Fairfax 2024

[SafetyinNumbers]

1 hour ago, bluedevil said:

I believe the upside in Ki is limited by the fact that BX owns most of the equity.  Unfortunately, when Ki needed to raise money to launch, Fairfax was capital restrained. 

 

What do you calculate as Fairfax’s ownership? What listing price are you assuming in the calculation?

[petec]

5 hours ago, SafetyinNumbers said:

Maybe you can share your own assumptions on BIAL and Ki as they seem high to you, you must have something in mind. 

 

Well, for an stake to be worth $100 per share in gains potential, the gain has to be about $2.2bn. Both companies would need to IPO at $10bn or higher to produce such a gain, and that's before tax. Maths below - mostly from memory so apologies if I have made a stupid mistake.

 

Fairfax owns 20% of Ki. Even assuming it is carried at zero, to generate a $2.2bn gain it needs to IPO at a valuation over $10bn. That's over 10x GWP on the platform and strikes me as an optimistic number unless we have a very strong thesis that Ki has a deep competitive moat.

 

FFH owns 29% of BIAL (42% of FIH which owns 69% of BIAL after the recent addition). FIH carried 59% of BIAL at $1.6bn in q3 and the recent 10% addition cost $255m, so the threshold for gains on FIH's 69% is $1.85bn. That implies $2.7bn for all of BIAL and $770m for FFH's 29% (excluding any impact on performance fees). To produce a $2.2bn gain to FFH BIAL has to IPO at $770m + $2.2bn = $3bn for 29%, or just over $10bn overall, or 4x the valuation that Siemens have just realised.

 

As I said - seems high to me. But if you have evidence that I am wrong, I'll be delighted.

 

 

 

 

[SafetyinNumbers]

On 12/30/2024 at 2:02 PM, petec said:

 

Well, for an stake to be worth $100 per share in gains potential, the gain has to be about $2.2bn. Both companies would need to IPO at $10bn or higher to produce such a gain, and that's before tax. Maths below - mostly from memory so apologies if I have made a stupid mistake.

 

Fairfax owns 20% of Ki. Even assuming it is carried at zero, to generate a $2.2bn gain it needs to IPO at a valuation over $10bn. That's over 10x GWP on the platform and strikes me as an optimistic number unless we have a very strong thesis that Ki has a deep competitive moat.

 

FFH owns 20% of Ki via Class A shares but 50% of the shares outstanding are preferred shares (Class C) similar to what FFH just bought back from OMERS in Brit. They are structured to be paid back with new shares at the listing price so effectively FFH has 40% ownership which will be diluted on IPO. I do think 5-10x premiums is not unreasonable for an AI powered insurance startup growing premiums exponentially backed by Blackstone. I didn’t previously appreciate how these minority interest structures were materially understating FFH economics. Those benefits will also come in when Allied World and Odyssey are bought back in over the next few years. 

 

 

Edited January 3 by SafetyinNumbers

[petec]

14 minutes ago, SafetyinNumbers said:

FFH owns 20% of Ki via Class A shares but 60% of the shares are held by preferred shares similar to what FFH just bought back from OMERS in Brit. They are structured to be paid back with new shares at the listing price so effectively FFH has 40% ownership which will be diluted on IPO. I do think 5-10x premiums is not unreasonable for an AI powered insurance startup growing premiums exponentially backed by Blackstone. I didn’t previously appreciate how these minority interest structures were materially understating FFH economics. Those benefits will also come in when Allied World and Odyssey are bought back in over the next few years. 

 

 

Thanks. Where’s the disclosure on this structure? I absolutely agree 5x is more believable. 

[SafetyinNumbers]

31 minutes ago, petec said:

 

 

FFH owns 29% of BIAL (42% of FIH which owns 69% of BIAL after the recent addition). FIH carried 59% of BIAL at $1.6bn in q3 and the recent 10% addition cost $255m, so the threshold for gains on FIH's 69% is $1.85bn. That implies $2.7bn for all of BIAL and $770m for FFH's 29% (excluding any impact on performance fees). To produce a $2.2bn gain to FFH BIAL has to IPO at $770m + $2.2bn = $3bn for 29%, or just over $10bn overall, or 4x the valuation that Siemens have just realised.

 

 

My BIAL math was overstated but I don’t think the Siemens price is very relevant to where BIAL will trade once it lists. The whole FIH is marked at a fraction of intrinsic value. The spread might not be $100/share but it’s pretty big.

[SafetyinNumbers]

1 minute ago, petec said:

Thanks. Where’s the disclosure on this structure? I absolutely agree 5x is more believable. 

The filings are available here: https://find-and-update.company-information.service.gov.uk/company/12594708/filing-history?page=2

 

Articles attached.

 

 

Ki Articles of Incorporation 9.23.20.pdf

[petec]

8 minutes ago, SafetyinNumbers said:

My BIAL math was overstated but I don’t think the Siemens price is very relevant to where BIAL will trade once it lists. The whole FIH is marked at a fraction of intrinsic value. The spread might not be $100/share but it’s pretty big.

Oh I’m sure there will be a decent sized mark, and growth thereafter. But I don’t think Siemens are stupid. If IPO is a 2025 affair, they’ve no need to leave *that much* on the table. 

[petec]

4 minutes ago, SafetyinNumbers said:

The filings are available here: https://find-and-update.company-information.service.gov.uk/company/12594708/filing-history?page=2

 

Articles attached.

 

 

Ki Articles of Incorporation 9.23.20.pdf 4.06 MB · 0 downloads

Thank you! 

[SafetyinNumbers]

1 minute ago, petec said:

Oh I’m sure there will be a decent sized mark, and growth thereafter. But I don’t think Siemens are stupid. If IPO is a 2025 affair, they’ve no need to leave *that much* on the table. 

Maybe but they use that capital to win infrastructure contracts. They probably have other deals to bid on which will have higher returns and they probably were convinced by BIAL that they will have the future business there despite no longer being a shareholder. 

[petec]

6 minutes ago, SafetyinNumbers said:

Maybe but they use that capital to win infrastructure contracts. They probably have other deals to bid on which will have higher returns and they probably were convinced by BIAL that they will have the future business there despite no longer being a shareholder. 

Directionally fair, but the returns hurdle is key, and the IRR on an imminent IPO is huge. 

[SafetyinNumbers]

3 minutes ago, petec said:

Directionally fair, but the returns hurdle is key, and the IRR on an imminent IPO is huge. 

 

Not if existing shareholders will be locked up for some time. Plus its Anchorage that is supposed to IPO, not BIAL, directly.

[petec]

5 minutes ago, SafetyinNumbers said:

 

Not if existing shareholders will be locked up for some time. Plus it’s Anchorage that is supposed to IPO, not BIAL, directly.

Fair points, especially if we are hoping for say 2x not 4x. 

[Viking]

13 hours ago, petec said:

 

I don't really understand this logic now vs 4 years ago when FFH was a nested egg of value. Today buybacks are worth far less and several of the right tail options have happened. What's the right tail at Eurobank, for example? Are our stakes in Ki (or even BIAL) really big enough to make a difference? 

 

4 years ago FFH was fairly easy to identify as a massive value opportunity. Today it looks more like a very attractive compounder to me.

 

What makes Fairfax such an interesting investment over the past 4 years is it keeps changing right before our eyes.

1.) Back in 2020 it was a turnaround - the company had stumbled badly (putting it lightly) from 2010 to 2020 with the investment management side of the business. By the end of 2022, it was clear the turnaround had been successfully executed.

- The equity hedge position had been exited in late 2016.

- The last of the short positions had been exited in late 2020.

- It was becoming increasingly clear their equity framework had been 'tweaked' around 2018 and the equity portfolio (taken as a whole) was slowly moving up the quality curve (in terms of management, business results and prospects).

2.) By early 2023, Fairfax had become a value play. Not a particularly well run company (that was the perception of most investors). But statistically very cheap (trading at 1 x book value).

3.) Today?

- How good is its insurance business?

- How good is its investment management business? 

- How good is its management team?

 

What kind of company is Fairfax? To value Fairfax today, an investor has to get this right.

 

Do investors have it right today? No, I don't think they do. They continue to underestimate the quality of the company. As a result, I continue to think Fairfax is undervalued.  

 

Fairfax is trading today at a P/BV = 1.3 and a PE of 8.7 (using my YE estimate for BV and EPS). That is cheap for an average company.

 

If we include 'excess of FV over CV' for associate and consolidated equity holdings, Fairfax is trading today at a P/BV = 1.2 and a PE of about 8. That is wicked cheap for a high quality company.

 

 

How much are they undervalued?

 

That is, literally, the million dollar question. Of course, we will only get our answer with the passage of time. 

 

What has made Fairfax such as difficult investment for many investors over the past 4 years is it keeps changing right in front of our eyes. Being open minded and focussed on the facts and the improving fundamental has been critical. As 'the story' changed, the valuation model also needed to change. Just like today.  

Edited December 30, 2024 by Viking

[yesman182]

@Viking can you help me understand what makes the insurance portion of the business special, besides being a disciplined underwriter? 
 

buffet has talked about how Geico’s advantage is not having agents and being a low cost producer. He has also talked about how Berkshire's reinsurance operations have a moat because they can write large dollar coverage, quickly and with their high capital the other party can be sure they will be around to pay in 40 years. 
 

The hidden assets on the balance sheet, the bond duration, the management caliber are often talked about, but I don’t personally have an understanding how FFHs different insurance operations are different from their competitors. Does a chapter in your book cover this? 

[Viking]

1 hour ago, yesman182 said:

@Viking can you help me understand what makes the insurance portion of the business special, besides being a disciplined underwriter? 
 

buffet has talked about how Geico’s advantage is not having agents and being a low cost producer. He has also talked about how Berkshire's reinsurance operations have a moat because they can write large dollar coverage, quickly and with their high capital the other party can be sure they will be around to pay in 40 years. 
 

The hidden assets on the balance sheet, the bond duration, the management caliber are often talked about, but I don’t personally have an understanding how FFHs different insurance operations are different from their competitors. Does a chapter in your book cover this? 

 

@yesman182, I have family coming over tonight for dinner... but to get you started, here is what Buffett had to say:

 

“With the acquisition of General Re — and with GEICO’s business mushrooming — it becomes

more important than ever that you understand how to evaluate an insurance company. The key

determinants are:

1.) the amount of float that the business generates;

2.) its cost; and

3.) most important of all, the long-term outlook for both of these factors.”

Warren Buffett – Berkshire Hathaway 1998AR

 

The key is versus expectations. My view is Mr. Market views Fairfax's insurance business as low to average (at best) quality.

 

You can also read Chapter 4 - Float

Fairfax Financial Volume 2 - Dec 2 2024.pdf

[gary17]

3 hours ago, Viking said:

 

@yesman182, I have family coming over tonight for dinner... but to get you started, here is what Buffett had to say:

 

“With the acquisition of General Re — and with GEICO’s business mushrooming — it becomes

more important than ever that you understand how to evaluate an insurance company. The key

determinants are:

1.) the amount of float that the business generates;

2.) its cost; and

3.) most important of all, the long-term outlook for both of these factors.”

Warren Buffett – Berkshire Hathaway 1998AR

 

The key is versus expectations. My view is Mr. Market views Fairfax's insurance business as low to average (at best) quality.

 

You can also read Chapter 4 - Float

Fairfax Financial Volume 2 - Dec 2 2024.pdf 43.59 MB · 11 downloads

wow did you type this up with LaTeX

[maplevalue]

Closed the year at exactly $2000!

[KFRCanuk]

7 hours ago, maplevalue said:

Closed the year at exactly $2000!

December 29, 2023 close was $1228.90! What a year !! Repeat in 2025!

Edited January 1 by KFRCanuk

[backtothebeach]

Even better adjusted for the dividend.
 

Return in 2024:
+53% in USD

+66% in CAD

 

Congrats to all! A huge shoutout and thank you to @Viking, @SafetyinNumbers, and all others who so generously share and discuss Fairfax here. And to @Parsad especially for making it all possible.

[villainx]

On 12/30/2024 at 7:50 PM, Viking said:

I have family coming over tonight for dinner...

 

Feel like you are leaving us hanging a little here.  What was dinner and how was it?

 

[bluedevil]

On 12/30/2024 at 2:22 PM, SafetyinNumbers said:

FFH owns 20% of Ki via Class A shares but 60% of the shares are held by preferred shares similar to what FFH just bought back from OMERS in Brit. They are structured to be paid back with new shares at the listing price so effectively FFH has 40% ownership which will be diluted on IPO. I do think 5-10x premiums is not unreasonable for an AI powered insurance startup growing premiums exponentially backed by Blackstone. I didn’t previously appreciate how these minority interest structures were materially understating FFH economics. Those benefits will also come in when Allied World and Odyssey are bought back in over the next few years. 

 

 

 

 

Can you say more about why Fairfax "effectively" has 40% ownership of Ki?  The filings ive seen say that Fairfax owns Class A (20%), while BX owns Class B and Class C (80%), excluding a smaller number of shares for the CEO.  See eg the full accounts from 2023. 

I confess i have not tried to go through the documents with a fine tooth comb, but i haven't seen something that suggests Fairfax enjoys 40% of the economics, nor do i follow why BX being repaid with new shares at the listing price would double Fairfax's economics.  Not doubting it, just trying to understand.  

 

Personally, I would be very happy if Ki IPOs at a 3 billion valuation, or 3x.   Digit -- a very exciting asset -- IPO'd with about 1 billion of premium and IPO'd at a 3bn value.

[SafetyinNumbers]

3 hours ago, bluedevil said:

 

 

Can you say more about why Fairfax "effectively" has 40% ownership of Ki?  The filings ive seen say that Fairfax owns Class A (20%), while BX owns Class B and Class C (80%), excluding a smaller number of shares for the CEO.  See eg the full accounts from 2023. 

I confess i have not tried to go through the documents with a fine tooth comb, but i haven't seen something that suggests Fairfax enjoys 40% of the economics, nor do i follow why BX being repaid with new shares at the listing price would double Fairfax's economics.  Not doubting it, just trying to understand.  

 

Personally, I would be very happy if Ki IPOs at a 3 billion valuation, or 3x.   Digit -- a very exciting asset -- IPO'd with about 1 billion of premium and IPO'd at a 3bn value.

That’s how I interpret the articles I attached above. I’m not a lawyer so could definitely have it wrong! I’m wrong a lot as I’m always trying to fill in the blanks when provided with incomplete information. This sort of structure does make sense and is consistent with other deals Fairfax has done except with this option to IPO. It’s really brilliant if that’s in fact the intent. It’s a home run for FFH and BX so it makes sense that’s how it works.

 

I took a screen shots of some key parts in the articles that influenced my thinking. I figure we’ll learn more at the AGM at the latest so it’s not that important except it highlights the abundance of material right tails that are in the portfolio.

[bluedevil]

Got it, thank you. 

I think you are right, which is awesome.

BX owns 60% and FFH owns 40% of the "true" equity

BX owns a large chunk of Class C stock that can be repurchased at an 8% IRR