CIBC Raise TargetMarch 13, 2023 Earnings Update
FAIRFAX FINANCIAL HOLDINGS LIMITED
Reiterating Outperformer Rating After A Solid Year
Our Conclusion
The filing of the annual report did not materially change our interpretation of
Q4 operating highlights, which were released in February. We believe that
Q4 results were encouraging and we are taking our earnings estimates and
price target higher on improved underwriting margins and higher run-rate
dividend and interest income. In the context of elevated and newly emerging
sources of macro risk, we prefer defensive holdings like the P&C insurers
(particularly those with an improving narrative like Fairfax) over the more
market- or credit-sensitive names in our coverage universe.
Key Points
Fairfax filed its annual report. The company filed its full 2022 annual report
after markets closed on Friday, March 10. Fairfax had previously announced
highlights from the quarter in February, and we provided an initial take on Q4
results at that time. In general we believe the quarter was encouraging as it
included: 1) an earnings beat on higher-than-expected gains on equity
exposures, 2) solid underwriting margins at a 91% combined ratio, and 3)
another step-up in run-rate interest and dividend income.
Underwriting margin improvement sustainable? Fairfax has now
delivered two consecutive years with a 95% combined ratio, which reflects a
meaningful improvement when compared to the company’s historical track
record. The perception of Fairfax being an investor first and an insurer
second could begin to fade (at least on the margin) if the company continues
to demonstrate its ability to deliver a consistent stream of positive
underwriting earnings. A shift in the earnings mix towards underwriting
income and away from investment gains/losses could have favourable
implications for the trading multiple, as underwriting income is a more
consistent and reliable form of earnings in a choppy market environment. We
do acknowledge that underwriting margins have benefitted from hard market
conditions over the past few years and that hard markets don’t last forever.
However, we tend to agree that the severity of recent CAT events could
prolong hard market conditions for a longer period of time than they
otherwise would have endured. Fairfax indicated that, on balance, it believes
the current pace of rate increases is exceeding loss cost trends across its
insurance operations.
Revising our estimates. We are revising our estimates to reflect 1) higher
run-rate dividend and interest income, and 2) a slight improvement in
underwriting margins given the favourable result in Q4 and our previously
conservative stance. Our 2023 EPS estimate moves closer to consensus.
Revising our price target higher. We are increasing our price target to
$1,200 (from $1,050 previously) to reflect our positive read on Q4 results,
higher earnings estimates, and appealing defensive attributes in the context
of emerging sources of macro risk.