Xerxes Posted May 17, 2024 Posted May 17, 2024 On 5/14/2024 at 8:16 PM, Viking said: 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. @Maxwave28 @Viking Home Depot puts out sometimes +40% ROE, given its fully shrunk equity … thanks to the very large historical capital return.
Viking Posted May 19, 2024 Posted May 19, 2024 (edited) Capital allocation - Circle of Competence - Margin of Safety - Concentration In this section we are going to explore the topic of capital allocation. Capital allocation is the most important responsibility of a management team. Why? Capital allocation decisions are what drive the long-term performance of a company and important metrics like reported earnings, growth in book value and return on equity. In turn, these metrics drive the multiple given to the stock by Mr. Market - and finally the share price and investment returns for shareholders. When done well, capital allocation does two important things: Delivers a solid return. Improves the quality of the company. Therefore, the fundamental task of an investor is to determine if management, over time, is making intelligent decisions regarding capital allocation. How to be a good investor / capital allocator Being a good investor is the same thing as being a good capital allocator. Warren Buffett is a great teacher. In his 1996 shareholder letter, Buffett succinctly lays out what an investor needs to do to be successful. This is the same approach that Berkshire Hathaway has followed - quite successfully - for decades. We have included Buffett’s full quote below. In his framework, Buffett introduces the concept of ‘circle of competence.’ Given its importance, we will explore it more fully in the next section. Warren Buffett - 1996 Shareholder Letter “Let me add a few thoughts about your own investments. Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after fees and expenses) delivered by the great majority of investment professionals. “Should you choose, however, to construct your own portfolio, there are a few thoughts worth remembering. Intelligent investing is not complex, though that is far from saying that it is easy. What an investor needs is the ability to correctly evaluate selected businesses. Note that word "selected": You don't have to be an expert on every company, or even many. You only have to be able to evaluate companies within your circle of competence. The size of that circle is not very important; knowing its boundaries, however, is vital. “To invest successfully, you need not understand beta, efficient markets, modern portfolio theory, option pricing or emerging markets. You may, in fact, be better off knowing nothing of these. That, of course, is not the prevailing view at most business schools, whose finance curriculum tends to be dominated by such subjects. In our view, though, investment students need only two well-taught courses - How to Value a Business, and How to Think About Market Prices. “Your goal as an investor should simply be to purchase, at a rational price, a part interest in an easily-understandable business whose earnings are virtually certain to be materially higher five, ten and twenty years from now. Over time, you will find only a few companies that meet these standards - so when you see one that qualifies, you should buy a meaningful amount of stock. You must also resist the temptation to stray from your guidelines: If you aren't willing to own a stock for ten years, don't even think about owning it for ten minutes. Put together a portfolio of companies whose aggregate earnings march upward over the years, and so also will the portfolio's market value. “Though it's seldom recognized, this is the exact approach that has produced gains for Berkshire shareholders: Our look-through earnings have grown at a good clip over the years, and our stock price has risen correspondingly. Had those gains in earnings not materialized, there would have been little increase in Berkshire's value.” ————— Mental model: circle of competence A mental model is simply a framework that helps us understand how something works. Mental models guide our behaviour and they help us solve problems. “The more models we have, the better able we are to solve problems. But if we don't have the models, we become the proverbial man with a hammer. To the man with a hammer, everything looks like a nail. If you only have one model, you will fit whatever problem you face to the model you have” Charlie Munger To guide investors, Warren Buffett introduces the concept of ‘circle of competence’ as a foundational mental model. What is it? ‘Circle of competence’ is a subject area when you have an edge. It is a match with your skills and experiences. To be successful at investing, stick to areas where you know more than other people. This might sound obvious. Few actually do it. It allows you to answer the 3 fundamental questions: Do you understand the business? Is it run by competent management? Does it sell for a price that is attractive? Let’s revisit Buffett’s quote: “You only have to be able to evaluate companies within your circle of competence. The size of that circle is not very important; knowing its boundaries, however, is vital.” Warren Buffett 1996 Shareholder Letter Buffett highlights a number of important points: Self awareness: You have to know what your circle of competence is. The size of the circle is not very important. Importantly, it can be expanded over time. Knowing the boundaries is ‘vital’. This is knowing what to avoid. In the HBO documentary linked below, Buffett expands on ‘circle of competence’ and provides additional insight: Patience: wait for the right opportunity - one that is in your ‘sweet spot.’ Think independently: don’t let the mood of Mr. Market influence what you are doing. HBO Documentary: Becoming Warren Buffett (30:30 minute mark) https://youtu.be/2Q5zhl4YVo8?si=A5RY0o3ivBfbPHYz “I was genetically blessed with a certain wiring that is very useful in a highly developed market system that has lots of chips on the table where I happen to be good at that game “Ted Williams wrote a book called the science hitting. In it he has a picture of himself at bat and the strike zone broken into 77 squares. He said if he waited for the pitch that was really in his sweet spot he would bat 400 and if he had to swing at something in the lower corner he would probably bat 235. “In investing I’m in a no-called strike business, which is the best business you can be in. I can look at 1000 different companies and I don’t have to be right on every one of them or even 50 of them. So I can pick the ball i want to hit. “The trick with investing is to sit there and watch pitch after pitch go by and wait for the one that is right in your sweet spot. If people are yelling ‘swing you bum!’ Just ignore them. “There is a temptation for people to act far too frequently in stocks simply because they’re so liquid. “Over the years you develop a lot of filters. I do know what is called my circle of competence. So i stay within that circle. I don’t worry about things that are outside of that circle. Defining what your game is… where you’re going to have an edge… is enormously important.” ————— Margin of safety “If you were to distil the secret of sound investment into three words we venture the motto, margin of safety.” Ben Graham The Intelligent Investor - Chapter 20 Margin of safety is one of the most important principles/concepts in investing. It is defined as the difference between a stock’s price and its intrinsic value. Buying a stock with a large margin of safety does two things at the same time: Limits the downside risk. Provides a high return opportunity. Circle of competence and margin of safety Only invest in opportunities that: fall within your circle of competence. can be purchased at prices that provide a margin of safety "If you understood a business perfectly — the future of a business — you would need very little in the way of a margin of safety," Warren Buffett - 1997 Berkshire Hathaway Annual Meeting ————— Concentration "Diversification may preserve wealth, but concentration builds wealth." Warren Buffett “If you can identify six wonderful businesses, that is all the diversification you need. And you will make a lot of money. And I can guarantee that going into a seventh one instead of putting more money into your first one is gotta be a terrible mistake. Very few people have gotten rich on their seventh best idea. But a lot of people have gotten rich with their best idea. So I would say for anyone working with normal capital who really knows the businesses they have gone into, six is plenty…” Warren Buffett - Talk at Florida University 1998 (1:05:30 mark) https://youtu.be/2MHIcabnjrA (great 90 minute video) A key part of Berkshire Hathaway’s long term success has been holding a concentrated portfolio of investments. Circle of competence and concentration Only investing in his ‘circle of competence’ gives Buffett conviction - and allows him to concentrate in his best ideas. This further improves Berkshire Hathaway’s long term returns. ————— Circle of competence, margin of safety and concentration Circle of competence, margin of safety and concentration are concepts that are inter-related and synergistic. Combined, they provide results that are far more powerful than those that could be achieved on their own. (1 + 1 + 1 = 5) Circle of competence = good returns Circle of competence + margin of safety = better returns Circle of competence + margin of safety + concentration in best ideas = best returns Key take-away: of the three, circle of competence is perhaps the most important component. It is the lynchpin. It is what allows the other two components to work their magic. ————— As he told us earlier, this has been the approach that Buffett has been using with great success to grow Berkshire Hathaway for decades. This also gives investors a blueprint to evaluate the capital allocation skills of management teams at other companies. Let’s now apply what we have learned. Let’s look at the capital allocation decisions of Fairfax Financial. We are also going to explore something Charlie Munger called ‘cannibal investing.’ Part 2 should be out in the next couple of days. Edited May 19, 2024 by Viking
Viking Posted May 20, 2024 Posted May 20, 2024 (edited) How to be a good investor / capital allocator: Part 2 For Part 1 - scroll up to read the previous post ‘Look at the cannibals’ One of Charlie Munger’s investing strategies was to look for ‘financial cannibals.’ This referred to companies that were buying back a large amount of their own stock over long periods of time. Of course, the price paid for the stock was important. Buying back large amounts of stock at cheap prices creates extraordinary value for shareholders. The math: (Important: Net earnings attributable to non-controlling interests (minority shareholders) is not part of EPS calculation. We will come back to this later.) Assuming net earnings stays the same, a lower share count will result in an increase in EPS. And if net earnings grows (numerator increases) at the same time the share count is reduced (denominator decreases) then EPS will increase even more. This becomes quite a powerful combination if it can be sustained over many years. This strategy can work so well because it checks all three boxes of a successful capital allocator: circle of competence - the management team has a big edge here - it understands the company/business better than anyone else. margin of safety - the management team also has a a big edge here - it understands the intrinsic value of the company better than anyone else and how it compares to the market price. concentration - when shares get wicked cheap (intrinsic value is much greater than the market value) management can buy back shares in volume. “…what those (prosperous) companies had in common was they bought huge amounts of their own stock and that contributed enormously to the ending record. Lou, Warren, and I would always think the average manager diversifying his company with surplus cash that’s been earned more than half the time they’ll screw it up. They’ll pay too high a price and so on. In many cases they’ll buy things where an idiot could see they would have been better to buy their own stock than buy this diversifying investment. And so somebody with that mind-set would be naturally drawn to what Jim Gibson used to call “financial cannibals,” people that were eating themselves.” Janet Lowe - Damn Right: Behind the Scenes with Berkshire Hathaway Billionaire Charlie Munger Fairfax: Record earnings and capital allocation Today Fairfax is generating a record amount of earnings. And given their sources (high quality), very high earnings are expected to continue for the next 3 or 4 years. This means Fairfax will be generating and allocating a record amount of capital over the next 4 years. Like all companies, Fairfax has three basic options when it comes to capital allocation: Re-invest in the business (organic growth or acquisitions) Buy back stock Pay a dividend What exactly will Fairfax do? Of course, this is the rub. The answer is we don’t know exactly what Fairfax will do. What Fairfax does will depend on a number of factors (internal and external). So when it comes to future capital allocation decisions, investors will need to trust the management team at Fairfax. Should we trust the management team at Fairfax? Will they be rational? Will they allocate capital in a way that it builds long term shareholder value? To help answer these questions we need to look into the past. But how far back do we need to go? Given Fairfax’s colourful history, this is a really interesting question. My view is investors should focus primarily on the past 5 years, with emphasis given to the past 3 years. Let’s start by looking at what Fairfax has been doing so far in 2024. And then let’s zoom out and look at what they have been doing over the past 4 years. What has Fairfax been doing on the capital allocation front so far in 2024? With three different activities, over the first 4.5 months of 2024, Fairfax has allocated $1.1 billion of capital. That is a significant number. 1.) Share buybacks = $613 million To May 10, Fairfax has reduced effective shares outstanding by 561,102 or 2.44%. The total cost was $613 million or $1,092/share. Book value at March 30, 2024 was $940/share. The shares were taken out at 1.15 x BV which is a very low valuation given the quality of Fairfax and its very strong earnings outlook over the next couple of years. It should be noted that Fairfax’s book value does not capture the excess of fair value (FV) over carrying value (CV) for the associate equity holdings of $1.2 billion pre-tax (about $50/share). “At March 31, 2024 the excess of fair value over carrying value of investments in non-insurance associates and consolidated non-insurance subsidiaries was $1,185.6 million.” Fairfax Q1 2024 Earnings Release If we include the excess of FV over CV ($35 after-tax) and expected 2024 earnings (US$140/share - current estimate at Yahoo Finance), Fairfax is buying back its shares at less than 1 x estimated 2024YE BV. That is very cheap. Lowering the share count boosts earnings per share. Share buybacks, when done at attractive prices, is a very shareholder friendly action. 2.) Take out minority interest in insurance companies = $127 million In April of 2024, Fairfax increased its stake in Gulf Insurance Group (GIG) from 90% to 97.1% “Subsequent to March 31, 2024, the company completed a mandatory tender offer for the non-controlling interests in Gulf Insurance and increased its equity interest from 90.0% to 97.1% for cash consideration of $126.7.” Fairfax Q1 2024 Interim Report Taking out minority partners means ‘net earnings attributable to non-controlling interests’ (minority shareholders) decreases. And ‘Net earnings attributable to shareholders’ increases. Taking out a minority partner means Fairfax shareholders are now entitled to receive a larger share of the future earnings at GIG. Like a share buyback, this activity also boosts earnings per share. 3.) Dividend = $363 million On January 3, 2024, Fairfax increased the dividend from $10 to $15/share, an increase of 50%. At the time Fairfax shares were US$914. The $15 dividend provided a yield to shareholders of 1.6%. “Given Fairfax’s substantial growth since it inaugurated a US$10 per share annual dividend 14 years ago, and given Fairfax’s current position of foreseeing strong earnings for the next few years based on insurance company underwriting income, locked-in interest and dividend income and income from associates, we felt it was appropriate to raise our annual dividend this year to US$15 per share, and we believe that this should be a sustainable level,” said Prem Watsa, Chairman and Chief Executive Officer of Fairfax.” Fairfax New Release January 3, 2024 Dividend payments provide an income stream for investors that can be reinvested to compound returns over time. Paying a consistent and growing dividend is seen as a sign of financial strength for a company. It is important to note that Fairfax is has been making many more capital allocation decisions than just the three highlighted above. Importantly, they continue to grow their P/C insurance operations in the current hard market. And they continue to actively manage their large fixed income and equity investment portfolio. Summary With these three activities highlighted above Fairfax allocated $1.1 billion of capital in the first 4.5 months of 2024. Investors want to see Fairfax grow earnings per share over time. Share buybacks reduce the denominator. Buying out minority shareholders increases the numerator. One of these activities would have been good. Both of these happening at the same time is even better - resulting in even larger EPS growth. And paying a dividend allows an investor, should they choose, to buy more shares - and increase their ownership share in the company even more. All three of these activities are very shareholder friendly - each delivers a solid return for shareholders. Importantly, they are also very low risk. Fairfax is also exercising good ‘plate discipline’ - with these capital allocation decisions they are swinging at pitches that are in their sweet spot. Each of these are what I would call ‘solid single’ types of investments. They move the runners around the bases. And of course, that is how you win the game. Importantly, the management team at Fairfax is acting rationally and building long term shareholder value with these decisions. This bodes well for the future. What if we look at each of these decisions - but over a slightly longer time horizon? When we look out a couple of years we see ‘cannibal investing’ at its best. Stock buybacks Over the past 6.4 years, Fairfax has spent $2.9 billion and reduced effective shares outstanding by 19.1%. That is a massive reduction in the share count. The average cost was $549/share. Book value at Dec 31, 2024 was $940/share. Intrinsic value is likely north of 1.4 x BV = $1,300. Bottom line, shares were repurchased at a price that was well below intrinsic value. For fun, let’s add in the total return swap position - giving Fairfax exposure to 1.96 million Fairfax shares at an average cost of $373/share. Over the past 6.4 years, Fairfax repurchased/got exposure to 26.2% of shares outstanding at an average cost of $501/share. These purchases have been very accretive for long term shareholders. This is a great example of superior capital allocation. These string of transactions will likely go down as one of Fairfax’s greatest investment decisions (to aggressively take out/get exposure to shares). Buying out minority partners Insurance Holdings Over the past 3.4 years, Fairfax has spent $1.9 billion to take out its partners and increase its ownership stake in its existing P/C insurance businesses. There were two big moves: 1.) In 2022, significantly increasing its ownership in Allied World from 70.9% to 83.4%. 2.) In 2023/24, obtaining a control position and increasing its ownership in Gulf Insurance Group from 43.4% to 97.1%. This move solidifies Fairfax’s position in the rapidly growing Middle East North Africa (MENA) region. These are quality P/C insurance companies. These decisions are very low risk and deliver a solid return to shareholders. Taking out minority partners is a solid way for Fairfax to grow ‘net earnings attributable to Fairfax shareholders.’ Price paid matters: I think the take-out price that Fairfax will eventually pay is largely set when the initial deal is struck with the minority partners in the insurance businesses. This provides Fairfax with some degree of certainty - and it provides the minority partners with an acceptable return over the life of the transaction. Do I have this generally right? I would appreciate hearing what others think on this topic. Non-insurance Consolidated Equities Over the past 3.4 years, Fairfax has spent $700 million to increase the size of its collection of consolidated equity holdings. This is slowly growing another income stream for Fairfax - one that is unrelated to its insurance business. This makes Fairfax a stronger, more financially resilient company. It will be interesting to see if Fairfax continues to grow this bucket of holdings in the future. Dividends Over the past 4 years, Fairfax has paid a total of $1.13 billion in dividends on its common shares. Summary Buying back shares on the cheap: over the past 6.4 years, Fairfax has spent $2.9 billion and reduced effective share outstanding by 19.1%. Buying out partners in its consolidated insurance and non-insurance holdings: over the past 3.4 years, Fairfax has spent $2.5 billion taking out minority partners in its insurance and non-insurance businesses. When it comes to capital allocation, for years now Fairfax has been a ‘financial cannibal.’ The kind that Charlie Munger would have really liked. Over the past 4 years, Fairfax has also paid out $1.1 billion in dividends. These are funds investors can reinvest to compound returns even more over time. But the Fairfax story gets better. Thats not all Fairfax has been doing with capital allocation over the past 4 years. Its has also been: Aggressively organically growing its P/C insurance business - taking full advantage of the hard market that started in late 2019. Selling assets at premium valuations - pet insurance, Resolute Forest Products, Ambridge Parners - for +$2 billion. Fixed income team navigated greatest bond bull / bear market in history. Protected balance sheet. Now earning record interest income. Dramatically improved the overall quality of their equity portfolio. Exited many poor investments. Merged others with stronger companies. New investments have been performing well. Some legacy investments have turned around. Group has never been better positioned. As a result of all of Fairfax’s capital allocation decisions, earnings at Fairfax have spiked higher. At the same time, the share count has come down meaningfully. Earnings per share have increased dramatically. What have we learned about the management team at Fairfax? The management team at Fairfax has been acting very rationally with their decisions - over many years. They have been swinging at pitches that are in their sweet spot - that are in their circle of competence. They have been scaling/concentrating their best opportunities appropriately. Their decisions have been building an enormous amount of shareholder value. When it comes to capital allocation, Fairfax’s track record in recent years has been outstanding. The team at Hamlin Watsa has been hitting the ball like Ted Williams. Not only have they been hitting for a very high average, but many of their decisions have been the financial equivalent of a home run. This is very encouraging for Fairfax shareholders. Guess what Fairfax is going to do in the future? Fairfax continues to have many good options in front of them: Buy back Fairfax stock - it still very cheap Buy out minority partners in its insurance operations (Eurolife, Brit, Allied World, Odyssey) - the table is set. Of course, Fairfax will also continue to do all the other regular things: Organically grow its P/C insurance business. Actively manage its fixed income and equity investment portfolio. Pay a modest dividend. And Fairfax will be opportunistic and take advantage of volatility in financial markets. As a result, we should see earnings continue to grow. And share count continue to shrink. And, like the past 4 years, this should result in much higher earnings per share. As we said earlier, we don’t know exactly what Fairfax will do in the future. It will depend on a number of factors (internal and external). But with their actions over the past 4 years they certainly have earned our trust. With record earnings coming over the next 4 years, Fairfax is in a great position - the set-up for Fairfax shareholders has never looked better. In 2024, Fairfax has entered a new phase in its evolution as a company - the 'wonderful business' phase. And as Buffett teaches us: “Time is the friend of the wonderful business...” Edited May 20, 2024 by Viking
adventurer Posted May 22, 2024 Posted May 22, 2024 Hello, is anyone here concerned about the fact that in the annual letter to Fairfax shareholders the CEO keeps talking about EBITDA? EBITDA does not seem to give an accurate update on the earnings as opposed to EBIT to my mind. Was there a discussion about that somewhere?
StubbleJumper Posted May 22, 2024 Posted May 22, 2024 30 minutes ago, adventurer said: Hello, is anyone here concerned about the fact that in the annual letter to Fairfax shareholders the CEO keeps talking about EBITDA? EBITDA does not seem to give an accurate update on the earnings as opposed to EBIT to my mind. Was there a discussion about that somewhere? How much does depreciation and amortization amount to for a holding company that is primarily an insurance outfit? Without looking at the numbers, I would have assumed that EBIT and EBITDA would be pretty much the same thing. SJ
gfp Posted May 22, 2024 Posted May 22, 2024 I think they are just referring to the use of EBITDA in providing color on some of the unconsolidated marks on the balance sheet - private stuff, investments in associates, equity method stuff. Prem isn't using EBITDA to discuss insurance company results as far as I am aware.
adventurer Posted May 22, 2024 Posted May 22, 2024 1 hour ago, StubbleJumper said: How much does depreciation and amortization amount to for a holding company that is primarily an insurance outfit? Without looking at the numbers, I would have assumed that EBIT and EBITDA would be pretty much the same thing. SJ If depreciation and amortization do not apply for results of insurance operations (which I do not yet know as a newbie), yes. But considering all the non-insurance operation Fairfax is involved in it may be more useful to dispense with EBITDA. Out of transparency at least it seems to me.
Xerxes Posted May 22, 2024 Posted May 22, 2024 28 minutes ago, adventurer said: If depreciation and amortization do not apply for results of insurance operations (which I do not yet know as a newbie), yes. But considering all the non-insurance operation Fairfax is involved in it may be more useful to dispense with EBITDA. Out of transparency at least it seems to me. it is exactly as GFP said. At company level, they talk book value and EPS. Never EBITDA. EPS goes hand in hand with BV. That said for private holding they quote EBITDA now and then.
MMM20 Posted May 22, 2024 Posted May 22, 2024 Hot take: EBITDA is a completely valid metric to use for some businesses *ducks*
Parsad Posted May 22, 2024 Posted May 22, 2024 48 minutes ago, MMM20 said: Hot take: EBITDA is a completely valid metric to use for some businesses *ducks* Yes, that is true. Any statistic or accounting number should not be looked upon in a vacuum. But each can provide some insight into the company's true nature and financial position. P/E by itself offers nothing...same with EPS or P/BV...EBITDA is no different. Cheers!
gfp Posted May 22, 2024 Posted May 22, 2024 Someone asked Tom Gayner about why MKL references EBITDA occasionally in their reports, especially as it relates to the MKL Ventures type stuff. Start at 1:32:40 timestamp or thereabouts on this video for the question. He eventually gets to why they still use it sometimes. It is part of the language of private businesses, private business brokers, etc. Make your own adjustments but cash flow available to pay debt and ownership has its uses -
Haryana Posted May 24, 2024 Posted May 24, 2024 Look at the repeated follies of Artificial Intelligence - https://www.theglobeandmail.com/investing/markets/stocks/FFH-T/pressreleases/26299224/26299224/ The same company (FFH) is twice in the table and with different valuation numbers without specifying in what currency.
gfp Posted May 31, 2024 Posted May 31, 2024 I just noticed there was a 25,000 share trade in FFH yesterday. Looked to be initiated by the buyer but obviously there was a buyer and a seller. That's a large single trade for Fairfax -
villainx Posted May 31, 2024 Posted May 31, 2024 1 hour ago, gfp said: I just noticed there was a 25,000 share trade in FFH yesterday. I can share that it wasn't me. Margin don't get that high.
hasilp89 Posted May 31, 2024 Posted May 31, 2024 2 hours ago, gfp said: I just noticed there was a 25,000 share trade in FFH yesterday. Looked to be initiated by the buyer but obviously there was a buyer and a seller. That's a large single trade for Fairfax - Buyback?
Malmqky Posted May 31, 2024 Posted May 31, 2024 (edited) Oh hey, core re/insurance subs upgraded to A+ and FFH upgraded to BBB+ by S&P Edited May 31, 2024 by Malmqky
nwoodman Posted May 31, 2024 Posted May 31, 2024 1 hour ago, Malmqky said: Oh hey, core re/insurance subs upgraded to A+ and FFH upgraded to BBB+ by S&P Excellent “Fairfax has built a very strong competitive position, through organic growth and strategic acquisitions, based on large and diversified re/insurance operations that are well established in their respective markets. Fairfax is one of the major global P/C re/insurers with $28.9 billion in gross premiums written (GPW) in 2023 (about $31.8 billion on a pro forma basis when including the $2.9 billion of GPW from the Gulf Insurance Group [GIG] acquisition in December 2023). We expect Fairfax's consolidated GPW to increase by about 15% in 2024 mostly driven by the GIG purchase. However, we believe the top line growth will likely moderate to about 5% in 2025-2026, supported by still favorable re/insurance.” https://disclosure.spglobal.com/ratings/pt/regulatory/article/-/view/type/HTML/id/3188808
Hoodlum Posted May 31, 2024 Posted May 31, 2024 7 hours ago, gfp said: I just noticed there was a 25,000 share trade in FFH yesterday. Looked to be initiated by the buyer but obviously there was a buyer and a seller. That's a large single trade for Fairfax - Another 66k block traded at the close today
gfp Posted May 31, 2024 Posted May 31, 2024 (edited) 14 minutes ago, Hoodlum said: Another 66k block traded at the close today I don't see that one - can you provide a screenshot of time and sales for FFH that shows what you are talking about? edit - OK I think I see it now but not in the T&S I have. I see 74,217 shares traded just after the close at 1534.31 I suppose it is possible / likely that these large crosses are just the routine stuff related to the various TRS counterparties. Edited May 31, 2024 by gfp
Hoodlum Posted May 31, 2024 Posted May 31, 2024 12 minutes ago, gfp said: I don't see that one - can you provide a screenshot of time and sales for FFH that shows what you are talking about? edit - OK I think I see it now but not in the T&S I have. I see 74,217 shares traded just after the close at 1534.31 I suppose it is possible / likely that these large crosses are just the routine stuff related to the various TRS counterparties.
Viking Posted June 2, 2024 Posted June 2, 2024 (edited) Fairfax’s Secret Sauce Fairfax has compounded BVPS at 18.9% over the past 38 years. The share price has compounded at 18.3% over the same time frame. These calculations are in US$ and include dividends. Importantly, Fairfax’s performance has been very strong over the past 3 years. Fairfax’s outstanding performance is not some numerical/statisitical aberration - some relic of the distant past. When compared to the universe of US listed companies since 1985, Fairfax’s compound return (18.3%) puts it in the top 1% of all companies. Fairfax calculates the numeric ranking at #17. That is an amazing stat. Note: All slides used in this post are from Prem's presentation at Fairfax's AGM held on April 11, 2024. https://www.fairfax.ca/wp-content/uploads/Fairfax-AGM-2024.pdf This leads to 3 very important questions: What caused Fairfax’s significant outperformance over the past 38 years? Are the factors/conditions that led to this outperformance still in place? What does this mean for the future performance of Fairfax? Let’s start by exploring the first question. What caused Fairfax’s significant outperformance over the past 38 years? How did Fairfax achieve and sustain such a high level of performance? Was Fairfax’s incredible performance just luck? Did Fairfax’s performance have little to do with ability/skill and effort? Was Fairfax simply in the right place at the right time - a benefactor of good fortune? Timeframe is the key to answering this question. If Fairfax’s strong performance had happened over a short time period (like 5 or 10 years) then perhaps we could attribute it primarily to luck. But +18% for 38 years? That level of outperformance over that timeframe can’t be attributed to luck. The timeframe is too long. Does Fairfax have a moat? A moat refers to sustainable competitive advantages that a company has that allow it to ward off the competition while continuing to grow its business and profitability over time. Most investors would probably say that Fairfax does not have a moat. Why? Well, when it comes to Fairfax most everyone knows 2 things: Insurance: Fairfax is not very good at insurance. Average at best. Investments: And Fairfax is also not very good at investments. ‘Cowboys’ might be a good way to describe them. But if it’s not luck and it’s not skill then what explains Fairfax’s exceptional long term performance? We come full circle and back to our original question. How was Fairfax able to achieve and sustain such a high level of outperformance? I think Mark Twain might have the answer. “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.“ Mark Twain The obvious answer is that Fairfax does indeed have a moat - sustainable competitive advantages. The fact that most investors don’t know what they are doesn’t mean they don’t exist. Instead, it provides great insight into how misunderstood Fairfax continues to be. And if the company is this misunderstood do you think it is fairly valued? Probably not. So as painful as this might be for some, let’s explore this further. What are Fairfax’s sustainable competitive advantages? I have come up with five. Please share your thoughts. 1.) Prem Watsa Brilliant founder. Fairfax would not exist without Prem. Exceptional leader. This was on full display during Covid. High integrity (internally and externally). Greatest strength? The ability to attract and retain talent (at both insurance and investment operations). His age (73) is a concern (he was born in Aug 1950). However, his health (physical and mental) appears good. Importantly, Prem has started to shed some responsibilities. And Fairfax has a deep bench of talent. Prem has been a sustainable competitive advantage for Fairfax. How ‘sustainable’ is this advantage moving forward? Yes, that is debatable. Prem’s age is not a concern for me today. But it is a risk. So it is something to monitor. 2.) Family Control - this facilitates building shareholder value over the long term Most publicly traded companies are slaves to hitting ‘expected’ quarterly results. This can be especially troublesome for P/C insurers. Being family controlled allows Fairfax to focus on building shareholder value over the long term. Having a long term focus is a critical ingredient in the successful operation of both business engines of insurance and investments. It allows Fairfax to accept, ride out and exploit volatility. Long term focus: Insurance: allows for the proper management of the insurance cycle. Importantly, it supports the discipline to walk away from unprofitable business in a soft market (that might last for years). Investments: allows for the investment in assets that will generate higher returns (like equities). Volatility is something to be exploited. Most traditional P/C insurers have the bulk of their investment portfolios (+90%) allocated to bonds. Fairfax invests in a wide array of assets (including equities). This gives Fairfax the ability to generate a higher return on its investment portfolio over time. This provides Fairfax with a structural advantage when compared to other traditional P/C insurers who invest primarily only in bonds. Fairfax - Berkshire Hathaway - Markel - WR Berkley P/C insurance has been a wonderful vehicle to use to build great wealth for shareholders over the long term. Fairfax, Berkshire Hathaway, Markel and WR Berkley are four P/C insurance companies that have produced exceptional long term track records. What else do they have in common? They all are family controlled. I don’t think that is a fluke. Fairfax, Berkshire Hathaway and Markel have something else in common: a significant portion of their investment portfolio is invested in equities. For these three companies, this is another important ingredient that has contributed to their exceptional long term performance. 3.) Fairfax’s Structure Below are three important parts of Fairfax’s structure: Small corporate head office - low overhead This keeps corporate costs low. Also, Prem’s annual salary of C$600,000 (with no stock options) is crazy low. Insurance companies: decentralized and run by their presidents. This structure has enabled the long term, successful growth of the P/C insurance operating companies. Fairfax’s insurance operations have exploded in size. And over the past 15 years they have also markedly improved in terms of profitability / quality. Capital allocation (acquisitions/investments): centralized at Fairfax’s head office / Hamblin Watsa. Allows Fairfax to allocate capital to the best opportunities (within the entire company) on a tax-efficient basis. Successfully utilizes a value investing framework. Partner with strong founders/management teams; financially sound organizations. Want to be passive investors (not a turn around shop). Over the past 6 years the team at Fairfax has been executing exceptionally well. Capital allocation - external relationships - deal flow Over the past 38 years, Fairfax and Hamblin/Watsa has built and cultivated an extensive (worldwide) and diverse (across sectors) network of relationships with external businesses / capital allocators. Fairfax has earned the reputation of being a trusted partner. Generates a steady amount of deal flow. Recent examples? In 2023, GIG and PacWest transactions. Fairfax has built a organizational structure that is similar to the one that Berkshire Hathaway has successfully employed for the past 55 years. It works really well. 4.) Float / Leverage With its insurance business, Fairfax produces an enormous amount of float - $35 billion at December 31, 2023. Float is technically a liability. What is the cost of this float? Fairfax has well run insurance companies. As a result, they produce a sizeable underwriting profit most years. This means Fairfax actually gets paid a significant amount to hold its float. Is Fairfax able to invest the float? Yes. And keep the investment return generated? Yes. With the spike in interest rates, Fairfax is now earning more than 7% on its total investment portfolio. So Fairfax has a $35 billion liability called float. They actually get paid a significant sum to hold this liability (underwriting profit was $1.5 billion in 2023). And they are able to invest the $35 billion and keep the return they generate (7% = $2.5 billion). Fairfax is generating about $4 billion per year, or $177/share, just from its insurance operations and $35 billion in float. But the story gets even better. Float at Fairfax has been growing like a weed - it has compounded at 18% over the past 38 years. And it should continue to grow in the future. It is important to note that earnings from float are in addition to earnings that Fairfax generates from its equity - funds provided by shareholders and retained earnings. Low cost and growing float is an extremely powerful combination. Just ask Warren Buffett. Float was the engine that propelled Berkshire Hathaway’s phenomenal growth in the 1980’s and 1990’s. 5.) Culture ‘Culture eats strategy for breakfast.’ Peter Drucker What does that mean? “…no matter how great your business strategy is, your plan will fail without a company culture that encourages people to implement it.” Corporate Governance Institute For successful organizations culture and strategy are two sides of the same coin - they are aligned with each other. Fairfax has a very strong culture. And it is aligned with its strategy. It has been carefully honed over the past 38 years. It has been forged in the fires of adversity. Its biggest champion has been Prem. A couple of examples: Insurance: What to do in a soft market? Write less business. Even at the expense of short term results (lower top line). Even if it persists for years. Zenith is a great example of this today. Investments: What to do when volatility hits? Do the opposite of what Mr. Market is likely doing. Don’t panic. Look for bargains. Get creative. Exploit the situation. In recent years, Fairfax is littered with great examples of this. The fact that Fairfax has had very little turnover suggests that its culture is aligned with the values/beliefs of its employees. All companies make mistakes. Successful companies embrace and learn from their mistakes. And use them to become stronger companies. Mistakes Made Over its 38 year history, Fairfax has made two big mistakes: Insurance: the acquisitions of Crum & Forster and TIG in 1998/1999. Investments: equity hedge/share positions (2010-2020) + poor equity purchases 2014-2017. Importantly, the mistakes made were solvable. The poor insurance acquisitions resulted in what Prem called the ‘biblical seven lean years’ for Fairfax from 1999 to 2005. And the poor equity investments resulted in a lost decade for Fairfax shareholders (2010-2020). But here is the silver lining for investors: each mistake drove Fairfax, over time, to make important and meaningful internal changes. These changes make Fairfax a much stronger company today. Insurance: the C&F and TIG fiasco taught Fairfax that they needed to re-think their approach to P/C insurance. Regarding acquisitions, they needed to flip from the Ben Graham ‘cigar butt’ approach to ‘quality at a fair price’ approach. They also needed to improve the quality of their owned P/C insurance businesses. As part of this evolution, in 2011 Andy Barnard was appointed President and COO of Fairfax Insurance Group to oversee all of Fairfax’s insurance operations. Fast forward to 2024. Fairfax’s collection of P/C insurance companies are now high quality. They have never been better positioned. Investments: Fairfax’s string or poor investments from 2010-2020 taught Fairfax that they needed to: End the equity hedge / short program. Equity hedges were exited in late 2016. The final short position was exited in late 2020. Fairfax publicly committed that it would no longer short indexes or individual stocks. Modify the stock selection framework used at Hamblin Watsa. With its new equity purchases Fairfax put more of a premium on partnering with founders/strong management teams and companies in a strong financial position. Since 2018, with new equity purchases, the team at Fairfax/Hamblin Watsa has been executing very well. It has also done a great job of exiting/fixing past mistakes. Fast forward to 2024. Fairfax’s equity holdings are lead by strong management teams. They are in strong financial positions and have solid prospects. Fairfax has never been better positioned. Mistakes made summary Each of the mistakes described above that were made by Fairfax were significant. They caused the performance of the company (and its stock) to suffer - for extended periods of time. But the mistakes made also taught Fairfax important lessons that led to substantive internal changes. Those changes have made Fairfax’s two economic engines - insurance and investments - stronger and more resilient. Each time, the mistake made provided the impetus for Fairfax to grow and improve as a company. Are the factors/conditions that led to Fairfax's outperformance over 38 years still in place? In 2023 Fairfax delivered the best year of earnings in its history. Results are being driven primarily by high quality operating income. Its two business units, insurance and investments, have never been better positioned. This suggests the factors/conditions that led to Fairfax’s outperformance in the past are indeed still in place. What does this mean for the future performance of Fairfax? Fairfax has compounded BVPS at 18.9% and the share price at 18.3% (US$ and including dividends) over the past 38 years. What has allowed that to happen over such a long time frame? Fairfax’s ‘secret sauce’ is made with the following ingredients: Prem Watsa - founder led Family control - allows long term focus Structure - small H/O, decentralized insurance subs, centralized capital allocation Float - low cost and growing Strong culture - aligned with strategy; aligned with employees beliefs and values Importantly, each of Fairfax’s sustainable competitive advantages all complement each other. The total value they deliver is much greater than the sum of the individual parts. The future With some trying years behind it, Fairfax has matured as a company. It now has a well run, profitable global P/C insurance business. At the same time it has an experienced well run investment operation. Fairfax’s collection of sustainable competitive advantages has never been stronger. The company looks like it is just entering its prime. The interesting thing is Fairfax is still a small company (relatively speaking). It still has a lot of growth ahead of it. It looks today an awful lot like a much younger Berkshire Hathaway (1980’s/1990’s version?). This bodes well for Fairfax’s future results. ————— The P/C insurance model: Why isn’t everyone doing it? Fairfax’s collection of insurance businesses and investments has created a virtuous circle of growth. The insurance businesses generates an underwriting profit. The investments (significantly augmented by float from insurance) generate more profits. The profits are then re-invested to grow insurance (which grows float further) and investments. Importantly, new money goes to best opportunities. This results in profits being compounded at high rates of return. Executed over many years - this results in exponential growth. If the model used by Fairfax, Berkshire Hathaway and Markel is so good (leverage P/C insurance and invest in equities) why isn’t more companies doing it? It is exceptionally difficult. And it takes a long time. P/C insurance is, relatively speaking, a small industry. P/C insurance is largely a commodity - it is a very competitive industry. It takes decades to build out/scale a P/C insurance company. Capital allocation (something other than bonds) is very difficult to do well over the long term. Volatility is a feature of the insurance industry, not a bug. Does this sound like a business Wall Street would be interested in? Wall Street hates volatility and thinks only in the very short term. If you are looking to get rich quick you would have to be an idiot to pick P/C insurance as your vehicle. As a result, only a few companies have been able to replicate Warren Buffett’s very successful model. Fairfax is one of them. Edited June 2, 2024 by Viking
UK Posted June 2, 2024 Posted June 2, 2024 3 hours ago, Viking said: Fairfax’s Secret Sauce Fairfax has compounded BVPS at 18.9% over the past 38 years. The share price has compounded at 18.3% over the same time frame. These calculations are in US$ and include dividends. Importantly, Fairfax’s performance has been very strong over the past 3 years. Fairfax’s outstanding performance is not some numerical/statisitical aberration - some relic of the distant past. When compared to the universe of US listed companies since 1985, Fairfax’s compound return (18.3%) puts it in the top 1% of all companies. Fairfax calculates the numeric ranking at #17. That is an amazing stat. Note: All slides used in this post are from Prem's presentation at Fairfax's AGM held on April 11, 2024. https://www.fairfax.ca/wp-content/uploads/Fairfax-AGM-2024.pdf This leads to 3 very important questions: What caused Fairfax’s significant outperformance over the past 38 years? Are the factors/conditions that led to this outperformance still in place? What does this mean for the future performance of Fairfax? Let’s start by exploring the first question. What caused Fairfax’s significant outperformance over the past 38 years? How did Fairfax achieve and sustain such a high level of performance? Was Fairfax’s incredible performance just luck? Did Fairfax’s performance have little to do with ability/skill and effort? Was Fairfax simply in the right place at the right time - a benefactor of good fortune? Timeframe is the key to answering this question. If Fairfax’s strong performance had happened over a short time period (like 5 or 10 years) then perhaps we could attribute it primarily to luck. But +18% for 38 years? That level of outperformance over that timeframe can’t be attributed to luck. The timeframe is too long. Does Fairfax have a moat? A moat refers to sustainable competitive advantages that a company has that allow it to ward off the competition while continuing to grow its business and profitability over time. Most investors would probably say that Fairfax does not have a moat. Why? Well, when it comes to Fairfax most everyone knows 2 things: Insurance: Fairfax is not very good at insurance. Average at best. Investments: And Fairfax is also not very good at investments. ‘Cowboys’ might be a good way to describe them. But if it’s not luck and it’s not skill then what explains Fairfax’s exceptional long term performance? We come full circle and back to our original question. How was Fairfax able to achieve and sustain such a high level of outperformance? I think Mark Twain might have the answer. “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.“ Mark Twain The obvious answer is that Fairfax does indeed have moats - sustainable competitive advantages. The fact that most investors don’t know what they are doesn’t mean they don’t exist. Instead, it provides great insight into how misunderstood Fairfax continues to be. And if the company is this misunderstood do you think it is fairly valued? Probably not. So as painful as this might be for some, let’s explore this further. What are Fairfax’s sustainable competitive advantages? I have come up with five. 1.) Prem Watsa Brilliant founder. Fairfax would not exist without Prem. Exceptional leader. This was on full display during Covid. High integrity (internally and externally). Greatest strength? The ability to attract and retain talent (at both insurance and investment operations). His age (73) is a concern (he was born in Aug 1950). However, his health (physical and mental) appears good. Importantly, Prem has started to shed some responsibilities. And Fairfax has a deep bench of talent. Prem has been a sustainable competitive advantage for Fairfax. How ‘sustainable’ is this advantage moving forward? Yes, that is debatable. Prem’s age is not a concern for me today. But it is a risk. So it is something to monitor moving forward. 2.) Family Control - this facilitates building shareholder value over the long term Most publicly traded companies are slaves to hitting ‘expected’ quarterly results. This can be especially troublesome for P/C insurers. Being family controlled allows Fairfax to focus on building shareholder value over the long term. Having a long term focus is a critical ingredient in the successful operation of both business engines of insurance and investments. It allows Fairfax to accept, ride out and exploit volatility. Long term focus: Insurance: allows for the proper management of the insurance cycle. Importantly, it supports the discipline to walk away from unprofitable business in a soft market (that might last for years). Investments: allows for the investment in assets that will generate higher returns (like equities). Volatility is something to be exploited. Most traditional P/C insurers have the bulk of their investment portfolios (+90%) allocated to bonds. Fairfax invests in a wide array of assets (including equities). This gives Fairfax the ability to generate a higher return on its investment portfolio over time. This provides Fairfax with a structural advantage when compared to other traditional P/C insurers who invest primarily only in bonds. Fairfax - Berkshire Hathaway - Markel - WR Berkley P/C insurance has been a wonderful vehicle to use to build great wealth for shareholders over the long term. Fairfax, Berkshire Hathaway, Markel and WR Berkley are four P/C insurance companies that have produced exceptional long term track records. What else do they have in common? They all are family controlled. I don’t think that is a fluke. Fairfax, Berkshire Hathaway and Markel have something else in common: a significant portion of their investment portfolio is invested in equities. For these three companies, this is another important ingredient that has contributed to their exceptional long term performance. 3.) Fairfax’s Structure Below are three important parts of Fairfax’s structure: Small corporate head office - low overhead Also, Prem’s annual salary of C$600,000 (with no stock options) is crazy low. This keeps corporate costs low. Insurance companies: decentralized and run by their presidents. This structure has enabled the long term, successful growth of the P/C insurance operating companies. Fairfax’s insurance operations have exploded in size. And over the past 15 years they have also markedly improved in terms of profitability / quality. Capital allocation (acquisitions/investments): centralized at Fairfax’s head office / Hamblin Watsa. Successfully utilizes a value investing framework. Partner with strong founders/management teams; financially sound organizations. Want to be passive investors (not a turn around shop). Allows Fairfax to allocate capital to the best opportunities (within the entire company) on a tax-efficient basis. Over the past 6 years the team at Fairfax has been executing exceptionally well. Capital allocation - external relationships - deal flow Over the past 38 years, Fairfax and Hamblin/Watsa has built and cultivated an extensive (worldwide) and diverse (across sectors) network of relationships with external businesses / capital allocators. Fairfax has earned the reputation of being a trusted partner. Generates a steady amount of deal flow. Recent examples? In 2023, GIG and PacWest transactions. Fairfax has built a organizational structure that is similar to the one that Berkshire Hathaway has successfully employed for the past 55 years. It works really well. 4.) Float / Leverage With its insurance business, Fairfax produces an enormous amount of float - $35 billion at December 31, 2023. Float is technically a liability. What is the cost of this float? Fairfax has well run insurance companies. As a result, they produce a sizeable underwriting profit most years. This means Fairfax actually gets paid a significant amount to hold its float. Is Fairfax able to invest the float? Yes. And keep the investment return generated? Yes. With the spike in interest rates, Fairfax is now earning more than 7% on its total investment portfolio. So Fairfax has a $35 billion liability called float. They actually get paid a significant sum to hold this liability (underwriting profit was $1.5 billion in 2023). And they are able to invest the $35 billion and keep the return they generate (7% = $2.5 billion). Fairfax is generating about $4 billion per year, or $177/share, just from its $35 billion in float. But the story gets even better. Float at Fairfax has been growing like a weed - it has compounded at 18% over the past 38 years. And it should continue to grow in the future. It is important to note that earnings from float are in addition to earnings that Fairfax generates from its equity - funds provided by shareholders and retained earnings. Low cost and growing float is an extremely powerful combination. Just ask Warren Buffett. Float was the engine that propelled Berkshire Hathaway’s phenomenal growth in the 1980’s and 1990’s. 5.) Culture ‘Culture eats strategy for breakfast.’ Peter Drucker What does that mean? “…no matter how great your business strategy is, your plan will fail without a company culture that encourages people to implement it.” Corporate Governance Institute For successful organizations culture and strategy are two sides of the same coin - they are aligned with each other. Fairfax has a very strong culture. And it is aligned with its strategy. It has been carefully honed over the past 38 years. It has been forged in the fires of adversity. Its biggest champion has been Prem. A couple of examples: Insurance: What to do in a soft market? Write less business. Even at the expense of short term results (lower top line). Even if it persists for years. Zenith is a great example of this today. Investments: What to do when volatility hits? Do the opposite of what Mr. Market is likely doing. Don’t panic. Look for bargains. Get creative. Exploit the situation. In recent years, Fairfax is littered with great examples of this. The fact that Fairfax has had very little turnover suggests that its culture is aligned with the values/beliefs of its employees. All companies make mistakes. Successful companies embrace and learn from their mistakes. And use them to become stronger companies. Mistakes Made Over its 38 year history, Fairfax has made two big mistakes: Insurance: the acquisitions of Crum & Forster and TIG in 1998/1999. Investments: equity hedge/share positions (2010-2020) + poor equity purchases 2014-2017. Importantly, the mistakes made were solvable. The poor insurance acquisitions resulted in what Prem called the ‘biblical seven lean years’ for Fairfax from 1999 to 2005. And the poor equity investments resulted in a lost decade for Fairfax shareholders (2010-2020). But here is the silver lining for investors: each mistake drove Fairfax, over time, to make important and meaningful internal changes. These changes make Fairfax today a much stronger company. Insurance: the C&F and TIG fiasco taught Fairfax that they needed to re-think their approach to P/C insurance. Regarding acquisitions, they needed to flip from the Ben Graham ‘cigar butt’ approach to ‘quality at a fair price’ approach. They also needed to improve the quality of their owned P/C insurance businesses. As part of this evolution, Andy Barnard was moved into his role in 2011 to oversee all of Fairfax’s insurance operations. Fast forward to 2024. Fairfax’s collection of P/C insurance companies are now high quality. They have never been better positioned. Investments: Fairfax’s string or poor investments from 2010-2020 taught Fairfax that they needed to: End the equity hedge / short program. Equity hedges were exited in late 2016. The final short position was exited in late 2020. Fairfax publicly committed that it would no longer short indexes or individual stocks. Modify the stock selection framework used at Hamblin Watsa. With its new equity purchases Fairfax put more of a premium on partnering with founders/strong management teams and companies in a strong financial position. Since 2018, with new equity purchases, the team at Fairfax/Hamblin Watsa has been executing very well. It has also done a great job of exiting/fixing past mistakes. Fast forward to 2024. Fairfax’s equity holdings are lead by strong management teams. They are in strong financial positions and have solid prospects. Fairfax has never been better positioned. Mistakes made summary Each of the mistakes described above that were made by Fairfax were significant. They caused the performance of the company (and its stock) to suffer - for extended periods of time. But the mistakes made also taught Fairfax important lessons that lead to substantive internal changes. Those changes have made Fairfax’s two economic engines - insurance and investments - stronger and more resilient. Each time, the mistake made provided the impetus for Fairfax to grow and improve as a company. Are the factors/conditions that led to Fairfax's outperformance over 38 years still in place? Fairfax just delivered its best year ever in 2023. Results are being driven primarily by high quality operating income. Its two business units, insurance and investments, have never been better positioned. This suggests the factors/conditions that led to Fairfax’s outperformance in the past are indeed still in place. What does this mean for the future performance of Fairfax? Fairfax has compounded BVPS at 18.9% and the share price at 18.3% (US$ and including dividends) over the past 38 years. What has allowed that to happen over such a long time frame? Fairfax’s ‘secret sauce’ is made with the following ingredients: Prem Watsa - founder led Family control - allows long term focus Structure - small H/O, decentralized insurance subs, centralized capital allocation Float - low cost and growing Strong culture - aligned with strategy; aligned with employees beliefs and values Importantly, each of Fairfax’s sustainable competitive advantages all complement each other. The total value they deliver is much greater than the sum of the individual parts. The future With some trying years behind it, Fairfax has matured as a company. It now has a well run, profitable global P/C insurance business. At the same time it has an experienced well run investment operation. Fairfax’s collection of sustainable competitive advantages has never been stronger. The company looks like it is just entering its prime. The interesting thing is Fairfax is still a small company (relatively speaking). It still has a lot of growth ahead of it. It looks today an awful lot like a much younger Berkshire Hathaway (1980’s version?). This bodes well for Fairfax’s future results. ————— The P/C insurance model: Why isn’t everyone doing it? Fairfax’s collection of insurance businesses and investments has created a virtuous circle of growth. The insurance businesses generates an underwriting profit. The investments (significantly augmented by float from insurance) generate more profits. The profits are then re-invested to grow insurance (which grows float further) and investments - importantly, new money goes to best opportunities. This results in profits being compounded at high rates of return. Executed over many years - this results in exponential growth. If the model used by Fairfax, Berkshire Hathaway and Markel is so good (leverage P/C insurance) why is everyone not doing it? It is exceptionally difficult. And it takes a long time. P/C insurance is, relatively speaking, a small industry. P/C insurance is a largely a commodity - it is a very competitive industry. It takes decades to build out/scale a P/C insurance company. Volatility is a feature of the insurance industry, not a bug. Does this sound like a business Wall Street would be interested in? Wall Street hates volatility and thinks only in the very short term. If you are looking to get rich quick you would have to be an idiot to pick P/C insurance as your vehicle. As a result, only a few companies have been able to replicate Warren Buffett’s very successful model. Fairfax is one of them. Great post!
Maverick47 Posted June 2, 2024 Posted June 2, 2024 4 hours ago, Viking said: The P/C insurance model: Why isn’t everyone doing it? Fairfax’s collection of insurance businesses and investments has created a virtuous circle of growth. The insurance businesses generates an underwriting profit. The investments (significantly augmented by float from insurance) generate more profits. The profits are then re-invested to grow insurance (which grows float further) and investments. Importantly, new money goes to best opportunities. This results in profits being compounded at high rates of return. Executed over many years - this results in exponential growth. If the model used by Fairfax, Berkshire Hathaway and Markel is so good (leverage P/C insurance and invest in equities) why isn’t more companies doing it? It is exceptionally difficult. And it takes a long time. P/C insurance is, relatively speaking, a small industry. P/C insurance is largely a commodity - it is a very competitive industry. It takes decades to build out/scale a P/C insurance company. Capital allocation (something other than bonds) is very difficult to do well over the long term. Volatility is a feature of the insurance industry, not a bug. Does this sound like a business Wall Street would be interested in? Wall Street hates volatility and thinks only in the very short term. If you are looking to get rich quick you would have to be an idiot to pick P/C insurance as your vehicle. As a result, only a few companies have been able to replicate Warren Buffett’s very successful model. Fairfax is one of them. Thanks @Viking! As always, your posts are full of thought provoking observations and questions. The section highlighted above from the end of your post struck a chord with me. As a retired actuary who spent 33 years with the same P and C company, who also admired and personally invested in Berkshire, Markel, Fairfax and (before Berkshire acquired it), Alleghany, I spent a good portion of my own time trying to get the company I worked for to copy the business model of these other companies, with no success. Your points about why more competitors don’t copy them are pretty much the same as I eventually concluded. Exponential compounding connected with long term focused investing in equities really begins to pay off once it’s had a long runway to work its inexorable magic. Ten years, which is a long time for a typical CEO just isn’t long enough for the associated risk to pay off. Family run companies like Berkshire, Fairfax, Markel, are able to take the long view and see how powerful a few extra points of returns, albeit lumpy, can pay off once the timeframe approaches and even exceeds 30 years. Charlie Munger was once asked why more companies didn’t follow Berkshire’s approach of focused investing in a few companies. He responded with “It’s a good question. More companies should follow us. Look at our results and the fun we’re having. But Jack McDonald, the Stanford Business professor who teaches a course based on these value investment principles, says he feels like the Maytag repairman.” I used this same question and answer in a white paper I shared with a new CEO and CFO at the company I worked for. The CEO responded with a short email basically saying it was interesting, but attributing Berkshire’s success only to great stock picking. I got a brief audience with the CFO, during which I learned that the company I worked for had decided to outsource the investment function altogether to a company focused on index ETFs for both equities and fixed income. That’s when I gave up trying to advocate for a more intelligent and successful business model from the inside of a company, and now in retirement, I vote with my own assets and invest them only in companies like Fairfax that have a proven track record of managing float, investments and insurance underwriting in an intelligent fashion. I’ve seen how hard it is to get competitors to change to a similar approach, and am convinced that this holistic long term view of a successful insurance business model is a true moat in and of itself. Analysts like Brett Horn who don’t think Fairfax has a moat miss exactly what you outlined in your post — the proof in the pudding of a hugely successful long term compounder, one which still has a good amount of runway left ahead of it. 1
backtothebeach Posted June 2, 2024 Posted June 2, 2024 1 hour ago, Maverick47 said: As a retired actuary who spent 33 years with the same P and C company, who also admired and personally invested in Berkshire, Markel, Fairfax and (before Berkshire acquired it), Alleghany, I spent a good portion of my own time trying to get the company I worked for to copy the business model of these other companies, with no success. Your points about why more competitors don’t copy them are pretty much the same as I eventually concluded. Thank you for your insight, @Maverick47.
Hektor Posted June 2, 2024 Posted June 2, 2024 Thanks @Viking for the post and @Maverick47 for your insight.
Recommended Posts
Create an account or sign in to comment
You need to be a member in order to leave a comment
Create an account
Sign up for a new account in our community. It's easy!
Register a new accountSign in
Already have an account? Sign in here.
Sign In Now