Fairfax 2024

[Gamma78]

I think "Family Control" is really the minimum common denominator. Ultimately @Viking you highlight other factors (1 - Prem Watsa and 5 - Culture) which really are under the heading of family control 

 

There are numerous other family holding companies that have very good returns - Exor in Italy, Bollore in France, Jardine Matheson in HK. I recall a document by Exor showing the long term trends of family owned companies and how high those returns were (well into teens on a very long term basis). Periodically someone will say that nepotism is a risk with a Berkshire and Fairfax - and strictly speaking that is true if you assume the next in line have no merit whatsoever. But to expect a wall street type with a suit and a 10 year timeline to outperform someone who actually thinks about the next generation? Nah. Long term family ownership is a shorthand for "agency", meaning someone who gives a shit for more than 10 years and more than their immediate options package.

 

I would say that PE is trying to fill out this space recently too. The float however is a leverage provider on "Family Control". And a great one - better than what PE can do themselves because it is more stable and less costly. And even the Exors, Bollores and Jardine Matheson don't have that. 

 

So to me.....Family Control + Float is the real moat. 

 

It rhymes too. 

 

 

 

 

Edited June 2, 2024 by gamma78

[Dinar]

You don't want family control.  You want between 15-30% insider ownership - big enough to care, but not a blocking position.  For every Arnault pere, Prem, Vincent Bollore, you get Sulzberger (NYT), Tim O'shaughnessy and Don Graham (GHC), MNPP & the Marx family.  

[Gamma78]

15-30% is something I would actually characterise often as de-facto control, in particular if vested in one person or family. In particular frequently rights on the shares are slightly distinct from quantity. 

 

I hear your argument, and I would say that family control is not unlike leverage. Cuts both ways. In the right hands it explodes value. In the wrong hands it decimates it. 

 

I am comfortable with Prem, the Google-guys, Buffett, the Agnelli family and Arnault because they have control and a long history of rational decision making. To me control in their hands is a competitive advantage. 

 

 

[Viking]

4 hours ago, gamma78 said:

I hear your argument, and I would say that family control is not unlike leverage. Cuts both ways. In the right hands it explodes value. In the wrong hands it decimates it. 

 

@gamma78 Great point. But I would add a caveat. Sometimes management loses their way - for extended time periods (a decade or longer). And when they do lose their way, it is not a given they will actually get the train back on the tracks. When this happens 'buy and hold' can be a terrible strategy.

 

Therefore, it is important for investors  - when they invest in individual companies - to be rational and do so with their eyes wide open. This applies equally to investments that are family controlled and those that are not family controlled.

 

My strategy with Fairfax over the past 21 years has been to own it when the company is managing its business (insurance and investments) in a way that fits with how I am wired.

 

There have been long periods when what Fairfax was doing was not a good fit for me. So I shifted to other investments that were.

 

I love what Fairfax has been doing the past 5 years. I love how the company is positioned today. And I think the table is set for them to do something special over the next 5 years (perhaps longer). But I will continue to be rational and monitor what they are doing.

 

This strategy has served me very well over the years. It is not Fairfax specific - it is how I manage all of my investments. 

Edited June 2, 2024 by Viking

[Viking]

15 hours ago, Maverick47 said:

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.

 

 

@Maverick47 I really appreciate (and enjoyed reading) your story. Thanks for sharing. 

 

My earlier post took me about 8 months to write (for all the different ideas to come together). Buffett's 'float' model includes so many interesting layers. I am still digesting all of them. (One miss from my write-up is how 'type of insurance written' is likely another important piece of the puzzle).

 

I am an outsider... I have never worked in P/C insurance or in investment management. So this topic does not come naturally / intuitively to me. So I do appreciate when people from inside the P/C insurance world comment. It helps me to understand if I am on to something. And how I need to revisit my thinking.

 

Yes, when I post I do try and be 'thought provoking.' I try and have an opinion. And I like to sometimes exaggerate to make a point. And I try and keep things interesting for the reader.

 

The goal is to develop a thesis on an idea. Stay inquisitive. Keep learning. And course correct over time. This board provides a wonderful platform to do this.

Edited June 2, 2024 by Viking

[bluedevil]

@Viking I don’t if you would call it a moat, but one thing that Fairfax has been exceptional at over the past 38 years is knowing the value of its own equity and selling high and buying low.  The latest chapter of that was the 2m shares repurchased in late 2021 and the nearly 2m shares of TRS exposure.  These have generated about $2.5 billion for the company, but they are just the most recent examples of highly opportunistic moves in Fairfax’s own equity that have juiced the returns on the stock.  Many years ago, i sat down and read every shareholder letter up to that point, and one thing that struck me was how much of “the story” this accounted for - including buying scale on the insurance side by issuing stock at 2X or more of book and using it to buy other insurance company’s at below book. 

 

[Viking]

1 hour ago, bluedevil said:

@Viking I don’t if you would call it a moat, but one thing that Fairfax has been exceptional at over the past 38 years is knowing the value of its own equity and selling high and buying low.  The latest chapter of that was the 2m shares repurchased in late 2021 and the nearly 2m shares of TRS exposure.  These have generated about $2.5 billion for the company, but they are just the most recent examples of highly opportunistic moves in Fairfax’s own equity that have juiced the returns on the stock.  Many years ago, i sat down and read every shareholder letter up to that point, and one thing that struck me was how much of “the story” this accounted for - including buying scale on the insurance side by issuing stock at 2X or more of book and using it to buy other insurance company’s at below book. 

@bluedevil I agree. This is another very important piece of the Fairfax puzzle. @SafetyinNumbers has pointed this out to me numerous times in the past. 
 

This topic would make a great future post - there are so many interesting angles to it. 

Here are two angles i find interesting. 

 

The overarching theme to this topic is how Fairfax views financial markets. 

1.) Fairfax aggressively exploits its share price. Issue shares when the stock is at a high valuation. Aggressively buy shares back when the stock is at a low valuation. It this context, high volatility in the stock price has been a very good thing for Fairfax. But what about those investors buying Fairfax stock issued at high valuations?
 

Of course Fairfax is simply doing what Ben Graham teaches: use Mr Market to your advantage. He is there to be exploited - take advantage of his irrationality/extreme mood swings.

 

But at the same time, Prem/Fairfax appears to want to attract long term shareholders. And most investors - even those who expect to hold for the long term - do not appreciate extreme volatility, especially of it is stretched out over many years.
 

Now contrast this with how Berkshire Hathaway operates. 

 

Now as a Fairfax shareholder, i love what Fairfax does. But i wonder if it fits the ‘we want long term shareholders’ mantra.
 

2.) There is a second angle to this. Fairfax takes a similar approach with its equity and insurance holdings. Sell stakes when they can fetch a high valuation. Buy them back when they can be re-purchased at a low valuation. 
 

Minority shareholders need to have their eyes wide open here. 
 

Again, i like what Fairfax does - it tends to build lots of value for Fairfax. 
 

But i wonder as Fairfax gets larger/more visible if it ‘tweaks’ this part of its business model. What do others think?

 

Edited June 3, 2024 by Viking

[modiva]

@Viking Thanks for very insightful analysis.  

 

While I agree with all of your points, I think the CAGR since inception is misleading metric to look at.  

 

What do I mean?  If we remove the first 5, 10, 15 years, it is very clear that the numbers don't look stellar but rather average.  The low starting point gives a high boost, but once we normalize it, the numbers look average. 

 

For example, the float/share since 1985 grew at 18.4% compounded, the growth rate reduces dramatically once we exclude the initial years.  The float/share since 1995 grew at 11.4%, and since 2000 grew at just 5.5%. 

 

Disclosure: I have 35% of my portfolio in Fairfax, and 15% in Fairfax India. 

 

[Viking]

1 hour ago, modiva said:

@Viking Thanks for very insightful analysis.  

 

While I agree with all of your points, I think the CAGR since inception is misleading metric to look at.  

 

What do I mean?  If we remove the first 5, 10, 15 years, it is very clear that the numbers don't look stellar but rather average.  The low starting point gives a high boost, but once we normalize it, the numbers look average. 

 

For example, the float/share since 1985 grew at 18.4% compounded, the growth rate reduces dramatically once we exclude the initial years.  The float/share since 1995 grew at 11.4%, and since 2000 grew at just 5.5%. 

 

Disclosure: I have 35% of my portfolio in Fairfax, and 15% in Fairfax India. 

 

@modiva I included the numbers since inception because those are the numbers that Fairfax has actually delivered. Having said that, i did not include those numbers to suggest that is the performance that they will deliver (across all metrics) moving forward. I think Fairfax can deliver mid to high teens growth in BV in the coming years.  Float? No, not that high. 
 

I do think the numbers Fairfax delivered from 2010-2020 are artificially low. If we think it makes sense to throw out the numbers from the early years (because they are artificially high) then i think it might also makes sense to throw out the numbers from 2010-2020. The numbers from 2010-2020 contain so much noise (like $5.4 billion in losses from the equity hedge/short positions that won’t be repeated in the future) that it affects their usefulness as a baseline to project what might happen in the future.

 

But i do get your point.

Edited June 3, 2024 by Viking

[petec]

23 hours ago, UK said:

 

Great post!

 

Yes - and one that would have been laughed at on here 5 short years ago!

[petec]

22 hours ago, Maverick47 said:

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.

 

 

This is fantastic. Thanks.

[petec]

12 hours ago, Dinar said:

You don't want family control.  You want between 15-30% insider ownership - big enough to care, but not a blocking position.  For every Arnault pere, Prem, Vincent Bollore, you get Sulzberger (NYT), Tim O'shaughnessy and Don Graham (GHC), MNPP & the Marx family.  

 

I think what you're saying is you want good family control not bad family control. 

 

In fact, I'm not sure you want *family* control at all. The Watsa family doesn't control Fairfax. Prem does. What you want is control, by someone good. Where it gets *really* interesting is when another good person inherits it and so good control becomes multigenerational.

[modiva]

51 minutes ago, Viking said:

@modiva I included the numbers since inception because those are the numbers that Fairfax has actually delivered. Having said that, i did not include those numbers to suggest that is the performance that they will deliver (across all metrics) moving forward. I think Fairfax can deliver mid to high teens growth in BV in the coming years.  Float? No, not that high. 
 

I do think the numbers Fairfax delivered from 2010-2020 are artificially low. If we think it makes sense to throw out the numbers from the early years (because they are artificially high) then i think it might also makes sense to throw out the numbers from 2010-2020. The numbers from 2010-2020 contain so much noise (like $5.4 billion in losses from the equity hedge/short positions that won’t be repeated in the future) that it affects their usefulness as a baseline to project what might happen in the future.

 

But i do get your point.

Thanks @Viking for generously sharing excellent insights, very much appreciated!

[Viking]

2 hours ago, petec said:

 

Yes - and one that would have been laughed at on here 5 short years ago!

@petec, as is usual, you make a very insightful point. 
 

There has been an enormous amount change in the results that Fairfax is delivering today compared to 5 short years ago. I thought it was refreshing to hear Prem at the AGM say even Fairfax did not see it coming (the magnitude of the change). 
 

To capitalize on Fairfax the past 5 years, an investor has needed to:

- stay inquisitive

- keep an open mind

 

These are two traits Stan Druckenmiller said he looks for in new hires. 
 

Investors who were unable ‘stay inquisitive’ and ‘keep an open mind’ completely missed the opportunity that has unfolded with Fairfax over the past 5 years. They probably still are.
 

I started to get interested in Fairfax as an investment again (in a big way) back in 2019. I had no idea this is how things would play out. It has been an absolutely crazy ride (in a good way). Many long-term Fairfax watchers have made similar comments in the recent past.

 

The ‘facts’ have been changing at a mind-boggling pace pretty much every year for the past 5 years. So much so, it has been hard to keep up.
 

External events certainly helped. You have highlighted this in the past. 
- Hard market in insurance.
- Interest rates normalizing at much higher levels.

- Record bull markets in steel and lumber. 

- Wicked volatility in bond and stock markets.
 

And Fairfax’s execution has been unbelievable. They have hit the ball out of the park on numerous occasions. 
 

The end result is we are now in uncharted territory with Fairfax.
1.) What is a ‘normalized’ level of earnings?

2.) How much will earnings grow in the comings years?

3.) What is the intrinsic value of the company as it exists today? 
 

Of the three questions i ask above, i think we are probably able to answer the first with some accuracy. Because we have 2023 in the books. The second question? This is where i think investors are way off base today (too low). And this is then resulting in a big miss with question 3 (also too low).
 

Looking ahead another 5 years… I can’t wait to see how things play out.

 

—————

 

Looking 5 years into the future (2028), what will Fairfax deliver?

 

1.) Float per share?

2.) Investments per share?

3.) 5 year average return on investments?

4.) Net Premiums written per share?

5.) 5 year average combined ratio?

6.) Earnings per share?

 

For each of the measures above, ‘amounts accruing to common shareholders.’

Edited June 3, 2024 by Viking

[Dinar]

According to Heard on the Street column in the WSJ, reinsurance pricing is down 5% on same risk basis.  

[StubbleJumper]

2 hours ago, Dinar said:

According to Heard on the Street column in the WSJ, reinsurance pricing is down 5% on same risk basis.  

 

Ouch.  Is the market finally turning? 

 

We are three days into the 2024 hurricane season, which the experts say will have a larger number of named storms and perhaps stronger than usual storms.  

 

Not sure that I like the sound of all of this.

 

 

SJ

[Dinar]

25 minutes ago, StubbleJumper said:

 

Ouch.  Is the market finally turning? 

 

We are three days into the 2024 hurricane season, which the experts say will have a larger number of named storms and perhaps stronger than usual storms.  

 

Not sure that I like the sound of all of this.

 

 

SJ

You are right, but the question is what is priced in?  One can plausibly argue that Fairfax will earn its market cap over the next five to six years, so it seems to me that the market is pricing in some softness in the reinsurance space.

[petec]

23 hours ago, Viking said:

To capitalize on Fairfax the past 5 years, an investor has needed to:

- stay inquisitive

- keep an open mind

 

For me it was:

• Understanding of the fact (and I do think it was a fact) that FFH was a curate's egg of underappreciated value, and
• Something approaching blind faith in Prem.

The latter is something I have thought about a lot. I was probably one of Prem's bigger defenders on this board during the dark years, and in particular defended his approach to macro. I was clearly totally wrong about that. But I also felt that a lot of the criticisms of his personal conduct and morals were wrong, and I felt he had built a culture that would win out in the end. It is interesting to see others come round to that view *after* results have improved. I have no idea whether I was smart or lucky. But I clearly wasn't as smart as those who didn't own this during the dark decade and then timed their re-entry well. 

 

[Cigarbutt]

8 hours ago, Dinar said:

You are right, but the question is what is priced in?  One can plausibly argue that Fairfax will earn its market cap over the next five to six years, so it seems to me that the market is pricing in some softness in the reinsurance space.

People who seem to follow the industry comment that, even if pricing has gone down slightly, contract and term conditions have remained tight, which is a subjective input that remains to be seen.

Anyways, historical perspective may be helpful:

Edited June 4, 2024 by Cigarbutt
spelling

[Dynamic]

This Watsa interview from 2011's first edition of the Fairfax Newsletter was interesting, posted here on Twitter/X by FindingComputers.

 

I'm afraid it's only in text as image format so you may need to zoom in and/or rotate a phone if reading it there.

[Viking]

If you wanted to understand the 'transformation' that has happened at Fairfax over the past 4 years in one chart this would probably be it. 

 

Note: my original chart had a calculation error which has been corrected in the chart below. I will talk to quality control to review what happened

 

The 5 income streams below flow into Fairfax's earnings:

1.) The total from all 5 income streams has increased from $1.8 to $5.7 billion.

- from $68/share to $259/share or 282%.

2.) Operating income has increased from $1 billion to $4.5 billion.

- from $39/share to $204/share or 426%.  

 

High quality operating income now represents 79% of all income streams, up from 55%. That is a game changer.

 

 

 

Edited June 6, 2024 by Viking

[Gamma78]

10 hours ago, Viking said:

If you wanted to understand the 'transformation' that has happened at Fairfax over the past 4 years in one chart this would probably be it. 

 

The 5 income streams below flow into Fairfax's earnings:

1.) The total from all 5 income streams has increased from $1.8 to $5.9 billion.

- from $68/share to $267/share or 293%.

2.) Operating income has increased from $1 billion to $4.87 billion.

- from $39/share to $219/share or 466%.  

 

High quality operating income now represents 82% of all income streams, up from 55%. That is a game changer.

 

 

 

Wow that is a really great way to capture the change. The thing I take away really is that while some believe there is a risk of results reverting to the previous time period's averages, the reality is that in that world of 0% interest rates float was worthless and interest/dividends were unrewarding. So even in a softer insurance market results should still on average be better than the past. Let alone the stellar results we are seeing now in a hard market. 

 

Someday that will be reflected fully in the price. Someday. 

[Viking]

4 hours ago, gamma78 said:

 

Wow that is a really great way to capture the change. The thing I take away really is that while some believe there is a risk of results reverting to the previous time period's averages, the reality is that in that world of 0% interest rates float was worthless and interest/dividends were unrewarding. So even in a softer insurance market results should still on average be better than the past. Let alone the stellar results we are seeing now in a hard market. 

 

Someday that will be reflected fully in the price. Someday. 

When you compare Fairfax’s income streams to traditional P/C insurers there are big differences.
 

Here is the split for most traditional P/C insurers:

- underwriting = 50%

- interest and dividends = 45%

- misc = 5%

 

A soft market in insurance will impact Fairfax’s earnings much less than it will impact traditional P/C insurers. Fairfax’s split for underwriting income is 20 to 25%. Fairfax is way more levered to investments. 
 

Fairfax’s significant share buybacks are also important. It is meaningfully increasing all the per share metrics:

- investments per share

- float per share

- earnings per share

 

I hope Fairfax continues to be aggressive with share buybacks. They are generating so much cash. The stock is cheap. It is such an easy / beneficial use of capital.

 

Edited June 6, 2024 by Viking

[dartmonkey]

15 hours ago, Viking said:

If you wanted to understand the 'transformation' that has happened at Fairfax over the past 4 years in one chart this would probably be it. 

 

The 5 income streams below flow into Fairfax's earnings:

1.) The total from all 5 income streams has increased from $1.8 to $5.9 billion.

- from $68/share to $267/share or 293%.

2.) Operating income has increased from $1 billion to $4.87 billion.

- from $39/share to $219/share or 466%.  

 

High quality operating income now represents 82% of all income streams, up from 55%. That is a game changer.

 

 

 

It looks like you wanted to add the effective shares outstanding for the 5 years 2016 to 2020. 

 

2016: 23.1m

2017: 27.8m

2018: 27.2m

2019: 26.8m

2020: 26.2m

Average, 2016-2020: 26.2m

 

2024e: 22.2m

Change, 2016-2020 to end 2024: -15%

 

By the way, looking at annual reports to compile these numbers, I noticed how often the word 'outstanding' is used in the annual letter, apart from referring to shares outstanding. A lot!! 

 

2016: 17

2017: 13

2018: 14

2019: 9

2020: 23

Average, 2016-2020: 15

 

2023: 29

Increase: almost 100%

 

In retrospect, 2020 would have been a pretty nice time to invest, with a sharp uptick in the outstandings, and the trend is still favourable. Maybe this technical indicator performs as well or better than the exclamation point indicator, what do you think?

[LC]

16 minutes ago, dartmonkey said:

In retrospect, 2020 would have been a pretty nice time to invest, with a sharp uptick in the outstandings, and the trend is still favourable. Maybe this technical indicator performs as well or better than the exclamation point indicator, what do you think?

Outstanding find, dartmonkey