FFH has reported prelim q1 results

[RichardGibbons]

It's also depends on how one views the lumber market over the next few years. If lumber remains around this level for a year, Resolute is trading for under 1x earnings.

[Xerxes]

Prem should absolutely use that argument (that is cheap @ 1x earning) when he flips a portion of his shares to the next value investor.

Fairly certain this was meant to be a short-term trade gone long-term trade. Unlike the fellow named Sokol, or John Chen or the Steel gentleman and other captains of industry, we never heard much of the different management that have been managing Resolute in the past decade.

From the 2018 letter: "We have invested $791 million in Resolute and received a special dividend of $46 million, for a net investment cost of $745 million. Our initial investment was a convertible bond purchased in 2008 for $347 million.We invested an additional $131 million prior to Resolute entering into creditor protection and most of the remainder during the period from December 2010 to 2013. Subsequent to write-downs and our share of profits and losses overtime, at December 31, 2018 we held our 30.4 million Resolute shares in our books at $300 million ($9.87 per share). The current fair market value of these shares is $244 million ($8.03 per share). You can see that Resolute has been a very poor investment to date!"

Now that being said:    The bull case on this from Fairfax perspective and for NOT selling, is if Resolute can spit out more special cash dividends (pete mentioned that earlier) such that it covers the initial cost and take a king' ransom. As major holder of the name, i hope FFH is pushing for that, and that the surplus earning from these high lumber prices, are being considered to be dividended back to Toronto. No point in re-investing that back into the lumber business (i.e. textile-oriented Berkshire for the good'old 60-70s).

Lastly, selling a sliver of the holding, will (might) probably force FFH to account it as equity investment down from fully consolidated. Not that it matters, but I believe (may be wrong on the accounting) that once it is converted into equity-accounting, the one-line item on B/S that represent net asset will have a fair value in line with the market value at which they sold the sliver. That means an upward adjustment from the current book value that was written down couple of times. Yet i also remember that companies cannot undo their previous impairments. So, not sure what happens in the case of moving from consolidated accounting to equity accounting on the B/S. 

 

Edited April 18, 2021 by Xerxes

[StubbleJumper]

10 hours ago, RichardGibbons said:

It's also depends on how one views the lumber market over the next few years. If lumber remains around this level for a year, Resolute is trading for under 1x earnings.

The history of commodity cycles would suggest that this will be a short-term situation.  Over the next few months, FFH might have the opportunity to find a sucker to buyout RFP at the top of the cycle.  For FFH, this would be manna from heaven, as it could provide the opportunity to exit what has been an absolute dog of an investment.  Unfortunately, they were unable to exit one of their other dogs (BB) a few months ago.

9 hours ago, Xerxes said:

Lastly, selling a sliver of the holding, will (might) probably force FFH to account it as equity investment down from fully consolidated. 

 

Marking RFP to market would at least generate some temporary paper gains and push the accounting BV higher at least temporarily.  But, my take is that the lumber and paper industry sucks and has terrible long-term economics.  Today's sky-high prices will likely trigger a supply response which will result in a reversion to more historical norms.  If the opportunity presents itself, I'd prefer to see this one fully converted to cash, and for FFH to dedicate the proceeds to some other investment with better long-term prospects.

 

SJ

[Daphne]

Relying entirely on history this time round might be short sighted.  In addition to housing demand driving price growth at RFP is beetle infestation and urban spread.  As a result trees for lumber are in growing  and somewhat alarming short supply. 

[Xerxes]

Daphne,

FFH is a financial investor not a strategic investor when it comes to these type of assets. Sure, they are strategic investor in other type of assets either in specific region like India or specific sector. 

On the other hand, Jim Pattison, the other Warren Buffet of Canada, is into lumber business and in fact was busy building up position in the sector during a depressed market and was working to privatize Canfor in the 2019 year.

Jim Pattison boosts stake in West Fraser Timber prompting shareholder rights plan - The Globe and Mail 

Was Prem Watsa busy building up position in the lumber sector during a depressed market ? Did Prem Watsa averaged down on this asset he had owned for more than a decade (i.e. one that he knows well) in March-April 2020, when RFP's entire market value was lower than its RFP's annual dividend payment in Q1 2020 ? no .. it didn't. To me that means he is not looking at it strategically, it is just a very-long short-term financial trade.

Best to close the chapter in a hurrah. The RFP results are coming in about a week time. I think i'll tune in. If FFH doesn't lock in some gains sometimes in Q2/Q3 into the bull market, when then price action is above their own estimate of intrinsic value (after the write-downs), than when would they do that. At the next cycle ? ... or is there such a time as lumber-super cycle.

Admittingly i am clueless on lumber and anything about it. Just an opinion.

[Xerxes]

On 4/17/2021 at 12:48 PM, Viking said:

RFP closed Friday at US$14.79. March 31 its share price closed at $10.95. Fairfax owns about 30.5 million shares so its position is up close to $90 million in the last 17 days. Even though Fairfax equity positions were up significantly in Q4 and Q1 it appears Q2 is off to a nice start.

Total position in RFP is now worth about $450 million. Its carrying value is $166 million; it is an associate/consolidated holding so gains in stock price are not mark to market.

It is interesting, i was just looking at the 2020 letter and on page 10 i noticed the following:

#Shares of RFP held was at 24.8 million (31%) of the company. Based on this and note from 2018, it looks like Fairfax did indeed sold about 6 million shares of RFP in 2020. Unless there is something i am not thinking about.

And it is already accounted as equity investment (not consolidated)

From 2018 letter: 

"Resolute. We have invested $791 million in Resolute and received a special dividend of $46 million, for a net investment cost of $745 million. Our initial investment was a convertible bond purchased in 2008 for $347 million. We invested an additional $131 million prior to Resolute entering into creditor protection and most of the remainder during the period from December 2010 to 2013. Subsequent to write-downs and our share of profits and losses over time, at December 31, 2018 we held our 30.4 million Resolute shares in our books at $300 million ($9.87 per share). The current fair market value of these shares is $244 million ($8.03 per share). You can see that Resolute has been a very poor investment to date!"

[Xerxes]

Longleaf Commentaries | Insights and Reports | Southeastern Asset Management 

"Fairfax Financial (FFH) (31%, 1.44%), the insurance and investment conglomerate, was a top contributor in the quarter. The COVID pandemic has had a dramatic impact on the insurance industry. Pricing trends had already turned positive in 2019, yet the losses and uncertainty from a global pandemic pushed the positive pricing trend, a “hard market” in insurance industry speak, to another level. As a result, sentiment toward Fairfax continued to improve as fourth quarter results demonstrated profitable underwriting with a 95.5% combined ratio, and premiums written increased 16% with significant contributions from increased pricing, as the insurance market continues to harden. Fairfax also invests a significant portion of its investments in equity securities with a value orientation. As the overall stock market and value stocks appreciated strongly over the last five to six months, Fairfax’s equity portfolio was a beneficiary. The company increased its book value per share 8% in 4Q, and we expect to see continued growth next quarter. With interest rates beginning to increase, Fairfax is also primed to reinvest in higher yielding debt. The company currently holds a significant portion of its fixed income portfolio in short-term instruments, putting the company in an opportunistic position to capitalize on higher rates. The stock still trades low on book value and normalized earnings multiples. CEO Prem Watsa repurchased over 5% of Fairfax shares through swaps to preserve capital for additional underwriting and also ended the costly market hedges that had stunted Fairfax’s value growth over the last 7 several years. The attractive price environment looks likely to continue, making this one of the best times in years for allocating capital into underwriting."

Edited April 19, 2021 by Xerxes

[Viking]

Xerxes, I am not sure if the lower reported share count for RFP is due to an outright sale or if they were perhaps part of the Riverstone sale. We should know more in a few weeks when they report Q1 results and when the new 13F comes out.
 

This is from page 11 of Prem’s letter in AR: 

“We began equity accounting RiverStone Barbados in 2020, so its investment portfolio is no longer consolidated. Within its investment portfolio are positions of many of the common stocks listed in the common stock holdings table above. For example, RiverStone Barbados owns 9.7 million shares of Fairfax India that are not included in the 41.9 million shares of Fairfax India we show in the common stock holdings table (combining both would give us 51.6 million shares or 34.5% ownership). The same can be said for a number of other holdings such as Atlas, BlackBerry, Commercial International Bank and Recipe. As part of the sale of RiverStone Barbados to CVC, we have the opportunity to purchase these securities over the next two years, at December 31, 2019 prices.”

Edited April 19, 2021 by Viking

[Xerxes]

Thanks ! so he has a call-option like agreement with the strike price being set at the Dec 31, 2019 price. ... and he can chose to forfeit that if the price doesn't interest him.

 

[StubbleJumper]

36 minutes ago, Xerxes said:

Thanks ! so he has a call-option like agreement with the strike price being set at the Dec 31, 2019 price. ... and he can chose to forfeit that if the price doesn't interest him.

 

Wait a minute.  Do we know for certain that purchase of securities is structured as an option?  In the quote that Viking provided, Prem used the word "opportunity" which almost (but not quite) implies that it's an option.  But, in the AR, it is also written, "Pursuant to the agreement with CVC, prior to closing the company entered into an arrangement with RiverStone Barbados to purchase (unless sold earlier) certain investments owned by RiverStone Barbados at a fixed price of approximately $1.2 billion prior to the end of 2022."  This latter sentence is more suggestive of a contractual arrangement that is not optional, but rather obligatory.  So, when Prem used the word "opportunity" did he mean that it was an opportunity that FFH had already exercised by entering into a contract, or did he mean that it was a discretionary opportunity (option) over which FFH could make an independent decision in the future?

In the end, my take is that FFH will be buying the securities in either case, but I think Prem may have used some imprecise English and as a result you might have taken a somewhat too favourable interpretation of this arrangement.  Does anyone else have any insight about whether this arrangement is truly an option?

 

SJ

Edited April 19, 2021 by StubbleJumper

[Cigarbutt]

1 hour ago, StubbleJumper said:

Wait a minute...

SJ

Additional perspective. The perception is that FFH divested RiverStone UK/Barbados and an argument could be made that the goal of the transaction was to monetize the asset for liquidity at head office. Paying back the revolver with the funds and the structure of buybacks through a total-return swap support that perception. The above does not negate the possibility to obtain a fair or even attractive valuation but it appears that CVC had negotiating leverage for the assets/liabilities transfer.

It's not clear if this went through a typical (UK) part VII transfer but such a transaction requires a regulatory third party to approve from the point of view of the runoff policyholders (assets and liabilities). The contingent value instrument seems to be a typical example of a component protecting CVC from further and unexpected negative reserves development. Let's say you buy a runoff entity (or even any insurer) and you don't like the portfolio (the asset side). For example, you think that exposure to long term bonds is too high. How do you negotiate the transaction? The easiest way is to ask the the seller to swap the assets for cash. An alternative would be to buy a derivative product to protect against interest risk post acquisition. The other option would be to have an 'option' inserted into the contract requiring the seller to buyback the securities at a agreed price if the buyer decides that it's necessary. i think FFH like the assets (and selling such large positions would be difficult over a short period) and would be happy to own them when cash levels become sufficient but it appears that CVC sits on the right side of the option (especially regarding timing). 

[petec]

I don’t think it’s an option. IIRC Prem said the shares in question were below Dec 2019 levels when the deal was done, so what it does is this:

1) it allows CVC some upside, but capped, and sets a floor, removing their risk. 
 

2) It allows Fairfax to keep both the upside and downside of the equities they picked. 
 

Assuming the stocks go up, CVC paid a slightly lower multiple of book than they announced, and Fairfax gets to keep most of the upside of the portfolio they spent ages building. 
 

Edited April 19, 2021 by petec

[OracleofCarolina]

Any one have the slides from the AGM?

 

[bluedevil]

Q1 results are out.

The total TRS position on Fairfax's own shares has grown to nearly 2 million shares:

 

Net gains on long equity exposures of $1,028.5 million was primarily comprised of unrealized appreciation of common stocks and long equity total return swaps, including unrealized gains with respect to swaps on 1,620,936 Fairfax subordinate voting shares with an original notional amount of $577.6 million (Cdn$740.3 million) or approximately $356.36 (Cdn$456.71) per share. Currently the company holds long equity total return swaps on 1,964,155 Fairfax subordinate voting shares with an original notional amount of $732.5 million (Cdn$935.0 million) or approximately $372.96 (Cdn$476.03) per share.

[bluedevil]

Link to results:

Fairfax Financial Holdings Limited: Financial Results for the First Quarter Toronto Stock Exchange:FFH (globenewswire.com)

[matthew2129]

So they increased the TRS by ~350K share and directly repurchased another ~150K shares, for a total of roughly ~500k shares during Q1. Plus another $2B of investment gains during Q1 ($1.1B of which isn't reflect in book value). Wow.