CIBCEQUITY RESEARCH
April 19, 2023 Flash Research
FAIRFAX FINANCIAL HOLDINGS LIMITED
Neutral Take On The Gulf Insurance Investment
Our Take
Fairfax appears to be paying a reasonable (i.e., average) multiple to increase
its equity interest in a high-growth insurer that is demonstrating profitability
and a good ROE. We estimate that the earnings impact to FFH is relatively
modest (i.e., +2%) and consequently don’t consider this transaction to be a
materially market-moving or thesis-changing event. This transaction follows a
few other notable events on the corporate development front over the past
year, including the divestiture of FFH’s Pet Insurance operations for $1.4
billion and expansion of the company’s equity interest in Allied World for
$734 million. From a capital allocation perspective, we suspect that investors
prefer the return of capital as opposed to reinvestment via M&A (as a
generalization) but also believe that an increased equity investment in a
growing insurer with profitable underwriting operations certainly doesn’t
detract from the quality of the broader business. For these reasons, we have
a neutral take on the Gulf Insurance investment overall.
Key Takeaways
• Fairfax increases its stake in Gulf Insurance Group. Fairfax
announced that it will acquire an additional 46% equity interest in
Gulf Insurance Group from KIPCO (a holding company focused on
investments in the Middle East and North Africa) for $860 million,
taking FFH’s ownership interest from 44% to 90%. The transaction is
expected to close in the second half of 2023.
• Transaction multiple appears middle-of-the-road. We estimate
that the transaction value implies a 15x P/E multiple (based on Gulf’s
2022 after-tax earnings attributable to shareholders) and 2.5x book
value. This appears generally in line with North American P&C
insurers that trade at 15x P/E (on average) and 2.2x book. Gulf
generated a ~17% ROE in 2022.
• Earnings impact to FFH is relatively modest. Previously, Fairfax’s
investment in Gulf was equity accounted. With the acquisition of a
control position, we suspect that Gulf will be fully consolidated for
financial reporting purposes going forward. We estimate that the
incremental earnings contribution associated with the larger equity
interest will positively impact Fairfax’ earnings by an order of
magnitude of ~2% (based on a simplistic extrapolation of Gulf’s 2022
earnings).
Outperformer
FFH-TSX, Sector: Financials
Current Price (4/18/23): C$910.12
Price Target (12-18 mos.): C$1,200.00