Txvestor

It hasn't been a buy and forget, because of all the missteps HW has made. Were it not for the equity hedges and deflation swaps, BV would easily have been 50% higer. And the multiple to BV would likely have persisted. If you buy here, you are betting that Prem will not do anything value destructive in the next few years. The market has not ruled put that possibility and I think the market is probably right. They jury remains out on the AWH purchase alone. To the poster stating he mentioned 2B and $70 per share, I was on the call as well. When an analyst asked, he was clear that this was not guidance. On that I would just say he has also touted 15% annual gains in BV for many years, and keeps saying over the long term, that hasn't happened in post crisis era either.

Cardboard, two or three days ago, FFH was trading pretty much bang-on at book value. My heuristic for BV (or at least a BV that is mostly tangible) is that this is the point where the business as a going concern offers zero value. This is the point where, if one could liquidate the assets for a "fair price" and put the business in run-off, you'd be equally well off to do so. So, I'd say that FFH deserves to trade above book. There's plenty of room to debate about how much above book it ought to trade, but my take is that this thing is not worth more dead than alive. SJ Agree with you on this stuble. In addition the recent subsidiary sales transactions demonstrated value above BV as well. I think the market here is discounting recent poor investment performance and extrapolating that into the future. I can't say that is unreasonable. MKL deserves their stock price being above BV. They have invested well, acquired non-dilutively, and outperformed the markets consistently. If Fairfax does that for 5 yr, they will rerate as well. Will that happen? I am not so sure. But the investment thesis here is thet even without hitting it out of the park, they should be able to consistently grow BV 10-12% a year, a feat that has eluded them over recent times. Even that would get them to a higer multiple than 1BV. Prem just has to make sure he doesn't trip over his shoelaces yet again.

Interesting observations, and as it happens to coincide with better underwriting results in recent years, one cannot really complain. AWH ceding that much, yet performing so poorly this last Cat season is shocking however. I guess at the very least, it is not as much a gem as it was touted, and Andy Barnard has a lot of work to do whipping their systems and processes into shape.

I think that is pretty rude. Thanks for stating the obvious. This is a free discussion here and nothing stubble said is out of bounds. Asking that question is not unreasonable given the recent vote consolidation. Remember even if ~1B is watsa family money, the vast majority of the market cap belongs to other shareholders. The fidjuciary responsibility is to them. As to the 600k annual salary, that cannot be the defense of every action. Prem is free to take what he deems a market appropriate salary, but then would be judged on those metrics. He chose not to and I can see why given his large ownership stake. All these questions do arise because for the past 8-9 yrs he has not distinguished himself during arguably the greatest bull market of many of our lifetimes. He was flat out wrong, and BV has suffered tremendously as a result even as he kept touting 15% PA as a longer term objective. Let's be clear, 8-9 yrs is not a short time either. Finally he has wagered pretty big on a market and economic turn upward at an interesting time in the cycle. In addition he has bet large ie over 50% large, on a couple of huge insurance acquisitions, on which the jury is still out. If the latter two things go against us, it would not be clear to me that his position is tenable, despite his fabled past.

Well said and absolutely true. I would be skeptical about anyone stating that they know AWH book inside out 100%. Its not possible. The Cat losses were higher than at other fairfax insurance subsidiaries and Prem hinted at some modifications to underwriting. The part that concerns me is the $50M adverse development from a claim(s) they took this Q. That is over and above the Cat losses. Based on the worse than Fairfax Cat losses and this additional adverse development, if anyome can cleerly categorically why it would be wront to question AWH I would be interested. The jury is out as far as I am concerned. This is a sizable and dilutive acquisition mind you. I think barring wacky investments by Prem(which he appears intent on tempering) and things going terribly wrong at AWH, the path to $2B a year in BV gains is not terribly difficult to envisage. At 8% equity gains, an average 3.5-4% bonds return, and 95% CR on 15B in written premiums gets you there. And as Prem pointed out thats $70/share/yr. on that basis in the current market Fairfax should be a stock closer to $1000 than to $500, but to my mind the unknowns stand in the way, which is why it teades where it currently does. The good part is fixing that is within grasp. I'm not sure that it's a simple question of being negative. The adverse development is definitely a concern. Does it end in Q4 or do we see more in the future? Was it caused by bad luck, or is it a symptom of bad underwriting (under pricing and poor adjustment practices)? Is it something that fixes itself, or can FFH find somebody to go in and fix it? Those are legitimate questions. Allied might be a decent deal, but the first few quarters are harkening back to the massive reserve adjustments of TIG and C&F. But, this time FFH doesn't have the SwissRe cover, right? The good news is that TIG and C&F were long-tail which is where the worst adverse development tends to appear. But, I'd say the jury is still out (this is true of all acquisitions -- it takes a bit of time to determine whether you bought a lemon or a turd). SJ

I agree, and I hope he has come to terms with his wackiness! I also worry a little about the Underwritig at AWH and hope there are no roaches in that motel we have taken over.

https://www.prnewswire.com/news-releases/seaspan-enters-into-definitive-agreements-for-250-million-unsecured-550-debenture-and-warrant-investment-with-fairfax-financial-holdings-limited-669830003.html Is this the same David Sokol of Berkshire Hathaway fame, that was unceremoniously booted out soon after the Lubrizol acquisition for front running his money while aware of Berkshire's plans to takeover? A little hard to stomach after Watsa's blind faith in Tom Ward that lost Fairfax hundreds of millions of dollars. If you listen to the likes of Walter Schloss one of the attributes of Warren Buffett they are amazed by is his uncanny ability to judge character, and as close as Sokol was to the top, I doubt he was acting with less than full knowledge. Certainly a concern for me. Any thoughts?

Merry christmas and happy new year to a wonderful group of young nvestors and benevolent humans. It never ceases to amaze me how many stand out investors are here. Humbled by your company! Thanks Sanjeev and each of you.

Food for thought. Are we creating the same thing in other sectors of the economy? When I read X hospital chain buying Y and see the numbers and scale of their regional and national footprint, and then the utter mismanagement. One wonders whether in the not too distant future we might see a cousin of “too big to fail” emerge in the health sector. The argument goes: “We cannot let these hospitals fail and leave 30M Americans without access to tertiary healthcare, this is a matter of life and death”. What’s to prevent that when we have 200+ hospital national chains being formed and deeply indebted? That was my biggest disappointment with Pres. Obama, I really don’t think we effectively dealt with TBTF, and now encouraged it in other vital sectors of the National economy, witness the huge mega mergers in multiple industries. Had the big banks been broken up instead of take over others we likely wouldn’t have seen these mega mergers in other sectors. The solution to TBTF can never be even bigger!!! The American taxpayer and eventually the US economy and it’s currency’s position is being imperiled by these actions IMHO.

Agree, one should always be careful of industries with headwinds threatening their margins and even survival. Whether that be certain brick and mortar retail or other industries, in the face of such upheaval, investing for me automatically goes into the "too hard" pile. I am certain there are a few retailers in the brick and mortar retail pile that are inappropriately being punished as we speak, but I am not sure I am equipped to know or figure that out. This industry(healthcare) is facing enormous upheaval and scrutiny like never before in decades, their margins are nowhere near to acute care facilities, and patient and family expectations and liability is quite high(as they often transition there from acute care and used to that level of care ad supervision which SNFs are not set up to provide). Staff is not the most motivated(or well paid for that matter). Hence it is not the best business when further to those issues, payments are pressured. Granted these are REITs, but if their end customer is not healthy their porospects too cannot be.

Prem plugging India Inc. And its growth potential. Some insights into his thoughts on fairfax india here. https://economictimes.indiatimes.com/opinion/interviews/businesses-we-have-invested-in-are-growing-by-leaps-and-bounds-prem-watsa/articleshow/61716345.cms

Sharperdingaan, Do you have any reason to think specifically about that? Historically reserving at both Fairfax insurance subs. as well as AWH/Brit has been conservative and usually gone the other way. Why are you thinking it might be different this time? And what was the Cat. loss in Ireland you are referring to?

True but the odds of another major in the rest of the year are rather small. These super cat years come along every decade or so, and in that context a Q is a very tiny part. But yeah another one will certainly be more impactful. From the outside, there appears to be room for some dispersion of underwriting prowess from legacy units to acquired ones. Andy Barnard has some work to do!

Yes and around half of that 930m loss was from the most recent two acquisitions.

By that measure with the amount of easy money floating around, we likely won’t see any hardening of the markets anytime in the near future. I’m not sure that’s the primary correlation. Let’s see, but taking 100B + out from an industry with a 750B or so capital base generally should be impactful.

Twocitiescapital, Perhaps so, but my point was those set of factors would be the same at odysseyre and the other legacy Insurance subsidiaries and the relative underperformance was what was unnerving. I just listened to the conference call recording from earlier this morning and Prem obviously projected confidence and seemed unperturbed. He said Andy Barnard and other senior execs. visited with AWH after the close and were happy with operations. He did mention a $20m negative reserve development at AWH and without that and Cat losses they would’ve been a CR of 96%. He mentioned their historically very conservative and redundant reserving. Mentioned Scott Carmelani’s Long track record etc. To me that was a bit self-contradictory but ..... At any rate, not rushing to judgement here but certainly something to keep an eye on going forward. I mean how many times haven’t we seen an insurance purchase go wrong initially even if it eventually works out. Sometimes one wonders if that’s not an industry way to bring out the dirty laundry! It happened to Prem and Fairfax before and it happened to no less than one WEB and Berkshire Hathaway right? On a more positive note, he mentioned his view that he thought the discrepancy between BV and IV was at its largest in its 32yr history. That’s quite a statement considering Fairfax has traded at as much as 2.5-3x BV in the past and generally at a much higher ratio than its current multiple. Perhaps one could argue that it was overvalued then but it’s quite obvious that atleast Prem thinks shares are undervalued. And considering market valuations you would be hard pressed to disagree. My 2c is that if AWH and Brit turn out over time to be as good operations as their other Insurance subsidiaries have been of late, given current market valuations etc, 1.5BV is certainly not unreasonable for this. If we get a hard underwriting market and/or other investment holdings perform well, then Prem may well turn out to be right in his assessment. Some ifs in there for sure but the market certainly is more than pricing those risks in at current levels. It will be an interesting next 12mths for sure and a lot more should be clear to us by then.

Upon reading this and seeing that Allied was responsible for about $400M of the $900+M cat losses, I decided to go back and look historically at Allied's underwriting. It is impressive. They certainly don't look like some of the companies that FFH bought back in the day that were early disasters (but eventually turned out well). $2.2B in favourable reserve development in the past 15 years. Only one year in 15 years that was over 100% CR. They averaged 90.5. Very consistent. Keep in mind their Portfolio is in the $9B range and they had $400M loss. As a percentage basis, they had more than their fair share within the FFH Group, that I agree with. Take a look at page 18 - "Income Statement" http://www.snl.com/Cache/1001217885.PDF?Y=&O=PDF&D=&fid=1001217885&T=&iid=4078260 That was my impression as well, and Prem even touted their long term compounding of BV with a solid underwriting track record as the underpinning of their quality and reason for paying premium to BV. Yet when you look at this Q numbers, they are significantly worse than legacy Fairfax insurance divisions. What's more, even EXCLUDING the Cat. losses this Q, AWH's CR was 106.2%. Again a Q does not make a reputation, but had AWH been trading on an exchange, I am pretty certain they would have been taken to the woodshed on these numbers. One hopes there is not more to this than just a Q of unfortunate developments.

Agree with Dazel, the CR for AWH and Brit were brutal and certainly much higher than legacy units. Hopefully its not a cause for concern and certainly a quarter does not make an underwriting reputation, but it certainly the relaive differential caught ones attention.

So true. Ask Pabrai 2016 v 2017. It is linear only when viewed in the rear view mirror. Lol.

Perhaps, but truth be told his recent investment record has not been anything to crow about. Most certainly a man of the utmost integrity and humility. And certainly pre 10yrs ago had an enviable track record but of late it has been bad with multiple permanent impairment of capital investments.

More extend and pretend. These gov'ts are betting on permanently lower interest rates in Euroland. If and when that changes, then we will se who has been swimming naked. My semse is that the way these places are piling on debt, we won't need rwtes to go up too high or for too lomg for this to become evident. The day of reckoning is coming. ZIRP has just slowed down the passage of time getting there.

Well, he did plug SHOS and ONDK and he tends to concentrate. So putting those two things together it doesnt surprise me that he still has $40M AUM.

Dazel, Whilst I share your enthusiasm for fairfax and their excellent insurance underwriting operations in a potentially hardening insurance market, the release states that the $1.4B is inclusive of the 9.9% shareholding they will have remaining. So I think you've double counted the remaining holding to get to the $2B. That is why I posted some time ago that when Prem sold the initial 12.2% stake to Warburg pincus for $USD383M back in May, they appeared to leave almost $200M USD on the table. Not sure what the issues were, but just 3mths later the stake is valued 60% more???

HJ, So good, i think most people here can see that the american people have been had. US gov't and corporations have cut bad deals for the averege american citizen. Isn't that the whole point! As to your preference for chinese doctors in tier 1 chinese cities. With the limited knowledge I have about standards there, I wouldn't consider myself eligible to comment. That said however when one reads of Mao Zedong's Barefoot chinese doctors and their qualifications etc. I can't say it inspires much confidence. And remember average is what matters if comparing apples to apples. Finally the point i made was not unique to the medical industry. It is much more systemic.

This unfortunately falls into the category of slogan solutions that theoretically exist but politically un-attainable. Real life is not a slogan. Will China remove all trade barriers? Tax only Apple and Google? Won't happen. Unfortunately democracy is a b.... Call it the friction in this political economy. Sometimes there's no solution other than to slow down the leap into the utopia and take a step back. I realize that. I'm talking about what I think should be aimed for, which is different from what many others believe (nationalists who believe their country/group is special because they were randomly born in it and such). Goals and slogans are different. If you don't have goals and just do whatever is politically expedient or advantageous at the moment, you just float around with the currents and rarely get anywhere. I am not sure it should even be aimed for. Would you wish to accept chinese environmental standards? Food and drug standards? Should we allow the free movement of chinese medical professionals with their level of skills and training into our system? I can site many such examples. And if we do not allow some parts of the economy access but we allow others, we again create the precise social disequilibrium that we are discussing. Despite the issues we are discussing, there are a lot of things about the US that are very right, and which must be preserved. The corporations aren't that much interested in this, and are far more interested in their bottom line and expanded market access. This is a very complex issue without a simple solution. Right now however the voice of the corporations is reigning supreme over the voice of the people. That was the clear theme of this last election, whether that was Trump on the republican side or Sanders on the democraric side. You had to have blinders on to miss that. The reality however is that the average person today is not percieving international trade to be helpful to his/her prospects. They are further frustrated that their will is not being expressed in the policy sphere. China and other trading partners will not interrupt this arrangement willingly as they obviously are net beneficiaries of the arrangement. Their goal is to let this keep rolling along for as long as they possibly can while developing teir domestic economy as quickly as their can. They are building a middle class out of it and the bigger they can build it, the easier their internal transformation will be. Same with most of our other trading partners. Free trade only works when the prosperity hence created over there then creates more demand for US goods and services. If it does not do that, then the system becomes solely about wage arbitrage by US corporations and with a net benefit to the other country. Cheaper goods at Walmart is a poor substitute for a stable and steady job. A proxy for measuring all of that is the US trade deficit. And glaringly apparent are the very real issue of rising trade deficits, rising levels of total national indebtedness as well as other non debt obligations, income inequality and federal reserve currency debasement. Many of these things are growing faster than GDP. These are most certainly not features of a strong economic transformation but rather a very unhealthy and dangerous one. They will invariably affect growth rates and social cohesion if they aren't doing so already.