dartmonkey

OK, question for the board: Given the fact that Fairfax has a normal course issuer bid outstanding, enabling them to purchase up to 10% of outstandings shares between 30 Sept 2023 and 29 Sept 2024, am I correct in thinking this allows them to continue purchasing their maximum of 8219 shares a day? (i.e., 25% of the average daily volume of Subordinate Voting Shares last year.) Given the fact that shares are selling at about $100 less than the pre-MW price, this would mean that they are saving almost $1m a day, thanks to the waters having been muddied for a little while. Unfortunately, I don't expect this savings to last long enough for it to be material.

https://www.eurobankholdings.gr/en/grafeio-tupou/etairiki-anakoinosi-05-02-24 Shares up nicely to $1.80, with one agency's approval of their increased stake of Hellenic Bank (from 29.2% to 55.3%). This may now be Fairfax's biggest equity holding, up from $2.1b at year end last month to over $2.4b now.

That would be ideal, mabe I will send investor relations a note. Thinking about this further, they note that the 5% annual hurdle, under which no performance fee applies, is not compounded. For a 3 year period, this makes very little difference: uncompounded 3*5%=15%, compounded 1.05^3-1=15.8%. But obviously, compounding over a longer period would make a difference. So when they look at the hurdle over 9 years, are they taking a 45% return from $9.62 (or from $10, maybe) as the hurdle? Over 9 years, 9*5%=45% but 1.05^9-1=55%, so it is starting to be important to know whether the hurdle is $14.50 or $15.50 - an extra 20c/share. And the difference will keep increasing, obviously, from one period to the next. In the very long term, it might mean that that 5% hurdle ends up being a lot less than 5%. For instance, for 2024 (year 10 of the plan), a 5% compounded hurdle would mean that they only take the fee on BV gains beyond $0.775/share (5% of $1.55), whereas an uncompounded 5% of $10 means they only take their fee above a 50c/share gain in BV . And in 10 more years, a 5% gain on the original $10/share would end up being like a 1.5% hurdle...

Giulio quoted the relevant blurb in the 2022 AR: Fairfax Financial is entitled to a performance fee calculated at the end of each three-year period, of 20% of any increase in Fairfax India’s BVPS (including distributions) above a non-compounded 5% increase each year from the BVPS at inception in 2015. So I think the fee is not as high as you are suggesting. It is not 20% of the excess over 5% from the high water mark, it is 20% of the excess over 15% of the high water mark, ever 3 years. See if you agree with my example: If the book value per share (BPVS) goes from $10 to $12.50 in the first 3 year period, then we've had a 25% gain, which is 10% over the 15% hurdle (5% annual hurdle, times 3 years, equals 15%.) A 'compounded" 5% hurdle would just mean that it applies above 1.05^3-1= 15.8%, instead of applying above 15%. Not really much of a difference, but it's always better for it to be clear! So in my example, the 20% performance fee is applied to that excess 10%, meaning that the fee is 2% over those 3 years, or a little less than 1%/year. If in the second 3-year period the book value goes sideways, say down to $12, then there is no fee; the fee only kicks in again above the high water mark ($12.50 + 15%*12.50 = $14.375. To take a real example, the 1st period (2015-2018) highwater mark, i.e. the BVPS on Dec 31st, 2017, was $15.24 (before the fee, which would end up reducing book value a bit.) A 5% non-annualized hurdle would have been 15%, so a book value going from $9.62 (the actual book value after commissions were deducted from the $10 IPO price), to $11.06, so the 20% performance fee should be calculated based on 20% of $15.24-$11.06=$4.18. Book value AFTER the fee was $14.46, meaning they took $0.78 per share, which represents 18.7% of the excess $4.18 amount above the hurdle. (There may be some technicalities of whether they make any adjustment for buybacks below book value which would tend to increase BV...) From 2018 to 2021, BVPS went from $14.46 (adjusted for the 2017 performance fee!) to $16.37, a much more modest increase, or 13.2%. That is under 15%, but the relevant comparison is not Dec 31st, 2017, it is back to the $9.64 opening BV again, but subtracting performance fees alread paid. So $9.62 plus 6 years of non-compounded 5% would bring us to $12.51, and so the performance fee should be 20% of the excess of $3.86, or 0.77/share. But since $0.78 in performance fees have alread been paid, there should have been no performance fee at the end of 2020. In actual fact, they paid $0.03 per share ($5.2m), so there is something wrong with my calculation, but it is close. Now we have finished the 3rd period, but we don't yet have the BV for the end of 2023. We know it was up to $20.89 at Q3 end, so the fee will be much more substantial, and in the Q3 FIH report, they noted that a performance fee of $82.6m had been accrued (amounting to about $0.61 per share.) Because there had been 8.75 years since the IPO, the calculation of the performance fee, if it had applied as of Sept 30, would have been that day's book value, $20.89, minus the 8.75 5% hurdles, or $9.64*(1+8.75*0.05) = $13.86, so the fee would apply to the difference, $20.89-$13.86=$7.03, times 20%, or $1.41, less the performance fees already applied, i.e. 0.78 and 0.03, leaving a new performance fee of $0.60. Given the BV gains in Q4, it is going to be a bit higher than this, maybe around $0.70. Please feel free to pick apart my logic!

The fee structure is exorbitant (2/20 structure like a PE fund) It's not actually quite that bad. It's 1.5% (the administrative fee part), not 2%. The performance is indeed 20%, but only 20% in excess of a 5% annual return. In the almost 9 years from inception in November 2014 to Sept 30, 2023, book value per share was up from $10/share to $20.89/share, i.e. up 109%, but since 1.05^9= 1.55, the fee only applies to the excess over 55%, so it would be approximately* 20% of 44% (8.8%) for the 9 year period, or a little less than 1% every year, not 2%. *I say approximately because the calculation is a little more complicated than this, and involves issues of the timing of the fee, whether it is paid in cash or in shares, and details I don't know about like how it is applied to the first period which did not begin on Dec 31st, 2014 but rather, I think, on the Closing Date (Jan 30, 2015) , so I don't know how the fee was calculated for the first 3-year period ending Dec 31, 2017. But you get the idea.

I've received the same notification from Fidelity. 0.25% obviously isn't much, but could amount to a couple hundred extra bucks per month if you have significant holdings. What exactly is the downside to enrolling? (If there is one.) Is this easy money with no downside? I would say, yes, easy money with no downside. Interactive Brokers also pays shareholders who have agreed to allow them to lend their shares, in their case, half of the borrow fee. The borrow fee for Fairfax is low, around 0.5% as far as I can tell, so in this case, they pay similarly. The broker takes a risk, lending out shares to a short seller, because the broker obviously has a legal obligation to return them to their owner, so I can see how they earn their fee. But for me, the share owner, I can't see how there's any risk at all, and so I can't see why I would want to turn down a 0.25% payment, small as it may be, when there's no risk to me. Some people have an objection to short selling in general, and especially of short selling of the shares of a company they are invested in, but it seems to me that this is irrational emotion getting in the way of increasing one's investment return.

For fun, here are some rough numbers for 2024: Poseidon = $200 to $250 Eurobank = $400 to $450 FFH-TRS = $400 to $500 Fairfax India = $125 Recipe = $75 Just a heads up that the Eurobank position if up over $200m year to date, i.e. over the last 3 weeks, and the FFH-TRS are up $118m. Good start to this year's scheduled $1.2b in equity gains. Come on, India, do your part now.

There have been concerns around what happens after these 3 years (not sure whether the “3 years” is because Viking has been projecting that time period, or because of the stated run rate by the company). Here is what Watsa has said about prospects in the next few years: Q3 Press release: During the first nine months of 2023 the company used cash and net proceeds from sales and maturities of U.S. treasury and other government short term investments and short-dated U.S. treasuries to purchase $5.8 billion of U.S. treasuries with maturities between 3 to 5 years and $2.4 billion of U.S. treasuries with maturities between 5 to 7 years, and to make net purchases of $2.1 billion of short-dated first mortgage loans and $1.6 billion of corporate and other bonds with maturities primarily between 2 to 5 years. These actions should result in continued higher levels of interest income for approximately the next 4 years. and more recently, announcing the dividend increase: “Given Fairfax’s substantial growth since it inaugurated a US$10 per share annual dividend 14 years ago, and given Fairfax’s current position of foreseeing strong earnings for the next few years based on insurance company underwriting income, locked-in interest and dividend income and income from associates, we felt it was appropriate to raise our annual dividend this year to US$15 per share, and we believe that this should be a sustainable level,” said Prem Watsa, Chairman and Chief Executive Officer of Fairfax. It seems to me that it is the extension of the average maturity of the bond portfolio to an average maturity of about 4 years that gives them this confidence about the next few years, since interest income of something like $2b/y is now locked in. I think this was also mentioned by Watsa in the 3Q conference call but I can't find a transcript - does anyone have one?

Yes, for people who think they don’t pay enough tax already this might be an attractive idea.

Underlying ownership Fairfax has 59% and OMERS 5% - it gets consolidated in FIH books with 64% BIAL controlling stake as Asset and 5% non-controlling interest in Equity. ok, got it that makes perfect sense, thanks. So FIH really does only own 59%, not 64% (up this year from 49%, not 54%.)

Fairfax India acquires additional 7% stake in Bengaluru airport - This 7% stake, for $175m, was at exactly the same valuation as the 3% stake they bought from in June: https://www.globenewswire.com/en/news-release/2023/06/21/2692532/0/en/Fairfax-India-Completes-Acquisition-of-an-Additional-3-Interest-in-Bangalore-International-Airport-Limited.html. It is because they actually agreed to this before June, but the second step was conditional on the airport hitting some additional benchmarks. From the June PR: As previously announced, Fairfax India, through its wholly-owned subsidiary, has also agreed to acquire an additional 7% equity interest in BIAL from SFS for additional consideration of $175 million, subject to the satisfaction of certain performance conditions by BIAL and other closing conditions, which are expected to be tested subsequent to October 31, 2023. There's still the question of dilution - in the annual report, they said they had a 54% stake, but that that they really only owned 49%, after dilution. I don't know what that dilution represents - employee stock options? convertible preferred shares? something else? - but if it is still present, that would mean they now own 64% minus 5% from the effects of the dilution, so 59%. Maybe we'll find out when the dust settles after the IPO eventually goes ahead.

Super! They're really going all in on this bet. The airport was already abut 40% of their assets, now it will be over half, if their valuation of the whole airport at $2.5b is correct.

I just took the 49% from the 2022 AR. Yes they own 54%, but I guess there are ptions or warrants outstanding that dillute this to 49%: p. 6: Investment / Date of Initial Investment / Ownership / Amount Invested / Fair Value (Dec 2022) / Annualized Return Bangalore International Airport (3) / March2017 / 54.0% / 653.0 / 1,233.7 / 12.2% (3) Fairfax India’s effective interest in Bangalore International Airport is 49.0%(on a fully diluted basis).

Yes, but I believe only 49% of that is for Fairfax, so $31m, and that is for an asset that is on the books for $1,233.7 (Dec 2022). However, we expect it to get much more profitable as its volume scales with little additional capital invested and unregulated non-aero revenue and real estate development revenues grow. So this is a great start, and hopefully means it may not need too much more capital.

Q. So you would pay a premium for any leverage or is this leverage more valuable because of its characteristics? A. Yes, in principle. Leverage from taking out a big loan would be worth a lot less than safe uncallable leverage from a steady self-renewing source of float like Fairfax's insurance business. Given the fact that float represents $28b at Fairfax, and equity is $26b (including non-controlling interests), and Fairfax is trading at only 1.1x book, you might say that Mr Market is giving very little value to that float, but I think it deserves a much more healthy premium. A huge loan that you never have to pay back is worth something.

Yes, very helpful indeed! So in the 2022 AR we are told the 10y average was 2.5%, and your data confirm this. And for the last 20 years it was 1.3%; however, for the last 23 years, including the terrible 2000, 2001 and 2002, the underwriting profit drops to 0.4% of float. Your table had one column that surprised me: since 1999, Berkshire's float is up from 2.8 times Fairfax's float, to 5.6 times Fairfax's now. I would have guessed the opposite.

OK, yes, I see, p. 24, for the last 10 years? 2.5% pre-tax underwriting profit. Thanks.

At a 10,000 ft level, I view Fairfax as a levered bond fund (leverage coming from float and debt) managed by a group of smart bond guys who have consistently delivered. The rest of the investments are hit and miss; sometimes they do ok, sometimes not. As long as they can underwrite below 100 CR and the bond guys keep executing, this will be a decent investment. I love this summary. My attempt, with a little more detail: A levered bond fund with enormous safe leverage provided by a solidly executing insurance base. As for investments, on the bond side, as well as the acquisition of controlling stakes in insurance and non-insurance businesses, there is a history of very successful performance, whereas on the stock investment side, it's a bit more hit and miss (Blackberry and the various shorts being the well-known examples of 'miss'.) Fortunately, out of $62b in investments, the successful side if much bigger: $36.7b in bonds, and $6.3b in associated companies like Poseidon, Eurobank, Stelco, Fairfax India, and $1.5b in derivative instruments, mostly swaps on Fairfax stock; on the more speculative side there are $6.9b in common stocks. I don't know where to put the $2.4b in preferred stocks, probably on the safe side, and it's small. So for $26b in equity, you get the returns from about $42b in bonds and associated companies, and $7b in more speculative equity investments (Occidental, Micron, Blackberry, Grivalia, Mytilineos, Kennedy Wilson, etc.). And you get some underwriting returns*, as a bonus. *Question for someone like Viking who has probably already done the calculation: what is the average underwriting performance of Fairfax, say since the year 2000, as a percentage of net premiums written for instance? I'll do the calculation at some point, but if someone's done it already, that would be quicker!

Sometimes we make a series of poor decisions, which has been the case with FFH's series of decisions to allocate increasing amounts of capital to BB and to not reduce that capital allocation when the opportunity presented itself. During this month, we have seen yet another strange decision by FFH to lend money to BB at a 1.75% interest rate for either 3 months or 6 months. On the face of it, that is yet another poor decision in a long series of decisions about BB which have not been optimal for shareholder value. The fake headline giving the appearance of yet another poor decision was merely icing on the cake for something which has been a source of frustration for shareholders for more than a decade now. I completely agree about BB, no question, and that was a serious amount of money wasted on what I think most of us were pretty confident would be a bad investment. I regret not shorting out the BB part in my own account, which I almost did when it became a meme stock, although I think the borrow was quite expensive. I could have at least sold some calls, though - please, Reddit, give me one more chance? So, yes, any significant further investment in BB would be worrisome. I don't really think 3 months sub-market interest on a small loan qualifies, and there may be some mitigating circumstances we are not aware of, but I would be pretty upset if there was anything more substantial. If the company wants to play around with tiny amounts of money in something like the Farmer's Edge privatization, fine, but no more $500m investments in failing businesses, please.

So folks are bashing/discussing FFH for buying more BB, yet nobody cares if it is actually true:)? So it seems. There's been no announcement of a purchase, and dataroma indicates the same ownership as before (46,724,700 shares.) Blackberry's Nov 13 filing states that Watsa has shared voting power on 46,853,700 shares, 46,724,700 of these through Fairfax. Here is the nonsense that Yahoo Finance attributes to GuruFocus: "On November 13, 2023, Prem Watsa (Trades, Portfolio), through Fairfax Financial Holdings, made a notable addition to its investment in BlackBerry Ltd (NYSE:BB). The transaction involved the acquisition of 129,000 shares at a price of $3.52 per share, increasing the total holdings to 46,853,700 shares. This move had a 0.03% impact on the portfolio, adjusting the position to 10.77% and marking a significant vote of confidence in the company's prospects." So I would speculate that there has been no additional purchase, but perhaps Watsa owns a few shares outside of Fairfax and that has caused GuruFocus to be confused. That $0.5m "significant vote of confidence" looks like it never happened. Back to complaining about the $4m privatization of Farmer's Edge...

Shareholders definitely will be better off now that a portion of the proceeds from those debs are reinvested. FFH was getting 1.75% interest, and pretty much any US treasury will yield ~5%, so that part is good. The part that isn't good is that the whole $330m isn't being reinvested at the higher rate. I don't love the idea of extending any more credit to BB, but if FFH is going to do it, they should at least demand market terms. For 3-month debt that would be, what, perhaps ~8% or something instead of the 1.75% they actually accepted? So, it looks to me like FFH is being shorted about $2m of interest over three months (and worse if it is extended to 6 months). Forgoing $2m in interest is the part of the glass that is empty, but removing $180m of the $330m invested via bonds is a much bigger part of the glass with water in it. And if getting a good deal and paying a low interest rate for 3 more months is helpful for Blackberry and allowed FFH to actually reduce the 47m share position, that would be even greater. Anything to get farther away from this canine investment.

It is not at all clear whether they owe tax on these gains since the underlying is the issuer's own shares. I meant to ask on a CC but can never seem to remember to do so on the actual mornings of the calls. When an issuer buys their own stock, doesn't retire it, and then sells it for a profit, there is no tax owed (at least in the US). Yes, this is all clearly true for stock repurchases. The question is, is it true for a derivative instrument purchased by a company where the underlying equity is the purchaser's own shares. In other words, if Fairfax buys shares of Occidental, and they go up, they pay tax on the gain, but if they buy their own shares, and they go up, no tax. Now say they buy TRSs on Occidental and Fairfax. Does the same distinction apply? What if they buy call options on each? The gains are fairly closely correlated with share price gains, but I suspect we agree that there will be no exemption for the gains on the call options. I would hope that the TRS derivative will be treated as a share repurchase but I fear it might not be, and this would make a substantial difference on the huge gain. OTOH, Fairfax knows the answer to our question, so perhaps the fact that they have not sold the TRSs, booked their gain, and used the funds to repurchase shares, is some indication that they think the gains will be tax free?

Long equity total return swaps provide a return which is directly correlated to changes in the fair values of the underlying individual equities.” Prem Watsa – Fairfax 2022AR OK, but I think Mark Dwelle was right to question the structure of this deal. The gain from buying these swaps at $344 that are now worth $916 is enormous, but I wonder if tax might not make a big difference. You don't pay tax on the increase in the value per share from repurchasing shares, but won't they have to pay tax on the investment gain using TRSs?

Likely be fine with them taking 10 tiny positions if even just 3 of them become home runs. National Stock Exchange was also a tiny position until we got it in the rear view mirror. They wanted this one to be much bigger - they bought 1% in 2016 for $26.8m and said this in the 2016 Annual Report: Since Indian regulations mandated that no single shareholder (other than the two founding shareholders who each own about 10%) could own more than 5%, Fairfax India decided to buy a 5% position in NSE. The position had to be accumulated from several institutional shareholders who were interested in selling. After accumulating about 1% by July2016 and while in the process of negotiating the purchase of another 3% block, strong rumours broke again that the much-anticipated public listing of NSE was about to be announced. As a result of the rumours, the potential sellers walked away. Fairfax India therefore decided to suspend its efforts to purchase the remainder of the 5% position. The position is worth $177m, as of Sept 30, 2023. 5% would have been worth $885m; Fairfax India all told is worth $1.79b...