Fairfax Annual Letter

[Parsad]

Does it come out tomorrow or next week?  Cheers!

[Santayana]

LOL, saw your post and thought it was out early!  Tomorrow I think.

[Parsad]

LOL, saw your post and thought it was out early!  Tomorrow I think.

 

Sorry!  I thought everyone could just post on this thread after it comes out and everyone has read it.

 

Cheers!

[StubbleJumper]

...and on the day that the annual letter is to be released, BB shares have dropped back down to US$9.  Let's hope that we see some sort of explanation.

 

 

SJ

[Viking]

It should be today based on Q4 conference call transcript (Feb 12):

 

Jennifer J.S Allen, Fairfax Financial Holdings Limited - VP & CFO

 

“Thank you, Prem. We wanted to let you know that in addition to the press release that was issued yesterday on our year-end results, Fairfax's 2020 annual report will be posted on the company's website on March 5, 2021.”

—————————

I am very interested to see how Fairfax discusses/presents its equity holdings (given their importance to Fairfax’s valuation).

 

Another comment from Jennifer in her prepared remarks:

 

“At December 31, 2020, our investments in associate 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 and associates by approximately $400 million.”

—————————

Jaeme Gloyn, National Bank Financial, Inc., Research Division - Analyst: “So first question is just around the Farmers Edge IPO. That seems to be -- that will be coming out pretty soon here. Can you maybe talk about some of the other industries or companies that you're looking to maybe tack into this pretty robust IPO market as a way to realize on value in some of those holdings?”

 

V. Prem Watsa, Fairfax Financial Holdings Limited - Founder, Chairman & CEO [35]

 

“ Jaeme, we're not allowed to say too much until they file, and until they are done. So Farmers Edge, as you know, has filed. We'll be filing some more. You'll be able to guess them. And, and we'll be filing them in India -- in Fairfax India. Many of them there. And, we've got some really good companies and we've developed them over. And Dexterra is a classic where the old horizon -- this called Dexterra, we have 49%. And we expect that to be a very successful company over time. So, we have many of them. And when you look at our non-insurance companies, some of you analysts are worried about the fact that we don't make any money. We reflect the losses, but we don't show the gains. And the gains come over time. So when you look at our investment portfolio, you know this Jaeme, we've got common shares. We have more than 20%, they become associates. If you have a 40% interest -- the numbers like that, in the case of Thomas Cook 65%, then you have to consolidate it. So in our Annual Report in 2020 -- for the 2020 Annual Report will come out in a few weeks, we're going to show it to you so that you can -- we're going to take another attempt to show you our common stock positions. And they -- some of them are just common stocks, some are associates, some are consolidated. It gets a little bit guy, but that's the accounting IFRS. We have to follow the accounting rules. But we're going to show that to you in a way that I think will be easier to understand. And over time, all of these investments, some do very well in a short period of time, and some take longer. And we just -- we're patient, long term investors.”

[maxthetrade]

It's out: https://s1.q4cdn.com/579586326/files/doc_financials/2020/q4/Letter-to-Shareholders-2020-(Final).pdf

[FairFacts]

Best quote..... "Nothing that a $1,000 share price won't solve"....Prem

[lessthaniv]

Best quote..... "Nothing that a $1,000 share price won't solve"....Prem

 

Better when paired with the footnote. 

* Amounts in this letter are in U.S. dollars unless specified otherwise. Numbers in the tables in this letter are in U.S. dollars and $ millions except as otherwise indicated.

 

:D

[Parsad]

Main takeaways:

 

- No mention if anything was done to take advantage of BB's share price action in January. 

- Insurance operations are fully global and just killing it...2021 should be even better than insurance results in 2020...I would expect a below 93% ratio again excluding any one-off insurance losses

- Room to write considerably more business

- Wade and Lawrence did well in 2020...no mention of numbers...but looks like their portfolio will be doubled

- Looks like Prem was trying to simplify investments to readers, but it seemed more complicated actually...hope analysts are smart enough to realize what is happening under the hood

- Looking at what was said in the AR and the 2021 proxy circular, Prem's putting his money where his mouth is...his personal ownership (not Sixty Two Company) has tripled it's position in Fairfax...so that full $150M purchase was as the press release said...a personal purchase!  Also they've bought back alot of shares and as previously stated, they have the huge total swap locked in at $343 USD.

- Invested in about $1.5B, 5% mortgages through KW if I read that correctly.

- Loss for 2020 in BIAL is extended in the lease by one-year, so no net loss over time as they grow BIAL and develop the 460 acres around the airport.

- Thinks India will continue to proper under Modi, as will Fairfax India holdings

- Utilizing Zoom effectively for manager and President's meetings...will this become the more safe, cost-efficient way to hold these meeting for corporations...certainly cheaper than flying them in from around the world and putting them up in hotels for 3-5 nights.

- With the debt raise in Q1, as expected, debt ratios will fall to close to 2019 numbers

- Will still have about $1.3B in cash as debt deals and sale of Riverstone Europe close

 

Feel free to add to the list!  Cheers!

[Viking]

A couple of random things that i found interesting (after speed reading the first half of the Prem’s letter).

 

1.) page 7: Digit ownership currently at 49%. Note 4: “74% upon conversion of securities, when permitted under recent budget”

 

Does this mean Fairfax will not need to lay out a bunch of cash to get to 74% ownership of digit? That would be huge.

 

2.) page 15: “Also in 2019, Fairfax India signed definitive agreements with OMERS, the pension plan for Ontario’s municipal employees, whereby Fairfax India will transfer 43.6% out of the 54% that it owns in BIAL to a wholly owned Indian holding company (Anchorage) and OMERS will pay about $130 million to acquire 11.5% of Anchorage from Fairfax India. This transaction values 100% of BIAL at $2.6 billion. We expect to close this transaction in March 2021 and begin soon after the process to list Anchorage on the Indian stock exchanges, possibly at a much higher valuation.”

 

An IPO of Anchorage should be very good news for Fairfax India and its stock price. The proceeds from the Anchorage IPO (and proceeds from sale to OMERS) could be re-invested further validating Anchorage and its valuation.

[barminov]

As a long time follower, and at times shareholder, of Fairfax, that letter was very disappointing. 

 

After the last conference call, it should have been pretty obvious to everyone at the company that shareholders want to know what, if anything, was done with BlackBerry. Prem side-stepped this and gave his usual: John Chen is great and we like him. Cool, but everyone that's followed the company for longer than a quarter already knew that. Shareholders are more interested in why several members of the investment team (including Wade Burton who he later praised for doing a great job) sold shares of BB during the run-up and FFH seemingly did nothing. If there's some reason they couldn't/didn't want to, say so but don't just avoid the subject altogether. Even a simple: "we can't talk about it" would have been better. 

 

Second, there was no discussion at all about their Tesla short. From the 2018 letter:

"After much thought and discussion, it became clear to me that shorting is

dangerous, very short term in nature and anathema to long term value investing. As I mentioned to you in last year’s

annual report, shorting has cost us, cumulatively, net of our gains on common stock, approximately $2 billion! This

will not be repeated! In the future, we may use options with a potential finite loss to hedge our equity exposure, but

we will never again indulge anew in shorting with uncapped exposure. Your Chairman continues to learn – slowly!!"

 

Yet they decided to not close out the Tesla short total return swap and kept extending it. On the conference calls, they made it sound like they were working through it, winding it down and there was just a little more left. This is deceptive at best. It's a short total return swap with Bank of America as a counterparty. I'm not a derivatives trader so I might be wrong here but I'm pretty sure you just pick up the phone and close the trade, maybe pay somewhat of a premium to get out. Instead, as late as September 11, 2020, they re-upped it for a notional amount of $128.7m at a strike price of $372.72. That sure doesn't jive with the statement made in the 2018 letter. At some point in 2020 they finally closed it out and yet the current letter basically just says "hey, we closed a short after losing a bunch of money." Maybe after a huge loss like that some discussion is warranted? Hell, I agree with them and this position but their timing was off and they got burned. If they explained the logic/thinking behind why they did it (it's crazy overvalued), explained what happened (the price kept going up with no rhyme or reason), and said "we learned once again why shorting without limiting your downside is dumb, we won't do it again" it would have been a lot better than the way they did handle it which was essentially an insult to everyone's intelligence and/or a hope that no one is paying attention.

 

Third, and by far the least important, it's Ukraine not "the Ukraine." This is mainly just a pet peeve of mine but "the Ukraine" is what Russians called it when it was one of the Soviet Republics because it was a region in a larger country (like the Great Plains, the Northeast, the Rockies etc). 99.9% of people don't/won't and shouldn't care but the people that might are the people in the Ukrainian subsidiaries that Prem is trying to praise. Interestingly enough, he got it right in the first part of the letter and switched to "the Ukraine" in the latter part. Anyway, at least he got Colombia right.

[Cigarbutt]

...

Fairfax in recent years has had a pretty good record with reserve releases. Lets hope it continues in the coming quarters/years. This is something i look at when they report. I think Q4 is when they do a complete review (so if there are issues this is when they will likely surface).

One area i will watching in Q4 is runoff. Now that the good part of runoff has been sold (Riverstone) it will no longer be possible to hide the increase to reserves from the ugly part (asbestos). I think last year in Q4 they took a $200 million hit. I would not be surprised to see another big hit this year. Obviously, this is just a guess on my part.

This year:

"Net adverse prior year reserve development at U.S. Run-off of $216.4 principally related to continued deterioration of asbestos, pollution and other hazards exposures ($213.7), and strengthening of other loss reserves ($6.7), partially offset by net favourable emergence on workers’ compensation loss reserves ($5.5). Net favourable prior year reserve development at European Run-off of $65.9 principally related to improvement in RiverStone (UK)’s employers’ liability and public liability exposures ($49.4) and improvement in Advent’s marine and property exposures ($9.5)." (my bold)

-----

-Overall for FFH, reserve releases are holding up nicely (better than anticipated), a phenomenon reflected overall (to various degrees) in the industry.

 

-On the asbestos front, FFH appears to simply follow industry trends in slowly catching up to the eventual result (not better or worse). One day, i will (not on an empty stomach) go through all disclosures and figure out the eventual asbestos costs for policies written before 2001 (2001! no wonder they say long tails can wag the dog). In February of 2020, we had exchanged on this and i had submitted the opinion that there was likely 350-400M left to be recognized over the next 5 to 7 years. This year's increase in reserves may have been extra conservative because asbestos reserves were transferred to Riverstone UK in early 2020. My understanding is that FFH is on the hook for further adverse reserve development in the sold reserves portfolios through a contingent value instrument-type of arrangement with CVC.

[gurjot]

Without having to be too political,  modi has increased hindu muslim divide in india.  Ecnomically speaking modi governement is not doing anything good for India.  Middle class is in worse shape than it was before modi took over .  Selling off governement owned entities has created collusion like situation .  eg railroad has tripled fares in the last few months when unemployment is high and same thing with gas prices are higher today than they were when crude was at  $140.

[Daphne]

Viking

Re EXCO: What form of security does FFH own e.g. bond, preferred stock, common stock, warrants?

 

Re Leons: When did these commons appear in the portfolio?

 

Thanks

D

 

[doc75]

Without having to be too political,  modi has increased hindu muslim divide in india.  Ecnomically speaking modi governement is not doing anything good for India.  Middle class is in worse shape than it was before modi took over .  Selling off governement owned entities has created collusion like situation .  eg railroad has tripled fares in the last few months when unemployment is high and same thing with gas prices are higher today than they were when crude was at  $140.

 

Yes, Prem's rosy view of Modi is certainly at odds with much of what I've read elsewhere.  But he's talking his book so I personally don't worry about the discrepancies.

 

In general, I feel Prem's writing often makes him seem avuncular to the point of being naive, particularly over the past few years.  (The exclamation points ending every second sentence don't help.)  I don't believe this is fully reflective of the depth of his thinking.  Buffet also has the whole "Uncle Warren" persona, but there's certainly a very shrewd businessman behind the aphorisms and platitudes.  Maybe not a fair comparison but perhaps you see my point.

 

[Spekulatius]

The letter is a joke. When you read it, you would think that FFH is crushing it, yet book value went down and the earnings are a black zero. Leverage on a Holding level is up. They have underperformed virtually any other insurance company follow in terms business performance. Unless they perform better, I don’t see why this would rerate higher.

[SafetyinNumbers]

As a long time follower, and at times shareholder, of Fairfax, that letter was very disappointing. 

 

After the last conference call, it should have been pretty obvious to everyone at the company that shareholders want to know what, if anything, was done with BlackBerry. Prem side-stepped this and gave his usual: John Chen is great and we like him. Cool, but everyone that's followed the company for longer than a quarter already knew that. Shareholders are more interested in why several members of the investment team (including Wade Burton who he later praised for doing a great job) sold shares of BB during the run-up and FFH seemingly did nothing. If there's some reason they couldn't/didn't want to, say so but don't just avoid the subject altogether. Even a simple: "we can't talk about it" would have been better. 

 

Second, there was no discussion at all about their Tesla short. From the 2018 letter:

"After much thought and discussion, it became clear to me that shorting is

dangerous, very short term in nature and anathema to long term value investing. As I mentioned to you in last year’s

annual report, shorting has cost us, cumulatively, net of our gains on common stock, approximately $2 billion! This

will not be repeated! In the future, we may use options with a potential finite loss to hedge our equity exposure, but

we will never again indulge anew in shorting with uncapped exposure. Your Chairman continues to learn – slowly!!"

 

Yet they decided to not close out the Tesla short total return swap and kept extending it. On the conference calls, they made it sound like they were working through it, winding it down and there was just a little more left. This is deceptive at best. It's a short total return swap with Bank of America as a counterparty. I'm not a derivatives trader so I might be wrong here but I'm pretty sure you just pick up the phone and close the trade, maybe pay somewhat of a premium to get out. Instead, as late as September 11, 2020, they re-upped it for a notional amount of $128.7m at a strike price of $372.72. That sure doesn't jive with the statement made in the 2018 letter. At some point in 2020 they finally closed it out and yet the current letter basically just says "hey, we closed a short after losing a bunch of money." Maybe after a huge loss like that some discussion is warranted? Hell, I agree with them and this position but their timing was off and they got burned. If they explained the logic/thinking behind why they did it (it's crazy overvalued), explained what happened (the price kept going up with no rhyme or reason), and said "we learned once again why shorting without limiting your downside is dumb, we won't do it again" it would have been a lot better than the way they did handle it which was essentially an insult to everyone's intelligence and/or a hope that no one is paying attention.

 

Third, and by far the least important, it's Ukraine not "the Ukraine." This is mainly just a pet peeve of mine but "the Ukraine" is what Russians called it when it was one of the Soviet Republics because it was a region in a larger country (like the Great Plains, the Northeast, the Rockies etc). 99.9% of people don't/won't and shouldn't care but the people that might are the people in the Ukrainian subsidiaries that Prem is trying to praise. Interestingly enough, he got it right in the first part of the letter and switched to "the Ukraine" in the latter part. Anyway, at least he got Colombia right.

 

Maybe they did an inverse total return swap on BB. Would be really easy for them to do since they can lend their own stock to the counterparty. We probably just need to see the Q1 report in less than two months and you might have your answer.

 

How big a number in investment gains in Q1 will make you happy even if you don't know BB gains are part of it? Do you have an estimate with BB marked to market? Some of the big names have moved up a lot so far in 2021.

 

I am just speculating of course. FFH did a long total return swap on its own stock and didn't have to file anything on SEDI. It would follow, it's the same if they entered into an inverse total return swap on BB.

 

Why would he ever say anything if that's the case? Better to be the supportive long term shareholder for BB's sake which is of course in our best interest too.

 

 

[Parsad]

Without having to be too political,  modi has increased hindu muslim divide in india.  Ecnomically speaking modi governement is not doing anything good for India.  Middle class is in worse shape than it was before modi took over .  Selling off governement owned entities has created collusion like situation .  eg railroad has tripled fares in the last few months when unemployment is high and same thing with gas prices are higher today than they were when crude was at  $140.

 

Yes, Prem's rosy view of Modi is certainly at odds with much of what I've read elsewhere.  But he's talking his book so I personally don't worry about the discrepancies.

 

In general, I feel Prem's writing often makes him seem avuncular to the point of being naive, particularly over the past few years.  (The exclamation points ending every second sentence don't help.)  I don't believe this is fully reflective of the depth of his thinking.  Buffet also has the whole "Uncle Warren" persona, but there's certainly a very shrewd businessman behind the aphorisms and platitudes.  Maybe not a fair comparison but perhaps you see my point.

 

Not comparing Modi to Lee Kuan Yew, but things were not rosy during the first few years he took over either.  But to make progressive change for the entire country, he had to make tough decisions to modernize the nation and bring it to developed standards.  Today, Singapore is the standard by which most developed nations are measured.  But did the ends justify the means? 

 

Perhaps, Modi is of the same cut...and to get India where it needs to be long-term for the benefit of all citizens, means pain for many years to create the necessary environment for change.  Another example is China...not sure many of us agree with how they got there, but today people outside of China (Munger among others) are talking about the eradication of poverty in China...something we haven't seen any nation of their size accomplish as quickly as they have. 

 

I have no position on Modi or China...but I am amongst those surprised by the changes they have made or are attempting to make...having visited both countries recently, talking to various classes of people and just looking at what they are doing.  That being said, I'm averse to investing in China simply because of the sheer frailty of property and legal rights there...and even now extending into Hong Kong.  Cheers!

[Viking]

The letter is a joke. When you read it, you would think that FFH is crushing it, yet book value went down and the earnings are a black zero. Leverage on a Holding level is up. They have underperformed virtually any other insurance company follow in terms business performance. Unless they perform better, I don’t see why this would rerate higher.

 

Spek, i can be pretty hard on Prem but i think your criticism of the letter as a ‘joke’ is a little too hard.

 

I appreciated the attempt made in the letter to help shareholders understand the various businesses (especially the equity holdings). But it is difficult to explain complicated stuff in a simply way. And it is complicated. And this may result in Fairfax permanently selling at a discount... not sure... we will see.

 

My view is Fairfax is like a supertanker. It has slowly been making more of the right moves (than wrong) for a few years now. News that another $1.5 billion will be managed by Wade and Lawrence (for a total of $3 billion) looks like another solid move; it looks to me like these guys buy higher quality and are more diversified than Prem. The benefit of this shift has been playing out the past year and should be another tailwind moving forward (for Fairfax shareholders). IPO’ing Farmers Edge, Boat Rocker, Seven Island and Anchorage is another very positive development (for the future of those companies and so also for Fairfax’s ownership position); they are being VERY opportunistic. And i expect more will be done; Fairfax is highly motivated. I also view the disclosure that the final short position is officially, really gone to be net positive - a piece of added complexity that is now gone (and the losses are in the past).

 

The sad truth is Fairfax has severely underperformed for investors for many years. However, for those who bought share after the March sell off, Fairfax has been a great investment. And with Fairfax’s equity holdings up more than $1.6 billion since Jan 1 (just the stuff i track and i am missing a bunch) Q1 is shaping up to be a strong quarter for earnings.

 

The reality is Fairfax’s equity portfolio, concentrated in cyclicals, lower quality companies, emerging markets and service sector was punished especially hard last year. And it is way out performing as we start 2021. So my guess is there is a good chance we are going to see solid BV/EPS growth (of better than 15%) in 2021 and it could easily be much higher.

 

The good news is Fairfax’s stock price is so low it has a very good risk / reward set up for investors.

 

The next important pivot for Fairfax, and others on this board have pointed this out many times, is they need to start to generate more consistent and predicable quarterly earnings. And they need their various businesses start to spin off more free cash flow to Fairfax as a whole. I think we will see this start to happen in 2021 and into 2022.

- Their insurance businesses are almost all now underwriting at a CR better than 100; taken as a whole they are now comfortable below 100. This has taken years to happen. And they have said NO MORE ACQUISITIONS. This is a big deal.

- Fairfax now seems to be taking a sink or swim approach with their various equity holds in terms of hitting daddy (Fairfax) up for endless amounts of cash to fix struggling operations. And this was during the pandemic. These operations have survived and as we come out of the other side of the pandemic Fairfax’s many equity holdings should start contributing more cash to Fairfax. Stelco just re-instated their dividend of $0.10/share. It is highly likely Stelco will issue a couple of special dividends in 2021. I expect good news from lots of other Fairfax companies.

- the earnings from the many equity holdings will also jump in 2021 and the year over year improvement should be outstanding and a material positive to Fairfax’s overall results.

- and i expect further monetizations from Fairfax in 2021 and the kind that puts cash in Fairfax’s coffers; these could be meaningful.

 

And it is an insurance company. And we are in a hard market so premium growth should be up double digits  in 2021 and the CR should be lower than 2020.

 

I continue to think that the stars are currently in alignment for Fairfax: hard market, solid underwriting, strong performance from equity holdings, rising interest rate environment, more confidence in management today than in years.

 

But to your point, they have not delivered in terms of EPS or BV growth... But i think 2021 they will :-) Having followed Fairfax for a couple of decades, when the stars align like right now they do have a history of hitting home runs (not singles). As with all investments... time will tell.

[Viking]

Viking

Re EXCO: What form of security does FFH own e.g. bond, preferred stock, common stock, warrants?

 

Re Leons: When did these commons appear in the portfolio?

 

Thanks

D

 

D, thanks for the heads up; i will add both to my tracker portfolio.

 

EXCO: From the 2020 AR:

 

P29: Fairfax owns 44% of Exco, a U.S. oil and gas producer. Despite weak energy prices in 2020, Exco generated $128 million in EBITDA and $36 million in free cash flow. Net debt fell to $145 million (1.1 times EBITDA). Led by Chairman John Wilder and CEO Hal Hickey, Exco achieved these results through high field level productivity and company-wide cost control. In December, Exco recorded its 73rd month without a lost time incident. Exco’s Chairman, John Wilder, is a great partner. We are well served by his leadership.

 

P 70: On June 28, 2019 EXCO Resources Inc. (‘‘EXCO’’) emerged from bankruptcy protection and settled the company’s holdings of EXCO bonds with common shares, resulting in the company recording a net loss on investment of $179.3 (realized losses of $296.3, of which $117.0 was recorded as unrealized losses in prior years).

 

LEONS:

 

Mr. Leon continued, "In January (2020, i think), Fairfax Financial converted approximately $48.5 million in convertible debentures into common shares of our Company. We have welcomed Fairfax's investment in LFL Group since 2013 and have appreciated the confidence of their team over the past several years. Entering 2020, LFL is better positioned than ever. As anticipated, we have significantly deleveraged following the acquisition of The Brick in 2013 and are now sitting with a net cash position on our expanded balance sheet. We continue to focus on delivering top-line growth accompanied by strict  cost controls in order to translate that growth into expanded earnings for our shareholders and executing on our strategic initiatives to position the Company for continued success."

 

- https://www.newswire.ca/news-releases/lfl-group-leon-s-furniture-limited-releases-record-revenue-and-earnings-for-the-fourth-quarter-ended-december-31-2019-and-announces-a-14-3-increase-to-its-dividend-811063897.html

[gurjot]

Without having to be too political,  modi has increased hindu muslim divide in india.  Ecnomically speaking modi governement is not doing anything good for India.  Middle class is in worse shape than it was before modi took over .  Selling off governement owned entities has created collusion like situation .  eg railroad has tripled fares in the last few months when unemployment is high and same thing with gas prices are higher today than they were when crude was at  $140.

 

Yes, Prem's rosy view of Modi is certainly at odds with much of what I've read elsewhere.  But he's talking his book so I personally don't worry about the discrepancies.

 

In general, I feel Prem's writing often makes him seem avuncular to the point of being naive, particularly over the past few years.  (The exclamation points ending every second sentence don't help.)  I don't believe this is fully reflective of the depth of his thinking.  Buffet also has the whole "Uncle Warren" persona, but there's certainly a very shrewd businessman behind the aphorisms and platitudes.  Maybe not a fair comparison but perhaps you see my point.

 

Not comparing Modi to Lee Kuan Yew, but things were not rosy during the first few years he took over either.  But to make progressive change for the entire country, he had to make tough decisions to modernize the nation and bring it to developed standards.  Today, Singapore is the standard by which most developed nations are measured.  But did the ends justify the means? 

 

Perhaps, Modi is of the same cut...and to get India where it needs to be long-term for the benefit of all citizens, means pain for many years to create the necessary environment for change.  Another example is China...not sure many of us agree with how they got there, but today people outside of China (Munger among others) are talking about the eradication of poverty in China...something we haven't seen any nation of their size accomplish as quickly as they have. 

 

I have no position on Modi or China...but I am amongst those surprised by the changes they have made or are attempting to make...having visited both countries recently, talking to various classes of people and just looking at what they are doing.  That being said, I'm averse to investing in China simply because of the sheer frailty of property and legal rights there...and even now extending into Hong Kong.  Cheers!

 

 

Lets not compare modi to Lee kuan yew. Democaratic rights and free speech has gotten bad to worse in the last 6 years. nobody internally is covering farmers protesting from last three months because all the mainstream media is owned by big biz who back modi financially and have benefited from these privatization moves.  lawyers and teachers are also protesting all over. Few people who do speak out are harrased with sedition charges or at least by income tax department. 

 

https://time.com/5942125/women-india-farmers-protests/

 

[Parsad]

Without having to be too political,  modi has increased hindu muslim divide in india.  Ecnomically speaking modi governement is not doing anything good for India.  Middle class is in worse shape than it was before modi took over .  Selling off governement owned entities has created collusion like situation .  eg railroad has tripled fares in the last few months when unemployment is high and same thing with gas prices are higher today than they were when crude was at  $140.

 

Yes, Prem's rosy view of Modi is certainly at odds with much of what I've read elsewhere.  But he's talking his book so I personally don't worry about the discrepancies.

 

In general, I feel Prem's writing often makes him seem avuncular to the point of being naive, particularly over the past few years.  (The exclamation points ending every second sentence don't help.)  I don't believe this is fully reflective of the depth of his thinking.  Buffet also has the whole "Uncle Warren" persona, but there's certainly a very shrewd businessman behind the aphorisms and platitudes.  Maybe not a fair comparison but perhaps you see my point.

 

Not comparing Modi to Lee Kuan Yew, but things were not rosy during the first few years he took over either.  But to make progressive change for the entire country, he had to make tough decisions to modernize the nation and bring it to developed standards.  Today, Singapore is the standard by which most developed nations are measured.  But did the ends justify the means? 

 

Perhaps, Modi is of the same cut...and to get India where it needs to be long-term for the benefit of all citizens, means pain for many years to create the necessary environment for change.  Another example is China...not sure many of us agree with how they got there, but today people outside of China (Munger among others) are talking about the eradication of poverty in China...something we haven't seen any nation of their size accomplish as quickly as they have. 

 

I have no position on Modi or China...but I am amongst those surprised by the changes they have made or are attempting to make...having visited both countries recently, talking to various classes of people and just looking at what they are doing.  That being said, I'm averse to investing in China simply because of the sheer frailty of property and legal rights there...and even now extending into Hong Kong.  Cheers!

 

 

Lets not compare modi to Lee kuan yew. Democaratic rights and free speech has gotten bad to worse in the last 6 years. nobody internally is covering farmers protesting from last three months because all the mainstream media is owned by big biz who back modi financially and have benefited from these privatization moves.  lawyers and teachers are also protesting all over. Few people who do speak out are harrased with sedition charges or at least by income tax department. 

 

https://time.com/5942125/women-india-farmers-protests/

 

Ummm, I said "Not comparing Modi to Lee Kuan Yew...".  But the similarities are there.  Cheers!

 

https://www.washingtonpost.com/world/asia_pacific/lee-kuan-yew-who-led-singapore-into-prosperity-over-30-year-rule-dies-at-91/2015/03/22/00f7ccbe-d0d4-11e4-a62f-ee745911a4ff_story.html

Scarred by deadly race riots that rocked Singapore in the 1960s, Mr. Lee took far-reaching steps to tamp down racial and religious tensions among the teeming island state’s Chinese, Malay and Indian populations. He imposed integration, instituting strict rules to ensure that Singaporeans of different backgrounds lived, studied and worked together.

 

A British-educated lawyer by training, Mr. Lee ran a government that was widely regarded as farsighted, honest and efficient, but it also could be overbearing and patronizing. The result was a tidy, law-abiding country, but one that visitors often described as regimented, sterile and dull.

 

Critics also charged that Mr. Lee’s administration permitted detention without charge or trial, censored the press, harassed political opponents and turned a blind eye to police mistreatment of suspects.

 

Some Singaporeans complained that the avowedly “paternalistic” government treated them like children, forbidding private citizens to own home satellite dishes, fining and humiliating people caught failing to flush public toilets, and even imposing a nationwide ban on chewing gum.

 

When a BBC reporter once suggested to him that allowing people to chew gum could help spur creativity, Mr. Lee retorted: “If you can’t think because you can’t chew, try a banana.”

 

Mr. Lee steadfastly defended his tough approach to political opponents, arguing that it was imperative in a country such as Singapore, with its ethnic Chinese majority and sizable Malay and Indian minorities.

 

“Nobody doubts that if you take me on, I will put on knuckle-dusters and catch you in a cul-de-sac,” he was quoted as saying in “Lee Kuan Yew: The Man and His Ideas,” a 1997 biography. “If you think you can hurt me more than I can hurt you, try. There is no other way you can govern a Chinese society.”

[Parsad]

The letter is a joke. When you read it, you would think that FFH is crushing it, yet book value went down and the earnings are a black zero. Leverage on a Holding level is up. They have underperformed virtually any other insurance company follow in terms business performance. Unless they perform better, I don’t see why this would rerate higher.

 

Spek, i can be pretty hard on Prem but i think your criticism of the letter as a ‘joke’ is a little too hard.

 

I appreciated the attempt made in the letter to help shareholders understand the various businesses (especially the equity holdings). But it is difficult to explain complicated stuff in a simply way. And it is complicated. And this may result in Fairfax permanently selling at a discount... not sure... we will see.

 

My view is Fairfax is like a supertanker. It has slowly been making more of the right moves (than wrong) for a few years now. News that another $1.5 billion will be managed by Wade and Lawrence (for a total of $3 billion) looks like another solid move; it looks to me like these guys buy higher quality and are more diversified than Prem. The benefit of this shift has been playing out the past year and should be another tailwind moving forward (for Fairfax shareholders). IPO’ing Farmers Edge, Boat Rocker, Seven Island and Anchorage is another very positive development (for the future of those companies and so also for Fairfax’s ownership position); they are being VERY opportunistic. And i expect more will be done; Fairfax is highly motivated. I also view the disclosure that the final short position is officially, really gone to be net positive - a piece of added complexity that is now gone (and the losses are in the past).

 

The sad truth is Fairfax has severely underperformed for investors for many years. However, for those who bought share after the March sell off, Fairfax has been a great investment. And with Fairfax’s equity holdings up more than $1.6 billion since Jan 1 (just the stuff i track and i am missing a bunch) Q1 is shaping up to be a strong quarter for earnings.

 

The reality is Fairfax’s equity portfolio, concentrated in cyclicals, lower quality companies, emerging markets and service sector was punished especially hard last year. And it is way out performing as we start 2021. So my guess is there is a good chance we are going to see solid BV/EPS growth (of better than 15%) in 2021 and it could easily be much higher.

 

The good news is Fairfax’s stock price is so low it has a very good risk / reward set up for investors.

 

The next important pivot for Fairfax, and others on this board have pointed this out many times, is they need to start to generate more consistent and predicable quarterly earnings. And they need their various businesses start to spin off more free cash flow to Fairfax as a whole. I think we will see this start to happen in 2021 and into 2022.

- Their insurance businesses are almost all now underwriting at a CR better than 100; taken as a whole they are now comfortable below 100. This has taken years to happen. And they have said NO MORE ACQUISITIONS. This is a big deal.

- Fairfax now seems to be taking a sink or swim approach with their various equity holds in terms of hitting daddy (Fairfax) up for endless amounts of cash to fix struggling operations. And this was during the pandemic. These operations have survived and as we come out of the other side of the pandemic Fairfax’s many equity holdings should start contributing more cash to Fairfax. Stelco just re-instated their dividend of $0.10/share. It is highly likely Stelco will issue a couple of special dividends in 2021. I expect good news from lots of other Fairfax companies.

- the earnings from the many equity holdings will also jump in 2021 and the year over year improvement should be outstanding and a material positive to Fairfax’s overall results.

- and i expect further monetizations from Fairfax in 2021 and the kind that puts cash in Fairfax’s coffers; these could be meaningful.

 

And it is an insurance company. And we are in a hard market so premium growth should be up double digits  in 2021 and the CR should be lower than 2020.

 

I continue to think that the stars are currently in alignment for Fairfax: hard market, solid underwriting, strong performance from equity holdings, rising interest rate environment, more confidence in management today than in years.

 

But to your point, they have not delivered in terms of EPS or BV growth... But i think 2021 they will :-) Having followed Fairfax for a couple of decades, when the stars align like right now they do have a history of hitting home runs (not singles). As with all investments... time will tell.

 

I agree with you Viking, but I can also see Spek's view.  For many years now, we know that Fairfax had a few key weaknesses...whether anyone admits it or not.  For a long time, they were guilty of buying lesser quality insurers and turning them around...used more asset/equity leverage than key comparable companies like Berkshire and Markel...invested in more distressed value plays, that sometimes worked and sometimes didn't, rather than better quality companies at a slight discount...because of the leverage, they had to pay more attention to macro economics and protect assets, so they shorted more, and bet against the bull market.  At the same time, because of these faults, it's given investors several chances at making money investing in the company.  Even those that hold for the long-term...as long as they dollar-cost averaged in over time...would have done quite well too.

 

But, I agree with many investors.  If Fairfax is using Berkshire as its role model, it is time for the board and Prem to continue to direct the company in that direction. 

 

- Our insurers are now operating at a very high level.  Critics can say what they want, but Fairfax's insurers are really a superb group of insurers now and I would put them up against any other insurer other than National Indemnity.  And everyone can see and agrees that has been a net benefit to Fairfax unlike their past insurance acquistions.

- While debt is manageable, with the amount of float we have and investments per share, do we really need the leverage of debt to add any net benefit to investment returns?  So I think it's time for Fairfax to eliminate most insurance holding company related debt...not non-insurance debt that is non-recourse, but they should only have a nominal amount of debt related to  their insurance business or holding company.

- Whereas most people think that Fairfax's portfolio is of low quality companies, I disagree slightly.  I think they are distressed value investors and focus on low p/b, p/cf companies, no matter what the future really looks like...more cigar butts than discounted growth businesses.  The overall portfolio is not bad, but they certainly could improve on it.  Giving more capital to Wade and Lawrence is a good step...buying better quality, non-insurance businesses would be good to.

- Finally, if they do the above, then they probably would have to pay less attention to macro issues...they wouldn't need to short...they would protect their ability to write business when pricing is good...they would generate more consistent returns.

 

The downside of all of this is that investors would have less opportunity to buy the swings in the company's price.  So you can have Fairfax as is, and make money in broad swings...or you can have an insurer more like Berkshire or Markel, but have less opportunity to buy cheaply.  Cheers!

[StevieV]

Viking: "The sad truth is Fairfax has severely underperformed for investors for many years. However, for those who bought share after the March sell off, Fairfax has been a great investment."

 

Parsad: "At the same time, because of these faults, it's given investors several chances at making money investing in the company.  Even those that hold for the long-term...as long as they dollar-cost averaged in over time...would have done quite well too."

 

 

The reality is that Fairfax has been a horrible place for shareholders for the last decade.  The USD share price at closing on Friday was $409.  That is lower than 5-years ago.  I see only one opportunity over the last 5 years to have added at a lower price than now - that was 2020.  I don't see any great entries over the last 10 years even with perfect hindsight.

 

Just looking at the chart, it looks to me like even a perfect entry in 2019, 2018, 2017, 2016, 2015, 2014, 2013, 2012, 2011 or 2010 would have produced returns that lagged the S&P 500, probably badly.  If anybody wants to point me to the good entry opportunities during those years, I invite them to do so.

 

Viking mentioned that an investor who bought Fairfax in March 2020 would be doing great.  I think March is probably the wrong month.  Depending upon when one bought in March, they could be doing well, but Fairfax didn't bottom until May, well after the general market.  It also didn't start recovering until after the market.  I'd say the best time to buy Fairfax was the end of October 2020.  But, who cares?  I lack clairvoyance and, if I were clairvoyant, could have done a lot better than buying Fairfax last year.  Lots of things have done well since March of last year.  Nothing special about Fairfax, which has trailed the S&P badly over the last year (since last March).

 

One can be bullish on Fairfax going forward given the improvement in insurance and, hopefully, leaving shorts behind.  However, it is silly to sugarcoat the past decade.  It has been, without reservation, terrible.  Terrible over any time frame, with or without dollar-cost-averaging, terrible whenever someone bought their position (minus a couple months in 2020).  It is simply untrue to suggest otherwise.

 

I appreciate both Viking's and Parsad's postings on Fairfax, but denying the reality of Fairfax's stock performance doesn't do anyone any good.

[Santayana]

Viking mentioned buying after the March selloff, not during March.  If for example you bought in May 2020, you've not done poorly.

 

I think Parsad was referring to the opportunity presented by Fairfax's historical volatility when he said investors have had several chances to make money.  In terms of long-term buy and hold, he's probably talking about a period of longer than 10 years.