petec

I don’t really understand the distinction you’re trying to make. BAM absolutely charges fees when investors invest alongside them. My guess - and it is only a guess at this point - is that Anchorage will pay fees to FIH in the same way that FIH pays fees to FFH (and BIP pays fees to BAM). If so, OMERS (and any other shareholder in Anchorage) will effectively pay a fee to FIH in the same way that any of us, owning shares in FIH, effectively pays a fee to FFH. I could obviously be wrong about this, but only if Anchorage pays its own investment team. If FIH makes the investment decisions for Anchorage, I’d be amazed if it doesn’t get a fee. I also disagree that it is unlikely that Anchorage will issue equity. It is highly likely. In fact I think it is the whole point. That (plus issuing debt) is how Anchorage will get the capital to grow. If FIH sells Anchorage shares the money goes to FIH, not Anchorage.

On reflection I think the right number for year end is 508, which is the 712m by which the fair value of investments in associates exceeds the carrying value less the 204m by which the carrying value of consolidated common equities exceeded market value. In other words if you were trying to calculate year end BVPS at fair/market value you’d add 508m or about $19 per share, and then you can add the $33 per share from marking Digit to the January valuation on a fully diluted basis. Clearly you can debate the fair value measure, especially for BIAL (though hopefully that debate is settled soon by the IPO). But if you follow this logic the fair value BVPS is 478+19+33=530, before any increase in listed share prices ytd. I’ll triple check this tomorrow but in the meantime please point out any more obvious flaws!

Petec, just so you know I think you are comparing some apples and oranges figures (this is due to the way FFH presents things). The $662 million FFH refers to is the market value of the common equities at 12/31 being less than the fair value by $662 million as laid out by Prem on page 10 of the annual report (due mainly to Eurobank and Quess). The $712 million figure that was mentioned by Jen Allen on the call corresponds to the Investment in Associates fair value over carrying value at 12/31/20 as laid out on page 72 of the annual. The biggest driver between these tables is the private insurance holdings (Eurolife, Thai Re, Go Digit) and then FFH India. FFH's comment on the call and then in the annual letter was that the fair value of the common as laid out by Prem on page 10 of the annual is now above that of their carrying value. These are very different statements so just want to be clear there. A good portion of Q1's gains (to the extent market stays up) then will simply go to having the carrying value and market value of the common equities be much closer. Good catch. I had a feeling something didn’t square, but I typed up my notes from the call and the letter two weeks apart and missed the nuance. My bad.

Hi all. Can anyone give me an informed estimate of construction costs for industrial and logistics real estate in North America? Ideally this would include buildings and services such as access roads and drainage, but not the cost of the land. Many thanks P

For what they are worth, my notes on the call and letter. Haven't dissected the AR yet. Sorry about the formatting - doesn't paste well... ○ BVPS $478 and adjusted BVPS could be $535 by end Feb 2021. Letter says yearend carrying value exceeded market value by $662m or $25 per share, but on the call they said that after the early 2021 rally, fair exceeds carrying by $712m or $27 per share. In addition they own 74% of Digit on a fully converted basis, worth $1406m at the Jan 2021 mark, but carried at $517m for a gap of $889m or $33 per share. ○ 2020 a real stress test, yet they managed to: • Make $313m on investments despite losing $1.5bn in Q1 and $529m on equity shorts in the year. • Put $1.38bn into insurance subsidiaries; think they are now fully capitalised and don't need more to grow. • Spend $206.6m buying the last 9.4% of Brit. • Buy back 801k shares (c.3%) at US$298 per share and lock in a further 1.4m shares at US$344 via a TRS. • Get to a YE debt/cap of 29.7%. • Do deals to get holdco cash to $1.4bn with all revolvers repaid (Riverstone $730m up front, and Brit $375m for 14%, value $2,679m). ○ Sale of Riverstone Europe. Operation was born out of the acquisition of Sphere Drake, which was put into runoff in 1999. RE then took on more internal runoff books until 2008 when, down to $100m in capital and short of work, it started buying books. Over 20 high-return transactions later Fairfax sold it for $1.35bn. I am not sure how they get to this figure - I think they sold 40% to OMERS for $560m in 2019 and 60% to CVC in 2020 for $730m plus $236m contingent on future performance. As part of the CVC deal they also agreed to buy a portfolio from Riverstone Europe for $1.2bn by the end of 2022. This portfolio consists of significant stakes in Fairfax India, Atlas, Blackberry, CIB, Recipe, and others and the valuation reflects December 2019 prices. Fairfax could have sold this portfolio pre-closing, but think it was "exceptionally undervalued". It's not clear whether they have the option or obligation to buy - I think it is an obligation but it could be quite valuable. ○ Insurance - pricing globally is rising 10-30% and terms are tightening. • NPW up 11% in 2020 16% in 4q. • Float per share up 10% to $927 having compounded at 18.4% since 1985. • 97.8% CR, including 4.8% of COVID losses, 4.7% of other CAT losses, and 3.3% of favourable prior year development. The average CR excluding covid was 93% and all businesses underwrote at under 100% on this basis. COVID losses were $670m or $25 per share pretax, and 50% are INBR. Underwriting profit $309m despite a $240m loss at Brit (largely covid - event cancellation etc.). • Writing at 1.0x NPW/surplus. 2002-5 they did 1.5x. • Across insurance they have over 20 profit centres focussed on a unique set of customers, geographies, or products. "Our insurance companies are worth much more than the amount at which they are carried on our balance sheet." • International (non-NA other than Brit) now accounts for $2.3bn of FFH equity. Fairfax's share of gross premiums and investments are worth $3.2bn and $5.3bn respectively. ▫ 2020 CR98%. All below 100% except Bryte (covid) and Digit (startup). ▫ Fast-growing businesses in underpenetrated areas. ▫ Latam (comprising Argentina, Chile, Colombia, Uruguay and acquired in 2017) dipped below 100% CR for the first time. ▫ Fairfax Brazil did 95%. It has now done 5 years under 100% and has doubled premiums in this time. ▫ Colonnade (Eastern Europe) did 93%. ▫ Ukraine. 2019: acquired 70% of two companies for $22m. 2020: gross premiums of $144, CR of 93%, and net profits of $16m for a 2x P/E. ▫ Eurolife did $500m of gross premia and geenrated $130m in net income. It has been "an extraordinary investment". ▫ Fairfax Asia did 97%. ▫ Digit grew gross premiums 40% and will do a 113% CR. Including investment income it should be profitable and "many of our companies expect do benefit from Digit's technological and innovation leadership". ▫ Gulf Insurance - part owned since 2010. Since then it has tripled gross premiums to $1,.4bn, averaging a 95% CR. In 2020 it bought AXA's Gulf operations adding $900m of gross premiums at a 95% CR. ○ Investments • Investment portfolio at yearend $42bn ($48bn including non-colsolidated companies like Gulf, Eurolife, and Digit). • "The most important determinant of long term success in any investment is good management, led by an outstanding CEO." • Wade and Lawrence had a good year and will get another $1.5bn in 2021. • More monetisations to come - "just the beginning". • Lost money on shorts again but "our last remaining short position is finally closed" and "we will never short stock indices or individual companies again". Closed out last short (almost certainly Tesla) at a huge loss in 2020. • Thomas Cook India will need some financing in 2021 given its business stopped dead, and will issue $60m of convertible prefs to Fairfax. Expect it to emerge "stronger and more efficient". • Quess has emerged stronger, with "more clients, better growth, net cash, and better free cash generation". • Farmers Edge IPO'd at $425m in value to Fairfax. They have invested $376m but due to accumulated losses it was carried at $303m. Post IPO it is debt free, with $100m in cash, and should generate free cash flow in 2022. • Boat Rocker has received CAD110m from Fairfax since investment in 2015 and has grown revenues tenfold from CAD70m to an expected 700m in that time. • AGT did record ebitda in 2020. • Invested $50m in Davos in 2016 and sold it to Unilever in 2020 for $59m plus a $36m 10-year contingent earn-out. • Peak Achievement is a 50/50 JV with Sagard/Paul Desmarais III. It owns Bauer (leader in hockey) and Easton (no.3 in baseball). In 2020 it merged Easton with Rawlings, the leader in baseball, for $65m in cash and a 28% stake. • Golf Town and Sporting Life - 71% owned for an investment of CAD74m. Had an outstanging year navigating covid and realigning Sporting Life. The two businesses are counter-seasonal so the combination has created working capital and cost synergies. • CIB's NPLs are 3x covered and the CAR is 31%. Pre-provision profits grew 13%. • Resolute bought 3 sawmills in early 2020 - great timing - and bought back 8% of shares outstanding at $4.28. • BDT provides family and founder-led businesses with long term capital. Fairfax have invested $647m, received cash back of $550m, and still have $631m. • KW. Have invested $1130m since 2010, received $1054, and have $582m, for an aveage annual realised return on completed projects of 20%. As of YE20 they have also committed to $1.5bn of first mortgages on high quality real estate with loans to value below 60%, an average yield of 5%, and an average maturity of 4 years. • Blue Ant merged Omnia with TSX-listed Enthusiast Gaming for shares at CAD1.65, now worth over CAD8. • Exco (44% owned) generated $136m in ebitda and $36m of free cash flow. Net debt fell to $145m. • Mosaic (61% owned if warrants exercised) "have done an outstanding job building a portfolio of established businesses in niche markets". Merged Dexterra into Horizon North at an average cost of $3.17.

On Digit, my understanding is that 1) they currently own 49% at a carrying value of $900 for 100%, implying an asset of c. $450m. 2) recent fundraising was done at a value of $1.9bn for 100%. 3) Fairfax own convertibles that get them to 74% without injecting additional capital. In other words, you could argue that their $450m asset is actually worth 74%*1900=$1400, an unrealised and unbooked gain of $950m or $35 per share. Is this right? Edit: their cost is actually $42+$475 = $517 so the bvps gap is more like $33.

You guys are overthinking this. FIH wants to invest in infrastructure in India. That's better done in a separate entity. This is a huge market so with any luck they will need to raise a lot of capital for this venture, and a dedicated infrastructure platform will almost certainly have a lower cost of capital than a general value-oriented closed-end fund like FIH. The advantage for FIH shareholders is that they probably get to charge a fee stream on what could be a substantial amount of third party capital in 5 or 10 years. That's very valuable, and comes at a higher ROIC than it would if FIH supplied all the capital. In this sense they are replicating what Brookfield have done and what Fairfax have done with Helios and Fairfax Africa. The disadvantage is that with their prime asset (and 90% of their NAV) trading publicly, there will be no reason for FIH to trade above book value because the portfolio will be easily replicable in the market. This is not a deal for dealing's sake. And it doesn't mean FIH are selling BIAL, other than the portion they have already sold to OMERS - Anchorage will IPO for new capital that can be used to fund investments in new assets (or in accelerating BIAL's real estate rollout, which to my knowledge is not funded, unlike BIAL's investment in expanding airport capacity for which they have debt lined up).

Sounds like they might get a shot at the GHIAL stake too, and the Anchorage IPO is the ideal opportunity to raise the funds.

No, I think that time for Fairfax was back in 2003. The decision that we are no longer going to buy crappy insurers and turn them around led to the group of quality insurers they have today. The second part of that was making Andy Barnard in charge of all of the insurers. Even with Fairfax's more eclectic style of investing, the real culprit behind their underperformance has been due to betting against and shorting the market after 2009. They took advantage of the 50% correction, but started hedging and that really hurt their performance. Even with minimal exposure to the stock market, they would have done very well just in their bond investments, conglomerate investments and the equities they did invest in...excluding their shorts and market bets which cost them significantly. Maybe the decision to stop shorting is a step in the right direction...simplifying their portfolio decisions. Cheers! Sanj, please stop describing what FFH did as "hedging." More than 100% of FFH's equity portfolio was "hedged." When your hedge-ratio exceeds your exposure to the underlying (ie, more than 100%) that's called speculation. It was one of the investment decisions where the excessive position sizing reflected poor risk management. SJ They were bets on values regressing to the mean. Historically he was able to wait out Mr. Market and take advantage of volatility (see dot com and housing bubbles). Unfortunately, Mr. Market hasn’t cooperated for over a decade and Prem learned his lessons the hard way. Prem is smart. He learned. He’s not just another run of the mill, self-made, Canadian, multi-billionaire from India. And, he has formally, in writing, taken shorting off the table. I don’t think he is addicted to shorting or to shareholder lawsuits. This issue is easy to understand and was even easier to solve. He also knows he doesn’t have to juice earnings with shorts anymore, now that he has more good investment opportunities than he has capital (for the foreseeable future). Now, all he has to do is reward a bunch of all-star insurance and non-insurance managers/investors like David Sokol, Byron Trott, Wade Burton, etc if they can grow capital by more than 15%. If they can do it, they get more capital. If they can’t then they don’t. The real story of the last ten years was not the shorts. It was the global network of non-insurance capital allocators he has been assembling. The next ten years won’t look like the last ten years. And, the stock will trade above BV again soon enough. Regardless of how one defines the shorts, this is a VERY good post. Spot on.

I'm happy about this, because I would rather they walked away from things that didn't pan out. I do not expect every investment to work, but I do want to see clear and decisive action around things that are not going to work. For years I think Fairfax was awful at this. I think they are improving.

It shouldn't matter. Whether the carrying value is above or below the market value, FFH's portion of earning (net of dividends) will continue to stack up on FFH's book value (i.e. carrying value). In equity accounting, market value is only relevant as a yardstick for analyst to question the carrying value. Then let us hope Eurobank is on it's way to sustainable earnings growth instead of constantly being plagued by large one-time writedowns and restructuring costs like it has been for the past several years. Agreed - although in their defence, most of those costs were predictable and I think management have handled the situation well. On the other side of the coin, if things go well they have the potential to go very well. For example, due to tax loss carryforwards they expect to generate more capital than earnings in the future - in fact they guide to generating 100bps a year from 2022. That’s 25-30% of the market cap generated annually. Dividend potential is significant. Yes. I am bullish and bought more in the March/April dip, but it has been a frustrating ride! I was wiped out in 2015. Rebought back in when momentum was going well, but covid-19 took all of that away as well. Now we're back to the bottom of the range it's bee in since 2016 and even a double from pre-earnings price only takes it a hair above its 2016 and 2018 highs. Hopefully the completion of the spin-outs, the corporate restructuring, and the pandemic all in the rear-view we can finally get to a sustained trend of earnings growth (and dividend potential), but I don't think this stock is going to move much until that happens. And it'll probably trade at a substantial discount to book like all European banks do even if it pays a 6-7% dividend. We're really banking on massive book value growth to make this work for us. Yes, but the combination of book value growth and capital generation (which as you know are related, but not the same) could be very powerful. If they’re right about 15c in EPS and 100bps of capital generation then they could easily pay an annual dividend exceeding 10% of the current share price. Or they could buy back shares. And that’s without assuming any real reflation in the Greek economy. Given they’re exiting a 10y depression, and doing the right things policy wise, I think there is scope for loan growth well ahead of the European average and also for real estate prices to rise which could drive book value growth well ahead of what you’d expect simply from retaining operating earnings. Overall I think this is a lot cleaner than the other euro banks, given what it has been through. I tried to buy this and couldn’t, so I get my exposure through FFH.

It shouldn't matter. Whether the carrying value is above or below the market value, FFH's portion of earning (net of dividends) will continue to stack up on FFH's book value (i.e. carrying value). In equity accounting, market value is only relevant as a yardstick for analyst to question the carrying value. Then let us hope Eurobank is on it's way to sustainable earnings growth instead of constantly being plagued by large one-time writedowns and restructuring costs like it has been for the past several years. Agreed - although in their defence, most of those costs were predictable and I think management have handled the situation well. On the other side of the coin, if things go well they have the potential to go very well. For example, due to tax loss carryforwards they expect to generate more capital than earnings in the future - in fact they guide to generating 100bps a year from 2022. That’s 25-30% of the market cap generated annually. Dividend potential is significant.

Eurobank results are out. This company has done a super job of navigating the past few years and based on guidance it trades on 4.3x 2022 earnings and 0.43x 2022 book value. I think it will double in the next 18 months. Unfortunately this won’t all feed into FFH book value since it is already carried well above market, but there is scope for a nice gain.

Exactly.

In fairness to Prem, the insurance companies did have an outstanding year and the investments are almost all performing well. Security prices might not be, but the underlying companies (which is what Prem is referring to) largely are. All those answers about the rear view. I’m talking about the present, about what is written in the 2020 annual report. We had a bad year and Prem is not candid about it. That is why he didn’t convince me that the futur will be different. On what basis did we have a bad year? The stock market valued certain assets at certain levels as it always does. On that basis, maybe. But did the insurance subs have a bad year? Did any of the big investments have a bad year operationally (ie, in the way that matters?). You’re absolutely right about the short. But as one example, if you’d told me that Atlas would have sailed through the most aggressive recession in history the way it did, I’d have laughed at you. And I own it. Yet it did. Who cares whether the stock (and therefore Fairfax’s BV) reflects that yet? I really don’t mean to get at you. But I think Fairfax had a spectacular year, all told. It went into the first global financial pandemic in 100 years overlevered and with a raft of cyclical holdings. It came out with cash, rising book value, and an underlying CR of 93%. Works for me. I think reporting combined ratio ex-one time events is really disingenuous. Literally the reason why people buy insurance is to protect from one time events. If you exclude them, of course your CR is going to look great. Their investment performance is great if you exclude the mistakes too, but that's just not how it works. I think reporting the CR with and without one time events helps with understanding. You’ll notice I quoted the CR excluding covid losses but including other cat losses. That seems fair to me, given that I have no evidence that another pandemic is likely to happen on any sensible timeframe (unlike, say, hurricanes).

In fairness to Prem, the insurance companies did have an outstanding year and the investments are almost all performing well. Security prices might not be, but the underlying companies (which is what Prem is referring to) largely are. All those answers about the rear view. I’m talking about the present, about what is written in the 2020 annual report. We had a bad year and Prem is not candid about it. That is why he didn’t convince me that the futur will be different. On what basis did we have a bad year? The stock market valued certain assets at certain levels as it always does. On that basis, maybe. But did the insurance subs have a bad year? Did any of the big investments have a bad year operationally (ie, in the way that matters?). You’re absolutely right about the short. But as one example, if you’d told me that Atlas would have sailed through the most aggressive recession in history the way it did, I’d have laughed at you. And I own it. Yet it did. Who cares whether the stock (and therefore Fairfax’s BV) reflects that yet? I really don’t mean to get at you. But I think Fairfax had a spectacular year, all told. It went into the first global financial pandemic in 100 years overlevered and with a raft of cyclical holdings. It came out with cash, rising book value, and an underlying CR of 93%. Works for me.

100% agree. The failures over the past 10 years are well understood and have been beaten to death here 100x. By the time many here are in agreement on what the front-view looks like, we will already be back to 1.3 x book value and this ridiculous opportunity will have passed. All that, plus there’s a lot of evidence that Fairfax are learning and reacting and focussing. The combination of all these factors is what matters.

In fairness to Prem, the insurance companies did have an outstanding year and the investments are almost all performing well. Security prices might not be, but the underlying companies (which is what Prem is referring to) largely are.

+1

On a couple of the factual points: 1) I don't think the $47.7bn is a typo. They have grown premiums written and this grows float. I think this is the yearend number or the current number. Your $40bn number is either last year's number, or the average figure for the year. 2) The IIFL subsids are mentioned separately because Fairfax has direct stakes as well as through Fairfax India. This is a legacy thing - they were owned before FIH was formed. 3) BDT Capital Partners has been a big holding for years now but profits are referred to as realised in this letter so I assume that (at least some of) it has been sold.

Altius Renewable Resources (ARR) IPO'd. Fairfax's interest is in Altius Minerals (ALS) which owns a portion of ARR, but I don't believe Fairfax owns any ARR directly. Ultimately, there will be some pass through benefit if ARR succeeds and raises ALS' price/visibility and Fairfax is able to earn more profits on the conversion of its preferred shares, but ultimate benefit to Fairfax of ARR's success will be likely be small. Agreed. It may be that the warrant strike price is reduced for the spin, but they don’t have a huge number of warrants anyway.

Saw this too but can't find any news. Maybe just catching back up to where it trades pre-Covid which was still cheap? One of the local brokers came out with a buy. Agree it is cheap, although I am not sure where it should trade (relative to BV) given low rates and impaired revenue generation capacity.

Just priced USD600m of debt at 3.39% and FIH did $100m at 5%.

I’d also trust him. But there’s no capital loss on a bond, is there? You just hold it to maturity, even if you mark it to market in the meantime. And I’m not even sure treasuries are market to market - one of you will know this but I think they can choose to hold them at amortized cost?

So, it's good if FFH can IPO these outfits and book a gain. It pushes up their equity number and gives a bit of slack on the revolving credit facility covenants. It might even enable some of the insurance subs to increase their underwriting volume. It also gives a higher profile to those companies which might turn them into acquisition targets in the future (ie, it could facilitate an exit). However, while this will increase reported earnings, it looks like there will once again be a bit of a quality of earnings issue in 2021. If all four IPOs come to fruition during 2021, it will likely give the appearance of high earnings, but clearly this is not something which is repeatable every year, nor do the "earnings" from these exercises result in any cash that can be used by the holdco for debt repayment, dividends or share buybacks. While the gains are a credit to management and reflect good decisions made in the past, when thinking about the longer term valuation of FFH, it might become important during 2021 to use some sort of adjusted income number. It's a good outcome, but it will definitely muddy the accounting numbers for the next year or two. SJ Stubble, i like many things about what Fairfax is doing with the IPO process: 1.) additional disclosure provided on companies and their business models 2.) significant funds raised from IPO will help companies be successful in future 3.) timing of IPO’s is very opportunistic (given high demand) and look to be at premium valuations 4.) significant funds raised from IPO will hopefully eliminate need for Fairfax to provide any further funding in future. This is a big deal and should help cash flow at Fairfax moving forward. 5.) with shares publicly traded Fairfax will have mechanism to exit more of position in future if that is what they want to do 6.) post IPO, with shares publicly traded, investors will have much better visibility into valuation of Fairfax’s many equity holdings (and reported BV) Absolutely right. The point about cash flows is huge. These things can now grow without imperilling Fairfax's ability to do the same. It's true that earnings are overstated when there is a gain. But equally they are understated when there isn't one (hopefully). Personally I think it's wiser to value this using book value and a sense of what X% CR + Y% investment returns - holdco costs could yield on average over time. I no longer worry about cash at the holdco. Prem has proven that whether it is outright (Riverstone UK) or via the discount window at his personal LOLR (OMERS) he can access cash by selling stakes pretty much whenever he wants. And crucially, he can do it well above BV, which "underwrites" the goodwill at the holdco. Disagree on #4. Prem had mentioned during the depth of the Covid crisis that holding company had no need to fund/finance non-insurance operations and businesses. If those assets didnt need funding in the worse of time, surely they dont need funding from FFH's balance sheet in the best of time. So, based on this, i don't think there is significant saving on cash flow usage because of the IPOs. The most signifcant operational use of cash flow at holding company level was the capitalization of the insurance company, which Prem declared it to be compelete in the Q4 call few weeks ago. That said, the IPO will allow these companies to fund their growth from a new avenue (capital market) than just internally. As far as book value one-time gain in Q1, so be it. It is an insurance/investment firm, the lumpiness will always be there even if it is paper gain. I’d take that statement from Prem with a pinch of salt. Apart from anything else you don’t know how long it was meant to stand for. Did he mean they didn’t need funding for a few months? Years? Ever? I mean, looking at FarmersEdge it seems clear that they needed cash last year and need more now. Plus, you don’t know what he meant by “need”. “Don’t need more cash to survive” is very different from “can take full advantage of their opportunities without any more cash”. Finally, for years Prem has been making statements about how well capitalised the insurance subs are and how they could grow premiums/surplus in a hard market. Come the hard market, and we find they have to pump capital into the subs. I fundamentally trust the man but it’s hard to square that circle. I’m fairly confident Fairfax was a cash constrained home and at least some of these non-insurance subs may find they do better on the outside. So I absolutely agree with #4.