Fairfax 2024

[Munger_Disciple]

6 hours ago, StubbleJumper said:

 

 

I'm sure that there's an internal table or schedule with the max impact of specific existential events, but I doubt very much that shareholders would ever get to see that!

 

But, it is somewhat sobering to look at current Net Earned Premiums and then multiply that number by the 13.9% hit from the Katrina, Rita, Wilma hurricanes, or the 8.8% hit from that Japan earthquake.  I understand that the company says it's less exposed to hurricane risk on the east coast now than it was for KRW, but those events would still be a big number!

 

 

SJ

 

Annualizing the first six month net premiums for 2024, we get $26 Billion in net annual premiums. So that gives us roughly $3.6 Billion loss for a Katrina type CAT event which is roughly in line with the numbers suggested by @SafetyinNumbers. It equates to roughly 12%-13% after tax earnings hit to book. 

[SafetyinNumbers]

4 hours ago, Munger_Disciple said:

 

Annualizing the first six month net premiums for 2024, we get $26 Billion in net annual premiums. So that gives us roughly $3.6 Billion loss for a Katrina type CAT event which is roughly in line with the numbers suggested by @SafetyinNumbers. It equates to roughly 12%-13% after tax earnings hit to book. 

They probably still make money that year.

[StubbleJumper]

1 hour ago, SafetyinNumbers said:

They probably still make money that year.

 

Edit: Just ignore my comment, I'm mathematically challenged tonight!

 

 

SJ

Edited August 22, 2024 by StubbleJumper

[Viking]

On 8/19/2024 at 3:33 PM, 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.”

@nwoodman  I thought this would be interesting to dig into a little: “I am in the combined ratios revert to 100 camp.”

 

Now i should say… i am not a P/C insurance guy. So i look forward to feedback from others who know much more than me on this topic. There is a lot of discussion on the board about Fairfax’s CR normalizing to 100 because ‘that is what always happens to P/C insurance.’
 

When i look at ‘P/C insurance’ I don’t see a homogenous business. Rather, i see a collection of very different businesses:

- Personal lines or commercial?

- Reinsurer or primary insurer?

- Standard or specialty?

- Is the business skewed to short tail (property or auto) or long tail (professional liability or workers comp)?

And then you have to overlay lots more important factors:

- geographies (US, UK, Europe, MENA, India…. Etc). This is a big one (getting bigger for Fairfax.)

- reserving history

The bottom line, I don’t think there is a ‘P/C insurance market.’ It looks to me like there are many (hundreds?) of P/C insurance markets. Especially for a global company like Fairfax. As a result, I think it highly unlikely that global insurance markets enter a synchronized soft market. instead, maybe we get rolling soft markets? 
 

A good example is workers comp in the US. I think it has been in a soft market for the past 5 years. This is significant business for Fairfax that looks poised to start to grow again in the coming years (just not sure when).

Intact Financial just warned about outsized catastrophe losses in Canada in Q3. They are the 800lb gorilla here - perhaps this extends the hard market another year here in Canada.

 

Bond yields have come way down in recent months. Central banks are easing - so yields could move even lower in the coming months/year. Many insurers were not able to roll a significant amount of their portfolio into longer dated bonds at peak rates (perhaps they missed the window). Lower bond yields moving forward will likely result in more discipline from most P/C insurers (they will need a solid CR to deliver the ROE expected by Wall Street).

 

WR Berkley keeps getting asked on conference calls if the ‘hard market’ is over. They keep saying the P/C insurance market (in the US) is splintering into ‘markets’, each with its own cycle (some soft, some hard and others in between).
 

Now we could get a really bad year for catastrophes and Fairfax’s CR might temporarily pop over 100 for that year. Perhaps we get two of these in a row - anything is possible. 
 

But do we get 4 or 5 years in a row? Never say never, but that seems highly unlikely.
 

Why? Because Fairfax looks too diversified (line of business, geography etc). The diversification is beneficial not just in terms of catastrophe exposure. It is also really beneficial in terms of the insurance market cycle (does India’s auto market run lock step with that of the US)?
 

The other really big factor is reserving. We could see reserve releases in the coming years surprise to the upside (especially if inflation comes down hard and stays low for years) - this might actually drive CR’s even lower for Fairfax (into the low 90’s, like we saw a decade ago). Not my base case. But not crazy talk either.

 

Bottom line, i think we have pretty good line-of-sight as to what a ‘normalized’ CR is for Fairfax in today’s environment. But 4 or 5 years from now? I don’t have a strong opinion. But that is the same for all P/C insurers (not just Fairfax).

 

Now it could be that i am completely out of my league - i have not owned Fairfax through a brutal hard market. So my view might simply be like a Disney movie. So i will continue to closely monitor the situation.
 

What i do care deeply about: Is Fairfax a disciplined underwriter? How disciplined/good are they?

 

I think the insurance cycle in the US will matter for Fairfax’s stock price (and all P/C insurers). If we get word that the hard market in the US has ended and P/C insurers are losing their discipline my guess is ALL P/C insurance companies will get taken out behind the woodshed. Which would probably give Fairfax the opportunity to buy back all the shares they want at very attractive prices. What i love about Fairfax right now is their flexibility/optionality - ability to flip the script - to actually benefit from what looks like a bad thing.

Edited August 22, 2024 by Viking

[UK]

Re insurance/CR: as of recent still ahead of BRK (good enough for me:)).

 

Edited August 22, 2024 by UK

[UK]

https://www.insurancejournal.com/news/international/2024/08/15/788486.htm

 

“Unlike previous boom and bust cycles, there are a number of factors—climate trends, an increasingly complex risk environment, and a prolonged period of higher interest rates—that make us believe these improved underwriting margins are likely to last for at least another couple of years if underwriting discipline is maintained,” said AM Best in its report titled “Strong Technical Profits Bolster Momentum for Global Reinsurers.”

 

https://www.swissre.com/media/press-release/pr-20240822-hy-2024-press-release.html

 

P&C Re renewed contracts with USD 4.5 billion in treaty premium volume on 1 July 2024. This represents a 7% volume increase compared with the business that was up for renewal. Overall, P&C Re achieved a price increase of 8% in this renewal round.

 

Edited August 22, 2024 by UK

[Maverick47]

2 hours ago, Viking said:

Now i should say… i am not a P/C insurance guy. So i look forward to feedback from others who know much more than me on this topic. There is a lot of discussion on the board about Fairfax’s CR normalizing to 100 because ‘that is what always happens to P/C insurance.’
 

When i look at ‘P/C insurance’ I don’t see a homogenous business. Rather, i see a collection of very different businesses:

- Personal lines or commercial?

- Reinsurer or primary insurer?

- Standard or specialty?

- Is the business skewed to short tail (property or auto) or long tail (professional liability or workers comp)?

And then you have to overlay lots more important factors:

- geographies (US, UK, Europe, MENA, India…. Etc). This is a big one (getting bigger for Fairfax.)

- reserving history

The bottom line, I don’t think there is a ‘P/C insurance market.’ It looks to me like there are many (hundreds?) of P/C insurance markets. Especially for a global company like Fairfax. As a result, I think it highly unlikely that global insurance markets enter a synchronized soft market. instead, maybe we get rolling soft markets? 

@Viking  I think you actually understand the forest of the P/C business as well as, if not better than, most folks who worked in a particular area of the business (such as myself) and who thus perhaps know more than you do only about a particular grove of trees in that forest!  That said, humility is one of the better characteristics of true value investors, so far be it from me to ever ask you not to employ it….

 

As you alluded to, some of those groves are longer or shorter tailed, or are primary rather than reinsurance, or commercial vs personal, to say nothing of the various geographies and regulatory regimes.  I do know enough about the surviving competitors in the business to feel optimistic about a soft cycle not necessarily hitting all lines at the same time, and that we’ve seen enough discipline from many participants in the business to not expect that this would necessarily mean a reversion to a 100 CR for Fairfax.

 

If you search Buffett’s letters from first decade or so after he bought all of Geico, he would often bemoan the lack of underwriting discipline of GEICO’s competitor, State Farm, which as a mutual insurance company, had accumulated a massive amount of surplus and was apparently more than willing to expend that surplus in support of CR’s well above 100 to maintain their industry leading market share.

 

This has changed over time, and as an example, State Farm is no longer willing to write business at a loss even in very  large states such as Florida and California simply to maintain market share.  I’ve seen similar examples of numerous US competitors also “getting religion” about the need to achieve CRs below 100.

2 hours ago, Viking said:

What i do care deeply about: Is Fairfax a disciplined underwriter? How disciplined/good are they?

That is exactly the right question to focus on.  They have exhibited this discipline in the recent past and Prem certainly highlights the CRs by subsidiary in his letters, which shows to us shareholders (and the leaders of the insurance subs) that he cares about this a great deal.  I suppose the only thing that I might like to know in addition is whether the incentive compensation plans for employees value this as well.  I do like it when everyone’s interests are aligned….

Edited August 22, 2024 by Maverick47

[nwoodman]

4 hours ago, Viking said:

If we get word that the hard market in the US has ended and P/C insurers are losing their discipline my guess is ALL P/C insurance companies will get taken out behind the woodshed. Which would probably give Fairfax the opportunity to buy back all the shares they want at very attractive prices. What i love about Fairfax right now is their flexibility/optionality - ability to flip the script - to actually benefit from what looks like a bad thing.

@viking, as we know it is a cyclical mean reverting commodity business so what really matters is underwriting discipline.  I am not seeing anything that suggests they are being anything other than disciplined.  
 

Timely that Morgan Stanley released a recent industry status report summarised as follows:
 

1. Market Conditions:

   - The report indicates diverging trends between life and P&C insurers.
   - P&C insurers are generally in a stronger position currently, but facing some headwinds.

2. Social Inflation:
   - This is a major concern for commercial carriers, putting pressure on margins and potentially leading to higher combined ratios.
   - The long-term impact of social inflation may be underappreciated by the market.

3. Personal Lines:
   - Personal lines carriers like Progressive and Allstate are seeing improving results, particularly in auto insurance as pricing stabilizes.

4. Reinsurance:
   - Reinsurers had mixed results - ahead on earnings but below expectations on premium growth.
   - Pricing remains firm, but growth is moderating, which could be an early sign of softening.

5. Commercial Lines:
   - Facing challenges due to social inflation and potential reserve inadequacies.
   - Pricing remained stable to positive overall in Q2 2024, but there are some marginal declines sequentially from the previous quarter.

6. Potential for Softening:
   - While not explicitly forecasting a broad market softening, the report provides some indicators that could point in that direction:
     a) Moderating growth in reinsurance
     b) Sequential declines in commercial pricing
     c) Stabilizing personal lines pricing
   - However, the report also notes that different segments of the market are in different stages of their cycles.

 

Perhaps I could have made it clearer in my original post, but I agree that their mix of lines and geography helps. Although a CR of a 100 is hardly the end of the world, especially if is a better CR than your peers.  Maybe I place too much emphasis on relative performance, but I see this as important over time.

 

Ultimately Fairfax will turn out to be an OK or great investment based on their capital allocation, same as Berkshire.  This means “don’t lose capital”.

 

 

INSURANCE_20240819_0411.pdf

Edited August 22, 2024 by nwoodman

[Viking]

11 hours ago, nwoodman said:

@viking, as we know it is a cyclical mean reverting commodity business so what really matters is underwriting discipline.  I am not seeing anything that suggests they are being anything other than disciplined.  
 

Timely that Morgan Stanley released a recent industry status report summarised as follows:
 

1. Market Conditions:

   - The report indicates diverging trends between life and P&C insurers.
   - P&C insurers are generally in a stronger position currently, but facing some headwinds.

2. Social Inflation:
   - This is a major concern for commercial carriers, putting pressure on margins and potentially leading to higher combined ratios.
   - The long-term impact of social inflation may be underappreciated by the market.

3. Personal Lines:
   - Personal lines carriers like Progressive and Allstate are seeing improving results, particularly in auto insurance as pricing stabilizes.

4. Reinsurance:
   - Reinsurers had mixed results - ahead on earnings but below expectations on premium growth.
   - Pricing remains firm, but growth is moderating, which could be an early sign of softening.

5. Commercial Lines:
   - Facing challenges due to social inflation and potential reserve inadequacies.
   - Pricing remained stable to positive overall in Q2 2024, but there are some marginal declines sequentially from the previous quarter.

6. Potential for Softening:
   - While not explicitly forecasting a broad market softening, the report provides some indicators that could point in that direction:
     a) Moderating growth in reinsurance
     b) Sequential declines in commercial pricing
     c) Stabilizing personal lines pricing
   - However, the report also notes that different segments of the market are in different stages of their cycles.

 

Perhaps I could have made it clearer in my original post, but I agree that their mix of lines and geography helps. Although a CR of a 100 is hardly the end of the world, especially if is a better CR than your peers.  Maybe I place too much emphasis on relative performance, but I see this as important over time.

 

Ultimately Fairfax will turn out to be an OK or great investment based on their capital allocation, same as Berkshire.  This means “don’t lose capital”.

INSURANCE_20240819_0411.pdf 9.12 MB · 7 downloads

@nwoodman, I completely agree. 

 

“Ultimately Fairfax will turn out to be an OK or great investment based on their capital allocation, same as Berkshire.  This means “don’t lose capital”.”

 

Fairfax is a good underwriter and at a 95CR, underwriting income still only represents about 20% of their various income streams. About 80% comes from investments. So yes, Fairfax is levered much, much more to investments. 
 

I think underwriting income is something like 45% of the income streams for most P/C insurers, with investments driving the other 55% (mostly interest income). So Fairfax is also much more levered to the investment side of the business than peers. 
 

This also means earnings at Fairfax are impacted much less by the insurance cycle than other P/C insurance peers. My guess is this is not well understood by Mr Market.

Edited August 22, 2024 by Viking

[Viking]

11 hours ago, Maverick47 said:

@Viking  I think you actually understand the forest of the P/C business as well as, if not better than, most folks who worked in a particular area of the business (such as myself) and who thus perhaps know more than you do only about a particular grove of trees in that forest!  That said, humility is one of the better characteristics of true value investors, so far be it from me to ever ask you not to employ it….

 

As you alluded to, some of those groves are longer or shorter tailed, or are primary rather than reinsurance, or commercial vs personal, to say nothing of the various geographies and regulatory regimes.  I do know enough about the surviving competitors in the business to feel optimistic about a soft cycle not necessarily hitting all lines at the same time, and that we’ve seen enough discipline from many participants in the business to not expect that this would necessarily mean a reversion to a 100 CR for Fairfax.

 

If you search Buffett’s letters from first decade or so after he bought all of Geico, he would often bemoan the lack of underwriting discipline of GEICO’s competitor, State Farm, which as a mutual insurance company, had accumulated a massive amount of surplus and was apparently more than willing to expend that surplus in support of CR’s well above 100 to maintain their industry leading market share.

 

This has changed over time, and as an example, State Farm is no longer willing to write business at a loss even in very  large states such as Florida and California simply to maintain market share.  I’ve seen similar examples of numerous US competitors also “getting religion” about the need to achieve CRs below 100.

That is exactly the right question to focus on.  They have exhibited this discipline in the recent past and Prem certainly highlights the CRs by subsidiary in his letters, which shows to us shareholders (and the leaders of the insurance subs) that he cares about this a great deal.  I suppose the only thing that I might like to know in addition is whether the incentive compensation plans for employees value this as well.  I do like it when everyone’s interests are aligned….

@Maverick47 when it comes to P/C insurance, I wonder if the overall market is a little more rational today than in the past. I look at all the shitty P/C insurance companies that Fairfax has purchased over the past 38 years - these have ALL been turned around. 
 

This does not mean there is not fierce competition. So we will see.

 

[73 Reds]

8 minutes ago, Viking said:

@nwoodman, I completely agree. 

 

“Ultimately Fairfax will turn out to be an OK or great investment based on their capital allocation, same as Berkshire.  This means “don’t lose capital”.”

 

Fairfax is a good underwriter and at a 95CR, underwriting income still only represents about 20% of their various income streams. About 80% comes from investments. So yes, Fairfax is levered much, much more to investments. 
 

I think underwriting income is something like 45% of the income streams for most P/C insurers, with investments driving the other 55% (mostly interest income). So Fairfax is also much more levered to the investment side of the business than peers. 
 

This also means earnings at Fairfax are impacted much less by the insurance cycle than other P/C insurance peers. My guess is this is not well understood by Mr Market.

Viking, I'm not sure I understand it either.  Does this simply mean that Fairfax writes less insurance?

[Viking]

3 hours ago, 73 Reds said:

Viking, I'm not sure I understand it either.  Does this simply mean that Fairfax writes less insurance?

 

@73 Reds , to better understand some of the variables at play, let's look a Travelers 2023 numbers and compare them to Fairfax.

 

When looking at Travelers 2023 numbers two things jump out:

• Underwriting income represents 57% of their income streams (like most P/C insurers, they only have 2 income streams).
• The yield (pre-tax) on their investment portfolio is about 3.3% (using the YE value of investment portfolio). 

Travelers is earning peanuts on its $88.5 billion investment portfolio - about 3.3%. It is expected to increase a small amount in 2024 ($200 million, which will bump the average yield to about 3.5%). This is because they are investing solely in fixed income. And it looks to me like they match the duration of their fixed income portfolio with their insurance liabilities.

 

Now compare Travelers to Fairfax. Fairfax is earning about 7% on its investment portfolio - double what Travelers is earning (see the chart at the bottom of the post). That is a massive gap. 

 

Fairfax is earning much, much more on their investment portfolio for a couple of reasons:

1.) They do not restrict their investments to bonds/fixed income.

2.) They are an active manager - they look to exploit dislocations/volatility (wherever it shows up).

3.) They are very good at what they do.

 

Comparing Fairfax and Travelers you really get some good insight into the power and value of the business model Fairfax that is successfully executing today. 

 

 

 

Below is a summary of investment returns for Fairfax. The returns have been smoothed over 2 year intervals to smooth out the annual volatility and make it easier to understand.

 

Edited August 22, 2024 by Viking

[Viking]

For board members who think 5% is a good 'normalized' return to use for Fairfax for its investment portfolio... let me stir the pot a little. 

 

From 2016 to 2022, Fairfax had four severe headwinds battering its investment portfolio:

1.) Zero interest rates

2.) Significant losses from the equity hedge/short positions

3.) An equity portfolio that was stuffed with shitty companies

4.) Historic bear market in bonds in 2022.

 

Despite these 4 significant headwinds, from 2016 to 2022, Fairfax still earned an average return of about 5.4% on its total investment portfolio.

 

Today, none of those headwinds exist. Some have been eliminated (equity hedge/short). And others have reversed and become tailwinds:

1.) Interest rates have normalized to much higher levels. It is highly unlikely they return to the lows of a few short years ago.

2.) Fairfax's equity portfolio has been fixed and is much higher quality (in terms of earnings power). 

 

My guess is a 5.4% return on the investment portfolio was a trough (smoothed) number for Fairfax. Today, Fairfax is earning about 7% on its investment portfolio. If we continue to get a few large asset sales in the coming years (likely, given what we have seen the past 10 years) then I think 7% is a reasonable baseline estimate to use looking out the next 3 to 5 years. and yes, the results will be volatile from year to year.

 

 

Here is the data for each year (from which the averages in the above table were calculated).

 

 

Edited August 22, 2024 by Viking

[73 Reds]

29 minutes ago, Viking said:

 

@73 Reds , to better understand some of the variables at play, let's look a Travelers 2023 numbers and compare them to Fairfax.

 

When looking at Travelers 2023 numbers two things jump out:

• Underwriting income represents 57% of their income streams (like most P/C insurers, they only have 2 income streams).
• The yield (pre-tax) on their investment portfolio is about 3.3% (using the YE value of investment portfolio). 

Travelers is earning peanuts on its $88.5 billion investment portfolio - about 3.3%. It is expected to increase a small amount in 2024 ($200 million, which will bump the average yield to about 3.5%). This is because they are investing solely in fixed income. And it looks to me like they match the duration of their fixed income portfolio with their insurance liabilities.

 

Now compare Travelers to Fairfax. Fairfax is earning about 7% on its investment portfolio - double what Travelers is earning (see the chart at the bottom of the post). That is a massive gap. 

 

Fairfax is earning much, much more on their investment portfolio for a couple of reasons:

1.) They do not restrict their investments to bonds/fixed income.

2.) They are an active manager - they look to exploit dislocations/volatility (wherever it shows up).

3.) They are very good at what they do.

 

Comparing Fairfax and Travelers you really get some good insight into the power and value of the business model Fairfax that is successfully executing today. 

 

 

 

Below is a summary of investment returns for Fairfax. The returns have been smoothed over 2 year intervals to smooth out the annual volatility and make it easier to understand.

 

Viking, I understand that Travelers invests much like most insurance companies so the idea that Fairfax is not levered as much to the insurance cycle assumes that investment results will overcome a softer insurance market and has little to do with the actual volume of premiums?  This has been one element of Berkshire's secret sauce as well; the question is if it works so well for companies like Berkshire, Fairfax and Markel, why don't other insurance companies adopt a similar model?

[73 Reds]

27 minutes ago, Viking said:

For board members who think 5% is a good 'normalized' return to use for Fairfax for its investment portfolio... let me stir the pot a little. 

 

From 2016 to 2022, Fairfax had four severe headwinds battering its investment portfolio:

1.) Zero interest rates

2.) Significant losses from the equity hedge/short positions

3.) An equity portfolio that was stuffed with shitty companies

4.) Historic bear market in bonds in 2022.

 

Despite these 4 significant headwinds, from 2016 to 2022, Fairfax still earned an average return of about 5.4% on its total investment portfolio.

 

Today, none of those headwinds exist. Some have been eliminated (equity hedge/short). And others have reversed and become tailwinds:

1.) Interest rates have normalized to much higher levels. It is highly unlikely they return to the lows of a few short years ago.

2.) Fairfax's equity portfolio has been fixed and is much higher quality (in terms of earnings power). 

 

My guess is a 5.4% return on the investment portfolio was a trough (smoothed) number for Fairfax. Today, Fairfax is earning about 7% on its investment portfolio. If we continue to get a few large asset sales in the coming years (likely, given what we have seen the past 10 years) then I think 7% is a reasonable baseline estimate to use looking out the next 3 to 5 years. and yes, the results will be volatile from year to year.

 

 

Here is the data for each year (from which the averages in the above table were calculated).

 

 

Also, one would expect that during a period of zero interest rates, just about any equity investment should do well.  Though I was not a shareholder throughout the 2010s, that had to be very frustrating for those who owned the stock during the period.

[Buckeye]

15 minutes ago, 73 Reds said:

Viking, I understand that Travelers invests much like most insurance companies so the idea that Fairfax is not levered as much to the insurance cycle assumes that investment results will overcome a softer insurance market and has little to do with the actual volume of premiums?  This has been one element of Berkshire's secret sauce as well; the question is if it works so well for companies like Berkshire, Fairfax and Markel, why don't other insurance companies adopt a similar model?

Hello Reds,

 

I think one thing that’s become apparent with regards to insurance companies is that in order for them to adopt similar practices as Berkshire, Fairfax and Markel is they need to be able to focus on the long term. So it seems like the insurance companies with heavy insider ownership are the only ones able to play the long game. 

Edited August 22, 2024 by Buckeye

[Viking]

33 minutes ago, Buckeye said:

Hello Reds,

 

I think one thing that’s become apparent with regards to insurance companies is that in order for them to adopt similar practices as Berkshire, Fairfax and Markel is they need to be able to focus on the long term. So it seems like the insurance companies with heavy insider ownership are the only ones able to play the long game. 

+1.  The P/C insurance model pioneered by Buffett (leverage float) is simple to understand. And difficult to execute well. 

[StubbleJumper]

54 minutes ago, 73 Reds said:

Also, one would expect that during a period of zero interest rates, just about any equity investment should do well.  Though I was not a shareholder throughout the 2010s, that had to be very frustrating for those who owned the stock during the period.

 

There was one quarterly release in particular when FFH reported capital losses on its equity hedges AND it reported capital losses on its equity portfolio.  That was a particularly dumbfounding earnings release when the company lost money on both the equities it invested in AND the hedges against those equities (if you are hedging properly, when you have a loss on the equities, you should have a gain on the hedges).  But, that was how it went.

 

 

SJ

[SafetyinNumbers]

48 minutes ago, StubbleJumper said:

 

There was one quarterly release in particular when FFH reported capital losses on its equity hedges AND it reported capital losses on its equity portfolio.  That was a particularly dumbfounding earnings release when the company lost money on both the equities it invested in AND the hedges against those equities (if you are hedging properly, when you have a loss on the equities, you should have a gain on the hedges).  But, that was how it went.

 

 

SJ

Yet it raised money at 1.3x BV in 2016 and traded as high as 1.6x a year earlier but is only worth 1.2x BV now according to the market.

 

Edited August 22, 2024 by SafetyinNumbers

[Xerxes]

Wow so that hedge/deflation/short optionality in the 2010s was worth 0.2-0.3 book. 
 

seems there were a lot of supporters 

[StubbleJumper]

16 minutes ago, SafetyinNumbers said:

Yet it raised money at 1.3x BV in 2016 and traded as high as 1.6x a year earlier but is only worth 1.2x BV now according to many members of the board.

 

 

 

Yep, the market price was buoyant after the outstanding results of the financial crisis.  In 2017, many of us thought that the share price should never drop below US$500.  Well, apparently we were wrong!

 

But as you note, that's one thing that FFH has done well over its history.  It has issued shares at high valuations, and then occasionally re-bought shares at lower valuations.  That's a small, but important part of that 18.3% average BV growth.

 

Turning to your observation about the company being worth only 1.2x BV today, I don't know who you are referring to.  I certainly have observed in 2022 that Mr Market would be unlikely to give us more than 1.2x BV any time soon.  But, perhaps in 2025, we'll get that 1.2x BV and perhaps even 1.3x.  

 

 

SJ

[SafetyinNumbers]

8 minutes ago, StubbleJumper said:

 

 

Yep, the market price was buoyant after the outstanding results of the financial crisis.  In 2017, many of us thought that the share price should never drop below US$500.  Well, apparently we were wrong!

 

But as you note, that's one thing that FFH has done well over its history.  It has issued shares at high valuations, and then occasionally re-bought shares at lower valuations.  That's a small, but important part of that 18.3% average BV growth.

 

Turning to your observation about the company being worth only 1.2x BV today, I don't know who you are referring to.  I certainly have observed in 2022 that Mr Market would be unlikely to give us more than 1.2x BV any time soon.  But, perhaps in 2025, we'll get that 1.2x BV and perhaps even 1.3x.  

 

 

SJ

I was rounding up 1.192 to 1.2 as it shows in the chart. 

[nwoodman]

2 hours ago, Viking said:

+1.  The P/C insurance model pioneered by Buffett (leverage float) is simple to understand. And difficult to execute well. 

+2, the model requires superior investment acumen and a willingness to potentially suffer a “conglomerate discount”  A game that only aligns with longer term thinking (nuts on the line helps too).  A motherhood statement but Berkshire is primarily an investment company/capital allocation machine  that uses float as part of their funding.  As it turns out they have been pretty damn good at insurance but I think this is partly a reflection of temperament (again thinking long term).  Fairfax only has to do 1/10th as well as Berkshire and the answer should be quite pleasing. A high probability IMHO.

[UK]

4 hours ago, 73 Reds said:

This has been one element of Berkshire's secret sauce as well; the question is if it works so well for companies like Berkshire, Fairfax and Markel, why don't other insurance companies adopt a similar model?

 

 

[SafetyinNumbers]

4 hours ago, Xerxes said:

Wow so that hedge/deflation/short optionality in the 2010s was worth 0.2-0.3 book. 
 

seems there were a lot of supporters 

When the market would get weak, portfolio managers would sell their other financials and buy FFH because it was hedged. That should still be true because the financial position FFH is in right now affords it so much optionality.
 

If FFH can dividend out $4b from the insurance subsidiaries to the holdco that means they can buy a lot more equities at the subsidiaries if the opportunity presented itself. That could supercharge returns. They seem almost certain to buy in their insurance minority interests which have a 20% return based on trailing results. The cost as of December was $2.5b so that might add ~$20/sh to EPS.

 

Return expectations are super low for the non-fixed income part of the portfolio. I think consensus probably reflects closer to 6% on a FTM basis. While these numbers might seem reasonably conservative, Fairfax has a few big engines in Eurobank, Poseidon and the TRS that are expected to provide 25%+ returns on 20% of the carrying value of the non-fixed income portfolio. That means 5% of the 6% expected is covered and the remaining $16b of non-fixed income has a very low hurdle to beat consensus. 
 

That’s why 15% ROE doesn’t seem like it’s difficult and 20% might be more likely than 12% for the next 5 years at least.