Leaderboard

@StubbleJumper capital allocation will be super interesting to watch with Fairfax in 2023. Driven by hard market (20% top line growth), much higher interest rates (spiking interest income) and continued asset monetizations, Fairfax looks like it is in a multi-year period where it will have $2 to $3 billion to allocate each and every year. Asset monetizations late in 2022: proceeds of $1.4 billion pet insurance sale (Oct). Fairfax India also closed on ICICI Wealth sale late last year. Asset monetizations 1H2023: Resolute sale ($600 million) and Ambridge ($400 million) set to close in 1H 2023 What will Fairfax do with all the cash they are generating? Capital allocation options: 1.) strong financial position - top priority. Cash at hold co was US$800 million at the end of Q3, well below $1 billion minimum target. Makes sense to me Fairfax will want to get this to $1.1 billion = $300 million 2.) dividend: at US$10 paid in late January = $234 million 3.) grow insurance in hard market: Fairfax has said repeatedly this is a top pick. It appears the hard market is continuing into 2023. Most insurance subs look well capitalized to fund growth on their own; perhaps C&F (keep some proceeds from pet insurance sale) and Brit get top ups. 4.) Runoff: might need a top up of $200 million or so. Lots of long tail stuff (impact of inflation?)… we will know much more when Fairfax reports Q4 (and they have completed their actuarial review). The top 4 items are pretty straight forward. Deciding what to do among the remaining options is where things get really interesting. The weightings are what i wonder about. 5.) Mergers and acquisitions: other than bolt on purchases (like Singapore Re in 2021), Fairfax has said repeatedly that they are done with big insurance purchases. They are happy with their global footprint. Fairfax actually has been a seller (at attractive prices): runoff in 2021, pet insurance in 2022 and Ambridge so far in 2023. 6.) FFH stock buybacks: it is a given Fairfax will buy back stock in 2023. I think a stock buyback of 500,000 shares is a good baseline number = 2% of shares outstanding. This is similar to where 2022 will likely come in. 7.) buy back minority interests (Allied, Odyssey and Brit): Fairfax was very active on this front in 2022, spending $750million to buy back a significant chunk of Allied. My guess is we see another spend of $500-$750 million in 2023. - some on the board feel this activity is similar to Fairfax doing a buyback. It does result in Fairfax shareholders owning a larger share of Fairfax earnings. 8.) buy equities - current holdings: Fairfax’s biggest spend in 2022 was increasing its ownership of existing equity holdings = $1.14 billion. Makes sense we see a step down here in 2023. a.) take private: Recipe = US$340 million, Grivalia Hospitality = $195 million b.) increasing ownership: Kennedy Wilson, Fairfax India, Altas, Altius, Ensign, John Keels, Foran, Myrilineos = $800 million in total. 9.) buy equities - new positions: Fairfax spent a significant amount on large cap equities/private equity in 2022 = $550 million. Perhaps Fairfax increases this amount in 2023. a.) large cap US: Bank of America, Chevron, Occidental, Micron (add) = $350 million b.) private equity: JAB investment fund = $200 (another $250 million in notes) When you look back at 2022 you see a very balanced approach by Fairfax: - grow insurance +20% in hard market - opportunistic - pay $10 dividend - sell high: pet insurance - opportunistic - buy back Fairfax stock - opportunistic - take out minority partners - increase ownership of equities already owned - opportunistic - seed new equity positions - opportunistic For 2023 i see Fairfax doing more of the same as 2022. Balance. Rational. And as a shareholder, i applaud it. Lots of low risk / high return decisions that will benefit shareholders for years to come. What changes from 2022 could we see in 2023? 1.) I think we will see some more purchases in India; and perhaps a very large one. I love Fairfax’s long term track record in India. But big purchases and Fairfax still makes me nervous… so we will see. 2.) perhaps we see Fairfax get more active on the stock buyback front. But i am not sure. Looking at 2022, Fairfax appears to prefer buying other equities trading at bear market lows. 3.) large cap US stocks: coming out of the Great Financial Crisis, Fairfax was flush with cash (thank you credit default swaps) and they put more than $1 billion into large cap US stocks. Looks like they might be doing the same thing again. Bottom line, i love how Fairfax allocated capital so far in 2022. And i look forward to seeing what they did in Q4 and what they do in 2023. Interesting and exciting times for Fairfax shareholders.