Fairfax stock positions

[glider3834]

4 hours ago, Viking said:

Here is a quick update of Fairfax's equity holdings. Please note, I have not updated the spreadsheet to capture any changes to positions that have happened the past couple of months. Regardless, my numbers should be directionally accurate. Since March 31 the equity portfolio has likely declined a little over $800 million = 5.7%. About $500 million of the total is mark to market = $20/share (pre-tax).

 

S&P500 performance since March 31?   - 9.3%

Nasdaq performance since March 31?   - 15.5%

 

Fairfax's results are not unexpected given the equity market sell off in April and May morphed beyond Nasdaq to include all stocks. perhaps the biggest takeaway is Fairfax's equity portfolio is continuing to outperforming the broad averages which is nice to see.

 

What does this mean for Fairfax and Q2 results?

1.) underwriting: tailwind (hard market)

2.) interest and dividend income: tailwind (rising interest rates)

3.) realized investment losses: headwind (from both equities and bonds)

 

My guess is we will see Fairfax report a loss of $5 to $10/share share when they report Q2 results. It would be impressive if they are able to get through a bear market is stocks and bonds in 2022 with only a minor hit to BV. We will see.

-----------

Big Movers (so far in Q2):

1.) Atlas            - $170

2.) Blackberry  - $166

3.) Stelco         - $116

 

It looks to me like about 70% of their holdings are down which is likely representative of what is going on in the overall market.

Fairfax Equity Holdings June 2 2022.xlsx 250.31 kB · 5 downloads

thanks Viking 

 

one positive potentially could be Exco Resources - natural gas prices have doubled YTD to over $8MMBtu & their hedges roll off this year.

 

 

 

[petec]

On 6/6/2022 at 3:57 AM, glider3834 said:

thanks Viking 

 

one positive potentially could be Exco Resources - natural gas prices have doubled YTD to over $8MMBtu & their hedges roll off this year.

 

 

 

 

Yes - Exco and Ensign might be little gems for FFH this year.

[Viking]

Since my last update on June 5 equity markets have continued to sell off and Fairfax's equity portfolio, not surprisingly, will be hit hard. From March 31 to June 30 my guess is their equity portfolio is down a little over $2 billion. Please note, my estimate is incomplete (it is not able to capture all positions accurately or what Fairfax has been doing during the quarter). Please note, investors need to due their own due diligence (my spreadsheet could contain material errors). Please let me know if you see any errors.

 

Largest changes (these 4 stocks = 65% of decline):

- Atlas           -$520

- Eurobank    -$350

- Stelco         -$220

- Blackberry  -$210

 

Of the $2 billion total, my guess is about $725 million is mark to market. Given the strong move higher in interest rates in Q2 my guess is Fairfax will book about $275-$300 million in fixed income losses. So we could see $1 billion (pre-tax) in investment losses in Q2 = $42/share.

 

In Q2 I do expect Fairfax to report very good underwriting results and increasing interest income. So these will help cushion losses from the investment portfolio. And the pet insurance sale will result in a significant increase in BV (not sure if this transaction will hit the financials in Q2 or when it is expected to close in Q3). Bottom line, I continue to think Fairfax will grow BV for the full year which, if it happens, would be quite the accomplishment given the carnage we are seeing in both bond and equity markets so far in 2022. 

Fairfax Equity Holdings June 30 2022.xlsx

Edited July 4, 2022 by Viking

[StubbleJumper]

1 hour ago, Viking said:

Of the $2 billion total, my guess is about $725 million is mark to market. Given the strong move higher in interest rates in Q2 my guess is Fairfax will book about $275-$300 million in fixed income losses. So we could see $1 billion (pre-tax) in investment losses in Q2 = $42/share.

 

Thanks, Viking.

 

This could very well become a table-pounding opportunity as we enter the most intense portion of the annual hurricane season!  In early August, Mr. Market probably will not like the headline EPS number resulting from those M2M losses, and Mr. Market never seems to like the uncertainty during hurricane season which really gets into full swing in mid-August.  If you've still got dry powder, you might get a good opportunity...and if you don't have dry powder, it might be worthwhile reflecting on what you might choose to sell if FFH shares take a serious dive.

 

 

SJ

[Viking]

1 hour ago, StubbleJumper said:

 

Thanks, Viking.

 

This could very well become a table-pounding opportunity as we enter the most intense portion of the annual hurricane season!  In early August, Mr. Market probably will not like the headline EPS number resulting from those M2M losses, and Mr. Market never seems to like the uncertainty during hurricane season which really gets into full swing in mid-August.  If you've still got dry powder, you might get a good opportunity...and if you don't have dry powder, it might be worthwhile reflecting on what you might choose to sell if FFH shares take a serious dive.

 

SJ

 

@StubbleJumper I have been thinking about the same things you discuss above. The challenge (to Fairfax shares selling off) is Fairfax shares have been trading pretty well all year (compared to the overall market). So it looks to me like someone is buying and I wonder if it is not Fairfax. So the stock could hold up better than expected even after earnings. And once the pet insurance deal closes Fairfax will have significant cash to buy back stock. But if we get a bad hurricane season, yes, Fairfax could get hit. And if we see top line slow (signs the hard market is ending) we could see all insurance stocks sell off. Having said all that I have been reducing my position (taking advantage of the recent run up) and shifting most of the proceeds into a basket of oil stocks - people are probably getting sick of all my oil posts in recent days. My cash balance is back up to 60% (I want to keep a high cash balance until i we are closer to a Fed pivot). Fairfax continues to be my third largest holding (after oil and BAC). I would likely be a buyer of Fairfax below US$500 and would likely get aggressive if it hit US$450.

Edited July 4, 2022 by Viking

[glider3834]

6 hours ago, Viking said:

And the pet insurance sale will result in a significant increase in BV (not sure if this transaction will hit the financials in Q2 or when it is expected to close in Q3).

viking I think they will separate out the pet insurance business as asset held for sale at its carrying amount in Q2 results. And the gain on sale would be reported when transaction is closed. 

 

Once we have the carrying amount, we can work out what the gain should look like.

 

Cheers

 

 

 

 

[Viking]

2 hours ago, glider3834 said:

viking I think they will separate out the pet insurance business as asset held for sale at its carrying amount in Q2 results. And the gain on sale would be reported when transaction is closed. 

 

Once we have the carrying amount, we can work out what the gain should look like.

 

Cheers

@glider3834 thanks for the clarity. Pretty crazy how much they are earning on the pet insurance transaction. An under-appreciated part of Fairfax are these very large one time gains they are able to surface… 

[glider3834]

Article on Kyle Shaw at ShawKwei

https://theceomagazine.com/executive-interviews/finance-banking/kyle-shaw

[glider3834]

Resolute Forest takeover 

https://www.bloomberg.com/news/articles/2022-07-06/paper-excellence-to-buy-resolute-forest-for-1-6-billion#xj4y7vzkg

[Thrifty3000]

^ I believe FFH owns around 44%

[glider3834]

5 minutes ago, Thrifty3000 said:

^ I believe FFH owns around 44%

Around 40%

[Thrifty3000]

Well, according to the annual report FFH owned 32% of the common as of the end of last year.

 

[Thrifty3000]

Note (3) in the annual report says:

 

Excludes shares controlled and directed through our asset value note from the sale of RiverStone Barbados

[glider3834]

Just now, Thrifty3000 said:

Note (3) in the annual report says:

 

Excludes shares controlled and directed through our asset value note from the sale of RiverStone Barbados

Fairfax Financial Holdings Limited, a significant stockholder of Resolute, has entered into a voting and support agreement to vote its shares in favor of the transaction. As of July 5, 2022, Fairfax Financial Holdings held approximately 30,548,190 shares, or 40% of the outstanding shares as of that date.

[Thrifty3000]

There it is. Thanks, @glider3834

 

Also, in the 2019 report Prem said they had net investment of $745 million in Resolute.

[StubbleJumper]

26 minutes ago, Thrifty3000 said:

There it is. Thanks, @glider3834

 

Also, in the 2019 report Prem said they had net investment of $745 million in Resolute.

 

Happily, at a sale price of $1.6b plus contingent value rights, it looks like ffh might actually get a return of its original capital.  The return ON capital will almost certainly be inadequate over the holding period, but this is a very good exit.  I was hoping that it would happen last September or October, but sometimes it takes a while to find a buyer.

 

Now, if they could just get their capital back from the blackberry investment.....

 

 

Sj

[Daphne]

True and they got some dividends along the way

[StubbleJumper]

Just referring to @Viking 's spreadsheet, RFP is carried on the books at US$276m so this will be another realised gain of $350 or $400m that should appear in Q3.  Lots of gains concentrated in that quarter....

 

 

SJ

[Xerxes]

I hope our pal @Viking kept his direct exposure on resolute. Some if not all. 
 

I complained endlessly last year as Brookfield was liquidating its lumber holdings (that I didn’t even know they had). Glad to see some tangible outcome. 

[Parsad]

The equity and bond losses will be more than offset by the gains in the RFP and JAB transactions.  Add insurance underwriting and interest income, and Fairfax will be probably the only insurer with positive earnings in the 2nd and 3rd Q of 2022.  While sitting on all that cash that they can put to work in equities or bonds that have taken one hell of beating this year so far!  Cheers!

[gfp]

18 minutes ago, Parsad said:

The equity and bond losses will be more than offset by the gains in the RFP and JAB transactions.  Add insurance underwriting and interest income, and Fairfax will be probably the only insurer with positive earnings in the 2nd and 3rd Q of 2022.  While sitting on all that cash that they can put to work in equities or bonds that have taken one hell of beating this year so far!  Cheers!

 

Doesn't seem like any of the positives would be recognized in the 2nd quarter so there would surely be a loss reported for Q2 - right?

[StubbleJumper]

1 minute ago, gfp said:

 

Doesn't seem like any of the positives would be recognized in the 2nd quarter so there would surely be a loss reported for Q2 - right?

 

Agreed.  Q2 numbers will be superficially bad.  The realised gains will not appear until Q3 or maybe even q4 for RFP.  But, will Mr. Market understand this, or will the stock price slide when the Q2 EPS number is released in 4 weeks?  I sniff the possibility of an opportunity...

 

SJ

[Viking]

Solid transaction. Sale price is very good given the environment we are in (going into potential recession and housing market slowing). We all have been asking what Fairfax will do with the commodity type equity holdings and we now have our answer on one - they will be opportunistic. It would be painful to hold all of the commodity equities through the cycle. Nice to see them sell one at peak pricing. And this begs the question if more deals are to come (Stelco and EXCO?). 
 

Psychologically, it is also nice to get closure on what had been a pretty terrible investment for many years (up until the pivot to lumber a couple of years ago). And at a much higher price than anyone could have dreamed possible not that long ago. Remember, this stock was trading under $1.50 in 2020. What a ride! As others have noted, let’s hope Fairfax is able to exit its Blackberry position also at a good price at some point. 

Fairfax has +$1 billion rolling in in Q3. What to do in a bear market? Taking out another 2 million Fairfax shares sure would be sweet! 
 

@Xerxes no i sold all my lumber stocks long ago. I am still a lumber bull over the medium term (i think the US housing building boom is just getting started and will last for years). But i am not brave enough to hold lumber stock as we get closer to a potential recession. But they are back on my watch list (as is Stelco) as they have come down a fair bit. 

[Viking]

22 minutes ago, gfp said:

 

Doesn't seem like any of the positives would be recognized in the 2nd quarter so there would surely be a loss reported for Q2 - right?

Regardless, Fairfax will include details (and expected increase in BV) from pet insurance and Resolute sales in the opening lines of their Q2 press release. So investors and analysts will be able to easily include them in their models. I think they also have some further gains on Digit (pending government approval). Bottom line, this reinforces the likelihood that Fairfax will be able to grow BV in 2022 (absent a brutal hurricane season or another 20% sell off in equity markets).

[Viking]

22 minutes ago, StubbleJumper said:

 

Agreed.  Q2 numbers will be superficially bad.  The realised gains will not appear until Q3 or maybe even q4 for RFP.  But, will Mr. Market understand this, or will the stock price slide when the Q2 EPS number is released in 4 weeks?  I sniff the possibility of an opportunity...

 

SJ

We can only hope. There have been many times in the past where Fairfax has been sitting on big gains and Mr Market has been completely asleep at the wheel… for a quarter or two. And then the shares pop