Fairfax 2024

[gfp]

7 minutes ago, dartmonkey said:

does FFH not have a fiduciary duty towards FFH shareholders to maximize what goes into FFH shareholders' pockets?

 

I suppose legally they have some wiggle room here, and could plausibly say that it is in the best interests of FFH to preserve FIH shareholders' trust in FFH, and to maintain FIH as a viable investment vehicle

 

Yes, they have a fiduciary duty to the FFH shareholders and they made what they felt was the right long term decision.  The key word is long term.  You lay it out in your post.

[Jaygo]

28 minutes ago, dartmonkey said:

 

 does FFH not have a fiduciary duty towards FFH shareholders to maximize what goes into FFH shareholders' pockets?

 

 

 

I think the fiduciary duty is for the stewardship of the business long term and that includes keeping relationships healthy by sometimes letting out a little line in fishing parlance.

 

In my own business ive had many opportunities to take advantage of desperate situations to maximise my dollars but generally do not as i dont think it is moral or long term business friendly.

 

I would say trying to maximise every penny is short term thinking and not responsible to the shareholders who can take no action on their own short of selling and moving on. 

[MMM20]

@dartmonkey I believe it was addressed by those who rightly pointed out that leaving some money on the table in any particular transaction is not inconsistent with the fiduciary duty to shareholders.

[Viking]

17 hours ago, Hamburg Investor said:

Regarding TRS you are actually calculating share price being nearly flat (or up 25 dollars, so 2.5%) until end of 2024 for the next 3 quarters and two weeks, or do I misunderstand how the TRS works? 

Of course the share price could be higher or lower within such a short timeframe, but of course you have to assume something. But what’s the rational behind $250 for 2024? Wouldn‘t it be rational to e. g. assume a share price end of 2027 (whatever that would be) and than draw a straight (or compounding) line to that point? Than it would maybe be rational to readjust that line each time you recalculate your forecast? Otherwise you maybe would come to the point, where you would have to assume a negative return to the end of the year, if you assume a fixed return per calendar year and the share price gets above that?! 
 

I am just asking
 

Why are net gains in investments lower in 2025 than in 2024? Intuitively I‘d think one would assume Fairfax to get 7% again but on 107% of 2024 equity, so it should be higher. Same with the TRS: If shareprice goes up algorithmic, than it should be higher 2025 than 2024; or is this a function of the good start of Fairfax share price in 2024, so you adjusted 2024, but not 2025?

 

In general I totally understand, that you have to be conservative with your assumptions the longer you look into the future (that’s what all good investors do - margin of safety) at the same time looking at the numbers I ask myself:

 

If Fairfax just manages a roe around 15% in 2024 and 2025 like in your foecast (so for times with a hard market, good hand with equity investments and bonds, very good crs…) and Prem at the same time gives out the goal of a roe of 15% on average (he said stock return or book value compounding should be 15%; but roughly that’s the same as having a roe of 15% as a goal. Or am I wrong?), than the question occurs: Is that goal doable if he just manages 15% as a roe in such good times, where not only management performs near perfection, but the circumstances (hard market etc.) give an extra tailwind?

 

If Prem doesn’t manage 18%, or 20% or more on average in such good times, he won‘t make 15% over time.
 

My best guess is, that this difference to 18% or 20% or even more is just a function of you being conservative with your estimates (which is very fine!). What do you think?

@Hamburg Investor good questions. I am modelling $1 billion in ‘net gains from investments’ in 2024. When i built my forecast, the rough math was $500 million from FFH-TRS ($250/share x 1.96 mn shares) and another $500 million from the mark-to-market equity holdings ($7 billion x 7% return on portfolio). 
 

From my perspective, a total of $1 billion is the important number. There are numerous ways to get there… i identified one potential path above. Given the continued increase in Fairfax’s share price to start 2024, my forecast of $1 billion in total gains is looking pretty conservative right now. 
 

But things can change fast. And there will be puts and takes for all buckets as the year plays out. 
 

With my 2024 forecast i want to lean out a little, but not get too far in front of my skis.
 

In terms of forecasting for 2025, there is more uncertainty - we are forecasting for two years. Yes, i am modelling a slightly lower ‘net gains from investments’ number in 2025 - primarily bacause i think the contribution from FFH-TRS will slow in 2025 (compared to 2024). High conviction? No. Just what seems like a reasonable guess.
 

Importantly, trying to guess what Fairfax is going to do with capital allocation is quite difficult looking out to 2025. Does Fairfax take a big swing (like buying a big bank in India?) or do they play it safe like they have been doing the past couple of years and continue to buy out minority partners (insurance and equity holdings). The risk / reward set-up is quite different for shareholders.

Edited March 19 by Viking

[petec]

21 hours ago, SafetyinNumbers said:

it would likely hurt FIH from a fund raising perspective in the future

 

A good point I had not considered. Especially with a massive equity issue coming up for the bank deal 

 

(Joke, in case anyone thinks otherwise...)

[Haryana]

 

Could we say there was a side benefit to FFH also by getting the FIH fee in cash to builld higher levels of liquidity at the Holding company at a time of dividend drought from the insurance subs in hard market ...

 

 

[Dinar]

@Viking, I thought that the equity portfolio was USD 15bn, no?

[dartmonkey]

7 minutes ago, Dinar said:

@Viking, I thought that the equity portfolio was USD 15bn, no?

The mark to market portion of the equity portfolio was $8.7b on Dec 31st, according to the annual report, and on March 8th, Viking estimated (posted here) that it might be worth $9.0b.

 

The other 2 portions, associates and consolidated, were worth $7.1 and $2.8b, respectively, for a total equity portfolio of $18.9, but the earnings from these other 2 portions are already included in the estimate.

[Viking]

2 hours ago, Dinar said:

@Viking, I thought that the equity portfolio was USD 15bn, no?

 

@Dinar , here are Fairfax's numbers as of Dec 31, 2023.

 

 

In my equity spreadsheet summary I include the FFH-TRS at its current notional (market) value of +$2 billion. This bumps the value of Fairfax's equity portfolio to $19 billion.  

Edited March 19 by Viking

[Viking]

2 hours ago, dartmonkey said:

The mark to market portion of the equity portfolio was $8.7b on Dec 31st, according to the annual report, and on March 8th, Viking estimated (posted here) that it might be worth $9.0b.

 

The other 2 portions, associates and consolidated, were worth $7.1 and $2.8b, respectively, for a total equity portfolio of $18.9, but the earnings from these other 2 portions are already included in the estimate.

 

@dartmonkey you are spot on. My current estimate has Fairfax's mark-to-market equity portfolio at about $9 billion. About $2 billion of this is the FFH-TRS. 

 

My earnings estimate for 'net gains on investments' is $1 billion for 2024:

• FFH TRS = $2 billion = $250 x 1.96 million = $500 million
• Remaining mark-to-market holdings = $7 billion x 7% = $500 million

[Hoodlum]

Fairfax is offering $1B in 30yr notes at 6.35%.  Is this replacing existing debt or do they have other plans for this?

 

https://www.fairfax.ca/press-releases/fairfax-announces-pricing-of-senior-notes-offering-03-19-2024/

 

 

Edited March 19 by Hoodlum

[glider3834]

8 minutes ago, Hoodlum said:

Fairfax is offering $1B in 30yr notes at 6.35%.  Is this replacing existing debt or do they have other plans for this?

 

https://www.fairfax.ca/press-releases/fairfax-announces-pricing-of-senior-notes-offering-03-19-2024/

 

 

Good question for AGM

[Santayana]

I'm sure at least some of it will be for what they're putting together for IDBI.

[nwoodman]

For those too lazy to reach for a calculator:

 

Based on the information provided, the current 30-year U.S. Treasury yield is around 4.44% as of March 19, 2024. Several reputable sources, including Trading Economics, Bloomberg, and Barron's, confirm this yield level.

 

The Fairfax Financial notes, with a coupon rate of 6.350%, are offering a spread of approximately 191 basis points (1.91%) over the current 30-year Treasury yield of 4.44%.

Spread = Fairfax Financial notes coupon rate - 30-year Treasury yield = 6.350% - 4.44% = 1.91% or 191 basis points

This spread is within the range of 100 to 200 basis points that is typically observed for investment-grade corporate bonds with a 30-year maturity.

 

Seems pretty competitive.  @StubbleJumper will be happy…for a while.

 

Only 5 more similar sized offerings to go

 

 

Edited March 19 by nwoodman

[petec]

6 hours ago, nwoodman said:

Seems pretty competitive.

 

The very fact they can issue this tells you how far they have come. Exceptional piece of finance.

[nwoodman]

1 hour ago, petec said:

 

The very fact they can issue this tells you how far they have come. Exceptional piece of finance.

Spot on.  I don’t think the existing and potential future credit upgrades have been fully factored in by the market.  Access to “cheaper’’ money than your competitors in an environment with sticky inflation is a great position to be in.  Fairfax doesn’t ever seem short of stuff to do.

[valueventures]

If Gildan Activewear gets sold, that would open up a spot in the S&P/TSX 60. How likely do you think it is that FFH would be added? Would that spot be more likely to go to another company in the same / similar sector as Gildan, or is financials in play? Thanks!

Edited March 20 by valueventures

[Saluki]

On 3/19/2024 at 8:41 AM, Jaygo said:

 

I think the fiduciary duty is for the stewardship of the business long term and that includes keeping relationships healthy by sometimes letting out a little line in fishing parlance.

 

In my own business ive had many opportunities to take advantage of desperate situations to maximise my dollars but generally do not as i dont think it is moral or long term business friendly.

 

I would say trying to maximise every penny is short term thinking and not responsible to the shareholders who can take no action on their own short of selling and moving on. 

 

This was exactly the issue in the Blue Chip Stamps litigation involving Berkshire many years ago. The issue was favoring one group of shareholders vs another and long term greedy vs short term greedy.  I'm no expert on Canadian corporate law and how it differs from Delaware corporate law, but there is some value in not having sharp elbows when it comes to dealing with people.  

 

Every big bank or insurance firm does a lot of trades on exchanges and bilaterally with other big players. There are people in every firm that deal with "out trades".  You call for a bid on a forex transaction, for instance, and unlike most trades (dollar/euro, dollar/yen, dollar/ swiss franc, dollar/kroner ), you want to trade the British Pound, but you forget that it is always quoted the other way GBP/Dollar and you give the wrong price. You verbally confirm the trade and realize that you quoted the price wrong. Or some trainee makes a fat finger trade for 1000 lots of something instead of a 100. If the other guy holds your feet to the fire and says "a deal's a deal", then you win that round and did good for your clients.  But there aren't many huge firms, and they keep trading amongst each other like a weekly poker game, so after a few rounds of that behavior you may find that people won't trade with you any more.  

 

Knowing what you know about how people behave, would you sell your office building on handshake deal to Sam Zell or Trump? Would you rather sell your family business to Berkshire or to Bain Capital? 

 

Looking at it the other way, if Prem is making decisions for FF India and he takes the better deals for FFH and dilutes them at the bottom, then he'll never be able to offer another separate publicly traded vehicle like this.  If he ensures it does well and the shareholders make money, then he can launch more of these.  Maybe put the Kennedy Wilson and other real estate, like the Toys R Us assets,  into a separate JV that is publicly traded and focused on Real estate. Maybe the Shipping stuff can be spun out with other logistics or infrastructure assets?  Who knows.  

[villainx]

Also value of the cash is ... cash to readily deploy.

Edited March 20 by villainx

[Spooky]

3 hours ago, Saluki said:

This was exactly the issue in the Blue Chip Stamps litigation involving Berkshire many years ago. The issue was favoring one group of shareholders vs another and long term greedy vs short term greedy.  I'm no expert on Canadian corporate law and how it differs from Delaware corporate law, but there is some value in not having sharp elbows when it comes to dealing with people.  

 

 

Canadian corporate law is a bit different than Delaware - the fiduciary duty is to act in the best interest of the corporation but you have to consider the interests of all the stakeholders in your decisions. In practice, courts still give a lot of deference to boards of directors so as long as you can demonstrate you considered the stakeholders other than shareholders in the decision making process. It is not just straight maximization of shareholder value.

[SafetyinNumbers]

5 hours ago, valueventures said:

If Gildan Activewear gets sold, that would open up a spot in the S&P/TSX 60. How likely do you think it is that FFH would be added? Would that spot be more likely to go to another company in the same / similar sector as Gildan, or is financials in play? Thanks!

I think FFH would be pretty likely to go in mostly because it’s so big versus the next option by size. The committee might lean on the weightings to avoid putting it in now but it’s just going to be a bigger weight going forward so it increases the risk of XIU underperforming XIC. 

[This2ShallPass]

On 3/16/2024 at 3:42 PM, Maverick47 said:

115 CR is about a 20% worsening from the ideal target of 95.  That’s a pretty poor underwriting result, not very likely in my opinion, but a reasonable worst case scenario, and it comes nowhere near to damaging the future viability of the company.

For worst case scenario, I looked at damages from Katrina which is the largest ever ($195B) and adjusted for inflation. So a Hurricane like that would cause $300B in damages today. Someone here mentioned Fairfax typically has 1% cat loss exposure and Berkshire 4%. That would cost Fairfax $3B. 

 

Then say we're really unlucky and got hit with another hurricane half the size, so 2 bad hurricanes in a 2-3 year period. That would be a loss of ~$4.5B. Bad but manageable, they lose little more than 1 year of operating earnings..

[This2ShallPass]

On 3/18/2024 at 10:30 AM, petec said:

On a separate topic, is anyone else bemused as to why they took the FIH fee in cash? If it is so undervalued should they not (given the FFH board's fiduciary duty is to FFH shareholders) have taken it in shares?

I'm definitely curious on how they managed to get such an unfair agreement in the first place.

 

Say I come to you with a proposition to make you a lot of money and you pay me a hefty fee in return. I then convince you my fees are calculated on a metric that I can control. 3 years pass and I tell you I have made $100,000 for you and my fees are $20k. You pay me the $20k and turn around to sell your shares to get the $80k in profit. To your shock, you find out no one is willing to buy for the price I told you and your profit is only $30k. But, here's the rub, you have already paid me $20k! Your net is $10k. I used your money, 100% of risk is yours and ended up with more money than you did. This is the reality of FIH shareholders like me (it just so happens I have way more Fairfax but that doesn't make it right).

 

On 3/18/2024 at 3:33 PM, gfp said:

 I think it just comes down to 'fair and friendly' and doing the right thing and it comes back around over and over when you always try to behave that way.

I'm happy they chose to get cash, but there's nothing fair and friendly about this structure. It fleeces the minority shareholders and is just another case of Fairfax not treating minority shareholders right.

 

[thowed]

@This2ShallPass  I understand your frustration.  However let's invert.  It's the old problem of whether to charge fees on Share Price on NAV.

 

When FIH launched, there was high excitement, and it traded at a fair Premium to NAV.  At that point it was more in investors' interests for Performance Fee to be on NAV.  So at that point, they were doing the right thing.

 

Now at a big discount to NAV, it's better the other way round.

 

Arguably Performance Fee on NAV is more correct, as that is more in their control, whereas the share price is not.

 

I suppose there's a separate argument that one of the Board's jobs is to make the NAV and Price converge...

[SafetyinNumbers]

58 minutes ago, thowed said:

@This2ShallPass  I understand your frustration.  However let's invert.  It's the old problem of whether to charge fees on Share Price on NAV.

 

When FIH launched, there was high excitement, and it traded at a fair Premium to NAV.  At that point it was more in investors' interests for Performance Fee to be on NAV.  So at that point, they were doing the right thing.

 

Now at a big discount to NAV, it's better the other way round.

 

Arguably Performance Fee on NAV is more correct, as that is more in their control, whereas the share price is not.

 

I suppose there's a separate argument that one of the Board's jobs is to make the NAV and Price converge...

The parties that fell down are the initial minority shareholders that negotiated on our behalf like OMERS, Markel etc… The mechanism is set up to close the discount every three years based on minority shareholders being incentivized to do so. The world switched to quants (screens for quality) and passive in the mean time so they are likely constrained or afraid to buy more. Investors for the most part don’t buy things because they are cheap anymore.

 

FFH and FIH have fulfilled their end of the bargain by buying a lot of stock back. It’s really hard to say they haven’t tried. I haven’t done the math but they must have offset a considerable portion of the performance fees on an intrinsic value basis. 
 

If the IDBI bank deal is structured like a sidecar, maybe the fees generated could offset a lot of the fees paid by FIH to FFH and that will be the narrative change needed to close the discount somewhat. I’m not counting on it but it’s a free option as it stands.