FFH at multi-year high

[ERICOPOLY]

The City of Toronto could purchase BBRY and change it's name to MarionBerry in an effort to take the headlines away from their crack smoking mayor:

 

http://online.wsj.com/news/articles/SB10001424052702303661404579179822063873580?mod=WSJ_hps_LEFTTopStories

 

[txlaw]

Txlaw, Grenville, Gio, Parsad. Maybe part of the problem also is that he is called the Buffett of the North, & that expectation is not fair. He is who he is. He invests in the way he knows how. It's obviously not like Buffett or MKL, or LUK. Sometimes when you go from managing medium amounts of money to huge amounts of money you start reaching. We'll only know in hindsight if that's true here.

  However as an investor, if I am not comfortable, or think it's a too high hurdle to be comfortable with then I pass and go on to others. That's not saying I mistrust him, or think he's lost his edge. It's just that some are not comfortable and some are. Hindsight will tell us who was MORE right.

 

Fair enough, rjstc.  I totally understand having this position -- it's a reasonable one to me.

[Kraven]

The angst on these threads is something.  People are acting like they discovered their significant other cheating on them every Sunday morning when all this time they thought they'd been at church during those times.

[warrior]

The angst on these threads is something.  People are acting like they discovered their significant other cheating on them every Sunday morning when all this time they thought they'd been at church during those times.

+1

[Parsad]

The angst on these threads is something.  People are acting like they discovered their significant other cheating on them every Sunday morning when all this time they thought they'd been at church during those times.

 

+1!  Cheers!

[Uccmal]

From Cardboard's post above:

 

Now, let's consider some facts or the last 5 and 10 years returns in book value growth per share per the annual report:

 

5 year: 10.5%

10 year: 11.7%

--–-----------

 

This bears repeating since it is more redlective of where Fairfax is at Today.  Where do you get 15% going forward? 10.5% would be more reasonable. 

 

This is why I sold out over a 2 year period, not the BBRY deal.  That just got rid of the last 50 out of over 1000 shares. 

[ERICOPOLY]

Did you guys think that 15% book value growth would happen when 100% hedged?  Was it a secret or something that they were hedged?

 

So here we are, deep in the red from the hedges, and you didn't get your 15% -- who's fault?

 

[Parsad]

Did you guys think that 15% book value growth would happen when 100% hedged?  Was it a secret or something that they were hedged?

 

So here we are, deep in the red from the hedges, and you didn't get your 15% -- who's fault?

 

+1!  Cheers!

[Guest valueInv]

Some thoughts I just posted on another thread:

http://www.cornerofberkshireandfairfax.ca/forum/fairfax-financial/prem-watsa-and-respect/msg139605/?topicseen#msg139605

 

I view all of this feedback as good.  Hopefully, the folks at FFH are reading carefully.

 

Looking for a job?

[shalab]

So here we are, deep in the red from the hedges, and you didn't get your 15% -- who's fault?

 

I don't expect them to return 15%, I like to trade them like SD mentioned and I own some from the block I bought at 340s. PW's letter to shareholders from March 2013:

 

Float is essentially the sum of loss reserves, including loss adjustment expense reserves, and unearned premium reserves, less accounts receivable, reinsurance recoverables and deferred premium acquisition costs. As the table shows, the average float from our operating companies increased 5.2% in 2012, at no cost (in fact a small benefit!). That increase is mainly due to internal growth. Our long term goal is to increase the float at no cost, by achieving combined ratios consistently at or below 100%. This, combined with our ability to invest the float well over the long term, is why we feel we can achieve our long term objective of compounding book value per share by 15% per annum over the long term.

 

[ERICOPOLY]

So here we are, deep in the red from the hedges, and you didn't get your 15% -- who's fault?

 

I don't expect them to return 15%, I like to trade them like SD mentioned and I own some from the block I bought at 340s. PW's letter to shareholders from March 2013:

 

Float is essentially the sum of loss reserves, including loss adjustment expense reserves, and unearned premium reserves, less accounts receivable, reinsurance recoverables and deferred premium acquisition costs. As the table shows, the average float from our operating companies increased 5.2% in 2012, at no cost (in fact a small benefit!). That increase is mainly due to internal growth. Our long term goal is to increase the float at no cost, by achieving combined ratios consistently at or below 100%. This, combined with our ability to invest the float well over the long term, is why we feel we can achieve our long term objective of compounding book value per share by 15% per annum over the long term.

 

Emphasis on over the long term.

 

Over the "short" term, they won't because of the equities hedge and these low bond yields don't contribute enough.

 

The best way to ensure that 15% will be attained over your holding period is to wait to buy until the drop the hedges, and wait to sell until they put them back on.

 

Well... still no guarantees, but I suggest the odds are higher than if you also choose to hold during the period when they are hedged.

 

 

 

[racemize]

Emphasis on over the long term.

 

Over the "short" term, they won't because of the equities hedge and these low bond yields don't contribute enough.

 

The best way to ensure that 15% will be attained over your holding period is to wait to buy until the drop the hedges, and wait to sell until they put them back on.

 

Well... still no guarantees, but I suggest the odds are higher than if you also choose to hold during the period when they are hedged.

 

My personal view was this, at the time of purchase (I hold quite a few FFH shares for the last few years):

 

1)  I like to buy these companies at book value or less--if it is clear that it will grow quickly in the near future, it probably won't sell for book value; (thus, I bought it then)

 

2) I don't know whether we are going to deflate or inflate, if they are wrong, it won't grow that fast, but perhaps we will still get the dividend+alpha, as it were; if they are right, then it is decent insurance for me (even if the stock goes down with the rest of the market, I'll be holding a company who's intrinsic value went up)--none of the rest of my investments were based on this theory of the future

 

3) Over the long term, hoping for 15%.  I'm worried that was too much now, but they have the capacity for lots of leverage.

 

 

[Parsad]

Some thoughts I just posted on another thread:

http://www.cornerofberkshireandfairfax.ca/forum/fairfax-financial/prem-watsa-and-respect/msg139605/?topicseen#msg139605

 

I view all of this feedback as good.  Hopefully, the folks at FFH are reading carefully.

 

Looking for a job?

 

ValueInv, why are you being such a dick?  Can you please grow up. 

[Guest valueInv]

Some thoughts I just posted on another thread:

http://www.cornerofberkshireandfairfax.ca/forum/fairfax-financial/prem-watsa-and-respect/msg139605/?topicseen#msg139605

 

I view all of this feedback as good.  Hopefully, the folks at FFH are reading carefully.

 

Looking for a job?

 

ValueInv, why are you being such a dick?  Can you please grow up.

 

Returning the favor:

 

Whoa, you've jumped the shark on this one.

 

I've been pretty entertained by the AAPL discussion for a while now, but good lord . . . ;D

[Parsad]

Some thoughts I just posted on another thread:

http://www.cornerofberkshireandfairfax.ca/forum/fairfax-financial/prem-watsa-and-respect/msg139605/?topicseen#msg139605

 

I view all of this feedback as good.  Hopefully, the folks at FFH are reading carefully.

 

Looking for a job?

 

ValueInv, why are you being such a dick?  Can you please grow up.

 

Returning the favor:

 

Whoa, you've jumped the shark on this one.

 

I've been pretty entertained by the AAPL discussion for a while now, but good lord . . . ;D

 

That's my point!  That comment is from April, and you still have a hard on for Txlaw...to try and make him look stupid.  What does this accomplish? 

 

No one is a child here.  How can grown men lob grenades at each other as if they are still in sophomore year of high school.  God Lord!  Cheers!

[Guest valueInv]

Some thoughts I just posted on another thread:

http://www.cornerofberkshireandfairfax.ca/forum/fairfax-financial/prem-watsa-and-respect/msg139605/?topicseen#msg139605

 

I view all of this feedback as good.  Hopefully, the folks at FFH are reading carefully.

 

Looking for a job?

 

ValueInv, why are you being such a dick?  Can you please grow up.

 

Returning the favor:

 

Whoa, you've jumped the shark on this one.

 

I've been pretty entertained by the AAPL discussion for a while now, but good lord . . . ;D

 

That's my point!  That comment is from April, and you still have a hard on for Txlaw...to try and make him look stupid.  What does this accomplish? 

 

No one is a child here.  How can grown men lob grenades at each other as if they are still in sophomore year of high school.  God Lord!  Cheers!

 

Couching BS in polite professional language does not make one a grown man anymore than putting lipstick on a pig makes it a supermodel.

 

Wellmont is doing what I used to do- engaging Txlaw intellectually. It's actually funny to watch someone else do it. It is also amazing that there is only one person who takes him to task.

[fareastwarriors]

I was hoping for sub C$ 400....

[james22]

I'm pretty new to individual stock investing, but do you not evaluate investments with respect to how their addition impacts the overall risk and return of the portfolio as a whole, as indexers do, rather than in isolation?

 

I don't know whether we are going to deflate or inflate, if they are wrong, it won't grow that fast, but perhaps we will still get the dividend+alpha, as it were; if they are right, then it is decent insurance for me (even if the stock goes down with the rest of the market, I'll be holding a company who's intrinsic value went up)--none of the rest of my investments were based on this theory of the future

 

I like Fairfax because their pessimism/deflation bet/cigar butt investing offsets BRK/LUK/MKL's optimism/inflation bet/quality investments.

[Parsad]

Some thoughts I just posted on another thread:

http://www.cornerofberkshireandfairfax.ca/forum/fairfax-financial/prem-watsa-and-respect/msg139605/?topicseen#msg139605

 

I view all of this feedback as good.  Hopefully, the folks at FFH are reading carefully.

 

Looking for a job?

 

ValueInv, why are you being such a dick?  Can you please grow up.

 

Returning the favor:

 

Whoa, you've jumped the shark on this one.

 

I've been pretty entertained by the AAPL discussion for a while now, but good lord . . . ;D

 

That's my point!  That comment is from April, and you still have a hard on for Txlaw...to try and make him look stupid.  What does this accomplish? 

 

No one is a child here.  How can grown men lob grenades at each other as if they are still in sophomore year of high school.  God Lord!  Cheers!

 

Couching BS in polite professional language does not make one a grown man anymore than putting lipstick on a pig makes it a supermodel.

 

Wellmont is doing what I used to do- engaging Txlaw intellectually. It's actually funny to watch someone else do it. It is also amazing that there is only one person who takes him to task.

 

I'm fine if you engage him intellectually.  It's the other stuff that the board can do without...such as the sophomoric shot you made today! 

[giofranchi]

15% CAGR "guaranteed" according to Gio...

 

Now, let's consider some facts or the last 5 and 10 years returns in book value growth per share per the annual report:

 

5 year: 10.5%

10 year: 11.7%

 

An easy observation is that the percentage is probably declining in the most recent period due to the larger size. Another easy one is that both starting points were very low or depth of the abyss at the beginning of 2003 and beginning of 2008 or before the financial crisis started.

 

So somehow, we are supposed to believe that future years will be much better than prior ones? By the way, I was also involved when the percentage goal was dropped from 20 to 15%. Is 12% coming? 10%?

 

I was also challenged and maybe insulted in another post about my attitude towards Fairfax and my "lack of respect". Well, let me state some observations to justify my view which are not at all emotional but, based on real information and simple math.

 

1- I have said for years that Fairfax structure or balance sheet is at a negative disadvantage. There is little invested in best return assets or stocks and businesses relative to shareholders equity. At least much less than at Berkshire. This is the result of carrying on too much debt, risky assets such as reinsurance and a fair amount of latent liabilities such as asbestos all of this leading to mediocre insurance ratings preventing the deployment into more productive and best return assets. I see no desire to reverse this and this hurts ROE.

 

2- We have been told for years that the focus is on improving combined ratios. To my knowledge, Fairfax has only achieved over the last 10 years below 100% combined ratios during hard markets and when no cat losses occurred. My conclusion was that the company is an average insurer in terms of underwriting profitability and that Mr. Watsa should have identified that the goal of the company was to amass float, minimize costs or at best make an underwriting profit but, not to keep creating this impression that we are all about making money on the underwriting side. Strike one for me on the "trust" front.

 

3- As Al and others have stated many times, the tendency to invest in poor businesses is creating unwanted issues and degrading the prospects for higher returns. I agree. It is also reducing insurance ratings since there is no visible, stable, recurring cash flows coming from what is considered the most risky part of the investment portfolio. I am also quite concerned about these large contrarian and macro bets. It has worked a few times, but there is no guarantee that it will work again, at least to the same extent.

 

4- I will bring up one point that I have never seen challenged or discussed on this board. Prem is apparently a multi-billionaire according to Forbes and others. I am sorry but, did anyone find out how that came about? He holds roughly 1.8 million shares of Fairfax through Sixty-Two (if he holds at 100%) and personally which is about $800 million. I can't remember which annual letter, but it was stated that he held over 90% of his wealth via Fairfax. So with the annual dividends, his small salary and his initial 10% outside Fairfax, he has made well over a billion$? I am not saying that there is anything nefarious here, I would simply like to understand how it was done and if the multi-billionaire status is accurate. It would be very interesting to know also when it was made since Fairfax could have badly used insider investment at a few times during the lean years when we signed dilutive deals.

 

5- The Fibrek/Resolute saga. Strike two on the "trust" front.

 

6- Continual praise for Tom Ward. Strike three on the "trust" front.

 

7- Blackberry involvement: Prasing Heins and never publicly challenging the board if things were thought to be heading badly or if the strategy seemed wrong. The Street would certainly have listened and be ready to help. Offering a low ball bid. Firing Heins, so apparently the strategy was all wrong. Not making good on the bid despite "guaranteed" type statements and putting reputation at stake. Investing more into Blackberry despite saying no previously to concerned Fairfax shareholders.

 

#7 was the last straw for me. While I hold no share of Fairfax since a long time, I held a small position in BBRY thinking that Prem's word was solid. Now, caveats are coming out or that an LBO was not right, etc. Trust is something that you don't play with me. Once it is broken, it is for good. If you say that you will do something, you do it. That is how I deal with friends, relatives, strangers, etc. I don't see why I should make an exception here.

 

Cardboard

 

Hi Cardboard,

I have read your analysis and I thank you: one of the reason I write on the board is to find people who disagree with me, and to listen to them carefully. Though people who agree with me are much more pleasant, those who disagree with me are much more useful! ;)

 

This being said, I try to answer your points:

First of all, I look for a 15% CAGR from each investment of mine. If I don’t believe that it is possible to achieve such a return, I do not invest. Please, mark my word “possible”: it certainly doesn’t mean “guaranteed”, nothing in this life is nor should be guaranteed…

And I do not think that a 15% CAGR in BVPS is possible, because Mr. Watsa says so. I think it is possible, simply because they must get investment results, which are significantly worse, not better, than the ones they have historically achieved, in order to grow BVPS at a CAGR of 15%.

Now to your points:

 

1 – I am not so sure: since the early ‘80s Bonds have been in a spectacular bull market, and the team at FFH was one of the best worldwide to capitalize on that secular trend. In future years that trend will most probably be reversed, and that’s when I would like to see more capital invested in stocks and wholly owned businesses. That’s also when “bad legacies”, like liabilities linked to damages made by asbestos, will probably have petered out and become less and less of a drag.

 

2 – It is true that CRs during the last 10 years have hardly stayed below 100%, but it is also true that policies written from 2003 to 2012 have brought in $43.0 billion of cumulative net premiums written at an average CR of 95.8%. Therefore, once again, problems of the past are still weighing on FFH’s underwriting results, but things are clearly improving. Furthermore, Mr. Andy Barnard, for whom I have great respect, has just begun supervising all FFH’s insurance & reinsurance operations. And, if he only gets close to replicating the success achieved at OdysseyRe…

 

3 – I think that in due time they will move closer and closer to the way of investing Al is suggesting. But, as I have already pointed out, not in a hurry… They will take their time, and rightly so imo. As long as macro is concerned, let’s just say that I am an agnostic… their macro bets imo are neither a plus nor a minus, I am just curious to see how all this will play out!

 

4 – Nothing to say about Mr. Watsa’s billionaire status…

 

5 – / 6 – As you know, I invest in BH… So, I simply guess we have different ideas of “trust”! ;D ;D

 

7 – I have already said what I think about the whole BBRY saga.

 

Thank you again for your thoughts and analysis! :)

 

Cheers,

 

giofranchi

 

[nestorius]

I figure this is relevant for this thread...

 

Fairfax Financial Holdings Limited

Treasury Offering of Subordinate Voting Shares

 

 

Issuer:

Fairfax Financial Holdings Limited (the “Company”).

 

Issue: Treasury offering of 1,000,000 subordinate voting shares (“Subordinate Voting Shares”) including 300,000 Subordinate Voting Shares sold to an institutional investor.

 

Issue Price: C$431.00 per Subordinate Voting Share

 

Issue Amount: C$431,000,000

 

Use of Proceeds: The net proceeds of the offering will be used to augment its cash position at the holding company and for general corporate purposes.

 

Form of Offering: Bought deal by way of a prospectus supplement to the Company’s short form base shelf prospectus dated December 10, 2012 to be filed in all provinces and territories of Canada. U.S. sales by private placement via Rule 144A.

 

Listing: An application will be made to list the Subordinate Voting Shares on the Toronto Stock Exchange (the “TSX”). The existing subordinate voting shares are listed on TSX under the symbol “FFH”.

 

Eligibility: Eligible for RRSPs, RRIFs, RESPs, TFSAs, RDSPs and DPSPs.

 

Joint Bookrunners: BMO Capital Markets and CIBC

 

Commission:

4.00% /  1.00% commission payable on portion to the institutional investor

 

Closing:

November 15, 2013.

[Uccmal]

Well, that equity issue is going to go over like a lead balloon.

 

From number 4 above.  Watsa has stated that 90% of his wealth is in FFH.  He holds something just above 2 million shares.  That puts him slightly above a billion.  I have never figured where Journalists get the 4 or 5 billion numbers I have read.  They are just plain wrong.  He doesn't appear on the Forbes richest which has a cut off somewhere above a billion.  You can easily reverse engineer Prems net worth considering he put himself through school selling vacuum cleaners.  Its not really relevant to any discussion.  He holds roughly 4 m BB shares on a look through basis. 

 

I haven't lost any respect for PW.  Sometimes I question his choice of partners.  Tom Ward gave me that slimy feeling when I first heard/saw him talk in person, as did the operator of Resolute.  My background has taught me how to read people quickly.  Of anything PW is too generous in his forgiveness of people's foibles. 

 

Fairfax is better off operating below the radar.  The whole RIM debacle has been a completely unnecessary distraction.  Of all the companies to get involved with, they had to choose the most high profile meltdown in Canada. 

 

Prem is honest, very capable, and has a fabulous track record.  If The trading price was sub 300 I would be a buyer today.  But it isn't.  Its overvalued at the moment. 

[treasurehunt]

Not sure why FFH is being compared to Canadian GDP.

 

Just take for example the total size of their US operations (Odyssey Re, Crum, etc...) and their Asian operations, investments elsewhere, etc...

 

Maybe compare them to global GDP, but Canadian?  They practically have nothing to do with Canada -- Northbridge is not that big a piece of their pie.

 

FRFHF is compared to canadian GDP as it is domiciled in Canada. At 0.4% of the GDP, it is already the big gorilla of Canada. If it reaches 2-3% of the GDP, it will have enough power to control the government and if it reaches higher, it will be more powerful than the government. It has to be broken up or become a regulated monopoly then.

 

In the U.S, this happened with standard oil initially and Microsoft in the late nineties. There are examples from Asia where this is happening now...

 

Very questionable. According to the Globe and Mail,  Fairfax is only 50th among Canadian companies by market cap: http://www.theglobeandmail.com/report-on-business/top-1000/article12832687/. Most of the biggest companies are banks and energy companies, but I don't think they qualify as regulated monopolies.

 

Also, Nortel had a market cap of almost $400 billion (Canadian dollars) back in the late nineties. They did not get broken up. Well, not by the government anyway. Blackberry had a market cap of around $80 billion at its peak. I don't remember any calls to break them up either.

[giofranchi]

If The trading price was sub 300 I would be a buyer today.  But it isn't.  Its overvalued at the moment.

 

Al,

sorry but I do not see any mathematical evidence that FFH is overvalued today…

Have you taken a look at “My 7 lean years model for FFH”? It very simply considers a CAGR in BVPS of 12% (less than 15%!!) for the next 16 years. Then it applies a 9% discount rate, to arrive at FFH’s Present Value of Equity. And you get a present value of 1.54 x BVPS. This assumes that beginning in year 17 FFH completely ceases to create value… which, I hope you might agree with me, is quite conservative… Therefore, I think FFH’s Present Value of Equity, as computed by “My 7 lean years model for FFH”, significantly underestimates FFH’s fair value…

Well now, as of yesterday FFH is trading at a multiple of $409 / $334.5 = 1.22 x BVPS. Yesterday’s dilution accounts for 5.4% of FFH shareholders’ equity, and BVPS today might be: $334.5 - $334.5 x 0.054 = $316.4. Even so, FFH is trading at a multiple of $409 / $316.4 = 1.29 x BVPS… significantly less than 1.54 x BVPS… which is significantly less than FFH’s fair value… How many margins of safety do you need?!

 

I understand all your and Cardboard’s criticisms about FFH, but I do not understand the math… nor the assumptions behind your calculation of FFH’s fair value.

 

PS

If you need another margin of safety, what about a discount rate of 9% for a company whose 10 year average cost of capital is only 1.1%? Even if you don’t like to define the discount rate as the cost of capital, and you prefer instead to think about discount rate as the possible return from similar investments, stocks in the long-run have returned on average more or less 9%… Yet, I guess you agree that FFH is no average stock, and the proof is in the fact that during the last 28 years FFH has left the S&P500 far behind… Therefore, I also think that to apply a discount rate of 9% is another conservative assumption to arrive at FFH’s Present Value of Equity.

 

giofranchi

 

[vinod1]

 

Have you taken a look at “My 7 lean years model for FFH”? It very simply considers a CAGR in BVPS of 12% (less than 15%!!) for the next 16 years. Then it applies a 9% discount rate, to arrive at FFH’s Present Value of Equity. And you get a present value of 1.54 x BVPS. This assumes that beginning in year 17 FFH completely ceases to create value… which, I hope you might agree with me, is quite conservative… Therefore, I think FFH’s Present Value of Equity, as computed by “My 7 lean years model for FFH”, significantly underestimates FFH’s fair value…

 

giofranchi

 

Giofranchi,

 

If I understand your model correctly, it takes a look at 20 years, it assumes no growth for 4 years, then a 16 year growth of 12%, assumes it would be at book at the end of 20 years and discounts it back at 9%.

 

If I do this I get an IV of a BV multiple of 1.1. I compounded at 12% for 16 years and then discounted by 9% for full 20 years. I think you might have discounted only for 16 years. Maybe I did not understand you model correctly.

 

Vinod