Maintain their $2000 target. GLTA
No Major Surprises With Q2 Results Our Conclusion
Second-quarter results had some puts and takes, but contained few
surprises. The combined ratio remained on trend, interest income continued
to edge higher (albeit at a moderating pace) and the mark-to-market impact
was better than we expected. Prior year reserve development also remained
favourable in the quarter, despite other insurers experiencing more
meaningful adverse development in certain casualty lines stemming – mostly
– from the pre-pandemic accident years. If we really wanted to nitpick the
results, we could highlight that the current accident year combined ratio (ex-
CATs) ticked slightly higher and the top line decelerated a few points.
Nothing from the quarter stood out as thesis-changing, however. The stock
remains deeply discounted despite the earnings profile being much more
skewed towards reliable sources of recurring income (i.e., underwriting +
interest income) than it has been historically.
Key Points
Underwriting margins remain stable overall. On an undiscounted basis,
the consolidated combined ratio came in at 93.9%, which was essentially
unchanged versus the prior quarter at 93.6% and year-ago levels of 93.9%.
Catastrophe losses contributed 2.7 combined ratio points on an
undiscounted basis (primarily reflecting Dubai floods and other attritional cat
losses), a touch higher than 2.4 points one year ago. Favourable prior year
development amounted to 2.2 points. Consequently, the current accident
year combined ratio (ex-CATs) amounted to 93.4% versus 92.4% in Q1 and
92.8% one year ago. Excluding the impact of Gulf Insurance, gross and net
premiums written increased 0.6% and 3.0% Y/Y, respectively, reflecting a
modest deceleration from the prior quarter at 3.6% and 5.3%.
Interest income continues to grind higher (albeit at a moderating pace).
Total interest and dividends amounted to $614 million, 4% higher
sequentially and reflected an annualized run-rate of nearly $2.5 billion
(comfortably above full-year guidance of +$2.0 billion).
Mark-to-market impact was better than expected. Fairfax reported net
gains on the investment portfolio of $242 million, better than our expectation
for a modest loss of $65 million. The “beat” was largely driven by net gains
on equity exposures (excluding the impact of the total return swaps on FFH
shares), whereas we had expected a loss given the direction of travel in
broad equal-weight equity market indices in the period.
Income from associates was generally in line. Fairfax’s share of profits
from associates amounted to $221 million, more or less in line (given the
fairly wide confidence interval) with our estimate of $250 million.
FFH remains deeply discounted. Book value per share increased 4%
sequentially and 17% Y/Y. Fairfax now trades at 1.16x P/B, which remains at
the low end of the peer group range. The stock also trades at 7.4x P/E
(based on NTM consensus EPS estimate), whereas peers trade at 14.7x