Fairfax Financial

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Fairfax Financial Holdings Limited

Type	Public: (TSX: FFH, NYSE: FFH)
Founded	1985
Headquarters	Toronto, Ontario, Canada
Key people	V. Prem Watsa, Chairman/CEO
Industry	insurance
Products	property and casualty insurance
Revenue	▲ US$8.0 billion (2008)
Net income	▲ US$1.5 billion (2008)
Employees	8,200
Website	www.fairfax.ca

Fairfax Financial Holdings Limited (TSX: FFH NYSE: FFH) is a financial holding company based in Toronto, Ontario, which is engaged in property, casualty, and life insurance and reinsurance, investment management, and insurance claims management. The company operates primarily through several subsidiaries, including Odyssey Re, Northbridge Financial, and Crum & Forster.

As of December 31, 2008, Fairfax had total assets of approximately $27.3 billion, and its revenue for the prior twelve months was approximately $8.0 billion. Over the last 22 years (that is, since present management took over - until fiscal year Dec. 31, 2007), the company had a compound growth rate of approximately 26% in book value per share.^[1]

Fairfax Financial has worldwide over 8,200 employees (5,000 of them work throughout the United States). There are just 30 employees at head office in Toronto.

This article may contain original research or unverified claims. Please improve the article by adding references. See the talk page for details. (January 2008)

Contents 1 Corporate Governance 1.1 Board of Directors 1.2 Officers 2 History 3 Subprime mortgage bubble 4 Fairfax - Financial Results 5 Credit Ratings 6 Hamblin Watsa Investment Council Ltd.(HWIC) 6.1 HWIC bet against the Housing Bubble 7 Subsidiaries 8 Other Investments 8.1 Canadian common stock holdings 8.2 Common stock holdings 8.3 Other notable transactions 9 Foundations 10 Trivia 11 Articles 12 Videos 13 External links 14 Regulatory Filings 15 References

[edit] Corporate Governance

[edit] Board of Directors

• Prem Watsa ^[2] Chairman and Chief Executive Officer
• Brandon W. Sweitzer Senior Fellow U.S. Chamber of Commerce
• Paul L. Murray President, Pinesmoke Investments
• David L. Johnston President and Vice-Chancellor, University of Waterloo
• Alan D. Horn Chairman, Rogers Communications Inc. and President and CEO, Rogers Telecommunications Ltd (as of April 2008)
• Robert J. Gunn Corporate Director
• Anthony F. Griffiths Corporate Director

[edit] Officers

• Prem Watsa Chairman and Chief Executive Officer
• Bradley P. Martin Vice President, Chief Operating Officer and Corporate Secretary
• Greg Taylor Vice President and Chief Financial Officer
• Peter Clarke Vice President and Chief Risk Officer
• Jean Cloutier Vice President and Chief Actuary
• David Bonham Vice President, Financial Reporting
• Ronald Schokking Vice President and Treasurer
• Paul Rivett Vice President and Chief Legal Officer
• Eric P. Salsberg Vice President, Corporate Affairs
• Hank Edmiston Vice President, Regulatory Affairs
• Trevor J. Ambridge Vice President
• M. Jane Williamson Vice President
• John Cassil Vice President

Source: Fairfax - Corporate Profile

[edit] History

Fairfax Financial Holdings Ltd. (“Fairfax”) was incorporated under the Canada Corporations Act on March 13, 1951 and continued under the Canada Business Corporations Act in 1976. Fairfax's original name was Markel Service of Canada Ltd., The name was subsequently changed to Markel Financial Holdings Ltd. and, in May 1987, to their current name of Fairfax Financial Holdings Ltd.^[3]

Fairfax is led by Chairman and CEO Prem Watsa. Watsa controls nearly half of Fairfax; his unorthodox business strategies have been compared to those of Warren Buffett.^[4][5] Fairfax is similar to Leucadia National Corporation (NYSE:LUK) and Markel Corp (NYSE:MKL). Leucadia and Markel are well regarded in the value investor community of Benjamin Graham, Warren Buffett, Charlie Munger and David Dodd. Leucadia is known as a "mini Berkshire Hathaway" with an average annual return of over 22%.

Fairfax Financial's investment team at "Hamblin Watsa Investment Council" (HWIC), an affiliate of Fairfax has achieved similar outstanding long term results. From 1985 to the end of 2007, Fairfax Financial had a compound growth rate of approximately 26% in book value per share, it's about 150 times what Fairfax began with in 1985.^[6]

V. Prem Watsa was born in 1950 in Hyderabad, India. Watsa eventually trained to be a chemical engineer. He graduated from the Indian Institute of Technology Madras in 1971/1972 with a bachelor's degree in Chemical Engineering. Watsa changed his path in 1972, however, moving to London, Ontario, where his older brother resided. Watsa's dad figured prospects were limited in India, so he told him that he, too, should go to Canada. Thereafter Watsa enrolled in the MBA program at the University of Western Ontario and obtained his Master Degree in Business Administration.

Prem Watsa's professional career began in 1974 when he joined Confederation Life Insurance Co. in Toronto, where he quickly moved from his position as an investment and research analyst to one of a stock portfolio manager for pension clients. His first boss at Confed, John Watson, handed him Benjamin Graham's The Intelligent Investor, the classic book of value investing. Watsa was a Vice President of Confederation Life Investment Counsel from 1974 to 1983.

In 1983, with almost ten years of experience under his belt, Watsa signed on with GW Asset Management (Gardiner Watson), a start-up asset management firm in Toronto. He served as Vice President of GW Asset Management from 1983 to 1984. At Gardiner Watson, Watsa met the talented Francis Chou in 1984.

Chou was also born in India and immigrated to Canada in 1976 with only $200 in his pocket. Success and a tidy personal fortune have come to Francis Chou through a remarkable Forrest Gump (character) type of odyssey. Initially, Francis worked as a telephone repair man and technician for seven years at Bell Canada. In the late 1970s, Chou became interested, as a hobby, in investing and discovered Ben Graham and his book Security Analysis, as well as the methodology of Warren Buffett. In July 1981, Francis Chou, who had only his a high school diploma under his belt, set up an investment club with seven co-workers and $51,000 in capital. By 1986, it had grown to about $1.7 million when the original investment club was converted to a mutual fund, Chou Associates. Chou left Bell Canada in 1984 and became a retail analyst at GW Asset Management (after 18 months at GW, Chou joined Prem Watsa at Fairfax Financial as one of its original investors).

In 1984, Prem Watsa left GW Asset Management to found his own asset management firm, Hamblin Watsa Investment Counsel Ltd. (now fully owned by Fairfax) together with his former boss from Confed, Tony Hamblin. Tony was the Chief Investment Officer at Confed. The five founding partners were: Tony Hamblin, Prem Watsa, Roger Lace, Brian Bradstreet and Frances Burke. All former colleagues from Confed are still with him today at HWIC. Francis Chou is an associate at Hamblin Watsa. In terms of results of long-term investments of funds of clients, his company ranked in the top 10% across Canada.

In 1985, Prem Watsa took control of Markel Financial, a Canadian-based specialist in trucking insurance. The company was controlled by the Virginia-based Markel family. The company was almost bankrupt, but Watsa figured it just needed a capital injection. Watsa hit it off with Steven Markel, who is still a friend. In May 1987, he re-organized Markel Financial Holdings Limited and re-named it Fairfax Financial Holdings Limited (FAIRFAX: short for "fair, friendly acquisitions"). Prem Watsa has served as Chairman and Chief Executive Officer of Fairfax Financial Holdings Limited (formerly Markel Financial Holdings) since 1985 and as Vice President of Hamblin Watsa Investment Counsel Ltd. (HWIC) since 1985. He is also the Chairman of Odyssey Re Holdings Corp's (ORH) board of directors. Mr. Watsa, directly, and indirectly through 1109519 Ontario Limited, The Sixty Two Investment Company Limited and 810679 Ontario Ltd., owns the controlling equity voting interest of Fairfax Financial Holdings Limited("Fairfax").^[7] He owns roughly 10% of Fairfax, which accounts for 99% of his personal wealth. His 10-for-1 multiple voting shares give him just over 50% ownership. The guiding principles of Fairfax are still intact. Honesty and integrity are essential in all relationships and will never be compromised. They never lost a President or Fairfax officer:^[8] Sir John Templeton has had the biggest influence in Watsa's life, as both a friend and business adviser. He visits him at least once a year at his home in the Bahamas. Sir John has been a Fairfax Financial shareholder for a longtime.^[9]

Mr. Prem Watsa is a Chartered Financial Analyst, a graduate of the Indian Institute of Technology with a degree in Chemical Engineering and a holder of an MBA from the Richard Ivey School of Business of the University of Western Ontario. He is a member of the Board of Trustees of the Hospital for Children, a member of the Advisory Board for the Richard Ivey School of Business, a member of the Board of Directors of the Royal Ontario Museum Foundation and as well as Chairman of the Investment Committee of St. Paul’s Anglican Church.^[10][11]

[edit] Subprime mortgage bubble

As early as the 2003, in an annual report issued by the company, chief executive Prem Watsa raised concerns about securitized products and talks about the subprime mortgage crisis and the United States housing bubble:

"We have been concerned for some time about the risks in asset-backed bonds, particularly bonds that are backed by home equity loans, automobile loans or credit card debt (we own no asset-backed bonds). It seems to us that securitization (or the creation of these asset-backed bonds eliminates the incentive for the originator of the loan to be credit sensitive... With securitization, the dealer (almost) does not care as these loans can be laid off through securitization. Thus, the loss experienced on these loans after securitization will no longer be comparable to that experienced prior to securitization (called a ‘‘moral’’ hazard)... This is not a small problem. There is $1.0 trillion in asset-backed bonds outstanding as of December 31, 2003 in the U.S.... Who is buying these bonds? Insurance companies, money managers and banks – in the main – all reaching for yield given the excellent ratings for these bonds. What happens if we hit an air pocket? Unlike...":^[12]

In an interview in the Globe and Mail in 2007, Mr. Watsa said believed that the global credit squeeze is in its "early days," and indicated he believed there may be similarities to the Japanese asset price bubble.^[13]

[edit] Fairfax - Financial Results

• Assets at December 31, 2008: USD 27.3 billion
• Total common shareholders’ equity at December 31, 2008: USD 4.9 billion

or $278.28 book value per basic share, representing an increase of 21.0% over common shareholders’ equity of $230.01 per basic share at December 31, 2007 (including the $5.00 per share dividend paid in 2008, book value per basic share increased by 23.2% in 2008).

• Cash at December 31, 2008: USD $1.56 billion at the holding company level.
• Dividend: Fairfax increased its annual dividend by 60% to $8 a share, reflecting higher earnings and increased cash. The previous annual dividend was $5 a share.^[14]
• Revenue for 2008: USD 7,975.4 million
• Net earnings for 2008: USD 1,473.8 million

Source: Fairfax - 2008 Annual & 4th Qtr. 2008 Interim Reports

[edit] Credit Ratings

Fitch Ratings (as of Tue., May 27, 2008)^[15]
Fitch Upgrades Fairfax's IDR to investment grade and Sr. Debt to 'BB+'; Outlook Stable

• Fairfax Financial Holdings Ltd. has an issuer default rating of BBB- and a senior debt rating of BB+. Fitch Ratings cited Fairfax's improved financial profile, with reductions in financial leverage, increased cash position, increased interest coverage, improved operating performance, stable runoff operations and continued favorable financial flexibility for the upgrade. The rating outlook on the company is stable.
• Odyssey Re Holdings Corp., Fairfax's subsidiary has an issuer default rating of BBB and a senior debt rating of BBB-.

[edit] Hamblin Watsa Investment Council Ltd.(HWIC)

Investment Performance
Fairfax's internal money management firm, Hamblin Watsa, earned 18.5% compounded returns annually, on its stock investments between 1998 and 2007. The investment team is led by Brian Bradstreet, Roger Lace, Sam Mitchell and Chandran Ratnaswami. The fixed income/CDS portfolio managers team has only two members, Brian Bradstreet and Enza LaSelva.

The following table shows the the time-weighted performance (excluding hedging) of HWIC vs S&P 500 Index and the Merrill Lynch U.S. Corporate Bond Index.
(The credit default swap position is not included in the results shown below).

	5 Years to Dec. 31, 2007	10 Years to Dec. 31, 2007	15 Years to Dec. 31, 2007
Common Stocks (HWIC)	25.9%	18.5%	19.5%
S&P 500	12.8%	5.9%	10.4%
Bonds (HWIC)	10.9%	9.1%	10.1%
Merrill Lynch U.S. Corporate Bond Index	4.6%	6.1%	6.5%

Source: - Fairfax Financial Holdings Ltd. 2007 Annual Report - PDF page 12 - The 2007 Fairfax Annual Meeting Slide Presentation - PDF page 14

At December 31, 2008, Fairfax's investment portfolio of $18.4 billion consisted of approximately 46% ($8.4 billion) of bonds, approximately 30% ($5.5 billion) of cash and short term investments and approximately 21% ($3.8 billion) of common stocks. Included in the bond portfolio are $4.0 billion of tax-exempt bonds approximately 87% of which are insured by Berkshire Hathaway Assurance Corp. ^[16]

[edit] HWIC bet against the Housing Bubble

The investment team of HWIC is benefiting from the subprime fallout, like John Paulson’s New York-based Paulson & Co, Andrew Lahde’s California-based Lahde Capital, Julian Robertson’s "Tiger Cubs" (formerly known as "Tiger Management Corp.")^[17] , and Michael Burry's Scion Capital (White Mountains Insurance Group is a minority investor in Scion Capital LLC), they have used derivatives to bet on the housing bubble. As of September 30, 2007, Fairfax and its subsidiaries own an enormous credit default swap (CDS) book with a $18.5 billion notional amount and an average term to expiry of 4.2 years, on about 25 to 30 companies, the majority of which are bond insurers and mortgage lenders. The CDS book had a cost of $344 million, and a market value of $546 million. The market value of these swaps have fluctuated significantly in the 3rd quarter of 2007 from less than $200 million at the end of June, to $537 million at the end of July to almost $1 billion (twice that value) in August to $544 million at the end of September.

[edit] Subsidiaries

• Odyssey Re based in Stamford, Connecticut, underwrites treaty and facultative reinsurance as well as specialty insurance business (61.0%-owned by Fairfax [Dec. 31, 2007]).
• Northbridge Financial based in Toronto, provides property and casualty insurance through its Commonwealth, Federated, Lombard and Markel subsidiaries, primarily in the Canadian market as well as in selected U.S. and international markets (Fairfax completed the privatization of Northbridge on January 13th, 2009)^[18].
• Crum & Forster based in Morristown, New Jersey, is a property and casualty insurance company. ^[19]
• Falcon Insurance based in Hong Kong, writes property and casualty insurance. ^[20]
• First Capital based in Singapore, writes property and casualty insurance.
• The U.S. runoff group consists of TIG, International Insurance and the Fairmont entities
• The European runoff group RiverStone Insurance UK and Dublin, Ireland-based nSpire Re ^[21]
• Hamblin Watsa Investment Counsel Ltd. HWIC was founded in 1984 and provides asset management for all of Fairfax's subsidiaries^[22]
• Cunningham Lindsey provides insurance claims services (90.0%-owned by Fairfax)^[23]
• MFXchange established in 2002, provides technology services for Fairfax and the insurance industry ^[24]
• Group Re
• ICICI Lombard is a 74/26% joint venture between ICICI Bank Limited, India's second largest bank and Fairfax Financial

[edit] Other Investments

• Fairfax Asia

Fairfax Asia Limited ("Fairfax Asia") is the fastest growing insurance line of business within the Fairfax Group.

• ICICI Lombard

ICICI Lombard is the largest private general insurance company in India, with a 12.5% market share. ICICI Bank, which owns the 74% of ICICI Lombard not owned by Fairfax, requested Indian government approval to sell a 5.9% stake in itself (ICICI Financial Services Ltd.) for $600 million to a group of private equity investors. ICICI Bank was looking at valuing ICICI Holdings at $10 billion.^[25][26][27]Goldman Sachs and other foreign funds were interested in buying the stake. Fairfax is carrying the minority interest in ICICI Lombard, on its balance sheet at $60 million, which appears to be a significant discount to intrinsic value (The 26% stake in ICICI Lombard is via Fairfax Asia, which is owned 100% by Fairfax Financial -- which also includes a 29.5% economic interest owned by Odyssey Re Holdings Corp).^[28]

• Advent Capital (Holdings) PLC

Fairfax maintaining its 46.8% interest in Advent Capital in the UK.^[29]

• Overstock.com

Fairfax holds a 16.5%^[30] stake in online retailer Overstock.com (Chou Associates Management Inc. holds a 9.9%^[31] stake). Patrick M. Byrne, the CEO, chairman and owner of Overstock comes from a family of value investors. He is the son of John J. Byrne, former chairman of Berkshire Hathaway's GEICO insurance subsidiary and White Mountains Insurance Group.

• Chou Associates Fund

In late 2002, Fairfax invested $50 million in Chou Associates Fund and another $50 million in the first half of 2003 (Fairfax apparently owns more than 26% of Chou Associates Fund).

[edit] Canadian common stock holdings

This includes outstanding stock as reported in news releases by Fairfax:

• CanWest Global Communications Corp. (22,41%)^[32]
• Cunningham Lindsey Group Inc. (90.0%)^[33]
• SFK Pulp Fund Units (17.4%)^[34][35]
• Torstar Corporation Class B Shares (18.2%)^[36]
• The Brick Group Income Fund (10.96%)^[37]

[edit] Common stock holdings

This includes outstanding stock as reported in the last SEC EDGAR filing (Form 13F) by Fairfax (as of Dec. 31, 2008).

• Advent Capital (Holdings) PLC / UK (46.8%)^[38]
• Abbott Laboratories
• Alcoa (new in 4th Q. 2008)
• Astrazeneca plc ADR
• Baldwin & Lyons Inc. Cl. B
• Berkshire Hathaway Inc. Cl. A
• Berkshire Hathaway Inc. Cl. B (sold out in 4th Q. 2007)
• Bristol Myers Squibb Co.
• Brown & Brown Inc.
• Burlington Northern Santa Fe (new in 4th Q. 2008)
• CFS Bancorp Inc.
• Cresud S.A.C.I.F. y A.
• Dell Inc.
• First Pl Finl Corp
• Frontier Communications
• Gannett Inc (new in 4th Q. 2008)
• General Electric Co (new in 4th Q. 2008)
• GlaxoSmithKline plc ADR
• IDT Corp
• Intel Corp (new in 4th Q. 2008)
• International Coal Group Inc.
• Johnson & Johnson
• King Pharmaceuticals Inc
• Kraft Foods Inc. Cl. A (new in 4th Q. 2008)
• Level 3 Communications Inc. (added more shares in 4th Q. 2008)
• Magna International Inc. Cl. A (new in 4th Q. 2008)
• Mohawk Inds Inc. (added more shares in 4th Q. 2008)
• Nam Tai Electrs Inc.
• New York Community Bank
• NewMarket Corp (sold out in 4th Q. 2008)
• Odyssey Re Holdings Corp. (61.0%-owned by Fairfax [Dec. 31, 2007])
• Office Depot Inc.
• Old Republic International Corp.
• Overstock.com Inc. Del (16.5%)
• Pfizer Inc.
• Progressive Corp (new in 4th Q. 2008)
• Ryanair Holdings plc ADR
• Sandridge Energy Inc.
• Steward Enterprises Inc.
• USG Corporation (added more shares in 4th Q. 2008)
• U.S. Bancorp Del
• Viacom Inc. Cl. B (new in 4th Q. 2008)
• Wal-Mart Stores Inc.
• Wells Fargo & Co (new in 4th Q. 2008)
• Wesco Financial (new in 4th Q. 2008)
• Zenith National Insurance Corp. (new in 4th Q. 2008)

Source: SEC filings

[edit] Other notable transactions

• AbitibiBowater Inc. (new—scheduled to close on March 31, 2008)

Fairfax made an investment of $350 million in AbitibiBowater convertible debentures with a 8% cash coupon.^[39] The debentures are convertible into common shares of AbitibiBowater Inc at US$10.00 per share. The debentures has an ability to pay interest in the form of additional "pay-in-kind" debentures at a rate of 10%, and has an AbitibiBowater subsidiary guarantee. They have a maturity of 5 years and are non-callable. Fairfax will have the right to appoint two directors to the Board of Directors.

[edit] Foundations

Not-for-profit entities affiliated with Fairfax

• The Sixty Four Foundation ^[40] Toronto, Ontario
• The Sixty Three Foundation ^[41][42] Toronto, Ontario

[edit] Trivia

• 14. November 2007 - The Prime Minister of Canada, Stephen Harper announced the appointment of Prof. David L. Johnston, President of the University of Waterloo and a Board member of Fairfax Financial, the Masco Corp. and a founding trustee of the MasterCard Foundation, as an independent advisor for the government. ^[43]
• Prem Watsa attended the Indian Institute of Technology around the same time as Ajit Jain. Jain is the head of Berkshire Hathaway Reinsurance Group. Watsa and Jain were both at different campuses at IIT and know each other from regular insurance industry meetings.

[edit] Articles

• 2009-02-19 - National Post - Fairfax Financial's 2008 coup An exclusive interview with Prem Watsa
• 2008-10-07 - Globe & Mail - Fairfax's Prem Watsa: Not Buying Stocks Why this slump will be 'long and deep'
• 2008-03-07 - Globe & Mail - Fairfax boosts CanWest stake to 16.29%
• 2008-01-29 - Globe & Mail - Eye On Equities: Scotia Capital sees earnings soar at Fairfax Financial
• 2008-01-21 - Financial Post - Why it's fair weather for Fairfax investors: McDonald's, Berkshire Hathaway, Fairfax Financial
• 2007-12-05 - Fool.com - How to Dodge the Debt: Berkshire, Fairfax, Alleghany et al.
• 2007-11-23 - Globe & Mail - He has never been more bearish Prem Watsa interview about the subprime mortgage bubble
• 2007-11-07 - SeekingAlpha.com - Morningstar Sees Fairfax Financial "Hitting On All Cylinders"
• 2007-09-19 - SeekingAlpha.com - Fairfax: The Tables Are Turning by Withney R. Tilson (T2 Partners LLC / Tilson Mutual Funds)
• 2007-05-26 - The Star - Fairfax braces for meltdown Prem Watsa says safety margins are inadequate amid speculative bubble
• 2006-01-26 - Globe & Mail - Short shrift Exclusive Interview of Fairfax CEO Prem Watsa
• 2005-04-05 - Richard Ivey School of Business, Canada the Ivey Centre for Value Investing and the Ben Graham Chair in Value Investing

[edit] Videos

• 2007-05-25 - Conference on Intelligent Investing (2007) Mr. Watsa’s keynote speech was Benjamin Graham and Bubbles.
• 2007-08-01 - Guest Speakers to Value Investing Classes Mr. Francis Chou, CFA, Chou Associates Management Inc. (Francis Chou is one of Fairfax original investors).

[edit] External links

• Fairfax.ca Fairfax Financial Holdings Ltd - Official Site
• Yahoo! Finance - FFH Quotes and Company Profile
• SeekingAlpha - FFH Quotes & Articles
• Globe & Mail - Fairfax Financial Company Snapshot
• Google Finance - FFH Quotes
• OdysseyRe.com Odyssey Re Holdings - Official Site
• NorthbridgeFinancial.com Northbridge Financial Corp. - Official Site
• ICICILombard.com ICICI Lombard - Official Site
• ChouFunds.com Chou Associates Management - Official Site

[edit] Regulatory Filings

• SEC.gov - Fairfax Financial Holdings Ltd.(FFH) - EDGAR Filings (CIK: 0000915191) the EDGAR database
• SEC.gov - Hamblin Watsa Investment Council Ltd.(HWIC) - EDGAR Filings (CIK: 0001275991) the EDGAR database
• SEC.gov - Odyssey Re Holdings Corp.(ORH) - EDGAR Filings (CIK: 0001137048) the EDGAR database
• SEDAR.com - Fairfax Financial Holdings Ltd.(FFH) Canadian Securities filings
• SEDAR.com - Northbridge Financial Corp.(NB) Canadian Securities filings
• SEDAR.com - Chou Associates Management Inc. Canadian Securities filings
• SEDI.com - System for Electronic Disclosure by Insiders the various Canadian provincial security regulators
• CanadianInsider.com - Fairfax Financial Holdings Ltd.(FFH) Insider Activity Review
• CanadianInsider.com - Northbridge Financial Corp.(NB) Insider Activity Review

[edit] References