Best Ideas 2021 - MOI Global · 2021. 1. 31. · A Global Property and Casualty Insurance Platform. 10 Fairfax Financial Holdings ... Quess 47.6 ₹412.60 ₹537.80 $81.5 Resolute

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Jeffrey StaceyStacey Muirhead Capital Management

January 2021

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DisclaimerStacey Muirhead Capital Management Ltd. (the “Firm”) is not providing investment advice through this material. This presentation is

provided for informational purpose only as an illustration of the Firm’s investment philosophy and shall not be considered investment

advice or a recommendation or solicitation to buy or sell any securities discussed herein, and does not contain enough information to

be considered a recommendation or a research report.

As of the date of this presentation the Firm continues to own the securities discussed herein. These opinions are not intended to be a

forecast of future events, a guarantee of future results, or investment advice. Past performance is not indicative of future results, and no

representation or warranty, express or implied, is made regarding future performance.

The Firm may engage in securities transactions that are inconsistent with this communication and may have long or short positions in

such securities. The information and any opinions contained herein are as of the date of this material, and the Firm does not undertake

any obligation to update them.

This material does not take into account individual investor circumstances, objectives, or needs and is not intended as a

recommendation to any person who is not a client of the firm. Securities, financial instruments, products or strategies mentioned in this

material may not be suitable for all investors. The Firm does not provide tax advice. Investors should seek tax advice based on their

particular circumstances from an independent tax advisor.

In reaching a determination as to the appropriateness of any proposed transaction or strategy, investors should undertake a thorough

independent review of the legal, regulatory, credit, accounting and economic consequences of such transaction in relation to their

particular circumstances and make their own independent decisions. By virtue of this publication, neither the Firm nor any of its

employees shall be responsible for any investment decision.

This confidential presentation contains information that has been compiled, by the Firm, from sources believed to be reliable; however,

there can be no guarantee as to the accuracy or completeness of such information. It also contains statements, estimates and

projections made by various third party companies with respect to their historical and projected performance. There can be no

assurance that such statements, estimates and projections will be realized and actual results may vary materially from those indicated.

Further, in any case, the Firm does not represent nor is affiliated with any of the third party companies and other entities named and

makes no representations as to the reasonableness of such assumptions or the accuracy or completeness of the information contained

herein. These materials are for the confidential use of only those persons to whom it is transmitted.

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The Stacey Muirhead Process

Can it be purchased at an attractive price?

Does it have honest and capable management?

Does it possess outstanding business economics?

GREAT BUSINESS GREAT PEOPLE GREAT PRICE

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Does it possess outstanding business economics?

• High returns on shareholders’ equity

• A strong balance sheet with minimal or no debt

• Attractive operating and profit margins

• Significant brand recognition

• Pricing power for its products

• Growing revenue and earnings over time

• Consistent free cash flow generation

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Does it have honest and capable management?

• “Skin in the game”

• Reasonable compensation practices

• Measurable pay for performance

• Demonstrated integrity

• Capital allocation record

• Unique corporate culture

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Can it be purchased at an attractive price?

“Your goal as an investor should be simply to purchase

at a rational price a part interest in an easily

understood business whose earnings are virtually

certain to be materially higher, five, ten or twenty years

from now.”

Warren Buffett

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My Best Idea for 2021

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Fairfax Financial Holdings

• Fairfax is a global property and casualty insurance and

reinsurance company

• Founded in 1985 by V. Prem Watsa

• Corporate objective is to compound book value per share by 15%

annually over the long term

• Fairfax is committed to transparent and complete disclosure to

shareholders

• Based in Toronto, Ontario

Corporate Overview

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A Global Property and Casualty Insurance Platform

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A Diversified Portfolio of Non-Insurance Businesses

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• Current Share Price (12/31) $340.94 *

• Shares Outstanding 26,235,991

• Market Capitalization $8.8 B

• Book Value/Share (09/30) $442.17

• Dividend/Share $10.00

• Dividend Yield 2.9%


Market Data

* All figures are in USD unless otherwise noted

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Does it possess superior

business economics?

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The Record (1986 – 2019)

Book Value/Share CAGR 19.3%

Peer Group * 18.9%

Share Price CAGR 17.8%

Peer Group * 18.2%

* Markel Corporation and Berkshire Hathaway

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• Insurance Underwriting

• Float Generation

• Investments (Interest, Dividends, Capital Gains)

• Non-Insurance Businesses (Operating Income, Capital Gains)


Key Drivers of Value Creation

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Insurance Underwriting

Average

Period Combined Ratio

1986 – 1990 106.7%

1991 – 1995 104.2%

1996 – 2000 114.4%

2001 – 2005 105.4%

2006 – 2010 99.9%

2011 – 2016 96.0%

2017 – 2019 99.8%

2020 – YTD 98.6%

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Float GenerationAverage Cost Average Long Term

Float (Benefit) Canada Treasury

Year (in $ Millions) of float Bond Yield

1986 22 (11.6)% 9.6%

2009 9,429 (0.1)% 3.9%

2019 20,150 (2.0)% 1.8%

Weighted average last ten years (1.0)% 2.5%

Fairfax weighted average financing differential last ten years: 3.5%

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Float Generation

Total Float Float

(in $ Millions) per Share

1985 13 $ 2.5

1990 164 30

1995 653 74

2000 5,877 449

2005 8,757 492

2010 13,110 641

2018 22,718 834

2019 22,379 834

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Reserve Development

Reserve Redundancy

Year (Combined Ratio Points)

2020 – 9 months 2.7 pts

2019 3.8

2018 6.8

2017 5.1

2016 8.5

2015 7.8

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• Insurance rates are skyrocketing!

• Net premiums written increased 12.6% in Q3 and 9.4% YTD

• COVID losses of $536 million YTD (60% are IBNR)

• “All-in” combined ratio of 98.6% YTD

• “Core” combined ratio of 89.2% YTD

• Favourable reserve development continues (2.7% in 2020)

Insurance Underwriting-Key Takeaways

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Average Total

Period Return on Investments

1986 – 1990 10.4%

1991 – 1995 9.7%

1996 – 2000 8.8%

2001 – 2005 8.6%

2006 – 2010 11.0%

2011 – 2016 2.3%

2017 – 2019 5.6%

Since Inception 8.0%


Investments

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Investments – Key Equity Portfolio HoldingsOwnership Price Price Gain/Loss

Name (in millions) (09/30) (12/31) (in $ millions)

Atlas (shares/warrants) 150.3 $8.94 $10.84 $285.6

BlackBerry (shares/converts) 101.7 $4.59 $6.63 $129.9

Eurobank 1,159.3 €0.38 €0.58 $281.6

Kennedy Wilson 13.3 $14.52 $17.89 $44.8

Quess 47.6 ₹412.60 ₹537.80 $81.5

Resolute Forest Products 30.6 $4.48 $6.54 $63.0

Stelco 13.0 $11.36* $22.73* $147.8

Total $1034.20

Per Share $39.42

* in CAD

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Investments – Majority InterestsOwnership Price Price Gain/Loss

Name (in millions) (09/30) (12/31) (in $ millions)

Dexterra 31.8 $5.06* $6.54* $47.1*

Fairfax India 51.7 $6.84 $9.60 $142.7

Helios Fairfax 36.9 $3.02 $5.25 $82.3

Recipe Unlimited 27.1 $9.87* $16.75* $146.6

Thomas Cook India 248.2 ₹27.85 ₹47.80 $67.7

Total $486.4

Per Share $18.53

* in CAD

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September 30, 2020

Due in 1 year or less 5,418.3

Due after 1 year through 5 years 10,025.2

Due after 5 year through 10 years 1,016.4

Due after 10 years 504.3

16,964.20

Investments – Fixed Income Portfolio

91%

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• Davos Brands sale to Diageo

• Riverstone Europe sale to CVC

• Easton Baseball sale to Rawlings

Strategic Monetization Program

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• The fixed income portfolio has a short duration

• Equity Investment Portfolio is much improved

• Majority Investment prices are much improved

• Strategic Monetization of Private Investments is ongoing

Investments - Summary

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Financial Position – September 30, 2020Consolidated Adjusted

Holding company cash and investments

(net of short sale and derivative obligations) 1,095.9 1095.9

Borrowing – holding company 5,440.7 5,440.7

Borrowing – insurance and reinsurance companies 1,076.0 1,076.0

Borrowing – non-insurance companies 2,132.9 –

Total debt 8,649.6 6,516.7

Net debt 7,553.7 5,420.8

Common shareholders’ equity 11,600.8 11,600.8

Preferred stock 1,335.5 1,335.5

Non-controlling interests 3,450.1 1,389.5

Total equity 16,386.4 14,325.8

Net debt/total equity 46.1% 37.8%

Net debt/net total capital 31.6% 27.5%

Total deb/total capital 34.5% 31.3%

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Does it possess superior business economics

• Superior long term growth in book value/share

• Profitable insurance underwriting

• Consistent Float Generation

• Conservative Reserving

• Excellent Long Term investment portfolio performance

• Strong Financial Position

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Does it have honest and

capable management?

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• Prem Watsa currently owns 1,542,880 Fairfax common shares

• Prem Watsa personally purchased an additional 482,600

shares in June for $149 million

• Annual compensation for Prem Watsa fixed at $600,000 with

no options or bonuses

• Fairfax capital allocation program includes an active share

repurchase program (2,068,409 shares since Q4/17)

• Excellent board of directors

• Fairfax Guiding Principles are a unique part of the corporate

culture

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Does it have honest and capable management

• “Skin in the Game”

• Reasonable compensation practices

• Capital allocation record/Share repurchases

• Unique corporate culture

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Can it be purchased at an

attractive price?

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Current Price $340.94

2020 Price Return -27.96%

Book Value/Share $442.17

Price/Book Value 0.77 X

Peer Group 1.29 X

Dividend Yield 2.9%

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What if?

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Valuation Return *

• Fairfax trades at current book

value/share 29.7%

• Fairfax trades at current peer group book

value/share multiple 67.3%

• Fairfax grows book value/share by 15% and

trades at book value/share 49.2%

• Fairfax grows book value/share by 15% and

trades at peer group book value/share multiple 92.4%


What if?

* without dividends

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• Current Market Price $341

• Current Book Value Per Share $442

• Annual Compounded Growth Rate 15%

• Book Value Per Share in 5 Years $899

• Market Price/Book Value Multiple 1.29 x

• Market Price in 5 Years $1,147

• Annual Compounded Rate of Return 27.5%


What if?

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What if?

$100 + EPS

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Great Business

Great People

Great Price


Summary

Documents

Best Ideas 2021 - MOI Global · 2021. 1. 31. · A Global Property and Casualty Insurance Platform. 10 Fairfax Financial Holdings ... Quess 47.6 ₹412.60 ₹537.80 $81.5 Resolute