Fairfax 2024

[Viking]

49 minutes ago, Munger_Disciple said:

 

Yeah aggregation makes sense. Most important is the ability of Fairfax to survive a super CAT event like a $600B loss event, which allows them to prosper in the hard market to follow the event.

Let us say in the worst case, Fairfax suffers 1.25% of 600B = 7.5B loss event pre-tax. They can survive that reasonably well but it would wipe out a couple of years worth of earnings.  

 

@Munger_Disciple , the challenge I have with 'tail risks' like the one scenario you mention above is I have no idea how to model them into my valuation for the company. What you are discussing is not specific to Fairfax - it is a risk to the entire P/C re/insurance industry. TODAY, NO P/C INSURANCE STOCKS HAVE YOUR SCENARIO FACTORED INTO THEIR STOCK PRICE. 

 

One of the biggest reasons I like Fairfax so much today is relative valuation - it trades at a much cheaper valuation than all peers. Despite having:

1.) the best 5 year track record (growth in BVPS) 

2.) the best management team (in terms of capital allocation)

3.) the best near-term earnings outlook

 

Given the exceptional near-term outlook for the company I am willing to overlook the risk of $600B loss event. It really is an interesting thought exercise - not specific to Fairfax, but all P/C insurance stocks.

 

Does it really mean they are all uninvestable for a rational investor? If so, why is Buffett loading up on Chubb? They would get killed if we had a $600B loss event. Is Buffett not thinking clearly?

Edited August 26, 2024 by Viking

[Munger_Disciple]

41 minutes ago, Viking said:

 

@Munger_Disciple , the challenge I have with 'tail risks' like the one scenario you mention above is I have no idea how to model them into my valuation for the company. What you are discussing is not specific to Fairfax - it is a risk to the entire P/C re/insurance industry. TODAY, NO P/C INSURANCE STOCKS HAVE YOUR SCENARIO FACTORED INTO THEIR STOCK PRICE. 

 

One of the biggest reasons I like Fairfax so much today is relative valuation - it trades at a much cheaper valuation than all peers. Despite having:

1.) the best 5 year track record (growth in BVPS) 

2.) the best management team (in terms of capital allocation)

3.) the best near-term earnings outlook

 

Given the exceptional near-term outlook for the company I am willing to overlook the risk of $600B loss event. It really is an interesting thought exercise - not specific to Fairfax, but all P/C insurance stocks.

 

Does it really mean they are all uninvestable for a rational investor? If so, why is Buffett loading up on Chubb? They would get killed if we had a $600B loss event. Is Buffett not thinking clearly?

 

I don't disagree that Fairfax is cheap, especially relative to others (ignoring for a moment tail risks). However I am a long term investor and I think about tail risks when I invest. I own only Berkshire & Fairfax and no other insurers (so can't comment on those). I am very confident Berkshire can very easily handle a $600B industry event. In fact Berkshire will report net profit in a year such an event happens. I think Fairfax will survive but take a hit to earnings (for two years I think at current run rate), so I am ok with it. Most other P/C insurers will go bankrupt in such a scenario. 

Edited August 26, 2024 by Munger_Disciple

[Viking]

1 hour ago, Munger_Disciple said:

 

Yeah aggregation makes sense. Most important is the ability of Fairfax to survive a super CAT event like a $600B loss event, which allows them to prosper in the hard market to follow the event.

Let us say in the worst case, Fairfax suffers 1.25% of 600B = 7.5B loss event pre-tax. They can survive that reasonably well but it would wipe out a couple of years worth of earnings.  

 

@Munger_Disciple , here is another way to look at tail risk... I live in Vancouver. There is a very good chance that we will get hit with an earthquake at some point in the future - we just don't know when and how big. So knowing this, is it rational for a person to live in Vancouver?  

 

Perhaps a better example is hurricane risk in Florida - or in many parts of the US. Lots of really bad hurricanes are coming in the next 50 years. we just don't know exactly where they are going to hit and when. Is the rational solution to move to a different part of the US? 

 

Again, the problem I have is I just don't know how to create something actionable from what I think I 'know.'  

 

If there is a 1% or even a 2% risk (timing of which is unknown), does that mean the investment should be avoided? Perhaps the answer is that ultimately there are no risk free investments (including Berkshire Hathaway). And perhaps this opens up the element of luck and its influence on investment returns. This is a really interesting topic.

Edited August 26, 2024 by Viking

[Munger_Disciple]

17 minutes ago, Viking said:

Again, the problem I have is I just don't know how to create something actionable from what I think I 'know.'  

 

If there is a 1% or even a 2% risk (timing of which is unknown), does that mean the investment should be avoided? Perhaps the answer is that ultimately there are no risk free investments (including Berkshire Hathaway). And perhaps this opens up the element of luck and its influence on investment returns. This is a really interesting topic.

 

 

First of all, the risk is 2% that the big one can happen in any single year, and it is obviously much higher when you expand your investment horizon. If you have a really long horizon, the probability of getting hit with at least one big one is close to 100%. So you can't just ignore it. 

It doesn't necessarily make Fairfax un-investable but it does affect my position sizing. 

 

Randomness (or luck as you say) is inherent in any probabilistic game including investing especially in the short run. In the long run, the stock performance should converge to the business performance. 

Edited August 26, 2024 by Munger_Disciple

[Viking]

4 minutes ago, Munger_Disciple said:

 

 

First of all, the risk is 2% that the big one can happen in any single year, and it is obviously much higher when you expand your investment horizon. If you have a really long horizon, the probability of getting hit with at least one big one is close to 100%. So you can't just ignore it. 

It doesn't necessarily make Fairfax un-investable but it does affect my position sizing. 

 

 

@Munger_Disciple The key to your analysis are three numbers:

1.) $600 billion loss event

2.) 2% chance of happening

3.) $ impact on any single insurance company

 

As I said earlier, I have no idea how accurate each of these numbers are for a company like Fairfax. It would simply be a wild guess. 

 

Buffett may say he thinks there is a 2% chance of a $600B loss event... Lots of what Buffett says is marketing - so I am not sure I would take even what he says on this topic for gospel. 

 

Anyways, it is a really interesting topic. But I will sign off for now  

[Hamburg Investor]

5 hours ago, Haryana said:

What do you mean "the price stays where it is"?

Why would that be?

That‘s just a theoretical scenario. I like to think about the downside. Most, if not all, of us are implicit thinking the stock price of FFH should go up in the next years. I wouldn‘t bet against that. Still from time to time things happen and the world changes within a moment. Think Covid, think FFH trading at 0.4 book value. 
 

So by this scenario I try to get a rough idea about „What if I am wrong and Mr. Market is go crazy within the next years? After all you‘ll NEVER know, where rhe stock price goes to in the short term (and 3 1/2 years to me is shortterm). 
 

So why not think about that „bad“ scenario? Would it be as bad as I think? Often things turn out to be way better even (or: especially!) in a bad case scenario than one thinks in the beginning.

 

E. g. in the other thread about the question if FFH would reach 2.000 dollar until 2027 I just bet „yes“. But I don‘t hope for that outcome. For every longterm holder (net seller or holder) of FFH it would be even better, if the share price would be way below 2.000 dollar. As shares can be bought back way cheaper.
 

So in a nutshell: No, I don‘t think, that the share price will stay where it is. But if anything, than I would hope for such an unlikely scenario, as my share of FFHs earnings would only go up. And I like to lean to the downside. Having shares of a business with a pe ratio of 8 today, and having zero return over 8 1/2 years and than owning a business with a normalized pe ratio of 2 and a normalized roe of 15%- if that‘s the bad case scenario, than that’s a scenario I buy. (Again: ignoring buybacks, which would make the scenario even better).

 

 

4 hours ago, dartmonkey said:

Even with P/B staying at 1.15, that means share prices would almost double. Book would only go from $23b to $29.5b, but because of the 6.4m shares repurchased, book per share would almost double, as would the share price at a constant multiple of book. P/E would just come down a bit, from 7 to 6.

 

Thank you for the work, which I really appreciate! Gives a lot of colour. 

[Munger_Disciple]

3 minutes ago, Viking said:

Anyways, it is a really interesting topic. But I will sign off for now  

 

Agree  that it's an interesting topic . 

Edited August 26, 2024 by Munger_Disciple

[Hamburg Investor]

31 minutes ago, Munger_Disciple said:

I think Fairfax will survive but take a hit to earnings (for two years I think at current run rate), so I am ok with it. Most other P/C insurers will go bankrupt in such a scenario. 

To me, that‘s the key point. Buffett said something like - from memory - crisis is good for a good business, as the crisis wipes out the competitors. A good business WINS through crisis, as it wins market share. Not only, but especially in those times. Gayner wrote about that topic some years ago in his annual report too, saying something like, that it‘s an advantage for its subsidiaries, that Markel will always be there to e. g. buy a new machine, if it gets broke at one of it’s subsidiaries. So management is able to always think for the (very) longterm.

 

So how will the world look like some years after a 600 bn dollar event? BRKs and FFHs market share should have grown AND the premiums within the sector as a whole should have grown too (as prices within the insurance sector would have grown). So both BRK and FFH would get a bigger piece of a growing cake, some years after such a scenario and I wouldn‘t be surprised, if CR would go down a lot. 
 

So, yes, there are tail risks, that will ultimately hit BRK and FFH; but in the long run those risks are in fact not risks but chances.  

[SafetyinNumbers]

Definity and Intact preannouced big CAT losses for Q3. Fairfax will get hit hard in Northbridge but Canada is ~10% of premiums so it shouldn’t be as bad.

 

While IFC has hardly moved on the announcement, I find it hard to believe FFH wouldn’t be down big if they pre-announced a $68 hit to pretax earnings for Q3 on CAT losses.

 

Thoughts?

[nwoodman]

34 minutes ago, SafetyinNumbers said:

Definity and Intact preannouced big CAT losses for Q3. Fairfax will get hit hard in Northbridge but Canada is ~10% of premiums so it shouldn’t be as bad.

 

While IFC has hardly moved on the announcement, I find it hard to believe FFH wouldn’t be down big if they pre-announced a $68 hit to pretax earnings for Q3 on CAT losses.

 

Thoughts?

Ouch, it’s been a busy season in Canada.  Do you think they were swimming a bit naked?

 

“Reinsurance recoveries include the full utilization of the $25 million available under the company's catastrophe aggregate treaty.”

 

https://www.newswire.ca/news-releases/definity-releases-estimate-of-financial-impact-from-catastrophe-losses-806928340.html

Cat Agg Treaty:

 

    1.    Threshold or Attachment Point: The treaty specifies an aggregate amount of losses that the insurer must incur before the reinsurance coverage kicks in. This is often referred to as the “attachment point.”
    2.    Coverage Limit: The treaty also defines a maximum amount that the reinsurer will pay once the attachment point is reached. This limit caps the reinsurer’s liability under the agreement.
    3.    Period of Coverage: The coverage typically applies to losses occurring within a defined period, usually one year.

 

 

[UK]

5 hours ago, Munger_Disciple said:

 

Agree  that it's an interesting topic . 

 

+1. And thanks for discussing this.

 

I think big picture/long term we also maybe must take into account, that CAT insurance is only a part of the total insurance economy. I am not sure how much this, lets call climate related potentialy long tail risk, makes of total FFH business though? Also all these loses (I expect) would not be unlimited in any 'asteroid size' case? I expect and trust somewhat, that an insurer, run by a family, whose almost total net worth depends on it, will do a good job of thinking about and managing these risks. Obviously BRK of 2024 seems to be more safe antifragile still, than FFH if 2024, just because of its diversification of the last ~20 years into operating businesess. It would be interesting to estimate in what year BRK was of the same risk as FFH today (somewhere before 2000?). We can always find something, like e.g. supervolcano risk (once in a 50000 years?) or what not (recently watched The Day After Tomorrow with my kid and it provoked some interesting thoughts for me:)) which would probably kill even BRK, or almost every other company, for that mater, so in the end this would not be a financial portfolio level worry anymore...Finally, despite of insiders WB or PW going almost totally fully in, I think it is still a good idea to cap ones investment to a size he can sleep well with. For me it could be as much as 60 percent for BRK (not at the current valuation) and up to 40 percent for FFH. These could change (but more likely to a lower side) in the future. This is also very personal, if ones max position size is 10 percent (which is totally fine and makes sense), then just keep FFH also at this or whatever limit.

 

Edited August 27, 2024 by UK

[SafetyinNumbers]

3 hours ago, UK said:

For me it could be as much as 60 percent for BRK (not at the current valuation) and up to 40 percent for FFH. These could change (but more likely to a lower side) in the future. This is also very personal, if ones max position size is 10 percent (which is totally fine and makes sense), then just keep FFH also at this or whatever limit.

 

It’s perhaps not obvious but the higher the valuation the better the ability to handle the punch. That’s why I’m not as excited about FFH staying cheap like I think most shareholders prefer. 
 

With respect to IFC, they trade at ~2.9x BV, they could replace the float very cheaply and more with a 2.5% equity issue that would be incredibly accretive. My only guess as to why they haven’t done it yet is because they have an acquisition planned to acquire float cheaply for stock.

[UK]

1 hour ago, SafetyinNumbers said:

It’s perhaps not obvious but the higher the valuation the better the ability to handle the punch. That’s why I’m not as excited about FFH staying cheap like I think most shareholders prefer. 
 

With respect to IFC, they trade at ~2.9x BV, they could replace the float very cheaply and more with a 2.5% equity issue that would be incredibly accretive. My only guess as to why they haven’t done it yet is because they have an acquisition planned to acquire float cheaply for stock.

 

Yes, I understand this if you look at it from a fundamental/business prospectives, but as an owner of a liquid security I am not so sure I would be comfortable with a possible ~30 (or more, depending on the valuation) percent hit to a very large position, just because of the risk of reverting valuation. There is a limit somewhere in my mind (or sleep well) for a valuation of any mature business for a very big position (but maybe I would keep something of less than 5-10 percent even at a crazy valuation). Maybe it is >1.5-1.7 BV or even 2 BV for FFH, perhaps something same for BRK, but I think I will know this only if/when we get there, meanwhile I do not see a need to adjust anything meaninfully untill at least 1.5 BV. 

 

Edited August 27, 2024 by UK

[SafetyinNumbers]

1 hour ago, UK said:

 

Yes, I understand this if you look at it from a fundamental/business prospectives, but as an owner of a liquid security I am not so sure I would be comfortable with a possible ~30 (or more, depending on the valuation) percent hit to a very large position, just because of the risk of reverting valuation. There is a limit somewhere in my mind (or sleep well) for a valuation of any mature business for a very big position (but maybe I would keep something of less than 5-10 percent even at a crazy valuation). Maybe it is >1.5-1.7 BV or even 2 BV for FFH, perhaps something same for BRK, but I think I will know this only if/when we get there, meanwhile I do not see a need to adjust anything meaninfully untill at least 1.5 BV. 

 

That’s my point, there wouldn’t necessarily be a 30% hit. IFC could probably raise money to cover the hole, down < 2%. The higher the multiple, the easier and cheaper it will be to raise money. As a business owner, it’s a much better position to be in. Owners of liquid securities on the other hand that use value as a factor especially are deathly afraid of drawdowns no matter their cost base.

[Hamburg Investor]

59 minutes ago, SafetyinNumbers said:

The higher the multiple, the easier and cheaper it will be to raise money. As a business owner, it’s a much better position to be in. Owners of liquid securities on the other hand that use value as a factor especially are deathly afraid of drawdowns no matter their cost base.

 

If I get you right, than buying on the cheap site isn’t an option for you as for the risk?! So you could get into the situation to buy a security, that is priced reasonable, but if it gets cheaper over time, than you sell, even though the gap to intrinsic value widens…?! 
 

I get your point and I‘d agree, that liquidity is all important and you make a good point. Still it leaves you with less opportunities and you would have to sell at points, where I‘d see most value. Think of FFH when it was valued at 0.4 book just 3 years (or so) ago. Have you sold at that point; if not, why?

 

Looking at Prems investment style, doesn’t he invest just totally contrary to you? Thinking about Eurobank and others. 

[SafetyinNumbers]

Just now, Hamburg Investor said:

 

If I get you right, than buying on the cheap site isn’t an option for you as for the risk?! So you could get into the situation to buy a security, that is priced reasonable, but if it gets cheaper over time, than you sell, even though the gap to intrinsic value widens…?! 
 

I get your point and I‘d agree, that liquidity is all important and you make a good point. Still it leaves you with less opportunities and you would have to sell at points, where I‘d see most value. Think of FFH when it was valued at 0.4 book just 3 years (or so) ago. Have you sold at that point; if not, why?

 

Looking at Prems investment style, doesn’t he invest just totally contrary to you? Thinking about Eurobank and others. 

You don’t get me right.

[73 Reds]

12 hours ago, Hamburg Investor said:

To me, that‘s the key point. Buffett said something like - from memory - crisis is good for a good business, as the crisis wipes out the competitors. A good business WINS through crisis, as it wins market share. Not only, but especially in those times. Gayner wrote about that topic some years ago in his annual report too, saying something like, that it‘s an advantage for its subsidiaries, that Markel will always be there to e. g. buy a new machine, if it gets broke at one of it’s subsidiaries. So management is able to always think for the (very) longterm.

 

So how will the world look like some years after a 600 bn dollar event? BRKs and FFHs market share should have grown AND the premiums within the sector as a whole should have grown too (as prices within the insurance sector would have grown). So both BRK and FFH would get a bigger piece of a growing cake, some years after such a scenario and I wouldn‘t be surprised, if CR would go down a lot. 
 

So, yes, there are tail risks, that will ultimately hit BRK and FFH; but in the long run those risks are in fact not risks but chances.  

Exactly!  Moving the discussion beyond insurance, those are the companies to own in any industry where a catastrophe, crisis, bad recession, etc.. will wipe out the weak and make the strong that much stronger.  If investing for the long run and there is a clear leader, I've never understood why anyone would choose 2nd best.  

[Hektor]

12 hours ago, Hamburg Investor said:

So how will the world look like some years after a 600 bn dollar event?

Given the magnitude of such an event, will governments (in US, Canada and/or elsewhere) step in to bail out the industry, depriving prudent businesses of opportunities?

[Hamburg Investor]

1 hour ago, Hektor said:

Given the magnitude of such an event, will governments (in US, Canada and/or elsewhere) step in to bail out the industry, depriving prudent businesses of opportunities?

In Germany government oftentimes steps in, if the economy gets hit badly (covid…). My gut feeling is, that in the US they are more market oriented and let things go without too much intervention; but at some point they would I guess. But I am not an expert, any thoughts from someone else?

[dartmonkey]

25 minutes ago, Hamburg Investor said:

2 hours ago, Hektor said:

Given the magnitude of such an event, will governments (in US, Canada and/or elsewhere) step in to bail out the industry, depriving prudent businesses of opportunities?

In Germany government oftentimes steps in, if the economy gets hit badly (covid…). My gut feeling is, that in the US they are more market oriented and let things go without too much intervention; but at some point they would I guess. But I am not an expert, any thoughts from someone else?

 

Western governments often step in to provide financing, preventing bankruptcy, but they don't just give money to companies to wipe out a big loss. Many of the 'bailouts' of public companies (like GM and Chrysler, for instance), came at a pretty high cost to shareholders. Competitors like Ford who were adequately financed did not get all that market share for themselves, but then, that was not really a realistic prospect anyways - if governments had let GM and Chrysler fail (as I feel they should have), then new competitors would have sprung up from their ashes pretty quickly, as their factories, technology, dealership network etc. were purchased out of bankruptcy. 

[glider3834]

20 hours ago, SafetyinNumbers said:

Definity and Intact preannouced big CAT losses for Q3. Fairfax will get hit hard in Northbridge but Canada is ~10% of premiums so it shouldn’t be as bad.

 

While IFC has hardly moved on the announcement, I find it hard to believe FFH wouldn’t be down big if they pre-announced a $68 hit to pretax earnings for Q3 on CAT losses.

 

Thoughts?

 

future results may deviate the past but Northbridge had lower cat losses in combined ratio (CR) % points than Intact & Definity in 2022 & 2023. Having said that, we will have to wait for Fairfax's Q3 results to know how Northbridge has been impacted.

 

 

Intact Canada P&C               C$ 14.9 (cat loss 2023 7.5 CR pts;  2022 4.1 CR pts)

Definity                                  C $ 4.0 (cat loss 2023 6.2 CR pts;  2022 3.7 CR pts)

Northbridge                           C$ 3.2  (cat loss 2023 1 CR pts; 2022 2 CR pts) * Fairfax rounded out the CR pts in the ARs

 

 

 

Edited August 27, 2024 by glider3834

[UK]

14 hours ago, SafetyinNumbers said:

That’s my point, there wouldn’t necessarily be a 30% hit. IFC could probably raise money to cover the hole, down < 2%. The higher the multiple, the easier and cheaper it will be to raise money. As a business owner, it’s a much better position to be in. Owners of liquid securities on the other hand that use value as a factor especially are deathly afraid of drawdowns no matter their cost base.

 

I agree with you with a prospective of a business/never sell owner! But I am looking at the situation as an owner of tradable security though and decission not to sell, at least something we could agree to call 'crazy well valued', is also a decission. Something like KO for WB in 2000 or AAPL today? I mean this hit from a too high valuation is a very valid risk by itself, even if the underlying business is perfectly fine, and usually, sooner or later (like bigtech in 2022?) it comes seemingly out of nowhere. I am not sure how to manage these risks (also of selling to early) preciselly and this could be a mistake, but I am sure I would began to lose some of my sleep owning 30+ percent position in FFH, as we know the circumstances today, at >2 BV. Perhaps I would not sleep if it is under 10 percent though. I think the cost base is one of the most dangerous things in such considerations and should be irrelevant in any case, no mater if it is a big winner or loser (except maybe somewhat for a tax purposes), at least I try to hide it from my eyes and thinking as much as possible. I think the real possibility why FFH is still atractive today is that too many market participants have a cost basis or remember to well the price of FFH of some 10 years before 2023. His (I hope) will pass:)

 

Edited August 28, 2024 by UK

[UK]

13 hours ago, 73 Reds said:

Exactly!  Moving the discussion beyond insurance, those are the companies to own in any industry where a catastrophe, crisis, bad recession, etc.. will wipe out the weak and make the strong that much stronger.  If investing for the long run and there is a clear leader, I've never understood why anyone would choose 2nd best.

 

+1. Just would like to add, that in my thinking it is companies with a very good and long term oriented management (which is very rare by itself) or operated by the shrewd owner/investor/family you can trust (and who then picks the right managment, if they are not running the business themselves, in the first place), which are able to do smart things during the crises and to become even stronger/more valuable. Then you can also leave such investments on autopilot / for long term more easily etc. It is a must have condition for me for most companies for a big investment, as all five I currently own do, but especially for an insurance company, where I definitelly have less ability to check and trust numbers myself. It is almost unthinkable for my to even consider something without the owner or if it is of the second class in this industry. While academia or MW may consider or scream this is a problem and reason not to own or short them:))). This is also how I ended up investing in BRK some ~12 year ago, despite the fact, that I started by doing research of the different insurance company at that time.

 

Edited August 28, 2024 by UK

[MMM20]

On 5/13/2024 at 9:35 AM, MMM20 said:

This is still my biggest position by a lot. It has gotten up to about half my retirement accounts. I’m talking about taking it down to 30-40%, still my biggest by ~2x. Still think it’s easily worth $2-3K and I would not sell if this were close to a normal core position.

 

I wanted to close the loop. I sold ~10% of my FRFHF around ~$1,200 to close the margin from buying HIFS then (and to buy SILA now which looks like a fat pitch to me). FRFHF remains my biggest position by ~3x, and I'd keep a large core position at ~$2,500 if it went there overnight. This still looks like the best thing out there, but I'm probably too conservative with sizing and it's a risk management decision that I hope I'll regret.

 

Edited August 30, 2024 by MMM20

[Junior R]

all time high hit today again