On 2/13, Fairfax Financial posted solid earnings for Q4 2019 of $23.58 well ahead of street estimates of $15.89.
Key takeaways:
1. President retires – Fairfax’ President, Paul Rivett, has retired. Chairman and CEO, Prem Wasta, has resumed control of operations.
2. Solid insurance results – Company grew book value at 14.8%, indicated a favorable new business environment with organic growth of 13% and posted a healthy combined ratio of 96.9%.
3. Improved investment results – Investments added $1.7b during 2019
Current Price: $ 472 Price Target: $510
Position Size: 1.0% TTM Performance: -0.9%
Thesis Intact. Key takeaways from the quarter:
Insurance results
· Book value growth of 14.8%, just below firm’s target of 15%.
· 96.9% combined ratio – Over past nine months all of Fairfax’s major insurance companies had combined ratios <100% – showing good profitability considering cat losses.
· Net written premiums increased 10.3% YoY.
Investment results
· Investments portfolio is very conservative 50% of the $40b investment portfolio is in bonds and short term cash.
· Only 14% of portfolio is invested in common stocks. Fairfax’s investment style is deep value and the results have been weak. Top three stock holdings are Seaspan (shipping), Blackberry (technology), and Kennedy-Wilson (real estate). Both Blackberry and Seaspan had good quarters.
· Firm has a large position ($100b notional value) in CPI-linked derivative, which will protect the company from a Japan-like scenario as well as potential debt solvency concerns. However, this position has been a drag on investment returns.
· One bright spot for the firm’s investments is its investments in India, which have shown strong returns and total over $5b.
Valuation
· Fairfax trades at a discount to book value of .97x book. The S&P insurance Index sells at 1.28x book. Fairfax is selling at a 30% discount to the industry. Further the company sells at a P/E ratio of 8.6x.
· Investors have been focused on investment returns and have under appreciated the conservative nature of the balance sheet and strength of the insurance operations.
· Company yields 2.0%. Share repurchases have been minimal as the company is focusing on growing operations given the current attractive pricing environment.
The Thesis on Fairfax:
- Fairfax is a disciplined insurance underwriter
- Strong history of book value growth – 18%/yr for 25 yrs
- Attractive valuation
- Defensively positioned balanced sheet
$FRFHF.US
Thanks,
John
John R. Ingram CFA
Chief Investment Officer
Partner
Direct: 617.226.0021
Fax: 617.523.8118
Crestwood Advisors
One Liberty Square
Suite 500
Boston, MA 02109