Fairfax 2021

[Parsad]

1 hour ago, Viking said:

 

Bonus question. This one is going to be multiple choice. What is the largest amount (in percentage terms) Fairfax has reduced its share count in a year? 
a.) 5%.    b.) 8%.   c.) 16%.   d.) 25%

 

I am going to let someone else post the answer. But remember, we all know beyond a doubt that Prem ONLY knows how to issue more and more shares every year  

 

 

 

d) 25% in 1990.  Cheers!

 

[Spekulatius]

1 hour ago, Parsad said:

 

d) 25% in 1990.  Cheers!

 

It is great that we found some ancient scrolls telling Prem’s tales of buybacks in his gleeful years:

 

Most of us are more the “what have we done for me lately” kind of fellows. Not much action on thee  since 2004.

[Viking]

1 hour ago, Spekulatius said:

It is great that we found some ancient scrolls telling Prem’s tales of buybacks in his gleeful years:

 

Most of us are more the “what have we done for me lately” kind of fellows. Not much action on thee  since 2004.

Spek, shame on you… you sound like a short term trader (not a real investor) with a comment like that  

 

But you have likely already sold the Fairfax shares you purchased last Friday. Realizing they will likely only give you a 25 or 30% return over the next year… and replaced them with the shitload of other stocks that are going to give you a 50-60% return. I bet you are happy you dodged that bullet!   

Edited October 5, 2021 by Viking

[nwoodman]

There has been a bit of chatter around insurance industry rags about cyber re/insurance after an S&P Global Ratings report was released a little while back.  The tie in  between BBY and Fairfax insurance businesses is likely not a new or unique thought.  Does anyone know if a cybersecurity insurance tie-in  has been discussed at any of the AGMs or anywhere else?

 

Probably remiss of me but I don't think that much about Blackberry even though it is a fair chunk of FFH equity holdings, as a % it continues to decline.  It is now in the mildly annoying but no longer a serious source of irritation, more like an option. 

 

Some snippets on the opportunity

 

"Prices in the cyber re/insurance market could rise sharply between 2021 and 2023, in some cases doubling from current levels, according to a report from S&P Global Ratings. “Depending on the region and [terms and conditions], policyholders could expect rate adjustments of up to 100% because the risk level has fundamentally changed,” S&P Global Ratings said last week in its report, Cyber Risks In a New Era: Reinsurers Could Unlock the Cyber Insurance Market.

https://www.canadianunderwriter.ca/insurance/will-cyber-insurance-rates-double-in-the-next-couple-years-1004213158/

 

Increasing Reinsurance Demand

The report said the pandemic exacerbated the huge cyber reinsurance protection gap by causing existing and new clients to increase demand for the protect, requesting larger limits and more inclusions in their policies’ terms and conditions (T&C). “Primary insurers rely relatively heavily on the reinsurance market for cyber insurance because it has a relatively short track record compared with more traditional and mature property/casualty lines of business,” said S&P, estimating that they pass 35%-45% of global cyber premium to reinsurers, with some regional variation.

 

Cyber Market Development

S&P expects this business line to be one of the fastest growing insurance markets over the next decade. “The dynamic change in claims pattern, rise of cyber threats, and huge accumulation risk creates an opportunity for larger reinsurance capacity.”  As a result of these trends, the number of reinsurers and insurers offering cyber coverage is rising, along with demand, but capacity is still limited, the report said S&P noted that the market would benefit from the development of a comprehensive retrocession market, as well as the use of insurance linked securities (ILS) or alternative capital to improve capacity. “The market faces increasing demand, but limited supply. In our opinion, lack of capacity could be holding back the development of a sustainable cyber re/insurance market,” the report affirmed.

https://www.insurancejournal.com/news/international/2021/09/30/634535.htm 

 

cyber risks in a new era- reinsurers could unlock the cyber insurance market s.pdf

Edited October 5, 2021 by nwoodman

[Parsad]

3 hours ago, Spekulatius said:

It is great that we found some ancient scrolls telling Prem’s tales of buybacks in his gleeful years:

 

Most of us are more the “what have we done for me lately” kind of fellows. Not much action on thee  since 2004.

 

They've essentially bought back roughly 10% since 2017:

 

From the fourth quarter of 2017 up to June 30, 2021, the company has purchased 1,322,303 subordinate voting shares for treasury and 1,102,998 for cancellation at an aggregate cost of $1,022.9 million.

 

And the latest normal course issuer bid indicates they can buy up to 2.456M shares...or another 10%...and I suspect they will buy most of those fairly early as long as the price remains cooperative. 

 

In a low-interest rate environment, with little opportunity as asset prices have risen in most sectors, the natural area to allocate capital is in undervalued buybacks of his own company. 

 

This alone will be accretive to shareholders if bought under book...very accretive if bought under tangible book...eventually Mr. Market will come to his senses, and the bears on here will have to come up with excuses on how lucky Prem was or why they took the other side of this simple argument. 

 

I remember most of the same people telling me how Handler should have been removed from Jefferies two years ago, yet they couldn't see the improvements and how Handler was simplifying the business to be more like Jefferies and less like Leucadia.  Same argument was made by people on why everyone should avoid Biglari Holdings during the pandemic...they thought it would go bankrupt and didn't want to invest with Sardar.

 

You buy something because it is cheap...not because you don't like the management.  You also need to have enough common sense to get out when the stock reaches your estimate of intrinsic value...again whether you like management or not.  Cheers!

[nwoodman]

7 hours ago, StubbleJumper said:

***edit*** BTW, does everyone see the shares outstanding in 2015?  That's the year when Prem re-weighted the multiple voting shares to hold his control level at ~42% of the votes.  If he wants Ben and Christine to continue to control FFH after he eventually cannot fulfill the role of CEO or Chair, the share-count needs to drop *below* that of 2015.  Let's hope that is a source of motivation for the Watsa family.

 

Well done again SJ.  I had forgotten that provision, it was forced through as an amendment.  I can read it and arrive at a slightly different interpretation but it is not completely at odds with your recollection.

 

1. Original Letter

https://www.fairfax.ca/news/press-releases/press-release-details/2015/Fairfax-Calls-Special-Shareholders-Meeting-to-Consider-Amendment-to-Terms-of-Multiple-Voting-Shares/default.aspx

 

2. Amendments

https://s1.q4cdn.com/579586326/files/doc_financials/2015/Chairman-Letter-(August).pdf

[Candyman1]

11 hours ago, TwoCitiesCapital said:

 

+1 same boat here. It's all about the price. All the excuses for the current discount existed back in 2018 when it was at a premium. Other than interest rates, not much has been said that sufficiently explains why we should expect this to persist. 

 

+1 It is all about the price (multiple). Not sure why so many seem to not be able to grasp this. I didn't buy FFH 10 years ago at 1.2 times book, I bought it at less than 70% of book less than a year ago for the second time after buying it in the low $100 early in this century and selling it close to 1.5 times book. It is eerily similar how that time resembles today. Trust me, people were just as critical back then. There was no way that FFH would get a revaluation of its multiple. Literally I had to fight tooth and nail to stop my boss from selling it and holding on to FFH carried a lot of employment risk for me. I can see that something similar might be the case today with many institutional investors.

Yes, there is much to be said about the last 10 years which justified not buying FFH at 1.2 times book then, but at less than 70% of book now I believe we are being compensated for the risk we take. It is my belief that the next few years will look better than the last 10 years and that there is a reasonable chance we get compensated for taking that risk. Yes, there is a scenario where FFH under performs and at 70% of book I believe my downside is protected.

 

For those that swear that FFH will trade at X valuation or will never trade at Y valuation, good luck, you guys have a self confidence I do not have. The longer in years I invest, the less certainty I find in my picks. I do know that margin of safety has served me very well over the years. Who the hell knows that FFH trades at less than 70% of book because it is too complex or that BB is what is keeping the valuation down or that Digit is already included in people's valuations of FFH, etc. What seems to be the case to me is that currently people project forward the last 10 years into the future and that holding FFH holds employment risk for people at many funds. And when FFH shows that is changing and we get some reasonable growth in BV we will see a reasonable revaluation to 1 to 1.2 times book, maybe higher, but who knows really.

 

[Spekulatius]

6 hours ago, Viking said:

Spek, shame on you… you sound like a short term trader (not a real investor) with a comment like that  

 

But you have likely already sold the Fairfax shares you purchased last Friday. Realizing they will likely only give you a 25 or 30% return over the next year… and replaced them with the shitload of other stocks that are going to give you a 50-60% return. I bet you are happy you dodged that bullet!   

 Nope havn’t sold. I do trade, but not for < 2% gains, I am thinking more 20%. We also get a dividend in a few month and I want to put that one in my pocket as well. If things go in the right direction, there is potential for much more. The real money generally isn‘t made on rerating alone, it is made on a combination of increasing asset value and rerating.

Edited October 5, 2021 by Spekulatius

[Cigarbutt]

5 hours ago, nwoodman said:

There has been a bit of chatter around insurance industry rags about cyber re/insurance after an S&P Global Ratings report was released a little while back. 

...

If someone could PM or post the original report I'd be eternally grateful.

Maybe i can help.  What is it you're exactly looking for?

[maplevalue]

14 hours ago, TwoCitiesCapital said:

+1 same boat here. It's all about the price. All the excuses for the current discount existed back in 2018 when it was at a premium. Other than interest rates, not much has been said that sufficiently explains why we should expect this to persist. 

 

+1 as well. Here is a chart from back in February (P/B even lower now). Sure there are issues, but should P/B be that much lower than pre-COVID...I would say no.

 

[nwoodman]

2 hours ago, Cigarbutt said:

Maybe i can help.  What is it you're exactly looking for?

 

S&P Global Ratings  - “Cyber Risks In a New Era: Reinsurers Could Unlock the Cyber Insurance Market”

 

Greatly obliged

[Xerxes]

11 hours ago, Spekulatius said:

It is great that we found some ancient scrolls telling Prem’s tales of buybacks in his gleeful years:

 

Thanks for the good laugh on a otherwise grey Tuesday morning where i live

[Xerxes]

in case, they were not posted before.

 

 

 

 

Edited October 5, 2021 by Xerxes

[Xerxes]

16 hours ago, StubbleJumper said:

I would agree with you that many founders cannot morph from empire building to shrinking the capital base, but we should keep in mind that Prem might have more motivation than most.

SJ

 

Thanks.

That was very informative !!

[Viking]

7 hours ago, Xerxes said:

in case, they were not posted before.

 

 

 

 

Xerxes, thanks for posting. The second video (21 min) was excellent. The person doing the interview asked great questions. So people watching the video get a solid overview of the company. Bottom line, Digit certainly looks like the real deal. The financial impact for Fairfax could rival the CDS gains back in 2008-09. And just like the CDS position it is being completely missed by most investors. Today.  Mr Market eventually ‘got’ the CDS investment and my guess is they will also eventually ‘get’ Digit. And Fairfax shares will respond accordingly. Just another of the many tailwinds / catalysts that should play out over the next 12-24 months.

[Cigarbutt]

8 hours ago, nwoodman said:

 

S&P Global Ratings  - “Cyber Risks In a New Era: Reinsurers Could Unlock the Cyber Insurance Market”

 

Greatly obliged

Are you simply looking for the following:   

Cyber Risks In A New Era: Reinsurers Could Unlock The Cyber Insurance Market | S&P Global Ratings (spglobal.com)

or something else?

If interested in the topic, S&P Global has a "cyber-landing" page:

Cyber Risk in a New Era | S&P Global Ratings (spglobal.com)

and they did a relevant webinar last fall. Here are the slides:

PowerPoint Presentation (spglobal.com)

i think you can access the webinar as a replay. 

 

Cyber risk is already an about 20-year-old market and trends are only starting to appear and unexpected stochastic-like losses could happen. Do you want to have the winner's curse-first mover "advantage"?

-----) Back to FFH 2021

[Dazel]

Fairfax looks real good right here!!!

[Xerxes]

4 hours ago, Viking said:

Xerxes, thanks for posting. The second video (21 min) was excellent. The person doing the interview asked great questions. So people watching the video get a solid overview of the company. Bottom line, Digit certainly looks like the real deal. The financial impact for Fairfax could rival the CDS gains back in 2008-09. And just like the CDS position it is being completely missed by most investors. Today.  Mr Market eventually ‘got’ the CDS investment and my guess is they will also eventually ‘get’ Digit. And Fairfax shares will respond accordingly. Just another of the many tailwinds / catalysts that should play out over the next 12-24 months.

 

Cheers

Perhaps we will see each other in Toronto for the AGM.

Whether the discount narrows or not, I'll buy you a drink for all the work you have done.

 

The only difference  I would say between CDS and Digit is that the former was cold hard cash that got realized. Digit will likely be unrealized gain for a long time even after its IPO. If Prem sells a portion of Digit, I would really question why Digit (a fast growing tech) deserves a trim and not Resolute (a lumbering sawmill) .

[petec]

4 hours ago, Xerxes said:

 

Cheers

Perhaps we will see each other in Toronto for the AGM.

Whether the discount narrows or not, I'll buy you a drink for all the work you have done.

 

The only difference  I would say between CDS and Digit is that the former was cold hard cash that got realized. Digit will likely be unrealized gain for a long time even after its IPO. If Prem sells a portion of Digit, I would really question why Digit (a fast growing tech) deserves a trim and not Resolute (a lumbering sawmill) .

Yes - I think the better analogy is ICICI Lombard, which was built from scratch into a very valuable asset. But even that was only sold because the other side wanted control. I suspect Fairfax might keep Digit for good, making it effectively the next big insurance subsidiary rather than an “investment”. 

[glider3834]

4 hours ago, petec said:

Yes - I think the better analogy is ICICI Lombard, which was built from scratch into a very valuable asset. But even that was only sold because the other side wanted control. I suspect Fairfax might keep Digit for good, making it effectively the next big insurance subsidiary rather than an “investment”. 

Yes petec agree - I think they are in Digit for the long term & its strategic investment, however, I think they will want to provide some liquidity to their retail individual shareholders, employee investors & VC funds at some point - but maybe they can do both via an IPO but retain majority control.

 

They have also said they are aiming for 10% market share in GWP in India - probably will take them 3-4 yrs to get to 5% (up from their current 1.7% share) assuming mid 30% GWP growth rate. So if they are going to get to 10% - at least 7-8 years I am thinking.

 

If they get to 5% market share & maintain their growth trajectory, I think it couldpotentially double Digit's valuation to around 7bil based on their current value of 3.5 bil with a 1.7% share  If they can double Digit's valuation then assuming dilution is not excessive Fairfax's stake could be worth around $4.5 bil. But maybe an IPO route could help them get to that valuation earlier.

 

I checked IRDAI and among insurers that have over 1% share - they are far & away the fastest growing, non-life insurer in India. There are a couple of digital insurers under 1% share including Acko  that are growing at faster percentage rate but off a much lower premium level.

 

They are also sharing the tech know-how from Digit through the rest of the Fairfax insurance business - so I think it has strategic importance - digitalisation in insurance sector is happening at a fast rate & I think Digit is a key part of Fairfax's strategy in capitalising on this.

 

They have also talked about expanding Digit beyond India - nothing has happened yet but maybe something to watch.

 

 

 

 

Edited October 6, 2021 by glider3834

[petec]

6 hours ago, glider3834 said:

Yes petec agree - I think they are in Digit for the long term & its strategic investment, however, I think they will want to provide some liquidity to their retail individual shareholders, employee investors & VC funds at some point - but maybe they can do both via an IPO but retain majority control.

 

They have also said they are aiming for 10% market share in GWP in India - probably will take them 3-4 yrs to get to 5% (up from their current 1.7% share) assuming mid 30% GWP growth rate. So if they are going to get to 10% - at least 7-8 years I am thinking.

 

If they get to 5% market share & maintain their growth trajectory, I think it couldpotentially double Digit's valuation to around 7bil based on their current value of 3.5 bil with a 1.7% share  If they can double Digit's valuation then assuming dilution is not excessive Fairfax's stake could be worth around $4.5 bil. But maybe an IPO route could help them get to that valuation earlier.

 

I checked IRDAI and among insurers that have over 1% share - they are far & away the fastest growing, non-life insurer in India. There are a couple of digital insurers under 1% share including Acko  that are growing at faster percentage rate but off a much lower premium level.

 

They are also sharing the tech know-how from Digit through the rest of the Fairfax insurance business - so I think it has strategic importance - digitalisation in insurance sector is happening at a fast rate & I think Digit is a key part of Fairfax's strategy in capitalising on this.

 

They have also talked about expanding Digit beyond India - nothing has happened yet but maybe something to watch.

 

 

 

 

Agree with all of this.

[Spekulatius]

20 hours ago, Xerxes said:

Digit will likely be unrealized gain for a long time even after its IPO. If Prem sells a portion of Digit, I would really question why Digit (a fast growing tech) deserves a trim and not Resolute (a lumbering sawmill) .

I totally agree. This would be watering the weeds and pulling the flowers. I really would like them to liquidate BB, RFP and Stelco, be it outright sales or special dividends from Stelco and RFP.

 

Digit has a lot of potential and they got in at the ground floor due to personal relationships Prem build over the years. That’s an real edge that they should build upon. They don’t have a real edge in commodity plays or BB.

As @rkbabang said up thread, the reason they invested in BB (for example) was likely personal connections with BB’s founders as well, not a real insight into the business or other edge. With a turnaround play, that can be a liability while with VC like investment, personal connections can be an edge.

[KPO]

12 minutes ago, Spekulatius said:

I totally agree. This would be watering the weeds and pulling the flowers. I really would like them to liquidate BB, RFP and Stelco, be it outright sales or special dividends from Stelco and RFP.

 

Digit has a lot of potential and they got in at the ground floor due to personal relationships Prem build over the years. That’s an real edge that they should build upon. They don’t have a real edge in commodity plays or BB.

As @rkbabang said up thread, the reason they invested in BB (for example) was likely personal connections with BB’s founders as well, not a real insight into the business or other edge. With a turnaround play, that can be a liability while with VC like investment, personal connections can be an edge.

I don’t understand the BB hold at levels it got to early this year, but I kind of understand why a company heavily into property insurance might want to own companies that benefit from their claims. It’s like when BRK owned Axalta. How much does GEICO spend on auto paint each year? Might as well capture some of that margin in house. 

[Viking]

The IPO market in India looks pretty frothy. If Digit decides to go the IPO route at a very high valuation i think Fairfax should cash out a chunk; not all, but a large chunk. And use the proceeds to buy back stock in a company trading at 0.65xBV (Fairfax). 
 

A decent example might be Quess. Fairfax got in on the ground floor. The Indian stock market went bonkers in 2018. At one point Quess traded over 1,000 INR. I think Fairfax marked the carrying value of their significant position near the high. Fairfax likely had an opportunity to sell a chunk at very high prices but did not. And when the Indian stock market hit the wall in 2019 Quess came down hard bottoming out at 200 INR in April 2020. And in 2020 Fairfax was forced to significantly drop its carrying value for Quess. The stock is now trading over 900 INR. But i am not sure buy and hold (great company, great prospects) was the right decision. 
 

i also wonder if the Quess experience is not one of the reasons Mr Market is largely ignoring the Digit news. 

Edited October 6, 2021 by Viking

[Xerxes]

But then they held on the other old-economy names ...

 

I think that is one of the reason why institutional investors stay away from FFH, unless there is a huge margin of safety (i.e. mean reversion).

 

Not because they don't believe Prem Watsa's ability but just that they cannot wrap their heads around what framework Prem Watsa is using to decide when to sell or buy. Think of endless discussion in this very forum about BB and resolute.

 

Institutional investors dont have that problem with say Brookfield. The BAM folks are showing themselves savvy investors using clear framework and speaking clear language that the investor base understand. That framework allows institutional investors to feel comfortable with BAM or BX and the like. Even if it is all optics or smoke and mirror. The investor base feel comfortable that at least they know where they stand (even if they are not in the stock).

 

With Berkshire and Fairfax, the investor would be literally outsourcing all that to the founder-CEO-operator and taking a leap of faith.

Edited October 7, 2021 by Xerxes