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Morningstar | Fairfax Is in Some Ways More of an Investment Fund

While its primary business is insurance, Fairfax is in some ways more of an investment fund. Chairman and CEO Prem Watsa has a history of bold investment bets and is more than willing to be unorthodox when it comes to portfolio construction. As a result, compared with other insurers, the company's results tend to be driven more by the investment side. We're somewhat skeptical of this approach, as we believe disciplined underwriting is a more sustainable path to long-term value creation, and Fairfax's underwriting record is relatively poor.Fairfax collected a multibillion-dollar windfall during the financial crisis thanks to some large bearish bets but then remained cautious for many years afterward, resulting in weak overall results despite a significant improvement in underwriting performance over time. We think Fairfax's performance will continue to hinge on whether Watsa's investment theses play out, and the company has pivoted on this front. Due to his bearish view, Watsa had fully hedged the company's still substantial equity portfolio in the post-crisis years. However, following the U.S. election of Donald Trump as president, Watsa did an about-face and is now banking on a strong equity market, as he was of the opinion that the Trump administration will have a positive impact on the U.S. economy. Time will tell whether Watsa’s optimism is well-founded, but we would note that the company essentially locked in the poor book value growth it has experienced through 2016 and incurred substantial opportunity costs as it sat out the bull market. Like other insurers, Fairfax was hit by the flurry of natural catastrophes in 2017, but this was largely offset by a large gain on the sale of its interest in ICICI Lombard, an Indian insurer, and Watsa's interest in the growing Indian market paid dividends. We think investors attracted to the stock due to a belief in Watsa’s ability to produce alpha on the investment side should consider his record over the past decade, which includes some big wins but also substantial losses and missed opportunities. Fairfax has seen a lot of ups and downs, but its performance has been increasingly mediocre.