Warren Buffet - Series II

On 18th Feb 2010, the announcement that Fairfax Financial Holdings (FRFHF) is to acquire Zenith National Insurance Corp. (ZNT) for about $1.3 billion in cash.

The deal is interesting because Fairfax, a Canadian insurance company, is run by Prem Watsa, who has been dubbed “the next Warren Buffett”. Buffett built Berkshire Hathaway (BRK.A) into one of the world’s largest corporations by buying up insurance assets and investing the float those assets generated into various companies such as Coca-Cola, (KO) American Express (AXP) and The Washington Post Company (WPO). In addition Berkshire owns about 80 businesses in such diverse industries as carpeting, bricks, candy and vacuum cleaners.

Prem Watsa was born in India in 1950 and is the founder, chairman and chief executive of Fairfax Financial Holdings. His track record of investment success has resulted in him picking up the monicker of being the “Canadian version” of the Oracle of Omaha. Watsa is not very widely known outside of Canada but is well regarded and followed among value investing circles. He has an incredibly prescient ability to analyze the financial markets. Some of his most famous calls include selling half his stocks before the 1987 crash and buying S&P puts before the index fell off a cliff in 2000. He also bet against the Japanese Nikkei but his biggest success came just recently when he bought credit default swaps on the premise that banks and financial institutions would struggle if a credit and liquidity crisis arose.

Since 2005, Fairfax revenue has stayed at roughly $5 billion. Net earnings, however, have grown at 100% compounded annually, from $53 million in 2005 to $856 million in 2008. The market price of Fairfax shares listed on the NYSE has doubled in value over this period. According to filings, Watsa has returned a compounded 23% annualized return in book value between 1993 and 2008. There are very few who can match a record like that. Over the last ten years, Fairfax’s wholly owned investment management company Hamblin Watsa Investment Counsel has produced a common stock investment return of 19.1% compounded annually, against a (1.4%) decline for the S&P index over the same period.

Fairfax’s latest quarterly filing shows a lot of overlap with Buffett in terms of common stock holdings. The company has positions in Berkshire Hathaway (BRK.A), Burlington Northern Santa Fe (which will now be converted into Berkshire shares and cash), General Electric (GE), Kraft (KFT), Wal-Mart (WMT) and Wells Fargo (WFC). Some other positions of interest are Dell (DELL) - which is the second biggest position at close to $500 million, Overstock.com (OSTK), Pfizer (PFE) and Merck (MRK). The company also recently bought a position in International Coal Group (ICO).