Morningstar | Fairfax 2Q Held Back by Poor Investment Results
Fairfax reported only marginal profitability in the second quarter as a solid showing on the underwriting side was held back by a net investment loss. The quarter supports our skeptical view of the ability of Prem Watsa to reliably add value through his unorthodox investment approach, and we are retaining our no-moat rating. Through the first six months of the year, book value per share has grown 3%, excluding the impact of dividends. We will maintain our CAD 664 fair value estimate.On the underwriting side, results were solid overall. The combined ratio came in at 96.1% compared with 94.9% last year, driven mainly by deterioration in underwriting profits at Northbridge and Fairfax Asia. The recently acquired Allied World operations performed reasonably well, posting a 94.9% combined ratio for the quarter. We liked the move to acquire Allied World, as it appears to be a relatively strong franchise, and Fairfax’s decentralized structure would seem to provide little infrastructure for improving underwriting results in acquired operations.
Stripping out the contribution from Allied World, net written premiums rose 16% year over year, suggesting that management remains aggressive in pursuing new business. Given Fairfax’s spotty underwriting history and the weak state of reinsurance pricing, we question whether this growth will prove value-creative, although the company’s international operations do lift its growth profile somewhat.
Fairfax took a net $58 million loss on its investments during the quarter, with a $159 million loss on its Blackberry position being the primary culprit. While we like that the company has eliminated much of its bearish posturing the past couple of years, the second quarter highlights the fact that investment results will still be driven by Watsa’s ability to pick stocks, and his track record includes both hits and misses. We still prefer franchises that focus on underwriting discipline, which we value as being more sustainable.
Fairfax Financial Holdings is a financial services holding company. Through its subsidiaries, Co. is engaged in property and casualty insurance and reinsurance and investment management. Co.'s insurance and reinsurance companies operate on a decentralized basis, with autonomous management teams applying a focused underwriting strategy to their markets. Co.'s investments are centrally managed for all the Co.'s group of companies by Hamblin Watsa Investment Counsel Ltd. Co. operates four main operating segments: Insurance, Reinsurance, Reinsurance and Insurance - Other, and Runoff.
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