Fairfax 2024

[SafetyinNumbers]

28 minutes ago, Santayana said:

He's forecasting $106 for 2024 and $92 for 2025.

Those were the old estimates unless they are unchanged.

[Parsad]

5 hours ago, Hoodlum said:

Our friend Brett has raised his target from $970 to 1180 cdn.  I don’t know how he can reconcile the stock being overvalued at $970, yet increase the target by $210.  He will need to do it again before long. 
 

https://www.morningstar.com/company-reports/1216921-fairfax-increasing-our-fair-value-estimate?listing=0P00006821

 

Not bad for a no moat company!  Cheers!

[giulio]

What stood out to me:

1. Their expertise in India and how well the bial team is executing
   • Buffett and Jain tried to set up an insurance operation in India and gave up. I am sure they tried to invest there and found out it was too difficult. This is of course from 2010, before Modi. I would say that Watsa has been highly successful instead and it does get enough credit for this. He saw the opportunity and positioned fairfax to succeed.
   • Bial becoming a hub for airlines in the south of India is a great accomplishment 
2. Sokol made me jump from my chair: I was not expecting that kind of growth from Atlas
3. "we don't forecast, we react and we are fast": great line and great example with the $1B issuance not being possible today
4. The fact that FFH might be less dependent on investment gains going forward and their improved ability to absorb cat losses: I liked that whole segment.
   • I don't think we are there already but it is a promising start especially if they tilt their investment strategy in that direction

G

[ValueMaven]

Very odd - FRFHF opened down nearly -4% today in the US Market.  Was able to add more in size around the ~$1055 level USD.  Just very odd opening action in the first 10-15mins of trading.  Has since normalized a bit.

[Hoodlum]

38 minutes ago, ValueMaven said:

Very odd - FRFHF opened down nearly -4% today in the US Market.  Was able to add more in size around the ~$1055 level USD.  Just very odd opening action in the first 10-15mins of trading.  Has since normalized a bit.

FFH was also down 2.5% at the open. The CAD to US exchange rate had a large drop with CAD dollar dropping almost 2% over past 2 days.  So there was likely an exchange rate adjustment on the stock this morning as well. 
 

I picked up some more as well after the open. 

Edited April 12, 2024 by Hoodlum

[ValueMaven]

helpful @Hoodlum thank you

[Parsad]

Fairfax Financial Holdings Limited: Result of Voting for Directors at Annual Shareholders’ Meeting - Fairfax Financial

 

What's with the big protest vote against Bill Weldon?  Is it something to do with his time at J&J?

 

Cheers!

[Santayana]

It comes up every year, but I'm always a little surprised at the > 10% number that seem to always vote against Prem.

[Parsad]

7 hours ago, Santayana said:

It comes up every year, but I'm always a little surprised at the > 10% number that seem to always vote against Prem.

 

The small protest every year against Prem is fine...he's CEO...there is always going to be a small group of disgruntled shareholders.  Buffett even usually gets the most against him too.

 

But it's almost a 50/50 split on subordinate voting for Bill...I've never seen that before!

 

Cheers!

[Thrifty3000]

3 hours ago, Parsad said:

 

The small protest every year against Prem is fine...he's CEO...there is always going to be a small group of disgruntled shareholders.  Buffett even usually gets the most against him too.

 

But it's almost a 50/50 split on subordinate voting for Bill...I've never seen that before!

 

Cheers!

I did some digging on Weldon. Looks like he was at the center of plenty of controversy when he was at JNJ.

 

[jfan]

I was just looking at their reserve triangles and it seems they are reporting a number of years of adverse developments (gross undiscounted calendar numbers). I've attached 2022's and 2023's triangle. Just wondering if someone can provide me so insight and whether this is something to watch more carefully (percentage-wise it doesn't seem to be very large relative to their policy liabilities)

 

Edited April 13, 2024 by jfan

[Tommm50]

Looks to me like they"re flat or down each year. They have favorable development every year but one, by $200k.

[Cigarbutt]

2 hours ago, Tommm50 said:

Looks to me like they"re flat or down each year. They have favorable development every year but one, by $200k.

Can you elaborate, especially concerning trends including what is referenced to by @jfan, from 2022 to 2023 calendar years?

[Cigarbutt]

22 hours ago, jfan said:

I was just looking at their reserve triangles and it seems they are reporting a number of years of adverse developments (gross undiscounted calendar numbers). I've attached 2022's and 2023's triangle. Just wondering if someone can provide me so insight and whether this is something to watch more carefully (percentage-wise it doesn't seem to be very large relative to their policy liabilities)

 

@jfan

Your line of questioning is quite reasonable and, since there's not much action here, i will give it a shot (btw thank you for the crypto links that you had provided after i asked a question or two in that thread).

-----

Disclosure: i have no formal training in reserve triangles but it is a fascinating topic and a relevant one for FFH and when an adolescent, i was told that i had what it took to become an actuary, an avenue not considered for various reasons including the deep desire to reach financial independence as soon as possible.

-----

-If FFH wants to reach the 15% ROE goal, a key input is the underwriting return over the complete cycle.

-Historically, despite many rational attempts to deal with this, there is the underwriting cycle and the associated (and correlated) reserve cycle that happens with a lag.

-When looking at triangles such as the ones included above, one has to remember that what happens (recognition of inaccurate reserves) in an older year will work like a domino and change all the reported numbers for the subsequent years. So looking at trends is important.

-----

Tentative conclusions

-Like the overall P+C (re)insurance market, FFH's numbers (and present trends revealing how wrong previously reported numbers were) reveal that the 2018 and 2019 (+ or - 2020 or even 2021) were written in quite a soft market and eventually recognized reserves have become more than the initially recognized objective for profit.

-While it is impossible to be precise, FFH continues to report overall positive net favorable development which means that the adverse development from softer and older years are more than being compensated by favorable from harder and more recent years.

-While it is impossible to be precise, FFH appears to have done better than the market in general as a result (combination of skill and luck; likely more skill than luck) of 1-focus on more specialized lines, 2-opportunistic growth ++ during hardening and maybe/likely of 3-better underwriting discipline.

-To specifically answer your question (needs to be watched carefully?), FFH has shown for some years the nonspecific strategy to be simply conservative in their reserving overall (choose the conservative side in the range given). Also, the poor years are now quite some time away and more than their typical reserve duration of around 3.8 years. In addition, if history is any guide, the more recent and significant growth in reserves during a hard market should continue to compensate and more for the net favorable development.

-Now, it's always possible that the underwriting culture has deteriorated and this may take years to figure out but i would offer a fairly substantiated opinion that this is quite unlikely.

If interested for more granular info at subsidiaries, look at the supplemental info:

FFH - Annual Financial Supplement (2023 Q4) (fairfax.ca)

OdysseyRe continues to be a star performer.

 

[Tommm50]

The reserve triangles show current reserves for each calendar year are less than the original reserves put up that year except 2018.  JFan may be referring to the penultimate (I don't often get to use that word) line which shows negative development for several years. This is the current calendar year's change for those prior year's reserves. These years are relatively young and I kinda expect younger years to show increased reserves as they mature. To me the more important comparisons are the what are current reserves for that year vs the initial reserves. By this metric only 2018 shows a modest deterioration.

 

If several years start to show current reserves are more than the initial reserves then that bears watching. Loss reserving has always been the Achilles Heel of P&C insurance companies. You've got to estimate your products cost when you won't know the actual cost for 5 or more years down the road. If you find out you're wrong at the end of that time you not only lose money for that year but possibly for all the intervening years you've made the same mistake.

 

An average insurance company may get some years right and some years wrong but as long as it averages out they continue merrily on their way as they also collect investment income on those reserves. A company that is conservative in their reserving will get all or almost all years where their initial reserves are more than their ultimate payouts. Like Fairfax.

[Viking]

What do board members think… Do we collectively have a good handle on Fairfax today? How about the more general investment community? Or, in another 12 months will we look back and say… ‘boy, was i ever off in my analysis of the company.’ Just like what has happened in each of the past 4 years. 
 

 

—————

 

Fairfax - 4 Years Later - Are We Really Any Smarter?

 

Fairfax’s stock has compounded at 40.1% for each of the last 4 years. Lots of investors missed participating in the run-up of the stock because they misunderstood and mis-judged the company. 

 

Fast forward to today. Most investors think they have a much better understanding of Fairfax and the opportunity it currently presents. 

 

I am not so sure. I think Fairfax remains a misunderstood company. And that is because:

• The fundamentals at Fairfax have been improving at a faster rate than investors generally understand or recognize.
• Driven by the reinvestment of $4 billion in annual earnings, profit growth over the next couple of years will likely exceed investors expectations.

So investors continue to materially underestimate the potential of the company and the growing earnings it will be able to generate in the coming years. 

 

—————

 

At the 15th Annual Fairfax Financial Shareholders Dinner on Wed April 10 there were a number of different events. One event was a Q&A on Fairfax moderated by Trevor (Tidefall Capital) with 2 panelists: me and Asheef @SafetyinNumbers. 

 

Below are my opening comments:

 

I want to start by saying thanks to Rob and the rest of the people involved for getting this event organized on short notice. It is a real privilege for me to be here.

 

I also want to give thanks to the board members of the investing forum ‘Corner of Berkshire and Fairfax’. Much of what I have written on Fairfax over the past 3 years was inspired and augmented by members on this investing forum.  A special thanks to Tarn for making the trip all the way from Australia.

 

Thanks to Asheef and Trevor for joining me for this session.

 

A quick message from the legal department

 

Nothing discussed tonight is intended to be financial advice. It is intended to educate and entertain. Consult your financial advisor before buying any stocks. 

 

————

 

OK, let’s get at why we are all here… to discuss that scrappy, unloved, misunderstood P/C insurance company called Fairfax Financial. Yes, make no mistake, it is still unloved and misunderstood.

 

————

 

Let’s start with a quick review of a few things. 

 

Over the past 4 years Fairfax’s stock has delivered a total return of 286%. 

 

That is a 4 year CAGR of 40.1%.

 

How does that compare to the market averages? 

• The S&P500 is up a total of 89%.
• The TSX is up a total of 60%.

Bottom line, over the past 4 years Fairfax’s absolute and relative return has been outstanding.

 

Ok, with a show of hands… 4 years ago, who in this room saw Fairfax delivering a CAGR of 40% per year over the following 4 years? Don’t be shy… 

 

No one. (No one in the room raised their hand.)

 

That, I think, is super interesting.

 

—————

 

Let’s fast forward to today. We are all so much smarter now when it comes to understanding Fairfax. Right? 

 

Me? I am not so sure. 

 

—————

 

So where are we at with Fairfax today? That’s what everyone here really wants to know.

 

The stock is up 286% over the past 4 years… so it must be overvalued today… right? 

 

What’s the problem with this ‘analysis’? Well, it’s not actually ‘analysis’. The fact that Fairfax is up 286% tells us very little about the current valuation of the stock. 

 

And that is because price, on its own, is a terrible way to value a stock.  

 

—————

 

Ok. So what measures should we use to value Fairfax?

 

Let’s look at two simple ones: PE and P/BV

 

Fairfax’s:

• PE is under 7 x my estimate of normalized earnings, which is about  $160/share
• P/BV is 1.1 x my estimate of book value at March 31, 2024

What do both of these two valuation measures tell us?

 

Fairfax’s stock is crazy cheap. Yes, even after a 286% increase over 4 years. That is nuts. 

 

—————

 

How is this possible?

 

First: Starting point matters. Fairfax was a hated stock in back in April of 2020. So Fairfax’s stock was much, much cheaper than any of us realized back in 2020. 

 

Second: Since 2018 the management team at Fairfax has been executing well. And since 2021 their execution has been exceptional. 

 

Here are 5 examples:

• Hard market in insurance. Over the past 4 years, net premiums written have increased from $13.3 billion to $22.9 billion or 73%. The CR has averaged 95.2%.
• The purchase of total return swaps in late 2020/early2021 has so far delivered about $1.4 billion in investment gains.
• The buyback of 2 million shares of Fairfax in December 2021 at $500/share. That is almost a 50% discount to current book value. And we know intrinsic value is much higher than book value.
• Sale of the pet insurance business in 2022 - which delivered a $1 billion after tax gain. This was like finding a pile of gold in your back yard - no one even knew they owned this business.
• Active management of the average duration of the fixed income portfolio. The move to 1.2 years in late 2021 and then the pivot to more than 3 years in late 2023. The financial benefit to Fairfax from these two moves can be measured in the billions.

 

I’m just scratching the surface with these 5 examples. I could easily list another 10 examples of decisions made by Fairfax in recent years that have had a positive and meaningful impact on their financial results. 

 

Bottom line, the fundamentals at Fairfax have been not just getting better - they have been literally exploding higher. I have never seen anything like it in my 25 years of investing.

 

As Peter Lynch would say ‘The story just keeps getting better’. But kind of on steroids.

 

—————

 

Let’s try and summarize things:

 

Where are we at with Fairfax today? 

 

The stock trading at a crazy cheap valuation.

 

Fairfax has three of economic engines:

• Insurance
• investments - fixed income
• Investments - equities

All three are performing at a high level at the same time - for the first time in the company’s history.

 

As a result, Fairfax is poised to generate historically high earnings of $4 billion (more?) in each of the next 3 years. It should also deliver an average ROE of about 15%.

 

The management team is best-in-class. When it comes to capital allocation, in Buffett’s words, the management team at Fairfax is hitting the ball like Ted Williams. In Druckenmiller’s words, the management team at Fairfax is on a hot streak. 

 

This highly performing team is about to get $12 billion in earnings over the next 3 years. Think of the value creation that is coming.

 

—————

 

OK. So after all that… What is an investor to do?

 

If you don’t know the answer to this question… well, you might want to stick to investing in index funds. 

Edited April 15, 2024 by Viking

[gfp]

55 minutes ago, Viking said:

OK. So after all that… What is an investor to do?

 

Go short because IFRS is confusing?

[Cigarbutt]

7 hours ago, Tommm50 said:

The reserve triangles show current reserves for each calendar year are less than the original reserves put up that year except 2018.  JFan may be referring to the penultimate (I don't often get to use that word) line which shows negative development for several years...By this metric only 2018 shows a modest deterioration.

If several years start to show current reserves are more than the initial reserves then that bears watching...

...Like Fairfax.

Interesting. Let's build on that using net reserves (ie where reserve development stays with the company instead of being ceded to another party):

So using the same line of reasoning, FFH has reserves reported (as of end of 2023) at higher levels than initially reported for the 2018, 2019, 2020 and 2021 years. And up to the 2019 year included, the end-2023 number is 410.5 M higher than the initial estimate. Also, the adverse movement from 2017 to 2018 was 1165.1 M ((254.6)-910.5). Not exactly catastrophic and not remotely as horrific as the late 1990s and early 2000s years (Ranger (ouch!), generic Crum, nauseating TIG etc) but still quite significant. No wonder (now), the late 2010s years were ripe for hardening.

So, the same conclusion applies but (opinion) the net reserves trend smooth out significant older and softer adverse development as a result of more recent and harder favorable development.

i'd simply add that this appreciation may help to guess the kind of underwriting contribution to the ROE of future years.

@jfan, the best thing now would be that someone comes along and tries to establish an opposing view.

 

 

[Crip1]

The question of whether or not we we fully understood Fairfax is complicated to say the least. Below are a few aspects of Fairfax along with some commentary:

 

·         Did we foresee the interest rate environment? I don't think so.

·         Did we foresee the hard market continuing as long as it has? Again, I don't believe so.

·         Did we think Fairfax was executing well and was well positioned? For the most part, yes, we did. We may have under estimated how well they were executing, but we did see that the company was in a much better place.

 

Many things have gone well for the company over the past four years, some of those things were within their control and some of other things were outside of their control. To the question of whether or not we understood what Fairfax was four years ago, we likely didn't. Part of the reason was the exogenous factors that, as investors, we never want to assume that everything's going to be wonderful because that doesn't always work out. To your point about underestimating the company, we likely did, but healthy pessimism was part of the reason.

 

While typing this, something else popped into my head. Viking, you've been commended many times over for your analysis of Fairfax, and said commendations were definitely deserved. One other aspect of your posting that was really impactful is talking me out of being "grounded" to a stock price from months past. Many times in my investing life I've sold part of a position with the theory that a recent run-up was temporary and that I could re-buy at a price 10% of so lower than the current price. I was tempted to do that with Fairfax, but you reasoned me out of it. I really appreciate that.

 

-Crip

 

 

[Tommm50]

2 hours ago, Cigarbutt said:

Interesting. Let's build on that using net reserves (ie where reserve development stays with the company instead of being ceded to another party):

So using the same line of reasoning, FFH has reserves reported (as of end of 2023) at higher levels than initially reported for the 2018, 2019, 2020 and 2021 years. And up to the 2019 year included, the end-2023 number is 410.5 M higher than the initial estimate. Also, the adverse movement from 2017 to 2018 was 1165.1 M ((254.6)-910.5). Not exactly catastrophic and not remotely as horrific as the late 1990s and early 2000s years (Ranger (ouch!), generic Crum, nauseating TIG etc) but still quite significant. No wonder (now), the late 2010s years were ripe for hardening.

So, the same conclusion applies but (opinion) the net reserves trend smooth out significant older and softer adverse development as a result of more recent and harder favorable development.

i'd simply add that this appreciation may help to guess the kind of underwriting contribution to the ROE of future years.

@jfan, the best thing now would be that someone comes along and tries to establish an opposing view.

 

 

I tend to think in terms of gross reserves as the overall test of reserving performance but I take your point, the net reserves are not quite as rosy. Putting the negative adverse development you cite in context of the size of the book however ($130M over 6 years, $110M leaving out the excellent 2017) being about $1M off is less than 1% of the total reserves and, in my view, pretty damn good at predicting the future.

 

[LC]

The million Canadian dollar question: are investors here buying, holding, or selling? 
 

What % if your portfolio is Fairfax compared to say, 6 or 12 months ago?

 

Partly rhetorical - but is Fairfax as easy of a “buy” today, versus 6, 12, 24 months ago? 

[MMM20]

14 hours ago, Viking said:

As Peter Lynch would say ‘The story just keeps getting better’. But kind of on steroids.

What do we make of the argument that, like a bodybuilder on steroids who ends up popping a bicep tendon, such rapid growth might inherently introduce fragility into their operations? Is it too much too fast for a staid insurance biz? Is Fairfax more susceptible to a black swan event than they were five years ago?

 

Edited April 15, 2024 by MMM20

[Cigarbutt]

10 hours ago, Tommm50 said:

I tend to think in terms of gross reserves as the overall test of reserving performance but I take your point, the net reserves are not quite as rosy. Putting the negative adverse development you cite in context of the size of the book however ($130M over 6 years, $110M leaving out the excellent 2017) being about $1M off is less than 1% of the total reserves and, in my view, pretty damn good at predicting the future.

Yes, i think this is correct.

It's becoming clear that the 2017-9 years were written with a semi-conscious expectation that premiums were insufficient to meet profit objectives and the shortfall could be compensated by investment income. In the industry, they call this cash flow underwriting and this is based on the same foundation as the need to remain fully invested at all times at the individual level.

For the industry, it appears that the eventually realized underwriting losses for those years were compensated by float investment income. See the following graph showing the yield on invested assets. For the industry, add a median 0.5% per year for realized gains:

For FFH:

It's interesting to note (it's becoming clear now) that, for those years, FFH did better (relatively) than the industry both for the reserves management and the float management. 

-----

Nuff said about triangles i guess. The relevant uncertain questions about the future are bound to be related to the asset side, i would venture to say, but what do i know?

Edited April 15, 2024 by Cigarbutt
spelling

[jfan]

Thanks @Cigarbutt and @Tommm50 for your replies and insight. The idea of writing policies in a soft market with just adequate pricing (with the expectation of some adverse loss developments) when there are good opportunities to use those premiums to invest in their portfolio for more attractive returns was helpful. 

 

Spending the morning watching videos on insurance triangles, paid/case reserves/incurred but no reported, basic methodologies to estimate of IBNR to derive loss reserves (case reserves + IBNR), and how to interpret loss development trends was particularly stimulating. 

 

Looking back at the 2 tables that I posted. A few amateur observations were made:

 

1) looking down the columns for each calendar year:

 

a) It appears that ~ 70% of cumulative paid losses occur within 6 years (6-year cumulative payment divided by 6-year re-estimated reserves)

b) Unfortunately, they don't report the entire table in 2023 AR, in the 2022 AR, after 8-9 years, the proportion of cumulative payments is mid-to-high 70% of re-estimated reserves). This suggests to me a fairly long-lag of actual payout to claimants. I'd assume this is because of the longer-tail nature of their specialty insurance focus.

c) Eyeballing the re-estimated reserves down each calendar year, there is little variability year-to-year as time goes by, within ~ $500 M at most up or down (in the range of $100 - 300 M most the time). Coupling what was said earlier about the soft market, it seems that there is not much pricing power, or too much social/judicial/cost inflation to be able to adjust reserves in a favorable manner.

 

2)  Looking at the diagonals for cumulative payments (gross table, not net)

 

a) The sum of diagonal (latest) minus the sum of the diagonal (previous year) = the payment made for losses in the most current calendar year. Using the 2022 AR, they paid out $25.5 B and had a final year end reserve of $38.3 B (ie ~ 66% or for every $1 of reserves set aside, they paid ~ $0.66 that year). Using the 2023 AR (which of there are only 6 years), they paid out $28.1 B and had a final year end reserve of $41.2 B (ie ~ 68%). This seems to me that their baseline underwriting assumptions are that 2/3 of their reserves will be paid out ~ 6 - 9 years. 

 

     I have not compared to their prior years nor other insurance companies, but is this in the opinion of the experts here, conservative? 

 

     I would imagine that if their underwriting deteriorated and they were not re-estimating their reserves properly, then these ratios should deviate from their baseline over time. I think this might be more useful than just looking at the reported magnitude of adverse/favorable loss reserve developments which is more retrospective than prospective.

Edited April 15, 2024 by jfan

[Hoodlum]

It looks like the loan to IIFL is for 3 years @ 9.5% 

https://economictimes.indiatimes.com/industry/banking/finance/fairfax-arm-infuses-rs-500-crore-into-iifl-finance/articleshow/109323304.cms