Fairfax 2023

[UK]

1 hour ago, MMM20 said:

https://www.wsj.com/real-estate/commercial/commercial-real-estates-next-big-headache-spiraling-insurance-costs-604efe4d?st=jtyozjrpfikx3at&reflink=desktopwebshare_permalink

 

So, all else equal, what happens to insurance pricing if property values actually do reset down ~20-30%, with mortgage rates being what they are and the markets actually starting to price in higher rates for longer? Obviously don't want to read too much into SF office prices down 50%+ or whatever it is exactly from peak. Just trying to poke holes in the FFH thesis...

 

 

Nice chart:)

Edited September 26, 2023 by UK

[TwoCitiesCapital]

2 hours ago, MMM20 said:

Yeah, I guess I'm conflating replacement cost with market prices, but you'd think one would follow the other. Property values down -> weakening demand for building materials and labor and so prices down -> replacement costs down -> insurance rates down. Maybe not the best logic. 

 

 

It should work that way - and probably does given a long enough perspective and timeline. But you can get significant deviations. 

 

We have ~30 story sky scraper downtown that was built in 1986 for $150 million back during the 80s. It's been empty for the better part of a decade. 

 

It can't even be sold today for $4 million (the last auction price that was walked away from) because the cost to redevelop to anything usable remains uneconomic. 

 

So you have a value that is down 97% from its original build price, probably is less than a fraction of 1% of what it'd cost today, but I guarantee insurance on it wouldn't be cheap because the costs to repair and etc would still be exorbitant relative to the property's market price. 

[UK]

21 minutes ago, TwoCitiesCapital said:

 

It should work that way - and probably does given a long enough perspective and timeline. But you can get significant deviations. 

 

We have ~30 story sky scraper downtown that was built in 1986 for $150 million back during the 80s. It's been empty for the better part of a decade. 

 

It can't even be sold today for $4 million (the last auction price that was walked away from) because the cost to redevelop to anything usable remains uneconomic. 

 

So you have a value that is down 97% from its original build price, probably is less than a fraction of 1% of what it'd cost today, but I guarantee insurance on it wouldn't be cheap because the costs to repair and etc would still be exorbitant relative to the property's market price. 

 

https://www.statista.com/statistics/916054/us-nonresidential-building-construction-market-cost/

 

It seems it went down only -12 per cent after 2008-2009. 

[nwoodman]

Why buy for $1 when you can pay $1.20.  I am not not surprised the share price went down considerably.  Still under book (€1.99) so will be accretive but I am speculating that it buys some political good will down the track.  I was really hoping they would get this done around market value of say €1.50-1.60 rather than €1.80

 

https://www.ekathimerini.com/economy/1220864/hfsf-launches-disposal-of-its-stake-in-eurobank/

Edited September 27, 2023 by nwoodman

[SafetyinNumbers]

4 hours ago, nwoodman said:

Why buy for $1 when you can pay $1.20.  I am not not surprised the share price went down considerably.  Still under book (€1.99) so will be accretive but I am speculating that it buys some political good will down the track.  I was really hoping they would get this done around market value of say €1.50-1.60 rather than €1.80

 

https://www.ekathimerini.com/economy/1220864/hfsf-launches-disposal-of-its-stake-in-eurobank/

Net additional cost €10-15m doesn’t hurt too badly. Do you really think the share price reacted to that or just the general market jitters?

[nwoodman]

5 minutes ago, SafetyinNumbers said:

Net additional cost €10-15m doesn’t hurt too badly. Do you really think the share price reacted to that or just the general market jitters?

Nah, should have had my morning coffee before posting There has been some rumours doing the rounds about the ECB raising the minimum reserve requirements (MRR). Morgan Stanley did some modelling  attached,  TLDR minimal impact on Eurobank.  I guess I am just a little surprised as I figured this would be up and to the right given the low valuation but Greece has been suffering their share of misfortunes of late.

eemea_20230919_0946.pdf

[Viking]

59 minutes ago, nwoodman said:

Nah, should have had my morning coffee before posting There has been some rumours doing the rounds about the ECB raising the minimum reserve requirements (MRR). Morgan Stanley did some modelling  attached,  TLDR minimal impact on Eurobank.  I guess I am just a little surprised as I figured this would be up and to the right given the low valuation but Greece has been suffering their share of misfortunes of late.

eemea_20230919_0946.pdf 282.72 kB · 2 downloads

@nwoodman Thanks for the colour on Eurobank. I was wondering what was up with the share price. The important think to me is the health of the underlying business. As long as that keeps improving i am not too fussed about the share price. 

[gfp]

Routine renewal of the NCIB, including automatic plan to continue repurchase activity during blackout periods if they wish -

https://www.fairfax.ca/press-releases/fairfax-financial-holdings-intention-to-make-a-normal-course-issuer-bid-for-subordinate-voting-shares-and-preferred-shares-2023-09-28/

[SafetyinNumbers]

2 hours ago, gfp said:

Routine renewal of the NCIB, including automatic plan to continue repurchase activity during blackout periods if they wish -

https://www.fairfax.ca/press-releases/fairfax-financial-holdings-intention-to-make-a-normal-course-issuer-bid-for-subordinate-voting-shares-and-preferred-shares-2023-09-28/

The automatic plan is new, I think. 

[Crip1]

Meanwhile...
 

Interest rates have been volatile for the past few weeks as the 10-year has moved 45 basis points in less than a month. Besides the Fed saying “Higher for Longer” there has not been much news showing inflation getting worse. Though it’s been sticky, it is moving lower. Besides that, the resumption of student loan payments and likelihood of a Government shutdown are only going to take steam out of the economy. Noteworthy is that the inversion of the yield curve is moving lower, seemingly each day. It will be REALLY interesting to see what Fairfax does on their Fixed Income investments in the next few months. For the past year or two the risk-reward of buying long-term debt was skewed towards risk over reward. The more than longer-term rates move higher and inflation measures continue to look more benign, the risk-reward analysis will at some point flip to reward. When this happens, the returns which are currently locked in through 2025 will extend depending on what percentage of their fixed income investments they move into longer-term bonds.

 

-Crip

[UK]

https://www.wsj.com/finance/investing/catastrophe-bond-market-4a96483c?mod=hp_minor_pos21

 

 

[newtovalue]

End of Q3 today - any estimates of book value? 

 

I'll go first - no major cat events, small bond losses MTM due to rising yields, equities relatively flat. 

 

Roughly i would bet $870-900 USD. My method is not scientific as @Viking - but hopefully in the right ballpark.

[MMM20]

1 hour ago, newtovalue said:

End of Q3 today - any estimates of book value? 

 

I'll go first - no major cat events, small bond losses MTM due to rising yields, equities relatively flat. 

 

Roughly i would bet $870-900 USD. My method is not scientific as @Viking - but hopefully in the right ballpark.

 

Mine is US$869.420 and stock hits US$1000 by Dec or we get another big dutch auction.

[newtovalue]

7 minutes ago, MMM20 said:

 

Mine is US$869.420 and stock hits US$1000 by Dec or we get another big dutch auction.

@MMM20 - Slow clap for you 

 

funniest guy on the board

[MMM20]

3 hours ago, newtovalue said:

@MMM20 - Slow clap for you 

 

funniest guy on the board

I’m gonna take this at face value and just say thanks. I still think the stock is trading at about a third of intrinsic value… I know some here think that’s funny but I’m deadly serious and here for the ride.

 

Edited September 29, 2023 by MMM20

[newtovalue]

haha - just having some fun! 

 

but agree with you - i think a long way to go until intrinsic value and i keep adding to my position. good luck to both of us!

[StubbleJumper]

Confession:  I purchased more FFH today.  After bitching and complaining about FFH's poor risk management decisions with respect to position sizing (ie, the "hedging" derivatives, Blackberry, etc), I have committed the same sin.  After the rise in the share price over the past few years, I should be looking at the position size and trimming my FFH position.  Instead, today I added.

 

What could possibly go wrong?

 

 

SJ

[Parsad]

7 hours ago, MMM20 said:

I’m gonna take this at face value and just say thanks. I still think the stock is trading at about a third of intrinsic value… I know some here think that’s funny but I’m deadly serious and here for the ride.

 

 

Happy to sell you all my FFH at $3,300 CDN per share today if you want!  Cheers!

[SafetyinNumbers]

1 hour ago, Parsad said:

 

Happy to sell you all my FFH at $3,300 CDN per share today if you want!  Cheers!

What would the over/under be on when we trade there?

[Parsad]

2 minutes ago, SafetyinNumbers said:

What would the over/under be on when we trade there?

 

7-10 years from now.  Cheers!

 

[Viking]

What was the change in the value of Fairfax’s equity portfolio in Q3?

 

Fairfax’s equity portfolio (that I track) ended Q3 with a total value of about $16.5 billion. This was an increase of about $187 million or 1.1% from June 30 to September 30, 2023. The increase in the quarter works out to about $8/share.

 

The S&P500 finished Q3 down 3.6% so Fairfax outperformed by 4.7% which is quite a large margin over three months.

 

Currency was a big headwind for Fairfax in Q3; the US$ went on a tear higher in September. Fairfax has a lot of international equities so this makes its outperformance in the quarter even more impressive.

 

Please note, I include holdings like the FFH-TRS position in the mark to market bucket and at its notional value (which was $1.6 billion at Sept 30). I also include debentures and warrants that are in the money in this bucket.

 

To state the obvious, my tracker portfolio is not an exact match to Fairfax’s actual holdings. It also does not capture changes Fairfax has made to its portfolio during the quarter. As a result, my tracker portfolio is useful only as a tool to understand the probable directional movement in Fairfax’s equity portfolio (and not the precise change).

 

Please let me know if you see any errors. I do mess up every once in a while.

 

 

Split of total holdings by accounting treatment

 

The split by account treatment is provided below. About 50% of Fairfax’s equity holdings are mark to market and will fluctuate each quarter with changes in equity markets. The other 50% are Associate and Consolidated holdings.

 

 

Split of total gains (losses) by accounting treatment

• The total change was an increase of $187 million = $8/share
• The mark to market change was an increase of $266 million = $11.44/share. Only changes in this bucket of holdings will show up in ‘net gains (losses) on investments’ (along with changes in the value of the fixed income portfolio) when Fairfax reports results each quarter.

 

What were the big movers in the equity portfolio?

• Thomas Cook India was the star performer in Q3. Their business was hit hard by Covid. They reported results for the most recent quarter were much higher than expected. Importantly, all parts of the company (including Sterling Resorts) are now performing at a very high (record?) level.
• The FFH total return swap position (giving exposure to 1.96 million Fairfax shares) continues to perform exceptionally well. This position is up +$900 million since it was initiated in late 2020.
• Eurobank got hit by the recent severe weather issues in Greece. Also by ECB announcement? Regardless, Eurobank looks very well positioned. Currency was a headwind.
• Fairfax’s big equity purchase in Q2 was to significantly increase its position of Occidental (its current value is $391 million). With oil spiking over $90, the timing of this purchase is looking pretty good today.

 

Below is a copy of my Excel spreadsheet (next 2 pages) if you want a closer look.

 

For Associate and Consolidated holdings, the excess of fair value to carrying value was $488 million or $21/share (pre-tax). Book value at Fairfax is understated by about this amount (less the tax impact). What is the split?

• Associates                  $268 million = $11.56/share
• Consolidated              $220 million =  $9.48/share

 

 

Fairfax Sept 30 2023.xlsx

Edited September 30, 2023 by Viking

[MMM20]

Don’t get me wrong @Parsad

 

Intrinsic value ~3x higher doesn’t mean I think it’ll trade there next year or that I’d pay that price for it. But if I did pay you that price, I bet I’d do just fine over a decade. That’s really my point.
 

My main point though is that a persistent discount to intrinsic value and above market IV *per share* growth what makes a long term hold compounder, right?

 

A high teens multiple of normalized earnings is a reasonable proxy for intrinsic value of a low-mid teens compounder with good aligned management and good capital allocation…and a long runway… because it pencils to a ~10-12% per share compounding from there. This is in a world of ~5% fixed income and ~7% long term expected returns in global equities. Do we agree on all that?

 

Will I be surprised if this trades at 2x BV after a few more years of great execution in a good enough market and a ~$1300-1500 BVPS? No, because the market has proven to be so reactive and backward looking in this one. A longer stretch of good results tends to bring out the incremental buyers. The buyers are higher. 

 

I won’t be convinced otherwise by arguments about historical trading ranges.

 

I will continue to ignore backward looking measures of value and see if that keeps paying off  

 

And i’ll continue on over here on Fairfax island with the weirdos and misfits. 

 

Enjoy the weekend everyone.

 

Edited September 30, 2023 by MMM20

[SafetyinNumbers]

1 hour ago, MMM20 said:

Don’t get me wrong @Parsad

 

Intrinsic value ~3x higher doesn’t mean I think it’ll trade there next year or that I’d pay that price for it. But if I did pay you that price, I bet I’d do just fine over a decade. That’s really my point.
 

My main point though is that a persistent discount to intrinsic value and above market IV *per share* growth what makes a long term hold compounder, right?

 

A mid-high teens multiple of normalized earnings is a reasonable proxy for intrinsic value of a low-mid teens compounder with good aligned management and good capital allocation…and a long runway… because it pencils to a ~10-12% per share compounding from there. This is in a world of ~5% fixed income and ~7% long term expected returns in global equities. Do we agree on all that?

 

Will I be surprised if this trades at 2x BV after a few more years of great execution in a good enough market and a ~$1300-1500 BVPS? No, because the market has proven to be so reactive and backward looking in this one. A longer stretch of good results tends to bring out the incremental buyers. The buyers are higher. 

 

I won’t be convinced otherwise by arguments about historical trading ranges.

 

I will continue to ignore backward looking measures of value and see if that keeps paying off  

 

And i’ll continue on over here on Fairfax island with the weirdos and misfits. 

 

Enjoy the weekend everyone.

 

I’m in your camp @MMM20. We know the mechanism for buyers to pay higher and higher multiples comes from quants and index huggers.

Over time, instead of projecting declining earnings estimates every year as they do now, analysts will project growing earnings which will invite more quants in.

 

With the persistent growth in book value, Fairfax’s weight in the S&P/TSX composite will go over 100bps (it’s 90bps now) probably in the next 6-12 months. The cost of being underweight will hurt more and more.
 

The hurdle to buy Fairfax at book value should be low but most actively managed funds can’t even look at it because it doesn’t pass the quant screens (see Morningstar’s analysis for example). It will be fun to watch the narratives on Fairfax adjust to accommodate the higher multiples that are paid over time. 
 

Clearly, I’m taking the under on @Parsad‘s 7-10 year estimate for the shares getting to C$3300.
 

 

[sleepydragon]

I am not sure quant or indexer will help much. Quant don’t trade much in CAN stocks as far as I know. And adding to index will boost maybe 1-5% max unless it’s being added to SP500.

 

if Fairfax is listed in US exchange, then it will rise a lot I think. 

[SafetyinNumbers]

1 hour ago, sleepydragon said:

I am not sure quant or indexer will help much. Quant don’t trade much in CAN stocks as far as I know. And adding to index will boost maybe 1-5% max unless it’s being added to SP500.

 

if Fairfax is listed in US exchange, then it will rise a lot I think. 

It’s already in the index (32nd biggest component). Passive and quants have taken so much market share from active managers that active managers are forced to act like passive and quants. They need to buy whatever is getting more relevant to keep up and sell whatever is underperforming. They need to buy what quants buy to keep up with their performance so they don’t lose market share.
 

Ultimately, when Fairfax is added to the S&P/TSX 60, passive will have to buy an additional ~4% of the float but that will take a long time as the index is already dominated by financials.

 

What makes you think quants aren’t active in Canada?