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cwericb
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Several of Fairfax’s holdings are doing quite well (as noted in the Tembec thread - Blackberry, Tembec,  ICI  Lombard and Eurobank all up substantially). I don’t see any major catastrophic events that would effect combined ratios dramatically, yet the share price of FFH continues to drop.

 

Would anyone venture to guess at any particular reason for this steady downward spiral in the share price? What am I missing?

 

We are down from $760 CDN in Sept to $570 today (about 25%).

 

Doesn’t FFH seem to be under priced at this point? I would be buying here, and may do so, but it is my largest holding already.

 

I am starting to think that there has to be a decent pop in price by the time we get the second quarter’s results next month.

 

Anyone buying here?

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I suspect the share price drop has to do with the Allied World purchase. Current holders of AW know they will be getting shares of FFH at the time the deal is closed. If they have decided (for any number of reasons) they will not continue to hold the FFH shares they are selling now (effectively shorting) FFH and will close out the sale when the FFH shares are awarded when the acquisition closes. They profit at the expense of current shareholders. Just one of the negative consequences of the FFH team entering into the AW transaction before they had the deal financing lined up.

 

Furthermore not all of the FFH equity holdings have been doing well this quarter e.g., IBM is down substantially.

 

 

 

 

 

 

 

 

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Do you think the Allied World shareholders would have enough weight to make the share price decrease like this?

 

I assumed that it was still negative sentiment because of what transpired last year and the years before...  Hoping the switch will flip over the next year.

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Here are some rough numbers of gains/losses since March 31st as of yesterday (all in USD millions)........Blackberry $174 ; Eurobank $154 ; IBM loss of $25 ; Kennedy Wilson loss of $35; Grivalia $34; Mytilineos $7; Tembec $21. This totals over $11 per share pretax. We know they will have a realized gain of approximately $248 from ICICI Lombard when the Warburg Pincus transaction closes and a further $454 in fair value increases for the part they are not selling based on this new price. On a look through basis Quess Corp. adds $160 and BIAL on a look through basis adds another $114. While all of this clearly won't go into book value at June 30th, you are still looking at total value gains pretax of more than $1.3 billion or $57 per share!  Of interest, the share price (in USD) is down $25 per share despite adding $57 per share in gains. As Benjamin Graham stated, "In the short run, the market is a voting machine but in the long run, the market is a weighing machine." Fairfax is basically trading at hard book value on an adjusted basis! This seems attractive to me.       

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Not sure that FFH trading cheaply at this point. From looking at the Y2016 annual report, Shareholders equity is 8,484 Canadian $, which at 23M shares leads to roughly $370 Can book value. now, I understand we have to adjust for fair value ofaffiliates - those were (3,267-2,633 or another 634 Can $($28/share). Even if this increased to $57 CAN/share, the book value is now $427 Can $ and at $570 Can $ (where it is trading now) we look at 1.33 book value.

 

I don't understand how OP can look at the consolidated balance sheet and get to  US$7.048 in book value for the insurance component. There are minority interests here that need to be deducted, so starting from the common stockholders equity as stated in their filing seems more appropriate.

 

I have to say, for a value investment and compounder, I find FFH's annual report very hard to read and it is quite difficult to understand the financial results as they relate to prior years. The disclosure seems to be all there, but it is much harder than for most other companies to put them together and get and deal how the company is doing.

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BIAL does not trade. Fairfax is buying another 10% for $200 million (USD). This values BIAL  at $2 Billion.  When this latest purchase closes Fairfax India will own 48% with a value of $960 million (based on the latest purchase price) All in, Fairfax India will have spent $579 million to acquire this position. This implies a gain of $381 million. Fairfax owns approximately 30% of Fairfax India so the implied gain at the Fairfax level is $114 million. I am not saying this will flow into book value immediately but it does illustrate the increased value Fairfax is creating.

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Not sure that FFH trading cheaply at this point. From looking at the Y2016 annual report, Shareholders equity is 8,484 Canadian $, which at 23M shares leads to roughly $370 Can book value. now, I understand we have to adjust for fair value ofaffiliates - those were (3,267-2,633 or another 634 Can $($28/share). Even if this increased to $57 CAN/share, the book value is now $427 Can $ and at $570 Can $ (where it is trading now) we look at 1.33 book value.

 

I don't understand how OP can look at the consolidated balance sheet and get to  US$7.048 in book value for the insurance component. There are minority interests here that need to be deducted, so starting from the common stockholders equity as stated in their filing seems more appropriate.

 

I have to say, for a value investment and compounder, I find FFH's annual report very hard to read and it is quite difficult to understand the financial results as they relate to prior years. The disclosure seems to be all there, but it is much harder than for most other companies to put them together and get and deal how the company is doing.

 

 

Spekulatius, you scare the shit out of me.

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I suspect that they're under pressure as rates are falling again - U.S. rates are at 2017 lows.

 

While Fairfax itself doesn't own any bonds to book losses from, it does limit the income generation outlook for them. When Fairfax exited it's hedges and fixed income investments, it moved itself from being a hedging bet on the global economy to a pure investment/insurance exposure. While the insurance side is firing on all cylinders, the investment side is largely in cash. 

 

With investment income/gains impaired by low rates (can't have BBRY/Eurobank/Tembec going up 60% every quarter...), the current earnings outlook is limited beyond the first two quarters.

 

While income potential relative to share price does seem high - particularly after accounting for a blowout quarter in gains - it isn't going to be continuously high without hitting homeruns in equities every quarter OR higher rates. I might be content to buy the shares now and wait, but I can understand why others aren't.

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The fact that book value is in U.S. has a huge impact on previous comments.

 

At Q1, book value is $361, which I have a P/B of somewhere between 1.1 and 1.2 depending on how many shares they issue for the buy out.  That doesn't included the recent gains or the unrecognized gains of ~ $1.4 billion dollars. 

 

If you want to make a bearish case, then you can write off all the good will.

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does anybody have the final share count after Allied World deal is done?

 

 

About half of the $54 per Allied World share is being paid for with cash. The original offer was:

 

$10 in cash, of which $5 is a cash dividend from Allied just prior to closing

$14 in FFH shares, at a fixed exchange ratio

$30 in FFH shares, with Fairfax retaining the option to replace this part on a dollar-for-dollar basis with cash from debt or from other partners.

 

Subsequently, OMERS, AIMCo and others agreed to cough up $18 per Allied share, so per Allied share it is now $28 cash, $26 in FFH shares; the company has said that that the $18 per share cash infusion means that 3.5 million FFH shares will not need to be issued. So a rough calculation would be that FFH will be issuing 3.5*(28/18)=5.44 million shares. Actually, it will be a bit more than that, since the 3.5 million share calculation was based on the March 9 closing price, which was $464.99; shares are now $432.46. If FFH is still trading at or below $435.65 at closing, that would mean approx. 5.44*(464.99/435.65)=5.81 million new shares, which would give us a share count of 23.86+5.81=29.67 million shares, a bit less if the FFH share price ends up above the US$435.65 lower collar.

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The fact that book value is in U.S. has a huge impact on previous comments.

 

At Q1, book value is $361, which I have a P/B of somewhere between 1.1 and 1.2 depending on how many shares they issue for the buy out.  That doesn't included the recent gains or the unrecognized gains of ~ $1.4 billion dollars. 

 

If you want to make a bearish case, then you can write off all the good will.

 

Agreed, I missed the comment in the annual report on the bottom of page 4:

 

(1) Amounts in this letter are in U.S. dollars unless specified otherwise. Numbers in the tables in this letter are in U.S. dollars and $ millions except as otherwise indicated.

 

So, now, I can reconcile this. Pretty stupid of me, I always assumed that a Canadian company has their balance sheet in Can $, but that is clearly not the case. I do agree that this makes FFH at least reasonably priced, if not cheap.

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I suspect that they're under pressure as rates are falling again - U.S. rates are at 2017 lows.

 

While Fairfax itself doesn't own any bonds to book losses from, it does limit the income generation outlook for them. When Fairfax exited it's hedges and fixed income investments, it moved itself from being a hedging bet on the global economy to a pure investment/insurance exposure. While the insurance side is firing on all cylinders, the investment side is largely in cash. 

 

With investment income/gains impaired by low rates (can't have BBRY/Eurobank/Tembec going up 60% every quarter...), the current earnings outlook is limited beyond the first two quarters.

 

While income potential relative to share price does seem high - particularly after accounting for a blowout quarter in gains - it isn't going to be continuously high without hitting homeruns in equities every quarter OR higher rates. I might be content to buy the shares now and wait, but I can understand why others aren't.

 

I suspect the interest rates are the main reason. 

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Here are some rough numbers of gains/losses since March 31st as of yesterday (all in USD millions)........Blackberry $174 ; Eurobank $154 ; IBM loss of $25 ; Kennedy Wilson loss of $35; Grivalia $34; Mytilineos $7; Tembec $21. This totals over $11 per share pretax. We know they will have a realized gain of approximately $248 from ICICI Lombard when the Warburg Pincus transaction closes and a further $454 in fair value increases for the part they are not selling based on this new price. On a look through basis Quess Corp. adds $160 and BIAL on a look through basis adds another $114. While all of this clearly won't go into book value at June 30th, you are still looking at total value gains pretax of more than $1.3 billion or $57 per share!  Of interest, the share price (in USD) is down $25 per share despite adding $57 per share in gains. As Benjamin Graham stated, "In the short run, the market is a voting machine but in the long run, the market is a weighing machine." Fairfax is basically trading at hard book value on an adjusted basis! This seems attractive to me.     

 

Too IIFL up 55% in Q2. $95 million USD increase in fair value ex the stake in FFH India.

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Several of Fairfax’s holdings are doing quite well (as noted in the Tembec thread - Blackberry, Tembec,  ICI  Lombard and Eurobank all up substantially). I don’t see any major catastrophic events that would effect combined ratios dramatically, yet the share price of FFH continues to drop.

 

Would anyone venture to guess at any particular reason for this steady downward spiral in the share price? What am I missing?

 

We are down from $760 CDN in Sept to $570 today (about 25%).

 

Doesn’t FFH seem to be under priced at this point? I would be buying here, and may do so, but it is my largest holding already.

 

I am starting to think that there has to be a decent pop in price by the time we get the second quarter’s results next month.

 

Anyone buying here?

 

Cwericb: Am curious if you decided to buy more. I'm in the exact same position of wondering if I should be adding to my largest position already!

 

I was initially wondering if the recent 20% drop in price was a delayed reaction to removing his bearish hedges. Comments so far suggested negative reaction to purchase of Allied or interest rates (interest rates are at historical lows and any recent moves have been small in the larger picture of things). 

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If you believe FFH could increase equity from now on like MKL might do, or that FFH could increase both BVPS and dividends like TRV might do, FFH is clearly undervalued today.

 

On the other hand, if you believe FFH will go on performing like a mediocre insurance company, FFH might still be overvalued.

 

I am not adding more shares right now: it is not a judgement about their future prospects, but it is simply because I like a diversified portfolio and don't want to let any position become too large.

 

Cheers,

 

Gio

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investmd

 

My portfolio sucks right now, especially since I have so much FFH, but I just bit the bullet & bought a few more shares at about $565 CDN.

 

When I buy it is usually a signal that the stock price will take a dive. Hope you can benefit :)

 

eb

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That looks like the correct volume for the pink sheet ADR shares.  There was a lot of volume into the close on the pink sheet shares.  The actual Canadian shares had a more normal total volume of 75,445 shares, but a lot of those trades were also into the close.

 

Is that a missprint on Yahoo Finance, or did 90,000 shares trade today?

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I suspect that they're under pressure as rates are falling again - U.S. rates are at 2017 lows.

 

While Fairfax itself doesn't own any bonds to book losses from, it does limit the income generation outlook for them. When Fairfax exited it's hedges and fixed income investments, it moved itself from being a hedging bet on the global economy to a pure investment/insurance exposure. While the insurance side is firing on all cylinders, the investment side is largely in cash. 

 

With investment income/gains impaired by low rates (can't have BBRY/Eurobank/Tembec going up 60% every quarter...), the current earnings outlook is limited beyond the first two quarters.

 

While income potential relative to share price does seem high - particularly after accounting for a blowout quarter in gains - it isn't going to be continuously high without hitting homeruns in equities every quarter OR higher rates. I might be content to buy the shares now and wait, but I can understand why others aren't.

 

I suspect the interest rates are the main reason.

 

It's both...the number of shares that will need to be issued for Allied and the fed raising rates slightly.  Funny thing is that Fairfax has over $10B cash in the portfolio which is sitting in 75% cash and bonds.  It doesn't matter what Fairfax's price does as stocks fall or rates rise...they will be able to buy when everyone else is selling and looking for cash. 

 

As PI said, you are essentially buying Fairfax at nominally higher than book value now.  Their insurance businesses are now world-class and fully profitable across the board.  The number of non-insurance businesses has increased dramatically and by region.  Like Berkshire, as they add better and better insurance and non-insurance businesses, intrinsic value will start to increase faster than book value due to GAAP and IFRS.  It is already a business that should be valued at 1.5 times book based on the cash flow of the underlying businesses and return on the investments per share. 

 

The one area that I think they should remain cautious is their debt load.  While still very manageable and staggered well, I hope they remain conscious and vigilant on this front.  One of Berkshire's advantages is that they are beholden to none.  I really would like Prem and Fairfax to follow that culture and model.  Cheers! 

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I suspect that they're under pressure as rates are falling again - U.S. rates are at 2017 lows.

 

While Fairfax itself doesn't own any bonds to book losses from, it does limit the income generation outlook for them. When Fairfax exited it's hedges and fixed income investments, it moved itself from being a hedging bet on the global economy to a pure investment/insurance exposure. While the insurance side is firing on all cylinders, the investment side is largely in cash. 

 

With investment income/gains impaired by low rates (can't have BBRY/Eurobank/Tembec going up 60% every quarter...), the current earnings outlook is limited beyond the first two quarters.

 

While income potential relative to share price does seem high - particularly after accounting for a blowout quarter in gains - it isn't going to be continuously high without hitting homeruns in equities every quarter OR higher rates. I might be content to buy the shares now and wait, but I can understand why others aren't.

 

I suspect the interest rates are the main reason.

 

It's both...the number of shares that will need to be issued for Allied and the fed raising rates slightly.  Funny thing is that Fairfax has over $10B cash in the portfolio which is sitting in 75% cash and bonds.  It doesn't matter what Fairfax's price does as stocks fall or rates rise...they will be able to buy when everyone else is selling and looking for cash. 

 

As PI said, you are essentially buying Fairfax at nominally higher than book value now.  Their insurance businesses are now world-class and fully profitable across the board.  The number of non-insurance businesses has increased dramatically and by region.  Like Berkshire, as they add better and better insurance and non-insurance businesses, intrinsic value will start to increase faster than book value due to GAAP and IFRS.  It is already a business that should be valued at 1.5 times book based on the cash flow of the underlying businesses and return on the investments per share. 

 

The one area that I think they should remain cautious is their debt load.  While still very manageable and staggered well, I hope they remain conscious and vigilant on this front.  One of Berkshire's advantages is that they are beholden to none.  I really would like Prem and Fairfax to follow that culture and model.  Cheers!

 

Would Watsa consider a share buyback? If FFH has >$10B in cash, is looking for opportunity to deploy and it's own stock is trading at a substantial discount to where Parsad says it should be trading at (1.5x BV), does it make sense to do a buyback/set a floor on the stock price?

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I suspect that they're under pressure as rates are falling again - U.S. rates are at 2017 lows.

 

While Fairfax itself doesn't own any bonds to book losses from, it does limit the income generation outlook for them. When Fairfax exited it's hedges and fixed income investments, it moved itself from being a hedging bet on the global economy to a pure investment/insurance exposure. While the insurance side is firing on all cylinders, the investment side is largely in cash. 

 

With investment income/gains impaired by low rates (can't have BBRY/Eurobank/Tembec going up 60% every quarter...), the current earnings outlook is limited beyond the first two quarters.

 

While income potential relative to share price does seem high - particularly after accounting for a blowout quarter in gains - it isn't going to be continuously high without hitting homeruns in equities every quarter OR higher rates. I might be content to buy the shares now and wait, but I can understand why others aren't.

 

I suspect the interest rates are the main reason.

 

It's both...the number of shares that will need to be issued for Allied and the fed raising rates slightly.  Funny thing is that Fairfax has over $10B cash in the portfolio which is sitting in 75% cash and bonds.  It doesn't matter what Fairfax's price does as stocks fall or rates rise...they will be able to buy when everyone else is selling and looking for cash. 

 

As PI said, you are essentially buying Fairfax at nominally higher than book value now.  Their insurance businesses are now world-class and fully profitable across the board.  The number of non-insurance businesses has increased dramatically and by region.  Like Berkshire, as they add better and better insurance and non-insurance businesses, intrinsic value will start to increase faster than book value due to GAAP and IFRS.  It is already a business that should be valued at 1.5 times book based on the cash flow of the underlying businesses and return on the investments per share. 

 

The one area that I think they should remain cautious is their debt load.  While still very manageable and staggered well, I hope they remain conscious and vigilant on this front.  One of Berkshire's advantages is that they are beholden to none.  I really would like Prem and Fairfax to follow that culture and model.  Cheers!

 

Would Watsa consider a share buyback? If FFH has >$10B in cash, is looking for opportunity to deploy and it's own stock is trading at a substantial discount to where Parsad says it should be trading at (1.5x BV), does it make sense to do a buyback/set a floor on the stock price?

 

It is important not to confuse the FFH holdco cash with the operating subsidiary cash balances.  FFH holdco doesn't have $10B cash. The cash is at the operating insurance subsidiary (ie. C&F, Northbridge, Odyssey Re, etc.) and those funds are part of the insurance reserves.  It's not like FFH has that $10B of their reserves (future claims) to buyback their own stock for investment purposes.  Holdco usually has about $1B which is what FFH basically considers as their minimum desired amt of Holdco cash set aside for financial emergencies/flexibility. So they basically have minimal liquidity that they want to readily part with unless they continue to lever up. More likely $20M here and $20M there, as they flow excess reserves from operating subs to holdco.  In the past, they have said they generally leave excess funds at the operating subs so they can write additional premiums when the time is right (a hard market).   

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