Fairfax Financial Holdings (TSE:FFH) Q4 Preview: Looking For A Good Close To The Year

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Fairfax Financial Holdings (TSE:FFH)  Q4 Preview: Looking For A Good Close To The Year

Q4 is expected to be a good quarter for the company based on the previously disclosed gain on sale from First Capital ($900MM) and strong equity market returns. However, we expect a less stellar result from the underwriting operations with a combined ratio assumption of 100%. The stock is starting to look more reasonably valued at a little over 1.1x BV. Our price target is updated from $725 to $700 based on USD depreciation.

Our Conclusion

Q4 is expected to be a good quarter for the company based on the previously disclosed gain on sale from First Capital ($900MM) and strong equity market returns. However, we expect a less stellar result from the underwriting operations with a combined ratio assumption of 100%. The stock is starting to look more reasonably valued at a little over 1.1x BV. Our price target is updated from $725 to $700 based on USD depreciation. We would like to have a more positive growth outlook or a discounted valuation before getting more positive on the name. We maintain our Neutral rating.

Implications

We are forecasting Q4 investment gains of $1,156MM, including $900MM after-tax from First Capital. It was a good quarter for U.S. equity markets in general and several of Fairfax’s largest holdings performed extremely well. We estimate a gain on the equity portfolio, net of derivative positions, of $189MM. Rate hedging on U.S. treasuries will help protect gains those gains.

Cat losses should not be anywhere near as extreme as last quarter, but may be large enough to eliminate any underwriting income. We assume a combined ratio (CR) of 100% for Q4, which would take the full year to 106.5%. We continue to believe that a CR assumption of ~95% is appropriate given business mix and average cat experience.

We are forecasting BVPS to end 2017 at $457, up 10% Q/Q and up 24% Y/Y. However, the bulk of the gains for the year came from the monetization of insurance businesses, which is not something that we should typically expect. We maintain our outlook for low single digit BVPS growth going forward, or at least until cash is redeployed and/or the company boosts underwriting volumes.

Fairfax expects (TSE:FFH) to report Q4 results on Thursday, February 15 after market close. The conference call is typically the following day at 8am ET (details are TBA).