StubbleJumper

Bial has been a fabulous investment, but in some respects I don't mind seeing it sold. There is possibly a large upside that has been left on the table, but in the back of my mind, I have always entertained the risk that a future government in India could nationalize it at a disadvantageous valuation using the rationale that a bunch of foreigners have been extracting fat profits at the expense of the Indian Population. That concern might be a holdover from the decades of government interference in the Indian business sector and maybe the country has moved forward from that. But, I don't entirely mind selling an asset that could be subject to expropriation. SJ

My recollection is that ORH has plenty of underwriting capacity due to high capital levels, as the premiums to surplus ratio. Was lower than 1 at the beginning of the year. They could write piles more reinsurance without hitting a capital constraint (and in fact this is what they've done in previous super hard markets). If there's a sub that's been tight on capital, it's Crum, and reinsurance isn't really their business. I'd say you need to break it down between capital that FFH needs for its insurance operations and that which it doesn't need. The insurance subs can invest their float in those kinds of opportunities. There would be no trouble at all to shift $3b or $5b out of treasuries and into convertible corporate bonds if the opportunity arises. There's no requirement for the Holdco to do this when 95+% of the investment funds are in the subs. But the holdco occasionally does hold a modest amount of capital that it doesn't really need for its insurance operations. It's possible that a billion or so might flow up to the holdco this fall and next spring as a result of the asset sales (pet ins and resolute). If this ends up being the case, it would be hard to imagine that they'd find a better investment than their own shares if current prices persist. SJ

I'd say you need to break it down a little. First consider the CPI components and then consider the indemnity components. So for CPI we know the headline number is like 8 percent and the leading elements are energy, food and motor vehicles, followed by a bunch of etcetera. For indemnities, the inflation is composed of replacement cost for goods and social inflation for civil liability. How do those square? Food and fuel aren't likely to be short term drivers of indemnities. Motor vehicles definitely are drivers of indemnities for the companies that insure them or reinsure them. So which elements of FFHs indemnities are you most worried? Prem has expressed concern about social inflation for 4 or 5 years now, so much of that is likely priced in. Otherwise, costs for rebuilding and other goods are probably not wildly out of control. But, fuel and food is pretty irrelevant in the short term. SJ

The large discount to BV provides plenty of incentive for some sort of action to be taken, either by Fairfax India or FFH. My take is that a SIB is a better vehicle if Fairfax India actually wants to buy back a meaningful volume of shares (a SIB with a Dutch Auction price bracket of US$10-12 would probably do the job this year). But, if the discount persists for a prolonged period, at some point it will end up near the top of FFH's capital allocation hierarchy. FFH's own shares are probably near the top at this stage and then possibly leaving capital in the insurance subs might be the second tier...but, if the discount to book doesn't change eventually Fairfax India will become one of the most attractive options... SJ

Did you note the "in most years" part of the comment? SJ

True if you are thinking about it in terms of our existing trucking system with its 40-ton trucks. The heavy trucks currently beat the hell out of the highway system. But, if you enter the imaginary world of self-driven trucks, you no longer need to have 40 tons of freight in an attempt to push down the cost of labour per ton-mile. For heavy freight, you could just as easily have twice as many trucks at 20 tons each, which would considerably reduce the wear and tear on the road. What is more, by imposing a congestion charge on trucks in the heavily congested areas of the country, the states could effectively push most of the truck traffic into the 8pm to 4am time frame when there's nobody on the road. But, all of this is decades in the future if it ever happens... SJ

Atlas Corp. The share price has hit $15 today, which leaves a potential upside of about $0.50 plus dividends if you believe that shareholders will ultimately accept the existing $15.50 buyout. So, the upside at this point is likely the 3.3% buyout premium plus another 3.3% annualized divvy. If it takes 3 months to complete the buyout, that's not a bad return, but if it takes 6 months it's crap. And if the deal falls through, the downside from here is probably -10% to -20%. SJ

Agreed on both. I would add that the *really* interesting thing will be to see what they've done with duration. SJ

@Viking Thanks for the update on the equities. It provides a more precise view of what we knew was going on -- there will be a mark-to-market loss reported when Q3 gets published in November, and then the benefit of the takeovers won't likely show up until Q1 2023. So, the headline EPS number will have a M2M loss on equities of $310m, and then looking at the fixed income sensitivity table published on page 20 of the Q2, a 100 bps parallel shift in the yield curve would be a mark-to-market hit to the bond portfolio of $263.2m. Call it a M2M loss on investments of $500-600m when the numbers are released. The headline numbers won't be pretty, but maybe it'll set up FFH to initiate a buyback at favourable prices. SJ

They probably have no intention to buy back that many shares. The NCIB filing is just an annual formality, and at the end of most years, it bears no resemblance to reality (last year's filing gave them the ability to buy back 3.5 million shares). It's a little like the annual shelf prospectus that FFH files. It gives the company the flexibility to rapidly respond to changing market conditions, but we shouldn't really expect those filings to be used to their maximum potential. But yes, if FIH does actually want to undertake meaningful repurchases, a SIB will have to be the tool. As you've quite rightly pointed out, the limit of 7k shares per day from the NCIB would mean it would take an eternity to spend US$20m. SJ

Shareholders of FFH will recall that Paul Rivett collaborated with a group to buy Toronto Star a couple of years ago. Some eyebrows were raised about the price paid and the circumstances of the transaction. In particular, @bearprowler6 noted that the price may have been inadequate and subsequent competing bids for the company were spurned by TS's board of directors while FFH's board of directors didn't seem to push for a higher bidder. Well, now there seems to be trouble in paradise with Paul Rivett seemingly in a scrap with his principal partner: https://nationalpost.com/news/canada/court-asked-to-force-sale-of-toronto-star-as-two-owners-irrevocably-impaired-over-future-of-media-giant No immediate relevance to FFH. But, for fuck's sake, how can't they make a buck at the price they paid? SJ

Resolute Forest Products. The price has dipped to US$20 today and it is virtually certain to be bought out at US$20.50 + CVR, likely in late-March or early-April. So, the 50-cent cash spread basically covers the carry for 6 months, and the CVR are a "free" lottery ticket. SJ

Yeah, the NCIB is an annual thing. It's good that they've filed it because it enables FFH to scoop up a few shares at prices well below what they paid through the SIB from Christmas last year. Given what's happened with interest rates and equity prices, we should fully expect to see some significant mark-to-market losses on the fixed income portfolio during Q3 and considerable mark-to-market losses on the equity portfolio. Add to this a 9-digit loss from Hurricane Ian which should be booked to Q3 (through IBNR). Headline EPS numbers could once again be pretty gruesome for Q3, even though FFH's core business is strengthening and the operating environment for its equity portfolio has become more favourable! The stock price has already been flirting with the US$450s over the past week, so perhaps there will be a truly excellent re-purchase opportunity during November after the superficially gruesome Q3 EPS numbers are released. The NCIB might enable FFH to pick up 100k or 200k shares during November, which would be great if the share price drops down to the low-$400s. Does anyone have any insight on whether the Pethealth transaction is likely to be booked to Q3? Here we are with two days remaining, and I don't recall seeing a press release indicating that the deal has been consummated. Maybe that one will be booked to Q4 and Resolute to Q1 2023. If those gains happen to coincide with a slowing of the M2M losses, we could see some really nice Q4 and Q1 numbers. Time to start digging in the chesterfield cushions to scrape together a few bucks. SJ

One small caution for readers of this discussion on the potential hit from Ian is that the Bloomberg article is quoting the total potential damage number from Ian, not the insurable damage. So, $60 billion sounds like a really large number, but that includes all perils, including damage from wind, rain, flooding and storm surge. Not all of those perils are insured under a typical policy. So, if there's $60B of damage in total, the insured damage might be more like half of that, depending on what exactly drove the losses. It's still going to be a large bill, but... SJ

Ignore what Prem says on the conference calls. Instead read what Van Hoisington and Lacy Hunt write. Prem says all kinds of crap, but what they actually do is considerably different. SJ

I'm not sure that's entirely true. The impression that I've had over the years is that FFH's investment team seems to be an adherent to the analysis of Van Hoisington and Lacy Hunt, who propose that we will see a long-term trend to lower real interest rates in the United States. Bradstreet has made gobs of money for shareholders by periodically exploiting regression-to-trend (ie, Van Hoisington's downward trend), but I don't think that FFH holds the view that 6% treasuries are some sort of long-term norm. SJ

Fully agree with the logic and thought process, but I would suggest that you might need to bump up your level of ambition. At this stage of the game the US sovereign yield curve is strangely flat with all maturities from 6 months to 30 years yielding between 3.5% to 4% (I can't remember the last time it was so flat). The yield on FFH's fixed income portfolio will definitely be heading north as they roll over maturing bonds, so that is a very sweet situation. But, if Bradstreet et al makes the decision to reach for yield by deploying a meaningful chunk of the fixed income port into corporates, it will likely take yields of 6%+ to make that happen because if you can get 3.87% for a 2-yr treasury or 3.66% for a 5-yr treasury, you probably wouldn't accept 5% for corporate bonds. These are good problems to have. It will be interesting to see just how far they push out the duration this fall. I'd like to see them roll a good chunk of the maturing bonds into 5-yr, but I guess we'll see how FFH views the world. SJ

I was dumb and only bought the equity instead of the LEAPS. I only scooped 3-4 bags instead of the 60-80 bags that Eric got. SJ

Yes, it is times like this that it would be nice if we still had access to LEAPS for FFH. There's probably not as much money in it now as there was back in 2003/2004 when guys like @ERICOPOLY made 60 or 80 bags, but a little non-recourse leverage today would still juice the returns nicely. SJ

My disappointment is that the stock has been more buoyant than I would like. Mr Market really didn't hate the headline EPS number that they released two weeks ago. Here we are halfway through August and all is quiet in the Atlantic basin, so the typical angst about hurricanes hasn't affected the market at all. How is a guy supposed to get a bargain around here?!! Maybe if Jen Allen would resign quietly with little explanation the stock would sell off as they always seem to do when the CFO suddenly quits. I was hoping for a buying opportunity in the low to mid $400s.... SJ

No, the conversation at the time on this board was, yes, ATCO is cheap. BUT, BRK.B is cheap with much less risk. AND GOOGL was cheap, and possibly cheap in a *generational* sense. And what the hell to say about META? The upside was clearly better than that of ATCO, but is Zuck a nut-job and has the world left him behind. No, I'd say that ATCO and C were about the same level of discussion because the time to work them out was likely to be similar (ie, a good outcome with a 5-yr horizon, but unlikely to be an outstanding outcome in 1-yr). In fact, probably C was a better buy than ATCO, but that's one that I didn't touch (and I didn't comment on it either). Heavens, probably BAC was a better buy than ATCO (and I didn't comment on that one either)... You picked a cheap stock and it worked out well for you, but there were all kinds of cheap stocks out there. If you have to choose between a cheap mega-cap and a ATCO, I don't at all blame board members for having bought the mega-caps instead of ATCO. SJ

Did you see me respond to the posts about people buying BRK.B? Did you see me responding to posts about people buying GOOGL? Did you see me responding to posts about people buying META? I also didn't mention Algoma Steel last month, but somebody else did after I already purchased. Doesn't mean they weren't cheap and doesn't mean I wasn't buying. And on that theme, do you ever recall me participating in the annual brag-fest during January about how well we've done during the year? In 20 years, I think I've made one comment in those annual dick-size threads, even though I might have made more. Not my style. Silence does not mean disagreement. ***edit*** And by the way, congratulations on your analysis having worked out in such a short time-frame. You weren't wrong that ATCO was cheap, but you didn't make the assertion that the valuation gap would close within 6 weeks. Those who bought BRK haven't gotten ~35-40% in those 6 weeks, but it's been a healthy ~10% without a special event. In the absence of that special event, I'm not sure that your table-pounding buy would have been better than GOOGL or BRK-B. SJ

Did you pull up the chart of the stock price before you wrote that bit about being mired in the toilet? During the market correction, ATCO's share price trended downward along with the broad-based decline in share prices. Go ahead and pull up the one-year chart. If somebody had offered $14.45/sh as recently as early April we would have all been shitting ourselves with laughter. The market correction has brought many share prices down, including ATCO's. On that theme, I wouldn't say that the discussion or lack of discussion on the board about or buying Atco when the price was $11 isn't particularly relevant. To that, I would simply ask the counter-question of, "Who the hell on this board *wasn't* buying something cheap when ATCO dropped to $11?" It was obvious that ATCO was cheap, but so were plenty of other issues, and most of us have been deploying capital in any number of companiess. So, yeah, there was much more chat about META, GOOG, and BRK-B, but so what? When the market corrects, there are so many things that are cheap it should be no surprise that there isn't intense discussion of just one or two, particularly when the mega-caps are included in the list of cheap shares. If you figure that $14.45 is okay, then that's your view and you are free to hold it. SJ

The offer *is* low and if it had been tabled any time before April it would have been laughed off as completely ridiculous. The question is not what FFH should instead offer, as clearly they can offer as much or as little as they like. The question is whether the company should describe itself as "Fair and Friendly Acquisitions (Fairfax)" when they wait for a broad market correction to offer an amount that would have been considered ridiculous four months ago. They themselves are the ones who made the assertion that their business would be conducted under the principle of "fairness." You can judge for yourself how well they have walked the talk. SJ

Yes. It was easily cheap enough to own at $11 which is why I hold a small position. I hold a much, much larger position in FFH, so I will certainly be a net beneficiary of FFH's opportunism with ATCO. Just to be clear, I don't think that I said that Prem cannot be trusted. Quite to the contrary. As I have suggested on multiple occasions over the years, he can obviously be trusted to look after his own financial interests. If investors choose to get involved with any of the companies that are a large position for FFH, they would be well advised to ensure that their interests are well-aligned with Prem's. "Fair and Friendly" might have been the objective underlying the name "Fairfax" at the company's birth, but it is not the hallmark of management over the past couple of decades. Is the next "Fair and Friendly" transaction going to be taking Fairfax India private at US$14? I think you have slightly mischaracterised the discussions that occurred when FFH first invested in Seaspan. My recollection was that there was considerable enthusiasm for FFH having taken a position in Seaspan, but after a few increases in the exposure to Seaspan (shares, notes and warrants), a few of us held the view that the Seaspan position might be butting up against the ceiling of an appropriate position size for FFH. There is a big difference between characterising something as a crappy investment vs acknowledging that there is an appropriate maximum position size for all investments. SJ