Fairfax 2020

[Viking]

Dropped 25% in 3 hours.....

 

 

Yep.  Did anyone ever expect to see FFH with a 4% dividend yield?

 

 

SJ

 

 

At $290 USD this is late 2007 prices!  Did the last 12-13 years really happen?

 

 

Honestly, some days it feels like Back to the Future.  Professor, fire up the DeLoreon because some bad investments and poor liquidity are coming back to roost...

 

 

SJ

 

Great analogy.

[Xerxes]

Perhaps I can neutralize further downside by shorting the exact # of FFH I am currently long  ;D

[ERICOPOLY]

Dropped 25% in 3 hours.....

 

 

Yep.  Did anyone ever expect to see FFH with a 4% dividend yield?

 

 

SJ

 

 

At $290 USD this is late 2007 prices!  Did the last 12-13 years really happen?

 

 

Honestly, some days it feels like Back to the Future.  Professor, fire up the DeLoreon because some bad investments and poor liquidity are coming back to roost...

 

 

SJ

 

You'll know it when they move to list on the NYSE.

[StubbleJumper]

Dropped 25% in 3 hours.....

 

 

Yep.  Did anyone ever expect to see FFH with a 4% dividend yield?

 

 

SJ

 

 

At $290 USD this is late 2007 prices!  Did the last 12-13 years really happen?

 

 

Honestly, some days it feels like Back to the Future.  Professor, fire up the DeLoreon because some bad investments and poor liquidity are coming back to roost...

 

 

SJ

 

You'll know it when they move to list on the NYSE.

 

 

RIP Spiro Contogouris

[mcliu]

This is their chance to shine. Hope they don’t f it up. I’m selling if they mess this up.  ;D

[StubbleJumper]

This is their chance to shine. Hope they don’t f it up. I’m selling if they mess this up.  ;D

 

How would you define "shine" during 2020?  What elements would be the key characteristics?  A few ideas of potential elements of a "good" year:

 

1) Grow the book by 10% or more, while simultaneously shaving the CR by 2%;

2) Keep the fixed income portfolio short in governments while piling some capital into corporate debt where the spreads are attractive or if warrants offered as a kicker;

3) Float a new debt issue for at least $750m to finance current year needs and Q1 2021;

4) Try to pick up the minority positions in Brit and Allied for a song during this market disruption, if they can scrape together the capital;

5) Get some cash in return for the deflation derivatives;

6) During a year that equities are in the shitter, don't throw a single penny at the "too hard pile" because there is plenty of value to be found in quality issues;

 

Seriously, what would constitute "shine" in your book?  Hopefully it doesn't involve triggering a bunch of paper gains by selling a portion of a sub so that it can be deconsolidated or by marking BIAL to market.  I've given you six potential elements...do you have other ideas?

 

 

SJ

[petec]

Only no2 is realistic. Hands are tied on all the others. Especially buying the minorities - these are at fixed prices, or with price floors.

 

My view is best you get this year is

1) div & int income sustainably over $1bn due to redeployment of fixed income at fatter spreads

2) equity portfolio has a v-shaped recovery due to corona-control and the fact that it’s v cheap

3) Brit and Eurolife minorities bought, Allied postponed (a virtual certainty)

4) CR doesn’t crap out too hard given corona

5) moderate ability to grow in 2021 in an even harder insurance market.

[jfan]

But at what point in price (given that the market price has dropped as low as $230 USD/share recently) that FFH becomes attractive despite issues with Prem, capital constraints, and a portfolio of turnaround equity choices?

 

At $230, they wouldn't have to achieve more than a 98% CR and 3-4% Pre-tax Investment return by my estimates.

 

 

[petec]

But at what point in price (given that the market price has dropped as low as $230 USD/share recently) that FFH becomes attractive despite issues with Prem, capital constraints, and a portfolio of turnaround equity choices?

 

At $230, they wouldn't have to achieve more than a 98% CR and 3-4% Pre-tax Investment return by my estimates.

 

Agreed, and I won’t be selling here. But 3-4% positive might be quite an ask given what their equities have done ytd.

[TwoCitiesCapital]

But at what point in price (given that the market price has dropped as low as $230 USD/share recently) that FFH becomes attractive despite issues with Prem, capital constraints, and a portfolio of turnaround equity choices?

 

At $230, they wouldn't have to achieve more than a 98% CR and 3-4% Pre-tax Investment return by my estimates.

 

Agreed, and I won’t be selling here. But 3-4% positive might be quite an ask given what their equities have done ytd.

 

Quite honestly, what's happened to their equities YTD is what gives me the confidence that they can do 3-4% on their investments. A simple 50% reversion back to what they were likely provides that.

 

Given the blow out in spreads, the drop in equities, and the drop in FFH, it's the first time it's been attractive to me with a clear path to 15% annualized since my lapse in judgement in 2018 thinking interest rates might actually be sustainably rising.

 

 

[StubbleJumper]

Only no2 is realistic. Hands are tied on all the others. Especially buying the minorities - these are at fixed prices, or with price floors.

 

My view is best you get this year is

1) div & int income sustainably over $1bn due to redeployment of fixed income at fatter spreads

2) equity portfolio has a v-shaped recovery due to corona-control and the fact that it’s v cheap

3) Brit and Eurolife minorities bought, Allied postponed (a virtual certainty)

4) CR doesn’t crap out too hard given corona

5) moderate ability to grow in 2021 in an even harder insurance market.

 

 

1) I don't think you get #1 because FFH only has $26b of bonds and bills, and $6b of common and preferreds, at Dec 31 prices.  As a P&C operator, they need to keep the lion's share of the $26b in governments, preferably short term, which currently yield less than 0.5%.  The dollar yield on the equity portfolio won't change, but in percentage terms it will go up (ie, if no stocks are sold, they get the same divvies as last year).  So, the math is like one of those tricky algebra problems from when we were 12 years old, but I don't think you quite get to $1B.  That $26B of bonds and bills already includes $18b of governments and $8b of corporates, so how much further can that be pushed?  Whatever governments you roll-over will almost certainly be rolled into considerably lower interest rates.  Whatever corporates get rolled will get rolled into considerably higher interest rates.  And then how many billions can you shift from governments to corporate to exploit the spread?  Maybe a couple billion, max?  Probably less than a couple billion.  That was one of the comments I made about the AR, because it looked as if they might have already begun reaching for yield when they were not really paid for the risk.  By my estimate, they have about $18B of bonds and notes in the one year or less category.  Irrespective of how you work through the algebra, I'm not sure that you get $1B in dividends and interest.  But it's a good stretch-goal!

 

2) Let's hope there is a V-shaped recovery in the equities, but that's mostly outside of FFH's control.  I'd be happy to take a bit of luck, but the equity recovery or lack of recovery probably won't be indicative of good management or poor management on FFH's part.

 

3) Above and beyond buying Brit, Eurolife, or Allied minority stakes, I'd like to see FFH try to negotiate a better deal.  They are not obliged to make those purchases, and perhaps the vendor will want to see some cash because equity markets have been horrific.  This might be an opportunity to say, "Look, equities have flopped by 30%, can we talk about the buyout price?  If I pile more of FFH's money into Brit/Eurolife and I don't get a discount, my shareholders will be apoplectic that I didn't use the cash to buy discounted AMEX or Visa shares instead...."  No guarantee of success, but mgt should view this as an opportunity.

 

4) Curious about how you view Covid's impact on the CRs.  Could be bad for Zenith, and perhaps there will be some business interruption insurance issues?  But do you see this as a "cat" for FFH's subs?  Frankly, I haven't been preoccupied by the possibility of claims, but maybe I haven't been thinking about this enough.

 

5) Yes, let's hope that the book can be grown significantly and profitably.  Why do you think the growth in the book of business must wait until 2021?  Are you of the view that there will be people who will non-renew their insurance during 2020 due to cash constraints?

 

 

SJ

[petec]

Only no2 is realistic. Hands are tied on all the others. Especially buying the minorities - these are at fixed prices, or with price floors.

 

My view is best you get this year is

1) div & int income sustainably over $1bn due to redeployment of fixed income at fatter spreads

2) equity portfolio has a v-shaped recovery due to corona-control and the fact that it’s v cheap

3) Brit and Eurolife minorities bought, Allied postponed (a virtual certainty)

4) CR doesn’t crap out too hard given corona

5) moderate ability to grow in 2021 in an even harder insurance market.

 

 

1) I don't think you get #1 because FFH only has $26b of bonds and bills, and $6b of common and preferreds, at Dec 31 prices.  As a P&C operator, they need to keep the lion's share of the $26b in governments, preferably short term, which currently yield less than 0.5%.  The dollar yield on the equity portfolio won't change, but in percentage terms it will go up (ie, if no stocks are sold, they get the same divvies as last year).  So, the math is like one of those tricky algebra problems from when we were 12 years old, but I don't think you quite get to $1B.  That $26B of bonds and bills already includes $18b of governments and $8b of corporates, so how much further can that be pushed?  Whatever governments you roll-over will almost certainly be rolled into considerably lower interest rates.  Whatever corporates get rolled will get rolled into considerably higher interest rates.  And then how many billions can you shift from governments to corporate to exploit the spread?  Maybe a couple billion, max?  Probably less than a couple billion.  That was one of the comments I made about the AR, because it looked as if they might have already begun reaching for yield when they were not really paid for the risk.  By my estimate, they have about $18B of bonds and notes in the one year or less category.  Irrespective of how you work through the algebra, I'm not sure that you get $1B in dividends and interest.  But it's a good stretch-goal!

 

2) Let's hope there is a V-shaped recovery in the equities, but that's mostly outside of FFH's control.  I'd be happy to take a bit of luck, but the equity recovery or lack of recovery probably won't be indicative of good management or poor management on FFH's part.

 

3) Above and beyond buying Brit, Eurolife, or Allied minority stakes, I'd like to see FFH try to negotiate a better deal.  They are not obliged to make those purchases, and perhaps the vendor will want to see some cash because equity markets have been horrific.  This might be an opportunity to say, "Look, equities have flopped by 30%, can we talk about the buyout price?  If I pile more of FFH's money into Brit/Eurolife and I don't get a discount, my shareholders will be apoplectic that I didn't use the cash to buy discounted AMEX or Visa shares instead...."  No guarantee of success, but mgt should view this as an opportunity.

 

4) Curious about how you view Covid's impact on the CRs.  Could be bad for Zenith, and perhaps there will be some business interruption insurance issues?  But do you see this as a "cat" for FFH's subs?  Frankly, I haven't been preoccupied by the possibility of claims, but maybe I haven't been thinking about this enough.

 

5) Yes, let's hope that the book can be grown significantly and profitably.  Why do you think the growth in the book of business must wait until 2021?  Are you of the view that there will be people who will non-renew their insurance during 2020 due to cash constraints?

 

 

SJ

 

1) I haven’t thought it through your way, because I don’t know the regulatory rules, but they’re at $800m ish now and said that $1bn was a reachable target before spreads gapped out, so I can only assume it’s more reachable now.

 

2) agree luck not control.

 

3) I find it staggeringly improbable that they will try to renegotiate with OMERS, especially since it would likely put the RiverStone UK deal at risk, but you might be right. I think they will just delay.

 

4) honestly I’m not sure.

 

5) recessions generally mean less insurance sold. Cash crises generally mean less insurance sold. My (very high level) assumption is that COVID-19 puts the brakes on premium growth for a few months (not necessarily a bad thing for FFH given capital constraint) but makes for an even harder market in 2021 due to lower bond yields, equity losses, higher claims etc. The best I can see for FFH right now is they somehow have the capital to grow at low risk in 2021.

[StubbleJumper]

 

1) I haven’t thought it through your way, because I don’t know the regulatory rules, but they’re at $800m ish now and said that $1bn was a reachable target before spreads gapped out, so I can only assume it’s more reachable now.

 

 

There are two things that have happened over the past few weeks.  The spreads have gapped out, but the risk-free has fallen like a stone:

 

https://www.bloomberg.com/markets/rates-bonds/government-bonds/us

 

Short-term governments have dropped from ~2.4% interest in 2019 to ~0.4% interest today, and it has occurred across all short maturities from 3 months to 2 years.  Any governments that need to be rolled in 2020 will face a drastically lower rate.  FFH has $8B of bonds that mature during 2020 and probably about $10b or $11b of cash equivalents.  Assuming that is 75% governments, that might be a total of about $13B in governments that will take a 2% interest rate haircut during 2020, which might reduce interest income by ~$260m for the government portion of the portfolio.  Assuming that there is $5B of corporates that will be rolled, you'd need to gain an extra 500 bps on the corporates you roll to just offset the lower interest rates on the governments.  The math is not particularly nice for FFH on this front.

 

 

SJ

[TwoCitiesCapital]

 

1) I haven’t thought it through your way, because I don’t know the regulatory rules, but they’re at $800m ish now and said that $1bn was a reachable target before spreads gapped out, so I can only assume it’s more reachable now.

 

 

There are two things that have happened over the past few weeks.  The spreads have gapped out, but the risk-free has fallen like a stone:

 

https://www.bloomberg.com/markets/rates-bonds/government-bonds/us

 

Short-term governments have dropped from ~2.4% interest in 2019 to ~0.4% interest today, and it has occurred across all short maturities from 3 months to 2 years.  Any governments that need to be rolled in 2020 will face a drastically lower rate.  FFH has $8B of bonds that mature during 2020 and probably about $10b or $11b of cash equivalents.  Assuming that is 75% governments, that might be a total of about $13B in governments that will take a 2% interest rate haircut during 2020, which might reduce interest income by ~$260m for the government portion of the portfolio.  Assuming that there is $5B of corporates that will be rolled, you'd need to gain an extra 500 bps on the corporates you roll to just offset the lower interest rates on the governments.  The math is not particularly nice for FFH on this front.

 

 

SJ

 

I don't disagree with the math, but IG spreads on corporates for the Agg are currently @ 3.3%. Munis can be had for 3% YTMs.  HY spreads are @ 9.3%. Even agency MBS are @ 1.3%.

 

There's plenty of yield to be picked up even without reaching on credit. I'm not demanding they get $1B in income/dividends. But making that income more solidified and secured long-term would be great so we didn't have to worry about rolling @ low rates in the future.

[Cigarbutt]

^Do you remember how a similar disconnect happened before between risk free rates and bonds in general? History doesn't repeat (and we may be still very early) but I remember that it would have been possible, at some point in 2008-9, to build a portfolio of solid investment-grade bonds yielding 8 to 10%. At that time, I was wondering how FFH would redeploy "excess" funds parked in government bonds. They sort of pulled a rabbit from a hat (at least from my perspective) by scooping up a large amount of relatively high-yielding muni bonds, mostly backed by BRK (!). They also did many other profitable moves. It is also interesting to remember that, then, they stood on the opposite side of the trade for some players who were about to find out how painful an explosion in spreads could be.

"Toto, I've a feeling we're not in Kansas anymore." The Wizard of Oz

[Xerxes]

But at what point in price (given that the market price has dropped as low as $230 USD/share recently) that FFH becomes attractive despite issues with Prem, capital constraints, and a portfolio of turnaround equity choices?

 

At $230, they wouldn't have to achieve more than a 98% CR and 3-4% Pre-tax Investment return by my estimates.

 

The drop in equities and the rebound won’t help with their 7% investment return goal.

The rebound would just undo what the drop did.

 

Unless I am misunderstanding your point

 

Agreed, and I won’t be selling here. But 3-4% positive might be quite an ask given what their equities have done ytd.

 

Quite honestly, what's happened to their equities YTD is what gives me the confidence that they can do 3-4% on their investments. A simple 50% reversion back to what they were likely provides that.

 

Given the blow out in spreads, the drop in equities, and the drop in FFH, it's the first time it's been attractive to me with a clear path to 15% annualized since my lapse in judgement in 2018 thinking interest rates might actually be sustainably rising.

[TwoCitiesCapital]

But at what point in price (given that the market price has dropped as low as $230 USD/share recently) that FFH becomes attractive despite issues with Prem, capital constraints, and a portfolio of turnaround equity choices?

 

At $230, they wouldn't have to achieve more than a 98% CR and 3-4% Pre-tax Investment return by my estimates.

 

 

 

Quite honestly, what's happened to their equities YTD is what gives me the confidence that they can do 3-4% on their investments. A simple 50% reversion back to what they were likely provides that.

 

Given the blow out in spreads, the drop in equities, and the drop in FFH, it's the first time it's been attractive to me with a clear path to 15% annualized since my lapse in judgement in 2018 thinking interest rates might actually be sustainably rising.

 

The drop in equities and the rebound won’t help with their 7% investment return goal.

The rebound would just undo what the drop did.

 

Unless I am misunderstanding your point

 

Agreed, and I won’t be selling here. But 3-4% positive might be quite an ask given what their equities have done ytd.

 

My apologies if it wasn't clear. I sold out of FFH when I realized that my 3-6 month flop on rising yields being sustainable was wrong and went back into the "there's no way in hell FFH gets 15% ROE @ these yields and stock prices" camp

 

So for me, buying back 25% of my original position today @ $290 USD means I actually have a decent chance at 15%/yr returns just from the reversion in current investments back to something closer to where they were.

 

 

[petec]

But at what point in price (given that the market price has dropped as low as $230 USD/share recently) that FFH becomes attractive despite issues with Prem, capital constraints, and a portfolio of turnaround equity choices?

 

At $230, they wouldn't have to achieve more than a 98% CR and 3-4% Pre-tax Investment return by my estimates.

 

 

 

Quite honestly, what's happened to their equities YTD is what gives me the confidence that they can do 3-4% on their investments. A simple 50% reversion back to what they were likely provides that.

 

Given the blow out in spreads, the drop in equities, and the drop in FFH, it's the first time it's been attractive to me with a clear path to 15% annualized since my lapse in judgement in 2018 thinking interest rates might actually be sustainably rising.

 

The drop in equities and the rebound won’t help with their 7% investment return goal.

The rebound would just undo what the drop did.

 

Unless I am misunderstanding your point

 

Agreed, and I won’t be selling here. But 3-4% positive might be quite an ask given what their equities have done ytd.

 

My apologies if it wasn't clear. I sold out of FFH when I realized that my 3-6 month flop on rising yields being sustainable was wrong and went back into the "there's no way in hell FFH gets 15% ROE @ these yields and stock prices" camp

 

So for me, buying back 25% of my original position today @ $290 USD means I actually have a decent chance at 15%/yr returns just from the reversion in current investments back to something closer to where they were.

 

Agreed. My point was about book value for 2020 given where the equities were on 1/1, not where they are now.

[TwoCitiesCapital]

But at what point in price (given that the market price has dropped as low as $230 USD/share recently) that FFH becomes attractive despite issues with Prem, capital constraints, and a portfolio of turnaround equity choices?

 

At $230, they wouldn't have to achieve more than a 98% CR and 3-4% Pre-tax Investment return by my estimates.

 

 

 

Quite honestly, what's happened to their equities YTD is what gives me the confidence that they can do 3-4% on their investments. A simple 50% reversion back to what they were likely provides that.

 

Given the blow out in spreads, the drop in equities, and the drop in FFH, it's the first time it's been attractive to me with a clear path to 15% annualized since my lapse in judgement in 2018 thinking interest rates might actually be sustainably rising.

 

The drop in equities and the rebound won’t help with their 7% investment return goal.

The rebound would just undo what the drop did.

 

Unless I am misunderstanding your point

 

Agreed, and I won’t be selling here. But 3-4% positive might be quite an ask given what their equities have done ytd.

 

My apologies if it wasn't clear. I sold out of FFH when I realized that my 3-6 month flop on rising yields being sustainable was wrong and went back into the "there's no way in hell FFH gets 15% ROE @ these yields and stock prices" camp

 

So for me, buying back 25% of my original position today @ $290 USD means I actually have a decent chance at 15%/yr returns just from the reversion in current investments back to something closer to where they were.

 

Agreed. My point was about book value for 2020 given where the equities were on 1/1, not where they are now.

 

Agreed.

[Xerxes]

I just hope that they are not shorting all the wrong names Einhorn-style (I.e. all FANG powerhouses listed in the Annual Letter)

[petec]

 

1) I haven’t thought it through your way, because I don’t know the regulatory rules, but they’re at $800m ish now and said that $1bn was a reachable target before spreads gapped out, so I can only assume it’s more reachable now.

 

 

There are two things that have happened over the past few weeks.  The spreads have gapped out, but the risk-free has fallen like a stone:

 

https://www.bloomberg.com/markets/rates-bonds/government-bonds/us

 

Short-term governments have dropped from ~2.4% interest in 2019 to ~0.4% interest today, and it has occurred across all short maturities from 3 months to 2 years.  Any governments that need to be rolled in 2020 will face a drastically lower rate.  FFH has $8B of bonds that mature during 2020 and probably about $10b or $11b of cash equivalents.  Assuming that is 75% governments, that might be a total of about $13B in governments that will take a 2% interest rate haircut during 2020, which might reduce interest income by ~$260m for the government portion of the portfolio.  Assuming that there is $5B of corporates that will be rolled, you'd need to gain an extra 500 bps on the corporates you roll to just offset the lower interest rates on the governments.  The math is not particularly nice for FFH on this front.

 

 

SJ

 

No that’s fair. I guess my base case is that when we come out of this the reverse happens: short govt yields rise and spreads compress. That means the short govts don’t have to roll onto much lower rates but that anything that’s been redeployed into corporates earns a higher rate. I think that’s reasonably probable, but it’s also a best case.

[petec]

I just hope that they are not shorting all the wrong names Einhorn-style (I.e. all FANG powerhouses listed in the Annual Letter)

 

I do think it’s very odd, the stocks they chose to highlight in the letter. Ok they’re not optically cheap, but they’ve largely got spectacular business models and growth. There was likely a bubble in some names, and particularly among the unprofitable story stocks, but not the ones they named.

[Xerxes]

For those of us who are uninitiated in the world corporate bond trading, is there an index based on European corporate bonds that can be bought to capitalize on the short-med term widening of credit spreads ?

[bearprowler6]

An update on the Horizon North and Dexterra transaction:

 

http://www.horizonnorth.ca/news-and-knowledge-centre/news/horizon-north-logistics-inc-announces-covid-19-response-including-reductions-to-2020-capital-spending-program-and-other-costs-and-reiterates-commitment-of-all-parties-to-transaction-with-dexterra-and/

[petec]

Just going through the call.

 

Eurolife buyout will probably be done by Eurolife, not holdco.

 

Brit will be about $100m.

 

Allied is bigger but given capital at Allied I wonder if Allied could also buy itself.

 

I wonder if this is a piece of the holdco liquidity puzzle that we are missing.

 

doesn't answer how they fund premium growth though.