petec

Totally agree, and I don't expect the bond portfolio to contribute much in the next few years. But that applies to all insurers and the industry as a whole needs to earn a return. So lower bond earnings drive underwriting discipline and contributes to the hard market. I think of it as two sides of the same coin. Also, FFH do have deflation protection - they have the swaps. It's not perfect, and won't pay out under a mild deflation, but they do have good protection against more extreme outcomes in both directions (inflation and rising rates, deflation and falling rates).

The key thing will be how steep the curve gets, more than the absolute rate. No point buying 10y if you’re not paid to take the risk vs 2y.

This is very wise advice.

Agree.

Ignorant question, because I haven’t actually checked, but do we know the TRS’s are held at the holdco, or could they be at the subs?

Understood. So we can’t tell much from the data we have, in short.

I thought he was talking about TRS positions on stocks other than Fairfax, and he was saying that while the Fairfax ones are long term, the others weren’t and have been partly unwound.

Yes. Fat fingers on my part. But I’m still wondering if that’s actually how it works. Or could the overall average be impacted by rewriting older, expiring swaps at higher prices? I just don’t know how these things work.

Couple of things I thought were interesting on the call. First, $2bn of TRS on their own stock at an average price of $372 vs $1.4bn at $343 in the 4q. By my maths that means they added $600m at $460 per share. Is that how it works? Second, re: being restricted on Blackberry, "we checked it ten times if we checked it once". I infer they really wanted to sell. Third: it's taken years but they have swung fully from being worried about deflation to being worried about inflation. I am not sure whether to congratulate them for chancing their minds or criticise them for taking so long, but it's notable.

The other point is they’ve repeatedly said they intend to raise more capital in the vehicle. I think the long term plan here is a huge fee stream, not a short term bump to book value.

Exactly. I suspect Stelco’s EV has actually gone down this year given how much cash they will generate. I don’t know the maths for Resolute. But I wouldn’t jump to the conclusion that just because the stocks are up, Fairfax should sell. I’m also somewhat sceptical Fairfax *can* sell Resolute in the market. They own too much. I wonder if they don’t end up controlling RFP through buybacks and just dividending cash to themselves.

1.9x TBV.

I don't think this has anything to do with whether I hold the shares. What I care about is what *I* think Fairfax can achieve, and whether this is in the price. My guess is they can do around 15% in this hard market and given current investment positioning, and more like 10% through the cycle given current bond yields. I don't think the stock is dirt cheap any more, especially on tangible book value. My view on the goodwill is that it is money good (i.e. if FFH sold any of the insurance subs, they would be able to do so at a price that justified the goodwill) but that it distorts comparisons. If you're comparing with a basket of peers, I think it is probably best to use tbv. That said, 15% ROE drives a spectacular ROTE, so tbv is going to grow very fast over the next few years if we are right about the hard market and investment potential.

Actually I suspect what it tells you is that the market is slowly catching up to how good this year is going to be, but hasn’t got there yet, and is also smart enough not to rerate the franchise for a short term phenomenon. Either way the point stands: the franchises haven’t rerated so the higher price isn’t necessarily a reason to sell.

There is some debate on the q1 prelim thread about whether Fairfax should sell RFP at these levels. I don’t know RFP as well as I know Stelco, but Stelco’s share price rise YTD (and since Fairfax bought it) is far less than the free cash flow Stelco will generate this year. In other words, assuming a special divi, the *franchise* is actually cheaper than it was before. I don’t have numbers for RFP but directionally the same logic applies.

I don’t think it’s an option. IIRC Prem said the shares in question were below Dec 2019 levels when the deal was done, so what it does is this: 1) it allows CVC some upside, but capped, and sets a floor, removing their risk. 2) It allows Fairfax to keep both the upside and downside of the equities they picked. Assuming the stocks go up, CVC paid a slightly lower multiple of book than they announced, and Fairfax gets to keep most of the upside of the portfolio they spent ages building.

There does seem to be an EXCO listing with the ticker EXCE. I’m not quite sure what it represents, nor what the share count is.

If RFP keeps buying back stock smartly in troughs, FFH will control those cash flows soon enough...

I do believe they have learned lessons. I'm just not sure I'd say management was their key mistake in the past. The big difference between Stelco and RFP is that Stelco is a low cost player with no debt. The big difference between Atlas and RFP is that Atlas has contracted cash flows to support its debt. Management will be a big part of why Stelco and Atlas will work out well for Fairfax. I absolutely believe that. But I am not so sure management is the key reason why RFP failed. Maybe I don't know it well enough. I am not disagreeing with you or Prem. I'd just have been fascinated to hear Prem name the companies he thought were badly managed! But I guess that would be pretty poor form in a public setting, and not like Prem. Either way, I really like the current portfolio.

Which of their investments did he say was poorly managed? I missed that.

I thought the same re the CR. I wonder if the preannouncement was to allow them top discuss results at the AGM. They have basically run through the same numbers on the call and that might have been a legal grey area without a preannouncement.

No, that was done a couple of years back. Rather meaningless - Prem still controls the majority.

How do you get to 0.7x? BVPS was 478 in q4. Add 47 of gains from marks to market and you’re at 525. Share price is 454. That’s 0.86x. It would take a lot of underwriting profit to get you to 0.7x, when you consider holdco costs etc., no? Also remember there’s a ton of goodwill. I think it’s money good, but it does distort the BV comparison with other insurers that don’t have it.

Back of the envelope, I think STLC and RFP combined could dividend $200m to Fairfax this year. In fact I think these two companies plus Eurobank are likely to have a combined average annual dividend yield above 10% over the next decade.

This might be better for the BAM thread, but can you give an example of no3? I do not think investors get a free ride simply because they are sharing the risk. They share the risk in a fund also, but pay a fee to have BAM manage the asset. I think that would be the same with co-investments. The only way I would imagine investors don't pay a fee is if they bring something to the table in terms of managing/improving the asset. But if it is BAM doing that, my guess is they always charge a fee. I assume the same goes for Anchorage. Either it will have its own management/investment team, or it will outsource that function to FIH for a fee.