Fairfax 2024

[Thrifty3000]

Step 1) Read this:
 

"We had by far the best year in our history. A record underwriting profit of $1.5bn and net earnings of $4.4bn. BVPS increased 25% to US$940. In the last 3 years, our BVPS has doubled. Our operating income of $3.9bn may continue at these levels for the next 4 years.” - Prem

Step 2) Study the last column, paying particular attention to the bottom right corner of this page in the annual report:

Step 3) Combine knowledge gleaned from steps 1 & 2 and imagine how the chart will look four years from now.

 

Step 4) Enjoy watching the share price climb to $2,000+ USD.

[SafetyinNumbers]

11 minutes ago, Thrifty3000 said:

Step 1) Read this:
 

"We had by far the best year in our history. A record underwriting profit of $1.5bn and net earnings of $4.4bn. BVPS increased 25% to US$940. In the last 3 years, our BVPS has doubled. Our operating income of $3.9bn may continue at these levels for the next 4 years.” - Prem

Step 2) Study the last column, paying particular attention to the bottom right corner of this page in the annual report:

Step 3) Combine knowledge gleaned from steps 1 & 2 and imagine how the chart will look four years from now.

 

Step 4) Enjoy watching the share price climb to $2,000+ USD.

Prem also highlighted the cushioning effect of IFRS17 on earnings. Lower volatility in earnings should make the shares more attractive to quants which helps the multiple. IFC trades north of 2.5x BV with similar ROE expectations. Maybe it will take the S&P/TSX 60 add to get us through all of the value investors that are ready to sell at between 1.2-1.5x BV but that’s where I think we’re going. 

 

[ander]

6 hours ago, Thrifty3000 said:

Step 1) Read this:
 

"We had by far the best year in our history. A record underwriting profit of $1.5bn and net earnings of $4.4bn. BVPS increased 25% to US$940. In the last 3 years, our BVPS has doubled. Our operating income of $3.9bn may continue at these levels for the next 4 years.” - Prem

Step 2) Study the last column, paying particular attention to the bottom right corner of this page in the annual report:

Step 3) Combine knowledge gleaned from steps 1 & 2 and imagine how the chart will look four years from now.

 

Step 4) Enjoy watching the share price climb to $2,000+ USD.

And further out, I'm guessing closer to $4,000+ USD in 7 years. Likely should be $1500 plus today and compound 17% per year gets you there.

[Viking]

Now that Fairfax's annual report is out I am able to update a few things. I thought I would start with the equity holdings. The AVLN position (from the Riverstone UK sale) was completely exited by year end 2023. As a result, the significant noise from this holding has been eliminated. We now have a clear view of exactly what Fairfax's position is in its various equity holdings. 

 

I wonder how much Fairfax spend exiting the AVLN position in 2023? My guess is it was a significant use of cash. 

----------

What was the change in value of Fairfax’s equity portfolio to March 8, 2024?

 

March 8, 2024

 

Fairfax’s equity portfolio (that I track) had a total value of about $19 billion at March 8, 2024. This is an increase of about $611 million (pre-tax) or 3.3%.

 

 

I include the FFH-TRS position in the mark to market bucket and at its notional value. 

 

My tracker portfolio is not an exact match to Fairfax’s actual holdings. My summary has been updated to include information from Fairfax’s 2023 annual report. My tracker portfolio is useful only as a tool to understand the rough change in Fairfax’s equity portfolio (and not the precise change).

 

Split of total holdings by accounting treatment

 

About 47% of Fairfax’s equity holdings are mark to market - and will fluctuate each quarter with changes in equity markets. The other 53% are Associate and Consolidated holdings.

 

Over the past couple of years, the share of the mark to market portfolio has been shrinking. This means Fairfax's quarterly results will be less impacted by volatility in equity markets.

 

 

Split of total gains by accounting treatment

• The total change is an increase of $611 million = $26.55/share
• The mark to market change is an increase of $281 million = $12.21/share. The change in this bucket of holdings will show up in ‘net gains (losses) on investments’ (along with changes in the value of the fixed income portfolio) when Fairfax reports results each quarter.

 

What were the big movers in the equity portfolio Q1-YTD?

• Eurobank is up $395 million and it is now Fairfax’s largest equity holding at $2.6 billion. 
• The FFH-TRS is up $328 million. This position is now Fairfax’s second largest holding. 
• Thomas Cook India is up 96 million. TCIC continues its strong performance. 
• Commercial International Bank is down $120 million. Egypt devaluated its currency 40% on March 7. Well run bank. Country is an economic mess.

 

Excess of fair value over carrying value (not captured in book value)

 

For Associate and Consolidated holdings, the excess of fair value to carrying value is about $1,335 million or $58/share (pre-tax). Book value at Fairfax is understated by about this amount.

• Associates:        $900 million = $39/share
• Consolidated:    $435 million = $19/share

Equity Tracker Spreadsheet explained

 

Holdings have been separated by accounting treatment: mark to market, associates – equity accounted, consolidated, other Holdings – total return swaps.

 

We come up with the value of each holding by multiplying the share price by the number of shares. Are holdings are tracked in US$, so non-US holdings have their values adjusted for currency. 

 

This spreadsheet contains errors. It is updates as new and better information becomes available.

 

 

 

 

 

Fairfax Mar 8 2024.xlsx

Edited March 9, 2024 by Viking

[anshulp]

On 3/2/2024 at 7:38 PM, gfp said:

Is this book still available anywhere?  I would like to gift one but I don’t want to give my only copy. Selfish, I know 

yeah if you email them they will send a copy. Its an awesome read.

[gfp]

11 minutes ago, [email protected] said:

yeah if you email them they will send a copy. Its an awesome read.

Awesome thanks - they obviously hired a talented designer and put a bunch of work into producing it.  I figure somewhere there is a big stack of them.

[anshulp]

np

[MMM20]

I don't mean to single this guy out, but maybe this is indicative of the marginal shareholder's mindset and partially explains why the stock remains so cheap (in addition to all the typical old biases and misconceptions).

 

https://emergingvalue.substack.com/p/portfolio-updates-february-march

 

I sold my Fairfax financial with a comfortable profit since I bought in Sept 2022, when muddy waters released their short report. I had bought Fairfax sometime recently when rates were starting to rise. With such nice gains in a very short period, and no idea of the impact of the short report, I sold. That could be an error to react quickly, because it looks like it is a good quality company. Anyway, with the proceeds I added to existing ones.

 

I am not an expert on insurance, but it’s clear that the book value is aggressively noted, with some assets benefiting from an epic bubble in Indian equities and overvalued US real estate, as well as temporary high interest rates. It does seem that earnings are above the normal trend. The company keeps performing well and is cheap based on current high rates elevated earnings, so It was not the best sale. I think that is it still a good company for the long term.

 

Edited March 11, 2024 by MMM20

[MMM20]

Thought this quote from the WRB CEO was worth highlighting here...

 

"Social inflation is -- it's become a bit of a buzzword in the industry. And I think just to level set it, all it is, is a reflection of a shift in society and by extension, a shift in the legal system and what's coming out of the legal system. The awards today are a multiple of what they once were. Beyond that, are there other things that are driving it? Sure, you have things such as litigation funding, along with other bits and pieces. But the big driver is just the social environment and how once upon a time, when damage was done, the legal system was there and by extension in the insurance industry to help make people whole for those damages. Today, it's a different environment where it's not just about making people whole for damages, it's also about punishing when in the eyes of a jury or sometimes a judge that there was a wrong done. So that shift, I think, is having a great impact on loss cost in general. And there's nothing that I see as far as that really slowing in any way, shape or form...Ultimately, when the day is all done, I think there's a bit of a misperception in the eyes of much of society. And that is, who pays the bill in the end? When it's a defendant paying the bill, they really don't pay the bill. It's the insurance carrier. And actually, the insurance carrier in the short run will pay the bill but ultimately, it's society that pays the bill because everyone's insurance costs go up as we are seeing that today." - WRB CEO

 

[dartmonkey]

52 minutes ago, MMM20 said:

 

I sold my Fairfax financial with a comfortable profit since I bought in Sept 2022, when muddy waters released their short report. I had bought Fairfax sometime recently when rates were starting to rise. With such nice gains in a very short period, and no idea of the impact of the short report, I sold. That could be an error to react quickly, because it looks like it is a good quality company. Anyway, with the proceeds I added to existing ones.

 

I am not an expert on insurance,… I think that is it still a good company for the long term.

 

Sort of the archetype of weak hands. It looks like a good company, but who knows whether Muddy Waters is right or not? Might as well sell, even after the 10% drop, since I’m still above my September buy price. 

 

I doubt many of us felt very threatened by the MW allegations, but if you don’t know better, how can you be sure enough to hang on and recoup your 10%?

[Parsad]

9 hours ago, dartmonkey said:

Sort of the archetype of weak hands. It looks like a good company, but who knows whether Muddy Waters is right or not? Might as well sell, even after the 10% drop, since I’m still above my September buy price. 

 

I doubt many of us felt very threatened by the MW allegations, but if you don’t know better, how can you be sure enough to hang on and recoup your 10%?

 

+1!  If you don't trust your own analysis, buy ETFs not common stocks!

 

Maybe it was Brett Horn!    Cheers!

[jbwent63]

16 hours ago, Parsad said:

 

+1!  If you don't trust your own analysis, buy ETFs not common stocks!

 

Maybe it was Brett Horn!    Cheers!

+1

[SafetyinNumbers]

Does anyone have a list of the minority interests in the insurance companies (Brit, Allied World, Odyssey) that Fairfax is able to repurchase along with the relevant timelines?

[gfp]

CIBC raises FFH target to C$2000 from C$1700 fwiw (not much)

Edited March 13, 2024 by gfp

[MMM20]

13 hours ago, SafetyinNumbers said:

Does anyone have a list of the minority interests in the insurance companies (Brit, Allied World, Odyssey) that Fairfax is able to repurchase along with the relevant timelines?

 

For Allied World (from annual report) -

 

 

Edited March 13, 2024 by MMM20

[SafetyinNumbers]

5 hours ago, MMM20 said:

 

For Allied World (from annual report) -

 

 

thanks!

 

I caught this too 

 

[MMM20]

"The key in investing is finding growth in value. You want to find something that is undervalued that can get overvalued. I’ve found you make the most money by having a 1–3-year variant view on a business and buying the stock before the business turns up, inflects, or accelerates. You must be willing to buy and hold dead money and look wrong before you’re right." https://microcapclub.com/turnarounds/?ref=newsletter

 

Feels like FFH is at the "They had a decent quarter, but I don't trust it" phase:

 

 

 

 

Edited March 14, 2024 by MMM20

[gfp]

look at all those green candles - what a crap short sale

 

[dartmonkey]

1 hour ago, SafetyinNumbers said:

Can anyone explain this in plain English? It sounds like FFH has calls allowing them to buy out the minority interests in 2026, 2027 and 2029, but then the minority interests can dump their stakes back to FFH in a variety of was once those call options have expired. Is that right?

 

And I presume there is some formula that says what price FFH has to pay, do we know anything about that?

[petec]

1 hour ago, dartmonkey said:

Can anyone explain this in plain English? It sounds like FFH has calls allowing them to buy out the minority interests in 2026, 2027 and 2029, but then the minority interests can dump their stakes back to FFH in a variety of was once those call options have expired. Is that right?

 

And I presume there is some formula that says what price FFH has to pay, do we know anything about that?

 If Fairfax doesn't exercise the calls, the other owners can force an IPO or (in some cases) a sale.

 

Prior examples would suggest there is a formula; no, we don't know what it is.

[gfp]

8 minutes ago, petec said:

 If Fairfax doesn't exercise the calls, the other owners can force an IPO or (in some cases) a sale.

 

Prior examples would suggest there is a formula; no, we don't know what it is.

 

The idea is that the pension plan partners won't get stuck with illiquid and unsaleable stock of private businesses.  They aren't ever going to IPO or force a sale of a subsidiary but the language is there to protect them.  It really is just preferred equity pawn-shop behavior with a friendly partner.

[vakilkp]

1 hour ago, gfp said:

It really is just preferred equity pawn-shop behavior with a friendly partner

This is correct and funny.  Gfp thanks for the posts and not just this one. 

[dartmonkey]

1 hour ago, gfp said:

 

The idea is that the pension plan partners won't get stuck with illiquid and unsaleable stock of private businesses.  They aren't ever going to IPO or force a sale of a subsidiary but the language is there to protect them.  It really is just preferred equity pawn-shop behavior with a friendly partner.

A special kind of pawnshop, that gives you money for your mother's jewelry that you really don't want them to sell, because you want to come back and get it in a couple of years when your finances are better. So you pay them an annual 10% fee to keep the jewelry in a special safe. They can also sell to someone else it if you don't come back to repurchase it within a few years.

 

Muddy Waters would add that there is another side benefit of this deal: you can 'sell' this jewelry to the pawn shop for an inflated price, because it allows you to claim that the rest of the jewelry you own is worth the same amount, reassuring other creditors. So it is a disguised loan, with a 10% interest rate, which can double as a book value adjustment, if needed. Of course, I don't believe this...

[SafetyinNumbers]

6 hours ago, dartmonkey said:

Can anyone explain this in plain English? It sounds like FFH has calls allowing them to buy out the minority interests in 2026, 2027 and 2029, but then the minority interests can dump their stakes back to FFH in a variety of was once those call options have expired. Is that right?

 

And I presume there is some formula that says what price FFH has to pay, do we know anything about that?

From the recent Allied World repurchases, it seems like they can buy back the shares at the same P/B multiple they were sold. For Allied World that was 1.3x BV. For Brit, I think it’s 1.55x and for Odyssey I recall 1.9x. If anyone can confirm, please do.

[giulio]

@SafetyinNumbers this is what I understood from last year AR.

The amount is fixed, like debt. If you keep the P/B unchanged and the insurance subs increase BV then FFH would have to pay a higher price.

The call option allows FFH to repay the same amount they received instead. If BV increases they record a gain on the value of the option. 

This is what happened last year with Allied and Eurolife purchases. I am halfway through this year AR and I'll write an update when I am done.

Hope this helps.

G