Fairfax 2022

[Parsad]

2 hours ago, gfp said:

Annual Report is out now:

 

https://s1.q4cdn.com/579586326/files/doc_financials/2021/FF/WEBSITE-Fairfax-Financial's-2021-Annual-Report.pdf

 

Terrific comprehensive letter!  The insurance engine is wound up tight...increasing premiums through 2021, into 2022 and likely 2023...still only writing at 1x statutory surplus (can go to 1.5x)...float and investments per share is enormous leverage if they get it right!

 

$630 USD per share book value, balance sheet in very good position, with investment side ready to pounce better than almost any other insurer...should be trading somewhere between $800-950 CDN per share.  Cheers!  

[nwoodman]

An amazingly clear and coherent letter.  The presentation of data and metrics is certainly a big improvement IMHO

 

Fairfax is in the best position I have seen in following the company for 10 years or so.  They will cop it on the chin this quarter with declines in Eurobank but the general mix of investments means they will do well in other areas.  Not exactly fortress Berkshire but moving in the right direction.

 

Underwriting will be key, if they can sustain those CRs then it should be game on. It’s been said before but the insurance business turn around is truly remarkable, an amazing job.

 

It was interesting to see that Blackberry only got three lines…

[Cevian]

The man has assembled a good team. Amazing depth! Good to see all the names of all the people involved, not many CEOs would do this.

[glider3834]

31 minutes ago, nwoodman said:

Fairfax is in the best position I have seen in following the company for 10 years or so.  They will cop it on the chin this quarter with declines in Eurobank but the general mix of investments means they will do well in other areas.  Not exactly fortress Berkshire but moving in the right direction.

Yep Prem has promised us lumpy returns!  - most European banks, including Eurobank, are really taking it on the chin recently due to Ukraine conflict/risk around Russia exposures - I believe Greek banks have limited direct exposure to Russia  but now there is economic uncertainty around impact (higher energy costs etc) on Greece - but on the flipside Eurobank looks cheaper now at just 60% of TBV- an opportunity for Fairfax to raise its stake a bit more?? Also I think given Fairfax's current share price, another opportunity is there now for them to buyback their stock - NCIB or maybe another SIB perhaps?  

 

 

[Viking]

3 hours ago, nwoodman said:

An amazingly clear and coherent letter.  The presentation of data and metrics is certainly a big improvement IMHO

 

Fairfax is in the best position I have seen in following the company for 10 years or so.  They will cop it on the chin this quarter with declines in Eurobank but the general mix of investments means they will do well in other areas.  Not exactly fortress Berkshire but moving in the right direction.

 

Underwriting will be key, if they can sustain those CRs then it should be game on. It’s been said before but the insurance business turn around is truly remarkable, an amazing job.

 

It was interesting to see that Blackberry only got three lines…

@nwoodman i completely agree. The letter was VERY logically laid out. Comprehensive. With pretty much all of the information a shareholder needs to understand the company. And like you said, VERY coherent. That is not easy to do given all of Fairfax’s different businesses.

 

For me the letter read like a coming out party for Fairfax. What a superb:

- collection of assets

- collection of people

- collection of relationships

Prem’s letter was written like a proud father walking his daughter down the aisle. The cumulation of 37 years of hard work on full display. And he is understandably proud of what the team at Fairfax has created: a top 25 global insurer that is exceptionally well positioned.

Edited March 5, 2022 by Viking

[Viking]

2 hours ago, Cevian said:

The man has assembled a good team. Amazing depth! Good to see all the names of all the people involved, not many CEOs would do this.

@Cevian i agree. It is clear to me that Fairfax has put a PREMIUM on partnering with talented people. And it nurtures those relationships for decades. You see this:

- at the insurance subs

- Hamblin Watsa and Fairbridge

- the many public and private equity holdings

This has always been a part of Fairfax. It just looks to me like they are moving even more in this direction.

[Parsad]

8 minutes ago, Viking said:

@nwoodman i completely agree. The letter was VERY logically laid out. Comprehensive. With pretty much all of the information a shareholder needs to understand the company. And like you said, VERY coherent. That is not easy to do given all of Fairfax’s different businesses.

 

For me the letter read like a coming out party for Fairfax. What a superb:

- collection of assets

- collection of people

- collection of relationships

Prem’s letter was written like a proud father walking his daughter down the aisle. The cumulation of 37 years of hard work on full display. And he is understandably proud of what the team at Fairfax has created: a top 25 global insurer that is exceptionally well positioned.

 

I've been a shareholder for over 20 years, and I've read every annual report since 1985.  The company has not been this well-positioned in its history...from insurance underwriting quality, portfolio management (cash, bonds, stocks), management depth, balance sheet strength and the sheer expanse of the business as a global insurer.  Yes, they messed up on the equity side over the last few years and a couple of the businesses could be walked back, but overall, they are positioned extremely well going forward and have preserved the gains in the last 18 months.  As long as they just act rationally going forward and make little to no macro bets, they should be in for a few good years.  Cheers!

[Viking]

3 hours ago, glider3834 said:

Yep Prem has promised us lumpy returns!  - most European banks, including Eurobank, are really taking it on the chin recently due to Ukraine conflict/risk around Russia exposures - I believe Greek banks have limited direct exposure to Russia  but now there is economic uncertainty around impact (higher energy costs etc) on Greece - but on the flipside Eurobank looks cheaper now at just 60% of TBV- an opportunity for Fairfax to raise its stake a bit more?? Also I think given Fairfax's current share price, another opportunity is there now for them to buyback their stock - NCIB or maybe another SIB perhaps?  

@glider3834 the US banks are also down 20% in the past 4 weeks so this is a global sell off. 
 

I am pretty confident that Fairfax will be buying back another big slug of stock especially if shares continue to trade under US$500 for any length of time. The NCIB is a logical place to start. Q1 they paid the dividend. So perhaps meaningful buybacks start to happen in Q2.

 

Another thing that jumped out to me reading Prem’s letter was the importance of balance sheet strength. Fairfax got its balance sheet fixed in 2021 after seeing debt increase meaningfully for three straight years. Subs and equity holdings were also on the same debt reduction diet in 2021 so this was clearly a company wide initiative. And sounds like we will be seeing more of the same in 2022 (likely at a lesser pace). My guess is the balance sheet got TOO STRETCHED during the pandemic… but the lesson was learned and moving forward we will see Fairfax/subs/equity holdings with much better balance sheets moving forward. Love it. 

Edited March 5, 2022 by Viking

[Parsad]

3 hours ago, glider3834 said:

Yep Prem has promised us lumpy returns!  - most European banks, including Eurobank, are really taking it on the chin recently due to Ukraine conflict/risk around Russia exposures - I believe Greek banks have limited direct exposure to Russia  but now there is economic uncertainty around impact (higher energy costs etc) on Greece - but on the flipside Eurobank looks cheaper now at just 60% of TBV- an opportunity for Fairfax to raise its stake a bit more?? Also I think given Fairfax's current share price, another opportunity is there now for them to buyback their stock - NCIB or maybe another SIB perhaps?  

 

 

 

Yes, that's correct.  Fairfax is one of the few insurers that benefits from lower asset prices...they thrive when things are tough for others.  With their insurance businesses already humming and capable of writing 50% more business, what do you think will happen if they can put the portfolio to work in a down market?!  Both engines firing...an awesome one-two punch! 

 

Hitting $1,000 USD in book value per share could happen well within 5 years for them...I can see 15-18% ROE years for the next two-three years.  Cheers!

[Parsad]

1 minute ago, Viking said:

@glider3834 the US banks are also down 20% in the past 4 weeks so this is a global sell off. 
 

I am pretty confident that Fairfax will be buying back another big slug of stock especially if shares continue to trade under US$500 for any length of time. The NCIB is a logical place to start. Q1 they paid the dividend. So perhaps meaningful buybacks start to happen in Q2.

 

Another thing that jumped out to me reading Prem’s letter was the importance of balance sheet strength. Fairfax got its balance sheet fixed in 2021 after seeing debt increase meaningfully for three straight years. Subs and equity holdings were also on the same debt reduction diet in 2021. And sounds like we will be seeing more of the same in 2022 (likely at a lesser pace). My guess is the balance sheet got TOO STRETCHED during the pandemic… but the lesson was learned and moving forward we will see Fairfax/subs/equity holdings with much better balance sheets moving forward. Love it. 

 

I would like to see less debt as well.  Not because they are overleveraged by debt, but they have plenty of leverage from float and investments.  They just don't need to have as much debt as they do to still hit 15% ROE.  That being said, debt to equity is still in great shape...I just want it to be in excellent shape!  Cheers!

[Viking]

26 minutes ago, Parsad said:

Hitting $1,000 USD in book value per share could happen well within 5 years for them...I can see 15-18% ROE years for the next two-three years.  Cheers!

i think i am a pretty hard marker. But i think Fairfax will hit BV of US$1,000 in 4 years. And possibly in 3 years. How?

1.) underwriting: i think we could see a multi year run where Fairfax achieves a better than 94CR. The 88 in Q4 has me wondering. I can’t wait to see Q1… if its in the low 90’s we may be off to the races (sub 94 CR). 
2.) interest and dividend income: if Fairfax is able to deploy a sizeable chunk of their fixed income portfolio at higher rates (like what we have seen announced with Kennedy Wilson) we should see interest and dividend income jump. 
 

These two buckets alone could deliver +$2 billion per year pre-tax as soon as 2023. And $2.5 billion in a couple of years is possible.
 

i also expect the equity holdings to deliver solid results (on average) the next few years. Digit IPO would be gravy. Of course there will be some surprises (but these will be both positive and negative) so i am not too worried on this front given how the company is positioned today. 

Edited March 5, 2022 by Viking

[Parsad]

2 minutes ago, Viking said:

 

i also expect the equity holdings to deliver solid results (on average) the next few years. Digit IPO would be gravy. Of course there will be some surprises (but these will be both positive and negative) so i am not too worried on this front given how the company is positioned today. 

 

Yeah, I think we can put the IPOs in the "icing on the cake" bucket.  Digit, Ki, Anchorage, etc...any increase in book value due to IPOs is a bonus...as well as any increase in value of the insurance subs, since we know Odyssey is carried on the books well below fair value. 

 

Just on the existing insurance earning power and allocating the investment portfolio, they can hit their 15% ROE mark as long as they keep it simple.  2-3 years of that and I'm a happy camper!  Cheers!  

[StubbleJumper]

11 hours ago, Viking said:

Another thing that jumped out to me reading Prem’s letter was the importance of balance sheet strength. Fairfax got its balance sheet fixed in 2021 after seeing debt increase meaningfully for three straight years. Subs and equity holdings were also on the same debt reduction diet in 2021 so this was clearly a company wide initiative. And sounds like we will be seeing more of the same in 2022 (likely at a lesser pace). My guess is the balance sheet got TOO STRETCHED during the pandemic… but the lesson was learned and moving forward we will see Fairfax/subs/equity holdings with much better balance sheets moving forward. Love it. 

 

The balance sheet is definitely more attractive, but it's not because debt has been reduced, but rather because the asset side has improved dramatically.  The main debt ratios are dramatically better than they were in September 2020.

 

But, let us not deceive ourselves about the company's level of debt.  On paper, total borrowings are down ~$500m between 2020 and 2021.  However, this has been effectively back-filled by borrowing money against selling a portion of Odyssey in 2021 and Riverstone in 2020.  Everyone is entitled to their opinion of those transactions, but I hold the view that they are effectively a form of non-recourse debt which likely carries a high single-digit interest rate (er, I mean dividend).  It has the characteristic of non-recourse debt because it technically doesn't have to be repaid, but I don't think that anyone in this forum has any doubt that FFH's intention is to reverse those transactions over the coming years by repaying buying back the positions that OMERS/CPP currently hold.  It doesn't appear on the balance sheet as debt, but let us not deceive ourselves.  If it looks like a duck, swims like a duck and quacks like a duck, it's probably a duck.

 

Absolute debt levels and "quasi-debt" levels aside, the earnings capacity is cause for optimism.  Short of another acquisition spree or further debt-financed share buybacks, it appears as if those debt ratios will be headed lower for the next few years, which is definitely good to see.

 

 

SJ

[Thrifty3000]

58 minutes ago, StubbleJumper said:

 

The balance sheet is definitely more attractive, but it's not because debt has been reduced, but rather because the asset side has improved dramatically.  The main debt ratios are dramatically better than they were in September 2020.

 

But, let us not deceive ourselves about the company's level of debt.  On paper, total borrowings are down ~$500m between 2020 and 2021.  However, this has been effectively back-filled by borrowing money against selling a portion of Odyssey in 2021 and Riverstone in 2020.  Everyone is entitled to their opinion of those transactions, but I hold the view that they are effectively a form of non-recourse debt which likely carries a high single-digit interest rate (er, I mean dividend).  It has the characteristic of non-recourse debt because it technically doesn't have to be repaid, but I don't think that anyone in this forum has any doubt that FFH's intention is to reverse those transactions over the coming years by repaying buying back the positions that OMERS/CPP currently hold.  It doesn't appear on the balance sheet as debt, but let us not deceive ourselves.  If it looks like a duck, swims like a duck and quacks like a duck, it's probably a duck.

 

Absolute debt levels and "quasi-debt" levels aside, the earnings capacity is cause for optimism.  Short of another acquisition spree or further debt-financed share buybacks, it appears as if those debt ratios will be headed lower for the next few years, which is definitely good to see.

 

 

SJ

Yeah, I agree it’s quasi-debt. I was actually just digging to see if the AR had more color on the Odyssey deal.

 

I haven’t found anymore clarification on the amount FFH will ultimately have to pay to buy back the equity. So, I’m going to assume the buyback will cost somewhere in the neighborhood of $1.2 billion. If FFH’s shares are worth $1,000 apiece in a few years then it will have been a good trade.

 

Here’s the language from the AR:
 

“Sale of non-controlling interest in Odyssey Group

On December 15, 2021 Odyssey Group issued shares representing an aggregate 9.99% equity interest to a subsidiary of Canada Pension Plan Investment Board (“CPPIB”) and OMERS, the pension plan for Ontario’s municipal employees, for cash consideration of $900.0 which was subsequently paid by Odyssey Group as a dividend to Fairfax. The company recorded an aggregate equity gain of $429.1, principally comprised of a dilution gain and the fair value of a call option received, which was presented as other net changes in capitalization in the consolidated statement of changes in equity. The company has the option to purchase the interests of CPPIB and OMERS in Odyssey Group at certain dates commencing in January 2025.”

[glider3834]

3 hours ago, StubbleJumper said:

 

The balance sheet is definitely more attractive, but it's not because debt has been reduced, but rather because the asset side has improved dramatically.  The main debt ratios are dramatically better than they were in September 2020.

 

But, let us not deceive ourselves about the company's level of debt.  On paper, total borrowings are down ~$500m between 2020 and 2021.  However, this has been effectively back-filled by borrowing money against selling a portion of Odyssey in 2021 and Riverstone in 2020.  Everyone is entitled to their opinion of those transactions, but I hold the view that they are effectively a form of non-recourse debt which likely carries a high single-digit interest rate (er, I mean dividend).  It has the characteristic of non-recourse debt because it technically doesn't have to be repaid, but I don't think that anyone in this forum has any doubt that FFH's intention is to reverse those transactions over the coming years by repaying buying back the positions that OMERS/CPP currently hold.  It doesn't appear on the balance sheet as debt, but let us not deceive ourselves.  If it looks like a duck, swims like a duck and quacks like a duck, it's probably a duck.

 

Absolute debt levels and "quasi-debt" levels aside, the earnings capacity is cause for optimism.  Short of another acquisition spree or further debt-financed share buybacks, it appears as if those debt ratios will be headed lower for the next few years, which is definitely good to see.

 

 

SJ

Riverstone Europe/Barbados sale proceeds went to Holdco, Fairfax did have option to repurchase their equity positions (in Riverstone Europe) which I think they would do through their subs not the Holdco & they would need around $1,2 bil & they look to have the cash in their insurance subs to do it . I don't think there was an option for Fairfax to buyback their European run-off business - they have kept the US run-off business which I think was a strategic move.

Edited March 5, 2022 by glider3834

[StubbleJumper]

44 minutes ago, glider3834 said:

Riverstone Europe/Barbados sale proceeds went to Holdco, Fairfax did have option to repurchase their equity positions (in Riverstone Europe) which I think they would do through their subs not the Holdco & they would need around $1,2 bil & they look to have the cash in their insurance subs to do it . I don't think there was an option for Fairfax to buyback their European run-off business - they have kept the US run-off business which I think was a strategic move.

 

No, you are correct.  Riverstone is gone forever.  I meant to say Brit and Odyssey were the mechanisms to "borrow" money without having additional debt appear on the balance sheet.  We know that those will almost certainly be repurchased in a few years, and we are guessing that OMERS/CPP will get their traditional 9% return on the deal!  Anyway, I don't want to belabour the point, but it's about $1.275 billion of cash that they received during 2022 and if the intention from the outset is to repay  buy it back with interest at a premium that provides a 9% return, then I consider it to be "quasi-debt" that should be mentally tacked onto the official debt number that appears on the balance sheet.

 

 

SJ

[bearprowler6]

What about Allied World? This was purchased 5 years ago with the help of our "friends" at OMERS, AIMCO et el. Now 5 years later and Fairfax continues to own only 71% of the shares of AW. I would assume that Fairfax would also want to own 100% of AW at some point? At the time of purchase, OMERS provided $1 billion and AIMCO $500 million of the cash needed to close the deal. Assuming Fairfax wants to buy out its minority partners than it will need to come up with an additional $1.5 billion plus the cost of financing  which at 9% would represent $135 million per year or a further $675 million and counting.

[glider3834]

4 hours ago, Thrifty3000 said:

Yeah, I agree it’s quasi-debt. I was actually just digging to see if the AR had more color on the Odyssey deal.

 

I am looking at the AR now

'In addition, the non-controlling interests in Allied World, Odyssey Group and Brit have a dividend in priority to the company'

Odyssey deal (like Brit etc) has a priority dividend - no information on the dividend % that I can see??

[glider3834]

38 minutes ago, bearprowler6 said:

What about Allied World? This was purchased 5 years ago with the help of our "friends" at OMERS, AIMCO et el. Now 5 years later and Fairfax continues to own only 71% of the shares of AW. I would assume that Fairfax would also want to own 100% of AW at some point? At the time of purchase, OMERS provided $1 billion and AIMCO $500 million of the cash needed to close the deal. Assuming Fairfax wants to buy out its minority partners than it will need to come up with an additional $1.5 billion plus the cost of financing  which at 9% would represent $135 million per year or a further $675 million and counting.

 

1 hour ago, StubbleJumper said:

 

No, you are correct.  Riverstone is gone forever.  I meant to say Brit and Odyssey were the mechanisms to "borrow" money without having additional debt appear on the balance sheet.  We know that those will almost certainly be repurchased in a few years, and we are guessing that OMERS/CPP will get their traditional 9% return on the deal!  Anyway, I don't want to belabour the point, but it's about $1.275 billion of cash that they received during 2022 and if the intention from the outset is to repay  buy it back with interest at a premium that provides a 9% return, then I consider it to be "quasi-debt" that should be mentally tacked onto the official debt number that appears on the balance sheet.

 

 

SJ

I think there are different ways to think about it

- they could issue equity (rather than debt) in FFH at a decent premium to BV & buyback minority interests at some future date - they do have a track record of buying back stock below BV & issuing stock above BV. 

- they want $1.5 bil at Holdco, so if they do buyback minorities I think more likely from FCF or selling equity.

- in a hypothetical situation owning 70% of 3 insurers with say 10 bil in float (effectively owning 7 bil in float) might make more sense than owning 100% of 1 insurer with 5 bil in float - in terms of thinking about capital allocation - not breaking down the individual subs numbers here. But the flipside is they have to pay priority dividends - I am sure they have done the numbers on this.

- They have option not obligation to buyback sub minorities- - we are guessing what they might do & at what price or %- they didn't buyback Allied minorities with the proceeds from Odyssey - so clear intent to maximise shareholder return at each turn.

[Cigarbutt]

The 'preferred' share 'coupon' is 10.00% for Brit minority ownership.

The 'preferred' share 'coupon' is 8.00% for Allied World (126.4M per year on initial par value of third parties of 1580.0M).

[StubbleJumper]

32 minutes ago, glider3834 said:

I think there are different ways to think about it

- they could issue equity (rather than debt) in FFH at a decent premium to BV & buyback minority interests at some future date - they do have a track record of buying back stock below BV & issuing stock above BV. 

- they want $1.5 bil at Holdco, so if they do buyback minorities I think more likely from FCF or selling equity.

- in a hypothetical situation owning 70% of 3 insurers with say 10 bil in float (effectively owning 7 bil in float) might make more sense than owning 100% of 1 insurer with 5 bil in float - in terms of thinking about capital allocation - not breaking down the individual subs numbers here. But the flipside is they have to pay priority dividends - I am sure they have done the numbers on this.

- They have option not obligation to buyback sub minorities- - we are guessing what they might do & at what price or %- they didn't buyback Allied minorities with the proceeds from Odyssey - so clear intent to maximise shareholder return at each turn.

 

 

No argument with any of that.  My point is simply to look at the financials with a critical eye.  We should not celebrate that debt has notionally decreased by ~$500m because we know very well that it was backfilled with quasi-debt.  I don't have a big problem with that as long as the funds from the issuance of quasi-debt were used for value-accretive purposes, and in 2021, that definitely seems to be the case (ie, to buy back shares at 0.8x BV and perhaps 0.66x IV).  But, look beyond the financial statement numbers and don't give management credit for something which they've not done, even if they do deserve credit for all of the great things that they *did* do during 2021.

 

I have a similar recurring caution about the paper gains that FFH triggers and reports from time to time.  If operations in a year have been great, then say that operations in the year have been great.  But, if a large EPS number is reported and half is the result of paper gains, then don't say that management had a great year.  The paper gains reflect good work in the previous 4 or 5 years, and that is to the credit of management.  But, for the question of, "What have you done for me lately?" paper gains are cold comfort.  So you will often see a quality of earnings caution from me because the financials don't always tell the entire truth.

 

I don't want to come off as negative about 2021 or about the sale of Odyssey to repurchase shares.  The year was excellent and the repurchase of shares financed by quasi-debt is almost certainly a good thing for shareholders.  But, let's not deceive ourselves about what's been done and what hasn't been done during the year.

 

 

SJ

[StubbleJumper]

5 minutes ago, Cigarbutt said:

The 'preferred' share 'coupon' is 10.00% for Brit minority ownership.

The 'preferred' share 'coupon' is 8.00% for Allied World (126.4M per year on initial par value of third parties of 1580.0M).

 

The preferred coupon for the Brit sale of 2021 is 10%?  Oy vey.  I had hoped that the days of 9% were over, but that hope was anchored in the notion that the coupon would be *less* than 9% rather than more.

 

 

SJ

[Parsad]

56 minutes ago, StubbleJumper said:

 

 

No argument with any of that.  My point is simply to look at the financials with a critical eye.  We should not celebrate that debt has notionally decreased by ~$500m because we know very well that it was backfilled with quasi-debt.  I don't have a big problem with that as long as the funds from the issuance of quasi-debt were used for value-accretive purposes, and in 2021, that definitely seems to be the case (ie, to buy back shares at 0.8x BV and perhaps 0.66x IV).  But, look beyond the financial statement numbers and don't give management credit for something which they've not done, even if they do deserve credit for all of the great things that they *did* do during 2021.

 

I have a similar recurring caution about the paper gains that FFH triggers and reports from time to time.  If operations in a year have been great, then say that operations in the year have been great.  But, if a large EPS number is reported and half is the result of paper gains, then don't say that management had a great year.  The paper gains reflect good work in the previous 4 or 5 years, and that is to the credit of management.  But, for the question of, "What have you done for me lately?" paper gains are cold comfort.  So you will often see a quality of earnings caution from me because the financials don't always tell the entire truth.

 

I don't want to come off as negative about 2021 or about the sale of Odyssey to repurchase shares.  The year was excellent and the repurchase of shares financed by quasi-debt is almost certainly a good thing for shareholders.  But, let's not deceive ourselves about what's been done and what hasn't been done during the year.

 

 

SJ

 

I agree with what you are trying to state Stubble, but I'm not sure that is fair.  You can't say they had a shitty year during a bad year and then say they had an ok year during a great year.  At some point, you just have to give them some credit for their work.

 

Anyway you cut it, the things they did this year were fully accretive...whether it was by selling ORH, buying back cheap shares, TRS, growth in premium volume, paying down debt, stabilizing the hold co's cash levels, extending the global reach of the insurers, value recognition of many of their holdings...it was pretty much all good.  A great year in Fairfax's history, especially after what shareholders have been through on the portfolio management side in the last 2-3 years.  

 

We know from Fairfax's history, they will issue equity and buy back their stakes in their insurance businesses when Fairfax's book is at 1.1-1.2 times or better and at $1,000-$1,100 per share.  Which I imagine will happen within the next 24-36 months...probably in line with when they sell out of the TRS, you will see an announcement to buy back ORH. 

 

They are opportunistic with every asset other than perhaps Blackberry's meme debacle.  Which I agree, they should have taken advantage of in some way.  Can you imagine if they had?  There probably would have been no need for an ORH sale.  But Prem doesn't do that...he's not going to sell a position he's fixing and leave them hanging.

 

There are certainly years where we should be calling out issues, but overall, this one ranks very well in their history!  Cheers!  

[ValueMaven]

Prem's letter was great!!!!!! 

[Viking]

1 hour ago, StubbleJumper said:

 

 

No argument with any of that.  My point is simply to look at the financials with a critical eye.  We should not celebrate that debt has notionally decreased by ~$500m because we know very well that it was backfilled with quasi-debt.  I don't have a big problem with that as long as the funds from the issuance of quasi-debt were used for value-accretive purposes, and in 2021, that definitely seems to be the case (ie, to buy back shares at 0.8x BV and perhaps 0.66x IV).  But, look beyond the financial statement numbers and don't give management credit for something which they've not done, even if they do deserve credit for all of the great things that they *did* do during 2021.

 

I have a similar recurring caution about the paper gains that FFH triggers and reports from time to time.  If operations in a year have been great, then say that operations in the year have been great.  But, if a large EPS number is reported and half is the result of paper gains, then don't say that management had a great year.  The paper gains reflect good work in the previous 4 or 5 years, and that is to the credit of management.  But, for the question of, "What have you done for me lately?" paper gains are cold comfort.  So you will often see a quality of earnings caution from me because the financials don't always tell the entire truth.

 

I don't want to come off as negative about 2021 or about the sale of Odyssey to repurchase shares.  The year was excellent and the repurchase of shares financed by quasi-debt is almost certainly a good thing for shareholders.  But, let's not deceive ourselves about what's been done and what hasn't been done during the year.

 

SJ

@StubbleJumper you make some great points. 

I completely agree the transactions where Fairfax partners with OMERS, CPPIB, AIMCO) come with a definite cost. To be completely honest i do not understand all the puts and takes very well.
 

Do we know how much Fairfax will have to pay the partners to buy the position in Odyssey back?
1.) Is it a fixed amount known today - like perhaps US$900 million?

2.) Or is the amount unknown and based off the future value of Odyssey (9.9% of a much higher future value)?

 

Understanding this is important to understanding the true cost of the deal over its life. if it is option 1.) above i like the deal a whole lot more than if it is option 2.) 
 

If 9.9% of Odyssey is ‘worth’ $900 million today, we KNOW 9.9% will be worth much more in 5 years time (my guess is Odyssey will compound in value at 12-15% over the next 5 years given we are still in a hard market).

 

It might be interesting to look at the Eurolife deal to better understand how all the financial puts and takes worked over its lifetime.

Edited March 6, 2022 by Viking