Is Fairfax Financial A Great Long-Term Investment?
Fairfax Financial is an insurance holding company that engages in property, casualty, life insurance, reinsurance, investment management and insurance claims management. Since it was taken over by Prem Watsa in 1985 the company has compounded book value at 23% and stock price at 19%. Mr. Watsa has run the firm very conservatively and it has had rapid growth the last 20 years. It is impossible to sum up Prem Watsa management abilities in one paragraph or in one article. Mr. Watsa like Warren Buffett is a value investors who looks for undervalued securities trading at a discount to intrinsic value.
Fairfax Financial shares have been beaten down with the rest of the global market. The company has seen its shares fall from $500/share to $463/share. Fairfax shares have been volatile over the last 10 years, rising and falling sharply in value. This has created a opportunity for long-term investors to add to their positions or start building one. Fairfax reported mixed second half results. The company reported record profits on its underwriting while on the other hand reported a massive loss in its equity portfolio. Fairfax saw massive quotational losses in its equity portfolio. These quotational losses wipe out Fairfax net earnings for the second half of the year. This isn't the first time that Fairfax's equity portfolio has wiped out profits and it won't be the last time.
Fairfax Financial engages in a variety of insurance operations which has allowed the company to use the float from premiums at an annual cost of 2.3% to invest in the stock market or private transactions. Through Benjamin Graham's value investing principles Prem Watsa has compound Fairfax book value at 21% over 28 years.
In the first half of 2015, Fairfax reported a net loss on its investment portfolio of $488.7 million, however, the company did report record underwriting profits of $269 million. Over the last four years Fairfax has reported consistent underwriting profits after four years of reporting underwriting losses. The bulk of Fairfax underwriting profits from the first half came from two operating subsidiaries. OdysseyRe produce underwriting profit of $128 million and Zenith National produced $61 million in underwriting profits as well.
Fairfax quotational loss was mainly driven by a $516 million loss in its bonds portfolio and the company's equity hedges that cost $176 million. Fairfax stock portfolio loss $122 million that compared to a gain of $500 million last year.
Fairfax is sells for 7x its earnings, 1.30x its book value and 5x its pretax earnings which include portfolio gains. If Fairfax sold for 9x to 10x its pretax earnings its would sell for $857.25 to $952.25 per share. The firm has been producing between $50 to $60 per share in profits or gains from its investment portfolio a year. If the firm sold for 1.6x to 1.7x it book value then it would sell for $542.20 to $576.30 per share. Fairfax produced operating earnings of $2.33 billion or $108/share. The company has produced 10-year average operating earnings of $653 million or $30.23/share. Fairfax is selling for 4.2x its operating earnings and selling for 15x its 10-year average operating earnings. One of the best way to determine the value of an insurance company is to look at its investment per share. Fairfax has over $1,073 per share in investment; that is a ratio of $2.56 in investments to each dollar of cost of its stock. For every dollar of cost the firm is producing nearly $3 in investments. If the company can return just 5% going forward it would be $51 per share and generate 12% return on equity. With its above average return on assets, capital and equity, it's very clear that the company has a value range of $576 to $1,080 per share.
Posted in ...Market Commentary