Fairfax 2022

[Daphne]

Scotiabank on Fairfax Financial's Pet Insurance Sale 

 

MIDNIGHTTRADER - Updated 3 hours ago 

12:14 PM EDT, 06/20/2022 (MT Newswires) -- Fairfax Financial announced a transaction that Scotiabank believes further highlights the significant gap between its intrinsic value and current stock price. Fairfax is selling the pet insurance operations of its Crum & Forster segment and Pethealth Inc. for $1.4 billion. Over the years, Fairfax has made a number of acquisitions in the pet insurance space totalling an estimated ~$150 million including Pethealth Inc. in 2014. No specific deal metrics were provided, but Scotia estimates the sale represents a likely return on capital of roughly ~5.6x. The accounting for the deal likely has a number of moving parts, but analyst Phil Hardie believes the deal could result in a sizable pre-tax gain potentially as high as $1.1 billion or ~$35.50/sh after-tax and boost Fairfax's book value by an additional 5.5%.

[Parsad]

27 minutes ago, Daphne said:

Scotiabank on Fairfax Financial's Pet Insurance Sale 

 

MIDNIGHTTRADER - Updated 3 hours ago 

12:14 PM EDT, 06/20/2022 (MT Newswires) -- Fairfax Financial announced a transaction that Scotiabank believes further highlights the significant gap between its intrinsic value and current stock price. Fairfax is selling the pet insurance operations of its Crum & Forster segment and Pethealth Inc. for $1.4 billion. Over the years, Fairfax has made a number of acquisitions in the pet insurance space totalling an estimated ~$150 million including Pethealth Inc. in 2014. No specific deal metrics were provided, but Scotia estimates the sale represents a likely return on capital of roughly ~5.6x. The accounting for the deal likely has a number of moving parts, but analyst Phil Hardie believes the deal could result in a sizable pre-tax gain potentially as high as $1.1 billion or ~$35.50/sh after-tax and boost Fairfax's book value by an additional 5.5%.

 

Thanks Daphne!  Did anyone in their right mind think that the pet insurance business owned by Fairfax was worth $1.4B?  I certainly didn't!  Cheers!

[maxthetrade]

1 minute ago, Parsad said:

Did anyone in their right mind think that the pet insurance business owned by Fairfax was worth $1.4B?  I certainly didn't!  Cheers!

 

It's indeed amazing. One has to wonder whether there are other hidden gems. 

[Viking]

1 hour ago, maxthetrade said:

 

It's indeed amazing. One has to wonder whether there are other hidden gems. 

i can see three. Others?
 

Digit is the obvious example. It is in plain sight but little of its value is reflected in Fairfax’s current share price.

Gulf Insurance Group, although much smaller than Digit, would be another. The AXA purchase looks very good. The business now has scale with strong growth potential as a consolidator. 

 

On the equity side:

EXCO: should nat gas prices stay elevated into 2023 and their hedges roll off… we could get a nice surprise.

Edited June 20, 2022 by Viking

[Parsad]

50 minutes ago, Viking said:

i can see three. Others?
 

Digit is the obvious example. It is in plain sight but little of its value is reflected in Fairfax’s current share price.

Gulf Insurance Group, although much smaller than Digit, would be another. The AXA purchase looks very good. The business now has scale with strong growth potential as a consolidator. 

 

On the equity side:

EXCO: should nat gas prices stay elevated into 2023 and their hedges roll off… we could get a nice surprise.

 

I think almost all of the insurance businesses are also carried for much less than they would get...the 10% sale of ORH was a good example.  I would guess that book value of the company is underestimated by at least 20%-30%...that's how much more they would get if they sold the insurance businesses and other little pockets of value like Digit, BIAL, etc.  Cheers!

[petec]

8 hours ago, Parsad said:

 

Thanks Daphne!  Did anyone in their right mind think that the pet insurance business owned by Fairfax was worth $1.4B?  I certainly didn't!  Cheers!

I’m tempted to say it may well not be, but I think JAB are quite smart. 
 

I think Fairfax has spent 25 years turning Crum from a commoditised junkyard into a cluster of niche specialties, so I’m not entirely surprised that there is a jewel in there (and perhaps more). But I’m delighted by the number!

[Viking]

On 6/14/2022 at 5:22 PM, Viking said:

Well this is starting to feel a little bit like Groundhog Day. Lets hope it has a happy ending for shareholders  (like Bill Murray’s character in the movie). Fairfax has certainly nailed the spike we are seeing in interest rates (at least so far).
 

The unprecedented spike (recent years anyways) in bonds yields keeps going! The past couple of weeks has been breathtaking (again). Lots of insurers are going to be reporting pretty substantial mark to market losses on their bond investment portfolios AGAIN in Q2. Now they hold most of the bonds to maturity… but there will be a sizable hit to book value even if the impact to reported net earnings is muted (they are all now reporting ‘adjusted book value’ in their earnings releases

Fairfax’s bond portfolio continues to be positioned almost perfectly (at least is was March 31) for the current interest rate environment. Q2 results are going to be super interesting to see what changes they make to the bond portfolio:  

1.) will Fairfax continue to add duration to its portfolio? (Avg duration increased from 1.2 years to 1.4 years in Q1)

2.) how much of their fixed income portfolio will they re-deploy? ($7.4 billion of cash was redeployed into gov bonds of 1 and 2 year durations in Q1)

3.) how much does 1.) + 2.) above increase the interest & dividend income bucket?

4.) how much higher do interest rates go?

 

                 2020.    2021.     2022.          

               Dec 31.  Dec31.   Mch 31   June 14

 

3 mo.       .09.         .06.         .52.        1.83

6 mo.       .09.         .19.        1.06.        2.43

1 yr.          .10.         .39.        1.63.        3.15

2 yr.          .13.         .73.        2.28        3.45

5 yr.          .36.       1.26.        2.42.       3.61

10 yr.        .93.       1.52.        2.32        3.49

30 yr.      1.65.       1.90.        2.44        3.45

 

Interest income at Fairfax is going to be moving materially higher in the coming quarters for 2 very important reasons:

1.) interest rates have moved materially higher across the curve

2.) because of significant growth in net premiums earned the investment portfolio of Fairfax has been spiking higher the past 2 years (thank you, hard market).

I think the second point is very under appreciated by investors. 

 

I thought it would be instructive to look at the past 4 years to better understand the trends and where Fairfax is today. 

1.) 'Total Fixed Income' below is defined as: cash and cash equivalents + short term investments + bonds (Holding Company + Portfolio Investments from Cash and Investments)

2.) Total Interest Income = all insurance units at Fairfax including runoff + corporate

3.) Yield = Interest / Total Fixed Income

 

                  Total FI            Interest          Yield

2018           $26.7 bill       $744 mill        2.78%        

2019           $26.3             $826              3.13%

2020          $29.8             $717               2.40%

2021           $36.8             $568              1.54%

2022 Q1     $36.5             $153 (Q)        0.42% (Q) = 1.68% (annualized)

 

The 'Total Fixed Income' bucket increased by 38% over the past 3 years. 'Interest Income' has decreased by 24%. Yield has decreased by 38%. 

 

What does the future hold? Much higher Interest Income. Why?

1.) 'Cash and cash equivalents' yields are up significantly. 1 month T-bill yield has increased from 0.05% (Jan 1) to 0.17% (March 31) to 1.15% (June 17). 2 month T-bill yield has increased from 0.06% (Jan 1) to 0.35% (March 31) to 1.5% (June 17). Fairfax had $11 billion in cash at March 31. 

2.) In Q1 $7.6 billion was re-invested at much higher yields (from cash and cash equivalents to 1 and 2 year gov bonds). My guess is the bump in yield was likely around 1.75% = $133 million annual = $33/quarter

3.) given the continued increase in interest rates in Q2 we can expect Fairfax will have continued to re-deploy a meaningful amount of their holdings into higher yielding securities.

 

What will Fairfax earn in Interest Income in 2022? I am going to go out on a bit of a limb... My guess is Fairfax will earn 2.25% yield in Q2 = $200 million. This is a significant increase from the $153 million earned in Q1. This will increase further in Q3 to 2.5% = $230 million. Looking ahead to 2023 I think @glider3834's prediction of $1 billion in interest income will be in the bag by the end of Q4 (=+$40/share). And $1 billion estimate could be low   

 

                 Total FI            Yield          Interest

2022E        $36.5 bill        2.0%           $730 mill   $182 mill/Q 

2022E        $36.5              2.25%         $821          $205

2022E        $36.5              2.5%           $912          $228

2022E        $36.5              2.75%        $1,003        $251

Edited June 21, 2022 by Viking

[Viking]

On 6/6/2022 at 11:05 AM, Viking said:

I like to follow Fairfax through three broad buckets:

1.) Underwriting

2.) Interest and dividend income

3.) Equity holdings

 

How is bucket 1 looking 5 months into 2022? Perhaps the most important thing we learned from P&C insurers when they reported Q1 results was the hard market is continuing. WRB forecast the hard market likely continuing into 2024.

 

What does this mean for Fairfax? Likely +20% top line growth in 2022. My current estimate is for Fairfax to grow net premiums earned by 25% in 2022 and another 10% in 2023. I think there is an outside chance Fairfax could hit US$20 billion in net premiums earned in 2022.  What does this mean for underwriting results?

 

                    Net Prem Earned     CR     Underwriting Profit

2023 Est       $21.3 billion            94          $1.28 billion  $57/share

2022 Est       $19.4 billion            94          $1.16 billion   $50

2021               $15.5                      95          $801 million  $31

2020              $13.86                    97.8        $308             $12

2019              $12.54                    96.9        $389             $15

2018              $11.91                      97.3        $322             $12

 

Fairfax could see close to 60% growth in net premiums earned over the last 4 years. At the same time we are seeing a lower CR. And this is resulting in a much higher underwriting profit (up 4X the past 4 years) to $50/share in 2022. As a reminder, Fairfax shares are trading at US$535 today.  

---------- 

One important input is hurricane activity. Sounds like the forecasts are for an above average hurricane season in 2022. Something to watch given we are just beginning hurricane season (June 1). The silver lining is a bad year for catastrophe losses will likely extend the hard market…

----------

My numbers above do NOT include runoff. My guess is the cost of runoff will come in at about $200 million per year (about the average from the past couple of years).  

In 2023 Fairfax could earn US$2.3 billion from just underwriting and interest income = @$100/share. Shares are trading at US$500 today. Something is not adding up…

[StubbleJumper]

5 hours ago, Viking said:

In 2023 Fairfax could earn US$2.3 billion from just underwriting and interest income = @$100/share. Shares are trading at US$500 today. Something is not adding up…

 

In the short-term, EPS will appear to be low as a result of mark-to-market losses on bonds and the little dip that equities have experienced. 

 

That mark-to-market loss on bonds is fascinating because even though the rate increases this year have fundamentally strengthened FFH's operating earnings capacity, it is depressing the EPS number.  Even that $7.6 billion of reinvestment that you referred to needs to be marked down for Q2 because rates have continued to rise!  So the good news (rising rates in Q1) will be masked by the better news (more rising rates in Q2).

 

The tumble in equity markets is a bit of a similar thing.  Long-time FFH shareholders have been looking forward to a re-pricing of equities because this is the sort of market in which FFH's investment team thrives.  In short, it's good news for the long term.  But, as you know well, that Q2 EPS number is going to be absolutely thrashed by mark-to-market losses on equities -- likely hundreds of millions of mark-to-market losses.

 

My guess is that Mr. Market will not view FFH favourably over the next little while because of those headline EPS numbers.  Meanwhile, irrespective of what happens to FFH's share price over the next 6 months, the reality is that the company is operating in more favourable conditions than it did during 2021.  Will FFH get another chance to repurchase shares at US$400 during 2022?  I'd say that's a fairly strong possibility as we head into the third quarter when hurricane angst kicks in every year.  I hope they are ready.

 

 

SJ

[modiva]

12 hours ago, Parsad said:

 

I think almost all of the insurance businesses are also carried for much less than they would get...the 10% sale of ORH was a good example.  I would guess that book value of the company is underestimated by at least 20%-30%...that's how much more they would get if they sold the insurance businesses and other little pockets of value like Digit, BIAL, etc.  Cheers!

 

Thanks Parsad. Agreed.  So, the real book value is ~USD 800 (+/- 5%).  Hoping, it returns to normalized value sometime in the coming 1-2 years. 

[Viking]

4 hours ago, StubbleJumper said:

 

In the short-term, EPS will appear to be low as a result of mark-to-market losses on bonds and the little dip that equities have experienced. 

 

That mark-to-market loss on bonds is fascinating because even though the rate increases this year have fundamentally strengthened FFH's operating earnings capacity, it is depressing the EPS number.  Even that $7.6 billion of reinvestment that you referred to needs to be marked down for Q2 because rates have continued to rise!  So the good news (rising rates in Q1) will be masked by the better news (more rising rates in Q2).

 

The tumble in equity markets is a bit of a similar thing.  Long-time FFH shareholders have been looking forward to a re-pricing of equities because this is the sort of market in which FFH's investment team thrives.  In short, it's good news for the long term.  But, as you know well, that Q2 EPS number is going to be absolutely thrashed by mark-to-market losses on equities -- likely hundreds of millions of mark-to-market losses.

 

My guess is that Mr. Market will not view FFH favourably over the next little while because of those headline EPS numbers.  Meanwhile, irrespective of what happens to FFH's share price over the next 6 months, the reality is that the company is operating in more favourable conditions than it did during 2021.  Will FFH get another chance to repurchase shares at US$400 during 2022?  I'd say that's a fairly strong possibility as we head into the third quarter when hurricane angst kicks in every year.  I hope they are ready.

 

SJ

@StubbleJumper i would not be surprised to see Fairfax trade at US$450 and if we get another big leg down in stocks (or a bad hurricane season) to $400. However, i think we can also make the case that Fairfax may not sell off aggressively (like in the past).

 

Why not? Underwriting and Interest income. And buybacks.

 

There is a good chance Fairfax could earn $450 million in underwriting and interest income in Q2. This will go a long way to offset the significant hit from mark to market losses in the bond and equity portfolios. My guess is BV will fall by @ $10/share. This will be far less than most insurers. 

i think investors in insurance companies value income from underwriting and interest MUCH MORE than gains in equities. As Fairfax demonstrates that these two buckets are increasing and that it is sustainable and growing i think we may start to see Fairfax re-rate and this will be supportive for the shares. 
 

If Fairfax can deliver a CR under 94 in Q2 that will be three quarters in a row the CR is under 94. And if interest income can grow from $157 million to something closer to $200 million in Q2 that will also be received very positively by analysts. 
 

We will also get more information on the Pet insurance sale to JAB. @Daphne ‘s Scotia report estimates the increase in BV = $35/share when it closes in 2H. Once this transaction closes Fairfax will also have significant resources to buy back stock. And if shares are trading at US$450 or below i think Fairfax will be a buyer. Fairfax did not have this option when shares cratered in 2020.

 

So nothing will surprise me when it comes to Fairfax and its share price. I did double my position yesterday (from 10 to 20% weighting). I really like the $1.4 billion sale of the pet insurance business to JAB. Hard to see how Fairfax does not deliver minimum 15% returns for investors for the next few years (with shares priced today at US$500). If shares go lower (and the story continues to improve) i will be happy to add more.

 

 

Edited June 21, 2022 by Viking

[Parsad]

4 hours ago, modiva said:

 

Thanks Parsad. Agreed.  So, the real book value is ~USD 800 (+/- 5%).  Hoping, it returns to normalized value sometime in the coming 1-2 years. 

 

Frankly, I think it should be trading around $800 CDN already.  I think Prem's comment about getting the share price to $1,000 may have been prescient, as I can see that happening a couple of years from now.  Cheers!

[Daphne]

At the AGM Prem also said he’d continue buy backs north of $700

[Crip1]

So, what do you do Mr, Watsa, assuming things once this deal closes as they are now, buyback Fairfax at C$650/US$500 or buy more ATCO at US$11.50 (and enjoy a 4.5% divvy yield)?

 

-Crip

[Viking]

1 hour ago, Crip1 said:

So, what do you do Mr, Watsa, assuming things once this deal closes as they are now, buyback Fairfax at C$650/US$500 or buy more ATCO at US$11.50 (and enjoy a 4.5% divvy yield)?

 

-Crip

What to do with the proceeds from the sale to JAB will likely be the number one question from analysts during the Q2 call.
 

Yes, instead of buying back Fairfax stock we could see Fairfax grow ownership in something they already own. I would be surprised if it is Atlas. Yes Atlas is cheap at current prices. However, Fairfax already has a way overweight position and shipping might be moving into the mother of all bear markets that could last years. Atlas could turn into a value trap. If investors were not drinking the Altas Kool-Aid during the shipping bubble why would they start drinking during the bust? (I do not follow Atlas very closely these days…)

 

What about buying another chunk of Fairfax India? Cheaper than Atlas. More diversified. Better prospects. More control.

 

Given the sell off in all equities Fairfax has lots of other good internal choices. Recipe at C$12.40 looks super cheap to me. (I hope not… lower quality and very poor track record.)
—————-

Having said all the above i hope they continue to buy back Fairfax shares, especially if they can buy under US$500. And anything under $450 back up the truck. Very accretive for shareholders.

 

Fairfax has something around 23.9 million shares outstanding. Down significantly from 27.8 outstanding in 2017. If Fairfax takes out another 1 million (US$500 million cost at todays prices) the share count will fall to under 23 million. This would take the share count back to 2015 levels and about 18% lower than the high reached in 2017. Pretty impressive reduction in a short period of time. 
 

Can Fairfax come up with a spare $125 million per quarter for share buybacks? I think they can… chug, chug, chug…

 

 

Edited June 21, 2022 by Viking

[A_Hamilton]

1 hour ago, Viking said:

What to do with the proceeds from the sale to JAB will likely be the number one question from analysts during the Q2 call.
 

Yes, instead of buying back Fairfax stock we could see Fairfax grow ownership in something they already own. I would be surprised if it is Atlas. Yes Atlas is cheap at current prices. However, Fairfax already has a way overweight position and shipping might be moving into the mother of all bear markets that could last years. Atlas could turn into a value trap. If investors were not drinking the Altas Kool-Aid during the shipping bubble why would they start drinking during the bust? (I do not follow Atlas very closely these days…)

 

What about buying another chunk of Fairfax India? Cheaper than Atlas. More diversified. Better prospects. More control.

 

Given the sell off in all equities Fairfax has lots of other good internal choices. Recipe at C$12.40 looks super cheap to me. (I hope not… lower quality and very poor track record.)
—————-

Having said all the above i hope they continue to buy back Fairfax shares, especially if they can buy under US$500. And anything under $450 back up the truck. Very accretive for shareholders.

 

Fairfax has something around 23.9 million shares outstanding. Down significantly from 27.8 outstanding in 2017. If Fairfax takes out another 1 million (US$500 million cost at todays prices) the share count will fall to under 23 million. This would take the share count back to 2015 levels and about 18% lower than the high reached in 2017. Pretty impressive reduction in a short period of time. 
 

Can Fairfax come up with a spare $125 million per quarter for share buybacks? I think they can… chug, chug, chug…

 

 

I'd like to see them just keep it on hand to fund premium growth and or begin reducing equity investments to tangible capital. I don't know why they always insist on living on the edge as it relates to liquidity and investment portfolio. Thankfully Bradstreet has kept them so short in duration this time around. 

[valueinvesting101]

John Keells Holdings PLC (JKH) will be raising the equivalent of US$75 million of foreign direct investment by way of a private placement of Sri Lankan Rupee-denominated unlisted convertible debentures to certain controlled affiliates of Canada-based Fairfax Financial Holdings Ltd.

https://www.timesonline.lk/business/John-Keells-to-raise-75-mln-thro-debentures-to-Canadian-firm/10-1137854
 

[Viking]

1 hour ago, valueinvesting101 said:

John Keells Holdings PLC (JKH) will be raising the equivalent of US$75 million of foreign direct investment by way of a private placement of Sri Lankan Rupee-denominated unlisted convertible debentures to certain controlled affiliates of Canada-based Fairfax Financial Holdings Ltd.

https://www.timesonline.lk/business/John-Keells-to-raise-75-mln-thro-debentures-to-Canadian-firm/10-1137854
 

Hopefully this is an example of Fairfax being opportunistic. They already own 13% of JKH (185 million shares) worth around US$85 million (at todays closing price). With this financing it looks to me that Fairfax will get 208 million more shares (in 18 months) for US$75 million. Post conversion they will own 24% of JKH.

 

I would imagine a well funded JKH may well be able to grow their market share given the crisis in Sri Lanka???

—————

Our Group - https://keells.com/our-group

 

John Keells Holdings PLC is Sri Lanka’s premier diversified company. From managing hotels and resorts in Sri Lanka and the Maldives to providing port, marine fuel and logistics services to IT solutions, manufacturing of food and beverages to running a chain of supermarkets, tea broking to stock broking, life insurance and banking to real estate, we have made our presence felt in virtually every major sphere of the economy. Since our modest beginnings as a produce and exchange broker in the early 1870s, we have been known to constantly re-invent, re-align and reposition ourselves in exploring new avenues of growth.

—————

The transaction amounts to a value of Rs.27.06 billion. The debentures will be issued at a price of Rs.130 each, resulting in the issue of 208,125,000 debentures to Fairfax with a maturity period of three years. The debentures will accrue interest at a nominal interest rate of 3 per cent per annum. Fairfax can convert each debenture to one new ordinary share of JKH after 18 months from the date of issue until maturity.

The maximum post-conversion dilution as a result of the issue amounts to 13.06 per cent if all debentures are converted into new ordinary shares of JKH.

[petec]

I think Prem has already said they don't see the need to add capital to subs to fund premium growth so that's probably out.

 

I very much doubt they will reduce equity down to tangible capital and I am not at all sure they should or need to.

 

The obvious uses (for me) is a buyback  - either of FFH shares or of the stubs in Odyssey, Brit, or Allied. And I would imagine the choice will be driven by the price of FFH shares because I imagine the buyback prices for the subsidiaries are fixed. 

[MMM20]

I looked at JAB in the past. Some ethics questions came up. I like that Fairfax continues to add long term partnerships with great external capital allocators. I just wonder if JAB is the right pick. 

 

 

https://neckar.substack.com/p/jab-and-the-family-office-conundrum

 

 

 

A brief history of JAB and the Reimann family

 

The story begins in 1823 in Pforzheim, a town at the edge of Southern Germany’s Black Forest (about an hour from where I grew up.) Local businessman Johann Adam Benckinser (initials “JAB”) acquired a chemical lab from its bankrupt owners and hired a promising young chemist named Karl Ludwig Reimann from the Universität Heidelberg (where Reimann had been the first to extract nicotine from tobacco).

 

Reimann married one of Benckinser’s daughters and took over the company after Benckinser’s death. The company expanded to a new plant in Ludwigshafen (today seat of Germany’s largest chemical company, BASF) and grew steadily.

 

The family’s darkest chapter occurred when Albert Reimann Sr. and his son Albert Reimann Jr. became enthusiastic supporters of the Nazi regime. In 1937, Reimann Jr. wrote to Heinrich Himmler: “We are a purely Aryan family business that is over 100 years old. The owners are unconditional followers of the race theory.” The company as well as the family’s estate employed forced laborers who were subjected to abuse.

 

After the war, the Reimann patriarchs denied their affiliation with the regime and the full story was not uncovered until a few years ago when JAB commissioned a historian (all of this was detailed in the New York Times).

 

In a wild twist, the historian uncovered Reimann Jr.’s affair with a young employee, Emilie Landecker, whose father Alfred had been Jewish. Emilie’s mother was Catholic and, anticipating the danger, Alfred ensured that his children were baptized. While his children survived the war, he was deported and murdered in 1942.

 

It seems the relationship between Reimann Jr. and Landecker continued after the war and resulted in three children. Reimann Jr., who had no children with his wife, eventually “adopted” those three children as well as six others. When he died, each inherited 11.1% of the Benckinser company (orange box on the below chart).

 

Reimann Jr. also neglected to tell any of them that he owned the company. They believed he was merely an executive. His will also forbid them from selling to anyone outside the family. Thus they found themselves unprepared to lead the company which, despite a successful expansion into consumer products such as detergents, reportedly lacked scale and competitiveness.

 

The heirs needed a leader and found one in a German Harvard MBA and former BCG consultant named Peter Harf.

 

Harf radically restructured the company. He further expanded into consumer products, looking for markets with “non-cyclical growth and strong brands but without a clear market leader.” In those industries, the consolidators would win “almost automatically” through synergies and greater scale. He acquired some 25 companies, including the Coty cosmetics business from Pfizer.

"We had a lot of marginal pieces in our portfolio. I'm not afraid of taking risks. I'm not afraid of losing. I'm not afraid of buying something.” Peter Harf

Then he split up the company, took the detergents business public, and merged it with the British Reckitt & Colman into Reckitt Benckinser.

 

After starting with a mid-size private chemicals business, the family now had stakes in two public companies: Reckitt Benckinser and Coty. Along the way, five of the heirs were paid out.

 

Harf also joined the board of directors (and later became chairman) of Interbrew, which subsequently merged with the 3G-controlled Brazilian AmBev to form Inbev, the world’s largest beer company. Harf witnessed firsthand 3G’s playbook of industry consolidation and cost-cutting.

 

Around 2010, he was ready for a new chapter. He pitched the family on using JAB as a 3G-like platform for private equity-style deals. He brought on two additional executives, Reckitt-Benckinser’s Dutch CEO Bart Becht and the French Olivier Goudet from Mars.

To align their interests with the family, the three would invest their own capital into JAB as well as receive options. Today, the family owns 90% of JAB and its executives the remaining 10%.

 

Harf struck another deal with the family: they would refrain from making public comments and even, according to one source, take an oath of secrecy. In exchange, he would compound their capital and protect their privacy by being JAB’s public face.

In his investments Harf was looking for consumer brands with steady growth, robust cash flows to support leverage, and in industries ripe for consolidation. Beer and chocolate had produced a small number of global players. "Coffee,” however, “only had Nestlé, the industry was fragmented." And it offered a growth tailwind because Millennials were "the best coffee drinkers ever.”

“If you go back in the U.S. 20 or 30 years ago, people would have their hot coffee in the morning and drink their Coke in the afternoon,” Mr. Becht said. “That has changed today.”

This started an acquisition spree up and down the “coffee and breakfast” value chain: from Keurig pods to coffee roasters and chains serving sandwiches and donuts.

 

JAB’s focus was on maximizing cash flows to support debt and enable further acquisitions. For example, they extended payment terms to their coffee suppliers to up to 300 days, three times as long as Nestle.

 

Only some of the companies seemed to fit the theme of market consolidation and were re-assembled into larger entities. The above timeline also omits that JAB tried its hand at luxury goods with Jimmy Choo and Bally. Today, many of its portfolio companies are public again: Keurig is now Keurig Dr. Pepper Snapple, JDE (Jacobs Douwe Egberts) consists of the former Peet’s, D.E Master Blenders, and Mondelez's coffee business. Krispy Kreme is public and Panera is going public via SPAC.

 

 

Harf made a comment that left no doubt about his perception of himself and JAB:

“JAB is not a family company but an investment holding and an active investor. Our model is difficult to copy. It is based on trust. We’re most comparable to the Swedish Wallenberg family, Jorge Paulo Lemann in Brazil, or Warren Buffett.”

---

So what did I miss?

 

First, German outlet Manager Magazin highlighted that JAB’s executives now derive substantial additional compensation through the private equity business for which they’ve raised some $17 billion from investors like the Peugeot and Santo Domingo families, Byron Trott, and Singapore’s GIC.

 

The magazine reported that JAB had hired executives from Mars for an expansion into petcare, which would be majority-owned by the private equity funds. It seems that one of the hires downloaded confidential documents before leaving which resulted in a lawsuit between Mars and JAB. Thus, a conflict of interest became apparent in which JAB’s capital and reputation could be at risk for a venture that benefits the management team and outside investors.

 

Harf also seemed to have entrenched himself personally at every level of JAB’s subsidiaries. JAB hired a designated successor, David Kamenetzky, who was supposed to restructure and simplify the web of companies and implement more formal oversight. The new structure was supposed to be “modeled after public companies,” which I interpret as a kind of formal board of directors.

 

Harf’s position at JAB had been built on trust and a long-standing relationship with the family. And, I would argue, it was entrenched by pursuing JAB’s hands-on and increasingly complex investment strategy.

 

Reportedly, Harf didn’t want to retire as originally planned. Perhaps understandable given the ongoing turnaround at Coty. It also echoes the careers of many other investors whose passion keeps them in the business

 

Under the new structure, Kamenetzky would have had power over Harf’s contract. And yet Harf had the right to fire Kamenetzky. And that is exactly what he did.

In the end, it seems like the magazine’s scathing articles may have had an effect. The family recently appointed a new vice chairman and designated successor to Harf.

Edited June 22, 2022 by MMM20

[Thrifty3000]

On 6/20/2022 at 6:39 AM, glider3834 said:

this is interesting - looks like Fairfax is selling its pet insurance business for $1.4 bil

 

WASHINGTON and TORONTO, June 20, 2022 (GLOBE NEWSWIRE) -- JAB Holding Company (“JAB”) and Fairfax Financial Holdings Limited (“Fairfax”) (TSX: FFH and FFH.U) today announced a transformational strategic partnership, in which JAB’s pet insurance business has agreed to acquire all of Fairfax’s interests in the Crum & Forster Pet Insurance Group™ (“C&F Pet”) and Pethealth Inc., including all of their worldwide operations. As part of the transaction, Fairfax will also make a $200 million1 investment in JCP V, JAB’s latest consumer fund.

As a result of the transaction, in which Fairfax will receive $1.4 billion in the form of $1.15 billion cash and $250 million in seller notes, JAB’s combined global pet insurance and ecosystem platform will be estimated to have gross written premiums and pet health services revenues of well over $1.2 billion by 2023, insuring more than 2.1 million pets. 

 

https://www.kulr8.com/news/money/jab-s-pet-insurance-business-to-acquire-global-pet-insurance-operations-of-fairfax-financial/article_1a5ce79b-9f63-598e-bc0a-16401efb451c.html

 

I can't get behind the Bloomberg paywall but here is another article

 

https://www.bloomberg.com/news/articles/2022-06-20/jab-is-said-to-buy-fairfax-stakes-in-pethealth-crum-forster

 

wow I didn’t even open the press release email when I got it because I assumed it was noise. Seems like a nice time to have an extra bil lying around. Bravo, FFH. 

[cwericb]

Articles like this won't hurt FFH share price ...

https://seekingalpha.com/article/4522235-fairfax-is-good-shelter-in-volatile-times?mailingid=28298801&messageid=2800&serial=28298801.1147&source=email_2800&utm_campaign=rta-stock-article&utm_medium=email&utm_source=seeking_alpha&utm_term=28298801.1147

 

I wonder if the funds from the pet insurance sale will be used to buy back Fairfax shares or could it go towards repurchasing the interests held by OMERS and CPPIB Credit Investments in Odyssey Group?

 

 

Edited July 8, 2022 by cwericb

[TwoCitiesCapital]

10-year yields back down to 2.9-3.0% after tagging 3.4% a month ago. Markets beginning to price in cuts in Q1 2023 already. 

 

2s-10s most inverted since 2007. 3M-10s probably likely to follow in the next 2-3 months with additional hikes. 

 

Really hoping Fairfax is considering extending duration some. Will be a shame if this plays out the exact same way as 2018-2020 and they miss the opportunity to add duration again and we continue the multi year trend of declining investment income before rates rise again. 

 

Not suggesting they take the whole portfolio out to 7-10 years, but at least a portion of it! 

[petec]

On 7/13/2022 at 6:07 PM, TwoCitiesCapital said:

10-year yields back down to 2.9-3.0% after tagging 3.4% a month ago. Markets beginning to price in cuts in Q1 2023 already. 

 

2s-10s most inverted since 2007. 3M-10s probably likely to follow in the next 2-3 months with additional hikes. 

 

Really hoping Fairfax is considering extending duration some. Will be a shame if this plays out the exact same way as 2018-2020 and they miss the opportunity to add duration again and we continue the multi year trend of declining investment income before rates rise again. 

 

Not suggesting they take the whole portfolio out to 7-10 years, but at least a portion of it! 

I’m agnostic here. I don’t really think they should be aiming to trade short/medium term moves and I don’t have a really strong view on whether rates are higher or lower in 5/10 years. 

[TwoCitiesCapital]

3 hours ago, petec said:

I’m agnostic here. I don’t really think they should be aiming to trade short/medium term moves and I don’t have a really strong view on whether rates are higher or lower in 5/10 years. 

 

Whether or not we think they should or not is irrelevant. They do as demonstrated by the move to dump ALL of their bonds in 2016. Which worked great for 2-years, but then the failure to renter in 2018 just meant it was all reversed and share holder paid the price with near zero interest income for 5 years. 

 

We now have another opportunity to re-enter bonds having missed much of the pain in bonds this year. Maybe take the duration of the portfolio out to 4 from 2ish now that rates are up 150-175 bps over the last year. 

 

That way they can lock in some of these 3%-ish type yields for the next several years if the bond market is right about a recession being around the corner. Might even pick up some capital gains if the Fed is forced to cut and still not taking a ton of duration risk if yields continue to rise because you can roll 10-20% of the portfolio into those higher yields every year as bonds come due and pay interest. 

 

 

 

 

Edited July 15, 2022 by TwoCitiesCapital