Fairfax 2024

[Munger_Disciple]

It seems to me that Prem is selling enough shares to take out the cost basis of 2020 purchase plus an additional $100mm (USD) post-tax. It makes sense for him to repay the loan at this point if he had indeed used a line of credit (I don't know if he did that or not) to purchase the 2020 shares worth $150mm.

Of course it would have been better if he didn't sell such a large block. However he still has > 90% of his net worth in Fairfax so that should make shareholders feel better. 

[Munger_Disciple]

19 minutes ago, dartmonkey said:

 Now he has sold 275,000 of these shares to the company (so they can be retired), at $US1,106.48. He continues to control 1,548,000 outstanding multiple voting shares and 519,828 subordinate voting shares of Fairfax, for a total of 2,067,828 shares, meaning that he had 2,342,828 shares before the sale, and has sold 11.7% of these. If the new stake is worth 90% of his net worth, that would mean that he previously had 101.9% of his net worth in Fairfax; if his current stake is higher than 90%, then his previous stake was even higher than 101.9%. That probably means he took out a loan to make the purchase back in 2020, when short term interest rates were still less than 1%.

 

 

IIRC Prem controls the voting of 1,548,000 multiple voting shares but he has an economic interest in only 1/2 of those, i.e., 774,000. So he had economic interest in a total of 1,569,000 FFH shares (multiple voting+subordinated) prior to the sale of 275,000. So he sold 17.5% of his economic interest in FFH, a reasonably significant portion. 

[Viking]

On 5/13/2024 at 6:19 AM, StubbleJumper said:

The valuation gap as defined by P/BV or pretty much any other widely used valuation measure has definitely narrowed over the past year, and as you suggested, it might be that certain insiders finally have a reasonable opportunity to trim their position.  I'm not sure that this is the case for Prem.  Back when he bought the US$150m of shares two years ago, I posed the question on this forum of where he sourced the cash to do so?  Did he have US$150m just sitting in his savings account, did he dig it out of the cushions of his chesterfield, or did he borrow the lion's share of that cash?  Based on this sale, my guess is that he probably borrowed the cash to buy those shares and the carry on that borrowing has caught up a little bit with the share price growth expectation (ie, if he borrowed that money, has the interest rate that he's paying grown to 7% or 7.5% ?).

 

Without a doubt, there are many FFH shareholders who would pay the higher capital gains rate if they liquidate their position next year.  But, I can tell you that I wouldn't let the tail wag the dog in this particular case.  The higher inclusion rate gives the appearance of an enormous tax hike, but keep it in context.  The highest marginal tax rate in Ontario is 53.5%.  With a 50% inclusion rate, you pay 26.75% tax on your capital gains, and now with the 67% inclusion you'd pay 35.7% tax on your capital gains.  So, the difference in tax paid on gains in the highest marginal bracket is like ~9%.  It's considerable, but if you believe that FFH is still a shade undervalued and that its underwriting growth still has legs, you would look forward 1, 2, or 3 years and conclude that share price will likely be strong enough to make it irrational to let the tax tail wag the dog.  

 

The value of my personal shares is independent of the size of the float.  My portion of FFH's future cash flows is X/total shares outstanding.  So, when 250k shares are retired, my portion of FFH's future cash flows goes up.   That part is not optics.  The part that might make it mostly optics is the price paid.  Continuing shareholders are only better off after a repurchase if the shares were repurchased at a price that is less than intrinsic value.  When FFH conducted the SIB a couple of years ago and bought back a boat-load at US$500, it was quite obviously the case that those repurchases were undertaken at a price lower than IV.  But, a repurchase price of US$1,100 is probably much closer to IV and the benefit to continuing shareholders is much more limited.  As an example if IV is actually US$1300 or $1400, we continuing shareholders collectively benefit benefit by 275k*US$200 or 300...less than five bucks a share?).  It's not nothing, but it doesn't move the needle all that much.

 

SJ

 

@StubbleJumper Your post has a bunch of really interesting angles to it. Below are some thoughts. As per usual, I like to stir the pot a little to hopefully generate some good discussion. And estimating 'intrinsic value' at a point in time is a really important topic. 

 

Below I bolded the part in your earlier comment that got my attention.

 

@StubbleJumper “The value of my personal shares is independent of the size of the float.  My portion of FFH's future cash flows is X/total shares outstanding.  So, when 250k shares are retired, my portion of FFH's future cash flows goes up.   That part is not optics.  The part that might make it mostly optics is the price paid.  Continuing shareholders are only better off after a repurchase if the shares were repurchased at a price that is less than intrinsic value.  When FFH conducted the SIB a couple of years ago and bought back a boat-load at US$500, it was quite obviously the case that those repurchases were undertaken at a price lower than IV.  But, a repurchase price of US$1,100 is probably much closer to IV and the benefit to continuing shareholders is much more limited.  As an example if IV is actually US$1300 or $1400, we continuing shareholders collectively benefit by 275k*US$200 or 300...less than five bucks a share?).  It's not nothing, but it doesn't move the needle all that much.”

 

Intrinsic value is a tough thing to estimate. When Fairfax did its SIB in late 2021 did investors at the time think Fairfax was buying shares below intrinsic value? I am not so sure. It is clear today that Fairfax got a steal of a deal.

 

With the buybacks so far in 2024, is Fairfax buying shares below intrinsic value?

 

It appears investors think Fairfax is buying back shares today at a price that is close to intrinsic value. Just like 2021, I am not so sure that investors are getting it right.

 

Why? Fairfax is a completely different company today than it was in late 2021 - especially when you focus on earnings. And future earnings is the critical input when calculating intrinsic value.

 

Here is what Prem had to say at the Fairfax AGM. He said this at the very beginning of his slide presentation.

 

“Fairfax -- and I've said it in our annual report, said it last year. I'll say it again. Fairfax has been transformed since 2017. Even we couldn't see it. If you had asked me 3 years ago, 4 years ago, I couldn't see that. Our premiums have gone up… The float has gone up, the investment portfolio, common shareholders' equity. Underwriting profit, because of this expansion in a hard market… interest and dividends… it's running at about $2 billion. … operating income of $4 billion that we can see for the next 4 years. The company has been transformed. And …because of this transformation, the intrinsic value of the company has gone up significantly.”

 

Let me try and explain my thinking in a little more detail.

 

Part 1

 

I think it is useful to dial back to November 2021. At that time, what were the facts?

 

On December 17, 2021, Fairfax announced the SIB: to repurchase 2 million shares at $500/share, with the offer expiring on Dec 23, 2021. Of interest, at Sept 30, 2021, book value was $562. Fairfax’s SIB was made at about 0.9 x BV.

https://www.fairfax.ca/press-releases/fairfax-announces-us1-0-billion-substantial-issuer-bid-and-sale-of-9-99-minority-stake-in-odyssey-group-2021-11-17/

 

On Nov, 16, 2021, the day before they announced the SIB, Fairfax shares closed at US$432.49. For the next month (mid Nov to mid Dec), Fairfax shares traded in a band between $440 and $460/share, well below the $500/share SIB price. Fairfax shares traded below $500/share for much of Q1, 2022.

 

This tells me that most investors likely felt Fairfax was buying back shares in Dec 2021 at a small premium to IV. In fact, a year later, in October of 2022, Fairfax share traded briefly below $450 - a price significantly below the SIB from the previous year.

 

Today - 30 months later - it is now obvious to investors that Fairfax’s SIB was executed at a price that was well below intrinsic value.

 

The key take-away is this - when the SIB was executed in 2021 most investors got it completely wrong.

 

My guess is most investors  - at a point in time - have no idea what Fairfax’s actual intrinsic value is. Yes, those are fighting words.

 

Why do I think that?

 

Intrinsic value is a theoretical concept and a wickedly difficult thing to estimate (just ask Buffett). Especially for a company like Fairfax where so much important stuff is going on under the hood. Instead, most investors simply focus on Fairfax’s current stock price and go from there (and make the buy, sell or hold decision based on what the animal entrails tell them at a given point in time).

 

Look at the commentary on this board when it comes to Fairfax… how much of the commentary is based primarily on a valuation framework and how much of the commentary is primarily based on where the stock price is trading?

 

To be fair, Fairfax’s stock price has been a rocket ship to the moon the past 4 years. But intrinsic value has also been on a rocket ship to the moon. Which has gone up more? Now that is a great question. So let’s explore that a little bit next. 

 

 

Part 2

 

Fairfax is not the same company today that it was in December 2021. Its insurance business is much larger and is more profitable. Its fixed income portfolio is much larger and earning a much higher average yield. Its equity holdings are much higher quality and performing much better. Fairfax has also been best-in-class with its capital allocation decisions the past 30 months (compared to there P/C insurance companies).

 

The magnitude of the change has even caught Fairfax by surprise. This is what Prem told us loud and clear at the AGM this year (see quote above).

 

As a result, operating earnings have spiked higher over the past 30 months. From 2016-2020, operating earnings at Fairfax averaged $1 billion per year. Importantly, this was the reference point for investors in Fairfax in November 2021. This is likely what they were using as their core input when calculating intrinsic value.

 

Today, operating earnings are in the $4.5 billion range. This is a 350% increase from the 2016-2020 average.

 

This level of operating earnings is sustainable moving forward - in fact, it should actually grow nicely over time (as record earnings get re-invested by the top-notch capital allocation team at Hamblin Watsa, creating larger/new income streams).

 

Of interest, book value has increased from $562 at Sept 30, 2021, to $940 today (March 31, 2024). Book value has increased 67% over the past 30 months. And operating earnings have increased 350%.

 

Back in Dec 2021, Fairfax paid 0.9 x BV ($500/$562) to repurchase 2 million shares.

 

Fast forward to today. So far in 2024, Fairfax has reduced effective shares outstanding by 605,000 or 2.6%. The total cost was $688 million or $1,090/share. Book value is $940/share so shares were purchased at a slight premium to BV of 1.15 x.

 

Compared to the SIB in 2021, does this mean Fairfax is now buying back shares at less of a discount to intrinsic value? Or at a price that is closer to intrinsic value?

 

Of course, the answer is - it depends. It depends on whether or not Fairfax is the same company that it was in late 2021. We know that Fairfax is not the same company. It has been transformed in recent years.

 

Operating earnings have increased 350%. Fairfax’s earnings have improved dramatically in size and quality. Higher quality means the company should now trade at a higher multiple than it did in December 2021.

 

Is 1.15 x BV the right multiple? No, of course not. It is much too low for a company of Fairfax’s quality. But investors won’t see it today.

 

But guess what? It will likely be obvious to investors 30 months from now.

 

Over the next three years, my guess is Fairfax will earn a total of somewhere between $450 to $500/share ($150 x 3 plus some growth). At the end of 2026, this would put book value at around $1,400/share. Let’s assume Fairfax should be valued at a P/BV multiple of 1.3 x. This is a low multiple for a company of Fairfax’s quality. This would put the share price at about $1,800 in 3 years time (early 2027). I view this estimate as a a reasonable baseline - could be a little higher or it could be a little lower. 

 

If this is how things play out, buying back shares today around $1,100/share will look like a steal in 3 years time (if the shares are trading at that time at around $1,800). 

 

In three years time, when investors look back to evaluate Fairfax’s repurchase of shares in 2024, my guess is they are going to conclude that Fairfax was able to buy them back at a price that was well below intrinsic value. Just like their evaluation today of the repurchase that Fairfax did in December 2021. With hindsight it will be obvious to everyone.

 

But today? Few can see it. And that is what I love about investing.

----------

PS: what is the appropriate P/BV multiple for Fairfax? What if it is 1.5 x ? It would be great to come back to this discussion in three years time...

 

Fairfax are value investors - and they are very good. They are aggressively buying back Fairfax stock today. That tells you loud and clear what they think about Fairfax's current valuation. And they understand the company - and its future prospects - very well.

Edited May 14, 2024 by Viking

[gfp]

After a brief technical delay, the NAIC website is functioning again and the Q1 reports are trickling out.  So far, for Odyssey Re, it looks like they sold $60m worth of Micron stock on 3/26 and purchased a Digit 10 year bond yielding 9.75% and an IIFL Finance 3 year bond yielding 9.5%, among other trades like Orla that we knew about.  This is not for consolidated Fairfax like a 13F, this is just for the Odyssey Re entity

 

Not sure if these will be legible so I am attaching the whole document.  Trades are at the end.

 

Purchases

 

 

Sales

 

23680.2024.P.Q1.P.O.1.4769174.pdf

[StubbleJumper]

2 hours ago, Viking said:

As per usual, I like to stir the pot a little to hopefully generate some good discussion. And estimating 'intrinsic value' at a point in time is a really important topic. 

 

Yeah, you'll get any number of estimates of IV for FFH.  A good, basic approach might be 1.2x or 1.3x adjusted BV.  That valuation is conservative enough that you aren't reliant on FFH actually routinely achieving its 15% BV growth target.  If they actually do routinely achieve that target, you will in retrospect evaluate that you were too conservative when you bought, but those are the good sorts of outcomes.

 

As you noted, when that SIB was conducted, it was priced slightly lower than book (ie, 0.9x).  At that point in time, the market was effectively saying that FFH was worth more dead than alive!  In theory, shareholders could have gotten roughly book if management had just thrown in the towel, run-off the business, sold the assets and written a cheque to shareholders!  Mr. Market can sometimes be a little too pessimistic, and when the price suggests that FFH shareholders would have been better off if the company weren't a going-concern, that's pretty negative.

 

But, what's it truly worth?  Well, if you believe it's worth 1.2x or 1.3x adjusted BV, then the valuation gap has closed significantly, but perhaps there's a bit more room to go.  The real question is what to do if Mr. Market pushes it to 1.4 or (gasp!) 1.5x.  That will be the point where shareholders will really need to think hard about what it's truly worth.  In the mean time, as long as the bottom doesn't suddenly fall out of the insurance market, we can sit back and watch the earnings flow in for the next few years.

 

 

SJ

[nwoodman]

1 hour ago, StubbleJumper said:

But, what's it truly worth?  Well, if you believe it's worth 1.2x or 1.3x adjusted BV, then the valuation gap has closed significantly, but perhaps there's a bit more room to go.  The real question is what to do if Mr. Market pushes it to 1.4 or (gasp!) 1.5x.  That will be the point where shareholders will really need to think hard about what it's truly worth.  In the mean time, as long as the bottom doesn't suddenly fall out of the insurance market, we can sit back and watch the earnings flow in for the next few years.

 

 

SJ

This sounds about right to me. Thinking about it over the last day I concluded that Prem left enough on the table to ensure that the optics of a direct buyback by the company will look good in a years time.  

[Viking]

Here is another way to look at the multiple Fairfax has been buying back shares for. 

 

In 2021, with the SIB, they paid a multiple of 0.9 x BV.

Today they are paying a multiple of 1.15. 

 

The multiple on the stock has increase 0.25 x. 

 

Fairfax is a very different company today than it was in 2021. Most importantly, operating earnings have increased from $1 billion (average from 2016-2020) to $4.5 billion today. The size and quality of Fairfax's income streams has increased dramatically. Clearly, the company deserves to trade at a much higher P/BV multiple today compared to 2021.

 

Perhaps the increase in multiple it deserves to trade at is 0.25 x. If so, then Fairfax today is buying back stock at the same (low) valuation that it was back in 2021. Anyways, I don't mean to beat this topic to death... just trying to think about it in different ways... 

Edited May 14, 2024 by Viking

[Viking]

21 minutes ago, nwoodman said:

This sounds about right to me. Thinking about it over the last day I concluded that Prem left enough on the table to ensure that the optics of a direct buyback by the company will look good in a years time.  

 

I like how Peter Lynch looked at insider buying/selling. "insiders might sell their shares for any number of reasons, but they buy them for only one: they think the price will rise."

 

He viewed the buying as a useful input when valuing a company. Usually, insiders only buy for one reason: they think their stock offers very good value. 

 

On the other hand, insiders sell for many reasons. As a result, insiders selling tends not to be a useful input when valuing a company. 

 

The fact that Fairfax has been able to buy back a significant number of shares the past 4.5 months and has not had to pay a big premium is a big win for shareholders. Thank you Prem  

Edited May 14, 2024 by Viking

[Hamburg Investor]

9 hours ago, StubbleJumper said:

 

Yeah, you'll get any number of estimates of IV for FFH.  A good, basic approach might be 1.2x or 1.3x adjusted BV.  That valuation is conservative enough that you aren't reliant on FFH actually routinely achieving its 15% BV growth target.  If they actually do routinely achieve that target, you will in retrospect evaluate that you were too conservative when you bought, but those are the good sorts of outcomes.

 

As you noted, when that SIB was conducted, it was priced slightly lower than book (ie, 0.9x).  At that point in time, the market was effectively saying that FFH was worth more dead than alive!  In theory, shareholders could have gotten roughly book if management had just thrown in the towel, run-off the business, sold the assets and written a cheque to shareholders!  Mr. Market can sometimes be a little too pessimistic, and when the price suggests that FFH shareholders would have been better off if the company weren't a going-concern, that's pretty negative.

 

But, what's it truly worth?  Well, if you believe it's worth 1.2x or 1.3x adjusted BV, then the valuation gap has closed significantly, but perhaps there's a bit more room to go.  The real question is what to do if Mr. Market pushes it to 1.4 or (gasp!) 1.5x.  That will be the point where shareholders will really need to think hard about what it's truly worth.  In the mean time, as long as the bottom doesn't suddenly fall out of the insurance market, we can sit back and watch the earnings flow in for the next few years.

 

 

SJ

I don‘t think, that 1.5 times book value is a high valuation. Of course it‘s not at a roe of 15% (so at 1.5 pb ratio, at a pe ratio of 10 than); but I even don’t find a lot of companies with a roe of 13% at a pe ratio below 11 or 12 these days (than again you come to 1.5 pb ratio). Do you? Okay, at 10% roe, a pe ratio of 15 - that‘s not interesting. But how likely is that? 

 

 

FFH realized a cagr of book value of 18% over 38 years. That 18% is the average after the worst decade in its history; before that bad years kicked in, the cagr was of course higher. That was a cagr of 26% from 1985 to 2009. 26% over a quarter century. Being in the top 1% (0.1%?) over a quarter century - was that luck or skill? If you think (like me), 26% over 24 years (and 18% over 38 years) has to be skill - how likely is it, that a value investor after that totally looses his skills?
 

Those following bad years in my view had at least something to do with the low bond yields; you could say the reason for the bad decade was only one factor (Prem doing bad). Than it would just be a coincidence, that a lot of other insurers did bad (although not that bad) in those years too, like MKL or BRK. But than: What’s your reasoning about those managers, as they at least haven’t outperformed the S&P500 over that decade too: Have Buffett and Gayner lost it too? 

 

Anyway its reasonable to assume the roe was around that 18% over that 38 years too, and 26% over the forst 24 years, or?
 

Looking at the change within Fairfax beginning in 2017 and assuming at least another 3 or 4 years being safe to go with 15+ % roe (so that’s 6 years in a row with a roe of 15+%), my question would be:

 

What’s your scenario for a hefty and longlasting downturn at FFHs roe after - looking from the standpoint in 3 or 4 years - 41 years with a cagr of around 18% roe? What makes you think, that the roe would go down to - say - 10% after 41 years with 18% on average? Low bond yields over the next 20 years? If that happens - okay, I go with you. It should get lower a bit, as FFH grows and gets bigger. Okay. But apart from external and from size factors, what should happen? Prem getting irrational? Loosing his skills after 41 years (again, if you’d see the last decade as a result of only one factor - Prem - and you think, that he‘s not anymore able of learning from mistakes - than that makes sense somehow; bit is that likely?!)? How reasonable is that - a value investor, who understood the power of float and having Bernard on his site - loosing all his skills after 4 decades of outperformance? 
 

I know, I know: Nothing is for sure. But that’s true for all stocks, so we should dig for reasonable risks, but I don’t see longterm risks other than Prem and Bernard getting hit by a bus, bonds going back to zero for 1 or 2 decades (but nobody knows… could go up to 8% with the same risk), a once in a century insurance risk materializing, galopping hyperinflation or deflation etc.; but most of that risks are just normal risks you have with any investment. 

 

Edited May 15, 2024 by Hamburg Investor

[nwoodman]

4 minutes ago, Viking said:

On the other hand, insiders sell for many reasons. As a result, insiders selling tends not to be a useful input when valuing a company. 

True, but we are not talking a paltry amount.  I think this is a 80-90c on the dollar repurchase that has been well considered.  

[Matthew Lembo]

Not to be too bullish, but would an ancillary benefit of share repurchases be that it extends the runway of potential compounding at FFH. By returning capital to shareholders it limits the size of the company’s capital base and allows FFH to continue to invest in smaller and perhaps higher returning opportunities and therefore delay the drag a larger capital base has on its investment universe as Buffett has warned about for years? 

[SafetyinNumbers]

25 minutes ago, Maxwave28 said:

Not to be too bullish, but would an ancillary benefit of share repurchases be that it extends the runway of potential compounding at FFH. By returning capital to shareholders it limits the size of the company’s capital base and allows FFH to continue to invest in smaller and perhaps higher returning opportunities and therefore delay the drag a larger capital base has on its investment universe as Buffett has warned about for years? 

I think they are trying to get the buybacks in before FFH goes in the 60. It would be surprising if that didn’t bring along some multiple expansion especially when FFH passes IFC in benchmark weight. 

[Viking]

1 hour ago, Maxwave28 said:

Not to be too bullish, but would an ancillary benefit of share repurchases be that it extends the runway of potential compounding at FFH. By returning capital to shareholders it limits the size of the company’s capital base and allows FFH to continue to invest in smaller and perhaps higher returning opportunities and therefore delay the drag a larger capital base has on its investment universe as Buffett has warned about for years? 

I think this is a great point. Especially if Fairfax wants to remain primarily a P/C insurer (and not morph into a conglomerate). Aggressively buying back undervalued shares as the hard market ends is such a good decision/use of excess capital.
 

It also means Fairfax/Prem is not focussed on empire building. Fairfax is instead clearly focussed on making decisions that build long term shareholder value. Very encouraging.

[StubbleJumper]

1 hour ago, Hamburg Investor said:

FFH realized a cagr of book value of 18% over 38 years. That 18% is the average after the worst decade in its history; before that bad years kicked in, the cagr was of course higher. That was a cagr of 26% from 1985 to 2009. 26% over a quarter century. Being in the top 1% (0.1%?) over a century - was that luck or skill? If you think (like me), 26% over 24 years has to be skill - how likely is it, that a value investor after that totally looses his skills?
 

 

I don't think that there's much question about whether it was luck or skill.  Nor do I think that there's any question about those skills suddenly disappearing.  But, it *is* definitely fair to question whether 1985-2009 can be replicated, and even whether the record of the entire 38 year period can be replicated on a going-forward basis.  Let's just say that I find that proposition to be dubious at best.  If it does happen, I'll be a happy guy, but there's a big difference between buying your first small insurance company and doubling its size 4 or 5 times and doing that when you already have net written of $23 billion.  Let's just say that I am a bit skeptical that they will routinely meet their 15% target for growth in BV.

 

2 hours ago, Hamburg Investor said:

Those foolowing bad years in my view had at least something to do with the low bond yields; you could say the reason for the bad decade was only one factor (Prem doing bad). Than it would just be a coincidence, that a lot of other insurers did bad (although not that bad) in those years too, like MKL or BRK. But than: What’s your reasoning about those managers, as they at least haven’t outperformed the S&P500 over that decade too: Have Buffett and Gayner lost it too? 

 

I must confess that I don't pay much attention to Gayner, so I won't offer a view on that.  Buffett hasn't lost it, but he has certainly had to change his approach to enable the returns that BRK has had.  The size challenge has been a real problem for BRK, particularly for investments.  Thank heavens that Todd or Ted put him onto Apple, or the past decade might have been pretty mediocre.

 

2 hours ago, Hamburg Investor said:

What’s your scenario for a hefty and longlasting downturn at FFHs roe after - looking from the standpoint in 3 or 4 years - 41 years with a cagr of around 18% roe? What makes you think, that the roe would go down to - say - 10% after 41 years with 18% on average? Low bond yields over the next 20 years? If that happens - okay, I go with you. It should get lower a bit, as FFH grows and gets bigger. Okay. But apart from external and from size factors, what should happen? Prem getting irrational? Loosing his skills after 41 years (again, if you’d see the last decade as a result of only one factor - Prem - and you think, that he‘s not anymore able of learning from mistakes - than that makes sense somehow; bit is that likely?!)? How reasonable is that - a value investor, who understood the power of float and having Bernard on his site - loosing all his skills after 4 decades of outperformance? 

 

The scenario is the math of operating an insurance sub.  Take a careful look at the disclosure that Prem provides in his annual letter which describes cost (benefit) of float, sovereign debt returns, and the resulting financing differential.  We have been in an unusually favourable situation for the past two or three years.  But, what that means is that either FFH has discovered the secret sauce which enables it to write a CR of 94 and buy treasuries at 5% and nobody else can do that, or it means that there is no secret sauce and other people can do that too.  If it's the former, then FFH shares a worth a fortune.  If it's the latter, capital will flow into the industry and those favourable returns will abate.  It is very rare to get BOTH a good underwriting profit AND strong sovereign debt returns.  My take is that the insurance market will turn, as it always does, so enjoy it while it lasts!

 

 

SJ

[Hektor]

1 hour ago, StubbleJumper said:

My take is that the insurance market will turn, as it always does

I guess when it turns, people will continue to buy sporting goods, get married, eat at restaurants, fly in/out of airport, travel/vacation, bank, lease ships to ship goods, insure etc., and Prem (and his team) will do what they have done all along, and then insurance will turn again. Do you agree?

[nwoodman]

9 hours ago, gfp said:

After a brief technical delay, the NAIC website is functioning again and the Q1 reports are trickling out.  . 

Thanks,  these are always fascinating.

 

Micron turned out to be a good trade, although they left a bit of money on the table. 

 

Date of Disposition: March 26, 2024
Number of Shares Sold: 572,934
Total Consideration: $60,018,937
Book/Adjusted Carrying Value: $48,894,188
Realized Gain: $29,262,819
Average Sale Price per Share: Approximately $104.76

 

Edited May 15, 2024 by nwoodman

[SafetyinNumbers]

51 minutes ago, nwoodman said:

Thanks,  these are always fascinating.

 

Micron turned out to be a good trade, although they left a bit of money on the table. 

 

Date of Disposition: March 26, 2024
Number of Shares Sold: 572,934
Total Consideration: $60,018,937
Book/Adjusted Carrying Value: $48,894,188
Realized Gain: $29,262,819
Average Sale Price per Share: Approximately $104.76

 

 

I guess they don't think of it as quality which makes sense. It will be interesting if they are patient on buying quality and then sitting on their hands. 

Edited May 15, 2024 by SafetyinNumbers

[nwoodman]

13 minutes ago, SafetyinNumbers said:

 

I guess they don't think of it as quality which makes sense. It will be interesting if they are patient on buying quality and then sitting on their hands. 

True, I thought it was a move in the right direction though 

[StubbleJumper]

12 hours ago, Hektor said:

I guess when it turns, people will continue to buy sporting goods, get married, eat at restaurants, fly in/out of airport, travel/vacation, bank, lease ships to ship goods, insure etc., and Prem (and his team) will do what they have done all along, and then insurance will turn again. Do you agree?

 

Without a doubt, but the math of it can be a bit nasty.  If the insurance market turns and the CR bounces up to even 98 from the current 94, it would hurt a fair bit.  On $23B of float net written, that would be nearly $1B hit income, pre-tax.  You'd need to sell a lot of chicken dinners at St Hubert to offset that!  And a situation where it's possible to simultaneously write a CR of 98 and buy sovereign debt at 5% would still be an unusually good financing differential...

 

 

SJ

Edited May 15, 2024 by StubbleJumper
generally sloppy composition

[Hektor]

7 minutes ago, StubbleJumper said:

Without a doubt, but the math of it can be a bit nasty.  If the insurance market turns and the CR bounces up to even 98 from the current 94, it would hurt a fair bit. 

Agree. However, what would be the likely duration of this situation? It could be a long time if there is a once in a 50 or a 100 year event, I would think. I guess FFH is better organized now than in the past to at least tide over such a period, if not take advantage of it (I don't know how, though )

[Hektor]

12 minutes ago, StubbleJumper said:

And a situation where it's possible to simultaneously write a CR of 98 and buy sovereign debt at 5% would still be an unusually good financing differential...

How like is such a situation, where CR goes up and a %5 debt opportunity exists? 

[Hamburg Investor]

12 hours ago, StubbleJumper said:

 

I don't think that there's much question about whether it was luck or skill.  Nor do I think that there's any question about those skills suddenly disappearing.  But, it *is* definitely fair to question whether 1985-2009 can be replicated, and even whether the record of the entire 38 year period can be replicated on a going-forward basis.  Let's just say that I find that proposition to be dubious at best.  If it does happen, I'll be a happy guy, but there's a big difference between buying your first small insurance company and doubling its size 4 or 5 times and doing that when you already have net written of $23 billion.  Let's just say that I am a bit skeptical that they will routinely meet their 15% target for growth in BV.

 

I don't think, you'll find a lot of people here, who are looking for 18% or 26% returns when investing in Fairfax. As I have already explained here, I don't do that. You describe the challenge very well: it is much easier to achieve extraordinary returns when you are smaller.

 

12 hours ago, StubbleJumper said:

I must confess that I don't pay much attention to Gayner, so I won't offer a view on that.  Buffett hasn't lost it, but he has certainly had to change his approach to enable the returns that BRK has had.  The size challenge has been a real problem for BRK, particularly for investments.  Thank heavens that Todd or Ted put him onto Apple, or the past decade might have been pretty mediocre.

Together with Markel, Berkshire is my second largest investment. As happy as I am about Apple's performance, even that is only a small part of Berkshire as a whole. Berkshire would be worse off without Apple, but it wouldn't be in a completely different league. However, my general thesis is that the investment decisions at Berkshire, Markel and Fairfax will never be so bad in the long run that they use up the advantage of the float. Whereby the float advantage is greater at Fairfax than at Markel and Berkshire (which also uses other levers, such as tax deferral) due to the greater leverage. In any case, Prem can make even more stupid investments than Gayner and still Fairfax will do better.

 

12 hours ago, StubbleJumper said:

 

The scenario is the math of operating an insurance sub.  Take a careful look at the disclosure that Prem provides in his annual letter which describes cost (benefit) of float, sovereign debt returns, and the resulting financing differential.  We have been in an unusually favourable situation for the past two or three years.  But, what that means is that either FFH has discovered the secret sauce which enables it to write a CR of 94 and buy treasuries at 5% and nobody else can do that, or it means that there is no secret sauce and other people can do that too.  If it's the former, then FFH shares a worth a fortune.  If it's the latter, capital will flow into the industry and those favourable returns will abate.  It is very rare to get BOTH a good underwriting profit AND strong sovereign debt returns.  My take is that the insurance market will turn, as it always does, so enjoy it while it lasts!

 

 

SJ

I think there are insurance companies that have the secret sauce. Geico is one of them, RLI too, Markel was also doing very well for many years; unlike Fairfax. But since 2011, Fairfax's combined ratio has regularly improved massively compared to Markel and the PC market as a whole. So I do believe that Fairfax has found a bit of the special sauce.
 

The interesting thing is that Fairfax achieved the CAGR of 26% at a time when the combined ratios were not particularly good compared to the market. Now the insurance business is structurally better (since Andy Barnard has been there; he started as COO in 2011). So while Fairfax grows and that surely depresses the outlook, the improved insurance gives tailwind.
 

I think you have to differentiate between two things: The structural change that Fairfax has gone through: The Fairfax insurance portfolio is much better today than it was in 2011, but not as good as, say, RLI. Also, the many new smaller insurance companies scattered around the world will improve the learning curve and provide opportunistic opportunities. And on the other hand, we have had and continue to have exceptionally good times in recent years (hard market). But I think that with interest rates above 4%, insurance companies in general will benefit, and the good insurers even a bit more of course. And if interest rates go down again? Then things will be worse. And if they rise to 8%? Then insurance companies will fare much better than the market. And where are interest rates going now? Well, nobody knows. But just because they were so low now doesn't mean they have to go there again. That would be the first time they went back to a point just because they were already there, wouldn't it?
 

In the end, the question is whether or not one interprets the combination of 1. favourable float (which Fairfax did not have in the past, but now has in my opinion), 2. the willingness to invest one's own equity in shares and companies and 3. having a value investor from Graham and Doddsville as CEO is a corporate advantage. If this is a clear advantage, then outperformance against an average company should be possible. If 10% roe is the average, then Berkshire, Markel and Fairfax should outperform. If Fairfax doubles twice times from here, then I am also sceptical as to whether 15% will be achievable in the long term. But until then I think it is absolutely possible. You can already see that Fairfax is focussing more on quality than Berkshire. Fairfax should therefore be able to follow the path outlined in the "Buffett Alpha" study, i.e. investing in large quality companies.

[MMM20]

8 minutes ago, Hamburg Investor said:

In the end, the question is whether or not one interprets the combination of 1. favourable float (which Fairfax did not have in the past, but now has in my opinion), 2. the willingness to invest one's own equity in shares and companies and 3. having a value investor from Graham and Doddsville as CEO is a corporate advantage. If this is a clear advantage, then outperformance against an average company should be possible. If 10% roe is the average, then Berkshire, Markel and Fairfax should outperform. If Fairfax doubles twice times from here, then I am also sceptical as to whether 15% will be achievable in the long term

 

Nice summary. ~12% per share compounding should be achievable with these structural advantages and rounds to a ~10x return over a couple decades. That's why I'm here. I hope they drop the ~15% goal as they get larger and just tell investors that as value investors they'll take what the market gives them.

[petec]

On 5/15/2024 at 1:52 AM, StubbleJumper said:

It is very rare to get BOTH a good underwriting profit AND strong sovereign debt returns.  My take is that the insurance market will turn, as it always does, so enjoy it while it lasts!

 

+1

 

Exactly correct. 

[petec]

15 hours ago, Hamburg Investor said:

In the end, the question is whether or not one interprets the combination of 1. favourable float (which Fairfax did not have in the past, but now has in my opinion), 2. the willingness to invest one's own equity in shares and companies and 3. having a value investor from Graham and Doddsville as CEO is a corporate advantage.

 

The only thing that really matters in the long term is culture. Fairfax has that in spades. That's the advantage of having a controlling shareholder. And it is the moat.