Fairfax - A Deep Dive on Management and Culture

[Viking]

2 hours ago, Maverick47 said:

I don’t have a great understanding of all the different executives at Fairfax, so thanks @Viking for this overview.  Just as an aside, I didn’t realize Paul Rivett was such a longtime coworker with Prem.  Out of idle curiosity I googled him and turns out he is CEO and president of Western Investments of Canada.  They clearly are attempting to follow the Fairfax playbook, with an insurance company base (Fortress) and a value investing framework.

 

Pretty early days, and even an aggressive premium growth target for Fortress to $100M by 2028 makes them small potatoes by comparison with Fairfax.

 

If imitation is the sincerest form of flattery, even the loss of this one executive is a credit to the business model.

 

I don’t know much about Francis Chou’s connection to Fairfax…was he part of Hamblin Watsa?  He gets called out in the GFC storyline for being a solid proponent of buying Credit Default swaps.  With his purchase of StoneTrust Insurance he would appear to be further down the road to creating a Fairfax-like company than Paul Rivett is with Western Investments. Too bad StoneTrust is not publicly traded, otherwise I’d be happy to consider being a shareholder…. 

I am also really growing to appreciate the value of decentralized insurance subsidiaries.  There is just great value in having more than a dozen insurance subsidiaries with their executives all steeped in the Fairfax culture and focused on disciplined underwriting.  With an emphasis on promoting from within, this makes it more likely to be a sustainable model going forward.

 

I worked for an insurance company with everything centralized and succession planning was somewhat hit or miss.  It was never clear what executive would make a good CEO when one was needed…they typically came from within from a lower level…such as a specialist in accounting, or finance, or even legal.  They each would have been given rotations through divisions where they would get some general management experience for a few years before getting an opportunity to be CEO.

 

A few didn’t seem to be great fits, some were too old to realistically put their stamp on the company since there was a hard age limit of 65,  and in other cases, unexpected deaths, exits for personal reasons, or for poor business performance,  led to a bit of a revolving door at the top until finally the Board selected an executive from outside the insurance industry altogether.  That last choice was the nail in the coffin, and the company was sold in an auction process a few years later.

 

The Fairfax structure strikes me as likely being a much better environment than what I experienced.

@Maverick47, decentralization is a big deal. It takes many years to put in place. First you need the right person running the operation. And then they need to get the rest of the organization on board. Not easy. Fairfax got going down this road in 2011, when Andy took over the insurance group. Here we are 15 years later - and 275 profit centers. 
 

I see a similar parallel with the investments. The quality of the people (collectively) running the different equities and non-insurance consolidated holdings is much improved over 10 or 15 years ago. And given how fast Fairfax is growing - that is a very good thing. 
 

The bigger theme is “optimization”. Decentralization + optimization is nirvana for the Fairfax/BRK business model. Excess cash. Growing over time. Allocated across the organization to the best available opportunity…

Edited 15 hours ago by Viking

[Txvestor]

One thing that all Fairfax investors need to keep in mind. Mr. Watsa's holding period for his family shares is forever, and he has stated that publicly and that the continuity after him is his family. They have a dividend to support their lifestyle and time is almost inconsequential to them.
And unlike most other investments where you can take a 5 or 10 or even 15 year perspective, I think Fairfax is one of those that could frustrate you even longer and genuinely test your patience. 
Also given the kind of companies they invest in, cyclicals, turnarounds, leveraged etc, it's not always a sure thing and neither is timeline apparently a major concern.
Take resolute forest products., or blackberry, They were failures as far as investments are concerned, but I believe even worse is it took a decade or more to realize that. 
That can be true even with potential successes, Fairfax India/BIAL (or even Eurobank for instance). In the former's case Shareholders are waiting 11+ yrs with sub par returns whilst they are told shares are cheap and do not reflect intrinsic value. They may very well be, but I haven't seen much done to realize this value. 
So that's the level of patience that you require. I'm speaking as a shareholder of Fairfax since 2008. I've seen good bad and raging bull market in this time. Even with the run over the last five years, compared to indexing, I am still behind on the portion of shares I bought then.

So if you are investing money you need for a college expenses, or retirement or something of the sort with a fixed timeline, you need to take heed, even if it's a decade out. 

Edited 1 hour ago by Txvestor