Viking

Ok. With Q3 results out here are some quick take answers: Bottom line, after delivering three outstanding quarters in a row, Fairfax has delivered a solid quarter in Q3. - net earnings of $462.4 million ($16.44/share) - Book value was $561.88 (Sept 30) compared to $478.33 (December 31, 2020) 1.) size of catastrophe losses? CR came in at 101.1; underwriting loss of -$47.5. I was expecting high ‘90’s. Mild disappointment. 2.) top line insurance growth - still double digits? YES! Big win. “net premiums written increased by 25.8% to $4,697.6 million from $3,735.2 million” - Rate vs exposure? TBA 3.) how much longer will hard market continue for? TBA (looks promising given growth of 25.8% we saw in net written premiums) 4.) annual update on reserving (i think this happens in Q3)? Good. “net favourable prior year reserve development of $69.6 million” 5.) share of profit of associates: growing? YES! “share of profit of associates of $227.3 million principally reflects share of profit of $82.0 million from Resolute, $43.3 million from Eurobank and $20.3 million from Atlas Corp.” 6.) Brit/CEO update? TBA 7.) Riverstone / sale of 14% of Brit close: impact on financials (lower debt etc)? YES! Big win. ”The company's total debt to total capital ratio, excluding non-insurance companies, decreased to 25.7% at September 30, 2021 from 29.7% at December 31, 2020, primarily reflecting lower total debt, due principally to lower borrowings at the insurance and reinsurance companies and the company having paid off its credit facility” 8.) Eurolife - increase in ownership from 50 to 80% - impact on financials? ”Upon consolidating Eurolife the company recorded a net gain of $130.5 million on remeasurement of the company's previous 50.0% joint venture interest in Eurolife to its fair value of $450.0 million, which is approximately book value.” 9.) Digit: is $46 gain in BV pushed out to Q4? Part was booked in Q3: ”Net gains on investments of $374.6 million primarily reflected net gains of $397.0 million on Digit compulsorily convertible preference shares.” 10.) GIG purchase of AXA closed in Sept 7; any impact on Fairfax’s financials? Not sure… 11.) how do equity holdings perform inQ3? Any sales? Any new purchases? Overall performance was better than i expected (ex Digit) given the known fall in value of their mark to market equities, driven by Blackberry. - Surprise! “realized gain on the sale of the Toys "R" Us Canada operations of $85.7 million” 12.) update on capital allocation moving forward? Do insurance subs have enough $ to grow on their own? Done repaying debt (i noticed another $85 million due in 2024 was repaid in Oct)? Are they ready to buy back stock in volume? TBA Homework: understand better what happened at Odyssey. Same with Brit.

@modiva Fairfax has its warts. 1.) increase in debt the past few years 2.) drop in interest and dividend income 3.) runoff - especially now that the good part of runoff has been sold 4.) Brit 5.) management credibility These are just a few that quickly come to mind. It will be interesting to see where debt levels sit after Q3 results with proceeds from sales of Riverstone ($700) and Brit ($375). I see they are also redeeming another $85 million of debt (announced in October). Bottom line, debt reduction looks to be a priority

@ICUMD i would sell and flip the proceeds into FFH I wonder if Fairfax India does not start to utilize its NCIB in Q4. Because the stock is not very liquid they are pretty restricted in the number of shares they can purchase (12,264/day). But soaking up 25% of the average daily trading volume would likely help get a more consistent bid under the shares. Chug, chug, chug… The Dutch auction allowed them to remove a larger number of shares more quickly (than via NCIB) but it did nothing to help the actual stock price as once the auction was over the stock promptly fell back to where it was trading pre-auction. ———————————————— The notice provides that Fairfax India’s board of directors has approved the purchase on the TSX, during the period commencing September 30, 2021 and ending September 29, 2022, of up to 3,500,000 Subordinate Voting Shares representing approximately 5.1% of Fairfax India’s public float of 68,470,912 Subordinate Voting Shares as at September 16, 2021. As at September 16, 2021, Fairfax India had outstanding 112,276,777 Subordinate Voting Shares. Under the bid, Fairfax India may purchase up to 12,264 Subordinate Voting Shares on the TSX (or other alternative Canadian trading systems) during any trading day, which represents 25% of the average daily trading volume on the TSX for the prior six months (being 49,056 Subordinate Voting Shares), all as calculated in accordance with the rules of the TSX. This limitation does not apply to purchases made pursuant to block purchase exemptions.

Fairfax’s bank in Egypt, Commercial International Bank, has been on fire the past 5 weeks. Not sure what is up. Fairfax owns 6.5% of CIB = 128 million shares (from the CIB web site) - The shares have increased from Egyptian Pound 42.66 (Sept 30) to 54 (Nov 3) - Fairfax’s position has increased from US$347 (Sept 30) to $439 (Nov 3) = + $92 million This puts CIB as Fairfax’s fifth largest individual stock holding after Atlas, Eurobank, Blackberry and Quess. It is larger than Stelco and Resolute. - https://ir.cibeg.com

Fairfax India has had an outstanding 2021 with lots of good things happening in Q3. And the stock? Closed June 30 at $13.50 and closed today (Nov 3) at $13.05. I hope they do another big buyback My math says BV should come in at north of $21/share (was $19.26/share June 30). BV was $16.37 on Dec 31. BV is up 28% in 9 months. And the increase has been driven primarily by the publicly traded stocks which are up +50% over the past 9 months. Impressive. What happened in Q3: 1.) completion of stock buyback in Aug = 4.7% of shares outstanding 2.) 11.5% of Anchorage sold for $129 million 3.) Chemplast Sanmar IPO completed - stock up +20% post IPO 4.) new purchase Maxop - $30 million for 51% - to support growth plans - Maxop is a precision aluminum die casting and machining solution provider for aluminum die casting components used by the automotive and industrial sectors, with customers in India, Asia, North America and Europe. Any updates on: 1.) Seven Islands IPO - still on? 2.) Anchorage IPO and growth plans? 3.) NSE IPO - coming in 2022? 4.) another big buyback coming? Sanmar’s businesses are in a really interesting position today…

@hobbit, thanks for posting. Chemplast is printing crazy money like Stelco right now. The PVC market is red hot and it looks like prices will stay elevated for longer (like steel prices in the US). i must admit i have had a hard time understanding the Chemplast Sanmar IPO from Sanmar. I am looking forward to reading the Fairfax India Q3 report to better understand how all the pieces look post IPO.

Agreed; nice to see the improvement at Recipe. I hope the focus on improving profitability and lowering total debt continues (and not just at Recipe). - nice that they show 2019 numbers - there will be some lasting benefits that come out of the covid experience: 1.) significant investments in technology 2.) much higher e-commerce system sales 3.) heightened urgency to deal with issues (poorly performing brands and locations) - this will result in a leaner more profitable business moving forward - debt reduction was also significant - net debt dropped by $50 million or more than 10% and is now lower than 2019. - number of restaurants = 1,284 down meaningfully from 1,375 in 2019. - covid issues remain (staffing, higher food costs, managing through Delta etc) so improvement from here will likely be slow and steady - Pinnacle Award - F&H’s Company of the Year - https://www.foodserviceandhospitality.com/kostuch-media-ltd-announces-2021-pinnacle-award-winners/

@glider3834 i am not sure what Fairfax’s ownership stake in Blue Ant is. My guess is it is not big (given it was split with Torstar). Regardless, it looks to me like Blue Ant has done a very good job over the years of expanding its business and Fairfax’s position likely has been increasing nicely in value.

Glider, i find a lot of value in taking a big picture look at different parts of Fairfax. And then comparing where they are today to where they were 2 or 3 years ago. My analysis informs my thesis that many things are slowly improving at Fairfax. Problems are being fixed. Companies are being put in a position to succeed. This is not to say all will succeed (Farmers Edge is on my watch list but it is still early days there). Others, like Dexterra, are simply hitting the ball out of the park (its market cap is up to almost US$500 million and they are looking to grow!). Chemplast Sanmar earnings look like Stelco earnings right now (PVC pricing is through the roof). And as this collection of businesses do well (in aggregate) we will see the benefits flow through to Fairfax (in different ways) in the coming years. These businesses over time will become a source of cash instead of a big use of cash (which has been the case in the past). That change is a big deal. In terms of what is left to ‘monetize’ EXCO (oil and gas) sure looks interesting. Bauer (owned by Peak) is the #1 hockey brand in Canada and should be quite valuable. Blue Ant Media has been growing like a weed (and they hit a home run with Enthusiast Gaming. So my guess is there is significant value there that is not appreciated and Fairfax will figure out how to surface it (they are motivated).

Fairfax has been ’monetizing’ a number of their privately held non-insurance holdings over the past couple of years. Fairfax’s definition of monetization is pretty broad and includes not just out-right sale (exiting entire holding) but also spinning the holding into the public markets (where they usually retain a controlling interest). Over the past 2 years they have ‘monetized’ more than $1 billion worth of assets. And they still have private investments worth more than $1 billion (my WAG) so they likely are not done in their effort to ‘surface value’. Am I missing any holdings? Attached below is a Word document with more information: some notes from each transaction and more information for each holding (this post is long enough already) . Why are they moving in the 'monetization' direction so aggressively? Are they recognizing Hamblin Watsa is not a turn-around shop? Is it so the value of the individual holding gets reflected more accurately in BV? Is it to position the holding so it can be more successful? The amount of cash going to Fairfax has been pretty minimal so this does not look like a focus. What do board members think? One big benefit for shareholders of the ‘monetization’ process is disclosure. Given the limited disclosure it is very difficult for investors to value the private holdings especially a couple of years after purchase. By reducing the number and size of private holdings Fairfax is making it easier for investors to understand, follow and attach a value to their many remaining equity holdings. I have included APR and Fairfax Africa in the ‘sale’ bucket because these assets are no longer managed directly by Fairfax. BIG WIN. Fairfax has been very opportunistic on the IPO front. The funds raised by these companies will be used to fund future growth/pay down debt. BIG WIN. Bottom line? Fairfax has strengthened their remaining collection of equity holdings with these moves (taken as a whole). And to have achieved this much during Covid is impressive. Future moves? Seven Islands IPO still on? Anchorage IPO in 2022? Digit IPO 2022? Sales: outright sale/significant change in management (Fairfax no longer involved) 1.) APR - sold to Atlas - March 2020 - proceeds of $200 million (18 million Atlas shares at $11.10 per share) 2.) Fairfax Africa merger with Helios - July 2020 - owns 32% of new publicly traded entity 3.) Davos Brands - sold to Diagio - Sept 2020 - proceeds $59 million + consideration of $36 million (depending on brands performance) - cost (2016) was $50 4.) Easton baseball (part of Peak Ach) - sold to Rawlings - Dec 2020 - cash proceeds $65 plus 28% ownership position in Rawlings (#1 manufacturer in baseball) - gain on sale of $15 million 5.) Rouge Media - sold in Q1 2021 - proceeds of $10 million 6.) Toys ‘R Us - sold retail business - Aug 2021 - no financial terms provided - sold to Putnam Investments. Still own the real estate. IPO’s/Mergers/Reverse Takeover: resulting in significant funds being raised to support growth prospects of company 7.) Dexterra (Carillion) reverse takeover of Horizon North - May 2020 - own 49% of publicly traded entity - carried on balance sheet at US$3.62/share 8.) Farmers Edge IPO - March 2021 - own 59.9% of publicly traded entity - raised $114 million 9.) Boat Rocker IPO - March 2021 - own 45% of publicly traded entity - raised $136.5 million 10.) Chemplast Sanmar IPO (Fairfax India) - Aug 2021 - subsidiary of Sanmar (Fairfax India has 42.9% equity interest in Sanmar). 11.) Insurance: Pethealth - Jan 1, 2021 - became a wholly owned subsidiary of Crum & Forster - I included this move because I did not realize this had been done Remaining collection of Private Investments 1.) Peak Achievement - Bauer Hockey - 43% ownership (owned with Sagard Holdings) 2.) AGT - taken private Feb 2019 - 80% ownership if warrants are exercised 3.) EXCO - emerged from bankruptcy protection June 2019 - 44% ownership 4.) Mosaic - taken private June 2021 5.) Ant Media 6.) Sporting Life and Golf Town - 61% ownership of each 7.) Rawlings - 28% ownership - Dec 2020 - Seidler Equity Partners are controlling shareholders 8.) Chorus Aviation - 13% (implied ownership stake) 9.) Small positions - Praktiker, Kitchen Stuff Plus and William Ashley Fairfax Private Investments Nov 2 2021.docx

@modiva on the Q3 conference call on Friday i am hoping Fairfax provides an update on stock buybacks (their priorities with future free cash flow). In recent years, the priority has been to support the subs grow in the hard market. Good decision. More recently paying down debt ($500 million outstanding on the revolver) has been another priority. Also a good decision. Fairfax might now be ready to start to get more aggressive with buybacks. We KNOW they think their stock price is crazy cheap. After all, they are value investors.

@KPO what i am trying to understand is why has earnings and BV growth been was so bad at Fairfax for much of the past decade. Can we identify with precision what the key drivers of this poor performance were? I think we can. It is crystal clear that the shorting strategy was the primary driver of the poor performance over the past decade. It was a monster $4.5 billion hit to earnings over a decade. The CPI strategy was another $650 million (or so) hit. So the two together total more than $5 billion or more than $500 million per year. This is identifiable. It is real $. And a real cost. Not theoretical. We also know that as of Dec 31, 2020 all short positions have been closed. We also know the majority of the cost of the CPI is baked in. So we know these costs will not continue moving forward (perhaps we get a small hit from the CPI as it runs off over the next 2 years). A massive cost item has been eliminated. It sounds to me like you think nothing has changed at Fairfax. So please tell me where is the new $500 million hit going to come from in 2021? And then again in 2022? And again in 2023? And every year for the next decade … I don’t see anything Fairfax is invested in today that is going to drive a new $500 million hit each and every year for the next decade. Therefore, all things being equal, this leads me to believe that earnings and growth in BV will be higher, and likely much higher, starting in 2021 (and future years) when compared to past years. ——————— sports analogy: Fairfax is an NFL football team. Every game it has played for the past 10 years it has spotted the other team a 21 to 0 lead at the start of the game. Needless to say, their win/loss record has been terrible for a decade. And since Jan 1 of 2021 all games now start 0-0. I don’t think it is crazy to project their win/loss record will improve when compared to past results in the years moving forward

Bingo. Yes, the shorts resulted in significant losses for a decade. But those losses had knock on effects… Fairfax needed cash and therefore had to sell assets to cover the losses. The assets sold were the ones that had gone up in value (gains had to be booked to offset the losses). They HAD to do what Peter Lynch warned about: pulling out the flowers and watering the weeds. The cost to Fairfax of the short positions was greater than just the simple financial losses booked on the short positions. Imaging what now happens to the garden when the flowers are allowed to fully bloom. Investors do not grasp the size of the impact the short losses had on Fairfax’s business for the past decade. And now that they are gone investors now do not grasp Fairfax’s earning power moving forward. ———- PS: why did Fairfax need to sell Riverstone? Both sales were done because they needed cash. Take a look at the increase in total debt the past 5 years. (The Riverstone sales were also likely done because Fairfax did not have the cash to fund Riverstone’s future growth.)

@Xerxes your comment reflects my number 1 watch-out with Fairfax: trust management. For me today it is not a big enough issue to not invest in the stock. I like the current direction of the company. And the stock is crazy cheap. However, i will be watching closely what Fairfax does (and what it says, but to a lesser extent). If i see them making new big bets that i do not like or understand i will re-evaluate what to do with my shares. It will take Fairfax time to earn back investors trust (and deservedly so). after all, actions have consequences.

Where the analysis gets even more interesting is when you add a couple more big loss items that will not keep repeating (at the same level) for the next decade: 1.) CPI linked derivatives: this investment has cost Fairfax an additional $650 million or so over the past decade. The position will likely not be renewed so it will not continue to cost Fairfax an average of $65 million per year for the next decade. 2.) cost to fix/exit all the poorly performing equity investments the past 5 or so years. This bucket deserves its own post as it is hard to grasp and i don’t have exact numbers. My guess is the drag was likely $100-$150 million per year (on average). Year after year Fairfax took very large financial hits to fix many of the equity holdings. RFP. EXCO bankruptcy. Fairfax Africa final merger with Helios. APR sale to Atlas. AGT take private? Farmers Edge before IPO? These are just a few that come to mind quickly. There are more. Now the good news is my read is most of the problem children have been fixed. And the portfolio of equity holdings is better quality Oct 2021 than at any time in the past 10 years. So i expect future costs to fix equity holdings problems to be much lower than past years. So when you add the cost to short, CPI bet and fixing the equity holdings the annual total cost was likely about $600 million (pre tax) each and every year (on average). And much of this cost goes away moving forward. That is a massive win for current shareholders.

Fairfax is very good at certain things. They are also very bad at some things. They have a terrible 10 year track record at ‘equity hedge’ and ‘short exposure’. So i am happy they will not be doing this any more. And I hope they focus on/do more of the things they are very good at

In my post above I said: "My view is ‘legacy issues’ will be much less of a drag moving forward. Most of the sins of the past have been corrected (this would make a great post all on its own…)." OK, so what was the 'original sin' that Fairfax committed? The decision to short equity markets (in a major way) beginning about 10 years ago (I only went back to 2011). What was the cost? About $4.5 billion pre-tax over a 10 year period (the numbers below come from the Fairfax year end news releases from Feb of each year). Holy shit! So for the past 10 years Fairfax has started each and every year $450 million (on average) in the hole. (The average of the last 9 years is $550 million.) Is anyone surprised that growth in BV over the past decade has been so poor? Especially when you factor in a $10 dividend payment that has been made each and every year. The good news is Fairfax has confirmed that they will no longer be shorting individual stocks or indexes and as of Dec 31, 2020 all short positions had been closed out. So starting Jan 1, 2021 Fairfax was starting its first year in a decade without a $450 million hole to fill. WOW! So beginning in 2021 shareholders will start to see what Fairfax can actually earn without one hand tied behind its back. And 6 months into the year earnings have been stellar To expect results at Fairfax to improve in the coming years investors have to ask the key question: What, if anything, has changed? No longer shorting is a massive change. short 2020 -$529 2019 -$58 2018 -$38 2017 -$418 2016 -$1,192 2015 $502 2014 -$195 2013 -$1,982 2012 -$1,006 2011 $414 Total -$4,501 avg -$450 Fairfax called these positions: 'equity hedges', then 'equity hedges and short positions' and then more recently just 'short exposure'.

2021 has been a very active and very good year for Fairfax owned media companies. Boat Rocker and Blue Ant look to be very well positioned to continue to benefit from the explosion in content creation. Boat Rocker will be using the proceeds from its recent IPO to drive significant growth. Blue Ant has significant resources to fund future growth (recently realized $100 million from reducing its stake in Enthusiast Gaming). Fairfax sold its small investment in Rouge Media in Q1. 1.) Boat Rocker - https://boatrocker.com/home/default.aspx - presentation: https://www.boatrocker.com/investor-relations/events-and-presentations/default.aspx Fairfax 2020AR: Fairfax acquired a controlling stake in Boat Rocker Media in 2015 and to date has invested Cdn$110 million. Under the leadership of co-founders David Fortier and Ivan Schneeberg and CEO John Young, the business has grown revenue from Cdn$70 million in 2015 to an expected Cdn$700 million in 2021. Once a Canadian-focused production company with notable hits such as Orphan Black and Being Erica, Boat Rocker is now global with 85% of revenue from outside Canada. Several well executed acquisitions over the past three years yielded a growing Talent Management business, one of the largest animation studios in North America and a blossoming Hollywood-based production studio. The demand for quality content continues to grow at unprecedented levels. Boat Rocker is in the process of doing an IPO, which will provide the business with capital to grow organically and by acquisition. Fairfax will not be selling any of its shares in the IPO. 2.) Blue Ant Media - https://blueantmedia.com - old article (2 years old): https://playbackonline.ca/2019/12/09/media-company-of-the-year-blue-ant-media-2/ Fairfax 2020AR: There were many business winners and losers created from the disruption caused by the pandemic. One interesting ‘‘win’’ happened at our investee Blue Ant Media led by Michael McMillan, the former CEO of Alliance Atlantis, which was looking for opportunities in the fast evolving media landscape. Blue Ant purchased a Los Angeles-based gaming company called Omnia Media, and in 2020 merged Omnia with Enthusiast Gaming, a TSX-listed gaming company, receiving as consideration mainly shares of Enthusiast priced at Cdn$1.65. Enthusiast shares have recently been trading above Cdn$8, a win-win for Blue Ant and Enthusiast. 3.) Rouge Media -sold in Q1, 2021 - https://rougemediagroup.com Fairfax 2020AR: the company sold substantially all of its interest in Rouge Media for consideration of approximately $10 and expects to record a nominal gain in the first quarter of 2021. Rouge Media sale is another (small) example of Fairfax: 1.) selling an underperforming business with tough prospects 2.) reducing the number of privately held investments

Here is the post from @wondering that covers how Blue Ant got its significant stake in Enthusiast Gaming 14 short months ago.

Along with WRB, i like to use Chubb to get a read of what is currently going on in the insurance industry. The million $ question today is when is the hard market going to end? After Q2 results were reported i think there was a general consensus (among analysts) that the hard market had peaked in Q1 (in terms of rate increases) and there was concern rates would come down quickly beginning in Q3. And you saw this reflected in stock prices of insurers (weakness). So what are we actually seeing from insurers in Q3? While rate increases have moderated a little from the Q1 peak, the increases continue to run well in excess of expected loss costs trends. The hard market is continuing with no end in sight. This is GREAT news for Fairfax. Every additional quarter from here they are able to grow their top line at +20% will be a significant driver of higher profitability in future years. Here is my key take away from the Chubb call: Elyse Greenspan -- Wells Fargo -- Analyst Hi, thanks. Good morning. Evan, you talked about robust price increases that we've seen for a while across the industry. As you think out over the course of the next year, do you think the industry can broadly maintain rate in excess of loss trend just as you think about the underlying dynamics out there? Evan G. Greenberg -- Chairman and Chief Executive Officer Elyse, I do. I think, look, I don't have a crystal ball, but from everything I see right now about rates and the shape and pattern of how, when I look over a number of quarters, what I would call is simply a moderation in the rate of increase, when I look at that and I look at the loss cost environment, and then I look at our retention rates against the kinds of rates we're achieving, so we achieved certain rate increases, but through a retention rate on business, which then tells me about the tone of the marketplace. All of that tells me that the industry should continue to achieve rate in excess of loss cost for some time to come.

@glider3834 I expect the CR will be high 90's for Q3 but I still expect full year to be solid (i.e. 97 ish) given they finished 1H at 95.1 And yes, the fixed income portfolio (I lump cash, mortgages etc in here) is really interesting. If there is one area where the Fairfax team has pretty consistently outperformed over the years it is with the fixed income portfolio. They have been very opportunistic. Given how the portfolio is constructed this is one area where Fairfax is making a decent sized macro call. As you describe they have positioned the bond portfolio (including the cash holdings) with exceptionally low duration. So if interest rates move a lot higher the next year or two Fairfax will be a big winner. As you mention the hit to their BV will be small (compared to other P&C insurers who have longer duration). And they will be able to redeploy the significant cash they hold at higher rates. However, their current positioning does come at a cost: lower interest income today. I am ok with how they are positioned. But this is something each investor will need to decide for themselves. Now of course an investor should also not look at the fixed income portfolio in isolation. After all 35% of their investment portfolio is in higher risk/much more volatile/much higher return equity/partnership/real estate type investments (much more than other P&C insurers). My guess is Fairfax has constructed the totality of their investment portfolio in a way that makes sense for Fairfax.

Xerxes, your post really gets to the heart of why an investor might want to back up the truck and buy shares of Fairfax. Or not. But first, a point of clarification. The transition/upgrading to “collection of very good asset allocators” has been going on at Fairfax for the past 4 years. It is largely done. (Of course this objective is never really done as It is an ongoing process.) Also, investors do not need to wait for the benefits to start to flow through to earnings. It is already happening and has been happening for a few years. The issue is the benefit to earnings has been masked by the continuing and significant drag of legacy issues. Fairfax has been paying for years to clean up the sins of its past. These legacy issues were significant and cost the company hundreds of millions most years to clean up. In just 2020 it cost the company something like $700 million to close out its final short position. Covid hit in March 2020 and rippled through Fairfax’s insurance business and investments causing yet more losses in 2020. This further muddied the waters making it more difficult for investors to see the improvements Fairfax has been making. What ‘legacy issue(s)’ remain outstanding? That are going to cost Fairfax $200 or $300 million in 2021 or 2022 to clean up? Remaining runoff? Brit? Bryte? International insurance? Perhaps. Farmers Edge write down? Small potatoes (in the big scheme of things). Moving forward the size and frequency of issues should be more manageable by Fairfax as a normal part of doing business. My view is ‘legacy issues’ will be much less of a drag moving forward. Most of the sins of the past have been corrected (this would make a great post all on its own…). As a result Fairfax’s reported results for years have understated the real earnings power of the underlying business. But this only matters when the constant drag from paying for past mistakes ends. And i think that is where we are at. At the same time, i expect insurance earnings to pop nicely the next couple of years due to the hard market. And investment earnings will also increase nicely as we exit covid and the various “asset allocators” Fairfax has partnered with continue to execute well. I view Fairfax as a turnaround story. And i think the turnaround is largely done. And in plain sight for investors to see. Earnings in Q1 and Q2 were phenomenal. And largely ignored (with the stock trading at US$410). Crazy what happens to earnings when the drag from legacy issues slows significantly. As earnings grow the stock price will eventually respond and as investor sentiment improves we should see the PE multiple expand (with the stock trading closer to BV). This will likely play out over a couple of years and should provide investors will very satisfactory returns. The next step i am hoping Fairfax takes in its journey is to start generating much higher free cash flow on a consistent basis. And start buying back stock in volume while the share price is crazy cheap. Aggressive share buybacks by Fairfax would accelerate the timing of the stock price trading closer to BV.

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 48% growth in net premiums earned (over 4 years) results in an increase in underwriting profit of 120%. 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 $700 million in underwriting profit in 2022 = $27/ share. 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 $16.01 16% Est 97 $480 $18 2022 est $17.70 10%. Est 96 $700 $27 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 pick 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.

I was listening to an economist talking about inflation continuing at high levels well into 2022 and then saying he thought it would be transitory. It made me laugh… 2021+2022+? it appears the definition for transitory is ‘not long term’. The inflation data in Canada came out last week very high. It was in all the various news media. High inflation is becoming embedded into expectations. what i really do not understand is the bond market. With inflation running at +4% annual clip and likely to stay high into 2022 and perhaps longer who in their right mind owns fixed income today? They are losing a bunch of money. For years. Guaranteed. Lots of very old retired people are super risk averse (like my 89 year old mother-in-law). Only ever invested in GIC type investments. The current government/central bank policy is effectively a huge tax on people who have savings and are very risk averse (lots of older people). They are paying $2,000 or $3,000 in purchasing power each and every year for every $100,000 they have in the bank. Small example. But at some point high inflation is going to start to really piss people off. Especially if interest rates stay where they are.

@Thrifty3000 was re-reading some older posts (you were providing context for the Mosaic Capital take private deal) and i really like your big picture assessment that Fairfax has been building out for years a diversified “collection” of very good asset allocators to manage their large investment portfolio. This demonstrates very good strategic thinking / long term planning and execution. And it provides clarity around succession planning at Hamblin Watsa as the old guard ages out. And yes, interesting to compare Fairfax’s approach to Berkshire’s; VERY different. Some examples: - Burton/Chin in-house team at Fairfax: managing $1.5 billion of equities and increasing to $3 billion - various limited partnerships managing $2.1 billion: BDT Capital Partners is one example (a $630 million position Dec 2020). - India team managing $1.7 billion (Fairfax India, Quess, Thomas Cook, IIFL triplets): this group has been delivering stellar results for years - Kennedy Wilson/real estate managing billions in real estate and fixed income investments: very successful decade long partnership - Atlas/Sokol is $1.8 billion position: great start to relationship. New build growth is locked and loaded. Much smaller examples include: - Helios/Africa: early days here; New team looks promising but we will see - Mosaic Capital taken private in June: focus on small to mid-cap Canadian companies And then you have all the individual equity holdings: - Stelco: very good capital allocation decisions post bankruptcy - RFP: very good capital allocation decisions last 3 years For the individual equity holdings good ‘capital allocation’ is a key input in assessing the overall quality of a management team. Grading each of the management teams of Fairfax’s various equity holdings would be an interesting exercise