Canadian Underwriter

Fairfax’s Watsa unruffled by pandemic, one of three “black swan” events in 2020

April 17, 2020   by Greg Meckbach

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The COVID-19 pandemic was one of three “black swans” to hit the industry so far in 2020 but despite the uncertainty and panic, things will return to normal, suggests Prem Watsa, CEO of Toronto-based Fairfax Financial Holdings Ltd.

“The U.S. and world economy will get started again and normalcy will return,” Watsa said Thursday during the annual general meeting of Fairfax, the corporate owner of insurers Northbridge, Allied World and OdysseyRe, among others. “We don’t know when, but it will happen.”

Watsa currently has his eye on life beyond the coronavirus.  “Social distancing is working, the curve is being flattened, we will get even faster testing, which is now in five minutes,” he said. “We will have medicine to fight the spread of COVID-19 and we will get a vaccine.”

Fairfax has not officially reported its exact financial results for 2020 Q1, but did say Apr. 14 that it expects to report a net loss of US$1.4 billion despite having combined ratios across of less than 100% across its insurance operations. This is because the value of stocks and bonds it holds in its investment portfolio dropped about US$1.5 billion.

“Extreme uncertainty, in my experience, leads to panic and this is what happened as the U.S. stock market dropped by 36% in 21 days, the fastest decline since October 1929,” Watsa said of the first quarter.

The economy has had three “black swan” events in 2020 so far, he added.

The first was coronavirus impacting China, then the rest of Asia, Europe and then North America. The second was the collapse in oil prices, and the third was business shutdowns that “locked down” most of the world economy.

“Have we experienced this before?” said Watsa, who founded Fairfax in 1985. “By definition no, otherwise it would not have been unprecedented. Over my career, three events come to mind that were also unprecedented and created great uncertainty that led to panic in the financial markets.”

The most recent was the subprime mortgage-induced financial crisis of 2008-09, in which “financial institutions were falling down like ninepins,” said Watsa.

Before that came Sept. 11, 2001, when Al Qaeda operatives hijacked four civilian airliners, two of which brought down the World Trade Center while a third crashed into the main headquarters of the U.S. Armed Services.

“New York City felt like it would never be safe again,” Watsa said Apr. 16  of the Sept. 11, 2001 attacks. “Stock markets closed for a week. No planes were allowed to land in the United States for a week. Insurance for large buildings like the Sears building in Chicago was no longer available. Fear was palpable. Extreme uncertainty led to panic.”

The earliest event Watsa mentioned was in 1974, when OPEC raised oil prices from $2 to $10 per barrel.

“Stock prices went down by approximately 50%, from the 1972 high and depression was in the air. All of this is to say that extreme uncertainty causes panic but it also creates great opportunity.  The lesson from the past is [the COVID-19 pandemic] too shall pass.”

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