Fairfax 2024

[petec]

8 hours ago, TwoCitiesCapital said:

I don't disagree with your logic of using the share repurchases as a floor for their incremental capital, but there's already a thread here discussing if FFH will break $2,000/sh by then. And it's a good probability it just might. 

 

So am not sure we can just assume that all repurchases will be done at prices or multiples available today. 

 

Sure, but we are analysing the stock today. If it goes to $2000 we will be richer; this is good, not bad.

[Hoodlum]

Fairfax Announces Termination of Total Return Swaps and Acquisition of the Common Shares.

 

 

https://www.fairfax.ca/press-releases/fairfax-announces-termination-of-total-return-swaps-of-ensign-energy-services-inc-and-acquisition-of-common-shares/

 

[Hoodlum]

Could someone help to explain the acquisition cost of these shares?  I presume this would lower the number of outstanding shares significantly, although I don't understand the low cost to Fairfax of only $2.34 per share.  

Edited June 11 by Hoodlum

[nwoodman]

50 minutes ago, Hoodlum said:

Could someone help to explain the acquisition cost of these shares?  I presume this would lower the number of outstanding shares significantly, although I don't understand the low cost to Fairfax of only $2.34 per share.  

Wasn’t that yesterday’s closing price?  It seems rather than have the swaps counterparty dump the shares onto the market,they have purchased them directly from the counterparty that arranged the swaps.  I haven’t followed this closely but a Perplexity search offered the following:

 

Equity Ownership

• In April 2022, Fairfax converted C$11.05 million of convertible debentures into 6,314,286 common shares of Ensign, increasing its ownership stake to 12.87% of outstanding shares at the time.

• In June 2020, Fairfax entered into cash-settled total return swap contracts for 4,557,600 notional common shares of Ensign, representing 2.79% of outstanding shares.

• On June 10, 2024, Fairfax terminated total return swaps over 7,787,600 Ensign common shares and agreed to purchase those shares at C$2.34 per share, representing 4.24% of outstanding shares.

• After the June 2024 transaction, Fairfax's beneficial ownership and control in Ensign increased to 29,588,486 common shares, or approximately 16.10% of all outstanding shares.

Major Shareholder

• Along with Murray Edwards (approximately 23% ownership), Fairfax is one of the largest shareholders in Ensign Energy Services.

• As major shareholders, Fairfax and Murray Edwards have the ability to provide capital to support Ensign's operations and potential refinancing needs.

Looks like they must have added to the swaps position after the initial setup in 2020.  My quick search doesn’t show this.  
 

What I find interesting is that Fairfax purchased the share position from the swap counterparty.  Might provide some color around how they intend to eventually wind up the FFH TRS position.

Edited June 11 by nwoodman

[gfp]

45 minutes ago, Hoodlum said:

Could someone help to explain the acquisition cost of these shares?  I presume this would lower the number of outstanding shares significantly, although I don't understand the low cost to Fairfax of only $2.34 per share.  

 

Seems like you are missing that these are TRS on Ensign Energy Services and not FFH.

[Hoodlum]

Just now, gfp said:

 

Seems like you are missing that these are TRS on Ensign Energy Services and not FFH.

Yes, that is what I missed.  

[petec]

2 hours ago, nwoodman said:

Wasn’t that yesterday’s closing price?  It seems rather than have the swaps counterparty dump the shares onto the market,they have purchased them directly from the counterparty that arranged the swaps.  I haven’t followed this closely but a Perplexity search offered the following:

 

Equity Ownership

• In April 2022, Fairfax converted C$11.05 million of convertible debentures into 6,314,286 common shares of Ensign, increasing its ownership stake to 12.87% of outstanding shares at the time.

• In June 2020, Fairfax entered into cash-settled total return swap contracts for 4,557,600 notional common shares of Ensign, representing 2.79% of outstanding shares.

• On June 10, 2024, Fairfax terminated total return swaps over 7,787,600 Ensign common shares and agreed to purchase those shares at C$2.34 per share, representing 4.24% of outstanding shares.

• After the June 2024 transaction, Fairfax's beneficial ownership and control in Ensign increased to 29,588,486 common shares, or approximately 16.10% of all outstanding shares.

Major Shareholder

• Along with Murray Edwards (approximately 23% ownership), Fairfax is one of the largest shareholders in Ensign Energy Services.

• As major shareholders, Fairfax and Murray Edwards have the ability to provide capital to support Ensign's operations and potential refinancing needs.

Looks like they must have added to the swaps position after the initial setup in 2020.  My quick search doesn’t show this.  
 

What I find interesting is that Fairfax purchased the share position from the swap counterparty.  Might provide some color around how they intend to eventually wind up the FFH TRS position.

 

My take is that back in 2020 they bought swaps because they didn't have cash. Now they do, so they're swapping for direct exposure. In effect, they bought these shares at $1.31. Nice move. At the current price ESI trades on a roughly 50% free cash flow yield and is paying off debt every quarter.

[petec]

2 hours ago, nwoodman said:

What I find interesting is that Fairfax purchased the share position from the swap counterparty.  Might provide some color around how they intend to eventually wind up the FFH TRS position.

 

Exactly. In effect the TRS locks in a buyback at the TRS price. Lovely stuff.

 

[nwoodman]

46 minutes ago, petec said:

 

Exactly. In effect the TRS locks in a buyback at the TRS price. Lovely stuff.

 

True albeit with a financing component and +/- cash flow implications.  As long as the price direction is correct then you also get the use of the cash in excess of interest payments on the way through.  It becomes a bit of a virtuous circle when that cash gets used for buybacks below IV.  
 

The Ensign swaps demonstrated that the process can be as simple as Fairfax fronting up with the cash based on the days closing price.  The counterparty doesn’t have to dump shares back into the market etc.  they get surety of price and Fairfax gets a swag of shares.  No epiphany but good to see it can be done this elegantly.

Edited June 11 by nwoodman

[TwoCitiesCapital]

I know TRS don't have to be disclosed, so it's hard to know what FFH holds. 

 

 But does anyone else know what other TRS may be on the books? I kind of thought they were historically using TRS to short stocks and didn't realize they were using them to go long anything but their own. Now I'm curious what other long positions reside outside of disclosure rules as structured like this? 

[dartmonkey]

On 6/9/2024 at 7:36 PM, Thrifty3000 said:

The three items above [dividend, buybacks, predicted buyouts of minority partners] 'account' for about 55% of earnings - and are built into my 2024 forecast.

 

The remaining 45% of earnings? This is probably a good example of where my forecast is too conservative. Especially when compounded over a couple of years. 

 

I am forecasting modest organic growth in net premiums written. And small growth in the investment portfolio (including fixed income). 

 

I am not including any large, one time investment gains in my forecast for 2024 or 2025. We know there will likely be some (at some point over the next 24 months) - we just don't know what they will be, their size and the timing. I keep waffling on whether to keep these in the forecast... I removed them from the latest.

 

I would appreciate how other board members are thinking about this same question.

 

On 6/9/2024 at 7:36 PM, Thrifty3000 said:

Simply buying back their own shares yields a double digit return, so if they’re investing in something other than buybacks it has to be a pretty high conviction bet with a high probability of outperforming buybacks. That’s a great problem to have.

 

In other words, what would be the rationale for buying short term bonds yielding 4 to 5% when they know with an unprecedented level of certainty that their own shares will be churning out >10% returns for 3 years and beyond?

 

I think it’s perfectly reasonable to set a 10% placeholder for returns on reinvested capital as long as the stock trades at current levels relative to book value.

I agree with Thrifty and think that the remaining 55% of earnings will either be reinvested in buybacks or else something even better. So a reasonable approach might be to plug in 75% in buybacks instead of 30%, even if we are not really predicting that level of buybacks. Equivalently, that extra 45% of earnings could be in 'Unknown Investment', with a 15% return; that unknown investment could end up being either more FFH shares or else something better.

 

Implicitly assuming a 0% return on that 45% of earnings is unrealistically low. In my opinion, we don't want to just throw in extra 'conservatism', we want to get our best estimate of value. It would be a shame to sell or reduce the size of a good investment like Fairfax because we've made assumptions on returns that are significantly lower than what we really expect. 

[dartmonkey]

On 6/8/2024 at 3:05 PM, Viking said:

 

The impact of the Digit IPO will be something to monitor. Especially once Fairfax gets their ownership position confirmed. There may be a realized gain (I am not sure how everything will play out from an accounting perspective). I am not concerned. 

 

 

Brief recap of recent Digit valuation:

 

Fairfax has this at a fair value of $2.265b on its 2023 annual report. Although Fairfax notes that it owns 49%, it also has 'securities' that, when converted, would give it a 68% stake. My understanding (someone please correct if this is not true) is that the $2.265b number is for the whole 68% stake, not just the 49% they own outright, so this would put the total fair value at $3.331b.

 

In February 2024, Muddy Waters contended that "Since 2021, the valuations for "InsureTech" stocks and Indian unicorns have collapsed. Digit's prospects for an IPO in the near future seem minimal."

 

They also said that "it is incontrovertible that Digit is worth far less today than where Fairfax ultimately marked it in 2021, ... we see Digit as generously being valued at ~$1.5 billion presently. We therefore adjust Fairfax's book value downward by -$1.1 billion to align Digit's carrying value with a more reasonable value."

 

 

Four months later, these predictions are not doing well. The IPO, with minimal prospects of happening in the near future, is done. The market capitalization, at today's share price (337.6 INR) is $3.78b, higher than the $3.331 fair value on Fairfax's books, and considerably higher than Muddy Waters 'generous' valuation of $1.5b.

 

I know it takes a while to process this new information, but 3 weeks after the IPO, I am eagerly awaiting Muddy Waters acknowledgement that at least this one adjustment, representing $1.1b out of their "~-$4.5 billion "conservative adjustment to book value," turns out to be unneeded. I don't know the details of the IFRS accounting for majority stakes, so it may well be that there will be no fair value adjustment in Q2, given the controlling stake, but the collapse in valuations sure hasn't played out. 

[petec]

14 hours ago, nwoodman said:

True albeit with a financing component and +/- cash flow implications.  As long as the price direction is correct then you also get the use of the cash in excess of interest payments on the way through.  It becomes a bit of a virtuous circle when that cash gets used for buybacks below IV.  
 

The Ensign swaps demonstrated that the process can be as simple as Fairfax fronting up with the cash based on the days closing price.  The counterparty doesn’t have to dump shares back into the market etc.  they get surety of price and Fairfax gets a swag of shares.  No epiphany but good to see it can be done this elegantly.

 

+1 to both paragraphs.

[petec]

11 hours ago, TwoCitiesCapital said:

I know TRS don't have to be disclosed, so it's hard to know what FFH holds. 

 

 But does anyone else know what other TRS may be on the books? I kind of thought they were historically using TRS to short stocks and didn't realize they were using them to go long anything but their own. Now I'm curious what other long positions reside outside of disclosure rules as structured like this? 

 

The ESI TRS was previously disclosed. I'm not aware of others.

[petec]

11 hours ago, dartmonkey said:

 

Brief recap of recent Digit valuation:

 

Fairfax has this at a fair value of $2.265b on its 2023 annual report. Although Fairfax notes that it owns 49%, it also has 'securities' that, when converted, would give it a 68% stake. My understanding (someone please correct if this is not true) is that the $2.265b number is for the whole 68% stake, not just the 49% they own outright, so this would put the total fair value at $3.331b.

 

In February 2024, Muddy Waters contended that "Since 2021, the valuations for "InsureTech" stocks and Indian unicorns have collapsed. Digit's prospects for an IPO in the near future seem minimal."

 

They also said that "it is incontrovertible that Digit is worth far less today than where Fairfax ultimately marked it in 2021, ... we see Digit as generously being valued at ~$1.5 billion presently. We therefore adjust Fairfax's book value downward by -$1.1 billion to align Digit's carrying value with a more reasonable value."

 

 

Four months later, these predictions are not doing well. The IPO, with minimal prospects of happening in the near future, is done. The market capitalization, at today's share price (337.6 INR) is $3.78b, higher than the $3.331 fair value on Fairfax's books, and considerably higher than Muddy Waters 'generous' valuation of $1.5b.

 

I know it takes a while to process this new information, but 3 weeks after the IPO, I am eagerly awaiting Muddy Waters acknowledgement that at least this one adjustment, representing $1.1b out of their "~-$4.5 billion "conservative adjustment to book value," turns out to be unneeded. I don't know the details of the IFRS accounting for majority stakes, so it may well be that there will be no fair value adjustment in Q2, given the controlling stake, but the collapse in valuations sure hasn't played out. 

 

If there is not a fair value adjustment, would this be reflected in Fairfax's "excess of fair over carrying" metric? I assume not, because I think the excess is only for investments, not insurance opcos (for example I don't think Gulf is included). But if it is in there it'll be +/- $13 per share pretax I think.

[dartmonkey]

13 hours ago, petec said:

 

If there is not a fair value adjustment, would this be reflected in Fairfax's "excess of fair over carrying" metric? I assume not, because I think the excess is only for investments, not insurance opcos (for example I don't think Gulf is included). But if it is in there it'll be +/- $13 per share pretax I think.

I don't know, but since they quote a fair value of $2265m for Digit in the annual report, they may be including the value of the full 68% stake once converted - I don't think they are ascribing a value of $4.622b to the whole 100% of Digit, it makes more sense for 68%% to be 2265 and the whole company to have a fair value of 2265/.68=3.331b.

Fairfax investment Date of Initial Inv. Ownership Cost Fair Value at Dec.31, 2023 Compounded Annualized Return

...

Digit                        Feb-17                   49.0%        154   2,265                                    61.9%

 

IF this is correct, they may continue assigning fair value and not consolidate, as long as they have not gone from 49% to 68%. I guess they will probably talk about this investment in the Q2 report, now that the IPO has happened, and we will get a better idea some time in late July or early August.

[SafetyinNumbers]

I think with Digit we have enough information to know where it was marked vs fair value. At YE23, if one takes the $2.265b FV for the entire position and deduct the $477m FV from the equity position disclosure it comes to the mark for the preferred ~$1.788b at year end. This means the whole position is marked at around $1.94b at the end of March which I think is pretty much the IPO price so I don’t expect a mark up on the IPO. 

 

 

[Viking]

Investment Portfolio: A Review of Returns From 2016-2023 and Estimate for 2024

 

Two things drive earnings at Fairfax:

• The underwriting profit it earns on its insurance operations.
• The return it earns on its investment portfolio.

In this post we will review the return Fairfax earns on its investment portfolio – in total dollars and as a percent. We will start by looking at the past (2016-2023). We will then use what we learn as inputs to help us build a forecast for 2024 and 2025. 

 

What is the value and composition of Fairfax’s investment portfolio?

 

Fairfax has an investment portfolio with a value of about $65 billion at March 31, 2024. This does not include FFH-total return swap position (with a notional value of about $2.2 billion).

 

 

 

Methodology

 

The total investment return for Fairfax can be calculated using the following inputs:

 

Income streams:

A.    Interest and dividend income

• Interest income earned from the fixed income portfolio.
• Dividend income earned the mark to market equity holdings.

B.    Share of profit of associates

• Fairfax’s share of pre-tax earnings from Eurobank, Poseidon, EXCO Resources, Stelco and Fairfax India.

C.    Non-insurance consolidated companies

• Pre-tax earnings from Recipe, Grivalia Hospitality, Thomas Cook India, AGT Food Ingredients, Dexterra, Sporting Life and Boat Rocker.

D.   Net gains (losses) on investments

• Unrealized gains from investment portfolio (stocks, fixed income etc).
• Large realized gains from asset sales and revaluations (including insurance).

We also include one more item:

 

E.    Excess of fair value over carrying value: 

• This captures the change in value each year of Fairfax’s associate equity holdings that is not captured in Fairfax’s financial statements (earnings or book value). We include it because this is real value that is being created each year.

Historical returns: 2016-2023

 

For the 8-year period from 2016 to 2023, Fairfax earned an average total return on its investment portfolio of about 5.5% per year. That is a much better return than I would have imagined. 

 

 

 

Note: D.) Net investment gains including sales

 

We have grouped three items into this bucket. All realized and unrealized gains, from both investments and insurance. And the losses from pushing out the maturities on long term debt.

 

 

 

Note: E.) Associates: YOY change in fair value vs carrying value

 

Equity holdings classified as ‘associates’ are valued on Fairfax’s balance sheet at their carrying value not their fair value (market value). Over the years, the fair value of this group of holdings has increased at a faster pace than it’s carrying value. This is value that is being created each year. At some point, Fairfax will harvest the gains.

 

To allow us to focus on Fairfax’s investment portfolio, we have excluded insurance, reinsurance and Fairfax India from our calculations below.

 

 

 

Historical returns: 2016-2023 – Calculated in 2-Year Averages

 

If we look at Fairfax’s returns from this time period using 2-year averages we can smooth out much of the annual volatility and get a much clearer picture as to what has been going on under the hood. 

 

2016 – 2017

• Average annual return on the investment portfolio bottomed out at 4%.
• Last of the equity hedges was removed in late 2016 resulting in a $1.2 billion loss.

2018-2019

• Average annual return improved to 5.4%.
• The return improved despite the bear market in stocks in December 2018.

2020-2021

• Average annual return improved to 6.4%.
• The return improved despite the bear market in stocks in 2020 (that hit Fairfax’s holdings especially hard, given they were skewed to cyclicals).

2022-2023

• Average annual return fell to 5.9%.
• However, this was an amazing return when we factor in what happened in 2022:
  • Historic bear market in bonds.
  • Bear market in stocks.

Fairfax’s average return in 2022-2023 is actually much better than most investors realize. Why? Fairfax’s massive bond portfolio is mark to market (unlike most P/C insurance peers). Fairfax’s 2-year return of 5.9% includes the carnage caused by the greatest bond bear market in history in 2022.

 

Summary (2016-2023): When viewed through 2-year averages it is clear that Fairfax’s total return on its investment portfolio has been steadily moving higher over the past 8 years.

 

 

 

Looking forward: Estimates for 2024 and 2025

 

The significant headwinds that were holding down Fairfax’s returns from 2016-2023 are now gone. And significant new tailwinds have emerged.

• Fixed income: portfolio earned 5% in Q1, 2024.
• Equities: the earnings power of Fairfax’s $19 billion equity portfolio is shining through.

My estimate is for Fairfax to earn a total return of about $4.7 billion in 2024, or 7.1% on its average investment portfolio of $65.9 billion. 

 

Importantly:

• Quality: Most of the return (70%) is now coming from high quality sources (interest and dividends and share of profit of associates). The much higher total investment return being delivered by Fairfax is sustainable and durable. 
• Volatility: Given the sources, the return will also be much less volatile than in the past. 

 

 

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Investments Per Share – The Trend From 2016-2023

 

What has been the growth profile of Fairfax’s investment portfolio?

 

At December 31, 2023, Fairfax’s investment portfolio was $64.8 billion or $2,816/share. From 2016 to 2023, Fairfax’s investment portfolio (per share) has a CAGR of 12.6%. That is an impressive growth rate.

 

 

 

A double whammy

 

When it comes to Fairfax’s investment portfolio, two things are happening at the same time:

• The size of the investment portfolio is growing nicely over time.
  • From 2016-2023, investments per share CAGR = 12.6%.
• The return being earned on the investment portfolio has increased to over 7%.
  • In 2016/2017, the average return was 4%.

This is a great set-up for Fairfax shareholders. The total investment portfolio should continue to grow nicely and a return of +7% looks sustainable in the coming years.

Edited Thursday at 07:15 PM by Viking

[dartmonkey]

15 hours ago, SafetyinNumbers said:

I think with Digit we have enough information to know where it was marked vs fair value. At YE23, if one takes the $2.265b FV for the entire position and deduct the $477m FV from the equity position disclosure it comes to the mark for the preferred ~$1.788b at year end. This means the whole position is marked at around $1.94b at the end of March which I think is pretty much the IPO price so I don’t expect a mark up on the IPO. 

 

Walk me through your reasoning or tell me if you think this seems right:

 

The preferreds are given a carrying value of about $1790 on March 31st, and the equity portion (49% of Digit's shares) is worth $477m (fair value), but is carried at $147m. That's presumably how you get a carrying value of $1.94b : $1.788b for the preferred plus the $.147b carrying value of the equity.

 

Once the preferreds are converted, Fairfax expected to own 68% of Digit.

 

Digit has a market cap of $3.74b at today's price (340.80 INR). If Fairfax still owned 68%, that would be worth $2.54b. 

 

But there are a couple of things I am not sure about. First, why are the preferreds, if they can be converted to 29% of the company, worth $1790, whereas the shares, worth 49% of the company, only have a fair value of $477m (end of 2023) or $476m (end of March)?

 

Second, Digit issued 41.4m new shares at the IPO, so the total market cap of Digit is higher now than it was pre-IPO. Before the IPO, they had 145.6m shares, so unless Fairfax ponied up more money to buy a proportion of those new shares, that 68% share would now only be .68*(145.6/187.0)= 52.9% of the $3.74b market cap, or $1.98b.

 

 

If my reasoning is right, then Fairfax's $1790+476 = $2.27b stake is now worth $1.98b, a drop of about 13%. It's a bit higher than the carrying value of $1.79b + $0.147b = $1.937b, but that may not be adjusted, given Fairfax's controlliing stake. But I am pretty sure that parts of this analysis may be wrong. 

[Viking]

Below is an interesting thread (4 parts) posted by 'bsilly,TLA' on twitter today. I have a thesis that, under Andy Barnard, the quality of Fairfax's P/C insurance business has been slowly, incrementally improving over the past decade. bsilly's thread seems to support that idea. This is not priced into Fairfax's stock today. Just another tailwind.

• https://twitter.com/bsilly3/status/1801345889262571548

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[Hoodlum]

25 minutes ago, Viking said:

Below is an interesting thread (4 parts) posted by 'bsilly,TLA' on twitter today. I have a thesis that, under Andy Barnard, the quality of Fairfax's P/C insurance business has been slowly, incrementally improving over the past decade. bsilly's thread seems to support that idea. This is not priced into Fairfax's stock today. Just another tailwind.

• https://twitter.com/bsilly3/status/1801345889262571548

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Thanks Viking for sharing this. The last 2 charts in particular are interesting as they remove most of the short term volatility. It is interesting to see how Fairfax compares to a similar sized business as TRV that trades at 1.9x book with a 15x PE.  Lots of upside for Fairfax. 

[Crip1]

2 hours ago, Viking said:

Below is an interesting thread (4 parts) posted by 'bsilly,TLA' on twitter today. I have a thesis that, under Andy Barnard, the quality of Fairfax's P/C insurance business has been slowly, incrementally improving over the past decade. bsilly's thread seems to support that idea. This is not priced into Fairfax's stock today. Just another tailwind.

• https://twitter.com/bsilly3/status/1801345889262571548

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Long time owners of Fairfax will remember the name BSilly from way back when. He was one of the best voices of reason back in those days when Fairfax was under attack by short sellers.  Too bad that his musings are few and far between on this board. Thanks for finding him on Twitter.

 

-Crip

[SafetyinNumbers]

8 hours ago, dartmonkey said:

 

Walk me through your reasoning or tell me if you think this seems right:

 

The preferreds are given a carrying value of about $1790 on March 31st, and the equity portion (49% of Digit's shares) is worth $477m (fair value), but is carried at $147m. That's presumably how you get a carrying value of $1.94b : $1.788b for the preferred plus the $.147b carrying value of the equity.

Once the preferreds are converted, Fairfax expected to own 68% of Digit.

 

Digit has a market cap of $3.74b at today's price (340.80 INR). If Fairfax still owned 68%, that would be worth $2.54b. 

 

But there are a couple of things I am not sure about. First, why are the preferreds, if they can be converted to 29% of the company, worth $1790, whereas the shares, worth 49% of the company, only have a fair value of $477m (end of 2023) or $476m (end of March)?

 

Second, Digit issued 41.4m new shares at the IPO, so the total market cap of Digit is higher now than it was pre-IPO. Before the IPO, they had 145.6m shares, so unless Fairfax ponied up more money to buy a proportion of those new shares, that 68% share would now only be .68*(145.6/187.0)= 52.9% of the $3.74b market cap, or $1.98b.

 

 

If my reasoning is right, then Fairfax's $1790+476 = $2.27b stake is now worth $1.98b, a drop of about 13%. It's a bit higher than the carrying value of $1.79b + $0.147b = $1.937b, but that may not be adjusted, given Fairfax's controlliing stake. But I am pretty sure that parts of this analysis may be wrong. 

I used the pre-offering share count of 875m * 68% * Rs 272 / 83.5 to get an IPO valuation for FFH’s stake at ~1.938b which is where it’s marked. I don’t assume the stake changed so to value it now that would mean it’s worth $2.42b (i.e. up 25% from IPO at Rs 340 all else being equal). 
 

I don’t think they were allowed to mark up the equity but they wanted to reflect closer to what Digit was worth on the balance sheet so they used the preferred valuation to reflect it. Since they are compulsory preferred, I assume the thinking was it reflected the economic reality so useful to the users of financial statements.

[Hamburg Investor]

12 hours ago, Viking said:

Below is an interesting thread (4 parts) posted by 'bsilly,TLA' on twitter today. I have a thesis that, under Andy Barnard, the quality of Fairfax's P/C insurance business has been slowly, incrementally improving over the past decade. bsilly's thread seems to support that idea. This is not priced into Fairfax's stock today. Just another tailwind.

• https://twitter.com/bsilly3/status/1801345889262571548

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This is really really interesting, thank you again, @Viking!

I shared a similar analysis here a few months ago, I think it was overseen (I just posted an xls file probably no-one opened; so this time with a picture).

Essentially, I wanted to understand how Fairfax compares to Markel and to the US PC industry as a whole.

I basically compared the following things after researching the annual combined ratios:

• Made the average combined ratios from 5 years (without weighting the premiums). This gives you smoothed figures
• Then I calculated the difference between FFH and MKL. You can see: Until 2011 - with exceptions - Markel was usually well ahead of Fairfax, mostly between 4 and 9 percentage points. In the following years, Fairfax caught up massively and for the last 10 years has been in a narrow range, with Markel usually only just ahead or even Fairfax in the lead. If you want, you can either see a slight trend in the opposite direction since 2017 (so Markel improving against Fairfax again) or a levelling off in very slightly negative territory from Fairfax view since 2014. In any case, Fairfax combined ratio has been catching up in large steps since 2011 and 2012 against Markel, probably above 5 percentage points  on average. 
• In comparison with the PC sector as a whole, I have created a difference on an annual basis. Years in which Fairfax cr was 3% worse (red) or 3% better (green) are marked accordingly. In this way, we can see where particularly large deviations occurred. You can see that 2011 was the last red year, with a total of 5 red and one green year up to 2011. Since 2013 there has been no more red year, but 6 (!) green ones. Of course, this is still episodic, but an initial picture emerges. 
• To gain a better picture of the entire period I added up the yearly differences between Fairfax and the PC sector over the years. So if Fairfax lagged 5% in year 1 and 2% in year b, I summed that up to (7%). The result: you can clearly see that from 2000 to 2011 the crs add up to (30%). Unweighted, this results in an average of (3%). Fairfax was therefore around 3% worse than the average PC company. After that until today (2011 to 2022), (30%) has become 8%. In other words: On average, Fairfax has beaten the PC market by about 3% / year. Comparing the periods before 2011 and after 2011, there is a difference of about 5% to 6% / year by which Fairfax cr has improved to the market. Fairfax has also outperformed Markel by roughly the same difference if you look at the 5-year differences; this means that Markel would have moved roughly in line with the market, while Fairfax would have made up considerable ground on both the market and Markel (and Traveller's, as I learn here and now).
• Comparing what I found - Fairfax relatively improving by 5 percentage points against a. Markel and b. the American PC industry as a whole, I find it astonishing, that the comparison against Travellers seems to tell nearly exactly the same story: In 2014 Fairfax cr was 5% behind Travellers; and in 2022 they are head to head. As if nothing changed between Travellers, Markel and the market; they all moved parallel into the same direction. Only Fairfax improved by about 5 percentage points against all three..

Please note my figures:

• In Germany we write "-5%" where in America you would write (5%), if I got it right.
• The cr figures are manually researched from the annual reports. It may be that errors have occurred there.
• Premium growth is not included. The mathematically correct way to calculate an average would have been "per dollar of premium over 5 years". Corresponding criticism is also appropriate when adding up against the PC industry etc. This is not perfect science, I check, only roughly ideas and theses.
• Is Fairfax a (purely American) PC insurer? Definitely not. This comparison is very flawed. I am not an insurance expert and have taken, what I could find easily and found relatively plausible ("Ok, let's do it and see if we could see an uptrend"). You could certainly take it further and compare each insurance line of Fairfax individually with suitable industry indices. That would also be desirable, but I don't have the time and it was enough for me for these purposes. Assuming that profitability trends in industries often occur worldwide, such a comparison can at least help to find general theses on trends - and that's all I was interested in here. In combination with the Markel comparison (and the Travellers comparison), an overall picture emerges, albeit a rough one.
• I have no idea how to get that fancy graphs, like the traveller one here, out of an excel. Has anybody a hint for me? That would certainly be easier to understand than my table.

[John Hjorth]

11 minutes ago, Hamburg Investor said:

• I have no idea how to get that fancy graphs, like the traveller one here, out of an excel. Has anybody a hint for me? That would certainly be easier to understand than my table. ...

 

<FFH Off Topic Begin>:

 

@Hamburg Investor, 

 

Here is one for you :

 

Hubspot [ February 29^th 2024] : How to Create Excel Charts and Graphs.

 

It's not that hard - Nothing is, if you can. Just try, and you'll get there!  -Good luck! 

 

<FFH Off Topic End>