Fairfax 2024

[Hoodlum]

1 hour ago, Dinar said:

This is a very good point.  However, there was an article a while ago, which stated that many countries in Europe are beginning to require climate insurance.  So while the supply of insurance may increase, the demand increase might be much bigger. 

I believe there will be new areas that will require catastrophe insurance that either lumped it in with other insurance in the past or never thought it could occur in their area.
 

Some areas in the Carolinas got hit very hard from Hurricane Milton and I know from speaking to some of my staff from that area who lived there for over 30 years, they thought they were protected because they were far enough inland.  Even the  NCEI that collect hurricane data in Asheville was unprepared and was offline for almost a month. The NCEI actually moved there over 50 years ago from New Orleans believing they would be protected. 

 

Earlier this month TD Insurance requested the first ever Canada Catastrophe bond. We will see more of this globally. 
 

https://www.artemis.bm/news/td-insurance-first-ever-pure-canada-risk-cat-bond-c150m-mmifs-re-2025-1/
 

TD Insurance, part of Canada’s TD Bank group, is seeking C$150 million in reinsurance from the capital markets through its debut MMIFS Re Ltd. (Series 2025-1) catastrophe bond deal, which would be the first natural cat bond to solely cover perils in that country, Artemis has learned.
 

There are other insurers in Canada that have the scale and natural catastrophe exposure to become cat bond sponsors in future, so this MMIFS Re issuance should serve to further promote the potential for accessing reinsurance through the capital markets to those companies.

 

Edited December 28, 2024 by Hoodlum

[nwoodman]

1 hour ago, Junior R said:

Blackberry also might be a stock that eventually breaks even for Fairfax or goes higher

Yep, never say never.  It’s been on a bit of a tear, after  a break-even quarter and  the Cylance sale for ~$160m plus shares in Arctic Wolf.  After adjustments this gives them $80m now and $40m in a years time.  The fact that they paid $1.4 bn in cash (ouch) in 2018 is history. I am sure we have all written off the BlackBerry investment so it’s like an option on IoT and Secure Comms at this stage.  Hopefully WSB boys get behind it again

 

https://www.blackberry.com/us/en/company/newsroom/press-releases/2024/arctic-wolf-and-blackberry-announce-acquisition-agreement-for-cylance

[petec]

On 12/28/2024 at 3:25 PM, SafetyinNumbers said:

I added a small amount yesterday too. I really shouldn’t at a 45%+ position but the more I learn, the more excited I get about the prospects of 20%+ ROE over the next 5 years given the H4L rates, high return reinvestment opportunities (buybacks, minority interests buy ins) and all of the right tail options in the non-fixed income portfolio (Ki, BIAL, EUROB…).
 

I don’t expect every call to be right just that it is logical in the context in which it was made. 

 

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.

[SafetyinNumbers]

2 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.

4 years ago I didn’t appreciate what a move in interest rates was going to do for base ROE. We hadn’t had the hard market yet either so premiums were a lot smaller and I didn’t know they were going to be able to grow so fast. The margin of safety on earnings is higher now than it was back then even if the stock is now trading at a premium to book vs a discount. 
 

Eurobank may have sustainable ROE of 15%+ which means it’s probably worth north of 2x BV. I’m not saying anyone will pay it anytime soon but it does mean buybacks can meaningfully improve EPS. They may also be able to continue doing accretive deals like Hellenic which seems very accretive. Ki and BIAL are also $100/sh+ opportunities in gains potential each when they IPO. That’s on top of the current FV over CV close to $100/sh. 

 

I think you are correct that it’s an attractive compounder. Forward ROE is likely somewhere between 15-25% over the next 5 years but it makes a big difference where it lands in that range to total returns especially if multiple expansion is has correlation with ROE. 
 

Not everyone invests the same though. That’s what makes a market. 

[petec]

On 12/28/2024 at 11:52 PM, nwoodman said:

The fact that they paid $1.4 bn in cash (ouch) in 2018 is history.

 

Just incredible when you think back.

[petec]

12 minutes ago, SafetyinNumbers said:

Not everyone invests the same though.

 

Absolutely and I did not mean to be critical. Just find it interesting. To me, 4 years ago, Fairfax was priced for nothing to go right, and I liked that because there were many ways for things to go right (even if I wasn't sure when).

 

Today I find it harder (but it is still my largest position).

 

14 minutes ago, SafetyinNumbers said:

Ki and BIAL are also $100/sh+ opportunities in gains potential each when they IPO.

 

This seems rather high to me. What are the underlying assumptions? (Sorry if it has been discussed upthread - I may have missed stuff over the last few weeks.)

[SafetyinNumbers]

28 minutes ago, petec said:

 

Absolutely and I did not mean to be critical. Just find it interesting. To me, 4 years ago, Fairfax was priced for nothing to go right, and I liked that because there were many ways for things to go right (even if I wasn't sure when).

 

Today I find it harder (but it is still my largest position).

 

 

This seems rather high to me. What are the underlying assumptions? (Sorry if it has been discussed upthread - I may have missed stuff over the last few weeks.)

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

[bluedevil]

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. 

 

[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 yesterday at 12:21 AM 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!