FFH 13F for 6/30/09

[ERICOPOLY]

 

After the quick 30% pop, put it in FFH.  That's what.

 

Regarding your treatment of float as equity.  Fairfax has more float per share, you should be happy with the switch.  Truly though, I think your reasoning there is highly flawed -- what about a life insurer with a much higher float/equity ratio?  Float is not equity.

 

 

 

Eric, you've convinced me. Somewhat.

 

After a good pop in FFH already I've sold some (15%) and put it in ORH. Mostly common and a handful of Feb 45 calls.

 

As with you if we get a pop due to a buyback/privatization I will put it right back into FFH. I'm doing this transaction in my registered accounts. I hate friction and I hate paying the taxman too soon. If it doesn't happen I'm perfectly content owning these ORH shares for quite some time. They are a great value regardless.

 

I hope to end up owing you a beer.

 

Cheers.

 

I hate friction and taxes too.  There is no certain success here, but I like the odds.  Worst case, I pay the taxes and hold ORH long term -- the taxes would erode the gap in value that I presently see in favor of ORH, but it won't completely erode it.

[ERICOPOLY]

Eric, FFH has averaged high cost float over quite a few years.  ROE at FFH has averaged 14% for just as many.  That is why I mentioned dilution by less desirable business returns; both ORH and FFH share the same investment returns (more or less).  Add to that $400 million of reasonably high cost new debt capital at FFH and the struggle continues.

 

As for life companies; please name me one that produces a combined ratio below 100%:  Suggesting a cost to their float.

 

I'm not entirely sure it is my logic that is flawed, but no insult intended.

 

 

You can go back to 2001 and see that ORH recorded a 103.1% combined ratio even if you exclude 9/11 and Enron.

 

You aren't giving FFH enough credit for FFH's turnaround -- focusing on historical cost of float is fair as long as you remember ORH's historical cost of float.

 

If you exclude a few recent years, ORH doesn't look good historically either.

 

Having no cost float doesn't make it equity.  Their hands are tied -- they can't put it 100% or 80% in equities like they can regular equity.  It is there to pay claims and for painfully clear reasons you just can't take on too much risk with it.

[ERICOPOLY]

The other thing I would like to add...

 

$1,300 invested in FFH will likely outperform $1,000 invested in ORH.

 

I am happier at the moment to have $1,000 in ORH rather than FFH, because like you said their float looks to be less expensive and on top of that I think the discount to book looks far better.  But to have an extra 30% of equity... hmm, I don't think ORH will beat FFH anymore if you handicap FFH/ORH like that with a 30% boost.

 

FFH dropped with the NB takeover and I expect it will be worse when ORH gets taken over.  I think that's because it's better to be getting the premium than giving it.  In a post ORH takeover world, FFH will have a considerable amount of goodwill on it's books -- offsetting the ICICI Lombard hidden value.  

 

So assuming the deal was announced this week (in a pretend world), you would be looking at ORH trading today at maybe 92% of tangible Q2 book, and FFH trading at 1.08x tangible Q2 book.  That means FFH is trading at a 17% premium to ORH, and that's without even accounting for ORH's fair share of ICICI Lombard hidden value which we need to add to ORH's Q2 book to be fair.

 

 

 

[EdWatchesBoxing]

If ORH is taken private, I imagine it will be similar to NB. NB was repurchasing shares for a while before FFH took them private.

 

It probably wasn't of the same magnitude as the ORH repurchases. From what I remember the avg volume for NB was quite low. They might have been saying, "Look, we'll reward those who held on to the end." Then they offered $39 for the remaining shares.

 

So, if they are really planning on taking ORH private, I'm sure it will be in the 1.3 range to keep it consistent with the NB deal, which is why I plan on taking the proceeds from selling FFH last week, buying ORH, and putting it back in FFH when this is all done.

 

All jokes aside, I agree with Smazz, if ORH can continue to repurchase shares the way that they have been, FFH may wait until they only need to pay the premium to insider shareholders before taking ORH private.

[ERICOPOLY]

All jokes aside, I agree with Smazz, if ORH can continue to repurchase shares the way that they have been, FFH may wait until they only need to pay the premium to insider shareholders before taking ORH private.

 

I spent a long time thinking about that possibility.  The self-serving conclusion I dreamed up is that they need to retire shares at a fast enough pace to offset the speed at which the total cost of a buyout keeps rising, driven by HWIC's success at growing the book value at ORH.

 

Since end of Q1, they have not met that goal.  Book value grew by 17% but they retired fewer than 10% of the remaining shares.

 

They either need to tone it down a bit at HWIC, or take it private soon.

 

[EdWatchesBoxing]

I spent a long time thinking about that possibility.  The self-serving conclusion I dreamed up is that they need to retire shares at a fast enough pace to offset the speed at which the total cost of a buyout keeps rising, driven by HWIC's success at growing the book value at ORH.

 

Since end of Q1, they have not met that goal.  Book value grew by 17% but they retired fewer than 10% of the remaining shares.

 

They either need to tone it down a bit at HWIC, or take it private soon.

 

 

Haha, cracked me up with that line. I understand your logic in moving from FFH to ORH, in fact, I was thinking the same thing, because of the relative cheapness (or maybe I read your post first, in that case I will give you all the credit if it all works out). Buy ORH, cheer on FFH to take it private at 1.3 * book.

[Partner24]

This late ORH privatization discussion is speculation at this point.

 

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, to retire outstanding debt and other corporate obligations from time to time, and for general corporate purposes.

 

As a FFH long term common stock owner, I have absolutely no expectation regarding that ORH privatization. What do I know is that FFH management team usually take very rational capital allocation decisions, so I give them a bat, watch them do their job and try to not shout "Hit it!" when a ball pass.

 

So I keep all my FFH shares. What do I know is they'll do it if the deal makes sense for FFH owners. If they do not do the deal, I'll still be happy anyway. It's not like their capital allocation decisions universe begin and end with the remaining of ORH.

[ERICOPOLY]

So I keep all my FFH shares. What do I know is they'll do it if the deal makes sense for FFH owners. If they do not do the deal, I'll still be happy anyway. It's not like their capital allocation decisions universe begin and end with the remaining of ORH.

 

You are dead right about that.  They should invest in whatever they think will put in the best returns.  But as long as they are going to be investing in equities, then ORH makes the most sense because they already have ORH's investments allocated to this other universe of best equities that you presumably speak of.  So buying ORH is actually the same thing as buying the best things that are not ORH.  HWIC is Picasso, and ORH minority interest is more canvas.  The paint they will put on the canvas are these other investment opportunities that they tell us they are finding all over the place in the global equity/bond markets.  Plus, as long as they are managing the investments at ORH they might as well get the full benefit from it instead of basically providing some of it for free to minority shareholders.

 

At the end of the day, you issue debt at 7.5% which after tax is 5%.  You invest it in ORH where, according to boardmember ReturnOnMyCapital equity is compounding at 20% after tax.  These past six months would have provided ripping returns from a buyout that only costs them 5% per annum... waiting and sucking thumbs while nibbiling at ORH shares below book did not pay off in the big picture.  They are still bullish about their prospects for their current holdings... this implies the train still hasn't left the station... or at least there is still time to scramble after it and hop on before it gains too much speed.

 

They are seeing great values in the stock and bond markets today... this is the time you want more float, but the market is soft and they can't grow their float organically... so it must be bought.  Or the other approach is to wait until equity markets no longer provide terrific value -- just like buying it today isn't as great a deal as buying it in March, it might be a better time to buy it today rather than a couple of years down the road when the investments at ORH have already delivered terrific returns.

 

 

 

 

[benhacker]

Eric!

 

...instead of basically providing some of it for free to minority shareholders.

 

You don't think that 30 bps fee isn't a fair price?  ;D  LOL... I totally agree.

 

What's funny, is we look at the logic of buying back under book (which I agree with), but the book is growing so fast that borrowing to buy it all now at a premium will probably be a good idea.  And yes, this increases risks, leverage etc... but I still think now is the time.

 

I do not have a great answer though for why the deal is in CAD though. 

 

At any rate, any outcome is good, and I believe Watsa and team will do the right and ethical thing.  So I wait.

 

Sold a big chunk of FFH Friday to buy ORH... ORH is now bigger, but I own both.

 

Ben

[ERICOPOLY]

Yeah, well like Smazz said, when asked about taking the subs private Prem said something like, "Well why would we want to do that if we already control the float?".  I remember a couple of annual meetings back UCCMAL told us about that line.

 

Then he marches right out there and snags NB at 1.3x.  I missed out on the NB takeover.

 

The saying goes, "Fool me once, shame on you.  Fool me twice, shame on me.".

 

[triedtestedand]

Cardboard, Ericopoly, et al:

 

While we're talking ORH share counts and conspiracy theories, does anyone have any more insight regarding the big block trade(s) that happened on June 26th, when volume was >2.5M shares?  In quarter ending June 30th, it doesn't look like any specific institutional investors added (max +173K) or reduced (min -678K) their positions near enough to account individually for the activity.

 

http://www.nasdaq.com/asp/holdings.asp?symbol=ORH&selected=ORH&FormType=Institutional

 

 

[ERICOPOLY]

Cardboard, Ericopoly, et al:

 

While we're talking ORH share counts and conspiracy theories, does anyone have any more insight regarding the big block trade(s) that happened on June 26th, when volume was >2.5M shares?  In quarter ending June 30th, it doesn't look like any specific institutional investors added (max +173K) or reduced (min -678K) their positions near enough to account individually for the activity.

 

http://www.nasdaq.com/asp/holdings.asp?symbol=ORH&selected=ORH&FormType=Institutional

 

 

 

 

I think if you gobble up 2.5M shares on a nibble by nibble basis, and then sell it in one big block, it shows you having zero net activity in this report.

[ubuy2wron]

Cardboard, Ericopoly, et al:

 

While we're talking ORH share counts and conspiracy theories, does anyone have any more insight regarding the big block trade(s) that happened on June 26th, when volume was >2.5M shares?  In quarter ending June 30th, it doesn't look like any specific institutional investors added (max +173K) or reduced (min -678K) their positions near enough to account individually for the activity.

 

http://www.nasdaq.com/asp/holdings.asp?symbol=ORH&selected=ORH&FormType=Institutional

 

The short position took a dramatic drop at the same time ,I suspect that was short covering.  Very good timing on the part of the shorts if I am in fact correct.

 

 

I think if you gobble up 2.5M shares on a nibble by nibble basis, and then sell it in one big block, it shows you having zero net activity in this report.

[Smazz]

 

All jokes aside, I agree with Smazz,

 

hold on a second.. did i miss some jokes at my expense :D