Canadian financial holding company, Fairfax Financial Holdings Limited, has refuted claims in a recent report from Muddy Waters that the firm has “consistently manipulated asset values and income” by engaging in certain transactions, including those with insurance entities.
Short-seller Muddy Waters released a report earlier today confirming it is short on Fairfax because it feels the company 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 a significant $4.5 billion or 18% lower than reported.
The report claims that Fairfax has been “pulling levers” to produce paper profits, and highlights the firm’s acquisition of Allied World in 2017, transactions with Brit and Odyssey in 2021, as well as numerous other deals between 2017 and 2023.
Muddy Waters claims that acquiring 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 the acquisition.
Essentially, Muddy Waters feels this underperformance caused the firm to become more aggressive in pulling accounting levers.
With regards to Brit and Odyssey, Fairfax issued shares equivalent to 13.9% and 9.99%, respectively, to OMERS in 2021. The report claims that these were essentially financing transactions that enabled Fairfax to bolster its valuation by over $544 million in 2021, describing these gains as “highly dubious”.
In response to allegations that its book value was overstated, Fairfax has released a statement refuting the allegations and insinuations within the Muddy Waters report.
The company assures all shareholders that it has prepared its financial statements and reporting in accordance with all applicable accounting principles, highlighting its record net income achieved in the first nine months of 2023.
Fairfax will report its Q4 and full year 2023 results on February 15th, and says that management “is pleased to address any questions relating to those results or the report issued today at that time.”
