Fairfax 2024

[Viking]

25 minutes ago, Dinar said:

I think the big risks are the northeast wind that Prem referred to (what is that by the way?), general major catastrophe - say massive earthquake in NY, 5-10% annual inflation that causes reserves to be inadequate, and lousy performance on the investment side.   While everyone is cheering for Prem, I remain a skeptic on the investment side.  (Tyku/Davos Brands, Shawkei, BDT, Blackberry - none of these were any good, and Eurobank was not exactly a home run.)  Their equity and quasi-equity - BDT has massively underperformed S&P while taking much greater risk - Shawkei is clearly quite levered, so is Eurobank, and Tyku/Davos from what I heard, could be a mistake, was never profitable, and without a greater  fool - Diageo could have been a zero.  

@Dinar If Fairfax has performed so poorly on the investment side, how did they compound book value at 18.4% over 38 years? Insurance/underwriting?

Edited April 17 by Viking

[Santayana]

2 hours ago, TwoCitiesCapital said:

How many billions were left on the table from 2016 - 2021 as we waited in short-bonds earnings practically nothing? What would those billions have compounded into if redeployed at covid lows? Or used to increase share repurchases? Or invested into treasuries that could've been sold at massive premiums near the covid lows? 

We'll never know - but there was a huge cost to shareholders for waiting.

 

Perhaps it paid off - but it paid off because we got lucky with the steepest hiking cycle in history paired with an incredibly strong insurance markets allowing a greater weight of portfolio to be reinvested at high rates versus what was invested/missing interest at low rates. Those didn't have to happen in tandem and isn't what Fairfax was prepared for when they went to 0 (you'll recall they did it under Trump expecting higher rates due to economic growth - not inflationary animal spirits under Biden). 

But they were mostly right 2016-2018 when we did have a rising rate environment, and then 2019-2020 may have been the steepest cutting cycle in history, and I don't think it was very easy to see that was coming.   Given how much lower the float was in 2016 vs. now, how much do you really think they could have made by taking on duration when the 10yr was trading at ~2%?

[hasilp89]

3 hours ago, Viking said:

What do people on the board feel are the biggest risks when investing in Fairfax today?

 

32 minutes ago, Dinar said:

 

I think the big risks are the northeast wind that Prem referred to (what is that by the way?), general major catastrophe - say massive earthquake in NY, 5-10% annual inflation that causes reserves to be inadequate,

 

For me it’s on the insurance side. It’s part of the business, but the unknown unknowns especially with global operations (1 in a 100 year flood happening right now in the UAE - hopefully Gulf doesn’t have a bunch of flood policies).
While I understand the culture of the management and generally trust them one. poor decision layered on one misprinted risk can hurt. Unlikely it puts a large hole in the business but it could slow things down.

 

Additionally I think it’s worth considering how strong the underwriting market has been. It can’t be this strong forever and premiums won’t go up in a straight line. Again doesn’t mean they drop 20% but it’s not out of the realm of possibility to see some declines.

[MMM20]

43 minutes ago, Viking said:

@Dinar If Fairfax has performed so poorly on the investment side, how did they compound book value at 18.4% over 38 years? Insurance/underwriting?

Some people believe that Fairfax has performed poorly on the investment side and won’t be convinced otherwise by any amount of data or examples.
 

[TwoCitiesCapital]

1 hour ago, Santayana said:

But they were mostly right 2016-2018 when we did have a rising rate environment, and then 2019-2020 may have been the steepest cutting cycle in history, and I don't think it was very easy to see that was coming.   Given how much lower the float was in 2016 vs. now, how much do you really think they could have made by taking on duration when the 10yr was trading at ~2%?

 

They were wrong for 2015/2016, neutral in 2017, right 2018/2019, and wrong in 2020. All that benefit of missing unrealized losses from 2016-2019 was reversed to missing out on billions of unrealized gains in 2020 making the outcome  moot. The cost of that round trip to nowhere? 2-3% a year minimum in interest income in billions so 10-12% minimum. 

 

And what happened to any 10-year bond bought in 2015/2016? They were 4-5 year bonds in 2022 when rates really started rising. You'd have lost roughly 8-10% at most in 2022. So you'd still be a positive  net on those bonds even after the rise. 

 

What saved them and made the trade work was float exploding as rates rose. The cost of 2-3% a year was borne on a much smaller portfolio than the benefit of being short duration as rates rose 5% on a much larger portfolio. But they couldn't have known/planned for that. It was luck that insurance pricing exploded post-covid. 

 

And we're still only considering a buy/hold scenarios. Fairfax has a history of being savvy with rates - I really think the most likely scenario, had they actually had duration on, would've been them selling it for huge gains to redeploy elsewhere. 

 

Point is - if you're giving them credit for being short duration in 2022, we also have to net that against under-earning from 2016-2021. 

 

 

 

Edited April 18 by TwoCitiesCapital

[Dinar]

1 hour ago, Viking said:

@Dinar If Fairfax has performed so poorly on the investment side, how did they compound book value at 18.4% over 38 years? Insurance/underwriting?

Leverage in a bull market, coupled with a good insurance business.  

[Dinar]

30 minutes ago, MMM20 said:

Some people believe that Fairfax has performed poorly on the investment side and won’t be convinced otherwise by any amount of data or examples.
 

O'k, wise guy, what has been the return on the equity & quasi equity portfolio over the past 5, 10, and 20 years and how does that compare with the S&P?  Then adjust for the fact that Shawkei, Tyku/Davos Brands and Eurobank where way riskier investments than the S&P 500, and that Fairfax should have earned liquidity and risk premiums above the S&P.  

[SafetyinNumbers]

18 minutes ago, Dinar said:

O'k, wise guy, what has been the return on the equity & quasi equity portfolio over the past 5, 10, and 20 years and how does that compare with the S&P?  Then adjust for the fact that Shawkei, Tyku/Davos Brands and Eurobank where way riskier investments than the S&P 500, and that Fairfax should have earned liquidity and risk premiums above the S&P.  

I think Fairfax is an absolute return investor and not a relative return investor. They aren’t trying to beat the S&P/500.

[Dinar]

26 minutes ago, SafetyinNumbers said:

I think Fairfax is an absolute return investor and not a relative return investor. They aren’t trying to beat the S&P/500.

And they should be, however what is then the appropriate benchmark?  In other words, how do you judge the performance of the portfolio?

Edited April 18 by Dinar

[Cigarbutt]

14 hours ago, UK said:

Is it fair to conclude that their duration of insurance liabilities decreased quite substantially in last six years, from this info bellow?

This line of reasoning raises the possibility that one comes to an incorrect conclusion.

The first issue is that float is based on net (not gross) insurance reserve liabilities (when premiums are ceded to another party of the reinsurance type so is the "float"). In 2017, FFH retained 81.8% of gross premiums and in 2023, 78.6% of gross premiums. So this partly explains why the growth in float was slower than the growth in gross premiums and is an issue unrelated to the "duration" of insurance liabilities.

The second and more important issue is more conceptual (and even mathematical). To assess the validity or signal when comparing the growth of premiums and float, one would have to assume some kind of steady state (for example, constant growth over time). Think of an insurer which decides to significantly curtail new business or even move to run-off. Then the negative growth in gross premiums would happen faster than the decline in float because of the lag effect and the shape of the payment distribution over time, an issue not linked to a change in the "duration" of insurance liabilities. 

Recently, FFH has grown ++ the gross premiums component:

The relative float growth will catch up over time especially if the growth in gross premiums written settles down (it's just a timing issue at this point) and this temporary decoupling is essentially unrelated to a hypothetical change in the "duration" of insurance liabilities.

One way to support the above is to observe, over time, the composition and distribution of the insurance product lines. This appears to be quite constant. On a recent conference call, the CFO mentioned an insurance liability duration of 3.8 years and i would suggest that this duration hasn't changed much in the last few years.

-----

Reading the above, i'm not sure it makes sense? Being simple minded (thinking along first principles is above my capacity), i always try analogies. So, for example, if you try to be more friendly to others around you, eventually, people around you will become more friendly to you (no guarantee of course) but there is a lag effect and your rate of growth of being nicer to others will precede the rate of growth of others being nice to you. The opposite obviously can occur but there may be a lag effect in the other direction as well due to the accumulation of social capital. Makes sense?

[SafetyinNumbers]

19 minutes ago, Dinar said:

And they should be, however what is then the appropriate benchmark?  In other words, how do you judge the performance of the portfolio?

I use 10% as my hurdle rate since that’s an estimate of long term equity returns. I’m not sure what they use. 

[UK]

3 hours ago, Cigarbutt said:

This line of reasoning raises the possibility that one comes to an incorrect conclusion.

The first issue is that float is based on net (not gross) insurance reserve liabilities (when premiums are ceded to another party of the reinsurance type so is the "float"). In 2017, FFH retained 81.8% of gross premiums and in 2023, 78.6% of gross premiums. So this partly explains why the growth in float was slower than the growth in gross premiums and is an issue unrelated to the "duration" of insurance liabilities.

The second and more important issue is more conceptual (and even mathematical). To assess the validity or signal when comparing the growth of premiums and float, one would have to assume some kind of steady state (for example, constant growth over time). Think of an insurer which decides to significantly curtail new business or even move to run-off. Then the negative growth in gross premiums would happen faster than the decline in float because of the lag effect and the shape of the payment distribution over time, an issue not linked to a change in the "duration" of insurance liabilities. 

Recently, FFH has grown ++ the gross premiums component:

The relative float growth will catch up over time especially if the growth in gross premiums written settles down (it's just a timing issue at this point) and this temporary decoupling is essentially unrelated to a hypothetical change in the "duration" of insurance liabilities.

One way to support the above is to observe, over time, the composition and distribution of the insurance product lines. This appears to be quite constant. On a recent conference call, the CFO mentioned an insurance liability duration of 3.8 years and i would suggest that this duration hasn't changed much in the last few years.

-----

Reading the above, i'm not sure it makes sense? Being simple minded (thinking along first principles is above my capacity), i always try analogies. So, for example, if you try to be more friendly to others around you, eventually, people around you will become more friendly to you (no guarantee of course) but there is a lag effect and your rate of growth of being nicer to others will precede the rate of growth of others being nice to you. The opposite obviously can occur but there may be a lag effect in the other direction as well due to the accumulation of social capital. Makes sense?

 

Thanks!

[Cigarbutt]

11 hours ago, Dinar said:

I think the big risks are the northeast wind that Prem referred to (what is that by the way?), general major catastrophe - say massive earthquake in NY?

-Attempt to answer this question, a reference to investment performance and another question

The reference may be related to wind risk in the Northeast USA (it's tricky to refer to this risk as there may be climatic repercussions...i found the picture below which is climate-agnostic):

i know that a "roughly" 1% exceedance probability is nothing to be excited about for the typical human but, when reading human recollections of such events in the New England area during the past century, people describe unexpected change with sunny skies changing to some kind of roar. People who tell these stories had either foresight or were simply lucky. 

Opinion: FFH is relatively well positioned for such event but who really knows?

-----

Opinion: To explain FFH's stock value outperformance over the last 38 years by referring to "leverage in a bull market" is likely a (over) simplification. They used to compare (in older annual reports, in the CEO's section) their relative investment outperformance compared to bond indices and large stock indices and the results were impressive (Graham-Doddsville type), a good thing because their underwriting performance was really terrible, then).

-----

Opinion: There is a short supply of discussion on the evolution of their investment stance (apart from sparse and intermittent mention of the cost part related to their previous posture). They used to position their portfolio in order to withstand a similar 1% exceedance probability event, a protection against the general markets not just wind but who cares these days? 

Edited April 18 by Cigarbutt
spelling

[MMM20]

12 hours ago, Dinar said:

O'k, wise guy, what has been the return on the equity & quasi equity portfolio over the past 5, 10, and 20 years and how does that compare with the S&P?  Then adjust for the fact that Shawkei, Tyku/Davos Brands and Eurobank where way riskier investments than the S&P 500, and that Fairfax should have earned liquidity and risk premiums above the S&P.  

I wasn’t referring to you - I know you can change your mind. Other people I talk to IRL continue to push back similarly, though, harping on Blackberry and other cherry-picked bad outcomes, despite what is now a satisfactory result over any long term period. They tend to be more GARP/ quality growth investors who don’t really like or get old school value and seem to expect a reversion to ZIRP and 2010s environment in which they built their careers. I guess we’ll see about that.
 

My own view is that this is a quality growth stock but driven by an old school value investor, so for many it just does not compute. Still, if FFH had outperformed consistently in the broadly defined equity portfolio over the past ~15 years, there would be no debating that this is a quality compounder and it would trade at ~3x book today. And do you include pet insurance? Do you include digit? Do you include the other insurance acquisitions? Would those not be considered “equity investments” inside of any conglomerate? I think the whole bifurcation is the wrong way to look at it. So much comes down to how you frame the analysis. 
 

Anyway, they seem set up to outperform peers for years and still we’re still at 7x p/e and 1.1x book. 
 

Edited April 18 by MMM20

[giulio]

12 hours ago, Viking said:

@Dinar If Fairfax has performed so poorly on the investment side, how did they compound book value at 18.4% over 38 years? Insurance/underwriting?

I cannot claim to be an expert in the field so any input is appreciated, here is my 2c:

 

An insurer would need to write @85% CR or below to achieve those results without a strong performance on the investment side. Some lines of insurance could allow you to achieve that CR. Or a combination of niche expertise and strong technology (i.e. low loss ratio and low expense ratio).

For example, Kinsale has a "standard" $3b portfolio but excels on the uw side.

 

I am not sure if an insurer can scale and still maintain such a CR. 

Another example would be Francis Chou at Wintaii: both strong uw and investment expertise, but he write $50M in premium on $150M of equity.

@Parsad correct me if I am wrong here.

What does Watsa mean when he says that to achieve 15% ROE FFH needs a 95% CR and a 7% return on investment portfolio?

The math is simple: a 7% ROI (both interests, dividends and gains realized and unrealized) translates to 5.1% after tax (26.5% Canadian rate). At 3x leverage (thanks to float and some debt) this equals 15% ROE. 

UW profits would more than cover FFH other expenses (overhead, interests, run off).

Now 75% of the portfolio is fixed income in nature (A) and 25% is equities (B). 

If (A) earns 4% and (B) 16% you get 7% ROI.

 

This is my extremely simplistic view and the way I would look at an insurer with demonstrated uw discipline and a focus on investment performance.

It is not easy to find both these elements. It is even more rare to find an investment team that aims for superior returns in BOTH equities and bonds!

Most insurers just park float in bonds and match liabilities. At FFH we benefit from an incredible astute team that looks for bargains even in bonds. Do not underestimate this.

 

I think the above equation completely melts down in a world of 0-2% return on bonds and an equity portfolio "drowned" in hedges, shorts and some bad investments. Still, Over the last 10 years, FFH BV has compounded at 10%.

 

I remain optimistic about the future and believe that they will achieve their stated goals. 

 

G

 

 

 

[giulio]

2 hours ago, Cigarbutt said:

They used to compare (in older annual reports, in the CEO's section) their relative investment outperformance compared to bond indices and large stock indices and the results were impressive (Graham-Doddsville type)

It would be great to see them post this again!

[Xerxes]

16 minutes ago, MMM20 said:

I wasn’t referring to you - I know you can change your mind. Many other people have pushed back similarly though harping on Blackberry and other mistakes.
 

My own view is that if they had outperformed consistently in the broadly defined equity portfolio over the past ~15 years, there would be no debating that this is a quality compounder and it would trade at ~3x book today. And do you include pet insurance? Do you include digit? Do you include the other insurance acquisitions? Would those not be considered “equity investments” inside of any conglomerate? I think that whole bifurcation is the wrong way to look at it.
 

Anyway, they seem set up to outperform peers for years and still we’re still at 7x p/e and 1.1x book. 
 

it maybe that in the 2010s, FFH was a “holding company” with its investment and therefor its fortune was heavily tied in BB, Resolute etc. Still worse they had an unusual appetite for large illiquid holdings. 

 

A “holding company”’s fortune improves only on the back of its investments. One has to sell an investment in gain to re-deploy elsewhere. And they just happened to be bad investment in 2010’ FFH era. 
 

Today, it is an “operating company” where the operating cash flows gushes in to make new investment, letting past investment mistakes dwindle in size harmlessly. 
 

 

 

 

Edited April 18 by Xerxes

[Hoodlum]

Congrats to Prem.   Well deserved. 
 

https://www.businesswire.com/news/home/20240418306017/en/Prem-Watsa-Named-2024-Insurance-Hall-of-Fame-Laureate

 

NEW YORK--(BUSINESS WIRE)--The International Insurance Society (IIS) has named Prem Watsa, the Founder, Chairman and CEO of Toronto-based Fairfax Financial Holdings Limited, the 2024 Insurance Hall of Fame Laureate. Mr. Watsa will be formally honored at an awards ceremony on Nov. 17, 2024 at the Hyatt Regency Miami. The awards ceremony kicks off the Global Insurance Forum, running from Nov. 17-19, 2024.

 

 

“As the 2024 Insurance Hall of Fame Laureate, Mr. Prem Watsa's legacy of excellence, ingenuity and integrity continues to inspire future generations in the insurance industry and beyond,” says Josh Landau, President of the International Insurance Society. “Mr. Watsa is a visionary leader whose wisdom and foresight have left an indelible mark on the financial landscape in Canada and across the globe.”

 

[Dinar]

@MMM20, Look I own the stock, and I give Prem credit for the correct calls on the bond market, the building of the insurance business, and investments in India.  If Prem is comfortable with venture capital - Digit, Tyke/Davos, etc.., then he is certainly comfortable with GARPY names or should be.  

[vinod1]

14 hours ago, Viking said:

@Dinar If Fairfax has performed so poorly on the investment side, how did they compound book value at 18.4% over 38 years? Insurance/underwriting?

 

I ran the numbers a whole while back, but if they have indexed their bond and stock portfolio, they would have pretty much achieved close to that without that really stunning first year. The main thing is the model. 

 

Run an efficient P&C company -> Gather long term float -> Invest that float in stocks and bonds

 

You dont have to be spectacular in underwriting and if you can just get the index returns for stocks and bonds, especially when interest rates are normal, you get outstanding results. 

 

Attributing performance is not straightforward. And take Fairfax claims of bond and stock performance with a grain of salt. It is basically an example of "How to Lie with Statistics". But I do not attribute that to any attempt to mislead, just plain enthusiasm. 

 

I would give Fairfax one thing, they did the right thing in sticking with cash when bond yields are low, resisting the institutional imperative (as many many investors on this board must have done as well), and invested in bonds when they normalized. Not easy, but they did that really well.

 

Vinod

 

 

 

 

[Hoodlum]

18 hours ago, Viking said:

@petec

I remember when everyone thought the 10 year US Treasury yield would peak at 3%. The fact the fixed income team did not meaningfully extend duration earlier and at much lower yields is amazing. 

 

I remember these discussions as well.  Fortunately, the bond team recognized that the rate increase had a ways to go at that time. 

[MMM20]

On 4/18/2024 at 10:11 AM, Dinar said:

@MMM20, Look I own the stock, and I give Prem credit for the correct calls on the bond market, the building of the insurance business, and investments in India.  If Prem is comfortable with venture capital - Digit, Tyke/Davos, etc.., then he is certainly comfortable with GARPY names or should be.  

 

 

I hear you. Either way it makes no sense that FFH still trades where it does, even if some people hate the portfolio and think it's a weird agglomeration of bad businesses and venture type bets.

 

 

Edited April 23 by MMM20
fixing screenshot

[Viking]

2 hours ago, MMM20 said:

 

 

I hear you. Either way it makes no sense that FFH still trades where it does, even if some people hate the portfolio and think it's a weird agglomeration of bad businesses and venture type bets.

@MMM20 It is interesting how everyone views Fairfax’s equity portfolio. Mostly, people seem to view it through the prism of their own investing framework.

 

The reason i like their current equity portfolio so much is more because of a relative perspective: 7 years ago it was stuffed full of underperforming holdings; or holdings with a poor outlook. That is no longer the case (or much less the case). As a result, i expect it to perform much better compared to the portfolio that existed 7 years ago.

Edited April 18 by Viking

[Parsad]

7 hours ago, vinod1 said:

 

I ran the numbers a whole while back, but if they have indexed their bond and stock portfolio, they would have pretty much achieved close to that without that really stunning first year. The main thing is the model. 

 

Run an efficient P&C company -> Gather long term float -> Invest that float in stocks and bonds

 

You dont have to be spectacular in underwriting and if you can just get the index returns for stocks and bonds, especially when interest rates are normal, you get outstanding results. 

 

Attributing performance is not straightforward. And take Fairfax claims of bond and stock performance with a grain of salt. It is basically an example of "How to Lie with Statistics". But I do not attribute that to any attempt to mislead, just plain enthusiasm. 

 

I would give Fairfax one thing, they did the right thing in sticking with cash when bond yields are low, resisting the institutional imperative (as many many investors on this board must have done as well), and invested in bonds when they normalized. Not easy, but they did that really well.

 

Vinod

 

 

 

 

 

+1!  I think they've added tremendous value to their investment return on the bond side...Brian has definitely added significant alpha.  On the equities side, I think they would have done fine as well if they had stayed away from the short positions, etc.  But because of those macro bets, just buying the S&P 500 would have given the same return or better on the equity side. 

 

With Wade leading the way on the equity side going forward, I think you'll start to see better returns.  But we may not do as well on the fixed income side when Brian is gone.  Regardless, with the leverage Fairfax uses in float and debt, they don't need homeruns...just doubles and triples...to hit that 15% ROE.  

 

Cheers!

[Parsad]

8 hours ago, Hoodlum said:

Congrats to Prem.   Well deserved. 
 

https://www.businesswire.com/news/home/20240418306017/en/Prem-Watsa-Named-2024-Insurance-Hall-of-Fame-Laureate

 

NEW YORK--(BUSINESS WIRE)--The International Insurance Society (IIS) has named Prem Watsa, the Founder, Chairman and CEO of Toronto-based Fairfax Financial Holdings Limited, the 2024 Insurance Hall of Fame Laureate. Mr. Watsa will be formally honored at an awards ceremony on Nov. 17, 2024 at the Hyatt Regency Miami. The awards ceremony kicks off the Global Insurance Forum, running from Nov. 17-19, 2024.

 

 

 

“As the 2024 Insurance Hall of Fame Laureate, Mr. Prem Watsa's legacy of excellence, ingenuity and integrity continues to inspire future generations in the insurance industry and beyond,” says Josh Landau, President of the International Insurance Society. “Mr. Watsa is a visionary leader whose wisdom and foresight have left an indelible mark on the financial landscape in Canada and across the globe.”

 

 

Congratulations to Prem!  Truly well deserved.  Cheers!