Viking

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.”

I have updated my spreadsheet that captures Fairfax's various 'equity' holdings. I have started updating the information to capture what was supplied in the AR and new news like the increase in Fairfax India. So how are Fairfax's equity holdings performing Jan 1 - March 18? In aggregate my spreadsheet says they are down about $300-$350 million or about 2-2.5%. Given the S&P 500 is down YTD by 6.4% this is solid performance. Mark-to-market decline is about $250 million = $10/share (pre-tax). QTD Big Swingers - Blackberry - $236 - Quess - $178 - CIB - $81 - Eurobank +$166 - Atlas +$131 - Stelco +$85 Please note: for some holdings my share count does not exactly match the share count provided in Prem’s letter. My share count includes Riverstone UK holdings; i will update my count as we learn more over 2022. As per usual, let me know if you catch any big errors with my numbers Fairfax Equity Holdings March 18 2022.xlsx

One strategy is responsible for Fairfax’s underperformance from 2011-2020: shorting strategy. That aspect of their investing strategy has changed: they will no longer short stocks or indices. In terms of stock picking, Fairfax has a pretty good track record over their 35 years (this is my guess… i have not run the numbers). Atlas was their most recent massive purchase and it is looking very good. Another recent medium sized purchase, Stelco, is also looking very good. Another recent smaller purchase, Dexterra, is also looking very good. Fairfax also employs some non-traditional strategies that i group in the equity bucket: their recent purchase of FFH TRS giving them exposure to 1.96 million Fairfax shares looks like a solid move to me. Bottom line, Fairfax is not Berkshire and never will be. It is Fairfax. With the shorting strategy in the rear view mirror my guess is reported results and BV growth at Fairfax will be much better the next 5 years than it was the 10 years from 2011-2020.

@Madpawn welcome to the dark side While Fairfax, Berkshire and Markel are all insurance companies that invest heavily in equities, all 3 do so in a very different way. Why the differences? Different business models. Berkshire is looking to own its positions forever. Fairfax, on the other hand, is looking to buy low and sell high. Fairfax also likes for businesses it controls to also trade on the stock market to allow for better price discovery (for Fairfax shareholders to better understand the actual market value of its various equity holdings).

Now i am not sure what goes into AM Best estimates, but if US P&C finished 2021 with a 102CR then it makes sense to me we should see the hard market continue well into 2022. And with inflation ripping and likely to stay elevated perhaps the hard market continues into 2023. If interest rates continue to increase the value of bond holdings will fall, especially for those insurers with long duration portfolios. In Q1 we will likely see large mark to market losses which will hit earnings and also hit book value. Fairfax, with an average duration of 1.2 years in its bond portfolio, is exceptionally well positioned versus peers. Just another reason for the hard market to continue. ————— U.S. P/C Industry Grew Surplus Despite Underwriting Loss in 2021 - https://www.mynewmarkets.com/articles/183933/u-s-p-c-industry-grew-surplus-despite-underwriting-loss-in-2021 “Insurance rating agency AM Best said it expects the U.S. property/casualty insurance industry to record an increase in surplus in 2021 thanks to investment income and capital gains improvements despite booking an underwriting loss of $15.7 billion. Best’s Market Segment Report, “P/C Industry Maintains Solid Capital Despite Increased Challenges in 2021,” said factors such as catastrophe activity, secondary perils, increased loss costs, and more-normalized losses in auto insurance will likely result in an industry combined ratio of 101.8 in 2021 compared to 98.8 in 2020. AM Best expects industry surplus to increase 7.1%, or $66.9 billion, in 2021 to a little more than $1 trillion.”

@KFS my guess is reported traditional ‘operating income’ is the financial metric most highly correlated with Fairfax’s price to BV multiple. By operating income i mean strictly underwriting profit + interest/dividends (not share of profit of associates). And for underwriting profit this includes runoff. When ‘operating income’ is trending up then Fairfax trades at a higher price to BV multiple. When ‘operating income’ is trending down (like now) Fairfax trades at a lower price to BV multiple. (At least that is my guess…). I think this is how most analysts look at and report on all insurance companies, including Fairfax (90% of their reports, including earnings estimates, focusses pretty much exclusively on operating income). So as per your question, this incorporates the importance of interest rates but with 2 important caveats: 1.) changes Fairfax makes to its fixed income portfolio matters 2.) there will be a lag before these changes flow through to reported results and analysts update their models From my perspective how interest rates actually increase or decrease interest and dividend income in reported results is what matters. ————— I think the equity investing side of Fairfax is largely ignored by most analysts (in terms of including in earnings estimates). Results are way, way too volatile - and not just quarter to quarter but also year to year. Even if they wanted to, whatever estimate they put in for equities will likely be wildly wrong and they will look stupid. So they do what any rational analyst would do and that is ignore the equity holdings (in terms of earnings estimates). And report on this ‘bucket’ only after the fact. ————— The good news? I think Fairfax could be at the next inflection point for operating income. I think 2021 might be the bottom. And i think operating income will increase nicely in 2022 - and it could increase significantly. Why? 1.) underwriting income should improve from 2021 (lower CR and much higher net premiums) 2.) interest and dividend income should increase from 2021 (given big increase in short term rates since Jan 1) If Fairfax reports higher operating income, starting with Q1 results, i would expect analysts to update their models and it makes sense to me the improved visibility into future earnings will result in Fairfax stock trading at a higher price to BV.

Calculated Risk is my go to for all things housing and economics. He recently posted on ‘Predicting the next Recession’. Great framework for how to think about the topic and what to watch for. 1.) most common cause of recession? Fed tightening to slow inflation. 2.) “The key will be to watch housing. Housing is the main transmission mechanism for Fed policy.” - “One of my favorite models for business cycle forecasting uses new home sales (also housing starts and residential investment). I also look at the yield curve, but I've found new home sales is generally more useful.” 3.) “If the Fed tightening cycle will lead to a recession, we should see housing turn down first (new home sales, single family starts, residential investment). There are other indicators too - such as the yield curve and heavy truck sales - but mostly I'll be watching housing. (I'm not currently on recession watch)” - https://www.calculatedriskblog.com/2022/03/predicting-next-recession.html

Russia desperately needs a break in the war. To rest its troops. And restock its supply lines. And figure out a new strategy. Sounds like putin is in process of paying/enlisting 40,000 Syrians to join the fight on Russia’s behalf… he needs time to put these sorts of measures in place. So my guess is ‘peace talk’ is just propaganda from Putin. My base case is Putin will continue until he gets regime change and at least 50% of Ukraine’s territory (the entire east of the country). ————— Putin has won IF the agreement you outline above is agreed to? My take is Putin has gotten his ass kicked. Militarily, economically and politically. Putin would be humiliated if he signed that agreement. Remember, he is a smash-mouth dictator. That is a win? Militarily, IF that is what the final agreement looks like (and i highly doubt Putin will settle for that) then, despite Russia winning most of the battles, Ukraine will have won the war - no regime change and they keep their independence. All other nations/groups in and bordering Russia now KNOW that Putin can be defeated - Ukraine provides the model. Russia will have achieved none of its stated objectives: regime change, de-Nazification, re-unification with mother Russia. NATO has been re-born. And ALL OF EUROPE IS RE-ARMING LIKE CRAZY to protect itself from Russia. That is victory for Putin? Economically, Russia is so screwed, even if sanctions are lifted. The economy will shortly be in recession/depression. Russia has effectively become a vassal stake to China. Victory? Politically, Putin has exposed himself for all the world to see - he is now a pariah in the West. There is no turning the clock back on this catastrophe. Look at the change in the just the relationship with Germany - a catastrophe. Ukrainians (most European countries) now hate anything associated with Putin. Putin has stoked the flames of patriotism/nationalism in Eastern European countries (and all of Europe). At home in Russia, over time, the truth will come out as to what Russia has done (it was a massive war/destruction/deaths) and that Russia got its ass kicked. Putin has lost his ability to exert his influence in the West like in the past. Victory?

With most investments it is usually best to ignore political dimensions as they are usually too unpredictable (timing and actual impact). This is probably true 95% of the time. The challenge is guessing when we are in the 5% of the time when political dimensions need to be considered. The other challenge today is investors are pretty terrible at incorporating 1 in 50 year (or longer) events into their investment process. Covid was a great example. Most people are trying to understand the war in Ukraine (and its impact on financial markets) by looking primarily at what happened with the Iraq war (or ‘other’ recent wars). Tiny sample size. And very little in common with what is going on today in Ukraine. So my guess is financial markets are not prepared for a protracted war that gets bigger and uglier (drawing more nations in) and that lasts a long time. i continue to think China is the key to how bad the Ukraine war gets. And to understand where China stands you only have to follow what they are telling their citizens about the war. Today the Chinese communication to their people is pretty much exactly what Putin is saying to the Russian people. Like i have been saying for the past month if you want to understand what someone is going to do… the best thing is to listen to what they actually say. China today is firmly in Putin’s corner. Until i see that change significantly i am going to remain very cautious on the war in Ukraine. China’s support will only embolden Putin. ————— Below is an example of an article on chinadaily.com that nicely sums up China’s current position: full support of Russia. I continue to think this position will be increasingly difficult to maintain as the war in Ukraine escalates. The West (countries and companies) will not allow China to openly support and fund Russia’s war - there will be consequences for China… and investors need to have their eyes wide open to the risks. ————- Nations urged to de-escalate Russia-Ukraine conflict - https://www.chinadaily.com.cn/a/202203/08/WS62268f9ea310cdd39bc8b05a.html With regard to China-Russia relations in the current international landscape, Wang said bilateral ties are grounded in a clear logic of history and driven by strong internal dynamics, and the friendship between the Chinese and Russian peoples is rock-solid. The China-Russia relationship is valued for its independence, he said. "It is based on nonalignment, non-confrontation and non-targeting of any third party, and it is free from interference or provocation by third parties. This is both what historical experience has taught us and it is an innovation in international relations." As one of the most crucial bilateral ties in the world, China-Russia cooperation will deliver benefits and wellbeing to the two peoples, and is also conducive to world peace, stability and development, Wang added.

i agree and that is what we are already seeing. However, i do think some US equities, like Apple, could be collateral damage. If so, that could be what drives markets the next leg lower. So we could see a flight to quality (US$) and lower equity markets. US bonds could rally with inflation set to move higher. Crazy times.