Author Topic: Q1 2020 Results  (Read 10237 times)



vinod1

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Re: Q1 2020 Results
« Reply #1 on: April 30, 2020, 05:44:33 PM »
Taking a quick look:

Valuing associates at fair value, book value is $390 per share as of Q1. Bigger hit than expected.

How in the world are they able to lose money on the shorts in Q1? Shorted Amazon?

Vinod
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Xerxes

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Re: Q1 2020 Results
« Reply #2 on: April 30, 2020, 06:10:11 PM »
My guess (hope that is not true) is that they shorted Netflix and Amazon, as listed in the annual letter, based on their higher old-school valuation ratio of P/E ** SIGH ** But let's give them the benefit of the doubt.  Or lets not
>:(


Where did you get $390 for BV ?
it says => Book value per basic share at March 31, 2020 was $422.03

it says $122.3 (unrealized short) that means it wasnt close as of March 31, when the market bounced back.

petec

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Re: Q1 2020 Results
« Reply #3 on: May 01, 2020, 02:20:42 AM »
Valuing associates at fair value, book value is $390 per share as of Q1. Bigger hit than expected.

I don't think this is a surprise. They'd already disclosed Eurobank had moved to associate accounting. By my rough maths that puts it on the books at $36 per FFH share vs a current market cap of $14, so it's the single biggest reason for the discrepancy.

I tend to ignore associate accounting, which can lead to almost random carrying values, and focus on market value and look-through book value. I think one needs both to get the full picture. If we value everything at market the BVPS is actually below $390, because several of the consolidated entities (FIH, FAH etc) are trading well below book. But if we value everything at look-through book value (i.e. as though every stake were consolidated) the picture is very different. At 1x post-deal TBV Eurobank is "worth" $54 per FFH share. That alone takes the $390 number to $430 ($390-14+54=430).

However you look at it, it seems to me there is a margin of safety with the shares at $280.

(And before you ask why I don't just own Eurobank, I'm trying, but my broker keeps cancelling the order and I haven't yet found out why.)
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steph

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Re: Q1 2020 Results
« Reply #4 on: May 01, 2020, 03:09:18 AM »
My guess (hope that is not true) is that they shorted Netflix and Amazon, as listed in the annual letter, based on their higher old-school valuation ratio of P/E ** SIGH ** But let's give them the benefit of the doubt.  Or lets not
>:(


Where did you get $390 for BV ?
it says => Book value per basic share at March 31, 2020 was $422.03

it says $122.3 (unrealized short) that means it wasnt close as of March 31, when the market bounced back.

Or they closed most of their shorts in the first part of the quarter...being just sick of losing money on them

Bryggen

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Re: Q1 2020 Results
« Reply #5 on: May 01, 2020, 08:34:16 AM »
I hear you on the depressed share price that dropped even more today. Shareholders that have been in the past 5 years didn't reap any benefit from FFH. Patience is running low on my end, buy hey, aren't we suppose to be long term ;) That keeps me cool, but for how long? I was silly enough thinking to add more today at this depressed price....

StubbleJumper

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Re: Q1 2020 Results
« Reply #6 on: May 01, 2020, 09:20:13 AM »
I took a quick scan of Q1 results, and it's more or less what FFH had telegraphed through its April press release and through Prem's comments at the annual meeting.  But, nonetheless here are a few comments/observations from my scan:


1) What's the deal with the CR? - Okay, so net written increased considerably (page 35 of Q1), but aren't the CRs just a wee bit disappointing (page 37 of Q1)?  We have been led to believe that much of the increase in net written was the result of price increases.  Price increases ought to fall directly down to the bottom line, meaning that CRs should have decreased markedly.  In actual fact, the consolidated CR dropped from 97% to 96.8%, which doesn't really show much of a price increase, and this is mostly due to the current accident year -- this is not a case of being hit by skeletons in the closet.  In fairness to FFH, Odyssey booked 6.1 CR points for Covid and Brit 6.2 points (pages 41 and 44 of Q1) which inflated things a bit for those two subs, but the underwriting overall has been a bit of a disappointment.  The "Other insurance" grouping is once again a bit of a disappointment with an Accident Year CR 100.6...once again, why bother taking the risk of doing business in shit-hole countries if your result is an underwriting loss?  At least the kleptocracies of Eastern Europe seem to have done a shade better.


2) Shift into corporates - It's not really news, but the shift out of governments and into corporates is quite visible (page 12 of Q1).  Corporates are now $12.3B compared to 9.9B on Dec 31.  Total investments are still $33B or $34B, so the corporates have been bumped up from abut 30% to about 36% of total investments.  FFH suggests that credit quality is generally pretty good but it has visibly declined as a result of this process of reaching for yield (page 24 of Q1). I wonder what their comfort level truly is?  Would they go to 40%?  How about 45%?


3) Debt levels and the revolver covenants - in February, I did a bit of ranting and raving about FFH's reliance on its revolver because revolver covananents tend to bite you on the ass at the worst moments.  FFH did the right thing by drawing its revolver before its lender could concoct a reason to pull it.  But, the displacement in markets has resulted in some of FFH's assets being marked down, and the covenants are becoming more of a thing.  FFH is permitted a maximum debt to equity of 0.35:1 (see page 19 of Q1), and they are currently at 0.34.  So, do a little bit of school-boy arithmetic, and it's evident that FFH is a bit tight on its convenant.  What size of asset impairment would be required to take you from 0.34 to 0.35?  A reduction of equity of about 3% would make FFH hit that threshold.  As we know, total consolidated equity is $16.2B (page 2 of Q1), so an asset write-down of ~$500m would be enough to force FFH to either make some decisions or to have a chat with its lender.

This is not an urgent, end-of-the-world type of situation.  The first obvious thing that FFH could do would be to sell some of the holdco bonds that it purchased with the revolver draw, and then use the proceeds to repay the revolver, and that would be enough to put it back "on side" with its covenant.  What is more, most of the equity positions have had favourable marks since March 31, so the situation is probably less tight than it was a month ago.  But, a $1B hit to assets or to insurance liabiities could become a cause for scrambling at FFH ($1B is just a couple of bad hurricanes in the US, right?).  FFH probably should be holding some proactive conversations with its lender...


4) Why aren't things worse at Zenith? - Am I alone in being surprised that Zenith's results were actually not that bad (page 43 of Q1)?  The accident year CR of 104.7 strikes me as lower than I would have expected.  I had imagined that there would be a heavy amount of claims due to doctors, nurses and personal service workers who allegedly caught Covid while working in nursing homes or hospitals.  Similarly, slaughter plants, public transit facilities and other employers all have heightened rates of Covid.  Is it the case that this is not material?  Or is it the case that Zenith is refusing to pay and losses will only be recognized after employers/employees sue Zenith on the argument that employment related Covid clusters are sufficient evidence that workers comp indemnities should be paid?  I was also a bit surprised that Zenith's net written hadn't really declined that much in Q1 (page 39 of Q1)...maybe it was too soon to expect that and we'll see a hit in Q2?


5) Subs' Revolver Usage - The subs are starting to draw pretty heavily on their revolvers.  Brit drew $83m and Recipe $210m (page 19).  For non-Canadian readers, almost all of Recipe's restaurant dining rooms are closed right now, but they are doing a bit of take-away and delivery business.  The revolver draw likely reflects the continued fixed costs with very little contribution margin to cover them.  When Recipe's dining rooms re-open, will it require an external cash source for working capital?  Would any lender other than FFH provide that cash?

Returning to point #3, FFH needs to manage its consolidated debt and its consolidated equity.  The subs have generally had a free reign to manage their business, but going forward, greater coordination from the holdco might be required to ensure that the actions of one or more subs does not trigger one of the holdco's revolver covenants.


6) Piling more money into Seaspan? - During Q1, FFH piled another $100m into Atlas (page 16 of Q1).  Seaspan has been one of FFH's few success stories in recent years, but returning to my traditional rants and raves about position-sizing, is this really wise?  Seaspan seems to be in good shape with much of their capacity under medium term contracts, but what residual risks remain (ie, counterparty risk, events eligible for declaration of force majeur, etc)?  FFH has now piled a total of $1.5B of its capital into Atlas.  Is this a reasonable risk from a position-sizing perspective?  Returning to point #3, a write-down of ~$500m would be inconvenient.


SJ

Cevian

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Re: Q1 2020 Results
« Reply #7 on: May 01, 2020, 12:30:21 PM »
I think I should stop listening to the conference calls.  :)

Every time I listen, I get encouraged and buy more shares. Purchased more at CAD$360 today. I don't think I've ever seen this kind of discount to book.

Parsad

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Re: Q1 2020 Results
« Reply #8 on: May 01, 2020, 01:07:48 PM »


6) Piling more money into Seaspan? - During Q1, FFH piled another $100m into Atlas (page 16 of Q1).  Seaspan has been one of FFH's few success stories in recent years, but returning to my traditional rants and raves about position-sizing, is this really wise?  Seaspan seems to be in good shape with much of their capacity under medium term contracts, but what residual risks remain (ie, counterparty risk, events eligible for declaration of force majeur, etc)?  FFH has now piled a total of $1.5B of its capital into Atlas.  Is this a reasonable risk from a position-sizing perspective?  Returning to point #3, a write-down of ~$500m would be inconvenient.


SJ

Hi SJ, I don't have answers for all of your questions, but I do have a response for #6:

I'm comfortable with them piling into Atlas.  I think Atlas will be a wholly-owned Fairfax Company one day like Mid-American became under Berkshire.  With Paul Rivett showing signs of moving into semi-retirement and spending more time with family, Prem and the old guard aging, Andy Barnard not being much younger than Prem, I like the idea of Bing Chen and Wade Burton sharing future duties at Fairfax in terms of a succession plan.  One handles operations and one handles investments.  That may change depending on what happens, what acquisitions are brought in, what leaders emerge, but I think shareholders could be comfortable in that pairing.  Cheers!
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petec

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Re: Q1 2020 Results
« Reply #9 on: May 01, 2020, 01:48:34 PM »
I hadn’t thought of that. That’s quite an outcome.
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