share.

• Net premiums written CAGR per share = 15%
• Investment portfolio CAGR per share = 12.3%
• Float per share CAGR = 12.5%

The growth from 2016 to 2018 was driven by acquisitions (and share issuance). The growth from 2019 to 2024 has been driven by the hard market in insurance (and share repurchases). 

 

It should be noted that Fairfax has achieved this impressive growth in both soft and hard P/C insurance markets.

 

Perhaps surprisingly, given the slowdown of the hard market, the per share growth in 2024 across all three metrics has continued at a robust pace:

• Net premiums written YOY growth estimate per share = 17%
• Investment portfolio YOY growth estimate per share = 13%
• Float per share YOY growth estimate per share = 13%

The per share growth in 2024 is being driven by acquisitions (GIG), a continuation of the hard market and meaningful share buybacks. Fairfax has many levers it can pull to continue to grow its business in the coming years – even if the hard market in insurance slows further. 

 

This is further proof of how well the management team at Fairfax has been performing for long term shareholders. 

 

@Viking such a poignant post.  You're right, so few companies are great allocators of capital and even fewer know when to repurchase their own stock in a material way.  I mean how many companies announce stock buybacks only to repurchase shares at inopportune times and then later you come to find out that executive compensation packages and stock options only raised the number of shares outstanding?  IMO, there is no reason to own stock in any public company that fails this test. 

[Viking]

@73 Reds , thanks for the feedback   As I continue to peel back the layers on Fairfax, the piece that has me the most excited is capital allocation. I call what Fairfax does 'unconstrained capital allocation' - because they have no self-imposed limitations. In this respect they look an awful lot like Henry Singleton. What Fairfax is doing today - from a capital allocation perspective - looks unique in P/C insurance.

 

Some might use Berkshire Hathaway and Markel as comparable for Fairfax but I don't think that works very well. BRK is now a massive conglomerate, with a large P/C insurance business. This now significantly restricts BRK's options when it comes to capital allocation. Buffett also has many self imposed restrictions. For example, up until recently, he refused to do share buybacks. Bottom line, Berkshire Hathaway today is not a good comparable for Fairfax when it comes to business model/capital allocation.

 

What about Markel? If I have to describe Tom Gaynor's approach to capital allocation it would be: he is doing his best trying to convince his shareholders that he is following in BRK's footsteps. What does that mean? I am not sure. And that is the problem I have with Markel. Instead of going down their own road/path, they appear to be much more focussed on trying to clone/mimic Berkshire Hathaway. Trying to convince others that you are Buffett/BRK reincarnate is not my idea of a well run company.

 

Fairfax, on the other hand, is clearly forging their own path. Their structure is similar to a younger BRK - decentralized operation. Capital allocation managed/driven by the senior team. Well run P/C insurance operations. But how Fairfax does capital allocation is completely different than Buffett/BRK - and it always has been. And Fairfax makes no apologies for it.

 

From my perspective, Fairfax is uniquely positioned today in P/C insurance. They are taking the P/C insurance model that has been used so successfully over the years by so many outstanding investors to create enormous wealth: Buffett/BRK, Singleton/Teledyne, Markel family/MKL, Singleton/Teledyne, Davis etc.   

 

The difference is almost all of these great companies are gone or, in BRK's case, have morphed into something else. Fairfax looks like it is in its prime - it is executing exceptionally well. They are in the process of writing a brand new book on how to fully exploit the P/C insurance model - using their style of capital allocation - and in the process, they are building enormous value for shareholders. Do they actually pull it off? (Perhaps a better question is 'how long can they continue to deliver outsized returns for shareholders?') We will have to wait and see. But based on what I have seen over the last 6 years, I really like their chances.

 

The challenge for lots of investors today is they are looking for another Buffett/BRK. And of course, that is never going to happen. History never repeats. But, as we learn from Mark Twain, history does have a habit of rhyming. The key for an investor is to be inquisitive and open minded... and to follow the facts. 

 

A capital allocation framework that is unique in P/C insurance today:

 

Each year, the management team at Fairfax takes what Mr Market gives it - they are very opportunistic. This year, it was stock buybacks. Growth in insurance. Digit IPO. Sale of Stelco. Purchases of Sleep Country and Peak. Along with a bunch of other things.

 

 

Edited Monday at 08:53 PM by Viking

[73 Reds]

5 minutes ago, Viking said:

@73 Reds , thanks for the feedback   As I continue to peel back the layers on Fairfax, the piece that has me the most excited is capital allocation. I call what Fairfax does 'unconstrained capital allocation' - because they have no self-imposed limitations. In this respect they look an awful to like Henry Singleton. What Fairfax is doing today - from a capital allocation perspective - looks unique in P/C insurance.

 

Some might use Berkshire Hathaway and Markel as comparable for Fairfax but I don't think that works very well. BRK is now a massive conglomerate, with a large P/C insurance business. This now significantly restricts BRK's options when it comes to capital allocation. Buffett also has many self imposed restrictions. For example, up until recently, he refused to do share buybacks. Bottom line, Berkshire Hathaway today is not a good comparable for Fairfax when it comes to business model/capital allocation.

 

What about Markel? If I have to describe Tom Gaynor's approach to capital allocation it would be: he is doing his best trying to convince his shareholders that he is following in BRK's footsteps. What does that mean? I am not sure. And that is the problem I have with Markel. Instead of going down their own road/path, they appear to be much more focussed on trying to clone/mimic Berkshire Hathaway. Trying to convince others that you are Buffett/BRK reincarnate is not my idea of a well run company.

 

Fairfax, on the other hand, is clearly forging their own path. Their structure is similar to BRK - decentralized operation. Capital allocation managed/driven by the senior team. Well run P/C insurance operations. But how Fairfax does capital allocation is completely different than Buffett/BRK. And Fairfax makes no apologies for it.

 

From my perspective, is uniquely positioned today in P/C insurance. They are taking the P/C insurance model that has been used so successfully over the years by so many outstanding investors to create enormous wealth: Buffett/BRK, Singleton/Teledyne, Markel family/MKL, Singleton/Teledyne, Davis etc.   

 

The difference is almost all of these great companies are gone or, in BRK's case, have morphed into something else. Fairfax is in its prime. And it is executing exceptionally well. They are in the process of writing a brand new book on how to fully exploit the P/C insurance model - using their style of capital allocation - to build enormous value for shareholders. Do they actually pull it off? We will have to wait and see. But based on what I have seen over the last 6 years, I really like their chances.

 

A capital allocation framework that is unique in P/C insurance today:

 

 

Yep!  Imagine if BRK had repurchased shares throughout its history and employed a TRS.  One main difference seems to be that Buffett was very focused on empire-building (in a good way) even while shunning traditional means of increasing shareholder value.  Of course history proves that he didn't need to do otherwise.  If Prem and Co. learned their lessons from the 2010s, the sky truly is the limit.   Proper underwriting gives an insurance company like Fairfax such a wide advantage over other asset management companies.  

[Viking]

13 minutes ago, 73 Reds said:

Proper underwriting gives an insurance company like Fairfax such a wide advantage over other asset management companies.  

 

@73 Reds I agree. Fairfax's other 'secret sauce' is not being restricted to bonds when investing. They are currently generating a return of better than 7.5% on their $70 billion investment portfolio. When you combine that with strong underwriting profit... well... +15% ROE is the result.  

 

The current fixed income yield of 4.7% is a game changer. As is a 15% return on equities.  

[wondering]

Jamie Lowry, head of european investments at Fairfax.  Discussion is not specifically about Fairfax, but it gives a little insight into how Jamie approaches his investment decisions.  Good talk.  A case study of the turnaround a Fiat under Sergio Marchionne.

 

 

[longlake95]

Just sold all my FFH.PR.D. Wondering what's up? Why all the FFH prefs are soaring...

[gfp]

No clue.  The only news I could find today was the bond sale to finance part of the Sleep Country deal.

https://www.bnnbloomberg.ca/investing/2024/11/19/sleep-country-mulls-potential-bond-sale-in-rare-leveraged-buyout/

[MMM20]

18 minutes ago, longlake95 said:

Just sold all my FFH.PR.D. Wondering what's up? Why all the FFH prefs are soaring...

 

Let me be the first to wildly speculate that someone's leaking the news about index inclusion and funds are buying the prefs to get around insider trading laws.

[gfp]

1 minute ago, MMM20 said:

 

Let me be the first to wildly speculate that someone's leaking the news about index inclusion and funds are buying the prefs to get around insider trading laws.

 

How would that produce a profit on index inclusion?

[longlake95]

1 minute ago, MMM20 said:

 

Let me be the first to wildly speculate that someone's leaking the news about index inclusion and funds are buying the prefs to get around insider trading laws.

 

I agree

[Malmqky]

1 minute ago, MMM20 said:

 

Let me be the first to wildly speculate that someone's leaking the news about index inclusion and funds are buying the prefs to get around insider trading laws.

I wildly speculate this is the case too.

[SafetyinNumbers]

4 minutes ago, MMM20 said:

 

Let me be the first to wildly speculate that someone's leaking the news about index inclusion and funds are buying the prefs to get around insider trading laws.

I don’t think that makes any sense. I think FFH.PR.C and FFH.PR.D are close to their reset dates so likely prime candidates to get redeemed at par. 

[MMM20]

12 minutes ago, SafetyinNumbers said:

I don’t think that makes any sense. I think FFH.PR.C and FFH.PR.D are close to their reset dates so likely prime candidates to get redeemed at par. 

 

With respect to all the Canadians here (I love your country!), Occam's razor = something shady and borderline illegal involving the hedge fund community up there. Maybe I'm wrong about exactly what it is.

 

Edited Tuesday at 08:10 PM by MMM20

[MMM20]

26 minutes ago, gfp said:

 

How would that produce a profit on index inclusion?

 

Cost of capital headed down across the board?

[SafetyinNumbers]

12 minutes ago, MMM20 said:

 

With respect to all the Canadians here (I love your country!), Occam's razor = something shady and borderline illegal involving the hedge fund community up there. Maybe I'm wrong about exactly what it is.

 

It’s a small country but I don’t think it takes a lot to predict redemption here. I assume mostly retail making the bet. The preferred aren’t very liquid so most hedge funds would pass.

[Hoodlum]

I blame it all on Muddy Waters.  

[mananainvesting]

Fairfax investing in Orla Notes: 

 

https://www.marketscreener.com/quote/stock/ORLA-MINING-LTD-19500426/news/Orla-Mining-Ltd-announced-that-it-expects-to-receive-CAD-200-million-in-funding-from-Fairfax-Financ-48397640/

 

[nwoodman]

13 minutes ago, mananainvesting said:

Fairfax investing in Orla Notes: 

 

https://www.marketscreener.com/quote/stock/ORLA-MINING-LTD-19500426/news/Orla-Mining-Ltd-announced-that-it-expects-to-receive-CAD-200-million-in-funding-from-Fairfax-Financ-48397640/

 

Love these paid to wait deals

[Parsad]

11 hours ago, SafetyinNumbers said:

I don’t think that makes any sense. I think FFH.PR.C and FFH.PR.D are close to their reset dates so likely prime candidates to get redeemed at par. 

 

You are correct, sir!  Cheers!

 

https://www.fairfax.ca/press-releases/fairfax-launches-c700-million-senior-notes-offering-11-19-2024/?utm_source=press-release&utm_medium=email&utm_term=Wed+Nov+20+2024&utm_campaign=Fairfax+Launches+C%24700+Million+Senior+Notes+Offering

[MMM20]

2 hours ago, Parsad said:

 

You are correct, sir!  Cheers!

 

https://www.fairfax.ca/press-releases/fairfax-launches-c700-million-senior-notes-offering-11-19-2024/?utm_source=press-release&utm_medium=email&utm_term=Wed+Nov+20+2024&utm_campaign=Fairfax+Launches+C%24700+Million+Senior+Notes+Offering

 

I was also correct that something shady was going on. Unless the timing of a spike - mid-day ahead of the announcement after the close - was pure coincidence

 

Edited Wednesday at 10:46 AM by MMM20

[Hoodlum]

4 hours ago, Parsad said:

 

You are correct, sir!  Cheers!

 

https://www.fairfax.ca/press-releases/fairfax-launches-c700-million-senior-notes-offering-11-19-2024/?utm_source=press-release&utm_medium=email&utm_term=Wed+Nov+20+2024&utm_campaign=Fairfax+Launches+C%24700+Million+Senior+Notes+Offering

Those are great rates for Fairfax.  I wonder if we will see further bond issues for general purposes.  It could see them do that to eventually close out the TRS and purchase those shares. 

[glider3834]

5 minutes ago, Hoodlum said:

Those are great rates for Fairfax.  I wonder if we will see further bond issues for general purposes.  It could see them do that to eventually close out the TRS and purchase those shares. 

I believe Preferred divs are not deductible while interest on notes should be, so after tax cost likely cheaper with notes.

 

[Viking]

Can someone educate me a little: Fairfax appears to be reducing its preferred share exposure and shifting it to debt (where the capital is held on the balance sheet is shifting). Other than saving a little (or a lot?) on the cost side (after tax), are there also strategic reasons/benefits to what they are doing?

 

Preferred shares are considered equity capital. Fairfax's financial position and earnings trajectory has never been better.