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.
