Fairfax 2021

[valueinvestor]

Mikhail Porter seems the person who ask the question - not sure why he felt the need to express his views on a conference call. It would've been more productive to ask why the mis-step and what will rectified in the future. I think Prem handled it very well, I wouldn't have been able to be as poised in that situation.

[nwoodman]

Here's the Q&A from the CC for those interested

 

Prem Watsa

 

[Audio Gap] your name and your company name and try to limit your questions to only one so that it’s fair to everyone on the call.

 

Okay, Dale, we're ready for your -- questions.

 

Question-and-Answer Session

 

Operator

 

We will now begin the question-and-answer session. [Operator Instructions]. Our first question comes from Jeff Fenwick from Cormark Securities. Your line is now open, you may proceed.

 

Jeff Fenwick

 

So, as you say, an interesting time in the markets and good opportunities for stock pickers. So my first question really is just around, your general thoughts on investment rotation. And are you being very active here and maybe selectively trimming some positions and looking for some new opportunities? And I guess the one I certainly get a lot of questions on rates, not surprisingly it’s Blackberry. So any comments on I guess the allocation and perhaps Blackberry specifically?

 

Prem Watsa

 

Yes, Jeff just on Blackberry, it's gone up and down. So just a couple of points. First of all, we don't comment on our securities purchase or sales, you know that. I will just say, two points. One, there are insiders and have insider obligations on Blackberry; and two, Blackberry closed on December 2020, closed the year, December ‘20 at 6.625.

 

Having said that, in 2019, the technology stocks were doing really well and have been doing very well for some time, as you know, Jeff. And the shift to value investing has begun, and then COVID came at us in 2020 in March. And it was significant. 180 countries that closed down their economies. We didn't know what was going to happen. And stocks -- particularly value-oriented stocks or stocks companies sensitive to the economy crashed.

 

Since that, we’ve come back, and now we've got vaccines coming, we've got testing. We just think the shift to value investing will take place over time. And that's already begun in November with the announcement of the Pfizer vaccine. Many, many vaccines have come to play, countries are getting back to normalization. I don't know exactly when, but that will happen. And the economies will come back.

 

And so we, of course, are stock pickers. We expect to make money on the things that we've invested in the past, and we are constantly looking at better opportunities. So this is what we've done with 35 years. We've got a tremendous track record. We've got a very good investment team led by Wade Burton and Lawrence Chin. And we're excited, Jeff, about what will happen in the next two years?

 

Jeff Fenwick

 

Okay, and maybe my next question, I'd like to focus on capital and uses of capital. Obviously, you highlighted how the balance sheet has strengthened after your RiverStone sale. As we look into this year with the insurance markets remaining hard, are you thinking about your first priority, I guess is pushing more capital down into the operating units? Are we looking at a similar magnitude of investment down there? I think it was $1.4 billion. Or maybe you might look more at doing something like share buybacks here if the stock is still trading below book value?

 

Prem Watsa

 

Yes, so the first thing to say is that insurance is our business -- core business. As you said, we put a ton of money in 2020 in the insurance companies. We don't think they need any more money now. Of course, our investment portfolio is coming back up as additional plus. But we've made them self-financing at the end of the year. And I'd expect them to grow significantly, when they grow they grow over time, right? So when you write premiums at -- you earn it over more than a year as the year comes forward.

 

So the insurance business is well primed, it reminds me of 2001 and what happened in 2002, after September 11th, some differences of course at all times. But as we said prices are going up, they're going up over all over the world and the terms are going up. We have capital. We purposely did the 14% on Brit so that we have another $375 million in case we need it. But at the moment we don't expect we need any money from the holding company or our insurance companies. They're well capitalized and financed and ready.

 

And most importantly, many companies are pulling back, Jeff, that our management team who run the companies are ready to expand and are expanding significantly as you saw in Allied and Northbridge and Odyssey already.

 

Jeff Fenwick

 

And I guess, maybe a comment on share buybacks then, if you have some capital available for that?

 

Prem Watsa

 

Yes. So share buybacks is always our first financial soundness, first -- a good opportunity to simplify insurance companies. Second, is share buybacks. And that's what we always look at, we had this opportunity, as we mentioned on the total return swap, it's an investment that we made. I've said before many times that our stock prices are incredibly cheap for the record that we've had. We go through phases though, we're not looking at every three months, every quarter, we are up 10%, or 5%. That's not how we run our company. But our long-term record is perhaps one of the better ones you’ll see. And so we play -- stock is cheap. So we've had a total -- but we looked at the potential investments that were available to Fairfax in our investment portfolios, we thought Fairfax was among the best, if not the best. And so we bought 1.4 million shares as we said in a total return swap and -- as an investment, we bought that as an investment. So we look at all possibilities, Jeff. And see what the future will bring.

 

Operator

 

The next question comes from the line of Juni Ra, Private Investor.

 

Unidentified Analyst

 

I have two questions. So for the total credit swaps, when is the expiry date for that and during the Reddit fiesta, did you guys take advantage by hedging any of your investments?

 

Prem Watsa

 

Sorry, when you say, the credit swaps, you mean these total…?

 

Unidentified Analyst

 

The Fairfax price. Yes, yes, so the total ones, yes, sorry.

 

Prem Watsa

 

Yes, total return swaps, yes. They are one year swaps and we've historically been able to extend it for as long as we like.

 

Unidentified Analyst

 

And then on the [Reddit] question, were you guys able to lock in any of the gains by taking any kind of hedging or was there no opportunity because of just a short period of time?

 

Prem Watsa

 

So as I said, right, I made the point that on Blackberry insiders, and we have inside obligations, and we never talked about sort of sales of our securities.

 

Operator

 

Our next question comes from the line of Tom MacKinnon from BMO Capital.

 

Tom MacKinnon

 

My question is about the selling of 14% of Brit to OMERS. I mean -- and I think you're quite -- your reasoning was, we got $375 million as a result of that and that's just in case we need it. Remember, earlier in 2020, you went to the debt market sort of in case you need it. Why are you selling off a 14% of Brit like in the height of some good hard markets here? Why wouldn't you use debt?

 

Prem Watsa

 

Yes, it's a very good question, Tom. We just want to be financially sound and we've done a very good relationship with Brit, with OMERS. You know that we had 40% on RiverStone UK that we sold to OMERS for $600 million and so they're taking $225 million and they're reinvesting $375 million in Brit. And we just think we've got a better relationship. If we bought back Tom, if we had about 89%, almost helped us in the past and we had 89%, that’s how we did the full of 14%. We bought all of it, I think back in 2020 and so we sold this 14% back. It's the $375 million possible potential, we're going to refine that sometime, which we've always done on debt issues that are coming in the next three years. We think it's just a good mix.

 

Tom MacKinnon

 

And so if anybody said, you're selling off an insurance -- part of an insurance company in what would appear to be pretty good insurance markets in order to improve liquidity versus going to the debt market, how would you answer that question?

 

Prem Watsa

 

I'd answer that by saying that we've done this before. And we have the ability to buyback that 14% from almost -- we've got many targets that we can buy it in a year and two years or three years. So it gives us a lot of flexibility, Tom. And the debt markets are bad, we understand that.

 

Operator

 

The next question comes from the line of Mark Dwelle from RBC Capital Markets.

 

Mark Dwelle

 

A couple of questions. On the Barbados, the sale of the Barbados business, you had mentioned briefly and it was mentioned in the press release about a plan to buyback or part of the agreement requires the buyback of 1.2 billion of investment assets. Could you just elaborate on that a little bit? Why is that being left out there? It seems like $1.2 billion is not an insignificant amount that presumably the holding company will need to come up with within the next couple of years in order to fund that purchase?

 

Prem Watsa

 

So, basically, we had a stock portfolio in RiverStone UK, and we could have sold it in December, or whenever in 2020. Our feeling was that it was very undervalued. So we have the ability, 1.2 billion is based on 2019 prices, year-end prices or 2022, we've got the ability to sell it or buy it back. It just -- we think it will be -- right now the 1.2 billion is very much what it's worth in the stock market, meaning the stocks in that portfolio are very much worth 1.2 billion. And we expect it to do very well. And so we can sell it if we want, or we can hold it. And we did -- we just think value investing is coming to the core.

 

The companies that we own are going to be -- are exceptionally undervalued in our minds. So take that, it just sold. But we think they're exceptionally valued. So it's actually undervalued and we think they're going to do pretty well. So we didn't want to sell it at these prices, but that's basically that.

 

Mark Dwelle

 

These are primarily -- these are common equities, or these are private equity holdings?

 

Prem Watsa

 

No, these are predominantly common stock positions that we have.

 

Mark Dwelle

 

My second question relates to executing the total return swap with respect to Fairfax shares. I guess, I was just curious why you pursue that structure, rather than just buying back the stock, if you felt like that was the good opportunity? I mean, is this a capital constraint that you couldn't really buy back that much?

 

Prem Watsa

 

We have to be careful, right? So not so much -- yes, we have to be very careful in terms of how much we can buy back. When we looked at Fairfax as a stock price and looked at everything else that we could buy, which is not over return swap on Fairfax. Right now, we paid US$344 per shares, our book value is $478. I mean, if you want the math, just on our book value basis, we'd have about $200 million gain. And Fairfax stock price for book value is worth another 200 million. We just think it's a terrific investment and our total return swap structure was a very good way for us to do it. And so we did it.

 

Mark Dwelle

 

I don't disagree with you that it was a good a good strike price, I guess it was really -- the form of the transaction rather than just actually buying the shares, using a derivative instead is just -- it's a little bit unusual. I haven't usually seen that with most of the companies that I've followed. So that was really my main question.

 

Prem Watsa

 

Yes, so, Mark, our point is just that we wanted to keep up -- we could -- where you have more than $1 billion in cash and the only company once -- or almost have down $375 million, we just wanted to be financially sound, and in all ways, as opposed to use that cash at this point in time.

 

Operator

 

Thank you. The next question comes from Jaeme Gloyn from National Bank Financial. Your line is now open. You may proceed.

 

Jaeme Gloyn

 

So first question is just around the Farmers Edge IPO, that seems to be -- that'll be coming out pretty soon here. Can you maybe talk about some of the other industries or companies that you're looking to maybe tap into this pretty robust IPO market as a way to realize on value in some of those holdings?

 

Prem Watsa

 

Jaeme we’re not allowed to say too much until they file and till they're done. So Farmers Edge, as you know has filed. We'll be filing some more, you'll be able to guess them. And we'll be filing them in India, in Fairfax India. Many of them there. And we've got some really good companies and we've developed them over time. And Dexterra is a classic where the old Horizon North is called Dexterra, we have 49%. And we expect that to be a very successful company over time.

 

So we have many of them. And when you look at our non-insurance companies, some of you analysts are worried about the fact that we don't make any money, we look like the losses. But we don't show the gains and the gains come over time. So when you look at our investment portfolio, you know that Jaeme, we've got common shares. If we have more than 20%, they become associates. If you have a 40% interest numbers like that, in the case of Thomas Cook, 65%, then you have to consolidate it.

 

So in our annual report in 2020 -- for the period 2020 annual report will come out in a few weeks, we're going to show it to you so that you can -- we're going to take another attempt to show you our common stock positions. And then some of them are just common stock, some are associates, some are consolidated, gets a little confusing, but that's the accounting IFRS, we have to follow the accounting rules. But we're going to show that to you in a way that I think will be easier to understand. And over time all of these investments, some do very well in a short period of time, and some take longer. And we just were patient long-term investors.

 

Jaeme Gloyn

 

Okay, great, thanks. And then just following up looking into the insurance sector as we think about COVID-19 risks and losses and reserving there. Yes, I would expect that loss reserves would diminish as the vaccine rollout unfolds. But can you talk about maybe some of the exposures in event cancellation and business interruption?

 

Prem Watsa

 

Yes, so event cancellation Jaeme we've taken the next six months. These event cancellation policies have very few, if any, and be written after March 2020. And so we've looked at the -- Brit has look forward and Allied were the two. And we've basically written up the first six months, where we think they’ll be written. So we don't expect that to be of any significance. But as I said in my comments that, there is that uncertainty, but we don't expect it to be very significant.

 

Jaeme Gloyn

 

Okay, and then on BI as well, do you have a quick comment to sort of frame that risk, like you just did with events cancellation?

 

Prem Watsa

 

Which risk again Jaeme, sorry?

 

Jaeme Gloyn

 

Business interruption.

 

Prem Watsa

 

Oh, business interruption, yes. Business interruption is an international risk that you have, so it's outside North America. We've taken most of the hit, you'll see that like 50%, 60% of the gross numbers that we've set up are IBNR, right? So that's reserves that are not allocated, incurred but not reported that we expected to come. We've been concerned as you’ve all through our history, we've been conservative. And so we expect that even in the case of business interruption. And there are some lawsuits and there's regulatory bodies making decisions, you have to watch how they come through. But we think all-in-all right now we’re well reserved.

 

Operator

 

The next question comes from [Mikhail Porter], a Private Investor.

 

Unidentified Analyst

 

I believe that it is time that you step down from having primary investments, responsibilities. I know that Jamie manages some capital, Wade manages some capital. We all know that those are very small portions of the capital base. And I think you are always quoting your long-term track record, but I can -- I know when the man is out of tune with the markets and I also think that it was a huge mistake if you did not take the BlackBerry gift that was given to you by the market. And I also don't think that you're doing deep analysis on your holdings.

 

I suspect that you probably don't do a lot of diving into the financials, the statements. You probably don't understand the microeconomics of the businesses you're buying. You probably are not talking to customers, suppliers, competitors, former employees. The investment business is a very competitive business. It's not like it used to be. I am not saying that, you should go out and buy technology stocks, but a sense when the man is not competitive in the field and is not working hard. And I think it's time that you step down from primary investing and I'm sure many of your associates agree with you but because they're Canadian, and tend to be nicer than Americans they don't say anything. And the banks don't ask you any difficult questions, because there's so few good companies in Canada, and they get financing fees from you. So they ask cowardly questions. Thank you.

 

Prem Watsa

 

Good points. You're entitled to your opinion, and we will let time decide that, okay? So thank you very much for your comment.

 

Operator

 

The next question comes from the line of [indiscernible], Private Investor.

 

Unidentified Analyst

 

My question is regarding Fairfax India. Could you please provide an update on your investment in Bangalore Airport? Are you still bullish about the prospects of that in investment given the situation with COVID and how it's going to evolve in the next two, three years? And also, could you provide an update regarding the deal you had with OMERS to sell stake at 2.7 billion valuation? And can we expect to like, has it closed or could you provide an update there? And also could you provide an update there? And also, could you tell us like whether we are still looking to do the IPO as it was written in the last annual report by the end of this year?

 

Prem Watsa

 

Yes. So Bangalore International Airport is a world class airport, going very well, the -- but stopped of course, during COVID. The business is coming back significantly, passengers are -- it's running at about 60% of capacity. And so the terminal is delayed, but the 2022, the second terminal will be built. The second runway is already built. And we expect it to -- we’re as excited about Bangalore International Airport as we always were. And we got our Toronto guy running it as you know, Hari Marar. And so this company will be on its way, in terms of it’s -- in terms of Fairfax India itself is a tremendous opportunity.

 

India is a land of opportunity. It's become very business-friendly. And Mr. Modi has come up with a very good budget. And we expect that our anchorage -- over time we’ll take it public, we think 2.7 billion, 2.8 billion for Bangalore International Airport 100% basis now is a very reasonable price. And so that's very, very possible.

 

In terms of the anchorage, approvals are still -- India there's a lot of approval, has to be the one more approval that is necessary and we think it will come soon. And so as excited customers in terms of Fairfax India. It has got lots of possibilities.

 

With that Dale let me take the last question, if you don't mind.

 

Operator

 

The next question comes from the line of Alan Parsow from Elkhorn Partners.

 

Alan Parsow

 

I just need a little bit of clarification if I can on the questions regarding Blackberry. I understand that you don't discuss changes in portfolio et cetera, regarding any of your positions. But there were filings made and this goes with regard to your inside comments, insider comments and directorship. There were some filings made in January, were six of the -- lots of Fairfax team sold their entire positions in Blackberry. I understand that's a subsequent event to the end of the quarter. But can you explain how they're able to sell their shares? And Fairfax may not be able to sell theirs? Or in the past, you’ve had two different positions in Blackberry, one convertible bonds and common stock. Are you saying you have restrictions on both of those for clarification for me, please?

 

Prem Watsa

 

The securities, SEC doesn't distinguish between convertibles and common shares. And in the case here, we are an insider. I am an insider, and Fairfax is an insider. Some of the people may not be insiders, and I don't know who you're referring to Alan, but some of them may not be insiders. And so they can do...

 

Alan Parsow

 

An example, Wade Burton, Roger Lace, I mean, there were significant investor people?

 

Prem Watsa

 

Yes, that's right. But the company is an insider. So we follow all these rules very carefully. And no one can sell anything unless they go through our legal department. And so we're very, very careful Alan in this type of situation. And because we don't talk about individual securities still till we’re done, that is how we run our affairs for 35 years. So you have to bear with us, Alan.

 

Prem Watsa

 

And I thank you for your question. I thank all of you. Dale, I think we're ready to go on to end the call. And as we've announced previously, for your safety and for the safety of all our employees from the global pandemic, our Annual Meeting will once again be held virtually on April 15th, at which time I look forward to answering again, all your questions. Instructions on how to join that webcast will be published on our website soon. So Dale thank you very much. This will terminate the call. Thank you.

[petec]

wow, which one of you just went off on Prem on the call?

 

What was said?

 

Rough version:

Called in and told him he needed to step away, he wasn't paying attention anymore, and had lost his touch.  Continued by saying that Prem didn't understand any of the companies he was investing in and wasn't doing any detailed analysis on microeconomics, his partners agreed but were Canadian so too nice to tell him, and the bankers were cowards not asking hard questions because Canada doesn't have enough good companies.

 

Sounds like Sanjeev.

 

Kidding!!!

 

Ha ha!!

 

I'm listening to the call now.  Let me see who this twat was!  Cheers!

 

Don't know who it was, but you could tell that they have very little understanding about how much analysis goes on at Fairfax when selecting investments.  I'm probably one of a very few handful of people who has actually seen the internal workings and spoken to all of the analysts, portfolio managers, core group in detail over the years, and does not work for the company.  This guy has no idea what he is talking about!  Cheers!

 

I have no doubt that you are right.

 

Or more accurately I flipping hope you are right!

 

But in fairness to the questioner, Prem's explanation of his investments is always highly simplistic, and usually revolves around people not microeconomics. We think John Chen is great!!! We believe in Blackberry!!! We bought Exxon on a 10% dividend yield!!!

 

You can get away with that when you're knocking it out of the park, but you have to assume people will question your thinking when you're not.

 

In my view it would do Prem no harm to adopt a more structured, numbers-based approach to explaining his investment theses.

 

90% of people wouldn't understand.  Buffett says he writes his letters in a way so that his sisters could understand what he's investing in.  The other issue is that if you say TOO MUCH, then shareholders linger on every tiny word you've said.  For example, Prem's said he won't short again...no matter how great the opportunity, or perhaps necessary to protect statutory surplus?!  Investors would be jumping all over him again if he shorts.  So it's a balancing act between enough information and not too much information. 

 

If people really want to know the depth of their analysis and thought process, come to our annual dinner in Toronto.  They get very deep into it where they can, especially past holdings.  Cheers!

 

Yeah I know there are drawbacks both ways. Personally I don’t think Prem gets the balance quite right, but that’s just my opinion.

 

And yes, I’ve been to the dinner, but just once. I fully intend to return!

[petec]

Boat Rocker just filed to IPO.

[bearprowler6]

Boat Rocker just filed to IPO.

 

https://privatecapitaljournal.com/fairfax-controlled-boat-rocker-media-files-for-ipo-on-tsx/

[Santayana]

Seemed to me he hinted at a Digit IPO coming soon as well. 

[no_free_lunch]

I know nothing of boat rocker. Anyone have a sense for the value there?

 

I hope he IPOs digit in the US. It can be marketed as the India version of lemonade. 

 

I have ffh at somewhere around $540 US or $675 CAD.  If it can just move to book, it historically has traded around there or even at a premium, it's still over 30% upside.  Plus any value that accrues due to insurance earnings.  Plus any future gains from portfolio.  It will take a few quarters or more if performance to rerate but it's very possible.  Not so crazy to see it moving up 40 to 60% over the next year or two.

 

On BB note that it's still a double from year end. As in the past 6 weeks.  Yes it's discouraging they couldn't monetize but they are doing ok.

[petec]

I’d be amazed if they IPO’d Digit at this stage. They said on the call that the Indian govt has now passed a law allowing them to go to 74% and they want to do this. I suspect this is what’s motivating the sales of Riverstone and Brit - effectively swapping these stakes for more Digit, which is a very smart move IMHO. But I don’t see how they’d do that while IPO’ing Digit, realistically.

[Santayana]

Good point about wanting to increase the Digit ownership amount.  This was the quote that had me thinking that way.

 

"We'll be filing some more, you'll be able to guess them. And we'll be filing them in India, in Fairfax India. Many of them there. And we've got some really good companies and we've developed them over time."

[petec]

Yeah remember Digit is not in Fairfax India. That’ll be referring to Anchorage/Bangalore Airport plus potentially others.

[no_free_lunch]

They sold a small stake in digit at year end so it's not unprecedented. I think it's in part to take profit but also to provide a valuation point.  With farmers edge they are only ipoing $100m, why not a similar float for digit?  It's more to highlight the value than to raise capital.  I could be totally wrong here, but it seems to fit.

[petec]

They sold a small stake in digit at year end so it's not unprecedented. I think it's in part to take profit but also to provide a valuation point.  With farmers edge they are only ipoing $100m, why not a similar float for digit?  It's more to highlight the value than to raise capital.  I could be totally wrong here, but it seems to fit.

 

My point is that Digit would have to sell a lot of shares for Fairfax to go to 74% *and* and IPO.

 

It’s possible. Just doesn’t seem likely.

[petec]

BTW does anyone understand why Digit’s carrying value won’t rise to the new mark? They said it wouldn’t on the call but I don’t know why.

[Viking]

BTW does anyone understand why Digit’s carrying value won’t rise to the new mark? They said it wouldn’t on the call but I don’t know why.

 

Perhaps because Fairfax needs to increase its ownership position to 74%. Bangalore Airport was only revalued to a ‘proper’ valuation AFTER Fairfax had built its position to what it wanted :-)

[Viking]

The driver of the very large beat from Fairfax in Q4 was ‘net gains on investments’ of $1,235.8 billion. Of this total $1,181.2 was ‘net gains on long equity exposures’. I don’t think anyone was expecting a number this big from this bucket.

 

Can someone explain to me the likely drivers for this massive number? Is it composed of the following:

1.) appreciation of owned stocks (largely found in 13F) - $350 million?

2.) appreciation of remaining assets held in ‘common stocks’ bucket on balance sheet - like partnerships etc ?

3.) appreciation in Atlas warrants and BB debs - $100 million?

4.) foreign currency net gains - due to substantial weakness of US$ in Q4 ?

5.) derivatives: common stock and equity long positions ?

 

I am trying to understand what the key drivers were in Q4 to better understand what might carry forward into Q1 given the continued strength in equity markets.

[StubbleJumper]

The driver of the very large beat from Fairfax in Q4 was ‘net gains on investments’ of $1,235.8 billion. Of this total $1,181.2 was ‘net gains on long equity exposures’. I don’t think anyone was expecting a number this big from this bucket.

 

Can someone explain to me the likely drivers for this massive number? Is it composed of the following:

1.) appreciation of owned stocks (largely found in 13F) - $350 million?

2.) appreciation of remaining assets held in ‘common stocks’ bucket on balance sheet - like partnerships etc ?

3.) appreciation in Atlas warrants and BB debs - $100 million?

4.) foreign currency net gains - due to substantial weakness of US$ in Q4 ?

5.) derivatives: common stock and equity long positions ?

 

I am trying to understand what the key drivers were in Q4 to better understand what might carry forward into Q1 given the continued strength in equity markets.

 

 

It's always really tough at Q4 to figure out what happened during the quarter because the release is so scant.  We will likely need to wait until the AR comes out to get a better handle on exactly what FFH held for investment during the quarter.  The one item that stands out as a wildcard in my mind is #5, and in particular, the TRS that were disclosed during 2020.  At one point last year, Two Cities walked us through the calculation of FFH's likely return from them, and they could have been a material contributor.  But, did FFH still hold them during Q4, or was the position closed?

 

I've never really liked the Q4 release, but I am making an exception this year with the underwriting results being so strong!

 

 

SJ

[matthew2129]

Anyone have an idea on whether FFH could have sold covered calls on BB without triggering any reporting requirements? The below guidance is clear that insiders need to file covered call transactions if they simultaneously sell puts, but if you just sell covered calls alone (i.e. not part of a collar transaction) then perhaps there's no filing requirement?

 

 

https://www.osc.gov.on.ca/documents/en/Securities-Category5/csa_20100611_55-312_equity-monetization.pdf

[Parsad]

The driver of the very large beat from Fairfax in Q4 was ‘net gains on investments’ of $1,235.8 billion. Of this total $1,181.2 was ‘net gains on long equity exposures’. I don’t think anyone was expecting a number this big from this bucket.

 

Can someone explain to me the likely drivers for this massive number? Is it composed of the following:

1.) appreciation of owned stocks (largely found in 13F) - $350 million?

2.) appreciation of remaining assets held in ‘common stocks’ bucket on balance sheet - like partnerships etc ?

3.) appreciation in Atlas warrants and BB debs - $100 million?

4.) foreign currency net gains - due to substantial weakness of US$ in Q4 ?

5.) derivatives: common stock and equity long positions ?

 

I am trying to understand what the key drivers were in Q4 to better understand what might carry forward into Q1 given the continued strength in equity markets.

 

Foreign stock positions are not included in the 13F, so they may have added to positions in Europe, India, South America, etc during the market downturn.  Cheers!

[petec]

BTW does anyone understand why Digit’s carrying value won’t rise to the new mark? They said it wouldn’t on the call but I don’t know why.

 

Perhaps because Fairfax needs to increase its ownership position to 74%. Bangalore Airport was only revalued to a ‘proper’ valuation AFTER Fairfax had built its position to what it wanted :-)

 

Ha! Fair point. I’m just surprised they had a choice. Maybe the fundraising was too small to cross a materiality threshold.

 

I have to say I think building Digit and then taking it to other markets is a really exciting prospect. I think Digit will be a big driver of value over the next 20 years, as ICICI and First Capital were.

[drzola]

Farmers Edge write up by someone with skin in the game fyi

 

https://upstreamaginsights.substack.com/p/farmers-edge-ipo

[Viking]

Farmers Edge write up by someone with skin in the game fyi

 

https://upstreamaginsights.substack.com/p/farmers-edge-ipo

 

Thanks for posting. Great summary. Hopefully the FE IPO is successful. Technology companies need $ to scale and the IPO should help in the near term. It looks like it will take a few years for FE to become profitable.

 

Fairfax needs an exit strategy on these types of investments (the ones that do not play out as they expected at acquisition and this one clearly has not). There needs to be a limit of how much $ they commit. The big reason is Fairfax is, at its core, an insurance company. And if it wants to be valued at BV or (dare we hope) a premium to BV it needs to have earnings that are somewhat predictable. The non-insurance operations cannot keep driving $100 or $200 million write offs every year (as assets are written down). These write offs happen far too much.

 

The good news is i think we can see a trend. In the past 12 months, APR was sold to Atlas. Fairfax Africa was merged into Helios. Farmers Edge IPO. And it appears Fairfax is not done. 2021 is certainly shaping up to be a busy year for Fairfax. Nice to see Fairfax motivated to act and take advantage of current market conditions.

 

I am looking forward to the day when the non-insurance companies generate large and consistent free cash flows for Fairfax each and every quarter... when analysts are able to model that in their estimates we should see a nice increase in multiple to BV with target prices.

 

PS: it is not surprising that Fairfax keeps saying that Digit is now profitable. Another headwind will become a tailwind as results are reported in the future. Of course, Digit looks like a home run. But still, it is nice to see more and more operations becoming profitable.

[drzola]

DE Deere reports next Friday Viking and it will be interesting to see what they discuss and report on the progress of their digital dashboard departments.

[petec]

Farmers Edge write up by someone with skin in the game fyi

 

https://upstreamaginsights.substack.com/p/farmers-edge-ipo

 

Thanks for posting. Great summary. Hopefully the FE IPO is successful. Technology companies need $ to scale and the IPO should help in the near term. It looks like it will take a few years for FE to become profitable.

 

Fairfax needs an exit strategy on these types of investments (the ones that do not play out as they expected at acquisition and this one clearly has not). There needs to be a limit of how much $ they commit. The big reason is Fairfax is, at its core, an insurance company. And if it wants to be valued at BV or (dare we hope) a premium to BV it needs to have earnings that are somewhat predictable. The non-insurance operations cannot keep driving $100 or $200 million write offs every year (as assets are written down). These write offs happen far too much.

 

The good news is i think we can see a trend. In the past 12 months, APR was sold to Atlas. Fairfax Africa was merged into Helios. Farmers Edge IPO. And it appears Fairfax is not done. 2021 is certainly shaping up to be a busy year for Fairfax. Nice to see Fairfax motivated to act and take advantage of current market conditions.

 

I am looking forward to the day when the non-insurance companies generate large and consistent free cash flows for Fairfax each and every quarter... when analysts are able to model that in their estimates we should see a nice increase in multiple to BV with target prices.

 

PS: it is not surprising that Fairfax keeps saying that Digit is now profitable. Another headwind will become a tailwind as results are reported in the future. Of course, Digit looks like a home run. But still, it is nice to see more and more operations becoming profitable.

 

Couldn’t disagree more.

 

Prem has never managed the firm for consistent earnings and has repeatedly said he never will.

 

If that means the stock trades below the multiple it could, good: more buybacks.

 

What matters to me is how fast BVPS compounds over 5 and 10 year time periods, and that’s all.

[drzola]

Investing in Nat resources companies and more specifically innovators is a Very tough Business as it takes multiple human generations and business cycles to get to market and scale in the past that is but things may have changed tho.

 

Example of an incredible products timeline to scale  here;

 

https://www.seedmaster.ca/about.php

[StubbleJumper]

Farmers Edge write up by someone with skin in the game fyi

 

https://upstreamaginsights.substack.com/p/farmers-edge-ipo

 

Thanks for posting. Great summary. Hopefully the FE IPO is successful. Technology companies need $ to scale and the IPO should help in the near term. It looks like it will take a few years for FE to become profitable.

 

Fairfax needs an exit strategy on these types of investments (the ones that do not play out as they expected at acquisition and this one clearly has not). There needs to be a limit of how much $ they commit. The big reason is Fairfax is, at its core, an insurance company. And if it wants to be valued at BV or (dare we hope) a premium to BV it needs to have earnings that are somewhat predictable. The non-insurance operations cannot keep driving $100 or $200 million write offs every year (as assets are written down). These write offs happen far too much.

 

The good news is i think we can see a trend. In the past 12 months, APR was sold to Atlas. Fairfax Africa was merged into Helios. Farmers Edge IPO. And it appears Fairfax is not done. 2021 is certainly shaping up to be a busy year for Fairfax. Nice to see Fairfax motivated to act and take advantage of current market conditions.

 

I am looking forward to the day when the non-insurance companies generate large and consistent free cash flows for Fairfax each and every quarter... when analysts are able to model that in their estimates we should see a nice increase in multiple to BV with target prices.

 

PS: it is not surprising that Fairfax keeps saying that Digit is now profitable. Another headwind will become a tailwind as results are reported in the future. Of course, Digit looks like a home run. But still, it is nice to see more and more operations becoming profitable.

 

Couldn’t disagree more.

 

Prem has never managed the firm for consistent earnings and has repeatedly said he never will.

 

If that means the stock trades below the multiple it could, good: more buybacks.

 

What matters to me is how fast BVPS compounds over 5 and 10 year time periods, and that’s all.

 

 

IMO, you need to go one more step.  That BV needs to be converted at some point into cash flows available for use by shareholders.  That requires either interest/dividends from the investment, or it requires a compelling, profitable exit-strategy.  To date, that has been the shortcoming of the investment in BB shares (but the debs have been a bit better).  Let us hope that this doesn't also end up being the shortcoming for Eurobank.

 

 

SJ