CIBCHave a $950.00 target. GLTA
EQUITY RESEARCH
April 28, 2022 Earnings Update
FAIRFAX FINANCIAL HOLDINGS LIMITED
No Digit Gains, No Problem
Our Conclusion
Overall, we felt that FFH printed an encouraging quarter. EPS beat our
expectations slightly, despite another deferral of the $400 million gains on
Digit. This deferral was more than offset by positive net gains on equity
exposures in the quarter, whereas we had anticipated a loss. Underwriting
margins were also a bit better than anticipated (supported by lower CAT
losses), and there was no noise from the run-off segment this quarter.
Key Points
Earnings beat, despite deferral of gains on Digit. Headline EPS came in
at $4.49 versus our estimate for a loss of $0.95 and consensus at a loss of
$1.37. Relative to our forecast, the beat was driven by a combination of
factors, including: 1) better-than-expected mark-to-market adjustments on
the common equity portfolio; 2) a higher earnings contribution from
associates; and, 3) a better-than-modeled loss ratio. BVPS decreased 0.7%
sequentially (after paying a $10 dividend in the quarter). The total debt to
total capital ratio was unchanged at 24.2% versus 24.1% in Q4 and down
from a peak of 32.5% in Q1/20.
Investment returns exceeded our expectations. Net losses on
investments amounted to $214 million, better than our estimate for a loss of
$308 million. Relative to our forecast, the beat appears attributable to
positive returns on the common equity portfolio, whereas we had expected a
loss. This beat was even more surprising after considering that Fairfax did
not record any gains on Digit in Q1 (we had modeled $400 million being
crystallized in the quarter). Approximately 46% of portfolio investments were
in cash and short-dated investments at the end of Q1, versus 50% in Q4.
This reflected an effort to redeploy short-term investments into higher-
yielding U.S. treasuries and Canadian government bonds. The excess of fair
value over carrying value for investments that are not marked-to-market
amounted to $344 million at the end of Q1, which was virtually unchanged
despite the drawdown in equity markets that occurred in the quarter. Fairfax
ended Q1 with $1.2 billion in holding company cash and investments, a
decrease from $1.5 billion at year-end.
Underwriting results were generally positive. Net premiums written
increased 28% Y/Y in Q1 versus 19% in Q4. The combined ratio came in at
93% for the quarter, reflecting an improvement compared to 96% one year
ago, but an increase from the prior quarter at 88%. Unlike Q4, however,
there was no material adverse reserve development in the run-off segment or
loss portfolio transfers (which lowered the reported combined ratio). We feel
that underwriting margins in Q1 were encouraging and reflected a relatively
clean quarter overall.
Conference call tomorrow at 8:30 a.m. ET: 1-888-390-0867 (Canada/U.S.)
or 1-212-547-0141 (International) passcode: FAIRFAX