Fairfax Financial Holdings Ltd T.FFH

RBC Raise Target

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Their upside scenario target is now up to US$1,100.00. GLTA

May 12, 2023

Fairfax Financial Holdings Limited 
Investment gains pace an all-round good Q1 result

Our view: Q1 results were solid all around with continued top-line growth, low 90s combined ratios, modest cat losses and continued strong growth of investment and associate income. Management has taken steps to lock in investment income for the next couple of years and combined with a still very favorable underwriting environment provides unusually high visibility to Fairfax earnings. With shares still trading at a discount to book value (even after solid gains last year) we continue to find Fairfax shares as among the most attractive opportunities in the P&C insurance space. We remain at Outperform.

Key points:

Outperform

TSX: FFH.U; USD 684.08; TSX: FFH

Price Target USD 875.00 ↑ 775.00

Adjusting estimates: We are raising our 2023 EPS estimate to $125.00 from *Implied Total Returns $100.00 reflecting the upside in the quarter and higher investment income partly offset by a reduced premium growth rate. Our 2024 estimate rises to $110.00 from $105.00 also reflecting higher investment income (albeit less impact). On an operating basis we are raising our 2023 estimate to $101.37.from $86.47 reflecting similar factors and our 2024 operating EPS estimate goes to $98.06 from $91.47.

We are raising our price target to $875 from $775 (about C$1,180 at a 1.35:1 exchange rate). This remains based on approximately 1.0x estimated ending 2023 book value.

1Q results: Reported 1Q23 net earnings per share of $49.38 vs. $4.49 last  year and our $25.81 estimate. Results include $0.8B of net realized  and unrealized gains on investments. On an operating basis, which excludes  these items, the company earned $34.71 per share (RBC forecast: $22.43). Better-than-expected investment and associate income was partly offset by weaker-than-expected non-insurance income.  

Items of note:

Core accident year margins were 90.9%, in line with our 90.7% forecast. We’d note that the reinsurance unit results include a small (0.3 points) of adverse development which resulted from reserve adds for late December storm losses. The company closed the sale of its Ambridge unit in May which will result in a gain of about $255 million pre-tax (about $9/share after tax). Fairfax will acquire a controlling stake in Gulf Insurance Group (2H23 close) which will result in the consolidation of about $2.7 billion of premiums and a $300 million gain (about $10/share after tax).

Positives:

1) Conservatively positioned fixed income portfolio with visibility to $1.5 billion annual earnings; 2) good underwriting results across all segments; 3) $100 million of buybacks in the quarter.

Negatives:

1) Lower-than-expected premium growth reflecting business mix adjustments; 2) modest reinsurance segment adverse development due to prior-period cat loss adjustment; 3) weaker-than-expected non- insurance results.