Fairfax 2020

[Xerxes]

I would say its a bit concerning that they managed to lose money (significantly) on both the long and short side. Realized plus unrealized losses of $821.9 MM for the long side, and $222.4 MM for the short side. Should be making money on one side of a long-short book...

 

That is for the first six months of the year, right?

Making money in 6 months during a pandemic? Really?

I am stealing Parsad's favourite: cheers!

 

Yes, during the pandemic.

 

[bizaro86]

I would say its a bit concerning that they managed to lose money (significantly) on both the long and short side. Realized plus unrealized losses of $821.9 MM for the long side, and $222.4 MM for the short side. Should be making money on one side of a long-short book...

 

That is for the first six months of the year, right?

Making money in 6 months during a pandemic? Really?

I am stealing Parsad's favourite: cheers!

 

The point of a long-short book is for gains on the shorts to offset losses on the longs when unexpected bad things happen (for example, a worldwide pandemic). If your shorts aren't making money (to offset losses on longs) during an event like that, maybe not doing them would be a better choice?

 

Or am I missing something here? If so, I'd love to know what it is...

[Parsad]

I would say its a bit concerning that they managed to lose money (significantly) on both the long and short side. Realized plus unrealized losses of $821.9 MM for the long side, and $222.4 MM for the short side. Should be making money on one side of a long-short book...

 

That is for the first six months of the year, right?

Making money in 6 months during a pandemic? Really?

I am stealing Parsad's favourite: cheers!

 

The point of a long-short book is for gains on the shorts to offset losses on the longs when unexpected bad things happen (for example, a worldwide pandemic). If your shorts aren't making money (to offset losses on longs) during an event like that, maybe not doing them would be a better choice?

 

Or am I missing something here? If so, I'd love to know what it is...

 

They are long on value stocks and short tech stocks.  So naturally, they haven't seen significant gains on the long side and they've suffered on the short side.  They will see their gains when tech stocks correct as main street returns to normal business and tech stocks get priced closer to reality.

 

Blackberry has barely moved...Fairfax India has barely moved...Atlas Corp (which is just killing it during a pandemic) has barely moved...and they are sitting on a ton of cash and bonds (which way have interest rates moved). 

 

So I think the fact that insurance is doing so well, even with significant insurance losses, is why Prem has tipped his hand and expressed his expectations to the general market with his $150M stock buy. 

 

Insurance despite the pandemic is doing fantastic and they've indicated pricing pressure is here...and when their investment portfolio turns as market sentiment eventually and inevitably turns to value stocks...Fairfax will see book value increase significantly!  We've seen it before, and we'll see it again.  Cheers!

[StubbleJumper]

Q2 2020 Conference Call Transcript:  https://seekingalpha.com/article/4362912-fairfax-financial-holdings-limited-frfhf-ceo-prem-watsa-on-q2-2020-results-earnings-call?part=single

 

SJ

[Xerxes]

Thanks

I think it was a good call.

No question about TorStar or Fairfax Africa's sale.

 

----------------

Funny question from an individual investor, who confused Exxon and Chevron with Enron and Chevrolet. I listened to the audio, he actually said Enron and Chevrolet.

 

"Okay. And the second question is the stocks that you guys bought in March like Enron, Chevrolet, Google, have you guys sold any of those positions, or do we have to wait till the next quarterly filings to see those?"

 

----------------

Anybody understands this statement: "The losses were principally comprised of incurred but not reported losses that represented on a net basis 70% of the COVID-19 losses reported."

 

is that like how banks do loan losses provisions. ? what does it mean incurred but not reported.

[Cigarbutt]

...

----------------

Anybody understands this statement: "The losses were principally comprised of incurred but not reported losses that represented on a net basis 70% of the COVID-19 losses reported."

is that like how banks do loan losses provisions. ? what does it mean incurred but not reported.

Disclosure: FFH is still on my radar but involves only peripheral vision.

Reported loss includes has occurred and has been reported to the company. Based on that, over time, companies have to "adjust" what they expect will happen in the future. Insurers vary in terms of the speed and extent of recognition of future potential developments. For Covid-19, Markel, for example, reported high losses in Q1 with a high component of IBNR, suggesting a pro-active stance. Others have decided to wait and see the future development before booking additional losses. What is very unusual about this virus is that 1-it is a major event (large losses expected), 2-models don't really exist as global pandemics happen only rarely and 3-unlike a hurricane or other major catastrophe, the virus event and related consequences are ongoing (uncertain duration). i think the statement made by FFH implies possibly a degree of conservatism reflecting the underlying uncertainty and long-tail nature of future claims.

[Pedro]

"i think the statement made by FFH implies possibly a degree of conservatism reflecting the underlying uncertainty and long-tail nature of future claims."

 

I agree & would add that FFH has continued favourable reserve development YOY so convservative reserving is their historical norm.

 

 

[Cigarbutt]

"i think the statement made by FFH implies possibly a degree of conservatism reflecting the underlying uncertainty and long-tail nature of future claims."

 

I agree & would add that FFH has continued favourable reserve development YOY so convservative reserving is their historical norm.

The Covid impact on (re)insurers is a mixed bag and there are segments that clearly have benefitted. Not a big deal for Fairfax but, with decreased mobility, car insurers don't seem to complain. That aspect, however, may help to explain the otherwise unusual favorable development in some of the segments. It will take time to figure out but Fairfax has, in the latest part of the cycle, showed better than average (relative basis) favorable development but there is no evidence that shows that it will completely diverge compared to industry-wide trends.

Another aspect of the Covid issue is duration and development patterns. For workers comp lines (Zenith), the reserve development (from claims not still incurred but that need to be priced beforehand) will be influenced by the presently unknown evolution of the virus problem, the public policy responses to it as well as future legislation for coverage. Event cancellation settlement should be straightforward but, even if the insurers' legal position in general appears strong for the business interruption claims, the extent of those claims remain presently unknown. Typically (one would need to assess specifically for Fairfax; i assume they use the usual policy language), the BI contracts include a specific duration (limit) clause but, if history is any guide, BI claims after previous catastrophes took a while to manifest. There are a lot of businesses looking at their options now. It would be expected that most claims will have clearer visibility when legal actions are taken (or not) somewhere around 2021. It is possible that some of these claims have already been "reported" without a clear quantifiable and specific claim amount. Sometimes, the IBNR account includes the typical not reported claims but may also include a "pipeline" reserve where a claim is considered in process, which results in some 'flexibilty' for reporting purposes. It appears that the unfavorable reserve development recognized by Fairfax for the BI claims should eventually reverse.

[cwericb]

Seeking Alpha article on Fairfax.

 

Fairfax Financial Holdings Ltd.: Undervalued But No Catalyst In Sight

 

https://seekingalpha.com/article/4364646-fairfax-financial-holdings-ltd-undervalued-no-catalyst-in-sight?utm_medium=email&utm_source=seeking_alpha&mail_subject=frfhf-fairfax-financial-holdings-ltd-undervalued-but-no-catalyst-in-sight&utm_campaign=rta-stock-article&utm_content=link-0

[Parsad]

Seeking Alpha article on Fairfax.

 

Fairfax Financial Holdings Ltd.: Undervalued But No Catalyst In Sight

 

https://seekingalpha.com/article/4364646-fairfax-financial-holdings-ltd-undervalued-no-catalyst-in-sight?utm_medium=email&utm_source=seeking_alpha&mail_subject=frfhf-fairfax-financial-holdings-ltd-undervalued-but-no-catalyst-in-sight&utm_campaign=rta-stock-article&utm_content=link-0

 

The gist of the article...nothing wrong with it...it's cheap...but no catalyst.  Just to get back to book value is a 40% return...what catalyst do you need for that?  Cheers!

[villainx]

Apologies as a slightly embittered Fairfax holder, but - I remember another thread where it was posed that if one wasn't comfortable holding on to (sub or fairfax main), one should get out.  Unfortunately, ... I got out.  I don't see the point of investing based on trust that things will improve ... when there are zero signs that things are improving.  I love folks contributing here, but i got out of my (very small) share of Fairfax.

[Xerxes]

I ll say this.

 

The very fact that FFH is unable to do both recap it’s insurance subs and buyback significantly at the same time is an pocket of opportunity that provides a not moving share price looking for a better day.

 

The fact that Buffet refused to buy back it own share and significantly deploy capital in Q2 was also a pocket of opportunity.

 

Lastly on FFH BV my sense is that with the write-offs on some of the Associates at the end of Q1, the stack that made up its BV has been de-risk of bias towards those names. Therefore as the BV is re-build it will be on strength of its better businesses.

 

When the BV gets close to where it was in dollar terms in the coming quarters, I would prefer the post-Q2 stack of BV than the pre-pandemic stack of BV. Same dollar value, but better tilt toward less impaired names.

 

My weird observation

[ander]

US based investors do you buy the local in Canada or FRFHF? The FRFHF not as liquid and wider bid / asks. Any other considerations?

[TwoCitiesCapital]

US based investors do you buy the local in Canada or FRFHF? The FRFHF not as liquid and wider bid / asks. Any other considerations?

 

I buy both pending which account has the availability of the cash.

 

FRFHF is lower liquidity, but I do all my trading with limit orders and haven't typically had much trouble entering or exiting.

[ander]

First time I'm doing a deep dive on Fairfax. Have not previously been a shareholder. I saw that Prem invested with David Sokol a couple of years ago. He was speculated to be heir apparent at BRK before implied questions of integrity (I do not have a strong view on the situation, but on the face of it, it did seem what David did was inappropriate in the spirit of highest integrity). Any thoughts on Prem's decision to invest with David Sokol?

I'm looking at it from the perspective of BRK tries to measure themselves with the highest integrity. There were some questions about Prem's practices several years ago, which I am comfortable with. Prem is a big admirer of BRK. Was his decision to work with David Sokol questioned?

[TwoCitiesCapital]

First time I'm doing a deep dive on Fairfax. Have not previously been a shareholder. I saw that Prem invested with David Sokol a couple of years ago. He was speculated to be heir apparent at BRK before implied questions of integrity (I do not have a strong view on the situation, but on the face of it, it did seem what David did was inappropriate in the spirit of highest integrity). Any thoughts on Prem's decision to invest with David Sokol?

I'm looking at it from the perspective of BRK tries to measure themselves with the highest integrity. There were some questions about Prem's practices several years ago, which I am comfortable with. Prem is a big admirer of BRK. Was his decision to work with David Sokol questioned?

 

Definitely questioned. If you do a search for Sokol on this site, you'll probably get a few threads where this is discussed outside of the ATCO thread.

[wondering]

https://www.enthusiastgaming.com/enthusiast-gaming-announces-acquisition-of-omnia-media-forming-largest-gaming-media-esports-and-entertainment-platform-in-north-america/

 

Blue Ant (a small FFH investment) sells Omnia to Enthusiast Gaming (TSX:EGLX) for $11 million Cdn plus 18 million shares of Enthusiast.

 

Links about these companies

 

https://blueantmedia.com/portfolio/omnia-media/

 

https://www.enthusiastgaming.com/about-us/

 

interesting.  I wonder if FFH had a hand valuing the transaction?

 

 

[Pedro]

This could use a tender offer or some sort of action to get this back to BV.  0.71X BV seems like something that should be taken advantage of via tendering or big buybacks.

 

Wouldn't Tempteton do that?

 

 

[petec]

This could use a tender offer or some sort of action to get this back to BV.  0.71X BV seems like something that should be taken advantage of via tendering or big buybacks.

 

Wouldn't Tempteton do that?

 

They don’t have the capital.

[StubbleJumper]

This could use a tender offer or some sort of action to get this back to BV.  0.71X BV seems like something that should be taken advantage of via tendering or big buybacks.

 

Wouldn't Tempteton do that?

 

They don’t have the capital.

 

 

I was surprised that they even bought back a few shares last Q.  Given their situation where they are a bit reliant on that revolver, I would have thought that they'd be doing everything possible to keep the ratios that are used for the covenants as low as possible.

 

 

SJ

[TwoCitiesCapital]

This could use a tender offer or some sort of action to get this back to BV.  0.71X BV seems like something that should be taken advantage of via tendering or big buybacks.

 

Wouldn't Tempteton do that?

 

 

Prem's decision is to grow the insurance companies instead. If they can do so profitably, the additional float is worth more in the long-term than a one-time repurchase would be. The gains from float are compounded returns with attractive economics and the flexibility to do buybacks later, if still attractive, where the gain from the buyback is a one-off return with no flexibility to increase economic return of the company beyond that. 

 

Also, the increased profitability could be the catalyst to rerate the share where a buyback isn't guaranteed to cause any re-rating. The "guaranteed" return is just the increase in BV/share which the market may, or may not, take notice of.

 

I'm ok with the limited buyback approach if they can capitalize on a hardening insurance market and expand float by 30-50% instead - I just feel it was disingenuous of them to use Templeton as the comparison if they're not going to act at the scale that would imply.

[Xerxes]

Prem talked about Singleton few years ago hinting at that buyback narrative.

 

I for one am glad that he had the steady hand and clear mind not to devour its own shares substantially in the past few years. Folks forget that the very steep discount of 0.7 is very recent. For years (before covid), investors here and on conference calls (I listen to all of them) have been begging him to buy back his shares. Imagine all the value that would have been send to the gutters had he bought back shares substantially at book value or 0.9 book value ... and then you had hardening of the insurance market and covid-19, and FFH had no dry powder left to take advantage and invest and its actual 'core' business.

 

On a different thread, I use the example of Boeing and General Electric, both led by manager-operators. Both nearly crashed as they spent years doing buyback and hollowing out their balance sheet all in the name of shareholder supremacy.

 

I yearn for long-term shareholder supremacy. .. not front-loaded shareholder supremacy.

 

Prem might not be a good stock picker in the Age of FANGS, but thankfully equities are one component of the entire business. FFH may have lost 30% or so but has a good chance for a comeback. I rather be a FFH shareholder (any day) than a General Electric that seen its shares plunge from $35 to $7.

[petec]

I’d also point out that Prem was clear (in writing, and in person) that the Singleton comparison was meant to be very long term. He never said that buybacks would be the priority at any specific point in time - merely that the age of issuing to do big deals was over, and that over time the count would fall.

 

It would be nice if the company had more capital and could grow in a hard market while buying back shares. But if that was the case, it wouldn’t be at 0.6x book.

[ander]

When looking at book value per share, wouldn't it be fair to adjust the Investments in Associates to Fair Value. ($4,684.7 carrying value - $3,669.0 fair value = $1,087 impact to Common Equity ... $11,458.7 common equity - $1,087 = $10,371.7 adjust common equity divided by 26.487 shares outstanding = $391 adjusted BV per share ... $313 share price / $391 is 0.8x book value). Still cheap at 0.8x but not as cheap. Thoughts?

[StubbleJumper]

When looking at book value per share, wouldn't it be fair to adjust the Investments in Associates to Fair Value. ($4,684.7 carrying value - $3,669.0 fair value = $1,087 impact to Common Equity ... $11,458.7 common equity - $1,087 = $10,371.7 adjust common equity divided by 26.487 shares outstanding = $391 adjusted BV per share ... $313 share price / $391 is 0.8x book value). Still cheap at 0.8x but not as cheap. Thoughts?

 

 

Yes, to the extent that it is possible, it is a worthwhile exercise to adjust the BV to reflect fair value, and you probably should also attempt to build a pro-forma income statement that strips out the non-recurring gains/losses and the extraordinary non-recurring cats (cats are a fact of life, but some years they are ridiculous).

 

 

SJ