Fairfax stock positions

[SafetyinNumbers]

30 minutes ago, glider3834 said:

 

https://www.insider.gr/epiheiriseis/294623/jp-morgan-katalytis-gia-ti-eurobank-i-exagora-tis-ellinikis-trapezas-blepei

 

JP Morgan expects significant upside for Eurobank's shares , recognizing that the acquisition of an additional 7.2% (29,710,012 shares) in Hellenic Bank , thus reaching 55.3% and pending the approval of the regulatory authorities that will now make it a subsidiary of the group, will act as a positive "catalyst" for the systemic bank.

In this light, the American house significantly increases the target price for the Eurobank share to 2.60 euros from 2.25 euros previously , with an "overweight" recommendation

Thanks for sharing! Probably why the stock was up almost 5% last week while the Greek market was flat.

[glider3834]

2 hours ago, SafetyinNumbers said:

Thanks for sharing! Probably why the stock was up almost 5% last week while the Greek market was flat.

[glider3834]

Just looking at Articles of Association public filing from Ki Financial https://find-and-update.company-information.service.gov.uk/company/08821629/filing-history?page=1

 

With Ki, Brit has approx 20% economic ownership & 51% voting power.

 

But interesting is that it looks like Blackstone's C shares (approx 50% of outstanding shares) carry a fixed 8% priority dividend entitlement, but are also redeemable by Ki (see below).

Assuming Ki was able to redeem and cancel these C shares from Blackstone , it would increase Brit's ownership from 20% to 40% approx.

 

Terms of Investment Agreement 19 September 2020 between Blackstone, Brit etc don't appear to be available, so we don't have all the information here.

 

Recently Ki has been getting more traction in the follow market, so its worth considering what Ki could be worth and what Fairfax's ownership stake could be.

 

https://www.reinsurancene.ws/ki-teams-with-travelers-aspen-to-expand-digital-follow-capacity/

 

https://www.insuranceinsider.com/article/2cc4cx6ph8z1opv140x6o/london-market-section/opinion-ki-who-owns-the-follow-market

 

 

 

 

 

 

 

 

 

Edited October 23, 2023 by glider3834

[SafetyinNumbers]

1 hour ago, glider3834 said:

Just looking at Articles of Association public filing from Ki Financial https://find-and-update.company-information.service.gov.uk/company/08821629/filing-history?page=1

 

With Ki, Brit has approx 20% economic ownership & 51% voting power.

 

But interesting is that it looks like Blackstone's C shares (approx 50% of outstanding shares) carry a fixed 8% priority dividend entitlement, but are also redeemable by Ki (see below).

Assuming Ki was able to redeem and cancel these C shares from Blackstone , it would increase Brit's ownership from 20% to 40% approx.

 

Terms of Investment Agreement 19 September 2020 between Blackstone, Brit etc don't appear to be available, so we don't have all the information here.

 

Recently Ki has been getting more traction in the follow market, so its worth considering what Ki could be worth and what Fairfax's ownership stake could be.

 

https://www.reinsurancene.ws/ki-teams-with-travelers-aspen-to-expand-digital-follow-capacity/

 

https://www.insuranceinsider.com/article/2cc4cx6ph8z1opv140x6o/london-market-section/opinion-ki-who-owns-the-follow-market

 

 

 

 

 

 

 

 

 

This is very interesting. Does Fairfax own the same class of shares as Blackstone directly or a different class with different terms?

[glider3834]

17 minutes ago, SafetyinNumbers said:

This is very interesting. Does Fairfax own the same class of shares as Blackstone directly or a different class with different terms?

sure breakdown is Brit has 100M Ord A shares (1 vote each), Blackstone have 150M Ord B shares (0.64 vote each) and 250M Ord C Priority Div shares (non voting); and key execs have 80K Ord G shares (non voting) 

[StubbleJumper]

9 hours ago, glider3834 said:

But interesting is that it looks like Blackstone's C shares (approx 50% of outstanding shares) carry a fixed 8% priority dividend entitlement, but are also redeemable by Ki (see below).

 

 

That is very interesting.  That's some great optionality for FFH.  At this stage, 8% isn't even an outrageous financing cost, so they can sit back for a few more years and see how the business goes at Ki and how the yield curve evolves, and then if both of those turn favourable, a redemption could make sense (or not!).

 

 

SJ

[glider3834]

8 hours ago, StubbleJumper said:

 

That is very interesting.  That's some great optionality for FFH.  At this stage, 8% isn't even an outrageous financing cost, so they can sit back for a few more years and see how the business goes at Ki and how the yield curve evolves, and then if both of those turn favourable, a redemption could make sense (or not!).

 

 

SJ

SJ yeh agreed - I dug into this a bit because I hadn't been able to understand the shareholding structure for Ki  

[MMM20]

On 10/6/2023 at 12:41 PM, MMM20 said:

Recent VIC writeup on Eurobank by Quincy Lee of Ancient Art/Teton Advisors (one of my favorites to track)

 

https://www.valueinvestorsclub.com/idea/Eurobank/7301771925

 

"In the two years since my last Eurobank writeup, the stock has doubled while the Nasdaq is down 8%.  The same thing will probably happen again the next two years to be quite honest.  Probably none of you bought it, and probably won’t this time either.  Anyway, I still like it today and haven’t sold a single share."

 

Prem is right there with you Quincy...

 

And same thing applies to FFH...

 

 

Via https://www.hamiltonlane.com/insight/weekly-research-briefing/current-animal-spirits

 

Pretty incredible that the UST 10yr > Greece 10yr

 

 

[TwoCitiesCapital]

32 minutes ago, MMM20 said:

 

Via https://www.hamiltonlane.com/insight/weekly-research-briefing/current-animal-spirits

 

Pretty incredible that the UST 10yr > Greece 10yr

 

 

 

I think what's more incredible is how long that has been able to persist in the past. 

 

It's happened before and wasn't just a simple aberration on a day or two. As your chart shows, that was the case for most of 2021 even before the Fed embarked on rate hikes. 

[MMM20]

2 hours ago, TwoCitiesCapital said:

 

I think what's more incredible is how long that has been able to persist in the past. 

 

It's happened before and wasn't just a simple aberration on a day or two. As your chart shows, that was the case for most of 2021 even before the Fed embarked on rate hikes. 

Fair enough. Just amazed that investors are still willing to lend the Greek govt money at ~4% ish with e.g. US mortgages at ~8%. But I guess I shouldn’t throw rocks from my American glass house.
 

Gonna be interesting to watch Eurobank’s contribution to FFH over the next few years.

 

Edited October 24, 2023 by MMM20

[gfp]

Outside of a crisis, all of these European sovereign bonds trade at a spread to Germany and Europe has a weaker economy / is already in a recession.  Is an Italian bond much better than a Greek bond?  One of the problems with Germany having it's fiscal house relatively in order is that they don't produce enough bonds to satisfy the market's need for high quality European government bond collateral.  This is a primary reason European rates were negative or near negative in so many places for so long.  The buyer of that security isn't making the same decision you are picturing (would I lend to this credit for this length of time for this price?)  - The buyer of that security might be making their return elsewhere in a chain of events/swaps/derivatives/whatever you want to call it and needs to post quality European sovereign bond collateral in the process.

[glider3834]

looks to be Grivalia's largest luxury hotel investment

 

With an investment approaching 300 million euros, Grivalia Hospitality inaugurated yesterday, with the participation of the Prime Minister , Kyriakos Mitsotakis , the head of Fairfax, Prem Watsa, and prominent names from the business and artistic worlds, the first luxury tourist complex One&Only in Greece and one of the three planned by the Kerzner International group in our country.

 

https://www.powergame.gr/akinita/533059/to-proto-oneonly-anoigei-tis-pyles-tou-stis-11-noemvriou/#google_vignette

Edited October 25, 2023 by glider3834

[TwoCitiesCapital]

4 hours ago, MMM20 said:

Fair enough. Just amazed that investors are still willing to lend the Greek govt money at ~4% ish with e.g. US mortgages at ~8%. But I guess I shouldn’t throw rocks from my American glass house.
 

Gonna be interesting to watch Eurobank’s contribution to FFH over the next few years.

 

 

Agreed. I'd rather own an 6-7% mortgage, but I'm guessing hedging costs back to EUR kill a lot of the excess return

[Viking]

Below is an update to a previous post I did on the TRS-FFH position. In the last couple of days, the position passed the $1 billion mark in gains. I still have a hard time wrapping my head around this investment. It is a mind bender. And a fantastic investment. Could its best days still be ahead?

----------

Fairfax Total Return Swaps – 1.96 million shares

 

The table is set for total return swap (TRS-FFH) to become one of Fairfax’s best investments ever. As of today, the investment has a total value of $1.8 billion and it now shows a gain of $1.07 billion since inception (over the last 34 months). Already in Q4 the position is up another $196 million or $8/Fairfax share. Wow!

 

What about moving forward? I think it could deliver another $500 million in gains ($21/share) from today to the end of 2024. What are my assumptions? Fairfax earnings of about $160/share in 2024. And the company trades at a 1.1 x multiple to book value - which I estimate at $1,065/share at Dec 31, 2024.  These look like pretty reasonable assumptions to me. 

 

“We think this will be a great investment for Fairfax, perhaps our best yet!” This is what Prem said in his letter in the 2020 annual report when first describing this investment. Clearly, Fairfax was thinking big when they made this investment.

 

The genius of this single investment is still lost on most investors/analysts. Probably because the TRS is a non-traditional type of investment. So, it is largely ignored by investors/analysts in their analysis of the company and its potential impact on future earnings.

 

 

Well let’s do a deep dive on this investment to better understand just what I am talking about.

 

What is the TRS-FFH investment?

 

In late 2020 and early 2021, Fairfax purchased total return swaps giving it exposure to 1.96 million Fairfax shares with an average notional amount (cost) of US$373/share.

 

At the time, Fairfax had about 26.2 million effective shares outstanding, so this investment represented 7.5% of the company’s shares. Effective shares outstanding at the end of Q3, 2023 dropped to 23.1 million so this investment now represents 8.5% of the company’s shares.

 

Fairfax’s equity portfolio is about $16.5 billion in size. The TRS-FFH position currently has a market value of $1.8 billion = 11% of the total equity portfolio. This is Fairfax’s third largest equity position, slightly smaller than Poseidon and Eurobank. It is a very large investment for Fairfax.

 

Why did Fairfax make this investment?

 

Fairfax's stock was trading at a crazy cheap valuation in late 2020. It was, by far, the best investment opportunity available to Fairfax at the time. To state the obvious, it was an investment they understood very well. So, it was a very low risk and very high return opportunity.

 

Comments from Prem about the total return swap purchase from the 2020AR. 

 

 

“Throughout much of last year (2020) following the pandemic-induced market plunge, I made public statements to the effect that our belief was that Fairfax shares were trading in the market at a ridiculously cheap price. In the summer I backed that up by personally purchasing close to $150 million of shares. Additionally, following our value investing philosophy, since the latter part of 2020 Fairfax has purchased total return swaps with respect to 1.4 million subordinate voting shares of Fairfax with a total market value at the time of those agreements of $484.9 million ($344.45 per share). We think this will be a great investment for Fairfax, perhaps our best yet!” P.Watsa FFH 2020AR

 

 

Prem’s answer to question from Mark Dwelle (RBC) on the Q4 conference call in Feb 2021.

 

 

Mark Dwelle: “My second question relates to executing the total return swap with respect to Fairfax shares. I guess, I was just curious why you pursue that structure, rather than just buying back the stock, if you felt like that was the good opportunity? I mean, is this a capital constraint that you couldn't really buy back that much?”

 

Prem Watsa: “We have to be careful, right? So not so much -- yes, we have to be very careful in terms of how much we can buy back. When we looked at Fairfax as a stock price and looked at everything else that we could buy, which is not over return swap on Fairfax. Right now, we paid US$344 per shares, our book value is $478. I mean, if you want the math, just on our book value basis, we'd have about $200 million gain. And Fairfax stock price for book value is worth another 200 million. We just think it's a terrific investment and our total return swap structure was a very good way for us to do it. And so we did it.”

 

 

Why buy the TRS-FFH versus simply buying back stock?

 

Fairfax did not have the cash at the time to buy back a significant amount of Fairfax stock directly.

 

Again, from the Q4 2021 conference call.

 

 

Mark Dwelle: “I don't disagree with you that it was a good a good strike price, I guess it was really -- the form of the transaction rather than just actually buying the shares, using a derivative instead is just -- it's a little bit unusual. I haven't usually seen that with most of the companies that I've followed. So that was really my main question.”

 

Prem Watsa: “Yes, so, Mark, our point is just that we wanted to keep up -- we could -- where you have more than $1 billion in cash and the only company once -- or almost have down $375 million, we just wanted to be financially sound, and in all ways, as opposed to use that cash at this point in time.”

 

 

This investment demonstrates Fairfax’s management team at their best:

 

• Rational: best available opportunity
• Opportunistic: buy when the stock was crazy cheap
• Creative: didn’t have the cash to do a buyback. Hello TRS.
• Conviction: wanted to buy a significant stake. Hello TRS (leverage).

 

Simply a brilliant investment - especially given the circumstances.

 

What is the outlook and for this investment?

 

The outlook for this investment is very good. Despite the run up over the past 34 months, Fairfax’s stock price still looks cheap. This means the value of the TRS-FFH could be understated today. Having a low starting point matters greatly when calculating future returns for an investment.

 

Three possible catalysts:

• Record consistent cash flow: It looks promising for the next three years.
• Lower share count: Average decline of around 2% per year looks like a good estimate.
• Growing multiple to book value: Over time, Mr. Market will likely come to understand and appreciate the Fairfax story.

 

All three happening together could drive Fairfax’s stock price higher - which of course means the value of the TRS-FFH investment would also be driven higher. This investment is poised to continue to generate solid returns for Fairfax in the coming years. 

 

What are sell-side analysts saying?

 

This group doesn’t know how to model Fairfax’s equity holdings. The FFH-TRS position is a head scratcher for this group. So, they ignore it. I am serious. 

 

Most sell-side analysts estimate Fairfax will earn $140 to $150/share next year. That translates to a $300 million gain in the FFH-TRS position. 

 

Most sell-side analysts estimate investment gains of about $500 to $600 million for Fairfax in 2024. That is for their total investment portfolio of $56.5 billion. Bonds and stocks. And FFH-TRS.

 

If my estimate is accurate and the FFH-TRS delivers $500 million in gains next year it means analyst estimates are likely way, way low. 

 

What is the lesson here for investors?

 

Sell-side analysts are like a limb on the body of Mr. Market. 

 

What does Ben Graham teach us about Mr. Market? He (she) is there to serve you – not to inform or advise you. Mr. Market often gets things wrong. You job as an investor is to profit from Mr. Markets mistakes.

 

A note on share buybacks

 

Capital allocation is one of the most important decisions for a management team. Fairfax has said they believe their stock is very undervalued. They have also said that as the hard market in insurance slows, they will look to use excess capital to buy back their stock more aggressively.

 

Fairfax is likely motivated to drive the share price higher. Every $100 increase in the share price equals a $200 million before-tax investment gain. The TRS-FFH investment makes share buybacks an even more compelling capital allocation decision for Fairfax.

 

Is the TRS-FFH investment like a buyback? The TRS-FFH is the next best thing to doing a big buyback. Buybacks are powerful because they improve per-share financial metrics: EPS & BVPS.

 

• Buybacks lower the denominator (per share). If the buyback is large and sustained – and pushes up the share price over time - the TRS position could gain significantly in value.
• At the same time, the TRS- FFH investment increases the numerator (earnings and BV).

 

Investors get a double benefit.

 

 —————

Comments from Prem about the total return swap position from the 2022AR. 

 

 

“During 2022 the company entered into $217.4 notional amount of long equity total return swaps for investment purposes. At December 31, 2022 the company held long equity total return swaps on individual equities for investment purposes with an original notional amount of $1,012.6 (December 31, 2021 – $866.2), which included an aggregate of 1,964,155 Fairfax subordinate voting shares with an original notional amount of $732.5 (Cdn$935.0) or approximately $372.96 (Cdn$476.03) per share at December 31, 2022 and 2021. During 2022 the long equity total return swaps on Fairfax subordinate voting shares produced net gains of $255.4 (2021 – $222.7). Long equity total return swaps provide a return which is directly correlated to changes in the fair values of the underlying individual equities.” Prem Watsa – Fairfax 2022AR

 

 

Comments from Prem about the total return swap position from the 2021AR. 

 

 

“For our stock price to match our book value’s compound rate of 18.2%, our stock price in Canadian dollars should be $1,335. And our intrinsic value exceeds book value, a principal reason being that our insurance companies generate huge amounts of float at no cost. This is the reason we continue to hold total return swaps with respect to 1.96 million subordinate voting shares of Fairfax with a total market value of $968 million at year-end.” Prem Watsa – Fairfax 2021AR

 

 

Comments from Prem about the total return swap position from the 2020AR. 

 

 

“Throughout much of last year following the pandemic-induced market plunge, I made public statements to the effect that our belief was that Fairfax shares were trading in the market at a ridiculously cheap price. In the summer I backed that up by personally purchasing close to $150 million of shares. Additionally, following our value investing philosophy, since the latter part of 2020 Fairfax has purchased total return swaps with respect to 1.4 million subordinate voting shares of Fairfax with a total market value at the time of those agreements of $484.9 million ($344.45 per share). We think this will be a great investment for Fairfax, perhaps our best yet!”

 

 

“Investment returns are very sensitive to end date values, so with a stock price of only $341 per share at the end of December 2020, our five and ten year and longer returns have been affected. We expect this to change as Fairfax begins to reflect intrinsic values again. Nothing that a $1,000 share price won’t solve!” Prem Watsa Fairfax 2020AR

 

 

 

Total Return Swap: Some Additional Details

 

The other major benefit of a total return swap is that it enables the TRS receiver to make a leveraged investment, thus making maximum use of its investment capital. Unlike in a repurchase agreement where there is a transfer of asset ownership, there is no ownership transfer in a TRS contract.

 

This means that the total return receiver does not have to lay out substantial capital to purchase the asset. Instead, a TRS allows the receiver to benefit from the underlying asset without actually owning it, making it the most preferred form of financing for hedge funds and Special Purpose Vehicles.

 

There are several types of risk that parties in a TRS contract are subjected to. One of these is counterparty risk. When a hedge fund enters into multiple TRS contracts on similar underlying assets, any decline in the value of these assets will result in reduced returns as the fund continues to make regular payments to the TRS payer/owner.

 

If the decline in the value of assets continues over an extended period and the hedge fund is not adequately capitalized, the payer will be at risk of the fund’s default. The risk may be heightened by the high secrecy of hedge funds and the treatment of such assets as off-balance sheet items.

 

Both parties in a TRS contract are affected by interest rate risk. The payments made by the total return receiver are equal to LIBOR +/- an agreed-upon spread. An increase in LIBOR during the agreement increases payments due to the payer, while a decrease in LIBOR decreases the payments to the payer. Interest rate risk is higher on the receiver’s side, and they may hedge the risk through interest rate derivatives such as futures.

 

https://corporatefinanceinstitute.com/resources/derivatives/total-return-swap-trs/

 

 

[treasurehunt]

29 minutes ago, Viking said:

Below is an update to a previous post I did on the TRS-FFH position. In the last couple of days, the position passed the $1 billion mark in gains. I still have a hard time wrapping my head around this investment. It is a mind bender. And a fantastic investment. Could its best days still be ahead?

Viking, thanks for a great recap of the TRS investment. Given that FFH looks undervalued still, the TRS should provide value for a while. Do you know the mechanics of how the TRS works exactly? Is it settled in cash quarterly? I was wondering if it is possible that FFH may have to come up with a bunch of cash if the stock price goes down a lot for some reason. I'm sure management has considered any such possibility, so this is more curiosity than anything else.

 

I have a vague recollection that this may have been discussed already, but a quick search of the site did not yield anything.

[petec]

48 minutes ago, Viking said:

In the last couple of days, the position passed the $1 billion mark in gains.

 

Just amazing.

 

Prem hasn't done badly on his personal 2020 investment, either!

[dartmonkey]

Long equity total return swaps provide a return which is directly correlated to changes in the fair values of the underlying individual equities.” Prem Watsa – Fairfax 2022AR

 

OK, but I think Mark Dwelle was right to question the structure of this deal. The gain from buying these swaps at $344 that are now worth $916 is enormous, but I wonder if tax might not make a big difference. You don't pay tax on the increase in the value per share from repurchasing shares, but won't they have to pay tax on the investment gain using TRSs?

[gfp]

6 minutes ago, dartmonkey said:

Long equity total return swaps provide a return which is directly correlated to changes in the fair values of the underlying individual equities.” Prem Watsa – Fairfax 2022AR

 

OK, but I think Mark Dwelle was right to question the structure of this deal. The gain from buying these swaps at $344 that are now worth $916 is enormous, but I wonder if tax might not make a big difference. You don't pay tax on the increase in the value per share from repurchasing shares, but won't they have to pay tax on the investment gain using TRSs?

 

It is not at all clear whether they owe tax on these gains since the underlying is the issuer's own shares.  I meant to ask on a CC but can never seem to remember to do so on the actual mornings of the calls.

 

When an issuer buys their own stock, doesn't retire it, and then sells it for a profit, there is no tax owed (at least in the US).

Edited November 6, 2023 by gfp

[dartmonkey]

It is not at all clear whether they owe tax on these gains since the underlying is the issuer's own shares.  I meant to ask on a CC but can never seem to remember to do so on the actual mornings of the calls.

 

When an issuer buys their own stock, doesn't retire it, and then sells it for a profit, there is no tax owed (at least in the US).

 

 

Yes, this is all clearly true for stock repurchases. The question is, is it true for a derivative instrument purchased by a company where the underlying equity is the purchaser's own shares. In other words, if Fairfax buys shares of Occidental, and they go up, they pay tax on the gain, but if they buy their own shares, and they go up, no tax. Now say they buy TRSs on Occidental and Fairfax. Does the same distinction apply? What if they buy call options on each? The gains are fairly closely correlated with share price gains, but I suspect we agree that there will be no exemption for the gains on the call options. I would hope that the TRS derivative will be treated as a share repurchase but I fear it might not be, and this would make a substantial difference on the huge gain. OTOH, Fairfax knows the answer to our question, so perhaps the fact that they have not sold the TRSs, booked their gain, and used the funds to repurchase shares, is some indication that they think the gains will be tax free? 

[MMM20]

What’s FFH’s incentive to ever unwind the TRS? Even if it’s taxable why not just let it ride and let the deferred tax liability grow indefinitely?

[TwoCitiesCapital]

42 minutes ago, MMM20 said:

What’s FFH’s incentive to ever unwind the TRS? Even if it’s taxable why not just let it ride and let the deferred tax liability grow indefinitely?

 

Because it's financed at a floating rate. 

 

The moment the floating rate is higher than the forward expected return of Fairfax, it becomes a book value drag. 

 

Before then, it can be a liquidity drag in any quarter that the stock doesn't go up by at least 1-2+% because you're paying the financing rate AND any negative returns in cash. 

 

As pointed out, they've made over $1B on this investment. That is $1B that has been paid to Fairfax in cash over preceding quarters that has been used to repurchase subs and shares for positive  economic benefit in addition to the $1B return.

 

But that also means we can reverse and Fairfax could owe that $1B back if shares return to prior levels. Unlikely, but any given time, some of the prior returns are at risk until Fairfax closes the contract. 

 

Edited November 7, 2023 by TwoCitiesCapital

[Crip1]

10 minutes ago, TwoCitiesCapital said:

 

Because it's financed at a floating rate. 

 

The moment the floating rate is higher than the forward expected return of Fairfax, it becomes a book value drag. 

 

Before then, it can be a liquidity drag in any quarter that the stock doesn't go up by at least 1-2+% because you're paying the financing rate AND any negative returns in cash. 

 

As pointed out, they've made over $1B on this investment. That is $1B that has been paid to Fairfax in cash over preceding quarters that has been used to repurchase subs and shares for positive  economic benefit in addition to the $1B return.

 

But that also means we can reverse and Fairfax could owe that $1B back if shares return to prior levels. Unlikely, but any given time, some of the prior returns are at risk until Fairfax closes the contract. 

 

Does the counterparty have the ability to terminate the contract?

[TwoCitiesCapital]

20 minutes ago, Crip1 said:

Does the counterparty have the ability to terminate the contract?

 

At the maturity of the contract, they'd have that option. As long as the counterparty had other ways of hedging the exposure I can't see why they would. They're collecting the financing and the spread - as long as they priced it sufficiently and hedged sufficiently, Fairfax should be able to continue to roll it. 

Edited November 7, 2023 by TwoCitiesCapital

[StubbleJumper]

12 hours ago, TwoCitiesCapital said:

The moment the floating rate is higher than the forward expected return of Fairfax, it becomes a book value drag. 

 

 

With FFH currently trading right around adjusted-BV, and with a ROE of 15%+ expected for 2024, they shouldn't perceive much pressure to close out the TRS.  Even if there's no increase in P/BV and we find ourselves at 1x next November, that's a 15%+ growth in the stock price which is considerably higher than the floating rate.  It will be a more challenging decision in a couple of years once CRs start to inch upwards and interest rates start to inch downwards, which will put a bit of pressure on that ROE.

 

12 hours ago, TwoCitiesCapital said:

But that also means we can reverse and Fairfax could owe that $1B back if shares return to prior levels. Unlikely, but any given time, some of the prior returns are at risk until Fairfax closes the contract. 

 

 

For me, the liquidity issue is the risk that I'd like to see FFH manage.  FFH's share price can drop $100 at any point.  In fact, as the share price has grown to US$900, the likelihood of having a fluctuation of $100 has probably become higher (ie, when your share price is $500, a drop of $100 is enormous, but not so much when you are at $900 or $1,000).  FFH needs to be ready to send a $200m or $400m cheque to the counter-party at any point in time, which needs to be taken into consideration when considering the holdco's cash and liquidity planning.

 

 

SJ

[nwoodman]

12 hours ago, Crip1 said:

Does the counterparty have the ability to terminate the contract?

Why would they? Fairfax is renting their balance sheet. Fairfax is the one placing a directional bet not the counterparty.  They are Fairfax “agnostic”.