Fairfax 2025

[Hoodlum]

I found this from the 2021 Annual Report.  Fairfax now has the option to reacquire the minority interest in Odyssey Re.  
 

The company has the option to purchase the interests of CPPIB and OMERS in Odyssey Group at certain dates commencing in January 2025.

[Thrifty3000]

41 minutes ago, Viking said:

 

@gfp , Yes, after I posted my table I realized it likely was not actually answering anything. you raise an important question. We are all trying to understand what the end game is for the FFH-TRS position - and what the impacts are for Fairfax.

Putting on my “think like a billionaire cap”…

 

FFH is Terminating TRS contracts - not Selling contracts.
 

TERMINATING a TRS contract is not the same as SELLING a TRS contract. No cash is exchanged for terminating a contract.
 

A TRS is a derivative contract - not a share of stock. The TRS settled/settles every quarter, and has essentially accrued zero dollars at the beginning of each new quarter.

 

All cash/gains from the TRS contracts was received at the end of each 90 day contract period.

 

Imagine someone has been giving you cash every 90 days that equates to the difference between what your FFH shares were worth at the beginning and end of said quarter.

 

If you’re wearing your billionaire cap what would you do with cash you had already booked/received from a contract you’ve since terminated? Under what scenario would you close a derivative contract on an asset that you then turn around and feel is undervalued enough to purchase outright?

[gfp]

8 minutes ago, Thrifty3000 said:

Under what scenario would you close a derivative contract on an asset that you then turn around and feel is undervalued enough to purchase outright?

 

I get what you are saying but obviously they both terminated a portion of the TRS and bought shares for cancellation under their normal course issuer bid in the same quarter so they are certainly willing to both reduce the size of this atypical derivative trade while still continuing to repurchase stock.  Likewise it made sense for Prem to sell hundreds of millions of dollars worth of FFH stock at a price that was also attractive for the company to be the buyer on the other side.

 

I believe that when Fairfax notifies a counterparty that they will not be renewing a TRS contract they can certainly negotiate for the purchase of the underlying block of shares that has been held by the counterparty to hedge their side of the TRS.  The big Canadian banks that facilitated this TRS trade were not short FFH shares this whole time.  They likely have large blocks of stock that can be sold if FFH doesn't negotiate for their purchase upon termination.

 

So if you are buying in your shares and you know of some big blocks it is possible you may simultaneously exit TRS exposure and buy the underlying hedge shares.  Or not.  But it wouldn't surprise me if it happens.

Edited Friday at 02:49 AM by gfp

[mananainvesting]

I fail to see the benefit of TRS for the other party

 

Why would the banks renew the TRS contract every quarter knowing how unprofitable it has been? If Fairfax is booking gains on the Contract, the other party should be booking losses right? Why would someone get into such a contract repeatedly? So are the banks effectively short $FFH?

[mananainvesting]

3 minutes ago, mananainvesting said:

I fail to see the benefit of TRS for the other party

 

Why would the banks renew the TRS contract every quarter knowing how unprofitable it has been? If Fairfax is booking gains on the Contract, the other party should be booking losses right? Why would someone get into such a contract repeatedly? So are the banks effectively short $FFH?

 

Took me a bit , but maybe here is how it works. Let’s say I am a bank who enters into a contract with FFH for TRS on 1 share at $100. For doing so $FFH pays me $10 per quarter. At the end of the quarter the stock is now worth $150. so I pay Fairfax $50(the difference), Fairfax pays me $10. At the end of the quarter if Fairfax doesn’t renew the TRS contract, I sell the stock in the market and recover $150. In the end I made a gain of $10. 

 

 

Please correct me If I am wrong. 

 

 

[Xerxes]

5 minutes ago, mananainvesting said:

I fail to see the benefit of TRS for the other party

 

Why would the banks renew the TRS contract every quarter knowing how unprofitable it has been? If Fairfax is booking gains on the Contract, the other party should be booking losses right? Why would someone get into such a contract repeatedly? So are the banks effectively short $FFH?

because banks are “financial services” companies and they are providing financial services to a corporate client, who has decided to take a position on itself and needs a product that fits the needs. 
 

Ideally banks makes their dough via fees

And not taking a directional position for or against the corporate client.
 

I.e so they would have been long the FFH shares to balance the TRS, if the risk officer was clear minded 

[nwoodman]

we probably need to pin this, but the bank (counterparty) is price agnostic, Fairfax is renting their balance sheet and taking the directional risk.

 

Edited Friday at 03:27 AM by nwoodman

[gfp]

13 minutes ago, mananainvesting said:

 

Took me a bit , but maybe here is how it works. Let’s say I am a bank who enters into a contract with FFH for TRS on 1 share at $100. For doing so $FFH pays me $10 per quarter. At the end of the quarter the stock is now worth $150. so I pay Fairfax $50(the difference), Fairfax pays me $10. At the end of the quarter if Fairfax doesn’t renew the TRS contract, I sell the stock in the market and recover $150. In the end I made a gain of $10. 

 

 

Please correct me If I am wrong. 

 

 

 

I'm not sure I followed your post but that doesn't mean it isn't right.  Basically it's just a financing deal - the banks hedge their end of the contract so they aren't taking any directional risk.  That could mean balancing a portion of it with other market participants that want to put the opposite TRS on (unlikely in the case of Fairfax stock but quite likely for other assets) or, as in this case, just buying the shares to offset the directional risk completely.  The fees and interest rate are where the bank makes money.  They are the bookie, not a fellow gambler.  The counterparty also gets the dividend, which is factored in to what they charge FFH.  There is a cost to Fairfax to keep the trade going.

 

But when the contracts are terminated - the hedge shares become available to either hit the market for sale, or as is more likely here, get bought up by indexers and closet indexers when Fairfax gets added to the S&P / TSX 60 index.

[SafetyinNumbers]

1 hour ago, Thrifty3000 said:

Putting on my “think like a billionaire cap”…

 

FFH is Terminating TRS contracts - not Selling contracts.
 

TERMINATING a TRS contract is not the same as SELLING a TRS contract. No cash is exchanged for terminating a contract.
 

A TRS is a derivative contract - not a share of stock. The TRS settled/settles every quarter, and has essentially accrued zero dollars at the beginning of each new quarter.

 

All cash/gains from the TRS contracts was received at the end of each 90 day contract period.

 

Imagine someone has been giving you cash every 90 days that equates to the difference between what your FFH shares were worth at the beginning and end of said quarter.

 

If you’re wearing your billionaire cap what would you do with cash you had already booked/received from a contract you’ve since terminated? Under what scenario would you close a derivative contract on an asset that you then turn around and feel is undervalued enough to purchase outright?

The only reason I could come up with is that they are concerned about the volatility of swap on liquidity given how big the notional is now. I have certainly heard that view expressed by others but I got the sense it was more of a concern about the impact on quarterly earnings volatility. 

[gfp]

3 minutes ago, SafetyinNumbers said:

The only reason I could come up with is that they are concerned about the volatility of swap on liquidity given how big the notional is now. I have certainly heard that view expressed by others but I got the sense it was more of a concern about the impact on quarterly earnings volatility. 

 

Yeah it's no fun when cash starts flowing out at the exact time you want to be getting aggressive allocating capital.  I don't think Buffett loved having that huge notional short put position during the financial crisis even though zero cash flowed out and he knew they were fine to hold through expiry.

 

You don't want to hold a derivative position like this through the last dollar - just the meat in the middle.

[SafetyinNumbers]

1 hour ago, gfp said:

I think I figured out what the deal with the $240m of treasury shares is - it was just a coincidence that it happened to be approximately the same amount of stock as the cancelled Total Return Swaps.  They were buying that $240m worth of stock for treasury all year, not just in Q4.  $146 million in the first half, the rest in the second half.

 

The total return swaps that were terminated were just terminated - the underlying shares were not repurchased from the counterparty.  When I read someone say that it looked like they had repurchased the shares from the cancelled TRS in the quarter, and the number of shares basically matched up, I thought that was what it was.  But it was just a coincidence.

 

The cancelled TRS had no impact on shares outstanding because they did not purchase the shares from the counterparty.  Just reduced the size of the trade by terminating a portion of it.

 

It will be interesting to see if they terminate the rest of the TRS during 2025.

 

Looking forward to the call tomorrow morning to hear what they did with the bond portfolio in Q4 and early Q1 and what they see coming in for the wildfires.

They closed the TRS and bought the shares back from the counterparty. Two separate transactions but with the same counterparty.

 

 

[gfp]

1 minute ago, SafetyinNumbers said:

They closed the TRS and bought the shares back from the counterparty. Two separate transactions but with the same counterparty.

 

 

 

Thanks - I see that now.  I thought the ~340k run rate of repurchases was just their normal course issuer bid but I guess they used this block for most of it.

 

Presumably if they hadn't bought this block of stock it would have hit the market and impacted the share price in December.

[nwoodman]

Personally I am very happy that they have started retiring the TRS.  If they can close out roughly 10%/quarter it would be a thing of beauty. It was an asymmetric but highly leveraged bet that has worked out well. In a 50% draw down Fairfax stock would not be immune and there would be a beta amplification because of them.  I think any indication of IV that it signals needs to considered together with liquidity and risk/reward considerations.

[Redskin212]

Agreed - the position was just getting too big!
Reducing it by about 10% a quarter would be wonderful

[nwoodman]

5 minutes ago, Redskin212 said:

Agreed - the position was just getting too big!
Reducing it by about 10% a quarter would be wonderful

The way I see it, it doesn’t make much different to IV but does derisk the share price or potential for larger than market type movements.  I did wonder last year whether some of those corrections may have been exaggerated due to the perceived TRS implications. 

[SafetyinNumbers]

10 minutes ago, Redskin212 said:

Agreed - the position was just getting too big!
Reducing it by about 10% a quarter would be wonderful

How about they reduce it by 10% every time it gets back to $2.8b?

[gfp]

So we see the 12/20 block trade on the chart.  I had assumed the two big January block trades were just the counterparties crossing shares once a year around the dividend but maybe we can ask them on the call if they terminated anything additional on the TRS in January.

 

 

 

[nwoodman]

On 1/3/2025 at 7:54 AM, Hoodlum said:

It looks like Fairfax helped Vacatia with the acquisition of Berkley Group (owner of 50 times share resorts).  There are no details of the acquisition cost or what Fairfax's involvement is.  

 

https://www.prnewswire.com/news-releases/vacatia-acquires-the-berkley-group-and-daily-management-302341393.html

 

MILL VALLEY, Calif. and FORT LAUDERDALE, Fla., Jan. 2, 2025 /PRNewswire/ -- Vacatia, Inc., a provider of innovative, customer-centric solutions for timeshare resorts, announced today that it has acquired The Berkley Group, Inc., one of the largest resort developers in the United States, and Daily Management, Inc., a full-service property management company of vacation ownership resorts.

 

 

The transaction was financed in partnership with certain affiliates of Fairfax Financial Holdings Limited.

"We are delighted to partner with Vacatia in its acquisition of Berkley and Daily Management," said Wade Burton, President and Chief Investment Officer at Hamblin Watsa Investment Counsel Ltd., the investment manager on behalf of Fairfax. "The Vacatia team, led by Caroline Shin, has a long track record of success in property acquisition, management and development, and we think they will be terrific stewards of the Berkley business in the future."

Good pick up.  We have a much better idea now

[Munger_Disciple]

4 hours ago, SafetyinNumbers said:

It would be vesting of grants, not new ones, to be clear. My understanding is that company does a match of a portion of the employee’s salary. Viking’s chart shows almost 2m shares in treasury for employees, so it seems reasonable ~10% of them would vest annually plus they basically bought the same amount back to replenish them.

 

From Viking's chart there seems to be a huge jump in treasury shares since 2015 by like 4X. We should really be using diluted share count to calculate book value rather than the BV per basic share in the press release.

[This2ShallPass]

4 hours ago, nwoodman said:

Personally I am very happy that they have started retiring the TRS.  If they can close out roughly 10%/quarter it would be a thing of beauty. It was an asymmetric but highly leveraged bet that has worked out well. In a 50% draw down Fairfax stock would not be immune and there would be a beta amplification because of them.  I think any indication of IV that it signals needs to considered together with liquidity and risk/reward considerations.

Yes this makes a lot of sense. Especially when they're minting money ($2.5B yearly from int & div!), it's good to reduce risk.

[This2ShallPass]

8 hours ago, Viking said:

 

@gfp, does this table help answer your question? I have not updated it to include the information from Q4. The table is in my excel workbook (shares tab, near the bottom) that I have been sharing.

 

 

 

Share based awards increased by 5x and share price increased 4x during the 11 years - 20x ($150M to $2.8B impact). That seems excessive, how much did their employee count grow by due to the big acquisitions?

 

8% dilution due to SBC - not sure what insurance industry averages are..

[SafetyinNumbers]

6 hours ago, Munger_Disciple said:

 

From Viking's chart there seems to be a huge jump in treasury shares since 2015 by like 4X. We should really be using diluted share count to calculate book value rather than the BV per basic share in the press release.

That would be inconsistent with most practice. They use the diluted share count for EPS but not for BV because the shares haven’t vested yet. 

[SafetyinNumbers]

3 hours ago, This2ShallPass said:

Share based awards increased by 5x and share price increased 4x during the 11 years - 20x ($150M to $2.8B impact). That seems excessive, how much did their employee count grow by due to the big acquisitions?

 

8% dilution due to SBC - not sure what insurance industry averages are..

It’s not real dilution because they buy the shares in the open market. 

[nwoodman]

10 hours ago, Hoodlum said:

I found this from the 2021 Annual Report.  Fairfax now has the option to reacquire the minority interest in Odyssey Re.  
 

The company has the option to purchase the interests of CPPIB and OMERS in Odyssey Group at certain dates commencing in January 2025.

Love your work. Didn’t realise or had forgotten that there was a sunrise on that deal.  I always figured that they would buy this in first. That color explains it.

Edited Friday at 12:48 PM by nwoodman

[gfp]

$500-750m pre-tax loss estimate on wildfires.  some or possibly all covered under "cat margin" in the quarter

 

"primarily on reinsurance" Odyssey, Brit and Allied World

 

typically 1 - 1.5% of industry losses.  Industry losses cited at $35-45 Billion.  Estimating closer to 1.5% - "the high side" since it is a reinsurance event

Edited Friday at 01:49 PM by gfp