Prem Watsa’s Fairfax Playbook: Insights from 38 Years of Shareholder Letters

How Discipline, Contrarian Bets, and a People-First Culture Built a Value Investing Powerhouse

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Prem Watsa, often dubbed “Canada’s Warren Buffett,” has guided Fairfax Financial Holdings since 1985, transforming it from a small Canadian insurer into a global property and casualty powerhouse with $32 billion in gross written premiums by 2023. Over 38 years, Fairfax’s book value per share has compounded at 18.9% annually, and its stock price at 18.2%, a testament to Watsa’s disciplined value investing and decentralized management approach. His annual shareholder letters, rich with insights on markets, underwriting, and culture, are a masterclass for investors and business leaders. Having studied Watsa’s letters from 1985 to 2024, I’ve distilled eight enduring lessons that illuminate his approach to building long-term wealth and resilience.

Source: Investors Globe

1. Insurance Float Is a Superpower
   Watsa modeled Fairfax after Berkshire Hathaway, leveraging insurance float—premiums collected before claims are paid—as a low-cost source of capital for investments. In his 2022 letter, he highlighted how Fairfax’s float grew fivefold since 2010, reaching $27.6 billion in gross premiums, fueling its investment portfolio. Unlike many insurers, Fairfax invests this float with a value-oriented, total-return focus, seeking undervalued assets with long-term potential. This strategy powered record net earnings of $4.4 billion in 2023, driven by $1.5 billion in underwriting profit and savvy investments.

2. Value Investing Requires Courage
   Watsa’s investment philosophy is rooted in Benjamin Graham’s principles: buy undervalued assets with a margin of safety and hold for the long term. His letters often detail contrarian bets, like shorting the housing bubble via credit default swaps in 2007, which yielded $3 billion in gains. In 2023, he avoided overhyped “Magnificent 7” stocks, citing their 33x earnings valuations, and instead focused on stakes like Occidental Petroleum and Orla Mining. These moves reflect his willingness to zig when markets zag, even if it means short-term underperformance.

3. Underwriting Discipline Is Non-Negotiable
   Watsa emphasizes that profitable underwriting is the bedrock of Fairfax’s success. In 2023, Fairfax achieved a record $1.5 billion underwriting profit, with major subsidiaries like Northbridge and Allied World posting combined ratios of 91% and 89%, respectively, despite $900 million in catastrophe losses. He credits this to decentralized management and a focus on writing only profitable business, as seen when Odyssey Group reduced premiums by 3% in 2023 to avoid underpriced risks. Since 2010, under Andy Barnard’s leadership, Fairfax has maintained combined ratios below 100% in all but two years.

4. A Strong Balance Sheet Is Your Armor
   Watsa’s letters repeatedly stress the importance of financial resilience. In 2020, Fairfax weathered COVID-19 losses of $669 million and a market crash with $1 billion in cash, no near-term debt maturities, and $2 billion in unused credit lines. By 2023, Fairfax’s debt-to-capital ratio was a modest 23.1%, and its holding company held $1.7 billion in cash and marketable securities. This fortress-like balance sheet allowed Fairfax to seize opportunities, like acquiring Gulf Insurance in 2023 for $860 million, enhancing its Middle East presence.

5. Culture Drives Performance
   Watsa’s letters reveal a deep commitment to people and culture. In 2023, he added the Golden Rule—“treat others as we would want to be treated”—to Fairfax’s Guiding Principles, reflecting its emphasis on fairness. Fairfax’s employee share ownership program has created wealth, with some employees amassing 4,000 shares worth CAD$4.9 million by 2023. Watsa’s decentralized structure empowers leaders like Peter Clarke and Andy Barnard, fostering accountability and innovation across Fairfax’s global operations.

6. Learn from Setbacks
   Watsa is candid about mistakes, using them as fuel for improvement. His 2001–2005 letters detail painful losses from the dot-com bust, Enron’s collapse, and 9/11 claims, which led to a negative return on equity in 2001. These setbacks prompted Fairfax to deleverage, refine its investment process, and strengthen reserves. By 2007, Watsa’s foresight in shorting the credit bubble turned losses into gains. His transparency about errors, like overpaying for certain acquisitions, builds trust with shareholders.

7. Focus on the Long Term
   Watsa’s letters dismiss short-term market noise, focusing on Fairfax’s goal of 15% annual book value growth over decades. In 2019, he noted that Fairfax’s insurance operations had a combined ratio below 100% for 14 years, despite volatile markets. His long-term bets, like Digit Insurance, which grew from a startup to $1 billion in premiums by 2023, reflect this patience. Even during the 2020 pandemic, Watsa stayed the course, avoiding panic sales and positioning Fairfax for a record 2021.

8. Adapt to Change Thoughtfully
   While Watsa’s core principles are timeless, he adapts to new realities. The 2023 adoption of IFRS 17, which introduced discounting of insurance liabilities, was a major accounting shift Fairfax embraced despite Watsa’s reservations about discounting. His investment in Digit Insurance, a tech-driven insurer, shows openness to digital disruption. Yet, Watsa remains cautious, avoiding speculative trends like overvalued tech stocks in 2023, ensuring Fairfax evolves without abandoning its value roots.

Final Thoughts

Prem Watsa’s annual letters are a masterclass in disciplined, long-term wealth creation. His 38-year track record, compounding Fairfax’s book value at 18.9% annually, underscores the power of blending value investing with insurance expertise and a people-first culture. Central to his success is his patience in betting on mispriced assets, a strategy that delivers outsized rewards when markets eventually recognize true value. Yet, as Watsa’s approach suggests, quality matters. While mispriced opportunities are key, chasing cheap stocks without durable competitive advantages or strong management can lead to pitfalls. High-quality stocks, often carrying a premium, justify their price through consistent earnings growth and resilience, aligning with Watsa’s focus on businesses with strong fundamentals. His letters remind us that true value investing balances patience with discernment—buying quality at the right price and holding for the long haul. As Watsa wrote in 2023, “We are truly blessed to have loyal, long-term shareholders like you.” His legacy teaches us that trust, forged through principled investing, is the ultimate reward.

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