MMM20

+1. This + hard market + Teledyne-ing -> ~1x ~$800/sh BV next year.

https://valueandopportunity.com/2022/02/15/a-first-look-into-the-insurtech-chainsaw-massacre-part-1/ Got me thinking. Would Digit be marked down 50-80%+ if they raised capital today? Too negative?

Y’all know what I mean. I am not an accountant. I am a lapsed cfa charterholder but really only ever retained the broad strokes in the first place (if anything). I am certainly not a great investor. But I’ve learned from WEB that we shouldn’t just count up the market value of assets and subtract liabilities to get to a reasonable estimate of intrinsic value… we gotta add in some value for capitalized normalized underwriting profit and adjust float liability to reflect economic reality. And *if* FFH really can underwrite as profitably as they’ve shown over the long haul at this point… and with so much capital then effectively acting as negative interest rate debt… I can get to like ~$1,500/share intrinsic value without being the biggest bull on the forum. That feels like a big change from 1-2 years ago, and I think the market’s still sleeping on it. Discount to IV is bigger today than it was a year ago, IMHO. I loaded up into the Dutch auction but have kept more shares than I started with a year ago.

I wish Prem addressed the point more directly. 95% combined ratio = 5% net margin on *underwriting* (note: edited) = $1B+ in income. Apply a 10x multiple to that and it's $10B in our intrinsic value calculation. I prefer to use more like ~2-3% normalized u/w profit in my thinking about this, but if it's ~5% then IV could easily be upwards of $1,500/share. Why not just lay that out for folks? Maybe b/c they want to do a Teledyne!

Ok, so I was able to speak with the head of Canadian tax structuring in prime brokerage at one of the big US investment banks. I should’ve done it 2 weeks ago… whatever, lesson learned. Apparently, it’s typical to split things over two chunks like this one… the unusual thing was that this spanned 2 different years, indeed generating a big capital loss “now” (2021) and a qualified dividend “later” (2022), which may naturally invite scrutiny from the tax authorities. Anyway, the structure+timing makes more sense to me now… beyond the obvious taking out a chunk of shares on a low volume stock. After doing the analysis, it seems I’m going to end up paying about half as much tax on a net basis, vs regular old short term capital gains. Lucky break, I guess? I assume others are in the same boat unless they had a super low cost basis. i believe I spoke with one of the top experts in these issues, so I feel good about it, but does anyone disagree / think I’m missing something?

Right. I’m curious what others are seeing (foreigners who tendered in taxable accounts). Maybe Schwab screwed it up and will change it later. But seems like I come out ahead here vs if it were short term cap gains. please report back any general findings from the Canadian accountant, if you would be so kind…

Are you seeing a 2021 realized capital loss generated by the first part of the transaction? My point is that, rough math, the big capital losses generated by the first part of the deal seem to roughly offset the dividend withholding tax paid… in my case at least. Looks like Canadian Tax Form NR7 is the one to apply for a refund on the withholding tax if you should’ve been exempt. I am not a tax guy though. agreed it’s a headache. Ive already spent too much life energy reading the docs and worrying about Canadian tax!

I believe this is what I’m trying to understand too (I just realized that the shares I tendered in my taxable account actually did have 15% tax withheld… oops) So, in the end, the tender shows up as a huge realized capital loss on the first chunk of cash we got, for 2021 (12/31/2021), and then 15% withholding tax on the second chunk, the deemed dividend, in 2022 (1/5/2022). Unless Schwab is just accounting for this wrong, the 2021 capital loss the tender generated on the first chunk is so big that I might have come out way ahead on my personal taxes by tendering if it really will offset my capital gains from elsewhere in 2021 (plus a tax loss carryforward in my case). Is anyone else seeing something similar? It seems like a quirk of the transaction being split across years and into capital gains/losses (2021) and dividend (2022). Could have big tax ramifications for people that I assume many didn’t expect… Am I missing something?

I just chatted with Schwab and they said the pay date was today and cash should hit accounts tomorrow morning. They can confirm the amounts now if you, like me, can’t wait til tomorrow to find out if you got hit with the tax. I didnt… FWIW- US resident, submitted 100% in all accounts, mostly but not all taxable accounts)

Oh yeah, mine too. Thanks. Turns out everything I sold to load up on FRFHF to tender is also up about 10% over the past few weeks. Why couldn’t BRK have been down 10%? I was told life was fair.

Ouch. what percentage of your total Fairfax position did you tender?

Anyone else (US residents?) still waiting on half the tender cash to hit all their accounts?

+1, this is my understanding too (I really hope i don't get tax withheld - what a headache)

If a ~97-98% combined ratio is sustainable, then by my own calc the stock is trading at something like an ~8x normalized look-through P/E. I don't think a $1000 stock price would be unreasonable whatsoever. Agreed, Prem?!

What I struggle with is what the real estate is worth if most legal stuff ends up grown in California. Even if that never happens, it seems like at Newlake’s cap rate you are paying roughly 2x the valuation of MSOs like AYR and VRNO, when you can own their (maybe?) emerging brands at pretty low multiples b/c of structural restrictions (for now?) on ownership of plant touchers. Do you disagree? I guess what I’m trying to think through is, what is that asset you want to own in an endgame of mature industry at national scale? Where will be the defensible profits? - Brands/distribution (booze model?) - Regulatory capture (tobacco model?) - R&D/compliance (pharma model?) - Physical infrastructure/ local warehouses (Amazon model?) - Software? - something else?

Following Prem’s personal $150M purchase in June 2020 has turned out to be a good call so far. The stock is arguably cheaper now.

We have reached the “stock might go up too fast for me to buy it” phase. Maybe 2022 will be Prem’s year.

Even if it’s 9% borrowing, it seems to me that their implied cost of equity is still about 20-30% even at $500, so a good move for shareholders and possibly more to come if the stock stays so cheap

Well, good thing Fidelity is (I think?) the biggest US retail brokerage then!

I had to call Fidelity to tender my shares. It took almost an hour - they had to walk through the terms in painstaking detail and get multiple approvals. I'm guessing this will be enough of a barrier for many people that my chances of a full fill at $500 are higher than I thought an hour ago.

The Company’s purchase of Shares from a U.S. Holder pursuant to the Offer will be treated either as a sale of the Shares or as a distribution by the Company, depending upon the circumstances at the time the Shares are purchased. The purchase of Shares from a U.S. Holder will be treated as a sale if (a) the purchase results in a “complete redemption” of the U.S. Holder’s equity interest in the Company, (b) the receipt of cash by the U.S. Holder is “not essentially equivalent to a dividend”, or (c) as a result of the purchase there is a “substantially disproportionate” reduction in the U.S. Holder’s equity interest in the Company, each within the meaning of Section 302(b) of the Code, as described below (referred to as the “Section 302 Tests”). The purchase of Shares from a particular U.S. Holder will be treated as a distribution if none of the Section 302 Tests is satisfied with respect to such holder. 46 In applying the Section 302 Tests, the constructive ownership rules of Section 318 of the Code apply. Thus, a U.S. Holder is treated as owning not only Shares actually owned by the U.S. Holder but also Shares actually (and in some cases constructively) owned by others. Under the constructive ownership rules, a U.S. Holder will be considered to own Shares owned, directly or indirectly, by certain members of the U.S. Holder’s family and by certain entities (such as corporations, partnerships, trusts, and estates) in which the U.S. Holder has an equity interest, as well as Shares that the U.S. Holder has an option to purchase. (a) Complete Redemption. A purchase of Shares pursuant to the Offer will result in a “complete redemption” of the U.S. Holder’s interest in the Company if, immediately after the sale, either (1) the U.S. Holder owns, actually and constructively, no Shares; or (2) the U.S. Holder actually owns no Shares and effectively waives constructive ownership of any constructively owned Shares under the procedures described in Section 302(c)(2) of the Code. U.S. Holders who desire to file such a waiver are urged to consult their own tax advisers. (b) Not Essentially Equivalent to a Dividend. A purchase of Shares pursuant to the Offer will be treated as “not essentially equivalent to a dividend” if it results in a “meaningful reduction” in the selling U.S. Holder’s proportionate interest in the Company. Whether a U.S. Holder meets this test will depend on relevant facts and circumstances. In measuring the change, if any, in a U.S. Holder’s proportionate interest in the Company, the meaningful reduction test is applied by taking into account all Shares that the Company purchases pursuant to the Offer, including Shares purchased from other Shareholders. The IRS has held in a published ruling that, under the particular facts of the ruling, a small reduction in the percentage share ownership of a small minority shareholder in a publicly and widely held corporation who did not exercise any control over corporate affairs constituted a “meaningful reduction”. If, taking into account the constructive ownership rules of Section 318 of the Code, a U.S. Holder owns Shares that constitute only a minimal interest in the Company, and such holder does not exercise any control over the affairs of the Company, then any reduction in the U.S. Holder’s percentage ownership interest in the Company should constitute a “meaningful reduction”. Such selling U.S. Holder should, under these circumstances, be entitled to treat the purchase of such holder’s Shares pursuant to the Offer as a sale for U.S. federal income tax purposes. Shareholders are urged to consult their own tax advisers with respect to the application of the “not essentially equivalent to a dividend” test in their particular circumstances. (c) Substantially Disproportionate. A purchase of Shares pursuant to the Offer will be “substantially disproportionate” as to a U.S. Holder if the percentage of the then outstanding Shares actually and constructively owned by such U.S. Holder immediately after the purchase is less than 80% of the percentage of the outstanding Shares actually and constructively owned by such U.S. Holder immediately before the purchase. Shareholders are urged to consult their own tax advisers with respect to the application of the “substantially disproportionate” test in their particular circumstances. It may be possible for a tendering U.S. Holder to satisfy one of the Section 302 Tests by contemporaneously selling or otherwise disposing of all or some of the Shares that such U.S. Holder actually or constructively owns that are not purchased pursuant to the Offer. Correspondingly, a tendering U.S. Holder may not be able to satisfy one of the Section 302 Tests because of contemporaneous acquisitions of Shares by such U.S. Holder or a related party whose Shares are attributed to such U.S. Holder. Shareholders are urged to consult their own tax advisers regarding the tax consequences of such sales or acquisitions in their particular circumstances.

I don’t know about Europe but I believe pg 44/45 of the offering document walks through tax issues for US, in case that points you in the right direction generally. Apparently it’ll be treated as capital gains vs Canadian deemed dividend withholding in various scenarios that they outline. Not a tax guy though.

$500 or bust!

Prem redemption media tour has begun in earnest...

At this point I'm just jealous of anyone who isn't already maxed out into the deadline.