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Fairfax Earnings: Both Sides of the Business Show Strength

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Fairfax FFH reported a strong first quarter, with attractive results on both the underwriting and investment sides of the business. As a result, book value per share, adjusted for dividends, increased 7% from the year-end figure. However, we see nothing to alter our long-term view, and will maintain our CAD 730 per share fair value estimate for the no-moat company.

Net premiums written increased 6% year over year, a relatively muted level of growth compared with recent quarters. While we hesitate to make too much of one quarter, it is possible that the company is seeing fewer opportunities as we move deeper into the hard market.

The combined ratio came in at 94.0%, compared with 93.1% last year. We’ve seen underwriting profitability start to flatten out at commercial line peers as well, and we don’t expect the hard market to drive significant improvements from here. Still, with underwriting profitability at an attractive spot, the outlook remains quite positive in the near term, and higher interest rates should provide an additional boost to overall profitability over time.

On the investment side, the company recorded an investment gain of $771 million for the quarter, with the bulk of that figure ($410 million) coming from its equity holdings. While Fairfax’s approach paid off this quarter, we continue to view the firm’s investment strategy as more risk-tolerant than value-creative from a long-term perspective.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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Brett Horn

Senior Equity Analyst
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Brett Horn, CFA, is a senior equity analyst for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. He covers insurers and credit bureaus. He also oversees the equity research team’s stewardship rating methodology.

Before joining Morningstar in 2006, Horn worked in the banking industry for about a decade, most recently as a commercial loan officer for First Bank, where he was responsible for underwriting loans and managing relationships with middle market clients. Before that, Horn worked for Mizuho Corporate Bank, where he managed loan portfolios and client relationships, primarily with Fortune 500 companies.

Horn holds a bachelor’s degree in business administration, with a concentration in finance, from the University of Wisconsin and a master’s degree in business administration from the University of Illinois. He also holds the Chartered Financial Analyst® designation. He ranked first in the business and industrial services industry in The Wall Street Journal’s annual “Best on the Street” analysts survey in 2013, the last year the survey was conducted.

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