Fairfax 2022

[Parsad]

2 hours ago, Viking said:

@StubbleJumper you make some great points. 

I completely agree the transactions where Fairfax partners with OMERS, CPPIB, AIMCO) come with a definite cost. To be completely honest i do not understand all the puts and takes very well.
 

Do we know how much Fairfax will have to pay the partners to buy the position in Odyssey back?
1.) Is it a fixed amount known today - like perhaps US$900 million?

2.) Or is the amount unknown and based off the future value of Odyssey (9.9% of a much higher future value)?

 

Understanding this is important to understanding the true cost of the deal over its life. if it is option 1.) above i like the deal a whole lot more than if it is option 2.) 
 

If 9.9% of Odyssey is ‘worth’ $900 million today, we KNOW 9.9% will be worth much more in 5 years time (my guess is Odyssey will compound in value at 12-15% over the next 5 years given we are still in a hard market).

 

It might be interesting to look at the Eurolife deal to better understand how all the financial puts and takes worked over its lifetime.

 

Let's look at the ORH transaction.  They sold 9.9% for $900M, giving it a valuation of essentially $9B.  But ORH book value at year-end is $5.4B.  Correct me if I'm wrong, but that means they sold 10% of ORH at nearly 1.67 times book! 

 

And then they went and bought back their stock, including the remaining 90% of ORH at 0.65-0.8 times year-end book value depending on which share buyback and the TRS.  I'm surprised they didn't sell 20% of ORH to buy back even more stock!

 

They will not pay 1.67 times book to buy back that 10% of ORH when they do...they are going to pay somewhere around 1.2-1.3 times book...watch!

 

So I'm not too concerned about that 10% of ORH growing at 12-15% over the next 2-5 years before they buy it back, because Fairfax is far ahead of the game by doing what they did, and then buying back ORH at a lower valuation than when they sold.  Cheers!

[Xerxes]

So Leon's Furniture was not a #neversell.

That is cool !

[Viking]

Yes, We got confirmation that Fairfax made a few sales in Q4:

- Leon’s 7.2 million shares at C$25 = C$180 million

- IIFL Wealth 4.1 million shares for proceeds of about US$78 million

- IFL Finance 28.4 million shares for proceeds of about US$115 million

 

All 3 positions were sold for very healthy gains.

And as has been mentioned by others, with the recent purchase of Fairfax India at a substantial discount to BV Fairfax was able with its Indian positions to essentially sell high and buy low a few months later (with part of the proceeds). It is almost comical because Fairfax India owns substantial stakes in all the IIFL Wealth and Finance. A small but very good trade for Fairfax shareholders. This also further concentrates their Indian holdings in Fairfax India which simplifies things a little.
 

Exiting Leon’s also looks smart. Fairfax got a very good exit price - near all time highs at C$25/share. Shares currently trade at $22. Shares traded at $16 pre-pandemic. Fairfax also recently received a special $1.25 dividend (Oct). Home furnishing retailers have seen a boom in business in Canada due to the pandemic. It is less certain how sales will trend post pandemic - especially if we see a shift in consumer spending in Canada towards services. Bottom line, today it looks like a great move by Fairfax. 

Edited March 6, 2022 by Viking

[Cigarbutt]

23 hours ago, StubbleJumper said:

 

The preferred coupon for the Brit sale of 2021 is 10%?  Oy vey.  I had hoped that the days of 9% were over, but that hope was anchored in the notion that the coupon would be *less* than 9% rather than more.

SJ

Apologies for the lack of clarity. The 10.0% coupon for Brit was for the initial OMERS' transaction. Disclosure upon transaction announcement is limited and the coupon (and reimbursement of principal) can only be reconstructed retrospectively looking at the separate disclosures eventually released by the relevant subsidiary (annual reports etc). For the recent Brit transaction, it will likely be possible to reconstruct the missing variables over the course of 2022 and beyond.

Given the general movements in rates, FFH's credit spread and growing level of confidence (OMERS' point of view), i'd assume the most recent coupon to be around 8% for the 2021 Brit 'deal'?

[Viking]

Startup Ki has been on my watch list since first announced by Brit. This business is exploding in size. A doubling of gross premiums in 2022? With a combined ratio below 100%? Not what i was expecting. Very happy to see expectations for CR < 100 in 2022.
 

“Ki, Brit’s partnership with Blackstone, had a fantastic year in 2021 under Mark Allan’s leadership, writing nearly $400 million in gross premiums in its very first year. There is no question that Ki’s digital platform works and it expects to write $800 million in 2022 with a combined ratio below 100%. Ki had the fastest start-up in Lloyd’s history.”

—————

“At Brit, the management team deserves great credit for bringing in the year at a combined ratio of 97%, absorbing another larger-than-usual level of catastrophe losses. The underlying strength of its portfolio, along with reserve releases flowing from prior years, allowed Brit to close with $56 million of underwriting profit. Along with growth in its core syndicate, Brit benefited from the successful launch of the Mark Allan-led Ki Syndicate, which recorded almost $400 million of gross premiums written in its first year of operation. Ki is the first fully automated follow only underwriter operating in the Lloyd’s subscription market. With Martin Thompson stepping in as interim CEO while Matthew Wilson takes a health-related leave of absence, Brit enters 2022 with a strong head of steam and a bright future.”

Edited March 7, 2022 by Viking

[glider3834]

On 3/6/2022 at 11:12 AM, Cigarbutt said:

The 'preferred' share 'coupon' is 10.00% for Brit minority ownership.

The 'preferred' share 'coupon' is 8.00% for Allied World (126.4M per year on initial par value of third parties of 1580.0M).

With 8% priority dividend for Allied World - could we look at it from a tax point of view - I am not a tax expert so if I am completely missing something then please call me out -  Allied world is based in Bermuda which I believe has a nil corporate tax rate but it looks like that could change to 15% in line with global minimum tax rate proposals - anyway my point is at time that Allied world deal was done & up until now, Fairfax's sub Allied World has been a beneficiary of this lower tax rate regime, allowing a higher after tax return for Fairfax & so in a way this has subsidised that priority dividend to OMERS etc - just a thought anyway.

Edited March 7, 2022 by glider3834

[petec]

I think the keys to the OMERS-type deals is the buyback provisions. Does FFH have a right to buy back at a fixed price, or a fixed multiple of book, or what? Only when we know this can we assess whether the deals were good. What I would say is that:

1) These deals are not quasi-debt. I know very well what SJ is getting at here, and it is a good point to raise, but debt HAS to be repaid and therefore represents a risk that does not apply here.

2) We cannot assume that the fair value of Odyssey is 1.67x book because if the minorities have a dividend rights and can be bought out for pre-agreed terms, then they do not own common equity and the value may be different.

3) When FFH's insurance subsidiaries are marked up to something approximating fair value, we have to be more careful comparing FFH's p/bv with other insurers. If all assets were marked in this way the company should trade at 1x BV, while a company built entirely organically, which effectively carries all its assets at depreciated cost, might trade well above book value. 

[StubbleJumper]

Down to 0.7x BV this morning.  It's getting silly again.  If it drops much more, Prem might have to start digging through the cushions on his sofa to see whether he personally can find another US$150m like he did 18 months ago...

 

 

SJ

[StubbleJumper]

2 hours ago, petec said:

1) These deals are not quasi-debt. I know very well what SJ is getting at here, and it is a good point to raise, but debt HAS to be repaid and therefore represents a risk that does not apply here.

 

As I said, it has the characteristics of non-recourse debt because technically you don't have to repay it.  But, failing to repay it also has a similar consequence of skipping out on non-recourse debt.  If you don't repay your non-recourse debt, you'll never again find a lender to provide credit under those terms.  And, if there actually is a gentlemen's agreement that the Brit and Odyssey positions will be repurchased by a particular date, it's the same problem -- if you don't respect that gentlemen's agreement, you'll never again find a partner for that OMERS kind of transaction.

 

In the end, why do we even care about the level of debt and "quasi-debt?"  I propose that the reason why we should care is that there are four basic things that you can do with your FCF: pay divvies, buy back common shares, make new capital investment and repay debt.  And, make no mistake.  The need to "repurchase" the Brit and Odyssey positions basically ear-marks $1.275B+ of near-term FCF that cannot be used for the first three purposes.

 

Now, this is not the end of the world.  But, when a company reduces its debt levels, the theory goes that it provides additional room to maneuver in allocating future FCF.  That did not really occur at FFH in 2021, despite an apparent debt reduction of ~$500m.

 

I promised that I would not belabour the point, and I swiftly broke my promise.  Sorry everyone.  It's one of my many character faults.

 

 

SJ

[maplevalue]

https://www.bloomberg.com/news/articles/2022-03-07/fairfax-is-said-to-weigh-selling-stake-in-iifl-wealth-management

 

Fairfax Financial Holdings Ltd., the Canadian investment firm run by Prem Watsa, is exploring the sale of its stake in Indian financial firm IIFL Wealth Management Ltd., according to people familiar with the matter. 

The Toronto-based firm is in early-stage talks with potential bidders for the stakes, said the people, who asked not to be identified as the information is private. Other major shareholders including General Atlantic could also consider joining Fairfax in selling their own stakes, the people said.  IIFL Wealth shares fell 1.2% on Monday, giving the company a market value of around $1.7 billion. A vehicle controlled by Fairfax holds about 13.6% of the firm’s shares, while General Atlantic has a 21% stake, according to data compiled by Bloomberg.

Deliberations are ongoing and the investors could decide not to proceed with the sales, the people said. Representatives for General Atlantic and IIFL Wealth declined to comment, while Fairfax didn’t immediately respond to requests for comment outside business hours.

Founded in 2008, IIFL Wealth offers solutions for high and ultra-high net worth individuals, family offices and institutional clients, according to its website. The Mumbai-based firm has more than $44 billion in assets under management.

[bearprowler6]

39 minutes ago, StubbleJumper said:

 

As I said, it has the characteristics of non-recourse debt because technically you don't have to repay it.  But, failing to repay it also has a similar consequence of skipping out on non-recourse debt.  If you don't repay your non-recourse debt, you'll never again find a lender to provide credit under those terms.  And, if there actually is a gentlemen's agreement that the Brit and Odyssey positions will be repurchased by a particular date, it's the same problem -- if you don't respect that gentlemen's agreement, you'll never again find a partner for that OMERS kind of transaction.

 

In the end, why do we even care about the level of debt and "quasi-debt?"  I propose that the reason why we should care is that there are four basic things that you can do with your FCF: pay divvies, buy back common shares, make new capital investment and repay debt.  And, make no mistake.  The need to "repurchase" the Brit and Odyssey positions basically ear-marks $1.275B+ of near-term FCF that cannot be used for the first three purposes.

 

Now, this is not the end of the world.  But, when a company reduces its debt levels, the theory goes that it provides additional room to maneuver in allocating future FCF.  That did not really occur at FFH in 2021, despite an apparent debt reduction of ~$500m.

 

I promised that I would not belabour the point, and I swiftly broke my promise.  Sorry everyone.  It's one of my many character faults.

 

 

SJ

SJ,

 

Do you look at the financing provided by OMERS, AIMCO to close the Allied World (AW) acquisition in the same way? I believe they provided $1.5 billion at the closing 5 years ago and continue hold 29% of the AW shares. With accrued "interest" the cash cost to purchase the OMERS & AIMCO stakes in AW would now exceed $2 billion and counting. 

 

Adding the AW $2 billion to the $1.275 billion you noted above we have a situation where Fairfax would need to set aside almost $3.3 billion and counting to repay its funding partners (OMERS, AIMCO, CPPIB) over the next several years.

 

If Fairfax never intends to acquire the minority stakes in AW, Brit and Odyssey then this discussion is moot however I suspect they want to own 100% of these entities at some point in the future. If this is correct then the cash cost to do so needs to tracked and factored into any assessment of Fairfax's future potential value. 

 

BTW---before the Fairfax fanboys over react---I am not suggesting that it was not prudent for Fairfax to work with their partners (OMERS etc) on the AW, Brit and Odyssey transactions. In particular the recent raising of funds by selling off small portions of Brit and Odyssey provided the capital needed to repurchase Fairfax shares well under book value. A very good move! I am however suggesting that it comes at a cost and I do not believe that the cost has been adequately factored into the very optimistic future valuations for Fairfax being discussed on this site. 

 

BP6

 

 

 

 

 

 

 

 

 

 

[petec]

4 hours ago, bearprowler6 said:

With accrued "interest" the cash cost to purchase the OMERS & AIMCO stakes in AW would now exceed $2 billion and counting. 

 

Does the interest accrue? I thought it took the form of preferential dividend rights, and was paid in cash.

4 hours ago, bearprowler6 said:

If this is correct then the cash cost to do so needs to tracked and factored into any assessment of Fairfax's future potential value.

 

It doesn't affect Fairfax's value, so long as the deal allows them to buy it back at a fair price. What it might affect, as SJ says, is their flexibility to use cash for other things.

 

4 hours ago, bearprowler6 said:

I am however suggesting that it comes at a cost

 

Absolutely.

Edited March 7, 2022 by petec

[petec]

4 hours ago, StubbleJumper said:

 

As I said, it has the characteristics of non-recourse debt because technically you don't have to repay it.  But, failing to repay it also has a similar consequence of skipping out on non-recourse debt.  If you don't repay your non-recourse debt, you'll never again find a lender to provide credit under those terms.  And, if there actually is a gentlemen's agreement that the Brit and Odyssey positions will be repurchased by a particular date, it's the same problem -- if you don't respect that gentlemen's agreement, you'll never again find a partner for that OMERS kind of transaction.

 

In the end, why do we even care about the level of debt and "quasi-debt?"  I propose that the reason why we should care is that there are four basic things that you can do with your FCF: pay divvies, buy back common shares, make new capital investment and repay debt.  And, make no mistake.  The need to "repurchase" the Brit and Odyssey positions basically ear-marks $1.275B+ of near-term FCF that cannot be used for the first three purposes.

 

Now, this is not the end of the world.  But, when a company reduces its debt levels, the theory goes that it provides additional room to maneuver in allocating future FCF.  That did not really occur at FFH in 2021, despite an apparent debt reduction of ~$500m.

 

I promised that I would not belabour the point, and I swiftly broke my promise.  Sorry everyone.  It's one of my many character faults.

 

 

SJ

 

I half agree and half don't. Counterpoints below:

1. When you have debt you have no flexibility around when to repay. When you have an option, you do. Flexibility has absolutely increased.
2. Without knowing the full terms of the deal we simply cannot know what the consequences of failing to "repay" would be. So long as OMERS et al are happy with their returns they may have no issue with Fairfax not "repaying" the loans. In fact they may see repayment as a threat, given the difficulty of redeploying capital. Certainly Fairfax's "failure" to "repay" the Allied "loan" does not seem to have stopped them attracting similar capital so far. 
3. Repurchasing shares in FFH and repurchasing positions in Brit/Allied/Odyssey amount to virtually the same thing - both ways, we end up owning more of what we already own. The deals effectively create liquidity on tap if FFH want to do another big buyback. Again, this arguably increases flexibility, given that liquidity may well be a barrier to buybacks for the mothership. The problem is, without knowing the terms of the deal and specifically the buyback price-setting mechanism, we cannot assess the value they might get. 
4. As I have argued before, having an in-house lender of last resort increases flexibility, rather than hindering it. I know you are not arguing counter to this but it's a point worth making.

 

[bearprowler6]

1 hour ago, petec said:

 

Does the interest accrue? I thought it took the form of preferential dividend rights, and was paid in cash.

 

It doesn't affect Fairfax's value, so long as the deal allows them to buy it back at a fair price. What it does affect, as SJ says, is their flexibility to use cash for other things.

 

 

Absolutely.

I am glad we can agree there is a cost. Until SJ raised this issue it had not been discussed and I for one am pleased that we are now doing so. 

 

Bad on me for using the words "accrued interest". The preferential dividend payments are a cash outflow that would have otherwise accrued to Fairfax and now must be paid to OMERS/AIMCO/CPPIB. Essentially, Fairfax gets the "use" of the funds up front (to assist with the closing of the Allied World acquisition or to buy back its own shares in the case of the Brit/Odyssey transactions) but loses out on preferential dividends paid out over time. 

 

You raise another concern with these transactions---we truly do not know whether Fairfax is able to buy them back at "fair value" or not? For example, the hard market had not yet started when the Allied World acquisition was undertaken. Presumably Allied World is much more valuable now given the impact on the hard market than at the time of acquisition. Who gets the benefit of this additional value? We simply do not know because of the lack of transparency surrounding this deal. 

 

It is amazing to me that with all the eyes on Fairfax on this board that no one truly knows how these "OMERS/AIMCO/CPPIB" financing deals work. We are simply to trust that it will all work out best for Fairfax and its shareholders. While this is good enough for many on this board it is not for me. I simply do not buy the traditional value investor view that all one needs to do is buy under book value and everything will work out in time. The long time under performance of Fairfax's share price suggests that many investors share my views and concerns. 

 

 

Edited March 7, 2022 by bearprowler6

[Parsad]

15 minutes ago, bearprowler6 said:

I simply do not buy the traditional value investor view that all one needs to do is buy under book value and everything will work out in time. The long time under performance of Fairfax's share price suggests that many investors share my views and concerns. 

 

 

 

The fact is that is that if you did that...buy well below book and sell above book...it has worked out every time for 35 years...roughly 8-9 times! 

 

It also doesn't mean the "fan boys" don't concern themselves with details.  There might be 3-4 people on this board who scrutinized Fairfax the way I did from 2001 to 2010 after the financial crisis.  Same with Berkshire, but that was between 1999 and 2005.  At some point in time, you become comfortable with management, their behavior (including risk assessment) and their ability to recover from adversity.  It's not that we're ignorant, but we know the gameplan. 

 

How much do I have to analyze Coca-cola or Disney management or their gameplan to know when it is cheap or not.  You cannot value management, only the business and its competitive advantages.  The difference is that Buffett, Watsa, Gaynor, etc add to the competitive advantages of their underlying business...not subtract.  When both the business and that management is available at a favourable price, a significant margin of safety, you are buying at a price that offsets the stuff you may not be able to assess adequately. 

 

How does Munger offset political risk...he buys Alibaba at a deeper discount.  It may not work out all of the time, but it tends to work out most of the time. 

 

No doubt other shareholders share your concern.  But it's probably more of a comfort issue, than a material issue.  Cheers!

[glider3834]

I think the issue being raised here is primarily to do with cash flow - Fairfax will need to put money aside that will prevent Fairfax putting funds to best effect eg share repurchases. Effectively Fairfax's hands will be tied.

But why do we think OMERS etc are in a hurry to get paid? the point has been made that OMERS are getting a good deal here.

Why couldn't  these 'call' options be extended for another few years?

Or OMERS stake sold to another party/partner that Fairfax wants to work with? or Fairfax raises funds via a share issue above BV? Or Fairfax actually sells one sub?

Another option as well could be one of Fairfax's subs buys the minority interest in Brit. So money would not need to come from the Holdco. This is not common, just Zenith & TRG where this has occured. 

I think there are multiple options on the table - Fairfax can get creative when they need to - their track record is there.

OMERS & CPPIB had no issue investing $1bil last year - even though their Brit, Allied stakes had not been bought back. 

When Fairfax sold Riverstone Europe, they made the point that OMERS was keen to redeploy money into a minority interest in Brit. Why did they do that? 

And OMERS have also invested into Anchorage.

For me it appears that OMERS like working with Fairfax & are keen to partner on deals & keen to put their money to work at every opportunity. So I would frame the issue in that way, rather than OMERS need to be paid back by this date or else OMERS won't want to partner with Fairfax in the future.  Also I would make point above I made that there are multiple ways Fairfax could do this, that would not impact their ability eg to buyback shares.

 

 

 

Edited March 7, 2022 by glider3834

[StubbleJumper]

49 minutes ago, bearprowler6 said:

I am glad we can agree there is a cost. Until SJ raised this issue it had not been discussed and I for one am pleased that we are now doing so. 

 

Bad on me for using the words "accrued interest". The preferential dividend payments are a cash outflow that would have otherwise accrued to Fairfax and now must be paid to OMERS/AIMCO/CPPIB. Essentially, Fairfax gets the "use" of the funds up front (to assist with the closing of the Allied World acquisition or to buy back its own shares in the case of the Brit/Odyssey transactions) but loses out on preferential dividends paid out over time. 

 

You raise another concern with these transactions---we truly do not know whether Fairfax is able to buy them back at "fair value" or not? For example, the hard market had not yet started when the Allied World acquisition was undertaken. Presumably Allied World is much more valuable now given the impact on the hard market than at the time of acquisition. Who gets the benefit of this additional value? We simply do not know because of the lack of transparency surrounding this deal. 

 

It is amazing to me that with all the eyes on Fairfax on this board that no one truly knows how these "OMERS/AIMCO/CPPIB" financing deals work. We are simply to trust that it will all work out best for Fairfax and its shareholders. While this is good enough for many on this board it is not for me. I simply do not buy the traditional value investor view that all one needs to do is buy under book value and everything will work out in time. The long time under performance of Fairfax's share price suggests that many investors share my views and concerns. 

 

 

Really, what it amounts to is expensive debt.  If FFH were in a stronger financial position, the approach would be to float $1b of notes at 4ish percent.  But it is what it is.  Instead they must revert to opaque deals with 9 percent coupons.

 

As I've said, as long as the destination of the proceeds meets a 12 or 15 percent hurdle, you can plug your nose and "borrow" at 9 percent. Thankfully @cigarbutt is willing to dig through the more obscure filings so that we get a bit of clarity on these deals.  And thankfully this most recent pair of deals was used for a purpose that appears to be a slam dunk.

 

My hope is that the improved earnings capacity results in a stronger financial position in a few years and then perhaps FFH can revert to more traditional financing arrangements at a lower cost.

 

SJ

[glider3834]

Just looking through AR 2021 - you can see what Fairfax are saying (on 3Q'22 call) that they have de-risked their catastrophe exposure - 2017 was a bit higher but similar to 2021 in terms of insured catastrophe losses. Looking at catastrophe losses as % of net premium written, it looks to have been reduced by nearly 50%.

 

[glider3834]

93,000 shares bought back (around $46 mil approx) b/w 1 Jan to 3 Mar-22 - hopefully they can increase it.

 

At December 31, 2021 there were 23,865,600 common shares effectively outstanding.

 

At March 3, 2022, Fairfax had 23,024,111 subordinate voting shares and 1,548,000 multiple voting shares outstanding (an aggregate of 23,772,881 shares effectively outstanding after an intercompany holding). 

 

[nwoodman]

 

Fairfax Financial Holdings Ltd., the Canadian investment firm run by Prem Watsa, is exploring the sale of its stake in Indian financial firm IIFL Wealth Management Ltd., according to people familiar with the matter. 

 

The Toronto-based firm is in early-stage talks with potential bidders for the stakes, said the people, who asked not to be identified as the information is private. Other major shareholders including General Atlantic could also consider joining Fairfax in selling their own stakes, the people said.

 

IIFL Wealth shares fell 1.2% on Monday, giving the company a market value of around $1.7 billion. A vehicle controlled by Fairfax holds about 13.6% of the firm’s shares, while General Atlantic has a 21% stake, according to data compiled by Bloomberg.

 

https://wap.business-standard.com/article-amp/companies/fairfax-financial-holdings-weighs-selling-stake-in-iifl-wealth-management-122030701546_1.html

[KFS]

There are obviously many factors impacting Fairfax's stock price as discussed endlessly on this board, but I think it’s worth remembering FFH’s price/book ratio over the past several years -- like many insurance companies -- has been fairly well correlated with interest rates as you can see in the two 5-year charts below. 

 

Just looking at some random data points over the past 5 years:

                                                P/B                       10-year %

July 2017                              1.15                        2.30%

August 2018                        1.20                        2.95%

October 2018                     1.25                        3.15%

August 2019                        1.03                        1.80%

Feb 2020                              1.00                        1.50% (just prior to covid crash)

April 2020                            0.70                        0.65% (just after covid crash)

August 2021                        0.86                        1.28%

March 2022 (today)          0.76                        2.16%

 

Today, with the recent increase in rates, it sure seems FFH stock has not responded in the typical way….  As perhaps other factors are weighing heavily on the stock, or the market is simply asleep in failing to acknowledge this rise and the impact it could have on the company’s earning potential.  Today the 10-year yield is at 2.16% and rising, and yet the P/B is lagging behind, still ~0.76.  FFH’s insurance business/float has increased quite dramatically over the past few years, and one would expect rates to be an even stronger factor going forward, yet here we are.  Like I said, there are obviously many other things affecting the stock as you all know, but I think it’s worth being aware of this historical relationship vs. the apparent lapse today... 

 

 

[maxthetrade]

2 hours ago, KFS said:

Today, with the recent increase in rates, it sure seems FFH stock has not responded in the typical way…. 

 

Probably makes more sense to look at real rates.

[TwoCitiesCapital]

3 hours ago, KFS said:

There are obviously many factors impacting Fairfax's stock price as discussed endlessly on this board, but I think it’s worth remembering FFH’s price/book ratio over the past several years -- like many insurance companies -- has been fairly well correlated with interest rates as you can see in the two 5-year charts below. 

 

Just looking at some random data points over the past 5 years:

                                                P/B                       10-year %

July 2017                              1.15                        2.30%

August 2018                        1.20                        2.95%

October 2018                     1.25                        3.15%

August 2019                        1.03                        1.80%

Feb 2020                              1.00                        1.50% (just prior to covid crash)

April 2020                            0.70                        0.65% (just after covid crash)

August 2021                        0.86                        1.28%

March 2022 (today)          0.76                        2.16%

 

Today, with the recent increase in rates, it sure seems FFH stock has not responded in the typical way….  As perhaps other factors are weighing heavily on the stock, or the market is simply asleep in failing to acknowledge this rise and the impact it could have on the company’s earning potential.  Today the 10-year yield is at 2.16% and rising, and yet the P/B is lagging behind, still ~0.76.  FFH’s insurance business/float has increased quite dramatically over the past few years, and one would expect rates to be an even stronger factor going forward, yet here we are.  Like I said, there are obviously many other things affecting the stock as you all know, but I think it’s worth being aware of this historical relationship vs. the apparent lapse today... 

 

 

 

The only reason for the correlation is b/c people expect higher rates to result in higher income. But that's only true if you invest the cash into higher rates. Fairfax didn't do that last time we went through the cycle and rates were significantly higher than they are today. 

 

I don't have a ton of confidence they're gonna put a ton of cash to work with rates even lower than prior opportunities they've passed on. Seems like the market agrees which is why the correlation broke down. We learned from history. 

 

If interest rates go to 5%, I'll eat my words. But I'm highly skeptical that the 10-year gets sustainably above 2.5% for more than a 3-6 month period and it's not clear that Fairfax will put it's cash to work until rates get well above the 3.25% that was passed on in 2018. 

 

Forward rate curve is already inverted for 2s-10s suggesting potential for another recession within 12-18 months. There's a very real possibility we sit on cash and miss it again. 

Edited March 16, 2022 by TwoCitiesCapital

[KFS]

6 minutes ago, TwoCitiesCapital said:

The only reason for the correlation is b/c people expect higher rates to result in higher income. But that's only true if you invest the cash into higher rates. Fairfax didn't do that last time we went through the cycle and rates were significantly higher than they are today. 

 

I don't have a ton of confidence they're gonna put a ton of cash to work with rates even lower than prior opportunities they've passed on. Seems like the market agrees which is why the correlation broke down. We learned from history. 

 

If interest rates go to 5%, I'll eat my words. But I'm highly skeptical that the 10-year gets sustainably above 2.5% for more than a 3-6 month period and it's not clear that Fairfax will put it's cash to work until rates get well above the 3.25% that was passed on in 2018. 

 

Forward rate curve is already inverted for 2s-10s suggesting potential for another recession within 12-18 months. There's a very real possibility we sit on cash and miss it again. 

 

 

Fair point.  I guess I tend to assume Bradstreet & gang would be able to make some intelligent decisions if/when the opportunities arise, but of course you may be right.  

 

[TwoCitiesCapital]

15 minutes ago, KFS said:

 

 

Fair point.  I guess I tend to assume Bradstreet & gang would be able to make some intelligent decisions if/when the opportunities arise, but of course you may be right.  

 

I would tend to agree if there had ever been an acknowledgement or discussion on their lack of action in 2018 or what they'll do differently next time, but there hasn't been. 

 

They've assured us that there will be no more shorting, but haven't assured us at what level of rates they'll start putting cash to work. So I have no reason to believe it'll be any different than in 2018 where we'll need to see at least 3.25% before they consider it.