Editor’s Note: This analysis was originally published as a stock note by Morningstar Equity Research.
Fairfax’s reported results were negatively affected by $692 million in losses from the California wildfires, but that was more than offset by $1.1 billion in investment gains.
Why it matters: The net impact was solid adjusted book value per share growth of 3.5% in the quarter. Absent large catastrophe losses, we think favorable industry conditions should continue to allow for strong returns.
The reported combined ratio increased to 98.5% from 93.6% last year. However, excluding catastrophe losses and reserve development, the company saw solid improvement in underwriting margins. At the industry level, we think commercial underwriting margins have likely peaked, and we don’t expect material improvement from currently attractive levels, but some quarter-to-quarter volatility is to be expected.Net written premiums increased 8% year over year, roughly in line with what we’ve seen from peers.
Key Morningstar Metrics for Fairfax Financial Holdings
The bottom line: We will maintain our CAD 1,540 fair value estimate for the no-moat company. We see shares as materially overvalued, and we think the market is extrapolating favorable market conditions too far into the future. In our view, P&C insurance is a highly competitive and inherently mean-reverting industry, and recent industry returns are unlikely to persist.
We think Fairfax is getting some extra credit from the market at the moment given a good run on the investment side. That continued this quarter with $780 million in gains on equity holdings. However, those gains appear to have come largely from one-time gains on sales and conversions.Year-over-year investment income growth was muted at 3%. With its short duration on the fixed income side, Fairfax was able to realize the benefits of higher interest rates more quickly than peers. But, at this point, it likely has less upside on this front.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.
