Fairfax 2020

[Xerxes]

You are absolutely right on lumpy results.

While I always took note of that, somehow I failed to register that BRK had never said. Though they (BRK) have been sayings … we don't care about reported earning but we care about long term economic growth per share.

 

Speaking of which, is it safe to assume that the last time that lumpy side was to the upside was the 2008-09 short … and perhaps Odessy (don't know the full story there, but folks were talking about in this thread).

 

And also as the new generation takes over, I think that would mean less lumpiness … and more steady growth.

[Xerxes]

Viking, my non-scientific but philosophical view is that the pendulum always swings back …

 

It may be rough for FFH, but I think both BRK and FFH had about the same peak-to-trough drop. FFH a bit more.

Just like FFH got a few large businesses impacted, BRK has a whole host of entities impacted as well (Coka Cola, Airlines, etc.).

 

They are both not investing heavily in equities in the dip it seems (from what we know); FFH b/c it cannot (perhaps), BRK because it doesn't want to.

I think as long as both names remain diversified within your own personal portfolio, that ought to do it.

 

I personally greatly admire the collection of old economy assets Fairfax India has.

EM will always be a challenge, … until it isn't a challenge anymore. Then people will flock back to India, they would call it "like investing in China in 2001" and that theme will go on, until pendulum swings back and it is no longer "like investing in China in 2001" etc. it is like investing in Chili in 2019. Unfortunately the pendulum swing happens over many years and it doesn't swing back in a way we can forecast.

 

I work in the aerospace industry for more than a decade; we have been doing well... our industry has been growing by this much X CAGR, i.e. Airbus pumping out +50 A.320 per month (I don't work for Airbus, but just an example), and that was baseline of all forecast … all was well, life was good …. well until suddenly it isn't (i.e. Covid).

 

Xerxes, you seem to have it all well thought out :-) i do own BRK. In all honesty, probably mostly just because i like Buffett. And the fact they have so much cash (ideal in the current environment). It is likely just a short term hold... i will be happy to sell for a quick 3-4% gain. Done it a couple of time already :-)

 

Fairfax India looks interesting. I do like some of the assets (but not CSB). But until i get some clarity regarding the path of virus i am going to get very selective (which means FIH will just stay on my watch list :-)

 

there is not much thinking on my side on my logic.

It is just that my view is that "it is never as good as it looks when things are good … and it is never as bad they look when things are bad".

We (be it investors, forecasters, industry participants) tend to take a snap shot of a great thing and project into the future, and when the bottom falls out, we tend to take a snapshot and also project it to the future, and call it structural change.

 

Always overshooting and undershooting

[wondering]

Pedro/KFS

I am not familiar of the team working their equities side. Do you know how much dollar value or percentage he is managing. high double digit is pretty impressive. Who knows maybe he was shorting Resolute Forest on leverage ?  for me the key is going to be the Q1 13F; i don't expect FFH loading up the truck during the drawdown. But I very much care about their position sizing of the two names that they chose to 'market' during the AGM: i.e. Exxon and Google. For me that would be key and indicative of new direction.

 

Based on a board member recommendation on a different thread, I listened to two Google Talk videos with Thomas Russo. Very interesting with his concepts of capacity to suffer. In some ways, that capacity to suffer applies to us FFH shareholders, I never expected major growth (have other growth engines in my portfolio); rather wanted a modest/steady but continuous growth.

 

Let's hope there is light at the end of tunnel.

 

I think the % managed by Wade and his team is still relatively small (maybe 15%) but growing. Prem names about 12 members of this team in the letter including Wendy Teramoto who he describes as Wilbur Ross' right hand for 20 years. (Sam Mitchell is a notable absentee - I am not sure whether he is still at Fairfax.)

 

More importantly, it sounds (from the letter and the AGM call) as though Wade's team has an increasing influence on decisions made by Prem, Roger, and Brian. The sense I get is that we are about halfway through the handover to the younger team. It's taken a decade, and it'll take a decade more. But their influence is growing.

 

One thing I would say, though, is that Fairfax should not be in your portfolio for steady but continuous growth. That's Berkshire, or Markel. Prem, for all his faults, has always been explicit that results will be lumpy. That's just the nature of the kind of deep value investing they do.

 

If I remember correctly, Sam Mitchell retired. I can't remember if Prem mentioned it on a CC or a AGM

[petec]

Speaking of which, is it safe to assume that the last time that lumpy side was to the upside was the 2008-09 short

 

They almost doubled BVPS between 2006 and 2009 so yes, those years were a bit special. Since then they booked decent gains in 2014, 2017, and 2019 as well, but didn't do much the rest of the time. So after doubling BVPS between 2006 and 2009, they grew it only 25% between 2009 and 2019. (Obviously shareholders also got the dividend.)

 

But that is the past. What matters is the future. As you say the new investment team may produce steadier performance. I don't really care. I am happy with lumpy - I just want a higher rate of compounding, and all we need for that is for Fairfax to avoid mistakes.

 

 

[TwoCitiesCapital]

With $835/share in float, $420/share in equity, and $337/share in debt - it's hard for me to come up with a case where returns aren't going exceptional @ $260/share.

 

That is $1500+/share earning you a return. 15% compounded from these depths only requires an annualized return of 2.5% on the float/debt/equity to get 15% ROIC for your dollars. Such a low bar! Particularly in an environment that is being disrupted where investment grade corporate debt and high-grade equities/preferred yield quite a bit more than that.

 

 

[Bryggen]

When is the 13-F filed and disclosed to find out more details on the XOM and GOOGL acquisitions?

Thanks!

[Bryggen]

As a newbie on this board, I would like to know if there is a post on this board where Fairfax business model is explained in a nutshell? It is a fairly complex / unconventional structure, so a summary of how it operates or even a chart allowing us to visualize it would be great!

 

I get the essential of what they owned and how they use the float to invest, etc, but I would like to deepen my understanding on the flow of the funds they received, use for investment, and how they are capped to keep cash reserves for the subs etc.

 

If no one ever did it; then, we need a volunteer! ;)

 

Thanks and this place is the best place I found to have great information on Fairfax. It is unbelievable the amount of infos and valuable insight found here and you guys know your stuff. This isn't Seeking Alpha and Yahoo Finance boards lol. This is the real shit.

 

Kudos to all of you!

 

Bry

[Bryggen]

Interesting article on FFH found today on Yahoo Finance.

 

Biased? I tend to buy what he says.

 

Thoughts?

 

https://ca.finance.yahoo.com/news/2-000-invest-bet-canada-115024446.html

 

 

[Bryggen]

More coverage on FFH- BNN:

 

https://www.bnnbloomberg.ca/video/brian-acker-discusses-fairfax-financial~1955386

 

These guys don't want to get their feet wet on stating an opinion on the company, it was obvious. Interesting.

[clutch]

Interesting article on FFH found today on Yahoo Finance.

 

Biased? I tend to buy what he says.

 

Thoughts?

 

https://ca.finance.yahoo.com/news/2-000-invest-bet-canada-115024446.html

 

It's a motley fool article... probably wrote after half an hour of research...

[Viking]

Does anyone have an opinion on the likelihood that FFH will need to do an equity offering in the near term to shore up their balance sheet? My guess is they are ok today. However, there are risks moving forward:

1.) possible operating losses in Q2 and Q3

2.) sizable impairments on equities/associates (Recipe and Toys R Us are flashing red and there are more)

 

Offsetting this will be some gains in their equity portfolio since March 31. The $2.9 billion in bonds they bought likely also will see some nice price appreciation. Dividend and interest income is also now a $900 million run rate which is very good (especially given the sale of 40% of runoff).

 

What do people think? Too many moving pieces and when combined with the virus (path unknown) simply too hard?

 

Best case scenario for Fairfax is a vaccine is discovered that can be deployed in volume in Q4.

 

My interest in FFH right now is as a short term trade. The company is out of favour. And the sector is out of favour. And the stock price has been very volatile of late.

 

Stock Price = US $250

BV = US $422

P/BV = 0.59

 

If we adjust BV to reflect Associates at fair value Vinod estimates BV = $390

P/adj BV = 0.64

 

Petec also suggested discounting BV further to reflect Fairfax India and Fairfax Africa at fair value

—————————————————-

Some notes after listening to the conference call:

- CR was decent at 96.8, with 2.6 points for Covid 19.

- Covid exposure is manageable with largest exposure at Brit and Odyssey

- expects to post underwriting profit for the year (even after Covid losses)

- expects written premiums to fall in Q2 and Q3 and rebound in Q4 as economic activity gets back to normal; expect flat for the year

 

- purchased $2.9 billion in US corporates; yield = 4.25% and term = 4 years ($123 million in interest income per year)

- run rate for interest and div income is $900 million

- continuing to focus on redeploying cash to grow this

 

- Riverstone divestiture happened March 31. 40% sold for $600 million. Continue to hold 60% valued at $605 million.

- debt offering in April $645 at 4.625% will add $30 million to interest expense per year

 

Balance Sheet

- had $700 million cash At hold co

- drew $1.8 billion of credit line; cash = $2.5 billion

- April debt issue = $645; total cash, net on credit line = $1,345 billion

- as global economies restart expect to pay down credit line

 

Can someone help me out with what happened to the $600 million proceeds (March 31) from the Riverstone sale? Is that included in the above figures?

 

- said FIH, FAH, Recipe and TC all have access to financing and do not need $ from Fairfax

- said covid did not affect long term value of Bangalore Airport

- Atlas, largest equity holding by far, reported decent Q1 results with strong future guidance (expects manageable impact from Covid)

[racemize]

Viking, what's your short-term trade target here?  Getting back to book value?

 

One idea, and I've switched to it, is just buying the preferreds.  If you are aiming to get to book value, I'm assuming they will get back to $20-$25 (depending on the series) at the same or better pace than common. 

[petec]

Viking, what's your short-term trade target here?  Getting back to book value?

 

One idea, and I've switched to it, is just buying the preferreds.  If you are aiming to get to book value, I'm assuming they will get back to $20-$25 (depending on the series) at the same or better pace than common.

 

Would you ever expect them to trade above par, given how low rates have gone? I need to look at the terms again.

[StubbleJumper]

Does anyone have an opinion on the likelihood that FFH will need to do an equity offering in the near term to shore up their balance sheet? My guess is they are ok today. However, there are risks moving forward:

1.) possible operating losses in Q2 and Q3

2.) sizable impairments on equities/associates (Recipe and Toys R Us are flashing red and there are more)

 

Offsetting this will be some gains in their equity portfolio since March 31. The $2.9 billion in bonds they bought likely also will see some nice price appreciation. Dividend and interest income is also now a $900 million run rate which is very good (especially given the sale of 40% of runoff).

 

What do people think? Too many moving pieces and when combined with the virus (path unknown) simply too hard?

 

Best case scenario for Fairfax is a vaccine is discovered that can be deployed in volume in Q4.

 

My interest in FFH right now is as a short term trade. The company is out of favour. And the sector is out of favour. And the stock price has been very volatile of late.

 

Stock Price = US $250

BV = US $422

P/BV = 0.59

 

If we adjust BV to reflect Associates at fair value Vinod estimates BV = $390

P/adj BV = 0.64

 

Petec also suggested discounting BV further to reflect Fairfax India and Fairfax Africa at fair value

—————————————————-

Some notes after listening to the conference call:

- CR was decent at 96.8, with 2.6 points for Covid 19.

- Covid exposure is manageable with largest exposure at Brit and Odyssey

- expects to post underwriting profit for the year (even after Covid losses)

- expects written premiums to fall in Q2 and Q3 and rebound in Q4 as economic activity gets back to normal; expect flat for the year

 

- purchased $2.9 billion in US corporates; yield = 4.25% and term = 4 years ($123 million in interest income per year)

- run rate for interest and div income is $900 million

- continuing to focus on redeploying cash to grow this

 

- Riverstone divestiture happened March 31. 40% sold for $600 million. Continue to hold 60% valued at $605 million.

- debt offering in April $645 at 4.625% will add $30 million to interest expense per year

 

Balance Sheet

- had $700 million cash At hold co

- drew $1.8 billion of credit line; cash = $2.5 billion

- April debt issue = $645; total cash, net on credit line = $1,345 billion

- as global economies restart expect to pay down credit line

 

Can someone help me out with what happened to the $600 million proceeds (March 31) from the Riverstone sale? Is that included in the above figures?

 

- said FIH, FAH, Recipe and TC all have access to financing and do not need $ from Fairfax

- said covid did not affect long term value of Bangalore Airport

- Atlas, largest equity holding by far, reported decent Q1 results with strong future guidance (expects manageable impact from Covid)

 

Good questions and good thought process.

 

I'm not sure that an equity issue is necessary any time soon.  But, the covenants on FFH's revolver do represent a bit of a risk. 

 

After the Q1 release, I spilled a bit of ink whining about how they were at a debt:equity of 0.34:1 on March 31, and their max ratio under the covenant is 0.35:1.  My whining was that it wouldn't take an outrageous collection of insurance catastrophes to amount to amount to a $1B hit to their consolidated equity, which would trigger a bit of scrambling to manage the revolver covenant.  Similarly, if equity markets take another leg down from where they were on March 31, it would only take about a hit of ~$500m to their equities compared to March 31 to leave FFH scrambling.  Neither of those events are terribly likely, but IMO, they are entirely conceivable, which is why I don't love this situation of being reliant on that revolver.  The good news is that the holdco is carrying so much cash equivalents that they could easily get "on side" with the covenant by trimming holdco cash equivalents and repaying a portion of the revolver...but the bad news is that the whole point of negotiating and paying stand-by fees for a large revolver is so you have flexibility and in the end you might not even be able to draw on it.  Happily, the revolver is good until Christmas 2022, so as long as they respect the covenants, all is good.

 

I do not view Recipe and Toys as being particularly vulnerable to a write-down any time soon.  You would need to make the assessment that the assets are permanently impaired.  While I don't love either of those businesses, at this point they are basically closed with the intention of fully reopening when social distancing measures are relaxed.  It would probably take at least couple of years of shitty sales and income after the full reopening to conclude that the businesses are fundamentally damaged and permanently impaired.  However, despite Prem's assurances that they will not need cash from the holdco, I do worry that if this closure is prolonged, they will end up burning through their revolvers and could ultimately require a cash injection to support their working capital needs when the restart occurs.  Does FFH have a spare $75m for Toys or a spare $200m for Recipe if that should become necessary?

 

It's trite to say it, but if everything goes well, everything will go well.  What is the holdco's cash situation between now and March 31, 2021?  I think it looks a bit like this:

 

Sources:

Cash at March 31, 2020:  $2,483

Debt issue: $645

Subsidiary dividends:  $?

Management fees: $? (this is what holdco gets from Fairfax India/Africa or Hamblin Watsa)

Interest/divvies on the $2.5B holdco cash: ~$50

 

 

Uses:

Revolver repayment in April 2020: $500

Holdco interest payments for 12 months: ~$300 (based on $5.2B holdco debt)

Holdco operating/admin: ?

Purchase of Brit minority stake: $100 (but nothing says that this cannot be paid from an insurance subsidiary)

Preferred and common divvy: $300 (assumes that FFH declares a $10 common divvy at Christmas 2020)

 

 

If you assume that the holdco cash inflows from management fees and subsidiary dividends exactly offset its cash outflows for operating/admin costs, the holdco would have about $1.9B cash on March 31, 2021.  So as I so tritely said, if everything goes well, everything will go well.  But, if they need to take a large, unfavourable equity mark or they experience a very bad cat year, they could be in the situation of needing to repay part of that revolver to respect their covenants, and then cash at March 31, 2021 might not look so rosy. 

 

 

 

SJ

 

 

*PS, my understanding is that Riverstone closed on March 31, meaning that the proceeds should be part of the $2.5B holdco cash.

[racemize]

Viking, what's your short-term trade target here?  Getting back to book value?

 

One idea, and I've switched to it, is just buying the preferreds.  If you are aiming to get to book value, I'm assuming they will get back to $20-$25 (depending on the series) at the same or better pace than common.

 

Would you ever expect them to trade above par, given how low rates have gone? I need to look at the terms again.

 

No, just trading back to where they were in 2019 is sufficient.  Meantime, 8% yield or so.

[Viking]

Viking, what's your short-term trade target here?  Getting back to book value?

 

One idea, and I've switched to it, is just buying the preferreds.  If you are aiming to get to book value, I'm assuming they will get back to $20-$25 (depending on the series) at the same or better pace than common.

 

Recemize, i would be quite happy with a 5-7% gain. I have had a good year and am sitting mostly in cash. The past month or so i have been very tactical taking a couple of small positions and selling for small gains. I need to do a little investing/trading to keep my brain from going Covid19 crazy :-)

 

I am happy to sit in cash With the majority of my portfolio until i have a better understanding of the impact of the virus on the actual economy.

[Viking]

Stubble, thanks for your thoughts. I did read your lengthy post after FFH posted results and found it very helpful :-)

 

Fairfax was very fortunate with the timing of the Riverstone deal. It brought them $600 million of much needed cash at (a now premium) valuation. With the economy in such terrible shape Fairfax will not be growing written premiums in the next 2 quarters (I am pretty sure this is what Prem said on the conference call) so the subs will likely not be needing $ from the hold co for business growth.

 

In the past Prem has proved to be very creative in surfacing value. Perhaps he has a rabbit or two yet to be pulled out of his hat.

[Cigarbutt]

^It seems like the Riverstone deal has two components.

 

First, there is 'value' recognition (although this value was deserved to start with if you think runoff operations are worth it).

 

Second, this was a liquidity operation. The 599.5M flowed to holdco (in a quarter when holdco was sending capital to insurance subs) in exchange for assets contributed to the Barbados-based joint venture. OMERS is participating for a price: the present value of the deconsolidated non-controlling interest. This is reminiscent of the Northbride and OdysseyRe bi-directional (sell then buy higher) operations (which were opportunities for profitable trades from an outsider perspective). There is a schedule for Fairfax to buy back the interest over time.

 

It was opportunistic but it is what it is.

[petec]

^It seems like the Riverstone deal has two components.

 

First, there is 'value' recognition (although this value was deserved to start with if you think runoff operations are worth it).

 

Second, this was a liquidity operation. The 599.5M flowed to holdco (in a quarter when holdco was sending capital to insurance subs) in exchange for assets contributed to the Barbados-based joint venture. OMERS is participating for a price: the present value of the deconsolidated non-controlling interest. This is reminiscent of the Northbride and OdysseyRe bi-directional (sell then buy higher) operations (which were opportunities for profitable trades from an outsider perspective). There is a schedule for Fairfax to buy back the interest over time.

 

It was opportunistic but it is what it is.

 

To clarify - there is a schedule of *options* for Fairfax to buy back. From what I hear they are unlikely to do so. I think the key part of this deal is that they have deconsolidated Riverstone UK, meaning it can lever up without affecting the FFH balance sheet. Apparently it needs to lever up to compete. I don’t think FFH will want it on their BS in future.

[petec]

Viking, what's your short-term trade target here?  Getting back to book value?

 

One idea, and I've switched to it, is just buying the preferreds.  If you are aiming to get to book value, I'm assuming they will get back to $20-$25 (depending on the series) at the same or better pace than common.

 

Would you ever expect them to trade above par, given how low rates have gone? I need to look at the terms again.

 

No, just trading back to where they were in 2019 is sufficient.  Meantime, 8% yield or so.

 

Yes, I can see the attraction. I just haven't really followed the prefs or what drives their prices, hence the question.

[petec]

It looks to me as though all the fixed-rate prefs sold off in 4Q18 (as did most equities) but never really recovered in 2019 (unlike most equities).

 

Is there an obvious reason? All else equal I'd have expected them to recover given the outlook for rates in mid 2019 was very different (lower) than mid 2018, and these are fixed rate securities.

 

Is this an FFH-specific spread or did Canadian prefs generally not recover?

[Cigarbutt]

Disclosure: FFH prefs are trading at interesting levels from a risk-reward perspective.

 

It seems CDN prefs have a life of their own with the fixed/resets aspect, institutional movements that tend to be correlated and more recently the ETF effect.

Raymond James produces reports that tend to describe the situational awareness:

https://www.raymondjames.ca/branches/premium/pdfs/preferredsharesreport.pdf

 

The ETF CPD is a relevant CDN preferred index.

For comparison:

                                    CPD            FFH.C

 

mid 2018                      14.25          24.50

01 2020                        12.27          18.55

min 03 2020                  9.37            12.85

now                              10.51          13.89

 

FFH preferreds follow the trends but also show variable credit-specific spreads. On top of market sentiment, there are two components that can go in the right or wrong directions.

[petec]

Thanks.

[petec]

https://www.canadianinsider.com/node/7?menu_tickersearch=FFH+%7C+Fairfax+Financial+Holding

 

Took me a while to find the pref data but thanks. I trust Brian Bradstreet's instincts.

 

Slightly worrying to see Barnard selling $1m of common. Perhaps he was buying a house. But the one thing that has kept me in FFH all these years is Prem's incredible ability to keep (what I judge to be) superb people in the business. There has to be a point where someone like Barnard, who has unquestionably delivered, gets p1ssed off that Prem isn't upholding his side of the bargain.

 

Quick follow up on this, FWIW. Andy Barnard has been selling when he exercises options for years now, but his retained holding is roughly flat and worth about USD12.5m.

 

https://ceo.ca/api/sedi/?insider=Barnard,%20Andrew

[Xerxes]

Unrelated Q1 13F seem to be due on Friday and Thursday for FFH and BRK.

 

It would be interesting to know what are top personal ownership of FFH management. How much of their wealth is tied to FFH percentage wise.

 

About FFH dividends, if that thing is turn off permanently it helps keep a good chunk of cash in and puts an incentive to increase value per share for the large owner-operator as oppose to live off dividends. Heck, the dividend outlay should in fact be used instead for share repurchase.