Fairfax 2024

[Hoodlum]

54 minutes ago, Dinar said:

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

Swiss Re today as well is targeting a P&C CR of below 85 for 2025.  They also committed to at least a 14% ROE over the next few years

 

 

Edited December 13 by Hoodlum

[Viking]

2 hours 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/

I love it. This increases the numerator of the EPS calculation. (Buybacks reduce the denominator of the EPS calculation.) Like when they purchased a chunk of Allied World a couple of years ago, I wonder if this will create some minor noise when Fairfax reports Q4 results? I do not understand how a ‘call option’ flows though the financial statements when it is exercised. I am not complaining - more a heads up so we are not surprised.

 

From the announcement today

 

TORONTO, Dec. 13, 2024 – Fairfax Financial Holdings Limited (“Fairfax”) (TSX: FFH and FFH.U) announces that it has increased its ownership interest in Brit Limited to 100% from 86.2% by acquiring the interest of OMERS, the pension plan for Ontario’s municipal employees, for cash consideration of approximately US$383 million.

From Fairfax’s 2021AR

 

“Sale of non-controlling interest in Brit On August 27, 2021 Brit issued shares representing a 13.9% equity interest to OMERS for cash consideration of $375.0 which was subsequently paid by Brit as a dividend to Fairfax. The company recorded an aggregate equity gain of $115.4, principally comprised of a dilution gain and the fair value of a call option received, which was presented as other net changes in capitalization in the consolidated statement of changes in equity.The company has the option to purchase OMERS’ interest in Brit at certain dates commencing in October 2023.”

 

“Brit, based in London, England, is a market-leading global Lloyd’s of London specialty insurer and reinsurer. In 2021, Brit’s net premiums written were US$1,998.3 million. At year-end, the company had shareholders’ equity of US$1,912.1 million and there were 854 employees.”

 

From Fairfax’s 2023AR

 

“Brit, based in London, England, is a market-leading global Lloyd’s of London specialty insurer and reinsurer. In 2023, Brit’s net premiums written were US$2,982.7 million.At year-end, the company had shareholders’ equity of US$2,617.2 million and there were 911 employees.”

Edited December 14 by Viking

[Hoodlum]

3 minutes ago, Viking said:

I love it. This increases the numerator of the EPS calculation. (Buybacks reduce the denominator of the EPS calculation.) Like when they purchased a chunk of Allied World a couple of years ago, I wonder if this will crease some minor noise when Fairfax reports Q4 results? I am not complaining. This is a solid move.

 

From the announcement today

 

TORONTO, Dec. 13, 2024 – Fairfax Financial Holdings Limited (“Fairfax”) (TSX: FFH and FFH.U) announces that it has increased its ownership interest in Brit Limited to 100% from 86.2% by acquiring the interest of OMERS, the pension plan for Ontario’s municipal employees, for cash consideration of approximately US$383 million.

From Fairfax’s 2021AR

 

“Sale of non-controlling interest in Brit On August 27, 2021 Brit issued shares representing a 13.9% equity interest to OMERS for cash consideration of

$375.0 which was subsequently paid by Brit as a dividend to Fairfax. The company recorded an aggregate equity gain of $115.4, principally comprised of a dilution gain and the fair value of a call option received, which was presented as other net changes in capitalization in the consolidated statement of changes in equity.The company has the option to purchase OMERS’ interest in Brit at certain dates commencing in October 2023.”

 

“Brit, based in London, England, is a market-leading global Lloyd’s of London specialty insurer and reinsurer. In 2021, Brit’s net premiums written were US$1,998.3 million. At year-end, the company had shareholders’ equity of US$1,912.1 million and there were 854 employees.”

 

From Fairfax’s 2023AR

 

“Brit, based in London, England, is a market-leading global Lloyd’s of London specialty insurer and reinsurer. In 2023, Brit’s net premiums written were US$2,982.7 million.At year-end, the company had shareholders’ equity of US$2,617.2 million and there were 911 employees.”

I also wonder if this had to be completed before the transition of KI Insurance transition out of Brit on Jan 1. 

[SafetyinNumbers]

1 hour ago, Hoodlum said:

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. 
 

 

It’s interesting. Unless I did the math wrong, so far the dividends received by OMERS until the end of Q224 were ~19% of their initial investment and with the gain a total of ~21%. So not a huge return over 40 months. It’s possible there was also another dividend in the past 5 months which would add to it.

[Hoodlum]

35 minutes ago, SafetyinNumbers said:

It’s interesting. Unless I did the math wrong, so far the dividends received by OMERS until the end of Q224 were ~19% of their initial investment and with the gain a total of ~21%. So not a huge return over 40 months. It’s possible there was also another dividend in the past 5 months which would add to it.

i suspect that the extra $8m was to cover the dividend for most of Q4. 

[TwoCitiesCapital]

1 hour ago, SafetyinNumbers said:

It’s interesting. Unless I did the math wrong, so far the dividends received by OMERS until the end of Q224 were ~19% of their initial investment and with the gain a total of ~21%. So not a huge return over 40 months. It’s possible there was also another dividend in the past 5 months which would add to it.

 

I don't think it's surprising to most of us to hear it was structured as some form of fixed rate financing arrangement. 

 

But consider where the 10-year treasury was in mid-2021 - like 1.5%. Corporate bonds wouldn't have been much higher. 

 

So this was still a very attractive deal for OMERS in terms of fixed return options. 

 

They got a 4-years bonds paying 4+% instead of 2+%. 

[SafetyinNumbers]

1 hour ago, TwoCitiesCapital said:

 

I don't think it's surprising to most of us to hear it was structured as some form of fixed rate financing arrangement. 

 

But consider where the 10-year treasury was in mid-2021 - like 1.5%. Corporate bonds wouldn't have been much higher. 

 

So this was still a very attractive deal for OMERS in terms of fixed return options. 

 

They got a 4-years bonds paying 4+% instead of 2+%. 

I agree but I did think this financing was more expensive. Happy to be wrong. 

[Redskin212]

I think OMERS hurdle for these type transactions is 9%

[SafetyinNumbers]

7 hours ago, Redskin212 said:

I think OMERS hurdle for these type transactions is 9%

Looks like they made 6% on this one. 

[Thrifty3000]

Anyone else hear rates gonna be higher for longer? Or, just me?

[SafetyinNumbers]

1 hour ago, Thrifty3000 said:

Anyone else hear rates gonna be higher for longer? Or, just me?

Very few stocks available that benefit from higher rates, a stronger USD and a sell off in quality stocks. FFH price might go down with it in the short term (as holders either need liquidity or think they are switching into something cheaper) but expected forward ROE is probably going up.

 

It also looks there is a plan to IPO Ki. I don’t know it well but it seems like BX has 80% of the equity (Class B & C) but there are different classes with different rights. The Class C appear to be cheap leverage with an 8% preferred return that gets repaid at the listing price meaning they may result in a big increase in Brit/FFH’s equity stake. These are like OMERS shares in Brit which appear to be 6% and understated FFH’s economics.
 

Ki might attract a very healthy multiple to book value and/or premiums given the nature of company (fast growth/AI) and the players (BX). Ki will likely do north of $1b in annual premiums soon so it could be material to FV over CV if it lists at 5-10x premiums.

 

Ki Articles of Incorporation 9.23.20.pdf

Edited Thursday at 02:12 AM by SafetyinNumbers
Did some work

[TwoCitiesCapital]

1 hour ago, Thrifty3000 said:

Anyone else hear rates gonna be higher for longer? Or, just me?

 

So we're told...

 

And yet, CPI-U is still sub 3%. Perhaps the trend is reaccelerating, but spending a few months between 2.5-2.7% hardly screams danger zone to me. My bias is for the intermediate outlook to be lower rates - especially with industrial activity/manufacturing shitting the bed again. 

Edited Thursday at 02:03 AM by TwoCitiesCapital

[Thrifty3000]

16 hours ago, TwoCitiesCapital said:

 

So we're told...

 

And yet, CPI-U is still sub 3%. Perhaps the trend is reaccelerating, but spending a few months between 2.5-2.7% hardly screams danger zone to me. My bias is for the intermediate outlook to be lower rates - especially with industrial activity/manufacturing shitting the bed again. 

Yeah, here’s a chart showing rate predictions vs reality overtime. A big ol’ time waster. 
 

[TwoCitiesCapital]

8 hours ago, Thrifty3000 said:

Yeah, here’s a chart showing rate predictions vs reality overtime. A big ol’ time waster. 
 

 

Historically - the 2-year treasury is a pretty good predictor of the Fed - but is some what volatile itself. 

 

It peaked in 2023 and has mostly been range bound since, but with lower highs and lower lows. The trend is flat-to-down. 

[Viking]

Is Fairfax a Growth Company?

 

Talk to other investors about Fairfax and guess what they usually want to talk about? Investments. Not Fairfax’s insurance businesses. Which is nuts. Because Fairfax is a P/C insurance company. In this post, we will explore Fairfax’s little followed and therefore likely misunderstood and under-appreciated insurance business. 

 

Is Fairfax a growth company?

 

I realize that sounds like a dumb question to ask. I mean this is Fairfax after all. But hey, just for fun, what do the numbers tell us?

 

Despite its sizeable investment management business, Fairfax is - at its core - still a P/C insurance company (sorry to disagree with you Morningstar). And the best measure of top line performance at a P/C insurance company  is to look at the trend in net premiums written. How has Fairfax performed over the past decade with this very important metric?

 

The 10-Year performance of NPW (2014-2024)

 

Fairfax has grown net premiums written (NPW) from $6.1 billion in 2014 to an estimated $25.4 billion in 2024. This performance is on track to deliver a total increase in NPW of $19.3 billion or 315%, which is a compound annual growth rate (CAGR) of 15.3%.

 

To state the obvious, that is an amazingly high level of growth in NWP over a decade. 

 

Importantly, this high level of growth was delivered through both soft and hard P/C insurance markets. And bull and bear financial markets. The external environment did not impede Fairfax’s ability to grow. That is pretty impressive. And really, really instructive. Truth be told, the external environment was one of the key factors that allowed Fairfax to deliver such outstanding growth year after year. And that because volatility creates opportunity. And one of Fairfax’s core strengths is being opportunistic and capitalizing on volatility.

 

Per Share 

 

Buffett teaches us that total growth numbers are not the metrics investors/shareholders should be primarily focussed on. What really matters is what is going on with the per share metrics. 

 

Per share, Fairfax has grown NPW from $289/share in 2014 to an estimated $1,160/share in 2024. This performance is on track to deliver a total increase in NPW of $871/share or 302%, which is a compound annual growth rate (CAGR) of 14.9%. Bottom line, the phenomenal growth has not been driven by diluting Fairfax's existing shareholders. Much more on this in the next post.

 

 

But Fairfax’s performance over the past decade has actually been much better than this. And that is because the numbers above do not include Fairfax’s P/C insurance company in India - called Digit Insurance.

 

In February 2017, Fairfax made their initial investment in a P/C insurance start-up called Digit. Over the past 8 years, Digit has been one of the fastest growing P/C insurance companies in India. Earlier this year, Digit completed its IPO. The company currently has a market cap of about $3.8 billion, with Fairfax’s position worth around $2 billion. Fairfax is the largest (and controlling) shareholder of Digit.

 

Importantly, India is expected to have the best performing economy in the world over the next decade. With its investment in Digit, Fairfax is perfectly positioned to benefit from this rapid growth in the coming years.

 

Including Digit, the growth of Fairfax’s P/C insurance business over the past 10 years has been best in class among P/C insurance companies.

 

How did Fairfax do it?

 

Fairfax’s management team has been putting on a clinic for the past decade in how to do/utilize capital allocation to rapidly grow a P/C insurance business.

 

But investors/analysts have been so focussed (infatuated?) with Fairfax’s investment business they have completely missed out on what has been happening with its P/C insurance business. And what it means for the company moving forward.

 

Capital allocation

 

Yes, we keep coming back to capital allocation.

 

Why is this?

 

Because it is really important. Especially a P/C insurance company like Fairfax. As we have discussed in the past, capital allocation is the most important job of a management team.

 

But the funny thing is, when people think about capital allocation and Fairfax they tend to only think (and talk) about the investment side of the business. (Yes, I am including much of my writing/analysis when I say this). That’s the ‘sexy’ part. And yes, Fairfax has done some pretty spectacular things with investments, especially in recent years.

 

But the insurance business?

 

It gets very little thought. Even less discussion. 

 

But guess what?

 

On the capital allocation front, Fairfax has done some pretty spectacular things with its P/C insurance business as well. Of course this matters a great deal. Because the two businesses - insurance and investments - are joined at the hip for Fairfax. Grow insurance and you grow that wonderful thing called float - that liability that is really an asset (for well run insurance companies, like Fairfax).

 

The steady, long term growth of the P/C insurance business was the primary engine that allowed Warren Buffett to deliver decades of outstanding growth for Berkshire Hathaway and its shareholders. Understanding what Buffett was doing with his insurance business over the years was a critical input to properly understanding and valuing Berkshire Hathaway. 

 

So let me say it again.

 

Fairfax has grown its insurance business by 15.3% per year for the past decade. Not including Digit. Guess what this kind of steady, long term growth does to the intrinsic value of a company? Yes, it sends it to the moon.

 

Are we paying attention yet?

 

What happens with insurance matters. A lot. Because the growth of the insurance business is what feeds the investment business.

 

The fact that such little attention is paid to Fairfax’s insurance business (its quality and its growth) puts a smile on my face. It tells me it is likely not yet reflected in the share price. As a result, investors continue to underestimate Fairfax’s future earnings and ROE.

 

Over the past 10 years, Fairfax has made a number of extraordinary moves to rapidly grow their insurance business. Under everyone noses, they have quietly built a power house P/C insurance business - in terms of quality and growth. This post is focussed on the growth aspect. A future post will tackle the quality aspect.

 

The quiet giant

 

Guess how many large cap Canadian companies have grown their top line by 15.3% for a decade straight? Not many. Apparently not many P/C insurance companies either. Like a goat going up a mountain, Fairfax has been nimbly and quickly climbing the rankings of the largest global P/C insurers. In 2023 they were ranked in the #21 position (same as 2022). 

 

 

Source: From Fairfax’s Slide Presentation at April 2024 AGM – Excluding Lloyd’s

 

So, let’s ask the question again that we began our post with…

 

Is Fairfax a growth company?

 

Yup. 

 

WOW! A Canadian company that is competing against the best the world has to offer… and not just playing the game (that participation award thing we love so much here in Canada) but actually winning? That is crazy. Canada must be so proud! Let’s invite Prem to Ottawa, hold a parade and celebrate! 

 

Except… ummm… few people in Canada seem to know that Fairfax exists let alone that it has been growing like a weed. It looks like most investors are also in the same boat because how does Mr. Market reward a fast-grower’s share price?

 

My current estimate is Fairfax will earn $160/share in 2024. This would put year-end book value at about $1,085 and would represent an ROE of about 16%.

 

From a valuation perspective, this would put Fairfax’s:

• P/BV at 1.29 x
• PE at 8.7 x

These are very low valuations for a company that:

• Has a CAGR for NPW of 15.3% over the past decade.
• Is also projected to deliver an ROE of 16% in 2024 (and mid teens moving forward).

Why is Fairfax’s valuation so low?

 

One reason is likely because with the hard market slowing, investors/analysts expect top line growth (in net premiums written) to markedly slow at Fairfax in the coming years. That might make sense from an industry perspective. But does that make sense for Fairfax? Looking at Fairfax's past, I don’t think it does. Because Fairfax has a proven ability to grow its insurance business over the long term at above market rates. 

 

 

Accounting value versus economic value

 

Importantly, Fairfax’s book value of $1,085/share does not include the ‘excess of fair value over carrying value’ of associate and consolidated equity holdings, which was $1.9 billion ($86/share pre-tax) at September 30, 2024.

 

And 2024 estimated EPS of $160/share for Fairfax does not include the change in ‘excess of fair value over carrying value’ for associate and consolidated equity holdings in 2024, which was $900 million ($41/share pre-tax) at September 30, 2024.

 

In 2024, Fairfax’s economic results are tracking to be much better than their accounting results.

 

This makes Fairfax’s stock look even cheaper from a valuation perspective.

 

But, hey, we all know Mr. Market is always right. Right? Except of course when Mr. Market is completely wrong. That is called a fat pitch by some country bumpkin who lives in Omaha. But hey, that is a story for another day. 

 

—————

 

What did Fairfax do to drive all that top-line growth in NPW?

 

In our next post, we will dig into exactly what Fairfax did to drive all that top-line growth in net premiums written over the past decade:

• Phase 1: Acquisitions – International expansion (2015-2017)
• Phase 2: Organic - Hard market (2019-2024)

I will also explain why I am optimistic about growth in the coming years, even though it appears parts of the hard market in insurance are slowing.

• Phase 3: Take-out of minority partners (2022-2026)

What we learn should help us better understand Fairfax and their P/C insurance business. And its growth prospects in the coming years. In turn, this should help us to properly value the company. 

 

The next post should be out in the next week

Edited Friday at 07:26 PM by Viking

[villainx]

Thanks!

[nwoodman]

Purely a curiosity, but as we close out the year it’s interesting that the FRFH (USD) share price is +/- the same as a Class A but with 40 years difference to the month.  One hell of a compounding curve over a 40 year time horizon.  Magnificent!

 

 

EDIT: Those minor perturbations between the voting vs weighing machine no doubt were hotly debated and in the end, corrected, but also resulted in large wealth transfers.  Also you needed to survive the 50% draw downs.

Edited yesterday at 12:17 PM by nwoodman

[SafetyinNumbers]

4 hours ago, nwoodman said:

Purely a curiosity, but as we close out the year it’s interesting that the FRFH (USD) share price is +/- the same as a Class A but with 40 years difference to the month.  One hell of a compounding curve over a 40 year time horizon.  Magnificent!

 

 

EDIT: Those minor perturbations between the voting vs weighing machine no doubt were hotly debated and in the end, corrected, but also resulted in large wealth transfers.  Also you needed to survive the 50% draw downs.

Thanks for sharing! I love these analogs because it opens my mind up to right tail potential.

1984-1994 is where a lot of the magic happened. BRK’s BV went from ~$1100 to ~$10000 or a ~25% CAGR and the multiple went from ~1.35x to ~2x. Combined that was a ~30% CAGR. Since then it’s been closer to ~12% which is still great but well below most quality investors hurdle rates.

 

Fairfax is a lot bigger than BRK was in 1984 and is actually a lot closer to BRK’s size (market cap) at the end of 1994 but given the set up, it’s not out of the realm of possibility that FFH can match that decade over the next decade. My hurdle rate is 10% so to have that right tail potential with margin of safety is very compelling to me.