Fairfax 2024

[nwoodman]

45 minutes ago, Phoenix01 said:

Here is a good review of the MW report.

https://youtube.com/watch?v=nsxGizwLTd8&si=KJEEabBKv7v5b70z

Ta,  seeing the table from the quarterly reminded me that Eurobank is a 2.5 bn position today vs carrying of $1.8bn.  Crickets on that one!

[Viking]

2 minutes ago, Maverick47 said:

Thanks @Viking.  The only thing I was sorry about was that I didn’t have any dry powder in my personal accounts to do the same.  However, I was able to pick up some shares for a family member’s account that I manage.  

 

@Maverick47  This really is an interesting situation. The time to short Fairfax was 2020. Maybe 2021. But today? I don't get it. Fairfax has had record operating earnings for three years in a row now. With more coming in 2024. This just means they will have significant funds to buy back a shitload of shares if they want. I think they just might.

 

The short sellers have to know this. They can't be that stupid.

 

So they need to get long at some point. And likely before Fairfax responds. That is days away. 

[Viking]

21 minutes ago, nwoodman said:

Ta,  seeing the table from the quarterly reminded me that Eurobank is a 2.5 bn position today vs carrying of $1.8bn.  Crickets on that one!

 

@nwoodman  I was thinking the exact same thing today. The Eurobank position is currently understated in BV by about $700 million. Add in Fairfax India and Thomas Cook and you are probably at around $1.3 billion (if you value Fairfax India at Fairfax India's low stock price). The fact that none of this is brought up is instructive. 

Edited February 9, 2024 by Viking

[Parsad]

1 hour ago, Viking said:

 

@treasurehunt For the past 3 years I have been writing pretty extensively on Fairfax (putting it mildly). I have compiled my writings into a 330 page document called 'Hiding in Plain Sight'. I will attach a copy of the updated PDF file to this post (and also the companion Excel file). I have not seen anything today that suggests I need to change anything in my PDF file. Anything I might want to say is in there. 

 

That is all I am going to say about what has been going on today. If you have a family member who believes in UFO's or Sasquatch do you argue about it with them? I don't. It is energy draining and it accomplishes nothing. 

 

Peter Lynch has one golden rule when it comes to investing: 'understand what you own'. Education is the key.

 

When a stock I own goes down and I panic it usually means I don't understand what I own. The answer? More education is needed. Hence why I am posting an updated version of my PDF file.

 

I was not panicking about my sizeable Fairfax position today. I was surprisingly calm. And I was adding. Buffett tells us 'Price is there to serve you not to inform you'. He is one smart dude.

Fairfax Feb 8 2024.pdf 15.9 MB · 13 downloads Fairfax Jan 31 2024.xlsx 255.57 kB · 8 downloads

 

+1!  Cheers!

[Parsad]

10 minutes ago, Viking said:

 

@Maverick47  This really is an interesting situation. The time to short Fairfax was 2020. Maybe 2021. But today? I don't get it. Fairfax has had record operating earnings for three years in a row now. With more coming in 2024. This just means they will have significant funds to buy back a shitload of shares if they want. I think they just might.

 

The short sellers have to know this. They can't be that stupid.

 

So they need to get long at some point. And likely before Fairfax responds. That is days away. 

 

I agree!  This was a timing issue.  With the 1st Q report coming out soon, somebody needed to cover.  Cheers!

[Munger_Disciple]

In the third quarter 2023 FFH interim report, Note 6 shows the carrying values and fair values for investments in associates. So the total fair value of these investments exceeds the total carrying value by 940mm. In other words, book value is understated by 940mm for these investments. Instead of taking a wholistic view, MW focuses only on those investments like Quess whose carrying value exceeds its fair value. Moreover Carson Block starts out his short thesis by claiming that BV only grew 9% instead of Prem's 15% goal. If this is headline of short thesis, those of us who are long have nothing to worry about. 

MW is report is very disingenuous & misleading to say the least. Blessing in disguise for those longs looking to increase their position. 
 

Edited February 9, 2024 by Munger_Disciple

[TwoCitiesCapital]

What's interesting about all of this, to me, is the 10% move today had me buying shares and increasing my position by 10%. 

 

But I wasn't increasing my position by 10% when we were at this price 4-6 weeks ago. Probably 1/2 anchoring bias and 1/2 knowing earnings announced next week are gonna be amazing 

 

 

Edited February 9, 2024 by TwoCitiesCapital

[Hektor]

2 hours ago, KFS said:

 

Fairly certain this fellow is a regular on this board.  Well done.  

 

It's completely incorrect to associate growth in Fairfax with book value adjustment: expert - Video - BNN (bnnbloomberg.ca)

[Hektor]

2 hours ago, Phoenix01 said:

Here is a good review of the MW report.

https://youtube.com/watch?v=nsxGizwLTd8&si=KJEEabBKv7v5b70z

[Hektor]

Interesting point in the YouTube video posted by @Phoenix01. Why were these questions not raised by the short seller during one of the previous conference calls.

 

?May be they discovered these “issues” after the last conference call 

 

Before going public, did the short seller approach Fairfax for a response to these “findings’? What was their response?

[Santayana]

1 hour ago, Viking said:

This really is an interesting situation. The time to short Fairfax was 2020. Maybe 2021. But today?

I'd love it if has been short since then!  It's really not clear if this is a new idea, or a last ditch attempt to unwind a position.

[treasurehunt]

2 hours ago, Viking said:

For the past 3 years I have been writing pretty extensively on Fairfax (putting it mildly). I have compiled my writings into a 330 page document called 'Hiding in Plain Sight'. I will attach a copy of the updated PDF file to this post (and also the companion Excel file). I have not seen anything today that suggests I need to change anything in my PDF file. Anything I might want to say is in there.

 

Thanks, Viking. I have read most of your posts here but it will be interesting to go through the compendium.

[Crip1]

8 hours ago, Viking said:

 

Is anyone else experiencing deja vu?

 

If Peter Eavis made an appearance, that would feel like deja vu. Although, as a long-time shareholder, it would be great to see BSilly or Cardboard back commenting.

 

-Crip

 

Edited February 9, 2024 by Crip1

[StubbleJumper]

2 hours ago, nwoodman said:

Ta,  seeing the table from the quarterly reminded me that Eurobank is a 2.5 bn position today vs carrying of $1.8bn.  Crickets on that one!

 

Well, that's what's so funny.  The report bemoaned the fact that some paper gains were triggered 4 or 5 years ago from Grivalia properties, buy it never took a paragraph to examine the current value of Grivalia.  Well, that's pretty obvious because Grivalia is now Eurobank, and as you say, the market value far exceeds the carrying value.  So to what end should someone bellyache today about the paper gains triggered 5 years ago when those paper gains are fully supported by an even higher market value?

 

And so it goes with APR Energy.  The report grouses about the possibility that it was dumped on Seaspan to avoid a paper loss at FFH, but it doesn't go that next step and evaluated the value of APR today.  Well, now APR is part of the Atlas position, and the fair value of that position is far greater than its carrying cost.  So, what's the point of bellyaching about that transaction from 3 years ago?

 

It's the same story with Odyssey and Brit.  The report throws a hissy-fit because there were modest paper gains triggered a few years ago, but it never went that next step to make the argument that those insurance subs were less valuable than the new carrying cost.  And certainly now three years later, there's no argument at all that those companies are more valuable than their carrying cost.

 

Let's just throw a pile of shit at the wall and see what sticks.

 

 

SJ

[Crip1]

This short report can be one of three things, as I see it:

 

1) Smash and grab - This is clearly possible with a stock that has risen rapidly, is complicated, and is in the blackout period ahead of what should be a pretty solid earnings report. If this is the case, one has to think that a 12% decline today should have resulted in some quick money and this may go away.

 

2) Honest analysis - There are contrarians out there, and I can sometimes fall into that camp. They do analysis and state their opinions with no nefarious intentions besides making money. One has to acknowledge that this is a possibility. If this is the case, then one would think this will go away pretty quickly but if the report and subsequent success in driving the price down continues, others may jump on board. If so, this will last a little while.

 

3) Something nefarious - Like the early 2000's, this may be bigger than Carson Block or the Muddy Waters firm. Not making accusations, just acknowledging that this is a possibility. And, if true, than this could get pretty ugly. Likely not as ugly as it did 20 years ago because Fairfax is in a significantly better position now than they were then, but ugly still.

 

-Crip

 

[Gmthebeau]

I don’t own Fairfax, and have never studied it, but Muddy Waters is not a fly by night smash and grab operation.  They have a very long history of under-covering companies that are complete frauds, although typically these are Chinese companies.  Looks like his says this was overstated by 18%, and it dropped 12% today.  Worst case scenario is another 6% if he is right and quick upside back where it was otherwise.  I might initiate a position tomorrow if it flushes more.

[treasurehunt]

3 hours ago, Phoenix01 said:

Here is a good review of the MW report.

https://youtube.com/watch?v=nsxGizwLTd8&si=KJEEabBKv7v5b70z

Very good reponse. Thanks for posting the link.

[nwoodman]

20 minutes ago, StubbleJumper said:

Let's just throw a pile of shit at the wall and see what sticks.

This!  I have been pondering the “research” over multiple coffees and came to the conclusion this board pulled together a better short thesis in 2021.  The very same board then blew it up as the facts changed dramatically.  Muddy Waters has brought a lemon to a knife fight but is 3-4 years late.  
 

When I saw that a short report was out and the market reaction, I figured we were having an “asbestos  moment’ in the insurance subs.  It turned out to be nickel and diming some selective marks while totally ignoring others to suit the narrative.  The nonsense about the 15% aspirational target, well that is getting solved as we speak.
 

Talk about a storm in a teacup.

[Viking]

35 minutes ago, Crip1 said:

 

If Peter Eavis made an appearance, that would feel like deja vu. Although, as a long-time shareholder, it would be great to see BSilly or Cardboard back commenting.

 

-Crip

@Crip1 BSilly is on my investing wall of fame for his posts on Fairfax, especially 2003 to 2005. So rational, educational and even keeled. 

[Crip1]

4 minutes ago, Viking said:

@Crip1 BSilly is on my investing wall of fame for his posts on Fairfax, especially 2003 to 2005. So rational, educational and even keeled. 

Concur 100%

[glider3834]

https://www.godigit.com/digest/stories/digit-funding-press-release

 

The key word is IFRS - Fairfax reports Digit results under IFRS but Digit reports under Indian GAAP. As per below, there are 'significant differences'.

 

Below Digit indicate that they cannot by law include IFRS Financials in their IPO Prospectus (excerpt below), but they plan to make IFRS financial data available after IPO for ease of comparison with other global companies in the same industry.

 

 

 

 

 

 

 

 

Edited February 9, 2024 by glider3834

[Gmthebeau]

I just watched his CNBC interview and skimmed his report.  Reasonable people can disagree on the value of assets.  He seems to state some of the assets in question and there is a lot of asset shuffling going on.  Reminded me a bit of a John Malone type situation.  He made a good point how a former audit exec from the auditor is on their board.  This would seem like a conflict.  I also understand short sellers attacked them previously and they did an accounting adjustment to restate financials after that  ~ I guess saying it was unrelated.  Uh huh.  Hard pass for me.  

[SafetyinNumbers]

I appreciate all of the good analysis on the board today. Thank you. 
 

I spent time with a few PMs today that were buying positions for the first time so they certainly saw it as an opportunity.

 

I tweeted about the MW IFRS 17 proposed haircut and the work is incredibly sloppy. If you disagree, please let me know.

 

 

Edited February 9, 2024 by SafetyinNumbers

[Parsad]

7 minutes ago, Gmthebeau said:

I just watched his CNBC interview and skimmed his report.  Reasonable people can disagree on the value of assets.  He seems to state some of the assets in question and there is a lot of asset shuffling going on.  Reminded me a bit of a John Malone type situation.  He made a good point how a former audit exec from the auditor is on their board.  This would seem like a conflict.  I also understand short sellers attacked them previously and they did an accounting adjustment to restate financials after that  ~ I guess saying it was unrelated.  Uh huh.  Hard pass for me.  

 

What?  Have you actually read the report?

 

Key takeaways:

• Fairfax is GE, not Berkshire Hathaway
• MW believes that there should $4.5B in adjustments to assets on the balance sheet
• Fairfax is pulling financial levers to improve results and book value since 2018
• Fairfax has missed their ROE target of 15% for several years

Ok, the 4th one is pretty much a joke.  Buffett and Munger have talked for decades about lumpy 15% versus an even 12% return every year.  Fairfax is an insurance company that invests its float for income, so there will be volatility in annual returns.  With that, you can get rid of the 1st one as well, since GE was engineering earnings to get a consistent annual return, not accepting volatile annual returns.  I'm glad Block really studied GE!

 

Slide #4 of MW's report shows how Allied put pressure on Fairfax and they wrote a 107% CR in the year acquired.  Then I guess somehow, Fairfax finagled a 97.3% CR since.  Last I checked, writing below 100% was the target for insurance companies, not what they necessarily wrote historically.  Again, not sure why he brings up Allied, since CR's are well under 100% for the last 5 years.

 

For mispriced assets:

 

Recipe

• They talk about the $15.30 takeover price for Recipe being artificial...well they have to talk to the PCAOB about that, because under IFRS fair value tests, the last market price or takeover price is what they have to use.
• They say that PWC restated goodwill and intangibles in 2021 compared to Recipe's previous auditor KPMG.  Although, they don't note that PWC also restated the 2020 goodwill and intangibles for Recipe.  So there was no real net tangible gain after acquiring Recipe if you simply look at Section 12 in the 2021 FFH AR showing total goodwill and intangibles for Recipe in 2020 and 2021 since the increase would have also been reflected in the restated 2020 financials for FFH in the 2021 report.

Quess

• They argue that Quess was deconsolidated to create an artificial accounting gain.  You can look at that whatever way you want.  It was treated fairly under IFRS.  Again, if there are issues, it's a PCAOB issue.
• Also, they don't account for the fact that Indian companies have not transitioned yet to IFRS and there might be adjustments in valuation between Indian Accounting Standards and IFRS.

EXCO

• They say it is overstated by $220M or so on the books.  I'll leave it to someone else with more understanding of the long history of EXCO to comment.

Grivalia/Eurobank

• Essentially saying that Eurobank overstated goodwill by $62M...you can quibble this whatever way you want, but $62M is barely material here relative to Eurobank's equity and assets.

Riverstone

• Suggested that the sale to OMERS and then subsequent sale from OMERS to CVC Capital was financial engineering to hide losses at Riverstone and show a profit at FFH.  Yes, OMERS took the risk of buying Riverstone simply to help out FFH.  Not that anything like that could risk OMERS entire being as a public pension plan, cause sanctions and fines against the investment team at OMERS, bar those managers from working in the industry, and possibly lose their CFA/Advisory designations.  Sure, let's help a friend out with some financial chicanery and risk everything, including our reputation.
• As an aside, they mention that CVC Capital acquired Riverstone from OMERS with asset note guarantees by Fairfax for 4 years...they also suggest that the associate shares Fairfax put up as collateral were simply stuffed into Riverstone to hide paper losses on those associate shares.  The funny thing is, most of those shares have recovered significantly since the pandemic and Fairfax would have been able to book tons of paper gains if they held those shares.  No comment on that of course!
• Also no breakdown by MW's if any losses have been paid on the 4 year guarantee!

Fairfax Africa/Helios

• They state that Helios was booked at $5.25 USD while the price on the date of deconsolidation (December 8, 2020) was $4.04 USD.  No mention that the stock traded up to $6 USD on the days after December 8, 2020.  Total gain...$43M...on $21B of shareholder equity.

APR Energy

• They say that Fairfax sold APR to Atlas (a friend) so they wouldn't have to show a loss.  Hmmm, funny how FFH hasn't bought it back, nor the fact that David Sokol and Bing Chen were willing to destroy their reputation solely to help Fairfax out.  

Bizarre Take on Prem's sale of Atlas shares - Prem sold shares of Atlas at the $15.50 tender offer and accepted the same number of shares from Poseidon...simply to align himself with the $1B investment by FFH into Poseidon.  MW's states without any real issue of criticism that they don't understand why Prem would sell ahead of the minority shareholders.  No idea what the argument is here.

 

Eurolife/OMERS transactions - again, I'll leave this one for Fairfax to comment on, because there are a number of transactions that make it more convoluted than I have time to examine it.  Essentially, MW's says that there was a $262M gain that should not be on the books.  Ok, again that is 1% of shareholder equity and one tenth of what they will earn in 2024.

 

Brit/Odyssey/OMERS transactions - MW's says it boosted book by $421M when portions of those were sold to OMERS because the remaining amounts were now carried at fair value.  They say they were essentially financial transactions to boost book with a call option to buy back.  Not sure how this is any different than any company under IFRS boosting liquidity by a partial sale of a fully consolidated entity.  Berkshire, Markel, etc would all book this the same way.

 

The most hilarious section of the analysis is Fairfax's accounting adjustments for Digit in 2021/2022 and the use of the FFH swaps.  They say Fairfax began booking the gains on valuation of Digit later than they should have by a quarter so that they could juice the results for those quarters.  Yet, the irony is if they had began when MW's suggests, then the gain in book value would have been inflated for 2021, a year which they say Fairfax was inflating gains widely through their transactions.  They also note that they haven't made any adjustments to book based on the value of the swaps!  In terms of a downward valuation of Digit that they suggest...I'm not sure I agree with the number, but Fairfax may have to adjust that based on prices for all fintech companies in India.  Depending on markets, it could just as easily be valued upwards again.  But I'll leave it to the auditors on this...I'm certain Muddy Waters has no clear idea either.  Even MW notes that Sequoia invested $3.5B into Digit and relegates it to Silicon Valley's lack of discipline.

 

Here's another big one that you can argue either way.  They say that under IFRS 17 Fairfax received too much in adjusted gains.  That their adoption gain divided by contract liabilities was about 6%...higher than the industry.  Yet, they don't note that Fairfax also generally books higher redundancies on statutory capital compared to the industry and it is around that 6% mark.  Could FFH book that more conservatively...sure.  Did FFH book that accurately...yes.

 

Farmer's Edge - another one that I'm not 100% up to speed on, but it's a $71M adjustment according to MW's.  That's in the negligible territory when you look at $26B in equity.

 

Lastly, they suggest that the 46% acquisition of Gulf Insurance is the latest piece of financial engineering by Fairfax and they purposely overpaid at 2.4 times book for the new stake.  Yet Gulf made $125M in 2022 and 26% would be about $58M.  The $860M cost amounts to about 15 times earnings.  Which isn't expensive when you are paying up for a leading, quality insurer.  One which also had a closing condition that the $2.00 per share price could not be lower than the 6-month moving average market share price leading up to the closing of the deal.  Thus why the premium offered was 100% to market price rather than 60-70%...to ensure the deal would close and KIPCO couldn't walk away.

 

Anyway, I'll leave it to brighter minds to approve or disapprove of the MW report.  But to lackadaisically say that an ex-partner of the audit firm sits on their BOD's is somehow irregular and that what happened in the past regarding the short seller attack and financial restatements without even glancing over the facts...well that's just bloody lazy analysis! 

 

Not too mention the liability that the auditors could be exposed to, Fairfax could be exposed to, employees jobs, shareholder's account values...does anyone really think that Fairfax and the auditors would risk all of that for plus/minus 2-5% of book value?!

 

Cheers!

 

[petec]

5 hours ago, SafetyinNumbers said:

I appreciate all of the good analysis on the board today. Thank you. 
 

I spent time with a few PMs today that were buying positions for the first time so they certainly saw it as an opportunity.

 

I tweeted about the MW IFRS 17 proposed haircut and the work is incredibly sloppy. If you disagree, please let me know.

 

 

 

This is an excellent catch which would have taken me some time to figure out - thanks.