Fairfax Financial has been quietly outperforming the market for months, yet remains surprisingly under-discussed among mainstream investors. The Toronto-based insurance and investment conglomerate, led by CEO Prem Watsa, has delivered remarkable returns of approximately 41% over the past year – substantially outpacing both the S&P 500 and the TSX Composite Index.
What’s driving this impressive performance? I’ve been tracking Fairfax Financial Holdings Ltd (TSX:FFH) for over a decade, and several fundamental factors appear to be converging. The company’s core insurance operations have demonstrated consistent underwriting profitability, a crucial metric that many investors overlook when evaluating insurance businesses.
Insurance is fundamentally about collecting premiums, investing the float, and paying out less in claims than you take in. Fairfax has excelled at this formula, posting a combined ratio of 94.3% in recent quarters, indicating that for every dollar of premium collected, they’re paying out just 94.3 cents in claims and expenses. This underwriting profit provides a steady foundation for their investment operations.
The investment side is where Watsa, often called “Canada’s Warren Buffett,” has historically made his boldest moves. After maintaining a defensively positioned portfolio for several years – which admittedly caused Fairfax to miss some of the post-2020 market gains – the company has adjusted its approach. Data from their recent quarterly filings shows they’ve reduced hedges while increasing positions in both value-oriented equities and fixed-income securities that now yield substantially more than they did two years ago.
According to Bloomberg data, Fairfax’s investment portfolio totals approximately $49.6 billion, with strategic positions across diverse sectors. Their largest equity holdings include companies like BlackBerry, Resolute Forest Products, and Atlas Corp, alongside a substantial fixed-income portfolio benefiting from today’s higher interest rate environment.
“What’s particularly interesting about Fairfax right now is how they’re deploying capital,” noted Myles Zyblock, chief investment strategist at Dynamic Funds, in a recent interview I conducted. “They’re finding value in areas many investors are overlooking, particularly in sectors undergoing significant structural transitions.”
Despite this performance, Fairfax trades at a price-to-book ratio of approximately 1.3x, considerably below many financial services peers. This discount persists despite a track record of book value per share growth averaging 13.9% annually since inception in 1985, according to company reports.
The market seems to be overlooking several key aspects of the Fairfax story. First, the company maintains significant operational diversification across property, casualty, and specialty insurance lines through subsidiaries like Northbridge Financial, Odyssey Group, and Crum & Forster. This diversification provides resilience during various market conditions.
Second, Fairfax maintains a strong capital position with approximately $1.6 billion in holding company cash and investments. This war chest gives Watsa flexibility to make opportunistic acquisitions or investments when others face liquidity constraints – a strategy that has served the company well historically.
Third, Fairfax has been actively repurchasing shares when they trade below intrinsic value. In the past year alone, they’ve reduced outstanding shares by approximately 2.3%, according to Financial Times data, creating additional value for remaining shareholders.
The company’s global footprint is another overlooked strength. While headquartered in Canada, Fairfax operates across North America, Europe, Asia, and Latin America. This geographic diversification helps mitigate regional economic cycles and provides access to growing insurance markets in developing economies.
“Fairfax represents a rather unique investment proposition,” explained David Rosenberg, founder of Rosenberg Research, when I spoke with him at a recent economic forum in New York. “They combine insurance operations with a value-oriented investment approach, creating two potential sources of return that don’t necessarily move in the same direction.”
The company has also maintained a disciplined dividend policy, recently increasing its quarterly dividend by 25% to $15 per share annually. While the yield remains modest at around 1.5%, the consistent growth demonstrates management’s confidence in future cash flow generation.
Risks certainly exist. Fairfax’s investment concentration can lead to volatility, as evidenced by periods of underperformance when Watsa’s market outlook hasn’t aligned with actual conditions. Insurance underwriting results could deteriorate if catastrophic events increase in frequency or severity – a growing concern amid climate change. Additionally, the company’s complex structure and global operations make it challenging for some investors to analyze fully.
The current macroeconomic environment presents both opportunities and challenges. Higher interest rates benefit Fairfax’s substantial fixed-income portfolio but could pressure equity valuations. Inflation impacts claim costs but can be mitigated through pricing adjustments in their insurance businesses. Economic slowdown concerns might affect premium growth but could create investment opportunities for their substantial capital reserves.
From my perspective covering financial markets for nearly two decades, Fairfax represents a compelling case study in how market inefficiencies can create opportunities for patient investors. The company’s blend of steady insurance operations, opportunistic investing, and disciplined capital allocation creates a formula for long-term wealth creation that works across market cycles.
For investors seeking exposure to financial services with a value-oriented approach, Fairfax warrants serious consideration – particularly while it trades at a discount to intrinsic value and continues its pattern of consistent book value growth. As markets navigate uncertain economic conditions, Fairfax’s proven resilience and capital strength position it well for continued outperformance.
While Prem Watsa may not garner the same headlines as other financial luminaries, his track record speaks volumes. Sometimes the most significant investment opportunities are found not in the constantly discussed market darlings, but in steadily performing businesses that deliver results while flying somewhat under the radar. Fairfax Financial appears to be precisely that kind of opportunity.
