Viking

At the end of the day, people and nations are judged by their ACTIONS. And the worse the actions the harsher the judgement. Putin/Russia invaded Ukraine and it has become a humanitarian catastrophe. Tens of thousands of people have been killed and injured. Millions of people have been displaced. Cities have been destroyed. And Russia’s war could be just GETTING STARTED. As the entire city and population - including women, children and those unable to leave - of Mariupol is getting destroyed and bludgeoned by Russia do i really care right now if parts of the Ukraine forces fighting to defend the city have neo-Nazi leanings? No. Why? Because they are likely the only thing able to prevent even more Ukrainian civilians in the city getting slaughtered. Sometimes you have to pick your poison. Putin/Russia started this war and they are the ones who will decide when it will end. At this stage it looks like Putin wants land. Crimea. Land bridge to Crimea. Maybe even large swaths of East Ukraine. At the end of the the day that is what this was all about… getting some land. Idiotic. And now all of Russia will live with the consequences for decades (much lower standard of living). Is there a lesson in all this? A democracy can quickly slip into a dictatorship and, once it happens, it rarely ends well.

@bearprowler6 yes, this investment has been a complete dog with fleas. It started in late 2016. Fairfax made a number of poor investment decisions before 2018 (EXCO, APR, Fairfax Africa, AGT are a few that quickly come to mind). Most have been dealt with. Farmers Edge was one of the remaining problem children. Crazy that they have burned through most of the IPO proceeds already. But i have also come to accept that Fairfax is probably going to have one big clunker like this each year. They still have a few pot holes left to fill in. And they also do like to swing for the fence with their investments - and a few will always fail/way underperform. Fortunately, they have been hitting the ball out of the park in recent years with most of their new equity investment decisions (Digit, Atlas, Stelco, Dexterra). This does lessen the sting from situations like Farmers Edge. @glider3834 i see one exit for Fairfax… they likely need to sell this puppy/merge it into a larger player - and do it quickly. Perhaps that is the purpose of the loan… buy some time to find a home for Farmers Edge. Perhaps for equity in a larger player. It looks like it is generating -$50 million in free cash flow per year… nuts. Or take it into bankruptcy. And, as you state, that likely explains the purpose of the loan - to control the bankruptcy process. ————— I think another factor is at work: Fairfax wants to attract entrepreneurs. To do this Fairfax must be viewed as a good, patient and trustworthy partner. Especially when a business is experiencing difficulty (which they all do). Look at the last 2 investments Fairfax India has made. They are not all going to work out. But a few that do work will do so spectacularly. Peter Lynch: “In this business, if you're good, you're right six times out of ten. You're never going to be right nine times out of ten”

The unprecedented spike in bonds yields the past couple of weeks has been breathtaking. Lots of insurers are going to be reporting pretty substantial mark to market losses on their bond investment portfolios. Fairfax’s bond portfolio was positioned almost perfectly Dec 31 (1.2 year avg duration). Q1 results are going to be super interesting: 1.) when does Fairfax start to add duration to its portfolio? 2.) how much of their fixed income portfolio will they re-deploy? 3.) how much does 1.) + 2.) above increase the interest & dividend income bucket? 4.) how much higher do interest rates go? 2020. 2021. 2022. Change Dec 31. Dec31. Feb 28. Mch 21. Mch 25. YTD 3 mo. .09. .06. .35. .47. .52. + .46 6 mo. .09. .19. .69. .88. .98. + .79 1 yr. .10. .39. 1.01. 1.25. 1.64. + 1.25 2 yr. .13. .73. 1.44. 2.10. 2.27. + 1.54 5 yr. .36. 1.26. 1.71. 2.31. 2.54. + 1.28 10 yr. .93. 1.52. 1.83. 2.30. 2.47. + .95 30 yr. 1.65. 1.90. 2.17. 2.52. 2.59. + .69

I have been trying to understand the big and sustained move in equities the past week. The more hawkish the Fed news (and the higher interest rates go) the more stocks rally. Which is counter intuitive to what one would normally expect to see. Could the answer be the bond market? Is the bond market cracking? Are people FINALLY recognizing that a -6% real yield is not worth the risk of owning a bond? Is the bond market the market that is in a bear market? Is the strength we are seeing in the stock market the past week the result of a rapid shift from large investment funds in their allocation to a lower weighting in bonds to a higher weighting of stocks?

It is not a fluke that Serbia is Russia's one supporter in Eastern Europe today. The Ukraine civilian population is in deep shit in Mariupol. Check out what Serbia did during the Yugoslav wars... I wonder if Ferguson back then would have counseled Albanians, Croats and Bosniaks to lay down their arms and given up (the whole 'war is worse than the alternative' thing)? ---------- War Crimes: - https://en.wikipedia.org/wiki/Serbia_in_the_Yugoslav_Wars Numerous war crimes were committed by Serbian military and Serbian paramilitary forces during the Yugoslav Wars. The crimes included massacres, ethnic cleansing, systematic rape, crimes against humanity and genocide. The International Court of Justice, cleared the Republic of Serbia of direct involvement in genocide, but found that it had failed to prevent mass killings, rapes, and ethnic cleansing.[39] The war crimes were usually carried out on ethnic and religious grounds and were primarily directed against civilians (Albanians, Croats, Bosniaks). Several United Nations bodies have judged that the aim of these war crimes in various wars was to create an ethnically pure Serbian state, or "Greater Serbia", encompassing Serbia as well as the Serb-populated areas in former Yugoslavia.[10][15]

I am trying to understand the lower end consumer in the US (bottom 40%). Rent is increasing dramatically. Food is increasing dramatically. Gas/energy is increasing dramatically. This group spends pretty much everything it earns on essentials. Inflation is running 8%… wage increases are running maybe 5%? Now i keep reading about ‘excess savings’… But every month is this large group not falling further and further behind (in real purchasing power)? Will it not result in lower consumer spending at some point? When i weave it all together: is a large swath of the US economy not in the middle of an economic shit storm? That is getting worse each month? And will continue to get worse the longer inflation continue to rips at 7-8%? Or is the simple answer this group essentially does not matter from an economic perspective - its overall impact on the economy is too small? The other 60% is what really matters?

One of many, many examples of badly Putin has miscalculated with the invasion of Ukraine. ————— Finland makes massive shift towards NATO, majority now support joining - https://www.foxnews.com/politics/finland-shows-strong-support-for-nato-poll Results from Autumn 2021 found only 26% of the population supported joining NATO, but following Russia’s invasion of Ukraine that number has leapt to 60% support for NATO membership. The same percentage of Finns support taking a decision this year on the matter. Historic support for joining NATO has remained low, with the previous peak in Autumn 1998 showing just 28% support. The study clearly cited Russia’s invasion of Ukraine as responsible for the shift in opinion. "The change is beyond comparison, both in terms of size and speed," EVA noted. The survey sampled over 2,000 responses from across a range of ages 18 to 79. "The change in attitudes observed in the survey is a result of the Finns’ reaction to the change in their security environment, which seems to have left the old security policy philosophy, which had dominated in Finland for many years, without a foundation." The study said that Russia has shown it "does not respect its neighbor’s sovereignty" and made real the "terrible nature of a defensive war fought on a country’s own territory." Finland and Russia share a particularly hostile history, most notably culminating in the Winter War of 1939 during which the Soviet Union attempted to invade Finland at the start of World War II. The Soviet Union suffered devastating losses estimated between 126,000 and 168,000 troops dead or missing. Finland lost just shy of 26,000 troops. The Soviet Union cited security concerns and demanded borderland territory from Finland, even establishing a puppet Finnish Communist government known as the Finnish Democratic Republic, which the Soviets used as justification to invade Finland.

I tell my kids that if something is not going right in their world - and they want to fix it - that they should start by looking in the mirror. No bitching and complaining. And especially no victim think. If you want a great life… make it happen. Not that complicated. And investing is the same.

“This conflict is almost over” i hope you are right. i wonder what land Putin now wants to carve out of Ukraine. I think he wants all of south Ukraine to Odesa. And also a big swath of Eastern Ukraine (not just the 2 regions from 2014). I also wonder what military he will allow Ukraine afterwards. My guess is he will demand they demilitarize. Which of course would allow Putin to come back in a few years and finish the job.

Great discussion. i am not trying to be ‘Churchillian’. @james22 quote hits the nail on the head: “For defeat brings worse things than any that can ever happen in war.” WHAT A BEAUTIFULLY SOUNDING PLAY ON WORDS. That is a Disney statement if i ever heard one. It is something only an dreamy eyed ACADEMIC would write. I’ll ask it again. 1.) what is it Putin actually wants today from Ukraine to end the conflict? 2.) what will he do to Ukraine once he has it firmly in his control? How many Ukrainians will die AFTER the Russians have control? +10,000? How many Ukrainians will be displaced/forced to leave their country/live in a different part of Ukraine? Millions? If you can’t answer these 2 questions with a high degree of certainty THERE IS NO WAY YOU CAN SUGGEST THROWING IN THE TOWEL IS THE BETTER OPTION for the Ukrainian people. ————— Bottom line, i have no idea how this situation will play out. And i hope Ukraine finds a way through it

The problem with Fergusons article is he does not shed a flicker of light on the most important question in this conflict: what Putin actually wants today from Ukraine to end the conflict? Ferguson assumes there is a deal to be made that is acceptable to Putin. Really? OK. Great! But… what is the deal? But of course Ferguson can’t suggest what Ukraine would likely have to agree to (it will be far worse than the worst thing anyone on this board can come up with). Or what Putin would do to Ukraine once he is firmly in control of the country (if Putin is openly willing to kill Russian’s who oppose him imagine what he will do to all the Ukrainians are killing Russians by the thousands right now). Yes… it will not be pretty. How many thousand Ukrainians does Ferguson estimate Putin will kill once he is back in control of the country? 10,000? 20,000? Maybe 3 or 4 Ukrainians for every Russian who was killed? Instead, all Ferguson wants to talk about is how the Ukrainian situation is hopeless. And the US (and Europe) are doing all the wrong things and so should stop before any more people get killed. Now maybe we will learn in the coming years that the West totally screwed up in Ukraine. And that Putin is not such a bad guy (for a dictator). But today, Ferguson sounds to me like he could have been a speech writer for Neville Chamberlain back in the day. ————— Ferguson is one of my favourite historical/financial authors. Putin is the central character in the Ukraine play (Ferguson assumes Putin is a rational actor and won’t use tactical nuclear etc). And Zelenski/Ukraine. And Europe. He might want to talk more about them in his next article.

At the end of the day i look at Fairfax and judge their decisions (individual bets) based on how they will likely impact the company and the financials over time. And size matters. Blackberry was a very big bet almost 10 years ago. I followed Fairfax into Blackberry when they started. And by the third conference call it was obvious to me that the company was a mess. I sold at a small loss. Fairfax kept buying. They also started shorting the market. In a big way. Year after year. And this one decision cost shareholders $4.5 billion over 10 years… so yes, it was a very stupid, wealth destroying decision. The possibility that it could have made the company billions is not relevant today. (The relevant point for investors - in any company- is to understand the major decisions the company is making and to be in agreement, or at least ok, with them.) On the insurance side, Fairfax was busy empire building (largely paid for by issuing stock)- Brit (to get Lloyds exposure), Allied, Eastern Europe, emerging markets etc. Bottom line, for many years from 2011-2017 i thought many of their ‘big bucket’ decisions were stupid or, at a minimum, not shareholder friendly. So i stayed away from investing (and even following) in the company for many years. When i like the ‘big bucket’ decisions (like now), and the stock is also cheap, i am very happy to own the stock. I probably sound like a big cry baby. But i firmly beleive Fairfax’s past issues were driven by bad decision making - not bad luck. If Fairfax is successful moving forward it will be because of good decision making - not good luck. Now when you are making good decisions you often ‘look’ lucky. Luck, over time, has little to do with performance of a business.

My belief is Fairfax is a constantly morphing entity. It is not some ‘constant’ - monolithic type organization - (the past 36 years) that falls in and out of favour. Rather, Fairfax is an organization that goes through 5-7 year stretches where it makes very good decisions and its stock does well (eventually) and other 5-7 year stretches where it makes bad decisions and the stock gets crushed. And the stock price often lags or overshoots (often by years) what is really going on under the hood. Its almost like Fairfax makes some exceptionally good decisions (over a few years), makes an incredible amount of money for shareholders and then it goes to their head. Then they then get stupid, and then make some incredibly stupid decisions (over a couple of years), and they lose a shitload of money for shareholders. And then (eventually) they recognize their errors, fix the mistakes, and get humble. And then they get smart again and start making exceptionally good decisions again… As an investor, you want to own Fairfax right when they flip from ‘incredibly stupid’ to ‘exceptionally good’ phase. My read is this change actually started in late 2016 (beginning of recognition of what a train wreck their shorting strategy had become). And every year since we have seen Fairfax make more important big strategic changes. No more new large insurance acquisitions. No more insurance acquisitions in emerging markets (spending $300 or $400 million per purchase). Recognition Fairfax is NOT a turn-around private equity shop (they tried that - with numerous equity purchases - and it failed miserably - spending years and hundreds of millions every year to fix all of the mistakes). Their success rate since 2018 with new equity investments (Seaspan, Stelco, Dexterra) suggests to me they are using different criteria than in the past. What does all this mean for the 2022 version of Fairfax? It is completely misunderstood. Investors do not recognize the changes Fairfax has been making (for years now). The changes are just starting to show in earnings and BV growth. 1.) all the many acquisitions have now been digested by Fairfax. Underwriting results are poised to do well with hard market being a big catalyst. 2.) equity investment portfolio is poised to perform well (in aggregate). Problem children have mostly been fixed. New investments made since 2018 are growing in value nicely. 3.) bond portfolio looks exceptionally well positioned for a higher interest rate environment. This all means Fairfax is poised to deliver very good results in the coming years. My guess is we are only about a year into another of the ‘makes a shitload of money for shareholders’ phases.

I am surprised this angle is not getting more press… High inflation, running hot for a few years, is partially solving the too much government debt problem (in real terms).

@bluedevil Fairfax is definitely not your plain vanilla P&C insurance company… when it comes to BOTH insurance and investing. With insurance, how many companies would do what they did with ICICI Lombard? And now Digit? Actually GROW a runoff division? How about Ki? With investing they have a massive fixed income portfolio today with an average duration of 1.2 years… that is NUTS (in a good way today). TRS position on 1.96 million Fairfax shares? $1.9 billion invested in Atlas? $1.5 billion invested in commodity companies (steel, forestry, mining, potash etc)? Significant exposure to real estate (including partnership with KW). My view is Fairfax is like a super tanker… very big and slow to change direction. Lots of big mistakes were made from 2010-2017 so results suffered. However, beginning in about 2018 something changed. Better new decisions were made. And each year a few past errors were fixed (pot holes were filled). The hard market over the past 3 years has helped. Covid just muddied the water (masked the improvements that were happening). Today Fairfax is a VERY different company from what is was in 2017. Most importantly it is positioned and poised to deliver very good results moving forward. But most investors do not understand or recognize the magnitude of the changes. And the stock is trading at US$480 - it is trading at a historic low. And that is called a wonderful opportunity.

@nwoodman “But man it must be quite depressing if you had sat on Fairfax for the last decade as “your best idea” waiting for it to be “understood’.” I agree. One lesson for me is to not blindly hold any stock. And when ‘the story’ (thesis for owning) materially changes for the worse to sell and move on. The other lesson is when the story changes and materially improves to buy (and not get caught thumb sucking - stuck in the past - unable to objectively look at the current situation or properly forecast what is likely to happen in the near future). Bottom line… be a rational investor.

Bond yields are spiking again today. Fairfax’s massive fixed income portfolio, with an average duration of 1.2 years, is looking better and better as interest rates continue to move higher. Every time the Fed speaks it is a little more hawkish and the market then prices in incrementally more hawkish Fed policy. At the next meeting the Fed then simply follows though and ‘does’ what is then priced in the market. 7 rate hikes in 2022 was the example last week. Today the Fed opened the door to a 50 basis point increase at its next meeting in May. The market has now ‘priced in’ a 65% chance the Fed will move 50 basis points in May. Guess what is likely coming at the Fed meeting in May? Bottom line, the Fed appears firmly focussed on inflation and is taking every opportunity it is given to incrementally execute more hawkish interest rate policy. And they are just getting started. (They were still buying bonds a few short weeks ago. And last week was the first rate hike of 0.25%. Balance sheet run off has not started yet.) The bond market has been COMPLETELY WRONG with how fast and how high yields have moved so far in 2022. The question is how high do yields (across the curve) go from here? And at what point does the equity market start to freak out. Yields below are for US Treasuries. What about corporate bonds? I think spreads have been widening so far in 2022 for corporate bonds compared to Treasuries. This suggests to me that the increase in yields on corporate bonds should be more than what is listed below for Treasuries. Most insurance companies have significant holdings of corporate bonds. 2020. 2021. 2022. Change Dec 31. Dec31. Jan 31. Feb 28. Mch 21. YTD 3 mo. .09. .06. .22. .35. .47. + .41 6 mo. .09. .19. .49. .69. .88. + .69 1 yr. .10. .39. .78. 1.01. 1.25. + .86 2 yr. .13. .73. 1.18. 1.44. 2.10. + 1.37 5 yr. .36. 1.26. 1.62. 1.71. 2.31. + 1.05 10 yr. .93. 1.52. 1.79. 1.83. 2.30. + .78 30 yr. 1.65. 1.90. 2.11. 2.17. 2.52. + .62

@Thrifty3000 what i laid out above is the bullish case for Fairfax. Here is the bearish case: We could have higher than normal catastrophes in 2022 driving the CR back over 95. The hard market could slow dramatically in the coming months. Fairfax may keep cash/short term investments at same/very high levels which would slow increase in interest dividend income bucket. Geopolitical situation could blow up and extreme risk off could hammer equities. My guess is Fairfax at U$480 is pricing in lots of bad news already. If actual performance at Fairfax trends closer to my bullish case then i see lots of upside in the share price. We will see

Regarding the Fed, it is not often that they take their projections for GDP growth WAY DOWN, and their projections for interest rate increases WAY UP and the stock market rallies like crazy. (I know, that ‘already priced in’ thing.) i am wondering if the start of balance sheet run off provides the next catalyst for interest rates to make their next move higher, especially the long end. When the Fed minutes come out in 2 weeks we will know more (my guess is the minutes will be more hawkish… the Fed is pivoting as fast as they can). i agree the risks to Ukraine escalating appear to be under appreciated by Mr Market. I think escalation would provide a potential ‘victory’ for Putin. Stage a ‘fake’ incident and then milk it for all the propaganda he can (domestically and internationally). Something where Russia is the ‘victim’. This war is FAR from over.

@Thrifty3000 yes, i think Fairfax is positioned to deliver +$80 per share from underwriting + interest/dividends in 2023 (perhaps more). This does not include share of profit of associates which was $324 million in 2021 (and could be +$400 million in 2022 and +$500 million in 2023). Assumptions: 1.) combined ratio = 94 in 2022 and 2023. 2021 was 95 so forecasting a 94 while we are still in a hard market is not being overly aggressive. For Fairfax to achieve a 94 in 2022 they will likely need to deliver a sub 94 CR when they report Q1 (low catastrophe quarter) so we will get better visibility into this in about 5 weeks. The 88CR they delivered in Q4 (and 95 for 2021) got me thinking we could see a sub 95 CR in future years. 2.) how much will net premiums written grow in 2022 and 2023? I have pencilled in 12% growth in 2022 and 5% growth in 2023. Growth in net premiums earned should be a little better (given 20% growth seen in 2021). 3.) interest and dividend income should be much higher in 2022 and again in 2023 given the big move in interest rates since Jan 1; especially in short term rates which is where Fairfax has most of its fixed income parked. The $3 billion invested with Kennedy Wilson could bump interest income by an incremental $100 million all by itself once it is fully deployed. So it is not a big stretch to pencil in a $250 million increase in interest and dividend income in 2023 (from 2021). We will need to see this bucket move higher when they report Q1 results to get a $100 million increase in 2022; and also an indication from Fairfax that they are starting to re-invest some of their cash/short term investments at higher rates. 4.) share count: i think a conservative estimate is for the share count to fall 3% in 2022 and another 3% in 2023. My guess is Fairfax will reduce share count by more than this if shares continue to trade in the US$500 range into Q2 and Q3. Here is what i am thinking: UW. I+D. Runoff. Total. /share. shares (year end) 2023. $1,200 + $900 - $100 = $2,000 $90. 22.5 2022. $1,000 + $750 - $150 = $1,600. $70. 23.2 2021. $801 + $641 - $200 = $1,250 $50 23.9.

Yes, extreme volatility has been the name of the game so far in 2022. And my guess is it will continue well into 2022. This will create great opportunities. Economically, the US certainly looks better positioned than Europe. What did we learn in the past week? - the war in Ukraine is getting worse. - the Fed was very hawkish at its March meeting. It is now telegraphing it will be increasing rates 7 times in 2022. Balance sheet run off start will likely be communicated at May meeting (May or June start?). Bond yields popped higher. - covid in Asia looks like it will rip for a while (more supply chain disruptions). - sentiment got far too negative on most beaten up stocks/sectors - big rally this past week.

How will rising interest rates impact WRB, Markel and Chubb? Well Chubb better pray interest rates don’t increase by 200 basis points over the next year… ————— WRB - page 60 of 2021 annual report. - Average duration of bond portfolio is 2.4 years. - size is $18.3 billion. - 100 basis point increase in interest rates = decline in value of bond portfolio of $449 million. - 200 basis point increase = decline of $894 million. - 300 basis point increase = decline of $1.32 billion. - WRB’s market cap is about $17 billion. ————— Markel - page 65 of 10Q. - avg duration of fixed income portfolio is 3.1 years - size is $12.6 billion. - 100 basis point increase = decline in value of bond portfolio of $565 million. - 200 basis point increase = decline of $1.097 billion. - Markel’s market cap is about $19.5 billion. ————— Chubb - page 69 10Q: - avg duration of fixed income portfolio is 4.1 years - size is $106 billion. - 100 basis point (bps) increase in interest rates would reduce the valuation of our fixed income portfolio by approximately $4.4 billion - Chubb’s market cap is about $90 billion.

Rising interest rates will impact P&C insurers in two important ways: 1.) short term: immediate impact to earnings as existing fixed income portfolios are re-valued. If hit is large it could also impact BV. 2.) long term: increase to interest income in future quarters / years as bonds and cash is re-invested at higher rates ————— It looks like Fairfax has done two important things in recent years to protect itself from the possibility of rising interest rates: 1.) aggressively sold down its bond portfolio and left proceeds parked in cash and short term investments - this has greatly reduced the total amount of bonds held. This can be seen by looking at the average duration of the fixed income portfolio = 1.2 years at Dec 30 2021. 2.) it has also entered into forward contracts to sell long dated U.S. treasury bonds (notional value $1.7 billion Dec 31, up from $300 million Dec 31, 2020). ————— It is possible to get a ballpark estimate of the possible losses from the recent spike in interest rates. Each P&C insurer publishes sensitivity estimates of the impact of changes in interest rates on its fixed income portfolio. So what has Fairfax published? If interest rates increase 100 basis points (from Dec 31, 2021) Fairfax would likely see mark to market losses on its bond portfolio of about $220 million (down from $335 A year ago). A 200 basis point increase would result in about a $420 million hit (down from $625 a year ago). Both of these amounts are VERY manageable for Fairfax. Given the spike we are seeing in interest rates so far in 2022 full credit to Fairfax for what they have done here. It would be VERY INTERESTING to see sensitivities for other P&C insurers, especially those with larger and longer duration portfolios. Could some P&C insurers see mark to market losses approaching $1 billion from their bond portfolios in 2022? Maybe… it will be very interesting to see how rising interest rates are impacting individual P&C insurers when they report Q1 earnings. (The life insurers are a whole other kettle of fish.) ————— Fairfax- From page 111 of 2021AR: “The table below displays the potential impact of changes in interest rates on the company’s fixed income portfolio based on parallel 200 basis points shifts up and down, in 100 basis points increments.” Base portfolio is $14.5 billion Dec 31 2021. 2020 200 basis point move up ($418) ($625) 100 basis point move up ($224). ($335) 100 basis point move down +$281. +$410 200 basis point move down +$608. +$872 Includes the impact of forward contracts to sell long dated U.S. treasury bonds with a notional amount at December 31, 2021 of $1,691.3 (December 31, 2020 – $330.8). Fairfax market cap is $11.9 billion.

@glider3834 thanks for posting this. What your chart clearly highlights is the significant macro bet on interest rates that Fairfax has been making the past few years (culminating at YE 2021). And how well Fairfax is positioned versus all peers in a rising interest rate environment - which is where we are today. It is actually nuts how Fairfax’s fixed income portfolio is positioned (average duration of 1.2 years) compared to ALL OTHER P&C INSURERS. When insurance companies report Q1 earnings it will be VERY INTERESTING to see how higher interest rates will impact earnings: 1.) how big are the mark to market losses in their bond portfolios 2.) what is the size of the hit to BV From an investing perspective, i also expect Fairfax to get ZERO CREDIT from investors (for now) for how it is positioned today - to actually benefit from rising rates via a material increase in interest and dividend income. But Fairfax will get credit for this positioning over time - eventually analysts and investors do ‘figure it out’ and the share price responds accordingly. Perhaps this macro bet will be the next big catalyst driving Fairfax’s share price higher. ————— It is quite interesting… WRB discussed this exact topic on its Q4 earnings call… funny, after Fairfax, they are next shortest duration at 2.4 years. “But again, as we see it, the growth will continue and the rate increases. There is nothing that leads us to believe that we will not continue to be able to get rate increases that outpaced trend by something that would be measured in the hundreds of basis points. So again, very promising on that front. Pivoting over to – for a moment to the investment side of the business. Again, we have, in my opinion, taken a very disciplined approach for an extended period of time in keeping not just the quality high, but the duration short. As we've discussed in the past, this has come at a price. But we think that we are going to be rewarded for that discipline going forward as you see interest rates moving up. You are going to see an opportunity for us to invest at higher rates, and you are going to see an opportunity for us to, under those circumstances, take the duration back out or extended. Both of these circumstances on the underwriting side and how we are poised there as well as how we are positioned on the investment side are going to have a very meaningful impact on the company's economic model. And as this unfolds, I think it's going to be quite consequential of what it's going to mean for the earnings power of the business. So let me pause there, and I will hand it over to Rich.”

The Q1 report for Fairfax will be very interesting but for different reasons than in the past (at least for me). My focus the past 15 months has been primarily on the equity portfolio (given how much it fell in value in 2020). Because recovery in the valuation of the equity portfolio was the primary driver of earnings and growth in BV in 2021 (i include Digit, which was an unexpected surprise, in the equity ‘bucket’). Moving forward i am really looking forward to seeing: 1.) how the insurance business is performing - can written premium growth continue at close to 20% year over year? - can CR of 95 be maintained or even go lower? 2.) changes to the bond portfolio - will interest and dividend income increase from Q4? Short term rates have been increasing since Jan 1. Was Q4 the bottom? - how aggressively is Fairfax buying longer duration and higher yielding fixed income instruments? We already have the Kennedy Wilson announcement. - how will these changes impact interest and dividend income moving forward? We have all seen interest rates across the curve move dramatic dramatically higher so far this year with another pop higher this week after the Fed meeting. I am also reading that credit spreads are also widening. Both are VERY positive developments for Fairfax given how its bond portfolio was positioned at the end of Q4. Looking ahead, i think it is possible that Fairfax could earn $2 billion in 2023 from underwriting income + interest and dividend income. Q1 results will provide a pretty good early indicator of how likely this is. If this happens then the investment thesis for Fairfax will change dramatically. In a good way. If Fairfax starts kicking out predictable operating earnings of about $500 million each and every quarter it will have an unprecedented amount of free cash flow rolling in. We will see What we do know is that outcome is not remotely priced into the share price today (trading at US$478). ————— We already received one update from Fairfax regarding my second question - changes to the bond portfolio: Fairfax boosts target for debt investment platform to $5 billion - https://ir.kennedywilson.com/news-events-and-presentations/press-releases/2022/02-23-2022-211613501 Fairfax has increased its first mortgage target within Kennedy Wilson’s debt investment platform by $3 billion to $5 billion. ————— From page 12 of Prem’s letter in the 2021AR: At the end of 2021, our fixed income portfolio, inclusive of cash and short term treasuries, which effectively comprised 72% of our investment portfolio, had a very short duration of approximately 1.2 years and an average rating of AA-. Rising rates in 2021 resulted in a small unrealized bond loss of $261 million. During the last two years, we were able to invest $1.6 billion in first mortgages with Kennedy Wilson at an average rate of 4.5%, with an average term of three years. ————— Homebuyers and owners scramble to secure low mortgage rates before more hikes come - https://finance.yahoo.com/news/homebuyers-scramble-to-secure-low-mortgage-rates-160123047.html “This week's more than quarter-point jump in mortgage rates is sending a dire message to homebuyers and owners: Time is running out. Weary buyers already facing the worst affordability conditions are now clambering to snag a low rate before any future increases price them out altogether, according to interviews with real estate pros, while the number of refi candidates coming through the door have dwindled as rates soared past 4% for the first time in almost three years. Mortgage rates have marched up by a full percentage point since the beginning of 2022, hitting 4.16% this week, according to Freddie Mac, and further increases may come as the Federal Reserve is set to raise a key benchmark rate up to six more times this year to combat inflation.”