CIBCHave a $2200 target. GLTA
EQUITY RESEARCH
November 1, 2024 Earnings Update
FAIRFAX FINANCIAL HOLDINGS LIMITED
Mixed Takeaways In Q3, But Slightly Positive Take Overall
Our Conclusion
Third-quarter results once again contained some puts and takes. The current
accident year combined ratio (ex-CATs) demonstrated a few points of
improvement, which could be indicative of underlying margin improvement.
On the other hand, interest and dividend income essentially plateaued in the
quarter. The slowing momentum was not necessarily unexpected, but makes
it a bit clearer or evident that this line item is indeed cresting. Mark-to-market
(MTM) gains were also lighter than anticipated, but can be volatile quarter-to-
quarter and difficult to predict with a high degree of precision. All things
considered, we have a slightly positive interpretation of the quarter
considering that underwriting margin improvement is more likely to be
indicative of a trend than the “miss” on MTM gains in Q3, and the slowing
momentum in interest income was already expected.
Key Points
Underwriting margins were solid in Q3. On an undiscounted basis, the
consolidated combined ratio came in at 93.9%, which was better than year-
ago levels of 95.0% despite a nearly identical magnitude of CAT losses (6.8
combined ratio points). The current accident year combined ratio (ex-CATs)
was 88.8%, reflecting a solid print versus the LTM average of 91.1%. This, in
our view, could be indicative of some degree of underlying margin
improvement. Excluding the impact of the Gulf Insurance acquisition, gross
and net premiums written increased 3.2% and 2.8% Y/Y, respectively, which
remained generally on-trend.
Interest and dividend income plateaus in the quarter. Total interest and
dividends amounted to $610 million, which was essentially flat on a
sequential basis. This is generally consistent with our expectation for slowing
momentum in the build of this line item.
Mark-to-market gains come in lighter than anticipated. Fairfax reported
net gains on the investment portfolio of $1.3 billion, which was less than we
were expecting. Net gains on common stocks amounted to only $99 million
implying a 1.4% return (when calculated using average portfolio balances of
$7.0 billion). This compares to the S&P 500 equal weight index and MSCI
world mid-cap index which were up 9.1% and 7.1%, respectively, in the
quarter.
Income from associates was in line. Fairfax’s share of profits from
associates amounted to $260 million, essentially in line (considering the fairly
wide confidential interval) with our estimate of $250 million.
BVPS growth and valuation. Book value per share increased 5.5%
sequentially. Fairfax now trades at 1.20x P/B, which remains towards the low
end of the peer group range. The stock also trades at 7.9x P/E based on the
2025 consensus EPS estimate, whereas peers trade at an average of 14.0x.