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2022 Top 10 List: Part 1 I am going to do this post in 2 parts. Part 1 will summarize the top 4 items driving shareholder value. Part 2 will summarize the remaining items. Fairfax has had an outstanding 2022. I characterized 2021 as the year the ‘new Fairfax’ finally started emerging for all to see. We got more of this in 2022. Fairfax has been making important changes under the hood for the past 4-5 years and 2021 and 2022 were the years in which all the hard work is now being reflected in the reported financial results. The Fairfax 'super tanker' finally appears to be headed in the right direction and is building value at a solid rate for shareholders again. FFH stock price increased 20% in 2022 (to Dec 29) - Dec 29, 2022 = US$591.73; Dec 31, 2021 = $492.13 - S&P500 is down 19% so FFH outperformance of close to 40% has been significant in 2022. BV decreased 9.5% in the 9 months to Sept 30 (BV will be much higher when Q4 is reported). - Sept 30, 2022 BV = US$569.97; Dec 31, 2021 BV = US$630.60 Dividend of US$10 dividend will likely be paid Jan 2022 (it is usually announced in early January). How can i say Fairfax had a great year in 2022 if BV is down 9.5% Sept YTD? The hit to BV is coming primarily from the spike in bond yields. We just had the worst year for bonds in something like 200 years! To Sept 30, 2022, net losses on investments was $2.3 billion (@$100/share) = $1.4 billion in bonds + $500 million in stocks + $400 million in currency. Counter intuitively, the spike in bond yields is actually the best thing that could have happened to Fairfax in 2022. Importantly for Fairfax, most of the ‘losses’ in the bond portfolio will likely reverse over the next year or two as bonds are held to maturity. And moving forward, Fairfax will be generating record amounts of interest income…. see below for the details. I also expect Fairfax to earn +$60/ share in Q4, which if it happens, will push BV for the full year into slightly positive territory. So even though BV will finish 2022 up slightly, as we will learn below, the future earnings power of Fairfax has never looked better. ————— 2022 Top 10 List: Part 1 (Top 4) 1.) increase in interest income: I estimate interest income will increase to a record $830 million in 2022 from $568 million in 2021 = increase of about US$260 million (+45%). In 2023 my guess is interest income will increase further to a staggering $1.37 billion, a $540 million increase (+65%) over 2022, and a 140% increase over 2021. For reference, $1.37 billion = $58/share and FFH shares are trading today under US$600. Fairfax is trading today at about 10X interest income (pre-tax). Nuts. The significant increase in interest income will be the gift to Fairfax shareholders that will keep on giving for years into the future. Fairfax has an investment portfolio of about $51 billion. Of this total, about $36 billion is fixed income. Over 2021 Fairfax reduced the duration of their fixed income portfolio to 1.2 years. Most P&C insurers have an average duration closer to 4 years. With such a low duration portfolio, Fairfax has been able to benefit from spiking interest rates by rolling over most of their fixed income portfolio into much higher rates. In Q3 they also started extending the average duration of their fixed income portfolio to 1.6 years by buying longer dated US treasuries (with 3-5 year duration). Increasing duration will lock in high yields for years into the future. 2.) increase in underwriting income: net premiums written will increase to a record $22 billion in 2022 from $17.8 billion in 2021 (+20% growth) and $14.7 billion in 2020 (+50% growth over the last 2 years). In turn, this is spiking underwriting profit which I estimate will come in at a record $970 million in 2022 (95CR est), compared to $801 million in 2021 (95CR) and $308 million in 2020 (97.8CR). In 2023 my guess is net premiums written will increase 15% to $25.4 billion and underwriting profit will increase to $1.1 billion (assuming a 95CR). For reference, $1.1 billion = $47/share. The significant increase in net premiums and underwriting profit will be the gift to Fairfax shareholders that will keep on giving for years into the future. What is driving the substantial increase in net premiums written? We are in a hard market for P&C insurance. It started in 2019 and looks like it will continue well into 2023. Re-insurance rates are set to spike higher in 2023 and this will benefit Fairfax as they have a large re-insurance business. 3.) increase in share of profit of associates: this source of earnings had a break-out year in 2022. I estimate share of profit of associates will finish 2022 at a record of around $1 billion = $43/share. Over the 5 year period, from 2017-2021, ‘share of profit of associates’ averaged about $200 million per year for Fairfax. My guess is ‘share of profits of associates’ should be able to deliver around $1 billion again in 2023 and this number could compound at +10% each year moving forward. That is a staggering increase in a very short period of time. What happened? Put simply, the earnings power of the equity holdings captured in the ‘associates-equity accounted’ bucket are beginning to shine through. The turnarounds have (finally) turned around (Eurobank). The fast growers are executing well (like Atlas). The commodity bull is running (Resolute, Stelco, EXCO Resources). What is ‘share of profits of associates’? Fairfax has an equity portfolio of about $15 billion. Of this total, about $5.6 billion (38%) are accounted for as ‘Associates’ and fall into this bucket. ‘Associates’ are holdings where Fairfax has an economic interest of 20% or more but no control. Investments in associates are accounted for using the equity method. 4.) significant asset monetization: Fairfax pulled a rabbit out of its hat in 2022. On October 31, 2022, Fairfax closed on the sale of C&F Pet Insurance Group and Pethealth to Independence Pet Group (majority owned by JAB Holding Company) for proceeds of $1.4 billion in the form of $1.15 billion in cash and $250 million in seller debentures. In Q4 Fairfax expects to record a pre-tax gain of approximately $1,278 million and an after-tax gain of approximately $992 million ($42/share). Bottom line, Fairfax sold a business no one knew they owned for $992 million after tax ($42/share). For a little background, Fairfax purchased Hartville Group for $34 million in 2013 and Pet Health for $89 million in 2014 and in 2022 sold the combined entity for $1.4 billion. That is nuts. Fairfax has a long history of buying small insurance businesses and patiently growing them over a decade or more and then selling them for very large gains: First Capital, ICICI Lombard, Riverstone UK and now C&F pet insurance. Very impressive. Makes one wonder what else Fairfax has in the cupboard that is under-appreciated by investors? ————— 2022 Top 10 List: Part 2 will follow in the next day or two.