Viking

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…

What i love about investing is a batter NEVER gets called ‘out’ if they miss a fat pitch right down the middle. The trick is to be patient. Keep your plate discipline. And to re-focus and get ready so you can hit the next fat pitch out of the park. Fairfax has been remarkably disciplined with the fixed income portfolio since the pandemic started. Early on Fairfax did load up on corporate bonds ($5 billion?) but the Fed and Treasury unleashed hell so the opportunity to buy higher yielding bonds literally lasted days. And then Fairfax sold pretty much everything they had purchased when rates bottomed out (realizing significant capital gains). A solid single. The plate discipline has been impressive (keeping duration this low and not reaching for yield). But it looks like the pitcher is getting tired and is about to lob a grapefruit right down the middle of the plate. Something that even i could probably rip pretty good. My guess is Bradstreet is highly focussed right now. And getting ready to swing very hard. Let’s hope he still has one good swing left

Yes, it is tricky. I am waiting to see what happens when we get balance sheet run off from the Fed. Some are thinking we could see the long end of the curve pop higher when this happens. And that will then allow the Fed to increase rates on the short end. Mt guess is the Fed does not want a flat or especially an inverted yield curve. I think the long end (10 year) is the one to watch. Pretty much everyone things the 10 year will not get much above 2%. But i wonder if this ‘analysis’ is not just recency bias. WHAT IF the 10 year actually moves closer to 3% later this year? What if the inflation numbers remain elevated into 2H 2022 (and don’t moderate in Q2)?

US bonds are breaking higher by 10 basis points across the entire entire curve to new highs. As has been pointed out by Glider in a previous post Fairfax will be a HUGE winner should rates continue to move higher (given the insanely low average duration in their bond portfolio < 2 years). This is a $30 billion portfolio (if memory serves me correctly). Brian Bradstreet likely has a big smile on his face right now.

I am a big believer in Druckenmiller’s strategy of sizing positions based on how asymmetrical the bet is. What are the chances Fairfax’s stock price drops 6-8% after earnings come out? What are the chances Fairfax’s stock price rises 6-8% after earnings come out? (Let’s say in the 30 days after earnings are released.) Today i think the chance of a positive reaction in the stock price from a positive earnings surprise is much higher (70%?) than an negative reaction in the stock price from a negative earnings surprise (30%?). Why? 1.) 7% reduction in share count. Will this not materially impact year end reported book value? In a very good way? - now i really do not understand how the sale of 10% of Odyssey will impact the financial statements (exactly where the ‘cost’ will show up). Or is the cost largely to be borne in the future via payments to lenders of $900 million? 2.) based on reporting from other P&C insurers my guess is Fairfax should report solid top line growth (+15-20%) and a decent CR (96?) 3.) solid investment gains in equity holdings - based on market moves in Q4 My guess is the benefit of the final mark up of the Digit revaluation will now come in Q1 given there have been no press releases on this topic (a +$35/share benefit). With shares trading at US$495 (near historic lows… looking back 5 or 6 years) my guess is there is a higher probability that Fairfax shares trade higher after earnings given all the current tailwinds. ————— What are the key risks? 1.) big increase in reserves for runoff 2.) big increase in reserves for Brit 3.) large losses at Kai - as it continues to scale (or busts) 4.) large write downs on one or more equity holdings - Farmers Edge? 5.) large loss on short position in Tesla… just kidding… couldn’t help myself

Well, time to start banging the table again regarding how cheap Fairfax stock is today at US$490/share. Now part of the challenge today is the stock has increased 100% after hitting its pandemic low in April 2020. The stock was up 45% in 2021. So it is natural for investors to think Fairfax stock HAS to now be fully valued (or close to it) after such a spectacular increase over the past 20 months. To help me get some perspective i like to look at what their trading range for the stock looked like over the past 5 or so years compared to where it is trading today. And to overlay how the business is positioned (fundamentals) today compared to the past. This approach helped me when i was looking at oil stocks in December. Many large cap oil stocks were up +100-200% from their lows in 2020. So the natural conclusion is ‘missed that one’. But when i looked at oil stock prices from the past 5-10 years it was clear that most oil companies were still trading at or below historical levels. MAYBE oil stocks were STILL cheap? So i dug into the fundamental picture and discovered: record levels of free cash flow, aggressive debt pay-down (putting balance sheets in great shape), record oil demand, constrained oil supplies etc, etc. The conclusion? Oil company stocks were still cheap even after the big move higher in 2021. And oil stocks have rocked to start the year (timing was a fluke but, hey, that happens sometimes). And it looks like the run could continue given how poor sentiment was towards energy stocks at the start of the year (energy was VERY under-owned as an asset class). Everybody is loving energy today… what a pivot! Funny what a RISING STOCK PRICE does to investor sentiment (eventually). The shift in investor sentiment from fear to greed is usually a VERY good thing for share prices (that PE multiple expansion thing). When i look at Fairfax today i see many of the same things. Fairfax’s current stock price today (US$490) is about where the stock was trading 7 years ago. COULD IT STILL BE CHEAP? What do the fundamentals say? The insurance side of Fairfax HAS NEVER BEEN POSITIONED BETTER. And it is not even close. The hard market has been driving top line growth for years (+20% just in 2021) and is poised to continue double digit growth in 2022. Supported by the hard market, underwriting profit should continue to increase and could come in at a record level in 2022. The equity part of the investment portfolio is very well positioned to deliver solid results in the coming years - backstopped by its 2 largest positions Atlas and Eurobank (both of which look like they are breaking out higher). The bond part of the portfolio is positioned perfectly for a rising interest rate environment which is exactly what is expected in 2022. Interest income is the one negative (down substantially the past few years); however, with interest rates now headed back higher this will flip from being a headwind to a tailwind in 2022. (Low interest rates is impacting ALL insurers and is a key driver of the hard market.) Importantly, we are also seeing a meaningful reduction in the share count - the Dutch auction in Dec lowered shares outstanding by 7% and we will likely see more of the same in 2022. And, yes, Fairfax will report blow out earnings for full year 2021 when it reports Q4 next week. And 2022 is positioned to be another very good year for earnings. Any way you look at it, Fairfax shares are ‘table pounding’ cheap at US$490/share. ————— My read is investor sentiment, while still low, is improving for Fairfax. Why is sentiment improving? The company is making good decisions. The company is executing well. And earnings are smoking. More of the same in 2022 and sentiment should continue to improve… and that should in turn drive multiple expansion.

Chubb released strong results yesterday. On the conference call the CEO expected strong top and bottom line results to continue into 2022… bottom line, no end in sight to the current hard market. Another positive indicator for Fairfax and Q4 results. And should be a continued strong tailwind for Fairfax in 2022. A little crazy that Fairfax is trading at US$490 given their actual performance in 2021 and all the tailwinds as we begin 2022. What is driving hard market today? 1.) social inflation - litigation - casualty 2.) inflation - property 3.) increased frequency of catastrophes 4.) climate change 5.) growing threat of cybersecurity

Thanks for the correction… i have not followed Fairfax’s fixed income portfolio very closely. Once they release the Annual Report perhaps more of a deep dive on that part of Fairfax’s investment portfolio is in order… Especially if inflation stays ‘persistently high’ into Q2 and bond yields continue to move higher over the year.

————— @glider3834 ‘s chart on duration is very instructive. I expected Fairfax’s fixed income portfolio to be well positioned compared to peers. I did not expect them to be BEST POSITIONED among peers to benefit from rising rates. ————— Doesn’t Fairfax have like $15 billion just in cash and short term investments? We have seen about a 1% increase on the very short end so does this not suggest we should see interest income increase @ $150 million = +$10 million per month. What i like is Q4 should be the bottom in interest and dividend income; importantly, we should see that bucket shift from a headwind the past 2 years (dropping every quarter) to a tailwind moving forward (increasing every quarter). If the Fed actually increases rates 4 times in 2022 we should see short term rates move even higher. The interesting thing to watch is what happens to interest rates further out on the curve when the Fed starts to shrink its balance sheet later this year (June?). Chubb suggested we could see a steepening of the yield curve when this happens. The bottom line, IF interest rates (across the curve) continue to move higher Fairfax is exceptionally well positioned. Of course, they have to act. Their long term track record with the fixed income part of their investment portfolio is pretty good… so i am optimistic they will make some moves this year that will benefit shareholders.

Fairfax has had an outstanding 2021. In fact it was one of the best years in Fairfax’s history. Below is a Top 10 list of what drove value for shareholders of Fairfax in 2021. What is missing? ————— At the bottom of this post are links to similar lists compiled for 2019 and 2020. ————— I would characterize 2021 as the year the ‘new Fairfax’ finally started emerging for all to see. Fairfax had been making important changes under the hood for the past 4-5 years and 2021 was the year all the hard work finally started to be reflected in the reported financial results. The Fairfax 'super tanker' finally appears to be headed in the right direction and building value at a solid rate for shareholders again. FFH stock price increased 45% in 2021 - Dec 31, 2021 = $492.13; Dec 31, 2020 = US$340 BV increased 18% in the 9 months to Sept 30 (BV will be higher when Q4 is reported) - Sept 30, 2021 = US$561.88; Dec 31, 2020 = US$478.33; Dividend of US$10 dividend was paid Jan 2021 1.) net gains on investments of $2.5 billion (to Sept 30) = $96/share - equities, Digit revaluation and FFH TRS - does NOT include pending gain on Digit of $1.1 billion (Digit should be on its own but i decided to include it here). - FFH TRS: 1.96 million shares at cost of US$396/share. Classic Fairfax move: creative, unconventional, opportunistic, smart, well timed, profitable 2.) increase in fair value of Investments in associates of US$1,372 million (to Sept 30) = $53/share - this gain is in addition to ‘gains on investments’ summarized above. - this gain is NOT captured in BV. 3.) significant increase in net premiums written of US$2.3 billion (to Sept 30) = growth of 20.5% - hard market that began in Q4 2019 is continuing as we begin 2022 4.) US$1 billion share buy back Dec: 2 million shares purchased (7% of shares outstanding) at US$500/share - financed through sale of 10% interest in Odyssey for US$900 million - share buybacks done below intrinsic value are very accretive for long term shareholders. - second classic Fairfax move of 2021: creative, opportunistic, smart, well timed 5.) debt reduction: total debt was paid down. Combined with significant earnings in 2021, debt ratios have improved considerably. - largely paid with proceeds from sale of the remainder of Riverstone for US$700 million and 14% interest in Brit for US$375 million. 6.) underwriting profit increased $182 million (to Sept 30) - YTD Sept 30, 2021 = $330; YTD Sept 30, 2020 = $142 million - given hard market we should see continued improvement in underwriting profit in 2022 (as written premiums become earned) 7.) Fairfax’s two largest equity holdings look exceptionally well positioned as we begin 2022 and the shares are very cheap: - Atlas: executed and completed financing on very aggressive new build strategy in 2021. Should drive 15-20% EPS growth per year next 3 years. - Eurobank: completed multi-year fix of balance sheet in 2021 and is now poised to grow business and earnings and leverage improving Greek economy 8.) Gulf Insurance Group: completed acquisition of AXA Gulf, increasing size by about 40% 9.) a number of Fairfax equity holdings completed significant stock buy backs in 2021, significantly increasing Fairfax’s ownership percent: Fairfax India, Stelco, Resolute Forest Products 10.) changes at private holdings: - Eurolife stake was increased to 80% - Pethealth was folded into Crum (Jan 1, 2021) - Toy ‘R Us retail operations were sold (kept real estate) - Boat Rocker IPO - raised C$170 million - very opportunistic - Farmers Edge IPO - raised C$125 million -very opportunistic (even though the business continues to struggle) The bad 1.) drop in interest and dividend income of $109 million (to Sept 30) - Sept 30 2021 = $496 million from Sept 30, 2020 = $605 million - decline is due to Fairfax reducing duration on bond portfolio - this strategy (low duration) carries a short term cost - however, should bond yields move higher (as is currently happening as we begin 2022) Fairfax is well positioned to benefit 2.) continued losses from what is left of runoff; what will average loss be moving forward? -$25 million/quarter? ————— 2020 list: https://thecobf.com/forum/topic/17401-fairfax-2020/page/34/ - scroll down to Dec 28 ————— 2019 list: https://thecobf.com/forum/topic/16444-fairfax2019/page/5/ - scroll down to Dec 28

Agreed. Especially if we get a CR that comes in under 96 on average in 2022. Operating earnings coming in each quarter should be able to take out a nice slug of shares under the NCIB. Sometimes hitting a couple of consecutive singles gets the base runner across home plate too.

Great results from WRB. Top line growth of +25%? Nuts. CR sub 90 means strong earnings from underwriting. Most important: no end in sight to hard market. This is VERY BULLISH for all insurers. The other item WRB highlighted: “do not underestimate the leverage in the investment portfolio”. Their bond portfolio has short duration. “This positioning came with a short term cost.” They are poised to take advantage of higher rates. WRB says “2022 will be an excellent year.” Why? Hard market + higher interest/dividend income = much higher operating income = much higher earnings. ————- The hard market continuing to roll along is very good news for Fairfax. My guess is we see net premiums written growth of +20% in Q4 and it appears 2022 is starting the same way. In 2021 one of my big reasons for holding Fairfax in size was the leverage in the investment portfolio from HIGHER STOCK PRICES. In 2022 perhaps the higher leverage for Fairfax’s investment portfolio will come from the cash/bond portfolio and not the equity holdings. They are VERY short duration. If they are able to redeploy a meaningful amount of their cash/bonds into higher yields their interest and dividend income will pop. Much higher underwriting income + much higher interest and dividend income = much higher operating earnings. Mr Market pays a premium for this type of earnings. Perhaps this is the path to a higher multiple for Fairfax’s stock price.

Well the Fed update is over…. And bond yields are spiking higher across the curve. IF bond yields continue higher it will be very interesting to see where the more speculative parts of the stock market goes. The Fed clearly sees inflation as public enemy number 1. Rate increases are coming in March and balance sheet run off is coming shortly after. Markets look pretty rational right now.

Looking 30 years into the future my guess is a stock portfolio will exceed (perhaps greatly) the return of a real estate portfolio in Canada IF NO LEVERAGE IS TAKEN INTO CONSIDERATION. If leverage is included, i think it is close enough that both likely make sense largely to get diversification. Prices in Vancouver and Toronto have increased so much the past 20 years they make Peleton at $80 look cheap…. But perhaps real estate in Canada pulls a Tesla and goes to $1,300. As we keep learning in financial markets… anything is possible. For a while (and real estate cycles last decades). From my perspective the key benefit of real estate is leverage… and this has been mentioned a couple of times already. I also subscribe to the Peter Lynch school of getting wealthy… the first thing you should do is buy a primary residence (but he was talking about something that was your home and not strictly an investment). The problem with real estate in most of Canada today (Alberta and Sask excepted?) is there is no margin of safety; it looks to me like the greater fool theory at play except it is not liquid (tough to exit quickly). What i love about stocks is if you are patient you will get a crazy good entry point every couple of years. Like what is happening right now. I only put my very best ideas in my TFSA. But getting wealthy exclusively with stocks is slow and takes 15-20 years (unless you are a Buffett or Druckenmiller). The key is getting your portfolio to the hockey stick part of the compound interest chart. Most people don’t get there so they don’t understand power of compounding year after year after year. They start too late. Or their rate of return is too low. Or they pull money out to spend it. it also depends on what you love. I love stocks/financial markets/economics/politics… always have. Houses have always been a place to live; put simply, i do not love real estate. Good luck! My experience is if you think long and hard… learn… your brain will figure things out for you (even when you are sleeping). Eventually, a light bulb will go off in your head and it will be clear what you need to do. The next step in the journey. And a couple of years later you will look back with no regrets. ————— Every day a new train stops at everyones door. Whether they realize it or not. It is there waiting for them to get on. Don’t let fear rule your life. Be very rational. And don’t be afraid to get on the train (go after the right opportunities). It is crazy where you can get to 15-20 years later.

@MikeL if you are new to investing hopefully that means you are also young. Being young usually means you are adding lots of new money to your portfolio (that savings thing)… New money often increases portfolio value faster than portfolio return. At least it did for me when i was young. I tell all young family members to train their brains to pray for BIG market sell offs. And when they happen find as much money as possible and buy… Dollar cost average, but try and go bigger when markets sell off. ————- Now if you are retired and trying to protect your nest egg (versus grow it quickly) then you can stop praying for a stock market sell off… and pray for something else instead.

My biggest mistakes in investing the past 10 years have happened by not paying enough attention to what the Fed was doing I understand other investors ignore the Fed and earn very good returns. Just another example of there is no ‘right’ way to make money in financial markets. The trick for each investor is to find a ‘way’ that fits their life situation AND their intellect and how they are wired. And that is why i like and get so much value out of what people post on this board. Even when they sometimes drive me a little nuts (and i say that with a smile on my face). Just like my wife drives me a little nuts some days…

My point was what CAUSED the sell off both times to quickly reverse? The Fed’s communication and actions. We are seeing a big sell off in stocks to start this year. I am simply saying, if history is any guide, what the Fed does on Wed matters to where the stock market goes from here. i am not out of the stock market (100% cash) like i was in March 2020. I am about 35% cash and was adding to my oil position this morning (currently my biggest weighting). Macro stuff usually does not matter. Except at inflection points. If the Fed ‘put’ is gone and the Fed actually starts to tighten and shrink its balance sheet (to bring inflation back under control) then the stock market will continue to be volatile. My solution is to simply carry a higher cash balance to be able to take advantage of the volatility. I am not a bear. And i am not a bull. Rather, i am just trying to preserve my wealth and make an adequate return on my investments

What stopped the 20% decline in stocks in Dec 2018 and caused the market to quickly reverse? THE FED. It did a complete 180 turn from hawk to complete dove. What stopped the 30% decline we saw in March 2020 and caused the market quickly reverse? THE FED. It pumped a historical amount of liquidity into the system. Is the Feds significant impact on the direction of the stock market not obvious?

The Fed is usually the cause of an economic slow down. Due to all the liquidity they have been pumping into the economy for years (and especially the past 2 years) the Fed has finally gotten their wish… inflation. Except they have way, way too much (7%). They also have asset bubbles in financial assets and a ripping real estate market. The genie GOT OUT OF THE BOTTLE. They got too much of what they wanted. But hey, that’s what happens when you run experiments: sometimes they produce outcomes you are not expecting To combat inflation/asset bubbles the Fed now needs to quickly remove the liquidity. Except this WILL LIKELY RESULT IN AN ECONOMIC SLOW DOWN. And the air is starting to come out of some asset bubbles (spac, bitcoin, small cap tech etc). Now the stock market is throwing a tantrum. As expected. We will find out on Wed if the Fed ‘put’ still exists. ————— It should also be noted, in actions, the Fed is still accommodative. It is only TALKING about removing liquidity. It actually hasn’t even started yet. And the stock market is already freaking out.

My read is the big risk today is the economy. PMI’s today were weak. Is this due primarily to Omicron (makes sense)? if the economy is ok then my guess is we having another buy the dip moment. If the economy is slowing AT THE SAME TIME inflation in the US is ripping 8% then my guess is markets will drop further. I will remain open minded… What you own is probably supremely important today. Companies with real (and growing) earnings trading at a low multiple should hold up better if we are actually in a 1999-2003 type market (where the speculative/super high multiple stuff got crushed).