Fairfax 2021

[RichardGibbons]

I think one reason buybacks might be better is because as businesses get too big, they can get diseconomies of scale. Like, if you're trying to deploy $N of insurance capital, you might be able to be pickier about who you insure than if you have to deploy $10N worth of insurance capital. Similarly, if you have a Berkshire-sized portfolio to deploy, it sharply limits the number of potential investments relative to a portfolio a hundredth that size.

 

Essentially, if you get too big, you can no longer deploy your capital in great investment, but have to settle for good investments.

 

If you buy back shares, you can keep yourself in the sweet spot where the economies of scale benefit you, but the diseconomies of scale don't yet have a major impact.

[TwoCitiesCapital]

1 hour ago, kab60 said:

That is not true, but it seems to be widely held. Dividends and buybacks are not the same, even if taxes are not an issue.

 

Buybacks below intrinsic value can increase value per share. With dividends you can buy more of the business, but the business' per share value doesn't change.

 

It's very simple yet I missed that point for a long time, and alot of others seem to do so too. 

 

If you reinvest the dividend for more shares than it's the same (excluding tax difference).

 

Seems like you're comparing X shares with dividend and X shares with a buyback without considering the dividend is reinvested for more shares. 

 

So you have fewer shares worth more (buybacks) or more shares at a lower price (dividend) that are roughly equivalent outcomes. 

 

[petec]

2 hours ago, kab60 said:

Buybacks below intrinsic value can increase value per share. With dividends you can buy more of the business, but the business' per share value doesn't change.

Sure, but why does it matter to you as a shareholder whether you own the same number of higher value shares, or a higher number of shares with the same value? It’s totally irrelevant (except for tax).

 

EDIT: sorry, just realized this point has been made.

Edited November 6, 2021 by petec

[petec]

1 hour ago, RichardGibbons said:

I think one reason buybacks might be better is because as businesses get too big, they can get diseconomies of scale. Like, if you're trying to deploy $N of insurance capital, you might be able to be pickier about who you insure than if you have to deploy $10N worth of insurance capital. Similarly, if you have a Berkshire-sized portfolio to deploy, it sharply limits the number of potential investments relative to a portfolio a hundredth that size.

 

Essentially, if you get too big, you can no longer deploy your capital in great investment, but have to settle for good investments.

 

If you buy back shares, you can keep yourself in the sweet spot where the economies of scale benefit you, but the diseconomies of scale don't yet have a major impact.

I don’t disagree, but Fairfax is not at this point. Maybe Berkshire is. 

[kab60]

21 minutes ago, petec said:

I don’t disagree, but Fairfax is not at this point. Maybe Berkshire is. 

I'm an idiot, forget what I said

 

Edit: Removed my comment, no need to cutter with nonsense.

Edited November 6, 2021 by kab60

[maxthetrade]

3 hours ago, Spekulatius said:

I don’t  get it. If taxes are not an issue (which is the case for me, if I hold shares in an IRA) I can use the dividend to buy more shares when I think it makes sense. If the company buys back shares, I have no control over when the shares are bought back.
 

When the company buy back shares, there are less shares outstanding and each share should be worth more. If this is done via dividends, the number of outstanding shares does not change, but I will own more shares (those bought from dividends) and it ends up having the same result for me.

 

Well there is a physioligical aspect as well, buybacks signal that mangement believes shares are undervalued and increase IV/share. For me as an investor it makes a difference how long it takes until shares trade at fair value. There is a huge diffrence whether I can get a 50% gain in a year or two.

Let's be clear, I like my position in FFH (my seond biggest), results were decent and I liked what I heard on the call but that doesn't mean there is no room for improvement. If I  were running the business I would try to get rid of the crappy cyclicals at high valuations, suspend the diividend and buy back a shitload of shares at at a deep disount to IV.

My personal pet peeves (after they promised to stop shorting) are BB and the dividend. But I can live with that because the stock is cheap enough.

Why mess with crappy businesses if you can buy things like DLTR (my third biggest position), KMX or BRK etc. cheaply?

BTW, I really like ATCO, it's clyclical but well managed.

 

 

 

Edited November 6, 2021 by maxthetrade

[Viking]

Fairfax has paid a US$10 dividend for many years. Consistently, i think, since it was started. Even in the years when results were not good (please correct me if i am wrong). 
 

Cutting a dividend is about the worst thing a management team can do. The management team loses credibility. And the stock gets punished.

 

2021 is shaping up to be a record year for earnings for Fairfax. And management is trying to re-built credibility. And keep the shareholders it currently has. I think a $10 dividend is coming in January  And it makes complete sense.

Edited November 7, 2021 by Viking

[petec]

8 hours ago, maxthetrade said:

buybacks signal that mangement believes shares are undervalued and increase IV/share

No they don’t. There’s plenty of evidence that buybacks are pro-, not counter-, cyclical. Some management teams are good at them but most just do them when they have excess cash, not when the share price offers an opportunity, so they’re not a reliable signal of undervaluation. And if the shares aren’t undervalued, they don’t increase IV per share.

[glider3834]

5 hours ago, Viking said:

Fairfax has paid a US$10 dividend for many years. Consistently, i think, since it was started. Even in the years when results were not good (please correct me if i am wrong). 
 

Cutting a dividend is about the worst thing a management team can do. The management team loses credibility. And the stock gets punished.

 

2021 is shaping up to be a record year for earnings for Fairfax. And management is trying to re-built credibility. And keep the shareholders it currently has. I think a $10 dividend is coming in January  And it makes complete sense.

+1 agree 

 

[maxthetrade]

11 hours ago, Viking said:

Cutting a dividend is about the worst thing a management team can do. The management team loses credibility. And the stock gets punished.

 

I don't think so if the reason is explained well and backed by actions, e.g. a tender offer. But I get it you guys really like the divi. Let's leave it at that. 

[bluedevil]

FFH's premiums written are on pace to hit about 23.5 billion this year.  Compare this to 15.5 billion in 2018.  That means 8 billion in premium growth (growth of 50%) has occurred in 3 years, organically and profitably.  Very exciting potential in the insurance operations -- and loads of potential organic growth remaining in India; middle east; latin america; eastern europe, and asia.

 

 

 

 

 

 

 

 

  

[Santayana]

12 hours ago, Viking said:

Fairfax has paid a US$10 dividend for many years. Consistently, i think, since it was started. Even in the years when results were not good (please correct me if i am wrong). 
 

Cutting a dividend is about the worst thing a management team can do. The management team loses credibility. And the stock gets punished.

 

2021 is shaping up to be a record year for earnings for Fairfax. And management is trying to re-built credibility. And keep the shareholders it currently has. I think a $10 dividend is coming in January  And it makes complete sense.

They started it at $5/share, raised it to $10 within a couple years, and yes have paid that every year since.

[glider3834]

On 11/5/2021 at 9:40 AM, Viking said:

1.) size of catastrophe losses? CR came in at 101.1; underwriting loss of -$47.5.

I have done up a few charts incorporating the latest Q3 result - according to my estimates underlying combined ratio appears to show continued improvement.

 

1. Covid - appears had a fairly minimal impact on Q3-21 results - actually was positive and reduced CR by 0.2 CR points (so still watchful on this but hopefully we are now through the worst of covid)

 

prior year adverse development - covid	-0.5%
Loss & LAE - current year - covid	+0.3%

 

Net impact on CR                                              -0.2 points

 

 

2. Underlying Combined ratio (stripping out impact of covid, catastrophes & favourable development)looks to be 89% (1st chart below) - continuing the downward trend & appears due mostly to hard market driving higher net earned premium effectively reducing the underwriting expense ratio - now down to 13.5% (2nd chart below).

 

 

 

 

 

My takeaways

- would expect covid to have lesser impact going forward on CR

- expect catastrophes and reserve development will have main impact on CR going forward

- with Q3'21 showing the lowest underlying combined ratio (stripping out impact of covid, catastrophes & favourable development) since 2018 with downward trend continuing - this raises the probability of lower combined ratios & higher underwriting profitability going forward - assuming both catastrophe losses & favourable development in line with prior years.

 

 

 

Edited November 7, 2021 by glider3834

[StubbleJumper]

I don't belly-ache about the dividend too much, but I would offer a few observations.

 

For the past decade (or two?) FFH has been a serial acquirer, and has aggressively purchased insurance and non-insurance subs whenever the financial capacity was available.  We have questioned the wisdom of a few of the acquisitions, but on the whole, the aggressive growth strategy has served shareholders well.  But, the result of this is that FFH has been chronically short of capital and occasionally leveraged to a greater extent than some shareholders might like.  

 

This chronic shortage of capital has resulted in significant new issuances of shares, sometimes at valuations favourable to existing shareholders and sometimes at valuations that are disappointing to existing shareholders.  These successive share issuances ultimately triggered the desire by the Watsa family to re-weight the multiple voting shares to sustain family control of FFH.  This shortage of capital has also required FFH to partner with other deep-pocketed organizations such as OMERS to complete certain acquisitions, or to refinance certain assets with the goal of bolstering holdco cash levels.

 

The share issuances, the re-weighting of the multiple voting shares, and the numerous murky collaborations with OMERS probably have not served shareholders well.  In the first instance, dilution was the outcome, and in the second and third instances, the company's reputation has suffered, which probably has a negative impact on the marketability of FFH's shares today.

 

I have not done the arithmetic about the magnitude of common dividends that FFH has paid out since it initiated the dividend, but I am guessing that it was US$3B+ that has been paid (maybe even US$4 billion?).  So, do the counterfactual analysis.  If FFH had not had a dividend and had instead retained that US$3B, what would the company's capital structure currently look like, would would the sharecount be, would we have seen that reweighting of the multiple voting shares, and would we be paying OMERS seemingly guaranteed dividends of 9% (this is one of the poignant measures of the cost of the dividend policy because shareholders are giving OMERS 9% dividends so that we can get our US$10/sh)?  All other things being equal, that ~US$3 billion of capital would probably have been better to be retained.

 

I would say that the dividend policy might have been appropriate for executive compensation, but it was very much poorly aligned with FFH's broader corporate strategy and had a number of undesirable consequences.  Management could have margined their shares to fund their lifestyle or we could have simply paid them a couple million bucks per year more.

 

Going forward, are the concerns of the past relevant?  Prem claims that he's done adding major insurance subs, and perhaps the serial-acquisitions are over?  Maybe the chronic shortage of capital will become a reliable and predicable annual surplus of capital?  I guess we'll see.  But the current opportunity to repurchase shares is just one more downside to a dividend policy that mostly has not served us well.

 

 

SJ

[maxthetrade]

18 minutes ago, StubbleJumper said:

I don't belly-ache about the dividend too much, but I would offer a few observations.

 

For the past decade (or two?) FFH has been a serial acquirer, and has aggressively purchased insurance and non-insurance subs whenever the financial capacity was available.  We have questioned the wisdom of a few of the acquisitions, but on the whole, the aggressive growth strategy has served shareholders well.  But, the result of this is that FFH has been chronically short of capital and occasionally leveraged to a greater extent than some shareholders might like.  

 

This chronic shortage of capital has resulted in significant new issuances of shares, sometimes at valuations favourable to existing shareholders and sometimes at valuations that are disappointing to existing shareholders.  These successive share issuances ultimately triggered the desire by the Watsa family to re-weight the multiple voting shares to sustain family control of FFH.  This shortage of capital has also required FFH to partner with other deep-pocketed organizations such as OMERS to complete certain acquisitions, or to refinance certain assets with the goal of bolstering holdco cash levels.

 

The share issuances, the re-weighting of the multiple voting shares, and the numerous murky collaborations with OMERS probably have not served shareholders well.  In the first instance, dilution was the outcome, and in the second and third instances, the company's reputation has suffered, which probably has a negative impact on the marketability of FFH's shares today.

 

I have not done the arithmetic about the magnitude of common dividends that FFH has paid out since it initiated the dividend, but I am guessing that it was US$3B+ that has been paid (maybe even US$4 billion?).  So, do the counterfactual analysis.  If FFH had not had a dividend and had instead retained that US$3B, what would the company's capital structure currently look like, would would the sharecount be, would we have seen that reweighting of the multiple voting shares, and would we be paying OMERS seemingly guaranteed dividends of 9% (this is one of the poignant measures of the cost of the dividend policy because shareholders are giving OMERS 9% dividends so that we can get our US$10/sh)?  All other things being equal, that ~US$3 billion of capital would probably have been better to be retained.

 

I would say that the dividend policy might have been appropriate for executive compensation, but it was very much poorly aligned with FFH's broader corporate strategy and had a number of undesirable consequences.  Management could have margined their shares to fund their lifestyle or we could have simply paid them a couple million bucks per year more.

 

Going forward, are the concerns of the past relevant?  Prem claims that he's done adding major insurance subs, and perhaps the serial-acquisitions are over?  Maybe the chronic shortage of capital will become a reliable and predicable annual surplus of capital?  I guess we'll see.  But the current opportunity to repurchase shares is just one more downside to a dividend policy that mostly has not served us well.

 

 

SJ

 

Excellent summary of the costs of the dividend policy.

 

[modiva]

59 minutes ago, StubbleJumper said:

I don't belly-ache about the dividend too much, but I would offer a few observations.

 

For the past decade (or two?) FFH has been a serial acquirer, and has aggressively purchased insurance and non-insurance subs whenever the financial capacity was available.  We have questioned the wisdom of a few of the acquisitions, but on the whole, the aggressive growth strategy has served shareholders well.  But, the result of this is that FFH has been chronically short of capital and occasionally leveraged to a greater extent than some shareholders might like.  

 

This chronic shortage of capital has resulted in significant new issuances of shares, sometimes at valuations favourable to existing shareholders and sometimes at valuations that are disappointing to existing shareholders.  These successive share issuances ultimately triggered the desire by the Watsa family to re-weight the multiple voting shares to sustain family control of FFH.  This shortage of capital has also required FFH to partner with other deep-pocketed organizations such as OMERS to complete certain acquisitions, or to refinance certain assets with the goal of bolstering holdco cash levels.

 

The share issuances, the re-weighting of the multiple voting shares, and the numerous murky collaborations with OMERS probably have not served shareholders well.  In the first instance, dilution was the outcome, and in the second and third instances, the company's reputation has suffered, which probably has a negative impact on the marketability of FFH's shares today.

 

I have not done the arithmetic about the magnitude of common dividends that FFH has paid out since it initiated the dividend, but I am guessing that it was US$3B+ that has been paid (maybe even US$4 billion?).  So, do the counterfactual analysis.  If FFH had not had a dividend and had instead retained that US$3B, what would the company's capital structure currently look like, would would the sharecount be, would we have seen that reweighting of the multiple voting shares, and would we be paying OMERS seemingly guaranteed dividends of 9% (this is one of the poignant measures of the cost of the dividend policy because shareholders are giving OMERS 9% dividends so that we can get our US$10/sh)?  All other things being equal, that ~US$3 billion of capital would probably have been better to be retained.

 

I would say that the dividend policy might have been appropriate for executive compensation, but it was very much poorly aligned with FFH's broader corporate strategy and had a number of undesirable consequences.  Management could have margined their shares to fund their lifestyle or we could have simply paid them a couple million bucks per year more.

 

Going forward, are the concerns of the past relevant?  Prem claims that he's done adding major insurance subs, and perhaps the serial-acquisitions are over?  Maybe the chronic shortage of capital will become a reliable and predicable annual surplus of capital?  I guess we'll see.  But the current opportunity to repurchase shares is just one more downside to a dividend policy that mostly has not served us well.

 

 

SJ

 

Great summary.  The case for dividends to justify management pay is not only weak but wierd.  Especially considering the needs of the company: strengthen financials and buyback ridiciculously cheap stock.

 

It just doesnt make sense to trade a few million dollars of management pay for a few hundred million dollars of dividend.  

 

Edited November 7, 2021 by modiva

[Xerxes]

Dividend vs. buyback 

 

Scenario:

- market cap: $100,000

- 5 shareholders with equal %

- company plans to return $20,000 to shareholders

 

Return of capital through dividend

$20,000 returned as cash dividends and split equally so each partner gets $4,000

One of the partners pulls out her Robinhood App and uses the $4,000 cash to buy some fractional shares 

So in aggregate she has now $24,000 worth of stock and another partner who sold and kept the dividend in cash has less (i.e. $16,000)

 

So now she has 24% of the company. Other partners have 20%, 20%, 20% and 16%.

 

Return of capital through share buyback

$20,000 returned as share buyback with 1 of the partners being bought out completely by the company.

There are now 4 partners each with 25% share of the company.

 

What's wrong with this math ...

Is this correct ? if so, it appears you get more with share buyback

 

[matthew2129]

5 minutes ago, Xerxes said:

Dividend vs. buyback 

 

Scenario:

- market cap: $100,000

- 5 shareholders with equal %

- company plans to return $20,000 to shareholders

 

Return of capital through dividend

$20,000 returned as cash dividends and split equally so each partner gets $4,000

One of the partners pulls out her Robinhood App and uses the $4,000 cash to buy some fractional shares 

So in aggregate she has now $24,000 worth of stock and another partner who sold and kept the dividend in cash has less (i.e. $16,000)

 

So now she has 24% of the company. Other partners have 20%, 20%, 20% and 16%.

 

Return of capital through share buyback

$20,000 returned as share buyback with 1 of the partners being bought out completely by the company.

There are now 4 partners each with 25% share of the company.

 

What's wrong with this math ...

Is this correct ? if so, it appears you get more with share buyback

 

In the first case she would have $20k out of an $80k market cap company (so also 25%, not 24%). The market cap in the first example goes down from $100k to $80K ex-dividend; and her stock would go down to $16k ex-dividend, then back up to $20k after buying the shares on robinhood

[Xerxes]

Clear, thanks, it was bugging me the whole weekend, when i was reviewing the discussion between the merit of the two few pages ago, as seen from the investor p.o.v. in a tax-free world.

[glider3834]

Well hopefully Fairfax will be able to start deploying their cash/st investments into higher yielding fixed income but given their continued cash/st investments build over Q3 (to 44% of their total portfolio) I suspect they are not ready to move just yet - I think interest rates probably need to go higher but I also think that move will be tempered to a degree as there are still covid related 'temporary' drivers which are impacting the recent inflation numbers

https://www.cnbc.com/2021/11/10/us-bonds-treasury-yields-climb-as-investors-eye-key-inflation-test.html

 

• At September 30, 2021 the company's insurance and reinsurance companies held portfolio investments of $48.1 billion (excluding Fairfax India's portfolio of $2.1 billion), of which approximately $21.2 billion was in cash and short dated investments representing approximately 44.1% of those portfolio investments.

 

 

Edited November 10, 2021 by glider3834

[nwoodman]

1 hour ago, glider3834 said:

Well hopefully Fairfax will be able to start deploying their cash/st investments into higher yielding fixed income but given their continued cash/st investments build over Q3 (to 44% of their total portfolio) I suspect they are not ready to move just yet

Agree but shouldn't be too far away.  I am sure they are still in the Lacey Hunt camp and this "inflationary" pressure will pass, the debt overhang is just too great.  Apologies if this has been posted previously, I watched it a couple of weeks ago and it is always great to hear Lacey Hunt's views. One of the greats IMHO. 

 

 

Also a day doesn't make a trend but it was interesting to see on a "sell off" day, FFH with +ve alpha

Edited November 10, 2021 by nwoodman

[maplevalue]

4 minutes ago, nwoodman said:

Also a day doesn't make a trend but it was interesting to see on a "sell off" day, FFH with +ve alpha

 

One of the reasons I like the stock. FFH should benefit from a higher rates environment, which is not true of many stocks  (particularly tech which has been driving much of the recent gains). You get to own a higher rate hedge at a compelling discount to book.

[TwoCitiesCapital]

On 11/10/2021 at 3:41 PM, nwoodman said:

Agree but shouldn't be too far away.  I am sure they are still in the Lacey Hunt camp and this "inflationary" pressure will pass, the debt overhang is just too great.  Apologies if this has been posted previously, I watched it a couple of weeks ago and it is always great to hear Lacey Hunt's views. One of the greats IMHO. 

 

 

Also a day doesn't make a trend but it was interesting to see on a "sell off" day, FFH with +ve alpha

 

I'm not so sure they are anymore. Dumping all of their Treasuries post-Trump's election suggested they'd moved to the inflationary camp awhile back. And they weren't buying Treasuries when the 10-year hit 3.25% in 2018. 

 

Id be shocked to see them deploy anything appreciable at rates anything close to today as they haven't really said anything to make me think they've changed their opinion on rates. 

Edited November 12, 2021 by TwoCitiesCapital

[glider3834]

Well in stark contrast to Stelco & Atlas Corp, the Q3 results from Farmers Edge are out - results look terrible with a very high cash burn  - fortunately this is not a major position for Fairfax (circa 100 mil now) - cost structure 23.1 mil for Q3  looks ridiculous against the revenue number of 6.8 mil . What I can't understand is how their annual recurring revenue has increased from 53 mil (Q420) to 64 mil in latest quarter - but they are only generating 6.8mil in quarterly revenue - maybe its a timing issue?? I am going to check out the Q3 analyst call which might provide some insight & expectations around Q4 ^& Fy22. https://www.farmersedge.ca/wp-content/uploads/2021/11/Third-Quarter-2021-Results.pdf

[glider3834]

33 minutes ago, glider3834 said:

Well in stark contrast to Stelco & Atlas Corp, the Q3 results from Farmers Edge are out - results look terrible with a very high cash burn  - fortunately this is not a major position for Fairfax (circa 100 mil now) - cost structure 23.1 mil for Q3  looks ridiculous against the revenue number of 6.8 mil . What I can't understand is how their annual recurring revenue has increased from 53 mil (Q420) to 64 mil in latest quarter - but they are only generating 6.8mil in quarterly revenue - maybe its a timing issue?? I am going to check out the Q3 analyst call which might provide some insight & expectations around Q4 ^& Fy22. https://www.farmersedge.ca/wp-content/uploads/2021/11/Third-Quarter-2021-Results.pdf

sorry should clarify its being carried at around 303 mil (at 31 Dec) & mkt value around 94 mil - I think high probability of impairment on this holding in Q4.

 

 

Edited November 12, 2021 by glider3834