Monday, May 21, 2012

The Miracle on Wellington Street

Theology and high finance rarely intersect but one place they likely met is at the Toronto headquarters of insurance conglomerate Fairfax Financial Holdings in the winter of 2003.
It was there, in the bitter cold of that early February, that V. Prem Watsa, Fairfax’s founder and chief executive, along with a handful of his closest colleagues, conceived a transaction whose effect has been nothing short of miraculous.
Certainly it didn’t seem like much: A then little known insurance company buying a block of shares in an even less well-known reinsurer it already virtually controlled hardly sparked chatter among insurance industry rivals or on Wall Street’s trading floors.
But it should have.
Fairfax’s purchase of 4.3 million shares of Stamford, Ct.-based Odyssey Re, increasing its stake to just over 80% from 74%, was the most consequential transaction in Watsa’s career. Though few understood it at the time, the March 2003 deal allowed the then money-losing Fairfax to take advantage of a little understood maneuver called “tax consolidation,” enabling Fairfax to claim (and receive) the profitable Odyssey Re’s tax payments.
Between 2003 and 2006, these payments amounted to more than $400 million.
That cash stream helped Fairfax avoid a brutal accounting charge that might have proven its undoing and boost its share price over several months to almost $250 from a January 2003 low of $57.

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