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Fairfax 2018


wondering

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I understand your logic but let's look at a couple of subs within fairfax.  Northbridge (100.2) and C&F (103.4) have a 10 year CR average of over 100.  If we merge these two subs into a better run entity while at the same time removing duplicate costs within the structure we should be able to bring down those ratios.  I do not think this would signal to the market that no one should sell their business as it will signal to the market fairfax prefers decentralized however you need to perform at the level of what the company expects.  I believe this is similar to what Berkshire did by consolidating their insurance subs under Ajit.  He was able to remove costs from the structure so that it becomes a better run entity. (Please correct me if I am wrong) 

 

Why would they swap assets with Canadian Pension Plan? I assume that's who you are referring to.  Do you mean with OMERS who has a 40% equity position in Eurolife?  Fairfax got Eurolife for an amazing price and the business continues to kick-ass. (Please see the thread below)  What I would like to see is a consolidation of their numerous insurance companies under the Fairfax umbrella and Andy should be able to significantly take costs out of the system.  That would create significant value however I do not see Prem agreeing to do so due to their fair and friendly culture he continues to talk about. 

 

That would be a gigantic error. They have a lot of talented people beyond Andy Barnard and the reason they stay is because they can run their own businesses under Fairfax’s decentralised system. Centralise, and not only do you lose them all but you send a signal that no-one who wants to keep building their business should ever sell to them again. Plus, the insurance business are not a homogenous mass that can be run together. They’re a massively diverse group of niches that need focussed management. Fairfax and Andy Barnard’s influence is already felt across the group - for example in the changes they plan to make regarding cat tolerance at AWH. He couldn’t do a lot more, but the downside would be enormous.

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I just don't think the CR tells you enough to make that call.

 

Consider 3 companies:

1) a specialist company that can write at 70% - but the niche is small and growth is limited.

2) a company at the more commoditised end of the market that loses all its customers writing at 95%.

3) a company at the more commoditised end of the market, writing at 100% when competitors with less cost discipline are writing at 101%, growing huge by slowly taking share, and making a ton of money investing the float.

 

Which is more valuable? And is the CR alone a good measure of whether the company has its costs under control?

 

Also, all else being equal (which it never is), long tail float written at 100% is more valuable than short tail float written at 99%, in the same way that a long term loan that costs you nothing is more valuable than a short term loan that costs you less than nothing.

 

My point is that the CR is as much about strategy as it is about costs. It’s not a sufficient tool (although it is a necessary tool) for judging management or efficiency or value creation. Its component parts - the loss ratio and the efficiency ratio - would be more helpful but even then you need to compare them to other insurance companies in the same segment, not to the other companies in Fairfax. For all the CR on its own tells you, these could be the two most efficient companies in their industries.

 

Take Crum for instance. Crum has transformed itself over the last decade. The mix of business is transformed and it’s stemmed what were huge underwriting losses. It generates a lot of float and IIRC it is one of the biggest payers of dividends to Fairfax. Looking at the headline CR and inferring that it is inefficient or badly managed just doesn't jive with me. I can't prove that you're wrong, but I can say with some confidence that the CR alone is not sufficient proof that you're right.

 

My understanding (correct me if I am wrong - I know less about Berkshire than Fairfax) is that Ajit has power over the Berkshire insurance subs but that they have not been consolidated into one company. Andy Barnard is the same - he already has huge practical influence over all the subsidiaries as I understand it and he has done a lot of work to remove duplicated costs and spread best practise, both of which can be done without consolidating companies legally. He also has all the info needed to make a decision like this. I am fairly sure that if he thought it was a good idea it would get done. Maybe it will be but I won't be surprised or disappointed if it isn't.

 

 

 

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I read it as:

 

Mar 28, 2018 (filed on Apr 10, 2018)

Nature of Transaction:38 - Redemption, retraction, cancellation, repurchase

# or value acquired/disposed of:-41,611

Price:--

 

If it's negative and the price is -- (blank) I would assume it's cancellation of treasury shares.

 

The other dates you showed with positive numbers of shares were presumably repurchased by Fairfax at the price shown but hadn't yet been cancelled.

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Thank you, this is extremely helpful.  I looked back at the filings for 2018 and they repurchased a total of 41,611 shares and all of them were cancelled.  This board is amazing, you learn something new everyday.

 

I read it as:

 

Mar 28, 2018 (filed on Apr 10, 2018)

Nature of Transaction:38 - Redemption, retraction, cancellation, repurchase

# or value acquired/disposed of:-41,611

Price:--

 

If it's negative and the price is -- (blank) I would assume it's cancellation of treasury shares.

 

The other dates you showed with positive numbers of shares were presumably repurchased by Fairfax at the price shown but hadn't yet been cancelled.

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It’s is usual to see companies show the redemption of their shares at month end...in this case Fairfax redeemed and cancelled 41,000 shares. I have had trouble finding Fairfax buyback action in the past. Nice to see the share buy back kicking in!

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  • 2 weeks later...

Prem continues to show how undervalued Fairfax is...

 

https://www.fairfax.ca/news/press-releases/press-release-details/2018/First-Quarter-Accounting-Gain/default.aspx

 

Accordingly, Fairfax must also change the manner in which it accounts for its ownership interest in Quess through TCIL from a subsidiary to an investment in an associate company.  This change in accounting will result in a non-cash accounting gain at Fairfax of approximately US$600 million in Fairfax’s first quarter ended March 31, 2018.

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On top of the Quess $600million gain to be booked in Q1 lets not forget about IIFL....

 

IIFL is splitting into three entities which should happen in this year.

 

Fairfax India is sitting on a $632mil unrecognized gain on IIFL and FFH is sitting on a $238mil unrecognized gain.

It the split causes these unrealized gains to be recognized on the books we will see another $450mil gain recognized this year.

 

Thats an 8% gain in BV before we have done anything, balance sheet will look better too (debt/equity ratio improvement). This year could get interesting......

 

 

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On top of the Quess $600million gain to be booked in Q1 lets not forget about IIFL....

 

IIFL is splitting into three entities which should happen in this year.

 

Fairfax India is sitting on a $632mil unrecognized gain on IIFL and FFH is sitting on a $238mil unrecognized gain.

It the split causes these unrealized gains to be recognized on the books we will see another $450mil gain recognized this year.

 

Thats an 8% gain in BV before we have done anything, balance sheet will look better too (debt/equity ratio improvement). This year could get interesting......

 

Sorry if I’m being dim but why does recognising a $238m gain drive a $450m gain?

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Based on Fairfax 'unlocking value' our BV should be around $485.51 (That's once IIFL splits into 3 separate entities)...We are sitting around 1.09x book and that's not including any earnings from operations + market gains (aka. Eurobank). 

 

On top of the Quess $600million gain to be booked in Q1 lets not forget about IIFL....

 

IIFL is splitting into three entities which should happen in this year.

 

Fairfax India is sitting on a $632mil unrecognized gain on IIFL and FFH is sitting on a $238mil unrecognized gain.

It the split causes these unrealized gains to be recognized on the books we will see another $450mil gain recognized this year.

 

Thats an 8% gain in BV before we have done anything, balance sheet will look better too (debt/equity ratio improvement). This year could get interesting......

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Sorry if I’m being dim but why does recognising a $238m gain drive a $450m gain?

 

$238mil is the gain on FFH's direct holding in IIFL. Through Fairfax India's holding they will recognize an additional $212mil.

 

D'oh. Thanks!

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Based on Fairfax 'unlocking value' our BV should be around $485.51 (That's once IIFL splits into 3 separate entities)...We are sitting around 1.09x book and that's not including any earnings from operations + market gains (aka. Eurobank). 

 

Agreed - although for completeness I have to point out there will be losses too on e.g. Blackberry.

 

EDIT - I take that back - BB not down much ytd, it's just fallen from a spike in 1q - but equally, Eurobank not up much, it just recovered from a dip in 1q.

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These transactions are not new to anyone on the board....it looks like the fact that Prem had to announce them as a material change (they have been involved in the discussions of split of the investments for sometime)is likely the reason for the lack of buy back. The only buybacks that would be allowed would be the automatic purchases that Fairfax put in place before the discussions. While I am happy with the appreciation....very disappointed more shares were not bought back!

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