Viking

The interesting thing to me is a few short years ago lots of people invested in Fairfax more for the investment gains not operating income. Now it has flipped and the focus is on operating income (which is not a bad thing). The funny thing is the investments/insurance holdings have never been better positioned. At the same time, we are seeing record earnings getting reinvested each year into new income streams. This suggests to me that investment gains will be very robust moving forward.

Q4 Earnings Review. Summary: great quarter and an amazing year. Here are the answers to the questions I asked on Wed: 1.) What is the size of the bond gains in Q4? $997 million - yes, a very big number 2.) What is the size of IFRS 17 impact? TBD - but not a concern. 3.) What is the average duration of the fixed income portfolio? Over the year, spent $11.7 billion on US treasuries with maturities between 5 and 7 years. We will need to wait until the AR is released to get specifics. 4.) What is interest and dividend income for Q4? Interest and dividends were $536.6 million, up from $512.7 in Q3. Pace of increase is slowing. GIG will be a tailwind in 2024. If Eurobank initiates a dividend this would provide a big tailwind to dividend income. I think Eurobank reports results in early March. 5a.) What is premium growth in Q4? Net premiums written down 5.5% in Q4 and up 3.5% for 2023. The shortfall in Q4 was driven by Odyssey exiting a quote share contract (low margin). And Brit continuing to exit its property cat exposure. Both moves were made to improve future profitability. People are looking for tangible evidence of actions Fairfax has been taking to improve the quality of their P/C insurance business… we'll, I think they have it. 5b.) What is the Q4 and YE combined ratio? The CR was 89.9% in Q4 and 93.2% for 2023. Do we see reserve releases? Yes. Favourable of $309.6 million for 2023 versus $196.2 million for 2022. 6.) What is share of profit of associates? Q4 came in at $127.7, lighter than I expected. We will see details in the AR. Full year was $1.02 billion. 7a.) What are investment gains from equities? Equity gains were $370.2 million in Q4 and $1.2 billion for 2023. 7b.) For equities, what is the excess of market value to carrying value? For all of Fairfax’s non-insurance holdings the excess of FV over CV was $1 billion, up from $310 million in 2022. What is status of RiverStone Barbados AVLN’s? Details to come in the AR. 8.) How does the closing/consolidation of Gulf Insurance Group impact financials? Do we see an investment gain booked of around $290 million? Yes 9.) What is the size of adverse development for runoff? Prior year reserve development for run-off came in at $259.4 million. 10.) What is year-end share count? Common shares effectively outstanding at Dec 31, 2023 = 23.0 million 11.) What is year-end book value per share? BV at Dec 31, 2023 = $939.65/share versus $762.28 at Dec 31, 2022.

Exited by CFP.TO position (C$16.40). Nice gain. If stock falls back under C$15 happy to buy back. Trades like this are done in a tax free account.

At first blush, splitting Quess into three companies makes so much sense. Quess is a massive company with very different verticals. This resembles the IIFL split into 3 separate companies (finance, wealth and securities) in 2019 and that has worked out exceptionally well for shareholders. Let’s hope the same happens with Quess. Another tailwind for Fairfax’s equity portfolio, although the timing looks like in will likely be 1H 2025. That’s OK - we are not in a hurry. This is another example of Fairfax providing great support for a holding. It is all about getting them in the best position possible to be successful moving forward. Fairfax has been doing a great job of doing this with their equity holdings over the past 6 or so years. And as a result, the quality of the group of equity holdings as a whole continues to improve.

@glider3834 great point. Fairfax is now starting to build a pretty impressive long term track record in terms of CAGR for BVPS. And they are leaving peers like Markel, WR Berkley and Chubb in the dust. It is impressive how long old narratives stick around. But Mr Market will eventually figure it out.

I look forward to hearing what Fairfax has to say on the conference call tomorrow morning. But at first glance, what a great finish to the best year in the company’s history. In short, 2023 was a transformative year for Fairfax. Insurance? Never been better positioned. Fixed income? Looks close to perfectly positioned. Equities? Never been better positioned. Most importantly, the quality of insurance and the investment portfolios (fixed income and equities) has never been better. Not sure what more an investor could ask of a company.

@Crip1 I like your description of the TRS position as leverage. It will be interesting to see if Fairfax comments. Kind of an obvious question for an analyst to ask: what is the exit strategy for TRS? The other interesting angle is all the cash Fairfax is currently generating. In 2023 very little went into buybacks. What if Fairfax gets more aggressive on the buyback front in 2024? Every $100 increase in the share price = $200 million in investment gains. This is a very bizarre set-up. The ‘ultimate’ alignment of interests between management and shareholders?

@dartmonkey I think management has commented on the TRS in the past. I think they have said they hold it as an investment. Not complicated. How do you evaluate an investment? By calculating intrinsic value. My guess is Fairfax can do this… for itself. I don’t understand all the hand-wringing / urgency to ‘do something’ with the TRS position. Especially given the likelihood of mid to high teens ROE the next couple of years.

@newtovalue What do you think the intrinsic value of Fairfax shares are? Once you answer this question, you get your answer to what Fairfax should to with the TRS position. At least that is how i would approach it. Why sell an investment when it is just starting to work? And its prospects have never been better? Is that not just cutting your flowers to water your weeds?

Q4 Earnings Review Below are a few of the things i will be watching for when Fairfax reports tomorrow. Anything missing from my list? 1.) What is the size of the bond gains? Interest rates came down aggressively in Nov/Dec. With Fairfax extending duration in October (perfectly timed) this could be a very big number. One offset might be the shorter dated bonds they likely sold and any losses they booked. When they increased the average duration to 2.5 years in Q1 there were some realized losses on the shorter dated bonds they sold. 2.) What is the size of IFRS 17 impact? Interest rates changes also impacts this bucket. This could also be a big number - but in the opposite direction to bond gains. One offset should be new business growth. 3.) What is the average duration of the fixed income portfolio? This is a big deal as it telegraphs the durability of the interest income stream of earnings. Which is an important input to future ROE estimates. 4.) What is interest and dividend income for Q4? Is it still increasing quarter over quarter? If so, how much? Do we get any update on the Kennedy Wilson debt platform (size and average yield)? The Stelco special dividend will be in the Q4 number. It will be important to see if Eurobank initiates a dividend when they report year end results - when this happens it will likely be a material development for future dividend income at Fairfax. 5a.) What is premium growth in Q4? 5b.) What is the Q4 and YE combined ratio? Is the hard market continuing? Any commentary on reinsurance? Do we see reserve releases? If so, level? 6.) What is share of profit of associates? 7a.) What are investment gains from equities? 7b.) For equities, what is the excess of market value to carrying value? What is status of RiverStone Barbados AVLN’s? We may have to wait for AR for this answer. 8.) How does the closing/consolidation of Gulf Insurance Group impact financials? Do we see an investment gain booked of around $290 million? What is the impact on: total investments? The IFRS 17 bucket? What is expected impact in 2024 on interest income and net premiums written? 9.) What is the size of adverse development for runoff? This business is lumped together with Eurolife’s life insurance business so we likely will need to wait for the AR for specifics. 10.) What is year-end share count? Do we get any commentary on the pace of buybacks moving forward? 11.) What is year-end book value per share? The answers from the first 10 questions will then give us the answer to this question.

Yes, that makes sense.

@Maverick47 great catch. From the 2022AR:

This part of Fairfax's press release looks interesting. At the end of 2022, the CAGR for BVPS was 17.8% (Fairfax 2022AR). In the press release from this morning it has the CAGR as 18.9%. Can someone explain the difference?

@glider3834 Thanks for fishing that out for me. AGT looks like another interesting asset. Hopefully we get more information on the private holdings when Fairfax publishes the AR.

Murad Al-Katib, President and Chief Executive Officer - AGT Food and Ingredients. On September 19, 2023, Murad gave a 75 minute talk to his Alma Mater, Edwards School of Business in Saskatoon, Saskatchewan. Great history and overview of the company. Pretty amazing what he has been able to accomplish. Click the link to watch the YouTube video: https://youtu.be/DzE9ypecdI8?si=cxvsU3EeXoXGzELc AGT 'reported sales' in 2022 = C$2.8 billion (the slide below is from the video) In Fairfax’s 2022AR, Prem said AGT had EBITDA of C$150 million Do board members have any thoughts on how this company should be valued? Fairfax owns around 60%. It seems to be in a perennial growth phase where everything is getting reinvested in the business.

@Maverick47 Great add. I actually almost didn’t finish this post… i got distracted on Thursday/Friday. But i had the framework scripted out so i decided to punch it out yesterday - a little rushed. But i think it works

One of the things i liked about doing this comparison is the Belichik/Brady Patriots were likely the most hated team in Football at the time. Fairfax was pretty hated back in 2020 - although this has been changing quickly over the past couple of years. Both organizations also have very strong cultures - along with leadership, thats what gets you through severe adversity. Given its importance, I really need to spend a little more time writing about culture. The problem is it is a very difficult topic to write about. It’s not math. If anyone has been short Fairfax shares the past three years - well, they have had their head handed to them. The can of Whoop Ass is for them if they decide to come to the AGM.

@LC , thanks for letting me know. It is corrected.

Fairfax - Super Bowl Sunday Edition Well it’s Super Bowl Sunday - the perfect time for a football themed post. People love watching sports so much because it is fun and entertaining. The competition is real. You cheer for your team. The outcome is uncertain. There is intrigue. There is the camaraderie - you watch with family and friends. And it feels exhilarating when your team wins the big game. We love watching sports so much because it so closely mirrors what happens in real life. We love investing for many of the same reasons. “Don't worry about the horse being blind, just load the wagon.” John Madden (I have no idea what the quote means… and i love it.) ————— Fairfax is in the final stages of completing one of the great comebacks in Canadian business history. Fairfax’s recent history resembles Super Bowl LI on Feb 5, 2017, when the New England Patriots played the Atlanta Falcons. What? Yes, it is true in so many ways. Let me explain how. The set-up Both are storied franchises. The Patriots have won 6 Super Bowls, the most in football. Long-term investing performance for P/C insurance companies is measured by the growth in the share price and book value. From 1985 to 2022, Fairfax compounded book value at 17.8% per year and its share price by 16.1% per year. That performance puts the company in very elite company. ————— The first 41 minutes of the Super Bowl LI For the first 41 minutes of Super Bowl LI, the New England Patriots played very poorly. The quarterback was missing open receivers. The receivers were dropping passes. The defence was not playing to potential. And the special teams unit was not contributing as needed. Bottom line, the team was underperforming. As a result, the Patriots found themselves down 28-3 with 4 minutes left to play in the third quarter. Prior to this game, the largest comeback in Super Bowl history had been from 10 points down. So at this point in the game pretty much everybody thought it was over. Oddsmakers gave Atlanta at 99.8 chance to win. Things were looking so bad, even loyal Patriots fans had given up on their team. And the haters (of which there were many)… they were apoplectic in their glee. From 2010-2017, Fairfax had also been playing a pretty poor game - and like the Patriots, the poor performance was mostly due to self-inflicted mistakes. Equity hedges (2010-2016). Shorts (last one exited in 2020). Poor equity purchases (mostly 2014-2017). When Covid hit in 2020, the underperformance (measured through earnings) got worse. The stock hit a 11-year low of US$250 in May of 2020. In May of 2020, Fairfax shareholders felt how New England Patriots fans felt mid-way through the third quarter of the Super Bowl. Many Fairfax shareholders bailed on their team and sold their shares. Everyone was writing them off. ————— The importance of leadership and culture You learn more about teams when they go through adversity than you do when times are good. This is the same for businesses. What did both the Patriots and Fairfax have going for them? Strong leadership The Patriots had Robert Kraft, Bill Belichick, Tom Brady and a roster stacked with high character players. Fairfax had Prem Watsa supported by a strong teams at its head office, Hamblin Watsa, insurance subs and at the equity holdings. Strong culture Patriot Way: “The way that Bill coaches his team to be putting the team first, not selfish, doing what’s best for the team, putting the team’s goals in front of your own personal goals. That was Tom Brady. He was able to do that for 20 years.” Rob Ninkovich Fairfax: I think the description above probably describes Prem Watsa and the culture he has been able to establish at Fairfax. Similarly, Andy Barnard has also been able to establish a very good culture in the insurance operations. (Discussing the importance of culture at Fairfax would make a great topic for a future post). When extreme adversity hits, and your see how people respond, that is when you learn what the true character of the organization is (sports team or business). The best sports teams find a way to turn the tables and thrive when adversity hits. It is the same with the best businesses. —————— Back to the game. Silver lining For both teams - Patriots and Fairfax - there was a silver lining. Yes, they were behind by a lot on the scoreboard. But they understood the primary problem was their own performance. And their performance was within their control. The silver lining was they knew the problems were fixable. So when Atlanta went up 28-3 with four minutes left in the third quarter, the Patriots never panicked. When Covid hit in 2020 and the various businesses became stressed and the stock of the company cratered, Fairfax also did not panic - at corporate, insurance subsidiaries or the equity holdings. For Fairfax, the comeback started later in 2020. At the time, little did the team at Fairfax know that they were about to embark on one of the most improbable comebacks in Canadian business history. What happened to turn the tide? No one thing. 1.) The comeback started for the Patriots with a pass from Tom Brady to running back James White who scored their first touchdown of the game with 2 minutes left in the third quarter. However, the Patriots missed the extra point. Patriots were now down 28-9. For Fairfax, the hard market in insurance really got going in 2020 and Andy Barnard and the insurance subs went on the offensive. It has continued to today. Net written premiums are estimated to have increased about 80% from $13.3 billion in 2019 to estimated $23.7 billion in 2023. In turn, this is delivering record underwriting profit. Touchdown for Fairfax. It is not surprising that the insurance team was the unit to lead the comeback for Fairfax. 2.) At the 9 minute mark of the 4th quarter Steven Goskowski kicks a field goal to make it a 2-score game. The Patriots trail 28-12. During the market panic caused by Covid, the fixed income team at Fairfax, lead by Brian Bradstreet, went on the offensive and purchased $3.9 billion in corporate bonds with a yield of 4.1% and a term of 4 years. Field goal Fairfax. The fixed income team at Hamblin Watsa has been a historical strength for Fairfax. 3.) With 8 minutes left in the 4th quarter, the Patriots defence gets to the Falcons quarterback and forces a turnover. Donta Hightower wasn’t blocked and was able to get to Matt Ryan to get a strip-sack. In late 2020/early 2021, the team at Hablin Watsa made their own big time play. They purchased total return swaps giving them exposure to 1.96 million Fairfax shares at a cost of US$372/share. This has delivered a return of well over $1 billion since then. This was very unexpected, creative and opportunistic - classic Fairfax football. 4.) The Patriots offence gets rolling again and this time Danny Amendola scores a touchdown. Brady immediately signals to go for 2 points. Direct snap to James White and he’s in for the 2-point conversion. The score is now 28-20. The Patriots are within striking distance but they need a stop on defence to get the ball back. Brian Bradstreet and the fixed income team made a gutsy call in late 2021 that resulted in another touchdown for Fairfax by taking the fixed income portfolio to 1.2 years average duration. The $3.9 billion in corporate bonds purchased in 2020 were now sold at a 1% yield which locked in a big realized gain. This move protected the balance sheet. Unlike most other P/C insurers, Fairfax avoided booking billions in unrealized losses when interest rates spiked in 2022 and 2023. 5.) The Patriots defence steps up again and Matt Ryan is sacked for loss of 12, taking Falcons out of field goal range. Fairfax’s investment in Digit insurance in India is flourishing. Started from scratch in 2017, at a cost of $154 million, fair value increased by $1.5 billion in 2021. It is possible we see an IPO in 2024. India is expected to be top performing economy and Fairfax is positioned to benefit in the coming years. 6.) Patriots get the ball back, down by 8, with 3 minutes to go. Julian Edelman makes one of the greatest catches in Super Bowl history at midfield with 2 minutes left to keep the drive alive. The Falcons defender knocked the pass in the air and Edelman came down with it. “Thats incredible” and “amazing concentration to make a play on that.” In late 2021, in an opportunistic move, Fairfax made their own ‘circus catch’. They repurchased 2 million shares of Fairfax at $500/share. This was well below book value of $872 at Sept 30, 2023 and has delivered incredible value to shareholders. 7.) With 0.53 seconds left James White scores his second touchdown of the game. Danny Amendola is in for 2 point conversion. The game is tied 28-28. Fairfax scores its next touchdown to tie the game in 2022 when it sells its pet insurance business for $1.4 billion - which delivered in an after-tax gain of 1 billion. Most observers did not know they owned this business. Fairfax also made the two point conversion when they sold Resolute Forest Products at the top of the lumber cycle for $626 million (plus $183 million CVC). The game goes to overtime The Patriots won the coin toss and elected to receive the ball. If they score a touchdown the game is over and they win the Lombardi trophy. 7.) In overtime, the Patriots move up the field. Sideline route. What a throw to Amendola. Pass is caught. Then a run. Fake it to Hogan… toss it to White… looking for blocks… getting blocks… he is inside the 20. Out of bounds at the 15. The Patriots have a very balanced attack. Pass interference in the end zone by Atlanta’s defence puts the ball at the one yard line. First and goal for the Patriots. Toss to White. He’sssssss ……. in! Touchdown Patriots! In Q1 of 2023, the fixed income team at Fairfax extended the average duration of fixed income portfolio to 2.5 years. In October, they put the ball over the goal line and score the winning touchdown when they extend the average duration to 3.1 years (details to come when Fairfax reports Q4 earnings). This play locks in record interest income of $2 billion for years into the future. The comeback is complete! Patriots complete the historic comeback and win the Superbowl! 34-28. Their 5th championship. When they report Q4 earnings, Fairfax is poised to report record operating earnings and record book value. Fairfax shares closed Friday at US$940, which is an increase of 276% from the low of $250 in May 2020. Fairfax is in the process of completing one of the most improbable comebacks in Canadian business history. New England fans - and Fairfax shareholders - are going crazy. What a game by Bill Belichick, Tom Brady and the New England Patriots. What a performance the past three years by Prem Watsa and the entire team at Fairfax - head office, Hamblin Watsa/Fairbridge, the insurance subs and the management teams at the various equity holdings. Led by Prem, the team at Fairfax have been beasts. Summary Like the New England Patriots comeback in Super Bowl XI, Fairfax’s improbable comeback the past three years serves as the ultimate reminder that the fight is never over, as long as there is a chance to win. We are reminded, as in life, anything is possible if you never give up. And that is one of the things that makes watching sports so great. Just like investing. After the game, a jubilant Fairfax shareholder was heard to say: “Nothing will ever top this. Ever.” (I’m not so sure… I think Fairfax has much more in store for shareholders in the coming years.) ————— What turned it around for Fairfax? Leadership was the key. At the low point in 2020, Prem shone. There are numerous stories from people who work at Fairfax about Prem and how he handled the adversity: He told staff two things: He had their backs: there would be no layoffs as a result of Covid. He knew what they were capable of: ‘do your job’. And get on your front foot - this was a time to be aggressive. He delivered a similar message to equity investments. At the AGM last year, Stelco CEO Alan Kestenbaum told a story of the incredible support he got from Prem during Covid and the confidence that gave him to continue to drive the business forward. Prem also lead by example in another important way: he backed up the truck and bought $150 million in stock. Prem’s actions during the Covid lows were likely his greatest moments as CEO of Fairfax. ————— Given the success they are having, I wonder if Fairfax is going to have a booth to sell merchandise at the AGM this year? What should be in it? Below is one suggestion. Maybe a Prem hoodie too? I survived the short attack of 2023? Would love to hear what ideas others have…

@SharperDingaan I am not sure what the actual problem is for Fairfax. Pain in the ass? Yes. Problem? No. The short campaigns from 2003-2005 were successful because of Fairfax’s financial condition, especially in 2003, and also because of the NYSE listing. IMHO, there is almost zero comparison to the situation today. Fairfax was also caught flat-footed. Fairfax is in better than rock solid shape. They have top tier insurance operations. Their fixed income portfolio is likely positioned well (details to come next week). Their equity portfolio has never looked better (in terms of quality and prospects). They have record free cash flow locked in for years. And they have a great deal of experience with how to deal with short campaigns. If the stock falls much below book value Fairfax will vacuum up shares. Look at the last 4 years. When adversity hits, this team doesn’t ‘survive’ they thrive. I suspect it will be the same this time around. It’s like the shorts thought they were picking a fight in the schoolyard with that scrawny new kid from 20 years ago. But that scrawny kid has grown up - older, bigger, stronger, wiser. And he has a bunch of buddies who love to brawl. And how do you deal with a bully? You punch them right in the face. Next week will be interesting. PS: and as an aside, as a Fairfax shareholder, this will also perhaps be a timely lesson for the Fairfax team to not get too high on their horse in the coming years. They have the table set to do something truly special.

i called RBC this morning to see if my shares could be lent out by RBC (they are in self directed accounts). No, they cannot be lent out. They told me to go to the monthly account summary in my account. In the asset review section there is a Quantity/Segregation column. As long as there is the same quantity listed for both Quantity and Segregation then the shares are not being lent out by RBC.

@Crip1 BSilly is on my investing wall of fame for his posts on Fairfax, especially 2003 to 2005. So rational, educational and even keeled.

@nwoodman I was thinking the exact same thing today. The Eurobank position is currently understated in BV by about $700 million. Add in Fairfax India and Thomas Cook and you are probably at around $1.3 billion (if you value Fairfax India at Fairfax India's low stock price). The fact that none of this is brought up is instructive.

@Maverick47 This really is an interesting situation. The time to short Fairfax was 2020. Maybe 2021. But today? I don't get it. Fairfax has had record operating earnings for three years in a row now. With more coming in 2024. This just means they will have significant funds to buy back a shitload of shares if they want. I think they just might. The short sellers have to know this. They can't be that stupid. So they need to get long at some point. And likely before Fairfax responds. That is days away.

@treasurehunt For the past 3 years I have been writing pretty extensively on Fairfax (putting it mildly). I have compiled my writings into a 330 page document called 'Hiding in Plain Sight'. I will attach a copy of the updated PDF file to this post (and also the companion Excel file). I have not seen anything today that suggests I need to change anything in my PDF file. Anything I might want to say is in there. That is all I am going to say about what has been going on today. If you have a family member who believes in UFO's or Sasquatch do you argue about it with them? I don't. It is energy draining and it accomplishes nothing. Peter Lynch has one golden rule when it comes to investing: 'understand what you own'. Education is the key. When a stock I own goes down and I panic it usually means I don't understand what I own. The answer? More education is needed. Hence why I am posting an updated version of my PDF file. I was not panicking about my sizeable Fairfax position today. I was surprisingly calm. And I was adding. Buffett tells us 'Price is there to serve you not to inform you'. He is one smart dude. Fairfax Feb 8 2024.pdf Fairfax Jan 31 2024.xlsx