Fishing in the non-bank pool
Two insurance companies that aren’t banks
Back in June, I wrote about Toronto-Dominion Bank’s troubles with the failed First Horizon deal. I also mentioned some of the problems besetting U.S. regional banks. Against this backdrop, it’s understandable that some investors might be nervous about increasing their exposure to the financial sector. But there are some non-bank players that are worth looking at. Here’s a look at two that I follow.
Fairfax Financial Holdings
Fairfax Financial Holdings (TSX: FFH) is one of the largest property/casualty insurers and reinsurers in North America. Its CEO, Prem Watsa, is often called the “Warren Buffett of Canada” because of his value-based investment approach. Apart from its insurance operations, Fairfax owns stakes in a number of non-insurance businesses, such as Stelco, BlackBerry, Resolute Forest Products, and Golftown.
Fairfax’s share price has risen sharply over the last year, virtually doubling to reach a recent all-time high of $1,152.
For the year ended Dec. 31, 2022, underwriting profit was a record at $1.1 billion on gross premiums written up 15.8% to $27.6 billion despite losses of $1.3 billion from payouts arising from catastrophes, largely due to Hurricane Ian hitting Florida last year. Net profit fell by two thirds, to $1.15 billion ($43.49 per share), down from $3.4 billion ($122.25 per share) in 2021, which reflected a markdown on Fairfax’s bond portfolio on the sharp rise in interest rates. Mr Watsa expects these unrealized losses to be reversed once interest rates stabilize. Fairfax also booked a $1.2 billion gain on the sale of its pet insurance business to German private investment company JAB Holdings.
For the first quarter ended March 31st 2023, Fairfax reported net earnings of $1.25 billion ($49.38) versus $588.7 million ($22.67), with operating income from insurance operations of $1.31 billion on growth in net premiums of 6.1% and operating profit of $313.8 million and an operating ratio (costs as a percentage of revenues) of 94%. Book value per share, which Warren Buffett and Mr Watsa consider the best measure of an insurance company’s progress, was $803.49, a 6.8% increase from $762.28 at Dec. 31, 2022.
Fairfax sold its interest in Brit Insurance’s MGA Ambridge to insurance services group Amynta for $400 million in May, booking a pre-tax gain of $255 million. In June, Fairfax announced the acquisition of a $2.3 billion portfolio of real estate construction loans from troubled U.S. regional bank Pacific Western Bank, in partnership with real estate investor Kennedy Wilson. The portfolio is being acquired for $2.1 billion, of which Fairfax will provide 95% ($2 billion). And 70% of the portfolio is in multifamily or student housing developments, with a loan to value of 51%, with an average interest rate of 8.6%. Fairfax is also investing $200 million in a 6% preferred from Kennedy Wilson and receiving seven-year warrants over 12.3 million Kennedy Wilson shares.
Despite its recent strong share price performance, Fairfax is attractive for its strong growth in operating income, ability to create value from its non-insurance investments, and continued repurchase of shares.
iA Financial Corp.
iA Financial Corporation Inc. (TSX: IAG) was founded in Quebec City in 1892, and is the fourth-largest life insurance company in Canada. Its acquisition of Hollis Wealth with its $34 billion in assets under management (AUM) from Scotiabank in 2017 made it the largest non-bank financial advisory firm in Canada. It also has sizeable operations in the U.S.
The shares have risen over 20% in the last year, reaching an all time high of $93.40 recently.
The company reported net income down 1%, to $842 million ($7.65 per share) for the year ended Dec. 31, 2022, reflecting AUM that was down 9.5%, to $200.2 billion due the bear markets in equities and bonds. Core earnings per share were actually up 6%, to $8.85, and the core return on shareholders’ equity was unchanged at 14.2%, while book value per share rose 1.7% to $63.06.
For the quarter ended March 31, 2023, net income was $273 million, compared with a loss of $19 million in 2022, core earnings per share rose 7%, to $2.08 versus $1.94, and the core return on shareholders equity rose slightly, to 14.6%. The solvency ratio increase to 149% from 126%, partially reflecting new accounting standards. Book value per share rose another 1.5%, to $64.69, and the company raised its dividend 13%, to $0.765 per share from $0.675, giving iA a yield of 3.33%.
iA is an attractive financial-sector choice for its strong operating performance, conservative investment portfolio, consistent dividend increases, and industry best share price performance since its IPO in 2000.
Gavin Graham is Chief Strategy Officer of Calgary-based SmartBe Investments. He is a veteran financial analyst, money manager, and a specialist in international investing, with over 35 years’ experience in global investment management.
Notes and Disclaimer
Content © 2023 by Gavin Graham. Used with permission.
The commentaries contained herein are provided as a general source of information, and should not be considered as investment advice or an offer or solicitations to buy and/or sell securities. Every effort has been made to ensure accuracy in these commentaries at the time of publication, however, accuracy cannot be guaranteed. Investors are expected to obtain professional investment advice.
The views expressed in this post are those of the author. Equity investments are subject to risk, including risk of loss. No guarantee of performance is made or implied. The foregoing is for general information purposes only. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice.