How much is FFH's BV understated due to potential for gains on Prefs/Debt Issues

[A_Hamilton]

I thought I'd share the following analysis as it appears that FFH's book value is significantly understated from a relatively new source: Gains from prefs and debt issued in Canadian dollars but carried on the B/S in USD.

Questions:

1.) How would one arrive at an intrinsic value of the Pref's/at what yield or discount to book should FFH be trying to repo these (note there are huge limitations here as the pref's trade infrequently)

2.) Will FFH swap the CAD exposure back to USD at any point prior to the call date of prefs or maturity date of debt to lock in gains?

3.) Are there any taxable gains for FFH as these are called/matured/repurchased?

4.) Are these true gains or do these offset Northbridge/other Canadian $ asset exposure and so are truly "hedges"? 

 

FFH_Pref_Debt.pdf

FFH_Pref_Debt.pdf

[benhacker]

Thanks Hamilton,

 

I hadn't run the #'s here in a while, bigger than I thought.  Appreciate you putting this down.

 

1) Tough to value the discount at face, and translate that back to a discount to book, but I'd say it's roughly right even though they can't repurchase at these prices.  I think CA preferreds are probably trading cheap because of selling pressure beyond fundamentals (same with a lot of CA debt I look at)

 

2) They may, but I doubt they are going to do so soon.

 

3) I think yes, these are taxable gains on below par retirement (both debt and preferred)

 

4) Not sure, Fairfax calls everything a hedge.  As a USD holder, it's probably a hedge, as a CAD holder, you may think it's a "bet"... ;-), I don't know exactly the right way to look at it.

 

Thanks again.  I need to run the #'s again here on the whole complex.  I sold down a ton last spring, and built maybe halfway back in the fall... but portfolio performance has really been struggling... I hope they turn that corner because reinsurance prices are tanking it seems.

[StubbleJumper]

I thought I'd share the following analysis as it appears that FFH's book value is significantly understated from a relatively new source: Gains from prefs and debt issued in Canadian dollars but carried on the B/S in USD.

Questions:

1.) How would one arrive at an intrinsic value of the Pref's/at what yield or discount to book should FFH be trying to repo these (note there are huge limitations here as the pref's trade infrequently)

2.) Will FFH swap the CAD exposure back to USD at any point prior to the call date of prefs or maturity date of debt to lock in gains?

3.) Are there any taxable gains for FFH as these are called/matured/repurchased?

4.) Are these true gains or do these offset Northbridge/other Canadian $ asset exposure and so are truly "hedges"?

 

 

Haven't looked at the exact magnitude of Canadian denominated assets vs debt, but my sense is that the impact on Northbridge, Cara and other Canadian assets will pretty much offset the preferreds and debt.  But it's a good reminder that we need to evaluate Northbridge's performance in the context of the currency valuation.  Over the past couple of years, when reading the financials I would occasionally be disappointed in the lack of YoY growth in Gross Written at NB, but then after reflecting on currency depreciation, I was much less disappointed. 

 

 

SJ