Fairfax 2024

[petec]

16 hours ago, Hoodlum said:

“The existence of a healthy ILS market appears to have diminished the franchise value of property catastrophe business to investors. Investors today appear much keener to allocate funds to shorter-term ILS instruments to capitalize on the hardened underwriting conditions, rather than in a rated balance sheet. As long as these alternative entry points exist, we don’t foresee capital flowing into the new reinsurers to support hardened property rates and conditions,” says AM Best.

 

Don't ILS also represent capital coming into the market? Why doesn't this depress prices? Seems to me the capital just comes in a different way.

[nwoodman]

1 hour ago, petec said:

 

Don't ILS also represent capital coming into the market? Why doesn't this depress prices? Seems to me the capital just comes in a different way.

Was thinking the same.  Good for MKL though.  It seems more a case of new capital acting rationally given the science around climate change would indicate the frequency and severity of Cats is up and to the right.

[Hoodlum]

2 hours ago, nwoodman said:

Was thinking the same.  Good for MKL though.  It seems more a case of new capital acting rationally given the science around climate change would indicate the frequency and severity of Cats is up and to the right.

 

Yes, it would seem that the ILS infusion in this scenario is directed at a specific area of need.  It looks like we may avoid the more abrupt overall switch from hard to soft market that we typically see after a prolonged hard market.  That could change if reinsurance experiences large losses this hurricane season, as that could provide the impetus for new entrants.

[nwoodman]

1 minute ago, Hoodlum said:

 

Yes, it would seem that the ILS infusion in this scenario is directed at a specific area of need.  It looks like we may avoid the more abrupt overall switch from hard to soft market that we typically see after a prolonged hard market.  That could change if reinsurance experiences large losses this hurricane season, as that could provide the impetus for new entrants.

True, thanks for posting the articles. There is a lot to cover in this space, the insight on ILS was really interesting. Whichever way you cut it this market is not necessarily following the usual playbook.  I would stop short of saying it is different this time, but insurance pricing power, like energy prices all feed into inflation, with a commensurate effect on lesser players ability to write.
 

 I may be at risk of repeating myself, but like Berkshire, Fairfax now has access to a considerable amount of quantitive and qualitative economic data.  I think the path to $100bn (say 3X) of equity is easier, not harder than what they have experienced to date. There really is a critical mass that leads to some pretty great outcomes IMHO.

[Hoodlum]

I only become familiar with the ILS instruments over the past few days.  Does anyone see any potential issues with how these are used today.  I would think this would have less oversight then the Reinsurance businesses and I become wary whenever an investment instrument becomes more in vogue.  

[TwoCitiesCapital]

2 hours ago, Hoodlum said:

I only become familiar with the ILS instruments over the past few days.  Does anyone see any potential issues with how these are used today.  I would think this would have less oversight then the Reinsurance businesses and I become wary whenever an investment instrument becomes more in vogue.  

 

The primary complaint over the last decade has been the amount of capital that flooded into the market due to ILS was largely what was keeping insurance pricing too low and keeping the market soft. Investors loved these things as a truly diversified income stream. 

 

This is good as tens of millions of investors should be better able to absorb the risk than a handful of reinsurers and there is no systemic risk.  

It's bad because most of those investors likely lack the same expertise in pricing as the reinsurance industry has and so may be more likely to underprice the risk - which will eventually lead to their exit from the market OR an improvement in their pricing. 

 

Not sure which is more likely, but these are products that have now been around 10+ years so I would hope the market participants are better at pricing the ILS 

[MMM20]

On 7/10/2024 at 11:53 AM, SafetyinNumbers said:

I think it matters because FFH is particularly under owned by Canadian active managers benchmarked to the Composite. Of course, it will depend on the price individual shareholders are willing to give up their shares (recently 1.2x trailing book). A new permanent shareholder of a million shares plus that adds with passive inflows regardless of the price is a nice to have and may help with multiple expansion but it’s no guarantee. 

 

Is that amount of incremental price-insentitive demand for shares (~5%?) typical for a major index inclusion? I do think you're probably on to something with how tightly held the shares are by long-term shareholders.

 

Edited July 11, 2024 by MMM20

[SafetyinNumbers]

1 hour ago, MMM20 said:

 

Is that amount of incremental price-insentitive demand for shares (~5%?) typical for a major index inclusion? I do think you're probably on to something with how tightly held the shares are by long-term shareholders.

 

I think it depends on the market and the benchmark. When I left UBS in 2012, the estimate was about 4% of the shares outstanding for the 60. I assume that’s probably up a bit since then. 
 

I’m hopeful there are enough long term holders who won’t want to pay taxes, that the P/B multiple will expand on entry and continue to expand as the flows persist. It might be a pipe dream though if it’s truly quants that control the multiple (i.e. are the marginal buyer).

[giulio]

https://www.wsj.com/finance/regulation/home-insurance-premiums-surge-states-approve-8656877d?mod=itp_wsj,djemITP_h

It is not just storms and hurricanes, don't forget wildfires! So far it has been a busy season and it could get worse in the coming months.

 

G

[ValueMaven]

I'm starting to view my position in FFH as a 'bond w/upside' ... I realize this is a very simplistic view - but it helps me have conviction in all of the different drivers of value + the risk/reward left in the name.  FFH is my 3rd largest holding!

[Junior R]

10 minutes ago, ValueMaven said:

I'm starting to view my position in FFH as a 'bond w/upside' ... I realize this is a very simplistic view - but it helps me have conviction in all of the different drivers of value + the risk/reward left in the name.  FFH is my 3rd largest holding!

What is your other 2

[ValueMaven]

43 minutes ago, Junior R said:

What is your other 2

 

Berkshire and Constellation 

[Spooky]

4 hours ago, ValueMaven said:

 

Berkshire and Constellation 

My man! My top two are Constellation and Berkshire as well with FFH now at number 4 or 5.

[Hoodlum]

Fairfax will now have some additional cash for Share Buybacks, Hurricane season or other investments (ie India).

 

https://www.businesswire.com/news/home/20240715698371/en/Cleveland-Cliffs-to-Acquire-Stelco-for-C70-per-Share

 

Quote

HAMILTON, Ontario--(BUSINESS WIRE)--Stelco Holdings Inc. (TSX: STLC) (“Stelco” or the “Company”) is pleased to announce that it has entered into a definitive agreement (the “Arrangement Agreement”) with Cleveland-Cliffs Inc. (NYSE: CLF) (“Cliffs”), pursuant to which Cliffs has agreed to acquire all of the issued and outstanding common shares of Stelco (the “Transaction”) at a price of C$70.00 per share (the “Consideration”), consisting of C$60.00 in cash and 0.454 of a share of Cliffs common stock (equivalent to C$10.00 based on the closing price of Cliffs common stock on July 12, 2024) per Stelco share.

 

The total enterprise value pursuant to the Transaction is approximately C$3.4 billion. The Consideration represents an 87% premium to Stelco’s closing share price of C$37.36 on July 12, 2024, and a 37% premium to Stelco’s 52-week high.

 

Fairfax Financial Holdings, an affiliate of Lindsay Goldberg LLC, Alan Kestenbaum, and each of the other directors and executive officers of Stelco collectively holding approximately 45% of the current outstanding Stelco common shares have entered into support agreements to vote in favour of the Transaction, subject to customary exceptions.

 

[giulio]

USD670 million pre-tax excluding shares consideration. 2.4x the carrying value at march 31st.

$18 per share pre-tax "emerging" value...don't tell muddy!

[Junior R]

I am hoping FFH doesn't move on this news...I am looking to move these proceeds into FFH

[backtothebeach]

Holy moly! Did not expect that.

[TwoCitiesCapital]

20 minutes ago, backtothebeach said:

Holy moly! Did not expect that.

 

Me neither - should've been buying STLC again instead of CLF over the last few months 

[Junior R]

this deal could be over $70 CLF is trading up...If CLF goes up we make more as the deal includes partial CLF share

[newtovalue]

what a nice surprise for a monday morning. luckily i own both FFH and STLC so this one works twice!

[Parsad]

4 hours ago, newtovalue said:

what a nice surprise for a monday morning. luckily i own both FFH and STLC so this one works twice!

 

Congratulations newtovalue!  Maybe you need to change your moniker to "damngoodatvalue".  Cheers!

[newtovalue]

4 hours ago, Parsad said:

 

Congratulations newtovalue!  Maybe you need to change your moniker to "damngoodatvalue".  Cheers!

haha! I love it. I am still learning so much from yourself and this group - so maybe i can change it to kindanewtovalue

[Haryana]

On 7/10/2024 at 7:51 AM, dartmonkey said:

...TSX60 includes banks: #1 Royal Bank, #2 TD Bank, #11 BMO, #12 Scotiabank, #16 CIBC and #27 National Bank; insurance companies: #14 Manulife, #25 Intact Financial, #28 SunLife, and #29 Great-West Lifeco;...

 

Does TSX 60 really include Great-West Lifeco?

I find it missing from the list in the following 3 sources:

https://money.tmx.com/quote/^TX60/constituents

https://www.barchart.com/ca/stocks/indices/tsx/tsx60

https://www.theglobeandmail.com/investing/markets/indices/TXSX/components/

 

Great-West Lifeco (GWO-T) is about the same market cap as FFH, why will they prefer to add FFH?

 

Edited July 16, 2024 by Haryana
brevity

[newtovalue]

good point @Haryana - just checked the Blackrock site and GWO is not there.

 

i dont think there is any reason they would prefer FFH to GWO - unless someone else can opine. Furthermore companies like ATZ-T (just to name one example) are not in the 60 but the argument can be made they should be to diversify the index sector weighting.

 

Perhaps we are getting ahead of ourselves (myself included) with hopes of inclusion for FFH.

 

https://blackrock.com/ca/investors/en/products/239832/ishares-sptsx-60-index-etf

[Hoodlum]

27 minutes ago, newtovalue said:

good point @Haryana - just checked the Blackrock site and GWO is not there.

 

i dont think there is any reason they would prefer FFH to GWO - unless someone else can opine. Furthermore companies like ATZ-T (just to name one example) are not in the 60 but the argument can be made they should be to diversify the index sector weighting.

 

Perhaps we are getting ahead of ourselves (myself included) with hopes of inclusion for FFH.

 

https://blackrock.com/ca/investors/en/products/239832/ishares-sptsx-60-index-etf

 

This article from 10 years ago discusses the logic behind the TSX 60 Index.  Much still applies today and may explain why it could be a long while until Fairfax is added.  Hopefully this is not behind a paywall for others to see.

 

https://www.theglobeandmail.com/globe-investor/investment-ideas/why-does-the-sptsx-60-exclude-some-of-canadas-biggest-stocks/article19057449/

 

Quote

But for the major TSX indexes, as well as many others, S&P adjusts pure market cap numbers. Instead of using the total value of the company, S&P calculates the value of a company's "free float," or the shares that are available to trade regularly.

 

Free float is best defined by what isn't included: Shares held by founding families, or by employees and executives, or by major strategic investors. Forty-four of the 230-plus companies in the S&P/TSX composite index have fewer than 75 per cent of their shares available in the free float.

...
Companies like Great-West Lifeco Inc., Tourmaline Oil Corp., Fairfax Financial Holdings Ltd., and Inter Pipeline Ltd. all are more valuable (even with a free-float adjustment) and would be included if total market cap were only the determinant and industry allocation did not matter. They are not in the 60, though, because it already has its quota of energy and financial companies. (The Big Five Canadian banks currently take up almost 29 per cent of the TSX 60.)
...

It also helps underweight companies that make the cut. Thomson Reuters Corp., Husky Energy Inc. and Imperial Oil Ltd. each would represent 2 per cent to 3 per cent of the TSX 60 if S&P used total market capitalization. Heavy insider ownership means less than half the companies' shares are in the free float, however, and the float-adjusted weight for each is about 1 per cent or slightly less.

 

The math also works in reverse: Canada's widely held big banks, which take up a chunk of the TSX 60 from their market values alone, take on extra weight because so much more of their value is in the free float.