Fairfax 2023

[Parsad]

6 hours ago, Intelligent_Investor said:

It's not the number that counts, its the severity. 1992 was a very inactive season (only 7 storms, 4 hurricanes, and 1 major hurricane), but the major hurricane was Andrew which was the costliest Atlantic hurricane for a long time. Now, even 30 years later no one talks about 1992 as an inactive season, all anyone remembers is Andrew leveling Miami. Even if there isn't that many hurricanes if we get "the big one", the impacts will be catastrophic and cause losses to the insurance industry

 

+1!  Cheers!

[Parsad]

9 hours ago, newtovalue said:

Brilliant - buy when there is blood in the streets.

 

8.6% yield. 51% loan to value. 1.7 years to maturity - $2.1BB notional. 

 

I LOVE this deal. FFH can get in on the cheap bank assets through KW. Winners keep winning.

 

 

https://www.fairfax.ca/news/press-releases/press-release-details/2023/Fairfax-Financial-Partners-With-Kennedy-Wilson-to-Acquire-Loan-Portfolio-From-Pacific-Western-Bank-Makes-Additional-Equity-Investment-in-Kennedy-Wilson/default.aspx

 

If I understand the deal correctly, it's a total obligation of $4B ($2.3B current loans being bought for $2B, with future loan funding of up to $1.7B).

 

The $2.3B effectively works out to 10% because of the 8.6% yield and discount of the purchase price.  Will the future $1.7B be at 8.6% as well?

 

If so, that's recurring income for the next two years of up to around $400M each year depending on when they loan the $1.7B, plus the loans are secured and there is a ton of current equity.

 

Win-win-win for FFH!  Cheers!

[maxthetrade]

I like the deal, looks very solid, much better than some crazy macro bet! 

[glider3834]

On 5/30/2023 at 4:58 PM, glider3834 said:

Just looking at this quote above from Morningstar.

 

Based on my estimates, over last 9 years (2013-2022) 

- Operating Income has grown at 14% CAGR

- Pre-tax operating income (before investment gains) per share has grown 15% CAGR

 

Pre-tax Operating Income (excluding investment gains) as a percentage of Common Shareholder Equity (start of period) was 15% in 2022 (versus 7% in 2013).

 

If we are looking at what sort of ROE or BVPS growth rate Fairfax can sustain going forward, IMHO I would look to pre-tax operating income (excluding investment gains) as a key driver.

 

If you then consider over 50% of Fairfax's BVPS growth rate since inception has come from investment gains, it doesn't seem unreasonable to expect a positive number here when measured over longer periods.

 

(Table below I put together from 2013 & 2022 Annual reports)   

 

 

 

Also please always do your own due diligence & don't just rely on my figures. Thanks!

 

Just realised I didn't factor in estimate for minority interests share of pre-tax income in above table - so now factoring this in, results in my new estimate for CAGR for pre-tax income growth per common share at 14% over last 9 yrs

 

Edited June 6, 2023 by glider3834

[gfp]

If Fairfax is really interested in extending duration while not giving up too much from their t-bill yields or taking additional credit risk I hope they took some of this BNSF offering yesterday.  5.2%, 30+ years, obviously a good credit

https://www.sec.gov/Archives/edgar/data/934612/000119312523160840/d477190dfwp.htm

[SafetyinNumbers]

45 minutes ago, gfp said:

If Fairfax is really interested in extending duration while not giving up too much from their t-bill yields or taking additional credit risk I hope they took some of this BNSF offering yesterday.  5.2%, 30+ years, obviously a good credit

https://www.sec.gov/Archives/edgar/data/934612/000119312523160840/d477190dfwp.htm

With an expected duration of claims at 4 years, I wouldn’t follow that strategy.

[gfp]

10 minutes ago, SafetyinNumbers said:

With an expected duration of claims at 4 years, I wouldn’t follow that strategy.

 

Different strokes for different folks.  I'd rather see some barbell like stuff than them buying forward contracts to lock in 3yr notes at 3.7 - 3.75% but they have a better track record than I do in the bond market.  I prefer the Berkshire method of sticking to t-bills but Fairfax takes a different approach.

 

[TwoCitiesCapital]

5 hours ago, gfp said:

If Fairfax is really interested in extending duration while not giving up too much from their t-bill yields or taking additional credit risk I hope they took some of this BNSF offering yesterday.  5.2%, 30+ years, obviously a good credit

https://www.sec.gov/Archives/edgar/data/934612/000119312523160840/d477190dfwp.htm

 

I tend to agree that I don't want them owning 30-year credit risk at rates less than short term treasuries. 

 

I think if they want duration, they can buy long dated treasuries, Treasury futures, or get reasonable spreads on low-coupon agency mortgages which will have extended durations due to lower prepayments and low coupons.

 

Why not lock in something like 6% YTMs for 5-10 years on agency mortgages instead of 5% with credit risk? 

 

I hope the only credit risk they're taking is at the front of the curve for the additional 1.5% of spread that won't blow out terribly much in a recession. 

[gfp]

My point was that they wouldn't be taking credit risk on a BNSF bond.  But opinions differ on the direction of long term rates.  I think all rates go lower from here and FFH wouldn't be worried about locking in 3yr bonds using forwards at 3.7% if they disagreed with my view that rates aren't headed higher.

[MMM20]

I’ve been wondering “whats the catch”  with the KW deal and saw the following in the JPM transcript. Could the mark to market LTV across the pool be closer to 70-80%? If so, still very attractive for that duration, but the ~10% expected return makes more sense… maybe the transcription is wrong and they’re just talking office…

 

”So we did a bit of work to understand the dynamics in the real estate market in the last several months. And so the real estate market’s totality in this country is around $13 trillion, $14 trillion, commercial real estate. The average inception loan-to-value was in the low-50s. If you were to do a mark-to-market of that portfolio now at the new cap rates and new occupancy rates and all that so that probably, the loan to value at the moment is between 70% to 80%. So definitively, it has been a deterioration. So an asset class that an insertion was $2.2 trillion, giving or taking, probably now is sometime between $1.5 trillion to $1.7 trillion. The amount of lending against that is $1.2 trillion. That is roughly half by — provided by banks and have provided by the markets, CMBS, some insurance companies, other participants" - JPM call

[Parsad]

Guys...they've run surpluses in their insurance ops for 15 straight years...I think they've got it down on how to structure their bond portfolio so that income and credit risk is balanced with future insurance claims.  Cheers!

[TwoCitiesCapital]

2 hours ago, gfp said:

My point was that they wouldn't be taking credit risk on a BNSF bond.  But opinions differ on the direction of long term rates.  I think all rates go lower from here and FFH wouldn't be worried about locking in 3yr bonds using forwards at 3.7% if they disagreed with my view that rates aren't headed higher.

 

It might be a better credit than other corporates, but it will still be hurt by a widening of spreads which is nearly guaranteed to happen as rates rise and the economy slows. 

 

All in all, if they want duration, they can get it in far more liquid and direct ways.

 

If they want credit exposure, I'd want them to wait until corporate spreads are priced attractively to lock in long duration spread. They can always use treasury futures/rates to hedge/manage the duration component at that time.  

[glider3834]

4 hours ago, MMM20 said:

I’ve been wondering “whats the catch”  with the KW deal and saw the following in the JPM transcript. Could the mark to market LTV across the pool be closer to 70-80%? If so, still very attractive for that duration, but the ~10% expected return makes more sense… maybe the transcription is wrong and they’re just talking office…

 

”So we did a bit of work to understand the dynamics in the real estate market in the last several months. And so the real estate market’s totality in this country is around $13 trillion, $14 trillion, commercial real estate. The average inception loan-to-value was in the low-50s. If you were to do a mark-to-market of that portfolio now at the new cap rates and new occupancy rates and all that so that probably, the loan to value at the moment is between 70% to 80%. So definitively, it has been a deterioration. So an asset class that an insertion was $2.2 trillion, giving or taking, probably now is sometime between $1.5 trillion to $1.7 trillion. The amount of lending against that is $1.2 trillion. That is roughly half by — provided by banks and have provided by the markets, CMBS, some insurance companies, other participants" - JPM call

Worth considering loan mix (skew to residential multi-family/student housing) and completion guarantees in addition to the LTV

 

All of the Loans are secured by real property located in the United States with an average loan-to-value ratio of approximately 51% and are supported by completion guarantees issued by the project equity sponsors. More than 70% of the Loans relate to multifamily or student housing development projects with the balance being a mix of industrial, hotel and life science office property development projects.

 

 

 

Edited June 6, 2023 by glider3834

[dartmonkey]

15 hours ago, glider3834 said:

Worth considering loan mix (skew to residential multi-family/student housing) and completion guarantees in addition to the LTV

 

All of the Loans are secured by real property located in the United States with an average loan-to-value ratio of approximately 51% and are supported by completion guarantees issued by the project equity sponsors. More than 70% of the Loans relate to multifamily or student housing development projects with the balance being a mix of industrial, hotel and life science office property development projects.

 

 

 

Yes, there doesn't seem to be any indication that this is a distressed sector like office space. With 70% being multifamily/student housing, and the rest in industrial/hotel/life science office property, it doesn't seem like the LTV would be any different now from when the loans were initiated. I don't exactly know what 'science office property' is, but while the word 'office' is scary, in these work-from-home tiimes, from the way the deal is described, it doesn't seem like it should be a big part of the deal.

[DM1]

[dartmonkey]

4 hours ago, DM1 said:

 

Even worse now, $1023! I hope the company has bought back a lot of shares since the first quarter report, but this opportunity for reinvesting way below intrinsic value may be closing up now. It will be interesting to see at what price they stop the repurchases.

[dartmonkey]

Just now, dartmonkey said:

 

Even worse now, $1023! I hope the company has bought back a lot of shares since the first quarter report, but this opportunity for reinvesting way below intrinsic value may be closing up now. It will be interesting to see at what price they stop the repurchases.

Sorry,, I mean $1013, up $23...

[Santayana]

And/or close out the TRS position.

[valuesource]

2 hours ago, dartmonkey said:

 

Even worse now, $1023! I hope the company has bought back a lot of shares since the first quarter report, but this opportunity for reinvesting way below intrinsic value may be closing up now. It will be interesting to see at what price they stop the repurchases.

I think they're a long way from backing off on repurchases.

[Viking]

14 minutes ago, valuesource said:

I think they're a long way from backing off on repurchases.

i agree. Prem has said that they feel their shares are worth much more than book value. My guess is he is probably thinking a minimum of 1.3 x BV (i am probably low). Fairfax also know earnings could total $300/share over the next 11 quarters. Book value today is $800. Book value could easily be $1,100 the end of 2025. At a 1.3 x multiple that would put the value of Fairfax shares (low end) at $1,400 at Dec 2025. Buying shares today at $750 is a bargain for Fairfax.

[Thrifty3000]

58 minutes ago, Viking said:

i agree. Prem has said that they feel their shares are worth much more than book value. My guess is he is probably thinking a minimum of 1.3 x BV (i am probably low). Fairfax also know earnings could total $300/share over the next 11 quarters. Book value today is $800. Book value could easily be $1,100 the end of 2025. At a 1.3 x multiple that would put the value of Fairfax shares (low end) at $1,400 at Dec 2025. Buying shares today at $750 is a bargain for Fairfax.

+1

[gfp]

I don't usually pull these filings for Fairfax subsidiaries, but I have Odyssey's Q1 2023 NAIC filing and thought some here might find it interesting to see under the hood on one of FFH's largest subsidiaries.  Investment holdings are near the end so might be easier to scroll from the end to see those.  Lots of deflation derivatives still left on the books.  Weird stuff like puts on Milk and Livestock.  I assume those are relics of the past, along with the CPI-linked derivatives that were a bet on deflation.  Anyway, just in case someone is interested I am attaching the NAIC filing here.

Odyssey Q1 2023 NAIC.pdf

[glider3834]

1 hour ago, gfp said:

I don't usually pull these filings for Fairfax subsidiaries, but I have Odyssey's Q1 2023 NAIC filing and thought some here might find it interesting to see under the hood on one of FFH's largest subsidiaries.  Investment holdings are near the end so might be easier to scroll from the end to see those.  Lots of deflation derivatives still left on the books.  Weird stuff like puts on Milk and Livestock.  I assume those are relics of the past, along with the CPI-linked derivatives that were a bet on deflation.  Anyway, just in case someone is interested I am attaching the NAIC filing here.

Odyssey Q1 2023 NAIC.pdf 3.32 MB · 4 downloads

Milk puts (like other agri product derivatives) i think would be related to insurance business eg protection sold to dairy farmers example below from Hudson crop insurance site 

 

'Dairy Revenue Protection (DRP) is an insurance plan approved by the Federal Crop Insurance Corporation to allow dairy farmers to purchase risk management protection against declines in quarterly revenue from milk sales as a result of a decline in milk prices, a decline in milk production, or both.'

 

https://hudsoncrop.com/products/drp/

Edited June 8, 2023 by glider3834

[Parsad]

7 hours ago, gfp said:

I don't usually pull these filings for Fairfax subsidiaries, but I have Odyssey's Q1 2023 NAIC filing and thought some here might find it interesting to see under the hood on one of FFH's largest subsidiaries.  Investment holdings are near the end so might be easier to scroll from the end to see those.  Lots of deflation derivatives still left on the books.  Weird stuff like puts on Milk and Livestock.  I assume those are relics of the past, along with the CPI-linked derivatives that were a bet on deflation.  Anyway, just in case someone is interested I am attaching the NAIC filing here.

Odyssey Q1 2023 NAIC.pdf 3.32 MB · 9 downloads

 

Shareholders should know that the investment portfolio is partially dispersed among the less senior investment managers and analysts. 

 

So you might see some esoteric ideas in the portfolio at different Fairfax subs and some of those ideas are testing the waters or involve the individual smaller portfolios being managed by those managers and analysts. 

 

All big ideas, and most of the investment portfolio, runs through the Investment Committee at Hamblin Watsa.  Kind of like how Ted and Todd manage some money for Berkshire, but Buffett handles most of it.  If you see big ideas, you know it's Buffett or Hamblin Watsa.  If you see smaller ideas, it is likely Ted or Todd and in Fairfax's case, these other managers and analysts outside of the Hamblin Watsa Investment Committee.

 

Cheers!

[Masterofnone]

12 times average trading volume on FRFHF today. Some institution cashing out while another sees opportunity in the future. Does Fairfax buy back OTC shares or do they only purchase on TSX?