Fairfax stock positions

[TwoCitiesCapital]

Fairfax has agreed to roll it's Blackberry converts.

 

Current debentures @ 3.75% and $10 strike are being redeemed @ 101.6854.

 

Principal is being reduced slightly and rolled between Fairfax and one other institutional investor for new converts @ 1.75% coupon and a $6 strike for conversion.

 

 

Well, FFH received a valuable OTM option with the roll, but we'll see a reduction of US$10m per year of interest income.  If BB actually does turn the corner, that option could become quite valuable.  The fact that BB needed to have the coupon reduced is a bit of a concern, because it really does call into question their ability to write a US$535m cheque in November 2023.  I can't say that I am particularly surprised by this outcome, but I had hoped for somewhat more favourable terms.

 

 

SJ

 

Beginning to look like sacrificing the $10M per year in income to restrike the options was worthwhile now that they're sitting on $250M in paper gains on the options  ;D

 

 

[StubbleJumper]

Fairfax has agreed to roll it's Blackberry converts.

 

Current debentures @ 3.75% and $10 strike are being redeemed @ 101.6854.

 

Principal is being reduced slightly and rolled between Fairfax and one other institutional investor for new converts @ 1.75% coupon and a $6 strike for conversion.

 

 

Well, FFH received a valuable OTM option with the roll, but we'll see a reduction of US$10m per year of interest income.  If BB actually does turn the corner, that option could become quite valuable.  The fact that BB needed to have the coupon reduced is a bit of a concern, because it really does call into question their ability to write a US$535m cheque in November 2023.  I can't say that I am particularly surprised by this outcome, but I had hoped for somewhat more favourable terms.

 

 

SJ

 

Beginning to look like sacrificing the $10M per year in income to restrike the options was worthwhile now that they're sitting on $250M in paper gains on the options  ;D

 

 

Yep, the new option is currently worth a hell of a lot.  Even the BB shares that FFH has been holding for a decade have regained a healthy portion of their paper losses.  It's a very nice change!

 

The next question is, "What is FFH's exit-strategy?"  The recent paper gains are great, but at some point they need to be turned into cash-in-pocket gains...

 

 

SJ

[petec]

 

Yep, the new option is currently worth a hell of a lot.  Even the BB shares that FFH has been holding for a decade have regained a healthy portion of their paper losses.  It's a very nice change!

 

The next question is, "What is FFH's exit-strategy?"  The recent paper gains are great, but at some point they need to be turned into cash-in-pocket gains...

 

SJ

 

Eventually yes, but what really matters now is that the stock price sticks. I think it is true to say that equity gains = capital = more underwriting in a hard market = more subsidiary profit = more dividend capacity to holdco = holdco deleverage etc.

 

If so, the simple fact that their holdings are going up unlocks a lot of good things.

[StubbleJumper]

 

Yep, the new option is currently worth a hell of a lot.  Even the BB shares that FFH has been holding for a decade have regained a healthy portion of their paper losses.  It's a very nice change!

 

The next question is, "What is FFH's exit-strategy?"  The recent paper gains are great, but at some point they need to be turned into cash-in-pocket gains...

 

SJ

 

Eventually yes, but what really matters now is that the stock price sticks. I think it is true to say that equity gains = capital = more underwriting in a hard market = more subsidiary profit = more dividend capacity to holdco = holdco deleverage etc.

 

If so, the simple fact that their holdings are going up unlocks a lot of good things.

 

 

Definitely a big piece of good news, and as you said, if the BB price is sustainably higher FFH could write more business.  My concern is that the BB YOLO effect could end up being a short-term phenomenon.  At some point, reality must kick in for some of the tech stock YOLO investments.  Will that be six months from now?  A year?  I don't know, but at a certain point I would be much happier to see cash or some other more predictable investment on FFH's balance sheet and not such a large slug of BB.

 

But, we now have a happier "problem" today than what has prevailed for the past decade.

 

 

SJ

[Xerxes]

I am all against FFH' taking advantage of the price increase.

Blackberry is a secular play, not a cyclical play, stick with it.

 

If there are things to take advantage by selling partially, it is the cyclical names.

 

The only time BB would become unbearable as a position if it goes-to-the-moon (borrowed terminology from the other side); this is hardly it.

When (or if) it pulls a Overstock it might be time to trim. But this far off.

[Viking]

 

Yep, the new option is currently worth a hell of a lot.  Even the BB shares that FFH has been holding for a decade have regained a healthy portion of their paper losses.  It's a very nice change!

 

The next question is, "What is FFH's exit-strategy?"  The recent paper gains are great, but at some point they need to be turned into cash-in-pocket gains...

 

SJ

 

Eventually yes, but what really matters now is that the stock price sticks. I think it is true to say that equity gains = capital = more underwriting in a hard market = more subsidiary profit = more dividend capacity to holdco = holdco deleverage etc.

 

If so, the simple fact that their holdings are going up unlocks a lot of good things.

 

 

Definitely a big piece of good news, and as you said, if the BB price is sustainably higher FFH could write more business.  My concern is that the BB YOLO effect could end up being a short-term phenomenon.  At some point, reality must kick in for some of the tech stock YOLO investments.  Will that be six months from now?  A year?  I don't know, but at a certain point I would be much happier to see cash or some other more predictable investment on FFH's balance sheet and not such a large slug of BB.

 

But, we now have a happier "problem" today than what has prevailed for the past decade.

 

 

SJ

 

A good example of this is Quess. It was trading at nosebleed levels for a while (then it was still embedded in Thomas Cook India). A small portion (i think it was 10%) was cashed out for something like $100 million. Years later the stock is trading down more than 50%. Looks like a great company. But selling more aggressively at peak prices makes some sense. Especially when you have other very good uses for the cash.

 

Imagine what Fairfax could do with the gains from a Blackberry sale... grow insurance op co’s in hard market, take out shares well below BV; reduce debt; buy another chunk of Allied from minority holders.

[Dazel]

You are all doing a great job!

 

Will add Fairfax have $10b in corporate bonds, Digit insurance (talked about on another thread) on the balance sheet as losses has little value as an asset that the public can value and its worth a lot! (IPO?), they are likely to sell Non core companies off in this environment (if Riverstone can be sold anything is on the table), AGT has a lot of value..expect a sale or IPO., Indian investments will rebound quickly as India will be leading global growth in this cycle. This year the street is expecting the highest growth numbers in a generation not sure if this will happen but any growth will help Fairfax’s portfolio greatly.

 

Most importantly, In the 18 years I have been involved in Fairfax their insurance business has gone from a hard time sleeping over reserves to reserve redundancy. Even as the business has grown into a global Goliath. In a hard market these potential returns are mouth watering and they are the reason to believe we are headed back to all time highs in the stock.

 

With the insurance business firing on all cylinders and capital investments and portfolio returns stabilizing the Fairfax corona virus blow up is not only over it’s time for offence. Prem and his team are great investors in blow ups and they have once again shown their strength , unfortunately, not unlike 2003, Fairfax was part of the blow up this time. It’s over...We are headed to all time highs.

 

I have been cleaning out some files (c-19 killing time!lol.) and I found an old box of newspaper clippings of the Fairfax battle with short sellers and all of the negative media articles. The one that stuck out was Fairfax insiders buying a boat load of shares in 2003...and now we have Prem buying a boat load of shares in the summer...17 years later.

 

BlackBerry’s moves and popularity will attract a new audience to Fairfax at the right time. Remember what Fairfax did in the late 1990’s...is the “Buffett of the North” in comeback mode!? I am betting on it. (Long and buying here)

 

“Most people invest and then sit around and wait and see what the next blow up will be,

I do the opposite, I wait for the blow up and then I invest.” Richard Rainwater

 

But it could also be Prem Watsa.

 

 

Dazel

 

 

[Xerxes]

Most importantly, In the 18 years I have been involved in Fairfax their insurance business has gone from a hard time sleeping over reserves to reserve redundancy. Even as the business has grown into a global Goliath. In a hard market these potential returns are mouth watering and they are the reason to believe we are headed back to all time highs in the stock.

 

With the insurance business firing on all cylinders and capital investments and portfolio returns stabilizing the Fairfax corona virus blow up is not only over it’s time for offence. Prem and his team are great investors in blow ups and they have once again shown their strength , unfortunately, not unlike 2003, Fairfax was part of the blow up this time. It’s over...We are headed to all time highs.

 

 

Hi Dazel, great post.

If you don't mind me asking since i am not verse in the history from 20 years ago in 2003.

Are you suggesting that FFH was unable to take advantage of the environment in 2003 just like today.

 

Was 2007-09 the only time they really nailed it ?

[Daphne]

Welcome back DAZEL, I've missed your enthusiasm. ;)

 

[Dazel]

Investments nailed it 2003...Brian Bradstreet made a killing in treasury bonds...the gains were so large

They were significant in size compared to market cap. Fairfax did very well in equites after the 2000 crash through to 2007 as well. In 2000, Fairfax and Sir John Templeman bought puts on the dot com ipo’s and were very short tech which turned out to be a big winner.

 

A lot of those profits went to fixing the insurance company reserves that they inherited from take overs in the 1990’s...believe me the reverse of this is a tail wind of significant strength not unlike what Berkshire has had the benefit of for many many years.

 

Fairfax is taking advantage of this hard market right now premium growth is substantial.

 

2007-2008 profits were spent buying back all of the subs...so the profits we have going forward which I think

Will be significant we get to keep as Fairfax has reached critical mass....they will likely shrink the amount of businesses they own as stated earlier. I see “Farmer Edge” has filed a prospectus....much more to come in my opinion...including splitting up BlackBerry and getting return of capital.

 

Shareholders will benefit this time because we get to keep the cash (reserves are in excellent shape with redundancy in their book again last quarter) to buy back stock as they did in 1990. Their best investment at these stock levels is to participate in the hard market, monetize non core assets and buy back their own stock..that’s it.

 

[Parsad]

Shareholders will benefit this time because we get to keep the cash (reserves are in excellent shape with redundancy in their book again last quarter) to buy back stock as they did in 1990. Their best investment at these stock levels is to participate in the hard market, monetize non core assets and buy back their own stock..that’s it.

 

Couldn't agree more!  The fact that virtually all asset classes are fully valued, they will probably get the opportunity to also exploit the bond and equities market over the next 12-24 months.  But they don't need to do that to hit their targets...it would just be icing on the cake, just like the return of market price to book value.  Cheers!

[Xerxes]

Shareholders will benefit this time because we get to keep the cash (reserves are in excellent shape with redundancy in their book again last quarter) to buy back stock as they did in 1990. Their best investment at these stock levels is to participate in the hard market, monetize non core assets and buy back their own stock..that’s it.

 

Couldn't agree more!  The fact that virtually all asset classes are fully valued, they will probably get the opportunity to also exploit the bond and equities market over the next 12-24 months.  But they don't need to do that to hit their targets...it would just be icing on the cake, just like the return of market price to book value.  Cheers!

 

Dazel/Parsad

Apologies if i am bit slow on the insurance related acronyms. There seems to be a inconsistency in the statements above.

 

If the redundancy is high, that means the insurance businesses are well capitalized; if they are well capitalized what is this theme about "we need to invest first in our insurance business". Maybe i am not catching the overall concept, but it seems to me that the statement (1) there is enough redundancy and reserves being in excellent shape doesn't square with (2) FFH investing and adding capital into to those very same businesses.

 

Am i missing something very obvious

 

 

 

 

[Dazel]

 

It has to do with reserves on insurance policies already written as opposed to what those

Actual losses are. “Favourable reserve development” means you over reserved for future insurance losses and the difference becomes profit. The opposite becomes losses. You will see that Fairfax premiums growth was 13% higher than last year and it takes capital to back this growth and “favourable reserve development” reduce continued which means prior insurance policies written were OVERLY cautious as opposed to what actually losses were...that is pure profit and a great sign. As for capital needs, because of the very strong rebound in Fairfax insurance portfolio’s they will have the capital they need for growth in premiums and the $  that comes into the holding company will be used for share buybacks.

 

 

"In the third quarter of 2020, all of our insurance companies achieved a combined ratio below 100%, except for Brit. Our consolidated combined ratio of 98.5% in the third quarter of 2020 included catastrophe losses of $218.6 million or 6.1 combined ratio points and COVID-19 losses of $143.2 million or 4.0 combined ratio points. Core underwriting performance continues to be very strong with a combined ratio excluding COVID-19 losses of 94.5%, continued favourable reserve development and growth in gross premiums written of 13.9%, and operating income was $254.7 million despite the catastrophe and COVID-19 losses. We continue to focus on being soundly financed and ended the quarter with approximately $1.2 billion in cash and investments in the holding company," said Prem Watsa, Chairman and Chief Executive Officer.

[Xerxes]

Thanks so same idea as the banks then.

 

The reserved capital being released (assuming that will happen), will allow equity being unlocked in the subs to do its works in lieue of injecting fresh capital, allowing the latter to be used elsewhere at the headquarters.

 

[Cigarbutt]

Thanks so same idea as the banks then.

The reserved capital being released (assuming that will happen), will allow equity being unlocked in the subs to do its works in lieue of injecting fresh capital, allowing the latter to be used elsewhere at the headquarters.

You are using the assumption that reserve releases will continue at the sub level. Why is that?

There is also a reserving cycle which historically correlates quite well with the underwriting (soft and hard) cycle. What is interesting is that the reserve cycle typically crystalizes over time (especially long tail lines) and the correlation can usually be made only in retrospect. It would probably be reasonable to base the capacity to grow at the sub level based on investment profits at the sub level and financial flexibility at holdco.

If interested, look at the hard cycle that happened around 2003-2006 (and the preceding soft part):

 

Note that it took many years for the large amplitudes to develop.

[Viking]

Cigarbutt, you make a very good point.

 

The drop in bond yields is the ‘in plain sight’ big issue for insurers, given it is relentlessly driving investment earnings lower.

 

The ‘out of sight’ potentially big issue for insurers is being under-reserved.

 

Perhaps both explain the current hard market and also why the hard market may last for some time (a couple years).

 

Fairfax in recent years has had a pretty good record with reserve releases. Lets hope it continues in the coming quarters/years. This is something i look at when they report. I think Q4 is when they do a complete review (so if there are issues this is when they will likely surface).

 

One area i will watching in Q4 is runoff. Now that the good part of runoff has been sold (Riverstone) it will no longer be possible to hide the increase to reserves from the ugly part (asbestos). I think last year in Q4 they took a $200 million hit. I would not be surprised to see another big hit this year. Obviously, this is just a guess on my part.

[Dazel]

 

 

You are missing 9 years of data? What happened in the last 9 years?

[Cigarbutt]

You are missing 9 years of data? What happened in the last 9 years?

i don't know. That's what i'm trying to figure out. :)

Outside of personal proprietary stuff, here's a graph that is quite representative. Note that by including or excluding some insurers (or some specific lines), one can get a slightly different pattern. Also note that, using the US (re)insurance industry as a proxy, total loss & LAE reserves have increased by about 15% over the period. This has been a mostly unusual soft cycle and the reserve release pattern of the last few years has been a very unusual and long-lasting contributor to insurers' bottom line.

 

 

As far as FFH is concerned and for this specific aspect (reserves and hardening cycle), one should hope for a massive negative development pattern because (IMO) FFH likely would show a relatively better pattern and this negative development would help to sustain the hard market and would allow significant market share (and float) growth during a period where policies are written very profitably.

[petec]

As far as FFH is concerned and for this specific aspect (reserves and hardening cycle), one should hope for a massive negative development pattern because (IMO) FFH likely would show a relatively better pattern and this negative development would help to sustain the hard market and would allow significant market share (and float) growth during a period where policies are written very profitably.

 

That's exactly my feeling, although I can't provide data back up my sense that Fairfax would do better than average.

[drzola]

Farmers Edge loses money so, this is good to dump off to public asap it appears.

 

This week Canadian newspaper The Globe and Mail reported that *Farmers Edge is filing it’s prospectus to go public with under writing from National Bank.

 

In other words, it might not be long until we get access to see the financials of a large agtech company looking to go public.

 

Farmers Edge is 50.4% owned by FairFax Financial, a publicly traded organization, so there is a small peak into some of their numbers via the FairFax Financial quarterly reports and annual reports.

 

Even with assumed numbers and metrics across agtech that might not scream “IPO!”, there is one thing people do want right now: Exposure to tech stocks. Couple this with the growing interest in food and sustainability and with the buzz from TELUS’ agriculture play

[Viking]

Here is what Fairfax had to say in the last 2 annual reports on Farmers Edge.

 

2018 AR: Farmers Edge. Farmers Edge was founded in 2005 by Wade Barnes in Winnipeg, Manitoba as a project-based consulting company providing value added agronomy services for large scale farmers. The business has since evolved into one of the leading SaaS (software as a service) farm management platforms with 24 million acres under management as of December 2018, with an anticipated increase to 40 million acres by the end of 2019. Key services offered under the Farmers Edge platform include: 1) One of the highest density of weather stations in North America. Farmers can have alerts sent to their phones, even at 4am, if there is to be frost on one of their farms. Important, as there is only one harvest! 2) Daily satellite imagery to track crop health via tablet, phone or PC. 3) Brand-agnostic telematics enabling passive data collection. 4) Soil sampling and variable rate fertilizer application, which allows farms to increase yields with less overall fertilizer application. Four-year customer contracts provide Farmers Edge with predictable recurring revenue and cash flows. Fairfax made a $95 million equity investment in March 2017 and has since provided additional funding of $64 million in the form of debentures plus warrants, based on an implied valuation of 4x projected December 2019 base business EBITDA.

 

2019 AR: Propelled by its founder, Wade Barnes, Farmers Edge has continued to grow acres under contract and, along with it, predictable recurring revenue and cash flows. Bill McFarland has become the Chair of Farmers Edge and will continue to support Wade as he builds out this valuable precision agriculture platform.

[petec]

I know projected is the key word, but 4x is quite amusing in today's context. You could apply that to revenues and it would look "cheap".

[petec]

A side note, but an interesting one:

 

Eurobank span out 75% of its Cairo mezzanine and junior NPE tranche in September. These are listed on the Athens exchange as Cairomez and Fairfax has about 30%. As of today this stake is currently worth approximately nothing.

 

However, I believe the underlying portfolio has:

- c. E12bn of credits.

- c. E7.5bn of credits after provisions.

- c. E4bn of real estate collateral, and this may be rising with Greek real estate prices which have turned the corner.

- c. E2.4bn of senior debt.

 

It's not impossible that Cairomez is worth the value of the real estate less the value of the senior tranche (the mezz get paid after the senior tranche has been repaid in full with interest, and after all admin and servicing fees). God knows what that's worth now: I have no idea how long it will take to work out, what the fees are, or what discount rate to use. But these notes are a potentially valuable option on the Greek economy reflating. It has basically been in a depression for a decade and has done a lot of hard policy homework in that time. There is evidence that it has turned (loan books growing despite covid, real estate prices rising). 

 

doValue, the servicer, owns 20% of the mezz/junior. Eurobank retained 5%.

[bluedevil]

Blackberry is screaming higher in pre-market trading - over $20 a share.  About a 600 million paper gain for FFH. Now I REALLY hope they sell their common shares before the WSB crowd moves on.

[bearprowler6]

Blackberry is screaming higher in pre-market trading - over $20 a share.  About a 600 million paper gain for FFH. Now I REALLY hope they sell their common shares before the WSB crowd moves on.

 

No room for weak hands on this one. Gains are just getting started. The key....do not try to support the move up with fundamentals. Just ride the momentum higher. Long suffering Fairfax shareholders are finally being rewarded for their faith in Prem. Stay strong and most importantly stay long.