Fairfax Financial Holdings Ltd T.FFH.PR.F

RBC

[retiredcf]

November 3, 2022

Fairfax Financial Holdings Limited Core insurance results beat expectations

TSX: FFH.U | USD 480.69 | Outperform | Price Target USD 700.00

Sentiment: Neutral

Net/Net: On an operating basis (which excludes the impact of unrealized and realized investment gains and losses) Fairfax reported  better than expected results in pretty much every major category - underwriting margins, investment income, associate income and non insurance income. While the headline combined ratio of100.03% doesn't stand out as all that impressive, that includes 15 points of catastrophic losses such that the underlying margin excluding both catastrophes and .09 points of favourable development is only 86.2%, which we believe is the best quarterly result the company has every reported. Premium growth remains strong across all units (some units appear lower growth due to currency). The company also remained active in share buybacks (a bit over $100m). Overall a good result. A conference call will be held on Friday, November 4, at 8:30 a.m. ET. We expect the recent Atlas, Recipe and pet insurance transactions will be discussed along with comments on market conditions, investment outlook and capital return.

3Q results: Fairfax Financial reported 3Q22 net loss per share of $3.65 vs. earnings of $16.44 last year and our $(11.79) estimate. Results included $0.5 billion of net realized and unrealized losses on investments. On an operating basis, which excludes these items, the company earned $14.92 per share (RBC forecast was $2.97). Results reflect better than forecast underwriting income as well as upsides in investment income, profit from associates and non-insurance company income.

Premiums: Net written premiums at ongoing operating units rose 18.6% to $5.6 billion which beat our +13.6% estimate. Crum & Forster (+34.5%), Odyssey Re (+32.0%) and Brit (+20.4%) were particular standouts. Growth reflects continued strong rate increases, exposure growth and new business.

Margins: The overall combined ratio amounted to 100.3% vs. 101.1% which beat our 101.6% forecast. Total cat losses were $803 million or 15 combined ratio points (we had expected 10 points). Losses from Ukraine totaled $40 million in the quarter (0.8 points). Favorable reserve development was 0.9 points which was in line with our 1.0 point forecast. On an ex-cat accident year basis the company had a combined ratio of 86.2% which was much better than our 92.5% estimate reflecting better core accident year margins.

Investments/other: Interest and dividend income totaled $256.5 million, beating our $209 million forecast. Associate income totaled $318 million, well ahead of our $175 million estimate. Non-insurance company income came in at $83.5 which also topped our $21.2 million forecast. Book value per share ended the quarter at $569.97, down 3.0% primarily reflecting adverse portfolio marks. Share buybacks totaled about 209,000 shares.