Fairfax stock positions

[StubbleJumper]

14 minutes ago, gfp said:

That choice was and is available to Fairfax and actually pays better

 

That's what's really fascinating.  If you think back to the spirited discussion on this board in February, the debate was whether FFH had pushed out its duration sufficiently.  Some board participants were satisfied with the modest increase in duration but some were disappointed that it hadn't been pushed out 3 or 4 years.  Well, perversely, we were all sorta wrong!  A better return would have been available by keeping the portfolio in a short duration!  However, I still like the risk management aspect of having pushed it out like what FFH has done.  They will capture some upside as they roll the maturing securities but there is no major downside for the next couple of years 

 

 

SJ 

[TwoCitiesCapital]

1 hour ago, StubbleJumper said:

 

That's what's really fascinating.  If you think back to the spirited discussion on this board in February, the debate was whether FFH had pushed out its duration sufficiently.  Some board participants were satisfied with the modest increase in duration but some were disappointed that it hadn't been pushed out 3 or 4 years.  Well, perversely, we were all sorta wrong!  A better return would have been available by keeping the portfolio in a short duration!  However, I still like the risk management aspect of having pushed it out like what FFH has done.  They will capture some upside as they roll the maturing securities but there is no major downside for the next couple of years 

 

 

SJ 

 

Yes. Interest rates have definitely risen higher than I expected. Still glad Fairfax extended duration and would want them to continue  to do so even if rates keep going higher. 

 

I'm not trying to get them to call the bottom. I kind of want them to get away from that type of behavior/portfolio management.

 

I want them to systematically lock in these 17 year highs in interest rates so we can have some visibility in benefitting from them for the foreseeable future. 

 

And while duration hasn't been a great equity hedge for the last 3 years, I expect it will be revert to being a decent one now it's an reasonably attractive alternative to equities. 

Edited October 5, 2023 by TwoCitiesCapital

[dartmonkey]

I think the table reverses the ‘available for sale’ categories, the no’s should be yes’es and vice versa

[MMM20]

Berkshire’s “bond” portfolio is really the utility and the railroad. Need to get outside the narrow accounting definitions to compare the two. Rising discount rates probably wouldn't be kind to the valuations of those businesses if they were individually publicly traded.

 

I'm guessing FFH is taking advantage of current rates to extend duration a bit closer to peers with real mid term rates now at ~2%+, but I'm operating under the assumption that inflation has been ~2-3% for a while now and that FFH knows it too. 

 

 

Edited October 5, 2023 by MMM20

[Viking]

19 hours ago, gfp said:

 

"A couple of insurers do not use ‘available for sale’ accounting. Fairfax Financial and Berkshire Hathaway. "  

 

Thanks for generously sharing your work on Fairfax again Viking.  I'm not sure I follow your reasoning on Berkshire completely.  You state that Berkshire doesn't use "available for sale" accounting but then quote Berkshire has saying "substantially all of our investments in fixed maturity securities are classified as available-for-sale."

 

Anyway, if the choice is between available for sale and held to maturity, it seems like AFS is the more honest accounting treatment of the two. 

 

Also for Berkshire's average duration, I believe large portions of the treasury bill position should be included with the 1 and 2 year paper that gets classified as investments in fixed maturities.  There is no question that from a bond investment point of view Berkshire has managed the current environment better than Fairfax.  What we don't know is if we will feel the same 2 or 3 years from now since Berkshire is unlikely to attempt to lock in current rates for 3 years and Fairfax seems eager to do so.  Fairfax is my second largest position and I am (mostly) happy with how they handled the recent rate environment.  But while Fairfax was locking up 3.75% reinvestment rates on this year's future maturities, Berkshire was buying 5.5% bills and taking no losses.

 

@gfp thanks for the feedback and comments. Yes, I made an error with Berkshire so I have edited my post. 

 

The challenge I have with 'available for sale' as an investor is the disconnect between reported EPS/ROE and reported BV. In a rising interest rate world it is pretty big for some insurers. For a fixed income portfolio, I think bond duration and credit quality matters a lot. 'Available for sale' - to me - kind of says it doesn't matter and I am having a hard time understanding that.

 

In terms of Fairfax, I will be happy if they get things 'approximately' right moving forward. It is unrealistic to expect them to continue to hit the ball out of the park like they have done recently. 

Edited October 6, 2023 by Viking

[Viking]

17 hours ago, StubbleJumper said:

 

That's what's really fascinating.  If you think back to the spirited discussion on this board in February, the debate was whether FFH had pushed out its duration sufficiently.  Some board participants were satisfied with the modest increase in duration but some were disappointed that it hadn't been pushed out 3 or 4 years.  Well, perversely, we were all sorta wrong!  A better return would have been available by keeping the portfolio in a short duration!  However, I still like the risk management aspect of having pushed it out like what FFH has done.  They will capture some upside as they roll the maturing securities but there is no major downside for the next couple of years 

 

SJ 

 

@StubbleJumper It will be interesting to look back in 6 months at what we were thinking today... It really does provide a great example of how difficult it is to navigate the current environment.

 

We have had bear markets is equities in 2018, 2020 and 2022. Perhaps another one in 2023. And we have had a historic bear market in fixed income for almost 2 years now. The kicker is we still don't know the impact higher rates will ultimately have on the economy. Or the future path of inflation (is it dead or does it come roaring back). The dynamism is one of the things I love about investing. 

[gfp]

5 hours ago, Viking said:

 

@gfp thanks for the feedback and comments. Yes, I made an error with Berkshire so I have edited my post. 

 

The challenge I have with 'available for sale' as an investor is the disconnect between reported EPS/ROE and reported BV. In a rising interest rate world it is pretty big for some insurers. For a fixed income portfolio, I think bond duration and credit quality matters a lot. 'Available for sale' - to me - kind of says it doesn't matter and I am having a hard time understanding that.

 

In terms of Fairfax, I will be happy if they get things 'approximately' right moving forward. It is unrealistic to expect them to continue to hit the ball out of the park like they have done recently. 

 

It still feels like you are getting this backwards.  Tell me what accounting treatment other than "available for sale" you think is more transparent?  Surely not held to maturity??  

[Xerxes]

AFS is the more honest treatment as it marks everything to the market and let the BV adjust, on a quarterly basis.  

 

HTM is the treatment that sort of assumes the “bond market” is closed. So we cannot trade until maturity nor can we “see” the market price, therefore cannot “mark”. That is what got the banks in trouble. This treatment sees ownership of fixed-income securities as like contracts between the two sides, … holding out till then the end. 


I think the nuance that Viking is speaking of is not so much AFS vs HTM. Rather if the realized/unrealized gain/losses changes pass through the P/L before hitting BV or not. I am uncertain (don’t remember) if with AFS both options are available. 
 

Aside AFS and HTM there was also Held for Trading which definitely would hit P/L. 

 

 

 

Edited October 6, 2023 by Xerxes

[Xerxes]

 

https://en.m.wikipedia.org/wiki/Available_for_sale

 

[MMM20]

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...

 

Edited October 6, 2023 by MMM20

[MMM20]

2 hours ago, 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

 

 

from deep in the archives...

Vol 1 Santangel's Review - Teton Capital.pdf

 

Edited October 6, 2023 by MMM20

[gfp]

8 minutes ago, MMM20 said:

Recent VIC writeup on Eurobank by Quincy Lee of Ancient Art/Teton Advisors (one of my favorite 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...

 

 

I wonder why he says he hasn't sold a single share and then at the end says 

"I and/or others I advise do not hold a material investment in the issuer's securities."

[Malmqky]

6 minutes ago, gfp said:

 

I wonder why he says he hasn't sold a single share and then at the end says 

"I and/or others I advise do not hold a material investment in the issuer's securities."

Material being the keyword, per his comments.

[Viking]

5 hours ago, gfp said:

 

It still feels like you are getting this backwards.  Tell me what accounting treatment other than "available for sale" you think is more transparent?  Surely not held to maturity??  

@gfp  as an investor i want to live in the land of reality. My point is for many P&C insurers, reported EPS and ROE in 2022 is not reflecting what actually happened with their balance sheet. The bonds they hold are worth a lot less today than they were worth in December of 2021. My view is the P/C insurers with long duration portfolios at Dec 2021 are now at a disadvantage versus peers - they are sitting on big losses but more importantly, their pickup in interest income will lag peers for the next year or two.

 

The accounting rules are the accounting rules - i get that. I am not suggesting anything should change. Or that there is a ‘better’ way to report results. Investors just need to be aware of the logic/build.
 

Allied and Odyssey had their credit ratings upgraded earlier this year by AM Best. One of the reasons cited was improved financial profile of the parent Fairfax - and i am pretty sure AM Best referenced how well Fairfax’s navigated the spiking of  interest rates (avoided big losses).

 

My point is when looking at P/C insurers, understanding their the makeup of their fixed income portfolios is important. What is the duration? What is the credit quality?
 

I probably should have split my post into two separate posts… but half the time i write a post i am not sure where it will take me when i start… and sometimes the topic is a little furry (for me). I appreciate all the feedback/pushback because as this is how i learn.
 

My view hasn’t changed. I see the insurers with low duration portfolios in Dec 2021 as being clear winners today. And if we get a recession, insurers with portfolios with higher credit quality will likely be the relative winners. Yes, over a 5 year span this matters much less. But at inflection points i think it matters.

[Santayana]

If you don't hold it, you can't sell it

[Maverick47]

3 hours ago, Viking said:

@gfp  as an investor i want to live in the land of reality. My point is for many P&C insurers, reported EPS and ROE in 2022 is not reflecting what actually happened with their balance sheet. The bonds they hold are worth a lot less today than they were worth in December of 2021. My view is the P/C insurers with long duration portfolios at Dec 2021 are now at a disadvantage versus peers - they are sitting on big losses but more importantly, their pickup in interest income will lag peers for the next year or two.

 

The accounting rules are the accounting rules - i get that. I am not suggesting anything should change. Or that there is a ‘better’ way to report results. Investors just need to be aware of the logic/build.
 

Allied and Odyssey had their credit ratings upgraded earlier this year by AM Best. One of the reasons cited was improved financial profile of the parent Fairfax - and i am pretty sure AM Best referenced how well Fairfax’s navigated the spiking of  interest rates (avoided big losses).

 

My point is when looking at P/C insurers, understanding their the makeup of their fixed income portfolios is important. What is the duration? What is the credit quality?
 

I probably should have split my post into two separate posts… but half the time i write a post i am not sure where it will take me when i start… and sometimes the topic is a little furry (for me). I appreciate all the feedback/pushback because as this is how i learn.
 

My view hasn’t changed. I see the insurers with low duration portfolios in Dec 2021 as being clear winners today. And if we get a recession, insurers with portfolios with higher credit quality will likely be the relative winners. Yes, over a 5 year span this matters much less. But at inflection points i think it matters.

Thanks Viking -- I continue to think that the disparity in how Fairfax has navigated the latest interest rate increase effect on their book value and future interest income relative to other large insurance companies is something that they will be able to take advantage of over at least the next few years.  A number of large competitors have had their credit ratings put on watch for potential downgrades, both because of underwriting losses and investment results.  I'm pretty sure that GAAP results in changes in market value of securities being recorded as part of comprehensive income for US based insurers.  And the investments on their balance sheet should be recorded at market value as well.  I suppose that headline earnings reports focusing on operating or underwiring earnings would exclude changes in market value of bond portfolios, but GAAP balance sheet comparisons can still show the impact on book value.  As investors, it's important to remember that future ROE reports will be based on both the size of the return and the size of the underlying equity.  Competitors that have destroyed their equity denominators, may have an advantage in the future by reporting "better" or "improving" ROEs, but I much prefer a company such as Fairfax which has a reasonable shot at reporting favorable ROEs based on improvements in BOTH the numerator and the denominator.     

Edited October 6, 2023 by Maverick47
Corrected typo.

[no_free_lunch]

I agree. This isn't just accounting that can be waved off.  Either you mark to market and take a huge hit or you accept a bond portfolio that returns significantly less than competitors.  I just wonder how to profit from it.  Ffh got priced up which makes sense given short term bonds but it's still undervalued.  I think it just no longer has the taint, there is no premium and yet its probably deserved. Other insurers with long bond books didn't really get hit so maybe some are shorts.  Are there other insurers with short bond portfolios who are advantaged but not pricing it in?  I'm already maxed on ffh allocation.  Sorry if that's too off topic.

Edited October 6, 2023 by no_free_lunch

[sleepydragon]

 

[nwoodman]

Some speculation on how the current Canadian/India frostiness may affect the sale process for IDBI bank

 

https://www.thehindubusinessline.com/money-and-banking/idbi-bank-divestment-indo-canadian-spat-may-dim-fairfaxs-chance/article67427015.ece 

 

"Fairfax India Holdings, the investment arm of Indian-origin Canadian billionaire Prem Watsa, seen as one of the top contenders for IDBI Bank, could now be in the back seat — thanks to the ongoing geopolitical spat between India and Canada. Highly placed sources say with the political tension not easing anytime soon, Fairfax’s is unlikely to be at an advantageous position to secure IDBI Bank in the ongoing divestment process. “If the tension between the two countries escalates or doesn’t end soon, Fairfax may lose its edge in the process,” the source said."

 

Also an update on the timing

 

"Amidst talks of delay in the divestment of IDBI Bank, people close to the development say the process is very much intact and the sale may conclude before March 31, 2024. While the bidding timelines for appointment of asset valuers has been extended from October 9-10 to October 30-31, it is gathered that the delay is more due to change in clauses pertaining to the bidding process based on suggestions received from potential bidders."

 

From what I can gather, the bid is being put forward via Fairfax India and CSB

 

https://bfsi.economictimes.indiatimes.com/news/banking/idbi-bank-sale-rbi-set-to-complete-vetting-of-buyers-bids-likely-early-next-year/104452746

 

IDBI Current Market Cap INR750 Bn =>$US9.02bn

Stake to be sold off 60.7% x $9bn >=> $5.5bn 

 

As stated previously, this would be a massive purchase, so I have been wondering, given Eurobank's aspirations for India, whether they might participate in a book build.  It's probably too messy, but you never know.  OMERS? 

[petec]

On 10/17/2023 at 12:45 AM, nwoodman said:

Eurobank's aspirations for India

 

Really? Did I miss something?

 

[glider3834]

1 hour ago, petec said:

 

Really? Did I miss something?

 

check out https://www.bnnbloomberg.ca/greece-s-eurobank-plans-to-expand-overseas-wealth-management-1.1942573

[Haryana]

https://hbr.org/2023/09/is-india-the-worlds-next-great-economic-power

...

Bank balance sheets are stronger and credit markets are functioning well. It’s telling that many Indian banks are valued higher than U.S. peers.  HDFC Bank — which merged with its parent, mortgage lender HDFC — has a market capitalization of $171 billion, making it the 4th largest financial company in the world. Even before the merger, the 29-year-old upstart was more valuable than the 154-year-old Goldman Sachs.

...

 

https://www.bernstein.com/our-insights/insights/2023/articles/indias-new-look-paving-roads-to-efficiency-and-investment.html

...

In our view, improvements in infrastructure and business efficiency will cascade across the economy, creating positive business dynamics for many Indian companies. Potential beneficiaries include domestic banks and infrastructure-related companies in construction, commercial vehicles, cement, steel and real estate.

...

Edited October 19, 2023 by Haryana
new research

[UK]

16 hours ago, Haryana said:

In contrast, the PB ratio of Asian banks is pegged at 13.41.

 

This must be a typo, maybe PE?

[Haryana]

7 hours ago, UK said:

 

This must be a typo, maybe PE?

I was unable to find further details with a quick search so removed that reference and updated that post with new research.

[glider3834]

 

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