Q2 results

[ValueMaven]

Anyone have a transcript that I can read?  I cant seem to find one

[Xerxes]

I don’t have a large FFH allocation like most people here. I think I am at 12%. It is not for lack of wanting, but i rarely do trade/swap.   

 

That said between FFH, Google and AMZN it has been a good 10 days. Those are three are about 30% of the entire portfolio. 

[Luke]

31 minutes ago, ValueMaven said:

Anyone have a transcript that I can read?  I cant seem to find one

 

Conference Call Q2 FFH.pdf

[LC]

1 hour ago, Tommm50 said:

I check the FRFHF stock price on the WSJ website. They also list the stock movement of 6 competitors (including Chubb and Berkley). All those competitors are negative today, from half a percent to almost two percent. Fairfax is up over four percent. Nice to see.

 

I'm guessing it's the much greater impact for other insurers of "mark to market" losses on their bond portfolios.

 

On above average volume as well - so it's not just us COBF'ers buying

[John Hjorth]

24 minutes ago, LC said:

 

On above average volume as well - so it's not just us COBF'ers buying

 

@LC,

Yeah, likely the rerating of Fairfax shares [both places] may now be a work in progress. - I won't be surprised to see more of the same short term going forward.

 

A bit amazing taking into consideration that the Fairfax forum here on CoBF has been accessible and and readable for CoBF guests / non-CoBF members all the time. 

 

I bet perhaps @Vikings fairly new X account may be a part of the full explanation [some may call it 'the culprit' !], too! 

[netcash1]

57 minutes ago, Luca said:

did they make any comments on Digit Insurance on the CC?

Conference Call Q2 FFH.pdf 125.77 kB · 8 downloads

 

[Thrifty3000]

16 hours ago, netcash1 said:

 

Regarding Digit, according to this footnote on page 69 of the annual report it sounds to me like Digit is stuck in the regulatory mud…

 

1. Digit Insurance and the company applied to the Insurance Regulatory and Development Authority of India ("IRDAI") for approval to convert the company's holdings in compulsory convertible preferred shares issued by Digit ("Digit CCPS") into equity shares of Digit. The IRDAI subsequently communicated that the application could not be considered in its current form as conversion of the Digit CCS would result in Digit (currently classified as an "Indian promoter" of Digit Insurance) becoming a subsidiary of the company, which was, at such time, prohibited under the then prevailing Indian insurance regulations. Since then, the IRDAI has enacted new regulations that have introduced a definition of a "Foreign Promoter", which would permit an Indian insurance company (like Digit Insurance) to be a subsidiary of a "Foreign Promoter". However, Digit does not currently qualify as a "Foreign Promoter" under these new regulations. Digit, Digit Insurance and the company intend to continue to explore all avenues under applicable law to achieve the company's majority ownership of Digit through conversion of the company's Digit CCPS.

Edited August 5, 2023 by Thrifty3000

[StubbleJumper]

I'm a bit surprised that there has been no comment on holdco cash.  It looks to me like there is currently only about $600m of cash and short term investments that FFH could realistically use to meet its liquidity requirements.  They will either need to float some bonds pretty soon or begin to use the revolver for operational purposes.  The actual numbers are a bit at odds with the statements in the Q2 and on the call about having plenty of liquidity and being soundly financed.

 

 

SJ

[Thrifty3000]

8 minutes ago, StubbleJumper said:

I'm a bit surprised that there has been no comment on holdco cash.  It looks to me like there is currently only about $600m of cash and short term investments that FFH could realistically use to meet its liquidity requirements.  They will either need to float some bonds pretty soon or begin to use the revolver for operational purposes.  The actual numbers are a bit at odds with the statements in the Q2 and on the call about having plenty of liquidity and being soundly financed.

 

 

SJ

 

I thought they had over a billion at the holdco. But, in addition to that keep in mind:

• FFH has a $2 billion undrawn revolver.
• FFH has lots of operating income flowing in every month.
• The subs operate autonomously and should only need holdco money in an emergency.
• The subs appear to have plenty of dividend capacity right now (it's in the annual report).

 

[StubbleJumper]

1 minute ago, Thrifty3000 said:

 

I thought they had over a billion at the holdco. But, in addition to that keep in mind:

• FFH has a $2 billion undrawn revolver.
• FFH has lots of operating income flowing in every month.
• The subs operate autonomously and should only need holdco money in an emergency.
• The subs appear to have plenty of dividend capacity right now (it's in the annual report).

 

 

Well, yes, the Q2 does say that the holdco has $1B.  But, when you look at the components of "cash", $358m are actually derivatives rather than cash equivalents, and another $147 are pledged for derivative obligations.  So, if you look at the actual short term assets that the company could realistically use for its operations, there's roughly $600m that could be easily liquidated.

 

The revolver is extremely important to maintain.  The question is whether you want to see the companies you invest in being reliant on revolving credit for general operations.  Maintaining it is a very good idea because it can be invaluable for the proverbial black swan or to opportunistically acquire a major asset.  But, it is a basic philosophical question of whether you want to see revolving credit being used for general operations.

 

FFH does have scads of operating income flowing every month, but it does not generally flow to the holdco, but rather the insurance subs.  The insurance subs do have dividend capacity to flow money to the holdco, but the most significant dividend capacity is in Allied, Odyssey and Northbridge.  The first two are competing where the market seems to be hardest, so how much of a dividend they would want to draw is an open question.

 

Over the next six months, the holdco will have cash outflows of $177 for Gulf, about $230 for the common divvy and about $25 for preferred divvies, plus whatever interest that needs to be paid on holdco debt.  With ~$600m of true liquid assets, I found the statements about liquidity to be a little odd.  If they float another $500m or $750m of debt, everything is good, but it does strike me that they are not as liquid as I would like to see.

 

 

SJ

[MMM20]

I don’t get the concern. Don’t they have $30B+ in liquid fixed income? $40B?

[gfp]

29 minutes ago, MMM20 said:

I don’t get the concern. Don’t they have $30B+ in liquid fixed income? $40B?

 

They don't want to dividend capital out of the insurance subsidiaries into the holding company because they want to support the growth while rates are attractive.  Once the fat opportunity passes, they will dial down the growth (or even shrink a little), which will free up a lot of dividend capacity up to the holdco.  That is why we aren't seeing much in the way of FFH repurchase activity this year.  Just small amounts.  They don't really have the money to do much.

Edited August 5, 2023 by gfp

[MMM20]

Thx. Still, they have plenty of ridiculously liquid assets to sell in a bad scenario, right? I can see how that view is too simplistic if the subs need all that capital to operate… but they can always pull back on growth and generate capital. Wrong way to think about it? 
 

Maybe if the stock hits a rough patch they’ll consider selling ~10% of another sub or another hidden trendy asset like pet insurance for a huge premium and buy back another big chunk of shares… those decisions are looking better and better by the week. Prem capital allocation haters increasingly in shambles.
 

BTW, look at the trailing 3, 5, 10, 15 year returns as of now. The skepticism tends to fade when the trailing returns look good. Less career risk. Expect the compounder / quality growth crowd to return in full force soon. Not to mention the closet indexers and momentum types. And yet still ~6x P/E. Still there for the old school value guys too

 

Edited August 5, 2023 by MMM20

[StubbleJumper]

1 hour ago, MMM20 said:

Thx. Still, they have plenty of ridiculously liquid assets to sell in a bad scenario, right? I can see how that view is too simplistic if the subs need all that capital to operate… but they can always pull back on growth and generate capital. Wrong way to think about it? 
 

Maybe if the stock hits a rough patch they’ll consider selling ~10% of another sub or another hidden trendy asset like pet insurance for a huge premium and buy back another big chunk of shares… those decisions are looking better and better by the week. Prem capital allocation haters increasingly in shambles.
 

BTW, look at the trailing 3, 5, 10, 15 year returns as of now. The skepticism tends to fade when the trailing returns look good. Less career risk. Expect the compounder / quality growth crowd to return in full force soon. Not to mention the closet indexers and momentum types. And yet still ~6x P/E. Still there for the old school value guys too

 

 

 

Yes, they could always sell an entire subsidiary or a portion of a subsidiary to raise cash.  You don't really want to do that because you don't generally get a great price from a forced sale.  And you definitely wouldn't do that until you tapped out your revolving credit and exhausted any possibility of floating more debt. 

 

But, just to be clear, you can't just take $5b of bonds from Odyssey and give them to the holdco to sell.  You can trigger dividends from the subs to the holdco to the extent that the regulators have approved, but you can't just transfer capital willy-nilly.  In a hard market, if you dividend too much money from your subs to the holdco, it might end up constraining your premium growth.

 

 

SJ

[glider3834]

6 hours ago, StubbleJumper said:

 

Well, yes, the Q2 does say that the holdco has $1B.  But, when you look at the components of "cash", $358m are actually derivatives rather than cash equivalents, and another $147 are pledged for derivative obligations.  So, if you look at the actual short term assets that the company could realistically use for its operations, there's roughly $600m that could be easily liquidated.

 

The revolver is extremely important to maintain.  The question is whether you want to see the companies you invest in being reliant on revolving credit for general operations.  Maintaining it is a very good idea because it can be invaluable for the proverbial black swan or to opportunistically acquire a major asset.  But, it is a basic philosophical question of whether you want to see revolving credit being used for general operations.

 

FFH does have scads of operating income flowing every month, but it does not generally flow to the holdco, but rather the insurance subs.  The insurance subs do have dividend capacity to flow money to the holdco, but the most significant dividend capacity is in Allied, Odyssey and Northbridge.  The first two are competing where the market seems to be hardest, so how much of a dividend they would want to draw is an open question.

 

Over the next six months, the holdco will have cash outflows of $177 for Gulf, about $230 for the common divvy and about $25 for preferred divvies, plus whatever interest that needs to be paid on holdco debt.  With ~$600m of true liquid assets, I found the statements about liquidity to be a little odd.  If they float another $500m or $750m of debt, everything is good, but it does strike me that they are not as liquid as I would like to see.

 

 

SJ

So Fairfax had $2.7B div paying capacity in subs at end of 2022, given their operating performance over 2023 in 1H has exceeded the corresponding period in 2022, seems reasonable to assume we are north of $3B now. Adding that to the $1B or so of cash & investments at the holdco & we have over $4B. 

 

With interest & dividend income pushing close to $500M per qtr - the rate of build in dividend paying capacity in the subs should accelerate going forward IMHO. 

 

I think we need to have a look at volatility of results too - with Allied one of the key reasons for recent credit rating upgrade was that they have reduced their cat exposure so that potentially reduces volatility of underwriting profit - we can see that in Allied's lower CR.

 

Looking at NPW growth rates for Allied, Odyssey & Northbridge for 1H'23 YTD these were 9.6%, 5.2% & 4% respectively. For the same period in 1H'22, NPW growth rates were 21.8%, 31.3% & 11.1%.

 

So that looks like decelerating growth to me and that IMHO should be supportive of theses subs building their div paying capacity further.

 

I suspect they don't want to publish their div paying capacity on a quarterly basis before they do their reserving audit in Q4 & thats why we get it annually.

 

I do think tax planning would be a consideration, liquidating investments in the subs to pay the holdco would potentially trigger tax & they might want to avoid which is why when they are sending divs to holdco it is generally coming from sale proceeds from divested businesses - this is just my hunch.

 

Also credit ratings would be a consideration at the sub level - higher upgrades (eg recently for Odyssey, Crum & Allied) I would think would reduce borrowing costs and a higher rating also benefits their insurance business - so a good thing.

 

So the reasons why they are not sending more cash to the holdco I think go beyond supporting NPW growth although I agree that is a key consideration.

 

 

Edited August 5, 2023 by glider3834

[Thrifty3000]

14 minutes ago, glider3834 said:

So Fairfax had $2.7B div paying capacity in subs at end of 2022, given their operating performance over 2023 in 1H has exceeded the corresponding period in 2022, seems reasonable to assume we are north of $3B now. Adding that to the $1B or so of cash & investments at the holdco & we have over $4B. 

 

With interest & dividend income pushing close to $500M per qtr - the rate of build in dividend paying capacity in the subs should accelerate going forward IMHO. 

 

I think we need to have a look at volatility of results too - with Allied one of the key reasons for recent credit rating upgrade was that they have reduced their cat exposure so that potentially reduces volatility of underwriting profit - we can see that in Allied's lower CR.

 

Looking at NPW growth rates for Allied, Odyssey & Northbridge for 1H'23 YTD these were 9.6%, 5.2% & 4% respectively. For the same period in 1H'22, NPW growth rates were 21.8%, 31.3% & 11.1%.

 

So that looks like decelerating growth to me and that IMHO should be supportive of theses subs building their div paying capacity further.

 

I suspect they don't want to publish their div paying capacity on a quarterly basis before they do their reserving audit in Q4 & thats why we get it annually.

 

I do think tax planning would be a consideration, liquidating investments in the subs to pay the holdco would potentially trigger tax & they might want to avoid which is why when they are sending divs to holdco it is generally coming from sale proceeds from divested businesses - this is just my hunch.

 

Also credit ratings would be a consideration at the sub level - higher upgrades (eg recently for Odyssey, Crum & Allied) I would think would reduce borrowing costs and a higher rating also benefits their insurance business - so a good thing.

 

So the reasons why they are not sending more cash to the holdco I think go beyond supporting NPW growth although I agree that is a key consideration.

 

 

I don’t think they would have to liquidate investments at sub cos and take a tax hit. They have hundreds of millions worth of bonds rolling over every month. They can simply not reinvest the bond proceeds and dividend that cash.

[StubbleJumper]

8 minutes ago, glider3834 said:

So the reasons why they are not sending more cash to the holdco I think go beyond supporting NPW growth although I agree that is a key consideration.

 

They actually list several of the reasons for not maxing out the divvy in the AR.  Supporting growth is one reason, but there are others.

 

Irrespective of their motivation, they haven't been sending regular dividends of more than ~$400m per year to the holdco.  My take is that they currently have about $600m of true liquid assets at the holdco (but, who knows, maybe the $358m of derivatives are more liquid than I think, and maybe those derivatives are not serving any risk management purpose or any strategic investment purpose).  So, from a cash sources perspective, that puts the holdco cash sources at about $1B, and then from a cash uses perspective, holdco interest, Gulf consideration payable, and preferred and common divvies will make up most of a billion.

 

It's not a crisis, but they will either need to make an extraordinarily large dividend from one or more sub, float $500m or $750m of bonds, or make use of the revolver for general operating purposes.  I would prefer that they float some bonds, but I guess we'll see how they choose to manage it.

 

 

SJ

[Parsad]

8 hours ago, StubbleJumper said:

 

Well, yes, the Q2 does say that the holdco has $1B.  But, when you look at the components of "cash", $358m are actually derivatives rather than cash equivalents, and another $147 are pledged for derivative obligations.  So, if you look at the actual short term assets that the company could realistically use for its operations, there's roughly $600m that could be easily liquidated.

 

The revolver is extremely important to maintain.  The question is whether you want to see the companies you invest in being reliant on revolving credit for general operations.  Maintaining it is a very good idea because it can be invaluable for the proverbial black swan or to opportunistically acquire a major asset.  But, it is a basic philosophical question of whether you want to see revolving credit being used for general operations.

 

FFH does have scads of operating income flowing every month, but it does not generally flow to the holdco, but rather the insurance subs.  The insurance subs do have dividend capacity to flow money to the holdco, but the most significant dividend capacity is in Allied, Odyssey and Northbridge.  The first two are competing where the market seems to be hardest, so how much of a dividend they would want to draw is an open question.

 

Over the next six months, the holdco will have cash outflows of $177 for Gulf, about $230 for the common divvy and about $25 for preferred divvies, plus whatever interest that needs to be paid on holdco debt.  With ~$600m of true liquid assets, I found the statements about liquidity to be a little odd.  If they float another $500m or $750m of debt, everything is good, but it does strike me that they are not as liquid as I would like to see.

 

 

SJ

 

Also the revolver was renewed for only one year.  They should have no problem renewing it again if things stay the same, but in the worst case scenario, if liquidity tightens, there is no guarantee that the revolver would be renewed.  They would then have to borrow elsewhere or dividend up capital from the insurance subs.  I would just be happier if they were sitting on $2B cash at the holdco...period!  Hey, but I'm just a worry wart!  Cheers!

[Thrifty3000]

If there’s a major crisis they can suspend dividend payments which would alleviate pressure.

[Haryana]

36 minutes ago, Thrifty3000 said:

If there’s a major crisis they can suspend dividend payments which would alleviate pressure.

 

Not have to think about that. They in all likelihood know well that they are soundly financed. OMERS is always in the background, ready for some unorthodox dealings.

 

Dividend is something they never want to touch. Prem mentioned before how they believe in the classic view of a stable dividend. This implies a dividend that is never reduced but only goes up with time. This is the reason that they have refused to increase it even when they could because they never want to have to cut it back down.

 

Touching the dividend will be a major sign of weakness. Not necessary also. They would know more option to raise cash than we could imagine. Could we imagine FFH TRS?

 

[maxthetrade]

6 hours ago, Haryana said:

They would know more option to raise cash than we could imagine. Could we imagine FFH TRS?

 

I think the TRS is settled on a quaterly basis, it would be a drag on liquidity if they run into trouble and the stock goes down. Cash is definitely running low and I would like to see a somewhat higher cash level too, but I would prefer if they don't increase leverage.