Fairfax stock positions

[nwoodman]

2 hours ago, petec said:

 

It's a while since I looked closely at Atlas, but I used to own it and followed it closely, and the sense I had was that they always optimised for IRR and meeting customer needs rather than type of ownership. So it may well be that they just got a good IRR from this deal. 

 

I was always slightly sceptical about this because IRR is only relevant if you can immediately redeploy the capital.

Quite possibly, these guys have more under utilised IQ points than I have in aggregate. Some thoughts nonetheless:

 

1. 2x's interest coverage may be the lower bound for covenants. 3x's give them a shot at IG. I think they don't have a choice at the moment given higher for longer

2. This play is a small but important part the overall Fairfax portfolio. If rates rise then Atlas sucks but Fairfax rolls at higher yield. Rates fall then Atlas becomes very profitable.
3. Good chance that there will be an embedded buyout clause in the novations.

4. These guys are clever, hopefully Brian Bradstreet is in someway involved on the debt side and advising as part of the broader portfolio
5. The only head scratcher is why are paying divs at this stage in their growth

A rough cut on sensitivity:

 

CURRENT POSITION (Q3 2024):

• Interest Expense: $174.6M quarterly ($698.4M annualized)
• Operating Earnings: $334.6M quarterly ($1,338.4M annualized)
• Current Interest Coverage: 2.3x
• Total Borrowings: $10.39B
• Average Interest Rate: 6.66%

RATE SENSITIVITY:

Interest Rate Changes (Annual Impact): +100bps:

• Additional Interest: +$103.9M
• New Interest Coverage: 1.96x
• Coverage Decline: -14.8%

+50bps:

• Additional Interest: +$52M
• New Interest Coverage: 2.12x
• Coverage Decline: -7.8%

-50bps:

• Interest Savings: -$52M
• New Interest Coverage: 2.48x
• Coverage Improvement: +7.8%

-100bps:

• Interest Savings: -$103.9M
• New Interest Coverage: 2.69x
• Coverage Improvement: +17%

FAIRFAX PERSPECTIVE: At higher rates:

• Atlas interest burden increases
• Fairfax investment portfolio yields improve
• Net positive for Fairfax despite Atlas stress

At lower rates:

• Atlas profitability improves significantly
• Each 100bps = ~$104M annual impact
• Could accelerate path to investment grade

Edit: In terms of divs, Fairfax may also see this as the return of capital phase as opposed to return on capital.  Just spit balling.

Edited December 2, 2024 by nwoodman

[petec]

On 12/2/2024 at 10:43 AM, nwoodman said:

Quite possibly, these guys have more under utilised IQ points than I have in aggregate. Some thoughts nonetheless:

 

1. 2x's interest coverage may be the lower bound for covenants. 3x's give them a shot at IG. I think they don't have a choice at the moment given higher for longer

2. This play is a small but important part the overall Fairfax portfolio. If rates rise then Atlas sucks but Fairfax rolls at higher yield. Rates fall then Atlas becomes very profitable.
3. Good chance that there will be an embedded buyout clause in the novations.

4. These guys are clever, hopefully Brian Bradstreet is in someway involved on the debt side and advising as part of the broader portfolio
5. The only head scratcher is why are paying divs at this stage in their growth

A rough cut on sensitivity:

 

CURRENT POSITION (Q3 2024):

• Interest Expense: $174.6M quarterly ($698.4M annualized)
• Operating Earnings: $334.6M quarterly ($1,338.4M annualized)
• Current Interest Coverage: 2.3x
• Total Borrowings: $10.39B
• Average Interest Rate: 6.66%

RATE SENSITIVITY:

Interest Rate Changes (Annual Impact): +100bps:

• Additional Interest: +$103.9M
• New Interest Coverage: 1.96x
• Coverage Decline: -14.8%

+50bps:

• Additional Interest: +$52M
• New Interest Coverage: 2.12x
• Coverage Decline: -7.8%

-50bps:

• Interest Savings: -$52M
• New Interest Coverage: 2.48x
• Coverage Improvement: +7.8%

-100bps:

• Interest Savings: -$103.9M
• New Interest Coverage: 2.69x
• Coverage Improvement: +17%

FAIRFAX PERSPECTIVE: At higher rates:

• Atlas interest burden increases
• Fairfax investment portfolio yields improve
• Net positive for Fairfax despite Atlas stress

At lower rates:

• Atlas profitability improves significantly
• Each 100bps = ~$104M annual impact
• Could accelerate path to investment grade

Edit: In terms of divs, Fairfax may also see this as the return of capital phase as opposed to return on capital.  Just spit balling.

 

I think the fact they're paying dividends tells you they're not capital constrained - the people involved are too rational and long term to make any other decision, but I could be wrong. 

 

I agree they're super smart, but I do think they got caught with their pants down somewhat when rates rose and I wonder why they didn't fix more of their liabilities, especially given that their contracts are not inflation-linked which I have always thought was a huge weakness of their model/the industry.

 

I see it as a kind of levered option, but I like your point that FFH overall benefits more if rates rise than fall - I hadn't really considered this aspect of their Atlas investment.

 

 

[Hoodlum]

It looks like the global bond market has recognized the stability at Eurobank. 
 

https://www.naftemporiki.gr/english/1848770/eurobank-strong-interest-in-600-million-euro-senior-preferred-notes/
 

The transaction received tremendous level of interest from the onset which resulted in a final demand of 3.4 billion euros, i.e. an oversubscription close to 6 times, thus enabling Eurobank to raise 600 million euro at a reduced credit spread of 125bps compared to the initial 155bps indication level.
 

Upon new issue allocation, foreign investors’ participation accounted for approximately 93% of the subscribed amount of the book, with key participation from the United Kingdom and Ireland (40%), France (14%), Germany (13%) and Italy (9%). In terms of investor type, 68% were Fund Managers, 19% were Banks and Private Banks, 6% were Hedge Funds and 5% were Insurance and Pension Funds.

[Hoodlum]

Hellenic bank received a ratings upgrade on Friday.  The update also provided some comments surrounding their decision and the impact from the Eurobank acquisition. 
 

https://www.financialmirror.com/2024/12/15/hellenic-bank-upgraded-on-strong-capitalisation-eurobank-synergies/

 

the acquisition by Eurobank is seen as strategically positive for HB given the expected synergies, particularly between the two Cyprus-based banks.

 

Eurobank Cyprus’ corporate banking operations are complimentary to HB’s predominately retail banking franchise.

 

“We therefore anticipate the planned merger to produce a more diversified balance sheet and earnings profile, and help address strategic challenges previously faced on a standalone basis,” CI Ratings said.

 

“We expect overall asset quality to remain stable post-merger given Eurobank Cyprus’ sound risk profile,” the rating agency added.

Capitalisation metrics are strong, as improved profitability and low dividend payouts have meant strong internal capital generation.

 

Meanwhile, higher capitalisation in combination with the decline in the volume of NPLs has improved the bank’s extended NPL coverage; this offsets the modest LLR coverage ratio. Capitalisation is anticipated to remain strong after the planned merger in view of Eurobank Cyprus good capital ratios.

 

“Looking ahead, we anticipate the quality of the funding base of the combined entity to remain good, despite Eurobank Cyprus having a much smaller proportion of retail deposits.”

[wondering]

A little nothing-burger of a Fairfax investment ZoomerMedia is going private.  The market cap is 20M, FFH owns approx 15%.  The selling price is 167% over the pre-announcement price.  I have no idea if Fairfax made any money on this thing.  I think if they broke even, they can call it a success.

 

I feel embarrassed because after quickly reading the press release and some of the disclosures, I still can't figure out if Fairfax is part of the purchasing group or are they selling their shares too.

 

under Continuing Shareholders paragraph "The Equity Commitment Provider is an affiliate of Fairfax.."  What is an Equity Commitment Provider?  Are they provide the loans for the buyout?

 

ZoomerMedia-NC-final.pdf

[SafetyinNumbers]

2 hours ago, wondering said:

A little nothing-burger of a Fairfax investment ZoomerMedia is going private.  The market cap is 20M, FFH owns approx 15%.  The selling price is 167% over the pre-announcement price.  I have no idea if Fairfax made any money on this thing.  I think if they broke even, they can call it a success.

 

I feel embarrassed because after quickly reading the press release and some of the disclosures, I still can't figure out if Fairfax is part of the purchasing group or are they selling their shares too.

 

under Continuing Shareholders paragraph "The Equity Commitment Provider is an affiliate of Fairfax.."  What is an Equity Commitment Provider?  Are they provide the loans for the buyout?

 

ZoomerMedia-NC-final.pdf 3.1 MB · 8 downloads

Looks like Northbridge is putting up most of the cash for the buyout. I bought some at 7.5 cents when the deal was announced. Seemed like a low risk arb. 

[Viking]

I am almost done putting together my ‘Top 10’ list of the most important things/events that drove shareholder value at Fairfax in 2024. My post should be out in the next couple of days. 

 

Eurobank deserves a special shout out. What it has accomplished/delivered over the past 4 years is amazing - it has delivered a total return of $2.1 billion to Fairfax shareholders (increase in market value + dividend paid). In 2024, it delivered a total return of $784 millon, or 35%. 

 

So it must be over valued today. Right? Wrong. It is still very (dirt?) cheap. (Tangible book value at Sept 30, 2024 was €2.27/share.)

 

Importantly, it will be taking Hellenic Bank private in 2025 and this sets the table nicely for the next stage in the growth of the company (top and bottom lines). The management team at Eurobank has been making all the right moved for years now - and this should tell investors something. 

 

Bottom line, Eurobank is turning into one of Fairfax's best-ever investments. And it looks like it is just getting started. 

 

PS: one week into 2025, Eurobank's stock is up another $150 million.  

 

Edited January 8 by Viking

[gfp]

Look at Eurobank breaking out!  I hadn't noticed until your post

 

[Viking]

15 minutes ago, gfp said:

Look at Eurobank breaking out!  I hadn't noticed until your post

 

 

+1. Both Eurobank and especially Hellenic Bank are overcapitalized. My guess is the management team at Eurobank is licking their chops - and already has a plan in place to 'solve' that problem.

• Another large dividend?
• Begin sizeable share buybacks?
• More acquisitions? (After they close on and digest Hellenic Bank)

Edited January 8 by Viking

[Viking]

Fairfax's second largest equity holding is FFH-TRS. This holding is up $914 million in 2024. Over the past 4 years it is up $2 billion. 

 

Now let's put Eurobank and FFH-TRS together. Together they are up $1.7 billion in 2024 ($784+$914). And $4.1 billion over the past 4 years. WOW!

 

Fairfax's average total equity portfolio was probably about $20 billion in 2024. Eurobank and FFH-TRS represent about 26.5% of the total. In 2024, these two investments delivered a total return of 8.5%.

 

Guess what Fairfax's equity portfolio delivered in 2024? A number much higher than 8.5%. Two investments delivered that. Fairfax has another 73.5% in equity investments that are - as a group - performing well (some very well).

 

At the start of 2024, investors were WAY TOO PESSIMISTIC in their estimates of what Fairfax's equity portfolio would deliver in 2024 and future years. My guess is that remains the case today.   

 

Edited January 8 by Viking

[Dinar]

This is going to sound horrible, but I think the California fire situation is about to drive premiums, including reinsurance up quite a bit.  The property loss must be immense, and even if insurance losses are not that big, it might still enforce underwriting discipline.  

[gfp]

Sounds like the state of California FAIR Plan insurance outfit is going to get a large chunk of it.  I wonder who sells reinsurance to that entity?

[mananainvesting]

JP Morgan estimated $10B in Insured Losses due to California Wild Fires. 

 

https://www.investors.com/news/top-california-property-insurer-earns-double-upgrade-from-goldman/

 

[Hoodlum]

51 minutes ago, mananainvesting said:

JP Morgan estimated $10B in Insured Losses due to California Wild Fires. 

 

https://www.investors.com/news/top-california-property-insurer-earns-double-upgrade-from-goldman/

 

 

But with of most of that not covered by reinsurance.

 

Based on a preliminary assessment of the affected area and historical events, insured losses from this fire could approach $10 billion, with primary carriers being more exposed than reinsurers, the note said. Arch Capital (ACGL) and RenaissanceRe (RNR) are the most exposed reinsurers, but their losses should be less than for similar events prior to 2023, the JPMorgan note said.

[Hoodlum]

Just to close of on the Peak (Bauer acquisition).  It looks like both CCM and Bauer were valued at 8x earning.

 

https://www.theglobeandmail.com/business/article-northleaf-buys-ccm-stake-hockey-equipment/

 

Quote

Altor’s growth strategy at Rossignol included building the company’s sports clothing business. Mr. Nabib said under its new owners, CCM plans to expand its apparel sales.

 

The private equity funds declined to disclose the terms of the transaction. Two sources with knowledge of the sale said Altor and Northleaf paid a total of $600-million in enterprise value – equity plus debt – which is eight times the company’s earnings before interest, taxes, depreciation and amortization (EBITDA) last year.

 

Private equity firms control the hockey equipment industry. CCM has approximately 35 per cent of the market and its major rival is Bauer Hockey LLC, with a roughly 60-per-cent share.

 

In October, Fairfax Financial Holdings Ltd. announced a deal to take control of Bauer by acquiring Sagard Holdings Inc.’s stake. The two sources said Fairfax also paid eight times EBITDA for Bauer, and Altor looked at buying the company before purchasing CCM.

 

 

 

 

Edited January 9 by Hoodlum

[Maverick47]

 

On 1/8/2025 at 1:38 PM, gfp said:

Sounds like the state of California FAIR Plan insurance outfit is going to get a large chunk of it.  I wonder who sells reinsurance to that entity?

All of the primary property insurers in the state share in the losses of the FAIR plan in proportion to their own voluntary market shares.  They will receive assessments from the FAIR plan to pay for losses that exceed the Plan’s ability to pay…because of this, I don’t believe the FAIR plan purchases reinsurance coverage itself, but I could be wrong about that.

 

I also don’t know how companies’ assessments are handled.  In some states, companies are allowed to recoup FAIR plan assessments in future years from their own future customers by adding recoupment surcharges to their customers’ bills until they have recouped the full amount of the assessment they paid previously.  Since a recoupment mechanism may exist, typical cat reinsurance contracts wouldn’t cover assessments.

 

Another possibility if a state doesn’t allow this sort of assessment recoupment mechanism is for their catastrophe reinsurance contract to specifically allow for these FAIR Plan assessments to be included with their own direct losses reported to their reinsurers.  In that case, it would be difficult to know which reinsurers have the most exposure since it would depend upon the reinsurance contract language for each primary company, loss attachment points, and the percentage share of each reinsurer in the company’s cat reinsurance treaty….

 

 

[gfp]

3 hours ago, Maverick47 said:

 

All of the primary property insurers in the state share in the losses of the FAIR plan in proportion to their own voluntary market shares.  They will receive assessments from the FAIR plan to pay for losses that exceed the Plan’s ability to pay…because of this, I don’t believe the FAIR plan purchases reinsurance coverage itself, but I could be wrong about that.

 

I also don’t know how companies’ assessments are handled.  In some states, companies are allowed to recoup FAIR plan assessments in future years from their own future customers by adding recoupment surcharges to their customers’ bills until they have recouped the full amount of the assessment they paid previously.  Since a recoupment mechanism may exist, typical cat reinsurance contracts wouldn’t cover assessments.

 

Another possibility if a state doesn’t allow this sort of assessment recoupment mechanism is for their catastrophe reinsurance contract to specifically allow for these FAIR Plan assessments to be included with their own direct losses reported to their reinsurers.  In that case, it would be difficult to know which reinsurers have the most exposure since it would depend upon the reinsurance contract language for each primary company, loss attachment points, and the percentage share of each reinsurer in the company’s cat reinsurance treaty….

 

 

 

thanks Maverick47!  Also explains all these line items on my Louisiana insurance policies that are tacked on "2005 Louisiana FAIR plan emergency assessment" ... That was 20 years ago and I'm still paying several hundred

[Maverick47]

4 hours ago, gfp said:

thanks Maverick47!  Also explains all these line items on my Louisiana insurance policies that are tacked on "2005 Louisiana FAIR plan emergency assessment" ... That was 20 years ago and I'm still paying several hundred

From what I can tell, the 2005 hurricane losses to the Louisiana FAIR plan were higher than the maximum 10% of 2005 statewide voluntary property premiums in the state that the FAIR plan was allowed to assess…so they issued revenue bonds to pay the 2005 FAIR plan losses instead, and the assessments since then have been used to retire the bonds.  If I’m not mistaken, the Louisiana assessments started in 2007 and are expected to end in 2025.  So if there are no assessable FAIR plan losses in 2025 and forward, you may be able to see those surcharges finally drop off your insurance bills in the not too distant future…

[Hoodlum]

On 1/8/2025 at 3:42 PM, gfp said:

Look at Eurobank breaking out!  I hadn't noticed until your post

 

 

it is Interesting that Go Digit has gone in the opposite direction the past few weeks and is now back to the IPO price.  I wonder what that is about.

[TwoCitiesCapital]

7 hours ago, Hoodlum said:

 

it is Interesting that Go Digit has gone in the opposite direction the past few weeks and is now back to the IPO price.  I wonder what that is about.

I know I saw India's GDP growth is expected to slow some in 2025 - perhaps thats weighing on the market as a whole? The NIFTY index is down 10-12% since September?

 

Also, while dangerous to apply generalizations to individual circumstances, my understanding is that MOST IPOs return to their IPO price, if not lower, within 3-years of the IPO once the hype and limited volume/access has faded. This is precisely why I have a rule to not buy IPOs in the first 2-years in place for my portfolios. 

Edited January 10 by TwoCitiesCapital