Fairfax Financial Holdings 

Fairfax Financial Holdings (TSX: FFH) operates across the property and casualty (P&C) insurance and reinsurance along with the associated investment management. The Group has several subsidiaries across America, Europe and Asia.

The Company announced the launched of its new debt platform in collaboration with Global real estate investment company Kennedy Wilson (NYSE: KW). The platform is likely to target first mortgage loans secured by high-quality real estate in the Western U.S., Ireland and the U.K.

Q1FY20 Financial Highlights: FFH reported gross premiums written at USD 4,775.7 million, as compared to USD 4,726.6 million in the previous corresponding period. The marginal increase was supported by price increases across the board. The quarter was marked by a significant net loss on Investments, amounting to USD 1,539.5 million against a net gain on investment of USD 723.4 million in pcp. The loss took a toll on the total income, which stood considerably lower at USD 3,159.1 million, versus USD 5,632.6 million in the previous corresponding quarter. During the quarter, the Group recorded a lower claim at USD 2,178 million against USD 2,399 million in pcp. Commissions, during the quarter, increased to USD 558.0 million, as compared to USD 528.8 million in Q1FY19. The Company reported a net loss of USD 1,389 million, as compared to a net profit of USD 814.6 million in the previous corresponding quarter. The Company exited the quarter cash and cash equivalent of USD 2,483.3 million and total assets of USD 69,196.4 million.

Q1FY20 Income Statement Highlights (Source: Company Reports)

Valuation Methodology: Price to Book Value Based Relative Valuation (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: 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. Investors should note that the stock is trading above the 50-days and 75-days simple moving average (SMA) of CAD 384.99 and CAD 328.22, respectively, indicating a bullish trend. The stock surged ~22% in the past one month, as most of the investors were leaning toward high-quality businesses. We have valued the stock using Price/Book Value based relative valuation approach and considered peers like Hartford Financial Services Group Inc, Great-West Lifeco Inc, Aviva PLC etc. and arrived at a target price offering double-digit upside potential (in % terms).  Hence, we recommend a ‘Buy’ rating on the stock at the closing price of CAD 425.09 as on June 9, 2020.

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

Intact Financial Corporation

Intact Financial Corporation (TSX: IFC) is a leading property and casualty insurance company that provides its services in Canada and the US. The group operates under the brand name of Intact Insurance through a network of brokers and its subsidiary, namely BrokerLink.

Major Highlights:

• The Company informed the retirement of Martin Beaulie from the position of Senior Vice President and Chief Risk Officer effective July 31, 2020 and confirmed the appointment of Benoit Morissette as Chief Risk and Actuarial Officer effective July 10, 2020.

• The Group declared a dividend of CAD 0.83 per common share, payable on June 15, 2020.

Q1FY20 Financial Highlights: INA impresses with its quarterly results and reported total revenues of CAD 3,029 million, higher than CAD 2,655 million in the previous corresponding quarter. The growth was driven by a decent performance from auto, property and commercial line segments, reflecting a 14% y-o-y growth in premiums. Net operating income stood at CAD 243 million, reflecting a solid 115% growth over Q1FY19. Net income stood at CAD 107 million, as compared to CAD 159 million in pcp, due to an additional provision of CAD 83 million made during the quarter. Net investment income, during the quarter, stood at CAD 150 million, up 7% on y-o-y, primarily driven by a higher invested asset supported by the acquisition of The Guarantee. Debt to capital ratio stood at 24.1%, was higher than 21.5% in the previous corresponding period. The Group reported total investment portfolio at CAD 17.8 billion, while total capital margin stood at CAD 1.5 billion. The Company exited the quarter with a cash balance of CAD 1,385 million, while total assets stood at CAD 32,229 million.

Q1FY20 Income Statement Highlights (Source: Company Reports) 

Valuation Methodology: Price to Book Value Based Relative Valuation (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The stock stood resilient and generated a solid return of ~12% in the last one year. At the last traded price, the stock traded above the 20-days and 50-days simple moving average (SMA) of CAD 131.64 and CAD 132.28, indicating a bullish trend. During Q1FY20, the group reported a decent growth across the segments (auto, property and commercial lines), which is impressive amid the backdrop of the current downturn. The Company maintained a strong capital position by taking multiple actions such as reducing its common equity portfolio, issuing medium-term notes, drawing on its credit facility and injecting funds into its insurance subsidiaries.  The Company has a strong balance sheet, low payout ratio and resilient operating income, and the Business would continue to support its customers and pay regular dividends followed by investing in future potential segments. The group is likely to be benefited by the recent acquisition, and integration is likely to boost the net operating income per share. We have valued the stock using Price to book value based relative valuation method and have arrived at a target upside offering lower double-digit (in percentage terms). For the said purposes, we have considered CI Financial Corp, Trisura Group Ltd and Morneau Shepell Inc, etc. as a peer group. Hence, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 133.15 on June 9, 2020.

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

Disclaimer

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