bearprowler6

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.

https://www.fairfax.ca/news/press-releases/press-release-details/2020/FAIRFAX-ANNOUNCES-ANNUAL-MEETING-WEBCAST-DETAILS/default.aspx

Two points: - Scientists and doctors rely on evidence. There is little evidence that masks protect the wearer in low-risk situations. There are two reasons why there is little evidence. One, they probably are less effective than you think (see below). But mostly, ethics boards tend not to approve research studies where you intentionally expose someone to an infectious disease. - Common sense is that masks droplets coming in and out. So they should provide equal protection in either case. But if you think about it, you will see that Fauci is right. Let's say a homemade mask reduces 50% of the droplets you inhale. But you can also get infected through the eyes, so let's say that reduces your protection by 1/3. You can also get infected by fiddling with an infected mask or improper washing. So maybe a mask is 25% effective. But respiratory droplets are probably not the primary transmission mechanism. Infection also occurs when you touch an infected person or item. Let's say that is 50% of transmissions. So a mask only reduces your odds of infection by 12.5%. (all numbers made up but roughly based on the limited research I have seen) But what happens if you put that mask on the infected person? The mask basically eliminates the airborne virus. Any droplets are unlikely to be expelled with enough force to enter your eyes, mouth, or nose. It will also reduce the number of droplets on nearby items. So a mask on an infected person might be 75% effective. Imagine you are in a crowded grocery store. There are 99 susceptible people and 1 infected person. If you put a mask only on the 99 susceptible people, the infected person will be walking around shedding virus on the shopping cart, breathing out droplets and aerosols, breathing on the veggies, touching the boxes, coughing on the checkout counter, touching the PIN pad.... So you can see why the Fauci and the CDC recommended masks for the infected people only! Now the problem was underestimating asymptomatic transmission and the lack of testing. The CDC advice is correct, but only if you can tell who is infected! KCL using your numbers... --masks worn by non-infected persons are 12.5% effective in preventing infection --masks worn by infected persons are 75% effective in eliminating transmission Have you not just made the case for everyone wearing a mask? And that is just to assist with lowering the spread of the corona virus let alone the impact on assisting with lowering the spread of other infections/ diseases.

I fully support Trump's decision not to wear a mask and strongly suggest the other members of his administration to follow his example!

FWIW, the European Commission cleared the merger on Feb 26 (simplified merger review procedure). Since the "deadline" (end of Q1 2020) outlined at the time the sale of 40% of RiverstoneUK has now been missed I think we can fairly assume the sale to OMERS is in trouble? Or at the very least being repriced? Fairfax needs to communicate on this one...... Furthermore, their equity holdings are getting crushed including but not limited to: -Blackberry -Eurobank -Resolute Forest Products -Stelco -Recipe -Kennedy Wilson In my view and I fully expect that others will disagree with this....a lifetime of work is being wiped out. Fairfax does not have adequate liquidity. The long term does not matter when you can't pay your current bills. Prem said he learned his lessons. Obviously not. The tide is out and....well we know what that means.....ugly indeed.... I agree that a lot of value has been destroyed. But you're going to have to convince me they can't pay current bills. Depends how you define it (not being able to pay their current bills) but consider the following: -They are already drawing on the bank line and that's before the current corona situation arose -Can't supply the capital needed to support the hard market in their insurance subs -Private investments must be starved for cash and looking to Fairfax to stay alive? -Selling off portions of long held assets (RiverstoneUK) to raise cash and now that's perhaps in jeopardy -Unknown funding sources to complete the minority interests in various insurance subs including Eurolife and Allied World -Capital markets don't offer a solution (but it would not surprise me if Prem dilutes his shareholders yet again even at these levels) Prem and the team go to Omaha every year. Buffett laid out the case for growing over time yet Prem and the team did not listen or thought they were smarter. At best Fairfa's share price flatlines for the next long while at its new share price level. Just like it fluctuated between $600 and $700 CAD for the last 10 years. Folks the market got this one right. One for the efficient market believers!

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

Status of OMERS purchase of 40% of Riverstone UK? When the deal was announced on December 20/19 it was expected to close by end of Q1 2020 (subject to regulatory approval). Well here we are...at the end of Q1 2020. Any news on this deal?

Maybe not, but equally it will go up a lot if performance improves because *any* buying will move the stock. Petec.....respectively, the issue is not whether the stock price goes up or not on good performance. The lack of liquidity of the stock makes it impossible for all but he smallest investor to take a position in the stock and have any hope at all of exiting when they need or want to. The traded volume yesterday was 3509 shares (closing share price is $3.01). So sure a very small retail investor can accumulate a couple of thousand shares at the current price and then trade out when/if the price recovers to...lets say even the IPO price of $10. But honestly, is this really what we are trying to do here? Fairfax Africa shares cannot be accumulated in any meaningful amount without dramatically moving up the share price. Also, once accumulated, a significant number of shares cannot be disposed of without greatly influencing the share price downward. In my view, why bother. There are simply too many other opportunities out there where similar profit opportunities exist without the constraint of trading liquidity to worry about. Furthermore, management did say they would address this issue (lack of liquidity for the shares) and have not done so. Perhaps this alone is reason enough to avoid these shares.

This stock is very thinly traded. At the first annual meeting, 2 years ago now, management indicated they would be taking steps to address this issue. Nothing has been done. Depending on the size of your investment this may become a problem down the road should you wish to or need to liquidate. I believe this to be a major knock against the stock and one of the major reasons it has drifted towards zero since the IPO. You will never get major buying or institutional support for this stock until this issue is addressed.

An update on the Horizon North and Dexterra transaction: http://www.horizonnorth.ca/news-and-knowledge-centre/news/horizon-north-logistics-inc-announces-covid-19-response-including-reductions-to-2020-capital-spending-program-and-other-costs-and-reiterates-commitment-of-all-parties-to-transaction-with-dexterra-and/

Yep. Did anyone ever expect to see FFH with a 4% dividend yield? SJ FFH's dividend will be no more.....the company (at the holdco) is severely cash restrained....and that was before this drop. Anyone else suspect that Omers will look to find a way out of its plan (act of God/force de majeure) to buy into Riverstone UK for $600 million? Forget about funding the growth of the insurance subs in the so-called hard market. Highly likely that insurance premiums will not be paid. And lets not forget about the devastation across its equity book (both public and private equities): -Atlas Corp (formerly Seaspan) -Blackberry -Recipe -Eurobank -Resolute Forest -etc Let's hope that Brian Bradstreet, the real brains behind the investment team at FFH, worked his magic yet again and sold out of all fixed income positions at the optimum time although this will only help so much. Comments/thoughts?

Investmd....I understand your frustrations totally. I have studied Fairfax in-depth for well over 20 years and invested in the shares almost as long. I concluded a few years ago that something was very very wrong. Despite all of my considerable efforts I could not get to the bottom of the problem. in the end I concluded it was not one or two problems but a myriad of problems that could not be corrected/overcome. As a result I started to sell off a portion of the shares I owned until I reduced the overall share position to a much smaller portion of my overall portfolio. I can assure you that I never looked back. My only regret....not selling all of the shares that I owned. I enjoyed going to the annual meeting and related activities which included meeting up with old friends that I had met along the way but let's get serious these reasons are not enough to keep me invested in the stock. So for what its worth....start selling off your Fairfax holdings. It will hurt to do so but in the end you will not regret it. Others will disagree with this recommendation but a growing number will agree. Good luck!

http://www.horizonnorth.ca/news-and-knowledge-centre/news/horizon-north-and-dexterra/ Another attempt at surfacing value?

What I thought was even more interesting was the commentary later on about wanting a more diverse, more liquid portfolio, albeit still with a value/opportunistic bent. They were also quite explicit about not wanting positions over $1bn (although that would mean reducing Eurobank which I think is unlikely and a mistake at this point). Short answer to your question is I have no idea what they will sell but the changes might go some way towards addressing a lot of the concerns raised here over the years. Given the comments made on the call related to a more liquid portfolio it would seem a number of existing private investments would be the initial candidates for monitization. The would also be consistent with the comment mae by Prem in his march/2019 letter to shareholders: "We expect to monetize some of our remaining investments in private companies with similar results!" Therefore the likely candidates would inlcude the following: - APR Energy -Davos -Peak Performance (formerly Performance Sports) -Farmers Edge -Toys R US (land value which they continually say is the value of the investment made) -Boat Rocker -Sporting Life/Golf Town Monitization could take several forms including IPOs and/or sale of a part or whole of these investments to a private equity buyer. The following from their public holdings are also possibilities: -CIB (Egypt) -Sterling Resorts (held through Thomas Cook) -Thomas Cook itself -Resolute Forest (take the hit and move on)

JEast---any chance the team at Fairfax uses this to buy back their stock at its current levels? It would seem that a lasting benefit to all long suffering shareholders could be attained if the funds from the sale are used in this way?

Shhhh.....you will wake Prem and Paul up. Its already past their bedtime. The complete silence from the Fairfax team regarding Blackberry and several of its other losers equity investments is nothing less than shameful! Awhile back one of the regular posters on this Board (who it was escapes me) suggested that one of the major problems with Fairfax was its non-existent investor relations communication strategy. Of course this person was shot down immediately by all the hard core net book value -- value investors. Well....that was about 40% ago on Blackberry and a good 20%+ ago on Fairfax itself. The standard response of "we focus on the long term" falls way short. I suspect they are embarrassed and simply don't know what to do and are hiding away under their desks just waiting for the January dividend payment and juicy year-end cash/stock bonuses. Is it possible to start a revolution at Fairfax?

Funnily enough several of these look really interesting to me at the moment. I have developed a new rule for following Fairfax: buy what they buy, just do it several years later. Fair enough Petec....but one needs to ask why they are always so early? In fact...they need to spend considerable time addressing this major flaw in their investment process. For example, as soon as they bought into Stelco it was pointed out by many on this board that the timing was very poor given where we were in the economic cycle and given the tariffs being levied by the Trump administration. And what happens...50% of their investment literally disappears over night. And they were way early on Blackberry and truth be told this is not a sure thing even from this level. Full disclosure....I bought into Blackberry late last week. Furthermore...although I might be wrong....Resolute Forest is simply a bad investment. They have had hundreds of million tied up in this loser for years. Time to admit the mistake, sell and redeploy the capital. I could go on but I think my point has been made. I have followed Fairfax for literally decades and am a very patient investor but something is not right when you assemble a group of equity investments like the ones they hold at the prices they bought in at.