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Fairfax Financial 2017 AGM


Parsad
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Hi Everyone,

 

The Fairfax AGM this year was fantastic as usual!  I know many have been critical of the company over the last couple of years, but I think they are making a huge mistake in underestimating what is going on.

 

The easiest way to see that there is a basic miscalculation of Fairfax is simply by taking a look at this year's lanyards and shareholder badge.  If you opened up the badge, you could see the logos of many of the companies Fairfax owns, and this didn't include most of the insurance businesses.  Literally, the badge looked like Berkshire nearly 20 years ago when I first began to look at the company.  And the insurance businesses are getting better and better as a whole at Fairfax!

 

Roy Thomson Hall is also getting too small for the AGM.  I suspect we may have to move it to the Metro Trade and Convention Centre soon, as the number of booths and venues literally engulfed all of Roy Thomson Hall, including the outside courtyard area.  Amazing to see all of the different businesses, organizations and people involved at Fairfax.

 

Unfortunately, I was manning the Templeton Foundation book table for most of the morning, so I did not get to see the Fairfax presentation.  I'm sure others can share comments on here.  The presentation slides are available here:

 

http://www.fairfax.ca/news/events-and-webcasts/default.aspx

 

Once again, amazing what is happening at Fairfax...we are watching the wheel being replicated again...the brushstrokes and final painting will look different than Berkshire, but the similarities are definitively there!  Cheers! 

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I will agree w Sanjeev that the venue inside seems to be too small. During the presentation, i saw it was packed to the 3rd tier seat level! There seems to be way more people compared to 6 years ago when i last went. However, I felt Fairfax did a great job with all the booths around outside. Was very easy to walk thru and stop by the booths and chat, eat, or drink.

 

Here are the notes that I took during the meeting. These are the notes/comments that I found interesting in addition to the slide presentation...

 

Fairfax Financial 2017 Annual Meeting notes

 

Compound growth in Book Value over last 5 years: S & P 500: 12.2%, BRK: 11.5%, FFH: 0.2%

 

“Over next 5 years, we will likely buy back our shares. Our insurance companies are now large enough, we will get dividends from them, our stock is undervalued at these prices. In 1990, we bot back 20% of our stock. Our intrinsic value is a lot higher than BV. Our insurance companies are worth alot more than their stated BV. We have over $1 bill in un-realized gains not reflected on our balance sheet.”

 

Re-insurance market is very tough, pricing has come down. ORH is about 60% re-insurance, 40% primary. Allied World acquisition will give us a strong presence w Fortune 1000 companies and solid relationships with the insurance brokers. After AW acquisition closes, we will be the 7th largest North American insurer.

 

$5 bill in India investments, $230 mill in cash available. May leverage up in the future.

 

Investing opportunities: We like the CB structure with warrants. Protects us on the downside and gives us some upside. We’ve done alot of deals like this lately and will probably do more.

 

Hedging experience: It’s unlikely we would hedge like that again.

 

“If we get 95% combined ratio with 7% return on our investments, that will get us to a 15% ROE”

 

Greece: prices still cheap. Risks are there but the prices are too cheap. We’ve met the new govt. Biggest risk for Greece is the overall EU breaking up. Greek bank we own trading at 30% of BV, 3-4x earnings.

 

Single stock investments: Likes GM, USG, Torstar. GM has net cash, like the CEO, not worried about self driving cars. Torstar has no debt, new CEO with skin in the game. Invested in Chorus, Canadian regional airline, mosiac capital, and Altius, royalty mining company. All of these with the CB warrant structure. Blackberry CB is money good, tremendous CEO in John Chen.

 

Andy Bernard on AIG deal: $669 mill in premiums, $491 mill in Lat America, $178 in Central & Eastern Europe. AIG came to us. They were looking to withdraw from these countries. We should write below 100 and expect nice premium growth in these countries as insurance is very under-insured, penetration rate is very low.

 

AIG and European insurers are withdrawing or restructuring their US operations so we may be able to be more active or write more business.

 

Brian Bradstreet: They know Wilbur Ross very well but did not talk to him about incoming Trump administration policy changes. Canadian banks are gonna be in alot of trouble when the housing market bursts! Still trying to figure out how to play it.

 

Prem has known Chandran Ratnaswami for over 50 years (I just thought this was very interesting)

 

FFH Africa: only 1 holding now. We are looking for opportunities but its a long term approach. Hopefully next year, we will have more to share with you.

 

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As measured by growth in a book value, Fairfax has really underperformed since 2010. That is a long time. The fundamental issue is they have made many very poor investment decisions over the past 7 years. I liked that they actually showed a couple of slides at the AGM that clearly demonstrated how poorly they have done. Given how bad the underperformance has been (and for how long) I think it is reasonable for investors to question just how good they are today at managing investments.

 

What do board members think? Is the last 7 years the start of a new trend at FFH where they continue to underperform on the investment side of things? Or do they honestly understand their errors and more importantly have the people in place today to get their investing mojo back?

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As measured by growth in a book value, Fairfax has really underperformed since 2010. That is a long time. The fundamental issue is they have made many very poor investment decisions over the past 7 years. I liked that they actually showed a couple of slides at the AGM that clearly demonstrated how poorly they have done. Given how bad the underperformance has been (and for how long) I think it is reasonable for investors to question just how good they are today at managing investments.

 

What do board members think? Is the last 7 years the start of a new trend at FFH where they continue to underperform on the investment side of things? Or do they honestly understand their errors and more importantly have the people in place today to get their investing mojo back?

 

I'm absolutely a believer that with the leverage they have, the insurance businesses they now have, and the investment team they have, they will get 15% annualized returns over the LONG-term. 

 

Remember, with that leverage and insurance operations that now consistently write at below a 100% combined ratio, they don't need stellar investment results like the past...they just need good returns.  Many people, on here and elsewhere, always assumed that Fairfax's insurance businesses would never operate at below 100% CR long-term...well guess what!

 

They have consistently added new managers, and some of the older ones are still young enough and very healthy enough to last another 20 years.  They also know that they can outsource some of the investment work load now, instead of having to manage it all in-house as the core team ages.  They have a deep team, and it will only get deeper as they get bigger and their reputation even more alluring to smart young managers and executives.

 

I would recommend that they start to outsource to other good managers as the cash flows get bigger and bigger...give Francis more money...give Vito Maida money...I'm happy to manage more over time!  ;D  Cheers!   

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At the Fairfax/Premier dinner someone asked an excellent question to the Fairfax management team as to why they didn't purchase or make more investments in a See's Candy type business and instead waste them on investments like Canwest, GM, Torstar etc. What would make me happy is if they aimed for more singles and doubles (Apple, Brookfield, etc) than placing bets on companies like Torstar and GM. I really enjoy investing in companies which are well run, name brand businesses getting temporarily beaten up (Chipotle) and Fairfax is at that point I feel now to do extremely well going forward.

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“Over next 5 years, we will likely buy back our shares. Our insurance companies are now large enough, we will get dividends from them, our stock is undervalued at these prices. In 1990, we bot back 20% of our stock. Our intrinsic value is a lot higher than BV. Our insurance companies are worth alot more than their stated BV. We have over $1 bill in un-realized gains not reflected on our balance sheet.

 

Is this another way of saying Fairfax suffers from a conglomerate discount or was this in a different context?

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“Over next 5 years, we will likely buy back our shares. Our insurance companies are now large enough, we will get dividends from them, our stock is undervalued at these prices. In 1990, we bot back 20% of our stock. Our intrinsic value is a lot higher than BV. Our insurance companies are worth alot more than their stated BV. We have over $1 bill in un-realized gains not reflected on our balance sheet.

 

Is this another way of saying Fairfax suffers from a conglomerate discount or was this in a different context?

 

They are just saying that intrinsic value is significantly higher than book value.  Some of their acquisitions under IFRS are being carried at cost, while the value is far higher...be it the intrinsic value or market value.  Cheers!

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As measured by growth in a book value, Fairfax has really underperformed since 2010. That is a long time. The fundamental issue is they have made many very poor investment decisions over the past 7 years. I liked that they actually showed a couple of slides at the AGM that clearly demonstrated how poorly they have done. Given how bad the underperformance has been (and for how long) I think it is reasonable for investors to question just how good they are today at managing investments.

 

What do board members think? Is the last 7 years the start of a new trend at FFH where they continue to underperform on the investment side of things? Or do they honestly understand their errors and more importantly have the people in place today to get their investing mojo back?

 

The hedges were clearly a mistake (albeit I feel I understand why they put them on).  They haven't clearly said as much but they have hinted at it several times and have corrected the error. 

 

On the long equity side they have done poorly at a time when most active and most value investors have also struggled.  I can forgive them that in the light of their long term record.

 

On the bond side they have continued to do outstandingly well.  Bonds are and always will be the bulk of the portfolio.

 

Given the float leverage 15% compounded long term is quite possible.  I think the biggest threat to that will be the starting point (0% rates vs. much higher rates over most of FFH's history, and therefore elevated bond and equity valuations), not their investment prowess.  In other words, they won't have the tailwind they have enjoyed for the last 30 years.  But nor will anyone, and clever people can usually find things.  I am encouraged by the pref/warrant deals.  And, as Parsad says, the insurance side is better than it was by a country mile.

 

Pete

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At the Fairfax/Premier dinner someone asked an excellent question to the Fairfax management team as to why they didn't purchase or make more investments in a See's Candy type business and instead waste them on investments like Canwest, GM, Torstar etc. What would make me happy is if they aimed for more singles and doubles (Apple, Brookfield, etc) than placing bets on companies like Torstar and GM. I really enjoy investing in companies which are well run, name brand businesses getting temporarily beaten up (Chipotle) and Fairfax is at that point I feel now to do extremely well going forward.

 

What was the answer?

 

FWIW my view is if you want the high qualify equities own BRK, and if you want someone grubbing around in the dirt for the undervalued cigar butts own FFH.  Both are proven long term investment strategies.  (FFH also do a lot of high quality investing - mainly when they buy permanent holdings in insurance subs, but also in FIH and some equities.)

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Put me in the camp with those who firmly believe that FFH will continue to do well. As to past performance, I have owned this company for ten years, my initial investment has nearly tripled in value, and I have no complaints.

 

Too many people have been looking at Fairfax almost as some sort of investment fund. It is not.

 

Sure, their investment strategy has been spotty at times, but look at the world wide insurance company they have been putting together in the meantime.

 

Yes, they have made some investment bets that have not paid off. But personally I like to make relatively safe investments with the bulk of my own portfolio so that I can afford take the odd long shot on the side. I see Fairfax’s investment strategy as having been somewhat the same.

 

Their hedges received a lot of criticism and while they may not have paid off, they did serve their purpose - yet a lot of people refuse to acknowledge that. This is an insurance company, I can’t criticize them for buying insurance. If I my house doesn’t burn down, did I make a mistake in buying insurance? We might also remember that Fairfax received similar criticism for their CDS holdings and we all know how that worked out.

 

People tend to focus on Fairfax’s poor investments and ignore the fact that they have also made many successful investments at the same time as they have been putting together a world wide insurance conglomerate. Now they want to concentrate on refining those insurance operations and growing their own business.

 

Prem warned, returns would be “lumpy”. That’s just fine with me. I am in this for the long haul and am excited about the future.

 

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Thank you very much for all the different perspectives,

When they were poor underwriters nobody thought they would improve someday and become profitable. Now they look like poor investment managers, and of course nobody seems to believe their investment results might improve in the future. Personally, I think it is easier to give them credit now on the investment side then it was to give them credit back then on the operating side. Because they have already proven they can choose investments wisely in the past.

Though I wouldn’t talk about 15% annualized anymore, nor I have any idea which kind of return should we expect from now on, I believe if they manage putting together both good underwriting and good investments, the business model is quite sound and satisfactory results will follow.

We will see.

 

Cheers,

 

Gio

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The challenge for Fairfax is bonds and stocks have been in a bull market since 2010 and the easy money in this cycle likely has been made. Bond yields appear headed higher in the coming years which will make it very difficult for bonds to drive investment results. Rising bond yields also will not be good for the stock market (already trading at s high PE, largely due to crazy low yield on bonds). Where are the investments that are going to help deliver 15% return in 2017 and 2018?

 

Now if we get a jump in 10 year bond yields (to over 3%) and a 10-20% stock market correction then FFH may look very appealing as they are mostly sitting on cash and will be in a position to benefit from the volatility.

 

FFH stock does look cheap today; I am just not sure what the catalyst is today that is going to drive decent results in the next year or two. One catalyst may be share repurchases.

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" I wouldn’t talk about 15% annualized anymore, nor I have any idea which kind of return should we expect from now on"

 

Ditto

 

It's not *that* hard, now that the long bonds and hedges (and vol associated with them) have gone, to get a sense of how the following add up:

- return assumption * portfolio ($40bn after AW)

- underwriting assumption * premiums 

- holdco costs and debt

- tax

 

Divide the above by the book value and you get a rough stab at the compounding rate, and you don't need heroic assumptions to get over 10% for very little risk.  That will do me fine and if they get to 15% that's free money at this price IMHO.

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