StubbleJumper

Because it hasn't been booked yet. That gets to my question of where we will sit at the end of Q4 in 7 weeks. There will likely be material earnings in addition to the amount booked for Digit, which will make valuations truly silly if there is no improvement in the stock price. SJ

Overall, it was a nice quarter. A few observations: 1) Underwriting is blowing the doors off! Net Written was up by more than 25%? I nearly shit my pants when I saw that. It looks like the hard market is gaining speed at FFH, which is hard to believe after this many quarters of favourable conditions. The combined ratio was actually okay. It looks bad, but it's Q3 and that's how Q3 usually goes. But, do a little school-boy arithmetic and strip out the cats, and you are left with a pre-cat CR of 87 in Q3 2021 compared to a pre-cat CR of 88 in Q3 last year. You can't control the cats, but at least the core underwriting looks to be solid. 2) The headline EPS number is great, but we need to temper that a bit because there is once again a bit of a quality of earnings question. Paper gains were recorded for Toys R Us ($85m), Eurobank ($130m) and Singapore Re ($32m). But, even stripping out those paper gains, it was still a very good quarter. 3) Valuation is still ridiculous. End of quarter book was US$562/sh. Tack on another ~$18/sh for excess of fair value over carrying value, and you're at US$580. The shares closed at US$410 today. That's like 0.7x adjusted book. What will we see for an end-of-year adjusted book value? If we don't see some significant market gains in the share price over the next 7 weeks, valuation ratios will be absolutely silly at year-end. 4) Why are we not seeing more favourable development? I had anticipated that the strong price movements over the past few years would have resulted in a bit more cookie-jarring of income. If all Q3 reports were like this one, life would be grand. SJ

Was that just the common shares, or does the $115m include the mark-to-model losses on the debs? SJ

Any time you can make a ~3% ROE in Q3 you're doing pretty well (that would be a fully acceptable annualised number). Usually Q3 has the highest cats of the year, so.... Looking forward to downloading the report and seeing how it all added up. SJ

The deleveraging is occurring very rapidly due to growth in the denominator for most measures of indebtedness (ie, debt/asset or debt/equity). The difference between those debt ratios in 2020 and in 2021 is like night and day. Another year or two with a 15% ROE would push those ratios into a nice and comfortable range, without ever repaying a single nominal dollar of debt. I was very unhappy with FFH management for having been so levered prior to the pandemic, but they've seemingly managed to grow their way out of the problem. SJ

When FFH went into the restaurant biz, I shit all over the idea because there are few industries as competitive as the restaurant industry. Every cooking enthusiast and every immigrant seems to think that he should set up a restaurant, put in ridiculous unpaid hours, recruit family members to work for peanuts, and even then most go out of business within a few years. But, Cara/Recipe has actually turned this into a half-decent business. I didn't post about this, but six weeks ago, I went for a vacation on Canada's east coast. When I travel by car, my objective is to rack up miles, so I stop in some pretty mediocre restaurants. McDonalds is my mainstay because it's normally right beside the highway, it's predictable, it's very fast, it's cheap and the cans are always clean. When I want to be "fancy" while driving, sometimes I stop at St. Hubert, which is what I did six weeks ago on my way to the east coast. St. Hubert has long been a very popular restaurant in Quebec because it was about the cheapest place you could go for a sit-down meal with table service. For decades their stock-in-trade was to sell quarter chicken meals (I prefer the leg-quarter) at a price that clocked in a couple of dollars higher than a McDonald's combo meal. The menu was traditionally very short, focussing on the chicken quarters, but also offering hot chicken sandwiches and poutine for those who weren't into roasted chicken. The up-sell was traditional Quebec desserts (sugar pie, or Poor Man's pudding) for a few bucks more. In short, it was a place to get an okay meal for an excellent price, with table service. I go to St. Hubert's a couple of times per year, but when I stopped there in September, it struck me that I could no longer find the quarter chicken meals on the menu. Being a cheap bastard careful with my money, I thoroughly looked through the menu and finally found the traditional quarter-chicken meals in small print on like page 4 of the menu. The first 3 pages were dedicated to a whole host of more expensive menu items (ribs, steaks, other chicken dishes, etc) and the cheapo traditional meals were buried deep in the menu. Okay, at least I found the cheapo (and fast!) option that I wanted, but it struck me that Cara/Recipe has done a great job of adapting the menu in an attempt to push the cheques higher. The founders did one thing well, and that was serve good chicken at a cheap price. The new management approach has taken the restaurant traffic from long-time patrons and added value by lengthening the menu with higher priced options. Who knew that professional management could actually add value after an acquisition?!? Anyway, that's a lengthy anecdote just to say that I had a nice vacation in the maritimes and that Recipe has done far more with St. Hubert than I had ever expected. In the next installment of my vacation diary, I will describe how I saved nearly 20 dollars by using the cheap-ass innovative technique of purchasing my own oyster shucking knife and buying oysters from the fishermen directly on the wharf... SJ

By the way, I ripped off Prem when I used the "more dead than alive" comment. That's what he wrote in the 2000 annual letter.... There's nothing new under the sun. [EDIT: Oops, now I've just ripped off Ecclesiastes. I should be better at attribution!] SJ

Yep, at the moment, the market seems to hold the view that Fairfax is worth more dead than alive. This too shall pass. SJ

Yes, at the moment, FFH's own shares appear to be one of the most attractive investments that it could make. As long as they make repurchases at a price lower than intrinsic value, it should be a nice outcome for shareholders (and perhaps intrinsic value might be 1.2x book?). To envision $5B of buybacks over 5 or 10 years, you need to imagine a source of funds. The buybacks are conducted by the holdco, so to have $5B over 10 years would require that the holdco find $500m/year of cash over and above what it uses for its interest payments, debt repayment, dividend payments and holdco overhead costs. I estimate that the holdco burns through about $750m/year on interest, dividends and corporate overhead. If you hope to see $5b of buybacks over 5 years or 10 years, you'd need the insurance subs to send $1.25 billion to $1.75 billion in dividends per year to the holdco, or you need to imagine the holdco continuing to lever-up, sell off subsidiaries (like Riverstone) or for the non-insurance subs to suddenly start making large cash contributions. If you look at Note 19 in the financial statements of the most recent annual report, you'll see that the entire dividend capacity of the insurance subs for 2021 was $1.55 billion. So, effectively, the insurance subs would have to contribute 100% of their dividend capacity to meet a buyback objective of the size that you have tabled. While that dividend capacity should grow as time goes on, the subs do need to retain a certain amount of capital to fund their organic growth objectives. We should not expect the subs to dividend 100% of their theoretical capacity, or anywhere close to it. All of this to say that the financial capacity is not really available at the moment for an aggressive buyback campaign and probably won't be for another year or two. Maybe in years 3 through 10 of your notional 10-year planning horizon? If the shares are still cheap-ish when capital becomes available to the holdco, the buybacks would be an attractive option. SJ

Viking, that's a nice summary of the impact of the market and deflation speculation decisions, amounting to roughly $500m/yr. But, that's not the whole deal. The other side of the deal is the poor equity investment decisions. As I have said in the past, FFH could have done better if it selected its equity portfolio by having the Watsa family dog shit on the investment listings from a newspaper, and having FFH buy shares of the companies that the turds landed on. But, somehow they managed to "hedge" an equity portfolio that performed terribly over the decade. Case in point would be my favourite whipping boy, Blackberry. FFH piled a shitload of capital into BB, eventually totalling more than $1B. Ignoring a few small-ish interest payments for the debentures, that money has returned approximately ZERO since 2012. Christ, if they'd have put the money in something as simple as a basic S&P500 investment, the annualized return would have been double-digits. So, for BB alone, you can add $100m/year to your annual $500m "hedging" fuck-up. Okay, so as you've noted, FFH says that it's no longer planning to take short positions and that the days of market speculation using derivatives is over, so we won't be spotting the other team three touchdowns every game. But, BB is still languishing on the balance sheet, so that alone continues with the practice of spotting the other team a field goal. I guess it's better than spotting them three touchdowns? SJ

Once again, can we please stop using the terms equity "hedges" and inflation "hedges?" Those terms imply that FFH was engaging in responsible risk management practices. What FFH actually did was "hedge" more than 100% of its equity portfolio and it had deflation "hedges" with a notional value of more than $100B for a company that had annual revenues that were less than one-third that high. When you "hedge" more than 100% of your exposure to the underlying, you are no longer managing risk, but rather speculating. So, let's instead tell the brutal truth. What FFH actually did was use derivatives for the purpose of market speculation. Management did this, it didn't work, and it cost shareholders dearly. We should not use the word "hedge" as an euphemism to somehow suggest that management made responsible choices with respect to position sizing. SJ

Based on a deep understanding and knowledge that those individuals would not have had a snowball's chance in hell of ever being selected for a board of directors if they did not have wealthy parents who had a large voting stake. SJ

Yep. The situation has degenerated to the point where we are left debating which appointments were merely bad, and which were atrocious. SJ

No, I have never had my father donate $1 billion so I could be hand-picked to run my own philanthropy foundation. My guess is that somebody who climbed through the ranks of the non-profit sector, with successive jobs of progressively higher responsibility, to eventually be competitively selected to be the boss of a $1 billion foundation would be a pretty talented person. But, that's not how Susie was selected for the job, was it? The culture of BRK will probably last one or two CEOs post-Buffett and then it will likely revert to a typical organization with an over-confident, self-interested management cadré. Appointing a 68 year-old family member to the board is unlikely to forestall that process. SJ

Just for the record, this is the résumé of Susie Buffett: https://en.wikipedia.org/wiki/Susan_Alice_Buffett Does that look like the ideal background of someone who has been appointed to guide the management of a $650 billion company? I'd say that she makes Christine McLean and Ben Watsa look like rock stars.... SJ

Earlier this week, I believe I questioned whether we ought to start calling Buffett the "Prem Watsa of the south." When somebody calls Prem the "Buffett of the north" it is intended as a compliment. If Buffett is called the "Watsa of the south" it clearly isn't. SJ

Yes, all of that, and four years ago the stock traded for US$530. At the end of September, I added some shares at CAD$520. There's bit of over-shoot and under-shoot on FFH's share price. SJ

Yes, I'd say that Canada has been a couple of years behind the US in adopting Amazon as a preferred retailer. My anecdotal observation is that the number of empty Amazon boxes at the curb on recycling day and the number of white mini-vans prowling through my neighbourhood have sky-rocketed over the past few years. The pandemic likely hasn't helped matters either, as Toys would likely have been designated as a "non-essential" retailer in Canada's largest province and therefore could only offer curbside pickup. If you have to order something for curbside pickup, you're better off just ordering it from Amazon and getting home delivery. All of that to say that I suspect that Toys' retail business hasn't gone well since FFH purchased it in 2018. I was very happy to see FFH sever the real estate from the actual business because then it will not be FFH which needs to make the agonizing decision of whether to close shop if (when?) the retail ops can no longer generate positive cash from ops. Instead, that will be Putnam's decision and, as long as they pay the rent, FFH is golden. And if they can't pay the rent, that's a minor speedbump on the road to ultimately divesting the real estate (hopefully at a large profit!). When FFH bought Toys, I groaned out loud because it looked to me like a reprise of Eddie Lampert's Sears purchase. In principle the assets are worth more than the purchase price, but that kind of investment only works if you don't lose a bunch of money from ops before you are able to divest the valuable assets. That doesn't look to be a risk anymore. SJ

@Viking Thank-you for investing the time to meticulously quantify those holdings. Followers of FFH knew the rough importance of each, but such a systematic coverage is an excellent resource for all of us. Sometimes when I see a list, my mind jumps to what is not on the list. In this case, your size-ranked list made me think a bit about where the Toys R Us holding would fit if it were publicly traded. Recently, FFH astutely unloaded the operational element of Toys, but retained the real estate (I say "astutely" because I am guessing that Toys is getting its ass handed to it by Amazon...). When FFH bought Toys for CAD$300m in 2018, the story was that the real estate alone was worth the purchase price, and now FFH has effective severed the real estate from the operations. So, given that real estate prices in Canada have gone absolutely bonkers over the past three years, what are those properties worth today? Has big-box real estate tracked the insanity of the residential real estate market? Is it possible that those real estate holdings are worth something similar to FFH's holding in Recipe (ie, US$336m) today? If anyone has any insight on the value of big-box sites, I'd love to read it. Thanks again for the excellent work. SJ

I don't generally announce any of my purchases or sales, but I also bought a bit three weeks ago at ~CAD$520. It seems like a no-brainer. SJ

In North America, overland flooding is a very unusual thing to insure because underwriters have a devil of a time to come up with an appropriate premium for a specific piece of land. Has Germany done a better job of flood plain mapping that would enable a competitive market in flooding insurance? It seems to me that it's the sort of residual risk that ends up being underwritten by the taxpayer... SJ

Another case of a marginally competent family member being given a position on the board. Should we now call Buffett the Prem Watsa of the south? SJ

Many still do make that argument. The dividend is just shy of US$270m, which would be enough to repurchase a considerable slug of shares. SJ

What is required at this point is a modicum of patience. The dividend easily covers the carry at the current price and will likely do so for a couple of years (unless we see the unlikely case that rates go bonkers). A two or three year time horizon will likely provide impressive returns to a buyer today. Don't overthink it. SJ

I'm not sure it completely ends those thoughts, but it does seriously cast doubt over the insider information hypothesis. There is always the possibility that the sale of shares was motivated by the need for cash (ie, maybe the guy is getting divorced and needs to pay out his wife, or maybe the guy is building a summer home on Lake Muskoka). At this point, the fact that FFH still holds BB tells me that Prem wants to hold BB, meaning it's an active decision, for better or for worse. SJ