Fairfax 2024

[Maverick47]

35 minutes ago, Munger_Disciple said:

This is a good point. The goal of a very successful investment should be to eventually have a huge amount of deferred taxes (which are technically due to govt but you decide if and when to incur it). Meanwhile we earn the return on the deferred taxes for ourselves. I call it our personal "float".

@Munger_Disciple

 

I like your idea of calling this our personal “float”!  It does make sense to take this into account in taxable accounts.

 

 Speaking of which, Fairfax and Berkshire both have this additional type of float on their own balance sheets as deferred income tax liabilities.  Since the cost of this float is always zero (an interest free loan from the government), it is basically just as valuable to shareholders as insurance float liabilities when combined ratios are at a 100 level.  When combined ratios are less than 100, then insurance float is essentially like a loan with a negative interest rate, and thus is more valuable than a deferred tax liability “loan” of the same amount, while combined ratios above 100 imply a positive interest rate on the insurance liabilities, and then they would be less valuable than the interest free loan from the government.

 

But as you note, we (and companies in similar deferred tax situations) can decide “if and when to incur it”).  This optionality has some indeterminable but non-zero value which makes it somewhat more valuable than insurance liability float which itself depends upon the vicissitudes of weather and claims behavior as far as identifying when the insurance float “loan” (or a portion thereof) has to be repaid.

Edited August 19 by Maverick47

[dartmonkey]

1 hour ago, Munger_Disciple said:

@Viking

 

I don't think anyone is assuming that Fairfax will deliver a long term ROE of 20%. 

 

Earlier in the thread, when people say Fairfax trades at a P/E of 5, that's exactly what they are implicitly assuming as opposed to current earnings at the peak of the cycle. One should have some idea of normalized earning power to evaluate the intrinsic value. 

 

Today, I think there is a pretty good chance that Fairfax can deliver a 15% ROE over the next 3 years.

 

Fair enough! However the terminal P/B of Fairfax at the end of the third year would largely depend on its normalized earning power going forward though the book should reflect the next three years worth of retained earnings. 

 

I am the one who said that the current P/E is 5 (well, 5.5) if the P/B is 1.1 and the E/B (i.e. ROE) is 20%, because P/E is mathematically the same as P/B/(E/B), so 1.1/.2=5.5. I think that for the next few years, those earnings are pretty much locked in, so it is reasonable to say that Fairfax is currently trading at about 5.5 the annual earnings we expect for the next few years. In other words, the company should earn more than half of its market cap in the next 3 years. If anything, I think this is an understatement - the company is quite likely to have even HIGHER earnings - those are just the operating earnings currently expected, before considering the fact that there will be some extra earnings from opportunistic sales like Gulf Re and PetCo and Stelco.

 

But it is true that we cannot count on earning 20% of equity forever - 18% is the history that includes when the company was very small, 15% is the goal that the company has often aimed for in the past, and after a few years of 20%, 12% is a realistic, conservative number that they should be able to hit fairly easily. So using just one number (20%, 18%, 15%, 12%, 10%) probably is too simplistic.

 

If the company can opportunistically repurchase a lot of shares with the cash pouring in the next few years, then that longer term return on equity, let's call it 12%, might be in comparison to a much smaller P (market cap), and we might get the same high low P/E anyways. But if you want to be super pessimistic, and use 12% return on current book even for the next few years, then you still get a pretty low number: P/E = 11./.12 = 9.2. That's not quite a worst case scenario, but it's a strikingly low ratio for a very pessimistic prediction of how the company will do, and they will only do that badly if there are some quite horrific things (like a really bad megacap) that hit them in the next few years. 

 

  

Edited August 19 by dartmonkey
I said high P/E when I mean low

[Munger_Disciple]

10 minutes ago, dartmonkey said:

 

I am the one who said that the current P/E is 5 (well, 5.5) if the P/B is 1.1 and the E/B (i.e. ROE) is 20%, because P/E is mathematically the same as P/B/(E/B), so 1.1/.2=5.5. I think that for the next few years, those earnings are pretty much locked in, so it is reasonable to say that Fairfax is currently trading at about 5.5 the annual earnings we expect for the next few years. In other words, the company should earn more than half of its market cap in the next 3 years. If anything, I think this is an understatement - the company is quite likely to have even HIGHER earnings - those are just the operating earnings currently expected, before considering the fact that there will be some extra earnings from opportunistic sales like Gulf Re and PetCo and Stelco.

 

But it is true that we cannot count on earning 20% of equity forever - 18% is the history that includes when the company was very small, 15% is the goal that the company has often aimed for in the past, and after a few years of 20%, 12% is a realistic, conservative number that they should be able to hit fairly easily. So using just one number (20%, 18%, 15%, 12%, 10%) probably is too simplistic.

 

If the company can opportunistically repurchase a lot of shares with the cash pouring in the next few years, then that longer term return on equity, let's call it 12%, might be in comparison to a much smaller P (market cap), and we might get the same high P/E anyways. But if you want to be super pessimistic, and use 12% return on current book even for the next few years, then you still get a pretty low number: P/E = 11./.12 = 9.2. That's not quite a worst case scenario, but it's a strikingly low ratio for a very pessimistic prediction of how the company will do, and they will only do that badly if there are some quite horrific things (like a really bad megacap) that hit them in the next few years. 

 

  

 

Thanks for the detailed response @dartmonkey.

 

I don't disagree with you that the earnings for the next 3 years will likely be very good and perhaps well above the long term "normalized" ROE. The main risk I see in the next 3 years is a potential mega catastrophic event.

 

Longer term, the size of Fairfax in addition to the normalization of underwriting cycle will also make it harder to earn a high ROE I think but if they can avoid major mistakes, it will be a highly satisfactory investment. As Charlie (Munger) wisely said, "Having low expectations is the secret to success and happiness in life."

[dartmonkey]

Longer term, the size of Fairfax in addition to the normalization of underwriting cycle will also make it harder to earn a high ROE I think but if they can avoid major mistakes, it will be a highly satisfactory investment. As Charlie (Munger) wisely said, "Having low expectations is the secret to success and happiness in life."

 

 

Maybe that's why I'm unhappy.

 

No, seriously, you are right, but when comparing with alternative investments, I think one can also err on the side of being too pessimistic, and miss out. So I think the right approach is to be optimistic first, buy FFH shares, then decide you might have been wrong, become pessimistic (while keeping those shares), and hopefully be pleasantly surprised when your new pessimism turns out to be unwarranted.

 

Edited August 19 by dartmonkey
added italics to quoted text, to make it clearer that this was a response to a previous text

[Munger_Disciple]

1 hour ago, dartmonkey said:

So I think the right approach is to be optimistic first, buy FFH shares, then decide you might have been wrong, become pessimistic (while keeping those shares), and hopefully be pleasantly surprised when your new pessimism turns out to be unwarranted.

 

 

 

I would put it slightly differently: If the investment makes sense even under conservative (or pessimistic if you prefer) assumptions, it gives the owner all important "margin of safety". 

 

It's always the negative surprises that we need to worry about, the positive surprises take care of themselves. 

 

When comparing investment options, it is better to compare them under different scenarios (conservative, baseline, somewhat optimistic). 

 

 

Edited August 19 by Munger_Disciple

[Munger_Disciple]

2 hours ago, Maverick47 said:

@Munger_Disciple

 

I like your idea of calling this our personal “float”!  It does make sense to take this into account in taxable accounts.

 

 Speaking of which, Fairfax and Berkshire both have this additional type of float on their own balance sheets as deferred income tax liabilities.  Since the cost of this float is always zero (an interest free loan from the government), it is basically just as valuable to shareholders as insurance float liabilities when combined ratios are at a 100 level.  When combined ratios are less than 100, then insurance float is essentially like a loan with a negative interest rate, and thus is more valuable than a deferred tax liability “loan” of the same amount, while combined ratios above 100 imply a positive interest rate on the insurance liabilities, and then they would be less valuable than the interest free loan from the government.

 

But as you note, we (and companies in similar deferred tax situations) can decide “if and when to incur it”).  This optionality has some indeterminable but non-zero value which makes it somewhat more valuable than insurance liability float which itself depends upon the vicissitudes of weather and claims behavior as far as identifying when the insurance float “loan” (or a portion thereof) has to be repaid.

 

In case of Berkshire, deferred taxes also arise from accelerated depreciation (for tax purposes) of capital intensive investments in BHE & BNSF. 

Edited August 19 by Munger_Disciple

[nwoodman]

I am in the combined ratios revert to 100 camp. However i wouldn’t be surprised if the mix of insurance Fairfax is writing today may favour better CRs than 10 years ago.  @glider3834 posted a league table a while back of Specialty underwriters that showed Fairfax had made considerable inroads primarily at the expense of Markel.  Then there was that insight that Markel baulked on Allied World.  Not saying it will be different this time but I do feel there is perhaps more flexibility across lines and geography than there used to be.  This may allow a bit more of a National Indemnity philosophy in terms of underwriting discipline.  Thank you again Andy Barnard. 

Buffett on NICO

“Some companies would feel that having [a significantly higher expense ratio] would be intolerable - but what we feel is intolerable is writing bad business… If you get a culture of writing bad business, it’s almost impossible to get rid of. We would rather suffer too much overhead than to teach our employees that, in order to retain their jobs, they needed to write any damn thing that came along, because that’s a very hard habit to get rid of once you’re hooked on it… I think we’re almost the only insurance company in the world - certainly public - that sends the absolutely unequivocal message to the people associated with us that they will never be laid off because of a lack of volume.”

[SafetyinNumbers]

20 minutes ago, nwoodman said:

I am in the combined ratios revert to 100 camp. However i wouldn’t be surprised if the mix of insurance Fairfax is writing today may favour better CRs than 10 years ago.  @glider3834 posted a league table a while back of Specialty underwriters that showed Fairfax had made considerable inroads primarily at the expense of Markel.  Then there was that insight that Markel baulked on Allied World.  Not saying it will be different this time but I do feel there is perhaps more flexibility across lines and geography than there used to be.  This may allow a bit more of a National Indemnity philosophy in terms of underwriting discipline.  Thank you again Andy Barnard. 

Buffett on NICO

“Some companies would feel that having [a significantly higher expense ratio] would be intolerable - but what we feel is intolerable is writing bad business… If you get a culture of writing bad business, it’s almost impossible to get rid of. We would rather suffer too much overhead than to teach our employees that, in order to retain their jobs, they needed to write any damn thing that came along, because that’s a very hard habit to get rid of once you’re hooked on it… I think we’re almost the only insurance company in the world - certainly public - that sends the absolutely unequivocal message to the people associated with us that they will never be laid off because of a lack of volume.”

What’s the over/under on when FFH has a combined ratio of 100 or above for a full year?

 

[SafetyinNumbers]

51 minutes ago, Munger_Disciple said:

 

 

I would put it slightly differently: If the investment makes sense even under conservative (or pessimistic if you prefer) assumptions, it gives the owner all important "margin of safety". 

 

It's always the negative surprises that we need to worry about, the positive surprises take care of themselves. 

 

When comparing investment options, it is better to compare them under different scenarios (conservative, baseline, somewhat optimistic). 

 

 

The reason I’m so bullish is because the margin of safety is so high. Unfortunately, for my own net worth, I have historically sold as soon as a stock gets to a price where I wouldn’t buy it anymore. I’m trying to avoid that this time with Fairfax because I can see all of the ways the right tail can surprise to the upside. 
 

The focus of this discussion and the most of the analysts that cover the stock is the downside. There is almost no analysis of the returns of the non-fixed income portfolio. The two biggest pieces generate mid-high teens returns on their carrying value. That means the TRS and the rest of the non-fixed income portfolio don’t have to do much to boost returns. 
 

It’s possible FFH will get added to the S&P/TSX 60 next month as AQN continues to sit below 20bps in the benchmark (the committee might also defer to December or put TFII in instead). I assume a lot of our fellow shareholders will sell stock into price insensitive buying whenever it happens because they think the shares are fully valued at 1.2x book or wherever it ends up. Perhaps, that will end up being the right decision in the short term but it just seems so unlikely in the long term.

[Junior R]

10 hours ago, SafetyinNumbers said:

The reason I’m so bullish is because the margin of safety is so high. Unfortunately, for my own net worth, I have historically sold as soon as a stock gets to a price where I wouldn’t buy it anymore. I’m trying to avoid that this time with Fairfax because I can see all of the ways the right tail can surprise to the upside. 
 

The focus of this discussion and the most of the analysts that cover the stock is the downside. There is almost no analysis of the returns of the non-fixed income portfolio. The two biggest pieces generate mid-high teens returns on their carrying value. That means the TRS and the rest of the non-fixed income portfolio don’t have to do much to boost returns. 
 

It’s possible FFH will get added to the S&P/TSX 60 next month as AQN continues to sit below 20bps in the benchmark (the committee might also defer to December or put TFII in instead). I assume a lot of our fellow shareholders will sell stock into price insensitive buying whenever it happens because they think the shares are fully valued at 1.2x book or wherever it ends up. Perhaps, that will end up being the right decision in the short term but it just seems so unlikely in the long term.

 

 

Its not really bad if you sell a stock at a price you no longer will buy it for (given you did some calculation to say its overvalued at that price)...Only bad thing would be if you calculated the intrinsic value incorrectly and the stock shots up

 

For me I will revisit my thesis when FFH gets to 1.2x book value..If  things work the way we expect it to work..This might take awhile as the book value will keep out pacing the stock price unless the crowd jumps in lol  

 

Someone correct me if the historical price is wrong or any splits

 

BKB.B CAGR  over 20 years 11.36%

• Price in August 2004: $57.62
• Price in August 2024: $448.77

FFH.TO 11.81% (not accounting for dividends)

• Price in August 2004: $183.00
• Price in August 2024: $1,540.93

QQQ 16.38% (not accounting for Dividends)

• Price in August 2004: $33.06
• Price in August 2024: $481.27

SPY 8.55% (not accounting for Dividends)

• Price in August 2004: $108.52
• Price in August 2024: $559.61

Over the last 20 years FFH has slightly out performed BKB.B excluding dividends 

 

I think for the next 1 to 5 years FFH will out preform 

Edited August 20 by Junior R

[Maverick47]

3 hours ago, Munger_Disciple said:

In case of Berkshire, deferred taxes also arise from accelerated depreciation (for tax purposes) of capital intensive investments in BHE & BNSF. 

Thank you for clearly adding this observation!  I know little about corporate taxation.  I had noticed the significant impact on Berkshire’s deferred tax liability driven by BHE and BNSF, but did not realize what exactly was driving this…..

 

I don’t think that Fairfax’s  own non insurance operating subsidiaries yet have the same sort of requirements or opportunities for capital investment and accelerated depreciation as Berkshire, but it might be worth looking out for this in the future.

 

 Right now though, Fairfax has plenty of opportunities to direct any operating earnings towards stock buybacks, purchasing minority interests, etc, so really have no need to invest in subsidiaries that would also require substantial capital investments.
 

[Dinar]

5 hours ago, Munger_Disciple said:

 

In case of Berkshire, deferred taxes also arise from accelerated depreciation (for tax purposes) of capital intensive investments in BHE & BNSF. 

True, but given that maintenance cap ex is vastly in excess of depreciation for both businesses, earnings are overstated, and free cash flow even with faster depreciation for tax purposes is below reported net income.

[Munger_Disciple]

6 minutes ago, Dinar said:

True, but given that maintenance cap ex is vastly in excess of depreciation for both businesses, earnings are overstated, and free cash flow even with faster depreciation for tax purposes is below reported net income.

 

BHE investments get regulated or guaranteed rate of return on capital employed, whether it is maintenance or growth capex. What you say is true for BNSF as it is the case with all railroads. 

Edited August 20 by Munger_Disciple

[Dinar]

38 minutes ago, Munger_Disciple said:

 

BHE investments get regulated or guaranteed rate of return on capital employed, whether it is maintenance or growth capex. What you say is true for BNSF as it is the case with all railroads. 

I am aware of utility regulations.  My point is that utility's earnings are overstated, and free cash flow is below net income since maintenance cap ex exceeds depreciation.  Sure, you usually (not always) get rate increases to pay for increased cap ex, but again, your earnings are overstated.  

[Junior R]

Quote

Canada NewsWire

TORONTO, Aug. 19, 2024

Board of Directors Recommends that Shareholders vote FOR the Arrangement

/NOT FOR DISTRIBUTION TO U.S. NEWSWIRE SERVICES OR FOR DISSEMINATION IN THE UNITED STATES/

TORONTO, Aug. 19, 2024 /CNW/ - Sleep Country Canada Holdings Inc. ("Sleep Country" or the "Company") (TSX: ZZZ), is pleased to announce that it has filed and is in the process of mailing the management proxy circular (the "Circular") and related materials for the special meeting (the "Meeting") of the Company's shareholders (the "Shareholders") to be held on September 18, 2024, to approve the previously announced plan of arrangement under the Canada Business Corporations Act (the "Arrangement"), pursuant to which 16133258 Canada Inc. (the "Purchaser"), a newly-formed and wholly-owned subsidiary of Fairfax Financial Holdings Limited ("Fairfax") (TSX: FFH) (TSX: FFH.U) will acquire all of the issued and outstanding common shares of Sleep Country for C$35.00 in cash per common share (the "Consideration"), all as more particularly described in the Circular.

Unanimous Recommendation of the Board of Directors and Benefits of the Arrangement to Shareholders

The Arrangement was reviewed and overseen by a Special Committee of the Board of Directors (the "Special Committee"). The Board of Directors, on the unanimous recommendation of the Special Committee, in consultation with its financial and legal advisors, and following consideration of a number of factors, unanimously determined that the Arrangement is fair to Shareholders and is in the best interests of Sleep Country, and recommended that Shareholders vote in favour of the Arrangement at the Meeting. The factors considered by the Board of Directors and the Special Committee are detailed in the Circular and include:

• Significant Premium. The Consideration offered to Shareholders under the Arrangement represents a 34% premium to the 20-day volume-weighted average price of the common shares on the Toronto Stock Exchange for the period ending on July 19, 2024, and a 28% premium to the closing price on July 19, 2024, the last trading day prior to the announcement of the Arrangement.
   
• Certainty of Value and Liquidity. The Consideration offered to Shareholders under the Arrangement is all cash, which allows Shareholders to immediately realize value for all of their investment. It also provides certainty of value and immediate liquidity in comparison to the risks and uncertainties to achieving equivalent value for the common shares by remaining a public company.
   
• Compelling Value Relative to Strategic Alternatives. The Special Committee and the Board of Directors concluded, after consultation with the Company's management and financial advisors, that the value offered to Shareholders under the Arrangement is more favourable to Shareholders than the value that could potentially result from other alternatives reasonably available to the Company, including a continuation of the status quo as a standalone entity, within a reasonably foreseeable timeframe.

Additional information related to the benefits and related risks of the Arrangement are contained in the Circular.

Interim Order

The Company is pleased to also announce that the Company has been granted an interim order (the "Interim Order") from the Ontario Superior Court of Justice (Commercial List) (the "Court") authorizing various matters, including the holding of the Meeting and the mailing of the Circular. The Meeting is to be held in accordance with the terms of the Interim Order.

Competition Act Approval

The Company is also pleased to announce that on August 5, 2024, the Commissioner of Competition under the Competition Act (Canada) issued an advance ruling certificate under Section 102 of the Competition Act (Canada), which allows the parties to complete the Arrangement as of the date of the advance ruling certificate and constitutes the Competition Act Approval for the purposes of the arrangement agreement dated July 21, 2024 among the Company, the Purchaser and Fairfax (the "Arrangement Agreement").

Meeting and Circular

The Meeting will be held as a virtual-only meeting conducted by live webcast at https://web.lumiagm.com/218125307 (password: sleep2024) on September 18, 2024 at 10:00 a.m. (Toronto time). Proxies must be received by the Company's transfer agent, Odyssey Trust Company, either online at https://login.odysseytrust.com/pxlogin, or in person, or by mail or courier, at Trader's Bank Building, 702 – 67 Yonge Street, Toronto, ON, M5E 1J8, not later than 10:00 a.m. (Toronto time) on September 16, 2024 (or no later than 48 hours, excluding Saturdays, Sundays and statutory holidays in the city of Toronto, before any reconvened meeting if the Meeting is adjourned or postponed). If a Shareholder holds its common shares through an investment advisor, broker, bank, trust company, custodian, nominee, clearing agency or other intermediary, a completed voting instruction form should be deposited in accordance with the instructions printed on the form.

At the Meeting, Shareholders will be asked to consider and, if deemed advisable, pass a special resolution approving the Arrangement. In order to be effective, the Arrangement will be subject to the approval of (i) at least 66 2/3% of the votes cast by Shareholders present in person virtually or represented by proxy at the Meeting; and (ii) a simple majority of the votes cast by Shareholders present in person virtually or represented by proxy at the Meeting, excluding votes from certain Shareholders, as required under Multilateral Instrument 61-101 – Protection of Minority Security Holders in Special Transactions. In addition to Shareholder approval, the Arrangement is subject to approval by the Court as well as the satisfaction of certain other customary closing conditions.

The Circular provides important information regarding the Arrangement and related matters, including the background to the Arrangement, the reasons for recommendation of the Special Committee and the Board of Directors, voting procedures and how to virtually attend the Meeting. Shareholders are urged to read the Circular and its appendices carefully and in their entirety. The Circular is being mailed to Shareholders in compliance with applicable laws and the Interim Order. The Circular is available under the Company's issuer profile on SEDAR+ at www.sedarplus.ca as well as on the Company's website at https://www.sleepcountrypoa.com/.

Shareholder Questions and Assistance

If you have any questions or need assistance in your consideration of the Arrangement or with the completion and delivery of your proxy, please contact the Company's strategic advisor, Kingsdale Advisors, at 1-888-518-1565 (toll-free in North America) or 1-416-623-2513 (text and call enabled outside of North America) or by email to contactus@kingsdaleadvisors.com. 

Advisors and Counsel

CIBC Capital Markets is acting as financial advisor and Davies Ward Phillips & Vineberg LLP is acting as legal advisor to the Special Committee and the Company. Blair Franklin Capital Partners is acting as financial advisor to the Special Committee, including providing a fixed-fee fairness opinion regarding the Arrangement. Torys LLP is acting as legal advisor to Fairfax.

Forward-Looking Information

Certain information in this news release contains forward-looking information and forward-looking statements, which reflect our current view with respect to anticipated events as well as the Company's objectives, plans, goals, strategies, outlook, results of operations, financial and operating performance, prospects and opportunities. Wherever used, the words "may", "will", "anticipate", "expect", and similar expressions, identify forward-looking information and forward-looking statements. Forward-looking information herein includes statements regarding: the reasons for, and the anticipated benefits of, the Arrangement; the timing for mailing of the Circular; the timing of various steps to be completed in connection with the Arrangement, including the anticipated dates for the holding of the Meeting; the timing and effects of the Arrangement; the solicitation of proxies by the Company and Kingsdale Advisors, the Company's strategic advisor; the ability of the parties to satisfy the other conditions to the closing of the Arrangement; and other statements that are not historical facts. Forward-looking information and forward-looking statements should not be read as guarantees of future events, performance or results, and will not necessarily be accurate indications of whether, or the times at which, such events, performance or results will be achieved. All the information in this news release containing forward-looking information or forward-looking statements is qualified by these cautionary statements.

Forward-looking information and forward-looking statements are based on information available to Sleep Country at the time they are made, underlying estimates, opinions and assumptions made by Sleep Country and management's current good faith belief with respect to future strategies, prospects, events, performance and results, and are subject to inherent risks and uncertainties surrounding future expectations generally. Such risks and uncertainties include, but are not limited to, those described in the Circular as well as the Company's management's discussion and analysis ("MD&A") for Q2 2024 under the sections "Risk Factors" and those described in the Company's 2023 annual information form (the "AIF") filed on March 6, 2024, both of which can be accessed under the Company's issuer profile on SEDAR+ at sedarplus.ca. In addition, forward-looking information in this news release is subject to a number of additional risks and uncertainties, including: the possibility that the Arrangement will not be completed on the terms and conditions, or on the timing, currently contemplated, and that it may not be completed at all, due to a failure to obtain or satisfy, in a timely manner or otherwise, required Shareholder, regulatory and Court approvals and other conditions of closing necessary to complete the Arrangement or for other reasons; failure to complete the Arrangement could negatively impact the price of the common shares or otherwise affect the business, financial condition or results of the Company; the Arrangement Agreement may be terminated by the parties in certain circumstances; the termination fee under the Arrangement Agreement may discourage other parties from attempting to acquire the Company or may have an adverse effect on the Company; the ability of the Board of Directors to consider and approve, subject to compliance with the terms and conditions of the Arrangement Agreement, a superior proposal for the Company; significant transaction costs or unknown liabilities; while the Arrangement is pending, the Company is restricted from taking certain actions; the possibility of adverse reactions or changes in business relationships resulting from the announcement or completion of the Arrangement; certain of the Company's directors and officers may have interests in the Arrangement that are different from those of Shareholders; the exercise of dissent rights by Shareholders may result in the Arrangement not being completed; risks related to tax matters; the failure to realize the expected benefits of the Arrangement; risks relating to the Company's ability to retain and attract key personnel during the interim period; credit, market, currency, operational, liquidity and funding risks generally and relating specifically to the Arrangement, including changes in economic conditions, interest rates or tax rates; the Company and the Purchaser may be subject to legal claims, securities class actions, derivative lawsuits and other claims; and other risks inherent to the business carried out by the Company and/or factors beyond its control which could have a material adverse effect on the Company or its ability to complete the Arrangement. Additional risks and uncertainties not presently known to the Company or that the Company currently believes to be less significant may also adversely affect the Company.

The Company cautions that the list of risk factors and uncertainties described above and in the Circular, the MD&A for Q2 2024 and the AIF are not exhaustive and that should certain risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual strategies, prospects, events, performance and results may vary significantly from those expected. There can be no assurance that the actual strategies, prospects, results, performance, events or activities anticipated by the Company will be realized or even if substantially realized, that they will have the expected consequences to, or effects on, the Company. Readers are urged to consider the risks, uncertainties, and assumptions carefully in evaluating the forward-looking information and forward-looking statements and are cautioned not to place undue reliance on such information and statements. The Company does not undertake to update any such forward-looking information or forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable laws.

About Sleep Country

Sleep Country is Canada's leading specialty sleep retailer with a purpose to transform lives by awakening Canadians to the power of sleep. Sleep Country operates under the retailer banners; Sleep Country Canada, Dormez-vous, the rest, Endy, Silk & Snow, Hush and Casper Canada. The Company has omnichannel and eCommerce operations, including 307 corporate-owned stores and 18 warehouses across Canada. Recognized as one of Canada's Most Admired Corporate Cultures in 2022 by Waterstone Human Capital, Sleep Country is committed to building a company culture of inclusion and diversity where differences are embraced and valued. The Company actively invests in its sleep ecosystem, innovative products, world-class customer experience, communities and its people. For more information about Sleep Country, please visit https://ir.sleepcountry.ca.

About Fairfax

Fairfax is a holding company which, through its subsidiaries, is primarily engaged in property and casualty insurance and reinsurance and the associated investment management.

SOURCE Sleep Country Canada Holdings Inc. Investor Relations

 

 View original content: http://www.newswire.ca/en/releases/archive/August2024/19/c7841.html

Copyright CNW Group 2024

 

[Munger_Disciple]

11 hours ago, Dinar said:

I am aware of utility regulations.  My point is that utility's earnings are overstated, and free cash flow is below net income since maintenance cap ex exceeds depreciation.  Sure, you usually (not always) get rate increases to pay for increased cap ex, but again, your earnings are overstated.  

 

I am no expert on energy business but return on capital (all things accounted for) seems to be a much better metric than GAAP earnings to evaluate the business. 

Edited August 20 by Munger_Disciple

[Viking]

I did a small edit to my long post from Sunday. I thought it would be useful to include more details for the Fairfax portion of the post. The edited portion is below. 

 

It is timely because I am updating my earnings forecast for Fairfax for 2024 and 2025 (small changes).

 

As I work though my earnings update, one item keeps jumping out to me - and that is the excess of fair value over carrying value for Fairfax's non-insurance associate and consolidated holdings. Something that is not even included in my earnings update. 

 

What is the problem?

 

Over the first 6 months the excess of FV over CV had increased by more than $500 million = +$20/share pre-tax. The total is $1.5 billion = $68/share (pre-tax).

 

When I think about 'normalized' earnings for Fairfax I include the excess of FV over CV - it is value that is being built by Fairfax over time. And as we have learned with Fairfax over the years, they will find a way to monetize this value (so that it is reflected in EPS and BVPS).   

 

When we look at published earnings forecasts for Fairfax (2024, 2025, 2026, 2027 etc) we need to remember that an important component is NOT BEING INCLUDED. As a result, EPS understates the economic value that is being created each year. Probably by about $10/share. And this gap will likely widen in future years.

 

Why will it widen?

 

1.) Fairfax has a large and growing amount allocated to equity investments.

2.) The share count is materially shrinking each year.

3.) The quality (in terms of earnings power) of this collection of holdings has never been better in Fairfax's history - significant value is now being created/compounded each year by this collection of holdings and a large piece of this value creation is not being captured in EPS or BVPS. 

 

Large investment gains are coming in the future

 

In the coming years, Fairfax will be monetizing the excess of FV to CV. And the investment gains will likely be higher when they do - because the intrinsic value of many of these holdings is higher than the FV. This is really hard for most investors to understand - it's like the 'spoon bending mind scene' in the Matrix movie.

 

When they happen, these large investment gains will be incremental to current EPS estimates. They will catch analysts and investors by surprise. EVEN THOUGH WE KNOW THEY ARE COMING.

 

This is one good example of how investors are underestimating future earnings for Fairfax. And estimates of future earnings determines the value of a stock. So investors continue to undervalue Fairfax's stock today - probably significantly. 

 

Of course Fairfax 'gets it.' and that is why they are being so aggressive with stock buybacks - even at a small premium to book value.  

 

Stelco is a good current example. 

• At June 30, 2024, Stelco had a FV = $351.8 million and a CV = $277.9 million; excess of FV over CV  = $73.9 million. 
• On July 15, Stelco was sold to Cleveland Cliffs for about $668 million. Fairfax will book an investment gain of about $390 million.
• The actual investment gain ($390m) is significantly more than the excess of FV over CV at June 30, 2024 ($73.9m).

With a CV = $277.9, Stelco was being significantly undervalued on Fairfax's balance sheet at June 30, 2024. Now that the sale has been announced, the $390 million gain will now get included in EPS and BVPS. And everyone is shocked and/or surprised... who could have know that something like this was going to happen? 

 

The 'investment gains' spring at Fairfax is getting coiled ever tighter. Lots more of these 'suprises' are coming in the future... We just don't know the timing or the details. Most investors though will continue to pretend they don't exist. This approach will simply give some investors a big advantage when it comes to understanding Fairfax (future earnings) and assessing its current valuation.

 

Sale of Stelco Holdings Inc. (From Fairfax's Q2-2024 earning report)

On July 15, 2024 Cleveland-Cliffs Inc. ("Cliffs") entered into a definitive agreement with Stelco to acquire all outstanding common shares of Stelco for consideration of Cdn$70.00 per share (consisting of Cdn$60.00 cash and Cdn$10.00 in Cliffs common stock). Closing of the transaction is subject to shareholder and regulatory approvals, and satisfaction of other customary closing conditions, and is expected to be in the fourth quarter of 2024. The company's current estimated pre-tax gain on sale of its holdings of approximately 13 million common shares of Stelco is approximately Cdn$531 ($390), calculated as the excess of consideration of approximately Cdn$910 ($668 or $51 per common share) over the carrying value of the investment in associate at June 30, 2024 of approximately Cdn$379 ($277.9).

 

============

Below is the edited piece from my post on Sunday.

 

Here is the link to the complete post: 

• https://thecobf.com/forum/topic/20517-fairfax-2024/page/75/#comment-575416

 

What does all of this have to do with Fairfax?

 

Fairfax has a significant portion of its equity portfolio in equities (about 30%). Over the past 5 years, Fairfax has been shifting from mark to market type holdings to associate/consolidated holdings. The proposed Sleep Country acquisition is the latest example of this trend. A gap between the fair value and the carrying value of these holdings has been growing in recent years. It is sizeable today – at June 30, 2024, the excess of FV over CV was $1.5 billion, or $68/effective share (pre-tax). Importantly, the excess of FV over CV has increased by $508 million over the first 6 months of 2024. This value creation is not captured in EPS or BVPS.

 

And there is likely a sizeable gap between intrinsic value and fair value, as we recently learned with the sale of Stelco (it was sold for much more than ‘fair value.’

 

What did Fairfax have to say on the matter in their Q2, 2024 earnings report?

 

Excess (deficiency) of fair value over adjusted carrying value 

 

"The table below presents the pre-tax excess (deficiency) of fair value over adjusted carrying value of investments in non-insurance associates and market traded consolidated non-insurance subsidiaries the company considers to be portfolio investments. Those amounts, while not included in the calculation of book value per basic share, are regularly reviewed by management as an indicator of investment performance. The aggregate pre-tax excess of fair value over adjusted carrying value of these investments at June 30, 2024 was $1,514.5 (December 31, 2023 - $1,006.0)."

 

 

Stock buybacks

 

Fairfax has also been very aggressive with stock buybacks in recent years. And they have picked up the pace so far in 2024. 

 

"During the first six months of 2024 the company purchased for cancellation 854,031 subordinate voting shares (2023 – 179,744) principally under its normal course issuer bids at a cost of $938.1 (2023 - $114.9), of which $726.5 (2023 - $70.4) was charged to retained earnings." Fairfax Q2-2024 Report

 

This year Fairfax has been buying back stock at an average price of $1,098/share. At Q2-2024, book value was $979.63. Fairfax is buying back a meaningful amount of stock at a price that is higher than book value. This will likely continue moving forward.

 

Why are they doing this? Fairfax understands its book value is understated. 

 

Edited August 20 by Viking

[StubbleJumper]

41 minutes ago, Viking said:

When I think about 'normalized' earnings for Fairfax I include the excess of FV over CV - it is value that is being built by Fairfax over time. And as we have learned with Fairfax over the years, they will find a way to monetize this value (so that it is reflected in EPS and BVPS).   

 

This is effectively just one element

of the broader Capital Gains item.  We know that capital gains will be a large element of our long-term return from FFH, but the magnitude and timing are devilishly difficult to forecast.  Whether that's the capital gain from something like Stelco or from the Pet Insurance division doesn't really matter, but it's definitely important that the fully owned or partially owned businesses become more valuable over time

 

44 minutes ago, Viking said:

Why are they doing this? Fairfax understands its book value is understated. 

 

 

The book value is what it is.  Jen Allen seems solid, so I would say that book value is neither overstated nor understated.  A more precise way to state it would be that FFH understands that, in reality, the shares are worth more than book value.  The question for an investor is how much more than BV are FFH shares worth?  A repurchase at 1.1x adjusted BV is probably beneficial to continuing shareholders because the intrinsic value of the shares is probably considerably higher than 1.1x.  The real trick for FFH is to ensure that it doesn't continue repurchases if its shares end up rising above intrinsic value.  Maybe that will be a problem for 2025 or 2026?  We can always dream!

 

 

SJ

[Viking]

2 hours ago, StubbleJumper said:

 

This is effectively just one element of the broader Capital Gains item.  We know that capital gains will be a large element of our long-term return from FFH, but the magnitude and timing are devilishly difficult to forecast.  Whether that's the capital gain from something like Stelco or from the Pet Insurance division doesn't really matter, but it's definitely important that the fully owned or partially owned businesses become more valuable over time

 

 

The book value is what it is.  Jen Allen seems solid, so I would say that book value is neither overstated nor understated.  A more precise way to state it would be that FFH understands that, in reality, the shares are worth more than book value.  The question for an investor is how much more than BV are FFH shares worth?  A repurchase at 1.1x adjusted BV is probably beneficial to continuing shareholders because the intrinsic value of the shares is probably considerably higher than 1.1x.  The real trick for FFH is to ensure that it doesn't continue repurchases if its shares end up rising above intrinsic value.  Maybe that will be a problem for 2025 or 2026?  We can always dream!

 

SJ

 

I think investment gains are 'devilishly' difficult to forecast over any one or two year span. However, I think it gets easier as you build an estimate over a longer time frame (like 3 or 4 years).  

 

If you go back 10 years, it is pretty easy to calculate an average for 'investment gains.' It could be separated into large 'one-time' gains and more 'normal' mark to market changes.

 

But Fairfax's investment portfolio is much, much larger today than 10 years ago. The size of the equity portfolio is also much larger. And the quality of the equity portfolio (in term of earnings power) is also much better. So my guess is the size of 'investment gains' coming from the equity portfolio in the coming years will be much larger than what it has been in the past.

 

In the past, it was crazy the significant value that Fairfax was able to surface with very timely asset sales from the insurance bucket of holdings: First Capital, ICICI Lombard, Riverstone Europe, pet insurance and Ambridge. None of the significant gains from each of those sales were built into earnings models before they happened. This does not include significant asset sales that have happened in the investment portfolio. I think this is instructive.

Asset sales are a great example of just how different Fairfax and Berkshire Hathaway execute their business models. Fairfax has realized significant value over the years from asset sales (and it has also been a significant source of cash for the company).

 

The beauty of Fairfax's active management/value investing model is they simply take what Mr. Market is giving them at the time. Insurance one day. Equities another day. Fixed income another day. Sometimes the value creation is rapidly growing the P/C insurance business in a hard market. Other times it is buying an asset at a low valuation (insurance or investments). Other times it is selling an asset at a premium valuation (insurance or investments). it is a little bizarre how some investors think Fairfax’s opportunity set is going to suddenly disappear in the coming years (or that they are suddenly going to get incredibly stupid).

Edited August 20 by Viking

[73 Reds]

28 minutes ago, Viking said:

 

I think investment gains are 'devilishly' difficult to forecast over any one or two year span. However, I think it gets easier as you build an estimate over a longer time frame (like 3 or 4 years).  

 

If you go back 10 years, it is pretty easy to calculate an average for 'investment gains.' It could be separated into large 'one-time' gains and more 'normal' mark to market changes.

 

But Fairfax's investment portfolio is much, much larger today than 10 years ago. The size of the equity portfolio is also much larger. And the quality of the equity portfolio (in term of earnings power) is also much better. So my guess is the size of 'investment gains' coming from the equity portfolio in the coming years will be much larger than what it has been in the past.

 

In the past, it was crazy the significant value that Fairfax was able to surface with very timely asset sales from the insurance bucket of holdings: First Capital, ICICI Lombard, Riverstone Europe, pet insurance and Ambridge. 

 

The beauty of Fairfax's active management/value investing model is they simply take what Mr. Market is giving them at the time. Asset sales are a great example of how Fairfax and Berkshire Hathaway are very different animals. Fairfax has realized significant value over the years from asset sales (and it has also been a significant source of cash for the company).

Viking, do you or anyone here know what the most significant catastrophic insurance event was that affected Fairfax and what it cost & when it occurred?  Also, do we know the maximum dollar liability the company may be on the hook for now for any single event? 

[Viking]

1 hour ago, 73 Reds said:

Viking, do you or anyone here know what the most significant catastrophic insurance event was that affected Fairfax and what it cost & when it occurred?  Also, do we know the maximum dollar liability the company may be on the hook for now for any single event? 

@73 Reds sorry, i have not spent any time on what you ask. What i do know is they have been actively reducing their exposure to the catastrophe part of the business in recent years (primarily at Brit i think). I know other board members have posted on this topic in the past so hopefully they will chime in with their thoughts.

—————

Here is an exchange during the Q&A from Fairfax’s Annual Meeting this year:

 

Unknown Shareholder
…my question is for Mr. Clarke, if he can answer. As a layman investor, I believe that, if a hurricane 5 catastrophic event happens to direct hit to Miami City, that might be a $500 billion event. I wonder if you agree with me. And Fairfax cost will be 1%. That's what I believe as a layman investor. And if this even happens twice in a row in 2 years, how Fairfax can see their balance sheet...

V. Watsa
So before Peter answers. That's exactly right. We look at stuff like that. And if it happens, how are we going to survive that? So the big [ plus ] on these events is their limits, right? And so we really focus on the worst case events, from mainly Odyssey and Allied, but Peter? Peter does all the modeling and looking at it all the time. Peter?

Peter Clarke
Sure. Yes, no, as Prem said, we're focused on our catastrophe exposure, of course. And it starts with our insurance operations. The #1 thing is they have to manage their risk appetite within their capital base, but on top of that, we do a lot of work at the Fairfax level aggregating the exposures. And we really look at PMLs. So this is your probable maximum losses. And over the last 3 or 4 years, from our premium growth, we've benefited greatly from the diversification we now have within that 30 billion of premium that we write. And we can really absorb -- we can absorb significant catastrophes and still show an underwriting profit. Like the last couple of years -- this past year, cat losses were marginally down, so we had a fairly good year, but the year before that, we had probably -- I think we had 1.3 billion of losses, and over 1 billion the year before, and still posted underwriting profit. So as our premium base got bigger, we have more margin in the business for catastrophe losses, but our exposure has stayed relatively flat. So we do look at it.

 

Northeast wind is one of our largest exposures. Southeast hurricane wind again is another one, so we're all -- we're on top of that. We look at it all the time and starts with our companies, yes. We have a team at the head office that we look at it. And of course, he's all into the details as well, so...

V. Watsa
That's the one risk that can destroy our company, so we are all focused on it all the time. You mentioned Miami. Of course, Houston, California earthquake, right, those are all big item, but one that you worry about -- there's a windstorm coming along, what he was saying, northeast wind. It's coming along the coast and hitting New York, rarely happened. It's happened once or maybe twice. Coming along -- it doesn't come into the -- it doesn't come inland, comes along and then comes into New York, which would be the -- we think, the worst one, and -- but we look at all of that all the time. So your question is a good one. That's something you have to do. You have to survive, stuff like that.

Edited August 20 by Viking

[Maverick47]

26 minutes ago, Viking said:

Peter Clarke
Sure. Yes, no, as Prem said, we're focused on our catastrophe exposure, of course. And it starts with our insurance operations. The #1 thing is they have to manage their risk appetite within their capital base, but on top of that, we do a lot of work at the Fairfax level aggregating the exposures. And we really look at PMLs. So this is your probable maximum losses. And over the last 3 or 4 years, from our premium growth, we've benefited greatly from the diversification we now have within that 30 billion of premium that we write. And we can really absorb -- we can absorb significant catastrophes and still show an underwriting profit. Like the last couple of years -- this past year, cat losses were marginally down, so we had a fairly good year, but the year before that, we had probably -- I think we had 1.3 billion of losses, and over 1 billion the year before, and still posted underwriting profit. So as our premium base got bigger, we have more margin in the business for catastrophe losses, but our exposure has stayed relatively flat. So we do look at it.

 

Northeast wind is one of our largest exposures. Southeast hurricane wind again is another one, so we're all -- we're on top of that. We look at it all the time and starts with our companies, yes. We have a team at the head office that we look at it. And of course, he's all into the details as well, so...

This is pretty typical of the cat risks faced by all reinsurers.  The US tends to have the largest concentration of insured property exposures, and all the primary carriers exposed to that are interested in purchasing property cat reinsurance.  While the frequency and severity of potential hurricanes hitting concentrated areas of Florida like Miami are of concern, the larger cat risk for the US tends to be Northeastern hurricane.  These exposures are modeled, so that the impact of sample hurricanes hitting the current insured properties are estimated. One historical hurricane in 1938 hit Long Island and continued to cause significant damage inland.  However, the density of insured dwellings in the area it hit was nowhere near as much as it is today.  So a repeat of that exact hurricane would cost quite a bit more than a category 5 hurricane hitting Miami.  Odyssey and Allied World and other of Fairfax’s reinsurers are careful to manage the property cat risk they write in aggregate.

[Santayana]

Gloria was $900M in 1985.  I wonder what that would be now.

[Maverick47]

Sandy was a hurricane in 2012, but when it hit the Northeast it had weakened to Tropical Storm strength.  A  number of the northeastern states had coastal home insurance customers with hurricane deductibles of 1 to 5% of the replacement value of their homes.  Insurance commissioners determined that the wind speed at landfall was less than hurricane  strength, so did not allow the higher hurricane deductibles to apply.  That probably helped contributed to the losses of about $93 billion.

Since hurricane deductibles were not triggered, the industry tends to refer to the event as Superstorm Sandy.

 

A category 3 or greater hurricane hitting the right portion of the Northeastern US could cause insured losses many times that of Sandy.

 

[StubbleJumper]

4 hours ago, 73 Reds said:

Viking, do you or anyone here know what the most significant catastrophic insurance event was that affected Fairfax and what it cost & when it occurred?  Also, do we know the maximum dollar liability the company may be on the hook for now for any single event? 

 

I'm guessing 9/11 or KRW.

 

Edit: after looking up the impact of 9/11 it was 10.3 cat points on the CR and KRW was 13.9 cat points on the CR.  As a point of reference, all catastrophes during 2023 were a combined 4 cat points on the CR.

 

@Maverick47 Sandy was 4.5 cat points.  But interestingly, the same table in the AR shows the Japan earthquake (the one that affected the nuclear plant at Fukashima) in 2011 was 8.8 cat points, which surprises me even though I probably read that AR a dozen times a dozen years ago.

 

 

SJ

Edited August 21 by StubbleJumper