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
