Fairfax Financial: Owner-Operated Insurer With Solid Long-Term Record

Jeffrey Stacey of Stacey Muirhead Capital Management presented his investment thesis on Fairfax Financial Holdings (Canada: FFH) at Best Ideas 2021.

Thesis summary:

Fairfax Financial Holdings is a property and casualty insurance and reinsurance company. Its stated corporate objective is to achieve a high return on invested capital and build long-term shareholder value. The company has been under present management since 1985 and is led by V. Prem Watsa, Chairman and CEO. He is also the controlling shareholder with an effective stake of 1.54 million shares, recently valued at $515 million (all figures in USD). This is down from over $1 billion a few years ago.

Fairfax has an amazing long-term track record of business and share price performance, but the share price has lagged recently. Over the 34 years since its beginning in 1985 to the end of 2019, Fairfax achieved a compounded annual growth rate of 19.3% in book value per share (including dividends), while the share price grew at 17.8%. In 2020, the book value per share declined by 6.9% while the share price declined by 29.7% The share price recently reflected a 24.5% discount to book value.

Jeff believes that the discount is not justified, and that Fairfax represents an attractive investment opportunity at recent prices. Insurance pricing is growing at double-digit rates, and the value of Fairfax’s equity investment portfolio has improved considerably. As well, Fairfax continues to strategically monetize some of its non-insurance businesses. Recent dispositions include Davos Brands and the pending sales of the Riverstone Europe runoff business and the Easton baseball equipment business.

Fairfax has been an active buyer of its shares in recent years, having repurchased 2.02 million shares since Q4 2017. In June 2020, Prem Watsa purchased an additional 0.48 million shares personally for just under $150 million.

With a favorable pricing environment for insurance, improved returns from the equity portfolio, strategic monetization of some of its non-insurance businesses, and share purchases by both Fairfax and Prem Watsa, Jeff believes that Fairfax Financial represents a compelling investment opportunity.

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About the instructor:

Jeffrey Stacey is the founder of Stacey Muirhead Capital Management Ltd. and he has over 35 years of investment industry experience. Jeff has an Honours Bachelor of Business Administration degree from Wilfrid Laurier University and is a Chartered Financial Analyst. He is married and has two children. Personal interests include hiking, fitness, reading, travelling, and playing the drums.

Jeff is an advisory board member of the student managed Ivey Value Fund at the University of Western Ontario and an advisory board member of the student managed School of Accounting and Finance Investment Fund at the University of Waterloo. He is also a member of the Board of Trustees at Parkminster United Church in Waterloo.

Prior experience includes being a member of the Finance and Investment Committee at the University of Waterloo and a member of the Dean’s Advisory Council at the Wilfrid Laurier University Lazaridis School of Business and Economics. Jeff is a former director of Rainmaker Entertainment Inc. and previously served on the Board of Trustees and the Investment Management Committee at the University of Guelph.

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