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The Once and Future C&F - Fair and Friendly
CHAPTER 5 Fair and Friendly
F airfax refers to the time right around the Crum & Forster acquisition as the beginning of the “Seven Lean Years” - when several of their earlier acquisitions manifested problems with reserves, reinsurance collectability and business plans that needed rehabilitation — along with the commensurate stress on capital, cash flow, credit ratings and share price. This is not to say that buying C&F precipitated the Seven Lean Years, but it is safe to say it did not help! If the early 1980s were an inopportune period during which to buy an insurance company, the late 1990s were not much better. The magnitude of the insurance industry’s mistakes from the 1970s and 1980s was just coming into full view. All insurance companies that wrote commercial casualty business were, to varying degrees, wrestling with these problems. You may be saying, “Surely Good Old So-and-So never had these problems,” but look closer: Good Old So-and-So was right there in the mix too. Even venerable Lloyds of London stared at the brink. However, companies were not equally capable of working their way back to full health. The defining characteristic of Fairfax founder Prem Watsa is his infectious optimism, paired with a keen sense of situational awareness. He believed
that — over the long term — we could work our way through any rough patch, no matter how bad. He made you want to walk through walls to prove him right. Prem’s vision — along with his commitment to do what it would take - and his ability to make the rest of us believe — made all the difference in navigating the lean years. By 1998, Prem had already come a long way. He arrived in Canada in 1972 — from Hyderabad, in southern India — with just enough money to buy an entrée at McDonald’s. Prem supported himself in his graduate business school studies by selling air conditioners. His first insurance job was in the investment department of Confederated Life, where he learned the practical side of the business. His time at Confederated also gave him the idea that running his own company might be a better match for his personality, so Prem started Fairfax in 1985. His assistant at the time came up with the name as a portmanteau highlighting his approach of engaging in “fair and friendly acquisitions.” This strategy was spectacularly successful: book value per share grew from $1.5 in 1985 to $112 in 1998. Prem is a value investor in the school of Ben Graham, who famously recommended buying cigar butt companies (his analogy for finding value
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