Fairfax 2024

[anshulpuri54@gmail.com]

np

[MMM20]

I don't mean to single this guy out, but maybe this is indicative of the marginal shareholder's mindset and partially explains why the stock remains so cheap (in addition to all the typical old biases and misconceptions).

 

https://emergingvalue.substack.com/p/portfolio-updates-february-march

 

I sold my Fairfax financial with a comfortable profit since I bought in Sept 2022, when muddy waters released their short report. I had bought Fairfax sometime recently when rates were starting to rise. With such nice gains in a very short period, and no idea of the impact of the short report, I sold. That could be an error to react quickly, because it looks like it is a good quality company. Anyway, with the proceeds I added to existing ones.

 

I am not an expert on insurance, but it’s clear that the book value is aggressively noted, with some assets benefiting from an epic bubble in Indian equities and overvalued US real estate, as well as temporary high interest rates. It does seem that earnings are above the normal trend. The company keeps performing well and is cheap based on current high rates elevated earnings, so It was not the best sale. I think that is it still a good company for the long term.

 

Edited March 11 by MMM20

[MMM20]

Thought this quote from the WRB CEO was worth highlighting here...

 

"Social inflation is -- it's become a bit of a buzzword in the industry. And I think just to level set it, all it is, is a reflection of a shift in society and by extension, a shift in the legal system and what's coming out of the legal system. The awards today are a multiple of what they once were. Beyond that, are there other things that are driving it? Sure, you have things such as litigation funding, along with other bits and pieces. But the big driver is just the social environment and how once upon a time, when damage was done, the legal system was there and by extension in the insurance industry to help make people whole for those damages. Today, it's a different environment where it's not just about making people whole for damages, it's also about punishing when in the eyes of a jury or sometimes a judge that there was a wrong done. So that shift, I think, is having a great impact on loss cost in general. And there's nothing that I see as far as that really slowing in any way, shape or form...Ultimately, when the day is all done, I think there's a bit of a misperception in the eyes of much of society. And that is, who pays the bill in the end? When it's a defendant paying the bill, they really don't pay the bill. It's the insurance carrier. And actually, the insurance carrier in the short run will pay the bill but ultimately, it's society that pays the bill because everyone's insurance costs go up as we are seeing that today." - WRB CEO

 

[dartmonkey]

52 minutes ago, MMM20 said:

 

I sold my Fairfax financial with a comfortable profit since I bought in Sept 2022, when muddy waters released their short report. I had bought Fairfax sometime recently when rates were starting to rise. With such nice gains in a very short period, and no idea of the impact of the short report, I sold. That could be an error to react quickly, because it looks like it is a good quality company. Anyway, with the proceeds I added to existing ones.

 

I am not an expert on insurance,… I think that is it still a good company for the long term.

 

Sort of the archetype of weak hands. It looks like a good company, but who knows whether Muddy Waters is right or not? Might as well sell, even after the 10% drop, since I’m still above my September buy price. 

 

I doubt many of us felt very threatened by the MW allegations, but if you don’t know better, how can you be sure enough to hang on and recoup your 10%?

[Parsad]

9 hours ago, dartmonkey said:

Sort of the archetype of weak hands. It looks like a good company, but who knows whether Muddy Waters is right or not? Might as well sell, even after the 10% drop, since I’m still above my September buy price. 

 

I doubt many of us felt very threatened by the MW allegations, but if you don’t know better, how can you be sure enough to hang on and recoup your 10%?

 

+1!  If you don't trust your own analysis, buy ETFs not common stocks!

 

Maybe it was Brett Horn!    Cheers!

[jbwent63]

16 hours ago, Parsad said:

 

+1!  If you don't trust your own analysis, buy ETFs not common stocks!

 

Maybe it was Brett Horn!    Cheers!

+1

[SafetyinNumbers]

Does anyone have a list of the minority interests in the insurance companies (Brit, Allied World, Odyssey) that Fairfax is able to repurchase along with the relevant timelines?

[gfp]

CIBC raises FFH target to C$2000 from C$1700 fwiw (not much)

Edited March 13 by gfp

[MMM20]

13 hours ago, SafetyinNumbers said:

Does anyone have a list of the minority interests in the insurance companies (Brit, Allied World, Odyssey) that Fairfax is able to repurchase along with the relevant timelines?

 

For Allied World (from annual report) -

 

 

Edited March 13 by MMM20

[SafetyinNumbers]

5 hours ago, MMM20 said:

 

For Allied World (from annual report) -

 

 

thanks!

 

I caught this too 

 

[MMM20]

"The key in investing is finding growth in value. You want to find something that is undervalued that can get overvalued. I’ve found you make the most money by having a 1–3-year variant view on a business and buying the stock before the business turns up, inflects, or accelerates. You must be willing to buy and hold dead money and look wrong before you’re right." https://microcapclub.com/turnarounds/?ref=newsletter

 

Feels like FFH is at the "They had a decent quarter, but I don't trust it" phase:

 

 

 

 

Edited March 14 by MMM20

[gfp]

look at all those green candles - what a crap short sale

 

[dartmonkey]

1 hour ago, SafetyinNumbers said:

Can anyone explain this in plain English? It sounds like FFH has calls allowing them to buy out the minority interests in 2026, 2027 and 2029, but then the minority interests can dump their stakes back to FFH in a variety of was once those call options have expired. Is that right?

 

And I presume there is some formula that says what price FFH has to pay, do we know anything about that?

[petec]

1 hour ago, dartmonkey said:

Can anyone explain this in plain English? It sounds like FFH has calls allowing them to buy out the minority interests in 2026, 2027 and 2029, but then the minority interests can dump their stakes back to FFH in a variety of was once those call options have expired. Is that right?

 

And I presume there is some formula that says what price FFH has to pay, do we know anything about that?

 If Fairfax doesn't exercise the calls, the other owners can force an IPO or (in some cases) a sale.

 

Prior examples would suggest there is a formula; no, we don't know what it is.

[gfp]

8 minutes ago, petec said:

 If Fairfax doesn't exercise the calls, the other owners can force an IPO or (in some cases) a sale.

 

Prior examples would suggest there is a formula; no, we don't know what it is.

 

The idea is that the pension plan partners won't get stuck with illiquid and unsaleable stock of private businesses.  They aren't ever going to IPO or force a sale of a subsidiary but the language is there to protect them.  It really is just preferred equity pawn-shop behavior with a friendly partner.

[vakilkp]

1 hour ago, gfp said:

It really is just preferred equity pawn-shop behavior with a friendly partner

This is correct and funny.  Gfp thanks for the posts and not just this one. 

[dartmonkey]

1 hour ago, gfp said:

 

The idea is that the pension plan partners won't get stuck with illiquid and unsaleable stock of private businesses.  They aren't ever going to IPO or force a sale of a subsidiary but the language is there to protect them.  It really is just preferred equity pawn-shop behavior with a friendly partner.

A special kind of pawnshop, that gives you money for your mother's jewelry that you really don't want them to sell, because you want to come back and get it in a couple of years when your finances are better. So you pay them an annual 10% fee to keep the jewelry in a special safe. They can also sell to someone else it if you don't come back to repurchase it within a few years.

 

Muddy Waters would add that there is another side benefit of this deal: you can 'sell' this jewelry to the pawn shop for an inflated price, because it allows you to claim that the rest of the jewelry you own is worth the same amount, reassuring other creditors. So it is a disguised loan, with a 10% interest rate, which can double as a book value adjustment, if needed. Of course, I don't believe this...

[SafetyinNumbers]

6 hours ago, dartmonkey said:

Can anyone explain this in plain English? It sounds like FFH has calls allowing them to buy out the minority interests in 2026, 2027 and 2029, but then the minority interests can dump their stakes back to FFH in a variety of was once those call options have expired. Is that right?

 

And I presume there is some formula that says what price FFH has to pay, do we know anything about that?

From the recent Allied World repurchases, it seems like they can buy back the shares at the same P/B multiple they were sold. For Allied World that was 1.3x BV. For Brit, I think it’s 1.55x and for Odyssey I recall 1.9x. If anyone can confirm, please do.

[giulio]

@SafetyinNumbers this is what I understood from last year AR.

The amount is fixed, like debt. If you keep the P/B unchanged and the insurance subs increase BV then FFH would have to pay a higher price.

The call option allows FFH to repay the same amount they received instead. If BV increases they record a gain on the value of the option. 

This is what happened last year with Allied and Eurolife purchases. I am halfway through this year AR and I'll write an update when I am done.

Hope this helps.

G

[SharperDingaan]

On 3/11/2024 at 12:46 PM, dartmonkey said:

Sort of the archetype of weak hands. It looks like a good company, but who knows whether Muddy Waters is right or not? Might as well sell, even after the 10% drop, since I’m still above my September buy price. 

 

 

You might want to rethink this; as we recently exited our swing trade at > CAD 1500, and typically swing trade around the dividend record date. We trade FFH because it's well run; but our trades themselves are just about being opportunistic, and acting on value when we see it. We act like insurance; additional buy side demand when the sh1te hits the fan, that quietly exits later when everybody is positive.

 

SD

[petec]

23 hours ago, gfp said:

 

The idea is that the pension plan partners won't get stuck with illiquid and unsaleable stock of private businesses.  They aren't ever going to IPO or force a sale of a subsidiary but the language is there to protect them.  It really is just preferred equity pawn-shop behavior with a friendly partner.

 

Yes, exactly. 

[petec]

22 hours ago, dartmonkey said:

you can 'sell' this jewelry to the pawn shop for an inflated price

 

Only if they're prepared to pay an inflated price to make you look good (and risk looking bad themselves). I highly doubt that.

[dartmonkey]

2 hours ago, petec said:

 

Only if they're prepared to pay an inflated price to make you look good (and risk looking bad themselves). I highly doubt that.

 Yes, sorry for the sarcasm. I don't really believe that Fairfax is primarily motivated by the need to artificially boost its reported book value.

 

On the other hand, when you sell at a high price with a guarantee that you can buy it back at the same high price, with an annual fee, it's not really a sale, it's a loan. But since it is structured as a sale, you can (or perhaps, must) revalue the book value of the shares you still own, which does boost the book value and maybe has some advantages for Fairfax vis-à-vis regulators. Unfortunately, it also opens you up to criticism that you did the deal JUST to boost your book value.

 

 

 

[SafetyinNumbers]

22 minutes ago, dartmonkey said:

 Yes, sorry for the sarcasm. I don't really believe that Fairfax is primarily motivated by the need to artificially boost its reported book value.

 

On the other hand, when you sell at a high price with a guarantee that you can buy it back at the same high price, with an annual fee, it's not really a sale, it's a loan. But since it is structured as a sale, you can (or perhaps, must) revalue the book value of the shares you still own, which does boost the book value and maybe has some advantages for Fairfax vis-à-vis regulators. Unfortunately, it also opens you up to criticism that you did the deal JUST to boost your book value.

 

 

 

The boost in the book value is only for the portion that is sold. Valuations are also surely done by the counterparty to justify the multiple paid. If the prime motivation is to increase book value, it’s not a very effective technique.

[SafetyinNumbers]

3 hours ago, SharperDingaan said:

 

You might want to rethink this; as we recently exited our swing trade at > CAD 1500, and typically swing trade around the dividend record date. We trade FFH because it's well run; but our trades themselves are just about being opportunistic, and acting on value when we see it. We act like insurance; additional buy side demand when the sh1te hits the fan, that quietly exits later when everybody is positive.

 

SD

Can you let us know when you re-enter? I’m curious about timing.