Fairfax 2018

[petec]

 

For the record (3 years of Latin leaves an imprint) the root of the word is offensus

 

 

Actually I think quite a lot of American (and I assume Canadian?) English is closer to old English than English English is (if you see what I mean). But I couldn't resist the dig.

[petec]

And by the way I am not trying to persuade you. Each to their own. But when someone posts a logical anti-thesis I feel I need to test my ideas against it to see if they stand up. Always a useful exercise.

[petec]

my unconscious mind wants to be convinced that FFH is a good investment.

 

Out of interest, why? Emotional attachment, or because your subconscious actually thinks this is a good option?

[petec]

One other thing I would add is I think capital has been flooding into the insurance markets for the same reason it has been flooding into the bond markets: a desperate hunt for yield. It's therefore possible that rising rates will do FFH a lot of good on the bond side and on the underwriting side.

 

[Cigarbutt]

With investments, like to see my role as an analyst (not a psychoanalyst). :)

Basically the same process as you: I build a case and check my case against potential negative outcomes and, more recently, other points of view.

See this maybe like a hurdle that needs to be reached before the trigger is released.

Didn't mean to transfer any responsibility on you.

 

Also, with Fairfax, as well described in the previous thread alluded to above, there is a need to evaluate the "seer" component and that is the hardest thing.

 

FWIW I also think that one has to consider the possibility that the next hard market may be triggered by the left-hand side of the balance sheet.

I seem to remember Mr. Watsa saying something to that effect.

[petec]

With investments, like to see my role as an analyst (not a psychoanalyst). :)

 

 

Point taken, but for me there is a link. I have learned (largely!) to be able to tell when I want to buy something for the right reasons (deep value, differentiated understanding) vs the wrong reasons (I've done a lot of work, I like the idea of the company, etc.)

 

I can't explain it well but it just feels different and it's quite consistent which feelings have worked well, and haven't, in the past. That's why in your shoes I'd be interrogating that subconscious of mine to understand why it wanted a particular analytical outcome!

 

Still the question was idle interest and we are wandering off topic...

 

[Dazel]

 

 

Anyone else watching Thomas Cook India stock? It’s 280...Fairfax cost is 59...it’s a home run on $250m investment.... not in book value as its consolidated.

 

Buy Fairfax shares Prem Back buy them all...when the crowd realizes Fairfax earnings potential and intrinsic value the buy back program will not be accretive and shares should not be pursued in volume over 1.5x book. The market is helping us out right now!

 

 

[petec]

 

Anyone else watching Thomas Cook India stock? It’s 280...Fairfax cost is 59...it’s a home run on $250m investment.... not in book value as its consolidated.

 

 

Yes - it's been superb. What I am interested to see is what happens after the Quess spin. Someone who met FFH recently says they think Thomas Cook itself is very undervalued, so there may be more to come. and I wonder if they plan to reduce Quess once the holding is at the Fairfax level given the headline valuation. But that is pure speculation - I don't know Quess well and if it can keep growing at the historic rate the valuation isn't so eye-watering.

[Dazel]

 

Thank you to all for their execellent input into this thread. Wonderful thinking and intellectual discussions. I admit Fairfax is not for everyone...it has been a bumpy road!

 

Want to clarify a few things will be away for awhile...I am a terrible writer so I will do it in point form!

 

-first and foremost the insurance operations are the key to the value of Fairfax..they most perform.

 

-bond and equity prices as whole are not cheap...but that does not mean that Bradstreet will not continue to trounce the index which values bond prices as a whole. Secondly, as we can see from Thomas Cook India share price (look at their recent chart)...not every one cares about Trump and the trade war retoric! There are pockets of value for value guys to out perform...and Fairfax is decade ahead in India where everyone is headed.

 

-when Fairfax says offence they are talking about the economies of the world not the stock markets...ie if India continues to grow at 7% a year Fairfax will make a killing. The Dow doesn’t matter.

 

-your either trust Prem and Fairfax management or you don’t pretty easy...if you don’t you should NOT buy shares

 

-I see large consistent buybacks up until $700 on FFH....after that they will slow substantially

 

-Volatility brings opportunity to those that are prepared...Fairfax is playing offence but they are doing so with a great Defense as well (lots of cash)...would have helped a lot in the first quarter with bond and equity prices dropping.

 

Value investors have been killed for years...Prem and Fairfax have not escaped this fate and many are right to doubt their recent stock picking performance. That is rear view mirror stuff but Fairfax has to prove themselves AGAIN for sure. Thomas Cook India is a good start.

 

[Crip1]

Want to clarify a few things will be away for awhile...I am a terrible writer so I will do it in point form! – Please do…it drives me crazy when someone wants to make multiple points in paragraph form. Points make it easier on the reader.

-when Fairfax says offence they are talking about the economies of the world not the stock markets...ie if India continues to grow at 7% a year Fairfax will make a killing. The Dow doesn’t matter. – Compels one to ponder whether Fairfax or Faifax India is the better investment.

  -your either trust Prem and Fairfax management or you don’t pretty easy...if you don’t you should NOT buy shares – I would add something to the effect of “if you don’t feel Prem is a good steward for your money, then you should NOT buy shares.

  -I see large consistent buybacks up until $700 on FFH....after that they will slow substantially. I think that once the news comes out that FFH is buying back shares that the price will spike making the buybacks less beneficial. Stated differently, I hope they’re buying a boatload now.

  Value investors have been killed for years...Prem and Fairfax have not escaped this fate and many are right to doubt their recent stock picking performance. That is rear view mirror stuff but Fairfax has to prove themselves AGAIN for sure. Thomas Cook India is a good start. After years of under-performance, I would hope that value-type investments over-perform in the coming years. The flipside of this is that over-performing against relatively benign overall market returns suggests absolute returns will not be great.

 

-Crip

[StubbleJumper]

 

 

Anyone else watching Thomas Cook India stock? It’s 280...Fairfax cost is 59...it’s a home run on $250m investment.... not in book value as its consolidated.

 

Buy Fairfax shares Prem Back buy them all...when the crowd realizes Fairfax earnings potential and intrinsic value the buy back program will not be accretive and shares should not be pursued in volume over 1.5x book. The market is helping us out right now!

 

 

Sure, it's great that ffh is demonstrating it's intrinsic value through transactions like the Keg and Thomas Cook.  But, that's really about value built 3, 4, 5 years ago that is getting crystallized.  Great, but we all knew that value had been built, so the question is, "What have you done for me lately?'

 

There will be something of a quality of earnings challenge for investors in the next little while as the numbers will be juiced with no real value being immediately built.  We need to maintain focus on quality earnings, notably those drive by a 95 CR and predicable higher returns for bonds.  The CR and the bond returns reflect operational performance of the recent period, not some fluffy accounting revaluation of an existing asset.

 

It is, nonetheless, gratifying to see assets revalued and a hidden gain unlocked.

 

 

SJ

[ourkid8]

Unfortunately they are not, the pace of buybacks in 2018 has been extremely slow. Now that I think about it, I have a strong suspicion they must be under negotiations with OMERS to start buying back their stake in Eurolife or potentially Brit.  It's the only logical explanation for the extremely slow share repurchases. 

 

Subsequent to December 31, 2017 and up to March 9, 2018 the company repurchased for cancellation 20,000 subordinate voting shares under the terms of its normal course issuer bid at a cost of $9.9.

 

https://s1.q4cdn.com/579586326/files/doc_financials/2017/annual/WEBSITE_Fairfax-FINANCIAL-FULL-Annual-Report-v3.pdf

 

  -I see large consistent buybacks up until $700 on FFH....after that they will slow substantially. I think that once the news comes out that FFH is buying back shares that the price will spike making the buybacks less beneficial. Stated differently, I hope they’re buying a boatload now.

-Crip

[petec]

Great, but we all knew that value had been built, so the question is, "What have you done for me lately?'

 

I'm not sure most people realised *quite* how much value had been built! Most people were too busy getting their knickers in a twist about the hedges to notice what was happening on the other side of the world in FC and Lombard.

 

As for what have you done for me lately:

a) bought 44% of Seaspan at 5x earnings just as it exits a capex cycle springs to mind.

b) the market will always pay a premium for predictable, or at least visible, gains. I prefer paying book value for companies that have a history of doing smart, but unpredictable things. Plenty of the investments here could do very well over the next 1-5 years and plenty more will be made.

 

[petec]

Unfortunately they are not, the pace of buybacks in 2018 has been extremely slow. Now that I think about it, I have a strong suspicion they must be under negotiations with OMERS to start buying back their stake in Eurolife or potentially Brit.  It's the only logical explanation for the extremely slow share repurchases. 

 

Subsequent to December 31, 2017 and up to March 9, 2018 the company repurchased for cancellation 20,000 subordinate voting shares under the terms of its normal course issuer bid at a cost of $9.9.

 

https://s1.q4cdn.com/579586326/files/doc_financials/2017/annual/WEBSITE_Fairfax-FINANCIAL-FULL-Annual-Report-v3.pdf

 

  -I see large consistent buybacks up until $700 on FFH....after that they will slow substantially. I think that once the news comes out that FFH is buying back shares that the price will spike making the buybacks less beneficial. Stated differently, I hope they’re buying a boatload now.

-Crip

 

+1

 

You can hope all you like but I fear the big buyback ain't comin'. The cash is earmarked for buying the stubs of Brit (FFH have the option to buy OMERS' 29.9% from 2018 and the ticket will be over $500m) and Eurolife.

 

[StubbleJumper]

Great, but we all knew that value had been built, so the question is, "What have you done for me lately?'

 

I'm not sure most people realised *quite* how much value had been built! Most people were too busy getting their knickers in a twist about the hedges to notice what was happening on the other side of the world in FC and Lombard.

 

As for what have you done for me lately:

a) bought 44% of Seaspan at 5x earnings just as it exits a capex cycle springs to mind.

b) the market will always pay a premium for predictable, or at least visible, gains. I prefer paying book value for companies that have a history of doing smart, but unpredictable things. Plenty of the investments here could do very well over the next 1-5 years and plenty more will be made.

 

Well Pete, that was the point.  You make your money when you buy, not when you sell.  Crystallizing gains feels nice, but we should rather spend our time and attention focussed on what is currently being done to build value.  I certainly don't question that good deals are being made that are improving IV, and seaspan is just one of those deals.  More importantly, the insurance operations and investments seem to be aligning nicely for improved operating earnings.  Those are the things that are being done lately that are actually creating value.

 

 

sj

[ourkid8]

Crip1/Dazel, does this change your views on Fairfax as both of you were expecting large share repurchases.  I personally think this is a net positive consolidating their positions in Brit (Andy Bernard needs to perform his magic to bring down the CR) and Eurolife (P&C Combined ratio less than 70% so they are kicking ass) to make them Fairfax subsidiaries. 

 

Unfortunately they are not, the pace of buybacks in 2018 has been extremely slow. Now that I think about it, I have a strong suspicion they must be under negotiations with OMERS to start buying back their stake in Eurolife or potentially Brit.  It's the only logical explanation for the extremely slow share repurchases. 

 

Subsequent to December 31, 2017 and up to March 9, 2018 the company repurchased for cancellation 20,000 subordinate voting shares under the terms of its normal course issuer bid at a cost of $9.9.

 

https://s1.q4cdn.com/579586326/files/doc_financials/2017/annual/WEBSITE_Fairfax-FINANCIAL-FULL-Annual-Report-v3.pdf

 

  -I see large consistent buybacks up until $700 on FFH....after that they will slow substantially. I think that once the news comes out that FFH is buying back shares that the price will spike making the buybacks less beneficial. Stated differently, I hope they’re buying a boatload now.

-Crip

 

+1

 

You can hope all you like but I fear the big buyback ain't comin'. The cash is earmarked for buying the stubs of Brit (FFH have the option to buy OMERS' 29.9% from 2018 and the ticket will be over $500m) and Eurolife.

[Cigarbutt]

The underlying question has to do with the flexibility in using cash. Nice problem.

I am not aware of the exact nature and timing of the options that Fairfax has in terms of buying back the rest of Brit and Eurolife.

From FFH's perspective, this is certainly an option to consider or negotiate.

 

Looking back, when cash was high in 2008, they bought back shares (1,07 million) around book value before privatizing Northbridge and OdysseyRe, but this was said to be done as an offset to the shares issued on conversion of debentures earlier in 2008 (0,9 million).

 

In 2009, NB was privatized contemporary to a corresponding Crum & Forster dividend and, later in the year, ORH was privatized in parallel to a share issue (2,9 million shares), in order to "maintain a strong financial position" at around book value (of course book value was quite higher then and maybe reflected better intrinsic value).

 

So now, extra cash is available and so are options. If Brit were trading on public markets, I would be a buyer at the right price with an expectation that FFH offers a reasonable premium for full consolidation (maybe that's already phrased in the contract with Brit).

 

In terms of "excess" cash, potential opportunities or absence thereof and the credit market, here's a link offering some perspective:

http://fpafunds.com/docs/special-commentaries/fpa-new-income-special-commentary_mar-2018.pdf?sfvrsn=2

 

Like the FPA people suggest, I would stay away from corporate bonds and attribute some of the dry powder to FFH share buybacks and/or subs full consolidation.

Buybacks can be great. Mr. Singleton's record at Teledyne comes to mind. But some like Circuit City, from 2003 to 2007, did not do so well.

A buyback (especially if significant) needs to take into account the present price vs value AND future circumstances.

Opinion: I would spread the buybacks over time and focus on flexibilty in order to catch the inevitable hard market that will eventually come.

 

 

[petec]

Great, but we all knew that value had been built, so the question is, "What have you done for me lately?'

 

I'm not sure most people realised *quite* how much value had been built! Most people were too busy getting their knickers in a twist about the hedges to notice what was happening on the other side of the world in FC and Lombard.

 

As for what have you done for me lately:

a) bought 44% of Seaspan at 5x earnings just as it exits a capex cycle springs to mind.

b) the market will always pay a premium for predictable, or at least visible, gains. I prefer paying book value for companies that have a history of doing smart, but unpredictable things. Plenty of the investments here could do very well over the next 1-5 years and plenty more will be made.

 

Well Pete, that was the point.  You make your money when you buy, not when you sell.  Crystallizing gains feels nice, but we should rather spend our time and attention focussed on what is currently being done to build value.  I certainly don't question that good deals are being made that are improving IV, and seaspan is just one of those deals.  More importantly, the insurance operations and investments seem to be aligning nicely for improved operating earnings.  Those are the things that are being done lately that are actually creating value.

 

 

sj

 

Oops - I thought you were suggesting that they hadn't done anything lately. We are on the same page.

[petec]

I am not aware of the exact nature and timing of the options that Fairfax has in terms of buying back the rest of Brit and Eurolife.

 

I don't know the exact terms but it's something like this: Brit was bought in 2015 and OMERS got 29.9% of it. Brit doesn't have to pay a dividend but if it does OMERS gets preference up to an annual hurdle. From 3 years onwards FFH have the option to buy the OMERS stub for cost plus an annual hurdle rate. I think the hurdle rate is 7-8% and I assume any dividend paid counts towards it. (Clearly depending on how book value performs relative to the hurdle rate, the total P/BV paid for Brit will change.)

 

I believe AWH works on a similar system so I assume Eurolife does too.

 

Anyway the point is that the Brit option goes live in 2018, Eurolife probably in 2019, and AWH probably in 2020, and I expect all 3 to be exercised.

 

[Cigarbutt]

Appreciate the feedback.

 

Just to add some details (from AR 2017):

 

"On August 3, 2016 Brit purchased shares for cancellation from its minority shareholder Ontario Municipal Employees Retirement System (‘‘OMERS’’) for cash consideration of $57.8, which increased the company’s ownership interest in Brit from 70.1% to 72.5%. On March 3, 2017 Brit paid a dividend of $45.8 to OMERS."

 

With your description and the above quote, I would tend to say that it is quite reasonable to assume that Brit may be 100% owned this year.

The total price tag should be +/- 650 million. (no special insight here, just applying a simple rule of three with adjustments (NCI, GW+INT, 2017 results). It is possible that OMERS required to be bought out in steps.

 

Also, statutory dividend capacity at Brit stands at 195,1 million. If considered needed (FFH has done this before), the price tag could be decreased (just shuffling $ around) by an upstream dividend to the parent. I assume that Brit's NPW are not growing and that may be an option.

 

[ourkid8]

Great news however I would like them to use the balance to refinance/repay other outstanding high yielding debt instead of being used for general corporate purposes.

 

Fairfax intends to use C$298.4 million of the net proceeds from the offering to redeem in full the C$267.3 million outstanding principal amount of Fairfax’s 7.25% senior notes due June 22, 2020 plus accrued and unpaid interest thereon and the applicable premium (the “2020 Notes”), and to use the balance to refinance or repay other outstanding debt or other corporate obligations of Fairfax and its subsidiaries and for general corporate purposes.

 

https://www.fairfax.ca/news/press-releases/press-release-details/2018/Fairfax-Completes-600-Million-Senior-Notes-Offering/default.aspx

 

https://finance.yahoo.com/news/fairfax-announces-pricing-offering-senior-200820172.html

 

Fairfax is issuing 600 million euro debt with a coupon of 2.75% per year and due 2028.  This is extremely cheap euro denominated debt and looks to be used to refinance higher yielding debt. 

 

"Fairfax intends to use the net proceeds from this offering to refinance or repay outstanding debt or other corporate obligations of Fairfax and its subsidiaries and for general corporate purposes. This may include the redemption or repurchase of certain of Fairfax’s previously issued senior unsecured notes. "

[petec]

Appreciate the feedback.

 

Just to add some details (from AR 2017):

 

"On August 3, 2016 Brit purchased shares for cancellation from its minority shareholder Ontario Municipal Employees Retirement System (‘‘OMERS’’) for cash consideration of $57.8, which increased the company’s ownership interest in Brit from 70.1% to 72.5%. On March 3, 2017 Brit paid a dividend of $45.8 to OMERS."

 

With your description and the above quote, I would tend to say that it is quite reasonable to assume that Brit may be 100% owned this year.

The total price tag should be +/- 650 million. (no special insight here, just applying a simple rule of three with adjustments (NCI, GW+INT, 2017 results). It is possible that OMERS required to be bought out in steps.

 

Also, statutory dividend capacity at Brit stands at 195,1 million. If considered needed (FFH has done this before), the price tag could be decreased (just shuffling $ around) by an upstream dividend to the parent. I assume that Brit's NPW are not growing and that may be an option.

 

I get to 600m using $1.88bn * 27.5% * 1.08^3 - $46m

 

$1.88 * 27.5% is OMERS' cost for remaining shares

 

1.08^3 is 8% annual hurdle for 3 years since deal

 

$46m is the dividend paid in 2017 (there may have been more in 2016/8).

 

I'm nowhere near 100% sure on the methodology but we are in the same ballpark.

 

Agreed re dividend.

[Dazel]

 

Ok I have a second...no time to answer questions.

 

Here is what I would do....Eurolife is not strategic to me they bought it because Eurobank had to sell it and they paid a fair price..and Eurolife has knocked it out of the park! FFH should sell their stake that trades at a PE of about 3 on their cost...they could get a PE of 9 at least I would try for 12...This would be a 4 bagger for FFH add about a billion pretax gain....

Take the proceeds and buy back Brit and as much AWH...as they can because they shit the bed last year and they will get a decent price. I would also look at selling the other consolidated holdings that are smaller that they can ge5 premiums for because they do not create enough cash flow for the time they take...the cash sales are better used for FFH buybacks...they are big enough with BrIt and AWH...

 

Use the cash on hand is for buy backs and other opportunities....

[Dazel]

 

 

Actually if was Prem i would just swap assets with CPP...Eurolife is more the kind of asset that they would rather hold...steady. They would not have the disaster risk of BrIt and AWH....hint premium for Eurolife!

 

 

[StubbleJumper]

 

Ok I have a second...no time to answer questions.

 

Here is what I would do....Eurolife is not strategic to me they bought it because Eurobank had to sell it and they paid a fair price..and Eurolife has knocked it out of the park! FFH should sell their stake that trades at a PE of about 3 on their cost...they could get a PE of 9 at least I would try for 12...This would be a 4 bagger for FFH add about a billion pretax gain....

Take the proceeds and buy back Brit and as much AWH...as they can because they shit the bed last year and they will get a decent price. I would also look at selling the other consolidated holdings that are smaller that they can ge5 premiums for because they do not create enough cash flow for the time they take...the cash sales are better used for FFH buybacks...they are big enough with BrIt and AWH...

 

Use the cash on hand is for buy backs and other opportunities....

 

 

If eurolife trades at 3pe, to whom would ffh sell it at 12?  It's possible that ffh might ultimately obtain 12 pe in 4 or 5 years, but my take is that a multiple like that is not on in the near future.

 

The cash decision is what it is.  I have offered an (unpopular) opinion that the buybacks will not be meaningful in the Teledyne sense because Prem is a serial acquirer.  The cash will disappear for (hopefully) acquisitions that improve IV.  At this stage, I just hope to Christ that Prem is hemming and hawing a fair bit when he sees ffh's own shares trading at a discounted of 20 or 30 percent to fair value.  Buying back the minority interests in allied and brit might be nice, but it's not clear to me at this point that it's a superior use of cash than buybacks.

 

Time will tell.

 

 

SJ