Fairfax stock positions

[gary17]

maybe the market is just reacting to big hurricanes  we are seeing and climate change - long term trend of bigger losses!

[TwoCitiesCapital]

3 hours ago, gary17 said:

maybe the market is just reacting to big hurricanes  we are seeing and climate change - long term trend of bigger losses!

 

I would assume that we're in a semi rational market where premiums would rise to reflect expected losses and valuations wouldn't be the flex factor. 

 

I know that's not always the case (a la Katrina), but it's not like the potential increase for extreme weather due to climate change is an unknown that no one is talking about. It's a fairly well known and well telegraphed phenomenon where they can price those trends into new policies. 

 

I don't understand the reason for their discount today that wouldn't have also been valid when they were at a premium in 2018. I'm just assuming it's the market having too short term of a view OR that it's enamored with sexier stocks at the moment because Fairfax is a way better investment today than in 2018 even without considering the difference in valuation. 

Edited September 16, 2021 by TwoCitiesCapital

[Viking]

3 hours ago, TwoCitiesCapital said:

 

I would assume that we're in a semi rational market where premiums would rise to reflect expected losses and valuations wouldn't be the flex factor. 

 

I know that's not always the case (a la Katrina), but it's not like the potential increase for extreme weather due to climate change is an unknown that no one is talking about. It's a fairly well known and well telegraphed phenomenon where they can price those trends into new policies. 

 

I don't understand the reason for their discount today that wouldn't have also been valid when they were at a premium in 2018. I'm just assuming it's the market having too short term of a view OR that it's enamored with sexier stocks at the moment because Fairfax is a way better investment today than in 2018 even without considering the difference in valuation. 

I agree that Fairfax is a better investment today that at any time in the past 5 years (perhaps since it was sitting on its CDS gains post GFC).
 

For the past 5 years the lowest Fairfax stock traded at was about US$430. I am conveniently ignoring what happened to the stock last year when we were in the teeth of covid; my view is this was a true outlier event. The stock has also traded as high as US $550 multiple times in the past 5 years.
 

And here we are once again with the stock trading at US$430.

 

Now lets compare Fairfax today to each of its versions in each of the past 5 years. Net premiums written? Underwriting profitability? Size of float? Size of investment portfolio? How the investment portfolio is positioned (both publicly traded and privately held companies)? BV?

 

The one area that is a negative is the continued fall in bond yields.

 

It is clear to me, on balance, that Fairfax today is positioned much better than at any time in the past 5 years (in terms of intrinsic value of the company, where the stock is trading, opportunity to grow EPS and BV in future). We are in a hard market. Its investment portfolio is performing very well. It insurance companies are in great shape. It has fixed most of the many issues that existed with its equity holdings so, as a basket, they are well positioned. With the closing of the Riverstone sale the balance sheet is in great shape. And importantly, communication from management has been better (although still a work in progress). 
 

Bottom line, lots to like about what has been going on under the hood. Fairfax just needs to keep executing exceptionally well. At some point Mr Market will figure it out  

Edited September 16, 2021 by Viking

[glider3834]

4 hours ago, Viking said:

I agree that Fairfax is a better investment today that at any time in the past 5 years (perhaps since it was sitting on its CDS gains post GFC).
 

For the past 5 years the lowest Fairfax stock traded at was about US$430. I am conveniently ignoring what happened to the stock last year when we were in the teeth of covid; my view is this was a true outlier event. The stock has also traded as high as US $550 multiple times in the past 5 years.
 

And here we are once again with the stock trading at US$430.

 

Now lets compare Fairfax today to each of its versions in each of the past 5 years. Net premiums written? Underwriting profitability? Size of float? Size of investment portfolio? How the investment portfolio is positioned (both publicly traded and privately held companies)? BV?

 

The one area that is a negative is the continued fall in bond yields.

 

It is clear to me, on balance, that Fairfax today is positioned much better than at any time in the past 5 years (in terms of intrinsic value of the company, where the stock is trading, opportunity to grow EPS and BV in future). We are in a hard market. Its investment portfolio is performing very well. It insurance companies are in great shape. It has fixed most of the many issues that existed with its equity holdings so, as a basket, they are well positioned. With the closing of the Riverstone sale the balance sheet is in great shape. And importantly, communication from management has been better (although still a work in progress). 
 

Bottom line, lots to like about what has been going on under the hood. Fairfax just needs to keep executing exceptionally well. At some point Mr Market will figure it out  

I agree Viking - I just hope they can buyback more shares at these levels - being able to extract divs from the subs would help

 

I noticed in the 2020 annual report the maximum dividend paying capacity of insurance subs below is around 1.55 bil (includes non-controlling interests) but we don't have an update of what this level is at 30 June 2021. We have had a strong 1H2021 so that should bolster this number but is offset by divs of 212 that subs have already made to holdco in 1H21. At same time, Holdco cash position is stronger with Brit & Riverstone sales.

 

Anyway I suspect they can increase the pace of share buybacks but we will have to wait & see. Could they also consider reducing the pace of premium growth to free up capital from insur subs & dividend back to the holdco to buyback shares. Plus also have a large total return swap whose value potentially will be increased by share buybacks & that will further increase BVPS. 

 

 

 

 

 

 

Edited September 17, 2021 by glider3834

[petec]

4 hours ago, glider3834 said:

Could they also consider reducing the pace of premium growth to free up capital from insur subs & dividend back to the holdco to buyback shares.

They could, but their prices experience has been that premium growth captured the n a hard market is sticky, and so once every ten or fifteen years you get a chance to make a step change in the size of the company. Whether that’s a better opportunity than a bigger buyback is obviously down to how cheap the shares are. Perhaps they’re now cheap enough that Prem will switch priorities, but I wouldn’t bet on it. More importantly, if premium growth is sticky then he’s got two good options, and we shouldn’t mind which he chooses. We financial analysts tend to have a bit of a knee-jerk preference for buybacks, but growing the business at good rates of return is just as attractive. 

[glider3834]

On 9/17/2021 at 3:45 PM, petec said:

They could, but their prices experience has been that premium growth captured the n a hard market is sticky, and so once every ten or fifteen years you get a chance to make a step change in the size of the company. Whether that’s a better opportunity than a bigger buyback is obviously down to how cheap the shares are. Perhaps they’re now cheap enough that Prem will switch priorities, but I wouldn’t bet on it. More importantly, if premium growth is sticky then he’s got two good options, and we shouldn’t mind which he chooses. We financial analysts tend to have a bit of a knee-jerk preference for buybacks, but growing the business at good rates of return is just as attractive. 

good points petec

[StevieV]

The share price has been impervious to good news and remained stubbornly cheap.  I am not sure that the opportunity to buyback shares is a fleeting one.  The company may have just as good of an opportunity to buyback shares after the opportunity to expand into a hard market has dried up.

[TwoCitiesCapital]

23 minutes ago, StevieV said:

The share price has been impervious to good news and remained stubbornly cheap.  I am not sure that the opportunity to buyback shares is a fleeting one.  The company may have just as good of an opportunity to buyback shares after the opportunity to expand into a hard market has dried up.

 

Fingers crossed. I wouldn't be angry if it persisted for another year or two to give Prem the opportunity to make good on his Teledyne comparison. 

[cwericb]

Seeking Alpha article on Fairfax holdings Q2

 

https://seekingalpha.com/article/4456094-prem-watsas-fairfax-financial-holdings-portfolio-q2-2021-update?mail_subject=frfhf-tracking-prem-watsa-s-fairfax-financial-holdings-portfolio-q2-2021-update&utm_campaign=rta-stock-article&utm_content=link-0&utm_medium=email&utm_source=seeking_alpha

[gary17]

Wow so in a market meltdown Fairfax shares are declining much faster than "growth" stocks like FANG!

[TwoCitiesCapital]

2 hours ago, gary17 said:

Wow so in a market meltdown Fairfax shares are declining much faster than "growth" stocks like FANG!

 

Did you actually expect the company so out of favor to trade at a 20% discount to it's NAV would outperforming companies that are trading at a premium valuation when people feel compelled to sell? 

 

This is just market behavior - what's in favor does well (on a relative basis) and what's out of favor does poorly...until that favor changes. 

 

Edited September 20, 2021 by TwoCitiesCapital

[StubbleJumper]

The annual dividend alone is once again nearing 2.5%...anybody interested in dividend stocks?!

 

 

SJ

[gary17]

the Liberal government that just got re-elected for a 3rd term will be taxing insurance companies on profit of $1B.  i think market is pricing this in.

[petec]

On 9/13/2021 at 7:32 PM, petec said:

That’s a very good point. Exco could be printing cash if they’re not over-hedged. 

I just remembered this: https://www.fairfax.ca/news/press-releases/press-release-details/2020/Fairfax-Announces-Entering-Into-Swap-Contracts-in-Respect-of-Common-Shares-of-Ensign/default.aspx

 

Ensign is highly levered, so if higher oil and gas prices lead to higher rig utilisation and higher day rates, which I regard as a virtual certainty regardless of ESG, there is considerable equity upside. 
 

Between Ensign and Exco, Fairfax has nearly $300 of book value exposure and potential upside in the hundreds of millions if they can monetize. 

Edited September 26, 2021 by petec

[SharperDingaan]

6 hours ago, petec said:

I just remembered this: https://www.fairfax.ca/news/press-releases/press-release-details/2020/Fairfax-Announces-Entering-Into-Swap-Contracts-in-Respect-of-Common-Shares-of-Ensign/default.aspx

 

Ensign is highly levered, so if higher oil and gas prices lead to higher RIT utilisation and higher day rates, which I regard as a virtual certainty regardless of ESG, there is considerable equity upside. 
 

Between Ensign and Exco, Fairfax has nearly $300 of book value exposure and potential upside in the hundreds of millions if they can monetize. 

 

We would add that ESI very likely made a profit in Q32021, and that their low share count is another plus. Most are also expecting them to take out a significant competitor via a stock swap, before any real dividends start. Should it occurr, FFH could expect a material unrealized gain, a variable dividend, and to be < the 10% reporting barq1. We own shares in both drilling companies.

 

SD 

Edited September 26, 2021 by SharperDingaan

[glider3834]

9 hours ago, petec said:

I just remembered this: https://www.fairfax.ca/news/press-releases/press-release-details/2020/Fairfax-Announces-Entering-Into-Swap-Contracts-in-Respect-of-Common-Shares-of-Ensign/default.aspx

 

Ensign is highly levered, so if higher oil and gas prices lead to higher rig utilisation and higher day rates, which I regard as a virtual certainty regardless of ESG, there is considerable equity upside. 
 

Between Ensign and Exco, Fairfax has nearly $300 of book value exposure and potential upside in the hundreds of millions if they can monetize. 

good find petec

 

Fairfax were carrying Exco at $238 mil at 31 Dec-20 based on 44% ownership (see below).

 

So that implies equity value of $540 mil for whole business. Then net debt is 140 mil (1.1x EBITDA at 31 Dec-20). So Enterprise value(EV=equity + net debt)  would be around 680mil. Exco generated EBITDA of128mil in 2020. So EV/EBITDA of around 5.3.

 

Since mid 2020 natural gas price has basically doubled (see below) & industry appears to be keeping production tight through fiscal restraint & that combined with increasing natural gas demand should support pricing  https://www.texasmonthly.com/news-politics/natural-gas-prices-surging-drillers/

 

Are Exco fully hedged or if partially hedged/not hedged they would be in a great position to increase EBITDA & so could we expect a higher fair value versus carrying?? I guess we will have to wait & see annual results - not much publicly available info in Exco.

 

 

 

 

(from AR2020)

Fairfax owns 44% of Exco, a U.S. oil and gas producer. Despite weak energy prices in 2020, Exco generated $128 million in EBITDA and $36 million in free cash flow. Net debt fell to $145 million (1.1 times EBITDA). Led by 28 Chairman John Wilder and CEO Hal Hickey, Exco achieved these results through high field level productivity and company-wide cost control. In December, Exco recorded its 73rd month without a lost time incident. Exco’s Chairman, John Wilder, is a great partner. We are well served by his leadership.

[petec]

Bloomberg shows a share price for Exco under the ticker EXCE, but I am not sure exactly how this works - I can't find any of the filings you'd normally need for a publicly traded security and I can't find it on the platforms I use to trade.

 

However it is there and FWIW the share price has gone from $1 a year ago to $5 now.

[Viking]

Attached below is an estimate of the changes in Fairfax's stock portfolio for Q3 (to Sept 30). The goal of the spreadsheet is to get a general estimate of what is going on under the hood. Not all of Fairfax's holdings are captured in the spreadsheet so reported results will be different.

 

After two blow out quarters, in Q3 the mark to market holdings are down in value about $270 million = $10/share (about 26 million shares outstanding). The Associate & Consolidated equities are down about $110 million = $4/share (not captured in earnings). So in total all the positions captured in the spreadsheet are down about $380 million = $14/share. This is about a - 3.3% change in the portfolio I track. 

 

One item not captured in my spreadsheet is Digit; when it is approved the revaluation will result in an increase of $46/share for Fairfax. Not sure if we will see this in Q3.

 

Big movers:

Blackberry      - $250 million

Farmers Edge - $140

Eurobank           - $80

FFH TRS            - $65

Atlas                + $120

Quess                + $65

 

Foran Mining and Ensign Energy have been added. As per usual, please let me know if you see any big errors   

 

Fairfax Equity Holdings Sept 30 2021.xlsx

Edited October 1, 2021 by Viking

[glider3834]

1 hour ago, Viking said:

Attached below is an estimate of the changes in Fairfax's stock portfolio for Q3 (to Sept 30). The goal of the spreadsheet is to get a general estimate of what is going on under the hood. Not all of Fairfax's holdings are captured in the spreadsheet so reported results will be different.

 

After two blow out quarters, in Q3 the mark to market holdings are down in value about $270 million = $10/share (about 26 million shares outstanding). The Associate & Consolidated equities are down about $110 million = $4/share (not captured in earnings). So in total all the positions captured in the spreadsheet are down about $380 million = $14/share. This is about a - 3.3% change in the portfolio I track. 

 

One item not captured in my spreadsheet is Digit; when it is approved the revaluation will result in an increase of $46/share for Fairfax. Not sure if we will see this in Q3.

 

Big movers:

Blackberry      - $250 million

Farmers Edge - $140

Eurobank           - $80

FFH TRS            - $65

Atlas                + $120

Quess                + $65

 

Foran Mining and Ensign Energy have been added. As per usual, please let me know if you see any big errors   

 

Fairfax Equity Holdings Sept 30 2021.xlsx 127.04 kB · 4 downloads

thanks Viking

 

So looks like potentially a small investment loss for Q3, unless Digit is included in which case will be large investment gain. I am guessing they would report when they receive regulatory approval to increase ownership in Digit - it may also happen early Q4 before results come out but I am not holding my breath - regulatory process in India can be slow.

 

I am interested to see Q3 profit results from associates (Eurobank, Atlas)  & consolidated non-insurance subs (Recipe) - would expect to see further improvement here.

 

We also had impact from hurricanes that will probably hurt the CR in insurance business but lets see.

 

Unless Digit gain is included, Q3 looks to be a more muted quarter but we need to put in context of big gains in Q1 & Q2.

 

 

[glider3834]

6 minutes ago, glider3834 said:

thanks Viking

 

So looks like potentially a small investment loss for Q3, unless Digit is included in which case will be large investment gain. I am guessing they would report when they receive regulatory approval to increase ownership in Digit - it may also happen early Q4 before results come out but I am not holding my breath - regulatory process in India can be slow.

 

I am interested to see Q3 profit results from associates (Eurobank, Atlas)  & consolidated non-insurance subs (Recipe) - would expect to see further improvement here.

 

We also had impact from hurricanes that will probably hurt the CR in insurance business but lets see.

 

Unless Digit gain is included, Q3 looks to be a more muted quarter but we need to put in context of big gains in Q1 & Q2.

 

 

they will get around $5 per share gain (which they reported in Sep) from consolidation of Eurolife & sales of Brit & Riverstone. Also would there be a small realised gain on sale of effectively a 5% BIAL stake to OMERS?

[Viking]

Gulf Insurance Group (GIG) is an under the radar asset for Fairfax. Fairfax owns 43.6% stake - that is what is currently posted on the Fairfax web site - paid $209 million in 2010. Fairfax is in partnership with KIPCO (they own more of GIG than Fairfax does). 

 

Sept 7, GIG closed its significant US$475 million acquisition of AXA’s/Kanoo’s MENA operations; i think they paid < 10PE. GIG certainly looks well positioned in the region after this acquisition.

 

GIG is traded on Kuwait stock exchange (not very liquid given significant size of Fairfax and KIPCO positions):

- share price = 0.888KWD = US$2.94

- shares outstanding = 284.57 million

- market cap = US $837 million

- Fairfax position value (43.6%) = $365 million

——————————-##

Gulf Insurance Group CEO Khaled Saud Al-Hassan said in an interview with “Al Arabiya” today, Tuesday, that the acquisition of the entire stake in “AXA Gulf” by Gulf Insurance is part of the group’s strategy to increase revenue and its presence in the Arab region.

He added that Gulf Insurance is currently present in 11 countries and its revenues totaled $ 1.5 billion in 2020, and the acquisition is part of the board’s policy for regional expansion and leadership in Arab insurance markets. operations and net profit.

Gulf Insurance Group CEO explained that Gulf Insurance Group is present in countries including Egypt, Algeria and Turkey, as well as other Arab markets, and these countries account for 50% of the group’s total revenues and Kuwait accounts for the remaining percentage.

Khaled Saud Al-Hassan indicated that the acquisition of AXA Gulf will increase the group’s revenues to $ 2.5 billion, making it the largest player in the Arab insurance market and is present in 13 countries, adding Qatar, Oman and Abu Dhabi after the acquisition, in in order to serve customers and shareholders.
- https://asumetech.com/gulf-insurance-in-al-arabiya-the-acquisition-of-axa-brings-revenues-to-2-5-billion-dollars/

——————————-

Overview of GIG before the acquisition:

http://www.gulfinsgroup.com/Home/Investor-Relations/Investor-Presentations

[petec]

On 10/2/2021 at 1:03 AM, Viking said:

Gulf Insurance Group (GIG) is an under the radar asset for Fairfax. Fairfax owns 43.6% stake - that is what is currently posted on the Fairfax web site - paid $209 million in 2010. Fairfax is in partnership with KIPCO (they own more of GIG than Fairfax does). 

 

Sept 7, GIG closed its significant US$475 million acquisition of AXA’s/Kanoo’s MENA operations; i think they paid < 10PE. GIG certainly looks well positioned in the region after this acquisition.

 

GIG is traded on Kuwait stock exchange (not very liquid given significant size of Fairfax and KIPCO positions):

- share price = 0.888KWD = US$2.94

- shares outstanding = 284.57 million

- market cap = US $837 million

- Fairfax position value (43.6%) = $365 million

——————————-##

Gulf Insurance Group CEO Khaled Saud Al-Hassan said in an interview with “Al Arabiya” today, Tuesday, that the acquisition of the entire stake in “AXA Gulf” by Gulf Insurance is part of the group’s strategy to increase revenue and its presence in the Arab region.

He added that Gulf Insurance is currently present in 11 countries and its revenues totaled $ 1.5 billion in 2020, and the acquisition is part of the board’s policy for regional expansion and leadership in Arab insurance markets. operations and net profit.

Gulf Insurance Group CEO explained that Gulf Insurance Group is present in countries including Egypt, Algeria and Turkey, as well as other Arab markets, and these countries account for 50% of the group’s total revenues and Kuwait accounts for the remaining percentage.

Khaled Saud Al-Hassan indicated that the acquisition of AXA Gulf will increase the group’s revenues to $ 2.5 billion, making it the largest player in the Arab insurance market and is present in 13 countries, adding Qatar, Oman and Abu Dhabi after the acquisition, in in order to serve customers and shareholders.
- https://asumetech.com/gulf-insurance-in-al-arabiya-the-acquisition-of-axa-brings-revenues-to-2-5-billion-dollars/

——————————-

Overview of GIG before the acquisition:

http://www.gulfinsgroup.com/Home/Investor-Relations/Investor-Presentations

Pedantic point, but interesting: do you think they consider Gulf a stock investment or an insurance subsidiary? I assume the latter.

[Viking]

12 hours ago, petec said:

Pedantic point, but interesting: do you think they consider Gulf a stock investment or an insurance subsidiary? I assume the latter.

I agree. My guess is they view GIG as an insurance sub. I put my summary of the company in the ‘Fairfax Stock Positions’ thread as the holding is similar to some of the equity holdings from an accounting perspective (if i understand things correctly).  
 

The ‘Other Insurance - Equity Accounted’ bucket has seen significant developments the past couple of months:

- Gulf Insurance Group: 40% larger with closing of AXA
- Eurolife: Fairfax increased ownership from 50 to 80%

- Digit: recent capital raise boosting valuation of company to $3.5 billion

Bottom line, Fairfax has a great collection of assets that are growing nicely in value. But it is hard to see… because their results are not reported in the same way / level of detail by Fairfax (like the wholly owned insurance subs).

 

Moving forward, it will be very interesting to see if Digit does move forward with an IPO in 2022. That has the potential to be a needle mover for Fairfax given the amount of $ that would be involved.

[petec]

Yes - especially if they IPO in the US.

[KPO]

https://www.barrons.com/articles/canadian-steelmaker-stelco-is-a-low-cost-producer-and-has-an-investor-friendly-ceo-how-that-could-boost-the-stock-51633365262