Author Topic: Fairfax 2020  (Read 67869 times)

Xerxes

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Re: Fairfax 2020
« Reply #400 on: June 01, 2020, 03:10:40 PM »
With all due respect, i think the Blackberry purchase was a disaster. After Fairfax’s first purchase they had 6 months to learn how challenged the business was amd how poorly managed it was; it was pretty obvious (all you had to do was listen to the quarterly calls to understand the management team was not up to the challenge.).

PS: i actually bought RIM shares back when Fairfax initiated their position. It took me 3 conference calls to figure out the RIM management team was in way over their head (the company was no longer a start up and the industry was morphing fast with strong competitors). I took a small hit when i sold my position. But investing in RIM became one of my best investment decisions ever because it taught me about the cell phone industry. 18 months later Apple got wickedly cheap (the narrative then was Samsung was going to take over the world) and i was able to take my learnings from my time in Blackberry and buy a truckload of Apple over a 4 month period (the stock just kept going lower), which ended up being by largest gain ever :-) Learn...

Looks like I have a short memory.
I forgot BB was a phone company competing with Apple at the time when FFH got in. LOL.
I was thinking cybersecurity and its IP portfolio.

On the positive side, if I forgot about that, that means the 100 year turn around is turning around just fine.


Cigarbutt

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Re: Fairfax 2020
« Reply #401 on: June 02, 2020, 02:04:33 PM »
...I hadn't seen the article from Insurance Journal, so that is interesting in particular.  A couple of the more elaborate industry level loss estimates gives a bound for Zenith.  It looks like perhaps 16 loss points, before reinsurance and government funding, might be the reasonable estimate, with a bound of perhaps 50 loss points.  So, for an outfit like Zenith that writes $750m of premium, that would be maybe ~$120m before reinsurance and government funding, but possibly as much as $375m .  As you said, it's probably not an existential question, but it's curious that no provision was taken in the first quarter.
SJ
Relevant follow-up about potential costs (workers comp in California) which is important for Zenith. The ongoing development (not in the sense of recognized reserve development but in the sense of the social inflation threat) is definitely positive. Absent future adverse legislation, costs appear more and more manageable. Even if there is unusual flexibility to submit claims, Zenith will have to opportunity to rebut the claims and influence case law. It appears that Zenith will be able to report reasonable estimates in the coming quarters.
https://www.wcirb.com/sites/default/files/documents/rb-covid19-cost_impact_of_governor_executive_order_0.pdf
...
The document was a nice walk through on how the costs can rapidly accumulate.  So in California, they are estimating a mid-point of 7 loss points and a bound of 10 or 11 points, and that's before any government programming or reinsurance.  If that applied across the US, that would be no problem at all for Zenith.
Beyond that, on a personal level, I am surprised at how small the indemnity is for a health care worker fatality.  Only $400k each and that includes medical costs as well as 5 or 10 years of economic support to surviving spouses and children?  The bulk of the workers dying must be personal support workers who don't earn so much?  I think I trotted out an assumption of about 5X as large, but admittedly, I just pulled that out of my ass because I know so little about WC.
SJ
Perhaps the saturation point has been reached for this topic but the California workers comp Bureau just came out with an interesting report:
https://www.wcirb.com/sites/default/files/documents/rb-impact_of_economic_downturn-audienceready_0.pdf
TL;DR version: with the economy slowing, on a net basis (more 'cumulative' injuries more than compensated by lower 'traumatic' injuries), there will be less claims per hours worked, if history is any guide. The challenge may mean much lower written premiums but Zenith has been there before and they could always send excess capital upstream until they can grow their book of business again.

petec

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Re: Fairfax 2020
« Reply #402 on: June 02, 2020, 02:23:17 PM »
...I hadn't seen the article from Insurance Journal, so that is interesting in particular.  A couple of the more elaborate industry level loss estimates gives a bound for Zenith.  It looks like perhaps 16 loss points, before reinsurance and government funding, might be the reasonable estimate, with a bound of perhaps 50 loss points.  So, for an outfit like Zenith that writes $750m of premium, that would be maybe ~$120m before reinsurance and government funding, but possibly as much as $375m .  As you said, it's probably not an existential question, but it's curious that no provision was taken in the first quarter.
SJ
Relevant follow-up about potential costs (workers comp in California) which is important for Zenith. The ongoing development (not in the sense of recognized reserve development but in the sense of the social inflation threat) is definitely positive. Absent future adverse legislation, costs appear more and more manageable. Even if there is unusual flexibility to submit claims, Zenith will have to opportunity to rebut the claims and influence case law. It appears that Zenith will be able to report reasonable estimates in the coming quarters.
https://www.wcirb.com/sites/default/files/documents/rb-covid19-cost_impact_of_governor_executive_order_0.pdf
...
The document was a nice walk through on how the costs can rapidly accumulate.  So in California, they are estimating a mid-point of 7 loss points and a bound of 10 or 11 points, and that's before any government programming or reinsurance.  If that applied across the US, that would be no problem at all for Zenith.
Beyond that, on a personal level, I am surprised at how small the indemnity is for a health care worker fatality.  Only $400k each and that includes medical costs as well as 5 or 10 years of economic support to surviving spouses and children?  The bulk of the workers dying must be personal support workers who don't earn so much?  I think I trotted out an assumption of about 5X as large, but admittedly, I just pulled that out of my ass because I know so little about WC.
SJ
Perhaps the saturation point has been reached for this topic but the California workers comp Bureau just came out with an interesting report:
https://www.wcirb.com/sites/default/files/documents/rb-impact_of_economic_downturn-audienceready_0.pdf
TL;DR version: with the economy slowing, on a net basis (more 'cumulative' injuries more than compensated by lower 'traumatic' injuries), there will be less claims per hours worked, if history is any guide. The challenge may mean much lower written premiums but Zenith has been there before and they could always send excess capital upstream until they can grow their book of business again.

Thanks!
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OliverSung

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Re: Fairfax 2020
« Reply #403 on: June 03, 2020, 11:24:21 AM »
Hi everyone,

Jumping in here with my first post on this forum. Incredibly excited to have joined.

I'm the author behind the Fairfax analysis at Junto Investments that Bryggen referred to earlier in this thread.

As for Fairfax, I'm all for thinking about the long game and bigger picture. It's pretty much only at times of uncertainty one is able to buy stuff below intrinsic value.

I think dwelling on individual investments tells us that the market cares more about the short-term stuff. I find very little reason to believe that management will not be able to live up to the baseline scenario that the current price reflects. Even after the last few weeks' share price gains.

Why wouldn't Hamblin Watsa learn from past investment blunders and look forward? Torstar is an exemplification of that. And why wouldn't there be great opportunity for Fairfax to compound invested capital well over the cost of capital going forward from here now that insurance operations are doing so well? The current price-to-book makes very little sense in this regard.

The level of uncertainty doesn't match the level of risk.

Cheers.

StubbleJumper

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Re: Fairfax 2020
« Reply #404 on: June 03, 2020, 12:24:41 PM »
Hi everyone,

Jumping in here with my first post on this forum. Incredibly excited to have joined.

I'm the author behind the Fairfax analysis at Junto Investments that Bryggen referred to earlier in this thread.

As for Fairfax, I'm all for thinking about the long game and bigger picture. It's pretty much only at times of uncertainty one is able to buy stuff below intrinsic value.

I think dwelling on individual investments tells us that the market cares more about the short-term stuff. I find very little reason to believe that management will not be able to live up to the baseline scenario that the current price reflects. Even after the last few weeks' share price gains.

Why wouldn't Hamblin Watsa learn from past investment blunders and look forward? Torstar is an exemplification of that. And why wouldn't there be great opportunity for Fairfax to compound invested capital well over the cost of capital going forward from here now that insurance operations are doing so well? The current price-to-book makes very little sense in this regard.

The level of uncertainty doesn't match the level of risk.

Cheers.


Welcome to the discussion.  Share everything that you want to share, and ask any question that you want to ask.  The most insightful threads are triggered by questions, comments and nuggets of information.

FFH has been obviously cheap for the past month.  The company has done an admirable job to ensure its holdco liquidity for the next 18 or so months, it has improved its underwriting, and it is in a more favourable investment environment for corporate bonds and equities.  Meanwhile the stock price tanked to ~US$250.  As TwoCities and others have pointed out, at that price it doesn't require much of an investment return to get a earnings-yield of 15% (ie, only US$37.50 EPS).  Despite the warts, FFH for the past month has been a compelling opportunity for people who have room in their asset allocation for more...


SJ

Xerxes

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Re: Fairfax 2020
« Reply #405 on: June 03, 2020, 04:50:22 PM »
Depends when you want to start the clock I guess.

Just like it is not Prem's fault that covid-19 bended the market, the bounce back from here is not Prem's gain ... unless he TAKES advantage of it.
Beefing up core liquidity is not taking advantage. That is just being a good swimmer in a storm. That is as far as giving credit goes.

He is going to say it in Q2 results, "see guys I told you it will bounce back"; hell, Blackberry shares shooting up from oblivion should provided enough mark to market juice to help things out. As long as market doesn't think FFH will eat Blackberry whole, then down it goes. 

To have a 15% on book value over the long term, he needs to have a massive lumpy return on the upside to undo the Lost Decade.
Or we could just take the clock based on the year the company was founded, to let the earlier years great gains average up the total compounded long term rate of return.

I am ok with 5-10 return on book value per annum.
What I like is the optionality.

StubbleJumper

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Re: Fairfax 2020
« Reply #406 on: June 04, 2020, 10:20:46 AM »
Depends when you want to start the clock I guess.

Just like it is not Prem's fault that covid-19 bended the market, the bounce back from here is not Prem's gain ... unless he TAKES advantage of it.
Beefing up core liquidity is not taking advantage. That is just being a good swimmer in a storm. That is as far as giving credit goes.

He is going to say it in Q2 results, "see guys I told you it will bounce back"; hell, Blackberry shares shooting up from oblivion should provided enough mark to market juice to help things out. As long as market doesn't think FFH will eat Blackberry whole, then down it goes. 

To have a 15% on book value over the long term, he needs to have a massive lumpy return on the upside to undo the Lost Decade.
Or we could just take the clock based on the year the company was founded, to let the earlier years great gains average up the total compounded long term rate of return.

I am ok with 5-10 return on book value per annum.
What I like is the optionality.


That's precisely it.  It absolutely depends on when you start the clock.  People who are anchored in a US$500 stock price from two years ago look at FFH and wonder when they will see US$75/sh of EPS which would give an earnings yield of 15%.  But, the decision to buy at $500 (or fail to sell at $500) was already made, so the $500 number and the $75 number are completely irrelevant.  The most relevant thing today is the current stock price and FFH's prospective earnings...and US$250 was pretty cheap.  Even today at US$316, it would likely work out well over a 5 year horizon.

I would like to also take the opportunity to make a couple of comments about the management of the past few months.  I am first person to bitch and moan about poor management decisions, and I am possibly amongst Prem's loudest critics.  But, so far in 2020, FFH management has pretty much done exactly what was needed:

-they proactively pre-released the direction and general magnitude of Q1 earnings
-they managed to float a debt issuance in a situation where credit markets were spooked and an equity issuance would have been highly dilutive
-they fully drew the revolver to proactively prevent the banker from screwing FFH by finding a reason to pull it
-they exploited widening credit spreads to bolster interest/dividend income
-they have continued to grow their book at seemingly profitable prices
-they have communicated their understanding of the pandemic impact on both underwriting and claims (they might ultimately be incorrect in their assessment, but at least they have been clear)
-so far there has been no sign of pulling from the "too hard pile," which is exactly what you want to see when securities valuations broadly declined.


Despite the many and varied mistakes that FFH management has made over the years (I have spilled much ink moaning about many of them), there is not really much that I can bitch about over the past 3 months.


SJ


petec

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Re: Fairfax 2020
« Reply #407 on: June 05, 2020, 05:34:06 AM »

-so far there has been no sign of pulling from the "too hard pile," which is exactly what you want to see when securities valuations broadly declined.


Must you tempt fate?

 ::)
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StubbleJumper

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Re: Fairfax 2020
« Reply #408 on: June 05, 2020, 09:16:04 AM »
Quote
He is going to say it in Q2 results, "see guys I told you it will bounce back"; hell, Blackberry shares shooting up from oblivion should provided enough mark to market juice to help things out. As long as market doesn't think FFH will eat Blackberry whole, then down it goes.


With the market going nuts this morning, I was thinking a bit about Xerxes' comment about FFH's Q2 mark.  Taking a quick gander at some of the major holdings (Recipe, BB, K-W, Resolute, Eurobank, Stelco, etc), almost all of them are showing considerable improvement over March 31.  There's still three weeks to go before June 30, and heaven knows what kind of gyrations we'll see between now and then, but has anyone taken the time to actually estimate the mark for Q2 to date?  Is it a 10-digit number, or just in the high 9-digits?


SJ

Xerxes

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Re: Fairfax 2020
« Reply #409 on: June 07, 2020, 05:59:11 PM »
SJ, I think of the names that are marked to market, there is only BB and K-W of consequence + Stelco. The first two are up about 32-33% from March 31 to date. Stelco is up 75% in CAD terms.

BB and K-W have a combined unrealized gain of USD $118 million.
Add to Stelco's ~$55 USD gain, it comes to $173 million unrealized gain.
Divided by 26.8 million outstanding shares that is very small number.

Blackberry Ltd
46,724,700 FFH ownership

Kennedy-Wilson Holdings Inc.
13,322,009 FFH ownership

Stelco
12,200,000 FFH ownership

The rest of the ones you named are equity accounted, but perhaps that there is a pickup in their earning vis a vis Q1.