Fairfax Financial Holdings Ltd. bought back US$1-billion of its own stock at a premium price on Christmas Eve, after selling a stake in a subsidiary for US$900-million to institutional investors OMERS and the Canada Pension Plan Investment Board.
A global property and casualty (P&C) insurance company, Fairfax announced plans in November to buy back up to 8.7 per cent of its own stock at a price of between US$425 and US$500 for each subordinated voting share. At the same time, Fairfax said it sold a 9.9-per-cent stake in its Stamford, Conn.-based division Odyssey Group Holdings Inc. to CPPIB and OMERS, two of Canada’s largest pension fund managers.
Toronto-based Fairfax is the latest of several Canadian financial services companies to launch significant share buybacks as regulators ease capital restrictions imposed during the pandemic and allow banks and insurers to deploy their cash as they see fit.
Fairfax set the purchase price on its buyback last Friday using a “modified Dutch auction,” which allows shareholders to select the prices at which they are willing to tender their stock. The auction was “modestly oversubscribed,” according to a report by analyst Phil Hardie at Scotiabank.
Fairfax ended up acquiring two million shares at US$500 each, the top end of its pre-set range. That day, Fairfax shares closed at US$464.02 on the New York Stock Exchange, meaning the buyback played out at an 8-per-cent 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 shares “provided an elegant solution to enhancing book value per share in the near term while also supporting future growth,” Mr. Hardie said.
The CPPIB and OMERS investment valued Odyssey at 1.7 times its book value. Meanwhile, the buyback saw Fairfax repurchase its own shares at a 10-per-cent discount to the company’s reported book value, which is US$561.88 per share. Mr. Hardie said: “The Odyssey deal highlights the significant gap between Fairfax’s stock price and the estimated intrinsic value of the company and its holdings.”
Fairfax, controlled by entrepreneur Prem Watsa, also raised capital by selling a 14-per-cent interest in its London-based reinsurance subsidiary Brit Ltd. to OMERS for US$375-million in October.
Historically, Fairfax has used the cash generated from its operating companies and investments to grow through acquisitions, rather than to pay for share buybacks. In recent years, the company has expanded in India and Africa.
The property, casualty and reinsurance industries are consolidating around their largest players, which include Fairfax. “With P&C business becoming more risky and complex, capital requirements and need for reinsurance will rise,” said Swiss Re, the world’s largest reinsurer, in a recent report. The Zurich-based company added: “Property will be the fastest growing segment, with global premiums forecast to increase by 5.3 per cent annually to 2040. Climate risks will be a main driver of the growth in property.”
Fairfax is expected to continue snapping up smaller rivals. In a report last week, analyst Mark Dwelle at RBC Capital Markets said: “The company has well over $1 billion of holding company cash and has the operating flexibility to pursue a variety of near term and long-term growth initiatives and acquisitions.”
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Andrew Willis