Fairfax Financial Holdings Limited

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

The Group closed a senior bridge loan of USD 63 million with Kennedy Wilson for a multifamily community in the Boulder in Colorado region. The above loan is the first closure under recently launched USD 2 billion platform that pursues first mortgage loans secured by high-quality real estate in the Western U.S., Ireland and the U.K.

Q2FY20 Financial Highlights: For the period ended June 30, 2020, FFH reported a stable set of numbers, wherein the Company posted income of USD 5,065.1 million, lower than USD 5,441.23 million in the previous corresponding period (pcp). The increase was driven by higher gross premium written as compared to the previous corresponding quarter. The quarter was marked by higher core underwriting performance coupled with an impressive combined ratio of 91.2% (excluding COVID-19 losses), continued favorable reserve development and growth in gross premiums written of 8.4%. The operating income stood at USD 120.5 million. The quarter was marked by higher loses on claims, a slight increase in the operating costs and commissions, while reported improvement in the other expenses at USD 938.4 million, significantly lower than USD 1,434.6 million in pcp. Net earnings stood at USD 426.3 million as compared to USD 579.5 million in Q2FY20.

Q2FY20 Income Statement Highlights (Source: Company Reports)

Risks: The Group’s total debt to total capital ratio, excluding non-insurance companies, increased to 31.8% on June 30, 2020 from 24.5% on December 31, 2019. Higher debt might put the balance sheet at risk.

Valuation Methodology: Price/Book Based (Illustrative)

Stock Recommendation: The stock of FFH corrected ~31% so far this year. FFH has a tremendous global presence and has a strong business model with ample financial flexibility, which is likely to help the group in navigating the current challenging environment.  The group is expected to witness some challenges in the near term as it operates in some segments where the premium directly linked to the economic activities. However, re-opening of the economies across the globe would drive the insurance premium and as well as the cash flows of the group. Despite the ongoing economic jolt, the Company reported higher net premiums written by the insurance and reinsurance of USD 3,555.5 million, reflecting a growth of 5.4% on y-o-y basis, which is commendable. We expect the Company would continue to deliver strong momentum from the core underwriting segment. The Company repaid USD 1,070 million which it had drawn from its credit facility during March 2020. We have valued the stock using the P/Book based relative valuation approach and arrived at a target price, which suggests a lower double-digit upside potential (in % terms). For the said purpose, we have considered industry (Financials) median on NTM basis. Hence, considering the aforesaid facts, we recommend a 'Buy' rating on the stock at the closing market price of CAD 419.68 on July 31, 2020.

FFH Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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