Fairfax 2023

[modiva]

Wow. Thanks @Viking for detailed insights. 

Edited January 10, 2023 by modiva

[Luke]

@Viking Thanks for the insights, its a great idea. VIC had Fairfax latest in 2021, if you are not a member yet, it might be worth a shot to make it an Idea. 

[gfp]

Are other people seeing a huge trade at the open on Fairfax's Toronto listed shares (FFH) ?  Very unusual.  Like $150+ million CAD?

[Daphne]

Done deal…hopefully with FFH as buyer

[Xerxes]

Maybe it is the Fairfax's counter-party to the total return swaps who is rushing (after the fact) to buy Fairfax shares to hedge their blown-out counter-party exposure after it rallied. They have been taken to the cleaners by Watsa. 

 

---------------

Unrelated, in 2022, we had a bear market where major indices dropped 15-20%, while Berkshire went flat and Fairfax rallied. Putting aside, FFH's undervaluation and how still cheap it is, if 2023 turns out to be a bull market year for indices, do folks think Fairfax would continue to rally, or would it a "pause" flat year. 

[jfan]

On 1/9/2023 at 6:42 PM, Viking said:

Fairfax’s stock is trading today at about US$600. If Fairfax earns $100/share in 2023 that would put the forward PE multiple at 6 times earnings. Crazy cheap. Fairfax stock is like a coiled spring.

Thanks @Viking for sharing all your hard work. 

 

I take a slightly different approach to valuing FFH as long as the management team and their goals remain stable. Given that their investment returns are their primary driver to earnings power, I use an expected value framework by focusing on the following variables:

1) Investment $ available

2) median combined ratio of 97.3% (data from 2007 - present)

3) median corporate expense

4) current interest expense

5) % of earnings attributable to minority interest

6) current outstanding shares

 

I build out a theoretical EPS for the range of all their geometric mean % investment returns and use their historical probabilities of occurrence to come to an expected EPS. Below is a graph of their return frequencies.

 

 

From this I get a point estimate of their EPS of $95 USD/share. 

 

Just another approach which seems to triangulate with @Viking's more detailed breakdown. Thought this would be interesting to share.

 

 

[Cigarbutt]

On 1/9/2023 at 6:37 PM, gfp said:

So this business is an MGU "Managing General Underwriter" - sort of like an insurance broker with the authority to bind coverage directly (make the underwriting decision).  My understanding is that Ambridge placed business not only with Brit but also with other global reinsurers.  After this deal closes, they will still have a close partnership with Brit to place business with them.  But Brit would no longer participate in the brokerage commission portion of that business.

 

No idea how this differs from an "MGA" (Managing general agent) but I think they are essentially the same.

Who am i to say but this seems to be the consensus view:

The term “managing general underwriter” is often used in the life and health context, while “managing general agent” is often used in the property and casualty context. In practice, the term “managing general underwriter” (“MGU”) is often used synonymously with MGA.

MGAs and MGUs seem to be in fashion lately (higher growth than general premium markets) so maybe a good time to sell but (for those with long memories) MGAs can be tricky and the MGA idea was, in fact, a significant part of the existential threat that's part of FFH's history (late 90s and early 2000s). When TIG was bought, about 50% of written premiums came from a single entity based in Dallas (potential ouch!). Mr. Watsa had this to say in 2003 (after putting the MGA platform into a to-be lengthy (and eventually very expensive) run-off):

"Of course, our big mistake at TIG was not recognizing that its MGA model would not work, particularly with one broker controlling 40-50% of the business. We should have shut or sold the MGA business years back and built on the much smaller individual risk underwriting operations. The losses at TIG resulted in a weakening of our financial position. You can rest assured on one thing, unless there are exceptional circumstances, we will not ‘‘give our pen’’ away." {my addition: or let anyone else write on our paper}

-----

As far as the counter-party comment and potentially naked exposure, someone somewhere is taking the loss but it would be surprising if it's the direct counter-party that's taking the hit because the exposure is likely countered by another party or somehow hedged.

[gfp]

Thanks for the context Cigarbutt.  I remember years ago Gen Re felt so highly of TransRe that they let them have the underwriting pen for a while and it surprised me at the time.  But really it was a good show of respect for their underwriting culture and of course they are now part of Berkshire.

https://www.sec.gov/Archives/edgar/data/775368/000119312516641267/d222170dex991.htm

[Cigarbutt]

^Yes underwriting 'discipline' is a cultural thing and is developed over time when leaders have it in their DNAs.

TransRe Press Release

---) Back to FFH 2023 and beyond

[TwoCitiesCapital]

2 hours ago, Xerxes said:

Maybe it is the Fairfax's counter-party to the total return swaps who is rushing (after the fact) to buy Fairfax shares to hedge their blown-out counter-party exposure after it rallied. They have been taken to the cleaners by Watsa. 

 

---------------

Unrelated, in 2022, we had a bear market where major indices dropped 15-20%, while Berkshire went flat and Fairfax rallied. Putting aside, FFH's undervaluation and how still cheap it is, if 2023 turns out to be a bull market year for indices, do folks think Fairfax would continue to rally, or would it a "pause" flat year. 

 

The outperformance has been significant and the shares remain cheap by most fundamental standards. It would not shock me to see this at $1,000 USD/share in the next 2 years. 

 

But, we must keep in mind that this cheapness has been obvious for last 2+ years and shares have traded significantly lower than they are today during that time. 

 

Given the significance of its recent outperformance, and the short-term nature of it being overbought, it wouldn't shock me to see a 10-15% pullback post-dividend where it'll establish a base for the next leg higher. 

Edited January 11, 2023 by TwoCitiesCapital

[Xerxes]

1 hour ago, TwoCitiesCapital said:

 

The outperformance has been significant and the shares remain cheap by most fundamental standards. It would not shock me to see this at $1,000 USD/share in the next 2 years. 

 

But, we must keep in mind that this cheapness has been obvious for last 2+ years and shares have traded significantly lower than they are today during that time. 

 

Given the significance of its recent outperformance, and the short-term nature of it being overbought, it wouldn't shock me to see a 10-15% pullback post-dividend where it'll establish a base for the next leg higher. 

 

Let's look at the very same table that Prem Watsa always pointing us at:

 

In the early 1990s recession, the share price went up a staggeting +145% and a dull +9% year after

I have no clue why FFH went up 196% in the year 1996. Anyone know why ?

In the early 2000s recession, the share price went up a staggeting +87% and a dull -11% year after

In the early 2009s recession, the share price went up a staggeting +36% and a dull +5% year after

In the early 2020 mini-recession, the share price went up a +43% in 2021 and probably a great 2022, given how close the "two recessions" are together. One Covid-based and the other Fed-based.

 

Again, not talking about book value or how cheap it is. Just the counter-cylicality of the stock in the market environment that competes with indices.

 

 

 

 

[A_Hamilton]

Any thoughts on losses from the December deep freeze throughout the U.S. and then these California floods? Hard to know how much loss content there will be on the reinsurance side, but I imagine the primary side will feel it industry wide.

Edited January 11, 2023 by A_Hamilton

[Viking]

Greece has been an interesting geography for Fairfax for the last decade. Fairfax has about $2 billion (current market value) invested in 4 Greek equities = 13.3% of their $15 billion equity portfolio. They also own 80% of Eurolife, with a carrying value of $450 million (I think). Bottom line, Greece is an important jurisdiction for Fairfax.

 

Over the past couple of years Greece has been slowly emerging from its financial catastrophe. A pro-business government has been busy restructuring the Greek economy. Tourism and property markets are once again doing well. Greece is one of the countries leading Europe in GDP growth in 2022 and this is expected to continue in 2023.  

 

So what assets does Fairfax own in Greece today?

• Eurobank: 32.2% ownership of a well managed bank that includes a very large and profitable property company (former Grivalia Properties); its balance sheet is fixed and 2022 has been a breakout year for profitability. This is the second largest equity holding for Fairfax (based on market value).
• Grivalia Hospitality: 78.4% ownership - deploys capital in the very attractive high-end hospitality sector in Greece, Cypress and Panama. Managed by Grivalia Management (also manages real estate for Eurobank).
• Mytilineos: 4.68% ownership - a global industrial and energy company.
• Praktiker: 100% ownership - a Home Depot type business. Much smaller than the other companies listed above.
• Eurolife: 80% ownership of a well managed and profitable insurance company; 20% owned by Eurobank. Has 31% share of the total life and general insurance market for 2021 in Greece.

 

What is the approximate value of Fairfax’s investments in Greece?

• Eurobank                $1,430 mill            Jan 11, 2023 market value
• Grivalia Hospitality   $340                   44.5% cost $195 million
• Mytilineos                  $140                  Jan 11, 2023 market value
• Praktiker                     $50?                 My guess - purchased for $29 million in 2014
• Eurolife                     $450?

—————

Eurobank stock is hitting what looks to me like a new 5 year high; today (Jan 11) the stock is trading at €1.15. Dec 31, 2022 it was €1.055. So Fairfax’s stake is up to $1.42 billion as we start 2023 (an increase of $120 million over Dec 31, 2022). Not too shabby. There is a good chance the dividend will be reinstated in 2023. This will be another catalyst for Eurobank shares. (Fairfax had a carrying value for Eurobank of $1.351 billion as of Dec 31, 2021.)

 

Eurobank had set a target to earn €0.14/share in 2022. Mid-year, management increased the target to €0.18/share. This means Eurobank stock is trading today at a P/E of 6.4. Very cheap. Attach a P/E of 8 to 2022 earnings and you get a share price of €1.44 (US$1.55). Fairfax has an original cost on its position in Eurobank of US$0.92/share. A price of US$1.55 = 70% return for Fairfax off its original cost base.  

 

Eurobank had a break-out year in 2022. Fairfax’s share of Eurobank’s pre-tax earnings:

• est $310 million FY 2022 ($230 million to Sept 30) 
• $162 million in 2021
• -$12 million in 2020

Earnings from Eurobank is jumping year over year and is spiking ‘share of profit of associates’ for Fairfax to record levels.

 

Bottom line, compared to 2 or 3 years ago, Eurobank is a good example of a Fairfax equity holding that is much better positioned today to deliver significant value to Fairfax in the coming years.

- Q3, 2022 Eurobank investor presentation: https://www.eurobankholdings.gr/-/media/holding/omilos/grafeio-tupou/etairikes-anakoinoseis/2022/3q-2022/3q2022-results-presentation.pdf

—————

Fairfax’s 10 year history in Greece has had a couple of triumphs (Grivalia, Eurolife), one catastrophe (initial investment in Eurobank), adversity, heroes, villains, a depression, a pestilence, loyalty, creativity (merger of Grivalia Properties with Eurobank) and years of hard work - it all reads like one of the books of the Iliad by Homer.

 

Below is a short summary of the odyssey of how Fairfax got to where it is today with its Greek investments. All good stories always start at the beginning. So…

 

Why did Fairfax invest in Greece? Answer: Ireland. What?

 

Fairfax had outstanding success investing in a distressed Irish bank (Bank of Ireland) in late 2011 after the Great Financial Crisis (I think they made +$800 million on this investment - tripled their money in a little over 5 years). And business partner, Kennedy Wilson, had great success investing in real estate in Dublin. So as the cash register was ringing on their Irish investments, Fairfax saw similar opportunities in Greece.

 

What was the timeline of the Greek purchases?

• 2011: purchased 3.8% position in Grivalia (Europroperties)
  • run by George Chryssiko who is one of the heroes of this story
  • the Greek journey begins
• Aug 2012: Grivalia (Eurobank Properties REIT) - Fairfax increased ownership from 3.8 to 18% for $50 million
• 2013: Grivalia (Eurobank Properties REIT) - Fairfax increased ownership to 41% for $20 million (plus?)
• Dec 2014: Eurobank: Fairfax makes initial investment of 400 million Euro with group of investors (including Brookfield, Wilbur Ross, Fidelity, Mackenzie, Capital Research and Management)
  • unemployment rate in Greece in 2014 is 28%!
• Nov 2015: Eurobank recapitalization
  • forced by ECB, definitely one of the villains of our story, Fairfax invests an additional 350 million Euro
  • ownership increases from 12.5% to 17%. 
  • 1 for 100 reverse share split; sold new shares for 1 euro.
• Aug 2016: Eurolife: Fairfax purchases 80% ownership; 40% to Fairfax for $181 million and 40% to OMERS for $181 million.
  • purchased from Eurobank. Fairfax was aided in its bid by its ownership in Eurobank (viewed as being good partner); important to Eurobank because the bank was retaining 20% ownership and much of Eurolife’s business was transacted through Eurobank distribution channels.
  • referendum in Greece in 2015; Tsipras/Syriza elected; Syria refugees
• 2017: Grivalia - Fairfax Increased ownership to 52.7% for $100 million   
• 2018: Eurolife - Fairfax increased ownership to 50%; bought 10% from OMERS (whose ownership decreased to 30%)
• Nov 2018 (closed May 2019): Eurobank - Fairfax increases stake to 32.4% via merger with Grivalia Properties.
  • all stock transaction valued at US$866 million
  • Fairfax owned 18% Eurobank and 54% of Grivalia; on close Fairfax owned 32.4% of new Eurobank
  • Grivalia paid 40.5 million Euro special dividend
  • Eurobank launched property management business run by Grivalia CEO
• July 2019 In Greek national election, pro-business party New Democracy elected, led by Kyriakos Mitsotakis, which received nearly 40% of the vote and won 158 seats, an outright majority.
• July 2021 Eurolife: Fairfax increased ownership to 80% (purchased OMERS 30% stake for $142.6)
  • Eurobank owns remaining 20%
• July 2022 Grivalia Hospitality: Fairfax increased ownership from 33.5% to 78.4% for $195 million
• Dec 2022 Mytilineos: Fairfax increased ownership to 4.68% for $53 million

————————-

Other Greek investments:

2013 Mytilineos - 5% for 30 million Euro ($41 million)

2014 Praktiker Hellas AE - bought 100% for 21 million Euro 

————————-

Why is Eurolife considered a gem?

2019AR: Through the crisis in Greece, we acquired a gem in Eurolife, a Greek property and casualty and life insurance company that operates predominantly in Greece but also in Romania. Alex Sarrigeorgiou has run Eurolife since 2004, following Eurobank’s decision to grow its insurance business, and we acquired it with OMERS as our partner in 2016. Since our initial 40% purchase of Eurolife in 2016 for Euro163 million, Eurolife has earned Euro347 million and paid dividends of Euro298 million and shareholders’ equity has increased from Euro400 million to Euro720 million at the end of 2019 after the payment of dividends. This phenomenal performance was predominantly because Eurolife had a significant holding of Greek government bonds whose rates went from 8% to 1% during that time period while its non-life business had an average combined ratio of 72%. We currently own 50% and equity account for Eurolife but plan to buy the rest of OMERS’ shares in 2020.

 

2020AR: Finally, in Greece, Eurolife has been an extraordinary investment for Fairfax. Writing both Life and Property/Casualty lines, the company in 2020 generated over $500 million of gross premiums written and produced net income of $130 million. Led by Alex Sarrigeorgiou, Eurolife has a track record second to none in the Greek market.

 

2021AR: On July 14, 2021 the company increased its interest in Eurolife FFH Insurance Group Holdings S.A. (“Eurolife”) to 80.0% from 50.0% by exercising a call option valued at $127.3 to acquire the joint venture interest of OMERS for cash consideration of $142.7 (€120.7). The assets, liabilities and results of operations of Eurolife’s life insurance business were consolidated in the Life insurance and Run-off reporting segment and those of Eurolife’s property and casualty insurance business were consolidated in the Insurance and Reinsurance – Other reporting segment, pursuant to which the company remeasured its 50.0% joint venture interest in Eurolife to its fair value of $450.0 and recorded a net gain of $130.5 in gain on sale and consolidation of insurance subsidiaries in the consolidated statement of earnings, inclusive of foreign currency translation gains that were reclassified from accumulated other comprehensive income (loss) to the consolidated statement of earnings. The remaining 20.0% equity interest in Eurolife continues to be owned by the company’s associate Eurobank. Eurolife is a Greek insurer which distributes its life and property and casualty insurance products and services through Eurobank’s network and other distribution channels.

(5)  Includes a redemption liability of $124.9 on non-controlling interests as the company’s associate Eurobank may put its 20.0% equity interest in Eurolife to the company commencing in 2024 at the then fair value of that interest.

—————————

2021AR: Eurobank, led by Fokion Karavias with support from George Chryssikos, had an outstanding year in 2021 as it expects its non-performing loan ratio to drop to 7%, return on tangible equity to increase to over 8%, and capital ratio (CETI) to be strong at approximately 13%. Under Fokion’s leadership, Eurobank’s profitability is expected to grow significantly with Greece’s strong economic growth. As I have said previously, Greece is blessed with a great prime minister, Mr Mitsotakis, who is very business friendly and has dramatically improved the economic outlook of Greece since he got elected three years ago. Greece’s GDP is expected to grow by 8.5% in 2021, its unemployment ratio fell to a decade low of 12.8% and real estate prices continued to increase. Since December 31, 2021, Eurobank shares have increased to a high of 1.14 euros per share – still a far cry from the book value of 1.47 euros per share. Eurobank is ready to begin paying dividends again (the first time since May 2008), subject to regulatory approval. The future is very bright for Eurobank.

—————————

Here is a little more information on Grivalia which is now part of Eurobank. With property prices on a multi-year move higher Grivalia is an important profit engine for Eurobank.

2017AR: In 2017, we raised our equity interest in Grivalia to 52.7% by buying 10.3% for $100 million when Eurobank decided to divest its interest in Grivalia. It has been six years since we first met George Chryssikos, the outstanding CEO of Grivalia. Through Wade Burton, we took our first position in Grivalia in 2011 at Euro5.77 per share. George has navigated the Greek economic crisis superbly by buying only the highest quality commercial buildings and shopping centres at huge discounts to replacement cost and unlevered returns of 8% to 10%, not using excessive leverage and always focusing on the long term. We are very excited to be partners with George and his team as they build a fantastic real estate company. Like Bill McMorrow at Kennedy Wilson, George has a unique nose for value in real estate! And like all our Fairfax companies, he is building a fine company, focused on its customers, looking after its employees, making a return for shareholders and gratefully reinvesting in the communities where it operates. Business is a good thing!!

—————————

2019AR: Merger of Grivalia Properties REIC and Eurobank Ergasias S.A.

Early in 2019, Fokion Karavias (CEO of Eurobank) and George Chryssikos (CEO of Grivalia) came up with the idea of merging Grivalia into Eurobank, to strengthen the capital position of Eurobank, and accelerating its non-performing loan stock reduction through spinning out Euro7.5 billion of non-performing loans from the bank to its shareholders. We thought it was a brilliant idea but the process took time as it was subject to shareholder approval at Eurobank and Grivalia and regulatory approval from the ECB. As part of the same plan, Eurobank sold its non-performing loans management unit, FPS, to doValue S.p.A. (a public company listed in Italy) for Euro360 million. We expect all these transactions to close by March 31, 2020 and Eurobank to be well capitalized and on its way to earning 10% on its shareholders’ equity in 2020. Last year, Greece had an election in which the business friendly party of Kyriakos Mitsotakis won a majority in the parliament. As the new Prime Minister, Kyriakos has the opportunity to transform Greece by encouraging foreign investment into the country and by being business friendly. Ten-year Greek government bonds, which peaked at a yield of 37% in 2012, came down to 10% in 2016 and are now trading below 1%. Recently, Greece did a 15-year bond issue at 1.9% and a 30-year issue at 2.5%. The animal spirits are coming back to Greece and we think the Greek economy and Greek companies will thrive. Eurobank should benefit!! Our cost of 1.2 billion shares of Eurobank after the Grivalia transaction is now 94¢ versus a book value of approximately 135¢ per share post the transaction. At year end, Eurobank was selling at 68% of book value and 6.5x normalized earnings. We still believe it will be a good investment for us.

 

On May 17, 2019 Grivalia Properties REIC (‘‘Grivalia Properties’’) merged into Eurobank Ergasias S.A. (‘‘Eurobank’’), as a result of which shareholders of Grivalia Properties, including the company, received 15.8 newly issued Eurobank shares in exchange for each share of Grivalia Properties. Accordingly, the company deconsolidated Grivalia Properties from the Non-insurance companies reporting segment, recognized a non-cash gain of $171.3 and reduced non-controlling interests by $466.2. In connection with the merger, Grivalia Properties had paid a pre-merger capital dividend of Euro0.42 per share on February 5, 2019. The company owned approximately 53% of Grivalia Properties and 18% of Eurobank prior to the merger, and owned 32.4% of Eurobank upon completion of the merger. 

————————

Eurobank: https://www.eurobank.gr/en/group

Grivalia Management: https://www.grivalia.com

Grivalia Hospitality: https://grivaliahospitality.com/about-us.html

Eurolife: https://www.eurolife.gr/en

Mytilineos: https://www.mytilineos.gr/who-we-are/mytilineos-company/

————————

Edited January 12, 2023 by Viking

[glider3834]

2 hours ago, A_Hamilton said:

Any thoughts on losses from the December deep freeze throughout the U.S. and then these California floods? Hard to know how much loss content there will be on the reinsurance side, but I imagine the primary side will feel it industry wide.

https://www.reinsurancene.ws/storm-elliott-to-have-limited-impact-on-lloyds-syndicates-argenta/

[Xerxes]

17 hours ago, Xerxes said:

 

Let's look at the very same table that Prem Watsa always pointing us at:

 

In the early 1990s recession, the share price went up a staggeting +145% and a dull +9% year after

I have no clue why FFH went up 196% in the year 1996. Anyone know why ?

In the early 2000s recession, the share price went up a staggeting +87% and a dull -11% year after

In the early 2009s recession, the share price went up a staggeting +36% and a dull +5% year after

In the early 2020 mini-recession, the share price went up a +43% in 2021 and probably a great 2022, given how close the "two recessions" are together. One Covid-based and the other Fed-based.

 

Again, not talking about book value or how cheap it is. Just the counter-cylicality of the stock in the market environment that competes with indices.

 

 

I like history, so let's take a historical view of the years its share price has more than 20% change and how did S&P500 performed in that same year. I have excluded all other years.

 

Of the years kept, 

- Yellows are when we had a downturns (either in economy or stock market).

- Greens are when the "Delta" between FFH stock return that year and S&P500 was more than 40%

- Reds are the years when S&P500 outperformed FFH

 

Not sure what conclusion to draw other than that, what has been said by Prem that coming out of back end of downturn, Fairfax does outperformed the broader indices. Sometimes that ourperformance has legs and goes over multi-years like (a) it did in the early 2000s, or (b) following the mild recession we had in the early 1990s which was a massive boon for FFH, as it fueled it all the way to 1999.

 

Whereas other times (c), it gets cut very short, coming out of the 2008-09 GFC. 

 

The only difference between the (a) and (b) vs. (c) is that the latter started the "hedging/deflation swaps" era.

 

 

Edited January 12, 2023 by Xerxes

[gfp]

23 hours ago, gfp said:

Are other people seeing a huge trade at the open on Fairfax's Toronto listed shares (FFH) ?  Very unusual.  Like $150+ million CAD?

 

This morning had an even larger first trade of over a quarter million FFH shares.  Interesting!

[gfp]

Also saw this article this morning -

https://www.retailbankerinternational.com/news/emirates-nbd-fairfax-stake-idbi/

[backtothebeach]

1 hour ago, gfp said:

 

This morning had an even larger first trade of over a quarter million FFH shares.  Interesting!

 

That would be 1% of market cap, sounds like a lot. Any chance it is a data glitch?

[A_Hamilton]

3 minutes ago, backtothebeach said:

 

That would be 1% of market cap, sounds like a lot. Any chance it is a data glitch?

No. I'd bet dollars to donuts that its is somehow tied to the counterparties involved in the total return swaps. The price moves are small and the volumes are huge suggesting that two parties have either long or short exposure and need to swap them out and both are afraid of moving price too much.

[maplevalue]

24 minutes ago, A_Hamilton said:

No. I'd bet dollars to donuts that its is somehow tied to the counterparties involved in the total return swaps. The price moves are small and the volumes are huge suggesting that two parties have either long or short exposure and need to swap them out and both are afraid of moving price too much.

 

Perhaps FFH converting the TRS into actually buying back the shares?

[StubbleJumper]

30 minutes ago, maplevalue said:

Perhaps FFH converting the TRS into actually buying back the shares?

 

It's always possible, I suppose.  There might be some sort of time limit on their TRS contract, or there might be some sort of escalator in the carry cost that would provide an incentive to do the buyback.  But failing that, we should consider some of the things that FFH could do with excess capital/cash and evaluate where the TRS might fit in the hierarchy of uses.  I'm numbering some of these possible uses of capital/cash, but the sequence doesn't necessarily reflect where I see them in the capital allocation hierarchy:

 

1) Pay back debt

2) Keep/inject capital into the insurance subs to enhance underwriting volume

3) Buy back the minority interests from outfits like OMERS (eg the 10% Odyssey position)

4) Make an acquisition

5) Buyback shares on the open market through the NCIB or through another SIB

6) Close out the TRS

 

There's a financial return to shareholders from each of these, but those returns vary drastically.  So, paying back debt would provide a pre-tax return of perhaps 5% annually, which probably doesn't meet FFH's hurdle for excess capital at this time.  Buying back some of the minority interests would provide a pre-tax return of perhaps 8% or 9% (because that's the ballpark dividend that FFH pays to OMERS), which is a bit of a better return on capital for shareholders (buying some Fairfax India would be an even better return).  While Prem has promised that acquisitions will not be a priority, if something can be bought cheaply enough, that might provide a double-digit return on capital for shareholders.  Buybacks through the NCIB or SIB might provide a one-time double-digit return for shareholders, depending on your views of FFH's intrinsic value compared to the prevailing market price.

 

So, those are some of the alternative uses of capital.  What do we get from closing out the TRS?  What is FFH paying the counterparty annually?  Personally I am guessing that it's more than the 5% that they could get from retiring debt, but less than the 8% or 9% that they could get by buying out OMERS's positions.  Unless there is a contractual reason to do it immediately, I can't imagine it's a priority for FFH. 

 

That being said, I can't explain who else has been moving 250,000 shares at a time.  Maybe it's time to take another look at the major holder list to see who might be getting out of FFH.  The shares are currently trading at perhaps 1.01x or 1.02x adjusted BV.  Would any of the large value guys dump FFH at that valuation when it seems obvious that FFH should have little trouble making its goal of 15% ROE during 2023?  It seems to me like a no-brainer to hold FFH given the current prevailing share price and economic prospects.  Unless there's some value guy out there who is selling because he sees a better opportunity than FFH during 2023?

 

Anyway, just a bit of navel gazing...

 

 

SJ

Edited January 12, 2023 by StubbleJumper

[TwoCitiesCapital]

Really hoping Fairfax locked in some 5-10 year treasuries during Q4. 

 

Really looking more and more like intermediate and long term yields peaked back in October/November. If they didn't roll @ 4+%, going to very difficult for me to believe they'll extend duration now that rates have started coming down. 

 

10-years is below 3.5% today from a high of nearly 4.25% in mid-October. 

[Parsad]

41 minutes ago, TwoCitiesCapital said:

Really hoping Fairfax locked in some 5-10 year treasuries during Q4. 

 

Really looking more and more like intermediate and long term yields peaked back in October/November. If they didn't roll @ 4+%, going to very difficult for me to believe they'll extend duration now that rates have started coming down. 

 

10-years is below 3.5% today from a high of nearly 4.25% in mid-October. 

 

Will be interesting to see what they did.  Brian is probably one of the best in the world at what he does...rarely does he put a foot down in the wrong place.  I was surprised by how much they were allocating in Q3...so they probably had some idea that things were peaking.  Cheers!

[jfan]

Sorry I'm a slow learner but FFH's ROE since 2002 has averaged 8% (with a wide dispersion) and a median of 6% (IQR25 2%, IQR75 12%).

With it trading at P:E of 6x, is the investment narrative here that FFH can sustain its current earnings for a longer period of time relative to its historical performance? Is then the hope here, that their PE multiple will expand to 10x?

 

 

[gfp]

23 hours ago, gfp said:

 

This morning had an even larger first trade of over a quarter million FFH shares.  Interesting!

 

Apologies, as this is getting repetitive, but there was again a huge trade (~210,000) shares on the open.