Opinions
David Baskin
Fairfax Financial
FFH-T
DON'T BUY
Jun 12, 2018
Stock price when the opinion was issued
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Everyone was shorting it in the 2000s, and now it's one of the most favoured stocks on the TSX. Up 13% YTD. He owns it in TFSAs. Helped by global acquisitions. Combined ratio ~94%. Underwriting has improved, costs kept in line. Almost every operation it has is showing profitability.
Estimated PE for this year is about 10x, normal for insurance industry. Has hit a high, but it's one you want to own for the long term. He continues to buy for clients.
A bit of a black box. Stock price has done very well the last few years, after having gone nowhere before that. Insurance at the core, and Prem Watsa's done a great job allocating those premiums. Higher rates favours insurers, lower rates the opposite, and he has no control over what the future holds.
If you own it, hold. You may want to investigate succession plans.
In the defensive part of Canadian financial services. Underwriting profitability consistently getting better, the core reason why stock's been doing better. Opportunity to term out its fixed income portfolio. Not a screaming bargain today, but makes sense as part of a diversified portfolio especially as we pivot away from banks and get a bit more defensive.
Prem Watsa is often described as the Warren Buffett of Canada. He is opportunistic, not afraid of taking risk. Some of his bets have not worked so well but many have. Insurance companies make money in two ways: core earnings from underwriting, and the investment returns from premiums. Warren Buffett initiated a different approach for investing insurance premiums. Rather than putting it into very safe, but low-yielding, bonds, he invested in stocks. Watsa follows this model and Fairfax has benefitted. The recent rises in interest rates are also very positive for all insurance companies because all of them still buy long-term assets. Fairfax has done nothing for investors for a long while, but he is proposing a top pick in the insurance industry today, and believes that the category has promise.