Q2 results

[glider3834]

starting new thread for Q2 out next Thurs

 

 

[Luke]

https://www.marketscreener.com/quote/stock/FAIRFAX-FINANCIAL-HOLDING-1409991/news/Financial-Results-for-the-Second-Quarter-44515124/

[Luke]

Our underwriting performance in the second quarter of 2023 continued to produce favourable results, with growth in gross premiums written of 10.0% and net premiums written of 8.4%, primarily reflecting new business and continued incremental rate increases in certain lines of business. We achieved underwriting profit of $337.5 million on an undiscounted basis and a consolidated combined ratio of 93.9% for the quarter.

[Luke]

During the first six months of 2023 the company used cash and net proceeds from sales and maturities of U.S. treasury and other government short-term investments and short dated U.S. treasuries to purchase $6.4 billion of U.S. treasuries with maturities between 3 to 5 years and net purchases of first mortgage loans of $2.0 billion with maturities less than 3 years, which will benefit interest and dividend income in the remainder of 2023.

[Luke]

Very nice numbers guys!

[nwoodman]

Solid results, the marks on bonds hurt but that is the time we live in.  Most impressive was the CR, I thought it would be edging up more as they are grew their book.  Poseidon is getting whacked but promising to hear that things are likely to stabilise from here.  All seems to be tracking in the right direction and certainly justifies the run up in share price.  The true earnings potential hasn’t been realised yet.

[Parsad]

Book value should go over $900 USD by year-end.  Looks like 1.2 times book would be $1,080 USD or close to $1,400 CDN.  Cheers!

[MMM20]

41 minutes ago, Parsad said:

Book value should go over $900 USD by year-end.  Looks like 1.2 times book would be $1,080 USD or close to $1,400 CDN.  Cheers!

BVPS ~$834 + ~$33/share fair value excess of carrying value of associates = ~$867. 
 

Does the stock gap up to $900 tomorrow? Let’s see.

 

Edited August 3, 2023 by MMM20
bad short term memory and napkin math

[Parsad]

1 minute ago, MMM20 said:

BVPS $835 + ~$34/share fair value excess of carrying value of associates = $869. Nice.
 

Does the stock gap up to $900 tomorrow? Let’s see. 
 

 

If not tomorrow, shortly!  As Viking has shown in his projections, the consistency of earnings over the next 2.5 years is pretty much written.  You're looking at adding $130-140 USD to book every year in 2023, 2024 and 2025.  I'm not sure anyone has a story like this!  It's there...plain as day in everyone's face and the markets haven't fully recognized it yet!  Cheers!

[glider3834]

pretty decent jump on consolidated interest & dividends $464M in Q2 ( vs $382M Q1)  

 

 

 

 

Edited August 3, 2023 by glider3834

[Malmqky]

Good quarter.
 

Fairfax is half-tempting me to break my “don’t add to positions over 25%” rule. Hopefully the market shares my enthusiasm tomorrow

[Viking]

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. 

Edited August 4, 2023 by Viking

[Viking]

1 hour ago, glider3834 said:

pretty decent jump on consolidated interest & dividends $464M in Q2 ( vs $382M Q1)  

That was the number that slapped me upside the head when i was reading… WOW!

Edited August 3, 2023 by Viking

[glider3834]

14 minutes ago, Viking said:

That was the number that slapped me upside the head when i was reading… WOW!

I don't think PacWest deal is fully included either - was expected to close end of Q2 or early Q3 I think

 

The closing of the Transaction and the sale of each Loan is subject to the satisfaction of customary closing conditions (including Pacific Western Bank securing certain counterparty consents and waivers), and it currently expected to close in multiple tranches during the second and early part of the third quarter of 2023. 

Edited August 3, 2023 by glider3834

[Redskin212]

I thought this was interesting.  Prem's personal holdings of Atlas shares, a little pocket change - $10 million

 

"Subsequent to the closing of the transaction, during the second quarter of 2023 Mr. Watsa, to avoid potential future conflicts of interest, sold all of his 678,021 shares of Poseidon to Fairfax. Mr. Watsa owned 678,021 shares of Atlas representing less than 0.3% ownership as an investment that were replaced with shares of Poseidon on a one-for-one basis as a result of the tender offer as part of the consortium described above. Mr. Watsa sold the Poseidon shares to Fairfax at $15.50 per share, the same price he could have obtained under the tender offer and the price at which Fairfax’s shares of Atlas were valued by the consortium which made the tender offer."

[nwoodman]

1 hour ago, Viking said:

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. 

 

Haven’t they given up some of this optionality, at least for this year, with the 6 month US Treasury bond forward contracts they entered into last quarter or does that show up in the bond losses for this quarter?  It was only $3bn then and $2.5bn now so maybe it isn’t all that material on a $33bn bond portfolio.

[Parsad]

2 hours ago, Viking said:

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. 

 

Nice recap!  Cheers!

[AlwaysDay1]

@Viking if I understand correctly you are saying that they will be able to roll their bonds at higher yields now. How does the interest from this behavior differ from the "dividend and interest income" of 500m per quarter? Where is this latter interest/dividend income from? Is it not from fixed income securities? Thanks. 

 

 

[LC]

Viking, I think they mentioned 10% percent on the new 1.8b mortgage bonds- so maybe more like 45m per q in incremental interest?

 

Also, do we know if they have extended duration on the bond portfolio? 

[SafetyinNumbers]

3 hours ago, Viking said:

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. 

Great highlights Viking. Trevor Scott pointed out that Fair Value of Associates over Carrying Value has grown to $33/share and adds it to BV to get what I’m calling adjusted book value (ABV). On that measure ABV grew from $822 to $867 which is more than it’s been in a very long time and was very recently very negative. Given how cheap Eurobank and FIH are alone, I expect this number to keep growing. I think it will be easy for PMs to justify paying over IFRS book value if they can point to ABV and I think they will be absolutely right to do so. It probably has better correlation to the stock price too.

 

Edited August 4, 2023 by SafetyinNumbers

[UK]

4 hours ago, Viking said:

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. 

 

Thanks Viking! The underwriting results, which was my biggest worry (as usual:)), are just awesome, especially while considering context! 

[Viking]

2 hours ago, LC said:

Viking, I think they mentioned 10% percent on the new 1.8b mortgage bonds- so maybe more like 45m per q in incremental interest?

 

Also, do we know if they have extended duration on the bond portfolio? 

@LC here is my logic. 10% on $1.8bn = $180mn. But we need to net out what they were earning on the $1.8 billion previously. My guess is 5% = $90 million. So we get $90 million in incremental earnings. Some of this will be investment gains (not dividends) as the bonds were purchased at a discount. So my guess is incremental interest and dividend amount will be $80 million or $20 million per quarter.

 

I didn’t come across the dividend amount. Please share (if anyone else knows).

[Viking]

2 hours ago, AlwaysDay1 said:

@Viking if I understand correctly you are saying that they will be able to roll their bonds at higher yields now. How does the interest from this behavior differ from the "dividend and interest income" of 500m per quarter? Where is this latter interest/dividend income from? Is it not from fixed income securities? Thanks. 

 

 

@AlwaysDay1 my writing is a little unclear at times… i am saying 2 things will likely bump interest and dividend income to over $500 million in Q3:

1.) incremental interest earned from $1.8 billion PacWest portfolio

2.) incremental interest earned from bonds that mature and are rolled over at higher maturities

 

[Viking]

2 hours ago, SafetyinNumbers said:

Great highlights Viking. Trevor Scott pointed out that Fair Value of Associates over Carrying Value has grown to $33/share and adds it to BV to get what I’m calling adjusted book value (ABV). On that measure ABV grew from $822 to $867 which is more than it’s been in a very long time and was very recently very negative. Given how cheap Eurobank and FIH are alone, I expect this number to keep growing. I think it will be easy for PMs to justify paying over IFRS book value if they can point to ABV and I think they will be absolutely right to do so. It probably has better correlation to the stock price too.

 

@SafetyinNumbers that is a great point. The difference between fair value and carrying value for associate and consolidated holdings is significant and should be included in the discussion of BV. Additional margin of safety.

[nwoodman]

1 hour ago, SafetyinNumbers said:

Great highlights Viking. Trevor Scott pointed out that Fair Value of Associates over Carrying Value has grown to $33/share and adds it to BV to get what I’m calling adjusted book value (ABV). On that measure ABV grew from $822 to $867 which is more than it’s been in a very long time and was very recently very negative. Given how cheap Eurobank and FIH are alone, I expect this number to keep growing. I think it will be easy for PMs to justify paying over IFRS book value if they can point to ABV and I think they will be absolutely right to do so. It probably has better correlation to the stock price too.

 

 

Best to stay reasonably conservative.  Who really knows what Poseidon is worth as a highly leveraged capital-intensive business in a world with more normal interest rates.  Given their massive drop in earnings, a $400 million haircut over "fair value" doesn't sound too outrageous to me.

 

Q1 23 $50.1m vs $49.7 Q1 22

Q2 23 $6.3m vs $72m Q2 22

Q3                       $58m Q3 22

Q4                       $78m Q4 22

 

Total                    $258 FY 22

 

The earnings release had this to say

 

"Share of profit of Poseidon (formerly Atlas) decreased to $6.3 million from $72.0 million due to higher interest expense, interest rate hedging losses (compared to hedging gains in the prior year) that fluctuate quarterly, and transaction costs related to the first quarter privatization of Poseidon. The company expects Poseidon’s earnings will normalize throughout the year."

 

Hopefully, this gets discussed in the CC.