Fairfax 2024

[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 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 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 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 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 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 by MMM20

[Junior R]

all time high hit today again

[SafetyinNumbers]

12 minutes ago, Junior R said:

all time high hit today again

We’ll find out Sept 6 after the close if FFH is going into the 60. I think the odds are 50-50. I think the street is less than 25% so I don’t think there is much prepositioning. Given the weight keeps going up, I think it’s inevitable but the street doesn’t think that long term.

I assume sellers will be catalyst driven hedge funds and retail investors who have oversized positions. 
 

What does everyone else think?

 

Edited August 30 by SafetyinNumbers

[dartmonkey]

9 minutes ago, SafetyinNumbers said:

We’ll find out Sept 6 after the close if FFH is going into the 60. I think the odds are 50-50. I think the street is less than 25%... 

 

What does everyone else think?

I'd go with the street. Algonquin must be below 20 basis points now, but the Financial sector is already too big, because of all our bank concentration. I guess it depends which criterion is more important, since you can't do both. So my guess is they'll punt.  

[gfp]

Change the name to "Fairfax Mattresses and More!" and they get in sure thing

[Hektor]

31 minutes ago, gfp said:

Change the name to "Fairfax Mattresses and More!" and they get in sure thing

[SafetyinNumbers]

1 hour ago, dartmonkey said:

I'd go with the street. Algonquin must be below 20 basis points now, but the Financial sector is already too big, because of all our bank concentration. I guess it depends which criterion is more important, since you can't do both. So my guess is they'll punt.  

It’s the reason most of the street doesn’t think FFH goes in too. I showed a couple of them that financials were more overweight in March 2022 when IFC went in (at a slightly lower weighting in the index than FFH is now) they shrug their shoulders. Seems like an important precedent to me.

Edited August 30 by SafetyinNumbers

[UK]

7 hours ago, gfp said:

Change the name to "Fairfax Mattresses and More!" and they get in sure thing

 

This is really good idea. Also "Fairfax and Sleep Well" or maybe "Fairfax and (just go to) Sleep" could be nice:)

 

PS. Or better yet: "Fairfax and Relax":)

 

Edited August 31 by UK

[wondering]

Article about speculation of Fairfax being included in S&P/TSX 60

 

https://www.theglobeandmail.com/business/article-this-goose-could-fly-south-straight-out-of-canadas-main-stock-index/

 

• because of lower trading volumes/float several companies could be delisted from the S&P/TSX 60
• names mentioned in delisting Canada Goose, Ballard Power Systems, Africa Oil Corp, Westshore Terminals, Algonquin Power according to Jean-Michel Gauthier, analyst at Bank of Montreal
• names mentioned as possible inclusion into the index include Bird Construction and Fairfax
• article discussed the fact that the index is already heavily weighted towards financials and natural resource companies

"S&P has a degree of discretion in decisions around which stocks go in its indexes. The key criteria it uses is known as “float” – the value of shares that aren’t held by insiders and that therefore trade frequently and are easily available to the public. The index provider does not release its proprietary float calculations.

To stay in the composite, a company’s float must not drop below 0.025 per cent, or 2.5 hundredths of a percentage point, of the total value of the index"

 

 

[SafetyinNumbers]

1 hour ago, wondering said:

Article about speculation of Fairfax being included in S&P/TSX 60

 

https://www.theglobeandmail.com/business/article-this-goose-could-fly-south-straight-out-of-canadas-main-stock-index/

 

• because of lower trading volumes/float several companies could be delisted from the S&P/TSX 60
• names mentioned in delisting Canada Goose, Ballard Power Systems, Africa Oil Corp, Westshore Terminals, Algonquin Power according to Jean-Michel Gauthier, analyst at Bank of Montreal
• names mentioned as possible inclusion into the index include Bird Construction and Fairfax
• article discussed the fact that the index is already heavily weighted towards financials and natural resource companies

"S&P has a degree of discretion in decisions around which stocks go in its indexes. The key criteria it uses is known as “float” – the value of shares that aren’t held by insiders and that therefore trade frequently and are easily available to the public. The index provider does not release its proprietary float calculations.

To stay in the composite, a company’s float must not drop below 0.025 per cent, or 2.5 hundredths of a percentage point, of the total value of the index"

 

 

There is nothing quite like price insensitive buying to help with price discovery. It would be interesting to know how much liquidity will be provided by retail shareholders when FFH goes in. Entry does seem inevitable but not necessarily September although I think the odds are better than 50-50.

 

Two notes : think Gauthier is from Scotia not BMO and the article suggests GOOS is getting kicked out because it trades more in NY but it’s actually because its float cap is under 2.5bps. There is no such rule for the 60 but 20bps has been the rule of thumb. AQN closed at 19bp on Friday but they increased the float a reasonable amount since the last measurement period so it might bounce back above 20bp. But it’s still just a rule of thumb.

[gfp]

I thought this article on Verisk's recent modeling was interesting.  I don't think it has a paywall.  Not sure where to post it so seems like Fairfax is as good as any.  

 

https://www.theinsurer.com/reinsurancemonth/industry-should-now-expect-average-annual-cat-losses-of-151bn-verisk/