Fairfax 2020

[chrispy]

Using Viking's spreadsheet it looks like ~3.7% increase to FRFHF with this 60% move in Blackberry - is that what you guys/gals are seeing?

[petec]

I vaguely recall that the average cost is in the $17's. I think they disclosed this a few years ago. If you convert the bond at $6 you get something like $12.

 

 

Thanks, Pete.  So the total position is still deeply under water, to say nothing of the time value of money.  Oh well, at least it's moving in the right direction.

 

 

SJ

 

I would strongly suggest never including the time value of money in your assessment of Fairfax's investments, unless you have a stiff drink to hand.

 

Atlas may be an exception.

[StubbleJumper]

I vaguely recall that the average cost is in the $17's. I think they disclosed this a few years ago. If you convert the bond at $6 you get something like $12.

 

 

Thanks, Pete.  So the total position is still deeply under water, to say nothing of the time value of money.  Oh well, at least it's moving in the right direction.

 

 

SJ

 

I would strongly suggest never including the time value of money in your assessment of Fairfax's investments, unless you have a stiff drink to hand.

 

Atlas may be an exception.

 

 

Yes, a potential investor would be well advised to simultaneously initiate a position in Fairfax Financial and Corby Distilling.

 

 

SJ

[bizaro86]

I vaguely recall that the average cost is in the $17's. I think they disclosed this a few years ago. If you convert the bond at $6 you get something like $12.

 

 

Thanks, Pete.  So the total position is still deeply under water, to say nothing of the time value of money.  Oh well, at least it's moving in the right direction.

 

 

SJ

 

I would strongly suggest never including the time value of money in your assessment of Fairfax's investments, unless you have a stiff drink to hand.

 

Atlas may be an exception.

 

 

Yes, a potential investor would be well advised to simultaneously initiate a position in Fairfax Financial and Corby Distilling.

 

 

SJ

 

Lol. If Prem would just have bought defensive staples like Corby for the last 10 years the mood in this thread would be a lot different.

[Xerxes]

From 2013 letter and assuming there were no more investment in the commons since.

I think the $17 figure is in CAD$.

 

Surely the convertibles have helped lowered that average cost and interest rate received compensated as well.

 

 

https://s1.q4cdn.com/579586326/files/Letter%20to%20Shareholders%20from%20Annual%20Report%202012%20FINAL_v001_o7033s.pdf

 

"Markets fluctuate – and very often in extreme directions. Remember the tech boom, when companies with no

sales were valued at tens of billions of dollars? In 2000, Northern Telecom accounted for 36.5% of the Toronto

Stock Exchange index and was worth almost Cdn$400 billion; by 2009, it was bankrupt! Well, last year the opposite happened to Research in Motion (now known as BlackBerry). At its low of approximately $61⁄2 per share, it

sold at 1⁄3 of book value per share and a little above cash per share (it has no debt). The stock price had declined

95% from its high! The company produces the BlackBerry which for years was synonymous with the smart phone.

The BlackBerry brand name is perhaps one of the more recognizable brand names in the world and the company

has 79 million subscribers worldwide. Revenues went from essentially zero to $20 billion in about 15 years – and

then it hit an air pocket! The company got complacent, perhaps overconfident, and did not respond quickly

enough to Apple and Android. Mike Lazaridis, the founder and a technological genius – and a good friend – asked

me to join the Board, which I did after meeting Thorsten Heins, whom Mike recommended as the next CEO of

the firm. Thorsten’s 27 years of experience in all types of leadership jobs in small and large divisions at Siemens,

combined with his five years at BlackBerry, were exactly what was needed. Thorsten hired a very capable

management team and then focused on producing a high quality BB10 – the next generation of BlackBerries. The

brand name, a security system second to none, a distribution network across 650 telecom carriers worldwide, a

79 million subscriber base, enterprise customers accounting for 90% of the Fortune 500, almost exclusive usage by

governments in Canada, the U.S. and the U.K., a huge original patent portfolio, an outstanding new operating

system developed by QNX and $2.9 billion in cash with no debt, are all formidable strengths as BlackBerry makes

its comeback! The stock price recently moved as high as $18 per share, a far cry from the $140 per share it sold at

a few years ago. And please note, 1.8 billion cell phones are sold worldwide annually, and of the 6 billion cell

phones in the world, only 1 billion are smart phones. Lots of opportunity for Canada’s greatest technology company! What is striking, even for a person like me who has seen many bull and bear markets, is that at $61⁄2 per

share, all the Wall Street and Bay Street analysts were uniformly negative – just as they were uniformly positive

only a few years ago at prices north of $100 per share. John Templeton’s advice to us: “Buy at the point of

maximum pessimism”, still rings in our ears!! We own approximately 10% of the company at an average cost of

$17 per share and we are excited about its prospects under Thorsten’s leadership and Mike’s technical genius."

[TwoCitiesCapital]

Honestly, this is our fault. We get hyped about $8-9/share so it falls back to $7 before closing

[bearprowler6]

More news:

 

https://www.fairfax.ca/news/press-releases/press-release-details/2020/Fairfax-Announces-Sale-of-RiverStone-Europe-to-CVC/default.aspx

[Daphne]

Christmas comes early...Santa Prem is on a roll.

[Cigarbutt]

-Mixed feelings about the monetization of the European run-off business

 

i had heavy exposure when run-off was formed in 2002 for the US run-off so there may be some unwarranted sentimental value but the run-off business they have built over time, including the European run-off, had reached crown-jewel value IMO, especially taking into account the possibility of huge opportunities in the future.

 

Objectively, one has to look at what is gained on top of what is lost. They are getting a 'good' price and the cash inflow will be welcomed flexibility in this time of uncertainty and hard market. i guess it all depends on what they opportunistically do with the money.

 

A disappointing aspect is that, if everything goes according to plan, 40% of the 15-20% premium they are getting now for the reincorporated unit will be going to the recently joined partner, Omers.

[petec]

The unit OMERS invested in last year was Riverstone UK. CVC is buying Riverstone Europe. They have the same CEO but are they the same? Is UK a subsidiary of Europe?

 

 

[bluedevil]

I am quite relieved to see this transaction.

 

Fairfax needed cash.  Net of 200m of excess cash at the holding company, it has $500 million on its credit lines; has a dividend payment upcoming; needs to buy out OMERS stakes in various businesses; and needs to support its insurance subsidiaries capital needs during a hard market.  With the recent rally in their equity holdings, and this sale, some of the clouds surrounding the company have dissipated.  Fairfax always had a significant number of cards that it could have easily played if needed, but great to see it happening thus far without selling any interests in any of the core insurance subs or any fire sales.

[petec]

The unit OMERS invested in last year was Riverstone UK. CVC is buying Riverstone Europe. They have the same CEO but are they the same? Is UK a subsidiary of Europe?

 

Scratch that. See below. They're the same subs. Looks to me like Fairfax (60%) have made a nice gain on this sale ($750m vs a carrying value of $605m, with a possible $237m to come). This would imply OMERS (40%) got $500m plus $158m contingent, which means they may well have recorded a loss - unless of course they got better terms than FFH, which I suspect is likely.

 

From the 3q interim: On March 31, 2020 the company contributed its wholly owned European run-off group ("European Run-off") to RiverStone

(Barbados) Ltd. (“RiverStone Barbados”), a newly created joint venture entity, for cash proceeds of $599.5 and a 60.0% equity interest

in RiverStone Barbados with a fair value of $605.0. OMERS, the pension plan for municipal employees in the province of Ontario,

jointly manages RiverStone Barbados and had contemporaneously subscribed for a 40.0% equity interest for cash consideration of

$599.5, based on the fair value of European Run-off at December 31, 2019 pursuant to the subscription agreement entered into on

December 20, 2019.

 

I am quite happy to see it go, frankly. I don't think the market gives runoff the credit it deserves and capitalising the cash flows up front to fund hard market growth in subs the market does understand is OK with me.

[Xerxes]

Anyone else  a bit suprised FFH hasn't moved more on this BB news?

One of their major holdings up almost 60% and FFH moving less than 2% seems odd.

 

I am not surprised.

FFH often spend years (decades) building up great set of businesses, but when it comes to monitzation it gets offset by a large short position gone wrong in a single quarter.

 

I am guessing market will give full recognition on the gains in Q4 when results come out in January and  netted against the realized shorts.

 

With FFH shorts, we never know what we get: the good, the bad or the ugly.

[petec]

Anyone else  a bit suprised FFH hasn't moved more on this BB news?

One of their major holdings up almost 60% and FFH moving less than 2% seems odd.

 

I am not surprised.

FFH often spend years (decades) building up great set of businesses, but when it comes to monitzation it gets offset by a large short position gone wrong in a single quarter.

 

I am guessing market will give full recognition on the gains in Q4 when results come out in January and  netted against the realized shorts.

 

With FFH shorts, we never know what we get: the good, the bad or the ugly.

 

Every dollar on the Blackberry share price above $6 is worth $100m to Fairfax, before tax.

 

Fairfax’s market cap is $10bn.

 

How much do you think the Fairfax share price *should* have moved, out of interest?

[Viking]

Fairfax needed cash.

1.) drive growth in hard market

2.) buy back OMERS stake in Eurolife (stated in 2019 AR this would happen in 2020) so perhaps we get a second announcement soon on this. (Perhaps this transaction results in OMERS getting cashed out of both Riverstone and Eurolife - and the Anchorage transaction is also imminent).

3.) fund January dividend (where they pay full amount) - likely US $10/share

4.) buy back stock - likely trading below 0.75BV as of today

 

This deal highlights a couple of the strengths in Fairfax:

- its ability to be creative and find unexpected solutions. I agree with Petec; i am sceptical that a runoff businesses embedded in Fairfax would ever be properly valued by Mr Market.

- it has some undervalued assets

 

Xerxes, i was conveniently ignoring Fairfax’s short fiasco in Q3... let’s hope they are not on the wrong side of this rally we are seeing in Q4 because if so it could be ugly when they report results. Spilled my coffee when i read your comment :-) We will all be very happy when Fairfax is officially out of the short game.

[petec]

Let’s hope they are not on the wrong side of this rally we are seeing in Q4

 

Given that what's rallying is the stuff they've been long, and not the stuff they've been vocal is overvalued, I am hopeful.

[bluedevil]

I have a bad feeling that the short position from hell is Tesla.  Just a guess.  If so, the losses could be brutal again.  :(

[Viking]

I have a bad feeling that the short position from hell is Tesla.  Just a guess.  If so, the losses could be brutal again.  :(

 

If it is Tesla and Fairfax books another couple hundred million loss (or more in Q4) then perhaps someone at Fairfax will finally have their ‘see jesus’ moment and finally learn a few important lessons.

[Cardboard]

Sold all my shares yesterday as it refused to break-up and thought it could pause after a nice quick gain, pretty much right from low.

 

Then this news today and thought: lucky me...

 

However, it is slightly down now with market unimpressed.

 

Looking at press release I can see partially why as company is not too transparent: Is it good or bad? What is use for proceeds? A gain or a loss?

 

It is a large company now and PR folks should know better by now.

 

Cardboard

 

[Cigarbutt]

The unit OMERS invested in last year was Riverstone UK. CVC is buying Riverstone Europe. They have the same CEO but are they the same? Is UK a subsidiary of Europe?

Scratch that. See below. They're the same subs. Looks to me like Fairfax (60%) have made a nice gain on this sale ($750m vs a carrying value of $605m, with a possible $237m to come). This would imply OMERS (40%) got $500m plus $158m contingent, which means they may well have recorded a loss - unless of course they got better terms than FFH, which I suspect is likely.

From the 3q interim: On March 31, 2020 the company contributed its wholly owned European run-off group ("European Run-off") to RiverStone

(Barbados) Ltd. (“RiverStone Barbados”), a newly created joint venture entity, for cash proceeds of $599.5 and a 60.0% equity interest

in RiverStone Barbados with a fair value of $605.0. OMERS, the pension plan for municipal employees in the province of Ontario,

jointly manages RiverStone Barbados and had contemporaneously subscribed for a 40.0% equity interest for cash consideration of

$599.5, based on the fair value of European Run-off at December 31, 2019 pursuant to the subscription agreement entered into on

December 20, 2019.

I am quite happy to see it go, frankly. I don't think the market gives runoff the credit it deserves and capitalising the cash flows up front to fund hard market growth in subs the market does understand is OK with me.

i'm eager to learn but don't come to the same numbers.

At end 2019, book value of the sub was 750.5m. Ultimately, with measurement adjustments after but based on yr-end, Omers paid 599.5m for a 40% interest, suggesting a 1.5b value for the unit without a control premium. This implies a 895m value for FFH which, i think, was written down to FV of 605m in correlation to negative results in Q1, including investment losses.

i understand FFH will receive proceeds of 750+235.7=985.7m for their 60% deconsolidated equity interest so (assuming Omers gets the same terms) Omers should be getting 500+157.1=657.1m.

One attractive aspect of FFH over the years (my humble perception) is (was?) that market recognition of value in the short term was not really relevant given a long term orientation. Even if felt to be obsolete, i have difficulty understanding why one should long for immediate market recognition when one of the principal lever of value creation would be share repurchases.

[petec]

The unit OMERS invested in last year was Riverstone UK. CVC is buying Riverstone Europe. They have the same CEO but are they the same? Is UK a subsidiary of Europe?

Scratch that. See below. They're the same subs. Looks to me like Fairfax (60%) have made a nice gain on this sale ($750m vs a carrying value of $605m, with a possible $237m to come). This would imply OMERS (40%) got $500m plus $158m contingent, which means they may well have recorded a loss - unless of course they got better terms than FFH, which I suspect is likely.

From the 3q interim: On March 31, 2020 the company contributed its wholly owned European run-off group ("European Run-off") to RiverStone

(Barbados) Ltd. (“RiverStone Barbados”), a newly created joint venture entity, for cash proceeds of $599.5 and a 60.0% equity interest

in RiverStone Barbados with a fair value of $605.0. OMERS, the pension plan for municipal employees in the province of Ontario,

jointly manages RiverStone Barbados and had contemporaneously subscribed for a 40.0% equity interest for cash consideration of

$599.5, based on the fair value of European Run-off at December 31, 2019 pursuant to the subscription agreement entered into on

December 20, 2019.

I am quite happy to see it go, frankly. I don't think the market gives runoff the credit it deserves and capitalising the cash flows up front to fund hard market growth in subs the market does understand is OK with me.

i'm eager to learn but don't come to the same numbers.

At end 2019, book value of the sub was 750.5m. Ultimately, with measurement adjustments after but based on yr-end, Omers paid 599.5m for a 40% interest, suggesting a 1.5b value for the unit without a control premium. This implies a 895m value for FFH which, i think, was written down to FV of 605m in correlation to negative results in Q1, including investment losses.

i understand FFH will receive proceeds of 750+235.7=985.7m for their 60% deconsolidated equity interest so (assuming Omers gets the same terms) Omers should be getting 500+157.1=657.1m.

One attractive aspect of FFH over the years (my humble perception) is (was?) that market recognition of value in the short term was not really relevant given a long term orientation. Even if felt to be obsolete, i have difficulty understanding why one should long for immediate market recognition when one of the principal lever of value creation would be share repurchases.

 

Aren’t our numbers exactly the same?

 

I guess my point is simply that a management team has, at any given moment, to assess the options in front of it. It’s not obviously daft (to my eyes) to sell European runoff at >BV and reinvest the proceeds in the other subs at BV at the start of a hard market that might see them valued at >BV, or in FFH shares at <BV.

[StubbleJumper]

i understand FFH will receive proceeds of 750+235.7=985.7m for their 60% deconsolidated equity interest so (assuming Omers gets the same terms) Omers should be getting 500+157.1=657.1m.

 

 

So, by the time this transaction is finalized, OMERS will have held their stake in Riverstone for one year and will once again have gotten their ~9% annualized return?  The same annualized return that they got from the Brit transaction?  Is that a coincidence or was it engineered?

 

 

SJ

[Crip1]

Cigarbutt,

 

“Even if felt to be obsolete, i have difficulty understanding why one should long for immediate market recognition when one of the principal lever of value creation would be share repurchases.”

 

That was kind of what I was thinking. There may be multiple reasons for the lack of transparency to which Cardboard referred. One of those being that “selling” this transaction would potentially hinder their ability to buy back shares at a good price. That said, for long-term holders who have had dead money invested here for years, it’s only natural to want to see a nice bump in price, especially if one is looking for an exit strategy.

 

-Crip

 

[Cigarbutt]

@petec

You make an excellent point. From a different perspective, a solid run-off operation is worth a significant premium to book value and sophisticated players like Omers were ready to pay such premiums at end of 2019. Fair value at end of Q1 was not representative of true intrinsic value and the sub is being sold in Q4 (3 quarters seem like an eternity these days). :)

It's not exactly the same but it feels a bit like (my perspective; i was mostly long then, parent, various subs etc) when OdysseyRe and Northbridge interests were offered to the public. The contract with Omers contained clauses to buyback the 40% interest within the next few years.

It's a capital allocation decision and it can make sense (it may make even more sense with further corporate announcements) but the hurdle rate is relatively high.

@SJ

It feels like Omers is doing the right things, given its mandate with both upside and downside limited and embedded 'reasonable' returns.

@Crip1

FFH has always displayed unusual creativity for liquidity management which has clear upside potential but comes with the associated risk that they may sometimes run low. Selling is always the hardest part.

[petec]

i understand FFH will receive proceeds of 750+235.7=985.7m for their 60% deconsolidated equity interest so (assuming Omers gets the same terms) Omers should be getting 500+157.1=657.1m.

 

 

So, by the time this transaction is finalized, OMERS will have held their stake in Riverstone for one year and will once again have gotten their ~9% annualized return?  The same annualized return that they got from the Brit transaction?  Is that a coincidence or was it engineered?

 

 

SJ

 

Neither.

A) we don’t know the conditions governing the contingent payout.

B) we don’t know if OMERS sold on the same terms, better, or worse.