Fairfax 2023

[Parsad]

19 hours ago, SafetyinNumbers said:

 

I assume the insurance companies benefit with ratings agencies and clients by having excess capital sit at the subsidiaries.

 

What do you see as the benefit of having cash at the holdco instead besides Social Value?

 

When 9/11 happened, BCN (biological, chemical, nuclear) exclusions were added to all insurance policies.  But insurers were still on the hook for losses for policies written before that.

 

What if your insurance subs need an injection of capital and it is hard to raise capital?  We've been there before.  Fortunately, we had good friends who bailed us out until we could get our legs under ourselves again.

 

I don't want FFH to be an insurer that has to go looking for capital in an outlier event.  Like Berkshire, I want them to be self-funding.  Because when money is tight, cash is king...including for your own protection!

 

Yes, you give up some gains, but you will live when others perish!  It's why I always have a fair amount of cash in everything I do.  And it works for corporations as well!

 

Cheers!

[StubbleJumper]

1 hour ago, Parsad said:

 

When 9/11 happened, BCN (biological, chemical, nuclear) exclusions were added to all insurance policies.  But insurers were still on the hook for losses for policies written before that.

 

What if your insurance subs need an injection of capital and it is hard to raise capital?  We've been there before.  Fortunately, we had good friends who bailed us out until we could get our legs under ourselves again.

 

 

+1

 

The pandemic didn't put any (many?) insurers out of business, but it should be instructive for us.  What didn't happen was an enormous hit from business interruption claims.  Thankfully, the legal framework prevented that ridiculous cat claim.  But what if it had not done so?  What if there would have been a couple billion of BI indemnities at FFH?  And what if Ffh's reinsurers had been hammered with enormous claims as a result?

 

Go back in history almost four years.  In spring 2020 credit markets seized up briefly, equity markets went into the shitter, and FFH reported significant M2M losses on its equity port, and moderate cat losses from covid.  At that time, the company had already tapped its revolver for general corporate purposes before that virus even broke out and they were already subject to the covenants.  Imo, FFH came uncomfortably close to violating those covenants in summer 2020.  Had the cat claims been meaningfully worse or if the collectibility of ffh's reinsurance receivables had been called into question (ie reinsurers who can't pay or won't pay), Prem might have driven the company onto a wall.  For me, it was masterfully managed by Prem given the cards he had available, but it was uncomfortable.

 

The lesson is to not fuck around.  Have plenty of capital and plenty of Holdco cash.  Keep a revolver, but never put yourself in a position where you might be reliant on the kindness of bankers.

 

 

SJ

[Parsad]

3 hours ago, StubbleJumper said:

 

 

+1

 

The pandemic didn't put any (many?) insurers out of business, but it should be instructive for us.  What didn't happen was an enormous hit from business interruption claims.  Thankfully, the legal framework prevented that ridiculous cat claim.  But what if it had not done so?  What if there would have been a couple billion of BI indemnities at FFH?  And what if Ffh's reinsurers had been hammered with enormous claims as a result?

 

Go back in history almost four years.  In spring 2020 credit markets seized up briefly, equity markets went into the shitter, and FFH reported significant M2M losses on its equity port, and moderate cat losses from covid.  At that time, the company had already tapped its revolver for general corporate purposes before that virus even broke out and they were already subject to the covenants.  Imo, FFH came uncomfortably close to violating those covenants in summer 2020.  Had the cat claims been meaningfully worse or if the collectibility of ffh's reinsurance receivables had been called into question (ie reinsurers who can't pay or won't pay), Prem might have driven the company onto a wall.  For me, it was masterfully managed by Prem given the cards he had available, but it was uncomfortable.

 

The lesson is to not fuck around.  Have plenty of capital and plenty of Holdco cash.  Keep a revolver, but never put yourself in a position where you might be reliant on the kindness of bankers.

 

 

SJ

 

+1!

 

In the late 70's as interest rates started to rise, Jim Pattison (a local billionaire) said that the Bank of Montreal called all of his loans.  He scrambled to find money to save his businesses at the time...he was days away from losing everything!  He promised himself at that time, that he will never put himself or his businesses in a position where he has to rely on outside capital, especially the banks!

 

Today, Jim Pattison Group is probably the largest private enterprise in Canada valued at about $10B USD...he owns all of it...and he does not rely on the banks or anyone else!  He's also good buddies with Buffett.  Cheers!

[Dazel]

Someone can check but I am assuming that Digit is owned by the Fairfax Holding company? Their IPO was expected early this year and would add great deal of cash into the hold co. Depending  in the IPO size. The serendipitous timing is that the coming IPO comes at a time when the Indian stock market is screaming higher. Ie the sales of Thomas Cook shares after a great year. 

[netcash1]

[StubbleJumper]

@netcash1It's interesting that Bradstreet et Al have chosen now as the time to reach for yield.  When they picked up the $2b of Pacificorp debt at 10%, I raised my eyebrows, but it was a smallish bond investment at an attractive rate.  If the next $2 billion have a similar risk-reward profile, it's pretty aggressive.  If it works out, the results will be outstanding.  But you don't get 10% without taking on a bit of credit risk.

 

The easiest thing in the world to do for FFH would be to sit back and roll the US treasuries as they mature.  It would lock in good profits for the next few years.   But it requires some balls to reach for yield.  Let's hope it works out!

 

 

SJ

Edited December 7, 2023 by StubbleJumper

[gfp]

Here are the two KW filings for those that can't read the small print in netcash1's post.  SJ, I thought 10% Pacificorp debt sounded pretty wild even with the wildfire liabilities but realized you meant PacWest LOL...

 

https://otp.investis.com/clients/us/kennedy_wilson1/SEC/sec-show.aspx?Type=html&FilingId=17105470&CIK=0001408100&Index=10000

 

https://otp.investis.com/clients/us/kennedy_wilson1/SEC/sec-show.aspx?Type=html&FilingId=17105435&CIK=0001408100&Index=10000

[Xerxes]

54 minutes ago, netcash1 said:

hi

what is the source for this. It is not available on the “news” on the website ?

[gfp]

6 minutes ago, Xerxes said:

hi

what is the source for this. It is not available on the “news” on the website ?

Read my post above yours.  I linked to both Kennedy Wilson 8-Ks

[Xerxes]

59 minutes ago, gfp said:

Here are the two KW filings for those that can't read the small print in netcash1's post.  SJ, I thought 10% Pacificorp debt sounded pretty wild even with the wildfire liabilities but realized you meant PacWest LOL...

 

https://otp.investis.com/clients/us/kennedy_wilson1/SEC/sec-show.aspx?Type=html&FilingId=17105470&CIK=0001408100&Index=10000

 

https://otp.investis.com/clients/us/kennedy_wilson1/SEC/sec-show.aspx?Type=html&FilingId=17105435&CIK=0001408100&Index=10000

Got it. Thank you.

[MMM20]

3 hours ago, StubbleJumper said:

But you don't get 10% without taking on a bit of credit risk.

 

In a downside case where cap rates double or whatever, can't KW/Fairfax foreclose and just hold the properties?

[StubbleJumper]

2 hours ago, MMM20 said:

 

In a downside case where cap rates double or whatever, can't KW/Fairfax foreclose and just hold the properties?

 

Would you want to do that?  Really, you just want your capital back with a return.  Foreclosing on actual real estate and hoping you can eventually sell it to get your capital back doesn't sound so enticing.

 

 

Sj

[Xerxes]

2 minutes ago, StubbleJumper said:

 

Would you want to do that?  Really, you just want your capital back with a return.  Foreclosing on actual real estate and hoping you can eventually sell it to get your capital back doesn't sound so enticing.

 

 

Sj

foreclosing on the actual real estate should be a “ohh damn the thesis just changed moment, but looks like I got some insurance, for what is worth”

[Crip1]

2 hours ago, MMM20 said:

 

In a downside case where cap rates double or whatever, can't KW/Fairfax foreclose and just hold the properties?

Can they? Yes. Anyone lending money on real estate can do that. However, there's a lot of cost involved with foreclosing and re-selling. Virtually no entity who lends on real estate wants to own said real estate, be it residential or commercial. I think, that the point you're making is that foreclosure does limit downside so that the investment will technically not go to zero, but that's risk limitation, not elimination.

[MMM20]

32 minutes ago, StubbleJumper said:

Would you want to do that?  Really, you just want your capital back with a return.  Foreclosing on actual real estate and hoping you can eventually sell it to get your capital back doesn't sound so enticing.

Just thinking though downside scenarios. Does anyone know if the KW vehicles are set up in such a way that, worst case, Fairfax can hold indefinitely? If I’m an insurance company I might want to just go team #neversell on some quality real estate anyway. Of course there are opportunity costs and let’s hope we don’t end up with real estate broadly cut in half but better not to be forced sellers in such a scenario.

 

Edited December 7, 2023 by MMM20

[Viking]

From a capital allocation standpoint, what has been Fairfax’s most impactful decision in 2023? 
1.) (pending) GIG acquisition?

2.) increase in average duration of fixed income portfolio from 1.6 to 3.1 years?

3.) expansion of relationship with Kennedy Wilson?

4.) other?
 

My vote today would be 2.). 
 

But my guess is we are still in the early innings of understanding what is happening with Kennedy Wilson. Fairfax is aggressively expanding in what is probably the most hated sector of the economy today. Very opportunistic.

Edited December 7, 2023 by Viking

[glider3834]

4 hours ago, Viking said:

From a capital allocation standpoint, what has been Fairfax’s most impactful decision in 2023? 
1.) (pending) GIG acquisition?

2.) increase in average duration of fixed income portfolio from 1.6 to 3.1 years?

3.) expansion of relationship with Kennedy Wilson?

4.) other?
 

My vote today would be 2.). 
 

But my guess is we are still in the early innings of understanding what is happening with Kennedy Wilson. Fairfax is aggressively expanding in what is probably the most hated sector of the economy today. Very opportunistic.

+1 

 

their TRS has generated ~US$600M YTD before swap fees & assuming its still open - so I would add that to list

Edited December 8, 2023 by glider3834

[Gregmal]

Ok so on KW, because to me, KW seems to be something that falls into the “old Fairfax” bucket…it’s one of those companies that has the Fairfax halo and thus over the years has tended to trade at an undeserved premium. They own some pretty unremarkable assets, in some pretty lousy locations, and I’ve never spent much time going past surface level analysis with it because it’s just so obviously unappealing almost immediately. Why is Fairfax still here and what’s the point in going forward this route versus something more independent or sensible from an investment standpoint?

[Jaygo]

Agreed. When you look at colliers ect. Kw seems like picking the runner up just because there is some history. 

[Thrifty3000]

On 12/7/2023 at 7:51 AM, gfp said:

Here are the two KW filings for those that can't read the small print in netcash1's post.  SJ, I thought 10% Pacificorp debt sounded pretty wild even with the wildfire liabilities but realized you meant PacWest LOL...

 

https://otp.investis.com/clients/us/kennedy_wilson1/SEC/sec-show.aspx?Type=html&FilingId=17105470&CIK=0001408100&Index=10000

 

https://otp.investis.com/clients/us/kennedy_wilson1/SEC/sec-show.aspx?Type=html&FilingId=17105435&CIK=0001408100&Index=10000

Back of the envelope, I estimate this will increase the earning power of the bond portfolio by around $5 per share. (I’m assuming less than 2% loss provision, but pulled that out of the air.)

[gfp]

1 hour ago, Thrifty3000 said:

Back of the envelope, I estimate this will increase the earning power of the bond portfolio by around $5 per share. (I’m assuming less than 2% loss provision, but pulled that out of the air.)

 

Are you assuming $5 per share is the incremental earning power of the additional $2 Billion loan investment (if it actually gets invested, this is just a commitment, not deployed) over that hypothetical $2 Billion being invested in a T-bill currently or are you assuming that hypothetical $2 Billion loan investment is earning zero currently?

[Hoodlum]

This was an interesting read on the impact of losses from Severe Convective Storms (SCS) on reinsurance losses.  SCS losses have increased on average 7% annually over the past 30 years and have a record $60B loss ($50B of which was in the US) in 2023. 
 

While more focus is placed on the one time events of Hurricanes and Earthquakes, it was interesting to see how these these storms have been adding up to a more  significant portion of Property losses and continue to grow a a high rate, helping to extent a hardening of the market. 
 

https://www.globalreinsurance.com/home/swiss-re-scs-losses-reach-record-60bn-in-2023/1447322.article

[Viking]

Here is an update on what Fairfax has done with share buybacks over the past 5.75 years. 

 

The big picture

 

Three factors drive stock returns over the long term:

• earnings
• multiple
• shares outstanding

The last factor is often ignored by investors.

 

Capital allocation

 

Capital allocation is the most important function of a management team and stock buybacks are one of many options that are available.

 

Share buybacks can be very beneficial for shareholders if they are done in a responsible manner (purchased at attractive prices) and sustained over many years.

 

It is counterintuitive, but for long term shareholders a low share price can be a big benefit - if the company is buying back shares and in a significant quantity. Especially if it persists for years.  

 

How does Fairfax approach buybacks?

 

Prem laid out Fairfax’s strategy regarding share buybacks in the 2018 annual report:

 

“I mentioned to you last year that we are focused on buying back our shares over the next ten years as and when we get the opportunity to do so at attractive prices. Henry Singleton from Teledyne was our hero as he reduced shares outstanding from approximately 88 million to 12 million over about 15 years.” Prem Watsa – Fairfax 2018AR

 

Fairfax approaches stock buybacks from the framework of a value investor: buy back shares when they are cheap and back up the truck when they are really cheap.

 

What has Fairfax been doing in recent years?

 

Fairfax’s year-end ‘effective shares outstanding’ peaked in 2017 at 27.75 million. Fairfax issued a total of 7.2 million shares in 2015, 2016 and 2017 to help fund its aggressive international expansion in insurance. The new shares were issued at an average price of about $462/share.

 

At September 30, 2023, the ‘effective shares outstanding’ at Fairfax had fallen to 23.1 million shares. Over the last 5.75 years (2018-Sept 2023), Fairfax has reduced its share count by approximately 4.6 million shares or 16.7%.  The average price paid to buy back shares was about $474/share.

 

The average price paid for the shares repurchased by Fairfax over the past 5.75 years is slightly higher than the price that shares were issued at from 2015-2017. Fairfax’s book value at Sept 30, 2023 was $876.55/share. Fairfax has been able to buy back a significant number of shares at a very attractive average price - well below intrinsic value (more than 50% below current intrinsic value?).

 

The big share re-purchase was in December 2021, when Fairfax executed a Dutch auction and purchased 2 million shares at US$500/share at a total cost of $1 billion. To fund the purchase, Fairfax sold 10% of Odyssey for US$900 million. The management team at Fairfax was both creative and opportunistic in executing this transaction.

 

Fairfax has been buying back shares, and in volume, the past couple of years because, at the time of purchase, they felt the shares represented outstanding value. Pretty simple. Rational. Very shareholder friendly.

 

What have we seen so far in 2023?

 

Fairfax lowered ‘effective shares outstanding’ by 209,000 shares in the first nine months of 2023. The pace so far in 2023 is below that of the past few years. My current forecast is that Fairfax will reduce effective shares outstanding by about 300,000 shares in 2023.

 

With Fairfax’s share price currently trading at around $900 it will be interesting to see what Fairfax does with share buybacks moving forward.

 

 

—————

Fairfax’s total return swaps (TRS) on 1.96 million Fairfax shares

 

Some investors consider this investment to represent a buyback of sorts. Here is an update on this holding. It is turning into one of Fairfax’s best investments ever.

 

The TRS-FFH has increased in value by about $1.06 billion, or more than 145% over 36months (not including the costs to maintain the position).

 

 

 —————

What does Warren Buffett have to say about share buybacks?

 

“A very minor gain in per-share intrinsic value took place in 2022 through Berkshire share repurchases as well as similar moves at Apple and American Express, both significant investees of ours. At Berkshire, we directly increased your interest in our unique collection of businesses by repurchasing 1.2% of the company’s outstanding shares. At Apple and Amex, repurchases increased Berkshire’s ownership a bit without any cost to us.

 

“The math isn’t complicated: When the share count goes down, your interest in our many businesses goes up. Every small bit helps if repurchases are made at value-accretive prices. Just as surely, when a company overpays for repurchases, the continuing shareholders lose. At such times, gains flow only to the selling shareholders and to the friendly, but expensive, investment banker who recommended the foolish purchases.

 

“Gains from value-accretive repurchases, it should be emphasized, benefit all owners – in every respect. Imagine, if you will, three fully-informed shareholders of a local auto dealership, one of whom manages the business. Imagine, further, that one of the passive owners wishes to sell his interest back to the company at a price attractive to the two continuing shareholders. When completed, has this transaction harmed anyone? Is the manager somehow favored over the continuing passive owners? Has the public been hurt?

 

“When you are told that all repurchases are harmful to shareholders or to the country, or particularly beneficial to CEOs, you are listening to either an economic illiterate or a silver-tongued demagogue (characters that are not mutually exclusive).”

 

Warren Buffett - Berkshire Hathaway 2022AR

 

 

Edited December 11, 2023 by Viking

[Thrifty3000]

On 12/9/2023 at 3:11 PM, gfp said:

 

Are you assuming $5 per share is the incremental earning power of the additional $2 Billion loan investment (if it actually gets invested, this is just a commitment, not deployed) over that hypothetical $2 Billion being invested in a T-bill currently or are you assuming that hypothetical $2 Billion loan investment is earning zero currently?

Yes. I was at my son's basketball game and while he was on the bench I did a super-back-of-the-envelope estimate just to see how much of a per share impact we were actually talking about. Basically just started out with the highest level round numbers:

 

- I gave FFH the benefit of the doubt and assumed a nice round $200 mil earnings potential

- Subtracted opportunity cost of, say, $80 mil for what the $2 bil could alternatively earn in treasuries

- Took the resulting $120 mil and divided by 23 million shares

- Which came out to a little north of $5 per share.

 

So, that's usually enough info for me after a first pass impact assessment, where I just want to quickly understand if we're talking about pennies per share, dollars per share, or tens of dollars per share.

 

You can then go in and add whatever other variables to the mix you want, which would likely pull the estimate down a buck or two, but it's not a level of detail I'm going to worry about.

Edited December 11, 2023 by Thrifty3000

[Thrifty3000]

Good news. FFH's Price to Book Value ratio has solidly expanded this year. Here are the numbers (using GAAP for 2020 and 2021).

 

Dec 31, 2020= .71

Dec 31, 2021= .78

Dec 31, 2022= .78

Dec 13, 2023 (Estimate)= 1.0

 

I have a hunch the strong upward trend isn't going to stop at 1. I'll be surprised if we don't hit 1.2 in the next 2 years.

 

A new baseline of $150+ EPS is especially exciting when you apply a 1.2x multiple and compare the result to today's stock price. #stillCheapAF