Fairfax 2024

[SafetyinNumbers]

3 hours ago, petec said:

On a separate topic, is anyone else bemused as to why they took the FIH fee in cash? If it is so undervalued should they not (given the FFH board's fiduciary duty is to FFH shareholders) have taken it in shares?

I think they were trying to be good partners and from a long term perspective it would likely hurt FIH from a fund raising perspective in the future if FFH is seen as punishing FIH for the discount. Forever is a long time.

 

They had to take the first two performance fees in stock and have discretion going forward. I still hope they will use the cash to tender for FIH shares so we can get some price discovery.

[A_Hamilton]

4 hours ago, petec said:

On a separate topic, is anyone else bemused as to why they took the FIH fee in cash? If it is so undervalued should they not (given the FFH board's fiduciary duty is to FFH shareholders) have taken it in shares?

I would argue that reputationally it is very poor form to fleece one's asset management clients by foisting material dilution on them because of a formula that was set ex-ante and with a stock that has traded very poorly. In the long term I think doing the right thing will lead them to much better opportunities here, heck maybe FIH trades at a premium to book one day and they can issue a bunch of stock and drive more fees to say nothing of all of the other relationships FFH has.

[TwoCitiesCapital]

4 hours ago, petec said:

On a separate topic, is anyone else bemused as to why they took the FIH fee in cash? If it is so undervalued should they not (given the FFH board's fiduciary duty is to FFH shareholders) have taken it in shares?

 

They can take it in cash and buy the shares at the same discount and end up with the roughly the same number of shares. 

 

The difference being float/tradable shares decreases (as opposed to increases) which may help close the NAV gap in the future AND is does NOT adversely impact FIH shareholders (including the existing balance of FIH shares Fairfax holds) via unnecessary dilution. 

[gfp]

8 minutes ago, TwoCitiesCapital said:

 

They can take it in cash and buy the shares at the same discount and end up with the roughly the same number of shares. 

 

The difference being float/tradable shares decreases (as opposed to increases) which may help close the NAV gap in the future AND is does NOT adversely impact FIH shareholders (including the existing balance of FIH shares Fairfax holds) via unnecessary dilution. 

 

That's true in theory but in practice it is not easy to buy $110 million worth of FIH.U shares without drastically moving the price.  I think it just comes down to 'fair and friendly' and doing the right thing and it comes back around over and over when you always try to behave that way.

[Hamburg Investor]

On 3/16/2024 at 4:58 PM, Viking said:

Earnings Estimates – Two Year Summary for 2024 & 2025

 

Below is an update to my two-year earnings estimate for Fairfax. Please note, forecasts are a guess at a point in time. To state the obvious, things are constantly changing. As a result, my earnings forecasts quickly become outdated. These forecasts are intended solely for entertainment purposes – please keep this in mind. 

 

Since my last update, Fairfax has released both Q4 earnings and their 2023 annual report. This allows us to finalize results the 2023 year and update our forecasts for 2024 and 2025. 

 

Summary

 

My current estimate is Fairfax will earn about $160/share in 2024 and about $165/share in 2025. For reasons outlined further below, I think both of these estimates have been constructed using mildly conservative assumptions. 

 

 

2024 & 2025 Forecast

 

A hard piece to forecast with Fairfax is capital allocation. Fairfax is currently generating a significant amount of earnings. But we don’t know today how the future cash flows will be invested:

• Grow insurance (continuation of hard market)
• Buy out minority partners in insurance?
• Equities or fixed income?
• Buy back a meaningful amount of Fairfax stock? 
• Other?

Looking at the last 5 years, the management team has done an outstanding job with capital allocation. My guess is they will continue to make good decisions (on balance) and this will benefit shareholders – likely providing a tailwind to my forecasts for 2024 and 2025.

 

Using Yahoo Finance as a guide, analysts are collectively estimating that Fairfax will earn about US$148/share (C$200) in 2024 and US$157/share (C$211) in 2025 (using $0.742 US$/C$ exchange rate). Why are analyst estimates below my forecast? From what I can see, most analysts are assigning little benefit to future earnings and Fairfax’s proven capital allocation skills. Most analysts will include these benefits into their earnings estimates after Fairfax has announced something.

 

I am assuming interest rates remain roughly at current levels (at March 10, 2024). Of course, this will likely not be the case. But given the duration of the fixed income portfolio is now closer to the duration of the insurance liabilities, changes in interest rates (up and down) might kind of balance out (in ‘net gains/losses on investments’ and ‘effects of discounting and risk adjustment- IFRS 17’)

 

Below is an 8-year snapshot for Fairfax. It communicates in a concise manner the dramatic transformation that has happened at the company, beginning around 2021. There has been a spike in operating income per share – it has increased from an average of $39/share over the 5-year period from 2016-2020, to $192/share in 2023. This much higher amount now looks like the new baseline for the company. For 2024, my estimate has operating income increasing to $197/share, which is a 400% increase from the average from 2016-2020. Normalized earnings at Fairfax have moved to a much higher level – and, importantly, this level looks sustainable.

 

 

What are the key assumptions?

 

1.) Underwriting profit: Estimated to come in at $1.24 billion in 2024.

• Net written premiums growth of 12% in 2024 and 3% in 2025. This is being driven by:
  • Continuation of the hard market, which we estimate will add $1 billion of NWP. 
  • The Gulf Insurance Group (GIG) acquisition, which will add $1.7 billion of NWP.
• Combined ratio (CR) of 95% in both 2024 and 2025.
  • Catastrophe losses: 2024 will be a more normal year (higher than 2023).
    • Fairfax continues to modestly shrink their total catastrophe exposure.
  • Reserve releases: continuation of the positive trend observed in 2023.

2.) Interest and dividend income: Estimated to increase to a record $2.2 billion in 2024 and 2025

• Interest and dividend income in Q4 2023 was $536.6 million; this provides a good baseline (starting point).
• GIG adds about $2.4 billion to the total investment portfolio in 2024. A tailwind.
• Eurobank will start paying a dividend in 2H 2024. A tailwind.
• Rate cuts by global central banks would be a headwind in 2H.

3.) Share of profit of associates: Estimated to increase to a record $1.03 billion in 2024.

• Earnings at Eurobank, Poseidon, Stelco and Fairfax India, in aggregate, should continue to grow nicely. EXCO (nat gas prices) could be a headwind.
• GIG will be a small headwind as it is now consolidated.

4.) Effects of discounting and risk adjustment (IFRS 17):

• The two key drivers for this bucket are the trend in net written premiums of the insurance business and changes in interest rates.
• Net written premiums growth of 12% in 2024 should be a tailwind. 
• I am modelling for interest rates to remain flat. 
• This bucket is among the most difficult to model – therefore, my confidence level in my estimates is low. 

5.) Life insurance and runoff:

• This combination of businesses lost about $348 million in 2023. 
• I expect earnings in 2024 to be a little better – a lower loss of $250 million - with life insurance being a modest tailwind.

6.) Other (revenue-expenses) - non-insurance subsidiaries: 

• Recipe, Dexterra, AGT, Grivalia Hospitality, Boat Rocker, Farmers Edge etc.  
• This combination of businesses earned $46 million in 2023. 
• I expect earnings to be better in 2024, coming in at $150 million.
• This bucket is poised to grow nicely for Fairfax in the coming years. It could surprise to the upside. Yes, the results will be lumpy.

7.) Interest expense: At $520 million, a modest increase to prior year of $510 million.

8.) Corporate overhead and other: At $435 million, a modest increase to prior year of $430 million.

 

9.) Net gains on investments: Estimated to come in around $1 billion in 2024.

• The big driver will be the FFH-TRS position. $250 x 1.96mn shares = $500 million?
• Remaining mark to market holdings of $7 billion x 7% return = $500 million?

10.) Gain on sale/deconsol of insurance sub: This is where I put the large asset sales/revaluations. 

• In 2023, it was the sale of Ambridge and the revaluation of GIG for a total of $550 million.
• In 2024, I am modelling a gain of $300 million. Perhaps Fairfax (finally) gets approval from regulators in India to move their ownership in Digit from 49% to 68% and this generates a sizable gain. A Digit IPO might also result in a write up of Fairfax’s position. 

Bottom line, this bucket is a wild card. But Fairfax has a long history of surfacing significant value hidden on its balance sheet. $300 million per year seems like a conservative average estimate. I am including insurance and non-insurance here together (even though the title says insurance).

 

11.) Income taxes: estimated at 19% (historical average rate)

 

12.) Non-controlling interests: I am expecting Fairfax to take out one of its minority partners in 2024. The leading candidate is Brit. My second choice would be increasing their ownership in Allied World to 90% (from 83.4%). 

• In the past, I used an average rate of 11% (amount of net earnings that was allocated to non-controlling interests). This has been reduced to 9.5% in 2024 and 7.5% in 2025. 
• This change increases the amount of net earnings going to Fairfax shareholders.

13.) Shares Outstanding: Estimated that effective shares outstanding will be reduced by 300,000 shares per year for 2024 and 2025. This is the same amount as 2023. 

 

Notes:

• ‘Underwriting profit’: Includes insurance and reinsurance; does not include runoff or Eurolife life insurance.
• ‘Interest and dividends’ and ‘share of profit of associates’: Includes insurance, reinsurance and runoff.

—————

Return on Equity Calculation

 

Return on equity (ROE) is calculated below using ‘average equity’ which is:

• (PY ending BV/share + CY ending BV/share) / 2

I think most of the industry (other P/C insurance companies, analysts) calculate ROE using an average number for equity. So, this likely makes my ROE estimates more comparable with industry numbers.

Regarding TRS you are actually calculating share price being nearly flat (or up 25 dollars, so 2.5%) until end of 2024 for the next 3 quarters and two weeks, or do I misunderstand how the TRS works? 

Of course the share price could be higher or lower within such a short timeframe, but of course you have to assume something. But what’s the rational behind $250 for 2024? Wouldn‘t it be rational to e. g. assume a share price end of 2027 (whatever that would be) and than draw a straight (or compounding) line to that point? Than it would maybe be rational to readjust that line each time you recalculate your forecast? Otherwise you maybe would come to the point, where you would have to assume a negative return to the end of the year, if you assume a fixed return per calendar year and the share price gets above that?! 
 

I am just asking
 

Why are net gains in investments lower in 2025 than in 2024? Intuitively I‘d think one would assume Fairfax to get 7% again but on 107% of 2024 equity, so it should be higher. Same with the TRS: If shareprice goes up algorithmic, than it should be higher 2025 than 2024; or is this a function of the good start of Fairfax share price in 2024, so you adjusted 2024, but not 2025?

 

In general I totally understand, that you have to be conservative with your assumptions the longer you look into the future (that’s what all good investors do - margin of safety) at the same time looking at the numbers I ask myself:

 

If Fairfax just manages a roe around 15% in 2024 and 2025 like in your foecast (so for times with a hard market, good hand with equity investments and bonds, very good crs…) and Prem at the same time gives out the goal of a roe of 15% on average (he said stock return or book value compounding should be 15%; but roughly that’s the same as having a roe of 15% as a goal. Or am I wrong?), than the question occurs: Is that goal doable if he just manages 15% as a roe in such good times, where not only management performs near perfection, but the circumstances (hard market etc.) give an extra tailwind?

 

If Prem doesn’t manage 18%, or 20% or more on average in such good times, he won‘t make 15% over time.
 

My best guess is, that this difference to 18% or 20% or even more is just a function of you being conservative with your estimates (which is very fine!). What do you think?

[dartmonkey]

18 hours ago, petec said:

On a separate topic, is anyone else bemused as to why they took the FIH fee in cash? If it is so undervalued should they not (given the FFH board's fiduciary duty is to FFH shareholders) have taken it in shares?

 

There has been some talk about Fairfax (FFH) 'doing the right thing' here by not diluting shareholders of Fairfax India (FIH) by 'taking advantage' of the fact that FIH shares are trading so far below book value, given FFH's 'fair and friendly' motto. As a shareholder of both firms, and given the fact that I own a much higher percentage of FIH than I do of FFH, I have every reason to be happy about this decision, but petec's point has not been addressed, I feel, and that, does FFH not have a fiduciary duty towards FFH shareholders to maximize what goes into FFH shareholders' pockets?

 

I suppose legally they have some wiggle room here, and could plausibly say that it is in the best interests of FFH to preserve FIH shareholders' trust in FFH, and to maintain FIH as a viable investment vehicle for its Indian operations. After all, FFH owns half of FIH, and get a hefty fee (1.5% of book value plus 20% of annual book value gains above 5%.) Feeding the golden goose well is in the interest of making sure they keep getting all these golden eggs.

[gfp]

7 minutes ago, dartmonkey said:

does FFH not have a fiduciary duty towards FFH shareholders to maximize what goes into FFH shareholders' pockets?

 

I suppose legally they have some wiggle room here, and could plausibly say that it is in the best interests of FFH to preserve FIH shareholders' trust in FFH, and to maintain FIH as a viable investment vehicle

 

Yes, they have a fiduciary duty to the FFH shareholders and they made what they felt was the right long term decision.  The key word is long term.  You lay it out in your post.

[Jaygo]

28 minutes ago, dartmonkey said:

 

 does FFH not have a fiduciary duty towards FFH shareholders to maximize what goes into FFH shareholders' pockets?

 

 

 

I think the fiduciary duty is for the stewardship of the business long term and that includes keeping relationships healthy by sometimes letting out a little line in fishing parlance.

 

In my own business ive had many opportunities to take advantage of desperate situations to maximise my dollars but generally do not as i dont think it is moral or long term business friendly.

 

I would say trying to maximise every penny is short term thinking and not responsible to the shareholders who can take no action on their own short of selling and moving on. 

[MMM20]

@dartmonkey I believe it was addressed by those who rightly pointed out that leaving some money on the table in any particular transaction is not inconsistent with the fiduciary duty to shareholders.

[Viking]

17 hours ago, Hamburg Investor said:

Regarding TRS you are actually calculating share price being nearly flat (or up 25 dollars, so 2.5%) until end of 2024 for the next 3 quarters and two weeks, or do I misunderstand how the TRS works? 

Of course the share price could be higher or lower within such a short timeframe, but of course you have to assume something. But what’s the rational behind $250 for 2024? Wouldn‘t it be rational to e. g. assume a share price end of 2027 (whatever that would be) and than draw a straight (or compounding) line to that point? Than it would maybe be rational to readjust that line each time you recalculate your forecast? Otherwise you maybe would come to the point, where you would have to assume a negative return to the end of the year, if you assume a fixed return per calendar year and the share price gets above that?! 
 

I am just asking
 

Why are net gains in investments lower in 2025 than in 2024? Intuitively I‘d think one would assume Fairfax to get 7% again but on 107% of 2024 equity, so it should be higher. Same with the TRS: If shareprice goes up algorithmic, than it should be higher 2025 than 2024; or is this a function of the good start of Fairfax share price in 2024, so you adjusted 2024, but not 2025?

 

In general I totally understand, that you have to be conservative with your assumptions the longer you look into the future (that’s what all good investors do - margin of safety) at the same time looking at the numbers I ask myself:

 

If Fairfax just manages a roe around 15% in 2024 and 2025 like in your foecast (so for times with a hard market, good hand with equity investments and bonds, very good crs…) and Prem at the same time gives out the goal of a roe of 15% on average (he said stock return or book value compounding should be 15%; but roughly that’s the same as having a roe of 15% as a goal. Or am I wrong?), than the question occurs: Is that goal doable if he just manages 15% as a roe in such good times, where not only management performs near perfection, but the circumstances (hard market etc.) give an extra tailwind?

 

If Prem doesn’t manage 18%, or 20% or more on average in such good times, he won‘t make 15% over time.
 

My best guess is, that this difference to 18% or 20% or even more is just a function of you being conservative with your estimates (which is very fine!). What do you think?

@Hamburg Investor good questions. I am modelling $1 billion in ‘net gains from investments’ in 2024. When i built my forecast, the rough math was $500 million from FFH-TRS ($250/share x 1.96 mn shares) and another $500 million from the mark-to-market equity holdings ($7 billion x 7% return on portfolio). 
 

From my perspective, a total of $1 billion is the important number. There are numerous ways to get there… i identified one potential path above. Given the continued increase in Fairfax’s share price to start 2024, my forecast of $1 billion in total gains is looking pretty conservative right now. 
 

But things can change fast. And there will be puts and takes for all buckets as the year plays out. 
 

With my 2024 forecast i want to lean out a little, but not get too far in front of my skis.
 

In terms of forecasting for 2025, there is more uncertainty - we are forecasting for two years. Yes, i am modelling a slightly lower ‘net gains from investments’ number in 2025 - primarily bacause i think the contribution from FFH-TRS will slow in 2025 (compared to 2024). High conviction? No. Just what seems like a reasonable guess.
 

Importantly, trying to guess what Fairfax is going to do with capital allocation is quite difficult looking out to 2025. Does Fairfax take a big swing (like buying a big bank in India?) or do they play it safe like they have been doing the past couple of years and continue to buy out minority partners (insurance and equity holdings). The risk / reward set-up is quite different for shareholders.

Edited March 19, 2024 by Viking

[petec]

21 hours ago, SafetyinNumbers said:

it would likely hurt FIH from a fund raising perspective in the future

 

A good point I had not considered. Especially with a massive equity issue coming up for the bank deal 

 

(Joke, in case anyone thinks otherwise...)

[Dinar]

@Viking, I thought that the equity portfolio was USD 15bn, no?

[dartmonkey]

7 minutes ago, Dinar said:

@Viking, I thought that the equity portfolio was USD 15bn, no?

The mark to market portion of the equity portfolio was $8.7b on Dec 31st, according to the annual report, and on March 8th, Viking estimated (posted here) that it might be worth $9.0b.

 

The other 2 portions, associates and consolidated, were worth $7.1 and $2.8b, respectively, for a total equity portfolio of $18.9, but the earnings from these other 2 portions are already included in the estimate.

[Viking]

2 hours ago, Dinar said:

@Viking, I thought that the equity portfolio was USD 15bn, no?

 

@Dinar , here are Fairfax's numbers as of Dec 31, 2023.

 

 

In my equity spreadsheet summary I include the FFH-TRS at its current notional (market) value of +$2 billion. This bumps the value of Fairfax's equity portfolio to $19 billion.  

Edited March 19, 2024 by Viking

[Viking]

2 hours ago, dartmonkey said:

The mark to market portion of the equity portfolio was $8.7b on Dec 31st, according to the annual report, and on March 8th, Viking estimated (posted here) that it might be worth $9.0b.

 

The other 2 portions, associates and consolidated, were worth $7.1 and $2.8b, respectively, for a total equity portfolio of $18.9, but the earnings from these other 2 portions are already included in the estimate.

 

@dartmonkey you are spot on. My current estimate has Fairfax's mark-to-market equity portfolio at about $9 billion. About $2 billion of this is the FFH-TRS. 

 

My earnings estimate for 'net gains on investments' is $1 billion for 2024:

• FFH TRS = $2 billion = $250 x 1.96 million = $500 million
• Remaining mark-to-market holdings = $7 billion x 7% = $500 million

[Hoodlum]

Fairfax is offering $1B in 30yr notes at 6.35%.  Is this replacing existing debt or do they have other plans for this?

 

https://www.fairfax.ca/press-releases/fairfax-announces-pricing-of-senior-notes-offering-03-19-2024/

 

 

Edited March 19, 2024 by Hoodlum

[glider3834]

8 minutes ago, Hoodlum said:

Fairfax is offering $1B in 30yr notes at 6.35%.  Is this replacing existing debt or do they have other plans for this?

 

https://www.fairfax.ca/press-releases/fairfax-announces-pricing-of-senior-notes-offering-03-19-2024/

 

 

Good question for AGM

[Santayana]

I'm sure at least some of it will be for what they're putting together for IDBI.

[nwoodman]

For those too lazy to reach for a calculator:

 

Based on the information provided, the current 30-year U.S. Treasury yield is around 4.44% as of March 19, 2024. Several reputable sources, including Trading Economics, Bloomberg, and Barron's, confirm this yield level.

 

The Fairfax Financial notes, with a coupon rate of 6.350%, are offering a spread of approximately 191 basis points (1.91%) over the current 30-year Treasury yield of 4.44%.

Spread = Fairfax Financial notes coupon rate - 30-year Treasury yield = 6.350% - 4.44% = 1.91% or 191 basis points

This spread is within the range of 100 to 200 basis points that is typically observed for investment-grade corporate bonds with a 30-year maturity.

 

Seems pretty competitive.  @StubbleJumper will be happy…for a while.

 

Only 5 more similar sized offerings to go

 

 

Edited March 19, 2024 by nwoodman

[petec]

6 hours ago, nwoodman said:

Seems pretty competitive.

 

The very fact they can issue this tells you how far they have come. Exceptional piece of finance.

[nwoodman]

1 hour ago, petec said:

 

The very fact they can issue this tells you how far they have come. Exceptional piece of finance.

Spot on.  I don’t think the existing and potential future credit upgrades have been fully factored in by the market.  Access to “cheaper’’ money than your competitors in an environment with sticky inflation is a great position to be in.  Fairfax doesn’t ever seem short of stuff to do.

[valueventures]

If Gildan Activewear gets sold, that would open up a spot in the S&P/TSX 60. How likely do you think it is that FFH would be added? Would that spot be more likely to go to another company in the same / similar sector as Gildan, or is financials in play? Thanks!

Edited March 20, 2024 by valueventures

[Saluki]

On 3/19/2024 at 8:41 AM, Jaygo said:

 

I think the fiduciary duty is for the stewardship of the business long term and that includes keeping relationships healthy by sometimes letting out a little line in fishing parlance.

 

In my own business ive had many opportunities to take advantage of desperate situations to maximise my dollars but generally do not as i dont think it is moral or long term business friendly.

 

I would say trying to maximise every penny is short term thinking and not responsible to the shareholders who can take no action on their own short of selling and moving on. 

 

This was exactly the issue in the Blue Chip Stamps litigation involving Berkshire many years ago. The issue was favoring one group of shareholders vs another and long term greedy vs short term greedy.  I'm no expert on Canadian corporate law and how it differs from Delaware corporate law, but there is some value in not having sharp elbows when it comes to dealing with people.  

 

Every big bank or insurance firm does a lot of trades on exchanges and bilaterally with other big players. There are people in every firm that deal with "out trades".  You call for a bid on a forex transaction, for instance, and unlike most trades (dollar/euro, dollar/yen, dollar/ swiss franc, dollar/kroner ), you want to trade the British Pound, but you forget that it is always quoted the other way GBP/Dollar and you give the wrong price. You verbally confirm the trade and realize that you quoted the price wrong. Or some trainee makes a fat finger trade for 1000 lots of something instead of a 100. If the other guy holds your feet to the fire and says "a deal's a deal", then you win that round and did good for your clients.  But there aren't many huge firms, and they keep trading amongst each other like a weekly poker game, so after a few rounds of that behavior you may find that people won't trade with you any more.  

 

Knowing what you know about how people behave, would you sell your office building on handshake deal to Sam Zell or Trump? Would you rather sell your family business to Berkshire or to Bain Capital? 

 

Looking at it the other way, if Prem is making decisions for FF India and he takes the better deals for FFH and dilutes them at the bottom, then he'll never be able to offer another separate publicly traded vehicle like this.  If he ensures it does well and the shareholders make money, then he can launch more of these.  Maybe put the Kennedy Wilson and other real estate, like the Toys R Us assets,  into a separate JV that is publicly traded and focused on Real estate. Maybe the Shipping stuff can be spun out with other logistics or infrastructure assets?  Who knows.  

[villainx]

Also value of the cash is ... cash to readily deploy.

Edited March 20, 2024 by villainx

[Spooky]

3 hours ago, Saluki said:

This was exactly the issue in the Blue Chip Stamps litigation involving Berkshire many years ago. The issue was favoring one group of shareholders vs another and long term greedy vs short term greedy.  I'm no expert on Canadian corporate law and how it differs from Delaware corporate law, but there is some value in not having sharp elbows when it comes to dealing with people.  

 

 

Canadian corporate law is a bit different than Delaware - the fiduciary duty is to act in the best interest of the corporation but you have to consider the interests of all the stakeholders in your decisions. In practice, courts still give a lot of deference to boards of directors so as long as you can demonstrate you considered the stakeholders other than shareholders in the decision making process. It is not just straight maximization of shareholder value.