StubbleJumper

It would be a very long-term consideration. The Watsa family's economic interest in FFH is roughly 10%, so you'd need a lot of buybacks to get you to a point where they owned enough to make the final push to go private. SJ

Well, again, that's a bit of a philosophical question. Is it okay to screw a few of your business partners as long as a bunch of your other business partners agree? And on Atlas, FFH provided its approval for the take-private transaction even if they didn't add any cash. They still agreed to screw some minority shareholders. As I said, that's business and that's life. But, these sorts of transactions, along with the periodic governance abuses, do tend to tarnish the image that Prem has attempted to cultivate over the years. SJ

Nothing wrong with making a quick buck if that was your investing hypothesis (I sometimes like a quick hit too!). But, an interesting mental exercise would be to construct a parallel universe where the minority position in ORH was NOT repurchased and was still trading on the NYSE. What might be the stock price today? SJ

When the minority position of a company is bought out at less than 1x, what the majority shareholder is saying is that it's worth more dead than alive. One of the ways that you can get a sense of "fairness" is to invert the situation. Would Prem have allowed his ORH position to be sold for that price? Not even close. Same deal for the Atlas takeout. None of the principal owners (FFH, Washington, Sokol, etc) would have accepted the price that minority shareholders received. Okay, that's business and that's life. But, these types of events do put a tarnish on the "fast and friendly" image that Prem has tried to cultivate over the decades. And, as you have read in these comments, it has led some investors to have a preference to invest in FFH directly rather than invest along with FFH in some other company like Fairfax India. SJ

And did you think it was "fair" when ORH was bought back at a price that was ultimately 0.95x BV? SJ

Is it insurable under business interruption, or is it cyber? Thinking back to the pandemic, doesn't business interruption require that access to physical facilities be interrupted for more than 24 hrs? Not sure what insurance hit there would be in this case. SJ

No, if I use a VPN to connect to the board, it's by accident. It usually means that I'm somewhere with dubious network security and I've done some financial transactions and forgot to turn off the VPN before visiting COBF. That being said, I don't spend all that much time at my principal residence, so I log in from all kinds of places. I think I stay home enough to qualify for provincial Medicare coverage, but I haven't done the precise calculation of how many days I've been in the province... SJ

I hated this investment when it was made. A heavily unionized company in a commodity industry that was targeted by then-president Trump as a strategic sector, and it had already gone bankrupt to boot. But, I guess there's a price for everything. Beyond that, I think I might have bitched about what FFH's exit-strategy would be, because there seemed to be no exit-strategy for existing crap-positions like Blackberry or Resolute. Well, this is a great exit with a fully acceptable ROI. Kudos to management for having gotten in, and then more importantly, having gotten OUT of stelco profitably. SJ

Seems to be back to normal for me now. It was a weird 24 hours. SJ

I've buggered around enough yesterday that my IP address is apparently banned. I power-cycled my modem in an attempt to get a new IP, but that didn't work. I can only log in using my mobile phone, which has a different IP. Is it possible to erase your IP blacklist? SJ

Irrespective of the magnitude it's not really even an issue. FFH has a program of charitable donations and espouses the "doing good while doing well" approach. Donating to this sort of cause could easily fit into that program. My question was just basic curiosity. Is the Watsa family donating money outside of FFH's charitable initiative, or was this part of the charitable initiative? Both are fine, but if was FFH's money, I'd tend to prefer that the "credit" be attributable to FFH rather than the Watsa family. If it was Watsa family money, then Prem should definitely be applauded for having made the donation. SJ

Well, that's what the headline would suggest, but I was having trouble finding more detailed clarity in the article itself, and there's no press release on Fairfax's website. In the article, I saw these two lines, one which would suggest it was Watsa family money and one which might suggest that it was Fairfax shareholder money: First: Mr. Prem Watsa, founder and chairman of Fairfax Financial Holdings Ltd., has donated $5 million (approximately Rs 41 crore) to his alma mater, the Indian Institute of Technology Madras, to advance brain research. And second: Fairfax Financial Holdings, under Mr. Prem Watsa’s leadership, has pledged its support to this cutting-edge research and development initiative. In a press release on Tuesday, Mr. Prem Watsa stated, “We are pleased to support this work and wish them the very best to reach greater heights.” SJ

It wasn't entirely clear to me when I read the story, did Prem donate $5m of the Watsa family's money, or did Prem donate $5m of Fairfax shareholders' money? SJ

The borrowing is occurring at the holdco level, while the bond investments are principally held in the insurance subs. The subs must keep those bonds as part of the insurance reserves to pay indemnities to policy holders. But, the question is a good question, and it's something that I mused about a bit yesterday. It appears as if the hard market might be peaking and that premium growth might be abating. That being the case, the insurance subs appear to have considerable excess capital that they could dividend up to the holdco. I fully understood the objective of refinancing the existing Allied debt (~$500m), but I didn't quite grasp the objective and timing of tacking on the extra $250m for use by the holdco. They needed that extra $250m last year when the subs were capital constrained, but it strikes me that the holdco's activities this year could be easily funded by dividends from the subs. In any case, the part that raised my eyebrows is only the $250mm so it's not really all that material. Better to borrow when you don't really need to than to wait until you are desperate! SJ

Interesting. The holdco was tight on cash for most of 2023, but in theory the insurance subs should be swimming in cash during 2024 and could easily dividend considerable amounts to the holdco. In that context, it raises an eyebrow that they are raising net cash of US$250m at this stage. I would have liked to see that last June... SJ

Of course I was cherry picking dates, and I blatantly announced the fact that I did so! But, the fact is that that there is nothing magical about a 10-year hold. I cherry-picked an 12-year hold that had a disappointing return. Frankly the mythical person who actually bought at the beginning of that period and sold at the end, would clearly belly-ache about a "lost decade." And the points that I cherry-picked were not the only points of 10-ish years with disappointing market returns. That is an indisputable fact that the chart makes abundantly clear! As I said, it's not all that hard to find a couple of points with disappointing returns over 10 years. But, more importantly, the market return and the growth in IV are not always in sync. The opportunity available in 2021/22 when you could buy FFH at 0.7x or 0.8x BV show that disconnect. At that point, the market was saying that FFH was worth more dead than alive! The market was saying that management was destroying value, and not just destroying a little bit of it, but a great deal of it. So, there was a considerable disconnect between market results and IV. Nonetheless, if market results are your only point of focus, you can certainly easily find a decade of disappointment. SJ

In fairness, if the stock price is all you are looking at, it's not hard at all to find a "lost decade." The stock price in January 2010 was US$392 and then it dropped below that level during the covid market displacement and stayed below that level for most of the first wave of covid (heck even in Sept 2022 it was only US$457). The dividends were a mitigating factor that provided a modest, positive return over that time but it's not hard at all to cherry-pick a start-date and end-date that give you an unsatisfactory market return over a decade. The question of whether there was a lost decade from an operational or capital allocation perspective is entirely a different question. I would say that there have been occasional poor investment and risk management decisions by FFH over the entire course of its existence, rather than there being only one decade with poor decisions. You just hope that the shrewd decisions outweigh the poor in terms of frequency and magnitude! SJ

Ouch. Is the market finally turning? We are three days into the 2024 hurricane season, which the experts say will have a larger number of named storms and perhaps stronger than usual storms. Not sure that I like the sound of all of this. SJ

Time for Ben to earn his stripes. If you wonder why FFH trades at a discount to some of its comparables, this is an example of the company's ongoing governance issues. SJ

How much does depreciation and amortization amount to for a holding company that is primarily an insurance outfit? Without looking at the numbers, I would have assumed that EBIT and EBITDA would be pretty much the same thing. SJ

Without a doubt, but the math of it can be a bit nasty. If the insurance market turns and the CR bounces up to even 98 from the current 94, it would hurt a fair bit. On $23B of float net written, that would be nearly $1B hit income, pre-tax. You'd need to sell a lot of chicken dinners at St Hubert to offset that! And a situation where it's possible to simultaneously write a CR of 98 and buy sovereign debt at 5% would still be an unusually good financing differential... SJ

I don't think that there's much question about whether it was luck or skill. Nor do I think that there's any question about those skills suddenly disappearing. But, it *is* definitely fair to question whether 1985-2009 can be replicated, and even whether the record of the entire 38 year period can be replicated on a going-forward basis. Let's just say that I find that proposition to be dubious at best. If it does happen, I'll be a happy guy, but there's a big difference between buying your first small insurance company and doubling its size 4 or 5 times and doing that when you already have net written of $23 billion. Let's just say that I am a bit skeptical that they will routinely meet their 15% target for growth in BV. I must confess that I don't pay much attention to Gayner, so I won't offer a view on that. Buffett hasn't lost it, but he has certainly had to change his approach to enable the returns that BRK has had. The size challenge has been a real problem for BRK, particularly for investments. Thank heavens that Todd or Ted put him onto Apple, or the past decade might have been pretty mediocre. The scenario is the math of operating an insurance sub. Take a careful look at the disclosure that Prem provides in his annual letter which describes cost (benefit) of float, sovereign debt returns, and the resulting financing differential. We have been in an unusually favourable situation for the past two or three years. But, what that means is that either FFH has discovered the secret sauce which enables it to write a CR of 94 and buy treasuries at 5% and nobody else can do that, or it means that there is no secret sauce and other people can do that too. If it's the former, then FFH shares a worth a fortune. If it's the latter, capital will flow into the industry and those favourable returns will abate. It is very rare to get BOTH a good underwriting profit AND strong sovereign debt returns. My take is that the insurance market will turn, as it always does, so enjoy it while it lasts! SJ

Yeah, you'll get any number of estimates of IV for FFH. A good, basic approach might be 1.2x or 1.3x adjusted BV. That valuation is conservative enough that you aren't reliant on FFH actually routinely achieving its 15% BV growth target. If they actually do routinely achieve that target, you will in retrospect evaluate that you were too conservative when you bought, but those are the good sorts of outcomes. As you noted, when that SIB was conducted, it was priced slightly lower than book (ie, 0.9x). At that point in time, the market was effectively saying that FFH was worth more dead than alive! In theory, shareholders could have gotten roughly book if management had just thrown in the towel, run-off the business, sold the assets and written a cheque to shareholders! Mr. Market can sometimes be a little too pessimistic, and when the price suggests that FFH shareholders would have been better off if the company weren't a going-concern, that's pretty negative. But, what's it truly worth? Well, if you believe it's worth 1.2x or 1.3x adjusted BV, then the valuation gap has closed significantly, but perhaps there's a bit more room to go. The real question is what to do if Mr. Market pushes it to 1.4 or (gasp!) 1.5x. That will be the point where shareholders will really need to think hard about what it's truly worth. In the mean time, as long as the bottom doesn't suddenly fall out of the insurance market, we can sit back and watch the earnings flow in for the next few years. SJ

The valuation gap as defined by P/BV or pretty much any other widely used valuation measure has definitely narrowed over the past year, and as you suggested, it might be that certain insiders finally have a reasonable opportunity to trim their position. I'm not sure that this is the case for Prem. Back when he bought the US$150m of shares two years ago, I posed the question on this forum of where he sourced the cash to do so? Did he have US$150m just sitting in his savings account, did he dig it out of the cushions of his chesterfield, or did he borrow the lion's share of that cash? Based on this sale, my guess is that he probably borrowed the cash to buy those shares and the carry on that borrowing has caught up a little bit with the share price growth expectation (ie, if he borrowed that money, has the interest rate that he's paying grown to 7% or 7.5% ?). Without a doubt, there are many FFH shareholders who would pay the higher capital gains rate if they liquidate their position next year. But, I can tell you that I wouldn't let the tail wag the dog in this particular case. The higher inclusion rate gives the appearance of an enormous tax hike, but keep it in context. The highest marginal tax rate in Ontario is 53.5%. With a 50% inclusion rate, you pay 26.75% tax on your capital gains, and now with the 67% inclusion you'd pay 35.7% tax on your capital gains. So, the difference in tax paid on gains in the highest marginal bracket is like ~9%. It's considerable, but if you believe that FFH is still a shade undervalued and that its underwriting growth still has legs, you would look forward 1, 2, or 3 years and conclude that share price will likely be strong enough to make it irrational to let the tax tail wag the dog. The value of my personal shares is independent of the size of the float. My portion of FFH's future cash flows is X/total shares outstanding. So, when 250k shares are retired, my portion of FFH's future cash flows goes up. That part is not optics. The part that might make it mostly optics is the price paid. Continuing shareholders are only better off after a repurchase if the shares were repurchased at a price that is less than intrinsic value. When FFH conducted the SIB a couple of years ago and bought back a boat-load at US$500, it was quite obviously the case that those repurchases were undertaken at a price lower than IV. But, a repurchase price of US$1,100 is probably much closer to IV and the benefit to continuing shareholders is much more limited. As an example if IV is actually US$1300 or $1400, we continuing shareholders collectively benefit benefit by 275k*US$200 or 300...less than five bucks a share?). It's not nothing, but it doesn't move the needle all that much. SJ

Yeah, I'm over 50% at this point. I like high conviction positions, but that's going beyond reasonable. It's an insurer, which makes it even more irresponsible and unwise. I know that I ought to take it back down to 30-35%, but... SJ