petec

Prem can change views - he proved that when Trump was elected. Very few people saw the Covid impact coming - my view frankly is Ackman got lucky, but I give him full credit for finding a way (unlike Prem) to hedge with little downside. Fairfax is not about to report a big gain magicked out of thin air. What is horrible for Prem, if he claims to be a value investor, is that he failed to pick up high quality value in 2010 and instead hedged a cheap market; and then turned on a dime when Trump was elected and decided that the economy was going to take off, but felt quality was too expensive and chose to express that view by investing in cyclical value which crapped out the minute a cloud appeared. It is a staggeringly poor series of decisions.

Took me a while to find the pref data but thanks. I trust Brian Bradstreet's instincts. Slightly worrying to see Barnard selling $1m of common. Perhaps he was buying a house. But the one thing that has kept me in FFH all these years is Prem's incredible ability to keep (what I judge to be) superb people in the business. There has to be a point where someone like Barnard, who has unquestionably delivered, gets p1ssed off that Prem isn't upholding his side of the bargain.

They don’t, but I didn’t know that - do you have a link?

Agreed. Sob.

FWIW, the European Commission cleared the merger on Feb 26 (simplified merger review procedure). Since the "deadline" (end of Q1 2020) outlined at the time the sale of 40% of RiverstoneUK has now been missed I think we can fairly assume the sale to OMERS is in trouble? Or at the very least being repriced? Fairfax needs to communicate on this one...... Furthermore, their equity holdings are getting crushed including but not limited to: -Blackberry -Eurobank -Resolute Forest Products -Stelco -Recipe -Kennedy Wilson In my view and I fully expect that others will disagree with this....a lifetime of work is being wiped out. Fairfax does not have adequate liquidity. The long term does not matter when you can't pay your current bills. Prem said he learned his lessons. Obviously not. The tide is out and....well we know what that means.....ugly indeed.... I agree that a lot of value has been destroyed. But you're going to have to convince me they can't pay current bills. Depends how you define it (not being able to pay their current bills) but consider the following: -They are already drawing on the bank line and that's before the current corona situation arose -Can't supply the capital needed to support the hard market in their insurance subs -Private investments must be starved for cash and looking to Fairfax to stay alive? -Selling off portions of long held assets (RiverstoneUK) to raise cash and now that's perhaps in jeopardy -Unknown funding sources to complete the minority interests in various insurance subs including Eurolife and Allied World -Capital markets don't offer a solution (but it would not surprise me if Prem dilutes his shareholders yet again even at these levels) Prem and the team go to Omaha every year. Buffett laid out the case for growing over time yet Prem and the team did not listen or thought they were smarter. At best Fairfa's share price flatlines for the next long while at its new share price level. Just like it fluctuated between $600 and $700 CAD for the last 10 years. Folks the market got this one right. One for the efficient market believers! In order: - True, although they also have $1.1bn in cash at the holdco level. - Agree with this, although 2 of the subs have material space to grow with current capital. - Possible, but who knows. - Maybe Riverstone was purely done to raise cash. But maybe not. Part of the thesis is that there are lots of runoff portfolios for sale coming out of Lloyds. It may be that this is a one off, capital-intensive opportunity that Fairfax didn't want to fund all on its own. - The funding for Eurolife will come from Eurolife. That's known. Brit is $100m. Allied is bigger but they have 4 years. - Likely agree. In summary: 1) I totally agree that it depends on how you define "current bills". Fairfax is not going to go bust. But nor is it going to grow the way it could have done. 2) I disagree on the share price staying flat. I don't believe Covid-19 permanently impairs value in several of the big holdings like Eurobank and Atlas. Presumably Covid-19 is temporary, and when it proves to be so, these stocks will come back. Atlas may not regain its recent heights for a while. Eurobank could surpass them, as I wrote on the Fairfax stock positions thread recently.

FWIW, the European Commission cleared the merger on Feb 26 (simplified merger review procedure). Since the "deadline" (end of Q1 2020) outlined at the time the sale of 40% of RiverstoneUK has now been missed I think we can fairly assume the sale to OMERS is in trouble? Or at the very least being repriced? Fairfax needs to communicate on this one...... Furthermore, their equity holdings are getting crushed including but not limited to: -Blackberry -Eurobank -Resolute Forest Products -Stelco -Recipe -Kennedy Wilson In my view and I fully expect that others will disagree with this....a lifetime of work is being wiped out. Fairfax does not have adequate liquidity. The long term does not matter when you can't pay your current bills. Prem said he learned his lessons. Obviously not. The tide is out and....well we know what that means.....ugly indeed.... I agree that a lot of value has been destroyed. But you're going to have to convince me they can't pay current bills.

BAM? Sailed through the crisis and was able to grow as a result of it.

"We have made some assumptions under a stress test environment": 1. repay the convert. 2. no refinancing. 3. no layoffs. 4. revenue down "20%, 30%, 50%". Result: they're comfortable for a couple of years except in "extreme scenarios", whatever that means.

Just going through the call. Eurolife buyout will probably be done by Eurolife, not holdco. Brit will be about $100m. Allied is bigger but given capital at Allied I wonder if Allied could also buy itself. I wonder if this is a piece of the holdco liquidity puzzle that we are missing. doesn't answer how they fund premium growth though.

The Eurobank 4q19 and 2020-22 business update makes for interesting reading. It is pre-COVID19 which will screw over 2020 but management does not expect it to change the long term outlook much. Bottom line is that the NPL restructuring is complete (only took a decade!) and growth is now the focus, partly in loans (loan/deposit ratio only 83% and deposits have been growing) but especially in fees and investment income. They project 12c of EPS in 2020 and 16c in 2022. They have TBVPS at E1.44 in 2020 going to E1.70 in 2022. Adjust that however you want for COVID-19. Share price currently E0.41. Greece is emerging from a depression with a pro-business government and Eurobank is heading towards making a 10% return on tangible equity. It is not unreasonable to think that it might trade on 10x earnings/1x TBVPS in a few years. If reaching E1.70 of TBVPS is delayed by a year by COVID-19, Fairfax's stake could be worth E2bn in 2023. https://www.eurobankholdings.gr/-/media/holding/omilos/enimerosi-ependuton/enimerosi-metoxon-eurobank/oikonomika-apotelesmata-part-01/2020/fy-2019/4q2019-results-presentation.pdf

It does rather depend what you want it for but my Surface Pro has been going for 4 years and I love it.

“I told you I was ill.” Spike Milligan.

several of the companies they hold are not making money, at least in a significant amount. I think what they need is for the businesses to become profitable, or at least for investors to believe that will happen. I exited some months ago because I simply could not see that moment coming. And I like the way they do things, the common sense they bring into the companies they invest in... I agree with this and also exited. I think the gems are Nova Pioneer, UBN, and ABC Botswana. There may also be gems in AFGRI but the overall business has not performed. I suspect there are some very good bits of CIG too. But both CIG and AFGRI need the economy to work, especially in SA, and that’s a long way away sadly. In the end I decided the good bits were too small to move the needle. But that was at more than twice the current price. I suspect there are good returns to be had from here. But I suspect that’s also true of a lot of things. I recently re-bought FIH. That has more visibility for me.

Good find re Zenith. Re business interruption insurance - it makes a lot of sense to exclude pandemics, because you’d want to exclude anything that had the potential to shut all businesses at once. Same applies to travel insurance.

I’ve been wondering tab out this but not had time to research.

Maybe not, but equally it will go up a lot if performance improves because *any* buying will move the stock. If you look at it as a multi-year hold, it's less of an issue. In 3 years either the fund is successful, which means it will have a much higher market cap and likely more liquidity, or it will keep languishing and possibly even get liquidated. Petec.....respectively, the issue is not whether the stock price goes up or not on good performance. The lack of liquidity of the stock makes it impossible for all but he smallest investor to take a position in the stock and have any hope at all of exiting when they need or want to. The traded volume yesterday was 3509 shares (closing share price is $3.01). So sure a very small retail investor can accumulate a couple of thousand shares at the current price and then trade out when/if the price recovers to...lets say even the IPO price of $10. But honestly, is this really what we are trying to do here? Fairfax Africa shares cannot be accumulated in any meaningful amount without dramatically moving up the share price. Also, once accumulated, a significant number of shares cannot be disposed of without greatly influencing the share price downward. In my view, why bother. There are simply too many other opportunities out there where similar profit opportunities exist without the constraint of trading liquidity to worry about. Furthermore, management did say they would address this issue (lack of liquidity for the shares) and have not done so. Perhaps this alone is reason enough to avoid these shares. If you look at it as a multi-year hold, it's less of an issue. In 3 years either the fund is successful, which means it will have a much higher market cap and likely more liquidity, or it will keep languishing and possibly even get liquidated. It seems to me like you are looking at it as some levered ETF that you want to get out of once it pops, and in that case, you are right, it's not going to do a good job at that. Exactly. Separately, I’m sceptical management can really do much about liquidity.

Maybe not, but equally it will go up a lot if performance improves because *any* buying will move the stock.

Honestly I think at this price the “risk” is that something goes right.

Is there any way around minimum order sizes for bond trades on Interactive Brokers? E.g. it is showing me Canacol 7.25% 2025s with a minimum order size of $200k which is rather more than I want to commit... I am fairly new to Interactive and still learning the system, hence the q.

SPG JEF FIH - but all small.

In the economy or in stocks? If the economy, why not? The political response is interesting. I think the UK (for once) is leading the world on the fiscal response to this thing. If the US does not get this right the impact at ground level *could* look like the GD. But only briefly. Eventually the pressure on pols will be huge.

I do think it’s very odd, the stocks they chose to highlight in the letter. Ok they’re not optically cheap, but they’ve largely got spectacular business models and growth. There was likely a bubble in some names, and particularly among the unprofitable story stocks, but not the ones they named.

There are two things that have happened over the past few weeks. The spreads have gapped out, but the risk-free has fallen like a stone: https://www.bloomberg.com/markets/rates-bonds/government-bonds/us Short-term governments have dropped from ~2.4% interest in 2019 to ~0.4% interest today, and it has occurred across all short maturities from 3 months to 2 years. Any governments that need to be rolled in 2020 will face a drastically lower rate. FFH has $8B of bonds that mature during 2020 and probably about $10b or $11b of cash equivalents. Assuming that is 75% governments, that might be a total of about $13B in governments that will take a 2% interest rate haircut during 2020, which might reduce interest income by ~$260m for the government portion of the portfolio. Assuming that there is $5B of corporates that will be rolled, you'd need to gain an extra 500 bps on the corporates you roll to just offset the lower interest rates on the governments. The math is not particularly nice for FFH on this front. SJ No that’s fair. I guess my base case is that when we come out of this the reverse happens: short govt yields rise and spreads compress. That means the short govts don’t have to roll onto much lower rates but that anything that’s been redeployed into corporates earns a higher rate. I think that’s reasonably probable, but it’s also a best case.

Quite honestly, what's happened to their equities YTD is what gives me the confidence that they can do 3-4% on their investments. A simple 50% reversion back to what they were likely provides that. Given the blow out in spreads, the drop in equities, and the drop in FFH, it's the first time it's been attractive to me with a clear path to 15% annualized since my lapse in judgement in 2018 thinking interest rates might actually be sustainably rising. The drop in equities and the rebound won’t help with their 7% investment return goal. The rebound would just undo what the drop did. Unless I am misunderstanding your point Agreed, and I won’t be selling here. But 3-4% positive might be quite an ask given what their equities have done ytd. My apologies if it wasn't clear. I sold out of FFH when I realized that my 3-6 month flop on rising yields being sustainable was wrong and went back into the "there's no way in hell FFH gets 15% ROE @ these yields and stock prices" camp So for me, buying back 25% of my original position today @ $290 USD means I actually have a decent chance at 15%/yr returns just from the reversion in current investments back to something closer to where they were. Agreed. My point was about book value for 2020 given where the equities were on 1/1, not where they are now.

1) I don't think you get #1 because FFH only has $26b of bonds and bills, and $6b of common and preferreds, at Dec 31 prices. As a P&C operator, they need to keep the lion's share of the $26b in governments, preferably short term, which currently yield less than 0.5%. The dollar yield on the equity portfolio won't change, but in percentage terms it will go up (ie, if no stocks are sold, they get the same divvies as last year). So, the math is like one of those tricky algebra problems from when we were 12 years old, but I don't think you quite get to $1B. That $26B of bonds and bills already includes $18b of governments and $8b of corporates, so how much further can that be pushed? Whatever governments you roll-over will almost certainly be rolled into considerably lower interest rates. Whatever corporates get rolled will get rolled into considerably higher interest rates. And then how many billions can you shift from governments to corporate to exploit the spread? Maybe a couple billion, max? Probably less than a couple billion. That was one of the comments I made about the AR, because it looked as if they might have already begun reaching for yield when they were not really paid for the risk. By my estimate, they have about $18B of bonds and notes in the one year or less category. Irrespective of how you work through the algebra, I'm not sure that you get $1B in dividends and interest. But it's a good stretch-goal! 2) Let's hope there is a V-shaped recovery in the equities, but that's mostly outside of FFH's control. I'd be happy to take a bit of luck, but the equity recovery or lack of recovery probably won't be indicative of good management or poor management on FFH's part. 3) Above and beyond buying Brit, Eurolife, or Allied minority stakes, I'd like to see FFH try to negotiate a better deal. They are not obliged to make those purchases, and perhaps the vendor will want to see some cash because equity markets have been horrific. This might be an opportunity to say, "Look, equities have flopped by 30%, can we talk about the buyout price? If I pile more of FFH's money into Brit/Eurolife and I don't get a discount, my shareholders will be apoplectic that I didn't use the cash to buy discounted AMEX or Visa shares instead...." No guarantee of success, but mgt should view this as an opportunity. 4) Curious about how you view Covid's impact on the CRs. Could be bad for Zenith, and perhaps there will be some business interruption insurance issues? But do you see this as a "cat" for FFH's subs? Frankly, I haven't been preoccupied by the possibility of claims, but maybe I haven't been thinking about this enough. 5) Yes, let's hope that the book can be grown significantly and profitably. Why do you think the growth in the book of business must wait until 2021? Are you of the view that there will be people who will non-renew their insurance during 2020 due to cash constraints? SJ 1) I haven’t thought it through your way, because I don’t know the regulatory rules, but they’re at $800m ish now and said that $1bn was a reachable target before spreads gapped out, so I can only assume it’s more reachable now. 2) agree luck not control. 3) I find it staggeringly improbable that they will try to renegotiate with OMERS, especially since it would likely put the RiverStone UK deal at risk, but you might be right. I think they will just delay. 4) honestly I’m not sure. 5) recessions generally mean less insurance sold. Cash crises generally mean less insurance sold. My (very high level) assumption is that COVID-19 puts the brakes on premium growth for a few months (not necessarily a bad thing for FFH given capital constraint) but makes for an even harder market in 2021 due to lower bond yields, equity losses, higher claims etc. The best I can see for FFH right now is they somehow have the capital to grow at low risk in 2021.