Fairfax Financial Holdings (FFH CN)

The first rule of investing is dont lose money; the second rule is dont forget Rule No. 1. Warren Buffett

Overview
Business Lines: Subsidiary Lines of and Buiness Property Casualty Reinsurance- OdysseyRe Reinsurance (Facultative and Treaty); Specialty Insurance US Insurance Commercial Property and Casualty; Specialty Insurance (Workers' Comp) Commercial Property and Casualty Commercial Property and Casualty; Various Specialty Lines Commercial Property and Casualty

Canadian Insurance Insurance and Reinsurance Other

*values shown as a % of total float, where float is defined as the sum of loss reserves, including loss
adjustment expense reserves, and unearned premium reserves, less AR, reinsurance recoverables and deferred premium acquisition costs

Asian Insurance

Established September 1985; BVPS was $2.08 Berkshire Hathaway model; goal of mgmt. is to compound BVPS Growth accomplished via M&A and superior investment returns; current BVPS is $365.86 (vs. current share price of $360.69).
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Performance
Year 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 1986-1999 (cagr) 2000-2011 (cagr) 2000-2005 (cagr) 2006-2011 (cagr) 1986-2011 (cagr) INTRINSIC VALUE STOCK PRICE % Change in US$ % Change in Book Value per Cdn$ Price Share per Share 180 292 48 (3) 31 21 27 25 41 (41) 24 93 1 18 42 145 18 9 25 46 63 196 36 10 30 69 38 (55) (5) (7) (21) (28) 7 (26) 31 87 (1) (11) (16) (17) 9 38 53 24 21 36 33 5 2 0 (3) 7 31.8% 25.4% 8.5% 5.6% -1.6% -5.9% 19.5% 13.6% 23.5% 20.7%

Lumpy returns, but outperformance over the long run 2000-2011 has been weaker, but due to a number of one-offs (and vs. S&P 500 TR cagr of <1%, stock has outperformed) Continued float growth (c. 5-6% cagr), with low cost of float (cost of float 20062011 was c. 1.10%)

Risk Management
When FFH models the most dire set of circumstances, or a sequence of catastrophes costing the industry $50-$100 billion (with a total industry loss of $250 billion), FFHs shareholders equity is hit by only 15% Management seeks to maintain $1 billion or more of cash & ST investments at the holdco to cover 3 to 4 years of administrative, interest, and preferred dividend expenses with no dividend support from any subsidiaries Holdco CFs from dividends, interest income, and mgmt. fees should cover holdco administrative, interest, and preferred dividend expenses by 1-2x Net debt/equity is not to exceed 50% (currently c. 24%) Net LT debt is not to exceed 3x the companys normal earnings base Mgmt. refinances debt well before maturity dates (maturities in the next 3 years total $283 million, which is less than 10% of all LT debt) Company maintains an unsecured, committed, LT credit facility (and typically report that it has been undrawn) Have SEC registered subsidiaries, which gives them the ability to issue non-controlling stakes if need be
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Management Character
Our investment philosophy is based on the value approach as laid out by Ben Graham and practiced by his most famous disciple, Warren Buffett. This means we buy stocks of financially sound companies at prices below their underlying long term values. We expect to make money over time, not in the next month or two. (1985 Annual Report) We have been very wrong over the past three years as the S&P 500 has done very well but we will not speculate and buy things that dont make any economic sense. We do not believe in New Eras and feel that most participants in todays equity markets in the U.S. will suffer significant permanent loss. It is very likely that the high price for the S&P 500 and Dow Jones reached in this cycle (which may have already taken place) will not be seen again in the next ten years not unlike the Nikkei Dow that peaked in 1989 at 39,000 and is still trading around 20,000 currently, ten years later. (1999 Annual Report) The headline story for 2007 was our credit default swap (CDS) position that we purchased in the past few years. You will remember these are five year swaps (in the main) which, on a mark-to-market basis, were down 75% at the end of 2006. We swallowed hard and purchased some more in early 2007. As of June 30, 2007, we had a cost of approximately $341 million for our $18.0 billion notional position which was worth $198 million at market. And then in July and August of 2007, markets changed! The market value of our CDS position exploded to $546 million at the end of September and, including $199 million in realized proceeds, to $1.3 billion at the end of December 2007 as the credit concerns that we have been writing about for the last few years became reality. (2007 Annual Report)

Second-level thinkers know that, to achieve superior results, they have to have an edge either information or analysis, or both. They are on the alert for instances of misperception. My son Andrew is a budding investor, and he comes up with lots of appealing investment ideas based on todays facts and the outlook for tomorrow. But hes been well trained. His first test is always the same: And who doesnt know that? Howard Marks

Why this opportunity exists?

Fully-hedged equity portfolio; weak industry pricing conditions O/w cash (29.6% vs. LT avg. near 25%) U/w fixed income (46.6% vs. LT avg. near 55%) 4.69% riskless return based on index delisting Impatient market offers opportunity for time arbitrage; purchase price at 0.98x BV and 0.90x FBV offers compelling upside
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Valuation