Short seller takes aim at Canadian insurance firm

The accusation has resulted in Fairfax's drop in sales

Short seller takes aim at Canadian insurance firm

Muddy Waters Capital LLC, a short seller, has targeted Fairfax Financial Holdings Limited, a Canadian insurance and reinsurance company, accusing it of manipulating the value of its assets, according to Reuters. 

At a recent Sohn Investment Conference, Carson Block, chief investment officer of Muddy Waters, outlined the firm's position against Fairfax Financial, which resulted in a 12 percent drop in the insurer's stock value, marking its most substantial decline since September 2008. 

According to Muddy Waters, Fairfax Financial's short interest amounts to 0.65 percent of its free float, equivalent to $203.81 million. To date, short sellers have realized over $21m in paper profits, data from Ortex reveals.  

Muddy Waters' report specifically calls out the insurance operations of Fairfax, which have struggled to maintain profitability following the hurricane-related catastrophes in 2017. Muddy Waters claims, “This underperformance pressured Fairfax into becoming aggressive in pulling accounting levers starting in 2018.” 

The short-selling firm accuses Fairfax of “consistently manipulated asset values and income by engaging in often value destructive transactions to produce accounting gains.” 

Despite these serious allegations, Fairfax has responded by affirming its commitment to integrity, stating it “has prepared its financial statements and reporting in accordance with all applicable accounting principles.”  

At this time, the allegations have not been independently verified by Reuters. 

Fairfax, established in 1985 by Canadian Indian billionaire Prem Watsa is now being compared by Muddy Waters not to Berkshire Hathaway but to General Electric, suggesting a negative view of its operational and financial strategies. 

One particular area of contention is Fairfax's valuation of its stake in Quess Corp, which Muddy Waters argues is carried at “unrealistic” values, nearly double its market valuation. 

In the past, Muddy Waters has placed bets against various firms, including CPI Property Group and Blackstone Mortgage Trust, highlighting its proactive approach in identifying and acting on perceived financial discrepancies.  

The firm's decision to target Fairfax follows significant short positions against TD Bank Group, underscoring the ongoing scrutiny and challenges faced by certain financial institutions. 

Despite Muddy Waters' report, Fairfax Financial's latest earnings highlight a company on the rise, with profits doubling to $1.19bn from the previous year and increases in both net and gross premiums written.  

Addressing the allegations, the National Bank of Canada observed, “The [Muddy Waters] report does not raise concerns with the earnings power of the business,” and added, “The [Muddy Waters] report does not describe any fraudulent or nefarious accounting tactics, but only potentially aggressive valuation marks,” highlighting the nuanced nature of the allegations and the ongoing debate over Fairfax Financial's financial practices.