Fairfax 2022

[nwoodman]

6 hours ago, Viking said:

@Xerxes  What you say makes complete sense. What i am wondering is if we are not seeing a trend at Fairfax. A shift in strategy to owning private businesses again. For the past 3 or 4 years Fairfax has been on a mission to get its privately held businesses into the public markets.

 Or conversely a realisation by Fairfax that the market will apply a healthy discount to any public company associated with it. I understand the "market is there to serve you" etc and opportunism can be rewarding.  However, each time this occurs it chips away at the company's reputation.  What was that famous quote by Buffett about reputation??? 

 

It was the definition of insanity to assume that this time would be different with an FFH sub.  So be it.

[Viking]

1 hour ago, nwoodman said:

 Or conversely a realisation by Fairfax that the market will apply a healthy discount to any public company associated with it. I understand the "market is there to serve you" etc and opportunism can be rewarding.  However, each time this occurs it chips away at the company's reputation.  What was that famous quote by Buffett about reputation??? 

 

It was the definition of insanity to assume that this time would be different with an FFH sub.  So be it.

@nwoodman my read is the shorting strategy was the final nail in the coffin for many investors and Fairfax (in terms of reputation). The losses continued year after year for 7 or so years. And they were big. The other things Fairfax does that drives investors a little batty were just icing on the cake.
 

My thesis for a few years now has been that i think Fairfax has turned the corner. And i do think investors will come back into the fold. The first problem was covid. That set the ‘new Fairfax’ thesis back 12 months. And now we have a second bear market in equities in 30 months. The losses in the equity portfolio we saw in Q2 are an all too familiar reminder of the reality of investing in Fairfax. 
 

Will the Atlas deal hurt Fairfax’s reputation? My guess is not much. And that is mostly because Fairfax restoring its reputation is still a work in progress (the bar is very low right now). I continue to be optimistic moving forward. Fairfax needs to continue to deliver exceptional/very good financial results for its shareholders - grow earnings per share and book value per share. Year after year. I think they are on track to do exactly that and so i expect their reputation to also slowly improve in the coming years. 
—————

i have less confidence in the multiples the publicly traded equities Fairfax controls will trade at. Fairfax India is perhaps the best example. I have no idea exactly why it trades at the extremely low multiple it does today. It looks like a broken stock to me. Performance, which has been very good, does not seem to matter. 

[nwoodman]

39 minutes ago, Viking said:

I have less confidence in the multiples the publicly traded equities Fairfax controls will trade at. Fairfax India is perhaps the best example. I have no idea exactly why it trades at the extremely low multiple it does today. It looks like a broken stock to me. Performance, which has been very good, does not seem to matter. 

 

That's my point.  Atlas was the opportunity to forge a new path, instead the whole thing just comes across as grubby in my opinion.  The fact that IR had pretty much shut down over the last few months makes it even more suspect.  Anyway enough said but I am sure Buffett isn't losing any sleep over Sokol's departure.  

[Viking]

12 minutes ago, nwoodman said:

 

That's my point.  Atlas was the opportunity to forge a new path, instead the whole thing just comes across as grubby in my opinion.  The fact that IR had pretty much shut down over the last few months makes it even more suspect.  Anyway enough said but I am sure Buffett isn't losing any sleep over Sokol's departure.  

@nwoodman i think we need to see how this whole thing plays out before we reach any conclusions. I am trying to figure out why ONE is part of the deal. That makes no sense (given Seaspan’s historic practice of doing business with all shippers).  

[glider3834]

So these appear to be the equity financing commitment limits made to BidCo ( i only just saw link so need to read through)

 

David Sokol   $30 mil

Washington Family $175mil 

ONE $1.4 Bbil

 

https://www.sec.gov/Archives/edgar/data/0001794846/000119312522213659/0001193125-22-213659-index.htm

 

@Viking

Edited August 6, 2022 by glider3834

[glider3834]

20 minutes ago, glider3834 said:

So these appear to be the equity financing commitment limits made to BidCo ( i only just saw link so need to read through)

 

David Sokol   $30 mil

Washington Family $175mil 

ONE $1.4 Bil

 

https://www.sec.gov/Archives/edgar/data/0001794846/000119312522213659/0001193125-22-213659-index.htm

 

@Viking

These look like commitment limits - actual transaction value may be less

Edited August 6, 2022 by glider3834

[nwoodman]

31 minutes ago, glider3834 said:

These look like commitment limits - actual transaction value may be less

Either way, interesting in terms of relative contribution.  As always thanks for digging.

 

Also begs the question , who exactly, is Sokol actually working for?

Edited August 6, 2022 by nwoodman

[Viking]

6 hours ago, glider3834 said:

So these appear to be the equity financing commitment limits made to BidCo ( i only just saw link so need to read through)

 

David Sokol   $30 mil

Washington Family $175mil 

ONE $1.4 Bbil

 

https://www.sec.gov/Archives/edgar/data/0001794846/000119312522213659/0001193125-22-213659-index.htm

 

@Viking

@glider3834 so it looks like ONE is the driver of this transaction. I am VERY happy to see that Fairfax is not putting any new money in (at this time). I am hoping Fairfax does a big buyback of their own shares when the pet insurance sale closes later in 2H (so it looks to me like this is still in play).
 

As a Fairfax shareholder bringing ONE on board likely makes Atlas a stronger company. I like this ALOT. Atlas is Fairfax’s largest investment. ONE has very deep pockets. They are a shipper. What i do not understand is why ONE does not buy all of ATLAS. 
 

Right now shipping companies are making obscene profits. If you want to keep the shipping market tight (and rates high) you use your profits to take out other players… you DON’T use your profits to add to capacity. That is largely what you are seeing with lumber and steel producers in North America (i.e. Stelco is not using its profits to grow steel production… it is using profits to dramatically reduce share count). 
 

Atlas was the shipper adding the most new capacity (i think). This deal makes lots of sense for ONE. It will be interesting to learn exactly what the strategic aspects of this deal are for ONE and how Atlas’ strategy possibly shifts as a result. Will ONE be a silent partner? Or not? Bottom line, I am quite happy to see another deep pocketed investor now involved with Atlas. 
 

i wonder what the other 5 shippers are thinking about this transaction (all of whom are bigger players than ONE). Could we see another larger shipper come in with a higher offer all of Atlas? From one of the other consortiums? The Altas conference call will be a very interesting listen. 
—————

ONE is the natural partner for Altas of all the big shippers. ONE is Seaspan’s largest customer by far at 24% (up from 16% Dec 31, 2017). ZIM is #2 at 17%. 
- https://filecache.investorroom.com/mr5ircnw_seaspan/1231/download/Atlas Investor Presentation May 2022 - vF.pdf
—————

ONE is part of THE Alliance, which also includes Yang Ming and Hapag Lloyd. Combined, the three shippers represent 39% of Seaspan's TEU. 
- https://www.container-xchange.com/blog/shipping-alliances/

Edited August 6, 2022 by Viking

[Xerxes]

I guess we will have more answer in the coming days, but we should not assume that FFH is the one that is leading this initiative. Maybe it is really Sokol, who is after all the champion and mastermind of the Atlas model. The vertical integration with ONE is interesting as outlined by Viking.  
 

If FFH is not adding to their stake, than the value for them is really private ownership vs. Public. And whatever advantage ONE brings in. And they are just rolling over with Sokol.

 

but also wouldn’t Atlas lose its neutrality like ARM would have had it gone with its now cancelled merger with NVidia. 

[glider3834]

48 minutes ago, Xerxes said:

I guess we will have more answer in the coming days, but we should not assume that FFH is the one that is leading this initiative. Maybe it is really Sokol, who is after all the champion and mastermind of the Atlas model. The vertical integration with ONE is interesting as outlined by Viking.  
 

If FFH is not adding to their stake, than the value for them is really private ownership vs. Public. And whatever advantage ONE brings in. And they are just rolling over with Sokol.

 

but also wouldn’t Atlas lose its neutrality like ARM would have had it gone with its now cancelled merger with NVidia. 

Atlas won't lose its neutrality IMHO as long as ONE is not the controlling shareholder & the charters that Atlas does with ONE are on similar commercial terms to other shipping liners. These charter rates are also being made publicly available, so they are visible to everyone.

 

 

 

 

[Parsad]

3 hours ago, Xerxes said:

I guess we will have more answer in the coming days, but we should not assume that FFH is the one that is leading this initiative. Maybe it is really Sokol, who is after all the champion and mastermind of the Atlas model. The vertical integration with ONE is interesting as outlined by Viking.  
 

If FFH is not adding to their stake, than the value for them is really private ownership vs. Public. And whatever advantage ONE brings in. And they are just rolling over with Sokol.

 

but also wouldn’t Atlas lose its neutrality like ARM would have had it gone with its now cancelled merger with NVidia. 

 

It also means that Prem isn't screwing over ATCO shareholders as originally suggested.  Cheers!

[nwoodman]

Increasing signs a true hard market may be near, say analysts

 

“While pricing had improved, the frequency and severity of events has kept accelerating as well, leaving significant questions around the adequacy of pricing,” they continued.

“Time will tell and January 1 renewals will be a key test, but we believe there are increasing signs a true hard market may be near, and at the very least there is little sign that pricing increases will abate anytime soon.”

Analysts at Morgan Stanley recently concurred with the comments made by JMP Securities, reporting that that widespread plans to pull back from the property catastrophe market should “bode well” for reinsurance pricing into 2023.

 

https://www.reinsurancene.ws/increasing-signs-a-true-hard-market-may-be-near-say-analysts/

 

I will try and dig out the MS report from June

 

Edit: Attached.  MKL gets a mention

insurance_20220614_0000.pdf

Edited August 8, 2022 by nwoodman

[MMM20]

Not super in the weeds on FFH at the moment - sold most to (try to) upgrade portfolio - but I still own a core position and hope this is an indication that Fairfax is setting up to sell its more cyclical holdings to buy back stock and/or upgrade the equity portfolio, now that valuation dispersions (eg between “junk” and “compounders”) have narrowed somewhat

 

Prem loves to talk about lessons learned from Buffett over the decades. Have they finally learned their lesson to pay a fair price for truly great businesses?
 

With the hard market maybe even accelerating (!), still a short duration fixed income portfolio, etc etc, step back - they’re really in a massive position of strength. This is their opportunity make real moves for shareholders. Goldilocks scenario in many ways!

 

Dont fool yourselves - ATCO is a great savvy operator but in an ultimately extremely cyclical crappy business with low returns on capital and filled with sketchy and irrational actors like state owned employment center shipyards. It was insanely cheap, now it’s not. So let some strategic capitalize the locked in earnings and pay you a big multiple. Punch out.

 

Incredible how fast we went from “Prem owns trash that’ll never go up” to debating whether he’s stealing the trash from shareholders 

 

Upgrade the portfolio. ACTUALLY do a Singleton and buy back massive chunks of the company over the next couple years.
 

Walk the talk. That’s how FFH might compound BVPS at double digits AND trade at a deserved premium to BV again.
 

^Just the strong opinion weakly held of one relative newcomer
 

 

 

 

 

 

Edited August 8, 2022 by MMM20

[Xerxes]

9 hours ago, Parsad said:

 

It also means that Prem isn't screwing over ATCO shareholders as originally suggested.  Cheers!

Very likely if Sokol is the lead on this. 

Prem never suggested that FFH should get in on this directly. Literally all of his comments in the past several years had been what a great asset this is for FFH to own. So if this is Sokol led venture, than not sure what Prem is doing wrong. 
 

 

[Pedro]

I'm seeing going private offers as the priority not buybacks. Is the dry powder I was expecting going to buy back shares now going to takeout offers? Why did Prem say buybacks are priority in the Q2 call if their second priority to take out offers?

[Parsad]

8 minutes ago, Pedro said:

I'm seeing going private offers as the priority not buybacks. Is the dry powder I was expecting going to buy back shares now going to takeout offers? Why did Prem say buybacks are priority in the Q2 call if their second priority to take out offers?

 

Only two times you should buy back stock.  Other greater opportunities aren't available or your stock is well discounted.  Otherwise return excess capital to shareholders in dividends.

 

If the discount to intrinsic value is greater in the takeouts, then it just makes more sense to postpone buybacks and take advantage of the other cheaper investments.  Cheers!

[petec]

1 hour ago, Pedro said:

I'm seeing going private offers as the priority not buybacks. Is the dry powder I was expecting going to buy back shares now going to takeout offers? Why did Prem say buybacks are priority in the Q2 call if their second priority to take out offers?

Because buybacks are funded out of equity and takeouts are funded out of float, is my guess. 

[lessthaniv]

https://www.insurancejournal.com/news/east/2022/08/11/679611.htm

 

 

[Viking]

6 minutes ago, lessthaniv said:

https://www.insurancejournal.com/news/east/2022/08/11/679611.htm

 

 

Interesting… chug, chug, chug…

 

https://www.trg.com/who-we-are/#who-we-are

 

OUR LEADERSHIP TEAM

RiverStone is a highly experienced group of professionals from various disciplines.

 

The RiverStone Group is a group of insurance, reinsurance, and service companies specializing in the management of legacy and run-off insurance businesses and portfolios. As an industry leader in claims resolution, reinsurance recovery, and dispute resolution, we employ over 350 professionals, operating across multiple offices and affiliates spread throughout the US.

 

RiverStone comprises a highly experienced group of international professionals from various disciplines, including finance, actuarial, litigation, claims handling, technology, and HR. Our team has worked on numerous high-profile, global run-off transactions, and our executives typically have more than 25 years of industry experience and on average have been with the company for over 15 years.

[ourkid8]

https://ca.finance.yahoo.com/news/fairfax-announces-pricing-senior-notes-220600581.html
 

The offering will be used to repurchase a portion of the 21% of Allied which OMERS owns and the remainder is for general corporate purposes.
 

We are also getting a pretty decent rate (5.625) for notes going out to 2032. 
 

—-

correction: Fairfax owns 70.9% so it was to repurchase the remaining 29.1%

Edited August 12, 2022 by ourkid8

[Thrifty3000]

It just hit me what the next few chess plays might look like once Sokol is drawn even deeper into the FFH sphere after the Atco deal.

First, Sokol gets a board seat at Fairfax, and it comes with some kind of rich, share-based, incentive to be more involved with operations and deal-making than just being a board member (but, it won't come with a formal operational title).

 

Second, within 5 years we'll start seeing some sweetheart deals involving both BRK and FFH, because at that point Greg Abel will be rewarding his old buddy D. Sokol for sourcing the much-needed ideas.

[Viking]

2 hours ago, ourkid8 said:

https://ca.finance.yahoo.com/news/fairfax-announces-pricing-senior-notes-220600581.html
 

The offering will be used to repurchase a portion of the 21% of Allied which OMERS owns and the remainder is for general corporate purposes.
 

We are also getting a pretty decent rate (5.625) for notes going out to 2032. 

here are some random first impression thoughts: 

1.) Allied World is looking like a pretty good business: as a Fairfax shareholder, yes, it would be great to own more/all.

2.) how much is Fairfax paying for how much of Allied World?

3.) what are savings each year for Fairfax buying back Allied World? Minority shareholders were getting paid a pretty decent sum every year i think. 
4.) US$750 million is not a small number. Does this push Fairfax total debt too high?

5.) Why not use proceeds from pet insurance sale to do this? Perhaps this is still being done (and both Allied minority shareholders will be bought out).

6.) Fairfax has a lot of large transactions on the go right now:

- pet insurance sale ($1.4 billion)

- Atlas take private (no new cash from Fairfax)

- Resolute sale (will close in 1H 2023; proceeds US $600 million + $180 duty lottery ticket)

- Stelco dutch auction (will Fairfax tender any shares?)

- Recipe take private (@ C$475 million to take out minority shareholders)

- today: buy back chunk of Allied World

 

 

Edited August 12, 2022 by Viking

[glider3834]

16 minutes ago, Viking said:

3.) what are savings each year for Fairfax buying back Allied World? Minority shareholders were getting paid a pretty decent sum every year i think. 

Fairfax are paying around 126 mil priority dividend on co-investors investment of 1584 mil = 8% dividend (vs interest on notes of 5.63% - so saving here)

 

But then the question is what will the buyout price be?

[Thrifty3000]

11 hours ago, Thrifty3000 said:

It just hit me what the next few chess plays might look like once Sokol is drawn even deeper into the FFH sphere after the Atco deal.

First, Sokol gets a board seat at Fairfax, and it comes with some kind of rich, share-based, incentive to be more involved with operations and deal-making than just being a board member (but, it won't come with a formal operational title).

 

Second, within 5 years we'll start seeing some sweetheart deals involving both BRK and FFH, because at that point Greg Abel will be rewarding his old buddy D. Sokol for sourcing the much-needed ideas.

To further expound, BRK will probably be a ready buyer of ATCO for $10+ billion in a few years.

[backtothebeach]

Not much love in the market for Fairfax these days ...