Fairfax Financial Holdings Limited

Strong Underwriting Performance: Fairfax Financial Holdings Limited (TSX: FFH) is engaged in property and casualty insurance and reinsurance and the associated investment management. As on 3 July 2020, the market capitalization of the company stood at CAD 11.55 billion.

Quarterly Performance (For the Period Ended 31 March 2020): Despite the unprecedented turbulent times because of the outbreak of COVID-19, FFH demonstrated strong underwriting performance in the first quarter of 2020 with a consolidated combined ratio of 96.8%. During the quarter, underwriting profit of the company increased to USD 103.1 million from USD 88.4 million in the pcp. However, the company reported a net loss of USD 1,259.3 million, primarily reflecting unrealized losses on investments.

Quarterly Financial Highlights (Source: Company Reports)

Future Expectations: The company remains focused on continuing to be soundly financed and have drawn credit facility solely to ensure high levels of liquid assets during these uncertain times. Fairfax reported a healthy balance sheet with cash balance and marketable securities of ~USD 2.5 billion.

Key Risks: The performance of the company is subject to inherent risks and uncertainties, which may cause the actual results, performance, or achievements to be materially different from any future results. These risks include the occurrence of catastrophic events with a frequency or severity exceeding estimates; changes in market variables, including interest rates, Forex, equity prices and credit spreads, which may negatively impact investment portfolio.

Stock Recommendation: The company has been reinvesting cash into higher yielding investment grade U.S. corporate bonds, which is likely to benefit interest income in the future. As per TSX, the stock of FFH is inclined towards its 52-weeks’ low level of CAD 319.37, proffering a decent opportunity for the investors to enter the market. On a Trailing Twelve Months basis (TTM), the stock is trading at an EV/Sales multiple of 0.7x, lower than the industry median (Financials) of 2.9x. The stock is also trading at an EV/EBITDA multiple of 2.7x as compared to the industry median (Insurance) of 4.8x and thus seems undervalued. Considering the current trading levels, valuations on TTM basis, decent underlying performance and positive long-term outlook, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 421.26, up by 2.4091% on 3 July 2020.

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

Intact Financial Corporation

Intact Ready to Ride the Growth Wave: Intact Financial Corporation (TSX: IFC) is a property and casualty insurance company that provides written premiums in Canada. As on 3 July 2020, the market capitalization of the company stood at CAD 18.53 billion. The company has that Martin Beaulieu will retire from the position of Senior Vice President and Chief Risk Officer on 31 July 2020 and Benoit Morissette will be appointed Chief Risk and Actuarial Officer with effect from 10 July 2020.

Quarterly Performance (For the Period Ended 31 March 2020): Despite the economic uncertainty due to the outbreak of COVID-19, financial performance of the company remains on track with excellent capital position and the resilient business. During the quarter, the company witnessed growth across all lines of business with an increase of 15% in premiums. In the same time span, the combined ratio of the company stood at 94.3%. During the quarter, net investment income increased by 7% as compared to last year and stood at CAD 150 million. This was driven by a higher level of invested assets from The Guarantee acquisition. Net operating income increased to CAD 243 million, reflecting growth in underwriting, investments, and distribution EBITA and other.

Quarterly Financial Highlights (Source: Company Reports)

Outlook: The company has adapted itself well in the new remote environment and is prepared to operate its business remotely for an extended period. With a strong balance sheet, low payout ratio and resilient operating income, IFC has the capacity to support its customers and pay its dividends, while continuing to invest in its strategy. It expects that the prevailing hard market conditions to moderate.

Key Risks: In the U.S., the company expects the continued hardening market conditions in commercial lines. IFC expects that the issues related to the COVID-19 crisis, including coverage issues and claims, certain class actions and related defense costs, as well as other indirect claims, could negatively impact its claims reserves.

Stock Recommendation: The company is in a healthy capital position with MCT of 202%, debt-to-total-capital of 24.1% and total capital margin of CAD 1.5 billion. Improved weather conditions and underlying performance resulted in an increase in Return on Equity to 14.0%. The company continue to outperform the industry on ROE by close to 6 points in 2019. As per TSX, the stock of IFC is trading slightly below the average 52-weeks’ level and thus holds the potential for growth. On a Trailing Twelve Months basis, the stock is trading at an EV/Sales multiple of 1.8x, lower than the industry Median (Financials) of 2.9x and thus seems undervalued. Considering the current trading levels, healthy financial position, improvement in ROE and valuation on TTM basis, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 129.6, up by 0.2243% on 3 July 2020.

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

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.