Fairfax 2020

[StubbleJumper]

A good news finally!

https://www.fairfax.ca/news/press-releases/press-release-details/2020/Intention-to-Make-a-Normal-Course-Issuer-Bid-for-Subordinate-Voting-Shares-and-Preferred-Shares/default.aspx

 

 

Annual news.  They must file one every year on the off-chance that they wish to repurchase shares.  It's just a formality.

 

SJ

 

Thanks for cooling my excitement ;)

So, when and how would they report actual share repurchases?

 

 

FFH usually makes mention of the repurchases in its quarterly financials.  Alternatively, if you don't want to wait until the financials are published, you can look for filings on SEDAR or this site is a good option:  https://www.canadianinsider.com/company-insider-filings?ticker=FFH

 

 

SJ

 

Anyone else notice subordinate voting share count is actually up YoY? 27,242,281 at 9/16/2020, 26,067,450 at 9/16/2019.

 

 

I hadn't noticed that, but after you flagged it, I pulled up the Q2 financials:  https://s1.q4cdn.com/579586326/files/doc_financials/2020/q2/FFH-2020-Q2-Interim-Report-(Final-Milestone-July-30-0451-pm).pdf 

 

On Page 21 of the Q2, it says the June 30th subordinated share count was 26.3m shares in 2020 vs 26.9m shares in 2019.  It's not exactly Teledyne, but at least it looks like the share-count is going down slowly...

 

 

SJ

[A_Hamilton]

 

 

Anyone else notice subordinate voting share count is actually up YoY? 27,242,281 at 9/16/2020, 26,067,450 at 9/16/2019.

 

 

I hadn't noticed that, but after you flagged it, I pulled up the Q2 financials:  https://s1.q4cdn.com/579586326/files/doc_financials/2020/q2/FFH-2020-Q2-Interim-Report-(Final-Milestone-July-30-0451-pm).pdf 

 

On Page 21 of the Q2, it says the June 30th subordinated share count was 26.3m shares in 2020 vs 26.9m shares in 2019.  It's not exactly Teledyne, but at least it looks like the share-count is going down slowly...

 

 

SJ

 

My point is just that it looks like FFH has been issuing treasury shares in Q3.

[Cevian]

I think this press release is important since they need to be seen to be giving the public enough notice and enough time between when Fairfax makes purchases of its own shares versus the timing of Prem's $150mil. large purchase of shares for his own account. The market has had plenty of time to digest the news and shares are lower now than when Prem purchased so I don't believe there is a conflict or timing issue of Fairfax now purchasing shares directly in the public markets.

[StubbleJumper]

 

 

Anyone else notice subordinate voting share count is actually up YoY? 27,242,281 at 9/16/2020, 26,067,450 at 9/16/2019.

 

 

 

I hadn't noticed that, but after you flagged it, I pulled up the Q2 financials:  https://s1.q4cdn.com/579586326/files/doc_financials/2020/q2/FFH-2020-Q2-Interim-Report-(Final-Milestone-July-30-0451-pm).pdf 

 

On Page 21 of the Q2, it says the June 30th subordinated share count was 26.3m shares in 2020 vs 26.9m shares in 2019.  It's not exactly Teledyne, but at least it looks like the share-count is going down slowly...

 

 

SJ

 

 

My point is just that it looks like FFH has been issuing treasury shares in Q3.

 

 

So, are the treasury shares destined for the employees, or do they need to issue some equity?  Let's hope it's for employee compensation...

 

We know that they are a bit tight on equity in some of the subs and that holdco can only draw on its revolver if consolidated equity levels are high enough.  Not surprisingly, Q1 was a clusterfuck.  Q2 was a bit of a disappointment because the equity portfolio didn't really bounce back.  Q3 ends in 2 days, and the major equity positions haven't done much over the past 89 days, plus Q3 is traditionally the worst for cats (what will it be, maybe $500m for the California fires, another $100m for covid, and maybe $150m for Hurricanes Laura and Sally?).  So is this a sign of a private placement? 

 

 

SJ

[Cigarbutt]

^

-Treasury share issuance has been "reserved" for share-based compensation and it would be hard to issue those shares to the market (to raise capital) without appropriate disclosure.

-It looks like Q3 points to a major change in trend concerning the net result of buyback (to cancel and treasury) vs issue to employees. For the issue to employee part, the result on risk-based capital measures is essentially neutral. Treasury shares are deducted from regulatory capital and when they are issued to employees, in the case of Fairfax, the net result on total equity is about zero as the increase in equity capital (through decrease in the treasury contra-account) is more or less balanced by the intra-equity share-based payment reserves account.

-Reserve development is also something to look for.

[StubbleJumper]

^

-Treasury share issuance has been "reserved" for share-based compensation and it would be hard to issue those shares to the market (to raise capital) without appropriate disclosure.

-It looks like Q3 points to a major change in trend concerning the net result of buyback (to cancel and treasury) vs issue to employees. For the issue to employee part, the result on risk-based capital measures is essentially neutral. Treasury shares are deducted from regulatory capital and when they are issued to employees, in the case of Fairfax, the net result on total equity is about zero as the increase in equity capital (through decrease in the treasury contra-account) is more or less balanced by the intra-equity share-based payment reserves account.

-Reserve development is also something to look for.

 

 

Yeah, I'm not worried about the impact on statutory capital from share awards to employees.  I am, however, a bit curious about the impact of cats during Q3.  I trotted out the possibility that cats could total $750m, which would likely result in a considerable negative earnings number for the quarter (not at all unusual for Q3 of any year).  The magnitude will likely be driven by indemnities triggered by the California fires -- they paid out $233m in 2018, so what will it be in 2020 when the fires appear to be considerably worse?  I wouldn't at all be surprised to see a net loss in Q3 that roughly offsets the net income in Q2.  If that's the case, FFH might be a little bit tighter on capital than it would like (but not dangerously tight).  A private equity placement would be disappointing at current share prices, but I would at least understand the motivation.  However, all of that hand-wringing is a separate issue from employee compensation.

 

 

SJ

[Pedro]

Yes - the increasing severity/frequency/payouts in cats was my #1 concern in the Fairfax 2030 thread. If the cats increase in frequency and severity then the hard market isn't as sexy for shareholders, its just paying catchup to the rising claims. Adding the Lloyds Covid rulings and then the Lloyds business in FFH may be facing some rough waters before year end.

 

 

[StubbleJumper]

Yes - the increasing severity/frequency/payouts in cats was my #1 concern in the Fairfax 2030 thread. If the cats increase in frequency and severity then the hard market isn't as sexy for shareholders, its just paying catchup to the rising claims. Adding the Lloyds Covid rulings and then the Lloyds business in FFH may be facing some rough waters before year end.

 

 

Cats are okay if you've properly priced the risk when you wrote the business, and I think FFH generally does a good job of that.  The problem that occasionally occurs is that two or three really large cats stack up in one year.  So, this year we will probably see a total of about $600m for covid and another $400-500m for the fires in California, a $100-200m for the Atlantic hurricane season, plus miscellaneous.  In this particular year, it might be as high as $1.5B in cats for $15B of net written?  So, if you think that FFH would have been good to write a 95 CR in a modest cat year, now you need to think more like 102 or 103 for 2020.

 

It's like 2001 or 2005, with the large events stacking up.  Years like this happen, but they are bit harder to take when FFH is a bit tight on capital and needs to actively manage its cash (hence the hand-wringing).

 

 

 

SJ

 

[Xerxes]

SJ,

 

In a CAT-heavy year, wouldn't those liabilities be paid out of the float. Yes, from an earning point of view, a billion paid out due to CAT events in a quarter would pass through the income statement and undo gains in the same quarter, with the net hitting the book value.

 

But from "cash usage" point of view, that $1 billion in liability payment comes from the conservatively run $38-39 billion float. Therefore, at corporate level in Toronto, the team should not be competing for resources, when it comes to capital allocation decisions, in a CAT heavy quarter. Fact is, as insurers, getting hit by liabilities is part of life, it is their cost-of-good-sold that just happen to come later and in a lumpier form, but it does always come in one form and another.

 

I think the {?} that might be coming would be the $10 USD jumbo-dividend in January. That is $278 million in Q1 of cash outflow, in a midst of a second wave, my guess they would keep it, but are probably feeling nervous about it. With an additional 482K of common stock added to his personal holding in July, I would think Prem needs the ~$4.8 million additional flow to his dividend stream as much as the next guy for his personal liquidity reason, but i also know that with so much of his wealth tied in, if he needs to take the axe to it to fortify the company's B/S, he will.

[Xerxes]

A podcast on the topic (FFH and its African subsidiary):

 

https://www.theinvestorspodcast.com/episodes/tip317-intrinsic-value-assessment-of-fairfax-w-jake-taylor/

[StubbleJumper]

SJ,

 

In a CAT-heavy year, wouldn't those liabilities be paid out of the float. Yes, from an earning point of view, a billion paid out due to CAT events in a quarter would pass through the income statement and undo gains in the same quarter, with the net hitting the book value.

 

But from "cash usage" point of view, that $1 billion in liability payment comes from the conservatively run $38-39 billion float. Therefore, at corporate level in Toronto, the team should not be competing for resources, when it comes to capital allocation decisions, in a CAT heavy quarter. Fact is, as insurers, getting hit by liabilities is part of life, it is their cost-of-good-sold that just happen to come later and in a lumpier form, but it does always come in one form and another.

 

I think the {?} that might be coming would be the $10 USD jumbo-dividend in January. That is $278 million in Q1 of cash outflow, in a midst of a second wave, my guess they would keep it, but are probably feeling nervous about it. With an additional 482K of common stock added to his personal holding in July, I would think Prem needs the ~$4.8 million additional flow to his dividend stream as much as the next guy for his personal liquidity reason, but i also know that with so much of his wealth tied in, if he needs to take the axe to it to fortify the company's B/S, he will.

 

 

Yes, the accounting transaction is that cat claims come from subsidiary cash which is part of the subsidiary reserves, or are added to IBNR.  In and of itself, that's not such a problem.  The issue in this specific year is that the subs are tight on capital, so heavy claims reduces their capital which impedes their ability to write new business during a hard market, and the covenants on the holdco's revolver limits the amount of cash that can be drawn on revolving credit facility based on the consolidated debt-to-capitalization ratio (max is 0.35:1).  FFH was bumping up near the ceiling of that ratio at the end of Q1 (was 0.34:1 on March 31).  There was modest net income generated in Q2, which gave a bit of breathing room on that ratio ceiling (was 0.325:1 on June 30).  But, now in Q3, it's quite possible that all of the income earned in Q2 will be reversed due to an unusual succession of cats.  So, are we back to where we were at the end of Q1, where FFH would be close to the ceiling of that consolidated debt-to-capitalization ratio if the revolver were fully drawn?  The revolver is large and gives great flexibility, but only if you can remain below 0:35:1.

 

Clearly, given enough time, FFH can earn enough to be able to fully draw on that revolver, but the short-term hits to equity are problematic.  If Q4 is "normal", FFH can earn enough income to once again have have a bit of breathing room.  But, if they take any impairment tests on certain assets and determine that a write-down of a major asset is appropriate, or if broad-market equity values slide in a post-election environment, it could quickly become an issue.  As long as FFH earns a bit of money in Q4 (ie, no major write-downs, no major mark-to-market losses on equities), the revolver will be available and it will be quite reasonable to declare the annual dividend.  But, it would have been a much more comfortable if there had been a light-cat year.

 

So, as I said, it's hand-wringing.

 

 

SJ

[wondering]

https://www.theinvestorspodcast.com/episodes/tip317-intrinsic-value-assessment-of-fairfax-w-jake-taylor/

 

From the We Study Billionaires podcast.

 

Goes over FFH and FAH.  Both positive and negatives discussed on the podcast have been already written about on this board.  However, still a good overview.

 

[Xerxes]

Had a look:

 

Blackberry and Kennedy Wilson are mostly flat quarter to quarter.

Stelco did have a $45 million gain from end of Q2 to end of Q3. A bit less than 45%.

 

Catching up slowly to the cost basis.

 

[StubbleJumper]

As you may have observed, I have been doing a little fussing about cats for Q3 and for the full-year 2020.  The following is a nice article about the level of cats in Q3:

 

https://www.insurancejournal.com/news/national/2020/10/16/586710.htm

 

It doesn't look to be a great quarter for FFH, but maybe it will be a bit better than I had expected?  So negative EPS for the quarter, but not deeply negative?  I guess we'll have to see what they add to their covid reserves...

 

 

SJ

[Xerxes]

Thanks. Insurance is a tough business. Never know how big your cost of good sold is going to be in the near term. Life insurance is probably an easier game.

 

Maybe there is an easier way to have permanent capital (like an asset manager) rather than through the float. At least you know that your redemption as asset manager is a function of your investing skill set whereas for an investor that has insurance premium as float, the “redemption” is not correlated to one’ investing prowess, rather a function of randomness of nature.

 

The only positive (if one can say this) is that because it is a tough business it takes out the players leaving FFH and others having better margins in the future. Lumpy results indeed.

[Bryggen]

Any thoughts on the upcoming call on Friday?

 

Expecting surprises or we pretty much know what will come out of this call?

 

Do you believe the January dividend could be threatened in the current context?

 

Just curious.

 

Thanks!

[Parsad]

 

Do you believe the January dividend could be threatened in the current context?

 

Just curious.

 

 

No.  I would 100% be shocked if the dividend was cut or not paid this year.  I think insurance results will be good.  Cheers!

[bearprowler6]

Q3 Results are out:

 

https://www.fairfax.ca/news/press-releases/press-release-details/2020/Fairfax-Financial-Holdings-Financial-Results-for-The-Third-Quarter/default.aspx

[Bryggen]

Q3 Results are out:

 

https://www.fairfax.ca/news/press-releases/press-release-details/2020/Fairfax-Financial-Holdings-Financial-Results-for-The-Third-Quarter/default.aspx

 

Thoughts on the results?

Still new trying to figuring out their numbers and if this is good or bad. Looks decent at first glance given the context.

Bry

[Santayana]

Trading at 60% of book.  Makes perfect sense to me.

[TwoCitiesCapital]

Number seem alright. Liquidity still seems a little constrained, but they were able to send $100M to insurance companies for growth, retain holding company cash, repurchase a few million in shares, and still have liquidity available to them on their revolver.

 

Insurance results were positive which is a plus for me after COVID and hurricanes and wildfires.

 

Ultimately, float + equity + debt is $1,600/share working on your behalf for every $265 US invested (6x leverage). Very low bar for shareholders to hit 15% compound here on out as return on float/equity/debt @ 3% will accomplish it even without considering benefits of repurchases below book.

[Viking]

Do we need to worry about the amount of cash the company is chewing through?

 

$1.1 billion in cash. But $700 million of this has been funded from the credit facility they tapped when the pandemic was raging earlier this year.

 

Looks to me like they need to find some cash from somewhere... Asset sale? Better operating results? Share issue?

————————-

- At March 31, 2020 the company had drawn $1,770.0 million on its credit facility, solely as a precaution, to support its insurance and reinsurance companies should it be needed if the effects of the COVID-19 pandemic continued for an extended period. The company subsequently repaid $1,070.0 million of that borrowing, leaving $700.0 million borrowed under that facility currently.

 

- On August 28, 2020 the company acquired the minority interest in Brit for cash consideration of $220.0 million.

 

- The company held $1,153.0 million of cash and investments at the holding company level ($1,095.9 million net of short sale and derivative obligations) at September 30, 2020, compared to $975.5 million ($975.2 million net of short sale and derivative obligations) at December 31, 2019.

 

- The company's total debt to total capital ratio, excluding non-insurance companies, increased to 31.3% at September 30, 2020 from 24.5% at December 31, 2019, primarily reflecting the $700.0 million drawn on the credit facility and decreased total capital due to decreased common shareholders' equity.

[Gregmal]

Geez, I hadn't looked at this one in a good while. What a total dumpster fire.

[Parsad]

Geez, I hadn't looked at this one in a good while. What a total dumpster fire.

 

What the heck are you talking about?  They just went through the pandemic, plus a fairly high catastrophe loss season, and the insurance operations still hit a 98.5% CR.  They have tons of cash to deploy, debt/equity is very manageable and they can issue a few hundred million in new long-term debt at cheap rates to repay the revolver if they need to.  The shares they are buying back are accretive when bought under book value, and if they achieve a 3% return on their portfolio plus a return to book, you are looking at a 150%-175% return over the next 4-5 years.  Cheers!

[Gregmal]

I hope so. I've just been watching this damn thing for so long and everytime there is a glimmer of something possibly positive its deemed a sign that things will be turning the corner any day now, with huge upside. The company is positioned for bad times in a good market, good times in a bad market...I mean at some point you just have to look at the past 10 years of decisions and mistakes and give credit where it is due. This isn't a company in an out of favor sector like O&G, or retail... I get that its gotten the short end of the covid stick similar to other insurance, banking and RE firms....but its supposed to be a company with "the smart guys" who are ahead of the curve. And its not and it hasn't been for over a decade now. Is there any case to say that on a risk adjusted basis you arent just better off owning WFC or BRK?