Key Morningstar Metrics for Fairfax Financial Holdings
What We Thought of Fairfax Financial Holdings’ Earnings
Fairfax Financial Holdings FFH capped off a very strong year with good results in the fourth quarter, as it continues to ride tailwinds on both sides of its business.
Why it matters: For the full year, book value per share (adjusted for dividends) increased 21%. We think this metric highlights how favorable industry conditions are.
- The combined ratio for the quarter was 88.6%, improved a bit from 89.5% last year. This is a strong level, in our view, but we believe underwriting margins for Fairfax and its peers have likely peaked.
- Net written premiums were basically flat year over year in the quarter, continuing the downward slide in growth the company has seen this past year. We think weaker property line pricing is increasingly weighing on results, and a lack of growth may be a sign of discipline as pricing gets more competitive.
The bottom line: We will maintain our C$1,730 fair value estimate for the no-moat company and see the shares as materially overvalued.
- On the investment side, Fairfax had another strong quarter, reporting USD 946 million in gains on its equity positions, pushing full-year gains to USD 3.1 billion. While recent investment results have been very favorable, we would note that the company’s long-term record is somewhat hit-and-miss.
- While we appreciate the current industry tailwinds, we think the market is extrapolating this favorable period too far into the future, resulting in industry valuations that are stretched from a long-term perspective. We believe weaker pricing will be the primary catalyst for a move back to more-normalized returns and see signs of this starting to occur in certain lines.
Editor’s Note: This analysis was originally published as a stock note by Morningstar Equity Research.
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