Recently, I’ve been writing a fair bit about insurance companies. Today, GuruFocus published an interview with Mason Hawkins and Sately Cates of Longleaf Partners Fund. Here is an exchange regarding Fairfax Financial.
Absent Prem Watsa’a speculations, Fairfax Financial Holdings’ performance would be greatly diminished. How does a value manager like you analyze an investment that is so dependent on the actions of one person?
[Hawkins:] First, unlike Berkshire Hathaway, where Mr. Buffett is virtually the sole investor, Fairfax has a very deep team of exceptionally talented analysts and investors, and they are anchored like almost no other investment group that we know of in Ben Graham’s margin-of-safety disciplines.
This team is housed in a company called Hamblin Watsa. It has an over-30-year record. It is led by Roger Lace, who is its president and head of equities. Brian Bradstreet oversees their fixed-income investing. Another leader is Chandran Ratnaswami who leads their international efforts. Sam Mitchell, who has had a terrific long-term record at another company, is part of the Hamblin Watsa group. Paul Rivett is their chief legal officer and also adds insight.
In Fairfax’s case, there is clearly a coordinated, cooperating, and collaborating investment team. They have executed like no other. Prem is part of that team, but by no means oversees the day-to-day execution of their investing efforts. Their record is nonpareil. In the last 15 years, they have grown book value per share at 16.4%, versus a 6.8% growth rate for the S&P 500. They have the number-one record in the insurance world of growing book value per share over that 15-year period. Over the last five years, Fairfax has grown book value at 22.5%, also number one among insurance companies. That was a period when the S&P had a 2.3% return. They far and away have exceeded their peers.
Turning to their long-term investment record, over the last 15 years their common stock investments have compounded at 17.2%, versus 6.8% for the S&P 500. Their bond record is equally superb. Their bonds have compounded over the last 15 years at 10.0% versus only 6.2% for the Bank of America Merrill Lynch US Corporate Index. Both bonds and stocks over the last 15 years have outperformed, and they have records in those two asset arenas unlike anyone we have studied, including those in the insurance world, hedge fund, and investment advisory world. They have a history of thinking independently, applying their appraisals, and using their discipline to say “no” unless something is exceptionally attractive from both a risk and a return standpoint.
Their hedging activities are misunderstood, and, to your question, they are not “speculations;” they are enabling them to lock in their investment performance and to protect their liabilities with their assets. Fairfax is a unique company, and they have evolved into one of the leading investment groups in the world, overlying a group of much-improved insurance companies. They have evolved with terrific management in the insurance companies that the holding company oversees.
Look at the team of talents that leads each of their insurance companies: Doug Libby at Crum and Forster, Mark Ram at Northbridge, and Nick Bentley running their runoff business called River Stone. You see well disciplined managers that understand that insuring risk has to be done at reasonable cost and against reasonable potential claim exposure. Dennis Gibbs is still a consultant of theirs, and he may be one of the most sagacious insurance minds there is.
Andy Bernard was just recently made president and COO of Fairfax Insurance Group. He previously ran OdysseyRe and created an exceptional company from virtually scratch. Now he oversees the various components of Fairfax’s worldwide and growing insurance group. As you probably know, they have nascent operations in many of the evolving world economies: India, China, the Middle East, and Eastern Europe. We believe that those early-day undertakings will pay great dividends as we go forward.
Fairfax is a combination of a superior investment team, with a lot of individuals who are very capable of running insurance companies and who have proven their worth and merit over a full cycle of insurance premium pricing. Prem has assembled a really unique group of operating and investing talent.