Author Topic: Fairfax  (Read 5636 times)

watsa_is_a_randian_hero

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Fairfax
« on: August 10, 2009, 05:27:21 PM »
This is my simple model on FFH.  Does anyone else have anything they do?  I'm assuming we're all talking about base-case values over $400 at this point?


Uccmal

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Re: Fairfax
« Reply #1 on: August 11, 2009, 09:22:36 AM »
Hi Brian, I have normally done something similar.  It was easier to value when NB was still a public company.  With your method I am trying to get my head around a couple of your numbers.

Why are you adding 355 M to FFH Asia?

Where does the 500 M Runoff come from?  Are you assuming this to be the holdings at Holdco not accounted for by RE, ORH, C&F, and NB?  If so, are these assets not already included in Holdco Marketable securities?  I am not clear if this is a double count?

Under the more aggressive secenarios you assign a value to Hamblin Watsa?  How did you get this value?  Is it not double counting if the results of HWICs actions are already in the values of the subs?  HWIC employs a couple of small rooms of employees who have a high value but I am not sure they are worth 800 M?

I am hoping I am not nitpicking.  As I said I would value it in a similar way.  I would actually apply 1.3 x the value of each long term subs book since this is what they bought NB in at.  The results would be similar to your base case.  We benefit from the extreme amounts of details Prem provides in the reports. 

Thanks, A. 
GARP tending toward value

watsa_is_a_randian_hero

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Re: Fairfax
« Reply #2 on: August 11, 2009, 09:56:49 AM »
Here are some more details on my assumptions:

FFH asia the $355 represents the difference between what they've booked for ICICI and what the appraised fair value was. 

The runoff is a tough one.  A couple years ago my conservative value would have just book $0 for runoff as a conservative number.  However, recent investment gains have increased the book value of the runoff group so much that I don't think that a $0 value would be overly conservative now.  The $500 represents slightly less than 50% of book.  Part of its book is counted in the equity of other subs.  It also represents valuing runoff at only the value of recent investment gains (saying the conservative value would be $0 if it weren't for recent gains, which will probably be distributed back to fairfax holdco anyways).

For Hablin Watsa, I don't think this is double counting.  The value of the subs are based off of 1x, 1.1x, and 1.2x current BV or 1.1x, 1.2x, and 1.3x 12/31 BV (if it is based off of 12/31 numbers, I used higher book multipleto account for recent gains).  This I think would be a normalized market insurance-company multiple.  However, what sets FFH apart is its investment management.  Essentially I've valued FFH as a generic insurance company with generic multiples (assuming a generic insurer cannot generate alpha), then added additional value for HWIC. 

The value of HWIC is based off the presumption of 5% growth in investments, 20% discount rate (net 15% cap rate), and $18 billion current investments.  Under conservative I assign 0 value.  Under base case I assume 1% alpha is created above and beyond what a generic insurer would earn.  Under aggressive I assume 2% alpha is created above and beyond what a generic insurer would earn.

In response to the question whether a couple of small rooms of employees are really worth $800mm or more, I would pose the question, how much value do you think Prem Watsa alone creates for FFH?  I would argue at least $500 million on ability to create alpha.  I changed to include all HWIC after recent performance on CDS generated by other key members.

oldye

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Re: Fairfax
« Reply #3 on: August 11, 2009, 11:07:53 AM »
"In response to the question whether a couple of small rooms of employees are really worth $800mm or more, I would pose the question, how much value do you think Prem Watsa alone creates for FFH?  I would argue at least $500 million on ability to create alpha.  I changed to include all HWIC after recent performance on CDS generated by other key members."

About 5 billion, without these guys the company isn't worth more than book. 

watsa_is_a_randian_hero

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Re: Fairfax
« Reply #4 on: August 11, 2009, 11:23:12 AM »
"In response to the question whether a couple of small rooms of employees are really worth $800mm or more, I would pose the question, how much value do you think Prem Watsa alone creates for FFH?  I would argue at least $500 million on ability to create alpha.  I changed to include all HWIC after recent performance on CDS generated by other key members."

About 5 billion, without these guys the company isn't worth more than book. 

Well I don't know if I'd go so far as to say $5 billion (you need to account for the risk that these guys are human, and human life in general is fragile).  That being said I would say base-case we should have another 15 good years based on current age of management.

Brian

oldye

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Re: Fairfax
« Reply #5 on: August 11, 2009, 11:39:37 AM »
We all have about a .8-1% chance of dying in any given year but not sure how that effects their value.


 Consider that they're running 18 billion and that an extra 5% return on those assets is 900 million a year or roughly the value added.  5 billion is a bargain price! 

triedtestedand

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Re: Fairfax
« Reply #6 on: August 11, 2009, 02:13:08 PM »
Hey ... do you think the employees at HWIC read this board and point to it in requesting annual bonuses?   Seriously though, I would look to value them on a differential basis compared to some benchmark peer group vs an absolute basis ...

watsa_is_a_randian_hero

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Re: Fairfax
« Reply #7 on: August 11, 2009, 02:34:16 PM »
Hey ... do you think the employees at HWIC read this board and point to it in requesting annual bonuses?   Seriously though, I would look to value them on a differential basis compared to some benchmark peer group vs an absolute basis ...

I am comparing them on a relative basis, not an absolute basis.  The benchmark is other insurance companies.  In my base-case, I've essentially said they will generate 1% alpha relative to what the average portfolio manger for a P&C company can do.

oldye

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Re: Fairfax
« Reply #8 on: August 11, 2009, 03:40:00 PM »
"The benchmark is other insurance companies.  In my base-case, I've essentially said they will generate 1% alpha relative to what the average portfolio manger for a P&C company can do."

Unless the benchmark is Markel and Berkshire, I don't know how you get 1% alpha...

The average insurer has grown its capital by 8% over the last couple of decades according to Buffett, Fairfax had averaged more than 23%.  The average insurance company can't invest in equities and hope to earn 20%, or nearly 10% from bonds

watsa_is_a_randian_hero

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Re: Fairfax
« Reply #9 on: August 11, 2009, 04:32:41 PM »
"The benchmark is other insurance companies.  In my base-case, I've essentially said they will generate 1% alpha relative to what the average portfolio manger for a P&C company can do."

Unless the benchmark is Markel and Berkshire, I don't know how you get 1% alpha...

The average insurer has grown its capital by 8% over the last couple of decades according to Buffett, Fairfax had averaged more than 23%.  The average insurance company can't invest in equities and hope to earn 20%, or nearly 10% from bonds

With respect to the statement that FFH has grown capital at 23%, that is not what we are talking about here.  That number is the book equity, which is levered through debt and insurance float.  Actual (unlevered) investment returns are lower. 

These are meant to be reasonable projections.  Their 15 year average is 4% on bonds and 10% on stocks per 2008 annual report.  This averages out to 5-6% alpha on investments, depending on portfolio allocation.  However, after subtracting for below-average underwriting (losses of 2.8%, while comparable companies might average loss of 1%), I would say historical performance generated 3-4% alpha, counting both assets and liabilities.  That might not be possible in future given scale of operations today (and I can guarantee the market will never price in an assumption that prem will earn 4% alpha in to eternity); I have used 1%-2% as reasonable projections that the marketplace could use as assumptions to estimate fair value.