What's the purpose?

[Packer16]

Maybe I am missing something here but what is the purpose of diluting shareholders to buy in the minority interest in ORH?  You can say the shares went to strong hands but doesn't FFH already have a strong shareholder base?  How does it create intrinsic value other than lowering the public reporting costs or ORH?  Was ORH's intrinsic value that much greater then FFH's when they are trading at about the same discount to book?  I am having a hard time seeing the advantage other than a cosmetic one of appearence?  TIA

 

Packer

[ragnarisapirate]

Would it have something to do with the tax code? Will they now not have to pay for gains in ORH common stock?

[oldye]

Maybe I am missing something here but what is the purpose of diluting shareholders to buy in the minority interest in ORH?  You can say the shares went to strong hands but doesn't FFH already have a strong shareholder base?  How does it create intrinsic value other than lowering the public reporting costs or ORH?  Was ORH's intrinsic value that much greater then FFH's when they are trading at about the same discount to book?  I am having a hard time seeing the advantage other than a cosmetic one of appearence?  TIA

 

Packer

 

I always felt it was to their advantage to have a publicly traded sub where they could put excess capital to work but I think we just need to see where they go with all this.  Buying it back gives them tremendous flexibility...all of their subs are over capitalized.  

 

 

 At this point I'm speculating but maybe we'll see them go after a Esurance, 21st century type car insurer.  They made a weird play on Progressive a few months back, put 50 million to work and then 3 months later sold out...maybe they saw some fundamental flaw that they could exploit?  Allstate and Farmers are just begging to have their @ss handed to them.  In Omaha Warren said that about 100 people signed up for Geico that weekend which paid for the entire event!  With a 97% satisfaction rate...short term float really works like long term float!  

[Cardboard]

The purpose should be to make more money. Odyssey Re is Fairfax's division with the highest return on equity and its largest. Buying more at a reasonable price can only make sense.

 

I am kind of surprised at this dilution fear while IMO, Fairfax shareholders should rejoyce. The offering was done at $347 U.S. which is quite above the $315.90 book value at June 30. It is a given that book value is higher now, but I figure it is around $335 to $340 looking at various markets impacting their assets and taxes. Odyssey Re book value is likely around $55 now. Even if we are more optimistic and assume that Fairfax issued shares at exactly their current book value, the maximum cost above book to buy the rest of ORH is only $155 million (15.5 million shares x ($65 - $55)).

 

It means a pretty good investment just on cost savings alone which should be around $20 million a year. You also have to admit that ORH book value has to be more valuable than the book of something like their runoff.

 

To me dilution is not buying a terrific asset at a reasonable price, but issuing shares below book to survive. Like we have seen during the 7 lean years. And to issue shares to keep it in cash. IMO, this is where Fairfax shareholders should pay their attention at this time.

 

As I mentioned before, it would be great if Fairfax could deploy their $1 billion of cash at holdco in a more efficient manner: 100% in their best ideas (equities or others) and hedged if needed for a rainy day. This way you would get great returns with this money and still solid ratings. It may be part of the grand plan.

 

Once the structure is simplified, which fully owning ORH allows, they may feel more comfortable to do something like that. I think that many fail to realize how much leverage was still present within Fairfax when considering that TIG and Crum & Forster were themselves major holders of ORH. Then you have Fairfax Asia, TRG Holding and Advent with spaghetti ownership. There is definitely some opportunities here to do something pretty smart.

 

Cardboard

[Packer16]

So does that mean at today's prices Fairfax is fairly valued and the upside is primarily in doing a new deal or putting excess capital to work at a good rate of return? As Fairfax appears to be selling at a premium to other cat insurers and in the insurance business I do not see many moats, is the higher premium a bet on future investment performance? 

 

Packer

[Granitepost]

Hi Cardboard:  I believe that Advent Capital now operates as a subsidiary of Fairfax.  I don't know if they have 100% ownership yet but there were no shares traded on Friday Sept 18 and the price has been stable at 210 pence for a couple of months.  See:  http://investing.businessweek.com/research/stocks/snapshot/snapshot_article.asp?ric=ADV.L

[oldye]

So does that mean at today's prices Fairfax is fairly valued and the upside is primarily in doing a new deal or putting excess capital to work at a good rate of return? As Fairfax appears to be selling at a premium to other cat insurers and in the insurance business I do not see many moats, is the higher premium a bet on future investment performance? 

 

Packer

 

What premium lol? 

Its not remotely close to fair value...don't use what other companies are trading at to tell you what your assets are worth. 

 

 

  They gave up about as much as they're receiving in value.

 

The fact that there is now an extra billion in equity...at least 200 million in additional earning power and still not seeing any upgrades.  The people that work at rating agencies are incompetent...although they're bound to get it right sooner rather than later.  I know because the stock is up and thats the only thing those morons seem to look at. 

[ERICOPOLY]

As Fairfax appears to be selling at a premium to other cat insurers and in the insurance business I do not see many moats, is the higher premium a bet on future investment performance? 

Packer

 

I think they get most of their returns from investments, not from insurance.  The 80% in equities certainly delivered the bulk of their gains this year for example, with book value up nearly 30% YTD.

 

Let's suppose in a parallel world there is another Fairfax run by the same investors but that isn't involved with insurance underwriting, so the only way to deliver gains would be from their investments.  Then you are comparing them to somebody like Leucadia.  How much premium then are they worth?  Remember, Leucadia's record is inferior.

 

 

[Uccmal]

As an FFH shareholder I feel I have at worst broken even in the short term.  This is a major plus long term.  The extra capital coming to the parent can be put to many uses.  There will be internal savings, and tax sharing at multiple levels. 

 

This company compares better to Luk p/b=1.7; Mkl p/b=1.3; pwf-t = 1.8; mfc=t=1.4; brk=1.4;

ffh=1.2.  June 30th numbers;

 

And, every one of the above is trading cheaper than they have in a while right now.  p.b in the range of 2 is probably more justified especially with the ever growing annual dividend. 

 

615/share US if this was "normal" time period

[redwood]

>>p.b in the range of 2 is probably more justified especially with the ever growing annual dividend. 

I thought they don't pay a regular dividend, just a "special" dividend for prem to make a living.

[Mungerville]

Watsa is not doing this to lose money or for his health or for kicks - he is doing it because he sees value.