Fairfax 2024

[Munger_Disciple]

3 hours ago, StubbleJumper said:

 

Certainly that's been true for the three years 2021 to 2023 that BV has grown by 20%+.  But, it's worth taking a long and hard look at the table that Prem publishes every year in his annual letter which depicts growth in BV (it appears on page 22 of the most recent annual letter).  Those annual growth numbers result in the much vaunted 18% compounded annualized growth in BV over the 38-year life of the company. 

 

One can hold the belief that the entire 38-year historical series is representative of the sort of results that one might expect over the next 38 years (ie, 18% growth in BV is the long-term norm and what we'll get in the future).  Or one might hold the belief that the first 10 or 15 years of FFH's results reflect a rapid growth start-up phase that cannot be replicated in the future because FFH is a much, much larger company (eg, BV grew 180% in 1986 and 48% in 1987 but that would be unthinkable with the current asset base), implying that you need to give a substantial haircut to that 18% historical result.  Or, one can simply take Prem's publicly stated objective of 15% growth in BV as an "expert opinion" of the sort of annual BV growth that one might expect. 

 

When I look at that table that Prem publishes every year, and I squint a little, I see a company that operates primarily in a highly competitive, cyclical industry that produces a commodity (insurance).  The value offered by FFH comes principally from shrewd investment decisions, but there remains an anchor on those investment returns driven by the requirement of keeping a large portion of its investment portfolio in sovereign debt.  Personally, I do not hold the view that the 38-year historical BV growth number of 18% can be replicated on a going-forward basis and I would be absolutely delighted if FFH were actually able to achieve Prem's 15% goal over the long-term.  My guess is that in 2039, we will look back on the previous 15 years and see a 12% annualized growth in BV, but time will tell.

 

One's view on this matters a great deal.  As you noted, if you hold the belief that 20-ish percent annualized growth in BV is the new normal over the long-term, FFH is screaming cheap priced at today's 1.1x.  If you simply accept Prem's 15% objective as representative of the long-term future, FFH is still very cheap.  But, if you look at Prem's BV growth table and you see 12% in the future, you likely wouldn't want to pay more than 1.5x for the shares, implying that the stock is cheap at 1.1x, but probably not outrageously cheap.

 

We shareholders have witness three really good years for FFH, and there's likely another couple of solid good years coming down the pipe.  Enjoy them while they are here!

 

 

SJ

 

Excellent post! It's a folly to assume long term ROE of 20% (well above Prem's own internal target) for Fairfax. I would be happy if Fairfax's BV compounds at 10%-12% for the next decade without major screwups in investments or underwriting. 

 

In a commodity business like insurance, it is crazy to expect a long term CR of 94. Buffett repeatedly said his goal for insurance business is 100CR; meaning he just wants it generate cost-free float. Keep in mind Berkshire is a lot less levered in their insurance business with a ton more capital than Fairfax!

Edited August 19, 2024 by Munger_Disciple

[Viking]

23 minutes ago, StubbleJumper said:

 

Yep.  We could be in a brave new world where it will be possible to simultaneously write a 94 CR every year and to routinely stuff your float with 4%+ sovereign debt, for a net financing differential of +10%.  But, I wouldn't count on it.

 

SJ

 

@StubbleJumper I am not trying to put words in your mouth - so please correct me if I am off base.  

 

Fairfax's future is like the multiverse in a Marvel movie. Fairfax has an infinite number of futures. 94CR is one. 4% interest rates is another. But there are an unlimited number of variables - many of which are very important. What your analysis largely ignores is management. It assumes Fairfax is a leaf getting blown by the wind - and where Fairfax goes will be determined by the wind. 

 

I completely disagree. I think the biggest factor that will determine Fairfax's future is not 'fate' (the wind) - it is management and the decisions they make. 

 

Why has Fairfax and Berkshire Hathaway performed so well over the past 38 years? Was it because of the P/C insurance cycle? Or the interest rates available on sovereign debt?

 

Both companies excelled because of the P/C insurance model and the excellent decisions made by the management team over time.

-----------

IMHO, what your mental model is completely missing is what we don't know - what the management team at Fairfax will do, especially when adversity (= opportunity) strikes. That is the same line of thinking that caused my to completely miss out on Berkshire Hathaway as an investment for decades - I couldn't see with certainty what Buffett was going to do so I way underestimated the value he was going to create in the subsequent years. 

[Viking]

54 minutes ago, Munger_Disciple said:

 

Excellent post! It's a folly to assume long term ROE of 20% (well above Prem's own internal target) for Fairfax. I would be happy if Fairfax's BV compounds at 10%-12% for the next decade without major screwups in investments or underwriting. 

 

In a commodity business like insurance, it is crazy to expect a long term CR of 94. Buffett repeatedly said his goal for insurance business is 100CR; meaning he just wants it generate cost-free float. Keep in mind Berkshire is a lot less levered in their insurance business with a ton more capital than Fairfax!

 

@Munger_Disciple , I don't think anyone is assuming that Fairfax will deliver a long term ROE of 20%. Today, I think there is a pretty good chance that Fairfax can deliver a 15% ROE over the next 3 years. Important: in my ROE 'calculation' I include excess of fair value over carrying value for the equity holdings. That does not show up in earnings or book value, but I think it is value creation that needs to be captured. 

 

Year 4 and further out? My guess is Fairfax will continue to do well, but I have no idea how well. There are too many unknowns. But I don't need to know what Fairfax will do in 4 or 5 years. Because in 3 years time (August 2027) I will have a very good handle on what I think Fairfax can do from August 2027 to 2030. What I do with my Fairfax position will be driven primarily by what I think I KNOW. Not what I don't know. 

 

What your analysis is missing is the reflexivity thing that George Soros is so famous for (I hope I don't get this wrong). But let's assume the CR for all P/C insurance companies go to 100 for years - not a one year blip caused by record catastrophes. If this happens, the share prices for many P/C insurers will get killed. This will likely present the perfect opportunity for a flush with cash player (like Fairfax) to make a big P/C acquisition at an attractive price. Soft insurance markets are a great time to grow via acquisition. 

 

That is exactly what Fairfax did from 2015 to 2107 - they used the then soft P/C insurance market to build out their global P/C insurance footprint (the fact they were able to do this when they were cash poor is amazing). 

 

In a soft insurance market Fairfax will also have the ability to shift capital to more productive uses. 

 

Like 2020, maybe Fairfax's share price gets taken out behind the woodshed. This will simply give Fairfax the opportunity to take out a meaningful amount of shares at a very attractive price (perhaps below book value).

 

Whatever boogeyman we can think of for Fairfax there is a flip side to it - something Fairfax can use to its advantage. The worse the boogeyman the better the opportunity. 

 

Now could we see high volatility over the short term (say 12 to 24 months) in the share price? Yes. But that would simply create the opportunity for significant long term value creation (via significant buybacks).

 

I am not assuming Fairfax will always make the most optimal decision moving forward and always come out smelling like roses. But I am also not doing the opposite - I am not assuming the worst because that is what Buffett says will happen. Fairfax tends to make their best investments (capital allocation) when adversity strikes. It is very counter-intuitive. 

 

Active management, volatility, unconstrained capital allocation and the power of compounding is a very potent combination.  Especially when you are flush with cash - this is the new variable for Fairfax.

Edited August 19, 2024 by Viking

[Parsad]

5 hours ago, SafetyinNumbers said:

It seems the relationship is actually exponential which also makes sense. 15% ROE businesses seem to trade > 2x book value and in IFC’s case 2.8x BV. Kinsale which has a 25%+ ROE trades at ~9x BV. 

I would caution FFH shareholders (including myself) from selling at 1.5x BV thinking that’s fair value when there is still significant growth and multiple expansion ahead. 

 

Shareholders need to consider their after-tax position in taxable accounts as well. 

 

I have so much in capital gains on FFH in my personal holding company, that at the new capital gains tax rate in Canada, it would set me back a long ways if I sold Fairfax only to buy something else.  Unless BRK gets cut by 65%, it wouldn't make sense for me to sell Fairfax and buy Berkshire if both grew at 15%! 

 

That's why in that account, I will just annually buy VOO going forward and average in as cash comes in.  The other core holdings bought like FFH, META, etc...will just let them keep compounding all of that capital gains. 

 

Now in non-taxable accounts...that's totally different!  Cheers!

[StubbleJumper]

39 minutes ago, Viking said:

MHO, what your mental model is completely missing is what we don't know - what the management team at Fairfax will do, especially when adversity (= opportunity) strikes. That is the same line of thinking that caused my to completely miss out on Berkshire Hathaway as an investment for decades - I couldn't see with certainty what Buffett was going to do so I way underestimated the value he was going to create in the subsequent years. 

 

 

Oh no, I'm not missing out on Fairfax at all (at this stage I'd be embarrassed to reveal the percentage of my portfolio in FFH because it's ridiculous, bordering on irresponsible)!  I'm just investing with my eyes wide open.  When you reach the top of the insurance cycle and the money starts coming in hand-over-fist, it is a mistake to project it too far into the future.  To your credit, you only tend to look forward a couple or three years at a time, which I think is probably about the limit of what one can do with any degree of precision.  But, when we slap a valuation multiple on the short term results, we are implicitly forecasting the long-term, and for that caution is preferable.

 

43 minutes ago, Viking said:

Fairfax's future is like the multiverse in a Marvel movie. Fairfax has an infinite number of futures. 94CR is one. 4% interest rates is another. But there are an unlimited number of variables - many of which are very important. What your analysis largely ignores is management. It assumes Fairfax is a leaf getting blown by the wind - and where Fairfax goes will be determined by the wind. 

 

Like it or not, the operating subs are subject to the industry competitive dynamics.  That involves highly profitable periods where it's relatively easy to grow premium, and it also involves difficult periods when FFH discontinues policies because they are not adequately profitable.  CRs go up, and CRs go down.  If that's what you mean by being blown around by the wind, well, that's what it is.

 

Management is quite another thing.  The reason why anyone would ever invest in FFH is because of the company's investment record.  Over long periods they hit just enough home runs to achieve a superior return.  Nobody is ignoring that.  But, there's an appropriate price for everything.

 

 

SJ

[Viking]

12 hours ago, nwoodman said:

True, picking up on @SafetyinNumbers point above, I think that is why we follow their capital allocation so closely.  There is a bit of scar tissue that has built up with Fairfax over the years from capital allocation misadventures.  I just don’t have those concerns with Berkshire and they make mistakes too.  Even when Buffett is doing nothing it feels like optionality.  To this end Wade’s recent CC comments resonated when he said he wasn’t finding much value in equities at the moment, I can empathise there.  Happy for them to keep the allocation to equities small until there is some really interesting or just take out an entire company e.g. Sleep Country.
 

I have probably touched on this before, but I have often thought that Berkshire has access to more timely information than the Fed.  It strikes me that Fairfax is entering a similar position in terms of data from their various subs which are now far and wide.  This has to help in general but in terms of managing a bond portfolio surely it must provide some semblance of a competitive advantage.
 

This ‘access to information’ also extends to key relationships and deal flow.  For me deal flow is key and I think that is something that has definitely improved in the last 5 years or so.  Berkshire doesn’t seem to get the opportunities they did when I first started to follow them 20 years ago.  It might be the law of large numbers but I do feel they got crowded out by the Fed during Covid so there is that.  
 

The good thing for Fairfax is that a $US1-2bn deal can make a material difference, as long as they are rational.

 

 

@nwoodman you make some great points:

1.) Fairfax's past mis-adventures and scar tissue. Making mistakes can be a wonderful educator. My guess is past mistakes have actually made Fairfax a stronger company today. And they are still recent enough that management likely still is feeling their sting. And I like that. 

2.) Great point about 'access to information'. Given how Fairfax thinks and operates this (they think about the economy and macro) getting real time information from the various businesses they own should help.

3.) You have spoken many times in the past about relationships/deal flow. What Fairfax did with Kennedy Wilson ($4 in real estate mortgages) last year provides perhaps the best recent example. Fairfax has spend decades building out their partnership/relationship networks. This should be another tailwind moving forward.

[Viking]

9 minutes ago, StubbleJumper said:

 

 

Oh no, I'm not missing out on Fairfax at all (at this stage I'd be embarrassed to reveal the percentage of my portfolio in FFH because it's ridiculous, bordering on irresponsible)!  I'm just investing with my eyes wide open.  When you reach the top of the insurance cycle and the money starts coming in hand-over-fist, it is a mistake to project it too far into the future.  To your credit, you only tend to look forward a couple or three years at a time, which I think is probably about the limit of what one can do with any degree of precision.  But, when we slap a valuation multiple on the short term results, we are implicitly forecasting the long-term, and for that caution is preferable.

 

 

Like it or not, the operating subs are subject to the industry competitive dynamics.  That involves highly profitable periods where it's relatively easy to grow premium, and it also involves difficult periods when FFH discontinues policies because they are not adequately profitable.  CRs go up, and CRs go down.  If that's what you mean by being blown around by the wind, well, that's what it is.

 

Management is quite another thing.  The reason why anyone would ever invest in FFH is because of the company's investment record.  Over long periods they hit just enough home runs to achieve a superior return.  Nobody is ignoring that.  But, there's an appropriate price for everything.

 

SJ

 

+1

 

I really do appreciate the opportunity to debate with other board members. We have a wonderful community of smart, thoughtful investors   

Edited August 19, 2024 by Viking

[StubbleJumper]

1 hour ago, SafetyinNumbers said:

That’s only part of the return although I do think insurance is a growth market because of climate change. I also think a lot of institutional investors that previously would have shown up to take advantage of the opportunity prefer less volatile returns so instead are in private equity and private credit.
 

Do you think the recent large premium growth has added any permanent operating leverage for Fairfax or will it all be given back in price?
 

What do you model for forward returns on the equity portfolio? 

 

Well, you might end up being right.  It's possible that over long periods FFH's insurance subs will be able to write a 94 CR, buy treasuries at 4%+, and run a premiums to surplus ratio of 2:1, resulting in a ~20% ROE for the sub.  Usually in the past, those sorts of returns were competed away as companies retained earnings and capital flowed into the industry (who doesn't want to throw more capital at a 20% ROE?!!).  Maybe the institutional investors will steer clear this time, but I wouldn't count on it.

 

The question of premium growth and operating leverage is an interesting one.  Operating leverage is highest in industries with high fixed costs.  That's not really the insurance industry.  Let us hope that most of the premium growth of recent years will endure even if the market softens, but that hasn't always been the case.  In softer markets in the past, FFH has allowed written less business.  The reason why the operating leverage question is interesting is that FFH's subs had a no lay-off policy during previous soft markets, which sort of converts labour from a variable cost into a semi-fixed cost.  You can see the effects of that when you decompose the CRs into their elements and see how the relative importance of the elements changes during soft and hard markets.

 

 

SJ

[Munger_Disciple]

@Viking

 

I don't think anyone is assuming that Fairfax will deliver a long term ROE of 20%. 

 

Earlier in the thread, when people say Fairfax trades at a P/E of 5, that's exactly what they are implicitly assuming as opposed to current earnings at the peak of the cycle. One should have some idea of normalized earning power to evaluate the intrinsic value. 

 

Today, I think there is a pretty good chance that Fairfax can deliver a 15% ROE over the next 3 years.

 

Fair enough! However the terminal P/B of Fairfax at the end of the third year would largely depend on its normalized earning power going forward though the book should reflect the next three years worth of retained earnings. 

 

What your analysis is missing is ........

 

I said I would be happy with 10-12% growth in book over the next decade; I would be ecstatic if it is more than that. I don't think I am missing anything. You are misinterpreting what I said. 

 

 

[Munger_Disciple]

40 minutes ago, Parsad said:

 

Shareholders need to consider their after-tax position in taxable accounts as well. 

 

I have so much in capital gains on FFH in my personal holding company, that at the new capital gains tax rate in Canada, it would set me back a long ways if I sold Fairfax only to buy something else.  Unless BRK gets cut by 65%, it wouldn't make sense for me to sell Fairfax and buy Berkshire if both grew at 15%! 

 

That's why in that account, I will just annually buy VOO going forward and average in as cash comes in.  The other core holdings bought like FFH, META, etc...will just let them keep compounding all of that capital gains. 

 

Now in non-taxable accounts...that's totally different!  Cheers!

 

This is a good point. The goal of a very successful investment should be to eventually have a huge amount of deferred taxes (which are technically due to govt but you decide if and when to incur it). Meanwhile we earn the return on the deferred taxes for ourselves. I call it our personal "float".

Edited August 19, 2024 by Munger_Disciple

[Maverick47]

35 minutes ago, Munger_Disciple said:

This is a good point. The goal of a very successful investment should be to eventually have a huge amount of deferred taxes (which are technically due to govt but you decide if and when to incur it). Meanwhile we earn the return on the deferred taxes for ourselves. I call it our personal "float".

@Munger_Disciple

 

I like your idea of calling this our personal “float”!  It does make sense to take this into account in taxable accounts.

 

 Speaking of which, Fairfax and Berkshire both have this additional type of float on their own balance sheets as deferred income tax liabilities.  Since the cost of this float is always zero (an interest free loan from the government), it is basically just as valuable to shareholders as insurance float liabilities when combined ratios are at a 100 level.  When combined ratios are less than 100, then insurance float is essentially like a loan with a negative interest rate, and thus is more valuable than a deferred tax liability “loan” of the same amount, while combined ratios above 100 imply a positive interest rate on the insurance liabilities, and then they would be less valuable than the interest free loan from the government.

 

But as you note, we (and companies in similar deferred tax situations) can decide “if and when to incur it”).  This optionality has some indeterminable but non-zero value which makes it somewhat more valuable than insurance liability float which itself depends upon the vicissitudes of weather and claims behavior as far as identifying when the insurance float “loan” (or a portion thereof) has to be repaid.

Edited August 19, 2024 by Maverick47

[dartmonkey]

1 hour ago, Munger_Disciple said:

@Viking

 

I don't think anyone is assuming that Fairfax will deliver a long term ROE of 20%. 

 

Earlier in the thread, when people say Fairfax trades at a P/E of 5, that's exactly what they are implicitly assuming as opposed to current earnings at the peak of the cycle. One should have some idea of normalized earning power to evaluate the intrinsic value. 

 

Today, I think there is a pretty good chance that Fairfax can deliver a 15% ROE over the next 3 years.

 

Fair enough! However the terminal P/B of Fairfax at the end of the third year would largely depend on its normalized earning power going forward though the book should reflect the next three years worth of retained earnings. 

 

I am the one who said that the current P/E is 5 (well, 5.5) if the P/B is 1.1 and the E/B (i.e. ROE) is 20%, because P/E is mathematically the same as P/B/(E/B), so 1.1/.2=5.5. I think that for the next few years, those earnings are pretty much locked in, so it is reasonable to say that Fairfax is currently trading at about 5.5 the annual earnings we expect for the next few years. In other words, the company should earn more than half of its market cap in the next 3 years. If anything, I think this is an understatement - the company is quite likely to have even HIGHER earnings - those are just the operating earnings currently expected, before considering the fact that there will be some extra earnings from opportunistic sales like Gulf Re and PetCo and Stelco.

 

But it is true that we cannot count on earning 20% of equity forever - 18% is the history that includes when the company was very small, 15% is the goal that the company has often aimed for in the past, and after a few years of 20%, 12% is a realistic, conservative number that they should be able to hit fairly easily. So using just one number (20%, 18%, 15%, 12%, 10%) probably is too simplistic.

 

If the company can opportunistically repurchase a lot of shares with the cash pouring in the next few years, then that longer term return on equity, let's call it 12%, might be in comparison to a much smaller P (market cap), and we might get the same high low P/E anyways. But if you want to be super pessimistic, and use 12% return on current book even for the next few years, then you still get a pretty low number: P/E = 11./.12 = 9.2. That's not quite a worst case scenario, but it's a strikingly low ratio for a very pessimistic prediction of how the company will do, and they will only do that badly if there are some quite horrific things (like a really bad megacap) that hit them in the next few years. 

 

  

Edited August 19, 2024 by dartmonkey
I said high P/E when I mean low

[Munger_Disciple]

10 minutes ago, dartmonkey said:

 

I am the one who said that the current P/E is 5 (well, 5.5) if the P/B is 1.1 and the E/B (i.e. ROE) is 20%, because P/E is mathematically the same as P/B/(E/B), so 1.1/.2=5.5. I think that for the next few years, those earnings are pretty much locked in, so it is reasonable to say that Fairfax is currently trading at about 5.5 the annual earnings we expect for the next few years. In other words, the company should earn more than half of its market cap in the next 3 years. If anything, I think this is an understatement - the company is quite likely to have even HIGHER earnings - those are just the operating earnings currently expected, before considering the fact that there will be some extra earnings from opportunistic sales like Gulf Re and PetCo and Stelco.

 

But it is true that we cannot count on earning 20% of equity forever - 18% is the history that includes when the company was very small, 15% is the goal that the company has often aimed for in the past, and after a few years of 20%, 12% is a realistic, conservative number that they should be able to hit fairly easily. So using just one number (20%, 18%, 15%, 12%, 10%) probably is too simplistic.

 

If the company can opportunistically repurchase a lot of shares with the cash pouring in the next few years, then that longer term return on equity, let's call it 12%, might be in comparison to a much smaller P (market cap), and we might get the same high P/E anyways. But if you want to be super pessimistic, and use 12% return on current book even for the next few years, then you still get a pretty low number: P/E = 11./.12 = 9.2. That's not quite a worst case scenario, but it's a strikingly low ratio for a very pessimistic prediction of how the company will do, and they will only do that badly if there are some quite horrific things (like a really bad megacap) that hit them in the next few years. 

 

  

 

Thanks for the detailed response @dartmonkey.

 

I don't disagree with you that the earnings for the next 3 years will likely be very good and perhaps well above the long term "normalized" ROE. The main risk I see in the next 3 years is a potential mega catastrophic event.

 

Longer term, the size of Fairfax in addition to the normalization of underwriting cycle will also make it harder to earn a high ROE I think but if they can avoid major mistakes, it will be a highly satisfactory investment. As Charlie (Munger) wisely said, "Having low expectations is the secret to success and happiness in life."

[dartmonkey]

Longer term, the size of Fairfax in addition to the normalization of underwriting cycle will also make it harder to earn a high ROE I think but if they can avoid major mistakes, it will be a highly satisfactory investment. As Charlie (Munger) wisely said, "Having low expectations is the secret to success and happiness in life."

 

 

Maybe that's why I'm unhappy.

 

No, seriously, you are right, but when comparing with alternative investments, I think one can also err on the side of being too pessimistic, and miss out. So I think the right approach is to be optimistic first, buy FFH shares, then decide you might have been wrong, become pessimistic (while keeping those shares), and hopefully be pleasantly surprised when your new pessimism turns out to be unwarranted.

 

Edited August 19, 2024 by dartmonkey
added italics to quoted text, to make it clearer that this was a response to a previous text

[Munger_Disciple]

1 hour ago, dartmonkey said:

So I think the right approach is to be optimistic first, buy FFH shares, then decide you might have been wrong, become pessimistic (while keeping those shares), and hopefully be pleasantly surprised when your new pessimism turns out to be unwarranted.

 

 

 

I would put it slightly differently: If the investment makes sense even under conservative (or pessimistic if you prefer) assumptions, it gives the owner all important "margin of safety". 

 

It's always the negative surprises that we need to worry about, the positive surprises take care of themselves. 

 

When comparing investment options, it is better to compare them under different scenarios (conservative, baseline, somewhat optimistic). 

 

 

Edited August 19, 2024 by Munger_Disciple

[Munger_Disciple]

2 hours ago, Maverick47 said:

@Munger_Disciple

 

I like your idea of calling this our personal “float”!  It does make sense to take this into account in taxable accounts.

 

 Speaking of which, Fairfax and Berkshire both have this additional type of float on their own balance sheets as deferred income tax liabilities.  Since the cost of this float is always zero (an interest free loan from the government), it is basically just as valuable to shareholders as insurance float liabilities when combined ratios are at a 100 level.  When combined ratios are less than 100, then insurance float is essentially like a loan with a negative interest rate, and thus is more valuable than a deferred tax liability “loan” of the same amount, while combined ratios above 100 imply a positive interest rate on the insurance liabilities, and then they would be less valuable than the interest free loan from the government.

 

But as you note, we (and companies in similar deferred tax situations) can decide “if and when to incur it”).  This optionality has some indeterminable but non-zero value which makes it somewhat more valuable than insurance liability float which itself depends upon the vicissitudes of weather and claims behavior as far as identifying when the insurance float “loan” (or a portion thereof) has to be repaid.

 

In case of Berkshire, deferred taxes also arise from accelerated depreciation (for tax purposes) of capital intensive investments in BHE & BNSF. 

Edited August 19, 2024 by Munger_Disciple

[nwoodman]

I am in the combined ratios revert to 100 camp. However i wouldn’t be surprised if the mix of insurance Fairfax is writing today may favour better CRs than 10 years ago.  @glider3834 posted a league table a while back of Specialty underwriters that showed Fairfax had made considerable inroads primarily at the expense of Markel.  Then there was that insight that Markel baulked on Allied World.  Not saying it will be different this time but I do feel there is perhaps more flexibility across lines and geography than there used to be.  This may allow a bit more of a National Indemnity philosophy in terms of underwriting discipline.  Thank you again Andy Barnard. 

Buffett on NICO

“Some companies would feel that having [a significantly higher expense ratio] would be intolerable - but what we feel is intolerable is writing bad business… If you get a culture of writing bad business, it’s almost impossible to get rid of. We would rather suffer too much overhead than to teach our employees that, in order to retain their jobs, they needed to write any damn thing that came along, because that’s a very hard habit to get rid of once you’re hooked on it… I think we’re almost the only insurance company in the world - certainly public - that sends the absolutely unequivocal message to the people associated with us that they will never be laid off because of a lack of volume.”

[SafetyinNumbers]

20 minutes ago, nwoodman said:

I am in the combined ratios revert to 100 camp. However i wouldn’t be surprised if the mix of insurance Fairfax is writing today may favour better CRs than 10 years ago.  @glider3834 posted a league table a while back of Specialty underwriters that showed Fairfax had made considerable inroads primarily at the expense of Markel.  Then there was that insight that Markel baulked on Allied World.  Not saying it will be different this time but I do feel there is perhaps more flexibility across lines and geography than there used to be.  This may allow a bit more of a National Indemnity philosophy in terms of underwriting discipline.  Thank you again Andy Barnard. 

Buffett on NICO

“Some companies would feel that having [a significantly higher expense ratio] would be intolerable - but what we feel is intolerable is writing bad business… If you get a culture of writing bad business, it’s almost impossible to get rid of. We would rather suffer too much overhead than to teach our employees that, in order to retain their jobs, they needed to write any damn thing that came along, because that’s a very hard habit to get rid of once you’re hooked on it… I think we’re almost the only insurance company in the world - certainly public - that sends the absolutely unequivocal message to the people associated with us that they will never be laid off because of a lack of volume.”

What’s the over/under on when FFH has a combined ratio of 100 or above for a full year?

 

[SafetyinNumbers]

51 minutes ago, Munger_Disciple said:

 

 

I would put it slightly differently: If the investment makes sense even under conservative (or pessimistic if you prefer) assumptions, it gives the owner all important "margin of safety". 

 

It's always the negative surprises that we need to worry about, the positive surprises take care of themselves. 

 

When comparing investment options, it is better to compare them under different scenarios (conservative, baseline, somewhat optimistic). 

 

 

The reason I’m so bullish is because the margin of safety is so high. Unfortunately, for my own net worth, I have historically sold as soon as a stock gets to a price where I wouldn’t buy it anymore. I’m trying to avoid that this time with Fairfax because I can see all of the ways the right tail can surprise to the upside. 
 

The focus of this discussion and the most of the analysts that cover the stock is the downside. There is almost no analysis of the returns of the non-fixed income portfolio. The two biggest pieces generate mid-high teens returns on their carrying value. That means the TRS and the rest of the non-fixed income portfolio don’t have to do much to boost returns. 
 

It’s possible FFH will get added to the S&P/TSX 60 next month as AQN continues to sit below 20bps in the benchmark (the committee might also defer to December or put TFII in instead). I assume a lot of our fellow shareholders will sell stock into price insensitive buying whenever it happens because they think the shares are fully valued at 1.2x book or wherever it ends up. Perhaps, that will end up being the right decision in the short term but it just seems so unlikely in the long term.

[Junior R]

10 hours ago, SafetyinNumbers said:

The reason I’m so bullish is because the margin of safety is so high. Unfortunately, for my own net worth, I have historically sold as soon as a stock gets to a price where I wouldn’t buy it anymore. I’m trying to avoid that this time with Fairfax because I can see all of the ways the right tail can surprise to the upside. 
 

The focus of this discussion and the most of the analysts that cover the stock is the downside. There is almost no analysis of the returns of the non-fixed income portfolio. The two biggest pieces generate mid-high teens returns on their carrying value. That means the TRS and the rest of the non-fixed income portfolio don’t have to do much to boost returns. 
 

It’s possible FFH will get added to the S&P/TSX 60 next month as AQN continues to sit below 20bps in the benchmark (the committee might also defer to December or put TFII in instead). I assume a lot of our fellow shareholders will sell stock into price insensitive buying whenever it happens because they think the shares are fully valued at 1.2x book or wherever it ends up. Perhaps, that will end up being the right decision in the short term but it just seems so unlikely in the long term.

 

 

Its not really bad if you sell a stock at a price you no longer will buy it for (given you did some calculation to say its overvalued at that price)...Only bad thing would be if you calculated the intrinsic value incorrectly and the stock shots up

 

For me I will revisit my thesis when FFH gets to 1.2x book value..If  things work the way we expect it to work..This might take awhile as the book value will keep out pacing the stock price unless the crowd jumps in lol  

 

Someone correct me if the historical price is wrong or any splits

 

BKB.B CAGR  over 20 years 11.36%

• Price in August 2004: $57.62
• Price in August 2024: $448.77

FFH.TO 11.81% (not accounting for dividends)

• Price in August 2004: $183.00
• Price in August 2024: $1,540.93

QQQ 16.38% (not accounting for Dividends)

• Price in August 2004: $33.06
• Price in August 2024: $481.27

SPY 8.55% (not accounting for Dividends)

• Price in August 2004: $108.52
• Price in August 2024: $559.61

Over the last 20 years FFH has slightly out performed BKB.B excluding dividends 

 

I think for the next 1 to 5 years FFH will out preform 

Edited August 20, 2024 by Junior R

[Maverick47]

3 hours ago, Munger_Disciple said:

In case of Berkshire, deferred taxes also arise from accelerated depreciation (for tax purposes) of capital intensive investments in BHE & BNSF. 

Thank you for clearly adding this observation!  I know little about corporate taxation.  I had noticed the significant impact on Berkshire’s deferred tax liability driven by BHE and BNSF, but did not realize what exactly was driving this…..

 

I don’t think that Fairfax’s  own non insurance operating subsidiaries yet have the same sort of requirements or opportunities for capital investment and accelerated depreciation as Berkshire, but it might be worth looking out for this in the future.

 

 Right now though, Fairfax has plenty of opportunities to direct any operating earnings towards stock buybacks, purchasing minority interests, etc, so really have no need to invest in subsidiaries that would also require substantial capital investments.
 

[Dinar]

5 hours ago, Munger_Disciple said:

 

In case of Berkshire, deferred taxes also arise from accelerated depreciation (for tax purposes) of capital intensive investments in BHE & BNSF. 

True, but given that maintenance cap ex is vastly in excess of depreciation for both businesses, earnings are overstated, and free cash flow even with faster depreciation for tax purposes is below reported net income.

[Munger_Disciple]

6 minutes ago, Dinar said:

True, but given that maintenance cap ex is vastly in excess of depreciation for both businesses, earnings are overstated, and free cash flow even with faster depreciation for tax purposes is below reported net income.

 

BHE investments get regulated or guaranteed rate of return on capital employed, whether it is maintenance or growth capex. What you say is true for BNSF as it is the case with all railroads. 

Edited August 20, 2024 by Munger_Disciple

[Dinar]

38 minutes ago, Munger_Disciple said:

 

BHE investments get regulated or guaranteed rate of return on capital employed, whether it is maintenance or growth capex. What you say is true for BNSF as it is the case with all railroads. 

I am aware of utility regulations.  My point is that utility's earnings are overstated, and free cash flow is below net income since maintenance cap ex exceeds depreciation.  Sure, you usually (not always) get rate increases to pay for increased cap ex, but again, your earnings are overstated.  

[Junior R]

Quote

Canada NewsWire

TORONTO, Aug. 19, 2024

Board of Directors Recommends that Shareholders vote FOR the Arrangement

/NOT FOR DISTRIBUTION TO U.S. NEWSWIRE SERVICES OR FOR DISSEMINATION IN THE UNITED STATES/

TORONTO, Aug. 19, 2024 /CNW/ - Sleep Country Canada Holdings Inc. ("Sleep Country" or the "Company") (TSX: ZZZ), is pleased to announce that it has filed and is in the process of mailing the management proxy circular (the "Circular") and related materials for the special meeting (the "Meeting") of the Company's shareholders (the "Shareholders") to be held on September 18, 2024, to approve the previously announced plan of arrangement under the Canada Business Corporations Act (the "Arrangement"), pursuant to which 16133258 Canada Inc. (the "Purchaser"), a newly-formed and wholly-owned subsidiary of Fairfax Financial Holdings Limited ("Fairfax") (TSX: FFH) (TSX: FFH.U) will acquire all of the issued and outstanding common shares of Sleep Country for C$35.00 in cash per common share (the "Consideration"), all as more particularly described in the Circular.

Unanimous Recommendation of the Board of Directors and Benefits of the Arrangement to Shareholders

The Arrangement was reviewed and overseen by a Special Committee of the Board of Directors (the "Special Committee"). The Board of Directors, on the unanimous recommendation of the Special Committee, in consultation with its financial and legal advisors, and following consideration of a number of factors, unanimously determined that the Arrangement is fair to Shareholders and is in the best interests of Sleep Country, and recommended that Shareholders vote in favour of the Arrangement at the Meeting. The factors considered by the Board of Directors and the Special Committee are detailed in the Circular and include:

• Significant Premium. The Consideration offered to Shareholders under the Arrangement represents a 34% premium to the 20-day volume-weighted average price of the common shares on the Toronto Stock Exchange for the period ending on July 19, 2024, and a 28% premium to the closing price on July 19, 2024, the last trading day prior to the announcement of the Arrangement.
   
• Certainty of Value and Liquidity. The Consideration offered to Shareholders under the Arrangement is all cash, which allows Shareholders to immediately realize value for all of their investment. It also provides certainty of value and immediate liquidity in comparison to the risks and uncertainties to achieving equivalent value for the common shares by remaining a public company.
   
• Compelling Value Relative to Strategic Alternatives. The Special Committee and the Board of Directors concluded, after consultation with the Company's management and financial advisors, that the value offered to Shareholders under the Arrangement is more favourable to Shareholders than the value that could potentially result from other alternatives reasonably available to the Company, including a continuation of the status quo as a standalone entity, within a reasonably foreseeable timeframe.

Additional information related to the benefits and related risks of the Arrangement are contained in the Circular.

Interim Order

The Company is pleased to also announce that the Company has been granted an interim order (the "Interim Order") from the Ontario Superior Court of Justice (Commercial List) (the "Court") authorizing various matters, including the holding of the Meeting and the mailing of the Circular. The Meeting is to be held in accordance with the terms of the Interim Order.

Competition Act Approval

The Company is also pleased to announce that on August 5, 2024, the Commissioner of Competition under the Competition Act (Canada) issued an advance ruling certificate under Section 102 of the Competition Act (Canada), which allows the parties to complete the Arrangement as of the date of the advance ruling certificate and constitutes the Competition Act Approval for the purposes of the arrangement agreement dated July 21, 2024 among the Company, the Purchaser and Fairfax (the "Arrangement Agreement").

Meeting and Circular

The Meeting will be held as a virtual-only meeting conducted by live webcast at https://web.lumiagm.com/218125307 (password: sleep2024) on September 18, 2024 at 10:00 a.m. (Toronto time). Proxies must be received by the Company's transfer agent, Odyssey Trust Company, either online at https://login.odysseytrust.com/pxlogin, or in person, or by mail or courier, at Trader's Bank Building, 702 – 67 Yonge Street, Toronto, ON, M5E 1J8, not later than 10:00 a.m. (Toronto time) on September 16, 2024 (or no later than 48 hours, excluding Saturdays, Sundays and statutory holidays in the city of Toronto, before any reconvened meeting if the Meeting is adjourned or postponed). If a Shareholder holds its common shares through an investment advisor, broker, bank, trust company, custodian, nominee, clearing agency or other intermediary, a completed voting instruction form should be deposited in accordance with the instructions printed on the form.

At the Meeting, Shareholders will be asked to consider and, if deemed advisable, pass a special resolution approving the Arrangement. In order to be effective, the Arrangement will be subject to the approval of (i) at least 66 2/3% of the votes cast by Shareholders present in person virtually or represented by proxy at the Meeting; and (ii) a simple majority of the votes cast by Shareholders present in person virtually or represented by proxy at the Meeting, excluding votes from certain Shareholders, as required under Multilateral Instrument 61-101 – Protection of Minority Security Holders in Special Transactions. In addition to Shareholder approval, the Arrangement is subject to approval by the Court as well as the satisfaction of certain other customary closing conditions.

The Circular provides important information regarding the Arrangement and related matters, including the background to the Arrangement, the reasons for recommendation of the Special Committee and the Board of Directors, voting procedures and how to virtually attend the Meeting. Shareholders are urged to read the Circular and its appendices carefully and in their entirety. The Circular is being mailed to Shareholders in compliance with applicable laws and the Interim Order. The Circular is available under the Company's issuer profile on SEDAR+ at www.sedarplus.ca as well as on the Company's website at https://www.sleepcountrypoa.com/.

Shareholder Questions and Assistance

If you have any questions or need assistance in your consideration of the Arrangement or with the completion and delivery of your proxy, please contact the Company's strategic advisor, Kingsdale Advisors, at 1-888-518-1565 (toll-free in North America) or 1-416-623-2513 (text and call enabled outside of North America) or by email to [email protected]. 

Advisors and Counsel

CIBC Capital Markets is acting as financial advisor and Davies Ward Phillips & Vineberg LLP is acting as legal advisor to the Special Committee and the Company. Blair Franklin Capital Partners is acting as financial advisor to the Special Committee, including providing a fixed-fee fairness opinion regarding the Arrangement. Torys LLP is acting as legal advisor to Fairfax.

Forward-Looking Information

Certain information in this news release contains forward-looking information and forward-looking statements, which reflect our current view with respect to anticipated events as well as the Company's objectives, plans, goals, strategies, outlook, results of operations, financial and operating performance, prospects and opportunities. Wherever used, the words "may", "will", "anticipate", "expect", and similar expressions, identify forward-looking information and forward-looking statements. Forward-looking information herein includes statements regarding: the reasons for, and the anticipated benefits of, the Arrangement; the timing for mailing of the Circular; the timing of various steps to be completed in connection with the Arrangement, including the anticipated dates for the holding of the Meeting; the timing and effects of the Arrangement; the solicitation of proxies by the Company and Kingsdale Advisors, the Company's strategic advisor; the ability of the parties to satisfy the other conditions to the closing of the Arrangement; and other statements that are not historical facts. Forward-looking information and forward-looking statements should not be read as guarantees of future events, performance or results, and will not necessarily be accurate indications of whether, or the times at which, such events, performance or results will be achieved. All the information in this news release containing forward-looking information or forward-looking statements is qualified by these cautionary statements.

Forward-looking information and forward-looking statements are based on information available to Sleep Country at the time they are made, underlying estimates, opinions and assumptions made by Sleep Country and management's current good faith belief with respect to future strategies, prospects, events, performance and results, and are subject to inherent risks and uncertainties surrounding future expectations generally. Such risks and uncertainties include, but are not limited to, those described in the Circular as well as the Company's management's discussion and analysis ("MD&A") for Q2 2024 under the sections "Risk Factors" and those described in the Company's 2023 annual information form (the "AIF") filed on March 6, 2024, both of which can be accessed under the Company's issuer profile on SEDAR+ at sedarplus.ca. In addition, forward-looking information in this news release is subject to a number of additional risks and uncertainties, including: the possibility that the Arrangement will not be completed on the terms and conditions, or on the timing, currently contemplated, and that it may not be completed at all, due to a failure to obtain or satisfy, in a timely manner or otherwise, required Shareholder, regulatory and Court approvals and other conditions of closing necessary to complete the Arrangement or for other reasons; failure to complete the Arrangement could negatively impact the price of the common shares or otherwise affect the business, financial condition or results of the Company; the Arrangement Agreement may be terminated by the parties in certain circumstances; the termination fee under the Arrangement Agreement may discourage other parties from attempting to acquire the Company or may have an adverse effect on the Company; the ability of the Board of Directors to consider and approve, subject to compliance with the terms and conditions of the Arrangement Agreement, a superior proposal for the Company; significant transaction costs or unknown liabilities; while the Arrangement is pending, the Company is restricted from taking certain actions; the possibility of adverse reactions or changes in business relationships resulting from the announcement or completion of the Arrangement; certain of the Company's directors and officers may have interests in the Arrangement that are different from those of Shareholders; the exercise of dissent rights by Shareholders may result in the Arrangement not being completed; risks related to tax matters; the failure to realize the expected benefits of the Arrangement; risks relating to the Company's ability to retain and attract key personnel during the interim period; credit, market, currency, operational, liquidity and funding risks generally and relating specifically to the Arrangement, including changes in economic conditions, interest rates or tax rates; the Company and the Purchaser may be subject to legal claims, securities class actions, derivative lawsuits and other claims; and other risks inherent to the business carried out by the Company and/or factors beyond its control which could have a material adverse effect on the Company or its ability to complete the Arrangement. Additional risks and uncertainties not presently known to the Company or that the Company currently believes to be less significant may also adversely affect the Company.

The Company cautions that the list of risk factors and uncertainties described above and in the Circular, the MD&A for Q2 2024 and the AIF are not exhaustive and that should certain risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual strategies, prospects, events, performance and results may vary significantly from those expected. There can be no assurance that the actual strategies, prospects, results, performance, events or activities anticipated by the Company will be realized or even if substantially realized, that they will have the expected consequences to, or effects on, the Company. Readers are urged to consider the risks, uncertainties, and assumptions carefully in evaluating the forward-looking information and forward-looking statements and are cautioned not to place undue reliance on such information and statements. The Company does not undertake to update any such forward-looking information or forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable laws.

About Sleep Country

Sleep Country is Canada's leading specialty sleep retailer with a purpose to transform lives by awakening Canadians to the power of sleep. Sleep Country operates under the retailer banners; Sleep Country Canada, Dormez-vous, the rest, Endy, Silk & Snow, Hush and Casper Canada. The Company has omnichannel and eCommerce operations, including 307 corporate-owned stores and 18 warehouses across Canada. Recognized as one of Canada's Most Admired Corporate Cultures in 2022 by Waterstone Human Capital, Sleep Country is committed to building a company culture of inclusion and diversity where differences are embraced and valued. The Company actively invests in its sleep ecosystem, innovative products, world-class customer experience, communities and its people. For more information about Sleep Country, please visit https://ir.sleepcountry.ca.

About Fairfax

Fairfax is a holding company which, through its subsidiaries, is primarily engaged in property and casualty insurance and reinsurance and the associated investment management.

SOURCE Sleep Country Canada Holdings Inc. Investor Relations

 

 View original content: http://www.newswire.ca/en/releases/archive/August2024/19/c7841.html

Copyright CNW Group 2024