Fairfax Announces Preferred Share Issue

[Redskin212]

Not sure I understand why they need to raise $200 million especially just after making a dividend payment of approx the same $200 milliom.

 

http://www.marketwire.com/press-release/Fairfax-Announces-Preferred-Share-Issue-1105503.htm

[StubbleJumper]

Hmmm.  I hope they don't waste the money on Canwest.....

[ERICOPOLY]

That's true but the majority of dividend paying companies also have debt -- they too could have less debt instead of paying the dividend.  It just looks a good deal bit more silly to raise the money so close to the dividend paying date.

 

[Partner24]

Well,:

 

the main pros that I see:

 

1) at least we are not diluted as common shareholders

2) it's financialy safer than debt

3) cost of that capital on the short term basis is reasonable

 

the main cons that I see:

 

1) are we getting too much outside capital thirsty? Do we really need that cash now?

2) why giving us dividends and then re-issue capital?  ???

2) the mid and long term cost of that capital is variable, so unknown at this time.

3) dividend is not tax deductible  

 

[oldye]

Well,:

 

the main pros that I see:

 

1) at least we are not diluted as common shareholders

2) it's financialy safer than debt

3) cost of that capital on the short term basis is reasonable

 

the main cons that I see:

 

1) are we getting too much outside capital thirsty? Do we really need that cash now?

2) why giving us dividends and then re-issue capital?  ???

2) the mid and long term cost of that capital is variable, so unknown at this time.

3) dividend is not tax deductible  

 

 

200 million is not a lot of capital for Fairfax..we're talking 2-3% and I hope they use the proceeds to buyback stock!

 

[Stone19]

I think they might call back the orh pref they are paying a higher % on and that would get them off the NYSE totally.Cheers

[gaf63]

Couple of possibilities:  pay off the ORH pfds. ( A at 8%),  injection of capital into  ICICI Lombard to bring % owned to 48%, 49%(if the Indian govt. ever moves on allowing higher foreign ownership), more investment opportunities with a much higher return than 4.75%, and the disastrous quake in Haiti could have caused major losses( altho would think that they ample reserves for such an occurance.

 

Gaf

 

 

 

 

[Uccmal]

I am in a rude mood today and this didn't help.  Other than getting the money cheap while they can I dont understand this move.  The optics are horrible for this kind of issue.  It looks as though they sold stock to pay the dividend - I am only implying what it looks like not what the reality is. 

 

Since it is at the corporate level I dont imagine it is for Canwest - god I hope not. 

 

It could just be to cover some of the market cap lost over the last 15 days - 800 million.

 

Sometimes I wish that Fairfax would hire a sophisticated PR firm to show them how to communicate via press releases etc.  Anyway I bought a couple of hundred shares today at a price $20 lower than I sold 100 at on the ex-dividend day.  Sometimes I wonder though when I will stop beating my head against the wall...  ::)

 

[omagh]

Good point...I was wondering why they filed a 6-K with the SEC today since they should be delisted.

 

-O

I think they might call back the orh pref they are paying a higher % on and that would get them off the NYSE totally.Cheers

[twacowfca]

It's a great move IMHO.  It's not debt, and they can pay the div at no real cost when inflation kicks up in a year or two.  However, they may use the proceeds to pay down other debt or pref that costs them more to service.

[valuecfa]

Normally I would be really peeved off when a healthy company I own has a pref issuance (instead of debt), but the terms are really, really good on this one for the issuer. 4.75% for at least 5 years, with the reset to only the 3 month GOC T-Bill + 2.16%, and the reset option only given every other 5 years.

 

That strikes me as a good deal. :)

 

 

The timing of this issuance is interesting though.

[Smazz]

"Fairfax intends to use the net proceeds of the offering to augment its cash position, to increase short term investments and marketable securities held at the holding company level, [glow=red,2,300]to retire outstanding debt[/glow] and other corporate obligations from time to time, and for general corporate purposes. The offering is expected to close on or about February 1, 2010."

 

Lets hope its that. That is what alot of us were hoping would eventually happen years ago when they werent in the good position they are now - the ability to get more favourable terms. I for one remember writing about in hopes for that eventuality. If it is for other reasons though I would be p****d.

[Uccmal]

smazz, lets hope.  I do like the preferred structure versus debt.  The next report is going to take alot of reading to get a handle on the company again.  So much has changed. 

 

So, why then is the stock trading so f-g cheap?

[Viking]

Uccmal, currently most insurance/reinsurance stocks are trading at very low multiples. Why?

1.) we are still in a soft pricing environment; with the rebound in risk assets insurers/reinsurers balance sheets have rebounded and there is lots of excess capacity. No catastrophes in 2009 (large payouts) also allowed everyone to post great underwriting results adding further to profitability.

2.) underwriting is expected to be challenging at best in 2010; there is a perception that many insurers dipped into reserves heavily the past few years to juice underwriting results and that this cannot continue in coming years.

3.) with interest rates at historic lows, interest & dividend income for the group will be flat

4.) with the recent run up in risk assets, and given that they are reflected in BV, it is prudent to assume that BV has more downside than upside in the near term (look at what happened to FFH and the rest of the industry in Q1 '09 when the markets sold off).

 

When you weave it all together, what is the catalyst in the insurance/reinsurance sector to drive investor interest?

 

Having said all that, insurance/reinsurance is becoming a sector that people do not like. I have built a core position in BRK-B. Should FFH continue to sell off I will be happy to own at under 0.9xBV. 

[Viking]

Specific to FFH, I estimated in a previous post that Dec 31 BV = $378. Current BV = $368 ($10 div). Current price = US $348; P/BV =  $348/368 = 0.95

 

http://cornerofberkshireandfairfax.ca/forum/index.php?topic=1605.0

[Viking]

Here are a couple of articles..

www.reuters.com/article/idCNN1516567620100115?rpc=44

www.gccapitalideas.com/2010/01/03/rates-retreat-as-capital-rebounds-global-reinsurance-renewals-at-january-1-2010/

[Uccmal]

Viking, Your rationale of course makes perfect sense, except that we know that FFH has at least 170-180 M per Q of dividend and interest income, and growing, in a very low inflation environment.  We know they have made $3-4 per share on Magna alone in the last month, a couple of dollars on GE, some on Intel, etc.  The BV per share you estimate is likely close or slightly low.

 

Markel is at 1.2 BV; BRK at 1.3 to say nothing of intrinsic value of either company.  They are both cheap as well which fuels your overall thesis.  Leastways I figure that FFH should trade in line with these two nowdays.  FFH at 1.3 BV would be about 460 US which would be about right for me.

 

Anyways, I am just impatient, sometimes.  Not always a good trait in a value investor  :P

[oldye]

Specific to FFH, I estimated in a previous post that Dec 31 BV = $378. Current BV = $368 ($10 div). Current price = US $348; P/BV =  $348/368 = 0.95

 

http://cornerofberkshireandfairfax.ca/forum/index.php?topic=1605.0

 

Yea this is a bit off, The U.S stock portfolio was break even hedge included for the Quarter, and that doesn't take a lot of other factors into account including what should be a strong Q4 from insurance. After the quarter ended they're up about 8$ per share based on the old 13f

 

Cheers :). 

[Crip1]

From the Reuters article posted by Viking:

 

  "The biggest price cuts are being taken by the largest

carriers, according to the most recent survey by the Council of

Insurance Agents and Brokers (CIAB) in October. Large

property-casualty insurers were paid about 7.4 percent less for

policies in the third quarter compared with the more modest 3.6

percent average decline recorded by smaller players."

 

I'm speculating that the reason larger players are seeing more pricing pressure than smaller ones is due to AIG cutting rate drastically since, well, they are backstopped by Uncle Sam. Can anyone in the industry confirm or advise to the contrary?

 

-Crip

[bablu]

Just renewed my car insurance in BC and paid 11% less (Optional portion). ICBC basic insurance portion went up by 7-8% ....

[kyleholmes]

From the Reuters article posted by Viking:

 

  "The biggest price cuts are being taken by the largest carriers, according to the most recent survey by the Council of Insurance Agents and Brokers (CIAB) in October. Large property-casualty insurers were paid about 7.4 percent less for

policies in the third quarter compared with the more modest 3.6 percent average decline recorded by smaller players."

 

I'm speculating that the reason larger players are seeing more pricing pressure than smaller ones is due to AIG cutting rate drastically since, well, they are backstopped by Uncle Sam. Can anyone in the industry confirm or advise to the contrary?

 

Crip,

 

I spoke to a fellow over at Markel Corp and he was livid about AIG's pricing..... they are trying to earn there way out of there problems which can seem smart when more money is coming in, than going out.... but in reality it really is not as more guarantees and money are going out, than money coming in! It just might take awhile to play out!

 

But from what he was saying you are correct, and he was quite enraged about it! He said they have been running there business correctly for years waiting for the stupidity to stop(ie-Reinsuring with questionable reinsurers, poor investments,etc) and the eventually hard market both with their investments and insurance.... they got the investments, but are waiting for the insurance and when they should have got one based on the storm on the left side of their competitors balance sheets... they have competitors that are writing business at unreasonable rates stopping it from turning..... He had some choice words for the competitors with back stops from Uncle Sam, which are some of the large culprits!

 

[Grenville]

A relevant tidbit from the 2000 Annual regarding the dividend: (I'm slowly making my way through the old annuals)

 

"This brings me to my own compensation arrangements. For many years now I have felt that as a controlling shareholder involved in the management of the company, my compensation should be closely linked to all shareholders. So from 2000 onwards, my compensation will be a fixed salary of $600,000 with no bonuses. This compensation will not increase annually, and if 1999/2000 is repeated, could decrease!! However, to make sure that my family survives, Fairfax will examine instituting a dividend – yes, a modest dividend – in 2001 at an annual rate of $1 or $2 per share. Going forward, the only difference between me and you, our shareholders, will be my salary of $600,000 – which based on recent performance, many of you may think is too high! While the payment of a modest dividend results in double taxation to most of you and is not as economically efficient as retaining all our profits and compounding at high rates of return (as we have done for the past 15 years), this was the only way I could think of to bring my compensation in line with your interests. While I may have generated some sympathy from you, I should add that I continue to travel well – in fact a little better recently because we sold our Lear Jet for US$2.5 million (cost US$1.8 million) and purchased a Gulfstream II for US$6.2 million."

[twacowfca]

What a great tidbit!  :). Buffettesque ***

 

Got any more, Grenville?