Post by
retiredcf on Mar 08, 2022 9:04am
CIBC
FFH is rated Outperform with an $825.00 target. GLTA
EQUITY RESEARCH
March 6, 2022 Earnings Update
FAIRFAX FINANCIAL HOLDINGS LIMITED
Revising Estimates Following Filing Of The Annual Report
Our Conclusion
We have updated our estimates following the filing of Fairfax’s annual report. Our 2022 EPS estimate declines, but this largely reflects the persistence of a risk-off equity market environment and rising bond yields since the last time we revised our forecasts. Overall, we felt Fairfax reported a solid Q4, characterized by an acceleration of top-line growth and healthy underwriting margins. Demonstrating margin expansion against the backdrop of a favourable pricing environment could be a catalyst for the name in 2022. At0.7x BVPS, Fairfax remains the cheapest North American property & casualty insurer that we follow. The stock remains second in our pecking order overall, and the best thematic trade idea in our coverage universe for a rising interest rate environment.
Key Points
Annual report has been filed. Fairfax filed its full 2021 annual report after
markets closed on Friday, March 4. The company had previously announced 2021 highlights in early February, and we provided an initial take on Q4 results at that time. However, we have waited for the filing of the annual report to update our estimates and obtain better visibility on Q4 results. Underwriting results were generally encouraging. Top-line growth was strong in Q4. Gross premiums written increased 32% Y/Y (versus 25% in the prior period), and net premiums written increased 38% (excluding the impact of loss portfolio transfers at Brit and Crum & Forster). The combined ratio came in at 88%, reflecting the largest quarterly underwriting margin since 2015. Adjusting for the impact of loss portfolio transfers in Q4, however, we estimate that the combined ratio would have been in the low 90% range.
Furthermore, over $200 million of adverse reserve development in the run-off segment was excluded from the consolidated combined ratio. If this were included, we estimate that the Q4 combined ratio would have been closer to the mid-90% range. Overall, we felt the acceleration of top-line growth was constructive, and that FFH could be capable of delivering margin expansion in 2022 if rate increases continue to outpace loss cost trends. Our earnings estimates remain based on a conservative combined ratio in the mid- to high 90% range.
Limited exposure to Eastern Europe. Fairfax indicated that it has
approximately $181 million or 1% of consolidated premiums in Ukraine.
Updating estimates to reflect the recent trajectory of equity markets.
Investment returns were lower than expected in Q4 owing to the partial
deferral of gains on Digit and lower-than-expected returns on the common
equity portfolio. We have updated our forward earnings estimates to reflect: i) the deferral of $400 million in gains on Digit into Q1; ii) the nearly 10% YTD decline in U.S. and global equity markets, and iii) some general fine-tuning.