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‘Warren Buffett’ of Canada, Prem Watsa—On Hurricanes and Top Holdings
Posted by: Sally Jones (IP Logged)
Date: March 26, 2013 05:28PM

The Blackberry launching mega-shareholder Prem Watsa, CEO and Chariman of Canada’s Fairfax Financial Holdings Limited, has been tagged as “Canada’s Warren Buffett.” Watsa’s history of massive gains, a cautious approach, and personal affability have earned him that honor. Coming from almost mythical origins, Watsa is said to have started with $8 dollars in his pocket but got a clue when he learned about insurance float from another Guru Francis Chou, referring to yet another top Guru Warren Buffett, back in 1985. Watsa and Chou were in Toronto, and Billionaire Investor Chou was working as a…telephone repairman! (Yes, you can become a billionaire, too.)

In a past interview with GuruFocus, Prem Watsa shared about his early days:

“When we began 25 years ago, if anyone told us where we'd be today, we'd never believe it. All we were trying to do when we began, book value was about $2 Canadian [$1.50 US in those days] and we were trying to double book value every five years. We thought we could do that with the insurance float, and of course opportunities came our way, we were flexible, and we had a ton of good people join us, and today we have done significantly better than what we expected. Our book value has compounded at 25% a year, way more than what we expected. So we simply take a year at a time, we take what comes to us, and we don't make any grand plans. Our history has been to be open to the opportunities ahead of us.”

Today Fairfax Financial is a worldwide insurance/reinsurance company operating in over 100 countries and penetrating new insurance markets. In his most recent 2012 letter to shareholders, Watsa offered many kudos to his talented team members while describing how it is to be an insurance company doing business in a climate of catastrophe. He described Hurricane Sandy as the insurance industry’s nightmare and said the storm is “expected to cost us about $261 million – mostly from OdysseyRe.” Described as the Fairfax crown jewel, OdysseyRe accounts for almost half of the company’s business. The OdysseyRe shareholder letter explained: “We see this deterioration in earnings as the result of a year of high catastrophe losses, and not as an indication of prospective deterioration in underwriting performance…” In fact, OdysseyRe had the best combined ratio in its history, with a record 88.5% combined ratio for 2012, generating $267 million in underwriting profit with conservative reserving, according to Watsa’s letter. OdysseyRe premiums also grew 15% in 2012.

A proponent of “no ego” among his team members, investor Guru Watsa described his company’s year of “lumpy results” and disclosed a book value per share increased by 6.5%. Book value per share ended the year at $378 per share, and common shareholders’ equity ended the year at $7.7 billion. He also stated, “In the 27 years since we began in 1985, our compound annual growth in book value per share has been 23%, while our common stock price has compounded at 19% annually.”

He further commented, “Our results have always been lumpy. In the three years 2007 – 2009, we earned $3.4 billion after taxes and book value per share increased by 146%. Since then, book value per share has increased by only approximately 10% (including dividends) because of our very cautious view of the financial markets (which has led us to be 100% hedged in our common stock portfolios) and, of course, the unprecedented catastrophes in 2011. We ended the year with cash and marketable securities at the holding company in excess of $1 billion.”

How does an insurance expert view this time of hurricanes and earthquakes? According to Watsa, “The key in the catastrophe business is to view it over the long term rather than pulling away after catastrophes have occurred.”

Born in India, Watsa’s company does business all over the world with many different cultures. He offers a keen understanding of culture differences and how they impact business and the decision making process. Watsa told GuruFocus: “We tried to be careful about who we become partners with, who we associate ourselves with. We have this fair and friendly culture that we've talked about. This fair and friendly culture is one of our guiding principles, and we want people who fit with that, we want partners who fit with that, who think long term. We're not trying to make money at the expense of everything else. If they don't buy into our values, we don't want to be partners with them, so that helps in terms of spreading our culture to any company we acquire.”

For its global insurance reach, Fairfax Financial Holdings Limited reported that in 2012, gross premiums written were $7.2 billion, compared to $17 million in 1985. The $7.2 billion does not include the company’s non-consolidated international operations like India, China and the Middle East which produced $2.5 billion in gross premiums written in 2012, of which the Fairfax share was $650 million.

Fifty-seven percent of that $7.2 billion was derived from North American insurance, with 31% from global reinsurance and 12% from international insurance.

Watsa described the emerging insurance markets of Asia, Latin America and the Middle East. There is room for rapid growth because of the market’s low penetration.

The company’s long term equity holdings are effectively remaining the same, according to Watsa, with reductions in bank positions. For example, he reduced his Wells Fargo (WFC) position by 40.65% quarter ending Sept. 30, 2012, with current shares at 1,754,687.

He also reduced his US Bancorp (USB) position, the same quarter ending, by 30.03%, leaving him with 3,112,579 shares.

As of December 31, 2012, Prem Watsa’s top holdings include:

The BlackBerry company, called Research in Motion Ltd. (BBRY), with a portfolio weighting of 24.5%, and shares of 51,854,700. BlackBerry launched its new Z10 Smartphone in the US this week. The company has a market cap of $7.57 billion; its shares were traded at around $14.45 with a P/E ratio of 9.6 and P/S ratio of 0.6. Research In Motion Ltd. had an annual average earnings growth of 18.6% over the past 5 years.

Johnson & Johnson (JNJ), with a portfolio weighting of 16.6%, and 5,941,600 shares. Johnson & Johnson was incorporated in the State of New Jersey in 1887. Johnson & Johnson has a market cap of $224.33 billion; its shares were traded at around $80.25 with a P/E ratio of 20.8 and P/S ratio of 3.4. The dividend yield of Johnson & Johnson stocks is 3%. The company has had an annual average earnings growth of 6.3% over the past 10 years.

Watsa added 1519.45% to his EXCO Resources Inc. (XCO) position quarter ending Dec. 31, 2012, with current shares at 10,672,200.

His holding history:

Prem Watsa also holds Resolute Forest Products Inc. (RFP), with a portfolio weighting of 13.1%, and 24,776,519 shares. Resolute Forest Products Inc. has a market cap of $1.6 billion; its shares were traded at around $16.92 with a P/E ratio of 59.3 and P/S ratio of 0.4.

Prem Watsa also added to his SandRidge Energy, Inc. (SD) position by 645.59%, quarter ending Dec. 31, 2012, currently owning 32,463,200 shares.

His latest trade was on Feb. 12, 2013. Watsa bought a new holding, 2,839,817 shares of Novadaq Technologies (NVDQ), priced at $11.1.

To summarize the year for Fairfax Financial Holdings Limited, Watsa wrote to shareholders: “We ended 2012 in a strong financial position, holding cash and marketable securities at the holding company of over $1 billion with no significant debt maturities in the next five years.”

“Canada’s Warren Buffett,” Prem Watsa’s top buys, sells, and holdings:

Guru Discussed: Warren Buffett: Current Portfolio, Stock Picks
Prem Watsa: Current Portfolio, Stock Picks
Stocks Discussed: WFC, USB, BBRY, JNJ, XCO, RFP, SD, NVDQ,
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