Fairfax 2024

[Hoodlum]

Moody’s is estimating a 6% increase in US Commercial line premiums in 2025
 

https://www.insurancebusinessmag.com/us/news/property/moodys-stable-2025-outlook-for-us-pandc-insurance-517796.aspx

 

According to Moody's, analysts predict a slight slowdown in premium growth for 2025. They estimate a 6% increase in direct premiums written for US commercial lines in 2024, reaching approximately $511 billion, up from $481 billion in 2023. However, they anticipate this growth to moderate in 2025 due to slower inflation and real GDP growth.

[SafetyinNumbers]

13 hours ago, mananainvesting said:

 

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

You didn’t ask me but that has never stopped me before. 
 

I think this is a question that’s really about estimating intrinsic value. I use three methods to triangulate FFH’s intrinsic value range.

 

1. Normalized PE. 15x is generally considered a fair market multiple and FFH is a better than average business so 15x FTM EPS seems reasonable. While consensus is $155, it’s probably too low, it still gives us $2325 or ~66% above current prices around $1400.

 

2. Relative P/B multiple. There is an exponential relationship between P/B and ROE which makes sense. A high ROE compounds much faster so it makes sense to pay more than 2x for a 20% ROE vs a 10%. When looking at FFH peers, an ROE between 15-20% should command a P/B closer to 2.5x. With so much in the multiple we can just use trailing BV instead of making the adjustments to FV etc. 2.5x BV is ~$2585.

 

3. Buffett method. This is the sum of BVPS and float per share. Buffett has made it pretty clear that float in the hands of a high quality insurer is worth at least the amount of the float. This makes sense because the income associated with the float accrues to the insurer and consistently grows over time. For FFH this is ~$2800.

That leaves me with an IV range of $2325-2800 which is wide but well above the current price offering large margin of safety.

 

[sholland]

20 hours ago, SafetyinNumbers said:

 

3. Buffett method. This is the sum of BVPS and float per share. Buffett has made it pretty clear that float in the hands of a high quality insurer is worth at least the amount of the float. This makes sense because the income associated with the float accrues to the insurer and consistently grows over time. For FFH this is ~$2800.

 

Valuation method #3 is novel to me and I was wondering if I could solicit the board to help me process this.  So BVPS is a rough proxy for the liquidation value of the business with the float being returned to policyholders. But Fairfax is a high quality insurer that is not being liquidated and the float is stable (steadily growing actually) so one could value the float like the face value of bonds that you continuously reinvest at maturity.  Am I missing anything?

[dartmonkey]

21 hours ago, SafetyinNumbers said:

3. Buffett method. This is the sum of BVPS and float per share. Buffett has made it pretty clear that float in the hands of a high quality insurer is worth at least the amount of the float. This makes sense because the income associated with the float accrues to the insurer and consistently grows over time. For FFH this is ~$2800.

That leaves me with an IV range of $2325-2800 which is wide but well above the current price offering large margin of safety.

 

Minor quibble: float that is not going to disappear may be worth almost as much as its equivalent in cash, but surely never more. If you are FFH and you have $35.1b in float (end of 2023 number) and can invest that float for a good return, it may be worth close to $35.1b in cash, which you might add to its book value, $21.6b, to get $56.7b, divided by 22,891,108 shares outstanding, to get $2477 per share. Updated to Q3, if we still had $35.1b in float (I don't think they report the updated value every quarter), and $22.7b in equity, divided by 21,990,603 shares outstanding, we would get $2628 per share, close to your figure, and even closer if you model in the probable increase in float over 3 quarters which you may have done here.

 

But if Fairfax could magically just keep that $35.1b in funds in perpetuity, with all the concomitant obligations to insured parties waived, that would be even better, right? In other words, a $1m 0% interest loan that is due in 40 years is great, and it's probably worth almost $1m, but certainly not more than $1m. I imagine you might say that it is worth more than $1m if the loan amount keeps increasing over time, but if Fairfax's float is increasing, it is because Fairfax is investing some of its earnings in buying new insurance businesses, or putting new capital into existing businesses, so there would be some double counting there.

 

The other thing that makes float worth a little less than its equivalent in cash, is that, being insurance float, there are some restrictions placed on what that cash can be invested in, meaning it has to be mostly invested in safe bonds. 

 

Anyways, by that method #3 metric, it would mean that (22.7+35.1)/22.7= 2.55 would be a P:B ratio that would make FFH fully valued. High enough that we don't have to worry too much about the details, and from today's 1.42 we have lots of room to grow before we get there. And if we get to 2.5, we could alwaysswitch to Method #1  

Edited December 13, 2024 by dartmonkey
typo

[SafetyinNumbers]

5 minutes ago, dartmonkey said:

 

Minor quibble: float that is not going to disappear may be worth almost as much as its equivalent in cash, but surely never more. If you are FFH and you have $35.1b in float (end of 2023 number) and can invest that float for a good return, it may be worth close to $35.1b in cash, which you might add to its book value, $21.6b, to get $56.7b, divided by 22,891,108 shares outstanding, to get $2477 per share. Updated to Q3, if we still had $35.1b in float (I don't think they report the updated value every quarter), and $22.7b in equity, divided by 21,990,603 shares outstanding, we would get $2628 per share, close to your figure, and even closer if you model in the probable increase in float over 3 quarters which you may have done here.

 

But if Fairfax could magically just keep that $35.1b in funds in perpetuity, with all the concomitant obligations to insured parties waived, that would be even better, right? In other words, a $1m 0% interest loan that is due in 40 years is great, and it's probably worth almost $1m, but certainly not more than $1m. I imagine you might say that it is worth more than $1m if the loan amount keeps increasing over time, but if Fairfax's float is increasing, it is because Fairfax is investing some of its earnings in buying new insurance businesses, or putting new capital into existing businesses, so tha

ere would be some double counting there.

 

The other thing that makes float worth a little less than its equivalent in cash, is that, being insurance float, there are some restrictions placed on what that cash can be invested in, meaning it has to be mostly invested in safe bonds. 

 

Anyways, by that method #3 metric, it would mean that (22.7+35.1)/22.7= 2.55 would be a P:B ratio that would make FFH fully valued. High enough that we don't have to worry too much about the details, and from today's 1.42 we have lots of room to grow before we get there. And if we get to 2.5, we could alwaysswitch to Method #1  

I think we can estimate float off of the quarterly balance sheet by taking insurance liabilities less reinsurance assets held. That was ~$39b at the end of Q3, up from ~$35b at end of 2023.

 

On the float value, I agree with Buffett.

[dartmonkey]

29 minutes ago, SafetyinNumbers said:

I think we can estimate float off of the quarterly balance sheet by taking insurance liabilities less reinsurance assets held. That was ~$39b at the end of Q3, up from ~$35b at end of 2023.

 

On the float value, I agree with Buffett.

 

Buffett, AR 2018: "Beyond using debt and equity, Berkshire has benefitted in a major way from two less-common sources of corporate funding. The larger is the float I have described. So far, those funds, though they are recorded as a huge net liability on our balance sheet, have been of more utility to us than an equivalent amount of equity. That’s because they have usually been accompanied by underwriting earnings. In effect, we have been paid in most years for holding and using other people’s money."

 

So the float is more valuable than equity if it produces underwriting gains, which of course is typical both of Berkshire and Fairfax. 

[SafetyinNumbers]

7 minutes ago, dartmonkey said:

 

Buffett, AR 2018: "Beyond using debt and equity, Berkshire has benefitted in a major way from two less-common sources of corporate funding. The larger is the float I have described. So far, those funds, though they are recorded as a huge net liability on our balance sheet, have been of more utility to us than an equivalent amount of equity. That’s because they have usually been accompanied by underwriting earnings. In effect, we have been paid in most years for holding and using other people’s money."

 

So the float is more valuable than equity if it produces underwriting gains, which of course is typical both of Berkshire and Fairfax. 

I think that’s right, the key is the high quality insurance operations although I still find investors who don’t think FFH has high quality insurance businesses. It’s worth searching Buffett and float on YouTube. Lots of great clips from the AGMs over the years.

[yesman182]

 

Here WEB talks about getting free float and how float has the utility like equity, but you couldn't realize it upon sale.  So it seems like valuation method #3 is an upper bound if the business is being run well in a stable market and a new owner doesn't see any great opportunities for improvements. 

 

 

 

[dartmonkey]

Roughly transcribed: "So it has the utility, to us, of common equity, in terms of what we can do with it.  How you value that, in terms of intrinsic value, is up to you."

 

I agree that the 1:1 equivalence with cash would be the upper bound. On the other hand, the value of the insurance business that generates that float could be more than the value of the float, if it has negative cost (i.e. positive underwriting profit, on average.)

[gfp]

I haven't read this entire discussion so apologies if this is repetitive, but a lot of people know to focus on the cost and utility of float but forget about the added dynamic of float that grows.  When Warren talks about the free cash flow coming in to Berkshire every day/month/year he usually deliberately includes the growth of float in that figure.

 

Of the major ways you can finance the growth of your company - new equity capital, various forms of debt instruments, etc. - growing insurance float (on good underwriting) is arguably the most attractive.  No dilution of the equity holder, positive cary, no maturity

[yesman182]

47 minutes ago, gfp said:

I haven't read this entire discussion so apologies if this is repetitive, but a lot of people know to focus on the cost and utility of float but forget about the added dynamic of float that grows.  When Warren talks about the free cash flow coming in to Berkshire every day/month/year he usually deliberately includes the growth of float in that figure.

 

Of the major ways you can finance the growth of your company - new equity capital, various forms of debt instruments, etc. - growing insurance float (on good underwriting) is arguably the most attractive.  No dilution of the equity holder, positive cary, no maturity

Yeah, I think that is why he said he wouldn’t trade float for cash if given a tax free opportunity, if it meant he couldn’t be in the insurance business in the future. 

[Maverick47]

2 hours ago, dartmonkey said:

Buffett, AR 2018: "Beyond using debt and equity, Berkshire has benefitted in a major way from two less-common sources of corporate funding. The larger is the float I have described. So far, those funds, though they are recorded as a huge net liability on our balance sheet, have been of more utility to us than an equivalent amount of equity. That’s because they have usually been accompanied by underwriting earnings. In effect, we have been paid in most years for holding and using other people’s money."

 

So the float is more valuable than equity if it produces underwriting gains, which of course is typical both of Berkshire and Fairfax. 

The second less-common source of corporate funding that Buffett referred to in the 2018AR is also a source that Fairfax enjoys, though to a much smaller extent than Berkshire:  deferred income tax liabilities.  
 

While float generated along with underwriting profits is a huge benefit to both, equivalent to being paid to borrow money from others, deferred tax liabilities are also more valuable than raising funding from equity or debt, since is essentially an interest free loan from the government.

 

@Viking often calls Fairfax’s management best in class.  The fact that Fairfax manages to qualify for an interest free loan from the government via deferred tax liabilities, just as Berkshire does, is another credit to their understanding of how to optimize corporate funding costs, and helps place them in that best in class management group in my opinion.

 

Just for fun, you might look at the balance sheets of other insurance companies to which the market assigns rich valuations, whether Chubb, Travelers, Allstate, Intact Financial, Progressive, Hartford, WRB, etc.

 

I think you’ll find that in many of the balance sheets of those well regarded companies, there will be a deferred tax asset, not a deferred tax liability…meaning that they are providing an interest free loan TO the government instead of receiving an interest free loan FROM the government.  
 

 

 

 

 

[SafetyinNumbers]

17 minutes ago, Maverick47 said:

The second less-common source of corporate funding that Buffett referred to in the 2018AR is also a source that Fairfax enjoys, though to a much smaller extent than Berkshire:  deferred income tax liabilities.  
 

While float generated along with underwriting profits is a huge benefit to both, equivalent to being paid to borrow money from others, deferred tax liabilities are also more valuable than raising funding from equity or debt, since is essentially an interest free loan from the government.

 

@Viking often calls Fairfax’s management best in class.  The fact that Fairfax manages to qualify for an interest free loan from the government via deferred tax liabilities, just as Berkshire does, is another credit to their understanding of how to optimize corporate funding costs, and helps place them in that best in class management group in my opinion.

 

Just for fun, you might look at the balance sheets of other insurance companies to which the market assigns rich valuations, whether Chubb, Travelers, Allstate, Intact Financial, Progressive, Hartford, WRB, etc.

 

I think you’ll find that in many of the balance sheets of those well regarded companies, there will be a deferred tax asset, not a deferred tax liability…meaning that they are providing an interest free loan TO the government instead of receiving an interest free loan FROM the government.  
 

 

 

 

 

Great point. Another way, FFH defers taxes besides deferring gains is by being aggressive on reserving. I think the next four years could be really interesting on reserve releases since those reserves are bigger when in a hard market but get released after four years if there are no unfavourable developments.

[mananainvesting]

Fairfax buys back 14% of Brit from Omers, increasing ownership to 100%. 

 

https://www.fairfax.ca/press-releases/fairfax-announces-acquisition-of-omers-investment-in-brit-2024-12-13/

[gfp]

"There's always something to do"

[Dinar]

Munich RE was up 4.1% after announcing 2025 earnings forecast, including forecasting a 79 combined ratio in the reinsurance business.

[Hoodlum]

1 hour ago, mananainvesting said:

Fairfax buys back 14% of Brit from Omers, increasing ownership to 100%. 

 

https://www.fairfax.ca/press-releases/fairfax-announces-acquisition-of-omers-investment-in-brit-2024-12-13/

The first sub buyback with more to come in 2025. It is interesting that Fairfax paid only $8M more than what they sold this for in 2021. So it looks like OMERS only benefited from the Brit dividends over that time. 
 

I believe we have now shifted away from share buybacks, focusing instead on buying back sub minority ownerships.  Odyssey Re will likely be next with the exit of non-profitable contacts completing in Q4. 
 

 

Edited December 13, 2024 by Hoodlum

[Hoodlum]

54 minutes ago, Dinar said:

Munich RE was up 4.1% after announcing 2025 earnings forecast, including forecasting a 79 combined ratio in the reinsurance business.

Swiss Re today as well is targeting a P&C CR of below 85 for 2025.  They also committed to at least a 14% ROE over the next few years

 

 

Edited December 13, 2024 by Hoodlum

[Viking]

2 hours ago, mananainvesting said:

Fairfax buys back 14% of Brit from Omers, increasing ownership to 100%. 

 

https://www.fairfax.ca/press-releases/fairfax-announces-acquisition-of-omers-investment-in-brit-2024-12-13/

I love it. This increases the numerator of the EPS calculation. (Buybacks reduce the denominator of the EPS calculation.) Like when they purchased a chunk of Allied World a couple of years ago, I wonder if this will create some minor noise when Fairfax reports Q4 results? I do not understand how a ‘call option’ flows though the financial statements when it is exercised. I am not complaining - more a heads up so we are not surprised.

 

From the announcement today

 

TORONTO, Dec. 13, 2024 – Fairfax Financial Holdings Limited (“Fairfax”) (TSX: FFH and FFH.U) announces that it has increased its ownership interest in Brit Limited to 100% from 86.2% by acquiring the interest of OMERS, the pension plan for Ontario’s municipal employees, for cash consideration of approximately US$383 million.

From Fairfax’s 2021AR

 

“Sale of non-controlling interest in Brit On August 27, 2021 Brit issued shares representing a 13.9% equity interest to OMERS for cash consideration of $375.0 which was subsequently paid by Brit as a dividend to Fairfax. The company recorded an aggregate equity gain of $115.4, principally comprised of a dilution gain and the fair value of a call option received, which was presented as other net changes in capitalization in the consolidated statement of changes in equity.The company has the option to purchase OMERS’ interest in Brit at certain dates commencing in October 2023.”

 

“Brit, based in London, England, is a market-leading global Lloyd’s of London specialty insurer and reinsurer. In 2021, Brit’s net premiums written were US$1,998.3 million. At year-end, the company had shareholders’ equity of US$1,912.1 million and there were 854 employees.”

 

From Fairfax’s 2023AR

 

“Brit, based in London, England, is a market-leading global Lloyd’s of London specialty insurer and reinsurer. In 2023, Brit’s net premiums written were US$2,982.7 million.At year-end, the company had shareholders’ equity of US$2,617.2 million and there were 911 employees.”

Edited December 14, 2024 by Viking

[Hoodlum]

3 minutes ago, Viking said:

I love it. This increases the numerator of the EPS calculation. (Buybacks reduce the denominator of the EPS calculation.) Like when they purchased a chunk of Allied World a couple of years ago, I wonder if this will crease some minor noise when Fairfax reports Q4 results? I am not complaining. This is a solid move.

 

From the announcement today

 

TORONTO, Dec. 13, 2024 – Fairfax Financial Holdings Limited (“Fairfax”) (TSX: FFH and FFH.U) announces that it has increased its ownership interest in Brit Limited to 100% from 86.2% by acquiring the interest of OMERS, the pension plan for Ontario’s municipal employees, for cash consideration of approximately US$383 million.

From Fairfax’s 2021AR

 

“Sale of non-controlling interest in Brit On August 27, 2021 Brit issued shares representing a 13.9% equity interest to OMERS for cash consideration of

$375.0 which was subsequently paid by Brit as a dividend to Fairfax. The company recorded an aggregate equity gain of $115.4, principally comprised of a dilution gain and the fair value of a call option received, which was presented as other net changes in capitalization in the consolidated statement of changes in equity.The company has the option to purchase OMERS’ interest in Brit at certain dates commencing in October 2023.”

 

“Brit, based in London, England, is a market-leading global Lloyd’s of London specialty insurer and reinsurer. In 2021, Brit’s net premiums written were US$1,998.3 million. At year-end, the company had shareholders’ equity of US$1,912.1 million and there were 854 employees.”

 

From Fairfax’s 2023AR

 

“Brit, based in London, England, is a market-leading global Lloyd’s of London specialty insurer and reinsurer. In 2023, Brit’s net premiums written were US$2,982.7 million.At year-end, the company had shareholders’ equity of US$2,617.2 million and there were 911 employees.”

I also wonder if this had to be completed before the transition of KI Insurance transition out of Brit on Jan 1. 

[SafetyinNumbers]

1 hour ago, Hoodlum said:

The first sub buyback with more to come in 2025. It is interesting that Fairfax paid only $8M more than what they sold this for in 2021. So it looks like OMERS only benefited from the Brit dividends over that time. 
 

I believe we have now shifted away from share buybacks, focusing instead on buying back sub minority ownerships.  Odyssey Re will likely be next with the exit of non-profitable contacts completing in Q4. 
 

 

It’s interesting. Unless I did the math wrong, so far the dividends received by OMERS until the end of Q224 were ~19% of their initial investment and with the gain a total of ~21%. So not a huge return over 40 months. It’s possible there was also another dividend in the past 5 months which would add to it.

[Hoodlum]

35 minutes ago, SafetyinNumbers said:

It’s interesting. Unless I did the math wrong, so far the dividends received by OMERS until the end of Q224 were ~19% of their initial investment and with the gain a total of ~21%. So not a huge return over 40 months. It’s possible there was also another dividend in the past 5 months which would add to it.

i suspect that the extra $8m was to cover the dividend for most of Q4. 

[TwoCitiesCapital]

1 hour ago, SafetyinNumbers said:

It’s interesting. Unless I did the math wrong, so far the dividends received by OMERS until the end of Q224 were ~19% of their initial investment and with the gain a total of ~21%. So not a huge return over 40 months. It’s possible there was also another dividend in the past 5 months which would add to it.

 

I don't think it's surprising to most of us to hear it was structured as some form of fixed rate financing arrangement. 

 

But consider where the 10-year treasury was in mid-2021 - like 1.5%. Corporate bonds wouldn't have been much higher. 

 

So this was still a very attractive deal for OMERS in terms of fixed return options. 

 

They got a 4-years bonds paying 4+% instead of 2+%. 

[SafetyinNumbers]

1 hour ago, TwoCitiesCapital said:

 

I don't think it's surprising to most of us to hear it was structured as some form of fixed rate financing arrangement. 

 

But consider where the 10-year treasury was in mid-2021 - like 1.5%. Corporate bonds wouldn't have been much higher. 

 

So this was still a very attractive deal for OMERS in terms of fixed return options. 

 

They got a 4-years bonds paying 4+% instead of 2+%. 

I agree but I did think this financing was more expensive. Happy to be wrong. 

[Redskin212]

I think OMERS hurdle for these type transactions is 9%