Fairfax2019

[petec]

Given that Fairfax and Hamblin Watsa is quite dependent on human capital. Perhaps the perspective of share dilution could be viewed as growth/succession cap ex to allow the company to continue operating into the future.

 

Furthermore, since Prem is the largest shareholder, any share dilution is also dilution of his proportion as well.

 

Certainly, long-dated options can have the possibility of incentive malalignment. What long-term incentive structure could fairfax put in place to help transition to the next generation and align them with the common shareholder?

 

My answer would be helping them purchase shares in the market, which Fairfax does a lot of (see annual letters).

 

As I say I have no issue with awards, but I’d like to know more about the conditions and likely rate.

 

No issuances do not dilute Prem’s votes.

[shalab]

As someone posted earlier, FRFHF returned 7% since 1998 nowhere near the 15% that is being promised every year. Yet, many people follow the person like a messiah (not unlike BH) justifying every action and statement even though it is not rational.

 

I like to follow their India investments as I own thomas cook. Also - I like to hunt for investment opportunities in India. However, FRFHF itself is a heavily leveraged company, even at the holding company level. They have 40B in investments and 11B in shareholder equity. The fact that they have been able to not generate returns in double digits despite such leverage should tell something.

 

Given that Fairfax and Hamblin Watsa is quite dependent on human capital. Perhaps the perspective of share dilution could be viewed as growth/succession cap ex to allow the company to continue operating into the future.

 

Furthermore, since Prem is the largest shareholder, any share dilution is also dilution of his proportion as well.

 

Certainly, long-dated options can have the possibility of incentive malalignment. What long-term incentive structure could fairfax put in place to help transition to the next generation and align them with the common shareholder?

 

My answer would be helping them purchase shares in the market, which Faurfax does a lot of (see annual letters).

 

As I say I have no issue with awards, but I’d like to know more about the conditions and likely rate.

 

No issuances do not dilute Prem’s votes.

[petec]

As someone posted earlier, FRFHF returned 7% since 1998 nowhere near the 15% that is being promised every year. Yet, many people follow the person like a messiah (not unlike BH) justifying every action and statement even though it is not rational.

 

I like to follow their India investments as I own thomas cook. Also - I like to hunt for investment opportunities in India. However, FRFHF itself is a heavily leveraged company, even at the holding company level. They have 40B in investments and 11B in shareholder equity. The fact that they have been able to not generate returns in double digits despite such leverage should tell something.

 

I think the days when anyone thought Prem was a messiah are long gone, and the idea that anyone on here tries to justify every action is laughable - the amount of criticism and invective over the last 5-odd years has been immense. The question is whether it is overdone, which it might be for two related reasons: 1) despite the clear failures on the investing side Prem has put together an impressive set of assets and people, and 2) people and organisations learn, and this one is clearly changing. Therein may lie the opportunity, for a value investor. We will find out.

 

BTW anyone who thinks of the 15% target as a promise is a moron.

 

Would you mind elaborating on your thesis for Thomas Cook? Obviously its been a home run, but only (it seems to me) because of Quess. Within the legacy business as far as I can tell profits on the forex side have collapsed and pricing on the travel side have been squeezed by OTAs. I like the various deals (Kuoni etc), but from what I see FCF hasn't grown since Fairfax bought it. However I have only glanced at it so I could be wrong on all of the above. Please correct me if so.

 

[shalab]

Regarding the 15% target, I know many people believe it as shown in the only "notes" shared from the meeting. May be it is time for Prem to become non-executive chairman and have his kids and Pual Rivett talk in the annual meeting, shareholder letters.

 

Regarding Thomas Cook, you are right about the forex, travel businesses. However, ordering through the internet is still not common in India (from what I understand) and brand names still have a lot of cachet. In Thomas Cook case, one has to look at P/B - not cashflows as it is difficult to calculate/estimate. I bought it when it was roughly 20% lower.

 

 

I think the days when anyone thought Prem was a messiah are long gone, and the idea that anyone on here tries to justify every action is laughable - the amount of criticism and invective over the last 5-odd years has been immense. The question is whether it is overdone, which it might be for two related reasons: 1) despite the clear failures on the investing side Prem has put together an impressive set of assets and people, and 2) people and organisations learn, and this one is clearly changing. Therein may lie the opportunity, for a value investor. We will find out.

 

BTW anyone who thinks of the 15% target as a promise is a moron.

 

Would you mind elaborating on your thesis for Thomas Cook? Obviously its been a home run, but only (it seems to me) because of Quess. Within the legacy business as far as I can tell profits on the forex side have collapsed and pricing on the travel side have been squeezed by OTAs. I like the various deals (Kuoni etc), but from what I see FCF hasn't grown since Fairfax bought it. However I have only glanced at it so I could be wrong on all of the above. Please correct me if so.

[Cigarbutt]

On November 3rd 2016, FFH sold 90% of their long-dated US Treasury bonds and, shortly thereafter, removed their equity hedges.

The expectations was for long term rates and stocks to go up.

https://www.forbes.com/sites/antoinegara/2016/11/11/canadian-billionaire-prem-watsa-nailed-the-trump-treasury-trade-and-is-bullish-on-stocks/#2ebe1ef257b6

 

As of today, after 2.5 years, long term rates are at the same level as on the selling date and the R2000 is up by about 10 to 12%.

 

I think that deflationary forces will continue to "win" over inflationary forces despite increasingly polarized forces and, for better of for worse, that conclusion continues to contaminate the investment thought process.

[petec]

On November 3rd 2016, FFH sold 90% of their long-dated US Treasury bonds and, shortly thereafter, removed their equity hedges.

The expectations was for long term rates and stocks to go up.

https://www.forbes.com/sites/antoinegara/2016/11/11/canadian-billionaire-prem-watsa-nailed-the-trump-treasury-trade-and-is-bullish-on-stocks/#2ebe1ef257b6

 

As of today, after 2.5 years, long term rates are at the same level as on the selling date and the R2000 is up by about 10 to 12%.

 

I think that deflationary forces will continue to "win" over inflationary forces despite increasingly polarized forces and, for better of for worse, that conclusion continues to contaminate the investment thought process.

.

 

I agree deflation wins over inflation - until the next bout of QE. The choice between the two is ultimately a political one and inflation is politically preferable when there’s tons of debt about.

 

(Minor correction - they didn’t say they were bullish on stock markets, but individual stocks.)

[jfan]

There was a wonderful podcast with David Zervos on the Sherman Show (Doubleline Capital). At the 22:00 minute mark, he explains that the deflationary forces in the US are secondary to demographics. Decreasing labor force growth reduces demand for goods coupled with technological progress creates this persistent milieu.

 

That being said, Torsten Slok (also on the Sherman Show) believes there is a bifurcated process. Goods are facing deflationary forces but local services that not fungible (eg health care) are experiencing inflation.

 

 

[TwoCitiesCapital]

On November 3rd 2016, FFH sold 90% of their long-dated US Treasury bonds and, shortly thereafter, removed their equity hedges.

The expectations was for long term rates and stocks to go up.

https://www.forbes.com/sites/antoinegara/2016/11/11/canadian-billionaire-prem-watsa-nailed-the-trump-treasury-trade-and-is-bullish-on-stocks/#2ebe1ef257b6

 

As of today, after 2.5 years, long term rates are at the same level as on the selling date and the R2000 is up by about 10 to 12%.

 

I think that deflationary forces will continue to "win" over inflationary forces despite increasingly polarized forces and, for better of for worse, that conclusion continues to contaminate the investment thought process.

 

I thought this for the longest time. It's why I was in Fairfax for the longest time. The equity hedges, the deflation derivatives, the hedged equities, etc.

 

Starting in late 2017, I started to realize that maybe I was wrong. Money velocity was rising the first time in years which seemed to confirm that inflation was on the upward trend. Rates had climbed 75-100bps and stock market was on fire after the tax rebates.

 

That being said - the weakness we've been seeing in equity markets, the ongoing trade war, the recent decline in money velocity again, and interest rates that have given up all of their gains might suggest I was premature to change my views.

 

I'm squarely back in the lower for longer camp after a brief 12 month hiatus.

[wondering]

Sad news

 

https://ca.finance.yahoo.com/news/fairfax-financial-says-chief-financial-135653428.html

[StubbleJumper]

Sad news

 

https://ca.finance.yahoo.com/news/fairfax-financial-says-chief-financial-135653428.html

 

 

Sad news indeed.  The May long weekend takes too many from us.

 

 

SJ

[wondering]

https://www.fairfax.ca/news/press-releases/press-release-details/2019/Fairfax-Launches-C500-Million-Senior-Notes-Offering/default.aspx

[wondering]

https://www.fairfax.ca/news/press-releases/press-release-details/2019/Fairfax-Announces-Acquisition-of-Shares-of-Quess/default.aspx

[petec]

https://www.fairfax.ca/news/press-releases/press-release-details/2019/Fairfax-Announces-Acquisition-of-Shares-of-Quess/default.aspx

 

Good for them. It’s cheap.

[valueinvesting101]

Is there disclosure requirement related to Quess shares? It's purchase of around $1.7 million USD. News has pushed price of Quess shares up by nearly 12%.

[TwoCitiesCapital]

Wish they'd repurchase their own shares. In USD, they're near the bottom of the 5-year range.

[Alekbaylee]

Good results overall: https://markets.businessinsider.com/news/stocks/fairfax-financial-holdings-second-quarter-financial-results-1028410155

[Spekulatius]

Good results overall: https://markets.businessinsider.com/news/stocks/fairfax-financial-holdings-second-quarter-financial-results-1028410155

 

Almost $6B in debt at the Holding Company, up from $4.8B. This is a pretty substantial leverage.

[StevieV]

"There were 26.9 million and 27.6 million weighted average common shares effectively outstanding during the second quarters of 2019 and 2018 respectively.  At June 30, 2019 there were 26,881,817 common shares effectively outstanding."

 

One thing that has confused and concerned me is the share count.  Looking at the release, the June 30, 2018 share count was actually 27.550 million.  In any event, looks to me like about a 2.5% reduction y-o-y.  Seems straightforward to me, but would appreciate any comments as I have found the reporting on this a bit confusing in the past.  I'd be happy with that pace of reduction.  No, it's not Singleton, but meaningful over time.

 

Also liked that combined ratio has remained at a number that I would consider good.

 

Lower rates are a challenge for all insurance companies.  I don't see it as any different for Fairfax.

[Dazel]

 

 

$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.

 

 

[petec]

Standout for me is the extent to which the market is hardening. Anyone know why? We haven’t had systematic capital destruction via cats, and rates haven’t gone up enough to deny capital to the industry, so why are we entering a hard market?

[Cigarbutt]

It does look like price increases are permeating across many lines. Is it for real?

The last part of this cycle has been unusually soft and I wonder if unusual access to cheap capital has distorted the underwriting price signals, maybe like the lack of capital discipline displayed in the shale gas industry.

Watching for underwriting cycles to turn is like watching an apple to fall. 2017 and 2018 were relatively poor years for (re)insurers due, in part, to higher catastrophe activity. The ILS segment, thought to be more sophisticated with more advanced models, turned out to be a persistenly disappointing factor recently due to loss creep. For example, Markel was 'surprised' by this development (which was compounded by 'issues' with top management) and had to put an entire segment into runoff. The component of dwindling reserve redundancies also seems to be a relevant contemporary catalyst. If interested, see the following, which offers a satisfactory industry perspective:

https://deconstructingrisk.com/2019/07/30/creepy-things/

 

For Fairfax, reserve redundancies, in combined ratio points:

2016            7.8%

2017            8.5%

2018            6.8%

Q1Q2 2018  3.5%

Q1Q2 2019  1.5% 

 

For Fairfax, net favourable development has been very strong vs the industry and the real action is often concentrated in the latter part of the year. IMO, FFH has established a strong underwriting culture and is likely to continue to show a better reserve development profile than the industry but, if history is any guide, across the industry, in a typical cycle, the extent of reserve deficiency eventually reported is directly proportional to the softness and extent of reserve releases of the previous component of the cycle.

[ABM]

Some have mentioned the debt but anyone have quality view on its development? 

 

I've seen analyst's call them out on the call as it tests the top end of the mgmt targets.  They trumpet the cash balance but that is dwarfed by the insurance liability.  Relative to 1H 2019 cash claims paid, it implies about 1 year worth buffer. No real allowance or a major CAT event, I think.

 

Compared to MKL and BRK's insurance segment appears much more aggressively capitalized.  Thoughts?

 

Thanks

[Cigarbutt]

Some have mentioned the debt but anyone have quality view on its development? 

 

I've seen analyst's call them out on the call as it tests the top end of the mgmt targets.  They trumpet the cash balance but that is dwarfed by the insurance liability.  Relative to 1H 2019 cash claims paid, it implies about 1 year worth buffer. No real allowance or a major CAT event, I think.

 

Compared to MKL and BRK's insurance segment appears much more aggressively capitalized.  Thoughts?

 

Thanks

On the positive side, 1- in the last annual report, they note significant regulatory dividend capacity, 2- compared to their historical record, the price of debt is relatively low and 3- they have a favorable maturity profile in the next few years.

 

On the negative side, looking at the cash flow movements to and from the holding company vs insurance subs, it seems that capital is going to the subs in order to support a hardening market, but this cash movement is happening very early in the game. The idea is to be able to grow the float opportunistically and that may be hard to achieve if the asset side of the business (high equity exposures) is compromised concurrently(even if only through temporary market swings) as regulators may limit the underwriting leverage especially if the holding debt level is perceived to be high.

 

Since the late 1990's, when it became clear that frogs don't transform into princes, FFH often had to issue equity at prices they didn't like and IMO, the lesson has not completely sunk in or has been forgotten.

[ourkid8]

The insurance market is hardening, why would you want them to repurchase stock more aggressively? They did reduce the shares outstanding YoY by 2.5% while allowing their insurance subs to grow. 

 

Wish they'd repurchase their own shares. In USD, they're near the bottom of the 5-year range.

[TwoCitiesCapital]

The insurance market is hardening, why would you want them to repurchase stock more aggressively? They did reduce the shares outstanding YoY by 2.5% while allowing their insurance subs to grow. 

 

Wish they'd repurchase their own shares. In USD, they're near the bottom of the 5-year range.

 

We'll see if it's a significant trend of hardening, or a blip, but from my perspective none of the issues that have caused market softness have been addressed yet and so it's unlikely for this hardening trend to persist.

 

I certainly could be wrong - I'm no insurance analysts/expert, but the prospect of a hard market in insurance has been touted since I started holding the position back in 2011 and it hasn't happened yet - largely because the industry has been flooded with excess capital and that still hasn't changed.