Leaderboard

Great quarter. Boring. But let’s look under the hood to see what we can learn. Here are three key takeaways: 1.) interest and dividend income = $464.6 million. This is now running at $1.86 billion/year. This does not include: - the higher interest income from the $1.8 billion in PacWest loan portfolio. This closed late in Q2. My guess is this will add $20 million per quarter to interest income. - as bonds continue to mature, Fairfax will be able to re-invest them at a much higher rate. My guess is Interest and dividend income for Q3 will be above $500 million. That would put it at $2 billion per year. That is $86/share. Fairfax is trading at 9.4 x estimated annual interest and dividend income. Holy shit Batman! 2.) combined ratio = 93.9. This was an elevated quarter for catastrophe losses… so this is a very good result. What happened? “…prudent expense management and decreased catastrophe losses.” Reading that in a Fairfax press release is music to my ears. Fairfax said they were decreasing Brit’s exposure to catastrophes and it appears we are seeing the benefits of this play out (probably company wide). My thesis is Fairfax has been slowly improving the quality of their insurance businesses for the last decade (under Andy Barnard’s leadership) and results this quarter support this idea. And how about Allied World’s CR of 91%… this sub looks like it has supplanted Odyssey as Fairfax’s top performing insurance sub. 3.) interest rates spiked late in Q2. We knew Fairfax was going to take a hit on their fixed income holdings in the quarter and now we know the number: a loss of $405.3 million. But this is a great thing for Fairfax. Their balance sheet has completely digested the spike in interest rates we have seen over the past 6 quarters. This is a big deal. Higher interest rates are a big tailwind for Fairfax. Their fixed income portfolio is still pretty low duration (2.5 years at the end of Q1). So lots of bonds will be rolling off every quarter. And Fairfax will now be able to reinvest at much higher rates, locking it in for years into the future. I hope we learn on the conference call what the average duration of the fixed income portfolio was at the end of Q2.