Fairfax Financial

Markel

Fairfax was incorporated as Markel Service of Canada on March 13, 1951 and continued under the Canada Business Corporations Act in 1976. The name was subsequently changed to Markel Financial Holdings Ltd.

In 1984, Prem Watsa left GW Asset Management to found his own asset management firm, Hamblin Watsa Investment Counsel Ltd. 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.

In 1985, 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.

Fairfax Financial Holdings Limited

In May 1987, Watsa re-organized Markel Financial Holdings Limited and renamed it Fairfax Financial Holdings Limited (FAIRFAX: short for "fair, friendly acquisitions").

From 1985 to the end of 2010, Fairfax Financial had a compound growth rate of approximately 25% in book value per share (per year), it's about 243 times what Fairfax began with in 1985.

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 since 1985. 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"). 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.

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.

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.

Recent years

As of December 31, 2010, Fairfax had total assets of approximately $31.7 billion, and its revenue for the prior twelve months was approximately $6.2 billion. Since Watsa took over, the company book value per share has compounded by 23% per year, while the common stock price has followed the growth at 19% per year.

On September 23, 2013, Fairfax made an offer to purchase cell phone maker BlackBerry for $4.7 billion or $9.00 a share. BlackBerry announced it had signed a letter of intent but would be open to other offers until November 4, 2013. Fairfax already held 10% of BlackBerry.

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

Investment Performance

Fairfax's internal money management firm, Hamblin Watsa, earned 19.9% compounded returns annually, on its stock investments (includes Equity Hedging) between 2000 and 2009. 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 time-weighted performance of HWIC vs S&P 500 Index and the BofA Merrill Lynch U.S. Corporate Bond Index.

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.

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., Kyle Bass' Hayman Capital, Andrew Lahde’s California-based Lahde Capital, Julian Robertson’s "Tiger Cubs" (formerly known as "Tiger Management Corp."), 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.

In the housing bubble and financial crisis years of 2008/2009, Fairfax was as one of the uniquely few companies that was able to grow through outstanding investment returns its common shareholders’ equity base from $4.1 billion to $7.4 billion – an increase of $3.3 billion – resulting in an increase in book value per share of 61% (not including dividends). This was far more than any company in the financial industry.

Subsidiaries

Odyssey Re based in Stamford, Connecticut, underwrites treaty and facultative reinsurance as well as specialty insurance business (100%-owned by Fairfax).

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 (100%-owned—Fairfax completed the privatization of Northbridge on January 13, 2009).

Crum & Forster based in Morristown, New Jersey, is a property and casualty insurance company.

Zenith Insurance Company based in Woodland Hills, California, is a wholly owned subsidiary of Fairfax. Zenith has been a specialist in workers' compensation insurance. Fairfax purchased 100% of Zenith National Insurance Corp for approximately $1.3 billion on May 20, 2010.

Falcon Insurance based in Hong Kong, writes property and casualty insurance.

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

Hamblin Watsa Investment Counsel Ltd. HWIC was founded in 1984 and provides asset management for all of Fairfax's subsidiaries

Cunningham Lindsey provides insurance claims services (43.6%-owned)

MFXchange established in 2002, provides technology services for Fairfax and the insurance industry

Group Re

ICICI Lombard is a 74/26% joint venture between ICICI Bank Limited, India's second largest bank and Fairfax Financial

Pethealth Inc. based in Ontario, Canada, with offices in the UK, and he USA was acquired by FairFax in November 2015.

Other investments

Fairfax Asia

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

Fairfax Brasil

Fairfax Brasil Seguros Corporativos S.A. ("Fairfax Brasil") is a Brazilian property and casualty insurance, headquartered in São Paulo.

Polish Re

Polish Re (Polskie Towarzystwo Reasekuracji Spółka Akcyjna) based in Warsaw, Poland, writes reinsurance business in Central and Eastern Europe (100%-owned by Fairfax).

Advent Capital (Holdings) PLC

Advent Capital, based in London, in the U.K., provides specialty property and casualty insurance, operating through Syndicates 780 and 3330 at Lloyd’s London (100%-owned by Fairfax).

Alliance Insurance

Fairfax owns a 20% stake in Alliance Insurance (Dubai).

Alltrust Insurance Company of China

Fairfax owns a 15% stake in Alltrust Insurance Company in China.

BlackBerry Ltd

In September 2013 the Blackberry signed a letter of intent to be acquired for $4.7 billion, or $9 per share by a consortium led by Fairfax Financial. The consortium has announced its intentions to take the company private.

General Fidelity Insurance Company

On August 17, 2010, Fairfax purchased 100% of General Fidelity Insurance Company (GFIC – a runoff company), for approximately $241 million. GFIC will be under RiverStone, Fairfax runoff group.

Gulf Insurance Co.

On September 28, 2010, Fairfax purchased 41.3% of Gulf Insurance Co. (a Kuwait insurance company), for approximately $217 million.

First Mercury Financial Corporation

On October 28, 2010, Fairfax announced to acquire all of the outstanding shares of First Mercury common stock for approximately $294 million. First Mercury will become the excess and surplus lines platform for Crum & Forster.

The Pacific Insurance Berhad

Pacific Insurance is headquartered in Kuala Lumpur, Malaysia. On December 3, 2010, Fairfax announced to acquire Malaysian insurer, The Pacific Insurance Berhad, for approximately US$64 million. Pacific will join the Fairfax Asia group. (The deal is expected to close in the 1st Q. of 2011)

Jordan Kuwait Bank

Odyssey Re, a wholly owned subsidiary of Fairfax owns a 4.8% stake of the Jordan Kuwait Bank.

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.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).

Overstock.com

Fairfax holds a 16.5% stake in online retailer Overstock.com (Chou Associates Management Inc. holds a 9.9% 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).

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 an 8% cash coupon. 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.