Fairfax Financial Holdings Ltd T.FFH.PR.M

RBC

[retiredcf]

February 11, 2022

Outperform

TSX: FFH.U; USD 491.73; TSX: FFH

Price Target USD 600.00

Fairfax Financial Holdings Limited

Strong operating results and $1B buyback fuel 12% sequential book value growth

Our view: Core underwriting results were impressive and book value growth was exceptionally strong fueled by gains, buybacks and the Odyssey sale. Asbestos charges and non-operating expenses were a drag on core numbers.

4Q results: Fairfax Financial reported 4Q21 net earnings per share of $33.64 vs. $32.68 last year and our $14.15 estimate. Results include $938 million of net realized and unrealized gains on investments and $17 million related to the sale of a business unit. On an operating basis, which excludes these items, the company earned $5.13 per share (RBC forecast was $11.47). An asbestos charge, much higher corporate overhead (few details) and weaker ordinary investment income offset positive core operating results and were the main reasons for the shortfall to our operating EPS forecast.

Premiums: Net written premiums rose 19% to $4.4 billion which beat our +11.1% estimate. Results include $702 million of loss portfolio transfers absent which net premiums rose by 37.9%. OdysseyRe (+49.8%), and Allied World (+23.1%) were particularly strong and Crum and Brit would have had growth of 26.3% and 83% absent the loss portfolio transfers.

Margins: The overall combined ratio amounted to 88.1% vs. 95.5% which was well ahead of our 98.8% forecast. Total cat losses were $209 million, 5.4 combined ratio points (we had expected 3.3 points). Favorable reserve development was 5.4 points which beat our 3.3 points. On an accident year basis, the company had a combined ratio of 88.1% which was much better than our 95.1% estimate, reflecting better core accident year margins. The run-off segment, however, had adverse development related to asbestos and other exposures of $212 million.

Net:Net: Core underwriting margins are the best we can remember and  growth is impreeeive. This is the best operating performance we've ever seen. Ordinary investment income should improve with interest rates and the big buyback provides further lift going forward.The company will hold a conference call on Friday, February 11, at 8:30 a.m. ET (dial-in 1-888-390-0867). We expect that questions will continue to focus on investment positioning, non-insurance holdings, recent share buybacks, and P&C insurance market conditions.