Fairfax Financial is the New Berkshire Hathaway: A Wall Street Transcript Interview with Willem Schilpzand, an Associate Portfolio Manager and Analyst at Alpine Capital Research

Wall Street Transcript

67 WALL STREET, New York - November 25, 2013 - The Wall Street Transcript has just published its current Investing Strategies Report. This special feature contains expert industry commentary through in-depth interviews with highly experienced Money Managers. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics covered: Large-Cap, Deep-Value - Bottom-Up Stock Selection - Repurchase Activity - Value Oriented Strategy - Investment Risk Management Strategies - High-Quality Blue-Chip Companies - Free Cash Flow Yield - Alternative Investing, Ultimate Returns

Companies include: Humana Inc. (HUM), Unitedhealth Group, Inc. (UNH), Intel Corporation (INTC), Microsoft Corporation (MSFT), Google Inc. (GOOG), Taiwan Semiconductor Manufactu (TSM), Berkshire Hathaway Inc. (BRK-A)

In the following excerpt from the Investing Strategies Report, an experienced portfolio manager discusses his investing methodology and current top picks:

TWST: Is there another stock you'd like to discuss?

Mr. Schilpzand: Another stock that we still find interesting is Fairfax Financial (FFH.TO). Fairfax is a property casualty insurance company run by Prem Watsa from Canada. When we look at the insurance space, we really look for a management team that has competencies on the underwriting side and competencies on the investment side. The underwriting side is critical, because you want to make sure that you own a company with a management team that doesn't get carried away in soft insurance pricing markets.

During soft markets, the premiums received upon writing the policies oftentimes do not compensate for the risk of loss on those policies in the out years. This lack of underwriting discipline destroys capital and reduces that company's ability to write more business in the future and reduces the opportunity to profitably invest its float.

Needless to say, you want to make sure that you invest alongside a management team that understands that and is patient and diligent in their underwriting. Fairfax is definitely that. They have a significant amount of excess underwriting capacity that they can use when insurance pricing firms in the future. This added premium would leverage a relatively fixed cost base and add greatly to Fairfax's earnings power. Higher future insurance pricing is likely as low interest rates reduce an insurance company's return on their float, and to make up for this lost profitability insurance companies have to increase their profitability on the underwriting side.

The second part of investing in insurance companies is the ability of the management team to allocate capital. We all know the Buffett model, where a lot of float comes in and that float is profitably invested through Berkshire (BRK-A). Fairfax has a similar model. They have been tremendous investors over the years, and we expect that to continue in the future. Fairfax is currently very defensively positioned with their entire equity book hedged. This hedging has been a drag on investment returns the past years and has led to lower than trend book value per share growth.

Fairfax has historically shown to be a very astute and opportunistic investor, and we believe the company has positioned itself very well to take advantage of any opportunities that might come along in the near and intermediate future...

For more of this interview and many others visit the Wall Street Transcript - a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs, portfolio managers and research analysts. This special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

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