bearprowler6

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?

Before wading into today's discussion on Fairfax's poor record on its private market investments and the reasons for Fairfax's poor performance; I thought it worthwhile to post an article from today's Financial Post which features comments from both Rivett and Bitove on their recent Torstar acquisition: https://business.financialpost.com/news/burning-cash-for-years-pair-acquiring-torstar-eye-growth-while-vowing-to-keep-progressive-values Two points covered in the article are worth noting: - Rivett/Bitove will not be engaging in a massive cost cutting exercise at Torstar. - Fairfax will not be involved in any way going forward. Its a good article and I wish them well. Too bad their enthusiasm and efforts for a turnaround were not applied during the course of the almost 10 years that Torstar shares were held by Fairfax.

Were other bidders even given a chance? Seems they have been prevented from bidding on Torstar because the Bitove/Rivett offer was accepted and a break up fee agreed to without testing the market. The pension issue at Torstar was dealt with. The pension liability was moved off the books in late 2019. Non-issue here. Sure the newspapers are a dying business however Torstar is much more than its newspapers.....its investments in Veritical Scope and Blue Ant are surely worth something. The 40% of Veritical Scope was bought 5 years ago for $190 million and has grown (albeit with a lot of debt) since than and as for Blue Ant....well Fairfax owns a large chunk of this directly as well so lets hope its not a zero. If the value of all the other assets of Torstar net to a negative value please explain how the auditors signed off on the BV of the company only a few months ago. Covid has not changed things that much. Back to the other bidders.....why not Fairfax itself. Sure turnarounds and liquidations are terrible but why give away any potential value that such actions could surface to Bitove/Rivett. Enough said. I am pleased that Fairfax has dealt with its Torstar mistake but in my view the price is too low. Others disagree. As for the optics around Rivett's involvement. I will leave that to each of you to decide on for yourselves. BP6

Norm, none of that justifies accepting, on behalf of Fairfax shareholders, the $0.63 takeover price. Fairfax is in the liquidation business. You don't suddenly get cold feet and give away considerable value (that will take some work to unlock) within Torstar to a former executive of Fairfax who supposedly retired. Please stop defending Prem....he needs be held accountable for yet another one of his Fair and Friendly deals.

I never bought into the retirement story for Rivett and stated as such on here numerous times over the last several months. I hate to be proven right..... The congratulations for Rivett is simply because he has picked Prems pocket on his way out the door. If this sale goes through at $0.63 per share than it will go down as one of the greatest corporate deals of all time....from Rivetts perspective alone. I am outraged....and other Fairfax shareholders should be as well...Fairfax holds more than 40% of the class B shares of Torstar. They have huge input into any takeover of the company. A takeover of Torstar does not occur unless Fairfax agrees. This deal should not go through at $0.63 per share. Wake up Prem! Something is very very wrong at Fairfax....this is just another example....

Optics is not good on this one. I don't like it. In Feb 2020 Prem commented, “Paul told me recently that for family reasons, he wanted to retire as President of Fairfax. It was with great sadness that I accepted his decision". I've been a big proponent of Prem and hold a lot of shares. Going forward, I'll have to approach any such comments with greater skepticism. Yes optics are terrible.....moving on is not a bad thing...but getting robbed by a former executive of the company who was apparently in retirement is quite something else. Why the hell would Fairfax agree to a buyout of Torstar at $0.63....the cash balance (and no debt) alone is worth more. The rest of the what Torstar owns....newspapers, several media properties (Torstar paid $190 million for their investment in Vertical Scope only 4 years ago and own 15% of Blue Ant Media etc) are worth considerable more than zero. Fairfax shareholders (and Torstar shareholders but who cares about them) should be outraged....but all we have here is largely silence from Fairfax shareholders.... I agree with Sanjeev on this one.....good for Paul Rivett....but this should not be allowed to happen.... As for the tax loss carryforwards this sale will create for Fairfax....these are only of value if you have investment gains to offset them which is not something that has been in abundance at Fairfax recently. BP6

https://www.torstar.com/images/Torstar_press_release_-_May_26_2020.pdf Paul Rivett comes out of “retirement”! Paul Rivett joins Jordan Bitove in taking Torstar private at $0.63 per share or approx $52 million in total. Fairfax Financial fully supports the take private transaction and will vote its 28.9 million class B Torstar shares in favour of the transaction. Fairfax will realize proceeds of $18.2 million on the sale of its shares. So let me get this straight....Rivett retires from Fairfax 3 months ago in order to spend time with his family and now comes out of retirement 3 months later in order to take Torstar private which results in a massive realized loss for Fairfax on its Torstar investment? How massive a loss? Well Fairfax acquired its 28.9 million Torstar Class B shares over several years including in the following transactions: - Nov 6/17 ---- 9.4 million shares @ $1.25 per share - Aug 25/16 --- 2.6 million shares @ $1.40 per share - June 3/16 --- 939,400 shares @ $1.77 per share - Mar 14/14 --- 2.4 million shares @ $5.35 per share - Earlier purchases were done at much higher per share values BTW at March 31, 2020 Torstar had more than $78 million in cash on its books and no debt! Thoughts or comments?

Prem did mention Exxon by name at the Annual Meeting conference call. He made reference to a 10% dividend rate. If they bought it in March and already sold it a few weeks later, they might have made a quick 20% or 25%. SJ Could it be that they purchased after March 31st which is the current filing date? The call was few weeks after that, right? That could explain why it isn't showing. Yep, that would be a sensible explanation. Of course, that would also mean that they are probably only ahead by 0-10% if they bought in April. I guess it's better than a kick in the pants. SJ It is also possible that Fairfax did not buy Exxon and Prem misspoke. Something similar happened on a quarterly call not that long ago when Prem referred to Brookfield and yet no transaction involving Brookfield had occurred. I know I have been bashing Prem and the team at Fairfax quite hard recently however in my view it is warranted. It seems to me that Prem has failed as an effective communicator which has resulted in frequent situations such as this where investors do not really know what has gone on. Fairfax is no longer a small little truck insurer run by a bunch of investment professionals with a value investing bias. It is a multi billion dollar global enterprise that needs and quite frankly deserves a fully staffed and professional run Investors Relations team. In addition to the poor investor communication my other concerns remain including too much debt, numerous long standing equity investments that are under water and not being dealt with and an aging management team with no obvious succession plan in place.

Allied World's Reinsurance book of business is also worth watching as Covid claims are identified. Noteworthy here is the facultative coverage offered by AWRe related to workers compensation. Also, as mentioned much earlier in this thread, Fairfax's overall exposure to 3rd party reinsurers as quantified through its Reinsurance Recoverables also deserves special attention as the extent of Covid claims unfolds over the next several quarters.

Although some employees thrive at home most employees are just not as productive on their own in their homes as in the office. I heard this from a cousin yesterday who is a very prominent architect in Toronto. He has 20 architects working for him. The last 2 months have been a disaster. The quality of work has suffered, costs soared due to work needing to be done over and deadlines missed. He has now installed plexiglass dividers between the workstations at the office and is moving from all staff working from home to a rotation of half from home and half working in the office. This is his experience and with a group of highly trained professionals. I have heard many stories similar to this. Employees have not been as productive from their homes and they had been previously been. There are many possible explanations for this however the reasons don't matter. Staff needs to be in the office in most cases in order to produce work at any reasonable level of quality. Recent comment by the CEO on the Brookfield Property Q1 call... they have been getting calls from most of their major tenants looking for more space...not less. These existing tenants will need to spread out their employees due to social distancing thus require more rental space and not less. This will reverse a trend that has been in place for the last 20 years.

And everyone would lose. No, Liberty (the concept) would win. ;) How naive you are. You think China would come out of a world war more democratic? You think liberty in the US would increase in the face of nuclear war? You think Taiwan wouldn't be potentially destroyed? You think dead people are free? Didn't Germany and Japan come out of a world war more democratic? East or West Germany?

Information on 13F filings can be found below: https://www.sec.gov/divisions/investment/13ffaq.htm From Questions 7: "The Official List of Section 13(f) Securities primarily includes U.S. exchange-traded stocks (e.g., NYSE, AMEX, NASDAQ), shares of closed-end investment companies, and shares of exchange-traded funds (ETFs). Certain convertible debt securities, equity options, and warrants are on the Official List and may be reported. But see Section 13(f)(4) (referring to equity securities of a class referred to in Exchange Act section 13(d)(1)) and exemptive rules 12a-4 and 12a-9 under the Exchange Act." Non US securities are excluded from the 13F filing so for an international entity/manager such as Fairfax it is essentially useless as a source of information on their overall holdings.

A shiny object for us to focus on: https://www.businesswire.com/news/home/20200514005103/en/Kennedy-Wilson-Fairfax-Launch-New-2-Billion

+1

Thanks Petec. Disagreeing about investment valuations is what makes a market! Let me start with a few comments on Eurobank....Prem's thesis was that it was very cheap relative to book value. Perhaps the cheapest bank on the planet. He never seemed to say much beyond that. Fairfax now owns something like 40% (I did not look up the exact percentage so apologies if this is off somewhat) of this company. How many recaps of this company did Fairfax participate in? Clearly the original thesis was wrong and Prem and team were unwilling to throw in the towel. I believe this was due to ego and also position sizing being too large. both of these raise other issues that seem to repeat at Fairfax. The most recent "recap" involving the merger with Grivalia seemed promising but now Eurobank owns real estate that is no doubt deeply affected by Covid. My bet is that further real estate write downs will be needed which will negatively impact BV in my view. Furthermore, I believe that unfortunately the Greek economy will be severely impacted by Covid. I believe that something like 20% of the economy is derived from tourism. This will impact many of Eurobank's clients in my view resulting in additional loan losses further impacting BV. The ultra low interest rates, which I believe are here for a very long time, were never good for Eurobank (or any other bank for that matter) and now seem to be here for the long haul. Sure the political climate in Greece is better now but given the hardship that Greece will likely experience as a result of Covid its not something (stable political environment) that I think we can count on going forward. I think the shares need to triple to get back to where they were trading at the beginning of the year. A tall if not impossible task if you ask me. Given the current backdrop economic backdrop we are all facing I would suggest that owing Greek banks is the last place I would want to be invested in especially in the size that Fairfax has. The attached article may be of interest: https://www.ekathimerini.com/252538/gallery/ekathimerini/business/the-cost-of-coronavirus-greek-tourism-slump-threatens-a-decade-of-hard-won-gains I would be pleased to provide you with my thoughts on Resolute and Stelco (I live about 20 kms from Stelco's head office so I know this one well) if you want to contact me in a PM.

Just after the last potential seller throws in the towel! Low interest rates (all else equal) mean less income from float. So yes, bad. Covid 19 has two impacts: 1) big recession means less demand for insurance. 2) potentially higher claims although Fairfax don't think they are badly affected. But who knows why the stock is getting (even) cheaper today. Might be Powell's comments, might be because Eurobank is down 10%, or it might just be because there are more sellers than buyers today. Bryggen, I am sorry you are experiencing this pain however a few of us on here (myself included) attempted to warn shareholders and those considering becoming shareholders to stay away from owning the shares of this company. Before I write anything further please understand that there are a few on here that will continue to strongly advocate for investing in Fairfax. They will cite the "undervalued" nature of their major equity holdings, the fixed income yield pick up during the bottom in mid-March, the long term track record of Prem and team, the hardening market, the vastly improved underwriting results and of course the fair and friendly culture. In my view, none of these reasons is sufficient to overcome the many deficiencies that have existed at Fairfax for several years and which are now being exposed for what they are. For every positive point put forward by those who still believe and advocate for investing in Fairfax's shares are equal and in my view more compelling reasons for not doing so. The company is now swimming in debt, it never had a strong capital structure however it is now simply awful. Its long term holdings in Eurobank, Resolute Forest, Stelco to name just a few are likely impaired beyond repair. I fear a similar fate for Recipe and the myriad of its private holdings in the retail space. These were low margin businesses at the best of times and that was before any additional costs that Covid will impose on all retail establishments. Fairfax Africa and India have been so very disappointing for shareholders in those companies as well as for shareholders of Fairfax who have watched their seed capital into these entities melt away. Furthermore, the low interest rates will hamper all insurance companies going forward. God help any existing shareholders if we have an active hurricane season this year. You now have a decision to make. Continue to hold and believe in the long term value of Fairfax (that was hard for me to write) or sell your shares now and redeploy the proceeds into other more compelling opportunities. The choice is yours. I have made mine!

Vinod1....brilliant....simply brilliant!

Maybe RBC was the outfit that extended the $2B revolver to FFH? ::) SJ +1

The difference between FFH's cash and BRK's cash is the extent to which mgt is free to deploy it without constraints. So, BRK doesn't actually have ~$130B of cash that can be deployed into just anything. Some of that cash needs to be maintained in risk-free (or almost risk-free) investments so that it is available for use by the insurance subs if there is some sort of mega-cat. So maybe BRK has $60 or $70B of truly discretionary cash that it could deploy into an acquisition, equity purchases, share repurchases or divvies? Now turn to FFH. Some of the cash hoard at FFH needs to be retained for insurance operations because we know that NB and C&F were bumping up against their UW ceiling due to their limited capital. So, of that ~$11B, how much can truly be deployed without constraints? Maybe a couple of billion? That thought process was the driver behind the discussions on this board about how high FFH's equity allocation could truly get, and my question about just how much exposure to corporate bonds/paper that FFH can truly accept. On the other issues that you listed #1 to #4, I don't believe that any of these are a short-term problem. Holdco liquidity is fine if this situation is cleared up within a year or so -- there are no major maturities coming down the pipe, Prem claims that Recipe and Seaspan won't need any more cash from FFH, so the big decision at Christmas will be whether it's still a good idea to kick out $270m in common dividends. But, if this situation persists for more than 1 year, clearly FFH will need to have a few conversations with its lender about that revolving credit line and then in 2022 the bullet payments will return. The other risk is that if the market takes another leg down and FFH is forced to take a negative mark on its equities, those revolver covenants could become a real thing. #2 and #3 are probably what is discouraging investors the most. Over the past few years, FFH has been heating its offices by throwing bundles of cash into a woodstove.... SJ Xerxes...let me offer a few thoughts in response to the question you raised: -Sure liquidity seems okay but it was achieved with borrowed funds. First the drawdown of the revolver and more recently the 10 year privately placed debt issue. This has significantly raised the debt/equity levels of the company into a range that many investors are uncomfortable with. -Following up on the above point. Many investors are shocked that Fairfax once again found itself in need of liquidity since Prem repeatedly stated over the last several years that they were over capitalized in their insurance subsidiaries and were waiting for the hard market when it turned out the parent company needed to inject cash into many of the insurance subsidiaries to support their growth once the hard market arrived. Fairfax was at the brink several years back. Prem swore he would never again allow that to happen. Needing to draw down on the revolver ...really Prem? Seems he forgot the very hard lessons that were taught many years ago. -Yes the hard market had started and the insurance companies seemed to take advantage of the higher premiums in Q1 however that was derailed by the outbreak of the pandemic. Premium growth can now be expected to stall or more likely decline over the next few quarters with no certainty it will pick back up within any foreseeable future. -Fairfax continues to hold numerous outsized equity positions with questionable future prospects that have been marked down significantly yet Prem and his team seem unwilling to sell. Included here are Fairfax’s holdings in Eurobank, Blackberry, Resolute Forest to name just a few (there are many more). These equities not only tie up considerable capital but also tie up considerable management time. These investments were mistakes. Man up and sell them off. It’s okay to admit you were wrong. The market place will simply not believe that The Hamblyn Walsa investment team has changed its ways until these losers are sold off. Buying small positions in Alphabet and Exxon is not enough. -Many of Fairfax’s investments are focused on two general segments of the economy---restaurants and retail. Can you think of two sectors that have been more affected “long term” by the Coronavirus? Enough said on this point. -I also think Paul Rivett’s departure and the hole that it leaves on Prem’s succession plan is weighing on the market’s perception of the company’s prospects. I have stated previously stated that I did not believe the publically stated reasons for Paul’s departure. If however the stated reason is true than Prem really messed up by not addressing that possibility with Paul before selecting him as Fairfax’s CEO heir apparent. For goodness sake, Paul took over the quarterly update calls and Prem stepped back from those totally until Paul decided to move on. -Fairfax is in the penalty box. Sure hard core deep value guys are still somewhat loyal however for the majority of the investing community Fairfax is now a show me story. It is no longer being given the benefit of the doubt. It will take a very long time for this perception to turn around. I personally do not believe that it is worthwhile waiting around to see if that turn around occurs regardless of what the current discount to BV seems to indicate.

It seems to have taken Chou an extremely long time to learn that you can't just buy cheap stocks without understanding the quality of what you are buying. With all due respect to Francis and Mohnish....no one needs to pay either of them for their investment management "skill" in order to own Apple or Google. I personally do not believe either of them suddenly found this "new" approach to value investing. Francis staunchly defended his former approach to value investing for more than 10 years and now he pivots and buys Apply and Google? Call me skeptical....at best. I wonder how his long suffering unit holders who bought into his previous approach all those years feel now? Why is it criminal if Pabrai or Chou pivot, but when Buffett did it with Apple, it was applauded. I owned Apple before Buffett, does that make me a better investor than Buffett? I don't own any Apple right now...does that make me worse than Buffett? Managers evolve...your investing style evolves depending on how and what you are allocating capital into. Chou allocates capital into an insurance business now as well, which cannot handle the same volatility his funds can, because the funds aren't leveraged and losses won't affect his ability to invest capital. In an insurance business, it directly affects his ability to write insurance contracts. Cheers! Criminal? your choice of words....certainly not mine. You say the change is due to an evolution....I say its more likely due to a capitulation. BTW....I am not saying the move is a bad thing....long overdue if you ask me.....

It seems to have taken Chou an extremely long time to learn that you can't just buy cheap stocks without understanding the quality of what you are buying. With all due respect to Francis and Mohnish....no one needs to pay either of them for their investment management "skill" in order to own Apple or Google. I personally do not believe either of them suddenly found this "new" approach to value investing. Francis staunchly defended his former approach to value investing for more than 10 years and now he pivots and buys Apply and Google? Call me skeptical....at best. I wonder how his long suffering unit holders who bought into his previous approach all those years feel now?

There is no evidence that Sanjeev's "theory" concerning Fairfax and Atlas longer term has even been considered. Furthermore, if it has been consider than Sanjeev should not have any knowledge of those discussions. Until than, the best that can be said is that Atlas is yet another oversized under performing investment made by the existing investment team at Fairfax. Prem's stated reason for investing in Atlas was to back and benefit from the investment prowess of David Sokol. Ridiculous reason for investing $1.5 billion but those are Prem's words. Sort of like taking the equity hedges off because of Trump's election win, investing big time into India because Modi's election win would be transformative and buying into Exxon because of the 10% common stock dividend yield it offered at the time of investment.

Here it is: https://www.fairfax.ca/news/press-releases/press-release-details/2020/Fairfax-Financial-Holdings-Limited-Financial-Results-For-The-First-Quarter/default.aspx

Regardless of how you slice it or try to spin it.....Fairfax is over leveraged and continues to have considerable funds (at the corporate as well as the subsidiary levels) tied up into a long series of illiquid under-performing equity investments as well as highly questionable non-publically traded non-insurance subsidiaries. Furthermore, with Paul Rivett stepping aside (and I continue not to believe the party line on his reasons why) the company is without a solid executive transition plan despite its aging executive management team. In addition, the industry as a whole faces massive headwinds given the current ultra low interest rate environment. The weakness of their focus on restaurants and retail has now been exposed. Their restaurant bet via Recipe is simply not financially viable given how restaurants will need to restructure until a COVID vaccine exists. And yes I know --- their equity picks (Eurobank, Blackberry, Atlas Corp etc) are currently offering great long term value at these levels. Do they offer the best long term value (all things considered) of all the possible equity investments out there at this time? No way! And I am not talking short term here---I mean over any reasonable long term horizon. I could go on but why bother. Those of us who have seen the light are out of this stock completely or have greatly reduced our positions. Those who still believe will learn soon enough. I think the short answer is that FFH floated 10-year debt, which they need for the longer term financing of the holdco, while the corporates at 4.25% will likely be sold in roughly a year for a realised gain. What is more, the corporates were largely funded from the revolver, which is a good tool to use opportunistically to exploit the temporary displacement of credit markets, but it's not a great tool for the longer term financing of the holdco. The money was made when FFH bought the corporates a few weeks ago, but it won't be realised until 2021. SJ The corporates were bought in the insurance subs investment portfolios. They’re funded by premiums, not holdco debt. I think you’re confusing the part of the revolver that was drawn down in Q1, which was reinvested “at a positive spread” (which may imply corporates, but they didn’t say that) but basically sits at the holdco as cash or near-cash in case of emergencies, with the part that was drawn down earlier and used for general holdco purposes, like recapping the subs, and has now been termed out. You are correct that FFH did not explicitly state that the revolver drawdown was invested in corporates, but simply that it was invested at a favourable spread. I took the mental short cut to assume that the only way to get a favourable spread would be to invest it in risky bonds (risk-free only yields about 0.50%). But, it is always possible that they found some sort of state/provincial/municipal debt or some sort of agency debt that yields enough to constitute a favourable spread. Whatever sort of risky bonds they bought at the holdco level are likely to be sold in 2021 if the risk-free returns to a sane level and the spreads narrow back to near pre-covid levels. Out of curiosity, where did you see that the revolver draw for re-capping the subs has been termed out? The risk of using a revolver for that purpose has always been that it needs to be regularly renegotiated and who knows what kind of covenants the lender will end up demanding. But, if it's termed out for, say 5 years, that would be great. SJ

I was pleased to see Fairfax release its Q1 update. Hopefully this starts a new trend where they communicate more frequently (quarterly calls and the annual meeting are not sufficient). I was relieved and somewhat surprised that the RiverstoneUK deal closed without adjustment on March 31/20. Fairfax needed that $600 million big time. Having said that I am not sure that the hard market is guaranteed. Sure the Q1 premium growth was nice to see but this is somewhat a rear-view mirror story. Given the economic back drop that we are now experiencing I think that premium growth is more than likely to slow considerably given the financial strain that so many companies are under. In addition, the current environment is likely to result in higher claims experience than expected in certain lines (e.g., workers comp). As for the draw down in the revolver----yes it was the right thing to do however it shows how cash tight they really were/are. But my biggest wish is they stay away from any significant new equity investments. I have absolutely no confidence in their ability to "select stocks" that will outperform. The equity team should focus on getting out of the equities they are in currently and leave any new investing to Brian B who will once again work his magic in the corporate bond market. Overall...it was a good update but the long term became quite a bit longer if you ask me.