Cover Street Capital: What Would You Do if You Were Prem WatsaVW Staff
The short answer is that I would certainly be in my house in the Bahamas and not bunkered up in Fairfax Financial global headquarters in Toronto…in March.
The longer story is as follows and is relevant both to the shares of Fairfax Financial Holdings Ltd (TSE:FFH) (OTCMKTS:FRFHF) as a possible investment and investing in general. The talk last week was all about Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B)’s annual report and Warren’s words of wisdom (which were pretty damn insightful this year). Receiving much less press was the letter penned by Prem Watsa of Fairfax Financial, a man who does not get anywhere near as much ink even though he has compounded book value at 21% for 28 years in a public forum. Yes, there is some funny “Leucadia math” involving compounding off of a very small base, but I am happy to be in print saying Prem Watsa is arguably one of the best investors of our generation and his performance was generated in public and private equity markets, in equity as well as debt, and in North America as well as in truly international investing. That is not easy work.
For some serious background on the company, go to Fairfax.ca. The short story begins with Prem Watsa, whose family emigrated from India and wound up in Canada. There he became a securities analyst at a prominent value-based insurance company, left to start his own investment firm, bought a small insurance company, and voila, a few decades later, he owns roughly 44% of a global insurance and reinsurance operation worth over $10 billion. Not too shabby. There have been a few legitimately white knuckle moments, which were how we got acquainted about 12 years ago. While financial complexity can scare some and insurance can bore others, a complex financial entity also allows a lot of different levers to be pulled that are not obviously apparent to a financial journalist who cries wolf in a crowded theater while shilling for prominent short sellers (and you know you are). Regretfully, I sold the stock after a 4-bagger a number of years ago, only to miss another 100% move—perfection remains comfortably out of reach here at Cove Street Capital.
Fast forward to today. Lessons were learned and Fairfax Financial Holdings Ltd (TSE:FFH) (OTCMKTS:FRFHF) has a collection of mostly solid global insurance and reinsurance businesses (although I am still not convinced about Crum and Forster) that are all under one roof and have competent management teams that are willing to step on the neck of the underwriters when profitable business cannot be written. Insurance is “soft” now, and Fairfax is writing at a 0.8 ratio of premium to surplus, a number that is roughly 70% of the business the company “could” write in proper conditions. This is precisely what you would want as a shareholder. Fairfax has also stealthily built an interesting emerging markets exposure with a large position in India and businesses that are growing toward materiality in Asia.
There is one conceptual problem. This man is bearish, and bearish with the conviction of a self made billionaire who runs nearly permanent capital.