Fairfax Financial Earnings: Strong Underwriting Margins Partially Offset by Investment Losses

Fairfax Financial FFH reported a solid second quarter with relatively strong underwriting margins. However, this was partially offset by some investment losses. While the second quarter was weaker than the first quarter, Fairfax is having a good year so far, with book value per share up 11% since year-end, adjusted for dividends. We will maintain our CAD 790 fair value estimate for the no-moat company and see the shares as overvalued at the moment.

Net written premiums increased 9% year over year during the second quarter, a bit of a bounceback from the more muted growth the company saw in the first quarter. We think premium growth is probably being driven primarily by rate increases, which we expect to moderate as we move deeper into the hard market.

The company’s combined ratio for the quarter was 93.9% compared with 94.1% last year. We’ve seen underwriting margins at peers flattening out in recent quarters as well, suggesting that the benefits of the hard market may have peaked. But with its underwriting margins strong relative to historical levels, Fairfax should be in an attractive position in the near term.

Fairfax booked an investment loss of $342 million for the second quarter, as a $164 million gain on its equity portfolio was more than offset by a $405 million loss on its fixed-income investments as interest rates continued to rise. We think investors should generally ignore mark-to-market changes on fixed-income investments related to interest-rate levels, as insurers like Fairfax typically hold these investments to maturity.