Fairfax 2024

[Hoodlum]

It looks like a ratings upgrade may may be coming from Fitch, based on their Outlook switching from Stable to Positive.

Fitch Revises Fairfax's Outlook to Positive; Affirms Ratings

Edited April 30, 2024 by Hoodlum

[nwoodman]

6 hours ago, Hoodlum said:

It looks like a ratings upgrade may may be coming from Fitch, based on their Outlook switching from Stable to Positive.

Fitch Revises Fairfax's Outlook to Positive; Affirms Ratings

Very good news indeed

[nwoodman]

Why Fairfax Financial should see an extraordinary run over the next decade

 

https://www.theglobeandmail.com/amp/investing/investment-ideas/article-why-fairfax-financial-should-see-an-extraordinary-run-over-the-next/

 

“Fairfax Financial is on the other side of an inflection point in its earnings and valuation that position it for an extraordinary run over the next decade. It’s following in the footsteps of Warren Buffett’s Berkshire Hathaway, which shot up 27 times after it reached the size Fairfax is now in 1995.”

 

@SafetyinNumbers nice work

 

 

 

Edited May 1, 2024 by nwoodman

[SafetyinNumbers]

1 hour ago, nwoodman said:

Why Fairfax Financial should see an extraordinary run over the next decade

 

https://www.theglobeandmail.com/amp/investing/investment-ideas/article-why-fairfax-financial-should-see-an-extraordinary-run-over-the-next/

 

“Fairfax Financial is on the other side of an inflection point in its earnings and valuation that position it for an extraordinary run over the next decade. It’s following in the footsteps of Warren Buffett’s Berkshire Hathaway, which shot up 27 times after it reached the size Fairfax is now in 1995.”

 

@SafetyinNumbers nice work

 

 

 

Thanks! Many thanks to @NormR for helping so much with the editing and connecting me with his editor.
 

I’m so excited to see it in the paper when it gets delivered tomorrow. Long time subscriber, first time contributor

[nwoodman]

16 minutes ago, SafetyinNumbers said:

Thanks! Many thanks to @NormR for helping so much with the editing and connecting me with his editor.
 

I’m so excited to see it in the paper when it gets delivered tomorrow. Long time subscriber, first time contributor

As you should be.  It reads really well

[Cigarbutt]

On 4/29/2024 at 3:41 PM, Viking said:

...

What will it cost Fairfax to take out OMERS and what will the accounting look like?

I am not sure how the accounting will work when Fairfax takes OMERS out. When Fairfax bought a chunk of Allied World back in 2022 there was a sizeable write down to equity (see quote below). Perhaps we see something similar here. Do other board members have thoughts?

From Fairfax’s 2023AR: “On September 27, 2022 the company increased its ownership interest in Allied World to 82.9% from 70.9% for total consideration of $733.5, inclusive of the fair value of a call option exercised and an accrued dividend paid, and recorded a loss in retained earnings of $163.3 in net changes in capitalization in the consolidated statement of changes in equity.”

The value of the call options for Fairfax at Dec 31, 2023: In ‘Other Assets’, the value of ‘call options on non-controlling interests’ = $306.6 million (2022: $167.4 million). This total is for Brit, Allied World and Odyssey. See quote below for more information.

From Fairfax’s 2023AR: “Comprised of call options on the non-controlling interests in Allied World, Brit and Odyssey Group, which expire in 2026, 2027 and 2029, respectively. At certain dates subsequent to expiry of a call option, the non-controlling interests may request an initial public offering of their shares, the structure, process and timing of which will be controlled by the company; in certain circumstances, the non-controlling interests may request a sale of the respective operating company to a third party.”

...

On this Board, some work had been done in FFH's threads concerning the first round of Brit's sale and then re-acquisition of a minority interest.

-----

Summary (From Feb 15th 2021):

Taking OMERS' perspective as FFH contributed capital and assigned its own dividends to Brit (all numbers in USD)

Summer 2015: OMERS (buys) pays 4.30 per share for 120M shares (29.92% interest), with a shareholders' agreement stipulating an annual dividend at 0.43 per share. Total 516.0M

In 2016: OMERS (sells) gets 4.30 per share for 13.449M shares, 57.8M

In 2018: OMERS (sells) gets 4.30 per share for 58.551M shares, 251.8M

In 2020: OMERS (sells) gets 4.30 per share for the remaining 48.000M shares, 206.4M

Total re-sold = 120M shares for 516.0M getting yearly 0.43 US cents per 4.30 USD share along the way.

So effectively a post-tax financing rate of 10%. For some time, this didn't seem to make much economic sense but...eventually it did?

Note: This line of thinking required some work in both FFH's and Brit's various filings. The numbers are clear about the price paid and the prices received by OMERS, showing how these co-investors' transactions are of the financing type. For the 10% yearly 'dividend' rate, some inferences need to be made but (opinion) the inference is likely right.

Note: This type of work was not quite straightforward and the application of IFRS accounting has made it (at least for me) much more byzantine.

-----

Based on the above, what about the 'cost' to re-acquire Brit's minority interest.

Short story: there is a lot of IFRS-related accounting noise but, in substance, FFH will likely buy back the minority interest at the price for which it was sold (fixed price), with a fixed dividend rate along the way.

-----

The following is based on hunch as much as knowledge so feel free to improve.

With IFRS, selling a minority interest is considered an equity transaction and transaction gains of the revaluation type have to be recognized (as well as a non-controlling revalued interest). For FFH, this comes with a call option to buy back the non-controlled interest (at a fixed price) which appears to be treated like a derivative asset with a value taking into consideration the changing value of the non-controlled interest which, itself, is influenced by the NCI's share of earnings. So, my understanding is that the call option value will tend to increase over time based on the subsidiary's positive income and this will be recognized in net income (and retained earnings) at the parent level from the financial asset gain. But this is not really an economic gain and it looks like the way to deal with this from an accounting point of view is to deduct this financial gain (reduced income and reduced retained earnings) when the call option to buy back the minority stake is exercised.

Short story (opinion): this accounting noise is just that.

 

Edited May 1, 2024 by Cigarbutt
spelling

[yqsun]

10 hours ago, SafetyinNumbers said:

Thanks! Many thanks to @NormR for helping so much with the editing and connecting me with his editor.
 

I’m so excited to see it in the paper when it gets delivered tomorrow. Long time subscriber, first time contributor

Thank you for the write-up! I just attached the comments to the article for non-subscribers to the newspaper.  Please click the following link:
https://ibb.co/3fGFCGf

 

Edited May 1, 2024 by yqsun
Picture attached is not clear so a link is provided.

[Xerxes]

On 4/30/2024 at 8:19 AM, SafetyinNumbers said:

It was a dumb joke that we get more snow in Toronto than Omaha (about 2x actually!). 

In reality, when BRK first hit the same market cap as FFH is now in 1995, it wasn’t set up as well as FFH is. BRK was trading at ~2.5x BV and had insurance premiums of only $3b. With that set up, I think FFH has a good chance of outperforming what BRK already accomplished in the last 29 years.

congrats sir,

 

Your article is also pegged to the Berkshire stock news. 
 

On an unrelated note, I am must admit, i am bit confused on the “architect” difference between BRK (pre-GenRe) and FFH today. 
 

Same market cap, but the float size was vastly different as a ratio to each other. 
 

Is that in your opinion an accident of history in their life cycle at those points in time or preferred “architecture” whereby in BRK case most of the market cap was hinged on retained earning as oppose to the size of the float. 
 

Edited May 1, 2024 by Xerxes

[Viking]

Q1 Earnings Preview. Below are a few of the things i will be watching for when Fairfax reports after markets close on Thursday. Anything missing from my list?

 

1.) How is Fairfax allocating new capital?

 

What did Fairfax do with $1 billion notes offering that was completed the end of March? Fairfax also received a $175 million dividend payment from Brit later in March.

 

Fairfax has some pretty big cash outlays in Q1:

• Dividend ($15/share) = $375 million
• Stock buybacks = $125 million? 125,000 shares @ $1,000/share?

Do we see Fairfax buy back another chunk from one of their minority partners in Brit, Allied or Odyssey?

 

2.) Impact of change in interest rates on reported results?

 

US Treasury rates 2 years + out on the curve moved about 30 basis points higher in the quarter. This will be a headwind to fixed income (resulting in unrealized investment losses) but will be a tailwind to IFRS 17 reporting (resulting in a benefit). How will it all shake out? Not sure - but not concerned.

 

I think Fairfax’s average duration is about as follows:

• Fixed income = 3 years
• Insurance liabilities = 4 years

More importantly, the significant increase in bond yields since Dec 31, 2023 is giving the fixed income team at Fairfax another juicy opportunity to extend duration at pretty attractive rates. Bond yields 3 years and further out have increased about 70 basis points over the past 4 months. Bond yields are only 15 to 30 basis points from the highs they reached in mid-October 2023.

 

 

3.) What is interest and dividend income?

 

Interest and dividend income came in at $536.4 million in Q4. Is it still increasing quarter over quarter? The Q1 number x 4 will provide the best estimate for full year interest and dividend income.

 

Is Fairfax’s investment in Kennedy Wilson’s debt platform continuing to grow?

 

4.) Insurance

• What is growth in net premiums written? GIG + organic…
• What is CR? Is it below 94%?
• What is level of reserve releases? Trend?

Commentary on hard market?

 

5.) What is share of profit of associates?

• Eurobank? Chug, chug, chug?
• Poseidon? Do we see green shoots yet?

6.) Equities

• What are investment gains from equities? The equities I track suggests mark to market gains of $390 million in Q1.
• For Associate holdings, what is the excess of market value to carrying value? This is value that is being created by Fairfax that is not being captured in book value.

 

 

7.) What is book value per share?

• The dividend payment in January will dent this by $15/share.

Edited May 1, 2024 by Viking

[SafetyinNumbers]

26 minutes ago, Xerxes said:

congrats sir,

 

Your article is also pegged to the Berkshire stock news. 
 

On an unrelated note, I am must admit, i am bit confused on the “architect” difference between BRK (pre-GenRe) and FFH today. 
 

Same market cap, but the float size was vastly different as a ratio to each other. 
 

Is that in your opinion an accident of history in their life cycle at those points in time or preferred “architecture” whereby in BRK case most of the market cap was hinged on retained earning as oppose to the size of the float. 
 

I’m glad the article is being associated with Berkshire. Quite frankly, it’s the biggest source of like-minded long term investors for FFH after the Canadian institutions. I rather get those individual shareholders first since the institutions don’t really care about the price they pay just the performance they get. 
 

I wanted to highlight how much better the set up is for FFH vs BRK both based on the size of the insurance business on a relative basis and the starting valuation. Of course, the forward macro conditions, execution and asset allocation decisions will determine what the future returns look like but I can see how quality investors might flock to FFH if they execute on the strategy of adding quality stocks on a big market dislocation.

 

i think it’s important to note that BRK has been way better on the equity investments which is why it has so much more surplus capital than FFH. It’s the reason Bloomstran prefers BRK. FFH is now in a position to stack surplus capital which will increase durability and the potential to add high return equities.

[TwoCitiesCapital]

1 hour ago, SafetyinNumbers said:

I think it’s important to note that BRK has been way better on the equity investments which is why it has so much more surplus capital than FFH. It’s the reason Bloomstran prefers BRK. FFH is now in a position to stack surplus capital which will increase durability and the potential to add high return equities.

 

I know the analyst who used to work for Semper Augustus. The view of FFH was too much blow-up risk at FFH. 

 

I dunno if that was from the insurance side or beunf uncomfortable with shorting/derivatives/investments etc, but that was the reason they were uninterested in FFH and Fairfax India when I was discussing them with him. 

Edited May 1, 2024 by TwoCitiesCapital

[Gamma78]

wow i didn't realise the scale of some things until I read @SafetyinNumbers article. BRK has 5x the float of FFH but 33x the market cap. Really points to the importance that choosing continuously compounding equities is going to have going forwards. To replicate BRK returns in the future FFH can't really be trading in and out of companies with cyclicality and otherwise poor economics. They need the compounders over long periods of time. My reflection on FFH is that I don't really see these just yet - and more importantly in the past that mentality of owning the type of business hasn't really been there (i.e. more focused on "trades" than compounders). The investments in India are pretty intriguing with regards to long term high return on capital compounding.  

[MMM20]

17 hours ago, SafetyinNumbers said:

Thanks! Many thanks to @NormR for helping so much with the editing and connecting me with his editor.
 

I’m so excited to see it in the paper when it gets delivered tomorrow. Long time subscriber, first time contributor

Any chance you can post a PDF?

[gfp]

pdf of the article.  Go ahead and remove it if an opinion section excerpt is some kind of copyright issue.

Why Fairfax Financial.pdf

[MMM20]

29 minutes ago, gfp said:

pdf of the article.  Go ahead and remove it if an opinion section excerpt is some kind of copyright issue.

Why Fairfax Financial.pdf 35.13 kB · 17 downloads

Great work @SafetyinNumbers and thanks for sharing @gfp. We like the stock

[dartmonkey]

18 hours ago, SafetyinNumbers said:

Fairfax’s float grew to $33-billion by the end of 2023, while the company’s market capitalization recently reached nearly $26-billion. By comparison, Berkshire had an insurance float of US$3-billion versus a US$26-billion market capitalization in early 1995, before Mr. Buffett used Berkshire’s shares to acquire Geico and Gen Re to materially increase Berkshire’s float. Today, Berkshire has a float of US$169-billion and a market capitalization of US$856-billion.

 

This is the key to the argument, I think. With Fairfax, you have float of $33b with $22b of equity (2023 year end numbers), whereas for Berkshire, you have float of $169b with equity of $561b. So $1 of equity is increased to $2.50 of investable assets with Fairfax, whereas with Berkshire, $1 of equity is increased to  $1.23 of investable assets. Fairfax is twice as leveraged by investment float. So if you think the key to success of Berkshire was the float leverage, Fairfax is a much better setup. If you think the key to Berkshire's success was investment savvy (an argument that it would be hard to support from the last 20 years of performance), then it's less clear that Fairfax is a good investment.

 

Since I favour the view that it is Berkshire's structure that has been the key to its success, at least in the last 30 years, I really like how Fairfax is positioned right now.

[SafetyinNumbers]

4 hours ago, TwoCitiesCapital said:

 

I know the analyst who used to work for Semper Augustus. The view of FFH was too much blow-up risk at FFH. 

 

I dunno if that was from the insurance side or beunf uncomfortable with shorting/derivatives/investments etc, but that was the reason they were uninterested in FFH and Fairfax India when I was discussing them with him. 

I don’t think a probabilistic investor would come to that conclusion. The complexity is designed to reduce risk and increase returns. 
 

Regardless, it’s a poor argument to make now based on the outlook in which surplus capital is about to skyrocket. The thing that makes Bloomstran pick BRK over FFH is its surplus capital. FFH is about to be swimming in it. In theory the increased durability should increase social value and returns.

[SafetyinNumbers]

47 minutes ago, dartmonkey said:

 

This is the key to the argument, I think. With Fairfax, you have float of $33b with $22b of equity (2023 year end numbers), whereas for Berkshire, you have float of $169b with equity of $561b. So $1 of equity is increased to $2.50 of investable assets with Fairfax, whereas with Berkshire, $1 of equity is increased to  $1.23 of investable assets. Fairfax is twice as leveraged by investment float. So if you think the key to success of Berkshire was the float leverage, Fairfax is a much better setup. If you think the key to Berkshire's success was investment savvy (an argument that it would be hard to support from the last 20 years of performance), then it's less clear that Fairfax is a good investment.

 

Since I favour the view that it is Berkshire's structure that has been the key to its success, at least in the last 30 years, I really like how Fairfax is positioned right now.

Another way to frame it is because of the profitable float leverage, the equity returns don’t have to be high to earn a 15% ROE but they could be and I’m betting they will be without having to pay for it. 

[Viking]

1 hour ago, dartmonkey said:

 

This is the key to the argument, I think. With Fairfax, you have float of $33b with $22b of equity (2023 year end numbers), whereas for Berkshire, you have float of $169b with equity of $561b. So $1 of equity is increased to $2.50 of investable assets with Fairfax, whereas with Berkshire, $1 of equity is increased to  $1.23 of investable assets. Fairfax is twice as leveraged by investment float. So if you think the key to success of Berkshire was the float leverage, Fairfax is a much better setup. If you think the key to Berkshire's success was investment savvy (an argument that it would be hard to support from the last 20 years of performance), then it's less clear that Fairfax is a good investment.

 

Since I favour the view that it is Berkshire's structure that has been the key to its success, at least in the last 30 years, I really like how Fairfax is positioned right now.

@dartmonkey , i think there are 2 keys when comparing Fairfax and Berkshire today:

1.) leverage: Fairfax is much more levered to float. All things being equal, that should contribute to outperformance. 
2.) size: Fairfax is much smaller. The opportunities available to it are much larger. AND the impact of good decisions will have a much quicker and larger impact on reported results. 

For proof, all you have to do is look at capital allocation at Fairfax and Berkshire Hathaway over the last 4 years. There is no comparison. That is not being critical of Berkshire Hathaway - it is an aging elephant. 

[Viking]

4 hours ago, SafetyinNumbers said:

I don’t think a probabilistic investor would come to that conclusion. The complexity is designed to reduce risk and increase returns. 
 

Regardless, it’s a poor argument to make now based on the outlook in which surplus capital is about to skyrocket. The thing that makes Bloomstran pick BRK over FFH is its surplus capital. FFH is about to be swimming in it. In theory the increased durability should increase social value and returns.

Fairfax of 10 years ago looks little like the Fairfax of today. So many ‘Fairfax pundits’ from 10 years ago do not recognize this change. There have been two game changers that have played out/accelerated over the past 4 years:

1.) capital allocation: the senior team at Fairfax has hit the ball out of the park the past 4 years. It is surfaced billions in shareholder value.
2.) the size of the increase in operating cash flow - and the fact it is largely locked and loaded for the next 4 years.

 

As a result, Fairfax is now entering uncharted territory as a company (for it). We are all still learning what baseline earnings are. The financial positioning/quality of the company has improved markedly. The bond ratings agencies (AM Best - insurance specialists) are ahead of the equity analysts in this regard - which is surprising (to me at least).
 

The people who are likely at the biggest disadvantage when it comes to Fairfax today are those who believed in the company and then bailed in 2018 to 2020 (stop the pain). And the detractors / haters. These investors/groups have the most to unlearn.

 

—————

Fairfax’s business and its future prospects have undergone a paradigm shift the past 4 years. One that many smart people don’t fully grasp today. 

“The disadvantage of a mind-set is that it can color and control our perception to the extent that an experienced specialist may be among the last to see what is really happening when events take a new and un-expected turn. When faced with a major paradigm shift, analysts who know the most about a subject have the most to unlearn. This seems to have happened before the reunification of Germany, for example. Some German specialists had to be prodded by their more generalist supervi- sors to accept the significance of the dramatic changes in progress toward reunification of East and West Germany.” Page 5, Psychology of Intelligence Analysis by Richards J. Heuer, Jr.

 

PDF copy of the book can be downloaded for free: https://www.ialeia.org/docs/Psychology_of_Intelligence_Analysis.pdf

 

Edited May 2, 2024 by Viking

[UK]

13 hours ago, gfp said:

pdf of the article.  Go ahead and remove it if an opinion section excerpt is some kind of copyright issue.

Why Fairfax Financial.pdf 35.13 kB · 47 downloads

 

The Security I Like Best:). Nice!

[Spooky]

I like Fairfax's setup here and have added some more to my position recently. But aren't we all jumping the gun comparing it to Berkshire and their position in 1995? To match Berkshire's track record going forward, Fairfax is going to need to significantly shift its asset allocation from 75% bonds to predominantly equities. As a Canadian company, will Fairfax be allowed to do this by insurance regulators (I'm ignorant on the rules here but there must be differences between the US and Canada)? Also, this shift presumes that there will be good opportunities to buy wonderful companies at fair prices that Fairfax can easily shift capital into. Is the investing environment going forward going to be conducive to doing this? Buffett himself has written that the investment arena is much more competitive now and there aren't as many easy opportunities as there were in the past. There are also many people out there now trying to implement the Munger playbook. Lastly, have we seen that Fairfax is able to identify and buy these compounders / wonderful companies? Where are the Coca-Cola's, Amex's, See's Candies, Apples in their portfolio today? Which companies in their portfolio have high returns on assets, are growing and have durable moats?

[Xerxes]

39 minutes ago, Spooky said:

I like Fairfax's setup here and have added some more to my position recently. But aren't we all jumping the gun comparing it to Berkshire and their position in 1995? To match Berkshire's track record going forward, Fairfax is going to need to significantly shift its asset allocation from 75% bonds to predominantly equities. As a Canadian company, will Fairfax be allowed to do this by insurance regulators (I'm ignorant on the rules here but there must be differences between the US and Canada)? Also, this shift presumes that there will be good opportunities to buy wonderful companies at fair prices that Fairfax can easily shift capital into. Is the investing environment going forward going to be conducive to doing this? Buffett himself has written that the investment arena is much more competitive now and there aren't as many easy opportunities as there were in the past. There are also many people out there now trying to implement the Munger playbook. Lastly, have we seen that Fairfax is able to identify and buy these compounders / wonderful companies? Where are the Coca-Cola's, Amex's, See's Candies, Apples in their portfolio today? Which companies in their portfolio have high returns on assets, are growing and have durable moats?

 

to flip this comment, we could ask if Berkshire had $25 billion market cap today in 2024, does one expect it to have a portfolio filled with “Coca-Cola's, Amex's, See's Candies, Apples” and the likes of it. 

probably not 

 

[Spooky]

38 minutes ago, Xerxes said:

 

to flip this comment, we could ask if Berkshire had $25 billion market cap today in 2024, does one expect it to have a portfolio filled with “Coca-Cola's, Amex's, See's Candies, Apples” and the likes of it. 

probably not 

 

 

Buffett bought $1B in Coca-Cola in 1988 so before they were the size Fairfax is currently. They also bought Amex a few years later in the early 90s. They had See's Candy much sooner.

[thowed]

21 minutes ago, Spooky said:

 

Buffett bought $1B in Coca-Cola in 1988 so before they were the size Fairfax is currently. They also bought Amex a few years later in the early 90s. They had See's Candy much sooner.

 

I suspect what Xerxes is suggesting is that in 2024 there is a much broader option of companies (e.g. Tech) compared with mid-1990s.

 

Personally I think there is much to like about Fairfax, but I'm not going to spend more time trying to compare it to 90s Berkshire.

 

Cheers!