Fairfax Financial Holdings Limited has further denied recent allegations made in the Muddy Waters report regarding the firm having manipulated its valuation and income by engaging in certain transactions.
In its announcement, the Canadian financial holding company stated that its management team “has reviewed all the 72 pages of the Muddy Waters report and its allegations and insinuations,” and “categorically deny and refute all of them, without exception, as false and misleading.”
In early February, short-seller Muddy Waters released a report stating that it believes Fairfax has manipulated its valuation and income by undertaking what it describes as “destructive transactions” to deliver accounting gains.
Muddy Waters feels that a conservative adjustment to book value should be significantly lower than reported and claims that Fairfax has been “pulling levers” to produce paper profits.
In its response following the review of the Muddy Waters report, Fairfax highlighted: “To the best of our knowledge, Muddy Waters has never attended our conference calls and never asked a question, called us or written to us, but instead went to CNBC during our quiet period with these one-sided, ill-informed allegations and insinuations in a transparent attempt to profit by short selling our stock.
“They may have successfully done this with other companies, but they have woefully misjudged the strength of Fairfax’s financials and prospects and we are confident the marketplace will reflect our strong fundamentals.”
The report also claimed that Fairfax’s acquisition of Allied World placed financial pressure on Fairfax’s insurance operations. The report says that the deal expanded Fairfax’s assets and liabilities by over 40%, and that even after the heavy cat load in 2017, the insurance business profitability has lagged since.
Additionally, it also highlighted Fairfax’s transactions with Brit and Odyssey in 2021 and the firm’s issued shares equivalent to 13.9% and 9.99%, respectively, to OMERS.
These transactions enabled the firm to grow its valuation by over $544m that year, gains that Muddy Waters describes as “highly dubious”.
Prem Watsa, Chairman and CEO of Fairfax, commented: “We are neither Berkshire Hathaway, nor GE, as Muddy Waters suggests. We are Fairfax, a strong and enduring company built over 38 years, committed to integrity, customer service, employee welfare and the communities we operate in. We have a unique Fair and Friendly culture throughout our organization. We strive to provide excellent returns to shareholders, and are committed to providing full disclosure in our annual report, highlighting both our pluses and minuses.
“We have always been focused on building for the long term and have never given any quarterly guidance.
“Over 38 years, our book value per share has compounded by 18.9% per year and our stock price at 18.0% per year. Out of 6,000 companies listed in the U.S. in 1985, when we began, less than 20 companies have a similar record. We have discussed repeatedly in our annual reports that we have not achieved our 15% objective in the last 5 to 10 years.
“However, we have more than achieved our 15% return over the last several years. Moreover, as those following Fairfax more closely are aware, the foundation of our operating income (underwriting profit, interest and dividend income, and profit from associates) is stronger than ever, and bodes well for the future.”
Fairfax is to report its fourth quarter and full year 2023 results on February 15th, and looks forward to answering any questions in its conference call on Friday, February 16, 2024.
