The Full Annual Report Our Conclusion
We have reviewed Fairfax’s full annual report and are updating our estimates
and price target. Our interpretation of Q4 results does not change, but we
have increased our 2023 EPS estimate primarily reflecting YTD momentum
in global equity markets and an expected positive mark-to-market adjustment
on the total return swaps on FFH shares (given the 22% increase YTD). Our
price target increases to $2000 based on a multiple of 1.4x applied to our
one-year forward BVPS estimate.
Key Points
The full annual report has been filed. Fairfax filed its full annual report
after market close on Friday, March 8. The company had previously
announced Q4/23 highlights in mid-February, and we published our take on
results at the time (see link here). The filing of the full annual report does not
change our interpretation of Q4 results, but we were awaiting the more
detailed disclosure to update our estimates. In general we felt that Q4 results
were encouraging as the company reported strong underwriting margins
supported by favourable prior-year reserve development (a positive outcome
considering the experience of other P&C insurers that have recognized
adverse development related to casualty lines stemming from the pre-
pandemic accident years). Premium growth slowed in the quarter, but this
was largely related to certain actions taken to improve profitability.
Some incremental detail provided on carrying values. Following the
detailed rebuttal to the Muddy Waters report that was provided on the Q4
2023 conference call, Fairfax provided some additional detail on the carrying
values of various equity investments discussed in the letter to shareholders.
Among others, we note that: 1) the Bangalore International Airport is carried
at 9.5x normalized free cash flow; 2) Recipe is carried at 8x EV/EBITDA or
10x free cash flow; 3) Exco is carried at approximately 3x net income in
2023; and 4) the investment in Farmers’ Edge is carried at zero. This detail is
certainly welcomed and may help further address some of the questions
prompted by the Muddy Waters report regarding balance sheet carrying
values.
Updating our estimates and price target. We see a favourable pricing
environment persisting in the P&C insurance space, driven partly by social
inflation in casualty lines and continued firming in CAT-exposed property lines
(albeit at a more moderate pace than one year ago). Long bond yields appear
to have stabilized in a healthy range, and we don’t foresee any obvious risks
emerging to derail recent momentum. We are increasing our price target on
Fairfax to $2000 which is based on a 1.4x multiple applied to our one-year
forward book value per share estimate (which remains significantly below
peers at 2.5x despite FFH generating a fairly average ROE). Our updated
price target would also imply approximately 10x P/E based on our two-year
forward EPS estimate despite peers trading at 15x, on average.