Fairfax Financial Holdings Ltd. :FRFHF-US: Earnings Analysis: Q2, 2017 By the Numbers : August 25, 2017

Fairfax Financial Holdings Ltd. reports financial results for the quarter ended June 30, 2017.

We analyze the earnings along side the following peers of Fairfax Financial Holdings Ltd. – Everest Re Group, Ltd., Axis Capital Holdings Limited, Aspen Insurance Holdings Limited, Loews Corporation, Chubb Limited, W. R. Berkley Corporation and Markel Corporation (RE-US, AXS-US, AHL-US, L-US, CB-US, WRB-US and MKL-US) that have also reported for this period.

Highlights

  • Summary numbers: Revenues of USD 2,936.60 million, Net Earnings of USD 311.60 million.
  • Year-on-year change in operating cash flow of 31.72% is about the same as the change in earnings, likely no significant movement in accruals or reserves.
  • Year-on-year earnings up despite decline in operating margins after interest and pretax margins.

The table below shows the preliminary results and recent trends for key metrics such as revenues and net income (See complete table at the end of this report):

2017-06-30 2017-03-31 2016-12-31 2016-09-30 2016-06-30
Relevant Numbers (Quarterly)
Revenues (mil) 2936.6 2901 2611.7 2396 2397.1
Revenue Growth (%YOY) 22.51 -0.14 -2.54 -25.22 -6.14
Earnings (mil) 311.6 82.6 -701.5 1.3 238.7
Earnings Growth (%YOY) 30.54 261.96 -772.58 -99.69 229.73
Net Margin (%) 10.61 2.85 -26.86 0.05 9.96
EPS 12.67 3.03 -30.77 -0.42 9.58
Return on Equity (%) 2.42 0.6 -5.8 -0.08 1.83
Return on Assets (%) 2.8 0.76 -6.42 0.01 2.19

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Market Share Versus Profits

Revenues History
Earnings History

FRFHF-US‘s change in revenue this period compared to the same period last year of 22.51% is almost the same as its change in earnings, and is about average among the announced results thus far in its peer group, suggesting that FRFHF-US is holding onto its market share. Also, for comparison purposes, revenues changed by 1.23% and earnings by 277.24% compared to the immediate last period.

Revenues Growth Versus Earnings Growth

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Leader, Earnings Focus, Laggard, Revenues Focus

Earnings Growth Analysis

Insurance companies sometimes tradeoff for improvements in premiums earned by relaxing standards in underwriting policies. A quick way to check against such activity is to compare the changes in loan loss provisions as well any chnages in the level of policy claims. If either of these checks point to a decline in the underwriting standards, it is quite possible that the company’s performance is a result of underwriting policy changes that could have a longer term impact compared to the shorter term pop in premiums earned.

Premiums Earned Percent History
Loss Ratio History

The company’s premiums earned as a percent of total revenues showed no year-on-year improvement and went from 83.51% to 72.69%. In spite of this, the company’s earnings went up – influenced primarily by the improvement in loss ratio from 60.40% to 58.26%. For comparison, premiums earned as a percent of revenues were 68.42% and the loss ratio 55.31% in the immediate last period.

Premiums Earned Percent Versus Loss Ratio

Cash Versus Earnings – Sustainable Performance?

It is important to examine a company�s cash versus earnings numbers to gauge whether its performance is sustainable.

Operating Cash Flow Growth Versus Earnings Growth

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Cash Flow based Earnings, Likely Non-cash Earnings, Low Cash Flow Base, Likely Undeclared Earnings

FRFHF-US‘s change in operating cash flow of 31.72% compared to the same period last year is about the same as its change in earnings this period. Additionally, this change in operating cash flow is about average among its peer group. This suggests that the company did not use accruals or reserves to manage earnings this period, and that, all else being equal, the earnings number is sustainable.

Margins

Despite a decline in operating margins after interest and a decline in pretax margins, the company’s earnings rose.

EBIT Margin Versus PreTax Margin

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Operation driven Earnings, One-time Favorables, Low Earnings Base, One-time Unfavorables
EBIT Margin History
PreTax Margin History

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Company Profile

Fairfax Financial Holdings Ltd. engages in the provision of property and casualty insurance, and reinsurance and investment management. It operates through the following segments: Insurance, Reinsurance, Insurance and Reinsurance, Runoff and Other. The Insurance segment comprises of Crum and Forster and Zenith National, which is a national commercial property and casualty insurance company in the U.S. writing a broad range of commercial coverage’s. The Reinsurance segment provides property and casualty products on a worldwide basis and underwrites specialty insurance in the U. S. and in the United Kingdom. The Insurance and Reinsurance segment comprises of Group Re, Advent, Polish Re and Fairfax Brasil, which focuses on third party business and also focused on specialty property reinsurance and insurance risks. The Runoff segment comprises of nSpire Re, which includes consolidated investment and liquidity management services. The Other segment comprises of Ridley, William Ashley, Sporting Life and Prime Restaurants, which engages in the animal nutrition business and operates in the U.S. and Canada. The company was founded by Vivian Prem Watsa in September 1985 and is headquartered in Toronto, Canada.

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