Viking

@petec sorry, i missed that your comment was specific to Eurobank. From my perspective, the ‘stumble’ at Poseidon has been their inability to come close to hitting their financial targets set out in the recent past. Interest expense appears to be the culprit. The CFO resigned in July 2023. 2024 will be a big year for Atlas, given all the new-builds that are getting completed. The issues in the Red Sea - if they persist - might help at the margin (driving shipping rates higher). The fact interest rates have come down significantly over the past 3 months might also help a little. I am not concerned about Poseidon/Atlas. I view it more as a missed opportunity (in the near term). I do expect the ship to right itself over time. Going private was the right move for Atlas.

@dartmonkey yes, great start to the year for two of Fairfax’s largest equity holdings. And if the big boys are performing well, that usually means good things for the performance of the equity group as a whole.

@petec “I think they've been making great decisions for a decade” 1.) On the insurance front, i agree. 2.) On the investments - fixed income front, i am neutral (looking at the decade as a whole). 3.) On the investments - equities front, the period 2014-2017 was a stinker (Eurobank 1st purchase, Fairfax Africa, APR, EXCO bankruptcy, AGT take private, Farmers Edge, Boat Rocker etc). Notwithstanding the recent stumble at Poseidon/Atlas, decisions made 2018 to present has been great (in aggregate). 4.) On the derivates front, the equity hedges/shorts were a catastrophe from 2010-2020 mostly (2010-2016). The FFH-TRS has been better than great. The question i have is did all the equity hedge/short losses and the losses from the poor equity purchases from 2014-2017 significantly warp the book value we see today? I wonder if it is significantly understated. The main reason i think it might be significantly understated is the fact the insurance business has increased in size by 350% from 2014-2024E. Book value has increased much less over this same timeframe. That is probably why i prefer to use a bottom-up earnings estimate as my primary valuation tool for Fairfax as opposed to book value. I trust the informational value of one much more than the other.

@Haryana If Fairfax's stock went up 20% each of the next 4 years then we would see a price of US$2,000. Three things drive a stock price: 1.) earnings 2.) multiple 3.) shares outstanding My view is much of the increase we have seen in Fairfax over the past three years is being driven by much higher earnings and much lower share count. The P/BV multiple has not expanded much from its historical range - one could argue the multiple is actually below its historical average. If we get multiple expansion in the coming years then I think investors will be very happy. Solid earnings + lower share count + multiple expansion = very happy shareholders.

@LC great point. To come up with a ‘fair value’ for Fairfax shares, i think it is helpful to use a number of different methods. And of course, ‘fair value’ is going to be a range. My previous post was done kind of tongue in cheek and not meant to be rigorous. One of my big mistakes in the past was using price as my primary tool when exiting a position (that sucker went up a lot so it is time to sell). That (flawed) logic lead me to sell my big Apple stake in 2015/16 (after a big gain) Sometimes when i write my posts i am talking to myself… As an investor I think it is very easy to get anchored in the past. I think many people are anchored in the past when they value Fairfax. Part of the problem is Fairfax is a turnaround… it was under-earning for almost a decade. So its past results are not a good input for investors to use today to value the company looking forward (although the past 2 years are much better). Getting anchored on faulty numbers is even worse. A question. I think with the following comment you were thinking interest rates might come down. Am i correct? “For example performance on the fixed income portfolio are dependent on interest rates. It may be difficult to project that component.” Do you see lower interest rates as a risk? Because they were lower in the past? What about higher interest rates? Would that then be opportunity for Fairfax? I find when investors look at Fairfax it is not done in a balanced way. Only one scenario is considered (usually anchored by past events) and it usually leads to lower earnings. The other scenario, which might be just as likely and would lead to higher earnings, is not considered. It is presented as being conservative but i don’t see it that way. Both risk and opportunities need to be equally considered when valuing a company. Probabilities then need to be assigned to each. And then folded into a valuation framework. - what is the probability rates move lower in the coming years? - what is the probability rates move higher in the coming years? Based on what i know today, my current assessment is the risks are probably petty balanced. At least close enough. (Yes, trying to predicting macro is pretty much impossible… but that is a topic for another day). Fairfax business results are in uncharted territory. They have been for the past three years. But investors keep expecting a return to the mean (lower historical numbers). I am not oblivious to the risks. But i am also not ignoring the opportunities. I am trying to find the middle ground (i think). What we are slowly learning is a great deal of intrinsic value had been building at Fairfax over the past 10 years. Until recently, it remained hidden (from earnings). But that is changing. It will likely take another couple of years for the true earnings power of the company to become clear to investors (including me).

@Dinar My estimate for underwriting profit for 2024 is a little lower than 2023 because of my assumptions with the combined ratio (CR). 2023 has been a low cat year (big ones) so i am forecasting a full-year CR of 94%. For 2024, i am using 95% as my CR estimate as i expect ‘big catastrophes’ to normalize (come in higher than this year). I think that is a reasonable assumption. Of course, one of these years, we are going to get a really bad year for catastrophes. There is also a chance we could learn that Fairfax is a better underwriter than previously thought. I think they have been slowly improving the quality of their insurance operations - most recently Brit and reducing its catastrophe exposure. If true, this suggests my CR assumption might prove to be too conservative. We will see. PS: if you go to the 'Premiums' tab in my Excel spreadsheet (attached) you can see the build. You can adjust the CR (or any estimate) as you like to make the estimate your own. Fairfax Jan 10 2024.xlsx

Fairfax: The Big Fish that Got Away? “The stock market is there to serve you and not to instruct you.” Warren Buffett Investors have lots of regrets. Missed opportunities. Not buying a stock that afterwards turns into a big winner. Or selling a winning position way too early. ‘The big fish that got away’ kind of story. In 2021, Fairfax’s shares returned 44%. An investor looking at Fairfax in early 2022 might have concluded ‘dang, missed that one!’ and not invested. In 2022, Fairfax’s shares returned 21%. Most stocks got crushed in the bear market of 2022, so Fairfax’s performance compared to the averages was exceptional. That same investor, looking at Fairfax in early 2023, might have come to the same conclusion: ‘dang, missed that one! For the second year in a row!’ and not invested again. The fish story just got bigger. Well, here we are now in early 2024. How did Fairfax's stock do in 2023? It was up another 55%. Over the past three years shares are up 170%. Investors who did not buy shares (or sold their position too early) over the past three years are left asking themselves what happened? How did they miss out? And what should they do now? The fish story is turning into a whopper of a tale. Three weeks into 2024 the stock is up another 5%. This puts the total increase at 184% since Dec 31, 2020, making it almost a two-bagger in Peter Lynch’s parlance. Fairfax, the ‘big fish,’ continues to taunt investors. What is the lesson to be learned? By itself, the increase in Fairfax’s share price of 184% since Dec 31, 2020, tells you little (nothing?) about Fairfax’s valuation today. This is because price (if used by itself) is a terrible valuation tool. Over the past three years, 'investors' who used price as their primary valuation tool for Fairfax have been led astray. As Buffett teaches us, a stock price exists to serve investors, not instruct them. Let’s take the discussion in a slightly different direction to see what we can learn. What happens if we increase the timeframe? Let’s humour ourselves and play the price game for a little longer. But this time with a couple of added twists. Let’s zoom out - instead of looking at Fairfax’s share price for the past three years, let’s look at the share price for the past 9 years. And let’s include operating earnings - let’s make our analysis a little more robust. From 2015 to 2019 (right before Covid hit), Fairfax’s share price traded in a pretty tight band around US$500. About 50% of the time Fairfax’s share price was over $500 and the other 50% of the time it was under $500. So for 5 years straight investors felt Fairfax was worth about US$500/share. Over this 5-year span, operating earnings at Fairfax averaged about $1.07 billion per year. So from 2015-2019, investors felt $1.07 billion in operating earnings warranted a Fairfax share price of about US$500. Let’s now compare this historical period to today to see what we can learn. Let’s start with the share price. Fairfax’s share price closed today at about US$970/share. The stock is up 94% from the average of about $500/share from 2015-2019. Let’s now look at operating earnings. Operating earnings are forecasted to come in at about $4.4 billion for 2023. That is an increase of 305% from the average of $1.07 billion from 2015-2019. My current estimate is for operating earnings to increase in 2024 to about $4.6 billion. Because the share count has come down meaningfully in recent years, this would put operating earnings per share over $200/share in 2024. This is 359% more than the average from 2015-2019 (about $44/share). Importantly, the increase in operating earnings is durable (the average duration of the fixed income portfolio was increased to 3.1 years in October 2023, which locks in interest income for the next couple ofyears, the largest component of operating income). Let’s put the two together. Fairfax’s stock is up about 90% over the past 9 years. And operating earnings per share - the high quality stuff - is forecasted to be up 359% (over the trend from 2015-2019). High quality earnings have exploded and the stock price has increased modestly. Valuation: Buffet teaches us that a stock is worth the present value of the cash flows (things like operating earnings) that are expected to be generated in the future. Conclusion Looking at Fairfax’s share price and using a 3-year time horizon it is easy to conclude the stock must be crazy expensive today. Looking at Fairfax’s share price and using a 9-year time horizon (and including operating earnings) it is easy to conclude the stock must be crazy cheap today. How can it be both crazy cheap and crazy expensive at the same time? The answer, of course, is that it can’t be both. Let’s circle back to my original comment - using the share price, on its own, as your primary tool to value Fairfax is pretty dumb. As we begin 2024, that big fish (called Fairfax) is once again staring investors right in the face. And guess what? It’s probably going to slip away from them yet again. And in another couple of years, they will think back to today and likely kick themselves. And the story of ‘the big fish that got away’ will get even bigger. ————— How do the traditional valuation metrics look today? Fairfax’s stock has a PE of 5.9 (to Yahoo Finance’s estimate of 2023 earnings). The ROE for 2023 is tracking to be a little over 20%, which is very good. Price to book value (P/BV) is 1.11, which is very low - and this could come down to around 1.05 when Fairfax reports Q4 results in a few weeks. Expensive? Really? ————— What happened in recent years to spike operating earnings so much at Fairfax? Lots of things. Below is one of them. Fairfax is a P/C insurance company. Net premiums written have grown from $6.1 billion in 2014 to an estimated $26.4 billion in 2024 (my current estimate), an increase of 331% over 10 years. Now over-lay this exceptional growth over 10-straight years with the much more modest increase seen in Fairfax’s stock price over the same time frame. Things that make you go hymmm…

+1

@Crip1 i agree with your thinking: “I’m increasingly less concerned about three years down the road…” At the start of 2023, many people were concerned that higher interest income was not sustainable. Fairfax’s fixed income portfolio had an average duration of 1.6 years and there were concerns a recession was likely later in 2023 (which would drive interest rates lower). A year later… what actually happened? 1.) Fairfax earned a record amount of interest income in 2023 (est $1.8 billion). That baby has been delivered. What a surprise. 2.) current run rate of interest income is likely over $500 million per quarter. It looks like 2024 will deliver another record year of interest income (third straight year). A second surprise. 3.) on the Q3 conf call, Prem stated average duration was extended to 3.1 years. High interest income is now locked in for 2024, 2025 and 2026. A third surprise. Investors response? Yes… BUT… My guess is lots of people still think interest income still has to come down… ‘soon’. My guess is this line of thinking is driven by recency bias. From Charles Schwab: “Recency bias can lead investors to put too much emphasis on recent events, potentially leading to short-term decisions that may negatively affect their long-term financial plans.” With hindsight, it is now clear that Fairfax was grossly under-earning on its fixed income portfolio for many years. It was under-earning primarily for two reasons: 1.) central bank policy - zero interest rate 2.) Fairfax positioning - very short duration and high quality (government). This happened way back in late 2016 (Fairfax pivoted after Trumps’s election). So the interest income numbers from 2017-2021 are abnormally low for Fairfax - and probably by a lot in some years (like 2021). Are they a good number to use as a baseline? Only if you think the Fed is going back to zero interest rates and you think Fairfax is going to go back to extremely conservative positioning (low duration and high quality government bonds). Otherwise, Fairfax’s historical numbers are a terrible baseline to use for interest income - looking forward. They will lead you to expect something that is highly unlikely. That is not being conservative… That is simply using faulty logic. For example, interest income was $568 million in 2021. It will come in around $1.8 billion in 2023 and likely north of $2 billion in 2024. What is the right number to use looking out a few years? An average of 2021 and 2023 = $1.2 billion? No. That is complete garbage. $568 million in 2021 is an outlier. As a result, you have to throw it out when doing your estimates for future interest income. What is a reasonable number? Probably something north of $2 billion. Why? 1.) Today, it looks highly unlikely that global central banks will be returning to zero interest rate policy. The risks look (to me) more skewed to inflation turning up again - but that is just a guess. 2.) The fixed income portfolio at Fairfax is going to increase in size - and it will probably be meaningful: - We are still in a hard market. - The GIG acquisition will add about 5%. - Minority partners (insurance) will likely get taken out. - Fairfax will do some other things in the coming years that will grow the size of the fixed income bucket. If the fixed income portfolio increases in size by 10% and the average yield comes down 10% (not a given) then total interest income will be (about)… flat. Still a very big number. 3.) Fairfax has been moving up (not down) the risk spectrum with its fixed income portfolio. And, as we said earlier, it has been extending duration not shortening it. - $1.8 billion in Pac West loans, taking the KW real estate loan portfolio to over $4 billion. In December, Fairfax increased the ‘capacity’ of this program to $10 billion, suggesting more real estate loans will be brought on board. These were earning around 8 to 9% in Q3. What if Fairfax expands the KW real estate program to $6 billion? Or $8 billion in 2024. Remember, capacity just got expanded to $10 billion. Earning an average yield of even 8%. That would support an even higher average yield on the total fixed income portfolio than what we have today. - Fairfax also has been slowly increasing its corporate holdings and they have talked about doing more of this should the right opportunity come along. When i forecast i like to stick to one or two years (three max). Looking out 4+ years, as i have said before, it is really a bet on the capital allocation skills of management. And for the past 6 years Fairfax has been best-in-class. And that is just another reason to be optimistic about future results.

Prem Watsa - Fairfax Q3, 2023 Conference Call: “As I've said for the last number of quarters, the most important point I can make for you is to repeat what I have said in the past. For the first time in our 37-year history, almost 38 years now, I can say to you we expect, of course no guarantees, our operating income to be more than $3 billion annually for the next three years. Operating income consisting of $1.5 billion-plus frominterest and dividend income we earned $1.4 billion year-to-date, $1 billion from underwriting profit, we made $943 million year-to-date, and $500 million from associates and management companies versus $1 billion year-to-date. This works out to be over $100 per share after interest expenses overhead and taxes. “We continue to exceed our expectations for the year with the year-to-date operating income already at $3.1 billion, excluding the effects of discounting and risk margin. Fluctuations in stock and bond prices will be on top of that. And this only really matters, as I've said many times, over the long-term. Recently, in October, during spike in treasury yields, we have extended our duration to 3.1 years with an average maturity of approximately 4 years, and yield of 4.9%. In the next four years, we are likely to have a recession in the United States, resulting in corporate spreads widening, allowing us to extend our maturities further.”

@Dinar I agree that BIAL is an undervalued asset. When we see that illusive Achorage IPO from Fairfax India we should get some clarity. One of the things that I like about Fairfax today is they have a number of assets that are undervalued in ‘book value’, some significantly so. Eurobank is another example. As is Thomas Cook India. And Digit. What about private holdings like AGT and Peak Achievement (Bauer Hockey) etc? And each year the ‘hidden value’ just keeps growing. Chug, chug, chug. This is setting the table for the next round of sizable realized gains at Fairfax. $500 million here… $500 million there… pretty soon you are talking real money. This is all upside to current earnings estimates. Unlike Berkshire, Fairfax is much more likely to surface value via a sale/merger/partnership etc. I like Fairfax’s approach. Selling pet insurance for $1.4 billion last year was brilliant. As was selling Resolute at the top of the lumber cycle. Buying more of GIG will result in an upward revaluation of Fairfax’s legacy position (about $290 million when they report Q4)? The recent Ambridge sale looks very opportunistic. All the cash from the sales has since been redeployed smartly… keeping the compounding machine going. Fairfax now has a pretty good collection of insurance and equity holdings ($18 billion in total for equities) that are growing in value each year, a chunk of which is not captured in book value. Fairfax has not been in this position that i can ever remember - in terms of most of their equity holdings compounding in value at the same time. As a reminder, total investments are likely over $60 billion (including GIG). Significant value has been created in recent years. And much more value will likely be created in the coming years. Another tailwind that will likely surprise people in the coming years… like who could possible have known? Even when it is staring them right in the face.

@nwoodman thanks for all the info on Eurobank. It has been invaluable. MS new price target of €2.33/share is 45% higher than where shares closed 2023 (€1.61/share). Fairfax’s position in Eurobank was worth $2 billion at year end. 45% upside = $900 million gain. That is not on anyones radar right now (analysts who follow Fairfax). Eurobank is a monster-sized position for Fairfax - and it is poised to get much larger. It really is amazing the turnaround that has happened at Eurobank over the past 3 years. It has been super interesting to watch the management team at Eurobank for the past 3 years - a steady stream of good decisions. The Hellenic Bank acquisition looks like it could be very good. And i can’t wait to see what the management team at Eurobank does in 2024. To use an old hockey analogy: for years, out of necessity (an economic depression will do that), Eurobank was playing Chris Chelios defense (ugly, brutal). Now they have shifted to playing an Edmonton Oiler offense (I am taking about the Gretzky, Messier, Kurri, Coffee version). As a fan, I much prefer watching the ‘Oilers in their prime’ version.

@juniorr i am not sure. I will figure that out over time.

@Luca before we did anything with the kids we talked to them first and got an agreement - any money they get from us is permanent savings. Not for spending - vehicles, vacations, wedding etc. The one exception might be a house. Yes, there is a risk that something could go wrong. But i am not worried (i think i know my kids and their attitude about financial literacy and money habits). As a family, we have been talking about financial topics their whole life (I ran a financial literacy club at their high school). Since we joined the real world (opened their TFSA’s about 18 months ago) the benefits far exceed anything i imagined. The kids are learning in small, slow increments. They are now able to help each other (setting up accounts, how the accounts work etc). Most importantly, they are starting to understand the power of compounding. And i am able to mentor them. Seeing how well everything has been going, we made all three of our kids an offer. After they graduate from university and get their first job we will match (100%) whatever they are able to save in their first year of working. No limit. The goal here is to help in-still the habits of thrift, live below your means and pay yourself first. My oldest graduated from university in 2023. She landed her first ‘big girl’ job. The day after she signed her offer letter she came to me with her savings plan and financial goals for the next year (on her own… not me badgering her). Her plan is to save about $25,000 in her first year. If she can do this, she will have $50,000 (in addition to TFSA and FHSA). To do this she is living at home (i called her a room mate and my wife almost killed me). We rent a big house (4 bedroom, 2,300sq ft with two living levels) so it is not a problem for my wife and me. There is also an estate planning / wealth transfer aspect to all of this. My wife and i have more than we will ever need. Shifting a small amount of our estate into tax free accounts (or index funds that they never sell in taxable accounts) to our kids - when they are very young - in a thoughtful, methodical, educational, habit building way is looking like a really good idea right now. I think each of my 3 kids could have $200,000 each, largely socked away in tax free accounts, by the time they are 25 years old. That is crazy. At the same time, they will understand most of the important building blocks of personal finance. And they will hopefully be developing good financial habits. The early results have been very positive. But it is a work in progress.

@nwoodman , here is a little more information: 1.) probably my biggest strength over the years has been avoiding bear markets. 2.) my biggest weakness the past 15 years is being too cautious coming out of bear markets (not simply being fully invested). 3.) my outperformance versus the market averages (thank you Fairfax, with assists from oil and extreme volatility) the past 3 years has been large - moving a chunk into index funds locks in that significant outperformance. My guess is stocks will rip again at some point in the next couple of years and what you own will matter much less than simply being fully invested. 4.) estate planning is becoming more important. If i am ever ‘hit by a bus’ i want my wife and kids to know what to do - and that is mostly index funds. So i decided i needed to migrate a significant chunk of my portfolio to index funds - so i can over time fine tune which index funds and weightings. My family is also learning at the same time (i have my wife/kids read about them and actually buy them in the accounts so they get familiar with the mechanics) which is super important (learning financial concepts in small incremental steps is key). My guess is i will flex how much of my portfolio i actively manage. Today, other than Fairfax, i do not have many high conviction ideas. But that might change. My plan right now is to over time get 2/3 of my portfolio on autopilot with index funds. My view is index funds offer reasonable (XIC.TO and VO) valuation today. XIC.TO is up about 14% since Feb 2020. That is terrible performance. If you include inflation, investors real returns are likely flat. VO is up 24% since Feb 2020 - real return has not been great. VOO is up about 42% since Feb 2020. And i am hoping all my index funds drop in value and i am able build out my index holdings at lower prices (which of course just means future returns will be higher).

Insightful post. I agree. All three of my kids (early 20’s) each have TFSA, FHSA (both tax free) and investment accounts. Their big advantage today over all other investors is time. Should they pick stocks? No. Index funds. Right now i am thinking 1/3 each in XIC.TO, VO and VOO. Set and forget (and easy) way to get rich. i now have 30% of my total investments in index funds (same three i listed above). That is a first for me. Over time, my plan is to have weightings of 2/3 index funds and 1/3 active management (i pick). At least that is the plan today. ————— I will point out that today i do have most of their investments in Fairfax (we started down this path 18 months ago). But new money will go to index funds (we have started). And as Fairfax approaches fair value (not there yet) i will shift them to 100% index funds. ————— I also tell them to pray for a long bear market in stocks - to hope their portfolio goes lower. Buy low, hopefully for years. They want a bull market in stocks when they are much older.

For board members who are interested I have just posted an updated version of 'Fairfax - Hiding in Plain Sight' and the companion Excel workbook. It includes lots of updates from the past 3 weeks: Chapter 1 has been updated. Updates to Fairfax India, BIAL, Hellenic Bank/Eurobank as well as estimated Q4 equity gains and YE equity rankings. I have also added Chapter 16: Education/Information on P/C insurance - just a few items today; moving forward, as i find good material i will add to it. The document is now contains over 300 pages of information on Fairfax. Let me know if you have any suggestions for improvement. Missing material? Errors? Have a great 2024! PS: FYI, I will always keep the most recent version of both documents (PDF file and Excel workbook) in the first post of this thread.

@Hamburg Investor I am going to push back on what you are trying to ask: I don’t think you can separate Fairfax management from external factors/events - the two are symbiotic. Is this what Soros called ‘reflexivity’? Let’s look at interest rates. If interest rates stay where they are, Fairfax will likely sit on current holdings/positions and collect interest. If interest rates fall 100 basis points on the long end, Fairfax will perhaps shorten duration and harvest some gains. If interest rates increase 100 basis points on the long end, Fairfax will likely extend duration and lock in high yields. My point is Fairfax will thoughtfully adjust to high volatility events. Look what happened last April. We had a mini-banking crisis. If we had discussed it before it happened, we probably would have guessed it would probably be bad for Fairfax (for any number of reasons). It ended up being good for Fairfax because they were able to pick up $1.8 billion in real estate loans that they will earn a return on of about 10%. Partner Kennedy Wilson picked up PacWest’s real estate team - greatly expanding their capabilities; my guess is this over time will prove be a great move. There will also be second order effects over time. Back to interest rates… Over time, where interest rates go will also impact parts of the insurance market (underwriting margins), although i am sceptical the linkage is as strong as some on this board think is the case. So if long rates decline 100 basis points then perhaps the hard market continues in parts of the insurance market. The opposite id long rates increase 100 basis points. If the hard market persists Fairfax will continue to allocate capital to insurance subs. If the hard market turns soft, Fairfax will shift and allocate capital to investments / dividends / stock buybacks. My point is Fairfax will thoughtfully adjust to events. A Trump victory in the fall? We need to see what the platform is for each candidate. My guess is Trump will run on a pro-business (less government) type of platform. He also will likely be a big spender (the government will continue to run big deficits) - he is a real estate guy after all. I think you would want to have your portfolio positioned for higher economic growth and higher inflation - but that is my early guess. (It would not surprise me to see Trump fire Powell and appoint Fed members who will support his views/policies.) How will this impact Fairfax? No idea. But i am confident we will get volatility in financial markets and Fairfax will be ready to pounce (again). In terms of investors reaction and stock price… well, anything can happen in the short run. Fairfax’s stock price is being set day-to-day by Mr Market (a manic depressive). With Fairfax I am focussed on earnings. And capital allocation. Macro, especially high volatility, is opportunity for Fairfax. At least that is how things have played out the past 5 years. Active management appears to matter again. Did i answer your question? ————— Perhaps you are trying to look at Fairfax through the lens of an economist… let’s assume Fairfax management does nothing… how would a change in interest rates affect Fairfax? This is perhaps a ‘theory’ based way of looking at things. I prefer (try?) to focus on a ‘reality’ based way of looking at Fairfax. What do i think will actually happen in the real world. Toggling between the two is perhaps the best approach (understand the theory but also how things are likely to play out in the real world).

@glider3834 thanks! I’ll take a closer look tomorrow.

@SafetyinNumbers i think your list is a good start. Here are some thoughts: 1.) equity position with most upside in 2024? Eurobank. I was surprised to see the stock value of Fairfax’s position up +$700 million in 2023. That values Eurobank at Euro 1.61/share. I think analyst price targets are currently in the Euro 2.25/share range. Eurobank could easily be up 30% in 2024 = $600 million gain for Fairfax. Re-starting the dividend at Eurobank will be very good. But Hellenic Bank could really drive earnings later in the year. The Eurobank management team is very good - my guess is they are not done growing. 2.) FFH-TRS: it would not shock me to see Fairfax’s share price increase $300 in 2024 = another $600 million gain. Not a prediction. We will see. If you prediction of Fairfax getting added to the TSX60 comes true - that would just be another tailwind, and probably a significant one. 3.) India has been a very quiet region for Fairfax for a couple of years now. I suspect that will change in 2024. You highlight two big potential catalysts: - Digit IPO: could we see a +$500 million increase in the value of Fairfax’s stake? There are also the ‘compulsory convertible preferred shares’ that Fairfax owns… when they get valued properly that will increase Fairfax’s ownership stake in Digit (74%?) and result in a big gain ($300 million?). - Anchorage IPO (BIAL): i think BIAL is the real deal. The more i read/research the more i like that asset. And there are reports Fairfax is bidding for part of IDBI Bank. if successful, that would be a big investment (even for a 10% stake). - https://www.livemint.com/companies/news/carlyle-fairfax-dbs-bank-may-bid-for-idbi-bank-11670349260107.html The problem with India is it is impossible to predict the timing of these events. I would probably be 50% for Digit IPO and 40% for Anchorage IPO - but those are wild guesses (more than my usual guesses). 4.) Is 2024 the year investors start to notice Fairfax’s group of consolidated holdings? Do we see $200 million in annual earnings from this group? Perhaps $250 million? Does Fairfax continue to grow the number of holdings in this group? Is the plan at Fairfax to morph into more of a Berkshire type structure? And make a concerted effort to grow another large income stream (that would complement the insurance businesses)? I am not sure. But they kind of appear to be moving in that direction a little. 5.) Poseidon. This is a massive holding for Fairfax. And it has been in a holding pattern for the past 2 years. More of the same in 2024? Or do we see earnings (finally) start to grow as the company modelled a couple of short years ago. They certainly messed up with the structure of their debt in a rising rate environment (surprising given Fairfax’s positioning two years ago). But i do think Sokol will get the train back on the rails… just not sure if it happens in 2024 or 2025. Probably 2025 - but we will see. 6.) Commodity holdings: Stelco, Foran Mining, EXCO, OXY, Altius Minerals - i think some of these holdings are going to rip higher in the next up-cycle in commodities (late 2024 or 2025?). Just not sure if that is 2024 or 2025. I love Stelco - it is a coiled spring. Foran is a lottery ticket. I wonder if EXCO gets sold (nat gas). Buffett sees something with OXY. 7.) Insurance - I am looking forward to seeing what GIG does to Fairfax’s balance sheet at year end when it gets consolidated. Total investments/float should get a nice pop. - Does the hard market continue into 2024? If Fairfax can get another year of 5 or 6% growth in net premiums written that would be great. With GIG that would put them +10% for the year, which would be very good. - Can we get another year with CR of around 95% or 96%? Lots of investors think it has to go to 100% - and quickly. I am not convinced. 8.) Kennedy Wilson debt platform. This went from $2 to over $4 billion in 2023. Do we go over $6 billion (or higher) in 2024? What is average interest rate earned? Is 8% a crazy high number? $6 billion at 8% = $480 million. 9.) Rabbit: For the past couple of years, Fairfax has pulled a rabbit out of their hat - something that no one is expecting that is good for shareholders. I think we get another one in 2024 - and, of course, i have no idea what it is. 10.) Like each of the past 5 or 6 years, capital allocation is going to be huge again in 2024. Why? Earnings at Fairfax are so high. The team is going to have billions to allocate, especially if they sell/monetize one or two largish holdings. What new income streams are they going to seed/create? In what bucket? Insurance or investments? Public or private? Anyways, there are some random/rambling thoughts about 2024… Would love to hear what others are thinking.

2023 Top 10 List: Fairfax Achieves ‘Escape Velocity’ At the end of each year I put together list of what I think are the 10 most important events that have happened at Fairfax during the year (usually in terms of driving shareholder value). This is the fifth year of me doing this list. Reading each of the summaries in succession provides an interesting 5-year view of what has been going on at Fairfax. Years 2019-2022 can be found in Chapter 14 of ‘Hiding in Plain Sight,’ a collection of my old posts on Fairfax (click the link below to access the PDF file). https://thecobf.com/forum/topic/20253-fairfax-financial-60-of-the-best-posts-all-in-one-document/#comment-526661 Am I missing anything? Let me know your thoughts as, yes, the list below is quite subjective. ———— 'Escape velocity' Fairfax edition, featuring David Bowie - Space Oddity https://youtu.be/iYYRH4apXDo?si=d4s1WQjQEBdQufBP Prem to Fairfax investors: “Take your protein pills and put your helmet on.” Prem needs to show up at the AGM this year dressed like David Bowie... especially the hair and platform shoes! ————— Fairfax’s business and financial results have been steadily improving each of the past three years. 2023 was the year overall company performance achieved ‘escape velocity’ - finally breaking free from the gravitational pull/orbit of its recent past (2010-2020). The company - its business results/earnings and reputation - is now charting new territory. Investors have noticed. Fairfax’s stock increased 55% in 2023. Over the past 3 years, Fairfax’s stock is up 170% and it has outperformed the S&P500 by a staggering 143%. Book value per share increased at Fairfax by 33% in the 9 months to Sept 30, 2023, and 83% over the past 33 months. My guess is BV will be up nicely in Q4. This is best-in-class performance compared to other P/C insurance peers. The performance of a few that I follow - Chubb, WR Berkley and Markel (all good P/C insurers) - has not come close to the performance of Fairfax over the past three years (in terms of growth of BV/share). A dividend of US$10/share was paid Jan 2023. Fairfax recently announced the dividend to be paid in January 2024 will increase to $15/share, which is an increase of 50%. ————— Top 10 'events’ driving shareholder value in 2023 1.) Exceptional overall company performance. This might sound like a cop-out. But i don’t think so. ALL three of Fairfax’s economic engines performed at a very high level in 2023: Insurance Investments - fixed income Investments - equities/derivatives As a result, Fairfax is poised to deliver - for the second year in a row - record results in each of underwriting profit, interest and dividend income and share of profit of associates. In 2023, operating income per share is poised to increase 43% (to $190/share) over 2022. Over the past three years, operating income per share is up a staggering 415% - this very important measure of company results has indeed achieved ‘escape velocity.’ My latest estimate has Fairfax delivering an ROE of about 20% in 2023. That is exceptional performance. But more important than the results delivered in 2023, Fairfax’s insurance and investment holdings continue to grow in size and improve in quality. This sets the table nicely for continued earnings growth (and high ROE’s) in the coming years. 2.) Extending the average duration of the fixed income portfolio from 1.6 years at Dec 31, 2022 to 3.1 years in October 2023. Prem Watsa - Fairfax Q3, 2023 Conference Call: “Recently, in October, during the spike in treasury yields, we have extended our duration to 3.1 years with an average maturity of approximately 4 years, and yield of 4.9%.” Over the past three years, the fixed income team at Fairfax has superbly navigated the company (and Fairfax shareholders) through the greatest fixed income bubble top and subsequent bear market in history. They protected the balance sheet from booking billions in losses. And, by meaningfully extending the average duration, they have locked in high interest income for years in the future. 3.) Insurance subsidiary Allied World is delivering great results again in 2023 (after having a stellar 2022) To Sept 30, CR = 90.6%, UW profit = $318.5 million and net premiums written were +10.2% to $3.88 billion. To be fair, most of Fairfax’s insurance subsidiaries are having a very good year. There is a good chance Fairfax could deliver a company-wide CR under 94% for 2023. 4.) Using the stock price, the value of Fairfax’s position in Eurobank increased about $715 million in 2023. Over the past three years, the position is up $1.33 billion. Eurobank earnings spiked higher in 2022 and again in 2023. The company has solid growth prospects; the pending acquisition of Hellenic Bank will be a catalyst in 2024. Dividend will likely be re-instated in early 2024 and this should be supportive of the stock price. Fairfax’s decision to merge Grivalia Holdings into Eurobank in 2019 is looking especially brilliant. With hindsight, the move allowed Fairfax to sell high (Grivalia) and buy low (Eurobank). At the time, the transaction was good for both parties. 5.) The value of Fairfax’s position in FFH-Total Return Swaps increased $640 million in 2023 (giving it exposure to 1.96 million Fairfax shares). Since inception (basically three years), the position is up $1.07 billion. Fairfax shares continue to look very cheap, which suggests this position could continue to perform well for Fairfax. 6.) Estimated increase in net premiums written in 2023 of $1.4 billion or 6% to $23.7 billion. The hard market in P/C insurance that started in late 2019 continued in 2023. Over the last three years, net premiums written have increased $9 billion or 61%. For some perspective, Warren Buffett purchased P/C insurer Alleghany in 2022 for $11.2 billion. In 2022, Alleghany had gross premiums written of $8.5 billion. The growth Fairfax has experienced the past three years in net premiums written has increased the intrinsic value of the company considerably. 7.) Purchase of KIPCO’s 44.3% interest in Gulf Insurance Group, increasing Fairfax’s stake from 43.7% to 90%. Cost? Aggregate fair valuation consideration of approximately $740 million (upfront payment of around $177 million and then 4 equal annual payments of $165 million). Prem on Fairfax Q1, 2023 Conference Call: “We structured it (the deal) in a way that perhaps a lot of it (annual payments) will come from the company itself, dividends from the company.” Size of GIG (2022): Net premiums written of $1.7 billion and investments of $2.4 billion. Deal closed in December. In Q4, Fairfax will book a pre-tax gain of around $290 million. Fairfax goes from being a minority shareholder in GIG to the controlling shareholder. Strategically, this secures Fairfax’s position as one of the leading P&C insurance providers in the Middle East North Africa (MENA) region. Fairfax is using its substantial cash flow to grow its insurance operations. It is also buying more of something it already owns (and knows well), a capital allocation strategy endorsed by both Peter Lynch and Warren Buffett. 8.) Purchase of $1.8 billion of PacWest real estate loans with expected annual return of 10%. This was one of Fairfax’s big capital allocation decision of 2023; very contrarian, very opportunistic and deep value. Expansion of real estate/debt platform partnership with Kennedy Wilson (to over $4 billion in total). Fairfax also invested $200 million directly in KW in debentures (6%) with 7-year warrants (12.3 million shares with strike price of $16.21). In December, it appears Fairfax increased their commitment to the KW debt platform by $2 billion from $8 billion to $10 billion. This will be something to monitor in 2024. 9.) The market value of Fairfax’s position in Thomas Cook India (TCIL) increased about $305 million in 2023. The excess of market value to carrying value (at Sept 30) increased by about $379 million. A significant portion of the value of TCIL is not captured in Fairfax’s book value (about $338 million at YE). On December 1, Fairfax sold 40 million shares for proceeds of $67 million. Covid hit TCIL especially hard. TCIL (and Sterling Resorts) aggressively cut costs. With its travel businesses rebounding strongly in 2023, the much lower cost base is now spiking profits. 10.) Monetized another asset and booked a $275 million pre-tax investment gain (closed in Q2, 2023). Sale of Ambridge Group (MGU operations of Brit) to Amynta Group for $379 million (and an additional $100 million subject to 2023 performance targets). Fairfax also entered into multi-year strategic partnership with Amynta Asset sales are important part of capital allocation framework at Fairfax, and this is something that differentiates it from BRK and Markel. Why sell an asset? Someone values it much more and/or for strategic reasons (the asset is a better fit elsewhere). Account Change: Implementation of IFRS 17 accounting standard Jan 1, 2023, increase book value per share by $104.60. On January 1, 2023, Fairfax (and all Canadian insurers) were required to implement IFRS 17 accounting standard. The cumulative effect of implementing IFRS 17 resulted in an increase in common shareholders’ equity at Fairfax of $2.4 billion at December 31, 2022. Pre-IFRS 17, at December 31, 2022, BV/share was US$658. Post-IFRS 17, at December 31, 2022, BV/share was US$762. Below is what Fairfax has to say about IFRS 17 when they released Q1, 2023 results: Honourable mention: Digit - growth of the business during the year was solid. BIAL - back in growth mode. Fairfax India purchased another 10% for $250 million. Increase in value of Mytilineos share price. Turnaround at Brit? After a couple of years of underperformance (from an underwriting perspective) it looks like Brit might have turned the corner in 2023. Reduction in size of Blackberry debenture to $150 million (to Feb 14, 2024), down from $365 million (was $500 million in 2020). Capital is being re-allocated from under-performers to better opportunities. I estimate Fairfax will reduce shares outstanding by about 1% in 2023. This is at a slower pace than the past couple of years. Over the past three years, the share count has been reduced by 3.06 million shares or 11.7%, at an average cost of US$508. My guess is Fairfax’s BV will finish 2023 north of US$900. This is yet another example of excellent capital allocation by Fairfax. Incomplete: Meadow Foods (UK): how much did Fairfax spend to purchase a majority position in August? What are prospects of the company? (Company had £550 million in sales…) Negatives: Continued decline in prospects of Blackberry/share price (market value of Fairfax’s position is down to $165 million at Dec 31, 2023). End of Farmers Edge: Fairfax is trying to take company private (to harvest significant tax losses?). Adverse reserve development in runoff of $80 million in 1H. Something to monitor moving forward. Digit IPO: in 2023, company appeared to continued to fumble the ball with regulators in India. Digit - still waiting for clarity on compulsory convertible preferred shares (expected to take Fairfax’s ownership position from 49% to 74%); appears to be another issue with regulators in India. Personnel announcements: January 2023 Fairfax news release: “Brian Young, CEO of Odyssey Group, will begin to share oversight responsibilities with Andy Barnard, President of Fairfax Insurance Group, over all of Fairfax’s insurance and reinsurance operations. Brian Young will continue as CEO of Odyssey Group.”

@Dinar the article you link to might be discussing what happened last year. For information on what is happening now or what might happen moving forward, below are some links you might find helpful: AM Best - 2024 Guide To Understanding the Insurance Industry https://bestsreview.ambest.com/default.aspx?altsrc=2 Gallagher Re - What A Difference A Year Makes - Jan 2024 (I haven't read this but it looks interesting) https://www.ajg.com/gallagherre/-/media/files/gallagher/gallagherre/news-and-insights/2024/january/what-a-difference-a-year-makes.pdf Other: https://www.reinsurancene.ws Great ongoing news source https://www.swissre.com/institute/ https://www.spglobal.com/ratings/en/sector/insurance/property-casualty

@thrifty For fun, here are some rough numbers for 2024: Poseidon = $200 to $250 Eurobank = $400 to $450 FFH-TRS = $400 to $500 Fairfax India = $125 Recipe = $75 Top 5 could deliver $1.2 billion in ‘value creation’ on their own. The FFH-TRS position is already up $120 million one week into the new year. If Eurobank announces the initiation of a dividend when they report YE results that likely will pop their share price. Of interest, much of the TRS notional position is not captured in BV (just the gains are captured in BV). So gains in that position really helps the ROE math.

As of December 31, 2023, my guess is Fairfax has an investment portfolio that totals about $60 billion, with the split being roughly as follows: In this post we review the holdings in the equities ‘bucket.’ To value a holding we normally used current ‘market value,’ which is the stock price at Dec 31, 2023, multiplied by the number of shares Fairfax owns. For private holdings we use Fairfax’s latest reported market value (sometimes carrying value). Derivative holdings, like the FFH-TRS, are included at their notional value. Where we have done something ‘funky’ we provide an explanation (see ‘additional notes’ below). We have attempted to capture a value for each holding that we feel roughly reflects its ‘intrinsic’ or actual economic value to Fairfax. For Fairfax India and Recipe, some shares are held in an ‘asset value note’ that was put on when Fairfax sold RiverStone Barbados a couple of years ago. We used share counts that reflect what we think Fairfax actually owns/controls. (I think some Poseidon shares are also included in this note but I am not sure so I did not make an adjustment for this - so the Poseidon position below might be understated by about 9%). Additional notes: Atlas: $2,100 = 2,046 FV at Q3 + $50 Q4 earnings (likely low) Fairfax India: $1,220 = $20.89 BV at FIH.U x 58.4 million shares Recipe: $900 = ($17.25 CV at Dec 31, 2022 x 49.4 million shares) + $50 million (2023 earnings est) AGT Food Ingredients: $350 million. A guess; probably low. EBITDA was C$150 million in 2022. Mytilineos: includes exchangeable bonds John Keells: includes convertible debentures Ok, let’s get to the fun part of this post. What are some key take-aways? Below are mine. What are yours? 1.) Fairfax has a pretty concentrated portfolio The top 5 holdings make up 45% of the total The top 15 holdings make up close to 70% of the total 2.) Steady improvement in quality of the top 15 holdings over the past 6 years: What happened? New money has been invested at Fairfax very well (FFH-TRS, buying more of existing holdings) Some high quality businesses have continued to execute well (Fairfax India, Stelco) Some businesses, after years of effort, have turned around (Eurobank). Some businesses that were severely affected by Covid have emerged stronger (Thomas Cook India, BIAL, Recipe?) Some businesses were restructured/taken private (EXCO, AGT) and are now performing much better. Some low quality business were sold/merged/wound down (Resolute Forest Products, APR, Fairfax Africa). Some low quality businesses have shrunk in size due to poor results (BlackBerry, Farmers Edge, Boat Rocker). The important point is the quality of Fairfax’s largest holdings have steadily been increasing. And this should result in higher overall returns from the equity portfolio in the coming years. 3.) What rate of return should this collection of equity holdings be able to deliver in 2024? 12% return x $18 billion = $2.16 billion (made up of share of profit of associates + dividends + ‘other’ consolidated non-insurance co’s + investment gains) This looks like a reasonable target for 2024, looking at the solid prospects/earnings profiles of the top 15 holdings (with a 70% weighting). 4.) A slow shift away from mark-to-market holdings. Today, less than 50% of the total portfolio is held in the mark-to-market bucket. Back in 2019, my guess is closer to 80% of the total portfolio was held in the mark-to-market bucket. This shift should have the effect of smoothing Fairfax’s reported results moving forward, especially during bear markets. As a reminder, in Q1, 2020, Fairfax had $1.1 billion in unrealized losses (when the equity portfolio was much smaller). As more holdings shift to the ‘Associates’ and ‘Consolidated’ buckets, it is the trend in underlying earnings at the individual holdings that will matter to Fairfax’s reported results and not a stock price - earnings are much more consistent than a stock price. Lower volatility in reported earnings should help Fairfax’s valuation (as volatility is considered bad by Mr. Market). This shift will also start to create a Berkshire Hathaway problem for Fairfax: over time book value will become an increasingly poor tool to use to value Fairfax. Why? The value of the ’Associates’ and ‘Consolidated’ companies captured in book value each year will fall short of the increase in their true economic value. Fairfax India is a good example of this today. Eurobank is a holding to watch moving forward. Bottom line, Fairfax looks very well positioned today. But the story gets better: like the past 6 years, I expect the quality of Fairfax's equity holdings to continue to improve in 2024. That will improve future returns. And, like a virtuous circle, the growing cash flows will be re-invested growing the companies even more. Thoughts? Am I missing something? What number below is most wrong? Why?

+1 Fairfax needs to re-build investor confidence. That is extremely important. Increasing the dividend is a no-brainer way to do that (yes, just one of many things that need to happen). And a material - 50% - increase in the dividend is even better (as long as it is sustainable… which it is in this case). Three things drive a share price: 1.) earnings 2.) multiple 3.) share count The spike higher in Fairfax’s shares the past three years has been driven by a spike in earnings and a rapid decrease in the share count. Multiple expansion HAS NOT HAPPENED. Yet. I think it will. But to get multiple expansion the management team will need to keep doing what they are doing - delivering solid results and communicating well. Multiple expansion is rocket fuel to a share price.