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Fairfax 2020


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The amazing thing about that article is the list of other little deals Fairfax has done that I know nothing about!

 

@Petec - agreed! I think this is part of the valuation challenge for FFH. As they have grown - they have acquired more and more investments which are hidden deep within the financial statements. Most investors (myself included) would not have a complete understanding of exactly what they own. Its at times like this I wonder if Fairfax would benefit from some providing its shareholders with a condensed view of their empire - similar to Buffett's 5 groves approach.

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The amazing thing about that article is the list of other little deals Fairfax has done that I know nothing about!

 

@Petec - agreed! I think this is part of the valuation challenge for FFH. As they have grown - they have acquired more and more investments which are hidden deep within the financial statements. Most investors (myself included) would not have a complete understanding of exactly what they own. Its at times like this I wonder if Fairfax would benefit from some providing its shareholders with a condensed view of their empire - similar to Buffett's 5 groves approach.

 

I'm not sure it matters.  Are the investments material?

 

At the end of the day, everything shows up in the earnings and book value, and those are largely influenced by the big factors. 

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Here is some new news on Farmers Edge, one of Fairfax’s private investments.

 

Farmers Edge and Fairfax Brasil Partner to Bring Data-Driven Crop Insurance to Growers in Brazil

- https://business.financialpost.com/pmn/press-releases-pmn/business-wire-news-releases-pmn/farmers-edge-and-fairfax-brasil-partner-to-bring-data-driven-crop-insurance-to-growers-in-brazil

 

Here is the summary on the company provided by Fairfax in their 2018 annual report.

 

“Farmers Edge. Farmers Edge was founded in 2005 by Wade Barnes in Winnipeg, Manitoba as a project-based consulting company providing value added agronomy services for large scale farmers. The business has since evolved into one of the leading SaaS (software as a service) farm management platforms with 24 million acres under management as of December 2018, with an anticipated increase to 40 million acres by the end of 2019. Key services offered under the Farmers Edge platform include: 1) One of the highest density of weather stations in North America. Farmers can have alerts sent to their phones, even at 4am, if there is to be frost on one of their farms. Important, as there is only one harvest! 2) Daily satellite imagery to track crop health via tablet, phone or PC. 3) Brand-agnostic telematics enabling passive data collection. 4) Soil sampling and variable rate fertilizer application, which allows farms to increase yields with less overall fertilizer application. Four-year customer contracts provide Farmers Edge with predictable recurring revenue and cash flows. Fairfax made a $95 million equity investment in March 2017 and has since provided additional funding of $64 million in the form of debentures plus warrants, based on an implied valuation of 4x projected December 2019 base business EBITDA.”

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  • 2 weeks later...

dividends are in.

 

My RBC Direct Investing account gave me a FX rate of 1.313

The TD Direct Investing account gave me a FX rate of 1.303

 

 

Why do you hold the shares on the Canadian side of your account?  Ask your broker to journal your shares to the US side of your account and then you will receive your divvy in US dollars.  That gives you the option to re-invest the divvy in the US market without having to exchange the money twice (ie, it would be disappointing to receive US$10k of FFH divvies which is converted to Cdn$13.13k if you are just going to convert it back to buy US shares...you would probably only end up with US$9,700 or something).  If you receive the divvy in the US side of your account, you can always convert the US dollars back to Cdn at your leisure if you need to in the future....

 

 

SJ

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dividends are in.

 

My RBC Direct Investing account gave me a FX rate of 1.313

The TD Direct Investing account gave me a FX rate of 1.303

 

 

Why do you hold the shares on the Canadian side of your account?  Ask your broker to journal your shares to the US side of your account and then you will receive your divvy in US dollars.  That gives you the option to re-invest the divvy in the US market without having to exchange the money twice (ie, it would be disappointing to receive US$10k of FFH divvies which is converted to Cdn$13.13k if you are just going to convert it back to buy US shares...you would probably only end up with US$9,700 or something).  If you receive the divvy in the US side of your account, you can always convert the US dollars back to Cdn at your leisure if you need to in the future....

 

 

SJ

 

Thanks.  Food for thought.

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dividends are in.

 

My RBC Direct Investing account gave me a FX rate of 1.313

The TD Direct Investing account gave me a FX rate of 1.303

 

 

Why do you hold the shares on the Canadian side of your account?  Ask your broker to journal your shares to the US side of your account and then you will receive your divvy in US dollars.  That gives you the option to re-invest the divvy in the US market without having to exchange the money twice (ie, it would be disappointing to receive US$10k of FFH divvies which is converted to Cdn$13.13k if you are just going to convert it back to buy US shares...you would probably only end up with US$9,700 or something).  If you receive the divvy in the US side of your account, you can always convert the US dollars back to Cdn at your leisure if you need to in the future....

 

 

SJ

 

Thanks.  Food for thought.

 

 

Oh, I forgot one other cheapskate trick.  You can actually withdraw US dividends in cash without any fees!

 

1) Open a no-cost RBC US$ High Interest Savings Account (HISA): https://www.rbcroyalbank.com/accounts/us-e-savings.html

 

2) Once that account is open, you can transfer US cash from the US side of your RBC brokerage account into your US$ HISA in just the same manner that you can transfer Canadian cash from your brokerage account into your RBC Canadian dollar chequing account. 

 

3) Then, you can search for a RBC ATM in your community that dispenses both Canadian and US dollars (use "Additional ATM features for the search)  https://maps.rbcroyalbank.com/

 

 

By journalling the FFH shares to the US side of your account, it possible to then transfer the US denominated dividend to your US$ HISA and withdraw US cash from a RBC ATM in your city, all with zero fees.  If you spend much time south of the border, it's a good way to get some US spending money without incurring any FX fees or ATM fees.

 

 

SJ

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  • 2 weeks later...

Fairfax releases Q4 results after markets close on Thursday. Here are a few of the things i will be watching:

 

1.) what is top line growth?

- Looks like we are in the early innings of hard market (ex workers comp) so growth should be solid

 

2.) what is company wide CR?

- with 10 year US government bonds trading at 1.5% a CR of 95% is the new 100%

- Fairfax said its presidents are incented at a 95% CR. Fairfax needs to now start to shoot for sub 95% CR (after catastrophes).

- Placing parts of Advent into runoff at the end of 2018 and minimal growth at Brit (worst CR performers) perhaps lowers company wide CR moving forward.

 

3.) what is trend in reserve releases?

- the trend (industry and Fairfax) has been lower over time.

 

4.) increase in book value per share

- should be a very good quarter for book value growth

- all three engines should contribute: underwriting, interest and dividend income and investment results

 

5.) update on recent transactions and their impact on financial statements. Not sure what gets booked in 2019 or 2020.

- Sale of ARP to Seaspan: Atlas will acquire APR, the world's largest lessor of mobile gas turbines, in an all-stock transaction valued at $750 million including the assumption of debt, for an expected equity value at closing of approximately $425 million. Atlas shares will be issued to the sellers in the Proposed Acquisition at $11.10 per share.

- Sale of 40% of Riverstone UK to OMERS: The cash purchase price of at least US$560 million... 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...).

- Demerger of Quess shares from Thomas Cook (TC owned 71 million shares of Quess and FFH owns 67% of TC): September 30, 2019 the company's investment in Quess Corp Limited had a carrying value of $1,038.7 which exceeded its fair value of $477.2 as determined by the market price of Quess shares.

- For Fairfax India, sale of 5% stake in Bangalore Airport for $134 million. Will record investment gain of $506 million or $3.30 per FIH share.

- For Fairfax India, transaction with Sanmar: Sanmar purchased $300 million principal amount of Sanmar bonds held by Fairfax India, plus accrued interest at an effective annual interest rate of 13.0%, for net cash consideration of approximately $425 million. Fairfax India re-invested $200 million of the cash consideration received from the bond sale in the purchase of Sanmar common shares. Fairfax India’s equity interest in Sanmar increased to approximately 43%. Fairfax India will retain approximately $225 million of the cash consideration for future Indian investments.

 

6.) update on buying out minority partners

- Brit and Eurolife appear the two at the top of the list. This really sucks as Fairfax has such better uses for cash right now. Brit is the worst performing op co (from a CR perspective). But it sounds like they are contractually obligated to do these deals in the near term.

 

7.) shareholders

- when do we see meaningful share buy backs?

- Most of Fairfax’s insurance peers have seen their stocks appreciate 30-40% over the past year. Fairfax stock is down 4%.

- Fairfax stock is actually trading 10% below where it was trading 5 years ago.

 

8.) has Fairfax learned the lessons?

- The decisions Fairfax made over the past 7 years have shattered investor confidence in the company.

- Fairfax has said they have learned the lesson when it comes to shorting the market. That is a good start but more needs to be done to restore investor confidence.

- Are they done with empire building (low ROE insurance acquisitions)?

- Will investment results improve?

 

Walk the talk on this Guiding Principle: “We always look at opportunities but emphasize downside protection and look for ways to minimize loss of capital.” Stop saying the problem is value investing is ‘out of favour’. Investments in declining companies like Blackberry or declining/shitty industries like Resolute or Stelco are simply bad decisions. Or regions with unmeasurable political and/or currency risk like Africa. There is no safety of principal; and it is not investing it is gambling - Own it, learn from it and stop doing it! :-)

 

If Fairfax wants to attract more long term investors as the equity portfolio turns over they need to move up the quality ladder with the companies they hold. Hopefully this is what we see moving forward.

 

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Good post. I agree with most of it.

 

I don't agree Fairfax need to target *sub* 95%. There's a benefit to growing float too.

 

I don't think they have to buy the minorities in Eurolife and Brit - but they can. The deal terms looked pretty favourable to me at the time - OMERS got a preferential dividend and Fairfax got the right to buy OMERS out at a price that compounded in the mid single digits. In other words, if BV grew faster than that the P/BV came down. I don't see why buying in the minorities is necessarily any better/worse than doing buybacks - depending on price, obviously. It is likely a good use of cash.

 

Empire building: they have said pretty clearly that they don't expect to do any more big deals. The platform is complete. But every business within it does tuck-ins. That said, I fully expect Prem to get itchy fingers if a really juicy deal comes along. It's in his bones.

 

Resolute and Blackberry have clearly been a disaster. I am not so sure Stelco will be. And I actively like what they are doing in Africa. Deep value, with diversified poltiical and currency risk, with the potential to clip fees on OPM.

 

I die a little inside when people say they need to move up the quality ladder. What they need to do is buy things for less than they are worth and with a pathway to realising that value. I don't care whether they do that with Coca-Cola or a cigar butt. Is Seaspan a high quality franchise, the way most people define quality? No. Has it been a great investment? Hell yes, because they bought it for way less than it was worth and helped catalyse the market's realisation of that fact. What they need to stop doing is being wrong about the intrinsic value of an investment, as they clearly were with Resolute and Blackberry and, I suspect, quite a lot of the private portfolio.

 

The major question you haven't asked is: is the monster position in Seaspan sized correctly given the risk and reward, and if not, what can/will they do about it?

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I die a little inside when people say they need to move up the quality ladder. What they need to do is buy things for less than they are worth and with a pathway to realising that value. I don't care whether they do that with Coca-Cola or a cigar butt. Is Seaspan a high quality franchise, the way most people define quality? No. Has it been a great investment? Hell yes, because they bought it for way less than it was worth and helped catalyse the market's realisation of that fact. What they need to stop doing is being wrong about the intrinsic value of an investment, as they clearly were with Resolute and Blackberry and, I suspect, quite a lot of the private portfolio.

 

Sure, the key is to be right.  If you can buy down the quality ladder and be right, that is great.  I assume those pushing to move to "quality" are doing so because Fairfax hasn't proven that they can consistently be right on the lower quality end.

 

More Seaspans and fewer Blackberrys - easier said than done.

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I die a little inside when people say they need to move up the quality ladder. What they need to do is buy things for less than they are worth and with a pathway to realising that value. I don't care whether they do that with Coca-Cola or a cigar butt. Is Seaspan a high quality franchise, the way most people define quality? No. Has it been a great investment? Hell yes, because they bought it for way less than it was worth and helped catalyse the market's realisation of that fact. What they need to stop doing is being wrong about the intrinsic value of an investment, as they clearly were with Resolute and Blackberry and, I suspect, quite a lot of the private portfolio.

 

Sure, the key is to be right.  If you can buy down the quality ladder and be right, that is great.  I assume those pushing to move to "quality" are doing so because Fairfax hasn't proven that they can consistently be right on the lower quality end.

 

More Seaspans and fewer Blackberrys - easier said than done.

 

I agree - but quality has had a hell of a run over the last decade. We don’t know that owning it will be right for the next one. Investing isn’t that simple.

 

Or to put it another way: we don’t know they’d be any good at investing in quality, either.

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Or to put it another way: we don’t know they’d be any good at investing in quality, either.

 

I certainly agree.  Just "switch to quality" is not that easy either.

 

Exactly.

 

Fairfax is an insurer/investor that focuses on value* and invests globally, including in some risky places. If you want an insurer/investor that focuses on long term ownership of quality stocks in a jurisdiction with low political risk, I’m sure you can think of one ;)

 

*Edit: value and quality aren’t mutually exclusive, obviously. CIB, Quess, Bangalore and others prove Fairfax aren’t averse to quality when they can find it cheap.

 

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I don't agree Fairfax need to target *sub* 95%. There's a benefit to growing float too.

 

If Fairfax is serious about hitting a 15% BV growth average over time they will need to write at a sub 95% CR. Bonds represent the majority of the investment portfolio and yields are very low and look likely to stay low. The whole insurance industry is facing the same issue.

 

On conference calls other insurance companies are communicating that they are getting price increases a couple of % in excess of expected loss trends. They expect this will result in a lower CR over time. These companies need a lower CR to deliver return targets required by shareholders. And their stock prices are moving higher as a result.

 

I am pretty sure Fairfax feels its shares are very undervalued. The reason they are so undervalued is the company has not been able to grow book value per share (much) over the past 5 years. And investors have little confidence they will be able to grow BV moving forward (let alone hit the 15% target). They should deliver a +15% growth in BV this year. Will they deliver in 2020? Writing at a 97.5CR they will need their equities to do exceptionally well every year and this is simply too much for an investor to reasonably expect.

 

There is another solution. Get more aggressive with lowering your CR. (And if you don’t grow top line as fast put your excess capital into share buybacks.)

 

Fairfax has much improved its underwriting from when i first started following the company way back in The early 2000’s. Its CR over the past decade is pretty decent and some subs are very good. I think they understand and will find a way to lower their CR to below 95% in the coming years. As i mentioned in my previous post, placing parts of Advent in run off and minimal growth at Brit (worst op co from CR perspective) are good signs. The op co’s with the best historical CR’s appear to be growing the fastest in the current hard market which is another positive sign.

 

Fairfax is so big now it is like a big oil tanker. I do believe they have been making incremental changes the past couple of years that are slowly turning the ship in a better direction for shareholders. I think we are going to see the insurance op co’s continue to improve (with some bumps along the way). And i think investment results will also improve. And the management team has demonstrated in the past that it can be very creative in surfacing value (with the sale of 40% of Riverstone being the most recent example).

 

In 2012-2017 Fairfax dug itself a very big hole. I think they are just now crawling out. The head winds are now being replaced with tail winds. 2019 was a very good year. 2020 could be just as good. So i am optimistic  :-)

 

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Or to put it another way: we don’t know they’d be any good at investing in quality, either.

 

I certainly agree.  Just "switch to quality" is not that easy either.

 

Exactly.

 

Fairfax is an insurer/investor that focuses on value* and invests globally, including in some risky places. If you want an insurer/investor that focuses on long term ownership of quality stocks in a jurisdiction with low political risk, I’m sure you can think of one ;)

 

*Edit: value and quality aren’t mutually exclusive, obviously. CIB, Quess, Bangalore and others prove Fairfax aren’t averse to quality when they can find it cheap.

 

My point earlier was more intended more for the company to live its guiding principal: “We always look at opportunities but emphasize downside protection and look for ways to minimize loss of capital.

 

There are too many examples where the company invested in a distressed company/industry. Things (predictably) got worse and they doubled down. Things got (predictably) worse and they doubled down again. Resolute is the best current example. Blackberry is another good example although the story is still being written there. Where was the downside protection to minimize the loss of capital?

 

When Prem talks about Fairfax and its investing style he sounds like Graham: value investing with a focus on safety of principal. Walk the talk is all i am saying. If you want to continue to swing for the fences with very large purchases of shitty companies/shitty industries then change your Guiding Principle. Clear communication with investors is all i am saying.

 

Fairfax has brought in some new people to their investment team. I am optimistic we will see a subtle shift in the equity portfolio over time to more quality positions :-)

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I totally agree with all of that except the word quality. Perhaps we are using the word differently. But it is quite possible to lose your principal by investing badly in quality, and quite possible to protect it by investing well in things like Seaspan, which most people wouldn’t define as quality.

 

Otherwise we are totally aligned.

 

I’m not sure the new people will be what make the difference. I think it will be Prem. he’s not stupid, and not the kind of guy to feel good about persistent failures. I suspect he took his eye off the ball. I bet he’s more focussed now.

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Paul Rivett retires.  Sad news.  I thought he was going to succeed Prem when Prem decided to retire

 

https://ca.finance.yahoo.com/news/fairfax-financial-holdings-limited-executive-220110417.html

 

Interesting, that's an early retirement.. Thought he was a successor since taking over the conference calls only a few quarters ago. Anyone have insights into this?

 

Q4: https://www.fairfax.ca/news/press-releases/press-release-details/2020/Fairfax-Financial-Financial-Results-for-the-Year-Ended-December-31-2019/default.aspx

 

Underwriting pretty good. Some decent investment gains, hopefully there's more left. Non-insurance seems to be struggling. Would be nice to see more stock buybacks.

 

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All in all, very good results. Chug, chug, chug. Most importantly a few nice upside surprises.

1.) solid top line growth of 11% for year

2.) solid CR of 96.9, slightly improved from last year

- big jump in underwriting profit of $394 versus $318 last year

3.) reserve releases

- solid $295 million in Q4 across all subs

4.) BV = $486 versus $432 Dec 31 2018, +14.8% (including $10 dividend)

5.) As expected, lots of changes to equities, most positive. Will need more disclosure to fully understand individual impacts. Quess revised down. Digit revised up.

6.) no update on buying out minority partners (unless i missed it)

7.) shareholders

- no meaningful share repurchases; expect this to be discussed on the conference call tomorrow

8.) has Fairfax learned the lessons?

- very good quarter. Lots of good news and positive trends to continue to build on.

 

Stock closed today at US $460 or Price to BV of 0.95 (BV is now $484). Top line is growing due to hard market. Underwriting is improving. Interest and dividend income is growing. Investment results were very good and look well positioned moving forward.

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