petec

I referred to them as "shit-holes" last year, so I didn't want to be repetitive. :D Ha ha ok you win ;) Btw my view on the international subs is that they’re options. If one turns into anything like another First Capital or ICICI Lombard we’re doing ok. If I had to bet I’d say it will be Brazil - the operation seems to be on track and it’s in a top ten world economy on the verge of liftoff. Eurolife is valuable but I don’t know how much it can grow. And Digit is shaping up to be a home run although since they don’t consolidate it I assume it’s not one of the companies you’re talking about. (Even if it isn’t, it’s important because many of the lessons learned via Digit may be applicable elsewhere.) It’s also worth remembering that insurance is hugely underpenetrated in many of these countries and multiples of book in the private markets are high.

And a very useful stream of consciousness it is, too. I can’t read the AR properly until next week so I can’t comment on much, but I would politely suggest that you educate yourself a bit before referring to Chile and Colombia as banana republics. I spend a lot of time in both countries and am currently in Chile. They have their faults but neither is a banana republic. Both grow consistently, have fiscal deficit rules unseen in the developed world, have reasonably low levels of debt, are functioning democracies with strengthening institutions, and have independent central banks that don’t resort to panic rate cuts every time the stock market falls 5% or the president sends a tweet. Sorry for the rant ;)

I read it more positively. UBN is going actively well, and ATMA is starting to receive dividends from UBN and ABCBotswana. CIG is in deep turnaround but got better in 2h, especially 4q, and liberalization of electricity in SA might be a boost. I’m not invested but it’s looking deeply undervalued. How much of the ATMA stake is covered by UBN now? And Nova Pioneer is going to be a superb long term holding.

Link? annual letter just published " Fairfax India intends to complete an IPO of AIIHL, targeted to value 100% of BIAL at $3.0 billion (a targeted valuation of $1.3 billion for 100% of AIIHL). A ‘‘ratchet’’ mechanism has been agreed with the investor whereby if the IPO is completed at a valuation of AIIHL below $1.3 billion, the investor will receive incremental shares of AIIHL to compensate for the difference between that actual valuation and $1.3 billion. " https://s1.q4cdn.com/293822657/files/doc_financials/annual_reports/2019/Website-Fairfax-India-2019-Shareholders-Letter.pdf do not know what to make of the ratchet clause though, I have seen it in some VC deals before. Thanks!

Link?

All very fair. Only thing I’d add is that they do have capacity, it’s just in the wrong place, at Odyssey, which is not seeing the same hardening (yet). That could change the outlook. What gives you the feeling that reserve releases will be reversed, apart from asbestos?

Cigarbutt, would you put Fairfax in the category of companies that can meaningfully grow market share when the time comes?

I’ve watched FFH for 15 years now and I sincerely have absolutely no sodding idea. Sorry.

V smart!

That might be true, but it is better to withhold an opinion until we understand who the buyer is and what sort of incentives may have come into play. I raised an eyebrow about this transaction because it seems strange that a 5% stake of a long-term asset would be sold. So, why did Fairfax sell it? Did they need to drop their stake to 49% to keep the nationalists at bay? Were they desperate for an infusion of $134m of cash? Did they find a partner with specific expertise that they wanted to bring aboard? Was there some other strategic motivation that was not articulated in the presser? One potential motivation that needs to be kept in the back of our head is that this minor transaction gives Fairfax the latitude to re-value that asset on its books. Fairfax India will book a gain of $500m based on a transaction of only $134m. And then what happens? Well, the Fairfax India's booked assets will suddenly be pumped up, which gives FFH a nice little boost to its annual management fee as well as the likelihood of a 20% performance fee in 2020. So, how much wealth will be extracted from Fairfax India unit holders from that little transaction? I'm guessing that the buyer's price for the 5% slice of that airport will be somewhat similar to the amount of money that FFH extracts from unit-holders. Maybe Prem will expand on this transaction in his annual letter and the annual report to provide more disclosure? For now, I am wary, but keeping an open mind. SJ https://www.vccircle.com/north-american-pension-fund-backs-fairfax-s-india-airport-investment-plan OMERS infrastrucure - strategic investor , this was probably done to get outside validation of big mark up in book value Okay, that makes me yet a little more uncomfortable. I had been holding out hope that it was a completely new player to the FFH world. FFH sold a chunk of the airport at roughly the same time as they sold a chunk of Riverstone runoff. I just hope to hell that there was no quid pro quo on those two deals and that the BIAL transaction was done at true fair market value rather than an inflated value designed to get a favourable mark on the value of the assets. There really should be no question about this, but unfortunately on more than one occasion, Prem has been too cute by half. SJ The quid pro quo being a sweet deal on Riverstone? Can’t see why that benefits FFH. Okay, so this is all hypothetical and nothing more. We have no knowledge that would support the existence of any quid pro quo between the two transactions. We have no actual knowledge of any wrong-doing or any other nefarious behaviour. But, the math is pretty basic and that's what creates the risk: The primary impact is that for every dollar that the value of that 5% BIAL deal is overestimated, the mark for Fairfax India goes up by $10. The secondary impact is that the annual management fee (1.5%) to FFH goes up by $0.15 based on the $10 mark and, possibly the performance bonus (20% of everything over the hurdle) could go up by $2 based on the $10 mark. So if you have the same buyer for two deals being conducted more or less simultaneously, and if you could convince the buyer to over-value one asset and under-value the other, you could create value for yourself. There's an argument that the buyer would only care about the combined value of the two cheques that he must write and wouldn't much care about the specific amounts on each cheque, so maybe it wouldn't be so hard to twist his arm. A portion of the $1 overvaluation would be attributable to minority Fairfax India holders, but that would be swamped by the secondary impact. So yes, I am a little uncomfortable with the idea of there being two transactions made to the same buyer at roughly the same time. If it true that the buyers are the same for both transactions, I wonder why there hasn't been better disclosure. And once again, to my knowledge, there is no evidence that anything like this has actually occurred. SJ Stubble, i think you are going down the rabbit hole on this one. Fairfax has a long, mutually beneficial history of partnering with OMERS on many large deals. It also looks to be doing more deals with Mitsui Sumitomo. Both of these two organizations look to be quality, well run organizations. Neither organization is going to do anything that is not in its own interests (including maximizing returns for their owners). 1.) Yes, Fairfax is in the process of completing a deal to sell 40% of Riverstone UK to OMERS for $600 million. My guess is if someone on this investment board proposed this exact deal (before it was announced) they would have been laughed at; few would have said that the Riverstone UK runoff business was worth $1.5 billion. The cash will likely be used by Fairfax to grow the business at the insurance subs that need $; we are in a hard market that may only last a year or two. Some of the cash may also be used to buy out minority partners (sounds like the timing is contractual). The deal will result in an increase in BV for Fairfax of $10/share. It sounds like the new Riverstone UK will have better access to capital needed to be able to grow their business more aggressively moving forward (likely due to OMERS involvement). This looks to me to be a very good deal for Fairfax and also a very good deal for OMERS. Nothing nefarious. 2.) Yes, Fairfax India is also in the process of creating a new subsidiary (Anchorage) to invest in the airport sector in India. This makes alot of sense as infrastructure investments are big money and it is good to have partners with deep pockets. Their investments in BIAL was $650 million, which is a massive number and not repeatable for Fairfax on their own. If they see other airport opportunities they will need to spend big money and will likely need partners to come up with the high price tag. And it sounds like there might be some big opportunities in India (see rohitc99’s comments). They have sold an 11.5% stake in Anchorage to someone for $134 million. This transaction will decrease Fairfax India’s ownership of BIAL from 54% to 49%. These is lots we do not know and when Fairfax India releases its annual report (March 6? Same as Fairfax?) i am sure we will know more. Is the new purchaser OMERS? I hope so as that would be a huge positive as they are a known entity and the perfect partner on this sort of transaction: a quality company with a long term focus (just like Fairfax) and they have deep pockets (access to capital). And it looks like OMERS is looking to grow their investments in Asia and they want to grow their exposure to infrastructure projects (in a low interest rate world with stock markets shrinking in size more money is moving to private markets). With OMERS as the partner i see nice growth opportunities with Anchorage, especially if they are able to bring another partner or two over time. This will be a big win for Fairfax India shareholders as they will slowly be able to monetize BIAL at a very good price and also grow in a new direction. Part of all the lack of communication currently may have to do with getting all the ducks lined up. Selling a chunk of BIAL may not be simple... current owners might have first right of refusal. Setting up Anchorage may require local government approval. I have no idea; but this is India so my guess is they have some hoops to jump through. The fact a buyer was not named in the press release (or would not be confirmed by Prem on the conference call) does not suggest anything untoward to me. We will know more when they can tell us. Regarding the price, perhaps the high price paid for 11.5% of Anchorage reflects the value the purchaser sees in not only the BIAL asset (which is all everyone is focussed on right now) but also the value of partnering with Fairfax in India and the value that will be created in the coming decade. Fairfax has a long successful history in India: ICICI Lombard, IIFL, Thomas Cook, Quess and more recently Digit and BIAL (just off the top of my head). Fairfax is very plugged in to India (understand the region and have the contacts) and it would be very rational for someone like OMERS to want to partner with them there (especially if they are not already well established in the region). It is also very encouraging to see the speed with which Fairfax is moving to develop BIAL; This shows a deep understanding of how to do business in India and also having the contacts to fill important positions with quality people. This will be a major drawing card for Anchorage as it expands. The sale of 11.5% of Anchorage might be an example of Fairfax actually earning its high fee from Fairfax India. If BIAL is worth anything close to $2.6 billion then Fairfax India shareholders are going to make out like bandits (and it looks like it just might be :-) I think you're right, except about getting ducks in a row. If that's the reason then either a) they should have delayed the release or b) they should have explained the situation. One other thing both deals have in common is they surface value in FFH. FFH have been saying for years that the sheraes are undervalued. There are two ways to fix that: persuade the market to apply a higher P/BV or do deals that surface true BV. We have seen a spate of deals recently that do the latter and I think it is a deliberate strategy. As an aside, I think often wonder why FFH and BAM don't partner up more often and India is a good example. FFH have great expertise in India and in financial services and BAM in infrastructure and businesses related to it. If the companies attacked the country together, they could broaden their opportunity set, reduce competition, and raise a ton of OPM to earn fees on.

SJ I broadly agree with your take on this discussion, and although I don’t think I care about it as much as you do yours always good at raising things I haven’t thought of/through. That said I wouldn’t conflate disclosure with integrity. Fairfax disclosure is often weaker than I’d like. That in and of itself doesn’t call their integrity into question.

We now have an idea of what Riverstone UK is worth. Does anyone have a handle on what the rest of Riverstone is worth? I don’t recall seeing disclosure that would allow one to estimate that.

More persuasively - given SJ clearly doesn’t trust FFH to start with - it would require OMERS to risk their reputation, which is possible but unlikely.

Totally agree this is possible. Don’t think it likely.

That might be true, but it is better to withhold an opinion until we understand who the buyer is and what sort of incentives may have come into play. I raised an eyebrow about this transaction because it seems strange that a 5% stake of a long-term asset would be sold. So, why did Fairfax sell it? Did they need to drop their stake to 49% to keep the nationalists at bay? Were they desperate for an infusion of $134m of cash? Did they find a partner with specific expertise that they wanted to bring aboard? Was there some other strategic motivation that was not articulated in the presser? One potential motivation that needs to be kept in the back of our head is that this minor transaction gives Fairfax the latitude to re-value that asset on its books. Fairfax India will book a gain of $500m based on a transaction of only $134m. And then what happens? Well, the Fairfax India's booked assets will suddenly be pumped up, which gives FFH a nice little boost to its annual management fee as well as the likelihood of a 20% performance fee in 2020. So, how much wealth will be extracted from Fairfax India unit holders from that little transaction? I'm guessing that the buyer's price for the 5% slice of that airport will be somewhat similar to the amount of money that FFH extracts from unit-holders. Maybe Prem will expand on this transaction in his annual letter and the annual report to provide more disclosure? For now, I am wary, but keeping an open mind. SJ https://www.vccircle.com/north-american-pension-fund-backs-fairfax-s-india-airport-investment-plan OMERS infrastrucure - strategic investor , this was probably done to get outside validation of big mark up in book value Okay, that makes me yet a little more uncomfortable. I had been holding out hope that it was a completely new player to the FFH world. FFH sold a chunk of the airport at roughly the same time as they sold a chunk of Riverstone runoff. I just hope to hell that there was no quid pro quo on those two deals and that the BIAL transaction was done at true fair market value rather than an inflated value designed to get a favourable mark on the value of the assets. There really should be no question about this, but unfortunately on more than one occasion, Prem has been too cute by half. SJ The quid pro quo being a sweet deal on Riverstone? Can’t see why that benefits FFH.

That might be true, but it is better to withhold an opinion until we understand who the buyer is and what sort of incentives may have come into play. I raised an eyebrow about this transaction because it seems strange that a 5% stake of a long-term asset would be sold. So, why did Fairfax sell it? Did they need to drop their stake to 49% to keep the nationalists at bay? Were they desperate for an infusion of $134m of cash? Did they find a partner with specific expertise that they wanted to bring aboard? Was there some other strategic motivation that was not articulated in the presser? One potential motivation that needs to be kept in the back of our head is that this minor transaction gives Fairfax the latitude to re-value that asset on its books. Fairfax India will book a gain of $500m based on a transaction of only $134m. And then what happens? Well, the Fairfax India's booked assets will suddenly be pumped up, which gives FFH a nice little boost to its annual management fee as well as the likelihood of a 20% performance fee in 2020. So, how much wealth will be extracted from Fairfax India unit holders from that little transaction? I'm guessing that the buyer's price for the 5% slice of that airport will be somewhat similar to the amount of money that FFH extracts from unit-holders. Maybe Prem will expand on this transaction in his annual letter and the annual report to provide more disclosure? For now, I am wary, but keeping an open mind. SJ https://www.vccircle.com/north-american-pension-fund-backs-fairfax-s-india-airport-investment-plan OMERS infrastrucure - strategic investor , this was probably done to get outside validation of big mark up in book value I’m not a subscriber so can’t read the article. How well-sourced is it? Only asking because Fairfax deliberately aren’t disclosing the buyer and I can’t imagine why they wouldn’t if it was OMERS.

That might be true, but it is better to withhold an opinion until we understand who the buyer is and what sort of incentives may have come into play. I raised an eyebrow about this transaction because it seems strange that a 5% stake of a long-term asset would be sold. So, why did Fairfax sell it? Did they need to drop their stake to 49% to keep the nationalists at bay? Were they desperate for an infusion of $134m of cash? Did they find a partner with specific expertise that they wanted to bring aboard? Was there some other strategic motivation that was not articulated in the presser? One potential motivation that needs to be kept in the back of our head is that this minor transaction gives Fairfax the latitude to re-value that asset on its books. Fairfax India will book a gain of $500m based on a transaction of only $134m. And then what happens? Well, the Fairfax India's booked assets will suddenly be pumped up, which gives FFH a nice little boost to its annual management fee as well as the likelihood of a 20% performance fee in 2020. So, how much wealth will be extracted from Fairfax India unit holders from that little transaction? I'm guessing that the buyer's price for the 5% slice of that airport will be somewhat similar to the amount of money that FFH extracts from unit-holders. Maybe Prem will expand on this transaction in his annual letter and the annual report to provide more disclosure? For now, I am wary, but keeping an open mind. SJ Agreed - I’d be happier not having to take the validation at face value.

I think the valuation of the sale of a noncontrol stake to a third party validates even the most expensive of the FFH transactions.

Where did you get the BIAL AR and is there a more recent one? Great find!

Agreed. I did not mean to suggest they were in trouble. I do, however, find it annoying that they spent years trumpeting the excess capital in the insurance subs and how they could as much as double premiums in a hard market - and now that one is here, we find they can’t, without injecting capital.

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

Petec, i heard Brookfield as well when i was listening to the conference call. search the release and there was nothing there. putting my conspiracy theorist hat on: i believe Prem might have blurted that out, because he was thinking about it, and he was thinking about it because something is in the works with Brookfield that is not public yet. i figured that the Airport unknown buyer in India might have been a BAM related/affiliated entity. Makes sense given all the talks that Bruce has been doing about India's opportunity today given the current financial crisis. But then again he was not talking about the Airport he was talking about Seaspan when he mentioned Brookfield. Not impossible, but intend to avoid conspiracy theories. I doubt Brookfield were the BIAL buyer because they usually buy control and trumpet their deals. I suspect Prem just misspoke. He’s not the clearest of communicators.

Cool - we are on the same page.

That could very well be the case. They would definitely have a gain from exercising the SSW warrants, but it doesn't much change the economic reality (outside of FFH having to add some cash to the existing investment). Keg/Recipe wasn't the correct transaction for me to reference. In 2018 the "accounting" transactions were Grivalia being consolidated, and Thomas Cook/Quess triggering a bunch of paper gains. In 2019, it was Quess triggering a bunch of paper losses and Eurolife/Grivalia triggering a bunch of paper gains. For the past few years, most of us have cooked up an adjusted BV to get an idea of the significance of some of the excess in value over book. But, really it might be time to create an adjusted net income to strip out the impact of some of the one-time transactions to better portray ongoing economic performance. SJ Ah I see what you’re getting at. Personally I care more about BV than earnings so I’m happy with the disclosure they’ve often provided on what BV would be if they marked to market. Agreed that the BV metric is the more important metric for valuing the insurance end of the operations, and it's been important to cook up an adjusted-BV estimate for the past few years to better reflect reality. But, it's also important to try to measure operational performance against any number of metrics, including EPS, ROE, CR and investment return. That's where some of these non-cash items muddy the water. This year, the dollars are small, with Eurobank/Grivalia being $6 or $7 per share...but the Thomas Cook/Quess number from 2018 was absolutely enormous, and the Grivalia consolidation number from 2018 was a smaller number added to it. A large head-line EPS number is nice to see and it definitely feels good, but... SJ I’m not against the idea. Although it does make me smile - the BAM thread is full of suggestions that “management metrics” like that is a red flag for fraud. Sometimes feels like management can’t win ;) Also - I initially read your comment about low quality earnings as a criticism of FFH management for massaging the numbers. But on reflection maybe you’re just saying that accounting treatment doesn’t always reflect reality. Is that right?

"Net gains on long equity exposures of $1,631.1 million in 2019 was primarily comprised of unrealized appreciation of preferred shares of Go Digit Infoworks ($350.9 million), the sale of the company's remaining interest in ICICI Lombard ($240.0 million), a non-cash gain on the merger of Grivalia Properties into Eurobank ($171.3 million) and significant unrealized appreciation of common stocks." Sorry - I doing a very poor job of expressing myself (possibly because I’m also trying to feed a 3 month old!). What I meant to say was: 1) I couldn’t remember whether they booked a gain on the Eurobank/Grivalia deal, but 2) if they did I’m pretty sure it did reflect economic reality in the sense that it moved book value closer to the mark-to-market book value. Until the deal Grivalia was consolidated so the rise in the share price since acquisition wasn’t reflected in FFH BV. I may be remembering wrong - don’t have my notes to hand.