Fairfax nears deal to buy Allied World for $4.9B

[rb]

http://www.theglobeandmail.com/report-on-business/streetwise/fairfax-financial-plans-ipo-for-company-focused-on-african-investments-sources/article33415475/

 

paywalled

[Hoodlum]

Non-paywalled version

 

http://www.pressreader.com/canada/the-globe-and-mail-ottawaquebec-edition/20161223/281754153977995

 

[StubbleJumper]

Can anyone share the details, in print, about this Africa fund? First I'm hearing of it. Would be excited by that opportunity though - especially if run in a fund format as opposed to Fairfax risking all of it's own capital.

 

The asset management business is a great model and using it to leverage their exposure, but protect their downside, to place like India and Africa seems brilliant IMO.

 

 

When they launched Fairfax India, my observation was that the only real advantage for FFH is the opportunity to earn some management fees.  So, like Fairfax India, this fund will be $1B, meaning that the investment fees would probably range from $10-20m per year (ie, a fee of 100-200 bps).  It's a nice little addition, but I can't see it really moving the needle.

 

 

SJ

[ourkid8]

Have you forgotten boots on the ground? With fairfax India fund, they have ICICI lombart and Thomas Cook management team to leverage.

 

Now in regards to africa, the management team feels they have sufficient boots on the ground from their 100% owned S. African zurich insurance business to leverage. (I was born in east africa and fully understand you need to be there to understand the business climate.). On the positive, it's another source of revenue that will come in so a win/win for fairfax shareholders.

 

Can anyone share the details, in print, about this Africa fund? First I'm hearing of it. Would be excited by that opportunity though - especially if run in a fund format as opposed to Fairfax risking all of it's own capital.

 

The asset management business is a great model and using it to leverage their exposure, but protect their downside, to place like India and Africa seems brilliant IMO.

 

 

When they launched Fairfax India, my observation was that the only real advantage for FFH is the opportunity to earn some management fees.  So, like Fairfax India, this fund will be $1B, meaning that the investment fees would probably range from $10-20m per year (ie, a fee of 100-200 bps).  It's a nice little addition, but I can't see it really moving the needle.

 

 

SJ

[StubbleJumper]

Have you forgotten boots on the ground? With fairfax India fund, they have ICICI lombart and Thomas Cook management team to leverage.

 

Now in regards to africa, the management team feels they have sufficient boots on the ground from their 100% owned S. African zurich insurance business to leverage. (I was born in east africa and fully understand you need to be there to understand the business climate.). On the positive, it's another source of revenue that will come in so a win/win for fairfax shareholders.

 

Can anyone share the details, in print, about this Africa fund? First I'm hearing of it. Would be excited by that opportunity though - especially if run in a fund format as opposed to Fairfax risking all of it's own capital.

 

The asset management business is a great model and using it to leverage their exposure, but protect their downside, to place like India and Africa seems brilliant IMO.

 

 

When they launched Fairfax India, my observation was that the only real advantage for FFH is the opportunity to earn some management fees.  So, like Fairfax India, this fund will be $1B, meaning that the investment fees would probably range from $10-20m per year (ie, a fee of 100-200 bps).  It's a nice little addition, but I can't see it really moving the needle.

 

 

SJ

 

 

What difference do the boots on the ground make?  The expected revenue stream for FFH from managing $1B of other people's money can only be about $10-20m per year.  Boots on the ground might mean that they'll do a better job of investing, but it doesn't change the revenue stream.

[ourkid8]

Your looking at it wrong. Off the top of my head I believe Fairfax invested over $300M of the $1B in the fund and I believe their $10-20m management fee is paid in additional units of the fund itself. Yes it is small right now in the whole scheme of things however if their investments do well, fairfax shareholders will also do well over the long term. (I am on vacation and not infront of the computer to pull the exact numbers)

 

Have you forgotten boots on the ground? With fairfax India fund, they have ICICI lombart and Thomas Cook management team to leverage.

 

Now in regards to africa, the management team feels they have sufficient boots on the ground from their 100% owned S. African zurich insurance business to leverage. (I was born in east africa and fully understand you need to be there to understand the business climate.). On the positive, it's another source of revenue that will come in so a win/win for fairfax shareholders.

 

Can anyone share the details, in print, about this Africa fund? First I'm hearing of it. Would be excited by that opportunity though - especially if run in a fund format as opposed to Fairfax risking all of it's own capital.

 

The asset management business is a great model and using it to leverage their exposure, but protect their downside, to place like India and Africa seems brilliant IMO.

 

 

When they launched Fairfax India, my observation was that the only real advantage for FFH is the opportunity to earn some management fees.  So, like Fairfax India, this fund will be $1B, meaning that the investment fees would probably range from $10-20m per year (ie, a fee of 100-200 bps).  It's a nice little addition, but I can't see it really moving the needle.

 

 

SJ

 

 

What difference do the boots on the ground make?  The expected revenue stream for FFH from managing $1B of other people's money can only be about $10-20m per year.  Boots on the ground might mean that they'll do a better job of investing, but it doesn't change the revenue stream.

[StubbleJumper]

Your looking at it wrong. Off the top of my head I believe Fairfax invested over $300M of the $1B in the fund and I believe their $10-20m management fee is paid in additional units of the fund itself. Yes it is small right now in the whole scheme of things however if their investments do well, fairfax shareholders will also do well over the long term. (I am on vacation and not infront of the computer to pull the exact numbers)

 

Have you forgotten boots on the ground? With fairfax India fund, they have ICICI lombart and Thomas Cook management team to leverage.

 

Now in regards to africa, the management team feels they have sufficient boots on the ground from their 100% owned S. African zurich insurance business to leverage. (I was born in east africa and fully understand you need to be there to understand the business climate.). On the positive, it's another source of revenue that will come in so a win/win for fairfax shareholders.

 

Can anyone share the details, in print, about this Africa fund? First I'm hearing of it. Would be excited by that opportunity though - especially if run in a fund format as opposed to Fairfax risking all of it's own capital.

 

The asset management business is a great model and using it to leverage their exposure, but protect their downside, to place like India and Africa seems brilliant IMO.

 

 

When they launched Fairfax India, my observation was that the only real advantage for FFH is the opportunity to earn some management fees.  So, like Fairfax India, this fund will be $1B, meaning that the investment fees would probably range from $10-20m per year (ie, a fee of 100-200 bps).  It's a nice little addition, but I can't see it really moving the needle.

 

 

SJ

 

 

What difference do the boots on the ground make?  The expected revenue stream for FFH from managing $1B of other people's money can only be about $10-20m per year.  Boots on the ground might mean that they'll do a better job of investing, but it doesn't change the revenue stream.

 

How is it relevant that they have separately invested $300m of shareholders money in this?  For the record, I think it's great that FFH is snooping around for value anywhere that it might be found, including Africa.  So, they pay some of their guys to find some opportunities and they invest the $300m.  The only advantage of going the next step and launching the fund is that they can use the same analysis for other people's money, and collect a modest fee.

 

What am I missing here?

[giofranchi]

I like anything that makes me think Prem is still very motivated to do well and grow the company.

Will we ever witness a 5 years period in which:

1) Bond returns are strong,

2) Equity returns are strong,

3) Underwriting returns are good?

Of course I cannot tell, but I am sure we won't if Prem, Mr. Bradstreet, Mr. Barnard, etc have lost the drive to achieve great results.

Though I don't know if this new Africa fund is a good idea or a not so good one, at least imo it shows that FFH's management is still eager to work hard and (hopefully) do well.

We'll see!

 

Cheers,

 

Gio

[SharperDingaan]

Your looking at it wrong. Off the top of my head I believe Fairfax invested over $300M of the $1B in the fund and I believe their $10-20m management fee is paid in additional units of the fund itself. Yes it is small right now in the whole scheme of things however if their investments do well, fairfax shareholders will also do well over the long term. (I am on vacation and not infront of the computer to pull the exact numbers)

 

Have you forgotten boots on the ground? With fairfax India fund, they have ICICI lombart and Thomas Cook management team to leverage.

 

Now in regards to africa, the management team feels they have sufficient boots on the ground from their 100% owned S. African zurich insurance business to leverage. (I was born in east africa and fully understand you need to be there to understand the business climate.). On the positive, it's another source of revenue that will come in so a win/win for fairfax shareholders.

 

Can anyone share the details, in print, about this Africa fund? First I'm hearing of it. Would be excited by that opportunity though - especially if run in a fund format as opposed to Fairfax risking all of it's own capital.

 

The asset management business is a great model and using it to leverage their exposure, but protect their downside, to place like India and Africa seems brilliant IMO.

 

 

When they launched Fairfax India, my observation was that the only real advantage for FFH is the opportunity to earn some management fees.  So, like Fairfax India, this fund will be $1B, meaning that the investment fees would probably range from $10-20m per year (ie, a fee of 100-200 bps).  It's a nice little addition, but I can't see it really moving the needle.

 

 

SJ

 

 

What difference do the boots on the ground make?  The expected revenue stream for FFH from managing $1B of other people's money can only be about $10-20m per year.  Boots on the ground might mean that they'll do a better job of investing, but it doesn't change the revenue stream.

 

How is it relevant that they have separately invested $300m of shareholders money in this?  For the record, I think it's great that FFH is snooping around for value anywhere that it might be found, including Africa.  So, they pay some of their guys to find some opportunities and they invest the $300m.  The only advantage of going the next step and launching the fund is that they can use the same analysis for other people's money, and collect a modest fee.

 

What am I missing here?

 

Think long-term, not short-term.

 

If a firm hopes to successfully invest in these places, 1) it has to be part of the business culture in these places, & 2) have the runway to let the investments develop. At best its a 5-10 year lottery ticket, that might well not even work - but you have to be in it to win it. It benefits the next generation, not this one.

 

We would suggest that the fees will simply cover the 'boots on the ground' cost of operation during its first 5-10 years, resulting in a zero cost option on business activity in these places. Should these places develop as expected, a known and entrenched 3rd party investment team will be a very valuable asset, & give FFH front of line access to deal flow. The fund itself would grow as well, the same as any other fund in a slowly improving investment climate.

 

It's a fairly standard inter-generational investment technique, & explicitly recognizes that the team is getting old.

We use a 'poor mans' version, with much the same generational aim.

 

Never forget that FFH is a family business, that outsiders are allowed to participate in.

There is going to be more of this.

 

SD

   

   

[StubbleJumper]

I like anything that makes me think Prem is still very motivated to do well and grow the company.

Will we ever witness a 5 years period in which:

1) Bond returns are strong,

2) Equity returns are strong,

3) Underwriting returns are good?

Of course I cannot tell, but I am sure we won't if Prem, Mr. Bradstreet, Mr. Barnard, etc have lost the drive to achieve great results.

Though I don't know if this new Africa fund is a good idea or a not so good one, at least imo it shows that FFH's management is still eager to work hard and (hopefully) do well.

We'll see!

 

Cheers,

 

Gio

 

 

Nope, seeing #1, #2 and #3 simultaneously would be a historical accident.  If you get decent investment returns, then the obvious thing to do is to expand your book by underwriting at a loss.  As long as your cost of float is reasonable, just keep writing more business to grow the float. 

 

 

[StubbleJumper]

Your looking at it wrong. Off the top of my head I believe Fairfax invested over $300M of the $1B in the fund and I believe their $10-20m management fee is paid in additional units of the fund itself. Yes it is small right now in the whole scheme of things however if their investments do well, fairfax shareholders will also do well over the long term. (I am on vacation and not infront of the computer to pull the exact numbers)

 

Have you forgotten boots on the ground? With fairfax India fund, they have ICICI lombart and Thomas Cook management team to leverage.

 

Now in regards to africa, the management team feels they have sufficient boots on the ground from their 100% owned S. African zurich insurance business to leverage. (I was born in east africa and fully understand you need to be there to understand the business climate.). On the positive, it's another source of revenue that will come in so a win/win for fairfax shareholders.

 

Can anyone share the details, in print, about this Africa fund? First I'm hearing of it. Would be excited by that opportunity though - especially if run in a fund format as opposed to Fairfax risking all of it's own capital.

 

The asset management business is a great model and using it to leverage their exposure, but protect their downside, to place like India and Africa seems brilliant IMO.

 

 

When they launched Fairfax India, my observation was that the only real advantage for FFH is the opportunity to earn some management fees.  So, like Fairfax India, this fund will be $1B, meaning that the investment fees would probably range from $10-20m per year (ie, a fee of 100-200 bps).  It's a nice little addition, but I can't see it really moving the needle.

 

 

SJ

 

 

What difference do the boots on the ground make?  The expected revenue stream for FFH from managing $1B of other people's money can only be about $10-20m per year.  Boots on the ground might mean that they'll do a better job of investing, but it doesn't change the revenue stream.

 

How is it relevant that they have separately invested $300m of shareholders money in this?  For the record, I think it's great that FFH is snooping around for value anywhere that it might be found, including Africa.  So, they pay some of their guys to find some opportunities and they invest the $300m.  The only advantage of going the next step and launching the fund is that they can use the same analysis for other people's money, and collect a modest fee.

 

What am I missing here?

 

Think long-term, not short-term.

 

If a firm hopes to successfully invest in these places, 1) it has to be part of the business culture in these places, & 2) have the runway to let the investments develop. At best its a 5-10 year lottery ticket, that might well not even work - but you have to be in it to win it. It benefits the next generation, not this one.

 

We would suggest that the fees will simply cover the 'boots on the ground' cost of operation during its first 5-10 years, resulting in a zero cost option on business activity in these places. Should these places develop as expected, a known and entrenched 3rd party investment team will be a very valuable asset, & give FFH front of line access to deal flow. The fund itself would grow as well, the same as any other fund in a slowly improving investment climate.

 

It's a fairly standard inter-generational investment technique, & explicitly recognizes that the team is getting old.

We use a 'poor mans' version, with much the same generational aim.

 

Never forget that FFH is a family business, that outsiders are allowed to participate in.

There is going to be more of this.

 

SD

   

 

 

 

Yeah, I don't tend to think long term about these sorts of things.  The returns are too distant and too uncertain, so I value them at roughly zero (ie, their probability of this giving them useful deal flow is probably only 15-20%, and then the time value of money means that I further discount it by 1/(1.07)^10 )

 

As long as it doesn't meaningfully distract FFH's management from their core operations, then it's all good.

 

 

SJ

[petec]

Here are a couple of interesting quotes from Prem regarding the rational for the purchase:

 

“The recent election . . . has a strong potential to make the business climate for growth great again,” he said. “We believe the US may see significant growth in GDP and our business in the US will benefit from any such positive development.”

 

Mr Watsa suggested that there could be more US deals in the future: “When the biggest economy in the world is on the way up we think the downside is significantly reduced and it becomes a value-oriented, stockpickers’ market. In the last few years we’ve played defence. We expect to play offence.”

 

https://www.ft.com/content/da6d1b3a-c5f5-11e6-9043-7e34c07b46ef?ftcamp=traffic/partner/feed_headline/us_yahoo/auddev&yptr=yahoo

 

He sounds like a cartain manic depressive fellow I want to sell some shares to... really strange.

 

Yea - This is getting bizarre. I don't have any issues with the acquisition in and of itself, but the 180 degree turn on the U.S. markets as the result of the election with no commentary on rising rates, falling liquidity, strengthening dollar, declining corproate profits, levered corporations, and valuations that appear excessive certainly seems strange.

 

If you read what he's said carefully, he hasn't done a 180 on the US markets but on the US economy.

 

The hedges were not mainly explained in valuation (e.g. CAPE, Tobin's Q) terms.  They were explained in terms of protecting the company from another 1929-33 type selloff, which would have destroyed the company in the absence of the hedges.

 

They now feel that that kind of catastrophe has reduced in probability, because we have a quantum shift from a world in which politicians over-regulate and rely on central bankers to promote growth via leverage, to one in which (maybe) government gets out of the way and productivity drives gdp.

 

So the hedges have gone.  Doesn't mean they think the market goes up.  All they've said on that front is that it will become a stockpicker's market again.  Value starts to win again.

I have a problem with this idea that productivity is suddenly going to go up and all ills are cured because of the election. This implies something along the following lines: As a business owner I have a project that I can execute that would that would improve productivity of my labor force and I can make me more money. Interest rates are low so I have cheap capital available. But I don't execute the project because I don't like the guy in the White House?

 

In addition economies are large and complex mechanisms. They don't turn on a dime. You don't go from deflation risk and possibility of a great depression just because you had an election. The risk of a stock market crash definitely doesn't go down after you've had a 100% or so rally in stock prices.

 

Re: productivity and economic complexity, I disagree.  Deregulating and reducing taxes has an immediate impact.  I'd direct you to "Job Creation" by Andy Pudzer, Trump's new Labour Secretary, for a description of why and how.  However, so far all we have is ideas: these things need to actually happen and that's the risk.

 

Re: risk of a bear market after a 100% rise, I agree.  But FFH wasn't hedging against that - he started hedging in 2010.  He was hedging against an apocalypse and thinks that risk is reduced. 

 

I'm not defending FFH here but I do think they have been fairly clear in communicating their strategy.

[petec]

+1

I just sold 15% of my position in FFH. I am now below my core position in the company for the first time since I initiated the position in November 1999. I did this after much thought, reflection and discussions/debate with individuals I trust.

 

I echo the comments made by both Uccmal and Benhacker---something is not right at FFH and hasn’t been for a VERY long time. Seriously---would anyone actually hold Blackberry, Resolute Forest and Eurobank as their 3 largest equity positions? Prem owes us (the shareholders of the company) a detailed explanation for what the exit strategy is for these and other underwater equity holdings. Simply saying that over the long term everything will work out is inadequate at best. The statement is meaningless without defining what “long term” means.

 

As outlined by Benhacker---the deal financing strategy being deployed recently by FFH (buy first / finance second) also concerns me greatly. Bringing in outside investors to finance these deals greatly changes the metrics and not favourably from a FFH shareholder perspective.

 

I remain a large shareholder of FFH however it was appropriate for me to reduce my equity exposure to the company because of the real concerns I have. Prem is now on a very short leash---it will be much easier for me to sell my remaining shares should he not deliver in short order.

 

As for capturing the animal spirits that have supposedly been unleashed by the Trump victory (I remain a huge skeptic) ----- I would suggest that holding shares of Goldman Sachs, AIG and Cheniere Energy would give you a much better opportunity to do this than by holding shares in FFH.

 

BP6

 

Thank you BP6,

If I have understood correctly, the main risks you see are:

1) Their stock picking performance will continue to generate very poor results,

2) They are financing the acquisition of Allied in a way that won't maximize shareholders' return.

You said you have discussed a lot about FFH with people you trust and who know FFH very well. And you have come to the conclusion there is something wrong at FFH.

Do you see other risks beside 1 and 2? I am really interested to understand if people who know FFH very well see risks that I might have overlooked.

 

Cheers,

 

Gio

 

Gio,

 

Your summary of my comments are not entirely accurate however I will try my best to respond to your questions.

 

My conclusion to sell a portion of the shares in FFH that I have held for 16 years was made after consideration of a number of factors however bottom line my ability to simply ``trust in Prem`` is not what it once was.

 

I did not say that FFH`s stock picking will continue to generate very poor results. I do not know what the future holds neither does the FFH team or any poster on this board. I did say that Prem owes his shareholders a detailed explanation of his exit strategy for 3 of his largest losing equity positions (Blackberry, Eurobank, Resolute Forest). Others may disagree with this—that`s okay.

 

I will not reiterate the numerous concerns that have been written about by other posters however they all factored into my decision. In addition however I have become concerned with the following items:

 

1) FFH`s leverage was often discussed as the reason for the equity hedges. I accepted this explanation. What disturbs me is that FFH did not take advantage of a sell-off in the preferred share market to lower their leverage by buying back the preferred shares in the market at well below their issue price. The various FFH preferred share issues were done at $25 per share and yielded about 5% at issue. They all traded down substantially to levels as low as $11-12 per share earlier in the year due to the drop in bond yields. Despite having the authority to buyback these shares in the open market FFH chose not to do so. I don`t know about you but issuing shares at $25 and buying them back at $11-12 seems like a good trade to me.

 

2) Prem continually touts the longevity and experience of the management team as a key positive for FFH. This was great when the team was in their 40`s however they are now approaching their 70`s. It is time for Prem to also articulate the succession plan for all the key members of the management and investment team. As one individual I know says—``when Brian Bradstreet retires I will sell all of my FFH shares``. Prem has agreed to stay on until at least his 75th birthday. Great---what about the rest of them. I do not believe we can count on all of the key members to stay around as long as Buffett and Munger have done at Berkshire.

 

3) Board governance is also an area I have some concerns with. The lack of diversity and new blood (and in my view Ben Watsa does not count) on the board cannot be overlooked.

 

4) What is the Eurolife acquisition really about. As we all know—life insurance is a vastly different business than property and casualty insurance. It`s okay if FFH is now diversifying into life insurance but tell us that. I suspect that FFH`s Eurolife investment was simply another capital raising exercise for Eurobank disguised in another form.

 

5) The conference call to discuss the Q3 2016 results was held on November 4, 2016. At that time Prem was still extremely concerned about the US and global economies and as a resulted maintained the equity hedges and deflation protection.  One week later---after the US election---FFH announces that everything is all right with the world and reduces the equity hedges  by 50% because of Trump`s election win in the US.  Simply put---I call bullshit on that explanation.

 

I could go on however I will stop here. I trust you get a sense that my decision to sell is well thought out and based on a detailed analysis of the issues as I see them. Hopefully these comments assist you in deciding what to do with your FFH shares.

 

As Uccmal said in an earlier post---what Prem has created at FFH is amazing. I could not have done it. He is to be applauded for what he has accomplished. Despite this I can no longer give him a pass when there are a series of issues at FFH that I have grave concern with which are not being addressed to my satisfaction.

 

BP6

 

Excellent post.  I disagree with some of it, but excellent nonetheless.

 

Probably the single thing making me most bullish on FFH is all the old guard shareholders throwing in the towel!  I intend to hold my shares for a very long time and compound at a decent rate.  My main concern for that thesis is succession.

[giofranchi]

 

Nope, seeing #1, #2 and #3 simultaneously would be a historical accident.  If you get decent investment returns, then the obvious thing to do is to expand your book by underwriting at a loss.  As long as your cost of float is reasonable, just keep writing more business to grow the float.

 

I am not so sure... Have you ever found an insurance company which was able to "engineer" a CR in between 100% and 102%?

In my experience, either you get a good underwriter (CR of 95%) or you get a bad one (CR of 105%). And if I had to choose, I would like FFH to keep underwriting profitably, even if that would mean to grow its float more slowly.

 

Cheers,

 

Gio

[giofranchi]

+1

I just sold 15% of my position in FFH. I am now below my core position in the company for the first time since I initiated the position in November 1999. I did this after much thought, reflection and discussions/debate with individuals I trust.

 

I echo the comments made by both Uccmal and Benhacker---something is not right at FFH and hasn’t been for a VERY long time. Seriously---would anyone actually hold Blackberry, Resolute Forest and Eurobank as their 3 largest equity positions? Prem owes us (the shareholders of the company) a detailed explanation for what the exit strategy is for these and other underwater equity holdings. Simply saying that over the long term everything will work out is inadequate at best. The statement is meaningless without defining what “long term” means.

 

As outlined by Benhacker---the deal financing strategy being deployed recently by FFH (buy first / finance second) also concerns me greatly. Bringing in outside investors to finance these deals greatly changes the metrics and not favourably from a FFH shareholder perspective.

 

I remain a large shareholder of FFH however it was appropriate for me to reduce my equity exposure to the company because of the real concerns I have. Prem is now on a very short leash---it will be much easier for me to sell my remaining shares should he not deliver in short order.

 

As for capturing the animal spirits that have supposedly been unleashed by the Trump victory (I remain a huge skeptic) ----- I would suggest that holding shares of Goldman Sachs, AIG and Cheniere Energy would give you a much better opportunity to do this than by holding shares in FFH.

 

BP6

 

Thank you BP6,

If I have understood correctly, the main risks you see are:

1) Their stock picking performance will continue to generate very poor results,

2) They are financing the acquisition of Allied in a way that won't maximize shareholders' return.

You said you have discussed a lot about FFH with people you trust and who know FFH very well. And you have come to the conclusion there is something wrong at FFH.

Do you see other risks beside 1 and 2? I am really interested to understand if people who know FFH very well see risks that I might have overlooked.

 

Cheers,

 

Gio

 

Gio,

 

Your summary of my comments are not entirely accurate however I will try my best to respond to your questions.

 

My conclusion to sell a portion of the shares in FFH that I have held for 16 years was made after consideration of a number of factors however bottom line my ability to simply ``trust in Prem`` is not what it once was.

 

I did not say that FFH`s stock picking will continue to generate very poor results. I do not know what the future holds neither does the FFH team or any poster on this board. I did say that Prem owes his shareholders a detailed explanation of his exit strategy for 3 of his largest losing equity positions (Blackberry, Eurobank, Resolute Forest). Others may disagree with this—that`s okay.

 

I will not reiterate the numerous concerns that have been written about by other posters however they all factored into my decision. In addition however I have become concerned with the following items:

 

1) FFH`s leverage was often discussed as the reason for the equity hedges. I accepted this explanation. What disturbs me is that FFH did not take advantage of a sell-off in the preferred share market to lower their leverage by buying back the preferred shares in the market at well below their issue price. The various FFH preferred share issues were done at $25 per share and yielded about 5% at issue. They all traded down substantially to levels as low as $11-12 per share earlier in the year due to the drop in bond yields. Despite having the authority to buyback these shares in the open market FFH chose not to do so. I don`t know about you but issuing shares at $25 and buying them back at $11-12 seems like a good trade to me.

 

2) Prem continually touts the longevity and experience of the management team as a key positive for FFH. This was great when the team was in their 40`s however they are now approaching their 70`s. It is time for Prem to also articulate the succession plan for all the key members of the management and investment team. As one individual I know says—``when Brian Bradstreet retires I will sell all of my FFH shares``. Prem has agreed to stay on until at least his 75th birthday. Great---what about the rest of them. I do not believe we can count on all of the key members to stay around as long as Buffett and Munger have done at Berkshire.

 

3) Board governance is also an area I have some concerns with. The lack of diversity and new blood (and in my view Ben Watsa does not count) on the board cannot be overlooked.

 

4) What is the Eurolife acquisition really about. As we all know—life insurance is a vastly different business than property and casualty insurance. It`s okay if FFH is now diversifying into life insurance but tell us that. I suspect that FFH`s Eurolife investment was simply another capital raising exercise for Eurobank disguised in another form.

 

5) The conference call to discuss the Q3 2016 results was held on November 4, 2016. At that time Prem was still extremely concerned about the US and global economies and as a resulted maintained the equity hedges and deflation protection.  One week later---after the US election---FFH announces that everything is all right with the world and reduces the equity hedges  by 50% because of Trump`s election win in the US.  Simply put---I call bullshit on that explanation.

 

I could go on however I will stop here. I trust you get a sense that my decision to sell is well thought out and based on a detailed analysis of the issues as I see them. Hopefully these comments assist you in deciding what to do with your FFH shares.

 

As Uccmal said in an earlier post---what Prem has created at FFH is amazing. I could not have done it. He is to be applauded for what he has accomplished. Despite this I can no longer give him a pass when there are a series of issues at FFH that I have grave concern with which are not being addressed to my satisfaction.

 

BP6

 

Excellent post.  I disagree with some of it, but excellent nonetheless.

 

Probably the single thing making me most bullish on FFH is all the old guard shareholders throwing in the towel!  I intend to hold my shares for a very long time and compound at a decent rate.  My main concern for that thesis is succession.

 

I have sold some shares for two reasons:

1) To open a position in JPM: I am late, but if Mr. Dimon is right about an "American Renaissance" in business, I think the next 5 years might be very good for the whole financial sector. And JPM imo is the best among big banks.

2) To increase cash: I have used FFH until now as a "good substitute for cash". Now I don't think that thesis is defensible anymore.

FFH remains a meaningful position in my portfolio.

 

Cheers,

 

Gio

[StubbleJumper]

 

Nope, seeing #1, #2 and #3 simultaneously would be a historical accident.  If you get decent investment returns, then the obvious thing to do is to expand your book by underwriting at a loss.  As long as your cost of float is reasonable, just keep writing more business to grow the float.

 

I am not so sure... Have you ever found an insurance company which was able to "engineer" a CR in between 100% and 102%?

In my experience, either you get a good underwriter (CR of 95%) or you get a bad one (CR of 105%). And if I had to choose, I would like FFH to keep underwriting profitably, even if that would mean to grow its float more slowly.

 

Cheers,

 

Gio

 

 

Isn't that why insurance companies all hire a legion of actuaries?  They are the folks who estimate the losses on insurance products based on who is buying them.  If the companies choose to underprice their offerings, then you get a 100+ CR.  And, that strategy is actually okay.  For several years FFH had  100+ CR and they made up for it by Hamblin Watsa shooting out the lights nearly every year.

 

 

SJ

[obtuse_investor]

We currently live in a low return environment. Trying to extract high returns from the market in a low return environment is precisely how permanent loss of capital is achieved.

 

As a Fairfax owner I am quite content seeing them increase their float (by acquiring profitable insurance operations); and investing it in a prudently and carefully in the low return environment.

 

The management seems to be doing the former. I'd like to see them start the latter as well.

[TwoCitiesCapital]

https://www.bloomberg.com/news/articles/2017-01-05/fairfax-said-in-talks-with-omers-to-back-4-9-billion-takeover

 

OMERS rumored to help Fairfax with Allied to reduce equity issuance.

[valuesource]

There is significant optionality built into this deal.  They still have about 45 days to decide how much stock/ cash to use, correct? (from conf call)

[wisdom]

^{https://www.bloomberg.com/news/articles/2017-01-24/omers-said-to-commit-1-billion-to-back-fairfax-s-allied-buy}

[gfp]

OMERS announcement is official -

http://s1.q4cdn.com/579586326/files/newsletters/PRFFH-Jan-27-2017-OMERS-Commits-to-Invest-US$1-Billion-in-Allied-World-Transaction-with-Fairfax.pdf

 

^{https://www.bloomberg.com/news/articles/2017-01-24/omers-said-to-commit-1-billion-to-back-fairfax-s-allied-buy}

[nwoodman]

Allied world results

 

https://www.twst.com/update/awac-allied-world-assurance-company-holdings-ag-allied-world-reports-fourth-quarter-and-full-year-2016-results/

 

YE CR 96.2%

 

Cheers

nwoodman

[nwoodman]

Nothing solid, but suggests they might get $1bn+ for their ICICI Lombard Stake

 

"Shares of ICICI Bank  gained 2 percent intraday Thursday after a media report suggested that global private equity firms are looking to acquire Fairfax's shareholding in general insurance company ICICI Lombard. "Global private equity firms including The Carlyle Group, Warburg Pincus Llc and Advent International have evinced interest in acquiring the 35 percent stake in ICICI Lombard General Insurance held by Canadian financial institution Fairfax Financial Holdings," a media report said quoting people aware of the development. According to a report, the proposed deal will value the joint venture at USD 3 billion (around Rs 20,000 crore). ICICI Lombard General Insurance Company is a joint venture between ICICI Bank, India's second largest lender and Canada’s Fairfax Financial Holdings. ICICI Bank holds 65 percent stake and the rest is held by Farifax in joint venture."

 

 

http://www.moneycontrol.com/news/buzzing-stocks/icici-bank2-as-pe-firms-shows-interest-for-stakelombard_8584341.html

[caprivenky]

Fairfax Financial to Increase Cash Consideration Component of Its $4.9 Billion Cash and Stock Offer

 

Marketwired MarketwiredMarch 10, 2017

TORONTO, ONTARIO and ZUG, SWITZERLAND--(Marketwired - Mar 10, 2017) -

 

(Unless otherwise provided herein, all dollar amounts in this announcement are expressed in U.S. dollars)

 

Fairfax Financial Holdings Limited ("Fairfax") (FFH.TO)(TSX:FFH.U) and Allied World Assurance Company Holdings, AG ("Allied World") (AWH) are pleased to announce that Fairfax has exercised its option to increase the cash consideration component of its offer to Allied World shareholders by $18.00 out of a possible increase of $30.00 per ordinary share. As a result, the cash consideration component of the offer will increase from $5.00 per ordinary share to $23.00 per ordinary share, together with the $5.00 special dividend that, subject to Allied World shareholder approval, will be payable in connection with the transaction, for total cash consideration of $28.00 per Allied World ordinary share.

 

The increase in cash consideration will correspondingly reduce the "Fixed Value Stock Consideration" under the terms of the previously announced definitive merger agreement.

 

Fairfax was able to increase the cash consideration through $1.6 billion of investments by minority co-investors in the Allied World acquisition vehicle that will be approximately 67% owned by Fairfax, including the previously announced $1 billion commitment from OMERS, a $500 million commitment from Alberta Investment Management Corporation ("AIMCo"), on behalf of certain of its clients, as well as certain other third party commitments.

 

"We are pleased to be able to increase the cash consideration component of our cash and stock offer of $54.00 per Allied World ordinary share by $18.00", said Prem Watsa, Chairman and CEO of Fairfax. "Allied World shareholders will now receive total cash consideration of $28.00 per ordinary share in connection with our transaction and Fairfax will be able to minimize the dilution to Fairfax shareholders, while having the flexibility to buy back the minority investments from OMERS, AIMCo and others over 5-7 years' time. We are very grateful for the support we have received from our co-investing partners, including OMERS and AIMCo. Thanks to these co-investing partners, our Fairfax shareholders will be happy to know we will not need to issue approximately 3.5 million Fairfax shares, based on the March 9th closing price of our shares."

 

"We are excited to be able to present Allied World's shareholders with an $18.00 increase in the cash component of Fairfax's offer," said Scott Carmilani, President, CEO and Chairman of Allied World. "By working with Fairfax to provide additional time to increase the cash consideration component of its offer, we were able to maximize the amount of cash our shareholders would receive, making the offer even more attractive."

 

About Fairfax

 

Fairfax is a holding company which, through its subsidiaries, is engaged in property and casualty insurance and reinsurance and investment management.

 

About Allied World

 

Allied World, through its subsidiaries and brand known as Allied World, is a global provider of innovative property, casualty and specialty insurance and reinsurance solutions. Allied World offers superior client service through a global network of offices and branches. All of Allied World's rated insurance and reinsurance subsidiaries are rated A by A.M. Best Company, A by Standard & Poor's, and A2 by Moody's, and our Lloyd's Syndicate 2232 is rated A+ by Standard & Poor's and AA

[nwoodman]

 

The Arkansas Insurance Department has approved the acquisition of two domestic affiliated companies, Allied World Surplus Lines Insurance (AWSLIC) and Vantapro Specialty Insurance Co., by Swiss and Canadian companies............The acquisition must still be approved by Delaware, New Hampshire, and four foreign governments.

 

http://www.insurancejournal.com/news/southcentral/2017/06/19/455052.htm

 

cheers

 

nwoodman