Fairfax 2020

[Viking]

Viking, what's your short-term trade target here?  Getting back to book value?

One idea, and I've switched to it, is just buying the preferreds.  If you are aiming to get to book value, I'm assuming they will get back to $20-$25 (depending on the series) at the same or better pace than common.

Recemize, i would be quite happy with a 5-7% gain. I have had a good year and am sitting mostly in cash. The past month or so i have been very tactical taking a couple of small positions and selling for small gains. I need to do a little investing/trading to keep my brain from going Covid19 crazy :-)

I am happy to sit in cash With the majority of my portfolio until i have a better understanding of the impact of the virus on the actual economy.

[Viking]

Stubble, thanks for your thoughts. I did read your lengthy post after FFH posted results and found it very helpful :-)

Fairfax was very fortunate with the timing of the Riverstone deal. It brought them $600 million of much needed cash at (a now premium) valuation. With the economy in such terrible shape Fairfax will not be growing written premiums in the next 2 quarters (I am pretty sure this is what Prem said on the conference call) so the subs will likely not be needing $ from the hold co for business growth.

In the past Prem has proved to be very creative in surfacing value. Perhaps he has a rabbit or two yet to be pulled out of his hat.

[Cigarbutt]

^It seems like the Riverstone deal has two components.

First, there is 'value' recognition (although this value was deserved to start with if you think runoff operations are worth it).

Second, this was a liquidity operation. The 599.5M flowed to holdco (in a quarter when holdco was sending capital to insurance subs) in exchange for assets contributed to the Barbados-based joint venture. OMERS is participating for a price: the present value of the deconsolidated non-controlling interest. This is reminiscent of the Northbride and OdysseyRe bi-directional (sell then buy higher) operations (which were opportunities for profitable trades from an outsider perspective). There is a schedule for Fairfax to buy back the interest over time.

It was opportunistic but it is what it is.

[petec]

^It seems like the Riverstone deal has two components.

First, there is 'value' recognition (although this value was deserved to start with if you think runoff operations are worth it).

Second, this was a liquidity operation. The 599.5M flowed to holdco (in a quarter when holdco was sending capital to insurance subs) in exchange for assets contributed to the Barbados-based joint venture. OMERS is participating for a price: the present value of the deconsolidated non-controlling interest. This is reminiscent of the Northbride and OdysseyRe bi-directional (sell then buy higher) operations (which were opportunities for profitable trades from an outsider perspective). There is a schedule for Fairfax to buy back the interest over time.

It was opportunistic but it is what it is.

To clarify - there is a schedule of *options* for Fairfax to buy back. From what I hear they are unlikely to do so. I think the key part of this deal is that they have deconsolidated Riverstone UK, meaning it can lever up without affecting the FFH balance sheet. Apparently it needs to lever up to compete. I don’t think FFH will want it on their BS in future.

[petec]

Viking, what's your short-term trade target here?  Getting back to book value?

One idea, and I've switched to it, is just buying the preferreds.  If you are aiming to get to book value, I'm assuming they will get back to $20-$25 (depending on the series) at the same or better pace than common.

Would you ever expect them to trade above par, given how low rates have gone? I need to look at the terms again.

No, just trading back to where they were in 2019 is sufficient.  Meantime, 8% yield or so.

Yes, I can see the attraction. I just haven't really followed the prefs or what drives their prices, hence the question.

[petec]

It looks to me as though all the fixed-rate prefs sold off in 4Q18 (as did most equities) but never really recovered in 2019 (unlike most equities).

Is there an obvious reason? All else equal I'd have expected them to recover given the outlook for rates in mid 2019 was very different (lower) than mid 2018, and these are fixed rate securities.

Is this an FFH-specific spread or did Canadian prefs generally not recover?

[Cigarbutt]

Disclosure: FFH prefs are trading at interesting levels from a risk-reward perspective.

It seems CDN prefs have a life of their own with the fixed/resets aspect, institutional movements that tend to be correlated and more recently the ETF effect.
Raymond James produces reports that tend to describe the situational awareness:
https://www.raymondjames.ca/branches/premium/pdfs/preferredsharesreport.pdf

The ETF CPD is a relevant CDN preferred index.
For comparison:
                                     CPD            FFH.C

mid 2018                      14.25           24.50
01 2020                        12.27          18.55
min 03 2020                  9.37            12.85
now                              10.51           13.89

FFH preferreds follow the trends but also show variable credit-specific spreads. On top of market sentiment, there are two components that can go in the right or wrong directions.

[petec]

Thanks.

[petec]

https://www.canadianinsider.com/node/7?menu_tickersearch=FFH+%7C+Fairfax+Financial+Holding

Took me a while to find the pref data but thanks. I trust Brian Bradstreet's instincts.

Slightly worrying to see Barnard selling $1m of common. Perhaps he was buying a house. But the one thing that has kept me in FFH all these years is Prem's incredible ability to keep (what I judge to be) superb people in the business. There has to be a point where someone like Barnard, who has unquestionably delivered, gets p1ssed off that Prem isn't upholding his side of the bargain.

Quick follow up on this, FWIW. Andy Barnard has been selling when he exercises options for years now, but his retained holding is roughly flat and worth about USD12.5m.

https://ceo.ca/api/sedi/?insider=Barnard,%20Andrew

[Xerxes]

Unrelated Q1 13F seem to be due on Friday and Thursday for FFH and BRK.

It would be interesting to know what are top personal ownership of FFH management. How much of their wealth is tied to FFH percentage wise.

About FFH dividends, if that thing is turn off permanently it helps keep a good chunk of cash in and puts an incentive to increase value per share for the large owner-operator as oppose to live off dividends. Heck, the dividend outlay should in fact be used instead for share repurchase.