Author Topic: Fairfax 2020  (Read 132499 times)

Xerxes

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Re: Fairfax 2020
« Reply #670 on: November 09, 2020, 11:37:14 AM »
LOL

Jurgis
I am partially blame for planting that seed. I have been bashing the shorts lately and specifically the comments made in the Q3 conference call that really sounded like: "ok guys we got burned enough by shorting, we are going to stop now." I think that comment was both meant for external as well as internal audience.

In reality we do not know the nature of the shorts (which names), however i think we do know the vehicle being used, i.e. through total return swaps.
See below. If I recall SJ made a comment on these few months back, something about putting a minimum amount and magnifying your gain/loss on a much larger notional amount.

Page 19 - Q3 report

"Equity contracts

The company may maintain short equity and equity index total return swaps for investment purposes that provide a return which is
inverse to changes in the fair values of the underlying equity indexes and certain individual equities.
During the third quarter and first nine months of 2020 the company paid net cash of $152.9 and $438.1 (2019 - paid net cash of $6.1
and received net cash of $127.1) in connection with the reset provisions of its short equity total return swaps (excluding the impact of
collateral requirements). During the third quarter and first nine months of 2020 the company closed out $90.2 and $494.6 notional
amount of its short equity total return swaps and recorded net losses on investments of $36.2 and $176.7 (realized losses of $79.2 and
$327.3, of which $43.0 and $150.6 was recorded as unrealized losses in prior quarters and prior years). During the third quarter and
first nine months of 2020 the company did not initiate any short equity total return swaps. During the first nine months of 2019 the
company closed out $89.9 notional amount of its short equity total return swaps and recorded net gains on investment of $30.3
(realized losses of $7.9, of which $38.2 was recorded as unrealized losses in prior years).

During the third quarter and first nine months of 2020 the company entered into $148.8 and $1,183.9 notional amounts of long equity
total return swaps for investment purposes following significant declines in global equity markets in the first quarter of 2020. At
September 30, 2020 the company held long equity total return swaps on individual equities for investment purposes with an original
notional amount of $1,342.9 (December 31, 2019 - $501.5). During the third quarter and first nine months of 2020 the company
received net cash of $48.9 and $80.8 (2019 - received net cash of $8.2 and paid net cash of $53.5) in connection with the reset
provisions of its long equity total return swaps (excluding the impact of collateral requirements). During the third quarter and first nine
months of 2020 the company closed out $212.7 and $464.7 notional amounts of its long equity total return swaps and recorded net
realized gains on investments of $52.9 and $122.3. During the third quarter and first nine months of 2019 the company did not initiate
or close out any long equity total return swaps.
At September 30, 2020 the aggregate fair value of the collateral deposited for the benefit of derivative counterparties included in
holding company cash and investments and in assets pledged for short sale and derivative obligations was $298.7 (December 31, 2019
- $152.4), comprised of collateral of $205.2 (December 31, 2019 - $70.3) required to be deposited to enter into such derivative
contracts (principally related to total return swaps) and $93.5 (December 31, 2019 - $82.1) securing amounts owed to counterparties to
the company's derivative contracts arising in respect of changes in the fair values of those derivative contracts since the most recent
reset date.
"
« Last Edit: November 09, 2020, 04:19:38 PM by Xerxes »


Xerxes

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Re: Fairfax 2020
« Reply #671 on: November 09, 2020, 11:48:53 AM »
On the reflationary trade, great news indeed. Should help partially with the mark to market of Q4.

However, I am specifically looking forward to see the return of this specific bet some years down the road. To my knowledge, it was the most significant & only move FFH made throughout the mayhem of March-April, trying to lock-in while credit spreads were blowing up. Fairly big bet, give that it is 7% of the portfolio. 

"Since mid-March 2020, Fairfax has been reinvesting its cash and short term investments into
higher yielding investment grade U.S. corporate bonds with an average maturity date of 4 years
and average interest rates of 4.25%, that will benefit interest income in the future. To date, taking
advantage of the increase in corporate spreads, Fairfax has purchased about $2.9 billion of such
bonds.
"

Viking

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Re: Fairfax 2020
« Reply #672 on: November 09, 2020, 02:00:02 PM »
This vaccine news should really help Fairfax.  They have so many investments that were hammered by the virus -- Eurobank; Exxon; Thomas Cook India; Bangalore Airport; Recipe restaurant business.  And so few that benefited from the virus.

Crazy 1 day moves.

Atlas + 11%
Eurobank + 26%
Fairfax India +10%
Recipe + 10
Should see a spike in Indian investments overnight.

If this shift in equity positioning has legs (if the news on the vaccine front continues to be positive, my guess is yes) Fairfax will do exceptionally well moving forward. Can we put a pitchfork in the ‘7 lean years’ trend?
« Last Edit: November 09, 2020, 02:25:47 PM by Viking »

cwericb

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Re: Fairfax 2020
« Reply #673 on: November 09, 2020, 04:20:33 PM »
Anyone who has invested in FFH in the past couple of weeks should be feeling pretty good about now.  :) 
Politicians and diapers must be changed often, and for the same reason. - Mark Twain

StubbleJumper

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Re: Fairfax 2020
« Reply #674 on: November 09, 2020, 06:14:59 PM »
Quote
See below. If I recall SJ made a comment on these few months back, something about putting a minimum amount and magnifying your gain/loss on a much larger notional amount.


I believe that it may have been TwoCities who helped us better understand the mechanics of the equity swaps.


SJ

Viking

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Re: Fairfax 2020
« Reply #675 on: November 11, 2020, 05:00:58 PM »
Here is an update of Fairfax's equity positions Sept 30-Nov 11. In aggregate my math says total equity positions are tracking up almost $600 million. Big move in 6 weeks (and larger than I expected). I've attached my excel spreadsheet; please let me know if you see any big errors :-)

Yes, most of the gains do not flow through to earnings. However, as the gap between 'fair value' and 'carried value' for Investments in Associates closes this makes reported book value more meaningful (shrinking the discount to BV shares trade at).   

- Stocks                                             + $69 million (mark to market)
- Atlas warrants                                  + $50 million (mark to market, I think)
- Associated and Consolidated equities +$471 million 
- Total                                                + 590 million

Biggest movers:
- Atlas shares = +$181 million
- Atlas warants = +$50 million
- Recipe = +$129 million
- Fairfax India = +$97 million

PS: I added Astarta, Atlas Mara and Horizons North to the spreadsheet. Fairfax India is in tab 2; I have NOT updated yet
« Last Edit: November 11, 2020, 05:26:59 PM by Viking »

roberts1001

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Re: Fairfax 2020
« Reply #676 on: November 12, 2020, 11:43:38 AM »
Please have patience with someone new to this board.  I'm trying to estimate FRFHF's IV.  From a quick and dirty look I'm thinking of something like 1.0x BV.  Does this seem about right?  Thank you for your input. 

Viking

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Re: Fairfax 2020
« Reply #677 on: November 12, 2020, 12:22:08 PM »
Roberts1001, welcome. Being open minded and inquisitive is a good thing :-)

Below is an article I was re-reading recently that i think provides a solid framework for looking at Fairfax as an investment. Fairfax today is trading at a much larger discount to BV than when the article was written. The stock sell off this year sucks for long term shareholders but provides a very attractive opportunity for new investors / new money. Especially if the news on the vaccine front the coming months is positive.

The question for me is what combination of CR and investment return will Fairfax need to hit to deliver a 10% ROE moving forward? What do people think is achievable over the next couple of years?

——————————
The Horse Story (Sept 2019)
- https://www.woodlockhousefamilycapital.com/post/the-horse-story

Most of the investors I’ve talked to about FFH will bring up Watsa almost immediately as, basically, someone they no longer trust to make good decisions or deliver good returns. I can understand why. (The baffling macro bets of some years ago cost FFH shareholders billions of dollars. Watsa said he not would make such bets again. But the damage was done.)

The insurance side of the operation has been strong for FFH in recent years. But even there, operations are below Watsa’s target of a 95% combined ratio. FFH’s Q2 number was 96.8%. Profitable – anything below 100% is profitable – but below target.

So, as you can see, the valuation is not such a cut-and-dried matter. FFH has had some issues. Nonetheless, we own the stock at a price below book value.

The most important reason is that the downside seems low. The valuation protects you, the company appears well-financed and management seems honest and well-intentioned. These are not small things.

Moreover, I think the assets collectively could generate a ~10%-type ROE. Watsa has made a public goal of hitting 15%. (FFH’s ROE was 15% in the second quarter, thanks to investment gains). He says a 95% combined ratio and a 7% return on FFH’s investments gets to a 15% ROE.

But in a low-interest rate environment, and given a large bond portfolio, a 7% return seems unlikely. But possible. Sustaining a double-digit ROE is key. (FFH can reach 10% by following a number of roads. For example, one road requires a ~95% combined ratio and ~5% return on its portfolio. That seems do-able.)


Anyway, a consistent 10% would grow book value at a decent clip and then you’d likely get an additional lift from the valuation even if the stock moved just to 1.2x book. As RayJay reports, a comparable set of North American insurers with an 11% ROE trades for 1.7x book value per share.

I admit, FFH is not exciting. It’s not fake meat or pot or sending billionaires into space. But it shouldn’t hurt you and has potential to deliver a very nice return. The current disappointing share performance could be, in the spirit of the horse story, a gift.
« Last Edit: November 12, 2020, 12:30:16 PM by Viking »

bizaro86

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Re: Fairfax 2020
« Reply #678 on: November 12, 2020, 12:49:57 PM »
(The baffling macro bets of some years ago cost FFH shareholders billions of dollars. Watsa said he not would make such bets again. But the damage was done.)


I would just ask how much has Fairfax lost on shorts since this article was published?

Viking

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Re: Fairfax 2020
« Reply #679 on: November 12, 2020, 02:24:12 PM »
(The baffling macro bets of some years ago cost FFH shareholders billions of dollars. Watsa said he not would make such bets again. But the damage was done.)


I would just ask how much has Fairfax lost on shorts since this article was published?

I agree that Fairfax has its warts. The question is what size of discount should reasonably be applied to shares to account for those warts. My view is the current discount is too large and likely far too large.

Fairfax shares are trading today (US$320) at the same level they were trading at in February 2008. That is simply crazy. Fairfax is not just ‘undervalued’ it is being historically undervalued. My view is the extreme undervaluation today is being driven primarily by sentiment (yes, the pandemic is also a factor). Fairfax has, at certain times in its history, made investors lots of money. 2003 was one. 2006-08 was another. Today looks like another.

Why?

I look at Fairfax as three buckets:

1.) insurance businesses - it looks to me to be as well positioned today as at any time in the companies history. Odyssey, Northbridge, Crum and Zenith are solid. Allied looks good (after a rough first year post acquisition). Brit has had its challenges but Fairfax seems to understand this and has been working for the past year to improve. Runoff, which historically was viewed as the most ‘shitty’ insurance business within Fairfax (a perennial money loser) has morphed and Fairfax was able to spin a large chunk of it off for a bucket of cash; where Riverstone UK goes from here will be interesting to follow.

Most importantly, we are in the beginning of an insurance hard market. And this time Fairfax has good insurance businesses. This is a huge deal that investors are completely missing.

Investing is the other key variable. When looking at Fairfax I break this into two buckets: fixed income and equities (stocks, associates and wholly owned companies).

2.) investments - fixed income. Historically, Fairfax has a very good track record when it comes to this bucket. A good recent example of this was the $5 billion? they put to work in corporates in April/May.

Bottom line, Fairfax has proven to be a better than average managing fixed income investments.

3.) investments - equities. This is the bucket that for the past 7-8 years has driven long term investors in Fairfax crazy. Bad decisions combined with bad management (of those non-insurance companies they control) combined with poor communication to shareholders = a stock trading at a historically low discount.

My view is Fairfax has been slowly ‘fixing’ its equity errors. Part of this fix is the slow recognition that they are not a turn around shop (for equities or wholly owned businesses) - Fairfax head office is not equipped to oversee businesses especially poorly performing businesses.

But Fairfax made so many purchases/mistakes over many years it is now taking a long, long time (years) to right the ship. And it is not a straight line (so there will be steps backwards). So we are not seeing the net benefits... yet.

To look at Fairfax equities as of Nov 2020, lets start by looking at Atlas. This is Fairfax’s largest investment, by far. This one company is more than 20% of the equity portfolio. And it is performing very well. We are in the middle of a pandemic and it is in a highly cyclical industry and how is its business doing? Very well. Solid top line growth. Solid earnings growth (remember, we are in a pandemic). Future prospects? Very good with lots of growth ahead. Stock is undervalued and every 10% move in shares is a $130 million ‘benefit’ to Fairfax. This stock alone could be a + $1 billion winner for FFH in the coming years.

CIB is a solid bank. Kennedy Wilson is a solid real estate company. Quess is a solid company. The IIFL triplets are all solid companies. Digit looks like it could be a home run. Bangalore Airport is a trophy asset. Fairfax India is well managed.

Other companies will be interesting to watch. Stelco looks to be well managed (yes, tough industry). Horizon North/Dexterra seems to have stabilized and it will be interesting to watch in the coming year. As we exit the pandemic Recipe will be ideally positioned (lots of mom and pop restaurants have closed so the big chains that Recipe owns will likely be the big winners in the short run).

Blackberry debentures were renewed at terms very favourable to Fairfax shareholders. Blackberry the company has value given it is involved in many of the right technology verticals.

Of all of Fairfax’s investments, Eurobank has been hit the hardest due to the pandemic. Pre-pandemic Eurobank had been making a great deal of progress (spinning of non performing loans) and the Greek economy was improving.

Fairfax continues to deal with its problem children. APR was sold/spun into Atlas. Fairfax Africa will hopefully get folded into Helios. (Last year Dexterra did a reverse takeover of Horizon North). These are examples of admission by Fairfax that they messed up (or the asset they purchased needed a new home to thrive), recognition of the mistake and the remedy. Fairfax has communicated there is more work to be done on this front. So i expect more companies to get spun out of the Fairfax black box and put in a position to sink or swim: Toys R Us/real estate, Performance Sports (Bauer), Farmers Edge etc.

And then of course, we have the equity shorts that (again) hit results in Q3 and came up again and again (rightly so) on the conference call. This was an example of the step back. Fairfax messed up. Again. But i think the message is getting though.

Bottom line, i think they are making alot of the right moves with the investment portfolio. But Fairfax has said they are not done... lots more work to do. And it will take time.

So when i put the three together (insurance + fixed income investing + equity investing) and shares trading at US$320 i see a $20 bill lying on the ground in plain sight :-)
« Last Edit: November 12, 2020, 09:05:02 PM by Viking »