Fairfax 2024

[glider3834]

1 hour ago, Viking said:

@Hoodlum , great points. My view is Fairfax is simply planting another seed with the speculated acquisition of French insurer Algingia. What the seed grows into we will see in the coming years. My guess is relationships and having boots on the ground is an important part of doing business in Europe. 

https://www.eurazeo.com/en/newsroom/press-releases/eurazeo-enters-exclusive-discussions-consortium-led-la-financiere-de

 

'The transaction remains subject to the approval of the relevant authorities and to various requirements, such as documentary conditions, and is expected to be finalised in spring 2025.'

 

https://www.bnnbloomberg.ca/business/company-news/2024/12/11/hermes-family-in-talks-to-invest-in-french-insurer-albingia/

[Hoodlum]

43 minutes ago, glider3834 said:

https://www.eurazeo.com/en/newsroom/press-releases/eurazeo-enters-exclusive-discussions-consortium-led-la-financiere-de

 

'The transaction remains subject to the approval of the relevant authorities and to various requirements, such as documentary conditions, and is expected to be finalised in spring 2025.'

 

https://www.bnnbloomberg.ca/business/company-news/2024/12/11/hermes-family-in-talks-to-invest-in-french-insurer-albingia/

 

A well run insurance business with 2023 CR of 84.  And it looks like the existing management team will have an equity stake.  This definitely looks like a quality acquisition.  I suspect FIBLAC is involved to inject additional capital for significant growth.

This is behind a paywall but it looks like Fairfax will own less than 50% of Albingia.

https://www.argusdelassurance.com/les-assureurs/albingia.233779

 

Edited December 12 by Hoodlum

[mananainvesting]

7 hours ago, Viking said:

@73 Reds , I agree. But I think you need to back it up one step. You need to start with the right industry. How many industries today are as good as a long term investment as they were 75 years ago? Very few. P/C insurance is likely one of a short list. 
 

Another key learning is the importance of monitoring an investment. Sometimes companies mess up - AIG is the poster child for this. It delivered exceptional returns for investors for decades - until it blew up in the Great Financial Crisis in 2007/08.
 

So the lessons for me from the book were:

1.) P/C continues to be a great place for a long term investor to focus on (that circle of competence thing).

2.) Buy the best managed operators, ideally at a low (or even fair) price. 
3.) Sit tight as long as management continues to execute well. Because exceptional management teams usually deliver exceptional returns. But to do this (sit tight for a decade or longer) requires a huge amount of trust - because you won’t know in advance exactly what management is going to do. You will only know this after the fact. 
 

For Davis, management was the key. Today with Fairfax, there is very little discussion of management and how good they are (or not). Even on this board. And i love it.

 

Based on what I have seen over the past 4 years, I think the management team at Fairfax is best in class in the P/C insurance industry. People call me a ‘Fairfax bull’. It cracks me up. I think I am just following the facts. 
 

The quality of Fairfax’s management team is not reflected in Fairfax’s valuation today. So I am getting something - the most important thing when investing - for free. It is like getting a free call option on something that is exceptionally valuable - management. 
 

What is the right multiple to attach to Fairfax if I am right?
 

My guess is that is something that is not on most investors radar today. Should it be? 

 

Thanks for sharing Viking. At what valuation/multiple would you say price would account for management?   

[Viking]

1 hour ago, mananainvesting said:

 

Thanks for sharing Viking. At what valuation/multiple would you say price would account for management?   

@mananainvesting , that is a great question. I will admit that ‘multiple’ is the most difficult part of the valuation process for me.
 

Back in 2021 and probably 2022, I probably would have said i would be happy with a P/BV multiple of 1.3 x. But that would have been largely built off of Fairfax version 2010-2020.
 

Much has changed regarding Fairfax over the past 4 years. As a result, my view today is a P/BV multiple of 1.3 x is too low.

 

What is an appropriate valuation/multiple today? My short answer is higher than where we are at today. How high? I’m not sure. My guess is I will know it when we get there (ora least get closer to ‘it’). 

[Hoodlum]

Brit Announced that Ki will operate as a standalone Insurance company within Fairfax, effective Jan 1 2025.  We may start hearing more about Ki from Fairfax in the quarterly releases and conference calls.

 

https://www.britinsurance.com/news/ki-to-become-standalone-business-within-the-fairfax-group

 

Ki was incubated and launched by Brit in 2020 and began writing business on 1 January 2021 with its own syndicate, 1618. Ki was one of the largest start-up syndicates in the history of Lloyd’s and the first digital follow syndicate.  

 

Over the last 4 years, Ki has grown significantly and evolved to become a digital follow platform offering capacity from multiple syndicates with over $1 billion of GWP written through the platform in 2024. 

 

Ki has now reached scale and developed its operations to enable it to operate as a separate company within Fairfax. It will continue to maintain a close partnership with Brit as a nominated lead across all classes. These changes to corporate structure and operations do not impact how brokers trade with Ki or Ki’s appetite in any class of business.

 

 

For those not familiar with how Ki operates, here are some details on how their business is using AI for underwriting.

 

https://ki-insurance.com/news/future-of-ai-in-underwriting

 

Edited December 12 by Hoodlum

[SafetyinNumbers]

1 hour ago, Hoodlum said:

Brit Announced that Ki will operate as a standalone Insurance company within Fairfax, effective Jan 1 2025.  We may start hearing more about Ki from Fairfax in the quarterly releases and conference calls.

 

https://www.britinsurance.com/news/ki-to-become-standalone-business-within-the-fairfax-group

 

Ki was incubated and launched by Brit in 2020 and began writing business on 1 January 2021 with its own syndicate, 1618. Ki was one of the largest start-up syndicates in the history of Lloyd’s and the first digital follow syndicate.  

 

Over the last 4 years, Ki has grown significantly and evolved to become a digital follow platform offering capacity from multiple syndicates with over $1 billion of GWP written through the platform in 2024. 

 

Ki has now reached scale and developed its operations to enable it to operate as a separate company within Fairfax. It will continue to maintain a close partnership with Brit as a nominated lead across all classes. These changes to corporate structure and operations do not impact how brokers trade with Ki or Ki’s appetite in any class of business.

 

 

For those not familiar with how Ki operates, here are some details on how their business is using AI for underwriting.

 

https://ki-insurance.com/news/future-of-ai-in-underwriting

 

Perhaps they are considering an IPO if the valuations are favourable at some point?

[Hoodlum]

25 minutes ago, SafetyinNumbers said:

Perhaps they are considering an IPO if the valuations are favourable at some point?

I thought of that as well. They better do it soon as this inflated market cannot last much longer. 

[SafetyinNumbers]

2 minutes ago, Hoodlum said:

I thought of that as well. They better do it soon as this inflated market cannot last much longer. 

It’s a pretty bifurcated market. Parts are inflated and parts are depressed. Although most people can never buy the depressed parts because of heuristics.

[Hoodlum]

Moody’s is estimating a 6% increase in US Commercial line premiums in 2025
 

https://www.insurancebusinessmag.com/us/news/property/moodys-stable-2025-outlook-for-us-pandc-insurance-517796.aspx

 

According to Moody's, analysts predict a slight slowdown in premium growth for 2025. They estimate a 6% increase in direct premiums written for US commercial lines in 2024, reaching approximately $511 billion, up from $481 billion in 2023. However, they anticipate this growth to moderate in 2025 due to slower inflation and real GDP growth.

[SafetyinNumbers]

13 hours ago, mananainvesting said:

 

Thanks for sharing Viking. At what valuation/multiple would you say price would account for management?   

You didn’t ask me but that has never stopped me before. 
 

I think this is a question that’s really about estimating intrinsic value. I use three methods to triangulate FFH’s intrinsic value range.

 

1. Normalized PE. 15x is generally considered a fair market multiple and FFH is a better than average business so 15x FTM EPS seems reasonable. While consensus is $155, it’s probably too low, it still gives us $2325 or ~66% above current prices around $1400.

 

2. Relative P/B multiple. There is an exponential relationship between P/B and ROE which makes sense. A high ROE compounds much faster so it makes sense to pay more than 2x for a 20% ROE vs a 10%. When looking at FFH peers, an ROE between 15-20% should command a P/B closer to 2.5x. With so much in the multiple we can just use trailing BV instead of making the adjustments to FV etc. 2.5x BV is ~$2585.

 

3. Buffett method. This is the sum of BVPS and float per share. Buffett has made it pretty clear that float in the hands of a high quality insurer is worth at least the amount of the float. This makes sense because the income associated with the float accrues to the insurer and consistently grows over time. For FFH this is ~$2800.

That leaves me with an IV range of $2325-2800 which is wide but well above the current price offering large margin of safety.

 

[sholland]

20 hours ago, SafetyinNumbers said:

 

3. Buffett method. This is the sum of BVPS and float per share. Buffett has made it pretty clear that float in the hands of a high quality insurer is worth at least the amount of the float. This makes sense because the income associated with the float accrues to the insurer and consistently grows over time. For FFH this is ~$2800.

 

Valuation method #3 is novel to me and I was wondering if I could solicit the board to help me process this.  So BVPS is a rough proxy for the liquidation value of the business with the float being returned to policyholders. But Fairfax is a high quality insurer that is not being liquidated and the float is stable (steadily growing actually) so one could value the float like the face value of bonds that you continuously reinvest at maturity.  Am I missing anything?

[dartmonkey]

21 hours ago, SafetyinNumbers said:

3. Buffett method. This is the sum of BVPS and float per share. Buffett has made it pretty clear that float in the hands of a high quality insurer is worth at least the amount of the float. This makes sense because the income associated with the float accrues to the insurer and consistently grows over time. For FFH this is ~$2800.

That leaves me with an IV range of $2325-2800 which is wide but well above the current price offering large margin of safety.

 

Minor quibble: float that is not going to disappear may be worth almost as much as its equivalent in cash, but surely never more. If you are FFH and you have $35.1b in float (end of 2023 number) and can invest that float for a good return, it may be worth close to $35.1b in cash, which you might add to its book value, $21.6b, to get $56.7b, divided by 22,891,108 shares outstanding, to get $2477 per share. Updated to Q3, if we still had $35.1b in float (I don't think they report the updated value every quarter), and $22.7b in equity, divided by 21,990,603 shares outstanding, we would get $2628 per share, close to your figure, and even closer if you model in the probable increase in float over 3 quarters which you may have done here.

 

But if Fairfax could magically just keep that $35.1b in funds in perpetuity, with all the concomitant obligations to insured parties waived, that would be even better, right? In other words, a $1m 0% interest loan that is due in 40 years is great, and it's probably worth almost $1m, but certainly not more than $1m. I imagine you might say that it is worth more than $1m if the loan amount keeps increasing over time, but if Fairfax's float is increasing, it is because Fairfax is investing some of its earnings in buying new insurance businesses, or putting new capital into existing businesses, so there would be some double counting there.

 

The other thing that makes float worth a little less than its equivalent in cash, is that, being insurance float, there are some restrictions placed on what that cash can be invested in, meaning it has to be mostly invested in safe bonds. 

 

Anyways, by that method #3 metric, it would mean that (22.7+35.1)/22.7= 2.55 would be a P:B ratio that would make FFH fully valued. High enough that we don't have to worry too much about the details, and from today's 1.42 we have lots of room to grow before we get there. And if we get to 2.5, we could alwaysswitch to Method #1  

Edited December 13 by dartmonkey
typo

[SafetyinNumbers]

5 minutes ago, dartmonkey said:

 

Minor quibble: float that is not going to disappear may be worth almost as much as its equivalent in cash, but surely never more. If you are FFH and you have $35.1b in float (end of 2023 number) and can invest that float for a good return, it may be worth close to $35.1b in cash, which you might add to its book value, $21.6b, to get $56.7b, divided by 22,891,108 shares outstanding, to get $2477 per share. Updated to Q3, if we still had $35.1b in float (I don't think they report the updated value every quarter), and $22.7b in equity, divided by 21,990,603 shares outstanding, we would get $2628 per share, close to your figure, and even closer if you model in the probable increase in float over 3 quarters which you may have done here.

 

But if Fairfax could magically just keep that $35.1b in funds in perpetuity, with all the concomitant obligations to insured parties waived, that would be even better, right? In other words, a $1m 0% interest loan that is due in 40 years is great, and it's probably worth almost $1m, but certainly not more than $1m. I imagine you might say that it is worth more than $1m if the loan amount keeps increasing over time, but if Fairfax's float is increasing, it is because Fairfax is investing some of its earnings in buying new insurance businesses, or putting new capital into existing businesses, so tha

ere would be some double counting there.

 

The other thing that makes float worth a little less than its equivalent in cash, is that, being insurance float, there are some restrictions placed on what that cash can be invested in, meaning it has to be mostly invested in safe bonds. 

 

Anyways, by that method #3 metric, it would mean that (22.7+35.1)/22.7= 2.55 would be a P:B ratio that would make FFH fully valued. High enough that we don't have to worry too much about the details, and from today's 1.42 we have lots of room to grow before we get there. And if we get to 2.5, we could alwaysswitch to Method #1  

I think we can estimate float off of the quarterly balance sheet by taking insurance liabilities less reinsurance assets held. That was ~$39b at the end of Q3, up from ~$35b at end of 2023.

 

On the float value, I agree with Buffett.

[dartmonkey]

29 minutes ago, SafetyinNumbers said:

I think we can estimate float off of the quarterly balance sheet by taking insurance liabilities less reinsurance assets held. That was ~$39b at the end of Q3, up from ~$35b at end of 2023.

 

On the float value, I agree with Buffett.

 

Buffett, AR 2018: "Beyond using debt and equity, Berkshire has benefitted in a major way from two less-common sources of corporate funding. The larger is the float I have described. So far, those funds, though they are recorded as a huge net liability on our balance sheet, have been of more utility to us than an equivalent amount of equity. That’s because they have usually been accompanied by underwriting earnings. In effect, we have been paid in most years for holding and using other people’s money."

 

So the float is more valuable than equity if it produces underwriting gains, which of course is typical both of Berkshire and Fairfax. 

[SafetyinNumbers]

7 minutes ago, dartmonkey said:

 

Buffett, AR 2018: "Beyond using debt and equity, Berkshire has benefitted in a major way from two less-common sources of corporate funding. The larger is the float I have described. So far, those funds, though they are recorded as a huge net liability on our balance sheet, have been of more utility to us than an equivalent amount of equity. That’s because they have usually been accompanied by underwriting earnings. In effect, we have been paid in most years for holding and using other people’s money."

 

So the float is more valuable than equity if it produces underwriting gains, which of course is typical both of Berkshire and Fairfax. 

I think that’s right, the key is the high quality insurance operations although I still find investors who don’t think FFH has high quality insurance businesses. It’s worth searching Buffett and float on YouTube. Lots of great clips from the AGMs over the years.

[yesman182]

 

Here WEB talks about getting free float and how float has the utility like equity, but you couldn't realize it upon sale.  So it seems like valuation method #3 is an upper bound if the business is being run well in a stable market and a new owner doesn't see any great opportunities for improvements. 

 

 

 

[dartmonkey]

Roughly transcribed: "So it has the utility, to us, of common equity, in terms of what we can do with it.  How you value that, in terms of intrinsic value, is up to you."

 

I agree that the 1:1 equivalence with cash would be the upper bound. On the other hand, the value of the insurance business that generates that float could be more than the value of the float, if it has negative cost (i.e. positive underwriting profit, on average.)

[gfp]

I haven't read this entire discussion so apologies if this is repetitive, but a lot of people know to focus on the cost and utility of float but forget about the added dynamic of float that grows.  When Warren talks about the free cash flow coming in to Berkshire every day/month/year he usually deliberately includes the growth of float in that figure.

 

Of the major ways you can finance the growth of your company - new equity capital, various forms of debt instruments, etc. - growing insurance float (on good underwriting) is arguably the most attractive.  No dilution of the equity holder, positive cary, no maturity

[yesman182]

47 minutes ago, gfp said:

I haven't read this entire discussion so apologies if this is repetitive, but a lot of people know to focus on the cost and utility of float but forget about the added dynamic of float that grows.  When Warren talks about the free cash flow coming in to Berkshire every day/month/year he usually deliberately includes the growth of float in that figure.

 

Of the major ways you can finance the growth of your company - new equity capital, various forms of debt instruments, etc. - growing insurance float (on good underwriting) is arguably the most attractive.  No dilution of the equity holder, positive cary, no maturity

Yeah, I think that is why he said he wouldn’t trade float for cash if given a tax free opportunity, if it meant he couldn’t be in the insurance business in the future. 

[Maverick47]

2 hours ago, dartmonkey said:

Buffett, AR 2018: "Beyond using debt and equity, Berkshire has benefitted in a major way from two less-common sources of corporate funding. The larger is the float I have described. So far, those funds, though they are recorded as a huge net liability on our balance sheet, have been of more utility to us than an equivalent amount of equity. That’s because they have usually been accompanied by underwriting earnings. In effect, we have been paid in most years for holding and using other people’s money."

 

So the float is more valuable than equity if it produces underwriting gains, which of course is typical both of Berkshire and Fairfax. 

The second less-common source of corporate funding that Buffett referred to in the 2018AR is also a source that Fairfax enjoys, though to a much smaller extent than Berkshire:  deferred income tax liabilities.  
 

While float generated along with underwriting profits is a huge benefit to both, equivalent to being paid to borrow money from others, deferred tax liabilities are also more valuable than raising funding from equity or debt, since is essentially an interest free loan from the government.

 

@Viking often calls Fairfax’s management best in class.  The fact that Fairfax manages to qualify for an interest free loan from the government via deferred tax liabilities, just as Berkshire does, is another credit to their understanding of how to optimize corporate funding costs, and helps place them in that best in class management group in my opinion.

 

Just for fun, you might look at the balance sheets of other insurance companies to which the market assigns rich valuations, whether Chubb, Travelers, Allstate, Intact Financial, Progressive, Hartford, WRB, etc.

 

I think you’ll find that in many of the balance sheets of those well regarded companies, there will be a deferred tax asset, not a deferred tax liability…meaning that they are providing an interest free loan TO the government instead of receiving an interest free loan FROM the government.  
 

 

 

 

 

[SafetyinNumbers]

17 minutes ago, Maverick47 said:

The second less-common source of corporate funding that Buffett referred to in the 2018AR is also a source that Fairfax enjoys, though to a much smaller extent than Berkshire:  deferred income tax liabilities.  
 

While float generated along with underwriting profits is a huge benefit to both, equivalent to being paid to borrow money from others, deferred tax liabilities are also more valuable than raising funding from equity or debt, since is essentially an interest free loan from the government.

 

@Viking often calls Fairfax’s management best in class.  The fact that Fairfax manages to qualify for an interest free loan from the government via deferred tax liabilities, just as Berkshire does, is another credit to their understanding of how to optimize corporate funding costs, and helps place them in that best in class management group in my opinion.

 

Just for fun, you might look at the balance sheets of other insurance companies to which the market assigns rich valuations, whether Chubb, Travelers, Allstate, Intact Financial, Progressive, Hartford, WRB, etc.

 

I think you’ll find that in many of the balance sheets of those well regarded companies, there will be a deferred tax asset, not a deferred tax liability…meaning that they are providing an interest free loan TO the government instead of receiving an interest free loan FROM the government.  
 

 

 

 

 

Great point. Another way, FFH defers taxes besides deferring gains is by being aggressive on reserving. I think the next four years could be really interesting on reserve releases since those reserves are bigger when in a hard market but get released after four years if there are no unfavourable developments.

[mananainvesting]

Fairfax buys back 14% of Brit from Omers, increasing ownership to 100%. 

 

https://www.fairfax.ca/press-releases/fairfax-announces-acquisition-of-omers-investment-in-brit-2024-12-13/

[gfp]

"There's always something to do"

[Dinar]

Munich RE was up 4.1% after announcing 2025 earnings forecast, including forecasting a 79 combined ratio in the reinsurance business.

[Hoodlum]

1 hour ago, mananainvesting said:

Fairfax buys back 14% of Brit from Omers, increasing ownership to 100%. 

 

https://www.fairfax.ca/press-releases/fairfax-announces-acquisition-of-omers-investment-in-brit-2024-12-13/

The first sub buyback with more to come in 2025. It is interesting that Fairfax paid only $8M more than what they sold this for in 2021. So it looks like OMERS only benefited from the Brit dividends over that time. 
 

I believe we have now shifted away from share buybacks, focusing instead on buying back sub minority ownerships.  Odyssey Re will likely be next with the exit of non-profitable contacts completing in Q4. 
 

 

Edited December 13 by Hoodlum