Viking

Greg, if you do not understand the catalysts for Fairfax here are a few that come quickly to mind: 1.) the turn in its investment portfolio beginning in Q4. The increase over the past three quarters has been breathtaking - $4 or $5 billion? (I am too lazy to look up the exact numbers). 2.) insurance is in a hard market: top line is currently growing at close to 30% and underwriting profit may be at record levels moving forward. 3.) Digit revaluation: resulting in a significant increase in BV. Possible IPO in 2022. 4.) results of non insurance operating companies should pick up in Q3 as global economies pick up. Improved profitability will flow through to Fairfax, 5.) Atlas Corp: Fairfax’s largest single investment has positioned itself to grow substantially in the next 24 months. Significant upside to Atlas shares. 6.) Riverstone UK/Brit sale for cash of $1.1 billion (in August?) Now timing, that is sometimes a tricky thing. When will Mr Market agree? Getting the catalyst and the timing exactly right at the same time… that is usually pretty difficult. And that is where patience comes in. My guess is over the next year Mr Market will get excited about many of the catalysts i listed above and will want to own Fairfax shares bidding the price higher in the process. While i wait Fairfax will continue to grow its businesses, grow its profits and increase BV. As the old guy in the Reminiscences of a Stock Operator says ‘the big money is made by sitting on your hands’ - find the right opportunity, establish a position and then wait. i get that lots of investors do not want to put their money in Fairfax. I can respect that. For those who are ok investing in Fairfax i hope they do well

Prem has said numerous times the past 2 years that Fairfax is done with big new insurance acquisitions. Because they are happy with their global footprint. And it provides them with lots of opportunity to grow organically. As i said above, they will do some small fill in acquisitions like Singapore Re (they already owned a chunk of this company so they bought what they did not own). Now i do expect them to buy the minority shareholders in Allied and Brit in the future. Issue shares to do so? Brit? No. Allied? I doubt it; although there is a chance it could happen.

Spec, the size of the TRS position is something i have never seen before even from Fairfax. And, given it is using leverage, it will be volatile and involve heightened risk. It is certainly unique for a P&C insurer. The RBC analyst sounded particularly dumfounded on the conference call when the position was first announced. It is yet another example of how Fairfax can get creative and do things that are unexpected and of magnitude. I like the transaction. Because i like the risk reward. I think Fairfax shares are dirt cheap. Fairfax also understand the heightened risks/downside of doing this kind of transaction. My guess is they are pretty confident the shares will be materially higher in the near future (something they do have some influence over). I also think the TRS telegraphs what we are likely to see in the next 6 to 12 months: the start of meaningful stock buybacks. What is it Fairfax can do to juice the share price (and value of TRS)? Buy back the stock in quantity. The shares will spike when this happens. (Not sure what the rules are on this… ) The Riverstone UK / Brit acquisitions are to close this month (we will see). What to do with $1.1 billion? More cash should be coming given all the tailwinds Fairfax is currently experiencing. Buy back some debt and… stock. Fairfax India is in the process of buying back 5% of its shares. Pretty easy decisions when you stock is dirt cheap. Just need some extra cash

My guess is the biggest driver of spike in share count the past 11 has been large acquisitions of insurance companies: Zenith in 2010, Brit in 2015 and Allied in 2017. Fairfax has stated numerous times in recent years that they are done with very large insurance acquisitions. This is a big deal and is another example of the ‘new Fairfax’. Moving forward, growth will be organically driven. They will do small acquisitions as we saw in Q2 with Singapore Re. One benefit of this major shift in strategy will be share count (shares will not be used to pay for a big insurance acquisition). Diluted share count has also gone up due to employee stock awards. I have not looked into this in any detail. I don’t think Fairfax is the only company that does this Perhaps someone more knowledgable can chime in on magnitude and how it compares to other similar companies. I think Fairfax’s awards are also long term in nature (earned over a couple of years); again, if anyone has more info please chime in To me the big issue at Fairfax the past 10 years is lack of cash generation (caused by a bunch of issues). So it has had to issue shares to help fund acquisitions and shore up its financial position. And it has been unable to buy back stock when it was cheap. The good news is Fairfax looks poised to deliver much better cash generation moving forward. Different corporate strategy. Hard market. Underwriting results are improving. Their consolidated holdings (lots of cyclicals) are rebounding nicely as global economies open up. Their equity investments have rebounded nicely in value and are poised to do well. Yes, the increase in shares outstanding from 2010 to 2020 was not good. However, i think Fairfax is a much different company today (than it was in 2010) with very different prospects. And i expect the share count to drop in a meaningful way at Fairfax in the coming years.

One small piece of information 5.1 million shares were issued in 2017 as part of the Allied World acquisition. Net written premiums at Allied was $2.2 billion in 2017. After 6 months net written premiums are $2.1 billion and grew at 32% in the most recent quarter. From the 2017 AR: “We closed our acquisition of Allied World on July 6, 2017 and we welcomed Scott Carmilani and Allied World’s 1,430 employees to the Fairfax family. As you know, Allied World is the largest acquisition that we have done and we pursued this acquisition because of Allied World’s outstanding track record over its 15 years of existence and the quality of its management team. We are very thankful to our financing partners OMERS ($1 billion), AIMCO ($0.5 billion) and two others. We issued a total of 5.1 million shares for Allied World. ” ”Allied World, based in Zug, Switzerland, provides property, casualty and specialty insurance and reinsurance solutions, with principal locations in the United States, Bermuda, London, Singapore and Canada. In 2017, Allied World’s net premiums written were US$2,238.8 million. At year-end, the company had shareholders’ equity of US$2,523.8 million and there were 1,430 employees. Allied World was acquired on July 6, 2017.”

Fairfax India’s publicly traded stocks have been on fire for the past 9 months. And since June 30 my quick math says they are up another $150 million ($1/share increase in BV) with the IIFL triplets leading the way. All of Fairfax’s investments in India have been performing exceptionally well (Fairfax India, Quess, Thomas Cook) since Nov of last year. Is the Indian stock market getting a little bubbly? Or is it a situation where the stocks were crazy cheap and they are now more fairly valued? The performance of the Indian stock market the past 6 months has been a surprise to me given how hard the Delta variant hit the country. The dutch auction for Fairfax India shares closes this week. It will be interesting to see what prices they pay for shares. And where Fairfax India shares trade after the auction closes. With Aug 1 BV of $20 and shares trading at $13.20 it certainly is a head scratcher for me. Sanmar and Seven Island IPO’s could boost BV higher when they happen. And the Anchorage transaction is another wild card. Bottom line, lots of catalysts which is encouraging. I hope management at Fairfax India continues to be aggressive with share buybacks after the Dutch auction is completed. Soak up all the shares they can at $13 Given how cheap Fairfax India shares are trading, that has to be the best use of cash for management right now. This is also a big win for Fairfax as their ownership stake increases materially.

Comments from Selective Insurance CEO on Q2 call. Views the current pricing environment as sustainable. James Bach: …where do you see rate increases going from here? John Marchioni Yes. So I mean, obviously, if you look at our performance over the first 2 quarters, it’s been relatively stable. And while the market dynamic is an influence on how we manage pricing, we also have taken a very measured approach in terms of understanding our own pricing targets based on our starting point profitability and our expectation of trend, and we’re going to manage rate in that context as opposed to just trying to maximize rate in the short-term because the market may or may not be conducive. I guess what I would point you to and what -- how we think about this going forward and why we think the current pricing environment is sustainable is what’s driving the pricing environment and whether those forces continue to be present when we look forward, and we would argue that they are. So let me just hit the key ones. So #1 is the low interest rate environment. We don’t know where that is. And I think as we try to point out in our prepared comments, while we think we’ve got a high-quality alternative investment portfolio and it’s been generating really strong returns for us. We realize that, that that to a certain extent for the entire industry is masking the pressure on the core fixed income portfolios. And when you roll forward the investment income impact from those declining yields, that is something that will put pressure on underwriting margins. The second piece is, when you think about -- and a number of companies, we would -- not us, but other companies have continued to point to a little bit more volatility in their non-cat losses in the more recent quarters. But if you look back over the last couple of years, you’ve seen higher and elevated and more volatile cat and non-cat property, you’ve got firming reinsurance pricing, and while it may be disappointing for the reinsurers in terms of where they are relative to where they would expected it to be from a pricing perspective, prices are still up, and that has to be factored in. And then loss trends with and without additional inflation continue to be a pressure point. And as we pointed to, the social inflation trends that were emerging and included in our loss reserve estimates and our loss picks, pre-pandemic, we fully expect to reemerge as the economy reopens. Everybody is dealing with those same drivers, and we think that props up the pricing environment. Now the other, I think, when you put it all together and think about it, is the starting margins for most of the industry needs improvement. And I realize everybody is reporting really strong results. We tend to focus on the underlying not ex-cat -- underlying with a normal cat load when you think about the starting point. And when you look at that for many companies in the industry and the industry broadly, there’s some loss ratio improvement still necessary. And then the final point I would make would be a lot of the back down in the last couple of quarters in the headline rate number for the industry have been driven by the lines that were really high in terms of rate level. So think high hazard, excess umbrella, specialty lines, D&O, EPL, management liability, that’s what’s bringing the overall number down. But I think you’ve seen a little bit more stability in commercial auto, general liability, commercial property in the lines that make up our portfolio.

Fairfax results are very volatile from year to year. I thought it would be interesting/educational to put pen to paper and estimate ‘normalized’ earnings power for Fairfax on a go forward basis. Please chime in with your own numbers and rationale or questions Assumption: the global economy is in the process of entering the new normal (we learn to live with covid). What are normalized earnings for Fairfax today? My estimates below are US$, quarterly and i have used the template Fairfax uses in their quarterly news releases: Underwriting $210 million/quarter Interest and Dividend $115 Share of Profit of Assoc $60 Sub Total $385 Run off -$25 Non insurance co +$25 Int Expense -$115 Corp Overhead -$25 Sub Total -$140 Total $245 Net gains on investments $225 ($900 million annually?) Total incl net gains $470 Taxes and non-cont interest -$120 (25%?) Net earnings $350/quarter Per share $13.50/share/quarter = $54/year Shares are trading at US $422 Is underwriting too high? Net gains on investments too low?

Ahhh. The good old days. I still remember them well

‘trading at discounts in perpetuity’ I think this is a real risk. I see it as lower probability right now but i am open minded. With their words and actions i wonder if management (lead by Prem) has done permanent and significant damage with the analyst and investment community. Credibility is a hard thing to win back once lost. With the result being the stock trades permanently below BV and perhaps significantly so. Fairfax has been creative in the past with booking transactions that cause an increase in all important book value. Quess was one such example a few years ago. The Anchorage transaction, spiking the value of BIAL, is a more recent example. Digit is the most recent example. Looking at the Fairfax India stock price today it is clear investors do not believe the value of BIAL is accurate. Looking at how Fairfax has traded since announcing the $1.8 billion Digit gain (down) it is clear investors do not believe that number is real. I am not suggesting Fairfax has done anything wrong. Or that the numbers they are reporting are not accurate. Perhaps investors expect the current valuations to be marked down in future years as happened recently with Quess. Not sure if the disconnect is a credibility issue, covid issue, timing issue or investors simply missing a good thing (or some combination). Having said all that, i do like Fairfax (and Fairfax India) as an investment. I really like the current risk/reward set up. However, my eyes are also wide open to the risks

I think low rates is currently THE key driver of the hard market today. The 10 year is currently yielding 1.25%. Most insurers still invest predominantly in bonds. As much higher yielding bonds in their portfolio continue to mature and they reinvest at 1.25% (or something else likely at a lower yield than what matured) the yield on their portfolio is coming down in a pretty relentless way (unless they take on more risk). If insurers expect to hit 15% ROE targets, with investment returns declining, they MUST earn more from underwriting. And insurance stocks that are not able to hit an acceptable ROE over time get punished by investors (one reason why Fairfax trades today at such a steep discount to BV). And management teams understand this so they are highly motivated right now to only write business at an acceptable CR. If the 10 year interest rate stays at 1.25% (acting like and anchor on the whole fixed income complex) i think the hard market could last longer than expected by Mr Market. It is interesting that all insurance executives are saying they see the hard market continuing into 2022 and Mr Market thinks the hard market is pretty much over. It looks to me like some insurers are slowly getting more creative with their investment portfolios (alternative investments etc) in an attempt to thread the needle of higher return and ‘bond like’ safety/low volatility. PS: we are starting to see one of the drivers of an improving CR and that is the significant top line growth resulting in a lower expense ratio. On the Q2 call i think Fairfax used Allied as an example and said the expense ratio fell 2% driven by rate increases.

Growth in net premiums written at Fairfax has been impressive: 2018 = $12.4 billion 2019 = $13.8 2020 = $14.9 1H 2021 = $8.7 = est close to $18 billion for year Growth the past three years has averaged 14% per year = 50% cumulatively. Northbridge, Odyssey and Allied are all growing faster than the company average. It will be interesting to see where net premiums go from here. Based on recent commentary from insurers it appears the current hard market should continue into 2022. We will see Chug, chug, chug…

RBC just released their Q2 update/report for Fairfax. Price target was raised to US $600 (from $550). Commentary/outlook is the most effusive i can remember. Looks to me like analysts are finally recognizing the stellar results and all of the significant tailwinds. If we see this from other analysts we should see the shares move solidly higher in the near term. Perhaps 2021 is also the beginning of the next chapter of Fairfax’s corporate history with shareholders… i like how the first couple of pages are being written ————————————- RBC Q2 report headline: “The best value opportunity in the P&C space right now” “Our view: Across the board premium growth and improving margins led to a very strong 2Q result. With good visibility to nearly another 10% book value growth as a result of a pending transaction together with a company generating underwriting profits and favorable reserve development in the middle of a hard market, we think there is significant room for multiple expansion. With shares currently trading at about 0.75x, Fairfax shares in our view are one of last true values in the P&C space.” ———————- “The excess of estimated fair value over carrying value of all Fairfax non-insurance associates including Fairfax India associates is about $1.9B or more than $57/share after-tax (not included in book value).”

Listened to the conference call. Pretty straight forward and followed the script from the earnings release pretty closely. Prem’s answers to questions were mostly short and sweet (well done) and he also punted questions to other Fairfax team members (well done). - expect hard market to last into 2022 - monetization bucket: Mosaic, Recipe (Milestones), Fairfax India (Privvy). Continue to look for opportunities to monetize positions. - why sell Brit? Part of Riverstone deal; gives Fairfax flexibility; continue to build relationship with OMERS - Digit $1.4 billion gain? Will be booked in Q3 or Q4 (when Fairfax is allowed by regulators to increase ownership to 74%) - Crum growth? Biggest driver big rebound in travel insurance. - reserve development? $60 million covid BI - reinsurance; non US; Allied and Odyssey - share buybacks? Focus is to be financed soundly and grow insurance organically. - Fairfax TRS: no expiry; positions can be extended - Any Blackberry shares sold? No - non insurance subs performance in 2H? Expected to improve as economy improves The analyst from BMO had a question on Digit; clear he had not read the Fairfax release a couple of weeks ago. It will be interesting to see how analysts discuss Digit and account for the $1.4 billion not yet booked by Faorfax.

Fairfax India shares closed today at $13.49. BV is now up to $19.26. “At June 30, 2021 common shareholders' equity was $2,876.3 million, or book value per share of $19.26, compared to $2,446.9 million, or book value per share of $16.37, at December 31, 2020”

True. I was not expecting they would need the full amount for deleveraging. After paying down debt i was hoping there would be enough cash left over to see some meaningful stock buybacks. I wonder if we do not see a big buyback after the Riverstone deal closes (similar to what we are currently seeing with Fairfax India). That would be like attaching rocket ships to Fairfax’s stock price.

Yes, Atlas is looking very undervalued. There are others too. Eurobank is looking well positioned once they get another tranche of bad loans off their books later this year (Mexico tranche). If we see tourism (and the Greek economy) rebound over the next 12 months then Eurobank should do very well from current levels (double not out of the question). My point is the investment portfolio could do very well for an extended period as there is still lots of value there when you dig into the individual holdings..

Where this gets really interesting is the catalysts remain in play. In Peter Lynch language the story is just getting better and better: 1.) hard market driving significant top line growth (27% in Q2); and increasingly improvement in bottom line (CR <95 in Q2) 2.) non insurance investments continue to perform very well and are poised for further gains in 2H 3.) deleveraging is on track when Riverstone UK transaction happens hopefully in August; cash from this transaction (including 14% Brit sale) will be significant ($750 + $375=$1,125). 4.) Digit is shaping up to be next home run 5.) Eurolife stake increased from 50 to 80% at cost of $142 million; nice to get this finally done 6.) Singapore Re stake increased from 28 to 94% for $103 million; perhaps now gives Fairfax Asia needed scale Stock closed today at $416. BV = $540. P/BV = .77 With the additional gain in Digit we have clear line of sight to BV of $600 at end of Q3 = P/BV of 0.69 And this ignores the $750 million in non insurance investments not captured in BV (another $29/ share).

Resolute Forest Products released stellar Q2 results (as expected). The special dividend of C$1.00/share was paid July 7. Fairfax was paid C$24.8 million (not including the Riverstone UK holdings). The management team at Resolute has done an outstanding job over the past few years. Repositioned the company. Paid down debt. Bought back significant amount of stock at depressed prices. Paid significant special dividend. Moving forward i expect more good news from Fairfax owned companies. As the economy improves in 2H the earnings of many companies will also improve and this will benefit Fairfax in many different ways: - growing dividends (regular and one time). - growing earnings flowing though to reported Fairfax earnings - higher stock prices (for those companies that are publicly traded) - opportunity for Fairfax to monetize more holdings A headwind will become a tailwind. Resolute is the example today (C$24.8 million gain coming in Q3). Stelco is earning crazy cash right now. Recipe is poised to deliver much improved results as the Canadian economy reopens. Dexterra is poised to do very well in 2H. There are lots more examples. —————————- From the RFP release: “The company repurchased 343,894 shares in the quarter, at an average price of $11.21, and it declared a special cash dividend of $1 per share of common stock, or $79 million in aggregate, which was paid on July 7 to holders of record at the close of business on June 28.” https://finance.yahoo.com/news/resolute-reports-preliminary-second-quarter-110000254.html

My guess is we may see Q2 earnings of around $20/share; so right in line with what Parsad posted above. Absent Fairfax getting much more aggressive with share buybacks i am not sure what the catalyst will be in the near term to drive the share price higher given all insurers are selling off after posting very strong Q2 results. A few things i will be looking for tomorrow: 1.) Gross premiums? Up 17% in Q1. I think growth could be higher in Q2. 2.) CR? 96% in Q1 = $149 million. Brit is the watchout. Does CR improve from Q1? 3.) Non insurance company results? Wild card; covid lock downs were a headwind in April; likely Q3 before this bucket gets going. 4.) Net gains on investments? My spreadsheet had +$470 million for Q2 and it is usually light (given it does not capture a bunch of holdings). 5.) Excess of fair value over adjusted carrying value of investments in non-insurance associates? My spreadsheet had +$200 million (incl Boat Rocker and Farmers Edge) 6.) Total debt to total capital ratio, excluding non-insurance companies? Was 30.2% in Q1. Would like to see this drop but likely will not happen until Riverstone closes. Updates: 7.) Riverstone UK sale ($750 million)/sale of 14% of Brit ($375 million) - what is the hold up? When will it close? 8.) Purchase of remaining stake in Eurolife? Amount? Transaction tied to 7.) above? 9.) FFH total return swaps - position still at 1.964 million shares? 10.) Digit valuation increase of $1.8 billion - any additional disclosure/discussion? 11.) Mosaic Capital acquisition for C$277 million - for businesses or management team? 12.) Fairfax India: update on Sanmar and Seven Islands IPO’s and Anchorage transaction. Estimate Q2 BV = $19/share Wild card: 13.) Blackberry - able to lock in US $15 price in Q2? (One can hope 14.) stock buybacks - given how low shares are trading and plans to make this a higher priority in the near term?

A couple of thoughts: 1.) Prem’s reputation: my guess is his reputation is at (or close) to an all time low in Canada right now. And rightly so. 2.) I get that Fairfax is not a company you are interested in owning; we all have our own emotional makeup/intellect/education/filters as there is no one way or ‘correct way’ to invest. However, I applaud investors who bought last year when the shares were in the toilet. Hopefully they all make a bunch of money 3.) honesty / self reflection is a rare and very valuable trait. Reminds me of Mark Twain’s old line “It Ain’t What You Don’t Know That Gets You Into Trouble. It’s What You Know for Sure That Just Ain’t So”

I might not explain this thought very well… but here goes. Looking at past results can be useful when looking at a company as an input to better estimate future performance / expected returns for shareholders. When not much changes at the company (business, business strategy, management, industry etc). Berkshire is perhaps a good example. There are other times when looking at past results completely messes investors up. A good example here are the big US banks around 2016-2017. Many investors looked at their performance over the previous 10 years (terrible results) and concluded they were dogs with fleas. Management teams were also a bunch of crooks (Goldman were vampire squid). The REALITY of the situation in 2016-17 was the banks were completely different animals: well capitalized, profitable, well managed. Over relying/weighting on past results caused most investors to completely miss the opportunity staring them in the face. What matters? The logic. Why did a company perform a certain way 5 years ago? Or last year? And are the 2 comparable? When a company has changed overweighting past results will lead investors to mis-forecast future results. A great example is Fairfax in 2008. They nailed CDS and made billions. This was not a repeatable event. But it resulted in investors being too optimistic about future results. And worse for investors Fairfax then got extremely bearish and proceeded to lose billions on short positions from 2013-2020. What does this ‘history’ tell us about future returns for Fairfax? On its own, way, way less than most investors might think. For me the key lesson of Fairfax’s historical returns (going back decades) is pretty simple: when they get the investing bucket right future returns for investors can be exceptionally good. When they get the investing bucket wrong future returns for investors can be terrible. There is also a second lesson for me: their insurance underwriting has improved (from weakness to mild strength). And a third lesson: this is NOT a buy and forget type stock (like Berkshire). Logic and being rational and open minded is key.

Every earnings report i have read / conference call i have listened to so far has said pretty much the same thing: the hard market is ongoing and likely to continue into 2022. Rate increases, while slowing, continue to be well in excess of loss cost trends. Focus is shifting to exposure growth. Very encouraging. Given the time it takes for written premiums to become earned it bodes well for underwriting results at P&C insurers. It should be a tailwind for the next couple of years.

Greg, Fairfax HAS caught fire over the past 9 months. It was trading at US $270 last October. And $340 Dec 31. So trading at even $413 today lots of investors have done very well with Fairfax over the past 9 months or so. Yes, the stock price has gone side ways for the last 5 months. And during that time its insurance operations and investments have done very well. So i think we can comfortably say the company is worth much more today than it was in Feb. We will find out more on Thursday. My guess is we will see another pop in the share price this year (assuming Fairfax continues to deliver solid results). At some point Mr Market will connect the dots and pick up the $20 bill lying on the ground As Buffett says, time is the friend of the wonderful business. Given what is going on under the hood right now at Fairfax i think investors can be patient. And to be able to say that about Fairfax in 2021 puts a smile on my face (However, i will be keeping an open mind on this topic.)

It appears we have a supply / demand imbalance More sellers than buyers. I am not trying to insult anyones intelligence but i think this best explains why we are seeing with the shares slowly selling off before what should be a good to very good earnings report. Lately, more investors are thinking selling shares is a better decision than buying more shares. Insurance stocks in general are weak right now and have been for months (due to low bond yields and concerns hard market price increases have peaked). Cyclical stocks have also been weak for months; and Fairfax is loaded with cyclicals (look at how Atlas has been trading the past few months). So perhaps investors are looking at Fairfax and they see headwinds on both the insurance and investing buckets and therefore want to sell the shares (perhaps locking in big gains from the past year). And with Fairfax releasing earnings in a few days (Thursday after markets close) perhaps large investors want to see actual results before committing new money. The important thing to me right now are the Q2 results of the company. In aggregate, my view is the Fairfax ‘story’ continues to get better. Hopefully, this is confirmed on Thursday. This should help stoke demand (although posting very good results did not help WRB’s share price). However, it would not surprise me to see shares trade in the current range over the next few months given what we are seeing in the overall market. The biggest near term catalyst might be stock buybacks by Fairfax. If earnings are solid perhaps Fairfax will have the cash to do a sizeable buyback. And with the stock trading at such a cheap valuation perhaps Fairfax will be more motivated to buy back shares. It will not take much of an increase in demand for shares for the price to pop. But if Fairfax is not interested/ or able buy back shares in a meaningful quantity i am not sure what the near term catalyst will be (given the current weakness in insurance and cyclical stocks). PS: Xerxes, makes sense a US listing would result in higher demand for shares