‘Smash and seize’, ‘hit or miss’ – what subsequent for Crum & Forster proprietor after brief assault

Fairfax Monetary Holdings (Fairfax) will likely be gearing up for a battle again on Friday, following a shock report from activist brief vendor Muddy Waters that spooked traders and despatched the group’s share value plummeting.

Analysts and market watchers appeared cut up on the allegations, with some speeding to Fairfax’s protection.

Fairfax is the “GE [General Electric] of Canada”, Muddy Waters set out within the extremely vital Thursday report by which it argued that the corporate’s e-book worth has been inflated by as a lot as 18%. Fairfax has slammed allegations as “false and deceptive”.

“We’re neither Berkshire Hathaway, nor GE, as Muddy Waters suggests,” Prem Watsa, Fairfax chairman and CEO stated in a Monday assertion. “We’re Fairfax, a robust and enduring firm constructed over 38 years, dedicated to integrity, customer support, worker welfare and the communities we function in.”

One supply stated that whereas the allegations come throughout the firm’s pre-results quiet interval, Fairfax shouldn’t be prevented from addressing historic issues earlier than Friday. Different commentators, nevertheless, labeled the timing a low blow.

“We anticipate Fairfax will counter all of Muddy Waters claims on their convention name and this report will likely be forgotten as shortly because it emerged,” Trevor Scott, Tidefall Capital portfolio supervisor, instructed Insurance coverage Enterprise through e-mail. “It would have zero impact on their insurance coverage subsidiaries or rankings because the claims are so simply disproved.”

Scott labeled the report a “’smash and seize’ brief assault” and took subject with its 18% e-book worth allegation.

“Even when all of Muddy Waters factors have been true, it could not materially have an effect on the corporate’s worth or trajectory,” Scott stated.

In its analysis transient, Muddy Waters argued that Fairfax’s Allied World acquisition put monetary stress on its insurance coverage operations, resulting in the holding firm aggressively “pulling accounting levers” from 2018.

Amongst a tide of allegations, Fairfax’s IFRS 17 restatements have been “too good to be true” to the tune of $1.24 billion, Muddy Waters claimed. It additional pointed to “extremely doubtful” features totaling $544.5 million from Odyssey Re and Brit share gross sales.

The activist analysis group additionally alleged that Indian insurance coverage firm Go Digit’s 2021 inventory promotion led its valuation to “incontrovertibly” collapse.

Fairfax-owned insurance coverage corporations not topic to scrutiny within the Muddy Waters analysis embrace Crum & Forster and Canada’s Northbridge.

Digging into among the insurance coverage allegations, Scott pointed to the lengthy tail nature of Fairfax’s insurance coverage enterprise and its “lengthy historical past” of conservative reserving estimations as drivers for its IFRS 17 out-performance of others.

He additional argued that somewhat than being overvalued, Go Digit has proved extra worthwhile than friends and by no means achieved the “lofty valuation ranges” seen by others within the public markets throughout the COVID-19 pandemic.

“Regarding the Odyssey and Brit Transactions in 2021, these did unencumber capital and barely enhance e-book worth however these transactions have been simply acknowledging the financial worth of the divisions that have been understated on Fairfax’s e-book worth,” Scott stated.

Muddy Waters shorts Fairfax – what has the analysis agency alleged?

Analysts cut up on Muddy Waters’ Fairfax brief and allegations

It’s understood that a minimum of one rankings company was nonetheless contemplating the affect of the Muddy Waters report’s findings late final week.

The brief vendor’s findings drew blended responses from analysts.

“At a excessive stage, we don’t disagree with its take, and we do suppose the inventory is materially overvalued proper now,” Morningstar analyst Brett Horn stated on Thursday. “In our opinion, Fairfax is a hit-and-miss investor, a comparatively poor underwriter, and has a very difficult construction.”

Others accused Muddy Waters of “quibbling” over worth.

“Our take is that the brief report encourages traders to entangle themselves within the trivialities of accounting remedy utilized to previous transactions, whereas overlooking the substantial construct of incomes energy that has amassed over the previous few years,” a CIBC analyst wrote in a Thursday observe.

The Muddy Waters report “cherry-picks” an array of enormous and sophisticated transactions to “construct a case that there’s a sample of aggressive accounting strikes”, Cormark Securities analysts stated in a observe that labeled the analysis’s publication a “drive by taking pictures”.

Fairfax’s share value closed 12% down on Thursday however had began to eke up come Friday. Previous to the Muddy Waters allegations, the holding firm had seen its share value greater than double over 5 years.

Fairfax v brief sellers – the Canadian insurance coverage big has been right here earlier than

Whereas the information piqued some curiosity, insurance coverage dealer sources on the bottom in Fairfax’s dwelling nation of Canada have been both unaware of or unconcerned by unfolding occasions – as one identified, Fairfax has been right here earlier than.

The property & casualty (P&C) insurance coverage holding firm, led by Fairfax chairman and CEO Prem Watsa since 1985, isn’t any stranger to brief vendor exercise. It additionally has type for not taking it mendacity down.

Fairfax’s protracted 2006 $8 billion lawsuit in opposition to SAC Capital chugged alongside for greater than a decade earlier than being dismissed by a New Jersey courtroom in 2018.

The insurance coverage holding firm had alleged that SAC Capital and boss Steven Cohen had within the early 2000s collaborated in a “racketeering scheme” to (in phrases stated to have been stated by defendants) “drive a stake” by means of the enterprise.

Insurance coverage corporations have beforehand fallen foul of Muddy Waters

Muddy Waters is probably going a well-known title to insurance coverage readers.

The activist brief vendor took goal at US-headquartered private strains insurtech Lemonade in 2021.

“Lemonade doesn’t give a f*** about securing its prospects’ delicate data,” Muddy Waters founder Carson Block wrote to Lemonade CEO Daniel Schreiber in a Might 2021 letter, by which the analysis agency appeared to element what it claimed to be an “egregious” safety breach on the insurer.

Lemonade co-founder Shai Wininger has denied that the alleged vulnerability existed.

Bought a view on the Muddy Waters Fairfax Monetary allegations? Depart a remark under.