Fairfax 2024

[Viking]

1 hour ago, 73 Reds said:

Viking, thanks again for your incredible depth of research.  Has the company really changed so much or have they simply learned from their mistakes?  A company doesn't grow BV at a CAGR of 18%+ for over 35 years by accident.  I loosely followed the company all throughout the 2010s and have the same questions now as I did then about some of the more public investment mistakes but now we recognize that management took ownership of their mistakes and moved on.  It was their "taking ownership" part that convinced me to invest; still looks like the same company to me, albeit that much larger.

 

@73 Reds The fact that Fairfax has been able to attract (and keep) shareholders of your quality gives me confidence that they are moving in the right direction. I agree with you - I think Fairfax has learned a great deal over the past 10 years. They have also had some important personnel changes (adding Wade Burton/Lawrence Chin, subtracting Paul Rivet, promoting Peter Clarke to name just a few).

 

Lots of investors don't want to invest in Fairfax today (or hold their shares long term) because of the very visible mistakes Fairfax made in the past. Given what we have seen from the management team at Fairfax over the past 6.5 years, I think the past mistakes actually make Fairfax a much stronger company today. As an investor, given what we know today, it makes me more confident in their future - it makes me want to invest in the more. It is really counter intuitive.

 

The cost of Fairfax's past mistakes was bourne by shareholders from 2010 to 2020 - and it was not pretty. Someone buying Fairfax shares in 2020 or later have been big beneficiaries of Fairfax's past mistakes - Mr. Market was irrationally pessimistic.

 

What were the big mistakes?

• The disastrous equity hedge/short 'decision' cost the company dearly (financially and reputation ally). But it also exposed a massive flaw in their investing framework.
• Blackberry was an unmitigated disaster. As was Abiliti-Bowater investment. Both of these investments exposed more flaws in their investing framework.
• Sandridge Energy, Fairfax Africa, APR Energy, Farmers Edge were all terrible investments. These investments exposed more flaws in their investing framework.

These all became great teachable moments for Fairfax.

 

Bottom line, Fairfax looked in the mirror and didn't like what they saw - they recognized they were the problem.

• Ending the equity hedge in late 2016 was the start and also the most important move (it was the biggest drag on results).
• By 2018, it was clear Fairfax started putting a much premium on management (Seaspan/Sokol and Stelco/Kestenbaum investments).
• In late 2020, Fairfax closed out its last short and very publicly promised not to repeat the equity hedge/short disaster.
• Around 2020/2021, Fairfax also stopped being a piggy bank to underperforming equities in their portfolio - generating cash flow became the new mantra. If they got cash from Fairfax it usually required restructuring by the company, a pound of flesh (increase in Fairfax's ownership on very favourable terms) etc.

Fast forward to today and you have a MUCH stronger company. Investors have never actually seen this version of Fairfax before.      

 

Fairfax today looks like a star athlete that has just entering their prime. With Fairfax, there is a good change we haven't even seen their best performance yet. And that is why I push back so much on people on this board who think Fairfax is at 'peak earnings' today. Peak? I think we are just getting a glimpse of what they can do. 

 

The crazy thing is Fairfax's stock is priced today like the company will be going into a steep earnings decline looking out 3 or 4 years. A big decline? WTF?

 

So even if I am completely wrong in my outlook for Fairfax, the stock will likely still perform reasonably well moving forward. And if I am right... well that would result in significant upside - that I am getting for free today. What a wonderful set-up. And that is why I love investing so much. 

Edited August 12, 2024 by Viking

[SafetyinNumbers]

17 minutes ago, Viking said:

 

The crazy thing is Fairfax's stock is priced today like the company will be going into a steep earnings decline looking out 3 or 4 years. A big decline? WTF?

 

To be fair to the quants that set prices, that’s exactly what the humans are expecting to happen. 
 

[73 Reds]

43 minutes ago, Viking said:

 

@73 Reds The fact that Fairfax has been able to attract (and keep) shareholders of your quality gives me confidence that they are moving in the right direction. I agree with you - I think Fairfax has learned a great deal over the past 10 years. They have also had some important personnel changes (adding Wade Burton/Lawrence Chin, subtracting Paul Rivet, promoting Peter Clarke to name just a few).

 

Lots of investors don't want to invest in Fairfax today (or hold their shares long term) because of the very visible mistakes Fairfax made in the past. Given what we have seen from the management team at Fairfax over the past 6.5 years, I think the past mistakes actually make Fairfax a much stronger company today. As an investor, given what we know today, it makes me more confident in their future - it makes me want to invest in the more. It is really counter intuitive.

 

The cost of Fairfax's past mistakes was bourne by shareholders from 2010 to 2020 - and it was not pretty. Someone buying Fairfax shares in 2020 or later have been big beneficiaries of Fairfax's past mistakes - Mr. Market was irrationally pessimistic.

 

What were the big mistakes?

• The disastrous equity hedge/short 'decision' cost the company dearly (financially and reputation ally). But it also exposed a massive flaw in their investing framework.
• Blackberry was an unmitigated disaster. As was Abiliti-Bowater investment. Both of these investments exposed more flaws in their investing framework.
• Sandridge Energy, Fairfax Africa, APR Energy, Farmers Edge were all terrible investments. These investments exposed more flaws in their investing framework.

These all became great teachable moments for Fairfax.

 

Bottom line, Fairfax looked in the mirror and didn't like what they saw - they recognized they were the problem.

• Ending the equity hedge in late 2016 was the start and also the most important move (it was the biggest drag on results).
• By 2018, it was clear Fairfax started putting a much premium on management (Seaspan/Sokol and Stelco/Kestenbaum investments).
• In late 2020, Fairfax closed out its last short and very publicly promised not to repeat the equity hedge/short disaster.
• Around 2020/2021, Fairfax also stopped being a piggy bank to underperforming equities in their portfolio - generating cash flow became the new mantra. If they got cash from Fairfax it usually required restructuring by the company, a pound of flesh (increase in Fairfax's ownership on very favourable terms) etc.

Fast forward to today and you have a MUCH stronger company. Investors have never actually seen this version of Fairfax before.      

 

Fairfax today looks like a star athlete that has just entering their prime. With Fairfax, there is a good change we haven't even seen their best performance yet. And that is why I push back so much on people on this board who think Fairfax is at 'peak earnings' today. Peak? I think we are just getting a glimpse of what they can do. 

 

The crazy thing is Fairfax's stock is priced today like the company will be going into a steep earnings decline looking out 3 or 4 years. A big decline? WTF?

 

So even if I am completely wrong in my outlook for Fairfax, the stock will likely still perform reasonably well moving forward. And if I am right... well that would result in significant upside - that I am getting for free today. What a wonderful set-up. And that is why I love investing so much. 

Yes, I largely agree with everything you write.  In fairness, I only started buying just after Covid but have been steadily buying shares over the last few years.  In fact when the MW report came out I literally used all the idle cash in various accounts to buy only Fairfax shares because the thesis sounded ridiculous, even to a round-numbers, "big picture" investor like me (my baseline for buying stocks - like you - is that I don't have to be precisely right about anything to still do well).  The difference between now and 2020 seems to be that earnings to a great extent are more predictable and predictably good.

[gfp]

Posting the Odyssey Re Q2 NAIC filing for those interested.  Investment activity is toward the end of the file.  

23680.2024.P.Q2.P.O.2.4808959.pdf

[glider3834]

2 hours ago, gfp said:

Posting the Odyssey Re Q2 NAIC filing for those interested.  Investment activity is toward the end of the file.  

23680.2024.P.Q2.P.O.2.4808959.pdf 1.73 MB · 5 downloads

thanks - this was interesting

 

 

 

Edited August 13, 2024 by glider3834

[glider3834]

 

I don't know much about this one but I think @petec mentioned this one previously - it looks like it has come to life a bit this year but a small holding

 

 

 

[SafetyinNumbers]

3 hours ago, glider3834 said:

thanks - this was interesting

 

 

 

Waterous Energy Fund’s only holding is Strathcona Resources SCR.TO. I think FFH owns ~14.5m shares indirectly. They are supposed to report results tonight and announce an initial dividend. I own some stock as I think it’s too cheap to NAV and they are motivated to get the shares to NAV.

[petec]

18 hours ago, Viking said:

@wondering  A lot of the discussion points in my posts are fluid… things that looks interesting that could go in different directions in the future. I am not sure what Fairfax’s thinking is on weightings within the equity bucket (mark to market, associate or consolidated). 
 

I agree with your summary: “My thinking was always Fairfax are value hunters and they will go where they see value. Period.  The way they hold the investment in secondary.”

 

i would add a little to your comment: Fairfax also seems to like the true value of their holdings to be reflected in book value (at least looking at it from an historical perspective).

 

Having said that, i wonder if they do not want to have some non-insurance consolidated holdings. ‘Bond type’ holdings that spit out cash. As a important offset to the P/C insurance business. But even here, if there is an opportunity to realize a big investment gain (like take take Recipe public in the future) my guess is they will do it.

 

I think there has been a trend in the general market towards more private and fewer public holdings. Fairfax has many deep pocketed partners. Perhaps part of what is happening at Fairfax i s just a microcosm of what is going on in the larger marketplace (towards more private holdings).

 

It might also be a reflection of Fairfax’s size - as Fairfax gets bigger it makes sense when they make investments they will own bigger stakes in companies (+20% or more) which will push more investments into the associates bucket or (50% or more) the consolidated bucket.

 

And some holdings are just better suited to be held as private holdings - versus public. AGT Food Ingredients is a great example if this - their business is too volatile and none of their peer group are publicly traded. I think taking Recipe private was smart for the business - my guess is they needed to restructure their operations after 10 years of acquisitions and this is difficult to do as a publicly traded company (they got started on this in the 2 years before Fairfax took them out). 

 

Of interest, when i calculate Fairfax’s splits (mark to market, associate and consolidated) i include the FFH-TRS in the mark to market bucket. If you exclude that holding (it is a derivative), the mark to market bucket is even smaller. 
 

And within the remaining holdings in the mark to market bucket, you have the significant limited partnership holdings that total $2 billion - BDT, ShawKwei, JAB etc. 

 

The true mark to market ‘common stock portfolio’ is $4.5 billion out of $20 billion in ‘equities’ and +$65 billion in total investments.

 

 

+1 - I think they are optimising for value to be reflected in book value, and for cash flows, not volatility of earnings.

[petec]

3 hours ago, glider3834 said:

 

I don't know much about this one but I think @petec mentioned this one previously - it looks like it has come to life a bit this year but a small holding

 

 

 

 

Interesting! This is basically an option on dead Greek loans coming back to life, IIRC.

[nwoodman]

46 minutes ago, petec said:

 

Interesting! This is basically an option on dead Greek loans coming back to life, IIRC.

Ah, saw this earlier today but the penny didn’t drop that it was that “Cairo”.  Thanks @glider3834 @petec

 

From Perplexity:

 

• Cairo Mezz Plc was established in 2020 in Nicosia, Cyprus with the corporate objective to hold the notes issued in the context of the Cairo securitization.
• The company was formerly known as Mairanus Ltd. and changed its name to Cairo Mezz Plc in September 2020.
• Cairo Mezz Plc was incorporated in 2020. Its shares were distributed to Eurobank shareholders in 2020, representing a 75% ownership of Eurobank Cairo's securitisation mezzanine tranche.
• The theoretical value of the distributed shares, based on Deloitte's valuation, was set at EUR 57.5m, EUR 0.0155 per Eurobank share or EUR 0.186 for every 12 shares held.

Cairo Mezz Plc was established in Cyprus in 2020 specifically to hold mezzanine and junior notes from the Cairo securitization of Eurobank's non-performing loans. Its shares originated from being distributed to existing Eurobank shareholders in 2020.

Edited August 13, 2024 by nwoodman

[Junior R]

back over $1560 lol

[hardcorevalue]

1 hour ago, Junior R said:

back over $1560 lol

 

What does this mean? I don’t get it. 

[Junior R]

Just now, hardcorevalue said:

 

What does this mean? I don’t get it. 

the stock price...it was under $1450 just a week ago 

[hardcorevalue]

Ha ok thanks, I guess I just think really long term here so it doesn’t seem like a huge drop! 

[petec]

On 8/13/2024 at 12:43 PM, nwoodman said:

Ah, saw this earlier today but the penny didn’t drop that it was that “Cairo”.  Thanks @glider3834 @petec

 

From Perplexity:

 

• Cairo Mezz Plc was established in 2020 in Nicosia, Cyprus with the corporate objective to hold the notes issued in the context of the Cairo securitization.
• The company was formerly known as Mairanus Ltd. and changed its name to Cairo Mezz Plc in September 2020.
• Cairo Mezz Plc was incorporated in 2020. Its shares were distributed to Eurobank shareholders in 2020, representing a 75% ownership of Eurobank Cairo's securitisation mezzanine tranche.
• The theoretical value of the distributed shares, based on Deloitte's valuation, was set at EUR 57.5m, EUR 0.0155 per Eurobank share or EUR 0.186 for every 12 shares held.

Cairo Mezz Plc was established in Cyprus in 2020 specifically to hold mezzanine and junior notes from the Cairo securitization of Eurobank's non-performing loans. Its shares originated from being distributed to existing Eurobank shareholders in 2020.

 

I believe the share price is an absolutely tiny fraction of the gross value of the underlying loans, but for good reason - they've been non-performing for a decade! Very low probability of an immense win here, I suspect.

Edited August 15, 2024 by petec

[nwoodman]

1 hour ago, petec said:

 

I believe the share price is an absolutely tiny fraction of the gross value of the underlying loans, but for good reason - they've been non-performing for a decade! Very low probability of an immense win here, I suspect.

Love the asymmetry. It does make you wonder, if on balance, there might be a few more pleasant surprises for Fairfax shareholders from that era. Not necessary for the thesis but  says a lot about management’s staying power IMHO.

 

[petec]

4 hours ago, nwoodman said:

Love the asymmetry. It does make you wonder, if on balance, there might be a few more pleasant surprises for Fairfax shareholders from that era. Not necessary for the thesis but  says a lot about management’s staying power IMHO.

 

 

Deflation swaps? 

[nwoodman]

15 minutes ago, petec said:

 

Deflation swaps? 

Well played sir.  Guess we should be careful of wishful thinking

[petec]

On 8/15/2024 at 9:29 AM, petec said:

 

I believe the share price is an absolutely tiny fraction of the gross value of the underlying loans, but for good reason - they've been non-performing for a decade! Very low probability of an immense win here, I suspect.

 

OK I am in work-avoidance mode today so I did a shallow dive.

 

Cairo Mezz owns mezz (euribor 3m+3%) and junior (euribor 3m+5%) notes due 2035, 2054, and 2062. These notes get paid when collections are made on part of Eurobank's old bad loan book. The notes trade on the Vienna exchange, but they are not active, so valuation is via DCF. The notes rank at the bottom of the payment waterfall for the relevant bad loans (7, 8, 9, and 10 out of 10 levels), so they have received no interest or principal repayments yet. However, in 2023 Cairo recorded a DCF valuation gain on the mezzanine notes, mainly because receipts for the senior notes came in ahead of expectations. (Cairo doesn't own the seniors but obviously improved senior receipts lifts the chance that the mezz and junior notes eventually receive something.) Another reason for the valuation increase was rising Greek real estate prices, which affects the collateral backing some or all of the defaulted loans.

 

Basic financials:

• The mezz notes are valued at E179m using a discount rate of 17%.
• The junior notes are valued at 0.
• There are no material liabilities.
• The book value is E179m.
• The share price is E0.40, giving a market cap of E123m.

The fun bit is that the nominal value of the notes is E2.7bn, of which E1.1bn is in the mezz and E1.6bn is in the juniors. Presumably the nominal value reflects what the notes would be worth if the underlying loans were money good. I assume there are filings for the individual notes somewhere with data on collateral etc. but I can't find them.

 

So, for Fairfax:

• FFH owns 50% of Cairo, worth E61m today.
• Carrying value is probably E56m, which was the market value at the end of 2q (I am not sure because a quick word search of the FFH annual report returns no hits).
• Lookthrough share of nominal value of the mezz: 50% x E1.1bn = E550m. 
• Lookthrough share of total nominal value: 50% x E2.7bn = E1.45bn.

Conclusion: in theory Cairo could be worth E1.45bn to FFH, but in reality E550m (full value for the mezz and nothing for the junior) would be an excellent result. No guarantees, but if the Greek economy continues to perform, and cash starts to trickle in, and underlying collateral values continue to rise, and the discount rate comes down (which it should if all the other factors fall into line), it's possible Cairo contributes a couple of hundred million dollars to FFH's book value over the next few years.  

 

NB I have edited this to correct the error I made regarding FFH's % ownership. 

 

 

 

 

Edited August 17, 2024 by petec

[petec]

1 hour ago, nwoodman said:

Well played sir.  Guess we should be careful of wishful thinking

 

Ha!

[gfp]

12 minutes ago, petec said:

FFH owns 33.5% of Cairo, worth E41m.

 

I think Fairfax owns half of Cairo - like 49.99% or something like that

[petec]

28 minutes ago, gfp said:

 

I think Fairfax owns half of Cairo - like 49.99% or something like that

 

Shareholding Structure – Cairo Mezz

 

Might be out of date I guess, but Cairo was basically a spin, and FFH owned 33.5% of Eurobank, so FFH would have had to have bought more since the spin to get to 50% and I don't recall that.

[gfp]

34 minutes ago, petec said:

 

Shareholding Structure – Cairo Mezz

 

Might be out of date I guess, but Cairo was basically a spin, and FFH owned 33.5% of Eurobank, so FFH would have had to have bought more since the spin to get to 50% and I don't recall that.

 

Just scroll up in this thread - I think it came over from Eurolife or something like that.  Out of the office so can't check exactly but for me the 49.99% figure is in this thread several posts above this

 

Edited August 15, 2024 by gfp

[StubbleJumper]

54 minutes ago, petec said:

Conclusion: in theory Cairo could be worth E900m to FFH, but in reality E370m (full value for the mezz and nothing for the junior) would be an excellent result. No guarantees, but if the Greek economy continues to perform, and cash starts to trickle in, and underlying collateral values continue to rise, and the discount rate comes down (which it should if all the other factors fall into line), it's possible Cairo contributes a couple of hundred million dollars to FFH's book value over the next few years.  

 

 

Pete,

 

Thanks for digging into that and summarising the results.  That could turn into US$10/sh, and then we should also remember the CVRs from Resolute which might also become a nice little payday.

 

 

SJ

[Viking]

1 hour ago, petec said:

 

OK I am in work-avoidance mode today so I did a shallow dive.

 

Cairo Mezz owns mezz (euribor 3m+3%) and junior (euribor 3m+5%) notes due 2035, 2054, and 2062. These notes get paid when collections are made on part of Eurobank's old bad loan book. They notes trade on the Vienna exchange, but they are not active, so valuation is via DCF. The notes rank at the bottom of the payment waterfall for the relevant bad loans (7, 8, 9, and 10 out of 10 levels), so they have received no interest or principal repayments yet. However, in 2023 Cairo recorded a DCF valuation gain on the mezzanine notes, mainly because receipts for the senior notes came in ahead of expectations. (Cairo doesn't own the seniors but obviously improved senior receipts lifts the chance that the mezz and junior notes eventually receive something.) Another reason for the valuation increase was rising Greek real estate prices, which affect the collateral backing some or all of the defaulted loans.

 

Basic financials:

• The mezz notes are valued at E179m using a discount rate of 17%.
• The junior notes are valued at 0.
• There are no material liabilities.
• The book value is E179m.
• The share price is E0.40, giving a market cap of E123m.

The fun bit is that the nominal value of the notes is E2.7bn, of which E1.1bn is in the mezz and E1.6bn is in the juniors. Presumably the nominal value reflects what the notes would be worth if the underlying loans were money good. I assume there are filings for the individual notes somewhere with data on collateral etc. but I can't find them.

 

So, for Fairfax:

• FFH owns 33.5% of Cairo, worth E41m today.
• Carrying value is probably E38m, which was the market value at the end of 2q, or E19m, which is 33.5% of the book value of Cairo when it was created (I am not sure because a quick word search of the FFH annual report returns no hits).
• Lookthrough share of nominal value of the mezz: 33.5% x E1.1bn = E370m. 
• Lookthrough share of total nominal value: 33.5% x E2.7bn = E900m.

Conclusion: in theory Cairo could be worth E900m to FFH, but in reality E370m (full value for the mezz and nothing for the junior) would be an excellent result. No guarantees, but if the Greek economy continues to perform, and cash starts to trickle in, and underlying collateral values continue to rise, and the discount rate comes down (which it should if all the other factors fall into line), it's possible Cairo contributes a couple of hundred million dollars to FFH's book value over the next few years.  

 

@petec  Great summary - of a topic that has a fair bit of complexity and is not well understood.