EUR 850.00 For Business Accounts Only

Morningstar | Investment Results Hit Fairfax in the Fourth Quarter

The downturn in the equity markets pushed Fairfax to a $478 million loss in the fourth quarter. In our view, this result provides further evidence that CEO Prem Watsa’s aggressive investing approach, which is intended to be value-creative, is also risk-creative. A lack of traction on the investment side and relatively high catastrophe losses led to a disappointing year for Fairfax, and book value per share, adjusted for dividends, was down 1.5% in 2018. We will maintain our CAD 681 fair value estimate.

Fairfax recognized a $756 million loss on its equity investments in the fourth quarter. While peers also saw losses due to the market downturn, Fairfax’s relatively high exposure magnified the impact on the bottom line. We hesitate to make too much of one quarter but would note that, while the company has at times seen some large investment gains in the post-crisis period, Watsa’s track record over this period is less than stellar overall. Investment results, in our view, have been the key driver of the negligible book value growth the company has achieved following the crisis. We would note that management’s appetite for risk on this side is the key driver for our high uncertainty rating.

The combined ratio improved to 99.3% from 100.8% last year, due to lower catastrophe losses and higher favorable reserve development. In our view, the 97.3% mark for the full year is a solid result considering relatively high catastrophe losses this year. While volatility from catastrophe losses obscures the trend, we do think Fairfax’s underwriting has shown material improvement in recent years. But the company is still not a positive standout in this respect. This leaves the company fairly dependent on Watsa’s ability to produce alpha to drive book value growth.