Fairfax Closes Out the Year on a Strong Note

Fairfax Financial FFH finished the year on a strong note, as the company saw good performance on both the underwriting and investing sides. For the full year, book value per share increased 6%, adjusted for dividends. After reassessing our assumptions, we expect to raise our $681 fair value estimate for the no-moat company by about 7% to reflect time value and capital market movements since our last update. However, we continue to see the shares as overvalued.

Net written premiums for property and casualty and reinsurance operations increased 16% year over year. While some of that is attributable to better pricing, we think Fairfax has grown more aggressive as industry pricing has improved. We would view this as the right approach.

The combined ratio in the quarter increased to 90.9% from 88.1% last year but remained at a very attractive level. For the full year, the combined ratio was 94.7%, which is toward the low end of the company’s historical range. We see this as primarily due to favorable market conditions.

For the quarter, Fairfax saw investment gains of $548 million, coming almost entirely from equity investments. This helped to pull down full-year investment losses to $1.7 billion. The bulk of the full-year loss ($1.1 billion) came from fixed income, as higher interest rates lowered carrying values. Given that insurers typically buy fixed-income investments and hold to maturity, we think investors should generally ignore these shifts in market value. On the positive side, Fairfax’s relatively low duration should allow it to realize the benefits of higher interest rates more quickly than peers.