Finance Essay

2813 Words Jun 1st, 2013 12 Pages
Fairfax Financial is an insurance holding company that has followed a path to success similar to Berkshire Hathaway. When investing in Fairfax, you are really investing in CEO Prem Watsa’s abilities to allocate capital (the insurance float) into investments that are profitable. It is precisely Watsa’s ability to do this that has generated such above-average returns for shareholders over the past 25 years. Fairfax's insurance business has had little to do with the company's success other than providing the temporary capital with which to make its investments. I say “temporary” because that is exactly what Fairfax’s float has been. On average, Fairfax’s insurance business actually costs it 2% of float a year. But Watsa’s ability to seek out …show more content…
This means that most of Fairfax’s gains, if any, will come from its bond holdings and its insurance business. If a deflationary environment does occur, then it will likely be Fairfax's bonds and derivative investments that drive future returns.

Fairfax operates three insurance companies in North America: Crum & Forster (P&C), First Mercury (Surplus and Specialty), and Zenith National (Workmen’s Compensation). These three had total premiums of $1.492 billion* in 2010. The Zenith National addition closed in 2010 and the acquisition of First Mercury closed in February 2011. *This figure was calculated taking Crum & Forster’s premiums as reported in Fairfax’s 10-k, Zenith National’s premium from May-December as reported in Fairfax’s 10-k, and First Mercury’s premiums as reported in First Mercury’s 10-k.

Crum & Forster has averaged a combined ratio of 99.8% from 2002-2010 and compounded growth has been about 17% for the past ten years. Zenith National has a 30 year average combined ratio of 95%. First Mercury has an average combined ratio of 93.2% over the past nine years. It is obvious that these latter two companies are two exceptional underwriters with consistent profits on underwriting. Over the long term, these companies should help Fairfax grow float at no cost or

Related Documents