Author Topic: Fairfax 2017  (Read 49357 times)

racemize

  • Lifetime Member
  • Hero Member
  • *****
  • Posts: 2679
Re: Fairfax 2017
« Reply #20 on: August 01, 2017, 07:49:03 PM »

As Prem mentioned on a conference call earlier this year Fairfax repurchased 20% of their shares back in 1990.....He used Henry Singleton and Teledyne as an example of  rising share count to grow and Singleton's legendary buy backs that retired 80% of Teledyne's shares.

No one was listening.

I was definitely listening, although I found it pretty confusing.  Singleton was only able to do that because of the huge discount the market applied to his business.  Without the discount, he couldn't have pulled it off, so it seems a little weird to predict that you can do the same thing that he did without knowing the future? 


james22

  • Sr. Member
  • ****
  • Posts: 365
Re: Fairfax 2017
« Reply #21 on: August 01, 2017, 08:05:40 PM »


Let's be clear the only reason I am here is because Fairfax is really hated....and I feel obligated to stand up for them with my capital and my voice here as I will forever be grateful for the pile of money they made me but also for the lessons of their thoughts, success and failure over the years.

We have made piles of money in Bank of America and Citigroup too because we bought good companies when they were hated... This is one of those times to buy one of the best performing companies in stock market history cheap and make piles of money.

I have said my piece and it is completely biased...buy it or not....I am betting that Prem gets redemption...and Fairfax outperforms Markel and Berkshire substantially over the next Five years.

The *only* reason I'm in Fairfax is expected returns.

If they've lost their way, I'm out.

But I'm optimistic.

petec

  • Hero Member
  • *****
  • Posts: 1445
Re: Fairfax 2017
« Reply #22 on: August 02, 2017, 01:29:53 AM »

As Prem mentioned on a conference call earlier this year Fairfax repurchased 20% of their shares back in 1990.....He used Henry Singleton and Teledyne as an example of  rising share count to grow and Singleton's legendary buy backs that retired 80% of Teledyne's shares.

No one was listening.

Yes and no.   What they did was restructure their agreement with Markel, selling them F-M Acquisition Corporation in return for cash, 23% of Fairfax, and some prefs.   It wasn't a buyback in the open market, bought-for-cash sense.   That would be new.

Also worth noting that they have the Brit and AW minorities to buy out over the next 5 years, and plan to raise cash at the holdco, so I'm not holding my breath for major buybacks.

Racemize: You're right.   The argument hinges on Fairfax's assertion that intrinsic value has been growing much faster than (and therefore presumably is above) book value.   If that's right then buybacks make sense.   I think it probably is right when I look at the platforms they've built in insurance and investing.   They're doing a lot of smart things that in aggregate will be better than average and just might be brilliant.

« Last Edit: August 02, 2017, 01:42:33 AM by petec »

villainx

  • Full Member
  • ***
  • Posts: 154
Re: Fairfax 2017
« Reply #23 on: August 02, 2017, 08:52:10 AM »

Also worth noting that they have the Brit and AW minorities to buy out over the next 5 years, and plan to raise cash at the holdco, so I'm not holding my breath for major buybacks.

Racemize: You're right.   The argument hinges on Fairfax's assertion that intrinsic value has been growing much faster than (and therefore presumably is above) book value.   If that's right then buybacks make sense.   I think it probably is right when I look at the platforms they've built in insurance and investing.   They're doing a lot of smart things that in aggregate will be better than average and just might be brilliant.



That's right, it was the Brit and AW minority stakes that I was thinking of.  As well as perhaps growing the capacity to not have to rely on OMERS or other partner investors - or is that actually to Fairfax's advantage?

I am not familiar with how much cash Fairfax would need to keep around, just wondering what would be theoretical size of any repurchase.

WneverLOSE

  • Full Member
  • ***
  • Posts: 100
Re: Fairfax 2017
« Reply #24 on: August 02, 2017, 11:32:42 PM »
I'm looking at fairfax at the moment but let me play devil advocate for a minute.

During the last 6 years the average ROE is about 4% (12.7% if you ignore the hedging losses, But I'm not sure you really wanna do that since every company in the world earns at least 15% ROE if you just pick the good use of that equity).

FFH is selling at about 1.2 book value if I understand the adjustments correctly regarding the Allied World acquisition and the India investments.

What returns do we realistically can expect FFH to make at such low interest rate, high prices and large influx of money going into insurance and reinsurance environment ?

Why Allied World that had 12% ROE is worth 1.4 book value ? can they really boost ROE by investments that much that paying 1.4 book will lead to 15% ROI ? (by my math ROE should go up to 19% starting today to make that 15% ROI)

When you guys say it is extremely cheap, what returns range do you expect ?

petec

  • Hero Member
  • *****
  • Posts: 1445
Re: Fairfax 2017
« Reply #25 on: August 03, 2017, 03:34:34 AM »
I'm looking at fairfax at the moment but let me play devil advocate for a minute.

During the last 6 years the average ROE is about 4% (12.7% if you ignore the hedging losses, But I'm not sure you really wanna do that since every company in the world earns at least 15% ROE if you just pick the good use of that equity).

FFH is selling at about 1.2 book value if I understand the adjustments correctly regarding the Allied World acquisition and the India investments.

What returns do we realistically can expect FFH to make at such low interest rate, high prices and large influx of money going into insurance and reinsurance environment ?

Why Allied World that had 12% ROE is worth 1.4 book value ? can they really boost ROE by investments that much that paying 1.4 book will lead to 15% ROI ? (by my math ROE should go up to 19% starting today to make that 15% ROI)

When you guys say it is extremely cheap, what returns range do you expect ?

I wouldn't say it's extremely cheap.   I'd say it is priced at a level where you can compound nicely (7-10% over the long term with little risk) and you have real optionality on a higher rate of compounding if the investments do well.

With bond interest plus underwriting at 95% less holdco costs and tax, Fairfax can probably do a 7% roe, meaning that if it holds its multiple it matches the market's long run return.   With a tailwind from equities, or outperformance in bonds, you can get past 10% fairly easily and towards 15%, which is their target.   

Re: AW, a 12% roe at 1.4% book is an 8.6% return on your purchase price, effectively in perpetuity.   That's not amazing, but it's not bad in a context of 7% long run returns from stocks and sweet FA on bonds today.   If you can juice the ROE with some nice investments, it gets exciting.

BTW while you're right that you can pick and choose what you include in ROE for any company, the difference here is that the hedges were a (bad) choice that has been changed.   Most companies can't do that so easily.   Ford can't suddenly decide that carmaking is a low ROE business and switch into pharma.   Fairfax, effectively, can (on the investment side).   So I'd argue that looking at their longer term investment and ROE record is legitimate, rather than just 5y.

Again, it is not extremely cheap.   But it is a very fair value for what has become a really powerful underwriting/investing/operating platform with a superb culture.   It ought to compound nicely.

WneverLOSE

  • Full Member
  • ***
  • Posts: 100
Re: Fairfax 2017
« Reply #26 on: August 03, 2017, 03:52:32 AM »
I'm looking at fairfax at the moment but let me play devil advocate for a minute.

During the last 6 years the average ROE is about 4% (12.7% if you ignore the hedging losses, But I'm not sure you really wanna do that since every company in the world earns at least 15% ROE if you just pick the good use of that equity).

FFH is selling at about 1.2 book value if I understand the adjustments correctly regarding the Allied World acquisition and the India investments.

What returns do we realistically can expect FFH to make at such low interest rate, high prices and large influx of money going into insurance and reinsurance environment ?

Why Allied World that had 12% ROE is worth 1.4 book value ? can they really boost ROE by investments that much that paying 1.4 book will lead to 15% ROI ? (by my math ROE should go up to 19% starting today to make that 15% ROI)

When you guys say it is extremely cheap, what returns range do you expect ?

I wouldn't say it's extremely cheap.   I'd say it is priced at a level where you can compound nicely (7-10% over the long term with little risk) and you have real optionality on a higher rate of compounding if the investments do well.

With bond interest plus underwriting at 95% less holdco costs and tax, Fairfax can probably do a 7% roe, meaning that if it holds its multiple it matches the market's long run return.   With a tailwind from equities, or outperformance in bonds, you can get past 10% fairly easily and towards 15%, which is their target.   

Re: AW, a 12% roe at 1.4% book is an 8.6% return on your purchase price, effectively in perpetuity.   That's not amazing, but it's not bad in a context of 7% long run returns from stocks and sweet FA on bonds today.   If you can juice the ROE with some nice investments, it gets exciting.

BTW while you're right that you can pick and choose what you include in ROE for any company, the difference here is that the hedges were a (bad) choice that has been changed.   Most companies can't do that so easily.   Ford can't suddenly decide that carmaking is a low ROE business and switch into pharma.   Fairfax, effectively, can (on the investment side).   So I'd argue that looking at their longer term investment and ROE record is legitimate, rather than just 5y.

Again, it is not extremely cheap.   But it is a very fair value for what has become a really powerful underwriting/investing/operating platform with a superb culture.   It ought to compound nicely.

Thanks for the reply, I seem to agree with everything, the hedges will only affect if they try to constantly predict macroeconomics situations, I guess they learned their lesson ?

petec

  • Hero Member
  • *****
  • Posts: 1445
Re: Fairfax 2017
« Reply #27 on: August 03, 2017, 07:30:49 AM »

Thanks for the reply, I seem to agree with everything, the hedges will only affect if they try to constantly predict macroeconomics situations, I guess they learned their lesson ?


Maybe. maybe not.   They have a 50% hit rate with macro prediction derivatives (counting the hedges and deflation swaps as one bet and the CDS as the other).   Who knows which lesson they have learned?!

TwoCitiesCapital

  • Hero Member
  • *****
  • Posts: 1963
Re: Fairfax 2017
« Reply #28 on: August 03, 2017, 08:35:15 AM »
I'm looking at fairfax at the moment but let me play devil advocate for a minute.

During the last 6 years the average ROE is about 4% (12.7% if you ignore the hedging losses, But I'm not sure you really wanna do that since every company in the world earns at least 15% ROE if you just pick the good use of that equity).

FFH is selling at about 1.2 book value if I understand the adjustments correctly regarding the Allied World acquisition and the India investments.

What returns do we realistically can expect FFH to make at such low interest rate, high prices and large influx of money going into insurance and reinsurance environment ?

Why Allied World that had 12% ROE is worth 1.4 book value ? can they really boost ROE by investments that much that paying 1.4 book will lead to 15% ROI ? (by my math ROE should go up to 19% starting today to make that 15% ROI)

When you guys say it is extremely cheap, what returns range do you expect ?

I absolutely think it's cheap relative to POTENTIAL earnings power. Now, when that earnings materializes is anyone's guess. It could take a year or two or three, but let's just think about this.

As of 12/31/2016, Fairfax had $1231/share working for you ($722 in no-cost float, $367 in book value, and $142 in net debt). I haven't run the figures to know how the acquisition of allied world impacts this, but it was my initial understanding that it was accretive to these metrics so it is likely higher now.

You're buying the earnings power of $1231 for $476 today (and as low as $420 at its recent lows). Obviously, the return on much of that $1,231 is constrained by regulations, but you only need a 4.4% net return on those assets to drive a 15% ROE and a 5.8% net return to get 15% from the current price.

With an investment team that has traditionally beaten those returns metrics just in bonds, let alone their long-term returns from equities, I'd expect that these are low hurdles for a 15% return form here on out.

Of course it won't happen over night - much of that $1,231 is sitting in cash and is uninvested. You can wait until it is invested for you to get the confidence that they'll return 10-15% a year from those investments, but my guess is the share price will be much higher once that uncertainty is removed.

petec

  • Hero Member
  • *****
  • Posts: 1445
Re: Fairfax 2017
« Reply #29 on: August 03, 2017, 08:55:50 AM »

You're buying the earnings power of $1231 for $476 today (and as low as $420 at its recent lows). Obviously, the return on much of that $1,231 is constrained by regulations, but you only need a 4.4% net return on those assets to drive a 15% ROE and a 5.8% net return to get 15% from the current price.


a) I don't think that's true if you include holdco and interest costs

b) 4.4% net isn't that easy in a business where you are constrained re: what you can invest in, when treasuries yield 2.5% gross.   I've been digging through their investment portfolio and there's some great potential in there, but i) some of the Indian prices have gone from silly cheap to pricing in quite a lot, so that move may be done for now, and ii) they have 25% of the post-AW portfolio in cash earning nothing.   I love this thing long term and agree there is great earnings POTENTIAL, but it's going to take some very good investments to realise that potential.

Fairfax's historic investment performance had a massive tailwind from falling bond yields (as did everyone's).   That won't repeat, so historic absolute returns aren't a good guide to the future.
« Last Edit: August 03, 2017, 08:57:35 AM by petec »