Fairfax 2024

[Maverick47]

I have appreciated a rational capital allocator being in charge of companies like Berkshire and Fairfax.  When they are engaged in buying back their own stock, it serves me as a small individual investor, because I interpret it as meaning that the stock is at least fairly, and in some cases, favorably, priced relative to intrinsic value.  So during my capital accumulation phase, it gives me a level of comfort in continuing to add to a position, even though the market price per share continues to rise over time.

 

I have a human tendency to anchor myself to valuations at which I first purchased a stock.  Although one might occasionally be fortunate enough to see those prices again (see Fairfax a few years ago), a more typical situation is when the valuation continues to rise steadily over time.  Stock buybacks at such times give me some comfort that I am not dramatically overpaying for my  later purchases…

[Mystery Guest]

2 hours ago, Maverick47 said:

I have appreciated a rational capital allocator being in charge of companies like Berkshire and Fairfax.  When they are engaged in buying back their own stock, it serves me as a small individual investor, because I interpret it as meaning that the stock is at least fairly, and in some cases, favorably, priced relative to intrinsic value.  So during my capital accumulation phase, it gives me a level of comfort in continuing to add to a position, even though the market price per share continues to rise over time.

 

I have a human tendency to anchor myself to valuations at which I first purchased a stock.  Although one might occasionally be fortunate enough to see those prices again (see Fairfax a few years ago), a more typical situation is when the valuation continues to rise steadily over time.  Stock buybacks at such times give me some comfort that I am not dramatically overpaying for my  later purchases…

With the stock over $1600 Canadian again it is worth reminding ourselves of a couple of things: 

 

its not the share price that counts as much as the look through earnings and long term capital allocation. 

I have held my shares for many years and added when the pricing seemed crazy low, and I had funds available.

I have no plans to sell any shares, at times holding on has been somewhat painful! 

 

I too have been wondering about the Sleep Country Purchase ...

Having Just Read The Outsiders   (thorndike)

If you have not read it, I think it sheds lots of Light on the hidden Fairfax master plan ...

Most of these CEOs were frugal and financially oriented enough to be able to pivot to an opportunity 

no one else saw but in hindsight was brilliant.  

 

I will share some thoughts 

 

I would rather see buy backs... 

my .02 we are not seeing the full Sleep picture 

I would speculate that they are working Recipe MK2....

They are looking to acquire brilliant operational talent in scalable businesses and build that way. 

Look at the Talent Pool Now Running the subs and operations.   

They will assemble a portfolio of Home oriented businesses.  

We would like to see them hold a Brilliant business forever but if the assembled package can be used as currency down the Road ... then they spin off...

 

 They will be accused of having NO MOAT, are  under appreciated, and underpriced  

and we will all get a chance to absorb more shares. 

 

I do not think I have attended an AGM where Prem has not mentioned Henry Singleton.  

 

 

 

 

[mananainvesting]

Hey all, My first post in this forum, although I been a lurker for a few years now. Many thanks to the kind and thoughtful posters here who have helped me better understand $FFH.TO. 

 

I have been wondering lately why $FFH.TO doesn't make a bid to buy all of $FIH.U? It is such good value, clearly the market isn't valuing it over the long run (trading less then book since 2018). Could it be because of regulations in India?

I own both $FFH and $FIH. 

 

Thank you and I am grateful to this community for the knowledge over the years! Cheers

[SafetyinNumbers]

5 hours ago, Viking said:

@Gamma78 I am not sure buying back stock will close the valuation gap. 
 

Look at Henry Singleton… he was able to buy back stock at favourable prices for a decade. Look at Berkshire Hathaway… they could have bought back meaningful amounts of stock many times over the past 50 years at good prices. 
 

There are two questions that need to be answered:

1.) what is causing the valuation gap for Fairfax (versus peers)?

2.) will stock buybacks cause the valuation gap to close?

 

What is causing the valuation gap for Fairfax (versus peers)?
- complexity of business model Fairfax uses. Lots of people don’t understand it.

- non-traditional business model Fairfax uses. Lots of people don’t like it. Just look at the blowback on the board from the Sleep Country acquisition.
- not Berkshire Hathaway. Lots of investors will not be happy with Fairfax until they become a clone of Berkshire Hathaway.
- hangover from past mistakes. Trust, once lost, is slow to rebuild.

 

There are more. What do other people think?

 

Will stock buybacks cause the valuation gap to close?

- buybacks will likely stop the stock from getting crazy cheap.

- i am not convinced buybacks on their own will get Fairfax’s stock to more fair valuation (like 1.5 x BV). 
- investors/analysts are underestimating the size of earnings and the impact of reinvestment and compounding over time - so they are continue to undervalue Fairfax today. It’s like the movie Groundhog Day playing out each year. 
 

As a result, like 2024, i think Fairfax in the coming years will be able to continue to buy back a meaningful amount of stock at a great price. They could reduce effective shares outstanding by 1 million in 2024 at a price of about 1 x year end BV. That is crazy.
 

This is really a best case scenario for long term shareholders of Fairfax. It’s like shooting fish in a barrel. Growing earnings. Materially lower share count. Like a goat going up a mountain, the important per share metrics will keep moving higher. 
 

Could investors fall in love with Fairfax again? Yes. Of course this could happen. But Fairfax will need to continue to execute well. And even then, given their style of investing, it will likely take a couple of years.

I think it’s the combination of discriminate sellers and indiscriminate buyers that decide the multiple.
 

Sellers are usually value and price sensitive. They sell because the multiple has reached a certain level and because they don’t want to experiment a drawdown. Most of the institutional trading is based on a percentage of volume and because institutions are way underweight FFH, I think those flows favour FFH. However, because they are on a % of volume they are price takers. The sellers set the price.

 

Indiscriminate buyers are quants and passive. They don’t care about value or price but instead factors and weighting. They will buy on upticks. Going into the S&P/TSX 60 will likely help our multiple even if it’s short lived b/c active investors tend to sell on a scale and it’s hard to come up with enough supply otherwise.

IFC has expanded its multiple by 0.6x+ since it went into the 60 in March 2022 and that’s without the earnings momentum that FFH has as IFC has only grown its book value single digits since then.

[dartmonkey]

3 hours ago, Viking said:

@Gamma78 I am not sure buying back stock will close the valuation gap. 
 

Look at Henry Singleton… he was able to buy back stock at favourable prices for a decade. Look at Berkshire Hathaway… they could have bought back meaningful amounts of stock many times over the past 50 years at good prices. 
 

...

 

As a result, like 2024, i think Fairfax in the coming years will be able to continue to buy back a meaningful amount of stock at a great price. They could reduce effective shares outstanding by 1 million in 2024 at a price of about 1 x year end BV. That is crazy.
 

This is really a best case scenario for long term shareholders of Fairfax. It’s like shooting fish in a barrel. Growing earnings. Materially lower share count. Like a goat going up a mountain, the important per share metrics will keep moving higher. 
 

Could investors fall in love with Fairfax again? Yes. Of course this could happen. But Fairfax will need to continue to execute well. And even then, given their style of investing, it will likely take a couple of years.

 

Following the Henry Singleton example, periods of overvaluation can help, too. Singleton issued stock when valuations were high, and repurchased stock when they were low. He is known for the period when he retired almost 90% of outstanding shares at low multiples, sometimes <10 times earnings. But he also succeeded by raising capital at much higher multiples, typically 40-70 times, in an earlier period. The ideal would be to have both kinds of periods.

 

By the way, here is what Watsa had to say about Singleton and buybacks, in the 1997 annual letter (my emphasis):

 

While we have had very minimal stock buybacks in the past few years, we should remind our newer shareholders that we have bought back significant amounts of our shares in the past (i.e. 1.6 million shares or 25% in 1990). By the way, you may not know, but the Michael Jordan of stock buybacks was Henry Singleton at Teledyne. Henry began Teledyne in 1961 with approximately seven million shares outstanding and grew the company through acquisitions while shares outstanding peaked in 1972 at 88 million. From 1972 to 1987, long before stock buybacks became popular, Henry reduced the shares outstanding by 87% to 12 million. Book value per share and stock prices compounded in excess of 22% per year during Henry’s 27 year watch at Teledyne– one of the best track records in the business. We will always consider investing in our stock first (i.e. stock buyback) before making any acquisitions.

[Gamma78]

6 hours ago, dartmonkey said:

 

Following the Henry Singleton example, periods of overvaluation can help, too. Singleton issued stock when valuations were high, and repurchased stock when they were low. He is known for the period when he retired almost 90% of outstanding shares at low multiples, sometimes <10 times earnings. But he also succeeded by raising capital at much higher multiples, typically 40-70 times, in an earlier period. The ideal would be to have both kinds of periods.

 

By the way, here is what Watsa had to say about Singleton and buybacks, in the 1997 annual letter (my emphasis):

 

While we have had very minimal stock buybacks in the past few years, we should remind our newer shareholders that we have bought back significant amounts of our shares in the past (i.e. 1.6 million shares or 25% in 1990). By the way, you may not know, but the Michael Jordan of stock buybacks was Henry Singleton at Teledyne. Henry began Teledyne in 1961 with approximately seven million shares outstanding and grew the company through acquisitions while shares outstanding peaked in 1972 at 88 million. From 1972 to 1987, long before stock buybacks became popular, Henry reduced the shares outstanding by 87% to 12 million. Book value per share and stock prices compounded in excess of 22% per year during Henry’s 27 year watch at Teledyne– one of the best track records in the business. We will always consider investing in our stock first (i.e. stock buyback) before making any acquisitions.

 

 

Would love to see more stock repurchases. Loved it when they repurchased 10% of the outstanding a couple of years ago below book value. Even at these valuations today it should be a no-brainer. There is a lot of talk about Singleton and Teledyne - I certainly hope they go this route with the valuation where it is currently. I'm not quite seeing them move exactly that way just yet though. After all, they just made a big capital allocation decision on Country Sleep. I'm fully prepared to give them benefit of doubt given the moves they have made recently. I would be lying if I said I understood that as a better deal than buying back their own shares. 

 

 

 

[petec]

On 7/29/2024 at 8:06 PM, Gamma78 said:

 

Distribution would be a moat (so retail footprint) and scale of deposits. Retail deposits are the lowest cost financing a bank can have (though they carry their own risk). Replicating Eurobank's retail footprint and deposit scale for a newer entrant is tougher. Brand I guess would be a third, but I think that is actually very tied to retail footprint. I think that is about the biggest moat a bank can have

 

There are certainly a lot of barriers to entry, although the incumbents also have the disadvantage of legacy IT systems and new virtual entrants have made surprising progress in some markets.

 

But barriers to entry are not economic moats. I think of a moat as something that protects an above-average ROIC over time. Legacy banks have to be 10-1 leveraged to reach mid teens ROEs. There's no moat. What you're going to get is commodity ROIC for a very long time so long as the leverage doesn't trip them up.

 

I'm not saying that's a bad thing btw.

[UK]

1 hour ago, Gamma78 said:

 

 

Would love to see more stock repurchases. Loved it when they repurchased 10% of the outstanding a couple of years ago below book value. Even at these valuations today it should be a no-brainer. There is a lot of talk about Singleton and Teledyne - I certainly hope they go this route with the valuation where it is currently. I'm not quite seeing them move exactly that way just yet though. After all, they just made a big capital allocation decision on Country Sleep. I'm fully prepared to give them benefit of doubt given the moves they have made recently. I would be lying if I said I understood that as a better deal than buying back their own shares. 

 

 

 

 

When FFH was issuing its shares at a 1.3 BV to make large insurance acquisitions in 2015-2016 I also have a lot of doubts regarding Singleton talk and felt this way (despite of them being right at the end), but after this period and since pandemic, I think they really have showed it is not only a talk for them. And they are only at some 30 B CAP currently, so still lots of other opportunities to alocate capital. I still do not think the acquisition of Sleep Country at less than 1 B USD (or 3-4 per cent of their CAP) is something to worry much about. It migh not be obvious, why they are doing it, but it does not seem obviously bad either, at least for me personally. And even if it turns out a not very good or bad one, to expect every single investment to work for FFH, I think would be a mistake and a bit to demanding:)

 

Edited July 31, 2024 by UK

[Hoodlum]

There was no change in Eurobank ownership of Hellenic after public offer expired.  It is still at 56%.

 

https://www.ekathimerini.com/economy/1245192/eurobanks-hellenic-bank-stake-at-56/

[Viking]

Fairfax  - The Influence of Henry Singleton

 

“History never repeats itself, but it does often rhyme.” Mark Twain

 

In my last post I did a short review of Henry Singleton. He has been an important influence/mentor to Fairfax. Today we are going to try to connect some of the dots. We are going to focus on capital allocation and one tool in the capital allocation toolbox - shareholders’ equity. And how, when it is used properly, it can build significant long term per share value for shareholders.

 

But remember… when comparing the present with the past we will never find an exact ‘repeat.’ That is not the point/objective of doing this exercise. However, if we look closely, we can find important examples of where the present does indeed ‘rhyme’ with the past. And that, in turn, can help improve our understanding of Fairfax - what they are doing and what they might do in the future.

---------

Link to my previous post on Henry Singleton

• https://thecobf.com/forum/topic/20517-fairfax-2024/page/65/#comment-572533

----------

Let’s start with the big picture

 

A CEO has two basic responsibilities:

• Operations (run the business)
• Allocate capital

When allocating capital, the basic choices available to the management team at Fairfax have been captured in the table below. In this post, we are going to focus on one tool in the capital allocation toolbox - shareholders’ equity - both as a source of capital (issuing stock) and as a use of capital (repurchasing stock).

 

 

 

Shareholders’ equity

 

The playbook of how a management team can use shareholders’ equity to drive long term per share value for shareholders is pretty simple:

• Issue stock when it is overvalued - and buy assets that are undervalued.
• Buy back stock when it is undervalued.
• Be aggressive at extremes (overvaluation and undervaluation).
• Keep doing both as long as conditions remain favourable.

There are two key reasons this strategy works so well:

• Mr. Market’s behaviour can very irrational at times - and it can persist for years.
• The management team knows what the intrinsic value of the company is - it has a big information advantage over Mr. Market.

The proper execution of this strategy over time can lead to extraordinary results for long term shareholders. Henry Singleton taught us this when he ran Teledyne.

—————

Fairfax Financial - Shareholders’ Equity - A 38-Year Journey

 

Let’s review how Fairfax Financial has used shareholders’ equity over their 38 year history to see what we can learn.

 

We will break our analysis into two time-frames:

• Phase 1 - 1985 to 2017 - Building out the P/C Insurance Platform
• Phase 2 - 2018 to today - Optimize the Operating Businesses and Aggressively Shrink the Share Count

Phase 1 - 1985 to 2017 - Building Out the P/C Insurance Platform

 

In 1985, the year it was founded, Fairfax began its journey with 5 million shares outstanding.

 

From 1985 to 2017, Fairfax:

• Issued 29.5 million shares
• Repurchased 6.7 million shares

As a results, effective shares outstanding at the end of 2017 were 27.8 million (5 + 29.5 - 6.7) - they increased by a total of 22.8 million over the previous 32 years.

 

Over the first 32 years of their existence (from 1985 to 2017), share issuance was used aggressively as a source of cash - and this cash was used to grow Fairfax’s global P/C insurance platform. From 1985 to 2017, Fairfax issued a total of 29.5 million shares. Shares were generally issued at a premium to book value (sometimes a significant premium). Proceeds were used to buy other P/C insurance companies trading at a much lower valuation. Bottom line, looking at share issuance in aggregate, Fairfax got good value.

 

Share buybacks have also been a meaningful use of cash for Fairfax. From 1985 to 2017, Fairfax repurchased a total of 6.7 million shares. Repurchases were 22% of issuance - over the years, for every 5 shares that were issued, Fairfax repurchased 1 share back. Share were generally repurchased when Fairfax’s stock was trading at a discount/on sale.  Like with share issuance, Fairfax got good value when they repurchased shares.

 

So in general, Fairfax issued stock when its shares were trading at a high valuation and used the cash to buy P/C insurance companies that were trading at a much lower valuation. Fairfax also bought back modest amounts of stock at times when its shares were trading at a low valuation.

 

This looks like it was textbook application of the principals of what a management team should do.

 

Is there a way we can actually measure how successful this strategy has been?

 

Yes. We can look at the change in long term per share book value (BVPS).

 

From 1985 to 2017, Fairfax increased:

• the share count at a CAGR of 5.5%.
• common shareholders equity at a CAGR of 25.8%.
• BVPS at a CAGR of 19.5%.

Using its stock to drive the growth of its P/C insurance platform resulted in enormous long term per share value creation for shareholders.

 

 

From Fairfax’s 2017AR:

 

—————

 

An important strategic change in 2017

 

With the purchase of Allied World in 2017, Fairfax officially completed the aggressive 32-year build out of their global P/C insurance platform. Moving forward, Fairfax would be focused on two things:

• Continue to do smaller bolt-on P/C insurance acquisitions.
• Optimize its existing insurance operations and investment portfolio.

Truth be told, Fairfax got to work optimizing its insurance operations back in 2011, when Andy Barnard was appointed President and COO to manage Fairfax’s total insurance business. When it comes to investments, fixed income has always been a strength of Fairfax. The issue at Fairfax in 2017 was its equity portfolio - it was stuffed full of underperforming companies, many of which were significant cash drags (they were not delivering cash to Fairfax - they needed cash from Fairfax).

 

By optimizing the insurance operations and investment portfolio Fairfax would be able to improve the ‘cash flow from operations,’ the most important source of cash.

 

What was the company planning on doing with the future free cash flow?

 

In the 2017AR, Prem told investors what was to come - Fairfax intended to get much more aggressive with share buybacks.

 

“Henry Singleton, at Teledyne, reversed this trend (of growing share count), as you know, and over the next ten years we expect to do the same - use our free cash flow to buy back our shares!”

 

At the time, Prem was laughed at (pretty loudly) for what he said.

 

Let’s look at what has happened at Fairfax since then.

 

Phase 2 - 2018 to Today - Optimize the Operating Businesses and Aggressively Shrink the Share Count

 

What did Fairfax do?

 

2018-2023: Aggressively reduce the share count

 

Effective shares outstanding at Fairfax peaked at 27.75 million in 2017. Over the past 6 years (to December 31, 2023), Fairfax reduced effective shares outstanding by 4.75 million, or 17.1%,  at an average cost of $484/share.

 

From 2018 to 2023, Fairfax was able to repurchase a significant amount of shares at a very low valuation. This is a great example of exceptional value creation by the management team at Fairfax.

 

 

What does this do to the important per share metrics?

 

Here is Prem’s slide from Fairfax’s AGM in April 2024.

 

 

Before moving on, we are going to take a minute to review a couple of things Fairfax did in 2020 and 2021. Because they provide some great insight into how Fairfax thinks about and executes capital allocation.

—————

Classic Fairfax - Turning Lemons into Lemonade

 

Fairfax’s share price got historically cheap in 2020/2021. I won’t get into the reasons as to why that happened (I have covered that topic in detail in many past posts).

 

2020 and 2021 was a great time for Fairfax to buy back a meaningful amount of its stock. The problem Fairfax had at the time was they were cash poor.

 

What to do? Classic Fairfax - get creative.

 

Fairfax made two brilliant moves in late 2020 and 2021.

 

1.) Fairfax Total Return Swap

 

In late 2020/early 2021, Fairfax established a position in a total return swap giving it exposure to 1.96 million Fairfax shares at an average price of $373/share. Although not technically a buyback, establishing this position serves as the next best thing. This position gave Fairfax exposure to 7.5% of its effective shares outstanding (26.2 million at Dec 31, 2020). That is a massive position.

 

2.) Dutch Auction

 

In late 2021, Fairfax executed a dutch auction and repurchased 2 million Fairfax shares at $500/share. To fund the repurchase, Fairfax sold a 9.99% equity stake in their largest P/C insurance company Odyssey Group to CPPIB and OMERS for proceeds of $900 million. This was a wicked smart way to quickly source a significant amount of cash from trusted, external sources. In turn, this allowed Fairfax to capitalize on a short term opportunity (share price trading at crazy low price).

• https://www.fairfax.ca/press-releases/fairfax-announces-us1-0-billion-substantial-issuer-bid-and-sale-of-9-99-minority-stake-in-odyssey-group-2021-11-17/

How have these two moves worked out?

 

1.) The FFH-TRS position is up $1.5 billion over the past 3.6 years (before carrying costs). This has turned into one of Fairfax’s best ever investments.

 

 

2.) Fairfax’s book value is $945 at March 31, 2024. Buying back 2 million shares at $500/share only 2.5 years ago was a steal of a deal for Fairfax and its shareholders.

 

Both of these moves executed by Fairfax scream Henry Singleton. They were:

• Very creative - establishing TRS and selling 9.99% of Odyssey to external partners.
• Very rational - Fairfax’s stock was trading at a historically low valuation.
• Highly opportunistic - seize the moment.
• Executed in scale. Both of these moves were of a significant size.
• Very unconventional - both were classic Fairfax moves.

 

Most impressively, these two deals were executed at a time when investors in Fairfax were literally ‘freaking out.’ But the management team at Fairfax was not ‘freaking out.’  Instead, the management team at Fairfax saw the opportunity and made two outstanding investments - the temperament the senior management team displayed during these dark times shows, among other things, great character. This should speak volumes to investors about the quality of the management team in place at Fairfax. This bodes well for the future.

 

It should also be noted that before Fairfax made either of these two investments, Prem told Fairfax shareholders very loudly that he thought Fairfax’s shares were dirt cheap. In June of 2020 he purchased $149 million in Fairfax shares at an average price of $309/share.

• https://www.fairfax.ca/press-releases/prem-watsa-acquires-additional-shares-of-fairfax-2020-06-15/

—————

OK, let’s circle around and get back on track.

 

Has Fairfax continued to buy back its shares in 2024?

 

My guess is when Fairfax reports Q2 results later this week, effective shares outstanding will come in at less than 22.4 million at June 30, 2024. Fairfax is on track to reduce effective shares outstanding by 1 million in 2024. This is at a much higher pace than we have seen in recent years.

 

Why is the pace of buybacks picking up in 2024?

 

I can think of two reasons:

 

1.) Low valuation: Fairfax’s stock continues to trade at a cheap valuation - its valuation is well below that of peers.

 

2.) Record free cash flow: Fairfax is now generating a record amount of free cash flow. It is coming from two sources:

• Record cash flow from operations (primarily operating income)
• Significant cash from asset sales

Since 2018, Fairfax has been working hard at optimizing its cash flow from operations. Importantly, the equity portfolio has been fixed. All three of Fairfax’s economic engines are now performing at a high level at the same time - and they have never been positioned better for the future:

• Insurance
• Investments - fixed income
• Investments - equities

Asset sales have historically been an important source of cash for Fairfax (and investment gains). This strength of Fairfax continues. The most recent example was the just-announced sale of Stelco. In 2023, it was the sale of Ambridge. In 2022 it was the sale of pet insurance and Resolute forest Products. All four sales were executed with the buyers all paying a premium price.

 

As a result, Fairfax is generating record free cash flow. And this looks set to continue in the coming years.

 

Summary

 

From 1985 to 2017, Fairfax was focussed on building out its global P/C insurance footprint. To fund this growth, Fairfax used its stock - usually issued when the stock was trading at a premium valuation.

 

In 2017, with the Allied World acquisition, Fairfax was officially done building out its global P/C platform. The focus of the company shifted to optimizing the cash flow from the insurance operations and investment portfolio.

 

From 2018 to today, Fairfax has reduced effective shares outstanding by more than 19%. Fairfax was very opportunistic and shares were repurchased at a very low valuation.

 

Over the past 38 years, Fairfax has put on a clinic on how to use shareholders’ equity to build long term per share value for shareholders. Henry Singleton would be proud of what they have been able to accomplish.

 

But the Fairfax story is still being written. Free cash flow at Fairfax has exploded over the past three years. The size and certainty of future earnings have both markedly improved at Fairfax in recent years. Buffett teaches us that certainty is the key variable to properly value an investment. At the same time, Fairfax’s management team is best in class among P/C insurance companies - measured though the growth in book value per share over the past 5 years.

 

Fairfax continues to trade at a significant discount to P/C insurance peers. Given what we know, this makes no sense. And if we know it, I think it is safe to say that  Fairfax knows it.

 

As a result, like Henry Singleton, it would not surprise me to see Fairfax continue to buy back a meaningful amount of Fairfax’s stock in the coming years. After all, Prem told us what the plan was all the way back in 2017.

 

PS: This post is long. Thanks for hanging in there and making it to the end. As I was writing, it became clear to me that the influence of Henry Singleton on Fairfax goes far beyond just shareholders' equity (issuing stock at a premium valuation and then buying it back at a low valuation). Henry Singleton's influence on Fairfax was likely much bigger - how to structure the company, how to run the operations (focus on cash generation) and how to think about capital allocation (be rational, use all the tools in the toolbox, be creative, go big, don't be afraid to be unconventional etc). And to focus on building long term per share value for shareholders.   

Edited July 31, 2024 by Viking

[dartmonkey]

1 hour ago, Viking said:

Let’s review how Fairfax Financial has used shareholders’ equity over their 38 year history to see what we can learn.

 

We will break our analysis into two time-frames:

• Phase 1 - 1985 to 2017 - Building out the P/C Insurance Platform
• Phase 2 - 2018 to today - Optimize the Operating Businesses and Aggressively Shrink the Share Count

Phase 1 - 1985 to 2017 - Building Out the P/C Insurance Platform

 

In 1985, the year it was founded, Fairfax began its journey with 5 million shares outstanding.

 

From 1985 to 2017, Fairfax:

• Issued 29.5 million shares
• Repurchased 6.7 million shares

As a results, effective shares outstanding at the end of 2017 were 27.8 million (5 + 29.5 - 6.7) - they increased by a total of 22.8 million over the previous 32 years.

 

Over the first 32 years of their existence (from 1985 to 2017), share issuance was used aggressively as a source of cash - and this cash was used to grow Fairfax’s global P/C insurance platform. From 1985 to 2017, Fairfax issued a total of 29.5 million shares. Shares were generally issued at a premium to book value (sometimes a significant premium). Proceeds were used to buy other P/C insurance companies trading at a much lower valuation. Bottom line, looking at share issuance in aggregate, Fairfax got good value.

 

Share buybacks have also been a meaningful use of cash for Fairfax. From 1985 to 2017, Fairfax repurchased a total of 6.7 million shares. Repurchases were 22% of issuance - over the years, for every 5 shares that were issued, Fairfax repurchased 1 share back. Share were generally repurchased when Fairfax’s stock was trading at a discount/on sale.  Like with share issuance, Fairfax got good value when they repurchased shares.

 

So in general, Fairfax issued stock when its shares were trading at a high valuation and used the cash to buy P/C insurance companies that were trading at a much lower valuation. Fairfax also bought back modest amounts of stock at times when its shares were trading at a low valuation.

 

 

 

Phase 2 - 2018 to Today - Optimize the Operating Businesses and Aggressively Shrink the Share Count

 

What did Fairfax do?

 

2018-2023: Aggressively reduce the share count

 

Effective shares outstanding at Fairfax peaked at 27.75 million in 2017. Over the past 6 years (to December 31, 2023), Fairfax reduced effective shares outstanding by 4.75 million, or 17.1%,  at an average cost of $484/share.

 

From 2018 to 2023, Fairfax was able to repurchase a significant amount of shares at a very low valuation. This is a great example of exceptional value creation by the management team at Fairfax.

 

 

 

 

...

 

From 2018 to today, Fairfax has reduced effective shares outstanding by more than 19%. Fairfax was very opportunistic and shares were repurchased at a very low valuation.

 

It sure would be great to have a year by year summary of the 30 years of share issuance and repurchase, with a suitable metric demonstrating that the issuances happened at high valuations and the repurchases at low valuation, not that I doubt for a second that this has been the overall pattern.

 

The above table, for 2018 to 2023, shows us the net share reduction, and I believe that there has been minimal share issuance in that period, and we all know that P/B has been low over this whole period, often beneath 1.0. But for 1985 to 2017, when share count went from 5.0 to 27.8 million, which  as you say can be summarized as (5 + 29.5 - 6.7), do we have any detail on what valuations were like for the periods when 29.5 million shares were issued, versus the valuation when the 6.7 million shares were repurchased?

 

The only way I can think of getting that would be to look at share counts quarter by quarter, with, say, book values at the beginning and end of each quarter, and seeing P/B during quarters when there were net issuances vs P/B during quarters when shares were issued. One would probably need to build up a spreadsheet with about 160 lines (4 quarters a year, for almost 40 years), with the share price, the book value, and the number of shares outstanding at the end of each quarter. Project for a rainy day...

[Daphne]

Eurobank produced another solid set of results in the first half. EPS amounted to 20cents, tangible book value per share increased to €2.25, while RoTBV reached 18.5%.

[glider3834]

On 7/31/2024 at 7:08 AM, mananainvesting said:

Hey all, My first post in this forum, although I been a lurker for a few years now. Many thanks to the kind and thoughtful posters here who have helped me better understand $FFH.TO. 

 

I have been wondering lately why $FFH.TO doesn't make a bid to buy all of $FIH.U? It is such good value, clearly the market isn't valuing it over the long run (trading less then book since 2018). Could it be because of regulations in India?

I own both $FFH and $FIH. 

 

Thank you and I am grateful to this community for the knowledge over the years! Cheers

when FFH IPO'd FIH it gave them access permanent 3P equity capital to fund deals and ability leverage their expertise/networks in India to generate AM fees.

 

The ideal scenario for any asset manager is to generate good returns for investors, grow the capital pool and potential fee stream over time.

 

If FFH were to fully privatise FIH by themselves, they would lose that 3P capital and AM fees and then there is the cost to fund/leverage considerations. 

 

So the question then is - is the value extraction opportunity so significant that it would justify a take private assuming they pay a 'fair & friendly' acquisition price etc?

 

You could hypothetically have an Atlas/Poseidon type scenario where you get one or more investors (eg pension funds, sovereign wealth funds) who form a consortium with FFH to take FIH private - in which case maybe FFH (via HWIC) could possibly remain the asset manager and retains 3P equity capital with potentially deep pocketed investors - plus there are time/cost savings of not being a listed entity.

 

Edited August 1, 2024 by glider3834

[mananainvesting]

2 minutes ago, glider3834 said:

when FFH IPO'd FIH it gave them access permanent 3P equity capital to fund deals and ability leverage their expertise/networks in India to generate AM fees.

 

The ideal scenario for any asset manager is to generate good returns for investors, grow the capital pool and potential fee stream over time.

 

If FFH were to fully privatise FIH, they would lose that 3P capital and AM fees and then there is the cost to fund/leverage considerations.

 

So the question then is - is the value extraction opportunity so significant that it would justify a take private assuming they pay a 'fair & friendly' acquisition price etc?

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Good points and thanks for replying.

 

Fairfax India hasn't been issuing shares for a while now so they are not growing 3P equity inorganically. Current/Early shareholders haven't had good returns either based on issue price of $10 (2015) vs $14.3 now. Whatever fees they lose I think will be mitigated by not sharing the portfolio returns with the other 60% FIH holders over the long term. 

 

If $FFH announces tomorrow they will take $FIH private at book value, I would be more happy than if they didn't. I roughly own 16X more $FFH than $FIH. Also, I think $FIH would earn better returns than Sleep Country, which makes me think it might be something to do with regulations in India that they haven't acquired FIH yet. 

 

 

 

[SafetyinNumbers]

17 minutes ago, mananainvesting said:

 

Good points and thanks for replying.

 

Fairfax India hasn't been issuing shares for a while now so they are not growing 3P equity inorganically. Current/Early shareholders haven't had good returns either based on issue price of $10 (2015) vs $14.3 now. Whatever fees they lose I think will be mitigated by not sharing the portfolio returns with the other 60% FIH holders over the long term. 

 

If $FFH announces tomorrow they will take $FIH private at book value, I would be more happy than if they didn't. I roughly own 16X more $FFH than $FIH. Also, I think $FIH would earn better returns than Sleep Country, which makes me think it might be something to do with regulations in India that they haven't acquired FIH yet. 

 

 

 

They have a regulatory benefit in the insurance subsidiaries by owning a public company. Plus they paid all of the fees to go public and in the very long term there is optionality by remaining public although with the exception of accretive buybacks it’s hard to see right now. 
 

I don’t think going private is a likely scenario although it might effectively look that way when they have excess capital to resume buybacks. 

[Viking]

Why would Fairfax want to take Fairfax India private (buy out existing shareholders)?
 

I can think of one good reason - Fairfax gets a deal.

 

Now if Fairfax gets a deal i am not sure how Fairfax India investors also get a deal (or at least feel like they are getting one).

 

Other than ‘good deal,’ I am having a hard time coming up with a good reason why Fairfax would want to take Fairfax India private:
1.) Fairfax already controls it.
2.) Fairfax owns 42.5% of the company.
3.) Fairfax India is very well managed. 

4.) The performance of Fairfax India has been very good - measured as growth in book value.

5.) Fairfax India owns a jewel of an asset (BIAL) which represents more than 50% of Fairfax India’s total value.

 

Fairfax India has been an exceptional investment for Fairfax. 
1.) Fairfax has increased its ownership in Fairfax India from 28.1% to 42.5% at a very low average cost. That is an increase of 50% since inception.

2.) As i said earlier, the BV of Fairfax India has increased materially since inception. 
This is a double win for Fairfax.
 

Future prospects for Fairfax India look very good.

1.) BIAL looks ideally positioned.

2.) An Anchorage/BIAL IPO is planned.

3.) IDBI rumours continue to swirl (what that acquisition would look like i have no idea).

4.) India’s economy looks set to rip in the coming decade.

 

Why does Fairfax need to do anything? Especially if they have to pay fair value?

Edited August 1, 2024 by Viking

[dartmonkey]

12 hours ago, Viking said:

Why would Fairfax want to take Fairfax India private (buy out existing shareholders)?
 

I can think of one good reason - Fairfax gets a deal.

 

Now if Fairfax gets a deal i am not sure how Fairfax India investors also get a deal (or at least feel like they are getting one).

 

Other than ‘good deal,’ I am having a hard time coming up with a good reason why Fairfax would want to take Fairfax India private:
1.) Fairfax already controls it.
2.) Fairfax owns 42.5% of the company.
3.) Fairfax India is very well managed. 

4.) The performance of Fairfax India has been very good - measured as growth in book value.

5.) Fairfax India owns a jewel of an asset (BIAL) which represents more than 50% of Fairfax India’s total value.

 

...

 

Why does Fairfax need to do anything? Especially if they have to pay fair value?

 

I completely agree. Fairfax India is a coiled spring, and it would probably be a great deal for Fairfax to take over the 57.5% of the company is doesn't already own. BUT... In addition to the factors Viking mentioned, Fairfax is getting an annual 1.5% fee on net asset value (including the 57.5% it doesn't own) plus a fifth of returns above 5%, so that's another reason to not disturb the golden goose. But the biggest reason, surely, is in Fairfax's name: they have set up this investment vehicle which has done well as far as increasing book value, but has done very poorly as far as share price increases go. If they were to take it private now, that would definitely not be seen as something that is 'fair and friendly', and would compromise their reputation and any future prospects of setting up similar funds. In the same way, they took their management fee in cash instead of in shares of FIH, not because the shares aren't a good deal, but because they don't want to appear like a vulture.

 

As an investor with a big stake in FIH, almost as big as my FFH stake, I would be disappointed, although I would grudgingly take what would likely be a large premium to the current share price and reinvest in FFH, so it would work out ok for me. But I would prefer that the share price do this without a takeover, and I think that is quite likely in the next year or so, the 2 catalysts being the Bangalore airport IPO and the IDBI purchase. I would be very surprised to see Fairfax think it is fair and friendly to take out FIH just prior to one of these catalysts finally arriving.

[Viking]

Fairfax Q2 Earnings Preview

 

Below are a few of the things i will be watching for when Fairfax reports after markets close today. Anything missing from my list?

 

1.) Digit IPO

• How does Fairfax have the position marked?
• Has Fairfax been able to sort out its final ownership position out with regulators?

2.) Insurance

• What is growth in net premiums written? GIG + organic…
• What is CR?
• What is level of reserve releases?
• Commentary on hard market? Cyber?

3.) Interest and dividend income

• Is it still growing?
• Interest and dividend income was $589.8 in Q1 2024 (and $536.4 million in Q4 2023).
• Is Fairfax’s investment in Kennedy Wilson’s debt platform continuing to increase in size?

4.) What is share of profit of associates?

• Eurobank? Chug, chug, chug?
• Poseidon? Are we seeing green shoots?

5.) Equities

• What are investment gains from equities? The equities I track suggests mark to market gains will be small in the quarter (see next point).
• Please note, mark to market equities in Fairfax India jumped quite a bit in Q2 - this should be a tailwind (it was a headwind in Q1). This is not captured in my model.
• For Associate holdings, what is the excess of market value to carrying value? This is value that is not being captured by book value.

 

 

6.) Capital allocation

 

Asset sale / purchase: any commentary?

• Sale of Stelco. A nice investment gain is coming in Q3.
• Purchase of Sleep Country.

Update on effective shares outstanding

• Under 22.4 million?
• 275,000 purchased from Prem in Q2.
• any commentary?

Do we see Fairfax buy back another chunk from one of their minority partners in Brit, Allied or Odyssey?

 

7.) What is book value per share?

• The dividend payment in January will dent this by $15/share.

 

8.) Impact of change in interest rates on reported results?

 

US Treasury rates closed out Q2 very close to where they closed out Q1.

 

There will be two impacts:

• Fairfax’s fixed income portfolio
• IFRS 17 reporting

How will it shake out? Not sure - but not concerned.

 

Edited August 1, 2024 by Viking

[TwoCitiesCapital]

52 minutes ago, dartmonkey said:

 

I completely agree. Fairfax India is a coiled spring, and it would probably be a great deal for Fairfax to take over the 57.5% of the company is doesn't already own. BUT... In addition to the factors Viking mentioned, Fairfax is getting an annual 1.5% fee on net asset value (including the 57.5% it doesn't own) plus a fifth of returns above 5%, so that's another reason to not disturb the golden goose. But the biggest reason, surely, is in Fairfax's name: they have set up this investment vehicle which has done well as far as increasing book value, but has done very poorly as far as share price increases go. If they were to take it private now, that would definitely not be seen as something that is 'fair and friendly', and would compromise their reputation and any future prospects of setting up similar funds. In the same way, they took their management fee in cash instead of in shares of FIH, not because the shares aren't a good deal, but because they don't want to appear like a vulture.

 

As an investor with a big stake in FIH, almost as big as my FFH stake, I would be disappointed, although I would grudgingly take what would likely be a large premium to the current share price and reinvest in FFH, so it would work out ok for me. But I would prefer that the share price do this without a takeover, and I think that is quite likely in the next year or so, the 2 catalysts being the Bangalore airport IPO and the IDBI purchase. I would be very surprised to see Fairfax think it is fair and friendly to take out FIH just prior to one of these catalysts finally arriving.

 

There are plenty of examples of people being involved with Fairfax subs that did not feel "fair and friendly" with the take-outs/take-unders/sale of share of the underlying investments you could have been coinvested with them on. 

 

I'm not saying I have issues with Fairfax - but I am saying you probably cannot rely on them to act in a way that protects you as an investor in a vehicle alongside them. They're going to do what is best for Fairfax - not what is best for you. 

[Xerxes]

Anybody in chart-voodoo technical analysis. 

 

Isn’t this a “bullish” signal with big upside ? the hound getting unleashed …

 

[hardcorevalue]

Technical analysis is tarot cards for men. 

Save your mental horsepower for actual analysis!

[cwericb]

"There are plenty of examples of people being involved with Fairfax subs that did not feel "fair and friendly" with the take-outs/take-unders/sale of share of the underlying investments you could have been coinvested with them on."

 

Yup. I try to stay away from companies in which Fairfax is involved. However, more than once Fairfax has become involved with companies that I already own. Past history would show that the "Fair and Friendly" refers to the Fairfax side of deals and not necessarily the other side.

 

Some of us have a long memory, but you only have to go back to the Fibrek situation to see how shareholders got royally screwed by Prem and Fairfax.

Edited August 1, 2024 by cwericb

[Parsad]

1 minute ago, hardcorevalue said:

Technical analysis is tarot cards for men. 

Save your mental horsepower for actual analysis!

 

+1!  Cheers!

[Hoodlum]

1 hour ago, Viking said:

Fairfax Q2 Earnings Preview

 

Below are a few of the things i will be watching for when Fairfax reports after markets close today. Anything missing from my list?

 

1.) Digit IPO

• How does Fairfax have the position marked?
• Has Fairfax been able to sort out its final ownership position out with regulators?

2.) Insurance

• What is growth in net premiums written? GIG + organic…
• What is CR?
• What is level of reserve releases?
• Commentary on hard market? Cyber?

3.) Interest and dividend income

• Is it still growing?
• Interest and dividend income was $589.8 in Q1 2024 (and $536.4 million in Q4 2023).
• Is Fairfax’s investment in Kennedy Wilson’s debt platform continuing to increase in size?

4.) What is share of profit of associates?

• Eurobank? Chug, chug, chug?
• Poseidon? Are we seeing green shoots?

5.) Equities

• What are investment gains from equities? The equities I track suggests mark to market gains will be small in the quarter (see next point).
• Please note, mark to market equities in Fairfax India jumped quite a bit in Q2 - this should be a tailwind (it was a headwind in Q1). This is not captured in my model.
• For Associate holdings, what is the excess of market value to carrying value? This is value that is not being captured by book value.

 

 

6.) Capital allocation

 

Asset sale / purchase: any commentary?

• Sale of Stelco. A nice investment gain is coming in Q3.
• Purchase of Sleep Country.

Update on effective shares outstanding

• Under 22.4 million?
• 275,000 purchased from Prem in Q2.
• any commentary?

Do we see Fairfax buy back another chunk from one of their minority partners in Brit, Allied or Odyssey?

 

7.) What is book value per share?

• The dividend payment in January will dent this by $15/share.

 

8.) Impact of change in interest rates on reported results?

 

US Treasury rates closed out Q2 very close to where they closed out Q1.

 

There will be two impacts:

• Fairfax’s fixed income portfolio
• IFRS 17 reporting

How will it shake out? Not sure - but not concerned.

 

 

Yes, I am interested in hearing about how they have marked the Go Digit position.  Unless they have been able to take advantage of the convertible bonds, then I think this will be marked down a bit based on the IPO price.

[mananainvesting]

14 hours ago, Viking said:

Why would Fairfax want to take Fairfax India private (buy out existing shareholders)?
 

I can think of one good reason - Fairfax gets a deal.

 

Now if Fairfax gets a deal i am not sure how Fairfax India investors also get a deal (or at least feel like they are getting one).

 

Other than ‘good deal,’ I am having a hard time coming up with a good reason why Fairfax would want to take Fairfax India private:
1.) Fairfax already controls it.
2.) Fairfax owns 42.5% of the company.
3.) Fairfax India is very well managed. 

4.) The performance of Fairfax India has been very good - measured as growth in book value.

5.) Fairfax India owns a jewel of an asset (BIAL) which represents more than 50% of Fairfax India’s total value.

 

Fairfax India has been an exceptional investment for Fairfax. 
1.) Fairfax has increased its ownership in Fairfax India from 28.1% to 42.5% at a very low average cost. That is an increase of 50% since inception.

2.) As i said earlier, the BV of Fairfax India has increased materially since inception. 
This is a double win for Fairfax.
 

Future prospects for Fairfax India look very good.

1.) BIAL looks ideally positioned.

2.) An Anchorage/BIAL IPO is planned.

3.) IDBI rumours continue to swirl (what that acquisition would look like i have no idea).

4.) India’s economy looks set to rip in the coming decade.

 

Why does Fairfax need to do anything? Especially if they have to pay fair value?

 

I don't think getting a fair deal for FFH vs FIH are mutually exclusive, both can get a fair deal, Ex: A Stock or cash option deal would solve that. IMO keeping $FIH public if market is not valuing it to book does more harm to Fairfax reputation than if not.  I understand one can make both for and against arguments, and I appreciate both views.