Fairfax 2018

[FFHWatcher]

As far as I understand FFH and the insurance industry (I could be wrong);

Buybacks can't/won't occur at the subsidiary/operating company level.

Buybacks can't/won't occur with float, as float is at the operating companies.

I assume that with FFH that it is no coincidence that their float is in the low to mid $20B range which matches their cash + short-term bonds.

Surplus at the operating companies are much more long-term in nature and is more available and more suited for long-term equity and investments in associates type investments.

Buybacks have to be done at the Holdco level and then cancel the shares to reduce the s/o.  (That would be cool using the float to buyback shares and then cancel them)

Their daily limit of share buybacks is 10,453 or about $6.5M/day

 

[FairFacts]

Bear in mind that on the last conference call Prem stated categorically that the $2bil holding company cash is a defensive posture which may increase over time and NOT excess capital looking for a home.

I take that to mean that the buy backs will have to be paid for out of operating cash flow.....

[ourkid8]

That's exactly what he wrote in last years annual report:

 

We are focused on using our free cash flow to buy back stock so it is unlikely our dividend will be increased soon

 

Henry Singleton, at Teledyne, reversed this trend, as you know, and over the next ten years we expect to do the same – use our free cash flow to buy back our shares!

 

I take that to mean that the buy backs will have to be paid for out of operating cash flow.....

[FFHWatcher]

Bear in mind that on the last conference call Prem stated categorically that the $2bil holding company cash is a defensive posture which may increase over time and NOT excess capital looking for a home.

I take that to mean that the buy backs will have to be paid for out of operating cash flow.....

 

Yes, the operating cash flow that occurs at the operating companies gets pushed up/dividended(?) up to the Holdco and used for buybacks.

(ie. Crum or Northbridge are not buying back FFH shares but they do pay dividends to holdco who then buyback shares with the excess cash flow)

[StubbleJumper]

Bear in mind that on the last conference call Prem stated categorically that the $2bil holding company cash is a defensive posture which may increase over time and NOT excess capital looking for a home.

I take that to mean that the buy backs will have to be paid for out of operating cash flow.....

 

 

I wouldn't take Prem's categorical statements too strongly.  He probably is well intentioned when he makes them and probably plans to adhere to them, but then sometimes things change.  As a result, FFH has flip-flopped over the years more than a fish out of water. 

 

Ffh apparently desperately needed its subs to be listed on the exchange, so we had LM, NB and ORH to unlock the value....until we apparently didn't need it.

 

Ffh desperately needed to be listed on the nyse until it apparently didn't need it.

 

Wfc, jnj, USB and kft were going to remain core holdings for a long, long time....until they were no longer considered core a few years later.

 

 

There were good reasons for each of those flip-flops.  IMO, all it would take for Premium to flip-flop on his holdco cash balance declaration would be a good reason.  "Ffh share price was ridiculous, we had plenty of liquidity in the subs, so we decided that we could moderate the holdco cash balance to take advantage of the displacement in the market for FFH shares, blah blah blah...."

 

I'm not sure that the current price would be attractive enough to trigger a flip-flop, but I have little doubt that US$375 would be irresistible.

 

 

 

SJ

[petec]

Wise words SJ although I imagine after the early 2000’s fiasco they’d always maintain decent holdco liquidity. Still, a $1bn buyback at $375 would be nice!

[walkie518]

Seaspan results out

 

https://mma.prnewswire.com/media/776731/Seaspan_Corporation_Seaspan_Reports_Third_Quarter_2018_Results.pdf?p=original

[petec]

Seaspan results out

 

https://mma.prnewswire.com/media/776731/Seaspan_Corporation_Seaspan_Reports_Third_Quarter_2018_Results.pdf?p=original

 

This quarter’s FCF yield is 10%. That’s not annualised. Bit less when you consider Fairfax warrant dilution but even so...

[gary17]

Seaspan results out

 

https://mma.prnewswire.com/media/776731/Seaspan_Corporation_Seaspan_Reports_Third_Quarter_2018_Results.pdf?p=original

 

This quarter’s FCF yield is 10%. That’s not annualised. Bit less when you consider Fairfax warrant dilution but even so...

 

a lot of cash flow wow

but also a lot of debt. 

 

[petec]

Yes but it’s a hard asset company at the end of a capex binge. The story from here is one of delevering by intelligently deploying the wave of free cash coming their way. Even if they just delever  the equity should benefit by the amount of the FCF each year (holding ev/ebitda constant). If Sokol can do something smart with the cash flows then it’s better than that. We will learn a lot on the call today as they have just done their first acquisition.

[gfp]

Results out -

 

https://s1.q4cdn.com/579586326/files/doc_financials/2018/Q3/FFH-2018-Q3-Press-Release-(Final).pdf

 

During the third quarter of 2018 the company repurchased for cancellation and repurchased for treasury a total of 99,622 subordinate voting shares at an aggregate cost of $55.9 million. During the fourth quarter of 2017 and up to September 30, 2018, the company repurchased for cancellation and repurchased for treasury a total of 656,063 subordinate voting shares at an aggregate cost of $346.7 million.

[TwoCitiesCapital]

Results out -

 

https://s1.q4cdn.com/579586326/files/doc_financials/2018/Q3/FFH-2018-Q3-Press-Release-(Final).pdf

 

During the third quarter of 2018 the company repurchased for cancellation and repurchased for treasury a total of 99,622 subordinate voting shares at an aggregate cost of $55.9 million. During the fourth quarter of 2017 and up to September 30, 2018, the company repurchased for cancellation and repurchased for treasury a total of 656,063 subordinate voting shares at an aggregate cost of $346.7 million.

 

Hopefully Q4 provides more opportunity for them to reduce shares even more dramatically.

 

I had sold about 50% of my position earlier in the year to buy other items that pulled back in January-April. I have since booked gains elsewhere in the portfolio and repurchased all of my shares of Fairfax as of today re-establishing the position at a lower basis.

 

Fairfax is about the only company that I can think of that stands to benefit tremendously from continuously higher rates and the ensuing recession.

 

 

[Cigarbutt]

The underwriting is very strong and reflective of a longer term trend.

IMO very strong Q3 underwriting results on an absolute and relative basis.

 

Florence cost 71.9M with most of the cost spread evenly between Brit (30.8M) and AW (27.6) with only 7.5M at ORH.

Advent has been morphed into other units and in runoff with the Lloyd's platform "reforming".

NPW growth is getting lower yoy  (AW actually down 4.1% yoy) and actually down from the previous quarter.

The subs remain very well capitalized and reserve releases continue unabated.

A significant runoff deal will accrue going forward.

 

Will listen to the conference call to better understand their investment strategy and outlook.

[Dazel]

 

All of the yelling and screaming a year ago about Allied being a bust etc....should be laid to rest! The insurance companies are now what we all dreamed they would be. Unfortunately, the investment climate (prices) are not cooperating to create gains short term so the numbers look weak. However, October certainly has brought some opportunity to buy some bargains which I expect Fairfax was doing. The structure of the company is set up to outperform...execution in a value environment and large buybacks here will make this a company to own for the longer term. Brian Breadstreet has successfully navigated the long term fall in bond prices...avoiding the large bond losses most of the industry is getting hit with. Corporate bond opportunities are showing up.

 

 

[TwoCitiesCapital]

 

All of the yelling and screaming a year ago about Allied being a bust etc....should be laid to rest! The insurance companies are now what we all dreamed they would be. Unfortunately, the investment climate (prices) are not cooperating to create gains short term so the numbers look weak. However, October certainly has brought some opportunity to buy some bargains which I expect Fairfax was doing. The structure of the company is set up to outperform...execution in a value environment and large buybacks here will make this a company to own for the longer term. Brian Breadstreet has successfully navigated the long term fall in bond prices...avoiding the large bond losses most of the industry is getting hit with. Corporate bond opportunities are showing up.

 

Their timing on bonds really HAS been phenomenal. Give them 6-12 months to roll a number of those binds at higher yields and we're talking some serious stable income being built. Especially if the long-ene goes up another 50-100 bos and they feel comfortable rolling into those

[Tommm50]

Help me, I'm confused. I've been in the insurance business a long time and the uw results for the quarter were EXCELLENT as compared to last year and in general. Yet the market knocks the price DOWN 2%. Is it possible the market is so ignorant of the key drivers of an insurance group or am I missing something important?

[mcliu]

Help me, I'm confused. I've been in the insurance business a long time and the uw results for the quarter were EXCELLENT as compared to last year and in general. Yet the market knocks the price DOWN 2%. Is it possible the market is so ignorant of the key drivers of an insurance group or am I missing something important?

 

Overall returns, net of overhead runoff and investments gains/losses, have been weak.

If you back out the non-cash gain from the Quess' accounting reclassification, book value barely grew.

It'll be hard to achieve the 15% BV growth that FFH has been targeting.

I think the market is waiting for better results on the investment side before it'll revalue shares.

[Tommm50]

Thx.

[Spekulatius]

Help me, I'm confused. I've been in the insurance business a long time and the uw results for the quarter were EXCELLENT as compared to last year and in general. Yet the market knocks the price DOWN 2%. Is it possible the market is so ignorant of the key drivers of an insurance group or am I missing something important?

 

Overall returns, net of overhead runoff and investments gains/losses, have been weak.

If you back out the non-cash gain from the Quess' accounting reclassification, book value barely grew.

It'll be hard to achieve the 15% BV growth that FFH has been targeting.

I think the market is waiting for better results on the investment side before it'll revalue shares.

 

Yes, book value growth has been subpar. This is the case with a lot of peers as well, I assume due to market to market losses from the bond portfolios. FWIW, I own quite a bit of RE and AXS as well.

[Dazel]

 

I have not been paying attention to the share based awards that have ballooned at Fairfax this has never been an issue when looking at Fairfax over the 20 years that I have...In early 2017 when I began to look at Fairfax again there were no such awards..0 (2016-antidilutive). After the Allied purchase I did not pay enough attention to the diluted share count to pick up on the share based awards as I assumed there would be shares held back for performance of Aliied after the acquisition that would be dilutive with a successful transition.

 

My comments on buybacks in hindsight are now completely and utterly wrong as Fairfax is buying back stock to try to keep up with stock handouts. I apologize for the oversight...trust me I am pissed at the mistake. My buy back theory is wrong...If I were paying more attention to management rather than the great opportunity that the companies, assets, liquidity and capital structure offer I would not have missed it. Fairfax is still set to out perform but the share count will not be shrinking like I had hoped unless the shares get hit hard and the share awards become anti dilutive.

[gfp]

I get how options can be anti-dilutive, but how are share awards ever anti-dilutive?

[Dazel]

 

2016 annual report says they are  antidilutive and therefore not used in earnings per share calculation in that year.

 

Fact is I don’t know what the hell they are...what the strike price is...who is getting them. Nothing so they may not be antidilutive in share price fall as they did in 2016. That is an assumption but obviously I have been wrong before!

 

When I get over my pissed off mood I will look some more.

[Viking]

FFH is now trading at a 52 week low CAN$603 and US$458. What is stopping Mr. Market from purchasing FFH? What is stopping me from buying shares is i have little confidence in how FFH evaluates equities. I am waiting to hear that FFH loaded up on GE when it was trading over $20 and Prem explain what a great business it is and how they think management is great (or some similar company). Yes, the stock looks cheap and the bond portfolio is positioned very well. However, it appears FFH is focussed on using excess cash to buy out minority partners in Brit, Allied and Gravalia.

 

The stock is trading where it was trading in Janaury 2015. My fear is FFH will still be trading at CAN$600 in a couple of years in the future. Hard to see a catalyst.

 

Other than ‘the stock is cheap’ can someone explain to me why FFH should trade higher than CAN$600 over the next year? What is going to happen with the underlying business that is going to warrant a higher share price?

 

[obtuse_investor]

Viking: Good question. I don't know the answer, but this is what I would suggest: invert the line of inquiry.

 

Instead of looking for what could go right over the next few years; look at what negative scenario is being priced in.

Another way to say that would be to not look at the upside, but rather the downside from here.

[Viking]

Obtuse, the big risk I see is FFH loads up with GE type value plays right before the US enters a recession and a big stock market correction. A second risk is they use all their freecashflow to buy out minority shareholders in companies like Brit which are underperforming. Thanks nstead of using free cash flow to buy back shares that look undervalued. From a corporate governance perspective Prem seems more focused on his kids and keeping control than driving shareholder value.