Fairfax 2024

[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 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 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 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 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. 

[dartmonkey]

 

 

23 minutes ago, cwericb said:

"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.

 

I think there is a big difference between an investment vehicle that Fairfax has set up, where it has a bit of an obligation to investors to be fair, and minority investors in a company like Fibrek, who feel that their investment got taken away from them when it was acquired (at a 39% premium) by another company (Resolute) with the support of Fairfax. Fairfax has no obligation to other Fibrek investors, but it arguably does have an obligation to Fairfax India investors. 

[Viking]

58 minutes ago, cwericb said:

"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.

@cwericb This is a really interesting topic. Fairfax has a value investing framework with everything that it does - with both insurance and investments. This means you buy low and sell high. It also means you opportunistically take advantage of Mr Markets frequent mood changes. As a Fairfax shareholder i want them to do this. 
 

When Fairfax took Recipe private they paid a 50% premium to where the stock was trading at the time. Now i think Fairfax got a good price. But at the time, i thought Recipe shareholders got a very good price. 
 

Poseidon is another interesting example. My guess is lots of Atlas shareholders were not happy with the takeout price. But did they get screwed? It might look like it in a few years when Fairfax starts to monetize its position. I think taking Atlas private has been a BRILLIANT move for Fairfax shareholders. I think it is much easier/better to operating Atlas as a private company -  out of the public market spotlight. Especially given everything that has happened over the past 2 years (freight rates plummeting, interest rates spiking, freight rates spiking). Importantly it has removed an enormous amount of volatility from Fairfax’s reported results - that is a topic that deserves its own post.

 

There are also the examples of when Thomas Cook India (Covid) and John Keells (currency crisis) needed cash infusions. Fairfax stepped up but demanded its pound of flesh (restructuring and increased ownership on very favourable terms). 
 

Early in 2022, Fairfax and Fairfax India took out a large player at $12/share - a criminally low price. 
 

Sorry for my rambling post. My point is over the past 5 years Fairfax has spent an enormous amount of money increasing its ownership in companies it already owns (including its own stock). Sometimes it flexes its position up and then back down (Thomas Cook India, Quess). Their moves have built enormous value for Fairfax shareholders. I hope they keep doing what they have been doing. 

Edited August 1 by Viking

[SafetyinNumbers]

47 minutes ago, dartmonkey said:

 

 

 

I think there is a big difference between an investment vehicle that Fairfax has set up, where it has a bit of an obligation to investors to be fair, and minority investors in a company like Fibrek, who feel that their investment got taken away from them when it was acquired (at a 39% premium) by another company (Resolute) with the support of Fairfax. Fairfax has no obligation to other Fibrek investors, but it arguably does have an obligation to Fairfax India investors. 

I have a lot of empathy for Fairfax and Prem in this Fibrek situation. With context, I think Fairfax acted appropriately in this situation. I know that’s not the opinion of most investors and maybe the courts but as a value investor that has signed a lock up agreement, I appreciate the situation they were in.

[SafetyinNumbers]

1 hour ago, hardcorevalue said:

Technical analysis is tarot cards for men. 

Save your mental horsepower for actual analysis!

I used to think this way but have come to appreciate that it’s clear some traders have skill when it comes to applying technical analysis much like many of us think we do when applying fundamental analysis. All traders and investors are looking for high probability set ups. Successful traders tend to use flow and technical analysis to look for favourable chart patterns and then apply very stringent risk management heuristics. I don’t have the personality for it personally but it seems to work for a lot of people. Instead, my personality forces me to torture myself with fundamental analysis and the inevitable resulting when I’m wrong or at least the price says I’m wrong. 

[hardcorevalue]

i can’t imagine selling something that’s undervalued because it’s an ugly chart or vice versa

 

that’s what makes a market i guess.

I should celebrate more people doing it, more money for me if i’m right.

[formthirteen]

11 minutes ago, hardcorevalue said:

i can’t imagine selling something that’s undervalued because it’s an ugly chart or vice versa

 

that’s what makes a market i guess.

I should celebrate more people doing it, more money for me if i’m right.

 

These are ugly charts of unviable business models. Technical analysis clearly indicates, "Yes, you are right. There's no viable business model.":

 

These businesses are undervalued according to management and owners.

[Gamma78]

On 7/31/2024 at 6:49 PM, Viking said:

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.   

 

 

Looks like Fairfax has repurchased 850k shares in the first 6 months for just shy of $ 1 bln, and now has 22.2 mln shares outstanding. 

 

 

 

 

 

 

 

[villainx]

1 hour ago, Gamma78 said:

Looks like Fairfax has repurchased 850k shares in the first 6 months for just shy of $ 1 bln, and now has 22.2 mln shares outstanding.

 

 

Thank you short report?

[LC]

Carson Block cashing that commission check from Prem as we speak (kidding)  

[cwericb]

Just before we leave the Fibrek situation lets not let the passage of time distort what actually happened. From the Financial Post:

 

Prem Watsa's 'mindboggling' explanation of forestry takeover prompts judge to award shareholders millions 

Testimony by Watsa was so problematic, judge awarded some Fibrek shareholders $13.5 million 

Canadian investor Prem Watsa was “purposely forgetful” and offered a “mindboggling” explanation in court testimony explaining why he backed a low-ball bid for a pulp mill in a sale to Resolute Forest Products Inc., a Montreal judge concluded in the seven-year-old case. 

Testimony by Watsa, chairman and chief executive officer of Fairfax Financial Holdings Inc., was so problematic it helped convince Montreal Superior Court Justice Michel Pinsonnault to award some Fibrek Inc. shareholders $13.5 million (US$10.2 million), plus interest. Fairfax “was in a blatant conflict of interest situation,” the Quebec judge said in his Sept. 26 ruling. 

“Watsa’s testimony was so vague and filled with so many uncertainties, unlikelihood, unsubstantiated denials and contradictions that it is very difficult for the court to give credence to the affirmations and explanations of the witness whose memory appeared to be failing on the most crucial aspects of his testimony,” Pinsonnault said. 

A spokesman for Fairfax disputed the judge’s conclusions, and said the company may appeal. 

“The decision distorts the facts, does not make business sense and unfairly characterizes Mr. Watsa’s testimony,” said Paul Rivett, Fairfax’s president. “All of Mr. Watsa’s statements were true and Fairfax acted throughout with honesty and integrity. We expect that the ruling will be appealed.” 

The case centred around Resolute’s December 2011 offer for Fibrek. Fairfax was the most important shareholder and insider of both Fibrek and Resolute, according to the judgment, having helped both companies survive financial difficulties in 2010. Toronto-based Fairfax agreed to sell its 33 million shares to Resolute for $1 apiece — locking in a price that dissenting shareholders considered too low. The judge considered the fair value of Fibrek shares to be $1.99, and found Watsa’s explanation for accepting less “mindboggling.” 

“It was obvious to the court that the witness was a reluctant witness not pleased to have to testify at the request of the dissenting shareholders’ lawyers who had accused Fairfax of being complicit with Resolute in the abusive hostile take-over bid scheme to the detriment and prejudice of the dissenting shareholders,” the judge said, adding that the court also found “that Watsa often appeared to be on the defensive and when pressed on crucial factual elements, the witness hastily took refuge behind ‘I do not remember’ or the like.” 

Watsa had decided that Fairfax would sell its Fibrek stake in February 2011, but didn’t want to do it on the open market, according to the ruling. So he seized the opportunity in May of that year to sell the stake to Resolute. The judge said the cash price was “of no significance” to Fairfax because it would convert the Fibrek shares into Resolute shares. The other shareholders were bound to a “conveniently” low cash price offered to and accepted by Fairfax, the judge said. 

Bloomberg News 

Doug Alexander 

Published Sep 30, 2019