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An interesting idea for FFH


Packer16
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I was thinking about FFH and the bind they have gotten into with the hedges and if there may not be a better structure where the hedges would not have to be used.  One idea is to IPO the insurance companies, sell say 30 to 40% and use the proceeds to allow Fairfax at the holdco level invest the proceeds in there normal distressed/value investments.  The insurance companies would use HW as there asset manager and use a more traditional mix of bonds at the insurance company level and dividend up excess capital to HW for investment.  This would allow HW to pursue its value/distressed investing which it is good at independent of the constraints of the hedges.  I think one of the issues with FFH is I am not sure investing insurance float in a distressed/value approach is appropriate.  The two other invest the float companies (MKL and BRK) invest in high quality companies and stay away from distress. 

 

Packer

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This is one way to do it. The other would be to issue stock in canadian dollars ( or u.s dollars ) to retire debt to bring the leverage down. Improves book value/share gains. They are getting a tail wind from the interest rate changes and if the unemployment keeps going down in the U.S., the low interest rates won't last forever.

 

However, I don't think Prem will do the above as he said in the conf call, he( and his family) is the controlling shareholder.

 

I was thinking about FFH and the bind they have gotten into with the hedges and if there may not be a better structure where the hedges would not have to be used.  One idea is to IPO the insurance companies, sell say 30 to 40% and use the proceeds to allow Fairfax at the holdco level invest the proceeds in there normal distressed/value investments.  The insurance companies would use HW as there asset manager and use a more traditional mix of bonds at the insurance company level and dividend up excess capital to HW for investment.  This would allow HW to pursue its value/distressed investing which it is good at independent of the constraints of the hedges.  I think one of the issues with FFH is I am not sure investing insurance float in a distressed/value approach is appropriate.  The two other invest the float companies (MKL and BRK) invest in high quality companies and stay away from distress. 

 

Packer

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  • 5 weeks later...

I was thinking about FFH and the bind they have gotten into with the hedges and if there may not be a better structure where the hedges would not have to be used.  One idea is to IPO the insurance companies, sell say 30 to 40% and use the proceeds to allow Fairfax at the holdco level invest the proceeds in there normal distressed/value investments.  The insurance companies would use HW as there asset manager and use a more traditional mix of bonds at the insurance company level and dividend up excess capital to HW for investment.  This would allow HW to pursue its value/distressed investing which it is good at independent of the constraints of the hedges.  I think one of the issues with FFH is I am not sure investing insurance float in a distressed/value approach is appropriate.  The two other invest the float companies (MKL and BRK) invest in high quality companies and stay away from distress. 

 

Packer

 

Packer - how about a small modification. First, IMHO, without a doubt FFH should be buying quality companies for the 100% owned business portion (i.e. MRK and BRK). However take $2 billion, about 10% of the investment portfolio, and create a BAM-type investment fund (similar to what they just proposed for India). Get pension funds to kick in another $8 billion and you have a $10 billion distressed asset investment fund. Charge 2% plus a performance fee. FFH makes about $160 million, or 8% guaranteed, in management fees plus performance fees if the fund does well. And on top of the management and performance fees FFH has a 20% stake in the fund. 

 

It works for BAM why not FFH?? Thoughts??

 

cheers

Zorro

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