Corner of Berkshire & Fairfax Message Board

General Category => Fairfax Financial => Topic started by: Dazel on January 18, 2019, 06:00:41 AM

Title: Fairfax2019
Post by: Dazel on January 18, 2019, 06:00:41 AM

This year’s catalysts

-Fairfax followers are as bearish as I have seen since 2003.

-I expect the best bond manager (Brian Bradstreet) in the world to have filled Fairfax Xmas stockings with corporate and other bonds that got trounced in December. We have seen him move very quickly in the past... 2008 he bought $7b in tax free muni’s yielding 7% in less than a month and sold almost the entire US treasury holding that was larger than that at a massive profit during the same time. In the first half of the 2000’s he did very well in corporate bonds where he needed to be nimble before 2007. I am betting on a much higher yield on Fairfax large portfolio which will take operating earnings higher. This and a likely higher shift into higher yielding short term treasuries in the fall will show more of the earnings power of Fairfax as opposed to holding 50% cash holdings.

-India’s growth remains the highest in the world and Fairfax is a way to play that

-share buyback will accelerate at these levels albeit not as big as I would like!

- insurance companies will continue to improve

-equity positions are at rock bottom with little downside risk

-as previously discussed I am unhappy with share based awards...these will be disclosed in detail by Prem.

Most importantly this is a solid business with loads of potential that is selling dirt cheap for all of the reasons discussed here. Is it a redemption year for Prem and his team at Fairfax? We will see.

-
Title: Re: Fairfax2019
Post by: Dazel on January 18, 2019, 07:06:21 AM

Disclosure: I have put my money where my mouth is and been buying FFH
Title: Re: Fairfax2019
Post by: StubbleJumper on January 18, 2019, 07:18:51 AM

Disclosure: I have put my money where my mouth is and been buying FFH


Were you able to buy some for less than US$450?  Seems like a no-brainer at that price.


SJ
Title: Re: Fairfax2019
Post by: petec on January 18, 2019, 09:39:16 AM
Dazel, how do you value Fairfax?
Title: Re: Fairfax2019
Post by: Cardboard on January 18, 2019, 02:15:13 PM
"-Fairfax followers are as bearish as I have seen since 2003."

Seriously?

Back then it traded well well below book value and it is not the case these days. Now they need to generate earnings at a reasonable ROE to justify trading above book and to move up.

Cardboard
Title: Re: Fairfax2019
Post by: Dazel on January 18, 2019, 03:49:05 PM


Petec,

They are under earning...50% cash and very poor equity performance....I expect that to change. I expect Hamblin Watsa too come through mostly Bradstreet and the bond side and higher yields. Insurance companies are world class and the other income line has quietly risen materially.

Cardboard,
You sound negative....lol. You and everyone else are entitled to your opinion. I have given you mine...

I am not saying I am right I am telling you what I think....and definitely will not be arguing and debating it until the earnings present themselves....which will prove me right or wrong.

2019 is all about earnings....good or bad. It is time for Fairfax to perform...if they do not I will accept it and move on. If it sounds like a broken record I appreciate the skepticism from all “You have not been wrong”!!!

Prem needs to once again prove himself through his team or the market is right.

Title: Re: Fairfax2019
Post by: shalab on January 19, 2019, 07:49:43 AM
Dazel, hope FRFHF works out for you.

US is a 20.5 trillion economy. India is at 2.7 trillion. Canada is at 1.7 trillion or so. FRFHF market cap is 13 billion. There are many opportunities in the market some of which will undoubtedly be better than FRFHF.

One can simply buy ThomasCook India and bypass the overhead of owning FRFHF. Even better, one can buy businesses with better prospects in India. Note that ThomasCook India has been flat since 2015 in Rupee terms and doesnt pay much of a dividend. The indian rupee has declined against USD at the same time.


"-Fairfax followers are as bearish as I have seen since 2003."

Seriously?

Back then it traded well well below book value and it is not the case these days. Now they need to generate earnings at a reasonable ROE to justify trading above book and to move up.

Cardboard
Title: Re: Fairfax2019
Post by: Dazel on January 19, 2019, 09:28:57 AM
Shalab,

Totally agree....Fairfax India and others  are a better bet for sure if you are India focused. $20trillion @2% vs $2.7t that will double likely every 6 or 7 years....is the place to be. Many better opportunities in India and those with feet on the ground would blow away Fairfax or any other investment vehicle.

Fairfax gives you exposure to India and particular in the private market they are integrated in the financial system there and will get a lot more opportunities than others because of the trust they have earned there. But as you say being able to play in all of the other world economies is very important ...No one else really gives you that optionality that I see with direct exposure to India of “some” scale. If there is someone I would be very interested in them as an investment.

Ironically, Thomas Cook India has been a home run that Hamblin Watsa do not get much credit for...in the equities poor performance hit they are taking publically. What have you done for me lately prevails and that is fair after some of the big stumbles.

Ie Apple and Amazon are growing massively in India but will not even move the needle to their world incomes.


Title: Re: Fairfax2019
Post by: Dazel on January 19, 2019, 10:07:24 AM

Just a follow up....there is lots of opportunity out there Shalab I agree...Fairfax’s advantage is they went into this sell off period with $28 billion of bonds and cash....of  note is that interest rates dropped substantially creating appreciation in their large treasury portion of those holdings and allowing them the opportunity to buy into a frozen bond market. In the past this has been their strength.

There was a window that if Fairfax acted that they would have seized large near term and long term profits in the investment portfolio....which has been the drag on Fairfax. So when you say there are many opportunities now which there are....many have had to wait for their holdings to appreciate to buy other things because they had little dry powder to buy into the worst December in almost 90 years.

Fairfax got a fast ball right down the middle of the plate ....

Did they hit that fast ball? Only they know that right now...but I don’t have to pay for that probability right now because the stock is cheap enough that they will do fine if they did not hit that fast ball out of the park.


Title: Re: Fairfax2019
Post by: shalab on January 19, 2019, 10:18:35 AM
Dazel - my estimate is that FRFHF has ~10% exposure to India. It is definitely huge compared to FAANGM's exposure to India. However, even old economy companies like BTI, CL, PG, UN have more exposure to India than FAANGM.

One can open a brokerage account in India (it is quite a hassle, time consuming but can be done), it will allow one to buy public companies in India. I expect Indian economy to grow to 5.5 trillion USD by 2030. At the same time US economy should be around 30-35 trillion USD. Canada would probably be at 2.5 trillion While India will do very well, the USA will also do well.

Shalab,

Totally agree....Fairfax India and others  are a better bet for sure if you are India focused. $20trillion @2% vs $2.7t that will double likely every 6 or 7 years....is the place to be. Many better opportunities in India and those with feet on the ground would blow away Fairfax or any other investment vehicle.

Fairfax gives you exposure to India and particular in the private market they are integrated in the financial system there and will get a lot more opportunities than others because of the trust they have earned there. But as you say being able to play in all of the other world economies is very important ...No one else really gives you that optionality that I see with direct exposure to India of “some” scale. If there is someone I would be very interested in them as an investment.

Ironically, Thomas Cook India has been a home run that Hamblin Watsa do not get much credit for...in the equities poor performance hit they are taking publically. What have you done for me lately prevails and that is fair after some of the big stumbles.

Ie Apple and Amazon are growing massively in India but will not even move the needle to their world incomes.
Title: Re: Fairfax2019
Post by: petec on January 19, 2019, 10:32:31 AM


Petec,

They are under earning...50% cash and very poor equity performance....I expect that to change. I expect Hamblin Watsa too come through mostly Bradstreet and the bond side and higher yields. Insurance companies are world class and the other income line has quietly risen materially.


Yes, I’m aware of this but what I meant was how do you value it? P/earnings power? P/BV? P/TBV? I’m interested in how you think about this.

Also, you say Thomas Cook was a home run. Was it? Or was it just Quess?
Title: Re: Fairfax2019
Post by: Dazel on January 19, 2019, 01:18:30 PM
Shalab,

It is higher % of Fairfax common stock portfolio.



So Petec....I am buying for the upside of earnings power or PE. I believe that Fairfax is worth more dead than alive and that is my margin of safety.

So let’s invert.

If I took all of Fairfax assets and had them run the same...but hypothetically Markel Gayner asset management ran the $40b investment portfolio starting September 30. What do you think the perception would be of earnings going forward?
Most of Markel’s annual reports start with it was an excellent investment year....they are consistent and they are good. They command an above 20 PE and with an investment portfolio half the size of Fairfax and only 10% cash have earned such a great reputation that the stock trades for $2b more than Fairfax in the market.
The investment community would tabulate how much more money Fairfax could make if Markel Gayner were running investments if things were the same with $40b as opposed to $20b!!!! They would double their investment returns and wow there would be sooo much money made over the next 10 years they would be catching Berkshire...okay maybe that is a bit much but you get the point. The earnings power of the investment portfolio is there. The market puts a 0 value on it because it has lost faith in Prem and his team. The value at Markel would be significant.

HW needs to perform for the earnings power to show up....I am betting they will.

P.S I used September 30 because Markel only had $2b cash going into mini fall crash they would not have been able to do much...what do you think they would have done if they had $20b cash equivalents to go on a buying spree?



Title: Re: Fairfax2019
Post by: Dazel on January 19, 2019, 02:59:03 PM

Petec,

You are correct Quess was the home run.
Title: Re: Fairfax2019
Post by: TwoCitiesCapital on January 19, 2019, 09:54:34 PM

Just a follow up....there is lots of opportunity out there Shalab I agree...Fairfax’s advantage is they went into this sell off period with $28 billion of bonds and cash....of  note is that interest rates dropped substantially creating appreciation in their large treasury portion of those holdings and allowing them the opportunity to buy into a frozen bond market. In the past this has been their strength.

There was a window that if Fairfax acted that they would have seized large near term and long term profits in the investment portfolio....which has been the drag on Fairfax. So when you say there are many opportunities now which there are....many have had to wait for their holdings to appreciate to buy other things because they had little dry powder to buy into the worst December in almost 90 years.

Fairfax got a fast ball right down the middle of the plate ....

Did they hit that fast ball? Only they know that right now...but I don’t have to pay for that probability right now because the stock is cheap enough that they will do fine if they did not hit that fast ball out of the park.

I'm not convinced they did. I would love it if Fairfax had locked in Treasury yields at 3.2% or rolled into credit in December, but neither seems REALLY compelling if you're waiting for a fat pitch.

3.2% was the highest rates in 7 years, BUT Fairfax believes we're in a period of unprecedented economic growth and rising rates...which makes 3.2% less compelling especially when compared to historical Treasuries. Did credit spreads widen in December? Yes. But they're still mostly tight by historical standards.

I think they'd have waited for higher rates and spreads before making a move given their outlook on valuations and rates.
Title: Re: Fairfax2019
Post by: StubbleJumper on January 20, 2019, 08:03:59 AM

Just a follow up....there is lots of opportunity out there Shalab I agree...Fairfax’s advantage is they went into this sell off period with $28 billion of bonds and cash....of  note is that interest rates dropped substantially creating appreciation in their large treasury portion of those holdings and allowing them the opportunity to buy into a frozen bond market. In the past this has been their strength.

There was a window that if Fairfax acted that they would have seized large near term and long term profits in the investment portfolio....which has been the drag on Fairfax. So when you say there are many opportunities now which there are....many have had to wait for their holdings to appreciate to buy other things because they had little dry powder to buy into the worst December in almost 90 years.

Fairfax got a fast ball right down the middle of the plate ....

Did they hit that fast ball? Only they know that right now...but I don’t have to pay for that probability right now because the stock is cheap enough that they will do fine if they did not hit that fast ball out of the park.

I'm not convinced they did. I would love it if Fairfax had locked in Treasury yields at 3.2% or rolled into credit in December, but neither seems REALLY compelling if you're waiting for a fat pitch.

3.2% was the highest rates in 7 years, BUT Fairfax believes we're in a period of unprecedented economic growth and rising rates...which makes 3.2% less compelling especially when compared to historical Treasuries. Did credit spreads widen in December? Yes. But they're still mostly tight by historical standards.

I think they'd have waited for higher rates and spreads before making a move given their outlook on valuations and rates.


Well, locking in at 3.2% might have been the thing to do in retrospect, but in the short term it probably doesn't make that much difference.  My guess is that half the $27B of cash/bonds were rolled during 2018 and if they were rolled into 2-year treasuries, what would be the weighted average rate?  Would it have been around 2.7% over the year?  So the "penalty" for not having perfectly managed the bond port might be ~50 bps on $27B? 

It would clearly have been better to have nailed it perfectly, but I don't mind the small-ish penalty that they've taken on the theory that rates are headed north over the next five-ish years.


SJ
Title: Re: Fairfax2019
Post by: Spekulatius on January 20, 2019, 09:03:30 AM
Dazel - my estimate is that FRFHF has ~10% exposure to India. It is definitely huge compared to FAANGM's exposure to India. However, even old economy companies like BTI, CL, PG, UN have more exposure to India than FAANGM.

One can open a brokerage account in India (it is quite a hassle, time consuming but can be done), it will allow one to buy public companies in India. I expect Indian economy to grow to 5.5 trillion USD by 2030. At the same time US economy should be around 30-35 trillion USD. Canada would probably be at 2.5 trillion While India will do very well, the USA will also do well.


High GNP growth does not necessarily mean a strong stock performance. China for example still has high GNP growth, but a very poor stock performance for many years now. There are numerous other examples. I believe stock market performance depends much more on how this GNP growth is achieved and profitability metrics than the actual GNP growth
Title: Re: Fairfax2019
Post by: shalab on January 20, 2019, 09:36:14 AM
What you are saying is absolutely right - I like USA the best when it comes to the stock market - the managements are generally shareholder friendly and very efficient. It doesn't hurt that USA has some of the best companies on the planet. E.g:, Japan has several successful companies but several investors have written about their experiences there - stakeholders other than shareholders are given priority.

India's commercial and court system are borrowed from Britain. So they are similar to the US in many respects. People should see better returns in India compared to some of the other "emerging" markets. E.g:, there is a reason why many RE companies in Hong Kong trade for low valuations - fraud is rampant. This problem of dishonest promoters also exists in India, out of the 6000 companies listed in the exchange, only about a 1000 or so are investable.

Here is the story from one of the super investors for reference:

https://economictimes.indiatimes.com/markets/stocks/news/picking-leel-electricals-was-a-mistake-admits-porinju/articleshow/67519758.cms


Dazel - my estimate is that FRFHF has ~10% exposure to India. It is definitely huge compared to FAANGM's exposure to India. However, even old economy companies like BTI, CL, PG, UN have more exposure to India than FAANGM.

One can open a brokerage account in India (it is quite a hassle, time consuming but can be done), it will allow one to buy public companies in India. I expect Indian economy to grow to 5.5 trillion USD by 2030. At the same time US economy should be around 30-35 trillion USD. Canada would probably be at 2.5 trillion While India will do very well, the USA will also do well.


High GMp growth does not necessarily mean a strong stock performance. China for example still has high GNP growth, but a very poor stock performance for many years now. There are numerous other examples. I believe stock market performance depends much more on how this GNP growth is achieved and profitability metrics than the actual GNP growth
Title: Re: Fairfax2019
Post by: Dazel on January 20, 2019, 01:50:42 PM
Shalab,

First of all I have benefitted from your work here....thank you. I believe you discovered the share awards which I have a big problem with.

I see you on the Berkshire thread which is excellent discussing the value of the holdings and $100b cash....Berkshire holdings were decimated in the fourth quarter. Mr. Buffett has a$20b limit for holding cash.

So Buffett has $80b cash on a $500b market cap...and many are excited about his buys despite Apples massive losses as well as others.

My questions to you are

1. Are Prem and HW actually that bad that with $20b+ in cash on a $12b market cap and minimal losses in the fourth quarter in comparison to Berkshire....that you doubt they benefit from the opportunity more than Berkshire did?

2. What is Fairfax worth if Mr. Buffett is running the investment portfolio?
Title: Re: Fairfax2019
Post by: shalab on January 20, 2019, 03:16:06 PM
I am a Prem and FRFHF fan. I made money in FRFHF and ORH (when it went private).  I bought Thomas Cook India at 196 INR last year. I follow all their investments India, Canada and the US. 

However, I liquidated my FRFHF positions recently and went into Berkshire.

The reasons are as follows:

1. FRFHF transparency (or lack thereof) - in BRK case, we clearly know how much is needed for insurance ops and how much isn't. We also know headquarters gets 400 MM of cash per week to invest in anyway they like. This translates to 21B per year. Apple drop is likely temporary and BRK will make 750MM per year from dividends increasing every year with their Q3 position. I even bought apple when it dropped to 140s.

   In FRFHF case, I don't believe their insurance operations are as sound - this is likely one of the reasons for hedges. Parsad suggested this a while back. So it is not clear how much cash is available to invest freely.

2. Berkshire investing FRFHF cash:
   It is not clear how much cash is available to invest - they have issued shares to raise money for acquisition(s). Parsad suggested in one of the threads on FRFHF to reduce leverage. They haven't done that. They also run hedge funds in India and Africa and pocket fees.  Where are the best ideas - is it in FRFHF or in the hedge fund? One of the suggestions by SD (which made the most sense) was that they are getting the next generation setup in the family business. Many people go to FRFHF annual meeting spending a bunch of money. Nothing of substance comes out either about the company or about its direction.

I believe there are better options available right now than FRFHF.

Shalab,

First of all I have benefitted from your work here....thank you. I believe you discovered the share awards which I have a big problem with.

I see you on the Berkshire thread which is excellent discussing the value of the holdings and $100b cash....Berkshire holdings were decimated in the fourth quarter. Mr. Buffett has a$20b limit for holding cash.

So Buffett has $80b cash on a $500b market cap...and many are excited about his buys despite Apples massive losses as well as others.

My questions to you are

1. Are Prem and HW actually that bad that with $20b+ in cash on a $12b market cap and minimal losses in the fourth quarter in comparison to Berkshire....that you doubt they benefit from the opportunity less than Berkshire did?

2. What is Fairfax worth if Mr. Buffett is running the investment portfolio?
Title: Re: Fairfax2019
Post by: Dazel on January 20, 2019, 05:36:56 PM

Thanks.

I don’t have anything to add....the past is the past.

Fairfax needs to perform that simple.
Title: Re: Fairfax2019
Post by: TwoCitiesCapital on January 21, 2019, 07:08:28 PM

Just a follow up....there is lots of opportunity out there Shalab I agree...Fairfax’s advantage is they went into this sell off period with $28 billion of bonds and cash....of  note is that interest rates dropped substantially creating appreciation in their large treasury portion of those holdings and allowing them the opportunity to buy into a frozen bond market. In the past this has been their strength.

There was a window that if Fairfax acted that they would have seized large near term and long term profits in the investment portfolio....which has been the drag on Fairfax. So when you say there are many opportunities now which there are....many have had to wait for their holdings to appreciate to buy other things because they had little dry powder to buy into the worst December in almost 90 years.

Fairfax got a fast ball right down the middle of the plate ....

Did they hit that fast ball? Only they know that right now...but I don’t have to pay for that probability right now because the stock is cheap enough that they will do fine if they did not hit that fast ball out of the park.

I'm not convinced they did. I would love it if Fairfax had locked in Treasury yields at 3.2% or rolled into credit in December, but neither seems REALLY compelling if you're waiting for a fat pitch.

3.2% was the highest rates in 7 years, BUT Fairfax believes we're in a period of unprecedented economic growth and rising rates...which makes 3.2% less compelling especially when compared to historical Treasuries. Did credit spreads widen in December? Yes. But they're still mostly tight by historical standards.

I think they'd have waited for higher rates and spreads before making a move given their outlook on valuations and rates.


Well, locking in at 3.2% might have been the thing to do in retrospect, but in the short term it probably doesn't make that much difference.  My guess is that half the $27B of cash/bonds were rolled during 2018 and if they were rolled into 2-year treasuries, what would be the weighted average rate?  Would it have been around 2.7% over the year?  So the "penalty" for not having perfectly managed the bond port might be ~50 bps on $27B? 

It would clearly have been better to have nailed it perfectly, but I don't mind the small-ish penalty that they've taken on the theory that rates are headed north over the next five-ish years.


SJ

Absolutely agree! That was basically my point - in hindsight, locking in at 3.2% or rolling to credit would have been the right things to do, but wouldn't have made sense if Fairfax is truly waiting for a fat pitch which is what we all believe they're doing. So there was likely 0 benefit to Fairfax from the December tumult or the spike and subsequent fall in rates. If anything, the fall in rates is going to hurt them as they roll the 2-year Treasuries. Was simply rebutting that Fairfax put money to work in December.
Title: Re: Fairfax2019
Post by: wondering on April 18, 2019, 01:59:17 PM
I was reading the Chou Funds 2018 annual report, and one of Francis' more recent purchases caught my eye.  Sometime in 2018, in the Chou RRSP Fund, Francis purchased 2,000 shares of Fairfax for a Canadian cost of $1,344,170 (or $672/share if my math is right).

Two observations

1) Francis is seeing value in Fairfax, even at $672 Cdn/share
2) I am guessing that he never bought Fairfax in the past because of appearance of conflict of interest since he was on the board a number of years ago.  I am guessing that the appropriate "cooling off" period has lapsed?
Title: Re: Fairfax2019
Post by: investmd on April 24, 2019, 02:55:55 PM
Thanks for sharing this insight.
It's a strange buy for Chou as in my opinion he usually seeks deeply undervalued/distressed stocks with a 2-10x potential. FFH doesn't fit that bucket. Maybe in the Chou RRSP, he is restricted to buying Canadian equities. I don't think he bought FFH in his flagship Chou Associates fund?
Title: Re: Fairfax2019
Post by: Broeb22 on April 24, 2019, 03:12:39 PM
If Fairfax can return to compounding at 15%, which should be easier when you’re not betting the world will end with expensive puts, the stock could be a 2x from revaluation alone starting at approximately 1x book value, and 5 years of 15% growth on top of the re-rating gets you to a 4x. The classic Davis double.
Title: Re: Fairfax2019
Post by: TwoCitiesCapital on April 24, 2019, 03:38:05 PM
If Fairfax can return to compounding at 15%, which should be easier when you’re not betting the world will end with expensive puts, the stock could be a 2x from revaluation alone starting at approximately 1x book value, and 5 years of 15% growth on top of the re-rating gets you to a 4x. The classic Davis double.

Yes, but as has been discussed exhaustively, 15% is no easy feat when interest rates are at 2.5% on the 10-year treasury. So either those equities need to do 15-20% per annum to make up for the dead-weight of the fixed income portfolio at 2.5-3% OR they need interest rates to rise to lock in longer term yields that are much higher than 3%.

I know the Prem keeps benchmarking himself to that number, but I haven't really heard anyone make a case for why we should expect 15-20% on the equity side. They haven't done that in the past decade even if you exclude the equity hedges and I don't expect them to suddenly start when valuations are very full and the bull market seemingly slowing after a 10-year expansion.

Even if there is a pullback, they're already fully invested on the equity side. It's not as if there are billions in cash, or hedges, that could be rolled into equities at more favorable valuations to help achieve that 15% ROE. Further, any sustained pullback is likely to impact Fairfax's stock as well - particularly since they're unhedged at this time.

I just don't see much reason to own this today. Maybe if you think that India or Greece or Blackberry is suddenly going to go gangbusters, it could be worthwhile, but then why not just Eurobank, Fairfax India, or Blackberry directly. Personally, I rolled all of my proceeds out of Fairfax and into Fairfax India earlier this year with the expectation that the India vehicle will dramatically outperform the parent in the near-to-mid term.
Title: Re: Fairfax2019
Post by: petec on April 25, 2019, 12:38:55 AM
Maybe if you think that India or Greece or Blackberry is suddenly going to go gangbusters, it could be worthwhile, but then why not just Eurobank, Fairfax India, or Blackberry directly.

I think the answer to that is you can, but the parent has advantaged access to new investments in some cases. You couldn't for example, have got the SSW deal in the market. Over time that advantage may add up.

What drives your confidence in the timeframe of the return in Fairfax India? I don't dispute its potential but I have no idea when it will be realised. Do you?
Title: Re: Fairfax2019
Post by: Broeb22 on April 25, 2019, 05:50:53 AM
TwoCities,

Fairfax's investment leverage appears to be approx. 2.78x if you back out the 4.25 billion of assets and the 4.25 billion of non-controlling interests. I get to 37.4 billion - 4.25 billion divided by 11.78 billion.

Is that not the right way to think about their investment leverage? If not, how do you figure the investment leverage?

If that is the right number, then an after-tax investment return just north of 5% would achieve a 15% book value growth, assuming investment leverage stayed relatively stable.

Is this way off-base?
Title: Re: Fairfax2019
Post by: petec on April 25, 2019, 07:53:23 AM
TwoCities,

Fairfax's investment leverage appears to be approx. 2.78x if you back out the 4.25 billion of assets and the 4.25 billion of non-controlling interests. I get to 37.4 billion - 4.25 billion divided by 11.78 billion.

Is that not the right way to think about their investment leverage? If not, how do you figure the investment leverage?

If that is the right number, then an after-tax investment return just north of 5% would achieve a 15% book value growth, assuming investment leverage stayed relatively stable.

Is this way off-base?

No, it's directionally right, and in-line with their guidance that a 95% combined ratio and a 7% investment return gives 15% book value growth after debt costs, taxes, etc.

The issue is that if you assume the investment book is 70/30 debt/equity, and you assume a 4% return on debt, you've got to have a 14% return on the equity investments to get to 7% overall. That's not pie in the sky but nor is it easy. That's why they're trying to be smart about debt+warrant deals, to juice the returns on the debt side.
Title: Re: Fairfax2019
Post by: StevieV on April 25, 2019, 08:31:29 AM
Same math implies the flip side as well, correct?

That is, because of the tilt towards fixed income, particularly high equity returns are necessary to boost the overall returns substantially.  However, mediocre equity returns shouldn't prevent book value from compounding in the high single digits and worse than mediocre equity returns shouldn't stop book value growth from being positive (assuming underwriting and fixed income performs). 
Title: Re: Fairfax2019
Post by: petec on April 25, 2019, 08:50:30 AM
Same math implies the flip side as well, correct?

That is, because of the tilt towards fixed income, particularly high equity returns are necessary to boost the overall returns substantially.  However, mediocre equity returns shouldn't prevent book value from compounding in the high single digits and worse than mediocre equity returns shouldn't stop book value growth from being positive (assuming underwriting and fixed income performs).

Certainly they ought to be able to do mid single digits. But it's not like there's no downside risk. A 10% equity loss would wipe out a 4% fixed income gain, roughly. And position sizes are big - if Eurobank, Seaspan, and Blackberry all go to the wall, you'll know about it. Thankfully there's little risk of that in my view ;)
Title: Re: Fairfax2019
Post by: TwoCitiesCapital on April 25, 2019, 09:16:43 AM
Same math implies the flip side as well, correct?

That is, because of the tilt towards fixed income, particularly high equity returns are necessary to boost the overall returns substantially.  However, mediocre equity returns shouldn't prevent book value from compounding in the high single digits and worse than mediocre equity returns shouldn't stop book value growth from being positive (assuming underwriting and fixed income performs).

Sure, but the argument for owning something for me has to be a higher bar than single digits. Particularly something that itself has the potential to be super-volatioe in a downturn simply due to market sentiment.

My only point wasn't to say FFH will lose money. It's just hitting their 15% ROE target consistently enough to get a rerating in the stock is seemingly a pipedream with interest rates and equity valuations where they're at. There's probably better opportunities out there at this time/price.

I don't have any specific forecasts for Fairfax India other than being generally bullish on EM, generally bullish on EM currencies, taking advantage of a significant pullback in Indian assets, and generally liking the investments they've made in that vehicle.

I don't like the fees, which is why I haven't owned it previously, but the high water mark should ensure I have plenty of upside in the near-to-midterm without paying much for it.
Title: Re: Fairfax2019
Post by: racemize on April 25, 2019, 09:28:05 AM
I don't like the fees, which is why I haven't owned it previously, but the high water mark should ensure I have plenty of upside in the near-to-midterm without paying much for it.

It's also a PFIC, which sucks for U.S. investors.
Title: Re: Fairfax2019
Post by: TwoCitiesCapital on April 25, 2019, 01:08:34 PM
I don't like the fees, which is why I haven't owned it previously, but the high water mark should ensure I have plenty of upside in the near-to-midterm without paying much for it.

It's also a PFIC, which sucks for U.S. investors.

Yes, that can be an impediment. 95% of my investable/liquid assets are in tax-free/tax-deferred accounts so I'm less impacted by the PFIC designation.
Title: Re: Fairfax2019
Post by: Luckyone77 on April 26, 2019, 10:47:39 AM
Well, boys, after 10 years of owning this stock I decided to sell my remaining shares today. I'm out. Greatly disappointed in their ability to judge stocks and, in particular, their ability to judge the management of these companies. I simply can't justify their continued underachievement. A dart board would have had greater success of stock picking. I hope my exit proves to be the turning point for the stock, as it so often seems to be (lol), and that you all are greatly rewarded for having hung in there. Hopefully, India will be the salvation.

Nevertheless, I do appreciate the keen insight of many of the posts on this site. Its been informative.
Title: Re: Fairfax2019
Post by: Zorrofan on May 01, 2019, 01:15:05 PM
Well, boys, after 10 years of owning this stock I decided to sell my remaining shares today. I'm out. Greatly disappointed in their ability to judge stocks and, in particular, their ability to judge the management of these companies. I simply can't justify their continued underachievement. A dart board would have had greater success of stock picking. I hope my exit proves to be the turning point for the stock, as it so often seems to be (lol), and that you all are greatly rewarded for having hung in there. Hopefully, India will be the salvation.

Nevertheless, I do appreciate the keen insight of many of the posts on this site. Its been informative.

I have been a FFH shareholder for longer than some of you may have been alive! I suffered the seven lean years and hoped for seven prosperous ones before Prem put on the hedges during one of  the longest bull runs in our lifetimes.

But facts are facts. At the close of 1998 the book value of FFH was $112.49, rising to $432.46 by the end of 2018. This represents a growth rate of less than 7% for the past twenty years. You can add on a bit for the dividend but it still represents a rather disappointing performance.  Prem is quick to mention the results since inception but frankly the last 20 years have been lackluster and I am seriously questioning the performance we can expect going forward.
Title: Re: Fairfax2019
Post by: petec on May 02, 2019, 04:34:58 AM
Well, boys, after 10 years of owning this stock I decided to sell my remaining shares today. I'm out. Greatly disappointed in their ability to judge stocks and, in particular, their ability to judge the management of these companies. I simply can't justify their continued underachievement. A dart board would have had greater success of stock picking. I hope my exit proves to be the turning point for the stock, as it so often seems to be (lol), and that you all are greatly rewarded for having hung in there. Hopefully, India will be the salvation.

Nevertheless, I do appreciate the keen insight of many of the posts on this site. Its been informative.

I have been a FFH shareholder for longer than some of you may have been alive! I suffered the seven lean years and hoped for seven prosperous ones before Prem put on the hedges during one of  the longest bull runs in our lifetimes.

But facts are facts. At the close of 1998 the book value of FFH was $112.49, rising to $432.46 by the end of 2018. This represents a growth rate of less than 7% for the past twenty years. You can add on a bit for the dividend but it still represents a rather disappointing performance.  Prem is quick to mention the results since inception but frankly the last 20 years have been lackluster and I am seriously questioning the performance we can expect going forward.

I’m halfway through my annual deep dive. Full disclosure: I’ve always liked this company so maybe I’m biased. But the more I read the more I like. Most of the major investments look good, some great, to me, with considerable value on the table. The amount going on under the bonnet is quite incredible and Fairfax has the opportunity to build several major businesses from scratch. This is a very different business to 20 years ago: Fairfax have worked themselves into a position where they can put incredible people in charge of operations and drive change. Putting info together from various sources I’m not worried about the stock buybacks for treasury - I think the buyback is real. And they’ve sworn off naked hedging. Lots to like, especially with markets where they are.
Title: Re: Fairfax2019
Post by: wondering on May 02, 2019, 02:54:44 PM
1st quarter results out.

https://s1.q4cdn.com/579586326/files/doc_news/2019/May/PRFFH-May-2-2019-Q1-Press-Release.pdf

I like the results.

- Shares continue to be bought back 250K + 118K shares for a total $175m
- net capital gains of $700m (a bounce back for the terrible 4th quarter in 2018)
- combined ratio of 97% (I wish it was a little lower, but I can't have everything)
- interest and dividends $235m (we are tracking towards the $1B for the year)
- book value per share 450/share US, increase of 6.7% from Dec
Title: Re: Fairfax2019
Post by: petec on May 02, 2019, 03:39:38 PM
I’m confused by the AGT transaction. Have they lent money to management for an MBO, or bought it themselves, or both?
Title: Re: Fairfax2019
Post by: gfp on May 02, 2019, 03:54:32 PM
I’m confused by the AGT transaction. Have they lent money to management for an MBO, or bought it themselves, or both?

Both.  They are both a lender and shareholder (controlling shareholder actually, 59.6% currently plus warrants that would bring it to 80%)
Title: Re: Fairfax2019
Post by: Cigarbutt on May 02, 2019, 04:12:59 PM
I’m confused by the AGT transaction. Have they lent money to management for an MBO, or bought it themselves, or both?

Both.  They are both a lender and shareholder (controlling shareholder actually, 59.6% currently plus warrants that would bring it to 80%)
FFH exchanged their common and preferred shares of the old entity for a controlling equity stake in the new entity, which likely rendered the "management" buyout possible as the transaction may have been too leveraged otherwise.
Title: Re: Fairfax2019
Post by: StubbleJumper on May 02, 2019, 04:32:51 PM
1st quarter results out.

https://s1.q4cdn.com/579586326/files/doc_news/2019/May/PRFFH-May-2-2019-Q1-Press-Release.pdf

I like the results.

- Shares continue to be bought back 250K + 118K shares for a total $175m
- net capital gains of $700m (a bounce back for the terrible 4th quarter in 2018)
- combined ratio of 97% (I wish it was a little lower, but I can't have everything)
- interest and dividends $235m (we are tracking towards the $1B for the year)
- book value per share 450/share US, increase of 6.7% from Dec


Spot on.  A few more observations:

1) Isn't it just a bit weird that FFH had realized gains on both their equities and their derivatives in the same quarter?  Don't get me wrong, I'll take it!  But, these were supposed to have been set up as a hedge, but they didn't act as a hedge in Q1.  The derivatives are starting to become small potatoes, but I found that was a bit weird anyway.

2) As you noted the CR is up, and favourable development is down.  The accident year CRs have been wacked for a number of years and there has been consistent, large favourable development.  In Q1 it was still favourable, but the magnitude was down.  What's the story?  Is it just a few shitty policies at Allied and a bit of bad luck in the other subs, or are we seeing the result of pricing pressure of a year or two ago across the line?  While completely irrational, I don't like seeing adverse development in the "new" sub (but somehow I would feel okay if were in an established sub?).

3) The interest rate sensitivity table would suggest that duration has increased a smidgen.  Is this a conscious effort and is this a sign of things to come, or is it just a bit of noise?  It would seem like a funny time to go a shade longer on fixed income, but in all fairness it would have worked out over the last quarter or two. 

4) With the exception of Zenith, net written looks good.  It's not that mythical 10% YoY growth, but 5% still shows some real organic growth.  It'll be interesting to get some commentary about the pricing environment during the conference call.

Nice boring quarter.  Let's hope that some of the large block equity postions continue to gain traction.


SJ
Title: Re: Fairfax2019
Post by: Santayana on May 02, 2019, 07:21:07 PM
The Zenith net written may not have been what we're looking for, but that 78.3 CR sure looks good!
Title: Re: Fairfax2019
Post by: shalab on May 02, 2019, 07:47:01 PM
Since they wont give you the diluted number of shares and book value per diluted share, here is the updated calculation after Q1:

Diluted number of shares at the end of 2018 - 28.397 million
Diluted number of shares at the end of Q1 2019 - 28.5107 million (obtained by shareholder earnings/diluted earnings per share - 769.2/26.98 - page 6 of the report).

Using the diluted shares, I get a book value of 414 at the end of 2018. Adjusting for dividends paid out - I get a book value growth of 5.39%

Increase in diluted shares => 113K shares.

Book value per diluted share => 425.76

The holding company's debt also increased:

The company's total debt to total capital ratio increased from 27.2% at December 31, 2018 to 29.2% at March 31, 2019, primarily reflecting increased borrowings by the holding company and non-insurance operations.


1st quarter results out.

https://s1.q4cdn.com/579586326/files/doc_news/2019/May/PRFFH-May-2-2019-Q1-Press-Release.pdf

I like the results.

- Shares continue to be bought back 250K + 118K shares for a total $175m
- net capital gains of $700m (a bounce back for the terrible 4th quarter in 2018)
- combined ratio of 97% (I wish it was a little lower, but I can't have everything)
- interest and dividends $235m (we are tracking towards the $1B for the year)
- book value per share 450/share US, increase of 6.7% from Dec


Spot on.  A few more observations:

1) Isn't it just a bit weird that FFH had realized gains on both their equities and their derivatives in the same quarter?  Don't get me wrong, I'll take it!  But, these were supposed to have been set up as a hedge, but they didn't act as a hedge in Q1.  The derivatives are starting to become small potatoes, but I found that was a bit weird anyway.

2) As you noted the CR is up, and favourable development is down.  The accident year CRs have been wacked for a number of years and there has been consistent, large favourable development.  In Q1 it was still favourable, but the magnitude was down.  What's the story?  Is it just a few shitty policies at Allied and a bit of bad luck in the other subs, or are we seeing the result of pricing pressure of a year or two ago across the line?  While completely irrational, I don't like seeing adverse development in the "new" sub (but somehow I would feel okay if were in an established sub?).

3) The interest rate sensitivity table would suggest that duration has increased a smidgen.  Is this a conscious effort and is this a sign of things to come, or is it just a bit of noise?  It would seem like a funny time to go a shade longer on fixed income, but in all fairness it would have worked out over the last quarter or two. 

4) With the exception of Zenith, net written looks good.  It's not that mythical 10% YoY growth, but 5% still shows some real organic growth.  It'll be interesting to get some commentary about the pricing environment during the conference call.

Nice boring quarter.  Let's hope that some of the large block equity postions continue to gain traction.


SJ
Title: Re: Fairfax2019
Post by: StevieV on May 03, 2019, 11:36:32 AM
Diluted number of shares at the end of 2018 - 28.397 million
Diluted number of shares at the end of Q1 2019 - 28.5107 million (obtained by shareholder earnings/diluted earnings per share - 769.2/26.98 - page 6 of the report).


I have to check these numbers and the buyback numbers above for myself.  However, assuming they are correct, that's a big problem.

0.4% dilution isn't too bad considered alone, but it's terrible if Fairfax spent the majority of their highly touted dividend and interest income to keep the share count not even flat.

Got to go back and refresh my memory on this issue.
Title: Re: Fairfax2019
Post by: Cigarbutt on May 03, 2019, 12:15:15 PM
The Zenith net written may not have been what we're looking for, but that 78.3 CR sure looks good!
I would suggest that the 2010 Zenith acquisition will eventually be recognized as an excellent one.

-Value at acquisition (May 2010): 1.3B for the 91.8% FFH did not own, including a 200M share issue "undervalued" at 355.
-Valuation parameters now would suggest a relatively low return since acquisition because the market never really hardened, even if 781M in dividends have been distributed to FFH along the way.

Workers comp insurance is very unusual, long-tail and requires an incredible amount of underwriting discipline and IMO Zenith continues to be a significant outlier, the value of which will only become apparent over the full underwriting cycle. Always hard to say ex-ante but many experts suggest that the present status of the net loss and LAE reserves is adequate, a similar situation to the soft market environment of the late 90's when, eventually, it was found, around 2001, that the net loss and LAE reserves deficiency had in fact reached about 33% of the calendar year total premiums (!). It's impossible to know the future but the reserve deficiency cycle suggests that redundancies are likely to reverse. For the 1997-2000 period, retrospective hindsight allowed to (see who was swimming naked) increase each of the ultimate accident year combined ratios by 15 to 23 percentage points (!).

The last few years have resulted in an amazingly competitive (soft) environment. Zenith has grown in the early 2010's when there was some hardening but growth (almost doubled NPW) came to some degree from rising premiums per policy and written premiums have been essentially flat to declining in the last 3 to 4 years. ZNT reported very poor combined ratios in 2010 to 2012 due to a very high expense ratio (kept their infrastructure, about extra 10% of the CR) and due to (too) conservative reserves adjustments. Over the long term, Zenith continues to show an enduring capacity to report lower loss ratios than the industry. The reserve release (20.5% CR points) in Q1 2019 is another example of their conservative reserving of prior periods.

In 2018, NWP for the year were 789.2M. In 2005, their NWP was 1.2B. They have huge opportunistic capacity to increase market share. Since 2015, many competitors have increased market share with gradually decreasing retention and likely a component of "cashflow" underwriting. In the industry these days, the typical reserves to NPW ratio sits around 3.5 to 4. For Zenith, it is now at 1.8, which means that even in an environment where redundancies become deficiencies, the negative impact will be much less on Zenith.

So, the market in this space is incredibly soft and nobody knows when the market will turn but turn, it will. Not long ago, AM Best had this to say about payroll growth and its potential impact on the workers comp insurance market:
"However, the US has not recorded a consistent decline in the unemployment rate longer than nine consecutive years since it began tracking the unemployment rate in 1929. Historically, long declines have typically been followed by sharp spikes in unemployment-which may serve as a forewarning for workers' compensation writers to expect payroll growth, and any resulting premium growth, to cease sooner rather than later, unless wage growth accelerates."

Zenith looks positioned to profit in correlation to the underwriting discipline they have shown in the last part of the journey.



Title: Re: Fairfax2019
Post by: A_Hamilton on May 03, 2019, 12:49:13 PM
Diluted number of shares at the end of 2018 - 28.397 million
Diluted number of shares at the end of Q1 2019 - 28.5107 million (obtained by shareholder earnings/diluted earnings per share - 769.2/26.98 - page 6 of the report).


I have to check these numbers and the buyback numbers above for myself.  However, assuming they are correct, that's a big problem.

0.4% dilution isn't too bad considered alone, but it's terrible if Fairfax spent the majority of their highly touted dividend and interest income to keep the share count not even flat.

Got to go back and refresh my memory on this issue.

No no...$769.2 is available to all shareholders of Fairfax. Preferred shareholders received $11.2 million, so available to common is $758/26.98= 28 million. Or page 19 of the interim report in Note 12.
Title: Re: Fairfax2019
Post by: Santayana on May 03, 2019, 04:55:57 PM
Thank you for clarifying, A_Hamilton.
Title: Re: Fairfax2019
Post by: shalab on May 03, 2019, 07:08:44 PM
Thanks for the note - I was going off the press release:

Diluted number of shares at the end of Q4 2018 - 28.397 million
Diluted number of shares at the end of Q1 2019 - 28.093054 million

Decrease => 303946 shares

Diluted number of shares at the end of 2018 - 28.397 million
Diluted number of shares at the end of Q1 2019 - 28.5107 million (obtained by shareholder earnings/diluted earnings per share - 769.2/26.98 - page 6 of the report).


I have to check these numbers and the buyback numbers above for myself.  However, assuming they are correct, that's a big problem.

0.4% dilution isn't too bad considered alone, but it's terrible if Fairfax spent the majority of their highly touted dividend and interest income to keep the share count not even flat.

Got to go back and refresh my memory on this issue.

No no...$769.2 is available to all shareholders of Fairfax. Preferred shareholders received $11.2 million, so available to common is $758/26.98= 28 million. Or page 19 of the interim report in Note 12.
Title: Re: Fairfax2019
Post by: petec on May 04, 2019, 03:01:35 PM
Some thoughts on the share issuance discussion.

I think the split between shares bought for treasury and for cancellation is a bit of a red herring. If they like the price now, it makes all the sense in the world to stock up on shares for future issuance under stock award schemes. The fact that they are buying them doesn't mean they will reissue them any time soon - on the 1q18 call Prem said the new share award plans vested in 15 years, and presumably the awards are somewhat performance based so they not be reissued at all. In 2018 90k shares were reissued, or about 0.33% of the outstanding.

More important is the number of dilutive shares. This number went from 0.69m shares to 0.89m over the course of 2018, up 200k. On the YE18 base, that would imply growth in the share count of 0.7% a year, which I wouldn't have a problem with. But the number of dilutive shares rose another 170k in 1q19 alone. If that pace is maintained then the share count is growing at about 2.4% a year, although as discussed above it may be many years before the dilutive shares are actually issued.

I can deal with a relatively high pace of issuance at the moment: a new generation is rising through the ranks, as we saw in the reorganisation at Hamblin Watsa last year, and I want them incentivised. But the 1q19 pace of dilution eats about 2/3rds of the 1m/year buyback they spoke of on the 1q call. That strikes me as too high unless performance improves a lot.

As an aside, the fact that the number of dilutive securities is growing at that speed when the share price isn't rising makes me wonder how demanding the performance targets are.

Finally, it really annoys me that they calculate BVPS using basic shares.
Title: Re: Fairfax2019
Post by: jfan on May 05, 2019, 08:42:29 AM
Given that Fairfax and Hamblin Watsa is quite dependent on human capital. Perhaps the perspective of share dilution could be viewed as growth/succession cap ex to allow the company to continue operating into the future.

Furthermore, since Prem is the largest shareholder, any share dilution is also dilution of his proportion as well.

Certainly, long-dated options can have the possibility of incentive malalignment. What long-term incentive structure could fairfax put in place to help transition to the next generation and align them with the common shareholder?

Title: Re: Fairfax2019
Post by: petec on May 05, 2019, 09:18:19 AM
Given that Fairfax and Hamblin Watsa is quite dependent on human capital. Perhaps the perspective of share dilution could be viewed as growth/succession cap ex to allow the company to continue operating into the future.

Furthermore, since Prem is the largest shareholder, any share dilution is also dilution of his proportion as well.

Certainly, long-dated options can have the possibility of incentive malalignment. What long-term incentive structure could fairfax put in place to help transition to the next generation and align them with the common shareholder?

My answer would be helping them purchase shares in the market, which Fairfax does a lot of (see annual letters).

As I say I have no issue with awards, but I’d like to know more about the conditions and likely rate.

No issuances do not dilute Prem’s votes.
Title: Re: Fairfax2019
Post by: shalab on May 05, 2019, 09:48:09 AM
As someone posted earlier, FRFHF returned 7% since 1998 nowhere near the 15% that is being promised every year. Yet, many people follow the person like a messiah (not unlike BH) justifying every action and statement even though it is not rational.

I like to follow their India investments as I own thomas cook. Also - I like to hunt for investment opportunities in India. However, FRFHF itself is a heavily leveraged company, even at the holding company level. They have 40B in investments and 11B in shareholder equity. The fact that they have been able to not generate returns in double digits despite such leverage should tell something.

Given that Fairfax and Hamblin Watsa is quite dependent on human capital. Perhaps the perspective of share dilution could be viewed as growth/succession cap ex to allow the company to continue operating into the future.

Furthermore, since Prem is the largest shareholder, any share dilution is also dilution of his proportion as well.

Certainly, long-dated options can have the possibility of incentive malalignment. What long-term incentive structure could fairfax put in place to help transition to the next generation and align them with the common shareholder?

My answer would be helping them purchase shares in the market, which Faurfax does a lot of (see annual letters).

As I say I have no issue with awards, but I’d like to know more about the conditions and likely rate.

No issuances do not dilute Prem’s votes.
Title: Re: Fairfax2019
Post by: petec on May 05, 2019, 10:25:45 AM
As someone posted earlier, FRFHF returned 7% since 1998 nowhere near the 15% that is being promised every year. Yet, many people follow the person like a messiah (not unlike BH) justifying every action and statement even though it is not rational.

I like to follow their India investments as I own thomas cook. Also - I like to hunt for investment opportunities in India. However, FRFHF itself is a heavily leveraged company, even at the holding company level. They have 40B in investments and 11B in shareholder equity. The fact that they have been able to not generate returns in double digits despite such leverage should tell something.

I think the days when anyone thought Prem was a messiah are long gone, and the idea that anyone on here tries to justify every action is laughable - the amount of criticism and invective over the last 5-odd years has been immense. The question is whether it is overdone, which it might be for two related reasons: 1) despite the clear failures on the investing side Prem has put together an impressive set of assets and people, and 2) people and organisations learn, and this one is clearly changing. Therein may lie the opportunity, for a value investor. We will find out.

BTW anyone who thinks of the 15% target as a promise is a moron.

Would you mind elaborating on your thesis for Thomas Cook? Obviously its been a home run, but only (it seems to me) because of Quess. Within the legacy business as far as I can tell profits on the forex side have collapsed and pricing on the travel side have been squeezed by OTAs. I like the various deals (Kuoni etc), but from what I see FCF hasn't grown since Fairfax bought it. However I have only glanced at it so I could be wrong on all of the above. Please correct me if so.
Title: Re: Fairfax2019
Post by: shalab on May 05, 2019, 07:22:19 PM
Regarding the 15% target, I know many people believe it as shown in the only "notes" shared from the meeting. May be it is time for Prem to become non-executive chairman and have his kids and Pual Rivett talk in the annual meeting, shareholder letters.

Regarding Thomas Cook, you are right about the forex, travel businesses. However, ordering through the internet is still not common in India (from what I understand) and brand names still have a lot of cachet. In Thomas Cook case, one has to look at P/B - not cashflows as it is difficult to calculate/estimate. I bought it when it was roughly 20% lower.


I think the days when anyone thought Prem was a messiah are long gone, and the idea that anyone on here tries to justify every action is laughable - the amount of criticism and invective over the last 5-odd years has been immense. The question is whether it is overdone, which it might be for two related reasons: 1) despite the clear failures on the investing side Prem has put together an impressive set of assets and people, and 2) people and organisations learn, and this one is clearly changing. Therein may lie the opportunity, for a value investor. We will find out.

BTW anyone who thinks of the 15% target as a promise is a moron.

Would you mind elaborating on your thesis for Thomas Cook? Obviously its been a home run, but only (it seems to me) because of Quess. Within the legacy business as far as I can tell profits on the forex side have collapsed and pricing on the travel side have been squeezed by OTAs. I like the various deals (Kuoni etc), but from what I see FCF hasn't grown since Fairfax bought it. However I have only glanced at it so I could be wrong on all of the above. Please correct me if so.
Title: Re: Fairfax2019
Post by: Cigarbutt on May 15, 2019, 06:00:32 AM
On November 3rd 2016, FFH sold 90% of their long-dated US Treasury bonds and, shortly thereafter, removed their equity hedges.
The expectations was for long term rates and stocks to go up.
https://www.forbes.com/sites/antoinegara/2016/11/11/canadian-billionaire-prem-watsa-nailed-the-trump-treasury-trade-and-is-bullish-on-stocks/#2ebe1ef257b6

As of today, after 2.5 years, long term rates are at the same level as on the selling date and the R2000 is up by about 10 to 12%.

I think that deflationary forces will continue to "win" over inflationary forces despite increasingly polarized forces and, for better of for worse, that conclusion continues to contaminate the investment thought process.
Title: Re: Fairfax2019
Post by: petec on May 15, 2019, 09:19:02 AM
On November 3rd 2016, FFH sold 90% of their long-dated US Treasury bonds and, shortly thereafter, removed their equity hedges.
The expectations was for long term rates and stocks to go up.
https://www.forbes.com/sites/antoinegara/2016/11/11/canadian-billionaire-prem-watsa-nailed-the-trump-treasury-trade-and-is-bullish-on-stocks/#2ebe1ef257b6

As of today, after 2.5 years, long term rates are at the same level as on the selling date and the R2000 is up by about 10 to 12%.

I think that deflationary forces will continue to "win" over inflationary forces despite increasingly polarized forces and, for better of for worse, that conclusion continues to contaminate the investment thought process.
.

I agree deflation wins over inflation - until the next bout of QE. The choice between the two is ultimately a political one and inflation is politically preferable when there’s tons of debt about.

(Minor correction - they didn’t say they were bullish on stock markets, but individual stocks.)
Title: Re: Fairfax2019
Post by: jfan on May 15, 2019, 10:46:16 AM
There was a wonderful podcast with David Zervos on the Sherman Show (Doubleline Capital). At the 22:00 minute mark, he explains that the deflationary forces in the US are secondary to demographics. Decreasing labor force growth reduces demand for goods coupled with technological progress creates this persistent milieu.

That being said, Torsten Slok (also on the Sherman Show) believes there is a bifurcated process. Goods are facing deflationary forces but local services that not fungible (eg health care) are experiencing inflation.

Title: Re: Fairfax2019
Post by: TwoCitiesCapital on May 15, 2019, 01:22:06 PM
On November 3rd 2016, FFH sold 90% of their long-dated US Treasury bonds and, shortly thereafter, removed their equity hedges.
The expectations was for long term rates and stocks to go up.
https://www.forbes.com/sites/antoinegara/2016/11/11/canadian-billionaire-prem-watsa-nailed-the-trump-treasury-trade-and-is-bullish-on-stocks/#2ebe1ef257b6

As of today, after 2.5 years, long term rates are at the same level as on the selling date and the R2000 is up by about 10 to 12%.

I think that deflationary forces will continue to "win" over inflationary forces despite increasingly polarized forces and, for better of for worse, that conclusion continues to contaminate the investment thought process.

I thought this for the longest time. It's why I was in Fairfax for the longest time. The equity hedges, the deflation derivatives, the hedged equities, etc.

Starting in late 2017, I started to realize that maybe I was wrong. Money velocity was rising the first time in years which seemed to confirm that inflation was on the upward trend. Rates had climbed 75-100bps and stock market was on fire after the tax rebates.

That being said - the weakness we've been seeing in equity markets, the ongoing trade war, the recent decline in money velocity again, and interest rates that have given up all of their gains might suggest I was premature to change my views.

I'm squarely back in the lower for longer camp after a brief 12 month hiatus.
Title: Re: Fairfax2019
Post by: wondering on May 21, 2019, 07:44:18 AM
Sad news

https://ca.finance.yahoo.com/news/fairfax-financial-says-chief-financial-135653428.html
Title: Re: Fairfax2019
Post by: StubbleJumper on May 21, 2019, 08:14:31 AM
Sad news

https://ca.finance.yahoo.com/news/fairfax-financial-says-chief-financial-135653428.html


Sad news indeed.  The May long weekend takes too many from us.


SJ
Title: Re: Fairfax2019
Post by: wondering on June 12, 2019, 05:38:12 AM
https://www.fairfax.ca/news/press-releases/press-release-details/2019/Fairfax-Launches-C500-Million-Senior-Notes-Offering/default.aspx
Title: Re: Fairfax2019
Post by: wondering on August 01, 2019, 08:17:34 AM
https://www.fairfax.ca/news/press-releases/press-release-details/2019/Fairfax-Announces-Acquisition-of-Shares-of-Quess/default.aspx
Title: Re: Fairfax2019
Post by: petec on August 01, 2019, 09:04:53 AM
https://www.fairfax.ca/news/press-releases/press-release-details/2019/Fairfax-Announces-Acquisition-of-Shares-of-Quess/default.aspx

Good for them. It’s cheap.
Title: Re: Fairfax2019
Post by: valueinvesting101 on August 01, 2019, 11:14:26 AM
Is there disclosure requirement related to Quess shares? It's purchase of around $1.7 million USD. News has pushed price of Quess shares up by nearly 12%.
Title: Re: Fairfax2019
Post by: TwoCitiesCapital on August 01, 2019, 03:18:20 PM
Wish they'd repurchase their own shares. In USD, they're near the bottom of the 5-year range.
Title: Re: Fairfax2019
Post by: Alekbaylee on August 01, 2019, 03:50:06 PM
Good results overall: https://markets.businessinsider.com/news/stocks/fairfax-financial-holdings-second-quarter-financial-results-1028410155
Title: Re: Fairfax2019
Post by: Spekulatius on August 01, 2019, 06:20:29 PM
Good results overall: https://markets.businessinsider.com/news/stocks/fairfax-financial-holdings-second-quarter-financial-results-1028410155

Almost $6B in debt at the Holding Company, up from $4.8B. This is a pretty substantial leverage.
Title: Re: Fairfax2019
Post by: StevieV on August 02, 2019, 06:23:35 AM
"There were 26.9 million and 27.6 million weighted average common shares effectively outstanding during the second quarters of 2019 and 2018 respectively.  At June 30, 2019 there were 26,881,817 common shares effectively outstanding."

One thing that has confused and concerned me is the share count.  Looking at the release, the June 30, 2018 share count was actually 27.550 million.  In any event, looks to me like about a 2.5% reduction y-o-y.  Seems straightforward to me, but would appreciate any comments as I have found the reporting on this a bit confusing in the past.  I'd be happy with that pace of reduction.  No, it's not Singleton, but meaningful over time.

Also liked that combined ratio has remained at a number that I would consider good.

Lower rates are a challenge for all insurance companies.  I don't see it as any different for Fairfax.
Title: Re: Fairfax2019
Post by: Dazel on August 02, 2019, 06:49:47 AM


$6b debt at the holding company is net $4b after cash...and the insurance companies do not have a lot of debt as they are strategically being less levered to be able to take advantage of an event, maintain high ratings and once you dividend their access capital to the holding company it’s gone...so it does not concern me. Insurance companies are vastly undervalued.

Title: Re: Fairfax2019
Post by: petec on August 03, 2019, 03:38:42 AM
Standout for me is the extent to which the market is hardening. Anyone know why? We haven’t had systematic capital destruction via cats, and rates haven’t gone up enough to deny capital to the industry, so why are we entering a hard market?
Title: Re: Fairfax2019
Post by: Cigarbutt on August 03, 2019, 05:07:38 AM
It does look like price increases are permeating across many lines. Is it for real?
The last part of this cycle has been unusually soft and I wonder if unusual access to cheap capital has distorted the underwriting price signals, maybe like the lack of capital discipline displayed in the shale gas industry.
Watching for underwriting cycles to turn is like watching an apple to fall. 2017 and 2018 were relatively poor years for (re)insurers due, in part, to higher catastrophe activity. The ILS segment, thought to be more sophisticated with more advanced models, turned out to be a persistenly disappointing factor recently due to loss creep. For example, Markel was 'surprised' by this development (which was compounded by 'issues' with top management) and had to put an entire segment into runoff. The component of dwindling reserve redundancies also seems to be a relevant contemporary catalyst. If interested, see the following, which offers a satisfactory industry perspective:
https://deconstructingrisk.com/2019/07/30/creepy-things/

For Fairfax, reserve redundancies, in combined ratio points:
2016            7.8%
2017            8.5%
2018            6.8%
Q1Q2 2018   3.5%
Q1Q2 2019   1.5% 

For Fairfax, net favourable development has been very strong vs the industry and the real action is often concentrated in the latter part of the year. IMO, FFH has established a strong underwriting culture and is likely to continue to show a better reserve development profile than the industry but, if history is any guide, across the industry, in a typical cycle, the extent of reserve deficiency eventually reported is directly proportional to the softness and extent of reserve releases of the previous component of the cycle.
Title: Re: Fairfax2019
Post by: ABM on August 04, 2019, 11:54:48 AM
Some have mentioned the debt but anyone have quality view on its development? 

I've seen analyst's call them out on the call as it tests the top end of the mgmt targets.  They trumpet the cash balance but that is dwarfed by the insurance liability.  Relative to 1H 2019 cash claims paid, it implies about 1 year worth buffer. No real allowance or a major CAT event, I think.

Compared to MKL and BRK's insurance segment appears much more aggressively capitalized.  Thoughts?

Thanks
Title: Re: Fairfax2019
Post by: Cigarbutt on August 05, 2019, 08:03:55 PM
Some have mentioned the debt but anyone have quality view on its development? 

I've seen analyst's call them out on the call as it tests the top end of the mgmt targets.  They trumpet the cash balance but that is dwarfed by the insurance liability.  Relative to 1H 2019 cash claims paid, it implies about 1 year worth buffer. No real allowance or a major CAT event, I think.

Compared to MKL and BRK's insurance segment appears much more aggressively capitalized.  Thoughts?

Thanks
On the positive side, 1- in the last annual report, they note significant regulatory dividend capacity, 2- compared to their historical record, the price of debt is relatively low and 3- they have a favorable maturity profile in the next few years.

On the negative side, looking at the cash flow movements to and from the holding company vs insurance subs, it seems that capital is going to the subs in order to support a hardening market, but this cash movement is happening very early in the game. The idea is to be able to grow the float opportunistically and that may be hard to achieve if the asset side of the business (high equity exposures) is compromised concurrently(even if only through temporary market swings) as regulators may limit the underwriting leverage especially if the holding debt level is perceived to be high.

Since the late 1990's, when it became clear that frogs don't transform into princes, FFH often had to issue equity at prices they didn't like and IMO, the lesson has not completely sunk in or has been forgotten.
Title: Re: Fairfax2019
Post by: ourkid8 on August 07, 2019, 02:51:59 PM
The insurance market is hardening, why would you want them to repurchase stock more aggressively? They did reduce the shares outstanding YoY by 2.5% while allowing their insurance subs to grow. 

Wish they'd repurchase their own shares. In USD, they're near the bottom of the 5-year range.
Title: Re: Fairfax2019
Post by: TwoCitiesCapital on August 07, 2019, 03:57:50 PM
The insurance market is hardening, why would you want them to repurchase stock more aggressively? They did reduce the shares outstanding YoY by 2.5% while allowing their insurance subs to grow. 

Wish they'd repurchase their own shares. In USD, they're near the bottom of the 5-year range.

We'll see if it's a significant trend of hardening, or a blip, but from my perspective none of the issues that have caused market softness have been addressed yet and so it's unlikely for this hardening trend to persist.

I certainly could be wrong - I'm no insurance analysts/expert, but the prospect of a hard market in insurance has been touted since I started holding the position back in 2011 and it hasn't happened yet - largely because the industry has been flooded with excess capital and that still hasn't changed.
Title: Re: Fairfax2019
Post by: wondering on August 09, 2019, 09:16:07 AM
https://www.fairfax.ca/news/press-releases/press-release-details/2019/Fairfax-Financial-Holdings-Corporation-Executive-Announcement/default.aspx

In sum,

Jennifer Allen is taking over the CFO position at FFH from interim CFO John Varnell.

Jennifer is leaving her post as CFO at FIH and FAH, and Amy Sherk is taking over those roles.

This is keeping with Fairfax's preference for hiring within.
Title: Re: Fairfax2019
Post by: wondering on August 30, 2019, 07:39:01 AM
https://www.fairfax.ca/news/press-releases/press-release-details/2019/Fairfax-Group-Donating-US1-Million-for-Karnataka-Flood-Relief/default.aspx

The Bangalore airport is in the state of Karnataka.
Title: Re: Fairfax2019
Post by: wisowis on September 05, 2019, 07:52:26 PM
https://www.woodlockhousefamilycapital.com/post/the-horse-story
Title: Re: Fairfax2019
Post by: gary17 on September 05, 2019, 10:13:41 PM
is a hard market good for P and C insurers?
Title: Re: Fairfax2019
Post by: omagh on September 06, 2019, 05:52:29 AM
Of course.  The hard market starts to appear when insurers, that have under-priced their contracts, consume capital in payouts for catastrophe losses.  These insurers tend to write less business as they need to preserve capital.  So, the insurers that have a counter-cyclical approach (i.e., write less business when pricing is soft and more when pricing is firm) have lots of available capital just as pricing increases (post-catastrophe pricing usually increases) and the overall capital is shrinking.  Hard markets can last a few months or a couple of years, often in niche categories, so putting capital to work at high rates for long periods is the aim of the game.  Not every insurer is geared to do this, so lots get caught up in increasing top-line revenues year by year.  Multi-cat years will shake out the weak capital.

- O

is a hard market good for P and C insurers?
Title: Re: Fairfax2019
Post by: gary17 on September 06, 2019, 07:31:20 AM
thanks
  i think BRK has a lot of cash , probably stand to benefit.

  FFH is cheap but of lesser quality and questionable culture.   hard for me to pull the trigger.
Title: Re: Fairfax2019
Post by: John Hjorth on September 06, 2019, 08:12:23 AM
https://www.woodlockhousefamilycapital.com/post/the-horse-story

This. Thank you for sharing, wisowis. Chris Mayer bents it in neon tubes : -Buy, if you're interested &/or want to get in, -hold on, if you're at full position [for you], & do not sell here at these levels.
Title: Re: Fairfax2019
Post by: Spekulatius on September 06, 2019, 05:23:55 PM
Of course.  The hard market starts to appear when insurers, that have under-priced their contracts, consume capital in payouts for catastrophe losses.  These insurers tend to write less business as they need to preserve capital.  So, the insurers that have a counter-cyclical approach (i.e., write less business when pricing is soft and more when pricing is firm) have lots of available capital just as pricing increases (post-catastrophe pricing usually increases) and the overall capital is shrinking.  Hard markets can last a few months or a couple of years, often in niche categories, so putting capital to work at high rates for long periods is the aim of the game.  Not every insurer is geared to do this, so lots get caught up in increasing top-line revenues year by year.  Multi-cat years will shake out the weak capital.

- O

is a hard market good for P and C insurers?

The problem is now that so much hybrid capital (catastrophe bonds  etc.) is on standby to take advantage of any hard market, should it occur. Unless we have an unfavorable credit market at the same time than a hard insurance market, I don’t see hard markets lasting.
Title: Re: Fairfax2019
Post by: Spekulatius on September 07, 2019, 08:52:47 AM


$6b debt at the holding company is net $4b after cash...and the insurance companies do not have a lot of debt as they are strategically being less levered to be able to take advantage of an event, maintain high ratings and once you dividend their access capital to the holding company it’s gone...so it does not concern me. Insurance companies are vastly undervalued.

Belated answer - the $4.3B in net debt with a $12.5B equity base is still higher than many other insurance cos that are typically 20-25% levered. Most other insurance cos don’t have the equity exposure that FFH has though FF India, Africa and various other holdings. It clearly is a more levered insurer than many others.

FWIW, I sold my FF holding when it went to $480+ and essentially put the proceeds into BRKB, which consider a better bet. I would consider buying back FFH below $430, but that would probably be for a trade.
Title: Re: Fairfax2019
Post by: UK on September 08, 2019, 04:28:37 AM
https://www.wsj.com/articles/storm-clouds-not-capital-ones-ease-for-reinsurers-11567767780

"Reinsurers’ shares already have made huge gains this year. Arch Capital Group Ltd. and RenaissanceRe Holdings Ltd. are up 54% and 41% respectively. Arch Capital is priced at about 1.7 times book value, and RenaissanceRe is at 1.6 times. The latter is close to its highest level since 2007 on that measure."
Title: Re: Fairfax2019
Post by: KFS on September 25, 2019, 07:25:30 AM
https://www.wsj.com/articles/value-stocks-beckon-investors-in-aging-bull-market-11569412801?mod=hp_lead_pos4

Value Stocks Beckon Investors in Aging Bull Market

"Diane Jaffee, a senior portfolio manager running $3.7 billion in value-focused funds at TCW Group Inc., notes the spread between the trailing price/earnings ratios of growth and value stocks on the Russell 1000 index hasn’t been this wide since the dot-com crash of 2001."
Title: Re: Fairfax2019
Post by: UK on September 28, 2019, 02:38:38 AM
https://www.bloomberg.com/news/articles/2019-09-27/watsa-s-mindboggling-reasoning-in-takeover-prompts-court-award
Title: Re: Fairfax2019
Post by: bearprowler6 on September 28, 2019, 05:14:10 AM
https://www.bloomberg.com/news/articles/2019-09-27/watsa-s-mindboggling-reasoning-in-takeover-prompts-court-award

That is a stunning decision by the Judge and damning commentary on Prem.

At one point The Judge called Prem's testimony "mindboggling"....on this I have to respectively disagree with the Judge. What is mindboggling is the decision to continue to hold Resolute Forest Products at all. And may I add...Blackberry, Eurobank, Stelco Torstar etc etc.

As far as the "long term" defence for hollding these positions....with the exception of Stelco all of these positions have been held for numerous years without any positive results. Blackberry for instance has been held 6 years since John Chen took over as CEO and years before that. Argue all you want but something is broken at the Hamblyn Watsa equity team and that is what is truly Mindboggling.

Thanks UK for posting the article.
Title: Re: Fairfax2019
Post by: Cigarbutt on September 28, 2019, 05:30:06 AM
https://www.bloomberg.com/news/articles/2019-09-27/watsa-s-mindboggling-reasoning-in-takeover-prompts-court-award
Humble opinion here, after having discovered and reviewed previous comments made on this Board years ago.
Disclosure: I was a Fairfax shareholder then and intensively looked at how money could be made somehow with ABH and FBK.
The definitive opinion may change after reading the whole judgement but this seems to be the price to pay for playing the game between legal rules and ethics.

There was a conceptual flaw from the start (especially versus the fair and friendly and not hostile culture mindset) by actively pursuing an acquisition where Fairfax was a significant shareholder in the bidder and the target. The relevant National Policy 62-202: Take-Over Bids Defensive Tactics, indicates that “[t]he primary objective of the take-over bid provisions of Canadian securities legislation is the protection of the bona fi de interests of the shareholders of the target company.” Regulatory bodies then focused on a majority concept of the take-over which did not take into account that this majority was possible by the inclusion of a party which had diverging interests and that this basic fact likely contributed to a financial oppression of Fibrek's minority shareholders. Higher Courts eventually deferred to the regulatory body's decisions so that Fairfax got the legal nod to proceed. But one has to consider that this would not have been OK under other legal jurisdictional auspices.

It seems that the September 2019 judgement is, somehow, an attempt to correct an unfair outcome for minority shareholders but the Court seems to omit that this process had been anointed with a legal seal of approval in a contemporaneous way and perhaps the judgement is an attempt to bridge the definition of fairness, from legal to ethical. It's not the job of the legal system to do this but it's an interesting side effect and a reminder to legislators.

Title: Re: Fairfax2019
Post by: StubbleJumper on September 28, 2019, 07:10:40 AM
https://www.bloomberg.com/news/articles/2019-09-27/watsa-s-mindboggling-reasoning-in-takeover-prompts-court-award
Humble opinion here, after having discovered and reviewed previous comments made on this Board years ago.
Disclosure: I was a Fairfax shareholder then and intensively looked at how money could be made somehow with ABH and FBK.
The definitive opinion may change after reading the whole judgement but this seems to be the price to pay for playing the game between legal rules and ethics.

There was a conceptual flaw from the start (especially versus the fair and friendly and not hostile culture mindset) by actively pursuing an acquisition where Fairfax was a significant shareholder in the bidder and the target. The relevant National Policy 62-202: Take-Over Bids Defensive Tactics, indicates that “[t]he primary objective of the take-over bid provisions of Canadian securities legislation is the protection of the bona fi de interests of the shareholders of the target company.” Regulatory bodies then focused on a majority concept of the take-over which did not take into account that this majority was possible by the inclusion of a party which had diverging interests and that this basic fact likely contributed to a financial oppression of Fibrek's minority shareholders. Higher Courts eventually deferred to the regulatory body's decisions so that Fairfax got the legal nod to proceed. But one has to consider that this would not have been OK under other legal jurisdictional auspices.

It seems that the September 2019 judgement is, somehow, an attempt to correct an unfair outcome for minority shareholders but the Court seems to omit that this process had been anointed with a legal seal of approval in a contemporaneous way and perhaps the judgement is an attempt to bridge the definition of fairness, from legal to ethical. It's not the job of the legal system to do this but it's an interesting side effect and a reminder to legislators.



So, the problem is that FFH puffs its chest out about employees conducting themselves with integrity and about undertaking Fair and Friendly Acquisitions (Fairfax), but then doesn't always walk the talk.  You now have a judge who noted their shortcomings during the Fibrek takeover, but to make matters worse, if the judge is to be believed, Prem was not always honest and forthcoming during the trial and instead hid behind a series of "I cannot recall" type of responses.  Given that Prem has had several years to review his notebooks from that period and to examine his diary to refresh his mind about meetings and teleconferences, the "I don't know" responses leaves me with really only two possible explanations for his behaviour:  1) he is incompetent and cannot take basic notes and review them later; or 2) the "I don't know" responses were a dishonest and unethical approach to concealing his previous unethical conduct.

In any case, we shouldn't expect to see any more posts in this forum praising Watsa's integrity.


SJ
Title: Re: Fairfax2019
Post by: Cardboard on September 28, 2019, 10:17:12 AM
This was a bad instance but, the one that really discredited Prem for me was this "take-over" of Blackberry that never happened.

It is illegal to make a take-over offer for a public company when you don't have the means or intention to carry it through. I understand that it was subject to obtaining support from friends and all that but, I think it was a manipulative scheme while Blackberry shares were heading downhill.
Title: Re: Fairfax2019
Post by: petec on September 30, 2019, 01:43:13 AM
What is mindboggling is the decision to continue to hold Resolute Forest Products at all. And may I add...Blackberry, Eurobank, Stelco Torstar etc etc. As far as the "long term" defence for hollding these positions....with the exception of Stelco all of these positions have been held for numerous years without any positive results.

Funnily enough several of these look really interesting to me at the moment. I have developed a new rule for following Fairfax: buy what they buy, just do it several years later.
Title: Re: Fairfax2019
Post by: bearprowler6 on September 30, 2019, 06:24:38 AM
What is mindboggling is the decision to continue to hold Resolute Forest Products at all. And may I add...Blackberry, Eurobank, Stelco Torstar etc etc. As far as the "long term" defence for hollding these positions....with the exception of Stelco all of these positions have been held for numerous years without any positive results.

Funnily enough several of these look really interesting to me at the moment. I have developed a new rule for following Fairfax: buy what they buy, just do it several years later.

Fair enough Petec....but one needs to ask why they are always so early?

In fact...they need to spend considerable time addressing this major flaw in their investment process. For example, as soon as they bought into Stelco it was pointed out by many on this board that the timing was very poor given where we were in the economic cycle and given the tariffs being levied by the Trump administration. And what happens...50% of their investment literally disappears over night.

And they were way early on Blackberry and truth be told this is not a sure thing even from this level. Full disclosure....I bought into Blackberry late last week.

Furthermore...although I might be wrong....Resolute Forest is simply a bad investment. They have had hundreds of million tied up in this loser for years. Time to admit the mistake, sell and redeploy the capital.

I could go on but I think my point has been made. I have followed Fairfax for literally decades and am a very patient investor but something is not right when you assemble a group of equity investments like the ones they hold at the prices they bought in at.
Title: Re: Fairfax2019
Post by: petec on October 01, 2019, 01:53:25 AM
Fair enough Petec....but one needs to ask why they are always so early?

I agree - that was the underlying point (perhaps not clear) of my post.

That said:

1) It's only fair to point out what they got right, like Quess and Seaspan.

2) I disagree that they should necessarily sell an investment simply because buying it was a mistake. For example FFH will never recoup their investment in RFP, but if consensus is right it will generate half of its market cap and a quarter of its enterprise value in free cash flow over the next two years.

As an aside, I think the Stelco investment will work out fine. To win when investing in bad/low ROIC businesses you need 3 things: underappreciated value; good capital allocation; and low debts (or contracted cash flows that match the debt maturities). Stelco has all three (as does Seaspan although the value is becoming more appreciated by the day).

Title: Re: Fairfax2019
Post by: KFS on October 01, 2019, 10:09:50 AM
Press Release Details

Fairfax Financial Holdings Limited: Intention to Make a Normal Course Issuer Bid for Subordinate Voting Shares and Preferred Shares
09/26/2019

https://www.fairfax.ca/news/press-releases/press-release-details/2019/Fairfax-Financial-Holdings-Limited-Intention-to-Make-a-Normal-Course-Issuer-Bid-for-Subordinate-Voting-Shares-and-Preferred-Shares/default.aspx

Title: Re: Fairfax2019
Post by: wondering on November 14, 2019, 07:32:17 AM
https://www.avantelogixx.com/Avante+Logixx+Secures+up+to+%2418.0+million+in+Financing+from+Well+Known+Canadian+Investor+and+To+Expand+Nationally+with+Acquisition+of+A.S.A.P.+Secured+Inc

Another convertible debenture deal,  Relatively small - total $18m Cdn. 7% interest.  If fully exercised, FFH would have 19% of the equity interest in the company.

"Avante Logixx Inc engaged in the provision of security, monitoring, system integration, and technology solutions. Its products and services include residential and corporate security business: Avante control center, monitoring, electronic building management, patrol and rapid response, intelligent perimeter protection, secure transport, international security travel advisory services, locksmith services, and smart home automation. "
Title: Re: Fairfax2019
Post by: investmd on December 18, 2019, 06:09:43 AM

This year’s catalysts

-Fairfax followers are as bearish as I have seen since 2003.

-I expect the best bond manager (Brian Bradstreet) in the world to have filled Fairfax Xmas stockings with corporate and other bonds that got trounced in December. We have seen him move very quickly in the past... 2008 he bought $7b in tax free muni’s yielding 7% in less than a month and sold almost the entire US treasury holding that was larger than that at a massive profit during the same time. In the first half of the 2000’s he did very well in corporate bonds where he needed to be nimble before 2007. I am betting on a much higher yield on Fairfax large portfolio which will take operating earnings higher. This and a likely higher shift into higher yielding short term treasuries in the fall will show more of the earnings power of Fairfax as opposed to holding 50% cash holdings.

-India’s growth remains the highest in the world and Fairfax is a way to play that

-share buyback will accelerate at these levels albeit not as big as I would like!

- insurance companies will continue to improve

-equity positions are at rock bottom with little downside risk

-as previously discussed I am unhappy with share based awards...these will be disclosed in detail by Prem.

Most importantly this is a solid business with loads of potential that is selling dirt cheap for all of the reasons discussed here. Is it a redemption year for Prem and his team at Fairfax? We will see.

-

Dazel: thanks for starting this thread at the beginning of the year and stating your conviction. It's 12 months later and I'm curious as to whether there have been adjustments to your thought process.

In another post in January you stated "2019 is all about earnings....good or bad. It is time for Fairfax to perform...if they do not I will accept it and move on. If it sounds like a broken record I appreciate the skepticism from all..."  In some ways FFH has performed - insurance side has done well, Seaspan & Eurobank - couple of their largest equity holdings have done well in past 12 months, BUT FFH stock price is essentially flat and I believe selling below book value. So what are your thoughts to close out the year?
Title: Re: Fairfax2019
Post by: wondering on December 20, 2019, 06:34:27 AM
https://www.fairfax.ca/news/press-releases/press-release-details/2019/OMERS-to-Invest-in-RiverStone-UK/default.aspx
Title: Re: Fairfax2019
Post by: Crip1 on December 20, 2019, 06:56:32 AM
https://www.fairfax.ca/news/press-releases/press-release-details/2019/OMERS-to-Invest-in-RiverStone-UK/default.aspx (https://www.fairfax.ca/news/press-releases/press-release-details/2019/OMERS-to-Invest-in-RiverStone-UK/default.aspx)


Was just about to post this. Although not huge, this is another example of realizing some value in their assets that was not previously reflected in BV. Wondering if this is a concerted effort or just being opportunistic. Thoughts from others who are better educated would be welcome.


-Crip
Title: Re: Fairfax2019
Post by: Viking on December 20, 2019, 10:19:10 AM
Fairfax over the years has made many purchases. What i really like about many of the transactions i am seeing this year is the company is setting units up to be more successful. It sounds like RiverStone wants to grow its business. These moves, because of the cash involved, also provide shareholders with an updated value of the business. My guess is Fairfax has more to come in the next 12 months. With FFH shares trading a little above BV i think FFH is highly motivated to unlock value. I would not be surprised to see a transaction (or a few) that brings in a chunk of cash and allows FFH to buy back a meaningful amount of FFH shares. Regarding the RiverStone transaction i am not sure if the proceeds from OMERS will be going to FFH corporate or to RiverStone to be used to grow their business.

“The cash purchase price for the RiverStone UK investment of at least US$560 million, subject to certain book value adjustments at closing, 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 on a pro forma basis).

Upon completion of the transaction, Fairfax will deconsolidate the UK run-off group and apply the equity method of accounting for its remaining interest. Fairfax may further monetize its remaining interest in UK run-off in the future although the company also retains the flexibility to repurchase its interest over time.”
Title: Re: Fairfax2019
Post by: petec on December 20, 2019, 10:50:28 AM
I wonder why this only covers the UK bit of Riverstone.
Title: Re: Fairfax2019
Post by: Cigarbutt on December 20, 2019, 11:39:30 AM
Re the recent transaction: mixed feelings.

I remember very well around 2002 when TIG was put into runoff and when Riverstone was formed. The turnaround that occurred was highly linked to performance at that relatively obscure sub. They very efficiently handled claims and capital and eventually became an acquisition vehicle. The 2010 AR summarized well how this is a gem of a business even if results tend to be lumpy and sometimes messy (at least on the surface). Anybody here remembers ORC Re or nSpireRe? Or the TRG acquisition (with the final payment in 2017)?

It seems that there will be (are already?) huge opportunities for profitable runoff transactions. It makes little sense to sell an interest in one of the crown jewels and the argument of transacting for value surfacing is not convincing. The deal may make sense if they expect to raise capital ++ in order to grow ++. Also, building ties with OMERS is a way to become too large to fail.
Title: Re: Fairfax2019
Post by: petec on December 20, 2019, 11:46:16 AM
Also, reading it carefully:
1) seems to me Riverstone wants capital Fairfax can’t provide because it’s pouring money into the underwriting subs to support premium growth (the excess capacity they’ve long touted is concentrated in one or two subs, and not the ones in the hardest markets).
2) the release twice suggests that having OMERS on board will allow RiverStone UK to raise debt capital at low rates. Why couldn’t they do that anyway? This strikes me as very odd.


Title: Re: Fairfax2019
Post by: petec on December 20, 2019, 11:49:07 AM
Re the recent transaction: mixed feelings.

I remember very well around 2002 when TIG was put into runoff and when Riverstone was formed. The turnaround that occurred was highly linked to performance at that relatively obscure sub. They very efficiently handled claims and capital and eventually became an acquisition vehicle. The 2010 AR summarized well how this is a gem of a business even if results tend to be lumpy and sometimes messy (at least on the surface). Anybody here remembers ORC Re or nSpireRe? Or the TRG acquisition (with the final payment in 2017)?

It seems that there will be (are already?) huge opportunities for profitable runoff transactions. It makes little sense to sell an interest in one of the crown jewels and the argument of transacting for value surfacing is not convincing. The deal may make sense if they expect to raise capital ++ in order to grow ++. Also, building ties with OMERS is a way to become too large to fail.

Agreed, although this makes a LOT of sense if a) Fairfax think they can pump proceeds into other subs at higher rates of return and b) RSUK can for some reason lever and grow in a way they couldn’t before. Then, it’s a win-win.
Title: Re: Fairfax2019
Post by: petec on December 20, 2019, 11:53:05 AM
Also, they mention having the right to buy this back. That makes it sound like the Brit, Allied, and Eurolife deals. IIRC the way those deals worked, OMERS basically got a fixed return if Fairfax exercised their buyback option. The risk:reward was very skewed in Fairfax’s favour. I wonder if what’s happening here is Fairfax needs capital to fund other subs and has basically done a repo deal with OMERS.
Title: Re: Fairfax2019
Post by: FFHWatcher on December 23, 2019, 08:16:17 AM
Also, they mention having the right to buy this back. That makes it sound like the Brit, Allied, and Eurolife deals. IIRC the way those deals worked, OMERS basically got a fixed return if Fairfax exercised their buyback option. The risk:reward was very skewed in Fairfax’s favour. I wonder if what’s happening here is Fairfax needs capital to fund other subs and has basically done a repo deal with OMERS.

Fairfax can further monetize the UK runoff, or they can buy it all back.  The current mgmt of Fairfax has been public that they are in the 'further monetize' camp at this point in time.  I assume they will use this capital to help buy back those minority interests (Brit & Allied) from OMERS that they have alluded to.  It sounds like Fairfax is simply rebalancing their ownership into their Primary Insurers by selling off pieces of their non-primary insurers/run-off.

I wonder how this type of deal would come about?  Who pitched who the idea?  Did OMERS see it and want it or did Fairfax see the asset and pitch it to OMERS?  I would assume it was Fairfax's idea to sell it.
Title: Re: Fairfax2019
Post by: petec on December 23, 2019, 09:40:55 AM
The current mgmt of Fairfax has been public that they are in the 'further monetize' camp at this point in time.

About Riverside specifically? Source?
Title: Re: Fairfax2019
Post by: Viking on December 23, 2019, 10:18:52 AM
OMERS paid US$560 million for 40% of Riverstone UK, which gives it a total value of $1.4 billion. If we did a sum of the parts valuation for Fairfax before this transaction my guess is no one would have said Riverstone UK was worth anything close to this much. It is encouraging that a business as hairy as this is worth $1.4 billion. And i applaud Fairfax for surfacing value in a most unexpected way. This is one of the strengths of Fairfax: they can be very creative. Benefits of this transaction:
- Proceeds of $560 million
- increase in BV of US$10
- clarity of total value of Riverstone UK

Fairfax has a market cap of only US$13 billion.

The question, as is being discussed, is what to do with the proceeds?
1.) buy out minority partners in Brit and Allied. If the pricing in the insurance market continies to harden then this becomes more important to do sooner rather than later
2.) grow premiums at insurance operations
3.) buy back stock.

We know FFH thinks their stock is very undervalued right now. Lots of good options. Nice to see for a change :-)
Title: Re: Fairfax2019
Post by: petec on December 23, 2019, 02:38:31 PM
OMERS paid US$560 million for 40% of Riverstone UK, which gives it a total value of $1.4 billion. If we did a sum of the parts valuation for Fairfax before this transaction my guess is no one would have said Riverstone UK was worth anything close to this much. It is encouraging that a business as hairy as this is worth $1.4 billion. And i applaud Fairfax for surfacing value in a most unexpected way. This is one of the strengths of Fairfax: they can be very creative. Benefits of this transaction:
- Proceeds of $560 million
- increase in BV of US$10
- clarity of total value of Riverstone UK

Fairfax has a market cap of only US$13 billion.

The question, as is being discussed, is what to do with the proceeds?
1.) buy out minority partners in Brit and Allied. If the pricing in the insurance market continies to harden then this becomes more important to do sooner rather than later
2.) grow premiums at insurance operations
3.) buy back stock.

We know FFH thinks their stock is very undervalued right now. Lots of good options. Nice to see for a change :-)

You're assuming the proceeds go to FFH and aren't a capital increase at RSUK.

I suspect you're right but the release isn't totally clear. If so, the proceeds are to support premium growth - the release does seem to indicate that.
Title: Re: Fairfax2019
Post by: Viking on December 23, 2019, 04:22:22 PM
OMERS paid US$560 million for 40% of Riverstone UK, which gives it a total value of $1.4 billion. If we did a sum of the parts valuation for Fairfax before this transaction my guess is no one would have said Riverstone UK was worth anything close to this much. It is encouraging that a business as hairy as this is worth $1.4 billion. And i applaud Fairfax for surfacing value in a most unexpected way. This is one of the strengths of Fairfax: they can be very creative. Benefits of this transaction:
- Proceeds of $560 million
- increase in BV of US$10
- clarity of total value of Riverstone UK

Fairfax has a market cap of only US$13 billion.

The question, as is being discussed, is what to do with the proceeds?
1.) buy out minority partners in Brit and Allied. If the pricing in the insurance market continies to harden then this becomes more important to do sooner rather than later
2.) grow premiums at insurance operations
3.) buy back stock.

We know FFH thinks their stock is very undervalued right now. Lots of good options. Nice to see for a change :-)

You're assuming the proceeds go to FFH and aren't a capital increase at RSUK.

I suspect you're right but the release isn't totally clear. If so, the proceeds are to support premium growth - the release does seem to indicate that.

My guess is FFH is pretty motivated to do all three (take out minority partners, support premium growth and buy back stock). I expect we will see more transactions in the next year or two that position them to execute on all three objectives.
Title: Re: Fairfax2019
Post by: petec on December 23, 2019, 11:02:58 PM
My guess is FFH is pretty motivated to do all three (take out minority partners, support premium growth and buy back stock). I expect we will see more transactions in the next year or two that position them to execute on all three objectives.

I agree they are motivated to do all three. But as you imply, they are not capitalised to do all three. The excess underwriting capacity is not in the subs that are seeing the most market hardening, so they are having to inject capital into the subs to grow. That's limiting the buyback, which is frustrating but probably the right decision because float is generally sticky once you've got it. My guess is we will not see much in the way of buybacks while the market is hardening* and they are buying in minorities, which is clearly a priority. I didn't mind that because I felt buying in minorities was, in effect, a buyback. But here they are selling a minority, which makes little sense to me unless there's truth in the assertion that Riverside UK can lever more and grow more with two owners than it can with one. But I can't think why that would be true.

*Unless reinsurance hardens, in which case they can grow *and* generate cash flow to buy back, because Odyssey is overcapitalised.
Title: Re: Fairfax2019
Post by: gary17 on December 23, 2019, 11:28:02 PM
From contacts I have, seems like the scenario Prem was concerned about China a few years ago may materialize.  venture capital seems to have dried up.  Government spending is down (subsidies for solar , wind and now EV are being cut, as well as many others) , and finally, Trump put a real dent on their export.  No wonder the chinese caved (they were going to earlier if Trump hadn’t changed his mind and pushed harder).  No technology transfer will have impact on china.  And the forced retirement of Jack Ma is sending a strong signal to many young , smart minds in China to rethink whether they should invest their career in China or elsewhere.   
Things like wechat and alipay are all controlled by a few communist elites that paved the way for the broad adoption in China- and this at the same time allows the government to have very direct control of data of its citizens. 
I think the US with its free enterprise and democracy backbone will continue to be the economic powerhouse that  marches forward….
PS. China’s gdp likely very low.  lower than the 6% states have
Title: Re: Fairfax2019
Post by: Dazel on December 24, 2019, 06:25:50 AM

InvestMD et all,

While I would not quite call it complete humble pie I am eating with my early predictions for the year...I was wrong footed on a lot!!!! I will stand by my outlandish at the time prediction on 2019 profit though....there is more than one way to get to heaven...Lol.

Without going through specifics....Fairfax has strengthened significantly in my mind (Seaspan home run helps)....

1. Bond performance was ok not great...
2. Blackberry and resolute were a bust...Eurobank headed higher....catalysts for 2020?
3. Insurance was excellent and is the backbone...very pleased
4. India has strengthened but has not really shown up (Fairfax India lagging)
5. There are several underrated investments in their stable that will be monetized
6. Buybacks did not materialize....I can see why and appreciate strength at the insurance level

All in all a solid year at Fairfax and the future looks very bright. I was involved in discussions with a third party who I encouraged to contact Fairfax for a strategic investment so I felt it was appropriate to stay away from the board. That deal is now dead as third parties shares have doubled and to my knowledge Fairfax was never contacted.

Cheers to all,

Dazel

Title: Re: Fairfax2019
Post by: petec on December 24, 2019, 08:03:52 AM
Thanks Dazel. I agree, FWIW.

Which do you think are the undervalued investments that will be monetised?
Title: Re: Fairfax2019
Post by: Viking on December 24, 2019, 10:47:49 AM
When you look at Fairfax over the past year they have been very busy (and many of their equity holdings havealso been very busy). In aggreggate it is clear that the company is worth more today than it was 12 months ago. I think Faifax is better positioned today than at any time in the past 7-8 years to grow BV. As they continue to execute we will get growth in BV and a higher PE multiple which will be very nice for shareholders.

It is also interesting to look at Fairfax’s year end closing share price (from 2018 AR):
2014 = $608.78 CAD
2015 = $656.91
2016 = $648.50
2017 = $669.34
2018 = $600.98
2019 = $608.19 (Dec 24)
Title: Re: Fairfax2019
Post by: Cardboard on December 25, 2019, 07:41:40 AM
Thinking of a lucky 7? LOL!
Title: Re: Fairfax2019
Post by: abyli on December 25, 2019, 08:10:16 AM
Thinking of a lucky 7? LOL!

Wow! I am glad I sold 7 years ago....
Title: Re: Fairfax2019
Post by: investmd on December 25, 2019, 05:43:02 PM
When you look at Fairfax over the past year they have been very busy (and many of their equity holdings havealso been very busy). In aggreggate it is clear that the company is worth more today than it was 12 months ago. I think Faifax is better positioned today than at any time in the past 7-8 years to grow BV. As they continue to execute we will get growth in BV and a higher PE multiple which will be very nice for shareholders.

It is also interesting to look at Fairfax’s year end closing share price (from 2018 AR):
2014 = $608.78 CAD
2015 = $656.91
2016 = $648.50
2017 = $669.34
2018 = $600.98
2019 = $608.19 (Dec 24)

Thanks. The price history at close for past 5 years that you shared, suggests if one was holding since Dec 2014, annual return has been about 2%/yr (from dividends) in generally a bull market. Wow! Will take a substantial run up in price to justify for those of us who have held.
Title: Re: Fairfax2019
Post by: Viking on December 26, 2019, 11:29:50 AM
When you look at Fairfax over the past year they have been very busy (and many of their equity holdings havealso been very busy). In aggreggate it is clear that the company is worth more today than it was 12 months ago. I think Faifax is better positioned today than at any time in the past 7-8 years to grow BV. As they continue to execute we will get growth in BV and a higher PE multiple which will be very nice for shareholders.

It is also interesting to look at Fairfax’s year end closing share price (from 2018 AR):
2014 = $608.78 CAD
2015 = $656.91
2016 = $648.50
2017 = $669.34
2018 = $600.98
2019 = $608.19 (Dec 24)

Thanks. The price history at close for past 5 years that you shared, suggests if one was holding since Dec 2014, annual return has been about 2%/yr (from dividends) in generally a bull market. Wow! Will take a substantial run up in price to justify for those of us who have held.

Looking in the rear view mirror is important. Why has the stock price gone sideways for 5 years?
1.) what errors were made?
2.) has the company learned the lessons?

The much more important number for me is $608.19 (Dec 24 stock price).
3.) What will the company do moving forward?

The shares currently trade below book value (cheap compared to other insurance companies).
- Their insurance businesses are performing well and look to be in a hardening market; this is a big positive.
- their bond portfolio is positioned well (short end of curve) should rates continue to move higher
- their equity portfolio looks well positioned as we enter 2020 should we see economic growth continue to chug along

And sentiment towards the company is terrible.

This is not to suggest the company is perfect; it is not. I think the company has learned some valuable lessons. However, on balance, i like the decisions the company has made the past 2 years. More importantly, the company (and its equity holdings) is doing lots of things to drive shareholder value in 2020 and beyond. Q4 results should be solid. I like the risk reward at current prices.
Title: Re: Fairfax2019
Post by: racemize on December 26, 2019, 12:52:56 PM
When you look at Fairfax over the past year they have been very busy (and many of their equity holdings havealso been very busy). In aggreggate it is clear that the company is worth more today than it was 12 months ago. I think Faifax is better positioned today than at any time in the past 7-8 years to grow BV. As they continue to execute we will get growth in BV and a higher PE multiple which will be very nice for shareholders.

It is also interesting to look at Fairfax’s year end closing share price (from 2018 AR):
2014 = $608.78 CAD
2015 = $656.91
2016 = $648.50
2017 = $669.34
2018 = $600.98
2019 = $608.19 (Dec 24)

Thanks. The price history at close for past 5 years that you shared, suggests if one was holding since Dec 2014, annual return has been about 2%/yr (from dividends) in generally a bull market. Wow! Will take a substantial run up in price to justify for those of us who have held.

Looking in the rear view mirror is important. Why has the stock price gone sideways for 5 years?
1.) what errors were made?
2.) has the company learned the lessons?

The much more important number for me is $608.19 (Dec 24 stock price).
3.) What will the company do moving forward?

The shares currently trade below book value (cheap compared to other insurance companies).
- Their insurance businesses are performing well and look to be in a hardening market; this is a big positive.
- their bond portfolio is positioned well (short end of curve) should rates continue to move higher
- their equity portfolio looks well positioned as we enter 2020 should we see economic growth continue to chug along

And sentiment towards the company is terrible.

This is not to suggest the company is perfect; it is not. I think the company has learned some valuable lessons. However, on balance, i like the decisions the company has made the past 2 years. More importantly, the company (and its equity holdings) is doing lots of things to drive shareholder value in 2020 and beyond. Q4 results should be solid. I like the risk reward at current prices.

+1 to this post.

A couple of add-ons:
1) It is annoying that they have USD BVPS, but Canadian stock price, as it doesn't let you compare them that directly.  Anyway, 2014 was something like $530 USD share price, on a book value of 394.83, which is a P/B of 1.35 vs $460 USD/462 BVPS (unadjusted) of basically 1.  So value creation was more like 3.4%+2% div = 5.4% CAGR.  Obviously still not a great result, but that tells you more about how they did as a company than the stock price does.  I think Q4 will make this look a bit better too, with the recent sales, depending on cats.

2) Let's compare to Markel that has much better sentiment (although last year didn't help them much).  2014 YE bvps was 543.96, price was $687 (P/B was 1.26).  Current is BVPS of $768, and price of $1,123 (P/B of 1.46).  Value creation (again using BVPS) was 7.5% CAGR. 

So Fairfax underperformed Markel by 2.1% per annum on BVPS+div, even though the price change was quite a bit different. 

3) Continuing this Markel comparison, if you go back and look at combined ratios of the two companies, FFH is pretty close to Markel.
Markel Combined ratios, 2014 to current: 95%, 89%, 92%, 105%, 98%, 95%; average: 95.7%
FFH Combined ratios, 2014 to current: 90.8%, 89.9%, 92.5%, 106.6%, 97.3%, 97.1%, average: 95.7%

Thinking about the above, it seems quite clear to me that FFH is undervalued and/or MKL is overvalued.  I tend to think the former, but a mix is possible.
Title: Re: Fairfax2019
Post by: chrispy on December 26, 2019, 04:51:15 PM
Very interesting, thank you all
Title: Re: Fairfax2019
Post by: Viking on December 28, 2019, 07:27:14 PM
Fairfax has had a very active 2019. For fun, i decided to try and come up with a 2019 Top 10 list of events driving value for shareholders. Some events were driven by Fairfax (corporate/subs) and some were driven by management teams in the stock/equities held. The breadth of the items below is very interesting and informative. On balance, it is clear to me that Fairfax, on balance, has done many things to build a more valuable company for shareholders over the past year. Please feel free to comment; what items are missing? One obvious bucket is ‘Share of profits of associates’ and how fast it is growing.

Here is a summary of the types of items impacting shareholder value:
- being positioned to capitalize at subs on hard market in insurance
- solid growth in interest and dividend income
- seeding new/newer investments: Seaspan (tranche 2)
- monetizing mature investments: ICICI Lombard sale and sale of 40% of Riverstone UK.
- merging investments to make the whole stronger: Eurobank/Grivalia
- selling investment to put it in a better position to thrive: APR Energy
- simplifying corporate structure to better enable companies to succeed: Thomas Cook demerger of Quess and IIFL split into Finance, Securities and Wealth

Top 10 Events Driving Shareholder Value During 2019

1.) Ongoing: emergence of hard market for pricing in certain insurance lines: leading to double digit growth in net premiums written at many of the subs. Looks like double digit growth should continue in 2020.

2.) Ongoing: Solid increase in interest and dividend income: while short of FFH goal of $1 billion, looks to be close to $900 million for 2019, versus $784 in 2018 and $559 in 2017.
- January: Seaspan: tranche 2 of $250 million at 5.5% = $14 million in interest income/year

3.) January: Seaspan: Fairfax’s additional $250 million investment = 37 million shares purchased at cost of $6.75; with shares currently trading at $14.25 paper gain = $278 million.
- 25 million additional warrants exercisable at $8.10 = paper gain of $154 million

4.) Eurobank: stock closed at $0.54 Euro on Dec 31, 2018. Today the stock is at 0.92 Euro; paper gain = US $400 million. Eurobank looks well positioned.
a.) April: merger with Grivalia improved balance sheet
b.) April: Cairo Securitization - plan to hive off 7.5 billion euro chunk of underperforming assets is now almost complete (target Q1 2020).
c.) July: election of pro business government in Greece with clear majority in parliament. Lowered corporate tax rate; approved Hercules (vehicle for banks to reduce non-performing assets. - see b).

5.) Sept/Oct: ICICI Lombard sales: of remaining 10% position for proceeds of US $729 million; recorded a net gain on investments of $240 million in 2019 (there was more in previous years).

6.) December: OMERS paid US$560 million for 40% of Riverstone UK, which gives it a total value of $1.4 billion. Will increase BV by $10/share.

7.) Fairfax India: book value is up significantly in 2019 (+$3/share). BIAL looks like a jewel of an investment that will grow double digits for years to come.
a.) Dec 16: Bangalore International Airport (BIAL): Fairfax India to sell an 11.5% interest in Anchorage Infrastructure (holds airport investments) for gross proceeds of 9.5 billion Indian rupees ($134-million at current exchange rates). Fairfax India’s ownership of BIAL will fall from 54% to 49%. As a result of the transaction, Fairfax India will record investment gains of approximately $506 million, an increase in book value per share of $3.30 per share. The investment gains are supported by positive operational developments at BIAL. For the 12-month period ending October 2019, total traffic at BIAL was approximately 33.7 million passengers. The second runway commenced operations in December 2019. The expansion project for a second terminal at BIAL is expected to be completed in 2021.
b.) Dec 23: Sanmar Chemicals Group: completed its previously announced transaction with Fairfax India. During the period since announcing the transaction in the third quarter of 2018 through September 30, 2019, Fairfax India recorded investment gains from the Sanmar common shares and bonds of approximately $210 million and $100 million, respectively.

8.) November: Sale of APR Energy to Seaspan: moved an underperforming unit into a better situation; obtained Seaspan shares is return.
- APR Energy: US $300 mill / $11.10 per share = 27 million shares
- $14 (share price today) - $11.10 (cost) = $2.90 x 27 million shares = $78 million paper gain

Under-performers:
9.) Recipe. Shares fell from CAN $26.19 to about $19.50 = $180 million paper loss. Hard to see this turning any time soon. Restaurant stocks in Canada have been crushed this year. Most provinces are increasing minimum wages aggressively and will be doing so in the coming years as well, which is a severe negative for the hospitality industry. It appears all the home delivery options available are negatively impacting revenue. The good news is the assets are quality and have value; at $19.50 they look cheap.

10.) Blackberry: shares fell from US $11.17 to about $6.50 = $220 million paper loss (double if you include convertible shares they own). The purchase of Cylance has not resulted in the growth expected. Most recent quarter results were ok. If they can get the Cylance unit growing the shares will do very well. 2020 will be very interesting to watch.

11.) Resolute Forest Products: shares fell from US $7.93 to about $4 = $120 million loss of papar. Dec: purchased 3 sawmills in US South for $150 million; should new home construction in US pick up in 2020 this could become a solid aquisition for RFP.

Not sure what to think
12.) AGT take private

More work needed (by me to understand the businesses):

13.) Indian Investment: Quess, Thomas Cook, IIFL Finance - Securities - Wealth
- there was a lot of noise with these investments in 2019. Thomas Cook demerged its Quest stake and IIFL split into 3. This made it difficult to follow. The good news is these 5 firms are now independent with easy to understand share structures; we know how much Fairfax owns of each. And it will be much easier to monitor and understand what is happening moving forward.

Quess: Amazon investment suggests Quess is undervalued. Quess also looks like a real jewel of an investment set to grow at double digits for many years to come.
a.) July Amazon invested US$ 7.43 million for a 0.51% stake in Quess ($ went to fund growth of Qdigit unit); they paid INR 676/share and market price at the time was INR 430 (they paid a 50% premium).
b.) December: Thomas Cook India demerged their 50% holding in Quess Corp in order to simplify the corporate structure.
Title: Re: Fairfax2019
Post by: bluedevil on December 29, 2019, 12:22:49 PM
One other item I would add to the list is the progress at Digit Insurance.  A recent start-up, but quickly becoming material.
Digit is the fastest growing general insurer in India, and will write 250m-280m in premiums this year.

According to this press report, Digit is currently looking to raise capital from domestic PE firms at a valuation between $800-900m.  According to the report, Fairfax has invested about $140m since 2017 in Digit, and I believe they own about half of it.  So a significant appreciation in Fairfax's investment already.

https://timesofindia.indiatimes.com/business/india-business/pes-value-insurance-tech-startup-digit-over-800m/articleshow/72448746.cms
Title: Re: Fairfax2019
Post by: Viking on January 04, 2020, 03:26:21 PM
Bluedeveil, thanks for posting on Digit; interesting to learn about another seed investment Fairfax made and how it is blossoming (years later). I have updated my list of Fairfax's various investments. I track this only to understand what is going on 'under the hood' quarter to quarter. It is not precise; but it is a good directional tool. It is interesting to see the wide geographic diversity of the top 10 holdings. Please let me know if you see any errors or if you have an update on a business Farifax holds :-)

So what has happened with Fairfax's various equity investments in Q4? Total equity portfolio looks like it is up about 7% which if accurate would be very good. Back on Nov 6 it was tracking to be flat.
- mark to market equities = + 6.8%
- associates and consolidated = + 9.3%; there are likely errors in here as the Quess deconsolidation from Thomas Cook happened in Q4 and i am not sure if I got everything correct. I also included APR Energy and debentures for Seaspan (as I want to know what is going on with all the various holdings).

Top holdings as of Dec 31 (US$)
1.) Eurobank (Greece) = $1,255 million
2.) Seaspan (US) =        $1,096
- APR will add $381 million in Q1; warrants (if exercised) = $355
- add all three together and Seaspan is about $1.8 billion!
3.) Fairfax India =            $660
4.) Recipe (Canada) =      $404
5.) CIB (Egypt) =             $395
6.) Blackberry (Canada) = $300
- FFH also has warrants which, if exercised, would double its position
7.) Kennedy Wilson (US) = $297
8.) Quess (India) =           $324
9.) Thomas Cook India =   $222
10.) Fairfax Africa =          $208

The key takeaway, from my perspective, is Fairfax’s largest equity holdings look to have made pretty good decisions in 2019 and most look well positioned as we begin 2020.
Title: Re: Fairfax2019
Post by: gary17 on January 04, 2020, 06:25:32 PM
This is too hard to follow, can you not turn this into dollar per share. thanks
Title: Re: Fairfax2019
Post by: Sombunall on January 05, 2020, 05:59:51 AM
Thank you Viking...

And c'mon gary17 -- don't be so lazy, convert it yourself! :-)
Title: Re: Fairfax2019
Post by: Xerxes on January 06, 2020, 08:24:48 PM
I would just add that Fairfax Financial's ownership in both Recipe Limited + Resolute Forest is accounted through equity method as FFH has a large ownership of both companies. So their stock movement quarter to quarter is not marked to market. But FFH percentage of their equity income is.

Unrelated saw this earlier this week on Recipe:

https://www.theglobeandmail.com/business/article-prem-watsa-hoped-to-revive-a-restaurant-giant-but-recipe-unlimiteds/
Title: Re: Fairfax2019
Post by: Viking on January 07, 2020, 12:16:23 PM
Gary, for Q4 my guess is we will see company wide underwriting come in at 97% CR. Interest and dividend income will be around $215 million. As i indicated above, mark to market gains on equities should be around $160 million. Interest expense will be about $130 million. When i put it all together my guess is BV in q4 should increase $10-$15/share. I try not to get too cute with these estimates; bottom line, i expect Fairfax to post solid earnings and BV growth in Q4. We need a few more quarters like this to get investors interested to get back on the FFH train :-)

My range is quite large because Fairfax and its equity holdings have been very active making moves in Q4 and i am not sure when all of these items will be reflected in FFH financials and how each transaction will ultimately impact BV.

For example, what i do not understand well is how Fairfax accounts for each of its ‘associates and consolidated’ holdings:
- Seaspan has had quite a run in Q4; will this gain be reflected in BV? If so, how much? (Is it valued at stock price? If so, why is Quess equity accounted?)
- Fairfax India announced two transactions late in Q4 that will increase its BV by about $3 per share; how will this flow though to FFH and timing?
- Quess is carried at a much higher value on the books than its current share price; will we see Fairfax adjust this down? Same with Recipe.
- will the APR transaction be reflected in Q4 results in some way even though it will not close until Q1 2020
- what is value of Digit; will Fairfax show it at a higher value?

Other:
- will the Riverstone UK transaction be reflected in Q4 results in some way (higher book value) even though it will not close until Q1 2020. This transaction alone will increase BV by $10 per share.

PS: when FFH made their final sale of ICICI Lombard it did not close until Oct but i am pretty sure they booked the gain in Q3 results. This is an example of why i am not sure on the exact timing of when the various announced transactions will be reflected in results :-)
Title: Re: Fairfax2019
Post by: Viking on January 11, 2020, 07:52:14 PM
I would just add that Fairfax Financial's ownership in both Recipe Limited + Resolute Forest is accounted through equity method as FFH has a large ownership of both companies. So their stock movement quarter to quarter is not marked to market. But FFH percentage of their equity income is.

Unrelated saw this earlier this week on Recipe:

https://www.theglobeandmail.com/business/article-prem-watsa-hoped-to-revive-a-restaurant-giant-but-recipe-unlimiteds/

Xerxes, of Fairfax’s current staple of larger investments it looks to me like Recipe may be in the most difficult situation. Their issues is not Recipe specific; restaurant stocks in Canada are really in a tough position. Here in Vancouver they are being hit with the perfect storm:
1.) big increase in property taxes by the city (8%)
2.) big increases in minimum wage of 6-7% every year for the last 3 years straight (with more big increases already confirmed by the Provincial government)
3.) shift with consumers from eating in restaurant to eating at home (with Skip the Dishes, Uber Eats who take as much as 25% of the order value etc)
4.) steady increase in health care costs

What you see across the board is restaurants are unable to increase revenue / cut costs fast enough to offset all the cost increases. 2020 will likely be another tough year for restaurant stocks. The good news for Recipe is the stock has already sold off pretty aggressively in 2019. The question is if we have seen the bottom in profitability or if more bad news is coming in 2020. At some point the sector will be a buy... not sure if we are there yet.
Title: Re: Fairfax2019
Post by: bizaro86 on January 11, 2020, 08:49:45 PM
I would just add that Fairfax Financial's ownership in both Recipe Limited + Resolute Forest is accounted through equity method as FFH has a large ownership of both companies. So their stock movement quarter to quarter is not marked to market. But FFH percentage of their equity income is.

Unrelated saw this earlier this week on Recipe:

https://www.theglobeandmail.com/business/article-prem-watsa-hoped-to-revive-a-restaurant-giant-but-recipe-unlimiteds/

Xerxes, of Fairfax’s current staple of larger investments it looks to me like Recipe may be in the most difficult situation. Their issues is not Recipe specific; restaurant stocks in Canada are really in a tough position. Here in Vancouver they are being hit with the perfect storm:
1.) big increase in property taxes by the city (8%)
2.) big increases in minimum wage of 6-7% every year for the last 3 years straight (with more big increases already confirmed by the Provincial government)
3.) shift with consumers from eating in restaurant to eating at home (with Skip the Dishes, Uber Eats who take as much as 25% of the order value etc)
4.) steady increase in health care costs

What you see across the board is restaurants are unable to increase revenue / cut costs fast enough to offset all the cost increases. 2020 will likely be another tough year for restaurant stocks. The good news for Recipe is the stock has already sold off pretty aggressively in 2019. The question is if we have seen the bottom in profitability or if more bad news is coming in 2020. At some point the sector will be a buy... not sure if we are there yet.

(3) is also bad because it hits high margin drink orders. So you get a lower average cheque size with lower margins, plus pay big commissions.
Title: Re: Fairfax2019
Post by: Xerxes on January 12, 2020, 07:11:50 PM

3.) January: Seaspan: Fairfax’s additional $250 million investment = 37 million shares purchased at cost of $6.75; with shares currently trading at $14.25 paper gain = $278 million.
- 25 million additional warrants exercisable at $8.10 = paper gain of $154 million


Top of my head, i recall FFH ownership was around +35-40% based on common stock (not counting warrants). Significant ownership, yet bizarrely one that is being marked to market as oppose to being under equity method.

I wonder with APR being folded in and an even larger ownership in common stock, if FFH would need to switch the way it accounts for the newly created Atlas Corp. Said differently, is it more advantageous for them to continue to mark to market (capturing the rising valuation) or capture their portion earnings (which would lag the rising valuation).

i understand that the accounting treatment is not done on a whim, but given that FFH public commitment has been a 15% return on equity, and they have been lagging, they do have an incentive to do what they can to capture the "value" into their book value earlier rather (market to market) than later (through equity method earning).     
Title: Re: Fairfax2019
Post by: Xerxes on January 12, 2020, 07:18:15 PM
Xerxes, of Fairfax’s current staple of larger investments it looks to me like Recipe may be in the most difficult situation. Their issues is not Recipe specific; restaurant stocks in Canada are really in a tough position. Here in Vancouver they are being hit with the perfect storm:
1.) big increase in property taxes by the city (8%)
2.) big increases in minimum wage of 6-7% every year for the last 3 years straight (with more big increases already confirmed by the Provincial government)
3.) shift with consumers from eating in restaurant to eating at home (with Skip the Dishes, Uber Eats who take as much as 25% of the order value etc)
4.) steady increase in health care costs

What you see across the board is restaurants are unable to increase revenue / cut costs fast enough to offset all the cost increases. 2020 will likely be another tough year for restaurant stocks. The good news for Recipe is the stock has already sold off pretty aggressively in 2019. The question is if we have seen the bottom in profitability or if more bad news is coming in 2020. At some point the sector will be a buy... not sure if we are there yet.

i am glad i do not own Recipe but glad that i own it diluted through FFH.

 And i can definitely see some of the MTY owned entities (Thai Express, Arahova) more or less empty all the time. yet, Allo-mon-coco, the breakfast joint, also owned by MTY is PACKED !!!!
i think for sit-ins the shift is really toward breakfast places.

On Recipe side, the only one that i care to use is The Keg + Harveys now and then.