To our Shareholders:
We had the best year in our history in 2021 as the world began to return to normalcy. We earned a record $3.4 billion* and our book value per share increased by 34.2% (adjusted for the $10 per share dividend) to $631 per share. At $23.8 billion, our gross premiums grew by 25.4% or $4.8 billion – essentially all organic and the most in any one year in our history. It took us 18 years from our inception to write $4.8 billion in annual gross premiums, while in 2021 our premiums increased by that in one year! The 25% growth is perhaps the highest among the top 25 P&C companies in the world and we rank in that august group.
The S&P 500 came roaring back in 2021 with a 29% return and the rotation to value continued. As Ben Graham said a long time ago, the “renaissance of value” has begun – but only just begun. Our investment net gains were a record $3.4 billion: as I have said many times – we like lumpy!
Since we began in 1985, 36 years ago, our book value per share has compounded by 18.9% (including dividends) annually while our common stock price has compounded by 16.9% (including dividends) annually.
Read full letter here.
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Investments
Last year in our annual report, I quoted Phil Carret, who has had an outstanding long term track record. The quote is so good that I am repeating it. 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.”
The first sentence is key: “Good management is rare at best, it is difficult to appraise, and it is undoubtedly the single most important factor in security analysis.”
Many companies suffered from the pandemic but the companies led by outstanding CEOs thrived.
A case in point, Atlas (ATCO, Financial), led by David Sokol and Bing Chen, had an outstanding year in 2021. Seaspan, the containership leasing company owned by Atlas, will grow by almost 1 million TEU to approximately 2 million TEU over the next several years, 73 vessels and close to $12 billion of gross contracted cash flow, primarily contributed by 70 new builds. Seaspan has already delivered three new build vessels ahead of schedule and expects all vessels to be in operation by year-end 2024 as scheduled. The modern new build program, with $7.5 billion in fully funded investment, is a testament to the consistent operational excellence that David and Bing have delivered together with creative turnkey solutions for their customers. Atlas has forecast earnings per share to increase from $1.68 to $2.50 in 2024. Lots more to come from David and Bing.
Stelco (TSX:STLC, Financial), under Alan Kestenbaum, had an outstanding year in 2021 as sales increased 172% to $4.1 billion and EBITDA increased to $2.1 billion, resulting in a leading EBITDA margin of 50%. High steel prices combined with Stelco being the low cost producer resulted in free cash flow of $1.4 billion in 2021. Stelco raised its dividend twice in 2021 to $1.20 per share (from $0.40 per share in 2020) and repurchased 11.4 million shares (13% of its shares outstanding) at $34.90 per share. In January 2022, through a Dutch auction, Stelco repurchased a further 4.4 million shares (5.7% of its shares outstanding) at $37 per share. As we have not sold a single share, our ownership has increased from 13.7% to 17.8%. Alan has also not sold a single share and owns 11.9% of Stelco. Stelco ended 2021 with net cash of $707 million.
In addition, Stelco recently signed a licensing agreement with Primobius GmgH to commercialize an EV battery recycling technology in North America. The proposed shredding and hydrometallurgical refinery will allow Stelco to recycle end-of-life EV batteries and recover up to 18,400 tonnes of nickel, manganese, cobalt sulphates and lithium hydroxide and 40,000 tonnes of steel annually. We believe this recent joint venture is an example of the entrepreneurial spirit at Stelco, taking advantage of an exciting new opportunity to create shareholder value.
2021 was a turnaround year for Tope Lawani and Babatunde Soyeye at Helios Fairfax Partners (TSX:HFPC.U, Financial) (Helios Fairfax) as they digested the existing positions in Fairfax Africa. Tope and Baba, co-founders of the Helios private equity business, completed their first year as Co-CEOs of Helios Fairfax with a focus on stabilizing the legacy holdings of Fairfax Africa in addition to making incremental new investments to create value for shareholders. The National Basketball Association chose Helios Fairfax as its only partner in Africa, and Helios Fairfax made a $30 million investment for a minority stake in NBA Africa. Other investments include a $16 million co-investment in Trone, a medical device distributor based in Morocco, and a $27 million investment in Helios Fund IV, showing investors in the Fund that Helios Fairfax eats its own cooking. With virtually all global private equity funds having exited Africa, Helios Fairfax is the only focused player in the continent and is often the first call for multinational companies looking to expand in Africa. Helios Fairfax investors will in time benefit from both the growth in balance sheet investments and the cash flow from the Helios business. With Helios Fairfax’s share price of $3.40 per share and depressed book value of $5.40 per share, we feel the current discount is unwarranted. Please see Tope and Baba at the Helios Fairfax AGM to hear more about the opportunities they are seeing in Africa.
Eurobank (ATH:EUROB, Financial), led by Fokion Karavias with support from George Chryssikos, had an outstanding year in 2021 as it expects its non-performing loan ratio to drop to 7%, return on tangible equity to increase to over 8%, and capital ratio (CETI) to be strong at approximately 13%. Under Fokion’s leadership, Eurobank’s profitability is expected to grow significantly with Greece’s strong economic growth. As I have said previously, Greece is blessed with a great prime minister, Mr Mitsotakis, who is very business friendly and has dramatically improved the economic outlook of Greece since he got elected three years ago. Greece’s GDP is expected to grow by 8.5% in 2021, its unemployment ratio fell to a decade low of 12.8% and real estate prices continued to increase. Since December 31, 2021, Eurobank shares have increased to a high of 1.14 euros per share – still a far cry from the book value of 1.47 euros per share. Eurobank is ready to begin paying dividends again (the first time since May 2008), subject to regulatory approval. The future is very bright for Eurobank.
Recipe (TSX:RECP, Financial) survived another tough year in 2021 as lockdowns closed its restaurants for long periods during the year. In spite of these lockdowns, Recipe pivoted to e-commerce sales, curbside pick-up and home delivery to generate system sales of Cdn$2.7 billion, up 12% from 2020 and down 22% from 2019. E-commerce sales now account for Cdn$675 million or almost 25% of Recipe’s system sales, up from Cdn$340 million or 10% of system sales in 2019. Recipe’s franchise revenue was Cdn$150 million in 2021, up 18% from 2020, and EBITDA for the year was Cdn$144 million, down 33% from pre-pandemic levels of Cdn$216 million. Recipe was able to reduce its debt outstanding by Cdn$95 million in 2021, capping an outstanding performance by Frank Hennessey and his team.
Dexterra (TSX:DXT, Financial) remains on track to achieve Cdn$1.0 billion in sales and Cdn$100 million in EBITDA in the near term. John MacCuish is leading the transformation to be a capital-light business. The workforce accommodations segment experienced strong growth and had strong profitability as resource industries in Canada rebounded in 2021. The strong underlying demand in affordable housing across Canada is also a priority for both the federal and provincial governments, and Dexterra’s modular solution business is in an excellent position to support this very important social issue. In January 2022, Dexterra also closed two facilities management acquisitions at attractive multiples with a combined purchase price of approximately Cdn$50 million. Dana Hospitality expands the company’s existing culinary services into education, entertainment, healthcare and leisure activities. Tricom Facility Services group, a business with a long history of providing janitorial and building maintenance services, builds the company’s strength in the hospitality, transit and entertainment verticals. These acquisitions have been financed by the company’s existing credit facility and the company’s balance sheet continues to be strong to support future growth.
John Chen is the reason BlackBerry (TSX:BB, Financial) has survived. The company has two high growth markets, cyber security and embedded operating systems for the automotive industry. John is focusing on growth in both markets. Recently, John has sold BlackBerry patents for $600 million, which will increase net cash to just under $1 billion.
It has been almost three years since we took AGT private, partnering with founder and CEO Murad Al-Katib. After record results in 2020, in 2021 the company experienced a record drought in western Canada and the impact of silo collapses at the primary port in Vancouver. Both incidents reduced volumes and margins in the value added processing of pulses, grains, oilseeds and specialty crops and in its bulk handling business. However, continued progress in growing its ingredients, including texturized plant protein and packaged foods businesses, allowed its revenue and results in 2021 to be well above the take-private year levels in 2019. AGT also recently announced a joint venture with Federated Co-Operative Limited (FCL) to construct a canola crushing facility which will supply under a long term take or pay contract 50% of the feedstock required for a 15,000 barrel a day renewable diesel plant owned by FCL.
Fairfax continues to jointly own Peak Achievement with its partner, Sagard Holdings. Peak’s core brands are Bauer, the leading hockey brand, and Maverik lacrosse. Peak also owns a minority investment in Rawlings, which is the number one brand in baseball. Fairfax paid $154 million for its stake in Peak in 2017. Since that time, EBITDA and free cash flow have increased steadily in the hockey and lacrosse businesses, and Fairfax has received $33 million in dividends. More to come under CEO Ed Kinnaly’s leadership, with opportunities in direct-to-consumer business, apparel and the overseas demand for high quality hockey equipment.
Sporting Life Group had another record year in 2021. CEO Chad McKinnon and his top management, including Freddie Lecoq and Barry Williams, continued to hit the cover off the ball. Bill Gregson, former CEO of Forzani, Recipe and The Brick, continues to be our trusted consultant on all things retail and real estate-related in Canada. We are very happy to have him in our corner. The 2021 EBITDA of the combined Sporting Life and Golf Town businesses is now higher than what Fairfax paid for its 71% stake several years ago. Golf, previously thought of as a declining sport, experienced a resurgence during COVID. Golf Town struggled to keep inventory (once finally received) on the shelf. The turnaround under the Sporting Life banner has begun to bear fruit and new locations are being opened. The revamped Sporting Life flagship store on Yonge Street in Toronto suggests that there is significant upside on the existing footprint.
Commercial International Bank (CAI:COMI, Financial) (CIB), in Egypt, had a much better year in 2021, with net profit up over 30% from the prior year. The Egyptian economy has found its footing and is now showing mid-single digit GDP growth. With the depths of COVID-19 in the rear-view mirror, CIB dramatically reduced loan loss provisioning in 2021 by 60% from the prior year. Despite incremental provisioning declining, the non-performing loans remain well over 200% covered. Add to this a 30% capital adequacy ratio and a rock solid balance sheet. Egypt’s Central Bank has begun to allow banks to reinstate dividends, which is helpful as CIB is arguably overcapitalized. Despite excess capital on the books, CEO Hussein Abaza has done a great job of sustaining 20% ROEs. With consistent double-digit compounding of earnings per share and book value per share since the 1990s and a digital transformation underway, the current valuation of 8 times earnings and 1.3 times book value appears to provide extraordinary value.
Resolute Forest Products (RFP, Financial) continues to transform its business. Over the past decade, revenue from its mature paper segment declined from 76% of the total to 26%. Today, wood products represents close to half of Resolute’s business. An increased focus on wood products paid off in 2021 as lumber prices hit a record high. Resolute used these strong, albeit cyclical, cash flows to reduce debt by $258 million, repurchase 6% of its outstanding shares for $48 million and pay a $1 per share special dividend aggregating $79 million. In the past two years, Resolute has repurchased 13% of its shares. In 2021, Duncan Davies succeeded our own Brad Martin as Chairman of the Board. Brad continues as Vice Chair. Over his nearly two decades as CEO, Duncan helped build one of the world’s largest lumber companies. With Duncan, Brad and new CEO Remi Lalonde, Resolute is well positioned and remains in good hands.
We continue to invest in BDT Capital Partners – since 2009 we have invested $723 million, have received cash distributions of $887 million and have a remaining year-end market value of $541 million. Byron Trott and his team have provided fantastic returns for us over the long term and 2021 was no exception. We very much look forward to our continued partnership well into the future.
We have an outstanding partnership with Kennedy Wilson (KW, Financial), 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 $1,150 million in real estate, received cash proceeds of $1,070 million and still have real estate worth about $542 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 60% on average. At the end of 2021, we had committed to mortgage loans of $1.44 billion in the U.S. at an average yield of 4.7% and an average maturity of 1.9 years. We had also committed to approximately $500 million of mortgage loans in the U.K. and Europe at an average yield of 3.8% and an average maturity of 1.7 years. We are truly grateful to Bill and his team, and Wade Burton on our side, for a very profitable and enjoyable relationship. In February 2022, we committed to invest $300 million in a 4.75% perpetual preferred in Kennedy Wilson, with seven-year warrants exercisable at $23 per share.
Our preferred share and warrant investment in Altius Minerals (TSX:ALS, Financial) is gathering steam. 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$800 million. The company’s business model of collecting royalties from a wide range of long-lived properties producing copper, gold, nickel, iron ore and potash generates considerable upside in an inflationary environment without having to make any additional capital investment. Royalty growth comes from production growth as well as price increases, not to mention meaningful optionality from existing royalty interests in projects which are likely to come onstream in the next few years. The company is also capitalizing on the increasing production of renewable energy resources through an in-house royalty model in partnership with Apollo, which trades publicly as Altius Renewable Resources.
Fairfax owns 43% of Exco Resources (EXCE, Financial), a U.S. oil and gas producer. In 2021, Exco benefitted from a strong rebound in commodity prices. EBITDA, free cash flow, liquidity, leverage and reserves all improved. Net debt fell to $115 million (0.75 times EBITDA). The value of Exco’s total proved reserves increased 85%. Its reserves replacement ratio for 2021, not related to commodity price improvements, was 434%. Led by Chairman John Wilder and CEO Hal Hickey, and Wendy Teramoto and Peter Furlan on our side, Exco achieved excellent results through high field level productivity and company-wide cost control. In January 2022, Exco recorded its 85th month without an employee lost time accident. John Wilder is a great long term partner, and we are well served by his leadership.
2021 was a remarkable year for Leon’s (LEFUF, Financial). With consumers under lockdown at various points throughout the year, Canadians invested in their homes and Leon’s was a beneficiary. In 2021, Leon’s grew revenue by 13%, net income by 27% and EPS by 32%.
Leon’s took advantage of its debt-free balance sheet to repurchase, via Dutch auction, 8 million common shares for an aggregate purchase price of Cdn$200 million. The share repurchase had the effect of reducing Leon’s share count by 10.4%. We sold our shares in the Dutch auction at Cdn$25 per share, twice the share price in March 2013 when we acquired a debenture convertible at Cdn$12.64 per share. We wish the Leon family much success in the future.
Farmers Edge (TSX:FDGE) raised Cdn$144 million via its IPO in March 2021 in order to fund growth in its digital AG platform. While its first year as a public company did not meet the high market expectations, the team had a record year of new acres under subscription. A bright spot in 2021 was the success in the company’s carbon product, which allows farmers to track and sell carbon credits, with over three million carbon acres sold in Canada. Continued growth in acres and in the distribution of insurance products is anticipated for this year and management has recently hired some new senior management to add bench strength and execution capability. The company has no debt and significant cash on its balance sheet.
Boat Rocker Media (TSX:BRMI) was successful in raising Cdn $170 million via its IPO in March 2021. The much-needed cash delevered the business, leaving Cdn$80 million of net cash on the balance sheet to fund contracted new TV shows in the pipeline. Boat Rocker has one of the largest Kids & Family studios in North America, with hit shows such as Dino Ranch (number 1 for kids 2-5 on Disney+), Tales Dark & Grimm (Netflix) and Daniel Spellbound (Netflix). While COVID-19 protocols played havoc with TV production and temporarily elevated costs, the animation team successfully transitioned to remote work and was running flat out all year. The company’s talent management agency, Untitled Entertainment, rebounded quickly as actors went back to work. During 2021, the company is expected to more than double revenue to over Cdn$600 million and is expecting a significant increase in EBITDA. We continue to cheer on co-founders David Fortier and Ivan Schneeberg and CEO John Young.
Because of the sponsorship of Darren Morcombe and Pierre Lassonde and the leadership of Dan Myerson as President, Fairfax invested Cdn$100 million in Foran Mining (TSXV:FOM), receiving 55.6 million shares and 16 million five-year warrants with an exercise price of Cdn$2.09 per share. Fairfax beneficially owns 28% of Foran’s common shares assuming conversion of the warrants and non-voting shares. Foran’s core asset is its McIlvenna Bay project located in the Flin Flon Greenstone Belt in Saskatchewan, one of the most successful mining regions in Canada. McIlvenna Bay is expected to become the world’s first carbon neutral mine. The project has indicated copper resources in excess of 39 million tonnes (and growing), and is expected to have a 19+ year mine life with low copper production cash costs given its high precious metal content. The project benefits from the extensive transportation and power infrastructure in the region. Foran has received initial permits to begin construction at McIlvenna Bay, with the project likely fully operational in 2025.
Since 2008 we have been investing with founder Kyle Shaw and his private equity firm ShawKwei & Partners, which takes significant stakes in middle-market industrial, manufacturing and service companies across Asia, partnering with management to help improve their businesses. We have invested $398 million in two funds (with a commitment to invest an additional $202 million), received cash distributions of $198 million and have a remaining value of $374 million at year-end. The returns to date are primarily from our investment in the 2010 vintage fund, which increased 46% in value in 2021 and has produced a compound annual return of approximately 16% since 2010. The 2017 vintage fund has drawn about 50% of committed capital to date, with a much-improved outlook for new deals, including its recent acquisition of CR Asia Group.
Led by its outstanding Chairman and CEO Krishan Balendra, John Keells Holdings (COL:JKH.N0000) is the largest listed conglomerate in Sri Lanka, with a significant presence in leisure, consumer foods, retail, transportation, property and financial services and a great long term record. Fairfax through its direct and indirect holdings has a 13% equity interest in the company.
I mentioned last year that 2021 may see the renaissance of value that Ben Graham referred to in 1974. The rotation to value stocks began in 2021 – with lots more to go. While value stocks moved up, high tech stocks began to come down, especially in early 2022 with interest rates rising due to inflation. Companies with no earnings are literally crashing – and suddenly! Netflix dropped over 20% on January 21, 2022 and is now down 35% in 2022. Shopify was down 14% on January 21, 2022 and another 16% on February 16, 2022 – it is now down 50% in 2022. The table below shows some of the declines that have taken place in 2021/2022 in tech stocks with little earnings.
The market values listed above show that there are a lot more declines to come in these tech stocks. For example, Zoom is down 69% from its high but still has a market value of $40 billion – with sales of only $4 billion. I remind you that in the dot.com crash, the NASDAQ dropped 85% from 1999 to 2002 – and none of the tech stocks were spared. And as in past speculations, very few investors (speculators?) would have made money. If you didn’t know why you bought a stock (i.e. no earnings, high valuations), what would make you sell it?
The table below shows you the market cap, revenue and net profit of Zoom and Shopify versus Atlas and Stelco.
When you compare Zoom and Shopify market caps to Atlas and Stelco you can see why the rotation from growth to value is taking place – and why we think we could experience another 1999 – 2002 time period, when our portfolios went up 100% even though stock markets worldwide dropped 40% – 50%.
We will look back with incredulity at the tech mania we have just experienced! The FAANG stocks have had outstanding growth records – and we missed them! Shame on us! But trees don’t grow to the sky – and we continue to watch from the sidelines. At year-end 2021, the combined market cap of only three stocks – Microsoft, Apple and Google – was equal to the combined market cap of all of the stocks listed in Canada, France and Germany. We remember 2000, when Cisco had a market cap more than the whole Canadian market. 21 years later Cisco is still down 50%.
Inflation and higher interest rates are the big risks the markets face today. The CPI index was up 7.5% in January 2022, the highest in 40 years and the ninth consecutive monthly reading above 5%. The Fed is behind the curve as it was in the 1970s and we fear interest rates will increase significantly over time. We should benefit as our total fixed income portfolio, inclusive of cash and short term treasuries, has a duration of only 1.2 years (an average term of 2.2), but significantly higher long rates will have an impact on the economy. This may still be a few years away and, as I said earlier, we have companies with great management that should be able to navigate these “rocks” profitably! Higher interest rates will destroy the speculation we have seen in high tech and other growth stocks with high valuations, SPACS, crypto currencies, etc. Another risk we continue to see is China and its real estate bubble – which is being tested. We remain skeptical that it will not burst but do not know when it will!
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Similarly to last year, Fairfax India (of which many of you are also shareholders) will hold its annual shareholders’ meeting at 2:00 p.m. on April 21. Details will be posted on the Fairfax India website.
Helios Fairfax Partners will hold its shareholders’ meeting on Wednesday, April 20 at 2:30 p.m. Details will be posted on its website.
So as we have done for the last 36 years, we look forward again to seeing all of you in person at our annual shareholders’ meeting in Toronto, after a hiatus of two years because of COVID-19. Our leaders will also be there to answer all your questions. We are truly blessed to have loyal, long term shareholders like you and I look forward to seeing you on April 21.
March 4, 2022
V. Prem Watsa (Trades, Portfolio)
Chairman and CEO
