petec
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Posts posted by petec
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While we’re at it I don’t recall Grivalia/Eurobank generating a paper gain either, and it’s clearly been value-enhancing because it was effectively a capital raise for the bank.
"Net gains on long equity exposures of $1,631.1 million in 2019 was primarily comprised of unrealized appreciation of preferred shares of Go Digit Infoworks ($350.9 million), the sale of the company's remaining interest in ICICI Lombard ($240.0 million), a non-cash gain on the merger of Grivalia Properties into Eurobank ($171.3 million) and significant unrealized appreciation of common stocks."
Sorry - I doing a very poor job of expressing myself (possibly because I’m also trying to feed a 3 month old!).
What I meant to say was:
1) I couldn’t remember whether they booked a gain on the Eurobank/Grivalia deal, but
2) if they did I’m pretty sure it did reflect economic reality in the sense that it moved book value closer to the mark-to-market book value. Until the deal Grivalia was consolidated so the rise in the share price since acquisition wasn’t reflected in FFH BV.
I may be remembering wrong - don’t have my notes to hand.
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There wasn’t a gain on APR so that’s not it and I don’t think the transaction will contribute earnings, high quality or low.
I suspect what they’re referring to is gains on the exercise of SSW warrants.
That could very well be the case. They would definitely have a gain from exercising the SSW warrants, but it doesn't much change the economic reality (outside of FFH having to add some cash to the existing investment).
Keg/Recipe wasn't the correct transaction for me to reference. In 2018 the "accounting" transactions were Grivalia being consolidated, and Thomas Cook/Quess triggering a bunch of paper gains. In 2019, it was Quess triggering a bunch of paper losses and Eurolife/Grivalia triggering a bunch of paper gains.
For the past few years, most of us have cooked up an adjusted BV to get an idea of the significance of some of the excess in value over book. But, really it might be time to create an adjusted net income to strip out the impact of some of the one-time transactions to better portray ongoing economic performance.
SJ
Ah I see what you’re getting at.
Personally I care more about BV than earnings so I’m happy with the disclosure they’ve often provided on what BV would be if they marked to market.
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While we’re at it I don’t recall Grivalia/Eurobank generating a paper gain either, and it’s clearly been value-enhancing because it was effectively a capital raise for the bank.
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There wasn’t a gain on APR so that’s not it and I don’t think the transaction will contribute earnings, high quality or low.
I suspect what they’re referring to is gains on the exercise of SSW warrants.
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Just started reading the transcript. “Realised gains in Seaspan and Brookfield” - sounds like they’ve sold some SSW and owner BAM? Unless there’s been a transcription error...
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Re 2: I think we know for a fact that some subs are capacity constrained, and I don’t know how easy it is to move capital between them. Does anyone?
Many ways to do it, including:
1) Use the dividend capacity already approved by regulators to send a divvy from the capital-rich subs to the holdco and then it's no trouble at all to shift if from the holdco to the capital-poor sub;
2) If the capital poor sub operates in the same jurisdiction as a capital-rich sub, merge them;
3) Float another holdco bond issue for $500m, and sprinkle the proceeds into the subs that require more capacity;
Maybe it's just a one-time freaky thing in Q4 that they were laying off premium on the reinsurers? But, that's not exactly how I imagined the company attacking a hardening market.
SJ
That's a concern I had about the capital flexibility to grow in a hard market.
When you look at yr-end 2018 regulatory dividend capacity at the (re)insurance subs, only Allied World (685.6M) and OdysseyRe (329.7M) had significant capacity. Crum and Forsters had some dividend capacity but up to Q3, after an early upstream dividend, overall, net capital has flowed to the sub to 'support' growth. Up to Q3, OdysseyRe has paid 50M in dividends to the parent and Allied World has paid 126.4M to minority interests. I'm not sure how easy it would be for the parent to obtain dividends from Allied without some kind of permission or sharing to the 32.2% minority interest. If this hard market continues, in order to participate, FFH needs profitability from operations and investments which renders the premium growth (and its retention) conditional.
Even if their equity investments are not likely to be correlated with markets, the level of equity investments to total capital is high and unusual in its composition and that aspect has regulatory capital implications.
I haven't dug into the numbers in any depth yet to know how true this is -
but it would be a massive slap in the face if all of these years we were told the company needed a fortress balance, that having tons of cash on hand was necessary, that hedging was necessary, all to be able to support subs in a hard market...only to get to the hard market and find out that they still can't do so?
They have capital, but as discussed by others it’s at Odyssey and reinsurance isn’t hardening as fast as primary. I do find it annoying that after years of implying that all subs have the capital to grow, we now discover they don’t.
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Petec,
I don’t agree. Rivett has done a great job as a caretaker and lawyer. He is not in the league of Prem
And others at Markel and Berkshire...to take the stock where it should go. I called these earnings last year and a record year...no one cares. SNC Lavalin was a tap in in their backyard...SNC did not need the money but it was the kind of transaction that Buffett like operators make...Fairfax has been asleep. Blackberry is so undervalued it is attributable to Fairfax passive (do nothing) approach....hurting performance instead of helping. It is all great and everything to have a good reputation but as Buffett said about David Winters when he challenged Coke’s board....what has he done for his shareholders?
I am frustrated to say the least....if Prem is done give me a leader. The bones are there....
Yes - fair. I’m not saying Rivett was the right man. I’ve no view on that. It’s just optically odd when the presumed heir resigns.
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I never particularly like this release because it's not accompanied by a full quarterly report, so it's a bit tougher to get the entire picture. I eagerly await the annual report coming in March. A few preliminary thoughts:
1) What's the deal with insurance operations? Is it just a coincidence that the favourable development for 2018 and 2019 respectively almost perfectly offset the cats for 2018 and 2019 respectively (see the final two tables at the bottom of the presser)? Is that a freakish occurrence, or is FFH pulling from the cookie jar to manage the numbers? Seriously, WEB always said that one of the biggest challenges in P&C investing is trying to assess whether you believe the numbers.
2) What's the deal with the Gross Written and Net Written in Q4 2019? Are we not in the midst of a hardening market? When you look at Q4's numbers, you see a visible bump in their ceding. Why? Is it the case that one or more of the subs is capital constrained, but still has plenty of profitable business to write, and is therefore throwing premium at the reinsurers? What the hell is going on here? If capital needs to be shifted from one sub to another, then do what needs to be done. But, it's not at all clear to me that ceding should have increased.
3) It's nice to see a double-digit increase in Net Written. Fixed income returns might be in the toilet and the CRs might be a little disappointing, but there's still room for growth in operating income if you can push up the underwriting volume. It would be super nice to see a high single digit increase in Net Written in 2020, coupled with the CR being shaved by a couple of points. A hardening market might just do that for you?
4) It will be interesting to read the annual letter and to get some colour from the conference call to better understand FFH's view of financial markets. If Prem and Brian were fussing about broad market valuations three years ago, they must be shitting a brick today.
5) The earnings per share number is nice, but will the market give it any cred? Quality of earnings over the past couple of years has been a bit suspect, but will anyone care?
Looking forward to the more detailed release in a few weeks.
SJ
Re 2: I think we know for a fact that some subs are capacity constrained, and I don’t know how easy it is to move capital between them. Does anyone?
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Paul Rivett retires. Sad news. I thought he was going to succeed Prem when Prem decided to retire
https://ca.finance.yahoo.com/news/fairfax-financial-holdings-limited-executive-220110417.html
That’s worrying.
Petec, given he is going to continue to be involved with FFH in a small way i am not worried. Yes, it is unfortunate to lose a good person. My guess is Fairfax has a deep bench to pick a replacement from.
It’s not the loss of a good person. It’s the loss of the heir to the throne. Weird, perhaps, rather than worrying.
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Paul Rivett retires. Sad news. I thought he was going to succeed Prem when Prem decided to retire
https://ca.finance.yahoo.com/news/fairfax-financial-holdings-limited-executive-220110417.html
That’s worrying.
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I’m predicting some big pref+warrant deals with the proceeds used for buybacks. Win-win-win!
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LatAm is so tricky - the Findlay Park fund was the one I was most impressed with (now at Brown Harriman).
That's the one. Latam is tricky but as a result you can get some good businesses at reasonable prices. And directionally, it's getting less tricky. The major economies have addressed many of their structural issues (inflation, fiscal, trade imbalances, over-regulation, weak institutions). It's the best performing major region in the world over the last 30 years (based on equity indices) despite being down 40% from its high, and I think it has a decent shot at compounding over the next 20. The currencies are cheap too.
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We have a slightly different setup in the UK, in that I can invest in child ISAs (tax free savings accounts) and SIPPs (tax free pension accounts) every year until the child is 18. My kids own BAM, FFH, and two funds whose managers I know well & like (one global, one Latin American). I am likely to hold them all for a long time but will watch and rejig if theses change.
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I totally agree with all of that except the word quality. Perhaps we are using the word differently. But it is quite possible to lose your principal by investing badly in quality, and quite possible to protect it by investing well in things like Seaspan, which most people wouldn’t define as quality.
Otherwise we are totally aligned.
I’m not sure the new people will be what make the difference. I think it will be Prem. he’s not stupid, and not the kind of guy to feel good about persistent failures. I suspect he took his eye off the ball. I bet he’s more focussed now.
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Or to put it another way: we don’t know they’d be any good at investing in quality, either.
I certainly agree. Just "switch to quality" is not that easy either.
Exactly.
Fairfax is an insurer/investor that focuses on value* and invests globally, including in some risky places. If you want an insurer/investor that focuses on long term ownership of quality stocks in a jurisdiction with low political risk, I’m sure you can think of one ;)
*Edit: value and quality aren’t mutually exclusive, obviously. CIB, Quess, Bangalore and others prove Fairfax aren’t averse to quality when they can find it cheap.
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I die a little inside when people say they need to move up the quality ladder. What they need to do is buy things for less than they are worth and with a pathway to realising that value. I don't care whether they do that with Coca-Cola or a cigar butt. Is Seaspan a high quality franchise, the way most people define quality? No. Has it been a great investment? Hell yes, because they bought it for way less than it was worth and helped catalyse the market's realisation of that fact. What they need to stop doing is being wrong about the intrinsic value of an investment, as they clearly were with Resolute and Blackberry and, I suspect, quite a lot of the private portfolio.
Sure, the key is to be right. If you can buy down the quality ladder and be right, that is great. I assume those pushing to move to "quality" are doing so because Fairfax hasn't proven that they can consistently be right on the lower quality end.
More Seaspans and fewer Blackberrys - easier said than done.
I agree - but quality has had a hell of a run over the last decade. We don’t know that owning it will be right for the next one. Investing isn’t that simple.
Or to put it another way: we don’t know they’d be any good at investing in quality, either.
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Good post. I agree with most of it.
I don't agree Fairfax need to target *sub* 95%. There's a benefit to growing float too.
I don't think they have to buy the minorities in Eurolife and Brit - but they can. The deal terms looked pretty favourable to me at the time - OMERS got a preferential dividend and Fairfax got the right to buy OMERS out at a price that compounded in the mid single digits. In other words, if BV grew faster than that the P/BV came down. I don't see why buying in the minorities is necessarily any better/worse than doing buybacks - depending on price, obviously. It is likely a good use of cash.
Empire building: they have said pretty clearly that they don't expect to do any more big deals. The platform is complete. But every business within it does tuck-ins. That said, I fully expect Prem to get itchy fingers if a really juicy deal comes along. It's in his bones.
Resolute and Blackberry have clearly been a disaster. I am not so sure Stelco will be. And I actively like what they are doing in Africa. Deep value, with diversified poltiical and currency risk, with the potential to clip fees on OPM.
I die a little inside when people say they need to move up the quality ladder. What they need to do is buy things for less than they are worth and with a pathway to realising that value. I don't care whether they do that with Coca-Cola or a cigar butt. Is Seaspan a high quality franchise, the way most people define quality? No. Has it been a great investment? Hell yes, because they bought it for way less than it was worth and helped catalyse the market's realisation of that fact. What they need to stop doing is being wrong about the intrinsic value of an investment, as they clearly were with Resolute and Blackberry and, I suspect, quite a lot of the private portfolio.
The major question you haven't asked is: is the monster position in Seaspan sized correctly given the risk and reward, and if not, what can/will they do about it?
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4. Bond yields. European bond yields are lower and have been for a while. Which normally lead to lower absolute results. Stock returns are a risk premium posted on bond returns. You lower bond yields and you'll end up with lower stock returns even though as a stock investor you will be adequately compensated for your risk.
I don't really understand this argument and I think its wrong. I've heard both Buffett and Graham argue the exact opposite repeatedly. As bond yields rise, earnings mulitples contract (and earnings yields rise) and current stock prices go down which increases future returns but depresses current returns. On the other hand when bond yields go up, earning yields go up and stock prices go up which improves returns looking backwards (from historical time point to present) but depresses returns looking forwards (from present to future time point).
This makes sense as its the bond yield which competes with stocks. Higher bond yields tend to attract people away from stocks and lower bond yields tend to push people towards stocks. Incidentally this does not really contradict the return premium argument since return premiums are about future stock returns and not current ones. A higher bond yield means a greater required future return on stocks which means stock prices now must be lower. Similarly a lower bond yield means a lower required future return on stocks which means stock price now must be higher.
Lower bond yields therefore should have led to higher stock prices in Europe.
Quite.
One other thing I suspect is true (but haven’t checked the stats) is that Europe has relied almost entirely on monetary stimulus whereas the US has applied both monetary and fiscal. The latter boosts the economy and profits growth, which are lacking in Europe. I suspect the time to buy Europe is when this changes.
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RNO, you’ve explained *when* you decided to get in and out of the market, but not *how*. Yet it works. So how do you decide? Is it instinct, or are there signals you find reliable?
I do totally agree, by the way, that one has to understand one’s own psychology and let that guide how one invests. Different things work for different people.
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Toys R us was bought for $300 million in early 2018.
2-3 years later, i imagine that at the very least this might have gained some value, given that it was bought at distress price.
i think that would make it contender for 3rd spot as illiquid as it is.
I think the best that comes from TrU is that they extract cash while it still generates some and then sell the real estate for more than the price the paid. I don’t think it’s getting marked up.
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Question. At Dec 31, 2018 what was Fairfax's 2nd largest equity holding? My guess is most board members would get this question wrong (even if given multiple guesses).
Answer: BDT Capital Partners (Oak Fund) = $443 million
Source: Fairfax 2018 Annual Meeting presentation
Currently, after Seaspan and Eurobank, BDT Capital Partners is likely Fairfax's third largest equity holding.
A year earlier (Dec 31, 2017) its value was $355 million (#5 in equity holding that year)
Given Fairfax has about $10-$11 billion in equity holdings this one represents about a 4% position.
I tried to find information on the fund in Fairfax quarterly and annual reports but am striking out. So I am assuming they still hold their position :-). Interesting holding. Not domiciled in India. Not in a declining industry... Looks like a quality holding with well regarded management. Byron Trott (founder and CEO) used to work at Goldman Sacks where he was Warren Buffett's private banker. Anyone have any information on the company and/or the Oak Fund (what it owns)?
Who are they? "BDT Capital Partners, LLC is a private equity arm of BDT & Company, LLC, specializing in investments in family-owned and entrepreneurial businesses. It also co-invests. BDT Capital Partners, LLC was founded in 2009 and is based in Chicago, Illinois."
Here is an article: https://heavy.com/news/2019/06/bdt-capital-partners/
3rd largest, not 2nd! You had me confused for a sec!
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The central bankers stopped being effective a long time ago in Europe. Yesterday's GDP data shows Italy GDP shrank by 0.3%. The last 8 quarters, the percentage growth in Italy's GDP is:
0.1, -0.1, -0.1, 0.1, 0.1, 0.1, 0.1, -0.3.
https://tradingeconomics.com/italy/gdp-growth
The central planners/bankers whine that they want inflation. When these central bankers buy financial assets, they get asset price inflation.
If central planners genuinely want goods inflation, they should just buy chemicals, cars, planes, boats, clothes, toys etc instead of stocks and corporate debt.
No. If they must print money to manage inflation they should distribute it equally to the population. The inequality created by squirting money into asset markets - meaning asset owners and managers benefit, but others don’t - is an appalling and dangerous consequence of central bank experimentation.
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I thought they never sold anything... more flexibility going forward?
https://finance.yahoo.com/news/lee-enterprises-buy-berkshire-hathaway-114510889.html
3x ebitda? Am I reading that right?
More like 3x EBITDA heading to 4-5x, etc.
In which case more than tripling your capital commitment is an odd thing to do even if it does move you higher up the structure.
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I thought they never sold anything... more flexibility going forward?
https://finance.yahoo.com/news/lee-enterprises-buy-berkshire-hathaway-114510889.html
3x ebitda? Am I reading that right?
Fairfax 2020
in Fairfax Financial
Posted
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?