Fairfax 2024

[dartmonkey]

15 hours ago, Viking said:

1.) Fairfax holds them as an investment - at least that is what they have said in the past. 
 

If they still own them, that suggests they still like the risk / reward trade off. And it is probably heavily skewed in a favourable way. Given the risks, why hold them otherwise?

 

For those who think Fairfax should sell… can you also indicate what you think fair value is for Fairfax’s stock? 
 

 

I think owning these swaps is pretty much the economic equivalent of just buying back shares, so I would be interested to hear what management thinks about selling the TRSs and using the cash to buy back shares - would it give a roughly equivalent outcome? Are there advantages (I presume there must be) to holding the TRSs indefinitely, rather than buying back the equivalent number of shares with the proceeds of the TRSs? Do the TRSs better satisfy capital requirements for insurance companies, for instance? And one additional quesiton that occurs to me, given the fact that there is now a 2% tax on buybacks, is this avoided (or postponed) by holding the swaps instead of actually doing the buybacks?

 

Since management is unlikely to spell this out for us, I would be curious to hear thoughts from members of this board about this comparison!

[gfp]

8 minutes ago, dartmonkey said:

 

I think owning these swaps is pretty much the economic equivalent of just buying back shares, so I would be interested to hear what management thinks about selling the TRSs and using the cash to buy back shares - would it give a roughly equivalent outcome? Are there advantages (I presume there must be) to holding the TRSs indefinitely, rather than buying back the equivalent number of shares with the proceeds of the TRSs? Do the TRSs better satisfy capital requirements for insurance companies, for instance? And one additional quesiton that occurs to me, given the fact that there is now a 2% tax on buybacks, is this avoided (or postponed) by holding the swaps instead of actually doing the buybacks?

 

Since management is unlikely to spell this out for us, I would be curious to hear thoughts from members of this board about this comparison!

 

Just keep in mind that this isn't an instrument where you sell it and get the money to do something with.  The cash flows have been flowing back and forth the entire time, settled up regularly.

[73 Reds]

37 minutes ago, dartmonkey said:

 

I think owning these swaps is pretty much the economic equivalent of just buying back shares, so I would be interested to hear what management thinks about selling the TRSs and using the cash to buy back shares - would it give a roughly equivalent outcome? Are there advantages (I presume there must be) to holding the TRSs indefinitely, rather than buying back the equivalent number of shares with the proceeds of the TRSs? Do the TRSs better satisfy capital requirements for insurance companies, for instance? And one additional quesiton that occurs to me, given the fact that there is now a 2% tax on buybacks, is this avoided (or postponed) by holding the swaps instead of actually doing the buybacks?

 

Since management is unlikely to spell this out for us, I would be curious to hear thoughts from members of this board about this comparison!

The most compelling feature seems to be that Fairfax can put a floor on the price of the stock as long as the price remains cheap and the company has enough cash to continue repurchasing shares.   The biggest concern (to me at least) is that Fairfax has the power to terminate the TRS if and when desired for little or no added cost.   Also, the identity of the counterparty(ies) would be good to know; unless the TRS is hedged, this has not been a good bet for any such counterparties.

[nwoodman]

37 minutes ago, dartmonkey said:

 

I think owning these swaps is pretty much the economic equivalent of just buying back shares, so I would be interested to hear what management thinks about selling the TRSs and using the cash to buy back shares - would it give a roughly equivalent outcome? Are there advantages (I presume there must be) to holding the TRSs indefinitely, rather than buying back the equivalent number of shares with the proceeds of the TRSs? Do the TRSs better satisfy capital requirements for insurance companies, for instance? And one additional quesiton that occurs to me, given the fact that there is now a 2% tax on buybacks, is this avoided (or postponed) by holding the swaps instead of actually doing the buybacks?

 

Since management is unlikely to spell this out for us, I would be curious to hear thoughts from members of this board about this comparison!

I see it as a directional bet on something they know.  It’s not accretive to EPS as the shares outstanding isn’t reduced, but has provided cash for them to repurchase actual shares along the way.   It’s a bit of a unique situation so not 100% sure of the RBC/MCT implication, though I feel it is favourable which is what made the position appealing and allowed them to write like crazy into a hard market.  I doubt the 2% buyback tax influences their thinking too much.

 

Looking forward to seeing how they close it out, my guess it may hinge on index inclusion for both share demand and valuation.  As has been discussed at length, it has proved very clever, first company I have heard of, let alone owned, that has done it with their own shares.  

[gfp]

15 minutes ago, 73 Reds said:

The most compelling feature seems to be that Fairfax can put a floor on the price of the stock as long as the price remains cheap and the company has enough cash to continue repurchasing shares.   The biggest concern (to me at least) is that Fairfax has the power to terminate the TRS if and when desired for little or no added cost.   Also, the identity of the counterparty(ies) would be good to know; unless the TRS is hedged, this has not been a good bet for any such counterparties.

 

The counterparties are the major Canadian banks.  They are hedged.  It is a routine transaction for them, not some big losing directional bet.

[73 Reds]

2 minutes ago, gfp said:

 

The counterparties are the major Canadian banks.  They are hedged.  It is a routine transaction for them, not some big losing directional bet.

If hedged, one might anticipate a rather dramatic drop in the price of the stock when the TRS is terminated.  

 

BTW, you are in New Orleans, right?  Stay safe.

[gfp]

3 minutes ago, 73 Reds said:

If hedged, one might anticipate a rather dramatic drop in the price of the stock when the TRS is terminated.  

 

BTW, you are in New Orleans, right?  Stay safe.

 

If Fairfax exits a bit early and doesn't hold out for a high valuation, there is always the possibility they are an interested buyer for the "hedge blocks" for lack of a better term.  They bought Prem's block - another case where "Fairfax" was both interested in buying and selling at a certain price - so it isn't too far fetched.  If they wait for over-valuation to exit, which I doubt, they may not be a buyer of the hedge shares.

 

Yes, I am in New Orleans proper, inland and east of the track.  Plenty of rain today.  The hurricane doesn't look too bad, we should be fine.  Just waiting around to leave town until after the storm so we can check the properties.

[73 Reds]

1 minute ago, gfp said:

 

If Fairfax exits a bit early and doesn't hold out for a high valuation, there is always the possibility they are an interested buyer for the "hedge blocks" for lack of a better term.  They bought Prem's block - another case where "Fairfax" was both interested in buying and selling at a certain price - so it isn't too far fetched.  If they wait for over-valuation to exit, which I doubt, they may not be a buyer of the hedge shares.

 

Yes, I am in New Orleans proper, inland and east of the track.  Plenty of rain today.  The hurricane doesn't look too bad, we should be fine.  Just waiting around to leave town until after the storm so we can check the properties.

"Just waiting around to leave town until after the storm so we can check the properties."

Yeah, know that feeling all too well.....

[MMM20]

On 8/26/2024 at 10:23 PM, SafetyinNumbers said:

Definity and Intact preannouced big CAT losses for Q3. Fairfax will get hit hard in Northbridge but Canada is ~10% of premiums so it shouldn’t be as bad.

 

While IFC has hardly moved on the announcement, I find it hard to believe FFH wouldn’t be down big if they pre-announced a $68 hit to pretax earnings for Q3 on CAT losses.

 

Can you share any insight into why Canadian PMs are such fans of IFC? Does the board agree that there's a reasonable upside scenario for FFH over the next few years in which that preference shifts? Maybe my thinking is too zero-sum and there's room for more than one - but I wonder if when FFH gets into the indexes, the narrative among these PMs will follow price and FFH will similarly get valued on earnings as a high quality compounder => 2x+ rerating (to fair-ish IMHO) from this valuation. So what's different about the IFC shareholder base? Are we talking CSU levels of cult fandom over the border there? Appreciate any insights from the board!

 

Edited September 12, 2024 by MMM20

[SafetyinNumbers]

34 minutes ago, MMM20 said:

 

Can you share any insight into why Canadian PMs are such fans of IFC? Does the board agree that there's a reasonable upside scenario for FFH over the next few years in which that preference shifts? Maybe my thinking is too zero-sum and there's room for more than one - but I wonder if when FFH gets into the indexes, the narrative among these PMs will follow price and FFH will similarly get valued on earnings as a high quality compounder => 2x+ rerating (to fair-ish IMHO) from this valuation. So what's different about the IFC shareholder base? Are we talking CSU levels of cult fandom over the border there? Appreciate any insights from the board!

 

I think they love IFC because it screens well on both qualitative and quantitative characteristics. 
 

I’m pretty sure that’s all it takes.

 

I think FFH can rerate as shares get bought by the company and eventually the 60 out of investors who think the current multiple is fair. I don’t know if it will ever screen well because of technical (FFH doesn’t report adjusted EPS) and business model reasons (equities can be lumpy).

[MMM20]

https://iansbnr.com/industry-cat-loads-are-still-not-high-enough/

 

"The US 1 in 100 PML is 30% of US surplus. Wow!!! That is a level typically associated with cat reinsurers. Sure, I get a lot of that PML doesn’t sit on US balance sheets due to reinsurance protection, but on a gross basis, the average US diversified insurer looks like a cat reinsurer! At the end of the day, the primaries are paying for this one way or the other. Just because they’re paying it through ceded premium, doesn’t mean the cost isn’t there. This calls into question whether US insurers are truly adequately capitalized to withstand a 1 in 100 event or are we heading towards another post Andrew reckoning where the industry learns it didn’t hold enough capital for cat risk? Just because we have better models now, doesn’t mean we can’t make the same mistakes in new ways! Housing investors had much better tools to assess risk in the 2000s than the 1990s but they made much bigger mistakes."

 

 

[SharperDingaan]

Just dropping in ...

 

What are the thoughts around the coming weather related cat losses as we go into hurricane season? The ask is because interest rates are dropping (inflation at 2%) raising the tide for all, and FFH traditionally has Q4 seasonal exposure to weather related cat losses. Seems to be a pending opportune swing trade; particularly if enough of the insured US East Coast floods out to stress the industry ability to pay out.

 

Hopefully we're not trying to buy back, at the same time that FFH is trying to buy in more of their now cheap stock  

 

SD

 

Edited September 17, 2024 by SharperDingaan

[cwericb]

Well, hurricane season runs June 1 to November 30 so we are well past the halfway point.

 

This year it was predicted that we would see above normal hurricane activity, but that has yet to happen. (There is already a thread here specifically devoted to this.)

 

Living on the Canadian East coast and having lived through both Hurricane Dorion and Hurricane Fiona in the past five years one tends to track these things fairly carefully. If we can just get by for another month or so we should be good for this year.

 

When one finds that "Hurricane Alley" has moved north to include the island on which you live AND your largest investment is Fairfax, hurricanes do  tend to get your attention.

 

Edited September 18, 2024 by cwericb

[SharperDingaan]

I hear you! we think of this as analogous to going for a cruise into an expected force 10+ hurricane. Little to do with the boat (FFH as ark), and everything to do with the expected washing machine experience.

 

Q4 is the year's catch-up quarter; hence more volatility than other quarters. If the abnormal hurricane season ends Nov-30, 2 of the 3 months in the quarter are exposed to adverse cat loss. Any kind of significant hurricane in December, flooding in the major East Coast cities, or concern around industry ability to pay is a bonus. Calgary's hail storm losses kicking off the bookings. Lower troughs.

 

50-75 bp of expected interest rate cuts by year end lifting the market, plus at least one significant election during Q4. Media streams start to post good news real estate experiences.  Higher peaks.

 

Last time we swing traded FFH was around the Annual General Meeting, at a price around CAD 1,550; at today's CAD 1,700 we're up CAD 150. Peak to trough difference here could well match/exceed that; if the washing machine produces a CAD 150 delta - it's a 9.5%+ return (150/(1700-150)). Bonus.     

 

There's also the benefit that were 50% of an existing FFH position sold at CAD 1,700; the remaining position would be hedged at CAD 1,700. Not a bad thing.

 

SD

 

Edited September 20, 2024 by SharperDingaan

[Cigarbutt]

On 9/16/2024 at 12:22 PM, MMM20 said:

https://iansbnr.com/industry-cat-loads-are-still-not-high-enough/

 

"The US 1 in 100 PML is 30% of US surplus. Wow!!! That is a level typically associated with cat reinsurers. Sure, I get a lot of that PML doesn’t sit on US balance sheets due to reinsurance protection, but on a gross basis, the average US diversified insurer looks like a cat reinsurer! At the end of the day, the primaries are paying for this one way or the other. Just because they’re paying it through ceded premium, doesn’t mean the cost isn’t there. This calls into question whether US insurers are truly adequately capitalized to withstand a 1 in 100 event or are we heading towards another post Andrew reckoning where the industry learns it didn’t hold enough capital for cat risk? Just because we have better models now, doesn’t mean we can’t make the same mistakes in new ways! Housing investors had much better tools to assess risk in the 2000s than the 1990s but they made much bigger mistakes."

 

 

Ok, i will try to address this.

Interesting article with an interesting view point.

An unusually bad cat year would indeed hurt the bottom line but would also create an opportunity for opportunistic capital.

Cat underwriting results make sense over the long term so another perspective is to ask is: is present policy pricing  adequate?

Cat risk has tended to remain at the primary insurers' level and underwriting in this area has been relatively poor. Reinsurers have remained disciplined for pricing it seems and underwriting results in the cat area have been relatively good. Discipline appears to be maintained:

https://www.insurancebusinessmag.com/ca/news/reinsurance/reinsurance-price-reductions-nonsense-says-munich-re-ceo-505748.aspx

For FFH, it appears that they have adjusted downwards their exposure to cat risk and have relevant and material exposure at the reinsurance level which could be adequately priced for results over the long term.

[dartmonkey]

On 9/6/2024 at 7:06 PM, SafetyinNumbers said:

S&P/TSX 60 decided not to kick out AQN so no change to the index. A reprieve for those still adding including the company. 

 

Algonquin has continued its gradual slide (along with most of the oil and gas sector), and now has a market cap of $5.65b, less than half its value when it was included in the TSX 60 in June 2020 and now less than 0.19% of the index.

 

For comparison, FFH is now $38b, but as the inclusion rules note (point iv), sector weighting trumps size. Sector weights are to mimic the sector weights of the TSX Composite, currently with 226 constituents. Sector weights for TSX Composite and TSX 60 are currently as follows:

 

 

Excluding Algonquin would mostly correct the Energy overweighting, but including Fairfax would add another 1.3% to Financials which are already overweighted by 3.8%. And TSX 60 criteria already state pretty clearly that the index aims to have the bigger TSX stocks included (point 2), but that sector weight trumps size (point 4) and minimu turnover is preferable (point 5) , so we may be out in the cold for a while longer.

 

Additions to the S&P/TSX 60 [my emphasis]

1. To be eligible for inclusion in the S&P/TSX 60 index, securities must be constituents of the S&P/TSX Composite.

2. When adding securities to the S&P/TSX 60 index, the Index Committee generally selects amongst the larger securities, in terms of float QMV, in the S&P/TSX Composite. Size may, however, be overridden for purposes of sector balance as described in item 4 below.

3. When adding securities to the S&P/TSX 60 index, the Index Committee generally selects securities with float turnover of at least 0.35. This is a guideline only and may be changed at the discretion of the Index Committee. In addition, this range may be overridden for purposes of sector balance described in item 4 below.

4. Security selection for the S&P/TSX 60 index is conducted with a view to achieving sector balance that is reflective of the GICS sector weights in the S&P/TSX Composite.

5. Minimum index turnover is preferable. Changes are made to the S&P/TSX 60 index on an as needed basis. The most common cause of deletion is merger or acquisition of a company. Other common reasons for deletion include bankruptcy, restructuring or other corporate actions. If a company substantially fails to meet one or more of the aforementioned guidelines for inclusion or if a company fails to meet the rules for continued inclusion in the S&P/TSX Composite, it is removed. The timing of removals is at the discretion of the Index Committee.

https://www.spglobal.com/spdji/en/documents/methodologies/methodology-sp-tsx-canadian-indices.pdf

[SafetyinNumbers]

39 minutes ago, dartmonkey said:

 

Algonquin has continued its gradual slide (along with most of the oil and gas sector), and now has a market cap of $5.65b, less than half its value when it was included in the TSX 60 in June 2020 and now less than 0.19% of the index.

 

For comparison, FFH is now $38b, but as the inclusion rules note (point iv), sector weighting trumps size. Sector weights are to mimic the sector weights of the TSX Composite, currently with 226 constituents. Sector weights for TSX Composite and TSX 60 are currently as follows:

 

 

Excluding Algonquin would mostly correct the Energy overweighting, but including Fairfax would add another 1.3% to Financials which are already overweighted by 3.8%. And TSX 60 criteria already state pretty clearly that the index aims to have the bigger TSX stocks included (point 2), but that sector weight trumps size (point 4) and minimu turnover is preferable (point 5) , so we may be out in the cold for a while longer.

 

Additions to the S&P/TSX 60 [my emphasis]

1. To be eligible for inclusion in the S&P/TSX 60 index, securities must be constituents of the S&P/TSX Composite.

2. When adding securities to the S&P/TSX 60 index, the Index Committee generally selects amongst the larger securities, in terms of float QMV, in the S&P/TSX Composite. Size may, however, be overridden for purposes of sector balance as described in item 4 below.

3. When adding securities to the S&P/TSX 60 index, the Index Committee generally selects securities with float turnover of at least 0.35. This is a guideline only and may be changed at the discretion of the Index Committee. In addition, this range may be overridden for purposes of sector balance described in item 4 below.

4. Security selection for the S&P/TSX 60 index is conducted with a view to achieving sector balance that is reflective of the GICS sector weights in the S&P/TSX Composite.

5. Minimum index turnover is preferable. Changes are made to the S&P/TSX 60 index on an as needed basis. The most common cause of deletion is merger or acquisition of a company. Other common reasons for deletion include bankruptcy, restructuring or other corporate actions. If a company substantially fails to meet one or more of the aforementioned guidelines for inclusion or if a company fails to meet the rules for continued inclusion in the S&P/TSX Composite, it is removed. The timing of removals is at the discretion of the Index Committee.

https://www.spglobal.com/spdji/en/documents/methodologies/methodology-sp-tsx-canadian-indices.pdf

Yes, that’s all true. But did you know that when Intact was added in March 2022 it was essentially same weight and rank in the Composite as Fairfax is now and Financials in the 60 were even more overweight then vs where they are now?

[dartmonkey]

5 minutes ago, SafetyinNumbers said:

Yes, that’s all true. But did you know that when Intact was added in March 2022 it was essentially same weight and rank in the Composite as Fairfax is now and Financials in the 60 were even more overweight then vs where they are now?

No, I didn't know that. Doing that again would just make the financial sector more overweight, but at least there's a precedent.

 

It seems that, as they mention, changes tend to occur when they have no choice, like when a company leaves the TSX Composite (usually via a merger, but also via bankruptcy), so Fairfax probably just has to wait for the merger of one of the current constituents, like for instance if someone bought out Algonquin or Gildan or something like that, and hope they don't add a non-financial that's smaller than Fairfax.

 

[SafetyinNumbers]

1 hour ago, dartmonkey said:

No, I didn't know that. Doing that again would just make the financial sector more overweight, but at least there's a precedent.

 

It seems that, as they mention, changes tend to occur when they have no choice, like when a company leaves the TSX Composite (usually via a merger, but also via bankruptcy), so Fairfax probably just has to wait for the merger of one of the current constituents, like for instance if someone bought out Algonquin or Gildan or something like that, and hope they don't add a non-financial that's smaller than Fairfax.

 

 

I think the committee like a lot of investors are looking at the FFH chart and are hoping it pulls back and AQN or something like TFII goes up a lot so they don't have to add another financial. The longer it takes the better from a buyback perspective. FFH is on the 4th year in a row with >15% ROE and the PB is still only ~1.2x which I find remarkable but I'm probably in the minority with that view.

[UK]

Maybe they should look more creatively and just acquire some current constituent themselves in order get in:)))

[SafetyinNumbers]

2 hours ago, UK said:

Maybe they should look more creatively and just acquire some current constituent themselves in order get in:)))

Why interrupt the buybacks and issue cheap stock. Time takes care of everything.

[UK]

9 minutes ago, SafetyinNumbers said:

Why interrupt the buybacks and issue cheap stock. Time takes care of everything.

 

Sorry, I was just kidding, I do not disagree:). Btw, personally I think we are at an almost satisfactory PBV level and it would be perfect for it to stay in some 1,3-1,5 PVB range from here. 

[SafetyinNumbers]

7 hours ago, UK said:

 

Sorry, I was just kidding, I do not disagree:). Btw, personally I think we are at an almost satisfactory PBV level and it would be perfect for it to stay in some 1,3-1,5 PVB range from here. 

I would like to get to 2.5x BV and start issuing equity to buy quality businesses at a fair price.

[Charlie]

In the second quarter the biggest purchase of Fairfax was a SP 500 Vanguard ETF:

 

https://www.dataroma.com/m/holdings.php?m=FFH

 

Anyone know the reasoning of this purchase?

Diversify from deep value style? Exposure to unpredictable tech sector? Stability?

Betting on Trump that he wins the election? Scarcity of other good investments?

 

I remember a quote of Buffett, that it is probably a mistake for very good investors to index, so just wondering.

Edited September 21, 2024 by Charlie

[SafetyinNumbers]

3 hours ago, Charlie said:

In the second quarter the biggest purchase of Fairfax was a SP 500 Vanguard ETF:

 

https://www.dataroma.com/m/holdings.php?m=FFH

 

Anyone know the reasoning of this purchase?

Diversify from deep value style? Exposure to unpredictable tech sector? Stability?

Betting on Trump that he wins the election? Scarcity of other good investments?

 

I remember a quote of Buffett, that it is probably a mistake for very good investors to index, so just wondering.

I believe them when they say they are looking to buy quality on a dip so not sure the deep value style is an appropriate descriptor anymore.