Corner of Berkshire & Fairfax Message Board

General Category => Fairfax Financial => Topic started by: Dazel on January 18, 2019, 06:00:41 AM

Title: Fairfax2019
Post by: Dazel on January 18, 2019, 06:00:41 AM

This yearís catalysts

-Fairfax followers are as bearish as I have seen since 2003.

-I expect the best bond manager (Brian Bradstreet) in the world to have filled Fairfax Xmas stockings with corporate and other bonds that got trounced in December. We have seen him move very quickly in the past... 2008 he bought $7b in tax free muniís yielding 7% in less than a month and sold almost the entire US treasury holding that was larger than that at a massive profit during the same time. In the first half of the 2000ís he did very well in corporate bonds where he needed to be nimble before 2007. I am betting on a much higher yield on Fairfax large portfolio which will take operating earnings higher. This and a likely higher shift into higher yielding short term treasuries in the fall will show more of the earnings power of Fairfax as opposed to holding 50% cash holdings.

-Indiaís growth remains the highest in the world and Fairfax is a way to play that

-share buyback will accelerate at these levels albeit not as big as I would like!

- insurance companies will continue to improve

-equity positions are at rock bottom with little downside risk

-as previously discussed I am unhappy with share based awards...these will be disclosed in detail by Prem.

Most importantly this is a solid business with loads of potential that is selling dirt cheap for all of the reasons discussed here. Is it a redemption year for Prem and his team at Fairfax? We will see.

-
Title: Re: Fairfax2019
Post by: Dazel on January 18, 2019, 07:06:21 AM

Disclosure: I have put my money where my mouth is and been buying FFH
Title: Re: Fairfax2019
Post by: StubbleJumper on January 18, 2019, 07:18:51 AM

Disclosure: I have put my money where my mouth is and been buying FFH


Were you able to buy some for less than US$450?  Seems like a no-brainer at that price.


SJ
Title: Re: Fairfax2019
Post by: petec on January 18, 2019, 09:39:16 AM
Dazel, how do you value Fairfax?
Title: Re: Fairfax2019
Post by: Cardboard on January 18, 2019, 02:15:13 PM
"-Fairfax followers are as bearish as I have seen since 2003."

Seriously?

Back then it traded well well below book value and it is not the case these days. Now they need to generate earnings at a reasonable ROE to justify trading above book and to move up.

Cardboard
Title: Re: Fairfax2019
Post by: Dazel on January 18, 2019, 03:49:05 PM


Petec,

They are under earning...50% cash and very poor equity performance....I expect that to change. I expect Hamblin Watsa too come through mostly Bradstreet and the bond side and higher yields. Insurance companies are world class and the other income line has quietly risen materially.

Cardboard,
You sound negative....lol. You and everyone else are entitled to your opinion. I have given you mine...

I am not saying I am right I am telling you what I think....and definitely will not be arguing and debating it until the earnings present themselves....which will prove me right or wrong.

2019 is all about earnings....good or bad. It is time for Fairfax to perform...if they do not I will accept it and move on. If it sounds like a broken record I appreciate the skepticism from all ďYou have not been wrongĒ!!!

Prem needs to once again prove himself through his team or the market is right.

Title: Re: Fairfax2019
Post by: shalab on January 19, 2019, 07:49:43 AM
Dazel, hope FRFHF works out for you.

US is a 20.5 trillion economy. India is at 2.7 trillion. Canada is at 1.7 trillion or so. FRFHF market cap is 13 billion. There are many opportunities in the market some of which will undoubtedly be better than FRFHF.

One can simply buy ThomasCook India and bypass the overhead of owning FRFHF. Even better, one can buy businesses with better prospects in India. Note that ThomasCook India has been flat since 2015 in Rupee terms and doesnt pay much of a dividend. The indian rupee has declined against USD at the same time.


"-Fairfax followers are as bearish as I have seen since 2003."

Seriously?

Back then it traded well well below book value and it is not the case these days. Now they need to generate earnings at a reasonable ROE to justify trading above book and to move up.

Cardboard
Title: Re: Fairfax2019
Post by: Dazel on January 19, 2019, 09:28:57 AM
Shalab,

Totally agree....Fairfax India and others  are a better bet for sure if you are India focused. $20trillion @2% vs $2.7t that will double likely every 6 or 7 years....is the place to be. Many better opportunities in India and those with feet on the ground would blow away Fairfax or any other investment vehicle.

Fairfax gives you exposure to India and particular in the private market they are integrated in the financial system there and will get a lot more opportunities than others because of the trust they have earned there. But as you say being able to play in all of the other world economies is very important ...No one else really gives you that optionality that I see with direct exposure to India of ďsomeĒ scale. If there is someone I would be very interested in them as an investment.

Ironically, Thomas Cook India has been a home run that Hamblin Watsa do not get much credit for...in the equities poor performance hit they are taking publically. What have you done for me lately prevails and that is fair after some of the big stumbles.

Ie Apple and Amazon are growing massively in India but will not even move the needle to their world incomes.


Title: Re: Fairfax2019
Post by: Dazel on January 19, 2019, 10:07:24 AM

Just a follow up....there is lots of opportunity out there Shalab I agree...Fairfaxís advantage is they went into this sell off period with $28 billion of bonds and cash....of  note is that interest rates dropped substantially creating appreciation in their large treasury portion of those holdings and allowing them the opportunity to buy into a frozen bond market. In the past this has been their strength.

There was a window that if Fairfax acted that they would have seized large near term and long term profits in the investment portfolio....which has been the drag on Fairfax. So when you say there are many opportunities now which there are....many have had to wait for their holdings to appreciate to buy other things because they had little dry powder to buy into the worst December in almost 90 years.

Fairfax got a fast ball right down the middle of the plate ....

Did they hit that fast ball? Only they know that right now...but I donít have to pay for that probability right now because the stock is cheap enough that they will do fine if they did not hit that fast ball out of the park.


Title: Re: Fairfax2019
Post by: shalab on January 19, 2019, 10:18:35 AM
Dazel - my estimate is that FRFHF has ~10% exposure to India. It is definitely huge compared to FAANGM's exposure to India. However, even old economy companies like BTI, CL, PG, UN have more exposure to India than FAANGM.

One can open a brokerage account in India (it is quite a hassle, time consuming but can be done), it will allow one to buy public companies in India. I expect Indian economy to grow to 5.5 trillion USD by 2030. At the same time US economy should be around 30-35 trillion USD. Canada would probably be at 2.5 trillion While India will do very well, the USA will also do well.

Shalab,

Totally agree....Fairfax India and others  are a better bet for sure if you are India focused. $20trillion @2% vs $2.7t that will double likely every 6 or 7 years....is the place to be. Many better opportunities in India and those with feet on the ground would blow away Fairfax or any other investment vehicle.

Fairfax gives you exposure to India and particular in the private market they are integrated in the financial system there and will get a lot more opportunities than others because of the trust they have earned there. But as you say being able to play in all of the other world economies is very important ...No one else really gives you that optionality that I see with direct exposure to India of ďsomeĒ scale. If there is someone I would be very interested in them as an investment.

Ironically, Thomas Cook India has been a home run that Hamblin Watsa do not get much credit for...in the equities poor performance hit they are taking publically. What have you done for me lately prevails and that is fair after some of the big stumbles.

Ie Apple and Amazon are growing massively in India but will not even move the needle to their world incomes.
Title: Re: Fairfax2019
Post by: petec on January 19, 2019, 10:32:31 AM


Petec,

They are under earning...50% cash and very poor equity performance....I expect that to change. I expect Hamblin Watsa too come through mostly Bradstreet and the bond side and higher yields. Insurance companies are world class and the other income line has quietly risen materially.


Yes, Iím aware of this but what I meant was how do you value it? P/earnings power? P/BV? P/TBV? Iím interested in how you think about this.

Also, you say Thomas Cook was a home run. Was it? Or was it just Quess?
Title: Re: Fairfax2019
Post by: Dazel on January 19, 2019, 01:18:30 PM
Shalab,

It is higher % of Fairfax common stock portfolio.



So Petec....I am buying for the upside of earnings power or PE. I believe that Fairfax is worth more dead than alive and that is my margin of safety.

So letís invert.

If I took all of Fairfax assets and had them run the same...but hypothetically Markel Gayner asset management ran the $40b investment portfolio starting September 30. What do you think the perception would be of earnings going forward?
Most of Markelís annual reports start with it was an excellent investment year....they are consistent and they are good. They command an above 20 PE and with an investment portfolio half the size of Fairfax and only 10% cash have earned such a great reputation that the stock trades for $2b more than Fairfax in the market.
The investment community would tabulate how much more money Fairfax could make if Markel Gayner were running investments if things were the same with $40b as opposed to $20b!!!! They would double their investment returns and wow there would be sooo much money made over the next 10 years they would be catching Berkshire...okay maybe that is a bit much but you get the point. The earnings power of the investment portfolio is there. The market puts a 0 value on it because it has lost faith in Prem and his team. The value at Markel would be significant.

HW needs to perform for the earnings power to show up....I am betting they will.

P.S I used September 30 because Markel only had $2b cash going into mini fall crash they would not have been able to do much...what do you think they would have done if they had $20b cash equivalents to go on a buying spree?



Title: Re: Fairfax2019
Post by: Dazel on January 19, 2019, 02:59:03 PM

Petec,

You are correct Quess was the home run.
Title: Re: Fairfax2019
Post by: TwoCitiesCapital on January 19, 2019, 09:54:34 PM

Just a follow up....there is lots of opportunity out there Shalab I agree...Fairfaxís advantage is they went into this sell off period with $28 billion of bonds and cash....of  note is that interest rates dropped substantially creating appreciation in their large treasury portion of those holdings and allowing them the opportunity to buy into a frozen bond market. In the past this has been their strength.

There was a window that if Fairfax acted that they would have seized large near term and long term profits in the investment portfolio....which has been the drag on Fairfax. So when you say there are many opportunities now which there are....many have had to wait for their holdings to appreciate to buy other things because they had little dry powder to buy into the worst December in almost 90 years.

Fairfax got a fast ball right down the middle of the plate ....

Did they hit that fast ball? Only they know that right now...but I donít have to pay for that probability right now because the stock is cheap enough that they will do fine if they did not hit that fast ball out of the park.

I'm not convinced they did. I would love it if Fairfax had locked in Treasury yields at 3.2% or rolled into credit in December, but neither seems REALLY compelling if you're waiting for a fat pitch.

3.2% was the highest rates in 7 years, BUT Fairfax believes we're in a period of unprecedented economic growth and rising rates...which makes 3.2% less compelling especially when compared to historical Treasuries. Did credit spreads widen in December? Yes. But they're still mostly tight by historical standards.

I think they'd have waited for higher rates and spreads before making a move given their outlook on valuations and rates.
Title: Re: Fairfax2019
Post by: StubbleJumper on January 20, 2019, 08:03:59 AM

Just a follow up....there is lots of opportunity out there Shalab I agree...Fairfaxís advantage is they went into this sell off period with $28 billion of bonds and cash....of  note is that interest rates dropped substantially creating appreciation in their large treasury portion of those holdings and allowing them the opportunity to buy into a frozen bond market. In the past this has been their strength.

There was a window that if Fairfax acted that they would have seized large near term and long term profits in the investment portfolio....which has been the drag on Fairfax. So when you say there are many opportunities now which there are....many have had to wait for their holdings to appreciate to buy other things because they had little dry powder to buy into the worst December in almost 90 years.

Fairfax got a fast ball right down the middle of the plate ....

Did they hit that fast ball? Only they know that right now...but I donít have to pay for that probability right now because the stock is cheap enough that they will do fine if they did not hit that fast ball out of the park.

I'm not convinced they did. I would love it if Fairfax had locked in Treasury yields at 3.2% or rolled into credit in December, but neither seems REALLY compelling if you're waiting for a fat pitch.

3.2% was the highest rates in 7 years, BUT Fairfax believes we're in a period of unprecedented economic growth and rising rates...which makes 3.2% less compelling especially when compared to historical Treasuries. Did credit spreads widen in December? Yes. But they're still mostly tight by historical standards.

I think they'd have waited for higher rates and spreads before making a move given their outlook on valuations and rates.


Well, locking in at 3.2% might have been the thing to do in retrospect, but in the short term it probably doesn't make that much difference.  My guess is that half the $27B of cash/bonds were rolled during 2018 and if they were rolled into 2-year treasuries, what would be the weighted average rate?  Would it have been around 2.7% over the year?  So the "penalty" for not having perfectly managed the bond port might be ~50 bps on $27B? 

It would clearly have been better to have nailed it perfectly, but I don't mind the small-ish penalty that they've taken on the theory that rates are headed north over the next five-ish years.


SJ
Title: Re: Fairfax2019
Post by: Spekulatius on January 20, 2019, 09:03:30 AM
Dazel - my estimate is that FRFHF has ~10% exposure to India. It is definitely huge compared to FAANGM's exposure to India. However, even old economy companies like BTI, CL, PG, UN have more exposure to India than FAANGM.

One can open a brokerage account in India (it is quite a hassle, time consuming but can be done), it will allow one to buy public companies in India. I expect Indian economy to grow to 5.5 trillion USD by 2030. At the same time US economy should be around 30-35 trillion USD. Canada would probably be at 2.5 trillion While India will do very well, the USA will also do well.


High GNP growth does not necessarily mean a strong stock performance. China for example still has high GNP growth, but a very poor stock performance for many years now. There are numerous other examples. I believe stock market performance depends much more on how this GNP growth is achieved and profitability metrics than the actual GNP growth
Title: Re: Fairfax2019
Post by: shalab on January 20, 2019, 09:36:14 AM
What you are saying is absolutely right - I like USA the best when it comes to the stock market - the managements are generally shareholder friendly and very efficient. It doesn't hurt that USA has some of the best companies on the planet. E.g:, Japan has several successful companies but several investors have written about their experiences there - stakeholders other than shareholders are given priority.

India's commercial and court system are borrowed from Britain. So they are similar to the US in many respects. People should see better returns in India compared to some of the other "emerging" markets. E.g:, there is a reason why many RE companies in Hong Kong trade for low valuations - fraud is rampant. This problem of dishonest promoters also exists in India, out of the 6000 companies listed in the exchange, only about a 1000 or so are investable.

Here is the story from one of the super investors for reference:

https://economictimes.indiatimes.com/markets/stocks/news/picking-leel-electricals-was-a-mistake-admits-porinju/articleshow/67519758.cms


Dazel - my estimate is that FRFHF has ~10% exposure to India. It is definitely huge compared to FAANGM's exposure to India. However, even old economy companies like BTI, CL, PG, UN have more exposure to India than FAANGM.

One can open a brokerage account in India (it is quite a hassle, time consuming but can be done), it will allow one to buy public companies in India. I expect Indian economy to grow to 5.5 trillion USD by 2030. At the same time US economy should be around 30-35 trillion USD. Canada would probably be at 2.5 trillion While India will do very well, the USA will also do well.


High GMp growth does not necessarily mean a strong stock performance. China for example still has high GNP growth, but a very poor stock performance for many years now. There are numerous other examples. I believe stock market performance depends much more on how this GNP growth is achieved and profitability metrics than the actual GNP growth
Title: Re: Fairfax2019
Post by: Dazel on January 20, 2019, 01:50:42 PM
Shalab,

First of all I have benefitted from your work here....thank you. I believe you discovered the share awards which I have a big problem with.

I see you on the Berkshire thread which is excellent discussing the value of the holdings and $100b cash....Berkshire holdings were decimated in the fourth quarter. Mr. Buffett has a$20b limit for holding cash.

So Buffett has $80b cash on a $500b market cap...and many are excited about his buys despite Apples massive losses as well as others.

My questions to you are

1. Are Prem and HW actually that bad that with $20b+ in cash on a $12b market cap and minimal losses in the fourth quarter in comparison to Berkshire....that you doubt they benefit from the opportunity more than Berkshire did?

2. What is Fairfax worth if Mr. Buffett is running the investment portfolio?
Title: Re: Fairfax2019
Post by: shalab on January 20, 2019, 03:16:06 PM
I am a Prem and FRFHF fan. I made money in FRFHF and ORH (when it went private).  I bought Thomas Cook India at 196 INR last year. I follow all their investments India, Canada and the US. 

However, I liquidated my FRFHF positions recently and went into Berkshire.

The reasons are as follows:

1. FRFHF transparency (or lack thereof) - in BRK case, we clearly know how much is needed for insurance ops and how much isn't. We also know headquarters gets 400 MM of cash per week to invest in anyway they like. This translates to 21B per year. Apple drop is likely temporary and BRK will make 750MM per year from dividends increasing every year with their Q3 position. I even bought apple when it dropped to 140s.

   In FRFHF case, I don't believe their insurance operations are as sound - this is likely one of the reasons for hedges. Parsad suggested this a while back. So it is not clear how much cash is available to invest freely.

2. Berkshire investing FRFHF cash:
   It is not clear how much cash is available to invest - they have issued shares to raise money for acquisition(s). Parsad suggested in one of the threads on FRFHF to reduce leverage. They haven't done that. They also run hedge funds in India and Africa and pocket fees.  Where are the best ideas - is it in FRFHF or in the hedge fund? One of the suggestions by SD (which made the most sense) was that they are getting the next generation setup in the family business. Many people go to FRFHF annual meeting spending a bunch of money. Nothing of substance comes out either about the company or about its direction.

I believe there are better options available right now than FRFHF.

Shalab,

First of all I have benefitted from your work here....thank you. I believe you discovered the share awards which I have a big problem with.

I see you on the Berkshire thread which is excellent discussing the value of the holdings and $100b cash....Berkshire holdings were decimated in the fourth quarter. Mr. Buffett has a$20b limit for holding cash.

So Buffett has $80b cash on a $500b market cap...and many are excited about his buys despite Apples massive losses as well as others.

My questions to you are

1. Are Prem and HW actually that bad that with $20b+ in cash on a $12b market cap and minimal losses in the fourth quarter in comparison to Berkshire....that you doubt they benefit from the opportunity less than Berkshire did?

2. What is Fairfax worth if Mr. Buffett is running the investment portfolio?
Title: Re: Fairfax2019
Post by: Dazel on January 20, 2019, 05:36:56 PM

Thanks.

I donít have anything to add....the past is the past.

Fairfax needs to perform that simple.
Title: Re: Fairfax2019
Post by: TwoCitiesCapital on January 21, 2019, 07:08:28 PM

Just a follow up....there is lots of opportunity out there Shalab I agree...Fairfaxís advantage is they went into this sell off period with $28 billion of bonds and cash....of  note is that interest rates dropped substantially creating appreciation in their large treasury portion of those holdings and allowing them the opportunity to buy into a frozen bond market. In the past this has been their strength.

There was a window that if Fairfax acted that they would have seized large near term and long term profits in the investment portfolio....which has been the drag on Fairfax. So when you say there are many opportunities now which there are....many have had to wait for their holdings to appreciate to buy other things because they had little dry powder to buy into the worst December in almost 90 years.

Fairfax got a fast ball right down the middle of the plate ....

Did they hit that fast ball? Only they know that right now...but I donít have to pay for that probability right now because the stock is cheap enough that they will do fine if they did not hit that fast ball out of the park.

I'm not convinced they did. I would love it if Fairfax had locked in Treasury yields at 3.2% or rolled into credit in December, but neither seems REALLY compelling if you're waiting for a fat pitch.

3.2% was the highest rates in 7 years, BUT Fairfax believes we're in a period of unprecedented economic growth and rising rates...which makes 3.2% less compelling especially when compared to historical Treasuries. Did credit spreads widen in December? Yes. But they're still mostly tight by historical standards.

I think they'd have waited for higher rates and spreads before making a move given their outlook on valuations and rates.


Well, locking in at 3.2% might have been the thing to do in retrospect, but in the short term it probably doesn't make that much difference.  My guess is that half the $27B of cash/bonds were rolled during 2018 and if they were rolled into 2-year treasuries, what would be the weighted average rate?  Would it have been around 2.7% over the year?  So the "penalty" for not having perfectly managed the bond port might be ~50 bps on $27B? 

It would clearly have been better to have nailed it perfectly, but I don't mind the small-ish penalty that they've taken on the theory that rates are headed north over the next five-ish years.


SJ

Absolutely agree! That was basically my point - in hindsight, locking in at 3.2% or rolling to credit would have been the right things to do, but wouldn't have made sense if Fairfax is truly waiting for a fat pitch which is what we all believe they're doing. So there was likely 0 benefit to Fairfax from the December tumult or the spike and subsequent fall in rates. If anything, the fall in rates is going to hurt them as they roll the 2-year Treasuries. Was simply rebutting that Fairfax put money to work in December.
Title: Re: Fairfax2019
Post by: wondering on April 18, 2019, 01:59:17 PM
I was reading the Chou Funds 2018 annual report, and one of Francis' more recent purchases caught my eye.  Sometime in 2018, in the Chou RRSP Fund, Francis purchased 2,000 shares of Fairfax for a Canadian cost of $1,344,170 (or $672/share if my math is right).

Two observations

1) Francis is seeing value in Fairfax, even at $672 Cdn/share
2) I am guessing that he never bought Fairfax in the past because of appearance of conflict of interest since he was on the board a number of years ago.  I am guessing that the appropriate "cooling off" period has lapsed?
Title: Re: Fairfax2019
Post by: investmd on April 24, 2019, 02:55:55 PM
Thanks for sharing this insight.
It's a strange buy for Chou as in my opinion he usually seeks deeply undervalued/distressed stocks with a 2-10x potential. FFH doesn't fit that bucket. Maybe in the Chou RRSP, he is restricted to buying Canadian equities. I don't think he bought FFH in his flagship Chou Associates fund?
Title: Re: Fairfax2019
Post by: Broeb22 on April 24, 2019, 03:12:39 PM
If Fairfax can return to compounding at 15%, which should be easier when youíre not betting the world will end with expensive puts, the stock could be a 2x from revaluation alone starting at approximately 1x book value, and 5 years of 15% growth on top of the re-rating gets you to a 4x. The classic Davis double.
Title: Re: Fairfax2019
Post by: TwoCitiesCapital on April 24, 2019, 03:38:05 PM
If Fairfax can return to compounding at 15%, which should be easier when youíre not betting the world will end with expensive puts, the stock could be a 2x from revaluation alone starting at approximately 1x book value, and 5 years of 15% growth on top of the re-rating gets you to a 4x. The classic Davis double.

Yes, but as has been discussed exhaustively, 15% is no easy feat when interest rates are at 2.5% on the 10-year treasury. So either those equities need to do 15-20% per annum to make up for the dead-weight of the fixed income portfolio at 2.5-3% OR they need interest rates to rise to lock in longer term yields that are much higher than 3%.

I know the Prem keeps benchmarking himself to that number, but I haven't really heard anyone make a case for why we should expect 15-20% on the equity side. They haven't done that in the past decade even if you exclude the equity hedges and I don't expect them to suddenly start when valuations are very full and the bull market seemingly slowing after a 10-year expansion.

Even if there is a pullback, they're already fully invested on the equity side. It's not as if there are billions in cash, or hedges, that could be rolled into equities at more favorable valuations to help achieve that 15% ROE. Further, any sustained pullback is likely to impact Fairfax's stock as well - particularly since they're unhedged at this time.

I just don't see much reason to own this today. Maybe if you think that India or Greece or Blackberry is suddenly going to go gangbusters, it could be worthwhile, but then why not just Eurobank, Fairfax India, or Blackberry directly. Personally, I rolled all of my proceeds out of Fairfax and into Fairfax India earlier this year with the expectation that the India vehicle will dramatically outperform the parent in the near-to-mid term.
Title: Re: Fairfax2019
Post by: petec on April 25, 2019, 12:38:55 AM
Maybe if you think that India or Greece or Blackberry is suddenly going to go gangbusters, it could be worthwhile, but then why not just Eurobank, Fairfax India, or Blackberry directly.

I think the answer to that is you can, but the parent has advantaged access to new investments in some cases. You couldn't for example, have got the SSW deal in the market. Over time that advantage may add up.

What drives your confidence in the timeframe of the return in Fairfax India? I don't dispute its potential but I have no idea when it will be realised. Do you?
Title: Re: Fairfax2019
Post by: Broeb22 on April 25, 2019, 05:50:53 AM
TwoCities,

Fairfax's investment leverage appears to be approx. 2.78x if you back out the 4.25 billion of assets and the 4.25 billion of non-controlling interests. I get to 37.4 billion - 4.25 billion divided by 11.78 billion.

Is that not the right way to think about their investment leverage? If not, how do you figure the investment leverage?

If that is the right number, then an after-tax investment return just north of 5% would achieve a 15% book value growth, assuming investment leverage stayed relatively stable.

Is this way off-base?
Title: Re: Fairfax2019
Post by: petec on April 25, 2019, 07:53:23 AM
TwoCities,

Fairfax's investment leverage appears to be approx. 2.78x if you back out the 4.25 billion of assets and the 4.25 billion of non-controlling interests. I get to 37.4 billion - 4.25 billion divided by 11.78 billion.

Is that not the right way to think about their investment leverage? If not, how do you figure the investment leverage?

If that is the right number, then an after-tax investment return just north of 5% would achieve a 15% book value growth, assuming investment leverage stayed relatively stable.

Is this way off-base?

No, it's directionally right, and in-line with their guidance that a 95% combined ratio and a 7% investment return gives 15% book value growth after debt costs, taxes, etc.

The issue is that if you assume the investment book is 70/30 debt/equity, and you assume a 4% return on debt, you've got to have a 14% return on the equity investments to get to 7% overall. That's not pie in the sky but nor is it easy. That's why they're trying to be smart about debt+warrant deals, to juice the returns on the debt side.
Title: Re: Fairfax2019
Post by: StevieV on April 25, 2019, 08:31:29 AM
Same math implies the flip side as well, correct?

That is, because of the tilt towards fixed income, particularly high equity returns are necessary to boost the overall returns substantially.  However, mediocre equity returns shouldn't prevent book value from compounding in the high single digits and worse than mediocre equity returns shouldn't stop book value growth from being positive (assuming underwriting and fixed income performs). 
Title: Re: Fairfax2019
Post by: petec on April 25, 2019, 08:50:30 AM
Same math implies the flip side as well, correct?

That is, because of the tilt towards fixed income, particularly high equity returns are necessary to boost the overall returns substantially.  However, mediocre equity returns shouldn't prevent book value from compounding in the high single digits and worse than mediocre equity returns shouldn't stop book value growth from being positive (assuming underwriting and fixed income performs).

Certainly they ought to be able to do mid single digits. But it's not like there's no downside risk. A 10% equity loss would wipe out a 4% fixed income gain, roughly. And position sizes are big - if Eurobank, Seaspan, and Blackberry all go to the wall, you'll know about it. Thankfully there's little risk of that in my view ;)
Title: Re: Fairfax2019
Post by: TwoCitiesCapital on April 25, 2019, 09:16:43 AM
Same math implies the flip side as well, correct?

That is, because of the tilt towards fixed income, particularly high equity returns are necessary to boost the overall returns substantially.  However, mediocre equity returns shouldn't prevent book value from compounding in the high single digits and worse than mediocre equity returns shouldn't stop book value growth from being positive (assuming underwriting and fixed income performs).

Sure, but the argument for owning something for me has to be a higher bar than single digits. Particularly something that itself has the potential to be super-volatioe in a downturn simply due to market sentiment.

My only point wasn't to say FFH will lose money. It's just hitting their 15% ROE target consistently enough to get a rerating in the stock is seemingly a pipedream with interest rates and equity valuations where they're at. There's probably better opportunities out there at this time/price.

I don't have any specific forecasts for Fairfax India other than being generally bullish on EM, generally bullish on EM currencies, taking advantage of a significant pullback in Indian assets, and generally liking the investments they've made in that vehicle.

I don't like the fees, which is why I haven't owned it previously, but the high water mark should ensure I have plenty of upside in the near-to-midterm without paying much for it.
Title: Re: Fairfax2019
Post by: racemize on April 25, 2019, 09:28:05 AM
I don't like the fees, which is why I haven't owned it previously, but the high water mark should ensure I have plenty of upside in the near-to-midterm without paying much for it.

It's also a PFIC, which sucks for U.S. investors.
Title: Re: Fairfax2019
Post by: TwoCitiesCapital on April 25, 2019, 01:08:34 PM
I don't like the fees, which is why I haven't owned it previously, but the high water mark should ensure I have plenty of upside in the near-to-midterm without paying much for it.

It's also a PFIC, which sucks for U.S. investors.

Yes, that can be an impediment. 95% of my investable/liquid assets are in tax-free/tax-deferred accounts so I'm less impacted by the PFIC designation.
Title: Re: Fairfax2019
Post by: Luckyone77 on April 26, 2019, 10:47:39 AM
Well, boys, after 10 years of owning this stock I decided to sell my remaining shares today. I'm out. Greatly disappointed in their ability to judge stocks and, in particular, their ability to judge the management of these companies. I simply can't justify their continued underachievement. A dart board would have had greater success of stock picking. I hope my exit proves to be the turning point for the stock, as it so often seems to be (lol), and that you all are greatly rewarded for having hung in there. Hopefully, India will be the salvation.

Nevertheless, I do appreciate the keen insight of many of the posts on this site. Its been informative.
Title: Re: Fairfax2019
Post by: Zorrofan on May 01, 2019, 01:15:05 PM
Well, boys, after 10 years of owning this stock I decided to sell my remaining shares today. I'm out. Greatly disappointed in their ability to judge stocks and, in particular, their ability to judge the management of these companies. I simply can't justify their continued underachievement. A dart board would have had greater success of stock picking. I hope my exit proves to be the turning point for the stock, as it so often seems to be (lol), and that you all are greatly rewarded for having hung in there. Hopefully, India will be the salvation.

Nevertheless, I do appreciate the keen insight of many of the posts on this site. Its been informative.

I have been a FFH shareholder for longer than some of you may have been alive! I suffered the seven lean years and hoped for seven prosperous ones before Prem put on the hedges during one of  the longest bull runs in our lifetimes.

But facts are facts. At the close of 1998 the book value of FFH was $112.49, rising to $432.46 by the end of 2018. This represents a growth rate of less than 7% for the past twenty years. You can add on a bit for the dividend but it still represents a rather disappointing performance.  Prem is quick to mention the results since inception but frankly the last 20 years have been lackluster and I am seriously questioning the performance we can expect going forward.
Title: Re: Fairfax2019
Post by: petec on May 02, 2019, 04:34:58 AM
Well, boys, after 10 years of owning this stock I decided to sell my remaining shares today. I'm out. Greatly disappointed in their ability to judge stocks and, in particular, their ability to judge the management of these companies. I simply can't justify their continued underachievement. A dart board would have had greater success of stock picking. I hope my exit proves to be the turning point for the stock, as it so often seems to be (lol), and that you all are greatly rewarded for having hung in there. Hopefully, India will be the salvation.

Nevertheless, I do appreciate the keen insight of many of the posts on this site. Its been informative.

I have been a FFH shareholder for longer than some of you may have been alive! I suffered the seven lean years and hoped for seven prosperous ones before Prem put on the hedges during one of  the longest bull runs in our lifetimes.

But facts are facts. At the close of 1998 the book value of FFH was $112.49, rising to $432.46 by the end of 2018. This represents a growth rate of less than 7% for the past twenty years. You can add on a bit for the dividend but it still represents a rather disappointing performance.  Prem is quick to mention the results since inception but frankly the last 20 years have been lackluster and I am seriously questioning the performance we can expect going forward.

Iím halfway through my annual deep dive. Full disclosure: Iíve always liked this company so maybe Iím biased. But the more I read the more I like. Most of the major investments look good, some great, to me, with considerable value on the table. The amount going on under the bonnet is quite incredible and Fairfax has the opportunity to build several major businesses from scratch. This is a very different business to 20 years ago: Fairfax have worked themselves into a position where they can put incredible people in charge of operations and drive change. Putting info together from various sources Iím not worried about the stock buybacks for treasury - I think the buyback is real. And theyíve sworn off naked hedging. Lots to like, especially with markets where they are.
Title: Re: Fairfax2019
Post by: wondering on May 02, 2019, 02:54:44 PM
1st quarter results out.

https://s1.q4cdn.com/579586326/files/doc_news/2019/May/PRFFH-May-2-2019-Q1-Press-Release.pdf

I like the results.

- Shares continue to be bought back 250K + 118K shares for a total $175m
- net capital gains of $700m (a bounce back for the terrible 4th quarter in 2018)
- combined ratio of 97% (I wish it was a little lower, but I can't have everything)
- interest and dividends $235m (we are tracking towards the $1B for the year)
- book value per share 450/share US, increase of 6.7% from Dec
Title: Re: Fairfax2019
Post by: petec on May 02, 2019, 03:39:38 PM
Iím confused by the AGT transaction. Have they lent money to management for an MBO, or bought it themselves, or both?
Title: Re: Fairfax2019
Post by: gfp on May 02, 2019, 03:54:32 PM
Iím confused by the AGT transaction. Have they lent money to management for an MBO, or bought it themselves, or both?

Both.  They are both a lender and shareholder (controlling shareholder actually, 59.6% currently plus warrants that would bring it to 80%)
Title: Re: Fairfax2019
Post by: Cigarbutt on May 02, 2019, 04:12:59 PM
Iím confused by the AGT transaction. Have they lent money to management for an MBO, or bought it themselves, or both?

Both.  They are both a lender and shareholder (controlling shareholder actually, 59.6% currently plus warrants that would bring it to 80%)
FFH exchanged their common and preferred shares of the old entity for a controlling equity stake in the new entity, which likely rendered the "management" buyout possible as the transaction may have been too leveraged otherwise.
Title: Re: Fairfax2019
Post by: StubbleJumper on May 02, 2019, 04:32:51 PM
1st quarter results out.

https://s1.q4cdn.com/579586326/files/doc_news/2019/May/PRFFH-May-2-2019-Q1-Press-Release.pdf

I like the results.

- Shares continue to be bought back 250K + 118K shares for a total $175m
- net capital gains of $700m (a bounce back for the terrible 4th quarter in 2018)
- combined ratio of 97% (I wish it was a little lower, but I can't have everything)
- interest and dividends $235m (we are tracking towards the $1B for the year)
- book value per share 450/share US, increase of 6.7% from Dec


Spot on.  A few more observations:

1) Isn't it just a bit weird that FFH had realized gains on both their equities and their derivatives in the same quarter?  Don't get me wrong, I'll take it!  But, these were supposed to have been set up as a hedge, but they didn't act as a hedge in Q1.  The derivatives are starting to become small potatoes, but I found that was a bit weird anyway.

2) As you noted the CR is up, and favourable development is down.  The accident year CRs have been wacked for a number of years and there has been consistent, large favourable development.  In Q1 it was still favourable, but the magnitude was down.  What's the story?  Is it just a few shitty policies at Allied and a bit of bad luck in the other subs, or are we seeing the result of pricing pressure of a year or two ago across the line?  While completely irrational, I don't like seeing adverse development in the "new" sub (but somehow I would feel okay if were in an established sub?).

3) The interest rate sensitivity table would suggest that duration has increased a smidgen.  Is this a conscious effort and is this a sign of things to come, or is it just a bit of noise?  It would seem like a funny time to go a shade longer on fixed income, but in all fairness it would have worked out over the last quarter or two. 

4) With the exception of Zenith, net written looks good.  It's not that mythical 10% YoY growth, but 5% still shows some real organic growth.  It'll be interesting to get some commentary about the pricing environment during the conference call.

Nice boring quarter.  Let's hope that some of the large block equity postions continue to gain traction.


SJ
Title: Re: Fairfax2019
Post by: Santayana on May 02, 2019, 07:21:07 PM
The Zenith net written may not have been what we're looking for, but that 78.3 CR sure looks good!
Title: Re: Fairfax2019
Post by: shalab on May 02, 2019, 07:47:01 PM
Since they wont give you the diluted number of shares and book value per diluted share, here is the updated calculation after Q1:

Diluted number of shares at the end of 2018 - 28.397 million
Diluted number of shares at the end of Q1 2019 - 28.5107 million (obtained by shareholder earnings/diluted earnings per share - 769.2/26.98 - page 6 of the report).

Using the diluted shares, I get a book value of 414 at the end of 2018. Adjusting for dividends paid out - I get a book value growth of 5.39%

Increase in diluted shares => 113K shares.

Book value per diluted share => 425.76

The holding company's debt also increased:

The company's total debt to total capital ratio increased from 27.2% at December 31, 2018 to 29.2% at March 31, 2019, primarily reflecting increased borrowings by the holding company and non-insurance operations.


1st quarter results out.

https://s1.q4cdn.com/579586326/files/doc_news/2019/May/PRFFH-May-2-2019-Q1-Press-Release.pdf

I like the results.

- Shares continue to be bought back 250K + 118K shares for a total $175m
- net capital gains of $700m (a bounce back for the terrible 4th quarter in 2018)
- combined ratio of 97% (I wish it was a little lower, but I can't have everything)
- interest and dividends $235m (we are tracking towards the $1B for the year)
- book value per share 450/share US, increase of 6.7% from Dec


Spot on.  A few more observations:

1) Isn't it just a bit weird that FFH had realized gains on both their equities and their derivatives in the same quarter?  Don't get me wrong, I'll take it!  But, these were supposed to have been set up as a hedge, but they didn't act as a hedge in Q1.  The derivatives are starting to become small potatoes, but I found that was a bit weird anyway.

2) As you noted the CR is up, and favourable development is down.  The accident year CRs have been wacked for a number of years and there has been consistent, large favourable development.  In Q1 it was still favourable, but the magnitude was down.  What's the story?  Is it just a few shitty policies at Allied and a bit of bad luck in the other subs, or are we seeing the result of pricing pressure of a year or two ago across the line?  While completely irrational, I don't like seeing adverse development in the "new" sub (but somehow I would feel okay if were in an established sub?).

3) The interest rate sensitivity table would suggest that duration has increased a smidgen.  Is this a conscious effort and is this a sign of things to come, or is it just a bit of noise?  It would seem like a funny time to go a shade longer on fixed income, but in all fairness it would have worked out over the last quarter or two. 

4) With the exception of Zenith, net written looks good.  It's not that mythical 10% YoY growth, but 5% still shows some real organic growth.  It'll be interesting to get some commentary about the pricing environment during the conference call.

Nice boring quarter.  Let's hope that some of the large block equity postions continue to gain traction.


SJ
Title: Re: Fairfax2019
Post by: StevieV on May 03, 2019, 11:36:32 AM
Diluted number of shares at the end of 2018 - 28.397 million
Diluted number of shares at the end of Q1 2019 - 28.5107 million (obtained by shareholder earnings/diluted earnings per share - 769.2/26.98 - page 6 of the report).


I have to check these numbers and the buyback numbers above for myself.  However, assuming they are correct, that's a big problem.

0.4% dilution isn't too bad considered alone, but it's terrible if Fairfax spent the majority of their highly touted dividend and interest income to keep the share count not even flat.

Got to go back and refresh my memory on this issue.
Title: Re: Fairfax2019
Post by: Cigarbutt on May 03, 2019, 12:15:15 PM
The Zenith net written may not have been what we're looking for, but that 78.3 CR sure looks good!
I would suggest that the 2010 Zenith acquisition will eventually be recognized as an excellent one.

-Value at acquisition (May 2010): 1.3B for the 91.8% FFH did not own, including a 200M share issue "undervalued" at 355.
-Valuation parameters now would suggest a relatively low return since acquisition because the market never really hardened, even if 781M in dividends have been distributed to FFH along the way.

Workers comp insurance is very unusual, long-tail and requires an incredible amount of underwriting discipline and IMO Zenith continues to be a significant outlier, the value of which will only become apparent over the full underwriting cycle. Always hard to say ex-ante but many experts suggest that the present status of the net loss and LAE reserves is adequate, a similar situation to the soft market environment of the late 90's when, eventually, it was found, around 2001, that the net loss and LAE reserves deficiency had in fact reached about 33% of the calendar year total premiums (!). It's impossible to know the future but the reserve deficiency cycle suggests that redundancies are likely to reverse. For the 1997-2000 period, retrospective hindsight allowed to (see who was swimming naked) increase each of the ultimate accident year combined ratios by 15 to 23 percentage points (!).

The last few years have resulted in an amazingly competitive (soft) environment. Zenith has grown in the early 2010's when there was some hardening but growth (almost doubled NPW) came to some degree from rising premiums per policy and written premiums have been essentially flat to declining in the last 3 to 4 years. ZNT reported very poor combined ratios in 2010 to 2012 due to a very high expense ratio (kept their infrastructure, about extra 10% of the CR) and due to (too) conservative reserves adjustments. Over the long term, Zenith continues to show an enduring capacity to report lower loss ratios than the industry. The reserve release (20.5% CR points) in Q1 2019 is another example of their conservative reserving of prior periods.

In 2018, NWP for the year were 789.2M. In 2005, their NWP was 1.2B. They have huge opportunistic capacity to increase market share. Since 2015, many competitors have increased market share with gradually decreasing retention and likely a component of "cashflow" underwriting. In the industry these days, the typical reserves to NPW ratio sits around 3.5 to 4. For Zenith, it is now at 1.8, which means that even in an environment where redundancies become deficiencies, the negative impact will be much less on Zenith.

So, the market in this space is incredibly soft and nobody knows when the market will turn but turn, it will. Not long ago, AM Best had this to say about payroll growth and its potential impact on the workers comp insurance market:
"However, the US has not recorded a consistent decline in the unemployment rate longer than nine consecutive years since it began tracking the unemployment rate in 1929. Historically, long declines have typically been followed by sharp spikes in unemployment-which may serve as a forewarning for workers' compensation writers to expect payroll growth, and any resulting premium growth, to cease sooner rather than later, unless wage growth accelerates."

Zenith looks positioned to profit in correlation to the underwriting discipline they have shown in the last part of the journey.



Title: Re: Fairfax2019
Post by: A_Hamilton on May 03, 2019, 12:49:13 PM
Diluted number of shares at the end of 2018 - 28.397 million
Diluted number of shares at the end of Q1 2019 - 28.5107 million (obtained by shareholder earnings/diluted earnings per share - 769.2/26.98 - page 6 of the report).


I have to check these numbers and the buyback numbers above for myself.  However, assuming they are correct, that's a big problem.

0.4% dilution isn't too bad considered alone, but it's terrible if Fairfax spent the majority of their highly touted dividend and interest income to keep the share count not even flat.

Got to go back and refresh my memory on this issue.

No no...$769.2 is available to all shareholders of Fairfax. Preferred shareholders received $11.2 million, so available to common is $758/26.98= 28 million. Or page 19 of the interim report in Note 12.
Title: Re: Fairfax2019
Post by: Santayana on May 03, 2019, 04:55:57 PM
Thank you for clarifying, A_Hamilton.
Title: Re: Fairfax2019
Post by: shalab on May 03, 2019, 07:08:44 PM
Thanks for the note - I was going off the press release:

Diluted number of shares at the end of Q4 2018 - 28.397 million
Diluted number of shares at the end of Q1 2019 - 28.093054 million

Decrease => 303946 shares

Diluted number of shares at the end of 2018 - 28.397 million
Diluted number of shares at the end of Q1 2019 - 28.5107 million (obtained by shareholder earnings/diluted earnings per share - 769.2/26.98 - page 6 of the report).


I have to check these numbers and the buyback numbers above for myself.  However, assuming they are correct, that's a big problem.

0.4% dilution isn't too bad considered alone, but it's terrible if Fairfax spent the majority of their highly touted dividend and interest income to keep the share count not even flat.

Got to go back and refresh my memory on this issue.

No no...$769.2 is available to all shareholders of Fairfax. Preferred shareholders received $11.2 million, so available to common is $758/26.98= 28 million. Or page 19 of the interim report in Note 12.
Title: Re: Fairfax2019
Post by: petec on May 04, 2019, 03:01:35 PM
Some thoughts on the share issuance discussion.

I think the split between shares bought for treasury and for cancellation is a bit of a red herring. If they like the price now, it makes all the sense in the world to stock up on shares for future issuance under stock award schemes. The fact that they are buying them doesn't mean they will reissue them any time soon - on the 1q18 call Prem said the new share award plans vested in 15 years, and presumably the awards are somewhat performance based so they not be reissued at all. In 2018 90k shares were reissued, or about 0.33% of the outstanding.

More important is the number of dilutive shares. This number went from 0.69m shares to 0.89m over the course of 2018, up 200k. On the YE18 base, that would imply growth in the share count of 0.7% a year, which I wouldn't have a problem with. But the number of dilutive shares rose another 170k in 1q19 alone. If that pace is maintained then the share count is growing at about 2.4% a year, although as discussed above it may be many years before the dilutive shares are actually issued.

I can deal with a relatively high pace of issuance at the moment: a new generation is rising through the ranks, as we saw in the reorganisation at Hamblin Watsa last year, and I want them incentivised. But the 1q19 pace of dilution eats about 2/3rds of the 1m/year buyback they spoke of on the 1q call. That strikes me as too high unless performance improves a lot.

As an aside, the fact that the number of dilutive securities is growing at that speed when the share price isn't rising makes me wonder how demanding the performance targets are.

Finally, it really annoys me that they calculate BVPS using basic shares.
Title: Re: Fairfax2019
Post by: jfan on May 05, 2019, 08:42:29 AM
Given that Fairfax and Hamblin Watsa is quite dependent on human capital. Perhaps the perspective of share dilution could be viewed as growth/succession cap ex to allow the company to continue operating into the future.

Furthermore, since Prem is the largest shareholder, any share dilution is also dilution of his proportion as well.

Certainly, long-dated options can have the possibility of incentive malalignment. What long-term incentive structure could fairfax put in place to help transition to the next generation and align them with the common shareholder?

Title: Re: Fairfax2019
Post by: petec on May 05, 2019, 09:18:19 AM
Given that Fairfax and Hamblin Watsa is quite dependent on human capital. Perhaps the perspective of share dilution could be viewed as growth/succession cap ex to allow the company to continue operating into the future.

Furthermore, since Prem is the largest shareholder, any share dilution is also dilution of his proportion as well.

Certainly, long-dated options can have the possibility of incentive malalignment. What long-term incentive structure could fairfax put in place to help transition to the next generation and align them with the common shareholder?

My answer would be helping them purchase shares in the market, which Fairfax does a lot of (see annual letters).

As I say I have no issue with awards, but Iíd like to know more about the conditions and likely rate.

No issuances do not dilute Premís votes.
Title: Re: Fairfax2019
Post by: shalab on May 05, 2019, 09:48:09 AM
As someone posted earlier, FRFHF returned 7% since 1998 nowhere near the 15% that is being promised every year. Yet, many people follow the person like a messiah (not unlike BH) justifying every action and statement even though it is not rational.

I like to follow their India investments as I own thomas cook. Also - I like to hunt for investment opportunities in India. However, FRFHF itself is a heavily leveraged company, even at the holding company level. They have 40B in investments and 11B in shareholder equity. The fact that they have been able to not generate returns in double digits despite such leverage should tell something.

Given that Fairfax and Hamblin Watsa is quite dependent on human capital. Perhaps the perspective of share dilution could be viewed as growth/succession cap ex to allow the company to continue operating into the future.

Furthermore, since Prem is the largest shareholder, any share dilution is also dilution of his proportion as well.

Certainly, long-dated options can have the possibility of incentive malalignment. What long-term incentive structure could fairfax put in place to help transition to the next generation and align them with the common shareholder?

My answer would be helping them purchase shares in the market, which Faurfax does a lot of (see annual letters).

As I say I have no issue with awards, but Iíd like to know more about the conditions and likely rate.

No issuances do not dilute Premís votes.
Title: Re: Fairfax2019
Post by: petec on May 05, 2019, 10:25:45 AM
As someone posted earlier, FRFHF returned 7% since 1998 nowhere near the 15% that is being promised every year. Yet, many people follow the person like a messiah (not unlike BH) justifying every action and statement even though it is not rational.

I like to follow their India investments as I own thomas cook. Also - I like to hunt for investment opportunities in India. However, FRFHF itself is a heavily leveraged company, even at the holding company level. They have 40B in investments and 11B in shareholder equity. The fact that they have been able to not generate returns in double digits despite such leverage should tell something.

I think the days when anyone thought Prem was a messiah are long gone, and the idea that anyone on here tries to justify every action is laughable - the amount of criticism and invective over the last 5-odd years has been immense. The question is whether it is overdone, which it might be for two related reasons: 1) despite the clear failures on the investing side Prem has put together an impressive set of assets and people, and 2) people and organisations learn, and this one is clearly changing. Therein may lie the opportunity, for a value investor. We will find out.

BTW anyone who thinks of the 15% target as a promise is a moron.

Would you mind elaborating on your thesis for Thomas Cook? Obviously its been a home run, but only (it seems to me) because of Quess. Within the legacy business as far as I can tell profits on the forex side have collapsed and pricing on the travel side have been squeezed by OTAs. I like the various deals (Kuoni etc), but from what I see FCF hasn't grown since Fairfax bought it. However I have only glanced at it so I could be wrong on all of the above. Please correct me if so.
Title: Re: Fairfax2019
Post by: shalab on May 05, 2019, 07:22:19 PM
Regarding the 15% target, I know many people believe it as shown in the only "notes" shared from the meeting. May be it is time for Prem to become non-executive chairman and have his kids and Pual Rivett talk in the annual meeting, shareholder letters.

Regarding Thomas Cook, you are right about the forex, travel businesses. However, ordering through the internet is still not common in India (from what I understand) and brand names still have a lot of cachet. In Thomas Cook case, one has to look at P/B - not cashflows as it is difficult to calculate/estimate. I bought it when it was roughly 20% lower.


I think the days when anyone thought Prem was a messiah are long gone, and the idea that anyone on here tries to justify every action is laughable - the amount of criticism and invective over the last 5-odd years has been immense. The question is whether it is overdone, which it might be for two related reasons: 1) despite the clear failures on the investing side Prem has put together an impressive set of assets and people, and 2) people and organisations learn, and this one is clearly changing. Therein may lie the opportunity, for a value investor. We will find out.

BTW anyone who thinks of the 15% target as a promise is a moron.

Would you mind elaborating on your thesis for Thomas Cook? Obviously its been a home run, but only (it seems to me) because of Quess. Within the legacy business as far as I can tell profits on the forex side have collapsed and pricing on the travel side have been squeezed by OTAs. I like the various deals (Kuoni etc), but from what I see FCF hasn't grown since Fairfax bought it. However I have only glanced at it so I could be wrong on all of the above. Please correct me if so.
Title: Re: Fairfax2019
Post by: Cigarbutt on May 15, 2019, 06:00:32 AM
On November 3rd 2016, FFH sold 90% of their long-dated US Treasury bonds and, shortly thereafter, removed their equity hedges.
The expectations was for long term rates and stocks to go up.
https://www.forbes.com/sites/antoinegara/2016/11/11/canadian-billionaire-prem-watsa-nailed-the-trump-treasury-trade-and-is-bullish-on-stocks/#2ebe1ef257b6

As of today, after 2.5 years, long term rates are at the same level as on the selling date and the R2000 is up by about 10 to 12%.

I think that deflationary forces will continue to "win" over inflationary forces despite increasingly polarized forces and, for better of for worse, that conclusion continues to contaminate the investment thought process.
Title: Re: Fairfax2019
Post by: petec on May 15, 2019, 09:19:02 AM
On November 3rd 2016, FFH sold 90% of their long-dated US Treasury bonds and, shortly thereafter, removed their equity hedges.
The expectations was for long term rates and stocks to go up.
https://www.forbes.com/sites/antoinegara/2016/11/11/canadian-billionaire-prem-watsa-nailed-the-trump-treasury-trade-and-is-bullish-on-stocks/#2ebe1ef257b6

As of today, after 2.5 years, long term rates are at the same level as on the selling date and the R2000 is up by about 10 to 12%.

I think that deflationary forces will continue to "win" over inflationary forces despite increasingly polarized forces and, for better of for worse, that conclusion continues to contaminate the investment thought process.
.

I agree deflation wins over inflation - until the next bout of QE. The choice between the two is ultimately a political one and inflation is politically preferable when thereís tons of debt about.

(Minor correction - they didnít say they were bullish on stock markets, but individual stocks.)
Title: Re: Fairfax2019
Post by: jfan on May 15, 2019, 10:46:16 AM
There was a wonderful podcast with David Zervos on the Sherman Show (Doubleline Capital). At the 22:00 minute mark, he explains that the deflationary forces in the US are secondary to demographics. Decreasing labor force growth reduces demand for goods coupled with technological progress creates this persistent milieu.

That being said, Torsten Slok (also on the Sherman Show) believes there is a bifurcated process. Goods are facing deflationary forces but local services that not fungible (eg health care) are experiencing inflation.

Title: Re: Fairfax2019
Post by: TwoCitiesCapital on May 15, 2019, 01:22:06 PM
On November 3rd 2016, FFH sold 90% of their long-dated US Treasury bonds and, shortly thereafter, removed their equity hedges.
The expectations was for long term rates and stocks to go up.
https://www.forbes.com/sites/antoinegara/2016/11/11/canadian-billionaire-prem-watsa-nailed-the-trump-treasury-trade-and-is-bullish-on-stocks/#2ebe1ef257b6

As of today, after 2.5 years, long term rates are at the same level as on the selling date and the R2000 is up by about 10 to 12%.

I think that deflationary forces will continue to "win" over inflationary forces despite increasingly polarized forces and, for better of for worse, that conclusion continues to contaminate the investment thought process.

I thought this for the longest time. It's why I was in Fairfax for the longest time. The equity hedges, the deflation derivatives, the hedged equities, etc.

Starting in late 2017, I started to realize that maybe I was wrong. Money velocity was rising the first time in years which seemed to confirm that inflation was on the upward trend. Rates had climbed 75-100bps and stock market was on fire after the tax rebates.

That being said - the weakness we've been seeing in equity markets, the ongoing trade war, the recent decline in money velocity again, and interest rates that have given up all of their gains might suggest I was premature to change my views.

I'm squarely back in the lower for longer camp after a brief 12 month hiatus.
Title: Re: Fairfax2019
Post by: wondering on May 21, 2019, 07:44:18 AM
Sad news

https://ca.finance.yahoo.com/news/fairfax-financial-says-chief-financial-135653428.html
Title: Re: Fairfax2019
Post by: StubbleJumper on May 21, 2019, 08:14:31 AM
Sad news

https://ca.finance.yahoo.com/news/fairfax-financial-says-chief-financial-135653428.html


Sad news indeed.  The May long weekend takes too many from us.


SJ
Title: Re: Fairfax2019
Post by: wondering on June 12, 2019, 05:38:12 AM
https://www.fairfax.ca/news/press-releases/press-release-details/2019/Fairfax-Launches-C500-Million-Senior-Notes-Offering/default.aspx
Title: Re: Fairfax2019
Post by: wondering on August 01, 2019, 08:17:34 AM
https://www.fairfax.ca/news/press-releases/press-release-details/2019/Fairfax-Announces-Acquisition-of-Shares-of-Quess/default.aspx
Title: Re: Fairfax2019
Post by: petec on August 01, 2019, 09:04:53 AM
https://www.fairfax.ca/news/press-releases/press-release-details/2019/Fairfax-Announces-Acquisition-of-Shares-of-Quess/default.aspx

Good for them. Itís cheap.
Title: Re: Fairfax2019
Post by: valueinvesting101 on August 01, 2019, 11:14:26 AM
Is there disclosure requirement related to Quess shares? It's purchase of around $1.7 million USD. News has pushed price of Quess shares up by nearly 12%.
Title: Re: Fairfax2019
Post by: TwoCitiesCapital on August 01, 2019, 03:18:20 PM
Wish they'd repurchase their own shares. In USD, they're near the bottom of the 5-year range.
Title: Re: Fairfax2019
Post by: Alekbaylee on August 01, 2019, 03:50:06 PM
Good results overall: https://markets.businessinsider.com/news/stocks/fairfax-financial-holdings-second-quarter-financial-results-1028410155
Title: Re: Fairfax2019
Post by: Spekulatius on August 01, 2019, 06:20:29 PM
Good results overall: https://markets.businessinsider.com/news/stocks/fairfax-financial-holdings-second-quarter-financial-results-1028410155

Almost $6B in debt at the Holding Company, up from $4.8B. This is a pretty substantial leverage.
Title: Re: Fairfax2019
Post by: StevieV on August 02, 2019, 06:23:35 AM
"There were 26.9 million and 27.6 million weighted average common shares effectively outstanding during the second quarters of 2019 and 2018 respectively.  At June 30, 2019 there were 26,881,817 common shares effectively outstanding."

One thing that has confused and concerned me is the share count.  Looking at the release, the June 30, 2018 share count was actually 27.550 million.  In any event, looks to me like about a 2.5% reduction y-o-y.  Seems straightforward to me, but would appreciate any comments as I have found the reporting on this a bit confusing in the past.  I'd be happy with that pace of reduction.  No, it's not Singleton, but meaningful over time.

Also liked that combined ratio has remained at a number that I would consider good.

Lower rates are a challenge for all insurance companies.  I don't see it as any different for Fairfax.
Title: Re: Fairfax2019
Post by: Dazel on August 02, 2019, 06:49:47 AM


$6b debt at the holding company is net $4b after cash...and the insurance companies do not have a lot of debt as they are strategically being less levered to be able to take advantage of an event, maintain high ratings and once you dividend their access capital to the holding company itís gone...so it does not concern me. Insurance companies are vastly undervalued.

Title: Re: Fairfax2019
Post by: petec on August 03, 2019, 03:38:42 AM
Standout for me is the extent to which the market is hardening. Anyone know why? We havenít had systematic capital destruction via cats, and rates havenít gone up enough to deny capital to the industry, so why are we entering a hard market?
Title: Re: Fairfax2019
Post by: Cigarbutt on August 03, 2019, 05:07:38 AM
It does look like price increases are permeating across many lines. Is it for real?
The last part of this cycle has been unusually soft and I wonder if unusual access to cheap capital has distorted the underwriting price signals, maybe like the lack of capital discipline displayed in the shale gas industry.
Watching for underwriting cycles to turn is like watching an apple to fall. 2017 and 2018 were relatively poor years for (re)insurers due, in part, to higher catastrophe activity. The ILS segment, thought to be more sophisticated with more advanced models, turned out to be a persistenly disappointing factor recently due to loss creep. For example, Markel was 'surprised' by this development (which was compounded by 'issues' with top management) and had to put an entire segment into runoff. The component of dwindling reserve redundancies also seems to be a relevant contemporary catalyst. If interested, see the following, which offers a satisfactory industry perspective:
https://deconstructingrisk.com/2019/07/30/creepy-things/

For Fairfax, reserve redundancies, in combined ratio points:
2016            7.8%
2017            8.5%
2018            6.8%
Q1Q2 2018   3.5%
Q1Q2 2019   1.5% 

For Fairfax, net favourable development has been very strong vs the industry and the real action is often concentrated in the latter part of the year. IMO, FFH has established a strong underwriting culture and is likely to continue to show a better reserve development profile than the industry but, if history is any guide, across the industry, in a typical cycle, the extent of reserve deficiency eventually reported is directly proportional to the softness and extent of reserve releases of the previous component of the cycle.
Title: Re: Fairfax2019
Post by: ABM on August 04, 2019, 11:54:48 AM
Some have mentioned the debt but anyone have quality view on its development? 

I've seen analyst's call them out on the call as it tests the top end of the mgmt targets.  They trumpet the cash balance but that is dwarfed by the insurance liability.  Relative to 1H 2019 cash claims paid, it implies about 1 year worth buffer. No real allowance or a major CAT event, I think.

Compared to MKL and BRK's insurance segment appears much more aggressively capitalized.  Thoughts?

Thanks
Title: Re: Fairfax2019
Post by: Cigarbutt on August 05, 2019, 08:03:55 PM
Some have mentioned the debt but anyone have quality view on its development? 

I've seen analyst's call them out on the call as it tests the top end of the mgmt targets.  They trumpet the cash balance but that is dwarfed by the insurance liability.  Relative to 1H 2019 cash claims paid, it implies about 1 year worth buffer. No real allowance or a major CAT event, I think.

Compared to MKL and BRK's insurance segment appears much more aggressively capitalized.  Thoughts?

Thanks
On the positive side, 1- in the last annual report, they note significant regulatory dividend capacity, 2- compared to their historical record, the price of debt is relatively low and 3- they have a favorable maturity profile in the next few years.

On the negative side, looking at the cash flow movements to and from the holding company vs insurance subs, it seems that capital is going to the subs in order to support a hardening market, but this cash movement is happening very early in the game. The idea is to be able to grow the float opportunistically and that may be hard to achieve if the asset side of the business (high equity exposures) is compromised concurrently(even if only through temporary market swings) as regulators may limit the underwriting leverage especially if the holding debt level is perceived to be high.

Since the late 1990's, when it became clear that frogs don't transform into princes, FFH often had to issue equity at prices they didn't like and IMO, the lesson has not completely sunk in or has been forgotten.
Title: Re: Fairfax2019
Post by: ourkid8 on August 07, 2019, 02:51:59 PM
The insurance market is hardening, why would you want them to repurchase stock more aggressively? They did reduce the shares outstanding YoY by 2.5% while allowing their insurance subs to grow. 

Wish they'd repurchase their own shares. In USD, they're near the bottom of the 5-year range.
Title: Re: Fairfax2019
Post by: TwoCitiesCapital on August 07, 2019, 03:57:50 PM
The insurance market is hardening, why would you want them to repurchase stock more aggressively? They did reduce the shares outstanding YoY by 2.5% while allowing their insurance subs to grow. 

Wish they'd repurchase their own shares. In USD, they're near the bottom of the 5-year range.

We'll see if it's a significant trend of hardening, or a blip, but from my perspective none of the issues that have caused market softness have been addressed yet and so it's unlikely for this hardening trend to persist.

I certainly could be wrong - I'm no insurance analysts/expert, but the prospect of a hard market in insurance has been touted since I started holding the position back in 2011 and it hasn't happened yet - largely because the industry has been flooded with excess capital and that still hasn't changed.
Title: Re: Fairfax2019
Post by: wondering on August 09, 2019, 09:16:07 AM
https://www.fairfax.ca/news/press-releases/press-release-details/2019/Fairfax-Financial-Holdings-Corporation-Executive-Announcement/default.aspx

In sum,

Jennifer Allen is taking over the CFO position at FFH from interim CFO John Varnell.

Jennifer is leaving her post as CFO at FIH and FAH, and Amy Sherk is taking over those roles.

This is keeping with Fairfax's preference for hiring within.