Fairfax2019

[petec]

I wonder why this only covers the UK bit of Riverstone.

[Cigarbutt]

Re the recent transaction: mixed feelings.

 

I remember very well around 2002 when TIG was put into runoff and when Riverstone was formed. The turnaround that occurred was highly linked to performance at that relatively obscure sub. They very efficiently handled claims and capital and eventually became an acquisition vehicle. The 2010 AR summarized well how this is a gem of a business even if results tend to be lumpy and sometimes messy (at least on the surface). Anybody here remembers ORC Re or nSpireRe? Or the TRG acquisition (with the final payment in 2017)?

 

It seems that there will be (are already?) huge opportunities for profitable runoff transactions. It makes little sense to sell an interest in one of the crown jewels and the argument of transacting for value surfacing is not convincing. The deal may make sense if they expect to raise capital ++ in order to grow ++. Also, building ties with OMERS is a way to become too large to fail.

[petec]

Also, reading it carefully:

1) seems to me Riverstone wants capital Fairfax can’t provide because it’s pouring money into the underwriting subs to support premium growth (the excess capacity they’ve long touted is concentrated in one or two subs, and not the ones in the hardest markets).

2) the release twice suggests that having OMERS on board will allow RiverStone UK to raise debt capital at low rates. Why couldn’t they do that anyway? This strikes me as very odd.

 

 

 

[petec]

Re the recent transaction: mixed feelings.

 

I remember very well around 2002 when TIG was put into runoff and when Riverstone was formed. The turnaround that occurred was highly linked to performance at that relatively obscure sub. They very efficiently handled claims and capital and eventually became an acquisition vehicle. The 2010 AR summarized well how this is a gem of a business even if results tend to be lumpy and sometimes messy (at least on the surface). Anybody here remembers ORC Re or nSpireRe? Or the TRG acquisition (with the final payment in 2017)?

 

It seems that there will be (are already?) huge opportunities for profitable runoff transactions. It makes little sense to sell an interest in one of the crown jewels and the argument of transacting for value surfacing is not convincing. The deal may make sense if they expect to raise capital ++ in order to grow ++. Also, building ties with OMERS is a way to become too large to fail.

 

Agreed, although this makes a LOT of sense if a) Fairfax think they can pump proceeds into other subs at higher rates of return and b) RSUK can for some reason lever and grow in a way they couldn’t before. Then, it’s a win-win.

[petec]

Also, they mention having the right to buy this back. That makes it sound like the Brit, Allied, and Eurolife deals. IIRC the way those deals worked, OMERS basically got a fixed return if Fairfax exercised their buyback option. The risk:reward was very skewed in Fairfax’s favour. I wonder if what’s happening here is Fairfax needs capital to fund other subs and has basically done a repo deal with OMERS.

[FFHWatcher]

Also, they mention having the right to buy this back. That makes it sound like the Brit, Allied, and Eurolife deals. IIRC the way those deals worked, OMERS basically got a fixed return if Fairfax exercised their buyback option. The risk:reward was very skewed in Fairfax’s favour. I wonder if what’s happening here is Fairfax needs capital to fund other subs and has basically done a repo deal with OMERS.

 

Fairfax can further monetize the UK runoff, or they can buy it all back.  The current mgmt of Fairfax has been public that they are in the 'further monetize' camp at this point in time.  I assume they will use this capital to help buy back those minority interests (Brit & Allied) from OMERS that they have alluded to.  It sounds like Fairfax is simply rebalancing their ownership into their Primary Insurers by selling off pieces of their non-primary insurers/run-off.

 

I wonder how this type of deal would come about?  Who pitched who the idea?  Did OMERS see it and want it or did Fairfax see the asset and pitch it to OMERS?  I would assume it was Fairfax's idea to sell it.

[petec]

The current mgmt of Fairfax has been public that they are in the 'further monetize' camp at this point in time.

 

About Riverside specifically? Source?

[Viking]

OMERS paid US$560 million for 40% of Riverstone UK, which gives it a total value of $1.4 billion. If we did a sum of the parts valuation for Fairfax before this transaction my guess is no one would have said Riverstone UK was worth anything close to this much. It is encouraging that a business as hairy as this is worth $1.4 billion. And i applaud Fairfax for surfacing value in a most unexpected way. This is one of the strengths of Fairfax: they can be very creative. Benefits of this transaction:

- Proceeds of $560 million

- increase in BV of US$10

- clarity of total value of Riverstone UK

 

Fairfax has a market cap of only US$13 billion.

 

The question, as is being discussed, is what to do with the proceeds?

1.) buy out minority partners in Brit and Allied. If the pricing in the insurance market continies to harden then this becomes more important to do sooner rather than later

2.) grow premiums at insurance operations

3.) buy back stock.

 

We know FFH thinks their stock is very undervalued right now. Lots of good options. Nice to see for a change :-)

 

[petec]

OMERS paid US$560 million for 40% of Riverstone UK, which gives it a total value of $1.4 billion. If we did a sum of the parts valuation for Fairfax before this transaction my guess is no one would have said Riverstone UK was worth anything close to this much. It is encouraging that a business as hairy as this is worth $1.4 billion. And i applaud Fairfax for surfacing value in a most unexpected way. This is one of the strengths of Fairfax: they can be very creative. Benefits of this transaction:

- Proceeds of $560 million

- increase in BV of US$10

- clarity of total value of Riverstone UK

 

Fairfax has a market cap of only US$13 billion.

 

The question, as is being discussed, is what to do with the proceeds?

1.) buy out minority partners in Brit and Allied. If the pricing in the insurance market continies to harden then this becomes more important to do sooner rather than later

2.) grow premiums at insurance operations

3.) buy back stock.

 

We know FFH thinks their stock is very undervalued right now. Lots of good options. Nice to see for a change :-)

 

You're assuming the proceeds go to FFH and aren't a capital increase at RSUK.

 

I suspect you're right but the release isn't totally clear. If so, the proceeds are to support premium growth - the release does seem to indicate that.

[Viking]

OMERS paid US$560 million for 40% of Riverstone UK, which gives it a total value of $1.4 billion. If we did a sum of the parts valuation for Fairfax before this transaction my guess is no one would have said Riverstone UK was worth anything close to this much. It is encouraging that a business as hairy as this is worth $1.4 billion. And i applaud Fairfax for surfacing value in a most unexpected way. This is one of the strengths of Fairfax: they can be very creative. Benefits of this transaction:

- Proceeds of $560 million

- increase in BV of US$10

- clarity of total value of Riverstone UK

 

Fairfax has a market cap of only US$13 billion.

 

The question, as is being discussed, is what to do with the proceeds?

1.) buy out minority partners in Brit and Allied. If the pricing in the insurance market continies to harden then this becomes more important to do sooner rather than later

2.) grow premiums at insurance operations

3.) buy back stock.

 

We know FFH thinks their stock is very undervalued right now. Lots of good options. Nice to see for a change :-)

 

You're assuming the proceeds go to FFH and aren't a capital increase at RSUK.

 

I suspect you're right but the release isn't totally clear. If so, the proceeds are to support premium growth - the release does seem to indicate that.

 

My guess is FFH is pretty motivated to do all three (take out minority partners, support premium growth and buy back stock). I expect we will see more transactions in the next year or two that position them to execute on all three objectives.

[petec]

My guess is FFH is pretty motivated to do all three (take out minority partners, support premium growth and buy back stock). I expect we will see more transactions in the next year or two that position them to execute on all three objectives.

 

I agree they are motivated to do all three. But as you imply, they are not capitalised to do all three. The excess underwriting capacity is not in the subs that are seeing the most market hardening, so they are having to inject capital into the subs to grow. That's limiting the buyback, which is frustrating but probably the right decision because float is generally sticky once you've got it. My guess is we will not see much in the way of buybacks while the market is hardening* and they are buying in minorities, which is clearly a priority. I didn't mind that because I felt buying in minorities was, in effect, a buyback. But here they are selling a minority, which makes little sense to me unless there's truth in the assertion that Riverside UK can lever more and grow more with two owners than it can with one. But I can't think why that would be true.

 

*Unless reinsurance hardens, in which case they can grow *and* generate cash flow to buy back, because Odyssey is overcapitalised.

 

[gary17]

From contacts I have, seems like the scenario Prem was concerned about China a few years ago may materialize.  venture capital seems to have dried up.  Government spending is down (subsidies for solar , wind and now EV are being cut, as well as many others) , and finally, Trump put a real dent on their export.  No wonder the chinese caved (they were going to earlier if Trump hadn’t changed his mind and pushed harder).  No technology transfer will have impact on china.  And the forced retirement of Jack Ma is sending a strong signal to many young , smart minds in China to rethink whether they should invest their career in China or elsewhere. 

Things like wechat and alipay are all controlled by a few communist elites that paved the way for the broad adoption in China- and this at the same time allows the government to have very direct control of data of its citizens. 

I think the US with its free enterprise and democracy backbone will continue to be the economic powerhouse that  marches forward….

PS. China’s gdp likely very low.  lower than the 6% states have

[Dazel]

 

InvestMD et all,

 

While I would not quite call it complete humble pie I am eating with my early predictions for the year...I was wrong footed on a lot!!!! I will stand by my outlandish at the time prediction on 2019 profit though....there is more than one way to get to heaven...Lol.

 

Without going through specifics....Fairfax has strengthened significantly in my mind (Seaspan home run helps)....

 

1. Bond performance was ok not great...

2. Blackberry and resolute were a bust...Eurobank headed higher....catalysts for 2020?

3. Insurance was excellent and is the backbone...very pleased

4. India has strengthened but has not really shown up (Fairfax India lagging)

5. There are several underrated investments in their stable that will be monetized

6. Buybacks did not materialize....I can see why and appreciate strength at the insurance level

 

All in all a solid year at Fairfax and the future looks very bright. I was involved in discussions with a third party who I encouraged to contact Fairfax for a strategic investment so I felt it was appropriate to stay away from the board. That deal is now dead as third parties shares have doubled and to my knowledge Fairfax was never contacted.

 

Cheers to all,

 

Dazel

 

 

[petec]

Thanks Dazel. I agree, FWIW.

 

Which do you think are the undervalued investments that will be monetised?

[Viking]

When you look at Fairfax over the past year they have been very busy (and many of their equity holdings havealso been very busy). In aggreggate it is clear that the company is worth more today than it was 12 months ago. I think Faifax is better positioned today than at any time in the past 7-8 years to grow BV. As they continue to execute we will get growth in BV and a higher PE multiple which will be very nice for shareholders.

 

It is also interesting to look at Fairfax’s year end closing share price (from 2018 AR):

2014 = $608.78 CAD

2015 = $656.91

2016 = $648.50

2017 = $669.34

2018 = $600.98

2019 = $608.19 (Dec 24)

[Cardboard]

Thinking of a lucky 7? LOL!

[abyli]

Thinking of a lucky 7? LOL!

 

Wow! I am glad I sold 7 years ago....

[investmd]

When you look at Fairfax over the past year they have been very busy (and many of their equity holdings havealso been very busy). In aggreggate it is clear that the company is worth more today than it was 12 months ago. I think Faifax is better positioned today than at any time in the past 7-8 years to grow BV. As they continue to execute we will get growth in BV and a higher PE multiple which will be very nice for shareholders.

 

It is also interesting to look at Fairfax’s year end closing share price (from 2018 AR):

2014 = $608.78 CAD

2015 = $656.91

2016 = $648.50

2017 = $669.34

2018 = $600.98

2019 = $608.19 (Dec 24)

 

Thanks. The price history at close for past 5 years that you shared, suggests if one was holding since Dec 2014, annual return has been about 2%/yr (from dividends) in generally a bull market. Wow! Will take a substantial run up in price to justify for those of us who have held.

[Viking]

When you look at Fairfax over the past year they have been very busy (and many of their equity holdings havealso been very busy). In aggreggate it is clear that the company is worth more today than it was 12 months ago. I think Faifax is better positioned today than at any time in the past 7-8 years to grow BV. As they continue to execute we will get growth in BV and a higher PE multiple which will be very nice for shareholders.

 

It is also interesting to look at Fairfax’s year end closing share price (from 2018 AR):

2014 = $608.78 CAD

2015 = $656.91

2016 = $648.50

2017 = $669.34

2018 = $600.98

2019 = $608.19 (Dec 24)

 

Thanks. The price history at close for past 5 years that you shared, suggests if one was holding since Dec 2014, annual return has been about 2%/yr (from dividends) in generally a bull market. Wow! Will take a substantial run up in price to justify for those of us who have held.

 

Looking in the rear view mirror is important. Why has the stock price gone sideways for 5 years?

1.) what errors were made?

2.) has the company learned the lessons?

 

The much more important number for me is $608.19 (Dec 24 stock price).

3.) What will the company do moving forward?

 

The shares currently trade below book value (cheap compared to other insurance companies).

- Their insurance businesses are performing well and look to be in a hardening market; this is a big positive.

- their bond portfolio is positioned well (short end of curve) should rates continue to move higher

- their equity portfolio looks well positioned as we enter 2020 should we see economic growth continue to chug along

 

And sentiment towards the company is terrible.

 

This is not to suggest the company is perfect; it is not. I think the company has learned some valuable lessons. However, on balance, i like the decisions the company has made the past 2 years. More importantly, the company (and its equity holdings) is doing lots of things to drive shareholder value in 2020 and beyond. Q4 results should be solid. I like the risk reward at current prices.

[racemize]

When you look at Fairfax over the past year they have been very busy (and many of their equity holdings havealso been very busy). In aggreggate it is clear that the company is worth more today than it was 12 months ago. I think Faifax is better positioned today than at any time in the past 7-8 years to grow BV. As they continue to execute we will get growth in BV and a higher PE multiple which will be very nice for shareholders.

 

It is also interesting to look at Fairfax’s year end closing share price (from 2018 AR):

2014 = $608.78 CAD

2015 = $656.91

2016 = $648.50

2017 = $669.34

2018 = $600.98

2019 = $608.19 (Dec 24)

 

Thanks. The price history at close for past 5 years that you shared, suggests if one was holding since Dec 2014, annual return has been about 2%/yr (from dividends) in generally a bull market. Wow! Will take a substantial run up in price to justify for those of us who have held.

 

Looking in the rear view mirror is important. Why has the stock price gone sideways for 5 years?

1.) what errors were made?

2.) has the company learned the lessons?

 

The much more important number for me is $608.19 (Dec 24 stock price).

3.) What will the company do moving forward?

 

The shares currently trade below book value (cheap compared to other insurance companies).

- Their insurance businesses are performing well and look to be in a hardening market; this is a big positive.

- their bond portfolio is positioned well (short end of curve) should rates continue to move higher

- their equity portfolio looks well positioned as we enter 2020 should we see economic growth continue to chug along

 

And sentiment towards the company is terrible.

 

This is not to suggest the company is perfect; it is not. I think the company has learned some valuable lessons. However, on balance, i like the decisions the company has made the past 2 years. More importantly, the company (and its equity holdings) is doing lots of things to drive shareholder value in 2020 and beyond. Q4 results should be solid. I like the risk reward at current prices.

 

+1 to this post.

 

A couple of add-ons:

1) It is annoying that they have USD BVPS, but Canadian stock price, as it doesn't let you compare them that directly.  Anyway, 2014 was something like $530 USD share price, on a book value of 394.83, which is a P/B of 1.35 vs $460 USD/462 BVPS (unadjusted) of basically 1.  So value creation was more like 3.4%+2% div = 5.4% CAGR.  Obviously still not a great result, but that tells you more about how they did as a company than the stock price does.  I think Q4 will make this look a bit better too, with the recent sales, depending on cats.

 

2) Let's compare to Markel that has much better sentiment (although last year didn't help them much).  2014 YE bvps was 543.96, price was $687 (P/B was 1.26).  Current is BVPS of $768, and price of $1,123 (P/B of 1.46).  Value creation (again using BVPS) was 7.5% CAGR. 

 

So Fairfax underperformed Markel by 2.1% per annum on BVPS+div, even though the price change was quite a bit different. 

 

3) Continuing this Markel comparison, if you go back and look at combined ratios of the two companies, FFH is pretty close to Markel.

Markel Combined ratios, 2014 to current: 95%, 89%, 92%, 105%, 98%, 95%; average: 95.7%

FFH Combined ratios, 2014 to current: 90.8%, 89.9%, 92.5%, 106.6%, 97.3%, 97.1%, average: 95.7%

 

Thinking about the above, it seems quite clear to me that FFH is undervalued and/or MKL is overvalued.  I tend to think the former, but a mix is possible.

[chrispy]

Very interesting, thank you all

[Viking]

Fairfax has had a very active 2019. For fun, i decided to try and come up with a 2019 Top 10 list of events driving value for shareholders. Some events were driven by Fairfax (corporate/subs) and some were driven by management teams in the stock/equities held. The breadth of the items below is very interesting and informative. On balance, it is clear to me that Fairfax, on balance, has done many things to build a more valuable company for shareholders over the past year. Please feel free to comment; what items are missing? One obvious bucket is ‘Share of profits of associates’ and how fast it is growing.

 

Here is a summary of the types of items impacting shareholder value:

- being positioned to capitalize at subs on hard market in insurance

- solid growth in interest and dividend income

- seeding new/newer investments: Seaspan (tranche 2)

- monetizing mature investments: ICICI Lombard sale and sale of 40% of Riverstone UK.

- merging investments to make the whole stronger: Eurobank/Grivalia

- selling investment to put it in a better position to thrive: APR Energy

- simplifying corporate structure to better enable companies to succeed: Thomas Cook demerger of Quess and IIFL split into Finance, Securities and Wealth

 

Top 10 Events Driving Shareholder Value During 2019

 

1.) Ongoing: emergence of hard market for pricing in certain insurance lines: leading to double digit growth in net premiums written at many of the subs. Looks like double digit growth should continue in 2020.

 

2.) Ongoing: Solid increase in interest and dividend income: while short of FFH goal of $1 billion, looks to be close to $900 million for 2019, versus $784 in 2018 and $559 in 2017.

- January: Seaspan: tranche 2 of $250 million at 5.5% = $14 million in interest income/year

 

3.) January: Seaspan: Fairfax’s additional $250 million investment = 37 million shares purchased at cost of $6.75; with shares currently trading at $14.25 paper gain = $278 million.

- 25 million additional warrants exercisable at $8.10 = paper gain of $154 million

 

4.) Eurobank: stock closed at $0.54 Euro on Dec 31, 2018. Today the stock is at 0.92 Euro; paper gain = US $400 million. Eurobank looks well positioned.

a.) April: merger with Grivalia improved balance sheet

b.) April: Cairo Securitization - plan to hive off 7.5 billion euro chunk of underperforming assets is now almost complete (target Q1 2020).

c.) July: election of pro business government in Greece with clear majority in parliament. Lowered corporate tax rate; approved Hercules (vehicle for banks to reduce non-performing assets. - see b).

 

5.) Sept/Oct: ICICI Lombard sales: of remaining 10% position for proceeds of US $729 million; recorded a net gain on investments of $240 million in 2019 (there was more in previous years).

 

6.) December: OMERS paid US$560 million for 40% of Riverstone UK, which gives it a total value of $1.4 billion. Will increase BV by $10/share.

 

7.) Fairfax India: book value is up significantly in 2019 (+$3/share). BIAL looks like a jewel of an investment that will grow double digits for years to come.

a.) Dec 16: Bangalore International Airport (BIAL): Fairfax India to sell an 11.5% interest in Anchorage Infrastructure (holds airport investments) for gross proceeds of 9.5 billion Indian rupees ($134-million at current exchange rates). Fairfax India’s ownership of BIAL will fall from 54% to 49%. As a result of the transaction, Fairfax India will record investment gains of approximately $506 million, an increase in book value per share of $3.30 per share. The investment gains are supported by positive operational developments at BIAL. For the 12-month period ending October 2019, total traffic at BIAL was approximately 33.7 million passengers. The second runway commenced operations in December 2019. The expansion project for a second terminal at BIAL is expected to be completed in 2021.

b.) Dec 23: Sanmar Chemicals Group: completed its previously announced transaction with Fairfax India. During the period since announcing the transaction in the third quarter of 2018 through September 30, 2019, Fairfax India recorded investment gains from the Sanmar common shares and bonds of approximately $210 million and $100 million, respectively.

 

8.) November: Sale of APR Energy to Seaspan: moved an underperforming unit into a better situation; obtained Seaspan shares is return.

- APR Energy: US $300 mill / $11.10 per share = 27 million shares

- $14 (share price today) - $11.10 (cost) = $2.90 x 27 million shares = $78 million paper gain

 

Under-performers:

9.) Recipe. Shares fell from CAN $26.19 to about $19.50 = $180 million paper loss. Hard to see this turning any time soon. Restaurant stocks in Canada have been crushed this year. Most provinces are increasing minimum wages aggressively and will be doing so in the coming years as well, which is a severe negative for the hospitality industry. It appears all the home delivery options available are negatively impacting revenue. The good news is the assets are quality and have value; at $19.50 they look cheap.

 

10.) Blackberry: shares fell from US $11.17 to about $6.50 = $220 million paper loss (double if you include convertible shares they own). The purchase of Cylance has not resulted in the growth expected. Most recent quarter results were ok. If they can get the Cylance unit growing the shares will do very well. 2020 will be very interesting to watch.

 

11.) Resolute Forest Products: shares fell from US $7.93 to about $4 = $120 million loss of papar. Dec: purchased 3 sawmills in US South for $150 million; should new home construction in US pick up in 2020 this could become a solid aquisition for RFP.

 

Not sure what to think

12.) AGT take private

 

More work needed (by me to understand the businesses):

 

13.) Indian Investment: Quess, Thomas Cook, IIFL Finance - Securities - Wealth

- there was a lot of noise with these investments in 2019. Thomas Cook demerged its Quest stake and IIFL split into 3. This made it difficult to follow. The good news is these 5 firms are now independent with easy to understand share structures; we know how much Fairfax owns of each. And it will be much easier to monitor and understand what is happening moving forward.

 

Quess: Amazon investment suggests Quess is undervalued. Quess also looks like a real jewel of an investment set to grow at double digits for many years to come.

a.) July Amazon invested US$ 7.43 million for a 0.51% stake in Quess ($ went to fund growth of Qdigit unit); they paid INR 676/share and market price at the time was INR 430 (they paid a 50% premium).

b.) December: Thomas Cook India demerged their 50% holding in Quess Corp in order to simplify the corporate structure.

[bluedevil]

One other item I would add to the list is the progress at Digit Insurance.  A recent start-up, but quickly becoming material.

Digit is the fastest growing general insurer in India, and will write 250m-280m in premiums this year.

 

According to this press report, Digit is currently looking to raise capital from domestic PE firms at a valuation between $800-900m.  According to the report, Fairfax has invested about $140m since 2017 in Digit, and I believe they own about half of it.  So a significant appreciation in Fairfax's investment already.

 

https://timesofindia.indiatimes.com/business/india-business/pes-value-insurance-tech-startup-digit-over-800m/articleshow/72448746.cms

[Viking]

Bluedeveil, thanks for posting on Digit; interesting to learn about another seed investment Fairfax made and how it is blossoming (years later). I have updated my list of Fairfax's various investments. I track this only to understand what is going on 'under the hood' quarter to quarter. It is not precise; but it is a good directional tool. It is interesting to see the wide geographic diversity of the top 10 holdings. Please let me know if you see any errors or if you have an update on a business Farifax holds :-)

 

So what has happened with Fairfax's various equity investments in Q4? Total equity portfolio looks like it is up about 7% which if accurate would be very good. Back on Nov 6 it was tracking to be flat.

- mark to market equities = + 6.8%

- associates and consolidated = + 9.3%; there are likely errors in here as the Quess deconsolidation from Thomas Cook happened in Q4 and i am not sure if I got everything correct. I also included APR Energy and debentures for Seaspan (as I want to know what is going on with all the various holdings).

 

Top holdings as of Dec 31 (US$)

1.) Eurobank (Greece) = $1,255 million

2.) Seaspan (US) =        $1,096

- APR will add $381 million in Q1; warrants (if exercised) = $355

- add all three together and Seaspan is about $1.8 billion!

3.) Fairfax India =            $660

4.) Recipe (Canada) =      $404

5.) CIB (Egypt) =            $395

6.) Blackberry (Canada) = $300

- FFH also has warrants which, if exercised, would double its position

7.) Kennedy Wilson (US) = $297

8.) Quess (India) =          $324

9.) Thomas Cook India =  $222

10.) Fairfax Africa =          $208

 

The key takeaway, from my perspective, is Fairfax’s largest equity holdings look to have made pretty good decisions in 2019 and most look well positioned as we begin 2020.

Fairfax_Equity_Holdings.xlsx

[gary17]

This is too hard to follow, can you not turn this into dollar per share. thanks