CIBCHave a $1000.00 target. GLTA
EQUITY RESEARCH
July 28, 2022 Earnings Update
FAIRFAX FINANCIAL HOLDINGS LIMITED
Investment Losses To Be Offset In Future Quarters
Our Conclusion
Fairfax reported diluted EPS that came in below our estimate owing largely to
a sizeable foreign currency loss on the investment portfolio that we had not
factored into our forecast. However, we expect the $1.5 billion of mark-to-
market losses that were recognized in Q2 to be more than offset in future
quarters by the forthcoming gains on Digit ($400 million), the sale of the Pet
Insurance business ($1.15 billion to $1.2 billion) and the sale of Resolute
($175 million). We felt there was nothing thesis-changing that emerged from
Q2 results, and were encouraged by a third consecutive quarter of a sub-
95% combined ratio. We rate Fairfax Financial Outperformer.
Key Points
Earnings came in below our estimates and consensus. Headline EPS
came in at a loss of $37.59 versus our estimate for a loss of $22.66 and
consensus at a loss of $4.22. Relative to our forecast, the miss was driven by
larger-than-expected losses on investments. BVPS decreased 6% on a
sequential basis. The total debt to total capital ratio increased to 25.0%
compared to 24.2% in the prior quarter, but down from the peak of 32.5% in
Q1/20.
Investment losses exceeded our expectations. Net losses on investments
amounted to $1.5 billion, which was larger than our estimate for a loss of
$1.2 billion. Relative to our forecast, the variance appears attributable to over
$200 million of foreign currency losses that we had not factored into our
estimate (driven by the strengthening of the U.S. dollar vis--vis the Indian
rupee, Sri Lankan rupee and Egyptian pound). As expected, Fairfax did not
crystallize any gains on Digit (we had modeled the $400 million of gains
being deferred into Q3), the sale of the Pet Insurance business or Resolute.
At the end of the quarter, 45% of portfolio investments were in cash and
short-dated investments versus 46% in Q1 and 50% in Q4/21. The deficiency
of fair value over carrying value for investments that are not marked-to-
market amounted to $803 million in Q2 compared to an excess of $344
million in the prior quarter. Fairfax ended Q2 with $1.1 billion in holding
company cash and investments, a modest decrease from $1.2 billion in Q1.
Underwriting results remained generally positive. Net premiums written
increased 25% Y/Y in Q2 versus 28% in Q1. The combined ratio came in at
94% for the quarter, broadly in line with the previous quarter at 93%. To the
extent that Fairfax is able to demonstrate a consistently sub-95% combined
ratio, we believe the company may begin to receive more recognition in the
market value of its stock for the contribution of underwriting income.
Conference call tomorrow at 8:30 a.m. ET: 1-888-390-0867 (Canada/U.S.)
or 1-212-547-0141 (International). Passcode: FAIRFAX.