dartmonkey

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...

(Edit: this is the really important part) “Recently, in October, during spike in treasury yields, we have extended our duration to 3.1 years with an average maturity of approximately 4 years, and yield of 4.9%.” Could someone explain to an insurance novice what the differece is between 'duration' (3.1 y) and 'average maturity' (approx. 4 y) ? OK, Google is my friend, right, and I see that duration is an industry-specific notion of how sensitive a portfolio is to interest rate changes. But from an iinvestment point of view, I think I primarily want to know how long we can count on these 4.9% yields, so that would be 4 years. And if interest rates were to drop, say by 1%, then what does duration tell me? Would it be correct to say that I expect about a 3% increase in the value of the bond portfolio, with a 1% drop in interest rates? (Or, inversely, a 3% loss, if interest rates rose by 1%? Can someone give me a numerical example? TIA!

Chubb and Fairfax have similar leverage (fixed income portfolio: net premiums earned), around 1.5-1.7 (I did the calculations, but I goofed up and lost my post and can't be bothered to redo it.) So I agree that a 1 point increase in interest rates should in principle give them leeway to increase combined ratios by MORE than one point, not less, even after tax. However, Chubb has an average duration of 4.5 years (so they say, in their 2022 AR), whereas Fairfax has duration more like 2y, so a given increase in LT interest rates available will translate into profits much more quickly for insurers like Fairfax with short duration. But eventually, everyone will get it, Fairfax just has a couple years more to enjoy the full benefit.

With millions of artificial shares floating around, you could easily drive a company's stock price into the ground. Even if the company has substantial cash on hand, they would not be able to buy back enough stock to keep it afloat without hindering working capital...unless the shares traded well below tangible cash and it was accretive...by that time, the company is into a death spiral because other investors start bailing. This would be a more convincing argument if you could think of one company where this kind of death spiral had actually happened. Death spirals stop because other investors see the opportunity to pick up cheap shares of a company that is fine, even if the shorted company itself doesn't have enough cash lying around to take advantage of the opportunity. In other words, there's no such thing as a death spiral. This is a good example of the kind of language that Byrne used to use but it is disconnected from reality.

Prem and Patrick Byrne never complained about short-selling. They only complained about naked short-selling and coordinated attacks through certain analysts, media and hedge funds, who specifically created downward spiral attacks ... Lots of people complain about regular old short "attacks" - Elon Musk comes to mind. The mature response is exemplified by Reed Hastings of Netflix who says people are welcome to short the shares but that they are miguided. Virulent attacks against supposed short 'attacks' usually come from CEOs that have something to hide. This distinction between 'regular' short selling and 'naked' short selling is really a distinction without a difference. Naked or not, it is hard to see how short sales could do anything to influence the medium- to long-term price of a company's shares. I suspect Watsa likes Byrne (and maybe knows him through Byrne's father, who was CEO of GEICO and whom Buffett has called the Babe Ruth of insurance). Maybe he wanted to show some sympathy for him, or maybe he was convinced by Byrne's arguments, and Overstock was Fairfax's #5 US holding as recently as 2016. But Byrne really is a nut, heavily iinto conspiracy theories of all sorts (not just 'naked shorting'), and I am glad to see the Overstock stake was dumped and there's been no more talk from Watsa about this odd character. (Although I see that Francis Chou bought 44000 shares last year, about $1m worth, down about 40% now, that's a bit weird.)

Long term holders recall Fairfax had the temerity to sue the hedge funds for manipulating their stock on the NYSE. Although it was 15 years ago it's hard to get off their black list once your on it. Enough of my conspiracy theory... It is one of the few things I don't like about Watsa. The right approach to short sellers is Buffett's: "Be my guest." The wrong approach is Watsa's, which he has fortunately dropped for at least 20 years now. While it is true that Fairfax's share price has been depressed by short selling, it is not because someone has been shorting Fairfax; it is because someone at Fairfax has been shorting the index and tech high flyers, and that had catastrophic results. Fairfax's stock price continues to be unbelievably low, and I think this is primarily because many shareholders still remember those bad results from shorting, and are not yet giving Watsa the benefit of the doubt that he has actually seen the light and won't do it again.

Tammy is last week's news, or rather, it didn't really make it to mainstream news because it never looked like it had much of a chance of hitting the continental USA, as it has pointed farther and farther northeast. At this point, it is expected to stay 'way off shore, with high confidence'. At the worst, for those of us in the Eastern USA and Canada, it may give us a fair amount of rain. Looking this up, it is interesting that, although this is an El Niño year meaning we expect less hurricane activity, 2023 has turned out to be a fairly active tropical storm season, Tammy being #20 this year (T being the 20th letter in the alphabet). But fortunately for us and for Fairfax, most of them, except for Idalia, stayed where they belong, well offshore.

I think the table reverses the ‘available for sale’ categories, the no’s should be yes’es and vice versa