Fairfax 2021

[Phoenix01]

Check this out: Fairfax Completes C$850 Million Senior Notes Offering

https://finance.yahoo.com/news/fairfax-completes-c-850-million-131900618.html

[aceskc]

Would love to hear from experts what their view is on Fairfax's normalized operating cash flow excluding investment gains & losses..  Despite comparisons to Berkshire, which earned ~10%+ equity (just operating earnings) through good years and bad, Fairfax's wholly owned business have a very different earning profile. To me it seems like their underwriting profit is consistently offset by corporate expenses, so you're essentially relying on their investment prowess to generate cash flows, so to me an investment in Fairfax really becomes tantamount to giving your money to a general investment manager, and your confidence in the manager to generate alpha over time. 

 

Now, obviously their are assets on the books that may be carried for less than they're worth, and can occasionally generate a cash flow spike when liquidated so may be these add a small premium to how, you'd otherwise value fairfax, but would love to view your thoughts as to what normalized cash flow looks like for Fairfax through the cycle, even with a hard market, and rising premiums. 

[petec]

Just priced USD600m of debt at 3.39% and FIH did $100m at 5%.

[Xerxes]

The previous $850 million offering went to re-finance previous higher interest debt; so leverage change net zero.

The one with $600 million doesn't' have an "allocated objective" in the filing. Wonder if with improvement in its equity and the bounce back in share, they are not using the opportunity to re-lever the D/E back.

[StubbleJumper]

The previous $850 million offering went to re-finance previous higher interest debt; so leverage change net zero.

The one with $600 million doesn't' have an "allocated objective" in the filing. Wonder if with improvement in its equity and the bounce back in share, they are not using the opportunity to re-lever the D/E back.

 

 

No, the holdco will need some cash during 2021. 

 

The sale of Riverstone will help as will the Brit transaction, but so far the IPOs are not adding any liquidity to the holdco (they are merely revealing the potential value of unsold positions).  So, in the middle of a ridiculous hard market, do you dividend money from the subs up to the holdco?  Do you maintain a draw on your revolver?  Or do you float some debt for cheap while you are on a roll and keep the revolver for some flexibility?

 

Good move.

 

 

SJ

[Xerxes]

Agree

I think i was saying the samething by saying levering.

Just that they could do it now with the D/E being more in their favor, fuel up the tanks vs few quarters ago with their back against the ratio.

 

 

[Phoenix01]

Check this out: Fairfax Completes US$600 Million Senior Notes Offering

https://finance.yahoo.com/news/fairfax-completes-us-600-million-162000239.html

[Daphne]

Boatrocker IPO on hold. 

 

Boat Rocker Media Inc.’s planned $175-million initial public offering is on hold, with the entertainment company weighing its options as investors cool on the IPO market following a series of poorly performing market debuts.

 

Toronto-based Boat Rocker, which produces television shows such as Orphan Black and MasterChef Canada, was scheduled to price its shares on Tuesday at between $12 and $14 each, ahead of a listing on the Toronto Stock Exchange.

 

However, investor demand for the offering was tepid, according to investment bankers familiar with the transaction. They said Boat Rocker’s executives and backers are now reviewing their options include cutting the price or size of the offering, or postponing the IPO. The Globe and Mail is not naming the sources because they are not authorized to speak for the company.

[FairFacts]

Sale of a Brit subsidiary, announced by the acquirer, no press release from Fairfax....

 

https://finance.yahoo.com/news/accelerant-acquires-commonwealth-insurance-company-130000763.html

[Cigarbutt]

Sale of a Brit subsidiary, announced by the acquirer, no press release from Fairfax....

https://finance.yahoo.com/news/accelerant-acquires-commonwealth-insurance-company-130000763.html

This is not a material transaction for FFH.

It's interesting though (i used to have a map on the wall trying to make sense of the maze etc). 'Commonwealth' was acquired in 1990 (!) and made its way to Northbridge. The initial 'Commonwealth' had a sub of its own that was writing policies (essentially oil and gas property in the US). This US sub of a sub did not turn into a butterfly and was eventually put into runoff and sold to an another internal runoff sub in 2013 (capital of about 20M) and was moved around after. Its residual capital is at about 8-9M and appears mostly to a be a liquid portfolio. Its value may have lied in its footprint (licensing).

[Xerxes]

Food for thoughts. What does Markel's and FFH's equity portfolio have in common ?

Nothing ...

 

For Markel, it is more of list of nameless equity that it shuffles around based on valuations. No sentiment attached. Just a list. For Fairfax, the static concentrated portion of the portfolio that is not run by Wade and Lawrence, seem to be viewed not as stocks but as owning a portion of businesses. You really get a sense of that with Prem walking the reader through the big equity position in his annual report, talking about the CEO and details of the business. The other portion of Fairfax's equity portfolio, (which presumably ran by Wade and Lawrence) seem to capture the beta of the broader market.

 

But is the static concentrated portion of the portfolio make Fairfax look like an unwieldy conglomerate as seen by the market. Personally I like that. Buffet calls conglomerate a term applied to holding companies that own a hodge-podge of unrelated businesses, arguing that in Berkshire' case, although a conglomerate, they do not pay control premium and are happy to have non-controlling stakes. Same goes for Fairfax as the last time they bought a full company at a premium was Allied World. So far so good.

 

Speaking of conglomerates, today Larry Culp is tearing down General Electric. About 20 years ago, GE was so addicted to its cash flows from GE Capital that it couldn't even think of walking away from it and then there was the shadow of Jack Welch looming over the new guy. It took 2008-09 and GE's near demise for the new CEO to step out of the shadow and decide on a vector, but then again took nearly 7 more years before lots of its were spun off as Synchrony Financial and other parts sold to Blackstone. Even that wasn't enough, it took an outsider and a pandemic to make drastic change.

 

Where is Fairfax vis a vis that timeline in its lifetime. Was 2020 for Fairfax, what 2008-09 was for General Electric. Meaning that it was life-changing but not drastic enough for the CEO to truly take the jackhammer out Larry Culp' style.

 

[Parsad]

Food for thoughts. What does Markel's and FFH's equity portfolio have in common ?

Nothing ...

 

For Markel, it is more of list of nameless equity that it shuffles around based on valuations. No sentiment attached. Just a list. For Fairfax, the static concentrated portion of the portfolio that is not run by Wade and Lawrence, seem to be viewed not as stocks but as owning a portion of businesses. You really get a sense of that with Prem walking the reader through the big equity position in his annual report, talking about the CEO and details of the business. The other portion of Fairfax's equity portfolio, (which presumably ran by Wade and Lawrence) seem to capture the beta of the broader market.

 

But is the static concentrated portion of the portfolio make Fairfax look like an unwieldy conglomerate as seen by the market. Personally I like that. Buffet calls conglomerate a term applied to holding companies that own a hodge-podge of unrelated businesses, arguing that in Berkshire' case, although a conglomerate, they do not pay control premium and are happy to have non-controlling stakes. Same goes for Fairfax as the last time they bought a full company at a premium was Allied World. So far so good.

 

Speaking of conglomerates, today Larry Culp is tearing down General Electric. About 20 years ago, GE was so addicted to its cash flows from GE Capital that it couldn't even think of walking away from it and then there was the shadow of Jack Welch looming over the new guy. It took 2008-09 and GE's near demise for the new CEO to step out of the shadow and decide on a vector, but then again took nearly 7 more years before lots of its were spun off as Synchrony Financial and other parts sold to Blackstone. Even that wasn't enough, it took an outsider and a pandemic to make drastic change.

 

Where is Fairfax vis a vis that timeline in its lifetime. Was 2020 for Fairfax, what 2008-09 was for General Electric. Meaning that it was life-changing but not drastic enough for the CEO to truly take the jackhammer out Larry Culp' style.

 

No, I think that time for Fairfax was back in 2003.  The decision that we are no longer going to buy crappy insurers and turn them around led to the group of quality insurers they have today.  The second part of that was making Andy Barnard in charge of all of the insurers.

 

Even with Fairfax's more eclectic style of investing, the real culprit behind their underperformance has been due to betting against and shorting the market after 2009.  They took advantage of the 50% correction, but started hedging and that really hurt their performance.  Even with minimal exposure to the stock market, they would have done very well just in their bond investments, conglomerate investments and the equities they did invest in...excluding their shorts and market bets which cost them significantly.  Maybe the decision to stop shorting is a step in the right direction...simplifying their portfolio decisions.  Cheers!

[StubbleJumper]

Food for thoughts. What does Markel's and FFH's equity portfolio have in common ?

Nothing ...

 

For Markel, it is more of list of nameless equity that it shuffles around based on valuations. No sentiment attached. Just a list. For Fairfax, the static concentrated portion of the portfolio that is not run by Wade and Lawrence, seem to be viewed not as stocks but as owning a portion of businesses. You really get a sense of that with Prem walking the reader through the big equity position in his annual report, talking about the CEO and details of the business. The other portion of Fairfax's equity portfolio, (which presumably ran by Wade and Lawrence) seem to capture the beta of the broader market.

 

But is the static concentrated portion of the portfolio make Fairfax look like an unwieldy conglomerate as seen by the market. Personally I like that. Buffet calls conglomerate a term applied to holding companies that own a hodge-podge of unrelated businesses, arguing that in Berkshire' case, although a conglomerate, they do not pay control premium and are happy to have non-controlling stakes. Same goes for Fairfax as the last time they bought a full company at a premium was Allied World. So far so good.

 

Speaking of conglomerates, today Larry Culp is tearing down General Electric. About 20 years ago, GE was so addicted to its cash flows from GE Capital that it couldn't even think of walking away from it and then there was the shadow of Jack Welch looming over the new guy. It took 2008-09 and GE's near demise for the new CEO to step out of the shadow and decide on a vector, but then again took nearly 7 more years before lots of its were spun off as Synchrony Financial and other parts sold to Blackstone. Even that wasn't enough, it took an outsider and a pandemic to make drastic change.

 

Where is Fairfax vis a vis that timeline in its lifetime. Was 2020 for Fairfax, what 2008-09 was for General Electric. Meaning that it was life-changing but not drastic enough for the CEO to truly take the jackhammer out Larry Culp' style.

 

No, I think that time for Fairfax was back in 2003.  The decision that we are no longer going to buy crappy insurers and turn them around led to the group of quality insurers they have today.  The second part of that was making Andy Barnard in charge of all of the insurers.

 

Even with Fairfax's more eclectic style of investing, the real culprit behind their underperformance has been due to betting against and shorting the market after 2009.  They took advantage of the 50% correction, but started hedging and that really hurt their performance.  Even with minimal exposure to the stock market, they would have done very well just in their bond investments, conglomerate investments and the equities they did invest in...excluding their shorts and market bets which cost them significantly.  Maybe the decision to stop shorting is a step in the right direction...simplifying their portfolio decisions.  Cheers!

 

 

Sanj, please stop describing what FFH did as "hedging."  More than 100% of FFH's equity portfolio was "hedged."  When your hedge-ratio exceeds your exposure to the underlying (ie, more than 100%) that's called speculation.  It was one of the investment decisions where the excessive position sizing reflected poor risk management.

 

 

SJ

[bearprowler6]

Food for thoughts. What does Markel's and FFH's equity portfolio have in common ?

Nothing ...

 

For Markel, it is more of list of nameless equity that it shuffles around based on valuations. No sentiment attached. Just a list. For Fairfax, the static concentrated portion of the portfolio that is not run by Wade and Lawrence, seem to be viewed not as stocks but as owning a portion of businesses. You really get a sense of that with Prem walking the reader through the big equity position in his annual report, talking about the CEO and details of the business. The other portion of Fairfax's equity portfolio, (which presumably ran by Wade and Lawrence) seem to capture the beta of the broader market.

 

But is the static concentrated portion of the portfolio make Fairfax look like an unwieldy conglomerate as seen by the market. Personally I like that. Buffet calls conglomerate a term applied to holding companies that own a hodge-podge of unrelated businesses, arguing that in Berkshire' case, although a conglomerate, they do not pay control premium and are happy to have non-controlling stakes. Same goes for Fairfax as the last time they bought a full company at a premium was Allied World. So far so good.

 

Speaking of conglomerates, today Larry Culp is tearing down General Electric. About 20 years ago, GE was so addicted to its cash flows from GE Capital that it couldn't even think of walking away from it and then there was the shadow of Jack Welch looming over the new guy. It took 2008-09 and GE's near demise for the new CEO to step out of the shadow and decide on a vector, but then again took nearly 7 more years before lots of its were spun off as Synchrony Financial and other parts sold to Blackstone. Even that wasn't enough, it took an outsider and a pandemic to make drastic change.

 

Where is Fairfax vis a vis that timeline in its lifetime. Was 2020 for Fairfax, what 2008-09 was for General Electric. Meaning that it was life-changing but not drastic enough for the CEO to truly take the jackhammer out Larry Culp' style.

 

No, I think that time for Fairfax was back in 2003.  The decision that we are no longer going to buy crappy insurers and turn them around led to the group of quality insurers they have today.  The second part of that was making Andy Barnard in charge of all of the insurers.

 

Even with Fairfax's more eclectic style of investing, the real culprit behind their underperformance has been due to betting against and shorting the market after 2009.  They took advantage of the 50% correction, but started hedging and that really hurt their performance.  Even with minimal exposure to the stock market, they would have done very well just in their bond investments, conglomerate investments and the equities they did invest in...excluding their shorts and market bets which cost them significantly.  Maybe the decision to stop shorting is a step in the right direction...simplifying their portfolio decisions.  Cheers!

 

 

Sanj, please stop describing what FFH did as "hedging."  More than 100% of FFH's equity portfolio was "hedged."  When your hedge-ratio exceeds your exposure to the underlying (ie, more than 100%) that's called speculation.  It was one of the investment decisions where the excessive position sizing reflected poor risk management.

 

 

SJ

 

+1

[Thrifty3000]

Food for thoughts. What does Markel's and FFH's equity portfolio have in common ?

Nothing ...

 

For Markel, it is more of list of nameless equity that it shuffles around based on valuations. No sentiment attached. Just a list. For Fairfax, the static concentrated portion of the portfolio that is not run by Wade and Lawrence, seem to be viewed not as stocks but as owning a portion of businesses. You really get a sense of that with Prem walking the reader through the big equity position in his annual report, talking about the CEO and details of the business. The other portion of Fairfax's equity portfolio, (which presumably ran by Wade and Lawrence) seem to capture the beta of the broader market.

 

But is the static concentrated portion of the portfolio make Fairfax look like an unwieldy conglomerate as seen by the market. Personally I like that. Buffet calls conglomerate a term applied to holding companies that own a hodge-podge of unrelated businesses, arguing that in Berkshire' case, although a conglomerate, they do not pay control premium and are happy to have non-controlling stakes. Same goes for Fairfax as the last time they bought a full company at a premium was Allied World. So far so good.

 

Speaking of conglomerates, today Larry Culp is tearing down General Electric. About 20 years ago, GE was so addicted to its cash flows from GE Capital that it couldn't even think of walking away from it and then there was the shadow of Jack Welch looming over the new guy. It took 2008-09 and GE's near demise for the new CEO to step out of the shadow and decide on a vector, but then again took nearly 7 more years before lots of its were spun off as Synchrony Financial and other parts sold to Blackstone. Even that wasn't enough, it took an outsider and a pandemic to make drastic change.

 

Where is Fairfax vis a vis that timeline in its lifetime. Was 2020 for Fairfax, what 2008-09 was for General Electric. Meaning that it was life-changing but not drastic enough for the CEO to truly take the jackhammer out Larry Culp' style.

 

No, I think that time for Fairfax was back in 2003.  The decision that we are no longer going to buy crappy insurers and turn them around led to the group of quality insurers they have today.  The second part of that was making Andy Barnard in charge of all of the insurers.

 

Even with Fairfax's more eclectic style of investing, the real culprit behind their underperformance has been due to betting against and shorting the market after 2009.  They took advantage of the 50% correction, but started hedging and that really hurt their performance.  Even with minimal exposure to the stock market, they would have done very well just in their bond investments, conglomerate investments and the equities they did invest in...excluding their shorts and market bets which cost them significantly.  Maybe the decision to stop shorting is a step in the right direction...simplifying their portfolio decisions.  Cheers!

 

 

Sanj, please stop describing what FFH did as "hedging."  More than 100% of FFH's equity portfolio was "hedged."  When your hedge-ratio exceeds your exposure to the underlying (ie, more than 100%) that's called speculation.  It was one of the investment decisions where the excessive position sizing reflected poor risk management.

 

 

SJ

 

They were bets on values regressing to the mean. Historically he was able to wait out Mr. Market and take advantage of volatility (see dot com and housing bubbles). Unfortunately, Mr. Market hasn’t cooperated for over a decade and Prem learned his lessons the hard way.

 

Prem is smart. He learned. He’s not just another run of the mill, self-made, Canadian, multi-billionaire from India. And, he has formally, in writing, taken shorting off the table. I don’t think he is addicted to shorting or to shareholder lawsuits.

 

This issue is easy to understand and was even easier to solve.

 

He also knows he doesn’t have to juice earnings with shorts anymore, now that he has more good investment opportunities than he has capital (for the foreseeable future).

 

Now, all he has to do is reward a bunch of all-star insurance and non-insurance managers/investors like David Sokol, Byron Trott, Wade Burton, etc if they can grow capital by more than 15%. If they can do it, they get more capital. If they can’t then they don’t.

 

The real story of the last ten years was not the shorts. It was the global network of non-insurance capital allocators he has been assembling.

 

The next ten years won’t look like the last ten years. And, the stock will trade above BV again soon enough.

[petec]

Food for thoughts. What does Markel's and FFH's equity portfolio have in common ?

Nothing ...

 

For Markel, it is more of list of nameless equity that it shuffles around based on valuations. No sentiment attached. Just a list. For Fairfax, the static concentrated portion of the portfolio that is not run by Wade and Lawrence, seem to be viewed not as stocks but as owning a portion of businesses. You really get a sense of that with Prem walking the reader through the big equity position in his annual report, talking about the CEO and details of the business. The other portion of Fairfax's equity portfolio, (which presumably ran by Wade and Lawrence) seem to capture the beta of the broader market.

 

But is the static concentrated portion of the portfolio make Fairfax look like an unwieldy conglomerate as seen by the market. Personally I like that. Buffet calls conglomerate a term applied to holding companies that own a hodge-podge of unrelated businesses, arguing that in Berkshire' case, although a conglomerate, they do not pay control premium and are happy to have non-controlling stakes. Same goes for Fairfax as the last time they bought a full company at a premium was Allied World. So far so good.

 

Speaking of conglomerates, today Larry Culp is tearing down General Electric. About 20 years ago, GE was so addicted to its cash flows from GE Capital that it couldn't even think of walking away from it and then there was the shadow of Jack Welch looming over the new guy. It took 2008-09 and GE's near demise for the new CEO to step out of the shadow and decide on a vector, but then again took nearly 7 more years before lots of its were spun off as Synchrony Financial and other parts sold to Blackstone. Even that wasn't enough, it took an outsider and a pandemic to make drastic change.

 

Where is Fairfax vis a vis that timeline in its lifetime. Was 2020 for Fairfax, what 2008-09 was for General Electric. Meaning that it was life-changing but not drastic enough for the CEO to truly take the jackhammer out Larry Culp' style.

 

No, I think that time for Fairfax was back in 2003.  The decision that we are no longer going to buy crappy insurers and turn them around led to the group of quality insurers they have today.  The second part of that was making Andy Barnard in charge of all of the insurers.

 

Even with Fairfax's more eclectic style of investing, the real culprit behind their underperformance has been due to betting against and shorting the market after 2009.  They took advantage of the 50% correction, but started hedging and that really hurt their performance.  Even with minimal exposure to the stock market, they would have done very well just in their bond investments, conglomerate investments and the equities they did invest in...excluding their shorts and market bets which cost them significantly.  Maybe the decision to stop shorting is a step in the right direction...simplifying their portfolio decisions.  Cheers!

 

 

Sanj, please stop describing what FFH did as "hedging."  More than 100% of FFH's equity portfolio was "hedged."  When your hedge-ratio exceeds your exposure to the underlying (ie, more than 100%) that's called speculation.  It was one of the investment decisions where the excessive position sizing reflected poor risk management.

 

 

SJ

 

They were bets on values regressing to the mean. Historically he was able to wait out Mr. Market and take advantage of volatility (see dot com and housing bubbles). Unfortunately, Mr. Market hasn’t cooperated for over a decade and Prem learned his lessons the hard way.

 

Prem is smart. He learned. He’s not just another run of the mill, self-made, Canadian, multi-billionaire from India. And, he has formally, in writing, taken shorting off the table. I don’t think he is addicted to shorting or to shareholder lawsuits.

 

This issue is easy to understand and was even easier to solve.

 

He also knows he doesn’t have to juice earnings with shorts anymore, now that he has more good investment opportunities than he has capital (for the foreseeable future).

 

Now, all he has to do is reward a bunch of all-star insurance and non-insurance managers/investors like David Sokol, Byron Trott, Wade Burton, etc if they can grow capital by more than 15%. If they can do it, they get more capital. If they can’t then they don’t.

 

The real story of the last ten years was not the shorts. It was the global network of non-insurance capital allocators he has been assembling.

 

The next ten years won’t look like the last ten years. And, the stock will trade above BV again soon enough.

 

Regardless of how one defines the shorts, this is a VERY good post. Spot on.

[Parsad]

Food for thoughts. What does Markel's and FFH's equity portfolio have in common ?

Nothing ...

 

For Markel, it is more of list of nameless equity that it shuffles around based on valuations. No sentiment attached. Just a list. For Fairfax, the static concentrated portion of the portfolio that is not run by Wade and Lawrence, seem to be viewed not as stocks but as owning a portion of businesses. You really get a sense of that with Prem walking the reader through the big equity position in his annual report, talking about the CEO and details of the business. The other portion of Fairfax's equity portfolio, (which presumably ran by Wade and Lawrence) seem to capture the beta of the broader market.

 

But is the static concentrated portion of the portfolio make Fairfax look like an unwieldy conglomerate as seen by the market. Personally I like that. Buffet calls conglomerate a term applied to holding companies that own a hodge-podge of unrelated businesses, arguing that in Berkshire' case, although a conglomerate, they do not pay control premium and are happy to have non-controlling stakes. Same goes for Fairfax as the last time they bought a full company at a premium was Allied World. So far so good.

 

Speaking of conglomerates, today Larry Culp is tearing down General Electric. About 20 years ago, GE was so addicted to its cash flows from GE Capital that it couldn't even think of walking away from it and then there was the shadow of Jack Welch looming over the new guy. It took 2008-09 and GE's near demise for the new CEO to step out of the shadow and decide on a vector, but then again took nearly 7 more years before lots of its were spun off as Synchrony Financial and other parts sold to Blackstone. Even that wasn't enough, it took an outsider and a pandemic to make drastic change.

 

Where is Fairfax vis a vis that timeline in its lifetime. Was 2020 for Fairfax, what 2008-09 was for General Electric. Meaning that it was life-changing but not drastic enough for the CEO to truly take the jackhammer out Larry Culp' style.

 

No, I think that time for Fairfax was back in 2003.  The decision that we are no longer going to buy crappy insurers and turn them around led to the group of quality insurers they have today.  The second part of that was making Andy Barnard in charge of all of the insurers.

 

Even with Fairfax's more eclectic style of investing, the real culprit behind their underperformance has been due to betting against and shorting the market after 2009.  They took advantage of the 50% correction, but started hedging and that really hurt their performance.  Even with minimal exposure to the stock market, they would have done very well just in their bond investments, conglomerate investments and the equities they did invest in...excluding their shorts and market bets which cost them significantly.  Maybe the decision to stop shorting is a step in the right direction...simplifying their portfolio decisions.  Cheers!

 

 

Sanj, please stop describing what FFH did as "hedging."  More than 100% of FFH's equity portfolio was "hedged."  When your hedge-ratio exceeds your exposure to the underlying (ie, more than 100%) that's called speculation.  It was one of the investment decisions where the excessive position sizing reflected poor risk management.

 

 

SJ

 

They were bets on values regressing to the mean. Historically he was able to wait out Mr. Market and take advantage of volatility (see dot com and housing bubbles). Unfortunately, Mr. Market hasn’t cooperated for over a decade and Prem learned his lessons the hard way.

 

Prem is smart. He learned. He’s not just another run of the mill, self-made, Canadian, multi-billionaire from India. And, he has formally, in writing, taken shorting off the table. I don’t think he is addicted to shorting or to shareholder lawsuits.

 

This issue is easy to understand and was even easier to solve.

 

He also knows he doesn’t have to juice earnings with shorts anymore, now that he has more good investment opportunities than he has capital (for the foreseeable future).

 

Now, all he has to do is reward a bunch of all-star insurance and non-insurance managers/investors like David Sokol, Byron Trott, Wade Burton, etc if they can grow capital by more than 15%. If they can do it, they get more capital. If they can’t then they don’t.

 

The real story of the last ten years was not the shorts. It was the global network of non-insurance capital allocators he has been assembling.

 

The next ten years won’t look like the last ten years. And, the stock will trade above BV again soon enough.

 

Yes, he's essentially got most of Peter Cundill's (Wade & Lawrence) proteges and Warren Buffett's (Sokol and Trott) proteges running money for Fairfax...plus all of the guys that learned at Prem, Brian and Roger's feet.  That's not a bad group by any standards! 

 

The biggest concern on the investment front is who can do what Brian did all these years?  Cheers!

[petec]

For what they are worth, my notes on the call and letter. Haven't dissected the AR yet. Sorry about the formatting - doesn't paste well...

 

○ BVPS $478 and adjusted BVPS could be $535 by end Feb 2021. Letter says yearend carrying value exceeded market value by $662m or $25 per share, but on the call they said that after the early 2021 rally, fair exceeds carrying by $712m or $27 per share. In addition they own 74% of Digit on a fully converted basis, worth $1406m at the Jan 2021 mark, but carried at $517m for a gap of $889m or $33 per share.

○ 2020 a real stress test, yet they managed to:

• Make $313m on investments despite losing $1.5bn in Q1 and $529m on equity shorts in the year.

• Put $1.38bn into insurance subsidiaries; think they are now fully capitalised and don't need more to grow.

• Spend $206.6m buying the last 9.4% of Brit.

• Buy back 801k shares (c.3%) at US$298 per share and lock in a further 1.4m shares at US$344 via a TRS.

• Get to a YE debt/cap of 29.7%.

• Do deals to get holdco cash to $1.4bn with all revolvers repaid (Riverstone $730m up front, and Brit $375m for 14%, value $2,679m).

○ Sale of Riverstone Europe. Operation was born out of the acquisition of Sphere Drake, which was put into runoff in 1999. RE then took on more internal runoff books until 2008 when, down to $100m in capital and short of work, it started buying books. Over 20 high-return transactions later Fairfax sold it for $1.35bn. I am not sure how they get to this figure - I think they sold 40% to OMERS for $560m in 2019 and 60% to CVC in 2020 for $730m plus $236m contingent on future performance. As part of the CVC deal they also agreed to buy a portfolio from Riverstone Europe for $1.2bn by the end of 2022. This portfolio consists of significant stakes in Fairfax India, Atlas, Blackberry, CIB, Recipe, and others and the valuation reflects December 2019 prices. Fairfax could have sold this portfolio pre-closing, but think it was "exceptionally undervalued". It's not clear whether they have the option or obligation to buy - I think it is an obligation but it could be quite valuable.

○ Insurance - pricing globally is rising 10-30% and terms are tightening.

• NPW up 11% in 2020 16% in 4q.

• Float per share up 10% to $927 having compounded at 18.4% since 1985.

• 97.8% CR, including 4.8% of COVID losses, 4.7% of other CAT losses, and 3.3% of favourable prior year development. The average CR excluding covid was 93% and all businesses underwrote at under 100% on this basis. COVID losses were $670m or $25 per share pretax, and 50% are INBR. Underwriting profit $309m despite a $240m loss at Brit (largely covid - event cancellation etc.).

• Writing at 1.0x NPW/surplus. 2002-5 they did 1.5x.

• Across insurance they have over 20 profit centres focussed on a unique set of customers, geographies, or products. "Our insurance companies are worth much more than the amount at which they are carried on our balance sheet."

• International (non-NA other than Brit) now accounts for $2.3bn of FFH equity. Fairfax's share of gross premiums and investments are worth $3.2bn and $5.3bn respectively.

▫ 2020 CR98%. All below 100% except Bryte (covid) and Digit (startup).

▫ Fast-growing businesses in underpenetrated areas.

▫ Latam (comprising Argentina, Chile, Colombia, Uruguay and acquired in 2017) dipped below 100% CR for the first time.

▫ Fairfax Brazil did 95%. It has now done 5 years under 100% and has doubled premiums in this time.

▫ Colonnade (Eastern Europe) did 93%.

▫ Ukraine. 2019: acquired 70% of two companies for $22m. 2020: gross premiums of $144, CR of 93%, and net profits of $16m for a 2x P/E.

▫ Eurolife did $500m of gross premia and geenrated $130m in net income. It has been "an extraordinary investment".

▫ Fairfax Asia did 97%.

▫ Digit grew gross premiums 40% and will do a 113% CR. Including investment income it should be profitable and "many of our companies expect do benefit from Digit's technological and innovation leadership".

▫ Gulf Insurance - part owned since 2010. Since then it has tripled gross premiums to $1,.4bn, averaging a 95% CR. In 2020 it bought AXA's Gulf operations adding $900m of gross premiums at a 95% CR.

○ Investments

• Investment portfolio at yearend $42bn ($48bn including non-colsolidated companies like Gulf, Eurolife, and Digit).

• "The most important determinant of long term success in any investment is good management, led by an outstanding CEO."

• Wade and Lawrence had a good year and will get another $1.5bn in 2021.

• More monetisations to come - "just the beginning".

• Lost money on shorts again but "our last remaining short position is finally closed" and "we will never short stock indices or individual companies again". Closed out last short (almost certainly Tesla) at a huge loss in 2020.

• Thomas Cook India will need some financing in 2021 given its business stopped dead, and will issue $60m of convertible prefs to Fairfax. Expect it to emerge "stronger and more efficient".

• Quess has emerged stronger, with "more clients, better growth, net cash, and better free cash generation".

• Farmers Edge IPO'd at $425m in value to Fairfax. They have invested $376m but due to accumulated losses it was carried at $303m. Post IPO it is debt free, with $100m in cash, and should generate free cash flow in 2022.

• Boat Rocker has received CAD110m from Fairfax since investment in 2015 and has grown revenues tenfold from CAD70m to an expected 700m in that time.

• AGT did record ebitda in 2020.

• Invested $50m in Davos in 2016 and sold it to Unilever in 2020 for $59m plus a $36m 10-year contingent earn-out.

• Peak Achievement is a 50/50 JV with Sagard/Paul Desmarais III. It owns Bauer (leader in hockey) and Easton (no.3 in baseball). In 2020 it merged Easton with Rawlings, the leader in baseball, for $65m in cash and a 28% stake.

• Golf Town and Sporting Life - 71% owned for an investment of CAD74m. Had an outstanging year navigating covid and realigning Sporting Life. The two businesses are counter-seasonal so the combination has created working capital and cost synergies.

• CIB's NPLs are 3x covered and the CAR is 31%. Pre-provision profits grew 13%.

• Resolute bought 3 sawmills in early 2020 - great timing - and bought back 8% of shares outstanding at $4.28.

• BDT provides family and founder-led businesses with long term capital. Fairfax have invested $647m, received cash back of $550m, and still have $631m.

• KW. Have invested $1130m since 2010, received $1054, and have $582m, for an aveage annual realised return on completed projects of 20%. As of YE20 they have also committed to $1.5bn of first mortgages on high quality real estate with loans to value below 60%, an average yield of 5%, and an average maturity of 4 years.

• Blue Ant merged Omnia with TSX-listed Enthusiast Gaming for shares at CAD1.65, now worth over CAD8.

• Exco (44% owned) generated $136m in ebitda and $36m of free cash flow. Net debt fell to $145m.

• Mosaic (61% owned if warrants exercised) "have done an outstanding job building a portfolio of established businesses in niche markets".

Merged Dexterra into Horizon North at an average cost of $3.17.

[ourkid8]

On Feb 17, Fairfax repurchased 89,923 shares for cancellation at $526.40... Come on Prem, keep on going!!!!

[A_Hamilton]

For what they are worth, my notes on the call and letter. Haven't dissected the AR yet. Sorry about the formatting - doesn't paste well...

 

○ BVPS $478 and adjusted BVPS could be $535 by end Feb 2021. Letter says yearend carrying value exceeded market value by $662m or $25 per share, but on the call they said that after the early 2021 rally, fair exceeds carrying by $712m or $27 per share. In addition they own 74% of Digit on a fully converted basis, worth $1406m at the Jan 2021 mark, but carried at $517m for a gap of $889m or $33 per share.

 

 

Petec, just so you know I think you are comparing some apples and oranges figures (this is due to the way FFH presents things).

 

The $662 million FFH refers to is the market value of the common equities at 12/31 being less than the fair value by $662 million as laid out by Prem on page 10 of the annual report (due mainly to Eurobank and Quess).

 

The $712 million figure that was mentioned by Jen Allen on the call corresponds to the Investment in Associates fair value over carrying value at 12/31/20 as laid out on page 72 of the annual. The biggest driver between these tables is the private insurance holdings (Eurolife, Thai Re, Go Digit) and then FFH India.

 

FFH's comment on the call and then in the annual letter was that the fair value of the common as laid out by Prem on page 10 of the annual is now above that of their carrying value.

 

These are very different statements so just want to be clear there. A good portion of Q1's gains (to the extent market stays up) then will simply go to having the carrying value and market value of the common equities be much closer.

 

 

[petec]

For what they are worth, my notes on the call and letter. Haven't dissected the AR yet. Sorry about the formatting - doesn't paste well...

 

○ BVPS $478 and adjusted BVPS could be $535 by end Feb 2021. Letter says yearend carrying value exceeded market value by $662m or $25 per share, but on the call they said that after the early 2021 rally, fair exceeds carrying by $712m or $27 per share. In addition they own 74% of Digit on a fully converted basis, worth $1406m at the Jan 2021 mark, but carried at $517m for a gap of $889m or $33 per share.

 

 

Petec, just so you know I think you are comparing some apples and oranges figures (this is due to the way FFH presents things).

 

The $662 million FFH refers to is the market value of the common equities at 12/31 being less than the fair value by $662 million as laid out by Prem on page 10 of the annual report (due mainly to Eurobank and Quess).

 

The $712 million figure that was mentioned by Jen Allen on the call corresponds to the Investment in Associates fair value over carrying value at 12/31/20 as laid out on page 72 of the annual. The biggest driver between these tables is the private insurance holdings (Eurolife, Thai Re, Go Digit) and then FFH India.

 

FFH's comment on the call and then in the annual letter was that the fair value of the common as laid out by Prem on page 10 of the annual is now above that of their carrying value.

 

These are very different statements so just want to be clear there. A good portion of Q1's gains (to the extent market stays up) then will simply go to having the carrying value and market value of the common equities be much closer.

 

Good catch. I had a feeling something didn’t square, but I typed up my notes from the call and the letter two weeks apart and missed the nuance. My bad.

[petec]

On reflection I think the right number for year end is 508, which is the 712m by which the fair value of investments in associates exceeds the carrying value less the 204m by which the carrying value of consolidated common equities exceeded market value.

 

In other words if you were trying to calculate year end BVPS at fair/market value you’d add 508m or about $19 per share, and then you can add the $33 per share from marking Digit to the January valuation on a fully diluted basis.

 

Clearly you can debate the fair value measure, especially for BIAL (though hopefully that debate is settled soon by the IPO). But if you follow this logic the fair value BVPS is 478+19+33=530, before any increase in listed share prices ytd.

 

I’ll triple check this tomorrow but in the meantime please point out any more obvious flaws!

[Daphne]

Boat Rocker Media Inc. expects to debut on the Toronto Stock Exchange next week after reducing the share price for its initial public offering.

 

The amended IPO will raise $170-million, down from the initially proposed $175-million and will debut at $9 per share, less than the $12-$14 range offered in the initial prospectus.

 

Boat Rocker will sell more of the company than originally planned, and at a lower valuation. There will be approximately 32.6 million common shares outstanding in the amended IPO, compared with 26.7 million in the initial prospectus.

[Phoenix01]

The increased volume on 2/18 & 2/19 might point to more re-purchases.  Interesting that the debt issuance for 600M was completed right after (3/3).  We will see....

[A_Hamilton]

On Feb 17, Fairfax repurchased 89,923 shares for cancellation at $526.40... Come on Prem, keep on going!!!!

The annual says on page 95 that they have repurchased for cancellation 137,923 shares and then 42,197 shares for treasury thru 3/4.