Underwriting Margins Demonstrate Consistency In Q2
Our Conclusion
Fairfax delivered another quarter of consistent underwriting results,
characterized by a modest acceleration of premium growth and solid
underwriting margins (94% combined ratio). CAT losses were relatively
benign in the quarter and prior-year development contributed favourably. For
the most part, the magnitude of mark-to-market losses on the investment
portfolio was generally aligned with our expectations. Holding company
liquidity ticked up following the sale of Ambridge, and Fairfax continues to
deploy capital into an attractive fixed-income environment characterized by
elevated market yields. We increase our price target to $1,400, implying 1.1x
our one-year forward BVPS estimate, and maintain our Outperformer rating.
Key Points
Underwriting results demonstrate consistency in Q2. Gross premiums
written increased 10.0% Y/Y, up slightly from 7.2% in the prior period.
Similarly, net premiums written advanced 8.4%, reflecting a modest increase
versus 6.1% in Q1. The consolidated combined ratio came in at 93.9% (on
an undiscounted basis – our preferred measure of profitability) which was
essentially unchanged versus 94.0% in Q1 and slightly better than the 95%
combined ratio achieved in 2021 and 2022. Prior-year development was
favourable overall (adding 1.3% to underwriting margins in the quarter) and
current period catastrophe losses were relatively benign, having a modest
2.4% combined ratio impact. In our view, the longer that Fairfax can deliver
consistently profitable underwriting results, the more credit the company may
receive in the market value of its stock for its stream of underwriting earnings
(which, historically, have been overshadowed by investment activities).
No major surprises on investment gains/losses. Mark-to-market losses
on the bond portfolio came in at $405 million versus our $390 million
estimate, and gains on equity exposures of $164 million were not too far off
the mark either (we had $215 million). That said, Fairfax recognized $55
million of FX losses and another $45 million of “other” losses which we had
not accounted for. However, we consider this to be normal course variability.
Foreign exchange gains and losses can be volatile in the short term, but
should balance out over time.
Other minor takeaways. Fairfax ended the quarter with cash and short-term
investments representing 12% of portfolio investments, down modestly from
14% in the prior quarter as the company continues to deploy into a higher
interest rate environment. Holding company cash also ticked up (from less
than $1.0 billion in Q1 to $1.1 billion) following a special dividend paid by Brit
related to the sale of Ambridge. The pre-tax excess of fair value over
carrying value of non-insurance investments increased from ~$440 million to
~$760 million, driven in large part (but not entirely) by the performance of
Eurobank. Fairfax’s debt-to-capital ratio (excluding non-insurance
companies) also ticked down slightly from 22.9% to 22.5% in the quarter.
Conference call tomorrow at 8:30 a.m. ET: 1-888-390-0867.