Fairfax Annual Letter

[bluedevil]

There can't be a debate that Fairfax's stock has performed very poorly in the last decade - that's an objective fact.  But question is will it be a good investment going forward for the next decade?

 

I think it has a pretty good shot.  I thought this year's letter was detailed and informative.  (If I have one concern it is that Prem seems unwilling/unable to discuss mistakes.  It would seem a helpful practice to avoid making them again.)

 

And I love Viking's analogy of a tanker turning around -- I think that's right.  Good core performance has been obscured/hurt by BIG mistakes (shorting; deflation swaps; concentrated bets on high risk investments) that have wiped out a lot of capital and left the overall company treading water.  Stop the diversions and we start to swim forward.

 

Looking forward, here is what I see:

 

(1)  Six very high quality, growing insurance companies that generate 18-billion in profitable float.

 

(2)  A number of insurance companies in the developing world -- India (we own 76% of Digit as soon as Gov't allows from convertible securities!); Middle East; LatAm; Asia; and South Africa -- that have long, secular growth runways in front of them.

 

(3)  A investment operation that faces no artificial restraints -- can focus on the long-term; can go anywhere in the world; growth or value; public or private or venture; and so on.  The operation is structured as a platform with many different people on the team.  Those that grow capital over time take on a more important role; those that fail to take on less of a role. 

 

(4)  No capital lost to shorting or acquisitions or the financial strain that comes from bad bets on them.

 

(5)  Excess cash going to strengthen financial position (agree 100% with Parsad's observation that FFH should not use debt!!) and then buy back shares.

 

It seems like the company a pretty clear path to compounding book value per share at say 10% a year for the next 5-10 years.

 

There's no magic or homeruns required.  Just keep the tanker on the new path!  Would love to hear from people who view the future differently for FFH and the reasons why.

 

Potential risks I see to FFH's book value compounding by 10% a year for the next decade:

 

Investing stinks:  Maybe, but I  think that what has created the real problems has been the macro and shorting misadventures.  Even making some mistakes on security selection they can do fine.  Where they have gotten in trouble in the last 10 years was underperformance of their picks; being wrong on shorts; and being wrong on deflation swaps.  They are lucky interest rates went down (a macro call they got right), or else the problems would have been worse.  But they seem to have extricated themselves from the problem activities.

 

Tech disruption of their UW subs.  I don't know enough to handicap this.  But they have a front row seat with Digit and Ki to learn the lessons.

 

Interest rates stay low and Fairfax keeps UW float in cash, which produces negative real returns.  My thought is that if interest rates stay where they are, then the "hard market" should really be a new normal to make up for it.

 

 

[StevieV]

Would love to hear from people who view the future differently for FFH and the reasons why.

 

I guess I am in your camp, but I think the risk/contrary view is quite simple.  Given the past decade, what should give an investor confidence about any of these things?

 

Take your number (3) - no artificial restraints on investments.  I'm not sure that is the case.  It is very much unclear that any of the BB position was sold.  Why not?  Everyone here was jumping up and pounding the table to monetize.  Fairfax was certainly aware.  If they didn't monetize, I'd guess it was some type of artificial, shareholder unfriendly, self-imposed restraint on dumping the BB position.

 

How about (4) - Fairfax was done shorting, but managed to lose a cool $704 million in 2020 in short equity positions.  More than 6% of the current market cap.  Just a massive amount well after they realized that it isn't something they should be doing.

 

Basically, they've managed to screw things up in the recent past.  How can one be certain they won't screw things up in the future, perhaps in new and unforeseen ways?

[no_free_lunch]

Keep it coming Stevie. This is why I consider ffh closer to a cigarbutt than long term hold. I would not be in it if there were better opportunities.

 

I guess the things I will throw out in their defense is ATCO , digit appear to be very sensible investments.  Otherwise yes I am having a hard time with their macro decisions.

[Viking]

StevieV, i agree with pretty much everything you say. And in terms of last year, my big purchase was Nov after the vaccine news came out. My point was more along the line that from March and for much of 2020 investors had lots of opportunity to pick Fairfax up at a very good price.

 

So we agree that Fairfax has been a terrible investment for investors who bought and held for the past 7-10 years. Especially those who bought in US$ 10 years ago. The issues that Fairfax has had with its business the past 10 years have been well documented on this site (each and every year) and i don’t think they have been sugar coated.

 

I am simply of the opinion that Fairfax has been, for a few years now, slowly been dealing with many of the core  issues that were causing underperformance. And yes, it has been 2 steps forward and one step back sometimes. I want to learn from the past. But what i care about more is what will happen in the future.

 

Investors often get anchored in the past and it prevents them from being objective when assessing a company, its current situation and its future prospects. I remember investing in Apple in the summer of 2013. The narrative surrounding the company at the time was completely wrong. And the stock was dirt cheap and it just kept going down... so i backed up the truck. The narrative has completely flipped today and people can’t pay a high enough price for the stock. Interesting thing is not all that much has changed at Apple (other than it has execute well).

 

Same thing with the big US banks in the summer of 2016. The narrative at the time was completely backwards looking, and of course, was completely wrong. It completely ignored/discounted all of the changes what had taken place at the companies and on the regulatory front. People could not get 2008-2010 out of their head. And it stopped them from understanding the big banks had completely changed as an investment on a go forward basis.

 

I think Fairfax is lining up the same way. Company has, for the past couple of years, been slowly been fixing issues it can fix. We are in an insurance hard market (only happens every 10 or 15 years). And, as vaccinations accelerate, financial markets (sectors Fairfax is heavily weighted towards: cyclicals, emerging markets, service) are taking off. And the stock is trading (still) close to historically low valuation (it is cheap). As i said, the risk/reward set up looks very good.

 

The key now is execution. Fairfax needs to perform. And in a somewhat predictable way (to re-build credibility with the investment community). But it will likely take time for Mr Market to get on board. It took years for the narrative for Apple and the big US banks to shift and just reflect reality. And in Apple’s case today it looks to me like the narrative is now overly optimistic. But this is often how investors make the big money.

[Viking]

Would love to hear from people who view the future differently for FFH and the reasons why.

 

I guess I am in your camp, but I think the risk/contrary view is quite simple.  Given the past decade, what should give an investor confidence about any of these things?

 

Take your number (3) - no artificial restraints on investments.  I'm not sure that is the case.  It is very much unclear that any of the BB position was sold.  Why not?  Everyone here was jumping up and pounding the table to monetize.  Fairfax was certainly aware.  If they didn't monetize, I'd guess it was some type of artificial, shareholder unfriendly, self-imposed restraint on dumping the BB position.

 

How about (4) - Fairfax was done shorting, but managed to lose a cool $704 million in 2020 in short equity positions.  More than 6% of the current market cap.  Just a massive amount well after they realized that it isn't something they should be doing.

 

Basically, they've managed to screw things up in the recent past.  How can one be certain they won't screw things up in the future, perhaps in new and unforeseen ways?

 

What are the big risks in investing today in Fairfax?

1.) crash in equity markets. One scenario is virus mutates into more lethal version; current vaccines no longer work etc

2.) catastrophic insurance event (Much bigger than Texas)

3.) Fairfax management credibility. Below are just a few examples:

- makes a big insurance acquisition. And overpays and uses Fairfax shares to pay (trading well below book).

- spends $500 million or even $1 billion on a swing for the fence, supposed ‘deep value’ stock in a shitty industry with terrible management.

- starts pouring big money (hundreds of millions) into current equity holdings that are struggling to help them make acquisitions and grow their business. Funded by selling the good assets (like Riverstone UK). Peter Lynch called this ‘pulling the flowers and watering the weeds’

 

I could go on. My eyes are wide open in understanding the risk investing in Fairfax. I will monitor the situation very closely. If Fairfax management does stupid things i will react accordingly with my shares. I like to describe Fairfax as a hairy type investment. So it is likely a trade for me and not a long term ‘buy and forget’ type stock.

[gurjot]

Without having to be too political,  modi has increased hindu muslim divide in india.  Ecnomically speaking modi governement is not doing anything good for India.  Middle class is in worse shape than it was before modi took over .  Selling off governement owned entities has created collusion like situation .  eg railroad has tripled fares in the last few months when unemployment is high and same thing with gas prices are higher today than they were when crude was at  $140.

 

Yes, Prem's rosy view of Modi is certainly at odds with much of what I've read elsewhere.  But he's talking his book so I personally don't worry about the discrepancies.

 

In general, I feel Prem's writing often makes him seem avuncular to the point of being naive, particularly over the past few years.  (The exclamation points ending every second sentence don't help.)  I don't believe this is fully reflective of the depth of his thinking.  Buffet also has the whole "Uncle Warren" persona, but there's certainly a very shrewd businessman behind the aphorisms and platitudes.  Maybe not a fair comparison but perhaps you see my point.

 

agreed.  lets see what future brings.

[barminov]

As a long time follower, and at times shareholder, of Fairfax, that letter was very disappointing. 

 

After the last conference call, it should have been pretty obvious to everyone at the company that shareholders want to know what, if anything, was done with BlackBerry. Prem side-stepped this and gave his usual: John Chen is great and we like him. Cool, but everyone that's followed the company for longer than a quarter already knew that. Shareholders are more interested in why several members of the investment team (including Wade Burton who he later praised for doing a great job) sold shares of BB during the run-up and FFH seemingly did nothing. If there's some reason they couldn't/didn't want to, say so but don't just avoid the subject altogether. Even a simple: "we can't talk about it" would have been better. 

 

Second, there was no discussion at all about their Tesla short. From the 2018 letter:

"After much thought and discussion, it became clear to me that shorting is

dangerous, very short term in nature and anathema to long term value investing. As I mentioned to you in last year’s

annual report, shorting has cost us, cumulatively, net of our gains on common stock, approximately $2 billion! This

will not be repeated! In the future, we may use options with a potential finite loss to hedge our equity exposure, but

we will never again indulge anew in shorting with uncapped exposure. Your Chairman continues to learn – slowly!!"

 

Yet they decided to not close out the Tesla short total return swap and kept extending it. On the conference calls, they made it sound like they were working through it, winding it down and there was just a little more left. This is deceptive at best. It's a short total return swap with Bank of America as a counterparty. I'm not a derivatives trader so I might be wrong here but I'm pretty sure you just pick up the phone and close the trade, maybe pay somewhat of a premium to get out. Instead, as late as September 11, 2020, they re-upped it for a notional amount of $128.7m at a strike price of $372.72. That sure doesn't jive with the statement made in the 2018 letter. At some point in 2020 they finally closed it out and yet the current letter basically just says "hey, we closed a short after losing a bunch of money." Maybe after a huge loss like that some discussion is warranted? Hell, I agree with them and this position but their timing was off and they got burned. If they explained the logic/thinking behind why they did it (it's crazy overvalued), explained what happened (the price kept going up with no rhyme or reason), and said "we learned once again why shorting without limiting your downside is dumb, we won't do it again" it would have been a lot better than the way they did handle it which was essentially an insult to everyone's intelligence and/or a hope that no one is paying attention.

 

Third, and by far the least important, it's Ukraine not "the Ukraine." This is mainly just a pet peeve of mine but "the Ukraine" is what Russians called it when it was one of the Soviet Republics because it was a region in a larger country (like the Great Plains, the Northeast, the Rockies etc). 99.9% of people don't/won't and shouldn't care but the people that might are the people in the Ukrainian subsidiaries that Prem is trying to praise. Interestingly enough, he got it right in the first part of the letter and switched to "the Ukraine" in the latter part. Anyway, at least he got Colombia right.

 

Maybe they did an inverse total return swap on BB. Would be really easy for them to do since they can lend their own stock to the counterparty. We probably just need to see the Q1 report in less than two months and you might have your answer.

 

How big a number in investment gains in Q1 will make you happy even if you don't know BB gains are part of it? Do you have an estimate with BB marked to market? Some of the big names have moved up a lot so far in 2021.

 

I am just speculating of course. FFH did a long total return swap on its own stock and didn't have to file anything on SEDI. It would follow, it's the same if they entered into an inverse total return swap on BB.

 

Why would he ever say anything if that's the case? Better to be the supportive long term shareholder for BB's sake which is of course in our best interest too.

 

To me the BB issue is about a lot more than whether or not the investment gain was realized in Q1 and the size of the gain. Generally speaking, I'm a very long term investor. Whether or not they realized this gain doesn't change the long term value of the shares all that much. What it does change radically though, is my assessment of FFH's management, their disclosures to shareholders, and the suitability of the company to be a long term holding in my portfolio. With their actions over the last 5-10 years, they've lost their place as a long term holding in my portfolio. If they've done nothing with BB and refuse to acknowledge it/talk about it, that just reinforces my belief that FFH is not a suitable long term holding. Like I said earlier, there could have been reasons why they couldn't do anything or didn't want to do anything, but as a shareholder I'd expect to hear about those. "John Chen is great and we like him" doesn't work for me. The TSLA short is in exactly the same bucket. The lack of discussion/disclosure, and continuing to do something they said they wouldn't is a much bigger issue to me than the actual loss.

 

Could they have realized the BB gain through a TR swap? Sure and maybe they did but what's the benefit of not disclosing this to shareholders? So John Chen doesn't find out? They could have easily told him: "We have no plans to sell BB but we're going to take advantage of the temporary price move with a TRS. Keep doing what you're doing, we're not going anywhere." I thought this was exactly what was happening when BB issued the press release that said we're not aware of anything happening to cause the share price movement. That gave insiders the all-clear but so far, it looks like nothing happened on that front.

 

EDIT: Just to be clear, I do see all the positives (huge improvements in the insurance subs, the gains in a lot of their holdings, etc) and I am currently a shareholder but because of these issues and several other things over the last 5-10 years, I'm along for the ride temporarily, not a long term partner.

[SafetyinNumbers]

They don't disclose it because they have a policy. If they didn't have a policy they would have to decide on each portfolio transaction if they should disclose it or not.

 

It just sounds like you don't like the corporate culture or the long term orientation. Not every stock is for everybody, that's what makes a market.

 

 

[barminov]

They don't disclose it because they have a policy. If they didn't have a policy they would have to decide on each portfolio transaction if they should disclose it or not.

 

It just sounds like you don't like the corporate culture or the long term orientation. Not every stock is for everybody, that's what makes a market.

 

What's the policy? They discuss plenty of their investments why not these?

[SafetyinNumbers]

What are your examples where they disclosed a trade that wasn't a sale or a purchase of shares of a company but didn't have to?

 

You seem to have a longer history with the company than I do. I took Prem at face value from the conference call.

[Daphne]

They did disclose when they made a pile on the credit default swaps in 2008

[barminov]

What are your examples where they disclosed a trade that wasn't a sale or a purchase of shares of a company but didn't have to?

 

You seem to have a longer history with the company than I do. I took Prem at face value from the conference call.

 

Well, I guess they don't have to discuss anything but from very recent examples, Prem gave dollar amounts of gains from General Motors and Lumen which were both mainly from Total Return Swaps, but there is no mention of the loss on Tesla TRS which was much bigger.

 

But Daphne's CDS example is the classic, big example of this.

[Santayana]

What are your examples where they disclosed a trade that wasn't a sale or a purchase of shares of a company but didn't have to?

 

You seem to have a longer history with the company than I do. I took Prem at face value from the conference call.

 

Well, I guess they don't have to discuss anything but from very recent examples, Prem gave dollar amounts of gains from General Motors and Lumen which were both mainly from Total Return Swaps, but there is no mention of the loss on Tesla TRS which was much bigger.

 

But Daphne's CDS example is the classic, big example of this.

 

Did I miss something?  is it a known fact that they've ever had any exposure to Tesla specifically?  I thought it was just conjecture.

[barminov]

What are your examples where they disclosed a trade that wasn't a sale or a purchase of shares of a company but didn't have to?

 

You seem to have a longer history with the company than I do. I took Prem at face value from the conference call.

 

Well, I guess they don't have to discuss anything but from very recent examples, Prem gave dollar amounts of gains from General Motors and Lumen which were both mainly from Total Return Swaps, but there is no mention of the loss on Tesla TRS which was much bigger.

 

But Daphne's CDS example is the classic, big example of this.

 

Did I miss something?  is it a known fact that they've ever had any exposure to Tesla specifically?  I thought it was just conjecture.

 

The company has never mentioned it but their filings say that on September 11, 2020, they entered a TRS on an "Auto Munufaturing (sic) Co." at a strike price of 372.72 with a notional amount of $128.7m that would benefit from a decline. TSLA closed on September 11, 2020 at $372.72.

[Santayana]

What filing was that?  In the Q3 report they stated "During the third quarter and first nine months of 2020 the company did not initiate any short equity total return swaps"

[barminov]

What filing was that?  In the Q3 report they stated "During the third quarter and first nine months of 2020 the company did not initiate any short equity total return swaps"

 

NAIC filing for Q3. It's possible that they just re-upped/recast an already existing TRS and therefore, didn't technically "initiate" it at that time, but the fact remains that they did this during Q3.

[Xerxes]

At the same time, because of these faults, it's given investors several chances at making money investing in the company.  Even those that hold for the long-term...as long as they dollar-cost averaged in over time...would have done quite well too.

 

The downside of all of this is that investors would have less opportunity to buy the swings in the company's price.  So you can have Fairfax as is, and make money in broad swings...or you can have an insurer more like Berkshire or Markel, but have less opportunity to buy cheaply.  Cheers!

 

Although I agree on the description above about opportunity to new comers and existing holders, I don't equate lump return with bad return.

Lumpy returns to me, means eventually over a long term horizon you will be made whole, as oppose to smooth return, that is more predictable. I am ok with either one.

 

While I am in your camp + Viking' generally, I do not believe that past the initial value-bounce back that has the advantage of starting off from a low-BV-base, there would be enough fuel in the tank, to push long-term ROE back to 15%. At best, past the initial bump, going forward, we can look forward to 10-15% if all goes well. And I seem to be okay with that. My point is however, the front-loaded positive lumpiness will not be enough to undo the lost decade.

 

 

 

 

[Xerxes]

I just read the FFH letter. Some comments:

 

"The world stopped in 2020.

Literally! COVID-19 closed down the economies of more than 180 countries."

 

:-) the letter started off like opening scroll of a Star Wars movie. Fairfax Strikes Back. Overall, I like the length and the level of detail. But here are some nitpicks.

 

--------------------------

"Everything included, we have $21.5 billion in gross premiums worldwide with an investment portfolio of $47.7 billion."

 

Is that a typo; i am pretty sure their investment portfolio is $39-40 billion.

--------------------------

I appreciate the effort put in into the equity investment and classification. Interestingly, I couldn't see Toy'R Us which was bought $400 million (i think) and therefore should have fully consolidated as part of the third bucket and is rather a significant sum.

 

I am not sure why IIFL Wealth and IIFL Finance are shown separately on page 10, if they are part of Fairfax India.

--------------------------

"During the period from March to May 2020, when corporate bond spreads widened significantly, we added $3.9 billion in investment grade corporate bonds at a yield of 4.1% and term of 4 years

 

Net gains on bonds of $460 million includes net gains on corporate bonds of $474 million and net losses of$35 million on government bonds (inclusive of losses on treasury locks of $102 million). The majority of the gains on corporate bonds were from bonds purchased in the first and second quarters of 2020 when credit spreads widened."

 

Very happy, that we have a definite closure on these in terms of returns.

11% return over six months!

 

--------------------------

"After the March/April crash in the stock market, we could not resist buying Exxon shares at a dividend yield of 10.5%, Canadian banks at an average yield of 6.1% and some other companies like Royal Dutch Shell, Alphabet, FedEx and Helmerich & Payne at very attractive prices. We sold approximately half of them in 2020 for a profit of $212 million or an average gain of 40% on our investment."

 

"Wade and Lawrence had an excellent year in 2020 managing $1.5 billion in invested assets. They did so well that we will give them another $1.5 billion to manage in 2021. At that rate, they will soon be managing the whole portfolio"

 

Couple of points:

- The mindless passive S&P500 returned 60% in the same time frame; unless you are building long term position at attractive prices, which is not the case since they sold half, your short term return will be compared with the index.

- What was the source of funding for these investments. Readily available cash or other equities were sold at distress price in March to buy these (potentially with better upside). If the latter than you are only riding the beta of the market to play the bounce back, so it is fair being compared to S&P500 return. 

- Were these $200 million returns managed by Wade and Lawrence ?

 

Using $200 million realized return, 40% return and "we sold half" statement as guide, I can back calculate a $1 billion investment in equities in March 2020.

 

--------------------------

BDT Capital Partner

 

Found this to be interesting holding. I think there was someone on the board that few years ago was talking about BDT Capital Partner and was asking for details. Looks like we got some.

--------------------------

A gentleman upthread made a comment about Tesla. Not sure where is that coming from. FFH never disclosed anything about its shorts positions. Folks on this board were speculating about Tesla being a short name, but that was about it.

 

"Over the last 15 years, our insurance business has had a combined ratio less than 100%, but our investment returns in the 2011 – 2016 time period were very poor because of a cautious approach to financial markets (hedging our common stocks) and a stock performance impacted by poor stock selection and ‘‘value investing’’ being out of favour. I said in our 2019 annual report that we would not short stock market indices (like the S&P500) or common stocks of individual companies ever again, and our last remaining short position was closed out in 2020 (not soon enough, as it cost us $529 million in 2020)"

 

I disagree with Prem here. A certain archaic way of defining value investing may be out of favour, but value investing is never out of favour. Microsoft was a value-play in 2011-2013, Apple was value play 2015-2017. Charter was probably a value play few years ago Etc. etc.

 

--------------------------

I am excited about FFH and FIH going forward. I should also say that i have been buying lots of shares of ONEX as well. It is a bit less than Fairfax in dollar terms, but am planning to make the equal dollar term holding. Then it is going to be a horse-race to see who has the most return by 2025. Gerry or Prem.

[Borgesian]

So they have now underperformed both the TSX and SP500 for over 20 years. I don't necessarily understand why people would keep betting on Prem.

[nwoodman]

So they have now underperformed both the TSX and SP500 for over 20 years. I don't necessarily understand why people would keep betting on Prem.

 

A rational observation and one that I think about far too often.  This company is the epitome of ‘the call of the value sirens” at times.  I think the individual IQs are high but something happens on occasions that leads to a Dunning-Krueger case study.  I agree with many that put it down to the opioid hit that was the CDS win following the 2008 housing bust.  Hubris, ego?not sure but it all starts and ends at the top. 

 

Mini rant out of the way, there is a base that has been built that is pretty amazing.  That too can be attributed to senior management.  I know hope is not a strategy but I do hope that with a hard market, they make some money, deleverage and lower their expectations.  The market has already lowered its expectations to a point where investors from this price point should do somewhere between OK to good.  The caveat is will Fairfax stop “being clever’ and look for 1ft hurdles.  I personally feel that they have their ducks in a row - Insurance, Atlas (offloading APR is enough, do nothing) and India.  Just concentrate on these, execute well and all will work out fine. Get distracted on “being too smart” and it will be another lost decade. 

[bearprowler6]

LONG TERM

Closing Share Prices in Canadian Dollars

Dec 31/14: $608.78

Dec 31/15: $656.91

Dec 31/16: $648.50

Dec 31/17: $669.34

Dec 31/18: $600.98

Dec 31/19: $609.74

Dec 31/20: $433.85

Mar 5/21:  $517.16

 

TRADING GAIN FROM LOWS OF 2020

2020 Low Price CAD // March 5/21 Closing Price CAD // % Gain 2020 Low to Mar 5/21

 

Fairfax Financial: $319.37 // $517.16 // 61.9%

Royal Bank of Canada: $72.00 // $$112.57 // 56.3%

Manulife Financial: $12.58 // $26.79 // 112.9%

Brookfield Asset Management: $31.35 // $52.66 // 68.0%

 

CONCLUSION:

 

My conclusion---Fairfax has been a disaster over the long term and absolutely nothing special from the lows of 2020. Nothing in Prem's latest letter suggests anything will change going forward.

 

[abyli]

Gosh, you guys are still here... I moved on in 2013 after holding FFH for 10 years....

[petec]

I just read the FFH letter. Some comments:

 

"The world stopped in 2020.

Literally! COVID-19 closed down the economies of more than 180 countries."

 

:-) the letter started off like opening scroll of a Star Wars movie. Fairfax Strikes Back. Overall, I like the length and the level of detail. But here are some nitpicks.

 

--------------------------

"Everything included, we have $21.5 billion in gross premiums worldwide with an investment portfolio of $47.7 billion."

 

Is that a typo; i am pretty sure their investment portfolio is $39-40 billion.

--------------------------

I appreciate the effort put in into the equity investment and classification. Interestingly, I couldn't see Toy'R Us which was bought $400 million (i think) and therefore should have fully consolidated as part of the third bucket and is rather a significant sum.

 

I am not sure why IIFL Wealth and IIFL Finance are shown separately on page 10, if they are part of Fairfax India.

--------------------------

"During the period from March to May 2020, when corporate bond spreads widened significantly, we added $3.9 billion in investment grade corporate bonds at a yield of 4.1% and term of 4 years

 

Net gains on bonds of $460 million includes net gains on corporate bonds of $474 million and net losses of$35 million on government bonds (inclusive of losses on treasury locks of $102 million). The majority of the gains on corporate bonds were from bonds purchased in the first and second quarters of 2020 when credit spreads widened."

 

Very happy, that we have a definite closure on these in terms of returns.

11% return over six months!

 

--------------------------

"After the March/April crash in the stock market, we could not resist buying Exxon shares at a dividend yield of 10.5%, Canadian banks at an average yield of 6.1% and some other companies like Royal Dutch Shell, Alphabet, FedEx and Helmerich & Payne at very attractive prices. We sold approximately half of them in 2020 for a profit of $212 million or an average gain of 40% on our investment."

 

"Wade and Lawrence had an excellent year in 2020 managing $1.5 billion in invested assets. They did so well that we will give them another $1.5 billion to manage in 2021. At that rate, they will soon be managing the whole portfolio"

 

Couple of points:

- The mindless passive S&P500 returned 60% in the same time frame; unless you are building long term position at attractive prices, which is not the case since they sold half, your short term return will be compared with the index.

- What was the source of funding for these investments. Readily available cash or other equities were sold at distress price in March to buy these (potentially with better upside). If the latter than you are only riding the beta of the market to play the bounce back, so it is fair being compared to S&P500 return. 

- Were these $200 million returns managed by Wade and Lawrence ?

 

Using $200 million realized return, 40% return and "we sold half" statement as guide, I can back calculate a $1 billion investment in equities in March 2020.

 

--------------------------

BDT Capital Partner

 

Found this to be interesting holding. I think there was someone on the board that few years ago was talking about BDT Capital Partner and was asking for details. Looks like we got some.

--------------------------

A gentleman upthread made a comment about Tesla. Not sure where is that coming from. FFH never disclosed anything about its shorts positions. Folks on this board were speculating about Tesla being a short name, but that was about it.

 

"Over the last 15 years, our insurance business has had a combined ratio less than 100%, but our investment returns in the 2011 – 2016 time period were very poor because of a cautious approach to financial markets (hedging our common stocks) and a stock performance impacted by poor stock selection and ‘‘value investing’’ being out of favour. I said in our 2019 annual report that we would not short stock market indices (like the S&P500) or common stocks of individual companies ever again, and our last remaining short position was closed out in 2020 (not soon enough, as it cost us $529 million in 2020)"

 

I disagree with Prem here. A certain archaic way of defining value investing may be out of favour, but value investing is never out of favour. Microsoft was a value-play in 2011-2013, Apple was value play 2015-2017. Charter was probably a value play few years ago Etc. etc.

 

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I am excited about FFH and FIH going forward. I should also say that i have been buying lots of shares of ONEX as well. It is a bit less than Fairfax in dollar terms, but am planning to make the equal dollar term holding. Then it is going to be a horse-race to see who has the most return by 2025. Gerry or Prem.

 

On a couple of the factual points:

1) I don't think the $47.7bn is a typo. They have grown premiums written and this grows float. I think this is the yearend number or the current number. Your $40bn number is either last year's number, or the average figure for the year.

2) The IIFL subsids are mentioned separately because Fairfax has direct stakes as well as through Fairfax India. This is a legacy thing - they were owned before FIH was formed.

3) BDT Capital Partners has been a big holding for years now but profits are referred to as realised in this letter so I assume that (at least some of) it has been sold.

[MarioP]

What I make me dislike this letter is not one of the many point brought by many here which are good. It is simply the general tone of the letter and it began right at the second paragraph.

 

In March, the S&P500 dropped 30% in 12 days. We absorbed the mark to market losses and thrived. We earned $218 million in 2020 and our book value per share increased by 0.6% (adjusted for the $10 per share dividend) to $478 per share. Our insurance companies had an outstanding year in 2020 and are growing significantly, while our investments more than overcame the March carnage by the end of 2020 and are continuing to perform well.

 

Man we made 0,6% last year and every thing was outstanding????? A little more humility please. That was a bad year and start with explaining us why it was bad. Not telling me that every thing performed well. How can you tell that investments perform well when you lost more then 500M$ on a short? That is part of the investment result.

 

Around 2001 I sold out because I was tired of the presentation of the result of insurance when there was catastrophe year. It was always something like "we had a good year if you exclude the catastrophe". How come in a good year they didn't exclude the premium collected for the catastrophe insurance? It sounds like they want the premium but don't expect to pay once in a while. If you want us to really understand how we doing without the catastrophe present us what are the premium we collected vs what we paid in 5 years periods.

 

I was back in because of all the good news for the subs but this report remember me why it will not be longterm for me. They can make a lot in 2021 but there is a not negligible possibility that they will waste it again.

[lessthaniv]

Surprising how many people drive their cars looking in the rear view mirror.