Author Topic: Fairfax 2020  (Read 128263 times)

StubbleJumper

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Re: Fairfax 2020
« Reply #610 on: October 04, 2020, 04:50:32 PM »
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
« Last Edit: October 04, 2020, 04:56:59 PM by StubbleJumper »


wondering

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Re: Fairfax 2020
« Reply #611 on: October 08, 2020, 05:57:49 AM »
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

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Re: Fairfax 2020
« Reply #612 on: October 16, 2020, 12:04:28 PM »
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

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Re: Fairfax 2020
« Reply #613 on: October 17, 2020, 04:35:26 PM »
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

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Re: Fairfax 2020
« Reply #614 on: October 20, 2020, 10:44:19 AM »
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

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Re: Fairfax 2020
« Reply #615 on: October 27, 2020, 05:38:52 PM »
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!
« Last Edit: October 27, 2020, 08:11:31 PM by Bryggen »

Parsad

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Re: Fairfax 2020
« Reply #616 on: October 28, 2020, 01:53:59 AM »

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!
No man is a failure who has friends!


Bryggen

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Re: Fairfax 2020
« Reply #618 on: October 29, 2020, 02:22:59 PM »
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
« Last Edit: October 29, 2020, 02:35:50 PM by Bryggen »

Santayana

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Re: Fairfax 2020
« Reply #619 on: October 29, 2020, 02:39:09 PM »
Trading at 60% of book.  Makes perfect sense to me.