Q2 Earnings Discussion

[Kazid]

@adventurer 

 

Ignoring the possibility of a multiple rerating on higher expected EPS/great capital allocation resulting from large buybacks, EPS will grow in line with the share buybacks, quite significantly. If the multiple stays flat (which again, unlikely, but let's say it is), the stock price will be a lot higher, so the same $ amount of money going into repurchases gets you fewer and fewer shares as time goes on. Add in any level of multiple rerating or "organic" earnings growth and this is even more pronounced.

 

See AZO & AN for two examples of this happening over time. Share count can fall a ton, but as EPS increases the same money goes less and less far. 

[UK]

7 hours ago, adventurer said:

Hello,

 

perhaps this has been discussed before but I did not find it. What is the consequence of these share buybacks? Say this goes on for another 5 years, wouldn`t the company be taken private at some point? I can see that the value of the shares will most probably rise but at some point the outstanding shares have been reduced to a point where it is possible to take Fairfax private and delist it. 

 

And thoughts on this?

 

Hopefully the consequence is, after FFH will be done buying back some 20 or 30 percent of shares, valuation will finally increase to a level it will no longer makes sense doing buybacks anymore. But by then they will be able to issue a lot of new shares and use them as an expensive currency for a new acreative acquisitions or other ideas:)

 

Seriously, I never considered FFH going private as a risk, or is it?

 

Edited August 6 by UK

[StubbleJumper]

31 minutes ago, UK said:

Seriously, I never considered FFH going private as a risk, or is it?

 

It would be a very long-term consideration. The Watsa family's economic interest in FFH is roughly 10%, so you'd need a lot of buybacks to get you to a point where they owned enough to make the final push to go private.

 

 

SJ

[jbwent63]

I've never seen it mentioned, but does anyone know if either Markel or Berkshire own any Fairfax stock? With BRK's recent purchase of Allegheny seemingly doing well, and the mountain of cash in Omaha, might FFH be a target? Would the Watsa family agree to sell? I know there is a history with Markel, being the roots of FFH, any chance they might take a run at Fairfax?

[gfp]

2 minutes ago, jbwent63 said:

I've never seen it mentioned, but does anyone know if either Markel or Berkshire own any Fairfax stock? With BRK's recent purchase of Allegheny seemingly doing well, and the mountain of cash in Omaha, might FFH be a target? Would the Watsa family agree to sell? I know there is a history with Markel, being the roots of FFH, any chance they might take a run at Fairfax?

 

Berkshire doesn't own any Fairfax stock.  I've never checked if Markel does - it wouldn't be on the 13F so you would have to check the NAIC filings for several of MKL's insurance subs to find out.

 

Watsa family has been pretty clear that Fairfax is not for sale.  They are painting their own painting.  

[hardcorevalue]

I don’t Prem would be selling for anything less than 2.5x book value. So unlikely to happen, he’s having too much fun painting his masterpiece. 

[Junior R]

11 minutes ago, hardcorevalue said:

I don’t Prem would be selling for anything less than 2.5x book value. So unlikely to happen, he’s having too much fun painting his masterpiece. 

2.5x would be a amazing but again like you said I think they want fairfax to stay

[Hamburg Investor]

12 minutes ago, gfp said:

 

Berkshire doesn't own any Fairfax stock.  I've never checked if Markel does - it wouldn't be on the 13F so you would have to check the NAIC filings for several of MKL's insurance subs to find out.

 

Watsa family has been pretty clear that Fairfax is not for sale.  They are painting their own painting.  

I am pretty sure that Markel owned Fairfax stock. But that’s mabe more than a decade ago, maybe before the financial crisis. If I remember correctly, then it wasn’t one of the biggest top4 positions of Markel, but at  the same time not one of the smallest. 

[Xerxes]

FFH does own a single class.A share of BRK. 
 

I don’t know if it is for sentimental reason. But it has been there forever. 

[Hoodlum]

48 minutes ago, Hamburg Investor said:

I am pretty sure that Markel owned Fairfax stock. But that’s mabe more than a decade ago, maybe before the financial crisis. If I remember correctly, then it wasn’t one of the biggest top4 positions of Markel, but at  the same time not one of the smallest. 

I believe Markel provided Fairfax with a lifeline of convertible debt during the early 2000s, during the short squeeze.  This is likely how they owned Fairfax stock for a short period. 
 

I am going strictly by memory on this so I may be mistaken. 

Edited August 6 by Hoodlum

[Daphne]

Hoping FFH is sweeping the floor at these rock bottom prices

[Hoodlum]

9 minutes ago, Daphne said:

Hoping FFH is sweeping the floor at these rock bottom prices

 

I believe they are limited to buying 25% of daily volume but hope they are maxing that out.

[gfp]

I just had some orders filled at 1064 USD and 1468 CAD.  Happy to have it continue lower

[Hamburg Investor]

1 hour ago, Hoodlum said:

I believe Markel provided Fairfax with a lifeline of convertible debt during the early 2000s, during the short squeeze.  This is likely how they owned Fairfax stock for a short period. 
 

I am going strictly by memory on this so I may be mistaken. 

Okay - Markel held Fairfax from 2006 and 2015, and it was between 3% and 8% of the portfolio. https://dataroma.com/m/hist/hist.php?f=MKL&s=FRFHF#google_vignette
 

[gfp]

2 minutes ago, Hamburg Investor said:

Okay - Markel held Fairfax from 2006 and 2015, and it was between 3% and 8% of the portfolio. https://dataroma.com/m/hist/hist.php?f=MKL&s=FRFHF#google_vignette
 

 

It's hard to tell whether they just stopped listing it on their 13F on that date or actually sold 100% of the position in one quarter.

[Hamburg Investor]

2 minutes ago, gfp said:

 

It's hard to tell whether they just stopped listing it on their 13F on that date or actually sold 100% of the position in one quarter.

So just for my understanding: As Fairfax isn't an American business Markel doesn't have to show them in their 13F, right?

It wouldn't have been a bad timing to exit Fairfax in 2015, if I remember correctly. 

What do you think, why they could have voted for not showing Fairfax any more? I mean, 1st they did, than maybe not any more - so, why...?!

[gfp]

2 minutes ago, Hamburg Investor said:

So just for my understanding: As Fairfax isn't an American business Markel doesn't have to show them in their 13F, right?

It wouldn't have been a bad timing to exit Fairfax in 2015, if I remember correctly. 

What do you think, why they could have voted for not showing Fairfax any more? I mean, 1st they did, than maybe not any more - so, why...?!

 

I don't know if they sold it right then, but I did just check their NAIC portfolio and MKL doesn't own any Fairfax shares as of 12/31/2023.

 

13F filings do not require disclosure of over-the-counter (non-exchange listed) stocks or foreign stocks.  I don't know why they included it previously but maybe they owned the NYSE-listed Fairfax shares until 2009 and somehow that became FRFHF and they kept up the disclosure out of habit.  I will list MKL's foreign stock holdings in case anybody has interest in that -

 

Diageo

Pernod Ricard

Sony Group ADR

AON

Accenture

Brookfield Reinsurance

Ferguson

Linde

RennaissanceRe

Willis Towers Watson

Spotify

 

[giulio]

I can't quote a source but if iirc markel and fairfax had some kind of cross shareholding. 

A member of the markel family sat on fairfax board and vice-versa.

At some point due to regulation/competition they decided to sell down their stakes and leave their board seats.

Maybe @Parsad has a better recollection of events.

 

[Maverick47]

The Markel family was involved from the beginning, investing more than 25% of the capital needed to set up the Canadian operations of Markel insurance as being controlled by Prem.  Look at the 1985 chairman’s letter on the Fairfax website and you can see that the initial name of the company was Markel Financial Holdings Limited, and changed to Fairfax a few years later.  Stephen Markel apparently ran the Canadian operations from his base in Virginia until Prem could find a President to run it.  

[Maverick47]

Chap 4 of “The First 25 Years of Fairfax” talks about Prem’s controlling Fairfax and Markel owning 20% when Prem wanted to buy Commonwealth Insurance Company of Vancouver, BC.

 

Steve Markel had little interest in expanding in Canada.

 

”There were only two options:  either we put Markel Corporation and Fairfax together or we split them apart.  We decided to disentangle them completely so that each of us would have greater freedom to pursue our growth.”

Edited August 6 by Maverick47

[dartmonkey]

12 hours ago, adventurer said:

Hello,

 

perhaps this has been discussed before but I did not find it. What is the consequence of these share buybacks? Say this goes on for another 5 years, wouldn`t the company be taken private at some point? I can see that the value of the shares will most probably rise but at some point the outstanding shares have been reduced to a point where it is possible to take Fairfax private and delist it. 

 

And thoughts on this?

 

I have never seen this happen, and here's why it would generally not work.

 

Say you had a company with 23m shares trading at $1075 per share, for a market cap of $24.75b for instance, and that company was earning $3b a year for the foreseeable future, much of which they intend to use mostly for share repurchases. (I actually am familiar with one company like this.) If they could succeed in spending that $3b on You might think that

 

But there are a few problems. With volume of about 40k shares sold per day, if they were to buy a fifth of that volume on the open market(that would be the limit for a normal course offering on the Toronto exchange, for instance), and if they were allowed to do this 200 trading days a year (they aren't, because of the timing around reports, etc., but being optimistic), that would mean they could buy about 1.6 million shares in a year, or $1.7b worth if the share price didn't change. That problem could be remedied by doing a substantial issuer bid, so it is not the principal problem.

 

Second, in Canada, there is now a 2% tax on repurchases of over $1 million. I have not seen this addressed by Watsa or, for that matter, by Buffett, for Berkshire, given that there is now a 1% tax on transactions in the USA.

 

But the biggest problem, for a company that wanted to take itself private, is that if the share repurchase is done at attractive prices, then the earnings per share of such a company would increase enormously, and it is almost certain that share prices would go much higher. I think this is likely to happen with Fairfax. There may be a few years where you could slip this manoeuvre pas ordiinary shareholders, who still believe that Fairfax's management is incompetent (Blackberry would be the prime example, or the failed shorts on tech companies, or the failed bet on deflation, or fraudulent (as accused by Muddy Waters, for instance), or just a boring company like EL-Financial that is cheap for a reason, since it has no moat and no sexy high-tech future. But if Fairfax got down to a 50% reduction in share count, and earnings held up, I am pretty sure the price of shares would soar, and Fairfax would find it increasingly difficult to repurchase substantial numbers of shares.

 

I guess the last point is that fit would be very out of character for Watsa to attempt to take the company private. I believe that he feels a sense of obligation to shareholders such that he would never dream of doing such a thing just out of principle. It is one thing to take another company private, despite the disappointment of minority shareholders, and it is quite another to take one's own company private, against the will of one's own minority shareholders. 

 

Anyways, Fairfax management only owns a small percentage of the firm right now: about 10%, and other directors have minimal stakes I believe. So they are a long way from taking the company private, even if they wanted to.

 

 

[glider3834]

10 hours ago, Xerxes said:

FFH does own a single class.A share of BRK. 
 

I don’t know if it is for sentimental reason. But it has been there forever. 

they have indirect own ~ $7M of BRK via via Chou Associates Fund but yep its not material

 

Edited August 7 by glider3834