Jeffrey Stacey January 2021 - Stacey Muirhead Capital Management - MOI Global

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Jeffrey Stacey January 2021 - Stacey Muirhead Capital Management - MOI Global
Jeffrey Stacey
Stacey Muirhead Capital Management

          January 2021
                                     1
Jeffrey Stacey January 2021 - Stacey Muirhead Capital Management - MOI Global
Disclaimer
Stacey 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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Jeffrey Stacey January 2021 - Stacey Muirhead Capital Management - MOI Global
The Stacey Muirhead Process

   Does it possess outstanding business economics?

   Does it have honest and capable management?

      Can it be purchased at an attractive price?

GREAT BUSINESS       GREAT PEOPLE          GREAT PRICE
                                                         3
Jeffrey Stacey January 2021 - Stacey Muirhead Capital Management - MOI Global
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
                                                     4
Jeffrey Stacey January 2021 - Stacey Muirhead Capital Management - MOI Global
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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Jeffrey Stacey January 2021 - Stacey Muirhead Capital Management - MOI Global
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
                                                                6
My Best Idea for 2021

                        7
Fairfax Financial Holdings
Corporate Overview

•   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

                                                                 8
Fairfax Financial Holdings
A Global Property and Casualty Insurance Platform

                                                    9
Fairfax Financial Holdings
A Diversified Portfolio of Non-Insurance Businesses

                                                      10
Fairfax Financial Holdings
Market Data

•   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%

* All figures are in USD unless otherwise noted                11
Fairfax Financial Holdings

       Does it possess superior
        business economics?

                                  12
Fairfax Financial Holdings
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           13
Fairfax Financial Holdings
Key Drivers of Value Creation

•   Insurance Underwriting
•   Float Generation
•   Investments (Interest, Dividends, Capital Gains)
•   Non-Insurance Businesses (Operating Income, Capital Gains)

                                                                 14
Fairfax Financial Holdings
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%

                                          15
Fairfax Financial Holdings
Float Generation
                                    Average           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%

                                                                                           16
Fairfax Financial Holdings
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

                                         17
Fairfax Financial Holdings
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

                                                18
Fairfax Financial Holdings
Insurance Underwriting-Key Takeaways

•   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)

                                                              19
Fairfax Financial Holdings
Investments
                               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%
                                                    20
Fairfax Financial Holdings
Investments – Key Equity Portfolio Holdings
                               Ownership        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                                                                               21
Fairfax Financial Holdings
Investments – Majority Interests
                             Ownership        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                                                                           22
Fairfax Financial Holdings
Investments – Fixed Income Portfolio
  September 30, 2020

  Due in 1 year or less                 5,418.3
                                                  91%
  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

                                                        23
Fairfax Financial Holdings
Strategic Monetization Program

•   Davos Brands sale to Diageo
•   Riverstone Europe sale to CVC
•   Easton Baseball sale to Rawlings

                                       24
Fairfax Financial Holdings
Investments - Summary

•   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

                                                               25
Fairfax Financial Holdings
Financial Position – September 30, 2020
                                                    Consolidated   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%
                                                                          26
Fairfax Financial Holdings
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                              

                                                             27
Fairfax Financial Holdings

       Does it have honest and
       capable management?

                                 28
Fairfax Financial Holdings

•   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

                                                                    29
Fairfax Financial Holdings
Does it have honest and capable management

• “Skin in the Game”                            

• Reasonable compensation practices             

• Capital allocation record/Share repurchases   

• Unique corporate culture                      

                                                    30
Fairfax Financial Holdings

      Can it be purchased at an
          attractive price?

                                  31
Fairfax Financial Holdings

 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%

                                  32
Fairfax Financial Holdings

                 What if?

                             33
Fairfax Financial Holdings
What if?
    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%

* without dividends                                             34
Fairfax Financial Holdings
What if?

•   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%

                                                35
Fairfax Financial Holdings
What if?

               $100 + EPS

                             36
Fairfax Financial Holdings
Summary

   Great Business

                    Great People

                                   Great Price

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