Author Topic: Fairfax 2020  (Read 204312 times)

StubbleJumper

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Re: Fairfax 2020
« Reply #630 on: October 30, 2020, 06:10:35 AM »

5) FFH bought the rest of Brit for $220m in August.  Didn't Prem tell us that it would be about $100m?  Maybe all of those business interruption covid claims made Brit more valuable  ;D ? Interesting that Brit paid a $20.6m dividend to the minority interest back in April and FFH bought that interest out for $220m.  What the hell kind of arrangement was that?


OMERS always got paid its dividends in cash. I'm not sure whether that was a preferential arrangement, or whether Fairfax opted to capitalise Brit to grow by taking stock instead.

I need to revisit the disclosures on Brit over the years. I think OMERS have done quite well.


Well, yes, that was the second part of my observation.  Not only did the buyout cost rise compared to guidance that I recall Prem providing during earlier teleconferences, but also it seems that OMERS was on the receiving end of a 9% dividend?  WTF?

It doesn't really make me feel better about any of the other existing partnerships that FFH has established with OMERS.


SJ


bearprowler6

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Re: Fairfax 2020
« Reply #631 on: October 30, 2020, 06:37:03 AM »

5) FFH bought the rest of Brit for $220m in August.  Didn't Prem tell us that it would be about $100m?  Maybe all of those business interruption covid claims made Brit more valuable  ;D ? Interesting that Brit paid a $20.6m dividend to the minority interest back in April and FFH bought that interest out for $220m.  What the hell kind of arrangement was that?


OMERS always got paid its dividends in cash. I'm not sure whether that was a preferential arrangement, or whether Fairfax opted to capitalise Brit to grow by taking stock instead.

I need to revisit the disclosures on Brit over the years. I think OMERS have done quite well.


Well, yes, that was the second part of my observation.  Not only did the buyout cost rise compared to guidance that I recall Prem providing during earlier teleconferences, but also it seems that OMERS was on the receiving end of a 9% dividend?  WTF?

It doesn't really make me feel better about any of the other existing partnerships that FFH has established with OMERS.


SJ

The lack of transparency/full disclosure around the various funding that OMERS has provided over the years is all you need to know. Prem continues to play up what a great partner Fairfax has in OMERS....great for OMERS and not so great for Fairfax shareholders.

I continue to believe that Fairfax got way ahead of itself and could not internally fund the organic growth of its insurance companies, the share buybacks that Prem had promised and the various acquisitions that it made. OMERS was more than willing to "help" out and provide the capital needed.

Although the cash level at the holdco remained essentially flat during the first 9 months of 2020: $1.153 billion at Sept 30/20 versus $1.099 billion at Dec 31/19 this only occurred because Fairfax drew $700 million on its line of credit, received $599.5 million on the sale of a portion of its Riverstone European Runoff business (to ....you guessed it.....OMERS) and completed a 10 year senior note offering of $650 million at 4.625%.

To summarize----cash level essentially flat, insurance hard market supported and Brit's minority interest bought out however at a cost of approx $1.950 billion in 9 months.



bearprowler6

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Re: Fairfax 2020
« Reply #632 on: October 30, 2020, 07:58:24 AM »
I hope so. I've just been watching this damn thing for so long and everytime there is a glimmer of something possibly positive its deemed a sign that things will be turning the corner any day now, with huge upside. The company is positioned for bad times in a good market, good times in a bad market...I mean at some point you just have to look at the past 10 years of decisions and mistakes and give credit where it is due. This isn't a company in an out of favor sector like O&G, or retail... I get that its gotten the short end of the covid stick similar to other insurance, banking and RE firms....but its supposed to be a company with "the smart guys" who are ahead of the curve. And its not and it hasn't been for over a decade now. Is there any case to say that on a risk adjusted basis you arent just better off owning WFC or BRK?

Fairfax is a three legged stool:
1.) insurance / underwriting - solid
2.) investing part 1: fixed income - solid
3.) investing equities / op coís - a mess

The way to make very good money with Fairfax for the past 20 years is to wait for the turn in stool leg 3. (Mr Market was always slow to catch on so the shares became $20 bills lying on the ground in plain sight for all to see.) The problem for Fairfax investors is stool leg 3 has underperformed for the last 7 years (more than offsetting the gains made in stool legs 1 and 2).

The good news for new investors in Fairfax is with shares trading at US$266 they will likely do well moving forward if Fairfax simply stops losing money with bucket 3. Crazy thing to say... but i think it is true (posters think i am only hard on Trump :-)

And that is how out of favour this company is today... People do not want to own it because they expect Fairfax to lose more money in bucket 3. There are lots of legacy dogs still barking in the shadows: Toys R Us, Recipe, Blackberry to name a few that quickly come to mind...

Now having said all that i might reestablish a position tomorrow. Because, to Sanjeevís point, if they ever start to make a positive return from stool leg 3 the stock will rock.

The other potential catalyst for shares is Premís creativity in surfacing value.

Hi Viking...I agree with your 3 legged stool analogy concerning Fairfax with one exception. To date Fairfax's fixed income investing has been very solid---in my view the real strength of the company over the last many years. My concern is that given the ultra low interest rate environment we are in and will likely remain in for a very long time I am not at all optimistic going forward that Fairfax will enjoy the lift that it has from its fixed income investments in the same way that that it has over the last 30 years. Sure it can fund some private debt deals and achieve some yield enhancement in the corporate market but the bulk of its fixed income investments will be in governments bonds and hence return virtually nothing for the foreseeable future. This will put even more pressure on its equity investments and on this point point I could not agree with you more---- this part of the 3 legged stool is a total mess. So although a few posters on here are saying that all Fairfax needs to do is achieve a 3% return on its investments in order to achieve a 15% long term compound on its shares from this point forward I am not so sure this is as much of a slam dunk as some others on here seem to think it is. Your thoughts/comments and those of others would be appreciated.

drzola

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Re: Fairfax 2020
« Reply #633 on: October 30, 2020, 08:02:28 AM »
They Just need to Green Slklate and actually hire an 21 st century equities purveyor simple is what simple does duh!

Cardboard

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Re: Fairfax 2020
« Reply #634 on: October 30, 2020, 08:11:14 AM »
Well.... After being out for maybe a decade, I bought some today.

Obviously, the market likes results considering the rest of the market today.

I believe it is justified since they have managed a decent combined ratio with a pretty nasty hurricane season, fires and Covid related losses.

Investment wise, these guys must be defensively positioned with their take on Nasdaq and now that they will reverse their stance on U.S. with a pro-taxation government likely coming in.

To keep it simple, I received recently my auto and home insurance renewals and prices are going up. Not much I could do either trying to negotiate lower with current company or competitors.

This trend should continue and if they can only avoid losing money on portfolio side, I believe that they will be better off than competitors.

Price is right or well below book. Seems right to me.

Cardboard

StubbleJumper

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Re: Fairfax 2020
« Reply #635 on: October 30, 2020, 08:41:48 AM »
I hope so. I've just been watching this damn thing for so long and everytime there is a glimmer of something possibly positive its deemed a sign that things will be turning the corner any day now, with huge upside. The company is positioned for bad times in a good market, good times in a bad market...I mean at some point you just have to look at the past 10 years of decisions and mistakes and give credit where it is due. This isn't a company in an out of favor sector like O&G, or retail... I get that its gotten the short end of the covid stick similar to other insurance, banking and RE firms....but its supposed to be a company with "the smart guys" who are ahead of the curve. And its not and it hasn't been for over a decade now. Is there any case to say that on a risk adjusted basis you arent just better off owning WFC or BRK?

Fairfax is a three legged stool:
1.) insurance / underwriting - solid
2.) investing part 1: fixed income - solid
3.) investing equities / op coís - a mess

The way to make very good money with Fairfax for the past 20 years is to wait for the turn in stool leg 3. (Mr Market was always slow to catch on so the shares became $20 bills lying on the ground in plain sight for all to see.) The problem for Fairfax investors is stool leg 3 has underperformed for the last 7 years (more than offsetting the gains made in stool legs 1 and 2).

The good news for new investors in Fairfax is with shares trading at US$266 they will likely do well moving forward if Fairfax simply stops losing money with bucket 3. Crazy thing to say... but i think it is true (posters think i am only hard on Trump :-)

And that is how out of favour this company is today... People do not want to own it because they expect Fairfax to lose more money in bucket 3. There are lots of legacy dogs still barking in the shadows: Toys R Us, Recipe, Blackberry to name a few that quickly come to mind...

Now having said all that i might reestablish a position tomorrow. Because, to Sanjeevís point, if they ever start to make a positive return from stool leg 3 the stock will rock.

The other potential catalyst for shares is Premís creativity in surfacing value.

Hi Viking...I agree with your 3 legged stool analogy concerning Fairfax with one exception. To date Fairfax's fixed income investing has been very solid---in my view the real strength of the company over the last many years. My concern is that given the ultra low interest rate environment we are in and will likely remain in for a very long time I am not at all optimistic going forward that Fairfax will enjoy the lift that it has from its fixed income investments in the same way that that it has over the last 30 years. Sure it can fund some private debt deals and achieve some yield enhancement in the corporate market but the bulk of its fixed income investments will be in governments bonds and hence return virtually nothing for the foreseeable future. This will put even more pressure on its equity investments and on this point point I could not agree with you more---- this part of the 3 legged stool is a total mess. So although a few posters on here are saying that all Fairfax needs to do is achieve a 3% return on its investments in order to achieve a 15% long term compound on its shares from this point forward I am not so sure this is as much of a slam dunk as some others on here seem to think it is. Your thoughts/comments and those of others would be appreciated.


Well, then create your own pro-forma income statement for 2021.  It might look a little like this:

1) UW profit
Net Written Premiums $16B (up 6.5% over 2020)
Consolidated Ratio: 94% (take the YTD CR, strip out the 10 cat points for 2020 and replace with 4 cat points for 2021)
UW profit = $960m

2) Investment returns
Investment portfolio $40B
Investment return 2% (bond duration is strangely favourable for this assumption)
Inv profit = $800m

3) Overhead = $200m (just grab the number from 2018)

4) Interest = $500m (run rate the first three-quarters of 2020)

Earnings before taxes = $960m + 800 - 200 - 500 = $1,060m
Taxes = $281m  (tax rate 26.5%)
Earnings after tax = $779m

Sharecount: 26.2 milion

EPS = $779/26.2 = $30


Is there anything outrageous about that bit of school-boy arithmetic?  The current stock price is US$268, so a basic EPS of $30/sh would be an 11% earnings yield, which is not reliant on much of an investment return and makes no assumption of further price increases.  The 15% target would be left in the dust if FFH actually got a 3% investment return.



SJ

Cigarbutt

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Re: Fairfax 2020
« Reply #636 on: October 30, 2020, 08:44:45 AM »
^Reasonable time to retrospectively evaluate the Brit acquisition so far.
-Price paid in summer of 2015 for 97.0% interest = 1,656.6M (including 575.9M in shares (price per share about 500-501(!)).
100% inferred price for 100% = 1,707.8M
-----
a look at OMERS
-in late June 2015, they got 29.9% interest for 516.0M
-since then
   -57.8 paid back by Brit in August 2016
   -251.8 paid back by parent in July 2018
   -206.4 paid back by parent in Q3 2020
-57.8+251.8+206.4=516.0M
-the return obtained by OMERS is related to dividends received over time: 45.8 (2017), 45.8 +12.8 (2018), 20.6 (2019) and 20.6 + 13.6 (2020) 
   -total div. = 159.2 which results in an about 9% compound return over time.
So that part of the initial transaction was financed by debt-like characteristics with an approximate 9% coupon, non-tax deductible.
Opinion: From Omers' point of view, i would say a satisfying risk-reward proposition, assuming they had some kind of downside protection.
-----
Of course, the future is where the money is but let's take a retrospective look from FFH's point of view.
Since acquisition: cumulative pre-tax income = 165.7M
Book value of Brit at end of Q3 2020 estimated at about 1.85B
Outside of holdco capital contribution to Brit to fund payments (capital and dividends) to OMERS, FFH parent contributed a net 196.6M
Brit, itself, paid OMERS (capital and dividends) 190.6M
Difference in book value from acquisition to end of Q3 2020 = about 140M
Average combined ratio since acquisition: 103%
The return (average net pre-tax earnings over book value) so far from both the underwriting and investment points of view has been very low (about 1.5 to 2.0% CAGR).
Other aspects to consider:
   -NPW at end of first complete year of operations (2016): 1,480.2M; at end of Q3 2020: about (annualized) 1,800M
   -reserves development is still positive, slightly overall better in 2020 in a declining trend and lower in Q3 year over year.

bearprowler6

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Re: Fairfax 2020
« Reply #637 on: October 30, 2020, 09:14:04 AM »
I hope so. I've just been watching this damn thing for so long and everytime there is a glimmer of something possibly positive its deemed a sign that things will be turning the corner any day now, with huge upside. The company is positioned for bad times in a good market, good times in a bad market...I mean at some point you just have to look at the past 10 years of decisions and mistakes and give credit where it is due. This isn't a company in an out of favor sector like O&G, or retail... I get that its gotten the short end of the covid stick similar to other insurance, banking and RE firms....but its supposed to be a company with "the smart guys" who are ahead of the curve. And its not and it hasn't been for over a decade now. Is there any case to say that on a risk adjusted basis you arent just better off owning WFC or BRK?

Fairfax is a three legged stool:
1.) insurance / underwriting - solid
2.) investing part 1: fixed income - solid
3.) investing equities / op coís - a mess

The way to make very good money with Fairfax for the past 20 years is to wait for the turn in stool leg 3. (Mr Market was always slow to catch on so the shares became $20 bills lying on the ground in plain sight for all to see.) The problem for Fairfax investors is stool leg 3 has underperformed for the last 7 years (more than offsetting the gains made in stool legs 1 and 2).

The good news for new investors in Fairfax is with shares trading at US$266 they will likely do well moving forward if Fairfax simply stops losing money with bucket 3. Crazy thing to say... but i think it is true (posters think i am only hard on Trump :-)

And that is how out of favour this company is today... People do not want to own it because they expect Fairfax to lose more money in bucket 3. There are lots of legacy dogs still barking in the shadows: Toys R Us, Recipe, Blackberry to name a few that quickly come to mind...

Now having said all that i might reestablish a position tomorrow. Because, to Sanjeevís point, if they ever start to make a positive return from stool leg 3 the stock will rock.

The other potential catalyst for shares is Premís creativity in surfacing value.

Hi Viking...I agree with your 3 legged stool analogy concerning Fairfax with one exception. To date Fairfax's fixed income investing has been very solid---in my view the real strength of the company over the last many years. My concern is that given the ultra low interest rate environment we are in and will likely remain in for a very long time I am not at all optimistic going forward that Fairfax will enjoy the lift that it has from its fixed income investments in the same way that that it has over the last 30 years. Sure it can fund some private debt deals and achieve some yield enhancement in the corporate market but the bulk of its fixed income investments will be in governments bonds and hence return virtually nothing for the foreseeable future. This will put even more pressure on its equity investments and on this point point I could not agree with you more---- this part of the 3 legged stool is a total mess. So although a few posters on here are saying that all Fairfax needs to do is achieve a 3% return on its investments in order to achieve a 15% long term compound on its shares from this point forward I am not so sure this is as much of a slam dunk as some others on here seem to think it is. Your thoughts/comments and those of others would be appreciated.


Well, then create your own pro-forma income statement for 2021.  It might look a little like this:

1) UW profit
Net Written Premiums $16B (up 6.5% over 2020)
Consolidated Ratio: 94% (take the YTD CR, strip out the 10 cat points for 2020 and replace with 4 cat points for 2021)
UW profit = $960m

2) Investment returns
Investment portfolio $40B
Investment return 2% (bond duration is strangely favourable for this assumption)
Inv profit = $800m

3) Overhead = $200m (just grab the number from 2018)

4) Interest = $500m (run rate the first three-quarters of 2020)

Earnings before taxes = $960m + 800 - 200 - 500 = $1,060m
Taxes = $281m  (tax rate 26.5%)
Earnings after tax = $779m

Sharecount: 26.2 milion

EPS = $779/26.2 = $30


Is there anything outrageous about that bit of school-boy arithmetic?  The current stock price is US$268, so a basic EPS of $30/sh would be an 11% earnings yield, which is not reliant on much of an investment return and makes no assumption of further price increases.  The 15% target would be left in the dust if FFH actually got a 3% investment return.



SJ

SJ---your "school boy arithmetic" seems reasonable for 2021. My question however related to the potential for long term compounding for the shares at the 15% level. Your 2% investment return assumption which produces $800m in your analysis for 2021 seems high post 2021(note the drop off in interest and dividend income from 2019 to 2020). If my concern is correct on this point than an investment return well in excess of the 3% target is needed to achieve the 15% overall earnings yield. Expecting Prem (and team) to produce this level of long term investment returns on a sustainable basis is simply not reasonable based on either the results of the last 10 years nor the longer term prospects for the company's current equity holdings.

StubbleJumper

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Re: Fairfax 2020
« Reply #638 on: October 30, 2020, 09:43:40 AM »
I hope so. I've just been watching this damn thing for so long and everytime there is a glimmer of something possibly positive its deemed a sign that things will be turning the corner any day now, with huge upside. The company is positioned for bad times in a good market, good times in a bad market...I mean at some point you just have to look at the past 10 years of decisions and mistakes and give credit where it is due. This isn't a company in an out of favor sector like O&G, or retail... I get that its gotten the short end of the covid stick similar to other insurance, banking and RE firms....but its supposed to be a company with "the smart guys" who are ahead of the curve. And its not and it hasn't been for over a decade now. Is there any case to say that on a risk adjusted basis you arent just better off owning WFC or BRK?

Fairfax is a three legged stool:
1.) insurance / underwriting - solid
2.) investing part 1: fixed income - solid
3.) investing equities / op coís - a mess

The way to make very good money with Fairfax for the past 20 years is to wait for the turn in stool leg 3. (Mr Market was always slow to catch on so the shares became $20 bills lying on the ground in plain sight for all to see.) The problem for Fairfax investors is stool leg 3 has underperformed for the last 7 years (more than offsetting the gains made in stool legs 1 and 2).

The good news for new investors in Fairfax is with shares trading at US$266 they will likely do well moving forward if Fairfax simply stops losing money with bucket 3. Crazy thing to say... but i think it is true (posters think i am only hard on Trump :-)

And that is how out of favour this company is today... People do not want to own it because they expect Fairfax to lose more money in bucket 3. There are lots of legacy dogs still barking in the shadows: Toys R Us, Recipe, Blackberry to name a few that quickly come to mind...

Now having said all that i might reestablish a position tomorrow. Because, to Sanjeevís point, if they ever start to make a positive return from stool leg 3 the stock will rock.

The other potential catalyst for shares is Premís creativity in surfacing value.

Hi Viking...I agree with your 3 legged stool analogy concerning Fairfax with one exception. To date Fairfax's fixed income investing has been very solid---in my view the real strength of the company over the last many years. My concern is that given the ultra low interest rate environment we are in and will likely remain in for a very long time I am not at all optimistic going forward that Fairfax will enjoy the lift that it has from its fixed income investments in the same way that that it has over the last 30 years. Sure it can fund some private debt deals and achieve some yield enhancement in the corporate market but the bulk of its fixed income investments will be in governments bonds and hence return virtually nothing for the foreseeable future. This will put even more pressure on its equity investments and on this point point I could not agree with you more---- this part of the 3 legged stool is a total mess. So although a few posters on here are saying that all Fairfax needs to do is achieve a 3% return on its investments in order to achieve a 15% long term compound on its shares from this point forward I am not so sure this is as much of a slam dunk as some others on here seem to think it is. Your thoughts/comments and those of others would be appreciated.


Well, then create your own pro-forma income statement for 2021.  It might look a little like this:

1) UW profit
Net Written Premiums $16B (up 6.5% over 2020)
Consolidated Ratio: 94% (take the YTD CR, strip out the 10 cat points for 2020 and replace with 4 cat points for 2021)
UW profit = $960m

2) Investment returns
Investment portfolio $40B
Investment return 2% (bond duration is strangely favourable for this assumption)
Inv profit = $800m

3) Overhead = $200m (just grab the number from 2018)

4) Interest = $500m (run rate the first three-quarters of 2020)

Earnings before taxes = $960m + 800 - 200 - 500 = $1,060m
Taxes = $281m  (tax rate 26.5%)
Earnings after tax = $779m

Sharecount: 26.2 milion

EPS = $779/26.2 = $30


Is there anything outrageous about that bit of school-boy arithmetic?  The current stock price is US$268, so a basic EPS of $30/sh would be an 11% earnings yield, which is not reliant on much of an investment return and makes no assumption of further price increases.  The 15% target would be left in the dust if FFH actually got a 3% investment return.



SJ

SJ---your "school boy arithmetic" seems reasonable for 2021. My question however related to the potential for long term compounding for the shares at the 15% level. Your 2% investment return assumption which produces $800m in your analysis for 2021 seems high post 2021(note the drop off in interest and dividend income from 2019 to 2020). If my concern is correct on this point than an investment return well in excess of the 3% target is needed to achieve the 15% overall earnings yield. Expecting Prem (and team) to produce this level of long term investment returns on a sustainable basis is simply not reasonable based on either the results of the last 10 years nor the longer term prospects for the company's current equity holdings.


The 2% is already very conservative.  Of the portfolio, about $10b is corporate bonds yielding about 3.5% with a 3-yr duration, ~$17B is governments bills and bonds yielding about 0.5%, plus another ~$13B is equity-like investments (preferreds, common stocks, investments in associates).  There should be no trouble at all to make 2% until the end of 2022 when the corporates will mostly need to be rolled.  When you weight it all out, getting a weighted 3% might require about a ~6% return on the equity-like investments, which is not a particularly outrageous hurdle. 

After 2022, who the hell knows? It could go a couple of different ways.  Either the risk-free rate remains at 0.5% in the "lower for longer" scenario, in which case you should expect to see tighter underwriting practices and higher insurance prices, or the risk-free will return to a more "normal" level which makes the 3% return easily attainable.  But, over the longer term, capital will leave the industry if there is not some acceptable combination of underwriting and investment profit.


SJ

bearprowler6

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Re: Fairfax 2020
« Reply #639 on: October 30, 2020, 10:10:05 AM »
I hope so. I've just been watching this damn thing for so long and everytime there is a glimmer of something possibly positive its deemed a sign that things will be turning the corner any day now, with huge upside. The company is positioned for bad times in a good market, good times in a bad market...I mean at some point you just have to look at the past 10 years of decisions and mistakes and give credit where it is due. This isn't a company in an out of favor sector like O&G, or retail... I get that its gotten the short end of the covid stick similar to other insurance, banking and RE firms....but its supposed to be a company with "the smart guys" who are ahead of the curve. And its not and it hasn't been for over a decade now. Is there any case to say that on a risk adjusted basis you arent just better off owning WFC or BRK?

Fairfax is a three legged stool:
1.) insurance / underwriting - solid
2.) investing part 1: fixed income - solid
3.) investing equities / op coís - a mess

The way to make very good money with Fairfax for the past 20 years is to wait for the turn in stool leg 3. (Mr Market was always slow to catch on so the shares became $20 bills lying on the ground in plain sight for all to see.) The problem for Fairfax investors is stool leg 3 has underperformed for the last 7 years (more than offsetting the gains made in stool legs 1 and 2).

The good news for new investors in Fairfax is with shares trading at US$266 they will likely do well moving forward if Fairfax simply stops losing money with bucket 3. Crazy thing to say... but i think it is true (posters think i am only hard on Trump :-)

And that is how out of favour this company is today... People do not want to own it because they expect Fairfax to lose more money in bucket 3. There are lots of legacy dogs still barking in the shadows: Toys R Us, Recipe, Blackberry to name a few that quickly come to mind...

Now having said all that i might reestablish a position tomorrow. Because, to Sanjeevís point, if they ever start to make a positive return from stool leg 3 the stock will rock.

The other potential catalyst for shares is Premís creativity in surfacing value.

Hi Viking...I agree with your 3 legged stool analogy concerning Fairfax with one exception. To date Fairfax's fixed income investing has been very solid---in my view the real strength of the company over the last many years. My concern is that given the ultra low interest rate environment we are in and will likely remain in for a very long time I am not at all optimistic going forward that Fairfax will enjoy the lift that it has from its fixed income investments in the same way that that it has over the last 30 years. Sure it can fund some private debt deals and achieve some yield enhancement in the corporate market but the bulk of its fixed income investments will be in governments bonds and hence return virtually nothing for the foreseeable future. This will put even more pressure on its equity investments and on this point point I could not agree with you more---- this part of the 3 legged stool is a total mess. So although a few posters on here are saying that all Fairfax needs to do is achieve a 3% return on its investments in order to achieve a 15% long term compound on its shares from this point forward I am not so sure this is as much of a slam dunk as some others on here seem to think it is. Your thoughts/comments and those of others would be appreciated.


Well, then create your own pro-forma income statement for 2021.  It might look a little like this:

1) UW profit
Net Written Premiums $16B (up 6.5% over 2020)
Consolidated Ratio: 94% (take the YTD CR, strip out the 10 cat points for 2020 and replace with 4 cat points for 2021)
UW profit = $960m

2) Investment returns
Investment portfolio $40B
Investment return 2% (bond duration is strangely favourable for this assumption)
Inv profit = $800m

3) Overhead = $200m (just grab the number from 2018)

4) Interest = $500m (run rate the first three-quarters of 2020)

Earnings before taxes = $960m + 800 - 200 - 500 = $1,060m
Taxes = $281m  (tax rate 26.5%)
Earnings after tax = $779m

Sharecount: 26.2 milion

EPS = $779/26.2 = $30


Is there anything outrageous about that bit of school-boy arithmetic?  The current stock price is US$268, so a basic EPS of $30/sh would be an 11% earnings yield, which is not reliant on much of an investment return and makes no assumption of further price increases.  The 15% target would be left in the dust if FFH actually got a 3% investment return.



SJ

SJ---your "school boy arithmetic" seems reasonable for 2021. My question however related to the potential for long term compounding for the shares at the 15% level. Your 2% investment return assumption which produces $800m in your analysis for 2021 seems high post 2021(note the drop off in interest and dividend income from 2019 to 2020). If my concern is correct on this point than an investment return well in excess of the 3% target is needed to achieve the 15% overall earnings yield. Expecting Prem (and team) to produce this level of long term investment returns on a sustainable basis is simply not reasonable based on either the results of the last 10 years nor the longer term prospects for the company's current equity holdings.


The 2% is already very conservative.  Of the portfolio, about $10b is corporate bonds yielding about 3.5% with a 3-yr duration, ~$17B is governments bills and bonds yielding about 0.5%, plus another ~$13B is equity-like investments (preferreds, common stocks, investments in associates).  There should be no trouble at all to make 2% until the end of 2022 when the corporates will mostly need to be rolled.  When you weight it all out, getting a weighted 3% might require about a ~6% return on the equity-like investments, which is not a particularly outrageous hurdle. 

After 2022, who the hell knows? It could go a couple of different ways.  Either the risk-free rate remains at 0.5% in the "lower for longer" scenario, in which case you should expect to see tighter underwriting practices and higher insurance prices, or the risk-free will return to a more "normal" level which makes the 3% return easily attainable.  But, over the longer term, capital will leave the industry if there is not some acceptable combination of underwriting and investment profit.


SJ

Very reasonable---thank-you!

Seems like a good time however to remind everyone of the compound total annual investment returns actually achieved by Fairfax over the last 10 years or so:

2011-2016: 2.3%
2017-2019: 5.6%

And yes I know that we need to look forward and not focus on the mistakes of the past however Prem seems unwilling to address several losing equity positions (both private and public markets) which account for a significant portion of Fairfax's current equity holdings. Combine this with the ultra low interest rates which in my view will be around for a very long time and we have a perfect storm which will work against Fairfax achieving the overall investment return it requires to achieve the 15% earnings yield.

For what its worth...I hope my concerns are not valid and Fairfax shares soar however we are dealing with Prem so I believe a healthy dose of skepticism is warranted!