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August 7, 2023
Fairfax Financial Holdings Limited Good Q2 results across the board
Outperform
TSX: FFH.U; USD 842.50; TSX: FFH
Price Target USD 980.00 ↑ 875.00
Our view: We thought Fairfax delivered a good all-round result in Q2 that featured rising investment income, solid underwriting results across the platform, and better non-insurance operating results. Fairfax views the market environment as still attractive and indeed top-line growth picked up slightly vs. Q1 levels. We expect to see investment income build as the company puts money to work at higher rates (their duration remains short vs. peers). With shares trading close to book value, we remain positive on the shares and reiterate our Outperform rating.
Key points:
Raising estimates:
We are increasing our 2023 and 2024 EPS estimates to $135 and $130 (from $125 and $110) mainly reflecting better investment income and profitability from its non-insurance units. On an operating basis, our 2023 and 2024 operating EPS estimates rise to $118.04 and $118.02 (from $101.37 and $98.06) for similar reasons. We are raising our price target to $980 from $875 (about C$1,313 at a 1:34:1 exchange rate) which is now based on 1.0x our ending 2024 book value per share estimate (previously 0.9x). We believe a slightly higher multiple is warranted given strong EPS power across its businesses and good recent results.
2Q results: Fairfax Financial reported 2Q23 EPS of $31.10 vs. $(37.59) last year and our $24.00 estimate. Results included $342.1 mm of net realized and unrealized investment losses. On an operating basis, ex these items, EPS was $34.79 per share vs $16.04 in Q2/22 (RBC forecast: $21.01). The upside was in several different areas including investment income, underwriting income, and share of profit from associates. Items of Note: The Q2 P&C combined ratio amounted to 93.9% vs. 94.1% last year, which was a full point better than our 94.9% forecast. Management indicated that the annual earnings power for the company is now over $3 billion (or $100/share) over the next three years through a combination of investment income ($1.5 billion), underwriting profits ($1 billion), and non-insurance income ($0.5 billion). Net written premiums in the P&C units rose 8.4% to $6.2 billion, which was ahead of our estimate and the +6.1% seen in Q1/23. Growth was broad based across all units with the International Insurers and Reinsurers unit leading the way (+22.8% NWP growth). Fairfax continues to see solid rate increases (generally described as being in the +6 to +6.5% range on average across the book), which management believes is outpacing loss cost inflation.
Positives:
1) Strong investment income growth; 2) Solid underwriting results; and 3) Associate income improved nicely on a y/y basis.
Negatives:
1) Reserve releases were tempered; 2) Loss in the run-off unit; and 3) Modest buybacks in the quarter.
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