The First 25 Years of Fairfax

[nwoodman]

Just finished this one, thanks @glider3834for the lend.  The three commentaries by Roger, Andy and Brian were superb. I figured we are among friends so reproduced them below.  Even though these were penned nearly 15 years ago, what struck me is the continuity of thought.

 

1. Roger Lace

 

For three years, day in, day out, Prem analyzed what companies were really worth: industrials, financials, every kind of business in Canada and the United States. He found it more like fun than work; he worked as much for the love of the game as for the money. He also made a number of lifelong friends, while never losing the chance to have a one-on-one training session with his mentor, John Watson. Such was the pleasure that, in 1977, he passed up a chance to take over as director of research for the lesser job of managing money for pension funds. His immediate superior was Tony Hamblin; Roger Lace and Brian Bradstreet were colleagues.

 

“I'm sure there were a few guys who just said they were value guys because they had to, whereas Prem felt strongly about it. John Watson worked me over in the formal sit-downs, but Prem worked me over pretty heavily in the daily chatter by the water cooler and in the office.

I was kind of neutral initially, a bit resistant, and he won me over by his rigorous, analytical approach. 

 

Where was Graham wrong? he kept asking, and since I couldn't find anything wrong, I was sold. I guess I would have to ask myself if that was Graham's doing or Prem's ability to convince people.

 

Prem was very outspoken, very enthusiastic, and he had an almost evangelical feeling about value investing. He was so outspoken and had so much conviction that I think some people got tired of hearing about it. But not the true believers like myself and Brian Bradstreet.

 

We bad to do a lot of internal and external presentations as analysts.

Prem pounded the table and did not take opposition lightly. Over the years, I suspect, a few people probably took him aside and said, "Hey, you're coming on a little too strong here," because he became a very good listener.

 

He took his persuasive powers and learned to point people in the right direction without being too heavy-handed. Once we got into portfolio management, Prem in particular wasn't one to modify his views in any way, and he took some pretty big positions in some pretty unpopular areas. I was of the same mindset, but I'm the type of guy who would rather switch than fight. If my superiors put their foot down, I went out of the room with my tail between my legs and did what I was told. Not Prem.

 

There were more and more guidelines and policies laid down from higher levels, but in the rare instance that you felt there should be some leeway, you were allowed to take it to the CEO or certain members of the board.

 

It was almost a joke because every other day, it seemed, Prem would be marching up to the boardroom to argue about the smallest details. And they always gave in, which was quite amazing.”

 

Roger Lace

 

 

2. Andy Barnard

 

In its early years, Odyssey Re began as a loose confederation of separately capitalized companies. In 2000, after the purchase of TIG Re, we restructured Odyssey onto a single, consolidated platform. Because of the numerous acquisitions from which Odyssey Re was created, the market was somewhat confused during this time as to what exactly was included in Odyssey, and what had been removed.

 

“In 2001, we took the company public in an IPO. Going public was a very helpful way for the company to communicate to the marketplace a new coherent identity and establish our brand awareness. In September 2001, the 9/11 attacks accelerated the hardening in the market that had begun to take place late in 1999. We had created a much more compelling platform by having one company with a billion dollars of capital and branches around the world. These steps allowed us to participate very effectively in the hardening market.

 

We went from writing about $150 million of premium when we started in 1996, to about $1 billion at the time we went public, to $2.5 billion three years later. The business that we wrote during this period has been very profitable.

 

Odyssey has certainly defied its skeptics. The various pieces we acquired and stitched together over the years had all been challenged companies at the time Fairfax acquired them for discount prices. The team at Odyssey engineered a remarkable turnaround, which confounded those who believed it was not possible to turn around struggling operations. We went public at $18 a share; Fairfax took us private eight years later at $65. We grew our book value over this period at more than a 20% compounded rate

- one of the best records in the industry.

 

Prem sees the best in everyone. He is generous spirited with a wonderful sense of humour. His analytic mind grasps the essential details of business quickly, yet he's an extraordinarily warm person with a remarkable ability to connect. He's got a unique combination of exceptional qualities that drive the culture at Fairfax.”

 

Andy Barnard

 

3. Brian Bradstreet

 

Brian's worry had become focused on a seemingly esoterie matter, reinsurance recoverables. Simply put, because Firfax's insurance companies had laid off a large portion of their risk to a host of reinsurance companies, as is standard insurance company practice, their ability to pay claims in full was contingent on the ability of those reinsurers to pay the reinsurance they had provided. By 2004 those reinsurance recoverables totalled over $8 billion.

 

“When I looked at that, I got scared. The more I looked into those reinsurance companies, the more scared I got. The investment markets were bubbly. There was a lot of crazy risk-taking. 

 

We ourselves on the fixed-income side were being offered Ponzi-type stuff that came with an AA or AAA rating. So I began to fear that the reinsurance companies we were relying on to pay us might buy this junk and get into trouble and we wouldn't get paid. That would

bor us right out of the water: And so I asked, How can we protect ourselves?

 

With the help of our analysts, I started researching all these reinsurance companies to see how mary treasury bonds they did or didn't own. If they

owned a lot, I could rest easy. If they didn't own a lot, that meant they might not be able to pay us. What we found was that pretty well all of them, including the best of them like AIG, were taking enormous risks. That was our initial screening. Then we started to dig more, company by company, and we realized they owned all these asset-backed, mortgage-backed, high-yield bonds, which were pronounced as safe as treasury bonds but were in fact pure risk.

 

One way to protect ourselves was to buy credit default swaps (CDSs), which were just appearing on the market around this time. They were basically bankruptcy insurance on the reinsurers. But I soon realized that we couldn't buy enough contracts on enough reinsurance companies to be diversified and fully protected. Then it occurred to me, Why don't we buy protection on the companies that are standing behind what the reinsurance companies are buying? 

 

If I was worried about the high-risk mortgage business, for example, why not bury insurance on the mortgage insurers in the United States? So we did. The next step was to buy insurance on the mortgage-lending companies like Fannie Mae and Freddie Mac, which were supposed to be government-backed but weren't in legal terms. Fannie Mae, for example, had $80 of exposure for every $1 of common equity, so it was a very good bet to fail.

 

We bought our first contracts in 2003 and our last ones in December 2007.

We just kept buying more and more, first five-year, then seven-year, because they were so cheap. By the end of 2006 we had invested $276 million in CDSs that the market valued at $72 million. At any other place I would have been kicked out on the street. Not here though. 

 

I remember going into an investment committee meeting where Prem asked, "What's the best idea we've got?" Francis Chou, who's a pretty shy guy, piped up, "Buy more credit default insurance." I didn't have the guts to say it.”

 

Brian Bradstreet

 

Edited October 4 by nwoodman

[UK]

13 minutes ago, nwoodman said:

Just finished this one, thanks @glider3834for the lend.  The three commentaries by Roger, Andy and Brian were superb. I figured we are among friend so reproduced them below.  Even though these were penned nearly 15 years ago, what struck me is the continuity of thought,

 

1. Roger Lace

 

For three years, day in, day out, Prem analyzed what companies were really worth: industrials, financials, every kind of business in Canada and the United States. He found it more like fun than work; he worked as much for the love of the game as for the money. He also made a number of lifelong friends, while never losing the chance to have a one-on-one training session with his mentor, John Watson. Such was the pleasure that, in 1977, he passed up a chance to take over as director of research for the lesser job of managing money for pension funds. His immediate superior was Tony Hamblin; Roger Lace and Brian Bradstreet were colleagues.

 

“I'm sure there were a few guys who just said they were value guys because they had to, whereas Prem felt strongly about it. John Watson worked me over in the formal sit-downs, but Prem worked me over pretty heavily in the daily chatter by the water cooler and in the office.

I was kind of neutral initially, a bit resistant, and he won me over by his rigorous, analytical approach. 

 

Where was Graham wrong? he kept asking, and since I couldn't find anything wrong, I was sold. I guess I would have to ask myself if that was Graham's doing or Prem's ability to convince people.

 

Prem was very outspoken, very enthusiastic, and he had an almost evangelical feeling about value investing. He was so outspoken and had so much conviction that I think some people got tired of hearing about it. But not the true believers like myself and Brian Bradstreet.

 

We bad to do a lot of internal and external presentations as analysts.

Prem pounded the table and did not take opposition lightly. Over the years, I suspect, a few people probably took him aside and said, "Hey, you're coming on a little too strong here," because he became a very good listener.

 

He took his persuasive powers and learned to point people in the right direction without being too heavy-handed. Once we got into portfolio management, Prem in particular wasn't one to modify his views in any way, and he took some pretty big positions in some pretty unpopular areas. I was of the same mindset, but I'm the type of guy who would rather switch than fight. If my superiors put their foot down, I went out of the room with my tail between my legs and did what I was told. Not Prem.

 

There were more and more guidelines and policies laid down from higher levels, but in the rare instance that you felt there should be some leeway, you were allowed to take it to the CEO or certain members of the board.

 

It was almost a joke because every other day, it seemed, Prem would be marching up to the boardroom to argue about the smallest details. And they always gave in, which was quite amazing.”

 

Roger Lace

 

 

2. Andy Barnard

 

In its early years, Odyssey Re began as a loose confederation of separately capitalized companies. In 2000, after the purchase of TIG Re, we restructured Odyssey onto a single, consolidated platform. Because of the numerous acquisitions from which Odyssey Re was created, the market was somewhat confused during this time as to what exactly was included in Odyssey, and what had been removed.

 

“In 2001, we took the company public in an IPO. Going public was a very helpful way for the company to communicate to the marketplace a new coherent identity and establish our brand awareness. In September 2001, the 9/11 attacks accelerated the hardening in the market that had begun to take place late in 1999. We had created a much more compelling platform by having one company with a billion dollars of capital and branches around the world. These steps allowed us to participate very effectively in the hardening market.

 

We went from writing about $150 million of premium when we started in 1996, to about $1 billion at the time we went public, to $2.5 billion three years later. The business that we wrote during this period has been very profitable.

 

Odyssey has certainly defied its skeptics. The various pieces we acquired and stitched together over the years had all been challenged companies at the time Fairfax acquired them for discount prices. The team at Odyssey engineered a remarkable turnaround, which confounded those who believed it was not possible to turn around struggling operations. We went public at $18 a share; Fairfax took us private eight years later at $65. We grew our book value over this period at more than a 20% compounded rate

- one of the best records in the industry.

 

Prem sees the best in everyone. He is generous spirited with a wonderful sense of humour. His analytic mind grasps the essential details of business quickly, yet he's an extraordinarily warm person with a remarkable ability to connect. He's got a unique combination of exceptional qualities that drive the culture at Fairfax.”

 

Andy Barnard

 

3. Brian Bradstreet

 

Brian's worry had become focused on a seemingly esoterie matter, reinsurance recoverables. Simply put, because Firfax's insurance companies had laid off a large portion of their risk to a host of reinsurance companies, as is standard insurance company practice, their ability to pay claims in full was contingent on the ability of those reinsurers to pay the reinsurance they had provided. By 2004 those reinsurance recoverables totalled over $8 billion.

 

“When I looked at that, I got scared. The more I looked into those reinsurance companies, the more scared I got. The investment markets were bubbly. There was a lot of crazy risk-taking. 

 

We ourselves on the fixed-income side were being offered Ponzi-type stuff that came with an AA or AAA rating. So I began to fear that the reinsurance companies we were relying on to pay us might buy this junk and get into trouble and we wouldn't get paid. That would

bor us right out of the water: And so I asked, How can we protect ourselves?

 

With the help of our analysts, I started researching all these reinsurance companies to see how mary treasury bonds they did or didn't own. If they

owned a lot, I could rest easy. If they didn't own a lot, that meant they might not be able to pay us. What we found was that pretty well all of them, including the best of them like AIG, were taking enormous risks. That was our initial screening. Then we started to dig more, company by company, and we realized they owned all these asset-backed, mortgage-backed, high-yield bonds, which were pronounced as safe as treasury bonds but were in fact pure risk.

 

One way to protect ourselves was to buy credit default swaps (CDSs), which were just appearing on the market around this time. They were basically bankruptcy insurance on the reinsurers. But I soon realized that we couldn't buy enough contracts on enough reinsurance companies to be diversified and fully protected. Then it occurred to me, Why don't we buy protection on the companies that are standing behind what the reinsurance companies are buying? 

 

If I was worried about the high-risk mortgage business, for example, why not bury insurance on the mortgage insurers in the United States? So we did. The next step was to buy insurance on the mortgage-lending companies like Fannie Mae and Freddie Mac, which were supposed to be government-backed but weren't in legal terms. Fannie Mae, for example, had $80 of exposure for every $1 of common equity, so it was a very good bet to fail.

 

We bought our first contracts in 2003 and our last ones in December 2007.

We just kept buying more and more, first five-year, then seven-year, because they were so cheap. By the end of 2006 we had invested $276 million in CDSs that the market valued at $72 million. At any other place I would have been kicked out on the street. Not here though. 

 

I remember going into an investment committee meeting where Prem asked, "What's the best idea we've got?" Francis Chou, who's a pretty shy guy, piped up, "Buy more credit default insurance." I didn't have the guts to say it.”

 

Brian Bradstreet

 

Nice, thanks!

[MarioP]

Thank you for that. I particularely appreciate the Brian Bradstreet explaination on how they come to buy the CDS before the financial collapse of 2008

[Xerxes]

@nwoodman

 

Is this the same book as the one below ? 

 

Odyssey_Group_Enduring_Momentum_FINAL_CMYK_05.18.2021.pdf (odysseygroup.com)

[nwoodman]

24 minutes ago, Xerxes said:

@nwoodman

 

Is this the same book as the one below ? 

 

Odyssey_Group_Enduring_Momentum_FINAL_CMYK_05.18.2021.pdf (odysseygroup.com)

[KFRCanuk]

I love how Brian Bradstreet organically found CDS's.

[Viking]

On 10/3/2024 at 11:58 PM, nwoodman said:

Just finished this one, thanks @glider3834for the lend.  The three commentaries by Roger, Andy and Brian were superb. I figured we are among friends so reproduced them below.  Even though these were penned nearly 15 years ago, what struck me is the continuity of thought.

 

1. Roger Lace

 

For three years, day in, day out, Prem analyzed what companies were really worth: industrials, financials, every kind of business in Canada and the United States. He found it more like fun than work; he worked as much for the love of the game as for the money. He also made a number of lifelong friends, while never losing the chance to have a one-on-one training session with his mentor, John Watson. Such was the pleasure that, in 1977, he passed up a chance to take over as director of research for the lesser job of managing money for pension funds. His immediate superior was Tony Hamblin; Roger Lace and Brian Bradstreet were colleagues.

 

“I'm sure there were a few guys who just said they were value guys because they had to, whereas Prem felt strongly about it. John Watson worked me over in the formal sit-downs, but Prem worked me over pretty heavily in the daily chatter by the water cooler and in the office.

I was kind of neutral initially, a bit resistant, and he won me over by his rigorous, analytical approach. 

 

Where was Graham wrong? he kept asking, and since I couldn't find anything wrong, I was sold. I guess I would have to ask myself if that was Graham's doing or Prem's ability to convince people.

 

Prem was very outspoken, very enthusiastic, and he had an almost evangelical feeling about value investing. He was so outspoken and had so much conviction that I think some people got tired of hearing about it. But not the true believers like myself and Brian Bradstreet.

 

We bad to do a lot of internal and external presentations as analysts.

Prem pounded the table and did not take opposition lightly. Over the years, I suspect, a few people probably took him aside and said, "Hey, you're coming on a little too strong here," because he became a very good listener.

 

He took his persuasive powers and learned to point people in the right direction without being too heavy-handed. Once we got into portfolio management, Prem in particular wasn't one to modify his views in any way, and he took some pretty big positions in some pretty unpopular areas. I was of the same mindset, but I'm the type of guy who would rather switch than fight. If my superiors put their foot down, I went out of the room with my tail between my legs and did what I was told. Not Prem.

 

There were more and more guidelines and policies laid down from higher levels, but in the rare instance that you felt there should be some leeway, you were allowed to take it to the CEO or certain members of the board.

 

It was almost a joke because every other day, it seemed, Prem would be marching up to the boardroom to argue about the smallest details. And they always gave in, which was quite amazing.”

 

Roger Lace

 

 

2. Andy Barnard

 

In its early years, Odyssey Re began as a loose confederation of separately capitalized companies. In 2000, after the purchase of TIG Re, we restructured Odyssey onto a single, consolidated platform. Because of the numerous acquisitions from which Odyssey Re was created, the market was somewhat confused during this time as to what exactly was included in Odyssey, and what had been removed.

 

“In 2001, we took the company public in an IPO. Going public was a very helpful way for the company to communicate to the marketplace a new coherent identity and establish our brand awareness. In September 2001, the 9/11 attacks accelerated the hardening in the market that had begun to take place late in 1999. We had created a much more compelling platform by having one company with a billion dollars of capital and branches around the world. These steps allowed us to participate very effectively in the hardening market.

 

We went from writing about $150 million of premium when we started in 1996, to about $1 billion at the time we went public, to $2.5 billion three years later. The business that we wrote during this period has been very profitable.

 

Odyssey has certainly defied its skeptics. The various pieces we acquired and stitched together over the years had all been challenged companies at the time Fairfax acquired them for discount prices. The team at Odyssey engineered a remarkable turnaround, which confounded those who believed it was not possible to turn around struggling operations. We went public at $18 a share; Fairfax took us private eight years later at $65. We grew our book value over this period at more than a 20% compounded rate

- one of the best records in the industry.

 

Prem sees the best in everyone. He is generous spirited with a wonderful sense of humour. His analytic mind grasps the essential details of business quickly, yet he's an extraordinarily warm person with a remarkable ability to connect. He's got a unique combination of exceptional qualities that drive the culture at Fairfax.”

 

Andy Barnard

 

3. Brian Bradstreet

 

Brian's worry had become focused on a seemingly esoterie matter, reinsurance recoverables. Simply put, because Firfax's insurance companies had laid off a large portion of their risk to a host of reinsurance companies, as is standard insurance company practice, their ability to pay claims in full was contingent on the ability of those reinsurers to pay the reinsurance they had provided. By 2004 those reinsurance recoverables totalled over $8 billion.

 

“When I looked at that, I got scared. The more I looked into those reinsurance companies, the more scared I got. The investment markets were bubbly. There was a lot of crazy risk-taking. 

 

We ourselves on the fixed-income side were being offered Ponzi-type stuff that came with an AA or AAA rating. So I began to fear that the reinsurance companies we were relying on to pay us might buy this junk and get into trouble and we wouldn't get paid. That would

bor us right out of the water: And so I asked, How can we protect ourselves?

 

With the help of our analysts, I started researching all these reinsurance companies to see how mary treasury bonds they did or didn't own. If they

owned a lot, I could rest easy. If they didn't own a lot, that meant they might not be able to pay us. What we found was that pretty well all of them, including the best of them like AIG, were taking enormous risks. That was our initial screening. Then we started to dig more, company by company, and we realized they owned all these asset-backed, mortgage-backed, high-yield bonds, which were pronounced as safe as treasury bonds but were in fact pure risk.

 

One way to protect ourselves was to buy credit default swaps (CDSs), which were just appearing on the market around this time. They were basically bankruptcy insurance on the reinsurers. But I soon realized that we couldn't buy enough contracts on enough reinsurance companies to be diversified and fully protected. Then it occurred to me, Why don't we buy protection on the companies that are standing behind what the reinsurance companies are buying? 

 

If I was worried about the high-risk mortgage business, for example, why not bury insurance on the mortgage insurers in the United States? So we did. The next step was to buy insurance on the mortgage-lending companies like Fannie Mae and Freddie Mac, which were supposed to be government-backed but weren't in legal terms. Fannie Mae, for example, had $80 of exposure for every $1 of common equity, so it was a very good bet to fail.

 

We bought our first contracts in 2003 and our last ones in December 2007.

We just kept buying more and more, first five-year, then seven-year, because they were so cheap. By the end of 2006 we had invested $276 million in CDSs that the market valued at $72 million. At any other place I would have been kicked out on the street. Not here though. 

 

I remember going into an investment committee meeting where Prem asked, "What's the best idea we've got?" Francis Chou, who's a pretty shy guy, piped up, "Buy more credit default insurance." I didn't have the guts to say it.”

 

Brian Bradstreet

 

 

@nwoodman I was lucky to get a copy of the book at this years AGM (at the silent auction/dinner the night before the AGM). The book does an outstanding job of walking the reader through Fairfax's first 25 years of existence. I understand Fairfax pretty well. This book added much more depth to my knowledge. Lots of great information on the key people at Fairfax (some of whom are still there), including where they got their start/training. It really is a crazy (amazing) story. It is unfortunate there is not a digital copy available for people to read/easily access. 

 

I really liked learning about the importance of Markel to Fairfax's start and first few years. It is interesting to compare the two companies today. Fairfax not only caught Markel, but has blown right by them in terms of all key metrics. Most importantly, Fairfax looks much better positioned than Markel today (people, structure, execution, results, prospects).

Edited October 7 by Viking

[nwoodman]

23 hours ago, Viking said:

I really liked learning about the importance of Markel to Fairfax's start and first few years. It is interesting to compare the two companies today. Fairfax not only caught Markel, but has blown right by them in terms of all key metrics. Most importantly, Fairfax looks much better positioned than Markel today (people, structure, execution, results, prospects).

It's never just one thing,  but Allied World may have been one of those "sliding door" moments for both companies.  

[Viking]

15 minutes ago, nwoodman said:

It's never just one thing,  but Allied World may have been one of those "sliding door" moments for both companies.  

 

I agree. I also think the transition at Markel from being Markel (family) run to the current management structure also explains a big part of the underperformance in recent years (when compared to Fairfax). Prem is still firmly in charge at Fairfax and has been instrumental in the renaissance the company has experienced over the past 6 years. I am less impressed by Gaynor the longer he is at the helm of Markel (and I find Gaynor's constant and over-the-top marketing to be more than a little nauseating - actually a little insulting). Succession planning is so important (and unknowable). 

 

PS: At Fairfax's AGM this year, I also found Prem's comments about long term shareholders to be a little off-putting. (My view is a rational investor SHOULD have sold Fairfax when management lost their way with investments. To pretend otherwise is an insult to their intelligence.)

Edited October 8 by Viking

[nwoodman]

54 minutes ago, Viking said:

I am less impressed by Gaynor the longer he is at the helm of Markel (and I find Gaynor's constant and over-the-top marketing to be more than a little nauseating - actually a little insulting). Succession planning is so important (and unknowable). 

. True, I am sure if we put in the work there we could demonstrate  a negative correlation between “gas bagging” and performance.  Thank goodness Prem has been not been doing the rounds like he was a few years back.  
 

Coming back to the book,  that is what struck me about the early years of Fairfax, “let the results do the talking”.

Edited October 8 by nwoodman