Fairfax2019

[wondering]

https://www.fairfax.ca/news/press-releases/press-release-details/2019/Fairfax-Financial-Holdings-Corporation-Executive-Announcement/default.aspx

 

In sum,

 

Jennifer Allen is taking over the CFO position at FFH from interim CFO John Varnell.

 

Jennifer is leaving her post as CFO at FIH and FAH, and Amy Sherk is taking over those roles.

 

This is keeping with Fairfax's preference for hiring within.

[wondering]

https://www.fairfax.ca/news/press-releases/press-release-details/2019/Fairfax-Group-Donating-US1-Million-for-Karnataka-Flood-Relief/default.aspx

 

The Bangalore airport is in the state of Karnataka.

[wisowis]

https://www.woodlockhousefamilycapital.com/post/the-horse-story

[gary17]

is a hard market good for P and C insurers?

[omagh]

Of course.  The hard market starts to appear when insurers, that have under-priced their contracts, consume capital in payouts for catastrophe losses.  These insurers tend to write less business as they need to preserve capital.  So, the insurers that have a counter-cyclical approach (i.e., write less business when pricing is soft and more when pricing is firm) have lots of available capital just as pricing increases (post-catastrophe pricing usually increases) and the overall capital is shrinking.  Hard markets can last a few months or a couple of years, often in niche categories, so putting capital to work at high rates for long periods is the aim of the game.  Not every insurer is geared to do this, so lots get caught up in increasing top-line revenues year by year.  Multi-cat years will shake out the weak capital.

 

- O

 

is a hard market good for P and C insurers?

[gary17]

thanks

  i think BRK has a lot of cash , probably stand to benefit.

 

  FFH is cheap but of lesser quality and questionable culture.  hard for me to pull the trigger.

[John Hjorth]

https://www.woodlockhousefamilycapital.com/post/the-horse-story

 

This. Thank you for sharing, wisowis. Chris Mayer bents it in neon tubes : -Buy, if you're interested &/or want to get in, -hold on, if you're at full position [for you], & do not sell here at these levels.

[Spekulatius]

Of course.  The hard market starts to appear when insurers, that have under-priced their contracts, consume capital in payouts for catastrophe losses.  These insurers tend to write less business as they need to preserve capital.  So, the insurers that have a counter-cyclical approach (i.e., write less business when pricing is soft and more when pricing is firm) have lots of available capital just as pricing increases (post-catastrophe pricing usually increases) and the overall capital is shrinking.  Hard markets can last a few months or a couple of years, often in niche categories, so putting capital to work at high rates for long periods is the aim of the game.  Not every insurer is geared to do this, so lots get caught up in increasing top-line revenues year by year.  Multi-cat years will shake out the weak capital.

 

- O

 

is a hard market good for P and C insurers?

 

The problem is now that so much hybrid capital (catastrophe bonds  etc.) is on standby to take advantage of any hard market, should it occur. Unless we have an unfavorable credit market at the same time than a hard insurance market, I don’t see hard markets lasting.

[Spekulatius]

 

 

$6b debt at the holding company is net $4b after cash...and the insurance companies do not have a lot of debt as they are strategically being less levered to be able to take advantage of an event, maintain high ratings and once you dividend their access capital to the holding company it’s gone...so it does not concern me. Insurance companies are vastly undervalued.

 

Belated answer - the $4.3B in net debt with a $12.5B equity base is still higher than many other insurance cos that are typically 20-25% levered. Most other insurance cos don’t have the equity exposure that FFH has though FF India, Africa and various other holdings. It clearly is a more levered insurer than many others.

 

FWIW, I sold my FF holding when it went to $480+ and essentially put the proceeds into BRKB, which consider a better bet. I would consider buying back FFH below $430, but that would probably be for a trade.

[UK]

https://www.wsj.com/articles/storm-clouds-not-capital-ones-ease-for-reinsurers-11567767780

 

"Reinsurers’ shares already have made huge gains this year. Arch Capital Group Ltd. and RenaissanceRe Holdings Ltd. are up 54% and 41% respectively. Arch Capital is priced at about 1.7 times book value, and RenaissanceRe is at 1.6 times. The latter is close to its highest level since 2007 on that measure."

[KFS]

https://www.wsj.com/articles/value-stocks-beckon-investors-in-aging-bull-market-11569412801?mod=hp_lead_pos4

 

Value Stocks Beckon Investors in Aging Bull Market

 

"Diane Jaffee, a senior portfolio manager running $3.7 billion in value-focused funds at TCW Group Inc., notes the spread between the trailing price/earnings ratios of growth and value stocks on the Russell 1000 index hasn’t been this wide since the dot-com crash of 2001."

[UK]

https://www.bloomberg.com/news/articles/2019-09-27/watsa-s-mindboggling-reasoning-in-takeover-prompts-court-award

[bearprowler6]

https://www.bloomberg.com/news/articles/2019-09-27/watsa-s-mindboggling-reasoning-in-takeover-prompts-court-award

 

That is a stunning decision by the Judge and damning commentary on Prem.

 

At one point The Judge called Prem's testimony "mindboggling"....on this I have to respectively disagree with the Judge. What is mindboggling is the decision to continue to hold Resolute Forest Products at all. And may I add...Blackberry, Eurobank, Stelco Torstar etc etc.

 

As far as the "long term" defence for hollding these positions....with the exception of Stelco all of these positions have been held for numerous years without any positive results. Blackberry for instance has been held 6 years since John Chen took over as CEO and years before that. Argue all you want but something is broken at the Hamblyn Watsa equity team and that is what is truly Mindboggling.

 

Thanks UK for posting the article.

[Cigarbutt]

https://www.bloomberg.com/news/articles/2019-09-27/watsa-s-mindboggling-reasoning-in-takeover-prompts-court-award

Humble opinion here, after having discovered and reviewed previous comments made on this Board years ago.

Disclosure: I was a Fairfax shareholder then and intensively looked at how money could be made somehow with ABH and FBK.

The definitive opinion may change after reading the whole judgement but this seems to be the price to pay for playing the game between legal rules and ethics.

 

There was a conceptual flaw from the start (especially versus the fair and friendly and not hostile culture mindset) by actively pursuing an acquisition where Fairfax was a significant shareholder in the bidder and the target. The relevant National Policy 62-202: Take-Over Bids Defensive Tactics, indicates that “[t]he primary objective of the take-over bid provisions of Canadian securities legislation is the protection of the bona fi de interests of the shareholders of the target company.” Regulatory bodies then focused on a majority concept of the take-over which did not take into account that this majority was possible by the inclusion of a party which had diverging interests and that this basic fact likely contributed to a financial oppression of Fibrek's minority shareholders. Higher Courts eventually deferred to the regulatory body's decisions so that Fairfax got the legal nod to proceed. But one has to consider that this would not have been OK under other legal jurisdictional auspices.

 

It seems that the September 2019 judgement is, somehow, an attempt to correct an unfair outcome for minority shareholders but the Court seems to omit that this process had been anointed with a legal seal of approval in a contemporaneous way and perhaps the judgement is an attempt to bridge the definition of fairness, from legal to ethical. It's not the job of the legal system to do this but it's an interesting side effect and a reminder to legislators.

 

 

[StubbleJumper]

https://www.bloomberg.com/news/articles/2019-09-27/watsa-s-mindboggling-reasoning-in-takeover-prompts-court-award

Humble opinion here, after having discovered and reviewed previous comments made on this Board years ago.

Disclosure: I was a Fairfax shareholder then and intensively looked at how money could be made somehow with ABH and FBK.

The definitive opinion may change after reading the whole judgement but this seems to be the price to pay for playing the game between legal rules and ethics.

 

There was a conceptual flaw from the start (especially versus the fair and friendly and not hostile culture mindset) by actively pursuing an acquisition where Fairfax was a significant shareholder in the bidder and the target. The relevant National Policy 62-202: Take-Over Bids Defensive Tactics, indicates that “[t]he primary objective of the take-over bid provisions of Canadian securities legislation is the protection of the bona fi de interests of the shareholders of the target company.” Regulatory bodies then focused on a majority concept of the take-over which did not take into account that this majority was possible by the inclusion of a party which had diverging interests and that this basic fact likely contributed to a financial oppression of Fibrek's minority shareholders. Higher Courts eventually deferred to the regulatory body's decisions so that Fairfax got the legal nod to proceed. But one has to consider that this would not have been OK under other legal jurisdictional auspices.

 

It seems that the September 2019 judgement is, somehow, an attempt to correct an unfair outcome for minority shareholders but the Court seems to omit that this process had been anointed with a legal seal of approval in a contemporaneous way and perhaps the judgement is an attempt to bridge the definition of fairness, from legal to ethical. It's not the job of the legal system to do this but it's an interesting side effect and a reminder to legislators.

 

 

 

So, the problem is that FFH puffs its chest out about employees conducting themselves with integrity and about undertaking Fair and Friendly Acquisitions (Fairfax), but then doesn't always walk the talk.  You now have a judge who noted their shortcomings during the Fibrek takeover, but to make matters worse, if the judge is to be believed, Prem was not always honest and forthcoming during the trial and instead hid behind a series of "I cannot recall" type of responses.  Given that Prem has had several years to review his notebooks from that period and to examine his diary to refresh his mind about meetings and teleconferences, the "I don't know" responses leaves me with really only two possible explanations for his behaviour:  1) he is incompetent and cannot take basic notes and review them later; or 2) the "I don't know" responses were a dishonest and unethical approach to concealing his previous unethical conduct.

 

In any case, we shouldn't expect to see any more posts in this forum praising Watsa's integrity.

 

 

SJ

[Cardboard]

This was a bad instance but, the one that really discredited Prem for me was this "take-over" of Blackberry that never happened.

 

It is illegal to make a take-over offer for a public company when you don't have the means or intention to carry it through. I understand that it was subject to obtaining support from friends and all that but, I think it was a manipulative scheme while Blackberry shares were heading downhill.

[petec]

What is mindboggling is the decision to continue to hold Resolute Forest Products at all. And may I add...Blackberry, Eurobank, Stelco Torstar etc etc. As far as the "long term" defence for hollding these positions....with the exception of Stelco all of these positions have been held for numerous years without any positive results.

 

Funnily enough several of these look really interesting to me at the moment. I have developed a new rule for following Fairfax: buy what they buy, just do it several years later.

[bearprowler6]

What is mindboggling is the decision to continue to hold Resolute Forest Products at all. And may I add...Blackberry, Eurobank, Stelco Torstar etc etc. As far as the "long term" defence for hollding these positions....with the exception of Stelco all of these positions have been held for numerous years without any positive results.

 

Funnily enough several of these look really interesting to me at the moment. I have developed a new rule for following Fairfax: buy what they buy, just do it several years later.

 

Fair enough Petec....but one needs to ask why they are always so early?

 

In fact...they need to spend considerable time addressing this major flaw in their investment process. For example, as soon as they bought into Stelco it was pointed out by many on this board that the timing was very poor given where we were in the economic cycle and given the tariffs being levied by the Trump administration. And what happens...50% of their investment literally disappears over night.

 

And they were way early on Blackberry and truth be told this is not a sure thing even from this level. Full disclosure....I bought into Blackberry late last week.

 

Furthermore...although I might be wrong....Resolute Forest is simply a bad investment. They have had hundreds of million tied up in this loser for years. Time to admit the mistake, sell and redeploy the capital.

 

I could go on but I think my point has been made. I have followed Fairfax for literally decades and am a very patient investor but something is not right when you assemble a group of equity investments like the ones they hold at the prices they bought in at.

[petec]

Fair enough Petec....but one needs to ask why they are always so early?

 

I agree - that was the underlying point (perhaps not clear) of my post.

 

That said:

 

1) It's only fair to point out what they got right, like Quess and Seaspan.

 

2) I disagree that they should necessarily sell an investment simply because buying it was a mistake. For example FFH will never recoup their investment in RFP, but if consensus is right it will generate half of its market cap and a quarter of its enterprise value in free cash flow over the next two years.

 

As an aside, I think the Stelco investment will work out fine. To win when investing in bad/low ROIC businesses you need 3 things: underappreciated value; good capital allocation; and low debts (or contracted cash flows that match the debt maturities). Stelco has all three (as does Seaspan although the value is becoming more appreciated by the day).

 

 

[KFS]

Press Release Details

 

Fairfax Financial Holdings Limited: Intention to Make a Normal Course Issuer Bid for Subordinate Voting Shares and Preferred Shares

09/26/2019

 

https://www.fairfax.ca/news/press-releases/press-release-details/2019/Fairfax-Financial-Holdings-Limited-Intention-to-Make-a-Normal-Course-Issuer-Bid-for-Subordinate-Voting-Shares-and-Preferred-Shares/default.aspx

 

 

[wondering]

https://www.avantelogixx.com/Avante+Logixx+Secures+up+to+%2418.0+million+in+Financing+from+Well+Known+Canadian+Investor+and+To+Expand+Nationally+with+Acquisition+of+A.S.A.P.+Secured+Inc

 

Another convertible debenture deal,  Relatively small - total $18m Cdn. 7% interest.  If fully exercised, FFH would have 19% of the equity interest in the company.

 

"Avante Logixx Inc engaged in the provision of security, monitoring, system integration, and technology solutions. Its products and services include residential and corporate security business: Avante control center, monitoring, electronic building management, patrol and rapid response, intelligent perimeter protection, secure transport, international security travel advisory services, locksmith services, and smart home automation. "

[investmd]

 

This year’s catalysts

 

-Fairfax followers are as bearish as I have seen since 2003.

 

-I expect the best bond manager (Brian Bradstreet) in the world to have filled Fairfax Xmas stockings with corporate and other bonds that got trounced in December. We have seen him move very quickly in the past... 2008 he bought $7b in tax free muni’s yielding 7% in less than a month and sold almost the entire US treasury holding that was larger than that at a massive profit during the same time. In the first half of the 2000’s he did very well in corporate bonds where he needed to be nimble before 2007. I am betting on a much higher yield on Fairfax large portfolio which will take operating earnings higher. This and a likely higher shift into higher yielding short term treasuries in the fall will show more of the earnings power of Fairfax as opposed to holding 50% cash holdings.

 

-India’s growth remains the highest in the world and Fairfax is a way to play that

 

-share buyback will accelerate at these levels albeit not as big as I would like!

 

- insurance companies will continue to improve

 

-equity positions are at rock bottom with little downside risk

 

-as previously discussed I am unhappy with share based awards...these will be disclosed in detail by Prem.

 

Most importantly this is a solid business with loads of potential that is selling dirt cheap for all of the reasons discussed here. Is it a redemption year for Prem and his team at Fairfax? We will see.

 

-

 

Dazel: thanks for starting this thread at the beginning of the year and stating your conviction. It's 12 months later and I'm curious as to whether there have been adjustments to your thought process.

 

In another post in January you stated "2019 is all about earnings....good or bad. It is time for Fairfax to perform...if they do not I will accept it and move on. If it sounds like a broken record I appreciate the skepticism from all..."  In some ways FFH has performed - insurance side has done well, Seaspan & Eurobank - couple of their largest equity holdings have done well in past 12 months, BUT FFH stock price is essentially flat and I believe selling below book value. So what are your thoughts to close out the year?

[wondering]

https://www.fairfax.ca/news/press-releases/press-release-details/2019/OMERS-to-Invest-in-RiverStone-UK/default.aspx

[Crip1]

https://www.fairfax.ca/news/press-releases/press-release-details/2019/OMERS-to-Invest-in-RiverStone-UK/default.aspx

 

 

Was just about to post this. Although not huge, this is another example of realizing some value in their assets that was not previously reflected in BV. Wondering if this is a concerted effort or just being opportunistic. Thoughts from others who are better educated would be welcome.

 

 

-Crip

[Viking]

Fairfax over the years has made many purchases. What i really like about many of the transactions i am seeing this year is the company is setting units up to be more successful. It sounds like RiverStone wants to grow its business. These moves, because of the cash involved, also provide shareholders with an updated value of the business. My guess is Fairfax has more to come in the next 12 months. With FFH shares trading a little above BV i think FFH is highly motivated to unlock value. I would not be surprised to see a transaction (or a few) that brings in a chunk of cash and allows FFH to buy back a meaningful amount of FFH shares. Regarding the RiverStone transaction i am not sure if the proceeds from OMERS will be going to FFH corporate or to RiverStone to be used to grow their business.

 

“The cash purchase price for the RiverStone UK investment of at least US$560 million, subject to certain book value adjustments at closing, will result in Fairfax recording a gain of approximately US$280 million before tax (an increase in book value per basic share of Fairfax of approximately US$10 before tax on a pro forma basis).

 

Upon completion of the transaction, Fairfax will deconsolidate the UK run-off group and apply the equity method of accounting for its remaining interest. Fairfax may further monetize its remaining interest in UK run-off in the future although the company also retains the flexibility to repurchase its interest over time.”