Corner of Berkshire & Fairfax Message Board

General Category => Fairfax Financial => Topic started by: ValueMaven on March 06, 2018, 05:10:54 PM

Title: 2017 Annual Letter
Post by: ValueMaven on March 06, 2018, 05:10:54 PM
Should be out shortly...does anyone have an ETA?

Sincerely,
ValueMaven
Title: Re: 2017 Annual Letter
Post by: ourkid8 on March 06, 2018, 06:38:15 PM
I believe it should be released Friday after market close...

Should be out shortly...does anyone have an ETA?

Sincerely,
ValueMaven
Title: Re: 2017 Annual Letter
Post by: ourkid8 on March 09, 2018, 02:42:05 PM
It's released.

http://s1.q4cdn.com/579586326/files/doc_financials/2017/annual/WEBSITE-Fairfax-Financial's-Shareholders'-Letter.pdf
Title: Re: 2017 Annual Letter
Post by: steph on March 10, 2018, 05:30:48 AM
Best letter in a very long time!
Prem finally admits that hedging was a mistake and that the equity selection was very poor over the last years.  They will do no hedging anymore and there will be a change in the equity team.
Mistakes are human, we all make them.  But it is important to admit them, learn out of them and move on.  It seems that Prem was finally able to do this and it is very important for the future of Fairfax. 
Title: Re: 2017 Annual Letter
Post by: FairFacts on March 10, 2018, 06:40:55 AM
I too liked the expansion of the investment team and the additional responsibilities of the younger members.

PW restated the investment goals and 15% increase in BV target.

'With $40 billion in investments, a current run rate of $11.5B in net premiums written and $12.5B in common shareholders equity, we need an investment return of approximately 7% in order to achieve an annual increase in 15% in BV per share, assuming a consolidated combined ratios of 95%"........."We have drilled deeper and by analysing each of our 21 insurance companies we have estimated the investment return needed for each company in order to achieve our 15% target. We have delegated investment responsibility for each of our insurance companies to one member of our investment team".


Title: Re: 2017 Annual Letter
Post by: FairFacts on March 10, 2018, 06:43:19 AM
Looks like they have added positions in GM and GE since last 13-F was filed. (p23 half way down the page).
Title: Re: 2017 Annual Letter
Post by: StevieV on March 10, 2018, 06:51:12 AM
I too liked the expansion of the investment team and the additional responsibilities of the younger members.

PW restated the investment goals and 15% increase in BV target.

'With $40 billion in investments, a current run rate of $11.5B in net premiums written and $12.5B in common shareholders equity, we need an investment return of approximately 7% in order to achieve an annual increase in 15% in BV per share, assuming a consolidated combined ratios of 95%"........."We have drilled deeper and by analysing each of our 21 insurance companies we have estimated the investment return needed for each company in order to achieve our 15% target. We have delegated investment responsibility for each of our insurance companies to one member of our investment team".

If they get the 15%, I would expect some multiple expansion.  That would give shareholders a somewhat better than 15% return.  Certainly could double in 3-4 years if they get 15% BVPS growth over that time. 

Of course, actually achieving the 15% is the key.
Title: Re: 2017 Annual Letter
Post by: karthikpm on March 10, 2018, 07:11:05 AM
I worry that they are bullish at the wrong time ( market and valuation at highs). I think their portfolio of companies and operating performance is better than their earlier years, but their investing performance has been sub par .
Title: Re: 2017 Annual Letter
Post by: StevieV on March 10, 2018, 07:30:44 AM
I worry that they are bullish at the wrong time ( market and valuation at highs). I think their portfolio of companies and operating performance is better than their earlier years, but their investing performance has been sub par .

I think that is a fair concern, but if forward returns for the market are low, that could still mean significant outperformance for Fairfax.

Let's say they add and subtract no value in their investing.  If the market returns 7% CAGR over the next 5 years (and Fairfax matches the market), Fairfax thinks they can grow at 15%.  I don't think 7% is unreasonable, but the market may very well fall short of that.  Let's say the market returns 3% (and, again, Fairfax matches).  Fairfax wouldn't hit 15%, but could do very well on a relative performance basis against the 3% market.

Lots of assumptions baked in.  Just saying that Fairfax might be a good relative performer in a challenged equity market.
Title: Re: 2017 Annual Letter
Post by: steph on March 10, 2018, 08:43:25 AM
I worry that they are bullish at the wrong time ( market and valuation at highs). I think their portfolio of companies and operating performance is better than their earlier years, but their investing performance has been sub par .

They are not bullish. They still hold lots of cash. That is why they will never be able to achieve 15% with yields as low as they are today.  But if they even achieve 10% priced at book value today, and hoping for a rerating at one point in time to 1,5 times book, that would still be a great investment.
Investment performance has been poor on the equity (and hedging) side, but on the bond portion of the portfolio they are amazing.  The fact that they sold everything just before Trump got elected when long term yields were at 1,5% is a master stroke.  For an insurer the fixed income part of the portfolio is essential, and with Fairfax you have the best.
Title: Re: 2017 Annual Letter
Post by: Viking on March 10, 2018, 09:58:32 AM
Reading the letter, it appears to me that Prem is less promotional and more fact oriented. Nice to see.

Can someone explain to me what impact the following transaction will have on Thomas Cook India and also Fairfax?

From page 9: “Quess has had a phenomenal run since we acquired our interest in it in 2013. Thomas Cook India invested $47 million in Quess in 2013, sold 5.4% last year for $97 million and retains 49%, which is currently worth over $1 billion. Because of Quess’ great success, Thomas Cook India intends to spin its holding in Quess out to its shareholders during 2018 so that Quess can be run independently as a public company under the leadership of Ajit Isaac. A big thank you to Madhavan Menon for nurturing Quess under the Thomas Cook India umbrella as it became large enough to be a freestanding company. Today, Quess is India’s leading integrated business services provider. With over 250,000 employees, the company has a pan-India presence with 65 offices across 34 cities, along with an overseas footprint in North America, the Middle East and South East Asia. It serves over 1,700 customers across five segments – Industrials, Global Technology Solutions, People and Services, Integrated Facility Management and Internet Solutions.”
Title: Re: 2017 Annual Letter
Post by: FairFacts on March 10, 2018, 10:43:37 AM
"Can someone explain to me what impact the following transaction will have on Thomas Cook India and also Fairfax?"

I think that it goes like this:

FFH owns 66% of Thomas Cook India
Thomas Cook owns a majority of Quess, I think it might be down to 49% now.
If TC spins out Quess it will no longer own, nor consolidate Quess in its numbers.
FFH will now own 66% of the 49% of Quess Stock which means FFH wil have a direct holding of 32.3%.

FFH will not consolidate Quess and thefore the gain will be recognised which until now was an unrealized gain in Thomas Cook.

Also, FFH can directly sell off Quess shares as and when it pleases.

We would see and imediate uptick in Book Value if this goes ahead.
Title: Re: 2017 Annual Letter
Post by: FairFacts on March 10, 2018, 10:45:55 AM
Interesting that the Debt and Warrant Deal on page 21 doesn't show the warrants held in Blackberry (I believe $500 mil of them).
Title: Re: 2017 Annual Letter
Post by: Viking on March 10, 2018, 11:37:35 AM
I worry that they are bullish at the wrong time ( market and valuation at highs). I think their portfolio of companies and operating performance is better than their earlier years, but their investing performance has been sub par .

They are not bullish. They still hold lots of cash. That is why they will never be able to achieve 15% with yields as low as they are today.  But if they even achieve 10% priced at book value today, and hoping for a rerating at one point in time to 1,5 times book, that would still be a great investment.
Investment performance has been poor on the equity (and hedging) side, but on the bond portion of the portfolio they are amazing.  The fact that they sold everything just before Trump got elected when long term yields were at 1,5% is a master stroke.  For an insurer the fixed income part of the portfolio is essential, and with Fairfax you have the best.

Steph, yes, FFH has absolutely excelled with their bond portfolio decisions over the past 18 months. Their total portfolio is about $40 billion. Only $9 billion is currently in bonds; of this amount only $1 billion is 5-10 year duration and $2 billion is more than 10 year duration.

It will be very interesting to watch where US interest rates go in 2018. If the long end (10 year plus) continues higher then bond losses will start to hit insurance companies book value when they report Q1 earnings. In a rising rate environment the size and average duration (years) of bond portfolios will become very important metrics for investors moving forward. Fairfax’s investment portfolio is ideally positioned for a rising rate environment.

If long bond yields increase enough, and spreads widen on junk debt, it may hit book values enough to support a harder market in insurance pricing.
Title: Re: 2017 Annual Letter
Post by: TwoCitiesCapital on March 10, 2018, 11:44:09 AM
Interesting that the Debt and Warrant Deal on page 21 doesn't show the warrants held in Blackberry (I believe $500 mil of them).

Correct me if I'm wrong, but there are no warrants in Blackberry. Just plain old common shares and $500M in convertible notes?
Title: Re: 2017 Annual Letter
Post by: gokou3 on March 10, 2018, 12:23:30 PM
I too liked the expansion of the investment team and the additional responsibilities of the younger members.

PW restated the investment goals and 15% increase in BV target.

'With $40 billion in investments, a current run rate of $11.5B in net premiums written and $12.5B in common shareholders equity, we need an investment return of approximately 7% in order to achieve an annual increase in 15% in BV per share, assuming a consolidated combined ratios of 95%"........."We have drilled deeper and by analysing each of our 21 insurance companies we have estimated the investment return needed for each company in order to achieve our 15% target. We have delegated investment responsibility for each of our insurance companies to one member of our investment team".


Could someone check my math:

95% combined ratio on $11.5B = $575M underwriting profit
7% return on $40B investments = $2800M return

Underwriting + investment return = $3.375B pretax or say $2.36B after-tax assuming 30% tax rate

After-tax ROE = 2.36/12.5 = 18.9% >> 15%?


I think it's difficult to have 95% combined ratio (including catastrophes) over long-term.  In fact, page 17 says their combined ratio since inception is 100%.  They may have gotten better over the years though.  On the other hand, 7% return on a mostly-bond portfolio may not be so easy either in the medium term given rising but still low interest rates.

Title: Re: 2017 Annual Letter
Post by: vinod1 on March 10, 2018, 12:38:33 PM
Gokou3 - You need to take into account Corporate expenses, runoff, interest expenses and preferred dividends.

Vinod
Title: Re: 2017 Annual Letter
Post by: vinod1 on March 10, 2018, 12:42:46 PM
Need to break down the 7% returns.

Fairfax has averaged 23% / 50% / 27% for Cash/Bond/Stock Allocation between 1986 to 2014 (when I last calculated them).

Assuming a 25% 50% 25% cash bond stock allocation.

If you assume 2% returns for the cash portion, 5% returns for bond portion, to get to 7% investment returns on total portfolio, the stock portfolio has to return 16%.

Even assuming 6% for bond portfolio would require the stocks to deliver 14% annually.

Vinod
Title: Re: 2017 Annual Letter
Post by: FairFacts on March 10, 2018, 12:47:40 PM
TwoCities

You are absolutely right, my bad, there are no BB warrants.
Title: Re: 2017 Annual Letter
Post by: gokou3 on March 10, 2018, 01:54:16 PM
Need to break down the 7% returns.

Fairfax has averaged 23% / 50% / 27% for Cash/Bond/Stock Allocation between 1986 to 2014 (when I last calculated them).

Assuming a 25% 50% 25% cash bond stock allocation.

If you assume 2% returns for the cash portion, 5% returns for bond portion, to get to 7% investment returns on total portfolio, the stock portfolio has to return 16%.

Even assuming 6% for bond portfolio would require the stocks to deliver 14% annually.

Vinod

Vinod,

Thanks for correcting my calculations.  Seems to me it's a tall order to get to 7% return in this kind of market (high stock AND bond valuations).
Title: Re: 2017 Annual Letter
Post by: StevieV on March 10, 2018, 04:43:00 PM
Need to break down the 7% returns.

Fairfax has averaged 23% / 50% / 27% for Cash/Bond/Stock Allocation between 1986 to 2014 (when I last calculated them).

Assuming a 25% 50% 25% cash bond stock allocation.

If you assume 2% returns for the cash portion, 5% returns for bond portion, to get to 7% investment returns on total portfolio, the stock portfolio has to return 16%.

Even assuming 6% for bond portfolio would require the stocks to deliver 14% annually.

Vinod

Vinod,

Thanks for correcting my calculations.  Seems to me it's a tall order to get to 7% return in this kind of market (high stock AND bond valuations).

My earlier post on this should be ignored.  I was reading and posting too fast.  7% for the equity portion of the portfolio and 7% for a blended portolio is much different.  A 14-16% return for the equity portion isn't plausible.
Title: Re: 2017 Annual Letter
Post by: chrispy on March 11, 2018, 05:46:48 AM
Prem touched on many topics that have been talked about here. Share buybacks, the consequences of selling JNJ WFC USB, changes in their equity investment approach, and his sons $50m investment fund. It appeared to me he is a little humbled by the way things have gone over the past few years...
Title: Re: 2017 Annual Letter
Post by: StevieV on March 11, 2018, 06:51:31 AM
Need to break down the 7% returns.

Fairfax has averaged 23% / 50% / 27% for Cash/Bond/Stock Allocation between 1986 to 2014 (when I last calculated them).

Assuming a 25% 50% 25% cash bond stock allocation.

If you assume 2% returns for the cash portion, 5% returns for bond portion, to get to 7% investment returns on total portfolio, the stock portfolio has to return 16%.

Even assuming 6% for bond portfolio would require the stocks to deliver 14% annually.

Vinod

Vinod,

Thanks for correcting my calculations.  Seems to me it's a tall order to get to 7% return in this kind of market (high stock AND bond valuations).

My earlier post on this should be ignored.  I was reading and posting too fast.  7% for the equity portion of the portfolio and 7% for a blended portolio is much different.  A 14-16% return for the equity portion isn't plausible.

I need to look more closely at this later today.  The numbers below are a little hasty.

It looks to me as though the book value is about $12.5B US.  A little under $10B CAD.  (most I see are per share; so perhaps I have this total book value incorrect).

If there are $40B in investments, at a 95% combined ratio, why would they need a 7% return to grow book at 15% (about 1.8B USD)?

Anyway, I've gotten myself confused here and need to take a fresh look.
Title: Re: 2017 Annual Letter
Post by: chrispy on March 11, 2018, 08:08:41 AM
I recall that if you remove the equity hedges from the 2016 report, bv grew by ~15% over the past 5 years. While it's not fair to pick and choose data, it does show that amount is possible.
Title: Re: 2017 Annual Letter
Post by: petec on March 11, 2018, 10:53:22 AM
FFH will not consolidate Quess and thefore the gain will be recognised which until now was an unrealized gain in Thomas Cook.

Won't they equity account it and therefore still not record it in BV?
Title: Re: 2017 Annual Letter
Post by: petec on March 11, 2018, 10:55:09 AM
Only $9 billion is currently in bonds; of this amount only $1 billion is 5-10 year duration and $2 billion is more than 10 year duration.

...and even that part is fully rate-hedged, according to this letter.
Title: Re: 2017 Annual Letter
Post by: StubbleJumper on March 11, 2018, 11:24:54 AM
I am offline more than online these days, but I gave the letter a quick read on my phone.  The tone was better, but the governance issues persist.  I will say it because nobody else has.  Prem's underhanded move to reweight his multiple voting shares continues to manifest itself in poorer governance.

1) Does anybody actually believe his explanation of shifting $50m of shareholders' money to be invested by his son?  Suddenly in 2017 it became critically important to put a tiny portion of the port into small and med caps?  So since 1986 it wasn't important, but now it is?  And the existing brains in hamblin Watsa couldn't do it in house?  My bullshit detector is ringing rather loudly.

2) Minority shareholders need independent board members to keep Prem from doing wacky and reckless things from his little echo chamber.  Actually, I should say MAJORITY shareholders need this because the Watsa family has only a small minority economic interest in FFH.  So, Prem is going to use his multiple voting shares to appoint his daughter to the board.  Yet another appointee who lacks business and life experience.  We need these board members to challenge Prem's tendency to do wacky things.  Young family members who are beholden to Prem for any future ownership of FFH shares cannot do this effectively.  And damned few people under age 50 do a good job of this sort of challenge function because they just don't have the range of experience required to do it.

3) After 5 shitty years due mainly to Prem's ill considered hedging strategy, the company is finally well positioned to make some money in the next few years.  We just need him to not make the next position sizing error like blackberry or the hedging (hedging was a position sizing problem, principally).

4) After the pathetic governance abuses over the past 3 or 4 years, all we can do is hope to Christ that Prem doesn't do the ultimately stupid move and give one of his kids a real job at FFH where their lack of experience can really fuck things up.  At least with Ben, the worst fuck-up is likely the shortfall of 300 or 400 bps of return on a risk adjusted basis.  If they are ever given the role of president in one of the subs, we may be in deep trouble.


Some things never seem to improve.


SJ 
Title: Re: 2017 Annual Letter
Post by: FairFacts on March 11, 2018, 11:38:04 AM
Petec
"Won't they equity account it and therefore still not record it in BV?"

I'm not certain of this but I believe that if FFH receive the spin-out shares in Quess they will book them at their current market value which will be reflected in BV.
Title: Re: 2017 Annual Letter
Post by: petec on March 11, 2018, 02:48:01 PM
Petec
"Won't they equity account it and therefore still not record it in BV?"

I'm not certain of this but I believe that if FFH receive the spin-out shares in Quess they will book them at their current market value which will be reflected in BV.

I'm fairly sure that as it is a >20% holding Fairfax would equity account it, reporting their share of Quess's net income and book value and ignoring the market price. That's why equity accounted associates contribute to the $1.2bn of unrealised gains that aren't in the book value currently. Quess would just add to that, I think.

SJ - largely agree with you - not too bothered about Ben's $50m mandate but the appointment of a second child to the board worries me and the suggestion that it is done to defend the culture without any detail as to why she is the right person to defend the culture is insulting both to our collective intelligence as shareholders and, frankly, to the significant number of very bright people at FFH who are more deserving of that seat and whose experience of the culture is far greater. Very annoying. And if they are going into Singleton-style buyback mode as they say, at some point in the next decade those multivoters will have outright control.
Title: Re: 2017 Annual Letter
Post by: Spekulatius on March 11, 2018, 06:23:42 PM
I agree on above criticism by Stubblejumper and I really think that the culture is of questionable value here (as discussed in another thread) and I would rather see a culture change than preserving it.

i am not sure about this, but if it were not for realized gains, FFH would have shown an operating losss, due to underwriting losses (mostly from FFH) which interest income did not compensate for. Again, this can happen, but it’s not a great result operationally. Did anyone notice thwt AWH (which they bought last year) had an understand ration above 100 before catastrophe losses? Not great either, hopefully it’s a one off.

Also Premium blabbers a bit too much about all these small deals that  are with 1-2% positions (if not less) and while they work out well, they don’t do all that much for the bottom line. They need to get big things right (AWH acqusition etc.)
Title: Re: 2017 Annual Letter
Post by: petec on March 12, 2018, 04:33:14 AM
I agree on above criticism by Stubblejumper and I really think that the culture is of questionable value here (as discussed in another thread) and I would rather see a culture change than preserving it.

i am not sure about this, but if it were not for realized gains, FFH would have shown an operating losss, due to underwriting losses (mostly from FFH) which interest income did not compensate for. Again, this can happen, but it’s not a great result operationally. Did anyone notice thwt AWH (which they bought last year) had an understand ration above 100 before catastrophe losses? Not great either, hopefully it’s a one off.

Also Premium blabbers a bit too much about all these small deals that  are with 1-2% positions (if not less) and while they work out well, they don’t do all that much for the bottom line. They need to get big things right (AWH acqusition etc.)

I think the culture is phenomenally valuable. It's very clear to me Fairfax attracts and retains superb people and is increasingly a company that people want to sell to. Changing that would be madness. But that's not the same as saying power should be heritable. Power should go to the person best able to protect the culture.

I don't think I'd expect an operating profit (excl gains) in a big cat year, especially when interest rates are so low. I actually thought the underwriting results were phenomenal - if you look at the subsids FFH where FFH controlled the underwriting, i.e. excl AWH, FFH would have made an operating profit in a massive CAT year for the industry. That's extraordinary and not what I would have expected at all. AWH was awful but Prem was clear that they don't expect AWH's results to differ so substantially from FFH's going forward, which is a way of saying they'll influence the underwriting. The idea that one bad hurricane season somehow makes AWH - a company with a good history - a bad deal seems nuts to me. I suspect it'll be a home run. Could be wrong.

As for the investing, far better that they focus on putting together a series of asymmetric outcome 1s and 2s than try to do something big. I love the details on those.

Title: Re: 2017 Annual Letter
Post by: Shane on March 12, 2018, 07:23:58 AM
I thought it was curious that he didn't buyback more shares, but then realized he mentioned using FCF to buyback shares.  Has he indicated he will use the proceeds from First Capital/ICIC to fund repurchases directly that I may have missed?

If he intends to use FCF as the primary source of funding for repurchases, many people on this board will be very disappointed.
Title: Re: 2017 Annual Letter
Post by: Dazel on March 12, 2018, 08:03:53 AM



Fairfax closed the first capital, deal on Dec 28 2017....we have not seen any buy back numbers since that deal closed. They are limited in what they can buy back per day. I would like to see consistent buybacks at these levels....to the maximum they are allowed.

Once again there are different opinions on where Fairfax is....and that’s great it makes a market. The longer we stay cheap the better for a Singleton type buy back plan. Long term shareholders win...hard to imagine that anyone would be upset if Fairfax bought back enough stock so that the Watsa family once again owned the majority of the shares! If Fairfax operates like the plan is set out...shareholders will once again be very happy if not well....everyone will be grumpy including me! I have been around for the grumpy and I have been around for the euphoria.
I made ton of money during Grumpy times and would like to do it again!

“You can’t buy what’s  popular and do well in investing”

Warren Buffett
Title: Re: 2017 Annual Letter
Post by: petec on March 12, 2018, 08:11:23 AM
If he intends to use FCF as the primary source of funding for repurchases, many people on this board will be very disappointed.

He's referenced Singleton and Teledyne before and in the letter. Teledyne issued to acquire for years and then turned the ship and bought back for years. The buyback is a long term thing. They can't put too much to work too fast - the stock isn't liquid enough, unless they do an SIB, but then they'd have to pay a premium - and they've never said they wanted to. Expect the share count to be much lower in 10 years but not necessarily in 10 months.
Title: Re: 2017 Annual Letter
Post by: ourkid8 on March 12, 2018, 08:54:35 AM
The proceeds at the Holdco ( First Capital/ICICI) looks to be earmarked to buy out their joint venture partner OMERS to control Eurolife, Brit etc...

-"We expect to buy out OMERS within the next two years, so Eurolife will become a Fairfax insurance subsidiary. "
-"Fairfax currently owns 70.1% of Brit and has the ability to repurchase the shares owned by OMERS over time."

I thought it was curious that he didn't buyback more shares, but then realized he mentioned using FCF to buyback shares.  Has he indicated he will use the proceeds from First Capital/ICIC to fund repurchases directly that I may have missed?

If he intends to use FCF as the primary source of funding for repurchases, many people on this board will be very disappointed.
Title: Re: 2017 Annual Letter
Post by: gokou3 on March 12, 2018, 09:39:28 AM
If he intends to use FCF as the primary source of funding for repurchases, many people on this board will be very disappointed.

He's referenced Singleton and Teledyne before and in the letter. Teledyne issued to acquire for years and then turned the ship and bought back for years. The buyback is a long term thing. They can't put too much to work too fast - the stock isn't liquid enough, unless they do an SIB, but then they'd have to pay a premium - and they've never said they wanted to. Expect the share count to be much lower in 10 years but not necessarily in 10 months.

I vaguely remember there is a restriction by the TSX by how many % of O/S a company can buy back in a year under NCIB, as well as a restriction based on trading volume (i.e. not exceeding X% of daily volume).  Is anyone familiar with such rules on TSX?
Title: Re: 2017 Annual Letter
Post by: ourkid8 on March 12, 2018, 09:41:48 AM
25% of the daily trading volume.

 
If he intends to use FCF as the primary source of funding for repurchases, many people on this board will be very disappointed.

He's referenced Singleton and Teledyne before and in the letter. Teledyne issued to acquire for years and then turned the ship and bought back for years. The buyback is a long term thing. They can't put too much to work too fast - the stock isn't liquid enough, unless they do an SIB, but then they'd have to pay a premium - and they've never said they wanted to. Expect the share count to be much lower in 10 years but not necessarily in 10 months.

I vaguely remember there is a restriction by the TSX by how many % of O/S a company can buy back in a year under NCIB, as well as a restriction based on trading volume (i.e. not exceeding X% of daily volume).  Is anyone familiar with such rules on TSX?
Title: Re: 2017 Annual Letter
Post by: petec on March 12, 2018, 10:04:39 AM
The proceeds at the Holdco (proceeds from First Capital/ICICI) looks to be earmarked to buy out their joint venture partner OMERS to control Eurolife, brit etc...

-"We expect to buy out OMERS within the next two years, so Eurolife will become a Fairfax insurance subsidiary. "
-"Fairfax currently owns 70.1% of Brit and has the ability to repurchase the shares owned by OMERS over time."

I think you're right and the same applies AWH eventually, I would think.
Title: Re: 2017 Annual Letter
Post by: Viking on March 12, 2018, 10:09:21 AM
The proceeds at the Holdco (proceeds from First Capital/ICICI) looks to be earmarked to buy out their joint venture partner OMERS to control Eurolife, brit etc...

-"We expect to buy out OMERS within the next two years, so Eurolife will become a Fairfax insurance subsidiary. "
-"Fairfax currently owns 70.1% of Brit and has the ability to repurchase the shares owned by OMERS over time."

I thought it was curious that he didn't buyback more shares, but then realized he mentioned using FCF to buyback shares.  Has he indicated he will use the proceeds from First Capital/ICIC to fund repurchases directly that I may have missed?

If he intends to use FCF as the primary source of funding for repurchases, many people on this board will be very disappointed.

I also wonder if this is why we are not seeing more aggressive share buybacks today. Buying the remainder of Allied World is also part of the bigger plan. The challenge is what is Allied World worth today? Given the size of the losses reported and the poor underwriting, it must be worth less than what it was purchased for. OMERS is going to want a premium.
Title: Re: 2017 Annual Letter
Post by: Shane on March 12, 2018, 10:32:14 AM
The proceeds at the Holdco (proceeds from First Capital/ICICI) looks to be earmarked to buy out their joint venture partner OMERS to control Eurolife, brit etc...

-"We expect to buy out OMERS within the next two years, so Eurolife will become a Fairfax insurance subsidiary. "
-"Fairfax currently owns 70.1% of Brit and has the ability to repurchase the shares owned by OMERS over time."

I thought it was curious that he didn't buyback more shares, but then realized he mentioned using FCF to buyback shares.  Has he indicated he will use the proceeds from First Capital/ICIC to fund repurchases directly that I may have missed?

If he intends to use FCF as the primary source of funding for repurchases, many people on this board will be very disappointed.

I also wonder if this is why we are not seeing more aggressive share buybacks today. Buying the remainder of Allied World is also part of the bigger plan.

It would make sense.  I'm struggling a bit with his mentioning Teledyne.  Singleton bought back shares because they were cheap and he lacked a better use of capital.  How can Fairfax know whether their shares will be cheap at any point other than the near term?  Buybacks should be done opportunistically.  I'm willing to give him the benefit of the doubt that he'll only make repurchases at attractive prices, but laying out a long-term plan to reduce share count doesn't make a lot of sense to me.
Title: Re: 2017 Annual Letter
Post by: petec on March 12, 2018, 10:32:59 AM
I think the structure of the Brit deal with OMERS is:
- They don't have to pay a dividend but if they do it all goes to OMERS up to a hurdle, and above that it goes to FFH holdco.
- They can buy OMERS out over several years at cost plus an incentive which I seem to remember being about 7% a year.

So if the BV compounds at >7% the p/bv falls and if not, it rises.

AW has clearly had a rotten start to that but I suspect we are a few years from them buying the stub and it's got a great record of BV growth so time is on their side.
Title: Re: 2017 Annual Letter
Post by: petec on March 12, 2018, 10:35:30 AM
It would make sense.  I'm struggling a bit with his mentioning Teledyne.  Singleton bought back shares because they were cheap and he lacked a better use of capital.  How can Fairfax know whether their shares will be cheap at any point other than the near term?  Buybacks should be done opportunistically.  I'm willing to give him the benefit of the doubt that he'll only make repurchases are attractive prices, but laying out a long-term plan to reduce share count doesn't make a lot of sense to me.

Agreed, but he hasn't made a commitment and they are value monkeys at heart. My guess is they will be very disciplined. I think of it more as a floor, like the Buffet 1.2x BV floor.

That said he clearly thinks IV is well above book so it will be interesting to see where they stop!
Title: Re: 2017 Annual Letter
Post by: Spekulatius on March 12, 2018, 10:37:53 AM
Yes, doing a Teledyne only makes sense if shares are quite undervalued and there is no wayside knowing how Mr. Market will value FFH going forward.
Talking about a huge buyback in context of above makes sense.
Title: Re: 2017 Annual Letter
Post by: StevieV on March 12, 2018, 11:08:00 AM
Need to break down the 7% returns.

Fairfax has averaged 23% / 50% / 27% for Cash/Bond/Stock Allocation between 1986 to 2014 (when I last calculated them).

Assuming a 25% 50% 25% cash bond stock allocation.

If you assume 2% returns for the cash portion, 5% returns for bond portion, to get to 7% investment returns on total portfolio, the stock portfolio has to return 16%.

Even assuming 6% for bond portfolio would require the stocks to deliver 14% annually.

Vinod

Vinod,

Thanks for correcting my calculations.  Seems to me it's a tall order to get to 7% return in this kind of market (high stock AND bond valuations).

My earlier post on this should be ignored.  I was reading and posting too fast.  7% for the equity portion of the portfolio and 7% for a blended portolio is much different.  A 14-16% return for the equity portion isn't plausible.

I need to look more closely at this later today.  The numbers below are a little hasty.

It looks to me as though the book value is about $12.5B US.  A little under $10B CAD.  (most I see are per share; so perhaps I have this total book value incorrect).

If there are $40B in investments, at a 95% combined ratio, why would they need a 7% return to grow book at 15% (about 1.8B USD)?

Anyway, I've gotten myself confused here and need to take a fresh look.

I guess I need help here.  Here is the quote from the letter.

"With $40 billion in investments, a current run rate of $11.5 billion in net premiums written and $12.5 billion in
common shareholders’ equity, we need an investment return of approximately 7% in order to achieve an annual
15% increase in book value per share, assuming a consolidated combined ratio of 95% at our insurance operations.
"

7% return on $40B is $2.8B.  $2.8B would much greater than a 15% increase in the book value.  It seems to me as though they are subtracting from the $40B in investments to get the 7% number, but I don't understand the steps.  Some of the 40B is certainly necessary for claims, but they should keep the investment returns.  That being said, they don't have a free hand on the entire 40B given the necessity to be able to pay out claims.  Is that what they are taking out, or is there something else?

Thanks in advance for any assistance.
Title: Re: 2017 Annual Letter
Post by: gokou3 on March 12, 2018, 11:26:25 AM
Need to break down the 7% returns.

Fairfax has averaged 23% / 50% / 27% for Cash/Bond/Stock Allocation between 1986 to 2014 (when I last calculated them).

Assuming a 25% 50% 25% cash bond stock allocation.

If you assume 2% returns for the cash portion, 5% returns for bond portion, to get to 7% investment returns on total portfolio, the stock portfolio has to return 16%.

Even assuming 6% for bond portfolio would require the stocks to deliver 14% annually.

Vinod

Vinod,

Thanks for correcting my calculations.  Seems to me it's a tall order to get to 7% return in this kind of market (high stock AND bond valuations).

My earlier post on this should be ignored.  I was reading and posting too fast.  7% for the equity portion of the portfolio and 7% for a blended portolio is much different.  A 14-16% return for the equity portion isn't plausible.

I need to look more closely at this later today.  The numbers below are a little hasty.

It looks to me as though the book value is about $12.5B US.  A little under $10B CAD.  (most I see are per share; so perhaps I have this total book value incorrect).

If there are $40B in investments, at a 95% combined ratio, why would they need a 7% return to grow book at 15% (about 1.8B USD)?

Anyway, I've gotten myself confused here and need to take a fresh look.

I guess I need help here.  Here is the quote from the letter.

"With $40 billion in investments, a current run rate of $11.5 billion in net premiums written and $12.5 billion in
common shareholders’ equity, we need an investment return of approximately 7% in order to achieve an annual
15% increase in book value per share, assuming a consolidated combined ratio of 95% at our insurance operations.
"

7% return on $40B is $2.8B.  $2.8B would much greater than a 15% increase in the book value.  It seems to me as though they are subtracting from the $40B in investments to get the 7% number, but I don't understand the steps.  Some of the 40B is certainly necessary for claims, but they should keep the investment returns.  That being said, they don't have a free hand on the entire 40B given the necessity to be able to pay out claims.  Is that what they are taking out, or is there something else?

Thanks in advance for any assistance.

See http://www.cornerofberkshireandfairfax.ca/forum/fairfax-financial/2017-annual-letter/msg326836/#msg326836
Title: Re: 2017 Annual Letter
Post by: StevieV on March 12, 2018, 11:34:15 AM
I see.  My bad.  Taxes, expenses, etc.
Title: Re: 2017 Annual Letter
Post by: Dazel on March 12, 2018, 05:20:33 PM


Fairfax used the 2007 and 2008 CDS winnings to buy back ORH, NB, Zenith and others....they were some of the best investments Fairfax has ever made (I have recently seen other posters still calling Prem a thief because of how good the deals turned out for Fairfax). They are the reason that FFH is undervalued. I believe they will do the samething  going forward but buybacks will be the priority. If they make a extra couple of  billion on Blackberry or Greek investments etc...Then you will see them buy back more of Brit and Allied.
Are we not all glad they did not own all those two companies last year! For some reason memories are short right now with Fairfax....nature of the beast.

Can someone please comment on Brian Bradstreet’s bond record it’s astonishing And there is no one close globally over 5,10,20, 30 years!!!!! No one. He is a legend and no one will comment on it...
Someone do the work and try to find someone close please! Crazy.
Title: Re: 2017 Annual Letter
Post by: vinod1 on March 12, 2018, 08:03:42 PM
Can someone please comment on Brian Bradstreet’s bond record it’s astonishing And there is no one close globally over 5,10,20, 30 years!!!!! No one. He is a legend and no one will comment on it...
Someone do the work and try to find someone close please! Crazy.

You are measuring against the wrong benchmarks.

A couple of years back I am trying to answer the question of why they are outperforming so much in the bond markets. Equity I can understand and we can see the major investments and how they played out.

In bond markets the alpha has to come from (a) security selection or (b) making correct macro calls on interest rates.

No doubt there is some of both. But it still does not explain such a large out performance. What I realized is that they are including non-stock investments such as convertibles and possibly warrant deals into the fixed income segment. Nothing wrong in that. But they have a different risk profile and you cannot then measure up against pure bond benchmarks.

Vinod

Title: Re: 2017 Annual Letter
Post by: StubbleJumper on March 12, 2018, 11:56:42 PM
It would make sense.  I'm struggling a bit with his mentioning Teledyne.  Singleton bought back shares because they were cheap and he lacked a better use of capital.  How can Fairfax know whether their shares will be cheap at any point other than the near term?  Buybacks should be done opportunistically.  I'm willing to give him the benefit of the doubt that he'll only make repurchases are attractive prices, but laying out a long-term plan to reduce share count doesn't make a lot of sense to me.

Agreed, but he hasn't made a commitment and they are value monkeys at heart. My guess is they will be very disciplined. I think of it more as a floor, like the Buffet 1.2x BV floor.

That said he clearly thinks IV is well above book so it will be interesting to see where they stop!


Prem talking about buybacks is a bit like a teenager talking about sex.  They both engage the subject with a great deal of enthusiasm, but when the rubber hits the road (or something!), they don't actually do it anywhere near as often or as successfully as their optimistic plans would suggest.  Working from memory, Prem has made enthusiastic references to buybacks in about half of the annual letters -- on some occasions promising to go on offence while on other occasions trying to contextualize a share issuance.

My observation is that Prem is a serial acquirer, picking up a new meaningful sub every second year or so.  As long as that's his approach, FFH will be capital constrained.  There will be no meaningful buyback unless he runs out of insurance subs to buy and actually allows cash to accumulate for a couple of years.

While I'm not shy to criticize Prem's management when I think it is merited, in this case it amounts to a question of the relative value proposition of buying your own shares vs buying somebody else's.  He mostly finds reasonably priced subs to acquire, so it's not obvious that buybacks would necessarily have been better.

Going forward, my sense is that FFH could throw a Bil at buybacks during 2018 if it so desired.  A tender offer for 2m shares at US$550 would likely get the desired response.  But, I would be shocked to see it happen.  I'm guessing that the over/under for sharecount in 2023 would be 30m.


SJ
Title: Re: 2017 Annual Letter
Post by: Dazel on March 13, 2018, 02:52:43 AM




Gundlach is the bond king....tell me that his portfolio has not had the opportunity to  similarly weight to Bradstreet’s....so take the bench mark out compare their numbers.
https://doublelinefunds.com/wp-content/uploads/core-fixed-income-fund-fact-sheet.pdf?c=1520932995

Fairfax who have supposedly lost their touch because most want to forget their long term record...have missed the fact Bradstreet has remained at the top of his game in any time period you want to look at over the last 32 years (In 1999 and 2000 he would have underperformed) the dismal last 9 years for HW he has destroyed Gundlach’s Double line record  since inception it’s inception. Bradstreet is the bond king!

P.s I love Gundlach and listen to all he has to say...


Title: Re: 2017 Annual Letter
Post by: Dazel on March 13, 2018, 04:10:27 AM

There was a lot of discussion on bond losses that Fairfax would possibly take on their bond portfolio after the sell off that has occurred in the bond market. Fairfax hedged the portfolio in 2016 and again in 2017...100 basis point rate increase would be $150m loss (page104 2017 annual). As suspected they are in a position to take advantage  of higher rates unlike many others with large bond portfolios that will take large losses to their principal. Most reached for yield....their earnings of the past will be inflated where as as the earnings power of Fairfax has been hidden by their large cash balance and hedging of rates. Great job once again Mr. Bradstreet! 2018 looks very promising.
Title: Re: 2017 Annual Letter
Post by: Cardboard on March 13, 2018, 06:04:21 AM
"Can someone please comment on Brian Bradstreet’s bond record it’s astonishing And there is no one close globally over 5,10,20, 30 years!!!!! No one. He is a legend and no one will comment on it..."

"Great job once again Mr. Bradstreet! 2018 looks very promising."

Dazel, you seem to have a lot riding on Mr. Bradstreet. I would suggest that maybe you should read between the lines. The guy is about to retire:

"With Roger Lace, Brian Bradstreet and I having worked together for over 40 years, we felt it was time to begin the
transition to a younger group for the management of our investment portfolios, of course supervised by the three of
us."

Cardboard
Title: Re: 2017 Annual Letter
Post by: Value^2 on March 13, 2018, 07:32:40 AM

Fairfax who have supposedly lost their touch because most want to forget their long term record.
..have missed the fact Bradstreet has remained at the top of his game in any time period you want to look at over the last 32 years (In 1999 and 2000 he would have underperformed) the dismal last 9 years for HW he has destroyed Gundlach’s Double line record  since inception it’s inception. Bradstreet is the bond king!

Many of us want's to ignore their long term record (from the beginning)  because they're influenced by their first two years in business which were anomaly (fraud).
Title: Re: 2017 Annual Letter
Post by: ourkid8 on March 13, 2018, 09:46:51 AM
I did a quick search of the last 10 years of shareholder's letters and Prem only referenced that he plans to repurchase stock in the last 2.  Last year they were digesting the acquisitions + unlocking value (ICICI/First Capital) and this year I strongly believe Prem will keep to his word and repurchase stock with FCF.  I understand your doubts as actions speak louder than words so we will have to wait until Q1 earnings are released. 

Without using the capital that was unlocked from ICICI / First capital, I do not see them aggressively repurchasing stock via a tender offer.  They will slowly repurchase shares in the open market which is rather unfortunate especially at the current price however that is what he is guiding. 

"Having said that, we are raising our threshold for acquisitions now so as to benefit from the ones we have already made – and to buy back our stock." -March 10, 2017 annual letter
"Henry Singleton, at Teledyne, reversed this trend, as you know, and over the next ten years we expect to do the same – use our free cash flow to buy back our shares!" - March 9, 2018 annual letter

It would make sense.  I'm struggling a bit with his mentioning Teledyne.  Singleton bought back shares because they were cheap and he lacked a better use of capital.  How can Fairfax know whether their shares will be cheap at any point other than the near term?  Buybacks should be done opportunistically.  I'm willing to give him the benefit of the doubt that he'll only make repurchases are attractive prices, but laying out a long-term plan to reduce share count doesn't make a lot of sense to me.

Agreed, but he hasn't made a commitment and they are value monkeys at heart. My guess is they will be very disciplined. I think of it more as a floor, like the Buffet 1.2x BV floor.

That said he clearly thinks IV is well above book so it will be interesting to see where they stop!


Prem talking about buybacks is a bit like a teenager talking about sex.  They both engage the subject with a great deal of enthusiasm, but when the rubber hits the road (or something!), they don't actually do it anywhere near as often or as successfully as their optimistic plans would suggest.  Working from memory, Prem has made enthusiastic references to buybacks in about half of the annual letters -- on some occasions promising to go on offence while on other occasions trying to contextualize a share issuance.

My observation is that Prem is a serial acquirer, picking up a new meaningful sub every second year or so.  As long as that's his approach, FFH will be capital constrained.  There will be no meaningful buyback unless he runs out of insurance subs to buy and actually allows cash to accumulate for a couple of years.

While I'm not shy to criticize Prem's management when I think it is merited, in this case it amounts to a question of the relative value proposition of buying your own shares vs buying somebody else's.  He mostly finds reasonably priced subs to acquire, so it's not obvious that buybacks would necessarily have been better.

Going forward, my sense is that FFH could throw a Bil at buybacks during 2018 if it so desired.  A tender offer for 2m shares at US$550 would likely get the desired response.  But, I would be shocked to see it happen.  I'm guessing that the over/under for sharecount in 2023 would be 30m.


SJ
Title: Re: 2017 Annual Letter
Post by: Dazel on March 13, 2018, 09:49:05 AM


Cardboard,

Wouldn't that be nice if Prem et all retired! Then we would have that new culture we are looking for!
LOL.
Bradstreet has another $10b in him before he is done...the math is on his side!

Cheers!
Title: Re: 2017 Annual Letter
Post by: Dazel on March 13, 2018, 10:03:21 AM

That's $10b in bond gains...Bradstreet was buying more shares in August...the Fairfax team is putting on the foil! They are a competitive bunch a couple of strong years will put them in performance in per share book value growth and market appreciation of a handful companies in history have achieved. Bradstreet's record alone to me is just amazing. Make no mistake this is a tight team though. They are bruised not beaten.
I have been loud and proud...but it's the numbers that matter...we will see.
Title: Re: 2017 Annual Letter
Post by: racemize on March 13, 2018, 10:39:10 AM

Fairfax who have supposedly lost their touch because most want to forget their long term record.
..have missed the fact Bradstreet has remained at the top of his game in any time period you want to look at over the last 32 years (In 1999 and 2000 he would have underperformed) the dismal last 9 years for HW he has destroyed Gundlach’s Double line record  since inception it’s inception. Bradstreet is the bond king!

Many of us want's to ignore their long term record (from the beginning)  because they're influenced by their first two years in business which were anomaly (fraud).

I realize you appear to only post in FFH to bash Prem and the investments, but just for everyone else who is interested, compounding rate for book value per share excluding the first two years is ~15%.  Seems pretty good to me.
Title: Re: 2017 Annual Letter
Post by: racemize on March 13, 2018, 10:54:43 AM
On the topic of sharebuybacks, I have all the letters, so I searched over the whole period for buyback/repurchases (similar to ourkid over last 10 years).  Here's what I found:

From 1988-1992 they repurchased 34% of outstanding shares.  Discussion of this buyback happened afterwards mostly.

Mentioned buybacks again in 1996/7, first mention of Singleton.  Did not emphasize they would do it, just that they would consider it first.

In 1999-2000, they talked about repurchase similar to 1988-1992 period.  Looks like they repurchased ~1,000,000 shares.  Then had to issue shares to 2005 due to the well-known issues.

Repurchased 1,000,000 shares in 2008.

In 2010, they said "Please do not think we have forgotten about common stock buybacks. We have historically purchased significant amounts of our stock, but have recently chosen instead to buy some excellent companies which became available and that we think will create significant intrinsic value in the future."

Then in 2016 buybacks were mentioned and in 2017, there was a strong emphasis on buybacks that we all read.

So, outside of 1999/2000 it doesn't seem like they overpromised and underdelivered on share buybacks given what they said.
Title: Re: 2017 Annual Letter
Post by: Viking on March 13, 2018, 11:17:13 AM
On the topic of sharebuybacks, I have all the letters, so I searched over the whole period for buyback/repurchases (similar to ourkid over last 10 years).  Here's what I found:

From 1988-1992 they repurchased 34% of outstanding shares.  Discussion of this buyback happened afterwards mostly.

Mentioned buybacks again in 1996/7, first mention of Singleton.  Did not emphasize they would do it, just that they would consider it first.

In 1999-2000, they talked about repurchase similar to 1988-1992 period.  Looks like they repurchased ~1,000,000 shares.  Then had to issue shares to 2005 due to the well-known issues.

Repurchased 1,000,000 shares in 2008.

In 2010, they said "Please do not think we have forgotten about common stock buybacks. We have historically purchased significant amounts of our stock, but have recently chosen instead to buy some excellent companies which became available and that we think will create significant intrinsic value in the future."

Then in 2016 buybacks were mentioned and in 2017, there was a strong emphasis on buybacks that we all read.

So, outside of 1999/2000 it doesn't seem like they overpromised and underdelivered on share buybacks given what they said.

Thanks for doing the research... always good to get the facts :-)
Title: Re: 2017 Annual Letter
Post by: StubbleJumper on March 13, 2018, 11:17:50 AM
On the topic of sharebuybacks, I have all the letters, so I searched over the whole period for buyback/repurchases (similar to ourkid over last 10 years).  Here's what I found:

From 1988-1992 they repurchased 34% of outstanding shares.  Discussion of this buyback happened afterwards mostly.

Mentioned buybacks again in 1996/7, first mention of Singleton.  Did not emphasize they would do it, just that they would consider it first.

In 1999-2000, they talked about repurchase similar to 1988-1992 period.  Looks like they repurchased ~1,000,000 shares.  Then had to issue shares to 2005 due to the well-known issues.

Repurchased 1,000,000 shares in 2008.

In 2010, they said "Please do not think we have forgotten about common stock buybacks. We have historically purchased significant amounts of our stock, but have recently chosen instead to buy some excellent companies which became available and that we think will create significant intrinsic value in the future."

Then in 2016 buybacks were mentioned and in 2017, there was a strong emphasis on buybacks that we all read.

So, outside of 1999/2000 it doesn't seem like they overpromised and underdelivered on share buybacks given what they said.

So, if I've understood you correctly, your money is on repurchases rather than acquisitions?  I'm clearly on the other side as Prem always seems to find a target that he finds attractive.To buy back say $1b of shares, the normal course issuer bid hardly seems adequate.  I guess we'll see whether there's a tender offer.   Time will tell



SJ
Title: Re: 2017 Annual Letter
Post by: Dazel on March 13, 2018, 11:28:30 AM

Value2...short it...hopefully the price drops for you.
Gotta love the stock market.

Title: Re: 2017 Annual Letter
Post by: ourkid8 on March 13, 2018, 11:28:58 AM
They are authorized to repurchase 2,672,504 (Daily limit of 15,318) common shares. At the current market price, that's around C$1.7B.

 They have also entered into an automatic share purchase plan with a designated broker to allow for the purchase of its Subordinate Voting Shares under the NCIB at times when Fairfax normally would not be active in the market due to applicable regulatory restrictions or internal trading black-out periods. (Second link)

http://www.fairfax.ca/news/press-releases/press-release-details/2017/Intention-to-Make-a-Normal-Course-Issuer-Bid-for-Subordinate-Voting-Shares-and-Preferred-Shares/default.aspx
http://www.fairfax.ca/news/press-releases/press-release-details/2017/Fairfax-Enters-Into-Automatic-Share-Purchase-Plan/default.aspx

On the topic of sharebuybacks, I have all the letters, so I searched over the whole period for buyback/repurchases (similar to ourkid over last 10 years).  Here's what I found:

From 1988-1992 they repurchased 34% of outstanding shares.  Discussion of this buyback happened afterwards mostly.

Mentioned buybacks again in 1996/7, first mention of Singleton.  Did not emphasize they would do it, just that they would consider it first.

In 1999-2000, they talked about repurchase similar to 1988-1992 period.  Looks like they repurchased ~1,000,000 shares.  Then had to issue shares to 2005 due to the well-known issues.

Repurchased 1,000,000 shares in 2008.

In 2010, they said "Please do not think we have forgotten about common stock buybacks. We have historically purchased significant amounts of our stock, but have recently chosen instead to buy some excellent companies which became available and that we think will create significant intrinsic value in the future."

Then in 2016 buybacks were mentioned and in 2017, there was a strong emphasis on buybacks that we all read.

So, outside of 1999/2000 it doesn't seem like they overpromised and underdelivered on share buybacks given what they said.

So, if I've understood you correctly, your money is on repurchases rather than acquisitions?  I'm clearly on the other side as Prem always seems to find a target that he finds attractive.To buy back say $1b of shares, the normal course issuer bid hardly seems adequate.  I guess we'll see whether there's a tender offer.   Time will tell



SJ
Title: Re: 2017 Annual Letter
Post by: Spekulatius on March 13, 2018, 05:14:07 PM
If the thesis plays out and FFH shows 15% book value growth or anything close to it for a couple of years, there won’t be any buybacks because most likely the P/B will be too high to warrant buybacks. In the end it will be the organic book growth that determines if the investment  thesis works, not buybacks.
Title: Re: 2017 Annual Letter
Post by: StubbleJumper on March 13, 2018, 09:25:54 PM
They are authorized to repurchase 2,672,504 (Daily limit of 15,318) common shares. At the current market price, that's around C$1.7B.

 They have also entered into an automatic share purchase plan with a designated broker to allow for the purchase of its Subordinate Voting Shares under the NCIB at times when Fairfax normally would not be active in the market due to applicable regulatory restrictions or internal trading black-out periods. (Second link)

http://www.fairfax.ca/news/press-releases/press-release-details/2017/Intention-to-Make-a-Normal-Course-Issuer-Bid-for-Subordinate-Voting-Shares-and-Preferred-Shares/default.aspx
http://www.fairfax.ca/news/press-releases/press-release-details/2017/Fairfax-Enters-Into-Automatic-Share-Purchase-Plan/default.aspx

On the topic of sharebuybacks, I have all the letters, so I searched over the whole period for buyback/repurchases (similar to ourkid over last 10 years).  Here's what I found:

From 1988-1992 they repurchased 34% of outstanding shares.  Discussion of this buyback happened afterwards mostly.

Mentioned buybacks again in 1996/7, first mention of Singleton.  Did not emphasize they would do it, just that they would consider it first.

In 1999-2000, they talked about repurchase similar to 1988-1992 period.  Looks like they repurchased ~1,000,000 shares.  Then had to issue shares to 2005 due to the well-known issues.

Repurchased 1,000,000 shares in 2008.

In 2010, they said "Please do not think we have forgotten about common stock buybacks. We have historically purchased significant amounts of our stock, but have recently chosen instead to buy some excellent companies which became available and that we think will create significant intrinsic value in the future."

Then in 2016 buybacks were mentioned and in 2017, there was a strong emphasis on buybacks that we all read.

So, outside of 1999/2000 it doesn't seem like they overpromised and underdelivered on share buybacks given what they said.

So, if I've understood you correctly, your money is on repurchases rather than acquisitions?  I'm clearly on the other side as Prem always seems to find a target that he finds attractive.To buy back say $1b of shares, the normal course issuer bid hardly seems adequate.  I guess we'll see whether there's a tender offer.   Time will tell



SJ


Yes, I saw those pressers too.  But, it strikes me as a wee bit impractical to absorb a quarter of the daily volume over almost a whole year to buy back $1b of shares.  The price would likely end up moving enough that you might need to rethink the magnitude of that kind of buying programme.  For that kind of large buyback, a reverse auction tender offer capped at say 1.1 or 1.15x bv (ie, us$550 or a shade higher) seems to me a more realistic way of actually getting that many shares at a price that FFH might actually be prepared to pay.


SJ
Title: Re: 2017 Annual Letter
Post by: petec on March 14, 2018, 01:08:18 AM
The buyback history might also suggest it will be opportunistic. There is a very high chance of a material market selloff in the timeframe we are discussing (5-10y). That's when I'd expect to see material activity. Otherwise it will be an FCF-driven slow burn.
Title: Re: 2017 Annual Letter
Post by: Cardboard on March 14, 2018, 05:45:35 AM
If they want to buyback shares in large quantity without a tender offer, they can buy from a single seller within 5% of market price for any quantity. That is an allowed exemption.

There are funds that do liquidate, change in mandate, etc.

Cardboard
Title: Re: 2017 Annual Letter
Post by: racemize on March 14, 2018, 06:31:51 AM
On the topic of sharebuybacks, I have all the letters, so I searched over the whole period for buyback/repurchases (similar to ourkid over last 10 years).  Here's what I found:

From 1988-1992 they repurchased 34% of outstanding shares.  Discussion of this buyback happened afterwards mostly.

Mentioned buybacks again in 1996/7, first mention of Singleton.  Did not emphasize they would do it, just that they would consider it first.

In 1999-2000, they talked about repurchase similar to 1988-1992 period.  Looks like they repurchased ~1,000,000 shares.  Then had to issue shares to 2005 due to the well-known issues.

Repurchased 1,000,000 shares in 2008.

In 2010, they said "Please do not think we have forgotten about common stock buybacks. We have historically purchased significant amounts of our stock, but have recently chosen instead to buy some excellent companies which became available and that we think will create significant intrinsic value in the future."

Then in 2016 buybacks were mentioned and in 2017, there was a strong emphasis on buybacks that we all read.

So, outside of 1999/2000 it doesn't seem like they overpromised and underdelivered on share buybacks given what they said.

So, if I've understood you correctly, your money is on repurchases rather than acquisitions?  I'm clearly on the other side as Prem always seems to find a target that he finds attractive.To buy back say $1b of shares, the normal course issuer bid hardly seems adequate.  I guess we'll see whether there's a tender offer.   Time will tell



SJ

Mostly, it seemed you were making a few assertions about how often FFH has talked about buybacks and whether they followed through, so I wanted to see if that was accurate or not.  It seems to me they haven't talked a big game and not followed through before, as you suggested.
Title: Re: 2017 Annual Letter
Post by: StubbleJumper on March 14, 2018, 07:22:27 AM
On the topic of sharebuybacks, I have all the letters, so I searched over the whole period for buyback/repurchases (similar to ourkid over last 10 years).  Here's what I found:

From 1988-1992 they repurchased 34% of outstanding shares.  Discussion of this buyback happened afterwards mostly.

Mentioned buybacks again in 1996/7, first mention of Singleton.  Did not emphasize they would do it, just that they would consider it first.

In 1999-2000, they talked about repurchase similar to 1988-1992 period.  Looks like they repurchased ~1,000,000 shares.  Then had to issue shares to 2005 due to the well-known issues.

Repurchased 1,000,000 shares in 2008.

In 2010, they said "Please do not think we have forgotten about common stock buybacks. We have historically purchased significant amounts of our stock, but have recently chosen instead to buy some excellent companies which became available and that we think will create significant intrinsic value in the future."

Then in 2016 buybacks were mentioned and in 2017, there was a strong emphasis on buybacks that we all read.

So, outside of 1999/2000 it doesn't seem like they overpromised and underdelivered on share buybacks given what they said.

So, if I've understood you correctly, your money is on repurchases rather than acquisitions?  I'm clearly on the other side as Prem always seems to find a target that he finds attractive.To buy back say $1b of shares, the normal course issuer bid hardly seems adequate.  I guess we'll see whether there's a tender offer.   Time will tell



SJ

Mostly, it seemed you were making a few assertions about how often FFH has talked about buybacks and whether they followed through, so I wanted to see if that was accurate or not.  It seems to me they haven't talked a big game and not followed through before, as you suggested.


With respect, you've looked at the sharecount over the past 20 years, right?  Do those numbers suggest to you that buybacks have truly been a goal, or do those numbers suggest to you that acquisitions have truly been a goal?  So, yes Prem has talked about buybacks on several occasions and the sharecount keeps trending up.

With that observation, I take his comments about Teledyne with a hefty dose of salt.  As I said, my money is on more acquisitions rather than buybacks.  And, as I noted, this isn't necessarily a bad thing.  If your own shares aren't the best use of your cash, then don't buy them.  Allocate cash to the best opportunity available.

Finally, if the world does evolve as Prem has suggested, in the short term a good chunk of the $2.5b cash held in the holdco could be used for a buyback.  I've thrown out the round number of a Bil, but it wouldn't be outrageous to bump that to $1.5 Bil which would still leave a respectable holdco cash balance.  For that kind of magnitude there's a practical decision to be made about the vehicle.  The normal course issuer bid is a boiler plate filing every year, but it could actually be used in this case.  I just think a tender might work better for the potential volumes that I've posited.  On the other hand, if it's just us$400m or something, the normal course issuer bid would probably work fine.


SJ
Title: Re: 2017 Annual Letter
Post by: racemize on March 14, 2018, 07:33:43 AM
Mostly, it seemed you were making a few assertions about how often FFH has talked about buybacks and whether they followed through, so I wanted to see if that was accurate or not.  It seems to me they haven't talked a big game and not followed through before, as you suggested.


With respect, you've looked at the sharecount over the past 20 years, right?  Do those numbers suggest to you that buybacks have truly been a goal, or do those numbers suggest to do that acquisitions have truly been a goal?  So, yes Prem has talked about buybacks on several occasions and the sharecount keeps trending up.

With that observation, I take his comments about Teledyne with a hefty dose of salt.  As I said, my money is on more acquisitions rather than buybacks.  And, as I noted, this isn't necessarily a bad thing.  If your own shares aren't the best use of your cash, then don't buy them.  Allocate cash to the best opportunity available.

Finally, if the world does evolve as Prem has suggested, in the short term a good chunk of the $2.5b cash held in the holdco could be used for a buyback.  I've thrown out the round number of a Bil, but it wouldn't be outrageous to bump that to $1.5 Bil which would still leave a respectable holdco cash balance.  For that kind of magnitude there's a practical decision to be made about the vehicle.  The normal course issuer bid is a boiler plate filing every year, but it could actually be used in this case.  I just think a tender might work better for the potential volumes that I've posited.  On the other hand, if it's just us$400m or something, the normal course issuer bid would probably work fine.


SJ

Just to be really clear what we're talking about here.  You said this:

Quote
Prem talking about buybacks is a bit like a teenager talking about sex.  They both engage the subject with a great deal of enthusiasm, but when the rubber hits the road (or something!), they don’t actually do it anywhere near as often or as successfully as their optimistic plans would suggest.  Working from memory, Prem has made enthusiastic references to buybacks in about half of the annual letters -- on some occasions promising to go on offence while on other occasions trying to contextualize a share issuance.

He didn't talk about it anywhere close to 50% of the letters.  He didn't promise a bunch of buybacks like he is now and not follow through as you suggested.  That's all I was addressing as it didn't sound right to me.  I'm not making any assertions other than to address specifically what you asserted with the facts of what he said in the letters.


Moreover, I didn't say he didn't issue shares--he did.  I'm saying he didn't before say "we are done with buying companies and are going to start reducing sharecount".  In fact, as I quoted, in 2010, he said "Please do not think we have forgotten about common stock buybacks. We have historically purchased significant amounts of our stock, but have recently chosen instead to buy some excellent companies which became available and that we think will create significant intrinsic value in the future."  So, to me, it seems pretty clear that he talked about acquisitions and then made some.  Now he's saying those are no longer necessary, and he's talking about buying back shares.  This all seems reasonable to me and does not show a pattern of talking one way and doing another with respect to share buybacks.
Title: Re: 2017 Annual Letter
Post by: StubbleJumper on March 14, 2018, 07:57:13 AM
Mostly, it seemed you were making a few assertions about how often FFH has talked about buybacks and whether they followed through, so I wanted to see if that was accurate or not.  It seems to me they haven't talked a big game and not followed through before, as you suggested.


With respect, you've looked at the sharecount over the past 20 years, right?  Do those numbers suggest to you that buybacks have truly been a goal, or do those numbers suggest to do that acquisitions have truly been a goal?  So, yes Prem has talked about buybacks on several occasions and the sharecount keeps trending up.

With that observation, I take his comments about Teledyne with a hefty dose of salt.  As I said, my money is on more acquisitions rather than buybacks.  And, as I noted, this isn't necessarily a bad thing.  If your own shares aren't the best use of your cash, then don't buy them.  Allocate cash to the best opportunity available.

Finally, if the world does evolve as Prem has suggested, in the short term a good chunk of the $2.5b cash held in the holdco could be used for a buyback.  I've thrown out the round number of a Bil, but it wouldn't be outrageous to bump that to $1.5 Bil which would still leave a respectable holdco cash balance.  For that kind of magnitude there's a practical decision to be made about the vehicle.  The normal course issuer bid is a boiler plate filing every year, but it could actually be used in this case.  I just think a tender might work better for the potential volumes that I've posited.  On the other hand, if it's just us$400m or something, the normal course issuer bid would probably work fine.


SJ

Just to be really clear what we're talking about here.  You said this:

Quote
Prem talking about buybacks is a bit like a teenager talking about sex.  They both engage the subject with a great deal of enthusiasm, but when the rubber hits the road (or something!), they don’t actually do it anywhere near as often or as successfully as their optimistic plans would suggest.  Working from memory, Prem has made enthusiastic references to buybacks in about half of the annual letters -- on some occasions promising to go on offence while on other occasions trying to contextualize a share issuance.

He didn't talk about it anywhere close to 50% of the letters.  He didn't promise a bunch of buybacks like he is now and not follow through as you suggested.  That's all I was addressing as it didn't sound right to me.  I'm not making any assertions other than to address specifically what you asserted with the facts of what he said in the letters.


Moreover, I didn't say he didn't issue shares--he did.  I'm saying he didn't before say "we are done with buying companies and are going to start reducing sharecount".  In fact, as I quoted, in 2010, he said "Please do not think we have forgotten about common stock buybacks. We have historically purchased significant amounts of our stock, but have recently chosen instead to buy some excellent companies which became available and that we think will create significant intrinsic value in the future."  So, to me, it seems pretty clear that he talked about acquisitions and then made some.  Now he's saying those are no longer necessary, and he's talking about buying back shares.  This all seems reasonable to me and does not show a pattern of talking one way and doing another with respect to share buybacks.


You seem seized upon my intro that, working from memory, buybacks were mentioned in about half the letters.  That's the danger of working from memory of course, but I am away from my office for two months in some interesting, but rural places.  I cannot peruse 20 years of letters, so rough recollection, as good or poor as it is, must do.

The broad message, however, doesn't change.  I fully expect the serial acquisitions to continue, and I fully expect a higher sharecount five years from today.  And, that's not necessarily a bad thing.  There'll be buybacks just as there are small repurchases every year, but I'm not holding my breath for a Teledyne model, because that's just not Prem's style.


Cheers

SJ
Title: Re: 2017 Annual Letter
Post by: flesh on March 15, 2018, 11:44:15 AM
Gokou3 - You need to take into account Corporate expenses, runoff, interest expenses and preferred dividends.

Vinod

How do I back into corporate expenses that aren't included in combined ratio? Is a tax rate of 25% conservative considering most business is done in countries that have a lower effective tax rate? If doing a steady state/owners earnings type of analysis isn't it safe to assume runoff is replaced with organic growth at least?

If we assume 25% cash (2 years or less), 50% bond(and divi/interest paying instruments), 25% equities, with 40b in investments (inclusive of holdco cash) and a conservative (based on recent five years) 98% combined ratio on 12b premiums written and a 25% tax rate.

10b cash @ 2%        = 200m
20b bond @ 4.5%     = 900m
10b stock @ 7%       = 700m

underwriting profit    =240m
+non insurance profit=?
                               = 2040m
-corporate/what else?
- 242 m interest        = 1798m
-25% tax                  = 449m
                                = 1348m

-67m preferred          = 1281m

Trying to wrap my head around this from a what will I be paid, conservatively, in the next few years standpoint. I'm still digging into this, just thought I might accelerate the answering of these questions by farming it out here.


                           
Title: Re: 2017 Annual Letter
Post by: petec on March 16, 2018, 11:53:14 AM
Reading all three letters I am really struck by the quality of managers these guys are able to attract. E.g. the guys they've hired to build Digit (who previously built Bajaj Allianz and then spent 5 years in Munich at senior levels in Allianz)) and the guy they have running Philafrica Foods (ex CEO Nestle China). There are impressive people just about everywhere.
Title: Re: 2017 Annual Letter
Post by: LightWhale on March 20, 2018, 09:21:43 AM
Has any of you had a look at Eurobank?  Trading at 1/4 to book, Prem in the letter argues it's one of the cheaper stocks in the world
Title: Re: 2017 Annual Letter
Post by: petec on March 20, 2018, 09:48:20 AM
Yes. There are some good presentations on the investor website and you can make a case that Greece will start reflating soon which would be great news. However the ECB stress tests in May will be key. Even if capital levels are ok the ECB and Berlin may insist on dilutive capital raises - they want Greece to exit its bailout this year and they don't want it to collapse back into bailout in a couple more years.

Now, you might argue that even if they issued 100% more shares you'd still only be at 0.5x book...but that's the risk.
Title: Re: 2017 Annual Letter
Post by: TwoCitiesCapital on March 20, 2018, 12:25:13 PM
Has any of you had a look at Eurobank?  Trading at 1/4 to book, Prem in the letter argues it's one of the cheaper stocks in the world

I have taken a speculative starter position in it again around EUR 0.80. The problem is the last time Greece looked like it was making progress, there was a political surprise and investors lost 99% of their investment. I'm betting it won't happen again, but you never really know...

Once bitten, twice shy.
Title: Re: 2017 Annual Letter
Post by: FairFacts on March 20, 2018, 01:51:01 PM
Kyle Bass of VC Hayman Capital (macro, event driven focus) reckons that Greece will break out in 2018 with a likely change in leadership. He predicts that Tsipras will be ousted before year end and replaced by the far more business friendly Mitsotakis. He says there is tons of money on the sidelines waiting to flood back into Greece.
Title: Re: 2017 Annual Letter
Post by: ValueMaven on March 20, 2018, 05:26:28 PM
FFH trading right around BV...anyone warming up to the name given the recent/modest selloff?

Sincerely,
VM
Title: Re: 2017 Annual Letter
Post by: petec on March 21, 2018, 03:15:33 AM
Kyle Bass of VC Hayman Capital (macro, event driven focus) reckons that Greece will break out in 2018 with a likely change in leadership. He predicts that Tsipras will be ousted before year end and replaced by the far more business friendly Mitsotakis. He says there is tons of money on the sidelines waiting to flood back into Greece.

Do you have a source for this?
Title: Re: 2017 Annual Letter
Post by: FairFacts on March 21, 2018, 05:29:16 AM
Petec,
https://www.bloomberg.com/news/articles/2017-10-06/bass-bets-greek-elections-called-within-a-year-spurring-rally (https://www.bloomberg.com/news/articles/2017-10-06/bass-bets-greek-elections-called-within-a-year-spurring-rally)

or

https://www.cnbc.com/2017/11/14/kyle-bass-predicts-investors-ready-to-put-billions-into-greek-economy.html (https://www.cnbc.com/2017/11/14/kyle-bass-predicts-investors-ready-to-put-billions-into-greek-economy.html)
Title: Re: 2017 Annual Letter
Post by: petec on March 21, 2018, 06:19:05 AM
Thanks!

Title: Re: 2017 Annual Letter
Post by: FairFacts on March 21, 2018, 07:41:11 AM
FFH trading right around BV...anyone warming up to the name given the recent/modest selloff?

Sincerely,
VM

I am very warm on FFH these days. I'm not sure what the catalyst will be to get the price moving but a couple of thoughts come to mind.
1. Are the AWH shareholders who received FFH shares selling steadliy and thus depressing the price?
2. The market may need to see several quarters of the new approach 'playing offence' and 'disciplined underwriting'.
3. When and in what form will buybacks take?

As WB said "The Stock Market is a device for transferring money from the impatient to the patient".
Title: Re: 2017 Annual Letter
Post by: Dazel on March 21, 2018, 09:26:01 AM


I would agree with your number 1. There is a constant seller in the market that is knocking down the price and it is likely former AWH holders that waited for 2018 to sell for lower tax rate on their capital gains. To be honest this is like looking a gift horse in the mouth I would like Prem to pick off all of those shares being sold.

Title: Re: 2017 Annual Letter
Post by: LightWhale on March 22, 2018, 01:04:12 AM
Thanks Petec, Fairfacts and TwoCities,
I'll start digging in on the weekend.