Viking

Glider, FYI, the estimate in the summary you linked to for RBC looks wrong. It says RBC has a price target CAN$550 (i clicked on your link and scrolled down). RBC’s actual current target for Fairfax is US$600. RBC has not done an update post share buyback announcement. RBC summary after Q3 results: “Strong top-line and book value growth, remains an outstanding value”

Glider, do you (or anyone else) have any visibility on how GIG paid for the AXA acquisition? I see Fairfax maintained their same ownership stake so it doesn’t look like it was via a big equity raise (unless Fairfax bought more shares and i missed it). Regardless, the AXA acquisition is transformative for GIG and their market share position in many of the countries in MENA. After many years of largely being a dormant investment for Fairfax, GIG has certainly thrust itself into the spotlight. It will be interesting to see how GIG does moving forward. - https://www.gulfinsgroup.com/Renderers/Showmedia.ashx?Id=57b75643-d12b-4ef9-a1ea-759ac43c8863&download=false

Yes, Glider, thanks for all the updates. Lots of good things going on at many of the companies Fairfax owns. Leon’s certainly has been a big winner during the pandemic. People are staying at home more and they are upgrading their furnishings. Record earnings is a beautiful thing. The stock is up about 40% from its pre-pandemic price range. 3 months ago they announced a C$1.25 special dividend. And now a massive buyback. Interesting it is another dutch auction. A few Fairfax owned companies have been very aggressive this year with share repurchases: Stelco, Fairfax India and Leons. And of course, Fairfax. RFP as well but more so last year (i think). Great to see.

+1 (you and i have got to stop agreeing all the time… board members are going to think we are actually the same person posting under two different names)

@Gregmal yes, i have a thesis on Fairfax. But i try and stay inquisitive and open minded. i post in detail because i want other posters to point out the flaws in my analysis. With facts. The more detail the better. Why am i wrong? I post to learn (both in writing a detailed post and then reading and debating thoughtful responses). i have never said that i think Fairfax’s portfolio of equity holdings is the same quality as Ackman/Buffett. With my question to you I was simply trying to learn what specific holdings you disliked and why? Your answer taught me lots about where you are coming from. Thank you. Now did your answers change my thesis on Fairfax… tempting, but no

@Gregmal In terms of actually answering my specific questions here is what i got out of your post: 1.) “The only exception I'd make here is Atlas” 2.) “Resolute is a piece of junk. The guy has owned it forever. I remember in 2013 hearing how Prem leadership and direction there was a bull case and the stock was at $16” Now I totally get why you think Fairfax’s equity holdings are dog shit. Learned tons. Thanks! ——————- This comment was especially insightful: “but I dont want to get into arguing individual names one by one because that misses the point” Got it! Wink, wink… —————— PS: and the Gamestop name drop was epic!

Greg, when you say ‘tons of garbage’ what specific positions are you referring to? And what makes the position ‘garbage’ in your eyes? Where its performance is going to suck big time in 2022 and 2023? Below are Fairfax’s top 5 ‘equity’ positions representing close to 40% of the equity bucket. What companies on the list are going to perform like garbage in 2022 and 2023? For sure at least 3 of the 5 positions must be complete dogs in your eyes… Because its the big dogs that will make or break Fairfax’s equity performance (not the tiny positions). 1.) Atlas (13%) is their largest position by far. Piece of shit? Sokol is an idiot. Terrible prospects. Sell it yesterday! 2.) Eurobank? Sell it now! Right when the business is fixed, and the Greek economy is coming out of a decade long depression and the bank is poised to do exceptionally well! Got it! 3.) Blackberry: well ok; you have a point here… but this is one position. And I will readily admit that I really have no idea about its future prospects... So my uninformed view on this company is pretty much useless for others 4.) Fairfax TRS. Unwind that position NOW! Really? 5.) Fairfax India. Punt it! Trading at .63xBV? Forget that the management team there is hitting the ball out of the park. The 5 to 10 positions are only about 16% of the total equity portfolio (small): 6.) BDT Capital Partners: solid long term performing holding. Sell! 7.) Quess: home run, long term holding, up +100% last 12 months. Woof! 8.) Stelco: sitting on $1billion in cash; star CEO. Punt that puppy! 9.) RFP: US new home construction starting secular bull market. Sell this lumber stock now! 10.) Recipe: Sell! Right before Canada reopens and restaurant sales take off!

And if my guess of 2022YE BV = US$700 is close to being right Prem is offering to buy the shares at 0.7x2022YE BV. Lots of people feel Fairfax underpaid for ORH buyout in 2009 (there was an information asymmetry as insiders knew ORH was poised to deliver MUCH better earnings post acquisition - which is exactly what happened). In hindsight it appears Fairfax got a steal of a deal when they bought out Odyssey Re. Prem/Fairfax management has the best visibility of all of us as to what Fairfax is currently worth and what the company will likely earn in the coming years. Perhaps the reason for the current transaction is that they KNOW their shares a dirt cheap and they are unlikely to stay this cheap for long. So what do you do if you are Fairfax? You find $1 billion and do a dutch auction to take the maximum number of shares out as quickly as possible. Simple. Opportunistic. i can’t wait for people to post in a few years how they were taken to the cleaners by Fairfax Deja vu? PS: Right now Prem must feel like a fox who has just been let into the henhouse.

A poker player has to play with the hand they are dealt. Regardless, Fairfax is not Berkshire and never will be. I love the fact that Fairfax is aggressively and quickly trying to buy back +2 million shares at a VERY attractive price of US$500 or better. And if not enough shares are tendered will they not simply use the remaining proceeds on maxing out the NCIB? Bottom line, the dutch auction is a great way to take out a bunch of shares quickly. Giddy up! Prem’s communication is not always the best (to say it charitably). However, Teledyne was used as an example for a reason. Prem has been saying for years that share buybacks are a priority. This is just the start. Fairfax’s insurance and investments are positioned the best they have been for the past 10 years. I think Fairfax earnings will improve moving forward. Excess cash is coming As a result i expect them to stay aggressive with buybacks for the next couple of years especially if shares continue to trade well below BV. And as a shareholder i love the move. Like i said on another post, my guess is BV will be in the US$700 range at 2022YE. That is 12 short months away. Buying back a significant number of shares at $500 or less will be hugely accretive for shareholders. ————— i have said in the past that growing earnings and higher multiple is a beautiful thing for shareholders. But there is an even better set up: growing earnings, materially lower share count and higher multiple. When all three happen together a 50-100% gain in the stock price is not unusual over a couple of years. And that is where we are (finally) with Fairfax.

Given the proceeds will be used to buy back stock do we subtract the $10/share dividend Fairfax saves (each and every year moving forward) from the cost it will be paying to the pension funds? Does this not effectively reduce Fairfax’s ‘cost’ on this deal by about 2.5% per year?

Most of my holdings are in TFSA, RRSP and RESP so what you are saying is music to my ears (as i am way overweight and would love to sell a chunk of Fairfax close to US$500, lock in some nice tax free gains, and ideally shift some $ into Atlas around $14 and Fairfax India around $13).

@mcliu what i like about the big share repurchase and how it is structured is it allows Fairfax to be patient with all their holdings. I expect they will be monetizing some equity holdings in 2022.

@StubbleJumper if you think there is a good chance the offer will be undersubscribed are you therefore thinking the price will be in the upper part of the range (closer to US$500)? I must admit I had a hard time understanding the Fairfax India dutch auction; it ended up being priced at the high end of the range.

What a way to close out one of your best years in history. Fairfax is finishing 2021 with a bang. Some early thoughts on the transaction: 1.) Fairfax pulls another rabbit out of their hat. One under-appreciated skill of Fairfax throughout their history is their creativity in surfacing value and finding big chunks of money when needed. In the recent past (last decade) the cash raised was used largely to cover big losses (failed shorting strategy in multiple years, big Allied losses year one of purchase). Today the cash raised is being used to drive significant and immediate shareholder value (big stock buyback). HELLO NEW FAIRFAX. This is affirmation of the significant pivot and progress the company has made with its business in recent years. Fairfax is no longer playing Chris Chelios defense; they are (finally) back to playing Wayne Gretzky offense. 2.) TRS position: FFH shares closed Sept 30 at US$403.61. Today they are trading at $466, up $63. Fairfax has exposure to 1.96 million share via TRS. As of today the pretax mark to market gain in Q4 is $123 million. This investment is going to make Fairfax some serious money over the next year. Another recent very large investment decision that is poised to deliver big time for shareholders. 3.) Dividend savings: Fairfax wants to buy back 2.35 million shares (up to US$500/share). Their dividend is usually US$10/share and paid its entirety in January. They will save $23.5 million in dividend payments each and every year moving forward. 4.) buying back shares at a price well below BV is a big deal. Basic shares will fall from 25.88 million to 23.53. Common shareholder equity Sept 30 was US$14.54 billion. Now i am not sure how the sale of 9.99% of ORH will affect common shareholder equity. We will get earnings in Q4. My guess is BV will be well north of $600 at Dec 31 (NOT including the $37 Digit gain). And a $700 BV looks pretty attainable for Dec 31, 2022. Even after the 7.5% increase today, the stock is trading at $465; still crazy cheap compared to my estimated YE 2022 BV. Buying back 10% of shares outstanding at under $500 is going to look like a brilliant move looking back in another 12 months time. 5.) My guess is they are just getting started with share buybacks. More will be coming in 2022. 6.) ‘the narrative’ for Fairfax continues to improve… chug, chug, chug

@Xerxes we have been discussing for quite some time what trigger would result in a re-rating of Fairfax’s stock price (back to historic norm of 1 or 1.1xBV). And i think the results of the discussion are inconclusive. I don’t know that there is one silver bullet (other than a big stock buyback - see bottom of post). Part of the challenge is it is unclear what exactly is causing the stock to trade at the significant discount it is today. Lots of good ideas have been presented: lack of growth in earnings, lack of growth in BV, lack of trust in reported BV, covid effects, low interest rates, increase in debt levels, complexity of valuing business, conglomerate discount, poor past management, lack of trust in management, family control, capitulation from long standing shareholders, no NYSE listing etc… Bottom line, given the size of the hole Fairfax has dug for itself over the past 10 years, the trigger for a re-rating likely is TIME. I largely agree with what @StubbleJumper wrote in his post above. Earnings growth. BV growth. Lower debt levels. Improved underwriting. Better management. Better communication by management. These will all take time to come into better focus for investors. Fairfax should exceed $95/share in earnings in 2021 (20% growth in BV from $478/share at Dec 30, 2020). They should be able to do another $90 in 2022, assuming $37 Digit revaluation is pushed into 2022 (15% growth in BV). They could earn $200/share 2021+2022. Not a crazy number. With the stock trading at $430, earning $100/year for a couple of years in a row (on average) will eventually matter (drive a higher stock price). That is why i am so focussed on earnings (and the various drivers of earnings) in lots of my posts. If Fairfax delivers what i think they are poised to deliver on the earnings front i am confident the stock will do very well from here. Fairfax will have the money to be opportunistic: buy back a bunch of stock or re-invest in the business. And as the earnings train gathers steam i expect the multiple to start to improve. And as we all know earnings growth + multiple expansion = stock price heaven for investors. ——————— ‘Consolidated share of profit of associates’ is one of the earnings buckets for Fairfax and has been underperforming for Fairfax for years. However, 2021 is much better than 2020. And i expect 2022 to be much better than 2021. Steady improvement in the coming years. Quarterly reported earnings at Resolute, Atlas and Eurobank are going to be volatile. I think reported earnings at Atlas this quarter took at big hit because of the debt transaction with Fairfax. Do i care? Not really. Because it was the right long term decision for Atlas. —————- Stock buybacks, if large and done over an extended period, would likely kick-start the re-rating process for Fairfax’s stock. The near term result is it would likely drive the stock to a new 52 week high. This in turn would likely bring in the technical/momentum crowd. One benefit of much higher earnings at Fairfax today is the cash it will generate that Fairfax can potentially funnel into buybacks. And the more the equity holdings go up the greater the chance that Fairfax will start to monetize them resulting in more large realized gains and cash that might get funnelled into buybacks (via dividends from the insurance subs). After listening to the Q3 conference call, I am now not convinced that a big stock buyback is imminent. So i am not holding my breath. I hope we get one but i will not be disappointed in it doesn’t happen right away.

@Xerxes ‘How should Fairfax be valued?’ Context is important. Before i dig into the question above (i’ll post something in the next couple of days) here are some big picture thoughts. Fairfax stock today is trading today at a historically low price to BV. At the same time the company is poised to deliver record earnings in 2021. And its future prospects, with both insurance and investments, is looking very good - the best in a decade (perhaps longer). So what is the problem? Clearly, investors are struggling to value the company, and its future earnings, as it exists today. Why? 1.) the business is difficult to value: due to its vast number of equity investment holdings and how they are accounted (3 different ways: mark to market, equity and consolidated) IT IS difficult to value Fairfax. 2.) historical earnings numbers are a mess: the historical earnings numbers for Fairfax are FULL OF NOISE. There were persistent large losses driven by issues that are mostly no longer relevant (i.e. shorting losses are the largest, but there are others). So past results do not provide investors today with a useful baseline. Past results tell investors little about what Fairfax will likely earn in the future. 3.) Covid: Covid’s impact, especially on investments, further muddied the water. It made it more difficult for investors to understand what was going on ‘under the hood’ at Fairfax: the changes that were happening and what the company’s earnings power is moving forward. 4.) investor sentiment in Fairfax is at an all time low: earnings the past 8 years have been volatile and terrible (not including 2021) when compared to market averages. Fairfax also has a long history of being a poor communicator. This has created trust issues with investors. Many investors have given up on the company. Much has changed at Fairfax that will materially impact earnings and BV growth in the coming years: 5.) we are in the third year of a hard market on the insurance side of the business: the benefit of the hard market is just starting to show up in earnings results in 2021 and should improve further from here. 6.) much has changed over the past 5 years with the investment side of business: the changes are numerous and material. No more shorting. Better buys (Digit, Atlas, Stelco, FFH TRS are 4 recent examples). Many problem investments have been fixed (i.e. Eurobank), sold (i.e. APR) or merged (i.e. Fairfax Africa). The changes have been gradual and many are not well understood or appreciated by investors. My view is much has changed at Fairfax over the past 4 or 5 years with both insurance and investments. And it is not understood by investors. So investors are underestimating the future earnings power of the company. Fairfax is delivering record earnings in 2021 and investors remain sceptical. And that scepticism is what is creating the current opportunity in its share price

Xerxes, you ask some thought provoking questions. i have viewed BRK for the last few years like a bond substitute (rock solid; will deliver a much better return than a bond but with more volatility). I have owned BRK on and off the past few years (selling after it is up 6 or 8%). Rinse and repeat (i have been able to do this trade multiple times some years). My view was reinforced when i heard Buffett talk at the AGM… he sounded more like a custodian than a manager. The clear priority was to protect the capital of the many families who were early investors (where BRK now represents the vast majority of their net worth). The big new news (last 12 months) is the relentless stock buybacks we have seen. (Interesting question: where do you think BRK share price would be today without the big buybacks? My guess is the share price would be lower. That tells you how conglomerates are valued by the market today.) Finally putting large amounts of cash to work is a big deal and should drive the stock price and multiple higher if it continues. This also telegraphs that Buffett believes the shares are cheap which perhaps provides a partial answer to your current valuation question. I do not own today so do not have a current view on valuation; if i do not own a company it usually falls off my radar. There are enough smart people valuing the company when i get interested i read their latest analysis and try and do an average to develop an opinion on valuation at that time. I like to look at all the different models; they all tell you something a little different about BRK. i will answer the Fairfax part of your question a little later… got to go for dinner

I updated my post below (posted about a month ago) with the information we received in Q3 (much stronger than expected growth in net premiums). Given Q3 results (and I am pretty sure Prem said Fairfax expects net premiums to post 20% growth for the year) I increased net premiums earned forecast from 16% growth to 20% for 2021. Given all the positive commentary from pretty much all insurers I also increased expected growth in net premiums earned in 2022 to 12% (from 10%). My guess is the 2021 CR should come in a little below 97 (was 97.3 YTD in Q3). So Fairfax may earn around $500 million in underwriting profit in 2021 ($19/share pre-tax). If the CR comes in at 96 in 2022 Fairfax may earn around $750 million in underwriting profit ($29/share pre-tax). Both of these numbers would be a big improvement from underwriting profit booked the past three years (2018 to 2020) which averaged CR of 97.3 = $340 million = $13/share. ------------------- Is the current insurance hard market a big deal for Fairfax and Fairfax shareholders? Yes. Why? Because it results in significant growth in premiums (top line) and a lower combined ratio (bottom line). You get a double benefit. So underwriting profitability spikes. But there is a lag (depending on the type of business written). It takes time for net written premiums to become earned premiums. (For the insurance experts on the board, please correct any errors in my comments). In the example below 56% growth in net premiums earned (over 4 years) results in an increase in underwriting profit of 135%. Easy to understand why Fairfax is prioritizing supporting growth in its insurance subs during the current hard market (over stock buybacks). It is not unreasonable to estimate that Fairfax will earn $750 million in underwriting profit in 2022 = $29/ share (pre-tax). And the longer the hard market continues to run the higher future earnings from underwriting will be for Fairfax. 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 $29 Why does a hard market result in a lower combined ratio? Price increases on the same unit of exposure are the big driver. A second benefit is a lower expense ratio (as top line grows faster than expenses). There is also a lag. It takes time for net written premiums to become net earned premiums. And in hard markets loss picks tend to be conservative resulting in reserve releases in future years which is good for future profits. And a hard market also provides significant benefits to the investment side of the business… by significantly increasing this magical thing called float… ————- Please note, my numbers above do not include what is left of the runoff business after the Riverstone sale.

@Maxwave28 unfortunately i do not have any insight into EXCO. Looking at the old financial releases they certainly were skewed to gas. So as long as they were not hedged or locked in to contracts going into 2021 they should be making serious money at current prices. We may need to wait until the 2021AR for another update. i wonder if much M&A activity is happening in the oil and gas sector; perhaps it is still too early in the cycle. Fairfax has a pretty decent sized and diversified collection of resource investment: EXCO, Stelco, RFP, Altius Minerals, Foran Mining (new position). It will be interesting to see if Fairfax monetizes any of these positions in the next 12 months. Stelco is up 125% from their purchase price; but it could have close to C$1 billion in cash at year end and Kestenbaum has been a master capital allocator so Fairfax may want to hang on and see what he can do with all the money that is raining down right now. Other than EXCO, AGT is one of the few large privately held investments Fairfax still has; my guess is they likely could surface a fair bit of value with an IPO. However, i am not sure how the current supply chain issues are impacting AGT. There has been very little news on the company in 2021 (at least i have not been able to find much). We may be at a stage in Fairfax’s development where they largely like what investments they have and want to see what the different management teams are capable of in the coming years. Fairfax has been working hard to fix some companies and get the rest better positioned to succeed so it makes sense they will be patient. ATCO is the largest investment and it is cheap with 20% growth pretty much locked in for the next few years. Eurobank also is cheap and also with solid growth prospects. Of the large equity investments perhaps Blackberry is the top candidate to be monetized; but i say this out of ignorance as i do not follow Blackberry closely enough to understand its current valuation / future prospects. What i like with Fairfax right now is they do not HAVE to do anything (in terms of monetizations). They are not short cash. They do not have a big part of their business chronically losing a bunch of money (like their short positioning did for years). Leverage is ok and improving (another $85 million in debt was redeemed in Oct). Subs are growing net premiums written +20%. Now Fairfax shares are dirt cheap so of course i would like to see a big buyback. And given how the shares have been trading since March, other than a big buyback, i do not see a near term catalyst. I was surprised Prem was not a little more upbeat on share buybacks during the call. Underpromise and overdeliver (the new Prem?)? Bottom line, Fairfax is hitting the ball out of the park right now in terms of delivering very good results. At some point the stock will respond and when it does the move will likely be fast (if history is any guide).

@StubbleJumper crazy low interest rates have been a key driver of the hard market. I wonder if high inflation is one of the key drivers of the hard market moving forward - and a big reason why pretty much all insurance companies expect the hard market to continue well into 2022.

The future path of inflation and its impact on bond yields will be important for Fairfax. If inflation remains higher for longer and bond yields move higher Fairfax is positioned to benefit in a big way (via higher interest income). A current headwind to earnings will become a tailwind. This will be something to watch in 2022. Interest and dividend income has come down quite a bit at Fairfax over the past 4 years. This is likely one of the reasons in explaining the weakness in the share price. What is driving the drop in interest & dividend income? Much lower interest rates. Most insurers are seeing a decline in the interest and dividend income bucket. And this is one of the key factors driving the current hard market. So there is a silver lining to the current low interest rate environment. So what are the actual pre-tax numbers for Fairfax? Investments. I&D Amount. Yield 2018. $39.0b $784. 2.01% 2019. $40.1. $880. 2.19% 2020. $41.1. $769. 1.87% 2021E. $45E $661E ($496 Sept 30) 1.47%E So interest and dividend income has come down significantly even as the size of the total investment portfolio has increased. The drop is about $100 million versus 2020 and $200 million versus 2019. Pretty significant. The drop in bond yields is impacting Fairfax more than most insurers. For years Fairfax has been selling its longer dated bonds and increasing the % of its portfolio in cash and short term investments (so its total fixed income portfolio has very low duration). They have been very opportunistic in this regard. This strategy has allowed Fairfax to book gains on sales of longer dated bonds. But the rate Fairfax is able to reinvest the proceeds is also much lower… so the cost has been lower future interest income. Why shorten the duration on your fixed income portfolio? If you believe interest rates are going to rise in the future. Higher interest rates will cause insurance companies to book losses on their bonds (especially longer dated bonds) and this will reduce BV. If interest rates increase Fairfax will have significant cash to invest in higher yielding bonds. This will spike future interest income. My guess is in 2021 we could see interest and dividend income bottoming out. Fairfax is increasing its total investments nicely. Dividends have also been increasing nicely in 2021. And inflation should result in higher bond yields which should provide Fairfax the opportunity to re-deploy some of its cash into higher yieldings investments. So 2022 might be the year we see ‘interest & dividend income’ bucket at Fairfax start to grow again. ————— On the dividend front Stelco’s increase to C$0.40/share/Q x 13 million shares = C$20.8 million. Companies have reinstated and are now increasing dividends.

Yes, Farmers Edge certainly appears to be having its challenges. Fairfax has been incubating this company for years. It may be a good test of my theory of ‘new Fairfax’. Does Fairfax ‘double down’ on a clearly struggling business (an example of old Fairfax)? Or do they let it be - whatever that may be (an example of new Fairfax where companies have been told to run their business profitably and to not come to mamma in search of a cash bailout). Fairfax is, obviously, NOT going to hit on all of their investments. Boat Rocker just delivered a solid Q3 ( i think they are hitting many of their IPO targets). Dexterra is looking like it will be a great investment (although their Q3 was not great). I wonder how AGT is doing… i would group it with these companies.

Stelco market cap is C$3.2 billion. Cash = $400 million. Q4 earnings $500-$600 million. Land sale? Q1 2022 shipments are already happening at very good prices. IF steel prices stay high into 2022 the stock should have another leg higher The conference call tomorrow AM should be entertaining and informative. What to do with $1 billion in cash?

The bond market is nuts. As it becomes clear inflation is NOT transitory how do bond yields stay low (across the curve)? Who puts their money in a vehicle that is guaranteed to lose them significant money (purchasing power)? i get holding bonds if inflation is 1 or even 2%. But inflation running consistently at +4%? My guess is if we get a big sell off in financial markets it will be driven by a big spike in bond yields. Much higher bond yields would be a game changer. Where is the ‘safety of principal’ or ‘adequate return’ parts (‘investment’ as defined by Graham).

The buyout price (A$8.45) is where the stock was trading pre-pandemic. The buyers are obviously looking through covid and very poor near term results in coming up with their value for the asset. Purchase price is A$23.6 billion. For reference, in 2018 and 2019 avg EBITDA was about A$1.3 billion. 1H 2021 EBITDA = A$210 million https://assets.ctfassets.net/v228i5y5k0x4/79DMHWTVxNhRH4Ke80DdK6/c7a2a1dc55198167b88f2faa57deb795/Sydney_Airport_-_2021_Half_Year_Results_Presentation.pdf Hopefully we see Fairfax India/Anchorage being opportunistic with IPO in India in 2022 (given how bubbly the IPO environment is currently). Regardless, as travel, especially international travel, opens up in 2022 we should see much improved results from BIAL moving forward.