From Prem Watsa’s 2013 letter to shareholders. We will be covering this year’s event, sign up for our free newsletter to ensure you do not miss any of it.


To Our Shareholders:


So all in, the result was a net loss of $565 million and a 7.8% decrease in book value (adjusted for the $10 per share dividend paid) to $339 per share. Since we began 28 years ago in 1985, our compound annual growth in book value per share has been 21.3%, while our common stock price has compounded at 19.0% annually.

While going through our past Annual Reports (a dangerous exercise), some of you long term investors may remember that we first entered the reinsurance business through the purchase of a tiny company called Sphere Re. That experience, and the purchase of Skandia in 1996, made us remark that the reinsurance business is particularly leveraged to a ‘‘few good men and women at the top’’. We saw that again in spades in 2013 as Brian Young and his team at OdysseyRe had the best combined ratio in the company’s history at 84.0%. In fact, we have more than made up for the 116.7% in the catastrophe-ravaged year of 2011. The average combined ratio for the past three years, including 2011, is 95.5%, with very conservative reserving. So a big round of applause for Brian and OdysseyRe, which accounts for almost half our business. I discussed OdysseyRe in last year’s Annual Report and called it ‘‘the jewel in our crown’’ – well, the jewel was shining a little brighter in 2013!

While you have your hands together, Zenith had an excellent year in 2013 as it once again made an underwriting profit (the first time since we purchased it in 2010), with a combined ratio of 97.1% on a premium base of $700 million – much higher than the $430 million it wrote in 2010. You will remember that Zenith had shrunk its volume from $1.2 billion in 2005 to $430 million in 2010 because rates were grossly inadequate. In the past two years, companies that had expanded significantly in workers’ compensation in the 2005 – 2010 period have been falling like dominoes, allowing rates to rise again to adequate levels. Jack Miller and his team at Zenith have navigated the treacherous waters of the California workers’ compensation market exceptionally well. We expect, in time, that Zenith will write more than the $1.2 billion it wrote in 2005.


Last year, for the first time since we began 28 years ago, we appointed a President at our head office. Given the size and scope of our operations, and the outstanding contributions of Paul Rivett to Fairfax’s growth, we named him President of our holding company. Since he joined us ten years ago, Paul has been intimately involved in all of our head office functions, including acquisitions, financing and succession planning. Also, as Chief Operating Officer of Hamblin Watsa Investment Counsel, our investment management subsidiary, and a member of our Investment Committee, he has been involved in our investments, particularly private placements like the Bank of Ireland and The Brick Furniture Stores and private investments like Sporting Life and William Ashley. More recently, Paul has led our expanding investments in the restaurant business – more on that later. Most importantly, Paul epitomizes our culture of being hard working and team oriented, with no ego. Paul works very closely with all our officers at Fairfax and Hamblin Watsa as well as with Andy Barnard.

At our annual meeting last year, Andy said that his objective was to have Fairfax become as well known for its  underwriting operations as for its investment results. Well, 2013 was a great start! He is now having a very significant  impact on all our underwriting operations worldwide. Under Andy, the Executive Leadership Council, which  consists of our Presidents, Peter Clarke, Jean Cloutier and Paul Rivett, continues to work well in coordinating our
diversified operations and getting the best from all of them. The working groups established by the Executive
Leadership Council across all our companies – all chief claims officers, all chief actuaries, all chief legal officers, etc. –
continue to explore and take advantage of best practices. A very important subgroup that I mentioned last year is our
Talent and Culture Development Working Group. It is making great strides in fostering our ‘‘fair and friendly’’
culture, with a special focus on outstanding customer service. Our special culture – nurtured and preserved over our


Prem Watsa on Blackberry

No sooner had the ink dried (almost!) after I wrote to you in last year’s Annual Report about BlackBerry, than  BlackBerry became a daily headline. The Board of Directors of BlackBerry decided to form a Special Committee to  look at all options for the company. As we were the biggest shareholder in the company (almost 10%) and were
potentially conflicted by my being on the Board, I decided to resign as a director so we could review all our options.  On September 23, 2013, Fairfax made an offer to take BlackBerry private at $9 per share, subject to a six-week due  diligence period. To do our due diligence, we hired a very experienced team led by Sanjay Jha, who ran Motorola,  Sandeep Chennakeshu, who was President of Ericsson Mobile Platforms, and John Bucher, who was Chief Strategy  Officer at Motorola Mobility. Briefly stated, their conclusions were simply: 1) the company had excellent assets,

2) the management teams had made many mistakes along the way, and 3) the company could not afford high cost LBO debt. For the first time in our history, our due diligence resulted in our not being able to complete an announced deal. After discussions with the Special Committee, led by its Chair Tim Dattels, instead of continuing with a go-private transaction, we proposed to raise $1.25 billion for BlackBerry in the form of 6% seven-year convertible debentures (convertible at $10 per share into BlackBerry stock) and proposed that John Chen be concurrently appointed as Executive Chairman of BlackBerry.

John Chen has an extraordinary background. After immigrating to the U.S. from Hong Kong at the age of 16, John  gained a Bachelor’s degree in electrical engineering from Brown and a Master’s from Caltech. He then trained at  Burroughs (Unisys), turned around Pyramid Technology Corp., and then very successfully resurrected Sybase and ran  it profitably for about 15 years. When John took over Sybase in 1998, it had lost money for four years, its stock price was down 90% (ring a bell?) and most analysts were predicting bankruptcy within six months. Within a year, Sybase was profitable and in 2010, 12 years later, SAP came knocking to buy it at $65 per share, more than ten times the $5 – $6 per share it sold at when John took it over! John has also been on the Board of Wells Fargo for eight years and Disney for ten years.

Since his appointment as Executive Chairman at BlackBerry in November 2013, John has bolstered the management  team (mainly with people he has worked with), done a joint venture with FoxConn to manufacture low cost phones
for emerging markets, brought back the ‘‘BB Classic’’ phone (the Q20) and publicly said that BlackBerry would break  even by the fourth quarter of fiscal 2015

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