Fairfax 2024

[SafetyinNumbers]

1 hour ago, jfan said:

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[Viking]

Share Buyback History - Fairfax

 

The big picture

 

Three factors drive stock returns over the long term:

• Earnings
• Multiple
• Shares outstanding

The last factor is often ignored by investors.

 

Capital allocation

 

Capital allocation is the most important function of a management team and stock buybacks are one of many options that are available. Share buybacks can be very beneficial for shareholders if they are done in a responsible manner (purchased at attractive prices) and sustained over many years.

 

It is counterintuitive, but for long term shareholders a low share price can be a big benefit - if the company is buying back shares and in a significant quantity. Especially if it persists for years.  

 

How does Fairfax approach buybacks?

 

Prem laid out Fairfax’s strategy regarding share buybacks in the 2018 annual report:

 

“I mentioned to you last year that we are focused on buying back our shares over the next ten years as and when we get the opportunity to do so at attractive prices. Henry Singleton from Teledyne was our hero as he reduced shares outstanding from approximately 88 million to 12 million over about 15 years.” Prem Watsa – Fairfax 2018AR

 

Fairfax approaches share buybacks from the framework of a value investor: buy back shares when they are cheap and back up the truck when they are really cheap.

 

What has Fairfax been doing in recent years?

• 2015 to 2017 – Issue shares to fund international P/C insurance expansion. 
  • Fairfax’s year-end ‘effective shares outstanding’ peaked in 2017 at 27.75 million. Fairfax issued a total of 7.2 million shares in 2015, 2016 and 2017 to help fund its aggressive international expansion. The new shares were issued at an average price of about $462/share.
• 2017 to today – Aggressively buy back shares. 
  • At September 30, 2024, the ‘effective shares outstanding’ at Fairfax had fallen to 22.0 million shares. Over the last 6.75 years (2018-Q3 2024), Fairfax has reduced effective shares outstanding by approximately 5.67 million shares or 20.8%.  The average price paid to buy back shares was about $595/share.

That is a significant reduction in shares outstanding. 

 

Did Fairfax get good value with its buybacks?

• From 2018 to 2022, Fairfax was able to buy back 4.4 million shares at an average price of $464/share. The average price paid was the same as the average price of the shares that were issued at from 2015-2017 ($462/share). 
• Fairfax’s book value at September 30, 2024 was $1,033/share.
• Fairfax’s intrinsic value is well above its book value. 

Fairfax has been able to buy back a significant number of shares at a very attractive average price – at a significant discount to book value and intrinsic value. 

 

Is Fairfax done with buybacks?

 

In the first 9 months of 2024, Fairfax has reduced effective shares outstanding by 1.01 million or 4.4%. That is more than the average for the past 6.75 years of 3.2%. So far in 2024, Fairfax has accelerated the pace of share buybacks.

 

Why is the pace of buybacks picking up?

 

Likely for three key reasons:

1. Robust cash generation: Fairfax is generating an enormous amount of free cash flow.
2. The hard market in P/C insurance is slowing: The P/C insurance companies no longer need capital to grow. In fact, the opposite is happening – the P/C insurance businesses are generating excess capital, which is being sent to Fairfax. 
3. Cheap stock: Fairfax’s stock trades at a big discount to its intrinsic value. 

For the stock repurchased to September 30, 2024, Fairfax has paid an average price of $1,113/share. This price is a slight premium to current book value ($1,033/share). Importantly, book value does not include the following: 

 

• “At September 30, 2024 the excess of fair value over carrying value of investments in non-insurance associates and market traded consolidated non-insurance subsidiaries was $1,921.4 compared to $1,006.0 at December 31, 2023. The pre-tax excess of $1,921.4 is not reflected in the company’s book value per share, but is regularly reviewed by management as an indicator of investment performance.” Fairfax Q3-2024 Interim Earnings Report
• This is $1.9 billion, or $87/share (pre-tax), in value that is not captured in book value.

Bottom line, in 2024 Fairfax has bought back more than 1 million shares, or 4.4%, at $1,113/share. Which is less than 1 x 2024 year-end ‘adjusted’ book value (if we include excess of FV over CV). That is delivering exceptional value to long term shareholders.

   

 

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Fairfax’s total return swaps (TRS) on 1.96 million Fairfax shares

 

Some investors consider this investment to represent a buyback of sorts. Over the past 4 years, the TRS-FFH has increased in value by about $1.9 billion (before carrying costs). This is turning into one of Fairfax’s best investments ever.

 

 

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What does Warren Buffett have to say about share buybacks? 

 

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Tracking the Per Share Change in Net Premiums, Investments and Float - Fairfax

 

Three of the most important metrics to measure the growth of a P/C insurance company over time are net premiums written, total investment portfolio and float. The change in the total values is important. But what is much more important, is the change in per share values over time.

 

How has Fairfax performed? 

 

Over the past 9 years, growth at Fairfax across all three metrics has been very strong. Especially when measured per share.

• Net premiums written CAGR per share = 15%
• Investment portfolio CAGR per share = 12.3%
• Float per share CAGR = 12.5%

The growth from 2016 to 2018 was driven by acquisitions (and share issuance). The growth from 2019 to 2024 has been driven by the hard market in insurance (and share repurchases). 

 

It should be noted that Fairfax has achieved this impressive growth in both soft and hard P/C insurance markets.

 

Perhaps surprisingly, given the slowdown of the hard market, the per share growth in 2024 across all three metrics has continued at a robust pace:

• Net premiums written YOY growth estimate per share = 17%
• Investment portfolio YOY growth estimate per share = 13%
• Float per share YOY growth estimate per share = 13%

The per share growth in 2024 is being driven by acquisitions (GIG), a continuation of the hard market and meaningful share buybacks. Fairfax has many levers it can pull to continue to grow its business in the coming years – even if the hard market in insurance slows further. 

 

This is further proof of how well the management team at Fairfax has been performing for long term shareholders. 

 

Edited 26 minutes ago by Viking