bearprowler6
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Posts posted by bearprowler6
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Don't want to suppress the jolly mood in the "FFH 2020" thread. So I'll post this here in this thread, just as a data point to be aware of. I took me only 5 minutes. Just went through the annual release for every year, and only copied the "realized gain/loss" through shorts/hedges and the likes. I ignored all the unrealized stuff, given that it would be captured when they are realized if not reversed.
End of 2016, is when FFH management made the pivot away from hedges/shorts and took its losses. Unless, i made a mistake, i am counting about a $1 billion of realized losses in shorts since the pivot to move away from shorts was made. That sum is 3x the size of current FFH investment value in Blackberry common shares. Yes, in the grand scheme of things, that comes to 2% of a $40 billion portfolio and maybe shorts are for FFH, what bitcoin is for some. Small position big potential upside.
But it is almost as if they cannot help themselves to not short technology growth companies. Betting against the central bank printing press has never been a profitable trade. Anyways ...
2011: zero
2012: $6.3 million
2013: ($1.350) billion
2014: $13 million
2015: $126 million
2016: ($2.634) billion
2017: ($553) million (almost all of it in Q4 2017!)
2018: ($248) million
2019: ($20.7) million
2020 (through Q3): ($327) million
Xerxes---thank-you for doing this work. Although I agree with the consensus view that Fairfax looks cheap on a BV basis I cannot justify adding to my investment because of issues such as this one. I do continue to hold a very small legacy position in the company -- more out of habit than for any good fundamental reason. So the company is tight for cash and we can look at $1 billion that was basically flushed down the drain? Until this behavior stops (it was supposed to stop at the end of 2016) and until the company deals with its many long time underperforming equity (both public and private) investments it is not a very attractive long term investment. I sincerely applaud those that bought late last Friday or at the open on Monday. A nice short term profit for sure. But nothing has fundamentally changed with this company and that is what keeps me away.
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I hope so. I've just been watching this damn thing for so long and everytime there is a glimmer of something possibly positive its deemed a sign that things will be turning the corner any day now, with huge upside. The company is positioned for bad times in a good market, good times in a bad market...I mean at some point you just have to look at the past 10 years of decisions and mistakes and give credit where it is due. This isn't a company in an out of favor sector like O&G, or retail... I get that its gotten the short end of the covid stick similar to other insurance, banking and RE firms....but its supposed to be a company with "the smart guys" who are ahead of the curve. And its not and it hasn't been for over a decade now. Is there any case to say that on a risk adjusted basis you arent just better off owning WFC or BRK?
Fairfax is a three legged stool:
1.) insurance / underwriting - solid
2.) investing part 1: fixed income - solid
3.) investing equities / op co’s - a mess
The way to make very good money with Fairfax for the past 20 years is to wait for the turn in stool leg 3. (Mr Market was always slow to catch on so the shares became $20 bills lying on the ground in plain sight for all to see.) The problem for Fairfax investors is stool leg 3 has underperformed for the last 7 years (more than offsetting the gains made in stool legs 1 and 2).
The good news for new investors in Fairfax is with shares trading at US$266 they will likely do well moving forward if Fairfax simply stops losing money with bucket 3. Crazy thing to say... but i think it is true (posters think i am only hard on Trump :-)
And that is how out of favour this company is today... People do not want to own it because they expect Fairfax to lose more money in bucket 3. There are lots of legacy dogs still barking in the shadows: Toys R Us, Recipe, Blackberry to name a few that quickly come to mind...
Now having said all that i might reestablish a position tomorrow. Because, to Sanjeev’s point, if they ever start to make a positive return from stool leg 3 the stock will rock.
The other potential catalyst for shares is Prem’s creativity in surfacing value.
Hi Viking...I agree with your 3 legged stool analogy concerning Fairfax with one exception. To date Fairfax's fixed income investing has been very solid---in my view the real strength of the company over the last many years. My concern is that given the ultra low interest rate environment we are in and will likely remain in for a very long time I am not at all optimistic going forward that Fairfax will enjoy the lift that it has from its fixed income investments in the same way that that it has over the last 30 years. Sure it can fund some private debt deals and achieve some yield enhancement in the corporate market but the bulk of its fixed income investments will be in governments bonds and hence return virtually nothing for the foreseeable future. This will put even more pressure on its equity investments and on this point point I could not agree with you more---- this part of the 3 legged stool is a total mess. So although a few posters on here are saying that all Fairfax needs to do is achieve a 3% return on its investments in order to achieve a 15% long term compound on its shares from this point forward I am not so sure this is as much of a slam dunk as some others on here seem to think it is. Your thoughts/comments and those of others would be appreciated.
Well, then create your own pro-forma income statement for 2021. It might look a little like this:
1) UW profit
Net Written Premiums $16B (up 6.5% over 2020)
Consolidated Ratio: 94% (take the YTD CR, strip out the 10 cat points for 2020 and replace with 4 cat points for 2021)
UW profit = $960m
2) Investment returns
Investment portfolio $40B
Investment return 2% (bond duration is strangely favourable for this assumption)
Inv profit = $800m
3) Overhead = $200m (just grab the number from 2018)
4) Interest = $500m (run rate the first three-quarters of 2020)
Earnings before taxes = $960m + 800 - 200 - 500 = $1,060m
Taxes = $281m (tax rate 26.5%)
Earnings after tax = $779m
Sharecount: 26.2 milion
EPS = $779/26.2 = $30
Is there anything outrageous about that bit of school-boy arithmetic? The current stock price is US$268, so a basic EPS of $30/sh would be an 11% earnings yield, which is not reliant on much of an investment return and makes no assumption of further price increases. The 15% target would be left in the dust if FFH actually got a 3% investment return.
SJ
SJ---your "school boy arithmetic" seems reasonable for 2021. My question however related to the potential for long term compounding for the shares at the 15% level. Your 2% investment return assumption which produces $800m in your analysis for 2021 seems high post 2021(note the drop off in interest and dividend income from 2019 to 2020). If my concern is correct on this point than an investment return well in excess of the 3% target is needed to achieve the 15% overall earnings yield. Expecting Prem (and team) to produce this level of long term investment returns on a sustainable basis is simply not reasonable based on either the results of the last 10 years nor the longer term prospects for the company's current equity holdings.
The 2% is already very conservative. Of the portfolio, about $10b is corporate bonds yielding about 3.5% with a 3-yr duration, ~$17B is governments bills and bonds yielding about 0.5%, plus another ~$13B is equity-like investments (preferreds, common stocks, investments in associates). There should be no trouble at all to make 2% until the end of 2022 when the corporates will mostly need to be rolled. When you weight it all out, getting a weighted 3% might require about a ~6% return on the equity-like investments, which is not a particularly outrageous hurdle.
After 2022, who the hell knows? It could go a couple of different ways. Either the risk-free rate remains at 0.5% in the "lower for longer" scenario, in which case you should expect to see tighter underwriting practices and higher insurance prices, or the risk-free will return to a more "normal" level which makes the 3% return easily attainable. But, over the longer term, capital will leave the industry if there is not some acceptable combination of underwriting and investment profit.
SJ
Very reasonable---thank-you!
Seems like a good time however to remind everyone of the compound total annual investment returns actually achieved by Fairfax over the last 10 years or so:
2011-2016: 2.3%
2017-2019: 5.6%
And yes I know that we need to look forward and not focus on the mistakes of the past however Prem seems unwilling to address several losing equity positions (both private and public markets) which account for a significant portion of Fairfax's current equity holdings. Combine this with the ultra low interest rates which in my view will be around for a very long time and we have a perfect storm which will work against Fairfax achieving the overall investment return it requires to achieve the 15% earnings yield.
For what its worth...I hope my concerns are not valid and Fairfax shares soar however we are dealing with Prem so I believe a healthy dose of skepticism is warranted!
So what this is saying, is even over past decade where investment returns were dismal and outweighed by short TRS and deflation swaps, they still managed the +2-3% compounded that is the benchmark for a 15-20% ROE going forward? And we don't have a hedged equity portfolio any more and many of their investments are off 50% or more from peaks at the end of 2019 period so seems to me that it doesn't take much to get this shop moving in that 2-3% direction.
TwoCitiesCapital---that is certainly one interpretation of what has been presented. Another way to look at it---despite the higher yields offered by bonds between 2011 and 2019 and the gains realized on their massive bond portfolio during that same time frame due to falling rates they were only able to realize average overall investment returns of 2.3% for the period 2011-2016 and 5.6% for 2017-2019.
As SJ pointed out earlier....Fairfax currently holds $10B in corporate bonds yielding 3.5% for another 2 years, $17B in government bonds yielding 0.5% and approx $13B in equity like investments (preferreds, common stock and investments in associates). Unless interest rates rise (in my view this is not likely) then $27B in overall bonds will earn next to nothing within 2 years which means the overall investment return will be solely dependent on the equity holdings which I believe is a very scary prospect for any investor into Fairfax who is looking to achieve a long term earnings yield of 15% or better.
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I hope so. I've just been watching this damn thing for so long and everytime there is a glimmer of something possibly positive its deemed a sign that things will be turning the corner any day now, with huge upside. The company is positioned for bad times in a good market, good times in a bad market...I mean at some point you just have to look at the past 10 years of decisions and mistakes and give credit where it is due. This isn't a company in an out of favor sector like O&G, or retail... I get that its gotten the short end of the covid stick similar to other insurance, banking and RE firms....but its supposed to be a company with "the smart guys" who are ahead of the curve. And its not and it hasn't been for over a decade now. Is there any case to say that on a risk adjusted basis you arent just better off owning WFC or BRK?
Fairfax is a three legged stool:
1.) insurance / underwriting - solid
2.) investing part 1: fixed income - solid
3.) investing equities / op co’s - a mess
The way to make very good money with Fairfax for the past 20 years is to wait for the turn in stool leg 3. (Mr Market was always slow to catch on so the shares became $20 bills lying on the ground in plain sight for all to see.) The problem for Fairfax investors is stool leg 3 has underperformed for the last 7 years (more than offsetting the gains made in stool legs 1 and 2).
The good news for new investors in Fairfax is with shares trading at US$266 they will likely do well moving forward if Fairfax simply stops losing money with bucket 3. Crazy thing to say... but i think it is true (posters think i am only hard on Trump :-)
And that is how out of favour this company is today... People do not want to own it because they expect Fairfax to lose more money in bucket 3. There are lots of legacy dogs still barking in the shadows: Toys R Us, Recipe, Blackberry to name a few that quickly come to mind...
Now having said all that i might reestablish a position tomorrow. Because, to Sanjeev’s point, if they ever start to make a positive return from stool leg 3 the stock will rock.
The other potential catalyst for shares is Prem’s creativity in surfacing value.
Hi Viking...I agree with your 3 legged stool analogy concerning Fairfax with one exception. To date Fairfax's fixed income investing has been very solid---in my view the real strength of the company over the last many years. My concern is that given the ultra low interest rate environment we are in and will likely remain in for a very long time I am not at all optimistic going forward that Fairfax will enjoy the lift that it has from its fixed income investments in the same way that that it has over the last 30 years. Sure it can fund some private debt deals and achieve some yield enhancement in the corporate market but the bulk of its fixed income investments will be in governments bonds and hence return virtually nothing for the foreseeable future. This will put even more pressure on its equity investments and on this point point I could not agree with you more---- this part of the 3 legged stool is a total mess. So although a few posters on here are saying that all Fairfax needs to do is achieve a 3% return on its investments in order to achieve a 15% long term compound on its shares from this point forward I am not so sure this is as much of a slam dunk as some others on here seem to think it is. Your thoughts/comments and those of others would be appreciated.
Well, then create your own pro-forma income statement for 2021. It might look a little like this:
1) UW profit
Net Written Premiums $16B (up 6.5% over 2020)
Consolidated Ratio: 94% (take the YTD CR, strip out the 10 cat points for 2020 and replace with 4 cat points for 2021)
UW profit = $960m
2) Investment returns
Investment portfolio $40B
Investment return 2% (bond duration is strangely favourable for this assumption)
Inv profit = $800m
3) Overhead = $200m (just grab the number from 2018)
4) Interest = $500m (run rate the first three-quarters of 2020)
Earnings before taxes = $960m + 800 - 200 - 500 = $1,060m
Taxes = $281m (tax rate 26.5%)
Earnings after tax = $779m
Sharecount: 26.2 milion
EPS = $779/26.2 = $30
Is there anything outrageous about that bit of school-boy arithmetic? The current stock price is US$268, so a basic EPS of $30/sh would be an 11% earnings yield, which is not reliant on much of an investment return and makes no assumption of further price increases. The 15% target would be left in the dust if FFH actually got a 3% investment return.
SJ
SJ---your "school boy arithmetic" seems reasonable for 2021. My question however related to the potential for long term compounding for the shares at the 15% level. Your 2% investment return assumption which produces $800m in your analysis for 2021 seems high post 2021(note the drop off in interest and dividend income from 2019 to 2020). If my concern is correct on this point than an investment return well in excess of the 3% target is needed to achieve the 15% overall earnings yield. Expecting Prem (and team) to produce this level of long term investment returns on a sustainable basis is simply not reasonable based on either the results of the last 10 years nor the longer term prospects for the company's current equity holdings.
The 2% is already very conservative. Of the portfolio, about $10b is corporate bonds yielding about 3.5% with a 3-yr duration, ~$17B is governments bills and bonds yielding about 0.5%, plus another ~$13B is equity-like investments (preferreds, common stocks, investments in associates). There should be no trouble at all to make 2% until the end of 2022 when the corporates will mostly need to be rolled. When you weight it all out, getting a weighted 3% might require about a ~6% return on the equity-like investments, which is not a particularly outrageous hurdle.
After 2022, who the hell knows? It could go a couple of different ways. Either the risk-free rate remains at 0.5% in the "lower for longer" scenario, in which case you should expect to see tighter underwriting practices and higher insurance prices, or the risk-free will return to a more "normal" level which makes the 3% return easily attainable. But, over the longer term, capital will leave the industry if there is not some acceptable combination of underwriting and investment profit.
SJ
Very reasonable---thank-you!
Seems like a good time however to remind everyone of the compound total annual investment returns actually achieved by Fairfax over the last 10 years or so:
2011-2016: 2.3%
2017-2019: 5.6%
And yes I know that we need to look forward and not focus on the mistakes of the past however Prem seems unwilling to address several losing equity positions (both private and public markets) which account for a significant portion of Fairfax's current equity holdings. Combine this with the ultra low interest rates which in my view will be around for a very long time and we have a perfect storm which will work against Fairfax achieving the overall investment return it requires to achieve the 15% earnings yield.
For what its worth...I hope my concerns are not valid and Fairfax shares soar however we are dealing with Prem so I believe a healthy dose of skepticism is warranted!
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I hope so. I've just been watching this damn thing for so long and everytime there is a glimmer of something possibly positive its deemed a sign that things will be turning the corner any day now, with huge upside. The company is positioned for bad times in a good market, good times in a bad market...I mean at some point you just have to look at the past 10 years of decisions and mistakes and give credit where it is due. This isn't a company in an out of favor sector like O&G, or retail... I get that its gotten the short end of the covid stick similar to other insurance, banking and RE firms....but its supposed to be a company with "the smart guys" who are ahead of the curve. And its not and it hasn't been for over a decade now. Is there any case to say that on a risk adjusted basis you arent just better off owning WFC or BRK?
Fairfax is a three legged stool:
1.) insurance / underwriting - solid
2.) investing part 1: fixed income - solid
3.) investing equities / op co’s - a mess
The way to make very good money with Fairfax for the past 20 years is to wait for the turn in stool leg 3. (Mr Market was always slow to catch on so the shares became $20 bills lying on the ground in plain sight for all to see.) The problem for Fairfax investors is stool leg 3 has underperformed for the last 7 years (more than offsetting the gains made in stool legs 1 and 2).
The good news for new investors in Fairfax is with shares trading at US$266 they will likely do well moving forward if Fairfax simply stops losing money with bucket 3. Crazy thing to say... but i think it is true (posters think i am only hard on Trump :-)
And that is how out of favour this company is today... People do not want to own it because they expect Fairfax to lose more money in bucket 3. There are lots of legacy dogs still barking in the shadows: Toys R Us, Recipe, Blackberry to name a few that quickly come to mind...
Now having said all that i might reestablish a position tomorrow. Because, to Sanjeev’s point, if they ever start to make a positive return from stool leg 3 the stock will rock.
The other potential catalyst for shares is Prem’s creativity in surfacing value.
Hi Viking...I agree with your 3 legged stool analogy concerning Fairfax with one exception. To date Fairfax's fixed income investing has been very solid---in my view the real strength of the company over the last many years. My concern is that given the ultra low interest rate environment we are in and will likely remain in for a very long time I am not at all optimistic going forward that Fairfax will enjoy the lift that it has from its fixed income investments in the same way that that it has over the last 30 years. Sure it can fund some private debt deals and achieve some yield enhancement in the corporate market but the bulk of its fixed income investments will be in governments bonds and hence return virtually nothing for the foreseeable future. This will put even more pressure on its equity investments and on this point point I could not agree with you more---- this part of the 3 legged stool is a total mess. So although a few posters on here are saying that all Fairfax needs to do is achieve a 3% return on its investments in order to achieve a 15% long term compound on its shares from this point forward I am not so sure this is as much of a slam dunk as some others on here seem to think it is. Your thoughts/comments and those of others would be appreciated.
Well, then create your own pro-forma income statement for 2021. It might look a little like this:
1) UW profit
Net Written Premiums $16B (up 6.5% over 2020)
Consolidated Ratio: 94% (take the YTD CR, strip out the 10 cat points for 2020 and replace with 4 cat points for 2021)
UW profit = $960m
2) Investment returns
Investment portfolio $40B
Investment return 2% (bond duration is strangely favourable for this assumption)
Inv profit = $800m
3) Overhead = $200m (just grab the number from 2018)
4) Interest = $500m (run rate the first three-quarters of 2020)
Earnings before taxes = $960m + 800 - 200 - 500 = $1,060m
Taxes = $281m (tax rate 26.5%)
Earnings after tax = $779m
Sharecount: 26.2 milion
EPS = $779/26.2 = $30
Is there anything outrageous about that bit of school-boy arithmetic? The current stock price is US$268, so a basic EPS of $30/sh would be an 11% earnings yield, which is not reliant on much of an investment return and makes no assumption of further price increases. The 15% target would be left in the dust if FFH actually got a 3% investment return.
SJ
SJ---your "school boy arithmetic" seems reasonable for 2021. My question however related to the potential for long term compounding for the shares at the 15% level. Your 2% investment return assumption which produces $800m in your analysis for 2021 seems high post 2021(note the drop off in interest and dividend income from 2019 to 2020). If my concern is correct on this point than an investment return well in excess of the 3% target is needed to achieve the 15% overall earnings yield. Expecting Prem (and team) to produce this level of long term investment returns on a sustainable basis is simply not reasonable based on either the results of the last 10 years nor the longer term prospects for the company's current equity holdings.
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I hope so. I've just been watching this damn thing for so long and everytime there is a glimmer of something possibly positive its deemed a sign that things will be turning the corner any day now, with huge upside. The company is positioned for bad times in a good market, good times in a bad market...I mean at some point you just have to look at the past 10 years of decisions and mistakes and give credit where it is due. This isn't a company in an out of favor sector like O&G, or retail... I get that its gotten the short end of the covid stick similar to other insurance, banking and RE firms....but its supposed to be a company with "the smart guys" who are ahead of the curve. And its not and it hasn't been for over a decade now. Is there any case to say that on a risk adjusted basis you arent just better off owning WFC or BRK?
Fairfax is a three legged stool:
1.) insurance / underwriting - solid
2.) investing part 1: fixed income - solid
3.) investing equities / op co’s - a mess
The way to make very good money with Fairfax for the past 20 years is to wait for the turn in stool leg 3. (Mr Market was always slow to catch on so the shares became $20 bills lying on the ground in plain sight for all to see.) The problem for Fairfax investors is stool leg 3 has underperformed for the last 7 years (more than offsetting the gains made in stool legs 1 and 2).
The good news for new investors in Fairfax is with shares trading at US$266 they will likely do well moving forward if Fairfax simply stops losing money with bucket 3. Crazy thing to say... but i think it is true (posters think i am only hard on Trump :-)
And that is how out of favour this company is today... People do not want to own it because they expect Fairfax to lose more money in bucket 3. There are lots of legacy dogs still barking in the shadows: Toys R Us, Recipe, Blackberry to name a few that quickly come to mind...
Now having said all that i might reestablish a position tomorrow. Because, to Sanjeev’s point, if they ever start to make a positive return from stool leg 3 the stock will rock.
The other potential catalyst for shares is Prem’s creativity in surfacing value.
Hi Viking...I agree with your 3 legged stool analogy concerning Fairfax with one exception. To date Fairfax's fixed income investing has been very solid---in my view the real strength of the company over the last many years. My concern is that given the ultra low interest rate environment we are in and will likely remain in for a very long time I am not at all optimistic going forward that Fairfax will enjoy the lift that it has from its fixed income investments in the same way that that it has over the last 30 years. Sure it can fund some private debt deals and achieve some yield enhancement in the corporate market but the bulk of its fixed income investments will be in governments bonds and hence return virtually nothing for the foreseeable future. This will put even more pressure on its equity investments and on this point point I could not agree with you more---- this part of the 3 legged stool is a total mess. So although a few posters on here are saying that all Fairfax needs to do is achieve a 3% return on its investments in order to achieve a 15% long term compound on its shares from this point forward I am not so sure this is as much of a slam dunk as some others on here seem to think it is. Your thoughts/comments and those of others would be appreciated.
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5) FFH bought the rest of Brit for $220m in August. Didn't Prem tell us that it would be about $100m? Maybe all of those business interruption covid claims made Brit more valuable ;D ? Interesting that Brit paid a $20.6m dividend to the minority interest back in April and FFH bought that interest out for $220m. What the hell kind of arrangement was that?
OMERS always got paid its dividends in cash. I'm not sure whether that was a preferential arrangement, or whether Fairfax opted to capitalise Brit to grow by taking stock instead.
I need to revisit the disclosures on Brit over the years. I think OMERS have done quite well.
Well, yes, that was the second part of my observation. Not only did the buyout cost rise compared to guidance that I recall Prem providing during earlier teleconferences, but also it seems that OMERS was on the receiving end of a 9% dividend? WTF?
It doesn't really make me feel better about any of the other existing partnerships that FFH has established with OMERS.
SJ
The lack of transparency/full disclosure around the various funding that OMERS has provided over the years is all you need to know. Prem continues to play up what a great partner Fairfax has in OMERS....great for OMERS and not so great for Fairfax shareholders.
I continue to believe that Fairfax got way ahead of itself and could not internally fund the organic growth of its insurance companies, the share buybacks that Prem had promised and the various acquisitions that it made. OMERS was more than willing to "help" out and provide the capital needed.
Although the cash level at the holdco remained essentially flat during the first 9 months of 2020: $1.153 billion at Sept 30/20 versus $1.099 billion at Dec 31/19 this only occurred because Fairfax drew $700 million on its line of credit, received $599.5 million on the sale of a portion of its Riverstone European Runoff business (to ....you guessed it.....OMERS) and completed a 10 year senior note offering of $650 million at 4.625%.
To summarize----cash level essentially flat, insurance hard market supported and Brit's minority interest bought out however at a cost of approx $1.950 billion in 9 months.
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Seems the My Pillow guy has found the cure...??
Why this clown gets any air time at all amazes me. Why anyone would listen to him, including the chief clown in the White House, is mind boggling.
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Is it just me, or are Charlie Munger's lessons on the "power of incentives" screaming loudly here? "Incentives are too powerful a control over human cognition or human behavior."
The history lesson from all of this is to simply own the parent FFH stock and avoid the underlings... FIH, FAH, ORH, etc. It feels very similar to discussion on the BAM board. If any "unfair" deals are taking place, owning stock in the parent company ensures your interests are aligned. The majority of Prem's net worth is in FFH and he just purchased $150M of additional shares. One could argue that FIH and FAH are just as undervalued as the parent FFH, if not more so, but you don't see Prem making any grand announcements of buying $150M of those. The priority hasn't changed and I don't think it will.
Well, yes, that is one potentially valid conclusion, and I generally view it as solid, sound advice.
But, there is yet one more problem with an outfit that sometimes does not seem to respect its partners. That problem is that the controlling shareholder has, until recently, only owned 7% of the economic interest in FFH but is likely now up to 9% ownership of the economic interest. That arrangement once again creates incentive problems because it creates a situation where every dollar of FFH's money that the controlling shareholder channels to his pet projects only costs him personally 9-cents.
This might be a potential explanation for seemingly strange decisions like hiving off $50m of FFH's investment portfolio to be managed by Ben Watsa. What is FFH paying Ben's firm to manage that $50m? Is it 200 bps per year? More? Less? Nobody on the outside knows. But, what we do know is that if it is 200 bps, that makes $1 million per year, and of that sum Prem would pay $90k to guarantee his son a job while the minority (majority) shareholders would pay the other $910k. Prem could have allowed his son to manage $50m of his personal assets, which would also have guaranteed Ben a job, but then Prem alone would be paying the freight on that.
Is it the same type of situation with TS? As others have noted, the TS controversy amounts to chicken-feed in the context of FFH's operations. Giving Paul Rivett a sweet-heart deal on TS would only potentially cost a few million of FFH's dollars. But, is this a case where Prem is happily spending 9-cent dollars for the benefit of his friends? Who really knows at this point. I would hope that Prem provides an explanation at the next quarterly call.
The problem with this type of personal conduct that gives the appearance of a potential conflict of interest is that it casts suspicion on both good and bad decisions. The charitable gifts that FFH makes are the same sort of thing where Prem is effectively spending 9-cent dollars. We like to believe that all of these donations are made with the most altruistic and best intentions. But, now, when an expenditure is made that is not perfectly obviously aligned with the duty of a fiduciary, it is hard to not have a niggling concern in the back of one's head that the expenditure might not really be in the interest of shareholders.
SJ
The "market" has responded to all of Prem's actions in the way that matters most; Fairfax's share price has gone no where. In fact, it is currently back to where it was at the end of 2013.
Closing Price in CAD:
Dec 31/13: $424.21
Dec 31/14: $608.78
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.
.
.
Dec 31/19: $609.74
July 16/20: $424.41
It will take performance of 15% per year for the next 3 years to get us slightly above the price at the end of Dec 31/14! So this will be a 9 year period where the share price will have done absolutely nothing.
There are many reasons for the under performance of the share price however I can't help but think that Prem's pattern of personal conduct has played at least a small part.
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Yet the deals keep headed towards Fairfax....
A few comments/questions:
1) Perhaps most importantly, in my view Fairfax's behavior on the Torstar acquisition (and during the several examples cited earlier in this thread) cannot be justified by the "deal flow" sent its way.
2) What about the deals Fairfax did not get a chance to look at because of how it behaved on previous deals? There is no way of knowing this however it is a possibility. Are you sure the company's reputation is as strong as it ever was?
3) Finally, what deals that headed toward Fairfax are you specifically referring to? And are you sure the terms of those deals did not adversely impact Fairfax due to the company's previous behavior?
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Prem is all about establishing and growing relationships. This sometimes goes against immediate optimization of every deal.
This is pocket change for Fairfax and the benefit from supporting allies is much greater for their reputation.
It is a matter of judgment. It is not a simple screw everyone and take as much profit as you can.
Stop defending him....this one is not even close....
The revised Rivett/Bitove bid works out for something like $60 million in total to acquire a company that has $70 million CASH on its books and NO DEBT and no unfunded pension liability plus it has various minority investments that conservatively will raise a further $100 million when they are sold.
You're asking some shareholders to stop defending him, but have you or anyone asked Prem why he is supporting the Bitove/Rivett deal? You guys always talk about self-dealing at Fairfax...show me some frickin' examples. The only things you guys point to is Resolute and now this. Resolute was to the benefit of Fairfax shareholders.
If the Bitove/Rivett deal wins, do you think there might be some long-term opportunity for Fairfax? And why are you pissed off at the investor and not Torstar management...they are the ones who should be explaining why they are supporting a specific deal to all shareholders. Cheers!
Here we go again....the old "long term"response! I have written on here before....without a specific timeline the phrase long term is meaningless!
As far as I can see Fairfax has been silent on its motives for accepting a lower price for its Torstar shares (than offered by the competing group)...so in the absence of a description of any future beenfit that may accrue to Fairfax shareholders I assume none exists.
furthermore, Stubble Jumper outlined it very well when he raised concerns with the actions of both Torstar's board/management and Fairfax!
Have to leave the board for a few minutes since Greg Sorbora (part of the group completing against Bitove/Rivett) is about to be interviewed on BNNBloomberg.
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Prem is all about establishing and growing relationships. This sometimes goes against immediate optimization of every deal.
This is pocket change for Fairfax and the benefit from supporting allies is much greater for their reputation.
It is a matter of judgment. It is not a simple screw everyone and take as much profit as you can.
Stop defending him....this one is not even close....
The revised Rivett/Bitove bid works out for something like $60 million in total to acquire a company that has $70 million CASH on its books and NO DEBT and no unfunded pension liability plus it has various minority investments that conservatively will raise a further $100 million when they are sold.
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And my question on that deal and issues raised is from a FFH shareholders' perspective, are we winning or losing?
Can someone explain.
FFH is a shareholder of Torstar and could have gotten more, but refused to allowing Rivett to succeed in his bid?
?
Furthermore, Rivett/Botove were on the record as saying that their group will begin to sell off many if not all of the investments (Vertical Scope, Blue Ant, Black Press, Nest Wealth etc) that Torstar currently owns and expects to raise at least $100 million from these sales.
By any measure this deal stinks. There is no justification for Fairfax supporting the Rivett/Bitove bid!
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And my question on that deal and issues raised is from a FFH shareholders' perspective, are we winning or losing?
Can someone explain.
FFH is a shareholder of Torstar and could have gotten more, but refused to allowing Rivett to succeed in his bid?
?
Furthermore, Rivett/Botove were on the record as saying that their group will begin to sell off many if not all of the investments (Vertical Scope, Blue Ant, Black Press, Nest Wealth etc) that Torstar currently owns and expects to raise at least $100 million from these sales.
By any measure this deal stinks. There is no justification for Fairfax supporting the Rivett/Bitove bid!
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more on Toronto Star on BNN.
Interesting clip.
There was an article in today's Globe which was even more disturbing. https://www.theglobeandmail.com/business/article-nordstar-ups-torstar-offer-in-what-could-end-bidding-war/
It would seem that the alternate bid might be superior because the proponents are suggesting that they are prepared to both bid higher in a cash-up-front perspective PLUS they have suggested that they would include contingent value rights to Torstar shareholders. Despite that, it seems like Prem has locked up our Torstar shares for the lower valued bid. I think that Prem might have a bit of explaining to do during the next quarterly teleconference if he is truly accepting an inferior bid from a former FFH executive.
It's looking more and more like BearProwler called this one correctly...
SJ
From the BNNBloomberg article:
"It's hard to understand the [families’] actions," said Groia, who worked at the OSC as associate general counsel and director of enforcement from 1985 to 1990.
"My experience as a former regulator is any time you can't understand why people are reacting the way they are, the general answer is that there's something motivating them that we don't know about. That's what an investigation is for."
Fair and friendly....hardly.....
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we were told the reason for the soft market was the massive inflows of capital
Have the inflows of capital changed?
Not that I'm aware of. I don't have industry data that measures that on a regular basis, but I can't think of anything that would have caused that to change.
We haven't had any major catastrophes to scare money out, insurance linked products are becoming a bigger part of the industry, and the hardening of the market started long before all of this COVID stuff could have made capital scarce (and doesn't seem to be making it scarce for other risk products).
My next door neighbour is a Managing Director at one of the major reinsurance brokerage companies. I just spoke to him about the current state of renewal rates, the existence of the hard market and why now for the hard market if one exists.
To summarize what he said:
-rates are hardening everywhere
-the outbreak of the pandemic has not slowed down renewal rates at all.
-the hard market which started last fall is continuing with no end in sight
-best rate increases being experienced since 2005
-capital has not left however it is finally demanding an adequate return on investment. Too many lines of business were no longer profitable
-as for why now---the industry simply couldnt hold out any longer. The low interest rates look like they are here for awhile and longer than anyone expected so increased renewal rates is the only chance the industry has to stay viable
Hopefully this helps!
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Let’s assume Thrifty3000 is correct and Fairfax stock price doubles in the next 5 years producing a very nice compounded rate of return over that period for those who buy in now. Buffett like indeed!
Sadly however for those shareholders that have held Fairfax before Covid the return would be much less than impressive. In fact, if the doubling in share price occurs the share price would essentially get back to where it was about 5-6 years ago. So over what then is a 10-11 year period the rate of return would be much less Buffett like.
Does Fairfax represent an interesting opportunity at the current time. I would say yes with several caveats! Does it represent the best opportunity from the entire universe of possibilities---in my view not likely!
For the record, I have more invested in the equity markets now than prior to the outbreak of the pandemic. I was fortunate to come into the pandemic with a very healthy cash balance and was able to deploy a good portion of the cash into very high quality names that I had been following for years during the panic sell-off in late March. I still hold a smallish position in Fairfax although the position size relative to the size of my entire portfolio is significantly reduced from where it was several years ago and even from where it was at the beginning of the year. I was fortunate to sell off a significant portion of the Fairfax shares I held earlier this year as the pandemic news started to break – some above $600 CAD and some above $500 CAD. I sold the shares this year because I believed that Fairfax was not positioned (for all the reasons I have been writing about) to hold up well to what I expected would be a very difficult economic environment.
So where does that leave things--- I believe that a decent rate of return can perhaps be made on Fairfax from these levels however other opportunities (e.g, certain reits, certain oil & gas names, CB or TRV if one insists on property & casualty exposure and perhaps even a direct investment into either or both Atco and Blackberry) of higher quality (my judgement) and of equal or greater rate of return potential are available and should be considered over an investment into Fairfax at this time.
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Common equity is around $12 billion USD.
The company is selling right now for $7.5 billion - a $4.5 billion haircut off of book value. Ouch.
Investments in associates, India and Africa are marked to model (generously) and on the books for $7 billion.
If Mr. Market was optimistic about those assets then Fairfax would easily trade at a premium to book value (ie. for more than $12 billion). But, Mr. Market is so down on them that he's basically written them off.
It seems like at the current price you're getting a first-rate insurance operator for cheap (even if it has to pair back underwriting or renegotiate some debt covenants near term), and you're getting Recipe, Eurobank, the retailers, Thomas Cook, Bangalor Airport, etc, etc, etc for free (aka really really cheap).
On top of that you have restructured, global, investment and operations management teams better able to grow whatever's left standing post-covid. (For example, even if Recipe loses half its locations in the next two years, the remaining locations could face a third the competition and twice the profitability after that - who knows. Eurobank could be the last bank standing in Greece. The retailers could band together and unseat Amazon - ok ok the retailers are dead.) Chances are there will be at least something left to work with in the portfolio a few years from now.
In short, there's not even a hint of confidence, let alone optimism, priced into this stock right now.
Thrifty, I understand that the company is trading well below its book value. That point is not in dispute. A few questions need to be asked, first will the gap between the market price and book value close or at least narrow substantially and second, how long will it take to do so.
My view and that all it is....the market has things about right at the current moment. Although there are exceptions (Atlas being one) for the most part the investment held by Fairfax are not very good and in many cases the onset of Covid has severely and permanently impaired the value of many of their investments. As for how long, I am solidly in the camp that the impact of Covid will last a lot longer than the general market seems to currently believe. As a result, I believe there are other investments (other than Fairfax) that offer better risk/reward profiles (with the emphasis on the risk aspect) than Fairfax currently does.
I believe the perfect storm has arrived and the low quality level of many of Fairfax's investments along with its elevated debt levels has truly exposed Fairfax. I hope and pray that I am wrong but I have positioned my overall portfolio with these beliefs in mind. You are clearly positioning your portfolio otherwise and I respect that.
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Pre covid, restaurants in Canada were facing the perfect storm:
1.) rising minimum wage (here in BC it was going up almost $1 per hour for each year for many years)
2.) rising property taxes, as high as 6% in some municipalities
3.) increase in usage of delivery apps (Ubereats etc) resulting in less dine-in; Ubereats take results in very poor margins on these sales
Restaurant stocks, especially large table count/dine in, were in a bear market pre-covid. None of the three trends listed above have gone away.
And then you add covid and you have a business model that is now completely broken (especially the dine in). Establishments with take out windows are best positioned but that is not the majority of Recipe’s establishments (i.e. Keg)
And recessions typically hit food away from home segment harder than food at home.
The restaurant business is extraordinarily difficult even in good times to make money. Fairfax clearly did not understand this basic fact when they started on their journey into restaurant ownership. And they kept adding completely new concepts which added more complexity and resulted in few synergies (each concept has to make it on its own). We discovered over time there was no wizard behind the screen (although the various wizards did get very rich). The bigger Recipe got the greater the chance it would fail. Individual brands lacked leadership and got stale; ‘synergies’ (great word) never materialized.
Having said all the above, there is a good chance that we could see in the next 6 months a devastating number of bankruptcies in this industry. There are lots of mom and pop operators who may not make it. The companies who can make it to the other side might be in good shape. Or perhaps we see a continuation of the long term trend: the industry muddles along and continues to destroy investor capital.
Fairfax might be tempted to double down with Recipe. There will likely be lots of opportunities to pick up other restaurant chains for a song. Or expand existing concepts (as better locations come on the market). But do you give Recipe more $ when they have not demonstrated the pre-covid model even worked? Would there not be lots of ‘synergies’?
They might need to go in the opposite direction. Start to sell off some of their concepts to other operators who are more focussed, passionate, motivated, nimble and better able to execute in covid world.
Amen...very well stated!
My vote....don't give Recipe another dime and begin to look at ways of getting out as much of your investment as possible before it is completely wiped out!
P.s. I have spoken with a lot of restaurant owners---both mom/pop types and those attached to major chains since Covid became a reality. bottom line---restaurants are not a segment where you want to deploy new capital going forward.
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We are talking about different things.
I agree about the overall record - that's why I'm a shareholder.
What I am criticising is their record in non-insurance private/control investing.
I think there is a difference in skillset between the various sources of value creation at Fairfax:
1) building and running (and sometimes selling) insurance companies
2) public market bond investing
3) public market equity investing
4) private/control equity investing
These are, roughly speaking, presented from best to worst in terms of what I think Fairfax are good at. By the time you get to (4), I don't think there is any evidence that they have created value in any real way, and I think the monetisation effort is an admission of that fact.
I think an examination of Fairfax's private/control equity investing activities would be a very worth while exercise. Performance in this segment of Fairfax's portfolio has been underwhelming at best. Why is that?
To answer this question I think we need to agree on the investments we are talking about. I assembled the following list after a quick review of the recent annual report----feel free to add names that I may have missed:
Retail Segment
-Golf Town/Sporting Life
-Toys R Us Canada
-Kitchen Stuff Plus
-William Ashley
-Praktiker (in Greece)
Other Segment
-AGT Foods
-Peak Performance (Bauer and Easton brands)
-Boat Rocker
-Rouge Media
-Davos Spirits
-Farmers Edge
Dexterra would have been listed under the Other segment however its recent merger with Horizons Logistics with Fairfax taking back shares of the resulting public company seems to take this one off the table.
My thoughts on the list of private investments:
-very heavily focus on retail
-none large enough to move the needle at the overall Fairfax level
-a number of them were decent turnaround/restructuring opportunities however do not make for very good long term cash generating holdings
-Praktikar (in Greece)---really---why bother?
-a number operate in industries requiring massive scale and investment (e.g., Boat Rocker) which Fairfax cannot provide
-Toys R Us Canada -- if the value was in the underlying real estate than steps should have been taken immediately upon completing the acquisition to realize on that valuu. One has to wonder why this was not done?
-Some offer good longer term value although the extent of that value is hard to assess: AGT, Farmers Edge
Overall I sense the private equity holdings are small, don't really offer much upside, are currently providing a poor return on invested capital, require considerable management time and attention and generally are operating in segments of the economy that have been hit very hard by Covid and will take years to recover.
Thoughts/comments of others?
I agree.
You missed Quantum, the McEwan Group, Blue Ant, Arctic Gateway (partly in AGT). I am sure I have missed some too.
Also, minor point but I think Peak Performance is the Bauer/Easton unit and Peak Achievement is the name for the merged Sporting Life and Golf Town. I may be wrong.
It looks to me like they’re implementing a pretty clear strategy to improve overall ROI from their private companies and associates. They seem to be picking a leader in a given industry/region, and then seeking to merge like-companies under that leader to better manage/allocate the capital. Look at all the brands under Recipe now, Eurobank’s acquisition of Grivalia, and Seaspan/APR under Sokol. They’re basically using their influence to create mini-holding companies, with specialist managers that can recommend the best use of capital among the brands in their domain. I think the strategy was already starting to work at Recipe. Despite industry headwinds Recipe was shuttering failing locations, sharing best practices with lower performers, and reallocating capital to the winning concepts.
I think the whole purpose of this strategy is to get lots of business experiments into the hands of several different, proven, managers, so they can more quickly ramp up the winners while letting the losers dwindle. Theoretically these managers will have their ear closer to the ground in their various industries and be able to make acquisition recommendations, etc.
In a way, they’re taking the model they used to allocate capital among insurance subsidiaries, and expanding it to how they will manage private companies and associates going forward. (They did the same thing with investment management teams too.) It might be kind of brilliant.
That is an interesting take on what Fairfax is doing....and if accurate may prove beneficial to Fairfax's bottom line over the medium to longer term.
Sadly as a result of Covid many retail stores and restaurants will suffer and not be able to achieve a reasonable level of profitability in any reasonable period.
I am attaching an interview with Rivett from yesterday (for a retired guy he sures seems busy) where he addresses the difficulties at Recipe:
Industry difficulties create some of the best opportunity for long term capital allocators like Fairfax. If you’re a restaurant company flying solo then you are nothing but terrified right now. If you are a restaurant company backed by an insurance company with a $40 billion dollar portfolio printing $100 million of cash monthly, you call up Prem and say “hey we might have a cheap acquisition opportunity pretty soon. It will be a total dog during Covid, but after that your family will make a killing for as long as humans still like eating.”
We will have to agree to disagree on the future for Recipe as a result of Covid......even if/when a vaccine is available the cost structure of dine in restaurants such as those offered under the Recipe umbrella are no longer economically viable as a result of the permanent changes imposed on the restaurants (and many retailers) as a result of Covid....
Restaurants, many retailers and numerous other businesses only make economic sense if they are crowded. The permanent social distancing including severe limits on crowd sizes simply make the fast casual restaurant segment uneconomical. It is for this reason that I believe landlords are not willing to provide rent relief or rent deferrals now.....they do not believe they will be repaid in the future. Just my take on things.
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We are talking about different things.
I agree about the overall record - that's why I'm a shareholder.
What I am criticising is their record in non-insurance private/control investing.
I think there is a difference in skillset between the various sources of value creation at Fairfax:
1) building and running (and sometimes selling) insurance companies
2) public market bond investing
3) public market equity investing
4) private/control equity investing
These are, roughly speaking, presented from best to worst in terms of what I think Fairfax are good at. By the time you get to (4), I don't think there is any evidence that they have created value in any real way, and I think the monetisation effort is an admission of that fact.
I think an examination of Fairfax's private/control equity investing activities would be a very worth while exercise. Performance in this segment of Fairfax's portfolio has been underwhelming at best. Why is that?
To answer this question I think we need to agree on the investments we are talking about. I assembled the following list after a quick review of the recent annual report----feel free to add names that I may have missed:
Retail Segment
-Golf Town/Sporting Life
-Toys R Us Canada
-Kitchen Stuff Plus
-William Ashley
-Praktiker (in Greece)
Other Segment
-AGT Foods
-Peak Performance (Bauer and Easton brands)
-Boat Rocker
-Rouge Media
-Davos Spirits
-Farmers Edge
Dexterra would have been listed under the Other segment however its recent merger with Horizons Logistics with Fairfax taking back shares of the resulting public company seems to take this one off the table.
My thoughts on the list of private investments:
-very heavily focus on retail
-none large enough to move the needle at the overall Fairfax level
-a number of them were decent turnaround/restructuring opportunities however do not make for very good long term cash generating holdings
-Praktikar (in Greece)---really---why bother?
-a number operate in industries requiring massive scale and investment (e.g., Boat Rocker) which Fairfax cannot provide
-Toys R Us Canada -- if the value was in the underlying real estate than steps should have been taken immediately upon completing the acquisition to realize on that valuu. One has to wonder why this was not done?
-Some offer good longer term value although the extent of that value is hard to assess: AGT, Farmers Edge
Overall I sense the private equity holdings are small, don't really offer much upside, are currently providing a poor return on invested capital, require considerable management time and attention and generally are operating in segments of the economy that have been hit very hard by Covid and will take years to recover.
Thoughts/comments of others?
I agree.
You missed Quantum, the McEwan Group, Blue Ant, Arctic Gateway (partly in AGT). I am sure I have missed some too.
Also, minor point but I think Peak Performance is the Bauer/Easton unit and Peak Achievement is the name for the merged Sporting Life and Golf Town. I may be wrong.
It looks to me like they’re implementing a pretty clear strategy to improve overall ROI from their private companies and associates. They seem to be picking a leader in a given industry/region, and then seeking to merge like-companies under that leader to better manage/allocate the capital. Look at all the brands under Recipe now, Eurobank’s acquisition of Grivalia, and Seaspan/APR under Sokol. They’re basically using their influence to create mini-holding companies, with specialist managers that can recommend the best use of capital among the brands in their domain. I think the strategy was already starting to work at Recipe. Despite industry headwinds Recipe was shuttering failing locations, sharing best practices with lower performers, and reallocating capital to the winning concepts.
I think the whole purpose of this strategy is to get lots of business experiments into the hands of several different, proven, managers, so they can more quickly ramp up the winners while letting the losers dwindle. Theoretically these managers will have their ear closer to the ground in their various industries and be able to make acquisition recommendations, etc.
In a way, they’re taking the model they used to allocate capital among insurance subsidiaries, and expanding it to how they will manage private companies and associates going forward. (They did the same thing with investment management teams too.) It might be kind of brilliant.
That is an interesting take on what Fairfax is doing....and if accurate may prove beneficial to Fairfax's bottom line over the medium to longer term.
Sadly as a result of Covid many retail stores and restaurants will suffer and not be able to achieve a reasonable level of profitability in any reasonable period.
I am attaching an interview with Rivett from yesterday (for a retired guy he sures seems busy) where he addresses the difficulties at Recipe:
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