StubbleJumper

Whether Digit gets booked in Q4 or Q1, it will be a large paper gain which will juice the EPS number. @Daphne has also suggested that FFH might book a gain of ~US$450m on the Odyssey transaction, and that one did definitely close in Q4. So, whether it all comes in Q4 or whether it appears in the next couple of consecutive quarters, there will be considerable paper gains appearing in the EPS numbers in the near future. It'll make the EPS, ROE and BV numbers look considerably better, but once again it will be important to look at the quarterly earnings with a discerning eye as quality of earnings will be a bit questionable. The creation of value from both of those transactions occurred a few years ago, not in Q4. That creation of value is definitely of credit to management over the past 5 years or so, but it doesn't really reflect on what they actually did in 2021. SJ

Entirely possible. That's the market. At this point, I would suggest that people pay attention to Prem. He told us that the share price was bat-shit crazy 18 months ago and then put US$150m of his own money on the table. Then last fall, he told us that the share price was bat-shit crazy and bought a pile of total return swaps. Then this fall he told us that the share price was bat-shit crazy and he borrowed a bunch of money sold a piece of Odyssey to finance a tender for a shit-tonne of shares. Is anyone still doubting whether he's serious? SJ

If he writes that chapter, he should note that it's not the first time that FFH issued at a high price and repurchased at a ridiculous price. SJ

The Globe and Mail published an article this morning about FFH's tender: https://www.theglobeandmail.com/business/article-fairfax-buys-back-1-billion-of-shares-after-cppib-omers-investment/ SJ

I have the opposite problem. I specifically bought a bit more than 500 shares for the purpose of tendering them. It looks like I'll make a gain of about 10% on the shares that I tendered, but through proration, I'll end up holding 10% of those shares to the new year. So, in rough terms, I will be getting all of my original investment back in cash over the next week or 10 days, and then I'll have 50-ish shares for free. So I will need to decide whether I keep them or dump them. I'll probably dump them after the Q1 results are released, and hopefully will get US$500 including the divvy which will likely be announced in the next few days.... I only wish that I had gone to a greater effort to rearrange my tax-advantaged accounts! SJ

1) A gain on the sale is a paper phenomenon and leaves shareholders neither better off nor worse off if the sale is made at a "fair" price. It will look good on the quarterly EPS numbers and the annual ROE, but it is not an economic gain. 2) The annual dividend savings is a real, cash phenomenon and should definitely be considered. SJ

I don't think that anyone has found a filing that confirms the rate. However, there has been plenty of chatter about past deals with OMERS where the return has been 9%. Based on those past deals, people have been speculating that FFH will once again be paying a dividend in the neighbourhood of 8-10%. At some point there will be enough filings available that we will be able to discover the true cost of this financing, but suffice to say that OMERS doesn't provide its capital for free! SJ

Well, IMO, they didn't actually sell equity in Odyssey. They seem to have borrowed some money created some sort of preferred shares that are more akin to debt than equity. My guess is that they'll end up paying a coupon dividend of 9% or 10% on this funny security they've created, so it's really something that I'd like to see them re-pay buy-back reasonably soon. If you think your shares are truly worth 1.2x BV and you run a tender at 0.8x BV, you've created considerable value for continuing shareholders even if you are financing it at 10%, as long as you don't pay that 10% for too many years. SJ

So, we will be pro-rated by 10 percent-ish, but the price looks to be US$500? Okay, that works for me! I'll have a few extra FFH shares laying around for the next couple of months, and then I'll trim my position back to what it was in November. SJ

For certainty, you would have to check the tax treaty. But, my recollection of the treaty is that retirement accounts are exempt from the withholding tax. So, in Canada, we have several different types of tax-advantaged accounts (some are specifically for retirement, and some are for education savings or general savings purposes), and when we invest in US securities, not all of them are exempt from the withholding tax, but I have never had an IRA of any flavour. When FFH pays out its annual dividend, do you get the full US$10 in your IRA/Roth, or is a portion typically withheld? SJ

The problem of not using a tax-advantaged account might be the Canadian withholding tax. The Canada Revenue Agency will withhold 15% of the resulting deemed dividend for shareholders resident in countries that have a tax treaty with Canada, and higher for countries without a tax treaty. So, even before your national revenue agency takes its slice of the pie, the Canadians will withhold at least US$37/sh (based on a hypothetical US$500 tender price and paid-up capital of US$252/sh). SJ

FFH is an undervalued security. We don't fully know what Q4 book will be, but odds are that it will be US$600+. So, if you bought FFH at, say US$460, with the intention to tender, would you blindly accept a purchase price tender and risk the tiny chance that the tender could go through at US$425? Or would you tender at US$480 or US$490 or something? If you are "wrong" and the final price is below what you've tender it at, you end up holding FFH through the new year. But, on January 20-ish it'll trade X-D and you'll get US$10 in divvies, and then Q4 results will be released around Valentine's Day. Chances are there'll be a pop around that earnings release, or alternatively, there could be a pop at Easter when the annual meeting will be held. There's no real reason to tender cheaply with a stock that is already ridiculously priced. As Monish Pabrai might say, Dhando. Heads I win, tails I don't lose. SJ

With a T+2 settlement, anyone who isn't already maxed out had better get their ass in gear! SJ

That might have some truth to it, particularly if the interview had been conducted by Toronto Star, in which FFH had a large ownership position in the past. But, this particular article was one of a series that the National Post published over the past week that has chronicled the importance of capitalism and the unparalleled success of capitalist countries. It seems to be a series designed to counteract the silliness coming from the woke crowd about dismantling capitalism in favour of some formed of a planned economy. We all know how well planned economies have worked in the past, but the millenial crowd have no recollection of the Iron Curtain, so my sense is that the Post is trying in vain to remedy that. An interview with Prem is an excellent component of that capitalism series because it ticks several boxes to bust some of the woke myths -- class mobility, economic success of new Canadians, economic success of visible minorities, and philanthropic attitudes of economically successful people. We need more articles and interviews like this to counteract all of the silliness from the woke crowd about how everyone who is not a rich white male is a victim, and that our salvation is collectivism. SJ

For forum participants who do not regularly read Canadian newspapers, the following is an interview with Prem from one of Canada's largest dailies: https://financialpost.com/executive/capitalist-manifesto-how-capitalism-and-canada-made-prem-watsa SJ

Today it was selling at like 0.6x Sept 30 BV. Let's hope they are scheming to buy some shares back at that price! SJ

No need to correct you. That's the exact tax situation. If the tender price ends up being US$500 and you are able to actually dump the shares on the open market at that price, you'd have a capital gain of about US$100. But if you successfully tender at that price, you'd have a deemed dividend of US$248. If you already have a considerable taxable income (your username is ICU MD, so I presume that you make a decent buck), the tax consequences of tendering from a taxable account are daunting. SJ

It won't be super fast. The SIB closes on December 23. The bean counters will do some work on the morning of Dec 24, but you should not expect full productivity on Christmas Eve. In Canada, Christmas Day and Boxing Day (Dec 26) are both statutory holidays (but they fall on Saturday and Sunday this year so December 27 and 28 are statutory days off this year), as is January 1 (but January 1 is a Saturday, so Monday January 3rd is the statutory holiday this year). So, really, a good outcome would be if we got our money on Dec 30 or Dec 31. Given the number of business days available, January 4 or 5 would be an okay outcome at that time of year. SJ

I don't think it will make a difference because I am guessing this one will be undersubscribed. But, yes, instead of a purchase price tender, I will probably choose some dollar value, perhaps US$460 or US$470 as a tender price just in case some freakish event occurs that it is actually oversubscribed. If the moons and stars align in a way that the tender is lower than that price range, I'll swallow hard and simply carry an over-allotment of FFH into 2022. I like a concentrated portfolio with high-conviction positions, but there's a limit to my comfort with everything. But, if push comes to shove, I'll carry more FFH than I'd like into Q1, collect the dividend and then hope for a favourable exit point after Q4 is released near Valentine's or, even hold until Easter when the annual meeting will be held. Both the Q4 and the annual meeting have resulted in short-term pops in the past. SJ

Yes, I always try to hold FFH in US-dollar accounts. That way, when the annual dividend is paid, it doesn't automatically get converted to Canadian dollars at an unfavourable exchange rate. In the case of the tender, I'll be happy to take US dollars for the shares and then figure out what to do with those US dollars over the course of the next month (maybe I'll buy more shares from the US market, or maybe I'll convert them back to Canadian dollars, but it will be a conscious decision rather than an automatic conversion at an unfavourable exchange rate). If, by some freak of nature, the substantial issuer bid is over-subscribed and my tender is pro-rated, then at least the excess FFH shares not accepted for tender will be in a US-dollar account and I'll probably hold them for a month or two. They'll probably trade X-D at the end of January, so that'll be US$10, and then FFH will likely release its Q4 results around Valentine's Day, which sometimes results in a bit of a pop. My take is that somebody buying today at US$450 with the intention of tendering would not have any trouble at all to profitably collect the divvy and then dump the excess shares in mid-February if pro-ration actually occurs. SJ

No. You should read the Issuer Bid Circular which was posted on SEDAR.com FFH has dedicated a few pages to describe the income tax issues for both Canada and the US. For your convenience, I have attached the filing. SJ fairfax.pdf

The normal withholding tax by the Canada Revenue Agency is 30%. Under the Canada-US tax treaty, the withholding tax is 15%. In the issuer bid circular, FFH has disclosed that its Paid-up Capital will be about US$252/sh. If the shares tender at US$500, there will be a deemed dividend of US$248/sh. The CRA will withhold 15% of that, or ~US$37/sh as a withholding tax for any US citizen that does not have an account that is tax advantaged under the tax treaty, and then the US holder needs to figure out what the IRS wants from him. If you bought today at US$450 and it works out that the tender price is US$500, there will be a slim profit for a US holder in a cash or margin account after paying the Canadian withholding tax...but, as @TwoCitiesCapital noted, a tender at US$500 would be a quick ~10% if you can figure out a way to elude the tax man. SJ

Because if you don't use a tax advantaged account, the Canada Revenue Agency will give it to you up the ass due to the deemed dividend. But, yes, I've rearranged some space in my tax advantaged accounts and I'll be tendering 500 shares or so. SJ

The premium:statutory capital ratio has definitely gone up and down over time as the insurance cycle has waxed and waned. The best way to see that is to look at the individual subs because what happens with Odyssey in the reinsurance industry is not always perfectly aligned with what happens with Crum as a primary underwriter, or with Zenith in workers comp. To my knowledge, the data are not readily downloadable, but would need to be manually cobbled together by reviewing annual reports. But, suffice it to say that the premiums:surplus ratio does move significantly over time, and, when you examine the annual CRs, the expense ratio balloons during a soft market and the subs refuse to underwrite unprofitable business. All of this is evident from casual observation of the financial statements over time, but unfortunately I don't know of anyone who has rigourously constructed and maintained an underwriting database for the individual subs. When I was quarantined for 14 days for international travel last spring, maybe I should have done it! SJ

The per share approach might clean up a bit of messiness in the data, which is that over 20 years a considerable chunk of the growth in Net Written was from acquisitions, some was from inflation, and then the thing that we are really interested in is that some was a true organic growth in the volume/value of premiums from existing subs. We can say that management is doing a great job if that organic growth after inflation is considerable, but we shouldn't give them a gold star for simply matching inflation. And, whether to give them a gold star for acquisitions is ambiguous because it kinda depends on the amount paid for the sub, and the quality of its underwriting and investing. Since many of the acquisitions were funded through expanding the share-count, a per-share approach cleans up that problem a bit. SJ