Fairfax stock positions

[Viking]

1 hour ago, Xerxes said:

Viking,

A comment on your post:   FFH first committed in 2017 (not 2021) (post Trump presidency + rate moving higher + animal spirits being unleashed) to not do any more shorting. And that is when I started buying small positions.

@Xerxes your comment reflects my number 1 watch-out with Fairfax: trust management.

 

For me today it is not a big enough issue to not invest in the stock. I like the current direction of the company. And the stock is crazy cheap.
 

However, i will be watching closely what Fairfax does (and what it says, but to a lesser extent). If i see them making new big bets that i do not like or understand i will re-evaluate what to do with my shares.
 

It will take Fairfax time to earn back investors trust (and deservedly so). after all, actions have consequences. 

Edited November 1, 2021 by Viking

[Gregmal]

Kudos SJ. There was discussion about this in another thread, not one relating to FFH but just portfolio management in general. If you are hedging, it is mitigate certain risks and allow other parts of your portfolio to flourish. To this extent, you can continually justify taking losses in certain areas to justify gains in others. But when your "hedges" are total losses and your long exposure is costing you money as well.....something is very wrong. 

[Xerxes]

i recently bought this book (link below), which have not read yet, i think Fairfax deserve a chapter in that book, both the positive aspect of it and the negative aspect of it.

 

Global Derivative Debacles: From Theory To Malpractice (Second Edition): From Theory to Malpractice (2nd Edition) eBook : Laurent L Jacque: Amazon.ca: Kindle Store

 

But FFH is not alone. I recall Harold Hamm's Continental Resources had hedged oil price risk via put option prior to the 2014 collapse in oil price, and comically remove the hedges (exactly at the wrong time) when oil plunged, leaving a lot on the table. (if i recall the story correctly).

 

Peter Munk, when he was alive and leading Barrick, he sold its future production and pretty much cap the upside for the investor. 

Lastly, there was the infamous case of Delta Air Line buying a refinery 10 or so years ago to hedge its exposure. Made a lot of noise about forward thinking ... what happened after that. Was that really worth it. My memory is 5 years out of date on that story.

 

Of the few examples i gave the first three, (FFH, Continental Resources and Barrick), the founder was the CEO and the operator. So one can deduct that there was a case of wanting to protect's one baby. BUT, if what is the value for the investor if the upside is fully hedged.

 

Folks here often complain who FFH sold J&J and the other quality names too soon. But if you look closely you will see that those 4 high quality name were sold exactly in the same year that FFH booked a major loss on its shorts position. Therefore, the high quality names were sold as an offset to close the shorts at a loss.

 

 

 

 

 

[glider3834]

I can't think of one successful investor that hasn't had a serious f*** up and Prem is no different - I guess that makes him human. I loved Buffett's reply in response to comment around his unsuccessful airlines investment & he replied our company still has more net worth than any other company on the planet....so true

 

And not just in world of investing but even in sport, I still can't get over (for football fans) Zidane's headbutting incident in the world cup final against Italy - one of the greatest footballers on the planet making an absolutely worst possible decision at the worst possible moment - during a world cup final! But hey he is still one of the greatest footballers of all time.

 

Prem & Fairfax's record will be judged by the investment community in the fullness of time - we're all lucky we don't have our records (and dirty laundry) on public display 

 

 

 

 

 

 

 

 

[Viking]

2 hours ago, Xerxes said:

Folks here often complain who FFH sold J&J and the other quality names too soon. But if you look closely you will see that those 4 high quality name were sold exactly in the same year that FFH booked a major loss on its shorts position. Therefore, the high quality names were sold as an offset to close the shorts at a loss.

Bingo. Yes, the shorts resulted in significant losses for a decade. But those losses had knock on effects… Fairfax needed cash and therefore had to sell assets to cover the losses. The assets sold were the ones that had gone up in value (gains had to be booked to offset the losses). They HAD to do what Peter Lynch warned about: pulling out the flowers and watering the weeds. The cost to Fairfax of the short positions was greater than just the simple financial losses booked on the short positions.
 

Imaging what now happens to the garden when the flowers are allowed to fully bloom.

 

Investors do not grasp the size of the impact the short losses had on Fairfax’s business for the past decade. And now that they are gone investors now do not grasp Fairfax’s earning power moving forward. 
———-

PS: why did Fairfax need to sell Riverstone? Both sales were done because they needed cash. Take a look at the increase in total debt the past 5 years. (The Riverstone sales were also likely done because Fairfax did not have the cash to fund Riverstone’s future growth.)

Edited November 1, 2021 by Viking

[Xerxes]

2 hours ago, glider3834 said:

I can't think of one successful investor that hasn't had a serious f*** up and Prem is no different - I guess that makes him human. I loved Buffett's reply in response to comment around his unsuccessful airlines investment & he replied our company still has more net worth than any other company on the planet....so true

 

And not just in world of investing but even in sport, I still can't get over (for football fans) Zidane's headbutting incident in the world cup final against Italy - one of the greatest footballers on the planet making an absolutely worst possible decision at the worst possible moment - during a world cup final! But hey he is still one of the greatest footballers of all time.

 

Prem & Fairfax's record will be judged by the investment community in the fullness of time - we're all lucky we don't have our records (and dirty laundry) on public display 

 

 

i dont think anyone here has any problem with the CEO doing what they thought was right. After all they (investors) are free to not own the stock. It is not doing what they committed as a CEO of a publicly traded company .. that is concerning.

 

Another sport analogy:  can Maradona scoring the win for Argentina in early 1980s be considered like scoring the bet against the housing in 2008-09. It was an asymmetric play-gamble that paid off in both cases.

 

Edited November 1, 2021 by Xerxes

[glider3834]

13 minutes ago, Viking said:

 

Investors do not grasp the size of the impact the short losses had on Fairfax’s business for the past decade. And now that they are gone investors now do not grasp Fairfax’s earning power moving forward.

+1 agree - including Digit gain expected I guess now for Q4 - we are probably on track for an approx 7% or maybe closer to 8% total investment return for this year (assuming there is no major drawdown in markets by year end) which I think would be the biggest since 2014 

 

Here is a visual on those hedges I put together a while back  - I have edited in red show impact of hedge removal

 

[glider3834]

8 minutes ago, glider3834 said:

+1 agree - including Digit gain expected I guess now for Q4 - we are probably on track for an approx 7% or maybe closer to 8% total investment return for this year (assuming there is no major drawdown in markets by year end) which I think would be the biggest since 2014 

 

Here is a visual on those hedges I put together a while back  - I have edited in red show impact of hedge removal

 

I should just qualify my comment with that expected return, that I am expecting negative impact from catastrophe losses in Q3 but still expecting its manageable & so that we still get to a high 90s CR for full year.

[gary17]

Each day Elon Musk's net worth is increasing more than the market cap of Fairfax !

Edited November 1, 2021 by gary17

[KPO]

15 hours ago, Viking said:

Where the analysis gets even more interesting is when you add a couple more big loss items that will not keep repeating (at the same level) for the next decade:

1.) CPI linked derivatives: this investment has cost Fairfax an additional $650 million or so over the past decade. The position will likely not be renewed so it will not continue to cost Fairfax an average of $65 million per year for the next decade.

2.) cost to fix/exit all the poorly performing equity investments the past 5 or so years. This bucket deserves its own post as it is hard to grasp and i don’t have exact numbers. My guess is the drag was likely $100-$150 million per year (on average). Year after year Fairfax took very large financial hits to fix many of the equity holdings. RFP. EXCO bankruptcy. Fairfax Africa final merger with Helios. APR sale to Atlas. AGT take private? Farmers Edge before IPO? These are just a few that come to mind quickly. There are more. Now the good news is my read is most of the problem children have been fixed. And the portfolio of equity holdings is better quality Oct 2021 than at any time in the past 10 years. So i expect future costs to fix equity holdings problems to be much lower than past years. 
 

So when you add the cost to short, CPI bet and fixing the equity holdings the annual total cost was likely about $600 million (pre tax) each and every year (on average). And much of this cost goes away moving forward. That is a massive win for current shareholders. 

I guess as in sports I’m not a fan of saying “if you omit the crucial three or four mistakes we would have had wild success.” Great, but once an interception is thrown you don’t get a do over. I’m cautiously optimistic about Fairfax going forward, but these are the same people that exercised a fair bit of poor judgement in recent history. 

[Daphne]

Glider, do you have any concrete information/ insight to support your belief Q3 will deliver negative cr results?  The reason I ask is those companies that have already reported are showing/expressing glowing results.

[glider3834]

8 minutes ago, Daphne said:

Glider, do you have any concrete information/ insight to support your belief Q3 will deliver negative cr results?  The reason I ask is those companies that have already reported are showing/expressing glowing results.

@Daphneno nothing concrete just a guesstimate - in 2017 Fairfax took around 1% share (or 1.3 bil) of the $130 bil in insured losses, the estimated  insured losses from Q3 (both Ida & European Storms) are probably in the US$40-50 bil area https://www.insuranceinsider.com/article/2923c79ber4dpafctaq68/aigs-mark-lyons-sees-q3-insured-catastrophe-losses-at-40bn so if we take 1% we are at say US$450 mil area but this is just a guess. Esimtating the CR is tricky because we don't know how much favourable reserve development or what other catastrophe exposure/lsosses they might have. But assuming no major reserve release in Q3 and an UWP of $185 mil (but for Ida etc), so if we subtract that from 450mil it probably puts them over 100CR for Q3 but I think they could still sit under or close to 100CR for 9mths if my estimates are close & also we still have Q4 to come - baring any major catastrophes you would expect a decent UWP there. 

 

 

 

 

 

 

[Viking]

4 hours ago, KPO said:

I guess as in sports I’m not a fan of saying “if you omit the crucial three or four mistakes we would have had wild success.” Great, but once an interception is thrown you don’t get a do over. I’m cautiously optimistic about Fairfax going forward, but these are the same people that exercised a fair bit of poor judgement in recent history. 

@KPO what i am trying to understand is why has earnings and BV growth been was so bad at Fairfax for much of the past decade. Can we identify with precision what the key drivers of this poor performance were? I think we can. It is crystal clear that the shorting strategy was the primary driver of the poor performance over the past decade. It was a monster $4.5 billion hit to earnings over a decade. The CPI strategy was another $650 million (or so) hit. So the two together total more than $5 billion or more than $500 million per year. This is identifiable. It is real $. And a real cost. Not theoretical. 
 

We also know that as of Dec 31, 2020 all short positions have been closed. We also know the majority of the cost of the CPI is baked in. So we know these costs will not continue moving forward (perhaps we get a small hit from the CPI as it runs off over the next 2 years).  A massive cost item has been eliminated.
 

It sounds to me like you think nothing has changed at Fairfax. So  please tell me where is the new $500 million hit going to come from in 2021? And then again in 2022? And again in 2023? And every year for the next decade …

 

I don’t see anything Fairfax is invested in today that is going to drive a new $500 million hit each and every year for the next decade. 
 

Therefore, all things being equal, this leads me to believe that earnings and growth in BV will be higher, and likely much higher, starting in 2021 (and future years) when compared to past years. 
———————

sports analogy: Fairfax is an NFL football team. Every game it has played for the past 10 years it has spotted the other team a 21 to 0 lead at the start of the game. Needless to say, their win/loss record has been terrible for a decade.
 

And since Jan 1 of 2021 all games now start 0-0. I don’t think it is crazy to project their win/loss record will improve when compared to past results in the years moving forward   
 

 

Edited November 2, 2021 by Viking

[StubbleJumper]

9 hours ago, Viking said:

 

And since Jan 1 of 2021 all games now start 0-0. I don’t think it is crazy to project their win/loss record will improve when compared to past results in the years moving forward   
 

 

 

 

Viking, that's a nice summary of the impact of the market and deflation speculation decisions, amounting to roughly $500m/yr.  But, that's not the whole deal.  The other side of the deal is the poor equity investment decisions.  As I have said in the past, FFH could have done better if it selected its equity portfolio by having the Watsa family dog shit on the investment listings from a newspaper, and having FFH buy shares of the companies that the turds landed on.  But, somehow they managed to "hedge" an equity portfolio that performed terribly over the decade.

 

Case in point would be my favourite whipping boy, Blackberry.  FFH piled a shitload of capital into BB, eventually totalling more than $1B.  Ignoring a few small-ish interest payments for the debentures, that money has returned approximately ZERO since 2012.  Christ, if they'd have put the money in something as simple as a basic S&P500 investment, the annualized return would have been double-digits.  So, for BB alone, you can add $100m/year to your annual $500m "hedging" fuck-up.

 

Okay, so as you've noted, FFH says that it's no longer planning to take short positions and that the days of market speculation using derivatives is over, so we won't be spotting the other team three touchdowns every game.  But, BB is still languishing on the balance sheet, so that alone continues with the practice of spotting the other team a field goal.  I guess it's better than spotting them three touchdowns?

 

 

SJ

[modiva]

1 hour ago, StubbleJumper said:

Viking, that's a nice summary of the impact of the market and deflation speculation decisions, amounting to roughly $500m/yr.  But, that's not the whole deal.  The other side of the deal is the poor equity investment decisions.

 

Thanks @Viking and @StubbleJumper

It is great to have the precise insights and counter points.  I have been accumulating Fairfax since pandemic that it's become significant size of 20% of my portfolio.  

 

As you pointed, Fairfax seemed to learn from the past mistakes of shorting and vowed not to do it again.  They also acknowledged in the earnings calls that some of their investments such as BB were terrible. 

 

If they done buybacks, instead of shorting over the last decade, they would have retired half of their stock.  Hindsight is everything.  But it's not too late now.  Wouldn't it be nice to announce a $5B buyback over the next 5, 10 years? That would be great way to win over the investors, new and old alike. 

[StubbleJumper]

11 minutes ago, modiva said:

 

Thanks @Viking and @StubbleJumper

It is great to have the precise insights and counter points.  I have been accumulating Fairfax since pandemic that it's become significant size of 20% of my portfolio.  

 

As you pointed, Fairfax seemed to learn from the past mistakes of shorting and vowed not to do it again.  They also acknowledged in the earnings calls that some of their investments such as BB were terrible. 

 

If they done buybacks, instead of shorting over the last decade, they would have retired half of their stock.  Hindsight is everything.  But it's not too late now.  Wouldn't it be nice to announce a $5B buyback over the next 5, 10 years? That would be great way to win over the investors, new and old alike. 

 

 

Yes, at the moment, FFH's own shares appear to be one of the most attractive investments that it could make.  As long as they make repurchases at a price lower than intrinsic value, it should be a nice outcome for shareholders (and perhaps intrinsic value might be 1.2x book?).

 

To envision $5B of buybacks over 5 or 10 years, you need to imagine a source of funds.  The buybacks are conducted by the holdco, so to have $5B over 10 years would require that the holdco find $500m/year of cash over and above what it uses for its interest payments, debt repayment, dividend payments and holdco overhead costs.  I estimate that the holdco burns through about $750m/year on interest, dividends and corporate overhead.  If you hope to see $5b of buybacks over 5 years or 10 years, you'd need the insurance subs to send $1.25 billion to $1.75 billion in dividends per year to the holdco, or you need to imagine the holdco continuing to lever-up, sell off subsidiaries (like Riverstone) or for the non-insurance subs to suddenly start making large cash contributions.

 

If you look at Note 19 in the financial statements of the most recent annual report, you'll see that the entire dividend capacity of the insurance subs for 2021 was $1.55 billion.  So, effectively, the insurance subs would have to contribute 100% of their dividend capacity to meet a buyback objective of the size that you have tabled.  While that dividend capacity should grow as time goes on, the subs do need to retain a certain amount of capital to fund their organic growth objectives.  We should not expect the subs to dividend 100% of their theoretical capacity, or anywhere close to it.

 

All of this to say that the financial capacity is not really available at the moment for an aggressive buyback campaign and probably won't be for another year or two.  Maybe in years 3 through 10 of your notional 10-year planning horizon?  If the shares are still cheap-ish when capital becomes available to the holdco, the buybacks would be an attractive option.

 

 

SJ

[Viking]

28 minutes ago, modiva said:

 

Thanks @Viking and @StubbleJumper

It is great to have the precise insights and counter points.  I have been accumulating Fairfax since pandemic that it's become significant size of 20% of my portfolio.  

 

As you pointed, Fairfax seemed to learn from the past mistakes of shorting and vowed not to do it again.  They also acknowledged in the earnings calls that some of their investments such as BB were terrible. 

 

If they done buybacks, instead of shorting over the last decade, they would have retired half of their stock.  Hindsight is everything.  But it's not too late now.  Wouldn't it be nice to announce a $5B buyback over the next 5, 10 years? That would be great way to win over the investors, new and old alike. 

@modiva on the Q3 conference call on Friday i am hoping Fairfax provides an update on stock buybacks (their priorities with future free cash flow).

 

In recent years, the priority has been to support the subs grow in the hard market. Good decision. More recently paying down debt ($500 million outstanding on the revolver) has been another priority. Also a good decision. Fairfax might now be ready to start to get more aggressive with buybacks.

 

We KNOW they think their stock price is crazy cheap. After all, they are value investors.

[Xerxes]

37 minutes ago, modiva said:

If they done buybacks, instead of shorting over the last decade, they would have retired half of their stock.  Hindsight is everything.  But it's not too late now.  Wouldn't it be nice to announce a $5B buyback over the next 5, 10 years? That would be great way to win over the investors, new and old alike. 

 

Sorry, but i got to push back on this view as well.

Had they retired half of their share, and the market had plunged, collectively we would have complained why could they not have bought back their share at a distress price and how they wasted so much dry powder on buybacks pre-market crash.

 

Going all in hedging (+90% of your positions), or going all in buying back one's stock, means that you assuming there is an extremely narrow set of different outcome in the future. I think with the things we have seen in 2020 and 2021 (i.e. Tesla, pandemic, negative oil WTI price, etc.), it has been more rewarding for a capital allocator to be humble and assume that anything is possible.

 

There is a recent interview with the previous CEO of Goldman Sachs on Bloomberg Front Row. I highly recommend for folks to watch it. He says it best:

 

He spends 98% of his time worrying about things with 2% probability ... most of the planning is about contingency planning, not what will happen, but what could happen ,,,, and given enough time, not only everything can happen but everything will happen

 

 

 

[glider3834]

5 hours ago, StubbleJumper said:

the entire dividend capacity of the insurance subs for 2021 was $1.55 billion.

I am expecting this will grow for 2022. If we use growth in book value as a rough proxy then we could expect subs statutory surplus to be higher - but we need to wait on Q3 results (Ida impact) & Q4 & also will depend on what they div out of the subs during the 2021 year.

 

5 hours ago, StubbleJumper said:

If you hope to see $5b of buybacks over 5 years or 10 years, you'd need the insurance subs to send $1.25 billion to $1.75 billion in dividends per year to the holdco, or you need to imagine the holdco continuing to lever-up, sell off subsidiaries (like Riverstone) or for the non-insurance subs to suddenly start making large cash contributions.

I agree that to get an immediate $5 bil buyback, we would need to sell a big sub. I actually believe Fairfax's insurance subs are being carried below their intrinsic worth & Fairfax have sold subs in the past like ICICI Lombard & First Capital & realised large capital gains. M&A for P&C insurers was around 1.2x BV in 2020 - I am guessing this would be higher now & then what would Fairfax's subs like Odyssey be worth - they have an excellent track record? I know Prem has said its their crown jewel & they would never sell but everything has a price & I believe they said they would never sell First Capital? 

 

We also need to go back to that buyback question? Is this the best decision? as @petecpointed out to me - we are in a hard market which provides an opportunity to really grow their net written premium substantially & premiums in insurance tend to be sticky so that will flow through later on in much higher net earned premium, underwriting profit & float. The best thing about growing organically is that they are underwriting that premium themselves, often with existing clients who they are already offering line/s of insurance to so its a safer & cheaper way to build than through acquistions.

 

I think they will try & strike a balance between growth & buying back their shares but buybacks are not the only way to build intrinsic value & pushing capital into their insurance business at the moment to grow premium seems smart & makes sense. If you cast your eye across their peers, Fairfax are sitting at the higher end in terms of double digit premium growth while others who often have a more rigid geographic focus as well  are growing at single digits.

 

 

[Parsad]

19 hours ago, Viking said:

@KPO what i am trying to understand is why has earnings and BV growth been was so bad at Fairfax for much of the past decade. Can we identify with precision what the key drivers of this poor performance were? I think we can. It is crystal clear that the shorting strategy was the primary driver of the poor performance over the past decade. It was a monster $4.5 billion hit to earnings over a decade. The CPI strategy was another $650 million (or so) hit. So the two together total more than $5 billion or more than $500 million per year. This is identifiable. It is real $. And a real cost. Not theoretical. 
 

We also know that as of Dec 31, 2020 all short positions have been closed. We also know the majority of the cost of the CPI is baked in. So we know these costs will not continue moving forward (perhaps we get a small hit from the CPI as it runs off over the next 2 years).  A massive cost item has been eliminated.
 

It sounds to me like you think nothing has changed at Fairfax. So  please tell me where is the new $500 million hit going to come from in 2021? And then again in 2022? And again in 2023? And every year for the next decade …

 

I don’t see anything Fairfax is invested in today that is going to drive a new $500 million hit each and every year for the next decade. 
 

Therefore, all things being equal, this leads me to believe that earnings and growth in BV will be higher, and likely much higher, starting in 2021 (and future years) when compared to past years. 
———————

sports analogy: Fairfax is an NFL football team. Every game it has played for the past 10 years it has spotted the other team a 21 to 0 lead at the start of the game. Needless to say, their win/loss record has been terrible for a decade.
 

And since Jan 1 of 2021 all games now start 0-0. I don’t think it is crazy to project their win/loss record will improve when compared to past results in the years moving forward   
 

 

 

Not entirely shorting.  They also did not go significantly long after the financial crisis, as they were still expecting macro-events to unfold differently...just like Grantham, Rosenfeld, et al.  They also did not go significantly long after March 2020. 

 

So, while shorting cost them alot, I think guessing on macro-events (particularly deflation and a huge market correction) was the main culprit.  They underestimated the sheer magnitude of capital that the world would deploy after the housing crisis and then the pandemic.  

 

And the main reason they had to guess macro-events was so their insurance business would not get hit with the long-tail insurance they write and the amount of debt they were carrying.  Markel, Berkshire, etc did not have this problem...they aren't as leveraged.  But Fairfax had to short and hedge because of their leverage.  

 

I'm less concerned about Prem shorting markets when he thinks they are overvalued, then simply the debt load they carry which prevents them from going long when markets give them great opportunities.  I would like to see the debt load cut in half!  Cheers!

[Parsad]

7 hours ago, Xerxes said:

 

Sorry, but i got to push back on this view as well.

Had they retired half of their share, and the market had plunged, collectively we would have complained why could they not have bought back their share at a distress price and how they wasted so much dry powder on buybacks pre-market crash.

 

Going all in hedging (+90% of your positions), or going all in buying back one's stock, means that you assuming there is an extremely narrow set of different outcome in the future. I think with the things we have seen in 2020 and 2021 (i.e. Tesla, pandemic, negative oil WTI price, etc.), it has been more rewarding for a capital allocator to be humble and assume that anything is possible.

 

There is a recent interview with the previous CEO of Goldman Sachs on Bloomberg Front Row. I highly recommend for folks to watch it. He says it best:

 

He spends 98% of his time worrying about things with 2% probability ... most of the planning is about contingency planning, not what will happen, but what could happen ,,,, and given enough time, not only everything can happen but everything will happen

 

 

 

 

100% Xerxes...I totally agree with this view!  Fairfax should be conservative, and they often have been.  But just their leverage alone is what forces them into a defensive position, when offense is what they should have been playing.  If they had half the debt that they have, they would not have to focus nearly as much on macro events.  Cheers!

[Parsad]

Based on Markel's results, granted they have more specialty lines and less reinsurance, they wrote at a killer 93% CR for the 3rd quarter and are writing at 91% for the year so far.  Hopefully Fairfax's insurance results are as good.  Cheers!
 

https://finance.yahoo.com/news/markel-reports-2021-third-quarter-204400657.html

[Viking]

Fairfax has been ’monetizing’ a number of their privately held non-insurance holdings over the past couple of years. Fairfax’s definition of monetization is pretty broad and includes not just out-right sale (exiting entire holding) but also spinning the holding into the public markets (where they usually retain a controlling interest). Over the past 2 years they have ‘monetized’ more than $1 billion worth of assets. And they still have private investments worth more than $1 billion (my WAG) so they likely are not done in their effort to ‘surface value’. Am I missing any holdings?

 

Attached below is a Word document with more information: some notes from each transaction and more information for each holding (this post is long enough already) . 

 

Why are they moving in the 'monetization' direction so aggressively? Are they recognizing Hamblin Watsa is not a turn-around shop? Is it so the value of the individual holding gets reflected more accurately in BV? Is it to position the holding so it can be more successful? The amount of cash going to Fairfax has been pretty minimal so this does not look like a focus. What do board members think?

 

One big benefit for shareholders of the ‘monetization’ process is disclosure. Given the limited disclosure it is very difficult for investors to value the private holdings especially a couple of years after purchase. By reducing the number and size of private holdings Fairfax is making it easier for investors to understand, follow and attach a value to their many remaining equity holdings.

 

I have included APR and Fairfax Africa in the ‘sale’ bucket because these assets are no longer managed directly by Fairfax. BIG WIN.

Fairfax has been very opportunistic on the IPO front. The funds raised by these companies will be used to fund future growth/pay down debt. BIG WIN.

 

Bottom line? Fairfax has strengthened their remaining collection of equity holdings with these moves (taken as a whole). And to have achieved this much during Covid is impressive.

Future moves? Seven Islands IPO still on? Anchorage IPO in 2022? Digit IPO 2022?

 

Sales: outright sale/significant change in management (Fairfax no longer involved)

1.) APR - sold to Atlas - March 2020 - proceeds of $200 million (18 million Atlas shares at $11.10 per share)

2.) Fairfax Africa merger with Helios - July 2020 - owns 32% of new publicly traded entity

3.) Davos Brands - sold to Diagio - Sept 2020 - proceeds $59 million + consideration of $36 million (depending on brands performance) - cost (2016) was $50

4.) Easton baseball (part of Peak Ach) - sold to Rawlings - Dec 2020 - cash proceeds $65 plus 28% ownership position in Rawlings (#1 manufacturer in baseball) - gain on sale of $15 million

5.) Rouge Media - sold in Q1 2021 - proceeds of $10 million

6.) Toys ‘R Us - sold retail business - Aug 2021 - no financial terms provided - sold to Putnam Investments. Still own the real estate.

 

IPO’s/Mergers/Reverse Takeover: resulting in significant funds being raised to support growth prospects of company

7.) Dexterra (Carillion) reverse takeover of Horizon North - May 2020 - own 49% of publicly traded entity - carried on balance sheet at US$3.62/share

8.) Farmers Edge IPO - March 2021 - own 59.9% of publicly traded entity - raised $114 million

9.) Boat Rocker IPO - March 2021 - own 45% of publicly traded entity - raised $136.5 million

10.) Chemplast Sanmar IPO (Fairfax India) - Aug 2021 - subsidiary of Sanmar (Fairfax India has 42.9% equity interest in Sanmar).

 

11.) Insurance: Pethealth - Jan 1, 2021 - became a wholly owned subsidiary of Crum & Forster

- I included this move because I did not realize this had been done  

 

Remaining collection of Private Investments

1.) Peak Achievement - Bauer Hockey - 43% ownership (owned with Sagard Holdings)

2.) AGT - taken private Feb 2019 - 80% ownership if warrants are exercised

3.) EXCO - emerged from bankruptcy protection June 2019 - 44% ownership

4.) Mosaic - taken private June 2021

5.) Ant Media

6.) Sporting Life and Golf Town - 61% ownership of each

7.) Rawlings - 28% ownership - Dec 2020 - Seidler Equity Partners are controlling shareholders

8.) Chorus Aviation - 13% (implied ownership stake)

9.) Small positions - Praktiker, Kitchen Stuff Plus and William Ashley

Fairfax Private Investments Nov 2 2021.docx

Edited November 3, 2021 by Viking

[Crip1]

On 10/27/2021 at 6:52 PM, Parsad said:

 

I spoke to Francis today, and he said the specialty lines aren't increasing much, but reinsurance is very strong.  So I would imagine that Fairfax's reinsurance businesses are going to continue to do well into 2023, but their more generalized specialty lines will not benefit nearly as much.  Fortunately, they do a ton of reinsurance!  Cheers!

I just finished looking at Markel's earnings which were released today. Their insurance including specialty showed underwriting profitability and roughly 20% growth year over year compared to their reinsurance which showed a 112% combined ratio for Q3 2021. 

 

Seems like a lesson in "stick to your knitting"

 

-Crip

 

[Crip1]

On 11/1/2021 at 8:25 AM, StubbleJumper said:

Once again, can we please stop using the terms equity "hedges" and inflation "hedges?"  Those terms imply that FFH was engaging in responsible risk management practices.  What FFH actually did was "hedge" more than 100% of its equity portfolio and it had deflation "hedges" with a notional value of more than $100B for a company that had annual revenues that were less than one-third that high.  When you "hedge" more than 100% of your exposure to the underlying, you are no longer managing risk, but rather speculating.

 

So, let's instead tell the brutal truth.  What FFH actually did was use derivatives for the purpose of market speculation.  Management did this, it didn't work, and it cost shareholders dearly.  We should not use the word "hedge" as an euphemism to somehow suggest that management made responsible choices with respect to position sizing.

 

 

SJ

This is coming from someone who "Drank the hedging Kool-Aid" several years ago. You are 100% right, SJ. Even if the market moved sideways it was a flawed idea. My bad for not seeing it at the time and you are right, it was pure speculation.

 

-Crip