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ERICOPOLY
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Posts posted by ERICOPOLY
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Many of us sold and bought back into FFH. In my case sold at 62.50 and bought back into FFH at $367 CAD on Sept 14. Lucky timing but the runup in FFH to $398+ CAD means that the ORH deal would have to close at more than $67.80 for me to have left any money on the table. I think that highly unlikely.
Given that I originally sold FFH at $372 CAD to finance the purchase of ORH at $48 this has been a very satisfying round trip.
I too sold at $62.50 and got back into FFH at $344 USD. $67.58 price for ORH is needed to match this.
The other thing I did with the proceeds was to write Jan 2011 $30 WFC puts for $8.88. Today those puts are at $7, giving me a price of $68 from ORH to match it. Not sure if this will be the best way to go with WFC, but it will be a 42% 16 month return if WFC is at or above $30 when they expire -- I like that, you know, 42% is okay with me... I think it will beat the market ;D
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Already traded at 1.75x US GAAP in early 2007 -- and that's before significant improvements.
That may have been part of the short sqeeze environment....
Probably right about that. However, about that time MKL was over 2x book, I think even like 2.2x. Even with a CR advantage of 9 points, that's only 6% after tax operating yield from underwriting which at 10x multiple is only worth 0.6x book. So 2.2x less 0.6x is 1.6x -- which is less than 1.75x book but not much.
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I started the year 100% notional FFH, now I'm only 70% notional FFH but it's the same number of shares!
Ultimately I think FFH will trade up to 2x book at some point -- barring that, at least 1.4x.
Already traded at 1.75x US GAAP in early 2007 -- and that's before significant improvements. This is not what I think is a fair price, but rather what I think a cheery consensus will eventually pay.
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And Crum gets upgraded too
http://finance.yahoo.com/marketupdate/inplay#ffh
2:50PM Fairfax Financial: Moody's upgrades Fairfax Financial's snr debt to Ba1; outlook positive (FFH) 339.40 -2.07 : Moody's upgraded the senior unsecured debt rating of Fairfax Financial Holdings Limited to Ba1 from Ba2; upgraded the insurance financial strength (IFS) ratings of Fairfax's subsidiary, Crum & Forster Holdings to Baa1 from Baa2 and Crum & Forster's senior debt rating to Ba1 from Ba2. In the same action, Moody's affirmed the IFS ratings of Odyssey Re Holdings Corp.'s (ORH) main operating subsidiaries at A3 and Odyssey's senior unsecured debt rating of Baa3 and preferred stock rating of Ba2. Moody's also upgraded the preferred stock rating of TIG Capital Trust I, another Fairfax subsidiary, to Ba3 from B1. This rating action follows Fairfax's announcement that it intends to repurchase the remaining 28% stake in Odyssey Re that it does not own. The upgrades of Fairfax and TIG reflect Fairfax's strengthening financial flexibility and the steady reduction in risk stemming from its run-off operations. The positive outlook reflects the company's long-term commitment to maintaining financial leverage at its current level and substantial holding company liquidity (in the range of $750 million to $1 billion). The upgrade of Crum & Forster reflects the improved financial profile and upgrade of Fairfax as Crum & Forster's ratings had previously been lower than their stand-alone credit profile because of the risks at Fairfax. The affirmation of Odyssey Re's ratings, with a stable outlook, reflects the rating agency's view that the company's underlying financial strength will not be materially altered by the Fairfax repurchase.
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ORH is worth more to FFH than to anyone else and they are paying up for it.
Well, this is the issue, isn't it? Lots of people on this board, including me, think that FFH is not paying up for the minority interest.
Most people on this board do not value ORH based solely on the portfolio holdings at any given point of time, although there is a lot of discussion about what BV is at the moment. Most people understand that ORH provides low cost (and possibly negative cost) float to FFH over time and adds diversification to FFH's lines of business. In HWIC's hands, ORH is very valuable. So are they really paying up for the minority interest? I don't think so.
I also think that ORH has been trading at a major discount in the market precisely because of FFH's involvement as an 80% owner.
I just sold out of all my ORH. I was leveraged through the February options, and I just feel more comfortable not chasing after a couple more dollars. I think $65 is probably the max anyone can expect FFH to up the bid.
I just bailed at $62.50.
Now the buyout will be raised I suppose.
I'm back in FFH now.
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Who says their stocks holdings are worth what the market value is showing?
Prem does. Otherwise you should hit him with a 2x4 for not selling.
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Andy Barnard has 400,000 shares of ORH.
Now, if the deal goes through at $60 I wonder if Andy would get a big pat on the back with additional cash "for his performance and leadership".
They should be motivated to keep him happy.
This would be very distasteful, so I think there's no way they can do it -- yet one more reason price won't be $60 in the end.
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What would you do? Interesting conundrum isn't it...
If ORH special committee told me to pay more than $60 I would walk away from the deal. It's not like FFH need to consolidate ORH into the FFH group.
Yeah, just like they didn't need to pay 30% above book for NB.
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Amy Calistri.
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- ORH short term shareholders had their small bonanza in a very short period of time. A return more than enough to be satisfied in my point of view.
That fits my sentiment. There is nothing wrong with FFH anyhow, happy to switch back.
Anyone who thinks FFH has too much debt should borrow a bunch of money and then put the cash proceeds in the bank, and then just let it sit there. Is it risky? Nope, just pay the loan off if you need to. But what if someday you really do need that money and it comes at a time when the capital markets are closed due to fear and panic in the markets? So really, the debt makes it a lower risk enterprise, not a higher one ;)
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Here is one for Prem:
Why not buy it for the same multiple the shares were issued at? Hey, that would be fair.
Unless you think you gouged them, eh?? Or, perhaps time are different and market valuation is lower (other companies to switch the cash proceeds into are trading at lower valuations too).
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ORH is just canvas on which HWIC paints. I think some of you are trying to sell blank canvas to Picasso at the price of a completed masterpiece.
If you did own a share of all the paintings that Picasso would paint now and in the future, then why would you sell for the price of the canvas ?
(assuming Picasso was still alive and expected to continue painting for many years ;) )
Cheers
That's what Fairfax shareholders own. Not ORH shareholders who merely contract Picasso to paint their canvas. Picasso changed his mind and doesn't want to work under contract anymore -- this is decidedly different from the relationship that ORH has with it's IN HOUSE underwriters.
I beg to disagree; Fairfax' value is to a large extend that it owns a huge chunk of ORH - effectively this is your guarantee that the contract will not be cancelled.
Fairfax would loose a lot of money if they cancelled the contract with ORH.
Unless, maybe, that a much higher offer was presented by a third party - in which case the $60 offer in comparison would be way to low...
I am playing the Devil's Advocate here. Put yourself in Prem's shoes. Why the hell should he have to pay up for his own performance? I mean, really.
...to expect a premium from Fairfax for it's own stock picking seems unjust... I like the analogy of selling the blank canvas to Picasso at an extreme premium on the basis of speculation that it will soon be worth a mint simply because he has produced past masterpieces.
Well, playing the devils advocate, then the persons constituting the HWIC could quit tomorrow and then Fairfax shareholders would also be aware that they only held a contract.
That's true, and I agree. I've said many, many times that I think FFH is only worth book value plus a risk-adjusted premium for the operating income from the float.
However, ORH is for sale and it doesn't make sense to raise the price of the sale in step with the investment prowess of the buyer.
If a bunch of mediocre investors made offers for ORH, then the price they would be willing to pay would be based upon their own projections of ROE. Is it fair to jack the price up to the moon for Warren Buffett as a buyer, or HWIC, just because they will be good allocators? I don't think so.
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ORH is just canvas on which HWIC paints. I think some of you are trying to sell blank canvas to Picasso at the price of a completed masterpiece.
The point is that HWIC do run the investments for the present holders.
If you did own a share of all the paintings that Picasso would paint now and in the future, then why would you sell for the price of the canvas ?
(assuming Picasso was still alive and expected to continue painting for many years ;) )
The decision to buy or sell @ 60 seems easy to me ::)
Cheers
Unlikely, but suppose Fairfax were to sell off it's majority stake? Overnight you'd learn the value of ORH without HWIC.
That's really all there is to ORH... the underwriting and an average return on investments -- Fairfax owns the rest already (HWIC)... they're just offering a price for the underwriting and average return on investments, which is fair given that they own the rest already.
If you did own a share of all the paintings that Picasso would paint now and in the future, then why would you sell for the price of the canvas ?
That's what Fairfax shareholders own. Not ORH shareholders who merely contract Picasso to paint their canvas. Picasso changed his mind and doesn't want to work under contract anymore -- this is decidedly different from the relationship that ORH has with it's IN HOUSE underwriters.
I beg to disagree; Fairfax' value is to a large extend that it owns a huge chunk of ORH - effectively this is your guarantee that the contract will not be cancelled.
Fairfax would loose a lot of money if they cancelled the contract with ORH.
Unless, maybe, that a much higher offer was presented by a third party - in which case the $60 offer in comparison would be way to low...
Cheers
It's unlikely that they would cancel the contract with ORH -- unless they sold their majority portion, in which case it would be almost certain that it would be cancelled. Selling the majority portion would be unlikely. Thus, ORH's ROE is at the mercy of Fairfax.
I am playing the Devil's Advocate here. Put yourself in Prem's shoes. Why the hell should he have to pay up for his own performance? I mean, really. The future performance is only there if he continues to be "lucky". It's not like Wells Fargo where you have this high ROE due to customer relationships, brand, etc... That stuff is what gets a high premium to book. Instead, much of ORH's growth comes from "lucky" stock picking and "lucky" macro calls. It's certainly a different animal. I can understand why a 20% ROE at Wells Fargo is going to be fetching a different multiple than a 20% ROE at ORH if it's coming from stock picking. But that's getting off topic -- to expect a premium from Fairfax for it's own stock picking seems unjust... I like the analogy of selling the blank canvas to Picasso at an extreme premium on the basis of speculation that it will soon be worth a mint simply because he has produced past masterpieces.
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Ericopoly: HWIC as ORH's investment managers, are as tied into ORH as its own underwriters are.
ORH is only worth 20% ROE if you have HWIC managing the show. So how common is it for an insurance company to have HWIC's numbers? I think any independent buyer should be assuming average investment returns.
It's only a 20% hindsight grower if HWIC runs the investments. This implies that HWIC is worth a massive chunk of that 20% ROE, but then Fairfax already owns HWIC and need not pay for it twice. So it's not in the ORH sale.
ORH is just canvas on which HWIC paints. I think some of you are trying to sell blank canvas to Picasso at the price of a completed masterpiece.
The point is that HWIC do run the investments for the present holders.
If you did own a share of all the paintings that Picasso would paint now and in the future, then why would you sell for the price of the canvas ?
(assuming Picasso was still alive and expected to continue painting for many years ;) )
The decision to buy or sell @ 60 seems easy to me ::)
Cheers
Unlikely, but suppose Fairfax were to sell off it's majority stake? Overnight you'd learn the value of ORH without HWIC.
That's really all there is to ORH... the underwriting and an average return on investments -- Fairfax owns the rest already (HWIC)... they're just offering a price for the underwriting and average return on investments, which is fair given that they own the rest already.
If you did own a share of all the paintings that Picasso would paint now and in the future, then why would you sell for the price of the canvas ?
That's what Fairfax shareholders own. Not ORH shareholders who merely contract Picasso to paint their canvas. Picasso changed his mind and doesn't want to work under contract anymore -- this is decidedly different from the relationship that ORH has with it's IN HOUSE underwriters.
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Ericopoly: HWIC as ORH's investment managers, are as tied into ORH as its own underwriters are.
The point I am making is that HWIC only manages Fairfax subsidiaries.
Now, suppose another buyer (not Fairfax) made an offer for ORH. Yeah, that's what I'm talking about -- HWIC's performance needs to be ignored when determining what an independent buyer would pay for ORH. At that point, HWIC would cease to manage ORH's portfolio for the new owner as HWIC only manages investments for Fairfax... period.
ORH is only worth 20% ROE if you have HWIC managing the show. So how common is it for an insurance company to have HWIC's numbers? I think any independent buyer should be assuming average investment returns.
It's only a 20% hindsight grower if HWIC runs the investments. This implies that HWIC is worth a massive chunk of that 20% ROE, but then Fairfax already owns HWIC and need not pay for it twice. So it's not in the ORH sale.
ORH is just canvas on which HWIC paints. I think some of you are trying to sell blank canvas to Picasso at the price of a completed masterpiece.
Not exactly talking my book am I.
I am a little disappointed with the initial price but I think we'll get another 5% or 10%. I am not yet a month into it so I guess I'll be an easy lay for Prem. A 20% pop to $60 felt good going into the weekend. Let's make it to 30% at least.
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Ericopoly: HWIC as ORH's investment managers, are as tied into ORH as its own underwriters are.
The point I am making is that HWIC only manages Fairfax subsidiaries.
Now, suppose another buyer (not Fairfax) made an offer for ORH. Yeah, that's what I'm talking about -- HWIC's performance needs to be ignored when determining what an independent buyer would pay for ORH. At that point, HWIC would cease to manage ORH's portfolio for the new owner as HWIC only manages investments for Fairfax... period.
ORH is only worth 20% ROE if you have HWIC managing the show. So how common is it for an insurance company to have HWIC's numbers? I think any independent buyer should be assuming average investment returns.
It's only a 20% hindsight grower if HWIC runs the investments. This implies that HWIC is worth a massive chunk of that 20% ROE, but then Fairfax already owns HWIC and need not pay for it twice. So it's not in the ORH sale.
ORH is just canvas on which HWIC paints. I think some of you are trying to sell blank canvas to Picasso at the price of a completed masterpiece.
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What would you pay for a company that has grown BV by 20% per year since 2001 and has a balance sheet and surplus position that is significantly better than any of its peers?
Except HWIC isn't for sale, only ORH.
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Well done, everyone. And a special thanks to Ericopoly, whose comments and analysis kept me in ORH when I was on the brink of selling out and moving to FFH.
I think Cardboard really helped sell me on the buyout thesis. Anyway, they were pretty full of shit weren't they, but then... they were acting in the best interest of the FFH shareholders. It would be stupid to tell everyone that they want to buyout ORH... so instead you tell people at the annual meeting that there would really be no point to a buyout, and when you raise $400m you issue a press release that it's just for a rainy day, you know. Like I said before, "Fool me once shame on you, fool me twice shame on me."
Yes, props to Cardboard, Vinay and probably some others who also pointed out the oddities in Fairfax's recent actions.
This was so good it was practically trading on insider information.
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Watsa, I agree with you, except that I think the 1.16X offer should be on current book, not June 30th. Either that or Fairfax should pay 1.2x June 30th. I think at $63, they would get 2/3rds of the remaining shares. I have a hard time believing that it will happen at $60. I'm not complaining though! ;D Cheers!
I agree that the only relevant book value in this discussion is the present one, as of September 4th. June 30th??? Pfftt!!.
I think ORH's book is understated by about $1.50 due to accounting on ICICI. Adding in equity portfolio gains of 10.3%, and $1 in operating income puts book value per share at roughly $57.50.
$66.70 would be the price using 1.16x against real book.
June 30th book is too out of date. It's not worth a multiple of June 30th, or March, or December last year, or June five years ago. It's worth a multiple of what it is fu*** currently at. Obviously.
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Well done, everyone. And a special thanks to Ericopoly, whose comments and analysis kept me in ORH when I was on the brink of selling out and moving to FFH.
I think Cardboard really helped sell me on the buyout thesis. Anyway, they were pretty full of shit weren't they, but then... they were acting in the best interest of the FFH shareholders. It would be stupid to tell everyone that they want to buyout ORH... so instead you tell people at the annual meeting that there would really be no point to a buyout, and when you raise $400m you issue a press release that it's just for a rainy day, you know. Like I said before, "Fool me once shame on you, fool me twice shame on me."
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CHA CHING !!!!!!!!!!!!!
:) :) :) :)
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Remember the stress tests, the govt made them raise capital even though more competent analysts like Warren Buffett said that it was ridiculous.
The dividend cut was a means of avoiding yet even more capital to be raised.
So, in that light what do you dislike about their dividend cut?
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WFC is still down for the year. JNJ is down slightly.
I think a core criteria for frothiness is that great companies at least trade in the black.
BRK is up less than 1% this year.
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If tomorrow morning we have twice has many U.S. dollars in circulation, shouldn't the price of everything priced in dollars doubles without any real growth in the economy and without much transactions? The pie is just divided differently, no?
Let's follow that through with a real example:
Is my house going to double in price simply because of Bernanke's quantitative easing doubling the quantity of dollars?
Here is what I think:
In order for the house to double in price, the buyer needs to be able to afford twice as much right?
Okay, have incomes doubled? No. So there is not twice the dollars chasing my house. The number of dollars chasing my house has not changed, in fact there are likely fewer dollars chasing my house because there are more unemployed people and people who are earning smaller paychecks.
So, the price of housing is not set by the total number of dollars that Bernanke doubled via his policies.
Rather, the price of housing is set by what the buyer can afford -- and in this recession he can afford less. Screw the quantitative easing causing inflation -- that house's price isn't going to budge until the buyer can afford to make it budge, and that means that his supply of dollars needs to double, which isn't happening.
Wages need to spiral upwards before that home price goes up. That's not what we have... we have rising unemployment and wages are certainly not skyrocketing.
Where is the money? If it's not in the consumer's hand, the price won't go up.
Anyways, that's just an example. Other things priced in the economy might behave differently. So far though I can't figure how quantitative easing is going to raise prices unless those consumers get their grubby hands on it... but the quantitative easing program hasn't done that. There's been cash for clunkers, but that's about it.
What are the odds re ORH
in Fairfax Financial
Posted
I don't remember the 2012 being available at the time.
However, going by the prices today the delta is only about $1.80 between the 2011 and 2012 puts. That's not enough to wet my whistle. I think it's (my bias) already a given that the shares will be at $30 in 2011, so making an additional $1.80 for the following 12 months only gives me an extra 8.5%. That's just not high enough of an annualized return... 8.5% is crappy.
It had to be at least 12 months to expiration because I don't want to pay 35% short-term capital gains rates... so that left me with the 2011 as my only viable option.