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[Parsad]

I've pounded the table in the past, and I've been pounding it for the last 3 months, even before Prem made his $150M purchase...but here it is from the horse's mouth, which most won't pay attention to anyways:

 

Prem Watsa

 

So, Christopher -- so I understand what is your question. Let me just say as I have said that our share price has been ridiculously cheap. I said that at the annual meeting. I said that in the first quarter. Saying it again and of course and I disclose that I have taken advantage of it and bought as many shares as I could to let everyone know it's ridiculous cheap. In 35 years, we never know when the stock price is going up or down. We just know that's cheap. Is it going to go up in the next six months? Or, is it -- I have bought it so that in the next five years I think it will be terrific return. And, Fairfax as a company, when we retire stock we are going to retire ton of stock if it's available. But we have to be careful when we retire it in relationship to the potential we have in the insurance business in terms of our financial position, in terms of the uncertainty in the marketplace. So, we have to take all of that into account. Our stock price is dirt cheap, and I can tell and I don't know if it'll be six months or a year or when it will go up, but it's going to go up very significantly, and that's been my experience over 35 years. And to our shareholders, I would say take advantage of it if you got to opportunity to, but otherwise, we just have to focus on the long-term.

 

So, next question, Ella?

 

Cheers!

[Xerxes]

I guess, it make sense he is putting priority on the investing in the insurance business. FFH can always buy back the shares tomorrow (and i doubt shareprice will move that much), and financial engineering should never be at the expense of creating intrinsic value. You don't want to be like Boeing or GE, hollowing out the balance sheet through massive buybacks for the sake of exiting shareholders and Wall Street, instead of taking a hard look at the pillars of the business and see where you can invest first to maintain one's competitiveness in the market place. And I would also say that if Mr. Watsa had an ownership of 1%, he may have preferred hollowing out the balance sheet through buybacks to keep the numbers up. So despite his weird gymnastics when it comes to common stock investment, I can safely state that I feel that he has an incentive to build the business for the long term shareholders and not to hollow it out. And I understand the counter points about mismatch between voting shares and involvement of his family etc. and agree with those as well.

 

That said, while Prem' is probably doing the right thing balancing capital allocation, the pill would have been easier to swallow, if this hasn't been coming after the long list of disappointments and mistakes, all well documented in this forum. Personally, i don't care too much stock prices not going up for the short term, as i can extremely patient, but what I CANNOT stand is his stubbornness when it comes to technology names, parading the names in the annual shareholder letters, with the most elementary valuation metric (p/e) to make a case. I am sorry, if after 20 years you have not understood that the Big Tech are not the Nortel et al. of 1999-2000, I will classify that as stubbornness.

 

The Economist had an article few weeks ago, where it was saying that how the 2000 stock market crash created a bias for deep value investors. Perhaps that is true, that 1999-2000 bias messes up their framework, as they all eagerly await for the Judgment Day, when Prophecy shall be fulfilled and the technology name halved again.

 

But the point is that even if the Prophecy is fulfilled, why take a short position against the mother of all secular trends, only to lose money in a massive rally and then break-even on the shorts when its goes back down. Short the easy stuff. Short the airlines, the restaurants, short Cara Operations ! ... wait in fact, you had said in past AGMs you will not short anymore, why are we even seeing short positions popping out on the quarterly results.

 

Thankfully, while, his weird equity investment, grabs the headlines and captures not our imagination but our frustration, we can be glad to know that the bulk of the $40 portfolio is not made up equity investments.

 

[investmd]

I would echo comment above about stubbornness: Watsa has been steadfast in saying that his LONG TERM shareholders have done very well.

However 10 year  return is flat- zero. Both 15 year return and 20 year returns are under < 5%/year before dividends.

His defn of Longterm seems to be only since inception. I wish he would give credit to shareholders who have stayed with him for 10-15 years, bought regularly and underperformed the market. They too are long term shareholders and the company has underperformed in the long term. If he accepted the mistakes, acknowledged, learned and moved forward situation would be more palatable. 

 

Any return from here is a win for short term investors. Those who have held long term have lost compounding power.

[KFS]

I've pounded the table in the past, and I've been pounding it for the last 3 months, even before Prem made his $150M purchase...but here it is from the horse's mouth, which most won't pay attention to anyways:

 

Prem Watsa

 

So, Christopher -- so I understand what is your question. Let me just say as I have said that our share price has been ridiculously cheap. I said that at the annual meeting. I said that in the first quarter. Saying it again and of course and I disclose that I have taken advantage of it and bought as many shares as I could to let everyone know it's ridiculous cheap. In 35 years, we never know when the stock price is going up or down. We just know that's cheap. Is it going to go up in the next six months? Or, is it -- I have bought it so that in the next five years I think it will be terrific return. And, Fairfax as a company, when we retire stock we are going to retire ton of stock if it's available. But we have to be careful when we retire it in relationship to the potential we have in the insurance business in terms of our financial position, in terms of the uncertainty in the marketplace. So, we have to take all of that into account. Our stock price is dirt cheap, and I can tell and I don't know if it'll be six months or a year or when it will go up, but it's going to go up very significantly, and that's been my experience over 35 years. And to our shareholders, I would say take advantage of it if you got to opportunity to, but otherwise, we just have to focus on the long-term.

 

So, next question, Ella?

 

Cheers!

 

 

I'll go on the record here and say that in the past few weeks I've made FFH into my largest investment ever at an average price that just happens to be pretty close to Prem's recent 150M purchase. 

 

A couple years ago, I called FFH "statistically cheap" when it was selling at slightly below 1.0 x book and made an initial investment.  I would have considered a fair, reasonable value to be around 1.3 or 1.4 x book.  Today, at 0.7 x book, this has easily entered the "stupid-cheap" category. 

 

I look forward to revisiting this post in 5-10 years and reflecting on Mr Market's extreme depressive outlook on FFH during this time.  I view this as a long-term investment and have no plans to sell. 

 

 

 

[investmd]

KFS, I admire your conviction and comfort in holding FFH long term with no plans to sell. Two questions:

 

1) I understand buying cheap when it is well  below book value. However, how do you square your statment of holding it long term with no plans to sell with with fact that  folks who said the same thing 10-15 years ago, have not had returns and paid the price in opportunity cost.

 

2) Whilst cheap today, are there catalysts you see to get back to fair value? or is it a question of "value will out" with time?

 

 

I've pounded the table in the past, and I've been pounding it for the last 3 months, even before Prem made his $150M purchase...but here it is from the horse's mouth, which most won't pay attention to anyways:

 

Prem Watsa

 

So, Christopher -- so I understand what is your question. Let me just say as I have said that our share price has been ridiculously cheap. I said that at the annual meeting. I said that in the first quarter. Saying it again and of course and I disclose that I have taken advantage of it and bought as many shares as I could to let everyone know it's ridiculous cheap. In 35 years, we never know when the stock price is going up or down. We just know that's cheap. Is it going to go up in the next six months? Or, is it -- I have bought it so that in the next five years I think it will be terrific return. And, Fairfax as a company, when we retire stock we are going to retire ton of stock if it's available. But we have to be careful when we retire it in relationship to the potential we have in the insurance business in terms of our financial position, in terms of the uncertainty in the marketplace. So, we have to take all of that into account. Our stock price is dirt cheap, and I can tell and I don't know if it'll be six months or a year or when it will go up, but it's going to go up very significantly, and that's been my experience over 35 years. And to our shareholders, I would say take advantage of it if you got to opportunity to, but otherwise, we just have to focus on the long-term.

 

So, next question, Ella?

 

Cheers!

 

 

I'll go on the record here and say that in the past few weeks I've made FFH into my largest investment ever at an average price that just happens to be pretty close to Prem's recent 150M purchase. 

 

A couple years ago, I called FFH "statistically cheap" when it was selling at slightly below 1.0 x book and made an initial investment.  I would have considered a fair, reasonable value to be around 1.3 or 1.4 x book.  Today, at 0.7 x book, this has easily entered the "stupid-cheap" category. 

 

I look forward to revisiting this post in 5-10 years and reflecting on Mr Market's extreme depressive outlook on FFH during this time.  I view this as a long-term investment and have no plans to sell.

[Xerxes]

https://www.canadianunderwriter.ca/commercial-lines/why-the-hard-market-reminds-fairfax-ceo-of-2001-1004195626/

 

Steep price increases that have hit brokers’ commercial clients will not continue for the long term, but the current hard market is reminiscent of the period after Sept. 11, 2001, when two planes destroyed the World Trade Centre in New York, suggests Prem Watsa, chairman and CEO of Fairfax Financial Holdings Ltd.

 

“The hard market is not going to last long,” Watsa said on a recent conference call discussing Fairfax’s financial results for the three months and six months ending June 30. “It reminds me of 2001. You had price increases in 2000. September 11 [2001] came into play and then prices really took off in 2002 and ‘03 and ’04. In that time period, we increased our premiums by 100% for the whole company.”

 

 

Watsa was referencing the aftermath of the Sept. 11, 2001 suicide plane hijacking by Al Qaeda operatives that brought down New York City’s World Trade Center towers and damaged the Pentagon, causing tens of billions of insured losses and killing thousands, many of them trapped in the buildings as well as all occupants of all four airliners and hundreds of first responders.

 

The catastrophic event caused commercial insurance markets to harden, resulting in steep price increases that are now seen in today’s contemporary commercial insurance market. Regarding today’s commercial insurance rates, “we are seeing price increases of 10% to 30%,” said Watsa, who founded Fairfax in 1985.

 

Toronto-based Fairfax owns Northbridge Insurance as well as several global P&C carriers, including Brit PLC, Allied World and Odyssey Group.

 

Fairfax reported July 30 it had net premiums written, across all of its insurance and reinsurance companies, of $3.56 billion in 2020 Q2, up 5.4% from $3.37 billion in 2019 Q2. All figures are in United States dollars. Net earnings in the latest quarter were $435 million.

 

Fairfax’s Toronto-based Northbridge subsidiary reported net premiums written of US$403.2 million in the latest quarter, up 5.4% from US$382.6 million in 2019 Q2. Northbridge’s premiums were up 11.3% for the first six months of the year, from $639.8 million in 2019 to $712.2 million in 2020. For first six months, Northbridge made premiums of $712.2 million this year, up 11.3% from $639.8 million in 2019.

 

In Canadian dollar terms, Northbridge’s net premiums written in 2020 Q2 increased by 8.9% over 2019 Q2 – and 13.9% from the first six months of 2019 to the first six months of 2020. This is primarily due to price increases, strong retention of renewal business, and growth in new business, partially offset by returned premium due to reduced exposure (mainly in auto) from the COVID-19 closures, Fairfax said in its management discussion and analysis of its Q2 financials.

 

At Zug, Switzerland-based Allied World (which Fairfax acquired in 2017), net premiums written increased by 20.4% from $657 million in 2019 Q2 to $791 million in 2020 Q2. This is primarily due to improved pricing and growth across both commercial primary insurance and reinsurance. For Allied World’s primary insurance business, its premiums were up mainly in excess casualty and professional lines.

 

Company-wide, Fairfax reported a combined ratio of 100.4% in Q2, compared to 96.8% in 2019 Q2.

 

Northbridge had combined ratio of 94.3% in 2020 Q2, a 4.8-point improvement from 99.1% in 2019 Q2.

 

Company-wide, Fairfax reported $17.5 billion in gross written premiums in 2019.  The lion’s share of those premiums come from Odyssey Group, New Jersey-based Crum & Forster, Brit, Allied World and Northbridge.  Fairfax also has extensive holdings outside insurance, such as the majority of Recipe Unlimited, whose restaurant brands include Harvey’s, Swiss Chalet, The Keg, Milestone’s, Montana’s, Kelsey’s and New York Fries, among others.

[ValueMaven]

Why would I want to buy FFH - which has struggled w/underwriting historically for sometime - when I can get BRK which is highly profitable, CHEAP, and has much better insurance exposure & other businesses overall.  I wonder on a risk-adjusted basis which is cheaper for the long-term... FFH or BRK ? 

[Parsad]

Why would I want to buy FFH - which has struggled w/underwriting historically for sometime - when I can get BRK which is highly profitable, CHEAP, and has much better insurance exposure & other businesses overall.  I wonder on a risk-adjusted basis which is cheaper for the long-term... FFH or BRK ?

 

Buffett's investment universe is 1/15th the size of Prem's.  If Buffett's universe comprises 200 public and private companies worldwide, Prem's universe has 3,000 companies to look at.  Combine that with the competition from large pension funds, private equity, hedge funds and ETF's, who do you think can continue to grow at 15% a year or better for longer?  Cheers!

[BG2008]

I am not a FFH expert, but I do understand BRK well and I have a problem of not owning BRK.  I think part of it is because my investors can easily buy BRK themselves.  This has lead me to hunt for value elsewhere.  The reality is that there is simplicity in BRK in that Buffet isn't trying to put on a deflation hedge.  Heck, BRK even put on one of the largest winners ever (by dollar value) in Apple.  So you have one company that does not make macro bets and another that buys CDS to try to generate a windfall in a deflation bet.  One company owns railroads, RV manufacturers (oligopoly structure), building materials (good businesses in general), one of the best run regulated utility business, and See's Candy, etc.  These businesses are simply much better than FFH's business.  It only took me about 10 years to understand that good businesses just do better in a 10-20 year time frame.  You don't have to horse trade as much.  You can just ride them. 

 

Does anyone know what is the lowest P/B that FFH has ever traded at?  If 0.7x is the lowest ever, than this is indeed interesting.  MSFT was flat for 10 years and has become one of the best performers recently.  Sometimes, things change and market perception change.  But I doubt I will make FFH an outsized position.  Perhaps, the better time is to actually see some changes in behavior and maybe just more allocation to share buybacks etc. 

[Parsad]

I am not a FFH expert, but I do understand BRK well and I have a problem of not owning BRK.  I think part of it is because my investors can easily buy BRK themselves.  This has lead me to hunt for value elsewhere.  The reality is that there is simplicity in BRK in that Buffet isn't trying to put on a deflation hedge.  Heck, BRK even put on one of the largest winners ever (by dollar value) in Apple.  So you have one company that does not make macro bets and another that buys CDS to try to generate a windfall in a deflation bet.  One company owns railroads, RV manufacturers (oligopoly structure), building materials (good businesses in general), one of the best run regulated utility business, and See's Candy, etc.  These businesses are simply much better than FFH's business.  It only took me about 10 years to understand that good businesses just do better in a 10-20 year time frame.  You don't have to horse trade as much.  You can just ride them. 

 

Does anyone know what is the lowest P/B that FFH has ever traded at?  If 0.7x is the lowest ever, than this is indeed interesting.  MSFT was flat for 10 years and has become one of the best performers recently.  Sometimes, things change and market perception change.  But I doubt I will make FFH an outsized position.  Perhaps, the better time is to actually see some changes in behavior and maybe just more allocation to share buybacks etc.

 

It's one of the lowest valuations of the business in a non-distressed period. 

 

It was lower after 9/11, Hurricane Hugo/Andrew, but it was a distressed business...insurance business was extremely stressed and cash was low. 

 

The reverse happened during the financial crisis, because Fairfax had a ton of cash and credit default swaps. 

 

This is one of the only periods in the last 20 years since I've been watching and been a shareholder, where Fairfax is not distressed, insurance operations are humming, cash is ample, debt is very manageable, and portfolio positioning is still mostly defensive...yet it is trading at 0.6 times book.

 

And I think that has alot to do with the complexity of the investment portfolio outside of the fixed income portion that is very long-term, distressed value.  Completely out of favour!  Cheers!

[mattee2264]

I think it is Prem's idiosyncractic investment style depressing the share price. Insurers with comparable (or worse) underwriting records trade around 1.2x book and are mostly invested in fixed income. And a large investment universe isn't necessarily a good thing as it gives them more opportunities to make head-scratching investments. Obviously he is trying to achieve outsized returns with his equity investments. But I think it would be in the shareholders' benefits to adopt a more conventional investment portfolio, achieve the easy target of average investment performance, and let the quality of the insurance operating businesses shine through and you will get the double whammy of a re-rating to at least 1.2x book value as well as book value growth on top.

[bizaro86]

I think it is Prem's idiosyncractic investment style depressing the share price. Insurers with comparable (or worse) underwriting records trade around 1.2x book and are mostly invested in fixed income. And a large investment universe isn't necessarily a good thing as it gives them more opportunities to make head-scratching investments. Obviously he is trying to achieve outsized returns with his equity investments. But I think it would be in the shareholders' benefits to adopt a more conventional investment portfolio, achieve the easy target of average investment performance, and let the quality of the insurance operating businesses shine through and you will get the double whammy of a re-rating to at least 1.2x book value as well as book value growth on top.

 

If they said they were going to index the equity portion of their investments the stock would go up materially the next day, imo. The market views their investing as significantly value destructive.

[Munger_Disciple]

There is really no comparison between FFH & Berkshire. Berkshire is so much better in every aspect than FFH that it is like comparing Roger Federer to a club player. In this interest rate environment it is crazy to have a 15% compound return target for intrinsic value with tons of leverage. That just won't happen. I prefer companies that under-promise and over-deliver.

[rranjan]

Why would I want to buy FFH - which has struggled w/underwriting historically for sometime - when I can get BRK which is highly profitable, CHEAP, and has much better insurance exposure & other businesses overall.  I wonder on a risk-adjusted basis which is cheaper for the long-term... FFH or BRK ?

 

Buffett's investment universe is 1/15th the size of Prem's.  If Buffett's universe comprises 200 public and private companies worldwide, Prem's universe has 3,000 companies to look at. 

 

It will be a huge advantage as long as we assume that Buffett and Prem can be compared as investor.

 

Prem has speculated many times and won some time. Buffett operates differently and his process is likely to produce very few permanent loss. He has still taken 1-2% permanent loss in past, but that's not going to set back Berkshire too much. Buffett process is repeatable and outcome is more predictable.

 

Prem can still produce higher returns due to being small, but certainly of that outcome is not very high. Both are different and can't be compared.

 

 

[Munger_Disciple]

Prem can still produce higher returns due to being small

 

First of all, the asset base of FFH is not that small (though much smaller than BRK). FFH also faces competition from PE and others for deals in the $1-5 billion range. Second being smaller in no way guarantees success; the lackluster investment performance of FFH over the last 15 years is a prime example of that.

[rranjan]

Prem can still produce higher returns due to being small

 

First of all, the asset base of FFH is not that small (though much smaller than BRK). FFH also faces competition from PE and others for deals in the $1-5 billion range. Second being smaller in now way guarantees success; the lackluster investment performance of FFH over the last 15 years is a prime example of that.

 

I was comparing only with Berkshire in relative terms. Anyway, as you said being small does not guarantee sucess.

 

With similar skill set, being small should provide a higher probability of success, but I don't think that skill set of Prem and Buffett can be compared.

 

Fairfax is priced cheaper than usual right now and owners may do fine in the  next few years with insurance hard market coming, but I don't know how to hadicap it. I put it in my too hard pile.

[Tommm50]

Conspiracy theories surrounding old enemies start to percolate...

[Xerxes]

How about Onex, the Canadian private equity company based in Toronto.

 

Shares off from $86CAD pre-pandemic to mid-$60; as much off as FFH.

Onex doesnt have a insurance business, but manages third party capital. That is its float. However, it generally invest a lot more alongside its partners, so i believe it makes dough mostly from capital gain as oppose to management fee + carried. Though it has been working to grow that.

 

Both FFH and Onex are of similar size, while the source of float is different, they have substantial assets under management.

Larger for FFH at $39 billion compared to $31 billion for Onex.

 

Onex's investment portfolio had about $1 billion loss in Q1, 2/3 of which was reversed in Q2. Somewhat similar to FFH that recovered only a portion of its Q1 impact when Q2 results came out.

 

For Onex, in the Q2 results in August, there is a chart that shows their calculation of value per share that comes to $84. Of that cash + investment with publicly traded shares make up $43 per share. The businesses with private valuation + Onex credit add another $40 per share. And they spend $250 million to buyback their shares at $57 market value. Asked why not more substantial buyback, answer was as investor, they are better off keeping their powder dry. Very much like FFH.

 

The reason why I throw Onex here in a FFH thread is to just point out that even an asset manager (onex) that didn't make weird macro bets & lost, has its share price cut and it has not even recovered by a little. Primarily, perhaps due to the opaque nature of some its more private business, where valuations are subjective. And even then, much like FFH, they are not doing major tender offer to buyback shares.

 

i do wish that Prem could produce a chart like this on page 19, where he would classify all of his investments and put them into three buckets: (1) low to positive impact (2) demand/supply headwinds due to covid (3) direct covid hit.

 

https://www.onex.com/static-files/8361bcc3-f860-4d5f-81be-64dd5868f832