Watsa Says Trump Era Time to Go on Offense With $4.9 Billion Bet

  • Fairfax’s acquisition boosts investment portfolio for Watsa
  • CEO sees a value-oriented, stock picker’s market under Trump

Prem Watsa, the Canadian investor who just agreed to buy a Swiss company in his largest deal, called the $4.9 billion agreement a bet on U.S. growth under President-elect Donald Trump.

The purchase of Allied World Assurance Co. by Watsa’s Toronto-based Fairfax Financial Holdings Ltd. will add to insurance operations in the U.S. while also boosting the size of his investment portfolio at a key time to about $39 billion from less than $30 billion.

“We’re expecting to play offense,” Watsa, 66, said in a conference call Monday, outlining his investment approach. “In the last few years we’ve played defense.”

Fairfax has posted average annual investment returns of 8.6 percent over the past three decades. However, he’s struggled to match that record in recent years, lamenting low growth and the threat of deflation. His enthusiasm increased, however, after U.S. voters elected Trump, who pledged to reduce corporate taxes and reduce regulation to stimulate the economy.

Under Trump, “we just think the downside is significantly reduced, and we think in a market like that in the U.S., and perhaps elsewhere, it becomes a value-oriented stock picker’s market,” Watsa said. “It is a market that we’ve excelled in for 20 years. We’ve got a team that has done really well in that market and we expect it to do very well in the future.”

Reduced Hedging

Watsa takes inspiration from U.S. value investor Warren Buffett in using insurance premiums to invest in other industries, often with contrarian wagers. Fairfax stock is trading for more than four times its 2002 closing price, even after slipping this year.

The Allied deal extends Watsa’s shift following the Nov. 8 vote. He said three days after Election Day that Fairfax cut equity hedges in half. And he intends to shorten the duration of bonds in the holding company’s portfolio.

The investor, born in Hyderabad, India, foresaw declines in the creditworthiness of U.S. banks and insurers before the 2008 financial crisis, even as the market boomed. His 2014 prediction that the rally in technology stocks would “end in tears" for investors hasn’t proved as prescient so far.

Tech Predictions

While Twitter Inc. has lost more than half its market value since his pronouncement, Facebook Inc. and Netflix Inc. have surged. Fairfax is also among the largest holders of BlackBerry Ltd. stock, and the Waterloo, Ontario-based mobile company has declined this year.

Watsa is also following Buffett’s approach of leaving management intact after a takeover. The main reason for agreeing to buy Zug, Switzerland-based Allied was the track record of Scott Carmilani, its chief executive officer, Watsa said on the call.

Allied World has posted an average combined ratio of about 87 over the past decade, meaning an underwriting profit of 13 cents for each premium dollar. The insurer helps guard clients including corporate executives against lawsuits and counts North America as its largest market. Watsa said he’s eager for growth there after announcing a deal weeks before the election to buy units from American International Group Inc. in nations including Turkey and Argentina.

The election of Trump along with Republican majorities in the Congress “has the strong potential to make the business climate for growth in the U.S. great again relative to the rest of the world,” Watsa said. “Our businesses in the U.S., including Allied World, will benefit from any such positive economic development.”

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