Prem Watsa's Fairfax 2023 Annual Shareholder Letter: Part 3

Continued from part two.

Financial Position

The following table shows our financial position at the end of 2023 and 2022. When we have a controlling interest in a company (for example, Recipe or Thomas Cook India (BOM:500413, Financial)), we are required to consolidate that company's financial statements into our own financial statements even though we do not guarantee the debt – and quite often it is an investment in a public company. Consequently, this table excludes the debt of our consolidated non-insurance companies:

• excludes $1.7 billion in 2023 ($1 billion in 2022) of investments in associates and non-insurance consolidated investments held in the holding company

We ended 2023 with a very strong financial position with $1.7 billion in cash and marketable securities plus an additional $1.7 billion of associates and consolidated non-insurance investments owned by the holding company (largely consisting of shares of Quess ($187 million), Eurobank ($377 million), Poseidon ($223 million) and Thomas Cook India ($289 million)). Our total debt-to-total-capital ratio in 2023 of 23.1% (22.4% excluding our 2024 bonds that were redeemed in early 2024) was less than 23.7% in 2022. Our adjusted operating income interest coverage continues to remain strong, increasing to 11.9x in 2023 from 8.1x in 2022. Late in the year, we issued $400 million of 6% unsecured notes due 2033 and early in 2024 upsized that by $200 million. The proceeds will be used to take out Fairfax's 2024 and 2025 bond maturities and to extend out the term to 10 years.

Investments

After almost 50 years in the investment business, I think Phil Carret said it all (and I quote him again):

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

And as my mentor, John Templeton said, “Whenever you can buy a large amount of future earnings for a low price, you have made a good investment.”

We have been blessed to know many of these exceptional leaders in our insurance business and in our investments.

Here's how our great leaders, who lead our investments performed in 2023:

During 2023, Poseidon completed a privatization with our new partners Ocean Network Express. Now a private company under the continued leadership of David Sokol and Bing Chen, Poseidon remains on track to solidify its position as the world's leading containership owner operator. Poseidon successfully executed on its 70 containership newbuild program by delivering 22 vessels – 317,220 TEU total in 2023, along with 12 vessels delivered in 2021 and 2022 – with each commencing their scheduled long-term charters. Execution of the remainder of Poseidon's newbuild program remains ahead of schedule, with the expected delivery of an additional 36 vessels in 2024. Poseidon's other business, APR Energy, continues its pivot to long-term predictable cash flow opportunities. Upon completion of Poseidon's containership newbuild program, Poseidon is expected to deliver more than $2.5 billion of revenue and $1.9 billion of adjusted EBITDA. In December 2023, Poseidon announced the expansion into the pure car truck carrier segment, with a newbuild program of four car carrier ships that each can hold over 10,000 passenger vehicles. This is a continuation of the consistent operational excellence that David and Bing have delivered together with creative turnkey solutions for their customers. Poseidon is expected to make net earnings in excess of $400 million in 2024 and $500 million in 2025. We carry our 43% ownership in Poseidon at $1.7 billion – 10x 2024 expected earnings or 8x 2025 expected earnings.

Eurobank (ATH:EUROB, Financial), led by Fokion Karavias, had another outstanding year in 2023 with net income of €1.14 billion. Recurring EPS jumped from 18 cents to over 31 cents, return on tangible book value increased to 18% and tangible book value finished at €2 per share. Eurobank's balance sheet also continues to strengthen – non-performing loans are less than 4% of loans (down from 5.2%) and core Tier 1 capital is up from 15.2% to 17%. The strong performance has started to be reflected in the stock price which rose over 50% in 2023 to €1.61 per share. This strong performance continues in 2024 as the bank prepares to pay its first dividend since 2008. On the strategic front, management made notable progress with the divestment of its Serbian bank and the acquisition of a majority stake in the number two bank in Cyprus.

The Greek economy continues its recovery with 2023 GDP growth around 2%, debt to GDP below 160% and the unemployment rate below 10% for the first time since the global financial crisis. DBRS, S&P and Fitch all upgraded Greece to investment grade status during the year. Finally, Prime Minister Mitsotakis won a resounding re-election and a second four-year term in office. Deservedly, Greece won The Economist's award for ‘Country of the Year' in 2023. Eurobank is carried on our books at €1.50 per share (or $1.66 per share).

In a year of volatile steel prices, Stelco (TSX:STLC, Financial) performed well, highlighting its competitive cost structure. Stelco's talented team – led by Alan Kestenbaum, Sujit Sanyal, and Paul Scherzer – continues to be excellent stewards of the business with a keen focus on creating shareholder value. We believe that Stelco owns the best-in-class blast furnace assets in North America, which is highlighted by its industry leading margins. The company's Lake Erie Works facility has had recent upgrades to its blast furnace, coke battery, a newly constructed co-generation facility and a new pig iron caster. Nippon recently announced an agreement to acquire US Steel at a multiple of 7.8x 2024 EBITDA, a significant premium to Stelco's trading multiple. We believe the US Steel acquisition highlights the value of blast furnace operations. Stelco continues to have significant net cash on its balance sheet, providing management with flexibility to take advantage of both organic and inorganic growth opportunities. The company rewarded shareholders with a Cdn$3 per share special dividend in addition to its Cdn$1.68 per share regular dividend in 2023. Stelco has raised its regular dividend for 2024 to Cdn$2.00 per share. We believe Stelco has a bright future under Alan Kestenbaum's leadership. Stelco is carried on our books at $22.44 per share versus a market price of $37.84 per share.

Fairfax continues to jointly own Peak Achievement with our partner, Sagard Holdings. Peak's core brands are Bauer, the leading hockey brand, and Maverik, a leading lacrosse brand. 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 has increased steadily in the hockey and lacrosse businesses, and Fairfax has received $72 million in dividends. Hockey participation growth continues post-pandemic and exciting developments such as Bauer's partnership with the new Professional Women's Hockey League are expected to drive incremental girls' participation. More to come under CEO Ed Kinnaly's leadership, with opportunities in direct-to-consumer, apparel and training. We carry Peak on our balance sheet at less than 5x free cash flow.

The Helios Fairfax Partners (TSX:HFPC.U, Financial) (HFP) team led by Tope Lawani and Babatunde Soyoye have effectively completed the turnaround with the only legacy asset remaining being the private school operator, Nova Pioneer. HFP has approximately $75 million in cash available to invest, in addition to an undrawn $70 million bank facility. HFP is now poised to generate positive growth in book value per share. Platform investments in Helios Sports & Entertainment Group, Helios CLEAR (Climate Growth Fund), Helios Seven Rivers, Helios Digital Ventures and Helios Energy Transition have begun making initial investments with Helios Fairfax Partners balance sheet. The next step is for the various platform investments to raise third-party capital for which Helios Fairfax Partners will receive management and carry fee income. Helios remains the only listed dedicated African investment vehicle in a market scarce of capital. We are excited to be partners with Tope and Baba. Fairfax's carrying value of HFP is $198 million versus market value of $91 million. HFP currently trades at 50% of book value.

In 2023, Exco Resources (EXCE, Financial) (a U.S. oil and gas producer) repurchased 8% of its shares. This increased Fairfax's ownership of Exco from 44% to 48%. After year end, Exco repurchased another 2% of its shares, increasing our ownership to 49%. Both transactions occurred at steep discounts to intrinsic value. Sometimes, as T. Boone Pickens noted, “it is cheaper to drill for oil (and gas!!) on the stock exchange than it is to drill directly”. Of course, Exco also did plenty of drilling. In 2023, Exco added more than twice as much to its reserves as it extracted through production. With weakness in commodity prices, the present value of proved reserves dropped. However, production volumes increased 3.2% year over year. Exco is well-positioned to navigate commodity price volatility. It has a strong balance sheet, nimble operations and decisive leadership. Chairman John Wilder and CEO Hal Hickey lead Exco. Fairfax's Wendy Teramoto and Peter Furlan are on its Board. Fairfax is well served by our long-term partners, John and Hal, who transformed Exco into a resilient oil and gas company. Exco is carried on our balance sheet at $418 million or $18.24 per share, approximately 3x net income in 2023, an increase from $12.59 per share last year, due to our share of their 2023 earnings of $5.65 per share.

Recipe (TSX:RECP, Financial), operating in its first full normal year since the pandemic, achieved record system sales in 2023. Sales increased to Cdn$3.7 billion, up 9% from 2022 and 5.6% higher than 2019. Margins also increased by 20 basis points, or 15% in dollars terms, over 2022. Impressively, the company delivered over Cdn$150 million in free cash flow and reduced overall leverage to less than 2.5x. Frank Hennessey, Ken Grondin and his team are focused on continuing to improve the overall margin rate while emphasizing top line growth. Expansion is underway in the United States and India markets as well as organic growth in Canada driven by new restaurants. The company will also be launching new products in its already sizable consumer packaged goods business (where Recipe's brands are sold in grocery stores). Recipe is carried at 8x enterprise value to EBITDA on our balance sheet or 10x free cash flow.

Grivalia Hospitality, under George Chryssikos, had a strong year of execution as two assets, including its largest, opened for business. The One & Only resort in Athens is a flagship in ultra-luxury hospitality and we are the proud owners. If you haven't booked your summer vacation yet – you know what to do! 2024 will see one additional asset come into operation – which will take the operating portfolio to five. These include Amanzoe in Porto Heli, ON Residence in Thessaloniki, Avant Mar in Paros, One & Only and 91 Athens Riviera in Athens. Focus now turns to operational and service excellence for these resorts with Greece forecast to receive a record number of tourists in 2024. George has another five high end hotels in development over the next few years. George has an outstanding track record in real estate and as I said last year, he has already made us $1 billion! We expect George to repeat that accomplishment with Grivalia Hospitality over time! At year end we carried Grivalia at €513 million for our 85% stake.

The Sporting Life Group continued its winning ways by delivering its highest revenue number in the company's history. The combined companies of Golf Town and Sporting Life have grown substantially since 2019, achieving a 51% increase in revenue over the four-year period. The core leadership team of Chad McKinnon CEO, Frederic Lecoq Chief Marketing Officer, and Barry Williams Chief Merchant remain intact and have added Nadia Vattovaz as CFO. Bill Gregson, former CEO of The Brick and Recipe, continues to consult with the Sporting Life Group leadership team and lend his expertise to key projects. The Sporting Life Group expanded in 2023 with the launch of the Team Town Sports brand. Team Town Sports is a specialty sporting goods concept that focuses on 13 team sports and is designed and assorted with new Canadians and women athletes top of mind. In 2023, three brick & mortar locations opened in Calgary and Mississauga. teamtownsports.com launched in the fall of 2023 to serve athletes across the vast Canadian market. Sporting Life Group has ambitious plans for continued growth and a number of initiatives to bring that to life. The Sporting Life Group is carried at Cdn$82 million or 4x free cash flow on our balance sheet.

Dexterra (TSX:DXT, Financial) is on track to achieve its vision of becoming a leader in delivering quality solutions to create, manage and operate infrastructure. Mark Becker became the CEO in 2023 and with a focus on execution and profitability, the company exceeded its medium-term goal of achieving Cdn$1 billion in revenue and Cdn$100 million EBITDA. Quite an accomplishment and great progress over the past three and a half years. The facilities management business took an important step forward with strong organic growth and improving profitability. The workforce accommodation segment experienced continued strong profitability, is building market share with new contracts and was pleased to support local communities during the unprecedented wildfire activity this past summer. Overall, Dexterra has a strong balance sheet and is generating significant free cash flow which positions it well to take advantage of acquisition opportunities. Dexterra is carried on our balance sheet at $108 million ($3.41 per share), which is less than the market value of $136 million ($4.28 per share).

AGT, run by founder and CEO Murad Al-Katib, had another record year in 2023, with EBITDA of over Cdn$160 million. Management is focused on several initiatives, including realizing hidden value from its existing asset base, enhancing the company's capital structure, growing the higher margin Ingredients and Packaged Foods business, and further expansion of AGT's role as a key supplier for global humanitarian programs in Ukraine, Syria and Afghanistan. AGT has built a global pulse sourcing and processing capability, which will become increasingly valuable as the total addressable market for plant-based protein continues to expand. Fairfax's 59.6% stake in AGT is currently carried at an enterprise to EBITDA ratio of 6x.

Farmers Edge (TSX:FDGE, Financial) had another challenging year in 2023. CEO, Vibhore Arora, reduced the cost base by nearly 50% since he took the reins in 2022. Unfortunately, acre and revenue growth has not yet materialized. In addition, the overall market for Digital/Precision Agriculture has been slower than anticipated to emerge. Management and the board have decided that the turnaround plan can be executed best outside of the public markets. As such, Farmers Edge is being taken private in 2024 so that management can focus on executing the business plan.

Boat Rocker Media (TSX:BRMI, Financial), led by John Young as CEO and Co-Chairmen and founders David Fortier and Ivan Schneeberg, had a challenging year managing the Hollywood Writer's strike in 2023 which caused significant disruption to new content orders. The company had a win in the year with the sale of Sci-fi thriller Beacon 23 to streaming service MGM+. Unfortunately, this event was not enough to offset overall softness in the premium scripted TV business. With the poor performance of the share price post IPO, management is focused on maximizing the value of the company's existing assets. Boat Rocker is carried on our balance sheet at approximately 6x EBITDA.

We continue to invest with Byron Trott through various BDT Capital Funds. Since 2009, we have invested $978 million, have received $979 million in distributions and still have investments with a year-end market value of $683 million. Byron and his team have generated fantastic long-term returns for Fairfax, and we very much look forward to our continued partnership.

Since we met Bill McMorrow and Kennedy Wilson in 2010, we have invested $1.2 billion alongside them in real estate, have received cash proceeds of $1.1 billion and still have real estate worth about $570 million. Our average annual realized return on completed projects is approximately 22%. We also own 10% 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 58% on average, including the Pac West Mortgages. At the end of 2023, we had invested in $4.1 billion of first mortgage loans in the U.S. at an average yield of 8.7% and an average maturity of 1.4 years with two, one-year renewal rights, and in $439 million of first mortgage loans in the U.K. and Europe at an average yield of 6.5% and an average maturity of 2.4 years.

We own 14% of Altius Minerals (TSX:ALS, Financial), which had a more difficult year in 2023 with royalty revenues falling 29%. A key reason for the decline was lower potash prices which resulted in a 42% drop in Altius' potash royalties. Long-term, we are very optimistic about Altius' world-class, Saskatchewan-based potash royalty assets. Of note, the company's portfolio of long-lived mineral royalties could expand significantly if major projects currently on the drawing board come to fruition – all without Altius having to commit an additional dime of capital investment! One area of strength in 2023 was the performance of Altius' renewable energy royalty business. This business continues to generate momentum, with total royalties growing 49% in 2023. Brian Dalton continues to do an outstanding job at Altius, a company he founded in 1997. Altius is carried on our balance sheet at the listed market price of $13.95 or $93 million.

Foran Mining (TSX:FOM), led by its CEO, Dan Myerson, and its founder, Darren Morcombe, continued to make progress in advancing its world-class McIlvenna Bay carbon-neutral copper project in the Flin Flon region of Saskatchewan. Foran continued a drilling program that confirmed copper mineralization at its adjacent Tesla deposit and showed continuity between Tesla and McIlvenna Bay. The drilling results at Telsa indicate the potential for a larger copper deposit than originally expected. Other significant highlights in 2023 was the announcing of the environmental assessment approval for the McIlvenna Bay project as well as G Mining Services as construction partner for McIlvenna Bay. G Mining has an impeccable track record of building mines on time and on budget. The addition of G Mining derisks McIlvenna Bay's development and the mine is expected to be commissioned in the second half of 2025. Foran raised Cdn$300 million in equity financing in 2023, effectively funding the construction of the McIlvenna Bay mine. Fairfax participated in the equity financing. Foran is carried on our balance sheet at the listed market price of $2.95 per share or $218 million.

Commercial International Bank (CAI:COMI) (CIB) results were very strong in 2023 with an ROE of over 40%, net interest margin of almost 8% and loan-loss provision coverage ratio of approximately 230%. There is significant hidden value in the build-up of provisions on the balance sheet which if adjusted for, reduces the price-to-book ratio well below 2x. Since 2014, the bank has continued to compound book value per share and EPS by nearly 20% per annum. The key driver of value to Fairfax and other foreign investors in CIB is the stability of the Egyptian Pound. Fairfax invested the vast majority of its position in CIB in the spring of 2014 when the market cap was less than $5 billion, at exchange rates at the time. During that same time, net profit at CIB in USD terms (at current exchange rates) has more than doubled and the market cap stands at just $7 billion with an estimated 2024 price to earnings ratio of 6x. By comparison, in local currency, the market cap has increased over five times! The Egyptian government has begun a massive asset disposal program to address the country's high sovereign debt. Execution will be critical to ensure foreign investors more than just tread water on their investments. Hisham Ezz Al-Arab, the Founder of the modern CIB Bank, came back as Chairman in December 2022.

Since 2008 we have invested with founder Kyle Shaw and his private equity firm ShawKwei & Partners. ShawKwei takes significant stakes in middle-market industrial, manufacturing and service companies across Asia, partnering with management to improve their businesses. We have invested $536 million in two funds (with a commitment to invest an additional $64 million), have received cash distributions of $217 million and have a remaining value of $504 million at year-end. The returns to date are primarily from our investment in the 2010 vintage fund, which, though decreasing 8.8% in value in 2023, has generated a 12% compound annual return since 2010. The 2017 vintage fund, which has drawn about 84% of committed capital to date, increased 23.1% in value in 2023 but has a compound annual return of 3.5% since inception. We expect Kyle to make higher returns on monetization of his major assets.

Led by its outstanding Chairman and CEO Krishan Balendra, John Keells Holdings (JKELF) 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. In the middle of the external crisis faced by Sri Lanka, the company raised $75 million in equity capital, entirely provided by Fairfax, to fund the West Container terminal in the port of Colombo which is under construction. This investment was made in the form of convertible debentures (CDs) having the option to convert any time after 18 months from the date of issuance at a price of Sri Lankan Rs130 per share. Both the currency and the underlying stock have appreciated considerably since our investment. Fairfax, through its direct and indirect holdings, has a 13% equity interest in the company currently which is being increased to 19.5% with a partial conversion of the CDs and it would increase to 24.5% upon full conversion. We believe that Sri Lanka will continue to be resilient and overcome the current challenges, as it has done on numerous occasions in the past, and that the country will soon begin again to realize its tremendous potential. John Keells Holdings is well-positioned to benefit from the revival of the Sri Lankan economy. The combined carrying value is its listed price of $195 million.

Orla Mining (ORLA), run by Jason Simpson, had an outstanding year. The team at Orla have executed extremely well and the Camino Rojo open pit mine in Mexico is producing at capacity of approximately 120,000 ounces of gold per year at a cash cost of approximately $800 per ounce. The company continues to make progress in permitting its South Railroad mine in Nevada with production expected to begin in 2027. South Railroad has the potential to double Orla's gold production at very attractive project economics. Lastly, drilling results indicate the potential for a lucrative underground mine at Camino Rojo. The site has a significant resource that includes approximately 12.5 million ounces of gold equivalent. We expect 2024 to be an active year for the company as it seeks permitting approval to expand its Camino Rojo open pit mine and permitting to begin construction of South Railroad. Orla generates attractive levels of free cash flow and has ample liquidity to fund its development and exploration activity. Orla is carried at its listed price of $3.23 per share or $122 million.

In 2023, the NASDAQ was up 43% and then another 8% in early 2024. The Magnificent Seven now account for 28% and technology, 30%, of the S&P 500 – even higher than the 26% at the dot com peak. This sectorial weighting has never been higher – for any sector in the S&P 500 ever. So excluding the Magnificent Seven from the S&P 500, the remaining 493 stocks went up only 13.5% since January 1^st, 2023. In 2000, Cisco sold at $77 per share, more than the whole Canadian stock market, and 23 years later it sells at $49 per share even though earnings have gone up nine times. Of course, today the excitement in the market is AI and Nividia is the star at $2 trillion. As my good friend Kiril Sokoloff chairman and founder of XIIID research says, “Nividia's market cap exceeds the combined market cap of the S&P500 energy sector (Exxon, Chevron etc) by $200 billion even though the net income for Nividia is $14 billion versus $147 billion for the energy sector”. Perhaps trees grow to the sky after all – but call me a skeptic! This reminds me of the Nifty Fifty – 50 outstanding companies in the late 1960s and early 1970s – which included McDonald's, Johnson & Johnson and Proctor & Gamble and also Polaroid, Avon and Eastman Kodak. As I said in our 2020 annual report to you in March 2021, after the crash in 1973/1974, these companies never saw their highs for more than 15 years – and some of them went bankrupt!

Ben Graham had some advice about the Nifty Fifty in September 1974: Stay away! He said “a conservative analyst…would have to do the near impossible – namely turn his back on them and let them alone”. This is exactly what we have done – and it has been painful! The Magnificent Seven have outstanding track records as I said in our 2019 annual report, but for them to grow at 10% – 20% in the future on revenue bases of $200 billion to $500 billion – means $20 to $100 billion additional revenue each year – only 170 companies in the S&P 500 had revenues of more than $20 billion in 2023.

In 2022/2023, credit has tightened significantly but we have yet to experience the after effects – particularly in commercial real estate and private credit – i.e. non-bank credit! Another area we continue to be very cautious about.

Our team at Hamblin Watsa led by Wade Burton, with strong support from Lawrence Chin, Roger Lace and Brian Bradstreet, continues to navigate the uncertain economic environment while providing excellent returns for you, our shareholders.

Shown below are the Hamblin Watsa professionals with their individual areas of focus:

Hamblin Watsa Professionals Responsibility

Wade Burton and Lawrence Chin United States and Canada (stocks & bonds)

Reno Giancola Canada (stocks & bonds)

Jamie Lowry and Ian Kelly Europe (stocks & bonds)

Quinn McLean Middle East, South Africa and private companies

Yi Sang Asia (stocks & bonds)

Gopalakrishnan Soundarajan India, Sri Lanka (stocks & bonds)

Jeff Ware South America (stocks & bonds)

Wendy Teramoto Private companies

Peter Furlan Chief Research Officer

Paul Ianni Private and public companies

Davis Town Public companies

Joe Coccimiglio Private and public companies

Navtej Sidhu Private and public companies

Paul Blake Stock trading

Kleven Sava Bond trading

The team continues to thrive, led by Wade and Lawrence, while everyone remains empowered in their respective areas of responsibility. Roger Lace, Brian Bradstreet, Chandran Ratnaswami and I continue to be active in managing the portfolio with more and more ideas flowing from Wade and his team. Our small investment committee (consisting of Wade Burton, Roger Lace, Brian Bradstreet, Lawrence Chin, Chandran Ratnaswami, Quinn McLean, Peter Clarke and me) will review large investments, asset mix, regulatory requirements and performance. As I have said in the past, committee decision-making in investments has some serious performance risks in our mind, we use this format solely to share information and discuss the pros and cons of any investment. We have built an extremely talented team with the ability to invest worldwide, working in a collaborative team environment, but individually empowered at the same time. We are excited about the future returns we expect from our investment team.

Miscellaneous

After not increasing our dividend of $10 per share for 14 years, we increased it by 50% to $15 per share. It is still only about 12% of our expected operating income after taxes.

The huge strength of our company – and impossible to copy – is the fair and friendly culture we have built in each of our companies over the past 38 years. Fairfax, our holding company, is led by Peter Clarke and our 11 outstanding Fairfax officers who have the highest integrity, team spirit and no ego. We are focused on protecting our company from unexpected downside risks and very quickly taking advantage of opportunities when they arise. On average, our officers have been with us for 19 years. The bedrock of our company is trust with a long-term focus.

This past year, Peter Clarke has again done an outstanding job in steering us through the rough waters that every business faces – always calm, confident with no ego!

I would be remiss if I did not thank our outstanding Board of Directors, led by Bill McFarland, for providing us with great guidance and wisdom as we build our company for the long term. We are truly blessed!

We continue to encourage all our employees to be owners of our company through our employee share ownership plan, under which our employees' share purchases by way of payroll deduction are supplemented by contributions by their employer. It is an excellent plan and employees have had great returns over the long term, as shown below:

If an employee earning $40,000 had participated fully in this program since its inception, he or she would have accumulated 4,000 shares of Fairfax worth Cdn$4.9 million at the end of 2023. I am happy to say we have many employees who have done exactly that!

For the third time in our history we have made a small change to our Guiding Principles. Treating people well has always been a huge part of our culture but was never specifically addressed in our Guiding Principles. After reviewing we decided to add the following to our Guiding Principles: “We follow the Golden Rule: we treat others as we would want to be treated”. Earlier in the year I came across a wonderful poster on The Golden Rule. It shows thirteen different religions and how each one of them has the golden rule in its scripture. I liked it so much I have asked all our companies around the world to hang the poster up in their offices!

It is with great sadness that I have to inform you that my partner, Tony Hamblin, of Hamblin Watsa Investment Counsel, passed away on October 2, 2023. Tony was our boss at Confederation Life during the 1970s and early 1980s before he and I began Hamblin Watsa in September 1984. Tony was president of Hamblin Watsa until he retired in 2006. He was a great boss and then a partner for Roger, Brian and me for all those years and we will miss him dearly. All of us at Hamblin Watsa and Fairfax offer our sincere condolences to Tony's wife Gail and their two sons, Drew and Geoff.

In his second year with us, Sanjay Tugnait, President and CEO of Fairfax Digital continued to build on the initiatives started in 2022. Sanjay, working with Thomas Cook, launched an AI powered sustainability platform to capture, measure and report carbon emissions for business travel, developed an innovative travel insurance product available through digital channels in Sri Lanka, and has been heavily involved in the development of Eurolife's embedded insurance platform and the recent announcement of the partnership between EuroLife and LTIMindtree in establishing a Gen AI and Digital Hub in Athens. Sanjay has done an outstanding job working with our companies and assisting in their digital initiatives.

We published our fourth ESG report in late 2023. The report highlights our global efforts in all areas related to ESG and is an aggregation of our operating company activities as well as what we do at Fairfax. While we cover all aspects of ESG in the report, our employees are our most important asset and a significant portion of the report is dedicated to our efforts to support our people around the world. We are very proud of these efforts as they exemplify our culture of doing good by doing well and following the golden rule of treating others the way you would want to be treated. To get a better understanding of these efforts, please read the full report available on our website www.fairfax.ca.

Craig Pinnock, Chief Financial Officer at Northbridge, continues to lead the Black Initiative Action Committee across our group of companies. Throughout 2023, we continued to advance the committee's recommendations. Additionally, the committee's work has resulted in a framework built upon six key pillars. This framework serves as a guide for organizing all our Diversity, Inclusion, and Belonging (DI&B) initiatives, extending beyond the initial focus on combating Anti-Black Systemic Racism. Many of these actions, along with details of the framework, are documented in the 2023 Fairfax ESG report, which highlights the progress made during the year. Lastly, we proudly maintain our strong partnership with the BlackNorth initiative, which, since its inception in June 2020, remains committed to eradicating Anti-Black Systemic Racism through collective efforts across corporate Canada.

We continue to focus on how Fairfax can survive for the next 100 years, long after I have gone! Our outstanding culture and my effective voting control will certainly help. As I have mentioned many times in the last 38 years, you, our shareholders, suffer a major negative as our company is not for sale at any price. So there will be no takeover bonanza. Of course, we have to perform for you over time and we plan to do exactly that in the long term.

As you know, we think business can be a force for good. Taking Fairfax as an example, we have written cumulative premiums of $258 billion while providing outstanding service to our customers. We are paying annual salaries and benefits to our employees all over the world of $2 billion. We have made cumulative donations of $315 million since we began our donations program in 1991 and, yes, over the 38 years we have paid cumulative taxes of $5.7 billion. This is why we consider business a force for good and why countries that are business friendly succeed mightily. We are a small microcosm of what business does worldwide.

In 2023, we donated $27 million, for a total of $315 million since we began our donations program in 1991. Over the 33 years since we began our donations program, our annual donations have gone up approximately 155 times at a compound rate of 17% per year. We are now donating 2% of pre-tax profit each year to charities across the globe – 1% through each of our insurance companies and 1% to our Fairfax foundations.

At our AGM, we will distribute our first annual report on our charitable givings and donations by company across the world. We are grateful because our company is successful, we can make these donations. “Doing good by doing well”, we call it at Fairfax.

The Fairfax Leadership Workshop continued strong in 2023 with a class of 27 leaders from 13 different countries. This was our eleventh class as we missed two due to the pandemic. The five-day program centers around our Guiding Principles and is a wonderful opportunity for attendees to connect with Fairfax culture, our most senior people and each other. These connections are critical for success in our very decentralized structure. To date, over 250 of our leaders have attended the program with over 110 of them gathering in Toronto for a reunion the week of our annual meeting. The success of the program can be measured by its popularity. The upcoming 2024 class will be the largest ever with over 30 slots and we still couldn't accommodate everyone!

Another highly successful initiative that has allowed us to connect and collaborate across our decentralized structure is our working groups. One more great idea from Andy, these single discipline working groups allow us to share knowledge and expertise without compromising the entrepreneurial spirit of our individual operations. Much like the Leadership Workshop, they bring our people together in a spirit of sharing and working together.

After a break for a couple of years due to COVID, due to popular demand we are bringing back our investor trip to India which we will be offering to our shareholders so that they can see firsthand the transformation and opportunities that India has to offer. For those of you that may not be familiar, the trip gives our shareholders a chance to experience the culture, people and cuisine of India, while exposing them to some of the companies that we have invested in. They will also have the chance to interact with the Presidents who run those companies. Madhavan Menon, Dipak Deva and his group will give our shareholders a memorable trip giving them a deeper understanding of why we think India is going to continue to be an exceptional investment opportunity in the years to come. More at our AGM.

The Value Investing Conference held by George Athanassakos the day before our annual shareholders' meeting will take place again this year! This will be its twelfth year and I highly recommend that you attend – it is well worth your time. If you have not attended in the past, please see the website for details: bengrahaminvesting.ca. Many who have participated have mentioned to me that it is one of the best of its kind, and this year's lineup of speakers, as usual, is outstanding. This year's featured keynote speakers are Andi Kerenxhi, President Ubineer Corp., Jason Zweig, Columnist from the Wall Street Journal and Fokion Karavias, CEO, Eurobank.

Unlike previous years, Fairfax India (of which many of you are also shareholders) will hold its annual shareholders' meeting on Wednesday, April 10 at 9:30a.m. (Toronto time) the day before our annual shareholders' meeting which is on April 11: details will be posted on its website. Helios Fairfax Partners will hold its investor day at 2:30 p.m. on April 10: details will be posted on its website.

As we have done for the last 38 years, we look forward once again to seeing all of you in person at our annual shareholders' meeting in Toronto, where our leaders will be ready 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 11.

March 8, 2024

V. Prem Watsa (Trades, Portfolio)

Chairman and Chief Executive Officer

1 Amounts in this letter are in U.S. dollars unless specified otherwise. Numbers in the tables in this letter are in U.S. dollars and $millions except as otherwise indicated. Some numbers may not add due to rounding. Certain of the performance measures and ratios in this letter do not have a prescribed meaning under IFRS Accounting Standards and may not be comparable to similar measures presented by other companies. See the Glossary of Non-GAAP and Other Financial Measures in the MD&A (MD&A Glossary) and the Appendix to Chairman's Letter to Shareholders (Appendix) for details.