February 10, 2015

On Tuesday, the S&P 500 rose 1.1% while Toronto rose 0.1%.

Couche-Tard was up 3.0%. The seemingly unstoppable Constellation Software was up 2.7%. Toll Brothers was up 2.1%.

After the close Canadian Western Bank announced that it will sell its property insurance operation to Intact Financial for $197 million or 2.5 times book value. Canadian Western has a book value of $1570 million. It was not clear if Intact was taking on any debt of the insurance operation. It appears that this insurance operation amounted to at most 12.5% of Canadian Western Bank’s operations. Since CWB was recently selling for 1.5 times book, this deal looks good from that perspective.

Overall I am not sure if this is a positive move for the bank or how the market will react. I suspect a mild positive reaction.

In the long-term it may harm CWB’s reputation with its employees and potential acquisition targets. This is what Warren Buffett refers to as a Gin Rummy strategy – discard your least promising card (business) when your turn comes.

However, back when CWB acquired this business It thought it was a strange fit and so they may well be right that it is a non-strategic asset. (But that won’t make the employees of this business fell any better.)  In any case some advisors and lawyers will certainly have had a good pay day.

This will leave the bank with so-called “excess” capital which it says will lower its ROE from continuing business in 2015 (Overall ROE will be up). Possibly it will use some the excess capital to buy back its shares, we shall see. This pending transaction may in fact have prevented CWB (and the insiders) from buying back shares at attractive prices in the past month or two.