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Ok Prem! Time To Think About The Next 25 Years!


Parsad
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Is it time for Fairfax to diversify its income stream by adding non-insurance businesses?  

160 members have voted

  1. 1. Is it time for Fairfax to diversify its income stream by adding non-insurance businesses?

    • Yes - Both Public & Private
    • Yes - Only Private Businesses
    • No - They Should Stick to Insurance


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Now that the first 25 years of Fairfax's history is complete, and they've created a formidable insurance business, is it time for the student to follow the mentor?  

 

In my opinion, I think Fairfax should now follow the Markel Ventures model and begin to acquire whole private businesses that most people would not be able to negotiate.  

 

- With Fairfax's history of "Fair & Friendly" insurance acquisitions, I think they would be the buyer of choice for private business owners who are too small for Berkshire and may not be as familiar with Markel.  

- They are so deep on the management front that this is a no-brainer.  

- Adding private businesses that aren't worried about quarterly reporting and regulatory hurdles at fair prices would diversify Fairfax's income stream.

- Adding successful business owners would only strengthen Fairfax's bench.

- Prem is getting older and succession will become a bigger concern over the next 10-15 years.

- They have the capital and the investment team to dig up and acquire wonderful small private businesses.

 

This is it Prem!  Time to do it.  Cheers!

 

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I agree, though FFH seems to be a deep value shop.  I have only been watching for a few years, but I believe higher quality businesses would be better or they would end up like LUK with a bunch of dingy assets. Though its worked quite well for LUK.

 

I would like to see better integration of the insurance units. I dont know much, but we are going to have 10-15 subs with different names and of significantly different sizes. Why not integrate these into regional businesses and rename / rebrand them. Though I have never run an insurance company so what do I know.

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Of course my vote is yes.  FFH has come this far, why not go all the way?

 

What is wrong with allocating capital (always) to the best possible source.  Buybacks (if you believe that crap), dividends, strengthen b/s or subs, or invest it into stocks, bonds or businesses.  People can't beat Buffett performance if they play with tougher rules - BRK can invest in anything.

 

 

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I asked Sam Mitchell about this issue a few years back and he indicated that FFH would look at this in the future, but it wasn't their focus since they still considered themselves to be an insurance company with some equity investments.  Obviously they do think about this very issue.

 

-O

Now that the first 25 years of Fairfax's history is complete, and they've created a formidable insurance business, is it time for the student to follow the mentor?  

 

In my opinion, I think Fairfax should now follow the Markel Ventures model and begin to acquire whole private businesses that most people would not be able to negotiate.  

 

- With Fairfax's history of "Fair & Friendly" insurance acquisitions, I think they would be the buyer of choice for private business owners who are too small for Berkshire and may not be as familiar with Markel.  

- They are so deep on the management front that this is a no-brainer.  

- Adding private businesses that aren't worried about quarterly reporting and regulatory hurdles at fair prices would diversify Fairfax's income stream.

- Adding successful business owners would only strengthen Fairfax's bench.

- Prem is getting older and succession will become a bigger concern over the next 10-15 years.

- They have the capital and the investment team to dig up and acquire wonderful small private businesses.

 

This is it Prem!  Time to do it.  Cheers!

 

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Yup, Prem said the same thing when I talked to him.  I think now with their size, and the sheer scope of their insurance business, they are in a prime position to exploit an area where alot of other people can't go. 

 

The private equity guys and hedge funds all overpay.  Berkshire can't look at any business with less than $1B a year in revenue...really $5B+ if they want to make even a small dent.  Markel doesn't have as much excess capital as Fairfax, nor is their team quite as wide and deep.  Same with all of the other hedgies turned activist turned acquisitor. 

 

Combine that with Prem's leadership, handoff and delegate management style, honesty, integrity, ethics and long-term focus, they would be the buyer of choice for many people...particularly in Canada!  Cheers!

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I'm impressed with the personal growth of Watsa through the hedge fund crisis and the fixing of FFH's balance sheet.  I don't think that he was in the same position as a leader 10 years ago as he is today and he's the better man for it. 

 

If he's up for it, I have an idea on Bloor Street in Toronto that would be right up FFH's ally as a whole company purchase where the principal shareholder is in his early 70's and runs his business on a pre-tax 15% ROE hurdle.  The whole company could be bought for <$200M.

 

-O

Combine that with Prem's leadership, handoff and delegate management style, honesty, integrity, ethics and long-term focus, they would be the buyer of choice for many people...particularly in Canada!  Cheers!

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Personally I see so many opportunity in India, Brazil and others emerging country that I would prefer them to stick to insurance for a while. They have to develop what they have, look for what they can acquire there and possibly starting other business similar to HUB or other things graviting around insurance.

 

Mario

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Parsad - I hate to admit when a Vancouver fan is right, but you made an interesting point.

 

Canada is probably in great shape over the coming decades in terms of growth.  Fairfax could offer private companies in Canada something that other companies couldn't offer (the Buffett approach of hands off, decentralized management, hold forever, integrity, etc.)

 

They either have the capital or access to capital to do it.

 

They could always start small like MKL did and see how well it works.  Time will tell...

 

 

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Well I hate it even more when a Philly fan agrees with me!  ;D  Regardless, I guess were both on top of the heap at the All-Star Break. 

 

Good luck to you until the playoffs, at which point I'm unfortunately going to have to spit into my palm before shaking your hand. 

 

Cheers!

 

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  • 1 month later...

Well Sanjeev, I take it you read the snippet from the latest annual letter right??  Looks like they're coming around...

 

"While our primary objective is to expand our insurance and reinsurance operations worldwide, our investing skills could provide us with opportunities to buy, in whole or in part, excellent companies in other industries which generate strong free cash flows and will contribute to our objective of achieving a 15% per year increase in book value per share over the long term. For entrepreneurial founders who have built their companies over long periods of time, Fairfax will be an excellent owner, allowing the founders to continue to run their business, unfettered by the head office, and we are open to these opportunities."

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Soo... anybody care to speculate about which type/company they will buy?

 

BeerBaron

 

What's the Canadian equivalent to See's Candies?  ;)

 

But seriously, I don't know, but as long they allocate money to the best place, I don't care that much if it's insurance, stocks, bonds, arbitrage, or whole businesses. All I know is that having the ability to invest anywhere should in theory lead to higher returns than being limited to only one industry. Let's hope it works out that way in practice...

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I am new to FFH (and this message board), but I am in a big fan of insurance companies owning non-insurance businesses that throw off cash flow (of which there are only 1.1 examples, to my knowledge, Berkshire and Markel). I think the rationale is more than just diversification and an additional investment opportunity set. Having a recurring stream of earnings at the holding company level should allow an insurance company to utilize its capital more aggressively in terms of asset leverage, and also in terms of flexibility to deploy capital in times of stress, when there may be issues with sending cash up to the holdco. In short, if properly executed, having a stable of good, cash flow producing businesses attached to the insurance operations should make the whole worth more than the sum of the parts.

 

It's amazing to me that only one company has copied Berkshire's playbook in this particular respect. I've wondered why FFH hasn't already started down this path....

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Soo... anybody care to speculate about which type/company they will buy?

 

I think you guys should throw out quality, researched ideas and debate the pros & cons.  Maybe a few of them will pique Fairfax's interest.  Cheers!

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Well Sanjeev, I take it you read the snippet from the latest annual letter right??  Looks like they're coming around...

 

"While our primary objective is to expand our insurance and reinsurance operations worldwide, our investing skills could provide us with opportunities to buy, in whole or in part, excellent companies in other industries which generate strong free cash flows and will contribute to our objective of achieving a 15% per year increase in book value per share over the long term. For entrepreneurial founders who have built their companies over long periods of time, Fairfax will be an excellent owner, allowing the founders to continue to run their business, unfettered by the head office, and we are open to these opportunities."

 

from your lips to gods ears. i'd love to see this happen. its why i like mkl... they get it & they're smart, disciplined buyers who have learned well from webs example.

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I surprised no one has already commented on the fact that Prem specifically mentioned pursuing these acquisitions in the 4th to last paragraph of the shareholder letter.

 

By the way, cash flow from our insurance and reinsurance operations, on a normalized basis, is approximately $0.5 to

$1.0 billion annually. While our primary objective is to expand our insurance and reinsurance operations worldwide,

our investing skills could provide us with opportunities to buy, in whole or in part, excellent companies in other

industries which generate strong free cash flows and will contribute to our objective of achieving a 15% per year

increase in book value per share over the long term. For entrepreneurial founders who have built their companies

over long periods of time, Fairfax will be an excellent owner, allowing the founders to continue to run their business,

unfettered by the head office, and we are open to these opportunities.

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I think you guys should throw out quality, researched ideas and debate the pros & cons.  Maybe a few of them will pique Fairfax's interest.  Cheers!

Just throwing a few names there...

 

If looking for quality they could buy RCH.TO

 

This is a consolidator in a highly segmented market, therefore could allocate capital in a efficient way. RCH has average very healty ROE without any leverage. Management only buys high quality assets at a reasonable price. One might look at the compounded earnings orver time and make it's own conclusion. It's not cheap tough.

 

If looking for a very strong player in it's market they could buy SJ.TO

 

SJ has finished the consolidation phase and are the largest supplier of railway ties in North-America. Their relationship with the railroads is symbiotic which means that if you believe in the future of RR you could buy into SJ at a much cheaper price then buying CN Railways. The moat is somewhat smaller then RR but so is CapEx. I would certainly not buy at this price tough!

 

 

If looking for a tool booth type of business they could buy BR (NYSE)

 

They basically have the monopoly of Proxy voting in the US. It's cheap for the caracteristics it posses because the market is worried about the transformation from mail voting to internet voting. I believe the complexity added by internet voting will actually enhance the value proposition of BR as the complexity will also increase. Probably way too big for FFH tough.

 

 

 

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I concur on RCH and SJ. Really well run companies in simple to understand niche businesses. With SJ, the lack of moat always bothered me, but they seem to produce excellent results. Not sure cnr is more expensive most of the time.

 

I'd throw out RBA and MTY as canadian equities of similar quality. I posted a brief comment on MTY on the Investment Ideas board. Not much response. RBA has a good writeup in Sequoia Funds I think, recent annual report. I'd call these way overpriced and slightly overpriced.

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How about some radio assets like SALM and SGA.  These are both throwing off alot of FCF and have defined niches (SGA small town stations and SALM in the Christian demo).  Another play could be SURW as they could fund the fiber build-outs arond their core rings. 

 

Distribution companies that also throw off FCF but have defendable niches are DIT and CORE. 

 

Packer

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How about some radio assets like SALM and SGA.  These are both throwing off alot of FCF and have defined niches (SGA small town stations and SALM in the Christian demo).  Another play could be SURW as they could fund the fiber build-outs arond their core rings. 

 

Distribution companies that also throw off FCF but have defendable niches are DIT and CORE. 

 

Packer

 

SALM and SGA would almost be considered runoff in my opinion. Is it what they are looking for?

 

BeerBaron

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Thats what it appears on the surface but once you dig you will see both have growth prospects because for SGA's focus on the local community versus the large consolidators and SALM's focus on a growing demo versus an overall decline.

 

Packer

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