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- Manlobbi
Stocks A to Z / Stocks F / Fairfax Financial (FFH)
No. of Recommendations: 1
Comments by Morningstar analyst Brett Horn
He has been very pessimistic on Fairfax which he has rated as overvalued since 2021. His current fair value is CAD 1290 and current share price is CAD 1990 , or 54% overvalued.
While its primary business is insurance, Fairfax is in some ways more of an investment fund. Chairman and CEO Prem Watsa has a long history of bold investment bets and has shown a willingness 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 results on the investment side. We're somewhat skeptical of this approach, as we believe disciplined underwriting is a more reliable path to long-term value creation for insurers. Fairfax's underwriting record is relatively poor, although it has improved recently.
We think Fairfax's performance will continue to hinge on whether Watsa's investment theses play out, but results on this front have become increasingly hit and miss over the years. Fairfax collected a multibillion-dollar windfall during the financial crisis thanks to some large bearish bets but then remained bearish for many years afterward, resulting in weak overall results despite a significant improvement in underwriting performance over time.
Following the 2016 US election of Donald Trump as president, Watsa did an about-face and banked on strong equity markets. Watsa's optimism has largely worked to the company's advantage, but it has come with some volatility.
More recently, management's decision to keep the duration short on its fixed-income portfolio has paid substantial dividends, as the company has been able to shift into higher yield securities relatively quickly.
We think investors attracted to the stock due to a belief in Watsa’s ability to produce alpha 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 over time has been trending toward mediocrity.
In the near term, however, strong industry pricing and higher interest rates should be a material tailwind for Fairfax and its peers and lead to unusually strong profitability.
No. of Recommendations: 2
What would we do without analysts like Brett Horn... That's what makes a market!
Seriously though, I don't need "alpha" from Prem. With underwriting profitability and the leverage I get on a $68 Billion investment portfolio on $23 Billion of shareholders equity, all I need is 5%. I am willing to place (continue placing) a bet that Prem does at least 5 but apparently Brett Horn is not.
rocketshipemoji
No. of Recommendations: 3
He has been very pessimistic on Fairfax which he has rated as overvalued since 2021. His current fair value is CAD 1290 and current share price is CAD 1990 , or 54% overvalued.
...
"We think investors attracted to the stock due to a belief in Watsa’s ability to produce alpha 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 over time has been trending toward mediocrity.
In the near term, however, strong industry pricing and higher interest rates should be a material tailwind for Fairfax and its peers and lead to unusually strong profitability."
This is quite consistent with what Brett Horn has been saying for several years, every year boosting his target price so that it remains at something like 2/3 the market price.
Many of his points are legitimate - it is quite true that Watsa had a really bad decade as some of his investments (Blackberry being the obvious example) went sour and his market shorts hurt the overall returns badly.
However, while he says he likes insurance companies that have disciplined underwriting (rather than relying on less predictable investment gains), it is odd that he doesn't acknowledge how good Fairfax's underwriting has been in the last few years (98%, 92%, 95%, 95%, and 93% in the last 5 years, for instance.) And to say that the performace is 'trending to mediocrity, despite the good underwriting and really positive investment results in recent years, just seems dishonest.
But I guess after being so negative at share prices a quarter of today's it will be psychologically hard for him to reverse course and acknowledge that things are really looking pretty good for the company!
dtb
No. of Recommendations: 3
I don't need "alpha" from Prem. With underwriting profitability and the leverage I get on a $68 Billion investment portfolio on $23 Billion of shareholders equity, all I need is 5%. I am willing to place (continue placing) a bet that Prem does at least 5 but apparently Brett Horn is not.
Yes, the total investment portfolio is probably about $70b now ($64.8b at the end of 2023.) That breaks down into about $50b in fixed income ($39b at the end of 2022, $44b at the end of 2023), and about $20b in non-fixed income investments ($16.5b at the end of 2023.)
The $50b in fixed income should make about 5%, so $2.5b pre-tax. The $20b in non-fixed income will have made well over 10% in 2024, so about $2b, for a total of $4.5b on $23b in equity, or 19% pre-tax, and we haven't gotten to underwriting. If the combined ratio slips to 97% on $33b of net premiums written, that's another $1b, and it could be more. So the 15% hurdle will be comfortably met in 2024. And that's without counting the fact that a lot of the earning power is hidden from view because of the accounting for the equity accounted associates like Eurobank, Poseidon, Fairfax India and Thomas Cook India. One way of seeing that this is happening (without double counting) is to note that there will be big realized gains like Stelco and Peak Achievement, in positions that equity accounting was valuing well beneath their selling price..
So yes, Watsa's alpha is very nice to have, but Fairfax is set up to do pretty well even if the alpha is just humdrum.
