Fairfax 2024

SafetyinNumbers · December 7, 2024

28 minutes ago, Castanza said:

None that discussed the company in depth (as you did), just casual mentions by hosts when discussing WB etc. I believe Chit Chat Stocks was one and The Acquirers Podcast. I’ve seen it pop up on Reddit from time to time. Maybe the same members as on COBF though.

Thanks. I have heard Jake Taylor mention it a couple of times on Value After Hours in passing. I started posting on Reddit about it as BrownMarubozu as well so that might be me.

villainx · December 7, 2024

56 minutes ago, SafetyinNumbers said:

Thanks. I have heard Jake Taylor mention it a couple of times on Value After Hours in passing. I started posting on Reddit about it as BrownMarubozu as well so that might be me.

Is the first 15/25 year book available for sale somewhere? It was mentioned in the pod you were a guest on, but haven’t found it anywhere.

TwoCitiesCapital · December 7, 2024

7 hours ago, Hamburg Investor said:

I agree about the sellers being longterm shareholders. But who were the buyers? Maybe also longterm shareholders? Both could be right.

I was buying.

Some selected quotes I made in the Fairfax 2020 and the Q1 2020 threads at the time:

On 5/1/2020 at 9:15 PM, TwoCitiesCapital said:

...at these prices, Fairfax need only generate 2.5% annualized on their float, debt, and equity to achieve 15% compounded returns from here.

No worrying about the accuracy of BV or IV or any of that necessary. No wondering if permanent impairment or a return to prior values. All of that is basically in the past. Do you think they can do 2.5% per year? If so, you get 15+% return on your capital.

On 5/2/2020 at 5:51 PM, TwoCitiesCapital said:

Fairfax has $1500-1600/share in float/equity/debt.

A net 2.5% return in those figures is $37.50/share at the low end. On a $260/share price, that's 14.4% annualized.

I'm not talking about portfolio returns, just that they need to net only 2.5% on the total of float/equity/debt after expenses. It doesn't seem like that should be a high bar, particularly if insurance (what the equity/debt supports) is performing well.

If people don't seem convinced of 2.5% net on those various forms of funding, then who the hell was buying this at $500-$600/share when the various forms of funding were the same, but the bar for acceptable performance was far higher?

On 12/23/2020 at 4:21 PM, TwoCitiesCapital said:

While I agree that low interest rates are an impediment to earnings - this isn't any different than in 2016-2018 and Fairfax traded much higher. The primary difference is just expectations.

In 2017/2018, the outlook for Fairfax is as described below

1) Insurance was doing reasonably well - but not booming,

2) float growth was doing reasonably well, but not accelerating

3) people thought interest rates were going sustainably higher, but ended up being wrong

4) equity performance expectations were a toss up.

With all of that, Fairfax traded at $400-600 USD over that time.

Now insurance IS booming, float growth IS accelerating, interest rates are still 0%, and equity performance is still a toss up - but could be better with valuations on many holdings being lower today than back in 2017.

I'm supposed to believe Fairfax deserves to trade 15-20% below the low-end of its range from 2016-2018 while being significantly better positioned?

Edited December 7, 2024 by TwoCitiesCapital

SafetyinNumbers · December 8, 2024

4 hours ago, villainx said:

Is the first 15/25 year book available for sale somewhere? It was mentioned in the pod you were a guest on, but haven’t found it anywhere.

They had some available at the AGM last year. I wish there was a PDF copy. I think it would be popular.

gfp · December 8, 2024

5 hours ago, villainx said:

Is the first 15/25 year book available for sale somewhere? It was mentioned in the pod you were a guest on, but haven’t found it anywhere.

If you email the company they will probably send you one for free. They used to send out paperback versions but the last version they mailed me was hardcover.

Try this email if you don't have a better contact over there -> [email protected]

villainx · December 9, 2024

On 12/7/2024 at 9:20 PM, gfp said:

Try this email if you don't have a better contact over there -> [email protected]

Thank you! Tom replied as you said, delivery pending Canadian mail strike delays.

Viking · December 11, 2024

The Davis Double Play - Learning from one of the GOAT’s

“History never repeats itself, but it does often rhyme.” Mark Twain

Is it possible to learn from history to become a better investor?

Yes. One of the reasons is because human nature/investor psychology does not change. But there are other reasons too. By studying the great investors of the past we can learn what they did to be successful. In turn, this can help us to better understand what is going on in financial markets today. And this can sometimes provide an important edge for an inquisitive and open minded investor.

—————-

Shelley Cullom Davis (1909 - 1994)

Shelby Cullom Davis was one of the most successful investors of his generation. John Rothchild captured his accomplishments (and those of his son, Shelby M. C. Davis and grandsons, Chris and Andrew Davis) in “The Davis Dynasty: Fifty Years of Sucessful Investing on Wall Street”.

In this post we are only going to profile the father, and we will refer to him as Shelby Davis. Of interest, his grandson - Chris Davis - sits on the board of Berkshire Hathaway today. The book is a great read for investors who like financial history and are also interested in the P/C insurance industry.

What did Shelby Davis accomplish?

Starting out in 1947 (at age 38), Davis turned $50,000 into $900 million by 1994 (when he died, at age 85). Over 47 years he achieved a CAGR of 23% per year. The annual rate of return is exceptional. The timeframe he achieved that rate of return is otherworldly. Yes, that performance makes Shelby Davis one of the GOAT’s.

Adjusted for inflation, $900 million in 1994 is equal to $1.9 billion today.

Ok, he got really rich.

So what?

Three things really stand out with how Davis built his fortune:

Investing in stocks - Davis is one of the rare individuals who built great wealth solely from investing in stocks.
Throughout his lifetime, he invested primarily in one sector - insurance stocks (P/C and life).
Leverage - Davis was a heavy user of leverage. Often 100%. Interesting that it never blew him up (especially in the 1969-1973 bear market).

This guy got filthy rich investing in insurance stocks? Ok. This guy is starting to sound interesting.

Investing framework

Before we start exploring the insurance angle it should be noted that Davis was a disciple of Ben Graham:

“In 1947 Davis was elected president of Graham’s stock analysts’ organization.” TDD - Page 81.

Circle of competence

Prior to becoming a full time investor, Davis was deputy superintendent of the New York state insurance department. Even though it was a relatively small industry, when he became a full time investor in 1947, Davis decided to focus on insurance. Over the years he became an expert in both life and P/C insurance companies.

“Davis was already famous in the life and casualty circles. Insiders began calling him ‘the dean of American insurance,’ though he’d never worked for an insurer.” TDD - Page 99

Over the years, Davis built up an incredible edge over other investors with his deep understanding of the insurance industry.

Expanding the circle of competence

Along with John Templeton and a few others, in the 1960’s Davis was a pioneer in investing in Japan and other international markets. Unsurprisingly, his focus when investing internationally was insurance companies (life and P/C).

Davis expanded his circle of competence not by looking to invest in other industries. Instead he expanded his circle of competence by looking to invest internationally, primarily in Japan. This is what led him to many outstanding investments, including AIG.

What did Davis like so much about P/C insurance stocks?

In his book, Rothchild explained why Davis was so attracted to insurance stocks as investments:

“Insurance companies enjoyed some terrific advantages as compared to manufacturers.

Insurers offered a product that never went out of style.
They profited from investing their customers’ money.
They didn’t require expensive factories or research labs.
They didn’t pollute.
They were recession-resistant.
During hard times consumers delayed expensive purchases (houses, cars, appliances, and so on), but they couldn’t afford to let their home, auto and life insurance policies lapse.
Because interest rates tend to fall in hard times insurance companies bond portfolios became more valuable.”

“These factors liberated insurance earnings from the normal business cycle, and made them generally recession-proof. Meanwhile, the income from bond-heavy portfolios, continued to rise.” TDD - Page 96

Davis especially liked the float - a liability that was really an asset - that was hidden on the balance sheet of insurance companies. He believed a growing float combined with the power of compounding would eventually make the company a big winner for long term investors.

And guess what?

Nothing has changed. All the factors that Davis saw and liked about insurance stocks 75 years ago still apply just as much today.

How did Davis decide which insurance stocks to own?

Davis used three criteria to evaluate insurance companies:

Was company profitable/earning money?
- Was the company a good underwriter?
How was the investment portfolio invested?
- Was the investment portfolio invested in a rational manner?
How good was management?
- The management piece was especially important for Davis.
- “You can always learn accounting on the side,” he told his son, “but you’ve got to study history. History gives you a broad perspective and teaches that exceptional people can make a difference.” TDD - Page 99
- Davis made it a priority to meet with management - something that was unusual at the time. His objective was to separate the ‘bluffers’ from the ‘doers’.

Using these three criteria - earnings, fundamentals, management - provided him with a solid understanding of the companies he invested in.

Guess what?

Nothing has changed. The basic methodology Davis used to evaluate insurance stocks 75 years ago still applies just as much today.

Picking the right industry was important. And picking the right company was also important. But Davis did one more thing. And this ‘thing’ is what allowed him to deliver such spectacular returns.

Patience

Davis never sold his winners. He let them compound undisturbed for decades. As a result, he was rewarded handsomely for his patience - his winners became massive winners.

What allowed him to ride out all the volatility?

It was what we reviewed earlier - he deeply understood the companies he was invested in. This knowledge allowed him to ride out volatility that naturally came with owning equities. It allowed him to think like and be a long term investor.

“The Davis double play”

When looking at individual companies, Davis was looking for a particular set-up. Because it could be especially lucrative for an investor.

Own the best insurance companies - that should result in modest (or better) growth in the business over time.
Buy them when they trade at a low multiple (P/BV, PE).

This is a great set-up for an investor, because it usually results in two things happening over time:

Growth in earnings.
Followed by multiple expansion - when Mr. Market starts to look more favourably on a company.

And as any investor knows, this combination can yield spectacular results. Especially if it is allowed to play out undisturbed for decades.

“As the company’s earnings advanced, giving the stock an initial boost, investors put a higher price tag on the earnings, giving the stock a second boost.” TDD - Page 95/96

When this played out with an investment, Shelby called it ‘the Davis double play.’

Summary

Exploiting this set-up over decades with investments in companies like AIG, Berkshire Hathaway and Japanese insurance stocks, is what enabled Davis to achieve such spectacular returns over his career as an investor.

Let’s bring this post from the past and into the present.

Is P/C insurance still a good sector to invest in today?

Warren Buffett has been selling some of his stock holdings in recent years, like Bank of America and more recently Apple.

Has he been buying anything?

Yes, Buffett has been buying P/C insurance companies. In 2022, he bought Alleghany. And in 2024, he made Chubb a top 10 equity holding for Berkshire Hathaway.

Buffett bought his first P/C insurance stock, National Indemnity, in 1967. Fifty-seven years later he is still buying P/C insurance companies/stocks. Obviously, he continues to like the current set-up - the valuation and long-term prospects of the well managed P/C insurance stocks.

Fairfax Financial

Fairfax is in the process of delivering ‘the Davis double play’ for its investors. The stock has been on a tear over the past 4 years. However, much of the increase in the stock price so far has been driven by spiking earnings. The multiple part of ‘the Davis double play’ has just started happening for Fairfax. As earnings continues to grow, Mr Market will look at the company even more favourably. As investor expectations/sentiment towards the company continues to improve we should see multiple expansion in the coming years.

Today, Fairfax trades at a low valuation. Especially when you consider the quality of its management team (best in class).

P/BV = 1.3. Exceptionally low for a company that is delivering a consistent ROE of > 15%.
PE = 8.8. Exceptionally low. Fairfax is not over-earning.

To quote Peter Lynch, Fairfax is priced for ‘mediocrity’.

None of this includes excess of FV over CV for Fairfax’s associate and consolidated equity holdings. This was $1.9 billion at Sept 30, 2023, or $86/share (pre-tax). This means Fairfax is even cheaper than it looks.

Exceptional people can make a difference

This might be my key learning from reading The Davis Dynasty: invest alongside outstanding people and then be patient - and you can reap amazing rewards, sometimes lasting for decades.

“You can always learn accounting on the side,” he (Shelby Davis) told his son, “but you’ve got to study history. History gives you a broad perspective and teaches that exceptional people can make a difference.” TDD - Page 99

The big disconnect today with the broader investment community and their ‘understanding’ of Fairfax is likely perceptions regarding of the quality of the management team - it is much better than most investors think. Fairfax is loaded with high-quality people:

Prem Watsa is an exceptional CEO.
Lead by Peter Clark and Jen Allen, the senior team at Fairfax is very good.
Lead by Andy Barnard, Fairfax has built one of the best P/C insurance platforms/businesses in the world.
Lead by Wade Burton, Fairfax has built one of the great investment management platforms/businesses in the P/C insurance industry.
Fairfax has been slowly building out a collection of high quality equity holdings that are lead/managed by very good CEO’s/management teams. To name just a few:
- Fokion Karavias at Eurobank. David Sokol/Bing Chen at Poseidon. Hari Marar at Bangalore International Airport. Kamesh Goyal, founder of Digit Insurance.

Fairfax’s current set-up: Growing top line/earnings + Low multiple + Exceptional management/people.

The exceptional management/people ‘reason’ is by far the most important of the three listed above. But it gets the least attention from the investment community.

With Fairfax today, an investor is able to buy a best-in-class management team at the lowest valuation (compared to peers). This provides a large margin of safety. And solid upside, just from earnings. And significant upside if we see multiple expansion.

Even with the spike in the share price over the past 4 years, Fairfax still looks like a compelling opportunity for patient, long term investors. I think Shelby Davis would agree.

—————

What did Peter Lynch have to say?

Peter Lynch wrote the foreword for The Davis Dynasty. Below is a quote from him that is chocked full of wisdom:

Slow-growth industries can produce great growth companies.
Exceptional leaders can deliver outstanding results for investors - sometimes lasting for decades.

“I differed from the Davises, but in one important area we had something in common. Some of my most rewarding investments came from slow-growth industries where expectations were low and profits lackluster. By looking for the most inspired competitors in uninspiring lines of work, I often found great growth companies (Toys “R” Us, La Quinta Motor Inns, and Taco Bell, for example) priced for mediocrity.”

“Similarly, in the insurance arena and later in the banking arena, Davis and his son bought shares in the best and brightest competitors for much less than they’d pay, say, for the best and the brightest in the hottest high-tech industries, which are always highly competitive and subject to sudden reversal of fortune.”

“You don’t hear too many college kids say it’s their dream to enter the property-casualty business, but while insurance may be unappealing to most, it has attracted a few outstanding operators like Hank Greenberg, who turned American International Group into an on-going bonanza for shareholders since the 1970s. Davis’ positions in AIG, and a dozen other companies with exceptional leaders, accounted for the bulk of his gains.”

Edited December 11, 2024 by Viking

73 Reds · December 11, 2024

4 minutes ago, Viking said:

The Davis Double Play - Learning from one of the GOAT’s

“History never repeats itself, but it does often rhyme.” Mark Twain

Is it possible to learn from history to become a better investor?

Yes. One of the reasons is because human nature/investor psychology does not change. But there are other reasons too. By studying the great investors of the past we can learn what they did to be successful. In turn, this can help us to better understand what is going on in financial markets today. And this can sometimes provide an important edge for an inquisitive and open minded investor.

—————-

Shelley Cullom Davis (1909 - 1994)

Shelby Cullom Davis was one of the most successful investors of his generation. John Rothchild captured his accomplishments (and those of his son, Shelby M. C. Davis and grandsons, Chris and Andrew Davis) in “The Davis Dynasty: Fifty Years of Sucessful Investing on Wall Street”.

In this post we are only going to profile the father, and we will refer to him as Shelby Davis. Of interest, his grandson - Chris Davis - sits on the board of Berkshire Hathaway today. The book is a great read for investors who like financial history and are also interested in the P/C insurance industry.

What did Shelby Davis accomplish?

Starting out in 1947 (at age 38), Davis turned $50,000 into $900 million by 1994 (when he died, at age 85). Over 47 years he achieved a CAGR of 23% per year. The annual rate of return is exceptional. The timeframe he achieved that rate of return is otherworldly. Yes, that performance makes Shelby Davis one of the GOAT’s.

Adjusted for inflation, $900 million in 1994 is equal to $1.9 billion today.

Ok, he got really rich.

So what?

Three things really stand out with how Davis built his fortune:

Investing in stocks - Davis is one of the rare individuals who built great wealth solely from investing in stocks.

Throughout his lifetime, he invested primarily in one sector - insurance stocks (P/C and life).

Leverage - Davis was a heavy user of leverage. Often 100%. Interesting that it never blew him up (especially in the 1969-1973 bear market).

This guy got filthy rich investing in insurance stocks? Ok. This guy is starting to sound interesting.

Investing framework

Before we start exploring the insurance angle it should be noted that Davis was a disciple of Ben Graham:

“In 1947 Davis was elected president of Graham’s stock analysts’ organization.” TDD - Page 81.

Circle of competence

Prior to becoming a full time investor, Davis was deputy superintendent of the New York state insurance department. Even though it was a relatively small industry, when he became a full time investor in 1947, Davis decided to focus on insurance. Over the years he became an expert in both life and P/C insurance companies.

“Davis was already famous in the life and casualty circles. Insiders began calling him ‘the dean of American insurance,’ though he’d never worked for an insurer.” TDD - Page 99

Over the years, Davis built up an incredible edge over other investors with his deep understanding of the insurance industry.

Expanding the circle of competence

Along with John Templeton and a few others, in the 1960’s Davis was a pioneer in investing in Japan and other international markets. Unsurprisingly, his focus when investing internationally was insurance companies (life and P/C).

Davis expanded his circle of competence not by looking to invest in other industries. Instead he expanded his circle of competence by looking to invest internationally, primarily in Japan. This is what led him to many outstanding investments, including AIG.

What did Davis like so much about P/C insurance stocks?

In his book, Rothchild explained why Davis was so attracted to insurance stocks as investments:

“Insurance companies enjoyed some terrific advantages as compared to manufacturers.

Insurers offered a product that never went out of style.

They profited from investing their customers’ money.

They didn’t require expensive factories or research labs.

They didn’t pollute.

They were recession-resistant.

During hard times consumers delayed expensive purchases (houses, cars, appliances, and so on), but they couldn’t afford to let their home, auto and life insurance policies lapse.

Because interest rates tend to fall in hard times insurance companies bond portfolios became more valuable.”

“These factors liberated insurance earnings from the normal business cycle, and made them generally recession-proof. Meanwhile, the income from bond-heavy portfolios, continued to rise.” TDD - Page 96

Davis especially liked the float - a liability that was really an asset - that was hidden on the balance sheet of insurance companies. He believed a growing float combined with the power of compounding would eventually make the company a big winner for long term investors.

And guess what?

Nothing has changed. All the factors that Davis saw and liked about insurance stocks 75 years ago still apply just as much today.

How did Davis decide which insurance stocks to own?

Davis used three criteria to evaluate insurance companies:

Was company profitable/earning money?

Was the company a good underwriter?

How was the investment portfolio invested?

Was the investment portfolio invested in a rational manner?

How good was management?

The management piece was especially important for Davis.

“You can always learn accounting on the side,” he told his son, “but you’ve got to study history. History gives you a broad perspective and teaches that exceptional people can make a difference.” TDD - Page 99

Davis made it a priority to meet with management - something that was unusual at the time. His objective was to separate the ‘bluffers’ from the ‘doers’.

Using these three criteria - earnings, fundamentals, management - provided him with a solid understanding of the companies he invested in.

Guess what?

Nothing has changed. The basic methodology Davis used to evaluate insurance stocks 75 years ago still applies just as much today.

Picking the right industry was important. And picking the right company was also important. But Davis did one more thing. And this ‘thing’ is what allowed him to deliver such spectacular returns.

Patience

Davis never sold his winners. He let them compound undisturbed for decades. As a result, he was rewarded handsomely for his patience - his winners became massive winners.

What allowed him to ride out all the volatility?

It was what we reviewed earlier - he deeply understood the companies he was invested in. This knowledge allowed him to ride out volatility that naturally came with owning equities. It allowed him to think like and be a long term investor.

“The Davis double play”

When looking at individual companies, Davis was looking for a particular set-up. Because it could be especially lucrative for an investor.

Own the best insurance companies - that should result in modest (or better) growth in the business over time.

Buy them when they trade at a low multiple (P/BV, PE).

This is a great set-up for an investor, because it usually results in two things happening over time:

Growth in earnings.

Followed by multiple expansion - when Mr. Market starts to look more favourably on a company.

And as any investor knows, this combination can yield spectacular results. Especially if it is allowed to play out undisturbed for decades.

“As the company’s earnings advanced, giving the stock an initial boost, investors put a higher price tag on the earnings, giving the stock a second boost.” TDD - Page 95/96

When this played out with an investment, Shelby called it ‘the Davis double play.’

Summary

Exploiting this set-up over decades with investments in companies like AIG, Berkshire Hathaway and Japanese insurance stocks, is what enabled Davis to achieve such spectacular returns over his career as an investor.

Let’s bring this post from the past and into the present.

Is P/C insurance still a good sector to invest in today?

Warren Buffett has been selling some of his stock holdings in recent years, like Bank of America and more recently Apple.

Has he been buying anything?

Yes, Buffett has been buying P/C insurance companies. In 2022, he bought Alleghany. And in 2024, he made Chubb a top 10 equity holding for Berkshire Hathaway.

Buffett bought his first P/C insurance stock, National Indemnity, in 1967. Fifty-seven years later he is still buying P/C insurance companies/stocks. Obviously, he continues to like the current set-up - the valuation and long-term prospects of the well managed P/C insurance stocks.

Fairfax Financial

Fairfax is in the process of delivering ‘the Davis double play’ for its investors. The stock has been on a tear over the past 4 years. However, much of the increase in the stock price so far has been driven by spiking earnings. The multiple part of ‘the Davis double play’ has just started happening for Fairfax. As earnings continues to grow, Mr Market will look at the company even more favourably. As investor expectations/sentiment towards the company continues to improve we should see multiple expansion in the coming years.

Today, Fairfax trades at a a low valuation. Especially when you consider the quality of its management team (best in class).

P/BV = 1.3. Exceptionally low for a company that is delivering a consistent ROE of > 15%.

PE = 8.8. Exceptionally low. Fairfax is not over-earning.

None of this includes excess of FV over CV for Fairfax’s associate and consolidated equity holdings. $900 million at Sept 30, 2023, or $87/share pre-tax. This means Fairfax is even cheaper than it looks.

Exceptional people can make a difference

This might be my key learning from reading The Davis Dynasty: invest alongside outstanding people and then be patient - and you can reap amazing rewards, sometimes lasting for decades.

“You can always learn accounting on the side,” he (Shelby Davis) told his son, “but you’ve got to study history. History gives you a broad perspective and teaches that exceptional people can make a difference.” TDD - Page 99

The big disconnect today with the broader investment community and their ‘understanding’ of Fairfax is likely perceptions regarding of the quality of the management team - it is much better than most investors think. Fairfax is loaded with high-quality people:

Prem Watsa is an exceptional CEO.

Lead by Peter Clark and Jen Allen, the senior team at Fairfax is very good.

Lead by Andy Barnard, Fairfax has built one of the best P/C insurance platforms/businesses in the world.

Lead by Wade Burton, Fairfax has built one of the great investment management platforms/businesses in the P/C insurance industry.

Fairfax has been slowly building out a collection of high quality equity holdings that are lead/managed by very good CEO’s/management teams. To name just a few:

Fokion Karavias at Eurobank. David Sokol/Bing Chen at Poseidon. Hari Marar at Bangalore International Airport. Kamesh Goyal, founder of Digit Insurance.

Fairfax’s current set-up: Growing top line/earnings + Low multiple + Exceptional management/people.

The exceptional management/people ‘reason’ is by far the most important of the three listed above. But it gets the least attention from the investment community.

Able to buy best-in-class management team at lowest valuation (compared to peers). Provides solid margin of safety. Solid upside, just from earnings. Significant upside if we see multiple expansion.

Even with the spike in the share price over the past 4 years, Fairfax still looks like a compelling opportunity for patient, long term investors. I think Shelby Davis would agree.

—————

What did Peter Lynch have to say?

Peter Lynch wrote the foreword for The Davis Dynasty. Below is a quote from him that is chocked full of wisdom:

Slow-growth industries can produce great growth companies.

Exceptional leaders can deliver outstanding results for investors - sometimes lasting for decades.

“I differed from the Davises, but in one important area we had something in common. Some of my most rewarding investments came from slow-growth industries where expectations were low and profits lackluster. By looking for the most inspired competitors in uninspiring lines of work, I often found great growth companies (Toys “R” Us, La Quinta Motor Inns, and Taco Bell, for example) priced for mediocrity.”

“Similarly, in the insurance arena and later in the banking arena, Davis and his son bought shares in the best and brightest competitors for much less than they’d pay, say, for the best and the brightest in the hottest high-tech industries, which are always highly competitive and subject to sudden reversal of fortune.”

“You don’t hear too many college kids say it’s their dream to enter the property-casualty business, but while insurance may be unappealing to most, it has attracted a few outstanding operators like Hank Greenberg, who turned American International Group into an on-going bonanza for shareholders since the 1970s. Davis’ positions in AIG, and a dozen other companies with exceptional leaders, accounted for the bulk of his gains.”

@Viking, fascinating story - never heard of him before. Thanks for sharing. The lesson I take from your post is to invest in what you know. If you have a background in a certain field or area, seek out potential investments that others without your knowledge and interests might miss.

UK · December 11, 2024

43 minutes ago, 73 Reds said:

@Viking, fascinating story - never heard of him before. Thanks for sharing. The lesson I take from your post is to invest in what you know. If you have a background in a certain field or area, seek out potential investments that others without your knowledge and interests might miss.

+1

Viking · December 11, 2024

1 hour ago, 73 Reds said:

@Viking, fascinating story - never heard of him before. Thanks for sharing. The lesson I take from your post is to invest in what you know. If you have a background in a certain field or area, seek out potential investments that others without your knowledge and interests might miss.

@73 Reds , I agree. But I think you need to back it up one step. You need to start with the right industry. How many industries today are as good as a long term investment as they were 75 years ago? Very few. P/C insurance is likely one of a short list.

Another key learning is the importance of monitoring an investment. Sometimes companies mess up - AIG is the poster child for this. It delivered exceptional returns for investors for decades - until it blew up in the Great Financial Crisis in 2007/08.

So the lessons for me from the book were:

1.) P/C continues to be a great place for a long term investor to focus on (that circle of competence thing).

2.) Buy the best managed operators, ideally at a low (or even fair) price.
3.) Sit tight as long as management continues to execute well. Because exceptional management teams usually deliver exceptional returns. But to do this (sit tight for a decade or longer) requires a huge amount of trust - because you won’t know in advance exactly what management is going to do. You will only know this after the fact.

For Davis, management was the key. Today with Fairfax, there is very little discussion of management and how good they are (or not). Even on this board. And i love it.

Based on what I have seen over the past 4 years, I think the management team at Fairfax is best in class in the P/C insurance industry. People call me a ‘Fairfax bull’. It cracks me up. I think I am just following the facts.

The quality of Fairfax’s management team is not reflected in Fairfax’s valuation today. So I am getting something - the most important thing when investing - for free. It is like getting a free call option on something that is exceptionally valuable - management.

What is the right multiple to attach to Fairfax if I am right?

My guess is that is something that is not on most investors radar today. Should it be?

Edited December 11, 2024 by Viking

Hoodlum · December 11, 2024

It looks like Fairfax is part of group in the process of finalizing acquisition of French insurer Algingia.

https://www.bnnbloomberg.ca/business/company-news/2024/12/11/hermes-family-in-talks-to-invest-in-french-insurer-albingia/

Krefeld Invest, the family office of heirs to the luxury goods fortune, is part of an investor group that’s in exclusive talks to buy the insurer from asset manager Eurazeo, according to a statement on Wednesday. The consortium is being led by existing shareholder the Chamoin family and also includes Canadian insurer Fairfax Financial Holdings.

Eurazeo SE said it expects to sell its entire 70% financial stake in Albingia, bringing around €289 million ($303 million) of sale revenue to its balance sheet.

Albingia is an independent player in the French commercial insurance lines market, which collected about €334 million in insurance premiums last year. Eurazeo bought a stake in the business six years ago, based on an enterprise value of around €508 million.

The deal is subject to approval of various relevant authorities and is set to close in spring 2025.

73 Reds · December 11, 2024

50 minutes ago, Viking said:

@73 Reds , I agree. But I think you need to back it up one step. You need to start with the right industry. How many industries today are as good as a long term investment as they were 75 years ago? Very few. P/C insurance is likely one of a short list.

Another key learning is the importance of monitoring an investment. Sometimes companies mess up - AIG is the poster child for this. It delivered exceptional returns for investors for decades - until it blew up in the Great Financial Crisis in 2007/08.

So the lessons for me from the book were:

1.) P/C continues to be a great place for a long term investor to focus on (that circle of competence thing).

2.) Buy the best managed operators, ideally at a low (or even fair) price.
3.) Sit tight as long as management continues to execute well. Because exceptional management teams usually deliver exceptional returns. But to do this (sit tight for a decade or longer) requires a huge amount of trust - because you won’t know in advance exactly what management is going to do. You will only know this after the fact.

For Davis, management was the key. Today with Fairfax, there is very little discussion of management and how good they are (or not). Even on this board. And i love it.

Based on what I have seen over the past 4 years, I think the management team at Fairfax is best in class in the P/C insurance industry. People call me a ‘Fairfax bull’. It cracks me up. I think I am just following the facts.

The quality of Fairfax’s management team is not reflected in Fairfax’s valuation today. So I am getting something - the most important thing when investing - for free. It is like getting a free call option on something that is exceptionally valuable - management.

What is the right multiple to attach to Fairfax if I am right?

My guess is that is something that is not on most investors radar today. Should it be?

We agree that management is highly important. In fact it is the most important factor to me in any public equity I would own. Great management neutralizes the notion that "overvalued" stocks must be sold.

Viking · December 11, 2024

51 minutes ago, Hoodlum said:

It looks like Fairfax is part of group in the process of finalizing acquisition of French insurer Algingia.

https://www.bnnbloomberg.ca/business/company-news/2024/12/11/hermes-family-in-talks-to-invest-in-french-insurer-albingia/

Krefeld Invest, the family office of heirs to the luxury goods fortune, is part of an investor group that’s in exclusive talks to buy the insurer from asset manager Eurazeo, according to a statement on Wednesday. The consortium is being led by existing shareholder the Chamoin family and also includes Canadian insurer Fairfax Financial Holdings.

Eurazeo SE said it expects to sell its entire 70% financial stake in Albingia, bringing around €289 million ($303 million) of sale revenue to its balance sheet.

Albingia is an independent player in the French commercial insurance lines market, which collected about €334 million in insurance premiums last year. Eurazeo bought a stake in the business six years ago, based on an enterprise value of around €508 million.

The deal is subject to approval of various relevant authorities and is set to close in spring 2025.

@Hoodlum , thanks for posting. Over the past 10 years, Fairfax’s insurance business has been growing like a fast grower. Fairfax did this by being very flexible and opportunistic - taking what was being offered to them at the time. Today, expectations are that the growth of Fairfax’s insurance business is coming to a hard stop. The hard market is coming to a hard stop so the top line growth at Fairfax has to also stop. Right? This is likely what is built into investor expectations today - and therefore the stock price.

My guess is that in the coming years Fairfax will continue to grow its insurance business at a rate better than the industry average. What will they do? It will depend on what is available to them at the time. They will be open minded and flexible.

Expectations of investors is very low today - in terms of top line growth of the insurance business. For the management team at Fairfax this will be like jumping over a one foot hurdle. I love it.

Edited December 11, 2024 by Viking

Masterofnone · December 11, 2024

In December of 2007 Berkshire was trading at 2 times book. I didn't sell any shares. Had I done so with conviction, I would be considerably richer today. (As it was, when prices got halved, I turned over every rock for capital to buy more.)

From that 2007 peak, shares have gained about 400%, (CAGR a bit under 10%), while the shares I bought November 2008 have gained 720%. It works out fine to fall in love with a wonderful business and never sell but it might not optimize returns. It certainly is less work, and if it is a truly great company, less actual risk to simply hold, regardless of valuation. You might not be correct determining fair value.

I'm now retired and this again changes the calculus for me. I'm more interested in retaining what I have. Berkshire is as close to fairly valued at the moment as it has been since 2007 and I've sold some in retirement accounts. At some time, Fairfax will likely become fully or even over valued. I'll sell when I think so- it has been a hell of a run.

If it keeps being run as it is today, never selling a share should also work out fine. It is tricky to maximize returns- things can become dear and stay dear for a long time. You have to be right in your assessment that you will be able to re-enter at a lower level, and that's beyond a lot of peoples pay grade.

Hoodlum · December 11, 2024

49 minutes ago, Viking said:

@Hoodlum , thanks for posting. Over the past 10 years, Fairfax’s insurance business has been growing like a fast grower. Fairfax did this by being very flexible and opportunistic - taking what was being offered to them at the time. Today, expectations are that the growth of Fairfax’s insurance business is coming to a hard stop. The hard market is coming to a hard stop so the top line growth at Fairfax has to also stop. Right? This is likely what is built into investor expectations today - and therefore the stock price.

My guess is that in the coming years Fairfax will continue to grow its insurance business at a rate better than the industry average. What will they do? It will depend on what is available to them at the time. They will be open minded and flexible.

Expectations of investors is very low today - in terms of top line growth of the insurance business. For the management team at Fairfax this will be like jumping over a one foot hurdle. I love it.

This purchase seems to be a bit different than previous insurance acquisitions ,as some of those involved are looking at this purely as an investment and don't come with an insurance background. It will be interesting to see how this one is structured. I presume Fairfax was included for their success from both the insurance and investing side of the business. This may involve an equity stake, performance fee or some combination of that , with the plan to expand the business quicky with the funds that Krefeld Invest ($171B family business) is able to provide.

We have seen how well the Fairfax subs have performed over the past few year, but there have been a couple of tailwinds from the past year that are clearing up now.

- For the past year Odyssey Re has not been renewing their Quota Share Contract and this has significantly impacted premium growth, by 11.9%! in Q3 alone. This is expected to be completed in Q4.

Odyssey’s gross premiums written were down 4.7% due to the previously disclosed non-renewal of a large quota share in the fourth quarter of 2023. Excluding the quota share contract, Odyssey’s business was up 7.2% in the third quarter, driven by its reinsurance operations.

- Brit has also been shedding unprofitable business and we should see this turn around in Q4.

Brit then were down 4% in the third quarter, and I think you’ll see that turn around as well as they’ve been--you know, they’ve been really focusing on the margins in their business and cutting back and reallocating capital to more profitable lines, so I would expect that you’ll see Brit on the positive side of premium growth going forward.

- In additional during 2025 we will have a full year of comparison for GIG. I believe Fairfax will provide guidance in their 2024 Shareholders letter where they will increase their very conservation sustaining operating income from $4B to ~4.5B ($125 --> $140/share) for the next 4 years. This would certainly be well in line with the ~15% ROE.

Viking · December 11, 2024

6 minutes ago, Hoodlum said:

This purchase seems to be a bit different than previous insurance acquisitions ,as some of those involved are looking at this purely as an investment and don't come with an insurance background. It will be interesting to see how this one is structured. I presume Fairfax was included for their success from both the insurance and investing side of the business. This may involve an equity stake, performance fee or some combination of that , with the plan to expand the business quicky with the funds that Krefeld Invest ($171B family business) is able to provide.

We have seen how well the Fairfax subs have performed over the past few year, but there have been a couple of tailwinds from the past year that are clearing up now.

- For the past year Odyssey Re has not been renewing their Quota Share Contract and this has significantly impacted premium growth, by 11.9%! in Q3 alone. This is expected to be completed in Q4.

Odyssey’s gross premiums written were down 4.7% due to the previously disclosed non-renewal of a large quota share in the fourth quarter of 2023. Excluding the quota share contract, Odyssey’s business was up 7.2% in the third quarter, driven by its reinsurance operations.

- Brit has also been shedding unprofitable business and we should see this turn around in Q4.

Brit then were down 4% in the third quarter, and I think you’ll see that turn around as well as they’ve been--you know, they’ve been really focusing on the margins in their business and cutting back and reallocating capital to more profitable lines, so I would expect that you’ll see Brit on the positive side of premium growth going forward.

- In additional during 2025 we will have a full year of comparison for GIG. I believe Fairfax will provide guidance in their 2024 Shareholders letter where they will increase their very conservation sustaining operating income from $4B to ~4.5B ($125 --> $140/share) for the next 4 years. This would certainly be well in line with the ~15% ROE.

@Hoodlum , great points. My view is Fairfax is simply planting another seed with the speculated acquisition of French insurer Algingia. What the seed grows into we will see in the coming years. My guess is relationships and having boots on the ground is an important part of doing business in Europe.

Hoodlum · December 11, 2024

16 minutes ago, Viking said:

@Hoodlum , great points. My view is Fairfax is simply planting another seed with the speculated acquisition of French insurer Algingia. What the seed grows into we will see in the coming years. My guess is relationships and having boots on the ground is an important part of doing business in Europe.

I agree. The continued growth of their global insurance business will open up new opportunities.

glider3834 · December 12, 2024

1 hour ago, Viking said:

@Hoodlum , great points. My view is Fairfax is simply planting another seed with the speculated acquisition of French insurer Algingia. What the seed grows into we will see in the coming years. My guess is relationships and having boots on the ground is an important part of doing business in Europe.

https://www.eurazeo.com/en/newsroom/press-releases/eurazeo-enters-exclusive-discussions-consortium-led-la-financiere-de

'The transaction remains subject to the approval of the relevant authorities and to various requirements, such as documentary conditions, and is expected to be finalised in spring 2025.'

https://www.bnnbloomberg.ca/business/company-news/2024/12/11/hermes-family-in-talks-to-invest-in-french-insurer-albingia/

Hoodlum · December 12, 2024

43 minutes ago, glider3834 said:

https://www.eurazeo.com/en/newsroom/press-releases/eurazeo-enters-exclusive-discussions-consortium-led-la-financiere-de

'The transaction remains subject to the approval of the relevant authorities and to various requirements, such as documentary conditions, and is expected to be finalised in spring 2025.'

https://www.bnnbloomberg.ca/business/company-news/2024/12/11/hermes-family-in-talks-to-invest-in-french-insurer-albingia/

A well run insurance business with 2023 CR of 84. And it looks like the existing management team will have an equity stake. This definitely looks like a quality acquisition. I suspect FIBLAC is involved to inject additional capital for significant growth.

This is behind a paywall but it looks like Fairfax will own less than 50% of Albingia.

https://www.argusdelassurance.com/les-assureurs/albingia.233779

Edited December 12, 2024 by Hoodlum

mananainvesting · December 12, 2024

7 hours ago, Viking said:

@73 Reds , I agree. But I think you need to back it up one step. You need to start with the right industry. How many industries today are as good as a long term investment as they were 75 years ago? Very few. P/C insurance is likely one of a short list.

Another key learning is the importance of monitoring an investment. Sometimes companies mess up - AIG is the poster child for this. It delivered exceptional returns for investors for decades - until it blew up in the Great Financial Crisis in 2007/08.

So the lessons for me from the book were:

1.) P/C continues to be a great place for a long term investor to focus on (that circle of competence thing).

2.) Buy the best managed operators, ideally at a low (or even fair) price.
3.) Sit tight as long as management continues to execute well. Because exceptional management teams usually deliver exceptional returns. But to do this (sit tight for a decade or longer) requires a huge amount of trust - because you won’t know in advance exactly what management is going to do. You will only know this after the fact.

For Davis, management was the key. Today with Fairfax, there is very little discussion of management and how good they are (or not). Even on this board. And i love it.

Based on what I have seen over the past 4 years, I think the management team at Fairfax is best in class in the P/C insurance industry. People call me a ‘Fairfax bull’. It cracks me up. I think I am just following the facts.

The quality of Fairfax’s management team is not reflected in Fairfax’s valuation today. So I am getting something - the most important thing when investing - for free. It is like getting a free call option on something that is exceptionally valuable - management.

What is the right multiple to attach to Fairfax if I am right?

My guess is that is something that is not on most investors radar today. Should it be?

Thanks for sharing Viking. At what valuation/multiple would you say price would account for management?

Viking · December 12, 2024

1 hour ago, mananainvesting said:

Thanks for sharing Viking. At what valuation/multiple would you say price would account for management?

@mananainvesting , that is a great question. I will admit that ‘multiple’ is the most difficult part of the valuation process for me.

Back in 2021 and probably 2022, I probably would have said i would be happy with a P/BV multiple of 1.3 x. But that would have been largely built off of Fairfax version 2010-2020.

Much has changed regarding Fairfax over the past 4 years. As a result, my view today is a P/BV multiple of 1.3 x is too low.

What is an appropriate valuation/multiple today? My short answer is higher than where we are at today. How high? I’m not sure. My guess is I will know it when we get there (ora least get closer to ‘it’).

Hoodlum · December 12, 2024

Brit Announced that Ki will operate as a standalone Insurance company within Fairfax, effective Jan 1 2025. We may start hearing more about Ki from Fairfax in the quarterly releases and conference calls.

https://www.britinsurance.com/news/ki-to-become-standalone-business-within-the-fairfax-group

Ki was incubated and launched by Brit in 2020 and began writing business on 1 January 2021 with its own syndicate, 1618. Ki was one of the largest start-up syndicates in the history of Lloyd’s and the first digital follow syndicate.

Over the last 4 years, Ki has grown significantly and evolved to become a digital follow platform offering capacity from multiple syndicates with over $1 billion of GWP written through the platform in 2024.

Ki has now reached scale and developed its operations to enable it to operate as a separate company within Fairfax. It will continue to maintain a close partnership with Brit as a nominated lead across all classes. These changes to corporate structure and operations do not impact how brokers trade with Ki or Ki’s appetite in any class of business.

For those not familiar with how Ki operates, here are some details on how their business is using AI for underwriting.

https://ki-insurance.com/news/future-of-ai-in-underwriting

Edited December 12, 2024 by Hoodlum

SafetyinNumbers · December 12, 2024

1 hour ago, Hoodlum said:

Brit Announced that Ki will operate as a standalone Insurance company within Fairfax, effective Jan 1 2025. We may start hearing more about Ki from Fairfax in the quarterly releases and conference calls.

https://www.britinsurance.com/news/ki-to-become-standalone-business-within-the-fairfax-group

Ki was incubated and launched by Brit in 2020 and began writing business on 1 January 2021 with its own syndicate, 1618. Ki was one of the largest start-up syndicates in the history of Lloyd’s and the first digital follow syndicate.

Over the last 4 years, Ki has grown significantly and evolved to become a digital follow platform offering capacity from multiple syndicates with over $1 billion of GWP written through the platform in 2024.

Ki has now reached scale and developed its operations to enable it to operate as a separate company within Fairfax. It will continue to maintain a close partnership with Brit as a nominated lead across all classes. These changes to corporate structure and operations do not impact how brokers trade with Ki or Ki’s appetite in any class of business.

For those not familiar with how Ki operates, here are some details on how their business is using AI for underwriting.

https://ki-insurance.com/news/future-of-ai-in-underwriting

Perhaps they are considering an IPO if the valuations are favourable at some point?

Hoodlum · December 12, 2024

25 minutes ago, SafetyinNumbers said:

Perhaps they are considering an IPO if the valuations are favourable at some point?

I thought of that as well. They better do it soon as this inflated market cannot last much longer.

SafetyinNumbers · December 12, 2024

2 minutes ago, Hoodlum said:

I thought of that as well. They better do it soon as this inflated market cannot last much longer.

It’s a pretty bifurcated market. Parts are inflated and parts are depressed. Although most people can never buy the depressed parts because of heuristics.

Fairfax 2024

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