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Morningstar | Fairfax Is Modestly Profitable in 3Q

Fairfax eked out a modest profit in the third quarter as it saw only modest catastrophe losses during the period. The company’s performance this year has been roughly in line with our long-term expectations, and we will maintain our CAD 681 per share fair value estimate and no-moat rating.

Underwriting results in the quarter were solid, in our view. Net written premiums increased 7% year over year, a level that strikes us as aggressive given the current pricing environment. We see a higher level of caution among the most disciplined companies in the space.

However, we view a combined ratio of 97.6% as a reasonably good result. Fairfax saw only modest catastrophe losses of $215 million during the quarter, which helped, but we do appreciate the strides the company has made in recent years in terms of improving underwriting results. This should make Fairfax less reliant on investment outcomes over time.

Investment gains during the quarter were modest, with only a $41 million net gain. Given the downturn in the market since the end of the third quarter, the investment side is likely to be a further impediment to book value growth during the current quarter.

Book value per share, excluding the impact of dividends, was up only 3% year to date at the end of the third quarter, a disappointing level given that catastrophe losses have not been a major factor. Currency issues appear to be a drag this year, however, so this phenomenon does not really reflect the core performance of the business, in our view.

Still, we think lackluster results on this front highlight the difficulties the franchise will have creating value going forward. CEO Prem Watsa’s investment style can lead to significant ups and downs in the near term, but Fairfax’s performance over time has been increasingly mediocre.