CIBCCurrently have a $1,200.00 target. GLTA
EQUITY RESEARCH
May 28, 2023 Earnings Update
FAIRFAX FINANCIAL HOLDINGS LIMITED
Introducing New Estimates Under IFRS 17 & 9
Our Conclusion
The adoption of a new accounting standard with IFRS 17 has introduced
significant changes to the way that earnings are recognized, measured,
presented and disclosed for insurance and reinsurance companies. The
geography of various line items has changed significantly, and we have
rebuilt our financial statement projection model to conform to the new
accounting standard. We are publishing this note with the purpose of
introducing our new EPS estimates for Fairfax Financial.
Key Points
Headline earnings should exhibit greater volatility going forward. Unlike
some peers which have introduced new measures of “adjusted”, “core” or
“operating” earnings that strip out some of the noise associated with the
transition to a new accounting standard, Fairfax continues to report IFRS
(i.e., unadjusted) earnings as a headline earnings metric. Owing largely to
the impact of fluctuating market yields on the discounting of claims reserves,
we expect unadjusted earnings will display greater volatility than it has
historically. However, we adopt a neutral view on quarterly changes in
market yields and consequently we do not forecast any positive or negative
impact in our forward estimates.
Focus remains on the same key performance indicators. Despite the
elevated volatility of headline earnings caused by the discounting of claims
reserves, we believe that investors should look through this impact entirely
when assessing operating and financial performance. Fairfax provides a very
helpful reconciliation of “insurance service result” to “underwriting profit”, the
latter of which is a much more informative and reliable measure of
underwriting earnings, in our view. This measure of underwriting profit is
calculated on an undiscounted basis (consistent with the prior methodology).
The trajectory of top-line growth and undiscounted underwriting margins
remain the most important metrics to assess performance of the insurance
business, in our view.
Actuals to be backfilled at a later date. Although the transition to a new
accounting statement compels prior year restatement of earnings under the
new standard, we do not have a fulsome history of actual operating EPS
calculated under IFRS 17 and 9. As the company releases Q2/23 to Q4/23
results, we expect to receive comparable period earnings under the new
accounting standard. However, the estimates summary on the right-hand
side of this page does not present 2021 and 2022 actual EPS, owing to the
absence of this data under the new accounting standard.