Fairfax 2024

[Viking]

1 hour ago, TwoCitiesCapital said:

 

The hand wringing is largely just due to the liquidity drag it can potentially create. Just like I was paranoid about their duration until they got around to locking it in. There has been a history of mistakes made that we don't want repeated. 

 

Fairfax damn near run afoul of covenants and cash @ holdings company before. Having to come up with cash to front the movement on 7% of it's shares every quarter is not chump change. Particularly as the share price has moved from $500s to $1000s. 

 

This isn't like their other equity investments because those wouldn't necessarily require additional cash infusions to continue holding through a downturn. And as the financing hurdle rises, and as the stock price rises, the potential cash cost of holding a position through a downturn is rising significantly

 

For now, I'm comfortable with it. But I would prefer them to let it go too early than to be forced to let it go too late.

 

"Buy fear, sell dear". Selling dear by definition means it hurts to sell and you don't want to do it. 

 

25 minutes ago, Crip1 said:

 

Not sure if it is technically "hand-wringing" but I do like the idea of using some proceeds from the TRSs to buy back stock. The difference I see between investing in TRSs and buying back one's own stock is that the TRS is technically temporary where the buyback is more permanent. Example, we get some black swan even that harms the company and, accordingly, brings the price of the stock down, we're hit with a double-whammy as not only is there harm done to the company, but the TRS investment becomes less valuable, driving down the price even more. It's leverage against the shareholders. Keynes famously said "the markets can remain irrational longer than you can remain solvent". Buying back stock is more permanent. 

 

So, while I am not in favor of getting out of the TRS position, I'd be happy trimming the position and using proceeds to juice the buyback. Also, not pounding the table on this...just seeing the attractiveness of doing so.

 

-Crip

@Crip1  I like your description of the TRS position as leverage. It will be interesting to see if Fairfax comments. Kind of an obvious question for an analyst to ask: what is the exit strategy for TRS?

 

The other interesting angle is all the cash Fairfax is currently generating. In 2023 very little went into buybacks. What if Fairfax gets more aggressive on the buyback front in 2024? Every $100 increase in the share price = $200 million in investment gains. This is a very bizarre set-up. The ‘ultimate’ alignment of interests between management and shareholders?

Edited February 14 by Viking

[Hoodlum]

As long as we have a hard market and the share price is below intrinsic value, then I would want them to keep the TRS position in place as is.  Any available cash would be best spent on expanding the insurance business.  The TRS can be closed once the share price is much close to the value of Fairfax.   It would be better to buy back shares during a softer market when share price is down from the peak. 

 

Also, I don't think that using cash from selling some TRS to buy shares would be the best way to use the funds, as the TRS provides leverage for share price increase which has a ways to go.  

[StubbleJumper]

2 hours ago, TwoCitiesCapital said:

Fairfax damn near run afoul of covenants and cash @ holdings company before. Having to come up with cash to front the movement on 7% of it's shares every quarter is not chump change. Particularly as the share price has moved from $500s to $1000s. 

 

It's interesting that the events of last week haven't seemed to have triggered much angst about the holdco cash flow aspect of the TRS.  Those clowns managed to push the share price down by 10-ish% for a few days (thank you very much!) and then it rebounded a couple of days later like nothing ever happened.  But, a short attack by some clowns isn't the only thing that can drive a considerable drop in the share price.  Other events could do so, and it could be considerably more than 10%.

 

As a basic exercise, people should consider some wacko event in financial markets that result in FFH's share price dropping by, say, 25% in a day (eg, October 19) and that credit markets freeze up (ie, like the financial crisis or early in covid).  What happens to the FFH holdco? 

 

Well, if the share price crashes by 25%, even for silly reasons, the holdco needs to write a cheque to the counter party for about US$250/share, or about US$500m.  Everyone should take a look at Note 5 to the financial statements and consider what that means for holdco cash.  Now, people will say that FFH can just send some dividends from the insurance subs to the holdco and all is well, but don't forget that the insurance subs' equity holdings would also be marked to market by perhaps -25% in the event of a broad-based crash.  That then leaves the revolving line of credit, providing that the bankers don't think of a good reason to cancel it...

 

Jen Allen seems like a pretty sharp cat and has probably done a bit of thinking about this, but it seems to me that FFH needs to carry much larger holdco cash balances (true liquidity, not some of the bullshit portrayed in Note 5) if it wants to continue to carry those TRS.

 

 

SJ

[Parsad]

5 minutes ago, StubbleJumper said:

 

It's interesting that the events of last week haven't seemed to have triggered much angst about the holdco cash flow aspect of the TRS.  Those clowns managed to push the share price down by 10-ish% for a few days (thank you very much!) and then it rebounded a couple of days later like nothing ever happened.  But, a short attack by some clowns isn't the only thing that can drive a considerable drop in the share price.  Other events could do so, and it could be considerably more than 10%.

 

As a basic exercise, people should consider some wacko event in financial markets that result in FFH's share price dropping by, say, 25% in a day (eg, October 19) and that credit markets freeze up (ie, like the financial crisis or early in covid).  What happens to the FFH holdco? 

 

Well, if the share price crashes by 25%, even for silly reasons, the holdco needs to write a cheque to the counter party for about US$250/share, or about US$500m.  Everyone should take a look at Note 5 to the financial statements and consider what that means for holdco cash.  Now, people will say that FFH can just send some dividends from the insurance subs to the holdco and all is well, but don't forget that the insurance subs' equity holdings would also be marked to market by perhaps -25% in the event of a broad-based crash.  That then leaves the revolving line of credit, providing that the bankers don't think of a good reason to cancel it...

 

Jen Allen seems like a pretty sharp cat and has probably done a bit of thinking about this, but it seems to me that FFH needs to carry much larger holdco cash balances (true liquidity, not some of the bullshit portrayed in Note 5) if it wants to continue to carry those TRS.

 

 

SJ

 

100% agree!  They'll tell you that they have access to the revolver, but I would be much happier if they just kept $2.5B in the holdco.  No one is going to sink that boat if they have $2.5B in there.  Either that or reduce the debt by $2B. 

 

Problem is that in a scenario like yours, even reduced debt won't help if liquidity is really strained in the system...you're seeking the kindness of strangers, and in a global economic catastrophe, strangers usually aren't kind!  If you need to come up with $1B suddenly, borrowing might not be an available option, or the rate might be through the roof.

 

Cheers!

[SafetyinNumbers]

25 minutes ago, StubbleJumper said:

 

It's interesting that the events of last week haven't seemed to have triggered much angst about the holdco cash flow aspect of the TRS.  Those clowns managed to push the share price down by 10-ish% for a few days (thank you very much!) and then it rebounded a couple of days later like nothing ever happened.  But, a short attack by some clowns isn't the only thing that can drive a considerable drop in the share price.  Other events could do so, and it could be considerably more than 10%.

 

As a basic exercise, people should consider some wacko event in financial markets that result in FFH's share price dropping by, say, 25% in a day (eg, October 19) and that credit markets freeze up (ie, like the financial crisis or early in covid).  What happens to the FFH holdco? 

 

Well, if the share price crashes by 25%, even for silly reasons, the holdco needs to write a cheque to the counter party for about US$250/share, or about US$500m.  Everyone should take a look at Note 5 to the financial statements and consider what that means for holdco cash.  Now, people will say that FFH can just send some dividends from the insurance subs to the holdco and all is well, but don't forget that the insurance subs' equity holdings would also be marked to market by perhaps -25% in the event of a broad-based crash.  That then leaves the revolving line of credit, providing that the bankers don't think of a good reason to cancel it...

 

Jen Allen seems like a pretty sharp cat and has probably done a bit of thinking about this, but it seems to me that FFH needs to carry much larger holdco cash balances (true liquidity, not some of the bullshit portrayed in Note 5) if it wants to continue to carry those TRS.

 

 

SJ

That would have been more of a concern a few years ago but they are earning ~$1bn a quarter now. It gives them a lot more leeway. The equity portfolio might go down 25% but it’s unlikely the bond portfolio would. They might have large gains there if rates plunged. 

[SafetyinNumbers]

2 hours ago, giulio said:

Thanks @SafetyinNumbers, i did not consider this optionality actually.

Still, it's way easier to hold the stock now. If the stock ran way higher than the actual business results/prospects it would be harder to hold on. What do you think?

That’s more of a question on investor psychology. Prem isn’t even thinking about selling. It’s not something he has to worry about and maybe we shouldn’t either no matter how hard it is. 

[Hektor]

1 hour ago, StubbleJumper said:

Jen Allen seems like a pretty sharp cat and has probably done a bit of thinking about this, but it seems to me that FFH needs to carry much larger holdco cash balances (true liquidity, not some of the bullshit portrayed in Note 5) if it wants to continue to carry those TRS.

+1

 

One could argue that this Prem and team would be aware of this risk, probably even better than anyone else. Could there  be safeguards in place that would avoid an outflow of $0.5B?

[Redskin212]

I have been a FFH shareholder for over 20 years, regularly attending annual meeting and listening to most quarterly conference call.  It is hard to explain, but I can hardly wait for the annual results release tomorrow and conference call Friday morning.   To me this silly MW report has just hyped it up more for me.

 

Thanks to all, especially Viking, for all the recent posts - the wealth of learning is amazing!

 

 

[TwoCitiesCapital]

53 minutes ago, Redskin212 said:

I have been a FFH shareholder for over 20 years, regularly attending annual meeting and listening to most quarterly conference call.  It is hard to explain, but I can hardly wait for the annual results release tomorrow and conference call Friday morning.   To me this silly MW report has just hyped it up more for me.

 

Thanks to all, especially Viking, for all the recent posts - the wealth of learning is amazing!

 

 

 

I'm giddy myself

 

Is gonna be high quality earnings (not accounting/paper gains) and a killer report 

[SafetyinNumbers]

News on the Digit board about IRDAI approval. SEBI approval also expected soon and speculation on H1 IPO.

 

It will be nice when it’s priced above FFH’s mark but we’ll see how it goes.

 

 

[LC]

5 hours ago, Hoodlum said:

As long as we have a hard market and the share price is below intrinsic value, then I would want them to keep the TRS position in place as is.  Any available cash would be best spent on expanding the insurance business.  The TRS can be closed once the share price is much close to the value of Fairfax.   It would be better to buy back shares during a softer market when share price is down from the peak. 

 

 

Agreed. Almost every company makes the same mistake - they find themselves in super favorable business conditions, generating tons of cash. Shareholders clamoring to buyback shares. Buybacks inevitably commence.

 

12, 24 months later? The business landscape changes. The share price is half what it was, same with competitors/adjacents. Rather than being able to take advantage, the company spent hundreds of millions, billions, on buybacks at prices 2x above the current price. 

[Hektor]

Does anyone here know if TRS has a time bound expiration? I vaguely remember Prem saying FFH can renew TRS as long as they wish (or something similar). I wonder if the outflow due to a stock slump might be limited to a particular time window, and will not continue if they don't renew TRS.

[lessthaniv]

Early note redemption announced yesterday for ~ $350m C$
 

https://www.globenewswire.com/news-release/2024/02/14/2829510/0/en/Fairfax-Announces-Early-Redemption-Of-Senior-Notes-Due-March-3-2025.html

[StubbleJumper]

26 minutes ago, lessthaniv said:

Early note redemption announced yesterday for ~ $350m C$
 

https://www.globenewswire.com/news-release/2024/02/14/2829510/0/en/Fairfax-Announces-Early-Redemption-Of-Senior-Notes-Due-March-3-2025.html

 

 

It's always nice to see them proactively managing the debt maturities, but this one is a little funny as they are redeeming debt that costs 4.95% one year early, while last month they were floating new debt at 6%.  I guess managing maturities costs a bit of money.

 

 

SJ

[SafetyinNumbers]

17 minutes ago, StubbleJumper said:

 

 

It's always nice to see them proactively managing the debt maturities, but this one is a little funny as they are redeeming debt that costs 4.95% one year early, while last month they were floating new debt at 6%.  I guess managing maturities costs a bit of money.

 

 

SJ

60bps difference between Canada and US 10 year benchmarks so it’s not apples to apples. 

[StubbleJumper]

31 minutes ago, SafetyinNumbers said:

60bps difference between Canada and US 10 year benchmarks so it’s not apples to apples. 

 

No, it's not apples to apples at all because it's comparing existing 1-yr debt vs. the new 10-yr debt.  But, it is a cash for cash difference, in that if they had waited a year to refinance and if prevailing interest rates remained the same (ie, if they are still able to float debt for 6% next year), they'd have saved a bit more than US$2.5 million in interest.  Of course, that comes with a certain level of risk, and managing the debt-maturities is all about managing risk (and rarely is risk management free!).

 

 

SJ

[Xerxes]

clawed its way back and locked in a hair above $1,400. 
 

[Thrifty3000]

Quick question: Do reserve releases flow through the income statement?

[Thrifty3000]

2 minutes ago, Thrifty3000 said:

Quick question: Do reserve releases flow through the income statement?

I’m assuming it only impacts balance sheet (and book value).

[StubbleJumper]

5 minutes ago, Thrifty3000 said:

Quick question: Do reserve releases flow through the income statement?

 

Yes, they flow through the income statement.

 

 

SJ

[gfp]

https://www.globenewswire.com/news-release/2024/02/15/2830440/0/en/Fairfax-Financial-Holdings-Limited-Financial-Results-for-the-Year-Ended-December-31-2023.html

 

https://www.fairfax.ca/wp-content/uploads/02_February_15_2024-PRFFH-2023_Q4_Press_Release_Final.pdf

Edited February 15 by gfp

[gfp]

"We have increased our annual interest and dividend income run-rate to approximately $2.0 billion and we anticipate it will remain at this level for approximately the next four years."

 

"

At December 31, 2023 there were 23,003,248 common shares effectively outstanding"

Edited February 15 by gfp

[MMM20]

The stock should be +50% tomorrow. Again, to be clear, it won’t be, but it should be. Anything below US$1500 is a farce with these results and outlook. 
 

Edited February 15 by MMM20

[keegomaster]

Very strong annual results. This is what caught my eye:

• The excess of fair value over carrying value of investments in non-insurance associates and market traded consolidated non-insurance subsidiaries increased significantly to $1,006.0 million at December 31, 2023 from $310.0 million at December 31, 2022, with $315.2 million of that increase related to publicly traded Eurobank.

[nwoodman]

@valuesource any chance you can delete your post.  There are links to the release no need to cut and paste the whole thing and it makes the flow of this thread very distracting.  Thanks in advance