Prem Watsa's 2020 Annual Shareholder Letter

'Canada's Warren Buffett' discusses markets and holdings

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Sydnee Gatewood
Mar 08, 2021
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To our Shareholders:

The world stopped in 2020. Literally! COVID-19 closed down the economies of more than 180 countries. Our employees all had to work from home more than 15,000 employees across the world. With huge thanks to all our employees, I am happy to say all our employees, led by our outstanding presidents, responded with great enthusiasm to serve all our clients, keep our employees safe and help our communities at the same time without missing a beat! Our culture and decentralized structure were put to a real life stress test and our presidents responded beautifully. At the holding company, in spite of the retirement of our President and the earlier passing of our Chief Financial Officer in 2019, our small team, led by the amazing performance of Peter Clarke our COO and Jenn Allen our CFO, also rose to the challenge. You can see why I feel our company is in great shape. We did not forget our responsibilities to those less fortunate than us as we made special donations of $4 million* across the world for COVID-19 relief, mainly to food banks.

In March, the S&P500 dropped 30% in 12 days. We absorbed the mark to market losses and thrived. We earned $218 million in 2020 and our book value per share increased by 0.6% (adjusted for the $10 per share dividend) to $478 per share. Our insurance companies had an outstanding year in 2020 and are growing significantly, while our investments more than overcame the March carnage by the end of 2020 and are continuing to perform well.

Since we began in 1985, our book value per share has compounded at 18.7% (including dividends) annually while our common stock price has compounded at 16.2% (including dividends) annually.

Here's how our insurance companies performed in 2020:

In spite of our COVID-19 losses of $669 million or 5 percentage points, we had a combined ratio of 98%. Excluding COVID-19 losses, we had a combined ratio of 93%. Our COVID-19 losses were mainly from business interruption losses outside of North America and event cancellation losses, mainly from Brit and more than 50% is in IBNR. All of our major insurance companies had combined ratios less than 100%, with the exception of Brit, and had significant growth in gross premiums led by Allied World, Odyssey Group and Northbridge. Premium increases accelerated during the year, rising from 12% in the first quarter to 16% in the fourth quarter mainly due to rate increases. After many years of a soft market, the property and casualty insurance industry is experiencing a hard market accentuated by COVID-19 losses, catastrophe exposures, social inflation and low interest rates. Interest rates were at record lows in 2020 never seen before even in the depression of the 1930s!

In 2020, we had exceptional performance at Allied World with a combined ratio of 95% and a 22% growth in gross premiums, Odyssey Group with a combined ratio of 95% and a 15% growth in gross premiums and Northbridge with a combined ratio of 92% and a 14% growth in gross premiums. Zenith continued to have an excellent combined ratio of 92% but because of declining rates in workers' compensation, shrank by 10% during the year. Crum & Forster had a combined ratio of 98% and grew by 10%. Brit had a combined ratio of 114% (98% excluding COVID-19 insurance losses) and a 7% growth in gross premiums.

In May 2021, Odyssey will complete 25 years as a Fairfax company. Odyssey began the journey as Skandia under Jim Dowd: we acquired it in 1996 and changed its name to Odyssey. Andy Barnard joined us shortly after with a very young Brian Young. Andy ran Odyssey Group for 15 years and then passed it to Brian in 2011. Over 25 years, Odyssey Group has had only two CEOs. Its record is quite astounding! Here it is:

We have great continuity at Odyssey Group as many executives and employees have been there for almost all this time. In 2020, Brian Young commissioned a book on the journey. It is a wonderful read. We will give a copy to all our shareholders at our in person annual meeting in 2022.

Late in 2020 we announced the sale of RiverStone Europe (owned 60% by us and 40% by OMERS) to CVC Capital Partners. RiverStone Europe is an industry leader in run-off insurance services, and CVC's scale and vision will give RiverStone Europe, under the continued leadership of Luke Tanzer and his management team, the opportunity to further grow the business. Nick Bentley and Luke are also very supportive of this transaction, based on their strong belief that it is the best way for RiverStone Europe to continue to grow and pursue run-off transactions. RiverStone Europe was born out of the acquisition of Sphere Drake Insurance Company. Due to performance issues, in 1999 it was put under the management of RiverStone. For the first ten years RiverStone Europe was kept busy with many of our own run-off portfolios including Sphere Drake Bermuda, Skandia UK, CTR and the Kingsmead Agency at Lloyd's. By 2008 they drove down the reserves and were down to only 53 staff and $100 million in capital. Instead of closing the operations we pivoted from internal run-off to third party acquisitions. They did their first deal in 2010 and have never looked back. They have completed over 20 transactions bringing in over $5 billion of assets and producing a great return on capital, which allowed us to sell the company at $1.35 billion. RiverStone Europe is a great story of success, first directly under the leadership of Nick Bentley and then for the last twelve years Luke Tanzer. We wish Luke and all employees at RiverStone Europe much success in the future.

Over 35 years, here's what we have developed in the insurance business worldwide:

Fairfax Worldwide Insurance Operations as at December 31, 2020

Everything included, we have $21.5 billion in gross premiums worldwide with an investment portfolio of $47.7 billion. You can see why we have said we are not planning to make any more significant acquisitions but are planning to grow organically. Our North American companies plus Brit account for 89% of all our consolidated premiums. All of the presidents of our insurance companies report to Andy Barnard and Peter Clarke as they have done for almost nine years now. We have a G7 (six insurance companies plus run-off) call every two weeks where problems (and opportunities) are discussed. Similarly, under the chairmanship of Bijan Khosrowshahi, we also have a G10 call that encompasses all the other insurance companies. These video calls work remarkably well! It is an effective way to generate cooperation among all our decentralized insurance companies.

As the table shows, our international operations outside the G7 companies total $4.7 billion in gross premiums (what Fairfax wrote in total in 2002, 17 years after we began) and $8.3 billion in investment portfolios. They are sizeable and encompass many parts of the world. In the main, these are very underpenetrated insurance markets and the growth potential long term for Fairfax is huge. As a group, the combined ratio in 2020 for these operations was 98%. All our operations had very good reserving, and they all had a combined ratio less than 100% except Bryte (because of COVID-19 business interruption losses) and Digit (which is still in start up mode but is growing at a very fast pace in India, beginning from scratch about three years ago). The recent budget in India will permit us to increase our ownership in Digit to 74%.


Since inception, gross premiums per share have compounded at 17% per year since inception and 14% in the last five years. We expect significant growth in the next five years through organic growth.

Seneca Insurance, as part of Crum & Forster, had an outstanding year in 2020 with a combined ratio of 87% after a few tough years recently. Since we purchased it in 2001, Seneca has expanded from $143 million in gross premiums written in 2001 to $336 million in 2020 with an average combined ratio during that period of 93%. Outstanding results by Marc Wolin and his team!

Last year I talked about Gary McGeddy who runs the Accident & Health profit centre at Crum & Forster. Over the better part of twenty years, Gary and his team have grown this business to over $1 billion in 2020 (despite COVID-19 reducing premium from its travel and its student inbound medical business by $200 million). We expect the next $1 billion may come much quicker. Outstanding results by Gary and the team at Crum & Forster.

Last year we also mentioned we acquired a 70% stake in two Ukrainian companies for $22 million. In the first full year with us they did not disappoint, with gross premiums written of $144 million, a combined ratio of 93% and net earnings of $16 million. We continue to be the largest property and casualty insurer in Ukraine. A big thank you to Andrey Peretyazhko at ARX, Oleksiy Muzychko at Universalna and their entire teams.

Also worth mentioning is that our Latin American operations, which include companies in Argentina, Chile, Colombia and Uruguay, produced for the first time since we acquired them in 2017 a consolidated combined ratio below 100%. Each of the management teams has been laser focused on producing an underwriting profit, resulting in a reduction in their combined ratio from 120% in 2018 to 99% today. Congratulations to Bijan Khosrowshahi, Fabricio Campos, his team and each of the presidents Juan Luis Campos in Argentina, Fabiana De Nicolo in Chile, Marta Lucia Pava in Colombia and Marcelo Lena in Uruguay.

Digit, under Kamesh Goyal's leadership, is continuing its outstanding growth record in its fiscal year ending March 31, 2021, with gross premiums expected to grow by 40% to $400 million. Its combined ratio is expected to drop to 113% and, including investment income, it should be profitable. Amazing performance for a start-up! Digit raised $18 million in 2020 at a valuation of $1.9 billion from some private equity investors. (In our books, Digit continues to be valued based on a 100% level of $900 million.) We are very excited about Digit's growth prospects in the years to come. Also, many of our insurance companies expect to benefit from Digit's technological and innovation leadership.

In 2020 Brit, in collaboration with Google cloud, launched Ki, a standalone business and the first fully digital and algorithmically-driven Lloyd's syndicate. Ki will aim to significantly reduce the amount of time and effort taken by brokers to place their follow-on capacity, creating greater efficiency, responsiveness and competitiveness. We partnered with Blackstone to provide $500 million of committed capital to fund the expansion of Ki. Ki began writing business in January 2021 and got off to a great start, writing $70 million of premium and on track to meet the full year 2021 plan of over $300 million. This is a very exciting new venture in the insuretech space and Matthew Wilson, Mark Allen and team have done an outstanding job getting this initiative up and running. Mark Allen has been appointed as CEO of Ki, and consequently will be stepping down as CFO of Brit.

The $19 billion gross premiums written of our consolidated insurance companies is generated through over 200 profit centres across the group. Each profit centre is focused on a unique set of customers, geographies or products that benefit through market leadership, product knowledge and the ability to provide excellent customer service. These profit centres also facilitate transparency when Andy and Peter monitor the insurance operations. Empowerment thrives at Fairfax!

Last year, I discussed our wonderful partnership which we entered into in 2010 with Kipco in Kuwait through its Vice Chairman Faisal Al-Ayyar. The performance of Gulf Insurance Group (''GIG''), run by Khaled Saoud Al Hasan, has been excellent, tripling gross premiums to $1.4 billion with a combined ratio of 95% since 2010. On November 30, 2020, the company announced the acquisition of AXA's operations in the Gulf region. This will add over $900 million in gross premiums written with a combined ratio running below 95%, providing GIG access to new markets in Oman and Qatar and increasing its operations in Saudi Arabia, Bahrain and the UAE. We are very excited about the tremendous long term opportunity this presents for GIG. We welcome Paul Adamson and the AXA Gulf Group employees to our partnership with Kipco.

In November, we announced the sale of Vault Insurance to a private equity group led by Scott Carmilani. Vault Insurance was founded in 2017 by Allied World and focused on serving the needs of the high net worth market. Scott, of course, was the founder of Allied World and helped build it into a leading worldwide insurance and reinsurance business. We thank Scott for all his contributions to the Fairfax insurance group and wish him much success with Vault Insurance.

2020 was the blackest of black swans. Without any warning, the world's economies closed. And our insurance subsidiaries were hit by COVID-19 losses of $669 million! At the same time, stock markets crashed in March 2020. As I said earlier, it was a real life stress test.

Because of cash and marketable securities in our holding company of about $1 billion, no debt maturities to speak of in the three years 2020 to 2022, unused credit lines of $2 billion and well capitalized insurance subsidiaries and major non-insurance subsidiaries, we absorbed the effects of the pandemic and thrived. Our focus has always been to have a very strong financial position to meet the unexpected problems that the world experiences often, ones we have not witnessed before! We will be even stronger in the future as we intend to hold cash (excluding any marketable securities) in excess of $1 billion in our holding company and to maintain and strengthen the other safeguards discussed earlier.

Over the years, we have made common stock investments pursuant to which we have significant ownership positions in a number of individual names. Although the returns can be lumpy, these holdings have served us well over the years especially on sale. The downside of larger ownership positions is that the accounting rules for these holdings are somewhat confusing (even for us!). What we find useful in clarifying the accounting positions is to separate these common stockholdings into three buckets. Generally, for positions where we hold less than a 20% economic interest and no control, we mark to market; where we have an economic interest of 20% or more but no control (these holdings are called associates), we equity account; and where we have control or an economic interest above 50%, we consolidate. I hope that the following detailed commentary will help to break through the difficulties of understanding the value of our investments resulting from the accounting rules and to provide a better understanding of the value of our investments.


A few additional comments:

  • We exclude common stocks in equity accounted insurance associates (such as Eurolife) from the preceding common stock holdings table as these are long term strategic assets that we have no plans on selling.
  • With consolidated accounting we must include in our common equity portfolio any underlying common equity holdings or associates held by our consolidated investments (such as Recipe and Fairfax India). When we look at our common equity holdings we like to back these common stocks out of our total common stock holdings and instead add back in only our share of the consolidated investments that hold these underlying assets, as shown in the preceding common stock holdings table.
  • The $1,740 million shown for Fairfax India comprises $412 million of mark to market common stocks (such as IIFL Wealth) and $1,328 million of equity accounted associates (such as Bangalore International Airport and Sanmar). The $1,852 million shown for Fairfax India includes the foregoing $1,740 million plus $112 million of cash and bonds.
  • We began equity accounting RiverStone Barbados in 2020, so its investment portfolio is no longer consolidated. Within its investment portfolio are positions of many of the common stocks listed in the common stock holdings table above. For example, RiverStone Barbados owns 9.7 million shares of Fairfax India that are not included in the 41.9 million shares of Fairfax India we show in the common stock holdings table (combining both would give us 51.6 million shares or 34.5% ownership). The same can be said for a
  • We equity account our 49% ownership in Digit, which is carried at $42 million; in addition, we have convertible preferred shares carried at $475 million all at the valuation of Digit on a 100% basis of $900 million.

It is important to recognize that, because our common stock investments are shown on our balance sheet at the carrying values, for common stocks in both the second and third buckets it is only on sale that their market values will be reflected on our balance sheet. By showing the above tables to you on a regular basis, you can mark to market the great majority of our common stock positions up and down! Additionally, remember, it is only in the long term that stock prices reflect underlying intrinsic values.


Over the last 15 years, our insurance business has had a combined ratio less than 100%, but our investment returns in the 2011 2016 time period were very poor because of a cautious approach to financial markets (hedging our common stocks) and a stock performance impacted by poor stock selection and ''value investing'' being out of favour. I said in our 2019 annual report that we would not short stock market indices (like the S&P500) or common stocks of individual companies ever again, and our last remaining short position was closed out in 2020 (not soon enough, as it cost us $529 million in 2020).


As you know, we became very excited about India after Mr. Modi got elected in 2014 with a majority. Why? Mr. Modi had an outstanding record of growth as chief minister of Gujarat (population 65 million), with 10% real growth in GDP over 13 years and a very business-friendly policy. In his first term as prime minister, Mr. Modi concentrated on looking after the poorest of the poor in India. He set up more than 400 million bank accounts for the unbanked to eliminate frictional loss in monies transferred from the government to the poor. He made sure every household had electricity and cooking gas and he provided health insurance to the 500 million poorest citizens of India. In his second term and his most recent budget, Mr. Modi pivoted. His most recent budget was strongly growth-oriented and very business-friendly, yet fiscally responsible. The key initiatives in the budget include privatization of several government-owned companies, increased spending on infrastructure, an increased foreign direct investment limit in insurance of 74% and the creation of a bad bank to ease the bad loan crisis. He did not increase taxes. Mr. Modi has recently begun speaking about how private business was needed to increase employment and wealth. You have to create wealth before it can be distributed, he said. He questioned why government bureaucrats should run airlines or petrochemical facilities. No government since India got its independence in 1947 has had the courage to praise private enterprise. Mr. Modi did just that, for the first time brazenly! We think India is set to boom like it never has before. This could be the transformational event we have been waiting for! Mr. Modi is opening up the Indian economy and giving Indians economic freedom. Very exciting!


As you can see, we have $15.0 billion ($572 per share) invested in our insurance companies our core business. Our largest insurance companies Northbridge, Odyssey Group, Crum & Forster, Zenith, Brit and Allied World account for over 90% of this investment. Our insurance companies have been and will be the gift that keeps giving, as they provide us with a float, currently $22.7 billion, which does not cost us anything in fact, in 2020 we were paid $309 million to keep the float and which is then invested worldwide. By the way, our insurance companies are worth much more than the amount at which they are carried on our balance sheet one reason why I think our stock is so undervalued.

Our consolidated non-insurance businesses (and your investment per share in them) are shown separately in the above table: they are significant, and again, are worth more than the amount at which they are carried on our balance sheet. As I said last year, we expect each of these non-insurance operations to generate a 15% annual return or better over the long term.

So as a shareholder of Fairfax, you benefit from four sources of income underwriting income, interest and dividend income, income from our non-insurance businesses and capital gains.


Throughout much of last year following the pandemic-induced market plunge, I made public statements to the effect that our belief was that Fairfax shares were trading in the market at a ridiculously cheap price. In the summer I backed that up by personally purchasing close to $150 million of shares. Additionally, following our value investing philosophy, since the latter part of 2020 Fairfax has purchased total return swaps with respect to 1.4 million subordinate voting shares of Fairfax with a total market value at the time of those agreements of $484.9 million ($344.45 per share). We think this will be a great investment for Fairfax, perhaps our best yet!

Here is how our stock price has done compared to the TSX and S&P500 (all including dividends):

Investment returns are very sensitive to end date values, so with a stock price of only $341 per share at the end of December 2020, our five and ten year and longer returns have been affected. We expect this to change as Fairfax begins to reflect intrinsic values again. Nothing that a $1,000 share price won't solve!

Insurance and Reinsurance Operations

Northbridge had a very successful year in 2020 as continued improvement in the Canadian market drove its combined ratio down to 92%. Underwriting profit more than doubled over 2019, coming in at over $100 million. Silvy Wright and her team have done an exceptional job with their clients in the mid-market commercial segment. Northbridge's reputation for outstanding customer service, combined with rising rates, allowed it to once again grow its portfolio by double digits in 2020. The company has been well served by its prudent reserving practices, and 2020 was no exception as prior year releases once again benefited the combined ratio. It will be a challenge for Northbridge to improve upon 2020's performance in 2021, but the conditions are in place to make that a possibility.

Since 2016, Odyssey Group and Zenith have traded places each year for the lead position in underwriting profit generated. In 2020, it was Odyssey Group's turn at the top again, producing $190 million of positive underwriting result. Brian Young and his team racked up a 95% combined ratio, despite absorbing $140 million of COVID-19 provisions. With 35 discrete business units across its Odyssey Re, Hudson and Newline platforms, Odyssey Group has a highly diversified book of business. Its activity in critical segments, such as Directors and Officers Liability insurance, expanded dramatically in 2020. Odyssey Group's net premiums written grew almost 12% in 2020, after having grown over 17% in the prior year. With a solid reserve position and rates increasing across many fronts, Odyssey Group is poised to continue its growth of both the top and bottom lines.

At Crum & Forster, Marc Adee's team produced a combined ratio of 98%, generating an underwriting profit of $60 million. Drying up of the Travel Insurance market, due to COVID-19, subdued the overall growth rate from the double digit pace the company had been accustomed to. Nevertheless, Crum & Forster still managed to post a 9% expansion in net premiums written over the previous year. Within the Crum & Forster family, it was Seneca Insurance that led the way with an 87% combined ratio and an outsized contribution to the total result. The Accident and Health Group and the Excess and Surplus Lines Division also once again had very rewarding results. While the growing Surety Division was a positive contributor, the Property Division was disappointing after being stung by the frequency of storm activity in 2020.

Zenith continued its string of exceptional results in 2020, posting a combined ratio of 92% and contributing over $50 million of underwriting profit. The Workers' Compensation market in the United States has been very competitive over the last several years, and prices declined around 10% in 2020. As a consequence, Zenith's net premiums written declined again during the year. It is a testament to the strength of the Zenith franchise and to the specialized skills of its employees that the company was able to maintain strong levels of profitability in the face of such challenging conditions. Kari Van Gundy and her team launched several initiatives to provide relief to the Zenith expense ratio during this time of declining revenue, including the provision of services to third party players in the Workers' Compensation field. We expect rate decreases to moderate in 2021, and that Zenith will continue to be one of our most profitable companies.


In addition to the companies discussed above, all of which are consolidated in Fairfax's financial and underwriting results, we have, as mentioned earlier, significant holdings in various operations which are not consolidated. Chief among these is the aforementioned Gulf Insurance Group. With $1.4 billion in gross premiums written, and a combined ratio in the low 90s, GIG had another very successful year. In India, Digit continued to build out its capabilities, utilizing cutting edge technology to enhance its expansion in this rapidly growing market. Expected to reach $400 million in gross premiums written in less than four years, Digit, led by CEO Kamesh Goyal, is now producing a net bottom line profit, though not yet an underwriting profit. Finally, in Greece, Eurolife has been an extraordinary investment for Fairfax. Writing both Life and Property/Casualty lines, the company in 2020 generated over $500 million of gross premiums written and produced net income of $130 million. Led by Alex Sarrigeorgiou, Eurolife has a track record second to none in the Greek market.

The tables that follow show you how our international operations (non-North American other than Brit) have grown in the last five years. The top table is at the 100% level and the bottom table is Fairfax's share; both exclude First Capital and ICICI Lombard, which were sold during this time period. The growth in the last five years includes organic growth, the start-up of Digit and the acquisitions of Fairfax Latam, Eurolife, Bryte, Colonnade and Fairfax Ukraine. We expect our international operations to continue to grow significantly because of the low insurance penetration in many of these countries.

On average we are writing at about 1.0 times net premiums written to surplus. In the hard markets of 2002 2005 we wrote, on average, at 1.5 times. As you know, our strategy during times when rates are rising, as they are currently, is to expand significantly in areas where margins are high.


Since we began in 1985, we have written over $175 billion in gross premiums, with a combined ratio of approximately 100%.


At our RiverStone run-off operations, led by Nick Bentley, while not recently active in U.S. run-off acquisitions (other than some small very successful captive insurance deals), the team has been very busy focusing on our U.S. legacy reserves, especially asbestos claims. Although we needed to strengthen reserves again in 2020 (about half of the previous year), the team continues to deliver significant value and savings from its dedicated focus and best in class experience I can assure you these reserves are in good hands. As mentioned previously, late in 2020 we announced the sale of our remaining interest in RiverStone's European business to CVC Capital Partners. Luke Tanzer and his entire team at RiverStone Europe had a very busy year, closing five run-off deals. They are excited to continue to expand in the very active UK run-off market, and again, we wish them all the best going forward.


Float is essentially the sum of loss reserves, including loss adjustment expense reserves, insurance contract payables, and unearned premium reserves, less insurance contract receivables, reinsurance recoverables and deferred premium acquisition costs. Our long term goal is to increase the float at no cost, by achieving combined ratios consistently at or below 100%. This, combined with our ability to invest the float well, is why we feel we can achieve our long term objective of compounding book value per share by 15% per annum. This no cost float is perhaps one of Fairfax's biggest assets and could be the key reason for our success in the future. In 2020, our ''cost of float'' was a 1.4% benefit, as we made an underwriting profit. In the last ten years, our float has cost us nothing (in fact, it provided an average 1.2% benefit per year), while during that time it cost the Government of Canada an average 2.2% per year to borrow for ten years an advantage for us over the Government of Canada of 3.4% per year.

In the past five years our float has increased by an average of 7% annually, due partly to organic growth in net premiums written at Odyssey Group, Northbridge and Crum & Forster and to the acquisition of Allied World in 2017, notwithstanding the sale of First Capital in 2017 and European run-off in 2020.


This has been one of the key reasons for our success in the past and will continue to be a key reason in the future.


The table shows the results from our insurance and reinsurance (underwriting and interest and dividends), run-off and non-insurance operations (which shows the pre-tax income (loss) before interest expense). Net realized gains (losses) and net change in unrealized gains (losses) are shown separately to help you understand the composition of our earnings. In 2020, after interest and dividend income, our insurance and reinsurance companies' operating income decreased to $916 million, due to lower interest and dividend income and slightly less underwriting profit. All in, after-tax earnings were $218 million. Of our interest expense of $476 million, $286 million was from borrowings by our holding company and our insurance and reinsurance companies, while $127 million was from borrowings by our non-insurance companies, which are non-recourse to Fairfax, and $63 million was from our leases.

Corporate overhead and other of $253 million includes investment management fees, holding company interest and dividends and holding company share of profit of associates, less corporate overhead and amortization of subsidiary companies' intangible assets. The increase in corporate overhead and other in 2020 primarily relates to losses on associate investments held at the holding company in 2020 of $48 million versus share of profit of $165 million in 2019 and investment management fees of $90 million in 2020 versus $197 million in 2019. We continue to focus on keeping holding company expenses low. (See more detail in the MD&A.)

Financial Position


We have a strong financial position, with $1.2 billion in cash and investments at the holding company at the end of 2020. With the imminent closing of the sale of European run-off and the sale of 14% of Brit to OMERS, we expect to have $1.3 billion cash at the holding company, with our credit facility fully paid off and our debt to capital ratios approaching 2019 levels.

On February 24, 2021, through a bought deal with Scotiabank, Royal Bank and Bank of Montreal as book runners, we issued Cdn$850 million of 10-year unsecured senior notes with a coupon of 3.95%. On March 1, 2021, through BofA Securities, J.P. Morgan and Citigroup, we issued $600 million of 10-year unsecured senior notes with a coupon of 338%. The proceeds will repay our 5.84% notes due 2022, our 4.5% notes due 2023 and other debt, leaving no maturities through 2023.


As I have said to you many times over the past 35 years, I think the most important determinant of long term success in any investment is good management, led by an outstanding CEO.

Years ago Phil Carret, in the book Classic Carret, said it best. Phil Carret in 1928 founded the Pioneer Fund, one of the very first mutual funds created in the United States. Phil, who ran the fund for 55 years with timeless value investing principles, outperformed the S&P 500 significantly.

Here's what Phil said:

''Good management is rare at best, it is difficult to appraise, and it is undoubtedly the single most important factor in security analysis.''

''Find the company whose boss is heart and soul dedicated to profitable operation, and even more interested in the profits of five years hence than those of today! If he has sound business judgement, skill in selecting the other members of his team, the rare ability to inspire them to superior performance as well, the company's stock is worth investigation.''

''There is no substitute for buying quality assets and allowing them to compound over the long-term. Patience can produce uncommon profits.''

We are blessed to have many investments led by outstanding CEOs and management teams. Here they are from our large positions (including some included in ''Other'' in the table on page 10):

David Sokol and Bing Chen continue to do a tremendous job driving shareholder value, operational excellence and strengthening Atlas' (

ATCO, Financial) leading positions. This was highlighted during the COVID-19 downturn when, despite many challenges, Atlas was able to maintain very high utilization and improve its credit profile. The container ship market, supported by strong demand and very low idle capacity, is undergoing a significant rebound. This has created an opportunity in the newbuild market, where Atlas has signed to build up to 31 large and modern ships for charters ranging from 5 to 18 years. These ships will increase its fleet capacity by approximately 45%. Atlas' best in class operations and balance sheet strength allowed it to take advantage of these opportunities. These new ships, the rebound in the container ship market and Atlas' ability to quickly take advantage of strategic opportunities should drive strong returns in the years to come. Outstanding performance by David, Bing and team!

Led by its outstanding CEO Alan Kestenbaum, Stelco (

TSX:STLC, Financial), in spite of a very difficult year in 2020, upgraded and modernized its facilities increasing its capacity by 10%, negotiated a strategic long term iron ore pellet supply agreement (and an option to acquire 25% of the high quality, low cost Minntac Mine) and further enhanced Stelco's industry leading cost position. Given current steel prices, Stelco is well poised to do extremely well in 2021. It continues to be debt free. Its stock price went from Cdn$11 at the end of 2019 to Cdn$4 in March 2020 and ended the year at Cdn$23. And they say markets are efficient!

2020 was another disappointing year for Fairfax Africa with net losses of $207 million. To strengthen the platform, we merged Fairfax Africa and Helios Investment Partners to form Helios Fairfax Partners (

TSX:HFPC.U, Financial) (''HFP''), forming the premier Africa-focused alternative investment manager, under the leadership of Tope Lawani and Babatunde Soyeye, the co-founders and managing partners of Helios Investment Partners, a private equity firm which they founded 15 years ago and which has had great success investing in Africa. Tope and Baba have assumed the roles of Co-Chief Executive Officers and directors of HFP. Fairfax continues to hold 32% of the equity and 53% of the votes of HFP. Together, Fairfax and Helios will be the ultimate controlling party of HFP. Going forward, investors in HFP will benefit from net management fee income, 25% of carry fee income from the past and half of carry fee income going forward from Helios' private equity funds. This flow through structure will bring a regular stream of earnings and cash flow for HFP in addition to appreciation potential of its cash and investments on the balance sheet. We are very excited about the future prospects for HFP in Africa under Tope and Baba's leadership. Please read HFP's annual letter to shareholders to learn more about the new strategy and exciting opportunities in Africa.

Eurobank (

ATH:EUROB, Financial) has an excellent management team led by CEO Fokion Karavias, and at his side is Vice Chairman George Chryssikos. Fokion has been with the bank since 1997, knows it inside out and has developed into a fine CEO since he began in 2015. Fokion and George have worked well together over fifteen years in a variety of roles. With Fokion in charge and George being very supportive, Eurobank is in an excellent position to take advantage of the post-pandemic flourishing of the Greek economy. In 2020, Eurobank completed the large securitisation transaction that was the main driver in reducing its Non-Performing Exposure ratio during the year from 30% to 15%, the lowest among Greek banks. Greece has perhaps the best government in Europe, as it is business-friendly and committed to supporting entrepreneurs to drive growth in the Greek economy. Bond investors have taken notice of the progress in Greece, driving yields on 10-year government debt below 1%. We are optimistic about the prospects for growth in the Greek economy and we think Eurobank will be a major beneficiary of that growth.

Recipe (

TSX:RECP, Financial) was one of our investments hardest hit by COVID-19 and the related closures of its network of over 1,300 restaurants across Canada. Despite a 30% drop in 2020 system sales to approximately Cdn$2.4 billion, Recipe managed to generate EBITDA of approximately Cdn$114 million and positive free cash flow of Cdn$31 million. We are thankful for the perseverance and tenacity of Frank Hennessey and the entire Recipe team, especially the front line workers, and the resiliency of Recipe's diversified businesses such as its grocery retail business that increased sales by 23%.

The development of Dexterra's (TSX:DXT) business was dramatically reshaped by the reverse takeover in May 2020 of Horizon North. Dexterra, now a listed public company and led by John MacCuish, has a vision to build a Canadian support services champion. Its activities include a comprehensive range of facilities management, workforce accommodations, and forestry and modular build capabilities, including being a leader in social housing projects. Dexterra has publicly stated that it is on course in the next few years for Cdn$1 billion in revenue and Cdn$100 million in EBITDA.

Farmers Edge (TSX:FDGE), which aims to disrupt the global agriculture ecosystem, just recently completed a very successful IPO. CEO Wade Barnes and his management team are digitizing the farm and providing data-driven insights to farmers along with developing a portfolio of products to disrupt large agriculture verticals including crop insurance, the carbon offset market and other financial services. The company expects strong growth in acres, revenue and EBITDA over the upcoming years. We have nurtured Farmers Edge since 2015 and over the years invested Cdn$376 million. At the IPO value, our investment is worth Cdn$425 million but due to Farmers Edge's losses over the years, it is carried on our balance sheet at only Cdn$303 million. Farmers Edge will be debt free with cash of Cdn$100 million and positive free cash flow next year.


In the past few years, John Chen has taken BlackBerry (BB) into two high growth markets:

  1. BlackBerry has entered into an exclusive partnership with Amazon on a connected vehicle data platform providing artificial intelligence/machine learning-based analytics on all in-vehicle sensors networks. BlackBerry's QNX subsidiary deals with all the major automobile manufacturers in the world and has 175 million connected cars using the QNX system.
  2. BlackBerry has completed the integration of Cylance and its BlackBerry end point management platform (UEM), and is now ready to tackle the cybersecurity and threat detection/prevention world, a market which is entirely compatible with BlackBerry's heritage and capabilities.

We continue to back John, as we extended the maturity of $323 million of our convertible debentures acquired in 2013 to 2023 with a reduced conversion price of $6 per share.

Global demand for healthy food fueled by population growth, changing consumer attitudes and rising incomes in emerging markets, particularly Asia, are providing excellent business fundamentals for our investment in AGT (TSX:AGT), a global food champion. Murad Al-Katib and his team are true innovators in developing and supplying plant-based and staple foods to retail, food service and the consumer products sector in over 100 countries around the world. AGT, acquired in 2019, delivered a strong performance in 2020, including 20% growth and record EBITDA.


Commercial International Bank (CAI:COMI.CA), in Egypt, continued to plow ahead despite the impact of COVID-19. Pre-provision profits grew more than 13%, NPLs are three times covered and the bank's capital adequacy ratio is among the highest in the world at 31%! Despite this, the shares are trading at 8 times earnings which is the lowest since the Arab Spring. Hisham Ezz El Arab retired after an unbelievable run at the bank for over 20 years. Under his management book value and earnings per share compounded by over 20% per annum and the bank did not raise capital once! We wish Hisham the best in his retirement. Hisham has left the bank in good hands with Hussein Abaza, who has been with the bank for 30 years, at the helm.

Resolute Forest Products (RFP) purchased three sawmills in the southeastern United States in early 2020, which turned out to be very good timing. During the pandemic demand for lumber has been strong, causing the price to spike to historic highs. Resolute's share price rose from a low of $1.15 in March to recently trading above $9.50. In 2020 Resolute allocated capital to shareholders by repurchasing 6.9 million shares, or 8% of outstanding, at an average price of $4.28 per share. 2021 looks like a promising year for Resolute as lumber prices remain high, pulp prices show signs of strengthening and Resolute's tissue business continues to develop. Yves Laflamme, Resolute's CEO, announced his retirement after a very successful 40-year career at Resolute. We thank Yves for his contribution to Resolute and wish him the best in his retirement. Resolute has appointed Remi Lalonde as its new CEO. Remi has great experience from being Resolute's CFO but also has operating experience from managing Resolute's Thunder Bay pulp mill. We look forward to Remi's leadership at Resolute. Remi has strengthened the leadership team by hiring Hugues Simon as President of Wood Products and Sylvain Girard as CFO.


We have an outstanding partnership with Kennedy Wilson (KW), led by its founder and CEO Bill McMorrow and Bill's partners, Mary Ricks and Matt Windisch. Since we met them in 2010 we have invested $1,130 million in real estate, received cash proceeds of $1,054 million and still have real estate worth about $582 million. Our average annual realized return on completed projects is approximately 20%. We also own 9% of the company.

More recently we have been investing with Kennedy Wilson in first mortgage loans secured by high-quality real estate in the western United States, Ireland and the United Kingdom with a loan to value ratio of less than 60%. At the end of 2020 we had committed to mortgage loans of approximately $1.5 billion at an average yield of 5% and an average maturity of four years. We are very grateful to Bill and his team for a very profitable and enjoyable relationship.

Our preferred share and warrant investment in Altius Minerals (TSX:ALS) continues to bear fruit. Led by founder Brian Dalton, Altius has built its mineral royalty business from scratch over the past 20 plus years and now has a market capitalization in excess of Cdn$600 million. In recent years, through an Altius subsidiary, Brian has successfully developed a royalty model for renewable energy projects which has been recently validated by a co-investment from Apollo and an IPO. The IPO values Altius' interest in the renewable royalty subsidiary at approximately Cdn$172 million which is in excess of 2 times the cost of Altius' investment. Although Altius' revenues were hard hit by the COVID-19 crisis in early 2020, the company is benefiting from the current substantial recovery in prices for commodities such as copper, iron ore and potash, as well as the growing interest in renewable energy and ESG-focused investments.

There were many business winners and losers created from the disruption caused by the pandemic. One interesting ''win'' happened at our investee Blue Ant Media led by Michael McMillan, the former CEO of Alliance Atlantis, which was looking for opportunities in the fast evolving media landscape. Blue Ant purchased a Los Angeles-based gaming company called Omnia Media, and in 2020 merged Omnia with Enthusiast Gaming (TSX:EGLX), a TSX-listed gaming company, receiving as consideration mainly shares of Enthusiast priced at Cdn$1.65. Enthusiast shares have recently been trading above Cdn$8, a win-win for Blue Ant and Enthusiast.

Fairfax owns 44% of Exco (EXCE), a U.S. oil and gas producer. Despite weak energy prices in 2020, Exco generated $128 million in EBITDA and $36 million in free cash flow. Net debt fell to $145 million (1.1 times EBITDA). Led by Chairman John Wilder and CEO Hal Hickey, Exco achieved these results through high field level productivity and company-wide cost control. In December, Exco recorded its 73rd month without a lost time incident. Exco's Chairman, John Wilder, is a great partner. We are well served by his leadership.

Fairfax invested Cdn$200 million in debt yielding 6% per annum and warrants which yield Fairfax an implied ownership of 13% in Chorus Aviation (TSX:CHR), which operates Air Canada's Jazz regional airline business. Air Canada has a 9.6% stake in Chorus. There is no question that COVID-19 has been catastrophic for the airline industry. That said, Joe Randell and his team have done an outstanding job managing the cost structure of Jazz with its partner, Air Canada. Chorus is still being paid its fixed fee under the Air Canada contract. In addition, Chorus is currently seeing very exciting opportunities in the leasing space as all airlines, including the majors, look to move planes off their balance sheet. While our warrants are currently well out of the money (strike price Cdn$8.25 per share), we are confident the business of Chorus and its partner Air Canada will swiftly recover when travel once again resumes.

In 2017 Fairfax invested Cdn$100 million in preferred shares yielding 6% per annum, Cdn$50 million in senior secured debentures yielding 5% per annum and 17 million warrants of Mosaic (MOS), implying a fully diluted ownership of 61%. Chairman John Mackay and CEO Mark Gardhouse have done an outstanding job building a portfolio of established businesses in niche markets across western Canada and Ontario. Since our investment, Mosaic has generated approximately Cdn$70 million in free cash flow and in the very difficult 2020 year managed its western Canada businesses well.

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I am the editorial director at GuruFocus. I have a BA in journalism and a MA in mass communications from Texas Tech University. I have lived in Texas most of my life, but also have roots in New Mexico and Colorado. Follow me on Twitter! @gurusydneerg