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Interview with Prem Watsa of Fairfax Financial Holdings Limited - Winter 2011
Posted by: Holly LaFon (IP Logged)
Date: October 4, 2012 11:11AM
Fairfax began after you had already started Hamblin Watsa Investment Counsel. Would you please tell us about how you started Hamblin Watsa?
Hamblin Watsa Investment Counsel opened its doors in 1984. After working as an investment analyst and money manager in large organizations, I teamed with my former boss from Confederation Life, Tony Hamblin, to start our own investment manager where we could run our business and manage money in our own style, answering only to our clients. We had credibility, a track record we had built managing money together at Confederation Life, and enough people who believed in our abilities and gave us enough of their own money to manage that we were able to start the business. We were soon joined by partners, most of whom we had worked with previously – Brian Bradstreet, Frances Burke, Roger Lace, Enza LaSelva and Mary Pritchard, all of whom are still with us. With clients who understood our value-oriented investment style, our business grew nicely.
How would you describe the investment style of Hamblin Watsa?
Our investment philosophy at Hamblin Watsa rests on the principles of value investing championed by Ben Graham and practised by Warren Buffett and John Templeton. We have a long term valueoriented approach to managing money, which results in our viewing the risk of capital loss within a portfolio differently than how other investment managers may view it. We do not worry about the short term fluctuations of the market, focusing instead on the long term asset values of our investments. We look at markets declining as an opportunity to buy good assets cheaply, or in other words, an opportunity to buy one dollar for fifty cents, as my old friend Peter Cundill would say. Similarly, when market exuberance sends prices well above our estimation of value, we don't buy, and we might sell. This long term approach takes solid research and courage and conviction, because you are regularly acting differently from the prevailing market sentiment and you may initially, and sometimes for quite a while, suffer unrealized losses until the market ultimately validates your investment choice. Simply put, a clear understanding of the fundamental value of our holdings allows us to go against the crowd. It is lonely at times, but it works.
Warren Buffett is the most well-known practitioner of this brand of long term value investing. We have long admired his skill and investment returns. But the most important idea I got from Mr. Buffett – and it was Francis Chou (who later became a young employee at Hamblin Watsa) who brought this idea to me – is that Warren Buffett, like Larry Tisch and Henry Singleton before him, realized that owning insurance companies would allow him to significantly increase the profits of those companies by exercising his investment skills on those companies' float (the "float" is basically the premiums collected but not yet used for paying claims or expenses).
And this lesson inspired you to start Fairfax?
It did. It was a defining moment for us. And we put this lesson into practice in 1985, when the opportunity to buy control of Markel Insurance Company of Canada came to us. With great luck and much hard work, we persuaded a number of our investment management clients, in particular Robbert Hartog who became a director and the Chairman of our Audit Committee, and my former employer Confederation Life, to invest $5 million to purchase control of Markel Insurance's holding company (which I'll call Fairfax since we subsequently changed the holding company's name to Fairfax Financial). As a result, we gained investment management of the $40 million float within Markel Insurance.
So you were now a money manager controlling an insurance company.
In my new role as Chairman and controlling shareholder of Fairfax, I was confident that we could manage Markel Insurance's investment portfolio well, but I had no background in running an insurance business. We needed an experienced person to run the insurance operations, so we hired a highly respected insurance industry veteran as CEO of Markel Insurance. Trusting in his expertise and experience, we allowed him to operate the company independently, while we retained exclusive responsibility for managing the company's investment portfolio.
Is it fair to say that this structure and philosophy underlies the Fairfax approach to running an insurance company?
Yes. We had hit upon a very powerful operating philosophy that we continue to follow today. Our goal at Fairfax is to provide long term returns for our shareholders by treating our customers well and our employees well. We realized we could achieve an excellent total return for our shareholders over time by combining disciplined underwriting in our property and casualty insurance businesses – disciplined meaning that business should be written profitably, and writings will be reduced if business cannot be written profitably – with investment management based on value investing principles. So we permit management of each of our insurance companies to manage their insurance business without interference from head office, while managing investments is all done at head office by Hamblin Watsa. This combination of disciplined underwriting by decentralized companies and a centralized valueoriented investment management dedicated to long term total returns has made Fairfax very different from most other insurance holding companies.
Are there other elements of your investment philosophy that influence how Fairfax (FRFHF)'s insurance businesses operate?
We brought the discipline of our investment style into our insurance operations. It doesn't make sense to us, as value-oriented long term investors, to pay more for a stock or bond than a price on which, in our estimation based on its value, we should earn a good return over time. The same principle holds true for underwriting. The insurance industry as we all know is very cyclical. We focus on avoiding writing business where we are not being properly compensated for assuming the potential liability. If pricing is weak and the business cannot be written profitably, we simply decline to write the business. Similarly, in a hard market where pricing is strong and profitable, we will focus on greatly expanding the amount of business written. Management of our companies understand clearly that they will be measured only on the profitability of their underwriting. As value investors, we focus on preserving capital and not paying too much for assets. That value philosophy drives our approach to the insurance business as well.
I think this focus on disciplined underwriting is very powerful and not all that common in the property and casualty industry. We judge our insurance companies by their profitability, not by the volume of business they write. Effectively, this is the same performance standard we use in judging our portfolio returns at Hamblin Watsa.
What is the geographic scope of the Fairfax insurance operations?
Fairfax now owns and has minority investments in a growing number of property and casualty insurance and reinsurance companies around the world. Since our first purchase in 1985, we have had the good fortune to build our presence in the industry by numerous acquisitions. We are now operating in over 100 countries around the world. We have made many "fair and friendly" acquisitions over the years and have been very fortunate indeed to have attracted top flight executives and talented people who were drawn to our decentralized approach and our culture.
Continue reading Fairfax Financial's winter 2011 newsletter.
Guru Discussed: Prem Watsa: Current Portfolio, Stock Picks
Stocks Discussed: FRFHF,
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