Fairfax 2018

[TwoCitiesCapital]

From the meeting today, sounds like buybacks will be the focus on retained earnings over the entire few years, but that current cash is reserved for buying back minority interests as they become available.

[racemize]

From the meeting today, sounds like buybacks will be the focus on retained earnings over the entire few years, but that current cash is reserved for buying back minority interests as they become available.

 

I guess that means they have enough current cash for the minorities they want to buy out, so we're relying on current/future cash flow to the holding company for buybacks?

[ourkid8]

Exactly, no one should be expecting significant repurchases.  Sorry Dazel.

 

From the meeting today, sounds like buybacks will be the focus on retained earnings over the entire few years, but that current cash is reserved for buying back minority interests as they become available.

 

I guess that means they have enough current cash for the minorities they want to buy out, so we're relying on current/future cash flow to the holding company for buybacks?

[petec]

 

 

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!

 

I hate to say it but I told you so! The buyback is a multiyear event funded by FCF; the cash on hand is for the OMERS stakes in Brit, Eurolife, and Allied. On the positive side the free cash flow from Toys R Us alone is enough to buy back 35bps of the stock each year ;)

[petec]

From the meeting today, sounds like buybacks will be the focus on retained earnings over the entire few years, but that current cash is reserved for buying back minority interests as they become available.

 

I guess that means they have enough current cash for the minorities they want to buy out, so we're relying on current/future cash flow to the holding company for buybacks?

 

This is also what was communicated in the annual letter and meetings with shareholders. It’s not news.

[racemize]

He said cash flow, but I don't think it was explicitly clear that all the current cash was off the table.

[ourkid8]

Over our history, we have issued 29.5 million shares as we expanded Fairfax from net premiums written of

$10 million to $10 billion (current run rate of $11.5 billion). During this period, we have also reduced our shares

outstanding by 6.7 million, for a net increase of 22.8 million. As the table below shows, our shares outstanding have

grown by 5.6x while net premiums written, investments and common equity have increased by 1,000x or more.

Henry Singleton, at Teledyne, reversed this trend, as you know, and over the next ten years we expect to do the

same – use our free cash flow to buy back our shares!

 

He said cash flow, but I don't think it was explicitly clear that all the current cash was off the table.

[racemize]

Over our history, we have issued 29.5 million shares as we expanded Fairfax from net premiums written of

$10 million to $10 billion (current run rate of $11.5 billion). During this period, we have also reduced our shares

outstanding by 6.7 million, for a net increase of 22.8 million. As the table below shows, our shares outstanding have

grown by 5.6x while net premiums written, investments and common equity have increased by 1,000x or more.

Henry Singleton, at Teledyne, reversed this trend, as you know, and over the next ten years we expect to do the

same – use our free cash flow to buy back our shares!

 

He said cash flow, but I don't think it was explicitly clear that all the current cash was off the table.

 

Right--he said cash flow, but I don't think it was explicitly clear that all the current cash was off the table.

[petec]

Over our history, we have issued 29.5 million shares as we expanded Fairfax from net premiums written of

$10 million to $10 billion (current run rate of $11.5 billion). During this period, we have also reduced our shares

outstanding by 6.7 million, for a net increase of 22.8 million. As the table below shows, our shares outstanding have

grown by 5.6x while net premiums written, investments and common equity have increased by 1,000x or more.

Henry Singleton, at Teledyne, reversed this trend, as you know, and over the next ten years we expect to do the

same – use our free cash flow to buy back our shares!

 

He said cash flow, but I don't think it was explicitly clear that all the current cash was off the table.

 

Right--he said cash flow, but I don't think it was explicitly clear that all the current cash was off the table.

 

You’re right. I inferred that from the amount needed to buy in the minorities, and the repeated references to Singleton. It was implicit but not explicit.

[Dazel]

 

 

While Petec has been right on the objectivity of the amount of stock to repurchased as not as high as mine...I did expect a bigger chunk of buybacks...that were likely held back first quarter.

 

If anyone was listening I said they would and should buy back large amounts below $700. Well we are there....so I do think and I will defer to Petec’s view. Very little buy backs it was an opportunity.

 

Prem’s character questioned, Allied being disastrous, Indian holding companies where Prem would steal the company...can’t remmeber their term, prem’s Family getting money they don’t deserve, HW the worst investors ever, value is dead. Buy bitcoin and pot stocks instead..LOL.

 

It’s not time to claim victory but a move from $565 (when I came back to the board to defend Prem and Fairfax)....is significant. Especially with the worst hurricane season on record!

 

The keys now that buyback will not be there....

1. Bradstreet sees fit to engage

2. Insurance companies “all” fire like they can

 

You have and will see the converts change their tune on Prem and Fairfax will turn positive. I have seen this movie before...it’s $1000 a share in not that long a period of time. Expect crickets on the board expect for those brave and the ones that counted the assets will make a lot of money. They will say it was easy...should have been able to see it. Well some did...congrats for now...FFH is just getting started.

 

Long and strong Prem and Fairfax...As I said....they will blow away MKL and BRK over the next number of years...it’s just math.

 

Dazel

[petec]

 

 

While Petec has been right on the objectivity of the amount of stock to repurchased as not as high as mine...I did expect a bigger chunk of buybacks...that were likely held back first quarter.

 

If anyone was listening I said they would and should buy back large amounts below $700. Well we are there....so I do think and I will defer to Petec’s view. Very little buy backs it was an opportunity.

 

Prem’s character questioned, Allied being disastrous, Indian holding companies where Prem would steal the company...can’t remmeber their term, prem’s Family getting money they don’t deserve, HW the worst investors ever, value is dead. Buy bitcoin and pot stocks instead..LOL.

 

It’s not time to claim victory but a move from $565 (when I came back to the board to defend Prem and Fairfax)....is significant. Especially with the worst hurricane season on record!

 

The keys now that buyback will not be there....

1. Bradstreet sees fit to engage

2. Insurance companies “all” fire like they can

 

You have and will see the converts change their tune on Prem and Fairfax will turn positive. I have seen this movie before...it’s $1000 a share in not that long a period of time. Expect crickets on the board expect for those brave and the ones that counted the assets will make a lot of money. They will say it was easy...should have been able to see it. Well some did...congrats for now...FFH is just getting started.

 

Long and strong Prem and Fairfax...As I said....they will blow away MKL and BRK over the next number of years...it’s just math.

 

Dazel

 

Hear hear Dazel and props to you for your drumbeat of positivity when sentiment was at the bottom.

[ourkid8]

Agreed!  Fairfax has become a significant position in my portfolio so let the good times roll.  At the Fairfax dinner, Brian confirmed he has allocated his fixed income portfolio in 1 year maturities so he has not 'engaged' yet...

 

 

 

While Petec has been right on the objectivity of the amount of stock to repurchased as not as high as mine...I did expect a bigger chunk of buybacks...that were likely held back first quarter.

 

If anyone was listening I said they would and should buy back large amounts below $700. Well we are there....so I do think and I will defer to Petec’s view. Very little buy backs it was an opportunity.

 

Prem’s character questioned, Allied being disastrous, Indian holding companies where Prem would steal the company...can’t remmeber their term, prem’s Family getting money they don’t deserve, HW the worst investors ever, value is dead. Buy bitcoin and pot stocks instead..LOL.

 

It’s not time to claim victory but a move from $565 (when I came back to the board to defend Prem and Fairfax)....is significant. Especially with the worst hurricane season on record!

 

The keys now that buyback will not be there....

1. Bradstreet sees fit to engage

2. Insurance companies “all” fire like they can

 

You have and will see the converts change their tune on Prem and Fairfax will turn positive. I have seen this movie before...it’s $1000 a share in not that long a period of time. Expect crickets on the board expect for those brave and the ones that counted the assets will make a lot of money. They will say it was easy...should have been able to see it. Well some did...congrats for now...FFH is just getting started.

 

Long and strong Prem and Fairfax...As I said....they will blow away MKL and BRK over the next number of years...it’s just math.

 

Dazel

 

Hear hear Dazel and props to you for your drumbeat of positivity when sentiment was at the bottom.

[StubbleJumper]

 

 

While Petec has been right on the objectivity of the amount of stock to repurchased as not as high as mine...I did expect a bigger chunk of buybacks...that were likely held back first quarter.

 

If anyone was listening I said they would and should buy back large amounts below $700. Well we are there....so I do think and I will defer to Petec’s view. Very little buy backs it was an opportunity.

 

Prem’s character questioned, Allied being disastrous, Indian holding companies where Prem would steal the company...can’t remmeber their term, prem’s Family getting money they don’t deserve, HW the worst investors ever, value is dead. Buy bitcoin and pot stocks instead..LOL.

 

It’s not time to claim victory but a move from $565 (when I came back to the board to defend Prem and Fairfax)....is significant. Especially with the worst hurricane season on record!

 

The keys now that buyback will not be there....

1. Bradstreet sees fit to engage

2. Insurance companies “all” fire like they can

 

You have and will see the converts change their tune on Prem and Fairfax will turn positive. I have seen this movie before...it’s $1000 a share in not that long a period of time. Expect crickets on the board expect for those brave and the ones that counted the assets will make a lot of money. They will say it was easy...should have been able to see it. Well some did...congrats for now...FFH is just getting started.

 

Long and strong Prem and Fairfax...As I said....they will blow away MKL and BRK over the next number of years...it’s just math.

 

Dazel

 

 

Dazel, your enthusiasm is nice, but try to remain a little balanced.  It's quite obvious that ffh is positioned to rack up decent operating earnings over the next 1 to 5 years, and it's quite obvious that the pricing in February/March was on the threshold of nicely cheap at approx 1x adjusted bv.  That's all fine and it bodes well for the future.

 

However, completely separately from the current valuation situation, ffh has undertaken a number of actions that are of dubious integrity from a corporate governance perspective.  Integrity and not a matter of degree.  Should we not be concerned about abuses of non-multiple voting shareholders?  Really, is it okay if abusive decisions are made as long as the dollars are small?  Imo, poor governance is poor governance and we should remain highly vigilant when we see it in small areas because often it's the tip of the iceberg (ie, what other decisions are being made that might benefit the watsa family without benefitting other shareholders?  Are there other things happening that do not require disclosure, but are still of dubious integrity?)

 

Fwiw, I am optimistic about ffh's short-term outlook, but in no way will that impact my concerns about some of the historical risk management errors that ffh has made or the ongoing governance concerns.  In fact, you might argue that those issues were the driver's of the recent valuation opportunity...

 

 

Sj

[FairFacts]

SJ,

 

What governance issues?

[StubbleJumper]

SJ,

 

What governance issues?

 

1) reweighting the multiple voting shares to maintain control, and after losing the vote, holding a second vote (presumably after twisting some arms of institutional holders?).

 

2) Using the reweighted multiple voting shares to appoint Ben watsa to the bod, despite the fact that the kid is wet behind the ears and would never be appointed to any other board of a major Canadian corporation on the basis of merit.

 

3) outsourcing a portion of ffh's investment portfolio to be managed by Ben watsa despite the fact that there are scads of equally well qualified (better qualified) firms in Toronto that are arms length.

 

4) using the multiple voting shares to appoint Christine to the bod despite the fact that she would never qualify to sit on a bod of a major Corp with her current level of experience.

 

 

 

So, it's not a partially favourable trend.  It leaves the open question of whether ffh engaged in that shitty Canadian tradition of paying institutional holders for their vote.  And it leaves us wondering what other things are being done for the family on ffh's dollar.  When the family takes a trip to India related to the dakshana charity, we just hope to hell that it was paid for with family money rather than ascribing business purposes to it and having it paid by ffh.  And that's the problem.  Once you start with small abuses, the level of confidence amongst minority holders plunges.

 

 

Sj

[FairFacts]

SJ,

 

What governance issues?

 

1) reweighting the multiple voting shares to maintain control, and after losing the vote, holding a second vote (presumably after twisting some arms of institutional holders?).

 

2) Using the reweighted multiple voting shares to appoint Ben watsa to the bod, despite the fact that the kid is wet behind the ears and would never be appointed to any other board of a major Canadian corporation on the basis of merit.

 

3) outsourcing a portion of ffh's investment portfolio to be managed by Ben watsa despite the fact that there are scads of equally well qualified (better qualified) firms in Toronto that are arms length.

 

4) using the multiple voting shares to appoint Christine to the bod despite the fact that she would never qualify to sit on a bod of a major Corp with her current level of experience.

 

 

 

So, it's not a partially favourable trend.  It leaves the open question of whether ffh engaged in that shitty Canadian tradition of paying institutional holders for their vote.  And it leaves us wondering what other things are being done for the family on ffh's dollar.  When the family takes a trip to India related to the dakshana charity, we just hope to hell that it was paid for with family money rather than ascribing business purposes to it and having it paid by ffh.  And that's the problem.  Once you start with small abuses, the level of confidence amongst minority holders plunges.

 

 

Sj

 

I hear you! My impression of Prem is based on close monitoring of FFH over the past two years. I have listened intently to the conference calls and studied the results and his commentary. My conclusion is that he is pretty consistent and constantly emphasizes the Guiding Principles and the Fair and Friendly Culture. Now on to your concerns about governance.

 

Points 1, 2 and 4. Multiple voting shares.

He states clearly that the purpose behind this move is to prevent 'our' company from being taken over - "now and after I pass away because those shares will never be sold". He goes on to say that his son Ben and Daughter Christine joined the board for the very same reason.

 

Point 3 - Ben managing a $50mil slice of the investment portfolio.

"The fund has had excellent results over the six years since it began"...."We invested in the fund to get access to those excellent returns, but also to potentially do debt and warrant deals with some of the fund's investee companies".

 

In otherwords these are all actions very consistent with his long term strategy (never selling etc..) AND fully disclosed, I don't have any issue with them.

 

Now, worrying a little about Allied World...but times will tell....

 

[StubbleJumper]

SJ,

 

What governance issues?

 

1) reweighting the multiple voting shares to maintain control, and after losing the vote, holding a second vote (presumably after twisting some arms of institutional holders?).

 

2) Using the reweighted multiple voting shares to appoint Ben watsa to the bod, despite the fact that the kid is wet behind the ears and would never be appointed to any other board of a major Canadian corporation on the basis of merit.

 

3) outsourcing a portion of ffh's investment portfolio to be managed by Ben watsa despite the fact that there are scads of equally well qualified (better qualified) firms in Toronto that are arms length.

 

4) using the multiple voting shares to appoint Christine to the bod despite the fact that she would never qualify to sit on a bod of a major Corp with her current level of experience.

 

 

 

So, it's not a partially favourable trend.  It leaves the open question of whether ffh engaged in that shitty Canadian tradition of paying institutional holders for their vote.  And it leaves us wondering what other things are being done for the family on ffh's dollar.  When the family takes a trip to India related to the dakshana charity, we just hope to hell that it was paid for with family money rather than ascribing business purposes to it and having it paid by ffh.  And that's the problem.  Once you start with small abuses, the level of confidence amongst minority holders plunges.

 

 

Sj

 

I hear you! My impression of Prem is based on close monitoring of FFH over the past two years. I have listened intently to the conference calls and studied the results and his commentary. My conclusion is that he is pretty consistent and constantly emphasizes the Guiding Principles and the Fair and Friendly Culture. Now on to your concerns about governance.

 

Points 1, 2 and 4. Multiple voting shares.

He states clearly that the purpose behind this move is to prevent 'our' company from being taken over - "now and after I pass away because those shares will never be sold". He goes on to say that his son Ben and Daughter Christine joined the board for the very same reason.

 

Point 3 - Ben managing a $50mil slice of the investment portfolio.

"The fund has had excellent results over the six years since it began"...."We invested in the fund to get access to those excellent returns, but also to potentially do debt and warrant deals with some of the fund's investee companies".

 

In otherwords these are all actions very consistent with his long term strategy (never selling etc..) AND fully disclosed, I don't have any issue with them.

 

Now, worrying a little about Allied World...but times will tell....

 

 

 

Yes, an explanation was furnished for reweighted the multiple voting shares.  The real question is whether that explanation is beneficial to shareholders broadly or just to the watsa family.  Is it beneficial to grant control to the next generation that hasn't earned it and hasn't built a damned thing.  The fact that two votes were required will pretty much answer that question.  Multiple voting shares are a shitty governance approach to begin with, and reweighting was unconscionable.  It is quite likely that talent will skip a generation and we might badly want someone to take over ffh if Ben and Christine don't cut the mustard...but we'll be stuck with them.  How much of your money is currently in Power Corp which is the poster child for talent skipping a generation...or would the poster child be Seagram's?

 

On the question of giving Ben a slice of the investment portfolio, my bullshit detector is ringing loudly.  The explanation is tripe.  There are any number of outfits in Toronto that have great records and operate at arms length.  The decision was made for the pure benefit of the watsa family, and be damned about the interests of the rest of us who own 93% of the company.  Disclosure was marginal, because I've seen no indication what we are paying in investment fees.  Is it 1%, 2%, some other amount?  So the family is getting some undisclosed financial benefit.  I will acknowledge that the amount is small in the context of ffh's operations and assets, but integrity is not a matter of degree.

 

I'm not at all worried about allied.  Prems game is acquisitions.  Some have been fabulous and some less than fabulous.  There will be some disappointments, but those are part of the batting average.  At least they do not raise questions about the family's integrity.

[John Hjorth]

StubbleJumper & FairFacts,

 

Thank you for a discussion, that to me has merit, and thereby is valid and fertile.

 

Discussions like this is what makes CoBF so awesome.

 

I guess it all boils down to personal trade offs based on preferences etc., combined with investment style [position sizing etc.]

[nodnub]

I'm a long time Fairfax shareholder and supporter. I was also disappointed in the multi voting share changes.

 

There has been discussion of the appropriateness of Ben amd Christine on the board... 

 

What about Karen Jurjevich?    High school principal from Prem's daughter's high school.

 

She could be a wonderful person and maybe a good friend of the Watsa family but how is that relevant as a board member at a company like Fairfax?  Doesn't appear to have relevant experience and I can't imagine her relationship to the family would make her very independant while taking action as a board member?

 

Karen L. Jurjevich

Ms. Jurjevich is Principal of Branksome Hall, a leading private International Baccalaureate (IB) World School for girls located in Toronto, and is also the CEO and Principal of Branksome Hall Global. Prior to joining Branksome Hall in 1998, Ms. Jurjevich was a Principal in the Toronto District School Board and, from 1988 to 1992, taught at Havergal College in Toronto, Ontario. Prior thereto, Ms. Jurjevich held a number of teaching positions and was previously a member of the Board of the Canadian Accredited Independent Schools, the Board of the Conference of Independent Schools of Ontario, the International Baccalaureate, North American Independent Schools Task Force. Ms. Jurjevich recently graduated from the Stanford Executive Program at the Stanford Graduate School of Business.

[Dazel]

 

 

SJ,

 

The only thing not balanced is my investment account its asset rich!! Prem has made me buckets of cash! And only pays himself $600k a year to run, live and breath Fairfax and 95% of his net worth is  in the company what the hell else do I Want?

 

Dazel

 

 

 

[StubbleJumper]

 

 

SJ,

 

The only thing not balanced is my investment account its asset rich!! Prem has made me buckets of cash! And only pays himself $600k a year to run, live and breath Fairfax and 95% of his net worth is  in the company what the hell else do I Want?

 

Dazel

 

 

Well, I guess that's one perspective.  "I don't care if my business partner has integrity as long as I'm making money."  Hopefully that perspective will work out well for you.

 

More broadly, it's interesting that someone should say that they are making buckets of money on ffh.  I guess if you have specific entry and exit points that are particularly favourable a guy could be beating the market by holding ffh.  On the other hand, some of the decisions that we've spoken of at length on this board have driven a pretty ugly three-year and five-year chart (the ten year chart isn't much better).  I'm optimistic about the next one to five years, but the past five have been forgettable.

 

 

Sj

[Dazel]

 

 

Your welcome SJ.

 

 

[gfp]

Results are out -

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

[ABM]

appears to be solid print across many fronts. my big concern was allied reserve developments and it looks like small redundancy and 94% CR for Q.  At $560/share implies 1.2x Q1 BVPS so needs strong results to support valuation but not very demanding compared to peers imo 

[FairFacts]

appears to be solid print across many fronts. my big concern was allied reserve developments and it looks like small redundancy and 94% CR for Q.  At $560/share implies 1.2x Q1 BVPS so needs strong results to support valuation but not very demanding compared to peers imo

 

I read CR of 96% per the press release?