Watsa's Wager on Equity Slump Sends Fairfax Financial to Record

  • Contrarian investments paying off amid global market upheaval
  • Beating Berkshire with stock up almost 8% in past year

Fairfax Financial Holdings Ltd. is surging near a record high as Chief Executive Officer Prem Watsa’s bearish bets pay off amid global market turmoil.

The insurance and investment firm rose 0.4 percent to C$717.96 for a market value of C$16.9 billion ($12.2 billion) at 12:15 p.m. in Toronto after climbing to a record C$734.91 on Feb. 2. The stock is up 7.6 percent in the past year, compared with an 8.6 percent slide in the Standard & Poor’s 500 Index and a 15 percent decline in Warren Buffett’s Berkshire Hathaway Inc., to which the Toronto-based firm is often compared.

Fairfax is benefiting from defenses Watsa erected starting in 2011, when he foresaw market volatility and declining inflation worldwide. Watsa has long been a contrarian investor, wagering on a rebound in floundering smartphone-maker BlackBerry Ltd. and Irish lenders after the financial crisis, and against a booming U.S. mortgage market before the 2008 crash. Watsa, 65, didn’t respond to e-mails and phone call requests for comment.

"While we hope the world economy muddles through," Watsa wrote in his 2015 annual letter to shareholders in March, "we continue to protect our company from the significant unintended consequences that prevail." Watsa, was concernedabout deflation and that a rising U.S. currency would curb earnings for U.S. companies abroad amid overvalued stock markets.

‘Unconventional Risks’

"Prem tends to take large, unconventional risks," Bloomberg Intelligence analyst Lindsay Dutch said in an e-mail. "Fairfax’s equity hedges hurt investment results in 2013, but have already begun to pay off amid market volatility and economic concerns."

Fairfax held $299 million in total return swap short positions tied to equity indexes as of Sept. 30, 2015, according to financial documents. In the first nine months of last year, the company gained $611 million on these and equity short bets, up from $108 million in the prior year period. In the last 12 months, every single major global index has declined except for Argentina’s, data compiled by Bloomberg show.

Watsa has made accurate contrarian predictions before. He purchased credit-default swaps worth about $198 million on U.S. banks and insurers in the years leading up to 2007. The swaps became more valuable as the subprime mortgage market collapsed and banks began to fall, and by 2008 were worth $2.1 billion.

"Some of you have wondered -- sometimes loudly -- why we bother with these hedges and credit default swaps," Watsa wrote in the 2006 annual report. "This insurance policy may pay dividends -- perhaps sooner than you think!"

Earnings Ahead

One of the company’s more recent bets is also in the money, after some initial pain. Fairfax led the financing for smartphone maker BlackBerry in November 2013, and is now its second-largest shareholder with a 9 percent stake. The Waterloo-Ontario based company has risen 50 percent since Fairfax’s investment. Watsa, who uses a BlackBerry Passport, has said in the past that he believes in the company’s long-term success.

Fairfax reported record underwriting profit of $552 million and record net earnings of $1.6 billion in 2014, the last full year of results. The company reports fourth-quarter results Feb. 18.

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