Fairfax 2023

[StubbleJumper]

@glider3834Yes, Bradsteet has one of the best fixed income investment records that I have seen.  That being said, I would not describe FFH's fixed income investment strategy during 2022 as an active, value oriented program.  They quite rightly kept things simple during 2022 by rolling over government bonds and bills into other government bonds and bills and the big innovation was not primarily climbing the risk ladder into corporates, but rather a moderate extension of average duration (some of us think they could have been more aggressive on this).  The losses on that bond port during 2022 were not primarily realised losses attributable to some bond investment going bad or an unexpected rotation of the yield curve, but rather they were simple unrealised M2M losses that resulted from a general rapid, upward shift of the yield curve.  In 2023 it is likely that those losses unwind as the short-term fixed income instruments age.  Those M2M losses during 2022 and subsequent reversals expected during 2023 have nothing to do with good decisions or poor decisions made by HWIC during 2022 and 2023 and everything to do with an historically rapid upward shift of the yield curve, followed by what we think will be a drastic slowing of that upward shift in 2023.

 

Having said that, Bradstreet definitely has created considerable value for FFH over the years through active management of the fixed income port.  Going long in the early 2000s was a conscious decision that worked out well (actually it was more of a barbell strategy than long, but the long bonds made us the money).  Going into corporates when the market was actually paying for risk during the financial crisis also worked out well and made us a tonne of money.  And, in the years leading up to the the financial crisis, Bradstreet earned a mountain of money for us by recognizing that the market wasn't paying for risk, so that the CDS were ridiculously underpriced.  But, not much of that sort of thing occurred during 2022, as the opportunities were not there.

 

 

SJ

[glider3834]

5 hours ago, StubbleJumper said:

@glider3834Yes, Bradsteet has one of the best fixed income investment records that I have seen.  That being said, I would not describe FFH's fixed income investment strategy during 2022 as an active, value oriented program.  They quite rightly kept things simple during 2022 by rolling over government bonds and bills into other government bonds and bills and the big innovation was not primarily climbing the risk ladder into corporates, but rather a moderate extension of average duration (some of us think they could have been more aggressive on this).  The losses on that bond port during 2022 were not primarily realised losses attributable to some bond investment going bad or an unexpected rotation of the yield curve, but rather they were simple unrealised M2M losses that resulted from a general rapid, upward shift of the yield curve.  In 2023 it is likely that those losses unwind as the short-term fixed income instruments age.  Those M2M losses during 2022 and subsequent reversals expected during 2023 have nothing to do with good decisions or poor decisions made by HWIC during 2022 and 2023 and everything to do with an historically rapid upward shift of the yield curve, followed by what we think will be a drastic slowing of that upward shift in 2023.

 

Having said that, Bradstreet definitely has created considerable value for FFH over the years through active management of the fixed income port.  Going long in the early 2000s was a conscious decision that worked out well (actually it was more of a barbell strategy than long, but the long bonds made us the money).  Going into corporates when the market was actually paying for risk during the financial crisis also worked out well and made us a tonne of money.  And, in the years leading up to the the financial crisis, Bradstreet earned a mountain of money for us by recognizing that the market wasn't paying for risk, so that the CDS were ridiculously underpriced.  But, not much of that sort of thing occurred during 2022, as the opportunities were not there.

 

 

SJ

SJ good points. My thought in 2023 was with a recession, they could start to transition from a short duration Treasury position to investing more in corporates at higher spreads, but its interesting corp spread over treasuries has been tightening  over last 4 mths  https://www.barrons.com/articles/high-quality-bonds-defaults-junk-51674769295

 

 

 

[glider3834]

3 minutes ago, glider3834 said:

SJ good points. My thought in 2023 was with a recession, they could start to transition from a short duration Treasury position to investing more in corporates at higher spreads, but its interesting corp spread over treasuries has been tightening  over last 4 mths  https://www.barrons.com/articles/high-quality-bonds-defaults-junk-51674769295

 

 

 

 

So if Q4 report shows more of the same - basically continuing a high quality bond/credit allocation but still pushing duration out more - US & CAN treasuries at 2 yrs etc - that won't surprise me.

 

They have been doing some high yield deals too https://www.lse.co.uk/news/duke-royalty-upgrades-credit-facility-to-gbp100-million-until-2028-qdy9ut7qebkhk5b.html

Edited February 4, 2023 by glider3834

[StubbleJumper]

1 hour ago, glider3834 said:

So if Q4 report shows more of the same - basically continuing a high quality bond/credit allocation but still pushing duration out more - US & CAN treasuries at 2 yrs etc - that won't surprise me.

 

That's what I would hope to see.  I don't expect a large move into corporates, as the market wasn't paying for risk last fall.  FFH tends to be very rational and very opportunistic on these things.  When risk is underpriced, they eschew corporate bonds, but when the market is paying for people to take risk, they deploy capital in a big way.

 

A couple other examples of Brian Bradstreet seizing opportunities occurred when the market went bonkers coming out of the financial crisis and FFH picked up a shitload of relatively high yielding municipal bonds 100% insured by Berkshire Hathaway!  FFH made out like bandits on that one.  And then, more recently in April/May 2020 they piled into corporates when spread blew out during that initial covid panic.  Rational and opportunistic.

 

 

SJ

[Xerxes]

4 hours ago, StubbleJumper said:

... when the market went bonkers coming out of the financial crisis and FFH picked up a shitload of relatively high yielding municipal bonds 100% insured by Berkshire Hathaway!  FFH made out like bandits on that one. 

 

And then, more recently in April/May 2020 they piled into corporates when spread blew out during that initial covid panic.  

 

11 hours ago, StubbleJumper said:

Going long in the early 2000s was a conscious decision that worked out well (actually it was more of a barbell strategy than long, but the long bonds made us the money). 

 

Going into corporates when the market was actually paying for risk during the financial crisis also worked out well and made us a tonne of money. 

 

And, in the years leading up to the the financial crisis, Bradstreet earned a mountain of money for us by recognizing that the market wasn't paying for risk, so that the CDS were ridiculously underpriced.  But, not much of that sort of thing occurred during 2022, as the opportunities were not there.

 

 

SJ,

For educational purposes, are there any readings on the history of these bond trades for 2000 and 2008-09 that you mentioned. I never traded bonds but always found them to be interesting read. If you have any additional qualitative comment (aside from what is on annual letters) please share or point me to the right direction.

 

I do recall the ones in 2020, related to Walt Disney corporate bonds. That is about it.

 

 

 

 

[Parsad]

11 hours ago, StubbleJumper said:

@glider3834Yes, Bradsteet has one of the best fixed income investment records that I have seen.  That being said, I would not describe FFH's fixed income investment strategy during 2022 as an active, value oriented program.  They quite rightly kept things simple during 2022 by rolling over government bonds and bills into other government bonds and bills and the big innovation was not primarily climbing the risk ladder into corporates, but rather a moderate extension of average duration (some of us think they could have been more aggressive on this).  The losses on that bond port during 2022 were not primarily realised losses attributable to some bond investment going bad or an unexpected rotation of the yield curve, but rather they were simple unrealised M2M losses that resulted from a general rapid, upward shift of the yield curve.  In 2023 it is likely that those losses unwind as the short-term fixed income instruments age.  Those M2M losses during 2022 and subsequent reversals expected during 2023 have nothing to do with good decisions or poor decisions made by HWIC during 2022 and 2023 and everything to do with an historically rapid upward shift of the yield curve, followed by what we think will be a drastic slowing of that upward shift in 2023.

 

Having said that, Bradstreet definitely has created considerable value for FFH over the years through active management of the fixed income port.  Going long in the early 2000s was a conscious decision that worked out well (actually it was more of a barbell strategy than long, but the long bonds made us the money).  Going into corporates when the market was actually paying for risk during the financial crisis also worked out well and made us a tonne of money.  And, in the years leading up to the the financial crisis, Bradstreet earned a mountain of money for us by recognizing that the market wasn't paying for risk, so that the CDS were ridiculously underpriced.  But, not much of that sort of thing occurred during 2022, as the opportunities were not there.

 

 

SJ

 

It's very easy to say it was easy in hindsight.  Brian's record is one of the few consistent things about Fairfax over the last 35+ years.  Less than 1% of fixed income money managers have a record like Brian's...both long-term and short-term performance.  The so-called best minds in fixed income investing have come and gone, but Brian continues to fly under the radar his entire career and keeps getting it right!  Extraordinary!  Cheers!

[StubbleJumper]

10 hours ago, Parsad said:

It's very easy to say it was easy in hindsight.

 

Oh, I don't believe that I ever suggested it was easy.  Rational, disciplined, opportunistic and creative, yes.  But easy?  I don't think anyone ever suggested that it was easy.  There's a reason why most insurance companies don't have anything close to FFH's fixed income investment track-record.

 

 

SJ

[StubbleJumper]

10 hours ago, Xerxes said:

 

 

 

SJ,

For educational purposes, are there any readings on the history of these bond trades for 2000 and 2008-09 that you mentioned. I never traded bonds but always found them to be interesting read. If you have any additional qualitative comment (aside from what is on annual letters) please share or point me to the right direction.

 

I do recall the ones in 2020, related to Walt Disney corporate bonds. That is about it.

 

 

 

 

 

Your best bet would be to read Prem's annual letters and possibly the fixed income section of the annual reports.  In a general sense, it's probably worthwhile to read Prem's annual letters to get an overview of the evolution of FFH.

 

 

SJ

[Cigarbutt]

9 hours ago, StubbleJumper said:

 

Oh, I don't believe that I ever suggested it was easy.  Rational, disciplined, opportunistic and creative, yes.  But easy?  I don't think anyone ever suggested that it was easy.  There's a reason why most insurance companies don't have anything close to FFH's fixed income investment track-record.

 

 

SJ

i would add that FFH's historical edge on the fixed income investing side has been very significant (although i don't really understand where they stand now apart from an incredibly high level of lightness of being versus at other times when they did not hesitate to be massively contrarian; and maybe now is not such a time).

 

-Looking back at all the episodes since formation, here's a comment from another this-time-is-different era (when FFH was a levered anchor holding)

 

Leading to the GFC, using dealer position as a proxy for the typical large institutional investor with a typical fixed income asset allocation and remembering that, on top of that, there was a huge pro-cyclical leverage going on in dealer positions also, one can 'feel' how contrarian FFH was around 2007-8. Another added feature not shown in the graph was that the huge move in credit spread included rates in 'risk-free' securities going down, allowing FFH to actually realize barbell investment gains before moving funds to higher yielding securities. For a while, then, it would have been possible to lock a 10% yield of at least intermediate duration on many investment-grade corporate bonds.

Anyways, things have changed and history doesn't repeat and the Covid period was different with a much more limited window of opportunity. It seems like the fixed income story is still unfolding.

[Saluki]

 

New Prem Interview.  A few interesting tidbits about his first meeting Buffett and Francis Chu.  

 

[Crip1]

59 minutes ago, Saluki said:

 

New Prem Interview.  A few interesting tidbits about his first meeting Buffett and Francis Chu.  

 

Prem's statements about relationships were quite interesting as they really apply in multiple areas, business-related and otherwise. The one point that he missed that is vital, however, is that of trust. Maintaining relationships is all fine and dandy, but if the people with whom we look to establish, maintain and build relationships do not have a level of trust in us, those relationships will be borderline meaningless. For Prem, my guess is the trust/integrity factor in dealing with people is almost like breathing so he does not mention it here as it's second nature to him. (Now, I do wish he spoke with more candor in his letters to shareholders as opposed to being the eternal optimist but that's an entirely separate discussion). 

 

-Crip

[valuesource]

IFC-T had a decent print.  Not exactly comparable to FFH.  91.5% CR but lighter on Premium growth.  Some discussion of hard market continuation.  Reinsurance super hard.  Conf Call tomorrow at 11:00am

[valuesource]

16 hours ago, valuesource said:

IFC-T had a decent print.  Not exactly comparable to FFH.  91.5% CR but lighter on Premium growth.  Some discussion of hard market continuation.  Reinsurance super hard.  Conf Call tomorrow at 11:00am

From the IFC Call...  Property seems tremendously profitable.

[valuesource]

12 minutes ago, valuesource said:

From the IFC Call...  Property seems tremendously profitable.

UK & Ireland was tough.  106%.  We can reasonably expect some weather losses in Brit.

[Xerxes]

Is it me or they forgot to announce conference call for Q4

[Daphne]

They’re about a week late now and still no announcement???

 

[valuesource]

14 hours ago, Xerxes said:

Is it me or they forgot to announce conference call for Q4

They will announce on Feb 16th.  I don't see a Press Release yet either.

[MMM20]

TORONTO, Feb. 10, 2023 (GLOBE NEWSWIRE) -- Fairfax Financial Holdings Limited (TSX: FFH and FFH.U) will hold a conference call at 8:30 a.m. Eastern Time on Friday, February 17, 2023 to discuss its 2022 year-end results, which will be announced after the close of markets on Thursday, February 16, 2023 and will be available at that time on its website at www.fairfax.ca. 

[Viking]

Since bottoming out Feb 1, US Treasury yields have been spiking again. This is good news for Fairfax given the very short average duration of their bond portfolio (of 1.6 years at Sept 30). It will be very interesting to see what Fairfax does with its bond portfolio in 2023.

1.) Do they continue to extend duration? (It increased from 1.2 years at June 30 to 1.6 years at Sept 30.)

2.) Do they shift portfolio composition from government and more to to corporates to take advantage of higher yields? 

 

The Fed is telling us that they will be taking the Fed Funds rate to over 5% in the coming months and will likely be keeping it there for all of 2023. We will see. 

 

When Fairfax reports on Thursday we will see interest income spike higher. We will also learn what the average duration of the bond portfolio is. 

----------

Looking back 12 short months ago it is amazing to see the significant increase in Treasury rates right across the curve. Fairfax's positioning of its bond portfolio on Dec 30, 2021 might just turn out to be one of its best calls in its history (of course, like the horse story, we will see...). Now Fairfax was positioned similarly (very short duration) for years... so there was definitely significant opportunity cost over many years. But for an investor in Fairfax today (with shares trading today at US$650) the future certainly looks bright... and a big reason is the positioning of the bond portfolio even the current interest rate environment.

 

Edited February 11, 2023 by Viking

[Xerxes]

While at the company level they may have nail the portfolio-duration and having optionality, it does make one wonder why their bond guys couldn’t talk to their equity guys !?! 
 

The same pin that in 2022 burst the bond bubble also bursts the growth equity side. Ultimately while their equity short view was not wrong, it was totally wrong in terms of execution, which means somehow the folks in Fairfax did not appreciate (or didn’t figure out) how much of the equity bubble was underwritten by very low rates. 

[racemize]

Let's not start talking about them shorting equities again please.  PTSD for all of us.

[Xerxes]

2 minutes ago, racemize said:

Let's not start talking about them shorting equities again please.  PTSD for all of us.

agreed. That horse has been beaten to death.
 

But one does wonder about the inner working of the company and how ideas and thoughts flow from different asset managers. 

[Viking]

19 minutes ago, Xerxes said:

While at the company level they may have nail the portfolio-duration and having optionality, it does make one wonder why their bond guys couldn’t talk to their equity guys !?! 
 

The same pin that in 2022 burst the bond bubble also bursts the growth equity side. Ultimately while their equity short view was not wrong, it was totally wrong in terms of execution, which means somehow the folks in Fairfax did not appreciate (or didn’t figure out) how much of the equity bubble was underwritten by very low rates. 

@Xerxes  i think most investors in insurance companies (me included) have little appreciation for approximately how the sausage is made. For a company like Fairfax, my guess is there is a great deal of complexity:

1.) while mostly in the US, their business is very geographically dispersed. Much more than most large insurers.

2.) they are 75% P&C insurance and 25% insurance

3.) their P&C insurance business is very diverse

4.) they continue to have a legacy runoff business

5.) their industry is highly regulated - and regulations vary by country

6.) their investment style is extremely varied and opportunistic

- equities: deep value, private equity, commodities, real estate, emerging markets, non-traditional

 

Perhaps i am over-stating the complexity. Bottom line, i try and understand Fairfax at 10,000 feet. It is difficult to get too in the weeds as to how everything is coordinated within Fairfax. My guess is it is all coordinated in some fashion (insurance, investments, op co, geography). 

 

[Xerxes]

4 minutes ago, Viking said:

 

- equities: deep value, private equity, commodities, real estate, emerging markets, non-traditional

 

Bed Bath Beyond Canada is up for sale !

 

[Viking]

6 hours ago, Xerxes said:

Bed Bath Beyond Canada is up for sale !

 

Its not the $100 million purchases/decisions i worry about. Its the $500 million and up purchases/decisions. But Fairfax has been putting alot of cookies back in the cookie jar the past couple of years with their big decisions:

1.) TRS on FFH: up to this point… a brilliant purchase. With a long runway ahead of it (with lots of expected volatility).

2.) Atlas: looks good. Could be great. But i have a hard time understanding the business and there is so much going on with take private, new builds, interest rates spiking, violent economic swings of post covid world (shift from goods to services in 2023), geopolitical strife affecting trade routes etc.

3.) bond duration at 1.2 years at Dec 31, 2021: not an equity purchase… but this was a big swing and could end up making Fairfax serious money over the next couple of years (while also protecting their balance sheet in 2022 at the same time the bond market was in a historic bear market). 
4.) pet insurance sale for almost $1 billion after tax. WTF? Really?

5.) Eurobank: has this actually turned into a great investment seemingly overnight? It has played out like some Greek version of Disney’s Cinderella. (I am getting all teary eyed…). Shares closed at 1.365 Euro on Friday.

6.) Resolute Forest Products sale: sold at the top of the lumber cycle for what could work out to $800 million (if the CVR pays out). Tissue, newsprint, paper… don’t let the door hit you on the ass on your way out  

 

The only big miss i can identify the past 3 years has been Blackberry and not finding a way to unload it in 2021. Fairfax did restructure the debenture (smaller in size) and at much more favourable terms. That sale would have been cathartic in so many ways.
 

But, hey, you rarely get everything you want in life. Gotta take the good with the bad. And with Fairfax, we have been getting spoiled a little with all the good the past few years.

Edited February 12, 2023 by Viking