Xerxes Posted December 13, 2020 Posted December 13, 2020 Good read on Stelco, just hope there is an exit strategy on this cyclical name, when good return has been made, this is not a compounder-in-the-making; or maybe it is ... what do I know. Then again, ICICI Lombard and Bank of Ireland, were both homeruns for Prem Watsa - sadly little do we talk about those wins here - and he was prepare to sell and lock-in profit. Hopefully, will see the same on Stelco. Over the longer term, i am just not interested in cyclical names (of course, even secular names are cyclical, over a very long term), so let me define cyclical as short-term highly GDP sensitive names. I am actually intrigued to listen to Stelco's conference call, not for the sake of owning it directly myself, but rather try to see what Prem Watsa saw in them. In the past conference calls and AGMs, Prem only talked about Stelco' CEO as a key a reason. If i recall correctly, he never really made the case to his investor base why a GDP-sensitive cyclical name like Stelco was the better choice than the universe possibilities that the market offered to him in 2018. I am sure he had good reason, but he never build that case publicly. And mind you, although today's stelco can be thought as a great way to play the recovery, we are talking about 2018.
Xerxes Posted December 13, 2020 Posted December 13, 2020 I will be astonished, and actually a bit disappointed, if they do a large buyback. They have consistently communicated that supporting the subs to take advantage of the hard market is the priority. And that's exactly the right decision. Buybacks are an excellent use of spare capital when shares are cheap, but reinvesting to grow at high returns on capital should always come first. Building per share value via growth has many advantages over doing it via buybacks. For example it can augment competitive positions and impact morale in a way that buybacks can't. They can buy back shares all they like in the next soft market. But despite all the positive moves made recently, they still don't have spare capital, so for now they should allocate what they have to growth. I might think differently if the stock traded at 0.4x or 0.5x book, but it doesn't. They have been injecting capital in their insurance before the pandemic started and ever since. Prem will have his "slug" of FFH shares, funded by some of the asset sales from the company's balance sheets. We just wont know when it will happen, but it will be sooner than we think (IMHO), for the simple fact that going-forward, as the recovery unfolds (while 2nd wave is playing 2 steps forward 1 step back), FFH's book value will pull the market value up in an absolute sense (simply said taking more investment $ for buyback), even if on a relative sense the discount remains there say 6 months from now.
petec Posted December 13, 2020 Author Posted December 13, 2020 Good read on Stelco, just hope there is an exit strategy on this cyclical name, when good return has been made, this is not a compounder-in-the-making; or maybe it is ... what do I know. Then again, ICICI Lombard and Bank of Ireland, were both homeruns for Prem Watsa - sadly little do we talk about those wins here - and he was prepare to sell and lock-in profit. Hopefully, will see the same on Stelco. Over the longer term, i am just not interested in cyclical names (of course, even secular names are cyclical, over a very long term), so let me define cyclical as short-term highly GDP sensitive names. I am actually intrigued to listen to Stelco's conference call, not for the sake of owning it directly myself, but rather try to see what Prem Watsa saw in them. In the past conference calls and AGMs, Prem only talked about Stelco' CEO as a key a reason. If i recall correctly, he never really made the case to his investor base why a GDP-sensitive cyclical name like Stelco was the better choice than the universe possibilities that the market offered to him in 2018. I am sure he had good reason, but he never build that case publicly. And mind you, although today's stelco can be thought as a great way to play the recovery, we are talking about 2018. I’d listen to every call going back to the IPO in 2017 and maybe read the financials. Prem has no obligation to explain his investments in detail, and there is plenty of public information if you want to research it yourself. I don’t differentiate between an X% IRR achieved by traditional compounding or an X% IRR achieved by (say) special dividends coming out of a cyclical. I think we will do well from Stelco over the long term because of the relationship between the going in price and long term cash flows, and the quality of capital allocation. Time will tell.
petec Posted December 13, 2020 Author Posted December 13, 2020 I will be astonished, and actually a bit disappointed, if they do a large buyback. They have consistently communicated that supporting the subs to take advantage of the hard market is the priority. And that's exactly the right decision. Buybacks are an excellent use of spare capital when shares are cheap, but reinvesting to grow at high returns on capital should always come first. Building per share value via growth has many advantages over doing it via buybacks. For example it can augment competitive positions and impact morale in a way that buybacks can't. They can buy back shares all they like in the next soft market. But despite all the positive moves made recently, they still don't have spare capital, so for now they should allocate what they have to growth. I might think differently if the stock traded at 0.4x or 0.5x book, but it doesn't. They have been injecting capital in their insurance before the pandemic started and ever since. Prem will have his "slug" of FFH shares, funded by some of the asset sales from the company's balance sheets. We just wont know when it will happen, but it will be sooner than we think (IMHO), for the simple fact that going-forward, as the recovery unfolds (while 2nd wave is playing 2 steps forward 1 step back), FFH's book value will pull the market value up in an absolute sense (simply said taking more investment $ for buyback), even if on a relative sense the discount remains there say 6 months from now. I’m sure Prem would love to buy back shares at this price. And he will. But I wouldn’t bet on it being big. The only way to sort out the holdco’s sources and uses issue is to increase dividend capacity from the subs, and the smartest way to do that is to put capital into them at the start of a hard market. I can’t really be bothered to debate this but I’ve seen people on here make buyback predictions based on relatively little information before, and then get annoyed with Prem when those predictions didn’t come to pass. The fact is that without insider info on the opportunities the subs have to write premia, you can’t know what Prem will do with the cash.
Viking Posted December 13, 2020 Posted December 13, 2020 I will be astonished, and actually a bit disappointed, if they do a large buyback. They have consistently communicated that supporting the subs to take advantage of the hard market is the priority. And that's exactly the right decision. Buybacks are an excellent use of spare capital when shares are cheap, but reinvesting to grow at high returns on capital should always come first. Building per share value via growth has many advantages over doing it via buybacks. For example it can augment competitive positions and impact morale in a way that buybacks can't. They can buy back shares all they like in the next soft market. But despite all the positive moves made recently, they still don't have spare capital, so for now they should allocate what they have to growth. I might think differently if the stock traded at 0.4x or 0.5x book, but it doesn't. They have been injecting capital in their insurance before the pandemic started and ever since. Prem will have his "slug" of FFH shares, funded by some of the asset sales from the company's balance sheets. We just wont know when it will happen, but it will be sooner than we think (IMHO), for the simple fact that going-forward, as the recovery unfolds (while 2nd wave is playing 2 steps forward 1 step back), FFH's book value will pull the market value up in an absolute sense (simply said taking more investment $ for buyback), even if on a relative sense the discount remains there say 6 months from now. I’m sure Prem would love to buy back shares at this price. And he will. But I wouldn’t bet on it being big. The only way to sort out the holdco’s sources and uses issue is to increase dividend capacity from the subs, and the smartest way to do that is to put capital into them at the start of a hard market. I can’t really be bothered to debate this but I’ve seen people on here make buyback predictions based on relatively little information before, and then get annoyed with Prem when those predictions didn’t come to pass. The fact is that without insider info on the opportunities the subs have to write premia, you can’t know what Prem will do with the cash. I would be very surprised if they did a large stock buyback in the near term. Now if they sold an asset for a premium valuation (like Blackberry) then perhaps. But this is not likely in the near term. In terms of near term priorities for cash: 1.) funding subs in hard market 2.) funding likely January dividend 3.) take out Eurolife partner (OMERS) 4.) pay down debt (elevated since pandemic started) 5.) take out Allied partners (OMERS) 6.) large stock buybacks Fairfax may make a smaller stock buyback (couple hundred million). Once the economy gets going and they sell off some businesses for large gains and cash starts to build on the balance sheet (also driven by operating earnings) then perhaps meaningful stock buybacks will happen. My guess is we are 6 months away from this becoming a more likely reality.
Viking Posted December 13, 2020 Posted December 13, 2020 Good read on Stelco, just hope there is an exit strategy on this cyclical name, when good return has been made, this is not a compounder-in-the-making; or maybe it is ... what do I know. Then again, ICICI Lombard and Bank of Ireland, were both homeruns for Prem Watsa - sadly little do we talk about those wins here - and he was prepare to sell and lock-in profit. Hopefully, will see the same on Stelco. Over the longer term, i am just not interested in cyclical names (of course, even secular names are cyclical, over a very long term), so let me define cyclical as short-term highly GDP sensitive names. I am actually intrigued to listen to Stelco's conference call, not for the sake of owning it directly myself, but rather try to see what Prem Watsa saw in them. In the past conference calls and AGMs, Prem only talked about Stelco' CEO as a key a reason. If i recall correctly, he never really made the case to his investor base why a GDP-sensitive cyclical name like Stelco was the better choice than the universe possibilities that the market offered to him in 2018. I am sure he had good reason, but he never build that case publicly. And mind you, although today's stelco can be thought as a great way to play the recovery, we are talking about 2018. I’d listen to every call going back to the IPO in 2017 and maybe read the financials. Prem has no obligation to explain his investments in detail, and there is plenty of public information if you want to research it yourself. I don’t differentiate between an X% IRR achieved by traditional compounding or an X% IRR achieved by (say) special dividends coming out of a cyclical. I think we will do well from Stelco over the long term because of the relationship between the going in price and long term cash flows, and the quality of capital allocation. Time will tell. I was also thinking today... ‘what is Fairfax’s strategy with cyclicals’. And do they have an exit strategy? Is it total return? Stock goes up 75% or 100% sell for large gain? Or is it to own it long term and get paid via dividend and increasing stock price? We do know Fairfax is not buy and hold forever. And given their need for cash i would expect them to be opportunistic should stocks like Stelco and Resolute continue to rocket higher in 2021.
StubbleJumper Posted December 13, 2020 Posted December 13, 2020 I will be astonished, and actually a bit disappointed, if they do a large buyback. They have consistently communicated that supporting the subs to take advantage of the hard market is the priority. And that's exactly the right decision. Buybacks are an excellent use of spare capital when shares are cheap, but reinvesting to grow at high returns on capital should always come first. Building per share value via growth has many advantages over doing it via buybacks. For example it can augment competitive positions and impact morale in a way that buybacks can't. They can buy back shares all they like in the next soft market. But despite all the positive moves made recently, they still don't have spare capital, so for now they should allocate what they have to growth. I might think differently if the stock traded at 0.4x or 0.5x book, but it doesn't. They have been injecting capital in their insurance before the pandemic started and ever since. Prem will have his "slug" of FFH shares, funded by some of the asset sales from the company's balance sheets. We just wont know when it will happen, but it will be sooner than we think (IMHO), for the simple fact that going-forward, as the recovery unfolds (while 2nd wave is playing 2 steps forward 1 step back), FFH's book value will pull the market value up in an absolute sense (simply said taking more investment $ for buyback), even if on a relative sense the discount remains there say 6 months from now. I’m sure Prem would love to buy back shares at this price. And he will. But I wouldn’t bet on it being big. The only way to sort out the holdco’s sources and uses issue is to increase dividend capacity from the subs, and the smartest way to do that is to put capital into them at the start of a hard market. I can’t really be bothered to debate this but I’ve seen people on here make buyback predictions based on relatively little information before, and then get annoyed with Prem when those predictions didn’t come to pass. The fact is that without insider info on the opportunities the subs have to write premia, you can’t know what Prem will do with the cash. I would be very surprised if they did a large stock buyback in the near term. Now if they sold an asset for a premium valuation (like Blackberry) then perhaps. But this is not likely in the near term. In terms of near term priorities for cash: 1.) funding subs in hard market 2.) funding likely January dividend 3.) take out Eurolife partner (OMERS) 4.) pay down debt (elevated since pandemic started) 5.) take out Allied partners (OMERS) 6.) large stock buybacks Fairfax may make a smaller stock buyback (couple hundred million). Once the economy gets going and they sell off some businesses for large gains and cash starts to build on the balance sheet (also driven by operating earnings) then perhaps meaningful stock buybacks will happen. My guess is we are 6 months away from this becoming a more likely reality. I mostly agree, but I would offer one quibble, but I think it's an important quibble. I don't believe that #4 (debt repayment) is even remotely on FFH's radar screen. I fervently hope that the people at FFH are looking at their debt ratios with a little concern and that the company's experience this spring of basically hitting the ceiling on their revolver covenant will be a bit of a wake-up call. But, I wouldn't expect to see much reduction in aggregate debt. My guess is that the strategy will actually be to grow FFH's equity and income which will improve the leverage ratio and debt-service-ratio. But, I actually expect that they will float *more* debt in 2021 and 2022, resulting in a growth of debt in dollar-terms, but the growing equity will result in a reduction of debt ratios. From a shareholder's perspective, I am hoping to see a couple of boring years where FFH does not make any major acquisitions and instead focuses on digesting some of the acquisitions of previous years. From where I sit, they need to earn a couple billion of income over the next few years and use it to improve the company's financial strength. I don't foresee much debt repayment or significant buybacks in the near future. An interesting exercise is to think about the cash-outflows associated with your hierarchy and compare it to a plausible net income that FFH could generate over the 2021-23 period: 1.) funding subs in hard market ==> Allied, ORH, Brit and Zenith are okay, but over a few years C&F and NB could use perhaps $300m 2.) funding likely January dividend ==> $270m/year for each of 2021-23 = $810m 3.) take out Eurolife partner (OMERS) ==> does anyone remember this amount??? 5.) take out Allied partners (OMERS) ==> working from memory, isn't this one $750m? To satisfy the items above basically looks like it would require more or less all of the Net Income that could reasonably be expected over 2021-23. SJ
StubbleJumper Posted December 13, 2020 Posted December 13, 2020 Good read on Stelco, just hope there is an exit strategy on this cyclical name, when good return has been made, this is not a compounder-in-the-making; or maybe it is ... what do I know. Then again, ICICI Lombard and Bank of Ireland, were both homeruns for Prem Watsa - sadly little do we talk about those wins here - and he was prepare to sell and lock-in profit. Hopefully, will see the same on Stelco. Over the longer term, i am just not interested in cyclical names (of course, even secular names are cyclical, over a very long term), so let me define cyclical as short-term highly GDP sensitive names. I am actually intrigued to listen to Stelco's conference call, not for the sake of owning it directly myself, but rather try to see what Prem Watsa saw in them. In the past conference calls and AGMs, Prem only talked about Stelco' CEO as a key a reason. If i recall correctly, he never really made the case to his investor base why a GDP-sensitive cyclical name like Stelco was the better choice than the universe possibilities that the market offered to him in 2018. I am sure he had good reason, but he never build that case publicly. And mind you, although today's stelco can be thought as a great way to play the recovery, we are talking about 2018. I’d listen to every call going back to the IPO in 2017 and maybe read the financials. Prem has no obligation to explain his investments in detail, and there is plenty of public information if you want to research it yourself. I don’t differentiate between an X% IRR achieved by traditional compounding or an X% IRR achieved by (say) special dividends coming out of a cyclical. I think we will do well from Stelco over the long term because of the relationship between the going in price and long term cash flows, and the quality of capital allocation. Time will tell. I was also thinking today... ‘what is Fairfax’s strategy with cyclicals’. And do they have an exit strategy? Is it total return? Stock goes up 75% or 100% sell for large gain? Or is it to own it long term and get paid via dividend and increasing stock price? We do know Fairfax is not buy and hold forever. And given their need for cash i would expect them to be opportunistic should stocks like Stelco and Resolute continue to rocket higher in 2021. It's not really the need for cash, because a sale of some of those legacy positions would come mainly from the insurance subs, and they can't just dividend the cash to the holdco without imperiling their underwriting capacity. From my perspective, it's more about recuperating some capital so that it can be redeployed into something with a greater likelihood of providing an acceptable return. For a few of those positions, it feels like Fairfax actually is a buy and hold forever investor! The investment in Abitibi Bowater was waaaaaaay back in 2008, the first money put into Research in Motion was, what, in about 2010, and Torstar was another epic story stretching over a decade or so? A permanent loss of capital is a bad thing, but it's even worse if it takes you a decade to lose your money! As Pete noted, if you think about the time-value-of-money for some of these investments, you had better do so with a stiff drink in your hand! Well, during 2020, the Torstar situation has been resolved and FFH can take the proceeds and the tax-loss, and re-deploy at least a bit of capital. It would be nice to get a "resolution" of Resolute and it would be nice to send Blackberry into "motion" during 2021 or 2022. Conditions are increasingly favourable for dumping those positions and moving on. There are many reasons to be cautiously optimistic about FFH in 2021! SJ
petec Posted December 13, 2020 Author Posted December 13, 2020 I’d love to see Blackberry sold at a decent price. But I wouldn’t mind if they kept resolute and just took the dividends over the years.
Xerxes Posted December 13, 2020 Posted December 13, 2020 1.) funding subs in hard market ==> Allied, ORH, Brit and Zenith are okay, but over a few years C&F and NB could use perhaps $300m 2.) funding likely January dividend ==> $270m/year for each of 2021-23 = $810m 3.) take out Eurolife partner (OMERS) ==> does anyone remember this amount??? 5.) take out Allied partners (OMERS) ==> working from memory, isn't this one $750m? To satisfy the items above basically looks like it would require more or less all of the Net Income that could reasonably be expected over 2021-23. close .. "We closed our acquisition of Allied World on July 6, 2017 and we welcomed Scott Carmilani and Allied World’s 1,430 employees to the Fairfax family. As you know, Allied World is the largest acquisition that we have done and we pursued this acquisition because of Allied World’s outstanding track record over its 15 years of existence and the quality of its management team. We are very thankful to our financing partners OMERS ($1 billion), AIMCO ($0.5 billion) and two others. We issued a total of 5.1 million shares for Allied World. The effect of this acquisition is shown in the table below, which was previously presented to you at our 2017 annual shareholders’ meeting:" "Not shown in the table above is our investment in Eurolife led by Alex Sarrigeorgiou. As you know, Eurolife is one of Greece’s leading life and non-life insurance companies, created by Eurobank in 2000. We bought our share of Eurolife in 2016 for $181 million, with Eurolife being 40% owned by us, 40% by OMERS and 20% by Eurobank. We expect to buy out OMERS within the next two years, so Eurolife will become a Fairfax insurance subsidiary. Eurolife has earned $111 million (our share) since we acquired it, benefitting greatly from a Greek bond portfolio of about A1 billion. The non-life portfolio had a combined ratio less than 70% again in 2017. We are very excited to be partners with Alex and his team at Eurolife as they build a very successful company in Greece." unless i am reading this wrong, Eurolife is pretty insignificant ref: 2018 letter
StubbleJumper Posted December 13, 2020 Posted December 13, 2020 1.) funding subs in hard market ==> Allied, ORH, Brit and Zenith are okay, but over a few years C&F and NB could use perhaps $300m 2.) funding likely January dividend ==> $270m/year for each of 2021-23 = $810m 3.) take out Eurolife partner (OMERS) ==> does anyone remember this amount??? 5.) take out Allied partners (OMERS) ==> working from memory, isn't this one $750m? To satisfy the items above basically looks like it would require more or less all of the Net Income that could reasonably be expected over 2021-23. close .. "We closed our acquisition of Allied World on July 6, 2017 and we welcomed Scott Carmilani and Allied World’s 1,430 employees to the Fairfax family. As you know, Allied World is the largest acquisition that we have done and we pursued this acquisition because of Allied World’s outstanding track record over its 15 years of existence and the quality of its management team. We are very thankful to our financing partners OMERS ($1 billion), AIMCO ($0.5 billion) and two others. We issued a total of 5.1 million shares for Allied World. The effect of this acquisition is shown in the table below, which was previously presented to you at our 2017 annual shareholders’ meeting:" "Not shown in the table above is our investment in Eurolife led by Alex Sarrigeorgiou. As you know, Eurolife is one of Greece’s leading life and non-life insurance companies, created by Eurobank in 2000. We bought our share of Eurolife in 2016 for $181 million, with Eurolife being 40% owned by us, 40% by OMERS and 20% by Eurobank. We expect to buy out OMERS within the next two years, so Eurolife will become a Fairfax insurance subsidiary. Eurolife has earned $111 million (our share) since we acquired it, benefitting greatly from a Greek bond portfolio of about A1 billion. The non-life portfolio had a combined ratio less than 70% again in 2017. We are very excited to be partners with Alex and his team at Eurolife as they build a very successful company in Greece." unless i am reading this wrong, Eurolife is pretty insignificant ref: 2018 letter So, you are saying it's more like: 1.) funding subs in hard market ==> Allied, ORH, Brit and Zenith are okay, but over a few years C&F and NB could use perhaps $300m 2.) funding likely January dividend ==> $270m/year for each of 2021-23 = $810m 3.) take out Eurolife partner (OMERS) ==> $181m 5.) take out Allied partners (OMERS) ==> $1B So, it might be ~$2.3B to do all four. If they have EPS=$30/sh, that basically will eat up three years of a conservative Net Income number. SJ
Thrifty3000 Posted December 14, 2020 Posted December 14, 2020 1.) funding subs in hard market ==> Allied, ORH, Brit and Zenith are okay, but over a few years C&F and NB could use perhaps $300m 2.) funding likely January dividend ==> $270m/year for each of 2021-23 = $810m 3.) take out Eurolife partner (OMERS) ==> does anyone remember this amount??? 5.) take out Allied partners (OMERS) ==> working from memory, isn't this one $750m? To satisfy the items above basically looks like it would require more or less all of the Net Income that could reasonably be expected over 2021-23. close .. "We closed our acquisition of Allied World on July 6, 2017 and we welcomed Scott Carmilani and Allied World’s 1,430 employees to the Fairfax family. As you know, Allied World is the largest acquisition that we have done and we pursued this acquisition because of Allied World’s outstanding track record over its 15 years of existence and the quality of its management team. We are very thankful to our financing partners OMERS ($1 billion), AIMCO ($0.5 billion) and two others. We issued a total of 5.1 million shares for Allied World. The effect of this acquisition is shown in the table below, which was previously presented to you at our 2017 annual shareholders’ meeting:" "Not shown in the table above is our investment in Eurolife led by Alex Sarrigeorgiou. As you know, Eurolife is one of Greece’s leading life and non-life insurance companies, created by Eurobank in 2000. We bought our share of Eurolife in 2016 for $181 million, with Eurolife being 40% owned by us, 40% by OMERS and 20% by Eurobank. We expect to buy out OMERS within the next two years, so Eurolife will become a Fairfax insurance subsidiary. Eurolife has earned $111 million (our share) since we acquired it, benefitting greatly from a Greek bond portfolio of about A1 billion. The non-life portfolio had a combined ratio less than 70% again in 2017. We are very excited to be partners with Alex and his team at Eurolife as they build a very successful company in Greece." unless i am reading this wrong, Eurolife is pretty insignificant ref: 2018 letter So, you are saying it's more like: 1.) funding subs in hard market ==> Allied, ORH, Brit and Zenith are okay, but over a few years C&F and NB could use perhaps $300m 2.) funding likely January dividend ==> $270m/year for each of 2021-23 = $810m 3.) take out Eurolife partner (OMERS) ==> $181m 5.) take out Allied partners (OMERS) ==> $1B So, it might be ~$2.3B to do all four. If they have EPS=$30/sh, that basically will eat up three years of a conservative Net Income number. SJ Are you factoring in the tidal wave of extra cash/profits that flood in during a legit hard market? Their discipline/ability to ramp up premium volume by 50% (from which claims will be paid out over years/decades) while at least doubling underwriting margins is a big part of the fun of owning BRK or FFH, and doesn't happen that often. For FFH we’re talking at least a couple billion of extra cash for owners overnight (during a legit hard market).
Viking Posted December 14, 2020 Posted December 14, 2020 Thrifty3000, Fairfax should see a nice uptick in operating earnings Q4 and in each subsequent quarter moving forward (slow and steady is my guess). I think it was Q4 of last year where we first started to hear about a hard market and i think it takes about a year for written premiums to become earned (please correct me if i am wrong). So my guess is we start to see small improvements in underwriting results starting in Q4 of this year. One offset will be interest and dividend income which has been trending lower and likely will not bottom until the economy is stronger. Earnings from associates should also become a tailwind as we get further into the recovery. Any estimates here? Lots of tailwinds to earnings moving forward: 1.) underwriting - hard market 2.) dividend income - improving economy 3.) earnings from associates - improving economy 4.) investment gains - from mark to market portfolio 5.) realized investment gains - as further monetizations happen Headwinds? 1.) interest income from bond portfolio - if interest rates stay low what does Fairfax do with sizeable short term bond portfolio? 2.) need to buy out minority partner in Eurolife - versus better use of funds right now 3.) mystery short position that reared its ugly head in Q3 - ??? RBC just raised its outlook for entire non-life insurance sector. They feel hard market = improved profitability = improved ROE = higher multiple. Higher earnings combined with rising multiple is a strong combination for stock price appreciation :-)
StubbleJumper Posted December 14, 2020 Posted December 14, 2020 1.) funding subs in hard market ==> Allied, ORH, Brit and Zenith are okay, but over a few years C&F and NB could use perhaps $300m 2.) funding likely January dividend ==> $270m/year for each of 2021-23 = $810m 3.) take out Eurolife partner (OMERS) ==> does anyone remember this amount??? 5.) take out Allied partners (OMERS) ==> working from memory, isn't this one $750m? To satisfy the items above basically looks like it would require more or less all of the Net Income that could reasonably be expected over 2021-23. close .. "We closed our acquisition of Allied World on July 6, 2017 and we welcomed Scott Carmilani and Allied World’s 1,430 employees to the Fairfax family. As you know, Allied World is the largest acquisition that we have done and we pursued this acquisition because of Allied World’s outstanding track record over its 15 years of existence and the quality of its management team. We are very thankful to our financing partners OMERS ($1 billion), AIMCO ($0.5 billion) and two others. We issued a total of 5.1 million shares for Allied World. The effect of this acquisition is shown in the table below, which was previously presented to you at our 2017 annual shareholders’ meeting:" "Not shown in the table above is our investment in Eurolife led by Alex Sarrigeorgiou. As you know, Eurolife is one of Greece’s leading life and non-life insurance companies, created by Eurobank in 2000. We bought our share of Eurolife in 2016 for $181 million, with Eurolife being 40% owned by us, 40% by OMERS and 20% by Eurobank. We expect to buy out OMERS within the next two years, so Eurolife will become a Fairfax insurance subsidiary. Eurolife has earned $111 million (our share) since we acquired it, benefitting greatly from a Greek bond portfolio of about A1 billion. The non-life portfolio had a combined ratio less than 70% again in 2017. We are very excited to be partners with Alex and his team at Eurolife as they build a very successful company in Greece." unless i am reading this wrong, Eurolife is pretty insignificant ref: 2018 letter So, you are saying it's more like: 1.) funding subs in hard market ==> Allied, ORH, Brit and Zenith are okay, but over a few years C&F and NB could use perhaps $300m 2.) funding likely January dividend ==> $270m/year for each of 2021-23 = $810m 3.) take out Eurolife partner (OMERS) ==> $181m 5.) take out Allied partners (OMERS) ==> $1B So, it might be ~$2.3B to do all four. If they have EPS=$30/sh, that basically will eat up three years of a conservative Net Income number. SJ Are you factoring in the tidal wave of extra cash/profits that flood in during a legit hard market? Their discipline/ability to ramp up premium volume by 50% (from which claims will be paid out over years/decades) while at least doubling underwriting margins is a big part of the fun of owning BRK or FFH, and doesn't happen that often. For FFH we’re talking at least a couple billion of extra cash for owners overnight (during a legit hard market). Nope, I'm not counting on anything weird or wonderful happening that results in outrageous profitability. About a month or six weeks ago, I tossed out a pro-forma income statement for 2021 in this forum to stimulate discussion. Working from memory, my assumptions were pretty conservative, with ~6% growth in Net Written, a 94 CR and a 2% return on investments. If price increases remain strong, perhaps the CR might be a shade better, but I wouldn't want to get too ambitious about that (historically a 94 CR is already exceptional). The growth in Net Written could definitely be larger (ie double-digits), but again, no need to go too crazy. With my cautious assumptions, I arrived at EPS of $30, but certainly with a bit of underwriting luck, or a couple of good outcomes on the major equity positions it could be considerably higher. The one thing that I would caution you about is to not go to extreme on FFH's ability to increase Net Written. On page 16 and on page 195 of the AR, there are a couple of nice tables which present the premiums to surplus ratio from Dec 31, 2019. There was much variation in this ratio amongst the subs, but NB, C&F and Brit were of particular interest because they were 1.4x, 1.7x and 1.3x respectively. Usually you don't see that ratio go above 2.0 because the regulators demand that companies keep enough reserves to pay indemnities. So, unless capital is added to those three subs, you won't likely see their Net Written increase by 50% any time soon because they just don't have adequate capital to do so. On the other hand, ORH, Allied, and Fairfax Asia could easily increase their premiums by 50%. The other thing to look at is Note 19 on page 95 of the annual report which depicts the dividend capacity of the subs. If you see a sub that can only dividend $100-150m to the parent, it's capital constrained and cannot crank up it's underwriting (because it needs to keep reserves when it writes policies). SJ
Thrifty3000 Posted December 14, 2020 Posted December 14, 2020 1.) funding subs in hard market ==> Allied, ORH, Brit and Zenith are okay, but over a few years C&F and NB could use perhaps $300m 2.) funding likely January dividend ==> $270m/year for each of 2021-23 = $810m 3.) take out Eurolife partner (OMERS) ==> does anyone remember this amount??? 5.) take out Allied partners (OMERS) ==> working from memory, isn't this one $750m? To satisfy the items above basically looks like it would require more or less all of the Net Income that could reasonably be expected over 2021-23. close .. "We closed our acquisition of Allied World on July 6, 2017 and we welcomed Scott Carmilani and Allied World’s 1,430 employees to the Fairfax family. As you know, Allied World is the largest acquisition that we have done and we pursued this acquisition because of Allied World’s outstanding track record over its 15 years of existence and the quality of its management team. We are very thankful to our financing partners OMERS ($1 billion), AIMCO ($0.5 billion) and two others. We issued a total of 5.1 million shares for Allied World. The effect of this acquisition is shown in the table below, which was previously presented to you at our 2017 annual shareholders’ meeting:" "Not shown in the table above is our investment in Eurolife led by Alex Sarrigeorgiou. As you know, Eurolife is one of Greece’s leading life and non-life insurance companies, created by Eurobank in 2000. We bought our share of Eurolife in 2016 for $181 million, with Eurolife being 40% owned by us, 40% by OMERS and 20% by Eurobank. We expect to buy out OMERS within the next two years, so Eurolife will become a Fairfax insurance subsidiary. Eurolife has earned $111 million (our share) since we acquired it, benefitting greatly from a Greek bond portfolio of about A1 billion. The non-life portfolio had a combined ratio less than 70% again in 2017. We are very excited to be partners with Alex and his team at Eurolife as they build a very successful company in Greece." unless i am reading this wrong, Eurolife is pretty insignificant ref: 2018 letter So, you are saying it's more like: 1.) funding subs in hard market ==> Allied, ORH, Brit and Zenith are okay, but over a few years C&F and NB could use perhaps $300m 2.) funding likely January dividend ==> $270m/year for each of 2021-23 = $810m 3.) take out Eurolife partner (OMERS) ==> $181m 5.) take out Allied partners (OMERS) ==> $1B So, it might be ~$2.3B to do all four. If they have EPS=$30/sh, that basically will eat up three years of a conservative Net Income number. SJ Are you factoring in the tidal wave of extra cash/profits that flood in during a legit hard market? Their discipline/ability to ramp up premium volume by 50% (from which claims will be paid out over years/decades) while at least doubling underwriting margins is a big part of the fun of owning BRK or FFH, and doesn't happen that often. For FFH we’re talking at least a couple billion of extra cash for owners overnight (during a legit hard market). Nope, I'm not counting on anything weird or wonderful happening that results in outrageous profitability. About a month or six weeks ago, I tossed out a pro-forma income statement for 2021 in this forum to stimulate discussion. Working from memory, my assumptions were pretty conservative, with ~6% growth in Net Written, a 94 CR and a 2% return on investments. If price increases remain strong, perhaps the CR might be a shade better, but I wouldn't want to get too ambitious about that (historically a 94 CR is already exceptional). The growth in Net Written could definitely be larger (ie double-digits), but again, no need to go too crazy. With my cautious assumptions, I arrived at EPS of $30, but certainly with a bit of underwriting luck, or a couple of good outcomes on the major equity positions it could be considerably higher. The one thing that I would caution you about is to not go to extreme on FFH's ability to increase Net Written. On page 16 and on page 195 of the AR, there are a couple of nice tables which present the premiums to surplus ratio from Dec 31, 2019. There was much variation in this ratio amongst the subs, but NB, C&F and Brit were of particular interest because they were 1.4x, 1.7x and 1.3x respectively. Usually you don't see that ratio go above 2.0 because the regulators demand that companies keep enough reserves to pay indemnities. So, unless capital is added to those three subs, you won't likely see their Net Written increase by 50% any time soon because they just don't have adequate capital to do so. On the other hand, ORH, Allied, and Fairfax Asia could easily increase their premiums by 50%. The other thing to look at is Note 19 on page 95 of the annual report which depicts the dividend capacity of the subs. If you see a sub that can only dividend $100-150m to the parent, it's capital constrained and cannot crank up it's underwriting (because it needs to keep reserves when it writes policies). SJ Hahahahaha. Love it: “ I'm not counting on anything weird or wonderful happening that results in outrageous profitability.” I’m actually with you pretty much 100%. For my personal model I forecast “normal” EPS of $28, and earnings growth barely to modestly outpacing inflation. I recognize the professionals are expecting EPS of $32+, but I can’t allow myself to assume the next couple decades will be much, if any, better than the last decade. (I also assume the really good ol’ days of taking advantage of hard markets have to be dampened by companies like BRK, FFH, and MRK sitting on the sidelines of a maybe $700 billion market with over $100 billion of dry powder. But, I guess it doesn’t hurt that most of the competition is yield-starved.)
bearprowler6 Posted December 14, 2020 Posted December 14, 2020 1.) funding subs in hard market ==> Allied, ORH, Brit and Zenith are okay, but over a few years C&F and NB could use perhaps $300m 2.) funding likely January dividend ==> $270m/year for each of 2021-23 = $810m 3.) take out Eurolife partner (OMERS) ==> does anyone remember this amount??? 5.) take out Allied partners (OMERS) ==> working from memory, isn't this one $750m? To satisfy the items above basically looks like it would require more or less all of the Net Income that could reasonably be expected over 2021-23. close .. "We closed our acquisition of Allied World on July 6, 2017 and we welcomed Scott Carmilani and Allied World’s 1,430 employees to the Fairfax family. As you know, Allied World is the largest acquisition that we have done and we pursued this acquisition because of Allied World’s outstanding track record over its 15 years of existence and the quality of its management team. We are very thankful to our financing partners OMERS ($1 billion), AIMCO ($0.5 billion) and two others. We issued a total of 5.1 million shares for Allied World. The effect of this acquisition is shown in the table below, which was previously presented to you at our 2017 annual shareholders’ meeting:" "Not shown in the table above is our investment in Eurolife led by Alex Sarrigeorgiou. As you know, Eurolife is one of Greece’s leading life and non-life insurance companies, created by Eurobank in 2000. We bought our share of Eurolife in 2016 for $181 million, with Eurolife being 40% owned by us, 40% by OMERS and 20% by Eurobank. We expect to buy out OMERS within the next two years, so Eurolife will become a Fairfax insurance subsidiary. Eurolife has earned $111 million (our share) since we acquired it, benefitting greatly from a Greek bond portfolio of about A1 billion. The non-life portfolio had a combined ratio less than 70% again in 2017. We are very excited to be partners with Alex and his team at Eurolife as they build a very successful company in Greece." unless i am reading this wrong, Eurolife is pretty insignificant ref: 2018 letter So, you are saying it's more like: 1.) funding subs in hard market ==> Allied, ORH, Brit and Zenith are okay, but over a few years C&F and NB could use perhaps $300m 2.) funding likely January dividend ==> $270m/year for each of 2021-23 = $810m 3.) take out Eurolife partner (OMERS) ==> $181m 5.) take out Allied partners (OMERS) ==> $1B So, it might be ~$2.3B to do all four. If they have EPS=$30/sh, that basically will eat up three years of a conservative Net Income number. SJ Would the Allied World buyout not also include the financing provided by AIMCO ($500 million) as well as the unspecified amount provided by the unnamed other financing partners? If so, the funds required by Fairfax would be in excess of $1.5 billion??
petec Posted December 14, 2020 Author Posted December 14, 2020 I would caution that, as far as I am aware, Fairfax does not have to buy out the minorities in Eurolife or Allied. I am pretty sure the buyout of Eurolife could already have happened and has been deferred. This is a little odd, because I seem to remember that Eurolife could have financed the buyout itself, but my point is that if Fairfax prefers to focus on capitalising wholly owned subs or even buying back shares, they can.
Thrifty3000 Posted December 14, 2020 Posted December 14, 2020 How much annual earnings does the $1.5 billion buy?
bearprowler6 Posted December 14, 2020 Posted December 14, 2020 I would caution that, as far as I am aware, Fairfax does not have to buy out the minorities in Eurolife or Allied. I am pretty sure the buyout of Eurolife could already have happened and has been deferred. This is a little odd, because I seem to remember that Eurolife could have financed the buyout itself, but my point is that if Fairfax prefers to focus on capitalising wholly owned subs or even buying back shares, they can. If this is the case the question becomes at what financing cost to Fairfax? OMERS is a major Canadian pension plan with total assets of approx $110 billion CAD (approx USD $86 billion). So a $1 billion "temporary" loan to Fairfax to finance the AW acquisition is not an immaterial amount. Also, any "delay" in repayment by Fairfax would attract an additional financing cost since OMERS is not known as the most charitable source of funds out there.
Cigarbutt Posted December 14, 2020 Posted December 14, 2020 Maybe a way to conceptualize these 'financing' deals with OMERS et al is to see them like quasi-perpetual preferred equity contracts. The coupon rate is relatively high but allowed FFH to acquire large controlling pieces of great businesses and it looks like they can decide, periodically, to buy back the financing at par value and not according to book value. It can be a win-win proposition.
petec Posted December 14, 2020 Author Posted December 14, 2020 Maybe a way to conceptualize these 'financing' deals with OMERS et al is to see them like quasi-perpetual preferred equity contracts. The coupon rate is relatively high but allowed FFH to acquire large controlling pieces of great businesses and it looks like they can decide, periodically, to buy back the financing at par value and not according to book value. It can be a win-win proposition. Yes, except I don't think there's necessarily or always a fixed coupon. From what I understand, the coupon is built into certain preferential dividend rights and into the price at which Fairfax pays if it chooses to buy the minority.
Xerxes Posted December 14, 2020 Posted December 14, 2020 Q4 2019 Conference call; pre-Covid, so timetable and valuations impacted A question with respect to your minority insurance partners. And they've helped you make acquisitions in the past. And I think the trend has been to sort of help -- to buy them out. But the RiverStone acquisition seems to go a little bit the other way, where you're actually selling some of the stuff back to them. So do you see -- envision an increasing role with these partners going forward? Or do you envision a role where you're going to be buying up your ownership from these partners going forward? Yes. So our -- yes, there are 2 ways -- 2 sides, right, Tom. One is our insurance companies, and we've been buying back our partners' interest over time. So like that would be Brit and that would be Eurolife and that would be Allied. Allied comes this year. So yes, so we'd be looking to eventually own those companies 100%. They are insurance companies and over time, we'd be looking at only 100%. In terms of the RiverStone, we've taken that -- we've taken OMERS as a partner, and we think what we've done is that, as a partner, we've allowed -- that allows us to deconsolidate. And our U.K. company now, RiverStone, can -- there's a lot of Lloyd's companies, and there's a lot of runoffs in the U.K. So it helps us to finance that separately with our partner. And eventually, there's all sorts of possibilities, including taking it public at some point in time. So we're looking at Riverstone U.K. in a separate basis. But it's very much -- it's been a great performer, U.K., and we think the big advantage is it allows us to finance it separately from the Fairfax insurance companies. And what would be the -- in order to take Eurolife and Britain and Allied up to 100% ownership, what's left for you? What kind of cost do you see of that over the next couple years? Yes. So the year Eurolife we'll doing it sometime this year. That we'll probably do it, right, from the company itself. We've done very well in Eurolife. So that won't need much money. And for Brit, we need about 10%, we have to buy back and we're looking at buying back that as soon as we can. And then Allied is -- opens up in June, I think, somewhere June, July, and then we have the ability to do that. I think the -- for Allied, Peter, if I remember, it was something like $1.5 billion, something like that, that we need to buy at some point in time in the next 3, 4 years. Okay. And what about -- and in the Brit, is that -- what's the dollar amount on that? The Brit, we don't have to, but it's approximately $100 million, plus/minus $100 million." 2020 letter; i believe that means the value has increased ! "Through the crisis in Greece, we acquired a gem in Eurolife, a Greek property and casualty and life insurance company that operates predominantly in Greece but also in Romania. Alex Sarrigeorgiou has run Eurolife since 2004, following Eurobank’s decision to grow its insurance business, and we acquired it with OMERS as our partner in 2016. Since our initial 40% purchase of Eurolife in 2016 for A163 million, Eurolife has earned A347 million and paid dividends of A298 million and shareholders’ equity has increased from A400 million to A720 million at the end of 2019 after the payment of dividends. This phenomenal performance was predominantly because Eurolife had a significant holding of Greek government bonds whose rates went from 8% to 1% during that time period while its non-life business had an average combined ratio of 72%. We currently own 50% and equity account for Eurolife but plan to buy the rest of OMERS’ shares in 2020." 2019 letter; Prem's perspective on minority buyout vs. buyback, before stock was dirt cheap. That calculus has indeed changed "I mentioned to you last year that we are focused on buying back our shares over the next ten years as and when we get the opportunity to do so at attractive prices. Henry Singleton from Teledyne was our hero as he reduced shares outstanding from approximately 88 million to 12 million over about 15 years. We began that process by buying back 1.1 million shares since we began in the fourth quarter of 2017 up until early 2019 – about half for cancellation and half for various long term incentive plans we have across our company. This was after we increased our ownership of Brit to 89% from 73% while having the funds ready to increase our ownership of Eurolife from 50% to 80% in August 2019." 2018 letter; seems to always be in the next 2 years "Not shown in the table above is our investment in Eurolife led by Alex Sarrigeorgiou. As you know, Eurolife is one of Greece’s leading life and non-life insurance companies, created by Eurobank in 2000. We bought our share of Eurolife in 2016 for $181 million, with Eurolife being 40% owned by us, 40% by OMERS and 20% by Eurobank. We expect to buy out OMERS within the next two years, so Eurolife will become a Fairfax insurance subsidiary. Eurolife has earned $111 million (our share) since we acquired it, benefitting greatly from a Greek bond portfolio of about A1 billion. The non-life portfolio had a combined ratio less than 70% again in 2017. We are very excited to be partners with Alex and his team at Eurolife as they build a very successful company in Greece." 2017 letter "We agreed to acquire 80% of Eurolife, which closed this past August. At closing, OMERS purchased 40% of Eurolife to help us finance this acquisition. Eurolife, led by Alex Sarrigeorgiou, had an outstanding year in 2016, writing A496 million of premium, achieving a non-life combined ratio of 55% and producing A68 million of net income. Given our 40% ownership, Eurolife is equity accounted in our financial statements." 2016 letter "Late in 2015 we agreed to acquire 80% of Eurolife, a life and property and casualty insurance company which is the third largest insurer in Greece and which distributes its products through Eurobank’s network, for $347 million – at about its underlying book value. We got to know Alex Sarrigeorgiou in the last few years and were very impressed with him, his management team and their track record. The company writes A306 million in premiums – A248 million in life insurance and A58 million in property and casualty. Over the past ten years, the property and casualty operations have had a combined ratio of 60.0% while the life insurance operations produce stable earnings with plain vanilla products. Eurolife had net income in 2015 of A48.4 million, 45% from life and 55% from P&C. We welcome Alex Sarrigeorgiou and the over 300 employees of Eurolife to the Fairfax family. As we did with Brit, where OMERS purchased 30% from us to help us finance the acquisition, we expect OMERS to buy 40% of Eurolife’s shares at close to help us finance the acquisition. In the case of both Brit and Eurolife, we expect to be able to acquire the interests back within the five years after closing, after providing OMERS with an acceptable return. The team at OMERS has been a pleasure to deal with."
Viking Posted January 1, 2021 Posted January 1, 2021 From 2021 Stock Pick Thread 4.) Equity portfolio looks cheap; will benefit if we get a recovery trade/risk-on in equity markets in 2021 (especially Indian holdings and Eurobank). Viking, arent we already past recovery in stocks? I thought many markets were at all time highs (some names in the hospitality, air travel industries that I follow are now higher than before the February/March crash!). MSCI India closed the year 15% up. And if I heard correctly, value had performed well at last. Anyway, good luck with the pick! ————————— My response: Yes, the stock averages are trading at new record highs. However, looking under the hood, it looks to me like there is a bifurcated market. Some stocks trading at very high multiples and another group of stocks trading at much lower multiples (lots of cyclicals in this bucket). Assuming the vaccine roll out is successful over the next 6-12 months my guess is we should see economic activity improve. As the recovery takes hold, earnings for cyclicals should pick up and this should result in higher stock prices. Looking at Fairfax’s stock portfolio: 1.) Atlas, trading at $10.84 looks cheap. It was trading at $14.21 a year ago. The company stronger today than a year ago. My guess is 12 months from now sales and profit will continue to grow. This company is over 20% of Fairfax’s equity portfolio. 2.) Eurobank, trading at € 0.58 looks cheap. A year ago it was trading at €0.92. Over the past year they have been able to hive off a large chunk of underperforming loans. Company is positioned well should we see an economic recovery in Greece. This stock is around 13% of Fairfax’s equity portfolio. 3.) the basket of Indian holdings also look cheap to not expensive: Fairfax India (cheap), Quess and the three IIFL triplets (not expensive). Especially if we see US$ weakness/emerging market strength over the next year. 4.) CIB (Egypt), Kennedy Wilson both look cheap at current prices. 5.) Stelco has been on fire. My guess is the stock will continue to march higher if steel prices remain high. 6.) Blackberry is starting to look like it might be getting some traction. They are in a lot of very sexy spaces. Stock is not expensive and if they actually execute well the stock currently at $6.63 could be crazy cheap. 7.) Recipe: i am even warming to Recipe. Lots of mom and pop restaurants have been put out of business because of the pandemic. My guess is Recipe has, during covid, culled the weak franchisees from their system. When we get to recovery in 2H 2020 i expect full service restaurants to perform exceptionally well (first thing people will do post covid is eat our more... easy, cheap way to reward yourself. ) This is Recipe’s sweet spot. The surviving restaurant chains should do exceptionally well. And they all now have a new revenue stream moving forward - takeout. I expect system sales to do very well at Recipe and this should materially increase royalty payments flowing to Recipe. Fairfax also has a number of other holdings that should do better/well moving forward. And we may see further monetizations in 2021. 1.) AGT: this business may be performing very well. This is a company to watch given its size and potential value to Fairfax in a sale. 2.) Farmers Edge, Performance Sports (Bauer Hockey), Toys R Us (real estate) and a bunch more. If we get a broad based economic recovery in 2021 there are many businesses under the Fairfax umbrella that will benefit. This will result in improving earnings for Fairfax: 1.) mark to market investment gains (on stock holdings) 2.) higher dividend payments to Fairfax 3.) higher earnings from associates (potentially much higher) 4.) higher realized gains on asset monetizations
Viking Posted January 1, 2021 Posted January 1, 2021 Here is an update on Fairfax equity positions to Dec 31, 2020 (see Excel spreadsheet below for details). My math says the holdings have increased in price by about $1.4 billion (+36%) during Q4. Very good increase for a quarter. Of this total about $350 million should flow through to earnings (pre-tax) or around $10/share after tax. Does this look about right? Top Holdings 1.) Seaspan $976 (not including warrants) 2.) Eurobank $796 3.) Fairfax India $495 4.) Quess $366 5.) Recipe $357 6.) Blackberry $310 (not including debentures) 7.) Commerce International Bank $289 8.) Kennedy Wilson $239 9.) Stelco $232 10.) Dexterra $162 11.) Thomas Cook India $160 12.) Resolute $159 13.) Helios Fairfax $145 (if Fairfax owns same number of shares) 14.) IIFL Triplets $125 BDT Capital Partners - do they still own this? Other investments: AGT, Toy 'R Us, Peak Performance, Farmers Edge and many more Other insurance investments (equity accounted): Gulf Insurance Group, Digit, Eurolife, Pet Health, Riverstone UK (sold 60% position for $750 million - will close in Q1 2021) - what are the value of each of these businesses? Worth looking into :-) Fairfax_Equity_Holdings_Dec_31_2020.xlsx
elliott Posted January 1, 2021 Posted January 1, 2021 My response: Yes, the stock averages are trading at new record highs. However, looking under the hood, it looks to me like there is a bifurcated market. Some stocks trading at very high multiples and another group of stocks trading at much lower multiples (lots of cyclicals in this bucket). Assuming the vaccine roll out is successful over the next 6-12 months my guess is we should see economic activity improve. As the recovery takes hold, earnings for cyclicals should pick up and this should result in higher stock prices. Thank you for the detailed response. Much appreciated :)
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