Corner of Berkshire & Fairfax Message Board

General Category => Fairfax Financial => Topic started by: wondering on January 03, 2020, 07:43:25 AM

Title: Fairfax 2020
Post by: wondering on January 03, 2020, 07:43:25 AM
Dividend time!

No change from prior years - $10US per share

Date of record - January 21, 2020

Payment date - January 28, 2020

https://www.fairfax.ca/news/press-releases/press-release-details/2020/Fairfax-Declares-Annual-Dividend/default.aspx
Title: Re: Fairfax 2020
Post by: wondering on January 08, 2020, 06:21:41 AM
Date of record changed to Jan 17

https://www.fairfax.ca/news/press-releases/press-release-details/2020/Fairfax-Revises-Record-Date-of-Annual-Dividend/default.aspx
Title: Re: Fairfax 2020
Post by: newtovalue on January 13, 2020, 04:32:42 PM
new acquisition by FFH in Sri Lanka

http://www.ft.lk/front-page/Fairfax-buys-10-7-JKH-stake-from-Khazanah-for-Rs-22-7-b/44-693402
Title: Re: Fairfax 2020
Post by: petec on January 14, 2020, 12:49:13 AM
new acquisition by FFH in Sri Lanka

http://www.ft.lk/front-page/Fairfax-buys-10-7-JKH-stake-from-Khazanah-for-Rs-22-7-b/44-693402

The amazing thing about that article is the list of other little deals Fairfax has done that I know nothing about!
Title: Re: Fairfax 2020
Post by: Dazel on January 14, 2020, 10:42:11 AM
https://www.insurancejournal.com/news/international/2020/01/13/554618.htm
Title: Re: Fairfax 2020
Post by: newtovalue on January 15, 2020, 06:36:38 PM
new acquisition by FFH in Sri Lanka

http://www.ft.lk/front-page/Fairfax-buys-10-7-JKH-stake-from-Khazanah-for-Rs-22-7-b/44-693402

The amazing thing about that article is the list of other little deals Fairfax has done that I know nothing about!

@Petec - agreed! I think this is part of the valuation challenge for FFH. As they have grown - they have acquired more and more investments which are hidden deep within the financial statements. Most investors (myself included) would not have a complete understanding of exactly what they own. Its at times like this I wonder if Fairfax would benefit from some providing its shareholders with a condensed view of their empire - similar to Buffett's 5 groves approach.
Title: Re: Fairfax 2020
Post by: StevieV on January 16, 2020, 07:22:34 AM
new acquisition by FFH in Sri Lanka

http://www.ft.lk/front-page/Fairfax-buys-10-7-JKH-stake-from-Khazanah-for-Rs-22-7-b/44-693402

The amazing thing about that article is the list of other little deals Fairfax has done that I know nothing about!

@Petec - agreed! I think this is part of the valuation challenge for FFH. As they have grown - they have acquired more and more investments which are hidden deep within the financial statements. Most investors (myself included) would not have a complete understanding of exactly what they own. Its at times like this I wonder if Fairfax would benefit from some providing its shareholders with a condensed view of their empire - similar to Buffett's 5 groves approach.

I'm not sure it matters.  Are the investments material?

At the end of the day, everything shows up in the earnings and book value, and those are largely influenced by the big factors. 
Title: Re: Fairfax 2020
Post by: Viking on January 16, 2020, 11:49:42 PM
Here is some new news on Farmers Edge, one of Fairfax’s private investments.

Farmers Edge and Fairfax Brasil Partner to Bring Data-Driven Crop Insurance to Growers in Brazil
- https://business.financialpost.com/pmn/press-releases-pmn/business-wire-news-releases-pmn/farmers-edge-and-fairfax-brasil-partner-to-bring-data-driven-crop-insurance-to-growers-in-brazil

Here is the summary on the company provided by Fairfax in their 2018 annual report.

“Farmers Edge. Farmers Edge was founded in 2005 by Wade Barnes in Winnipeg, Manitoba as a project-based consulting company providing value added agronomy services for large scale farmers. The business has since evolved into one of the leading SaaS (software as a service) farm management platforms with 24 million acres under management as of December 2018, with an anticipated increase to 40 million acres by the end of 2019. Key services offered under the Farmers Edge platform include: 1) One of the highest density of weather stations in North America. Farmers can have alerts sent to their phones, even at 4am, if there is to be frost on one of their farms. Important, as there is only one harvest! 2) Daily satellite imagery to track crop health via tablet, phone or PC. 3) Brand-agnostic telematics enabling passive data collection. 4) Soil sampling and variable rate fertilizer application, which allows farms to increase yields with less overall fertilizer application. Four-year customer contracts provide Farmers Edge with predictable recurring revenue and cash flows. Fairfax made a $95 million equity investment in March 2017 and has since provided additional funding of $64 million in the form of debentures plus warrants, based on an implied valuation of 4x projected December 2019 base business EBITDA.”
Title: Re: Fairfax 2020
Post by: wondering on January 28, 2020, 06:32:39 AM
dividends are in.

My RBC Direct Investing account gave me a FX rate of 1.313
The TD Direct Investing account gave me a FX rate of 1.303
Title: Re: Fairfax 2020
Post by: StubbleJumper on January 28, 2020, 07:51:57 AM
dividends are in.

My RBC Direct Investing account gave me a FX rate of 1.313
The TD Direct Investing account gave me a FX rate of 1.303


Why do you hold the shares on the Canadian side of your account?  Ask your broker to journal your shares to the US side of your account and then you will receive your divvy in US dollars.  That gives you the option to re-invest the divvy in the US market without having to exchange the money twice (ie, it would be disappointing to receive US$10k of FFH divvies which is converted to Cdn$13.13k if you are just going to convert it back to buy US shares...you would probably only end up with US$9,700 or something).  If you receive the divvy in the US side of your account, you can always convert the US dollars back to Cdn at your leisure if you need to in the future....


SJ
Title: Re: Fairfax 2020
Post by: wondering on January 29, 2020, 06:27:41 AM
dividends are in.

My RBC Direct Investing account gave me a FX rate of 1.313
The TD Direct Investing account gave me a FX rate of 1.303


Why do you hold the shares on the Canadian side of your account?  Ask your broker to journal your shares to the US side of your account and then you will receive your divvy in US dollars.  That gives you the option to re-invest the divvy in the US market without having to exchange the money twice (ie, it would be disappointing to receive US$10k of FFH divvies which is converted to Cdn$13.13k if you are just going to convert it back to buy US shares...you would probably only end up with US$9,700 or something).  If you receive the divvy in the US side of your account, you can always convert the US dollars back to Cdn at your leisure if you need to in the future....


SJ

Thanks.  Food for thought.
Title: Re: Fairfax 2020
Post by: StubbleJumper on January 29, 2020, 08:12:43 AM
dividends are in.

My RBC Direct Investing account gave me a FX rate of 1.313
The TD Direct Investing account gave me a FX rate of 1.303


Why do you hold the shares on the Canadian side of your account?  Ask your broker to journal your shares to the US side of your account and then you will receive your divvy in US dollars.  That gives you the option to re-invest the divvy in the US market without having to exchange the money twice (ie, it would be disappointing to receive US$10k of FFH divvies which is converted to Cdn$13.13k if you are just going to convert it back to buy US shares...you would probably only end up with US$9,700 or something).  If you receive the divvy in the US side of your account, you can always convert the US dollars back to Cdn at your leisure if you need to in the future....


SJ

Thanks.  Food for thought.


Oh, I forgot one other cheapskate trick.  You can actually withdraw US dividends in cash without any fees!

1) Open a no-cost RBC US$ High Interest Savings Account (HISA): https://www.rbcroyalbank.com/accounts/us-e-savings.html

2) Once that account is open, you can transfer US cash from the US side of your RBC brokerage account into your US$ HISA in just the same manner that you can transfer Canadian cash from your brokerage account into your RBC Canadian dollar chequing account. 

3) Then, you can search for a RBC ATM in your community that dispenses both Canadian and US dollars (use "Additional ATM features for the search)  https://maps.rbcroyalbank.com/


By journalling the FFH shares to the US side of your account, it possible to then transfer the US denominated dividend to your US$ HISA and withdraw US cash from a RBC ATM in your city, all with zero fees.  If you spend much time south of the border, it's a good way to get some US spending money without incurring any FX fees or ATM fees.


SJ
Title: Re: Fairfax 2020
Post by: Viking on February 10, 2020, 03:44:14 PM
Fairfax releases Q4 results after markets close on Thursday. Here are a few of the things i will be watching:

1.) what is top line growth?
- Looks like we are in the early innings of hard market (ex workers comp) so growth should be solid

2.) what is company wide CR?
- with 10 year US government bonds trading at 1.5% a CR of 95% is the new 100%
- Fairfax said its presidents are incented at a 95% CR. Fairfax needs to now start to shoot for sub 95% CR (after catastrophes).
- Placing parts of Advent into runoff at the end of 2018 and minimal growth at Brit (worst CR performers) perhaps lowers company wide CR moving forward.

3.) what is trend in reserve releases?
- the trend (industry and Fairfax) has been lower over time.

4.) increase in book value per share
- should be a very good quarter for book value growth
- all three engines should contribute: underwriting, interest and dividend income and investment results

5.) update on recent transactions and their impact on financial statements. Not sure what gets booked in 2019 or 2020.
- Sale of ARP to Seaspan: Atlas will acquire APR, the world's largest lessor of mobile gas turbines, in an all-stock transaction valued at $750 million including the assumption of debt, for an expected equity value at closing of approximately $425 million. Atlas shares will be issued to the sellers in the Proposed Acquisition at $11.10 per share.
- Sale of 40% of Riverstone UK to OMERS: The cash purchase price of at least US$560 million... will result in Fairfax recording a gain of approximately US$280 million before tax (an increase in book value per basic share of Fairfax of approximately US$10 before tax...).
- Demerger of Quess shares from Thomas Cook (TC owned 71 million shares of Quess and FFH owns 67% of TC): September 30, 2019 the company's investment in Quess Corp Limited had a carrying value of $1,038.7 which exceeded its fair value of $477.2 as determined by the market price of Quess shares.
- For Fairfax India, sale of 5% stake in Bangalore Airport for $134 million. Will record investment gain of $506 million or $3.30 per FIH share.
- For Fairfax India, transaction with Sanmar: Sanmar purchased $300 million principal amount of Sanmar bonds held by Fairfax India, plus accrued interest at an effective annual interest rate of 13.0%, for net cash consideration of approximately $425 million. Fairfax India re-invested $200 million of the cash consideration received from the bond sale in the purchase of Sanmar common shares. Fairfax India’s equity interest in Sanmar increased to approximately 43%. Fairfax India will retain approximately $225 million of the cash consideration for future Indian investments.

6.) update on buying out minority partners
- Brit and Eurolife appear the two at the top of the list. This really sucks as Fairfax has such better uses for cash right now. Brit is the worst performing op co (from a CR perspective). But it sounds like they are contractually obligated to do these deals in the near term.

7.) shareholders
- when do we see meaningful share buy backs?
- Most of Fairfax’s insurance peers have seen their stocks appreciate 30-40% over the past year. Fairfax stock is down 4%.
- Fairfax stock is actually trading 10% below where it was trading 5 years ago.

8.) has Fairfax learned the lessons?
- The decisions Fairfax made over the past 7 years have shattered investor confidence in the company.
- Fairfax has said they have learned the lesson when it comes to shorting the market. That is a good start but more needs to be done to restore investor confidence.
- Are they done with empire building (low ROE insurance acquisitions)?
- Will investment results improve?

Walk the talk on this Guiding Principle: “We always look at opportunities but emphasize downside protection and look for ways to minimize loss of capital.” Stop saying the problem is value investing is ‘out of favour’. Investments in declining companies like Blackberry or declining/shitty industries like Resolute or Stelco are simply bad decisions. Or regions with unmeasurable political and/or currency risk like Africa. There is no safety of principal; and it is not investing it is gambling - Own it, learn from it and stop doing it! :-)

If Fairfax wants to attract more long term investors as the equity portfolio turns over they need to move up the quality ladder with the companies they hold. Hopefully this is what we see moving forward.
Title: Re: Fairfax 2020
Post by: petec on February 11, 2020, 08:22:12 AM
Good post. I agree with most of it.

I don't agree Fairfax need to target *sub* 95%. There's a benefit to growing float too.

I don't think they have to buy the minorities in Eurolife and Brit - but they can. The deal terms looked pretty favourable to me at the time - OMERS got a preferential dividend and Fairfax got the right to buy OMERS out at a price that compounded in the mid single digits. In other words, if BV grew faster than that the P/BV came down. I don't see why buying in the minorities is necessarily any better/worse than doing buybacks - depending on price, obviously. It is likely a good use of cash.

Empire building: they have said pretty clearly that they don't expect to do any more big deals. The platform is complete. But every business within it does tuck-ins. That said, I fully expect Prem to get itchy fingers if a really juicy deal comes along. It's in his bones.

Resolute and Blackberry have clearly been a disaster. I am not so sure Stelco will be. And I actively like what they are doing in Africa. Deep value, with diversified poltiical and currency risk, with the potential to clip fees on OPM.

I die a little inside when people say they need to move up the quality ladder. What they need to do is buy things for less than they are worth and with a pathway to realising that value. I don't care whether they do that with Coca-Cola or a cigar butt. Is Seaspan a high quality franchise, the way most people define quality? No. Has it been a great investment? Hell yes, because they bought it for way less than it was worth and helped catalyse the market's realisation of that fact. What they need to stop doing is being wrong about the intrinsic value of an investment, as they clearly were with Resolute and Blackberry and, I suspect, quite a lot of the private portfolio.

The major question you haven't asked is: is the monster position in Seaspan sized correctly given the risk and reward, and if not, what can/will they do about it?
Title: Re: Fairfax 2020
Post by: StevieV on February 11, 2020, 08:53:25 AM
Quote
I die a little inside when people say they need to move up the quality ladder. What they need to do is buy things for less than they are worth and with a pathway to realising that value. I don't care whether they do that with Coca-Cola or a cigar butt. Is Seaspan a high quality franchise, the way most people define quality? No. Has it been a great investment? Hell yes, because they bought it for way less than it was worth and helped catalyse the market's realisation of that fact. What they need to stop doing is being wrong about the intrinsic value of an investment, as they clearly were with Resolute and Blackberry and, I suspect, quite a lot of the private portfolio.

Sure, the key is to be right.  If you can buy down the quality ladder and be right, that is great.  I assume those pushing to move to "quality" are doing so because Fairfax hasn't proven that they can consistently be right on the lower quality end.

More Seaspans and fewer Blackberrys - easier said than done.
Title: Re: Fairfax 2020
Post by: petec on February 11, 2020, 09:54:12 AM
Quote
I die a little inside when people say they need to move up the quality ladder. What they need to do is buy things for less than they are worth and with a pathway to realising that value. I don't care whether they do that with Coca-Cola or a cigar butt. Is Seaspan a high quality franchise, the way most people define quality? No. Has it been a great investment? Hell yes, because they bought it for way less than it was worth and helped catalyse the market's realisation of that fact. What they need to stop doing is being wrong about the intrinsic value of an investment, as they clearly were with Resolute and Blackberry and, I suspect, quite a lot of the private portfolio.

Sure, the key is to be right.  If you can buy down the quality ladder and be right, that is great.  I assume those pushing to move to "quality" are doing so because Fairfax hasn't proven that they can consistently be right on the lower quality end.

More Seaspans and fewer Blackberrys - easier said than done.

I agree - but quality has had a hell of a run over the last decade. We don’t know that owning it will be right for the next one. Investing isn’t that simple.

Or to put it another way: we don’t know they’d be any good at investing in quality, either.
Title: Re: Fairfax 2020
Post by: StevieV on February 11, 2020, 10:13:44 AM
Quote
Or to put it another way: we don’t know they’d be any good at investing in quality, either.

I certainly agree.  Just "switch to quality" is not that easy either.
Title: Re: Fairfax 2020
Post by: petec on February 11, 2020, 10:24:33 AM
Quote
Or to put it another way: we don’t know they’d be any good at investing in quality, either.

I certainly agree.  Just "switch to quality" is not that easy either.

Exactly.

Fairfax is an insurer/investor that focuses on value* and invests globally, including in some risky places. If you want an insurer/investor that focuses on long term ownership of quality stocks in a jurisdiction with low political risk, I’m sure you can think of one ;)

*Edit: value and quality aren’t mutually exclusive, obviously. CIB, Quess, Bangalore and others prove Fairfax aren’t averse to quality when they can find it cheap.
Title: Re: Fairfax 2020
Post by: Viking on February 11, 2020, 10:52:20 AM
I don't agree Fairfax need to target *sub* 95%. There's a benefit to growing float too.

If Fairfax is serious about hitting a 15% BV growth average over time they will need to write at a sub 95% CR. Bonds represent the majority of the investment portfolio and yields are very low and look likely to stay low. The whole insurance industry is facing the same issue.

On conference calls other insurance companies are communicating that they are getting price increases a couple of % in excess of expected loss trends. They expect this will result in a lower CR over time. These companies need a lower CR to deliver return targets required by shareholders. And their stock prices are moving higher as a result.

I am pretty sure Fairfax feels its shares are very undervalued. The reason they are so undervalued is the company has not been able to grow book value per share (much) over the past 5 years. And investors have little confidence they will be able to grow BV moving forward (let alone hit the 15% target). They should deliver a +15% growth in BV this year. Will they deliver in 2020? Writing at a 97.5CR they will need their equities to do exceptionally well every year and this is simply too much for an investor to reasonably expect.

There is another solution. Get more aggressive with lowering your CR. (And if you don’t grow top line as fast put your excess capital into share buybacks.)

Fairfax has much improved its underwriting from when i first started following the company way back in The early 2000’s. Its CR over the past decade is pretty decent and some subs are very good. I think they understand and will find a way to lower their CR to below 95% in the coming years. As i mentioned in my previous post, placing parts of Advent in run off and minimal growth at Brit (worst op co from CR perspective) are good signs. The op co’s with the best historical CR’s appear to be growing the fastest in the current hard market which is another positive sign.

Fairfax is so big now it is like a big oil tanker. I do believe they have been making incremental changes the past couple of years that are slowly turning the ship in a better direction for shareholders. I think we are going to see the insurance op co’s continue to improve (with some bumps along the way). And i think investment results will also improve. And the management team has demonstrated in the past that it can be very creative in surfacing value (with the sale of 40% of Riverstone being the most recent example).

In 2012-2017 Fairfax dug itself a very big hole. I think they are just now crawling out. The head winds are now being replaced with tail winds. 2019 was a very good year. 2020 could be just as good. So i am optimistic  :-)
Title: Re: Fairfax 2020
Post by: Viking on February 11, 2020, 11:24:11 AM
Quote
Or to put it another way: we don’t know they’d be any good at investing in quality, either.

I certainly agree.  Just "switch to quality" is not that easy either.

Exactly.

Fairfax is an insurer/investor that focuses on value* and invests globally, including in some risky places. If you want an insurer/investor that focuses on long term ownership of quality stocks in a jurisdiction with low political risk, I’m sure you can think of one ;)

*Edit: value and quality aren’t mutually exclusive, obviously. CIB, Quess, Bangalore and others prove Fairfax aren’t averse to quality when they can find it cheap.

My point earlier was more intended more for the company to live its guiding principal: “We always look at opportunities but emphasize downside protection and look for ways to minimize loss of capital.

There are too many examples where the company invested in a distressed company/industry. Things (predictably) got worse and they doubled down. Things got (predictably) worse and they doubled down again. Resolute is the best current example. Blackberry is another good example although the story is still being written there. Where was the downside protection to minimize the loss of capital?

When Prem talks about Fairfax and its investing style he sounds like Graham: value investing with a focus on safety of principal. Walk the talk is all i am saying. If you want to continue to swing for the fences with very large purchases of shitty companies/shitty industries then change your Guiding Principle. Clear communication with investors is all i am saying.

Fairfax has brought in some new people to their investment team. I am optimistic we will see a subtle shift in the equity portfolio over time to more quality positions :-)
Title: Re: Fairfax 2020
Post by: petec on February 11, 2020, 11:59:08 AM
I totally agree with all of that except the word quality. Perhaps we are using the word differently. But it is quite possible to lose your principal by investing badly in quality, and quite possible to protect it by investing well in things like Seaspan, which most people wouldn’t define as quality.

Otherwise we are totally aligned.

I’m not sure the new people will be what make the difference. I think it will be Prem. he’s not stupid, and not the kind of guy to feel good about persistent failures. I suspect he took his eye off the ball. I bet he’s more focussed now.
Title: Re: Fairfax 2020
Post by: wondering on February 13, 2020, 02:09:27 PM
Paul Rivett retires.  Sad news.  I thought he was going to succeed Prem when Prem decided to retire

https://ca.finance.yahoo.com/news/fairfax-financial-holdings-limited-executive-220110417.html
Title: Re: Fairfax 2020
Post by: mcliu on February 13, 2020, 02:32:45 PM
Paul Rivett retires.  Sad news.  I thought he was going to succeed Prem when Prem decided to retire

https://ca.finance.yahoo.com/news/fairfax-financial-holdings-limited-executive-220110417.html

Interesting, that's an early retirement.. Thought he was a successor since taking over the conference calls only a few quarters ago. Anyone have insights into this?

Q4: https://www.fairfax.ca/news/press-releases/press-release-details/2020/Fairfax-Financial-Financial-Results-for-the-Year-Ended-December-31-2019/default.aspx

Underwriting pretty good. Some decent investment gains, hopefully there's more left. Non-insurance seems to be struggling. Would be nice to see more stock buybacks.
Title: Re: Fairfax 2020
Post by: petec on February 13, 2020, 03:08:14 PM
Paul Rivett retires.  Sad news.  I thought he was going to succeed Prem when Prem decided to retire

https://ca.finance.yahoo.com/news/fairfax-financial-holdings-limited-executive-220110417.html

That’s worrying.
Title: Re: Fairfax 2020
Post by: Viking on February 13, 2020, 03:14:05 PM
All in all, very good results. Chug, chug, chug. Most importantly a few nice upside surprises.
1.) solid top line growth of 11% for year
2.) solid CR of 96.9, slightly improved from last year
- big jump in underwriting profit of $394 versus $318 last year
3.) reserve releases
- solid $295 million in Q4 across all subs
4.) BV = $486 versus $432 Dec 31 2018, +14.8% (including $10 dividend)
5.) As expected, lots of changes to equities, most positive. Will need more disclosure to fully understand individual impacts. Quess revised down. Digit revised up.
6.) no update on buying out minority partners (unless i missed it)
7.) shareholders
- no meaningful share repurchases; expect this to be discussed on the conference call tomorrow
8.) has Fairfax learned the lessons?
- very good quarter. Lots of good news and positive trends to continue to build on.

Stock closed today at US $460 or Price to BV of 0.95 (BV is now $484). Top line is growing due to hard market. Underwriting is improving. Interest and dividend income is growing. Investment results were very good and look well positioned moving forward.
Title: Re: Fairfax 2020
Post by: Viking on February 13, 2020, 03:28:43 PM
Paul Rivett retires.  Sad news.  I thought he was going to succeed Prem when Prem decided to retire

https://ca.finance.yahoo.com/news/fairfax-financial-holdings-limited-executive-220110417.html

That’s worrying.

Petec, given he is going to continue to be involved with FFH in a small way i am not worried. Yes, it is unfortunate to lose a good person. My guess is Fairfax has a deep bench to pick a replacement from.
Title: Re: Fairfax 2020
Post by: Viking on February 13, 2020, 04:20:01 PM
Here is what one investment house had to say in their preliminary report :-)

"Net/Net: Core insurance underwriting results were strong and growth was good across most units although this was significantly overshadowed by weak results from non-insurance operations, affiliates, and the run-off unit. While we think that Fairfax is well positioned for current favorable market conditions, quarters like this are why valuation has continued to lag peers. A conference call will be held at 8:30 a.m. ET (dial-in 800-369-2013; passcode Fairfax) on Friday, February 14."
Title: Re: Fairfax 2020
Post by: StubbleJumper on February 13, 2020, 05:46:17 PM
I never particularly like this release because it's not accompanied by a full quarterly report, so it's a bit tougher to get the entire picture.  I eagerly await the annual report coming in March.  A few preliminary thoughts:

1) What's the deal with insurance operations?  Is it just a coincidence that the favourable development for 2018 and 2019 respectively almost perfectly offset the cats for 2018 and 2019 respectively (see the final two tables at the bottom of the presser)?  Is that a freakish occurrence, or is FFH pulling from the cookie jar to manage the numbers?  Seriously, WEB always said that one of the biggest challenges in P&C investing is trying to assess whether you believe the numbers. 

2) What's the deal with the Gross Written and Net Written in Q4 2019?  Are we not in the midst of a hardening market?  When you look at Q4's numbers, you see a visible bump in their ceding.  Why?  Is it the case that one or more of the subs is capital constrained, but still has plenty of profitable business to write, and is therefore throwing premium at the reinsurers?  What the hell is going on here?  If capital needs to be shifted from one sub to another, then do what needs to be done.  But, it's not at all clear to me that ceding should have increased.

3) It's nice to see a double-digit increase in Net Written.  Fixed income returns might be in the toilet and the CRs might be a little disappointing, but there's still room for growth in operating income if you can push up the underwriting volume.  It would be super nice to see a high single digit increase in Net Written in 2020, coupled with the CR being shaved by a couple of points.  A hardening market might just do that for you?

4) It will be interesting to read the annual letter and to get some colour from the conference call to better understand FFH's view of financial markets.  If Prem and Brian were fussing about broad market valuations three years ago, they must be shitting a brick today.

5) The earnings per share number is nice, but will the market give it any cred?  Quality of earnings over the past couple of years has been a bit suspect, but will anyone care?


Looking forward to the more detailed release in a few weeks.


SJ
Title: Re: Fairfax 2020
Post by: petec on February 13, 2020, 11:29:49 PM
Paul Rivett retires.  Sad news.  I thought he was going to succeed Prem when Prem decided to retire

https://ca.finance.yahoo.com/news/fairfax-financial-holdings-limited-executive-220110417.html

That’s worrying.

Petec, given he is going to continue to be involved with FFH in a small way i am not worried. Yes, it is unfortunate to lose a good person. My guess is Fairfax has a deep bench to pick a replacement from.

It’s not the loss of a good person. It’s the loss of the heir to the throne. Weird, perhaps, rather than worrying.
Title: Re: Fairfax 2020
Post by: Viking on February 14, 2020, 12:33:09 AM

4) It will be interesting to read the annual letter and to get some colour from the conference call to better understand FFH's view of financial markets.  If Prem and Brian were fussing about broad market valuations three years ago, they must be shitting a brick today.

SJ

SJ, regarding market valuations my guess is Fairfax is expecting the US and global economy to continue to chug along which should be good for stock markets. When you look at their specific holdings (Dec 31, 2019 valuations) there is nothing that i would call grossly overvalued and not much that i would call overvalued. The large position in Indian equities (Quess, Thomas Cook and the twin IIFL positions) have been in an 18 month bear market that looks to have finally turned in the last 6 weeks (for Quess and IIFL anyways). Similar for their position in Recipe - casual dining restaurant stocks in Canada have been getting crushed all 2019. Hard to see Recipe getting much cheaper and when they get back to same store sales growth (and improve profitability) there will be lots of upside (2H 2020?). Seaspan had a wonderful run in 2019 but i dont know if i would call it super expensive (perhaps a little expensive). Eurobank also had a great run in 2019 (it was crazy cheap at the end of 2018) and is probably fairly valued now with decent prospects. Blackberry is not expensive and if the Cylance acquisition works out it could increase 50% or more. Bottom line, valuations of the stocks they hold look pretty reasonable in aggregate. 2020 should be another decent year for investment gains.
Title: Re: Fairfax 2020
Post by: petec on February 14, 2020, 01:30:47 AM
I never particularly like this release because it's not accompanied by a full quarterly report, so it's a bit tougher to get the entire picture.  I eagerly await the annual report coming in March.  A few preliminary thoughts:

1) What's the deal with insurance operations?  Is it just a coincidence that the favourable development for 2018 and 2019 respectively almost perfectly offset the cats for 2018 and 2019 respectively (see the final two tables at the bottom of the presser)?  Is that a freakish occurrence, or is FFH pulling from the cookie jar to manage the numbers?  Seriously, WEB always said that one of the biggest challenges in P&C investing is trying to assess whether you believe the numbers. 

2) What's the deal with the Gross Written and Net Written in Q4 2019?  Are we not in the midst of a hardening market?  When you look at Q4's numbers, you see a visible bump in their ceding.  Why?  Is it the case that one or more of the subs is capital constrained, but still has plenty of profitable business to write, and is therefore throwing premium at the reinsurers?  What the hell is going on here?  If capital needs to be shifted from one sub to another, then do what needs to be done.  But, it's not at all clear to me that ceding should have increased.

3) It's nice to see a double-digit increase in Net Written.  Fixed income returns might be in the toilet and the CRs might be a little disappointing, but there's still room for growth in operating income if you can push up the underwriting volume.  It would be super nice to see a high single digit increase in Net Written in 2020, coupled with the CR being shaved by a couple of points.  A hardening market might just do that for you?

4) It will be interesting to read the annual letter and to get some colour from the conference call to better understand FFH's view of financial markets.  If Prem and Brian were fussing about broad market valuations three years ago, they must be shitting a brick today.

5) The earnings per share number is nice, but will the market give it any cred?  Quality of earnings over the past couple of years has been a bit suspect, but will anyone care?


Looking forward to the more detailed release in a few weeks.


SJ

Re 2: I think we know for a fact that some subs are capacity constrained, and I don’t know how easy it is to move capital between them. Does anyone?
Title: Re: Fairfax 2020
Post by: Dazel on February 14, 2020, 05:42:10 AM

Petec,

I don’t agree. Rivett has done a great job as a caretaker and lawyer. He is not in the league of Prem
And others at Markel and Berkshire...to take the stock where it should go. I called these earnings last year and a record year...no one cares. SNC Lavalin was a tap in in their backyard...SNC did not need the money but it was the kind of transaction that Buffett like operators make...Fairfax has been asleep. Blackberry is so undervalued it is attributable to Fairfax passive (do nothing) approach....hurting performance instead of helping. It is all great and everything to have a good reputation but as Buffett said about David Winters when he challenged Coke’s board....what has he done for his shareholders?
I am frustrated to say the least....if Prem is done give me a leader. The bones are there....
Title: Re: Fairfax 2020
Post by: StubbleJumper on February 14, 2020, 06:02:10 AM
I never particularly like this release because it's not accompanied by a full quarterly report, so it's a bit tougher to get the entire picture.  I eagerly await the annual report coming in March.  A few preliminary thoughts:

1) What's the deal with insurance operations?  Is it just a coincidence that the favourable development for 2018 and 2019 respectively almost perfectly offset the cats for 2018 and 2019 respectively (see the final two tables at the bottom of the presser)?  Is that a freakish occurrence, or is FFH pulling from the cookie jar to manage the numbers?  Seriously, WEB always said that one of the biggest challenges in P&C investing is trying to assess whether you believe the numbers. 

2) What's the deal with the Gross Written and Net Written in Q4 2019?  Are we not in the midst of a hardening market?  When you look at Q4's numbers, you see a visible bump in their ceding.  Why?  Is it the case that one or more of the subs is capital constrained, but still has plenty of profitable business to write, and is therefore throwing premium at the reinsurers?  What the hell is going on here?  If capital needs to be shifted from one sub to another, then do what needs to be done.  But, it's not at all clear to me that ceding should have increased.

3) It's nice to see a double-digit increase in Net Written.  Fixed income returns might be in the toilet and the CRs might be a little disappointing, but there's still room for growth in operating income if you can push up the underwriting volume.  It would be super nice to see a high single digit increase in Net Written in 2020, coupled with the CR being shaved by a couple of points.  A hardening market might just do that for you?

4) It will be interesting to read the annual letter and to get some colour from the conference call to better understand FFH's view of financial markets.  If Prem and Brian were fussing about broad market valuations three years ago, they must be shitting a brick today.

5) The earnings per share number is nice, but will the market give it any cred?  Quality of earnings over the past couple of years has been a bit suspect, but will anyone care?


Looking forward to the more detailed release in a few weeks.


SJ

Re 2: I think we know for a fact that some subs are capacity constrained, and I don’t know how easy it is to move capital between them. Does anyone?

Many ways to do it, including:

1) Use the dividend capacity already approved by regulators to send a divvy from the capital-rich subs to the holdco and then it's no trouble at all to shift if from the holdco to the capital-poor sub;
2) If the capital poor sub operates in the same jurisdiction as a capital-rich sub, merge them;
3) Float another holdco bond issue for $500m, and sprinkle the proceeds into the subs that require more capacity;

Maybe it's just a one-time freaky thing in Q4 that they were laying off premium on the reinsurers?  But, that's not exactly how I imagined the company attacking a hardening market.


SJ
Title: Re: Fairfax 2020
Post by: StubbleJumper on February 14, 2020, 06:05:58 AM
Paul Rivett retires.  Sad news.  I thought he was going to succeed Prem when Prem decided to retire

https://ca.finance.yahoo.com/news/fairfax-financial-holdings-limited-executive-220110417.html

That’s worrying.

Petec, given he is going to continue to be involved with FFH in a small way i am not worried. Yes, it is unfortunate to lose a good person. My guess is Fairfax has a deep bench to pick a replacement from.

It’s not the loss of a good person. It’s the loss of the heir to the throne. Weird, perhaps, rather than worrying.


I haven't seen anyone say it yet, so I will say it:  "Did he jump or was he pushed?"

Frankly, in situations like this, my instinct would be that he was pushed.

SJ
Title: Re: Fairfax 2020
Post by: Cigarbutt on February 14, 2020, 06:44:16 AM
...
Re 2: I think we know for a fact that some subs are capacity constrained, and I don’t know how easy it is to move capital between them. Does anyone?
Many ways to do it, including:

1) Use the dividend capacity already approved by regulators to send a divvy from the capital-rich subs to the holdco and then it's no trouble at all to shift if from the holdco to the capital-poor sub;
2) If the capital poor sub operates in the same jurisdiction as a capital-rich sub, merge them;
3) Float another holdco bond issue for $500m, and sprinkle the proceeds into the subs that require more capacity;

Maybe it's just a one-time freaky thing in Q4 that they were laying off premium on the reinsurers?  But, that's not exactly how I imagined the company attacking a hardening market.

SJ
That's a concern I had about the capital flexibility to grow in a hard market.
When you look at yr-end 2018 regulatory dividend capacity at the (re)insurance subs, only Allied World (685.6M) and OdysseyRe (329.7M) had significant capacity. Crum and Forsters had some dividend capacity but up to Q3, after an early upstream dividend, overall, net capital has flowed to the sub to 'support' growth. Up to Q3, OdysseyRe has paid 50M in dividends to the parent and Allied World has paid 126.4M to minority interests. I'm not sure how easy it would be for the parent to obtain dividends from Allied without some kind of permission or sharing to the 32.2% minority interest. If this hard market continues, in order to participate, FFH needs profitability from operations and investments which renders the premium growth (and its retention) conditional.
Even if their equity investments are not likely to be correlated with markets, the level of equity investments to total capital is high and unusual in its composition and that aspect has regulatory capital implications.
Title: Re: Fairfax 2020
Post by: TwoCitiesCapital on February 14, 2020, 06:48:14 AM
...
Re 2: I think we know for a fact that some subs are capacity constrained, and I don’t know how easy it is to move capital between them. Does anyone?
Many ways to do it, including:

1) Use the dividend capacity already approved by regulators to send a divvy from the capital-rich subs to the holdco and then it's no trouble at all to shift if from the holdco to the capital-poor sub;
2) If the capital poor sub operates in the same jurisdiction as a capital-rich sub, merge them;
3) Float another holdco bond issue for $500m, and sprinkle the proceeds into the subs that require more capacity;

Maybe it's just a one-time freaky thing in Q4 that they were laying off premium on the reinsurers?  But, that's not exactly how I imagined the company attacking a hardening market.

SJ
That's a concern I had about the capital flexibility to grow in a hard market.
When you look at yr-end 2018 regulatory dividend capacity at the (re)insurance subs, only Allied World (685.6M) and OdysseyRe (329.7M) had significant capacity. Crum and Forsters had some dividend capacity but up to Q3, after an early upstream dividend, overall, net capital has flowed to the sub to 'support' growth. Up to Q3, OdysseyRe has paid 50M in dividends to the parent and Allied World has paid 126.4M to minority interests. I'm not sure how easy it would be for the parent to obtain dividends from Allied without some kind of permission or sharing to the 32.2% minority interest. If this hard market continues, in order to participate, FFH needs profitability from operations and investments which renders the premium growth (and its retention) conditional.
Even if their equity investments are not likely to be correlated with markets, the level of equity investments to total capital is high and unusual in its composition and that aspect has regulatory capital implications.

I haven't dug into the numbers in any depth yet to know how true this is -

 but it would be a massive slap in the face if all of these years we were told the company needed a fortress balance, that having tons of cash on hand was necessary, that hedging was necessary, all to be able to support subs in a hard market...only to get to the hard market and find out that they still can't do so?
Title: Re: Fairfax 2020
Post by: Viking on February 14, 2020, 07:15:12 AM
A couple of notes from the conference call:
- Annual report and Q4 info will be available March 6
- net written premiums grew at accelerating rate each quarter; sees trend continuing in 2020
- supporting growth of insurance subs top priority; this is because hard markets occur infrequently and only last a short period of time (a couple of years)
- share repurchases will be done with cash not needed to grow insurance subs
- in the non-insurance segment, TCook/Quess demerger resulted in $191 million impairment
- US runoff had $216 million loss due to asbestos strengthening; example of social inflation
- $600 million will be coming to FFH in Q1 when the Riverstone UK deal closes; after sale closes Riverstone UK will have opportunity (with OMERS) to grow business. Fairfax may take Riverstone public at some point.
- minority insurance partners buyout: 10% of Brit soon at $100 million (seems low?); Eurolife will be small amount; Allied agreement opens up mid year and Fairfax has 3-4 years to buy out minority partner
- Go Digit: the company recently raised 10% at $800 million valuation. The $300 million gain recognized by Fairfax was Go Digit convertible shares (owned via Quess) not the common stock owned by Fairfax (hope i got this right)
- BIAL sale was to third party investor; purchaser was not named
Title: Re: Fairfax 2020
Post by: petec on February 14, 2020, 09:20:57 AM

Petec,

I don’t agree. Rivett has done a great job as a caretaker and lawyer. He is not in the league of Prem
And others at Markel and Berkshire...to take the stock where it should go. I called these earnings last year and a record year...no one cares. SNC Lavalin was a tap in in their backyard...SNC did not need the money but it was the kind of transaction that Buffett like operators make...Fairfax has been asleep. Blackberry is so undervalued it is attributable to Fairfax passive (do nothing) approach....hurting performance instead of helping. It is all great and everything to have a good reputation but as Buffett said about David Winters when he challenged Coke’s board....what has he done for his shareholders?
I am frustrated to say the least....if Prem is done give me a leader. The bones are there....

Yes - fair. I’m not saying Rivett was the right man. I’ve no view on that. It’s just optically odd when the presumed heir resigns.
Title: Re: Fairfax 2020
Post by: petec on February 14, 2020, 09:22:58 AM
...
Re 2: I think we know for a fact that some subs are capacity constrained, and I don’t know how easy it is to move capital between them. Does anyone?
Many ways to do it, including:

1) Use the dividend capacity already approved by regulators to send a divvy from the capital-rich subs to the holdco and then it's no trouble at all to shift if from the holdco to the capital-poor sub;
2) If the capital poor sub operates in the same jurisdiction as a capital-rich sub, merge them;
3) Float another holdco bond issue for $500m, and sprinkle the proceeds into the subs that require more capacity;

Maybe it's just a one-time freaky thing in Q4 that they were laying off premium on the reinsurers?  But, that's not exactly how I imagined the company attacking a hardening market.

SJ
That's a concern I had about the capital flexibility to grow in a hard market.
When you look at yr-end 2018 regulatory dividend capacity at the (re)insurance subs, only Allied World (685.6M) and OdysseyRe (329.7M) had significant capacity. Crum and Forsters had some dividend capacity but up to Q3, after an early upstream dividend, overall, net capital has flowed to the sub to 'support' growth. Up to Q3, OdysseyRe has paid 50M in dividends to the parent and Allied World has paid 126.4M to minority interests. I'm not sure how easy it would be for the parent to obtain dividends from Allied without some kind of permission or sharing to the 32.2% minority interest. If this hard market continues, in order to participate, FFH needs profitability from operations and investments which renders the premium growth (and its retention) conditional.
Even if their equity investments are not likely to be correlated with markets, the level of equity investments to total capital is high and unusual in its composition and that aspect has regulatory capital implications.

I haven't dug into the numbers in any depth yet to know how true this is -

 but it would be a massive slap in the face if all of these years we were told the company needed a fortress balance, that having tons of cash on hand was necessary, that hedging was necessary, all to be able to support subs in a hard market...only to get to the hard market and find out that they still can't do so?

They have capital, but as discussed by others it’s at Odyssey and reinsurance isn’t hardening as fast as primary. I do find it annoying that after years of implying that all subs have the capital to grow, we now discover they don’t.
Title: Re: Fairfax 2020
Post by: Viking on February 14, 2020, 09:55:55 AM
Here is a summary of Q4 results from one of the big Canadian banks:

“Our view: The insurance part of the business is shifting into a higher gear with strong growth, improving margins and still solid reserves. Quarterly results were negatively impacted by some non-insurance items that are largely one-time in nature. We think valuation is among the most attractive in the P&C space at a discount to book value with rising earnings momentum.”
Title: Re: Fairfax 2020
Post by: KFS on February 14, 2020, 01:03:51 PM
A couple of notes from the conference call:
- Annual report and Q4 info will be available March 6
- net written premiums grew at accelerating rate each quarter; sees trend continuing in 2020
- supporting growth of insurance subs top priority; this is because hard markets occur infrequently and only last a short period of time (a couple of years)
- share repurchases will be done with cash not needed to grow insurance subs
- in the non-insurance segment, TCook/Quess demerger resulted in $191 million impairment
- US runoff had $216 million loss due to asbestos strengthening; example of social inflation
- $600 million will be coming to FFH in Q1 when the Riverstone UK deal closes; after sale closes Riverstone UK will have opportunity (with OMERS) to grow business. Fairfax may take Riverstone public at some point.
- minority insurance partners buyout: 10% of Brit soon at $100 million (seems low?); Eurolife will be small amount; Allied agreement opens up mid year and Fairfax has 3-4 years to buy out minority partner
- Go Digit: the company recently raised 10% at $800 million valuation. The $300 million gain recognized by Fairfax was Go Digit convertible shares (owned via Quess) not the common stock owned by Fairfax (hope i got this right)
- BIAL sale was to third party investor; purchaser was not named


Some additional notes:
- Repurchased 479k shares in 2019.  1.2 million since 2017.  Repurchases are expected to be significant but over a long term (i.e. 10 years) as stated in previous annual report, not necessarily in short term or every quarter.  (Singleton repurchased 85% of shares outstanding over a 10-15 year stretch.) 
- Coronavirus:  minimal or insignificant impact on insurance. 
- Stock market overall valuations are high, but... for example, from 1999 to 2002 the overall market dropped 50% while Fairfax value-focused investments increased 100% over the same period. 
- Fairfax india clearly undervalued.  Great potential for BIAL, 3rd largest city in India, community of software engineers; re-election of Modi. 
Title: Re: Fairfax 2020
Post by: petec on February 14, 2020, 11:22:08 PM
Just started reading the transcript. “Realised gains in Seaspan and Brookfield” - sounds like they’ve sold some SSW and owner BAM? Unless there’s been a transcription error...
Title: Re: Fairfax 2020
Post by: StubbleJumper on February 15, 2020, 06:51:49 AM
Just started reading the transcript. “Realised gains in Seaspan and Brookfield” - sounds like they’ve sold some SSW and owner BAM? Unless there’s been a transcription error...


Perhaps gains on SSW have something to do with the APR merger.  That's the sort of thing that I was alluding to in my comments from yesterday about quality of earnings.  There have been a few transactions over the past couple of years which have triggered accounting gains without any real change to the economic reality.  Keg and Recipe are an example.  Eurolife and Grivalia is another.  SSW and APR might be a third example, if that transaction has already hit the books? 

It's almost worthwhile inventing a pro-forma income statement to strip out some of this.


SJ
Title: Re: Fairfax 2020
Post by: petec on February 15, 2020, 07:15:28 AM
There wasn’t a gain on APR so that’s not it and I don’t think the transaction will contribute earnings, high quality or low.

I suspect what they’re referring to is gains on the exercise of SSW warrants.
Title: Re: Fairfax 2020
Post by: StubbleJumper on February 15, 2020, 07:24:06 AM
There wasn’t a gain on APR so that’s not it and I don’t think the transaction will contribute earnings, high quality or low.

I suspect what they’re referring to is gains on the exercise of SSW warrants.


That could very well be the case.  They would definitely have a gain from exercising the SSW warrants, but it doesn't much change the economic reality (outside of FFH having to add some cash to the existing investment).

Keg/Recipe wasn't the correct transaction for me to reference.  In 2018 the "accounting" transactions were Grivalia being consolidated, and Thomas Cook/Quess triggering a bunch of paper gains.  In 2019, it was Quess triggering a bunch of paper losses and Eurolife/Grivalia triggering a bunch of paper gains. 

For the past few years, most of us have cooked up an adjusted BV to get an idea of the significance of some of the excess in value over book.  But, really it might be time to create an adjusted net income to strip out the impact of some of the one-time transactions to better portray ongoing economic performance.


SJ
Title: Re: Fairfax 2020
Post by: petec on February 15, 2020, 07:25:32 AM
While we’re at it I don’t recall Grivalia/Eurobank generating a paper gain either, and it’s clearly been value-enhancing because it was effectively a capital raise for the bank.
Title: Re: Fairfax 2020
Post by: StubbleJumper on February 15, 2020, 07:27:27 AM
While we’re at it I don’t recall Grivalia/Eurobank generating a paper gain either, and it’s clearly been value-enhancing because it was effectively a capital raise for the bank.

"Net gains on long equity exposures of $1,631.1 million in 2019 was primarily comprised of unrealized appreciation of preferred shares of Go Digit Infoworks ($350.9 million), the sale of the company's remaining interest in ICICI Lombard ($240.0 million), a non-cash gain on the merger of Grivalia Properties into Eurobank ($171.3 million) and significant unrealized appreciation of common stocks."
Title: Re: Fairfax 2020
Post by: petec on February 15, 2020, 07:28:43 AM
There wasn’t a gain on APR so that’s not it and I don’t think the transaction will contribute earnings, high quality or low.

I suspect what they’re referring to is gains on the exercise of SSW warrants.


That could very well be the case.  They would definitely have a gain from exercising the SSW warrants, but it doesn't much change the economic reality (outside of FFH having to add some cash to the existing investment).

Keg/Recipe wasn't the correct transaction for me to reference.  In 2018 the "accounting" transactions were Grivalia being consolidated, and Thomas Cook/Quess triggering a bunch of paper gains.  In 2019, it was Quess triggering a bunch of paper losses and Eurolife/Grivalia triggering a bunch of paper gains. 

For the past few years, most of us have cooked up an adjusted BV to get an idea of the significance of some of the excess in value over book.  But, really it might be time to create an adjusted net income to strip out the impact of some of the one-time transactions to better portray ongoing economic performance.


SJ

Ah I see what you’re getting at.

Personally I care more about BV than earnings so I’m happy with the disclosure they’ve often provided on what BV would be if they marked to market.
Title: Re: Fairfax 2020
Post by: StubbleJumper on February 15, 2020, 07:36:10 AM
There wasn’t a gain on APR so that’s not it and I don’t think the transaction will contribute earnings, high quality or low.

I suspect what they’re referring to is gains on the exercise of SSW warrants.


That could very well be the case.  They would definitely have a gain from exercising the SSW warrants, but it doesn't much change the economic reality (outside of FFH having to add some cash to the existing investment).

Keg/Recipe wasn't the correct transaction for me to reference.  In 2018 the "accounting" transactions were Grivalia being consolidated, and Thomas Cook/Quess triggering a bunch of paper gains.  In 2019, it was Quess triggering a bunch of paper losses and Eurolife/Grivalia triggering a bunch of paper gains. 

For the past few years, most of us have cooked up an adjusted BV to get an idea of the significance of some of the excess in value over book.  But, really it might be time to create an adjusted net income to strip out the impact of some of the one-time transactions to better portray ongoing economic performance.


SJ

Ah I see what you’re getting at.

Personally I care more about BV than earnings so I’m happy with the disclosure they’ve often provided on what BV would be if they marked to market.


Agreed that the BV metric is the more important metric for valuing the insurance end of the operations, and it's been important to cook up an adjusted-BV estimate for the past few years to better reflect reality.  But, it's also important to try to measure operational performance against any number of metrics, including EPS, ROE, CR and investment return.  That's where some of these non-cash items muddy the water.  This year, the dollars are small, with Eurobank/Grivalia being $6 or $7 per share...but the Thomas Cook/Quess number from 2018 was absolutely enormous, and the Grivalia consolidation number from 2018 was a smaller number added to it.  A large head-line EPS number is nice to see and it definitely feels good, but...


SJ


SJ
Title: Re: Fairfax 2020
Post by: petec on February 15, 2020, 07:38:43 AM
While we’re at it I don’t recall Grivalia/Eurobank generating a paper gain either, and it’s clearly been value-enhancing because it was effectively a capital raise for the bank.

"Net gains on long equity exposures of $1,631.1 million in 2019 was primarily comprised of unrealized appreciation of preferred shares of Go Digit Infoworks ($350.9 million), the sale of the company's remaining interest in ICICI Lombard ($240.0 million), a non-cash gain on the merger of Grivalia Properties into Eurobank ($171.3 million) and significant unrealized appreciation of common stocks."

Sorry - I doing a very poor job of expressing myself (possibly because I’m also trying to feed a 3 month old!).

What I meant to say was:
1) I couldn’t remember whether they booked a gain on the Eurobank/Grivalia deal, but
2) if they did I’m pretty sure it did reflect economic reality in the sense that it moved book value closer to the mark-to-market book value. Until the deal Grivalia was consolidated so the rise in the share price since acquisition wasn’t reflected in FFH BV.

I may be remembering wrong - don’t have my notes to hand.
Title: Re: Fairfax 2020
Post by: petec on February 15, 2020, 07:44:51 AM
There wasn’t a gain on APR so that’s not it and I don’t think the transaction will contribute earnings, high quality or low.

I suspect what they’re referring to is gains on the exercise of SSW warrants.


That could very well be the case.  They would definitely have a gain from exercising the SSW warrants, but it doesn't much change the economic reality (outside of FFH having to add some cash to the existing investment).

Keg/Recipe wasn't the correct transaction for me to reference.  In 2018 the "accounting" transactions were Grivalia being consolidated, and Thomas Cook/Quess triggering a bunch of paper gains.  In 2019, it was Quess triggering a bunch of paper losses and Eurolife/Grivalia triggering a bunch of paper gains. 

For the past few years, most of us have cooked up an adjusted BV to get an idea of the significance of some of the excess in value over book.  But, really it might be time to create an adjusted net income to strip out the impact of some of the one-time transactions to better portray ongoing economic performance.


SJ

Ah I see what you’re getting at.

Personally I care more about BV than earnings so I’m happy with the disclosure they’ve often provided on what BV would be if they marked to market.


Agreed that the BV metric is the more important metric for valuing the insurance end of the operations, and it's been important to cook up an adjusted-BV estimate for the past few years to better reflect reality.  But, it's also important to try to measure operational performance against any number of metrics, including EPS, ROE, CR and investment return.  That's where some of these non-cash items muddy the water.  This year, the dollars are small, with Eurobank/Grivalia being $6 or $7 per share...but the Thomas Cook/Quess number from 2018 was absolutely enormous, and the Grivalia consolidation number from 2018 was a smaller number added to it.  A large head-line EPS number is nice to see and it definitely feels good, but...

SJ

I’m not against the idea. Although it does make me smile - the BAM thread is full of suggestions that “management metrics” like that is a red flag for fraud. Sometimes feels like management can’t win ;)

Also - I initially read your comment about low quality earnings as a criticism of FFH management for massaging the numbers. But on reflection maybe you’re just saying that accounting treatment doesn’t always reflect reality. Is that right?
Title: Re: Fairfax 2020
Post by: StubbleJumper on February 15, 2020, 07:54:58 AM
While we’re at it I don’t recall Grivalia/Eurobank generating a paper gain either, and it’s clearly been value-enhancing because it was effectively a capital raise for the bank.

"Net gains on long equity exposures of $1,631.1 million in 2019 was primarily comprised of unrealized appreciation of preferred shares of Go Digit Infoworks ($350.9 million), the sale of the company's remaining interest in ICICI Lombard ($240.0 million), a non-cash gain on the merger of Grivalia Properties into Eurobank ($171.3 million) and significant unrealized appreciation of common stocks."

Sorry - I doing a very poor job of expressing myself (possibly because I’m also trying to feed a 3 month old!).

What I meant to say was:
1) I couldn’t remember whether they booked a gain on the Eurobank/Grivalia deal, but
2) if they did I’m pretty sure it did reflect economic reality in the sense that it moved book value closer to the mark-to-market book value. Until the deal Grivalia was consolidated so the rise in the share price since acquisition wasn’t reflected in FFH BV.

I may be remembering wrong - don’t have my notes to hand.


Agreed that the only way to move the BV measurement closer to economic reality is to book the gain -- that's a fact of accounting.  But, when you see an EPS number with that kind of gain baked in, it's essential to not view that number as a sustainable measure of annual economic performance.  FFH's PE is now <7, but does that metric mean anything at all?  Has it meant anything at all for the past two years when the paper gains have been so important?

It's also an interesting thing for FFH's target of growing BV by 15%.  A "successful" year would be more or less like 2019 when BV grew by 14.8%.  But, really, you'd probably want to strip out those one-time paper gains to get a better sense of how successful 2019 truly was (unless we believe that paper gains of that magnitude are sustainable and repeatable).

I don't want to make it seem like FFH has done something wrong here.  I'm just suggesting that people should take that headline EPS number with a grain of salt.  And, I wonder how the market will end up viewing it.


SJ
Title: Re: Fairfax 2020
Post by: StubbleJumper on February 15, 2020, 08:03:42 AM
There wasn’t a gain on APR so that’s not it and I don’t think the transaction will contribute earnings, high quality or low.

I suspect what they’re referring to is gains on the exercise of SSW warrants.


That could very well be the case.  They would definitely have a gain from exercising the SSW warrants, but it doesn't much change the economic reality (outside of FFH having to add some cash to the existing investment).

Keg/Recipe wasn't the correct transaction for me to reference.  In 2018 the "accounting" transactions were Grivalia being consolidated, and Thomas Cook/Quess triggering a bunch of paper gains.  In 2019, it was Quess triggering a bunch of paper losses and Eurolife/Grivalia triggering a bunch of paper gains. 

For the past few years, most of us have cooked up an adjusted BV to get an idea of the significance of some of the excess in value over book.  But, really it might be time to create an adjusted net income to strip out the impact of some of the one-time transactions to better portray ongoing economic performance.


SJ

Ah I see what you’re getting at.

Personally I care more about BV than earnings so I’m happy with the disclosure they’ve often provided on what BV would be if they marked to market.


Agreed that the BV metric is the more important metric for valuing the insurance end of the operations, and it's been important to cook up an adjusted-BV estimate for the past few years to better reflect reality.  But, it's also important to try to measure operational performance against any number of metrics, including EPS, ROE, CR and investment return.  That's where some of these non-cash items muddy the water.  This year, the dollars are small, with Eurobank/Grivalia being $6 or $7 per share...but the Thomas Cook/Quess number from 2018 was absolutely enormous, and the Grivalia consolidation number from 2018 was a smaller number added to it.  A large head-line EPS number is nice to see and it definitely feels good, but...

SJ

I’m not against the idea. Although it does make me smile - the BAM thread is full of suggestions that “management metrics” like that is a red flag for fraud. Sometimes feels like management can’t win ;)

Also - I initially read your comment about low quality earnings as a criticism of FFH management for massaging the numbers. But on reflection maybe you’re just saying that accounting treatment doesn’t always reflect reality. Is that right?


No, it's not at all about massaging the numbers in this case.  If you are worried about numbers being massaged you should be looking for a cookie jar.  If a cookie jar exists, you should focus of the reserves because if something is hidden that's where it will be.  Despite the supervision provided by the various regulators, we should always squint a little bit when we look at reserve levels, reserve releases, reserve bolstering, U/W profit and CRs.  The truth about those numbers can only really be verified over a period of 5 or more years....  IMO, a little suspicion, a dose of skepticism and a great deal of scrutiny are appropriate.


SJ
Title: Re: Fairfax 2020
Post by: petec on February 15, 2020, 08:39:01 AM
Cool - we are on the same page.
Title: Re: Fairfax 2020
Post by: Xerxes on February 15, 2020, 08:39:59 AM
Just started reading the transcript. “Realised gains in Seaspan and Brookfield” - sounds like they’ve sold some SSW and owner BAM? Unless there’s been a transcription error...

Petec,
i heard Brookfield as well when i was listening to the conference call.
search the release and there was nothing there.

putting my conspiracy theorist hat on:
i believe Prem might have blurted that out, because he was thinking about it, and he was thinking about it because something is in the works with Brookfield that is not public yet.

i figured that the Airport unknown buyer in India might have been a BAM related/affiliated entity. Makes sense given all the talks that Bruce has been doing about India's opportunity today given the current financial crisis. But then again he was not talking about the Airport he was talking about Seaspan when he mentioned Brookfield. 
Title: Re: Fairfax 2020
Post by: petec on February 15, 2020, 09:02:02 AM
Just started reading the transcript. “Realised gains in Seaspan and Brookfield” - sounds like they’ve sold some SSW and owner BAM? Unless there’s been a transcription error...

Petec,
i heard Brookfield as well when i was listening to the conference call.
search the release and there was nothing there.

putting my conspiracy theorist hat on:
i believe Prem might have blurted that out, because he was thinking about it, and he was thinking about it because something is in the works with Brookfield that is not public yet.

i figured that the Airport unknown buyer in India might have been a BAM related/affiliated entity. Makes sense given all the talks that Bruce has been doing about India's opportunity today given the current financial crisis. But then again he was not talking about the Airport he was talking about Seaspan when he mentioned Brookfield.

Not impossible, but intend to avoid conspiracy theories. I doubt Brookfield were the BIAL buyer because they usually buy control and trumpet their deals. I suspect Prem just misspoke. He’s not the clearest of communicators.
Title: Re: Fairfax 2020
Post by: Viking on February 15, 2020, 10:29:38 AM
Does anyone have thoughts on the RiverStone UK sale? Fairfax mentioned when they announced the sale that there will be a $10 gain in BV. My guess is that is still coming in Q1 when the deal is announced (i.e. it did not hit in Q4 financials). Correct?

Prem on the conference call said the benefit of selling 40% and getting OMERS involved is it will provide access to $ to grow the business. It will be interesting to see how fast Riverstone UK grows post acquisition. Sounds like there are lots of opportunities.

That deal closes soon (sometime in the next 6 weeks). Fairfax will be able to put the $600 million to work. They will likely use it to buy 10% of Brit and Eurolife minority interests. And grow the business at the insurance subs.

Prem mentioned they may IPO Riverstone UK down the road. Perhaps that is the plan for how they will take out their minority partners in Allied. Trade runoff (Riverstone UK) for minority positions in Allied and Brit looks like a good trade to me. Makes Fairfax more of a pure play insurance operation and removes the overhang of having to find a big chunk of cash to buy out minority partners (especially in a hard market when your stock is trading below BV).

It really is amazing how much stuff is going on under the hood at this company. My guess is 2020 will see lots more developments just like 2019 :-)
Title: Re: Fairfax 2020
Post by: petec on February 15, 2020, 01:57:54 PM
Does anyone have thoughts on the RiverStone UK sale?

I think they needed capital. If the deal was intended to give RUK capital to grow, it would have been structured as a capital injection rather than a partial sale. Frustrating they can’t be more honest when they describe these things. Plus, they said they’d never sell the insurance subs and now they’ve sold (part of) two in two years.

Agree re what’s going on under the bonnet. It’s felt like that for a couple of years.
Title: Re: Fairfax 2020
Post by: Viking on February 15, 2020, 02:34:02 PM
Does anyone have thoughts on the RiverStone UK sale?

I think they needed capital. If the deal was intended to give RUK capital to grow, it would have been structured as a capital injection rather than a partial sale. Frustrating they can’t be more honest when they describe these things. Plus, they said they’d never sell the insurance subs and now they’ve sold (part of) two in two years.

Agree re what’s going on under the bonnet. It’s felt like that for a couple of years.

I agree, they need capital. But not to put out a fire. Rather, they need capital to take advantage of some once in 10 year opportunities:
1.) aggressively grow business in hard market at some insurance subs
2.) stock price below BV

They also need $ to buy out minority partners.

Bottom line, their need for cash today is what i would call a good problem.

Also, my guess is the market will never value the runoff businesses favourably (in the Fairfax family). In the current environment i am very much in favour of them selling/monetizing undervalued assets (like Riverstone) to fund hard market growth and share buybacks (the hard market in pricing will not last forever and when it ends we can expect Fairfax to get very aggressive on share buybacks).

It will be interesting to see what Fairfax plans to do with Seaspan. This has become such a large position. Another first class type of problem to have :-) My guess is nothing happens until after the APR aquisition which is expected to close some time in 1H 2020 if memory serves me correctly. Seaspan reports Feb 19.
Title: Re: Fairfax 2020
Post by: petec on February 15, 2020, 02:56:39 PM

Bottom line, their need for cash today is what i would call a good problem.


Agreed. I did not mean to suggest they were in trouble. I do, however, find it annoying that they spent years trumpeting the excess capital in the insurance subs and how they could as much as double premiums in a hard market - and now that one is here, we find they can’t, without injecting capital.
Title: Re: Fairfax 2020
Post by: petec on February 17, 2020, 12:09:25 AM
We now have an idea of what Riverstone UK is worth. Does anyone have a handle on what the rest of Riverstone is worth? I don’t recall seeing disclosure that would allow one to estimate that.
Title: Re: Fairfax 2020
Post by: Viking on February 17, 2020, 11:58:29 PM
Here is a summary from RBC of what they heard about insurance pricing on Q4 conference calls:

“What we heard was really bullish. We heard current rate increases were averaging anywhere from mid-single digits to low double digits depending on business mix. The more specialty, the more large account, the more excess casualty and D&O the more likely the average had two digits. The more workers comp, the more small account, the more standard lines, the more likely the average was around +/-5%. Heading in we expected the latter group would be around 5% and it was. We expected the former group however to be around 8% and we would say based on commentary it was probably a little higher than that.

As far as how long pricing conditions would last, again we were positively surprised. Our going in expectation was that companies would be cagey about addressing this topic and would give luke warm responses like ‘several more quarters’ or something like that. To our surprise there was pretty good unanimity that pricing power would persist throughout 2020. To our further surprise there were plenty suggesting the good times could roll well into 2021. While the latter corresponds with our own bullish viewpoint, we did not really expect to hear it said aloud. It was. Which gives us quite a bit of confidence in our conviction that we are only in the first or maybe second innings of a very favorable P&C market.”
Title: Re: Fairfax 2020
Post by: Cigarbutt on February 26, 2020, 06:32:57 AM
Viking, it looks like you made some money on this short ride. Based on a three to five year outlook, I didn't feel comfortable with the short term nature of the trade but well done for you.

FFH announced (on the call, not in the news release) that a 216M charge was recorded in the run-off section for asbestos and environmental reserve strengthening in 2019. This comes after an asbestos-related charge of 143.6M in 2018 and 182.5M in 2017 (ultimately and mostly due to 'legacy' units from C+F, Clearwater etc). Concerning the asbestos reserves, it's interesting to note that net reserves are still at the same level as 20 years ago. Since then, a lot of cash has been paid out, reserves have been raised along the way and there have been a few acquisitions with embedded asbestos reserves. I come to the conclusion that FFH's progress has been largely in line with the industry in that regard (FFH has a leading global market share in asbestos reserves; for example BRK has only 1.7x FFH exposure in that area despite being much larger overall as an insurer). Recently, the social inflation has played a role (even more than the usual trend and JNJ's talc issue may help to inflate the issue) but I think that the asbestos question is now under control and will likely show a material run-off (reserves heading towards zero) within the next 5 to 7 years. At large, it seems that the industry is reserved at 90% of the ultimate amount and if FFH continues to stick to the average evolution, it is reasonable to expect 350 to 400M further reserve strengthening during that period.

The potential relevant aspect here is the fact that the setup of the run-off sub came with many advantages (efficient way to run-off inside claims, potential profit center with acquisitions and especially the ability to separate poor results from 'continuing' operations). FFH has recently shown better than average underwriting results from continuing operations but it is helpful to remember that they were effectively able to segregate (channel is too strong a word) poor results into the run-off segments. Only for the asbestos charges, in the last 3 years, including these in the 'continuing' operations would have meant a combined ratio higher by about 2% each year. This is just to say that adjustments have to be made to the reported record.

Speaking of adjustments, here's an update on reserve releases (unaudited) as a % of CR improvement ('continuing' operations).
2016:  7.8%
2017:  8.5%
2018:  6.8%
2019:  3.8%
Overall, it seems that FFH has been able to develop a slightly better underwriting culture than the relevant part of the insurance industry (which is an amazing improvement compared to a certain period many years ago) but I would say that they are not much better than average and the true nature of reserves of recent acquisitions (Brit, Allied) is still, and will be, discovery in the making. Why this may be relevant, given a 5 year outlook?. IMO, the industry is shaping up for an unusual degree of hardening that could surprise to the upside if the capital "suppressants" that have been described eventually revert to the mean or more. I think the best way to make money here will be to invest in new capital ventures that will form opportunistically (ventures that will not have 'legacy' issues and that can set up a robust operating platform). But this comes down to timing the market versus time in the market and an alternative is to invest in companies that will be able to meaningfully grow (absolute and relative market share when the time comes). I happen to think that a lot of policies that have been written in the last few years and that have been associated with reserve releases will ultimately show a reversal of the trend with reserve deficiencies, to an extent that is not appreciated now.

The following is potentially interesting (especially figure 17, which can even be more instructive if put in a longer historical perspective). JLT Re has cried wolf for a while underlining that timing may make you look stupid but looking stupid does not necessarily mean that all your arguments are.
https://www.jltre.com/our-insights/publications/viewpoint-reinsurance-cycle/the-economic-cycle
We are truly living through unusual times and I'm glad to be alive.

Title: Re: Fairfax 2020
Post by: petec on February 26, 2020, 03:05:24 PM
Cigarbutt, would you put Fairfax in the category of companies that can meaningfully grow market share when the time comes?
Title: Re: Fairfax 2020
Post by: Cigarbutt on February 26, 2020, 04:51:28 PM
^This was touched upon in reply #34.
To expand slightly, the participation will be conditional on (and proportional to):
1-investment performance (absolute and relative)
If the hard market is exacerbated by an impact on the asset side, FFH will not be spared and in fact may be, compared to peers, more significantly compromised (high equity exposure).
2-operating performance
They would require hardening to outpace the typical reversal recognized in prior years' reserves and significant catastrophe losses would impact their regulatory capital to a significant degree given their reinsurance exposure.

Reflecting on recent developments, they don't behave as if they have excess capital and we may be only at the beginning so...
In the past, they have issued equity at prices they didn't like in order to 'benefit' from opportunities and that's a possibility that should be considered.
I'm not a shareholder now (and I may be wrong about that) but remembering the last hardening phase, I was a shareholder and increased ownership significantly in the months that followed an end of year share issue in 2001, during a period when the risk-reward looked better (IMHO).

https://s1.q4cdn.com/579586326/files/doc_financials/011103ceo.pdf
see p.3, second to last paragraph, shares issued at 200 CDN
https://s1.q4cdn.com/579586326/files/doc_presentations/2013AGMWebsiteCopy_v001_u6w5x6.pdf
2013 slide presentation, see slide 15

Take the above with a grain of salt as I sort of prepared for the US 30-yr bond to reach 1.81% (that's where it is now) but I'm still confused about the significance. I'm mentioning that because, recently, FFH shifted attitude on the fixed income side and expected rates to go up significantly so it's not unreasonable to consider the possibility that they're confused too.
Title: Re: Fairfax 2020
Post by: petec on February 27, 2020, 06:08:15 AM
All very fair. Only thing I’d add is that they do have capacity, it’s just in the wrong place, at Odyssey, which is not seeing the same hardening (yet). That could change the outlook.

What gives you the feeling that reserve releases will be reversed, apart from asbestos?
Title: Re: Fairfax 2020
Post by: Cigarbutt on February 27, 2020, 08:34:22 AM
^Based on the following  assumptions :

-The underwriting cycle is typically associated with such a reversal.
-FFH, even if more conservatively reserved than the median insurer, will tend to follow the industry trends of the typical delayed recognition of the trend reversal (business written that was felt to be profitable when, in fact, it was not).

So, this educated guess is based on historical assumptions and maybe this time is different (looking to be convinced otherwise for the industry and for FFH specifically). But if history is any guide, the magnitude of the reversal may be correlated to the unusual softness of the previous leg of the cycle.
How this plays out remains to be defined and one may want to play this actively, opportunistically or whatever.
Title: Re: Fairfax 2020
Post by: Viking on February 27, 2020, 09:53:40 AM
Cigar, thanks for taking the time to post. I am not an insurance expert and find your posts to be helpful :-)

I am back on the sideline with Fairfax. Their equity portfolio is getting hit pretty hard.
Title: Re: Fairfax 2020
Post by: Cigarbutt on February 27, 2020, 03:16:15 PM
^just in case you or others are interested, I came across today a recent report by the Argo Group which may be relevant. The idea is not to suggest that FFH is or will be a mirror image but a parallel can be drawn with the realization that previous business written may not be so profitable after all. Even if Argo's evolving situation walks and quacks like a duck (typical reversal of the reserve pattern), it is possible that the issue is isolated and already remediated but I doubt it. When you see a cockroach...and it potentially reflects (as a leading indicator) an industry-wide cyclical pattern.

Argo is domiciled in Bermuda and has grown net premiums written at a very high rate during the last few soft years. Here's what happened to reserve development (unaudited):
in combined ratio %    -unfavorable in (  )
2012  2.8%     2013  2.6%     2014  2.8%     2015  2.3%     2016  2.4%     2017  0.5%     2018  1.0%     2019  (8.0%)
details in 2019, per quarter:     Q1  0.6%     Q2  (5.2%)     Q3  (9.3%)     Q4  (17.9%)

Argo shows a pattern that moves slowly and then suddenly and rating agencies are getting agitated, which will likely make it hard for the company to grow profitable business to compensate for the reserve issue.
https://www.reinsurancene.ws/argo-reports-operating-loss-unfavourable-reserve-development/

To be clear: IMO, FFH is relatively much better positioned but the wave may be coming and some may be more naked than others.
Title: Re: Fairfax 2020
Post by: Hoodlum on February 27, 2020, 05:08:16 PM
Cigar, thanks for taking the time to post. I am not an insurance expert and find your posts to be helpful :-)

I am back on the sideline with Fairfax. Their equity portfolio is getting hit pretty hard.

But shouldn't their bond gains be offsetting this?
Title: Re: Fairfax 2020
Post by: Viking on February 27, 2020, 06:11:25 PM
I just updated my spreadsheet for tracking Fairfax Equity holdings (attached below). If anyone sees errors in the spreadsheet please let me know :-)

From the start of the year (Jan 1) to today (Feb 27) my estimate is their mark to market equity holdings are down $520 million (Eurobank is down $406). I believe they also mark to market the Seaspan warrants; they are down an additional $108 million.

The majority of their equity holdings are Associated and Consolidated Equities and I am not sure exactly how all of these are valued on the financial statements at each quarter-end. I like to track what the stock prices are doing to get a handle on how Mr. Market is valuing these holdings over time. These holdings are down $632 million ($740-$108 Seaspan warrants).

All three of these items: $520 + $108 + $632 = $1,260. Please note, this is not the hit that Fairfax would take if the quarter ended today; the $632 would not flow through the financials :-)

Fairfax is in a very tricky position. They hold a lot of equities in their portfolio. Great with a 'risk-on' trade which is how they have been positioned since Trump was elected. Absolutely brutal position to be in should we get sustained, large stock market sell-off.

PS: the portfolio of Fairfax India is actually up nicely since Jan 1 (still even with the global equity sell off). Their holdings are another tab on the spreadsheet. I estimate their mark to market equity holdings are actually up $128 million this year. Pretty interesting :-)   
Title: Re: Fairfax 2020
Post by: StubbleJumper on February 27, 2020, 06:39:30 PM
Cigar, thanks for taking the time to post. I am not an insurance expert and find your posts to be helpful :-)

I am back on the sideline with Fairfax. Their equity portfolio is getting hit pretty hard.

But shouldn't their bond gains be offsetting this?


They'll definitely have some bond gains, but they have drastically reduced the duration of the fixed income portfolio over the past couple of years, so gains are muted.  The unfortunate part of the most recent earnings release is that it wasn't accompanied by a full set of financials, but you can at least look to Q3's filings for a bit of inspiration.  At the end of Q3, FFH reported that a 100 bps parallel decline in the yield curve would have resulted in $279m in gains.  Well, bond rates have dropped by more like 40 bps, so the bond gains are probably pretty trivial in the context of the hit to the stock portfolio.


SJ
Title: Re: Fairfax 2020
Post by: Cigarbutt on February 27, 2020, 06:48:32 PM
^To add to the pseudo-"hedging" hypothesis mentioned above and to what SJ just described, FFH has substantially changed the duration (since 2016) of their fixed income portfolio with expectations that they would be able to reinvest coupons at higher rates.

From their interest rate risk disclosure, with a 100 basis point decrease in interest rates, result in market value of the fixed income portfolio:
2015        928M
2016        125M
2017        161M
2018        290M
Q3 2019   279M

Since Jan 1st 2020, the 10-yr Tr. bond has gone down about 65 basis points.

Hedging aside, interest rates elevation will require some reversal of fortune and perhaps some Fed cooperation but the Fed, these days, may be more into easing inoculation, not to fight the disease but to numb the pain. (Mr. James Grant compared monetary activism to a virus in 2015; Mr. Grant is sometimes wrong and often early).
Title: Re: Fairfax 2020
Post by: TwoCitiesCapital on February 27, 2020, 08:22:55 PM
Cigar, thanks for taking the time to post. I am not an insurance expert and find your posts to be helpful :-)

I am back on the sideline with Fairfax. Their equity portfolio is getting hit pretty hard.

But shouldn't their bond gains be offsetting this?

No, because there is very limited duration in their short term portfolio. Short term bonds are up only a few tenths of a percent.
Title: Re: Fairfax 2020
Post by: petec on March 10, 2020, 02:15:40 AM
I wonder when the share price gets cheap enough to make buybacks a better option than premium growth?

Obviously some of the share price fall is to do with falling equity holdings in things like Eurobank and Atlas. But those are big positions FFH can’t realistically add to. If they were comfortable with the value in them 40-50% higher, buybacks are very rational here.

My guess is they will stick to premium growth. Also see SJ’s thread for why they may not be able to fund buybacks. Pity.
Title: Re: Fairfax 2020
Post by: bearprowler6 on March 10, 2020, 09:09:23 AM
http://www.horizonnorth.ca/news-and-knowledge-centre/news/horizon-north-and-dexterra/

Another attempt at surfacing value?
Title: Re: Fairfax 2020
Post by: StubbleJumper on March 10, 2020, 09:42:40 AM
http://www.horizonnorth.ca/news-and-knowledge-centre/news/horizon-north-and-dexterra/

Another attempt at surfacing value?


Thank you for sharing that.  It's nice to get an update on where the Carrillon assets are headed, and it's nice to see that FFH will be on the receiving end of dividends and might ultimately have a partner to whom it can sell its stake (if that is what FFH decides to do).

One of the unfortunate aspects of FFH's growth is that it is hard to follow the progress of every asset because most of the acquisitions are not individually material to FFH.  Without a creating 1,000 page annual report, they just cannot really report on how things are going.  I am quite curious how things are going with some of the other smaller acquisitions of the past couple of years, notably Toys R Us and Churchill.  But at least we now know a bit more about Carrillon.


SJ
Title: Re: Fairfax 2020
Post by: petec on March 10, 2020, 12:26:39 PM
http://www.horizonnorth.ca/news-and-knowledge-centre/news/horizon-north-and-dexterra/

Another attempt at surfacing value?


Thank you for sharing that.  It's nice to get an update on where the Carrillon assets are headed, and it's nice to see that FFH will be on the receiving end of dividends and might ultimately have a partner to whom it can sell its stake (if that is what FFH decides to do).

One of the unfortunate aspects of FFH's growth is that it is hard to follow the progress of every asset because most of the acquisitions are not individually material to FFH.  Without a creating 1,000 page annual report, they just cannot really report on how things are going.  I am quite curious how things are going with some of the other smaller acquisitions of the past couple of years, notably Toys R Us and Churchill.  But at least we now know a bit more about Carrillon.


SJ

Agreed, although:
1) I don’t see why they couldn’t have taken a dividend from Dexterra without merging it.
2) They seem to be getting about C$100m of value, based on Horizon North’s predeal share price. Can anyone remember what they paid? I’m not sure they’re surfacing much value here unless the merger blurb about growth and x-sell is true.

Title: Re: Fairfax 2020
Post by: StubbleJumper on March 10, 2020, 12:44:53 PM
http://www.horizonnorth.ca/news-and-knowledge-centre/news/horizon-north-and-dexterra/

Another attempt at surfacing value?


Thank you for sharing that.  It's nice to get an update on where the Carrillon assets are headed, and it's nice to see that FFH will be on the receiving end of dividends and might ultimately have a partner to whom it can sell its stake (if that is what FFH decides to do).

One of the unfortunate aspects of FFH's growth is that it is hard to follow the progress of every asset because most of the acquisitions are not individually material to FFH.  Without a creating 1,000 page annual report, they just cannot really report on how things are going.  I am quite curious how things are going with some of the other smaller acquisitions of the past couple of years, notably Toys R Us and Churchill.  But at least we now know a bit more about Carrillon.


SJ

Agreed, although:
1) I don’t see why they couldn’t have taken a dividend from Dexterra without merging it.
2) They seem to be getting about C$100m of value, based on Horizon North’s predeal share price. Can anyone remember what they paid? I’m not sure they’re surfacing much value here unless the merger blurb about growth and x-sell is true.


Yep, they might have already been taking a dividend from Dexterra, but it was a bit hard to tell from the small bit of ink that FFH could dedicate to Carrillon in the AR.  Now at least we do have confirmation that there is an ongoing cash in-flow related to it, which is at least something.  I don't believe that they ever included the price that they paid for the Carrillon assets in a press release...I don't remember if there was enough in the AR to get a feel for it.  That's why I like when people find these sorts of articles, because it provides a bit more info that can't all be disclosed in the AR (unless you want a 1,000 page AR).

I would like to see a similar article about Toys R Us.  You and I had a bit of an exchange last year about the $100m EBITDA figure that was trotted out..and I think I saw a couple of articles about possible expansion.  But, is Toys a net cash contributor to FFH at this point, is it requiring cash injections, or is it neutral?  I'm pretty sure that the numbers are not material, but I am still curious.

Same questions about Port of Churchill....

If people see random articles about FFH subs, please share!  That's the only way we figured out who was the buyer of the Bangalore airport stake because it was not included in the press release from December.


SJ
Title: Re: Fairfax 2020
Post by: petec on March 10, 2020, 01:22:09 PM
Yes, agreed that it is good to have more visibility. I guess the downside is BV gets market to whatever the market's current mood is even more than it already does, but it's small fry.

Title: Re: Fairfax 2020
Post by: petec on March 10, 2020, 01:48:24 PM
Quick scan of 2018 AR does not give price paid, but they said they paid 6x ev/ebitda and 5x FCF.

This deal values Dexterra at C$100m (using HN predeal price) and the release says it has no debt and generates $16.5m ebitda in 2019 and 23m in 2020. That suggests it has been sold for multiples of 6x and 4.3x. The release also says it has capex needs of only $3m and generates a lot of FCF, which is consistent with the FCF multiple claimed by FFH on acquisition.

Conclusions:
1) FFH have not made money from multiple expansion, but they could have made (or lost) money by growing (or shrinking) ebitda.
2) Even if EBITDA has been flat, they could have taken a 20% dividend out of it each year.
Title: Re: Fairfax 2020
Post by: StubbleJumper on March 10, 2020, 02:05:48 PM
Quick scan of 2018 AR does not give price paid, but they said they paid 6x ev/ebitda and 5x FCF.

This deal values Dexterra at C$100m (using HN predeal price) and the release says it has no debt and generates $16.5m ebitda in 2019 and 23m in 2020. That suggests it has been sold for multiples of 6x and 4.3x. The release also says it has capex needs of only $3m and generates a lot of FCF, which is consistent with the FCF multiple claimed by FFH on acquisition.

Conclusions:
1) FFH have not made money from multiple expansion, but they could have made (or lost) money by growing (or shrinking) ebitda.
2) Even if EBITDA has been flat, they could have taken a 20% dividend out of it each year.


That makes sense.  If the FCF number is calculated properly and includes all of the maintenance capex, you are right that it could have kicked off a nice amount of cash.  If they paid $100m and it has a long term dividend capacity of even $10m, it's a nice little gem.


SJ
Title: Re: Fairfax 2020
Post by: petec on March 10, 2020, 02:27:43 PM
Another more minor point is I believe private investments are more capital intensive to hold (from an insurance regulation/rating POV) than public.

EDIT: this would also apply to APR. I expect more.
Title: Re: Fairfax 2020
Post by: petec on March 10, 2020, 05:23:26 PM
Just occurred to me: the Blackberry convert ($500m) matured in Jan 2020. I wonder if it got repaid, or rolled. Guess we will know at the end of the month.
Title: Re: Fairfax 2020
Post by: StubbleJumper on March 10, 2020, 06:28:51 PM
Just occurred to me: the Blackberry convert ($500m) matured in Jan 2020. I wonder if it got repaid, or rolled. Guess we will know at the end of the month.


You know the answer to that question.  We discussed that about 2 years ago.  It will be rolled because Blackberry doesn't have a surplus of cash and nobody other than FFH will lend them money.  It is an encumbered asset for FFH.  That is water under the bridge.


Edit: Did I read incorrectly, or is it not $605m, and matures Nov 2020?  It gets rolled in any case, but it just gives RIM a bit more time to burn through some cash.  ;)


SJ
Title: Re: Fairfax 2020
Post by: petec on March 11, 2020, 03:09:48 AM
Just occurred to me: the Blackberry convert ($500m) matured in Jan 2020. I wonder if it got repaid, or rolled. Guess we will know at the end of the month.


You know the answer to that question.  We discussed that about 2 years ago.  It will be rolled because Blackberry doesn't have a surplus of cash and nobody other than FFH will lend them money.  It is an encumbered asset for FFH.  That is water under the bridge.


Edit: Did I read incorrectly, or is it not $605m, and matures Nov 2020?  It gets rolled in any case, but it just gives RIM a bit more time to burn through some cash.  ;)


SJ

And as it was back then, BB is net cash and free cash positive. Specifically it has $880m on the BS and is projected to earn about $200m a year in FCF going forward, with positive FCF in every quarter.

I’m only guessing here, but in the easiest lending environment in human history I’m going to go out on a limb and suggest they could get some debt if they needed it, which they don’t.

I’m fairly sure it is $500m but less sure re Jan/Nov.

EDIT: it’s November. My bad - but more time for the convert to be in the money ;)

And it was $605, but Fairfax didn’t take all of it - I’m pretty sure they have 500m.
Title: Re: Fairfax 2020
Post by: StubbleJumper on March 11, 2020, 06:11:17 AM
Just occurred to me: the Blackberry convert ($500m) matured in Jan 2020. I wonder if it got repaid, or rolled. Guess we will know at the end of the month.


You know the answer to that question.  We discussed that about 2 years ago.  It will be rolled because Blackberry doesn't have a surplus of cash and nobody other than FFH will lend them money.  It is an encumbered asset for FFH.  That is water under the bridge.


Edit: Did I read incorrectly, or is it not $605m, and matures Nov 2020?  It gets rolled in any case, but it just gives RIM a bit more time to burn through some cash.  ;)


SJ

And as it was back then, BB is net cash and free cash positive. Specifically it has $880m on the BS and is projected to earn about $200m a year in FCF going forward, with positive FCF in every quarter.

I’m only guessing here, but in the easiest lending environment in human history I’m going to go out on a limb and suggest they could get some debt if they needed it, which they don’t.

I’m fairly sure it is $500m but less sure re Jan/Nov.

EDIT: it’s November. My bad - but more time for the convert to be in the money ;)

And it was $605, but Fairfax didn’t take all of it - I’m pretty sure they have 500m.



Well, I must have been reading different financial statements than you.  What I saw for the first 9 months of BB's year is that they reported small negative cash from operations on their cashflow statement.  What is more, there is always a small amount of maintenance capex that is required, meaning they are burning cash by operating, and then burning a bit more just to allow themselves to continue to operate.  The burn rate on operations and capex appears like it was $40m over the 9 months.  It is well and good to project $200m FCF on a going-forward basis, but let's just say that I am from Missouri....

BB does have some cash on its BS, and theoretically, FFH could demand a cheque to settle those notes.  So where would that leave everybody?  Well, instead of the $880m cash on the BS, they would have $275m.  Effectively, BB would be operating with very little room to manoeuvre.  That would be all fine and good for FFH if the notes were FFH's only considerations -- if you just owned the notes, your answer would be "Tough shit.  Cut us a cheque."   But, FFH also owns a large slug of BB shares and Prem is on the BoD, so by insisting on re-payment of the notes you'd be kneecapping an equity investment that you cannot really divest in the short-term.

If you believe that BB could borrow money, your view of their reputation is a good deal more favourable than mine.  A lender would want to see a compelling prospect of BB generating meaningful FCF because if a lender were forced to petition BB into bankruptcy, there is much uncertainty about how much value could be recouped from an intellectual property firesale that would not be conducted until 2024 or 2025.  It's a stinker for a lender, which is why FFH is involved.


SJ
Title: Re: Fairfax 2020
Post by: petec on March 11, 2020, 10:29:24 AM
Just occurred to me: the Blackberry convert ($500m) matured in Jan 2020. I wonder if it got repaid, or rolled. Guess we will know at the end of the month.


You know the answer to that question.  We discussed that about 2 years ago.  It will be rolled because Blackberry doesn't have a surplus of cash and nobody other than FFH will lend them money.  It is an encumbered asset for FFH.  That is water under the bridge.


Edit: Did I read incorrectly, or is it not $605m, and matures Nov 2020?  It gets rolled in any case, but it just gives RIM a bit more time to burn through some cash.  ;)


SJ

And as it was back then, BB is net cash and free cash positive. Specifically it has $880m on the BS and is projected to earn about $200m a year in FCF going forward, with positive FCF in every quarter.

I’m only guessing here, but in the easiest lending environment in human history I’m going to go out on a limb and suggest they could get some debt if they needed it, which they don’t.

I’m fairly sure it is $500m but less sure re Jan/Nov.

EDIT: it’s November. My bad - but more time for the convert to be in the money ;)

And it was $605, but Fairfax didn’t take all of it - I’m pretty sure they have 500m.



Well, I must have been reading different financial statements than you.  What I saw for the first 9 months of BB's year is that they reported small negative cash from operations on their cashflow statement.  What is more, there is always a small amount of maintenance capex that is required, meaning they are burning cash by operating, and then burning a bit more just to allow themselves to continue to operate.  The burn rate on operations and capex appears like it was $40m over the 9 months.  It is well and good to project $200m FCF on a going-forward basis, but let's just say that I am from Missouri....

BB does have some cash on its BS, and theoretically, FFH could demand a cheque to settle those notes.  So where would that leave everybody?  Well, instead of the $880m cash on the BS, they would have $275m.  Effectively, BB would be operating with very little room to manoeuvre.  That would be all fine and good for FFH if the notes were FFH's only considerations -- if you just owned the notes, your answer would be "Tough shit.  Cut us a cheque."   But, FFH also owns a large slug of BB shares and Prem is on the BoD, so by insisting on re-payment of the notes you'd be kneecapping an equity investment that you cannot really divest in the short-term.

If you believe that BB could borrow money, your view of their reputation is a good deal more favourable than mine.  A lender would want to see a compelling prospect of BB generating meaningful FCF because if a lender were forced to petition BB into bankruptcy, there is much uncertainty about how much value could be recouped from an intellectual property firesale that would not be conducted until 2024 or 2025.  It's a stinker for a lender, which is why FFH is involved.


SJ

An entirely reasonable reply. I am a little more hopeful that BB's operational dip is temporary. I'd also point out that its equity value to FFH is not only $200m so if the dip is not temporary, FFH have a strong incentive to burn the $200m in order to ensure recovery of the $500m. My guess is a halfway solution is likely: roll 50% and massively improve the conversion ratio on the other 50%. Keeps all the upside while lowering the downside.

Revisit in November...
Title: Re: Fairfax 2020
Post by: StubbleJumper on March 11, 2020, 03:25:01 PM
Just occurred to me: the Blackberry convert ($500m) matured in Jan 2020. I wonder if it got repaid, or rolled. Guess we will know at the end of the month.


You know the answer to that question.  We discussed that about 2 years ago.  It will be rolled because Blackberry doesn't have a surplus of cash and nobody other than FFH will lend them money.  It is an encumbered asset for FFH.  That is water under the bridge.


Edit: Did I read incorrectly, or is it not $605m, and matures Nov 2020?  It gets rolled in any case, but it just gives RIM a bit more time to burn through some cash.  ;)


SJ

And as it was back then, BB is net cash and free cash positive. Specifically it has $880m on the BS and is projected to earn about $200m a year in FCF going forward, with positive FCF in every quarter.

I’m only guessing here, but in the easiest lending environment in human history I’m going to go out on a limb and suggest they could get some debt if they needed it, which they don’t.

I’m fairly sure it is $500m but less sure re Jan/Nov.

EDIT: it’s November. My bad - but more time for the convert to be in the money ;)

And it was $605, but Fairfax didn’t take all of it - I’m pretty sure they have 500m.



Well, I must have been reading different financial statements than you.  What I saw for the first 9 months of BB's year is that they reported small negative cash from operations on their cashflow statement.  What is more, there is always a small amount of maintenance capex that is required, meaning they are burning cash by operating, and then burning a bit more just to allow themselves to continue to operate.  The burn rate on operations and capex appears like it was $40m over the 9 months.  It is well and good to project $200m FCF on a going-forward basis, but let's just say that I am from Missouri....

BB does have some cash on its BS, and theoretically, FFH could demand a cheque to settle those notes.  So where would that leave everybody?  Well, instead of the $880m cash on the BS, they would have $275m.  Effectively, BB would be operating with very little room to manoeuvre.  That would be all fine and good for FFH if the notes were FFH's only considerations -- if you just owned the notes, your answer would be "Tough shit.  Cut us a cheque."   But, FFH also owns a large slug of BB shares and Prem is on the BoD, so by insisting on re-payment of the notes you'd be kneecapping an equity investment that you cannot really divest in the short-term.

If you believe that BB could borrow money, your view of their reputation is a good deal more favourable than mine.  A lender would want to see a compelling prospect of BB generating meaningful FCF because if a lender were forced to petition BB into bankruptcy, there is much uncertainty about how much value could be recouped from an intellectual property firesale that would not be conducted until 2024 or 2025.  It's a stinker for a lender, which is why FFH is involved.


SJ

An entirely reasonable reply. I am a little more hopeful that BB's operational dip is temporary. I'd also point out that its equity value to FFH is not only $200m so if the dip is not temporary, FFH have a strong incentive to burn the $200m in order to ensure recovery of the $500m. My guess is a halfway solution is likely: roll 50% and massively improve the conversion ratio on the other 50%. Keeps all the upside while lowering the downside.

Revisit in November...


Well, that's a fascinating question in some respects.  You have a few broad options:

1) FFH could roll the notes and re-price the conversion privilege.  If the market is still in the crapper in November, the conversion privilege could be repriced considerably lower.  If BB executes and everything turns out to be roses, you convert the notes which results in owning a very large chunk of BB.  Somehow you exit from that equity position and you ride into the sunset....  If FFH does that, does the partner in the notes agree to do the same, or does FFH expand its note position to the full $605m?

2) Prem resigns his BoD seat, and FFH sells its BB shares for what the market will bring.  It then insists that BB write a cheque for the convertibles.  BB is screwed, but who cares?  FFH takes ~$500m for the notes and maybe ~$100m for the equity and walks away, chalking the whole thing up to "bad luck."  That ~$600m is redeployed into something that actually makes FFH some money....


So which is the more attractive option at this point?  I have always though that BB should have been tossed onto the "too hard" pile.  But, if you can use your muscle to force a low enough conversion price, is there a reasonable prospect of getting decent return out of rolling the converts?  Every instinct tells me to walk away and recuperate the capital that you can, but...


SJ
Title: Re: Fairfax 2020
Post by: petec on March 11, 2020, 03:27:20 PM
Mes sentiments exactement.
Title: Re: Fairfax 2020
Post by: wondering on March 16, 2020, 06:37:19 AM
AGM cancelled.  There will be a webcast.

https://www.fairfax.ca/news/press-releases/press-release-details/2020/FAIRFAX-ANNOUNCES-CHANGES-TO-ANNUAL-MEETING/default.aspx
Title: Re: Fairfax 2020
Post by: Santayana on March 18, 2020, 10:58:24 AM
Dropped 25% in 3 hours.....
Title: Re: Fairfax 2020
Post by: StubbleJumper on March 18, 2020, 11:03:27 AM
Dropped 25% in 3 hours.....


Yep.  Did anyone ever expect to see FFH with a 4% dividend yield?


SJ
Title: Re: Fairfax 2020
Post by: Santayana on March 18, 2020, 11:07:32 AM
Too bad no options, or this could be an Ericopoly moment.

Title: Re: Fairfax 2020
Post by: bearprowler6 on March 18, 2020, 11:40:39 AM
Dropped 25% in 3 hours.....


Yep.  Did anyone ever expect to see FFH with a 4% dividend yield?


SJ

FFH's dividend will be no more.....the company (at the holdco) is severely cash restrained....and that was before this drop.

Anyone else suspect that Omers will look to find a way out of its plan (act of God/force de majeure) to buy into Riverstone UK for $600 million?

Forget about funding the growth of the insurance subs in the so-called hard market. Highly likely that insurance premiums will not be paid.

And lets not forget about the devastation across its equity book (both public and private equities):
-Atlas Corp (formerly Seaspan)
-Blackberry
-Recipe
-Eurobank
-Resolute Forest
-etc

Let's hope that Brian Bradstreet, the real brains behind the investment team at FFH, worked his magic yet again and sold out of all fixed income positions at the optimum time although this will only help so much.

Comments/thoughts?
Title: Re: Fairfax 2020
Post by: Xerxes on March 18, 2020, 12:27:33 PM
It should be a very interesting AGM next month.
I don’t mind share drop.

What I mind is them having exposure (through illiquidity of some of their holdings) when they advertise as otherwise.
Title: Re: Fairfax 2020
Post by: StubbleJumper on March 18, 2020, 01:00:20 PM
Dropped 25% in 3 hours.....


Yep.  Did anyone ever expect to see FFH with a 4% dividend yield?


SJ

FFH's dividend will be no more.....the company (at the holdco) is severely cash restrained....and that was before this drop.

Anyone else suspect that Omers will look to find a way out of its plan (act of God/force de majeure) to buy into Riverstone UK for $600 million?

Forget about funding the growth of the insurance subs in the so-called hard market. Highly likely that insurance premiums will not be paid.

And lets not forget about the devastation across its equity book (both public and private equities):
-Atlas Corp (formerly Seaspan)
-Blackberry
-Recipe
-Eurobank
-Resolute Forest
-etc

Let's hope that Brian Bradstreet, the real brains behind the investment team at FFH, worked his magic yet again and sold out of all fixed income positions at the optimum time although this will only help so much.

Comments/thoughts?


Mostly in agreement, but I would caution that the next scheduled divvy is 11 months away, so lots of things can change in that time.  But, I would agree that if they were contemplating the announcement of a divvy for payment at the end of May, it would probably be best to nix it because they'd need to float a debt offering to make it happen.

The nice thing about OMERS is that usually they are swimming in cash, looking for places to put it.  With some deals, financing is a constraint and the Riverstone deal could fall through because of that.  If OMERs finds a way to back out, it's because they have found better places to park their money (that would be understandable).

The hardening market is interesting.  How much capital has left the industry in the past 6 weeks?  I am a little less worried about people dropping their policies than I am about the state of reinsurers, as FFH has enormous reinsurance receivables (we've been there before, dealing with the "can't pays" and the "won't pays").


SJ
Title: Re: Fairfax 2020
Post by: ERICOPOLY on March 19, 2020, 02:26:27 PM
Dropped 25% in 3 hours.....


Yep.  Did anyone ever expect to see FFH with a 4% dividend yield?


SJ


At $290 USD this is late 2007 prices!  Did the last 12-13 years really happen?
Title: Re: Fairfax 2020
Post by: petec on March 19, 2020, 02:32:17 PM
Dropped 25% in 3 hours.....


Yep.  Did anyone ever expect to see FFH with a 4% dividend yield?


SJ


At $290 USD this is late 2007 prices!  Did the last 12-13 years really happen?

Sadly I can confirm they did.
Title: Re: Fairfax 2020
Post by: StubbleJumper on March 19, 2020, 03:12:37 PM
Dropped 25% in 3 hours.....


Yep.  Did anyone ever expect to see FFH with a 4% dividend yield?


SJ


At $290 USD this is late 2007 prices!  Did the last 12-13 years really happen?


Honestly, some days it feels like Back to the Future.  Professor, fire up the DeLoreon because some bad investments and poor liquidity are coming back to roost...


SJ
Title: Re: Fairfax 2020
Post by: Viking on March 19, 2020, 03:15:51 PM
Dropped 25% in 3 hours.....


Yep.  Did anyone ever expect to see FFH with a 4% dividend yield?


SJ


At $290 USD this is late 2007 prices!  Did the last 12-13 years really happen?


Honestly, some days it feels like Back to the Future.  Professor, fire up the DeLoreon because some bad investments and poor liquidity are coming back to roost...


SJ

Great analogy.
Title: Re: Fairfax 2020
Post by: Xerxes on March 19, 2020, 05:06:05 PM
Perhaps I can neutralize further downside by shorting the exact # of FFH I am currently long  ;D
Title: Re: Fairfax 2020
Post by: ERICOPOLY on March 19, 2020, 05:49:45 PM
Dropped 25% in 3 hours.....


Yep.  Did anyone ever expect to see FFH with a 4% dividend yield?


SJ


At $290 USD this is late 2007 prices!  Did the last 12-13 years really happen?


Honestly, some days it feels like Back to the Future.  Professor, fire up the DeLoreon because some bad investments and poor liquidity are coming back to roost...


SJ

You'll know it when they move to list on the NYSE.
Title: Re: Fairfax 2020
Post by: StubbleJumper on March 19, 2020, 05:57:23 PM
Dropped 25% in 3 hours.....


Yep.  Did anyone ever expect to see FFH with a 4% dividend yield?


SJ


At $290 USD this is late 2007 prices!  Did the last 12-13 years really happen?


Honestly, some days it feels like Back to the Future.  Professor, fire up the DeLoreon because some bad investments and poor liquidity are coming back to roost...


SJ

You'll know it when they move to list on the NYSE.


RIP Spiro Contogouris
Title: Re: Fairfax 2020
Post by: mcliu on March 19, 2020, 06:39:32 PM
This is their chance to shine. Hope they don’t f it up. I’m selling if they mess this up.  ;D
Title: Re: Fairfax 2020
Post by: StubbleJumper on March 19, 2020, 07:07:49 PM
This is their chance to shine. Hope they don’t f it up. I’m selling if they mess this up.  ;D

How would you define "shine" during 2020?  What elements would be the key characteristics?  A few ideas of potential elements of a "good" year:

1) Grow the book by 10% or more, while simultaneously shaving the CR by 2%;
2) Keep the fixed income portfolio short in governments while piling some capital into corporate debt where the spreads are attractive or if warrants offered as a kicker;
3) Float a new debt issue for at least $750m to finance current year needs and Q1 2021;
4) Try to pick up the minority positions in Brit and Allied for a song during this market disruption, if they can scrape together the capital;
5) Get some cash in return for the deflation derivatives;
6) During a year that equities are in the shitter, don't throw a single penny at the "too hard pile" because there is plenty of value to be found in quality issues;

Seriously, what would constitute "shine" in your book?  Hopefully it doesn't involve triggering a bunch of paper gains by selling a portion of a sub so that it can be deconsolidated or by marking BIAL to market.  I've given you six potential elements...do you have other ideas?


SJ
Title: Re: Fairfax 2020
Post by: petec on March 19, 2020, 07:39:34 PM
Only no2 is realistic. Hands are tied on all the others. Especially buying the minorities - these are at fixed prices, or with price floors.

My view is best you get this year is
1) div & int income sustainably over $1bn due to redeployment of fixed income at fatter spreads
2) equity portfolio has a v-shaped recovery due to corona-control and the fact that it’s v cheap
3) Brit and Eurolife minorities bought, Allied postponed (a virtual certainty)
4) CR doesn’t crap out too hard given corona
5) moderate ability to grow in 2021 in an even harder insurance market.
Title: Re: Fairfax 2020
Post by: jfan on March 19, 2020, 07:43:40 PM
But at what point in price (given that the market price has dropped as low as $230 USD/share recently) that FFH becomes attractive despite issues with Prem, capital constraints, and a portfolio of turnaround equity choices?

At $230, they wouldn't have to achieve more than a 98% CR and 3-4% Pre-tax Investment return by my estimates.

 
Title: Re: Fairfax 2020
Post by: petec on March 19, 2020, 07:53:58 PM
But at what point in price (given that the market price has dropped as low as $230 USD/share recently) that FFH becomes attractive despite issues with Prem, capital constraints, and a portfolio of turnaround equity choices?

At $230, they wouldn't have to achieve more than a 98% CR and 3-4% Pre-tax Investment return by my estimates.

Agreed, and I won’t be selling here. But 3-4% positive might be quite an ask given what their equities have done ytd.
Title: Re: Fairfax 2020
Post by: TwoCitiesCapital on March 19, 2020, 09:09:20 PM
But at what point in price (given that the market price has dropped as low as $230 USD/share recently) that FFH becomes attractive despite issues with Prem, capital constraints, and a portfolio of turnaround equity choices?

At $230, they wouldn't have to achieve more than a 98% CR and 3-4% Pre-tax Investment return by my estimates.

Agreed, and I won’t be selling here. But 3-4% positive might be quite an ask given what their equities have done ytd.

Quite honestly, what's happened to their equities YTD is what gives me the confidence that they can do 3-4% on their investments. A simple 50% reversion back to what they were likely provides that.

Given the blow out in spreads, the drop in equities, and the drop in FFH, it's the first time it's been attractive to me with a clear path to 15% annualized since my lapse in judgement in 2018 thinking interest rates might actually be sustainably rising.

Title: Re: Fairfax 2020
Post by: StubbleJumper on March 20, 2020, 06:39:19 AM
Only no2 is realistic. Hands are tied on all the others. Especially buying the minorities - these are at fixed prices, or with price floors.

My view is best you get this year is
1) div & int income sustainably over $1bn due to redeployment of fixed income at fatter spreads
2) equity portfolio has a v-shaped recovery due to corona-control and the fact that it’s v cheap
3) Brit and Eurolife minorities bought, Allied postponed (a virtual certainty)
4) CR doesn’t crap out too hard given corona
5) moderate ability to grow in 2021 in an even harder insurance market.


1) I don't think you get #1 because FFH only has $26b of bonds and bills, and $6b of common and preferreds, at Dec 31 prices.  As a P&C operator, they need to keep the lion's share of the $26b in governments, preferably short term, which currently yield less than 0.5%.  The dollar yield on the equity portfolio won't change, but in percentage terms it will go up (ie, if no stocks are sold, they get the same divvies as last year).  So, the math is like one of those tricky algebra problems from when we were 12 years old, but I don't think you quite get to $1B.  That $26B of bonds and bills already includes $18b of governments and $8b of corporates, so how much further can that be pushed?  Whatever governments you roll-over will almost certainly be rolled into considerably lower interest rates.  Whatever corporates get rolled will get rolled into considerably higher interest rates.  And then how many billions can you shift from governments to corporate to exploit the spread?  Maybe a couple billion, max?  Probably less than a couple billion.  That was one of the comments I made about the AR, because it looked as if they might have already begun reaching for yield when they were not really paid for the risk.  By my estimate, they have about $18B of bonds and notes in the one year or less category.   Irrespective of how you work through the algebra, I'm not sure that you get $1B in dividends and interest.  But it's a good stretch-goal!

2) Let's hope there is a V-shaped recovery in the equities, but that's mostly outside of FFH's control.  I'd be happy to take a bit of luck, but the equity recovery or lack of recovery probably won't be indicative of good management or poor management on FFH's part.

3) Above and beyond buying Brit, Eurolife, or Allied minority stakes, I'd like to see FFH try to negotiate a better deal.  They are not obliged to make those purchases, and perhaps the vendor will want to see some cash because equity markets have been horrific.  This might be an opportunity to say, "Look, equities have flopped by 30%, can we talk about the buyout price?  If I pile more of FFH's money into Brit/Eurolife and I don't get a discount, my shareholders will be apoplectic that I didn't use the cash to buy discounted AMEX or Visa shares instead...."  No guarantee of success, but mgt should view this as an opportunity.

4) Curious about how you view Covid's impact on the CRs.  Could be bad for Zenith, and perhaps there will be some business interruption insurance issues?  But do you see this as a "cat" for FFH's subs?  Frankly, I haven't been preoccupied by the possibility of claims, but maybe I haven't been thinking about this enough.

5) Yes, let's hope that the book can be grown significantly and profitably.  Why do you think the growth in the book of business must wait until 2021?  Are you of the view that there will be people who will non-renew their insurance during 2020 due to cash constraints?


SJ
Title: Re: Fairfax 2020
Post by: petec on March 20, 2020, 08:01:23 AM
Only no2 is realistic. Hands are tied on all the others. Especially buying the minorities - these are at fixed prices, or with price floors.

My view is best you get this year is
1) div & int income sustainably over $1bn due to redeployment of fixed income at fatter spreads
2) equity portfolio has a v-shaped recovery due to corona-control and the fact that it’s v cheap
3) Brit and Eurolife minorities bought, Allied postponed (a virtual certainty)
4) CR doesn’t crap out too hard given corona
5) moderate ability to grow in 2021 in an even harder insurance market.


1) I don't think you get #1 because FFH only has $26b of bonds and bills, and $6b of common and preferreds, at Dec 31 prices.  As a P&C operator, they need to keep the lion's share of the $26b in governments, preferably short term, which currently yield less than 0.5%.  The dollar yield on the equity portfolio won't change, but in percentage terms it will go up (ie, if no stocks are sold, they get the same divvies as last year).  So, the math is like one of those tricky algebra problems from when we were 12 years old, but I don't think you quite get to $1B.  That $26B of bonds and bills already includes $18b of governments and $8b of corporates, so how much further can that be pushed?  Whatever governments you roll-over will almost certainly be rolled into considerably lower interest rates.  Whatever corporates get rolled will get rolled into considerably higher interest rates.  And then how many billions can you shift from governments to corporate to exploit the spread?  Maybe a couple billion, max?  Probably less than a couple billion.  That was one of the comments I made about the AR, because it looked as if they might have already begun reaching for yield when they were not really paid for the risk.  By my estimate, they have about $18B of bonds and notes in the one year or less category.   Irrespective of how you work through the algebra, I'm not sure that you get $1B in dividends and interest.  But it's a good stretch-goal!

2) Let's hope there is a V-shaped recovery in the equities, but that's mostly outside of FFH's control.  I'd be happy to take a bit of luck, but the equity recovery or lack of recovery probably won't be indicative of good management or poor management on FFH's part.

3) Above and beyond buying Brit, Eurolife, or Allied minority stakes, I'd like to see FFH try to negotiate a better deal.  They are not obliged to make those purchases, and perhaps the vendor will want to see some cash because equity markets have been horrific.  This might be an opportunity to say, "Look, equities have flopped by 30%, can we talk about the buyout price?  If I pile more of FFH's money into Brit/Eurolife and I don't get a discount, my shareholders will be apoplectic that I didn't use the cash to buy discounted AMEX or Visa shares instead...."  No guarantee of success, but mgt should view this as an opportunity.

4) Curious about how you view Covid's impact on the CRs.  Could be bad for Zenith, and perhaps there will be some business interruption insurance issues?  But do you see this as a "cat" for FFH's subs?  Frankly, I haven't been preoccupied by the possibility of claims, but maybe I haven't been thinking about this enough.

5) Yes, let's hope that the book can be grown significantly and profitably.  Why do you think the growth in the book of business must wait until 2021?  Are you of the view that there will be people who will non-renew their insurance during 2020 due to cash constraints?


SJ

1) I haven’t thought it through your way, because I don’t know the regulatory rules, but they’re at $800m ish now and said that $1bn was a reachable target before spreads gapped out, so I can only assume it’s more reachable now.

2) agree luck not control.

3) I find it staggeringly improbable that they will try to renegotiate with OMERS, especially since it would likely put the RiverStone UK deal at risk, but you might be right. I think they will just delay.

4) honestly I’m not sure.

5) recessions generally mean less insurance sold. Cash crises generally mean less insurance sold. My (very high level) assumption is that COVID-19 puts the brakes on premium growth for a few months (not necessarily a bad thing for FFH given capital constraint) but makes for an even harder market in 2021 due to lower bond yields, equity losses, higher claims etc. The best I can see for FFH right now is they somehow have the capital to grow at low risk in 2021.
Title: Re: Fairfax 2020
Post by: StubbleJumper on March 20, 2020, 08:25:31 AM

1) I haven’t thought it through your way, because I don’t know the regulatory rules, but they’re at $800m ish now and said that $1bn was a reachable target before spreads gapped out, so I can only assume it’s more reachable now.


There are two things that have happened over the past few weeks.  The spreads have gapped out, but the risk-free has fallen like a stone:

https://www.bloomberg.com/markets/rates-bonds/government-bonds/us

Short-term governments have dropped from ~2.4% interest in 2019 to ~0.4% interest today, and it has occurred across all short maturities from 3 months to 2 years.  Any governments that need to be rolled in 2020 will face a drastically lower rate.  FFH has $8B of bonds that mature during 2020 and probably about $10b or $11b of cash equivalents.  Assuming that is 75% governments, that might be a total of about $13B in governments that will take a 2% interest rate haircut during 2020, which might reduce interest income by ~$260m for the government portion of the portfolio.  Assuming that there is $5B of corporates that will be rolled, you'd need to gain an extra 500 bps on the corporates you roll to just offset the lower interest rates on the governments.  The math is not particularly nice for FFH on this front.


SJ
Title: Re: Fairfax 2020
Post by: TwoCitiesCapital on March 20, 2020, 08:41:56 AM

1) I haven’t thought it through your way, because I don’t know the regulatory rules, but they’re at $800m ish now and said that $1bn was a reachable target before spreads gapped out, so I can only assume it’s more reachable now.


There are two things that have happened over the past few weeks.  The spreads have gapped out, but the risk-free has fallen like a stone:

https://www.bloomberg.com/markets/rates-bonds/government-bonds/us

Short-term governments have dropped from ~2.4% interest in 2019 to ~0.4% interest today, and it has occurred across all short maturities from 3 months to 2 years.  Any governments that need to be rolled in 2020 will face a drastically lower rate.  FFH has $8B of bonds that mature during 2020 and probably about $10b or $11b of cash equivalents.  Assuming that is 75% governments, that might be a total of about $13B in governments that will take a 2% interest rate haircut during 2020, which might reduce interest income by ~$260m for the government portion of the portfolio.  Assuming that there is $5B of corporates that will be rolled, you'd need to gain an extra 500 bps on the corporates you roll to just offset the lower interest rates on the governments.  The math is not particularly nice for FFH on this front.


SJ

I don't disagree with the math, but IG spreads on corporates for the Agg are currently @ 3.3%. Munis can be had for 3% YTMs.  HY spreads are @ 9.3%. Even agency MBS are @ 1.3%.

There's plenty of yield to be picked up even without reaching on credit. I'm not demanding they get $1B in income/dividends. But making that income more solidified and secured long-term would be great so we didn't have to worry about rolling @ low rates in the future.
Title: Re: Fairfax 2020
Post by: Cigarbutt on March 20, 2020, 08:56:18 AM
^Do you remember how a similar disconnect happened before between risk free rates and bonds in general? History doesn't repeat (and we may be still very early) but I remember that it would have been possible, at some point in 2008-9, to build a portfolio of solid investment-grade bonds yielding 8 to 10%. At that time, I was wondering how FFH would redeploy "excess" funds parked in government bonds. They sort of pulled a rabbit from a hat (at least from my perspective) by scooping up a large amount of relatively high-yielding muni bonds, mostly backed by BRK (!). They also did many other profitable moves. It is also interesting to remember that, then, they stood on the opposite side of the trade for some players who were about to find out how painful an explosion in spreads could be.
"Toto, I've a feeling we're not in Kansas anymore." The Wizard of Oz
Title: Re: Fairfax 2020
Post by: Xerxes on March 20, 2020, 09:25:10 AM
But at what point in price (given that the market price has dropped as low as $230 USD/share recently) that FFH becomes attractive despite issues with Prem, capital constraints, and a portfolio of turnaround equity choices?

At $230, they wouldn't have to achieve more than a 98% CR and 3-4% Pre-tax Investment return by my estimates.

The drop in equities and the rebound won’t help with their 7% investment return goal.
The rebound would just undo what the drop did.

Unless I am misunderstanding your point

Agreed, and I won’t be selling here. But 3-4% positive might be quite an ask given what their equities have done ytd.

Quite honestly, what's happened to their equities YTD is what gives me the confidence that they can do 3-4% on their investments. A simple 50% reversion back to what they were likely provides that.

Given the blow out in spreads, the drop in equities, and the drop in FFH, it's the first time it's been attractive to me with a clear path to 15% annualized since my lapse in judgement in 2018 thinking interest rates might actually be sustainably rising.
Title: Re: Fairfax 2020
Post by: TwoCitiesCapital on March 20, 2020, 10:07:52 AM
But at what point in price (given that the market price has dropped as low as $230 USD/share recently) that FFH becomes attractive despite issues with Prem, capital constraints, and a portfolio of turnaround equity choices?

At $230, they wouldn't have to achieve more than a 98% CR and 3-4% Pre-tax Investment return by my estimates.



Quite honestly, what's happened to their equities YTD is what gives me the confidence that they can do 3-4% on their investments. A simple 50% reversion back to what they were likely provides that.

Given the blow out in spreads, the drop in equities, and the drop in FFH, it's the first time it's been attractive to me with a clear path to 15% annualized since my lapse in judgement in 2018 thinking interest rates might actually be sustainably rising.

The drop in equities and the rebound won’t help with their 7% investment return goal.
The rebound would just undo what the drop did.

Unless I am misunderstanding your point

Agreed, and I won’t be selling here. But 3-4% positive might be quite an ask given what their equities have done ytd.

My apologies if it wasn't clear. I sold out of FFH when I realized that my 3-6 month flop on rising yields being sustainable was wrong and went back into the "there's no way in hell FFH gets 15% ROE @ these yields and stock prices" camp

So for me, buying back 25% of my original position today @ $290 USD means I actually have a decent chance at 15%/yr returns just from the reversion in current investments back to something closer to where they were.

Title: Re: Fairfax 2020
Post by: petec on March 20, 2020, 11:53:29 AM
But at what point in price (given that the market price has dropped as low as $230 USD/share recently) that FFH becomes attractive despite issues with Prem, capital constraints, and a portfolio of turnaround equity choices?

At $230, they wouldn't have to achieve more than a 98% CR and 3-4% Pre-tax Investment return by my estimates.



Quite honestly, what's happened to their equities YTD is what gives me the confidence that they can do 3-4% on their investments. A simple 50% reversion back to what they were likely provides that.

Given the blow out in spreads, the drop in equities, and the drop in FFH, it's the first time it's been attractive to me with a clear path to 15% annualized since my lapse in judgement in 2018 thinking interest rates might actually be sustainably rising.

The drop in equities and the rebound won’t help with their 7% investment return goal.
The rebound would just undo what the drop did.

Unless I am misunderstanding your point

Agreed, and I won’t be selling here. But 3-4% positive might be quite an ask given what their equities have done ytd.

My apologies if it wasn't clear. I sold out of FFH when I realized that my 3-6 month flop on rising yields being sustainable was wrong and went back into the "there's no way in hell FFH gets 15% ROE @ these yields and stock prices" camp

So for me, buying back 25% of my original position today @ $290 USD means I actually have a decent chance at 15%/yr returns just from the reversion in current investments back to something closer to where they were.

Agreed. My point was about book value for 2020 given where the equities were on 1/1, not where they are now.
Title: Re: Fairfax 2020
Post by: TwoCitiesCapital on March 20, 2020, 12:27:55 PM
But at what point in price (given that the market price has dropped as low as $230 USD/share recently) that FFH becomes attractive despite issues with Prem, capital constraints, and a portfolio of turnaround equity choices?

At $230, they wouldn't have to achieve more than a 98% CR and 3-4% Pre-tax Investment return by my estimates.



Quite honestly, what's happened to their equities YTD is what gives me the confidence that they can do 3-4% on their investments. A simple 50% reversion back to what they were likely provides that.

Given the blow out in spreads, the drop in equities, and the drop in FFH, it's the first time it's been attractive to me with a clear path to 15% annualized since my lapse in judgement in 2018 thinking interest rates might actually be sustainably rising.

The drop in equities and the rebound won’t help with their 7% investment return goal.
The rebound would just undo what the drop did.

Unless I am misunderstanding your point

Agreed, and I won’t be selling here. But 3-4% positive might be quite an ask given what their equities have done ytd.

My apologies if it wasn't clear. I sold out of FFH when I realized that my 3-6 month flop on rising yields being sustainable was wrong and went back into the "there's no way in hell FFH gets 15% ROE @ these yields and stock prices" camp

So for me, buying back 25% of my original position today @ $290 USD means I actually have a decent chance at 15%/yr returns just from the reversion in current investments back to something closer to where they were.

Agreed. My point was about book value for 2020 given where the equities were on 1/1, not where they are now.

Agreed. 👍
Title: Re: Fairfax 2020
Post by: Xerxes on March 20, 2020, 02:56:08 PM
I just hope that they are not shorting all the wrong names Einhorn-style (I.e. all FANG powerhouses listed in the Annual Letter)
Title: Re: Fairfax 2020
Post by: petec on March 21, 2020, 03:29:04 AM

1) I haven’t thought it through your way, because I don’t know the regulatory rules, but they’re at $800m ish now and said that $1bn was a reachable target before spreads gapped out, so I can only assume it’s more reachable now.


There are two things that have happened over the past few weeks.  The spreads have gapped out, but the risk-free has fallen like a stone:

https://www.bloomberg.com/markets/rates-bonds/government-bonds/us

Short-term governments have dropped from ~2.4% interest in 2019 to ~0.4% interest today, and it has occurred across all short maturities from 3 months to 2 years.  Any governments that need to be rolled in 2020 will face a drastically lower rate.  FFH has $8B of bonds that mature during 2020 and probably about $10b or $11b of cash equivalents.  Assuming that is 75% governments, that might be a total of about $13B in governments that will take a 2% interest rate haircut during 2020, which might reduce interest income by ~$260m for the government portion of the portfolio.  Assuming that there is $5B of corporates that will be rolled, you'd need to gain an extra 500 bps on the corporates you roll to just offset the lower interest rates on the governments.  The math is not particularly nice for FFH on this front.


SJ

No that’s fair. I guess my base case is that when we come out of this the reverse happens: short govt yields rise and spreads compress. That means the short govts don’t have to roll onto much lower rates but that anything that’s been redeployed into corporates earns a higher rate. I think that’s reasonably probable, but it’s also a best case.
Title: Re: Fairfax 2020
Post by: petec on March 21, 2020, 03:30:45 AM
I just hope that they are not shorting all the wrong names Einhorn-style (I.e. all FANG powerhouses listed in the Annual Letter)

I do think it’s very odd, the stocks they chose to highlight in the letter. Ok they’re not optically cheap, but they’ve largely got spectacular business models and growth. There was likely a bubble in some names, and particularly among the unprofitable story stocks, but not the ones they named.
Title: Re: Fairfax 2020
Post by: Xerxes on March 21, 2020, 02:33:23 PM
For those of us who are uninitiated in the world corporate bond trading, is there an index based on European corporate bonds that can be bought to capitalize on the short-med term widening of credit spreads ?
Title: Re: Fairfax 2020
Post by: bearprowler6 on March 27, 2020, 08:58:06 AM
An update on the Horizon North and Dexterra transaction:

http://www.horizonnorth.ca/news-and-knowledge-centre/news/horizon-north-logistics-inc-announces-covid-19-response-including-reductions-to-2020-capital-spending-program-and-other-costs-and-reiterates-commitment-of-all-parties-to-transaction-with-dexterra-and/
Title: Re: Fairfax 2020
Post by: petec on March 30, 2020, 04:23:46 AM
Just going through the call.

Eurolife buyout will probably be done by Eurolife, not holdco.

Brit will be about $100m.

Allied is bigger but given capital at Allied I wonder if Allied could also buy itself.

I wonder if this is a piece of the holdco liquidity puzzle that we are missing.

doesn't answer how they fund premium growth though.
Title: Re: Fairfax 2020
Post by: bearprowler6 on March 30, 2020, 06:47:08 AM
Status of OMERS purchase of 40% of Riverstone UK?

When the deal was announced on December 20/19 it was expected to close by end of Q1 2020 (subject to regulatory approval).

Well here we are...at the end of Q1 2020. Any news on this deal?

Title: Re: Fairfax 2020
Post by: Cigarbutt on March 30, 2020, 08:21:05 AM
Status of OMERS purchase of 40% of Riverstone UK?
When the deal was announced on December 20/19 it was expected to close by end of Q1 2020 (subject to regulatory approval).
Well here we are...at the end of Q1 2020. Any news on this deal?
FWIW, the European Commission cleared the merger on Feb 26 (simplified merger review procedure).
Title: Re: Fairfax 2020
Post by: Xerxes on March 31, 2020, 04:45:53 PM
From the blackberry call this evening:

Analyst:   given macro environment, how much do you need and what are your plans for the convert

Chen:   after paying the convert we $385m of cash/equivalent. we made some assumptions (guessing he means scenarios. We will pay back the convert, but saving $23m on interest, obviously cash balance will go down, we also assume the debt market is closed so assumed no financing  ...…. quite comfortable that they liquidity
Title: Re: Fairfax 2020
Post by: petec on April 01, 2020, 01:23:12 AM
From the blackberry call this evening:

Analyst:   given macro environment, how much do you need and what are your plans for the convert

Chen:   after paying the convert we $385m of cash/equivalent. we made some assumptions (guessing he means scenarios. We will pay back the convert, but saving $23m on interest, obviously cash balance will go down, we also assume the debt market is closed so assumed no financing  ...…. quite comfortable that they liquidity

"We have made some assumptions under a stress test environment":
1. repay the convert.
2. no refinancing.
3. no layoffs.
4. revenue down "20%, 30%, 50%".

Result: they're comfortable for a couple of years except in "extreme scenarios", whatever that means.
Title: Re: Fairfax 2020
Post by: bearprowler6 on April 01, 2020, 08:18:29 AM
Status of OMERS purchase of 40% of Riverstone UK?
When the deal was announced on December 20/19 it was expected to close by end of Q1 2020 (subject to regulatory approval).
Well here we are...at the end of Q1 2020. Any news on this deal?
FWIW, the European Commission cleared the merger on Feb 26 (simplified merger review procedure).

Since the "deadline" (end of Q1 2020) outlined at the time the sale of 40% of RiverstoneUK has now been missed I think we can fairly assume the sale to OMERS is in trouble? Or at the very least being repriced?

Fairfax needs to communicate on this one......

Furthermore, their equity holdings are getting crushed including but not limited to:

-Blackberry
-Eurobank
-Resolute Forest Products
-Stelco
-Recipe
-Kennedy Wilson

In my view and I fully expect that others will disagree with this....a lifetime of work is being wiped out. Fairfax does not have adequate liquidity. The long term does not matter when you can't pay your current bills. Prem said he learned his lessons. Obviously not.

The tide is out and....well we know what that means.....ugly indeed....

 
Title: Re: Fairfax 2020
Post by: petec on April 01, 2020, 08:25:33 AM
Status of OMERS purchase of 40% of Riverstone UK?
When the deal was announced on December 20/19 it was expected to close by end of Q1 2020 (subject to regulatory approval).
Well here we are...at the end of Q1 2020. Any news on this deal?
FWIW, the European Commission cleared the merger on Feb 26 (simplified merger review procedure).

Since the "deadline" (end of Q1 2020) outlined at the time the sale of 40% of RiverstoneUK has now been missed I think we can fairly assume the sale to OMERS is in trouble? Or at the very least being repriced?

Fairfax needs to communicate on this one......

Furthermore, their equity holdings are getting crushed including but not limited to:

-Blackberry
-Eurobank
-Resolute Forest Products
-Stelco
-Recipe
-Kennedy Wilson

In my view and I fully expect that others will disagree with this....a lifetime of work is being wiped out. Fairfax does not have adequate liquidity. The long term does not matter when you can't pay your current bills. Prem said he learned his lessons. Obviously not.

The tide is out and....well we know what that means.....ugly indeed....

I agree that a lot of value has been destroyed. But you're going to have to convince me they can't pay current bills.
Title: Re: Fairfax 2020
Post by: bearprowler6 on April 01, 2020, 08:57:00 AM
Status of OMERS purchase of 40% of Riverstone UK?
When the deal was announced on December 20/19 it was expected to close by end of Q1 2020 (subject to regulatory approval).
Well here we are...at the end of Q1 2020. Any news on this deal?
FWIW, the European Commission cleared the merger on Feb 26 (simplified merger review procedure).

Since the "deadline" (end of Q1 2020) outlined at the time the sale of 40% of RiverstoneUK has now been missed I think we can fairly assume the sale to OMERS is in trouble? Or at the very least being repriced?

Fairfax needs to communicate on this one......

Furthermore, their equity holdings are getting crushed including but not limited to:

-Blackberry
-Eurobank
-Resolute Forest Products
-Stelco
-Recipe
-Kennedy Wilson

In my view and I fully expect that others will disagree with this....a lifetime of work is being wiped out. Fairfax does not have adequate liquidity. The long term does not matter when you can't pay your current bills. Prem said he learned his lessons. Obviously not.

The tide is out and....well we know what that means.....ugly indeed....

I agree that a lot of value has been destroyed. But you're going to have to convince me they can't pay current bills.

Depends how you define it (not being able to pay their current bills)  but consider the following:

-They are already drawing on the bank line and that's before the current corona situation arose
-Can't supply the capital needed to support the hard market in their insurance subs
-Private investments must be starved for cash and looking to Fairfax to stay alive?
-Selling off portions of long held assets (RiverstoneUK) to raise cash and now that's perhaps in jeopardy
-Unknown funding sources to complete the minority interests in various insurance subs including Eurolife and Allied World
-Capital markets don't offer a solution (but it would not surprise me if Prem dilutes his shareholders yet again even at these levels)

Prem and the team go to Omaha every year. Buffett laid out the case for growing over time yet Prem and the team did not listen or thought they were smarter.

At best Fairfa's share price flatlines for the next long while at its new share price level. Just like it fluctuated between $600 and $700 CAD for the last 10 years. Folks the market got this one right. One for the efficient market believers!
Title: Re: Fairfax 2020
Post by: petec on April 01, 2020, 09:14:45 AM
Status of OMERS purchase of 40% of Riverstone UK?
When the deal was announced on December 20/19 it was expected to close by end of Q1 2020 (subject to regulatory approval).
Well here we are...at the end of Q1 2020. Any news on this deal?
FWIW, the European Commission cleared the merger on Feb 26 (simplified merger review procedure).

Since the "deadline" (end of Q1 2020) outlined at the time the sale of 40% of RiverstoneUK has now been missed I think we can fairly assume the sale to OMERS is in trouble? Or at the very least being repriced?

Fairfax needs to communicate on this one......

Furthermore, their equity holdings are getting crushed including but not limited to:

-Blackberry
-Eurobank
-Resolute Forest Products
-Stelco
-Recipe
-Kennedy Wilson

In my view and I fully expect that others will disagree with this....a lifetime of work is being wiped out. Fairfax does not have adequate liquidity. The long term does not matter when you can't pay your current bills. Prem said he learned his lessons. Obviously not.

The tide is out and....well we know what that means.....ugly indeed....

I agree that a lot of value has been destroyed. But you're going to have to convince me they can't pay current bills.

Depends how you define it (not being able to pay their current bills)  but consider the following:

-They are already drawing on the bank line and that's before the current corona situation arose
-Can't supply the capital needed to support the hard market in their insurance subs
-Private investments must be starved for cash and looking to Fairfax to stay alive?
-Selling off portions of long held assets (RiverstoneUK) to raise cash and now that's perhaps in jeopardy
-Unknown funding sources to complete the minority interests in various insurance subs including Eurolife and Allied World
-Capital markets don't offer a solution (but it would not surprise me if Prem dilutes his shareholders yet again even at these levels)

Prem and the team go to Omaha every year. Buffett laid out the case for growing over time yet Prem and the team did not listen or thought they were smarter.

At best Fairfa's share price flatlines for the next long while at its new share price level. Just like it fluctuated between $600 and $700 CAD for the last 10 years. Folks the market got this one right. One for the efficient market believers!

In order:
- True, although they also have $1.1bn in cash at the holdco level.
- Agree with this, although 2 of the subs have material space to grow with current capital.
- Possible, but who knows.
- Maybe Riverstone was purely done to raise cash. But maybe not. Part of the thesis is that there are lots of runoff portfolios for sale coming out of Lloyds. It may be that this is a one off, capital-intensive opportunity that Fairfax didn't want to fund all on its own. 
- The funding for Eurolife will come from Eurolife. That's known. Brit is $100m. Allied is bigger but they have 4 years.
- Likely agree.

In summary:
1) I totally agree that it depends on how you define "current bills". Fairfax is not going to go bust. But nor is it going to grow the way it could have done.
2) I disagree on the share price staying flat. I don't believe Covid-19 permanently impairs value in several of the big holdings like Eurobank and Atlas. Presumably Covid-19 is temporary, and when it proves to be so, these stocks will come back. Atlas may not regain its recent heights for a while. Eurobank could surpass them, as I wrote on the Fairfax stock positions thread recently.
Title: Re: Fairfax 2020
Post by: Xerxes on April 01, 2020, 09:25:32 AM
If they couldn’t do well in a bull market and couldn’t do well in a bear market, than the mistake is mine to hold them.
Title: Re: Fairfax 2020
Post by: petec on April 01, 2020, 09:59:11 AM
If they couldn’t do well in a bull market and couldn’t do well in a bear market, than the mistake is mine to hold them.

Agreed. Sob.
Title: Re: Fairfax 2020
Post by: Santayana on April 01, 2020, 10:12:37 AM
The way insiders have been buying the Preferreds, it's hard for me to believe they have a serious liquidity problem.
Title: Re: Fairfax 2020
Post by: petec on April 01, 2020, 11:29:00 AM
The way insiders have been buying the Preferreds, it's hard for me to believe they have a serious liquidity problem.

They don’t, but I didn’t know that - do you have a link?
Title: Re: Fairfax 2020
Post by: Santayana on April 01, 2020, 11:30:36 AM
https://www.canadianinsider.com/node/7?menu_tickersearch=FFH+%7C+Fairfax+Financial+Holding
Title: Re: Fairfax 2020
Post by: petec on April 01, 2020, 11:53:00 AM
https://www.canadianinsider.com/node/7?menu_tickersearch=FFH+%7C+Fairfax+Financial+Holding

Took me a while to find the pref data but thanks. I trust Brian Bradstreet's instincts.

Slightly worrying to see Barnard selling $1m of common. Perhaps he was buying a house. But the one thing that has kept me in FFH all these years is Prem's incredible ability to keep (what I judge to be) superb people in the business. There has to be a point where someone like Barnard, who has unquestionably delivered, gets p1ssed off that Prem isn't upholding his side of the bargain.
Title: Re: Fairfax 2020
Post by: Xerxes on April 01, 2020, 11:59:22 AM
Thanks Santayana,

My concern is very simplistic, i know; it is just that FFH cannot have it both ways, being unable to capitalize on a bull and bear markets.
In terms of liquidity. I think their constraint does play a part in some of the things they want to do but don't believe it is a liquidity crunch.

The upcoming AGM meeting would be very useful for me to decide to if by back end of the year, I need to sell FFH or not. I hope not.
Either way, I plan to keep FIH till 2030 at least.

Have a look Bill Ackman who was able to change and become an activist against himself when he screwed up with the Valeant bet. He stepped back, reformed and came back. And most recently he was able to turn his long macro view a on dime and decide that coronavirus would a major problem for his long portfolio; he made a bet on CDS and made billions. That is pro-active hedging and a flexible mindset.

In FFH, as early March 2020, in the letter to shareholders, Prem talk about his short duration bond portfolio not having any exposure to rising interest rate. How is rising interest rate was a concern in Feb./March in a world that was on the edge of getting toppled over by the compounding mathematics of COVID-19 ? it seems his macro point of view once solidified (through '16 Trump election) refuses to change.

But then again, I could be completely wrong, ;-) we could all be pleasantly surprised, when at the AGM in a few weeks, they reveal their hidden CDS hedges (ala Ackman) and reveal that now they are sitting on a massive realized gain. Gains that they plow back on those insurances business and their own shares …. with enough leftover to buy the rest of RPF that they don't own. That would be acceptable.
Title: Re: Fairfax 2020
Post by: petec on April 01, 2020, 12:15:57 PM
In FFH, as early March 2020, in the letter to shareholders, Prem talk about his short duration bond portfolio not having any exposure to rising interest rate. How is rising interest rate was a concern in Feb./March in a world that was on the edge of getting toppled over by the compounding mathematics of COVID-19 ? it seems his macro point of view once solidified (through '16 Trump election) refuses to change.

But then again, I could be completely wrong, ;-) we could all be pleasantly surprised, when at the AGM in a few weeks, they reveal their hidden CDS hedges (ala Ackman) and reveal that now they are sitting on a massive realized gain. Gains that they plow back on those insurances business and their own shares …. with enough leftover to buy the rest of RPF that they don't own. That would be acceptable.

Prem can change views - he proved that when Trump was elected.

Very few people saw the Covid impact coming - my view frankly is Ackman got lucky, but I give him full credit for finding a way (unlike Prem) to hedge with little downside.

Fairfax is not about to report a big gain magicked out of thin air.

What is horrible for Prem, if he claims to be a value investor, is that he failed to pick up high quality value in 2010 and instead hedged a cheap market; and then turned on a dime when Trump was elected and decided that the economy was going to take off, but felt quality was too expensive and chose to express that view by investing in cyclical value which crapped out the minute a cloud appeared. It is a staggeringly poor series of decisions.

Title: Re: Fairfax 2020
Post by: Santayana on April 01, 2020, 12:16:20 PM
I'm definitely not saying that liquidity issues won't prevent them from executing some things they may have wanted to do, but I don't think they are "swimming naked" as bearprowler6 suggested. 
Title: Re: Fairfax 2020
Post by: mranski on April 01, 2020, 12:23:06 PM
The comments about Barnard make me wonder about the reasons for Paul Rivett ‘retiring’ at a young age. It has to be a big negative to lose someone who was touted as Prem’s successor.
Title: Re: Fairfax 2020
Post by: petec on April 01, 2020, 12:37:28 PM
The comments about Barnard make me wonder about the reasons for Paul Rivett ‘retiring’ at a young age. It has to be a big negative to lose someone who was touted as Prem’s successor.

Yeah I wondered that.
Title: Re: Fairfax 2020
Post by: Xerxes on April 01, 2020, 03:14:37 PM
In FFH, as early March 2020, in the letter to shareholders, Prem talk about his short duration bond portfolio not having any exposure to rising interest rate. How is rising interest rate was a concern in Feb./March in a world that was on the edge of getting toppled over by the compounding mathematics of COVID-19 ? it seems his macro point of view once solidified (through '16 Trump election) refuses to change.

But then again, I could be completely wrong, ;-) we could all be pleasantly surprised, when at the AGM in a few weeks, they reveal their hidden CDS hedges (ala Ackman) and reveal that now they are sitting on a massive realized gain. Gains that they plow back on those insurances business and their own shares …. with enough leftover to buy the rest of RPF that they don't own. That would be acceptable.

What is horrible for Prem, if he claims to be a value investor, is that he failed to pick up high quality value in 2010 and instead hedged a cheap market; and then turned on a dime when Trump was elected and decided that the economy was going to take off, but felt quality was too expensive and chose to express that view by investing in cyclical value which crapped out the minute a cloud appeared. It is a staggeringly poor series of decisions.

:-) now he has a chance to buy Berkshire at 1.05 BV or so
Title: Re: Fairfax 2020
Post by: petec on April 02, 2020, 12:05:57 AM
In FFH, as early March 2020, in the letter to shareholders, Prem talk about his short duration bond portfolio not having any exposure to rising interest rate. How is rising interest rate was a concern in Feb./March in a world that was on the edge of getting toppled over by the compounding mathematics of COVID-19 ? it seems his macro point of view once solidified (through '16 Trump election) refuses to change.

But then again, I could be completely wrong, ;-) we could all be pleasantly surprised, when at the AGM in a few weeks, they reveal their hidden CDS hedges (ala Ackman) and reveal that now they are sitting on a massive realized gain. Gains that they plow back on those insurances business and their own shares …. with enough leftover to buy the rest of RPF that they don't own. That would be acceptable.

What is horrible for Prem, if he claims to be a value investor, is that he failed to pick up high quality value in 2010 and instead hedged a cheap market; and then turned on a dime when Trump was elected and decided that the economy was going to take off, but felt quality was too expensive and chose to express that view by investing in cyclical value which crapped out the minute a cloud appeared. It is a staggeringly poor series of decisions.

:-) now he has a chance to buy Berkshire at 1.05 BV or so

Ha! Sadly he doesn't even have that. He can't add to equities and there's very little he can realistically sell to redeploy cash, because his stock picks are either 1) very undervalued, 2) illiquid, 3) sponsored by Fairfax, or all three. They will have to be very smart to make hay in this crisis, and I think their opportunity is in the bond market, not the equity market.
Title: Re: Fairfax 2020
Post by: TwoCitiesCapital on April 02, 2020, 10:13:05 AM
In FFH, as early March 2020, in the letter to shareholders, Prem talk about his short duration bond portfolio not having any exposure to rising interest rate. How is rising interest rate was a concern in Feb./March in a world that was on the edge of getting toppled over by the compounding mathematics of COVID-19 ? it seems his macro point of view once solidified (through '16 Trump election) refuses to change.

But then again, I could be completely wrong, ;-) we could all be pleasantly surprised, when at the AGM in a few weeks, they reveal their hidden CDS hedges (ala Ackman) and reveal that now they are sitting on a massive realized gain. Gains that they plow back on those insurances business and their own shares …. with enough leftover to buy the rest of RPF that they don't own. That would be acceptable.

What is horrible for Prem, if he claims to be a value investor, is that he failed to pick up high quality value in 2010 and instead hedged a cheap market; and then turned on a dime when Trump was elected and decided that the economy was going to take off, but felt quality was too expensive and chose to express that view by investing in cyclical value which crapped out the minute a cloud appeared. It is a staggeringly poor series of decisions.

:-) now he has a chance to buy Berkshire at 1.05 BV or so

Ha! Sadly he doesn't even have that. He can't add to equities and there's very little he can realistically sell to redeploy cash, because his stock picks are either 1) very undervalued, 2) illiquid, 3) sponsored by Fairfax, or all three. They will have to be very smart to make hay in this crisis, and I think their opportunity is in the bond market, not the equity market.

+1

Good things opportunities will be abundant in both
Title: Re: Fairfax 2020
Post by: gfp on April 14, 2020, 04:27:22 PM
Update from Fairfax - preliminary first quarter results:
https://www.fairfax.ca/news/press-releases/press-release-details/2020/Fairfax-Reports-Recent-Developments/default.aspx
Title: Re: Fairfax 2020
Post by: Santayana on April 14, 2020, 05:00:54 PM
So now trading at something around 70% of book. 
Title: Re: Fairfax 2020
Post by: Xerxes on April 14, 2020, 05:08:13 PM
Thx

$2.9 billion plowed into high-yield.
That is 7% of the 40% portfolio.
Title: Re: Fairfax 2020
Post by: Cevian on April 14, 2020, 05:12:29 PM
"higher yielding investment grade U.S. corporate bonds with an average maturity date of 4 years and average interest rates of 4.25%, that will benefit interest income in the future."

Honestly, isn't that one of the worst placed to be at the moment?
Title: Re: Fairfax 2020
Post by: TwoCitiesCapital on April 14, 2020, 05:29:35 PM
"higher yielding investment grade U.S. corporate bonds with an average maturity date of 4 years and average interest rates of 4.25%, that will benefit interest income in the future."

Honestly, isn't that one of the worst placed to be at the moment?

Maybe, but they're buying it AFTER the initial panic dislocation and it's only 4-year paper. Too far out to be immediately of concern and short-enough that additional moves in rates and credit spreads won't have major impacts. This alone could increase interest income by 10-15% per annum in coming years with no credit giving to any potential for higher rates - and there is probably more of this to come if I'm correct in that this isn't over just yet.

Also, aren't these typically the types of bonds that are rolled in times like this? Companies voluntarily tender 2-4 year paper at a premium to push out maturities with a 7-10 year issuance to buy time and certainty of funding?

Also, the equity accounting of Eurobank is likely to help seeing as it won't be marked-to-market. This will be one to watch though as future appreciation also won't flow through and current book values will be overstated as a result.
Title: Re: Fairfax 2020
Post by: StubbleJumper on April 14, 2020, 05:33:56 PM
Update from Fairfax - preliminary first quarter results:
https://www.fairfax.ca/news/press-releases/press-release-details/2020/Fairfax-Reports-Recent-Developments/default.aspx


Okay, that's actually a reasonably good collection of news.  We already knew that the equity portfolio would be a shit-show, but hopefully that is temporary.  But the good news is reassuring;

1) Riverstone closed as planned, which was key for holdco liquidity.

2) FFH drew down the revolver almost fully before the lender could find a reason to screw them by pulling it.  Now it's the lender's problem!  Say what you want about Prem, but he's nobody's fool.  There's some banker out there who probably wishes that he hadn't written that $2B revolver a couple years ago!

3) They have been hitting the corporate debt market hard.  This is Bradstreet's expertise, so that is a very good sign.  Look for some realized gains in 2021 and 2022 from the corporates being bought over the past month.  The money is being made now, but it won't be realized until later.

4) Gross Written is up 12% and CRs are under 100, so that is exactly what most of us were hoping for on the underwriting front.


Okay, this is good.  We already knew about the equity shit-show, so this is helpful.  It would be useful to have FFH make a general statement about the language used in its business continuity insurance contracts and the likelihood that those contracts will trigger indemnities.



SJ

Title: Re: Fairfax 2020
Post by: Parsad on April 14, 2020, 06:32:56 PM
Update from Fairfax - preliminary first quarter results:
https://www.fairfax.ca/news/press-releases/press-release-details/2020/Fairfax-Reports-Recent-Developments/default.aspx


Okay, that's actually a reasonably good collection of news.  We already knew that the equity portfolio would be a shit-show, but hopefully that is temporary.  But the good news is reassuring;

1) Riverstone closed as planned, which was key for holdco liquidity.

2) FFH drew down the revolver almost fully before the lender could find a reason to screw them by pulling it.  Now it's the lender's problem!  Say what you want about Prem, but he's nobody's fool.  There's some banker out there who probably wishes that he hadn't written that $2B revolver a couple years ago!

3) They have been hitting the corporate debt market hard.  This is Bradstreet's expertise, so that is a very good sign.  Look for some realized gains in 2021 and 2022 from the corporates being bought over the past month.  The money is being made now, but it won't be realized until later.

4) Gross Written is up 12% and CRs are under 100, so that is exactly what most of us were hoping for on the underwriting front.


Okay, this is good.  We already knew about the equity shit-show, so this is helpful.  It would be useful to have FFH make a general statement about the language used in its business continuity insurance contracts and the likelihood that those contracts will trigger indemnities.



SJ

+1!  Premium pricing for insurance is only going to increase over the next 24 months.  There were already huge spikes in premium pricing in certain areas, and with portfolio losses across the board, those able to write business are going to do well over the next couple of years. 

I truly feel that businesses that gain efficiencies now and make it through this period in the top 10-20% of their industry, are going to be the long-term players in the future who will benefit from today's tightening.  Cheers!
Title: Re: Fairfax 2020
Post by: vinod1 on April 14, 2020, 06:43:26 PM
Net losses on investments of approximately $1.5 billion will reflect unrealized losses on the Company’s equity and equity-related holdings and bonds.

Is my understanding correct that the $1.5 billion loss in equities/FI is understated by about $0.5 billion loss on the Eurobank?

Yesterday, I was going through the portfolio to size up the losses and I approximated to about $1.5 billion decline, so the above would be a much bigger hit than I expected.

Who would have imagined in 2009, the come the next major crisis, a dot com stock (Amazon) would be a pillar of strength while Fairfax would be tapping the credit lines?

Vinod
Title: Re: Fairfax 2020
Post by: Xerxes on April 14, 2020, 06:44:15 PM
For those of us who are less familiar about the insurance side, what is the normal gross premium growth rate, if 12% is considered exceptional.

A high gross premium growth rate, doesn't it just mean that you are just trying to grow market share, at a cost that it might cost you profitability ?
Title: Re: Fairfax 2020
Post by: StubbleJumper on April 14, 2020, 07:00:34 PM
For those of us who are less familiar about the insurance side, what is the normal gross premium growth rate, if 12% is considered exceptional.

A high gross premium growth rate, doesn't it just mean that you are just trying to grow market share, at a cost that it might cost you profitability ?


The industry level data can be viewed here: https://www.iii.org/table-archive/21113

But, the logic of a premium increase is that the real, inflation-adjusted value of insured assets might go up by a couple percent per year (more houses built, more cars on the road, etc every year) and then the cost of those assets might go up by inflation which might be a couple extra percent.  So maybe 4% growth is average?

The nice thing about a 10% increase, like what we saw in 2018 is that a large chunk of that falls directly onto insurers' bottom line.  That's why so many of us on this board were a little tepid about FFH's reported CR for 2018.  We were hoping that it would be 95-ish.


SJ
Title: Re: Fairfax 2020
Post by: Xerxes on April 14, 2020, 07:20:55 PM
Who would have imagined in 2009, the come the next major crisis, a dot com stock (Amazon) would be a pillar of strength while Fairfax would be tapping the credit lines?

yeah

Thinking back to that era (though slightly pre-Lehman), I recall the stalwarts were Exxon and Chevron in the financial media circles … the same way Amazon is holding up now and now those companies are in the gutter.

I hope 10 years from now, it won't be bitcoin … maybe gold will be the asset class that will have the last laugh when it reaches $6,000 / ounce due to a massive sovereign crisis and Marc Bristow will be the face stability in that massive market downturn ….. Marc, who ? :-)
Title: Re: Fairfax 2020
Post by: clutch on April 14, 2020, 07:57:00 PM

Who would have imagined in 2009, the come the next major crisis, a dot com stock (Amazon) would be a pillar of strength while Fairfax would be tapping the credit lines?

Vinod

Quote of the day
Title: Re: Fairfax 2020
Post by: petec on April 14, 2020, 11:50:14 PM
I’m pleasantly surprised at the size of the loss, but as others suggest I suspect some of the equity markdown is masked by equity accounting. For example, FIH and FAH will be on the books for more than market value and I need to remind myself how Recipe is accounted.

In fairness, it’s quite smart of Fairfax to structure their equity exposure this way and protect BV from short term marks.

Also like the fact they’re swimming in cash. So much for a liquidity crunch.
Title: Re: Fairfax 2020
Post by: Bryggen on April 15, 2020, 08:54:33 AM
Hey guys and sorry for opening a new thread while I should have posted here on this news. Blame the newbie!

Would you say that Fairfax is in a position to capture the buying opportunities that this market currently offers? One would think that Prem would ''back up the truck'', but could they (and will they) use their cash pile to buy equities at great value? How read read the use of the line of credit relative to this point?

Prem said in his last letter that value investing was out-of-favour. I think it has now changed and would like to see them (and us!) benefit from it.

Thoughts?

Bry

Title: Re: Fairfax 2020
Post by: petec on April 15, 2020, 11:06:23 AM
Hey guys and sorry for opening a new thread while I should have posted here on this news. Blame the newbie!

Would you say that Fairfax is in a position to capture the buying opportunities that this market currently offers? One would think that Prem would ''back up the truck'', but could they (and will they) use their cash pile to buy equities at great value? How read read the use of the line of credit relative to this point?

Prem said in his last letter that value investing was out-of-favour. I think it has now changed and would like to see them (and us!) benefit from it.

Thoughts?

Bry

They can’t buy any more equities. Simplistically, they can invest their equity in equities but their float must be invested in fixed income.

So the opportunities are in switching from treasuries to corporates at expanded spreads and buying back stock. They’re doing a little of both but neither will change their prospects much.

They entered this sell off fully invested in cyclical value stocks. As a result, there’s not much they can do.
Title: Re: Fairfax 2020
Post by: Bryggen on April 15, 2020, 11:27:53 AM
Hey guys and sorry for opening a new thread while I should have posted here on this news. Blame the newbie!

Would you say that Fairfax is in a position to capture the buying opportunities that this market currently offers? One would think that Prem would ''back up the truck'', but could they (and will they) use their cash pile to buy equities at great value? How read read the use of the line of credit relative to this point?

Prem said in his last letter that value investing was out-of-favour. I think it has now changed and would like to see them (and us!) benefit from it.

Thoughts?

Bry

They can’t buy any more equities. Simplistically, they can invest their equity in equities but their float must be invested in fixed income.

So the opportunities are in switching from treasuries to corporates at expanded spreads and buying back stock. They’re doing a little of both but neither will change their prospects much.

They entered this sell off fully invested in cyclical value stocks. As a result, there’s not much they can do.

Thanks for your input. Pretty bad then. They missed the bull market few years ago because of the massive short positions and now they can't capitalize on the great bargains offered. Is it me or it is very disappointing from Prem? I am puzzled by his thinking, which appears to be against what he always been valuing.
Title: Re: Fairfax 2020
Post by: Bryggen on April 15, 2020, 11:28:54 AM
On another note, a very good article on Fairfax and Prem:

https://junto.investments/companies/fairfax-financial/

Title: Re: Fairfax 2020
Post by: petec on April 15, 2020, 11:35:39 AM
Hey guys and sorry for opening a new thread while I should have posted here on this news. Blame the newbie!

Would you say that Fairfax is in a position to capture the buying opportunities that this market currently offers? One would think that Prem would ''back up the truck'', but could they (and will they) use their cash pile to buy equities at great value? How read read the use of the line of credit relative to this point?

Prem said in his last letter that value investing was out-of-favour. I think it has now changed and would like to see them (and us!) benefit from it.

Thoughts?

Bry

They can’t buy any more equities. Simplistically, they can invest their equity in equities but their float must be invested in fixed income.

So the opportunities are in switching from treasuries to corporates at expanded spreads and buying back stock. They’re doing a little of both but neither will change their prospects much.

They entered this sell off fully invested in cyclical value stocks. As a result, there’s not much they can do.

Thanks for your input. Pretty bad then. They missed the bull market few years ago because of the massive short positions and now they can't capitalize on the great bargains offered. Is it me or it is very disappointing from Prem? I am puzzled by his thinking, which appears to be against what he always been valuing.

That is more or less the gist of this thread for most of the past decade, sadly.

The positive spin is that if you go through the holdings you can find serious value today, especially in Eurobank.
Title: Re: Fairfax 2020
Post by: Parsad on April 15, 2020, 12:11:50 PM
Hey guys and sorry for opening a new thread while I should have posted here on this news. Blame the newbie!

Would you say that Fairfax is in a position to capture the buying opportunities that this market currently offers? One would think that Prem would ''back up the truck'', but could they (and will they) use their cash pile to buy equities at great value? How read read the use of the line of credit relative to this point?

Prem said in his last letter that value investing was out-of-favour. I think it has now changed and would like to see them (and us!) benefit from it.

Thoughts?

Bry

They can’t buy any more equities. Simplistically, they can invest their equity in equities but their float must be invested in fixed income.

So the opportunities are in switching from treasuries to corporates at expanded spreads and buying back stock. They’re doing a little of both but neither will change their prospects much.

They entered this sell off fully invested in cyclical value stocks. As a result, there’s not much they can do.

Hi Petec,

How did you conclude this?  They've said numerous times, Sam Mitchell, Prem, Brian, Francis...there is no limitation to how much they can allocate to equities, be it float or equity, but they have to make sure the portfolio is in a position where they aren't risking a huge reduction in statutory surplus or liquidity.

Hi Bryggen,

While Fairfax was optimistic about equities after Trump won, they are deep value investors and have only felt that the markets provided tremendous opportunity on two occasions in the last 20 years...the collapse of the tech bubble in 2000 and again in 2009 after the financial crisis.  Even when markets fell 50% each of those times, they were reluctant to invest all of their capital...so it's going to have to take a bigger drop for them to buy alot more.  I think they would rather let Brian do his thing on the bond side right now, then take a ton of risk on equities...I think they will still be highly selective at this point.  That may be awfully conservative, but that's they way they operate. 

Compare that to Charlie Munger who went all in with Daily Journal's excess capital in 2009...today, Daily Journal is the best capitalized media company in the world!  While most other print media is scrambling for investors or donors, Daily Journal will probably never have to worry about financing again...or at least for 100 years or so!   :D

Cheers!
Title: Re: Fairfax 2020
Post by: Xerxes on April 15, 2020, 12:22:16 PM
Petec / StubbleJumper

What is the link between cash at holding co. ... and the $40 billion portfolio ?

I understand that the debt they are raising, recap of insurance entities, dividends, buybacks, and the money they are getting by selling run-off business, and the buyout of the minorities are all financed through the holding company cash. That is clear.

What about the return on the $40 billion portfolio ? the returns generated by $40 billion portfolio are either unrealized (so not usable just yet), realized (some phantom accounting return but some real gain as well) or through dividend/interest streams. How does the interest/dividend generated by the portfolio flow back to the company holding co.

I am trying to understand the mechanics of how one side of the business (portfolio) is funding the overall FFH business (i.e. holding co. cash position)
Title: Re: Fairfax 2020
Post by: Xerxes on April 15, 2020, 12:25:29 PM
Hi Petec,

How did you conclude this?  They've said numerous times, Sam Mitchell, Prem, Brian, Francis...there is no limitation to how much they can allocate to equities, be it float or equity, but they have to make sure the portfolio is in a position where they aren't risking a huge reduction in statutory surplus or liquidity.


I think at this point, when it comes to the FFH optics Petec (like myself and others) would like to be wrong, wrong, wrong and then right !
:-)
Title: Re: Fairfax 2020
Post by: StubbleJumper on April 15, 2020, 12:52:39 PM
Petec / StubbleJumper

What is the link between cash at holding co. ... and the $40 billion portfolio ?

I understand that the debt they are raising, recap of insurance entities, dividends, buybacks, and the money they are getting by selling run-off business, and the buyout of the minorities are all financed through the holding company cash. That is clear.

What about the return on the $40 billion portfolio ? the returns generated by $40 billion portfolio are either unrealized (so not usable just yet), realized (some phantom accounting return but some real gain as well) or through dividend/interest streams. How does the interest/dividend generated by the portfolio flow back to the company holding co.

I am trying to understand the mechanics of how one side of the business (portfolio) is funding the overall FFH business (i.e. holding co. cash position)



Most of the investment portfolio is held in the subs -- like 95% of it or so.  If the subs succeed in their underwriting, and if Hamlin Watsa does a good job of investing the subs' float for them, the subs can be highly profitable and can issue dividends to FFH holdco.  But, the subs can only issue a dividend to the holdco if the insurance regulators in the various jurisdictions approve.  On page 95 of the AR, FFH describes the approved dividend capacity of the major subs.  However, if the subs max out their dividends to the holdco, it results in a reduction of the subs' capital and underwriting capacity, so the challenge is to find that happy medium.

One of the challenges for FFH is to ensure that there is adequate holdco liquidity.  FFH holdco needs cash for interest payments on holdco debt, operating expenses for the holdco, and holdco common and preferred dividends.  In addition to those cash needs, there are also opportunities that the holdco can exploit using cash, such as acquisitions and share buybacks.  If the holdco does not have adequate divvies from the subs, management fees arising from Hamblin Watsa, Fairfax India and Africa, and interest/divvies on holdco investments, it becomes dependent on debt (including the revolver) to finance its activities.  That's all fine and good until capital markets freeze up.


SJ
Title: Re: Fairfax 2020
Post by: Xerxes on April 15, 2020, 12:55:23 PM
On another note, a very good article on Fairfax and Prem:

https://junto.investments/companies/fairfax-financial/


Vinod had a great quote earlier in which he referred to Amazon and FFH.

I own both for about 4 years or so (more or less), on FFH I have been averaging down on every purchase, on AMZN I have been averaging up on every purchase.

I don't consider myself as an top-notch investor and I am sucker for a good story, but a top-notch investor would have probably looked at these two names and my record of averaging up/down at these two specific names, and would have said: this is obvious, don't average down on FFH, in fact sell FFH and buy more AMZN.

Alas, i am who i am :-)
Title: Re: Fairfax 2020
Post by: Xerxes on April 15, 2020, 01:07:23 PM
Most of the investment portfolio is held in the subs -- like 95% of it or so.  If the subs succeed in their underwriting, and if Hamlin Watsa does a good job of investing the subs' float for them, the subs can be highly profitable and can issue dividends to FFH holdco.  But, the subs can only issue a dividend to the holdco if the insurance regulators in the various jurisdictions approve.  On page 95 of the AR, FFH describes the approved dividend capacity of the major subs.  However, if the subs max out their dividends to the holdco, it results in a reduction of the subs' capital and underwriting capacity, so the challenge is to find that happy medium.
SJ

Thanks … I ll have a look at A/R page 95.

putting this in reverse, they said this yesterday in their COVID update "During the first quarter of 2020, Fairfax utilized approximately $400 million and $300 million of its cash and marketable securities to provide capital support to its insurance and reinsurance operations and to pay common and preferred share dividends, respectively."

When FFH injects money into the subs for capital support, as oppose to receive dividends from them, is that akin to equity injection?

If so when FFH does it for an entity like Allied World, which is co-owned with OMERS, does it mean that capital injection by FFH is pro-rated and matched by OMERS ? if FFH taking the full burden of that capital injection and OMERS not participating, that would mean that it is actually doing on its own behalf as well as OMERS, so in fact increasing its stake in Allied World as the expense of OMERS
Title: Re: Fairfax 2020
Post by: StubbleJumper on April 15, 2020, 01:28:35 PM
Most of the investment portfolio is held in the subs -- like 95% of it or so.  If the subs succeed in their underwriting, and if Hamlin Watsa does a good job of investing the subs' float for them, the subs can be highly profitable and can issue dividends to FFH holdco.  But, the subs can only issue a dividend to the holdco if the insurance regulators in the various jurisdictions approve.  On page 95 of the AR, FFH describes the approved dividend capacity of the major subs.  However, if the subs max out their dividends to the holdco, it results in a reduction of the subs' capital and underwriting capacity, so the challenge is to find that happy medium.
SJ

Thanks … I ll have a look at A/R page 95.

putting this in reverse, they said this yesterday in their COVID update "During the first quarter of 2020, Fairfax utilized approximately $400 million and $300 million of its cash and marketable securities to provide capital support to its insurance and reinsurance operations and to pay common and preferred share dividends, respectively."

When FFH injects money into the subs for capital support, as oppose to receive dividends from them, is that akin to equity injection?

If so when FFH does it for an entity like Allied World, which is co-owned with OMERS, does it mean that capital injection by FFH is pro-rated and matched by OMERS ? if FFH taking the full burden of that capital injection and OMERS not participating, that would mean that it is actually doing on its own behalf as well as OMERS, so in fact increasing its stake in Allied World as the expense of OMERS


Yes, it is exactly an equity injection.  Some of us have been bitching and moaning over the past couple of months about the fact that some of the subs did not seem to have adequate capital to crank up their underwriting to exploit this hardening market.  If FFH is confident that it can write a CR or 95 or lower, it makes perfect sense to inject some money into the subs and rapidly grow the book of business.  For every dollar of capital injected into a sub, they can comfortably write $1.50 or $2 of incremental premium and invest those premium dollars in fixed income.  Page 195 of the AR depicts the existing premiums:capital ratios.

If an injection is made into a sub with a minority interest, presumably the minority will also pony up some cash.  Prem made some noise about Riverstone expanding its book in the future....


SJ
Title: Re: Fairfax 2020
Post by: Pedro on April 15, 2020, 01:47:40 PM
Which subs do you believe received the capital?

How would  the average investor determine for themselves in an annual or quarterly report which subs are cutting it close to requiring capital? Any walk thorough or guidance would be greatly appreciated.
Title: Re: Fairfax 2020
Post by: petec on April 15, 2020, 01:58:29 PM
They can’t buy any more equities. Simplistically, they can invest their equity in equities but their float must be invested in fixed income.

So the opportunities are in switching from treasuries to corporates at expanded spreads and buying back stock. They’re doing a little of both but neither will change their prospects much.

They entered this sell off fully invested in cyclical value stocks. As a result, there’s not much they can do.

Hi Petec,

How did you conclude this?  They've said numerous times, Sam Mitchell, Prem, Brian, Francis...there is no limitation to how much they can allocate to equities, be it float or equity, but they have to make sure the portfolio is in a position where they aren't risking a huge reduction in statutory surplus or liquidity.



I asked and they told me. As I understand it regulation does not explicitly forbid it but as you say, they can't risk the surplus or their liquidity, so to all practical intents and purposes they are limited, and it shows in their behaviour, because IIRC they have never invested substantially more than book value in equities. I must check.
Title: Re: Fairfax 2020
Post by: petec on April 15, 2020, 02:05:53 PM
Petec / StubbleJumper

What is the link between cash at holding co. ... and the $40 billion portfolio ?

I understand that the debt they are raising, recap of insurance entities, dividends, buybacks, and the money they are getting by selling run-off business, and the buyout of the minorities are all financed through the holding company cash. That is clear.

What about the return on the $40 billion portfolio ? the returns generated by $40 billion portfolio are either unrealized (so not usable just yet), realized (some phantom accounting return but some real gain as well) or through dividend/interest streams. How does the interest/dividend generated by the portfolio flow back to the company holding co.

I am trying to understand the mechanics of how one side of the business (portfolio) is funding the overall FFH business (i.e. holding co. cash position)

In very rough and simplistic terms the $40bn splits $10bn equity (which FFH own) and $30bn float (which policyholders own, but FFH can keep the investment returns.

Those returns actually show up at the insurance subsidiaries, because that's where the float is. Insurance company profits (which includes investment returns) can be retained to fund growth or dividended up to the holdco.

The holdco's main source of cash flow is insurance subsidiary dividends. It uses these cash flows to service holdco prefs and debt, to pay head office costs, and to pay the dividend.

That's all fine. The issue at the moment is that the holdco actually needs to put money into the insurance subs to support growth (rather than receive dividends from them) and also needs to fund the purchase the Brit and eventually Allied minorities (Eurolife will fund the purchase of the Eurolife minority itself).

That's why holdco cash looks quite tight over the next few years. But the key point I think you're getting at is that they can't use the $40bn portfolio to service holdco cash needs because it is held at the insurance subsidiaries against future claims.

Edit: sorry, I didn't see that SJ had already answered this!
Title: Re: Fairfax 2020
Post by: petec on April 15, 2020, 02:07:14 PM
Which subs do you believe received the capital?

How would  the average investor determine for themselves in an annual or quarterly report which subs are cutting it close to requiring capital? Any walk thorough or guidance would be greatly appreciated.

The annual letter gives statutory surplus/premiums and you can see that Odyssey and Allied are the two that have significant excess capital.

The quarterly and annual reports detail capital injections into the subs.
Title: Re: Fairfax 2020
Post by: petec on April 15, 2020, 02:13:32 PM
If an injection is made into a sub with a minority interest, presumably the minority will also pony up some cash. 
SJ

I would also presume this - but if not, then we may be double counting the need to inject equity and buy in minorities. It is possible they can achieve both objectives with one outlay.
Title: Re: Fairfax 2020
Post by: StubbleJumper on April 15, 2020, 02:23:38 PM
Which subs do you believe received the capital?

How would  the average investor determine for themselves in an annual or quarterly report which subs are cutting it close to requiring capital? Any walk thorough or guidance would be greatly appreciated.


Well, the quick way to eye-ball it is to look at page 95 of the AR which depicts dividend capacity, because that gives you a sense of "excess capital."  Then you can go to page 195 and look at the premiums:surplus ratio.

We know that last year, FFH drew a divvy from C&F and then for whatever reason, reinjected some capital.  When you look at C&F's dividend capacity on page 95, it was $140m, and then when you look at C&F's premiums:surplus ratio on page 195 it's 1.7:1.  Usually you don't see that ratio go above 2:1.  So, with a surplus of $1.4B, perhaps C&F could bump up its net written premiums by $500m to $2.8B (see page 16).  The problem is that C&F increased its net written by 18% during 2019, and 33% in Q4 2019 compared to Q4 2018 (page 5).  So you have a sub that looks to be a little lean on capital, received an injection in 2019 and is probably growing its premium at a pace of 20%+.  It cannot sustain that kind of premium growth throughout 2020 without a capital injection. 

Northbridge is in a similar situation so they probably would benefit from a bit of capital too, but it's a less pronounced "problem." 

Allied has lots of capital, while Zenith and Brit did not grow their book during 2019.  Odyssey has lots of capital, but it has also shot out the lights in the past when pricing got stupid, so it would not at all surprise me if their book could outgrow their capital.


SJ
Title: Re: Fairfax 2020
Post by: petec on April 15, 2020, 02:35:52 PM
Which subs do you believe received the capital?

How would  the average investor determine for themselves in an annual or quarterly report which subs are cutting it close to requiring capital? Any walk thorough or guidance would be greatly appreciated.


Well, the quick way to eye-ball it is to look at page 95 of the AR which depicts dividend capacity, because that gives you a sense of "excess capital."  Then you can go to page 195 and look at the premiums:surplus ratio.

We know that last year, FFH drew a divvy from C&F and then for whatever reason, reinjected some capital.  When you look at C&F's dividend capacity on page 95, it was $140m, and then when you look at C&F's premiums:surplus ratio on page 195 it's 1.7:1.  Usually you don't see that ratio go above 2:1.  So, with a surplus of $1.4B, perhaps C&F could bump up its net written premiums by $500m to $2.8B (see page 16).  The problem is that C&F increased its net written by 18% during 2019, and 33% in Q4 2019 compared to Q4 2018 (page 5).  So you have a sub that looks to be a little lean on capital, received an injection in 2019 and is probably growing its premium at a pace of 20%+.  It cannot sustain that kind of premium growth throughout 2020 without a capital injection. 

Northbridge is in a similar situation so they probably would benefit from a bit of capital too, but it's a less pronounced "problem." 

Allied has lots of capital, while Zenith and Brit did not grow their book during 2019.  Odyssey has lots of capital, but it has also shot out the lights in the past when pricing got stupid, so it would not at all surprise me if their book could outgrow their capital.


SJ

SJ I don’t have the stats to hand. How much excess capital does Allied appear to have?
Title: Re: Fairfax 2020
Post by: StubbleJumper on April 15, 2020, 02:39:35 PM
Which subs do you believe received the capital?

How would  the average investor determine for themselves in an annual or quarterly report which subs are cutting it close to requiring capital? Any walk thorough or guidance would be greatly appreciated.


Well, the quick way to eye-ball it is to look at page 95 of the AR which depicts dividend capacity, because that gives you a sense of "excess capital."  Then you can go to page 195 and look at the premiums:surplus ratio.

We know that last year, FFH drew a divvy from C&F and then for whatever reason, reinjected some capital.  When you look at C&F's dividend capacity on page 95, it was $140m, and then when you look at C&F's premiums:surplus ratio on page 195 it's 1.7:1.  Usually you don't see that ratio go above 2:1.  So, with a surplus of $1.4B, perhaps C&F could bump up its net written premiums by $500m to $2.8B (see page 16).  The problem is that C&F increased its net written by 18% during 2019, and 33% in Q4 2019 compared to Q4 2018 (page 5).  So you have a sub that looks to be a little lean on capital, received an injection in 2019 and is probably growing its premium at a pace of 20%+.  It cannot sustain that kind of premium growth throughout 2020 without a capital injection. 

Northbridge is in a similar situation so they probably would benefit from a bit of capital too, but it's a less pronounced "problem." 

Allied has lots of capital, while Zenith and Brit did not grow their book during 2019.  Odyssey has lots of capital, but it has also shot out the lights in the past when pricing got stupid, so it would not at all surprise me if their book could outgrow their capital.


SJ

SJ I don’t have the stats to hand. How much excess capital does Allied appear to have?


Allied's dividend capacity was $800m as at Dec 31.  Premiums to surplus was 0.6:1.  So, they could increase their premiums by maybe 150% and it would still only be 1.5:1?


SJ
Title: Re: Fairfax 2020
Post by: petec on April 15, 2020, 02:44:56 PM
Which subs do you believe received the capital?

How would  the average investor determine for themselves in an annual or quarterly report which subs are cutting it close to requiring capital? Any walk thorough or guidance would be greatly appreciated.


Well, the quick way to eye-ball it is to look at page 95 of the AR which depicts dividend capacity, because that gives you a sense of "excess capital."  Then you can go to page 195 and look at the premiums:surplus ratio.

We know that last year, FFH drew a divvy from C&F and then for whatever reason, reinjected some capital.  When you look at C&F's dividend capacity on page 95, it was $140m, and then when you look at C&F's premiums:surplus ratio on page 195 it's 1.7:1.  Usually you don't see that ratio go above 2:1.  So, with a surplus of $1.4B, perhaps C&F could bump up its net written premiums by $500m to $2.8B (see page 16).  The problem is that C&F increased its net written by 18% during 2019, and 33% in Q4 2019 compared to Q4 2018 (page 5).  So you have a sub that looks to be a little lean on capital, received an injection in 2019 and is probably growing its premium at a pace of 20%+.  It cannot sustain that kind of premium growth throughout 2020 without a capital injection. 

Northbridge is in a similar situation so they probably would benefit from a bit of capital too, but it's a less pronounced "problem." 

Allied has lots of capital, while Zenith and Brit did not grow their book during 2019.  Odyssey has lots of capital, but it has also shot out the lights in the past when pricing got stupid, so it would not at all surprise me if their book could outgrow their capital.


SJ

SJ I don’t have the stats to hand. How much excess capital does Allied appear to have?


Allied's dividend capacity was $800m as at Dec 31.  Premiums to surplus was 0.6:1.  So, they could increase their premiums by maybe 150% and it would still only be 1.5:1?


SJ

Yes. Which would be a nice surprise.

Arguably more likely, Allied could buy a decent chunk of the OMERS minority stake (which I recall being $1.5bn) themselves and still grow premiums.

Brit could also afford to its the OMERS minority.

That somewhat improves the picture on holdco liquidity.

 
Title: Re: Fairfax 2020
Post by: StubbleJumper on April 15, 2020, 03:02:58 PM
Which subs do you believe received the capital?

How would  the average investor determine for themselves in an annual or quarterly report which subs are cutting it close to requiring capital? Any walk thorough or guidance would be greatly appreciated.


Well, the quick way to eye-ball it is to look at page 95 of the AR which depicts dividend capacity, because that gives you a sense of "excess capital."  Then you can go to page 195 and look at the premiums:surplus ratio.

We know that last year, FFH drew a divvy from C&F and then for whatever reason, reinjected some capital.  When you look at C&F's dividend capacity on page 95, it was $140m, and then when you look at C&F's premiums:surplus ratio on page 195 it's 1.7:1.  Usually you don't see that ratio go above 2:1.  So, with a surplus of $1.4B, perhaps C&F could bump up its net written premiums by $500m to $2.8B (see page 16).  The problem is that C&F increased its net written by 18% during 2019, and 33% in Q4 2019 compared to Q4 2018 (page 5).  So you have a sub that looks to be a little lean on capital, received an injection in 2019 and is probably growing its premium at a pace of 20%+.  It cannot sustain that kind of premium growth throughout 2020 without a capital injection. 

Northbridge is in a similar situation so they probably would benefit from a bit of capital too, but it's a less pronounced "problem." 

Allied has lots of capital, while Zenith and Brit did not grow their book during 2019.  Odyssey has lots of capital, but it has also shot out the lights in the past when pricing got stupid, so it would not at all surprise me if their book could outgrow their capital.


SJ

SJ I don’t have the stats to hand. How much excess capital does Allied appear to have?


Allied's dividend capacity was $800m as at Dec 31.  Premiums to surplus was 0.6:1.  So, they could increase their premiums by maybe 150% and it would still only be 1.5:1?


SJ

Yes. Which would be a nice surprise.

Arguably more likely, Allied could buy a decent chunk of the OMERS minority stake (which I recall being $1.5bn) themselves and still grow premiums.

Brit could also afford to buy the OMERS minority.

That somewhat changes the picture on holdco liquidity.


Yes, the Allied buy-up is $1.5B, but FFH doesn't have to make that decision for another 3 or 4 years.  FFH could definitely buy the Allied stake and then take a $500m divvy from Allied to offset the cost.  But mostly, I am not preoccupied with the Allied buy-up because there is still plenty of time for capital markets to normalise before FFH needs to do anything.

SJ
Title: Re: Fairfax 2020
Post by: bearprowler6 on April 15, 2020, 03:07:33 PM
I was pleased to see Fairfax release its Q1 update. Hopefully this starts a new trend where they communicate more frequently (quarterly calls and the annual meeting are not sufficient).

I was relieved and somewhat surprised that the RiverstoneUK deal closed without adjustment on March 31/20. Fairfax needed that $600 million big time.

Having said that I am not sure that the hard market is guaranteed. Sure the Q1 premium growth was nice to see but this is somewhat a rear-view mirror story. Given the economic back drop that we are now experiencing I think that premium growth is more than likely to slow considerably given the financial strain that so many companies are under. In addition, the current environment is likely to result in higher claims experience than expected in certain lines (e.g., workers comp).

As for the draw down in the revolver----yes it was the right thing to do however it shows how cash tight they really were/are.

But my biggest wish is they stay away from any significant new equity investments. I have absolutely no confidence in their ability to "select stocks" that will outperform. The equity team should focus on getting out of the equities they are in currently and leave any new investing to Brian B who will once again work his magic in the corporate bond market.

Overall...it was a good update but the long term became quite a bit longer if you ask me.
Title: Re: Fairfax 2020
Post by: Parsad on April 15, 2020, 05:45:19 PM
They can’t buy any more equities. Simplistically, they can invest their equity in equities but their float must be invested in fixed income.

So the opportunities are in switching from treasuries to corporates at expanded spreads and buying back stock. They’re doing a little of both but neither will change their prospects much.

They entered this sell off fully invested in cyclical value stocks. As a result, there’s not much they can do.

Hi Petec,

How did you conclude this?  They've said numerous times, Sam Mitchell, Prem, Brian, Francis...there is no limitation to how much they can allocate to equities, be it float or equity, but they have to make sure the portfolio is in a position where they aren't risking a huge reduction in statutory surplus or liquidity.



I asked and they told me. As I understand it regulation does not explicitly forbid it but as you say, they can't risk the surplus or their liquidity, so to all practical intents and purposes they are limited, and it shows in their behaviour, because IIRC they have never invested substantially more than book value in equities. I must check.

They only had about 30% of shareholder equity in equities at the end of 2019...$5.3B versus $17.3B in shareholder equity.  Assume book value fell 15% to date...to $14B, but their equity portfolio is off 40% to $3B...now equity investments to shareholder equity is 21%.  They invested up to 60-70% of shareholder equity into equities at different times during their history...that means they could double or triple their current equity exposure if they wanted and still stay under historical ratios. 

I certainly don't think they are going to do that presently, but if stock market prices fell even more dramatically, there is no restriction on how much they could put in equities, and they could certainly go far higher than what they presently have.  Cheers!
Title: Re: Fairfax 2020
Post by: Cigarbutt on April 15, 2020, 08:47:33 PM
They can’t buy any more equities. Simplistically, they can invest their equity in equities but their float must be invested in fixed income.
So the opportunities are in switching from treasuries to corporates at expanded spreads and buying back stock. They’re doing a little of both but neither will change their prospects much.
They entered this sell off fully invested in cyclical value stocks. As a result, there’s not much they can do.
Hi Petec,
How did you conclude this?  They've said numerous times, Sam Mitchell, Prem, Brian, Francis...there is no limitation to how much they can allocate to equities, be it float or equity, but they have to make sure the portfolio is in a position where they aren't risking a huge reduction in statutory surplus or liquidity.
I asked and they told me. As I understand it regulation does not explicitly forbid it but as you say, they can't risk the surplus or their liquidity, so to all practical intents and purposes they are limited, and it shows in their behaviour, because IIRC they have never invested substantially more than book value in equities. I must check.
They only had about 30% of shareholder equity in equities at the end of 2019...$5.3B versus $17.3B in shareholder equity.  Assume book value fell 15% to date...to $14B, but their equity portfolio is off 40% to $3B...now equity investments to shareholder equity is 21%.  They invested up to 60-70% of shareholder equity into equities at different times during their history...that means they could double or triple their current equity exposure if they wanted and still stay under historical ratios. 
I certainly don't think they are going to do that presently, but if stock market prices fell even more dramatically, there is no restriction on how much they could put in equities, and they could certainly go far higher than what they presently have.  Cheers!
Added for historical perspective and using the following for data:
-table found towards the end of annual reports and labeled "investments" a few years back and "overview of investment performance" more recently
-using total equity (including NCI)
-keeping FI and FA in the consolidated numbers and including investments in associates as equity or equity-like
-using total equity and equity-like over total shareholders equity, TE/TS
-using total equity and equity-like over total investments, TE/TI

-Period leading to the dot-com
TE/TS 25-35%, TE/TI around 8 to 10%   with significant hedges in place (index puts and short position on basket of tech stocks)
Personal note: I remember fairly well (i'm quite sure it was) Roger Lace answering a question about the relevance of maintaining S&P puts around that time. i don't recall the exact words but the gist of it was that it would have been inappropriate NOT to have them, at that specific time.

-Period leading to the GFC
TE/TS 50-90%, TE/TI from about 12% rising to about 22% in 2008   with (from 2004 on) significant equity hedges in place (about 50%)

-2009
TE/TS 74%, TE/TI 27%   a time when FFH was wildly profitable and when markets were...lower than now (absolute and relative basis)

-2010-2016
TE/TS 50-60%, TE/TI 18-22%   with (from 2010 on) significant equity hedges in place (went from 30 to 100% hedge in 2010)

-2017-9
TE/TS 49% rising to 59%, TE/TI 23% rising to 27%   with no equity hedge

IMHO, ratings agency (and regulators) have always kept an eye on the unusual degree of equity exposure for a typical P+C (re)insurer. The issue was dealt with lumpy but overall good results, keeping at least 1B at the holding level and...hedging.
At this point, FFH maintains the same level of equity acrobatics but they're performing at a higher level with no net. It can still be an impressive show but i find it unusual for an insurer and wonder if they're not one step away from a share issue.
Title: Re: Fairfax 2020
Post by: petec on April 16, 2020, 12:39:25 AM
@SJ - of course, using YE19 dividend capacity is misleading when we know that capital has since been destroyed at the subs. But assuming the stocks come back, and I think most of them will, Allied can probably largely fund the buyout of its own minority over the next 4 years. It just can't do that and grow.

@bearprowler - I sincerely hope Fairfax do not to communicate more frequently. They were right to this time, because it's a weird quarter and they know they will get questions at the AGM. But normally, 90 days is the blink of an eye in business terms.

@Sanjeev - I'll be quite happy if you're right but that's not my understanding. Thinking back, they may not have drawn the link between book value and equities quite as clearly as I did upthread - apologies for the confusion. But they have said publicly that equities will generally be 25-30% of the portfolio (which very roughly = common equity), and that there is a practical limit to how high they can go. For example, Rivett said on the 4q18 call that they will generally have 25-30% of the portfolio in equities and that "we're roughly at the upper end of our limit...given the rules and regulations...in the reinsurance and insurance companies". He didn't mention ratings agencies but I believe they represent a restriction, too. BTW for the purposes of this discussion I believe equities refers to all equity exposure, whether private or public and no matter how accounted.

Either way I agree they won't pile in at these levels, at least not to markets generally, although they might find a few of the levered smallcaps in troubled industries that they seem to specialise in!

All that said, they might be able to get good equity upside from converts or pref/warrant deals, without actually investing more in equities.
Title: Re: Fairfax 2020
Post by: petec on April 20, 2020, 07:01:16 AM
I enjoyed Prem's clarity on the topic of how much they could invest in equities at the AGM:

Q: How high could you take that percentage of the portfolio for equity exposure?

A: We have selected about that, you know, what we have today and you can always trade something that we may not - we like a lot, but we like something even better higher quality. So we've done that and selectively but situation at the, will that be like but yes so that's where we are right now on our equity portfolio.

 :o
Title: Re: Fairfax 2020
Post by: Xerxes on April 20, 2020, 03:03:08 PM
This is hilarious. Different softer style.

Charlie Munger would have said: "that is how we like it; nothing to add"

BTW if you have a link to the AGM transcript (FFH, FIH) please do share.
I listened to them, but had a hard time hearing sometimes.
Title: Re: Fairfax 2020
Post by: StubbleJumper on April 20, 2020, 03:51:22 PM
This is hilarious. Different softer style.

Charlie Munger would have said: "that is how we like it; nothing to add"

BTW if you have a link to the AGM transcript (FFH, FIH) please do share.
I listened to them, but had a hard time hearing sometimes.


+1 on the transcript request.  I rarely bother listening to the conference calls because I quickly tire of the "rah-rah, the past was great and the future will be great" part of the calls.  I can normally read a quarterly conference call transcript from Seeking Alpha in about 10 minutes, which is a lot better than listening for 60.  But, I saw no transcript of the annual meeting, so I had to listen to a two hour call.  Suffice it to say that the call gave me a year's worth of BS about how great the past was, how valuable the culture is and how the best is yet to come.  If somebody can point the way to a transcript of that meeting, it will guarantee that I will not have to endure a replay!


SJ
Title: Re: Fairfax 2020
Post by: TwoCitiesCapital on April 20, 2020, 04:42:44 PM
I enjoyed Prem's clarity on the topic of how much they could invest in equities at the AGM:

Q: How high could you take that percentage of the portfolio for equity exposure?

A: We have selected about that, you know, what we have today and you can always trade something that we may not - we like a lot, but we like something even better higher quality. So we've done that and selectively but situation at the, will that be like but yes so that's where we are right now on our equity portfolio.

 :o

If I had to take a stab at interpreting that, it likely means they will NOT be increasing equity allocation and will be doing relative value trades with the existing portfolio.

There' still going to be meat on the bone for them in fixed income which is GREAT! But definitely not the outcome we would've envisioned from the "financial ark" that Fairfax was setting itself up to be when it was hedged.

Title: Re: Fairfax 2020
Post by: petec on April 21, 2020, 12:10:17 AM
I enjoyed Prem's clarity on the topic of how much they could invest in equities at the AGM:

Q: How high could you take that percentage of the portfolio for equity exposure?

A: We have selected about that, you know, what we have today and you can always trade something that we may not - we like a lot, but we like something even better higher quality. So we've done that and selectively but situation at the, will that be like but yes so that's where we are right now on our equity portfolio.

 :o


If I had to take a stab at interpreting that, it likely means they will NOT be increasing equity allocation and will be doing relative value trades with the existing portfolio.

There' still going to be meat on the bone for them in fixed income which is GREAT! But definitely not the outcome we would've envisioned from the "financial ark" that Fairfax was setting itself up to be when it was hedged.

Agreed.

On a separate note with oil at -$37 those deflation swaps might actually be worth something.  ;) ::)
Title: Re: Fairfax 2020
Post by: mcliu on April 24, 2020, 01:46:04 PM
https://www.fairfax.ca/news/press-releases/press-release-details/2020/Fairfax-Announces-Pricing-of-Senior-Notes-Offering/default.aspx

US$650M 10Y 4.625%
Title: Re: Fairfax 2020
Post by: StubbleJumper on April 24, 2020, 05:12:28 PM
https://www.fairfax.ca/news/press-releases/press-release-details/2020/Fairfax-Announces-Pricing-of-Senior-Notes-Offering/default.aspx

US$650M 10Y 4.625%


That is excellent.  With the disruption in financial markets, I had anticipated that they would not be able to float debt at a reasonable rate.  However, this rate is perfectly fine and the amount is only $100m less than what I thought they might need.

About a month ago, I listed a half dozen possible elements of a "successful" year for FFH in the context of the recent turmoil.  This is one of them.  A double-digit increase in Net earned with a mid-90s CR was another. 

Good to see!

SJ


SJ
Title: Re: Fairfax 2020
Post by: beerbaron on April 24, 2020, 06:31:16 PM

https://www.fairfax.ca/news/press-releases/press-release-details/2020/Fairfax-Announces-Pricing-of-Senior-Notes-Offering/default.aspx

US$650M 10Y 4.625%


That is excellent.  With the disruption in financial markets, I had anticipated that they would not be able to float debt at a reasonable rate.  However, this rate is perfectly fine and the amount is only $100m less than what I thought they might need.

About a month ago, I listed a half dozen possible elements of a "successful" year for FFH in the context of the recent turmoil.  This is one of them.  A double-digit increase in Net earned with a mid-90s CR was another. 

Good to see!

SJ


SJ

Don't celebrate yet, the notes will be offered but there might be no takers at the proposed rate.

BeerBaron
Title: Re: Fairfax 2020
Post by: StubbleJumper on April 24, 2020, 07:16:22 PM

https://www.fairfax.ca/news/press-releases/press-release-details/2020/Fairfax-Announces-Pricing-of-Senior-Notes-Offering/default.aspx

US$650M 10Y 4.625%


That is excellent.  With the disruption in financial markets, I had anticipated that they would not be able to float debt at a reasonable rate.  However, this rate is perfectly fine and the amount is only $100m less than what I thought they might need.

About a month ago, I listed a half dozen possible elements of a "successful" year for FFH in the context of the recent turmoil.  This is one of them.  A double-digit increase in Net earned with a mid-90s CR was another. 

Good to see!

SJ


SJ

Don't celebrate yet, the notes will be offered but there might be no takers at the proposed rate.

BeerBaron


I thought that it was a private placement, meaning that it's a done deal.  Is there something specific that makes you understand something else?

SJ
Title: Re: Fairfax 2020
Post by: beerbaron on April 24, 2020, 07:25:24 PM
You are right, it seems the financing is secured. At first glance I thought  they were going to offer the notes to a bunch of bankers.

BeerBaron
Title: Re: Fairfax 2020
Post by: StubbleJumper on April 24, 2020, 07:29:52 PM
You are right, it seems the financing is secured. At first glance I thought  they were going to offer the notes to a bunch of bankers.

BeerBaron


But, you are right that it will feel more secure when they issue a second press release in a week or so saying that the deal has been transacted (usually there are two press releases for these things?).


SJ
Title: Re: Fairfax 2020
Post by: beerbaron on April 24, 2020, 07:59:07 PM
Yeah, the closing date is in a week so in a week we can celebrate.

BeerBaron
Title: Re: Fairfax 2020
Post by: petec on April 24, 2020, 11:51:25 PM
The biggest thing this does is release the risk of breaching the covenant on the revolver. Good news. I had a feeling this was coming - Prem made a pointed comment at the AGM about having bond market access.
Title: Re: Fairfax 2020
Post by: Cigarbutt on April 25, 2020, 04:34:23 AM
Lately, there has been great demand to meet rising supply of investment-grade debt securities, especially with the newly erected backstops and FFH did well to wait a bit for the dust to settle.
It's interesting to compare to their last June 2019 500M CDN debt issue (unaudited and some adjustments because of the CDN USD differential):
June 2019 issue= 10-yr risk-free=1.53% + IG spread=2.38% + FFH-specific spread=0.33%   =)  4.24%
April 2020 issue= 10-yr risk-free=0.61% + IG spread=3.26% + FFH-specific spread=0.78%   =)  4.65%
By waiting a few days (since the "peak" CV vertigo on March 23), the IG spread has come down by 0.61% and i would bet that the FFH-specific spread has come down also.

There are many potential perspectives on this but they recently mentioned that they used part of the funds obtained on the revolver to buy corporate debt and now they are paying back the revolver using funds obtained while issuing Baa3 debt.
https://www.moodys.com/research/Moodys-rates-Fairfax-Financials-senior-notes-Baa3--PR_1000002674
Title: Re: Fairfax 2020
Post by: TwoCitiesCapital on April 25, 2020, 07:27:09 AM
Just seems strange. Why plow $2.9 billion into corporate debt yielding 4.25% to just then go float a note for $600 million paying 4.65%?

I mean, I get that the money is in different places with the subsidiaries owning the corporates and the holding company issuing the debt, but this seems like bad economics to me unless if the revolver is more onerous and this is repaying that?
Title: Re: Fairfax 2020
Post by: petec on April 25, 2020, 07:43:53 AM
The $2.9bn is part of the float. It’s not just in a different place, it has a fundamentally different purpose and it’s not really owned by FFH because it is “owed” to policyholders. For example, it cannot be used to recapitalize the insurance subs to help them grow in a hard market, and it can’t be used to buy back FFH shares for cancellation.

The cash at the holdco does belong to FFH. The question is how it’s funded. It can be equity or debt and if it’s debt it can be revolver or term. All that’s happening here is that they’re terming out most of the portion of the revolver debt that they’ve already spent (but not the portion they drew down last quarter as a precaution).

If one took your line of thinking, it would never make sense to buy treasuries, which by definition yield less than the cost of debt or equity funding. But it does make sense to buy treasuries, because they’re funded by float at (hopefully) a sub-100 CR.
Title: Re: Fairfax 2020
Post by: StubbleJumper on April 25, 2020, 08:19:46 AM
Just seems strange. Why plow $2.9 billion into corporate debt yielding 4.25% to just then go float a note for $600 million paying 4.65%?

I mean, I get that the money is in different places with the subsidiaries owning the corporates and the holding company issuing the debt, but this seems like bad economics to me unless if the revolver is more onerous and this is repaying that?


I think the short answer is that FFH floated 10-year debt, which they need for the longer term financing of the holdco, while the corporates at 4.25% will likely be sold in roughly a year for a realised gain.  What is more, the corporates were largely funded from the revolver, which is a good tool to use opportunistically to exploit the temporary displacement of credit markets, but it's not a great tool for the longer term financing of the holdco. 

The money was made when FFH bought the corporates a few weeks ago, but it won't be realised until 2021.


SJ
Title: Re: Fairfax 2020
Post by: petec on April 25, 2020, 08:26:41 AM
Just seems strange. Why plow $2.9 billion into corporate debt yielding 4.25% to just then go float a note for $600 million paying 4.65%?

I mean, I get that the money is in different places with the subsidiaries owning the corporates and the holding company issuing the debt, but this seems like bad economics to me unless if the revolver is more onerous and this is repaying that?


I think the short answer is that FFH floated 10-year debt, which they need for the longer term financing of the holdco, while the corporates at 4.25% will likely be sold in roughly a year for a realised gain.  What is more, the corporates were largely funded from the revolver, which is a good tool to use opportunistically to exploit the temporary displacement of credit markets, but it's not a great tool for the longer term financing of the holdco. 

The money was made when FFH bought the corporates a few weeks ago, but it won't be realised until 2021.


SJ

The corporates were bought in the insurance subs investment portfolios. They’re funded by premiums, not holdco debt.

I think you’re confusing the part of the revolver that was drawn down in Q1, which was reinvested “at a positive spread” (which may imply corporates, but they didn’t say that) but basically sits at the holdco as cash or near-cash in case of emergencies, with the part that was drawn down earlier and used for general holdco purposes, like recapping the subs, and has now been termed out.
Title: Re: Fairfax 2020
Post by: StubbleJumper on April 25, 2020, 08:43:32 AM
Just seems strange. Why plow $2.9 billion into corporate debt yielding 4.25% to just then go float a note for $600 million paying 4.65%?

I mean, I get that the money is in different places with the subsidiaries owning the corporates and the holding company issuing the debt, but this seems like bad economics to me unless if the revolver is more onerous and this is repaying that?


I think the short answer is that FFH floated 10-year debt, which they need for the longer term financing of the holdco, while the corporates at 4.25% will likely be sold in roughly a year for a realised gain.  What is more, the corporates were largely funded from the revolver, which is a good tool to use opportunistically to exploit the temporary displacement of credit markets, but it's not a great tool for the longer term financing of the holdco. 

The money was made when FFH bought the corporates a few weeks ago, but it won't be realised until 2021.


SJ

The corporates were bought in the insurance subs investment portfolios. They’re funded by premiums, not holdco debt.

I think you’re confusing the part of the revolver that was drawn down in Q1, which was reinvested “at a positive spread” (which may imply corporates, but they didn’t say that) but basically sits at the holdco as cash or near-cash in case of emergencies, with the part that was drawn down earlier and used for general holdco purposes, like recapping the subs, and has now been termed out.



You are correct that FFH did not explicitly state that the revolver drawdown was invested in corporates, but simply that it was invested at a favourable spread.    I took the mental short cut to assume that the only way to get a favourable spread would be to invest it in risky bonds (risk-free only yields about 0.50%).  But, it is always possible that they found some sort of state/provincial/municipal debt or some sort of agency debt that yields enough to constitute a favourable spread.  Whatever sort of risky bonds they bought at the holdco level are likely to be sold in 2021 if the risk-free returns to a sane level and the spreads narrow back to near pre-covid levels. 

Out of curiosity, where did you see that the revolver draw for re-capping the subs has been termed out?  The risk of using a revolver for that purpose has always been that it needs to be regularly renegotiated and who knows what kind of covenants the lender will end up demanding.  But, if it's termed out for, say 5 years, that would be great.


SJ
Title: Re: Fairfax 2020
Post by: bearprowler6 on April 25, 2020, 09:05:47 AM
Just seems strange. Why plow $2.9 billion into corporate debt yielding 4.25% to just then go float a note for $600 million paying 4.65%?

I mean, I get that the money is in different places with the subsidiaries owning the corporates and the holding company issuing the debt, but this seems like bad economics to me unless if the revolver is more onerous and this is repaying that?

Regardless of how you slice it or try to spin it.....Fairfax is over leveraged and continues to have considerable funds (at the corporate as well as the subsidiary levels) tied up into a long series of illiquid under-performing equity investments as well as highly questionable non-publically traded  non-insurance subsidiaries. Furthermore, with Paul Rivett stepping aside (and I continue not to believe the party line on his reasons why) the company is without a solid executive transition plan despite its aging executive management team. In addition, the industry as a whole faces massive headwinds given the current ultra low interest rate environment. The weakness of their  focus on restaurants and retail has now been exposed. Their restaurant bet via Recipe is simply not financially viable given how restaurants will need to restructure until a COVID vaccine exists.

And yes I know --- their equity picks (Eurobank, Blackberry, Atlas Corp etc) are currently offering great long term value at these levels. Do they offer the best long term value (all things considered) of all the possible equity investments out there at this time? No way! And I am not talking short term here---I mean over any reasonable long term horizon.

I could go on but why bother. Those of us who have seen the light are out of this stock completely or have greatly reduced our positions. Those who still believe will learn soon enough.


I think the short answer is that FFH floated 10-year debt, which they need for the longer term financing of the holdco, while the corporates at 4.25% will likely be sold in roughly a year for a realised gain.  What is more, the corporates were largely funded from the revolver, which is a good tool to use opportunistically to exploit the temporary displacement of credit markets, but it's not a great tool for the longer term financing of the holdco. 

The money was made when FFH bought the corporates a few weeks ago, but it won't be realised until 2021.


SJ

The corporates were bought in the insurance subs investment portfolios. They’re funded by premiums, not holdco debt.

I think you’re confusing the part of the revolver that was drawn down in Q1, which was reinvested “at a positive spread” (which may imply corporates, but they didn’t say that) but basically sits at the holdco as cash or near-cash in case of emergencies, with the part that was drawn down earlier and used for general holdco purposes, like recapping the subs, and has now been termed out.



You are correct that FFH did not explicitly state that the revolver drawdown was invested in corporates, but simply that it was invested at a favourable spread.    I took the mental short cut to assume that the only way to get a favourable spread would be to invest it in risky bonds (risk-free only yields about 0.50%).  But, it is always possible that they found some sort of state/provincial/municipal debt or some sort of agency debt that yields enough to constitute a favourable spread.  Whatever sort of risky bonds they bought at the holdco level are likely to be sold in 2021 if the risk-free returns to a sane level and the spreads narrow back to near pre-covid levels. 

Out of curiosity, where did you see that the revolver draw for re-capping the subs has been termed out?  The risk of using a revolver for that purpose has always been that it needs to be regularly renegotiated and who knows what kind of covenants the lender will end up demanding.  But, if it's termed out for, say 5 years, that would be great.


SJ
Title: Re: Fairfax 2020
Post by: petec on April 25, 2020, 09:24:01 AM
Just seems strange. Why plow $2.9 billion into corporate debt yielding 4.25% to just then go float a note for $600 million paying 4.65%?

I mean, I get that the money is in different places with the subsidiaries owning the corporates and the holding company issuing the debt, but this seems like bad economics to me unless if the revolver is more onerous and this is repaying that?


I think the short answer is that FFH floated 10-year debt, which they need for the longer term financing of the holdco, while the corporates at 4.25% will likely be sold in roughly a year for a realised gain.  What is more, the corporates were largely funded from the revolver, which is a good tool to use opportunistically to exploit the temporary displacement of credit markets, but it's not a great tool for the longer term financing of the holdco. 

The money was made when FFH bought the corporates a few weeks ago, but it won't be realised until 2021.


SJ

The corporates were bought in the insurance subs investment portfolios. They’re funded by premiums, not holdco debt.

I think you’re confusing the part of the revolver that was drawn down in Q1, which was reinvested “at a positive spread” (which may imply corporates, but they didn’t say that) but basically sits at the holdco as cash or near-cash in case of emergencies, with the part that was drawn down earlier and used for general holdco purposes, like recapping the subs, and has now been termed out.



You are correct that FFH did not explicitly state that the revolver drawdown was invested in corporates, but simply that it was invested at a favourable spread.    I took the mental short cut to assume that the only way to get a favourable spread would be to invest it in risky bonds (risk-free only yields about 0.50%).  But, it is always possible that they found some sort of state/provincial/municipal debt or some sort of agency debt that yields enough to constitute a favourable spread.  Whatever sort of risky bonds they bought at the holdco level are likely to be sold in 2021 if the risk-free returns to a sane level and the spreads narrow back to near pre-covid levels. 

Out of curiosity, where did you see that the revolver draw for re-capping the subs has been termed out?  The risk of using a revolver for that purpose has always been that it needs to be regularly renegotiated and who knows what kind of covenants the lender will end up demanding.  But, if it's termed out for, say 5 years, that would be great.


SJ

Well in effect they’ve termed it out. They’ve just issued a 10y bond and the stated use of proceeds is to repay the revolver.

Maybe they’ll keep the revolver wholly drawn, but cash/near cash at the holdco then rises. Same effect.

Agree re risk free rate at 0.5% but I guess my broader point is I did not take the $2.9bn of corporates to include holdco reinvestment of the revolver draw. I assumed that was all in the investment portfolio.
Title: Re: Fairfax 2020
Post by: Bryggen on April 26, 2020, 05:20:17 PM
hi all,
would love to hear your take on the depressed share price. Bought 5 years ago in the high 500 and it hasn't turned out quite as good as I expected. Now, the drop we suffered the past month or so hurts. As most of you, I am in for the long run with FFH , but still have some concerns of the inability to drive the share price to its actual value.
Any thoughts?
Thanks!
Title: Re: Fairfax 2020
Post by: Xerxes on April 26, 2020, 06:03:50 PM
I will give my opinion. The current downdraft on the share price is probably due to some and of points below.

- anticipating a mark-to-market decline on BV due to the positions that are marked-to-market (i.e. BB etc.)
- liquidity concern with holding company
- the trading liquidity becomes apparent during market downturn
- FX rate USD:CAD; share price today in $CAD is the same as in 2013, but with a very different FX rate.
- systematic concern with larger holdings that are equity accounted (Recipe, Seanspan, Eurobank) all of which are getting a covid broadside hit
 
of the above, (1) and (5) are general market condition, so will reverse in time. And then it becomes function of good those individual picks were as oppose to correlation racing to 1.
(4) and (3) you cannot do anything about it.
(2) is probably is no concern based on previous posters
Title: Re: Fairfax 2020
Post by: petec on April 27, 2020, 12:49:32 AM
All that, and the fact that if you look at the last 10 years FFH can't invest for sh1t, so one of the key value drivers is broken. That impacts the p/bv the market will pay.

On the positive side:
1) We are likely in a hard market, which drives better CR's and investment leverage.
2) Several of FFH's big holdings (especially ATCO and EUROB in my view) look very cheap.
3) FFH are working to improve investment decisions, although it's a leap of faith to assume this will work.
Title: Re: Fairfax 2020
Post by: chrispy on April 27, 2020, 06:25:50 AM
Not disagreeing with any of the points made by petec or Xerxes but when have their holdings not looked 'cheap'?  I feel like they have been 'cheap' since they were bought
Title: Re: Fairfax 2020
Post by: petec on April 27, 2020, 06:57:40 AM
Not disagreeing with any of the points made by petec or Xerxes but when have their holdings not looked 'cheap'?  I feel like they have been 'cheap' since they were bought

I agree.
Title: Re: Fairfax 2020
Post by: petec on April 27, 2020, 06:59:24 AM
Actually I don’t quite agree. There was a point when Quess looked actively expensive!
Title: Re: Fairfax 2020
Post by: Bryggen on April 27, 2020, 11:09:53 AM
Thanks guys for your great input. Hope my question and the answers received have nothing to do with the 8+% pop we got today ;)
Title: Re: Fairfax 2020
Post by: KFS on April 27, 2020, 12:31:42 PM
All that, and the fact that if you look at the last 10 years FFH can't invest for sh1t, so one of the key value drivers is broken. That impacts the p/bv the market will pay.

On the positive side:
1) We are likely in a hard market, which drives better CR's and investment leverage.
2) Several of FFH's big holdings (especially ATCO and EUROB in my view) look very cheap.
3) FFH are working to improve investment decisions, although it's a leap of faith to assume this will work.

Wade Burton has had a 19.5% compound return over 10 years.  Just imagine how different FFH would look today if Wade had been the leader of the FFH investment team during this entire period. 

Title: Re: Fairfax 2020
Post by: Viking on April 27, 2020, 02:51:17 PM
Not disagreeing with any of the points made by petec or Xerxes but when have their holdings not looked 'cheap'?  I feel like they have been 'cheap' since they were bought

To add to what Petec mentions, look at pretty much all the Indian companies held the past 3-5 years. There was what looks to be a bubble in Indian stocks a couple pf years ago. The ride that Fairfax has been on with these holding has been absolutely amazing.

Moving forward Fairfax had better hope that Hoisington’s macro call is wrong (that we are moving towards mild deflation). Emerging markets (India) could be challenged moving forward. Some of the individual holding like Recipe (Canadian restaurant stocks - many full serve) will also struggle mightily in the near term.

Is is staggering how the outlook for Fairfax has changed in 12 weeks. 12 weeks ago my view was Fairfax was ideally positioned to benefit from hardening insurance market and risk on in stocks (including emerging markets). They had made a number of moves to lock in some investment gains and get other investments positioned to succeed.

The virus has completely submarined them. Completely unexpected. Resulting in more pot holes that will now need to be filled in (testing shareholders patience).

My focus right now is quality. Recently bought CB and WRB. Cheap; well managed; easy to understand; well positioned. I feel good when i listen to their conference calls (although i much prefer listening to the old Berkely to the son :-).
Title: Re: Fairfax 2020
Post by: Xerxes on April 27, 2020, 04:43:02 PM
Viking, my non-scientific but philosophical view is that the pendulum always swings back …

It may be rough for FFH, but I think both BRK and FFH had about the same peak-to-trough drop. FFH a bit more.
Just like FFH got a few large businesses impacted, BRK has a whole host of entities impacted as well (Coka Cola, Airlines, etc.).

They are both not investing heavily in equities in the dip it seems (from what we know); FFH b/c it cannot (perhaps), BRK because it doesn't want to.
I think as long as both names remain diversified within your own personal portfolio, that ought to do it.

I personally greatly admire the collection of old economy assets Fairfax India has.
EM will always be a challenge, … until it isn't a challenge anymore. Then people will flock back to India, they would call it "like investing in China in 2001" and that theme will go on, until pendulum swings back and it is no longer "like investing in China in 2001" etc. it is like investing in Chili in 2019. Unfortunately the pendulum swing happens over many years and it doesn't swing back in a way we can forecast.

I work in the aerospace industry for more than a decade; we have been doing well... our industry has been growing by this much X CAGR, i.e. Airbus pumping out +50 A.320 per month (I don't work for Airbus, but just an example), and that was baseline of all forecast … all was well, life was good …. well until suddenly it isn't (i.e. Covid).
Title: Re: Fairfax 2020
Post by: Viking on April 27, 2020, 05:00:58 PM
Viking, my non-scientific but philosophical view is that the pendulum always swings back …

It may be rough for FFH, but I think both BRK and FFH had about the same peak-to-trough drop. FFH a bit more.
Just like FFH got a few large businesses impacted, BRK has a whole host of entities impacted as well (Coka Cola, Airlines, etc.).

They are both not investing heavily in equities in the dip it seems (from what we know); FFH b/c it cannot (perhaps), BRK because it doesn't want to.
I think as long as both names remain diversified within your own personal portfolio, that ought to do it.

I personally greatly admire the collection of old economy assets Fairfax India has.
EM will always be a challenge, … until it isn't a challenge anymore. Then people will flock back to India, they would call it "like investing in China in 2001" and that theme will go on, until pendulum swings back and it is no longer "like investing in China in 2001" etc. it is like investing in Chili in 2019. Unfortunately the pendulum swing happens over many years and it doesn't swing back in a way we can forecast.

I work in the aerospace industry for more than a decade; we have been doing well... our industry has been growing by this much X CAGR, i.e. Airbus pumping out +50 A.320 per month (I don't work for Airbus, but just an example), and that was baseline of all forecast … all was well, life was good …. well until suddenly it isn't (i.e. Covid).

Xerxes, you seem to have it all well thought out :-) i do own BRK. In all honesty, probably mostly just because i like Buffett. And the fact they have so much cash (ideal in the current environment). It is likely just a short term hold... i will be happy to sell for a quick 3-4% gain. Done it a couple of time already :-)

Fairfax India looks interesting. I do like some of the assets (but not CSB). But until i get some clarity regarding the path of virus i am going to get very selective (which means FIH will just stay on my watch list :-)
Title: Re: Fairfax 2020
Post by: petec on April 27, 2020, 11:02:45 PM
Viking

If we get deflation a) FFH has the deflation swaps and b) I think I’d rather be in EM than DM. EM has the demographic advantage, plus it has higher inflation levels and therefore is more likely to have disinflation than deflation. Only the strong dollar would be an issue but EM is less exposed to the dollar than it used to be.

Why don’t you like CSB? Funnily enough I was thinking yesterday that FFH has widespread EM bank exposure (CIB, UBN, CSB, plus some smalls and arguably Eurobank) and I suspect there’s a lot of knowledge that can be shared across them. EM banking is a great business and the opportunity technology offers to bank the previously unbanked is huge. I think we will see Fairfax’s banks create huge value over the next couple of decades.

Pete
Title: Re: Fairfax 2020
Post by: Spekulatius on April 28, 2020, 05:14:06 PM
Not disagreeing with any of the points made by petec or Xerxes but when have their holdings not looked 'cheap'?  I feel like they have been 'cheap' since they were bought

To add to what Petec mentions, look at pretty much all the Indian companies held the past 3-5 years. There was what looks to be a bubble in Indian stocks a couple pf years ago. The ride that Fairfax has been on with these holding has been absolutely amazing.

Moving forward Fairfax had better hope that Hoisington’s macro call is wrong (that we are moving towards mild deflation). Emerging markets (India) could be challenged moving forward. Some of the individual holding like Recipe (Canadian restaurant stocks - many full serve) will also struggle mightily in the near term.

Is is staggering how the outlook for Fairfax has changed in 12 weeks. 12 weeks ago my view was Fairfax was ideally positioned to benefit from hardening insurance market and risk on in stocks (including emerging markets). They had made a number of moves to lock in some investment gains and get other investments positioned to succeed.

The virus has completely submarined them. Completely unexpected. Resulting in more pot holes that will now need to be filled in (testing shareholders patience).

My focus right now is quality. Recently bought CB and WRB. Cheap; well managed; easy to understand; well positioned. I feel good when i listen to their conference calls (although i much prefer listening to the old Berkely to the son :-).

I agree with you. FFH looks like trash. It had a stub left that I should have sold at $450 when I sold the bulk of my position and ended up selling into the decline at $315 and I am not looking back.

Drawing down the revolver should raise some eyebrows as it clearly shows that they walk on thin ice. Cigarbutt also made the same point basically looking at how heavily their are into equities relative to their equity base.
Title: Re: Fairfax 2020
Post by: Pedro on April 28, 2020, 06:16:06 PM
Wade Burton has had a 19.5% compound return over 10 years.  Just imagine how different FFH would look today if Wade had been the leader of the FFH investment team during this entire period.
[/quote]

I've listened to Wade speak before. He's sharp.

How does a human with record like this stay in the bullpen when the starting pitching is hitting batters.  Give him the saddle and stay out of his way.

I don't imagine FFH shares make up a large % of his portfolio when you make a 19.5% compounded return over a decade.

It's impressive they've kept him.  I hope it is evidence of good culture  & the deep bench Prem talks about
Title: Re: Fairfax 2020
Post by: Viking on April 28, 2020, 08:16:17 PM
Viking

If we get deflation a) FFH has the deflation swaps and b) I think I’d rather be in EM than DM. EM has the demographic advantage, plus it has higher inflation levels and therefore is more likely to have disinflation than deflation. Only the strong dollar would be an issue but EM is less exposed to the dollar than it used to be.

Why don’t you like CSB? Funnily enough I was thinking yesterday that FFH has widespread EM bank exposure (CIB, UBN, CSB, plus some smalls and arguably Eurobank) and I suspect there’s a lot of knowledge that can be shared across them. EM banking is a great business and the opportunity technology offers to bank the previously unbanked is huge. I think we will see Fairfax’s banks create huge value over the next couple of decades.

Pete

Pete, if we get deflation it will be the result of a severe, likely global, recession. This will hit EM harder than DM. I think India is in a precarious position; last year their financial system had serious issues and my guess is they were not fixed. The current worldwide recession could not have come at a worse time. CSB might be a good bank; it is just in a very tough situation.

I do like CIB’s long term track record but will be staying clear of EM stocks for now.

Having said all that, for those ok with high uncertainty, able to handle severe volatility and with a long term perspective there is likely lots of money to be made investing in EM stocks today. Just not a good fit for me :-)
Title: Re: Fairfax 2020
Post by: petec on April 29, 2020, 12:50:49 AM
I’m not so worried by the kind of short, sharp deflation you get in a big recession. First, that might just bring the deflation swaps to life. Second, I think a big recession is already priced into the EM stocks and currencies I look at. Third, there is a huge monetary and fiscal response. And fourth, it’s possible EM comes out quicker and stronger than DM, as happened in 2010.

The other kind of deflation would be a long slow Japan-style one, caused by the weight of debt built up in successive crises. That’s what Lacy Hunt argues for in the video recently shared on the Hoisington thread. If that happens it will be too slow for the deflation swaps, but I’d expect EM to outperform DM significantly.

Separately re India, I think a lot has been done to solve the issues. The job is not complete but the problems are largely in the public banks (NPLs) and non-bank financials (liquidity). CSB is recently recapitalised and under new management and it might actually be a great environment for them to grow.
Title: Re: Fairfax 2020
Post by: Xerxes on April 29, 2020, 07:20:12 PM
Pedro/KFS
I am not familiar of the team working their equities side. Do you know how much dollar value or percentage he is managing. high double digit is pretty impressive. Who knows maybe he was shorting Resolute Forest on leverage ?  for me the key is going to be the Q1 13F; i don't expect FFH loading up the truck during the drawdown. But I very much care about their position sizing of the two names that they chose to 'market' during the AGM: i.e. Exxon and Google. For me that would be key and indicative of new direction.

Based on a board member recommendation on a different thread, I listened to two Google Talk videos with Thomas Russo. Very interesting with his concepts of capacity to suffer. In some ways, that capacity to suffer applies to us FFH shareholders, I never expected major growth (have other growth engines in my portfolio); rather wanted a modest/steady but continuous growth.

Let's hope there is light at the end of tunnel.
Title: Re: Fairfax 2020
Post by: petec on April 30, 2020, 01:16:50 AM
Pedro/KFS
I am not familiar of the team working their equities side. Do you know how much dollar value or percentage he is managing. high double digit is pretty impressive. Who knows maybe he was shorting Resolute Forest on leverage ?  for me the key is going to be the Q1 13F; i don't expect FFH loading up the truck during the drawdown. But I very much care about their position sizing of the two names that they chose to 'market' during the AGM: i.e. Exxon and Google. For me that would be key and indicative of new direction.

Based on a board member recommendation on a different thread, I listened to two Google Talk videos with Thomas Russo. Very interesting with his concepts of capacity to suffer. In some ways, that capacity to suffer applies to us FFH shareholders, I never expected major growth (have other growth engines in my portfolio); rather wanted a modest/steady but continuous growth.

Let's hope there is light at the end of tunnel.

I think the % managed by Wade and his team is still relatively small (maybe 15%) but growing. Prem names about 12 members of this team in the letter including Wendy Teramoto who he describes as Wilbur Ross' right hand for 20 years. (Sam Mitchell is a notable absentee - I am not sure whether he is still at Fairfax.)

More importantly, it sounds (from the letter and the AGM call) as though Wade's team has an increasing influence on decisions made by Prem, Roger, and Brian. The sense I get is that we are about halfway through the handover to the younger team. It's taken a decade, and it'll take a decade more. But their influence is growing.

One thing I would say, though, is that Fairfax should not be in your portfolio for steady but continuous growth. That's Berkshire, or Markel. Prem, for all his faults, has always been explicit that results will be lumpy. That's just the nature of the kind of deep value investing they do.
Title: Re: Fairfax 2020
Post by: Xerxes on April 30, 2020, 06:40:04 AM
You are absolutely right on lumpy results.
While I always took note of that, somehow I failed to register that BRK had never said. Though they (BRK) have been sayings … we don't care about reported earning but we care about long term economic growth per share.

Speaking of which, is it safe to assume that the last time that lumpy side was to the upside was the 2008-09 short … and perhaps Odessy (don't know the full story there, but folks were talking about in this thread).

And also as the new generation takes over, I think that would mean less lumpiness … and more steady growth.
Title: Re: Fairfax 2020
Post by: Xerxes on April 30, 2020, 06:44:09 AM
Viking, my non-scientific but philosophical view is that the pendulum always swings back …

It may be rough for FFH, but I think both BRK and FFH had about the same peak-to-trough drop. FFH a bit more.
Just like FFH got a few large businesses impacted, BRK has a whole host of entities impacted as well (Coka Cola, Airlines, etc.).

They are both not investing heavily in equities in the dip it seems (from what we know); FFH b/c it cannot (perhaps), BRK because it doesn't want to.
I think as long as both names remain diversified within your own personal portfolio, that ought to do it.

I personally greatly admire the collection of old economy assets Fairfax India has.
EM will always be a challenge, … until it isn't a challenge anymore. Then people will flock back to India, they would call it "like investing in China in 2001" and that theme will go on, until pendulum swings back and it is no longer "like investing in China in 2001" etc. it is like investing in Chili in 2019. Unfortunately the pendulum swing happens over many years and it doesn't swing back in a way we can forecast.

I work in the aerospace industry for more than a decade; we have been doing well... our industry has been growing by this much X CAGR, i.e. Airbus pumping out +50 A.320 per month (I don't work for Airbus, but just an example), and that was baseline of all forecast … all was well, life was good …. well until suddenly it isn't (i.e. Covid).

Xerxes, you seem to have it all well thought out :-) i do own BRK. In all honesty, probably mostly just because i like Buffett. And the fact they have so much cash (ideal in the current environment). It is likely just a short term hold... i will be happy to sell for a quick 3-4% gain. Done it a couple of time already :-)

Fairfax India looks interesting. I do like some of the assets (but not CSB). But until i get some clarity regarding the path of virus i am going to get very selective (which means FIH will just stay on my watch list :-)

there is not much thinking on my side on my logic.
It is just that my view is that "it is never as good as it looks when things are good … and it is never as bad they look when things are bad".
We (be it investors, forecasters, industry participants) tend to take a snap shot of a great thing and project into the future, and when the bottom falls out, we tend to take a snapshot and also project it to the future, and call it structural change.

Always overshooting and undershooting
Title: Re: Fairfax 2020
Post by: wondering on April 30, 2020, 06:46:28 AM
Pedro/KFS
I am not familiar of the team working their equities side. Do you know how much dollar value or percentage he is managing. high double digit is pretty impressive. Who knows maybe he was shorting Resolute Forest on leverage ?  for me the key is going to be the Q1 13F; i don't expect FFH loading up the truck during the drawdown. But I very much care about their position sizing of the two names that they chose to 'market' during the AGM: i.e. Exxon and Google. For me that would be key and indicative of new direction.

Based on a board member recommendation on a different thread, I listened to two Google Talk videos with Thomas Russo. Very interesting with his concepts of capacity to suffer. In some ways, that capacity to suffer applies to us FFH shareholders, I never expected major growth (have other growth engines in my portfolio); rather wanted a modest/steady but continuous growth.

Let's hope there is light at the end of tunnel.

I think the % managed by Wade and his team is still relatively small (maybe 15%) but growing. Prem names about 12 members of this team in the letter including Wendy Teramoto who he describes as Wilbur Ross' right hand for 20 years. (Sam Mitchell is a notable absentee - I am not sure whether he is still at Fairfax.)

More importantly, it sounds (from the letter and the AGM call) as though Wade's team has an increasing influence on decisions made by Prem, Roger, and Brian. The sense I get is that we are about halfway through the handover to the younger team. It's taken a decade, and it'll take a decade more. But their influence is growing.

One thing I would say, though, is that Fairfax should not be in your portfolio for steady but continuous growth. That's Berkshire, or Markel. Prem, for all his faults, has always been explicit that results will be lumpy. That's just the nature of the kind of deep value investing they do.

If I remember correctly, Sam Mitchell retired. I can't remember if Prem mentioned it on a CC or a AGM
Title: Re: Fairfax 2020
Post by: petec on April 30, 2020, 07:27:20 AM
Speaking of which, is it safe to assume that the last time that lumpy side was to the upside was the 2008-09 short

They almost doubled BVPS between 2006 and 2009 so yes, those years were a bit special. Since then they booked decent gains in 2014, 2017, and 2019 as well, but didn't do much the rest of the time. So after doubling BVPS between 2006 and 2009, they grew it only 25% between 2009 and 2019. (Obviously shareholders also got the dividend.)

But that is the past. What matters is the future. As you say the new investment team may produce steadier performance. I don't really care. I am happy with lumpy - I just want a higher rate of compounding, and all we need for that is for Fairfax to avoid mistakes.

Title: Re: Fairfax 2020
Post by: TwoCitiesCapital on May 01, 2020, 08:55:15 AM
With $835/share in float, $420/share in equity, and $337/share in debt - it's hard for me to come up with a case where returns aren't going exceptional @ $260/share.

That is $1500+/share earning you a return. 15% compounded from these depths only requires an annualized return of 2.5% on the float/debt/equity to get 15% ROIC for your dollars. Such a low bar! Particularly in an environment that is being disrupted where investment grade corporate debt and high-grade equities/preferred yield quite a bit more than that.

Title: Re: Fairfax 2020
Post by: Bryggen on May 01, 2020, 08:16:57 PM
When is the 13-F filed and disclosed to find out more details on the XOM and GOOGL acquisitions?
Thanks!
Title: Re: Fairfax 2020
Post by: Bryggen on May 05, 2020, 07:32:23 AM
As a newbie on this board, I would like to know if there is a post on this board where Fairfax business model is explained in a nutshell? It is a fairly complex / unconventional structure, so a summary of how it operates or even a chart allowing us to visualize it would be great!

I get the essential of what they owned and how they use the float to invest, etc, but I would like to deepen my understanding on the flow of the funds they received, use for investment, and how they are capped to keep cash reserves for the subs etc.

If no one ever did it; then, we need a volunteer! ;)

Thanks and this place is the best place I found to have great information on Fairfax. It is unbelievable the amount of infos and valuable insight found here and you guys know your stuff. This isn't Seeking Alpha and Yahoo Finance boards lol. This is the real shit.
 
Kudos to all of you!

Bry
Title: Re: Fairfax 2020
Post by: Bryggen on May 08, 2020, 08:51:39 AM
Interesting article on FFH found today on Yahoo Finance.

Biased? I tend to buy what he says.

Thoughts?

https://ca.finance.yahoo.com/news/2-000-invest-bet-canada-115024446.html

Title: Re: Fairfax 2020
Post by: Bryggen on May 08, 2020, 07:50:55 PM
More coverage on FFH- BNN:

https://www.bnnbloomberg.ca/video/brian-acker-discusses-fairfax-financial~1955386

These guys don't want to get their feet wet on stating an opinion on the company, it was obvious. Interesting.
Title: Re: Fairfax 2020
Post by: clutch on May 08, 2020, 08:10:19 PM
Interesting article on FFH found today on Yahoo Finance.

Biased? I tend to buy what he says.

Thoughts?

https://ca.finance.yahoo.com/news/2-000-invest-bet-canada-115024446.html

It's a motley fool article... probably wrote after half an hour of research...
Title: Re: Fairfax 2020
Post by: Viking on May 10, 2020, 01:33:24 PM
Does anyone have an opinion on the likelihood that FFH will need to do an equity offering in the near term to shore up their balance sheet? My guess is they are ok today. However, there are risks moving forward:
1.) possible operating losses in Q2 and Q3
2.) sizable impairments on equities/associates (Recipe and Toys R Us are flashing red and there are more)

Offsetting this will be some gains in their equity portfolio since March 31. The $2.9 billion in bonds they bought likely also will see some nice price appreciation. Dividend and interest income is also now a $900 million run rate which is very good (especially given the sale of 40% of runoff).

What do people think? Too many moving pieces and when combined with the virus (path unknown) simply too hard?

Best case scenario for Fairfax is a vaccine is discovered that can be deployed in volume in Q4.

My interest in FFH right now is as a short term trade. The company is out of favour. And the sector is out of favour. And the stock price has been very volatile of late.

Stock Price = US $250
BV = US $422
P/BV = 0.59

If we adjust BV to reflect Associates at fair value Vinod estimates BV = $390
P/adj BV = 0.64

Petec also suggested discounting BV further to reflect Fairfax India and Fairfax Africa at fair value
—————————————————-
Some notes after listening to the conference call:
- CR was decent at 96.8, with 2.6 points for Covid 19.
- Covid exposure is manageable with largest exposure at Brit and Odyssey
- expects to post underwriting profit for the year (even after Covid losses)
- expects written premiums to fall in Q2 and Q3 and rebound in Q4 as economic activity gets back to normal; expect flat for the year

- purchased $2.9 billion in US corporates; yield = 4.25% and term = 4 years ($123 million in interest income per year)
- run rate for interest and div income is $900 million
- continuing to focus on redeploying cash to grow this

- Riverstone divestiture happened March 31. 40% sold for $600 million. Continue to hold 60% valued at $605 million.
- debt offering in April $645 at 4.625% will add $30 million to interest expense per year

Balance Sheet
- had $700 million cash At hold co
- drew $1.8 billion of credit line; cash = $2.5 billion
- April debt issue = $645; total cash, net on credit line = $1,345 billion
- as global economies restart expect to pay down credit line

Can someone help me out with what happened to the $600 million proceeds (March 31) from the Riverstone sale? Is that included in the above figures?

- said FIH, FAH, Recipe and TC all have access to financing and do not need $ from Fairfax
- said covid did not affect long term value of Bangalore Airport
- Atlas, largest equity holding by far, reported decent Q1 results with strong future guidance (expects manageable impact from Covid)
Title: Re: Fairfax 2020
Post by: racemize on May 10, 2020, 02:07:19 PM
Viking, what's your short-term trade target here?  Getting back to book value?

One idea, and I've switched to it, is just buying the preferreds.  If you are aiming to get to book value, I'm assuming they will get back to $20-$25 (depending on the series) at the same or better pace than common. 
Title: Re: Fairfax 2020
Post by: petec on May 10, 2020, 02:23:26 PM
Viking, what's your short-term trade target here?  Getting back to book value?

One idea, and I've switched to it, is just buying the preferreds.  If you are aiming to get to book value, I'm assuming they will get back to $20-$25 (depending on the series) at the same or better pace than common.

Would you ever expect them to trade above par, given how low rates have gone? I need to look at the terms again.
Title: Re: Fairfax 2020
Post by: StubbleJumper on May 10, 2020, 02:46:01 PM
Does anyone have an opinion on the likelihood that FFH will need to do an equity offering in the near term to shore up their balance sheet? My guess is they are ok today. However, there are risks moving forward:
1.) possible operating losses in Q2 and Q3
2.) sizable impairments on equities/associates (Recipe and Toys R Us are flashing red and there are more)

Offsetting this will be some gains in their equity portfolio since March 31. The $2.9 billion in bonds they bought likely also will see some nice price appreciation. Dividend and interest income is also now a $900 million run rate which is very good (especially given the sale of 40% of runoff).

What do people think? Too many moving pieces and when combined with the virus (path unknown) simply too hard?

Best case scenario for Fairfax is a vaccine is discovered that can be deployed in volume in Q4.

My interest in FFH right now is as a short term trade. The company is out of favour. And the sector is out of favour. And the stock price has been very volatile of late.

Stock Price = US $250
BV = US $422
P/BV = 0.59

If we adjust BV to reflect Associates at fair value Vinod estimates BV = $390
P/adj BV = 0.64

Petec also suggested discounting BV further to reflect Fairfax India and Fairfax Africa at fair value
—————————————————-
Some notes after listening to the conference call:
- CR was decent at 96.8, with 2.6 points for Covid 19.
- Covid exposure is manageable with largest exposure at Brit and Odyssey
- expects to post underwriting profit for the year (even after Covid losses)
- expects written premiums to fall in Q2 and Q3 and rebound in Q4 as economic activity gets back to normal; expect flat for the year

- purchased $2.9 billion in US corporates; yield = 4.25% and term = 4 years ($123 million in interest income per year)
- run rate for interest and div income is $900 million
- continuing to focus on redeploying cash to grow this

- Riverstone divestiture happened March 31. 40% sold for $600 million. Continue to hold 60% valued at $605 million.
- debt offering in April $645 at 4.625% will add $30 million to interest expense per year

Balance Sheet
- had $700 million cash At hold co
- drew $1.8 billion of credit line; cash = $2.5 billion
- April debt issue = $645; total cash, net on credit line = $1,345 billion
- as global economies restart expect to pay down credit line

Can someone help me out with what happened to the $600 million proceeds (March 31) from the Riverstone sale? Is that included in the above figures?

- said FIH, FAH, Recipe and TC all have access to financing and do not need $ from Fairfax
- said covid did not affect long term value of Bangalore Airport
- Atlas, largest equity holding by far, reported decent Q1 results with strong future guidance (expects manageable impact from Covid)

Good questions and good thought process.

I'm not sure that an equity issue is necessary any time soon.  But, the covenants on FFH's revolver do represent a bit of a risk. 

After the Q1 release, I spilled a bit of ink whining about how they were at a debt:equity of 0.34:1 on March 31, and their max ratio under the covenant is 0.35:1.  My whining was that it wouldn't take an outrageous collection of insurance catastrophes to amount to amount to a $1B hit to their consolidated equity, which would trigger a bit of scrambling to manage the revolver covenant.  Similarly, if equity markets take another leg down from where they were on March 31, it would only take about a hit of ~$500m to their equities compared to March 31 to leave FFH scrambling.  Neither of those events are terribly likely, but IMO, they are entirely conceivable, which is why I don't love this situation of being reliant on that revolver.  The good news is that the holdco is carrying so much cash equivalents that they could easily get "on side" with the covenant by trimming holdco cash equivalents and repaying a portion of the revolver...but the bad news is that the whole point of negotiating and paying stand-by fees for a large revolver is so you have flexibility and in the end you might not even be able to draw on it.  Happily, the revolver is good until Christmas 2022, so as long as they respect the covenants, all is good.

I do not view Recipe and Toys as being particularly vulnerable to a write-down any time soon.  You would need to make the assessment that the assets are permanently impaired.  While I don't love either of those businesses, at this point they are basically closed with the intention of fully reopening when social distancing measures are relaxed.  It would probably take at least couple of years of shitty sales and income after the full reopening to conclude that the businesses are fundamentally damaged and permanently impaired.  However, despite Prem's assurances that they will not need cash from the holdco, I do worry that if this closure is prolonged, they will end up burning through their revolvers and could ultimately require a cash injection to support their working capital needs when the restart occurs.  Does FFH have a spare $75m for Toys or a spare $200m for Recipe if that should become necessary?

It's trite to say it, but if everything goes well, everything will go well.  What is the holdco's cash situation between now and March 31, 2021?  I think it looks a bit like this:

Sources:
Cash at March 31, 2020:  $2,483
Debt issue: $645
Subsidiary dividends:  $?
Management fees: $? (this is what holdco gets from Fairfax India/Africa or Hamblin Watsa)
Interest/divvies on the $2.5B holdco cash: ~$50


Uses:
Revolver repayment in April 2020: $500
Holdco interest payments for 12 months: ~$300 (based on $5.2B holdco debt)
Holdco operating/admin: ?
Purchase of Brit minority stake: $100 (but nothing says that this cannot be paid from an insurance subsidiary)
Preferred and common divvy: $300 (assumes that FFH declares a $10 common divvy at Christmas 2020)


If you assume that the holdco cash inflows from management fees and subsidiary dividends exactly offset its cash outflows for operating/admin costs, the holdco would have about $1.9B cash on March 31, 2021.  So as I so tritely said, if everything goes well, everything will go well.  But, if they need to take a large, unfavourable equity mark or they experience a very bad cat year, they could be in the situation of needing to repay part of that revolver to respect their covenants, and then cash at March 31, 2021 might not look so rosy. 



SJ


*PS, my understanding is that Riverstone closed on March 31, meaning that the proceeds should be part of the $2.5B holdco cash.
Title: Re: Fairfax 2020
Post by: racemize on May 10, 2020, 03:06:36 PM
Viking, what's your short-term trade target here?  Getting back to book value?

One idea, and I've switched to it, is just buying the preferreds.  If you are aiming to get to book value, I'm assuming they will get back to $20-$25 (depending on the series) at the same or better pace than common.

Would you ever expect them to trade above par, given how low rates have gone? I need to look at the terms again.

No, just trading back to where they were in 2019 is sufficient.  Meantime, 8% yield or so.
Title: Re: Fairfax 2020
Post by: Viking on May 10, 2020, 03:26:12 PM
Viking, what's your short-term trade target here?  Getting back to book value?

One idea, and I've switched to it, is just buying the preferreds.  If you are aiming to get to book value, I'm assuming they will get back to $20-$25 (depending on the series) at the same or better pace than common.

Recemize, i would be quite happy with a 5-7% gain. I have had a good year and am sitting mostly in cash. The past month or so i have been very tactical taking a couple of small positions and selling for small gains. I need to do a little investing/trading to keep my brain from going Covid19 crazy :-)

I am happy to sit in cash With the majority of my portfolio until i have a better understanding of the impact of the virus on the actual economy.
Title: Re: Fairfax 2020
Post by: Viking on May 10, 2020, 03:37:41 PM
Stubble, thanks for your thoughts. I did read your lengthy post after FFH posted results and found it very helpful :-)

Fairfax was very fortunate with the timing of the Riverstone deal. It brought them $600 million of much needed cash at (a now premium) valuation. With the economy in such terrible shape Fairfax will not be growing written premiums in the next 2 quarters (I am pretty sure this is what Prem said on the conference call) so the subs will likely not be needing $ from the hold co for business growth.

In the past Prem has proved to be very creative in surfacing value. Perhaps he has a rabbit or two yet to be pulled out of his hat.
Title: Re: Fairfax 2020
Post by: Cigarbutt on May 10, 2020, 04:05:02 PM
^It seems like the Riverstone deal has two components.

First, there is 'value' recognition (although this value was deserved to start with if you think runoff operations are worth it).

Second, this was a liquidity operation. The 599.5M flowed to holdco (in a quarter when holdco was sending capital to insurance subs) in exchange for assets contributed to the Barbados-based joint venture. OMERS is participating for a price: the present value of the deconsolidated non-controlling interest. This is reminiscent of the Northbride and OdysseyRe bi-directional (sell then buy higher) operations (which were opportunities for profitable trades from an outsider perspective). There is a schedule for Fairfax to buy back the interest over time.

It was opportunistic but it is what it is.
Title: Re: Fairfax 2020
Post by: petec on May 10, 2020, 11:21:25 PM
^It seems like the Riverstone deal has two components.

First, there is 'value' recognition (although this value was deserved to start with if you think runoff operations are worth it).

Second, this was a liquidity operation. The 599.5M flowed to holdco (in a quarter when holdco was sending capital to insurance subs) in exchange for assets contributed to the Barbados-based joint venture. OMERS is participating for a price: the present value of the deconsolidated non-controlling interest. This is reminiscent of the Northbride and OdysseyRe bi-directional (sell then buy higher) operations (which were opportunities for profitable trades from an outsider perspective). There is a schedule for Fairfax to buy back the interest over time.

It was opportunistic but it is what it is.

To clarify - there is a schedule of *options* for Fairfax to buy back. From what I hear they are unlikely to do so. I think the key part of this deal is that they have deconsolidated Riverstone UK, meaning it can lever up without affecting the FFH balance sheet. Apparently it needs to lever up to compete. I don’t think FFH will want it on their BS in future.
Title: Re: Fairfax 2020
Post by: petec on May 11, 2020, 12:28:42 AM
Viking, what's your short-term trade target here?  Getting back to book value?

One idea, and I've switched to it, is just buying the preferreds.  If you are aiming to get to book value, I'm assuming they will get back to $20-$25 (depending on the series) at the same or better pace than common.

Would you ever expect them to trade above par, given how low rates have gone? I need to look at the terms again.

No, just trading back to where they were in 2019 is sufficient.  Meantime, 8% yield or so.

Yes, I can see the attraction. I just haven't really followed the prefs or what drives their prices, hence the question.
Title: Re: Fairfax 2020
Post by: petec on May 11, 2020, 12:48:07 AM
It looks to me as though all the fixed-rate prefs sold off in 4Q18 (as did most equities) but never really recovered in 2019 (unlike most equities).

Is there an obvious reason? All else equal I'd have expected them to recover given the outlook for rates in mid 2019 was very different (lower) than mid 2018, and these are fixed rate securities.

Is this an FFH-specific spread or did Canadian prefs generally not recover?
Title: Re: Fairfax 2020
Post by: Cigarbutt on May 11, 2020, 05:26:04 AM
Disclosure: FFH prefs are trading at interesting levels from a risk-reward perspective.

It seems CDN prefs have a life of their own with the fixed/resets aspect, institutional movements that tend to be correlated and more recently the ETF effect.
Raymond James produces reports that tend to describe the situational awareness:
https://www.raymondjames.ca/branches/premium/pdfs/preferredsharesreport.pdf

The ETF CPD is a relevant CDN preferred index.
For comparison:
                                     CPD            FFH.C

mid 2018                      14.25           24.50
01 2020                        12.27          18.55
min 03 2020                  9.37            12.85
now                              10.51           13.89

FFH preferreds follow the trends but also show variable credit-specific spreads. On top of market sentiment, there are two components that can go in the right or wrong directions.
Title: Re: Fairfax 2020
Post by: petec on May 11, 2020, 05:42:34 AM
Thanks.
Title: Re: Fairfax 2020
Post by: petec on May 11, 2020, 06:00:38 AM
https://www.canadianinsider.com/node/7?menu_tickersearch=FFH+%7C+Fairfax+Financial+Holding

Took me a while to find the pref data but thanks. I trust Brian Bradstreet's instincts.

Slightly worrying to see Barnard selling $1m of common. Perhaps he was buying a house. But the one thing that has kept me in FFH all these years is Prem's incredible ability to keep (what I judge to be) superb people in the business. There has to be a point where someone like Barnard, who has unquestionably delivered, gets p1ssed off that Prem isn't upholding his side of the bargain.

Quick follow up on this, FWIW. Andy Barnard has been selling when he exercises options for years now, but his retained holding is roughly flat and worth about USD12.5m.

https://ceo.ca/api/sedi/?insider=Barnard,%20Andrew
Title: Re: Fairfax 2020
Post by: Xerxes on May 11, 2020, 08:27:00 PM
Unrelated Q1 13F seem to be due on Friday and Thursday for FFH and BRK.

It would be interesting to know what are top personal ownership of FFH management. How much of their wealth is tied to FFH percentage wise.

About FFH dividends, if that thing is turn off permanently it helps keep a good chunk of cash in and puts an incentive to increase value per share for the large owner-operator as oppose to live off dividends. Heck, the dividend outlay should in fact be used instead for share repurchase.
Title: Re: Fairfax 2020
Post by: Parsad on May 11, 2020, 11:57:53 PM
Unrelated Q1 13F seem to be due on Friday and Thursday for FFH and BRK.

It would be interesting to know what are top personal ownership of FFH management. How much of their wealth is tied to FFH percentage wise.

About FFH dividends, if that thing is turn off permanently it helps keep a good chunk of cash in and puts an incentive to increase value per share for the large owner-operator as oppose to live off dividends. Heck, the dividend outlay should in fact be used instead for share repurchase.

The only one of most concern is Prem...he has 90% of his net worth tied to Fairfax.  But pretty much all senior management holds significant amounts or did own significant amounts (they may be selling in retirement or for estate planning).  Francis Chou has held all of his Fairfax shares since he got them for $3 and has never sold a share.  The Watsa family has no intention of selling their stake either other than for charitable contributions/obligations a la Buffett.

As long as the Watsa family controls the votes, the dividend policy won't change.  It was controversial when it was implemented and it will remain controversial with some shareholders today, but Prem thought it was the most equitable way for him/family/charities to meet their financial obligations over time, without having to sell shares and give up control like most family-controlled companies...think Ford, think Eatons, etc.  With many long-term Fairfax shareholders hitting retirement, including former employees, the dividend gives them additional retirement income without selling their shares...I suspect they will vote with Prem on this one, so those against it should just suck it up.  Otherwise buy Markel or Berkshire!  You can always take your total dividends and just buy Fairfax shares on the open market...probably at a better price than Fairfax could each year as they have certain requirements on buybacks.  Cheers!
Title: Re: Fairfax 2020
Post by: Xerxes on May 12, 2020, 05:02:53 AM
Thanks Parsad
Very clear. Just that Ford, Eaton example where family is given handouts are not encouraging when the business is just a piggybank. 

I am guessing that is why Buffet has personal holding of JPM and Seritgae REIT is that he can compliment his $100K salary without touching his shares with dividends.
Title: Re: Fairfax 2020
Post by: petec on May 12, 2020, 06:03:15 AM
Thanks Parsad
Very clear. Just that Ford, Eaton example where family is given handouts are not encouraging when the business is just a piggybank. 

I am guessing that is why Buffet has personal holding of JPM and Seritgae REIT is that he can compliment his $100K salary without touching his shares with dividends.

The majority of the dividend goes to shareholders other than Prem. If he wanted to use the business as a piggybank he'd pay himself more. 
Title: Re: Fairfax 2020
Post by: Bryggen on May 12, 2020, 01:32:12 PM
Unrelated Q1 13F seem to be due on Friday and Thursday for FFH and BRK.

It would be interesting to know what are top personal ownership of FFH management. How much of their wealth is tied to FFH percentage wise.

About FFH dividends, if that thing is turn off permanently it helps keep a good chunk of cash in and puts an incentive to increase value per share for the large owner-operator as oppose to live off dividends. Heck, the dividend outlay should in fact be used instead for share repurchase.


With many long-term Fairfax shareholders hitting retirement, including former employees, the dividend gives them additional retirement income without selling their shares...

Those retired must be concerned with the share price as well. I support the dividend payment and glad to hear Prem won't give that up. Now, focus has to be on doing everything they need to show the market they will weather-the-storm and can do well on the investment side going forward. Then and only then, we will see our share regain ''some'' value.
Title: Re: Fairfax 2020
Post by: Parsad on May 12, 2020, 11:09:08 PM
Thanks Parsad
Very clear. Just that Ford, Eaton example where family is given handouts are not encouraging when the business is just a piggybank. 

I am guessing that is why Buffet has personal holding of JPM and Seritgae REIT is that he can compliment his $100K salary without touching his shares with dividends.

Hi Xerxes, my comparison was how Fairfax is different than the Ford and Eatons...not similar.  The Ford and Eatons slowly lost control and ownership.  Cheers!
Title: Re: Fairfax 2020
Post by: Bryggen on May 13, 2020, 07:09:40 AM
Stock at a 52 weeks low today....

When is this going to stop?

Am I right to say that low interest rates impacts negatively their insurance businesses?
How is COVID-19 also impact them?

I assume that is the reason for the drop as well as the lost in the confidence people have on their investments.

I wouldn't lie saying I am a very unhappy shareholder these days.

Trying to understand to make some sense out of it, if any sense at all !

Title: Re: Fairfax 2020
Post by: petec on May 13, 2020, 07:58:59 AM

When is this going to stop?


Just after the last potential seller throws in the towel!

Low interest rates (all else equal) mean less income from float. So yes, bad.

Covid 19 has two impacts:
1) big recession means less demand for insurance.
2) potentially higher claims although Fairfax don't think they are badly affected.

But who knows why the stock is getting (even) cheaper today. Might be Powell's comments, might be because Eurobank is down 10%, or it might just be because there are more sellers than buyers today.
Title: Re: Fairfax 2020
Post by: bearprowler6 on May 13, 2020, 08:06:49 AM

When is this going to stop?


Just after the last potential seller throws in the towel!

Low interest rates (all else equal) mean less income from float. So yes, bad.

Covid 19 has two impacts:
1) big recession means less demand for insurance.
2) potentially higher claims although Fairfax don't think they are badly affected.

But who knows why the stock is getting (even) cheaper today. Might be Powell's comments, might be because Eurobank is down 10%, or it might just be because there are more sellers than buyers today.

Bryggen, I am sorry you are experiencing this pain however a few of us on here (myself included) attempted to warn shareholders and those considering becoming shareholders to stay away from owning the shares of this company. Before I write anything further please understand that there are a few on here that will continue to strongly advocate for investing in Fairfax. They will cite the "undervalued" nature of their major equity holdings, the fixed income yield pick up during the bottom in mid-March, the long term track record of Prem and team, the hardening market, the vastly improved underwriting results and of course the fair and friendly culture. In my view, none of these reasons is sufficient to overcome the many deficiencies that have existed at Fairfax for several years and which are now being exposed for what they are. For every positive point put forward by those who still believe and advocate for investing in Fairfax's shares are equal and in my view more compelling reasons for not doing so.

The company is now swimming in debt, it never had a strong capital structure however it is now simply awful. Its long term holdings in Eurobank, Resolute Forest, Stelco to name just a few are likely impaired beyond repair. I fear a similar fate for Recipe and the myriad of its private holdings in the retail space. These were low margin businesses at the best of times and that was before any additional costs that Covid will impose on all retail establishments. Fairfax Africa and India have been so very disappointing for shareholders in those companies as well as for shareholders of Fairfax who have watched their seed capital into these entities melt away. Furthermore, the low interest rates will hamper all insurance companies going forward. God help any existing shareholders if we have an active hurricane season this year.

You now have a decision to make. Continue to hold and believe in the long term value of Fairfax (that was hard for me to write) or sell your shares now and redeploy the proceeds into other more compelling opportunities. The choice is yours. I have made mine!
Title: Re: Fairfax 2020
Post by: petec on May 13, 2020, 09:06:04 AM
bearprowler, good post - even if I disagree with some of it.

Could you clarify what you mean when you say that Eurobank, Resolute, and Stelco are impaired? That statement has a different meaning depending on whether you're starting with current share prices, or carrying values, or purchase prices - hence the question. If you feel you have a clear handle on the value of any of these business I'd be interested to know.

Title: Re: Fairfax 2020
Post by: Bryggen on May 13, 2020, 09:30:13 AM

When is this going to stop?


Just after the last potential seller throws in the towel!

Low interest rates (all else equal) mean less income from float. So yes, bad.

Covid 19 has two impacts:
1) big recession means less demand for insurance.
2) potentially higher claims although Fairfax don't think they are badly affected.

But who knows why the stock is getting (even) cheaper today. Might be Powell's comments, might be because Eurobank is down 10%, or it might just be because there are more sellers than buyers today.

Bryggen, I am sorry you are experiencing this pain however a few of us on here (myself included) attempted to warn shareholders and those considering becoming shareholders to stay away from owning the shares of this company. Before I write anything further please understand that there are a few on here that will continue to strongly advocate for investing in Fairfax. They will cite the "undervalued" nature of their major equity holdings, the fixed income yield pick up during the bottom in mid-March, the long term track record of Prem and team, the hardening market, the vastly improved underwriting results and of course the fair and friendly culture. In my view, none of these reasons is sufficient to overcome the many deficiencies that have existed at Fairfax for several years and which are now being exposed for what they are. For every positive point put forward by those who still believe and advocate for investing in Fairfax's shares are equal and in my view more compelling reasons for not doing so.

The company is now swimming in debt, it never had a strong capital structure however it is now simply awful. Its long term holdings in Eurobank, Resolute Forest, Stelco to name just a few are likely impaired beyond repair. I fear a similar fate for Recipe and the myriad of its private holdings in the retail space. These were low margin businesses at the best of times and that was before any additional costs that Covid will impose on all retail establishments. Fairfax Africa and India have been so very disappointing for shareholders in those companies as well as for shareholders of Fairfax who have watched their seed capital into these entities melt away. Furthermore, the low interest rates will hamper all insurance companies going forward. God help any existing shareholders if we have an active hurricane season this year.

You now have a decision to make. Continue to hold and believe in the long term value of Fairfax (that was hard for me to write) or sell your shares now and redeploy the proceeds into other more compelling opportunities. The choice is yours. I have made mine!

Thanks for your honest input. Not reassuring, but I would rather honesty.

I am now curious to hear from the others on it ;)

Bry
Title: Re: Fairfax 2020
Post by: bearprowler6 on May 13, 2020, 09:40:34 AM
bearprowler, good post - even if I disagree with some of it.

Could you clarify what you mean when you say that Eurobank, Resolute, and Stelco are impaired? That statement has a different meaning depending on whether you're starting with current share prices, or carrying values, or purchase prices - hence the question. If you feel you have a clear handle on the value of any of these business I'd be interested to know.

Thanks Petec. Disagreeing about investment valuations is what makes a market!

Let me start with a few comments on Eurobank....Prem's thesis was that it was very cheap relative to book value. Perhaps the cheapest bank on the planet. He never seemed to say much beyond that. Fairfax now owns something like 40% (I did not look up the exact percentage so apologies if this is off somewhat) of this company. How many recaps of this company did Fairfax participate in? Clearly the original thesis was wrong and Prem and team were unwilling to throw in the towel. I believe this was due to ego and also position sizing being too large. both of these raise other issues that seem to repeat at Fairfax. The most recent "recap" involving the merger with Grivalia seemed promising but now Eurobank owns real estate that is no doubt deeply affected by Covid. My bet is that further real estate write downs will be needed which will negatively impact BV in my view. Furthermore, I believe that unfortunately the Greek economy will be severely impacted by Covid. I believe that something like 20% of the economy is derived from tourism. This will impact many of Eurobank's clients in my view resulting in additional loan losses further impacting BV. The ultra low interest rates, which I believe are here for a very long time, were never good for Eurobank (or any other bank for that matter) and now seem to be here for the long haul. Sure the political climate in Greece is better now but given the hardship that Greece will likely experience as a result of Covid its not something (stable political environment) that I think we can count on going forward.

I think the shares need to triple to get back to where they were trading at the beginning of the year. A tall if not impossible task if you ask me. Given the current backdrop economic backdrop we are all facing I would suggest that owing Greek banks is the last place I would want to be invested in especially in the size that Fairfax has.

The attached article may be of interest:

https://www.ekathimerini.com/252538/gallery/ekathimerini/business/the-cost-of-coronavirus-greek-tourism-slump-threatens-a-decade-of-hard-won-gains

I would be pleased to provide you with my thoughts on Resolute and Stelco (I live about 20 kms from Stelco's head office so I know this one well) if you want to contact me in a PM.




Title: Re: Fairfax 2020
Post by: TwoCitiesCapital on May 13, 2020, 09:49:29 AM

When is this going to stop?


Just after the last potential seller throws in the towel!

Low interest rates (all else equal) mean less income from float. So yes, bad.

Covid 19 has two impacts:
1) big recession means less demand for insurance.
2) potentially higher claims although Fairfax don't think they are badly affected.

But who knows why the stock is getting (even) cheaper today. Might be Powell's comments, might be because Eurobank is down 10%, or it might just be because there are more sellers than buyers today.

Bryggen, I am sorry you are experiencing this pain however a few of us on here (myself included) attempted to warn shareholders and those considering becoming shareholders to stay away from owning the shares of this company. Before I write anything further please understand that there are a few on here that will continue to strongly advocate for investing in Fairfax. They will cite the "undervalued" nature of their major equity holdings, the fixed income yield pick up during the bottom in mid-March, the long term track record of Prem and team, the hardening market, the vastly improved underwriting results and of course the fair and friendly culture. In my view, none of these reasons is sufficient to overcome the many deficiencies that have existed at Fairfax for several years and which are now being exposed for what they are. For every positive point put forward by those who still believe and advocate for investing in Fairfax's shares are equal and in my view more compelling reasons for not doing so.

The company is now swimming in debt, it never had a strong capital structure however it is now simply awful. Its long term holdings in Eurobank, Resolute Forest, Stelco to name just a few are likely impaired beyond repair. I fear a similar fate for Recipe and the myriad of its private holdings in the retail space. These were low margin businesses at the best of times and that was before any additional costs that Covid will impose on all retail establishments. Fairfax Africa and India have been so very disappointing for shareholders in those companies as well as for shareholders of Fairfax who have watched their seed capital into these entities melt away. Furthermore, the low interest rates will hamper all insurance companies going forward. God help any existing shareholders if we have an active hurricane season this year.

You now have a decision to make. Continue to hold and believe in the long term value of Fairfax (that was hard for me to write) or sell your shares now and redeploy the proceeds into other more compelling opportunities. The choice is yours. I have made mine!

Thanks for your honest input. Not reassuring, but I would rather honesty.

I am now curious to hear from the others on it ;)

Bry

He hit the nail on the head for the bull argument.

I've been saying for awhile that it was hard for me to see how Fairfax could generate a reasonable return with interest rates and equity markets where they were at. I sold most of my position in mid-2018 for prices around $550-575/share. The argument was interest rates were too low and equity markets to high for them to make a reasonable return for me as a shareholder. 

I'd argue that this is the first time Fairfax has been attractive since - primarily because what is currently lacking in rates can be more than made up in spread products like corporate bonds, municipals, and equity products and build a conservative portfolio yielding 3-4% fairly easily. 4% on their investment portfolio alone is enough to make shares attractive @ $250/share. You get the positive returns from underwriting and any appreciation in subsidiaries/equity accounted investments for free.

I've started repurchasing the shares I sold in 2018 here.
Title: Re: Fairfax 2020
Post by: petec on May 13, 2020, 09:56:01 AM
bearprowler, good post - even if I disagree with some of it.

Could you clarify what you mean when you say that Eurobank, Resolute, and Stelco are impaired? That statement has a different meaning depending on whether you're starting with current share prices, or carrying values, or purchase prices - hence the question. If you feel you have a clear handle on the value of any of these business I'd be interested to know.

Thanks Petec. Disagreeing about investment valuations is what makes a market!

Let me start with a few comments on Eurobank....Prem's thesis was that it was very cheap relative to book value. Perhaps the cheapest bank on the planet. He never seemed to say much beyond that. Fairfax now owns something like 40% (I did not look up the exact percentage so apologies if this is off somewhat) of this company. How many recaps of this company did Fairfax participate in? Clearly the original thesis was wrong and Prem and team were unwilling to throw in the towel. I believe this was due to ego and also position sizing being too large. both of these raise other issues that seem to repeat at Fairfax. The most recent "recap" involving the merger with Grivalia seemed promising but now Eurobank owns real estate that is no doubt deeply affected by Covid. My bet is that further real estate write downs will be needed which will negatively impact BV in my view. Furthermore, I believe that unfortunately the Greek economy will be severely impacted by Covid. I believe that something like 20% of the economy is derived from tourism. This will impact many of Eurobank's clients in my view resulting in additional loan losses further impacting BV. The ultra low interest rates, which I believe are here for a very long time, were never good for Eurobank (or any other bank for that matter) and now seem to be here for the long haul. Sure the political climate in Greece is better now but given the hardship that Greece will likely experience as a result of Covid its not something (stable political environment) that I think we can count on going forward.

I think the shares need to triple to get back to where they were trading at the beginning of the year. A tall if not impossible task if you ask me. Given the current backdrop economic backdrop we are all facing I would suggest that owing Greek banks is the last place I would want to be invested in especially in the size that Fairfax has.

The attached article may be of interest:

https://www.ekathimerini.com/252538/gallery/ekathimerini/business/the-cost-of-coronavirus-greek-tourism-slump-threatens-a-decade-of-hard-won-gains

I would be pleased to provide you with my thoughts on Resolute and Stelco (I live about 20 kms from Stelco's head office so I know this one well) if you want to contact me in a PM.

Thanks. FWIW they have 31% of Eurobank - very difficult to exit given liquidity. But I am less bearish about your other points:
1) BV will be E1.35 once the current set of transactions (spinoff of NPLs and sale of servicer) complete.
2) Greece has suffered 10 years of depression. Residential real estate prices are down 40%. Half of loans went bad. Covid will not help, but it may be that the damage to the loan book has already been done.
3) Provisions + collateral cover 100% of NPLs.
4) NPL exposure will be down to very manageable levels post-spin.
5) Greece's banking system has been cut down from something like 25 to 4 banks.
6) Greece has done deep reforms and now (finally) has a pro-business government.

Q1 results are out at the end of May. They will be very interesting. There is risk here. But I think there is a good chance Eurobank gets back to carrying value, and may do much better, over the next couple of years. Hopefully this post ages well.

I'll PM you!
Title: Re: Fairfax 2020
Post by: petec on May 13, 2020, 10:00:05 AM

When is this going to stop?


Just after the last potential seller throws in the towel!

Low interest rates (all else equal) mean less income from float. So yes, bad.

Covid 19 has two impacts:
1) big recession means less demand for insurance.
2) potentially higher claims although Fairfax don't think they are badly affected.

But who knows why the stock is getting (even) cheaper today. Might be Powell's comments, might be because Eurobank is down 10%, or it might just be because there are more sellers than buyers today.

Bryggen, I am sorry you are experiencing this pain however a few of us on here (myself included) attempted to warn shareholders and those considering becoming shareholders to stay away from owning the shares of this company. Before I write anything further please understand that there are a few on here that will continue to strongly advocate for investing in Fairfax. They will cite the "undervalued" nature of their major equity holdings, the fixed income yield pick up during the bottom in mid-March, the long term track record of Prem and team, the hardening market, the vastly improved underwriting results and of course the fair and friendly culture. In my view, none of these reasons is sufficient to overcome the many deficiencies that have existed at Fairfax for several years and which are now being exposed for what they are. For every positive point put forward by those who still believe and advocate for investing in Fairfax's shares are equal and in my view more compelling reasons for not doing so.

The company is now swimming in debt, it never had a strong capital structure however it is now simply awful. Its long term holdings in Eurobank, Resolute Forest, Stelco to name just a few are likely impaired beyond repair. I fear a similar fate for Recipe and the myriad of its private holdings in the retail space. These were low margin businesses at the best of times and that was before any additional costs that Covid will impose on all retail establishments. Fairfax Africa and India have been so very disappointing for shareholders in those companies as well as for shareholders of Fairfax who have watched their seed capital into these entities melt away. Furthermore, the low interest rates will hamper all insurance companies going forward. God help any existing shareholders if we have an active hurricane season this year.

You now have a decision to make. Continue to hold and believe in the long term value of Fairfax (that was hard for me to write) or sell your shares now and redeploy the proceeds into other more compelling opportunities. The choice is yours. I have made mine!

Thanks for your honest input. Not reassuring, but I would rather honesty.

I am now curious to hear from the others on it ;)

Bry

He hit the nail on the head for the bull argument.


That was the bull argument??  :o
Title: Re: Fairfax 2020
Post by: Viking on May 13, 2020, 10:23:25 AM
Today the overall market is down 2%, insurance stocks are down about 3% and Fairfax is down 5%. Sounds about right for a risk off day.

I was wondering what would happen to Fairfax if the market started to once again sell off. Looks like there is still risk to the downside.

How low could it go? Look at the WFC thread... some stocks just seem to be one way trains. Crazy times.

We seem to have a bifurcated market - big winners and big losers. The stock market looks like it might be rolling over.  What happens to the dogs if we get another brutal sell off?
Title: Re: Fairfax 2020
Post by: TwoCitiesCapital on May 13, 2020, 11:59:08 AM

When is this going to stop?


Just after the last potential seller throws in the towel!

Low interest rates (all else equal) mean less income from float. So yes, bad.

Covid 19 has two impacts:
1) big recession means less demand for insurance.
2) potentially higher claims although Fairfax don't think they are badly affected.

But who knows why the stock is getting (even) cheaper today. Might be Powell's comments, might be because Eurobank is down 10%, or it might just be because there are more sellers than buyers today.

Bryggen, I am sorry you are experiencing this pain however a few of us on here (myself included) attempted to warn shareholders and those considering becoming shareholders to stay away from owning the shares of this company. Before I write anything further please understand that there are a few on here that will continue to strongly advocate for investing in Fairfax. They will cite the "undervalued" nature of their major equity holdings, the fixed income yield pick up during the bottom in mid-March, the long term track record of Prem and team, the hardening market, the vastly improved underwriting results and of course the fair and friendly culture. In my view, none of these reasons is sufficient to overcome the many deficiencies that have existed at Fairfax for several years and which are now being exposed for what they are. For every positive point put forward by those who still believe and advocate for investing in Fairfax's shares are equal and in my view more compelling reasons for not doing so.

The company is now swimming in debt, it never had a strong capital structure however it is now simply awful. Its long term holdings in Eurobank, Resolute Forest, Stelco to name just a few are likely impaired beyond repair. I fear a similar fate for Recipe and the myriad of its private holdings in the retail space. These were low margin businesses at the best of times and that was before any additional costs that Covid will impose on all retail establishments. Fairfax Africa and India have been so very disappointing for shareholders in those companies as well as for shareholders of Fairfax who have watched their seed capital into these entities melt away. Furthermore, the low interest rates will hamper all insurance companies going forward. God help any existing shareholders if we have an active hurricane season this year.

You now have a decision to make. Continue to hold and believe in the long term value of Fairfax (that was hard for me to write) or sell your shares now and redeploy the proceeds into other more compelling opportunities. The choice is yours. I have made mine!

Thanks for your honest input. Not reassuring, but I would rather honesty.

I am now curious to hear from the others on it ;)

Bry

He hit the nail on the head for the bull argument.


That was the bull argument??  :o

He clearly listed what the bulls would say in response - which is basically what I said.

On an unrelated note, anyone have the transcript from Q1 earnings call? Seeking Alpha doesn't seem to have it and I'm uncertain that it will be posted at this point.
Title: Re: Fairfax 2020
Post by: Xerxes on May 13, 2020, 12:20:25 PM
Clearly a very polarized name with very diverse and interesting point of views. 
Much like the Tesla thread but without the Muskism.

Covid 19 changed the chessboard, I rather wait to see what the new generation would be doing. Starting by this quarter 13F. I like to think I should not underestimate someone who built a multi billion dollar business and his capacity to learn from mistakes.

I sold Nvidia few weeks ago after a good run from $130 ish.
At least that is what I tell to comfort myself when I look at my melting FFH holding ....
Title: Re: Fairfax 2020
Post by: Bryggen on May 13, 2020, 01:11:15 PM
Clearly a very polarized name with very diverse and interesting point of views. 
Much like the Tesla thread but without the Muskism.

Covid 19 changed the chessboard, I rather wait to see what the new generation would be doing. Starting by this quarter 13F. I like to think I should not underestimate someone who built a multi billion dollar business and his capacity to learn from mistakes.

I sold Nvidia few weeks ago after a good run from $130 ish.
At least that is what I tell to comfort myself when I look at my melting FFH holding ....

Feeling better that I am not alone watching my FFH holding melting ;)
Title: Re: Fairfax 2020
Post by: Parsad on May 13, 2020, 01:48:32 PM
I suspect we will have one more down swing here through the 2nd quarter...from the posts above, we are getting closer to capitulation, as the bears are all growling and even some of the bulls are getting frustrated.  You've hit bottom when people just give up...probably around high 290's.

- People are complaining about Fairfax India and Fairfax Africa...one has been about 5-6 years and one has been about 2-3 years.  Do you know how long it took Fairfax Asia to become the fantastic deal it was when we sold...13 years! 
- I hear complaints about Eurobank...but we saw the same thing with Bank of Ireland which was a winner. 
- Whining about insurance...we're writing at 96% across the board for several years...do you guys remember when we could barely break 105% for 8 years! 
- We have a ton of bonds and cash, while debt to equity is below 35%...about $1.5B in the holding company...do you remember when we borrowed $300M from Cundill, Southeastern and Markel?!
- While Seaspan is breakeven right now, can anyone deny that this going to be a winner 10-15 years from now? 
- Yes, we are having challenges with BB, but this is a business that for all intents and purposes should have been bankrupt already...if the board had listened to Prem and hired John Chen in the beginning, BB would be sitting on another $1B in cash and wouldn't have wasted 18 months since Fairfax originally bought the stock.  Yeah, they should have avoided it, but shit happens...at least they dealing with it!
- You have a young portfolio team but with alot of experience, and you still have the old dogs like Brian and Prem paving the way...I think non-bond investments will do better this decade than last!
- It's trading at 60 cents on the tangible dollar...yet people are scared it might go down to 50 cents on the tangible dollar before it eventually goes back to par...that's the psychology right now from you guys!

As a distressed value investor, I'm almost always early in and early out...that's just the nature of the beast.  So I don't care if Fairfax falls another $100 in the next 6 months...as long as it's back at par 2 years from now!  Cheers!
Title: Re: Fairfax 2020
Post by: Pedro on May 13, 2020, 01:54:26 PM
Can someone call up Mitsui and get them to offer 4X BV for all of FFH like they did for First Capital? That would be a nice way to expand their  broad global partnership.

https://www.fairfax.ca/news/press-releases/press-release-details/2017/Fairfax-and-Mitsui-Sumitomo-Insurance--Enter-into-Strategic-Alliance-and-Sale-of-First-Capital/default.aspx

Title: Re: Fairfax 2020
Post by: Bryggen on May 13, 2020, 02:14:56 PM
I suspect we will have one more down swing here through the 2nd quarter...from the posts above, we are getting closer to capitulation, as the bears are all growling and even some of the bulls are getting frustrated.  You've hit bottom when people just give up...probably around high 290's.

- People are complaining about Fairfax India and Fairfax Africa...one has been about 5-6 years and one has been about 2-3 years.  Do you know how long it took Fairfax Asia to become the fantastic deal it was when we sold...13 years! 
- I hear complaints about Eurobank...but we saw the same thing with Bank of Ireland which was a winner. 
- Whining about insurance...we're writing at 96% across the board for several years...do you guys remember when we could barely break 105% for 8 years! 
- We have a ton of bonds and cash, while debt to equity is below 35%...about $1.5B in the holding company...do you remember when we borrowed $300M from Cundill, Southeastern and Markel?!
- While Seaspan is breakeven right now, can anyone deny that this going to be a winner 10-15 years from now? 
- Yes, we are having challenges with BB, but this is a business that for all intents and purposes should have been bankrupt already...if the board had listened to Prem and hired John Chen in the beginning, BB would be sitting on another $1B in cash and wouldn't have wasted 18 months since Fairfax originally bought the stock.  Yeah, they should have avoided it, but shit happens...at least they dealing with it!
- You have a young portfolio team but with alot of experience, and you still have the old dogs like Brian and Prem paving the way...I think non-bond investments will do better this decade than last!
- It's trading at 60 cents on the tangible dollar...yet people are scared it might go down to 50 cents on the tangible dollar before it eventually goes back to par...that's the psychology right now from you guys!

As a distressed value investor, I'm almost always early in and early out...that's just the nature of the beast.  So I don't care if Fairfax falls another $100 in the next 6 months...as long as it's back at par 2 years from now!  Cheers!

Very thoughtful comments Parsad. Thanks!
Title: Re: Fairfax 2020
Post by: Parsad on May 13, 2020, 02:15:09 PM
Can someone call up Mitsui and get them to offer 4X BV for all of FFH like they did for First Capital? That would be a nice way to expand their  broad global partnership.

https://www.fairfax.ca/news/press-releases/press-release-details/2017/Fairfax-and-Mitsui-Sumitomo-Insurance--Enter-into-Strategic-Alliance-and-Sale-of-First-Capital/default.aspx

Pedro, you hit the nail on the head.  Today, no one wants Fairfax or its businesses at 0.6 times book...yet a couple of years ago, Mitsui paid 4x book for First Capital. 

Like I said, I don't care if Fairfax goes down another $100, just as long as they sell off their assets at 1.5 times book or better in the future.  Partner Re just sold for $9B US...I would imagine Odyssey Re would get at least 4.5B-5B US...that's over 75% of Fairfax's entire market cap right now alone. 

Back in 2003, Fairfax couldn't sell it's insurance businesses because no one would buy them then when they were running at 105% per year.  If Fairfax needs money, they have tangible, quality insurance assets, alongside their non-insurance assets they can sell.  Heck they, can just dividend up surplus capital if they need it.  They could not do these things in the past.  Cheers!
Title: Re: Fairfax 2020
Post by: patterson on May 13, 2020, 02:34:50 PM
Clearly a very polarized name with very diverse and interesting point of views. 
Much like the Tesla thread but without the Muskism.

Covid 19 changed the chessboard, I rather wait to see what the new generation would be doing. Starting by this quarter 13F. I like to think I should not underestimate someone who built a multi billion dollar business and his capacity to learn from mistakes.

I sold Nvidia few weeks ago after a good run from $130 ish.
At least that is what I tell to comfort myself when I look at my melting FFH holding ....

Feeling better that I am not alone watching my FFH holding melting ;)

You aren't alone. FRFHF is my largest holding, followed by WFC. I’ve still managed to break even over the past year due to large positions in mining stocks such as NG (purchased in early 2019 and sold recently for 150% gain) and SGGDX (purchased throughout 2019 and up 70%). Now, I’m trying to figure out where to go from here. I’m tempted to keep averaging into my losing positions but am afraid that I’ll box myself into becoming too concentrated.

The bearish arguments provided by Viking, Bearprowler, and others are very compelling, and would probably be enough to convince me to sell if I didn't think that the things they point out (terrible investment results, low interest rates, etc) are already factored into the price. Those would have been great reasons to have already exited (as Viking and Bearprowler did I believe, at much higher prices), but they may or may not be good reasons to sell going forward. I've followed Fairfax for about 15 years and have never seen sentiment as negative as it is now. While it could get worse, I wouldn't want to bet on it getting worse, not at these prices.
Title: Re: Fairfax 2020
Post by: Bryggen on May 13, 2020, 02:46:42 PM
Clearly a very polarized name with very diverse and interesting point of views. 
Much like the Tesla thread but without the Muskism.

Covid 19 changed the chessboard, I rather wait to see what the new generation would be doing. Starting by this quarter 13F. I like to think I should not underestimate someone who built a multi billion dollar business and his capacity to learn from mistakes.

I sold Nvidia few weeks ago after a good run from $130 ish.
At least that is what I tell to comfort myself when I look at my melting FFH holding ....

Feeling better that I am not alone watching my FFH holding melting ;)

You aren't alone. FRFHF is my largest holding, followed by WFC. I’ve still managed to break even over the past year due to large positions in mining stocks such as NG (purchased in early 2019 and sold recently for 150% gain) and SGGDX (purchased throughout 2019 and up 70%). Now, I’m trying to figure out where to go from here. I’m tempted to keep averaging into my losing positions but am afraid that I’ll box myself into becoming too concentrated.

The bearish arguments provided by Viking, Bearprowler, and others are very compelling, and would probably be enough to convince me to sell if I didn't think that the things they point out (terrible investment results, low interest rates, etc) are already factored into the price. Those would have been great reasons to have already exited (as Viking and Bearprowler did I believe, at much higher prices), but they may or may not be good reasons to sell going forward. I've followed Fairfax for about 15 years and have never seen sentiment as negative as it is now. While it could get worse, I wouldn't want to bet on it getting worse, not at these prices.

If you ask me - and I am a newbie - I give lots of weight to Parsad's comments. Maybe it is some confirmation bias, but it is appealing to me, credible, and make sense when you have a long time horizon. I do trust they have a great safety net with their valuable assets as Parsad commented. That alone should calm us down a bit and allow us to see the big picture. This company isn't going bankrupt tomorrow. A comment that was also made today is to trust a guy that has built a multi billions dollars company; I also buy that one. Yes, our bearish friends also have valid comments, but I am convinced Prem and his team are working hard to weather the storm and head in the right direction on solid ground going forward. They aren't going to stand still here.

I value different opinions and the beauty of it is that is generates a debate of ideas like this one. You then have the information you need to make your own decision. Mine is to hold and maybe add a little as it gets closer to 300 although I hope not ! Parsad said it all when he said it will eventually revert back close to BV. I can afford to wait. I am happy with 2 years ( or a little more!).
Title: Re: Fairfax 2020
Post by: Xerxes on May 13, 2020, 04:36:59 PM
generally speaking if one wants a good return one needs to be radically right when the market is saying something else and one should be ok with that divergence of opinion and capitalize on it. Otherwise Index consensus investing is the way to go.

But also, it is also true that when one averages down on a stock too often it is sign that the initial thesis was off. I made more money when I averaged UP on a stock. 

At this point though I think FFH has probably become deep value itself.

I just cannot believe that Prem with his 90% holding wouldn’t have an economic interest to right ship AND his reputation.

I am staying course.
Title: Re: Fairfax 2020
Post by: vinod1 on May 13, 2020, 05:03:35 PM
At the current prices it is pretty cheap and I see no reason why it should not be worth say at least 0.8x adjusted book value. So pretty decent upside from $230. Forget the stock price, look at what the business is likely to generate.

Pre-covid I used to buy this at 0.95x and sell at 1.05x.

Now, low rates are likely to last a long time reducing the investment portfolio return big time. In addition, it is exposed to tail risks. I sold out at $455 and it is very very tempting to buy. If I buy I would have a strict position limit.

I think it is good to remember what Buffett mentioned:

When I look at worst case possibilities, I would say that there are things that I think are quite improbable. And I hope they don’t happen, but that doesn’t mean they won’t happen. I mean, for example, in our insurance business, we could have the world’s, or the country’s, number one hurricane that it’s ever had, but that doesn’t preclude the fact that could have the biggest earthquake a month later. So we don’t prepare ourselves for a single problem. We prepare ourselves for problems that sometimes create their own momentum. I mean 2008 and 9, you didn’t see all the problems the first day, when what really kicked it off was when the Freddie and Fannie, the GSEs went into conservatorship in early September. And then when money market funds broke the buck… There are things to trip other things, and we take a very much a worst case scenario into mind that probably is a considerably worse case than most people do.

Yes, Fairfax has a lot of levers to pull, but it needs a bit of luck.

Vinod
Title: Re: Fairfax 2020
Post by: bearprowler6 on May 13, 2020, 05:09:14 PM
At the current prices it is pretty cheap and I see no reason why it should not be worth say at least 0.8x adjusted book value. So pretty decent upside from $230. Forget the stock price, look at what the business is likely to generate.

Pre-covid I used to buy this at 0.95x and sell at 1.05x.

Now, low rates are likely to last a long time reducing the investment portfolio return big time. In addition, it is exposed to tail risks. I sold out at $455 and it is very very tempting to buy. If I buy I would have a strict position limit.

I think it is good to remember what Buffett mentioned:

When I look at worst case possibilities, I would say that there are things that I think are quite improbable. And I hope they don’t happen, but that doesn’t mean they won’t happen. I mean, for example, in our insurance business, we could have the world’s, or the country’s, number one hurricane that it’s ever had, but that doesn’t preclude the fact that could have the biggest earthquake a month later. So we don’t prepare ourselves for a single problem. We prepare ourselves for problems that sometimes create their own momentum. I mean 2008 and 9, you didn’t see all the problems the first day, when what really kicked it off was when the Freddie and Fannie, the GSEs went into conservatorship in early September. And then when money market funds broke the buck… There are things to trip other things, and we take a very much a worst case scenario into mind that probably is a considerably worse case than most people do.

Yes, Fairfax has a lot of levers to pull, but it needs a bit of luck.

Vinod

+1
Title: Re: Fairfax 2020
Post by: Viking on May 13, 2020, 05:09:19 PM
When looking at Fairfax today:
1.) insurance businesses in aggregate are in solid shape writing at 96 CR.
2.) bond portfolio is positioned reasonably well
3.) dividend and interest income, with run rate of $900 million is solid.

What is the above worth?

4.) the remainder is the equity portfolio: stocks, associates, wholly owned companies  which i think is around $9 billion.

The real question When trying to value Fairfax is what is this group of assets worth?

I wonder what would happen to Fairfax’s stock price if they publicly stated that moving forward they will be moving up the quality spectrum with future equity purchases. And disposing of some legacy equity positions (the stinkers). Shift a couple of billion in equities from low quality to higher quality. This would hit BV in the short term (losses on sales); but would likely also result in a higher price/BV from Mr Market.

Perhaps this is kind of what we are seeing play out the last 18-24 months. The biggest new purchase, by far, is Seaspan/Atlas and this looks like a decent company (how good we will only know in a few years as it is still very young in its current incarnation). Last year there were lots of moves to get some of the operating companies into a better spot (Eurobank, AGT etc). We will see the size of Alphabet and Exxon positions.

Wishful thinking?
Title: Re: Fairfax 2020
Post by: Xerxes on May 13, 2020, 05:26:42 PM
13F is couple of days.
We will get some real answer if the equity investment attitude is changing
Title: Re: Fairfax 2020
Post by: Parsad on May 14, 2020, 12:17:14 AM
Clearly a very polarized name with very diverse and interesting point of views. 
Much like the Tesla thread but without the Muskism.

Covid 19 changed the chessboard, I rather wait to see what the new generation would be doing. Starting by this quarter 13F. I like to think I should not underestimate someone who built a multi billion dollar business and his capacity to learn from mistakes.

I sold Nvidia few weeks ago after a good run from $130 ish.
At least that is what I tell to comfort myself when I look at my melting FFH holding ....

Feeling better that I am not alone watching my FFH holding melting ;)

You aren't alone. FRFHF is my largest holding, followed by WFC. I’ve still managed to break even over the past year due to large positions in mining stocks such as NG (purchased in early 2019 and sold recently for 150% gain) and SGGDX (purchased throughout 2019 and up 70%). Now, I’m trying to figure out where to go from here. I’m tempted to keep averaging into my losing positions but am afraid that I’ll box myself into becoming too concentrated.

The bearish arguments provided by Viking, Bearprowler, and others are very compelling, and would probably be enough to convince me to sell if I didn't think that the things they point out (terrible investment results, low interest rates, etc) are already factored into the price. Those would have been great reasons to have already exited (as Viking and Bearprowler did I believe, at much higher prices), but they may or may not be good reasons to sell going forward. I've followed Fairfax for about 15 years and have never seen sentiment as negative as it is now. While it could get worse, I wouldn't want to bet on it getting worse, not at these prices.

If you ask me - and I am a newbie - I give lots of weight to Parsad's comments. Maybe it is some confirmation bias, but it is appealing to me, credible, and make sense when you have a long time horizon. I do trust they have a great safety net with their valuable assets as Parsad commented. That alone should calm us down a bit and allow us to see the big picture. This company isn't going bankrupt tomorrow. A comment that was also made today is to trust a guy that has built a multi billions dollars company; I also buy that one. Yes, our bearish friends also have valid comments, but I am convinced Prem and his team are working hard to weather the storm and head in the right direction on solid ground going forward. They aren't going to stand still here.

I value different opinions and the beauty of it is that is generates a debate of ideas like this one. You then have the information you need to make your own decision. Mine is to hold and maybe add a little as it gets closer to 300 although I hope not ! Parsad said it all when he said it will eventually revert back close to BV. I can afford to wait. I am happy with 2 years ( or a little more!).

Always make your own analytical decisions about investing.  Doesn't matter what I say, what Prem says or even Buffett!  Doesn't matter what we do either.  The easiest way to go broke as a value investor is to simply follow what others are doing instead of doing your own research.  And if you can't stand behind your own research, buy ETF's and dollar cost average in over time.

What I can provide you is perspective, my rational assumptions and how I came to my conclusions.  Yes, I've seen this rodeo before...including with Fairfax.  Amazing what 22 years of investing teaches you, especially over this last generation where we've incredibly seen compressed cycles of 50% drops in the market 3 times...1999/2000, 2008/2009 and 2020/2021. 

You generally get one of those cycles every other generation...we've seen three in one generation.  Is that due to the internet?  Computer trading?  ETF's?  Massive amounts of competition by hedge funds, private equity, pensions, etc?  Recklessness in financial instruments, by the Fed, IMF?  Distortions in monetary policy?  Maybe a combination of all them!

All I know is that I've been given 3 massive swings at the bat in one generation...300% gains over several years.  This is probably the last one before I retire, and I'm going big!  I expect the stuff I'm buying today to be up 300% or better from my current cost over the next 5-7 years. 

While I mourn for the personal losses...we've had 4 people we know die from Covid-19 now...the other part of me like Buffett has always said, welcomes this moment of uncertainty and crisis.  These are the times that the true value investor benefits from the normal transfer of wealth, because everyone is afraid...including the institutions, hedge funds, private equity guys and general market. 

Have we seen the bottom...probably not...I would imagine it will hit in the 2nd or 3rd quarter.  And then the locked up, pent-up consumer frenzy in subsequent quarters will end the recession and breath new life into a new bull market next year.  We'll then face the consequences of all of this loose money flying around.  At some point, I cannot imagine how we will avoid some sort of inflation...as good as governments have become at quantitative easing and tightening.  Government debt will undoubtedly be of concern at some point...not necessarily the U.S., but probably Europe or South America.  Until then, enjoy these prices because this bear market won't last forever...even though they seem like they've been coming fast and furiously!  Cheers!
Title: Re: Fairfax 2020
Post by: petec on May 14, 2020, 04:26:37 AM
13F is couple of days.
We will get some real answer if the equity investment attitude is changing

Don't hold your breath. They'd have had to have sold some of their big positions to do anything meaningful, and they have not mentioned doing so.

As an aside, the Dundee/DPM transaction yesterday shows how they could, in theory, offload some of the big stakes if they wanted.
Title: Re: Fairfax 2020
Post by: bearprowler6 on May 14, 2020, 04:46:50 AM
A shiny object for us to focus on:

https://www.businesswire.com/news/home/20200514005103/en/Kennedy-Wilson-Fairfax-Launch-New-2-Billion
Title: Re: Fairfax 2020
Post by: petec on May 14, 2020, 05:51:22 AM
Ha - what’s wrong with the Eastern US?
Title: Re: Fairfax 2020
Post by: StubbleJumper on May 14, 2020, 06:36:45 AM
A shiny object for us to focus on:

https://www.businesswire.com/news/home/20200514005103/en/Kennedy-Wilson-Fairfax-Launch-New-2-Billion


At least they've made money from their engagement with K-W.
Title: Re: Fairfax 2020
Post by: Bryggen on May 14, 2020, 07:23:15 AM
From CNBC : ''Coronavirus will be the largest loss on record for insurers, Lloyd’s of London says''

Would Fairfax insurance businesses face such a large loss as well?

https://www.cnbc.com/2020/05/14/lloyds-of-london-coronavirus-will-be-largest-loss-on-record-for-insurers.html

Bry
Title: Re: Fairfax 2020
Post by: Xerxes on May 14, 2020, 08:13:30 AM
13F is couple of days.
We will get some real answer if the equity investment attitude is changing

Don't hold your breath. They'd have had to have sold some of their big positions to do anything meaningful, and they have not mentioned doing so.

As an aside, the Dundee/DPM transaction yesterday shows how they could, in theory, offload some of the big stakes if they wanted.

Indeed

Unrelated (and I know that it is impossible at the moment) but if FFH was able to buy back its share at 0.6 BV with the same total quantity that it issued shares ABOVE BV for the Allied World purchase in 2016 that would have been a quite a coup worthy of a song.
Title: Re: Fairfax 2020
Post by: petec on May 14, 2020, 08:21:18 AM
13F is couple of days.
We will get some real answer if the equity investment attitude is changing

Don't hold your breath. They'd have had to have sold some of their big positions to do anything meaningful, and they have not mentioned doing so.

As an aside, the Dundee/DPM transaction yesterday shows how they could, in theory, offload some of the big stakes if they wanted.

Indeed

Unrelated (and I know that it is impossible at the moment) but if FFH was able to buy back its share at 0.6 BV with the same total quantity that it issued shares ABOVE BV for the Allied World purchase in 2016 that would have been a quite a coup worthy of a song.

Ha - if only.
Title: Re: Fairfax 2020
Post by: ourkid8 on May 14, 2020, 10:31:58 AM
FFH is currently repurchasing shares at these prices however not at the same quantity.  :) 

13F is couple of days.
We will get some real answer if the equity investment attitude is changing

Don't hold your breath. They'd have had to have sold some of their big positions to do anything meaningful, and they have not mentioned doing so.

As an aside, the Dundee/DPM transaction yesterday shows how they could, in theory, offload some of the big stakes if they wanted.

Indeed

Unrelated (and I know that it is impossible at the moment) but if FFH was able to buy back its share at 0.6 BV with the same total quantity that it issued shares ABOVE BV for the Allied World purchase in 2016 that would have been a quite a coup worthy of a song.
Title: Re: Fairfax 2020
Post by: Fairfaxnut on May 14, 2020, 10:41:44 AM
FFH is currently repurchasing shares at these prices however not at the same quantity.  :) 

13F is couple of days.
We will get some real answer if the equity investment attitude is changing

Don't hold your breath. They'd have had to have sold some of their big positions to do anything meaningful, and they have not mentioned doing so.

As an aside, the Dundee/DPM transaction yesterday shows how they could, in theory, offload some of the big stakes if they wanted.

Indeed

Unrelated (and I know that it is impossible at the moment) but if FFH was able to buy back its share at 0.6 BV with the same total quantity that it issued shares ABOVE BV for the Allied World purchase in 2016 that would have been a quite a coup worthy of a song.

An SIB would be nice here....
Title: Re: Fairfax 2020
Post by: TwoCitiesCapital on May 14, 2020, 11:39:23 AM

On an unrelated note, anyone have the transcript from Q1 earnings call? Seeking Alpha doesn't seem to have it and I'm uncertain that it will be posted at this point.

If there is no transcript, does anyone mind summarizing what was said about the Equity Total Return swaps previously mentioned in the thread. It sounded like Fairfax went long total return swaps in March?

If that is so, these are likely a source of additional liquidity since these things tend to be standardized and settled on a quarterly basis in cash payments. Depending on the size of the TRS purchase, Fairfax could have tens of millions of cash coming to it in June simply based on what the indices have done since March.
Title: Re: Fairfax 2020
Post by: StubbleJumper on May 14, 2020, 11:58:12 AM

On an unrelated note, anyone have the transcript from Q1 earnings call? Seeking Alpha doesn't seem to have it and I'm uncertain that it will be posted at this point.

If there is no transcript, does anyone mind summarizing what was said about the Equity Total Return swaps previously mentioned in the thread. It sounded like Fairfax went long total return swaps in March?

If that is so, these are likely a source of additional liquidity since these things tend to be standardized and settled on a quarterly basis in cash payments. Depending on the size of the TRS purchase, Fairfax could have tens of millions of cash coming to it in June simply based on what the indices have done since March.


Transcript is here: https://finance.yahoo.com/news/edited-transcript-ffh-earnings-conference-024448274.html


SJ
Title: Re: Fairfax 2020
Post by: TwoCitiesCapital on May 14, 2020, 01:16:58 PM

On an unrelated note, anyone have the transcript from Q1 earnings call? Seeking Alpha doesn't seem to have it and I'm uncertain that it will be posted at this point.

If there is no transcript, does anyone mind summarizing what was said about the Equity Total Return swaps previously mentioned in the thread. It sounded like Fairfax went long total return swaps in March?

If that is so, these are likely a source of additional liquidity since these things tend to be standardized and settled on a quarterly basis in cash payments. Depending on the size of the TRS purchase, Fairfax could have tens of millions of cash coming to it in June simply based on what the indices have done since March.


Transcript is here: https://finance.yahoo.com/news/edited-transcript-ffh-earnings-conference-024448274.html


SJ

Thanks. Wasn't aware YAHOO also provided the service and Google didn't pull it up in a search. Have always relied on SeekingAlpha!

Doesn't seem like a whole lot of information is given on the swaps, notional amounts, or underlying indices. The quarterly report does say the notional for the swaps is $952 million though.

When I worked for a hedge fund, these were typically standardized on total return indices and would settle on the 3rd Thursday of the month ending the quarter or something like that. Things might've changed since then given the move to Central Clearing and whatnot, but I'm just trying to ballpark figures of incoming liquidity to Fairfax as a result of these derivative positions.

Using the S&P 500 total return index and a last settlement date of 3/19 - Fairfax would be in the money by 18.7% on the current run and would be owed a cash payout of $178 million if values don't change between now and June. $178 million of incoming cash in a quarter is nothing to sneeze at for those who are concerned about liquidity issues.
Title: Re: Fairfax 2020
Post by: StubbleJumper on May 14, 2020, 02:37:55 PM

On an unrelated note, anyone have the transcript from Q1 earnings call? Seeking Alpha doesn't seem to have it and I'm uncertain that it will be posted at this point.

If there is no transcript, does anyone mind summarizing what was said about the Equity Total Return swaps previously mentioned in the thread. It sounded like Fairfax went long total return swaps in March?

If that is so, these are likely a source of additional liquidity since these things tend to be standardized and settled on a quarterly basis in cash payments. Depending on the size of the TRS purchase, Fairfax could have tens of millions of cash coming to it in June simply based on what the indices have done since March.


Transcript is here: https://finance.yahoo.com/news/edited-transcript-ffh-earnings-conference-024448274.html


SJ

Thanks. Wasn't aware YAHOO also provided the service and Google didn't pull it up in a search. Have always relied on SeekingAlpha!

Doesn't seem like a whole lot of information is given on the swaps, notional amounts, or underlying indices. The quarterly report does say the notional for the swaps is $952 million though.

When I worked for a hedge fund, these were typically standardized on total return indices and would settle on the 3rd Thursday of the month ending the quarter or something like that. Things might've changed since then given the move to Central Clearing and whatnot, but I'm just trying to ballpark figures of incoming liquidity to Fairfax as a result of these derivative positions.

Using the S&P 500 total return index and a last settlement date of 3/19 - Fairfax would be in the money by 18.7% on the current run and would be owed a cash payout of $178 million if values don't change between now and June. $178 million of incoming cash in a quarter is nothing to sneeze at for those who are concerned about liquidity issues.


Yes, $178m is $6/share pre-tax, so that's great.  I am, however, curious where those swaps are held.  Are they held in holdco or in one or more of the subs?  Money is money, but as you suggested, it would be a happy situation if a cash influx happened to be at the holdco.


SJ
Title: Re: Fairfax 2020
Post by: petec on May 14, 2020, 02:58:42 PM
Excuse my ignorance, but if you’re long a TRS what happens if the market drops? Do you just lose your principal, or is the liability greater?
Title: Re: Fairfax 2020
Post by: TwoCitiesCapital on May 14, 2020, 03:55:30 PM
Excuse my ignorance, but if you’re long a TRS what happens if the market drops? Do you just lose your principal, or is the liability greater?

Typically, index TRS are quarterly cash settled. So if you have $1B of notional that goes up 10% over the quarter, you'd be owed $100 million, less financing costs, at the end of the quarter and the contract would continue forward for the next quarter until maturity.

So in this case, if the $950 million in notional that Fairfax owns goes down more than the $180 million that we estimated they were in the money by, they'd owe cash at the June settlement
Title: Re: Fairfax 2020
Post by: Xerxes on May 14, 2020, 04:29:07 PM
What a the advantage of using a swap instead of just buying the index if the bet was rebound in the market ?
Title: Re: Fairfax 2020
Post by: TwoCitiesCapital on May 14, 2020, 05:16:17 PM
What a the advantage of using a swap instead of just buying the index if the bet was rebound in the market ?

Cash. With the TRS you only need initial margin and maintenance margin to maintain. Fairfax's $950 million position probably only costed something like $90-100 million in cash to put on
Title: Re: Fairfax 2020
Post by: petec on May 15, 2020, 12:35:50 AM
So in this case, if the $950 million in notional that Fairfax owns goes down more than the $180 million that we estimated they were in the money by, they'd owe cash at the June settlement

This all makes my head hurt but I find it very hard to find a positive. A few thoughts:

1) If I understand correctly, Fairfax are exposed in both directions. I am struggling to see how this is much different from the short swaps that so hurt us in the bull market. Fairfax took a levered bet on stock movements without capping their downside or the potential cash collateral calls if they are wrong. In return for a possible $178m profit which doesn't really move the needle, they risked moving the liquidity/capital situation from "mildly concerning" to "oh fuck". If this interpretation is correct, I would argue that they have kept to the letter of their promise not to short equities again, but perhaps not the spirit of it.

2) Although at the end of the quarter their long TRS position was 10x the size of their short position, note 7 suggests they either really f***ed up the timing on their shorts or they were short stocks that have gone up a lot, including in q1. If it is the latter, one might reasonably infer that they shorted the tech stocks they wrote about in the 2019 newsletter - and did so without telling us. Here is the wording: During the first quarter of 2020 the company closed out $404.4 notional amount of its short equity total return swaps and recorded net losses on investments of $107.4 (realized losses of $248.1, of which $140.7 was recorded as unrealized losses in prior quarters). I am no expert but I would assume a $248m loss on $404m of notional means they were very wrong.

@SJ, the wording re: the collateral suggests to me the TRS's are at least partly held at the holding company. Note 7 says: At March 31, 2020 the aggregate fair value of the collateral deposited for the benefit of derivative counterparties included in holding company cash and investments and in assets pledged for short sale and derivative obligations was $413.4 (December 31, 2019 - $152.4)…" Presumably if the collateral is at the holdco, the TRS is too.

@TCC, two questions if I may:
a) note 7 shows zero cost for the long and the short equity TRS's. How does that work? Is the only cost the collateral that needs to be posted? Or is there an up front "premium"?
b) what is the advantage of these TRSs vs a call with capped downside and no need for collateral?

Finally, also in note 7 of the 1q report, can anyone explain the assets & liability columns under "fair value"? Does the asset represent swaps that are in the money and the liability represent swaps that are out of the money?



Title: Re: Fairfax 2020
Post by: TwoCitiesCapital on May 15, 2020, 08:43:27 AM
So in this case, if the $950 million in notional that Fairfax owns goes down more than the $180 million that we estimated they were in the money by, they'd owe cash at the June settlement

This all makes my head hurt but I find it very hard to find a positive. A few thoughts:

1) If I understand correctly, Fairfax are exposed in both directions. I am struggling to see how this is much different from the short swaps that so hurt us in the bull market. Fairfax took a levered bet on stock movements without capping their downside or the potential cash collateral calls if they are wrong. In return for a possible $178m profit which doesn't really move the needle, they risked moving the liquidity/capital situation from "mildly concerning" to "oh fuck". If this interpretation is correct, I would argue that they have kept to the letter of their promise not to short equities again, but perhaps not the spirit of it.


Yes. Exposed in both directions just like owning the stock would, just with a lesser cash outlay upfront. This position provides liquidity at zero gain and positive gains and costs liquidity at negative gains but still likely better than owning the actual security (from a liquidity perspective).

Say they buy $1000 stock. That's $1000 out the door. They buy a TRS for $1000 notional on the same stock and they put up $100-$150. Even if the stock moves against them 50% and they now owe $500, they've still only had a total outlay of $600-650 versus the $1000 from owning the stock directly. Roughly same P&L (less financing costs), but way less cash used.

Quote
2) Although at the end of the quarter their long TRS position was 10x the size of their short position, note 7 suggests they either really f***ed up the timing on their shorts or they were short stocks that have gone up a lot, including in q1. If it is the latter, one might reasonably infer that they shorted the tech stocks they wrote about in the 2019 newsletter - and did so without telling us. Here is the wording: During the first quarter of 2020 the company closed out $404.4 notional amount of its short equity total return swaps and recorded net losses on investments of $107.4 (realized losses of $248.1, of which $140.7 was recorded as unrealized losses in prior quarters). I am no expert but I would assume a $248m loss on $404m of notional means they were very wrong.


I think you're right about what they were short, though sounds to me it's not as bad as you think. They had $404 million of exposure during the first quarter carried @ a $140 million unrealized loss. During the quarter, that $140/million loss became a $240 million realized loss. So yes, they're down 50% on the position as a whole, but only 25% or so came from the 1st quarter. Sounds to me like they were short Amazon?


Quote
@TCC, two questions if I may:
a) note 7 shows zero cost for the long and the short equity TRS's. How does that work? Is the only cost the collateral that needs to be posted? Or is there an up front "premium"?
b) what is the advantage of these TRSs vs a call with capped downside and no need for collateral?

Finally, also in note 7 of the 1q report, can anyone explain the assets & liability columns under "fair value"? Does the asset represent swaps that are in the money and the liability represent swaps that are out of the money?

Typically there is zero cost upfront because the only cash required from you is posting initial margin which is still owned by you. As far as a premium, you pay LIBOR+spread that accrues while the contract is ongoing - financing costs are netted from P&L monthly or quarterly when the contract settles.

For calls your paying a premium for the right to own a contract. For TRS you only pay ongoing LIBOR+spread that is  typically quite a bit less than call premiums AND you're only paying while the contract is active/accruing where calls you pay for the entire time premium upfront.
Title: Re: Fairfax 2020
Post by: Xerxes on May 16, 2020, 03:12:38 PM
Folks
Would it be fair to say that the $2.9 billion that FFH invested in March when credit spread blew out, now that Fed stepped in and closed opportunity for distress fixed income investor, those spread have narrowed, so ... does it mean that a significant portion of that capital gain would be marked-to-market as unrealized gain by close of June (Q2). I think that capital gain is front-loaded where you see most of the snap back happen in Q2 ... and the rest panned over several quarters.

This is 7% of the $39 billion portfolio. The position is significantly larger than Blackberry, Resolute and Seaspan combined. This fixed income unrealized gain on its own might in turn snap back the discount between market and BV.

What am I missing here ?
Title: Re: Fairfax 2020
Post by: petec on May 16, 2020, 03:18:11 PM
They’re fairly short duration bonds, so the price doesn’t move much when the yield compresses. It will be a benefit, but not a game changer.
Title: Re: Fairfax 2020
Post by: Xerxes on May 16, 2020, 04:04:36 PM
They’re fairly short duration bonds, so the price doesn’t move much when the yield compresses. It will be a benefit, but not a game changer.

It says average age of 4 years for the corporate bonds.
In their pre AGM memo update.
Title: Re: Fairfax 2020
Post by: StubbleJumper on May 16, 2020, 05:35:23 PM
They’re fairly short duration bonds, so the price doesn’t move much when the yield compresses. It will be a benefit, but not a game changer.

It says average age of 4 years for the corporate bonds.
In their pre AGM memo update.


Yes, the $2.9B of corporate bonds are about 4 years, plus, apparently the holdco bought a pile of commercial paper with the money that it drew from the revolver (on the call, Prem stressed that these were not corporate bonds, but after the ABCP debacle of 12 years ago, what the hell difference is there?).  The corporate bonds have probably gone up a shade, but with a 4 year duration, it's probably not outrageous.  The bigger question is, if FFH sells the corporates, into what should the proceeds be invested?  Governments haven't budged in the past month, so not much incentive to unload the corporates.


SJ
Title: Re: Fairfax 2020
Post by: Xerxes on May 16, 2020, 06:42:48 PM
Ok so it is really a yield thing. Getting higher yield, which was otherwise unavailable prior.
I thought credit spread snap back would mean meaningful capital gain.
Title: Re: Fairfax 2020
Post by: TwoCitiesCapital on May 16, 2020, 06:44:11 PM
Ok so it is really a yield thing. Getting higher yield, which was otherwise unavailable prior.
I thought credit spread snap back would mean meaningful capital gain.

It would've if they were longer dated and/or high yield. But they were primarily IG and short dated so spread duration wasn't huge and the move in spreads less pronounced.
Title: Re: Fairfax 2020
Post by: Bryggen on May 19, 2020, 08:36:22 AM
From CNBB : ''Coronavirus will be the largest loss on record for insurers, Lloyd’s of London says''

Would Fairfax insurance businesses face such a large loss as well?

https://www.cnbc.com/2020/05/14/lloyds-of-london-coronavirus-will-be-largest-loss-on-record-for-insurers.html

Bry

Throwing that one in again to get you guys' input. Could Fairfax insurance businesses face similar losses? As large as Lloyd's?
Title: Re: Fairfax 2020
Post by: StubbleJumper on May 19, 2020, 10:19:41 AM
From CNBB : ''Coronavirus will be the largest loss on record for insurers, Lloyd’s of London says''

Would Fairfax insurance businesses face such a large loss as well?

https://www.cnbc.com/2020/05/14/lloyds-of-london-coronavirus-will-be-largest-loss-on-record-for-insurers.html

Bry

Throwing that one in again to get you guys' input. Could Fairfax insurance businesses face similar losses? As large as Lloyd's?


I think you need to think about covid on a sub-by-sub basis. 

Prem assures us that the US subs (C&F) used the industry standard virus exclusions in their commercial contracts, which should protect them from business interruption claims.  It seems like about half of the US states have enacted legislation to provide immunity to nursing homes for covid claims ( https://time.com/5835228/nursing-homes-legal-immunity-coronavirus/ ) so that too should help limit litigation.  So far, I have not read about any litigation involving C&F, but there are definitely many cases already launched against other US primary insurers (KJP posted this in the P&C thread: https://www.law360.com/pennsylvania/articles/1273308 ).

Given that Northbridge didn't take a covid provision, one presumes that they used some sort of exclusionary language for business interruption.  What is more, nursing home litigation risk in Canada is less pronounced because getting a class certified is a bit more difficult, and you can usually only sue for actual economic damages in Canada -- punitive damages are very, very rare in Canada, and that would be the expensive part of the claim because the economic damage from the premature death of an 88 year-old is pretty minimal because most of them don't have a job or run a business (ie, when an senior citizen dies a year or two sooner than he should have, virtually no income is lost).

Zenith is one of the subs that causes me consternation.  Zenith has stated on its website that a covid related workers comp claim needs to demonstrate that the virus was caught in the workplace rather than in the community ( https://www.thezenith.com/wp-content/uploads/Zenith-Coronavirus-Update.pdf ).  In most cases, that's a pretty hard thing to prove, but I do wonder whether there won't be some employers/employees who argue that the existence of a covid cluster in a workplace is adequate proof of virus provenance.  In particular, nursing homes, public transit agencies and slaughter houses have all had a heavy incidence of covid, resulting in time off and sometimes death of employees.  I question whether some of that might ultimately come back to Zenith if groups of employees convince a judge or jury that the existence of an employment related cluster is adequate proof that covid was actually a workplace injury.  But, I don't recall seeing any covid provision for Zenith.

Like every other reinsurer in the world, Odyssey is a bit of a concern because it's impossible for a shareholder to have any idea of what exactly is being reinsured.  Odyssey took a $50m covid provision, so obviously there are at least a few policies that are a problem.  But, is Odyssey reinsuring a primary company that was sloppy in the wording of its business interruption insurance?  Hard to know, but it's a point of concern.

The other sub that might be a problem is Brit.  Brit does business in the UK and apparently some of the commercial policies written by UK insurers did not have a virus exclusion, so that might be the driver behind Lloyds' large estimate of indemnities.  Brit did take a covid provision in Q1, but who knows the extent of their problem?  Did they write many commercial policies with business interruption?  What reinsurance have they taken out on their commercial book?


At this point, we don't have many options other than to take Prem at his word and assume that the covid claims will not be very large.  We don't have many options other than to accept that the $84m provision in Q1 is a fair estimate of the ultimate covid liability.  But, I certainly don't blame you for being concerned about how this might evolve.


SJ
Title: Re: Fairfax 2020
Post by: Bryggen on May 19, 2020, 11:13:25 AM
Thanks SJ for your very informative answer to my question/concern.

On another matter, glad FFH got out of this on time a year ago:
https://www.bnnbloomberg.ca/reitmans-seeks-court-protection-from-creditors-under-ccaa-plans-restructuring-1.1438260

We don't have any positions left, isn't?
Title: Re: Fairfax 2020
Post by: StubbleJumper on May 19, 2020, 11:30:14 AM
Thanks SJ for your very informative answer to my question/concern.

On another matter, glad FFH got out of this on time a year ago:
https://www.bnnbloomberg.ca/reitmans-seeks-court-protection-from-creditors-under-ccaa-plans-restructuring-1.1438260

We don't have any positions left, isn't?


No, I think that FFH is out of Reitmans.  The larger concern is that FFH seems to like to buy POS companies that do not have a moat and that operate in highly competitive sectors.  Doing things like buying Reitmans outright while it is reorganizing would be right up FFH's alley!  Let's hope that Prem can resist!


SJ
Title: Re: Fairfax 2020
Post by: Cigarbutt on May 19, 2020, 05:48:47 PM
...
Zenith is one of the subs that causes me consternation.  Zenith has stated on its website that a covid related workers comp claim needs to demonstrate that the virus was caught in the workplace rather than in the community ( https://www.thezenith.com/wp-content/uploads/Zenith-Coronavirus-Update.pdf ).  In most cases, that's a pretty hard thing to prove, but I do wonder whether there won't be some employers/employees who argue that the existence of a covid cluster in a workplace is adequate proof of virus provenance.  In particular, nursing homes, public transit agencies and slaughter houses have all had a heavy incidence of covid, resulting in time off and sometimes death of employees.  I question whether some of that might ultimately come back to Zenith if groups of employees convince a judge or jury that the existence of an employment related cluster is adequate proof that covid was actually a workplace injury.  But, I don't recall seeing any covid provision for Zenith.
...
At this point, we don't have many options other than to take Prem at his word and assume that the covid claims will not be very large.  We don't have many options other than to accept that the $84m provision in Q1 is a fair estimate of the ultimate covid liability.  But, I certainly don't blame you for being concerned about how this might evolve.
SJ
In terms of COVID-19 by priority of potential impact, event cancellation comes first, then business interruption (dynamics developing) and then workers comp exposure (at Zenith). The evolving "presumption" definition makes sense. Typically, the presumption of a work related "disease" (infectious or not) does not apply and the worker has to "prove" that there is causality. However in certain instances (by using classes of work or criteria for exposure) the presumption threshold can be modified. Work-related exposure to COVID-19 will be specific to state or provincial jurisdiction but similar principles apply. Some areas will use a class of work method (ie healthcare workers, first responders, working in meat processing plants?) and states like California will use a criteria method. The end result (the story has evolved when compared to the Zenith link mentioned above; this was released relatively early in the game) was influenced by inputs given by players like Zenith. There may be significant pockets of costs but the typical accepted claim using the criteria will likely result in very manageable costs. Also, the typical person who will get COVID-19 will be asymptomatic or will have limited symptoms. Zenith has a long history of strong underwriting and this episode may even help them to strengthen their moat when rate increases will be authorized by regulators.
https://www.thezenith.com/wp-content/uploads/Agent-GovernorExecutiveOrder.pdf
Title: Re: Fairfax 2020
Post by: Spekulatius on May 19, 2020, 06:51:15 PM
From CNBB : ''Coronavirus will be the largest loss on record for insurers, Lloyd’s of London says''

Would Fairfax insurance businesses face such a large loss as well?

https://www.cnbc.com/2020/05/14/lloyds-of-london-coronavirus-will-be-largest-loss-on-record-for-insurers.html

Bry

Throwing that one in again to get you guys' input. Could Fairfax insurance businesses face similar losses? As large as Lloyd's?


I think you need to think about covid on a sub-by-sub basis. 

Prem assures us that the US subs (C&F) used the industry standard virus exclusions in their commercial contracts, which should protect them from business interruption claims.  It seems like about half of the US states have enacted legislation to provide immunity to nursing homes for covid claims ( https://time.com/5835228/nursing-homes-legal-immunity-coronavirus/ ) so that too should help limit litigation.  So far, I have not read about any litigation involving C&F, but there are definitely many cases already launched against other US primary insurers (KJP posted this in the P&C thread: https://www.law360.com/pennsylvania/articles/1273308 ).

Given that Northbridge didn't take a covid provision, one presumes that they used some sort of exclusionary language for business interruption.  What is more, nursing home litigation risk in Canada is less pronounced because getting a class certified is a bit more difficult, and you can usually only sue for actual economic damages in Canada -- punitive damages are very, very rare in Canada, and that would be the expensive part of the claim because the economic damage from the premature death of an 88 year-old is pretty minimal because most of them don't have a job or run a business (ie, when an senior citizen dies a year or two sooner than he should have, virtually no income is lost).

Zenith is one of the subs that causes me consternation.  Zenith has stated on its website that a covid related workers comp claim needs to demonstrate that the virus was caught in the workplace rather than in the community ( https://www.thezenith.com/wp-content/uploads/Zenith-Coronavirus-Update.pdf ).  In most cases, that's a pretty hard thing to prove, but I do wonder whether there won't be some employers/employees who argue that the existence of a covid cluster in a workplace is adequate proof of virus provenance.  In particular, nursing homes, public transit agencies and slaughter houses have all had a heavy incidence of covid, resulting in time off and sometimes death of employees.  I question whether some of that might ultimately come back to Zenith if groups of employees convince a judge or jury that the existence of an employment related cluster is adequate proof that covid was actually a workplace injury.  But, I don't recall seeing any covid provision for Zenith.

Like every other reinsurer in the world, Odyssey is a bit of a concern because it's impossible for a shareholder to have any idea of what exactly is being reinsured.  Odyssey took a $50m covid provision, so obviously there are at least a few policies that are a problem.  But, is Odyssey reinsuring a primary company that was sloppy in the wording of its business interruption insurance?  Hard to know, but it's a point of concern.

The other sub that might be a problem is Brit.  Brit does business in the UK and apparently some of the commercial policies written by UK insurers did not have a virus exclusion, so that might be the driver behind Lloyds' large estimate of indemnities.  Brit did take a covid provision in Q1, but who knows the extent of their problem?  Did they write many commercial policies with business interruption?  What reinsurance have they taken out on their commercial book?


At this point, we don't have many options other than to take Prem at his word and assume that the covid claims will not be very large.  We don't have many options other than to accept that the $84m provision in Q1 is a fair estimate of the ultimate covid liability.  But, I certainly don't blame you for being concerned about how this might evolve.


SJ

It is important to note that any provision taken for Q1 represents the status as determined on 3/31 , but most likely earlier than that to determine losses.
I think we will see much larger losses in Q2 and Q3, but they doesn’t just apply to FFH subs, it applies to all Insurers.

On 3/31, the epidemic was just ~4 weeks old and insurance losses will take time to play it.
Title: Re: Fairfax 2020
Post by: StubbleJumper on May 19, 2020, 08:19:20 PM
...
Zenith is one of the subs that causes me consternation.  Zenith has stated on its website that a covid related workers comp claim needs to demonstrate that the virus was caught in the workplace rather than in the community ( https://www.thezenith.com/wp-content/uploads/Zenith-Coronavirus-Update.pdf ).  In most cases, that's a pretty hard thing to prove, but I do wonder whether there won't be some employers/employees who argue that the existence of a covid cluster in a workplace is adequate proof of virus provenance.  In particular, nursing homes, public transit agencies and slaughter houses have all had a heavy incidence of covid, resulting in time off and sometimes death of employees.  I question whether some of that might ultimately come back to Zenith if groups of employees convince a judge or jury that the existence of an employment related cluster is adequate proof that covid was actually a workplace injury.  But, I don't recall seeing any covid provision for Zenith.
...
At this point, we don't have many options other than to take Prem at his word and assume that the covid claims will not be very large.  We don't have many options other than to accept that the $84m provision in Q1 is a fair estimate of the ultimate covid liability.  But, I certainly don't blame you for being concerned about how this might evolve.
SJ
In terms of COVID-19 by priority of potential impact, event cancellation comes first, then business interruption (dynamics developing) and then workers comp exposure (at Zenith). The evolving "presumption" definition makes sense. Typically, the presumption of a work related "disease" (infectious or not) does not apply and the worker has to "prove" that there is causality. However in certain instances (by using classes of work or criteria for exposure) the presumption threshold can be modified. Work-related exposure to COVID-19 will be specific to state or provincial jurisdiction but similar principles apply. Some areas will use a class of work method (ie healthcare workers, first responders, working in meat processing plants?) and states like California will use a criteria method. The end result (the story has evolved when compared to the Zenith link mentioned above; this was released relatively early in the game) was influenced by inputs given by players like Zenith. There may be significant pockets of costs but the typical accepted claim using the criteria will likely result in very manageable costs. Also, the typical person who will get COVID-19 will be asymptomatic or will have limited symptoms. Zenith has a long history of strong underwriting and this episode may even help them to strengthen their moat when rate increases will be authorized by regulators.
https://www.thezenith.com/wp-content/uploads/Agent-GovernorExecutiveOrder.pdf


Thanks for the thoughtful observations, Cigarbutt.  I guess my disquietude about workers comp reflects my limited knowledge about the subject.  It was an enormous cost, largely underwritten by Uncle Sam, for the 9/11 response.  There is some talk of public funding for covid workers, but this is yet unclear.  I agree that most will have extremely mild symptoms that they might not even notice, some will have a modest WC claim if they are off work for a month or two because that would likely exhaust their paid sick leave.  The ones that get expensive will be the tail cases -- those that have long-term lung issue, extreme PTSD and those that actually perish from covid.

In the US there have already been about 100 public transit workers who have died from covid (https://www.theguardian.com/world/2020/apr/20/us-bus-drivers-lack-life-saving-basic-protections-transit-worker-deaths-coronavirus).  My guess is that there will be hundreds of workers from nursing homes that will meet the same fate.  And then there will be the other less visible deaths from places like the slaughter plants that we have already mentioned, plus the retail workers who worked in essential businesses.  What kind of indemnities will be triggered?  A couple million bucks per death if the policy covers income replacement for 5, 10, or more years?  It doesn't take a lot of imagination to envision 1,000 fatalities in the US, resulting an industry level indemnity of perhaps a couple billion divided by however many underwriters are in that space.  If the government does get involved, that becomes more manageable (just like what it was for the 9/11 responders), but it seems perplexing to me that this has not already been a cause for at least a modest provision at Zenith.

Anyway, maybe this will end up being nothing-burger for Zenith, but I still find that idea quite counterintuitive.


SJ
Title: Re: Fairfax 2020
Post by: Cigarbutt on May 20, 2020, 05:04:20 AM
...
Zenith is one of the subs that causes me consternation.  Zenith has stated on its website that a covid related workers comp claim needs to demonstrate that the virus was caught in the workplace rather than in the community ( https://www.thezenith.com/wp-content/uploads/Zenith-Coronavirus-Update.pdf ).  In most cases, that's a pretty hard thing to prove, but I do wonder whether there won't be some employers/employees who argue that the existence of a covid cluster in a workplace is adequate proof of virus provenance.  In particular, nursing homes, public transit agencies and slaughter houses have all had a heavy incidence of covid, resulting in time off and sometimes death of employees.  I question whether some of that might ultimately come back to Zenith if groups of employees convince a judge or jury that the existence of an employment related cluster is adequate proof that covid was actually a workplace injury.  But, I don't recall seeing any covid provision for Zenith.
...
At this point, we don't have many options other than to take Prem at his word and assume that the covid claims will not be very large.  We don't have many options other than to accept that the $84m provision in Q1 is a fair estimate of the ultimate covid liability.  But, I certainly don't blame you for being concerned about how this might evolve.
SJ
In terms of COVID-19 by priority of potential impact, event cancellation comes first, then business interruption (dynamics developing) and then workers comp exposure (at Zenith). The evolving "presumption" definition makes sense. Typically, the presumption of a work related "disease" (infectious or not) does not apply and the worker has to "prove" that there is causality. However in certain instances (by using classes of work or criteria for exposure) the presumption threshold can be modified. Work-related exposure to COVID-19 will be specific to state or provincial jurisdiction but similar principles apply. Some areas will use a class of work method (ie healthcare workers, first responders, working in meat processing plants?) and states like California will use a criteria method. The end result (the story has evolved when compared to the Zenith link mentioned above; this was released relatively early in the game) was influenced by inputs given by players like Zenith. There may be significant pockets of costs but the typical accepted claim using the criteria will likely result in very manageable costs. Also, the typical person who will get COVID-19 will be asymptomatic or will have limited symptoms. Zenith has a long history of strong underwriting and this episode may even help them to strengthen their moat when rate increases will be authorized by regulators.
https://www.thezenith.com/wp-content/uploads/Agent-GovernorExecutiveOrder.pdf
Thanks for the thoughtful observations, Cigarbutt.  I guess my disquietude about workers comp reflects my limited knowledge about the subject.  It was an enormous cost, largely underwritten by Uncle Sam, for the 9/11 response.  There is some talk of public funding for covid workers, but this is yet unclear.  I agree that most will have extremely mild symptoms that they might not even notice, some will have a modest WC claim if they are off work for a month or two because that would likely exhaust their paid sick leave.  The ones that get expensive will be the tail cases -- those that have long-term lung issue, extreme PTSD and those that actually perish from covid.
In the US there have already been about 100 public transit workers who have died from covid (https://www.theguardian.com/world/2020/apr/20/us-bus-drivers-lack-life-saving-basic-protections-transit-worker-deaths-coronavirus).  My guess is that there will be hundreds of workers from nursing homes that will meet the same fate.  And then there will be the other less visible deaths from places like the slaughter plants that we have already mentioned, plus the retail workers who worked in essential businesses.  What kind of indemnities will be triggered?  A couple million bucks per death if the policy covers income replacement for 5, 10, or more years?  It doesn't take a lot of imagination to envision 1,000 fatalities in the US, resulting an industry level indemnity of perhaps a couple billion divided by however many underwriters are in that space.  If the government does get involved, that becomes more manageable (just like what it was for the 9/11 responders), but it seems perplexing to me that this has not already been a cause for at least a modest provision at Zenith.
Anyway, maybe this will end up being nothing-burger for Zenith, but I still find that idea quite counterintuitive.
SJ
The post's aim was to moderate the existential worry but it's early and developing and there will be costs to Zenith (currently about #17 in market size). If you look at Markel (currently about #23 in market size), their Q1 report appeared quite conservative overall (versus future losses) for COVID-19 exposure but they reported and commented that the workers comp threat was forming and was not counted in the reported reserve numbers. The following gives an idea of exposure range for the industry:
https://www.insurancejournal.com/news/national/2020/05/05/567599.htm
The factors that mitigate the threat are 1-the degree of "expansiveness" of states for inclusion will be proportional to various state-sponsored stop-loss schemes and 2-use of quota-share and excess of loss reinsurance (of course this is a two-way street).
One thing to watch for is that workers claims tend to rise with unemployment (interesting topic on its own) and that may end up more significant than the disease itself.
Title: Re: Fairfax 2020
Post by: StubbleJumper on May 20, 2020, 07:18:42 AM
Thanks Cigarbutt.  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
Title: Re: Fairfax 2020
Post by: bearprowler6 on May 20, 2020, 07:21:52 AM
Allied World's Reinsurance book of business is also worth watching as Covid claims are identified. Noteworthy here is the facultative coverage offered by AWRe related to workers compensation.

Also, as mentioned much earlier in this thread, Fairfax's overall exposure to 3rd party reinsurers as quantified through its Reinsurance Recoverables also deserves special attention as the extent of Covid claims unfolds over the next several quarters.
Title: Re: Fairfax 2020
Post by: Bryggen on May 22, 2020, 11:46:27 AM
Another Fool article on Fairfax. Simplistic and positive view.

https://ca.finance.yahoo.com/news/canada-warren-buffett-why-now-160053674.html

I may be seeking confirmation bias, but interesting.
Title: Re: Fairfax 2020
Post by: patterson on May 22, 2020, 12:27:21 PM
Another Fool article on Fairfax. Simplistic and positive view.

https://ca.finance.yahoo.com/news/canada-warren-buffett-why-now-160053674.html

I may be seeking confirmation bias, but interesting.

Bryggen,

I agree with the article's conclusion that it's a good time to buy Fairfax, but keep in mind that the Motley Fool has published various iterations of the same article for years now about "Canada's Warren Buffett" and this is just the latest one.
Title: Re: Fairfax 2020
Post by: Bryggen on May 24, 2020, 11:50:44 AM
Tracking Prem Watsa's Fairfax Financial Holdings Portfolio - Q1 2020 Update
https://seekingalpha.com/article/4349793
Title: Re: Fairfax 2020
Post by: Cevian on May 24, 2020, 12:03:22 PM
Where's Exxon? I could have sworn he said Exxon on the call, even mentioned what the dividend was yielding at the time (I think 10%).
Title: Re: Fairfax 2020
Post by: John Hjorth on May 24, 2020, 12:45:26 PM
Where's Exxon? I could have sworn he said Exxon on the call, even mentioned what the dividend was yielding at the time (I think 10%).

Personally, I hear you, Cevian,

Also, personally, I'm [also] puzzled by this, & need to go back to listen to the conference call.
Title: Re: Fairfax 2020
Post by: StubbleJumper on May 24, 2020, 01:07:38 PM
Where's Exxon? I could have sworn he said Exxon on the call, even mentioned what the dividend was yielding at the time (I think 10%).


Prem did mention Exxon by name at the Annual Meeting conference call.  He made reference to a 10% dividend rate.  If they bought it in March and already sold it a few weeks later, they might have made a quick 20% or 25%.


SJ
Title: Re: Fairfax 2020
Post by: Xerxes on May 24, 2020, 03:12:07 PM
Absolutely, he even referred to the exact same CNBC interview that the Exxon CEO was talking about the dividend. And I had watched that interview prior.

Funny thing when 13F came out last week, although I did not see Exxon I did see Chevron as part of their holding. And was just wondering if between Prem and his managers if there was a mistake on what exactly they bought. I hope that is not the case but with these guys losing money on their shorts in Q1 ... who knows what’s going in the black box. I hope that there is a perfectly good explanations for these snd that my biases are just biases.

Unrelated to 13F mishaps, buying Exxon and Chevron at their cyclical low is the right way to invest as a value investor. Buying Stelco at its cyclical high is a bad value investment as a value investor.. No margin of safety will protect you when the denominator “earning” collapses in a recession. In fact often times, (Not related to Stelco) the stock value drops less than the earning collapse, in which case, you actually get multiple expansion even as the absolute dollar value of your investment goes down and your ROI gets to the cleaners.
Title: Re: Fairfax 2020
Post by: Xerxes on May 24, 2020, 03:21:19 PM
Good news is that as Resolute marches into oblivion it represents an ever smaller portion of the equity portfolio, so less damage going forward.

Bad news is that Resolute is not marked to market, so its quarter to quarter valuation never really hit the bottom line in a good or bad way.

Good news is that it has seen a few write offs and those had already hit the book, so unlikely to see more.

I never looked at Resolute earnings in the past ten years, no clue if the earning it contributed diminished in a massive way.
Title: Re: Fairfax 2020
Post by: Bryggen on May 24, 2020, 06:42:49 PM
Where's Exxon? I could have sworn he said Exxon on the call, even mentioned what the dividend was yielding at the time (I think 10%).


Prem did mention Exxon by name at the Annual Meeting conference call.  He made reference to a 10% dividend rate.  If they bought it in March and already sold it a few weeks later, they might have made a quick 20% or 25%.


SJ

Could it be that they purchased after March 31st which is the current filing date? The call was few weeks after that, right? That could explain why it isn't showing.
Title: Re: Fairfax 2020
Post by: StubbleJumper on May 24, 2020, 07:13:16 PM
Where's Exxon? I could have sworn he said Exxon on the call, even mentioned what the dividend was yielding at the time (I think 10%).


Prem did mention Exxon by name at the Annual Meeting conference call.  He made reference to a 10% dividend rate.  If they bought it in March and already sold it a few weeks later, they might have made a quick 20% or 25%.


SJ

Could it be that they purchased after March 31st which is the current filing date? The call was few weeks after that, right? That could explain why it isn't showing.


Yep, that would be a sensible explanation.  Of course, that would also mean that they are probably only ahead by 0-10% if they bought in April. I guess it's better than a kick in the pants.


SJ
Title: Re: Fairfax 2020
Post by: bearprowler6 on May 25, 2020, 08:06:27 AM
Where's Exxon? I could have sworn he said Exxon on the call, even mentioned what the dividend was yielding at the time (I think 10%).


Prem did mention Exxon by name at the Annual Meeting conference call.  He made reference to a 10% dividend rate.  If they bought it in March and already sold it a few weeks later, they might have made a quick 20% or 25%.


SJ

Could it be that they purchased after March 31st which is the current filing date? The call was few weeks after that, right? That could explain why it isn't showing.


Yep, that would be a sensible explanation.  Of course, that would also mean that they are probably only ahead by 0-10% if they bought in April. I guess it's better than a kick in the pants.


SJ

It is also possible that Fairfax did not buy Exxon and Prem misspoke. Something similar happened on a quarterly call not that long ago when Prem referred to Brookfield and yet no transaction involving Brookfield had occurred. I know I have been bashing Prem and the team at Fairfax quite hard recently however in my view it is warranted. It seems to me that Prem has failed as an effective communicator which has resulted in frequent situations such as this where investors do not really know what has gone on. Fairfax is no longer a small little truck insurer run by a bunch of investment professionals with a value investing bias. It is a multi billion dollar global enterprise that needs and quite frankly deserves a fully staffed and professional run Investors Relations team.

In addition to the poor investor communication my other concerns remain including too much debt, numerous long standing equity investments that are under water and not being dealt with and an aging management team with no obvious succession plan in place.
Title: Re: Fairfax 2020
Post by: Thrifty3000 on May 25, 2020, 10:29:26 AM
Where's Exxon? I could have sworn he said Exxon on the call, even mentioned what the dividend was yielding at the time (I think 10%).


Prem did mention Exxon by name at the Annual Meeting conference call.  He made reference to a 10% dividend rate.  If they bought it in March and already sold it a few weeks later, they might have made a quick 20% or 25%.


SJ

Could it be that they purchased after March 31st which is the current filing date? The call was few weeks after that, right? That could explain why it isn't showing.

On page 17 of the recent quarterly report it says:

"During the first quarter of 2020 the company entered into $676.3 notional amount of long equity total return swaps for investment purposes following significant declines in global equity markets in the quarter. At March 31, 2020 the company held long equity total return swaps on individual equities for investment purposes with an original notional amount of $1,138.3 (December 31, 2019 - $501.5)."

I have a hunch the Exxon investment was via a total return swap.
Title: Re: Fairfax 2020
Post by: Xerxes on May 25, 2020, 10:59:22 AM
Thanks Thrifty
That would be awesome, though given that he was referring to the dividend, it kinda tells me he was thinking as an equity position and a contributor to his $1 billion interest/dividend target.

Those equity swap seem like an interesting way to take a directional bet on the market with minimum upfront outlay, but if a market bounce is your bet, I think the swap are best employed against the overall market, rather than individual names. What is the point of doing that unless you were doing on technology "stay-home" specific names.

Anyways, these swaps are completely outside my plain vanilla area of expertise, not that I am an expert in plain vanilla investing either.

but I do know common sense.
Title: Re: Fairfax 2020
Post by: Thrifty3000 on May 25, 2020, 06:54:21 PM
Thanks Thrifty
That would be awesome, though given that he was referring to the dividend, it kinda tells me he was thinking as an equity position and a contributor to his $1 billion interest/dividend target.

Those equity swap seem like an interesting way to take a directional bet on the market with minimum upfront outlay, but if a market bounce is your bet, I think the swap are best employed against the overall market, rather than individual names. What is the point of doing that unless you were doing on technology "stay-home" specific names.

Anyways, these swaps are completely outside my plain vanilla area of expertise, not that I am an expert in plain vanilla investing either.

but I do know common sense.

A total return swap entitles the buyer to receive payments for capital gains and dividends (the total return).

https://www.investopedia.com/terms/t/totalreturnswap.asp
Title: Re: Fairfax 2020
Post by: Cigarbutt on May 26, 2020, 03:49:04 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
Title: Re: Fairfax 2020
Post by: StubbleJumper on May 26, 2020, 05:01:38 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


Thank-you for sharing that document.  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
Title: Re: Fairfax 2020
Post by: bearprowler6 on May 26, 2020, 06:45:30 PM
https://www.torstar.com/images/Torstar_press_release_-_May_26_2020.pdf

Paul Rivett comes out of “retirement”!

Paul Rivett joins Jordan Bitove in taking Torstar private at $0.63 per share or approx $52 million in total.

Fairfax Financial fully supports the take private transaction and will vote its 28.9 million class B Torstar shares in favour of the transaction. Fairfax will realize proceeds of $18.2 million on the sale of its shares.

So let me get this straight....Rivett retires from Fairfax 3 months ago in order to spend time with his family and now comes out of retirement 3 months later in order to take Torstar private which results in a massive realized loss for Fairfax on its Torstar investment?

How massive a loss? Well Fairfax acquired its 28.9 million Torstar Class B shares over several years including in the following transactions:

-   Nov 6/17 ---- 9.4 million shares @ $1.25 per share
-   Aug 25/16 --- 2.6 million shares @ $1.40 per share
-   June 3/16 --- 939,400 shares @ $1.77 per share
-   Mar 14/14 --- 2.4 million shares @ $5.35 per share
-       Earlier purchases were done at much higher per share values

BTW at March 31, 2020 Torstar had more than $78 million in cash on its books and no debt!

Thoughts or comments?
Title: Re: Fairfax 2020
Post by: Cigarbutt on May 26, 2020, 07:19:10 PM
...
https://www.wcirb.com/sites/default/files/documents/rb-covid19-cost_impact_of_governor_executive_order_0.pdf
...

...
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
This is a result partly from the compromise reached whereas the employers will not likely encounter tort litigation for the large majority of deaths (at least that was the case before CV) and the employees' survivors will receive funds relatively automatically corresponding, in substance, to the economic losses (varies across jurisdictions). For CV, there is a risk that the employer is considered or found 'negligent' versus Covid mortality (with the potential for 'nuclear' verdicts) and this would likely bypass the insurance intermediate such as Zenith. The indemnity to dependents is fixed as a percentage of salary (often two-thirds) and there is often a cap (absolute amount or duration) that may be related to the 'ability' to work for the surviving spouse and children no longer qualify for benefits when they reach adulthood (remember the age group of the typical CV death). Also, the indemnity owed by the insurance carrier may be lowered by corresponding amounts that may result from Medicare rules (surviving spouse). So there are a lot of mitigating factors.

An interesting spill-over effect though are the additional costs that employers will accrue (to eventually be passed on the customer) when prevention measures will be applied (equipment and protocols) in order to prevent workers from getting sick when businesses reopen (think restaurants, hospitality, healthcare etc). If i were part of Zenith, i would make sure that future coverage will be conditional on firms following state regulations being presently drafted for going back to work protocols. A lot of potential grey areas and this will not help productivity of the services sector..
Title: Re: Fairfax 2020
Post by: StubbleJumper on May 26, 2020, 07:23:02 PM
https://www.torstar.com/images/Torstar_press_release_-_May_26_2020.pdf

Paul Rivett comes out of “retirement”!

Paul Rivett joins Jordan Bitove in taking Torstar private at $0.63 per share or approx $52 million in total.

Fairfax Financial fully supports the take private transaction and will vote its 28.9 million class B Torstar shares in favour of the transaction. Fairfax will realize proceeds of $18.2 million on the sale of its shares.

So let me get this straight....Rivett retires from Fairfax 3 months ago in order to spend time with his family and now comes out of retirement 3 months later in order to take Torstar private which results in a massive realized loss for Fairfax on its Torstar investment?

How massive a loss? Well Fairfax acquired its 28.9 million Torstar Class B shares over several years including in the following transactions:

-   Nov 6/17 ---- 9.4 million shares @ $1.25 per share
-   Aug 25/16 --- 2.6 million shares @ $1.40 per share
-   June 3/16 --- 939,400 shares @ $1.77 per share
-   Mar 14/14 --- 2.4 million shares @ $5.35 per share
-       Earlier purchases were done at much higher per share values

BTW at March 31, 2020 Torstar had more than $78 million in cash on its books and no debt!

Thoughts or comments?


You hadn't already mentally written this off?  If FFH were to hold this for another 5 or 10 years, what do you figure would be their cashflows from the investment?  Approximately zero?  At least with this arrangement, FFH gets $18m and a tax carry-forward and they can focus on something else.  Maybe they'll also be able to recuperate a bit of capital from Resolute and Toys too?

Past decisions have been regrettable, but moving on isn't necessarily a bad thing.


SJ
Title: Re: Fairfax 2020
Post by: Parsad on May 27, 2020, 12:39:09 AM
https://www.torstar.com/images/Torstar_press_release_-_May_26_2020.pdf

Paul Rivett comes out of “retirement”!

Paul Rivett joins Jordan Bitove in taking Torstar private at $0.63 per share or approx $52 million in total.

Fairfax Financial fully supports the take private transaction and will vote its 28.9 million class B Torstar shares in favour of the transaction. Fairfax will realize proceeds of $18.2 million on the sale of its shares.

So let me get this straight....Rivett retires from Fairfax 3 months ago in order to spend time with his family and now comes out of retirement 3 months later in order to take Torstar private which results in a massive realized loss for Fairfax on its Torstar investment?

How massive a loss? Well Fairfax acquired its 28.9 million Torstar Class B shares over several years including in the following transactions:

-   Nov 6/17 ---- 9.4 million shares @ $1.25 per share
-   Aug 25/16 --- 2.6 million shares @ $1.40 per share
-   June 3/16 --- 939,400 shares @ $1.77 per share
-   Mar 14/14 --- 2.4 million shares @ $5.35 per share
-       Earlier purchases were done at much higher per share values

BTW at March 31, 2020 Torstar had more than $78 million in cash on its books and no debt!

Thoughts or comments?

Interesting...very interesting!  Congratulations to Paul.  Cheers!
Title: Re: Fairfax 2020
Post by: Cevian on May 27, 2020, 05:48:48 AM
https://www.torstar.com/images/Torstar_press_release_-_May_26_2020.pdf

Paul Rivett comes out of “retirement”!

Paul Rivett joins Jordan Bitove in taking Torstar private at $0.63 per share or approx $52 million in total.

Fairfax Financial fully supports the take private transaction and will vote its 28.9 million class B Torstar shares in favour of the transaction. Fairfax will realize proceeds of $18.2 million on the sale of its shares.

So let me get this straight....Rivett retires from Fairfax 3 months ago in order to spend time with his family and now comes out of retirement 3 months later in order to take Torstar private which results in a massive realized loss for Fairfax on its Torstar investment?

How massive a loss? Well Fairfax acquired its 28.9 million Torstar Class B shares over several years including in the following transactions:

-   Nov 6/17 ---- 9.4 million shares @ $1.25 per share
-   Aug 25/16 --- 2.6 million shares @ $1.40 per share
-   June 3/16 --- 939,400 shares @ $1.77 per share
-   Mar 14/14 --- 2.4 million shares @ $5.35 per share
-       Earlier purchases were done at much higher per share values

BTW at March 31, 2020 Torstar had more than $78 million in cash on its books and no debt!

Thoughts or comments?

Optics is not good on this one. I don't like it. In Feb 2020 Prem commented, “Paul told me recently that for family reasons, he wanted to retire as President of Fairfax. It was with great sadness that I accepted his decision".

I've been a big proponent of Prem and hold a lot of shares. Going forward, I'll have to approach any such comments with greater skepticism.
Title: Re: Fairfax 2020
Post by: bearprowler6 on May 27, 2020, 05:55:09 AM
https://www.torstar.com/images/Torstar_press_release_-_May_26_2020.pdf

Paul Rivett comes out of “retirement”!

Paul Rivett joins Jordan Bitove in taking Torstar private at $0.63 per share or approx $52 million in total.

Fairfax Financial fully supports the take private transaction and will vote its 28.9 million class B Torstar shares in favour of the transaction. Fairfax will realize proceeds of $18.2 million on the sale of its shares.

So let me get this straight....Rivett retires from Fairfax 3 months ago in order to spend time with his family and now comes out of retirement 3 months later in order to take Torstar private which results in a massive realized loss for Fairfax on its Torstar investment?

How massive a loss? Well Fairfax acquired its 28.9 million Torstar Class B shares over several years including in the following transactions:

-   Nov 6/17 ---- 9.4 million shares @ $1.25 per share
-   Aug 25/16 --- 2.6 million shares @ $1.40 per share
-   June 3/16 --- 939,400 shares @ $1.77 per share
-   Mar 14/14 --- 2.4 million shares @ $5.35 per share
-       Earlier purchases were done at much higher per share values

BTW at March 31, 2020 Torstar had more than $78 million in cash on its books and no debt!

Thoughts or comments?

Optics is not good on this one. I don't like it. In Feb 2020 Prem commented, “Paul told me recently that for family reasons, he wanted to retire as President of Fairfax. It was with great sadness that I accepted his decision".

I've been a big proponent of Prem and hold a lot of shares. Going forward, I'll have to approach any such comments with greater skepticism.


Yes optics are terrible.....moving on is not a bad thing...but getting robbed by a former executive of the company who was apparently in retirement is quite something else.

Why the hell would Fairfax agree to a buyout of Torstar at $0.63....the cash balance (and no debt) alone is worth more.

The rest of the what Torstar owns....newspapers, several media properties (Torstar paid $190 million for their investment in Vertical Scope only 4 years ago and own 15% of Blue Ant Media etc) are worth considerable more than zero.

Fairfax shareholders (and Torstar shareholders but who cares about them) should be outraged....but all we have here is largely silence from Fairfax shareholders....

I agree with Sanjeev on this one.....good for Paul Rivett....but this should not be allowed to happen....

As for the tax loss carryforwards this sale will create for Fairfax....these are only of value if you have investment gains to offset them which is not something that has been in abundance at Fairfax recently.

BP6

Title: Re: Fairfax 2020
Post by: cwericb on May 27, 2020, 05:59:22 AM
“Paul Rivett joins Jordan Bitove in taking Torstar private at $0.63 per share or approx $52 million in total.”

“BTW at March 31, 2020 Torstar had more than $78 million in cash on its books and no debt!”

Given that we have been mourning the loss of Paul Rivett from Fairfax due to family reasons and now this, in what way does this pass the smell test?

Just wondering what I am missing and why this is worthy of congratulations?

Title: Re: Fairfax 2020
Post by: bearprowler6 on May 27, 2020, 06:28:59 AM
“Paul Rivett joins Jordan Bitove in taking Torstar private at $0.63 per share or approx $52 million in total.”

“BTW at March 31, 2020 Torstar had more than $78 million in cash on its books and no debt!”

Given that we have been mourning the loss of Paul Rivett from Fairfax due to family reasons and now this, in what way does this pass the smell test?

Just wondering what I am missing and why this is worthy of congratulations?

I never bought into the retirement story for Rivett and stated as such on here numerous times over the last several months. I hate to be proven right.....

The congratulations for Rivett is simply because he has picked Prems pocket on his way out the door. If this sale goes through at $0.63 per share than it will go down as one of the greatest corporate deals of all time....from Rivetts perspective alone.

I am outraged....and other Fairfax shareholders should be as well...Fairfax holds more than 40% of the class B shares of Torstar. They have huge input into any takeover of the company. A takeover of Torstar does not occur unless Fairfax agrees. This deal should not go through at $0.63 per share. Wake up Prem!

Something is very very wrong at Fairfax....this is just another example....
Title: Re: Fairfax 2020
Post by: cwericb on May 27, 2020, 06:44:05 AM
Once again, a new application of the "Fair and Friendly" motto of Fairfax.
Title: Re: Fairfax 2020
Post by: NormR on May 27, 2020, 06:51:07 AM
Keep in mind that Paul will likely have to do many unpalatable things at Torstar to have a chance of stopping the red ink. A bunch of them, like firing workers, will eat cash. The required repair job would likely have significant negative publicity value if FFH bought it instead - and the results probably wouldn't move the needle at FFH. There is a reason why Buffett got out of the liquidation business.

I wish Paul the best of luck in his new endeavor.

         
Title: Re: Fairfax 2020
Post by: Pedro on May 27, 2020, 06:59:56 AM
I'm expecting the ongoing monetization of smaller investments/non core/non insurance assets to be at losses. Hope I'm wrong and there's a multi-bagger in there.

I hope they use the $18M to buyback shares.

Title: Re: Fairfax 2020
Post by: bearprowler6 on May 27, 2020, 07:01:12 AM
Keep in mind that Paul will likely have to do many unpalatable things at Torstar to have a chance of stopping the red ink. A bunch of them, like firing workers, will eat cash. The required repair job would likely have significant negative publicity value if FFH bought it instead - and the results probably wouldn't move the needle at FFH. There is a reason why Buffett got out of the liquidation business.

I wish Paul the best of luck in his new endeavor.

       

Norm, none of that justifies accepting, on behalf of Fairfax shareholders, the $0.63 takeover price. Fairfax is in the liquidation business. You don't suddenly get cold feet and give away considerable value (that will take some work to unlock) within Torstar to a former executive of Fairfax who supposedly retired. Please stop defending Prem....he needs be held accountable for yet another one of his Fair and Friendly deals.
Title: Re: Fairfax 2020
Post by: cwericb on May 27, 2020, 07:03:52 AM
Thanks for the input Norm, but the optics are not good here with the numbers and the story surrounding Rivett leaving Fairfax. I doubt many shareholders would be impressed with what looks like a ‘sweetheart deal’.
Title: Re: Fairfax 2020
Post by: StubbleJumper on May 27, 2020, 07:23:25 AM
https://www.torstar.com/images/Torstar_press_release_-_May_26_2020.pdf

Paul Rivett comes out of “retirement”!

Paul Rivett joins Jordan Bitove in taking Torstar private at $0.63 per share or approx $52 million in total.

Fairfax Financial fully supports the take private transaction and will vote its 28.9 million class B Torstar shares in favour of the transaction. Fairfax will realize proceeds of $18.2 million on the sale of its shares.

So let me get this straight....Rivett retires from Fairfax 3 months ago in order to spend time with his family and now comes out of retirement 3 months later in order to take Torstar private which results in a massive realized loss for Fairfax on its Torstar investment?

How massive a loss? Well Fairfax acquired its 28.9 million Torstar Class B shares over several years including in the following transactions:

-   Nov 6/17 ---- 9.4 million shares @ $1.25 per share
-   Aug 25/16 --- 2.6 million shares @ $1.40 per share
-   June 3/16 --- 939,400 shares @ $1.77 per share
-   Mar 14/14 --- 2.4 million shares @ $5.35 per share
-       Earlier purchases were done at much higher per share values

BTW at March 31, 2020 Torstar had more than $78 million in cash on its books and no debt!

Thoughts or comments?

Optics is not good on this one. I don't like it. In Feb 2020 Prem commented, “Paul told me recently that for family reasons, he wanted to retire as President of Fairfax. It was with great sadness that I accepted his decision".

I've been a big proponent of Prem and hold a lot of shares. Going forward, I'll have to approach any such comments with greater skepticism.


Yes optics are terrible.....moving on is not a bad thing...but getting robbed by a former executive of the company who was apparently in retirement is quite something else.

Why the hell would Fairfax agree to a buyout of Torstar at $0.63....the cash balance (and no debt) alone is worth more.

The rest of the what Torstar owns....newspapers, several media properties (Torstar paid $190 million for their investment in Vertical Scope only 4 years ago and own 15% of Blue Ant Media etc) are worth considerable more than zero.

Fairfax shareholders (and Torstar shareholders but who cares about them) should be outraged....but all we have here is largely silence from Fairfax shareholders....

I agree with Sanjeev on this one.....good for Paul Rivett....but this should not be allowed to happen....

As for the tax loss carryforwards this sale will create for Fairfax....these are only of value if you have investment gains to offset them which is not something that has been in abundance at Fairfax recently.

BP6


Bearprowler,

If this is truly a sweetheart deal, should we not expect to see additional suitors appear on the market?  I understand your concerns about the fact that Torstar is being bought at far below book -- and in fact as you said, below cash.  But, if it's an obvious steal, we should expect other offers, right?

I expect no other offer because Torstar appears fundamentally broken.  Newspapers are a dying industry and Torstar is competing in a market that is shared with the Toronto Sun, the Globe and Mail and the National Post.  The only worse newspaper market in Canada is Montreal!  So are Torstar shareholders getting screwed?  I guess there's a couple of ways to try to measure that:

1) Discount the cash from operations - when you look back 3 or 4 years, it seems pretty evident that Torstar has generated essentially no cash from operations, and that's ignoring the need for maintenance capex.  From a basic discounted cash flow sniff-test, how much cash from operations would Torstar need to be worth $100m?  Maybe they'd need about $15m cash from ops (maybe even $20m), understanding that maintenance capex is unavoidable?  Is there any reasonable prospect of getting that kind of cash from ops?  The trend has been really unfavourable, and were it not for a cash infusion from the federal government, would Torstar still even be in business?  I am having trouble seeing any prospect that a future owner could extract annual cashflows from Torstar, but hey, maybe they have some excellent management plan that will turn things around?  From a discounted cashflow perspective, it looks roughly like a zero.

2) Sum of the parts - your point about selling Torstar for less than its cash is spot on.  But, is it feasible for a management team to sell the assets, settle the debts and walk away with more than $52m?  Most of the assets appear to be worth nothing.  If you were to shut down Torstar, under Ontario law you would be on the hook for severance costs of probably 6 months to a year of pay for each of Torstar's hundreds of employees.  My guess is that alone would eat down that cash balance to below the $52m purchase price, and then the employees would go to court to try to have the rest of that cash seized to satisfy the pension plan deficit.  If you liquidate, it's likely a zero, or close to it.


Torstar is a stinker and has been for a long time.  The other one on FFH's books that is also likely a stinker is Toys R Us, but we don't ever see enough disclosure to know for sure.  FFH bought Toys with the notion that the real estate alone was enough to underpin the purchase price, but I am guessing that Toys is losing money from an accounting perspective and I question whether it too is cash flow positive.  And once again, to extract any value out of Toys, FFH has to either find a greater fool, make it profitable enough to pay divvies to FFH, or liquidate it.  And, just like Torstar, it's really tough to liquidate Toys and extract much value from the assets.

The first best option would have been to have never bought crappy assets like these in the first place.  The second best option is to recognize your mistake, try to salvage whatever value you can and move on.

Perversely, I don't view this development as a bad thing.


SJ
Title: Re: Fairfax 2020
Post by: petec on May 27, 2020, 07:26:53 AM
A few things that jump out at me.

1) We do not have the evidence to justify the claim that Rivett has "come out of retirement". A company he jointly controls has made an acquisition. Perhaps he will be heavily involved in the management of this acquisition, or perhaps he will be no more heavily involved than he is at (say) Fairfax, where I believe he remains on more than one board.

2) Fairfax support this deal. This gives rise to two possibilities: a) Fairfax are deeply corrupt and are giving a freebie to a friend, against their own best interests and those of their controlling shareholder, or b) Fairfax (like the broader market) have come to disagree with BP6 on the intrinsic value of Torstar shares (or the likelihood of realising that intrinsic value in a reasonable timeframe) and have decided to move on. I know which I think is more likely.

3) A board which believes Prem cannot admit mistakes, and which has been calling for Prem to crystallise losses and move on, even in stocks which are highly likely to be worth more than their current trading prices, is now horrified that Prem has admitted a mistake/crystallised a loss/moved on at a 67% premium to the current trading price (of the B shares, admittedly).

Title: Re: Fairfax 2020
Post by: mcliu on May 27, 2020, 07:29:58 AM
Not sure about optics with Paul Rivett, it is a little perplexing.

But the deal itself is not a "sweetheart deal". If anything, Torstar's fairly/overvalued at these prices. There's cash, but also a lot of liabilities, AP, provisions, pension liabilties.
FCF in 2019 was ($9M) and ($20M) after capex. There's no indication that'll stop. They'll probably have to inject more working capital if the bleeding continues or accelerates, especially with this whole COVID situation. VerticalScope made $18M in 2019, maybe less this year, but has close to $145M in net debt, so equity is probably not worth very much. It's nowhere near the $100M that they're carrying it at on the books. If you adjust the balance sheets and net out liabilities, there's really not much equity left.

Also, advertising $ is going to take a big hit. Very few newspapers will survive and this is the Toronto Star, not NYT or WSJ.
It was a stupid investment to begin with, so they're lucky to get some money out.
Title: Re: Fairfax 2020
Post by: petec on May 27, 2020, 07:35:20 AM
Not sure about optics with Paul Rivett, it is a little perplexing.


It really isn't that perplexing. At Fairfax, Rivett had a reputation for working extremely hard. People like that don't just stop.
Title: Re: Fairfax 2020
Post by: cwericb on May 27, 2020, 07:40:38 AM
None of us here has a better insight into the value of Torstar than Paul Rivett. If Torstar is such a dud, why would Rivett want to have anything to do with it at the risk of his personal funds?
 
On the other hand if he has a plan to reinvent Torstar, why didn’t he put it in place while Fairfax was still paying him for his expertise?
Title: Re: Fairfax 2020
Post by: bearprowler6 on May 27, 2020, 07:44:02 AM
Were other bidders even given a chance? Seems they have been prevented from bidding on Torstar because the Bitove/Rivett offer was accepted and a break up fee agreed to without testing the market.

The pension issue at Torstar was dealt with. The pension liability was moved off the books in late 2019. Non-issue here.

Sure the newspapers are a dying business however Torstar is much more than its newspapers.....its investments in Veritical Scope and Blue Ant are surely worth something. The 40% of Veritical Scope was bought 5 years ago for $190 million and has grown (albeit with a lot of debt) since than and as for Blue Ant....well Fairfax owns a large chunk of this directly as well so lets hope its not a zero.

If the value of all the other assets of Torstar net to a negative value please explain how the auditors signed off on the BV of the company only a few months ago. Covid has not changed things that much.

Back to the other bidders.....why not Fairfax itself. Sure turnarounds and liquidations are terrible but why give away any potential value that such actions could surface to Bitove/Rivett.

Enough said. I am pleased that Fairfax has dealt with its Torstar mistake but in my view the price is too low. Others disagree. As for the optics around Rivett's involvement. I will leave that to each of you to decide on for yourselves.

BP6




Title: Re: Fairfax 2020
Post by: petec on May 27, 2020, 07:49:17 AM
None of us here has a better insight into the value of Torstar than Paul Rivett. If Torstar is such a dud, why would Rivett want to have anything to do with it at the risk of his personal funds?
 
On the other hand if he has a plan to reinvent Torstar, why didn’t he put it in place while Fairfax was still paying him for his expertise?

None of us does, but plenty of people at Fairfax do. It is quite possible that they simply disagree (which in turn would make agreeing a path forward impossible).
Title: Re: Fairfax 2020
Post by: petec on May 27, 2020, 07:55:45 AM

Back to the other bidders.....why not Fairfax itself.

 ;D

Dear lord can you imagine the reaction on this board if Fairfax took Torstar private?! Prem can't admit mistakes! Declining industries! Good money after bad! Liquidity! Leverage! AAAAAAAAAARRRRRRGGGGGHHHHH.

Couple of (serious!) points:
1) What makes you believe Torstar did not test the market before agreeing this deal?
2) If there was a better deal to be had, why would Fairfax not have taken it?
Title: Re: Fairfax 2020
Post by: Xerxes on May 27, 2020, 07:58:17 AM
Did Prem got the best return for his shareholder (I.e fiduciary duty) under the present condition for Tor Star.

The optics looks weird with Paul but if the answer to the above is Yes, than we are all good.
At least in my simple mind. 
Title: Re: Fairfax 2020
Post by: StubbleJumper on May 27, 2020, 08:04:32 AM

Back to the other bidders.....why not Fairfax itself.

 ;D

Dear lord can you imagine the reaction on this board if Fairfax took Torstar private?! Prem can't admit mistakes! Declining industries! Good money after bad! Liquidity! Leverage! AAAAAAAAAARRRRRRGGGGGHHHHH.

Couple of (serious!) points:
1) What makes you believe Torstar did not test the market before agreeing this deal?
2) If there was a better deal to be had, why would Fairfax not have taken it?

3) Anyone can still make a bid.  The break-fee seems to be only $2+1.5m on a deal that is currently valued at $52m.  If somebody figures that this is a bargain and comes in and offers, say, $75m later this week Torstar BoD wouldn't have much choice but to recommend that the offer be accepted and simply pay the break-fee.  Any offer above $55.5m ($52+3.5) would be a no-brainer for shareholders, right?  Probably not going to happen...
Title: Re: Fairfax 2020
Post by: Daphne on May 27, 2020, 08:28:54 AM
Hang on....no need to ratchet up the conspiracy theories.  I’ve worked on a number of deals, at the most senior levels in the insurance sector, in the retail sector, in media etc.  One in the insurance sector was a multi country deal concluded in ten days start to finish.

So, if we’re going to speculate here, try this plausible scenario (plausible because I’ve seen it happen).  Buyer starts talking to Prem and co about their desire to buy out Torstar and take it private.  Prem says, who’s going to run it?  They say we have a few people in mind.  Prem says, what about Paul, he knows the business, is brilliant at what he does and is looking for a position that keeps him closer to home. Could be a terrific fit.  The rest is history.

McLuhan said it best....if I hadn’t believed it I wouldn’t have seen it.
Title: Re: Fairfax 2020
Post by: Parsad on May 27, 2020, 02:02:34 PM
Agree with Daphne!

You guys need to think about the long-game when it comes to Fairfax...not the short-term.  I have no idea exactly what the reasons were behind Paul making this deal and Fairfax supporting it, but I can think of something that would be in the interest of Fairfax shareholders long-term.  And Prem would not do a deal if it hurts Fairfax shareholders in the slightest...he just doesn't operate that way, and he has no vested interest to do so.  Do you really think Paul would pull the wool over Prem's eyes?  Paul would never put himself ahead of Prem either!

Here's my view:

Paul wanted to slow things down.  He semi-retires from Fairfax, but still sits on Recipe's board.  He then acquires Torstar with Jordan Bitove, through their wholly-owned LP.  Torstar has not worked out for Fairfax.  Now Paul and Jordan have to turn it around or play with the underlying assets and gain some value.  While presently Nordstar is wholly-owned by the Bitove and Rivett families, does anyone in their right mind here believe that they will never raise outside capital for Nordstar once Paul decides...ok, I've played enough golf and I'm done with family time after 3 months of quarantine...I need to exercise my brain again!

Prem is getting older...the Hamblin Watsa old guard is getting older...Buffett made this mistake with the double-T's...good, but not Buffett and not Lou Simpson.  Who is going to carry the investment load...most likely Wade Burton and Lawrence Chin.  But you could allocate capital to other's you trust over time...Nordstar...Francis via Chou Funds or Stonetrust...Atlas Corp...Vito Maida and Patient Capital...etc.

For now, Prem gets rid of Torstar, as they weren't going to spend their time turning it around, plus tax losses to offset gains.  Paul turns it around with Jordan, and they have their vehicle.  Prem can always consider injecting capital into Nordstar or a turned around Torstar later.  You really think Paul or Jordan would reject capital from Prem at some point?  Cheers!
Title: Re: Fairfax 2020
Post by: petec on May 27, 2020, 02:48:38 PM
Is Rivett any good at investing? He’s a lawyer by background. IIRC he was in charge of Fairfax’s private investments and that didn’t go well.
Title: Re: Fairfax 2020
Post by: Parsad on May 27, 2020, 07:57:13 PM
Is Rivett any good at investing? He’s a lawyer by background. IIRC he was in charge of Fairfax’s private investments and that didn’t go well.

I'm constantly confused by this comment about how Fairfax's "private" investments have not done well.  Before, the criticisms used to be how their insurance businesses were awful...but since they are all writing below a 100% CR, now everybody says how awful their private investments are.  Are they great...no...but if you look at the entirety of Fairfax's private investments (including insurance and non-insurance businesses), they have done perfectly fine over time based on the target they are trying to hit on annualized investment return.  Cheers!
Title: Re: Fairfax 2020
Post by: petec on May 28, 2020, 12:13:07 AM
Is Rivett any good at investing? He’s a lawyer by background. IIRC he was in charge of Fairfax’s private investments and that didn’t go well.

I'm constantly confused by this comment about how Fairfax's "private" investments have not done well.  Before, the criticisms used to be how their insurance businesses were awful...but since they are all writing below a 100% CR, now everybody says how awful their private investments are.  Are they great...no...but if you look at the entirety of Fairfax's private investments (including insurance and non-insurance businesses), they have done perfectly fine over time based on the target they are trying to hit on annualized investment return.  Cheers!

Lumping insurance and non-insurance together merely obscures what Fairfax is good at, and what they're not.

Their record on the insurance side is outstanding. They have done wonderfully in Lombard, First Capital, Gulf, probably Digit, and others. This is why I disagree with SJ on the "shithole countries" investments. Brazil in particular may grow to be another home run. In fact if I have any criticism it's that they don't do more - for example I would think Digit's model could be exported to Africa, Latin America, and the rest of Asia, and Fairfax has the footprint to do this.

However, their record on the non-insurance side appears to be dire. There is basically no reporting, so it is hard to tell. But in aggregate the private businesses that are consolidated appear to be lossmaking (IIRC they report ebitda and interest costs and they sum to a negative). Past realisations have shown a couple of wins (Arbor, Ridley), but I don't recall anything that really moved the needle. The only big one (APR) was done at carrying value, which I think had been written down a little. I have (faint) hopes for Quantum, Boat Rocker, Praktiker, and maybe a couple of other little things, but I don't see any evidence of progress overall and there may be some real duds. As far as I can tell Fairfax have conspicuously failed to build a third (insurance, float, private) source of cash flows at a reasonable cost, as Markel and Berkshire have done. I would be delighted by evidence to the contrary, but without it I interpret the monetisation plan as an admission of failure. While I like the admission, the failure needs to be acknowledged.
Title: Re: Fairfax 2020
Post by: Parsad on May 28, 2020, 12:36:37 AM
Is Rivett any good at investing? He’s a lawyer by background. IIRC he was in charge of Fairfax’s private investments and that didn’t go well.

I'm constantly confused by this comment about how Fairfax's "private" investments have not done well.  Before, the criticisms used to be how their insurance businesses were awful...but since they are all writing below a 100% CR, now everybody says how awful their private investments are.  Are they great...no...but if you look at the entirety of Fairfax's private investments (including insurance and non-insurance businesses), they have done perfectly fine over time based on the target they are trying to hit on annualized investment return.  Cheers!

Lumping insurance and non-insurance together merely obscures what Fairfax is good at, and what they're not.

Their record on the insurance side is outstanding. They have done wonderfully in Lombard, First Capital, Gulf, probably Digit, and others. This is why I disagree with SJ on the "shithole countries" investments. Brazil in particular may grow to be another home run. In fact if I have any criticism it's that they don't do more - for example I would think Digit's model could be exported to Africa, Latin America, and the rest of Asia, and Fairfax has the footprint to do this.

However, their record on the non-insurance side appears to be dire. There is basically no reporting, so it is hard to tell. But in aggregate the private businesses that are consolidated appear to be lossmaking (IIRC they report ebitda and interest costs and they sum to a negative). Past realisations have shown a couple of wins (Arbor, Ridley), but I don't recall anything that really moved the needle. The only big one (APR) was done at carrying value, which I think had been written down a little. I have (faint) hopes for Quantum, Boat Rocker, Praktiker, and maybe a couple of other little things, but I don't see any evidence of progress overall and there may be some real duds. As far as I can tell Fairfax have conspicuously failed to build a third (insurance, float, private) source of cash flows at a reasonable cost, as Markel and Berkshire have done. I would be delighted by evidence to the contrary, but without it I interpret the monetisation plan as an admission of failure. While I like the admission, the failure needs to be acknowledged.

Their investment results since inception...from the 2019 Letter:

                         Compound
                          Growth in                    Average               Average Total
                             Book                      Combined                Return on
                      Value per Share                Ratio                  Investments

1986-1990              57.7%                    106.7%                    10.4%
1991-1995              21.2%                    104.2%                      9.7%
1996-2000              30.7%                    114.4%                      8.8%
2001-2005              (0.7)%                   105.4%                      8.6%
2006-2010               24.0%                    99.9%                     11.0%
2011-2016                 2.1%                    96.0%                      2.3%
2017-2019               12.0%                    99.8%                      5.6%

Ok, fine...I'll compare both insurance and investments.  As you can see, in the earlier years, Fairfax was getting great investment returns but insurance was not profitable.  Insurance increased book value and float, but the quality of the insurance businesses needed improvement.  Later, as investments didn't do as well, Fairfax had improved their insurance businesses dramatically. 

So overall, Fairfax's investments have actually done very well...lackluster in the last decade, but really quite good overall.  Whereas their insurance business has improved massively and is writing consistent business during that last decade plus.  If they keep insurance underwriting where it is and modestly improve their investment results compared to the last decade, they are going to have tremendous growth in book value per share.  Cheers!
Title: Re: Fairfax 2020
Post by: petec on May 28, 2020, 01:25:49 AM
We are talking about different things.

I agree about the overall record - that's why I'm a shareholder.

What I am criticising is their record in non-insurance private/control investing.

I think there is a difference in skillset between the various sources of value creation at Fairfax:
1) building and running (and sometimes selling) insurance companies
2) public market bond investing
3) public market equity investing
4) private/control equity investing

These are, roughly speaking, presented from best to worst in terms of what I think Fairfax are good at. By the time you get to (4), I don't think there is any evidence that they have created value in any real way, and I think the monetisation effort is an admission of that fact.
Title: Re: Fairfax 2020
Post by: cwericb on May 28, 2020, 06:26:41 AM
So let’s get down to the nuts and bolts.

I would suggest that no one really cares what Fairfax did 10, 20 or 30 years ago. That’s history. We can quote figures portraying Fairfax as a great company, and I believe it has great potential, but the bottom line is that very few appear to agree.

In 2016 Fairfax share price was pushing $800 CDN. In fact, it was in that area as recently as June 2018.  Two years later the share price can’t seem to reach half that amount. And that is not even factoring in gains the general markets have made in the meantime.

This certainly doesn’t seem to indicate much respect for Fairfax’s performance. We may believe it is a great company but few seem to agree.

Fairfax used to have a large core of longtime shareholders but it would appear that a lot of those longtime shareholders have simply become fed up with the company’s performance and dumped their shares.

The question is: What is Fairfax doing to attract investors, what are they doing to boost the share price?

I ask this because I really don’t think Fairfax management gives a damn.
Title: Re: Fairfax 2020
Post by: StubbleJumper on May 28, 2020, 06:43:57 AM
So let’s get down to the nuts and bolts.

I would suggest that no one really cares what Fairfax did 10, 20 or 30 years ago. That’s history. We can quote figures portraying Fairfax as a great company, and I believe it has great potential, but the bottom line is that very few appear to agree.

In 2016 Fairfax share price was pushing $800 CDN. In fact, it was in that area as recently as June 2018.  Two years later the share price can’t seem to reach half that amount. And that is not even factoring in gains the general markets have made in the meantime.

This certainly doesn’t seem to indicate much respect for Fairfax’s performance. We may believe it is a great company but few seem to agree.

Fairfax used to have a large core of longtime shareholders but it would appear that a lot of those longtime shareholders have simply become fed up with the company’s performance and dumped their shares.

The question is: What is Fairfax doing to attract investors, what are they doing to boost the share price?

I ask this because I really don’t think Fairfax management gives a damn.



No, the exodus of longtime shareholders occurred when Prem decided to reweight his multiple voting shares so that the Watsa family could retain full control of FFH despite having only a 7% economic interest.  That sad story took an interesting twist when Prem decided at the last minute to extend the voting period, presumably because he needed some more time to convince a few shareholders to vote in his favour.  Since that time, the FFH board of directors has been stacked with two Watsa children who have mediocre qualifications, and Prem seems to have created a job for one of the kids by hiving off a chunk of our investment portfolio for him to manage.  Long-time shareholders are not impressed by the governance abuses, and the investing results haven't been good enough for them to keep their shares while holding their noses.

There is a reason why a considerable portion of minority shareholders withhold their director vote for select FFH directors.


SJ
Title: Re: Fairfax 2020
Post by: bearprowler6 on May 28, 2020, 06:57:45 AM
Before wading into today's discussion on Fairfax's poor record on its private market investments and the reasons for Fairfax's poor performance; I thought it worthwhile to post an article from today's Financial Post which features comments from both Rivett and Bitove on their recent Torstar acquisition:

https://business.financialpost.com/news/burning-cash-for-years-pair-acquiring-torstar-eye-growth-while-vowing-to-keep-progressive-values

Two points covered in the article are worth noting:

- Rivett/Bitove will not be engaging in a massive cost cutting exercise at Torstar.
- Fairfax will not be involved in any way going forward.

Its a good article and I wish them well. Too bad their enthusiasm and efforts for a turnaround were not applied during the course of the almost 10 years that Torstar shares were held by Fairfax.

Title: Re: Fairfax 2020
Post by: petec on May 28, 2020, 07:47:53 AM

The question is: What is Fairfax doing to attract investors, what are they doing to boost the share price?

I ask this because I really don’t think Fairfax management gives a damn.


Quite right too. Let them focus on running the company.
Title: Re: Fairfax 2020
Post by: Thrifty3000 on May 28, 2020, 07:57:01 AM
I think a dispassionate appraisal of Fairfax, assuming a continuation of the last decade’s performance as your base case, lands you somewhere in the neighborhood of:

- normalized earnings of $25 to $30 USD per share
- with earnings growth exceeding the pace of share dilution by a couple percentage points.

I’m certain Prem assumes a (much) higher growth rate. And, I’m intrigued by some of the new strategies in progress to achieve faster growth. Structuring specialized investment and management teams around targeted geographies and business models is interesting - and will create multiple channels for deploying capital to the highest return opportunities. For example, if Africa sucks while India thrives we’ll see much more capital concentrated in India than Africa over time (while many on this message board will be overlooking India and whining about Africa. Haha).

The Fairfax insurance operations are a cash machine, minting something like a hundred million dollars a month that has to be re-deployed. That’s not the world’s worst problem to have. If you or I had to deploy a hundred million a month for the next 10 years we’d probably make some billion dollar mistakes too.

The main questions are:

- are you comfortable with the baseline assumption
- if so, then what’s $25 to $30 per share - and growing - of passive, look-through, earnings worth to you (what will it likely be worth to others down the road)
- Are there better alternatives

The short answer is Fairfax is probably worth a good bit more than $270 USD.
Title: Re: Fairfax 2020
Post by: bearprowler6 on May 28, 2020, 08:02:09 AM
We are talking about different things.

I agree about the overall record - that's why I'm a shareholder.

What I am criticising is their record in non-insurance private/control investing.

I think there is a difference in skillset between the various sources of value creation at Fairfax:
1) building and running (and sometimes selling) insurance companies
2) public market bond investing
3) public market equity investing
4) private/control equity investing

These are, roughly speaking, presented from best to worst in terms of what I think Fairfax are good at. By the time you get to (4), I don't think there is any evidence that they have created value in any real way, and I think the monetisation effort is an admission of that fact.

I think an examination of Fairfax's private/control equity investing activities would be a very worth while exercise. Performance in this segment of Fairfax's portfolio has been underwhelming at best. Why is that?

To answer this question I think we need to agree on the investments we are talking about. I assembled the following list after a quick review of the recent annual report----feel free to add names that I may have missed:

Retail Segment

-Golf Town/Sporting Life
-Toys R Us Canada
-Kitchen Stuff Plus
-William Ashley
-Praktiker (in Greece)

Other Segment

-AGT Foods
-Peak Performance (Bauer and Easton brands)
-Boat Rocker
-Rouge Media
-Davos Spirits
-Farmers Edge

Dexterra would have been listed under the Other segment however its recent merger with Horizons Logistics with Fairfax taking back shares of the resulting public company seems to take this one off the table.

My thoughts on the list of private investments:

-very heavily focus on retail
-none large enough to move the needle at the overall Fairfax level
-a number of them were decent turnaround/restructuring opportunities however do not make for very good long term cash generating holdings
-Praktikar (in Greece)---really---why bother?
-a number operate in industries requiring massive scale and investment (e.g., Boat Rocker) which Fairfax cannot provide
-Toys R Us Canada -- if the value was in the underlying real estate than steps should have been taken immediately upon completing the acquisition to realize on that valuu. One has to wonder why this was not done?
-Some offer good longer term value although the extent of that value is hard to assess: AGT, Farmers Edge

Overall I sense the private equity holdings are small, don't really offer much upside, are currently providing a poor return on invested capital, require considerable management time and attention and generally are operating in segments of the economy that have been hit very hard by Covid and will take years to recover.

Thoughts/comments of others?






Title: Re: Fairfax 2020
Post by: petec on May 28, 2020, 08:14:46 AM
We are talking about different things.

I agree about the overall record - that's why I'm a shareholder.

What I am criticising is their record in non-insurance private/control investing.

I think there is a difference in skillset between the various sources of value creation at Fairfax:
1) building and running (and sometimes selling) insurance companies
2) public market bond investing
3) public market equity investing
4) private/control equity investing

These are, roughly speaking, presented from best to worst in terms of what I think Fairfax are good at. By the time you get to (4), I don't think there is any evidence that they have created value in any real way, and I think the monetisation effort is an admission of that fact.

I think an examination of Fairfax's private/control equity investing activities would be a very worth while exercise. Performance in this segment of Fairfax's portfolio has been underwhelming at best. Why is that?

To answer this question I think we need to agree on the investments we are talking about. I assembled the following list after a quick review of the recent annual report----feel free to add names that I may have missed:

Retail Segment

-Golf Town/Sporting Life
-Toys R Us Canada
-Kitchen Stuff Plus
-William Ashley
-Praktiker (in Greece)

Other Segment

-AGT Foods
-Peak Performance (Bauer and Easton brands)
-Boat Rocker
-Rouge Media
-Davos Spirits
-Farmers Edge

Dexterra would have been listed under the Other segment however its recent merger with Horizons Logistics with Fairfax taking back shares of the resulting public company seems to take this one off the table.

My thoughts on the list of private investments:

-very heavily focus on retail
-none large enough to move the needle at the overall Fairfax level
-a number of them were decent turnaround/restructuring opportunities however do not make for very good long term cash generating holdings
-Praktikar (in Greece)---really---why bother?
-a number operate in industries requiring massive scale and investment (e.g., Boat Rocker) which Fairfax cannot provide
-Toys R Us Canada -- if the value was in the underlying real estate than steps should have been taken immediately upon completing the acquisition to realize on that valuu. One has to wonder why this was not done?
-Some offer good longer term value although the extent of that value is hard to assess: AGT, Farmers Edge

Overall I sense the private equity holdings are small, don't really offer much upside, are currently providing a poor return on invested capital, require considerable management time and attention and generally are operating in segments of the economy that have been hit very hard by Covid and will take years to recover.

Thoughts/comments of others?

I agree.

You missed Quantum, the McEwan Group, Blue Ant, Arctic Gateway (partly in AGT). I am sure I have missed some too.

Also, minor point but I think Peak Performance is the Bauer/Easton unit and Peak Achievement is the name for the merged Sporting Life and Golf Town. I may be wrong.
Title: Re: Fairfax 2020
Post by: Thrifty3000 on May 28, 2020, 09:13:21 AM
We are talking about different things.

I agree about the overall record - that's why I'm a shareholder.

What I am criticising is their record in non-insurance private/control investing.

I think there is a difference in skillset between the various sources of value creation at Fairfax:
1) building and running (and sometimes selling) insurance companies
2) public market bond investing
3) public market equity investing
4) private/control equity investing

These are, roughly speaking, presented from best to worst in terms of what I think Fairfax are good at. By the time you get to (4), I don't think there is any evidence that they have created value in any real way, and I think the monetisation effort is an admission of that fact.

I think an examination of Fairfax's private/control equity investing activities would be a very worth while exercise. Performance in this segment of Fairfax's portfolio has been underwhelming at best. Why is that?

To answer this question I think we need to agree on the investments we are talking about. I assembled the following list after a quick review of the recent annual report----feel free to add names that I may have missed:

Retail Segment

-Golf Town/Sporting Life
-Toys R Us Canada
-Kitchen Stuff Plus
-William Ashley
-Praktiker (in Greece)

Other Segment

-AGT Foods
-Peak Performance (Bauer and Easton brands)
-Boat Rocker
-Rouge Media
-Davos Spirits
-Farmers Edge

Dexterra would have been listed under the Other segment however its recent merger with Horizons Logistics with Fairfax taking back shares of the resulting public company seems to take this one off the table.

My thoughts on the list of private investments:

-very heavily focus on retail
-none large enough to move the needle at the overall Fairfax level
-a number of them were decent turnaround/restructuring opportunities however do not make for very good long term cash generating holdings
-Praktikar (in Greece)---really---why bother?
-a number operate in industries requiring massive scale and investment (e.g., Boat Rocker) which Fairfax cannot provide
-Toys R Us Canada -- if the value was in the underlying real estate than steps should have been taken immediately upon completing the acquisition to realize on that valuu. One has to wonder why this was not done?
-Some offer good longer term value although the extent of that value is hard to assess: AGT, Farmers Edge

Overall I sense the private equity holdings are small, don't really offer much upside, are currently providing a poor return on invested capital, require considerable management time and attention and generally are operating in segments of the economy that have been hit very hard by Covid and will take years to recover.

Thoughts/comments of others?

I agree.

You missed Quantum, the McEwan Group, Blue Ant, Arctic Gateway (partly in AGT). I am sure I have missed some too.

Also, minor point but I think Peak Performance is the Bauer/Easton unit and Peak Achievement is the name for the merged Sporting Life and Golf Town. I may be wrong.

It looks to me like they’re implementing a pretty clear strategy to improve overall ROI from their private companies and associates. They seem to be picking a leader in a given industry/region, and then seeking to merge like-companies under that leader to better manage/allocate the capital. Look at all the brands under Recipe now, Eurobank’s acquisition of Grivalia, and Seaspan/APR under Sokol. They’re basically using their influence to create mini-holding companies, with specialist managers that can recommend the best use of capital among the brands in their domain. I think the strategy was already starting to work at Recipe. Despite industry headwinds Recipe was shuttering failing locations, sharing best practices with lower performers, and reallocating capital to the winning concepts.

I think the whole purpose of this strategy is to get lots of business experiments into the hands of several different, proven, managers, so they can more quickly ramp up the winners while letting the losers dwindle. Theoretically these managers will have their ear closer to the ground in their various industries and be able to make acquisition recommendations, etc.

In a way, they’re taking the model they used to allocate capital among insurance subsidiaries, and expanding it to how they will manage private companies and associates going forward. (They did the same thing with investment management teams too.) It might be kind of brilliant.
Title: Re: Fairfax 2020
Post by: bearprowler6 on May 28, 2020, 09:26:54 AM
We are talking about different things.

I agree about the overall record - that's why I'm a shareholder.

What I am criticising is their record in non-insurance private/control investing.

I think there is a difference in skillset between the various sources of value creation at Fairfax:
1) building and running (and sometimes selling) insurance companies
2) public market bond investing
3) public market equity investing
4) private/control equity investing

These are, roughly speaking, presented from best to worst in terms of what I think Fairfax are good at. By the time you get to (4), I don't think there is any evidence that they have created value in any real way, and I think the monetisation effort is an admission of that fact.

I think an examination of Fairfax's private/control equity investing activities would be a very worth while exercise. Performance in this segment of Fairfax's portfolio has been underwhelming at best. Why is that?

To answer this question I think we need to agree on the investments we are talking about. I assembled the following list after a quick review of the recent annual report----feel free to add names that I may have missed:

Retail Segment

-Golf Town/Sporting Life
-Toys R Us Canada
-Kitchen Stuff Plus
-William Ashley
-Praktiker (in Greece)

Other Segment

-AGT Foods
-Peak Performance (Bauer and Easton brands)
-Boat Rocker
-Rouge Media
-Davos Spirits
-Farmers Edge

Dexterra would have been listed under the Other segment however its recent merger with Horizons Logistics with Fairfax taking back shares of the resulting public company seems to take this one off the table.

My thoughts on the list of private investments:

-very heavily focus on retail
-none large enough to move the needle at the overall Fairfax level
-a number of them were decent turnaround/restructuring opportunities however do not make for very good long term cash generating holdings
-Praktikar (in Greece)---really---why bother?
-a number operate in industries requiring massive scale and investment (e.g., Boat Rocker) which Fairfax cannot provide
-Toys R Us Canada -- if the value was in the underlying real estate than steps should have been taken immediately upon completing the acquisition to realize on that valuu. One has to wonder why this was not done?
-Some offer good longer term value although the extent of that value is hard to assess: AGT, Farmers Edge

Overall I sense the private equity holdings are small, don't really offer much upside, are currently providing a poor return on invested capital, require considerable management time and attention and generally are operating in segments of the economy that have been hit very hard by Covid and will take years to recover.

Thoughts/comments of others?

I agree.

You missed Quantum, the McEwan Group, Blue Ant, Arctic Gateway (partly in AGT). I am sure I have missed some too.

Also, minor point but I think Peak Performance is the Bauer/Easton unit and Peak Achievement is the name for the merged Sporting Life and Golf Town. I may be wrong.

It looks to me like they’re implementing a pretty clear strategy to improve overall ROI from their private companies and associates. They seem to be picking a leader in a given industry/region, and then seeking to merge like-companies under that leader to better manage/allocate the capital. Look at all the brands under Recipe now, Eurobank’s acquisition of Grivalia, and Seaspan/APR under Sokol. They’re basically using their influence to create mini-holding companies, with specialist managers that can recommend the best use of capital among the brands in their domain. I think the strategy was already starting to work at Recipe. Despite industry headwinds Recipe was shuttering failing locations, sharing best practices with lower performers, and reallocating capital to the winning concepts.

I think the whole purpose of this strategy is to get lots of business experiments into the hands of several different, proven, managers, so they can more quickly ramp up the winners while letting the losers dwindle. Theoretically these managers will have their ear closer to the ground in their various industries and be able to make acquisition recommendations, etc.

In a way, they’re taking the model they used to allocate capital among insurance subsidiaries, and expanding it to how they will manage private companies and associates going forward. (They did the same thing with investment management teams too.) It might be kind of brilliant.

That is an interesting take on what Fairfax is doing....and if accurate may prove beneficial to Fairfax's bottom line over the medium to longer term.

Sadly as a result of Covid many retail stores and restaurants will suffer and not be able to achieve a reasonable level of profitability in any reasonable period.

I am attaching an interview with Rivett from yesterday (for a retired guy he sures seems busy) where he addresses the difficulties at Recipe:

https://www.bnnbloomberg.ca/recipe-unlimited-chair-urges-landlords-to-play-ball-help-tenants-1.1441853
Title: Re: Fairfax 2020
Post by: Thrifty3000 on May 28, 2020, 09:34:49 AM
We are talking about different things.

I agree about the overall record - that's why I'm a shareholder.

What I am criticising is their record in non-insurance private/control investing.

I think there is a difference in skillset between the various sources of value creation at Fairfax:
1) building and running (and sometimes selling) insurance companies
2) public market bond investing
3) public market equity investing
4) private/control equity investing

These are, roughly speaking, presented from best to worst in terms of what I think Fairfax are good at. By the time you get to (4), I don't think there is any evidence that they have created value in any real way, and I think the monetisation effort is an admission of that fact.

I think an examination of Fairfax's private/control equity investing activities would be a very worth while exercise. Performance in this segment of Fairfax's portfolio has been underwhelming at best. Why is that?

To answer this question I think we need to agree on the investments we are talking about. I assembled the following list after a quick review of the recent annual report----feel free to add names that I may have missed:

Retail Segment

-Golf Town/Sporting Life
-Toys R Us Canada
-Kitchen Stuff Plus
-William Ashley
-Praktiker (in Greece)

Other Segment

-AGT Foods
-Peak Performance (Bauer and Easton brands)
-Boat Rocker
-Rouge Media
-Davos Spirits
-Farmers Edge

Dexterra would have been listed under the Other segment however its recent merger with Horizons Logistics with Fairfax taking back shares of the resulting public company seems to take this one off the table.

My thoughts on the list of private investments:

-very heavily focus on retail
-none large enough to move the needle at the overall Fairfax level
-a number of them were decent turnaround/restructuring opportunities however do not make for very good long term cash generating holdings
-Praktikar (in Greece)---really---why bother?
-a number operate in industries requiring massive scale and investment (e.g., Boat Rocker) which Fairfax cannot provide
-Toys R Us Canada -- if the value was in the underlying real estate than steps should have been taken immediately upon completing the acquisition to realize on that valuu. One has to wonder why this was not done?
-Some offer good longer term value although the extent of that value is hard to assess: AGT, Farmers Edge

Overall I sense the private equity holdings are small, don't really offer much upside, are currently providing a poor return on invested capital, require considerable management time and attention and generally are operating in segments of the economy that have been hit very hard by Covid and will take years to recover.

Thoughts/comments of others?

I agree.

You missed Quantum, the McEwan Group, Blue Ant, Arctic Gateway (partly in AGT). I am sure I have missed some too.

Also, minor point but I think Peak Performance is the Bauer/Easton unit and Peak Achievement is the name for the merged Sporting Life and Golf Town. I may be wrong.

It looks to me like they’re implementing a pretty clear strategy to improve overall ROI from their private companies and associates. They seem to be picking a leader in a given industry/region, and then seeking to merge like-companies under that leader to better manage/allocate the capital. Look at all the brands under Recipe now, Eurobank’s acquisition of Grivalia, and Seaspan/APR under Sokol. They’re basically using their influence to create mini-holding companies, with specialist managers that can recommend the best use of capital among the brands in their domain. I think the strategy was already starting to work at Recipe. Despite industry headwinds Recipe was shuttering failing locations, sharing best practices with lower performers, and reallocating capital to the winning concepts.

I think the whole purpose of this strategy is to get lots of business experiments into the hands of several different, proven, managers, so they can more quickly ramp up the winners while letting the losers dwindle. Theoretically these managers will have their ear closer to the ground in their various industries and be able to make acquisition recommendations, etc.

In a way, they’re taking the model they used to allocate capital among insurance subsidiaries, and expanding it to how they will manage private companies and associates going forward. (They did the same thing with investment management teams too.) It might be kind of brilliant.

That is an interesting take on what Fairfax is doing....and if accurate may prove beneficial to Fairfax's bottom line over the medium to longer term.

Sadly as a result of Covid many retail stores and restaurants will suffer and not be able to achieve a reasonable level of profitability in any reasonable period.

I am attaching an interview with Rivett from yesterday (for a retired guy he sures seems busy) where he addresses the difficulties at Recipe:

https://www.bnnbloomberg.ca/recipe-unlimited-chair-urges-landlords-to-play-ball-help-tenants-1.1441853

Industry difficulties create some of the best opportunity for long term capital allocators like Fairfax. If you’re a restaurant company flying solo then you are nothing but terrified right now. If you are a restaurant company backed by an insurance company with a $40 billion dollar portfolio printing $100 million of cash monthly, you call up Prem and say “hey we might have a cheap acquisition opportunity pretty soon. It will be a total dog during Covid, but after that your family will make a killing for as long as humans still like eating.”
Title: Re: Fairfax 2020
Post by: bearprowler6 on May 28, 2020, 09:43:34 AM
We are talking about different things.

I agree about the overall record - that's why I'm a shareholder.

What I am criticising is their record in non-insurance private/control investing.

I think there is a difference in skillset between the various sources of value creation at Fairfax:
1) building and running (and sometimes selling) insurance companies
2) public market bond investing
3) public market equity investing
4) private/control equity investing

These are, roughly speaking, presented from best to worst in terms of what I think Fairfax are good at. By the time you get to (4), I don't think there is any evidence that they have created value in any real way, and I think the monetisation effort is an admission of that fact.

I think an examination of Fairfax's private/control equity investing activities would be a very worth while exercise. Performance in this segment of Fairfax's portfolio has been underwhelming at best. Why is that?

To answer this question I think we need to agree on the investments we are talking about. I assembled the following list after a quick review of the recent annual report----feel free to add names that I may have missed:

Retail Segment

-Golf Town/Sporting Life
-Toys R Us Canada
-Kitchen Stuff Plus
-William Ashley
-Praktiker (in Greece)

Other Segment

-AGT Foods
-Peak Performance (Bauer and Easton brands)
-Boat Rocker
-Rouge Media
-Davos Spirits
-Farmers Edge

Dexterra would have been listed under the Other segment however its recent merger with Horizons Logistics with Fairfax taking back shares of the resulting public company seems to take this one off the table.

My thoughts on the list of private investments:

-very heavily focus on retail
-none large enough to move the needle at the overall Fairfax level
-a number of them were decent turnaround/restructuring opportunities however do not make for very good long term cash generating holdings
-Praktikar (in Greece)---really---why bother?
-a number operate in industries requiring massive scale and investment (e.g., Boat Rocker) which Fairfax cannot provide
-Toys R Us Canada -- if the value was in the underlying real estate than steps should have been taken immediately upon completing the acquisition to realize on that valuu. One has to wonder why this was not done?
-Some offer good longer term value although the extent of that value is hard to assess: AGT, Farmers Edge

Overall I sense the private equity holdings are small, don't really offer much upside, are currently providing a poor return on invested capital, require considerable management time and attention and generally are operating in segments of the economy that have been hit very hard by Covid and will take years to recover.

Thoughts/comments of others?

I agree.

You missed Quantum, the McEwan Group, Blue Ant, Arctic Gateway (partly in AGT). I am sure I have missed some too.

Also, minor point but I think Peak Performance is the Bauer/Easton unit and Peak Achievement is the name for the merged Sporting Life and Golf Town. I may be wrong.

It looks to me like they’re implementing a pretty clear strategy to improve overall ROI from their private companies and associates. They seem to be picking a leader in a given industry/region, and then seeking to merge like-companies under that leader to better manage/allocate the capital. Look at all the brands under Recipe now, Eurobank’s acquisition of Grivalia, and Seaspan/APR under Sokol. They’re basically using their influence to create mini-holding companies, with specialist managers that can recommend the best use of capital among the brands in their domain. I think the strategy was already starting to work at Recipe. Despite industry headwinds Recipe was shuttering failing locations, sharing best practices with lower performers, and reallocating capital to the winning concepts.

I think the whole purpose of this strategy is to get lots of business experiments into the hands of several different, proven, managers, so they can more quickly ramp up the winners while letting the losers dwindle. Theoretically these managers will have their ear closer to the ground in their various industries and be able to make acquisition recommendations, etc.

In a way, they’re taking the model they used to allocate capital among insurance subsidiaries, and expanding it to how they will manage private companies and associates going forward. (They did the same thing with investment management teams too.) It might be kind of brilliant.

That is an interesting take on what Fairfax is doing....and if accurate may prove beneficial to Fairfax's bottom line over the medium to longer term.

Sadly as a result of Covid many retail stores and restaurants will suffer and not be able to achieve a reasonable level of profitability in any reasonable period.

I am attaching an interview with Rivett from yesterday (for a retired guy he sures seems busy) where he addresses the difficulties at Recipe:

https://www.bnnbloomberg.ca/recipe-unlimited-chair-urges-landlords-to-play-ball-help-tenants-1.1441853

Industry difficulties create some of the best opportunity for long term capital allocators like Fairfax. If you’re a restaurant company flying solo then you are nothing but terrified right now. If you are a restaurant company backed by an insurance company with a $40 billion dollar portfolio printing $100 million of cash monthly, you call up Prem and say “hey we might have a cheap acquisition opportunity pretty soon. It will be a total dog during Covid, but after that your family will make a killing for as long as humans still like eating.”

We will have to agree to disagree on the future for Recipe as a result of Covid......even if/when a vaccine is available the cost structure of dine in restaurants such as those offered under the Recipe umbrella are no longer economically viable as a result of the permanent changes imposed on the restaurants (and many retailers) as a result of Covid....

Restaurants, many retailers and numerous other businesses only make economic sense if they are crowded. The permanent social distancing including severe limits on crowd sizes simply make the fast casual restaurant segment uneconomical. It is for this reason that I believe landlords are not willing to provide rent relief or rent deferrals now.....they do not believe they will be repaid in the future. Just my take on things.

Title: Re: Fairfax 2020
Post by: petec on May 28, 2020, 09:51:13 AM
We are talking about different things.

I agree about the overall record - that's why I'm a shareholder.

What I am criticising is their record in non-insurance private/control investing.

I think there is a difference in skillset between the various sources of value creation at Fairfax:
1) building and running (and sometimes selling) insurance companies
2) public market bond investing
3) public market equity investing
4) private/control equity investing

These are, roughly speaking, presented from best to worst in terms of what I think Fairfax are good at. By the time you get to (4), I don't think there is any evidence that they have created value in any real way, and I think the monetisation effort is an admission of that fact.

I think an examination of Fairfax's private/control equity investing activities would be a very worth while exercise. Performance in this segment of Fairfax's portfolio has been underwhelming at best. Why is that?

To answer this question I think we need to agree on the investments we are talking about. I assembled the following list after a quick review of the recent annual report----feel free to add names that I may have missed:

Retail Segment

-Golf Town/Sporting Life
-Toys R Us Canada
-Kitchen Stuff Plus
-William Ashley
-Praktiker (in Greece)

Other Segment

-AGT Foods
-Peak Performance (Bauer and Easton brands)
-Boat Rocker
-Rouge Media
-Davos Spirits
-Farmers Edge

Dexterra would have been listed under the Other segment however its recent merger with Horizons Logistics with Fairfax taking back shares of the resulting public company seems to take this one off the table.

My thoughts on the list of private investments:

-very heavily focus on retail
-none large enough to move the needle at the overall Fairfax level
-a number of them were decent turnaround/restructuring opportunities however do not make for very good long term cash generating holdings
-Praktikar (in Greece)---really---why bother?
-a number operate in industries requiring massive scale and investment (e.g., Boat Rocker) which Fairfax cannot provide
-Toys R Us Canada -- if the value was in the underlying real estate than steps should have been taken immediately upon completing the acquisition to realize on that valuu. One has to wonder why this was not done?
-Some offer good longer term value although the extent of that value is hard to assess: AGT, Farmers Edge

Overall I sense the private equity holdings are small, don't really offer much upside, are currently providing a poor return on invested capital, require considerable management time and attention and generally are operating in segments of the economy that have been hit very hard by Covid and will take years to recover.

Thoughts/comments of others?

I agree.

You missed Quantum, the McEwan Group, Blue Ant, Arctic Gateway (partly in AGT). I am sure I have missed some too.

Also, minor point but I think Peak Performance is the Bauer/Easton unit and Peak Achievement is the name for the merged Sporting Life and Golf Town. I may be wrong.

It looks to me like they’re implementing a pretty clear strategy to improve overall ROI from their private companies and associates. They seem to be picking a leader in a given industry/region, and then seeking to merge like-companies under that leader to better manage/allocate the capital. Look at all the brands under Recipe now, Eurobank’s acquisition of Grivalia, and Seaspan/APR under Sokol. They’re basically using their influence to create mini-holding companies, with specialist managers that can recommend the best use of capital among the brands in their domain. I think the strategy was already starting to work at Recipe. Despite industry headwinds Recipe was shuttering failing locations, sharing best practices with lower performers, and reallocating capital to the winning concepts.

I think the whole purpose of this strategy is to get lots of business experiments into the hands of several different, proven, managers, so they can more quickly ramp up the winners while letting the losers dwindle. Theoretically these managers will have their ear closer to the ground in their various industries and be able to make acquisition recommendations, etc.

In a way, they’re taking the model they used to allocate capital among insurance subsidiaries, and expanding it to how they will manage private companies and associates going forward. (They did the same thing with investment management teams too.) It might be kind of brilliant.

I think this is exactly right.
Title: Re: Fairfax 2020
Post by: Thrifty3000 on May 28, 2020, 09:52:58 AM
We are talking about different things.

I agree about the overall record - that's why I'm a shareholder.

What I am criticising is their record in non-insurance private/control investing.

I think there is a difference in skillset between the various sources of value creation at Fairfax:
1) building and running (and sometimes selling) insurance companies
2) public market bond investing
3) public market equity investing
4) private/control equity investing

These are, roughly speaking, presented from best to worst in terms of what I think Fairfax are good at. By the time you get to (4), I don't think there is any evidence that they have created value in any real way, and I think the monetisation effort is an admission of that fact.

I think an examination of Fairfax's private/control equity investing activities would be a very worth while exercise. Performance in this segment of Fairfax's portfolio has been underwhelming at best. Why is that?

To answer this question I think we need to agree on the investments we are talking about. I assembled the following list after a quick review of the recent annual report----feel free to add names that I may have missed:

Retail Segment

-Golf Town/Sporting Life
-Toys R Us Canada
-Kitchen Stuff Plus
-William Ashley
-Praktiker (in Greece)

Other Segment

-AGT Foods
-Peak Performance (Bauer and Easton brands)
-Boat Rocker
-Rouge Media
-Davos Spirits
-Farmers Edge

Dexterra would have been listed under the Other segment however its recent merger with Horizons Logistics with Fairfax taking back shares of the resulting public company seems to take this one off the table.

My thoughts on the list of private investments:

-very heavily focus on retail
-none large enough to move the needle at the overall Fairfax level
-a number of them were decent turnaround/restructuring opportunities however do not make for very good long term cash generating holdings
-Praktikar (in Greece)---really---why bother?
-a number operate in industries requiring massive scale and investment (e.g., Boat Rocker) which Fairfax cannot provide
-Toys R Us Canada -- if the value was in the underlying real estate than steps should have been taken immediately upon completing the acquisition to realize on that valuu. One has to wonder why this was not done?
-Some offer good longer term value although the extent of that value is hard to assess: AGT, Farmers Edge

Overall I sense the private equity holdings are small, don't really offer much upside, are currently providing a poor return on invested capital, require considerable management time and attention and generally are operating in segments of the economy that have been hit very hard by Covid and will take years to recover.

Thoughts/comments of others?

I agree.

You missed Quantum, the McEwan Group, Blue Ant, Arctic Gateway (partly in AGT). I am sure I have missed some too.

Also, minor point but I think Peak Performance is the Bauer/Easton unit and Peak Achievement is the name for the merged Sporting Life and Golf Town. I may be wrong.

It looks to me like they’re implementing a pretty clear strategy to improve overall ROI from their private companies and associates. They seem to be picking a leader in a given industry/region, and then seeking to merge like-companies under that leader to better manage/allocate the capital. Look at all the brands under Recipe now, Eurobank’s acquisition of Grivalia, and Seaspan/APR under Sokol. They’re basically using their influence to create mini-holding companies, with specialist managers that can recommend the best use of capital among the brands in their domain. I think the strategy was already starting to work at Recipe. Despite industry headwinds Recipe was shuttering failing locations, sharing best practices with lower performers, and reallocating capital to the winning concepts.

I think the whole purpose of this strategy is to get lots of business experiments into the hands of several different, proven, managers, so they can more quickly ramp up the winners while letting the losers dwindle. Theoretically these managers will have their ear closer to the ground in their various industries and be able to make acquisition recommendations, etc.

In a way, they’re taking the model they used to allocate capital among insurance subsidiaries, and expanding it to how they will manage private companies and associates going forward. (They did the same thing with investment management teams too.) It might be kind of brilliant.

That is an interesting take on what Fairfax is doing....and if accurate may prove beneficial to Fairfax's bottom line over the medium to longer term.

Sadly as a result of Covid many retail stores and restaurants will suffer and not be able to achieve a reasonable level of profitability in any reasonable period.

I am attaching an interview with Rivett from yesterday (for a retired guy he sures seems busy) where he addresses the difficulties at Recipe:

https://www.bnnbloomberg.ca/recipe-unlimited-chair-urges-landlords-to-play-ball-help-tenants-1.1441853

Industry difficulties create some of the best opportunity for long term capital allocators like Fairfax. If you’re a restaurant company flying solo then you are nothing but terrified right now. If you are a restaurant company backed by an insurance company with a $40 billion dollar portfolio printing $100 million of cash monthly, you call up Prem and say “hey we might have a cheap acquisition opportunity pretty soon. It will be a total dog during Covid, but after that your family will make a killing for as long as humans still like eating.”

We will have to agree to disagree on the future for Recipe as a result of Covid......even if/when a vaccine is available the cost structure of dine in restaurants such as those offered under the Recipe umbrella are no longer economically viable as a result of the permanent changes imposed on the restaurants (and many retailers) as a result of Covid....

Restaurants, many retailers and numerous other businesses only make economic sense if they are crowded. The permanent social distancing including severe limits on crowd sizes simply make the fast casual restaurant segment uneconomical. It is for this reason that I believe landlords are not willing to provide rent relief or rent deferrals now.....they do not believe they will be repaid in the future. Just my take on things.

Then the dine-in assets of Recipe will be starved of new capital and will dwindle. In the meantime they may find ways to capitalize on the continuing demand for food preparation. A capitalist with cash flow has options.
Title: Re: Fairfax 2020
Post by: Thrifty3000 on May 28, 2020, 09:53:54 AM
We are talking about different things.

I agree about the overall record - that's why I'm a shareholder.

What I am criticising is their record in non-insurance private/control investing.

I think there is a difference in skillset between the various sources of value creation at Fairfax:
1) building and running (and sometimes selling) insurance companies
2) public market bond investing
3) public market equity investing
4) private/control equity investing

These are, roughly speaking, presented from best to worst in terms of what I think Fairfax are good at. By the time you get to (4), I don't think there is any evidence that they have created value in any real way, and I think the monetisation effort is an admission of that fact.

I think an examination of Fairfax's private/control equity investing activities would be a very worth while exercise. Performance in this segment of Fairfax's portfolio has been underwhelming at best. Why is that?

To answer this question I think we need to agree on the investments we are talking about. I assembled the following list after a quick review of the recent annual report----feel free to add names that I may have missed:

Retail Segment

-Golf Town/Sporting Life
-Toys R Us Canada
-Kitchen Stuff Plus
-William Ashley
-Praktiker (in Greece)

Other Segment

-AGT Foods
-Peak Performance (Bauer and Easton brands)
-Boat Rocker
-Rouge Media
-Davos Spirits
-Farmers Edge

Dexterra would have been listed under the Other segment however its recent merger with Horizons Logistics with Fairfax taking back shares of the resulting public company seems to take this one off the table.

My thoughts on the list of private investments:

-very heavily focus on retail
-none large enough to move the needle at the overall Fairfax level
-a number of them were decent turnaround/restructuring opportunities however do not make for very good long term cash generating holdings
-Praktikar (in Greece)---really---why bother?
-a number operate in industries requiring massive scale and investment (e.g., Boat Rocker) which Fairfax cannot provide
-Toys R Us Canada -- if the value was in the underlying real estate than steps should have been taken immediately upon completing the acquisition to realize on that valuu. One has to wonder why this was not done?
-Some offer good longer term value although the extent of that value is hard to assess: AGT, Farmers Edge

Overall I sense the private equity holdings are small, don't really offer much upside, are currently providing a poor return on invested capital, require considerable management time and attention and generally are operating in segments of the economy that have been hit very hard by Covid and will take years to recover.

Thoughts/comments of others?

I agree.

You missed Quantum, the McEwan Group, Blue Ant, Arctic Gateway (partly in AGT). I am sure I have missed some too.

Also, minor point but I think Peak Performance is the Bauer/Easton unit and Peak Achievement is the name for the merged Sporting Life and Golf Town. I may be wrong.

It looks to me like they’re implementing a pretty clear strategy to improve overall ROI from their private companies and associates. They seem to be picking a leader in a given industry/region, and then seeking to merge like-companies under that leader to better manage/allocate the capital. Look at all the brands under Recipe now, Eurobank’s acquisition of Grivalia, and Seaspan/APR under Sokol. They’re basically using their influence to create mini-holding companies, with specialist managers that can recommend the best use of capital among the brands in their domain. I think the strategy was already starting to work at Recipe. Despite industry headwinds Recipe was shuttering failing locations, sharing best practices with lower performers, and reallocating capital to the winning concepts.

I think the whole purpose of this strategy is to get lots of business experiments into the hands of several different, proven, managers, so they can more quickly ramp up the winners while letting the losers dwindle. Theoretically these managers will have their ear closer to the ground in their various industries and be able to make acquisition recommendations, etc.

In a way, they’re taking the model they used to allocate capital among insurance subsidiaries, and expanding it to how they will manage private companies and associates going forward. (They did the same thing with investment management teams too.) It might be kind of brilliant.

I think this is exactly right.

High five!
Title: Re: Fairfax 2020
Post by: Viking on May 28, 2020, 10:35:10 AM
Pre covid, restaurants in Canada were facing the perfect storm:
1.) rising minimum wage (here in BC it was going up almost $1 per hour for each year for many years)
2.) rising property taxes, as high as 6% in some municipalities
3.) increase in usage of delivery apps (Ubereats etc) resulting in less dine-in; Ubereats take results in very poor margins on these sales

Restaurant stocks, especially large table count/dine in, were in a bear market pre-covid. None of the three trends listed above have gone away.

And then you add covid and you have a business model that is now completely broken (especially the dine in). Establishments with take out windows are best positioned but that is not the majority of Recipe’s establishments (i.e. Keg)

And recessions typically hit food away from home segment harder than food at home.

The restaurant business is extraordinarily difficult even in good times to make money. Fairfax clearly did not understand this basic fact when they started on their journey into restaurant ownership. And they kept adding completely new concepts which added more complexity and resulted in few synergies (each concept has to make it on its own). We discovered over time there was no wizard behind the screen (although the various wizards did get very rich). The bigger Recipe got the greater the chance it would fail. Individual brands lacked leadership and got stale; ‘synergies’ (great word) never materialized.

Having said all the above, there is a good chance that we could see in the next 6 months a devastating number of bankruptcies in this industry. There are lots of mom and pop operators who may not make it. The companies who can make it to the other side might be in good shape. Or perhaps we see a continuation of the long term trend: the industry muddles along and continues to destroy investor capital.

Fairfax might be tempted to double down with Recipe. There will likely be lots of opportunities to pick up other restaurant chains for a song. Or expand existing concepts (as better locations come on the market). But do you give Recipe more $ when they have not demonstrated the pre-covid model even worked? Would there not be lots of ‘synergies’?

They might need to go in the opposite direction. Start to sell off some of their concepts to other operators who are more focussed, passionate, motivated, nimble and better able to execute in covid world.
Title: Re: Fairfax 2020
Post by: bearprowler6 on May 28, 2020, 11:36:04 AM
Pre covid, restaurants in Canada were facing the perfect storm:
1.) rising minimum wage (here in BC it was going up almost $1 per hour for each year for many years)
2.) rising property taxes, as high as 6% in some municipalities
3.) increase in usage of delivery apps (Ubereats etc) resulting in less dine-in; Ubereats take results in very poor margins on these sales

Restaurant stocks, especially large table count/dine in, were in a bear market pre-covid. None of the three trends listed above have gone away.

And then you add covid and you have a business model that is now completely broken (especially the dine in). Establishments with take out windows are best positioned but that is not the majority of Recipe’s establishments (i.e. Keg)

And recessions typically hit food away from home segment harder than food at home.

The restaurant business is extraordinarily difficult even in good times to make money. Fairfax clearly did not understand this basic fact when they started on their journey into restaurant ownership. And they kept adding completely new concepts which added more complexity and resulted in few synergies (each concept has to make it on its own). We discovered over time there was no wizard behind the screen (although the various wizards did get very rich). The bigger Recipe got the greater the chance it would fail. Individual brands lacked leadership and got stale; ‘synergies’ (great word) never materialized.

Having said all the above, there is a good chance that we could see in the next 6 months a devastating number of bankruptcies in this industry. There are lots of mom and pop operators who may not make it. The companies who can make it to the other side might be in good shape. Or perhaps we see a continuation of the long term trend: the industry muddles along and continues to destroy investor capital.

Fairfax might be tempted to double down with Recipe. There will likely be lots of opportunities to pick up other restaurant chains for a song. Or expand existing concepts (as better locations come on the market). But do you give Recipe more $ when they have not demonstrated the pre-covid model even worked? Would there not be lots of ‘synergies’?

They might need to go in the opposite direction. Start to sell off some of their concepts to other operators who are more focussed, passionate, motivated, nimble and better able to execute in covid world.

Amen...very well stated!

My vote....don't give Recipe another dime and begin to look at ways of getting out as much of your investment as possible before it is completely wiped out!

P.s. I have spoken with a lot of restaurant owners---both mom/pop types and those attached to major chains since Covid became a reality. bottom line---restaurants are not a segment where you want to deploy new capital going forward.
Title: Re: Fairfax 2020
Post by: Xerxes on May 28, 2020, 12:41:35 PM
Having said all the above, there is a good chance that we could see in the next 6 months a devastating number of bankruptcies in this industry. There are lots of mom and pop operators who may not make it. The companies who can make it to the other side might be in good shape. Or perhaps we see a continuation of the long term trend: the industry muddles along and continues to destroy investor capital.

Fairfax might be tempted to double down with Recipe. There will likely be lots of opportunities to pick up other restaurant chains for a song. Or expand existing concepts (as better locations come on the market). But do you give Recipe more $ when they have not demonstrated the pre-covid model even worked? Would there not be lots of ‘synergies’?

They might need to go in the opposite direction. Start to sell off some of their concepts to other operators who are more focussed, passionate, motivated, nimble and better able to execute in covid world.

I think the above makes it clear, how time consuming are these "FFH platforms" from capital allocation point of view. Not even the operating aspect of it, which you can leave it in the hands of a great operator, if you find one. So good thing that they didn't keep Torstar. Less bandwidth on the collective brain trust. 

Folks, lets move up from the weeds and trenches to a nice cruising altitude of 50,000 feet.
I have listened to many interviews (well few) with Prem Watsa, and my takeaway has been always on the following two statements that he always repeat, (1) he very often talks about John Templeton and is obviously very much fond of him, I believe he once stated on BNN that he even has a Templeton bust in his office (2) he very strongly believes in one outperformance going a long away to compensate a few laggards and then some

On (1), on this board we often compare Buffet and Watsa, shouldn't we compare Watsa to his own idol, which is John Templeton. Not saying if it is going to better, but just to have the right baseline
On (2) while the statement sounds obvious, maybe all FFH needs is a Seaspan going right

Hopefully, with the value of his holding shaved off 40-45%, he has the right incentives now ...
Title: Re: Fairfax 2020
Post by: Xerxes on May 28, 2020, 12:43:32 PM
I just cross checked on Google, the Prem Watsa with Templeton.

I got a book, where Prem calls Templeton, "perhaps greatest investor of all time"

https://books.google.ca/books?id=lAzBNSKVIjwC&pg=PR7&lpg=PR7&dq=templeton+fund+manager+prem+watsa&source=bl&ots=bEWQoKzEf4&sig=ACfU3U1Zf3R58xEEeWsZL3OAilqafhFapg&hl=en&sa=X&ved=2ahUKEwjQ-v2KptfpAhXYHc0KHXhWAQUQ6AEwA3oECAsQAQ#v=onepage&q=templeton%20fund%20manager%20prem%20watsa&f=false
Title: Re: Fairfax 2020
Post by: Thrifty3000 on May 28, 2020, 01:00:31 PM
Common equity is around $12 billion USD.

The company is selling right now for $7.5 billion - a $4.5 billion haircut off of book value. Ouch.

Investments in associates, India and Africa are marked to model (generously) and on the books for $7 billion.

If Mr. Market was optimistic about those assets then Fairfax would easily trade at a premium to book value (ie. for more than $12 billion). But, Mr. Market is so down on them that he's basically written them off.

It seems like at the current price you're getting a first-rate insurance operator for cheap (even if it has to pair back underwriting or renegotiate some debt covenants near term), and you're getting Recipe, Eurobank, the retailers, Thomas Cook, Bangalor Airport, etc, etc, etc for free (aka really really cheap).

On top of that you have restructured, global, investment and operations management teams better able to grow whatever's left standing post-covid. (For example, even if Recipe loses half its locations in the next two years, the remaining locations could face a third the competition and twice the profitability after that - who knows. Eurobank could be the last bank standing in Greece. The retailers could band together and unseat Amazon - ok ok the retailers are dead.) Chances are there will be at least something left to work with in the portfolio a few years from now.

In short, there's not even a hint of confidence, let alone optimism, priced into this stock right now.
Title: Re: Fairfax 2020
Post by: bearprowler6 on May 28, 2020, 01:30:24 PM
Common equity is around $12 billion USD.

The company is selling right now for $7.5 billion - a $4.5 billion haircut off of book value. Ouch.

Investments in associates, India and Africa are marked to model (generously) and on the books for $7 billion.

If Mr. Market was optimistic about those assets then Fairfax would easily trade at a premium to book value (ie. for more than $12 billion). But, Mr. Market is so down on them that he's basically written them off.

It seems like at the current price you're getting a first-rate insurance operator for cheap (even if it has to pair back underwriting or renegotiate some debt covenants near term), and you're getting Recipe, Eurobank, the retailers, Thomas Cook, Bangalor Airport, etc, etc, etc for free (aka really really cheap).

On top of that you have restructured, global, investment and operations management teams better able to grow whatever's left standing post-covid. (For example, even if Recipe loses half its locations in the next two years, the remaining locations could face a third the competition and twice the profitability after that - who knows. Eurobank could be the last bank standing in Greece. The retailers could band together and unseat Amazon - ok ok the retailers are dead.) Chances are there will be at least something left to work with in the portfolio a few years from now.

In short, there's not even a hint of confidence, let alone optimism, priced into this stock right now.

Thrifty, I understand that the company is trading well below its book value. That point is not in dispute. A few questions need to be asked, first will the gap between the market price and book value close or at least narrow substantially and second, how long will it take to do so.

My view and that all it is....the market has things about right at the current moment. Although there are exceptions (Atlas being one) for the most part the investment held by Fairfax are not very good and in many cases the onset of Covid has severely and permanently impaired the value of many of their investments. As for how long,  I am solidly in the camp that the impact of Covid will last a lot longer than the general market seems to currently believe. As a result, I believe there are other investments (other than Fairfax) that offer better risk/reward profiles (with the emphasis on the risk aspect) than Fairfax currently does.

I believe the perfect storm has arrived and the low quality level of many of Fairfax's investments along with its elevated debt levels has truly exposed Fairfax. I hope and pray that I am wrong but I have positioned my overall portfolio with these beliefs in mind. You are clearly positioning your portfolio otherwise and I respect that.







Title: Re: Fairfax 2020
Post by: Ballinvarosig Investors on May 28, 2020, 02:21:57 PM
Thanks for the input Norm, but the optics are not good here with the numbers and the story surrounding Rivett leaving Fairfax. I doubt many shareholders would be impressed with what looks like a ‘sweetheart deal’.
I think you are wrong on this one.

Torstar was clearly a mistake and the chances of it turning around at this stage are very, very slim. If anything, it's more likely the equity here is going to zero, especially with covid blowing a hole in the balance sheet. My guess is that Fairfax realise this, but they also recognise that Torstar is a Canadian institution with a lot of jobs and history at stake. I am sure that Prem could push for an aggressive liquidation, or perform some asset stripping to squeeze a little bit of extra value, but do you think he is really going to destroy his and Fairfax's reputation for a few pennies? No, I think the proposed deal is more about going private, being able to save some money, having two dedicated owner operators who with both try and give Torstar its best chance at survival.

This sort of thing is not unknown in the newspaper biz these days. We had a newspaper group here in Ireland that was majority owned by insiders, had €80m net cash, was cash flow positive, yet it got sold for just €145m. These types of business are being priced for death probably because they are dead.
Title: Re: Fairfax 2020
Post by: Thrifty3000 on May 28, 2020, 04:10:39 PM
Common equity is around $12 billion USD.

The company is selling right now for $7.5 billion - a $4.5 billion haircut off of book value. Ouch.

Investments in associates, India and Africa are marked to model (generously) and on the books for $7 billion.

If Mr. Market was optimistic about those assets then Fairfax would easily trade at a premium to book value (ie. for more than $12 billion). But, Mr. Market is so down on them that he's basically written them off.

It seems like at the current price you're getting a first-rate insurance operator for cheap (even if it has to pair back underwriting or renegotiate some debt covenants near term), and you're getting Recipe, Eurobank, the retailers, Thomas Cook, Bangalor Airport, etc, etc, etc for free (aka really really cheap).

On top of that you have restructured, global, investment and operations management teams better able to grow whatever's left standing post-covid. (For example, even if Recipe loses half its locations in the next two years, the remaining locations could face a third the competition and twice the profitability after that - who knows. Eurobank could be the last bank standing in Greece. The retailers could band together and unseat Amazon - ok ok the retailers are dead.) Chances are there will be at least something left to work with in the portfolio a few years from now.

In short, there's not even a hint of confidence, let alone optimism, priced into this stock right now.

Thrifty, I understand that the company is trading well below its book value. That point is not in dispute. A few questions need to be asked, first will the gap between the market price and book value close or at least narrow substantially and second, how long will it take to do so.

My view and that all it is....the market has things about right at the current moment. Although there are exceptions (Atlas being one) for the most part the investment held by Fairfax are not very good and in many cases the onset of Covid has severely and permanently impaired the value of many of their investments. As for how long,  I am solidly in the camp that the impact of Covid will last a lot longer than the general market seems to currently believe. As a result, I believe there are other investments (other than Fairfax) that offer better risk/reward profiles (with the emphasis on the risk aspect) than Fairfax currently does.

I believe the perfect storm has arrived and the low quality level of many of Fairfax's investments along with its elevated debt levels has truly exposed Fairfax. I hope and pray that I am wrong but I have positioned my overall portfolio with these beliefs in mind. You are clearly positioning your portfolio otherwise and I respect that.

Alright, let's imagine a pretty nightmarish 3 years to come:

- The only bright spot is $900 million dividend income annually for 3 years
- But, it's consumed by $800 million annual losses in associates (continuing the $205 million loss trend from Q1/2020)
- $0 underwriting profits annually thanks to mega cat losses
- $0 gains from investments annually
- The dividend is canceled and holding company cash dwindles a few hundred million per year to cover various costs
- While tax savings offset holding company interest expense.
- In summary: book value declines to, say, $10 or $11 billion in 3 years. (And Fairfax will have been dropped from the title of this website.)

Then in year 4 the sun comes out and it feels more like the 2017 - 2019 version of Fairfax:

- gains from investments and associates offset holding company costs, interest, taxes, etc
- underwriting profits return to a normalized $200 to $400 million
- interest income holds steady at $800 to $900 million
- $1.3 billion drops to the bottom line, of which $1 billion is attributed to common shareholders, and is celebrated by the owners of 28 million fully diluted common shares
- The world finally awakens to Fairfax's "normalized" earnings potential of $35.71428571428571 USD per share, and slaps a 16 multiple on it for a per share value of $571.4285714285714.

And there you have it, after buying your shares for $275 in 2020 you doubled your money in true Buffett-esqe style in less than 5 years.

Obviously it could play out a few different ways (ex: upon canceling the dividend the share price drops to $50 per share and FFH buys back millions of shares.).

But, am I willing to risk one twentieth of my liquid net worth (minus 25% held in cash) on it working out ok? In a word, yup.
Title: Re: Fairfax 2020
Post by: Parsad on May 28, 2020, 11:53:30 PM
I think a dispassionate appraisal of Fairfax, assuming a continuation of the last decade’s performance as your base case, lands you somewhere in the neighborhood of:

- normalized earnings of $25 to $30 USD per share
- with earnings growth exceeding the pace of share dilution by a couple percentage points.

I’m certain Prem assumes a (much) higher growth rate. And, I’m intrigued by some of the new strategies in progress to achieve faster growth. Structuring specialized investment and management teams around targeted geographies and business models is interesting - and will create multiple channels for deploying capital to the highest return opportunities. For example, if Africa sucks while India thrives we’ll see much more capital concentrated in India than Africa over time (while many on this message board will be overlooking India and whining about Africa. Haha).

The Fairfax insurance operations are a cash machine, minting something like a hundred million dollars a month that has to be re-deployed. That’s not the world’s worst problem to have. If you or I had to deploy a hundred million a month for the next 10 years we’d probably make some billion dollar mistakes too.

The main questions are:

- are you comfortable with the baseline assumption
- if so, then what’s $25 to $30 per share - and growing - of passive, look-through, earnings worth to you (what will it likely be worth to others down the road)
- Are there better alternatives

The short answer is Fairfax is probably worth a good bit more than $270 USD.

With the debt, float and asset/equity leverage Fairfax uses...$30 USD average earnings is very low...I think normalized earnings based on today's book value and leverage, would be somewhere around $45-65 USD.  Cheers!
Title: Re: Fairfax 2020
Post by: petec on May 29, 2020, 12:40:46 AM
I'm a little sceptical about the dividend income in the short term as several holdings (Recipe) have cancelled dividends.

Incidentally, this crisis shows the stupidity of buybacks over dividends in some cases. Recipe bought back a lot of stock in 2019. I am not in the doom and gloom camp on restaurants (I believe they will find ways to adapt) but there are clear structural challenges. In that situation, dividends strike me as a much better idea than buybacks.

But that is somewhat irrelevant here. Fairfax is dirt cheap. Many of its holdings are dirt cheap too, so there is a double discount. It has more cyclical exposure than some might like (bearprowler) but if you believe that the world will return to anything like normal in a reasonable space of time (which I do) Fairfax will be a beneficiary.
Title: Re: Fairfax 2020
Post by: bearprowler6 on May 29, 2020, 05:30:05 AM
Let’s assume Thrifty3000 is correct and Fairfax stock price doubles in the next 5 years producing a very nice compounded rate of return over that period for those who buy in now. Buffett like indeed!

Sadly however for those shareholders that have held Fairfax before Covid the return would be much less than impressive. In fact, if the doubling in share price occurs the share price would essentially get back to where it was about 5-6 years ago. So over what then is a 10-11 year period the rate of return would be much less Buffett like.

Does Fairfax represent an interesting opportunity at the current time. I would say yes with several caveats! Does it represent the best opportunity from the entire universe of possibilities---in my view not likely!

For the record, I have more invested in the equity markets now than prior to the outbreak of the pandemic. I was fortunate to come into the pandemic with a very healthy cash balance and was able to deploy a good portion of the cash into very high quality names that I had been following for years during the panic sell-off in late March. I still hold a smallish position in Fairfax although the position size relative to the size of my entire portfolio is significantly reduced from where it was several years ago and even from where it was at the beginning of the year. I was fortunate to sell off a significant portion of the Fairfax shares I held earlier this year as the pandemic news started to break – some above $600 CAD and some above $500 CAD. I sold the shares this year because I believed that Fairfax was not positioned (for all the reasons I have been writing about) to hold up well to what I expected would be a very difficult economic environment.

So where does that leave things--- I believe that a decent rate of return can perhaps be made on Fairfax from these levels however other opportunities (e.g, certain reits, certain oil & gas names, CB or TRV if one insists on property & casualty exposure and perhaps even a direct investment into either or both Atco and Blackberry) of higher quality (my judgement) and of equal or greater rate of return potential  are available and should be considered over an investment into Fairfax at this time.

Title: Re: Fairfax 2020
Post by: Bryggen on June 01, 2020, 11:23:54 AM
Fairfax Held Talks to Acquire Remaining Shares of BlackBerry (BB) - Source

Surprised? Not really. Positive? Probably.

https://www.streetinsider.com/Hot+M+and+A/Fairfax+Held+Talks+to+Acquire+Remaining+Shares+of+BlackBerry+%28BB%29+-+Source/16955634.html


Thoughts?
Title: Re: Fairfax 2020
Post by: TwoCitiesCapital on June 01, 2020, 11:30:29 AM
Fairfax Held Talks to Acquire Remaining Shares of BlackBerry (BB) - Source

Surprised? Not really. Positive? Probably.

https://www.streetinsider.com/Hot+M+and+A/Fairfax+Held+Talks+to+Acquire+Remaining+Shares+of+BlackBerry+%28BB%29+-+Source/16955634.html


Thoughts?

Behind a paywall, so I can't see all of the details. That being said, I got burned betting on Blackberry the LAST time Fairfax announced the intended acquisition of the remainder of the company, so hesitant to believe it'll actually happen this time around - though shares are much cheaper.
Title: Re: Fairfax 2020
Post by: omagh on June 01, 2020, 12:12:50 PM
Fairfax Held Talks to Acquire Remaining Shares of BlackBerry (BB) - Source

Surprised? Not really. Positive? Probably.

https://www.streetinsider.com/Hot+M+and+A/Fairfax+Held+Talks+to+Acquire+Remaining+Shares+of+BlackBerry+%28BB%29+-+Source/16955634.html


Thoughts?

It looks like due diligence is going on from BB side.  Not much news...
https://seekingalpha.com/news/3579210-fairfax-held-talks-to-buy-remaining-shares-of-blackberry-street-insider (https://seekingalpha.com/news/3579210-fairfax-held-talks-to-buy-remaining-shares-of-blackberry-street-insider)
BlackBerry (BB +5.2%) surges as much as 7% after Street Insider reported Fairfax Financial recently held talks to acquire the remaining shares it did not already own.

According to the article, BlackBerry has formed a special committee and hired bankers to assist in the potential acquisition.

More to come...
Title: Re: Fairfax 2020
Post by: rb on June 01, 2020, 12:42:21 PM
Oh great! Buying more dogshit!

Btw it's real, just got an email from a buddy of mine that works there. The guys are prepping their resumes to leave after they get vested by this deal.
Title: Re: Fairfax 2020
Post by: Bryggen on June 01, 2020, 01:47:00 PM
Oh great! Buying more dogshit!

Btw it's real, just got an email from a buddy of mine that works there. The guys are prepping their resumes to leave after they get vested by this deal.

Not sure it would be a bad deal depending on what they pay for BB. I think they can sell this as a whole or in parts for much more in just few years. Leaving it grow without the pressure of the market should benefit. I think there is potential in the cybersecurity space and that BB has value overall.

As for your tip, I am always very careful when I hear those i.e. '' a friend says...'' ;)
Title: Re: Fairfax 2020
Post by: Viking on June 01, 2020, 02:08:02 PM
I agree, private ownership would be better for Blackberry as it executes on its transformation. And Fairfax certainly should understand the company right now.

Just wondering where Fairfax will get the $ from? They will need a big chunk of money. Another partnership with OMERS?

And interesting that they feel this would be the best use of shareholders capital - versus buying Fairfax shares at a steep discount or growing insurance subs in hard market or buying something else.

Perhaps something is driving the decision to make the purchase now.
Title: Re: Fairfax 2020
Post by: rb on June 01, 2020, 02:11:47 PM
Really? They've been doing their "transformation"for close to 10 years now. When is it going to transform? 2040?

They're basically ramping up to incinerate a whole lot more capital.
Title: Re: Fairfax 2020
Post by: rb on June 01, 2020, 02:18:40 PM
Oh great! Buying more dogshit!

Btw it's real, just got an email from a buddy of mine that works there. The guys are prepping their resumes to leave after they get vested by this deal.

Not sure it would be a bad deal depending on what they pay for BB. I think they can sell this as a whole or in parts for much more in just few years. Leaving it grow without the pressure of the market should benefit. I think there is potential in the cybersecurity space and that BB has value overall.

As for your tip, I am always very careful when I hear those i.e. '' a friend says...'' ;)
Well it's pretty clear what they're gonna pay isn't it? A control premium to the current stock price. Were you a Blackberry investor? If so, why not? It's obviously a great deal.
Title: Re: Fairfax 2020
Post by: Xerxes on June 01, 2020, 02:24:18 PM
I think unlike Torstar, Stelco or Resolute (why?why?), BB had merits in the right hand. Folks, might bundle all of FFH mistakes into one bucket, but I don't think BB belongs there in the pile of stupid ideas. They should keep it and partner with someone for the privatization.

I don't know if folks noticed, I recall seeing on the news feed somewhere in the Teachers' 13F that they had invested in BB common shares in Q4 or Q1. I ll try to find the source.

What BB should do first is to raise capital at very low rate, to pay off the convert and stop paying that high rate to FFH. that would save it money and allow FFH to get its principal back for better use.
Title: Re: Fairfax 2020
Post by: Xerxes on June 01, 2020, 02:28:37 PM
And interesting that they feel this would be the best use of shareholders capital - versus buying Fairfax shares at a steep discount or growing insurance subs in hard market or buying something else.

Perhaps something is driving the decision to make the purchase now.

I think these are different buckets.
Capital allocated to growing sub-insurance will not compete with the portfolio resources being used to buy portion BB or anything else (if this is even true).
Prem has been clear that he is not buying back his shares, so there is no conflict there as he is not doing it and in any case if he were, that would compete with resources allocated to grow sub-insurance.
Title: Re: Fairfax 2020
Post by: Viking on June 01, 2020, 02:45:43 PM
I think unlike Torstar, Stelco or Resolute (why?why?), BB had merits in the right hand. Folks, might bundle all of FFH mistakes into one bucket, but I don't think BB belongs there in the pile of stupid ideas. They should keep it and partner with someone for the privatization.

I don't know if folks noticed, I recall seeing on the news feed somewhere in the Teachers' 13F that they had invested in BB common shares in Q4 or Q1. I ll try to find the source.

What BB should do first is to raise capital at very low rate, to pay off the convert and stop paying that high rate to FFH. that would save it money and allow FFH to get its principal back for better use.

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...
Title: Re: Fairfax 2020
Post by: petec on June 01, 2020, 03:01:31 PM
And interesting that they feel this would be the best use of shareholders capital - versus buying Fairfax shares at a steep discount or growing insurance subs in hard market or buying something else.

Perhaps something is driving the decision to make the purchase now.

I think these are different buckets.
Capital allocated to growing sub-insurance will not compete with the portfolio resources being used to buy portion BB or anything else (if this is even true).
Prem has been clear that he is not buying back his shares, so there is no conflict there as he is not doing it and in any case if he were, that would compete with resources allocated to grow sub-insurance.

You’re right it is different buckets. But Prem is buying back his own stock, slowly.
Title: Re: Fairfax 2020
Post by: Xerxes on June 01, 2020, 03:06:42 PM
And interesting that they feel this would be the best use of shareholders capital - versus buying Fairfax shares at a steep discount or growing insurance subs in hard market or buying something else.

Perhaps something is driving the decision to make the purchase now.

I think these are different buckets.
Capital allocated to growing sub-insurance will not compete with the portfolio resources being used to buy portion BB or anything else (if this is even true).
Prem has been clear that he is not buying back his shares, so there is no conflict there as he is not doing it and in any case if he were, that would compete with resources allocated to grow sub-insurance.

You’re right it is different buckets. But Prem is buying back his own stock, slowly.

Not until he has paid back the debt he recently raised on the right hand side of his balance sheet, which he said that it will remain at cash/near cash. That was meant to only to fortify the business. He will not use those dollars to buyback shares. He could do that, then he would have contradicted a clear statement he made in Q1.

But very slowly to your point.


Title: Re: Fairfax 2020
Post by: petec on June 01, 2020, 03:09:15 PM
And interesting that they feel this would be the best use of shareholders capital - versus buying Fairfax shares at a steep discount or growing insurance subs in hard market or buying something else.

Perhaps something is driving the decision to make the purchase now.

I think these are different buckets.
Capital allocated to growing sub-insurance will not compete with the portfolio resources being used to buy portion BB or anything else (if this is even true).
Prem has been clear that he is not buying back his shares, so there is no conflict there as he is not doing it and in any case if he were, that would compete with resources allocated to grow sub-insurance.

You’re right it is different buckets. But Prem is buying back his own stock, slowly.

Not until he has paid back the debt he recently raised on the right hand side of his balance sheet, which he said that it will remain at cash/near cash. That was meant to only to fortify the business. He will not use those dollars to buyback shares. He could do that, then he would have contradicted a clear statement he made in Q1.

But very slowly to your point.

Well, he bought back 140k shares in April IIRC. That’s what, half a percent of the company in one month?
Title: Re: Fairfax 2020
Post by: Xerxes 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.
Title: Re: Fairfax 2020
Post by: Cigarbutt 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.
Title: Re: Fairfax 2020
Post by: petec 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!
Title: Re: Fairfax 2020
Post by: OliverSung 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.
Title: Re: Fairfax 2020
Post by: StubbleJumper 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
Title: Re: Fairfax 2020
Post by: Xerxes 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.
Title: Re: Fairfax 2020
Post by: StubbleJumper 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

Title: Re: Fairfax 2020
Post by: petec 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?

 ::)
Title: Re: Fairfax 2020
Post by: StubbleJumper 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
Title: Re: Fairfax 2020
Post by: Xerxes 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.
Title: Re: Fairfax 2020
Post by: Xerxes on June 07, 2020, 06:03:23 PM
This is from Q1 report:

"Portfolio investments comprise investments carried at fair value and equity accounted investments, the aggregate carrying value of which was $37,867.5 ($37,435.3 net of subsidiary short sale and derivative obligations) at March 31, 2020 compared to $38,235.0 ($38,029.4 net of subsidiary short sale and derivative obligations) at December 31, 2019. The decrease of $594.1 principally reflected net unrealized losses on common stocks, total return swaps, equity warrants and U.S. treasury bond forward contracts, in addition to the specific factors which caused movements in portfolio investments as discussed in the paragraphs that follow.

Subsidiary cash and short term investments (including cash and short term investments pledged for short sale and derivative obligations) decreased by $630.2, primarily reflecting proceeds from sales and maturities of short-dated U.S. treasury bonds principally reinvested into U.S. corporate bonds, partially offset by the reinvestment of U.S. treasury bond proceeds into corporate and other short term investments.

Bonds (including bonds pledged for short sale and derivative obligations) decreased by $808.2 primarily reflecting sales and maturities of short-dated U.S. treasury bonds, partially offset by the reinvestment of proceeds into U.S. corporate bonds.
Common stocks decreased by $772.8 primarily reflecting net unrealized losses as a result of the global economic and social disruption caused by the COVID-19 pandemic."

I am not sure what companies are included in the $772 figure for common stock decrease. But it cannot include Resolute/Atlas/Recipe. Of that $772 figure, I calculate $380 million due to BB, K-W and Stelco losing value from Dec 31 to March 31.

Now, $173 million of that $772 is reversed by the bounce back on BB, K-W and Stelco from March 31 to date. Not including BB converts as I am not sure how those are accounted quarter to quarter.
Title: Re: Fairfax 2020
Post by: StubbleJumper on June 07, 2020, 07:17:54 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.


Good point on the equity accounting.  I don't generally spend much time thinking about mark-to-market gains, but that doesn't excuse my being brain-dead and asking about companies that are consolidated or equity accounted!  So, it looks like maybe a couple hundred million from the major equity holdings, plus likely a considerable chunk from the total return swaps and possibly something considerable for the miscellaneous equities....so it's likely low-to-mid 9-digits.  Quarterly financial reporting is going to look bizarre for a great many companies!

Thanks for setting me straight,

SJ
Title: Re: Fairfax 2020
Post by: petec on June 08, 2020, 02:58:16 AM
On this topic, it seems to me that Fairfax may have been deliberately reconstructing their equity portfolio to reduce M2M volatility. Does anyone else have this sense?
Title: Re: Fairfax 2020
Post by: Thrifty3000 on June 08, 2020, 04:25:57 AM
On this topic, it seems to me that Fairfax may have been deliberately reconstructing their equity portfolio to reduce M2M volatility. Does anyone else have this sense?

I 100% get that sense. Their marks to model in India are super aggressive. And, they’re trying to go the same route with Africa. But, you just have to look at the compensation system to see the benefits to them, and why their judgment probably gets clouded. Of course, now they’re in the same boat as Biglari, where it could be years before their next performance fee payout.
Title: Re: Fairfax 2020
Post by: Thrifty3000 on June 08, 2020, 04:40:16 AM
They were carrying Quess at something like 70 times trailing look through earnings, until they impaired it last quarter to a humble 50 times. I think Bangalore is carried at around 100 times look through earnings. Geez. But, they excused these sky high marks because arms length transactions were done with suckers willing to pay those prices.

(I have no doubt Bangalore will eventually be worth it’s carrying value, as more capacity is added and real estate is developed. But, Fairfax was able to fast track years of performance fees thanks to the high marks.)
Title: Re: Fairfax 2020
Post by: petec on June 08, 2020, 04:42:45 AM
On this topic, it seems to me that Fairfax may have been deliberately reconstructing their equity portfolio to reduce M2M volatility. Does anyone else have this sense?

I 100% get that sense. Their marks to model in India are super aggressive. And, they’re trying to go the same route with Africa. But, you just have to look at the compensation system to see the benefits to them, and why their judgment probably gets clouded. Of course, now they’re in the same boat as Biglari, where it could be years before their next performance fee payout.

It's not the scale/aggressiveness of the marks. It's the accounting structure. More and more of the equities seem to be consolidated or equity accounted, so that stock market moves don't affect BV. I can't decide whether I think this is a great way of enabling them to focus on the long term or a naughty way of disguising losses.
Title: Re: Fairfax 2020
Post by: Thrifty3000 on June 08, 2020, 04:50:13 AM
I think it mostly provides stability and allows better long term focus. Berkshire enjoys the same benefits. I’m sure, for example, it was nice not having to mark BNSF down to fair market value on March 31.
Title: Re: Fairfax 2020
Post by: petec on June 08, 2020, 05:07:19 AM
I think it mostly provides stability and allows better long term focus. Berkshire enjoys the same benefits. I’m sure, for example, it was nice not having to mark BNSF down to fair market value on March 31.

Sure. But they own BNSF, and control its cash flows, and there isn't a market price.

Not so Eurobank and Seaspan.
Title: Re: Fairfax 2020
Post by: Xerxes on June 08, 2020, 05:26:28 AM
Pete
FFH is definitely using the full extent of accounting when it suits them, but two things:

- I really doubt that they are going to overinvest hundreds of  millions so that is passes the threshold above 20% ownership to be equity accounted

- equity accounting also has a huge impact on book value. Ex When impairment was done on recipe and resolute that also pass through income statement hitting book value. Worse it doesn’t bounce back quarter to quarter. My view is that Equity method is a better way to account for large strategic holdings that are below 50%. 

On BRK side, there is no shortages of interviews where Buffet actually tells people to ignore mark to market accounting.
Title: Re: Fairfax 2020
Post by: petec on June 08, 2020, 05:48:44 AM
Pete
FFH is definitely using the full extent of accounting when it suits them, but two things:

- I really doubt that they are going to overinvest hundreds of  millions so that is passes the threshold above 20% ownership to be equity accounted

- equity accounting also has a huge impact on book value. Ex When impairment was done on recipe and resolute that also pass through income statement hitting book value. Worse it doesn’t bounce back quarter to quarter. My view is that Equity method is a better way to account for large strategic holdings that are below 50%. 

On BRK side, there is no shortages of interviews where Buffet actually tells people to ignore mark to market accounting.

Yes - I am not saying M2M is particularly worthwhile. My main concern is whether FFH are being a little manipulative, seeming to find ways to lock in relatively high equity accounting values and then being slow to impair. I don't really have an issue with it frankly because no accounting system is perfect but it's something to be aware of.
Title: Re: Fairfax 2020
Post by: StubbleJumper on June 08, 2020, 06:52:42 AM
Pete
FFH is definitely using the full extent of accounting when it suits them, but two things:

- I really doubt that they are going to overinvest hundreds of  millions so that is passes the threshold above 20% ownership to be equity accounted

- equity accounting also has a huge impact on book value. Ex When impairment was done on recipe and resolute that also pass through income statement hitting book value. Worse it doesn’t bounce back quarter to quarter. My view is that Equity method is a better way to account for large strategic holdings that are below 50%. 

On BRK side, there is no shortages of interviews where Buffet actually tells people to ignore mark to market accounting.

Yes - I am not saying M2M is particularly worthwhile. My main concern is whether FFH are being a little manipulative, seeming to find ways to lock in relatively high equity accounting values and then being slow to impair. I don't really have an issue with it frankly because no accounting system is perfect but it's something to be aware of.


Hard to know whether they are being manipulative, but it does argue for squinting a bit when looking at the EPS number (there was BV growth of 14.8% in 2019, right?!).  Usually EPS is one of the metrics used to measure how well a company has performed in a particular year, but the paper gains triggered by periodic marks, or the failure to write down assets that are not marked can conceal true economic performance for the year.  Usually when FFH triggers paper gains, they are the result of good decisions made 4 or 5 years ago -- these decisions are still to the credit of management, but they are not really indicative of performance in the current year.

Maybe Ben Graham was a pretty smart guy when he advocated the use of a E10?


SJ
Title: Re: Fairfax 2020
Post by: Xerxes on June 08, 2020, 07:42:55 AM
For BRK, there are three different valuations:  book value, intrinsic value (a range) and market value. The first one has been dropped as a yardstick.

For FFH, there are only two different valuations they look at : book value and market value.
On annual letters, if I recall, Prem W. equals book value with intrinsic value.

It is safe to say that BRK looks more at economic reality as oppose to FFH that sees accounting  book value as a significant yardstick in representing economic reality.
Title: Re: Fairfax 2020
Post by: Xerxes on June 08, 2020, 07:47:04 AM
I think it mostly provides stability and allows better long term focus. Berkshire enjoys the same benefits. I’m sure, for example, it was nice not having to mark BNSF down to fair market value on March 31.

I may be wrong, but I think the value of BNSF and mid-American energy are their historical purchase cost without any upward adjustment to account for all the value created since their purchase.. So an adjustment would be a boost to BRK book value.

I think your comment assumes BNSF was being carried out fair market value, in which case a mark to market drop would bring it down.
Title: Re: Fairfax 2020
Post by: Thrifty3000 on June 08, 2020, 08:09:34 AM
Pete
FFH is definitely using the full extent of accounting when it suits them, but two things:

- I really doubt that they are going to overinvest hundreds of  millions so that is passes the threshold above 20% ownership to be equity accounted

- equity accounting also has a huge impact on book value. Ex When impairment was done on recipe and resolute that also pass through income statement hitting book value. Worse it doesn’t bounce back quarter to quarter. My view is that Equity method is a better way to account for large strategic holdings that are below 50%. 

On BRK side, there is no shortages of interviews where Buffet actually tells people to ignore mark to market accounting.

Yes - I am not saying M2M is particularly worthwhile. My main concern is whether FFH are being a little manipulative, seeming to find ways to lock in relatively high equity accounting values and then being slow to impair. I don't really have an issue with it frankly because no accounting system is perfect but it's something to be aware of.


Hard to know whether they are being manipulative, but it does argue for squinting a bit when looking at the EPS number (there was BV growth of 14.8% in 2019, right?!).  Usually EPS is one of the metrics used to measure how well a company has performed in a particular year, but the paper gains triggered by periodic marks, or the failure to write down assets that are not marked can conceal true economic performance for the year.  Usually when FFH triggers paper gains, they are the result of good decisions made 4 or 5 years ago -- these decisions are still to the credit of management, but they are not really indicative of performance in the current year.

Maybe Ben Graham was a pretty smart guy when he advocated the use of a E10?


SJ

I agree with watching look through earnings over time. It would be nice if we could have any sense of what "normalized" non-insurance earnings looks like now, or what non-insurance earnings might look like 10 years from now. I predict non-insurance earnings in 2030 will be somewhere between $0 and $2 billion. How's that for precision?
Title: Re: Fairfax 2020
Post by: Thrifty3000 on June 08, 2020, 08:24:50 AM
I think it mostly provides stability and allows better long term focus. Berkshire enjoys the same benefits. I’m sure, for example, it was nice not having to mark BNSF down to fair market value on March 31.

I may be wrong, but I think the value of BNSF and mid-American energy are their historical purchase cost without any upward adjustment to account for all the value created since their purchase.. So an adjustment would be a boost to BRK book value.

I think your comment assumes BNSF was being carried out fair market value, in which case a mark to market drop would bring it down.

Yeah, I used BNSF as an example because it was the first holding that popped into my mind that BRK had to mark to market during the prior crisis, but had the luxury of not needing to do that for BNSF this time around.
Title: Re: Fairfax 2020
Post by: Bryggen on June 08, 2020, 09:12:49 AM
Not sure if I should laugh rather than being excited reading this ;)
Thought this news was now well in the past and the topic concluded.
Not sure about you, but it ain't going to happen, right?

https://ca.yahoo.com/finance/news/buy-alert-blackberry-tsx-bb-200059026.html

Title: Re: Fairfax 2020
Post by: StubbleJumper on June 08, 2020, 09:28:32 AM
Not sure if I should laugh rather than being excited reading this ;)
Thought this news was now well in the past and the topic concluded.
Not sure about you, but it ain't going to happen, right?

https://ca.yahoo.com/finance/news/buy-alert-blackberry-tsx-bb-200059026.html


It wouldn't surprise me if Prem were interested in buying BB outright, but the market cap is $3B+ and then you'd probably need to offer some sort of premium, which might value the company at $3.5-4B.  To execute a takeover, FFH would probably need to find about $2.5B to add to its existing equity and debenture position.  It would probably be a significant challenge to float that much debt, and it would require that FFH also renegotiate its revolver.  Even if FFH partnered with an outfit like OMERS, it would still need to find a large pile of capital.

I can't see it happening, but never say never.


SJ
Title: Re: Fairfax 2020
Post by: TwoCitiesCapital on June 10, 2020, 11:22:08 AM
Can someone explain what is driving the hard market?

I've been skeptical of it so far just because we were told the reason for the soft market was the massive inflows of capital through new insurance-linked products and etc paired with limited catstrophes to remove said capital.

So what's changed? Why is it that suddenly low yields mean insurers hold the line and raise pricing. Low ROEs were acceptable for most of the last decade, why is 2020 suddenly different?

Guess I'm just trying to understand where I'm wrong in being skeptical. We've had a few months of sustained pricing increases across the industry and now places like Lancashire are raising capital to out to work in underwriting. The experts seem to believe this is for real so I'm just trying to understand what changed the dynamic?
Title: Re: Fairfax 2020
Post by: petec on June 10, 2020, 11:25:42 AM
Can someone explain what is driving the hard market?

I've been skeptical of it so far just because we were told the reason for the soft market was the massive inflows of capital through new insurance-linked products and etc paired with limited catstrophes to remove said capital.

So what's changed? Why is it that suddenly low yields mean insurers hold the line and raise pricing. Low ROEs were acceptable for most of the last decade, why is 2020 suddenly different?

Guess I'm just trying to understand where I'm wrong in being skeptical. We've had a few months of sustained pricing increases across the industry and now places like Lancashire are raising capital to out to work in underwriting. The experts seem to believe this is for real so I'm just trying to understand what changed the dynamic?

Ive been wondering the same.
Title: Re: Fairfax 2020
Post by: ERICOPOLY on June 10, 2020, 11:38:35 AM
we were told the reason for the soft market was the massive inflows of capital

Have the inflows of capital changed?
Title: Re: Fairfax 2020
Post by: TwoCitiesCapital on June 10, 2020, 12:19:18 PM
we were told the reason for the soft market was the massive inflows of capital

Have the inflows of capital changed?

Not that I'm aware of. I don't have industry data that measures that on a regular basis, but I can't think of anything that would have caused that to change.

We haven't had any major catastrophes to scare money out, insurance linked products are becoming a bigger part of the industry, and the hardening of the market started long before all of this COVID stuff could have made capital scarce (and doesn't seem to be making it scarce for other risk products).
Title: Re: Fairfax 2020
Post by: bearprowler6 on June 10, 2020, 03:22:31 PM
we were told the reason for the soft market was the massive inflows of capital

Have the inflows of capital changed?

Not that I'm aware of. I don't have industry data that measures that on a regular basis, but I can't think of anything that would have caused that to change.

We haven't had any major catastrophes to scare money out, insurance linked products are becoming a bigger part of the industry, and the hardening of the market started long before all of this COVID stuff could have made capital scarce (and doesn't seem to be making it scarce for other risk products).

My next door neighbour is a Managing Director at one of the major reinsurance brokerage companies. I just spoke to him about the current state of renewal rates, the existence of the hard market and why now for the hard market if one exists.

To summarize what he said:

-rates are hardening everywhere
-the outbreak of the pandemic has not slowed down renewal rates at all.
-the hard market which started last fall is continuing with no end in sight
-best rate increases being experienced since 2005
-capital has not left however it is finally demanding an adequate return on investment. Too many lines of business were no longer profitable
-as for why now---the industry simply couldnt hold out any longer. The low interest rates look like they are here for awhile and longer than anyone expected so increased renewal rates is the only chance the industry has to stay viable


Hopefully this helps!
Title: Re: Fairfax 2020
Post by: Xerxes on June 10, 2020, 04:00:34 PM
Bearprowler,

so that I don't understand the logic,

Low interest rate, takes away the incentive to write insurance, because the float has less alternative 'safe' investment options.
Less underwriting capacity means fewer underwriting not fore market share sake but for return's sake.

Did the low rate regime that first started in 2008-09, also caused similar behavior
Title: Re: Fairfax 2020
Post by: Cigarbutt on June 10, 2020, 06:10:03 PM
Can someone explain what is driving the hard market?

I've been skeptical of it so far just because we were told the reason for the soft market was the massive inflows of capital through new insurance-linked products and etc paired with limited catstrophes to remove said capital.

So what's changed? Why is it that suddenly low yields mean insurers hold the line and raise pricing. Low ROEs were acceptable for most of the last decade, why is 2020 suddenly different?

Guess I'm just trying to understand where I'm wrong in being skeptical. We've had a few months of sustained pricing increases across the industry and now places like Lancashire are raising capital to out to work in underwriting. The experts seem to believe this is for real so I'm just trying to understand what changed the dynamic?
Who knows and there are multiple inputs but the alternative capital market is an area to look at. 2019 calendar year was characterized by very significant loss creep (adverse development) from catastrophe activity occurring in prior years (starting with Irma, 2017 event, which 'developed' well into 2019). The alternative capital is at the margin but it forms about 15 to 20% of reinsurance capital and is very significant in the retrocession category. The volume of securities outstanding in 2019 grew because of multi-year contracts but the new issuance level was actually down, something that hasn't occurred in ages. A blip or more? Because of previous negative surprises and the associated "trapped" capital in collateralized transactions, 'investors' have been asking much higher spreads.

On a business level and as a coincident indicator, underwriters, at some point, 'realize' that the last policies written were unprofitable. At the industry level, this means that some leave business lines altogether and disciplined underwriters have their prices met and more.
Title: Re: Fairfax 2020
Post by: TwoCitiesCapital on June 10, 2020, 06:30:40 PM
Can someone explain what is driving the hard market?

I've been skeptical of it so far just because we were told the reason for the soft market was the massive inflows of capital through new insurance-linked products and etc paired with limited catstrophes to remove said capital.

So what's changed? Why is it that suddenly low yields mean insurers hold the line and raise pricing. Low ROEs were acceptable for most of the last decade, why is 2020 suddenly different?

Guess I'm just trying to understand where I'm wrong in being skeptical. We've had a few months of sustained pricing increases across the industry and now places like Lancashire are raising capital to out to work in underwriting. The experts seem to believe this is for real so I'm just trying to understand what changed the dynamic?
Who knows and there are multiple inputs but the alternative capital market is an area to look at. 2019 calendar year was characterized by very significant loss creep (adverse development) from catastrophe activity occurring in prior years (starting with Irma, 2017 event, which 'developed' well into 2019). The alternative capital is at the margin but it forms about 15 to 20% of reinsurance capital and is very significant in the retrocession category. The volume of securities outstanding in 2019 grew because of multi-year contracts but the new issuance level was actually down, something that hasn't occurred in ages. A blip or more? Because of previous negative surprises and the associated "trapped" capital in collateralized transactions, 'investors' have been asking much higher spreads.

On a business level and as a coincident indicator, underwriters, at some point, 'realize' that the last policies written were unprofitable. At the industry level, this means that some leave business lines altogether and disciplined underwriters have their prices met and more.

Helpful.

Thanks!
Title: Re: Fairfax 2020
Post by: TwoCitiesCapital on June 10, 2020, 06:32:53 PM
we were told the reason for the soft market was the massive inflows of capital

Have the inflows of capital changed?

Not that I'm aware of. I don't have industry data that measures that on a regular basis, but I can't think of anything that would have caused that to change.

We haven't had any major catastrophes to scare money out, insurance linked products are becoming a bigger part of the industry, and the hardening of the market started long before all of this COVID stuff could have made capital scarce (and doesn't seem to be making it scarce for other risk products).

My next door neighbour is a Managing Director at one of the major reinsurance brokerage companies. I just spoke to him about the current state of renewal rates, the existence of the hard market and why now for the hard market if one exists.

To summarize what he said:

-rates are hardening everywhere
-the outbreak of the pandemic has not slowed down renewal rates at all.
-the hard market which started last fall is continuing with no end in sight
-best rate increases being experienced since 2005
-capital has not left however it is finally demanding an adequate return on investment. Too many lines of business were no longer profitable
-as for why now---the industry simply couldnt hold out any longer. The low interest rates look like they are here for awhile and longer than anyone expected so increased renewal rates is the only chance the industry has to stay viable


Hopefully this helps!

Thanks - I guess it makes sense that the industry is FINALLY accepting that they need to be economic on the policies and not just rely on float return.

I guess I just don't feel very comfortable assuming that's what happened when it didn't happen in any year where low interest rates were also a thing before.

Who knows how long this will last ,but have even more confidence in Fairfax at these prices if that's the case.
Title: Re: Fairfax 2020
Post by: omagh on June 15, 2020, 10:00:33 AM
Bearprowler,

so that I don't understand the logic,

Low interest rate, takes away the incentive to write insurance, because the float has less alternative 'safe' investment options.
Less underwriting capacity means fewer underwriting not fore market share sake but for return's sake.

Did the low rate regime that first started in 2008-09, also caused similar behavior

If an insurance company writes consistently at 100% CR and makes 5% on the float after tax, it should report roughly 5% AT profit assuming no leverage.  So, with treasury rates down to 0.5% or lower, the way to report a similar profit as the previous simple example is to raise prices to ensure that the insurance business writes consistently at 95% CR; again with no leverage or change in portfolio mix.  Prices just went up in a hard market to help the company and its industry peers maintain profitability.  In the old days, one could write insurance at a loss (CR>100%) and make it back to profitability through investments and leverage.  Bill Berkley and Warren Buffett have talked extensively about these mechanics if you look around.

In the post-2008-9 period there was a short hard market 2010-11 if I recall correctly.  I had shares in Odyssey Re which Fairfax bought out in this timeframe as cat insurance was becoming very profitable to write at that point.  We're probably in the middle of a similar hardening as the industry's going forward financial picture has diminished greatly due to bond pricing getting whacked.
Title: Re: Fairfax 2020
Post by: Xerxes on June 15, 2020, 10:44:51 AM
So really ultra low yield knocked out the investment engine of the twin-engine insurance business.
Now it all comes down to the one remaining underwriting engine performing and lifting the whole business. Game is much harder without the investment lift, so capacity leaves the market.

Kind of counter intuitive, I would have thought that aspect would have exasperated the market share game. 
Title: Re: Fairfax 2020
Post by: lessthaniv on June 15, 2020, 02:09:29 PM
ORIGINAL: Prem Watsa Acquires Additional Shares of Fairfax

2020-06-15 17:05 ET - News Release


TORONTO, June 15, 2020 (GLOBE NEWSWIRE) -- Fairfax Financial Holdings Limited (TSX: FFH and FFH.U) announces that Prem Watsa, its Chair and CEO, has advised that over the last few days he has purchased in the market 482,600 subordinate voting shares of Fairfax for an aggregate purchase cost of approximately US$148.95 million.

Mr. Watsa commented as follows in connection with this purchase: “At our AGM and on our first quarter earnings release call, I said that our shares are ‘ridiculously cheap’. That statement reflected my recognition that in the 35 years since Fairfax began, I have never seen Fairfax shares sell at a bigger discount to their intrinsic value than they have recently. I have now backed up my strong words by purchasing close to US$150 million of Fairfax shares in the market over the last few days, as I believe that this will be an excellent long term investment.”

Fairfax is a holding company which, through its subsidiaries, is engaged in property and casualty insurance and reinsurance and the associated investment management.

For further information contact:               John Varnell, Vice President, Corporate Development
at (416) 367-4941
        
Title: Re: Fairfax 2020
Post by: StubbleJumper on June 15, 2020, 04:14:11 PM
ORIGINAL: Prem Watsa Acquires Additional Shares of Fairfax

2020-06-15 17:05 ET - News Release


TORONTO, June 15, 2020 (GLOBE NEWSWIRE) -- Fairfax Financial Holdings Limited (TSX: FFH and FFH.U) announces that Prem Watsa, its Chair and CEO, has advised that over the last few days he has purchased in the market 482,600 subordinate voting shares of Fairfax for an aggregate purchase cost of approximately US$148.95 million.

Mr. Watsa commented as follows in connection with this purchase: “At our AGM and on our first quarter earnings release call, I said that our shares are ‘ridiculously cheap’. That statement reflected my recognition that in the 35 years since Fairfax began, I have never seen Fairfax shares sell at a bigger discount to their intrinsic value than they have recently. I have now backed up my strong words by purchasing close to US$150 million of Fairfax shares in the market over the last few days, as I believe that this will be an excellent long term investment.”

Fairfax is a holding company which, through its subsidiaries, is engaged in property and casualty insurance and reinsurance and the associated investment management.

For further information contact:               John Varnell, Vice President, Corporate Development
at (416) 367-4941


Good sign!  So now he has ~9% of the economic interest?  I wonder if he borrowed against the multiple voting shares to make this happen?  I would not have thought that he would have ~$150m just laying around....


SJ


***edit, it's worth noting that Prem didn't exactly hit bottom in that he paid ~US$300/sh, and bottom was a good 12 or 15 percent lower than that.
Title: Re: Fairfax 2020
Post by: Xerxes on June 15, 2020, 04:20:11 PM
Just to give this context.
Common share dividends is about $275 million.
8% of that is $22 million in dividend cash payment.

So the $150 million that he put in is 6-7 times the size of his annual dividends.
Assuming my math is correct this must be a good.

Title: Re: Fairfax 2020
Post by: StubbleJumper on June 15, 2020, 04:24:17 PM
Just to give this context.
Common share dividends is about $275 million.
8% of that is $22 million in dividend cash payment.

So the $150 million that he put in is 6-7 times the size of his annual dividends.
Assuming my math is correct this must be a good.


So, you are suggesting that if Prem might have had ~US$150m laying around if he had racked up ~10-12 years of divvies, paid the dividend taxes and then didn't go crazy on spending in his personal life?  That's definitely plausible.


SJ
Title: Re: Fairfax 2020
Post by: Xerxes on June 15, 2020, 04:57:46 PM
Not at all.
I was just giving scale to his $150 million. Which at first I struggled to categorize as significantly big or just ok.
 
That was my way of saying if he is getting this much every January from his captive investment so a number that is multi fold greater must be viewed as a significant purchase.
Title: Re: Fairfax 2020
Post by: Parsad on June 15, 2020, 10:32:15 PM
Not at all.
I was just giving scale to his $150 million. Which at first I struggled to categorize as significantly big or just ok.
 
That was my way of saying if he is getting this much every January from his captive investment so a number that is multi fold greater must be viewed as a significant purchase.

I would assume that Prem has about $200-250M outside of his Fairfax stock at a minimum before the stock purchase.  He's stated numerous times that 90% of his net worth is in Fairfax...which would be about $1.5B or so before the stock market correction.  So in relation to his net worth, it is probably the most substantial purchase of Fairfax stock that I have seen him make...and I'm going back 20 years!  It was at 0.6 times book for God's sake.  We had not seen that since 2003-2007.  Cheers!
Title: Re: Fairfax 2020
Post by: John Hjorth on June 16, 2020, 01:34:08 AM
These purchases have taken place in Mr. Watsa's personal account, right? Does anyone here on CoBF know, if the controlling shareholding in FFH is still in that legal entity called Sixty Two Company [or something like that] ?


Edit: Fixed typo.
Title: Re: Fairfax 2020
Post by: petec on June 16, 2020, 04:12:56 AM
These purchases have taken place in in Mr. Watsa's personal account, right? Does anyone here on CoBF know, if the controlling shareholding in FFH is still in that legal entity called Sixty Two Company [or something like that] ?

I believe it is.
Title: Re: Fairfax 2020
Post by: John Hjorth on June 16, 2020, 04:16:00 AM
Thank you, Pete.
Title: Re: Fairfax 2020
Post by: Cigarbutt on June 16, 2020, 04:31:14 AM
From this year's proxy:
"The Sixty Two Investment Company Limited (‘‘Sixty Two’’) owns 50,620 subordinate voting shares and 1,548,000 multiple voting shares, representing 41.9% of the total votes attached to all classes of our shares (100% of the total votes attached to the multiple voting shares and 0.2% of the total votes attached to the subordinate voting shares). V. Prem Watsa, our Chairman and Chief Executive Officer, controls Sixty Two and himself beneficially owns an additional 258,790 subordinate voting shares and exercises control or direction over an additional 2,100 subordinate voting shares. These shares, together with the shares owned directly by Sixty Two, represent 42.5% of the total votes attached to all classes of our shares (100% of the total votes attached to the multiple voting shares and 1.2% of the total votes attached to the subordinate voting shares)."

For context:
https://s1.q4cdn.com/579586326/files/doc_downloads/shareholder_letters/1992-Letter.pdf
Title: Re: Fairfax 2020
Post by: villainx on June 16, 2020, 10:28:46 AM
This is with Fairfax not doing share buybacks, right?
Title: Re: Fairfax 2020
Post by: petec on June 16, 2020, 02:24:36 PM
This is with Fairfax not doing share buybacks, right?

They are buying back. Or at least they were in April, which is the last data I saw.
Title: Re: Fairfax 2020
Post by: mcliu on June 16, 2020, 02:28:10 PM
They repurchased ~16k shares in May. Small amount.
Title: Re: Fairfax 2020
Post by: Xerxes on June 23, 2020, 07:29:04 PM
I listend to Blackberry AGM today.
https://www.blackberry.com/content/dam/blackberry-com/Documents/pdf/investors/Blackberry-AGM-2020-Presentation.pdf

They did a good job to capture the size of the market for s/w security. Unfortunately, but funny enough, they screwed up their Q&A session by getting only one question, some system issue about the work-from-home-AGM or whatever. I didn't like the optics. A software company shouldn't screw up the AGM by not getting the system right.

Interestingly enough, the one question that did get through was about Fairfax, where someone asked if a low-ball bid by FFH can be prevented by a poison pill.
To me that tells me that there is a interest from BB shareholder base in the long term potential of BB, and that there would be push back on any low-ball bid that would undervalue that potential.

Quarterly results are tomorrow, so perhaps we can get more on the Q&A session that didn't happen today.

BlackBerry Fiscal Year 2021 First Quarter Results Conference Call
Date: Wednesday, June 24, 2020
Time: 05:30 PM Eastern Daylight Time
Title: Re: Fairfax 2020
Post by: Xerxes on June 24, 2020, 02:57:23 PM
Listening to quarterly results now.

BB confirmed that they are redeeming the convertible when it comes due.
Cash released for FFH, i guess ...
Title: Re: Fairfax 2020
Post by: TwoCitiesCapital on June 24, 2020, 03:05:58 PM
Listening to quarterly results now.

BB confirmed that they are redeeming the convertible when it comes due.
Cash released for FFH, i guess ...

Nice! Plenty of places I imagine they could reinvest that if we get some more turbulence which is looking more likely by the day.
Title: Re: Fairfax 2020
Post by: StubbleJumper on June 24, 2020, 06:09:48 PM
Listening to quarterly results now.

BB confirmed that they are redeeming the convertible when it comes due.
Cash released for FFH, i guess ...


I will believe it when I see it.  But, all in all, It's perfectly fine for FFH to find some other place to invest $500m, if they actually do get to November without rolling it.


SJ
Title: Re: Fairfax 2020
Post by: Xerxes on July 01, 2020, 08:52:07 PM
Not sure if this was already posted about Ensign Energy Services Inc. and FFH's swap contract on it.
I guess by mid-June, when FFH entered this agreement the broader market was at all time high, so FFH went back to picking the weird apples.

https://www.globenewswire.com/news-release/2020/06/15/2047994/0/en/Fairfax-Announces-Entering-Into-Swap-Contracts-in-Respect-of-Common-Shares-of-Ensign.html

Q2 results should be interesting not only for FFH, but also for the triple-Bs: Brookfield, Berkshire and Blackstone.
You get to see what this class of institutional investors actually did in terms of market participation in Q2, yes they all talked about it in April and hinted their views.

But the "walk" ought to be more interesting than the "talk".
Title: Re: Fairfax 2020
Post by: StubbleJumper on July 09, 2020, 02:08:19 PM

Back to the other bidders.....why not Fairfax itself.

 ;D

Dear lord can you imagine the reaction on this board if Fairfax took Torstar private?! Prem can't admit mistakes! Declining industries! Good money after bad! Liquidity! Leverage! AAAAAAAAAARRRRRRGGGGGHHHHH.

Couple of (serious!) points:
1) What makes you believe Torstar did not test the market before agreeing this deal?
2) If there was a better deal to be had, why would Fairfax not have taken it?

3) Anyone can still make a bid.  The break-fee seems to be only $2+1.5m on a deal that is currently valued at $52m.  If somebody figures that this is a bargain and comes in and offers, say, $75m later this week Torstar BoD wouldn't have much choice but to recommend that the offer be accepted and simply pay the break-fee.  Any offer above $55.5m ($52+3.5) would be a no-brainer for shareholders, right?  Probably not going to happen...



Looks like there might be a slightly richer bid for Torstar:  https://www.cbc.ca/news/business/torstar-tsx-bid-1.5643172


SJ
Title: Re: Fairfax 2020
Post by: Bryggen on July 10, 2020, 01:26:04 PM
Seriously, I have never seen anyone dodging the question as much as Acker on FFH. Ok, at the end he says that if it goes a lot cheaper he would consider buying, but other than that, I didn't learn anything from his intervention on BNN.

We don't have much to focus on these days, so here is the interview:

https://www.bnnbloomberg.ca/market-call/brian-acker-discusses-fairfax-financial~1993367

PS: I guess at around $400 CDN, we could get a better deal than Prem!



Title: Re: Fairfax 2020
Post by: Xerxes on July 10, 2020, 07:04:51 PM
I listened to 3 of his clips about FFH, BABA and Shopfiy in the same interview.

He just doesn’t like anything.
Title: Re: Fairfax 2020
Post by: Phoenix01 on July 11, 2020, 07:54:02 AM
Best seems to like what they are seeing at Fairfax.
https://www.businesswire.com/news/home/20200710005503/en/Affirms-Credit-Ratings-Fairfax-Financial-Holdings-Limited

How does this compare to the previous (pre-Covid) reports?
Title: Re: Fairfax 2020
Post by: StubbleJumper on July 12, 2020, 04:35:23 AM

Back to the other bidders.....why not Fairfax itself.

 ;D

Dear lord can you imagine the reaction on this board if Fairfax took Torstar private?! Prem can't admit mistakes! Declining industries! Good money after bad! Liquidity! Leverage! AAAAAAAAAARRRRRRGGGGGHHHHH.

Couple of (serious!) points:
1) What makes you believe Torstar did not test the market before agreeing this deal?
2) If there was a better deal to be had, why would Fairfax not have taken it?

3) Anyone can still make a bid.  The break-fee seems to be only $2+1.5m on a deal that is currently valued at $52m.  If somebody figures that this is a bargain and comes in and offers, say, $75m later this week Torstar BoD wouldn't have much choice but to recommend that the offer be accepted and simply pay the break-fee.  Any offer above $55.5m ($52+3.5) would be a no-brainer for shareholders, right?  Probably not going to happen...



Looks like there might be a slightly richer bid for Torstar:  https://www.cbc.ca/news/business/torstar-tsx-bid-1.5643172


SJ


Yet another richer bid for Torstar:  https://www.theglobeandmail.com/business/article-nordstar-ups-torstar-offer-in-what-could-end-bidding-war/

The market seems to agree with BearProwler!


SJ
Title: Re: Fairfax 2020
Post by: Xerxes on July 13, 2020, 01:40:39 PM
more on Toronto Star on BNN.
Interesting clip.

https://www.bnnbloomberg.ca/nordstar-raises-bid-for-torstar-to-60-million-days-after-rival-offer-1.1464392
Title: Re: Fairfax 2020
Post by: StubbleJumper on July 13, 2020, 01:50:18 PM
more on Toronto Star on BNN.
Interesting clip.

https://www.bnnbloomberg.ca/nordstar-raises-bid-for-torstar-to-60-million-days-after-rival-offer-1.1464392


There was an article in today's Globe which was even more disturbing.  https://www.theglobeandmail.com/business/article-nordstar-ups-torstar-offer-in-what-could-end-bidding-war/

It would seem that the alternate bid might be superior because the proponents are suggesting that they are prepared to both bid higher in a cash-up-front perspective PLUS they have suggested that they would include contingent value rights to Torstar shareholders.  Despite that, it seems like Prem has locked up our Torstar shares for the lower valued bid.  I think that Prem might have a bit of explaining to do during the next quarterly teleconference if he is truly accepting an inferior bid from a former FFH executive.

It's looking more and more like BearProwler called this one correctly...

SJ
Title: Re: Fairfax 2020
Post by: bearprowler6 on July 16, 2020, 04:59:44 AM
more on Toronto Star on BNN.
Interesting clip.

https://www.bnnbloomberg.ca/nordstar-raises-bid-for-torstar-to-60-million-days-after-rival-offer-1.1464392


There was an article in today's Globe which was even more disturbing.  https://www.theglobeandmail.com/business/article-nordstar-ups-torstar-offer-in-what-could-end-bidding-war/

It would seem that the alternate bid might be superior because the proponents are suggesting that they are prepared to both bid higher in a cash-up-front perspective PLUS they have suggested that they would include contingent value rights to Torstar shareholders.  Despite that, it seems like Prem has locked up our Torstar shares for the lower valued bid.  I think that Prem might have a bit of explaining to do during the next quarterly teleconference if he is truly accepting an inferior bid from a former FFH executive.

It's looking more and more like BearProwler called this one correctly...

SJ

https://www.bnnbloomberg.ca/torstar-bid-raises-shareholders-ire-sparking-calls-for-osc-probe-1.1466294

From the BNNBloomberg article:

"It's hard to understand the [families’] actions," said Groia, who worked at the OSC as associate general counsel and director of enforcement from 1985 to 1990.

"My experience as a former regulator is any time you can't understand why people are reacting the way they are, the general answer is that there's something motivating them that we don't know about. That's what an investigation is for."

Fair and friendly....hardly.....





Title: Re: Fairfax 2020
Post by: StubbleJumper on July 16, 2020, 06:33:15 AM
more on Toronto Star on BNN.
Interesting clip.

https://www.bnnbloomberg.ca/nordstar-raises-bid-for-torstar-to-60-million-days-after-rival-offer-1.1464392


There was an article in today's Globe which was even more disturbing.  https://www.theglobeandmail.com/business/article-nordstar-ups-torstar-offer-in-what-could-end-bidding-war/

It would seem that the alternate bid might be superior because the proponents are suggesting that they are prepared to both bid higher in a cash-up-front perspective PLUS they have suggested that they would include contingent value rights to Torstar shareholders.  Despite that, it seems like Prem has locked up our Torstar shares for the lower valued bid.  I think that Prem might have a bit of explaining to do during the next quarterly teleconference if he is truly accepting an inferior bid from a former FFH executive.

It's looking more and more like BearProwler called this one correctly...

SJ

https://www.bnnbloomberg.ca/torstar-bid-raises-shareholders-ire-sparking-calls-for-osc-probe-1.1466294

From the BNNBloomberg article:

"It's hard to understand the [families’] actions," said Groia, who worked at the OSC as associate general counsel and director of enforcement from 1985 to 1990.

"My experience as a former regulator is any time you can't understand why people are reacting the way they are, the general answer is that there's something motivating them that we don't know about. That's what an investigation is for."

Fair and friendly....hardly.....



It's puzzling how often FFH ends up being involved in transactions that have a bad smell to them.


SJ
Title: Re: Fairfax 2020
Post by: bizaro86 on July 16, 2020, 07:43:44 AM
more on Toronto Star on BNN.
Interesting clip.

https://www.bnnbloomberg.ca/nordstar-raises-bid-for-torstar-to-60-million-days-after-rival-offer-1.1464392


There was an article in today's Globe which was even more disturbing.  https://www.theglobeandmail.com/business/article-nordstar-ups-torstar-offer-in-what-could-end-bidding-war/

It would seem that the alternate bid might be superior because the proponents are suggesting that they are prepared to both bid higher in a cash-up-front perspective PLUS they have suggested that they would include contingent value rights to Torstar shareholders.  Despite that, it seems like Prem has locked up our Torstar shares for the lower valued bid.  I think that Prem might have a bit of explaining to do during the next quarterly teleconference if he is truly accepting an inferior bid from a former FFH executive.

It's looking more and more like BearProwler called this one correctly...

SJ

https://www.bnnbloomberg.ca/torstar-bid-raises-shareholders-ire-sparking-calls-for-osc-probe-1.1466294

From the BNNBloomberg article:

"It's hard to understand the [families’] actions," said Groia, who worked at the OSC as associate general counsel and director of enforcement from 1985 to 1990.

"My experience as a former regulator is any time you can't understand why people are reacting the way they are, the general answer is that there's something motivating them that we don't know about. That's what an investigation is for."

Fair and friendly....hardly.....



It's puzzling how often FFH ends up being involved in transactions that have a bad smell to them.


SJ

It's not that puzzling anymore, imo. I think when you have a large enough sample of actions, Occam's razor applies.
Title: Re: Fairfax 2020
Post by: Pedro on July 16, 2020, 09:07:31 AM
I read the competing bid by Modern Media Holdings Inc's to be more likely to break up the company since the future asset contigency sales is in their deal.  I read the Nordstar bid  as committing to keep the paper intact.

Isn't the seller within the right to choose which company to sell to based on the way the new buyer will run the business?  In this case keeping the business operating and not stripping it was part of the reason why Nordstar was chosen.

I might be misunderstanding but I dont see the egregious action by the owners for their baby to be in the hands of like minded buyers.

Title: Re: Fairfax 2020
Post by: Bryggen on July 16, 2020, 09:17:48 AM
And my question on that deal and issues raised is from a FFH shareholders' perspective, are we winning or losing?

Can someone explain.

FFH is a shareholder of Torstar and could have gotten more, but refused to allowing Rivett to succeed in his bid?

?
Title: Re: Fairfax 2020
Post by: bearprowler6 on July 16, 2020, 09:28:32 AM
And my question on that deal and issues raised is from a FFH shareholders' perspective, are we winning or losing?

Can someone explain.

FFH is a shareholder of Torstar and could have gotten more, but refused to allowing Rivett to succeed in his bid?

?

Furthermore, Rivett/Botove were on the record as saying that their group will begin to sell off many if not all of the investments (Vertical Scope, Blue Ant, Black Press, Nest Wealth etc) that Torstar currently owns and expects to raise at least $100 million from these sales.

By any measure this deal stinks. There is no justification for Fairfax supporting the Rivett/Bitove bid!

Title: Re: Fairfax 2020
Post by: bearprowler6 on July 16, 2020, 09:32:35 AM
And my question on that deal and issues raised is from a FFH shareholders' perspective, are we winning or losing?

Can someone explain.

FFH is a shareholder of Torstar and could have gotten more, but refused to allowing Rivett to succeed in his bid?

?

Furthermore, Rivett/Botove were on the record as saying that their group will begin to sell off many if not all of the investments (Vertical Scope, Blue Ant, Black Press, Nest Wealth etc) that Torstar currently owns and expects to raise at least $100 million from these sales.

By any measure this deal stinks. There is no justification for Fairfax supporting the Rivett/Bitove bid!

https://www.theglobeandmail.com/business/article-torstar-buyer-expects-to-raise-100-million-selling-minority-stakes/#comments
Title: Re: Fairfax 2020
Post by: StubbleJumper on July 16, 2020, 09:48:36 AM
I read the competing bid by Modern Media Holdings Inc's to be more likely to break up the company since the future asset contigency sales is in their deal.  I read the Nordstar bid  as committing to keep the paper intact.

Isn't the seller within the right to choose which company to sell to based on the way the new buyer will run the business?  In this case keeping the business operating and not stripping it was part of the reason why Nordstar was chosen.

I might be misunderstanding but I dont see the egregious action by the owners for their baby to be in the hands of like minded buyers.


Yes, the seller of an asset can sell to whomever he wants.  But, in this case, we have a number of management teams involved who are supposed to be acting as fiduciaries for the actual owners (shareholders) of their firm. 

The first such management team is Torstar management who should be recommending that its shareholders adopt the objectively most favourable offer, and then holding a shareholder vote to approve or deny the takeover.  During that vote, the *actual owners* of TS can make their individual decision of whether they view the offer as desirable.  The families can vote against the best financial offer if they want, but to fulfill its fiduciary responsibility, TS should be recommending the better offer and should organize a vote.

The second such management team is FFH management, who should be pursuing the best financial offer on behalf of its shareholders (including those of us in this forum).  If the FFH management team is knowingly accepting an inferior financial offer for those TS shares which *we* own, they have some explaining to do.  If the decision was actually taken or if it appears to have been taken simply to help their buddy, Paul Rivett, then they really have some explaining to do.  I have nothing against Paul Rivett, but I do not at all want any portion of my financial interest in FFH to be expropriated just because he's a nice guy.

In the case of FFH, the company has had recurring governance failures.  This looks like it might just be one more abuse of minority (majority!) shareholders.


SJ
Title: Re: Fairfax 2020
Post by: Pedro on July 16, 2020, 10:01:26 AM
Gotcha. Thanks for explaining clearly - i can see the oncern here, specially if Nordstar was looking at divesting assests too. 
Title: Re: Fairfax 2020
Post by: Phoenix01 on July 16, 2020, 10:04:43 AM
Prem is all about establishing and growing relationships.   This sometimes goes against immediate optimization of every deal.

This is pocket change for Fairfax and the benefit from supporting allies is much greater for their reputation.

It is a matter of judgment.   It is not a simple screw everyone and take as much profit as you can.
Title: Re: Fairfax 2020
Post by: bearprowler6 on July 16, 2020, 10:11:49 AM
Prem is all about establishing and growing relationships.   This sometimes goes against immediate optimization of every deal.

This is pocket change for Fairfax and the benefit from supporting allies is much greater for their reputation.

It is a matter of judgment.   It is not a simple screw everyone and take as much profit as you can.

Stop defending him....this one is not even close....

The revised Rivett/Bitove bid works out for something like $60 million in total to acquire a company that has $70 million CASH on its books and NO DEBT and no unfunded pension liability plus it has various minority investments that conservatively will raise a further $100 million when they are sold.
Title: Re: Fairfax 2020
Post by: bizaro86 on July 16, 2020, 11:14:06 AM
Prem is all about establishing and growing relationships.   This sometimes goes against immediate optimization of every deal.

This is pocket change for Fairfax and the benefit from supporting allies is much greater for their reputation.

It is a matter of judgment.   It is not a simple screw everyone and take as much profit as you can.

Do you think continually acting against the best interests of their own investors (and those of their subs) will enhance their reputation?
Title: Re: Fairfax 2020
Post by: Parsad on July 16, 2020, 12:22:37 PM
Prem is all about establishing and growing relationships.   This sometimes goes against immediate optimization of every deal.

This is pocket change for Fairfax and the benefit from supporting allies is much greater for their reputation.

It is a matter of judgment.   It is not a simple screw everyone and take as much profit as you can.

Stop defending him....this one is not even close....

The revised Rivett/Bitove bid works out for something like $60 million in total to acquire a company that has $70 million CASH on its books and NO DEBT and no unfunded pension liability plus it has various minority investments that conservatively will raise a further $100 million when they are sold.

You're asking some shareholders to stop defending him, but have you or anyone asked Prem why he is supporting the Bitove/Rivett deal?  You guys always talk about self-dealing at Fairfax...show me some frickin' examples.  The only things you guys point to is Resolute and now this.  Resolute was to the benefit of Fairfax shareholders.

If the Bitove/Rivett deal wins, do you think there might be some long-term opportunity for Fairfax?  And why are you pissed off at the investor and not Torstar management...they are the ones who should be explaining why they are supporting a specific deal to all shareholders.  Cheers!
Title: Re: Fairfax 2020
Post by: bearprowler6 on July 16, 2020, 12:41:09 PM
Prem is all about establishing and growing relationships.   This sometimes goes against immediate optimization of every deal.

This is pocket change for Fairfax and the benefit from supporting allies is much greater for their reputation.

It is a matter of judgment.   It is not a simple screw everyone and take as much profit as you can.

Stop defending him....this one is not even close....

The revised Rivett/Bitove bid works out for something like $60 million in total to acquire a company that has $70 million CASH on its books and NO DEBT and no unfunded pension liability plus it has various minority investments that conservatively will raise a further $100 million when they are sold.

You're asking some shareholders to stop defending him, but have you or anyone asked Prem why he is supporting the Bitove/Rivett deal?  You guys always talk about self-dealing at Fairfax...show me some frickin' examples.  The only things you guys point to is Resolute and now this.  Resolute was to the benefit of Fairfax shareholders.

If the Bitove/Rivett deal wins, do you think there might be some long-term opportunity for Fairfax?  And why are you pissed off at the investor and not Torstar management...they are the ones who should be explaining why they are supporting a specific deal to all shareholders.  Cheers!

Here we go again....the old "long term"response! I have written on here before....without a specific timeline the phrase long term is meaningless!

As far as I can see Fairfax has been silent on its motives for accepting a lower price for its Torstar shares (than offered by the competing group)...so in the absence of a description of any future beenfit that may accrue to Fairfax shareholders I assume none exists.

furthermore, Stubble Jumper outlined it very well when he raised concerns with the actions of both Torstar's board/management and Fairfax!

Have to leave the board for a few minutes since Greg Sorbora (part of the group completing against Bitove/Rivett) is about to be interviewed on BNNBloomberg.



Title: Re: Fairfax 2020
Post by: bizaro86 on July 16, 2020, 04:49:50 PM
Prem is all about establishing and growing relationships.   This sometimes goes against immediate optimization of every deal.

This is pocket change for Fairfax and the benefit from supporting allies is much greater for their reputation.

It is a matter of judgment.   It is not a simple screw everyone and take as much profit as you can.

Stop defending him....this one is not even close....

The revised Rivett/Bitove bid works out for something like $60 million in total to acquire a company that has $70 million CASH on its books and NO DEBT and no unfunded pension liability plus it has various minority investments that conservatively will raise a further $100 million when they are sold.

You're asking some shareholders to stop defending him, but have you or anyone asked Prem why he is supporting the Bitove/Rivett deal?  You guys always talk about self-dealing at Fairfax...show me some frickin' examples.  The only things you guys point to is Resolute and now this.  Resolute was to the benefit of Fairfax shareholders.

If the Bitove/Rivett deal wins, do you think there might be some long-term opportunity for Fairfax?  And why are you pissed off at the investor and not Torstar management...they are the ones who should be explaining why they are supporting a specific deal to all shareholders.  Cheers!

Do we get to count the time where they sold a piece of FIH's best asset in a way that guarantees OMERS (the buyer) a profit and allowed them to book huge management fees? Seems like the only loser there is FIH shareholders.

How about the time FAH shareholders sold one of their best assets to the mothership for way lower than a recent outside bid as part of a low-disclosure  deal?

Just two more examples from this year, to go along with Resolute, Torstar and the multi-voting shares.
Title: Re: Fairfax 2020
Post by: StubbleJumper on July 16, 2020, 08:40:24 PM
Prem is all about establishing and growing relationships.   This sometimes goes against immediate optimization of every deal.

This is pocket change for Fairfax and the benefit from supporting allies is much greater for their reputation.

It is a matter of judgment.   It is not a simple screw everyone and take as much profit as you can.

Stop defending him....this one is not even close....

The revised Rivett/Bitove bid works out for something like $60 million in total to acquire a company that has $70 million CASH on its books and NO DEBT and no unfunded pension liability plus it has various minority investments that conservatively will raise a further $100 million when they are sold.

You're asking some shareholders to stop defending him, but have you or anyone asked Prem why he is supporting the Bitove/Rivett deal?  You guys always talk about self-dealing at Fairfax...show me some frickin' examples.  The only things you guys point to is Resolute and now this.  Resolute was to the benefit of Fairfax shareholders.

If the Bitove/Rivett deal wins, do you think there might be some long-term opportunity for Fairfax?  And why are you pissed off at the investor and not Torstar management...they are the ones who should be explaining why they are supporting a specific deal to all shareholders.  Cheers!

Do we get to count the time where they sold a piece of FIH's best asset in a way that guarantees OMERS (the buyer) a profit and allowed them to book huge management fees? Seems like the only loser there is FIH shareholders.

How about the time FAH shareholders sold one of their best assets to the mothership for way lower than a recent outside bid as part of a low-disclosure  deal?

Just two more examples from this year, to go along with Resolute, Torstar and the multi-voting shares.



Actually, the one that I liked best was when FFH proposed to buy out the minority shareholders of ORH for US$60/share back in September 2009.  Presumably FFH made that offer with the intimate knowledge of ORH's financial situation. When ORH eventually filed it's 10Q for September 2009, you know what it's book value was?  Yep, it BV at the end of Q3 2009 was a shade under $62/share.  That's right, FFH proposed to buy out its partners for less than book.  Eventually they bumped up their offer to $65/share, which was a princely multiple of 1.05x book, for a highly profitable reinsurer that had grown its book value by 25% during the year. 

Fair and friendly?  Not so much.


SJ
Title: Re: Fairfax 2020
Post by: Phoenix01 on July 17, 2020, 04:56:16 AM
Yet the deals keep headed towards Fairfax....
Title: Re: Fairfax 2020
Post by: bearprowler6 on July 17, 2020, 06:59:41 AM
Yet the deals keep headed towards Fairfax....

A few comments/questions:

1) Perhaps most importantly, in my view Fairfax's behavior on the Torstar acquisition (and during the several examples cited earlier in this thread) cannot be justified by the "deal flow" sent its way.

2) What about the deals Fairfax did not get a chance to look at because of how it behaved on previous deals? There is no way of knowing this however it is a possibility. Are you sure the company's reputation is as strong as it ever was?

3) Finally, what deals that headed toward Fairfax are you specifically referring to? And are you sure the terms of those deals did not adversely impact Fairfax due to the company's previous behavior?
Title: Re: Fairfax 2020
Post by: KFS on July 17, 2020, 07:27:08 AM
Is it just me, or are Charlie Munger's lessons on the "power of incentives" screaming loudly here?  "Incentives are too powerful a control over human cognition or human behavior."

The history lesson from all of this is to simply own the parent FFH stock and avoid the underlings... FIH, FAH, ORH, etc.  It feels very similar to discussion on the BAM board.  If any "unfair" deals are taking place, owning stock in the parent company ensures your interests are aligned.  The majority of Prem's net worth is in FFH and he just purchased $150M of additional shares.  One could argue that FIH and FAH are just as undervalued as the parent FFH, if not more so, but you don't see Prem making any grand announcements of buying $150M of those.  The priority hasn't changed and I don't think it will. 

Title: Re: Fairfax 2020
Post by: StubbleJumper on July 17, 2020, 07:46:39 AM
Is it just me, or are Charlie Munger's lessons on the "power of incentives" screaming loudly here?  "Incentives are too powerful a control over human cognition or human behavior."

The history lesson from all of this is to simply own the parent FFH stock and avoid the underlings... FIH, FAH, ORH, etc.  It feels very similar to discussion on the BAM board.  If any "unfair" deals are taking place, owning stock in the parent company ensures your interests are aligned.  The majority of Prem's net worth is in FFH and he just purchased $150M of additional shares.  One could argue that FIH and FAH are just as undervalued as the parent FFH, if not more so, but you don't see Prem making any grand announcements of buying $150M of those.  The priority hasn't changed and I don't think it will.


Well, yes, that is one potentially valid conclusion, and I generally view it as solid, sound advice. 

But, there is yet one more problem with an outfit that sometimes does not seem to respect its partners.  That problem is that the controlling shareholder has, until recently, only owned 7% of the economic interest in FFH but is likely now up to 9% ownership of the economic interest.  That arrangement once again creates incentive problems because it creates a situation where every dollar of FFH's money that the controlling shareholder channels to his pet projects only costs him personally 9-cents. 

This might be a potential explanation for seemingly strange decisions like hiving off $50m of FFH's investment portfolio to be managed by Ben Watsa.  What is FFH paying Ben's firm to manage that $50m?  Is it 200 bps per year?  More?  Less?  Nobody on the outside knows.  But, what we do know is that if it is 200 bps, that makes $1 million per year, and of that sum Prem would pay $90k to guarantee his son a job while the minority (majority) shareholders would pay the other $910k.  Prem could have allowed his son to manage $50m of his personal assets, which would also have guaranteed Ben a job, but then Prem alone would be paying the freight on that.

Is it the same type of situation with TS?  As others have noted, the TS controversy amounts to chicken-feed in the context of FFH's operations.  Giving Paul Rivett a sweet-heart deal on TS would only potentially cost a few million of FFH's dollars.  But, is this a case where Prem is happily spending 9-cent dollars for the benefit of his friends?  Who really knows at this point.  I would hope that Prem provides an explanation at the next quarterly call.

The problem with this type of personal conduct that gives the appearance of a potential conflict of interest is that it casts suspicion on both good and bad decisions.  The charitable gifts that FFH makes are the same sort of thing where Prem is effectively spending 9-cent dollars.  We like to believe that all of these donations are made with the most altruistic and best intentions.  But, now, when an expenditure is made that is not perfectly obviously aligned with the duty of a fiduciary, it is hard to not have a niggling concern in the back of one's head that the expenditure might not really be in the interest of shareholders.


SJ
Title: Re: Fairfax 2020
Post by: bearprowler6 on July 17, 2020, 08:31:01 AM
Is it just me, or are Charlie Munger's lessons on the "power of incentives" screaming loudly here?  "Incentives are too powerful a control over human cognition or human behavior."

The history lesson from all of this is to simply own the parent FFH stock and avoid the underlings... FIH, FAH, ORH, etc.  It feels very similar to discussion on the BAM board.  If any "unfair" deals are taking place, owning stock in the parent company ensures your interests are aligned.  The majority of Prem's net worth is in FFH and he just purchased $150M of additional shares.  One could argue that FIH and FAH are just as undervalued as the parent FFH, if not more so, but you don't see Prem making any grand announcements of buying $150M of those.  The priority hasn't changed and I don't think it will.


Well, yes, that is one potentially valid conclusion, and I generally view it as solid, sound advice. 

But, there is yet one more problem with an outfit that sometimes does not seem to respect its partners.  That problem is that the controlling shareholder has, until recently, only owned 7% of the economic interest in FFH but is likely now up to 9% ownership of the economic interest.  That arrangement once again creates incentive problems because it creates a situation where every dollar of FFH's money that the controlling shareholder channels to his pet projects only costs him personally 9-cents. 

This might be a potential explanation for seemingly strange decisions like hiving off $50m of FFH's investment portfolio to be managed by Ben Watsa.  What is FFH paying Ben's firm to manage that $50m?  Is it 200 bps per year?  More?  Less?  Nobody on the outside knows.  But, what we do know is that if it is 200 bps, that makes $1 million per year, and of that sum Prem would pay $90k to guarantee his son a job while the minority (majority) shareholders would pay the other $910k.  Prem could have allowed his son to manage $50m of his personal assets, which would also have guaranteed Ben a job, but then Prem alone would be paying the freight on that.

Is it the same type of situation with TS?  As others have noted, the TS controversy amounts to chicken-feed in the context of FFH's operations.  Giving Paul Rivett a sweet-heart deal on TS would only potentially cost a few million of FFH's dollars.  But, is this a case where Prem is happily spending 9-cent dollars for the benefit of his friends?  Who really knows at this point.  I would hope that Prem provides an explanation at the next quarterly call.

The problem with this type of personal conduct that gives the appearance of a potential conflict of interest is that it casts suspicion on both good and bad decisions.  The charitable gifts that FFH makes are the same sort of thing where Prem is effectively spending 9-cent dollars.  We like to believe that all of these donations are made with the most altruistic and best intentions.  But, now, when an expenditure is made that is not perfectly obviously aligned with the duty of a fiduciary, it is hard to not have a niggling concern in the back of one's head that the expenditure might not really be in the interest of shareholders.


SJ

The "market" has responded to all of Prem's actions in the way that matters most; Fairfax's share price has gone no where. In fact, it is currently back to where it was at the end of 2013.

Closing Price in CAD:

Dec 31/13: $424.21

Dec 31/14: $608.78
.
.
.
.
Dec 31/19: $609.74

July 16/20: $424.41

It will take performance of 15% per year for the next 3 years to get us slightly above the price at the end of Dec 31/14! So this will be a 9 year period where the share price will have done absolutely nothing.

There are many reasons for the under performance of the share price however I can't help but think that Prem's pattern of personal conduct has played at least a small part.


Title: Re: Fairfax 2020
Post by: Xerxes on July 17, 2020, 09:14:34 AM
Just a quick comment since it was not mentioned.
On BNN it was alluded that the families prefer the Rivett bid because it was seen as more aligned with the political view that the newspaper has. Something along those lines.

In the grand scheme of things, peanuts for FFH but if there is a pattern than that is more problematic.
I suspect this wouldn’t be a huge issue if FFH overall return would have been spectacular in the past 10 years. Which says something about us as well. When the tide is high, we tend to look past these  things. Well I should speak for myself I guess.

On the subs, you cannot blame FFH to prioritize FFH book value above FIH and FAH. We always said there is a permanent discount to BV on them for this very reason. Their discount to BV will widen and shrink but will never close. Even if it widens by huge margin, it is likely that the market is discounting a steep drop that is yet to come on the BV as oppose it to be a great opportunity.

At the end of the day, FIH return to its shareholder will be great as long as India massive long term potential holds and exceed despite “structural issues with the vehicle”. But for that you are getting a discount.

On OMERS, I like to fly on a wall in their internal meeting to how they really perceive their deals with FFH. Do they keep coming back because it is the devil that they know, or are they somehow perceive that they can get good and fair deals. 
Title: Re: Fairfax 2020
Post by: Parsad on July 17, 2020, 12:08:05 PM
Is it just me, or are Charlie Munger's lessons on the "power of incentives" screaming loudly here?  "Incentives are too powerful a control over human cognition or human behavior."

The history lesson from all of this is to simply own the parent FFH stock and avoid the underlings... FIH, FAH, ORH, etc.  It feels very similar to discussion on the BAM board.  If any "unfair" deals are taking place, owning stock in the parent company ensures your interests are aligned.  The majority of Prem's net worth is in FFH and he just purchased $150M of additional shares.  One could argue that FIH and FAH are just as undervalued as the parent FFH, if not more so, but you don't see Prem making any grand announcements of buying $150M of those.  The priority hasn't changed and I don't think it will.


Well, yes, that is one potentially valid conclusion, and I generally view it as solid, sound advice. 

But, there is yet one more problem with an outfit that sometimes does not seem to respect its partners.  That problem is that the controlling shareholder has, until recently, only owned 7% of the economic interest in FFH but is likely now up to 9% ownership of the economic interest.  That arrangement once again creates incentive problems because it creates a situation where every dollar of FFH's money that the controlling shareholder channels to his pet projects only costs him personally 9-cents. 

This might be a potential explanation for seemingly strange decisions like hiving off $50m of FFH's investment portfolio to be managed by Ben Watsa.  What is FFH paying Ben's firm to manage that $50m?  Is it 200 bps per year?  More?  Less?  Nobody on the outside knows.  But, what we do know is that if it is 200 bps, that makes $1 million per year, and of that sum Prem would pay $90k to guarantee his son a job while the minority (majority) shareholders would pay the other $910k.  Prem could have allowed his son to manage $50m of his personal assets, which would also have guaranteed Ben a job, but then Prem alone would be paying the freight on that.

Is it the same type of situation with TS?  As others have noted, the TS controversy amounts to chicken-feed in the context of FFH's operations.  Giving Paul Rivett a sweet-heart deal on TS would only potentially cost a few million of FFH's dollars.  But, is this a case where Prem is happily spending 9-cent dollars for the benefit of his friends?  Who really knows at this point.  I would hope that Prem provides an explanation at the next quarterly call.

The problem with this type of personal conduct that gives the appearance of a potential conflict of interest is that it casts suspicion on both good and bad decisions.  The charitable gifts that FFH makes are the same sort of thing where Prem is effectively spending 9-cent dollars.  We like to believe that all of these donations are made with the most altruistic and best intentions.  But, now, when an expenditure is made that is not perfectly obviously aligned with the duty of a fiduciary, it is hard to not have a niggling concern in the back of one's head that the expenditure might not really be in the interest of shareholders.


SJ

The "market" has responded to all of Prem's actions in the way that matters most; Fairfax's share price has gone no where. In fact, it is currently back to where it was at the end of 2013.

Closing Price in CAD:

Dec 31/13: $424.21

Dec 31/14: $608.78
.
.
.
.
Dec 31/19: $609.74

July 16/20: $424.41

It will take performance of 15% per year for the next 3 years to get us slightly above the price at the end of Dec 31/14! So this will be a 9 year period where the share price will have done absolutely nothing.

There are many reasons for the under performance of the share price however I can't help but think that Prem's pattern of personal conduct has played at least a small part.

Markel's price hit 2015 prices...WTM hit 2015 prices...Everest Re hit 2014 prices at their lows...this is irrelevant to whether an investment is a good investment or not.  Whether FFH is a good investment now...especially compared to when it was priced higher.  You know better than that!  Cheers!
Title: Re: Fairfax 2020
Post by: Daphne on July 18, 2020, 07:33:33 AM
The “pattern” I’m seeing here is that this board is filling up with conspiracy theorists.

Dr. John Grohol, a psychologist and the founder of Psych Central, says that conspiracy theorists come up with ideas out of thin air to match whatever 'fact' they think is true, and often use paranoia-based beliefs to convince others.
Title: Re: Fairfax 2020
Post by: bizaro86 on July 18, 2020, 07:56:12 AM
The “pattern” I’m seeing here is that this board is filling up with conspiracy theorists.

Dr. John Grohol, a psychologist and the founder of Psych Central, says that conspiracy theorists come up with ideas out of thin air to match whatever 'fact' they think is true, and often use paranoia-based beliefs to convince others.

Or maybe strongly held beliefs (backed up in many case by previous large Fairfax projects) are being held on to even in the face of disconfirming evidence.

“For some of our most important beliefs, we have no evidence at all, except that people we love and trust hold these beliefs. Considering how little we know, the confidence we have in our beliefs is preposterous—and it is also essential.”

—2002 Nobel Laureate Daniel Kahneman

Moat beliefs aren't necessary to change, which is why people don't change them. However, if a management team begins to take shareholder unfriendly actions, it's usually best to assume those actions will continue and not change back.

You can see that on this board on the Biglari thread. Many folks were defending how optically cheap that was long after it became obvious that ~100% of the value was going to Biglari and ~0% to outside shareholders. I don't think Fairfax is at that level, but there are enough examples of shareholder unfriendly actions that a management discount is absolutely appropriate. Maybe that hasn't always been true, but like Munger said:

"We all are learning, modifying, or destroying ideas all the time. Rapid destruction of your ideas when the time is right is one of the most valuable qualities you can acquire. You must force yourself to consider arguments on the other side."

Dismissing cogent arguments as paranoia is pretty obviously an ad hominem attack, imo.
Title: Re: Fairfax 2020
Post by: Xerxes on July 18, 2020, 08:25:13 PM
But, there is yet one more problem with an outfit that sometimes does not seem to respect its partners.  That problem is that the controlling shareholder has, until recently, only owned 7% of the economic interest in FFH but is likely now up to 9% ownership of the economic interest.  That arrangement once again creates incentive problems because it creates a situation where every dollar of FFH's money that the controlling shareholder channels to his pet projects only costs him personally 9-cents. 


i disagree with this comment specifically.
I think 9-10% ownership is a huge incentive. Sure, this is not BRK level of ownership with Buffet. But if i compare to many other companies their CEO ownership is as low as 1%, it is really high.
More so, what else is in Watsa's portfolio. Is it >90% FFH stock, if yes, than i think proper economics incentive is there on both dimensions.

Personally, i would preferred no dividends as it gives the optics of cash-cow that all it does is to ensure the cash inflows is just enough to cover the cash outflows + $10 per share for dividends.
But that is me.

 
Title: Re: Fairfax 2020
Post by: StubbleJumper on July 19, 2020, 06:43:23 AM
But, there is yet one more problem with an outfit that sometimes does not seem to respect its partners.  That problem is that the controlling shareholder has, until recently, only owned 7% of the economic interest in FFH but is likely now up to 9% ownership of the economic interest.  That arrangement once again creates incentive problems because it creates a situation where every dollar of FFH's money that the controlling shareholder channels to his pet projects only costs him personally 9-cents. 


i disagree with this comment specifically.
I think 9-10% ownership is a huge incentive. Sure, this is not BRK level of ownership with Buffet. But if i compare to many other companies their CEO ownership is as low as 1%, it is really high.
More so, what else is in Watsa's portfolio. Is it >90% FFH stock, if yes, than i think proper economics incentive is there on both dimensions.

Personally, i would preferred no dividends as it gives the optics of cash-cow that all it does is to ensure the cash inflows is just enough to cover the cash outflows + $10 per share for dividends.
But that is me.


Yes, the key difference is that the typical CEO with a 1% ownership stake is not entrenched by virtue of multiple-voting shares and is at risk of being turfed if he pursues too many visible pet projects.  That is possibly one reason why you will not see the CEO of Bank of America hive off $50m for his son to manage.  It is probably also the reason why the CEO of BAC will not nominate his son and daughter to sit on the Board.  If you are going to make use of multiple voting shares to retain control with a relatively small economic interest, you need to always be more Catholic than the Pope when it comes to using the firm's funds.


SJ
Title: Re: Fairfax 2020
Post by: Spekulatius on July 19, 2020, 08:28:58 AM
The “pattern” I’m seeing here is that this board is filling up with conspiracy theorists.

Dr. John Grohol, a psychologist and the founder of Psych Central, says that conspiracy theorists come up with ideas out of thin air to match whatever 'fact' they think is true, and often use paranoia-based beliefs to convince others.

Or maybe strongly held beliefs (backed up in many case by previous large Fairfax projects) are being held on to even in the face of disconfirming evidence.

“For some of our most important beliefs, we have no evidence at all, except that people we love and trust hold these beliefs. Considering how little we know, the confidence we have in our beliefs is preposterous—and it is also essential.”

—2002 Nobel Laureate Daniel Kahneman

Moat beliefs aren't necessary to change, which is why people don't change them. However, if a management team begins to take shareholder unfriendly actions, it's usually best to assume those actions will continue and not change back.

You can see that on this board on the Biglari thread. Many folks were defending how optically cheap that was long after it became obvious that ~100% of the value was going to Biglari and ~0% to outside shareholders. I don't think Fairfax is at that level, but there are enough examples of shareholder unfriendly actions that a management discount is absolutely appropriate. Maybe that hasn't always been true, but like Munger said:

"We all are learning, modifying, or destroying ideas all the time. Rapid destruction of your ideas when the time is right is one of the most valuable qualities you can acquire. You must force yourself to consider arguments on the other side."

Dismissing cogent arguments as paranoia is pretty obviously an ad hominem attack, imo.

FFH is run like a Family business and outside shareholders have no recourse and are just along for the ride. This is fine and doesn’t matter much when they are performing but it does matter a lot when they don’t (as is the case here) and warrants a discount. FFH and Biglari are just different shades of grey here’s with BH being extreme and uninvestible.  FFH is just a much milder form of nepotism.

That’s the real danger with family run business. If they perform Mr Market Will not care much about the lack of influence for outside shareholder, but if not, Mr Market will discount a steeper and steeper discount to fair value based on perception of management capability (or lack thereof), much more so than with a truly public company, where an activist could jump in and shake things up.
Title: Re: Fairfax 2020
Post by: Phoenix01 on July 20, 2020, 03:17:14 AM
Prem is not lining his pockets.

Fairfax Financial Holdings Limited is worth CA$15b, and total annual CEO compensation was reported as US$1.3m for the year to December 2018.

Bank of America CEO Brian Moynihan's pay for 2019 stayed flat at $26.5 million, the Charlotte-based bank said Friday. The bank's board gave Moynihan $25 million in restricted stock and a base salary of $1.5 million for his performance, according to a Securities and Exchange Commission filing.Feb 7, 2020.
Title: Re: Fairfax 2020
Post by: Phoenix01 on July 20, 2020, 03:33:55 AM
Prem's son & daughter on the board of directors is a head scratcher for me.

Fairfax is definitely Prem's baby & he wants to take good care of it and everyone associated with it.  His multiple voting shares allow him the freedom to do what he thinks is best. So far it has worked out very well, but it has not been a smooth ride.

His children will inherit a fortune and perhaps they need to understand what that means and how it will impact all stakeholders.   What better way than to place them on the board of directors?

Allowing his son to manage a tiny portfolio may be the cheapest way to groom a future key player.  If he fails, then it would have cost much less than had he been given a big role right from the beginning.   If he succeeds then everyone wins.

Nepotism is in the opportunities given to family members. Shareholders are not being ripped off.  Even Buffet has family members on his board of directors....

Title: Re: Fairfax 2020
Post by: SharperDingaan on July 20, 2020, 05:15:29 AM
Like it or not, FFH is a family business transitioning succession. An inherently higher risk activity.
Mistakes are inevitable. There is a reason why merit is a criteria, and not nepotism - and the higher the appointment, the more critical that separation is. It is preferable that the screw-ups happen in a row-boat, not the ship carrying the row-boats; there are lots of potential solutions, but it will be a family decision, not the shareholders.

Higher risk, gets settled via a higher price discount. Lower multiples, haircuts for opportunity loss, waning 'popularity', etc.
There are plenty of fish in the sea. An investor can toss back an ugly one, and get a replacement, at any time. 

We wish them luck, but most investors would be better off elsewhere.

SD
Title: Re: Fairfax 2020
Post by: Bryggen on July 20, 2020, 06:51:34 PM
To feed the discussion, an interesting read on integrity and good leadership as per Prem Watsa:

https://www.ivey.uwo.ca/news/blogs/2020/july/prem-watsa-explains-integrity-is-the-cornerstone-of-good-leadership/

Title: Re: Fairfax 2020
Post by: SharperDingaan on July 20, 2020, 08:31:44 PM
Sadly - good leadership, and a good investment, don't have a high degree of correlation.
Mostly because leadership is long-term orientated whereas investment is short term orientated. A great business requires reputation, growth & predictability, whereas a great investment - just requires volatility.

An Enron a Worldcom, a Nortel were all great investments; both on the way up (long), and on the way down (short). Had you 'invested' wisely, you would have made stupid amounts of money. The leadership in those companies? not so hot. There are all kinds of other examples - and we see them every day. Might not be most peoples preference, but it is just another way of turning a profit.

The equation changes when you have partners. Shareholders are NOT partners. no matter how much they might think they are.
Partners have unlimited liability exposure to each other, shareholders don't. Different dynamics.

SD

 
Title: Re: Fairfax 2020
Post by: Parsad on July 21, 2020, 02:42:51 PM
But, there is yet one more problem with an outfit that sometimes does not seem to respect its partners.  That problem is that the controlling shareholder has, until recently, only owned 7% of the economic interest in FFH but is likely now up to 9% ownership of the economic interest.  That arrangement once again creates incentive problems because it creates a situation where every dollar of FFH's money that the controlling shareholder channels to his pet projects only costs him personally 9-cents. 


i disagree with this comment specifically.
I think 9-10% ownership is a huge incentive. Sure, this is not BRK level of ownership with Buffet. But if i compare to many other companies their CEO ownership is as low as 1%, it is really high.
More so, what else is in Watsa's portfolio. Is it >90% FFH stock, if yes, than i think proper economics incentive is there on both dimensions.

Personally, i would preferred no dividends as it gives the optics of cash-cow that all it does is to ensure the cash inflows is just enough to cover the cash outflows + $10 per share for dividends.
But that is me.


Yes, the key difference is that the typical CEO with a 1% ownership stake is not entrenched by virtue of multiple-voting shares and is at risk of being turfed if he pursues too many visible pet projects.  That is possibly one reason why you will not see the CEO of Bank of America hive off $50m for his son to manage.  It is probably also the reason why the CEO of BAC will not nominate his son and daughter to sit on the Board.  If you are going to make use of multiple voting shares to retain control with a relatively small economic interest, you need to always be more Catholic than the Pope when it comes to using the firm's funds.


SJ

I think Berkshire and Fairfax shareholders know the difference between how these two companies are managed and the typical corporate structure of most corporations.  You get what you get with Berkshire and Fairfax...that you will be treated equal to management, and that management has interests that are aligned with shareholders long-term.  That some family influence or atypical culture will exist...be it Howard Buffett on the board of Berkshire or Ben Watsa on the board of Fairfax.  Otherwise investors are welcome to invest in other companies where the culture is more agreeable to them.  Cheers!
Title: Re: Fairfax 2020
Post by: Parsad on July 21, 2020, 02:43:44 PM
But, there is yet one more problem with an outfit that sometimes does not seem to respect its partners.  That problem is that the controlling shareholder has, until recently, only owned 7% of the economic interest in FFH but is likely now up to 9% ownership of the economic interest.  That arrangement once again creates incentive problems because it creates a situation where every dollar of FFH's money that the controlling shareholder channels to his pet projects only costs him personally 9-cents. 


i disagree with this comment specifically.
I think 9-10% ownership is a huge incentive. Sure, this is not BRK level of ownership with Buffet. But if i compare to many other companies their CEO ownership is as low as 1%, it is really high.
More so, what else is in Watsa's portfolio. Is it >90% FFH stock, if yes, than i think proper economics incentive is there on both dimensions.

Personally, i would preferred no dividends as it gives the optics of cash-cow that all it does is to ensure the cash inflows is just enough to cover the cash outflows + $10 per share for dividends.
But that is me.

+1!  Cheers!
Title: Re: Fairfax 2020
Post by: EricSchleien on July 21, 2020, 02:49:49 PM
To feed the discussion, an interesting read on integrity and good leadership as per Prem Watsa:

https://www.ivey.uwo.ca/news/blogs/2020/july/prem-watsa-explains-integrity-is-the-cornerstone-of-good-leadership/

My colleagues and I just had a good laugh at this paper. I'd argue it's worthless and totally predictable based off the current awareness in the business world.

This is a nice description of integrity, however, it doesn't really get at the heart of the matter of the power of integrity. When integrity degrades into a morality conversation it loses its power. Also having a set of guiding principles will NOT inherently ground a good culture.

The Jensen/Erhard course taught at Harvard as well as 44 other Universities actually gets to the heart of the matter of Integrity. I've done this work and it's nothing that you can get from reading about integrity.

They give the program away for free online which you can get here: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=920625

On a side note, businesses that get integrity as a distinction experience increase of profits of 600% within 1 year. Businesses that get their "guiding principles" actually aligned with their culture, takes about 2 days to do and 6-24 months to be seen into action and you get a result on average of 3-5x.

It's my hope that this work gets taught in every business school in the country one day. It's a HUGE missing in our society.

Title: Re: Fairfax 2020
Post by: rkbabang on July 21, 2020, 03:17:04 PM
To feed the discussion, an interesting read on integrity and good leadership as per Prem Watsa:

https://www.ivey.uwo.ca/news/blogs/2020/july/prem-watsa-explains-integrity-is-the-cornerstone-of-good-leadership/

My colleagues and I just had a good laugh at this paper. I'd argue it's worthless and totally predictable based off the current awareness in the business world.

This is a nice description of integrity, however, it doesn't really get at the heart of the matter of the power of integrity. When integrity degrades into a morality conversation it loses its power. Also having a set of guiding principles will NOT inherently ground a good culture.

The Jensen/Erhard course taught at Harvard as well as 44 other Universities actually gets to the heart of the matter of Integrity. I've done this work and it's nothing that you can get from reading about integrity.

They give the program away for free online which you can get here: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=920625

On a side note, businesses that get integrity as a distinction experience increase of profits of 600% within 1 year. Businesses that get their "guiding principles" actually aligned with their culture, takes about 2 days to do and 6-24 months to be seen into action and you get a result on average of 3-5x.

It's my hope that this work gets taught in every business school in the country one day. It's a HUGE missing in our society.

Just read that abstract.  It sounds like they are equating "integrity" with keeping your word and owning your shit.  Roughly speaking.  Not sure how that is teachable, I've always thought about integrity as something someone has or doesn't, but I'm interested enough that I think I'm going to read the whole paper.
Title: Re: Fairfax 2020
Post by: StubbleJumper on July 21, 2020, 03:19:29 PM
But, there is yet one more problem with an outfit that sometimes does not seem to respect its partners.  That problem is that the controlling shareholder has, until recently, only owned 7% of the economic interest in FFH but is likely now up to 9% ownership of the economic interest.  That arrangement once again creates incentive problems because it creates a situation where every dollar of FFH's money that the controlling shareholder channels to his pet projects only costs him personally 9-cents. 


i disagree with this comment specifically.
I think 9-10% ownership is a huge incentive. Sure, this is not BRK level of ownership with Buffet. But if i compare to many other companies their CEO ownership is as low as 1%, it is really high.
More so, what else is in Watsa's portfolio. Is it >90% FFH stock, if yes, than i think proper economics incentive is there on both dimensions.

Personally, i would preferred no dividends as it gives the optics of cash-cow that all it does is to ensure the cash inflows is just enough to cover the cash outflows + $10 per share for dividends.
But that is me.


Yes, the key difference is that the typical CEO with a 1% ownership stake is not entrenched by virtue of multiple-voting shares and is at risk of being turfed if he pursues too many visible pet projects.  That is possibly one reason why you will not see the CEO of Bank of America hive off $50m for his son to manage.  It is probably also the reason why the CEO of BAC will not nominate his son and daughter to sit on the Board.  If you are going to make use of multiple voting shares to retain control with a relatively small economic interest, you need to always be more Catholic than the Pope when it comes to using the firm's funds.


SJ

I think Berkshire and Fairfax shareholders know the difference between how these two companies are managed and the typical corporate structure of most corporations.  You get what you get with Berkshire and Fairfax...that you will be treated equal to management, and that management has interests that are aligned with shareholders long-term.  That some family influence or atypical culture will exist...be it Howard Buffett on the board of Berkshire or Ben Watsa on the board of Fairfax.  Otherwise investors are welcome to invest in other companies where the culture is more agreeable to them.  Cheers!


When Howie was appointed to the BoD back in what, 92 or 93, what was WEB's economic interest in percentage terms in BRK?  After donating shitloads of his shares, what is WEB's economic interest in 2020?  It's not even close to comparable.


SJ
Title: Re: Fairfax 2020
Post by: EricSchleien on July 21, 2020, 03:29:58 PM
To feed the discussion, an interesting read on integrity and good leadership as per Prem Watsa:

https://www.ivey.uwo.ca/news/blogs/2020/july/prem-watsa-explains-integrity-is-the-cornerstone-of-good-leadership/

My colleagues and I just had a good laugh at this paper. I'd argue it's worthless and totally predictable based off the current awareness in the business world.

This is a nice description of integrity, however, it doesn't really get at the heart of the matter of the power of integrity. When integrity degrades into a morality conversation it loses its power. Also having a set of guiding principles will NOT inherently ground a good culture.

The Jensen/Erhard course taught at Harvard as well as 44 other Universities actually gets to the heart of the matter of Integrity. I've done this work and it's nothing that you can get from reading about integrity.

They give the program away for free online which you can get here: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=920625

On a side note, businesses that get integrity as a distinction experience increase of profits of 600% within 1 year. Businesses that get their "guiding principles" actually aligned with their culture, takes about 2 days to do and 6-24 months to be seen into action and you get a result on average of 3-5x.

It's my hope that this work gets taught in every business school in the country one day. It's a HUGE missing in our society.

Just read that abstract.  It sounds like they are equating "integrity" with keeping your word and owning your shit.  Roughly speaking.  Not sure how that is teachable, I've always thought about integrity as something someone has or doesn't, but I'm interested enough that I think I'm going to read the whole paper.

Really good observation. Nobody "has" or "doesn't have" integrity. And it's taught through making distinctions. The distinction integrity is what creates the performance increases. The explaining of it does not and just makes for interesting dialogue at best.

Distinctions are made from abstractions. Principles get derived from distinction. Most people if they're lucky start with principles and most people don't even go that deep.

Integrity is often thought of conceptually as moral uprightness and steadfastness, or as you would say "having it"—making the “good” choices, doing the “right thing.” In fact, it is far more than that. Integrity is actually a experiential phenomenon in and of itself. It has to do with authenticity—being true to ourselves—and it is the foundation for power and effectiveness. It is a home, an anchor, a continuing commitment—a way of being and acting that shapes who we are.

When one distiguishes integrity as distinction, it opens up a completely new world. Kind of like if you've ever seen the movie "The Gods Must Be Crazy"...when the coke bottle drops from the sky...there is no distinction coke bottle for them so they interact with it differently. On the contrary, you and I have no access to the distinction called "not a coke bottle" so we actually are unable to have access to THEIR experience of the coke bottle. Same thing with trying to explain the color purple to a blind man..they have no distinction called purple or color. Also, if you show someone from an uncontested tribe a photograph, they will see a blob. They don't actually experience a picture.

So distinction is the access to the breakthrough performance.....and the business world is still in the stone ages by teaching these as concepts, it's actually pretty amateur hour...say unlike management techniques which business school has gotten masterful over the past 50 years. Probably because they are taught as techniques and you don't have to distuigish much..just teach someone a tool.

However, the natural space people get to through discovering this experience is integrity resides in the ability to constitute yourself as your word, to be true to your principles, and ultimately, be true to yourself. Seeing authenticity as the access to being authentic around where one is being inauthentic as nobody "is" authentic.

Integrity is not constrained by, nor does it reside in, rules, prescriptions, or imposed demands. Integrity creates an environment of freedom, power, and joy.

Of course the constraint here is that you can't explain a distinction just like I can't explain purple to a blind man. So explaining the distinction integrity will just land as a concept at best.

Cheers!
Title: Re: Fairfax 2020
Post by: bizaro86 on July 21, 2020, 04:13:38 PM
The idea that being true to oneself could be the highest value in a belief system makes me sad.

Can I suggest the golden rule as a proxy for integrity - "Do unto others as you would have them do unto you."

Title: Re: Fairfax 2020
Post by: Cigarbutt on July 21, 2020, 05:54:14 PM
The idea that being true to oneself could be the highest value in a belief system makes me sad.
Can I suggest the golden rule as a proxy for integrity - "Do unto others as you would have them do unto you."
How you balance oneself with others is a personal matter inasmuch the opinion is not shared in social media. :)
The submitted paper has this section on page 52:
"In a critical sense, who I am for another is my word,39 i.e., my expression of my self. For a relationship to have integrity (to be whole and complete), one’s word must be whole and complete. As Shakespeare said, “This above all: to thine own self be true, it must follow, as the night the day, Thou cans’t not be false to any man.”40 When one is true to one’s word (which is being true to one’s self), one cannot be but true to any man."
Interestingly and as usual with this type of brain-washing activity, circular arguments and quotes taken outside of their context are used. The Shakespeare quote comes through one of his characters: Polonius, who is known for his bad judgement and hypocrisy. Also, assuming the quote has substantive value, in a Freudian slip type of way, the explanation of the quote does not correspond to the quote: cans't not be false to any man ---) cannot be true to any man!
While it's possible to go through the entire paper and references, the following personal growth parody related to the main author may be sufficient:
https://www.youtube.com/watch?v=T5XYNQv6F_o
---o---o---
To link with the FFH 2020 thread, over the last few years, i've come to conclude to an integrity drift and the last outcome from the Fibrek saga did not help:
https://financialpost.com/news/fp-street/watsas-mindboggling-reasoning-in-takeover-prompts-court-award
Title: Re: Fairfax 2020
Post by: SharperDingaan on July 21, 2020, 06:19:53 PM
"Not sure how that is teachable"

Friends in low places advise that it's very simple - in their world; the first one or two to forget sleep with the fishes, following which everyone remembers. In our world, it's the metaphorical heads on sticks - same message, but less clean up, and no flies to deal with.
African thing  ;)

SD
Title: Re: Fairfax 2020
Post by: cwericb on July 22, 2020, 06:17:29 AM
“Integrity”?   Here are some quotes about Prem Watsa from the article about the Fibrek court case :

“Canadian investor Prem Watsa was “purposely forgetful” and offered a “mindboggling” explanation in court testimony explaining why he backed a low-ball bid for a pulp mill in a sale to Resolute Forest Products Inc., a Montreal judge concluded in the seven-year-old case.”

“Watsa’s testimony was so vague and filled with so many uncertainties, unlikelihood, unsubstantiated denials and contradictions that it is very difficult for the court to give credence to the affirmations and explanations of the witness whose memory appeared to be failing on the most crucial aspects of his testimony,”

Fairfax “was in a blatant conflict of interest situation,” the Quebec judge said”

“Fairfax agreed to sell its 33 million shares to Resolute for $1 apiece — locking in a price that dissenting shareholders considered too low. The judge considered the fair value of Fibrek shares to be $1.99, and found Watsa’s explanation for accepting less “mindboggling.”

Now that’s not a couple of cents per share in the difference. Nor is it a debatable difference. At the time I said on this board that the deal was dead wrong and that it made a joke of the Fairfax motto of  “Fair and Friendly” acquisitions.

Meanwhile, his defenders here tried to justify the buyout as “Watsa was simply acting in the best interests of Fairfax”. Or, I suppose you could put it another way since Watsa owns a sizable portion of Fairfax, “Watsa was simply looking after Watsa’s best interests”.

Rather putting Prem Watsa on a pedestal, perhaps consider that he simply stole $33,000,000 from Fibrek shareholders (myself included) and then got caught with his pants down.

So when you consider the present Rivett and Torstar situation ... well, there just seems to be an odd smell coming from the company.

Title: Re: Fairfax 2020
Post by: Jurgis on July 22, 2020, 06:20:53 AM
Is it me or did a bunch of posts from last night disappear (in various topics)?
Title: Re: Fairfax 2020
Post by: cwericb on July 22, 2020, 09:06:10 AM
Thanks for that. I thought I was going nuts. I posted last night and this morning it was gone. So I essentially reposted.
Title: Re: Fairfax 2020
Post by: SharperDingaan on July 22, 2020, 09:07:27 AM
Keeps circling back to the trust, vision, and reporting thing. Everyone makes mistakes ... but when they keep coming up, and more frequently, it's a pattern. Fair and Friendly might have been the original vision, but it has devolved quite a bit since then.

Make your own assessments, but there are plenty of other fish.

SD
Title: Re: Fairfax 2020
Post by: AZ_Value on July 22, 2020, 09:45:36 AM
When someone shows you who they are, believe them.

IMO the right time to move on from FFH was many years ago and many instances of them talking from both sides of their mouths ago.

AZ
Title: Re: Fairfax 2020
Post by: Bryggen on July 22, 2020, 10:17:02 AM
Now, as everyone talks about integrity and suspicious deals, what are your thoughts on that one with BB - just out today:

https://seekingalpha.com/news/3593625-blackberry-redeeming-convertibles-in-debt-restructuring?utm_medium=email&utm_source=seeking_alpha&mail_subject=frfhf-blackberry-redeeming-convertibles-in-debt-restructuring&utm_campaign=rta-stock-news&utm_content=link-3
Title: Re: Fairfax 2020
Post by: SharperDingaan on July 22, 2020, 11:00:41 AM
No dog in this, but it's not a bad deal for the work-out.
Very telling that the principal o/s is being reduced by 80 M - depending on how one calculates.
Risk management.

Ultimately, the business expectation is that BB is eventually merged into someone bigger, for a smaller slice of a bigger/better pie. But were they not already trapped in BB, there are other/better IT investments. The ongoing opportunity cost is the premium on the call option, at the current yield curve - pretty cheap. Can't really fault the business decision.

SD

Title: Re: Fairfax 2020
Post by: Thrifty3000 on July 22, 2020, 12:13:28 PM
When someone shows you who they are, believe them.

IMO the right time to move on from FFH was many years ago and many instances of them talking from both sides of their mouths ago.

AZ

I've read Prem's letters and listened to him speak for years. I think he's a good man. I think he's a great promoter. I never feel like he's trying to mislead me. I always feel like he's trying to sell me, on Fairfax. Good for him. That's what I want from a CEO.

Prem is a human billionaire. He will have good days and bad days. In the public eye he will have good performances and bad performances. He will experience a range of good and bad fortune. You can easily selectively build a case for or against a man like Prem.

It's why we have to look at the data over time - at the per share earnings potential against the price per share.

If you think Prem belongs anywhere near the same camp as someone like Biglari then by all means exit and don't look back - at least until he's no longer in control.

As investors it's our job to evaluate the prospects of the business. A decade ago Prem was regarded as super-human, and the company was selling for something like 30 times its near-term earnings potential. That's Mr. Market's fault, not Prem's. (It was probably a good time to trim one's position and become an observer. I think plenty of investors did.)

No matter how you slice it the earnings power of the business grew over the last 10 years. Now the company is a going concern selling for what could easily be less than 10 times its near-term earnings potential.

So, the value has increased while the price has plummeted. I'm not sure that's the kind of scenario I'd advise others to "move on" from.
Title: Re: Fairfax 2020
Post by: StubbleJumper on July 22, 2020, 12:26:03 PM
Now, as everyone talks about integrity and suspicious deals, what are your thoughts on that one with BB - just out today:

https://seekingalpha.com/news/3593625-blackberry-redeeming-convertibles-in-debt-restructuring?utm_medium=email&utm_source=seeking_alpha&mail_subject=frfhf-blackberry-redeeming-convertibles-in-debt-restructuring&utm_campaign=rta-stock-news&utm_content=link-3


Yep, the BB shareholders are up in arms.  I guess their underlying assumption was that either BB doesn't need the liquidity or that there is a long line-up of potential lenders who would be prepared to lend a half-billion at 3.75% with no conversion privilege.  I am from the school of thought that FFH's last note flotation was at 4 5/8%, so if that's what FFH pays for debt, what should a riskier outfit like BB pay?  Maybe 7%?  Seriously, a 15 minute walk through their financials for the past 3 or 4 years is enough to make a guy want to puke. 

Maybe there is a long line-up of outfits wanting to lend money to companies that have drastically transformed their business and are cashflow negative?  I don't see it, but I've been wrong plenty of times before...


SJ
Title: Re: Fairfax 2020
Post by: Parsad on July 22, 2020, 04:00:37 PM
Whenever I see a run of posts like this on Fairfax, the stock usually does well in the ensuing months...keep it up!  Cheers!
Title: Re: Fairfax 2020
Post by: StubbleJumper on July 22, 2020, 06:02:14 PM
Whenever I see a run of posts like this on Fairfax, the stock usually does well in the ensuing months...keep it up!  Cheers!



What have you been eating recently?  My portfolio needs that you go out for lunch!


SJ
Title: Re: Fairfax 2020
Post by: Parsad on July 22, 2020, 06:49:06 PM
Whenever I see a run of posts like this on Fairfax, the stock usually does well in the ensuing months...keep it up!  Cheers!



What have you been eating recently?  My portfolio needs that you go out for lunch!


SJ

Frickin' can't until the restrictions are off.  It's no fun when hot waitresses have masks on all of the time!  Cheers!
Title: Re: Fairfax 2020
Post by: SharperDingaan on July 24, 2020, 06:28:52 AM
This will help keep the price down.
https://www.theglobeandmail.com/business/article-ontario-court-delays-torstar-takeover-after-rival-bidder-raises/

"Torstar lawyer Ryan Morris cast the two objecting parties as “a bitter, failed bidder and a disgruntled former employee who should not be permitted to disrupt a robust process.” He said NordStar increased its offer for Torstar – publisher of the Toronto Star newspaper – twice as the auction played out, securing the support of the five families who control Torstar’s voting stock and of major shareholder Fairfax Financial Holdings Inc."

Most would expect that the FFH presence, and prior history with this kind of thing, was a factor in the court decision.
The obvious resolution is another round of bidding, and sale to the highest bidder - if the existing winner is to remain, they pay up for it.  Put up the winning bid, and put the peeving lawyer away.

There is nothing wrong with fair bidding for an asset. However, it is theft if the selling company doesn't accept the highest bid.
Like it or not, all the sellers common shareholders own the company equally. 

SD




Title: Re: Fairfax 2020
Post by: bearprowler6 on July 30, 2020, 02:24:38 PM
Q2 Results are out:

https://www.fairfax.ca/news/press-releases/press-release-details/2020/Fairfax-Financial-Holdings-Limited-Financial-Results-for-the-Second-Quarter/default.aspx
Title: Re: Fairfax 2020
Post by: Xerxes on July 30, 2020, 03:53:03 PM
Unless I am reading wrong book value had a paltry 3% bounce up of March 31 lows.

The net investment portfolio loss of $1.3 billion at the end of Q1, reverses by half, for the six months period.
Title: Re: Fairfax 2020
Post by: StubbleJumper on July 30, 2020, 05:03:51 PM
Unless I am reading wrong book value had a paltry 3% bounce up of March 31 lows.

The net investment portfolio loss of $1.3 billion at the end of Q1, reverses by half, for the six months period.



Did I read this right?  On page 11 of the Q2, the stock investment portfolio was valued at $3.8 billion, but on page 15 the net gains on common stocks (realised and unrealised combined) was $130m.  Didn't the S&P rise by like 18 or 20% during the quarter?

Am I missing something obvious?


SJ
Title: Re: Fairfax 2020
Post by: Xerxes on July 30, 2020, 06:15:04 PM
you are exactly right !

A paltry bounce back both on the bond and common stock portfolio, purely from a realized/unrealized capital gain/loss point of view.
That explains the mediocre 3% bounce back on the book, in turn.
494 million return on bonds portfolio of ~$17 billion + 130 million returns on the common stock portfolio of 3.8 billion

The crown jewels* are, however, grouped under the Associates (~$4.6 billion in value). For, those unless there is an impairment charge, you wont see the their stock movement captured in page 15, I believe. But overtime, one should see FFH's portion of earning to do better if those associate perform better. 

I should state however that one-quarter of S&P500 is made of BigTech/FANG, and the aggregate bounce back of the BigTech lifted the S&P500 far better than Blackberry powerhouse bounce back did within the FFH common stock portfolio. If you are competing against S&P500, you need either of the following two things: (1) either you got the genius to do without Big Tech in the portfolio and still do really well or (2) have at least as much Big Tech as the index, and you can get creative on the remaining 3/4 of the portfolio.

*crown jewels net of Resolute, as RFP is no jewel let alone a crown jewel
Title: Re: Fairfax 2020
Post by: bizaro86 on July 30, 2020, 07:17:10 PM
I would say its a bit concerning that they managed to lose money (significantly) on both the long and short side. Realized plus unrealized losses of $821.9 MM for the long side, and $222.4 MM for the short side. Should be making money on one side of a long-short book...
Title: Re: Fairfax 2020
Post by: Bryggen on July 30, 2020, 08:02:13 PM
I would say its a bit concerning that they managed to lose money (significantly) on both the long and short side. Realized plus unrealized losses of $821.9 MM for the long side, and $222.4 MM for the short side. Should be making money on one side of a long-short book...

That is for the first six months of the year, right?
Making money in 6 months during a pandemic? Really?
I am stealing Parsad's favourite: cheers!
Title: Re: Fairfax 2020
Post by: Xerxes on July 30, 2020, 09:05:27 PM
I would say its a bit concerning that they managed to lose money (significantly) on both the long and short side. Realized plus unrealized losses of $821.9 MM for the long side, and $222.4 MM for the short side. Should be making money on one side of a long-short book...

$821 million is over 6 months.
For Q1 the investment loss was about $1.3 billion, half of which got recouped by this quarter $600 or so investment gain.
So, net, we are at the $821 million mark for the first six months.

I don't expect much mark-to-market bounce back on BV from the common stock portfolio. This would have been the peak on mark-to-market bounce back I think.
It will be up to the insurance business, capital gains on the bond portfolio and earning pickups from Associates to build up the BV going forward I think.


Title: Re: Fairfax 2020
Post by: Xerxes on July 30, 2020, 09:06:34 PM
I would say its a bit concerning that they managed to lose money (significantly) on both the long and short side. Realized plus unrealized losses of $821.9 MM for the long side, and $222.4 MM for the short side. Should be making money on one side of a long-short book...

That is for the first six months of the year, right?
Making money in 6 months during a pandemic? Really?
I am stealing Parsad's favourite: cheers!

Yes, during the pandemic.
Title: Re: Fairfax 2020
Post by: bizaro86 on July 30, 2020, 10:17:36 PM
I would say its a bit concerning that they managed to lose money (significantly) on both the long and short side. Realized plus unrealized losses of $821.9 MM for the long side, and $222.4 MM for the short side. Should be making money on one side of a long-short book...

That is for the first six months of the year, right?
Making money in 6 months during a pandemic? Really?
I am stealing Parsad's favourite: cheers!

The point of a long-short book is for gains on the shorts to offset losses on the longs when unexpected bad things happen (for example, a worldwide pandemic). If your shorts aren't making money (to offset losses on longs) during an event like that, maybe not doing them would be a better choice?

Or am I missing something here? If so, I'd love to know what it is...
Title: Re: Fairfax 2020
Post by: Parsad on July 30, 2020, 10:52:18 PM
I would say its a bit concerning that they managed to lose money (significantly) on both the long and short side. Realized plus unrealized losses of $821.9 MM for the long side, and $222.4 MM for the short side. Should be making money on one side of a long-short book...

That is for the first six months of the year, right?
Making money in 6 months during a pandemic? Really?
I am stealing Parsad's favourite: cheers!

The point of a long-short book is for gains on the shorts to offset losses on the longs when unexpected bad things happen (for example, a worldwide pandemic). If your shorts aren't making money (to offset losses on longs) during an event like that, maybe not doing them would be a better choice?

Or am I missing something here? If so, I'd love to know what it is...

They are long on value stocks and short tech stocks.  So naturally, they haven't seen significant gains on the long side and they've suffered on the short side.  They will see their gains when tech stocks correct as main street returns to normal business and tech stocks get priced closer to reality.

Blackberry has barely moved...Fairfax India has barely moved...Atlas Corp (which is just killing it during a pandemic) has barely moved...and they are sitting on a ton of cash and bonds (which way have interest rates moved). 

So I think the fact that insurance is doing so well, even with significant insurance losses, is why Prem has tipped his hand and expressed his expectations to the general market with his $150M stock buy. 

Insurance despite the pandemic is doing fantastic and they've indicated pricing pressure is here...and when their investment portfolio turns as market sentiment eventually and inevitably turns to value stocks...Fairfax will see book value increase significantly!   We've seen it before, and we'll see it again.  Cheers!
Title: Re: Fairfax 2020
Post by: StubbleJumper on July 31, 2020, 09:29:40 AM
Q2 2020 Conference Call Transcript:  https://seekingalpha.com/article/4362912-fairfax-financial-holdings-limited-frfhf-ceo-prem-watsa-on-q2-2020-results-earnings-call?part=single

SJ
Title: Re: Fairfax 2020
Post by: Xerxes on July 31, 2020, 08:45:07 PM
Thanks
I think it was a good call.
No question about TorStar or Fairfax Africa's sale.

----------------
Funny question from an individual investor, who confused Exxon and Chevron with Enron and Chevrolet. I listened to the audio, he actually said Enron and Chevrolet.

"Okay. And the second question is the stocks that you guys bought in March like Enron, Chevrolet, Google, have you guys sold any of those positions, or do we have to wait till the next quarterly filings to see those?"

----------------
Anybody understands this statement: "The losses were principally comprised of incurred but not reported losses that represented on a net basis 70% of the COVID-19 losses reported."

is that like how banks do loan losses provisions. ? what does it mean incurred but not reported.
Title: Re: Fairfax 2020
Post by: Cigarbutt on July 31, 2020, 09:32:49 PM
...
----------------
Anybody understands this statement: "The losses were principally comprised of incurred but not reported losses that represented on a net basis 70% of the COVID-19 losses reported."
is that like how banks do loan losses provisions. ? what does it mean incurred but not reported.
Disclosure: FFH is still on my radar but involves only peripheral vision.
Reported loss includes has occurred and has been reported to the company. Based on that, over time, companies have to "adjust" what they expect will happen in the future. Insurers vary in terms of the speed and extent of recognition of future potential developments. For Covid-19, Markel, for example, reported high losses in Q1 with a high component of IBNR, suggesting a pro-active stance. Others have decided to wait and see the future development before booking additional losses. What is very unusual about this virus is that 1-it is a major event (large losses expected), 2-models don't really exist as global pandemics happen only rarely and 3-unlike a hurricane or other major catastrophe, the virus event and related consequences are ongoing (uncertain duration). i think the statement made by FFH implies possibly a degree of conservatism reflecting the underlying uncertainty and long-tail nature of future claims.
Title: Re: Fairfax 2020
Post by: Pedro on August 02, 2020, 09:26:05 AM
"i think the statement made by FFH implies possibly a degree of conservatism reflecting the underlying uncertainty and long-tail nature of future claims."

I agree & would add that FFH has continued favourable reserve development YOY so convservative reserving is their historical norm.

Title: Re: Fairfax 2020
Post by: Cigarbutt on August 02, 2020, 06:12:55 PM
"i think the statement made by FFH implies possibly a degree of conservatism reflecting the underlying uncertainty and long-tail nature of future claims."

I agree & would add that FFH has continued favourable reserve development YOY so convservative reserving is their historical norm.
The Covid impact on (re)insurers is a mixed bag and there are segments that clearly have benefitted. Not a big deal for Fairfax but, with decreased mobility, car insurers don't seem to complain. That aspect, however, may help to explain the otherwise unusual favorable development in some of the segments. It will take time to figure out but Fairfax has, in the latest part of the cycle, showed better than average (relative basis) favorable development but there is no evidence that shows that it will completely diverge compared to industry-wide trends.
Another aspect of the Covid issue is duration and development patterns. For workers comp lines (Zenith), the reserve development (from claims not still incurred but that need to be priced beforehand) will be influenced by the presently unknown evolution of the virus problem, the public policy responses to it as well as future legislation for coverage. Event cancellation settlement should be straightforward but, even if the insurers' legal position in general appears strong for the business interruption claims, the extent of those claims remain presently unknown. Typically (one would need to assess specifically for Fairfax; i assume they use the usual policy language), the BI contracts include a specific duration (limit) clause but, if history is any guide, BI claims after previous catastrophes took a while to manifest. There are a lot of businesses looking at their options now. It would be expected that most claims will have clearer visibility when legal actions are taken (or not) somewhere around 2021. It is possible that some of these claims have already been "reported" without a clear quantifiable and specific claim amount. Sometimes, the IBNR account includes the typical not reported claims but may also include a "pipeline" reserve where a claim is considered in process, which results in some 'flexibilty' for reporting purposes. It appears that the unfavorable reserve development recognized by Fairfax for the BI claims should eventually reverse.
Title: Re: Fairfax 2020
Post by: cwericb on August 05, 2020, 11:50:05 AM
Seeking Alpha article on Fairfax.

Fairfax Financial Holdings Ltd.: Undervalued But No Catalyst In Sight

https://seekingalpha.com/article/4364646-fairfax-financial-holdings-ltd-undervalued-no-catalyst-in-sight?utm_medium=email&utm_source=seeking_alpha&mail_subject=frfhf-fairfax-financial-holdings-ltd-undervalued-but-no-catalyst-in-sight&utm_campaign=rta-stock-article&utm_content=link-0
Title: Re: Fairfax 2020
Post by: Parsad on August 05, 2020, 04:24:16 PM
Seeking Alpha article on Fairfax.

Fairfax Financial Holdings Ltd.: Undervalued But No Catalyst In Sight

https://seekingalpha.com/article/4364646-fairfax-financial-holdings-ltd-undervalued-no-catalyst-in-sight?utm_medium=email&utm_source=seeking_alpha&mail_subject=frfhf-fairfax-financial-holdings-ltd-undervalued-but-no-catalyst-in-sight&utm_campaign=rta-stock-article&utm_content=link-0

The gist of the article...nothing wrong with it...it's cheap...but no catalyst.  Just to get back to book value is a 40% return...what catalyst do you need for that?  Cheers!
Title: Re: Fairfax 2020
Post by: villainx on August 05, 2020, 07:00:45 PM
Apologies as a slightly embittered Fairfax holder, but - I remember another thread where it was posed that if one wasn't comfortable holding on to (sub or fairfax main), one should get out.  Unfortunately, ... I got out.  I don't see the point of investing based on trust that things will improve ... when there are zero signs that things are improving.  I love folks contributing here, but i got out of my (very small) share of Fairfax.
Title: Re: Fairfax 2020
Post by: Xerxes on August 06, 2020, 08:37:30 PM
I ll say this.

The very fact that FFH is unable to do both recap it’s insurance subs and buyback significantly at the same time is an pocket of opportunity that provides a not moving share price looking for a better day.

The fact that Buffet refused to buy back it own share and significantly deploy capital in Q2 was also a pocket of opportunity.

Lastly on FFH BV my sense is that with the write-offs on some of the Associates at the end of Q1, the stack that made up its BV has been de-risk of bias towards those names. Therefore as the BV is re-build it will be on strength of its better businesses.

When the BV gets close to where it was in dollar terms in the coming quarters, I would prefer the post-Q2 stack of BV than the pre-pandemic stack of BV. Same dollar value, but better tilt toward less impaired names.

My weird observation
Title: Re: Fairfax 2020
Post by: ander on August 07, 2020, 08:14:38 AM
US based investors do you buy the local in Canada or FRFHF? The FRFHF not as liquid and wider bid / asks. Any other considerations?
Title: Re: Fairfax 2020
Post by: TwoCitiesCapital on August 07, 2020, 09:42:01 AM
US based investors do you buy the local in Canada or FRFHF? The FRFHF not as liquid and wider bid / asks. Any other considerations?

I buy both pending which account has the availability of the cash.

FRFHF is lower liquidity, but I do all my trading with limit orders and haven't typically had much trouble entering or exiting.
Title: Re: Fairfax 2020
Post by: ander on August 14, 2020, 09:05:05 AM
First time I'm doing a deep dive on Fairfax. Have not previously been a shareholder. I saw that Prem invested with David Sokol a couple of years ago. He was speculated to be heir apparent at BRK before implied questions of integrity (I do not have a strong view on the situation, but on the face of it, it did seem what David did was inappropriate in the spirit of highest integrity). Any thoughts on Prem's decision to invest with David Sokol?
I'm looking at it from the perspective of BRK tries to measure themselves with the highest integrity. There were some questions about Prem's practices several years ago, which I am comfortable with. Prem is a big admirer of BRK. Was his decision to work with David Sokol questioned?
Title: Re: Fairfax 2020
Post by: TwoCitiesCapital on August 14, 2020, 12:07:34 PM
First time I'm doing a deep dive on Fairfax. Have not previously been a shareholder. I saw that Prem invested with David Sokol a couple of years ago. He was speculated to be heir apparent at BRK before implied questions of integrity (I do not have a strong view on the situation, but on the face of it, it did seem what David did was inappropriate in the spirit of highest integrity). Any thoughts on Prem's decision to invest with David Sokol?
I'm looking at it from the perspective of BRK tries to measure themselves with the highest integrity. There were some questions about Prem's practices several years ago, which I am comfortable with. Prem is a big admirer of BRK. Was his decision to work with David Sokol questioned?

Definitely questioned. If you do a search for Sokol on this site, you'll probably get a few threads where this is discussed outside of the ATCO thread.
Title: Re: Fairfax 2020
Post by: wondering on August 17, 2020, 04:22:08 AM
https://www.enthusiastgaming.com/enthusiast-gaming-announces-acquisition-of-omnia-media-forming-largest-gaming-media-esports-and-entertainment-platform-in-north-america/

Blue Ant (a small FFH investment) sells Omnia to Enthusiast Gaming (TSX:EGLX) for $11 million Cdn plus 18 million shares of Enthusiast.

Links about these companies

https://blueantmedia.com/portfolio/omnia-media/

https://www.enthusiastgaming.com/about-us/

interesting.  I wonder if FFH had a hand valuing the transaction?

Title: Re: Fairfax 2020
Post by: Pedro on August 18, 2020, 12:11:37 PM
This could use a tender offer or some sort of action to get this back to BV.  0.71X BV seems like something that should be taken advantage of via tendering or big buybacks.

Wouldn't Tempteton do that?

Title: Re: Fairfax 2020
Post by: petec on August 18, 2020, 12:46:33 PM
This could use a tender offer or some sort of action to get this back to BV.  0.71X BV seems like something that should be taken advantage of via tendering or big buybacks.

Wouldn't Tempteton do that?

They don’t have the capital.
Title: Re: Fairfax 2020
Post by: StubbleJumper on August 18, 2020, 01:37:51 PM
This could use a tender offer or some sort of action to get this back to BV.  0.71X BV seems like something that should be taken advantage of via tendering or big buybacks.

Wouldn't Tempteton do that?

They don’t have the capital.


I was surprised that they even bought back a few shares last Q.  Given their situation where they are a bit reliant on that revolver, I would have thought that they'd be doing everything possible to keep the ratios that are used for the covenants as low as possible.


SJ
Title: Re: Fairfax 2020
Post by: TwoCitiesCapital on August 18, 2020, 01:47:12 PM
This could use a tender offer or some sort of action to get this back to BV.  0.71X BV seems like something that should be taken advantage of via tendering or big buybacks.

Wouldn't Tempteton do that?


Prem's decision is to grow the insurance companies instead. If they can do so profitably, the additional float is worth more in the long-term than a one-time repurchase would be. The gains from float are compounded returns with attractive economics and the flexibility to do buybacks later, if still attractive, where the gain from the buyback is a one-off return with no flexibility to increase economic return of the company beyond that. 

Also, the increased profitability could be the catalyst to rerate the share where a buyback isn't guaranteed to cause any re-rating. The "guaranteed" return is just the increase in BV/share which the market may, or may not, take notice of.

I'm ok with the limited buyback approach if they can capitalize on a hardening insurance market and expand float by 30-50% instead - I just feel it was disingenuous of them to use Templeton as the comparison if they're not going to act at the scale that would imply.
Title: Re: Fairfax 2020
Post by: Xerxes on August 18, 2020, 06:52:35 PM
Prem talked about Singleton few years ago hinting at that buyback narrative.

I for one am glad that he had the steady hand and clear mind not to devour its own shares substantially in the past few years. Folks forget that the very steep discount of 0.7 is very recent. For years (before covid), investors here and on conference calls (I listen to all of them) have been begging him to buy back his shares. Imagine all the value that would have been send to the gutters had he bought back shares substantially at book value or 0.9 book value ... and then you had hardening of the insurance market and covid-19, and FFH had no dry powder left to take advantage and invest and its actual 'core' business.

On a different thread, I use the example of Boeing and General Electric, both led by manager-operators. Both nearly crashed as they spent years doing buyback and hollowing out their balance sheet all in the name of shareholder supremacy.

I yearn for long-term shareholder supremacy. .. not front-loaded shareholder supremacy.

Prem might not be a good stock picker in the Age of FANGS, but thankfully equities are one component of the entire business. FFH may have lost 30% or so but has a good chance for a comeback. I rather be a FFH shareholder (any day) than a General Electric that seen its shares plunge from $35 to $7.
Title: Re: Fairfax 2020
Post by: petec on August 19, 2020, 12:38:54 AM
I’d also point out that Prem was clear (in writing, and in person) that the Singleton comparison was meant to be very long term. He never said that buybacks would be the priority at any specific point in time - merely that the age of issuing to do big deals was over, and that over time the count would fall.

It would be nice if the company had more capital and could grow in a hard market while buying back shares. But if that was the case, it wouldn’t be at 0.6x book.
Title: Re: Fairfax 2020
Post by: ander on August 19, 2020, 07:33:34 AM
When looking at book value per share, wouldn't it be fair to adjust the Investments in Associates to Fair Value. ($4,684.7 carrying value - $3,669.0 fair value = $1,087 impact to Common Equity ... $11,458.7 common equity - $1,087 = $10,371.7 adjust common equity divided by 26.487 shares outstanding = $391 adjusted BV per share ... $313 share price / $391 is 0.8x book value). Still cheap at 0.8x but not as cheap. Thoughts?
Title: Re: Fairfax 2020
Post by: StubbleJumper on August 19, 2020, 08:11:44 AM
When looking at book value per share, wouldn't it be fair to adjust the Investments in Associates to Fair Value. ($4,684.7 carrying value - $3,669.0 fair value = $1,087 impact to Common Equity ... $11,458.7 common equity - $1,087 = $10,371.7 adjust common equity divided by 26.487 shares outstanding = $391 adjusted BV per share ... $313 share price / $391 is 0.8x book value). Still cheap at 0.8x but not as cheap. Thoughts?


Yes, to the extent that it is possible, it is a worthwhile exercise to adjust the BV to reflect fair value, and you probably should also attempt to build a pro-forma income statement that strips out the non-recurring gains/losses and the extraordinary non-recurring cats (cats are a fact of life, but some years they are ridiculous).


SJ
Title: Re: Fairfax 2020
Post by: A_Hamilton on August 19, 2020, 08:21:44 AM
When looking at book value per share, wouldn't it be fair to adjust the Investments in Associates to Fair Value. ($4,684.7 carrying value - $3,669.0 fair value = $1,087 impact to Common Equity ... $11,458.7 common equity - $1,087 = $10,371.7 adjust common equity divided by 26.487 shares outstanding = $391 adjusted BV per share ... $313 share price / $391 is 0.8x book value). Still cheap at 0.8x but not as cheap. Thoughts?

I think you need to tax effect the loss that you are embedding, but this is how I think about it as well.
Title: Re: Fairfax 2020
Post by: ander on August 19, 2020, 09:06:00 AM
When looking at book value per share, wouldn't it be fair to adjust the Investments in Associates to Fair Value. ($4,684.7 carrying value - $3,669.0 fair value = $1,087 impact to Common Equity ... $11,458.7 common equity - $1,087 = $10,371.7 adjust common equity divided by 26.487 shares outstanding = $391 adjusted BV per share ... $313 share price / $391 is 0.8x book value). Still cheap at 0.8x but not as cheap. Thoughts?

I think you need to tax effect the loss that you are embedding, but this is how I think about it as well.

Thx. Would have to do that with gains as well. Including share-based payment awards, BV per share is closer to $376 which would be 0.83x BV.
Title: Re: Fairfax 2020
Post by: petec on August 19, 2020, 11:31:09 AM
When looking at book value per share, wouldn't it be fair to adjust