Viking

Well given it is Super Bowl Sunday today let's think big and audacious and Fairfax… ————— In my previous post I suggested we might see Fairfax achieve a 94 combined ratio in 2022 - and that this might be a conservative estimate. I know, i know. That is NUTS. Crazy talk. EVERYONE KNOWS Fairfax always writes at a high ‘90’s CR. Just look at the past 5 years (see below for proof). And as recently as 2017 they wrote at 106.6. Barf. So a 94 CR is a pipe dream. Right? What if i told you there is a good chance they will actually achieve a 90CR. Consistently. In the coming years. Got your attention yet? ————— I would appreciate feedback from others on the board. I have said repeatedly i am NOT an insurance guy. Or an accountant. I have followed Fairfax very closely for the past 20 years (i did go cold turkey from about 2012-2018). Below I have constructed a thesis. And i would appreciate hearing why my thesis is wrong. Or not. But please… specifics, logic, reasoning etc. So we can all learn something. And hopefully make some money along the way… Because if I am right there is some BIG money to make with Fairfax in the next 12-24 months. ————— Just to set the table, let’s assume Fairfax delivers a 90CR in 2022. Yes, lets go crazy for a minute. What does that mean in cold hard underwriting earnings? US$18 billion in net earned premiums in 2022 x 0.10 (90CR) = $1.8 billion in underwriting income = $75/share (24 million shares). Holy shit Batman. ————— But Fairfax achieving a 90CR is like Prem deciding to sell Blackberry… it just ain’t going to happen. Right? Well, not so fast… Not only is it possible, it also might be LIKELY... OK, WHY? First we need to do some digging… ————— I had a strange thought yesterday: can anything be learned from looking at Fairfax’s CR - going back 21 years. Can history teach us anything? And can those learnings help us understand where Fairfax’s CR might be headed in the future. Because understanding future earnings is the key to understanding how the share price is valued today and where it might be headed in the future. (We REALLY LIKE the set-ups where the shares are undervalued at the same time profitability is increasing.) ————— So for fun lets look at Fairfax’s combined ratios for the past 21 years. Are there any patterns or is it completely random? Is there anything interesting going on? Our starting point is 2001 and the combined ratio that year was 120.9. And of course that number was driven by 9-11. Surprisingly (for me anyways) looking at Fairfax’s combined ratio for the past 20 years (2001-2021) you see 4 obvious cycles: hard market followed by soft market followed by hard market followed by soft market. 1.) from 2002-2007, Fairfax had 4 year stretch (over 5 years) where they achieved an average combined ratio of 97). I excluded the 2005 CR = 107.6 due to Hurricane Catrina - as it was an outlier. After all mother nature can always mess with an underlying trend for one year. This hard market bottomed at 97 because interest rates were high - US 10 year treasuries were yielding 5.5 to 6% (the ones on the books were yielding even more); corporates would have been higher yet. So with interest rates so high writing insurance business at a 97CR was very profitable. 2.) from 2008-2012, Fairfax had 5 year stretch where they achieved an average combined ratio of 105. 3.) from 2013-2016, Fairfax had a 4 year stretch where they achieved an average combined ratio under 92. This was a shocker for me. This stellar 4 year track record happened when I was not following Fairfax. (It's not the things you know that get you i trouble... its the things you think you know that ain't so.) 4.) from 2017-2021, Fairfax had a 5 year stretch where they achieved an average combined ratio of 99. This soft market peaked so much lower than the 2008-2012 soft market because interest rates are so much lower today - US 10 year treasuries are yielding 2%; corporates are modestly higher. With interest rates so low an average CR of 99 is not good. So to summarize the past 20 years: the average CR was 97 (hard market) then 105 (soft market) then 92 (hard market) then 99 (soft market). Those are BIG, BIG swings. ---------- What are the lessons? The insurance business is very cyclical. But each cycle, once established, lasts for years - 4 to 5 years to be precise. Like clockwork. And it appears as though we might be just beginning the next cycle change. From a soft market to a hard market. Fairfax reporting an 88CR in Q4 was like a school teacher ringing a bell. THE HARD MARKET IS NOW (FINALLY) SHOWING UP IN REPORTED RESULTS. You also see this when looking at results from other insurers. Because the insurance cycle is an industry event. The Q1 report will be important: if Fairfax reports a CR in the low 90’s then there is a pretty good chance that my thesis is correct and we are off to the races. So what is a realistic CR for Fairfax to report in 2022 and the next few years? The last hard market saw them deliver an average 92CR with interest rates higher than they are today. So that suggests to me in this next hard market cycle we could see an average CR below 92 and possibly below 90. And that is because crazy low interest rates has made this hard market cycle even more firm than normal. Companies understand earnings from interest and dividends are going to remain challenged so they HAVE TO EARN MORE FROM UNDERWRITING IF THEY ARE GOING TO HIT THEIR RETURN OBJECTIVES. And earn their year end bonuses. And keep their shareholders happy. ————— Now how do we know a low CR trend will last for years? It is because of how insurance companies set reserves. In soft markets the kitchen cupboard is allowed to run low, especially the last year or two (and reserve releases get smaller). No one wants to report a terrible CR (compared to peers) so they eat every last morsel they had previously squirrelled away in the pantry. In hard markets, especially in the first year or two, the kitchen cupboard needs to be completely re-stocked with groceries (it is empty after all and not having enough to eat is still fresh in everyones minds). So when a hard market begins reported CR’s are understated which allows reserves to be re-built. Think 2021. But once the restocking is done (and the pantry is now bursting with food) ALL THE PROFITS FROM THAT POINT FORWARD NOW FLOW TO THE CR. And the CR magically drops like a stone and stays low for years (remember, that pantry is full again… so we start to get above average reserve releases). ————— Now where this gets confusing for investors is the lag from when insurance companies SAY WE ARE IN A HARD MARKET to when we SEE IT SHOW UP IN A FALLING CR. It looks to me, 9 quarters into the current hard market, that we likely have just passed the point where all the pantries have now been fully restocked and we should start to see really impressive CR’s being reported by insurance companies in the coming quarters. Like a CR of 88 from Fairfax in Q4. The really cool thing is it will come as a complete shock to most investors (the analysts have been banging the drum for a few quarters now). THE IMPROVING PROFITABILITY IS NOT PRICED IN TO THE STOCK. Well, at least it isn’t for Fairfax. ————- CR Cat Losses Cat CR Events 2021 95 $1,203 7.5 Hurr Ida; Europe Fl; Texas WS 2020 97.8 $1,313 9.5 Covid; US Hurricanes 2019 96.9 $498 4.0 2018 97.3 $752 6.5 2017 106.6 $1,330 13.7 Hurr Harvey/Irma/Maria 2016 92.5 $353 4.6 2015 89.9 2014 90.8 2013 92.7 2012 99.9 2011 114.2 Japan earthquake; US storms 2010 103.5 Haiti earthquake 2009 99.8 2008 106.2 Hurricane Ike 2007 94 2006 95.5 2005 107.6 Hurricane Catrina 2004 97.5 2003 97.6 2002 101.5 2001 120.9 9-11

The shocker for me when Fairfax reported Q4 results on Friday was the combined ratio of 88 for Q4 - which brought Fairfax down to a 95 CR for full year 2021 ($801 million underwriting profit). It now looks to me like a CR of 94 could be a conservative estimate for 2022 (given 2021 was 4th worst year on record for cat losses). Three short months ago i estimated Fairfax would post a 97CR for full year 2021. Very wrong. And i felt a 96 CR was an achievable estimate for 2022. Looking very wrong today as well. So whats the big deal? So what if the CR improves by a couple of percent. Does it really make much of a difference in $? Yup. If Fairfax can achieve a 94CR next year they will earn about US$1.1 billion from underwriting = $46/share. Fairfax shares are trading at under US$520 today. Now, yes, $46 is pre tax. But still… that is nuts. Because that $46 does not include: 1.) GROWING interest and dividend income (they benefit big time from rising rates) 2.) GROWING share of profit of associates (driven by Eurobank and Altas, both poised to have breakout earnings in 2022) 3.) gains from an investment portfolio that is skewed to cyclicals/value/resources (net gains totalled $2.3 billion in 2021) 4.) another $400 million gain in Q1 from Digit is coming (after net gains of $1.49 billion in 2021) ————— Net earned premiums. Underwriting profit 2022. $18.1 est. $1,100 est. $46/share 2021. $15.5. $801. $31/share 2020. $13.9. $308. $12/share —————- Fairfax earned an underwriting profit of about $335 million per year on average from 2018-2020 ($13/share). It was $801 million in 2021. Estimated underwriting profit of $1.1 billion in 2022. Yes, the magnitude of the increase is very large and meaningful, especially when you compare it to the average from 2018-2020 (more than a $750 million increase). ————— Conservative reserving tailwind: given we have been in an insurance hard market for over two years now (i use Q4 2019 as the start) all P&C insurance companies have had ample opportunity to pad reserves pretty well. This padding of reserves is not captured in the reported CR. So it does not sshow up in reported earnings. Rather, the benefit resides (and hides) within P&C balance sheets. This is a hidden asset that will benefit shareholders ONLY in future years via reserve releases. Who cares? This suggests to me we will likely see reported CR start to surprise to the downside (modestly) in the coming years driven in part by higher than expected reserve releases. ————— How might 2023 look? Well, we are only 10.5 months away. And we are supposed to be long term investors (not traders). So lets put forward some numbers of how 2023 might look for Fairfax: net premiums earned = $19 billion x 93CR = $1.33 billion / 23 million shares outstanding = $58/share. Just from underwriting… Remember, shares are trading < $520 today. ————— Yup… an improving CR is a big deal and definitely something to pay attention to. Q1 results will be key: was the low CR in Q4 an outlier or a sign of better things to come? ————— What am i conveniently ignoring? 1.) losses from runoff: averaging about $200 million per year and not included in my analysis above… hopefully 2021 was a bit of a kitchen sink thing… so lets assume ongoing losses here = $100 million per year. 2.) not sure how the sale of 9.9% of Odyssey will flow through the financials… there is a cost; just not sure which buckets it will be paid from… anyone have any thoughts? (I am a sales/management guy not an accountant.)

@Munger_Disciple here are a few comments to get you started: 1.) Andy Barnard is running the insurance side of Fairfax and has been for many years now (at least a decade). Prior to that he ran Odyssey Re. Odyssey has been one of the crown jewels of Fairfax - very good long term track record. I think Prem has discussed how Andy runs the insurance side of things (profit centre's, decentralized, high level of accountability etc)… i’ll do some searching and see what i can find. 2.) float: RBC has mentioned that Fairfax tends to write longer tail business 3.) leverage: i’ll let others more knowledgable than me comment here 4.) succession planning: Andy is running the insurance side of things. On the investment side of things i think there is a transition happening from the old guard (Prem - equities, Brian Bradstreet - Bonds) to the new guard (Wade Burton, Lawrence Chin etc. My guess is this has been happening for the last couple of years - and you can see it in the shift in types of equities Fairfax is putting new money in to the past 3 or 4 years (and how they have been fixing the many past equity mistakes made 4 and more years ago). In the last annual report Prem talked about how Wade/Lawrence would be getting more money to manage given their successful long term track record. Importantly, employees seem to really like Prem and working at Fairfax. It should be noted the CEO’s of both Brit and Allied both left after they were acquired.

Does anyone know how the 2 pension funds get paid for their 9.9% equity stake in Odyssey? Do they get paid solely via their share of Odyssey earnings? Or do they get paid via guaranteed fixed payment each year from Odyssey (more like a bond type payment). The answer to this will help me understand how meaningful the amount paid for 9.9% of Odyssey can actually be extrapolated to value all of Odyssey (and then Fairfax).

Oil was my number one ‘equity’ pick back in December. Oil was by far my largest holding in January (Cenovus and also some Suncor). The developing Ukraine situation just became another factor driving oil pricing oil higher. i have immense respect for Russia and China. They are playing chess while much of the West plays checkers (and this has been going on for years). It is just frustrating to me that they are so under-appreciated as adversaries. But, yes, lets get back to investing. The next geopolitical hit spot will be Taiwan. After the Olympics my guess is China will get busy with bringing the island back into the family. How the West responds to Russia in the Ukraine will inform China what to expect when they put the screws to Taiwan (spoiler alert; the Chinese are going to learn the West will do little. But my guess is China already understands this). What are the investment implications? What is the new oil? Semi-conductors. The question is how do you play the risk of a semi-conductor mayhem/shortage? My early read is get long semiconductor companies that are not domiciled in Taiwan. At a minimum companies who do not have a majority of their production in Taiwan. Hello Intel? I am an idiot when it comes to the semiconductor industry. Any suggestions from board members of best way to get up to speed?

@cubsfan Putin feared Trump? Trump had an open love affair with Putin. The french kiss in public kind of romance. Didn’t even try to hide it. Just watch the actual video footage of the times they got together. Trump looks like an undersexed teenage male who finally gets a date with the girl of his dreams… That behaviour made Putin fearful of Trump? ————— Now did the generals in the Pentagon understand Putin? Yup. Did Trump’s fawning etc make them vomit? Yup.

@Gregmal you realize Russia is likely going to INVADE Ukraine. The kind that will kill lots of people AND destroy an economy. “The people play a role…”??? Where am i getting my information from? Well, i lived in Europe for a year when i was younger. (Lived in Indonesia when i was younger as well… little village at the of a dirt road rural kind of thing.) Both times i lived with locals and so got the unvarnished view of things - not the tourist view. I have lots of friends who have European background (they were born there but now call Canada home). My wife is Italian heritage (her parents have lots of interesting stories of growing up in Italy in the ‘40’s and ‘50’s). My brother in law is German (all of his family is still in Germany). I did a political science/economics/business degree in university. One of my hobbies (since i was a kid) is reading history - and Russia/Soviet Union was a focus. I read lots of European newspapers. Recently, i have founds some really interesting panel discussions on Ukraine on Youtube from people who live in that part of the world. What is going on in Ukraine is not too difficult to put together. Why do you attempt to label those who disagree with you? Why not simply debate the ideas? I don’t really care where you go to get your ideas. And I have no desire to label you in any way. That is just stupid. (I call it lazy brain… no thinking required.) What i do care about is your logic? Why do you believe what you believe. And the more detail the better. Because that might actually TEACH me something. Because i fully understand i do not understand the situation in the Ukraine very well. I am open minded to what others have to say…

@Gregmal i am assuming you are not serious with your comments about Eastern Europe. You seriously think Poland, Lithuania, Latvia, Estonia, Czech Republic etc belong back under the Russian/Soviet boot? Because that is the way it was in the recent past? You do realize that what is going on in the Ukraine today is not a Disney movie… Lots and lots of people are going to die. In terms of the Ukraine, have you actually talked to anyone living there today about what they actually want? What kind of future they want for their kids? Do you seriously think a majority of people living in the Ukraine want Russia to come in and destroy the economy and install a puppet government? Seriously? No one can deny that Russia is basically playing the power game. And the Ukrainian people are screwed. Lets not pretend they will enjoy it too. Lets also be honest and admit that Trump was an absolute train wreck when it comes to US foreign policy. The meeting he had with Putin in Helsinki looked like some twisted porn flick (Trump was so hot to impress Putin). Look at all the people who died in WWII to build a better world… Trump threw pretty much every long standing ally of the US under the bus during his term. Millions died to build a better world and trump simply said… who cares. I only care about me today. So today NO ONE trusts the US. And Putin is LOVING IT. Couldn’t have planned it any better. And 40 million Ukrainians are about to lose their independence. But i get it… they will be waiving Russian flags when the army rolls in. The thousands who die in the war.. well that will be fake news… the economy getting destroyed and the resulting unemployment… well people over there obviously love a shitty economy (just look at Russia’s) and massive unemployment and all the outcomes that has for health. And the parents will be celebrating the future for their children going down the toilet. Woo hoo! Seriously?

RBC today raised FFH price target from US$600 to $675. Below is their summary paragraph: “Making all the right moves” Our view: Probably the best underwriting result we've seen in 20 years following the company. Strong growth in a hard market is true to its playbook and opportunistic. Investment portfolio positioning could also be a '22 tailwind. Add all that to a $1 billion buyback in the quarter and we see a management that is making all the right moves yet a share multiple that still greatly lags peers. We think there is significant room for multiple expansion and continue to view FFH shares as a best-in-class value opportunity at about 0.75x book value.

I agree; the information provided/ communicated by Fairfax during the call was pretty well articulated (for the most part). Short and concise. And the key / most important stuff. i also added to my position at end of today. Sold the last of my oil position (locking in a sizeable gain in 6 weeks). And rolled the proceeds back onto Fairfax. The stock is crazy cheap (especially with what we have learned in the past 24 hours). The story continues to improve in significant ways. ‘Watering the flowers’ i think is what Peter Lynch would call it

Here a couple of take-aways from the Q4 earnings conference call. I tried to focus on stuff i did not see in the news release. - buying back stock will be a focus in 2022 given how undervalued the shares continue to be. But not at expense of growing subs in hard market or at expense of financial position. - annual report will be posted on web site March 4. - lots of records set in Q4 and 2021 full year - 2021 investment return $4.4 billion = 9.2%. With 1/2 of portfolio essentially earning nothing. - continue to believe stock portfolio is undervalued - driven by concerns with inflation, 50% of investment portfolio is in cash and short term investments. Not getting paid for taking interest rate risk. This lowers interest income in the short term. But provides protection should interest rates increase. With this defensive posture they are able to take advantage of an increase in rates. Every 100 basis point increase will add $250 million in investment income. We have already seen a 50 basis point increase. - entering 2022 see significant opportunity for growth in underwriting. Market conditions remain favourable. Overall rate increases remain attractive. - Company underwriting expense ratio 1% lower in 2021. Driven by Allied. - remainder of Digit transaction will close in Q1. -Brit (ex Ki) grew premiums 17%; 95 CR - Ki: 2021 CR = 113.5; Q4 CR = 88? - Odyssey equity transaction: only 9.9% interest was ‘written up’. No gain recoded on remaining stake owned by Fairfax. - 2 portfolio transfers were one offs. Brit to Riverstone (part they sold). Crum to Riverstone (part still owned by Fairfax) - corporate overhead charge of $183 million: partly due to goodwill and intangible asset charge - TRS FFH position: rolled and extended. Continue to see shares as undervalued. - Fairfax India: want to partner with founders who want to continue running the business. They are not a private equity shop.

@TwoCitiesCapital What if companies have pricing power? What if they are able to increase prices to cover all cost increases AND a little extra? I love Druckenmiller. I also think companies today have pricing power. And that is one of a couple reasons why the inflation genie is out of the bottle. Pandemics, in short, are a bitch. ————— Now i know that is NOT what history says SHOULD happen. Or what the text books say. But it looks like that is what is actually HAPPENING. And earnings continue to beat expectations (in aggregate). ————— Looking out into 2023 you might be right. I just think you are way early. The inflation dragon is just getting started with the mayhem. Lake Town is burning. But we are way too early in the story… the hero is still bumbling around and has only just started looking for his sword… And there are no guarantees he actually has what it takes to slay the dragon (this is, after all, not a Disney movie).

My top conviction idea for 2022 was volatility. The simple way to get rich the past 10 years is to simply follow the Fed. When they were adding liquidity - invest (buy and hold). A monkey throwing darts and getting rich kind of thing. When the Fed is removing liquidity (like now) - trade (play the volatility). Not with your whole portfolio. But with a chunk of it. I am back to 45% cash. Between now and mid-March (when the Fed announces its first rate increase) my guess is we will get another big sell off. Stock pickers will be the ones making good money in 2022. The dart throwing buy and hold monkey is going to have a tougher time this year. My guess is this year we are going to get so many big swings in markets that investors are going to want to get on a roller coaster so they can get their bearings back.

@Cigarbutt thanks for the lesson… much appreciated. ‘Swiss Re cover’… yes, that brings back some memories.

What makes the performance in 2021 even more impressive is their biggest asset by far - BIAL (airport) - has been suffering for 2 years. As business rebounds in 2022 BIAL will transition from a headwind to a tailwind for Fairfax India. Stock is crazy cheap, especially as the world gets to the other side of Omicron.

From my perspective the complete shocker is the Q4 CR of 88 and underwriting profit in Q4 of $471 million. WTF? Full year CR of 95 (it was 97.8 in 2020)? We have been in a hard market for +2 years now. IF WE ARE NOW SEEING THE BENEFITS OF THE HARD MARKET VIA A MUCH IMPROVED CR THAT IS BIG, BIG NEWS. Is it reasonable to model a 94 CR for Fairfax in 2022? If yes, holy shIt batman. Remember written premiums have been growing 20%. Add in a 94 (or better) CR and Fairfax will be generating record underwriting income in 2022. This is the earnings source (along with interest and dividend income) that pretty much all insurance analysts use to value an insurance company (it determines the multiple they use). ----------- Now lets overlay how the bond portfolio is positioned today (extremely low duration). This should lead in INCREASING interest and dividend income as we move further into 2022 (rising interest rate environment). ------------ MUCH HIGHER OPERATING INCOME (UNDERWRITING + INTEREST & DIV INCOME) = HIGHER MULTIPLE ON FAIRFAX'S STOCK. ----------- Can some explain the "loss portfolio transfers completed at Crum & Forster and Brit in the fourth quarter of 2021". What is this kind of transaction is this and what impact does it have on future results? Why do it?

The future path of inflation is key. If inflation remains elevated into 2H then bond yields will be moving much higher than people expect. Who called the 10 years to be over 2% today? No one i know. Bridgewater is calling for inflation to be at 5% at YE. Why? It is in the process of broadening out (everything in the economy is now going up). Not consensus. Every year there is one or two important things the market gets very wrong. I am starting to wonder if the 10 year yield does not surprise to the upside later this year (closer to 3%). I remain open minded PS: my local Mc Donalds was closed today (drive in only). Reason? No labour. I have never seen that before. Wait until the economy opens up post Omicron AND THE DEMAND FOR LABOUR INCREASES. When you are already at full employment…

What will it take for Fairfax to close the valuation discount? No surprises will help. But in the short term my guess is delivering improving operating earnings. So the CR is key today. And if Fairfax can communicate a path to increasing interest and dividend income as the year progresses (via extending duration of the bond portfolio) then we MIGHT see the valuation discount shrink. The analyst community seems to be wholly focussed on operating earnings. My read is they view any oversized investment gains as not sustainable. Now Fairfax is positioned very well today with its investment portfolio. Very low duration with bonds. Heavily tilted to cyclicals on stocks. Both are in the sweet spot. At least right now. BV is in their control; as long as this continues to grow i will be happy. Multiple expansion will be a bonus.

@glider3834 thanks for the colour on EXCO. My guess is we will have to wait until the AR is published to get a more detailed update on the individual positions. ————— Sounds like there is some drama at Quess. It is down about 9% today. - https://www.moneycontrol.com/news/business/exclusive-quess-corp-group-ceo-suraj-moraje-likely-to-step-down-8068251.html

With Fairfax earnings being released after markets close Thursday what are the things people are watching most closely? Here are a couple of things for me: 1.) does net written premiums growth stay close to 20%? - hard market: still alive and well as we enter 2022? 2.) CR: are we able to get below 96? - Northbridge: impact of BC flooding? - Brit: and more covid charges? Ki? New CEO… - reserving? I think Q4 is when annual reserve review is done. 3.) interest and dividend income: do we see bottoming? - how does total compare to Q3? 4.) realized gains? Stock holdings were up nicely in Q4. - do we see impairment charge for Farmers Edge? Altas Mara? Others? - any change to FFH TRS position size? - Digit update? Did Indian government give approval? Or is this still pending? - were any equity positions sold? 5.) runoff: do we see another big asbestos related addition to reserves? - this business is now included with Eurolife… 6.) sale of 10% of Odyssey: how does this flow through financial statements? - does transaction impact value Odyssey is carried at in BV? 7.) YE BV/share: how much over US$600? This is the big one

Now i know this is impossible. But what happens IF the 10 year US treasury goes to 5% in the next 2 years. Let’s pretend the inflation genie is out of the bottle. Lots of insurance companies will be booking massive losses (mark to market losses on their bond holdings) and taking big hits to BV. With losses for some possibly in the billion $ range. Managing a bond portfolio (and duration) has got to be driving people crazy. The inflation tail risk is rising. The deflation tail risk is still there. What to do?

The really cool thing is you DON’T HAVE TO HOLD ONLY ONE FOR THE NEXT DECADE. Will Berkshire be the same company when Buffet is no longer there? Clearly no. Let me ask this - over the next YEAR - would you rather own: Berkshire, Markel, or Fairfax?? I know my answer!! -- you can only pick ONE Fairfax hands down... ————— My experience is if you get the 1 year thing right the 10 year thing looks after itself. ————— Most of my investments are in tax advantaged accounts so there is no cost for me to flip into better risk/reward investmemts.

Yes, there is likely lots more to the duration question than simply a guess on future interest rates. I wonder how the real estate and commodity holdings also factor in to their inflation outlook. On the real estate side you have Kennedy Wilson (stock) but more importantly the partnership with mortgage bonds. The Toys R Us real estate must have increased significantly in value since purchase (+$100 million?) Stelco has been a home run. Resolute is well positioned (holding this long term dog was the correct decision IMHO). I am really looking forward to getting an update on EXCO Resources (nat gas and some oil) when they release the AR; this position must have increased in value a couple hundred million over the past year. Ensign Energy is well positioned (should drilling ever pick up). Altius Minerals has been performing ok. And they just invested in Foran Mining to increase long term exposure to metals. Bottom line, Fairfax has significant exposure to real estate/commodity equities. My guess is the positioning was driven largely by a desire to hedge against inflation risk. It certainly is looking smart today. Especially when you overlay the current duration of the bond portfolio. Fairfax took out significant protection to their investment portfolio for the risk of inflation. We like to focus on their big mistakes. Their current positioning for inflation might prove to be one of their best decisions of the past 5 years.

@Xerxes Last year i did the math (it is in post) and i think the average loss over 7 years was around US$500 million. Very lumpy. But the average cost was the average cost. To cover the the ongoing significant losses Fairfax HAD to sell good assets too soon. This creates a vicious circle where FUTURE RETURNS are then lower (in Peter Lynch terms they were forced to pull their flowers and water their weeds). This is one of the reasons i keep saying looking at PAST RESULTS for Fairfax WAY UNDERESTIMATES their true earnings power today. We are just starting to see what Fairfax is capable of. Watch what happens to earnings when they: 1.) consistently write at a sub 95CR - on the significantly higher premium base 2.) Atlas trades north of $20/share and Eurobank trades over €1.50… and most of the remaining equity holdings chug along higher 3.) Digit IPO 4.) start moving further out on the yield curve with a significant part of their bond portfolio Of course there will be set backs. And it will not be a straight line up. But with Fairfax shares trading at < US$500 there is a lot of upside given all the current tailwinds.

@bluedevil agree with pretty much everything you said. The swing for the fences macro approach is why Fairfax will likely never be a long term hold for me. Especially when i strongly disagree with what they are doing (like their since discontinued ‘shorting’ strategy). However, it is possible to understand Fairfax’s big bets. And when they are right it pays (and usually handsomely) to own shares. Because the impact on earnings (with a lag) is usually material: 1.) ending the short strategy was a massive win. It eliminated a US$500 million loss EVERY YEAR, on average, for 7 straight years (with 2020 being the last year). Fairfax had to find $500 million every year from somewhere just to get to back to break even. When people look at Fairfax historical results they do not appreciate what an anchor this one strategy was to results over 7 years. And now that this has ended, we are only beginning to see the benefits. We are finally stating to see what the true earnings power of the company really is. Earnings in 2021 were stellar. 2.) the turn in their equity portfolio in late 2020 and subsequent gains in value past 15 months 3.) massive gains from Digit revaluation 4.) continued growth in net written premiums of 20% 5.) improving underwriting… will we see an average CR of 95 or better? Now all of the above tailwinds are pretty well understood as we have been discussing them for the past year. The EMERGING TAILWIND is: 6.) the spike in bond yields Fairfax’s bond portfolio is exceptionally well positioned for the current environment (out of control inflation). And when one of Fairfax’s macro bets starts to ‘work’ it pays for investors to own Fairfax shares. That has been my learning from following and successfully investing in the company’s shares for the past 20 years. Now it is still early days and far to early to declare victory on the ‘rising interest rate’ macro call. However, it certainly looks promising. And worth monitoring…