StubbleJumper

I have finally seen an estimate of the insurance indemnities from the flooding event in British Columbia. Surprisingly, it's only CAD$450m. Fairfax's share of that would amount to chump-change. https://www.cbc.ca/news/canada/british-columbia/bc-flood-damage-1.6280393?cmp=rss SJ

You hold FFH in accounts at four different brokers? How the hell much money do you have?!!? SJ

Fully agree. Unless we want to see a 1,000 page Annual Report, there needs to be thoughtful decisions made about what is disclosed and what is omitted. We really do not want a 1,000 page AR because it would prevent us from seeing the forest for the trees. Materiality is a primary driver of that decision about what merits ink and what doesn't. But, as you noted, if Ki aspires to write $800m of premium in 2022, it might soon become pretty material. SJ

Conjecture is what occurs when disclosure does not provide full clarity. In an effort to assess a fair value for the shares, the ongoing exercise of a shareholder is to take the data provided from disclosure and augment that with conjecture about what has not been disclosed and about what might happen in the future. It is noteworthy that you have expressed disagreement with other people's conjecture, but then offered only your own alternative conjecture as a replacement (unless what you wrote about ownership and voting ratios is fact based, but not open-source, which would be its own problem). I must say that I prefer your version of conjecture rather than @bluedevil's because yours implies a higher intrinsic value, but it remains a point of uncertainty for us until FFH makes the situation explicitly clear. I give FFH a pass on the level of disclosure for Ki because it has been not material, so far. But, following your observation of Ki aspiring to write $800m of premium in 2022, it begs the question of when its economic contribution becomes material and merits more verbose disclosure. Just spit-balling a bit, an outfit that writes $800m of premium might kick out $40m UW profit and perhaps another $10-20m of investment income? Maybe that begins to be material in 2022 and we should soon see a bit more ink next year? SJ

It's funny that Tidefall noted that. When the SIB closes in a couple of weeks, what will FFH's book value be? My rough estimate is that Prem is offering to buy back shares at about 0.8x. Looks to be a good deal for continuing shareholders! SJ

If your angle is the SIB, you are, IMO, thinking about this the wrong way. Even if Northbridge and Odyssey take the sort of hit that you'd typically see from a large hurricane, it wouldn't change the SIB. The insurance reserves are plentiful and are held at the insurance subsidiary level, while the cash for the SIB resides at the holdco level. The two are not linked in any meaningful way. No, I'd say that if you are worried about the SIB, you should instead be thinking about whether we are setting up for a March 2020 style pandemic market, where valuations take a significant dive over a short period. So, think back to March 2020 and look at the stock charts. Recipe went into the shitter, Resolute went lower than the shitter, and most of the other equity holdings dropped like stones. All of that was marked to market and FFH had a couple atrocious quarters, which placed pressure on FFH's debt-to-capital ratios. Access to credit in March/April was dubious for most companies, and FFH was reliant on its revolver. The reprise of that scenario is what should be your concern if you worry about the SIB. Should that re-occur, then conserving capital and cash at the holdco level might become a priority. Omicron has rocked the market on Friday and today. I don't think there's much to worry about, but never say never. If there's a risk to the SIB, it's not the flooding in BC. It's the potential for the equity portfolio to crash and burn over the next three weeks. SJ

No, the Canadian banks pay their common dividends in Canadian dollars. But, that doesn't prevent you from using the US dollars from the proceeds of this tender to buy the shares in US dollars from the NYSE (because all 5 banks are inter-listed). And then, it's the same logic as FFH, but in reverse. You phone your broker and you ask to have your Canadian bank shares journaled from the US side of your account to the Canadian side because the Canadian banks pay their dividends in Canadian dollars. You don't want to hold your Canadian bank shares on the US side of your account because every dividend payment will automatically be converted from Canadian dollars into US dollars if you keep them in your US account. As much as possible, you want to do the currency conversions when and as you need them to minimize your costs. And you probably want to use Norbert's Gambit when you do the conversion. SJ

Well, it's an interesting question, isn't it? Have you seen any estimate of insurable damage? I occasionally visit Canadian Underwriter and the Insurance Journal and I've seen nothing. So, what does it all add up to? As a general rule, most Canadian buildings are not insured for overland flooding because governments in Canada have done such a piss-poor job of flood plain mapping that it's nearly impossible for an underwriter to come up with an appropriate premium for a specific piece of property. As a result, they can only quote insanely high flood coverage premiums under the assumption that there will be adverse selection. So, most houses just go uninsured for flooding, and the assumption is that the provincial government will pony up some cash to victims, or if it's a big event, the feds will step in through the Disaster Financial Assistance Arrangements. It'll be big bucks, but that won't be Fairfax's problem, right? When you insure your car, you usually get both collision and all perils coverage (many cars went for a "swim" during the floods). But, in British Columbia, which company insures cars? ICBC, right? Effectively, all of the cars are insured by a Crown Corporation. Does ICBC take out reinsurance? No idea. It wouldn't surprise me that they would want some sort of reinsurance, even if it had some relatively high attachment point, but I can't say for certain what ICBC has done. Unless ICBC's reinsurer happens to be Odyssey or Allied, the fact that thousands of cars went for a swim, which is covered under all perils, is not of much significance. So, what are we left with? Business insurance? So, business continuity insurance could be a real problem in BC as there are large areas where the flood has prevented people from accessing and running their business. Northbridge probably wrote some of that, but what does it amount to? Is it material? I wouldn't think so, but I've been surprised before. But, we are lucky to have somebody there on the ground, and it's somebody who knows about insurance. @Parsad is right there, and maybe he has some insight about potential indemnities? SJ

Ask your broker to journal the FFH shares over to the US side of your account before tendering and then when you receive US dollars from the tender, they won't be automatically converted into Canadian dollars. When you finally decide what you want to do with the proceeds, you can make the decision about converting. It's possible that your next purchase will be inter-listed and you can simply buy it from the NYSE without ever giving your broker an exchange rate spread (if you do the arithmetic about exchange rate spreads, a smallish conversion of $50k USD ends up being a spread of probably $600 or $700 Canadian dollars). More broadly, any Canadian holder of FFH shares should probably always keep their FFH shares on the US side of their account because the annual dividend is in US dollars. No need to convert it into Canadian until you are sure what you want to do with it. SJ

The stock price for Fairfax India is really getting stupid again. It's $12.02 as I type. Anyone buying these days? SJ

IRA? Check the tax section of the SIB circular and the Canada-US Tax Treaty to be sure, but when I exploit tenders from the other direction (ie, a US tender using a Canadian RRSP) there has been no withholding tax because the tax treaty exempts retirement accounts. For Canadians this presents an interesting twist because a Registered Retirement Savings Plan doesn't get dinged with the withholding tax on dividends, but our Tax-Free Savings Accounts do get dinged because the TFSA is not explicitly a retirement account (even though most of us do intend to use it for that purpose). When FFH kicks out its annual dividend, have you experienced a withholding tax in your IRA? SJ

This is a complicated issue. My approach is to try to maximize my wealth, subject to my ultra-conservative personality. I take an approach that embraces high-conviction positions, which is seemingly at odds with the conservatism, but in some respects might be completely aligned with risk-adjusted wealth maximization (without being a big swinging dick like @ERICOPOLY who does absolutely insane things in terms of high conviction positions). One of my motivations for growing wealth is that I can't quite say exactly how much money I'll need for my time on earth. I am a cheap bastard careful with my money, so I have more than I likely will require, but who knows? End-of-life can be a hell of a thing and you can burn through a pile of cash over 5 or 10 years. So, my approach is to accumulate now to the extent of my ability and if I find myself overwhelmed by wealth in 15 years then that's fine (there's a good chance that will happen). I will then be faced with the "good" scenario of struggling to find an appropriate balance between bequeathing that wealth to family and to charity. How shall it be split, and amongst whom? It is almost certain that there will be a considerable surplus and the end-of-life challenge will probably be to rationally allocate it. So is it a good thing or a bad thing to wait to donate your wealth? You noted that Buffett has mostly elected to wait. I think that is a rational decision if your rate of return exceeds your perception of the social discount rate. So if you think you can grow your wealth sufficiently rapidly that it exceeds the social discount rate, the world is better off if you retain your capital and bequeath it upon your death. This approach involves winners and losers due to the intertemporal nature of the decision, but like all aspects of life, trade-offs are a reality. IMO, Buffett should not have given a penny to charity before his death because he almost certainly has been able to compound his money at a rate that exceeds the social discount rate. On a personal note, I anticipate that the bulk of my charitable donations will await my death. This is a function of two things: the first is the ultra-conservativism of not wanting to ever run out of money and be a burden on anyone while I remain alive, and the second is the cocksure arrogance that I can grow my wealth more rapidly than the social discount rate, meaning that my wealth will do more social good in the future than it would today. Am I right? Who the hell knows? But those two personality flaws are what drive my decisions with respect to charitable giving. SJ

I don't like FFH being more than 20%. But, at current valuation, I'll go there... SJ

It's 99 shares per beneficial holder, not per account. So, 99 for you, 99 for your wife, and then you need to figure out who the beneficial holders are for your kids' RESPs because it might be 99 per kid too.... So that's the legalese, but who's going to enforce it? Will your broker realise it and enforce the 99 per person rule as opposed to 99 per account? Would Prem enforce it? He wants to buy shares and will probably be undersubscribed, so I can't imagine that he'd fuss about it. I have no insight on the currency thing. I always keep FFH in USD accounts because the divvy comes in USD. SJ

There might be two risks. The first is that OMERS could pull the plug, which I find highly unlikely. FFH has chosen a deep-pocketed partner that chronically has cash to deploy and requires more yield than government bonds can provide. I am not worried about OMERS at all. The second risk is that FFH pulls the plug. That sort of thing could occur if the world goes to hell in a handbasket over the next four weeks and FFH decides that it needs to conserve both equity and cash. This seems like a bit of an extreme scenario, but we should never say never. The pandemic market of March 2020 did result in a few things like that happening (example, MGM repriced its tender and then cancelled it altogether). Given that FFH is offering about 0.8x book, my sense is that a pretty severe situation would be required for this one to not go through. I added back in October and I added again today in a tax advantaged account. If things go south, I don't mind being overweight FFH for a year or two. SJ

Yes, you are absolutely right. There's money to be made if you have some space available in a tax-advantaged account. If you have friends who would understand what a SIB is and would not be afraid to exploit it, you would be doing them a favour because there's quite likely an easy ~US$5k to be made in a month's time with the odd-lot privilege (if you can make space in a tax-advantaged account). In fact, if you wanted to be an even better friend, you could tell them to simply load up on the shares and tender, odd-lot privilege be damned. If you have space to buy, say, 300 shares in a tax-advantaged account it almost certainly will work out well. Chances are that you won't be pro-rated because the SIB will be under-subscribed. And if it actually is fully-subscribed, your "bad" outcome is that a percentage of your shares will be tendered at the high-$400s and you end up holding a percentage into January/February. When the Q4 earnings come out around Valentine's Day, FFH is quite likely to report book value at US$600+, which should propel the shares forward at least a bit. This one is an asymmetric bet as long as you manage the income tax consequences. SJ

@Viking I'm not sure how you can look at a chart like this and not wonder whether FFH missed an opportunity to dump Resolute during the spring/summer: It momentarily traded at a stock price that basically had not been seen for a *decade*. On a going-forward basis, how high must the annual dividend be to justify not selling at US$14 or $15? Maybe US$1/sh per year would be a bare minimum if a long-term hold is intended and no growth can be reasonably expected? So, great that they made US$5/sh in the last 12 months, but not so great if the lumber cycle and the tariffs revert back to the experience of the previous decade or so: I guess we'll see where this one goes.... SJ

The US government hit RFP with some pretty stiff tariffs on exports to the US. Seems like a strange thing to do so soon after an historic spike in lumber prices. I wonder whether the peak share price that we saw last summer wasn't a missed opportunity. SJ

Not sure what to think about digital penetration... SJ

Prem is offering 0.8x Q4 BV. None of the value guys will tender at that price. Seriously, guys like Mason Hawkins will not be tendering their shares. People holding in taxable accounts will not be tendering because it will trigger a shitload of income tax. So who will tender? Maybe I will, if I can juggle around some securities on my tax advantaged accounts and then buy a few shares for that specific purpose. But what will that be? Maybe I can figure out a way to buy and tender 100 shares or something? It would be an easy $5k, which is nice beer money but it doesn't do much for FFH. I am guessing the SIB will be undersubscribed. But, if they get a million shares at 0.8x, that's not a bad outcome. SJ

Agreed that a lot of that stuff is well described as "poo poo." Disagree that it can realistically be sold to buy FFH shares. That "poo poo" constitutes part of the insurance subs' reserves. If you sell it, you cannot dividend the cash to the FFH holdco to use for repurchases without reducing the subs' capital level and underwriting capacity. As things currently stand, it looks like most of the subs' ROE from 2020 has been used to expand underwriting in 2021. It requires about $1 of capital to write $2 of premium. Net written premiums are up by ~20% in the first 9 months, so basically the subs needed 10% more capital in 2021 than in 2020 just for organic growth. If our wet dream comes true and the hard market continues, most of the profits of the insurance subs from 2021 will need to be retained to once again grow premiums at a rapid clip in 2022. FFH is in a strangely attractive situation. It currently has too many profitable uses for capital. Do you use it to profitably grow your book and reap that benefit for several years to come (premium is sticky)? Or do you buy back your shares at a 30%+ discount to "fair value"? Both are good opportunities for shareholders, but there is a trade-off between them. SJ

This point should not be lost on shareholders. We know that this tender offer closes on Dec 23, and by the time FFH actually cuts the cheques to those who tender it will be approximately Dec 31, or if you prefer, the end of Q4. If the Digit transaction closes in the coming weeks, we *know* that Q4 BV will be US$600+. If FFH actually succeeds to buy 2 million shares at US$500, it's immediately accretive to continuing shareholders by an amount of US$200m+. Effectively, Prem is offering to buy the share at about 0.8x book. SJ

As the discussion over the past day has highlighted, there are several possible criteria for the SIB being viewed as successful. It is possible that FFH defines success as signalling the market about the company's future. It is possible that they define success as bumping the share price into the US$500 range. Or it is possible that they define success by reducing the share-count, even if they don't quite get 2 million shares tendered (ie, if there is 1.6 million shares tendered at a cost of US$800m, is that a failure?). I suspect that the SIB will be undersubscribed, but who knows? Sometimes they end up being oversubscribed even though the tax consequences are significant. But, if you are a Canadian taxfiler, it's an interesting exercise to take the census of SIBs over the past 5 or so years. Those which have tax treatment as capital gains are generally oversubscribed and subject to pro-rating. Those which have large deemed dividends tend to be undersubscribed. The one thing in FFH's favour is that they are not trying to repurchase an enormous percentage of their shares (ie, about 7.4%) and there's not that many shares locked up by insiders (about 3 million). So, they really only need up-take of about 10% of the available shares to max out their buy-back. It is possible that there will be enough shareholders that will be able to take advantage of the SIB without triggering dire tax consequences. This stands in contrast to a couple of other SIBs over the past couple of years, notably the ELF and Power family SIBs. In the case of ELF, family ownership was substantial, so there were not many free shares available. In the case of the Desmarais family, IIRC, they proportionately tendered for GWO and PFC, but didn't tender for POW? In any case, POW was the only one that was oversubscribed. SJ

It depends on your tax bracket and whether you are able to immediately apply the capital loss to offset gains in the past 3 years, or whether you need to carry it forward for some period of time before being able to use it. But, just for giggles and farts, assume that we are dealing with an Ontario taxpayer in the CAD$100k+ tax bracket, and that he bought his FFH shares for US$400 and the buy-back ends up being US$500. If he tenders: The first tax impact is that the guy pays tax on the eligible dividend of US$500-252=248. So, gross that up by 38%, pay tax at 46% and then take the 25% dividend tax credit. It's a considerable tax bill of about US$70/sh. Then, as you noted, the second step is to get the capital loss, so take proceeds of US$252 subtract the ACB of US$400 and you get a capital loss of US$148/sh. Apply the 50% inclusion rate, and you can carry back US$74 of losses against capital gains from previous years, which at a tax rate of 46% would we worth about US$34. So, call it a net tax bill of ~US$36. If he just sells: On the other hand, if the guy were able to just dump his shares on the market at US$500, he'd have a capital gain of US$500-$400=$100. Apply the 50% inclusion and tax at 46% and he would be dinged for about US$23 in capital gains tax. As you go into progressively higher tax brackets, the arithmetic becomes even more unfavourable for tendering. And, if you are tendering a meaningful amount of shares (let's say 100+), you'll almost certainly be bumped into another tax bracket! SJ

Absolutely it would be excellent for a Canadian taxpayer who earns less than ~CAD$50k. But, how many FFH shareholders are in that tax bracket? SJ