Viking

@Thrifty3000 For 2022 my guess is interest expense will finish the year around $450 million (adding $10 million for the recent issuance to the current run rate). 2023 = $475 million. This includes lease liabilities. My focus with my estimates/models is 12 and 24 months out. There are so many big moving parts - for me - it is pretty useless to try and go further out than that. Fairfax has little debt maturing the next couple of years (they did a pretty good job refinancing and pushing out some maturities in 2020 and 2021). The future path of interest rates will have a huge impact on Fairfax (to state the obvious). If fed funds goes over 4% late this year and remains over 4% for all of 2023 then Fairfax’s interest income is going to be massive (+$1.4 billion in 2023). They will have ample cash flow to pay off any debt that comes due. Or they might decide to pay a higher interest rate and refinance and push the small amount of 2024 maturing debt further out. But having to refinance a small amount of debt at a higher interest rate is a great problem to have (when you have a $35 billion fixed income portfolio with an average maturity of 1.2 years). ———— From FFH Q2 report: Interest expense in the second quarter and first six months of 2022 of $108.8 and $212.7 (2021 - $117.8 and $283.9) was comprised of interest expense on borrowings of $97.2 and $188.9 (2021 - $101.6 and $252.2, inclusive of a loss on redemptions of holding company unsecured senior notes of nil and $45.7) and interest expense on accretion of lease liabilities of $11.6 and $23.8 (2021 - $16.2 and $31.7). ————— Upcoming debt maturities: 2024 = $283 million 2025 = $277

I think the most likely scenario is Fairfax India continues to buy back shares. When the ICICI Wealth sale happens they will be flush with cash. Fairfax owns a little over 40%. Is there a limit to how high Fairfax’s ownership can go before they are forced/required to take out all the shares of Fairfax India? ————— i was adding to my small position in Fairfax India on Friday at under $10. If Fairfax decided they wanted to take Fairfax India private at $15 i would do a happy dance. I would be happy to take a 35-40% gain (on my average cost) and roll the proceeds into Fairfax (my holding is in a tax free account). ————— Fairfax India is an exceptionally well run business. And it is a broken stock. This happens. The problem for Fairfax India is how does it scale? The rational thing to do today is buy back all the shares they can… the problem is this is shrinking the company. And lack of liquidity is probably one of the biggest reasons the stock is so cheap; buying back stock makes this problem worse. But how does Fairfax India get another $1 or 2 billion to scale? The management team there deserves to have more $ to manage - based on their track record. ————— We KNOW Prem wants to invest significant $ in India in the coming years (i think he said something like $5 billion). Now this will likely include partners (OMERS, CCIB ETC). The question is how does this investment happen? ————— Fairfax India reminds me of Brookfield Property Partners. Brookfield eventually did the obvious - took it private at a big discount.

Interesting interview. First i have heard of Palantir (software company). The interview is a bit of an advertisement for the company. But there are some interesting things discussed. A few take aways: 1.) the economic model of the last 40 years is dead - pretty much impossible to predict what China does moving forward because you have to get inside the head of one man (Xi) 2.) where the globe goes from here (economically and politically) is an open canvas 3.) the US looks well positioned (adaptability; cheap energy)

Can we now reasonably say that the base case is that Fairfax should be able to earn about US$100/share moving forward? With the shares closing today below $500 that is a PE of 5. Using the ‘back of the napkin’ method: With a CR of 95. And with an after tax return of 4% on $50 billion investment portfolio. $750 million + $2 billion = $2.75 billion / 23.7 million shares = $116/share. Bit of a buffer of about $350 million… enough to cover minority interests, loss from runoff, interest expense etc? Looking out another year, if: 1.) the hard market continues (and we get another year of +15% top line growth) 2.) Fairfax is able to push duration of the bond portfolio out to +3 years at attractive yields 3.) Fairfax finds one or two assets to monetize 4.) Fairfax buys back $500 million or another $1 billion in stock Well… $100/share will start to look low as a base case.

The problem with inflation is it will give you lots of head fakes along the way… looks like it is turning down and then… BOOM ! (as my favourite football announcer John Madden used to say) it turns higher again. What do people think will be happening to commodity prices in another 12-18 months when the global economy is back in growth mode? And China is stimulating their economy? Oil? +$100 (perhaps much higher). Steel? +$1,000. Lumber? +$1,000. And if we actually get around to electric vehicles…. Copper? Other metals? Much higher. Inflation will rip again. And if the shortage of workers in the US is structural… more inflation. Ukraine war and then rebuild of their economy? Gonna need lots of materials… Please note, i am not doom and gloom. I think North America is going to outperform the rest of the world the next couple of years. And i really have no idea where inflation goes… but if it stays high (5%) i will not be surprised. And if you have a debt bubble isn’t the way to fix it to let inflation rip for 4 or 5 years (kind of what we have been doing the last 18 months) to bring debt levels down in real terms? That was the playbook governments and central banks used after WWII and it worked… looks to me like the same thing is happening in US and Europe today (especially Europe).

Ask any family if they think inflation is a problem. Food? Gas? Rent? I think +90% of families will say crazy high inflation is their top worry today. My guess is most businesses are building in inflation expectations of 4-5% when building budgets for 2023. (Those on the board with day jobs please correct me if i am wrong.) I think gold is most highly correlated with the US$ not inflation. When the US$ stops rising my guess is then you will see gold pop higher. (I think gold has been rising nicely when priced in euros or yen.)

@Spekulatius i think a number of things are happening at the same time. One thing by itself would be hard enough for companies/the economy to deal with. And they are all of different duration (some cyclical; some secular). Weave them all together and you have the reality of today. What is an investor to do? Be inquisitive. Open minded. And rational. 1.) covid - still not close to being over - largest economic impact today is general shift from goods to services - zero covid policy in China 2.) Into year 2 of high inflation in Western countries; currently at 8% - Fed policy has shifted from extreme QE (caused bubbles in financial assets: stocks, bonds and real estate) to extreme QT (burst bond and stock bubbles and is deflating real estate bubble). - inflation is starting to get entrenched into expectations. 3.) underinvestment for past 7 years/ESG/government policy has created a supply problem for energy. Result will be higher prices moving forward. Europe had an energy crisis well before Russia invaded Ukraine (yes, invasion made it worse…). This secular trend is inflationary. (Commodities are generally all in the same bucket here.) 4.) Russia invasion of Ukraine has created the greatest geopolitical crisis since the Second World War. Russia being one of worlds largest producers this is rippling through all commodity markets. And lots of other things. 5.) China has decided to come out. World is splintering into two blocks: West and authoritarian blocks. 6.) globalization is dead. Production is shifting from Asia back to North America and Europe. This secular trend is inflationary. 7.) others?

Added to Fairfax India at under $10. The only unknown is how much money i am going to make… and the timing. Like shooting fish in a barrel.

@glider3834 it certainly would be interesting to know what is rattling around in Brian Bradstreet’s head these days - and the bond department at Fairfax. We have seen government bond yields spike much higher than anyone expected 6 months ago. I wonder if Fairfax is waiting for credit spreads to blow wider before loading up on corporates. One would think locking in a yield north of 5% for 3 to 4 years (for a portion of the portfolio) would make sense. Europe looks headed for a recession (if its not already there). And growth in the US will be slowing (it takes 12 months or so for rate hikes to work their ‘magic’). If we get a recession in the US in 2023 then it makes sense corporate spreads should widen but we may see Treasury yields fall at the same time as the market starts to price in interest rate cuts by the Fed. Just like with great comedy, the key will be timing. Sept/Oct tend to be very volatile for financial markets so hopefully Fairfax gets a pitch they like. ————— If Fairfax is able to lock in a yield north of 4% on its bond portfolio - adding duration - that will do wonders to its operating earnings outlook (the interest & dividend income bucket) for the near term. That would deliver interest income alone of $1.4 billion per year (on $35 billion fixed income portfolio). ————— Here are details of the corporates they started to buy in March of 2020: the interest rate was 4.25% and the average maturity was 4 years. “Since mid-March 2020, the company has been reinvesting its cash and short term investments at its insurance and reinsurance operations into higher yielding investment grade U.S. corporate bonds with an average maturity date of 4 years and average interest rates of 4.25%, that will benefit interest income in the future. Up to March 31, 2020, taking advantage of the increase in corporate spreads, the company had purchased approximately $2.9 billion of such bonds.”

Yes, the current set up for Fairfax looks pretty compelling. Near term catalysts? 1.) pet insurance sale: given its size ($1.4 billion and $950 million realized gain) and impact on BV ((increase of $40/share) the closing of this deal should be positive for the stock. Timing? Sometime in 2H. It should be noted, Fairfax tends to be aggressive with the timelines it usually provides (deals often take longer, and sometimes much longer, to close). - the secondary benefit of this deal is what does Fairfax do with a large portion of the cash? Is it: a.) left at C&F to allow them to grow in the late innings of a hard market? b.) Or is a large chunk dividended to the hold co? If it is sent to the hold co, is it used to: i.) buy out minority partner(s) in Allied World? ii..) Or is it used for another dutch auction? 2.) Q3 earnings when they are reported end of October: could we see record operating earnings in Q3 (underwriting income + interest and dividend income) of around $500 million? (I think that would be a record?) a.) underwriting income: hurricane season in US so far in 2022 has been much milder than expected. https://en.wikipedia.org/wiki/2022_Atlantic_hurricane_season Could we see a sub 95CR from Fairfax in Q3? Could we see a sub 94CR for all of 2022? That would put $1 billion in underwriting income for the year in play. i.) what is top line growth across company? Close to 20%? ii.) what is outlook for P&C hard market? iii.) what is growth of re-insurance? Sounds like re-insurance is now in a hard market. Growth here at Odyssey and Allied World could surprise to the upside. b.) interest and dividend income: At the end of Q2 Fairfax said current annual run rate was $950 million. Bond yields continue to move much higher in Q3. i.) does consolidated interest and dividend income (including runoff) come in around $230 million? It grew about $35 million from Q1 ($169 million) to Q2 ($203 million). ii.) do we get an update to the annual run rate? To something north of $1.1 billion? iii.) has Fairfax started to extend duration of fixed income portfolio beyond 1.2 years? iv.) as interest rates spike, P&C insurers with much longer average duration in their fixed income holdings (pretty much everyone else) will be taking a third large consecutive hit to book value in Q3. Do regulators care? Will the significant hit to BV impact other insurers ability to grow their business in the current hard market? Does this reality extend the current hard market out another year? - on the Q2 call Prem mentioned European insurers as being especially hard hit by rising bond yields (big hit to BV). I wonder how BV at the big European reinsurers is being impacted by rising interest rates? - as with pet insurance sale, what does Fairfax do with $500 million in operating earnings in Q3? And another $500 million in Q4? Many of us on this board have long complained about Fairfax hold co being chronically cash poor, especially during down turns. Is it really different this time? It certainly looks like it could be. ————— When Q3 results are reported we will also get further details of just how much of Allied World was bought back from OMERS. Does Fairfax buy back only a portion? Sounds like it. If so, that would allow proceeds from pet insurance sale and Q3 operating earnings to be used for something else (another big stock buyback in Q4). - “Fairfax intends to use substantially all of the net proceeds of this offering to purchase a portion of the non-controlling interests in Allied World Assurance Company Holdings, Ltd (“Allied World”), and use any remainder for general corporate purposes.” ————— Another smaller catalyst could be closing of the Resolute deal. I think this is expected to close in Q1, 2023 (i have read different dates so i am not sure… perhaps Q4). The sooner the better. Fairfax will book a nice gain. And the proceeds ($600 million) can get recycled into other opportunities… we are in a bear market. ————— Digit, and its IPO, is another potential catalyst. The question is timing. Financial markets will likely remain pretty volatile the next 12 months - not sure how this impacts a Digit IPO. The important thing is that Digit keeps executing well (continuing its growth). Bottom line, i am not expecting a Digit IPO in 2022 or perhaps even 1H 2023… but this is simply an uninformed guess. ————— Is Fairfax done monetizing assets for 2022? EXCO Resources (nat gas producer) is the private holding that i find most interesting today… i wonder what it would fetch if put up for sale? Or IPO?

At current bond yields insurers will be taking another significant hit to earnings (mark to market losses) and book value when they report Q3 earnings. We could see three quarters in a row where many P&C insurers report very large hits to book value. Will regulators start to care? Does this result in hard market continuing into 2023? Does Fairfax’s positioning of its bond portfolio (1.2 year average duration) start to benefit its underwriting (it can keep the petal to the metal on growth)? Will other insurers have to slow their growth? ————— US Treasury Yields Dec 31. June 30. Sept 13 1 month. 0.06. 1.28. 2.48 1 year. 0.39. 2.80. 3.88 2 year. 0.73. 2.92. 3.74 3 year. 0.97. 2.99. 3.75 5 year. 1.26. 3.01. 3.58 10 year. 1.52. 2.98 3.43 Most P&C insurers have an average duration of around 4 years on their bond portfolio. Fairfax, at 1.2 years, and WR Berkley, at 2.4 years, are the two outliers.

Bond yields are spiking and most maturities are at or near decade? highs. Market is now forecasting Fed funds rate of 4.25% in March 2023. Higher rates are very good news for Fairfax and their $35-$36 billion bond portfolio (1.2 year avg. duration). Fairfax said in Q2 release the current annual run rate for interest and dividend income was $950 million. This will be higher when they report Q3 results. If they are able to get an average yield of 4% on their bond portfolio = $350 million/quarter = $1.4 billion/year. Dividends tracking at $35 million/quarter = $140 million/year investment expenses tracking at $15 million/quarter = $60 million/year Add the 3 items and we could see Fairfax earnings in the interest and dividend bucket $375 million/quarter = $1.5 billion/year = $63/share. ————— So what could Fairfax earn in operating income in 2023? 1.) underwriting (95CR) = $1 billion 2.) interest and dividend income = $1.5 billion 3.) share of profit of associates =$500 million (primarily Atlas + Eurobank) Total = $3 billion/year = US$127/share (pre-tax) Fairfax shares are trading at US$498 = 4 x estimated 2023 operating earnings (pre-tax). Any gains on the significant equity portfolio (much of which is priced today at bear market prices) is just gravy. ————— Hard market is boosting underwriting income. Rising bond yields is spiking interest and dividend income. Associate earnings are chugging along (Atlas/Eurobank). Stock is wicked cheap. Got it! ————— My number above for underwriting does not include runoff, which will likely be a drag of $150 million/year = $6/share.

China continues to crack down and reveal their true colors. And not surprisingly China's 'new' values (text book definition of totalitarian) look to be almost an exact match to Apple's values as a company. I wonder how all of this also plays into a companies ESG score? How do you even score a totalitarian regime like China's on ESG? What a mess... ----------- Macho, macho man. China wants to be a country of macho men, and it’s trying to make that happen by banning “sissy” boybands and “effeminate” males from all media in the nation. Broadcasters must “resolutely put an end to sissy men and other abnormal esthetics,” the National Radio and TV Administration wrote in a new set of rules released Thursday. It also used the term “niang pao,” an insult for effeminate men that means “girlie guns.” The new rules call for broadcasters to enforce a “correct beauty standard” and to boycott “vulgar” internet celebrities and celebrations of wealth, while promoting “traditional Chinese culture, revolutionary culture and socialist culture.” They also ban all “idol audition shows” and recommend blacklisting anyone who has broken the law or offended public morals. Additionally, the rules say that broadcasters should avoid airing anything that is “overly entertaining.” The Chinese Communist Party’s propaganda department announced the new media masculinity rules on Thursday, in its latest effort to police morality through censorship. President Xi Jinping has essentially pledged to Make China Great Again with a “national rejuvenation,” which he is trying to pull off through strict control of all business, education, culture and religion in the country. The CCP has racked up a long list of censorship and human rights abuses in recent years, from the persecution of ethnic Uighurs in Xinjiang, to the complete denial of the 1989 massacre at Tiananmen Square, to new rules that ban certain karaoke songs or limit children from playing more than three hours of online video games a week. Even Winnie the Pooh has been banned, after the character was once used to mock Xi.

Anyone who doesn’t understand how China works needs to read that article. What a messed up political system. As China’s economy continues to get bigger, just like with the former Soviet Union, allocation of scare resources gets much more difficult with a communist model. Thanks for posting.

If you look under the hood stock average returns the last decade (2010-2020) were likely largely driven by a handful of mega stocks: Apple, Microsoft, Amazon, Google, Facebook, Tesla etc. If you did not own these stocks you likely had a lost decade. If these mega stocks go sideways the next 3-5 years then stock indexes likely will go sideways as well. Can investors make money? Of course. How? Picking the right stocks. And there is the rub…

India is one country i know very little about. So i have been trying to change that. Below are three videos from a German TV station that discuss some of the current themes. Outside of the US and Canada, India is the next most important country for Fairfax: Fairfax India, Digit, Quess and Thomas Cook. Prem also has very aggressive growth plans for Fairfax investments in India to increase materially in the coming years. Bottom line, India will be an increasingly important part of the Fairfax business mix in the future.

@wondering thanks for posting the link. It certainly looks like Fairfax has picked the right long term partner to get exposure to Africa. Fairfax Africa and Helios Fairfax is a great example of what i like to call ‘old Fairfax’ and ‘new Fairfax’. Fairfax Africa was started because Paul Rivette saw what Fairfax India was doing (quite successfully) and felt it could easily be duplicated in Africa. In theory, sounded like a great idea. In practice, it was a disaster. There was significant financial damage done directly to Fairfax. Does anyone know what the actual financial hit has been so far? My guess is more than $200 million (i actually have refused to do a deep dive on Fairfax Africa because it was such a shit show). There was also significant reputational damage done to Fairfax. Investors in Fairfax Africa got taken out behind the woodshed. And yes, it was Fairfax’s fault. Because Fairfax was borderline negligent in how it handled the whole Fairfax Africa affair. This was not some outside company… Fairfax Africa was Fairfax’s baby. “Trust takes years to build, seconds to break, and forever to repair.” One of the reasons Fairfax stock trades at the low multiple it does today is because many investors no longer trust Fairfax. The ‘equity hedge/short’ fiasco was the big screw up with an 11 year impact on results. Fairfax Africa was another, smaller, screw up. Helios Fairfax is the ‘new Fairfax’ part of the story. After a few year, Fairfax recognized its mistake with Fairfax Africa. It found the right partner to get exposure to Africa (Helios). It paid a heavy price (write downs). But Fairfax now looks well positioned to benefit over the coming decade as Africa develops. The reason i keep bringing up the equity hedges and today, Fairfax Africa, is so we - and Fairfax - do not forget the very serious mistakes made by the management team at Fairfax in the still recent past. Because those (and other) past mistakes cost Fairfax (and Fairfax shareholders) hundreds of millions of dollars every year for over a decade. Those mistakes also eviscerated any trust that existed between Fairfax and much of their former shareholder base. I really like what i have been seeing from Fairfax the past 4 or 5 years. I probably come across as being quite the fan boy. I don’t think i am… my eyes are wide open. It will take years of good decision making, communication and performance for Fairfax to earn back the trust it has (deservedly) lost with investors.

Big move in US treasury yields today. 10 years is up to 3.34%, up 15 basis points. Close to its 10 year high reached in June of 3.5% since hitting 2.65% the end of July the 10 year has increased 70 basis points in the last 5 weeks. That is a massive move. I think where the 10 year goes from here will be a key data point to monitor moving forward. Higher long bond yields = lower stock market multiple (generally speaking). 3 year, 5 year and 7 year are all also up 15 basis points. Yield on 3 year is up to almost to 3.6%, a decade high. If bond yields get close to 4% my guess is a fair bit of money will start to move in to bonds. If US bond yields continue higher, especially further out on the curve, get out your pop corn. This month we also are just beginning Phase 2 of QE (with the amount of treasuries the Fed is letting run off doubling in size to $95 billion per month). Joseph Wang (the Fed Guy) is of the opinion that the higher supply of treasuries (from QT and increased issuance from the large federal deficit) in the coming months could push treasury yields higher…

@Spekulatius thanks

@Spekulatius if a North American investor wanted to get exposure to Europe in the future do you think it is better to try and pick a basket of stocks or keep it simple and buy an ETF? My problem is i do not follow European companies closely enough to go the company route. Do you have a short list of European companies you think are world class and very well positioned for the next decade?

A key question an investor needs to answer is Europe in secular decline today? After its asset bubble popped in the late 1980’s Japan has fallen into a 45 year downward spiral. So Japanese assets have looked cheap for decades. The problem Japan has is the country never dealt with its core issues… because they did not want a severe recession/unemployment/businesses failing. That ‘model’ is not part of Japanese culture (employment for life etc). So we will see how Europe responds to its current energy crisis… do they double down on failed past strategies… or do they get rational and pivot energy policy at least in the near term to nuclear/hydrocarbons. What made the US so investable in 2010-11 is they dealt with their issues. 5% of the population (my guess) got financially wiped out in the housing crash. The economy tanked. Unemployment skyrocketed. Banks were forced to recapitalize. Investors lost billions. Everyone shouted ‘god bless America’ and the economy pivoted. Not perfect. But what i like about the US model is its capacity to change. Europe i am not so sure…

My rule of thumb has been to focus on finding the right investment set up. Currency factors have not been a key driver (on their own). Now what is interesting is it is usually severe economic weakness that causes a currency to plunge. And severe economic weakness usually causes profits to plummet which causes lots of well run companies to plunge in value. In this situation, cheap currency + cheap stocks = wonderful opportunity. John Templeton would be licking his chops. This was the exact situation existed in 2008-09 in the US. Currency got crushed. Stocks got crushed. In hindsight, non-US investors were given the buying opportunity of a life time (funny how these kind of mouth watering opportunities keep popping up every 5 or 10 years…). However, it did take a few years to play out (versus months). I got lucky. Back in 2013 i was backing up the truck with Apple. Being a Canadian investor my portfolio shifted mostly to US$ assets when the Cad$ was close to parity with the US$. By 2016 the Cad$ was back down to $0.75 so i picked up a nice 20-25% currency gain in addition to my gains in Apple over a couple of years. The currency gains were largely dumb luck… I know a few Canadians who bought US real estate in 2012-13 and have since made out like bandits (getting big currency gains as well as big asset appreciation). My sons hockey coach actually backed up the truck with Apple in 2013 (i was managing the hockey team and we would talk about investing pre-game) and then took his big winnings on Apple and used it as a down payment on a nice property in Arizona (his retirement plan). Lucky. Smart. Opportunistic. The Cad$ has also significantly appreciated in value versus the Euro and Yen over the past 18 months (yes, not as much as the US$). Given we are likely still in the early innings of the energy crisis in Europe my guess is the Euro could go lower and perhaps much lower; i have seen some estimates that the Euro could fall from parity today to the US$ to the 0.80 level. If that happens my guess is lots of well run European companies will also be dirt cheap - they might already be there… What about European real estate? Probably also getting dirt cheap (in US$ or Cad$ terms) but i am not sure the investment angle here for most people. But i am going to be patient. What drove the Cad$ in 2009-10 was a strong economy lead by a commodity boom (and quick rebound in housing). If we are in the early innings of another commodity super cycle then the Cad$ should perform reasonably well in the coming years (with housing perhaps being a drag this time).

Well energy markets got two important pieces of news today: 1.) The main Nord Stream pipeline will not be restarted 2.) OPEC cut supply by 100,000 barrels/day What to think? 1.) The energy crisis in Europe looks to be entering its next phase. 2.) OPEC wants to keep oil prices in the $90 to $100 range What does it mean? 1.) Gas prices in Europe are going higher. The European economy is going to weaken further. If Russia cuts off gas from the pipeline flowing through Ukraine to Europe then things will get much worse for Europe. What a crazy set up. 2.) even if we get a global recession oil prices might not correct much (perhaps to $80).

@Cigarbutt thanks for posting in detail on this important topic. Could your concerns (developing losses on longer tail lines) be a key driver of the current hard market (especially when combined with falling interest income due to low bond yields)? My understanding is the hard market began in 2H 2019 - if true, that means we have just finished year three. And everything i am reading suggests the hard market will continue to run well into 2023. My guess is 4 years of hard market price increases should be able to provide a fair bit of cover for mistakes made in past years. But i will readily admit i do not understand this aspect of P&C insurance very well. ————- This topic has been discussed on past WRBerkley conference calls. The question is usually something like “given hard market has been running a couple of years already, why are we not seeing larger numbers for prior year positive development?” WRB answer: “we are being conservative”. My interpretation: “it is coming, just not yet”

Below is an update of Fairfax's equity holdings two months into Q3: +$860 million. Mark-to-market holdings are up slightly (essentially flat) to June 30. And the remaining holdings are up about $850 million (@$35/share pre-tax), erasing the $800 million deficit they were in at June 30. Not surprisingly, Atlas (take private), Resolute (sale) and Recipe (take private) are the three big movers driving $800 million of the gain Q3YTD. Fairfax Equity Holdings Sept 2 2022.xlsx