petec

Notional is actually $87bn as some contracts have expired. They pay out 1% of notional for every 1% that CPI is below the strike CPI level on the day of expiry. So for them to be worth $87bn, the price of everything in the CPI basket has to go to zero in each relevant territory. Not zero growth, zero absolute. If that happens, I’m going shopping. Given average expiry is 2.9 years away, and they’re not currently in the money, you’ve got to have quite a rapid deflation for them to be worth $1bn at expiry, let alone $100bn. That said, they can be sold to a greater fool, if one can be found who will pay a significant sum. And 2.9 is the average, so some of the contracts may be significantly longer. But I’d be very wary of pencilling in a best case valuation greater than a few hundred million.

They’re fairly short duration bonds, so the price doesn’t move much when the yield compresses. It will be a benefit, but not a game changer.

Thanks!

Yeah - their holdings are scattered across multiple subs, and I have never found a single source that gives the whole picture. So they may well have bought more Google (for example) than this. Then again I don't think the big news is in the equity portfolio. We already knew they were pretty much maxed out on equities and I think we can assume they're not going to sell any of the big positions here, so they are limited in what they can do and the impactful decisions will be on the bond side. So far we know they have redeployed or have plans to redeploy $5bn ($2.9bn into corporates, and $2bn into mortgages with Kennedy Wilson). That's where the news is, in my view. That and any sign of lasting deflation.

Also - there are some known holdings missing, like Stelco, Eurobank. I don't spend a lot of time with 13F's. Does this include all the subsidiary holdings? Because if not it's basically useless.

Some very odd looking outputs there. Might be worth going to the source. The Blackberry thing might be something to do with the $500m convert but I can't imagine what. The Seaspan numbers just look wrong. (EDIT - no they don't I misread them. Sorry.)

This all makes my head hurt but I find it very hard to find a positive. A few thoughts: 1) If I understand correctly, Fairfax are exposed in both directions. I am struggling to see how this is much different from the short swaps that so hurt us in the bull market. Fairfax took a levered bet on stock movements without capping their downside or the potential cash collateral calls if they are wrong. In return for a possible $178m profit which doesn't really move the needle, they risked moving the liquidity/capital situation from "mildly concerning" to "oh fuck". If this interpretation is correct, I would argue that they have kept to the letter of their promise not to short equities again, but perhaps not the spirit of it. 2) Although at the end of the quarter their long TRS position was 10x the size of their short position, note 7 suggests they either really f***ed up the timing on their shorts or they were short stocks that have gone up a lot, including in q1. If it is the latter, one might reasonably infer that they shorted the tech stocks they wrote about in the 2019 newsletter - and did so without telling us. Here is the wording: During the first quarter of 2020 the company closed out $404.4 notional amount of its short equity total return swaps and recorded net losses on investments of $107.4 (realized losses of $248.1, of which $140.7 was recorded as unrealized losses in prior quarters). I am no expert but I would assume a $248m loss on $404m of notional means they were very wrong. @SJ, the wording re: the collateral suggests to me the TRS's are at least partly held at the holding company. Note 7 says: At March 31, 2020 the aggregate fair value of the collateral deposited for the benefit of derivative counterparties included in holding company cash and investments and in assets pledged for short sale and derivative obligations was $413.4 (December 31, 2019 - $152.4)…" Presumably if the collateral is at the holdco, the TRS is too. @TCC, two questions if I may: a) note 7 shows zero cost for the long and the short equity TRS's. How does that work? Is the only cost the collateral that needs to be posted? Or is there an up front "premium"? b) what is the advantage of these TRSs vs a call with capped downside and no need for collateral? Finally, also in note 7 of the 1q report, can anyone explain the assets & liability columns under "fair value"? Does the asset represent swaps that are in the money and the liability represent swaps that are out of the money?

Excuse my ignorance, but if you’re long a TRS what happens if the market drops? Do you just lose your principal, or is the liability greater?

Don't hold your breath. They'd have had to have sold some of their big positions to do anything meaningful, and they have not mentioned doing so. As an aside, the Dundee/DPM transaction yesterday shows how they could, in theory, offload some of the big stakes if they wanted. Indeed Unrelated (and I know that it is impossible at the moment) but if FFH was able to buy back its share at 0.6 BV with the same total quantity that it issued shares ABOVE BV for the Allied World purchase in 2016 that would have been a quite a coup worthy of a song. Ha - if only.

Ha - what’s wrong with the Eastern US?

Don't hold your breath. They'd have had to have sold some of their big positions to do anything meaningful, and they have not mentioned doing so. As an aside, the Dundee/DPM transaction yesterday shows how they could, in theory, offload some of the big stakes if they wanted.

Just after the last potential seller throws in the towel! Low interest rates (all else equal) mean less income from float. So yes, bad. Covid 19 has two impacts: 1) big recession means less demand for insurance. 2) potentially higher claims although Fairfax don't think they are badly affected. But who knows why the stock is getting (even) cheaper today. Might be Powell's comments, might be because Eurobank is down 10%, or it might just be because there are more sellers than buyers today. Bryggen, I am sorry you are experiencing this pain however a few of us on here (myself included) attempted to warn shareholders and those considering becoming shareholders to stay away from owning the shares of this company. Before I write anything further please understand that there are a few on here that will continue to strongly advocate for investing in Fairfax. They will cite the "undervalued" nature of their major equity holdings, the fixed income yield pick up during the bottom in mid-March, the long term track record of Prem and team, the hardening market, the vastly improved underwriting results and of course the fair and friendly culture. In my view, none of these reasons is sufficient to overcome the many deficiencies that have existed at Fairfax for several years and which are now being exposed for what they are. For every positive point put forward by those who still believe and advocate for investing in Fairfax's shares are equal and in my view more compelling reasons for not doing so. The company is now swimming in debt, it never had a strong capital structure however it is now simply awful. Its long term holdings in Eurobank, Resolute Forest, Stelco to name just a few are likely impaired beyond repair. I fear a similar fate for Recipe and the myriad of its private holdings in the retail space. These were low margin businesses at the best of times and that was before any additional costs that Covid will impose on all retail establishments. Fairfax Africa and India have been so very disappointing for shareholders in those companies as well as for shareholders of Fairfax who have watched their seed capital into these entities melt away. Furthermore, the low interest rates will hamper all insurance companies going forward. God help any existing shareholders if we have an active hurricane season this year. You now have a decision to make. Continue to hold and believe in the long term value of Fairfax (that was hard for me to write) or sell your shares now and redeploy the proceeds into other more compelling opportunities. The choice is yours. I have made mine! Thanks for your honest input. Not reassuring, but I would rather honesty. I am now curious to hear from the others on it ;) Bry He hit the nail on the head for the bull argument. That was the bull argument?? :o

Thanks Petec. Disagreeing about investment valuations is what makes a market! Let me start with a few comments on Eurobank....Prem's thesis was that it was very cheap relative to book value. Perhaps the cheapest bank on the planet. He never seemed to say much beyond that. Fairfax now owns something like 40% (I did not look up the exact percentage so apologies if this is off somewhat) of this company. How many recaps of this company did Fairfax participate in? Clearly the original thesis was wrong and Prem and team were unwilling to throw in the towel. I believe this was due to ego and also position sizing being too large. both of these raise other issues that seem to repeat at Fairfax. The most recent "recap" involving the merger with Grivalia seemed promising but now Eurobank owns real estate that is no doubt deeply affected by Covid. My bet is that further real estate write downs will be needed which will negatively impact BV in my view. Furthermore, I believe that unfortunately the Greek economy will be severely impacted by Covid. I believe that something like 20% of the economy is derived from tourism. This will impact many of Eurobank's clients in my view resulting in additional loan losses further impacting BV. The ultra low interest rates, which I believe are here for a very long time, were never good for Eurobank (or any other bank for that matter) and now seem to be here for the long haul. Sure the political climate in Greece is better now but given the hardship that Greece will likely experience as a result of Covid its not something (stable political environment) that I think we can count on going forward. I think the shares need to triple to get back to where they were trading at the beginning of the year. A tall if not impossible task if you ask me. Given the current backdrop economic backdrop we are all facing I would suggest that owing Greek banks is the last place I would want to be invested in especially in the size that Fairfax has. The attached article may be of interest: https://www.ekathimerini.com/252538/gallery/ekathimerini/business/the-cost-of-coronavirus-greek-tourism-slump-threatens-a-decade-of-hard-won-gains I would be pleased to provide you with my thoughts on Resolute and Stelco (I live about 20 kms from Stelco's head office so I know this one well) if you want to contact me in a PM. Thanks. FWIW they have 31% of Eurobank - very difficult to exit given liquidity. But I am less bearish about your other points: 1) BV will be E1.35 once the current set of transactions (spinoff of NPLs and sale of servicer) complete. 2) Greece has suffered 10 years of depression. Residential real estate prices are down 40%. Half of loans went bad. Covid will not help, but it may be that the damage to the loan book has already been done. 3) Provisions + collateral cover 100% of NPLs. 4) NPL exposure will be down to very manageable levels post-spin. 5) Greece's banking system has been cut down from something like 25 to 4 banks. 6) Greece has done deep reforms and now (finally) has a pro-business government. Q1 results are out at the end of May. They will be very interesting. There is risk here. But I think there is a good chance Eurobank gets back to carrying value, and may do much better, over the next couple of years. Hopefully this post ages well. I'll PM you!

bearprowler, good post - even if I disagree with some of it. Could you clarify what you mean when you say that Eurobank, Resolute, and Stelco are impaired? That statement has a different meaning depending on whether you're starting with current share prices, or carrying values, or purchase prices - hence the question. If you feel you have a clear handle on the value of any of these business I'd be interested to know.

Just after the last potential seller throws in the towel! Low interest rates (all else equal) mean less income from float. So yes, bad. Covid 19 has two impacts: 1) big recession means less demand for insurance. 2) potentially higher claims although Fairfax don't think they are badly affected. But who knows why the stock is getting (even) cheaper today. Might be Powell's comments, might be because Eurobank is down 10%, or it might just be because there are more sellers than buyers today.

May I ask which?

One holding I think is very well positioned here is Kennedy Wilson. They have been net sellers for several years while growing institutional relationships, so they have significant investment capacity for the coming cycle. And they're trading at about 50% of conservatively-calculated SOTP value. I rather hope Fairfax buy more - in fact, it would be a great franchise to have in-house - but I doubt they will.

The majority of the dividend goes to shareholders other than Prem. If he wanted to use the business as a piggybank he'd pay himself more.

They talked about doing a common buyback after they converted the series 5 prefs, but never had the cash. Now they have a boatload of cash.

Notably the $8 warrants are only valid for 12 months so Dundee keep upside above 8 if it takes longer than a year to get there. Quite a smart deal structure.

I’d guess at a common stock buyback and investments in mining small caps, which are crapped out. I’d go so far as to say that Jonathan Goodman has not put a foot wrong - but the most difficult part, which is restarting growth, is yet to come.

Took me a while to find the pref data but thanks. I trust Brian Bradstreet's instincts. Slightly worrying to see Barnard selling $1m of common. Perhaps he was buying a house. But the one thing that has kept me in FFH all these years is Prem's incredible ability to keep (what I judge to be) superb people in the business. There has to be a point where someone like Barnard, who has unquestionably delivered, gets p1ssed off that Prem isn't upholding his side of the bargain. Quick follow up on this, FWIW. Andy Barnard has been selling when he exercises options for years now, but his retained holding is roughly flat and worth about USD12.5m. https://ceo.ca/api/sedi/?insider=Barnard,%20Andrew

Thanks.

It looks to me as though all the fixed-rate prefs sold off in 4Q18 (as did most equities) but never really recovered in 2019 (unlike most equities). Is there an obvious reason? All else equal I'd have expected them to recover given the outlook for rates in mid 2019 was very different (lower) than mid 2018, and these are fixed rate securities. Is this an FFH-specific spread or did Canadian prefs generally not recover?

Would you ever expect them to trade above par, given how low rates have gone? I need to look at the terms again. No, just trading back to where they were in 2019 is sufficient. Meantime, 8% yield or so. Yes, I can see the attraction. I just haven't really followed the prefs or what drives their prices, hence the question.