Fairfax Financial Holdings Ltd T.FFH.PR.C

RBC

[retiredcf]

Current and upside scenario targets are US$600 and US$750. And the cut and paste was a nightmare. GLTA

Fairfax Financial Holdings Limited

Strong top-line and book value growth, remains an outstanding value

Our View: Accident year margins continued to improve and growth was impressive across all units. Debt/Cap ratios have dropped with the completion of several transactions which positions the company to be more opportunistic in both growth and buyback decisions. The Digit transaction remains pending which will provide a further book value boost when closed. We  think there is significant room for multiple expansion and continue to view FFH shares as an outstanding value opportunity at about 0.75x book value. 

Key points:

Estimates/price target: We’re increasing our 2021 EPS estimate to $102.75 from $94.60 which primarily reflects the investment upside in the quarter. On an operating basis we are lowering our estimate to $23.00 from $27.90 which reflects the $5 shortfall in the quarter. For 2022 we’re increasing our estimate to $63.00 from $58.00 which reflects better growth and slightly better margins based on 2021 accident year results and continued pricing strength. Our 2023 estimate is similarly increased to $64.50 from $60.00. Our estimates do not include Go-Digit which would become consolidated once necessary approvals are achieved (a modest positive to '22 and beyond).

Price target: We are maintaining our $600 price target (about C$750) which remains based on about 1.0x multiple which we apply to estimated ending 2022 book value. With good visibility to further book value growth together with a company generating underwriting profits, favorable reserve development in the middle of a hard market we think 1.0x book value is still a very attractive multiple.

3Q Results: Reported 2Q21 net earnings per share of $16.44 vs. $4.44 lasty ear and our $8.41 estimate. Results included $375 million of net realized and unrealized gains on investments. On an operating basis, which excludes these items, the company earned $0.72 per share (RBC forecast was $5.73).  Catastrophe losses of $605 million were well above the $275 million we modelled though the difference was partially offset by higher associate and affiliate income.

Items of Note: 

	Management continues to anticipate receiving necessary
approvals to complete the Digit transactions announced in July and
estimates a $37/share benefit to book value when complete. The
completion of the Eurolife purchase, Brit sale and Riverstone Barbados
sale prompted the repayment of credit lines which reduced the debt/
capital ratio to about 25.7% which is in line with peers. About 72% of the
approximately $700 million of Covid-19 reserves taken to date remain in

IBNR.

Positives: 1) new business; 2) improved AY combined ratio; 3) reduced debt/cap ratio following completed transactions.

Negatives: 1) Much higher-than-expected catastrophe losses; 2) continued investment income pressure.