Here’s Why Tidefall Capital Remains Optimistic in Fairfax Financial (FRFHF)

Tidefall Capital, an investment management firm, recently released its third-quarter 2022 investor letter, a copy of which can be downloaded here. A decrease of -1.2% percentage points was delivered by the fund’s institutional shares for the third quarter of 2022, still slightly better than the S&P 500 Index’s -4.9%, and the TSX Index which was down by about -1.4% for the same period.  Try to spare some time to check the fund’s top 5 holdings for you to have an idea about their best stock picks this 2022.

In its Q3 2022 investor letter, Tidefall Capital mentioned Fairfax Financial Holdings Limited (NYSE:FRFHF) and explained its insights for the company. Founded in 1951, Fairfax Financial Holdings Limited (NYSE:FRFHF) is a Toronto, Canada-based financial holding company with a $13.7 billion market capitalization. Fairfax Financial Holdings Limited (NYSE:FRFHF) delivered a 11.67% return since the beginning of the year, while its 12-month returns are up by 29.82%. The stock closed at $549.58 per share on November 08, 2022.

Here is what Tidefall Capital has to say about Fairfax Financial Holdings Limited (NYSE:FRFHF) in its Q3 2022 investor letter:

“It’s been one year since our initial letter on Fairfax Financial and although the shares have increased in price we believe the discount to intrinsic value has actually widened substantially. Having recently covered our qualitative thesis on the shares in The Globe and Mail, we want to now highlight the increasing earnings power that is likely to flow through to shareholders going forward. There are two main earning drivers for an insurance company, its underwriting performance and its investment portfolio.

Underwriting: In 2021, Fairfax had a combined ratio of 95%, meaning for every $1 in premiums, the company had to pay out 95 cents in losses and expenses (a lower combined ratio is better). This is slightly better than its 10 year average of 96%. Although the first six months of this year had a combined ratio of 94%, Hurricane Ian will no doubt push Fairfax’s combined ratio higher this quarter. However, going forward, if Fairfax can maintain its 10 year average, at the current level of $21bn of net premiums earned, Fairfax would make over $1bn in underwriting profit.

Investment Portfolio: Although Fairfax has an equity portfolio filled with old economy value stocks worth $5bn, it’s overshadowed by its $35bn in bonds and cash. As described in our article, unlike nearly every other insurance company, Fairfax remained disciplined and did not reach for yield in the bond bubble to increase investment income. Consequently, Fairfax’s bond portfolio has a duration of just 1.2 years vs 4.2 years for the industry, allowing for a rapid redeployment into higher yielding fixed income securities. For example, in the last quarter of 2021, Fairfax had annualized interest income of $500m, if rates average 4% next year, Fairfax is on track for $1.4bn per year in interest. Recent sell side reports have 2023 EPS estimates of $79 per share but we believe it’s only a matter of time before rising rates push them to revise higher…” (Click here to see the full text)

Investments, Finance

Our calculations show that Fairfax Financial Holdings Limited (NYSE:FRFHF) fell short and didn’t make it on our list of the 30 Most Popular Stocks Among Hedge Funds. Fairfax Financial Holdings Limited (NYSE:FRFHF) delivered a 4.33% return in the past 3 months. In July 2022, we also shared another hedge fund’s views on Fairfax Financial Holdings Limited (NYSE:FRFHF) in another article. You can find other investor letters from hedge funds and prominent investors on our hedge fund investor letters 2022 Q3 page.


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Disclosure: None. This article is originally published at Insider Monkey.