Fairfax 2021

[ERICOPOLY]

3 minutes ago, modiva said:

 

This is astonishing.  The share count was diluted by ~10 million shares.  It translates to ~$5B dilution or ~50% of the market value.  Imagine what it would do to the share price if there was a buyback vs. dilution of the same.  I think this is one of the biggest reasons for underperformance over the last 10 years.  I hope the situation reverses in the coming decade.   

 

Another lesson learned from going to see Warren and Charlie for 40 years?

[modiva]

I am new to the forum and am an investor in Fairfax.   It has a huge potential with 2-3x in 2-3 years.  But this is realized not just by great execution but also by creating right perceptions that show that the company cares about shareholders.   

[Gregmal]

LOL yea I dont even know that. Thats egregious in any context but especially when you have had half of Canada talking about how undervalued this is for the past decade. Did Prem feel the company was overvalued or something? Profitable companies running real buybacks are virtually unstoppable. Looks at Dillards. The well known "shitty rural mall retailer".....outperforming AMZN during the same time period FFH grow the share count 50%....nothing special to it other than generating cash and buying stock.

[Viking]

One small piece of information  5.1 million shares were issued in 2017 as part of the Allied World acquisition. Net written premiums at Allied was $2.2 billion in 2017. After 6 months net written premiums are $2.1 billion and grew at 32% in the most recent quarter. 
 

From the 2017 AR: “We closed our acquisition of Allied World on July 6, 2017 and we welcomed Scott Carmilani and Allied World’s 1,430 employees to the Fairfax family. As you know, Allied World is the largest acquisition that we have done and we pursued this acquisition because of Allied World’s outstanding track record over its 15 years of existence and the quality of its management team. We are very thankful to our financing partners OMERS ($1 billion), AIMCO ($0.5 billion) and two others. We issued a total of 5.1 million shares for Allied World. ”

 

”Allied World, based in Zug, Switzerland, provides property, casualty and specialty insurance and reinsurance solutions, with principal locations in the United States, Bermuda, London, Singapore and Canada. In 2017, Allied World’s net premiums written were US$2,238.8 million. At year-end, the company had shareholders’ equity of US$2,523.8 million and there were 1,430 employees. Allied World was acquired on July 6, 2017.”

Edited August 2, 2021 by Viking

[nwoodman]

8 minutes ago, Viking said:

One small piece of information  5.1 million shares were issued in 2017 as part of the Allied World acquisition. 
 

From the 2017 AR: “We closed our acquisition of Allied World on July 6, 2017 and we welcomed Scott Carmilani and Allied World’s 1,430 employees to the Fairfax family. As you know, Allied World is the largest acquisition that we have done and we pursued this acquisition because of Allied World’s outstanding track record over its 15 years of existence and the quality of its management team. We are very thankful to our financing partners OMERS ($1 billion), AIMCO ($0.5 billion) and two others. We issued a total of 5.1 million shares for Allied World. ”

 

at the upper end of the P/B range for the last 10 years too. Longer term graph shown for comparative purposes

 

 

 

 

 

Edited August 2, 2021 by nwoodman

[Parsad]

 

This is astonishing.  The share count was diluted by ~10 million shares.  It translates to ~$5B dilution or ~50% of the market value.  Imagine what it would do to the share price if there was a buyback vs. dilution of the same.  I think this is one of the biggest reasons for underperformance over the last 10 years.  I hope the situation reverses in the coming decade.   

 

42 minutes ago, ERICOPOLY said:

 

Another lesson learned from going to see Warren and Charlie for 40 years?

 

36 minutes ago, Gregmal said:

LOL yea I dont even know that. Thats egregious in any context but especially when you have had half of Canada talking about how undervalued this is for the past decade. Did Prem feel the company was overvalued or something? Profitable companies running real buybacks are virtually unstoppable. Looks at Dillards. The well known "shitty rural mall retailer".....outperforming AMZN during the same time period FFH grow the share count 50%....nothing special to it other than generating cash and buying stock.

 

There was a lot of dilution at Berkshire when GenRe was acquired...about 25%!  And GenRe was not a good investment for a few years, whereas Allied is double the size since Fairfax acquired it and writing good business.  While the Fairfax shares weren't overvalued in the Allied transaction, they were also acquiring a good insurer at fair value. 

 

After years of shareholders complaining about Fairfax buying shitty insurers and trying to turn them around, once they actually pay fair value for a good insurer, you guys complain about dilution!  Cheers!

[Gregmal]

GenRe was bought towards the end of the tech bubble and even still Warren has been honest about the share issuance being a massive mistake. Prem meanwhile, issued stock that on an adjusted basis was roughly where it is trading today. If you owned the stock then, you still haven't been made whole on a per share value basis. And on top of that, I am pretty sure there were a lot of people talking about how FFH was cheap then too. 

 

I was impressed with the recent earnings. I almost bought in. Then, the stock opened for trading. A couple days later....its barely moved and given a little back from the 530 prints I saw. Thats toxic. When your blowout figures are just totally ignored. It reminds me of a lot of the oil companies or GM for years which I owned. Blowout, blowout, blowout....shares barely budge. And GM, like 5+ years later is at 60 from 35-40...and some shareholders will tell you "it was worth the wait, the returns are OK", but the truth is, much like my hunch with FHH when it finally goes up 20-30%...is that you probably could have bought anything(relatively speaking) in the index or even the index itself, and gotten similar if not way better returns in many cases. Is this just a comfort vehicle, aka the devil you know for people? Or is it really the best investment out there?(or one of the best 10 or whatever constitutes a portfolio)

Edited August 3, 2021 by Gregmal

[Parsad]

3 minutes ago, Gregmal said:

GenRe was bought towards the end of the tech bubble and even still Warren has been honest about the share issuance being a massive mistake. Prem meanwhile, issued stock that on an adjusted basis was roughly where it is trading today. If you owned the stock then, you still haven't been made whole on a per share value basis. And on top of that, I am pretty sure there were a lot of people talking about how FFH was cheap then too. 

 

I was impressed with the recent earnings. I almost bought in. Then, the stock opened for trading. A couple days later....its barely moved and given a little back from the 530 prints I saw. Thats toxic. When your blowout figures are just totally ignored. It reminds me of a lot of the oil companies or GM for years which I owned. Blowout, blowout, blowout....shares barely budge. And GM, like 5+ years later is at 60 from 35-40...and some shareholders will tell you "it was worth the wait, the returns are OK", but the truth is, much like my hunch with FHH when it finally goes up 20-30%...is that you probably could have bought anything(relatively speaking) in the index or even the index itself, and gotten similar if not way better returns in many cases. Is this just a comfort vehicle, aka the devil you know for people? Or is it really the best investment out there?(or one of the best 10 or whatever constitutes a portfolio)

 

Yeah, this makes zero sense to me.  After Berkshire bought GenRe, Berkshire's earnings were killing it for the 1st year...even excluding GenRe...yet the stock traded at the lowest P/B in its history.  That's when I first bought Berkshire.  And guess what, the stock didn't move until the tech bubble ended where it went on a tear.

 

Fairfax has been here before.  Just because it didn't move on a good earnings report, doesn't mean the stock is dead money.  If you are a value investor, you know that at some point in time, the market will eventually reduce the spread between market price and intrinsic value.  IT ALWAYS HAPPENS!  ALWAYS!  The emphasis is that this contraction is as consistent as gravity. 

 

Sometimes it happens as a company performs poorly, and intrinsic value decreases to where market price is.  Often, it's the reverse, and completely out of favor stocks with good fundamentals find their valuation increasing closer to intrinsic value.

 

We saw this in the fall/winter of last year and into spring of this year.  It wasn't simply Reddit investors, or millennium money, but investors rotating to undervalued stocks...sometimes well exceeding fundamentals and intrinsic value.  The market does this.  It is efficient over time, but extremely inefficient during shorter periods.  

 

When people were buying earlier last year, you said that FFH was a dud.  Then it ran up a bit and earnings started to prove real.  Now you are saying you almost bought now after the earnings release.  Please don't buy once it is over $750-800 CDN, because that would be the wrong time to buy and add a position!  Cheers!

[Gregmal]

I mean I just fundamentally think that when you trade at a discount, let alone a large and perpetual one, your focus should be on closing that. It flies in the face of the Outsider CEO MO or just in general the benefits of the capital markets where you can use overvalued stock as currency, to always be trading at a discount. For instance, APTS has gotten fairly popular of late. Its a straight up turnaround story from a management and reputational standpoint. If it trades at 50c on the dollar, and the reason for that is management and certain corporate actions, it is the single most important facet of the investment to STOP MAKING THOSE MISTAKES. If Joel Murphy turned around and issued 30M shares tomorrow as part of the deal, I dont care if he's buying Mark Hughes plot of land, Madison Square Garden, or half of Florida....its a big no-no. It still shows his head on in the place of "growing in size" rather than maximizing per share value. Whereas if Prem decided tomorrow to make a big acquisition, who'd be surprised? No one should be, because on a valuation basis he's done so before. Thats my point. To close the discounts you need to address the issues....Ive rarely seen these things correct themselves just by earning their way out of it. Wells makes lots of money. Fuck tons. But the reputation is why it doesnt trade like JPM. 

[Viking]

My guess is the biggest driver of spike in share count the past 11 has been large acquisitions of insurance companies: Zenith in 2010, Brit in 2015 and Allied in 2017. 
 

Fairfax has stated numerous times in recent years that they are done with very large insurance acquisitions. This is a big deal and is another example of the ‘new Fairfax’. Moving forward, growth will be organically driven. They will do small acquisitions as we saw in Q2 with Singapore Re. One benefit of this major shift in strategy will be share count (shares will not be used to pay for a big insurance acquisition).

 

Diluted share count has also gone up due to employee stock awards. I have not looked into this in any detail. I don’t think Fairfax is the only company that does this  Perhaps someone more knowledgable can chime in on magnitude and how it compares to other similar companies. I think Fairfax’s awards are also long term in nature (earned over a couple of years); again, if anyone has more info please chime in  

 

To me the big issue at Fairfax the past 10 years is lack of cash generation (caused by a bunch of issues). So it has had to issue shares to help fund acquisitions and shore up its financial position. And it has been unable to buy back stock when it was cheap. 
 

The good news is Fairfax looks poised to deliver much better cash generation moving forward. Different corporate strategy. Hard market. Underwriting results are improving. Their consolidated holdings (lots of cyclicals) are rebounding nicely as global economies open up. Their equity investments have rebounded nicely in value and are poised to do well.
 

Yes, the increase in shares outstanding from 2010 to 2020 was not good. However, i think Fairfax is a much different company today (than it was in 2010) with very different prospects. And i expect the share count to drop in a meaningful way at Fairfax in the coming years.

[Gregmal]

7 minutes ago, Parsad said:

 

Yeah, this makes zero sense to me.  After Berkshire bought GenRe, Berkshire's earnings were killing it for the 1st year...even excluding GenRe...yet the stock traded at the lowest P/B in its history.  That's when I first bought Berkshire.  And guess what, the stock didn't move until the tech bubble ended where it went on a tear.

 

Fairfax has been here before.  Just because it didn't move on a good earnings report, doesn't mean the stock is dead money.  If you are a value investor, you know that at some point in time, the market will eventually reduce the spread between market price and intrinsic value.  IT ALWAYS HAPPENS!  ALWAYS!  The emphasis is that this contraction is as consistent as gravity. 

 

Sometimes it happens as a company performs poorly, and intrinsic value decreases to where market price is.  Often, it's the reverse, and completely out of favor stocks with good fundamentals find their valuation increasing closer to intrinsic value.

 

We saw this in the fall/winter of last year and into spring of this year.  It wasn't simply Reddit investors, or millennium money, but investors rotating to undervalued stocks...sometimes well exceeding fundamentals and intrinsic value.  The market does this.  It is efficient over time, but extremely inefficient during shorter periods.  

 

When people were buying earlier last year, you said that FFH was a dud.  Then it ran up a bit and earnings started to prove real.  Now you are saying you almost bought now after the earnings release.  Please don't buy once it is over $750-800 CDN, because that would be the wrong time to buy and add a position!  Cheers!

Eh I didnt buy because I dont think the issues are fixed(I also just think there's better stuff at the moment but that can change). And I didnt need to back up the truck during the covid crash like many did because there was plenty else much more appealing that turned out to perform much better. I mean come on dude, you bought Sardar's dumpster BH and its almost tripled. This is like my GM example. Sure if you held you made money. But you could have bought plenty else and done just as well if not better. My interest in these is parallel to my BRK investment earlier this year, or probably even more so when by myself I called the inflection on FIZZ(go check the thread) before its quick triple. When the risk/reward on an individual level are cant miss and the risk/reward on a macro level are poor. It's probably not going to be long term, but many times, like buying BRK in January, you can get beautiful, market crushing, absolute returns out of setups like this that are almost risk free. 

Edited August 3, 2021 by Gregmal

[ERICOPOLY]

1 hour ago, Parsad said:

 

This is astonishing.  The share count was diluted by ~10 million shares.  It translates to ~$5B dilution or ~50% of the market value.  Imagine what it would do to the share price if there was a buyback vs. dilution of the same.  I think this is one of the biggest reasons for underperformance over the last 10 years.  I hope the situation reverses in the coming decade.   

 

 

 

There was a lot of dilution at Berkshire when GenRe was acquired...about 25%!  And GenRe was not a good investment for a few years, whereas Allied is double the size since Fairfax acquired it and writing good business.  While the Fairfax shares weren't overvalued in the Allied transaction, they were also acquiring a good insurer at fair value. 

 

After years of shareholders complaining about Fairfax buying shitty insurers and trying to turn them around, once they actually pay fair value for a good insurer, you guys complain about dilution!  Cheers!

 

Not the case, rather than complaining about the acquisition, I was entirely not thinking about the acquisition.

 

It's still 5 million shares given out to employees.  One can get excited about buybacks, but that's just treading water or rather sinking less slowly.

 

How about pay employees?  Out of, you know, earnings?

 

Edited August 3, 2021 by ERICOPOLY

[Spekulatius]

On 7/31/2021 at 6:09 PM, ERICOPOLY said:

 

They have about 8% of shares outstanding worth of TRS.  So I think if you multiply $54 by 1.08 you arrive at about $58.32, assuming the shares appreciate at precisely the rate of EPS increases. 

 

It's a bit confusing to arrive at an estimate for earnings when share increases feed back into earnings and earnings drive share increases.

Is it just me who thinks that writing TRS swaps in size on their own shares is a bad idea from a risk Management perspective?

The very real possibility of a feedback loop of poor stock performance with real market-Market losses affecting the balance sheet should keep someone away, especially as insurance company. 
Just because it worked last time doesn’t make this a good process.

Edited August 3, 2021 by Spekulatius

[Parsad]

1 hour ago, Gregmal said:

Eh I didnt buy because I dont think the issues are fixed(I also just think there's better stuff at the moment but that can change). And I didnt need to back up the truck during the covid crash like many did because there was plenty else much more appealing that turned out to perform much better. I mean come on dude, you bought Sardar's dumpster BH and its almost tripled. This is like my GM example. Sure if you held you made money. But you could have bought plenty else and done just as well if not better. My interest in these is parallel to my BRK investment earlier this year, or probably even more so when by myself I called the inflection on FIZZ(go check the thread) before its quick triple. When the risk/reward on an individual level are cant miss and the risk/reward on a macro level are poor. It's probably not going to be long term, but many times, like buying BRK in January, you can get beautiful, market crushing, absolute returns out of setups like this that are almost risk free. 

 

Sometimes reputation gives you the opportunity to make a ton of money because markets/analysts ignore a company regardless of fundamentals.

 

The three companies I've made money on over and over at different times without holding the stock through dead money periods are Overstock.com, Fairfax Financial and Biglari Holdings (and its predecessors) in order of magnitude return.  

 

Notice anything similar between them?  Misunderstood or eccentric CEO's with businesses that were not completely easy to understand.  And they went through several periods of challenges (self-made and otherwise) where markets discounted them significantly and there was an opportunity to buy cheap, and then sell again as markets recognized fundamentals were improving.  

 

I'm not saying hold Fairfax forever...but it was dirt cheap last March/April and into the winter of 2020, remains significantly undervalued as fundamentals show dramatic improvement, and will end up above book at some point in the next year or two, where I will cut my position in half or more depending on how high it is valued.  Cheers!

[Parsad]

35 minutes ago, Spekulatius said:

Is it just me who thinks that writing TRS swaps in size on their own shares is a bad idea from a risk Management perspective?

The very real possibility of a feedback loop of poor stock performance with real market-Market losses affecting the balance sheet should keep someone away, especially as insurance company. 
Just because it worked last time doesn’t make this a good process.

 

If you have a 80% chance that the stock rises and 20% chance the stock falls, would you not take that bet every time?  And if it does fall, would you not simply double-down?  No zero, double zero popping up!    Cheers!

[petec]

2 hours ago, Gregmal said:

Whereas if Prem decided tomorrow to make a big acquisition, who'd be surprised? No one should be, because on a valuation basis he's done so before.

When? Bearing in mind the nwoodman post above showing the p/BV when he bought Allied was very different to the p/BV today?

 

For the record, I’d be astonished if he issued shares for a big acquisition today. 
 

[Viking]

1 hour ago, Spekulatius said:

Is it just me who thinks that writing TRS swaps in size on their own shares is a bad idea from a risk Management perspective?

The very real possibility of a feedback loop of poor stock performance with real market-Market losses affecting the balance sheet should keep someone away, especially as insurance company. 
Just because it worked last time doesn’t make this a good process.

Spec, the size of the TRS position is something i have never seen before even from Fairfax. And, given it is using leverage, it will be volatile and involve heightened risk. It is certainly unique for a P&C insurer. The RBC analyst sounded particularly dumfounded on the conference call when the position was first announced. 
 

It is yet another example of how Fairfax can get creative and do things that are unexpected and of magnitude.
 

I like the transaction. Because i like the risk reward. I think Fairfax shares are dirt cheap. Fairfax also understand the heightened risks/downside of doing this kind of transaction. My guess is they are pretty confident the shares will be materially higher in the near future (something they do have some influence over). 
 

I also think the TRS telegraphs what we are likely to see in the next 6  to 12 months: the start of meaningful stock buybacks. What is it Fairfax can do to juice the share price (and value of TRS)? Buy back the stock in quantity. The shares will spike when this happens. (Not sure what the rules are on this… )
 

The Riverstone UK / Brit acquisitions are to close this month (we will see). What to do with $1.1 billion? More cash should be coming given all the tailwinds Fairfax is currently experiencing. Buy back some debt and… stock.

 

Fairfax India is in the process of buying back 5% of its shares. Pretty easy decisions when you stock is dirt cheap. Just need some extra cash

Edited August 3, 2021 by Viking

[Viking]

41 minutes ago, petec said:

When? Bearing in mind the nwoodman post above showing the p/BV when he bought Allied was very different to the p/BV today?

 

For the record, I’d be astonished if he issued shares for a big acquisition today. 
 

Prem has said numerous times the past 2 years that Fairfax is done with big new insurance acquisitions. Because they are happy with their global footprint. And it provides them with lots of opportunity to grow organically. As i said above, they will do some small fill in acquisitions like Singapore Re (they already owned a chunk of this company so they bought what they did not own). 
 

Now i do expect them to buy the minority shareholders in Allied and Brit in the future. Issue shares to do so? Brit? No. Allied? I doubt it; although there is a chance it could happen. 

[glider3834]

on share issues - its all about the economic value added from the share issue that is important & not the issue itself.

 

Here is Prem quote From Fairfax Annual report 2017 

 

Over our history, we have issued 29.5 million shares as we expanded Fairfax from net premiums written of $10 million to $10 billion (current run rate of $11.5 billion). During this period, we have also reduced our shares outstanding by 6.7 million, for a net increase of 22.8 million. As the table below shows, our shares outstanding have grown by 5.6x while net premiums written, investments and common equity have increased by 1,000x or more. Henry Singleton, at Teledyne, reversed this trend, as you know, and over the next ten years we expect to do the same – use our free cash flow to buy back our shares!

 

on TRS - Viking has correctly identified that they are in a position to influence the TRS outcome which is important - the size of the TRS position is really large & I think this could turn into one of the best investments they make over the next 6 mths given the discounted level where FFH shares are trading - lets see how we go;)

 

 

 

 

[glider3834]

2 hours ago, Viking said:

Prem has said numerous times the past 2 years that Fairfax is done with big new insurance acquisitions. Because they are happy with their global footprint. And it provides them with lots of opportunity to grow organically. As i said above, they will do some small fill in acquisitions like Singapore Re (they already owned a chunk of this company so they bought what they did not own). 
 

Now i do expect them to buy the minority shareholders in Allied and Brit in the future. Issue shares to do so? Brit? No. Allied? I doubt it; although there is a chance it could happen. 

+1 

 

agree - I think they will continue use available cash to buyback stock & future large insurance acquisitions are unlikely

 

 

[Gregmal]

4 hours ago, Parsad said:

 

Sometimes reputation gives you the opportunity to make a ton of money because markets/analysts ignore a company regardless of fundamentals.

 

The three companies I've made money on over and over at different times without holding the stock through dead money periods are Overstock.com, Fairfax Financial and Biglari Holdings (and its predecessors) in order of magnitude return.  

 

Notice anything similar between them?  Misunderstood or eccentric CEO's with businesses that were not completely easy to understand.  And they went through several periods of challenges (self-made and otherwise) where markets discounted them significantly and there was an opportunity to buy cheap, and then sell again as markets recognized fundamentals were improving.  

 

I'm not saying hold Fairfax forever...but it was dirt cheap last March/April and into the winter of 2020, remains significantly undervalued as fundamentals show dramatic improvement, and will end up above book at some point in the next year or two, where I will cut my position in half or more depending on how high it is valued.  Cheers!

 

I don't disagree with you on the trading logic. The best trading setups are when there is an inflection or a variable change that is significant that the market doesnt recognize right away. However what I am saying is that I dont see the variable change here and you and others are basically just saying "its cheap". Which to me, has never really been the key to unlock the big move. And this logic continues to be lazily used here with shit such as "if you bought in March/April 2020", but even there, NO!! you're wrong! If you bought FFH during that time frame you made a mistake because you could have bought everything under the sun and probably done just as well if not better. You could have bought the index and done better! Which is what Im getting at. Maybe the setup here to folks is "its cheap". And maybe from here, the market or "value stocks" do 15% and FFH does 15% and everyone is high fiving about "yea FFH is on fire".... but thats a waste of time to me. I'm looking for the stock thats market neutral or setup to do 20% when the broader market does 5%. And to get that you need a change or an inflection and Ive yet to see or hear anything with FFH that puts it in that category. The closest I saw was in January, and a few of the more superb traders here like @SharperDingaansaw it and hit that move, but even there, there were much better alternatives like BRK.

Edited August 3, 2021 by Gregmal

[glider3834]

6 hours ago, nwoodman said:

 

at the upper end of the P/B range for the last 10 years too. Longer term graph shown for comparative purposes

 

 

 

 

 

if BV is $541 (30 Jun-21) & we adjust for expected $46 increase from Digit revaluation of convertible preferred shares in Q3 & adjust a further $57 (see below - from RBC recent analyst report)  - can we say adjusted BV is closer to US$644 per share (versus $431 share price) for a P/adjusted BV = 0.66?

 

“The excess of estimated fair value over carrying value of all Fairfax non-insurance associates including Fairfax India associates is about $1.9B or more than $57/share after-tax (not included in book value).”

[glider3834]

for what its worth - interesting both Cormark & Scotiabank raised their price targets further on 2/8 after Q2 results

 

https://www.marketbeat.com/stocks/TSE/FFH/price-target/

[glider3834]

30 minutes ago, Gregmal said:

And to get that you need a change or an inflection and Ive yet to see or hear anything with FFH that puts it in that category.

Gregmal when you look for an inflection point for a stock - are you looking at technical stuff like trading volume or daily buy/sell ratios?

[UK]

If i am correct 2017 was done at about 1.1 BV.

 

 

 

So, even if everything goes right, what is realistic upside/ceiling? Some 1.3?

 

Edited August 3, 2021 by UK