Fairfax 2020

[Viking]

I just updated my spreadsheet for tracking Fairfax Equity holdings (attached below). If anyone sees errors in the spreadsheet please let me know :-)

From the start of the year (Jan 1) to today (Feb 27) my estimate is their mark to market equity holdings are down $520 million (Eurobank is down $406). I believe they also mark to market the Seaspan warrants; they are down an additional $108 million.

The majority of their equity holdings are Associated and Consolidated Equities and I am not sure exactly how all of these are valued on the financial statements at each quarter-end. I like to track what the stock prices are doing to get a handle on how Mr. Market is valuing these holdings over time. These holdings are down $632 million ($740-$108 Seaspan warrants).

All three of these items: $520 + $108 + $632 = $1,260. Please note, this is not the hit that Fairfax would take if the quarter ended today; the $632 would not flow through the financials :-)

Fairfax is in a very tricky position. They hold a lot of equities in their portfolio. Great with a 'risk-on' trade which is how they have been positioned since Trump was elected. Absolutely brutal position to be in should we get sustained, large stock market sell-off.

PS: the portfolio of Fairfax India is actually up nicely since Jan 1 (still even with the global equity sell off). Their holdings are another tab on the spreadsheet. I estimate their mark to market equity holdings are actually up $128 million this year. Pretty interesting :-)   

[StubbleJumper]

Cigar, thanks for taking the time to post. I am not an insurance expert and find your posts to be helpful :-)

I am back on the sideline with Fairfax. Their equity portfolio is getting hit pretty hard.

But shouldn't their bond gains be offsetting this?

They'll definitely have some bond gains, but they have drastically reduced the duration of the fixed income portfolio over the past couple of years, so gains are muted.  The unfortunate part of the most recent earnings release is that it wasn't accompanied by a full set of financials, but you can at least look to Q3's filings for a bit of inspiration.  At the end of Q3, FFH reported that a 100 bps parallel decline in the yield curve would have resulted in $279m in gains.  Well, bond rates have dropped by more like 40 bps, so the bond gains are probably pretty trivial in the context of the hit to the stock portfolio.


SJ

[Cigarbutt]

^To add to the pseudo-"hedging" hypothesis mentioned above and to what SJ just described, FFH has substantially changed the duration (since 2016) of their fixed income portfolio with expectations that they would be able to reinvest coupons at higher rates.

From their interest rate risk disclosure, with a 100 basis point decrease in interest rates, result in market value of the fixed income portfolio:
2015        928M
2016        125M
2017        161M
2018        290M
Q3 2019   279M

Since Jan 1st 2020, the 10-yr Tr. bond has gone down about 65 basis points.

Hedging aside, interest rates elevation will require some reversal of fortune and perhaps some Fed cooperation but the Fed, these days, may be more into easing inoculation, not to fight the disease but to numb the pain. (Mr. James Grant compared monetary activism to a virus in 2015; Mr. Grant is sometimes wrong and often early).

[TwoCitiesCapital]

Cigar, thanks for taking the time to post. I am not an insurance expert and find your posts to be helpful :-)

I am back on the sideline with Fairfax. Their equity portfolio is getting hit pretty hard.

But shouldn't their bond gains be offsetting this?

No, because there is very limited duration in their short term portfolio. Short term bonds are up only a few tenths of a percent.

[petec]

I wonder when the share price gets cheap enough to make buybacks a better option than premium growth?

Obviously some of the share price fall is to do with falling equity holdings in things like Eurobank and Atlas. But those are big positions FFH can’t realistically add to. If they were comfortable with the value in them 40-50% higher, buybacks are very rational here.

My guess is they will stick to premium growth. Also see SJ’s thread for why they may not be able to fund buybacks. Pity.

[bearprowler6]

http://www.horizonnorth.ca/news-and-knowledge-centre/news/horizon-north-and-dexterra/

Another attempt at surfacing value?

[StubbleJumper]

http://www.horizonnorth.ca/news-and-knowledge-centre/news/horizon-north-and-dexterra/

Another attempt at surfacing value?

Thank you for sharing that.  It's nice to get an update on where the Carrillon assets are headed, and it's nice to see that FFH will be on the receiving end of dividends and might ultimately have a partner to whom it can sell its stake (if that is what FFH decides to do).

One of the unfortunate aspects of FFH's growth is that it is hard to follow the progress of every asset because most of the acquisitions are not individually material to FFH.  Without a creating 1,000 page annual report, they just cannot really report on how things are going.  I am quite curious how things are going with some of the other smaller acquisitions of the past couple of years, notably Toys R Us and Churchill.  But at least we now know a bit more about Carrillon.


SJ

[petec]

http://www.horizonnorth.ca/news-and-knowledge-centre/news/horizon-north-and-dexterra/

Another attempt at surfacing value?

Thank you for sharing that.  It's nice to get an update on where the Carrillon assets are headed, and it's nice to see that FFH will be on the receiving end of dividends and might ultimately have a partner to whom it can sell its stake (if that is what FFH decides to do).

One of the unfortunate aspects of FFH's growth is that it is hard to follow the progress of every asset because most of the acquisitions are not individually material to FFH.  Without a creating 1,000 page annual report, they just cannot really report on how things are going.  I am quite curious how things are going with some of the other smaller acquisitions of the past couple of years, notably Toys R Us and Churchill.  But at least we now know a bit more about Carrillon.


SJ

Agreed, although:
1) I don’t see why they couldn’t have taken a dividend from Dexterra without merging it.
2) They seem to be getting about C$100m of value, based on Horizon North’s predeal share price. Can anyone remember what they paid? I’m not sure they’re surfacing much value here unless the merger blurb about growth and x-sell is true.

[StubbleJumper]

http://www.horizonnorth.ca/news-and-knowledge-centre/news/horizon-north-and-dexterra/

Another attempt at surfacing value?

Thank you for sharing that.  It's nice to get an update on where the Carrillon assets are headed, and it's nice to see that FFH will be on the receiving end of dividends and might ultimately have a partner to whom it can sell its stake (if that is what FFH decides to do).

One of the unfortunate aspects of FFH's growth is that it is hard to follow the progress of every asset because most of the acquisitions are not individually material to FFH.  Without a creating 1,000 page annual report, they just cannot really report on how things are going.  I am quite curious how things are going with some of the other smaller acquisitions of the past couple of years, notably Toys R Us and Churchill.  But at least we now know a bit more about Carrillon.


SJ

Agreed, although:
1) I don’t see why they couldn’t have taken a dividend from Dexterra without merging it.
2) They seem to be getting about C$100m of value, based on Horizon North’s predeal share price. Can anyone remember what they paid? I’m not sure they’re surfacing much value here unless the merger blurb about growth and x-sell is true.

Yep, they might have already been taking a dividend from Dexterra, but it was a bit hard to tell from the small bit of ink that FFH could dedicate to Carrillon in the AR.  Now at least we do have confirmation that there is an ongoing cash in-flow related to it, which is at least something.  I don't believe that they ever included the price that they paid for the Carrillon assets in a press release...I don't remember if there was enough in the AR to get a feel for it.  That's why I like when people find these sorts of articles, because it provides a bit more info that can't all be disclosed in the AR (unless you want a 1,000 page AR).

I would like to see a similar article about Toys R Us.  You and I had a bit of an exchange last year about the $100m EBITDA figure that was trotted out..and I think I saw a couple of articles about possible expansion.  But, is Toys a net cash contributor to FFH at this point, is it requiring cash injections, or is it neutral?  I'm pretty sure that the numbers are not material, but I am still curious.

Same questions about Port of Churchill....

If people see random articles about FFH subs, please share!  That's the only way we figured out who was the buyer of the Bangalore airport stake because it was not included in the press release from December.


SJ

[petec]

Yes, agreed that it is good to have more visibility. I guess the downside is BV gets market to whatever the market's current mood is even more than it already does, but it's small fry.