Fairfax 2021

[Parsad]

1 hour ago, Viking said:

@Xerxes we have been discussing for quite some time what trigger would result in a re-rating of Fairfax’s stock price (back to historic norm of 1 or 1.1xBV). And i think the results of the discussion are inconclusive. I don’t know that there is one silver bullet (other than a big stock buyback - see bottom of post). 
 

Part of the challenge is it is unclear what exactly is causing the stock to trade at the significant discount it is today. Lots of good ideas have been presented: lack of growth in earnings, lack of growth in BV, lack of trust in reported BV, covid effects, low interest rates, increase in debt levels, complexity of valuing business, conglomerate discount, poor past management, lack of trust in management, family control, capitulation from long standing shareholders, no NYSE listing etc…

 

Bottom line, given the size of the hole Fairfax has dug for itself over the past 10 years, the trigger for a re-rating likely is TIME. I largely agree with what @StubbleJumper wrote in his post above. 
 

Earnings growth. BV growth. Lower debt levels. Improved underwriting. Better management. Better communication by management. These will all take time to come into better focus for investors.
 

Fairfax should exceed $95/share in earnings in 2021 (20% growth in BV from $478/share at Dec 30, 2020). They should be able to do another $90 in 2022, assuming $37 Digit revaluation is pushed into 2022 (15% growth in BV). They could earn $200/share 2021+2022. Not a crazy number. 
 

With the stock trading at $430, earning $100/year for a couple of years in a row (on average) will eventually matter (drive a higher stock price). 
 

That is why i am so focussed on earnings (and the various drivers of earnings) in lots of my posts. If Fairfax delivers what i think they are poised to deliver on the earnings front i am confident the stock will do very well from here. Fairfax will have the money to be opportunistic: buy back a bunch of stock or re-invest in the business.

 

And as the earnings train gathers steam i expect the multiple to start to improve. And as we all know earnings growth + multiple expansion = stock price heaven for investors. 
———————

‘Consolidated share of profit of associates’ is one of the earnings buckets for Fairfax and has been underperforming for Fairfax for years. However, 2021 is much better than 2020. And i expect 2022 to be much better than 2021. Steady improvement in the coming years.
 

Quarterly reported earnings at Resolute, Atlas and Eurobank are going to be volatile. I think reported earnings at Atlas this quarter took at big hit because of the debt transaction with Fairfax. Do i care? Not really. Because it was the right long term decision for Atlas.
—————-

Stock buybacks, if large and done over an extended period, would likely kick-start the re-rating process for Fairfax’s stock. The near term result is it would likely drive the stock to a new 52 week high. This in turn would likely bring in the technical/momentum crowd.
 

One benefit of much higher earnings at Fairfax today is the cash it will generate that Fairfax can potentially funnel into buybacks. And the more the equity holdings go up the greater the chance that Fairfax will start to monetize them resulting in more large realized gains and cash that might get funnelled into buybacks (via dividends from the insurance subs).
 

After listening to the Q3 conference call, I am now not convinced that a big stock buyback is imminent. So i am not holding my breath. I hope we get one but i will not be disappointed in it doesn’t happen right away.

 

I've seen this over and over for the last 20+ years with Fairfax and with different investments.  If the long-term fundamentals of the business have truly changed, like gravity, the price will move up or down to intrinsic value.  It's not a re-rating, or question of "if this happens", but it ALWAYS happens.  Any business or investment will always long-term be priced at the discounted value of the cash that can be taken out of it...be it in liquidation or long-term cash flow. 

 

The question is how much time it takes and will the net annualized return compensate for the risk taken.  Generally, if a business is generating positive free cash flow, is priced below liquidation value, and has manageable debt, you've taken most of the risk out of the investment.  Then all it comes down to is patience!  Cheers!

[nwoodman]

13 hours ago, Viking said:

After listening to the Q3 conference call, I am now not convinced that a big stock buyback is imminent. So i am not holding my breath. I hope we get one but i will not be disappointed in it doesn’t happen right away.

Me too and then you get this

 

https://www.fairfax.ca/news/press-releases/press-release-details/2021/Fairfax-Announces-US1.0-Billion-Substantial-Issuer-Bid-and-Sale-of-9.99-Minority-Stake-in-Odyssey-Group/default.aspx

[Parsad]

4 minutes ago, nwoodman said:

Me too and then you get this

 

https://www.fairfax.ca/news/press-releases/press-release-details/2021/Fairfax-Announces-US1.0-Billion-Substantial-Issuer-Bid-and-Sale-of-9.99-Minority-Stake-in-Odyssey-Group/default.aspx

 

Well, I guess Prem isn't waiting for gravity!  Here comes the massive buyback you guys wanted.  A dutch auction to force the price higher while any shares tendered will be retired at a really good price to intrinsic value.  If this doesn't push the stock to at least $625 CDN, nothing will until gravity eventually kicks in!  Cheers!

[Daphne]

IMO the biggest news here is the value put on OR.  If OMMERS and CCBIP are willing to pay up based on a 9B valuation, what is the total FFH really worth?

[Parsad]

3 minutes ago, Daphne said:

IMO the biggest news here is the value put on OR.  If OMMERS and CCBIP are willing to pay up based on a 9B valuation, what is the total FFH really worth?

 

Yup!  It's win-win for Prem.  Either they buy back stock for cheap or they've proven that Odyssey Re's valuation is higher than on paper. 

 

Question for those more astute on these matters, will this mean a repricing of Odyssey on the balance sheet?  Based on IFRS, the new securities would reprice Odyssey's fair market value significantly higher than on the current financials, in turn increasing book value per share.  

 

Cheers!

[glider3834]

19 minutes ago, Parsad said:

 

Yup!  It's win-win for Prem.  Either they buy back stock for cheap or they've proven that Odyssey Re's valuation is higher than on paper. 

 

Question for those more astute on these matters, will this mean a repricing of Odyssey on the balance sheet?  Based on IFRS, the new securities would reprice Odyssey's fair market value significantly higher than on the current financials, in turn increasing book value per share.  

 

Cheers!

Wow massive news 

 

Odyssey's carrying value which was 3.9 bil at 31 Dec-20  - they haven't reported 30 Sep-21 carrying value but lets assume around 17.5% increase in Fairfax's book value then its probably sitting around the 4.5 bil area - so sale price is around 2 x book value at 9 bil valuation by my estimate

 

 

Edited November 17, 2021 by glider3834

[Xerxes]

On 11/13/2021 at 7:44 PM, Xerxes said:

So value added by FFH's heavy-hitter Associates come in play only (1) if the management at some point monetize a sliver of the holding or (2) accounting rules are changed such that Associates get that mark-to-market. Since the latter is impossible and the former would only come into play when FFH is ready to monetize, than clearly it is that uptick in earning that needs to be there to lift the valuation by multiples.   

 

Thanks everyone for your response. I think you are more or less all hinged on BV as a proxy   i still take issue with the scale of earnings coming from Resolute vs. the combined Atlas/Eurobank. No wonder the RPF, the dog, is being kept around, as it is contributing a lot to the paper profits.

 

On the news this morning. wasn't Odyssey, the crown jewel ? But if they can get full value from it (without making interest payment to OMERS etc.) to fund their tender offer and while at it jack-up the BV, than that cannot be bad.

[MMM20]

25 minutes ago, glider3834 said:

Wow massive news 

 

Odyssey's carrying value which was 3.9 bil at 31 Dec-20  - they haven't reported 30 Sep-21 carrying value but lets assume around 17.5% increase in Fairfax's book value then its probably sitting around the 4.5 bil area - so sale price is around 2 x book value at 9 bil valuation by my estimate

 

 

So 2021 year-end BVPS might be ~$800/sh? Can that be right? 

[nwoodman]

58 minutes ago, Daphne said:

IMO the biggest news here is the value put on OR.  If OMMERS and CCBIP are willing to pay up based on a 9B valuation, what is the total FFH really worth?

OK I am gong to call it, does anyone honestly believe that Odyssey is worth 9B?  I am happy that they are buying back shares but again the cash is via the Omers pawn shop and we don't know what the  interest rate is.  I will be horrified if they take the mark,  it is as good as a related third party. Just saying.... 

[maxthetrade]

Nice move even if that means paying Omers the usual 9%.

[gfp]

Can anyone clear up this question on share count of FFH:  In the Q3 press release they state

" At September 30, 2021 there were 25,876,369 common shares effectively outstanding."

 

In today's announcement they state:

"Fairfax’s 26,986,170 total issued and outstanding Shares,"

 

Why the difference / increase?

[bearprowler6]

10 minutes ago, nwoodman said:

OK I am gong to call it, does anyone honestly believe that Odyssey is worth 9B?  I am happy that they are buying back shares but again the cash is via the Omers pawn shop and we don't know what the  interest rate is.  I will be horrified if they take the mark,  it is as good as a related third party. Just saying.... 

That kind of negativity won't be tolerated on here @nwoodman! Despite how accurate the statement is!

 

CPPIB even wanted in on this deal...in fact it was the CPPIB Credit Investment unit within CPPIB that funded their portion of the deal. "Credit Investment Unit" not the equity investment unit! That should say it all! 

 

Prem was clearly feeling the heat for the underperformance of the stock and finally capitulated! Sure today's news will move the stock up in the short term but at what cost to the remaining shareholders? Once again the lack of details around the OMERS and CPPIB provided funding is noteworthy!

 

Having said that, I for one wish Prem would "sell off" whatever portion of Odyssey or whatever asset he chooses to once and for all clean up the balance sheet --- eliminate all the outstanding debt and expensive preferred share financings, buy out the minority shareholders of Allied World, Brit etc.

 

The stock price seems to be catching a bid in the pre-market! Should be a fun day. Do the long suffering  shareholders sell or continue to hold out for the long term? 

[StubbleJumper]

51 minutes ago, nwoodman said:

OK I am gong to call it, does anyone honestly believe that Odyssey is worth 9B?  I am happy that they are buying back shares but again the cash is via the Omers pawn shop and we don't know what the  interest rate is.  I will be horrified if they take the mark,  it is as good as a related third party. Just saying.... 

 

 

When FFH took ORH private, we shareholders were effectively offered 1x book.  And now this is 2x book?  I'd say that the buyout was ridiculously undervalued, and this is now ridiculously overvalued.

 

 

SJ

[lessthaniv]

1 hour ago, Parsad said:

 

Yup!  It's win-win for Prem.  Either they buy back stock for cheap or they've proven that Odyssey Re's valuation is higher than on paper. 

 

Question for those more astute on these matters, will this mean a repricing of Odyssey on the balance sheet?  Based on IFRS, the new securities would reprice Odyssey's fair market value significantly higher than on the current financials, in turn increasing book value per share.  

 

Cheers!

The SWAPS are looking good too!

[maplevalue]

30 minutes ago, bearprowler6 said:

CPPIB even wanted in on this deal...in fact it was the CPPIB Credit Investment unit within CPPIB that funded their portion of the deal. "Credit Investment Unit" not the equity investment unit! That should say it all! 

 

Could this mean that the "new series of securities" is not straight equity. Maybe some sort of convertible debt with a high coupon? It would then make the $900mm value not necessarily translate exactly into what the equity of Odyssey is worth.

[StubbleJumper]

1 minute ago, lessthaniv said:

The SWAPS are looking good too!

 

 

Well, this will be interesting to see.  The TRS were described as a measure to lock-in a buyback price.  What was announced today *is* the buyback.  So, do they close out the TRS following the auction?  Or was it really the case that the TRS were intended for speculation in FFH's own shares, in which case we shouldn't expect to see the position closed?

 

 

SJ

[Parsad]

5 minutes ago, StubbleJumper said:

 

 

Well, this will be interesting to see.  The TRS were described as a measure to lock-in a buyback price.  What was announced today *is* the buyback.  So, do they close out the TRS following the auction?  Or was it really the case that the TRS were intended for speculation in FFH's own shares, in which case we shouldn't expect to see the position closed?

 

 

SJ

 

They are limited in what they can buy back with an issuer bid.  So they buy back shares offered now in the dutch auction, and then they've also locked in a buy back price through the TRS which they can exercise outside of a normal course issuer bid.  In essence, they may be able to buy back 20-25% of their stock at reasonable prices without being limited under a normal course issuer bid.  Prem has often talked about Singleton and Teledyne.  This is Fairfax's Teledyne buyback moment!  Cheers!

[SharperDingaan]

Just to throw in some reality ....

 

It is highly likely that the BC (& elsewhere) flooding is going to generate all kinds of big claims, that will burn through the vaious reinsurance tranches. Additionally, most would expect that as a Cdn Reinsurer, Odyssey very likely has disproportionatly more exposure to Cdn risk, and the BC claims. If you expect both the Odyssey Q42021 to suck (BC claims), and the whole 2021 to suck (BC fires AND floods), the issuer bid looks very good. FFH gets the shares ..... 

 

Q4 is the make/break quarter for the years performance. Given the fire/flood, most would expect FFH to show an UW loss for 2021, and that UW losses offset a good chunk of investment gains. Just burnt 10B to increase exposure to future UW losses! what is it wiith these people! Just can't win with FFH! Market sentiment unlikely to support an ongoing higher share price in the short-term voting machinery.

 

It's mid November ....

Now an enterprizing lad ........ might take the opportunity to do a round trip wash sale - buying back over the festive season, at low prices, in a nice thin market  Harvest a tax loss? book a round trip gain? and set-up for the once/yr dividend paid in January? Pretty hard to see how one walks away with < 10-15%.

 

SD

 

[Xerxes]

35 minutes ago, Parsad said:

Prem has often talked about Singleton and Teledyne.  This is Fairfax's Teledyne buyback moment!  Cheers!

 

I am with you, but at the moment, to be fair, i see this as Fairfax's FIH buyback moment rather than Teledyne moment. The Teledyne moment needs to have a sustainable continuous source of excess FCF to fund the buyback (ala Berkshire today). A step in the right direction and at the right time before close of the 2021 year.

 

Viking previously alluded to that end of year need to show price.

 

 

[mcliu]

1 hour ago, gfp said:

Can anyone clear up this question on share count of FFH:  In the Q3 press release they state

" At September 30, 2021 there were 25,876,369 common shares effectively outstanding."

 

In today's announcement they state:

"Fairfax’s 26,986,170 total issued and outstanding Shares,"

 

Why the difference / increase?

I think for "effectively outstanding", they deduct 799,230 of intercompany holdings of shares. And then the rest might be newly issued stock compensation.. Anyone can clarify?

[gfp]

50 minutes ago, maplevalue said:

 

Could this mean that the "new series of securities" is not straight equity. Maybe some sort of convertible debt with a high coupon? It would then make the $900mm value not necessarily translate exactly into what the equity of Odyssey is worth.

 

Think of it like preferred equity - a high coupon but it isn't debt.  Whoever called it going to the pawn shop has it right.  They do these deals all the time and it is a good deal for the pension funds.  Fair and friendly with the pension funds for sure.  I would be shocked it this required them to mark up Odyssey to $9B and I wouldn't pencil in that number informally either.  But someday, sure

[StubbleJumper]

Odyssey is not a Canadian reinsurer.  I wouldn't expect Odyssey to have any more than its traditional "share" of a typical North American catastrophe.  Northbridge *is* a Canadian insurer, so we should expect to see NB take it on the chin from this weather event.

 

What remains unclear to me is just how the economic damages of this storm get divided.  In general, you cannot get insurance for over-land flooding in Canada.  Presumably you can get an indemnity if your house is wiped out by a mudslide, or if flooding triggers business interruption indemnities, or if your car ends up going for a swim.  My guess is that the Canadian federal government will be in this for 10-digits of dollars, but I'm not entirely certain how it will stack up for the insurers.

 

 

SJ

[Parsad]

16 minutes ago, SharperDingaan said:

Just to throw in some reality ....

 

It is highly likely that the BC (& elsewhere) flooding is going to generate all kinds of big claims, that will burn through the vaious reinsurance tranches. Additionally, most would expect that as a Cdn Reinsurer, Odyssey very likely has disproportionatly more exposure to Cdn risk, and the BC claims. If you expect both the Odyssey Q42021 to suck (BC claims), and the whole 2021 to suck (BC fires AND floods), the issuer bid looks very good. FFH gets the shares ..... 

 

Q4 is the make/break quarter for the years performance. Given the fire/flood, most would expect FFH to show an UW loss for 2021, and that UW losses offset a good chunk of investment gains. Just burnt 10B to increase exposure to future UW losses! what is it wiith these people! Just can't win with FFH! Market sentiment unlikely to support an ongoing higher share price in the short-term voting machinery.

 

It's mid November ....

Now an enterprizing lad ........ might take the opportunity to do a round trip wash sale - buying back over the festive season, at low prices, in a nice thin market  Harvest a tax loss? book a round trip gain? and set-up for the once/yr dividend paid in January? Pretty hard to see how one walks away with < 10-15%.

 

SD

 

 

Probably correct.  But remember with large losses come large premium increases.  With the flooding and damage in BC, we are going to see 3-4 times insurance price increases in the affected regions next year and the year after.  Cheers!

[Parsad]

4 minutes ago, Xerxes said:

 

I am with you, but at the moment, to be fair, i see this as Fairfax's FIH buyback moment rather than Teledyne moment. The Teledyne moment needs to have a sustainable continuous source of excess FCF to fund the buyback (ala Berkshire today). A step in the right direction and at the right time before close of the 2021 year.

 

Viking previously alluded to that end of year need to show price.

 

 

 

Prem doesn't care about price in any given year or year-end.  As long as the price reflects intrinsic value over time, he's happy.  This was just an opportunistic way to buy back shares...if it improves visibility on share price, then that's just icing on the cake.  

 

All institutions are reaching for yield now with interest rates so low and asset prices so high.  Pension funds like OMERS are looking at any way they can generate interest income.  Buying a stake in ORH, with Fairfax likely to buy it back over time, and in the mean time reap above market rates on the deal...that's a win for OMERS with limited risk.  It's also a win for Fairfax to be able to buy a large amount of shares at reasonable prices.  Cheers!

[Gregmal]

Amazing what happens when you get off your ass and actually do something. Like I said, fundamentals weren’t gonna do it. Market wants to see real, meaningful action. This is definitely a start.