Is this Insurance company the Berkshire Hathaway of Canada?

FFH - Fairfax Financial Holdings

Fairfax Financial Holdings is a leading provider of property and casualty insurance, reinsurance and investment management services to its clients. It is a holding company and is known for applying focused underwriting strategies.

The company operates through Insurance and Reinsurance, Run-off and other segments. By product line, property (34% of consolidated net premiums) and casualty (57%) are Fairfax’s largest sources of net premiums followed by specialty (9%) insurance and reinsurance. Its subsidiaries provide a wide range of property and casualty products, maintaining diversity across all classes of business, geographies, and types of insureds. Fairfax has a strong foothold in the growing insurance and reinsurance markets of Southeast Asia, Eastern Europe, the Middle East, and Brazil. Fairfax’ companies operate in over 100 countries all over the world.

Investment Data

Revenue Growth & Market Exposure

Fairfax has a sound track record of acquisitions and successful integrations in the past three decades of its existence. It made two significant private company investments in 2018-2019, Dexterra and AGT. Odyssey Group and Allied World are Fairfax’ largest investments till date. Fairfax’ portfolio of insurance companies generate over $15 billion in gross premiums annually and is worth $39 billion. Underwriting profit and investment income generate strong returns from these businesses. Fairfax also has investments in non-insurance companies and expects each of these businesses to grow at 15% or more in the long term.

Fairfax’ businesses are leaders in markets they serve, for example, Northbridge Financial is one of the largest commercial property and casualty insurers in Canada based on gross premiums written. Most of these companies are wholly owned by Fairfax Financial. The company also has operations in Latin America, Brazil, Africa, India, Thailand, Hong Kong, etc.

Fairfax is also strengthening its digital footprint by making strategic acquisitions in this direction. It entered into a joint venture with the largest insurance group of the Netherlands, to form Onlia which is expected to offer innovative digital auto insurance and a mobile app in Canada. Given Fairfax’ experienced management team and investment expertise, it has a major advantage in identifying and closing these opportunities. It also sold one of its private investments in the last year and is targeting to dispose of some of its investments in private companies in the future in order to better align its portfolio.

Dividends

Fairfax Financial is unique in that it pays dividends once a year and has been paying $10 per share consistently without any increases. It pays out nearly 42% of its earnings as dividends to shareholders. Fairfax also has a share buyback program.

Fairfax’ book value per share has compounded at 18.7% since its inception. It is expecting to compound its MTM book value per share by 15% annually over the long term. The company plans to write $500 million annually in premiums and break-even (on an underwriting basis) in the next few years. Fairfax has been managing its float, which is essentially the sum of loss reserves, excellently over the years. The company is targeting to increase this float at no cost, by achieving combined ratios of 100% or below consistently over the long term. This no-cost float is Fairfax’s biggest competitive advantage.

Fairfax offers its shareholders to benefit from three sources of income: underwriting income, investment income including capital gains, and returns from its non-insurance businesses. Northbridge’s premium grew by double digits in 2018, as a result of strong positive reserve development. The Odyssey Group now derives equal premium volume from its insurance activities and its traditional reinsurance operations, while Fairfax Asia also registered a high combined ratio of 99.8% in 2018. Fairfax is in a good position to gain from its diversified businesses by leveraging its expertise and generating attractive total returns over the long term.

Competition

Fairfax experiences competitive market conditions across many lines of business, especially property and casualty insurance business. The company competes directly with Intact Financial, which is the largest property and casualty insurance provider in Canada and a leading specialty insurance provider in North America. Other competitors include Manulife Financial Corporation, Power Financial, Sun-Life Financials, and iA Financial Corporation.

Bottom Line

Fairfax Financial is one of the top insurance and reinsurance companies in Canada. It also provides investment management services and operates through its many subsidiaries all over the world. The company’s proven performance, strong management team, investment expertise and impeccable global reputation should aid growth in the future.

With the amount of acquisitions and holdings FFH has, it definitely looks like the company Warren Buffett has built but it’s unclear of the performance expectations for total returns in the future. FFH has taken a bet on India and it may very well pay off.

DISCLOSURE: Please note that I may have a position in one or many of the holdings listed. For a complete list of my holdings, please see my Dividend Portfolio.

DISCLAIMER: Please note that this blog post represents my opinion and not an advice/recommendation. I am not a financial adviser, I am not qualified to give financial advice. Before you buy any stocks/funds consult with a qualified financial planner. Make your investment decisions at your own risk – see my full disclaimer for more details.
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