Viking

Glider thanks for posting the Digit news last Thursday. The news was material to Fairfax and investors were given a small window of time to make some money. Great example of the value posters on this board provide members. Well done! ——- So where does Fairfax book value sit as of today? (Edited as per Xerxes and Petec comments below) March 31 = US $497 Est Q2 earnings = $20 (ex Digit) Est June 30 BV = $520 Digit gain = $61 (once transaction closes and is approved by regulators Q3 or perhaps Q4?) BV including Digit = $580 (not sure if $61 digit gain is pre or post tax?) Stock price July 5 = CAN $560 = US $454 Price to BV = 0.78 (incl Digit transaction) Fairfax is positioned exceptionally well should economic activity continue to pick up in 2H 2021 and into 2022. The US is leading the way. Canada and Europe (think Greece) are just getting started (reopening). The worst looks to be be behind India. Fairfax owns many businesses who have been underperforming and this underperformance had been holding back reported results; as we begin Q3 my guess is what has been a headwind will now become a tailwind and Fairfax will be firing on all cylinders moving forward: 1.) hard market - perhaps driving best insurance results in its history 2.) more investments gains from its equity holdings 3.) improving results from operating companies contributing to reported earnings ————————— Atlas is the current large holding that looks most undervalued to me. Fairfax has a position currently worth about US $1.5 billion. As Mr Market comes to appreciate the top line and EPS trajectory for the next 3 years it would not surprise me to see shares trade in the high teens - this would results in a $500 million gain for Fairfax (only part of which would impact net earnings because much of it is accounted for as an Associate position). My point is despite the run up of the past 8 months there is still the potential for significant value appreciation with the equity holdings.

WOW! Given the size of the equity raise ($200 million) it seems likely to me that Fairfax will need to recognize Digit at a much higher valuation. The equity raise in Dec 2019 was $91 million and resulted in a revaluation ($350 million gain for Fairfax). There is close to a $2 billion gap right now = $70 / share. Below are some comments on Digit in the 2020AR. ———————- 2020AR page 8: All our operations had very good reserving, and they all had a combined ratio less than 100% except Bryte (because of COVID-19 business interruption losses) and Digit (which is still in start up mode but is growing at a very fast pace in India, beginning from scratch about three years ago). The recent budget in India will permit us to increase our ownership in Digit to 74%. 2020AR Page 8: Digit, under Kamesh Goyal’s leadership, is continuing its outstanding growth record in its fiscal year ending March 31, 2021, with gross premiums expected to grow by 40% to $400 million. Its combined ratio is expected to drop to 113% and, including investment income, it should be profitable. Amazing performance for a start-up! Digit raised $18 million in 2020 at a valuation of $1.9 billion from some private equity investors. (In our books, Digit continues to be valued based on a 100% level of $900 million.) We are very excited about Digit’s growth prospects in the years to come. Also, many of our insurance companies expect to benefit from Digit’s technological and innovation leadership. 2020AR page 12: We equity account our 49% ownership in Digit, which is carried at $42 million; in addition, we have convertible preferred shares carried at $475 million – all at the valuation of Digit on a 100% basis of $900 million. Date of initial investment: Feb 2017 Ownership: 49% Cost: $154 million Fair Value Dec 30, 2020: $596 million Compounded Annualized Return: 68.5% 2020AR page 21: In India, Digit continued to build out its capabilities, utilizing cutting edge technology to enhance its expansion in this rapidly growing market. Expected to reach $400 million in gross premiums written in less than four years, Digit, led by CEO Kamesh Goyal, is now producing a net bottom line profit, though not yet an underwriting profit. 2020AR page 65: Preferred Stock $487.7 (3) Primarily comprised of the company’s investment in compulsory convertible preferred shares of Go Digit Infoworks Services Limited (‘‘Digit’’). The company also holds a 49.0% equity interest in Digit as described in note 6. Page 71: (10) On December 23, 2019 Go Digit Infoworks Services Private Limited (‘‘Digit’’) entered into definitive agreements whereby its general insurance subsidiary Go Digit Insurance Limited (‘‘Digit Insurance’’) subsequently issued approximately $91 (6.5 billion Indian rupees) of new equity shares primarily to three Indian investors. This transaction valued Digit Insurance at approximately $858 (61.2 billion Indian rupees) and resulted in the company recording net unrealized gains on investments of $350.9 on its investment in Digit compulsory convertible preferred shares. The company also holds a 49.0% equity interest in Digit as described in note 6. Page 74: (3) On December 23, 2019 Digit entered into definitive agreements whereby its general insurance subsidiary Digit Insurance subsequently issued approximately $91 (6.5 billion Indian rupees) of new equity primarily to three Indian investors. This transaction valued Digit Insurance at approximately $858 (61.2 billion Indian rupees) and valued the company’s 49.0% equity interest in Digit at $122.3 at December 31, 2019. The company’s 49.0% equity interest in Digit is comprised of a 45.3% interest in Digit common shares and a 3.7% interest through Digit compulsory convertible preferred shares that are considered in-substance equity. Foreign direct ownership in the insurance sector in India is limited to 49.0% and as a result the remainder of the company’s investment in Digit compulsory convertible preferred shares is recorded at FVTPL as described in note 5. Page 167: Fairfax Asia also has an investment in Digit compulsory convertible preferred shares. Page 199: (12) On December 23, 2019 Go Digit Infoworks Services Private Limited (‘‘Digit’’) entered into definitive agreements whereby its general insurance subsidiary Go Digit Insurance Limited (‘‘Digit Insurance’’) subsequently issued approximately $91 (6.5 billion Indian rupees) of new equity primarily to three Indian investors. This transaction valued Digit Insurance at approximately $858 (61.2 billion Indian rupees) and resulted in the company recording net unrealized gains on investments of $350.9 on its investment in Digit compulsory convertible preferred shares.

Glider, yes, Fairfax has a lot of equity exposure that i do not capture in my spreadsheet so i would expect their reported results to be better. Thanks for posting the historical price to BV measures. Buyers at todays share price are getting two things: 1.) stock trading at low band of historic P/BV trading range (cheap) 2.) company very well positioned to benefit from current trends: - hard market for insurance pricing that is at stage where higher priced written premiums will transition to earned premiums which should result in improving combined ratio and better profitability. - investment portfolio is leveraged to cyclicals which will benefit disproportionately from higher economic growth in 2021 and 2022. And despite the crazy run up the past 8 months lots of the equity holdings have solid upside should the economy grow as expected the next 12-24 months: 1.) Atlas: actually looks undervalued and perhaps significantly at current prices. As they take delivery of new builds later in 2021 and investors better understand revenue and earnings trajectories shares should increase nicely. This is Fairfax’s largest single holding. 2.) Eurobank: was up significantly in Q2. The economy in Greece is slowly improving, the government is pushing through much needed market reforms and the bank continues to aggressively decrease non-performing loans. Chug, chug, chug 3.) Blackberry: was up significantly in Q2. Thank you wallstreetbets subreddit. I continue to think there is a solid chance Fairfax will be able to unload this puppy at some point in 2021. While we wait perhaps we get good news on the patent sale... 4.) India investments (Quess, IIFL triplets, Thomas Cook): companies have performed very well, especially given the Covid situation in India. 5.) Fairfax India: crazy cheap compared to the value of the individual companies it holds. Two IPO’s planned which could add further value for shareholders. Not surprising Fairfax India is buying back a chunk of stock. 6.) Resource plays - Resolute and Stelco - could see significant upside should lumber and steel prices remain higher than currently expected / reflected in share prices. 7.) Recipe and Dexterra: Recipe is ideally positioned as a reopening play as dining out should spike in Canada over the next year. Dexterra will also benefit big time as its camp / airport business ramp back up; it also has a growing modular housing platform that is poised to benefit from the push from big cities for affordable housing solutions for homeless (should be some nice contract wins in 2H 2021). 8.) Fairfax total return swaps (1.9 million shares): this is a significant holding. Fairfax is sending a strong message they feel their shares are undervalued. And they will benefit big time should they go up in value (interests are aligned with shareholders :-). And what about their insurance businesses? Lots of great things going on here. I am interested to get an update on how Digit (India) is doing; this is shaping up to be a very big winner for Fairfax in the coming years. Should its share price continue to trade sideways I do expect Fairfax to do something creative to be able to buy back a chunk of shares. If we see solid economic growth in 2H and further increases in the equity holdings perhaps we will see some monetizations with some of the proceeds used to take out FFH shares. We will see

Attached below is my Excel file estimating how Fairfax's equity holdings have performed in Q2. Another very good quarter with equity investments in aggregate up about US $600 million (this includes Farmers Edge and Boat Rocker which were down about $180 million in total). The big gainers were BB +$355 million and Eurobank $150 million. Mark to market holdings are up about $475 million = $18/share pre tax. So my guess is Fairfax could report earnings in the $20/share range which would bring June 30 BV to about US$520. Fairfax shares are trading today at about $440/share = 0.85 x BV. Cheap RBC is currently estimating Fairfax will earn $10.41 so after Fairfax reports results the end of July we should see some nice upward revisions to EPS from the analysts. I used the 2020 AR as my starting point. So I DO NOT capture the $1.3 billion in equity holdings in Riverstone. So my estimate above is likely understated. 13F numbers have been updated on the smaller positions. Q1 report was used to update the FFH total return swap quantity and ownership interest in Farmers Edge and Boat Rocker. Does anyone know which bucket Farmers Edge and Boat Rocker fall? Is it 'Associates-Equity Accounted' or 'Consolidated Equities' or something else? I will move them into the correct bucket once I know. This makes 3 quarters in a row where Fairfax will beat earnings estimates by a significant margin. Despite the big increase in share price the last 9 months the shares are still cheap - they are trading below where they were trading in January 2020. The company looks well positioned as economic activity starts/continues to improve in 2H 2021 and the insurance hard market is expected to continue into 2022 (although it looks like it is slowing). PS: the file is used primarily to capture the direction and magnitude of changes in Fairfax's equity holdings and not meant to be too precise... there is too much going on and much that is not disclosed in the quarterly reports. Fairfax Equity Holdings June 30 2021.xlsx

Thrifty, i hope you are correct. With the insurance businesses, Fairfax certainly has been able to shift from weak link to strength (in aggregate); it took the right people in the right roles and time. And shareholders are reaping the benefit of the current hard market. If Fairfax has been in the process of also ‘fixing’ the investment side of its business and it works then, as Prem likes to say, ‘the best is yet to come for shareholders.’ What you say above makes sense. It is a great way for investors to understand the changes in recent years. Fairfax has been evolving with how it manages its investments and perhaps the Mosaic acquisition is the next building block in that evolution. if Fairfax performs better on the investment side of the business in the coming years then we should see sentiment improve. This in turn should then lead to price to BV expansion (over 1). Growing BV a higher multiple should lead to multi year outperformance in share price. We will see. But the set up is looking good PS: i would also add Kennedy Wilson to the list of capital allocators that Fairfax has chosen to partner with; this covers off the real estate/mortgage bucket.

I think the deleveraging is primarily tied to the Riverstone sale combined with OMERS re-purchase of part of Brit. The cash from those two transactions are to go to debt reduction. Bizarre regulatory approval has not been given yet given it was expected in Q1 i think. I do find the Mosaic transaction interesting... how was it the BEST use of cash right now. Perhaps a large shareholder of Mosaic wanted out and approached Fairfax (Mosaic stock has underperformed for many years). Covid really hit Mosaic owned companies hard. Some are also Alberta focussed and oil & gas focussed which added to the pain the past couple of years. Given all that has transpired the past year it will likely take another year or perhaps two to understand what the new baseline earnings profile of the basket of companies owned by Mosaic. So i understand why Mosaic is better off as a private company today - much more freedom to do what is needed with the underlying companies out of the public spotlight. I just hope Fairfax did not overpay. I also hope Mosaic has a competent management team and does not need help from Fairfax in this regard (not a strength for Fairfax). The management team at Mosaic is responsible for the poor stock price performance the past 5 years so this is not encouraging at initial glance. But i do not understand Mosaic well so will keep an open mind for now.

Stubble, i agree. Perhaps the plan is to have Mosaic become the platform from which they manage all the wholly owned Canadian operations (including those currently owned by Fairfax). Given all the things Fairfax COULD do with any excess cash right now it is interesting they decided to do this deal. Either the business assets Mosaic currently owns are quite undervalued or there is a compelling strategic reason or some combination of the two. i hope this is not yet another example of Fairfax doubling down on a struggling business... i do not understand Mosaic so i do not have a strong opinion right now. They are buying Mosaic at the price the business was trading at pre-pandemic (early 2020). - https://mosaiccapitalcorp.com/wp-content/uploads/2021/02/January-2021-Corporate-PPT.pdf

i wonder if Prem is booted as a director at the annual meeting tomorrow if that does not give Fairfax the green light to unload the shares

Greg, yes, i feel for shareholders who have held the stock for the past 10 years; ugly. However, those who bought after the stock cratered last year have done exceptionally well. And the stock is hardly expensive today given how the company is currently positioned: - we are in a hard market for insurance pricing and it looks like it may last another year or even two. That is significant. - the equity portfolio has been performing very well and looks reasonably well positioned moving forward should the economic recovery continue into 2022 The big challenge for investors in Fairfax is lack of trust in Prem. This is a watchout for me; although not currently a big enough concern as i own stock.

So what is going on with BB stock? It is trading today at US $13.20. It has been trading above $13 for three weeks now. Why is it not going back below $9? We are a week away from quarter end. Should BB continue to trade at current levels it would be up about $4.50 / share from March 31 = $450 million mark to market gain for FFH when they report Q2 results. This is about $17/share pre tax. Not a small number. i also continue to think the longer BB shares trade at elevated levels the greater the chance that FF will monetize the asset. The benefits of monetization are numerous; the question is what price will it take?

FFH. Happy to add to position at current prices. Q2 results should be solid. Hard market continues. Investments should add to net earnings. Shares are trading back below 0.9XBV (whole P&C sector sold off last week).

Hobbit, that is a very good summary. Thank you for taking the time to post it. So you are confident that the valuation of BIAL is roughly accurate at $1.4 billion? If so, Fairfax India is dirt cheap. The question then becomes when will sentiment change and drive the share price closer to BV? What are your thoughts on the share buyback/dutch auction? Is it a marketing exercise by Fairfax India to get the story out (how undervalued the company is)? Or is it to buy out the weak hands (shareholders who are frustrated with multi-year underperformance)? Or the first step to increase Fairfax’s ownership stake - leading to Fairfax buying Fairfax India back down the road? I especially liked your very candid explanation of why the share price is trading so far below BV. I agree with everything you said. I am not sure if time alone will fix this. I hope Fairfax India keeps aggressively buying back stock (and does another big buyback if share continue to trade so far below BV when the dutch auction is completed). Large stock buybacks appear to me the best way to reward current shareholders.

It certainly looks cheap at $13 ($12.60 yesterday). What has surprised me about India and the covid spike of recent months is how well Indian stocks are doing; most of Fairfax Indian stocks are up nicely. And Fairfax India’s publicly traded stocks are also trading up. So why is Fairfax India trading $5 below BV? I think the issue is sentiment; confidence in the parent Fairfax (not Fairfax India). If this does not change i hope Fairfax buys Fairfax India (pull a move out of BAM’s playbook). Perhaps getting more aggressive on the share buybacks (increasing Fairfax’s % ownership) is a step in this direction.

With Fairfax India trading at US$12.30 and BV around $18 this move does not surprise me. Especially with Fairfax India languishing in the $12 range for the past 4 months. It makes sense Fairfax India would want to take advantage of the situation. Fairfax India has 149.6 million shares outstanding. I think Fairfax controls 1/3 of shares so this leaves a max of 100 million available for the tender. At the midpoint of the offer ($13.75) Fairfax India would retire 7.6 million shares. Fairfax India trades about 80,000 shares per day (on TSE and US) so it would be pretty difficult for Fairfax India to buy 7.6 million shares on the open market in a reasonable amount of time (and not also spike the price significantly to well over $15). it will be interesting to see how Fairfax India shares perform in the next week PS: i think Fairfax also believes its share price is severely undervalued... it would not surprise me to see them do something as well in the coming months.

1.) historically low interest rates. It is normal in Canada to go with a 5 year fixed mortgage (amortized over 25 years); this rate was under 2% last year and is currently around 2.4%. (If US had interest rates this low for years would it result in higher house prices?) My guess is this is the single biggest reason. - another related factor is central bank policies / flush of liquidity that is spiking all asset categories (real estate, stocks, collectables, bitcoin etc). 2.) speculation. Real estate has been going up lots and pretty much every year since 2000 (20 years and counting). It is viewed as a pretty much guaranteed winner. Lots of people i know own 2 or more houses. Momentum is huge. FOMO is real. - My neighbour recently sold his 25 year old house; original owner; purchased $250,000 and sold for $1,335,000. Who wouldn’t want to get in on this money train? 3.) money flows: lots of offshore money (China, Hong Kong etc) and drug money sloshing into this market. Vancouver is such a small city it does not take much new money to spike demand and prices. No government wants to discuss this bucket; although the offshore bucket has been getting more attention. 4.) big tax advantage to own real estate: gains on primary residence is tax free 5.) people cannot walk away from their mortgage in things go bad; real estate market in Canada is VERY resilient. Canada did not experience housing bust in 2008-09. 6.) covid impacts: families/work from home want space spiking demand for single family homes.

Stubble, i agree with what you are saying. I was too lazy with my comment. In 2020 Fairfax’s equity holdings (lots of cyclicals) cratered in price as profits took a big hit. This reduced the amount of dividend income Fairfax received. In 2021 the profitability of Fairfax’s equity holdings has greatly improved. My point is this should result in Fairfax receiving more dividend income year over year. Stelco re-instating their dividend and RFP with their special dividend are two examples. It would not surprise me to see something from Recipe late in 2021 or early 2022 if restaurant sales in Canada spike in the summer and fall. I see dividend income as a small tailwind for Fairfax in 2021 and 2022 versus a headwind in 2020. PS: good discussion on the Resolute thread about how the one time dividend will actually impact Fairfax from an accounting perspective....

Thanks for the corrections. I struggle with what share count to use for Fairfax’s various equity holdings. I do not understand the Riverstone transaction, what equities are included, and what the exact share numbers are. I decided to use the numbers Fairfax provided in the AR. Hopefully in 2021 Fairfax gets the Riverstone sale done and is able to repurchase the equity holdings and report shares owed in a more transparent way Bottom line, interest and dividend income is growing nicely.

Resolute just announced a $1/share special dividend. Fairfax owns 24.8 million shares = CAN $24.8 million. Stelco could also do the same thing (large one time dividend). This will help Fairfax grow interest and dividend income in 2021. Will Fairfax record the dividend in Q2 or Q3? The record date is June 28. Payment is July 7. Pretty rational and balanced use of cash by Resolute: 1.) invest additional $50 million in very profitable part of business (sawmills) 2.) pay down $180 million in debt 3.) $1 special dividend ($79 million) And the earnings from lumber looks poised to stay strong (as long as US housing starts stay strong). —————————— MONTRÉAL, June 10, 2021 /CNW Telbec/ - Resolute Forest Products Inc. (NYSE: RFP) (TSX: RFP) today declared a special cash dividend of $1.00 per share of common stock, payable on July 7 for holders of record at the close of business on June 28. The company also announced additional capital investments of $50 million in its wood products operations to support its continued growth, and it confirmed the repayment of all amounts outstanding under its revolving and term credit facilities, reducing debt by $180 million in the second quarter. - https://resolutefp.mediaroom.com/2021-06-10-Resolute-Announces-1-share-Special-Dividend-and-50-million-in-Lumber-Investments

In process of doing the deep dive on lumber i will understand if Fairfax does not sell Resolute at current prices. There is a good chance that lumber prices are going to stay higher than expected for a couple of years. Not US $1,200. But also not $250. If prices average US $500 or higher then Resolute will make very good money. The current price spike was caused by insatiable demand. (The short lived price spike in 2018 was driven by sharp contraction in supply - forest fires in BC combined with severe issues with rail delivery). Supply will increase a little each of the next couple of years. But if housing starts in the US come in at 1,600 (annualized) or higher the next couple of years then lumber prices will likely do very well. We will see crazy volatility with lumber prices so hang on to your hat as the ride will be wild; it would not surprise me to see stock prices of lumber companies swing 20 or 30% in any given month. (The silver lining about steep stock price declines is all lumber companies are swimming in cash - that they do not know what to do with - and so would be aggressive buyers of their stock on any big decline from current levels.) Resolute has also hit the ball out of the park the last 18 months when it comes to capital allocation. They purchased 3 sawmills in the US south in late 2019 for US $185 million at the bottom of the cycle. My guess is these 3 mills will generate more than $185 million in EBITDA for Resolute by end of 2021 since acquisition (so over the past 24 months). Compared to 8 years ago paper is now a much smaller part of Resolute’s total business. I think they also reduced shares outstanding over the past year by 8 or 10% at an average cost of something like $5/share (i’ll check later tonight when i get home). Total debt has come down. And the pension obligation is slowly being addressed. During the last price spike in lumber they also paid a special distribution to shareholders. Resolute has its warts. I much prefer WFG or IFP to get exposure to lumber/OSB (pure plays with cleaner balance sheets and no legacy issues like pension). However, Resolute is a much different company today than it was 8 years ago; much better positioned especially given the current demand / supply imbalance in lumber and strength in commodity markets in general.

Fairfax was not allowed by SEC to sell BB last time around. And Prem said they were motivated. So this tells me they were/are open to exiting BB position. Fairfax needs the profit / cash. They need to de-lever their balance sheet. They need to buy back all the equity holdings from Riverstone. (Interesting the sale of Riverstone has not been finalized yet... which includes another sale of Brit to OMERS). Exiting BB at +/- US$15 would also be a big reputational win for Fairfax. It would allow FFH to book a decent profit off their cost base. Their biggest current dog would transform into decent investment. This sale would also be another significant step in the transition of their investment portfolio. They have slowly been dealing with their mistakes the past 3 years and a BB sale would be another significant step on that journey. My guess is given enough time with the current price spike Fairfax will pull the trigger. I am higher conviction this time on this prediction than the last time

So a week ago BB was trading at US $8.60 and today it is trading at $17.60. Fairfax owns 100 million shares so their position in BB is up $900 million. Fairfax has about 26 million shares outstanding so the increase in BB = $35/share (pre-tax). BB closed at $8.43 on March 31. The BB position is mark-to-market not equity accounted so it impacts book value each quarter end. Fairfax shares are trading at US $468 and have been flat for the past week. What is going on in BB has not been priced into FFH stock price. My view is there is a decent probability that Fairfax will sell some of its current position in BB given current prices; especially if this run up last another week or two. So buyers of FFH stock today are getting all the upside of a potential BB sale/monetization with zero downside risk (if FFH does nothing).

Prem was pretty clear that they tried to find a way to monetize their BB position in Q1 but were blocked due to SEC rules tied to debenture reset. And that restriction was no longer in place. If Blackberry continies to move higher (over US $15) - and remains there for any length of time - i will be very surprised if Fairfax does not find a way to monetize at least part of their position. They can use the $. PS: does anyone remeber the price that the Fairfax insider sold BB shares at in Q1? My guess is that price might be informative.

Yes, Resolute has been an absolute beast for Fairfax over the past year. I don’t follow the company super close but it looks like it is slowly pivoting its business, driven by lumber in 2018 and again by lumber in 2021. The purchase on the 3 lumber mills from Conifex in late 1999 looked like a mistake when covid hit in March/April on 2020 but looks well timed now. There is also a chance someone might take the paper/newsprint (shitty) businesses of its hands... we can only hope. They are also sitting on over $200 million in softwood lumber duty payments that may be returned to them if the US / Canada can come to an agreement. For me, there are much better positioned companies in the forestry segment for people who want to invest new money. Resolute has certainly improved its financial position and business over the past 5 years but not so much that i would want to own it over any of the other big Canadian players like West Fraser, Interfor or even Canfor.

Interfor (iFP.TO). Lumber companies are raining cash. Will pay a $2 special dividend (with likely more to come). Supply / demand imbalance could remain in place for years (BC is not able to ramp production like it historically has dues to mountain pine beetle - in fact it will be reducing production in the coming years). The US South will become the new swing producing region but it will take years for new mills to open. Bottom line, if lumber prices stay above $1,000 for SPF into 2022 all lumber producers are going to earn obscene amounts on money. Time to do a deeper dive this weekend...

Thank you for posting. Some take aways: 1.) current investment positioning: short US$; positioned for inflation - long commodities (oil, copper etc); long equities. Will be surprised if he has not exited equity positioning by year end. 2.) Fed is supposed to be forward looking with policy. Focussed on employment which is a lagging indicator. This makes no sense. 3.) current environment: risky, interesting as hell, will end badly just don’t know when. 4.) shorting: currently as much opportunity as he has seen in his lifetime on short side