Post by
retiredcf on May 12, 2023 8:57am
CIBC
Have a $1200.00 target. GLTA
EQUITY RESEARCH
May 11, 2023 Flash Research
FAIRFAX FINANCIAL HOLDINGS LIMITED
Initial Take On Q1/23
Our Take: The adoption of IFRS 17 & 9 certainly clouded the interpretation
of Q1 earnings, but in general we felt it was a positive quarter overall in the
sense that underwriting margins were better than anticipated owing to lower-
than-expected CAT losses. On the investment side, net gains were below our
estimate (which counterbalanced the impact of better underwriting margins
on overall earnings). However, we believe that Fairfax’s ability to deliver
consistently positive underwriting margins is the most important focus for
investors. Conference call tomorrow at 8:30 a.m. ET.
Key Metrics
• Headline earnings beat in Q1, but the adoption of IFRS
introduces some noise. Fairfax reported diluted EPS of $49.38,
exceeding consensus at $41.44 and our estimate of $40.48.
However, the interpretation of earnings has been partly clouded by
the adoption of a new accounting standard which created a lot of
noise in the recognition of earnings. For example, Fairfax indicated
that the effects of discounting and risk adjustment in the quarter
resulted in an increase to pre-tax earnings of $310 million. If we
adjust that impact out, earnings appear to be much more in line with
our estimate.
• Investment gains came in a bit lighter than our estimate. Net
gains on investments came in at $771 million, which was lower than
our estimate of $975 million. The variance appears to be attributable
to lower-than-expected gains on both bond and equity exposures.
• Underwriting margins were a bit stronger than anticipated.
Fairfax reported a 94% combined ratio which was consistent with the
past two years but better than our estimate in the high 90s. We
adopted a more conservative stance owing to the notable U.S. wind
events and tornados in the month of March. However, these events
didn’t appear to have much of a meaningful impact on Fairfax’s
underwriting margins. Total CAT losses for the quarter only
amounted to 3.7 combined ratio points and were mostly related to
the earthquake in Turkey and other events.
• Adopted of IFRS 17 & 9 requires some structural model
updates. We plan to update our forecasts at a later date after we
have realigned our model format to the presentation under the new
accounting standard.
• Conference call tomorrow at 8:30 a.m. ET: 1-888-390-0867