SafetyinNumbers

Under Canadian rules there is no need to file unless they are over 10% of shares outstanding and the TRS is smaller than that.

Great way to frame the opportunity, Viking. From your numbers, reported book value is going up 30% in the next 13 months. It’s going to be hard for quants to ignore that kind of move. Plus, if the stock doesn’t keep up, it’s probably fair to assume buybacks will pick up which just makes it cheaper.

I'm not entirely certain but I'm sure its for regulatory or tax reasons they have to trade the shares once a year. My understanding is that it's usually a bank subsidiary that holds the swap with the corporate and the broker. Presumably when Fairfax entered into the long swap with the bank, the bank then entered into long swap with the broker who had to go buy the shares underlying. The broker might have found other counterparties but most likely they just bought the shares. Interest rates were so low when they put it on, the cost was probably covered by the dividend. Now it's probably costing a few points a year to keep it on. I think Fairfax could probably close out the swap and buy all of the shares when they are ready to by putting up the initial basis of the trade. I don't see any reason to do it while they are growing so fast and the stock is so cheap. I haven't been in a broker for over 10 years and this wasn't my area so my understanding could be wrong or the process might have changed. The transactions make sense though through that lens.

I used to work for a broker at a big bank (2002-2012) most of it on a street facing prop desk. They probably have to cross the shares under the TRS annually. We used to see those trades go up all of the time and we would call a desk (including our own) to see if there was liquidity only to find out it was "swap related". That meant it was two legal entities trading the shares between them. Usually two different subsidiaries of the bank. The volume does catch attention though and there is a lot of money trading on momentum and technical analysis. It can't hurt the narrative to have high volume at all time highs trading at 6x EPS when the reported book value is likely to go up 25%+ in 13 months.

A rights issue, while fair, is probably a mistake given the NAV discount has been so big for so long. Plus it favours FFH as they get their performance fee shares at year end at market price thus making that fee even more expensive. From what I have read, Fairfax is looking for a 10% stake which if my quick math is correct works out to about $700m. Maybe they can split it between FFH and FIH, with FIH adding some leverage to get it done without tapping equity markets. I would be ok with FFH buying FIH stock at book value to fund the purchase but that doesn’t seem like Prem’s style. It would be great for minority holders.

Based on SEDI filings (below), FIH.U bought back 412,227 shares back in Q4. My understanding is that they can keep raising their stake in Fairfax India. I doubt OMERS is a seller so the public float can keep shrinking.

plus FFH strategically used its paper when it was trading well above book to do insurance acquisitions which supercharged its float while no one cared about float.

It’s a really great piece and so is your writing Viking. I would love if he had included some float analysis. FFH float to market cap ratio is so much higher than the public peers and it seems like investors stopped paying attention to float after such a long period of almost zero interest rates.

Perhaps it will be the category (2) investors that will sell to the category (3) earnings momentum investors who get book value growth of 15%/yr on average over a few years and multiple expansion from 1x to 1.3x. They can then sell to category (4) quality stocks investors who will be convinced by the 5 year track that it's finally safe to buy. Category (4) currently own all of the other P&C names that trade over 1.5x book.

Increasing dividends or a stock split would increase the share price almost certainly despite not having any impact on intrinsic value as both moves increase the pool of potential buyers. I doubt either will happen.

Does anyone know if they invest the dividends?

Assuming your savings rate is pretty high presumably your concentration will go down naturally. That would also defer tax if it's in a taxable account. I live off my portfolio so I probably wouldn't let that happen in the first place but in your situation it's a really interesting decision.

Thanks for sharing. Anyone know how many other approvals are needed and what the timeline should be?

IIFL sale closed. Hopefully we see a good sized SIB soon.

RBC is at $95.75 for 2023 and $100 for 2024 but consensus is only $88 and $86 so some decent upside in consensus to come which might help with more quant buying.

Ironically, people not wanting to own FIH because of the performance fee makes the performance fee more expensive given it's paid in shares. The performance fee is part of the deal and ideally we want to pay as much as possible because it means book value is growing quickly! The bigger part of the return for us buying at these levels is probably going to be the closing of the discount. The only strategy, FIH has to close the discount is to buyback stock which they are doing. Perhaps more aggressively once the IIFL deal closes. There is currently $34m accrued for the performance fee due on Dec 31, 2023 so I guess that means it's above the high water mark. Most holdcos with big discounts don't have such strong performance and thus justify their discounts. The FIH discount should be a lot smaller based on performance alone. Perhaps if the BIAL mark goes up a lot, it will help bring on new investors to help close the discount to something more reasonable if one is necessary at all. Ideally, we trade at a premium to book at some point to give the team a low cost of capital to take advantage of what seem like a multitude of opportunities in India.

I received two notes from brokers this week pushing FFH based on technical analysis as it’s hitting new 52 week-highs. One also pointed out that Dec and Jan are seasonally strong months vs the index for FFH. My guess is the technical confirmation and seasonality allowed some PMs to finally buy FFH again especially after the quarter they just put out that demonstrated the earnings power that you have so eloquently shared with us on this board. The next resistance area are the all time highs which were tested in 2016 and 2018. I think most technicians would say it will probably pause there for a bit but it could really run if/when it breaks out to all time highs.

I’m surprised you don’t think the stock is dirt cheap. I get that the float isn’t as valuable in a low rate environment but surely it’s value has grown exponentially in the past year but none of that value is reflected in the share price. That being said, the right thing to do is grow premiums while insurance markets are hard and buy back stock with excess capital as they are doing. Frankly, the growth is another reason why the stock is so cheap. To be at such a big discount to book, with 260% float to market cap, 4% interest rates, an incredibly hard reinsurance market where most of the peers have had their balance sheets hammered by higher interest rates and still trade at a discount to book seems dirt cheap.

Arguably, Fairfax common is the best risk/reward around. They would have to pay at least 1.25x book to buy such a high quality insurance business and arguably a lot more for one that comes with as high a float to book value that Fairfax has at a time when the value of the float is going up as fast as interest rates. There certainly isn’t a business they know better. Fairfax India might be up there too at less than half of book value (marked to market) but it will probably do its own buyback and increase Fairfax’s stake passively.

This article has more details. https://www.pehalnews.in/fairfax-to-sell-stake-in-bengaluru-airport-for-1-5bn/2562538/

I heard back from the MX. They say FFH is not liquid enough for listed options.

I did but I also noted that you put they were allowed to buy 3.5m shares in brackets but didn’t make it clear they actually bought them which to me implied they didn’t for a casual reader. I happen to think they should be motivated to close the discount as much as possible by the end of the next performance period which ends next December. Personally, I wish they would offer us FFH stock and just take it private. It would be especially accretive if FFH is trading at a premium to book by the end of next year which I think is possible considering the earnings profile at FFH and the high likelihood of its own buybacks in the next 14 months.

I didn’t see any news either. Maybe the IIFL Wealth sale is expected to close soon. It was supposed to close by the end of Q3. That would give them cash to pursue an SIB if they choose.

There is also a weekly block exemption which allows them to buy more than the daily limit but they need to find a block seller. Earlier this year that was Fidelity who I think are probably out of the name now. Last year they asked permission to buy 3.5m shares and they did buy back all 3.5m so I don’t understand Stubble’s comment about it bearing “no resemblance to reality”. From the NCIB PR: “Pursuant to its existing Normal Course Issuer Bid, Fairfax India sought and received approval from the TSX to purchase up to 3,500,000 Subordinate Voting Shares, and has purchased to date 3,500,000 Subordinate Voting Shares, which included Subordinate Voting Shares reserved for share-based payment awards, during the last twelve months through open market purchases on the TSX and other alternative Canadian trading systems at a volume weighted average price per share of US$12.40.”

It also seems like some free optionality on more share buybacks and potentially a going private by FFH.