FRFHF Q3

[shalab]

I read through FRFHF Q3 report - I was surprised by the amount of dilution. I am also surprised diluted book value is never mentioned anywhere in the report.

 

Book Value:

 

451.52 per share

 

shares outstandign for calculation of book value:

 

27,374,203

 

Diluted shares outstanding:

 

28,357,173

 

Book value per Diluted share: 435.87

 

 

 

 

 

 

 

 

 

[Dazel]

Looks like You are not cancelling out the 799,230 shares owned by Hamblin Watsa that are owned by Fairfax...and shares purchased that have not been cancelled but are owned by Fairfax.

Pg 20. Of the third quarter report shows the breakdown of shares outstanding. Your first number is what they state as the effective shares outstanding at September 30, 2018.

 

 

[FairFacts]

You may be picking up options issued in your share count. Options are not included in shares outstanding until they are exercised.

 

[gfp]

I don't think they are options.  I think they are restricted share awards - so the company does not receive any proceeds as they vest.  They are amortized or whatever over their vesting periods and included as a compensation expense over time.

 

You may be picking up options issued in your share count. Options are not included in shares outstanding until they are exercised.

[Dazel]

 

Shaleb where did you get the 28.357m fully diluted share count?

 

[mcliu]

Page 21 of Q3 report. $500M worth of share-based payments?  ::)

[Dazel]

 

Shalab,

 

Nice find...very disappointing buyback in light of almost 1m share based award payments...I see the majority were in the year end 2017...But almost 400000 this year!!!! For what?

Would like to see Fairfax explain. I missed this as 2016 share based awards were anti dilutive so they were not there...possibly many of the 900k plus awards are antidilutive now?

Anyone see a break down of the share based awards...it should be somewhere...I am too pissed off to look right now.

[petec]

Am I reading this right?

 

Note 11 on p20 gives basic shares outstanding and shows that they have bought far more shares for the stock awards scheme than they issued, which makes sense if they think the shares are undervalued. They issued 76k or about $35m worth over 9 months.

 

Note 12 on p21 shows 938m dilutive share awards. This is a cumulative number. The fact they’re dilutive suggests they’re in the money but without notes it’s very hard to tell when they vest and become basic, or whether the increase y/y is due to new issuance or some other change (unlikely to be due to share price increase, sadly).

 

One table suggests the share repo is moving well ahead of issuance, the other doesn’t.

 

At the very least they need to discuss why they don’t disclose bvpds rather than bvpbs.

[Spekulatius]

I think this runs as share based compensation through the income statement. It’s is noted in page 37/75 as $65.4M in share based payments to directors and employees for the first 9 month and seems to be rapidly rising.

[gfp]

I suppose some of the rise could be associated with the Allied World acquisition.  Maybe a call to IR would shed some light.  From the final Allied World Annual Report (attached)

 

**Edit: I guess not, upon reading the merger agreement it sounds like all Allied World share based awards, RSU's, performance based share awards, options, etc ...  were accelerated to fully vested and paid in cash or treated as shares under the merger agreement.  I guess Fairfax just started giving out stock as compensation a lot more heavily in the last few years.

 

seems like they should have gone a little bit easier with the Teledyne references if they were going to handle issuance/repurchases this way.  Setting yourself up for disappointment.

[gfp]

I have a quick question.  So in July Fairfax put $264.6 million into Brit as a capital contribution and Brit used that to purchase an 11.2% ownership interest form OMERS (and pay OMERS an accrued dividend owed).  So it's like a share repurchase / retirement, where Fairfax's ownership goes up, but so does the ownership of the other remaining minority owners - right?

 

Why wouldn't Fairfax buy the shares from OMERS, which would increase Fairfax's ownership only?

 

Is the net effect the same?  As in, the capital contribution raised FFH's ownership percentage and then the share cancellation resulted in the same percentage ownership dynamics for all parties as would have been the case if FFH just bought OMERS's shares directly?

[Cigarbutt]

I have a quick question.  So in July Fairfax put $264.6 million into Brit as a capital contribution and Brit used that to purchase an 11.2% ownership interest form OMERS (and pay OMERS an accrued dividend owed).  So it's like a share repurchase / retirement, where Fairfax's ownership goes up, but so does the ownership of the other remaining minority owners - right?

 

Why wouldn't Fairfax buy the shares from OMERS, which would increase Fairfax's ownership only?

 

Is the net effect the same?  As in, the capital contribution raised FFH's ownership percentage and then the share cancellation resulted in the same percentage ownership dynamics for all parties as would have been the case if FFH just bought OMERS's shares directly?

I seem to remember that FFH, with the purchase of Zenith, had used an upstream dividend from the acquired sub itself to "finance" the purchase and was expecting a similar scenario with the repurchase of minority interest for Brit as Brit had, at least at the end of last year, significant dividend capacity. Earlier this year, I had tried to figure out the ins and outs with FFH disclosures and numbers didn't seem right. Just looked deeper at Brit's own disclosure (half-year report, see below) and numbers do add up. See note 19 p.41 and note 15 p.38. Conceptually, FFH, through a sub, actually used the "contribution" to buy shares (new) of Brit and Brit used its own capital (contribution minus dividend) to acquire and cancel shares from OMERS (who is the only minority holder for Brit). I can't explain why FFH did not buy directly from OMERS and wonder if it is related to legal structure, regulatory capital rules or tax reasons. The net effect on Brit capital appears to be essentially nil.

http://www.britinsurance.com/financials/results

 

Of note also, versus the share awards issue that may have resulted from the acquisition of Brit (and AW?), I looked at note 33 from Brit AR 2017:

 

33 SHARE‑BASED PAYMENTS (continued)

(a) Long‑Term Incentive Plan (Performance Share Plan replacement)

On the Fairfax acquisition of Brit Limited, the 65% of PSP awards that did not immediately vest were converted by Fairfax

into awards under this scheme. The conversion terms allowed for 60% of the 280p Brit Limited acquisition share price to be

converted into the equivalent value of options to acquire shares in Fairfax at a nil exercise price. Subject to continued service,

the options vest in November 2018 and there are a further seven years to exercise the options.

The fair value of the awards are determined by the market price of the underlying shares at the valuation date. The calculation

of the compensation cost recognised in the income statement in respect of these awards assumes forfeitures due to employee

turnover of 5% per annum prior to vesting, with subsequent adjustments to reflect actual experience.

Reconciliation of movement in the number of awards

Year ended Year ended

31 December 31 December

2017 2016

Number Number

of awards of awards

Outstanding at 1 January 7,712 7,865

Forfeited (312) (153)

Outstanding at 31 December 7,400 7,712

In order to settle share‑based payment awards, in 2015 the Group purchased US$10.7m of preference shares in FFHL Share

Option 1 Corp and that company has purchased shares in Fairfax. Of the purchase, US$3.9m related to this scheme and was

recorded within equity so as to offset the share‑based payment charges recorded in equity on exercise of the awards. There

were no additional shares purchased for this scheme in 2016 and 2017.

 

So it appears that a small amount of share buyback activity has been earmarked for the unvested Brit share awards at acquisition.

[gfp]

Thanks Cigarbutt, I appreciate the thoughtful reply

[FairFacts]

The 13 F was filed today. Not much going on:

1. Sold IBM entirely, last reported at $37.1mil

2. Bought $2.5mil GE stock

3. Bought $10.0mil GM stock.

 

 

[TwoCitiesCapital]

Seems like they might have been a bit early on GE. Am looking forward to see how they build out the portfolio now that recent volatility over the past 9-10 months gives them opportunity in a few traditional blue chip companies