Fairfax stock positions

[Viking]

Over the next 2 weeks my plan is to review a number of Fairfax's asset sales from the past 7 or 8 years. My view is Fairfax continues to be a misunderstood company. What to do? Educate investors. Explain to them what has actually been happening at the company over the past 7 years. This will also provide much needed colour regarding the transformation that has happened at Fairfax (especially earnings). And help us better understand what might be coming in the future. Please share your thoughts / insights.

 

Future posts will review the following sales: First Capital, RiverStone Europe, Pet Insurance, Bank of Ireland, Corporate Bonds in late 2021 and Resolute Forest Products. Let me know if there are other 'sales' from the past 7 or 8 years that should be included/would be interesting to dig into. The focus is to provide more information on the breadth and quality of the decision making that has been happening at Fairfax for a long time now.

 

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ICICI Lombard – 2017 to 2019 – A Strategic Pivot in India

 

ICICI Lombard presents many outstanding examples of what Fairfax does well as a company:

 

1.     How strategic they are in their thinking. Back in 2001 who was thinking about investing in India? Fairfax was.

2.     How long term they are in their thinking. This investment did very little (return wise) for the first 10 years of its existence.

3.     The importance of picking the right partner. Fairfax nailed this by choosing to partner with ICICI Bank.

4.     Having a decentralized structure. Fairfax was not actively involved in operating the company.  

 

But we have an added and unexpected twist:

 

5.     The ability to pivot strategically when the facts change.  

 

What Fairfax accomplished with its P/C business in India over the past 7 years has been nothing short of epic. They completely disrupted what was a very successful situation/business model. Clayton Christensen (author of ‘The Innovator’s Dilemma’) would be proud. In 2016/17, Fairfax abruptly changed the strategic direction of their P/C insurance business in India. And they were successful. They have created billions of dollars in shareholder value in the process. But more importantly, they have secured their future in the growing P/C insurance market in India. Given the growth that is expected from the Indian economy in the coming decades, that is a big, big deal.

 

What happened?

 

Beginning in 2017, Fairfax executed a brilliant strategic pivot - away from longtime partner ICICI Lombard and to startup Digit. This was a very strategic, calculated, rational, gutsy, high risk / high reward decision. 

 

What was the financial impact?

 

From 2017 to 2019, Fairfax sold their entire 34.9% stake in ICICI Lombard for proceeds of about $1.6 billion. Between realized gains and share of profit of associates it looks to me like they generated a total return of about $1.3 billion pre-tax (I think minimal tax was paid due to the tax jurisdictions where the ICICI Lombard positions were held). 

 

In 2017, Fairfax seeded Digit. At December 31, 2023, Fairfax’s Digit position (49%) had a cost basis of $154 million and a fair value estimate of $2.265 billion = CAGR of 62%. In Q2-2024 Digit completed its IPO in India, so we should get a valuation update when Fairfax reports Q2 results. 

 

The bottom line is Fairfax harvested gains of around $1.3 billion (from the sale of ICICI Lombard) and have generated additional gains of +$2 billion (in Digit). That is $3.3 billion in shareholder value creation in the last 7.5 years. And they own a significant stake/control position in one of the fastest growing P/C insurers in India. 

 

The timing of Fairfax’s sale of ICICI Lombard is also important – 2017 and 2019. Total proceeds were $1.6 billion. Unlike today, this was a time when Fairfax needed the cash. Fairfax commented that some of the proceeds from the 2019 sale would be used to support the insurance subsidiaries grow in the hard market (that was just getting started). Bottom line, Fairfax was able to put the proceeds from the sale of ICICI Lombard to good use.

 

Why did Fairfax pivot from ICICI Lombard to Digit?

 

The facts changed. 

 

Fairfax’s partnership with ICICI Bank was the perfect fit from 2001 to 2016. But not in 2017. ICICI Bank wanted to take ICICI Lombard public - and they didn’t want to reduce their ownership position to below 55%. To go public, at least 25% of the shares needed to be owned by retail investors/public. This meant Fairfax would have to reduce its ownership in ICICI Lombard from 34.9% to 20%. 

 

Going public would reduce Fairfax’s ownership in ICICI Lombard by 42%. Fairfax is a P/C insurance company. They were looking to expand their P/C insurance business/exposure in India - not reduce it significantly.

 

What was the solution?

 

Seed startup P/C insurer Digit - and partner with Kamesh Goyal. Importantly, Fairfax would have a control position in Digit – which is something they never had with ICICI Lombard.

 

This move would require Fairfax to reduce their ownership in ICICI Lombard to 9.9%. India does not want cross ownership of P/C insurance companies. If you own a large position in one, the max position you can have in a second is 9.9%.

 

————

 

A short history of Fairfax’s investment in ICICI Lombard

 

Fairfax began its insurance journey in India in 2000. That was the year the government in India opened the property and casualty insurance industry to foreign investment. Fairfax partnered with ICICI Bank, a large private bank in India, and created a joint venture called ICICI-Lombard. Fairfax invested $10 million for an interest of 26% in the new venture, the maximum allowed by Indian law at the time.

 

ICICI-Lombard experienced rapid growth in the years that followed and by 2006, they had become the largest private general insurance company in India with a 12.5% market share. Over the years Fairfax made numerous capital infusions to support the growth of ICICI-Lombard and maintain their ownership at 26%.

 

In 2015, the Indian government allowed foreign ownership in insurance companies to increase to 49%. That year Fairfax purchased an additional stake of 9% in ICICI-Lombard from ICICI Bank for $234 million; this increased Fairfax’s ownership in ICICI-Lombard to 34.9%.

 

 

—————

 

Comments from Prem on ICICI Lombard from Fairfax’s 2017AR.

 

“ICICI Lombard is an Indian insurance company that we began in 2001 from scratch as a minority partner with ICICI Bank. Over the following 16 years, ICICI Lombard went on to become the largest non-government-owned property and casualty insurance company in India. Until fairly recently, our ownership interest was limited to 26% by government mandate. About three years ago, the government allowed the foreign ownership to go to 49%, which resulted in our going to 35% by buying 9% from ICICI Bank. Since then, given ICICI Lombard’s intent to go public, ICICI Bank wanting to control ICICI Lombard with at least 55% ownership, and Indian law requiring that the public own at least 25% of a public company, our ownership would be reduced to a mere 20%. As property and casualty insurance is our core business and we are very optimistic about the growth prospects in India, and as Indian law does not permit an ownership of 10% or more in more than one insurance company, we agreed with ICICI Bank that we would reduce our interest in ICICI Lombard to below 10% so that we could start our own property and casualty company in India, Digit. ICICI Lombard is a great company led by an exceptional leader, Bhargav Dasgupta, and we wish them much success in the years to come. We have thoroughly enjoyed our partnership with ICICI Bank and its CEO Chanda Kochhar and we wish them also much success in the future.”

 

“The reduction in our equity interest in ICICI Lombard from 35% to 9.9% resulted in cash proceeds of $909 million plus our continuing to own 45 million shares of ICICI Lombard worth $450 million at the IPO (now worth about $550 million) resulting in an after-tax gain of $930 million.”

 

Comments from Prem on Digit from Fairfax’s 2017AR.

 

“As I mentioned in the section on ICICI Lombard earlier, we are very excited to welcome Kamesh Goyal and his more than 240 employees at Digit to Fairfax. Kamesh built Bajaj Allianz from scratch to be the second largest non-government-owned P&C company in India and then spent a total of 17 years at Allianz, the last five years in Munich operating at the highest levels. He is building a digital property and casualty insurance company in India, which was created in December 2016 and has begun actively selling policies. We are very excited about the prospects of Digit.” 

 

From Fairfax’s 2017AR.

 

On July 6, 2017 the company sold a 12.2% equity interest in ICICI Lombard General Insurance Company Limited (‘‘ICICI Lombard’’) to private equity investors for net proceeds of $376.3 and a net realized investment gain of $223.3. On September 19, 2017 the company sold an additional 12.1% equity interest through participation in ICICI Lombard’s initial public offering for net proceeds of $532.2 and a net realized investment gain of $372.3. The company’s remaining 9.9% equity interest in ICICI Lombard was reclassified from the equity method of accounting to common stock at FVTPL, resulting in a $334.5 re-measurement gain. 

 

Comments from Prem on the exit from the ICICI Lombard investment from Fairfax’s 2019AR.

 

“We sold our last remaining position in ICICI Lombard in 2019 for $729 million. As I mentioned to you in our 2017 annual report, we helped build the largest private property and casualty company in India with our name, Lombard, very much continuing in the future. It has been a very profitable investment for us and we wish the management team, led by Bhargav Dasgupta, much success in the future.”

 

From Fairfax’s 2019AR.

 

“During 2019 the company sold its 9.9% equity interest in ICICI Lombard for gross proceeds of $729.0 and recognized a net gain on investment of $240.0 (realized gains of $311.2, of which $71.2 was recorded as unrealized gains in prior years), primarily related to the removal of the discount for lack of marketability previously applied by the company to the traded market price of its ICICI Lombard common stock.”

[Hoodlum]

It looks like Fairfax wants to divest this investment. 
 

https://www.lapresse.ca/affaires/entreprises/2024-07-03/concurrents-jusque-sur-le-marche-des-capitaux/bauer-et-ccm-pourraient-avoir-de-nouveaux-proprietaires-cet-ete.php

 

Similarly, Fairfax and Sagard are considering divesting Bauer, whose activities are grouped together under the Peak Achievement name, including the assets of Maverik, a lacrosse brand. The American bank Morgan Stanley is working on the deal, according to a person familiar with the situation who asked not to be named to avoid damaging his industry connections.

[gfp]

14 minutes ago, Hoodlum said:

It looks like Fairfax wants to divest this investment. 
 

https://www.lapresse.ca/affaires/entreprises/2024-07-03/concurrents-jusque-sur-le-marche-des-capitaux/bauer-et-ccm-pourraient-avoir-de-nouveaux-proprietaires-cet-ete.php

 

Similarly, Fairfax and Sagard are considering divesting Bauer, whose activities are grouped together under the Peak Achievement name, including the assets of Maverik, a lacrosse brand. The American bank Morgan Stanley is working on the deal, according to a person familiar with the situation who asked not to be named to avoid damaging his industry connections.

Very interesting- thanks for posting that. Don’t suppose the same buyer would be permitted to acquire both CCM and peak achievement 

[Hoodlum]

3 hours ago, gfp said:

Very interesting- thanks for posting that. Don’t suppose the same buyer would be permitted to acquire both CCM and peak achievement 

I wouldn’t think so but I am not sure if a regulatory body would step in. 

[Viking]

3 hours ago, gfp said:

Very interesting- thanks for posting that. Don’t suppose the same buyer would be permitted to acquire both CCM and peak achievement 

 

Did Fairfax not sell Easton to Rawlings? If it can happen in baseball why not hockey?

 

https://sgbonline.com/rawlings-to-purchase-easton/

 

Transaction Details (Easton sale to Rawlings)
The transaction is subject to the satisfaction of customary closing conditions, including the receipt of U.S. regulatory clearance. 

 

In 2018, Newell Brands Inc. sold Rawlings to a fund managed by Seidler Equity Partners (SEP), a private investment firm based in Marina del Rey, CA, for $395 million. Major League Baseball co-invested in the purchase. Rawlings, founded in 1887 and based in St. Louis, MO, comprises the Rawlings, Miken and Worth brands.

 

Peak Achievement Athletics was acquired by two private equity groups, Sagard Holdings Inc. and Fairfax Financial Holdings, in bankruptcy proceedings in February 2017. The company is the parent of Bauer Hockey, Easton Baseball/Softball, Cascade Lacrosse and Maverik Lacrosse. Peak Achievement Athletics. The Easton hockey and cycling businesses are owned by other entities.

Edited July 6 by Viking

[MMM20]

Boom times are back for container shipping https://www.economist.com/business/2024/06/27/boom-times-are-back-for-container-shipping

 

"If the Red Sea remains rough until later this year, the extra demand [from rerouting around Africa] could more or less soak up the growing fleet, whose capacity is poised to expand by 8% this year. If the Houthis stand back sooner, it would leave many of the new ships idle. What of future years? Vincent Clerc, Maersk’s chief executive, concedes that overcapacity is again one possible outcome. Already many of Maersk’s rivals are using the unexpected windfall to order new ships. But Mr Clerc remains optimistic that oversupply can be avoided if shipping firms delay taking vessels from lessors and scrap older ships sooner—not a bad idea as they green their fleets to meet emissions targets. Although things are likely to stay 'volatile and unpredictable', that could still mean 'a decade of robust market conditions' for the industry. Spoken like an old salt."

 

 

[Viking]

Below is instalment 2 in my review of asset sales at Fairfax from the past 7 or 8 years. My goal is to provide some additional insights - that should provide a little more colour into the transformation that has happened at Fairfax (especially earnings). And help us better understand what might be coming in the future. Please share your thoughts / insights.

 

First Capital – August 2017 – The Amazing Mr. Athappan

 

First Capital provides many outstanding examples of what Fairfax does well as a company. But three really stand out:

1. The incredible power of partnering with outstanding people – and letting time and compounding work its magic. 
2. The benefit of being opportunistic – sometimes a buyer is willing to pay a truly obscene price for an asset.
3. International focus – In 2001 Fairfax seeded ICICI Lombard (India). In 2002 Fairfax seeded First Capital (Singapore). Both have become home run investments for Fairfax and its shareholders.

 —————

 

In 2017, Fairfax sold First Capital for $1.7 billion and booked a $1 billion gain after-tax. The amount Fairfax received from this sale was a complete shocker at the time. First Capital was sold for more than 3 times book value. As part of the deal, Fairfax also established a strategic partnership with Mitsui Sumitomo, making a great deal even better.

 

At the time, First Capital was the largest P/C insurer based in Singapore. In 2016 it had shareholders’ equity of $473 million and gross premiums written of $384 million. The CR was 86.4% and underwriting profit was $41 million.

 

Fairfax’s initial (and only) investment in First Capital was $35 million in 2002. This investment had a CAGR of about 30% over a 15-year period. Wow!

 

The bottom line was Mitsui Sumitomo was willing to pay a king’s ransom to become the largest P/C insurer in Singapore. 

 

2017 was also a time when Fairfax was short on cash. Their investment portfolio was underperforming. And they were at the tail end of their aggressive international P/C insurance expansion - their $4.9 billion purchase of Allied World closed in July 2017. The sale of First Capital was announced in August of 2017. 

 

Importantly, First Capital was sold at more than 3 times book value. Allied World was purchased at 1.3 times book value. Over the past 7 years, Allied World has become a wonderful acquisition for Fairfax. 

 

What was First Capital such a big success story for Fairfax?

 

The amazing Mr. Athappan. Fairfax picked the right partner way back in 2002. Mr. (Ramaswamy) Athappan was an incredible leader/partner/entrepreneur. Not only did he build First Capital from scratch, he also has his fingerprints all over Fairfax’s many insurance acquisitions in Southeast Asia over the past 15 years. 

 

After the sale of First Capital, Mr. Athappan (and his son Gobi) continued to manage Fairfax’s diverse collection of P/C insurance holdings in Southeast Asia. Of interest, the purchase of Singapore Re (the 72% Fairfax did not already own) for $103 million in 2021 is looking like it was timed perfectly, right before the onset of the hard market in reinsurance.

 

Unfortunately, Mr. Athappan passed away in May of 2024 at the age of 78. In June 2024, Mr. Athappan’s son, Gobi, was appointed Chairman and CEO of Fairfax Asia. The Athappan gift keeps on giving to Fairfax and its shareholders. Fairfax Asia is a significant platform for Fairfax in a very important region that should continue to grow nicely in the coming years.

 

Mr. Athappan was one of the founding members of the $1 billion club at Fairfax - individuals who have built enormous value for Fairfax and its shareholders over the years. 

 —————

Mr. Athappan’s legacy: Fairfax Asia

 

 —————

Link to Mitsui Sumitomo’s presentation on acquisition of First Capital in August 2017.

• https://www.ms-ad-hd.com/en/ir/ir_event/event/presentation/main/06/teaserItems1/00/linkList/0/link/20170824_info_e.pdf

 —————

Quote from Fairfax’s press release on May 23, 2024.

 

“Over the past 22 years, Mr. Athappan has been a driving force in developing Fairfax’s insurance operations in Southeast Asia. He made invaluable contributions to the success of Fairfax and Fairfax Asia over these years through his leadership, mentorship and guidance. “Mr. Athappan was an exceptional leader with an incredible track record of success. He was a trusted and valued colleague, but most importantly, he was a very good friend of mine and many others here at Fairfax,” said Prem Watsa, Chairman and Chief Executive Officer of Fairfax. “To his family members and loved ones, we send our deepest condolences on the loss of a very special person.” 

—————

Comments from Prem about the sale of First Capital from Fairfax’s 2017AR.

 

"...Mr. Athappan has had an incredible record with us in building First Capital. We provided $35 million in 2002 to let him establish First Capital; 15 years later, with no additional capital having been added, he had grown First Capital to be the largest P&C company in Singapore and with the Mitsui Sumitomo deal, gave us back $1.7 billion. That’s a compound rate of return of approximately 30% annually. A fantastic track record by Mr. Athappan!” 

 

Prem explains why Fairfax agreed to sell First Capital.

 

“For the past two years, Mr. Athappan has come to me saying that he had taken First Capital as far as he could in the commercial property and casualty business in Singapore and that he needed a partner like Mitsui with a brand name to build the personal lines business. I refused him twice as I really did not want to sell First Capital. His continued persistence, his position as the founder of the company, and the fact that he would continue to run Fairfax Asia and First Capital and we would have a 25% quota share in the business of First Capital going forward persuaded us, with unanimous support from our officers and directors, to form a global alliance with Mitsui Sumitomo Insurance Company and sell First Capital to them. We worked very closely with Matsumoto san, the Senior Executive Officer of International Business of Mitsui Sumitomo, and his team, and the partnership is going very well. Through our cooperation agreement with Mitsui Sumitomo, we have been working together on a number of fronts including opportunities on reinsurance, shared business and products and innovation to name a few. We are very excited to be a partner with Mitsui Sumitomo. Total proceeds from the sale of First Capital were $1.7 billion, resulting in an after-tax gain of $1.0 billion. I do want to emphasize that we agreed to this global alliance and sale only because of its truly unique circumstances and we do not see this being repeated! Our companies are not for sale, period!” 

Edited July 7 by Viking

[Viking]

Sale of Riverstone Europe – 2019 to 2020 – Improving the Quality of the P/C Insurance Business

 

Below is instalment 3 in my review of asset sales at Fairfax from the past 7 or 8 years. My goal is to provide some additional insights - that should provide a little more colour into the transformation that has happened at Fairfax (especially earnings). And help us better understand what might be coming in the future. Please share your thoughts / insights.

 

First, a quick review:

 

Capital allocation

 

Capital allocation is the most important responsibility of a management team. Why? Capital allocation decisions are what drive the long-term performance of a company and important metrics like reported earnings, growth in book value and return on equity. In turn, these metrics drive the multiple given to the stock by Mr. Market - and finally the share price and investment returns for shareholders.

 

When done well, capital allocation does two important things:

1. Delivers a solid return.
2. Improves the quality of the company.

Asset Sales

 

Asset sales are one part of capital allocation that separates Fairfax from its peers. In selling an asset, Fairfax is essentially trading a stream of future cash flows for a lump sum today.

 

Why sell an asset?  Sometimes another company - who is willing to pay up - values an asset at a much higher value than you do. There also can be important strategic reasons to sell an asset.

 

Asset sales have been a very important part of Fairfax’s capital allocation framework, realizing significant value for Fairfax and its shareholders over the years.

————

Riverstone Europe – 2019 to 2020 – Improving the Quality of the P/C Insurance Business

 

In two different transactions, Fairfax sold the biggest piece of its run-off business, RiverStone Europe, for announced total proceeds of about $1.5 billion. In December of 2019, Fairfax sold 40% of RiverStone Europe to OMERS for $599 million. In December of 2020, CVC Capital Partners bought 100% of RiverStone Europe  - taking out both Fairfax and OMERS.

 

 

This was a significant sale for Fairfax for a couple of reasons:

1. It dramatically shrunk the size of Fairfax’s run-off business by more than 70%. In turn, the sale likely materially reduced Fairfax’s exposure to long-tail insurance liabilities (a good thing in the high inflation world of today). For P/C insurers, run-off businesses are generally considered to be low quality. Selling RiverStone Europe improved the overall quality of Fairfax’s remaining P/C insurance business.
2. 2019/2020 was also a time when Fairfax was short on cash. Their investment portfolio was underperforming. The timing of this sale was very good.
3. By late 2020, it was clear the hard market in P/C insurance had arrived. Fairfax was aggressively expanding its P/C insurance business - to do this some of the insurance subs would needed more capital. The proceeds from the sales of RiverStone Europe would be put to very good use.

Essentially, Fairfax was able to sell the majority of its run-off business for a fair price. And use the proceeds to then aggressively grow its P/C insurance business in a hard market. They were able to shift a significant amount of capital from a low quality business into high quality businesses. Well at least that is what it looks like they did (looking at it today).

—————

A short review of Fairfax’s run-off business

 

Fairfax had two run-off operations: The Resolution Group (TRG - US) and RiverStone Europe.

 

Run-off has historically been a very large part of Fairfax’s total P/C insurance business. It looks like the run-off business peaked out at 25% of Fairfax’s common shareholders’ equity at December 31, 2014 - nine short years ago. Today (December 31, 2023), the runoff business represents 1.8%. That is a massive reduction in size.

 

The first big step down (to 14%) happened in 2017 - that is the year Allied World was purchased. The second big step down (to 4%) happened in 2019, when Fairfax sold 40% of RiverStone Europe to OMERS (and RiverStone Europe was deconsolidated). But it is also interesting to note that since 2020, Fairfax has continued to shrink the size of its runoff business (in both absolute and percentage terms).

 

Does this make Fairfax a higher quality P/C company than it was in the past? Yes, I think it does. But I am not an insurance expert. I would love to hear what other board members think.

 

 

What is runoff?

 

“Run-off portfolio refers to insurance policies or reinsurance contracts terminated but for which the Insurer or the Reinsurer remains liable for until the final settlement and payment of the claims. It may be a business or a territory for which the Insurer or Reinsurer is no longer operating but where contracts or liabilities are still in force.”

 

“Due to these outstanding claims or the potential claims to be notified, the Insurer or Reinsurer must set up reserves; especially for long tail businesses (such as motor liability, medical malpractice, and general third party liability). These risks are highly volatile. Moreover, discontinued run-off businesses must respect Solvency 2 rules. Their management requires resources. Run-off liabilities may require significant equity at the expense of the development of new businesses.” Source: CCR RE

• https://blog.ccr-re.com/en/what-is-run-off

PWC Global Insurance Run-off Survey

• https://www.pwc.com/gx/en/industries/financial-services/publications/global-insurance-run-off-survey.html

Why did Fairfax sell RiverStone Europe?

 

RiverStone Europe was a quality business. It was well run and profitable. But it also wanted to grow - and to do that it needed capital - and a lot of it.

 

But in the years before 2021, Fairfax did not have a lot of excess capital. And with the hard market, any excess capital Fairfax did have was going to go to its traditional P/C insurance business - not runoff.

 

The solution? Sell RiverStone Europe for a fair price. And then use the proceeds to aggressively grow the traditional P/C business in the hard market. And that is what Fairfax has done.

 

What a smart strategic pivot.

 

The sale was also a very good move for RiverStone Europe. It looks like they have been growing like a weed the past couple of years and are very profitable. This sale looks like it was a win for everyone involved.

 

RiverStone International - 2023AR

• https://www.rsml.co.uk/wp-content/uploads/2024/05/RIHL-Consolidated-2023-Annual-Report.pdf

Was it a mistake for Fairfax to sell RiverStone Europe?

 

My view is Mr. Market does not like P/C insurance businesses that have a big run-off business. For a whole bunch of reasons. As a result, it was highly unlikely they were ever going to value a ’good’ run-off business appropriately.

 

We all think Fairfax should trade at a much higher multiple than what it is trading at today. That likely would not happen if the runoff business was still 20 to 25% of shareholders’ equity.

 

Of note, with the sale, Fairfax did give up a significant amount of investments ($2.375 billion at Dec 31, 2019).

—————

Details of RiverStone Europe’s Sale To CVC From Fairfax’s 2020AR

 

“Late in 2020 we announced the sale of RiverStone Europe (owned 60% by us and 40% by OMERS) to CVC Capital Partners. RiverStone Europe is an industry leader in run-off insurance services, and CVC’s scale and vision will give RiverStone Europe, under the continued leadership of Luke Tanzer and his management team, the opportunity to further grow the business. Nick Bentley and Luke are also very supportive of this transaction, based on their strong belief that it is the best way for RiverStone Europe to continue to grow and pursue run-off transactions. RiverStone Europe was born out of the acquisition of Sphere Drake Insurance Company. Due to performance issues, in 1999 it was put under the management of RiverStone. For the first ten years RiverStone Europe was kept busy with many of our own run-off portfolios including Sphere Drake Bermuda, Skandia UK, CTR and the Kingsmead Agency at Lloyd’s. By 2008 they drove down the reserves and were down to only 53 staff and $100 million in capital. Instead of closing the operations we pivoted from internal run-off to third party acquisitions. They did their first deal in 2010 and have never looked back. They have completed over 20 transactions bringing in over $5 billion of assets and producing a great return on capital, which allowed us to sell the company at $1.35 billion. RiverStone Europe is a great story of success, first directly under the leadership of Nick Bentley and then for the last twelve years Luke Tanzer. We wish Luke and all employees at RiverStone Europe much success in the future.”

 

“We began equity accounting RiverStone Barbados in 2020, so its investment portfolio is no longer consolidated. Within its investment portfolio are positions of many of the common stocks listed in the common stock holdings table above. For example, RiverStone Barbados owns 9.7 million shares of Fairfax India that are not included in the 41.9 million shares of Fairfax India we show in the common stock holdings table (combining both would give us 51.6 million shares or 34.5% ownership). The same can be said for a number of other holdings such as Atlas, BlackBerry, Commercial International Bank and Recipe. As part of the sale of RiverStone Barbados to CVC, we have the opportunity to purchase these securities over the next two years, at December 31, 2019 prices.”

 

“At our RiverStone run-off operations, led by Nick Bentley, while not recently active in U.S. run-off acquisitions (other than some small very successful captive insurance deals), the team has been very busy focusing on our U.S. legacy reserves, especially asbestos claims. Although we needed to strengthen reserves again in 2020 (about half of the previous year), the team continues to deliver significant value and savings from its dedicated focus and best in class experience – I can assure you these reserves are in good hands. As mentioned previously, late in 2020 we announced the sale of our remaining interest in RiverStone’s European business to CVC Capital Partners. Luke Tanzer and his entire team at RiverStone Europe had a very busy year, closing five run-off deals. They are excited to continue to expand in the very active UK run-off market, and again, we wish them all the best going forward.”

————

More information from Fairfax’s 2020AR

 

Sale of RiverStone Barbados to CVC Capital Partners

"On December 2, 2020 the company entered into an agreement with CVC Capital Partners (‘‘CVC’’) whereby CVC will acquire 100% of RiverStone (Barbados) Ltd. (‘‘RiverStone Barbados’’). OMERS, the pension plan for Ontario’s municipal employees, will sell its 40.0% joint venture interest in RiverStone Barbados as part of the transaction. On closing the company expects to receive proceeds of approximately $730 for its 60.0% joint venture interest in RiverStone Barbados and a contingent value instrument for potential future proceeds of up to $235.7. Closing of the transaction is subject to various regulatory approvals and is expected to occur in the first quarter of 2021. Pursuant to the agreement with CVC, prior to closing the company entered into an arrangement with RiverStone Barbados to purchase (unless sold earlier) certain investments owned by RiverStone Barbados at a fixed price of approximately $1.2 billion prior to the end of 2022."

 

Contribution of European Run-off to a joint venture

"On March 31, 2020 the company contributed its wholly owned European run-off group (‘‘European Run-off’’) to RiverStone (Barbados) Ltd. (‘‘RiverStone Barbados’’), a newly created joint venture entity, for cash proceeds of $599.5 and a 60.0% equity interest in RiverStone Barbados with a fair value of $605.0. OMERS, the pension plan for municipal employees in the province of Ontario, contemporaneously subscribed for a 40.0% equity interest for cash consideration of $599.5, based on the fair value of European Run-off at December 31, 2019 pursuant to a subscription agreement on December 20, 2019, and entered into a shareholders’ agreement with the company to jointly direct the relevant activities of RiverStone Barbados. At closing on March 31, 2020, the company deconsolidated the assets and liabilities of European Run-off from assets held for sale and liabilities associated with assets held for sale on the consolidated balance sheet respectively, which included European Run-off’s unrestricted cash and cash equivalents of $377.8, and commenced applying the equity method of accounting to its joint venture interest in RiverStone Barbados. The company recorded a pre-tax gain on deconsolidation of insurance subsidiary of $117.1 in the consolidated statement of earnings, comprised of a gain of $243.4 on the disposal of 40.0% of European Run-off and a gain of $35.6 on remeasurement to fair value at the closing date of the 60.0% of European Run-off retained, partially offset by foreign currency translation losses of $161.9 that were reclassified from accumulated other comprehensive income (loss) to the consolidated statement of earnings. The deconsolidation of European Run-off increased the company’s non-controlling interests by $340.4 at March 31, 2020 as RiverStone Barbados holds investments in certain of the company’s subsidiaries as described in note 16."

[Xerxes]

@Viking

 

if you have any take on TheHub it would interesting. They are an insurance broker.

https://www.investmentexecutive.com/news/industry-news/hub-intl-to-sell-subsidiaries-to-fairfax/

 

@dealraker brought it up couple of times. 

[dealraker]

Hub got stolen from me!   Probably the saddest day in my investing life.  Actually, without a single doubt, the saddest day of my investing life.  

 

Other than that I know nothing today about Hub.  

Edited July 9 by dealraker

[Tommm50]

3 hours ago, Xerxes said:

@Viking

 

if you have any take on TheHub it would interesting. They are an insurance broker.

https://www.investmentexecutive.com/news/industry-news/hub-intl-to-sell-subsidiaries-to-fairfax/

 

@dealraker brought it up couple of times. 

 

Hub was once partially owned by Fairfax. Their investment in Hub about 25 years ago gave them the capital to grow.

[dealraker]

45 minutes ago, Tommm50 said:

 

Hub was once partially owned by Fairfax. Their investment in Hub about 25 years ago gave them the capital to grow.

Hub is a fabulous business that for a short while we could own directly.

[Viking]

Pet Insurance – June 2022 – Capitalizing on a Mania in Cats and Dogs

 

Below is instalment 4 in my review of asset sales at Fairfax from the past 7 or 8 years. My goal is to provide some additional insights - that should provide a little more colour into the transformation that has happened at Fairfax (especially earnings). And help us better understand what might be coming in the future. Please share your thoughts / insights.

----------

Pets have been a rapidly growing business segment in North America for the past 30 years. Covid took this growth to a new, higher level. Especially the services part of the business (veterinary services, pet insurance, supplies etc). On the service side, the business model was shifting to a ‘one stop shop’ model for pet owners – get all your pet needs taken care by one provider. The big players in the industry (like JAB Holding) were in a race to consolidate (to get scale) and the price for good assets went through the roof – reaching mania/bubble proportions. 

 

Fairfax had no desire to expand into other aspects of the pet business (vet care or supplies). Therefore, consolidation was a significant risk to its pet insurance business.

----------

“While the pet insurance market was valued at US$10.1 billion in 2023, a report from Allied Market Research revealed that it is projected to reach US$38.3 billion by 2033, growing at a compound annual growth rate (CAGR) of 14.5% from 2024 to 2033.”

 

https://www.insurancebusinessmag.com/ca/news/breaking-news/doubledigit-growth-projected-for-pet-insurance-market-489864.aspx#:~:text=While the pet insurance market,14.5% from 2024 to 2033.

----------

What do you do when someone offers you an obscene price for a business?

 

In June 2022, Fairfax announced it had sold its pet insurance business (which resided in Crum & Forster) to JAB Holding for $1.4 billion. With the sale, Fairfax realized a gain of $1.2 billion pre-tax and $934 million after-tax.

 

The reaction from investors? Disbelief. Even investors who were knowledgeable about Fairfax didn’t know Crum & Forster actually owned a pet insurance business – it was so small. 

 

Fairfax’s stock actually sold off in the months after they announced the sale. It was like Mr. Market refused to believe that the announced deal was real. It was a little surreal. Of course, Q3-2022 was a wonderful time to buy Fairfax’s stock (it traded as low as $450/share). 

 

The sale of the pet insurance business has resulted in one of Fairfax’s great investment gains ever. The business was worth much more to JAB than it was to Fairfax. Selling it at a premium valuation was the right decision. This is a great example of Fairfax being open minded and opportunistic with its capital allocation framework. 

 

The fact they were able to execute the deal in the middle of a bear market (in both stocks and bonds) was also significant – this provided the opportunity to also reinvest the significant proceeds into other assets that were selling at steep discounts and/or support the growth of the insurance subsidiaries in the hard market. 

 

This is a great example of the significant benefits that can come from active management - sell an asset at a bubble high price and flip the proceeds into other assets selling at bear market low prices. 

 

Test driving a new capital allocator

 

JAB Holdings has a long and successful track record. As part of the deal to sell its pet insurance business, Fairfax agreed to invest $200 million with JAB – a relatively small sum for Fairfax. Fairfax has a long history of doing this. If they like what they see they will likely expand their relationship with JAB in the future - give them more money to invest. This is a great way to find/establish relationships with the best global capital allocators. 

 

A Short history of the pet insurance business at Fairfax

 

In 2013, Crum and Forster purchased pet insurer The Hartville Group (based in US) for $34 million. In 2014, Fairfax purchased Pethealth (based in Canada) for $89 million. In August of 2020, Pethealth was folded into Crum and Forster, creating the 4th largest pet insurance business. 

• https://www.cfins.com/pethealth-to-combine-with-crum-will-create-fourth-largest-pet-insurance-enti/

 —————

What was the size of the pet insurance business? 

 

Based on Prem’s answer to a question on Fairfax’s Q2, 2022 conference call, the annual revenue was $350 million. This was a very small business – when compared to the price it sold for.

 

Mark Dwelle (RBC): “…Another quick numbers question. If I may, on the sale of the Pet Insurance business. Can you give us a sense of kind of a range of about how much revenue you'll be, I guess, selling when that happens? And again, it's just I'm trying to understand as we get into next year, that's revenue that will go away from Crum and to be able to keep track of the run rate there.”

 

Prem Watsa: “…But forex must be $350 million, and it's a Pet Insurance and it's in the United States, mainly, but Canada and then the UK, some, and obviously, we like the price. But JAB is they get a lot of good things from Crum, including data on 30 million pets, and ASPCA support for 16 years. And so we think it's a win-win. We think JAB is going to do extremely well. They're focused on this segment. Not only Pet Insurance, but supplies and pet care hospitals. And we just think they'll -- this company has done very well we've seen what they've done in coffee. And we think over time, they're going to do very well. Fairfax’s Q2 Earnings Conference Call

 —————

Comments from Prem on the sale of the pet insurance business from Fairfax’s 2022AR.

 

“Late in 2021, Gary McGeddy, who runs the Accident and Health division at Crum & Forster, called Andy to suggest that we sell our pet insurance business as there was much consolidation taking place in the pet industry (insurance, food, hospitals, etc.) and we were perhaps not well placed to benefit from it. After much discussion, Morgan Stanley introduced us to Olivier Goudet, CEO of JAB Holdings. JAB, under Chairman Peter Harf and CEO Olivier Goudet, has a terrific record of consolidating many industries, including coffee and restaurants, so we decided to sell our pet insurance business to them for $1.4 billion, resulting in a net pre-tax profit of $1.2 billion. As JAB has a very impressive record, we decided to invest $200 million in their Fund 5 (which focuses on the pet industry), and also take back a $250 million note with an interest rate of 6% as part of the sale proceeds. We think JAB will be a great owner of our pet insurance business and wish them and all our employees much success.” Fairfax 2022AR

 

More details on the sale of the pet insurance business from Fairfax’s 2022AR. 

 

“On October 31, 2022 the company sold its interests in the Crum & Forster Pet Insurance Group and Pethealth, including all of their worldwide operations, to Independence Pet Group and certain of its affiliates, which are majority owned by JAB Holding Company (“JAB”), for $1.4 billion, paid as $1.15 billion in cash and $250.0 in debentures. The company also committed to invest $200.0 in JCP V, a JAB consumer fund. As a result of the sale, the company recorded a pre-tax gain of $1,213.2, inclusive of foreign currency translation losses that were reclassified from accumulated other comprehensive income (loss) to the consolidated statement of earnings, and selling expenses, in gain on sale and consolidation of insurance subsidiaries in the consolidated statement of earnings (an after-tax gain of $933.9), and deconsolidated assets and liabilities with carrying values of $149.1 and $32.0.” Fairfax’s 2022AR

 —————

Details of Fairfax’s Acquisition of Hartville Group and Pethealth

 

Media release of Fairfax’s acquisition of Hartville in 2013.

 

TORONTO, ONTARIO--(Marketwired - May 15, 2013) - Fairfax Financial Holdings Limited (TSX:FFH) announces the signing of a merger agreement with Hartville Group, Inc., of Canton, Ohio, pursuant to which Hartville will become wholly-owned by Crum & Forster's United States Fire Insurance Company. The transaction, which is subject to customary conditions including regulatory approval, is expected to close early in the third quarter of 2013.

 

Hartville, one of the oldest and largest pet insurance providers in the U.S., provides pet insurance plans under several brand names, including Hartville Pet Insurance and the Petshealth Care Plan. Hartville also is the exclusive strategic partner for pet insurance with The American Society for the Prevention of Cruelty to Animals®.

 

"We are very excited to have Hartville join the Fairfax group," said Prem Watsa, Chairman and CEO of Fairfax. "This acquisition represents a new phase in our existing relationship with Hartville through Fairmont Specialty. As a result of the vertical integration created by this merger, Hartville's pet insurance programs will be uniquely positioned in the industry to generate sustainable growth."

 

Media release of Fairfax’s acquisition of Pethealth in 2014.

 

TORONTO, ONTARIO, August 29, 2014 – Fairfax Financial Holdings Limited (TSX: FFH) and Pethealth Inc. (TSX: PTZ) announced today that they have entered into an arrangement agreement under which Fairfax will acquire all of the outstanding common shares of Pethealth for $2.79 per share in cash. In addition, under the terms of the transaction, Fairfax will acquire all of the outstanding preferred shares of Pethealth for a purchase price of $2.79 per share in cash, plus any dividends accrued but unpaid up to, but excluding, the day of closing.

 

The purchase price represents a premium of approximately 26% to the closing price of Pethealth’s common shares on the TSX on August 29, 2014 and a premium of approximately 69% to the closing price of Pethealth’s common shares on the TSX on August 15, 2014.  The purchase price also represents a premium of approximately 69% to Pethealth’s volume weighted average share price for the twenty trading days ending on August 15, 2014 and a premium of 36% to the all-time high price of Pethealth’s common shares prior to such date.

 

Total cash consideration of approximately $100 million will be paid for Pethealth’s common and preferred shares and options.  The transaction, which will be completed by way of a plan of arrangement (the “Arrangement”), is subject to certain customary closing conditions, and is expected to close in the fourth quarter of 2014.

Edited July 10 by Viking

[A_Hamilton]

19 hours ago, dealraker said:

Hub is a fabulous business that for a short while we could own directly.

From what I've seen of Hub's financials (they have some privately traded debt and if you own it you can get access) FFH shareholders can only wish Prem had decided to be an insurance broker as opposed to a multiline insurer.

[Viking]

Summary of Fairfax's P/C Insurance Asset Sales

 

Over the past week we have reviewed 4 different asset sales that Fairfax made in its P/C insurance business from 2017 to 2023. In my summary below I have included a 5th sale - Ambridge Group. It is smaller than the other sales, but still of a meaningful size.

 

The total proceeds from the 5 sales made from 2017 to 2023 was about $6.4 billion. The pre-tax gain was more than $3.8 billion or an average or about $540 million per year - for each of the past 7 years. WOW!

 

 

What else have we learned?

 

When looked at the 5 sales in aggregate:

 

1.) Delivered an outstanding return for Fairfax and its shareholders.

- First Capital, pet insurance and Ambridge were all sold at premium valuations.

2.) Improved the quality of the company

- Strategic pivot in India (from ICICI Lombard to Digit, where Fairfax now has a control position).

- sold RiverStone Europe (run-off), one of their lower quality P/C insurance businesses.

 

Both objectives of good capital allocation were achieved.

 

But the story gets even better.

 

Did the significant sales (proceeds were $6.4 billion) over the past 7 years materially shrink the size of Fairfax’s P/C insurance business? It makes sense that it would have. But it did not. In fact the opposite happened.

 

It appears Fairfax was able to use the significant proceeds from the asset sales to accelerate their growth - by acquisition and then in the hard market. Fairfax grew net premiums written from $8.1 billion in 2016 to $22.9 billion in 2023, growth of 183% or a CAGR of 16%.

 

We included the per share numbers. Importantly, the growth in NPW over the 7 years period (2016 to 2023) did not happen as a result of the issuance of new shares.

 

Fairfax was able to have its cake (significantly grow NPW)  and eat it too (monetize assets at premium valuations). Brilliantly executed.

 

 

Value investing

 

When most investors think of value investing, they think exclusively in terms of equities.

 

The value investing framework is infused into all parts of Fairfax - investments (equities and fixed income) and P/C insurance. 

 

The benefits of active management

 

Over the past 7 years, Fairfax has put on a clinic on the significant benefits of active management. The Fairfax team has been best-in-class among P/C insurers with their overall execution over the past 7 years. And it is not close.

 

Most investors have not figured this out yet. Despite its monster run the past three years, Fairfax’s stock continues to trade at a big discount to peers. Investors in Fairfax are getting best-in-class management at a significant discount.

 

What about the investment management business?

 

Fairfax has two businesses: P/C insurance and investment management. We have completed our review of asset sales in the P/C insurance business. Next we will review asset sales from the past 7 years in Fairfax’s investment management business. What else can we learn? Much more to come over the next week. Our story will read like Charles Dickens classic 'A Tale of Two Cities.' 

Edited July 11 by Viking

[Viking]

Bank of Ireland – 2014 to 2017 – Value Investing 101

 

Over the next week my plan is to continue reviewing a number of Fairfax's asset sales  - this time from the investment management side of the business. We will start with Bank of Ireland. We will also review the following 'sales': Equity hedges/shorts (2016/2020), Fairfax Africa (2020), Corporate bonds (2021), Resolute Forest Products (2022), Blackberry Debentures (2020/2024).  

 

What do you see with most of these sales? Fairfax fixing their biggest problems. But I am getting ahead of myself. 

 

My goal with reviewing the sales in detail is to provide some additional insights - that should provide a little more colour into the transformation that has happened at Fairfax (especially earnings). And help us better understand what might be coming in the future. Please share your thoughts / insights.

----------

Value investing is at the core of how Fairfax/Hamblin Watsa manage their investments. Fairfax’s investment in Bank of Ireland provides a great ‘how-to-do’ example of value investing.  

 

Ben Graham, the father of value investing, taught that stocks should be purchased when they trade at a large discount to their intrinsic value. Buying stocks with a large ‘margin of safety’ provides an investor with downside protection (should they be wrong) and significant upside potential (should they be right). Stocks trading at a large margin of safety are usually deeply out of favour. 

 

And Graham also taught that stocks should be sold when they are ‘dear’ or trade at a premium to their intrinsic value. Rinse and repeat.

—————

One of Fairfax’s great investments made in the decade of the 2010s was Bank of Ireland.

 

In October 2011, Fairfax invested €280 million ($387) for an 8.7% stake in Bank of Ireland. Fairfax exited their position in 4 sales made in 2014, 2015, 2016 and 2017.

 

How did they do?

 

My estimate is Fairfax realized a total gain on this investment of about $800 million, or about 200%. That is an outstanding return over a 6-year period (with 1/3 of the position exited in year 3 and another 1/3 exited in year 4).

 

My final number (gain) is an estimate. Fairfax provided us with an update in March of 2017 (the 2016AR). My guess is they sold their remaining position in 2017 at close to where Eurobank was marked when they provided their update. It is interesting that Fairfax never provided a final summary for this investment in the 2017AR. 

 

Value Investing 101

 

Maximum pessimism is often a great time to buy out of favour and undervalued stocks. Buying an Irish bank shortly after the biggest real estate bubble in history popped was a deeply contrarian thing to do. In 2011, when Fairfax made its investment, Bank of Ireland was trading at a significant discount to book value.

 

Concentration

 

When they find the right opportunity, Fairfax is not afraid to concentrate their position. At the time, Bank of Ireland was a large investment for Fairfax (common shareholders’ equity was $7.4 billion at Dec 31, 2011). 

 

Bottom line, Bank of Ireland is a great example of value investing done well by the team at Fairfax.

 

Some additional thoughts: the power of relationships/connections and deal flow

• The idea to invest in Bank of Ireland came from Bill McMorrow at Kennedy Wilson.
• The initial investment was made with big partners: Wilbur Ross, Mark Denning (Capital Research) and Will Danoff (Fidelity).
• After stepping down as CEO of Bank of Ireland in 2016, Ritchie Boucher worked as an advisor to Fairfax, Eurobank and Kennedy Wilson. 

—————

Comments from Prem in Fairfax’s 2011 Annual Report

 

“And there is more to the McMorrow story. While Bill was negotiating the purchase of some real estate loans from Bank of Ireland, he was really impressed with Ritchie Boucher, the Bank’s CEO. Bill introduced Ritchie to us, and we too were very impressed. With the help of our friends at Canadian Western Bank, one of the best banks in Canada, we thoroughly reviewed the opportunity and then quickly formed an investment group with Wilbur Ross, Mark Denning from Capital Research and Will Danoff at Fidelity, which purchased $1.6 billion of Bank of Ireland shares on a rights issue (Fairfax’s share was $387 million). This issue reduced the Irish government’s stake in Bank of Ireland from 36% to 15%. In spite of having hundreds of years of history and the strongest credit culture in the country, Bank of Ireland barely survived the real estate crisis in Ireland, where both house prices and commercial real estate prices dropped by approximately 50% from their highs. It is the only major Irish bank to survive that crisis – the rest of the Irish banking industry is now government owned. The rights issue plus other capital generated by Bank of Ireland has resulted in the Bank having capital to withstand an even further drop in Irish commercial real estate prices and Irish house prices. Bank of Ireland is very strongly capitalized, led by an excellent banker, Ritchie Boucher, and its shares were available at a significant discount to book value. We look forward to being long term shareholders of Bank of Ireland and hope to make more investments in that country as it continues under strong leadership diligently remedying its economic problems. Ireland by the way is a leading location of choice for foreign direct investment because of its talent, tax regime and technology capabilities together with its unique pro-business environment. Our nSpire Re subsidiary has been in Dublin since 1990 and was a great help in making our decision to invest in Bank of Ireland.” Prem Watsa - Fairfax 2011AR

 

Comments from Prem in Fairfax’s 2013 Annual Report

 

“It is amazing to witness the transformation that has taken place in Ireland. In 2011, when we made our investment in the Bank of Ireland at €0.10 per share, 10-year Government of Ireland rates were 12%, housing prices had come down 40% and sentiment was bleak. Since then, 10-year Government of Ireland rates have dropped to 3.1%, house prices have bottomed out and have begun to rise, Ireland has access to the bond markets again and capital is flooding into Ireland! Under Richie Boucher’s strong leadership, the Bank of Ireland continues to do well as it recently refinanced its government-owned €1.8 billion preferred by doing a €580 million equity issue at €0.26 per share and selling the rest into the marketplace. Also, it did a €750 million unsecured five-year bond financing at 3.34%! The Irish Government has now had all its loans to the Bank of Ireland paid back and its 13.95% ownership of the common stock is in a sizeable profit position. We thank the Irish Government for its exceptional support of the Bank of Ireland and look forward to the Bank’s continued progress under Richie’s leadership. 

 

“As this letter went to print, because of the significant appreciation in our position in the Bank of Ireland, we rebalanced that position by selling a third of it at approximately €0.33 per share. The Bank of Ireland has been one of our most successful investments because of the outstanding performance of Richie and his management team. We continue to be strong supporters of Richie and the Bank of Ireland.” Fairfax 2013AR

 

Comments from Prem in Fairfax’s 2016 Annual Report

 

“Richie Boucher at the Bank of Ireland had another outstanding year in 2016 as the Bank earned €793 million. In 2016, the Bank continued to improve: non-performing loans fell by €4.1 billion (34%); pre-tax profit exceeded €1 billion for the second straight year; the pension deficit narrowed to €0.45 billion (from €1.19 billion); the CET1 ratio improved from 12.9% to 14.2%; and the Bank was number one or number two in every major product line in Ireland. Bank of Ireland is on firm footing and is poised to benefit from Ireland’s recovering economy – estimated GDP growth in 2016 was 5.2% and unemployment is projected to fall to 6.8% in 2017.”

 

“We purchased 2.8 billion shares of Bank of Ireland stock in late 2011 at €0.10 per share. As of today, we have sold 85% of our position at €0.32 per share, for a total realized and unrealized gain of approximately $806 million. Richie has produced outstanding results for us and we are fortunate that he consented to join the Eurobank Board. Bank of Ireland is expected to announce its first dividend in the last eight years in 2017!” Fairfax 2016AR

Edited July 12 by Viking

[glider3834]

https://cyprus-mail.com/2024/07/12/hellenic-bank-board-rejects-eurobanks-acquisition-offer-as-unfair/

[nwoodman]

5 hours ago, glider3834 said:

https://cyprus-mail.com/2024/07/12/hellenic-bank-board-rejects-eurobanks-acquisition-offer-as-unfair/

So does this get delayed now with Eurobank backstopping their shares?  All seems a bit cute.  I guess you work with the board and raise the offer price or sit tight for 6 months and see where the share price is at.

 

EDIT: or they all get left hanging and delisted as a result  of  less than 25% in the hands of the public.

 

“Additionally, the board highlighted the minimum dispersal criteria applicable in the case of the main market where the company is listed, as per Regulation 379/2014 of the Cyprus Securities and Exchange Commission, which requires “at least 25 per cent of the shares proposed for listing to be held by the wider public and by at least 300 natural or legal persons”.

 

Difficult to tell but if Logicom does have a minor holding then between the two entities they may have 25%
 

“Based on the information provided in the search results, there is no indication that Logicom has a direct stake in Eurobank. The key relevant details are:

1. Logicom Group is the largest shareholder of Demetra Holdings Plc, owning 29.62% of its shares. Demetra Holdings in turn owns 21.33% of Hellenic Bank's shares, making it the second largest shareholder after Eurobank.

2. Some sources mention that Logicom, along with Demetra Holdings, collectively hold around 25% of Hellenic Bank's shares. This suggests Logicom may have a small direct stake of around 3-4% in Hellenic Bank in addition to its indirect ownership through Demetra.”

 

This would leave only 20% in the “wider public”. In summary:

 

“The board highlighted that if Eurobank's ownership increases substantially, Hellenic Bank may not meet the Cyprus Stock Exchange's minimum free float requirement of 25% of shares being held by at least 300 minority shareholders. This could lead to the bank's shares being suspended from trading or delisted entirely”

With 55% of the shareholding Eurobank can pass ordinary resolutions.  They need another 20% and they can pass special and extraordinary resolutions I.e. do whatever they want.  Here’s hoping that the threat of a delisting and the subsequent illiquidity flushes out that 20%.

Edited July 13 by nwoodman

[Viking]

Resolute Forest Products – July 2022 – Being Opportunistic and Exiting a Mistake

 

Below is the next instalment in my review of asset sales at Fairfax from the past 7 years. What do we see? Fairfax fixing their biggest problems. But I am getting ahead of myself. My goal is to provide some additional insight into the transformation that has happened at Fairfax (especially earnings). And help us better understand what might be coming in the future. Please share your thoughts.

—————

In July 2022, Fairfax sold Resolute Forest Products (RFP) to Paper Excellence Group (a global diversified manufacturer of pulp and specialty, printing, writing and packaging papers) for total consideration of $665.6 million ($20.50/share).

 

Fairfax accomplished 3 things with this sale:

• Got a great price for the asset - they sold it at the peak of the bull market in lumber.
• Were able to shift the proceeds/capital into much better investments/opportunities.
• Exited a big mistake - got one of their worst ever equity purchases off their books.

—————

RFP was sold at $20.50/share. For perspective, back in March 2020, RFP shares traded as low as $1.20/share. Fairfax owned 30.5 million shares, so RFP’s market cap in March of 2020 was a total of $37 million. Two short years later Fairfax sold it for total proceeds of $665.6 million. Wow! Pre-pandemic, RFP’s shares traded at an average of about $6/share. In the historic lumber bull market of 2021, RFP’s shares traded at an average of about $12/share. Bottom line, at $20.50, Fairfax got an outstanding price for this company.

 

But price is just the beginning of why this was a great move for Fairfax and its shareholders. RFP also owned some pretty crappy businesses: newsprint, paper and tissue. And the ‘good’ business, lumber, was/is getting killed by higher interest rates. I think RFP also had a large pension liability on its books. Bottom line, Fairfax sold what was overall (still) a very challenged business. 

 

The timing of the sale - in the middle of bear markets in both bonds and stocks - was also significant. It gave Fairfax the opportunity to redeploy the proceeds into opportunities with much better long term prospects. This sale improved the quality/earnings potential of Fairfax’s equity portfolio.

 

There is also the psychological benefit of Fairfax selling RFP. This shouldn’t matter - but it does. AbitibiBowater/RFP was one of Fairfax’s worst-ever equity investments.  I am guessing there are lots of long-term shareholders of Fairfax who are very happy that Fairfax sold RFP. It is a great example of another one of the ghosts of ‘old Fairfax’ being laid to rest by the current team at ‘new Fairfax’.

 

 

—————

Old Fairfax - A short history of a terrible long term investment

 

In 2008, Fairfax made an initial investment of $347 million in RFP (called AbitibiBowater back then).

 

What did they get?

 

Fairfax got a company - AbitibiBowater - that was:

1. Poorly managed.
2. Had a very stressed balance sheet (massive amount of debt).
3. Had a terrible core business/prospects (newsprint and paper).
4. Was statistically cheap - traded well below book value.

I like to call the investment framework used by Fairfax at the time as ‘old Fairfax.’ It appeared to be some kind of deep value investing - focussed pretty much exclusively on finding statistically cheap companies (trading at big discounts to book value).

 

What could possible go wrong?

 

In 2010 AbitibiBowater filed for creditor protection.

 

What did Fairfax do?

 

They then decided they were a turnaround shop - and they pumped in even more money and time.

 

By 2012, Fairfax had ‘invested’ a total of $791 million in RFP (AbitibiBowater was renamed RFP in 2011).

 

Also buried in RFP’s sad history was the smelly (putting it politely) take-out in 2012 of Fibrek (SFK Pulp).

 

Fairfax’s carrying value for RFP bottomed out at $134 million in 2020.

 

To be fair, the management team at RFP had been doing a better job in recent years. The purchase of the three lumber mills in the US south in 2020 (at the bottom of the lumber cycle) was perfectly timed. Bottom line, the management team got RFP to a position where it was sold at a very high price.

 

RFP is a great example of what Fairfax’s value investing framework USED TO LOOK LIKE. Not surprisingly, investments like RFP caused the returns on Fairfax’s investment portfolio to lag for much of the decade from 2010 to 2020. And this caused Fairfax's stock price to underperform over the same time period.

 

 

—————

Why was Abitibi-Bowater / RFP one of Fairfax’s worst ever investments?

 

Opportunity cost.

 

From 2008 to 2012, Fairfax invested a total of $791 million in RFP/AbitibiBowater. 10 years later (2022), after dividends received and total proceeds of $665.6 from the sale, Fairfax was still underwater on its original investment.

 

The real ‘cost’ of Fairfax’s investment in RFP was the opportunity cost. Over a 10 year period a $791 million investment should have returned more than $1 billion to Fairfax and its shareholders (if we assume a very low return of only 8.5% per year).

—————

Was the problem with this investment that value investing in general was not working?

 

This reason/excuse drives me crazy.

 

Value investing has always worked. And it will likely always work in the future.

 

But bad investing (usually) does not work - especially if you keep doing it. You might get lucky for a while. But eventually reality sets in.

 

Buying a company that:

1. Is poorly managed.
2. Is highly leveraged.
3. Has poor prospects.

And then doubling down (money and time) when things go from bad to worse?

 

That is not value investing. That is bad investing. Sorry there is no way to put lipstick on this pig. 

 

What AbitibiBowater/RFP investment (fiasco) illustrates is Fairfax had a problem with its value investing framework. It was a problem because the terrible investments (back in the 2014-2017 period) did not just include AbitibiBowater/RFP. It was also BlackBerry. And Eurobank (the initial investment). And Sandridge Energy. And Exco Resources. And Fairfax Africa. And APR Energy. And Farmers Edge. Fairfax had too many dogs in its equity portfolio all at the same time.

 

To 'discover' the source of the problem - well, Fairfax needed to take a good hard look in the mirror. And that is what they did. 

 

But there is a silver lining to this story - The Emergence of New Fairfax

 

From 2016 to 2017 it looks to me like Fairfax had its ‘come to Jesus’ moment with how it was managing its investment portfolio - Fairfax likely got tired of the investment portfolio’s constant bleeding of money (hundreds of millions every single year). And the fact it was stuffed with a bunch of shitty companies - so its prospects were bleak.

 

In his shareholder letter in the 2018AR, Prem admitted that RFP had been ‘a very poor investment.’ It seems Fairfax’s was ready to embark on a new course.

 

What did they do? Here is what I think happened (around 2018):

• Overhauled their value investing framework. Put a premium on:
  • Partnering with quality management/founders.
  • Strong balance sheet.
  • Solid prospects.
• Got to work dealing with all the shitty holdings.
• New money would go to the top opportunities/performers - not to the shitty companies in need of more cash to keep the lights on (like had been happening). Fairfax would no longer be a piggy bank for poorly run equity holdings.

Look at Fairfax’s new equity purchases beginning in 2018. They have been stellar (as a group). And over the past 6 years they also have been able to clean up most of the shitty holdings. Selling RFP for $665.5 million in 2022 was a very important part of this renewal process. We will review a few other of the larger sales in future posts.

 

Over the past 7 years we have witnessed a remarkable turnaround in Fairfax’s equity portfolio - it has improved markedly in terms of overall quality/earnings power. Fairfax's equity portfolio of today (2024) does not resemble the equity portfolio that existed in 2017. And in recent years, we have also started to see the impact of the turnaround in Fairfax’s record reported results. Instead of bleeding money every year, Fairfax’s equity holdings are now delivering solid returns. And the good news story is just getting started.

—————

The Genesis of Fairfax’s initial investment in AbitibiBowater in 2008

 

The 2 newspaper articles linked below provide some additional information on Fairfax’s initial investment in AbitibiBowater in 2008.

 

From The Globe & Mail (April 2, 2008)

 

"It may be tiny by global mergers and acquisitions standards, but the life-saving $350-million (U.S.) investment by Fairfax Financial Holdings Ltd. in troubled AbitibiBowater Inc. is giving deal makers lots to chew on.

 

"For one thing, Fairfax's convertible debenture investment was crafted in three short days over the Easter weekend after Abitibi called late Thursday night to say the plan was the best offer it had on the table after weeks of negotiating with other unidentified suitors.

 

"Within two days we went from zero to a fully drafted deal," said Fairfax's chief legal officer Paul Rivett, who credits his former Shearman & Sterling LLP Toronto partners Chris Cummings and counsel Stephen Centa with closing the deal so quickly. Assisting the group was Torys LLP partner David Chaikof."

• https://www.theglobeandmail.com/report-on-business/fairfax-abitibi-pact-sends-a-message-of-caution/article17983261/

From The Globe and Mail (March 14, 2008)  - describing the initial transaction:

 

Fairfax gambles on better times at AbitibiBowater

• https://www.theglobeandmail.com/report-on-business/fairfax-gambles-on-better-times-at-abitibibowater/article20383961/

 

It appears Paul Rivette was front and center with the AbitibiBowater investment for Fairfax. Paul ‘retired’ from Fairfax in February of 2020. Today Paul is Executive Chair and Director of Greenfirst Forest Products - a forestry company that closely resembles an ‘old Fairfax’ type of investment.

 

—————

Comments from Prem about Resolute Forest Products from Fairfax’s 2022AR.

 

“In July 2022, Resolute agreed to be purchased by the Paper Excellence Group. The cash portion of the deal, $20.50 per share, represented a 64% premium to Resolute’s pre-announcement price. Resolute’s shareholders will also receive contingent value rights tied to potential duty deposit refunds of up to $500 million. Fairfax, which held 40% of Resolute, agreed to vote in favour of the deal.”

 

“Paper Excellence’s acquisition of Resolute closed on March 1, 2023. Our journey with Resolute began in a significant way in April 2008 with the purchase of approximately $350 million of an 8% AbitibiBowater convertible bond (at $10 per share) – almost 14 years ago! We added to our investment in Resolute in common shares and bonds over the years with a net investment after dividends of $715 million. With the interest income received on our bonds, sale proceeds of $622 million and with a little bit of good fortune on our remaining holdings in the contingent value rights, we may end up breaking even over this long holding period – although clearly a very poor long-term return. A big thank you to Remi Lalonde, Duncan Davies and Brad Martin for leading a strong turnaround in Resolute’s results over the last few years.” Prem Watsa – Fairfax 2022AR

 

Comments from Prem about Resolute Forest Products from Fairfax’s 2018AR.

 

“We have invested $791 million in Resolute and received a special dividend of $46 million, for a net investment cost of $745 million. Our initial investment was a convertible bond purchased in 2008 for $347 million. We invested an additional $131 million prior to Resolute entering into creditor protection and most of the remainder during the period from December 2010 to 2013. Subsequent to write-downs and our share of profits and losses over time, at December 31, 2018 we held our 30.4 million Resolute shares in our books at $300 million ($9.87 per share). The current fair market value of these shares is $244 million ($8.03 per share). You can see that Resolute has been a very poor investment to date!” Prem Watsa – Fairfax 2018AR

—————

For long term shareholders, here is a trip down memory lane for RFP. A link to historical milestones at the company from 2008 to present…

• https://www.resolutefp.com/About_Us/Our_History/

Edited July 14 by Viking

[UK]

11 hours ago, Viking said:

Was the problem with this investment that value investing in general was not working?

 

This reason/excuse drives me crazy.

 

Value investing has always worked. And it will likely always work in the future.

 

But bad investing (usually) does not work - especially if you keep doing it. You might get lucky for a while. But eventually reality sets in.

 

Buying a company that:

1. Is poorly managed.
2. Is highly leveraged.
3. Has poor prospects.

And then doubling down (money and time) when things go from bad to worse?

 

That is not value investing. That is bad investing. Sorry there is no way to put lipstick on this pig. 

 

Thanks for all these posts Viking! They contain some real gems:)

[Hoodlum]

@Viking  It looks like you will have another Investment exit to do a writeup on.

 

https://www.businesswire.com/news/home/20240715698371/en/Cleveland-Cliffs-to-Acquire-Stelco-for-C70-per-Share

 

Quote

HAMILTON, Ontario--(BUSINESS WIRE)--Stelco Holdings Inc. (TSX: STLC) (“Stelco” or the “Company”) is pleased to announce that it has entered into a definitive agreement (the “Arrangement Agreement”) with Cleveland-Cliffs Inc. (NYSE: CLF) (“Cliffs”), pursuant to which Cliffs has agreed to acquire all of the issued and outstanding common shares of Stelco (the “Transaction”) at a price of C$70.00 per share (the “Consideration”), consisting of C$60.00 in cash and 0.454 of a share of Cliffs common stock (equivalent to C$10.00 based on the closing price of Cliffs common stock on July 12, 2024) per Stelco share.

 

The total enterprise value pursuant to the Transaction is approximately C$3.4 billion. The Consideration represents an 87% premium to Stelco’s closing share price of C$37.36 on July 12, 2024, and a 37% premium to Stelco’s 52-week high.

 

Fairfax Financial Holdings, an affiliate of Lindsay Goldberg LLC, Alan Kestenbaum, and each of the other directors and executive officers of Stelco collectively holding approximately 45% of the current outstanding Stelco common shares have entered into support agreements to vote in favour of the Transaction, subject to customary exceptions.

 

Edited July 15 by Hoodlum

[MMM20]

43 minutes ago, Hoodlum said:

@Viking  It looks like you will have another Investment exit to do a writeup on.

 

https://www.businesswire.com/news/home/20240715698371/en/Cleveland-Cliffs-to-Acquire-Stelco-for-C70-per-Share

 

 

Wow. Is that really a ~75% premium? 

[Hoodlum]

21 minutes ago, MMM20 said:

Wow. Is that really a ~75% premium? 

yes, although it was trading at $50/share at the beginning of this year. 

[nwoodman]

Another IRR 20%+ pre-tax?  12.2m shares @ 20.5 in 2018.  Say $65 adjusted sale price in 6 years.  I think it’s fair to say that this is supportive of the 15% CAGR thesis.  Well done.

[gfp]

12 minutes ago, nwoodman said:

Another IRR 20%+ pre-tax?  12.2m shares @ 20.5 in 2018.  Say $65 adjusted sale price in 6 years.  I think it’s fair to say that this is supportive of the 15% CAGR thesis.  Well done.

 

I lost track of all the Stelco dividends over the years - are you factoring those in?