Viking

The next couple of weeks should be interesting for Fairfax’s share price: 1.) how is Dutch auction impacting current share price? 2.) where does share price trade post Dutch auction? 3.) does the Fed spook financial markets when they meet this week? Regarding the Dutch auction my plan right now is to hold my FFH shares held in taxable accounts. And tender some shares in tax free accounts (not sure how many or what price). I want to see how things play out with the Fed this week. I am hopeful financial markets continue with the whole Christmas rally theme. The Fed is the big watch out for me this week. Powell has done a hard pivot from dovish to more hawkish. If the Fed moves even more hawkish this week my guess is financial markets will sell off and it could get ugly. Having said all that, financial markets have been super resilient (back at all time highs). Perhaps the Fed shift to more hawkish has been fully priced in to stocks. We will see in a few days. ————— The bond market continues to be the big head-scratcher for me. With inflation running so high bond yields (across the curve) looks nuts… The real interest rate is super negative. If inflation continues to run hot into Q2 and 2H of 2022 you would think bond yields will have to move higher at some point.

For my US friends you have no idea what a housing ‘bubble’ driven by fundamentals looks like (i say that with all due respect). Vancouver and Toronto real estate markets are a one way train that has been rolling for 20 years. The US bubble in 2008 is NOT a good comparable for what is going on today as it was driven primarily by lax lending standards, speculation and overbuilding. Fast forward to today where you have had under-building in the US for many years - undersupply - in the face of growing demand driven by demographics, covid preferences (that are likely not going away any time soon) and easy money. Look at what US home builders are forecasting for 2022… very bullish. But hey, maybe Vancouver/Toronto are terrible comparables. We will see PS: i am a self confessed real estate idiot (i am not complaining... dumb luck has worked out great for me!) ————— This is What a Crisis Looks Like - https://stevesaretsky.com/this-is-what-a-crisis-looks-like/ “Greater Vancouver home sales jumped 11% from last year, the second strongest November on record besides 2015. In case you forgot, the winter of 2015 was sparked by a frenzy of offshore buyers, pushing the market to dizzying heights before ultimately peaking a few months later in the spring of 2016. It feels a lot like that today, with sales up and inventory down a whopping 40% from last years levels. If you thought looking for a detached house last year was tough, well inventory has fallen another 25% since then and currently sits at its lowest levels ever. In other words, bidding wars and high prices. Detached home prices are now up 21% in Greater Vancouver and 36% in the Fraser Valley. There have certainly been better times to buy a house, and today isn’t one of them.”

i agree, the shares are crazy cheap. But i would be very surprised if Fairfax took out the rest of Fairfax India any time soon. Better to let Fairfax India buy back 6-8% of stock every year moving forward at prices of 0.75 X BV or lower (and grow ownership materially over time and at no cost to Fairfax). Chug, chug. Now i own some Fairfax India so i would love to see the stock price move higher. But i own much more Fairfax

Stelco, Suncor and a smaller amount of RFP. Oil looks very interesting. I was listening to an analyst from JPM. He said very little new investment will be going into oil moving forward. The investors who are left in oil and gas are VERY RETURN FOCUSSED. And they want a high return on their investment. So we should see growing demand as the world learns to live with covid and limited new supply coming on stream. $100 oil in 2022 is not a crazy high number.

Glider, RFP only has operations in Eastern Canada (Quebec and Ontario) so their operations are not affected by what is happening in BC (West coast of Canada). But the price spike is a big benefit to RFP. The transportation issues in BC are affecting primarily West Fraser and Canfor and also Interfor and Western Forest Products. BC has also significantly raised log costs (it is actually tied to the selling price of lumber but with a lag); BC has gone from being the lowest cost region in North America to the highest cost region today. This also impacts decisions by lumber producers to curtail production in BC. BC government is also looking to remove another large swath of forestland from the current allowable cut. Bottom line, the size of the lumber industry in BC has been shrinking in size for the last 5 years and it will continue to shrink for at least the next 5 years. This is a big reason why the big lumber producers like West Fraser and Interfor are being so aggressive with acquisitions right now… they KNOW BC is shrinking in size and that combined with strong demand from housing in the US will keep prices much higher than historical levels.

Kestenbaum’s capital allocation track record at Stelco is impressive. As i used to say to my employees “past performance is best indicator of future performance”. If Kestenbaum can buy shares in volume at below market prices i hope he keep going with the share buybacks. They did a special dividend back in 2018 (timing?) so that would not surprise me. Imagine if they start kicking out $5/share special dividends very quarter moving forward… $100 to $200 million/quarter would still be building on their cash hoard on their balance sheet. Bizarre (in a very good way). And for all of those people who are waiting for steel prices to pull a lumber… they might want to look again at what lumber is doing. Lumber futures are back over US$900. And Dec-March is typically when lumber prices peak (seasonally strong demand). In tight markets it does not take much to spike prices. All lumber needed was a once in a century rainfall in the pacific northwest / massive floods / causing massive destruction of transportation routes in BC (a province that chops a few trees)… They should have the big problems fixed by Feb of next year. That dog RFP is starting to bark again

Stelco is getting close (again) to table pounding levels (if it is not already there). 1/3 of market cap (C$3 billion) is in cash (assuming Q4 comes in as expected). Stelco is already close to 1/3 through Q1 (given extended lead times and lags to pricing) and selling at very good prices. So Q1 looks great (another $500-$600 million in earnings?). That would put cash at end of Q1 at 1/2 of current market cap. They also have the pending land deal. The key risk is the CEO does something stupid with the $1 billion in cash. There is also a good chance he actually does something very good for shareholders… that is all additional upside for investors.

I bought more Atlas today. $13? Should be able to earn close to $2 next year. Omicron will likely deliver more supply chain pain which is good for Atlas (extend hard market for container shipping prices). Now its shares will likely sell off further if we get a big sell off… but as we saw in 2020 the business IS resilient and earnings should still roll in largely as expected.

Real estate has been the big growth engine that has driven the Chinese economy the past couple of decades. I think the video Parsad linked to above said something like 1/3 of the economy is tied to real estate. Crazy high. Zi has decided to hard pivot their economy/society. I get WHY. But i will be very surprised if it happens smoothly. Major policy error in China (leading to slower than expected economic growth) is one of the major risks i see in 2022.

The ramifications of Powell’s Q&A today will be something to watch moving forward. I think we can all agree that Fed policy impacts financial markets. In a big way. Especially the past decade. Some would argue following the Fed was the most important input to generating outsized investment returns. Today Powell officially recognized that inflation is a big problem. ‘Transitory’ has been banned as a word. He also opened the door to accelerating the taper process. This would then allow the Fed to move rate increases forward into 2022. Why move so fast? That inflation thing… Monetary policy is transitioning from easy to tight. We are at the inflection point. Next Fed meeting is mid Dec. Let the speculation begin on when rate increases happen in 2022. Do financial markets pull a tantrum heading into the Dec meeting? That is usually what happens… and the Fed usually backs down. But maybe not this time. For the past 10 years financial markets KNEW the Fed had their back. At the first sign of trouble the Fed came to the rescue with easy money policies. EVERY TIME. The Fed was able to do so because deflation was their primary concern. So policy COULD be super accommodative. All the time. No one wanted the US to become Japan. Inflation is now transitioning to public enemy #1 at the Fed. What are financial markets going to do when trouble comes (as it always does) and the Fed looks the other way? Wow. Brave new world. A generation of investors are about to grow up. At the school of hard knocks (the Disney movie is coming to an end). What worked the past 10 years JUST MIGHT NOT KEEP WORKING. ————— We are slowly coming to grips with life with covid. Massive changes in consumer behaviour. Massive ongoing supply chain disruption. Massive reduction in labour force participation. Massive inflation. Massive wage gains. None of the economic models work. Virus mutates and we start on the NEXT ITERATION of life with covid. Exhausting. For families/consumers. And for business owners.

@glider3834 yes, you are correct. The format i used is the format Fairfax presents first when it reports quarterly results (in the press releases). Fairfax uses this format because it feels it provides investors with a better picture/understanding of the different components of their business (insurance, life/runoff, corporate). This format does report a lower interest and dividend number in the top (and adds the missing amounts into a couple of items below). Just another way of looking at all the pieces.

What will Fairfax earn in 2022? To cut to the chase, below is my summary with current estimates. Would appreciate others wading in with additional thoughts I have attached my excel file for those wanting to play with the numbers. The volatility year to year of the individual items and total results is pretty amazing. Going all the way back to 2018 allows us to see trends and also calculate averages. ---------- Please note: I have not looked in detail into three items: Life/Runoff, Corporate Overhead and Non-controlling Interest. My numbers below need some work (well, it all needs some work). - Fairfax decided to add Eurofile's Life Insurance business to runoff for reporting purposes. My guess is Life Insurance will offset some of runoffs annual losses. Just not sure how much to build in for 2022. So my conservative best guess is Fairfax will earn about US$1.4 billion in 2022 = $62/share. Digit revaluation will add $37 to BV. So between 2021 and 2022 Fairfax could earn something around $200/share. Shares are currently trading at $445. I have not built in a few important things: - where do interest rates go in 2022? Higher rates will benefit Fairfax over time: cause an immediate hit to earnings/BV but should allow Fairfax to earn more on its cash/short term investments in future years - how to account for cost of $900 million sale of 9.9% of Osyssey (need to bump non-controlling interest further?) ------------ US$ 2018 2019 2020 2021E 2022E 1.) Underwriting Profit: $318 $395 $309 $500 $750 2.) Int & Div Income: $544 $657 $561 $445 $460 3.) Share of Profit of Assoc: $94 $56 $46 $300 $400 Total Operating Income $956 $1,108 $916 $1,245 $1,610 Per Share $37 $43 $35 $48 $67 4.) Life/Runoff Exp (ex g/l): -$198 -$215 -$194 -$150 -$100 5.) Non-insurance Co (ex g/l): $380 -$2 -$179 -$75 $75 6.) Interest Expense: -$347 -$472 -$476 -$504 -$420 7.) Corp Overhead Exp: -$182 $98 -$253 $60 $60 8.) Net Gains (L) on Invest: $253 $1,716 $313 $2,754 $725 Gain on De-consol of Sub $0 $0 $117 $0 $0 Pre-tax Income $898 $2,276 $279 $3,378 $2,017 9.) Income Taxes -$44 -$262 -$207 -$642 -$383 10.) Non-controlling Interest: -$442 $33 $181 -$220 -$150 Net Earn Attrib to Sh of FFH $412 $2,047 $253 $2,516 $1,484 Per Share $15.86 $78.71 $9.74 $96.77 $61.83 Shares Outstanding (mill) 26 26 26 26 24 ----------- How should Fairfax be valued? Nov 22, 2021: There are many ways to value an insurance company like Fairfax. One thing I try and understand is what, if anything, is changing? At both the company and industry level. And are the changes good, neutral or bad for earnings. Changes likely to lead to higher future earnings i call ‘tailwinds’. Changes likely to lead to lower future earnings I call a ‘headwinds’. A scorecard can be developed for a company where change in the various items can be captured. And when tabulated this earnings scorecard can provide a pretty good estimates for the future trajectory of earnings. And higher earnings usually = higher stock price. Important: an item changing from a headwind to neutral is actually a win for shareholders. And an item going from a modest tailwind to a big tailwind is another win for shareholders. The reason i am so positive on Fairfax today is because of all the improvements to so many of the items that sum to net earnings. This tells me that earnings should be higher in 2022 and future years . And with Fairfax shares trading at US$455 this increase in earnings is NOT yet reflected in the share price. So what has been changing at Fairfax the past couple of years? Below is a summary. I will dig into the individual items in more detail in the coming days. 1.) Underwriting Profit: big tailwind (from modest tailwind) 2.) Interest & Dividend Income: neutral (from modest headwind) 3.) Share of Profit of Associates: modest tailwind (from modest headwind) Total Operating Income 4.) Life Insurance and Run-off: neutral (from neutral) 5.) Non-insurance Companies: TBA 6.) Interest Expense: modest tailwind (from modest headwind) 7.) Corporate Overhead Expense: neutral (from neutral) 8.) Net Gains (Losses) on Investments: TBA Pre-tax Income 9.) Taxes: neutral (from modest tailwind) 10.) Non-controlling Interest: modest headwind (from modest tailwind) Net Earnings Attributable to Shareholders of Fairfax Shares outstanding: big tailwind ————— P&C insurance companies are valued mostly off Operating Income. Analysts love predicability. This part of Fairfax earnings should increase nicely in 2022. ————— Nov 22: 1.) Underwriting Profit: after Investment Gains (Losses) this is the most important item impacting earnings for Fairfax. Why do i think it will be a big tailwind for Fairfax in 2022 and after? Fairfax has earned an underwriting profit of about $335 million per year on average from 2018-2020. My guess is they will earn about $500 million in 2021 (97CR) and $750 million in 2022 (96CR). Pretax Underwriting Profit Per share. YOY Inc/share 2018-2020. $335 million avg. $13.00 2021 est $500 million. $19.25. 48% (26 m sh) 2022 est $750 million. $31.25. 62% (24 m sh) Net premiums earned are growing at a 20% clip in 2021. Expectations are now (post Q3 earnings update) that the hard market will continue into 2022. Estimating that Fairfax delivers a 96CR in 2022 (= over $30 per share) is NOT an aggressive call. And if, heaven forbid, Fairfax delivers a 95CR in 2022 it will earn close to $40 per share in underwriting profit. A significant increase. (Reducing the share count from 26 to 24 million is a big deal for all the per share numbers.) So underwriting profit could be $18 per share higher than the average from 2018-2020 = 140% increase. And Fairfax shares are currently trading near their historic low price band (going all the way back to 2014) at US $455/ share. And this is just one of the tailwinds coming in 2022… Makes complete sense! ——————— Net premiums. YOY earned growth. CR. Underwriting profits 2018 $11.91 - 97.3 $318 $12/share 2019 $12.54 5%. 96.9 $395 $15 2020. $13.86 11%. 97.8 $308 $12 2021 est $16.63 20% Est 97 $500 $19 2022 est $18.63 12%. Est 96 $750 $31 On this same thread i posted a longer more detailed note on this topic on Sat Nov 13. ——————- Nov 23: 2.) Interest and dividend income -insurance and reinsurance. Please note, i decided to edit the post to capture the numbers consistent with how Fairfax reports results in their short form press releases. So i am using their Feb press releases to source my YE numbers and the Nov press release for Q3 (in case you are wondering). I also want to be able to take my individual posts and sum them to come up with an 2022 earning estimate for Fairfax. As interest rates have fallen significantly in recent years (especially since the start of the the pandemic) this item has come down significantly even as the size of the total investment portfolio has increased. This item is falling for all insurers and is one of the key drivers of the current hard market in pricing (so there is a silver lining). The drop for Fairfax in 2021 is about $100 million versus 2020 and $200 million versus 2019. Pretty significant. The good news is interest and dividend income likely has bottomed out in 2021. After earning about $445 million in 2021, My guess is Fairfax will earn about $460 million in 2022 and $500 million in 2023. Summary: Interest and dividend income will transition from a headwind to neutral in 2022 and become a modest tailwind in 2023. My estimates may prove to be too conservative. Wild card: inflation is currently running much hotter for longer than most observers expected. If this continues into 2022 we could see bond yields pop. Some former Fed officials think we could see US 10 year treasuries move to +3% over the next 24 months. If this happens and Fairfax is able to redeploy their massive cash/short term holdings we will see interest and dividend income spike and this item would become a big tailwind to earnings. I&D Amount. Per Share 2018. $544 2019. $657 2020. $561. $21.60 2021 est $445 ($341 Sept 30) $17.11 2022 est. $460. $17.70 ————— Nov 24 6.) Interest Expense: total debt levels were steadily increasing at Fairfax from 2018-2020. So interest expense has also been steadily increasing. Not ideal. However, this has changed in a major way in 2021. Proceeds from the recent sales (Riverstone UK and 14% of Brit) were largely used to pay down a big chunk of debt (paid off its credit facility completely). And Fairfax has paid off an additional $85 million of debt in Oct (redeemed notes that were due in 2024). And the insurance and non-insurance subs have also been paying down debt in 2021. As a result, Fairfax is ending 2021 with lower debt levels and they are now once again at a reasonable level (especially considering the very large increase in equity we have seen this year). Fairfax has also been very active taking advantage of the exceptionally low interest rate environment. They have been able to reduce the interest rate they pay on their debt (higher cost debt has been redeemed and replaced with lower cost debt) and maturities have been extended (locking in low interest rates many years into the future). These moves came with a short term cost - hit to earnings - $46 million ‘loss on early redemption’ was the charge in 2021. Moving forward, lower total debt levels combined with lower interest rates paid will result in much lower interest expense for Fairfax starting in 2022. This is a good example of Fairfax running their business for the long term. Interest expense averaged about $475 million 2018 and 2019. It popped to $505 in 2021. And should fall to around $420 million in 2022. Interest expense will shift from being a modest headwind to earnings to a modest tailwind. Interest Expense 2018 $347 2019 $472 (change in lease accounting caused $68 increase) 2020 $476 2021 $504. ($394 Sept 30 YTD + $110 same as Q3) - includes $46 million loss on early redemption 2022 $420 est ($105 est / quarter x 4) ————— Borrowings (at Dec 31) Fairfax/ins/re-ins. Non insurance. Total 2018 $4.9. $1.6. $6.5 2019 $5.2. $2.1. $7.3 2020 $6.6. $2.2. $8.6 2021 Sept 30 $6.3. $1.7. $8.0 2022 Dec 31 est $6.2. $1.7. $7.9 ————— Also: “On June 29, 2021 the company amended and restated its $2.0 billion unsecured revolving credit facility with a syndicate of lenders which extended the term from December 21, 2022 to June 29, 2026.” ————— Nov 29 How should Fairfax be valued? Here are details (with numbers) on three more of the items i highlighted in my initial post. I am using Fairfax's Feb (short form) press releases to source my YE numbers and the Nov press release for Q3 (in case you are wondering). The goal is to be able to sum the estimates from each of the individual posts and come up with a 2022 earnings estimate for Fairfax. And that should then help us understand how the shares are valued today. ---------- The most challenging part of coming up with an earnings estimate for Fairfax is trying to forecast what its investment portfolio will do. So i am going to keep things as simple as possible. I am going to ignore the fixed income (including cash) part of the investment portfolio. Let’s assume Fairfax make no big changes here. (You can overlay your own 2022 forecast for interest rates, its impact on Fairfax's bond portfolio and flow through to earnings and BV.) The equities part of the portfolio (including TRS-FFH) currently has a value around $15 billion. Let’s be conservative and assume Fairfax makes 8% in aggregate on this group of assets (by 'make' I mean primarily stock price appreciation). Why is 8% conservative? Atlas, Eurobank, Fairfax India and TRS-FFH make up more than 30% of Fairfax’s equity bucket and i expect each of these to deliver 15% returns in 2022 (based on where shares are currently trading). An 8% return equals about $1.2 billion pre-tax in ‘earnings’. Fairfax will report this value increase in three primary ways and here is my guess as to where the ‘earnings’ will show up in their financials: 3.) Share of Profit of Associates: $400 (primarily Atlas, Eurobank, Resolute) 5.) Non-insurance Companies: $100 (primarily F-India, Recipe, Dexterra, AGT) 8.) Net Gains (Losses) on Investments: $700 (mark to market equities plus TRS-FFH) I expect results of both ‘Share of Profits of Associates’ and ‘Non-insurance Companies’ to improve quite a bit from their averages from 2018-2020. They will shift from a headwind to a modest tailwind to earnings. And as the equities owned by Fairfax continue to increase in value (share price appreciation) i do expect Fairfax will start to actually sell some positions and this will boost ‘Net Gains on Investments’ even further. Important: now do i really think that $1.2 billion in 2022 will flow through to Fairfax earnings exactly as i laid out above? No, of course not. But, i do think it is reasonable to expect Fairfax’s various equity holdings to generate about $1.2 billion in ‘value’ for Fairfax in 2022. And this value will flow through the financials (earnings and BV) in different ways over the years. My belief is every equity position Fairfax currently holds will eventually be sold at some point in the future. That is why i focus on the stock price of the individual holdings (along with management, earnings outlook etc). When Fairfax sells an equity position that is when investors are ‘made whole’ from a reported financial perspective. My $1.2 billion number for 2022 is likely low. The average total of these three buckets from 2018-2021 is $1,400. I would expect Fairfax's future performance to be better than its past performance given all the fixes/improvements they have made to their equity holdings the past 4 years. Digit: To keep things simple, I am also ignoring Digit. We know a $37 increase in BV is coming in Q4 or Q1 of next year. SOPOA. NIC. NGOI Total 2018 $94 $380. $253 $727 2019 $56. $(2). $1,716 $1,770 2020. $46. $(179). $313 $180 2021Sept YTD $270. $(104). $2,754 2021 est $300. $(75). $2,754 $2,979 2022 est $400 $75. $725 $1,200 2018-2021 average = $1,400 million/year Fairfax Equity Holdings Nov 29 2021.xlsx

@Thrifty3000 my view is there is no one correct way to value Fairfax. Rather it is best to come at it in a few different ways. And if they all tell you the same thing… well then… you might be getting close to understanding things. I like what you have done because it is something i have never attempted (trying to estimate look through earnings). I am almost done my estimate of the equity positions and should be able to post it soon

@StubbleJumper @MMM20 thanks for posting your thoughts on the odd lot opportunity. Given Fairfax’s very high share price 99 shares spread across a bunch of tax advantaged accounts (RRSP, TFSA, RESP) starts to add up to a pretty sizeable potential short term gain (especially considering most families have multiples of each type of account). A little more than just beer money PS: do you guys have any insight into currency transaction costs (what to elect to minimize them)? For investors who hold FFH in a Can$ account like an RESP (tax advantaged).

@StubbleJumper i really do not understand why so many are in such a panic forFairfax to unload Resolute. Yes, it was a dog for Fairfax for many, many years. However, the company the past 3 or so years has made lots of money; and made lots of very good decisions with that money. The company has successfully pivoted to lumber and more: - it bought 3 lumber mills in the US South at the bottom of the cycle in 2020 - bought back a bunch of stock at crazy cheap prices - paid 2 large special dividends - paid back most of its debt; refinanced whats left at low rates The shares hardly look expensive. Especially if average lumber prices stay elevated (compared to historical norms) the next few years. Now i am not saying Resolute is some wonderful company. But i also do not think it is the terrible company it was 10 years ago. Yes, Resolute has been hit much harder with duties than most other Canadian lumber producers. Not sure why. They will shift and focus on selling their Canadian production in Canada. Other Canadian producers (with lower duties) will shift to selling more Canadian production into the US. Resolute does have three lumber mills producing in the US south. Bottom line, if lumber prices stay elevated Resolute will continue to earn very good money for shareholders. I think there is a good chance US housing starts will remain elevated for the next 5-10 years. If so, lumber prices will average much higher prices than in the past. I understand if Fairfax is patient with Resolute. Resolute is also sitting on more than $300 million in lumber duties (on deposit). I think the last time this happened (softwood lumber dispute) when it was finally resolved a big chunk of the duties actually went back to the lumber companies. Something to keep in mind.

How should Fairfax be valued? Here is more detail (with numbers) on another one of the items i highlighted in my initial post. I am not doing my deep dives in numeric order (i am going to bounce around). ————— 6.) Interest Expense: total debt levels were steadily increasing at Fairfax from 2018-2020. So interest expense has also been steadily increasing. Not ideal. However, this has changed in a major way in 2021. Proceeds from the recent sales (Riverstone UK and 14% of Brit) were largely used to pay down a big chunk of debt (paid off its credit facility completely). And Fairfax has paid off an additional $85 million of debt in Oct (redeemed notes that were due in 2024). And the insurance and non-insurance subs have also been paying down debt in 2021. As a result, Fairfax is ending 2021 with lower debt levels and they are now once again at a reasonable level (especially considering the very large increase in equity we have seen this year). Fairfax has also been very active taking advantage of the exceptionally low interest rate environment. They have been able to reduce the interest rate they pay on their debt (higher cost debt has been redeemed and replaced with lower cost debt) and maturities have been extended (locking in low interest rates many years into the future). These moves came with a short term cost - hit to earnings - $46 million ‘loss on early redemption’ was the charge in 2021. Moving forward, lower total debt levels combined with lower interest rates paid will result in much lower interest expense for Fairfax starting in 2022. This is a good example of Fairfax running their business for the long term. Interest expense averaged about $475 million 2018 and 2019. It popped to $505 in 2021. And should fall to around $420 million in 2022. Interest expense will shift from being a modest headwind to earnings to a modest tailwind. Interest Expense 2018 $347 2019 $472 (change in lease accounting caused $68 increase) 2020 $476 2021 $504. ($394 Sept 30 YTD + $110 same as Q3) - includes $46 million loss on early redemption 2022 $420 est ($105 est x 4) ————— Borrowings (at Dec 31) Fairfax/ins/re-ins. Non insurance. Total 2018 $4.9. $1.6. $6.5 2019 $5.2. $2.1. $7.3 2020 $6.6. $2.2. $8.6 2021 Sept 30 $6.3. $1.7. $8.0 2022 Dec 31 est $6.2. $1.7. $7.9 ————— Also: “On June 29, 2021 the company amended and restated its $2.0 billion unsecured revolving credit facility with a syndicate of lenders which extended the term from December 21, 2022 to June 29, 2026.”

Yes, i will make that change i also just edited the Dividend and Interest post to match how Fairfax reports in their short form press releases. I am using their Feb releases for most of my YE numbers and the Nov press release for my Q3 numbers. This will keep all the various posts i do consistent in terms of my source material. And will also make future updates easy (using future Fairfax press releases).

@Thrifty3000 that is a great question and the short answer is no. And i am not planning on doing that right now. i am thinking about how to capture all the equity holdings and i am likely going to focus on the individual holdings share price. So lets assume Atlas is trading at $14 at year end. Cheap. Given Atlas’ outstanding prospects i think it is a reasonable to expect the share price to increase 15% in 2022 to $16.10. Fairfax owns 126 million shares. $2.10 x 126 = $265 million in value creation for Fairfax. I am likely going to ignore exactly how this value flows through the financials. I don’t really care. My guess is Fairfax eventually will sell ALL of its equity holdings at some point in the future (i just don’t know when) so shareholders will see all of the value of a higher share price at some point in the future. i am simply trying to come up with some estimates that make sense and allow me to come up with an earnings number that is close to being accurate. I have said this many times… but the historical numbers for Fairfax are so messed up (full of noise) i don’t think many people understand what Fairfax might earn in 2022. We will see in about another week (i should be done my first take). And it will be great to hear what others think

How should Fairfax be valued? Here is more detail (with numbers) on another of the items i highlighted in my initial post. ————— 2.) Interest and dividend income -insurance and reinsurance. Please note, i decided to edit the post to capture the numbers consistent with how Fairfax reports results in their short form press releases. So i am using their Feb press releases to source my YE numbers and the Nov press release for Q3 (in case you are wondering). I also want to be able to take my individual posts and sum them to come up with an 2022 earning estimate for Fairfax. As interest rates have fallen significantly in recent years (especially since the start of the the pandemic) this item has come down significantly even as the size of the total investment portfolio has increased. This item is falling for all insurers and is one of the key drivers of the current hard market in pricing (so there is a silver lining). The drop for Fairfax in 2021 is about $100 million versus 2020 and $200 million versus 2019. Pretty significant. The good news is interest and dividend income likely has bottomed out in 2021. After earning about $445 million in 2021, My guess is Fairfax will earn about $460 million in 2022 and $500 million in 2023. Summary: Interest and dividend income will transition from a headwind to neutral in 2022 and become a modest tailwind in 2023. My estimates may prove to be too conservative. Wild card: inflation is currently running much hotter for longer than most observers expected. If this continues into 2022 we could see bond yields pop. Some former Fed officials think we could see US 10 year treasuries move to +3% over the next 24 months. If this happens and Fairfax is able to redeploy their massive cash/short term holdings we will see interest and dividend income spike and this item would become a big tailwind to earnings. I&D Amount. Per Share 2018. $544 2019. $657 2020. $561. $21.60 2021 est $455 ($341 Sept 30) $17.50 2022 est. $460. $19.20

Nice to see. Just like other regions, being the leader in technology is a big deal.

How should Fairfax be valued? Here is more detail (with numbers) on one of the items i highlighted in my initial post. —————- 1.) Underwriting Profit: after Investment Gains (Losses) this is the most important item impacting earnings for Fairfax. Why do i think it will be a big tailwind for Fairfax in 2022 and after? Fairfax has earned an underwriting profit of about $335 million per year on average from 2018-2020. My guess is they will earn about $500 million in 2021 (97CR) and $750 million in 2022 (96CR). Pretax Underwriting Profit Per share. YOY Inc/share 2018-2020. $335 million avg. $13.00 2021 est $500 million. $19.25. 48% (26 m sh) 2022 est $750 million. $31.25. 62% (24 m sh) Net premiums earned are growing at a 20% clip in 2021. Expectations are now (post Q3 earnings update) that the hard market will continue into 2022. Estimating that Fairfax delivers a 96CR in 2022 (= over $30 per share) is NOT an aggressive call. And if, heaven forbid, Fairfax delivers a 95CR in 2022 it will earn close to $40 per share in underwriting profit. A significant increase. (Reducing the share count from 26 to 24 million is a big deal for all the per share numbers.) So underwriting profit could be $18 per share higher than the average from 2018-2020 = 140% increase. And Fairfax shares are currently trading near their historic low price band (going all the way back to 2014) at US $455/ share. And this is just one of the tailwinds coming in 2022… Makes complete sense! ——————— Net premiums. YOY earned growth. CR. Underwriting profits 2018 $11.91 - 97.3 $318 $12/share 2019 $12.54 5%. 96.9 $395 $15 2020. $13.86 11%. 97.8 $308 $12 2021 est $16.63 20% Est 97 $500 $19 2022 est $18.63 12%. Est 96 $750 $31 On this same thread i posted a longer more detailed note on this topic on Sat Nov 13.

How should Fairfax be valued? There are many ways to value an insurance company like Fairfax. One thing I try and understand is what, if anything, is changing? At both the company and industry level. And are the changes good, neutral or bad for earnings. Changes likely to lead to higher future earnings i call ‘tailwinds’. Changes likely to lead to lower future earnings I call a ‘headwinds’. A scorecard can be developed for a company where change in the various items can be captured. And when tabulated this earnings scorecard can provide a pretty good estimates for the future trajectory of earnings. And higher earnings usually = higher stock price. Important: an item changing from a headwind to neutral is actually a win for shareholders. And an item going from a mild tailwind to a big tailwind is another win for shareholders. The reason i am so positive on Fairfax today is because of all the tailwinds to so many of the items that sum to net earnings. This tells me that earnings should be higher in 2022 and future years . And with Fairfax shares trading at US$455 this increase in earnings is NOT yet reflected in the share price. So what has been changing at Fairfax the past couple of years? Below is a summary. I will dig into the individual items in more detail in the coming days. 1.) Underwriting Profit: big tailwind (from modest tailwind) 2.) Interest & Dividend Income: neutral (from modest headwind) 3.) Share of Profit of Associates: modest tailwind (from modest headwind) Total Operating Income 4.) Runoff Expense: neutral (from modest headwind) 5.) Non-insurance Companies: TBA 6.) Interest Expense: modest tailwind (from modest headwind) 7.) Corporate Overhead Expense: neutral (from neutral) 8.) Net Gains (Losses) on Investments: TBA Pre-tax Income 9.) Taxes and Non-controlling Interest: modest headwind (from modest tailwind) Net Earnings Attributable to Shareholders of Fairfax Shares outstanding: big tailwind ————— P&C insurance companies are valued mostly off Operating Income. Analysts love predicability. This part of Fairfax earnings should increase nicely in 2022.

IIFL is but one of many recent examples of where Fairfax has simply been hitting the ball out of the park. Smart initial purchase. Split into 4 separate companies that are all thriving. Delivering significant value creation for shareholders. With solid future prospects. Smarts. Vision. Execution. Patience. Well managed. The positions are owned primarily through Fairfax India with smaller positions also owned directly by Fairfax. My rough math for Fairfax India only owned positions has the 4 companies worth about $750 million (Sept 30) with a cost of about $300 million. Initial investment was made in Dec 2015. But i know, i know. It doesn’t matter what is actually going on under the hood at Fairfax today. What matters is that shitty Abitibi purchase in 2008. Or that shitty RIM purchase in 2010. What a bunch of dummies… Woof! —————— From 2020AR: “Under the exceptional leadership of Nirmal Jain and R. Venkataraman, IIFL, another important Fairfax India (and Fairfax Financial) investment, has established a leading national financial services company serving over 6 million customers from over 2,400 branches in India. You will recall that in 2018, IIFL announced its intention to divide its three business groups into three separate companies, with each to be listed on the Indian stock exchanges, as IIFL believed that this was the best structure for its business and would further enhance value. In May 2019 IIFL Holdings, the company that Fairfax and Fairfax India had originally invested in, was, as planned, divided into three separate companies: IIFL Finance (the non-bank financial corporation), IIFL Wealth (the wealth and asset management company) and IIFL Securities (the retail and institutional broker, financial products distribution and investment banking company). Prior to this, 5paisa, which literally means ‘‘5 cents’’, was spun off from IIFL Holdings in 2017, and Fairfax and Fairfax India own a 36% equity interest in it. It is one of India’s fastest growing technology-led financial services companies and offers an array of financial products and services through a digital platform and mobile application. All of these companies are well established with excellent management teams and we expect each of them to do very well as independent listed companies under the IIFL brand umbrella.”

The really interesting thing to me is how the narrative changes when it is completely wrong. Pretty much impossible to predict the catalyst or the timing. So the problem for investors is trying to time things too cutely. PS: i added to my Atlas position today at $13.94. Cheap. Solid prospects. Well managed. What not to like?

@bluedevil , Atlas is making the case that it is no longer a cyclical type holding. But the market clearly is not agreeing (yet). The problem Atlas has in the short term is it is still being valued like a cyclical. Except it is not currently earning the windfall profits its competitors are (who are doing business the old way). So its shares are lagging. And my guess is when shipping rates come down and the industry gets hammered Atlas will also get taken out behind the woodshed. Even though its business will be much more resilient. So investors don’t see the upside today but they do experience the downside tomorrow (look what happened to the share price in 2020 even though earnings barely budged). As we are learning with Fairfax, narratives once established are VERY hard to change. Even when they are flat out wrong The good news is Atlas’ earnings should pop every quarter from here moving forward for the next couple of years. At some point, as the earnings continue to roll in, Mr Market will start to pay enough attention that the ‘narrative’ will finally get updated. And then the stock will pop (higher earnings + higher multiple = stock price heaven). But this process could well take another year or even two. Patience will be needed.