Fairfax 2023

[kab60]

13 hours ago, glider3834 said:

Just having another look at this - AIG are paying a dividend out of Validus re prior to close so thats included in transaction value , but from M&A perspective this sale of Validus Re is priced at

 

1.4 x tangible BV  & 1.1 x GPW of $2.7B in 2022 with 95 combined ratio

 

'Total consideration for the transaction is $2.985 billion, equal to 1.42x Validus' tangible equity of $2.1 billion to be delivered to RNR at closing, with any excess to be retained by AIG.'

https://www.fitchratings.com/research/insurance/fitch-affirms-renaissanncere-ratings-following-validus-re-acquisition-announcement-outlook-stable-23-05-2023

 

The expected property GPW of the company will be approximately $900 million. For casualty and specialty, GPW is expected to be roughly $1.8 billion, with RenRe stating that the combined ratio will be in line with the existing portfolio, at around 95%.

https://www.reinsurancene.ws/renres-gpw-poised-to-expand-by-30-to-12bn-following-validus-re-acquisition/

 

Worth noting too that Validus Re increased premiums by 40% in Q1'23 so that likely would be factored in too

https://www.reinsurancene.ws/validus-re-premiums-up-40-significant-rate-increases-expected-in-june-aig-ceo-zaffino/

 

In addition, AIG will retain 95% of the development on Validus Re’s net reserves at closing, mitigating RenaissanceRe’s balance sheet risk.

https://www.reinsurancene.ws/moodys-affirms-a-stable-outlook-for-renre-post-acquisition-of-aigs-validus-re/

 

 

 

 

 

 

Yes, that's correct. My bad. As an AIG shareholder I was/am entirely focused on how much capital we're getting back through the transaction (>4,5B), as I saw 3B quoted around.

[MMM20]

On 5/24/2023 at 3:38 PM, racemize said:

I mean the real issue is that if anything like the last 10 years happens again, it should not trade at 2x book value.    

 

FFH traded at ~1x BV in 1H 2013 = ~CAD$300-350 stock. This was roughly 15-20x earnings at the time, if my data is right. It now trades at ~1x BV (really ~0.8x properly adjusted, but whatever) = ~CAD$950 stock. But this is ~6x earnings right now. In other words, FFH generated a ~12%+ annualized total return over the last 10 years despite the fact that the earnings multiple derated by, like, two thirds (again, if i have good data).

 

And if the earnings base has in fact reset much higher with their (1) smart/lucky insurance acquisitions right ahead of the hard market, (2) short duration fixed income positioning right ahead of inflation/rate hiking cycle, and (3) transformation to something resembling an endowment-style decentralized "great manager" strategy on the equity investment side, not to mention (4) willingness/ability to buy back chunks of stock at discounts to IV... well, then it's not about the repeatability of some home run scenario in which the stock doubles over 2 years. That already happened and yet the stock still screams cheap on earnings when you dig into it a little. Accounting book value doesn't come close to telling investors what they need to know... right now, looking forward.

 

So I just think it’s *also* worth doing the math on expected returns in a *bull* (my base ) case in which the valuation expands back to a peer multiple (coincidentally the same level as ~10 years ago... from which the expected return would again look something like ~12%) layered onto low-mid teens EPS growth. To me, EPS doubling and P/E multiple doubling or tripling over the next half decade or so is a reasonable, realistic scenario. That's something like a ~5x over ~5 years, or a ~40% annualized total return.

 

Meanwhile, when I bring up the stock, I mostly still hear something like, "lol, the Blackberry guys?"

 

Edited May 26, 2023 by MMM20

[Thrifty3000]

 

^ inflation trend.

 

We won’t even be feeling the full effects of the Fed’s rate hikes and tightening for another 6 to 18 months.

 

 

[Thrifty3000]

1 hour ago, Thrifty3000 said:

 

^ inflation trend.

 

We won’t even be feeling the full effects of the Fed’s rate hikes and tightening for another 6 to 18 months.

 

 

Prem mentioned recently that a recession could present the next big opportunity to increase earnings power by allowing them to buy high quality corporate bonds yielding over 5%.
 

I think any opportunity like that to significantly level up EPS would be a strong catalyst to boost the share price back above book value.

Edited May 25, 2023 by Thrifty3000

[TwoCitiesCapital]

1 hour ago, Thrifty3000 said:

 

^ inflation trend.

 

We won’t even be feeling the full effects of the Fed’s rate hikes and tightening for another 6 to 18 months.

 

I'm glad they extended duration last quarter. I hope they keep incrementally pushing it out. 

 

The primary thing keeping inflation positive at this time is the lagged effect of housing still coming through as positive even though home prices have been falling for a few months now (and seem likely to continue). 

 

Inflation is going back to zero, at least temporarily, regardless if there is a recession or not. Locking in 1.5-2% real yields before inflation falls off that cliff would do A LOT to hedge some potential equity and economic downside and provide consistency to the income. 

[racemize]

I guess getting back to the multiple of book value trading question.  In all honesty, if you are a permanent holder, you don't want it to trade at 2x book value.  In fact, you want it to trade as low as possible for as long as possible, so they can buy back shares.  Trading higher does nothing good for you, unless you 1) want to sell; or 2) want them to issue shares to buy other companies I guess.

[MMM20]

19 hours ago, racemize said:

I guess getting back to the multiple of book value trading question.  In all honesty, if you are a permanent holder, you don't want it to trade at 2x book value.  In fact, you want it to trade as low as possible for as long as possible, so they can buy back shares.  Trading higher does nothing good for you, unless you 1) want to sell; or 2) want them to issue shares to buy other companies I guess.

I mean, I completely agree... but it’s also a sizing question around the fair value and risk/reward. I know I'm not alone here with a big position now vs a typical core holding. 

 

Edited May 26, 2023 by MMM20

[Parsad]

Ok, I just did my usual discount cash flow analysis of FFH, which has worked like a charm for 23 years.  From my estimates, I get intrinsic value between $1,131 USD and $1,807 USD.  The high end assumes FFH can do 15% ROE over the next 10 years, which has not happened over the last 10 years, so take that with a grain of salt...that would get MMM to his 2 times book valuation.  $1,131 USD is the conservative valuation for intrinsic value.  It should be able to achieve that with little difficulty...and would have a 1.4-1.5 times book value.  Cheers!

[Xerxes]

Thank you Prem & co. for showing restraint and not shorting Nvidia in the past six months despite valuation concerns. 

[Parsad]

23 minutes ago, Xerxes said:

Thank you Prem & co. for showing restraint and not shorting Nvidia in the past six months despite valuation concerns. 

 

Haha!  Cheers!

[Thrifty3000]

1 hour ago, Xerxes said:

Thank you Prem & co. for showing restraint and not shorting Nvidia in the past six months despite valuation concerns. 

Nvidia’s $940 billion market cap stands at 64 times gross profits over the 12 months through April.  At the peak of the dot-com bubble, shares of tech darling Cisco crested at a mere 53 times trailing gross profit.  - Almost Daily Grant’s

 

 

[Crip1]

7 hours ago, racemize said:

I guess getting back to the multiple of book value trading question.  In all honesty, if you are a permanent holder, you don't want it to trade at 2x book value.  In fact, you want it to trade as low as possible for as long as possible, so they can buy back shares.  Trading higher does nothing good for you, unless you 1) want to sell; or 2) want them to issue shares to buy other companies I guess.

Viking has done more in-depth research on Fairfax than many investors do on all their holdings, so there’s little reason to expound on that. What has become clear is that after years of working to keep the company afloat for the next 12 months, FFH has morphed into a company that makes decisions with longer-term timeframes.  

 

So, on one side we have FFH selling at a discount to BV. On the other side FFH sells at 1.5x to 2x BV. The beauty of it is that FFH wins either way. Nothing wrong with taking out a few hundred thousand shares as a way to benefit long-term shareholders. Should we magically sell at 1.75x BV in a few months, FFH then has currency to make (strategic) acquisitions. Heads we win, tails we don’t lose.

 

Interest rates: Rates move lower and we’re locked in to attractive returns for the next 3 years. Rates move higher and we can roll our fixed income into high-yield corporate. Heads we win, tails we don’t lose.

 

-Crip

[Parsad]

15 minutes ago, Crip1 said:

Viking has done more in-depth research on Fairfax than many investors do on all their holdings, so there’s little reason to expound on that. What has become clear is that after years of working to keep the company afloat for the next 12 months, FFH has morphed into a company that makes decisions with longer-term timeframes.  

 

So, on one side we have FFH selling at a discount to BV. On the other side FFH sells at 1.5x to 2x BV. The beauty of it is that FFH wins either way. Nothing wrong with taking out a few hundred thousand shares as a way to benefit long-term shareholders. Should we magically sell at 1.75x BV in a few months, FFH then has currency to make (strategic) acquisitions. Heads we win, tails we don’t lose.

 

Interest rates: Rates move lower and we’re locked in to attractive returns for the next 3 years. Rates move higher and we can roll our fixed income into high-yield corporate. Heads we win, tails we don’t lose.

 

-Crip

 

+1!  Cheers!

[SafetyinNumbers]

22 hours ago, Parsad said:

Ok, I just did my usual discount cash flow analysis of FFH, which has worked like a charm for 23 years.  From my estimates, I get intrinsic value between $1,131 USD and $1,807 USD.  The high end assumes FFH can do 15% ROE over the next 10 years, which has not happened over the last 10 years, so take that with a grain of salt...that would get MMM to his 2 times book valuation.  $1,131 USD is the conservative valuation for intrinsic value.  It should be able to achieve that with little difficulty...and would have a 1.4-1.5 times book value.  Cheers!

Fairfax didn’t have “normal interest rates” or a float 2x the share price for the last decade. Just some pepper to add to the grain of salt  

[Parsad]

2 hours ago, SafetyinNumbers said:

Fairfax didn’t have “normal interest rates” or a float 2x the share price for the last decade. Just some pepper to add to the grain of salt  

 

Took into consideration the current interest rate environment.  Float cuts both ways.  It's leverage that can increase exposure to catastrophe risks in a bad season...and this one seems to be shaping up to be a bad one for hurricanes/typhoons.  Cheers!

[Parsad]

New all-time high today!  Let's break $1,000 CDN next week!

 

https://finance.yahoo.com/quote/FFH.TO/?p=FFH.TO

 

Cheers!

[MMM20]

On 5/26/2023 at 5:12 PM, Parsad said:

 

Took into consideration the current interest rate environment.  Float cuts both ways.  It's leverage that can increase exposure to catastrophe risks in a bad season...and this one seems to be shaping up to be a bad one for hurricanes/typhoons.  Cheers!

 

Let's say they underwrite to 105% combined over the next decade with more catastrophe losses but in more historically normal interest rate environment. That's equivalent to borrowing at 5% when literal cash is yielding 5% right now. That’s an oversimplification, but borrowing at even 5% wouldn’t be too bad if a global 60/40 portfolio is priced to return something like 8-10% again. FFH produced some decent returns early in their history underwriting at nearly 110% combined, eh?
 

And still not up against law of large numbers like BRK, where even a $5B profit in Japanese trading companies doesn't move the needle as Buffett and Munger discussed at the AGM. The expected returns math is instructive, but we gotta remember that FFH doesn’t just own the whole market (for better or worse  ) and if something like Digit cuts a certain way, FFH could produce silly returns. The reverse is of course true too but still way overstated nowadays IMHO b/c of the lingering stench of the 2010-18 ish performance. 

 

Edited May 28, 2023 by MMM20

[SafetyinNumbers]

17 hours ago, Parsad said:

 

Took into consideration the current interest rate environment.  Float cuts both ways.  It's leverage that can increase exposure to catastrophe risks in a bad season...and this one seems to be shaping up to be a bad one for hurricanes/typhoons.  Cheers!

I think what we are both saying is correct. If I understand your argument correctly, our risk of impairment from the insurance business is so big, our expected intrinsic value should be significantly lower than any of our peers and so we should trade meaningfully cheaper on common metrics based on expected returns. 

 

I use a 10% expected forward return as a benchmark for my intrinsic value estimate. That’s usually where I’m entirely out of a position since there are higher returns expected elsewhere. Right now, Fairfax seems like it’s close to 20% (based on forward earnings yield) and I think there might be upside optionality from the portfolio which is mostly ignored. I agree with you there is risk associated with owning a large insurance business but I’m not sure what odds the market is placing on such an event and if it’s consistent across the peers.
 

Ultimately though, if intrinsic value is the price where one can expect to earn an expected 10% forward return, what is IV right now? 
 

I would expect a forward 15% ROE which equates to 1.5x P/B or about US$1200 IV estimate to earn 10% forward returns. We are over earning now based on most estimates and have some embedded gains to come into BV soon (Digit, Ambridge, GIG) so arguably IV is a touch higher providing some margin of safety.
 

I might be underestimating the odds of an existential event for Fairfax and don’t think the discount should be very big vs MKL, BRK and others. Arguably the expected returns are lower than 10% for some of the peers. I’m curious if others think about valuation similarly.

 

[This2ShallPass]

On 5/26/2023 at 2:12 PM, Parsad said:

and this one seems to be shaping up to be a bad one for hurricanes/typhoons.

Are Fairfax options available in Canadian exchanges? If so, why not?

 

Which other public insurance companies closely resemble Fairfax (from an insurance exposure to major hurricane standpoint)? 

 

I'm planning to take a small insurance () with OTM puts during hurricane season, premiums have to be right though..

[SafetyinNumbers]

51 minutes ago, This2ShallPass said:

Are Fairfax options available in Canadian exchanges? If so, why not?

 

Which other public insurance companies closely resemble Fairfax (from an insurance exposure to major hurricane standpoint)? 

 

I'm planning to take a small insurance () with OTM puts during hurricane season, premiums have to be right though..

No listed options on FFH. I tried to get them listed last year so I could buy calls but was told by MX, it’s too illiquid for options. 

[Viking]

The table is set for the total return swaps (TRS-FFH) to become one of Fairfax’s best investments ever. It has delivered about $750 million in investment gains since inception (over the last 30 months). And i think it can deliver $1.5 to $2 billion in additional gains over the next 5 years. That would put total gains at $2.2 to $2.7 billion over a 7 year period. Not too shabby.

 

“We think this will be a great investment for Fairfax, perhaps our best yet!” This is what Prem said in his letter in the 2020 annual report when first describing this investment. Clearly, Fairfax was thinking big when they made this investment.

 

The genius of this single investment is still lost on most investors. Probably because the TRS is a non-traditional type of investment. So it is largely ignored by investors in their analysis of the company and its potential impact on future earnings.

 

Well lets do a bit of a deep dive on this investment to better understand just what the freak i am talking about.

 

What is the TRS-FFH investment?

 

In late 2020 and early 2021, Fairfax purchased total return swaps giving it exposure to 1.96 million Fairfax shares with an average notional amount (cost) of US$373/share.

 

At the time, Fairfax had about 26.2 million effective shares outstanding so this investment represented about 7.5% of the company’s shares. Effective shares outstanding  at the end of Q1, 2023, have dropped to 23.2 million so this investment now represents about 8.4% of the company’s shares.

 

Fairfax’s equity portfolio is about $15 billion in size. The TRS-FFH position currently has a market value of $1.43 billion = 9.5% of the total equity portfolio. This is Fairfax’s third largest equity position, behind Atlas ($2.04 billion) and Eurobank ($1.95 billion). Bottom line, this investment is a very large one for Fairfax.

 

Why did Fairfax make this investment?

 

Fairfax's stock was trading at a crazy cheap valuation in late 2020. It was, by far, the best investment opportunity available to Fairfax at the time. To state the obvious, it was an investment they understood very well. So it was a very low risk and very high return opportunity.

 

Prem’s Letter 2020AR: “Throughout much of last year (2020) following the pandemic-induced market plunge, I made public statements to the effect that our belief was that Fairfax shares were trading in the market at a ridiculously cheap price. In the summer I backed that up by personally purchasing close to $150 million of shares. Additionally, following our value investing philosophy, since the latter part of 2020 Fairfax has purchased total return swaps with respect to 1.4 million subordinate voting shares of Fairfax with a total market value at the time of those agreements of $484.9 million ($344.45 per share). We think this will be a great investment for Fairfax, perhaps our best yet!”

 

Prem’s answer to question from Mark Dwelle (RBC) on the Q4 2020 conference call held in Feb 2021:

Mark Dwelle: “My second question relates to executing the total return swap with respect to Fairfax shares. I guess, I was just curious why you pursue that structure, rather than just buying back the stock, if you felt like that was the good opportunity? I mean, is this a capital constraint that you couldn't really buy back that much?”

 

Prem Watsa: “We have to be careful, right? So not so much -- yes, we have to be very careful in terms of how much we can buy back. When we looked at Fairfax as a stock price and looked at everything else that we could buy, which is not over return swap on Fairfax. Right now, we paid US$344 per shares, our book value is $478. I mean, if you want the math, just on our book value basis, we'd have about $200 million gain. And Fairfax stock price for book value is worth another 200 million. We just think it's a terrific investment and our total return swap structure was a very good way for us to do it. And so we did it.”

 

Why TRS-FFH versus simply buying back stock?

 

Fairfax did not have the cash at the time to buy back a significant amount of Fairfax stock directly.

 

Again, from the Q4 2020 conference call:

Mark Dwelle: “I don't disagree with you that it was a good a good strike price, I guess it was really -- the form of the transaction rather than just actually buying the shares, using a derivative instead is just -- it's a little bit unusual. I haven't usually seen that with most of the companies that I've followed. So that was really my main question.”

Prem Watsa: “Yes, so, Mark, our point is just that we wanted to keep up -- we could -- where you have more than $1 billion in cash and the only company once -- or almost have down $375 million, we just wanted to be financially sound, and in all ways, as opposed to use that cash at this point in time.”

 

This investment demonstrates Fairfax’s management team at their best:

• Rational: best available opportunity
• Opportunistic: buy when the stock was crazy cheap
• Creative: didn’t have the cash to do a buyback. Hello TRS.
• Conviction: wanted to buy a significant stake. Hello TRS (leverage).

Simply a brilliant investment - especially given the circumstances.

 

How is the investment performing?

 

From Jan 1, 2020 to March 31, 2023 (9 quarters) the investment has resulted in cumulative investment gains of $618 million. And so far in Q2, 2023, the investment is up another $125 million. This puts cumulative investment gains close to $750 million, which is a 100% gain in less than 30 months. The S&P500 is up 12% over the same time period. So, I would grade this investment A+.

 

 

What is the outlook for this investment?

 

This is where things get really interesting for shareholders. This investment is poised to spike much higher in the coming years.

 

Let’s make 2 assumptions:

1. Fairfax will grow book value at an average compound rate of 14% over the next 5 years (2023 to 2027). For reference, i have Fairfax earning $150/share in 2023 = almost a 20% increase in book value.
2. Fairfax stock will trade at 1.1 x book value in 5 years time (end of 2027). As Fairfax delivers a mid-teens growth in book value it is natural to assume Mr Market will reward the company with a 1.1 x multiple to book value.

I view these two assumptions as being a reasonable base case.

 

If Fairfax grows BV by 14% each of the next 5 years and Mr Market rewards it with a 1.1 x multiple at the end of those 5 years (2027) its share price will be $1,614. The TRS-FFH will be worth $3.1 billion and the investment gain will be $2.4 billion (from 2021-2027).

 

 

In the table above i have done three scenarios - conservative (1 x BV), base case (1.1 x BV) and aggressive (1.2 x BV). The gain in the TRS-FFH investment ranges from $2.1 to $2.7 billion.

 

What are the catalysts to the investment thesis?

 

There are a number of catalysts to this investment. Despite the run up over the past 30 months, Fairfax’s stock price is still dirt cheap. This means the value of the TRS-FFH is understated today. Having a low starting point matters greatly when calculating future returns for an investment.

 

Three catalysts:

• record, consistent free cash flow: largely locked and loaded for the next three years
• lower share count: average decline of 3% per year is likely a good estimate
• growing multiple to book value: over time, Mr Market will come to understand and appreciate the Fairfax story

All three happening together will drive Fairfax’s stock price higher - which of course means the value of the TRS-FFH investment will also be driven higher.

 

A note on share buybacks

 

Capital allocation is one of the most important decisions for a management team. Fairfax has said they believe their stock is very undervalued. They have also said that as the hard market in insurance slows they will look to use excess capital to buy back their stock more aggressively.

 

Fairfax is highly motivated to drive the share price higher. Every $100 increase in the share price = $200 million before-tax investment gain. The TRS-FFH investment makes share buybacks an even more compelling capital allocation decision for Fairfax.

 

Conclusion

 

The table is set for Fairfax to earn as much as $2.7 billion on its TRS-FFH investment (2021 to 2027). Investors, as per usual, are not looking forward and connecting the dots. As a result, they are grossly underestimating the size of gains that are coming.

 

Cheap share price + Record cash flow + End of hard market + Increasing buybacks = much higher stock price = significant gains for TRS-FFH

 

==========

 

Is the TRS-FFH investment like a buyback?

 

The TRS-FFH is the next best thing to doing a big buyback.

 

Buybacks are powerful because they improve per-share financial metrics: EPS & BVPS.

• Buybacks lower the denominator (per share). If the buyback is large and sustained - so that it actually pushes up the price of the share price over time - the TRS position will gain significantly in value.
• At the same time, the TRS- FFH investment increases the numerator (earnings and book value).

Investors get a double benefit.

 

==========

 

Education: Total Return Swap

• https://corporatefinanceinstitute.com/resources/derivatives/total-return-swap-trs/

The other major benefit of a total return swap is that it enables the TRS receiver to make a leveraged investment, thus making maximum use of its investment capital. Unlike in a repurchase agreement where there is a transfer of asset ownership, there is no ownership transfer in a TRS contract.

 

This means that the total return receiver does not have to lay out substantial capital to purchase the asset. Instead, a TRS allows the receiver to benefit from the underlying asset without actually owning it, making it the most preferred form of financing for hedge funds and Special Purpose Vehicles (SPV).

 

There are several types of risk that parties in a TRS contract are subjected to. One of these is counterparty risk. When a hedge fund enters into multiple TRS contracts on similar underlying assets, any decline in the value of these assets will result in reduced returns as the fund continues to make regular payments to the TRS payer/owner.

 

If the decline in the value of assets continues over an extended period and the hedge fund is not adequately capitalized, the payer will be at risk of the fund’s default. The risk may be heightened by the high secrecy of hedge funds and the treatment of such assets as off-balance sheet items.

 

Both parties in a TRS contract are affected by interest rate risk. The payments made by the total return receiver are equal to LIBOR +/- an agreed-upon spread. An increase in LIBOR during the agreement increases payments due to the payer, while a decrease in LIBOR decreases the payments to the payer. Interest rate risk is higher on the receiver’s side, and they may hedge the risk through interest rate derivatives such as futures.

 

==========

Q1 2020 Conference Call

 

Prem: "They are one year swaps and we've historically been able to extend it for as long as we like."

 

Mark Dwelle: "My second question relates to executing the total return swap with respect to Fairfax shares. I guess, I was just curious why you pursue that structure, rather than just buying back the stock, if you felt like that was the good opportunity? I mean, is this a capital constraint that you couldn't really buy back that much?"

 

Prem Watsa: "We have to be careful, right? So not so much -- yes, we have to be very careful in terms of how much we can buy back. When we looked at Fairfax as a stock price and looked at everything else that we could buy, which is not over return swap on Fairfax. Right now, we paid US$344 per shares, our book value is $478. I mean, if you want the math, just on our book value basis, we'd have about $200 million gain. And Fairfax stock price for book value is worth another 200 million. We just think it's a terrific investment and our total return swap structure was a very good way for us to do it. And so we did it."

 

Mark Dwelle: "I don't disagree with you that it was a good a good strike price, I guess it was really -- the form of the transaction rather than just actually buying the shares, using a derivative instead is just -- it's a little bit unusual. I haven't usually seen that with most of the companies that I've followed. So that was really my main question."

 

Prem Watsa: "Yes, so, Mark, our point is just that we wanted to keep up -- we could -- where you have more than $1 billion in cash and the only company once -- or almost have down $375 million, we just wanted to be financially sound, and in all ways, as opposed to use that cash at this point in time."

==========

Q1-2023 News Release

 

At March 31, 2023 the company continued to hold equity total return swaps on 1,964,155 Fairfax subordinate voting shares with an original notional amount of $732.5 million (Cdn$935.0 million) or approximately $372.96 (Cdn$476.03) per share, on which the company recorded $139.8 million of net gains in the first quarter of 2023.

==========

2022AR

 

Long equity total return swaps

During 2022 the company entered into $217.4 notional amount of long equity total return swaps for investment purposes. At December 31, 2022 the company held long equity total return swaps on individual equities for investment purposes with an original notional amount of $1,012.6 (December 31, 2021 – $866.2), which included an aggregate of 1,964,155 Fairfax subordinate voting shares with an original notional amount of $732.5 (Cdn$935.0) or approximately $372.96 (Cdn$476.03) per share at December 31, 2022 and 2021. During 2022 the long equity total return swaps on Fairfax subordinate voting shares produced net gains of $255.4 (2021 – $222.7). Long equity total return swaps provide a return which is directly correlated to changes in the fair values of the underlying individual equities.

 

During 2022 the company received net cash of $238.2 (2021 – $439.6) in connection with the closures and reset provisions of its long equity total return swaps (excluding the impact of collateral requirements). During 2022 the company closed out $63.0 notional amount (2021 – $1,876.7) of its long equity total return swaps and recorded net realized losses on investments of $8.1 (2021 – net realized gains of $243.0).

==========

2021AR

For our stock price to match our book value’s compound rate of 18.2%, our stock price in Canadian dollars should be $1,335. And our intrinsic value exceeds book value, a principal reason being that our insurance companies generate huge amounts of float at no cost. This is the reason we continue to hold total return swaps with respect to 1.96 million subordinate voting shares of Fairfax with a total market value of $968 million at year-end.

—————

Equity total return swaps – long positions

During 2021 the company entered into $753.6 notional amount of long equity total return swaps for investment purposes which included long equity total return swaps on an aggregate of 969,460 Fairfax subordinate voting shares with an original notional amount of $403.3 (Cdn$508.5) or approximately $416.03 (Cdn$524.47) per share, all of which remained open at December 31, 2021. At December 31, 2021 the company held long equity total return swaps on individual equities for investment purposes with an original notional amount at December 31, 2021 of $866.2 (December 31, 2020 – $1,746.2), which included an aggregate of 1,964,155 Fairfax subordinate voting shares with an original notional amount of $732.5 (Cdn$935.0) or approximately $372.96 (Cdn$476.03) per share. These contracts provide a return which is directly correlated to changes in the fair values of the underlying individual equities.

During 2021 the company received net cash of $439.6 (2020 – $207.4) in connection with the closures and reset provisions of its long equity total return swaps (excluding the impact of collateral requirements). During 2021 the company closed out $1,876.7 notional amount (2020 – $878.8) of its long equity total return swaps and recorded net realized gains on investments of $243.0 (2020 – $216.7).

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2020AR:

 

Throughout much of last year following the pandemic-induced market plunge, I made public statements to the effect that our belief was that Fairfax shares were trading in the market at a ridiculously cheap price. In the summer I backed that up by personally purchasing close to $150 million of shares. Additionally, following our value investing philosophy, since the latter part of 2020 Fairfax has purchased total return swaps with respect to 1.4 million subordinate voting shares of Fairfax with a total market value at the time of those agreements of $484.9 million ($344.45 per share). We think this will be a great investment for Fairfax, perhaps our best yet!

 

 

Investment returns are very sensitive to end date values, so with a stock price of only $341 per share at the end of December 2020, our five and ten year and longer returns have been affected. We expect this to change as Fairfax begins to reflect intrinsic values again. Nothing that a $1,000 share price won’t solve!

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Amounts recorded in net realized gains (losses) include net gains (losses) on total return swaps where the counterparties are required to cash-settle monthly or quarterly the market value movement since the previous reset date notwithstanding that the total return swap positions remain open subsequent to the cash settlement.

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During 2020 the company entered into $1,906.9 notional amount of long equity total return swaps on individual equities for investment purposes following significant declines in global equity markets in the first quarter of 2020. Included in those contracts were long equity total return swaps on an aggregate of 994,695 Fairfax subordinate voting shares with an original notional amount of $329.2 (Cdn$426.5) or approximately $330.95 (Cdn$428.82) per share, all of which remained open at December 31, 2020. Subsequent to December 31, 2020 the company entered into long equity total return swaps on an additional 413,169 Fairfax subordinate voting shares with an original notional amount of $155.7 (Cdn$198.5). At December 31, 2020 the company held long equity total return swaps on individual equities for investment purposes with an original notional amount at December 31, 2020 of $1,746.2 (December 31, 2019 – $501.5). These contracts provide a return which is directly correlated to changes in the fair values of the underlying individual equities. During 2020 the company received net cash of $207.4 (2019 – paid net cash of $34.5) in connection with the closures and reset provisions of its long equity total return swaps (excluding the impact of collateral requirements). During 2020 the company closed out $878.8 notional amount of its long equity total return swaps and recorded net realized gains on investments of $216.7. During 2019 the company did not initiate or close out any long equity total return swaps.

Edited May 29, 2023 by Viking

[LC]

Do we know who the swap counterparty is? I'd imagine a Canadian bank? 

[Viking]

45 minutes ago, LC said:

Do we know who the swap counterparty is? I'd imagine a Canadian bank? 

Good question. I am not sure who it is. Given Fairfax’s experience with the CDS during the housing crash my guess is they have thought this risk through pretty well.

[SafetyinNumbers]

I met a smart investor at the Markel AGM a few weeks ago who sold his Fairfax because he was scared away by the TRS, thinking it was too aggressive. I told him it wasn’t too late to get back in!

[backtothebeach]

Do we know when the TRS expires?