dartmonkey
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Posts posted by dartmonkey
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5 hours ago, UK said:
I am not sure I understand his comment either, but this logic you have described I think would work only for insurers with short duration bond portfolios. It would be interesting to know what is the average duration of bond portfolios of the whole insurance industry, but assuming some other companies own much more longer term bonds, increase in yields would not do much good for them for quite a while?
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.
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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.
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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.)
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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.
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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.
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I think the table reverses the ‘available for sale’ categories, the no’s should be yes’es and vice versa
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Berkshire 2022 AR (p. K-70). Hard to beat for short duration, and a nicely timed shift in 2022, just like Fairfax:
December 31, 2022 2021
ASSETS
Insurance and Other:
Cash and cash equivalents* $32,260 $85,319
Short-term investments in U.S.TreasuryBills. 92,774 58,535
Investments in fixed maturity securities 25,128 16,434
Investments in equity securities 308,793 350,719
Equity method investments 28,050 16,045
...
Total 725,989 741,993
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Despite my general dislike of Trudeau and his inept woke government, I was prepared to give them the benefit of the doubt regarding this spat with India - you can’t just stand by when a Canadian citizen is murdered in Canada by a foreign government. But I may have been wrong to presume we had good evidence for this serious allegation : https://nationalpost.com/opinion/canadas-remarkably-slapdash-assassination-accusation
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12 minutes ago, StubbleJumper said:
I don't really mind them putting a few bucks into the S&P index, but the more worrisome possibility is that this investment might have been paired against a short (ie, go long S&P while simultaneously shorting some stock that you hate).
SJ
That would indeed be worrisome, given Watsa's pretty unambiguous promise in the 2018 report:
In the past, to protect our equity exposures in uncertain times, we shorted indices (mainly the S&P500 and Russell 2000) and a few common stocks. 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!!
repeated in 2021:
I said in our 2019 [sic; but I think he meant 2018] 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).
If he renegs on this promise, I think people would be furious. Even though I think shorting the market would probably work out well at current prices, with the company doing so well since the end of the shorts, I dare to hope that he has ruled out shorting too clearly for him to just go back to doing it again.
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22 minutes ago, Luca said:
That SP 500 is indeed a headscratcher lol!
Agreed about the S&P, but it's small ($30m), I wonder if they acquired it somehow and haven't gotten rid of it yet. Seems contrary to everything they usually say and do.
As for Occidental, at $354m it may be #1 in the 13-F, but it's really small potatoes compared to the huge bond portfolio, the big private companies they own, notably Eurobank and Atlas/Poseidon (each about $2b). Even Thomas Cook is bigger (about $400m), and Mytilineos is about the same size as the Occidental bet. And of course, the dreaded Blackberry is even smaller, fading into obscurity (thankfully!)
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21 minutes ago, MMM20 said:
~5% cash is looking pretty damn good right now… but our "problem" is that Fairfax might be the single best way to invest in that thesis!
Exactly. I like to think my portfolio is half cash, half conservative stocks. Except that the cash half is actually levered 2:1, plus a dollop of underwriting income and savvy investing in gems like Eurobank, Poseidon and (lest we forget the downside) Blackberry...
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8 hours ago, Viking said:
@steph . And the stock still trades well under 6 x 2023E earnings. Nuts.Yes, there is a recent thread on this forum about historic landmarks, but maybe one landmark that we are within spitting distance of touching is price to book, which is getting close to 1. Q1 common shareholders' equity $18,663.8m (USD), market cap $18.574 as I speak (using the FRFHF quote). We will have a new book value in a few days, and it will be much higher than $18.6b (any guesses?), so we will still be trading well beneath book value, but it's heading in that direction...
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6 hours ago, SafetyinNumbers said:
How long before it has the biggest market cap in Canada? I’m thinking in terms of decades. Constant reinvestment instead of dividends like the other high ROE comps makes a big difference.I'd just as soon it doesn't get so big that it can't keep the same high returns on capital, and repurchasing stock (especially over the last few years, but even now) is a good way of doing that. And, together with the dividend, it makes it hard to compare with other Canadian companies that have more or less return of capital to investors. But more important to me is that MY market cap keeps climbing up, even if Fairfax's stays the same because it is pouring more into my account...
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9 hours ago, UK said:
Climate change “has the potential of changing the insurance business profoundly and making part of the world un-insurable,” Gonzalo Gortazar, CaixaBank SA’s chief executive officer, said in an interview with Bloomberg TV Friday. “It’s not happening yet, but if we keep moving in that direction this is something we will have to face in due course.”
Yet, is that represents more of a threat (unexpected losses, regulatory risks, etc) or an opportunity (increasing market, better pricing, etc) for insurance/reinsurance companies? Perhaps everything will come down even more to execution quality of any particular company? Could all this negative publicity at least help improve pricing somewhat:)?
It seems to me that this possibility of more climate change disasters (although this is more of a fear than a current reality) is an opportunity for insurers, not a threat. Of course if the risk increases, rates will have to go up, but this just expands the total addressable market of the insurance industry. In the same way that fully self-driving cars might drastically shrink the auto insurance industry, more hurricanes or flooding or fires might expand it. That may not be good for humans, but it’s good for insurance companies.
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12 hours ago, nwoodman said:
Gut-wrenching in terms of what could have been but a testament to them fishing in the right waters.
Yes, every time I see a FIH report indicating how brilliantly this tiny investment is doing, I have another little wrench...
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On 7/10/2023 at 5:00 PM, Haryana said:
There is nothing holy about using end of 2011 as the start date, go just 5 years further back and you get this:
Yes, of course you are right, I just used the same dates that Brooklyn Investor used to show that Berkshire is the real thing, the Berkshire wannabees are also-rans. I just wondered if that particular fairly non-natural 11.5y period might have been not quite so bad, if one counted dividends. The answer is no, it takes us from 4.6 to 6.9% annualized, still a long way from Berkshire's 13.9%.
Of course Fairfax looks a lot better if you include the big macro bet put on before the global financial crisis that paid off handsomely. And the period chosen is the almost the worst imaginable period for Fairfax, beginning about the same time as the catastrophic shorting adventure. hopefully behind us now forever. Going back a bit farther, things are not so bad. And also, hopefully, going forwards a bit farther will do the same trick...
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6 hours ago, SafetyinNumbers said:
I did the math to solve for the DRIP and the multiple expansion for BRK and contraction for FFH. The spread narrows quite a bit. That’s what I call margin of safety.I did the calculation too, since I wasn't sure whether Brooklyn Investor had included the dividends.
You can do it with FRFHF in USD ($10 dividend every year) or with FIH in CAD ($10US dividend converted to CAD at prevailing exchange rate). There's still a big gap with BRK, but it does narrow a bit:
So 13.9% from Berkshire, and 6.9% from Fairfax still hurts, but it's not as bad as the 4.6% you would calculate if you ignored the dividend.
FIH gets a better return, but only because the exchange rate has gone from rough parity in 2011 to 1.33 now. To compare apples with apples, Berkshire's 13.9% in USD has to be compared to the FRFHF return in USD; a Berkshire investment in USD would be even better than 13.9% annualized for a Canadian, who would also benefit from having invested in USD.
Boy, it's pretty depressing typing in those FRFHF share price numbers, going nowhere, with share price lower in January 2021 than in December 2011, almost 10 years prior. Hopefully that's over at last!
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18 hours ago, Parsad said:
The funny thing is that Eurobank may still be considerably undervalued! Should trade at book or better over the next couple of years. That being said, I wouldn't mind if they take a little off the table here.
Cheers!
Agreed. Remembering the successful Bank of Ireland investment, they purchased 8.7% in 2011 for 0.10 eurs, and sold most of it in 2014 and 2015 for between 0.33 and 0.36 euros, and cut it further from 2.9% to 1.5% in 2016, and the rest in 2017, for a total profit of over $1b US. (In the 2002 AR, Watsa called Richie Boucher from the Bank of Ireland Fairfax's 'first billion dollar man', with George Chryssikos's of Grivalia and Eurobank having his name added to this illustrious list. Interestingly, Boucher was on Eurobank's board from 2017 to 2020, so maybe it's contagious.)
Anyways, the Bank of Ireland has not done much since 2017, going from about 8 euros to 9, and paying out 0.67 euros since then. Hopefully, Eurobank will not suffer the same fate, but if Fairfax lightens its investment a bit, there would be a good precedent.
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7 hours ago, gfp said:
I can't remember off hand if it was 2 year or 3 year notes they were locking in with the futures/forwards, but I remember the rate they locked in was around 3.75%. It should be noted that so far that was a horrible bet. US2Y Yield is currently 4.92% and US3Y Yield is currently 4.545%.
According to the Q1 report, their bond position went from $29,001 on Dec 31st to $32,545 on Mar 31st, so they basically invested $2.5b of cash into bonds. 2y rates went from about 4% in January, to a peak of 5% in early March, and then back down to around 4% for most of April and May, and then, late May and June back up to almost 5%, as you note. 1y yields are a little higher, 3y yields a little lower. When I saw they had put about $1.4b of cash and short term investments, plus another $1b of Q1 earnings, into 1-3y treasury bonds with a duration of about 3 years, but not more, I thought they had maybe waited a bit too long again, but no, rates are back up to 5%.
Would it have been better if they had hit the top 5% treasury yields (mid-March or right now)? Should they have held out for even higher rates? Who knows, but I am glad they have locked in $1.5b of interest and dividends for the next 3 years. They have some pretty significant earnings coming in this quarter (closing of Ambridge, for instance), so they may be able to sweeten the interest income stream a bit more, now, we will see. But with their pretty stellar track record of getting their macro interest rate calls right, over the years, so I am not going to criticize them for not hitting the exact peak.
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The modeled probability of aggregate catastrophe losses in any one year exceeding this amount is generally more than once in every 250 years."
It reads as though they mean greater than one event in 250 years, which would be greater than 0.4% chance per year with no upper limit.
Yes, I'm sure from the context that they meant that the modeled probability of losing 15% of equity in any one year is LESS than 0.4%, not more, which would not be reassuring!
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1 hour ago, Luca said:
What i meant is that if Fairfax India keeps compounding nicely, i think the book value will get back to something around 1x book from the current 0.7x book. So we wont only capture the book value gains after fees but also the closure of the discount. I hope my logic is understandable.
So for me, buying this for way less than book gives possible extra returns, if India and Fairfax India gets in favor after outperforming in a decade or so.
I think we agree, although you and I are both having trouble with typos! You mean it will compound nicely, if the share price (not book value) gets back to something around 1x book, right? And as Haryana more clearly put it, there are no fees (or, more precisely, only 20c of fees) up to the most recent book value, and only 1/5 of book value gains beyond 5% per annum, for book values higher than $18.85/share.
Lots of asset managers and their shareholders have to live with share prices below asset value: Pershing Square is another good example. So a return of the share price to 1x book may be a bit optimistic, although of course it would boost returns a lot if it ever happens. But even if it doesn't, and we only track BV, returns are already not bad - despite a few lost years from the COVID scare and its devastating effects on the airport, along with a weakening rupee, BV growth per share was 8.5% up to last December. Even without a share value:book value narrowing, I could live with 10% BV growth, and won't begrudge Fairfax from taking one of those percentage points for its fee.
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Fees will eat up returns of the closure to book value so one could say at current valuation and closure in year 10, we are getting the pure returns by Fairfax India for free. Looks like a pretty nice bet.
Not exactly. Book value is now $18.85 per share by my calculation (March 31st equity $2,598,273,000; shares 137,815,952), share price $13.65, but don't forget the fees have already been paid for book value up to . Fees are paid based on book value, not share price, and they are 1/5 of BV increase beyond a 5% annually (this December 31st is the end of the 3rd 3y calculation period). They are paid every 3 years if book value is higher than the previous highwater mark, but (I think) not reimbursed if there is a book value drop. But they are accrued, based on each trimester's BV, and as of March 31, there was a fee accrual of 20c/share. In other words, there is 20c per to be paid if book value on December 31st is the same as it is now. But whether the share price climbs up to book value of not makes no difference to the fee.
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33 minutes ago, Crip1 said:
Dude, you are speaking my language.
Considering FFH is my largest holding, by far, I clearly like the company and the story. But, there is one aspect of Fairfax that is highly problematic, IMHO, and that’s Prem’s reluctance to candidly admit errors. Buffett has always been extraordinarily good at this and I think it’s healthy for any individual, especially one in a leadership position.
It is almost impossible to change unless there is valid reason, and the valid reason needs to be admitting errors or, at minimum, admitting that things could have been done better. Prem is reluctant to do this. He was looked at very favorably during the financial crisis based on how well he navigated Fairfax through that. The ensuing 8-10 years were substantially less successful. Will we see a repeat now? I don’t think so, but I am not as sure with Prem because of the lack of candidly admitting errors.
-Crip
How about this:
2019: In the past, to protect our equity exposures in uncertain times, we shorted indices (mainly the S&P500 and Russell 2000) and a few common stocks. 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!!
2020: 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).
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Just now, dartmonkey said:
Even worse now, $1023! I hope the company has bought back a lot of shares since the first quarter report, but this opportunity for reinvesting way below intrinsic value may be closing up now. It will be interesting to see at what price they stop the repurchases.
Sorry,, I mean $1013, up $23...
Q3 results
in Fairfax Financial
Posted
(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!