Fairfax Q2 2011 results

My apologies for the lack of posting lately. I’ve had some significant repair issues with the RV and have been spending most of my time at a repair shop and re-routing travel plans for the next 2 months. So, I figured I’d jump in with a post on my favorite under valued insurance company.

Fairfax Financial reported Q2 2011 results after the close yesterday. The press release can be found here. From the release;

Fairfax Financial Holdings Limited (TSX: FFH)(TSX: FFH.U) announces net earnings of $83.3 million in the second quarter of 2011 ($3.40 per diluted share) compared to net earnings of $23.7 million in the second quarter of 2010 ($0.87 per diluted share). The increase in earnings arose primarily from net gains on investments of $119.6 million compared to net losses on investments of $29.3 million last year. Book value per share decreased to $358.60 at June 30, 2011 from $376.33 at December 31, 2010, a decrease of 2.0% (adjusted for the $10.00 per share common dividend paid in the first quarter of 2011).

“Despite the challenging insurance industry and investment environment, during the second quarter we recorded good operating results and essentially maintained our common shareholders’ equity and book value per share,” said Prem Watsa, Chairman and Chief Executive Officer of Fairfax. “Excluding acquisitions, our consolidated premiums grew by 10% during the second quarter. Also, during the quarter, we retired $694 million U.S. of outstanding Fairfax, Crum & Forster and OdysseyRe notes and financed this by issuing ten year Fairfax bonds in the U.S. and Canada at record low interest rates. The company continues to be soundly financed with cash and marketable securities at the holding company level in excess of $1 billion.”

Q2 was an improvement over Q1 in many ways. Fairfax only does comparison to the year ago quarter and the end of year values so you need to look at quarter on quarter variations on your own. See my post on Q1 results for comparisons. First, book value increased to $358.60 in Q2 from $354.72 in Q1. This is still down from the $376.33 at the end of 2010 but its an improvement. Next, the insurance business did better in Q2. Primarily due to lower catastrophe losses Fairfax came close to generating an underwriting profit. The details are below.

The tornadoes in the US impacted the company’s overall combined ration by 7 points but catastrophe losses were much improved over Q1 where the Japanese tsunami had a major effect. These are good results and what I expect over the long term at a minimum, for the insurance business to break even. Also, as mentioned in the release Fairfax continued to grow their revenue, insurance premiums, at a 10% clip. This means  their insurance float and thus investment portfolio is increasing. As far as investments go, lets look at their investment performance in Q2.

Compared to investment losses in Q1 of $101.5M in Q2 Fairfax had investment gains of $119.6M. Most of the investment gains were due to increases in the value of the muni bond portfolio. In the equity section of the investment portfolio their hedges continued to due their job, offsetting all the stock losses during the quarter. At the end of Q2 Fairfax had 90% of their equity portfolio hedged. The investment portfolio seems very well positioned for the current environment.

Also during the quarter the company refinanced a bunch of their debt with 10 year bonds at much lower rates. This will improve earnings going forward.

All in all, it was a good Q2 for Fairfax. The insurance business is still tough but Fairfax continues to be disciplined and to grow premiums. Their investment portfolio is very well positioned for a tough economic climate and continues to generate great dividend and interest income. At the end of Q2, interest and dividends are running at an annualized rate of about 10% yield on book value adjusting for the tax free impact of the muni portfolio (yield is about 8.5% not accounting for the tax free munis). With shares trading a s1.1 times book value Fairfax is still a good value and still a great stealth dividend stock.