Fairfax Financial (TSX: FFH) is a holding company which, through its subsidiaries, is engaged in property and casualty insurance and reinsurance and the associated investment management.

Key highlights 

• Elevated written premiums: The group’s Gross premiums written by the insurance and reinsurance operations increased by 27.1% to USD 5,977.7 million from USD 4,702.7 million and net premiums written increased by 27.4% to USD 4,529.5 million from USD 3,555.5 million. Outstanding renewal business retention, rate increases, and lower returned premium due to reduced exposure from COVID-19 closures were all factors in the strong performance.

• Better than industry ratio: The group reported improved operational efficiency and posted a combined ratio for Q2 2021 at 81.4%, significantly lower than the industry median of 93.4%, seems impressive. Notably, in Q2 2021, the group’s loss ratio and an expense ratio stood at 64.4% and 17.0%, respectively, improved sequentially, which is a good indication.

• Raised gain on investments:  With net gains on investments of USD 1,290.2 million, the group's investments climbed significantly, principally due to net gains on long equity exposures and USD 425.0 million on Digit compulsorily convertible preference shares. In the second quarter of 2021, mark-to-market movements on non-insurance investments in associates and consolidated investments that are not shown in the financial statements increased by roughly USD 338 million.

• Robust liquidity: As on June 30, 2021, the company's insurance and reinsurance companies held approximately USD 18.1 billion in cash and short dated investments representing approximately 39.5% of portfolio investments. We believe this liquidity will provide enough confidence to the group to carry its long-term plans.

• Disposed RiverStone Europe to CVC: CVC Capital Partners ("CVC") recently purchased all of the company's interests in RiverStone Europe for roughly USD 700 million. Fairfax will also be eligible for a contingent value instrument of up to USD 235.7 million after the deal closes.
  

Financial overview of Q2 2021 (In millions of USD)

Source: Company 

• In Q2 2021, the group reported healthy consolidated revenue of USD 6,831.0 million compared to USD 5,065.1 million in the previous corresponding period. The rise in revenue was mainly due to strong retention of renewal business, rate increases and decreased returned premium due to reduced exposure from COVID-19 closures.
• Primarily due to slight increase in net losses on claims, the group’s consolidated expenses increased to USD 5,263.5 million against USD 4,516.3 million in pcp.
• On the back of healthy revenues and maintained expenses the group elevated its net earnings to USD 1,280.2 million against USD 426.3 million in pcp. An increase in net earnings was mainly as a result of increases in net premiums earned, net gains on investments and other revenue.
  

Risks associated with investment

Increase in claims, and volatility in the financial markets might take a toll on the overall performance of the group. 

Valuation Methodology (Illustrative): Price to Book Value 

Stock recommendation 

The group reported a revenue growth despite the challenging times in the overall economy, which is commendable. We expect, with the gradual revival of the overall economy, the company would report lower net claims, which would further boost the profitability. Overall, the company witnessed growth in net premiums written and also improved operational efficiency and posted a combined ratio for Q2 2021 at 81.4%, significantly lower than the industry median of 93.4%, which seems impressive. Therefore, based on the above rationale and valuation, we recommend a “Hold” rating at the closing price of CAD 515.82 as on November 3, 2021. We have considered Manulife Financial Corp, MS&AD Insurance Group Holdings Inc., etc. as the peer group for the comparison.

One-Year Technical Price Chart (as on November 03, 2021). Source: REFINITIV, Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

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