Fairfax 2020

[petec]

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?

[StubbleJumper]

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

[StubbleJumper]

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

[petec]

Cool - we are on the same page.

[Xerxes]

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. 

[petec]

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.

[Viking]

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 :-)

[petec]

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.

[Viking]

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.

[petec]

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.