Fairfax 2024

[73 Reds]

3 minutes ago, TwoCitiesCapital said:

 

Fairfax is receiving the return on a number of shares, as if it owned them, in exchange for a financing rate (LIBOR or whatever iteration it exists today plus a spread). 

 

Typically, the return and financing costs are better and paid either monthly or quarterly. 

 

In cases where the return on Fairfax shares exceeds the financing cost, Fairfax receives cash. 

 

In cases where the return on Fairfax shares is less than the financibg costs, Fairfax pays cash. 

Thanks @TwoCitiesCapital.  Can Fairfax terminate this transaction at any time?  Otherwise, how long does it last?  I would think that if the company anticipates an operational rough patch of any duration it might want to terminate the TRS in advance.

Edited September 10, 2024 by 73 Reds
spelling

[TwoCitiesCapital]

36 minutes ago, 73 Reds said:

Thanks @TwoCitiesCapital.  Can Fairfax terminate this transaction at any time?  Otherwise, how long does it last?  I would think that if the company anticipates an operational rough patch of any duration it might want to terminate the TRS in advance.

 

Hard to say for more bespoke contracts like this. 

 

But my experience with them is there is typically a stated maturity/reset date where the notional value and financing rates can be adjusted for an extension or terminated. 

 

It's not uncommon for these to be monthly or quarterly intervals, so I'd expect Fairfax to be able to exit with some flexibility if they want to. 

[SafetyinNumbers]

There is a lot of concern about the volatility of the earnings but even if the stock plunged back to (real time) BV, that’s only a ~$400m or ~$16/sh hit to earnings and it’s temporary. The potential loss also doesn’t seem big enough to cause any stress to the balance sheet. I know investors have a preference for smoothed earnings but FFH will always be lumpy. It also might make a bad quarter worse one of these days but right now when they are growing BV 3-5% a quarter at ~1x fwd BV it just doesn’t seem that risky. If it was just another investment, most investors wouldn’t think twice and it’s small enough they still shouldn’t. 

[Haryana]

On 9/7/2024 at 12:40 PM, Viking said:

...

Fairfax’s stock is up 297% over the past 4 years. That is a CAGR of 41.1%. $1,000 invested in Fairfax 4 years ago would be worth $3,968 today, an increase of $2,968. That is a crazy good.

...

First of all, many thanks for your postings.

You appreciate dialogue and things pointed out, therefore, I dare present the following.

 

Your numbers above seem to be without dividend. I think dividends should be reinvested for CAGR calculation.

With dividends, the stock would be up ~330%with a CAGR of ~44% over that 4 year period.

That is more than a quadruple. A $1000 would be $4290.

 

[Viking]

57 minutes ago, Haryana said:

First of all, many thanks for your postings.

You appreciate dialogue and things pointed out, therefore, I dare present the following.

 

Your numbers above seem to be without dividend. I think dividends should be reinvested for CAGR calculation.

With dividends, the stock would be up ~330%with a CAGR of ~44% over that 4 year period.

That is more than a quadruple. A $1000 would be $4290.

 

@Haryana that is a good catch. When i write my posts sometimes i get lazy with my metrics. So sometimes i default to what is easy to find. I typically just use Yahoo Finance or company reports for my data. I wonder if i should subscribe to a paid service so it would be easier to pull more inclusive data points. 
 

Do others on the board subscribe to any paid services for data collection / graphs etc? Do board members have any recommendations?

 

[UK]

9 hours ago, Viking said:

And then your gut gets involved - it doesn’t want to be ignored or left out. So it starts telling you do something as well (sometimes it is screaming).

 

As a result, winning positions usually get sold way too early. The reasons always make sense at the time.

 

Do nothing? Ignore what both your brain and gut are telling you? Now that is hard. Pretty much impossible for most investors.

 

This process gets even harder for big positions - because you monitor your big positions even more closely (so your brain and your gut have even more to say).

 

I am glad I can report that my gut is very comfortable with FFH since I made it into a big position in second half of 2022 and sometimes it is almost ahead of itself (I added to FFH during MW attack without even finishing reading all the report:)). But I still feel and think there has to be a limit somewhere and today I see it at ~40 percent (was above this in the early Summer, currently a tad below). What would be your ideas about this?

 

Edited September 11, 2024 by UK

[Viking]

1 hour ago, UK said:

 

I am glad I can report that my gut is very comfortable with FFH since I made it into a big position in 2022 and sometimes it is almost ahead of itself (I added to FFH during MW attack without even finishing reading all the report). But I still feel and think there has to be a limit somewhere and today see it at ~40 percent (was above this in the early Summer, currently somewhat below). What would be your ideas about this?

@UK good for you. Well done. 

Concentration is a hugely important topic. And definitely not one size fits all - probably because so many things go into the calculation. Everyone really needs to figure this out for themself.
 

When i was younger, i would sometimes go 100% with one stock (only for a short period of time). But only if it was something I understood exceptionally well. That just kept going down - so over time my position size would get quite large (as i would keep adding). The last time i did this with a stock was with Apple in 2013.
 

I also have core positions that i will flex up and down depending on what Mr. Market does. So this makes it difficult to give definitive numbers on position sizes (targets or actuals). That is what i was doing with Apple - but the story kept getting better and the stock kept getting cheaper - so i kept adding. Probably a really stupid thing to do.
 

The flexing is temporary and allows me to take advantage of short term volatility in my very best ideas while i am waiting for the longer term thesis to play out.
 

Fairfax is my biggest position today (it has been for the past 4 years) and i have flexed it up and back down twice this year (on both sell offs). 
 

My goal is to have no one position at more than about 33% of my total portfolio. Fairfax is over that today (I don’t want to give an exact number because it changes). 
 

After Fairfax, my biggest holdings are 3 index funds - VOO, VO and XIC). My goal is to build these up to about 40% of my total portfolio (roughly equal weights).
 

I also like cash - i am ok going up to 20%. I love the optionality of cash. I went 100% cash in Feb 2020 when Covid was bearing down - i didn’t like the risk/reward and all my investments at the time were in tax free accounts (so there were no tax issues).
 

The rest of my portfolio is a bunch of misc stuff that i will flex up and down depending on a bunch of different factors.

 

Not sure if that answers your question. It probably raises more questions than it answers. And be warned - i might change my mind tomorrow (to anything written above). I mean this seriously. Mr Market can do some really crazy things. And i will remain open minded and be opportunistic.

 

I also think i have been very lucky over the years, especially over the past 20 years… none of my concentrated positions have blown up on me. This could have easily happened (for any number of reasons). Now i don’t get highly concentrated that often. When i do, it is only with stuff i think i understand very well. And i generally don’t keep positions extremely concentrated for long. So i think it is probably time to tweak this part of my investment process/framework. 
 

Morgan Housel has written about how most investors are not able to evolve as they age from ‘grow capital’ to ‘preserve capital.’ That is what i am trying to use ETF/index funds for in my portfolio - the set and forget / preserve capital part. The rest is my ‘grow capital’ part.

Edited September 11, 2024 by Viking

[Haryana]

1 hour ago, Viking said:

@Haryana that is a good catch. When i write my posts sometimes i get lazy with my metrics. So sometimes i default to what is easy to find. I typically just use Yahoo Finance or company reports for my data. I wonder if i should subscribe to a paid service so it would be easier to pull more inclusive data points. 
 

Do others on the board subscribe to any paid services for data collection / graphs etc? Do board members have any recommendations?

 

 

One thing I like about Morningstar is their charts for Growth that include dividends for free, easy comparison. 

[Haryana]

11 hours ago, Viking said:

 

On Saturday I posted Part 1 (lessons 1 to 4). It is linked above for those who have not read it. Here is the conclusion, Part 2 (lessons 5 to 8). 

 

Fairfax Financial - 8 Lessons Learned Over the Past 4 Years

 

Lesson 5.) Value investing works - really well.

 

"The three most important words in investing are margin of safety.” Warren Buffett

 

What is margin of safety?

 

Buy something for less than it is worth.

 

This investment framework works so well for 2 simple reasons:

1. If you are right, you can make a lot of money.
2. If you are wrong, your downside is protected.

And the bigger the discount (margin of safety) the better.

 

“It is extraordinary to me that the idea of buying dollar bills for 40 cents takes immediately with people or doesn't take at all.” Warren Buffett

 

What is a good way to value an insurance company?

 

By using book value.

 

What was Fairfax’s price/book value multiple in 2020?

 

At the end of 2019, Fairfax traded at a P/BV = 1x. At the time, Fairfax was out of favour as an investment - and this was reflected in its very low P/BV multiple.

 

After Covid hit, Fairfax sold off aggressively. From March to December of 2020 it traded at a P/BV multiple of about 0.7x and there were times when it traded below 0.6x.

 

That was a historically low valuation for Fairfax.

 

 

What was a rational investor to do?

 

Buy the stock, of course.

 

Fairfax was a textbook value investment in 2020.

 

Buying Fairfax was a pretty easy decision. The difficult decision in 2020 was position size - how much should an investor buy?

 

—————

 

Lesson 6.) Sizing a position is critically important to long term investment performance

 

“Sizing is 70% to 80% of the equation. Part of the equation is seeing the investment, part of the investment is seeing myself in a good trading rhythm. It’s not whether you’re right or wrong, it’s how much you make when you’re right and how much you lose when you’re wrong,” Stan Druckenmiller

• https://moneyweek.com/investments/investment-strategy/605020/stan-druckenmiller-position-size-really-matters

In 2022, Warren Buffett said that 12 investment decisions - one about every 5 years - is what has delivered much of Berkshire Hathaway’s outperformance over the years.

 

“In 58 years of Berkshire management, most of my capital-allocation decisions have been no better than so-so... Our satisfactory results have been the product of about a dozen truly good decisions – that would be about one every five years.” Warren Buffett - Berkshire Hathaway 2022AR

 

Truly great investment opportunities come along very infrequently - Buffett found about two each decade. And he is really good at this game. Guess how many an average investor are going to find?

 

These are investments that:

• you understand better than almost everyone else.
• are trading at a very cheap valuation.

When you find one of these you need to take full advantage - and get the position size right. Getting this right is what allows an investor to outperform the market averages over time.

 

Concentrating a position does a couple of important things for an investor:

• It focusses the mind (that ‘skin in the game’ thing).
• It results in a higher purchase threshold (reserved for best ideas).

Of course this strategy only works if you are right.

 

Concentration is a great example of how the theory part of investing is incredibly simple. And the practice/execution part is incredibly difficult.

 

Is concentration not a risky think to do?

 

I like Buffett’s definition of risk:

 

“Risk comes from not knowing what you are doing.” Warren Buffett

 

Fairfax

 

For much of 2020, Fairfax was trading at a historically low valuation of 0.7 x BV (even going as low as 0.6 x BV). This means the stock was trading at the largest ‘margin of safety’ in the company’s history.

 

Later in 2020, Fairfax’s investments had stabilized (cyclical stocks rebounded) and its insurance business was growing nicely (hard market).

 

Yes, this was a great time to buy the stock. But more importantly, it was the perfect time to back up the truck and build out a concentrated position.

 

With Fairfax, investors got one of those ‘punch card’ moments that Buffett has often talked about in the past.

 

—————-

 

Back in 2020, Sanjeev’s was saying much of the same thing. Below is one of his posts from May 14, 2020:

 

“What I can provide you is perspective, my rational assumptions and how I came to my conclusions.  Yes, I've seen this rodeo before...including with Fairfax.  Amazing what 22 years of investing teaches you, especially over this last generation where we've incredibly seen compressed cycles of 50% drops in the market 3 times...1999/2000, 2008/2009 and 2020/2021. 

 

“You generally get one of those cycles every other generation...we've seen three in one generation.  Is that due to the internet?  Computer trading?  ETF's?  Massive amounts of competition by hedge funds, private equity, pensions, etc?  Recklessness in financial instruments, by the Fed, IMF?  Distortions in monetary policy?  Maybe a combination of all them!

 

“All I know is that I've been given 3 massive swings at the bat in one generation...300% gains over several years.  This is probably the last one before I retire, and I'm going big!  I expect the stuff I'm buying today to be up 300% or better from my current cost over the next 5-7 years.”

• https://thecobf.com/forum/topic/17401-fairfax-2020/page/12/#comment-401311

—————-

 

Lesson 7.) Following the fundamentals  - this is what should have kept an investor in Fairfax

 

“You’re not buying a stock, you’re buying part ownership in a business. You will do well if the business does well. And if you didn't pay a totally silly price.” Warren Buffett

 

“What possible assurance do you have that (a stock you own) will go up in price? And if you are buying, how much should you pay? What you’re asking here is what makes a company valuable, and why it will be more valuable tomorrow than it is today. There are many theories, but to me, it always comes down to earnings and assets. Especially earnings.” Peter Lynch - One Up On Wall Street

 

OK. So you discovered a great investment. You bought it. And then you sized it properly - made it a significant position.

 

What do you do next?

 

You own a piece of a business. So the next thing you do is you closely monitor how the business is performing:

• Financials/earnings
• Management
• Insurance industry
• Financial markets
• Prospects

You monitor the fundamentals of the business. Are they improving? Staying the same? Or deteriorating?

 

—————

 

"If past history was all that is needed to play the game of money, the richest people would be librarians." Warren Buffett

 

Monitoring the fundamentals is even more important for a turnaround play. And that is what kind of investment Fairfax was back in 2020.

 

What happened with Fairfax?

 

In 2021, the fundamentals of the company got better. Much better.

 

Why?

 

Three things were happening at the same time:

1. Driven by the hard market, the insurance business was growing rapidly.
2. Cyclical stocks (Fairfax has lots in their portfolio) spiked higher.
3. The management team began executing exceptionally well in terms of capital allocation.

Headwinds had flipped to tailwinds. Also, by 2021, Fairfax had fixed its investing framework. The turnaround was turning around - and quickly.

 

The fundamentals of the business continued to improve in 2022. And again in 2023. A decade long headwind  - low interest rates - turned into a tailwind when interest rates spiked. By the end of 2023, the turnaround was complete. Truth be told, it was probably complete the end of 2022.

 

What happened to earnings?

 

Earnings spiked higher. Importantly, the increase in earnings was being driven by spiking operating income. Operating income at Fairfax averaged $1.1 billion/year ($45/share) from 2016 to 2021. In 2023 it was $4.4 billion ($193/share). Per share, operating income increased by 329%. That is a simply amazing increase over a 3 year period.

 

 

What about the stock price?

 

The stock price spiked higher.

 

What about the valuation of the stock?

 

This is where the story gets even more interesting - and a little nuts.

 

Mr Market was focussed on Fairfax’s stock price. Those who followed the company closely were focussed on fundamentals/earnings.

 

Fairfax’s stock went up lots. But so did Fairfax’s fundamentals. As a result, the valuation gap wasn’t shrinking by all that much. As a result, the stock continued to be undervalued.

 

Following the fundamentals closely is what likely stopped many investors in Fairfax from selling their shares after a quick gain. This gets to our next lesson.

 

————-

 

Lesson 8.) Patience is how you make the big money.

 

“And right here let me say one thing: After spending many years in Wall Street and after making and losing millions of dollars I want to tell you this: It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight! It is no trick at all to be right on the market. You always find lots of early bulls in bull markets and early bears in bear markets. I've known many men who were right at exactly the right time, and began buying or selling stocks when prices were at the very level which should show the greatest profit. And their experience invariably matched mine - that is, they made no real money out of it. Men who can both be right and sit tight are uncommon. I found it one of the hardest things to learn. But it is only after a stock operator has firmly grasped this that he can make big money...” Reminiscences of a Stock Operator

 

“Be patient. The stocks that have been most rewarding to me have made their greatest gains in the third or fourth year I owned them. A few took ten years.” Peter Lynch

 

“Selling your winners and holding your losers is like cutting the flowers and watering the weeds.” Peter Lynch

 

How many investors sold their Fairfax shares for a quick small gain in 2021. Or 2022. Or 2023? Or 2024? Most of the investors that sold Fairfax over the past three years have likely missed out on making the big money.

 

What is the hardest thing in investing?

 

Holding winners might be the hardest thing for an investor to do. Holding big winners… well, that is almost impossible.

 

So guess what?

 

Most investors have few if any big winners. As a result they usually underperform the market averages.

 

Why is this?

 

Monitor (following the fundamentals) and patience (hold your winners) are often contradictions. Because monitor often results in action. Your brain just can’t help itself - it’s busy computing and… well, it’s decided you need to do something… anything! It needs you to act on what it think it knows.

 

And then your gut gets involved - it doesn’t want to be ignored or left out. So it starts telling you do something as well (sometimes it is screaming).

 

As a result, winning positions usually get sold way too early. The reasons always make sense at the time.

 

Do nothing? Ignore what both your brain and gut are telling you? Now that is hard. Pretty much impossible for most investors.

 

This process gets even harder for big positions - because you monitor your big positions even more closely (so your brain and your gut have even more to say).

 

Selling a big winner way too early can be disastrous to an investors long term results. Because they come along so infrequently.

 

So what is an investor to do?

 

Be as rational as possible. And here we are, back at the start of our story (see ‘Lesson 1: Investors need to be rational at all times with their investments')

 

Where does Fairfax go from here?

 

Fairfax has already been a 3 bagger for many members of Corner of Berkshire and Fairfax.

 

Are we done? I don’t think so.

 

Fairfax continues to trade at a valuation (P/BV) that is well below that of its P/C insurance peers. We also know Fairfax’s book value is understated (one reason is the excess of FV over CV) - so this makes it even cheaper. Earnings are strong (near record highs). When it comes to capital allocation, the management team at Fairfax has been best in class over the past 5 years. Bottom line, stock still looks cheap and its prospects look solid.

 

But don’t take my word for it. It looks like Fairfax has repurchased and retired another 61,000 of their shares in August. They are on pace to reduce effective shares outstanding by more than 1 million in 2024. Fairfax are value investors - they only buy back shares if they think they are trading at a discount to their intrinsic value.

 

This was an amazing two part post. 

 

A live case study including nuggets. 

 

Better than reading two good books. 

 

[UK]

2 hours ago, Viking said:

@UK good for you. Well done. 

Concentration is a hugely important topic. And definitely not one size fits all - probably because so many things go into the calculation. Everyone really needs to figure this out for themself.
 

When i was younger, i would sometimes go 100% with one stock (only for a short period of time). But only if it was something I understood exceptionally well. That just kept going down - so over time my position size would get quite large (as i would keep adding). The last time i did this with a stock was with Apple in 2013.
 

I also have core positions that i will flex up and down depending on what Mr. Market does. So this makes it difficult to give definitive numbers on position sizes (targets or actuals). That is what i was doing with Apple - but the story kept getting better and the stock kept getting cheaper - so i kept adding. Probably a really stupid thing to do.
 

The flexing is temporary and allows me to take advantage of short term volatility in my very best ideas while i am waiting for the longer term thesis to play out.
 

Fairfax is my biggest position today (it has been for the past 4 years) and i have flexed it up and back down twice this year (on both sell offs). 
 

My goal is to have no one position at more than about 33% of my total portfolio. Fairfax is over that today (I don’t want to give an exact number because it changes). 
 

After Fairfax, my biggest holdings are 3 index funds - VOO, VO and XIC). My goal is to build these up to about 40% of my total portfolio (roughly equal weights).
 

I also like cash - i am ok going up to 20%. I love the optionality of cash. I went 100% cash in Feb 2020 when Covid was bearing down - i didn’t like the risk/reward and all my investments at the time were in tax free accounts (so there were no tax issues).
 

The rest of my portfolio is a bunch of misc stuff that i will flex up and down depending on a bunch of different factors.

 

Not sure if that answers your question. It probably raises more questions than it answers. And be warned - i might change my mind tomorrow (to anything written above). I mean this seriously. Mr Market can do some really crazy things. And i will remain open minded and be opportunistic.

 

I also think i have been very lucky over the years, especially over the past 20 years… none of my concentrated positions have blown up on me. This could have easily happened (for any number of reasons). Now i don’t get highly concentrated that often. When i do, it is only with stuff i think i understand very well. And i generally don’t keep positions extremely concentrated for long. So i think it is probably time to tweak this part of my investment process/framework. 
 

Morgan Housel has written about how most investors are not able to evolve as they age from ‘grow capital’ to ‘preserve capital.’ That is what i am trying to use ETF/index funds for in my portfolio - the set and forget / preserve capital part. The rest is my ‘grow capital’ part.

 

Viking, thank you very much for your elaborate response. It answers my question more than enough and it also resonates with me personally very well, perhaps maybe except for the part of being 100 percent in cash or one position, but also never say never:)

 

And btw, despite me being a very stubborn and slow learner, it was mostly yours (and also Parsad's and other members) material and posts, that finally had awakened me to the FFH opportunity in 2022 in the first place! And I has followed and owned FFH on/off (but never as very large position) since 2012, the year I had also joined this board:)

 

I usually cape my largest positions at 20-25 percent and I usually own 4-6, so that was also a start with FFH initially in 2022, but later, mostly after selling some of the M7 positions in 2023, I kept adding to FFH right until this MW situation and basically made this into 2x limit position in 2023. I also want to disclaim, that this might change tomorrow etc, but as I see situation today, I think for me this will oscillate between 30 and 40 percent for a while. I think I will cape my largest positions somewhere in the 20-30 range in the future more strictly though, or depending on the circumstances (e.g. perhaps I would like to be able to have total attention for my portfolio, if being concentrated more than this, while this could change in the future).  

 

Thanks again and looking forward for your future input on FFH appreciatively!

 

Edited September 11, 2024 by UK

[MMM20]

8 hours ago, Viking said:

Do others on the board subscribe to any paid services for data collection / graphs etc? Do board members have any recommendations?

 

I pay ~$300/year for Koyfin and get more value out of it than my old ~$20k/year (?) Bloomberg terminal.

[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