Author Topic: 2030-35 --- Fairfax 10-15 years from now  (Read 5002 times)

Xerxes

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2030-35 --- Fairfax 10-15 years from now
« on: September 18, 2020, 05:01:08 PM »
While, we tend to focus on the quarterly stream of data coming in for a public company like FFH, the narrative from Mr. Watsa has been to look for the long term. The purpose of this thread is not to re-hash the last 10 years (although i am showing a few metrics from 2010), we got enough threads for that and many horses has been slaughtered in the process, nor is to talk about the current short term dislocation, which many rightly or wrongly believe to be a great opportunity or not a so great opportunity.

So where do you see the company in 2030-35. It is a very legitimate question to ask. After all, FFH and Prem Watsa are all about the very long term. To that end, let's ignore the equity bets that gets talked a lot around here. As we know those bets (except for the two mentioned below) are small and in the grand scheme of things were always, I believe, call-options-without-expiry kind of bets.

2030-35


- gross premium written
        2010: gross premium $5.36 billion
        2017: gross premium $12.2 billion [The boost from Allied World, I am guessing]
        2019: gross premium $17.51 billion
        2030-35: north of $30 billion [a target]

- total float
          Was $13 billion in 2010 and now is ~$22 billion
          What does the hardening of the insurance cycle mean for the size of the float. I understand it means more discipline and profitable underwriting, but does it also mean an increase in the absolute size of the float

- outstanding shares (hopefully 40% bought back)
          Was 20 million in 2010 and now is ~28 million; can FFH gobble up 40% of its outstanding shares by 2030-35 and reduce float down to 16-18 million, to pre-2008 levels. Massive share buy back can only be accretive to remaining shareholders if they are investing now in the business themselves. Otherwise you will see a flat share price with lower share count and thereby a shrinkage of the overall market cap. Glad to see there is a no misalignment.

- size of the investment portfolio
          Was $19 billion in 2010 and now is ~$39 billion

- book value
          Was $379 USD in 2010 and now is ~$422 USD ($486 USD in Dec 2019 pre-pandemic to be fair). A flat 1% compounding over ten years due to the shorts etc. With shorts removed and the upside un-capped:

          An unlikely 15% compounded rate of growth would mean $3,433 USD in 15 years from now
          A conservative (but possible) 10% compounded rate of growth would mean $1,762 USD in 15 years from now
          A low 5% compounded rate of growth would mean $877 USD in 15 years from now

Should be noted that share buyback above BV tends to lower book-value-per-share and share buyback below BV tends to increase book-value-per-share.


WILD CARD (ALPHA):
- the size and growth of FIH in 2030-35
- the size and growth of Atlas in 2030-35

Perhaps, for FFH to achieve 15% compounded over the long term, it needs a home run on both of the above. If it gets 1 out of 2 totally right, that would mean 10%, and if gets both wrong, 5% compounded over the long term.

Not sure if this is right framework to think about this but this is how i see it.

Can Prem pull a Microsoft out of his hat and move away from his Ballmer era ?
« Last Edit: September 21, 2020, 05:47:02 PM by Xerxes »


Viking

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Re: 2030-35 --- Fairfax 10-15 years from now
« Reply #1 on: September 19, 2020, 01:22:48 AM »
Great question. It is very instructive that float, investment portfolio and share count are all up dramatically the past 10 years but BV per share is not.

Five
buckets:
1.) underwriting... are they able to get company wide CR to under 95 and then closer to 90: a tailwind, given current hard market and improvement at company over long term
2.) returns from bond portfolio: neutral to a headwind in future years (with zero and perhaps negative interest rates offset by solid long term track record)
3.) returns from equities: neutral (my assumption is the massive short bet kind of thing will not be repeated); poor overall record the past 10 years
4.) management creativity in surfacing value (First Capital sale, sale of 40% of runoff being two recent examples); a tailwind
5.) PE multiple Mr Market attaches to company (largely driven by investor confidence in management): a headwind

My guess is FFH will do better a better job of growing BV over the next 10 years. If they do this then sentiment should improve and the PE multiple should expand. IF these both happen shareholders will be richly rewarded.

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Spekulatius

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Re: 2030-35 --- Fairfax 10-15 years from now
« Reply #2 on: September 19, 2020, 04:07:05 PM »
I don’t see them producing 15% returns , this would be a very low probability.
10% returns are possible and if they can generate this somewhat consistently, one would get an additional return from rerating most likely.

A few thing - with record low interest rate their prowess in bonds matter much less in the future than the past. They also need to generate decent return with their equity portfolio for a change. It seems to me a bit of a crapshoot if they can do this.
What matter more than anything else is good underwriting. With lack of tailwind from bond investment income the combined rates for insurers will have to come down in order for them to earn adequate returns. FFH has made progress on this and it is important that they keep at it. We likely need combined ratio to average below 90% if the interest rates fall to near zero and stay there.
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bluedevil

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Re: 2030-35 --- Fairfax 10-15 years from now
« Reply #3 on: September 21, 2020, 08:02:24 AM »
Great question!  I see the following potential in Fairfax in 10 years:  A company that writes $35 billion in premiums a year.  The company achieves this through steady organic growth of 7-8% per year.  Over the last ten years, the company has built roots all over the world.  It harnesses it over the next 10 years by experiencing growth in areas where insurance penetration is very low (think Digit in India); and by taking what it does well in one country already and transporting it to other countries where it is already located.  Sticking with the example of Digit, once it is up and running, nothing is stopping the company from taking the all digital, simple for consumers philosophy and applying it to other countries. There are hundreds of profit dials in the insurance operation that can be spread into other markets, and I believe that is exactly what Fairfax is focused on doing.  Consider the value of a well disciplined underwriting operation that profitably writes 35 billion a year in insurance!  I view this opportunity as the most attractive thing about an investment in Fairfax and think the odds are quite good of the company achieving a great result on the insurance side given the work that has already been done, the very long term underwriting and reserving discipline shown when companies are in the Fairfax stable, and the track record of Andy Barnard. 

On the other side of the house, investments, is what will determine whether Fairfax is a tremendous investment over the next 10 years, or a decent one, or a poor one.  I know the company has one big thing it is favor over the next 10 years.  It is structurally set up to be successful.  While many institutional money managers are constrained by all kinds of issues -- short term focus of investors, "style box" constraints, and so on -- Prem has created a structure for HWIC where it can be focused on the long term and can go anyplace in any market or any region where there is value.  Now it will be up to people like Wade Burton, Lawrence Chin, Quinn McLean, and Jamie Lowry to actually make good investment decisions, as opposed to being crushed by the SP500, as has happened over the last 10 years.  To me, that is a wildcard.  The missing ingredient at Fairfax these days -- it seems to me -- is a superstar money manager who can be trusted to oversee a 40 billion dollar portfolio, and the other money managers, for the next 20 years.  Perhaps that is Wade Burton, but I have been a shareholder for a very long time that has ready every letter and listened to every call, and I couldn't tell you much about him, his philosophy, past investments or the like.  This to me is the big unknown for Fairfax going forward.

I will note that some of the past uncertainties around the company should not be present going forward.  Prem has moved away from shorting, which takes one risk off the table.  He has also moved away from buying other insurance companies in favor or organic growth, so less risk there as well.  The company in my view continues to be plagued by being cash strapped and overextended at times, but if it can get past the current hump, presumably with future acquisitions and shorting curtailed, this will be less of a recurring problem in the next 10-15 years.
 

petec

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Re: 2030-35 --- Fairfax 10-15 years from now
« Reply #4 on: September 21, 2020, 10:54:20 AM »
Great question!  I see the following potential in Fairfax in 10 years:  A company that writes $35 billion in premiums a year.  The company achieves this through steady organic growth of 7-8% per year.  Over the last ten years, the company has built roots all over the world.  It harnesses it over the next 10 years by experiencing growth in areas where insurance penetration is very low (think Digit in India); and by taking what it does well in one country already and transporting it to other countries where it is already located.  Sticking with the example of Digit, once it is up and running, nothing is stopping the company from taking the all digital, simple for consumers philosophy and applying it to other countries. There are hundreds of profit dials in the insurance operation that can be spread into other markets, and I believe that is exactly what Fairfax is focused on doing.  Consider the value of a well disciplined underwriting operation that profitably writes 35 billion a year in insurance!  I view this opportunity as the most attractive thing about an investment in Fairfax and think the odds are quite good of the company achieving a great result on the insurance side given the work that has already been done, the very long term underwriting and reserving discipline shown when companies are in the Fairfax stable, and the track record of Andy Barnard. 

On the other side of the house, investments, is what will determine whether Fairfax is a tremendous investment over the next 10 years, or a decent one, or a poor one.  I know the company has one big thing it is favor over the next 10 years.  It is structurally set up to be successful.  While many institutional money managers are constrained by all kinds of issues -- short term focus of investors, "style box" constraints, and so on -- Prem has created a structure for HWIC where it can be focused on the long term and can go anyplace in any market or any region where there is value.  Now it will be up to people like Wade Burton, Lawrence Chin, Quinn McLean, and Jamie Lowry to actually make good investment decisions, as opposed to being crushed by the SP500, as has happened over the last 10 years.  To me, that is a wildcard.  The missing ingredient at Fairfax these days -- it seems to me -- is a superstar money manager who can be trusted to oversee a 40 billion dollar portfolio, and the other money managers, for the next 20 years.  Perhaps that is Wade Burton, but I have been a shareholder for a very long time that has ready every letter and listened to every call, and I couldn't tell you much about him, his philosophy, past investments or the like.  This to me is the big unknown for Fairfax going forward.

I will note that some of the past uncertainties around the company should not be present going forward.  Prem has moved away from shorting, which takes one risk off the table.  He has also moved away from buying other insurance companies in favor or organic growth, so less risk there as well.  The company in my view continues to be plagued by being cash strapped and overextended at times, but if it can get past the current hump, presumably with future acquisitions and shorting curtailed, this will be less of a recurring problem in the next 10-15 years.
 

This is a very good post. My view is that the risk of real downside in the investing side is much reduced by the promise not to short, and so the outlook from here for the whole entity at this starting price sits somewhere between OK and superb. That's a decent range for me.
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Xerxes

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Re: 2030-35 --- Fairfax 10-15 years from now
« Reply #5 on: September 21, 2020, 05:45:26 PM »
Thanks folks for great posts.

I'll edit my first post to add $35 billion as gross premium as idea for 2030-35.
Here is the growth over the years.

2000: gross premium $6.5 billion
2001: gross premium $6.83 billion
2002: gross premium $8.12 billion
------- between years, mostly flat, lower and closer to $5-6 billion range [not sure what happened here]
2008: gross premium $5.06 billion
2009: gross premium $5.09 billion
2010: gross premium $5.36 billion
2011: gross premium $6.74 billion
2012: gross premium $7.39 billion
2013: gross premium $7.22 billion
2014: gross premium $7.45 billion
2015: gross premium $8.65 billion
2016: gross premium $9.53 billion
2017: gross premium $12.2 billion [The boost from Allied World, I am guessing]
2018: gross premium $15.52 billion
2019: gross premium $17.51 billion

2030-35: north of $30 billion

Was reading Lawrence Cunningham book called "dear shareholders ..." Bought it not because of BRK and FFH, mostly to learn about other companies. That said read the portion about FFH first.

The two except on buyback from 1988 and 1999:

When he needs to move, he will move.

1988: during 1998, Fairfax shares traded in a range of $11.75 to $15.125. At the lower end of range, we felt our shares were an excellent investment for the company and instituted a buyback of 10% of the float. We managed to purchase only 14,200 shares at average price of $12.94 per share. We will continue to repurchase our shares if we consider that to be the best investment available for your company.

1999:There is a silver lining in every cloud. Because of the very significant decline in our stock price, we were able to buy back 706,103 shares of Fairfax at an average price of $293 per share, approximately 5% of the shares outstanding. So far in 2000, we have repurchased an additional 244,044 shares at an average price of $190 per share. In 1990, under similar conditions, we repurchased 1.8 million shares or 25% of the shares outstanding at approximately $9 per share – one of the better investments we have made!
« Last Edit: September 21, 2020, 05:47:36 PM by Xerxes »

StubbleJumper

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Re: 2030-35 --- Fairfax 10-15 years from now
« Reply #6 on: September 21, 2020, 06:06:36 PM »
In 2035, Prem would be 85.  Let us hope that his health and mental acuity hold.  It is interesting that nobody in this thread has made mention of Ben or Christine.


SJ

Viking

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Re: 2030-35 --- Fairfax 10-15 years from now
« Reply #7 on: September 21, 2020, 07:27:20 PM »
In 2035, Prem would be 85.  Let us hope that his health and mental acuity hold.  It is interesting that nobody in this thread has made mention of Ben or Christine.


SJ

Yes, there are lots more things that will play into where Fairfax is in 10-15 years (and how well shareholders do):
1.) Succession planning: important, especially for Fairfax given Prem’s voting control stake
2.) Prem’s personality / character: you either are ok with this or not

My guess is a fair number of investors (familiar with the company) have both of these as watch outs. Personally, i am ok with the risks with shares trading at current prices (i am being compensated for the added risk). Also makes it hard to make Fairfax a permanent hold.

petec

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Re: 2030-35 --- Fairfax 10-15 years from now
« Reply #8 on: September 22, 2020, 01:33:52 AM »
I would be more positive on both.

On succession, I see no evidence so far that Prem's intention is anything other than what he says it is, namely, to put his votes in the hands of a family member who understands and preserves the culture - much as Buffett is doing by making Howard Berkshire's Chairman. Yes, there is risk here, but only inasmuch as there is in any controlled company.

On personality/character: clearly this has led to mistakes, but it is also pretty much the reason for the existence and long term success of the firm. On balance it is a positive.
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Xerxes

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Re: 2030-35 --- Fairfax 10-15 years from now
« Reply #9 on: September 22, 2020, 06:18:21 AM »
SJ
Great point and highly relevant one, which I seemed to have missed in my initial post.