StubbleJumper

You have that half-right, IMO. What you should be asking yourself is, "If FFH screwed the minority shareholders in the Odyssey Re transaction, and again in the Fibrek transaction, and once again in the ATCO transaction, what will happen to minority shareholders of FFH if the time ever comes that the Watsa family wants to take FFH private?" SJ

They are screwing the minority of the minority because even if the deal is approved, the deep value guys know very well that the price is not high enough. Just like what they did when they screwed the deep value guys when they bought back the Odyssey Re minority. They effectively bought back ORH at book value when anyone with a brain knew it was worth far more. And now they want to buy ATCO at a PE of perhaps ~7x, when that is obviously too little. Look, if they want to initiate a Jesus-big tender offer then the weak hands can tender away all they like. FFH did that with its own shares last fall, and the weak hands happily tendered their shares at 0.8x BV. But it's shitty when the deal is structured such weak hands vote that the deep value guys should be expropriated at a price far lower than fair value. SJ

Holy Christ, Sanj. What PE multiple based on 2022 earnings do you believe they are offering? Are you brave enough to simply take earnings from Q1 and run-rate that for the year? If you are brave enough to do that, it would be $14.45/(4x$0.56)=~7 PE. This offer is typical FFH horseshit. SJ

No, as is typically the case with FFH, it is opportunistic. Fair and friendly, not so much. SJ

Yeah, it's not such a problem for consumers in the United States who are well off. On average, consumers in the US spent 10% of their disposable income on food during 2021. Okay, the CPI rate for food is 10% these days, so maybe in 2022 that'll bump the average family expenditure on food to 11% of disposable income, meaning something else has to decline a wee bit to accommodate that increase? And if you personally have an income which is double or triple the average, the percentage that you dedicate to food becomes trivial and the impact of higher prices becomes pretty irrelevant. SJ

If you want to better understand the balance sheets for the major food grains, you should take a gander at the WASDE report: https://www.usda.gov/oce/commodity/wasde/wasde0722.pdf With respect to world feed grain supply, what should jump out at you right away is the ridiculous quantities of corn that the United States dedicates unnecessarily to ethanol production. The Unites States currently converts 125 million metric tonnes of corn into motor fuel every year. Even in a good year, the Ukraine and Russia only produce about 80 million metric tonnes of coarse grain per year. So, in short, the US effectively sends more coarse grain through cars' tailpipes than is even produced by the countries in that theatre of war. A rational response from the US would be to fast-track regulatory approval to increase domestic refining capacity and to make room for that refined fuel by reducing or completely eliminating its ethanol mandate. Does a democrat president in the White House swing a big enough stick to get that sort of policy through, particularly after the mid-term elections? Would the republicans in congress take the current high grain prices as an opportunity to roll back the silly bio-fuel policy when that policy is much beloved by the fly-over states (particularly by the vowel states)? Soy is a bit less of a problem because it requires far less nitrogen than coarse grains, like corn. But, keep in mind that bean prices are up by like US$4/bu compared to the crop year 2020/21. For a typical nitrogen application of 300 lbs/acre, the higher bean price doesn't quite offset the increase in nitrogen costs, but it's close. The fear about Brazil is likely misplaced unless you see a drastic acreage shift next year in the US from corn to soy. Where the pinch might occur is in the world wheat market because Russia and Ukraine represent roughly 25% of the world exports. What they export is low quality wheat from the Black Sea into discount markets (ie, poor countries). Some of the reduced supply on the export market might be offset by lower feed wheat usage in major producing countries, as places like Canada and the United States can displace the wheat in the livestock ration by switching to more corn and then export our poor quality wheat to low-income countries, but this is unlikely to happen in crop year 2022/23. There will be much unhappiness in the low income countries that have traditionally depended on supply from the Black Sea. What is clear is that meat prices have risen and will rise more. That won't bother us all that much in North America or Europe, but in countries that already had limited animal protein in their diet, it might become very unaffordable. All of this has the potential to create unrest in the developing world. People don't always think of this but the Arab Spring was driven in large part by dry conditions in the vowel states. The next bit of unrest might be driven by conflict in the Black Sea. I am not optimistic that governments in North America will take the humanitarian approach to this and increase petroleum production, push for greater refining capacity and eliminate the ridiculous policy of wasting food grains to produce ethanol. We will probably just stand pat to keep the fly-over states happy, irrespective of what suffering it causes in distant parts of the globe. SJ

No. On January 2, 2023, you can recontribute the full 200k that you withdrew, plus the allocation for 2023 (~$6k). SJ

I wish that Prem would punt more of the questions to the other officers (like Jen Allen), then if he wants, he can chime in with his 25 cents after the other officers offer a clear and cogent response. But, I don't find that the "Prem fuddle" alone is very helpful. SJ

I like this quarter's results. The fundamentals are sound with excellent underwriting and improved interest and dividend income. I like what they've done with the fixed income portfolio, and expect that they'll keep rolling it over the next year. Was anyone else surprised that they've really, really not reached for yield? If anything they've gravitated towards sovereigns and other AAA. The revolver was renewed, which is great. You want to see that being done at a point when they don't actually need it. But, what do folks make of the holdco "cash" situation? I put quotations around the word cash for a reason. Note 5 does not give me much reassurance as cash and investments are down to $1b and it looks like they really only have about $600m of true liquidity available. Thank Christ for that revolver because they might actually need it. Okay, so how will Mr. Market respond to this? Were the superficial numbers shitty enough to trigger a slide in FFH's share price? We know that there are considerable gains that will be realised in Q3, and possibly Q4. Will the market react badly to the headline numbers and give us prices that will be favourable for repurchases and to add to our position? I like it. SJ

IMO, valuation is not the right way to think of it. I tend to handicap the risk in rough terms of a mental frequency table of how often the FFH stock price tends to decline, irrespective of whether it is fully valued. So, for a 10% price decline, I'm guessing that occurs a couple of times per year for FFH. For a 20% price decline, I'm guessing that occurs about once every 2 years. And for a 30% price decline, that might occur about once every 5 years. And then there are the infrequent black swan events like 9/11, or the KRW hurricanes, or the 2008 stock market plunge , or the 2020 pandemic panic that might push the stock price to drop by 40% or more. I haven't actually downloaded the stock price data to see whether reality corresponds to my perception of the frequency of these types of drops, but a more industrious fellow could actually do so (and I hope that Jen Allen has actually done so)! So, even at the current stock price, for the 10% decline, FFH needs to write a cheque of ~US$80m to the TRS counter-party, which isn't such a problem, but it should be fully expected a couple of times during a year. But, moving up the scale, that 30% decline starts to look like a cheque (or a series of cheques) for a quarter-billion dollars. That begins to get into the range of real money in the context of Prem's preferred holdco cash balance of ~$1b. It's not a big deal, but it should drive a bit of a thought process by the CFO about whether that preferred cash balance ought to be bumped up a bit, and it should trigger a bit of reflection about how the large revolver plays into this. Agreed that the risk predominantly skews to the upside. It's not even close. But, I do hope that Jen Allen is banging on Prem about risk management a bit more than some of the previous CFOs have done. SJ

The benefit, if there is one, would be risk management for holdco cash. Hopefully Jen Allen has thought this all through. But, those TRS do work both ways. When the stock price rises by US$100, life is grand because the counterparty mails a 9-digit cheque to FFH holdco and we all snigger about how easily that money was made. But, if the stock price should plunge by US$100, it's the FFH holdco that needs to find the cash to write that 9-digit cheque to the counterparty. When things are going well, this is not a problem at all. Holdco cash balances are strong at the moment, the stock price is on solid footing at the moment (as you note, it's valued below book right now), and capital requirements of the subs have consisted of opportunistic growth opportunities rather than bolstering due to adverse development. The issue that might arise is that some event that affects one or more of the subs which requires a capital injection from the holdco could also impact FFH's share price which could simultaneously require writing a large cheque to the counterparty. Presumably Jen Allen has done her homework on holdco cash, credit lines, expected cash outflows and has made a recommendation about whether those TRS impose a meaningful risk of liquidity challenges. SJ

Yeah, except there were plenty of us banging away on them last summer to sell RFP, BB and Stelco while the price was high. At least they managed to get a control premium from RFP by waiting a year, which worked out well, but it doesn't look too good for the other two. SJ

If FFH tenders the whole thing at $35/sh, we might do well to ask Prem what he was doing last summer when the prevailing market price was dependably higher. FFH could have trickled out their shares over 8 or 9 months and done better than $35. SJ

If you are able to buy the shares under US$20, you end up making more than $0.50/sh on the cash portion which is pretty close to an adequate return for tying up your capital for 9 months. And then you get a lottery ticket in the form of the CVR. The CVR is basically the potential of eventually getting up to US$500m/77m shares, or about US$6, pre-tax. If you end up only getting half of that (ie, US$3/sh), it's still pretty decent, and if you get nothing at all from the CVR, it's still not a terrible outcome making 50+ cents per share on the cash portion of the buy-out. My issue with the opportunity is that it will likely require a 9 month hold before getting the cash portion. So, the current cash spread has been offering like 2.5-3.0 percent for a 9-month hold, which doesn't quite do it for me. If I can still get that cash spread in October, I'd probably take the 2.5 or 3.0 percent return for what would be a 6-month hold, and then be delighted to get the "free" CVR lottery ticket that is potentially quite valuable. Or, if the shares drop to like $19.25 next week, it would also be very attractive. It's not quite a no-brainer at the moment, but if the market goes even a bit wacky on some day over the next couple of months it could quickly become a no-brainer. SJ

Agreed. The chances of this deal blowing up seem to be pretty low. At various points over the past week, it's been possible to buy the shares for less than US$20, which basically provides an adequate return for the cash portion of the deal alone, assuming that the deal closes as expected during April. Then the contingent value rights are where a guy might end up making a decent return. My guess is that we will get a chance to buy RFP shares around $20 in September or October, which would make for a shorter hold...and if we get really lucky, maybe the market will get stupid and we can buy shares at $19 or something between now and Christmas. SJ

Agreed. Q2 numbers will be superficially bad. The realised gains will not appear until Q3 or maybe even q4 for RFP. But, will Mr. Market understand this, or will the stock price slide when the Q2 EPS number is released in 4 weeks? I sniff the possibility of an opportunity... SJ

Just referring to @Viking 's spreadsheet, RFP is carried on the books at US$276m so this will be another realised gain of $350 or $400m that should appear in Q3. Lots of gains concentrated in that quarter.... SJ

Happily, at a sale price of $1.6b plus contingent value rights, it looks like ffh might actually get a return of its original capital. The return ON capital will almost certainly be inadequate over the holding period, but this is a very good exit. I was hoping that it would happen last September or October, but sometimes it takes a while to find a buyer. Now, if they could just get their capital back from the blackberry investment..... Sj

Thanks, Viking. This could very well become a table-pounding opportunity as we enter the most intense portion of the annual hurricane season! In early August, Mr. Market probably will not like the headline EPS number resulting from those M2M losses, and Mr. Market never seems to like the uncertainty during hurricane season which really gets into full swing in mid-August. If you've still got dry powder, you might get a good opportunity...and if you don't have dry powder, it might be worthwhile reflecting on what you might choose to sell if FFH shares take a serious dive. SJ

In the short-term, EPS will appear to be low as a result of mark-to-market losses on bonds and the little dip that equities have experienced. That mark-to-market loss on bonds is fascinating because even though the rate increases this year have fundamentally strengthened FFH's operating earnings capacity, it is depressing the EPS number. Even that $7.6 billion of reinvestment that you referred to needs to be marked down for Q2 because rates have continued to rise! So the good news (rising rates in Q1) will be masked by the better news (more rising rates in Q2). The tumble in equity markets is a bit of a similar thing. Long-time FFH shareholders have been looking forward to a re-pricing of equities because this is the sort of market in which FFH's investment team thrives. In short, it's good news for the long term. But, as you know well, that Q2 EPS number is going to be absolutely thrashed by mark-to-market losses on equities -- likely hundreds of millions of mark-to-market losses. My guess is that Mr. Market will not view FFH favourably over the next little while because of those headline EPS numbers. Meanwhile, irrespective of what happens to FFH's share price over the next 6 months, the reality is that the company is operating in more favourable conditions than it did during 2021. Will FFH get another chance to repurchase shares at US$400 during 2022? I'd say that's a fairly strong possibility as we head into the third quarter when hurricane angst kicks in every year. I hope they are ready. SJ

Thanks. That was what I feared. Given the buy-back opportunity that might be presented by the market, it would have been preferable to have a large slug of cash going directly to the holdco. I guess they could use all of C&F's already approved dividend capacity, but the AR suggested that it was only about $185m, which doesn't get you too far. FFH is in an interesting position. As we've discussed in this forum, increased interest rates gives the company the ability to drastically improve its operating income over the next 1-5 years, which is excellent news. But, just like with the Q1 numbers, in the short-term we should expect all of that fundamental improvement to be offset by capital losses on bonds and from some of the equity positions. Those capital losses don't much matter because the bonds involved are likely to be held to maturity, and FFH has always held the long view on its equity positions. But, how will the market respond? The headline EPS number probably will not be very good when it is released in August. If you take the market's response to those superficially disappointing headline EPS numbers and layer on the annual angst about potential Q3 and Q4 cat losses, there may be a good opportunity to pick up some shares at a favourable price during the peak hurricane season in September... I just hope that FFH is ready for that type of opportunity. SJ

@glider3834 Thanks for flagging that transaction. I hadn't browsed Bloomberg's site yet today, so that was new for me. The pet health business was always one that I found a bit strange. People are prepared to spend ridiculous sums of money to prolong Fluffy's life by a year or two, and pet owners who hold that attitude and are self-aware quite rightly pay large insurance premiums to help them manage the inevitable emotional decisions that they will face. I am not a pet owner, so I have always thought that the whole pet industry is a bit irrational, but I've always been a bit intrigued about being able to profit from other people's irrational decisions! In that context, I am a bit disappointed that FFH is exiting that part of the industry and only hope that Prem was able to negotiate an adequate price. Turning to more practical matters, does anyone understand how this line of business was structured in FFH? Some of it appears to be held within C&F and some within Pethealth. So, of the US$1.15 billion of cash proceeds, which portion might end up at C&F and which portion would be either in the other subs or at the holdco level. That preoccupation might be a little "inside baseball" in nature, but I confess that last week's decline in FFH's stock price has prompted me to thinking about whether more buybacks are on the horizon. The large SIB buyback was conducted at US$500/sh, and on Friday we were back down to ~US$485 per share and dropping like a stone. The notion of having, say $750m injected into the holdco at this point definitely opens up some possibilities. Unfortunately, the total return swaps are now working against FFH. They are great on the way up, but less good on the way down. Since the end of Q1, the stock price is down ~US$60/sh, so FFH holdco will need to find ~$120m of cash for the counterparty. Nonetheless, it would be really nice if there's another opportunity to buy, say, 1 million shares at US$400..... SJ

Might have been better to ask who on this board isn't buying BRK at last week's prices. SJ

Most insurance policies do not provide indemnities for damages triggered by war. But, I do wonder what impact this might have on Net Written during 2022 and 2023. If you are a Ukranian property owner, do you bother taking out an insurance policy? ISTM that the biggest risk is rockets raining down from the sky, so normal floods, fires and wind seem pretty minimal in the context of the current situation. SJ

Lately there's not much to say. We can only hope that FFH has held the line on duration. During the first quarter, it must have been tempting as hell to deploy some of the cash/t-bills into 2-yr or 5-yr terms just to get a bit of yield. Well, let's hope that they rolled the 6-month into new 6-month securities because the world has changed significantly. I believe that I was the guy who suggested in January that the 2-yr might be the sweet spot and rolling a portion of the port into 2-yr might be a good idea. Well, just ignore me... SJ