Fairfax Financial annual letter to shareholders for the year ended December 31, 2014.
Prem Watsa discusses a theme he mentioned last year, with an inclusion of private companies at high valuations.
What does value investing really mean? Q1 2021 hedge fund letters, conferences and more Some investors might argue value investing means buying stocks trading at a discount to net asset value or book value. This is the sort of value investing Benjamin Graham pioneered in the early 1920s and 1930s. Other investors might argue value Read More
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To Our Shareholders:
Our results in 2014 were the best in our 29-year history, with record underwriting profit of $552 million(1) and record net earnings of $1.6 billion. Our combined ratio of 90.8% was the lowest in our history, with all our major insurance companies having combined ratios less than 100%. Book value per share increased 19.5% (adjusted for the $10 per share dividend paid) to $395 per share and our stock price increased 44% to Cdn$609. We had a good year – and it was about time! Since we began in 1985, our book value per share has compounded at 21.1% annually while our common stock price has compounded at 19.8% annually.
Here’s how our insurance companies performed in 2014:
Fairfax Financial: Portfolio holdings
As you can see in the table, all our major insurance operations had a combined ratio less than 100%, with OdysseyRe contributing 65% of our record underwriting profit and Zenith 16%. OdysseyRe had another outstanding year under Brian Young’s leadership while Zenith, under Jack Miller’s leadership, had the best year since we bought it in 2010. Fairfax Asia, under Mr. Athappan’s leadership, continued its outstanding performance while Northbridge, under Silvy Wright, and Crum & Forster, under Doug Libby, performed very well.
2014 was a year in which a number of management successions took place in our insurance subsidiaries, all in the Fairfax style – smoothly, with an internal successor. Doug Libby, after 15 years of outstanding performance at Seneca and Crum & Forster, decided to retire. Doug celebrated 25 years with Seneca in 2014 – and what a wonderful record he has had there. He took a virtually bankrupt company in 1989, made it profitable in three years and then had an average combined ratio of 88.3% for the next 22 years, with average annual reserve redundancies of 6.8% per year. Since we purchased Seneca in 2000, it has had an average combined ratio of 87.0%, generated cumulative underwriting profits of $230 million and increased its net premiums written from $41 million to $242 million.
Including investment income, Seneca has earned cumulative after-tax profits of $308 million, versus our purchase price of $65 million. Doug moved Crum & Forster, which he took over in 2008, to a specialty line focus to better serve its clients. Specialty lines now account for over 80% of Crum & Forster’s business, versus 5% when we purchased it, and Doug was able to achieve a combined ratio below 100% in 2014. With much gratitude, we wish Doug, Miani and family a happy retirement.
Doug passed the baton to Marc Adee, who has been with us since 2000 when he joined TIG Insurance in Dallas as Chief Actuary. Marc then ran Fairmont (the good insurance business segments from our TIG and Ranger acquisitions) from 2004 with an average combined ratio of 93.0% over the past 11 years while increasing its gross premiums written by over 300% from $206 million to $636 million. Recently, Marc took over the running of First Mercury. We are excited about Crum & Forster’s prospects under Marc’s leadership.
Late in 2014, Jack Miller decided to pass the role of CEO at Zenith to Kari Van Gundy while retaining the role of Chairman. Jack has done an outstanding job over the past 17 years at Zenith, being Stanley Zax’s right hand man for the first 14 years and then taking over as CEO in 2012 when Stanley retired. Jack has been instrumental in building Zenith’s team culture and providing outstanding customer service to its clients and brokers. It is fitting that Jack decided to step down as CEO after the year that Zenith generated the lowest combined ratio (87.5%), with excellent reserving, since we acquired it in 2010. Given Jack’s long experience at Zenith, he will help Andy Barnard and all of our Presidents enhance the focus on customer service excellence at Fairfax.
Kari has been with Zenith for 23 years, first as Chief Financial Officer of a subsidiary, then as Chief Financial Officer of Zenith and later as Chief Operating Officer of Zenith. Over the years, Kari has been intimately involved in the development of the company’s culture and track record of underwriting profitability. Going forward, she will be assisted by Davidson Pattiz who will be Zenith’s Chief Operating Officer. Davidson has run the Claims Department at Zenith for nine years. We are excited about Zenith’s prospects under Kari’s and Davidson’s leadership.
Fairfax Financial: Management changes in Brazil
Finally, at Fairfax Brasil, as planned, Jacques Bergman passed the role of CEO to Bruno Camargo while retaining the role of Chairman. Jacques and Bruno were the key reasons we began our Brazilian operations from scratch in S˜ao Paulo. We have attained critical mass in Brazil with $158 million in gross premiums written and approximately 80 employees but have not attained underwriting profitability yet. Together with Jean Cloutier at Fairfax, Jacques will help us develop our operations in Latin America while Bruno will take the company forward. Jacques and Bruno have worked together for the past 17 years, the last five within Fairfax. We continue to be excited about our prospects in Brazil under Bruno’s leadership.
Andy Barnard continues to do an outstanding job overseeing all our insurance operations as the President of Fairfax Insurance Group. It has been approximately four years since he moved from being the CEO of OdysseyRe to being responsible for our insurance and reinsurance operations – first only in the U.S., and now worldwide. The results are obvious for everyone to see! Even apart from benefitting from reduced catastrophes, our underwriting results have been outstanding – and should continue to be so! Andy has helped mold our team-oriented Fairfax culture, foster strict underwriting discipline with good reserving and develop our talent across all our companies, including encouraging executive transfers within the group. One of the key reasons for our success over the years is our decentralized structure where each President is responsible for the success of his or her operations. There is no better way to empower people. Andy has developed this structure further by developing profit centres in each of our companies. We now have over 100 profit centres in our worldwide operations. The leaders of our profit centres, in effect, are presidents of their own operations and are responsible for providing outstanding customer service, looking after their employees and providing an underwriting profit with good reserving. This is a very important, empowering structure for our company, and we are excited about its possibilities. The Executive Leadership Council (ELC), under Andy, consists of the heads of our major company groupings, plus Paul Rivett, Peter Clarke and Jean Cloutier of Fairfax. The ELC facilitates the coordination of our diversified insurance and reinsurance operations. Our working groups – all our claims officers, all our chief actuaries, etc. – continue to explore best practices and take advantage of our companies’ individual expertise. The Talent and Culture Development working group is deepening the practice of our ‘‘fair and friendly’’ culture, with a special focus on outstanding customer service. Our special culture – nurtured and preserved over our 29 years and expressed in our Guiding Principles, which again are reproduced as an Appendix to this Annual Report – will be the major reason for our long term success.
Our Fairfax Leadership Workshop, which brings together about 25 of our most promising managers from across the globe for a week of training and networking in Toronto, is working exceptionally well. After this year’s workshop, there will be approximately 100 of our managers from across the world who will have participated in this program. In a decentralized operation, this is a great way to spread our culture and knowledge of our operations and to connect key leaders across our companies. As I have said before, the future of Fairfax is in terrific hands.
I am always amazed at the speculation that can take place in the stock market, as shown in the table below, and how
long it can last:
The Wall Street Journal says that worldwide there are 73 companies that are valued at more than $1 billion by
venture capital investors, versus half that number prior to the dot.com crash. The third column of the table above
shows the ratio of the latest valuation of each company to its total cumulative equity funding raised from inception.
So Uber has a valuation of $41.2 billion as compared to the cumulative equity capital raised of $2.8 billion – i.e., the
valuation is a hefty 14.7 times all of the money that was raised by the company.
We’re confident that most of this will end as other speculations have – very badly
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