Fairfax 2021

[petec]

Farmers Edge write up by someone with skin in the game fyi

 

https://upstreamaginsights.substack.com/p/farmers-edge-ipo

 

Thanks for posting. Great summary. Hopefully the FE IPO is successful. Technology companies need $ to scale and the IPO should help in the near term. It looks like it will take a few years for FE to become profitable.

 

Fairfax needs an exit strategy on these types of investments (the ones that do not play out as they expected at acquisition and this one clearly has not). There needs to be a limit of how much $ they commit. The big reason is Fairfax is, at its core, an insurance company. And if it wants to be valued at BV or (dare we hope) a premium to BV it needs to have earnings that are somewhat predictable. The non-insurance operations cannot keep driving $100 or $200 million write offs every year (as assets are written down). These write offs happen far too much.

 

The good news is i think we can see a trend. In the past 12 months, APR was sold to Atlas. Fairfax Africa was merged into Helios. Farmers Edge IPO. And it appears Fairfax is not done. 2021 is certainly shaping up to be a busy year for Fairfax. Nice to see Fairfax motivated to act and take advantage of current market conditions.

 

I am looking forward to the day when the non-insurance companies generate large and consistent free cash flows for Fairfax each and every quarter... when analysts are able to model that in their estimates we should see a nice increase in multiple to BV with target prices.

 

PS: it is not surprising that Fairfax keeps saying that Digit is now profitable. Another headwind will become a tailwind as results are reported in the future. Of course, Digit looks like a home run. But still, it is nice to see more and more operations becoming profitable.

 

Couldn’t disagree more.

 

Prem has never managed the firm for consistent earnings and has repeatedly said he never will.

 

If that means the stock trades below the multiple it could, good: more buybacks.

 

What matters to me is how fast BVPS compounds over 5 and 10 year time periods, and that’s all.

 

 

IMO, you need to go one more step.  That BV needs to be converted at some point into cash flows available for use by shareholders.  That requires either interest/dividends from the investment, or it requires a compelling, profitable exit-strategy.  To date, that has been the shortcoming of the investment in BB shares (but the debs have been a bit better).  Let us hope that this doesn't also end up being the shortcoming for Eurobank.

 

 

SJ

 

Agreed.

[Viking]

Farmers Edge write up by someone with skin in the game fyi

 

https://upstreamaginsights.substack.com/p/farmers-edge-ipo

 

Thanks for posting. Great summary. Hopefully the FE IPO is successful. Technology companies need $ to scale and the IPO should help in the near term. It looks like it will take a few years for FE to become profitable.

 

Fairfax needs an exit strategy on these types of investments (the ones that do not play out as they expected at acquisition and this one clearly has not). There needs to be a limit of how much $ they commit. The big reason is Fairfax is, at its core, an insurance company. And if it wants to be valued at BV or (dare we hope) a premium to BV it needs to have earnings that are somewhat predictable. The non-insurance operations cannot keep driving $100 or $200 million write offs every year (as assets are written down). These write offs happen far too much.

 

The good news is i think we can see a trend. In the past 12 months, APR was sold to Atlas. Fairfax Africa was merged into Helios. Farmers Edge IPO. And it appears Fairfax is not done. 2021 is certainly shaping up to be a busy year for Fairfax. Nice to see Fairfax motivated to act and take advantage of current market conditions.

 

I am looking forward to the day when the non-insurance companies generate large and consistent free cash flows for Fairfax each and every quarter... when analysts are able to model that in their estimates we should see a nice increase in multiple to BV with target prices.

 

PS: it is not surprising that Fairfax keeps saying that Digit is now profitable. Another headwind will become a tailwind as results are reported in the future. Of course, Digit looks like a home run. But still, it is nice to see more and more operations becoming profitable.

 

Couldn’t disagree more.

 

Prem has never managed the firm for consistent earnings and has repeatedly said he never will.

 

If that means the stock trades below the multiple it could, good: more buybacks.

 

What matters to me is how fast BVPS compounds over 5 and 10 year time periods, and that’s all.

 

My point is not that Fairfax needs to become another Chubb or WR Berkley in terms of how it runs its investment portfolio. But Fairfax’s return on its investment portfolio has been abysmal for the past 8 years. And the issue is not value investing is ‘out of favour’. They have made too many very poor decisions. And many of the very big variety. Ben Graham defined investing as ‘safety of principal and adequate return’. Not that complicated. Prem keeps quoting Graham as an important influence. So many of their decisions completely miss both the safety of principal part AND the adequate return part. This needs to stop (and i think it is). The derivative bets (notice i did not say investments) have been a complete mess for years (yes, they might have worked out in Q4). They appear to be modifying this behaviour.

 

Too many non-insurance businesses in their portfolio suck money out of Fairfax; they should be supplying money to Fairfax. So what happens? Fairfax is FORCED in bad times to sell off pieces of their quality insurance operations to raise cash to get the non-insurance companies through the hard times. Selling 14% of Brit is the most recent example. Before that Riverstone UK (part 2). Before that, Riverstone UK (part 1). This makes no sense. Their investment strategy needs to continue to improve so this stops happening.

 

And the pandemic simply amplified the flaws with their investing strategy (too many low quality companies); they are VERY lucky central banks and governments came to their rescue (and everyone else too). Imagine where Fairfax would be today if the pandemic had morphed into a world wide depression. Relying on easy money from governments is not a smart strategy.

 

The problem is they dug such a large hole (over many years) it will take more time for them to dig out; probably another year assuming the virus, the economy and financial markets cooperate. Their current investing formula does not work in recessions; this lesson needs to be learned and a pivot needs to be made. Just like the recent derivatives lesson/learned/pivot.

 

So my hope is not that Fairfax becomes Berkshire, or Chubb or WR Berkley from an investment perspective. The problem right now is no one knows what Fairfax’s investment strategy is. It has been a complete mess for so many years. So my hope is, over time, they decide to own/invest in businesses that (in aggregate) will grow BV of Fairfax over a reasonable amount of time. Businesses that, in aggregate, do not severely stress the company’s balance sheet when recessions hit (like what just happened). I am ok with lumpy. But not 8 year cycles; that is nuts.

 

So i hope they continue to punt the poor performers off their balance sheet and replace them with companies that are higher quality. So that when the next recession hits they are not put in a massive hole and forced to sell their good assets to get through. I do believe that super tanker is turning; Fairfax has some amazing/solid investments. But more work needs to be done.

 

 

 

 

[petec]

That’s all fine, but none of it argues for predictable, modellable cash flows. That won’t happen.

[maxthetrade]

That’s all fine, but none of it argues for predictable, modellable cash flows. That won’t happen.

 

I don't care for predictable but it has to be profitable in the end! There simply was too much gambling in the past. Even in 08 they were very lucky with respect to timing!

[Viking]

That’s all fine, but none of it argues for predictable, modellable cash flows. That won’t happen.

 

Stubble, i agree wholeheartedly to your comment above :-)

 

Petec, i also agree with you. Fairfax will have lumpier results than other insurance companies. However, my view is the ‘non insurance companies’ bucket is now large and diverse enough that is should be able to generate a positive return for Fairfax (in aggregate) even in a down year like 2020. Instead it delivered -$179 million in 2020 (drags were Fairfax Africa, Recipe, other retail, Thomas Cook). My guess is this bucket will continue to underperform in Q1 and perhaps Q2. However, if the economy continues to improve we should see a big rebound in results in this segment in 2H. Could we see $100 million in earnings in a quarter from ‘non insurance companies’?

 

The reason i am harping on the ‘non insurance companies’ bucket is because it will be one of the key drivers for Fairfax’s valuation moving forward as it will be a nice counter to falling interest and dividends. Especially if shareholders want to see Fairfax trade a multiple to BV (like anything close to 1.2xBV).

 

- underwriting: should improve in 2021 (driven by hard market as written premiums become earned)

- interest and dividends: will be lower in 2021

- share of profit of associates: insurance and reinsurance: looking good (especially with Digit now profitable)

- runoff: do we get meaningful asbestos reserve additions each year ($150 million)?

- non-insurance companies: should increase dramatically as recovery takes hold

- interest expense: flat to slight reduction; higher balances offset by lower rates?

- corporate overhead: ?

- net gains on investments: wild card; looks very promising as recovery takes hold

[ValueMaven]

'Net losses on short equity exposures of $528.6 million resulted from closing out the company's remaining short equity total return swaps.'

 

This type of 'stuff' is insane.  That is why FFH trades BELOW book ... you never know what they are going to do!!  I'm starting to think the Prem CDS subprime trade was luck ... his hit ratio on these macro-trades for the past decade+ have been poor

[Xerxes]

Good day folks,

i listened to the conference call and here are my comments. Apologies if i am repeating some stuff already mentioned, i did not read all the posts yet.

 

Tone of the conference call

 

Q2 2020: the tone was defiant and bullish; we will survive. I like that conference call.

Q3 2020: the tone was complete nervousness; very cryptic, playing close to the vest

Q4 2020: very cryptic, playing close to the vest but very bullish and confident

 

Investment return

While folks are focusing on the mark to market bounce back, for me the real jewel was this statement in the conference call. Although not captured in the book value (so not talked about greatly here), this is the market validating Fairfax estimation of these associates' intrinsic value. I think that is great.

 

At December 31, 2020, our investments in associates had an aggregate fair value that exceeded the carrying values by $712 million. And due to the equity method of accounting for these investments, this excess of fair value over the carrying value is not included in our book value per share. This is a significant positive change from the March 31, 2020, when the aggregate carrying value exceeded the fair values of the investments in associates by approximately $400 million.

 

In March, aggregate carrying value > fair value by $400 million

In December, aggregate  fair value > carrying value by $712 million

 

13F

 

I would classify the equity portfolio into two portions. The Atlas, Blackberry, India investment etc (otherwise known as concentrated positions) are the ALPHA investments of Fairfax, while the rest of stock portfolio, which are made of host of random names (to me) as the BETA of the portfolio. I would argue that a good chunk of the mark to market accounting in Q3 and Q4 were due to the BETA portion of the portfolio bouncing back. I think if they were to replace BETA portion of the portfolio with S&P500, they would probably get the same return.

 

What makes Fairfax so interesting as an investment, is that basket of ALPHA, which makes them at least to me uncorrelated to S&P500, which in turn gets its alpha from its 25% allocation to the FANG names.

 

I feel that investors need to understand that and need to bear with the captain of the ship. You are here because of the dissimilarities that this name has with the rest of the market. Today, any clown (including yours truly) can make the statement that Amazon is a must have in a portfolio.

 

Shorts

 

I, Xerxes, will continue to reserve the right to complain about the shorts. Simply because the captain of ship promised and committed to a set of action in 2016, yet felt seduced by the short-casino again in 2020, and of course doing all of them wrong. I don't believe the shorts in 2020, were all remnants of previous shorts that were somehow unclosed. They were seduced by the dark side. Thank god they got burned. Being right on the shorts in 2008, on one hand provided FFH with a big boost in its book value pull forward from the future but on the other hand gave it the kiss of death, paralyzing them for a decade, in their thinking.

 

For the year, the amazing return that the fixed-income and the rest of portfolio had was largely undone by the casino-shorts. What is so frustrating is lack of explanation that makes it looks like they lost their mind and mindlessly shorting high growth names because their valuation offends them etc. I don't like shorts, and specially don't like them when the investor is not using the short as a hedge, but as a complement to their base-line thinking. If your company is sensitive to the economy (i.e. cyclical), you will do well if your shorts is against your peers, as oppose to shorting technology names, that had the mother of all tailwinds unleashed by the pandemic.

 

FFH didnt need to sell one its limb to get some cash for buyback if it didnt lost so much in shorts.

 

The Rude Gentleman

 

About the gentleman on the conference call asking for Prem resignation, I would say that his comment were mostly assertion. He should have, instead, challenge why Prem Watsa made a commitment on shorts in 2016 only to go back to it. That would have been a good criticism. To say that an institutional investor doesn't do analysis I think is mostly a guess work. Now, the institutional investor can have poor judgement on some investment, and therefore poor results.

 

I will add this. Like any other investor, when you have one or two good winners, that tends to expand your set of optionality, with your equity expanding. When you have one or two investment gone bad that tend to limit your set of optionality. That is what happened with FFH, their oxygen was cut off, compounded by weird shorts and therefore unable to act neither in the bull market nor in the bear market in 2020. Watching mostly from the sidelines.

Blackberry

 

I am ok if they didn't want to disclose anything. I trust that they have the same economic interest as the rest of their shareholders in ensuring that they capture some gains from the recent rally. It would have been nice to know. But I can wait.

 

That said, that last exchange about how Wade Burton and Roger Lace liquidating their position and the whole insider thing doesn't square well.

 

 

 

 

[petec]

Xerxes do you have any evidence that they initiated new shorts in 2020? Or is it a gut feel?

[StubbleJumper]

'Net losses on short equity exposures of $528.6 million resulted from closing out the company's remaining short equity total return swaps.'

 

This type of 'stuff' is insane.  That is why FFH trades BELOW book ... you never know what they are going to do!!  I'm starting to think the Prem CDS subprime trade was luck ... his hit ratio on these macro-trades for the past decade+ have been poor

 

 

The CDS is becoming a more distant memory over time, but don't forget that the CDS was not the first successful macro call.  FFH made a shitload off index puts in the early aughts, and on multiple occasions made a shitload off fixed income by correctly assessing the moves in the yield curve.  But, the past is past, so what have they done for us lately?  ::)

 

 

SJ

[Santayana]

Is it possible they basically executed a straddle with the index return swaps last Spring? 

[Xerxes]

Q4 2019 results shows:

An unrealized short of ($154 million).

That tells me that was the snapshot of how the year ended.

 

In a market, which largely plunged in mid-Feb, they somehow ended up closing Q1 with a ($248) million realized lost in shorts. While having still $122 million unrealized short position open. So that unrealized short of ($154 million) at the end of Q4, somehow exploded into ($248) realized shorts by close of Q1 and with some left over.

 

There is also the THE OTHER segment, which i think captures their total return swaps. I think when Prem says shorts, he means direct shorts as well as when he uses TRS to short.

 

Q1: The Other segment had a ($116) realized losses

Q2: The Other segment had a ($249) realized losses

Q3: The Other segment had a ($74) realized losses

Q4: The Other segment had a ($102) realized losses

 

Total for the year:

($703) million in realized shorts

($542) million in realized losses in the Other segment

 

That is far cry from where the picture started in at the beginning of 2020.

[petec]

Q4 2019 results shows:

An unrealized short of ($154 million).

That tells me that was the snapshot of how the year ended.

 

In a market, which largely plunged in mid-Feb, they somehow ended up closing Q1 with a ($248) million realized lost in shorts. While having still $122 million unrealized short position open. So that unrealized short of ($154 million) at the end of Q4, somehow exploded into ($248) realized shorts by close of Q1 and with some left over.

 

There is also the THE OTHER segment, which i think captures their total return swaps. I think when Prem says shorts, he means direct shorts as well as when he uses TRS to short.

 

Q1: The Other segment had a ($116) realized losses

Q2: The Other segment had a ($249) realized losses

Q3: The Other segment had a ($74) realized losses

Q4: The Other segment had a ($102) realized losses

 

Total for the year:

($703) million in realized shorts

($542) million in realized losses in the Other segment

 

That is far cry from where the picture started in at the beginning of 2020.

 

Yeah I need to think this through. My gut sense is that without a lot more info on what they actually shorted, and how, we can’t be sure. Happy to be contradicted.

 

One broader question I have is this: the bond team here is meant to be superb, yet they never spotted the opportunity that Ackman did. I wonder why.

[Xerxes]

Hard to say.

 

My way of explaining that to myself is that Prem and his close associates probably have a limited bandwidth with all the stuff and operations that they are managing. Afterall it is a company and not a nimble investment fund so perhaps it all happened to fast (same for Markel and BRK), so their gut reaction was survival, as oppose to profiting on the downside. 

 

I am ok with that and can understand. My issue is post-crash, the only shorts that were losing money were anything related to technology. So if you lost money on shorts, that could only mean you were shorting technology names.

 

In any case, water under the bridge.

 

Good news is that while the OTHER segment shows a realized loss of $542 million, it also shows a unrealized of $449 million. Which means they capped their losses at $542 million, but carrying the upside into Q1.

 

 

 

[ValueMaven]

who asked prem to resign?  Can someone post the part with this The Rude Gentleman ??

 

[nwoodman]

who asked prem to resign?  Can someone post the part with this The Rude Gentleman ??

 

https://www.cornerofberkshireandfairfax.ca/forum/fairfax-financial/fairfax-2021/msg450940/#msg450940

[DooDiligence]

Operator "The next question comes from [Mikhail Porter], a Private Investor."

 

Unidentified Analyst

 

I believe that it is time that you step down from having primary investments, responsibilities. I know that Jamie manages some capital, Wade manages some capital. We all know that those are very small portions of the capital base. And I think you are always quoting your long-term track record, but I can -- I know when the man is out of tune with the markets and I also think that it was a huge mistake if you did not take the BlackBerry gift that was given to you by the market. And I also don't think that you're doing deep analysis on your holdings.

 

I suspect that you probably don't do a lot of diving into the financials, the statements. You probably don't understand the microeconomics of the businesses you're buying. You probably are not talking to customers, suppliers, competitors, former employees. The investment business is a very competitive business. It's not like it used to be. I am not saying that, you should go out and buy technology stocks, but a sense when the man is not competitive in the field and is not working hard. And I think it's time that you step down from primary investing and I'm sure many of your associates agree with you but because they're Canadian, and tend to be nicer than Americans they don't say anything. And the banks don't ask you any difficult questions, because there's so few good companies in Canada, and they get financing fees from you. So they ask cowardly questions. Thank you.

 

Prem Watsa

 

Good points. You're entitled to your opinion, and we will let time decide that, okay? So thank you very much for your comment.

 

 

It's uncanny. Like he's talking about me.

[drzola]

My best guess is this may well be very good news for Digit.

 

https://economictimes.indiatimes.com/industry/banking/finance/insure/irdai-asks-insurers-to-issue-digilocker-to-policyholders-to-preserve-documents/articleshow/80910020.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst

 

[petec]

Minor observation:

 

In q3 FFH bought the last 9.4% of Brit for $220m implying a value of $2340m.

 

They've just announced the sale of 14% at $375m implying $2679m.

 

Obviously we don't know what Brit's BV is given its 125% CR in 4q and returns on investments, but in simple terms its good to see them selling at a higher price than they paid!

[nwoodman]

Minor observation:

 

In q3 FFH bought the last 9.4% of Brit for $220m implying a value of $2340m.

 

They've just announced the sale of 14% at $375m implying $2679m.

 

Obviously we don't know what Brit's BV is given its 125% CR in 4q and returns on investments, but in simple terms its good to see them selling at a higher price than they paid!

 

Perhaps.  What it says to me though is “weak hands”.  Can you imagine Berkshire ever playing such nickel and  dime shenanigans!

[Cigarbutt]

Minor observation:

In q3 FFH bought the last 9.4% of Brit for $220m implying a value of $2340m.

They've just announced the sale of 14% at $375m implying $2679m.

Obviously we don't know what Brit's BV is given its 125% CR in 4q and returns on investments, but in simple terms its good to see them selling at a higher price than they paid!

Additional perspective.

Point 1: the difference in valuation is, in fact, larger.

Point 2: it doesn't matter that much because FFH is likely to pay back OMERS over time based on the recent valuation (+ a dividend +\- 9%)

Point 3: it's interesting though that, using their own (FFH-OMERS) internal private appraisals, IV growth at Brit had CAGR of about 8% since acquisition.

Point 4: so the market just needs to recognize this now over time although delayed gratification may be indicated if buybacks are part of the picture.

 

The 220M in Q3 2020 included an accrued dividend of 13.6M and the capital returned to OMERS appears to have been based to a pre-defined formula established at acquisition (summer 2015). So, the principal component paid back to Omers was likely based on a summer 2015 about 1.7B valuation.

 

^Reasonable time to retrospectively evaluate the Brit acquisition so far.

-Price paid in summer of 2015 for 97.0% interest = 1,656.6M (including 575.9M in shares (price per share about 500-501(!)).

100% inferred price for 100% = 1,707.8M

-----

a look at OMERS

-in late June 2015, they got 29.9% interest for 516.0M

-since then

  -57.8 paid back by Brit in August 2016

  -251.8 paid back by parent in July 2018

  -206.4 paid back by parent in Q3 2020

-57.8+251.8+206.4=516.0M

-the return obtained by OMERS is related to dividends received over time: 45.8 (2017), 45.8 +12.8 (2018), 20.6 (2019) and 20.6 + 13.6 (2020) 

  -total div. = 159.2 which results in an about 9% compound return over time.

So that part of the initial transaction was financed by debt-like characteristics with an approximate 9% coupon, non-tax deductible.

Opinion: From Omers' point of view, i would say a satisfying risk-reward proposition, assuming they had some kind of downside protection.

-----

Of course, the future is where the money is but let's take a retrospective look from FFH's point of view.

Since acquisition: cumulative pre-tax income = 165.7M

Book value of Brit at end of Q3 2020 estimated at about 1.85B

Outside of holdco capital contribution to Brit to fund payments (capital and dividends) to OMERS, FFH parent contributed a net 196.6M

Brit, itself, paid OMERS (capital and dividends) 190.6M

Difference in book value from acquisition to end of Q3 2020 = about 140M

Average combined ratio since acquisition: 103%

The return (average net pre-tax earnings over book value) so far from both the underwriting and investment points of view has been very low (about 1.5 to 2.0% CAGR).

Other aspects to consider:

  -NPW at end of first complete year of operations (2016): 1,480.2M; at end of Q3 2020: about (annualized) 1,800M

  -reserves development is still positive, slightly overall better in 2020 in a declining trend and lower in Q3 year over year.

Still, these capital allocation moves raise some uncomfortable questions.

[petec]

Minor observation:

 

In q3 FFH bought the last 9.4% of Brit for $220m implying a value of $2340m.

 

They've just announced the sale of 14% at $375m implying $2679m.

 

Obviously we don't know what Brit's BV is given its 125% CR in 4q and returns on investments, but in simple terms its good to see them selling at a higher price than they paid!

 

Perhaps.  What it says to me though is “weak hands”.  Can you imagine Berkshire ever playing such nickel and  dime shenanigans!

 

Yes and no. Clearly it would have been better to have more capital in 2020. But in the absence of that, selling Riverstone Europe and using OMERS as a LOLR allowed Prem to capitalize his better subs, buy back shares, repay revolvers, and prepare to increase his stake in Digit. So I’d characterize it as a weak hand played well.

[petec]

Minor observation:

In q3 FFH bought the last 9.4% of Brit for $220m implying a value of $2340m.

They've just announced the sale of 14% at $375m implying $2679m.

Obviously we don't know what Brit's BV is given its 125% CR in 4q and returns on investments, but in simple terms its good to see them selling at a higher price than they paid!

Additional perspective.

Point 1: the difference in valuation is, in fact, larger.

Point 2: it doesn't matter that much because FFH is likely to pay back OMERS over time based on the recent valuation (+ a dividend +\- 9%)

Point 3: it's interesting though that, using their own (FFH-OMERS) internal private appraisals, IV growth at Brit had CAGR of about 8% since acquisition.

Point 4: so the market just needs to recognize this now over time although delayed gratification may be indicated if buybacks are part of the picture.

 

The 220M in Q3 2020 included an accrued dividend of 13.6M and the capital returned to OMERS appears to have been based to a pre-defined formula established at acquisition (summer 2015). So, the principal component paid back to Omers was likely based on a summer 2015 about 1.7B valuation.

 

^Reasonable time to retrospectively evaluate the Brit acquisition so far.

-Price paid in summer of 2015 for 97.0% interest = 1,656.6M (including 575.9M in shares (price per share about 500-501(!)).

100% inferred price for 100% = 1,707.8M

-----

a look at OMERS

-in late June 2015, they got 29.9% interest for 516.0M

-since then

  -57.8 paid back by Brit in August 2016

  -251.8 paid back by parent in July 2018

  -206.4 paid back by parent in Q3 2020

-57.8+251.8+206.4=516.0M

-the return obtained by OMERS is related to dividends received over time: 45.8 (2017), 45.8 +12.8 (2018), 20.6 (2019) and 20.6 + 13.6 (2020) 

  -total div. = 159.2 which results in an about 9% compound return over time.

So that part of the initial transaction was financed by debt-like characteristics with an approximate 9% coupon, non-tax deductible.

Opinion: From Omers' point of view, i would say a satisfying risk-reward proposition, assuming they had some kind of downside protection.

-----

Of course, the future is where the money is but let's take a retrospective look from FFH's point of view.

Since acquisition: cumulative pre-tax income = 165.7M

Book value of Brit at end of Q3 2020 estimated at about 1.85B

Outside of holdco capital contribution to Brit to fund payments (capital and dividends) to OMERS, FFH parent contributed a net 196.6M

Brit, itself, paid OMERS (capital and dividends) 190.6M

Difference in book value from acquisition to end of Q3 2020 = about 140M

Average combined ratio since acquisition: 103%

The return (average net pre-tax earnings over book value) so far from both the underwriting and investment points of view has been very low (about 1.5 to 2.0% CAGR).

Other aspects to consider:

  -NPW at end of first complete year of operations (2016): 1,480.2M; at end of Q3 2020: about (annualized) 1,800M

  -reserves development is still positive, slightly overall better in 2020 in a declining trend and lower in Q3 year over year.

Still, these capital allocation moves raise some uncomfortable questions.

 

I need to go through the numbers in proper detail. At the time, Fairfax said they had the right to buy the OMERS stake at cost plus about 7% per year. Brit didn't have to pay a dividend but if it did, OMERS got preferential rights. As you say, this only makes any sense if OMERS had downside protection, but Fairfax didn't mention this.

[Cigarbutt]

^The 516.0 in matches exactly the 516.0 out. With this and other transactions with OMERS, one gets the impression that OMERS is a debt financing partner, ie they look to get their principal back and to get a reasonable return along the way.

 

OMERS' returns (as reported end-yr 2019):

1-year    11.9%

3-year      8.5%

5-year      8.5%

10-year    8.2%

Their stated goal is 7-11%.

[cwericb]

"Tracking Prem Watsa's Fairfax Financial Holdings Portfolio - Q4 2020 Update"

 

https://seekingalpha.com/article/4406115-tracking-prem-watsa-s-fairfax-financial-holdings-portfolio-q4-2020-update?mail_subject=frfhf-tracking-prem-watsa-s-fairfax-financial-holdings-portfolio-q4-2020-update&utm_campaign=rta-stock-article&utm_content=link-0&utm_medium=email&utm_source=seeking_alpha

 

Article from Seeking Alpha.

 

 

[Xerxes]

I get a feeling that OMERS got diamond hands when it comes to holding on those limbs