Fairfax Earnings: Positive Momentum Continues

Fairfax FFH continued its recent string of good results in the third quarter. Book value per share, adjusted for dividends, has grown 16% year to date, which gives an indication of the winds the company has had at its back this year. While we appreciate the positives the company is enjoying right now, its historical performance has been increasingly hit or miss over time, and we don’t expect this to change long term. We will maintain our CAD 970 fair value estimate for the no-moat company and see shares as a bit overvalued at the moment.

The combined ratio for the quarter came in at 95.0%, compared with 100.3% last year. The improvement was entirely driven by a decline in catastrophe losses. We’ve seen underwriting margins at peers flattening out in recent quarters, suggesting that the benefits of the hard market may have peaked. Still, underwriting margins are at relatively attractive level compared with Fairfax’s historical levels, which should leave the company in a favorable position in the near term.

Fairfax recorded a modest investment gain of $56 million in the quarter, as a $273 million gain on its equity holdings was partially offset by losses on fixed-income investments. We think investors should ignore marks on fixed income, given that insurers generally hold fixed-income securities to maturity.

Fairfax’s investment income improved to $513 million from $257 million last year. Fairfax had kept its duration low on its fixed income investments and that is paying off now that interest rates have risen. Based on its commentary, it sounds like the company is shifting to longer-duration securities. We think this is the right move. We see interest rate risk as more balanced now and believe moving toward the more typical industry approach of matching investment and claims duration is therefore appropriate.