Mar 3, 2010
A friend recently attended an talk with Prem Watsa of Fairfax Financial (PINK:
The Soft P&C Market:
If you look at the insurance sector, a number of businesses are trading at low multiples because of the current pressures of the soft market. Some, like the management over at W.R. Berkely believe that the market is poised to turn around.
-Fairfax has wide reach. Active in over 100 countries, 25% premiums outside of N. America
-Fairfax faces declining volumes because of soft market but Fairfax has power to write more business if they see things improved.
-Globally, P&C markets remain soft. Signs of improvement in certain regions: Northbridge managed to raise rates in Canada.
-Fairfax could easily double underwriting volumes in the face of hard market, boosting earnings and investment float
The Investment Environment:
As some of you may know, Watsa’s Hamblin-Watsa Investment Counsel takes Fairfax’s float and uses it to make investments in all sorts of securities. They have an excellent track record of beating the market over the years.
-Watsa sees the possibility that growth will be flat as we may encounter deflationary pressures on the economy.
-Fairfax has structured their investment portfolio so that it can withstand a 50% drop in equity markets in addition to major CAT losses.
-Fairfax continues to be conservative about the markets and has 30% of the equity portfolio hedged with index swaps.
-2/3 of their muni bonds are insured by Berkshire Hathaway. Most were purchased near bottom prices. This boosts their yield on the portfolio which has an extra kicker of being tax exempt securities with a 5.75% average yield
-Some opportunities for value investors but they are becoming fewer.
-Target holding at least $1B in cash at holdco level in case of negative events.
Fairfax recently acquired Zenith National Insurance Group. The company specialized in workers comp insurance and ran a conservatively managed investment portfolio.
-Fairfax has known Zenith management for over 20 years. Zenith has an excellent underwriting record and the company scaled back volumes because of soft market
-Zenith has a vanilla investment portfolio, Fairfax intends to have Hamblin-Watsa take over and try to boost performance
-Crum & Forster may be able to sell products through Zenith’s network of brokers and agents.