Fairfax Financial Holdings Ltd FAXXF

RBC

[retiredcf]

July 29, 2022

Fairfax Financial Holdings Limited Core insurance results beat expectations

TSX: FFH.U | USD 531.31 | Outperform | Price Target USD 750.00

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 principally as a result of better than expected underwriting margins, which came in about 1 point better on a GAAP basis and almost 3 points better on an accident year basis. Premium growth remains strong across all units, with a combination of pricing, new business, and exposure growth driving a 24.9% increase in premiums. Dividend & interest income also continue to top expectations as more cash is deployed and yields rise. Non-insurance results were a bit disappointing and adverse portfolio marks were a drag on book value (down 6%). Overall a good result. A conference call will be held on Friday, July 29, at 8:30 a.m. ET. Key topics will include capital return, deployment of investment assets, insurance pricing and market conditions, and a discussion of key operating unit metrics.

2Q results: Fairfax Financial reported 2Q22 net loss per share of $37.59 vs. earnings of $43.25 last year and our $15.64 estimate. Results included $1.5 billion of net realized and unrealized losses on investments. On an operating basis, which excludes these items, the company earned $16.04 per share (RBCe $12.70). Better than forecast underwriting results and investment and associate income offset weaker than forecast non-insurance results.

Premiums: Net written premiums at ongoing operating units rose 24.9% to $5.7 billion, which beat our +13.5% estimate. Crum & Forster (+19.7%) and Odyssey Re (+34.3%) were particular standouts. Brit’s results were up 63.3% including Ki and 25.6% excluding Ki. Growth reflects continued strong rate increases, exposure growth, and new business.

Margins: The overall combined ratio amounted to 94.1% vs. 94.3%, which beat our 95.5% forecast. Total cat losses were $165 million or 3.2 combined ratio points (RBCe 4.6 points). Losses from Ukraine totaled $40 million in the quarter (0.8 points). Favorable reserve development was 0.9 points ($21.9 million), which lagged our 3.5 point forecast. On an accident year basis the company had a combined ratio of 91.8%, much better than our 94.4% estimate, reflecting better core accident year margins.

Investments/other: Associate and interest and dividend income totaled $460 million, beating our $297 million estimate. Consolidated non-insurance affiliates produced a loss of $60.1 million, lagging our $25 million earnings assumption. Results include a $109 million goodwill writedown associated with Farmers Edge. Book value per share ended the quarter at $588.36, down 6.0%,