Fairfax 2021

[glider3834]

5 hours ago, StubbleJumper said:

do you want to see a management team exposing the company cash flow risk from TRS compounded on top of whatever other events in the insurance industry or financial markets that trigger a reduction in the company's share price? 

SJ I think thats one reason why they wanted to keep $1.5 bil in holdco & 2 bil revolver undrawn - with the TRS it is around 2mil shares &  733 mil or so exposure  - given their existing liquidity & other potential options to raise further liquidity- cash flow risk is well covered IMO with downside risk low given strike price -  its a calculated risk but I wouldn't put it in the same category as their macro bet.

 

long equity total return swaps on 1,964,155 Fairfax subordinate voting shares with an original notional amount of $732.5 million (Cdn$935.0 million) or approximately $372.96 (Cdn$476.03) per share.

Edited November 18, 2021 by glider3834

[glider3834]

7 hours ago, Parsad said:

I think this was just another way of showing the underlying value of the insurance businesses, force the price up based on the reality that Fairfax will buy any stock tendered up to $500 USD, without having to exercise the TRS or continue buying under the normal course issuer bid...which was not having the desired effect of closing the gap between intrinsic value. 

+1 agree - the longer the time period the more expensive the TRS

 

There are 3 discounts in the current FFH share price IMO

- share price discount to BV

and BV is understated because

- insurance subs - fair value > carrying value 

- non-insurance subs - fair value > carrying value

 

[mcliu]

I think the simple explanation for the TRS is that, at the time, FFH shares were very attractive but the company needed to preserve capital given all the uncertainties in the market.

 

The banks were likely be the counterparties to earn their fees and would have hedged out their positions by buying shares.

 

I think the cash raise and SIB will also help cushion the stock price if they unwind the TRS.

[mcliu]

17 hours ago, Viking said:

@mcliu what i like about the big share repurchase and how it is structured is it allows Fairfax to be patient with all their holdings. I expect they will be monetizing some equity holdings in 2022. 

Some of the cyclicals are minting money right now, but it won't last forever.. 

[StubbleJumper]

The issuer bid circular has been posted to SEDAR (attached).  Paid-up capital is US$252/sh.  So, if the tender goes through at the high-end of the bracket there will be a deemed dividend of US$500-$252=$248/sh.

 

 

SJ

fairfax.pdf

[value_hunter]

1 hour ago, StubbleJumper said:

The issuer bid circular has been posted to SEDAR (attached).  Paid-up capital is US$252/sh.  So, if the tender goes through at the high-end of the bracket there will be a deemed dividend of US$500-$252=$248/sh.

 

 

SJ

fairfax.pdf 1.46 MB · 12 downloads

For Canadian, this gain will be treated as eligible dividend, not capital gain, right?  Will this even be better as you get dividend tax credit which you may pay 0 tax if you are in the low bracket tax. 

[StubbleJumper]

13 minutes ago, value_hunter said:

For Canadian, this gain will be treated as eligible dividend, not capital gain, right?  Will this even be better as you get dividend tax credit which you may pay 0 tax if you are in the low bracket tax. 

 

Absolutely it would be excellent for a Canadian taxpayer who earns less than ~CAD$50k.  But, how many FFH shareholders are in that tax bracket? 

 

 

SJ

[value_hunter]

1 minute ago, StubbleJumper said:

 

Absolutely it would be excellent for a Canadian taxpayer who earns less than ~CAD$50k.  But, how many FFH shareholders are in that tax bracket? 

 

 

SJ

And you can also claim capital loss since the sell price will be adjusted to $252. I think this will probably be better than just claim whole gain (excess) as capital gain. What do you think?

[StubbleJumper]

Just now, value_hunter said:

And you can also claim capital loss since the sell price will be adjusted to $252. I think this will probably be better than just claim whole gain (excess) as capital gain. What do you think?

 

It depends on your tax bracket and whether you are able to immediately apply the capital loss to offset gains in the past 3 years, or whether you need to carry it forward for some period of time before being able to use it.

 

But, just for giggles and farts, assume that we are dealing with an Ontario taxpayer in the CAD$100k+ tax bracket, and that he bought his FFH shares for US$400 and the buy-back ends up being US$500.

 

If he tenders:

 

The first tax impact is that the guy pays tax on the eligible dividend of US$500-252=248.  So, gross that up by 38%, pay tax at 46% and then take the 25% dividend tax credit.  It's a considerable tax bill of about US$70/sh.

 

Then, as you noted, the second step is to get the capital loss, so take proceeds of US$252 subtract the ACB of US$400 and you get a capital loss of US$148/sh.  Apply the 50% inclusion rate, and you can carry back US$74 of losses against capital gains from previous years, which at a tax rate of 46% would we worth about US$34.

 

So, call it a net tax bill of ~US$36.

 

If he just sells:

 

On the other hand, if the guy were able to just dump his shares on the market at US$500, he'd have a capital gain of US$500-$400=$100.  Apply the 50% inclusion and tax at 46% and he would be dinged for about US$23 in capital gains tax.

 

 

As you go into progressively higher tax brackets, the arithmetic becomes even more unfavourable for tendering.  And, if you are tendering a meaningful amount of shares (let's say 100+), you'll almost certainly be bumped into another tax bracket!

 

 

SJ

 

[value_hunter]

6 minutes ago, StubbleJumper said:

 

It depends on your tax bracket and whether you are able to immediately apply the capital loss to offset gains in the past 3 years, or whether you need to carry it forward for some period of time before being able to use it.

 

But, just for giggles and farts, assume that we are dealing with an Ontario taxpayer in the CAD$100k+ tax bracket, and that he bought his FFH shares for US$400 and the buy-back ends up being US$500.

 

If he tenders:

 

The first tax impact is that the guy pays tax on the eligible dividend of US$500-252=248.  So, gross that up by 38%, pay tax at 46% and then take the 25% dividend tax credit.  It's a considerable tax bill of about US$70/sh.

 

Then, as you noted, the second step is to get the capital loss, so take proceeds of US$252 subtract the ACB of US$400 and you get a capital loss of US$148/sh.  Apply the 50% inclusion rate, and you can carry back US$74 of losses against capital gains from previous years, which at a tax rate of 46% would we worth about US$34.

 

So, call it a net tax bill of ~US$36.

 

If he just sells:

 

On the other hand, if the guy were able to just dump his shares on the market at US$500, he'd have a capital gain of US$500-$400=$100.  Apply the 50% inclusion and tax at 46% and he would be dinged for about US$23 in capital gains tax.

 

 

As you go into progressively higher tax brackets, the arithmetic becomes even more unfavourable for tendering.  And, if you are tendering a meaningful amount of shares (let's say 100+), you'll almost certainly be bumped into another tax bracket!

 

 

SJ

 

That works for lower tax bracket. Thanks, SJ.

[Maxwave28]

What about if one is not a taxable entity eg pension funds in the United States and or Canada? Perhaps those types of investors are less sensitive.
 

perhaps naively but I doubt that fairfax would go thru this process if they didn’t have some reasonable expectation of the tender being somewhat successful. Otherwise why go thru the brain damage. 
 

[StubbleJumper]

15 minutes ago, Maxwave28 said:

What about if one is not a taxable entity eg pension funds in the United States and or Canada? Perhaps those types of investors are less sensitive.
 

perhaps naively but I doubt that fairfax would go thru this process if they didn’t have some reasonable expectation of the tender being somewhat successful. Otherwise why go thru the brain damage. 
 

 

As the discussion over the past day has highlighted, there are several possible criteria for the SIB being viewed as successful.  It is possible that FFH defines success as signalling the market about the company's future.  It is possible that they define success as bumping the share price into the US$500 range.  Or it is possible that they define success by reducing the share-count, even if they don't quite get 2 million shares tendered (ie, if there is 1.6 million shares tendered at a cost of US$800m, is that a failure?).

 

I suspect that the SIB will be undersubscribed, but who knows?  Sometimes they end up being oversubscribed even though the tax consequences are significant.  But, if you are a Canadian taxfiler, it's an interesting exercise to take the census of SIBs over the past 5 or so years.  Those which have tax treatment as capital gains are generally oversubscribed and subject to pro-rating.  Those which have large deemed dividends tend to be undersubscribed.  The one thing in FFH's favour is that they are not trying to repurchase an enormous percentage of their shares (ie, about 7.4%) and there's not that many shares locked up by insiders (about 3 million).  So, they really only need up-take of about 10% of the available shares to max out their buy-back.  It is possible that there will be enough shareholders that will be able to take advantage of the SIB without triggering dire tax consequences.

 

This stands in contrast to a couple of other SIBs over the past couple of years, notably the ELF and Power family SIBs.  In the case of ELF, family ownership was substantial, so there were not many free shares available.  In the case of the Desmarais family, IIRC, they proportionately tendered for GWO and PFC, but didn't tender for POW?  In any case, POW was the only one that was oversubscribed.  

 

 

SJ

[maxthetrade]

Thanks for the discussion guys, I was completely unaware of the tax consequences, shows that Germany isn't the only country with byzantine tax laws.

If they define success as simply bumping the share price without buying back a menaingful amount of stock I'd be dissapointed. That would remind me of the stunt they tried to pull off with the BB buyout.

Usually I'd expect arbitrageurs to make sure that enough shares get tendered but in this case this seems impossible unless there is a loophole that allows some entities to avoid the tax consquences.

Will be interesting to see how this plays out.

 

[glider3834]

1 hour ago, maxthetrade said:

Thanks for the discussion guys, I was completely unaware of the tax consequences, shows that Germany isn't the only country with byzantine tax laws.

If they define success as simply bumping the share price without buying back a menaingful amount of stock I'd be dissapointed. That would remind me of the stunt they tried to pull off with the BB buyout.

Usually I'd expect arbitrageurs to make sure that enough shares get tendered but in this case this seems impossible unless there is a loophole that allows some entities to avoid the tax consquences.

Will be interesting to see how this plays out.

 

I think we should look at this substantial issuer bid from a liquidity perspective as well for institutional investors & not looking at it purely from a retail investor angle. 

 

If you are a large institutional investor who maybe has been holding onto Fairfax for a long period of time - the SIB provides an opportunity to divest - with the current avg daily trading volume just 50,000 shares - it makes it very difficult to sell a larger position & heavy volume selling will likely impact price negatively.

 

Also if a institutional investor has made an internal decision to sell because they have fundamental reasons for not owning the company then tax considerations will be of secondary importance, their first consideration will be that they are stewards of their fund investors capital and they have other investments which they deem to be more attractive. Also they can tender their shares at US$500 a share - a decent premium to current price.

 

We are also running into the end of the calendar year & for institutions that want to rebalance their portfolio this is the time they will want to do it - so the timing of this SIB is relevant IMO.

 

Also from tax perspective institutions that are pension funds or running pension accounts may see it as more attractive, or if they are sitting on a capital loss then maybe they can minimise the tax impact.

 

I wouldn't jump to the conclusion that this SIB won't succeed at least partially & if they soak up maybe 50% through the SIB & maybe another 50% using their NCIB over the next 3 months then that could still work - I have no doubt that Fairfax would have taken on feedback in the past from insitutional investors & would have done their own research internally prior to launching this - there is a cost associated with it as well. 

Edited November 18, 2021 by glider3834

[Xerxes]

Same here. Thanks for the discussion. I am holding mine in RRSP so saved from all this tax talks but they are interesting.

 

The negotiation with two pension funds must have taken over a year. There is a roadmap that got us where we are today, and the current market environment, TRS, actual monetization, paper-funny-money monetization, tender offer for FIH and now for FFH, all part of that road map. 

 

Why they decided to crystallize a portion of Odyssey Re NOW, and fund their buyback at cost of 8%? (minus 2% dividend saved), as oppose to do the buyback drip and drab via excess free cash flow over several years, just means they expect their P&L to runs hot in 2022, so want to torque that share count accordingly ... or so is my hope. 

 

Another way to think about it is the following: the TRS is the rocket, and everything in this compressed roadmap is jet fuel. It makes no sense for Fairfax to setup TRS with its quarterly cash requirement (whichever it goes) just for the fun of it. That things needs rocket fuel, so that they can close it profitably. 

 

I cannot believe that the man for 10 years held out on his deflation swaps is out there to juice the share price with this tender offer (as a short term thing without an overall roadmap), eventhough i think the last dollar value of the last trading day of the year does have an importance from a reporting point of view to him.   

Edited November 18, 2021 by Xerxes

[value_hunter]

My understanding is the tender will pay in USD. If you choose CAD, there will be some exchange fee. Anyone have idea, how much the spread Computershare Trust Company of Canada will charge? Is it better to convert FFH.TO Toronto list to FRFHF in advance?

 

The exchange rate that will be used to convert payments from United States dollars into Canadian dollars
will be the rate established by Computershare Trust Company of Canada, in its capacity as foreign exchange service
provider, on the date the funds are converted, which rate will be based on the prevailing market rate on that date. The
risk of any fluctuations in such rates, including risks relating to the particular date and time at which funds are
converted, will be solely borne by the Shareholder. Computershare Trust Company of Canada will act as principal in
such currency conversion transactions. Computershare Trust Company of Canada may earn a commercially reasonable
spread between its exchange rate and the rate used by any counterparty from which it purchases the elected currency.

[glider3834]

On 11/18/2021 at 1:29 AM, gfp said:

Can anyone clear up this question on share count of FFH:  In the Q3 press release they state

" At September 30, 2021 there were 25,876,369 common shares effectively outstanding."

 

In today's announcement they state:

"Fairfax’s 26,986,170 total issued and outstanding Shares,"

 

Why the difference / increase?

This has been bugging me & please disregard my last post on this one- here goes

 

Outstanding shares = Float (public) + Restricted shares https://www.wallstreetmojo.com/outstanding-shares-stocks/

 

 

(figures below in thousands)

 

Public float = 24,167 (below)

 

Share-based award -  dilutive 1,558 & anti-dilutive 1,269 = 2,827 (at 30 Sep-21 from Q3 '21 Interim report)

 

Outstanding shares = 26,994  (which is close to figure announced I think of 26,986)

 

So I suspect the basic outstanding shares number (used to calculate Fairfax's book value per share) has not changed too much from 30 Sep-21 - does the above sound right guys?

 

Edited November 19, 2021 by glider3834

[Xerxes]

Since the other thread is running hot. I will post this here.

 

I thought this statement from 2018 was worth the re-highlight, with the excess free cash flow being defined as the $2 billion of earning minus the $300 million, which comes to theoretically $1.7 billion . The issue is they haven't been hitting 15% for a while pre-Pandemic era, and between minority buyback and debt re-payment, the vision has not hold. 

 

We maintained our dividend in 2018 at $10 per share. As I have mentioned to you before, we are focused on using our free cash flow to buy back stock so it is unlikely our dividend will be increased soon. A 15% return on equity implies earnings of approximately $2 billion, so paying approximately $300 million in dividends would leave us with $1.7 billion for stock buybacks and tuck-in acquisitions. Since we began paying dividends, we have paid cumulative dividends of $113 per share

-----------------------------------------------

 

On a different note here some data point since the share issuance to buy Allied World in 2016-17. Another way to think about the benefit of the buyback is to see them as payback what they took from the cookie-jar back in 2016.

 

Importantly, the FFH common shares they issued in 2016-17, I am guessing 3 million shares, were issued at a much higher multiple to book value than today. So with this tender offer and the current buyback in place, they are buying back what they issued then at a much lower multiple to BV. 

 

Said differently, they would be effectively lowering their acquisition cost of Allied World, if they are able to continue to swallow up 3 million share, bigger than today' tender offer for sure, but the direction is clear. 

 

                                   

	2015	2016	2017	2018	2019	2020
cash flow for dividend common/preferred	265.4	271.8	282	328.3	323.8	319.7
cash flow from operations		1258.2	2734.2	-1924.3	1355.4	139.8
net earning		-394.7	1614.9	817.9	1971.2	37.4
share count	22.2	23.1	27.8	27.2	26.8	26.2

 

 

 

 

Edited November 19, 2021 by Xerxes

[glider3834]

8 hours ago, glider3834 said:

I think we should look at this substantial issuer bid from a liquidity perspective as well for institutional investors & not looking at it purely from a retail investor angle. 

 

If you are a large institutional investor who maybe has been holding onto Fairfax for a long period of time - the SIB provides an opportunity to divest - with the current avg daily trading volume just 50,000 shares - it makes it very difficult to sell a larger position & heavy volume selling will likely impact price negatively.

 

Also if a institutional investor has made an internal decision to sell because they have fundamental reasons for not owning the company then tax considerations will be of secondary importance, their first consideration will be that they are stewards of their fund investors capital and they have other investments which they deem to be more attractive. Also they can tender their shares at US$500 a share - a decent premium to current price.

 

We are also running into the end of the calendar year & for institutions that want to rebalance their portfolio this is the time they will want to do it - so the timing of this SIB is relevant IMO.

 

Also from tax perspective institutions that are pension funds or running pension accounts may see it as more attractive, or if they are sitting on a capital loss then maybe they can minimise the tax impact.

 

I wouldn't jump to the conclusion that this SIB won't succeed at least partially & if they soak up maybe 50% through the SIB & maybe another 50% using their NCIB over the next 3 months then that could still work - I have no doubt that Fairfax would have taken on feedback in the past from insitutional investors & would have done their own research internally prior to launching this - there is a cost associated with it as well. 

I just had a look on Morningstar here https://www.morningstar.ca/ca/report/stocks/ownership.aspx?t=0P00006821

 

Apparently the top 20 funds & institutions are sitting on around 11.89 mil of FFH TSX listed shares or 41.7% of total shares held. 

 

Also worth noting that there are institutional investors who appear to have been recently selling Fairfax shares, who are sitting on 100,000 or more share positions - I think the liquidity of this SIB at potential premium to current share if tendering up closer to US$500 (current price US$460) could be attractive - hey the US$40 extra might even help pay the deemed div tax (if applicable to that seller)!

 

 

 

 

 

 

 

 

 

 

 

 

Edited November 19, 2021 by glider3834

[wondering]

glider, you do awesome research!  thanks.

 

[glider3834]

7 hours ago, wondering said:

glider, you do awesome research!  thanks.

 

cheers @wondering - I appreciate the contribution everyone makes on this board & try to return the favour as best I can

[glider3834]

for what its worth - appears to be a few analyst upgrades for Fairfax since buyback announced

https://www.marketbeat.com/stocks/TSE/FFH/price-target/

 

 

Edited November 20, 2021 by glider3834

[Viking]

1 hour ago, glider3834 said:

for what its worth - appears to be a few analyst upgrades for Fairfax since buyback announced

https://www.marketbeat.com/stocks/TSE/FFH/price-target/

 

 

Glider, FYI, the estimate in the summary you linked to for RBC looks wrong. It says RBC has a price target CAN$550 (i clicked on your link and scrolled down). RBC’s actual current target for Fairfax is US$600. RBC has not done an update post share buyback announcement. 
 

RBC summary after Q3 results: “Strong top-line and book value growth, remains an outstanding value”

Edited November 20, 2021 by Viking

[glider3834]

24 minutes ago, Viking said:

Glider, FYI, the estimate in the summary you linked to for RBC looks wrong. It says RBC has a price target CAN$550 (i clicked on your link and scrolled down). RBC’s actual current target for Fairfax is US$600. RBC has not done an update post share buyback announcement. 
 

RBC summary after Q3 results: “Strong top-line and book value growth, remains an outstanding value”

good pick up thanks Viking - its like that saying always go back to the source - I guess thats the potential issue with any 3rd party sites - not sure if yourself (or anyone) has a site they visit thats free which has analyst ratings, I prefer not to subscribe. I like to be aware of analyst ratings (& ideally if information is available understand their reasons & how they get there) not to rely on but rather if it is massively different from my own target it leads me to check, double-check & triple-check again my investment thesis

 

 

Edited November 21, 2021 by glider3834

[glider3834]

I wanted to respond to the Fairfax owns 'cyclical crap' discussion points raised - thought better to do it in this thread & not the SIB thread.

 

If we just take a step back for a moment & think about the whole investment portfolio positioning - because I believe the strategy is really the critical piece.

 

1. Fairfax has 44% of their investments in cash & investments - higher interest rates will allow them to raise their fixed income allocation & increase interest income ( if you believe interest rates are headed higher then you would give this part of their strategy a tick & this is 44% of their total portfolio!). 

 

2. Fairfax is long India - this could be the most important & smartest strategic call by Prem over the years - India is now the number 1 emerging market economy in the world (sorry China!) & while their sharemarket looks decidedly frothy , India's economic prospects in terms of GDP growth etc look strong. Fairfax's Indian investments over the last few years have done exceptionally well.

 

Lets take Digit in this context -  India has GDP growth rate of 7% & has been growing premiums at high double digits (sounds a bit like US GDP growth rate in the 1960s & Geico when it started off when it had a similar growth rate - like Digit , Geico was challenging the status quo). 

 

Just on Digit because I am being cheeky here - media reports I have read suggest that Berkshire said no to Kamesh Goyal when he asked Berkshire to invest in Digit & Ajit Jain actually introduced Kamesh to Prem  & rest is history as they say.

 

3. Fairfax is long Greece (& Europe) - to be fair this has been a terrible call by Fairfax for many years - but it would be a mistake now for Fairfax to throw in the towel with Greece with this economy firmly set to rebound - the real estate market & property prices are on the rise, GDP in 7% area . Fairfax's strategic decision to maintain its exposure to Greece now IMO is the right one. Eurobanks results this week will be worth checking out - I am quietly optimistic - Eurobank has now become the opportunistic, value investor picking up stakes in banks in SE Europe where it sees opportunities, so its not just recovering, its now also in growth mode (a potential dividend on the way in 2022 ?? 

 

4. Fairfax is long resource plays - this is a bet on inflation IMO as well as the individual management teams & company prospects - insurers need to hedge their inflation risks in managing their liabilities

 

5. Fairfax is long real estate (eg Kennedy Wilson, Toys r us portfolio) - ditto on 4.

 

6. Fairfax is long covid recovery plays in travel, hospitality, dining & retail. Many of their investees that were hammered by covid, have used covid to digitise & streamline their cost bases. So coming out of covid have opportunity to deliver better earnings(eg Thomas Cook India, Recipe) - keep your eye on the profit from associates & non-insurance segment contribution to the Earnings statement over the next few quarters.

 

5. Fairfax is long Fairfax - their TRS position is effectively their 4th largest equity holding with around US$900 mil or so exposure ! They are also raising spare cash not to 'empire build' but to buyback their own stock - which company does Fairfax understand better than any other company as an investment - itself! This is a no brainer & good strategic call IMO.

 

6. Fairfax is an international insurer - owning equities in many different countries is also part of their strategy to match insurance liabilities in those different countries. 

 

7. Fairfax is an investor that likes to own concentrated positions & have a seat at the table - thats why you will see them holding big stakes & yes liquidity is a potential issue, however, in many cases these are also publicly listed companies (also Fairfax's cash & short-term investments effectively hedge their equity positions & provide liquidity during market downturns like 2020). Often the companies Fairfax has big stakes in are in that US$1-5 bil size area & perhaps that is just a function of Fairfax's market cap & investment universe, they can't afford a BNSF like Berkshire but what about Atlas with an ex-Berkshire manager at the helm??

 

There are other aspects to Fairfax's strategy including their preference for management teams who are strong capital allocators with good track records , but I wanted to highlight the above. 

 

I think we would all like them to dump BB at some point but is now the best point? The challenge here is that BB operating performance actually looks to be improving, Ivy looks very interesting  - are they being stubborn here - maybe - does BB need to be a great investment for Fairfax investment thesis to play out - not really IMO.

 

I have seen a few posts suggesting Fairfax should maybe have jumped into the MSFT,APPL type investments - I agree but its too late to now jump on that bandwagen - we are talking about stocks that have gone from multiples in the teens to the 30s, 40s (that continued multiple expansion with interest rates now starting to increase looks to be challenging from here) - Fairfax do have GOOG which is a smaller $50 mil or so position -I believe they won't shy away from a big tech company investment like GOOG at the right price (personally I wish they had taken a bigger slice of GOOG when they had the chance but anyway)

 

Worth noting two amongst Fairfax's top 10 investments that are non-cyclical- BDT partners largest investment is a beverage manufacturing business (I suspect this is Keurig Dr Pepper), Fairfax India's largest investment is in infrastructure - Bangalore Airport. 

 

Anyway there is my Sunday afternoon ramble

Edited November 21, 2021 by glider3834