The company has a US$65-billion investment portfolio thanks to its retained earnings and float, which provides it low-cost leverage
Fairfax Financial is on the other side of an inflection point in its earnings and valuation that position it for an extraordinary run over the next decade. It’s following in the footsteps of Warren Buffett’s Berkshire Hathaway, which shot up 27 times after it reached the size Fairfax is now in 1995.and Berkshire both have large property and casualty insurance operations that collect premiums and invest them in a portfolio of stocks and bonds, which is then used to pay claims.
At Fairfax’s annual meeting on April 11, chief executive officer and founder Prem Watsa said the company is well positioned to earn at least $4-billion pretax per year for the next four years, and yet the market cap is only $26-billion. The company has also shown a strong ability to navigate insurance catastrophes over the last decade and underwriting only represents 20 per cent of its expected earnings over the forecast period, including reasonable gains for its equity portfolio.
Fairfax trades at a low multiple because many investors avoid companies with volatile earnings. They prefer a steady 10-per-cent compound annual growth rate to lumpy 15-per-cent growth and are willing to pay more for the former than the later. The narrative on Fairfax is likely to change with a new focus on the company’s transformation, higher level of expected earnings, growing durability and increasing quality, all of which suggest its shares will trade at higher multiples.
Berkshire Fairfax Cent Float Company Earnings Demand Insurance Geico Berkshire Berkshire Hathaway
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