Q1 2020 Results

[vinod1]

 

Well, not sure 60% of either necessarily matters. I made the point in the other thread that, at these prices, Fairfax need only generate 2.5% annualized on their float, debt, and equity to achieve 15% compounded returns from here.

 

No worrying about the accuracy of BV or IV or any of that necessary. No wondering if permanent impossible or a return to prior values. All of that is basically in the past. Do you think they can do 2.5% per year? If so, you get 15+% return on your capital.

 

How are you getting 15% with portfolio investments returning 2.5%?

 

I understand you are using $255 stock price as your capital base, but are you taking into account interest expenses, corporate expenses, preferred dividends? Even 3.5% pre-tax return does not get me to 15%.

 

Vinod

 

For a shorthand analysis like this, it would not be entirely unreasonable to net underwriting profits against head office costs (incl interest) and simply look at investment return/stock price.

 

I think we are looking at nearly $650 million in these other expenses and underwriting could cover half of it. So it has a material impact. I get a 7-8% return on capital under those assumptions. Not 15%.

 

Vinod

[StubbleJumper]

 

Well, not sure 60% of either necessarily matters. I made the point in the other thread that, at these prices, Fairfax need only generate 2.5% annualized on their float, debt, and equity to achieve 15% compounded returns from here.

 

No worrying about the accuracy of BV or IV or any of that necessary. No wondering if permanent impossible or a return to prior values. All of that is basically in the past. Do you think they can do 2.5% per year? If so, you get 15+% return on your capital.

 

How are you getting 15% with portfolio investments returning 2.5%?

 

I understand you are using $255 stock price as your capital base, but are you taking into account interest expenses, corporate expenses, preferred dividends? Even 3.5% pre-tax return does not get me to 15%.

 

Vinod

 

For a shorthand analysis like this, it would not be entirely unreasonable to net underwriting profits against head office costs (incl interest) and simply look at investment return/stock price.

 

I think we are looking at nearly $650 million in these other expenses and underwriting could cover half of it. So it has a material impact. I get a 7-8% return on capital under those assumptions. Not 15%.

 

Vinod

 

 

No, everybody does the rough math a bit differently, but the math has gotten pretty attractive over the past month, irrespective of how exactly you do it.

 

The quick math in my mind is that if you believe that FFH is good for $15B net written and a 95 CR, that's $750m UW profit which is roughly enough to offset the interest and holdco admin costs.  So what's left is the investment income and the other operating income (but let's call the operating income a zero from Toys, William Ashley, etc).  The investment portfolio as at Dec 31 was US$1,300/sh and yesterday's stock price was ~US$260/share, so call it about 5:1 leverage.  So, from where I sit a 2.5% yield on the investment portfolio gives you 5 x 2.5%=12.5% pre-tax.  To get 15% earnings yield post-tax you might need an investment portfolio yield of 3.5% to 4% (ie at 5x that would be 17.5% or 20% pre-tax to get your 15% post-tax). 

 

My quick math excludes any contribution from Fairfax India and Africa, which are clearly valuable, but a bit hard to predict.  If you believe that the operating companies and Fairfax India and Africa will contribute something positive, then you could get your math down to 2.5%....

 

 

SJ

 

 

[TwoCitiesCapital]

 

Well, not sure 60% of either necessarily matters. I made the point in the other thread that, at these prices, Fairfax need only generate 2.5% annualized on their float, debt, and equity to achieve 15% compounded returns from here.

 

No worrying about the accuracy of BV or IV or any of that necessary. No wondering if permanent impossible or a return to prior values. All of that is basically in the past. Do you think they can do 2.5% per year? If so, you get 15+% return on your capital.

 

How are you getting 15% with portfolio investments returning 2.5%?

 

I understand you are using $255 stock price as your capital base, but are you taking into account interest expenses, corporate expenses, preferred dividends? Even 3.5% pre-tax return does not get me to 15%.

 

Vinod

 

Not portfolio investments. Fairfax has $1500-1600/share in float/equity/debt.

 

A net 2.5% return in those figures is $37.50/share at the low end. On a $260/share price, that's 14.4% annualized.

 

I'm not talking about portfolio returns, just that they need to net only 2.5% on the total of float/equity/debt after expenses. It doesn't seem like that should be a high bar, particularly if insurance (what the equity/debt supports) is performing well.

 

If people don't seem convinced of 2.5% net on those various forms of funding, then who the hell was buying this at $500-$600/share when the various forms so funding were the same, but the bar for acceptable performance far higher?

[Parsad]

 

Well, not sure 60% of either necessarily matters. I made the point in the other thread that, at these prices, Fairfax need only generate 2.5% annualized on their float, debt, and equity to achieve 15% compounded returns from here.

 

No worrying about the accuracy of BV or IV or any of that necessary. No wondering if permanent impossible or a return to prior values. All of that is basically in the past. Do you think they can do 2.5% per year? If so, you get 15+% return on your capital.

 

How are you getting 15% with portfolio investments returning 2.5%?

 

I understand you are using $255 stock price as your capital base, but are you taking into account interest expenses, corporate expenses, preferred dividends? Even 3.5% pre-tax return does not get me to 15%.

 

Vinod

 

Not portfolio investments. Fairfax has $1500-1600/share in float/equity/debt.

 

A net 2.5% return in those figures is $37.50/share at the low end. On a $260/share price, that's 14.4% annualized.

 

I'm not talking about portfolio returns, just that they need to net only 2.5% on the total of float/equity/debt after expenses. It doesn't seem like that should be a high bar, particularly if insurance (what the equity/debt supports) is performing well.

 

If people don't seem convinced of 2.5% net on those various forms of funding, then who the hell was buying this at $500-$600/share when the various forms so funding were the same, but the bar for acceptable performance far higher?

 

Normal human psychology.  The guys buying at $600 were the ones selling at $350-400!

 

We just heard from Prem in the annual letter that Wade Burton has averaged 19.8% annualized since 2008 for Fairfax, and we all know what Brian Bradstreet can do...yet we're worried that they won't be able to achieve 3-4% annualized on the portfolio over the next 10 years! 

 

The only concern would be if we see a massive LA earthquake or the worst hurricane in history in the Gulf Coast this year on top of everything going on.  I'm betting against those two happening!  Cheers!

[Spekulatius]

 

Well, not sure 60% of either necessarily matters. I made the point in the other thread that, at these prices, Fairfax need only generate 2.5% annualized on their float, debt, and equity to achieve 15% compounded returns from here.

 

No worrying about the accuracy of BV or IV or any of that necessary. No wondering if permanent impossible or a return to prior values. All of that is basically in the past. Do you think they can do 2.5% per year? If so, you get 15+% return on your capital.

 

How are you getting 15% with portfolio investments returning 2.5%?

 

I understand you are using $255 stock price as your capital base, but are you taking into account interest expenses, corporate expenses, preferred dividends? Even 3.5% pre-tax return does not get me to 15%.

 

Vinod

 

Not portfolio investments. Fairfax has $1500-1600/share in float/equity/debt.

 

A net 2.5% return in those figures is $37.50/share at the low end. On a $260/share price, that's 14.4% annualized.

 

I'm not talking about portfolio returns, just that they need to net only 2.5% on the total of float/equity/debt after expenses. It doesn't seem like that should be a high bar, particularly if insurance (what the equity/debt supports) is performing well.

 

If people don't seem convinced of 2.5% net on those various forms of funding, then who the hell was buying this at $500-$600/share when the various forms so funding were the same, but the bar for acceptable performance far higher?

 

Normal human psychology.  The guys buying at $600 were the ones selling at $350-400!

 

We just heard from Prem in the annual letter that Wade Burton has averaged 19.8% annualized since 2008 for Fairfax, and we all know what Brian Bradstreet can do...yet we're worried that they won't be able to achieve 3-4% annualized on the portfolio over the next 10 years! 

 

The only concern would be if we see a massive LA earthquake or the worst hurricane in history in the Gulf Coast this year on top of everything going on.  I'm betting against those two happening!  Cheers!

 

Ever so optimistic. I haven’t seen many great things coming to shareholders of financials after they drew down the credit line. Better allocation on the investment side would be great, but first they need to get rid of the existing stuff, which is mostly impaired.

[Txvestor]

I am a little concerned that they reported only 83M of losses related to the pandemic.

Whereas MKL reported 325M in business interruption etc. I am wondering how well they are reserving.

Their investment returns have been abysmal for this entire cycle everything from hedges to wrong stock picks to poor long term holdings here. So by now we have a balance sheet that is the most leveraged it been in a long time and I am not sure how well prepared they are for a big hit.

[Xerxes]

I am going to group the perceived issues into 4 categories.

 

- (1) Holding Co. liquidity

- (2) Historical portfolio return

- (3) Future portfolio return

- (4) cash injection into portfolio companies

 

Most folks here agree that current liquidity at the holding company is enough. If (1) is truly not an issue than then the deep discount is not justified and is an opportunity.

 

Most folks here agree that portfolio past return (recent history) has been a great disappointment. This is already reflected in the book value through mark to market and/or impairment(s). However, should (2) start or perceive to weigh more on the BV and trigger some covenants at holding company level, that will likely have a secondary effect on (1), thereby justifying a huge discount even if current liquidity is perceived to be enough at the moment.

 

Most folks here agree that portfolio return in the future will be much better (or so we hope). If (3) WILL be true than the deep discount is not justified and is an opportunity.

 

----- total dry powder available ----

 

can someone explain what is wrong with the logic below>

 

BRK's cash pile is $130B (aprox.). vs. market value of $444B. So 30% of the market cap.

FFH's cash pile (hold co. + portfolio cash) is about $11B vs. $10B market cap. So 100%

 

what am I not understanding ?

 

 

 

[racemize]

I am a little concerned that they reported only 83M of losses related to the pandemic.

Whereas MKL reported 325M in business interruption etc. I am wondering how well they are reserving.

Their investment returns have been abysmal for this entire cycle everything from hedges to wrong stock picks to poor long term holdings here. So by now we have a balance sheet that is the most leveraged it been in a long time and I am not sure how well prepared they are for a big hit.

 

MKL has a lot more specialty policies than BRK I believe.  And that's where language gets a little weird, as those are not standardized.  I for example, have a policy from MKL (only 5%, as it was a lloyd's syndicate) that specifically covers business interruption when the government shuts you down for "an occurence of an identified human disease", with no pandemic exclusion language or addendum.

[StubbleJumper]

I am going to group the perceived issues into 4 categories.

 

- (1) Holding Co. liquidity

- (2) Historical portfolio return

- (3) Future portfolio return

- (4) cash injection into portfolio companies

 

Most folks here agree that current liquidity at the holding company is enough. If (1) is truly not an issue than then the deep discount is not justified and is an opportunity.

 

Most folks here agree that portfolio past return (recent history) has been a great disappointment. This is already reflected in the book value through mark to market and/or impairment(s). However, should (2) start or perceive to weigh more on the BV and trigger some covenants at holding company level, that will likely have a secondary effect on (1), thereby justifying a huge discount even if current liquidity is perceived to be enough at the moment.

 

Most folks here agree that portfolio return in the future will be much better (or so we hope). If (3) WILL be true than the deep discount is not justified and is an opportunity.

 

----- total dry powder available ----

 

can someone explain what is wrong with the logic below>

 

BRK's cash pile is $130B (aprox.). vs. market value of $444B. So 30% of the market cap.

FFH's cash pile (hold co. + portfolio cash) is about $11B vs. $10B market cap. So 100%

 

what am I not understanding ?

 

 

The difference between FFH's cash and BRK's cash is the extent to which mgt is free to deploy it without constraints.  So, BRK doesn't actually have ~$130B of cash that can be deployed into just anything.  Some of that cash needs to be maintained in risk-free (or almost risk-free) investments so that it is available for use by the insurance subs if there is some sort of mega-cat.  So maybe BRK has $60 or $70B of truly discretionary cash that it could deploy into an acquisition, equity purchases, share repurchases or divvies?  Now turn to FFH.  Some of the cash hoard at FFH needs to be retained for insurance operations because we know that NB and C&F were bumping up against their UW ceiling due to their limited capital.  So, of that ~$11B, how much can truly be deployed without constraints?  Maybe a couple of billion?  That thought process was the driver behind the discussions on this board about how high FFH's equity allocation could truly get, and my question about just how much exposure to corporate bonds/paper that FFH can truly accept.

 

On the other issues that you listed #1 to #4, I don't believe that any of these are a short-term problem.  Holdco liquidity is fine if this situation is cleared up within a year or so -- there are no major maturities coming down the pipe, Prem claims that Recipe and Seaspan won't need any more cash from FFH, so the big decision at Christmas will be whether it's still a good idea to kick out $270m in common dividends.  But, if this situation persists for more than 1 year, clearly FFH will need to have a few conversations with its lender about that revolving credit line and then in 2022 the bullet payments will return.  The other risk is that if the market takes another leg down and FFH is forced to take a negative mark on its equities, those revolver covenants could become a real thing.

 

#2 and #3 are probably what is discouraging investors the most.  Over the past few years, FFH has been heating its offices by throwing bundles of cash into a woodstove....

 

 

SJ

 

 

[bearprowler6]

I am going to group the perceived issues into 4 categories.

 

- (1) Holding Co. liquidity

- (2) Historical portfolio return

- (3) Future portfolio return

- (4) cash injection into portfolio companies

 

Most folks here agree that current liquidity at the holding company is enough. If (1) is truly not an issue than then the deep discount is not justified and is an opportunity.

 

Most folks here agree that portfolio past return (recent history) has been a great disappointment. This is already reflected in the book value through mark to market and/or impairment(s). However, should (2) start or perceive to weigh more on the BV and trigger some covenants at holding company level, that will likely have a secondary effect on (1), thereby justifying a huge discount even if current liquidity is perceived to be enough at the moment.

 

Most folks here agree that portfolio return in the future will be much better (or so we hope). If (3) WILL be true than the deep discount is not justified and is an opportunity.

 

----- total dry powder available ----

 

can someone explain what is wrong with the logic below>

 

BRK's cash pile is $130B (aprox.). vs. market value of $444B. So 30% of the market cap.

FFH's cash pile (hold co. + portfolio cash) is about $11B vs. $10B market cap. So 100%

 

what am I not understanding ?

 

 

The difference between FFH's cash and BRK's cash is the extent to which mgt is free to deploy it without constraints.  So, BRK doesn't actually have ~$130B of cash that can be deployed into just anything.  Some of that cash needs to be maintained in risk-free (or almost risk-free) investments so that it is available for use by the insurance subs if there is some sort of mega-cat.  So maybe BRK has $60 or $70B of truly discretionary cash that it could deploy into an acquisition, equity purchases, share repurchases or divvies?  Now turn to FFH.  Some of the cash hoard at FFH needs to be retained for insurance operations because we know that NB and C&F were bumping up against their UW ceiling due to their limited capital.  So, of that ~$11B, how much can truly be deployed without constraints?  Maybe a couple of billion?  That thought process was the driver behind the discussions on this board about how high FFH's equity allocation could truly get, and my question about just how much exposure to corporate bonds/paper that FFH can truly accept.

 

On the other issues that you listed #1 to #4, I don't believe that any of these are a short-term problem.  Holdco liquidity is fine if this situation is cleared up within a year or so -- there are no major maturities coming down the pipe, Prem claims that Recipe and Seaspan won't need any more cash from FFH, so the big decision at Christmas will be whether it's still a good idea to kick out $270m in common dividends.  But, if this situation persists for more than 1 year, clearly FFH will need to have a few conversations with its lender about that revolving credit line and then in 2022 the bullet payments will return.  The other risk is that if the market takes another leg down and FFH is forced to take a negative mark on its equities, those revolver covenants could become a real thing.

 

#2 and #3 are probably what is discouraging investors the most.  Over the past few years, FFH has been heating its offices by throwing bundles of cash into a woodstove....

 

 

SJ

 

Xerxes...let me offer a few thoughts in response to the question you raised:

 

-Sure liquidity seems okay but it was achieved with borrowed funds. First the drawdown of the revolver and more recently the 10 year privately placed debt issue. This has significantly raised the debt/equity levels of the company into a range that many investors are uncomfortable with.

 

-Following up on the above point. Many investors are shocked that Fairfax once again found itself in need of liquidity since Prem repeatedly stated over the last several years that they were over capitalized in their insurance subsidiaries and were waiting for the hard market when it turned out the parent company needed to inject cash into many of the insurance subsidiaries to support their growth once the hard market arrived. Fairfax was at the brink several years back. Prem swore he would never again allow that to happen. Needing to draw down on the revolver ...really Prem? Seems he forgot the very hard lessons that were taught many years ago.

 

-Yes the hard market had started and the insurance companies seemed to take advantage of the higher premiums in Q1 however that was derailed by the outbreak of the pandemic. Premium growth can now be expected to stall or more likely decline over the next few quarters with no certainty it will pick back up within any foreseeable future.

 

-Fairfax continues to hold numerous outsized equity positions with questionable future prospects that have been marked down significantly yet Prem and his team seem unwilling to sell. Included here are Fairfax’s holdings in Eurobank, Blackberry, Resolute Forest to name just a few (there are many more). These equities not only tie up considerable capital but also tie up considerable management time. These investments were mistakes. Man up and sell them off. It’s okay to admit you were wrong. The market place will simply not believe that The Hamblyn Walsa investment team has changed its ways until these losers are sold off. Buying small positions in Alphabet and Exxon is not enough.

 

-Many of Fairfax’s investments are focused on two general segments of the economy---restaurants and retail. Can you think of two sectors that have been more affected “long term” by the Coronavirus? Enough said on this point.

 

-I also think Paul Rivett’s departure and the hole that it leaves on Prem’s succession plan is weighing on the market’s perception of the company’s prospects. I have stated previously stated that I did not believe the publically stated reasons for Paul’s departure. If however the stated reason is true than Prem really messed up by not addressing that possibility with Paul before selecting him as Fairfax’s CEO heir apparent. For goodness sake, Paul took over the quarterly update calls and Prem stepped back from those totally until Paul decided to move on.

 

-Fairfax is in the penalty box. Sure hard core deep value guys are still somewhat loyal however for the majority of the investing community Fairfax is now a show me story. It is no longer being given the benefit of the doubt. It will take a very long time for this perception to turn around. I personally do not believe that it is worthwhile waiting around to see if that turn around occurs regardless of what the current discount to BV seems to indicate.

 

[bizaro86]

I think the problem with underwriting better portfolio returns is the way they invest (distressed/cigar butts) isnt well suited to the size of their investments.

 

Buying Toys R Us Canada out of BK would be fine if you could sell your stake once it was up and running and had a couple of good quarters. Holding it long term seems destined to fail.

 

BlackBerry could have worked out great if they could have been more nimble getting out at the peaks.

 

Cigar butts are one puff stocks. You need to get your returns on the one puff and then get out. That's harder to do on big huge positions in firms (eg recipe).

[petec]

My notes on the Q and the call, for what they're worth.

 

- Fairfax are swimming in cash. It's just not their cash, so we'd better hope they don't need it.

 

- $500 of the revolver has been repaid using proceeds from the bond sale. (NB ex-Fed action the bond sale would have been impossible and FFH would be in a tougher position. Fortress it is not.)

 

- Brit and Recipe drew their revolvers. Only Recipe drew by a significant amount, and frankly it would be bloody odd if a restaurant company didn't draw its revolver at the moment. More worrying is the $408m of debt at AGT, $365m of which is on the revolver. This is down from $387m at yearend, and the revolver has been extended to March 2021, but it's not prudent financing.

 

- Additional $100m in 5.5% Atlas debentures, adds to concentration risk, but if you haven't decided you're comfortable with concentration risk you really shouldn't own Fairfax. Bigger question for me here is why are these debentures on worse terms than the previous ones, which came with juicy warrant incentives?

 

- Can't help but smile at the fact they bought long equity total return swaps in March.

 

- Share buybacks stepped up in April - 140k (0.5% of the company) bought back for cancellation in April vs 50k in 1Q.

 

- The preferred dividend Allied pays to its minorities ($126m in 1Q) is a painful drag on capital. Brit paid $21m.

 

- I thought they said Allied was best-placed to exploit a hardening market, so I am a little surprised to see that it is Northbridge and Crum that are still growing at 20%.

 

- Excluding CAT losses and reserve development (not because they're unimportant, but because they're lumpy) the CR improved from 97.1% to 94%. I don't really know how to judge whether this improvement is sufficient in light of the hardening market, but at least it is there.

 

- p46 mentions a share of profit in Digit. Digit was lossmaking at year end but growing like a weed towards breakeven. If it is has already got there, that's impressive.

 

- Annual run rate of dividend and interest income is now $900m. I wonder if this includes dividend cuts e.g. at Recipe?

 

- Will have some losses from Covid-19, but expect to make underwriting profits in 2020.

 

- "Markets might be high because of Microsoft and Amazon and all of these, but I'm looking at stock prices of companies that I know and there's a ton of them that are very cheap."

 

 

[petec]

If people don't seem convinced of 2.5% net on those various forms of funding, then who the hell was buying this at $500-$600/share when the various forms so funding were the same, but the bar for acceptable performance far higher?

 

Normal human psychology.  The guys buying at $600 were the ones selling at $350-400!

 

 

This exchange made me smile. If there was value then there is extreme value now, even if covid-19 has permanently reduced the value of Eurobank, Recipe, Atlas, Bangalore Airport, etc. to a point below their current share prices.

[Bryggen]

Is it fair to say that if FFH has its back against the wall financially, they could in a worst case scenario liquidate assets to breather better? The company owns several businesses and securities. One would think they have that option in the worst case scenario?

 

Wondering when this slide will stop.... Sub $350 today. Wow.

 

Thanks in advance for your valuable input.

[Bryggen]

Also interesting noting RBC's report published May 2nd:

 

''While results are likely to be pressured over the near term, Fairfax continues to see good underwriting and operating results, particularly at OdysseyRe. The transformative Allied World acquisition, along with a number of smaller acquisitions, will meaningfully expand Fairfax's global footprint and we expect it to bring notable top-line and bottom-line growth. Our thesis is that Fairfax’s long-term track record of double-digit book value growth will continue and the current valuation provides an attractive risk-reward entry point for those willing to back the company’s long-term investment track record. Fairfax has a deep cash position and ample access to capital, which gives it the flexibility to be opportunistic as well as patient.''

 

Trying to put this with you guys' analysis together. This report seems positive while some opinion of yours are more bleak.

 

Newbie trying to figure out where to stand. Read: Buy more and sit on my ass. ;)

 

 

[StubbleJumper]

Also interesting noting RBC's report published May 2nd:

 

''While results are likely to be pressured over the near term, Fairfax continues to see good underwriting and operating results, particularly at OdysseyRe. The transformative Allied World acquisition, along with a number of smaller acquisitions, will meaningfully expand Fairfax's global footprint and we expect it to bring notable top-line and bottom-line growth. Our thesis is that Fairfax’s long-term track record of double-digit book value growth will continue and the current valuation provides an attractive risk-reward entry point for those willing to back the company’s long-term investment track record. Fairfax has a deep cash position and ample access to capital, which gives it the flexibility to be opportunistic as well as patient.''

 

Trying to put this with you guys' analysis together. This report seems positive while some opinion of yours are more bleak.

 

Newbie trying to figure out where to stand. Read: Buy more and sit on my ass. ;)

 

 

Maybe RBC was the outfit that extended the $2B revolver to FFH?  ::)

 

 

SJ

[petec]

They could absolutely sell assets, including a major insurance sub to repay all holdco debt.

 

 

[bearprowler6]

Also interesting noting RBC's report published May 2nd:

 

''While results are likely to be pressured over the near term, Fairfax continues to see good underwriting and operating results, particularly at OdysseyRe. The transformative Allied World acquisition, along with a number of smaller acquisitions, will meaningfully expand Fairfax's global footprint and we expect it to bring notable top-line and bottom-line growth. Our thesis is that Fairfax’s long-term track record of double-digit book value growth will continue and the current valuation provides an attractive risk-reward entry point for those willing to back the company’s long-term investment track record. Fairfax has a deep cash position and ample access to capital, which gives it the flexibility to be opportunistic as well as patient.''

 

Trying to put this with you guys' analysis together. This report seems positive while some opinion of yours are more bleak.

 

Newbie trying to figure out where to stand. Read: Buy more and sit on my ass. ;)

 

 

Maybe RBC was the outfit that extended the $2B revolver to FFH?  ::)

 

 

SJ

 

+1

[Xerxes]

Thanks SJ / BearP6 for the feedback.

For me, the 100% dry powder position on FFH was striking compared to 35%, but the reality is probably much lower.

Need that 13F !!

 

Bryggen,

 

I will give one qualitative feedback. This is purely my own opinion. I have not counted the actual number of times in the two AGM transcripts of FFH and BRK, but the overall impression that I had was that at Berkshire's AGM, I heard a lot of "I don't know …." from Warrant Buffet, while at the Fairfax AGM, I heard a lot of "it will come back …." sort of language from Prem Watsa. That was just my overall impression.

 

I believe the relative size of their usable dry powder to be positively correlated with their time horizon and the wideness of the range of possibilities that they are seeing.

 

I think what that means in turn is that if there is a second leg down in major way (i.e. 1929 style), it is very likely that FFH may not survive in its current form given that Prem Watsa base-line view doesn't see that, but Berkshire would be well positioned to be the Rock of Gibraltar. It was telling me for to hear Charlie Munger on WSJ saying that we are just trying to survive through this.

 

If there is no major leg down, I think FFH will probably do better for new investor given the big discount that the market is giving.

 

[Viking]

If people don't seem convinced of 2.5% net on those various forms of funding, then who the hell was buying this at $500-$600/share when the various forms so funding were the same, but the bar for acceptable performance far higher?

 

Normal human psychology.  The guys buying at $600 were the ones selling at $350-400!

 

 

This exchange made me smile. If there was value then there is extreme value now, even if covid-19 has permanently reduced the value of Eurobank, Recipe, Atlas, Bangalore Airport, etc. to a point below their current share prices.

 

Context is important. All insurance stocks have been crushed in the last 10 weeks. Chubb was trading over $160 in Feb and now it is trading below $100. WRB has fallen from $79 to $51. The declines have been 35-38%.

 

Fairfax has fallen from $625 to $350 a 44% decline. It also had a much larger Q1 loss and hit to BV.

 

So compared to other insurance stocks the decline in FFH looks reasonable.

 

The question moving forward is if you want to put new money into the insurance sector where do you do it? My vote, given the broad based sell off, is to put it into the highest quality names. My current picks are WRB and CB (two that i have followed for years and like).

[petec]

If people don't seem convinced of 2.5% net on those various forms of funding, then who the hell was buying this at $500-$600/share when the various forms so funding were the same, but the bar for acceptable performance far higher?

 

Normal human psychology.  The guys buying at $600 were the ones selling at $350-400!

 

 

This exchange made me smile. If there was value then there is extreme value now, even if covid-19 has permanently reduced the value of Eurobank, Recipe, Atlas, Bangalore Airport, etc. to a point below their current share prices.

 

Context is important. All insurance stocks have been crushed in the last 10 weeks. Chubb was trading over $160 in Feb and now it is trading below $100. WRB has fallen from $79 to $51. The declines have been 35-38%.

 

Fairfax has fallen from $625 to $350 a 44% decline. It also had a much larger Q1 loss and hit to BV.

 

So compared to other insurance stocks the decline in FFH looks reasonable.

 

The question moving forward is if you want to put new money into the insurance sector where do you do it? My vote, given the broad based sell off, is to put it into the highest quality names. My current picks are WRB and CB (two that i have followed for years and like).

 

That’s a reasonable assessment, but as someone who hasn’t followed others, and doesn’t want to invest the time, it’s also reasonable to ask a very simple “FFH-yes or no” question.

[Viking]

Also interesting noting RBC's report published May 2nd:

 

''While results are likely to be pressured over the near term, Fairfax continues to see good underwriting and operating results, particularly at OdysseyRe. The transformative Allied World acquisition, along with a number of smaller acquisitions, will meaningfully expand Fairfax's global footprint and we expect it to bring notable top-line and bottom-line growth. Our thesis is that Fairfax’s long-term track record of double-digit book value growth will continue and the current valuation provides an attractive risk-reward entry point for those willing to back the company’s long-term investment track record. Fairfax has a deep cash position and ample access to capital, which gives it the flexibility to be opportunistic as well as patient.''

 

Trying to put this with you guys' analysis together. This report seems positive while some opinion of yours are more bleak.

 

Newbie trying to figure out where to stand. Read: Buy more and sit on my ass. ;)

 

 

Maybe RBC was the outfit that extended the $2B revolver to FFH?  ::)

 

 

SJ

 

+1

 

I have been reading the RBC research reports for years. I find them generally to be very good. However, for years they have been positive on Fairfax with a very high price target (often 50% higher than where the stock was trading). RBC’s commentary on underwriting and CR estimates have been pretty accurate. Their commentary on investment results, especially the equity holdings, has been consistently too optimistic and largely along the lines ‘they have a great long term track record so we will give them the benefit of the doubt’. I have also wondered why RBC has been so ‘nice’ to FFH :-)

 

Fairfax’s investments (in aggregate) - including equities, hedges, warrants and private business purchases - have been value destroying for 8 years or so. Something looks broken in how they are managing investments (how they are picking individual securities and how structuring the overall portfolio). Confidence in management is at an all time low (in how it is managing the total investment portfolio). Many current investments are low quality and will struggle in the near term. If we get a severe recession that lasts into 2021 we can expect more large losses from the investment portfolio which will drive BV lower. Not surprising the discount to BV is where it is today. 

 

PS: i was getting more positive on FFH late last year as they were making some moves i liked. Unfortunately, the virus has exposed them badly and it will likely slow their ability to ‘fix’ things (in the investment portfolio). Brutal timing. But what we are seeing with the virus is the fatal flaw in their investment approach.

[petec]

Thanks SJ / BearP6 for the feedback.

For me, the 100% dry powder position on FFH was striking compared to 35%, but the reality is probably much lower.

Need that 13F !!

 

Bryggen,

 

I will give one qualitative feedback. This is purely my own opinion. I have not counted the actual number of times in the two AGM transcripts of FFH and BRK, but the overall impression that I had was that at Berkshire's AGM, I heard a lot of "I don't know …." from Warrant Buffet, while at the Fairfax AGM, I heard a lot of "it will come back …." sort of language from Prem Watsa. That was just my overall impression.

 

I believe the relative size of their usable dry powder to be positively correlated with their time horizon and the wideness of the range of possibilities that they are seeing.

 

I think what that means in turn is that if there is a second leg down in major way (i.e. 1929 style), it is very likely that FFH may not survive in its current form given that Prem Watsa base-line view doesn't see that, but Berkshire would be well positioned to be the Rock of Gibraltar. It was telling me for to hear Charlie Munger on WSJ saying that we are just trying to survive through this.

 

If there is no major leg down, I think FFH will probably do better for new investor given the big discount that the market is giving.

 

Overall I Think this is right. The only point I'd make is: deflation swaps. I find it highly unlikely they pay out, but if they do...

[Cevian]

I think we all agree that "cigar butt" investing hasn't quite worked out for them. Having said that, based on only the two names they announced on the call as having purchased in Q1 (Google and Exxon), it seems those were good purchases and entry points to have made at that time. I'm encouraged by those moves.

 

[Parsad]

When you get this much pessimism around Fairfax, then you are approaching the bottom.  Unlike most, I expect more of a V-shaped recovery from the pandemic.  Yes, the lingering effects will go on for a couple of years, but the amount of capital injected, the strength of the financial system heading into this crisis, and the pent-up frustration and demand from consumers will bode well towards the end of the year and into next year. 

 

Most of Fairfax's losses were unrealized investment losses, part of which would have already recovered in April.  They did not incur significant impairment, and I can't see how their retail and restaurant businesses would have been hit any harder than Berkshire's or comparable companies.  Their insurance businesses are going to enjoy a hard market across the board, and they were already writing at a 96% combined ratio.  Brian bought a ton of corporate bonds paying over 4% while U.S. short-term rates are at zero. 

 

They did not have to tap into the revolver...as Buffett said, there was a moment in March when liquidity was about to completely dry up...Fairfax like everyone else saw that happening and tapped the revolver to make sure it couldn't be pulled on them.  Then they went and raised $650M to make sure they had enough liquidity to get them through another 2008!  But the Fed acted quickly this time...they had a game plan they could already use and liquidity returned to the markets immediately.

 

You think Fairfax just stood still after doing all that?  I guarantee you that they are doing everything to make sure that if you get an LA earthquake or a massive Gulf storm, they will still be walking around to take advantage of that market.  I would imagine they are doing whatever they can to make sure that Fairfax's financials are improving in case the pandemic gets worse. 

 

I've been through 1999/2000 with Fairfax, been though 2003-2005 when the hedge funds cratered the stock to $56 US, through 2008-2009 when liquidity ACTUALLY dried up around the world and now this global pandemic.  I have not held Fairfax consistently through that entire period, but took advantage of the irrationality of investors each time...swing batter batter...swing!  Cheers!