Fairfax 2021

[petec]

BTW for amusement:

 

I think there are about 230m shares outstanding after the IPO. 80m now, plus 130m from conversion of the Fairfax and Osmington debs, plus 20 for warrants.

 

FDGE had a revenue run rate of $55m at YE20.

 

At $10, it's being valued on 42x revenues.

 

I haven't the heart to do the calculation at $17.

[matthew2129]

Looks like they entered into total return swaps to buyback over 5% of the outstanding shares during q4:

 

"Throughout much of last year, I made public statements to the effect that our belief was that Fairfax shares were trading in the market at a ridiculously cheap price. Following our value investing philosophy, since the latter part of 2020 we have purchased total return swaps with respect to 1,407,864 subordinate voting shares of Fairfax with a total market value at the time of those agreements of $484.9 million ($344.45 (Cdn$443.93) per share)," said Prem Watsa, Chairman and Chief Executive Officer.

 

Also directly bought back several hundred thousand shares:

 

During 2020 the company purchased 457,603 subordinate voting shares for treasury and 343,871 for cancellation at an aggregate cost of $238.8 million.

[petec]

Something for everyone here.

 

BVPS 478 *before* BlackBerry and Farmer’s Edge. And the buyback is superb.

 

Not sure why they’re selling 15% of Brit.

[bearprowler6]

Here's the press release for the full year 2020 results:

 

https://www.fairfax.ca/news/press-releases/press-release-details/2021/Fairfax-Financial-Holdings-Limited-Financial-Results-for-the-Year-Ended-December-31-2020/default.aspx

[nwoodman]

A lot to like.  The deleveraging is the most welcome aspect for my money.  I would much prefer a multi year compounder albeit with lower CAGR, than feeling like I need to jump in and out. Capital gains tax is over rated

[ValueMaven]

weird total return swap trade on the company ??  Why not just buyback stock??  it is way more meaningful then $100M/$200M you might make on a TRS trade linked to Fairfax ... argh!

[Viking]

It looks pretty much exactly what we all expected... NOT (but in a very good way this time :-)

 

$1.2 billion net gain on investments? WTF?

[petec]

weird total return swap trade on the company ??  Why not just buyback stock??  it is way more meaningful then $100M/$200M you might make on a TRS trade linked to Fairfax ... argh!

 

Because they didn’t have the cash to buy the stock. Instead they locked in the price for when they have cash later.

[Dazel]

 

Great results...

The corporates I kept mentioning...$500m gain.

Happy they cut their losses on the mystery short....$500m loss.....ouch.

Absolutely pumped about the total return swap of the buyback!!!!

Love what they are doing...

 

Quarter one will also be a blow out....we are headed to records. Prem is back.

[Viking]

weird total return swap trade on the company ??  Why not just buyback stock??  it is way more meaningful then $100M/$200M you might make on a TRS trade linked to Fairfax ... argh!

 

Because they didn’t have the cash to buy the stock. Instead they locked in the price for when they have cash later.

 

Which perhaps explains the 15% sale of Brit to OMERS (source of cash for buyback)

[StubbleJumper]

Something for everyone here.

 

BVPS 478 *before* BlackBerry and Farmer’s Edge. And the buyback is superb.

 

Not sure why they’re selling 15% of Brit.

 

 

They needed to borrow some money without pushing up their ratios, so instead of borrowing they sold some of Brit to OMERS, likely with that 9% promise, and then they'll buy it back in a couple of years.  Every time they do a deal with OMERS, I feel like I need to take a shower after.

 

 

SJ

[petec]

weird total return swap trade on the company ??  Why not just buyback stock??  it is way more meaningful then $100M/$200M you might make on a TRS trade linked to Fairfax ... argh!

 

Because they didn’t have the cash to buy the stock. Instead they locked in the price for when they have cash later.

 

Yeah maybe but they’re not short after Riverstone.

Which perhaps explains the 15% sale of Brit to OMERS (source of cash for buyback)

[Parsad]

I'm wondering if Prem mentioning the total return swaps hinted at what they may have done with the Blackberry spike in January.  I hope they locked in some of those gains!  Also, as I estimated, I would imagine book value in Q1 presently is around $500 USD...which would justify a price of $600 USD at the end of Q1.  Cheers!

[petec]

Something for everyone here.

 

BVPS 478 *before* BlackBerry and Farmer’s Edge. And the buyback is superb.

 

Not sure why they’re selling 15% of Brit.

 

 

They needed to borrow some money without pushing up their ratios, so instead of borrowing they sold some of Brit to OMERS, likely with that 9% promise, and then they'll buy it back in a couple of years.  Every time they do a deal with OMERS, I feel like I need to take a shower after.

 

 

SJ

 

Quite.

[StubbleJumper]

weird total return swap trade on the company ??  Why not just buyback stock??  it is way more meaningful then $100M/$200M you might make on a TRS trade linked to Fairfax ... argh!

 

 

The holdco doesn't have the cash for a large scale buyback.  They actually bought far more shares during 2020 than I ever expected. 

 

 

SJ

[StevieV]

Happy they cut their losses on the mystery short....$500m loss.....ouch.

 

Did they say that the shorts are fully closed out?  $175 million in short equity unrealized gains as of year-end according to one of the charts in the release.  Unrealized = active as of year end, right?

[StubbleJumper]

Am I the first to say that the insurance subs shot lights out?  Holy smokes!  Net Written growth is not just double-digits for most of those subs (Brit and Zenith excepted), but well into the double digits (WTF, Odyssey gross written up by like 25%!!!).  The combined ratios were outstanding.  Capital still looks a bit tight at Crum, despite the holdco pumping an enormous amount into the subs.  Just as an observation completely separate from Q4 results, does anybody have a good explanation for why Allied cedes so much premium?

 

The FFH total return swaps are very likely to work out fabulously during 2021.  Is anyone else surprised that the regulators even allow companies to buy TRS in themselves?  Not a criticism of FFH, but it's just that I don't ever recall seeing that technique disclosed by other companies.

 

Not a word about "subsequent to quarter's end?"  How is that possible?

 

Best quarter that I can recall in quite some time.

 

 

SJ

[petec]

Yup. 93% CR excl covid. Super stuff.

[lessthaniv]

I'm interested as to understanding the terms of the TRS contract they've initiated. In praticular, when/how it can be terminated.

 

Taking into account the comment about price ~ $443cdn and the following quote;  "Throughout much of last year, I made public statements that Fairfax shares were trading at a ridiculously cheap price. Since the latter part of 2020 we have purchased total return swaps of 1,407,864 shares of Fairfax"

 

The stock hit ~$443cdn in later Nov, so I'd guess the contract is only a couple of months old. Hopefully it can only be closed on the termination date so they can book the rest of their gains first!

 

 

Edit: Corrected actual quote

 

[petec]

I'm interested as to understanding the terms of the TRS contract they've initiated. In praticular, when/how it can be terminated.

 

Taking into account the comment about price ~ $443cdn and the following quote;  "Throughout much of last year, I made public statements that Fairfax shares were trading at a ridiculously cheap price. Since the latter part of 2020 we have purchased total return swaps of 1,407,864 shares of Fairfax" (5.4% of shares)"

 

The stock hit ~$443cdn in later Nov, so I'd guess the contract is only a couple of months old. Hopefully it can only be closed on the termination date so they can book the rest of their gains first!

 

Doesn’t matter when it closes. The point is (I think) they’ve locked in that price for a future buyback of 1.4m shares.

 

Edit: what I mean is that when it closes doesn’t affect the profitability of the eventual buyback.

[doc75]

Am I the first to say that the insurance subs shot lights out?  Holy smokes!  Net Written growth is not just double-digits for most of those subs (Brit and Zenith excepted), but well into the double digits (WTF, Odyssey gross written up by like 25%!!!).  The combined ratios were outstanding.  Capital still looks a bit tight at Crum, despite the holdco pumping an enormous amount into the subs.  Just as an observation completely separate from Q4 results, does anybody have a good explanation for why Allied cedes so much premium?

 

The FFH total return swaps are very likely to work out fabulously during 2021.  Is anyone else surprised that the regulators even allow companies to buy TRS in themselves?  Not a criticism of FFH, but it's just that I don't ever recall seeing that technique disclosed by other companies.

 

Not a word about "subsequent to quarter's end?"  How is that possible?

 

Best quarter that I can recall in quite some time.

 

 

SJ

 

Not only were they able to do it, but they apparently didn't have to disclose the swap in the same way they have to disclose market purchases.

 

Which makes me think that a TRS on Blackberry was also possible without disclosure.  Time will tell.

 

[Patient Investor]

BTW for amusement:

 

I think there are about 230m shares outstanding after the IPO. 80m now, plus 130m from conversion of the Fairfax and Osmington debs, plus 20 for warrants.

 

FDGE had a revenue run rate of $55m at YE20.

 

At $10, it's being valued on 42x revenues.

 

I haven't the heart to do the calculation at $17.

 

 

Petec,

 

I don't think you have the math quite right. There is going to be a consolidation of shares immediately prior to the IPO (see page 101 of the preliminary prospectus) While we don't yet know the exact ratio  we can back into it from the PowerPoint presentation on Sedar. Using the midpoint of the offer range, the company suggests that the IPO shareholders will own 16% and Fairfax will own 65%. Based on $100 million being raised at $13.50 per share implies that the IPO shareholders will own

7.41 million shares.  If the IPO shareholders own 16% this implies a total share count outstanding after the IPO of approximately 46.31 million shares outstanding (i.e. after the effects of the share consolidation immediately prior to the IPO). With 65% ownership post IPO, this suggests that Fairfax will own about 30.1 million shares. At $13.50 per share, it also implies that the market valuation will be about $625 million in total.

[StubbleJumper]

Am I the first to say that the insurance subs shot lights out?  Holy smokes!  Net Written growth is not just double-digits for most of those subs (Brit and Zenith excepted), but well into the double digits (WTF, Odyssey gross written up by like 25%!!!).  The combined ratios were outstanding.  Capital still looks a bit tight at Crum, despite the holdco pumping an enormous amount into the subs.  Just as an observation completely separate from Q4 results, does anybody have a good explanation for why Allied cedes so much premium?

 

The FFH total return swaps are very likely to work out fabulously during 2021.  Is anyone else surprised that the regulators even allow companies to buy TRS in themselves?  Not a criticism of FFH, but it's just that I don't ever recall seeing that technique disclosed by other companies.

 

Not a word about "subsequent to quarter's end?"  How is that possible?

 

Best quarter that I can recall in quite some time.

 

 

SJ

 

Not only were they able to do it, but they apparently didn't have to disclose the swap in the same way they have to disclose market purchases.

 

Which makes me think that a TRS on Blackberry was also possible without disclosure.  Time will tell.

 

 

 

We can live in hope!

 

SJ

[doc75]

Regarding short exposure:  It appears FFH continued to hold open short positions at Dec 31, with mark-to-market gains of $175m. 

 

Am I reading this correctly?  And, if so, does it make anyone else worry about what has happened to those since Dec 31?

 

 

[Viking]

RBC was forecasting Q4 earnings for Fairfax of $5/share... (yes, investment gains are pretty much impossible to accurately estimate for Fairfax). We should see large target price increases tomorrow from all the analysts given:

1.) much larger than expected increase in BV

2.) larger than expected increase in net premiums written

3.) better CR

4.) significant Q1 tailwinds:

- equity holdings up about another $1.4 billion since Jan 1 (yes, a big bunch of this equity accounted)

- upside from Farmers Edge IPO

- Digit revaluation

 

———————————

Globe and Mail news article on results. Fairfax should get lots of positive press with these results in the coming days and weeks.

 

- https://www.theglobeandmail.com/business/article-fairfax-bounces-back-from-early-covid-19-pandemic-losses/