Q2 2021

[Parsad]

2 hours ago, glider3834 said:

What a great result - 27% growth in GWP and 94% CR immediately stood out - quarterly operating result for insurance & reinsurance looks to be a record  I believe at$398 mil -  we are only half way through the year but still excellent progress so far.

 

The non-insurance operating result has a lot more room to improve too as we continue covid-19 vaccination effort provided the economic recovery stays on track, so I think when looking at normalised operating earnings potential for Fairfax there is still appears to be a lot of scope for growth. 

 

Great to see even a small buyback of $63 mil in 2Q '21 hopefully that will continue

 

 

 

Their average cost on the buyback in Q2 is $50 USD per share higher than where it is presently trading.  I would expect them to be buying back shares tomorrow and next week if they are allowed (no blackout), and the stock doesn't jump $100 per share. 

 

Absolutely no reason why the stock shouldn't be trading at $640 CDN or better.  Above the current highest analyst target of $626 CDN.  Cheers!

[Parsad]

4 hours ago, TwoCitiesCapital said:

Now watch - it'll trade flat tomorrow and be up 5% on Monday/Tuesday. 

 

Probabaly!  The analysts have an average target price of $569 CDN.  They'll talk to Prem on the call tomorrow and then raise their target prices early next week.  

 

I would imagine the current high target at $626 CDN will become the new average target price next week after the stock overshoots the current $569 CDN average target price.    

 

That's how it works sadly!  Cheers!

[ander]

Great results! On the Digit portion I read the Digit thread as well, but wondering if anyone had a sense of fair value. I understand the benefit of the mark-to-market, but in this environment (some companies being value at ridiculous price levels), anyone do work on what they think would be a reasonable valuation on Digit. 

[ERICOPOLY]

It would be a good thing to forego stock buybacks and instead use the money for other investments that they find cheap so that things aren't so leveraged all the time.  It builds financial strength which is a hedge in itself.  This is what Buffett did over the years -- he talks about the "mighty Amazon".   He's talking about the strength of those diverse streams of cash flows.  Many tributaries contribute to the Amazon river.

Edited July 30, 2021 by ERICOPOLY

[petec]

3 hours ago, Parsad said:

current highest analyst target of $626 CDN

Where are you getting this from? Bloomberg shows 5 bank analyst targets, ranging from C$650-780.

[ERICOPOLY]

15 hours ago, Parsad said:

 

Should surpass $600 USD a share by the end of the 3rd Q in book value.  My average cost was $450 CDN, but it has risen to about $485 CDN after adding 33% more to my stake last week and this week.  Cheers!

 

Yes, quite likely. 

 

"As previously reported, upon closing of the Digit Insurance equity issuance in the third quarter, and upon final approval by the Indian government of its previously announced intention to increase foreign ownership limits, we anticipate recording an additional gain of approximately $1.4 billion or $46 in book value per basic share."

 

[ERICOPOLY]

Why does my cost basis in USD come out to $420?  Is that a sign the party is on again?

[Crip1]

36 minutes ago, ERICOPOLY said:

Why does my cost basis in USD come out to $420?  Is that a sign the party is on again?

Maybe a sign from above to sell your Fairfax and look into cannibus stocks?

[Candyman1]

10 hours ago, ander said:

Great results! On the Digit portion I read the Digit thread as well, but wondering if anyone had a sense of fair value. I understand the benefit of the mark-to-market, but in this environment (some companies being value at ridiculous price levels), anyone do work on what they think would be a reasonable valuation on Digit. 

Good luck on that one. What I know is that Digit seems well run, is in a fast growing insurance market and is gaining share quickly while not doing stupid stuff like for example LMND is doing. I would not be surprised if Digit in ten years turns out to be way more successful than we all imagined. I remember reading the Facebook IPO prospectus and thinking that the runway for Facebook is massive. And I did not buy it. Well I think the runway for Digit could be massive too.

Edited July 30, 2021 by Candyman1

[Viking]

Listened to the conference call. Pretty straight forward and followed the script from the earnings release pretty closely. Prem’s answers to questions were mostly short and sweet (well done) and he also punted questions to other Fairfax team members (well done). 
- expect hard market to last into 2022

- monetization bucket: Mosaic, Recipe (Milestones), Fairfax India (Privvy). Continue to look for opportunities to monetize positions.

- why sell Brit? Part of Riverstone deal; gives Fairfax flexibility; continue to build relationship with OMERS

- Digit $1.4 billion gain? Will be booked in Q3 or Q4 (when Fairfax is allowed by regulators to increase ownership to 74%)

- Crum growth? Biggest driver big rebound in travel insurance.

- reserve development? $60 million covid BI - reinsurance; non US; Allied and Odyssey

- share buybacks? Focus is to be financed soundly and grow insurance organically.

- Fairfax TRS: no expiry; positions can be extended

- Any Blackberry shares sold? No

- non insurance subs performance in 2H? Expected to improve as economy improves

 

The analyst from BMO had a question on Digit; clear he had not read the Fairfax release a couple of weeks ago. It will be interesting to see how analysts discuss Digit and account for the $1.4 billion not yet booked by Faorfax.

[cwericb]

No Blackberry shares sold?

Given Prem's position on the board of BB he is obviously in a position to know a lot more than we do.  Hopefully he sees significant developments that are in the works and it is not a situation where FFH is so involved with BB that it is very difficult to get out. Just thinking out loud.

[TwoCitiesCapital]

1 minute ago, cwericb said:

No Blackberry shares sold?

Given Prem's position on the board of BB he is obviously in a position to know a lot more than we do.  Hopefully he sees significant developments that are in the works and it is not a situation where FFH is so involved with BB that it is very difficult to get out. Just thinking out loud.

 

I honestly think this is the problem. He's too close to it. He's seen opportunity in it for over a decade and it's failed to deliver.

 

Time to cut the losses. Wish he'd resign from the board and find the most advantageous way to exit the equity position. I'm fine with them holding the converts, but at least get out of the stock! 

[Parsad]

2 minutes ago, TwoCitiesCapital said:

 

I honestly think this is the problem. He's too close to it. He's seen opportunity in it for over a decade and it's failed to deliver.

 

Time to cut the losses. Wish he'd resign from the board and find the most advantageous way to exit the equity position. I'm fine with them holding the converts, but at least get out of the stock! 

 

I have a feeling BB will be taken out, and Fairfax is waiting for that type of opportunity to monetize it.  They've never been the type of company to cut bait and run.  They are going to see the process through.  But from what we can see with other assets, they are trying to monetize what they can. 

 

I suspect they are waiting for someone (perhaps OMERS at some point or someone else) to make an offer for BB and take over the reins.  Rather than simply sell the shares and leave John Chen and BB to fend solely by themselves. 

 

As a shareholder, it is hard to watch and see them forgo an opportunity to capitalize on the BB price rise, but at the same time, the integrity is why I like the company and management, and people want to do deals with them.  Cheers!

[petec]

34 minutes ago, Viking said:

monetization bucket: Mosaic

Their definition of monetisation is comical. I thought that when they referred to selling APR for shares as monetisation, and when they referred to IPOing companies without selling a share as montisation, but calling it monetisation when you buy something...that takes panache!

 

Ref Blackberry, didn't we establish some time ago that when the thing spiked a second time FFH were in a blackout period? So why is no sale a surprise?

[Daphne]

2 minutes ago, Parsad said:

 

I have a feeling BB will be taken out, and Fairfax is waiting for that type of opportunity to monetize it.  They've never been the type of company to cut bait and run.  They are going to see the process through.  But from what we can see with other assets, they are trying to monetize what they can. 

 

I suspect they are waiting for someone (perhaps OMERS at some point or someone else) to make an offer for BB and take over the reins.  Rather than simply sell the shares and leave John Chen and BB to fend solely by themselves. 

 

As a shareholder, it is hard to watch and see them forgo an opportunity to capitalize on the BB price rise, but at the same time, the integrity is why I like the company and management, and people want to do deals with them.  Cheers!

Agreed!

[Parsad]

34 minutes ago, Viking said:

Listened to the conference call. Pretty straight forward and followed the script from the earnings release pretty closely. Prem’s answers to questions were mostly short and sweet (well done) and he also punted questions to other Fairfax team members (well done). 
- expect hard market to last into 2022

- monetization bucket: Mosaic, Recipe (Milestones), Fairfax India (Privvy). Continue to look for opportunities to monetize positions.

- why sell Brit? Part of Riverstone deal; gives Fairfax flexibility; continue to build relationship with OMERS

- Digit $1.4 billion gain? Will be booked in Q3 or Q4 (when Fairfax is allowed by regulators to increase ownership to 74%)

- Crum growth? Biggest driver big rebound in travel insurance.

- reserve development? $60 million covid BI - reinsurance; non US; Allied and Odyssey

- share buybacks? Focus is to be financed soundly and grow insurance organically.

- Fairfax TRS: no expiry; positions can be extended

- Any Blackberry shares sold? No

- non insurance subs performance in 2H? Expected to improve as economy improves

 

The analyst from BMO had a question on Digit; clear he had not read the Fairfax release a couple of weeks ago. It will be interesting to see how analysts discuss Digit and account for the $1.4 billion not yet booked by Faorfax.

 

Nice take away...that's about what I got from hearing the call.  Regarding the hard market, they expect double digit growth into 2022.  It was clear from the conversations between management, what we've read from CEO's of other insurers, this hard market has real legs.  They also pointed out that their portfolio is well-positioned to capitalize on rising rates without rising rates having any significant negative impact.  Cheers!

[no_free_lunch]

11 hours ago, ander said:

Great results! On the Digit portion I read the Digit thread as well, but wondering if anyone had a sense of fair value. I understand the benefit of the mark-to-market, but in this environment (some companies being value at ridiculous price levels), anyone do work on what they think would be a reasonable valuation on Digit. 

I don't know exactly but it trades at roughly 7x last year's premiums and is growing 40-50% a year. In comparison lemonaid is going for 50x premiums.  So perhaps a bit overpriced but doesn't feel like it's in blue sky opioid induced bubble territory like other tech companies.  It would probably trade 3 to 5x higher if it was based in the US.

[TwoCitiesCapital]

1 hour ago, Parsad said:

As a shareholder, it is hard to watch and see them forgo an opportunity to capitalize on the BB price rise, but at the same time, the integrity is why I like the company and management, and people want to do deals with them.  Cheers!

 

I have a large portion of my account in FFH and so obviously trust Prem to an extent and I'm not trying to imply he ISN'T trustworthy with the following. 

 

But foregoing selling BB has nothing to do with integrity. I mean this is the same company, and the same investment, that they publicly announced they'd take private and then bailed on doing so. Where was their integrity then?

 

That, along with the Fibrek examples discussed elsewhere, have demonstrated that FFH doesn't believe it owes anything to external managers or the minority shareholders that invest alongside it. I'm not saying that is a bad thing. Most companies operate like this and FFH's only legal duty is to its own shareholders.

 

Just pointing out it is NOT a distinguishing feature as you imply and that it surely can't be the reason they've chosen not to sell as it would be at odds with their history. 

 

 

Edited July 30, 2021 by TwoCitiesCapital

[cwericb]

Integrity.

 

Yes that is what I was getting at in my previous post on Fairfax and it legal problems. Essentially the judge in the matter found that Prem integrity was at very best - questionable. And that is overlooking that the deal was crooked in the first place as was found by the court. Wasn't Prem also on the board of Fibrek when it rejected a higher bid for the company only to sell to FFH at a lowball offer?

 

I think this is one of the reasons that the market discounts Fairfax when pricing it. As it is still my largest holding I sincerely hope that he will clean up his act and that the market will come to trust the company again.

 

And before I get criticized for the above, I would suggest reading the reports from the trial and perhaps explain the situation rwith Paul Rivett and Torstar because I think both are issues that raise questions about integrity.

 

HOWEVER...  I still think that Fairfax still has the potential to do very well in the future if it can keep its nose clean.

[ander]

On Digit, are they contributing any cash or proceeds to increase ownership to 74% in Q3/Q4? and presumably, if so it will be down at today's valuation? or do they own rights to purchase at lower valuation? or is it not an actual increase in ownership but since would be allowed to increase ownership, it triggers a change in accounting only?

 

From the Q2 report below.

 

"During June 2021, the company's 49.0% equity accounted associate Go Digit Infoworks Services Private Limited ("Digit") entered into agreements with certain third party investors whereby its general insurance subsidiary Go Digit Insurance Limited ("Digit Insurance") will raise approximately $200 (14.9 billion Indian rupees) of new equity shares, valuing Digit Insurance at approximately $3.5 billion (259.5 billion Indian rupees), which resulted in the company recording a net unrealized gain of $425.0 on its investment in Digit compulsory convertible preferred shares as described in note 5 (Cash and Investments) and note 6 (Investment in Associates) to the interim consolidated financial statements for the three and six months ended June 30, 2021. The transactions are subject to customary closing conditions and regulatory approval, and are expected to close in the third quarter of 2021. Upon closing of the Digit Insurance equity issuance in the third quarter, and upon final approval by the Indian government of its previously announced intention to increase foreign ownership limits in the insurance sector from 49.0% to 74.0% and the company obtaining regulatory approval specific to its holdings in Digit, the company anticipates it will consolidate Digit and record an additional gain of approximately $1.4 billion."

[Xerxes]

Not totally clear to me. My read is that the regulators in India have to push the limit to 75% for foreigners (which may or may not include FFH - it is not clear).

If it does include FFH, than there would have to be cash outlay by FFH at a higher valuation, pushing up their cost basis. If it doesn't include FFH, than they get diluted.

 

I just hope the whole 75% increase ownership hurdle, is not a repeat of Pershing/SEC/Universal/Ackman fiasco, causing FFH to go backward on something that stated to be "done deal" on the conference call.

 

--------------------

On Blackberry

 

i knew it !!! at least someone on the call push for it and asked the right question.

The quarter had enough goodies in it, to offset lack of positive news on BB. Even the "Rude Gentleman" from Q1 2021, did not show up.

He was probably happy,

 

 

[ander]

1 minute ago, Xerxes said:

Not totally clear to me. My read is that the regulators in India have to push the limit to 75% for foreigners (which may or may not include FFH - it is not clear).

If it does include FFH, than there would have to be cash outlay by FFH at a higher valuation, pushing up their cost basis. If it doesn't include FFH, than they get diluted.

 

I just hope the whole 75% increase ownership hurdle, is not a repeat of Pershing/SEC/Universal/Ackman fiasco, causing FFH to go backward on something that stated to be "done deal" on the conference call.

 

--------------------

On Blackberry

 

i knew it !!! at least someone on the call push for it and asked the right question.

The quarter had enough goodies in it, to offset lack of positive news on BB. Even the "Rude Gentleman" from Q1 2021, did not show up.

He was probably happy,

 

 

Thanks. That's exactly what I'm trying to understand re: consolidation. Are they buying a nominal amount, or accounting change or large $ amount? I'm just wary of them adding at possibly inflated multiples (could be a great deal, but things are frothy in this environment). And if so, if true value turns out to be lower in the future that would be unfortunate.

[Xerxes]

For now only accounting change.

[bluedevil]

Indian government (including both Houses of Parliament) have approved going to FDI of 74%
 

rules still need to be finalized 

 

then Fairfaxs specific application to go to 74 needs to be approved  

 

both steps should happen at this point.  

 

not entirely clear but I don’t think FFH has to put in new cash  I think the point of the converts was to allow FFH to go to 74% without new cash but has never been explicitly spelled out 

 

I think all this was a lesson learned from ICICI lombard when FFH helped build that for many years and then when ownership limits went up, their partner played hardball on how much they increased stake and cost 

 

 

 

 

 

 

 

 

 

 

[gfp]

27 minutes ago, bluedevil said:

Indian government (including both Houses of Parliament) have approved going to FDI of 74%
 

rules still need to be finalized 

 

then Fairfaxs specific application to go to 74 needs to be approved  

 

both steps should happen at this point.  

 

not entirely clear but I don’t think FFH has to put in new cash  I think the point of the converts was to allow FFH to go to 74% without new cash but has never been explicitly spelled out 

 

I think all this was a lesson learned from ICICI lombard when FFH helped build that for many years and then when ownership limits went up, their partner played hardball on how much they increased stake and cost 

 

Yes that is my understanding of it as well.  No new cash invested at a higher valuation.  It's a shadow way to subvert foreign ownership limits.  Kind of like when Berkshire wasn't allowed to own more of MidAmerican Energy because of the Public Utility Holding Company rules.  Berkshire owned some securities that could convert into very large ownership percentages only once it became legal.  I think they were something like 10% income securities in the meantime.  Would have to revisit.

 

Quote

Due to the limited nature, both in substance and number, of avail- able exemptions, private investors motivated to invest in the public util- ity sector had to resort to complex and burdensome ownership struc- tures to avoid regulation as a holding company. For example, in the first significant private equity investment in the electric utility industry, Berk- shire Hathaway successfully acquired an interest in MidAmerican Energy Holding Company only after estab- lishing a fairly complex ownership structure in which Berkshire purchased only 9.9 percent of MidAmerican’s voting stock, but owned 81 percent of its overall equity, including preferred stock that allowed Berkshire to elect two of 10 MidAmerican directors and have veto rights over certain material corporate transactions. The balance of the voting common stock was held by individuals, including Walter Scott, Jr., a member of Berkshire’s Board of Directors, who controls approximate- ly 88 percent of the voting interest in MidAmerican.

 

What is the point of limiting foreign ownership if government is going to allow deals like Fairfax's convertible preference shares?  Seems like the violate the spirit of the rule, if not the letter.

Edited July 30, 2021 by gfp