Corner of Berkshire & Fairfax Message Board

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

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

No change from prior years - $10US per share

Date of record - January 21, 2020

Payment date - January 28, 2020

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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


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

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


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


SJ

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

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


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


SJ

Thanks.  Food for thought.


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

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

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

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


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


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

More Seaspans and fewer Blackberrys - easier said than done.

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

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

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

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

Exactly.

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

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

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

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

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

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

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

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

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

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

Exactly.

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

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

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

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

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

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

Otherwise we are totally aligned.

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

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

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

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

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

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

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

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

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

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

That’s worrying.

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

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

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

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

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

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

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


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


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

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

That’s worrying.

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

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

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

SJ

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

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

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

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

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

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


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


SJ

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

Petec,

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

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

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

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

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

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


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


SJ

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

Many ways to do it, including:

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

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


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

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

That’s worrying.

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

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


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

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

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

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

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

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

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

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

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

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

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

Petec,

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

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

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

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

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

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

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

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

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


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


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

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


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

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

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


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

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

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


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

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

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


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

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

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


SJ

Ah I see what you’re getting at.

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

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


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

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

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


SJ

Ah I see what you’re getting at.

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


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


SJ


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

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

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

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

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

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


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

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

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


SJ

Ah I see what you’re getting at.

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


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

SJ

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

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

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

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

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

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


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

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

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


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

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


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

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

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


SJ

Ah I see what you’re getting at.

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


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

SJ

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

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


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


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

They also need $ to buy out minority partners.

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

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

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

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


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

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

As far as how long pricing conditions would last, again we were positively surprised. Our going in expectation was that companies would be cagey about addressing this topic and would give luke warm responses like ‘several more quarters’ or something like that. To our surprise there was pretty good unanimity that pricing power would persist throughout 2020. To our further surprise there were plenty suggesting the good times could roll well into 2021. While the latter corresponds with our own bullish viewpoint, we did not really expect to hear it said aloud. It was. Which gives us quite a bit of confidence in our conviction that we are only in the first or maybe second innings of a very favorable P&C market.”