P3 PUBLIC PENSIONS FUND PRIVATE BUSINESS

Fairfax buys back $1-billion of shares after CPPIB, OMERS investment

DECEMBER 26, 2021

Fairfax Financial Holdings Limited bought back US$1 billion of its own stock at a premium price on Christmas Eve, after selling a stake in a subsidiary to institutional investors OMERS and the Canada Pension Plan Investment Board for US$900 million.

Fairfax, a global property and casualty (P&C) insurance company, in November announced plans to buy back up to 8.7 percent of its own stock for between US$425 and US$500 for each subordinated voting share. At the same time, Toronto-based Fairfax said it had acquired its Stamford, Conn.-based division Odyssey Group Holdings Inc. Sold a 9.9 percent stake in CPPIB and OMERS, Canada’s two largest pension fund managers.

Fairfax is the latest in a string of Canadian financial services companies to initiate significant share buybacks, as regulators ease capital restrictions imposed during the pandemic and allow banks and insurers to cash in as they see fit.
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Toronto-based Fairfax last Friday set the buyback price on its buybacks using a “modified Dutch auction,” which allows shareholders to choose the price they are willing to tender their stock at. According to a report by Scotiabank analyst Phil Hardy, the auction was “slightly oversubscribed”.

Fairfax received two million shares at the top end of its pre-set range at US$500 each. That day, Fairfax shares closed at US$464.02 on the New York Stock Exchange, so the buyback played out at an 8 percent premium to where the company’s stock was trading at the time.

The decision to sell a stake in a subsidiary and use the capital to buy back the shares “provided a great solution for increasing book value per share in the near term while supporting future growth,” Mr. Hardy said.

The CPPIB and OMERS investments valued Odyssey at 1.7 times its book value. In contrast, the buyback saw Fairfax repurchase its shares at a 10 percent discount to the company’s reported book value, which is US$561.88 per share. Mr Hardy said: “The Odyssey deal highlights a significant gap between Fairfax’s share price and the estimated intrinsic value of the company and its holdings.”

Fairfax, controlled by entrepreneur Prem Vatsa, also raised capital in October by selling a 14 percent interest in London-based reinsurance subsidiary Brit Ltd to OMERS for US$375 million.

Historically, Fairfax has used the cash generated from its operating companies and investments to grow through acquisitions, rather than paying for share buybacks. In recent years, the company expanded into India and Africa.

The property, casualty and reinsurance industries are consolidating around their biggest players, which includes Fairfax. “With the P&C business becoming more risky and complex, the capital requirements and the need for reinsurance will increase,” Swiss Re, the world’s largest reinsurance company, said in a recent report. The Zurich-based company said: “Asset will be the fastest-growing segment, with global premiums projected to grow 5.3 percent annually through 2040. Climate risk will be the main driver of asset growth.”

Fairfax is expected to continue snapping up smaller rivals. In a report last week, RBC Capital Markets analyst Mark Dwley said: “The company has more than $1 billion in holding company cash and has the operational flexibility to pursue a variety of near-term and long-term growth initiatives and acquisitions.” “