kyleholmes

http://www.bengrahaminvesting.ca/Resources/Video_Presentations/Guest_Speakers/2011/Watsa_2011.htm

Roman Bridges Sanjeev!

Sanjeev, I agree with you... just thought I would post it as I had not seen anyone mention it yet! Kyle

1992 Annual Report HWIC is an investment counselling firm that Tony Hamblin and I founded in 1984. With five partners, Tony Hamblin, Roger Lace, Brian Bradstreet, Frances Burke and me, who have worked together for 18 years, and Vito Maida, a recent addition, the firm manages approximately $1 billion in pension, corporate and individual funds. Of the $1 billion, approximately $240 million are funds that originate from Fairfax's insurance subsidiaries. From inception the firm was set up to manage a small number of portfolios with a long term value-oriented philosophy. All the clients agreed to an incentive fee, resulting in HWIC being more investment driven than marketing-oriented. The company's long term results have ranked among those of the top investment managers in Canada. How did we value the firm? Firstly, we created an independent committee of our Board, chaired by Robbert Hartog. Secondly, we consulted Sir John Templeton, the dean of the investment counselling business and also a large shareholder of ours. After arriving at a price that both Robbert and Sir John felt was fair, we obtained written approval of this transaction from all of the more than 50% of our minority shareholders that we contacted. Thus, the valuation of $14 million ($1.85 million in cash and 433,773 Fairfax shares valued at $28 per share) was considered fair and approved by our Board of Directors, the majority of our minority shareholders and all the partners at HWIC. 1994 Annual Report As far as the business of HWIC is concerned, 1994 was another record year as incentive fees were earned from most clients, including Fairfax's insurance subsidiaries. Incentive fees are paid by HWIC's clients only if their results exceed the hurdle rate on both a one year and from inception basis. For example, for clients that have a Canadian common stock portfolio managed by HWIC, the hurdle rate is the TSE 300 return plus 200 basis points, i.e., before the client pays incentive fees, the client's results, net of all fees, must exceed the TSE 300 return plus 200 basis points for both 1994 and from inception. Incentive fees payable are 10% of any return in the past year above the hurdle rate (90% remains with the client) up to a maximum of 1.75% of assets. All the non-Fairfax related clients have considered this a very fair fee and have been happy to pay incentive fees in the past two years. Fairfax's insurance subsidiaries were charged incentive fees by HWIC for the first time in 1994. Insurance subsidiaries did not qualify for incentive fees in 1993 mainly because of a block of FCA shares purchased for them by your Chairman in 1989. Some more details about investment management fees paid by Fairfax's insurance subsidiaries to HWIC: 1)Incentive fees are paid only on common stock portfolios. Results are measured against the TSE 300 return plus 200 basis points for Canadian stocks and the S&P 500 return plus 200 basis points for U.S. stocks. 2)The inception date for Canadian common stock portfolios is January 1, 1990, the date incentive fees were first instituted by HWIC for its clients. The inception date for U.S. common stock portfolios is March 31, 1994, the first quarterly date on which HWIC managed a U.S. common stock portfolio for a U.S. subsidiary of Fairfax (Ranger). The common stocks of any subsequently acquired insurance subsidiary will be included in the appropriate portfolio for measurement purposes essentially from the date of acquisition. 3)The average base fee paid by Fairfax's insurance subsidiaries to HWIC for investment management is 0.25% of assets significantly less than the average base fee paid by HWIC's pension clients. Reflecting the Continental Canada purchase and a reduction in the base fee, the average base fee in 1995 for Fairfax's insurance subsidiaries will drop to 0.17% of assets. Just to refresh your memory, when Fairfax purchased HWIC in 1992, a fair revenue sharing mechanism was instituted at HWIC. This is how it works. The revenue base for HWIC in 1992 was $3.7 million of which $2.0 million covered expenses, including salaries and overhead, and $1.7 million was pre-tax profit. In each year after the sale, HWIC retains $2.0 million of the first $3.7 million of revenue to pay expenses, while Fairfax gets the remaining $1.7 million. Any revenue above $3.7 million in any year is split 50/50 between Fairfax and HWIC Fairfax's 50% being additional profit (to the $1.7 million), while HWIC's 50% covers any incremental expenses beyond $2.0 million and thereafter constitutes a profit pool to be shared among its partners and employees. This is an excellent way to provide attractive returns for Fairfax while keeping the incentives at HWIC. In 1994 HWIC had revenue from base fees of approximately $4.6 million. Incentive fees totalled $4.9 million of which $1.6 million was from Fairfax insurance subsidiaries. Through the revenue sharing mechanism discussed earlier, Fairfax earned a 33% pre-tax return on its $14 million investment in HWIC. These returns are all cash and, of course, there is no additional capital investment needed at HWIC. As mentioned last year, while returns after goodwill amortization (of $1.4 million annually) will be less than those mentioned above, we think the returns we have shown are the best measure of HWIC's performance. This is perhaps an appropriate point to mention where my compensation comes from. I get a straight salary of $250,000 from Fairfax with no bonuses, director's fees or other payments from Fairfax or any of its subsidiaries (other than HWIC). From HWIC, like all partners there, I get a $200,000 salary and participate in the profit sharing pool (up to 30%) described earlier. Any bonus that is shown for me in the proxy circular comes from this profit participation. Because my compensation can be significant depending on investment results, I wanted to make sure you understood exactly where it comes from. Why did HWIC make sense for Fairfax? Mainly, for the following three reasons: 1) It was a very good investment for Fairfax. Under very reasonable assumptions (i.e. no incentive fees or additional funds under management), Fairfax could achieve its 20% return on investment. Also, a multiple of 3.8 times revenue and 8 times pre-tax earnings was reasonable compared to private transactions and public valuations of investment counselling firms. Furthermore, we paid for most of the purchase by issuing shares of Fairfax at a fair price of $28 per share. 2) It brought proven investment management into Fairfax. 3) It removed my perceived conflict of interest and placed all of my interests in one pot. *This is not an apples to apples comparison, but figured I would post it nonetheless out of interests sake....

http://sportsillustrated.cnn.com/vault/article/magazine/MAG1153364/index.htm I have witnessed first hand some of the excesses that go on with some of these athletes.... mostly in professional hockey. I know many will not believe this but some of them do not know how to fill out cheques, go to the bank, etc. Many pro athletes pay a couple percent a year of their salary for people to "look" after their finances such as making sure their rent, phone bills, etc are paid! And as you could imagine many get royally fleeced... and I mean fleeced, but they have no idea even if they are being taken or if they are not. Stealing from babies in a way.... and makes a person sick listening to the stories.

http://online.wsj.com/article/SB20001424052702303912104575163891292354932.html http://files.shareholder.com/downloads/BHI/639761756x0x363026/210AEB5A-0060-4756-AE2C-78D988A49417/na_rigs_040110.pdf The EIA data showed that gas supply rose 4% in 2009, despite a 60% decline in onshore gas rigs. The conflicting numbers have perplexed analysts.

The banks aren't stupid. I am not convinced of this Sanjeev! ;D

Viking, I used to watch this show (years ago) when I lived in Toronto. I saw the spanking by Embry... yes, a classic. I loved it when Brian stated 'model price' like it actually meant something. My read on Brian was that must be good at sales because the logic behind his stock picks certainly was lacking. Nice to hear he is still going strong; gives me confidence that most on this board can continue to outperform Sit through any finance courses taught at our North American universities.... and you will have great confidence that most on this board will continue to outperform.... variance is risk, markets are efficient, beta means something, etc, etc! It is mind boggling talking to some of these guys who are teaching our "future"!

Watsa's Ownership in Fairfax I have seen numerous different estimates of Prem's net worth and ownership in Fairfax and wanted to see if anyone else had an different estimate than mine. The confusing thing for most I believe is just how much of The Sixty Two Company does he own. When shares are beneficially listed it can provide amounts that are misleading as we all know. Not that it really matters much as Prem has more than enough money on the line in any of the various different estimates and has went above the call of duty for shareholders throughtout his whole tenure. Just out of interests sake I tried coming up with a number. Here is my estimate. On page 849 of "Fairfax Discovery" it gives an organizational chart as of September 30, 2001 of Prem's ownership directly and indirectly in Fairfax. It lists that he has: 129,735 shares through number company 810679 12,589 shares held personally and a 50.01% ownership in The Sixty Two Investment Company Limited which would result in another (1,598,620 * 50.01%) 799,470 shares which equals a total of 941,794 shares This being said though, these numbers are of September 30, 2001... which as we know from his annual reports he has added more shares since then. Looking at Sedi it looks like he has added an additional 119,246 shares directly and through his kids account. All added up it looks like, plus or minus some, that he has an ownership stake of 1,061,040 shares. Is this correct or am I missing something? Other interesting subjects if anyone else knew would be 1) What percentage of ESL Investments is Lampert's 2) What percentage of the Lion Fund is Biglari's. While I understand that it is their fund so they have an incentive to treat all of it like their own, just out of interests sake knowing actually ownership percentages would be interesting.

From the Reuters article posted by Viking: "The biggest price cuts are being taken by the largest carriers, according to the most recent survey by the Council of Insurance Agents and Brokers (CIAB) in October. Large property-casualty insurers were paid about 7.4 percent less for policies in the third quarter compared with the more modest 3.6 percent average decline recorded by smaller players." I'm speculating that the reason larger players are seeing more pricing pressure than smaller ones is due to AIG cutting rate drastically since, well, they are backstopped by Uncle Sam. Can anyone in the industry confirm or advise to the contrary? Crip, I spoke to a fellow over at Markel Corp and he was livid about AIG's pricing..... they are trying to earn there way out of there problems which can seem smart when more money is coming in, than going out.... but in reality it really is not as more guarantees and money are going out, than money coming in! It just might take awhile to play out! But from what he was saying you are correct, and he was quite enraged about it! He said they have been running there business correctly for years waiting for the stupidity to stop(ie-Reinsuring with questionable reinsurers, poor investments,etc) and the eventually hard market both with their investments and insurance.... they got the investments, but are waiting for the insurance and when they should have got one based on the storm on the left side of their competitors balance sheets... they have competitors that are writing business at unreasonable rates stopping it from turning..... He had some choice words for the competitors with back stops from Uncle Sam, which are some of the large culprits!

http://watch.bnn.ca/#clip240385 Little bit on Canadian Banks on BNN

Wesco Financial Shareholder Letters Anyone have any links to more of these letters dating back pre-1997? Thanks in advance!

Ericopoly, I know your pain. A friend of mine plays in the National Hockey League with the Columbus Blue Jackets and gets shut down for almost everything! He is not overly business savvy, so he usually calls me for advice and I can't believe some of the stuff I hear. He has a 3 year contract(one way) for over half a million dollars a year and routinely gets shut down for things like American Express, Target and other cards. He just bought a condo and had a hell of a time getting approved as well. He had to eventually get his loan from a smaller, regional bank that does almost all the lending to the Blue Jackets, as no other bank will touch the players as many are Canadians and have little to no credit in the US. The banker at the regional bank said that in all the loans they have given to the players, they have never had one missed or late payment! Common sense just isn't very common I guess! P.S- He was buying some furniture the other day, and got embarrassingly declined for a card that would have allowed him to save 10% on his purchases. Is actually quite comical at this point!!

Sanjeev, I am not quite as bearish as Martin, but I think things will get tougher for a lot longer before they get better. We may not see the lows of the recent past, but we will most certainly tread deep waters over the next couple of years. Not speaking specially about the Fairfax posting here but this is why I am of the belief that the importance of managements abilities over the next 3-5 years has been magnified many fold. If a person is wrong about the "new normal" you will still do quite well, and if they are right they are still in a great position to build value over the very tough economic times that result from the "new normal"! Example: Berkshire Hathaway 1974- $38/share 1980- $400/share *Alot of value can be built in very different economic times! It goes without saying though that these "abilities" are only part of the valuation process and must be purchased at attractive long term values! I am a majority in Sanjeev's camp as everyday there seems to be less value around..... with this said though, I have been finding enough!

Uses of Idle Cash! There are alot of different options out there for idle cash to sit until the 60 miles an hour fast ball comes across the plate and I was curious where other board members park there cash, when they have any? Any favourite places? Canadian and US Funds? This is something that I have yet to see talked about on the board, so quite interested in hearing the responses! Thanks in advance!