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 Fairfaxís 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.

ďFarmers 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.Ē
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 Indiaís 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 Fairfaxís 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: ďWe always look at opportunities but emphasize downside protection and look for ways to minimize loss of capital.Ē Stop saying the problem is value investing is Ďout of favourí. 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 donít know that owning it will be right for the next one. Investing isnít that simple.

Or to put it another way: we donít know theyíd 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 donít know theyíd 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 donít know theyíd 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, Iím sure you can think of one ;)

*Edit: value and quality arenít mutually exclusive, obviously. CIB, Quess, Bangalore and others prove Fairfax arenít 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 donít 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 2000ís. 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 coís with the best historical CRís 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 coís 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 donít know theyíd 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, Iím sure you can think of one ;)

*Edit: value and quality arenít mutually exclusive, obviously. CIB, Quess, Bangalore and others prove Fairfax arenít averse to quality when they can find it cheap.

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

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 wouldnít define as quality.

Otherwise we are totally aligned.

Iím not sure the new people will be what make the difference. I think it will be Prem. heís 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 heís 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

Thatís 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

Thatís 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

Thatís 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.

Itís not the loss of a good person. Itís 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 donít 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 donít 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 Cokeís 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 donít 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

Thatís 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.

Itís not the loss of a good person. Itís 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 donít 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 donít 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 donít 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 Cokeís 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. Iím not saying Rivett was the right man. Iíve no view on that. Itís 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 donít 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 itís at Odyssey and reinsurance isnít 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 donít.
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:

ďOur 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.Ē
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. ďRealised gains in Seaspan and BrookfieldĒ - sounds like theyíve sold some SSW and owner BAM? Unless thereís been a transcription error...
Title: Re: Fairfax 2020
Post by: StubbleJumper on February 15, 2020, 06:51:49 AM
Just started reading the transcript. ďRealised gains in Seaspan and BrookfieldĒ - sounds like theyíve sold some SSW and owner BAM? Unless thereís 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 wasnít a gain on APR so thatís not it and I donít think the transaction will contribute earnings, high quality or low.

I suspect what theyíre 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 wasnít a gain on APR so thatís not it and I donít think the transaction will contribute earnings, high quality or low.

I suspect what theyíre 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 weíre at it I donít recall Grivalia/Eurobank generating a paper gain either, and itís 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 weíre at it I donít recall Grivalia/Eurobank generating a paper gain either, and itís 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 wasnít a gain on APR so thatís not it and I donít think the transaction will contribute earnings, high quality or low.

I suspect what theyíre 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 youíre getting at.

Personally I care more about BV than earnings so Iím happy with the disclosure theyíve 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 wasnít a gain on APR so thatís not it and I donít think the transaction will contribute earnings, high quality or low.

I suspect what theyíre 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 youíre getting at.

Personally I care more about BV than earnings so Iím happy with the disclosure theyíve 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 weíre at it I donít recall Grivalia/Eurobank generating a paper gain either, and itís 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 Iím also trying to feed a 3 month old!).

What I meant to say was:
1) I couldnít remember whether they booked a gain on the Eurobank/Grivalia deal, but
2) if they did Iím 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 wasnít reflected in FFH BV.

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

I suspect what theyíre 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 youíre getting at.

Personally I care more about BV than earnings so Iím happy with the disclosure theyíve 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

Iím not against the idea. Although it does make me smile - the BAM thread is full of suggestions that ďmanagement metricsĒ like that is a red flag for fraud. Sometimes feels like management canít 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 youíre just saying that accounting treatment doesnít always reflect reality. Is that right?
Title: Re: Fairfax 2020
Post by: StubbleJumper on February 15, 2020, 07:54:58 AM
While weíre at it I donít recall Grivalia/Eurobank generating a paper gain either, and itís 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 Iím also trying to feed a 3 month old!).

What I meant to say was:
1) I couldnít remember whether they booked a gain on the Eurobank/Grivalia deal, but
2) if they did Iím 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 wasnít reflected in FFH BV.

I may be remembering wrong - donít 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 wasnít a gain on APR so thatís not it and I donít think the transaction will contribute earnings, high quality or low.

I suspect what theyíre 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 youíre getting at.

Personally I care more about BV than earnings so Iím happy with the disclosure theyíve 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

Iím not against the idea. Although it does make me smile - the BAM thread is full of suggestions that ďmanagement metricsĒ like that is a red flag for fraud. Sometimes feels like management canít 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 youíre just saying that accounting treatment doesnít 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. ďRealised gains in Seaspan and BrookfieldĒ - sounds like theyíve sold some SSW and owner BAM? Unless thereís 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. ďRealised gains in Seaspan and BrookfieldĒ - sounds like theyíve sold some SSW and owner BAM? Unless thereís 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. Heís 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 canít be more honest when they describe these things. Plus, they said theyíd never sell the insurance subs and now theyíve sold (part of) two in two years.

Agree re whatís going on under the bonnet. Itís 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 canít be more honest when they describe these things. Plus, they said theyíd never sell the insurance subs and now theyíve sold (part of) two in two years.

Agree re whatís going on under the bonnet. Itís 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 canít, 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 donít 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:

ďWhat 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 Ďseveral more quartersí 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 Iíd add is that they do have capacity, itís 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 canít 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 SJís 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 donít see why they couldnít have taken a dividend from Dexterra without merging it.
2) They seem to be getting about C$100m of value, based on Horizon Northís predeal share price. Can anyone remember what they paid? Iím not sure theyíre 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 donít see why they couldnít have taken a dividend from Dexterra without merging it.
2) They seem to be getting about C$100m of value, based on Horizon Northís predeal share price. Can anyone remember what they paid? Iím not sure theyíre 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.

Iím only guessing here, but in the easiest lending environment in human history Iím going to go out on a limb and suggest they could get some debt if they needed it, which they donít.

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

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

And it was $605, but Fairfax didnít take all of it - Iím 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.

Iím only guessing here, but in the easiest lending environment in human history Iím going to go out on a limb and suggest they could get some debt if they needed it, which they donít.

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

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

And it was $605, but Fairfax didnít take all of it - Iím 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.

Iím only guessing here, but in the easiest lending environment in human history Iím going to go out on a limb and suggest they could get some debt if they needed it, which they donít.

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

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

And it was $605, but Fairfax didnít take all of it - Iím 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.

Iím only guessing here, but in the easiest lending environment in human history Iím going to go out on a limb and suggest they could get some debt if they needed it, which they donít.

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

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

And it was $605, but Fairfax didnít take all of it - Iím 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 donít 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 donít f it up. Iím 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 donít f it up. Iím 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 itís v cheap
3) Brit and Eurolife minorities bought, Allied postponed (a virtual certainty)
4) CR doesnít 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 wonít 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 wonít 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 itís v cheap
3) Brit and Eurolife minorities bought, Allied postponed (a virtual certainty)
4) CR doesnít 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 havenít thought it through your way, because I donít know the regulatory rules, but theyíre at $800m ish now and said that $1bn was a reachable target before spreads gapped out, so I can only assume itís 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 Iím 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 havenít thought it through your way, because I donít know the regulatory rules, but theyíre at $800m ish now and said that $1bn was a reachable target before spreads gapped out, so I can only assume itís 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 havenít thought it through your way, because I donít know the regulatory rules, but theyíre at $800m ish now and said that $1bn was a reachable target before spreads gapped out, so I can only assume itís 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 wonít 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 wonít 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 wonít 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 wonít 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 wonít 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 wonít 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 wonít 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 wonít 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 havenít thought it through your way, because I donít know the regulatory rules, but theyíre at $800m ish now and said that $1bn was a reachable target before spreads gapped out, so I can only assume itís 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 thatís 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 donít have to roll onto much lower rates but that anything thatís been redeployed into corporates earns a higher rate. I think thatís reasonably probable, but itís 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 itís very odd, the stocks they chose to highlight in the letter. Ok theyíre not optically cheap, but theyíve 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  ...Ö. 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  ...Ö. 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 couldnít do well in a bull market and couldnít 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 couldnít do well in a bull market and couldnít 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 donít, but I didnít 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 Ö. 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 Ö. 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 Ďretiringí at a young age. It has to be a big negative to lose someone who was touted as Premís 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 Ďretiringí at a young age. It has to be a big negative to lose someone who was touted as Premís 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 Ö. 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 Ö. 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 Ö. 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