Viking

Spek, i can be pretty hard on Prem but i think your criticism of the letter as a ‘joke’ is a little too hard. I appreciated the attempt made in the letter to help shareholders understand the various businesses (especially the equity holdings). But it is difficult to explain complicated stuff in a simply way. And it is complicated. And this may result in Fairfax permanently selling at a discount... not sure... we will see. My view is Fairfax is like a supertanker. It has slowly been making more of the right moves (than wrong) for a few years now. News that another $1.5 billion will be managed by Wade and Lawrence (for a total of $3 billion) looks like another solid move; it looks to me like these guys buy higher quality and are more diversified than Prem. The benefit of this shift has been playing out the past year and should be another tailwind moving forward (for Fairfax shareholders). IPO’ing Farmers Edge, Boat Rocker, Seven Island and Anchorage is another very positive development (for the future of those companies and so also for Fairfax’s ownership position); they are being VERY opportunistic. And i expect more will be done; Fairfax is highly motivated. I also view the disclosure that the final short position is officially, really gone to be net positive - a piece of added complexity that is now gone (and the losses are in the past). The sad truth is Fairfax has severely underperformed for investors for many years. However, for those who bought share after the March sell off, Fairfax has been a great investment. And with Fairfax’s equity holdings up more than $1.6 billion since Jan 1 (just the stuff i track and i am missing a bunch) Q1 is shaping up to be a strong quarter for earnings. The reality is Fairfax’s equity portfolio, concentrated in cyclicals, lower quality companies, emerging markets and service sector was punished especially hard last year. And it is way out performing as we start 2021. So my guess is there is a good chance we are going to see solid BV/EPS growth (of better than 15%) in 2021 and it could easily be much higher. The good news is Fairfax’s stock price is so low it has a very good risk / reward set up for investors. The next important pivot for Fairfax, and others on this board have pointed this out many times, is they need to start to generate more consistent and predicable quarterly earnings. And they need their various businesses start to spin off more free cash flow to Fairfax as a whole. I think we will see this start to happen in 2021 and into 2022. - Their insurance businesses are almost all now underwriting at a CR better than 100; taken as a whole they are now comfortable below 100. This has taken years to happen. And they have said NO MORE ACQUISITIONS. This is a big deal. - Fairfax now seems to be taking a sink or swim approach with their various equity holds in terms of hitting daddy (Fairfax) up for endless amounts of cash to fix struggling operations. And this was during the pandemic. These operations have survived and as we come out of the other side of the pandemic Fairfax’s many equity holdings should start contributing more cash to Fairfax. Stelco just re-instated their dividend of $0.10/share. It is highly likely Stelco will issue a couple of special dividends in 2021. I expect good news from lots of other Fairfax companies. - the earnings from the many equity holdings will also jump in 2021 and the year over year improvement should be outstanding and a material positive to Fairfax’s overall results. - and i expect further monetizations from Fairfax in 2021 and the kind that puts cash in Fairfax’s coffers; these could be meaningful. And it is an insurance company. And we are in a hard market so premium growth should be up double digits in 2021 and the CR should be lower than 2020. I continue to think that the stars are currently in alignment for Fairfax: hard market, solid underwriting, strong performance from equity holdings, rising interest rate environment, more confidence in management today than in years. But to your point, they have not delivered in terms of EPS or BV growth... But i think 2021 they will :-) Having followed Fairfax for a couple of decades, when the stars align like right now they do have a history of hitting home runs (not singles). As with all investments... time will tell.

A couple of random things that i found interesting (after speed reading the first half of the Prem’s letter). 1.) page 7: Digit ownership currently at 49%. Note 4: “74% upon conversion of securities, when permitted under recent budget” Does this mean Fairfax will not need to lay out a bunch of cash to get to 74% ownership of digit? That would be huge. 2.) page 15: “Also in 2019, Fairfax India signed definitive agreements with OMERS, the pension plan for Ontario’s municipal employees, whereby Fairfax India will transfer 43.6% out of the 54% that it owns in BIAL to a wholly owned Indian holding company (Anchorage) and OMERS will pay about $130 million to acquire 11.5% of Anchorage from Fairfax India. This transaction values 100% of BIAL at $2.6 billion. We expect to close this transaction in March 2021 and begin soon after the process to list Anchorage on the Indian stock exchanges, possibly at a much higher valuation.” An IPO of Anchorage should be very good news for Fairfax India and its stock price. The proceeds from the Anchorage IPO (and proceeds from sale to OMERS) could be re-invested further validating Anchorage and its valuation.

It should be today based on Q4 conference call transcript (Feb 12): Jennifer J.S Allen, Fairfax Financial Holdings Limited - VP & CFO “Thank you, Prem. We wanted to let you know that in addition to the press release that was issued yesterday on our year-end results, Fairfax's 2020 annual report will be posted on the company's website on March 5, 2021.” ————————— I am very interested to see how Fairfax discusses/presents its equity holdings (given their importance to Fairfax’s valuation). Another comment from Jennifer in her prepared remarks: “At December 31, 2020, our investments in associate had an aggregate fair value that exceeded the carrying values by $712 million. And due to the equity method of accounting for these investments, this excess of fair value over the carrying value is not included in our book value per share. This is a significant positive change from the March 31, 2020, when the aggregate carrying value exceeded the fair values of the investments and associates by approximately $400 million.” ————————— Jaeme Gloyn, National Bank Financial, Inc., Research Division - Analyst: “So first question is just around the Farmers Edge IPO. That seems to be -- that will be coming out pretty soon here. Can you maybe talk about some of the other industries or companies that you're looking to maybe tack into this pretty robust IPO market as a way to realize on value in some of those holdings?” V. Prem Watsa, Fairfax Financial Holdings Limited - Founder, Chairman & CEO [35] “ Jaeme, we're not allowed to say too much until they file, and until they are done. So Farmers Edge, as you know, has filed. We'll be filing some more. You'll be able to guess them. And, and we'll be filing them in India -- in Fairfax India. Many of them there. And, we've got some really good companies and we've developed them over. And Dexterra is a classic where the old horizon -- this called Dexterra, we have 49%. And we expect that to be a very successful company over time. So, we have many of them. And when you look at our non-insurance companies, some of you analysts are worried about the fact that we don't make any money. We reflect the losses, but we don't show the gains. And the gains come over time. So when you look at our investment portfolio, you know this Jaeme, we've got common shares. We have more than 20%, they become associates. If you have a 40% interest -- the numbers like that, in the case of Thomas Cook 65%, then you have to consolidate it. So in our Annual Report in 2020 -- for the 2020 Annual Report will come out in a few weeks, we're going to show it to you so that you can -- we're going to take another attempt to show you our common stock positions. And they -- some of them are just common stocks, some are associates, some are consolidated. It gets a little bit guy, but that's the accounting IFRS. We have to follow the accounting rules. But we're going to show that to you in a way that I think will be easier to understand. And over time, all of these investments, some do very well in a short period of time, and some take longer. And we just -- we're patient, long term investors.”

Holy moly Batman! Boat Rocker should be next. It will be interesting to see what Fairfax reports as its cost base for Farmers Edge when they report Q1 results (and what the size of the realized gain is). Bottom line, it looks to me like Fairfax is executing exceptionally well right now being very opportunistic. Their equity holdings are on fire :-) And yet the stock continues to trade well below BV (which will be jumping again when they report Q1 results, even after accounting for the US $10 dividend payment). ———————— Farmers Edge jumps 18% in Canada trading debut after IPO - https://www.bnnbloomberg.ca/farmers-edge-jumps-18-in-canada-trading-debut-after-ipo-1.1571590 Agricultural technology startup Farmers Edge Inc. surged 18 per cent in its Toronto trading debut after raising $125 million (US$99 million) in its Canadian initial public offering. Shares of the Winnipeg, Manitoba-based firm jumped to $20 at 9:30 a.m. trading, above its IPO price of $17 a share. That gives the company a market value of about $814 million, based on about 40.7 million shares outstanding.

Fairfax has three very large equity holdings: 1.) Atlas - including warrants 2.) Blackberry - including debentures 3.) Eurobank A 10% move in Eurobank = about US $80million for Fairfax. The market value of the position is now worth about $900 million. The carrying value is $1,137. If the move in Eurobank continues, given its size, this will be very good for Fairfax’s equity holdings. Yes, the position is not mark to market. However, for the consolidated equity positions taken as a group, it is a positive to see the market value exceed carrying value. This in turn supports Fairfax’s stated BV. There have been times when the market value of Fairfax’s consolidated equity holdings was far lower than their carrying value. When this is the case it makes sense to me to discount Fairfax BV (to be conservative). As fair value grows in excess of carrying value then perhaps a premium to BV is warranted. Fairfax wants to get out ahead of this issue and this is a primary reason they have promised additional disclosure in the upcoming annual report.

Buffett may have chosen to stay tight lipped on lots of topics in this years annual letter because we are still in the middle of them. Often the best time to comment/best learnings (via the letter) is a couple of years after the fact once the dust has settled. Regardless, he will get lots of questions on all these topics at the AGM so investors will get more information shortly. ——————— From my perspective the biggest news was the meaningful buybacks of BRK stock. With continued purchases in Q1. That is a big deal for shareholders.

As in Prem needs a Charlie? More the ah-ha moment finally understanding the importance of ‘buy wonderful businesses’ that can ‘run themselves’. I would be VERY happy if Fairfax moved more in this direction.

I read this section and could not help but think of Fairfax... ——————————— (From page 4): Charlie and I want our conglomerate to own all or part of a diverse group of businesses with good economic characteristics and good managers. Whether Berkshire controls these businesses, however, is unimportant to us. It took me a while to wise up. But Charlie – and also my 20-year struggle with the textile operation I inherited at Berkshire – finally convinced me that owning a non-controlling portion of a wonderful business is more profitable, more enjoyable and far less work than struggling with 100% of a marginal enterprise. For those reasons, our conglomerate will remain a collection of controlled and non-controlled businesses. Charlie and I will simply deploy your capital into whatever we believe makes the most sense, based on a company’s durable competitive strengths, the capabilities and character of its management, and price. If that strategy requires little or no effort on our part, so much the better. In contrast to the scoring system utilized in diving competitions, you are awarded no points in business endeavors for “degree of difficulty.” Furthermore, as Ronald Reagan cautioned: “It’s said that hard work never killed anyone, but I say why take the chance?”

WOW. Great summary. Thanks for posting. I have never read anything in detail on Japan’s experience in the late 80’s. This book looks like a solid place to start. A question: was there a way to ride out the storm? I am thinking a large cash position would have worked out very well. (Miss the massive drop in real estate and stock market prices; although it looks like it took years - and decades in some cases - to play out.

In bond yields go to 2% it will be because the virus is being defeated and the economy is on fire (annual GDP growth of +8% for US). Stocks to own? Cyclicals; commodities; service sector. I agree this would be good for BRK. What are people thinking about US$ in this scenario?

So, it's good if FFH can IPO these outfits and book a gain. It pushes up their equity number and gives a bit of slack on the revolving credit facility covenants. It might even enable some of the insurance subs to increase their underwriting volume. It also gives a higher profile to those companies which might turn them into acquisition targets in the future (ie, it could facilitate an exit). However, while this will increase reported earnings, it looks like there will once again be a bit of a quality of earnings issue in 2021. If all four IPOs come to fruition during 2021, it will likely give the appearance of high earnings, but clearly this is not something which is repeatable every year, nor do the "earnings" from these exercises result in any cash that can be used by the holdco for debt repayment, dividends or share buybacks. While the gains are a credit to management and reflect good decisions made in the past, when thinking about the longer term valuation of FFH, it might become important during 2021 to use some sort of adjusted income number. It's a good outcome, but it will definitely muddy the accounting numbers for the next year or two. SJ Stubble, i like many things about what Fairfax is doing with the IPO process: 1.) additional disclosure provided on companies and their business models 2.) significant funds raised from IPO will help companies be successful in future 3.) timing of IPO’s is very opportunistic (given high demand) and look to be at premium valuations 4.) significant funds raised from IPO will hopefully eliminate need for Fairfax to provide any further funding in future. This is a big deal and should help cash flow at Fairfax moving forward. 5.) with shares publicly traded Fairfax will have mechanism to exit more of position in future if that is what they want to do 6.) post IPO, with shares publicly traded, investors will have much better visibility into valuation of Fairfax’s many equity holdings (and reported BV) Seeing the value of these IPO’s i wonder what a company like AGT might be valued at should it go this route. The learning is there is significant value in the non-publicly traded companies Fairfax owns.

Brief history of the Farmers Edge investment: Dec 31/17: 46.1% owned with a Fair Value (FV) of $ 95 million and a Carrying Value (CV) of $88.1 million (the 46.1% interest acquired for $95 million on March 1/17) Dec 31/18: 49.2% owned with a FV of $66.6 million and a CV of $66.9 million Dec 31/19: 50.4% owned with a FV of $43.8 million and a CV of $41.0 million Sept 30/20: 50.4% owned with a FV of $43.8 million and a CV of $41.0 million Note: All amounts in USD. Bearprowler, thanks for posting. It looks to me like the gain in BV that Fairfax will book on the close could be very large.

As a reminder Fairfax has an interest in four current IPO’s: 1.) Farmers Edge 2.) Boat Rocker 3.) Seven Islands Shipping - via Fairfax India 4.) Altius Renewables - via Atius Minerals $100 million here, $100 million there... pretty soon it all adds up to some real money :-) And when these are completed my guess is Fairfax is not done monetizing/surfacing value from companies it owns/holds significant stakes in. Let’s hope the markets remain receptive to these sorts of deals...

So it looks like Farmers Edge IPO is happening at CAN$17/share (upper end). Fairfax will own 25 million shares = $425 million. What is this carried on the books at? Fairfax will likely be booking a significant gain when they report Q1 results and it will increase BV. It will be nice to see :-) ————————- Fairfax Financial Holdings backed Farmers Edge prices $125M IPO https://privatecapitaljournal.com/fairfax-financial-holdings-backed-farmers-edge-prices-125m-ipo/ CPE News (2/24/2021) – Farmers Edge Inc., a company majority owned by Fairfax Financial Holdings Limited (TSX: FFH and FFH.U) and backed by Osmington Inc. and Mitsui & Co. Ltd., has filed a final prospectus in respect of its initial public offering (IPO) of common shares. Farmers Edge will issue 7,353,000 common shares at a price of $17.00 per share for gross proceeds of $125,001,000, or $143,751,150 if the over-allotment option is exercised in full. Farmers Edge will have 40,678,719 common shares outstanding or 41,781,669 common shares if the over-allotment option is fully exercised. Fairfax will own 25,023,193 common shares representing 61.5% of the outstanding shares (59.9% if over-allotment option is fully exercised). ————————- The closing of the Offering is expected to occur on or about March 3, 2021 (the “Closing Date”) and is subject to customary closing conditions, including the receipt of all necessary regulatory approvals.

Yes, i saw the same thing late in trading today. Bottom line, Fairfax has exposure to a little over 100 million BB shares. So every US$1 increase in BB share price = $100 million gain for FFH (pre-tax). This entire position is mark-to-market accounted; meaning it will also directly impact reported book value when Fairfax reports Q1 results. As a reminder, BB was trading at Dec 31 at US$6.63. So with shares trading $12.39 after hours = about $600 million gain = about $22-23 per share pre tax. Significant :-)

Rising rates is a tailwind for Fairfax (all things considered). They hold a disproportionate amount of their very large bond portfolio in short duration bonds or cash. As rates rise they will take a mark to market loss on existing holdings which will lower BV. However, if they are able to redeploy some of the cash/short term securities into higher yielding bonds then this will increase interest income.

One of the challenges with investing is getting anchored with past prices. Especially the current environment where prices for lots of stocks have been on fire for months. It is easy to get paralyzed and 'thumb suck' in this environment (do nothing). Fairfax India closed today at US$12.25/share. November 6th the stock was trading at $7.39/share. So shares have increased 65% in 3.5 months. It is natural to think "well I missed that one". The interesting thing is Fairfax India shares still look cheap and they might even be crazy cheap. Book value Dec 31, 2020 was $16.37. Since Jan 1 (the last 7 weeks) their publicly traded equity holdings are up about $200 million (22% in agggegate) = $1.35/share. We also know one of their private holdings, Seven Islands Shipping, has filed an IPO. Seven Island has a fair value of $92 million which will increase, and perhaps materially, upon completion of the IPO. Bottom line, I think we can safely estimate BV today is north of $17.50. So with share trading at $12.25 and BV currently around $17.50 what gives? BIAL. Investors must not believe the valuation given to the airport (BIAL) = $1,383 million. This is what makes the Anchorage transaction so important for Fairfax India's stock price. If Fairfax is able to sell a chunk of BIAL that confirms the $1,383 mark investors might start to believe the valuation is real. And if Fairfax India is able to add other infrastructure assets to Anchorage in 2021 then that will help validate the Anchorage structure (and it sounds like they are trying hard). The cool things for investors is with Fairfax India shares trading at $12.25 you are getting BIAL for half price (of its fair value). There is only upside with Anchorage. And there are a lot of tailwinds for investing in India right now and I would expect this will benefit many of Fairfax India's other holdings during 2021. So despite a 65% increase in Fairfax India the past 7 weeks I was happy to add a chunk today at $12.35. PS: attached is an excel file with Fairfax India's holdings (go to FFI tab)... let me know if you see any mistakes :-) Fairfax_Equity_Holdings_Feb_22_2021.xlsx

Defining just exactly what ‘inflation’ is is part of the challenge. One example is real estate in Vancouver. Single family home prices are expected to increase this year 20-30% (maybe as soon as this spring). Crazy. And prices were already at bubble levels. This looks like asset inflation to me. Ever rising prices :-) So i agree rates and ‘inflation’ often don’t move in the same way.

Fairfax has a successful long term track record when it comes to investing in India. And i think they view Fairfax India as their growth vehicle of the future in India (for non-insurance companies). It appears Fairfax/Fairfax India likes what they have learned with BIAL and want to expand in ‘infrastructure’ type assets in India. The problem is these types of assets will likely be very expensive to buy. And Fairfax India simply does not have the $ today. And currently, neither does Fairfax (a spare $500 million or more kicking around). Anchorage should be a good way to monetize BIAL at a premium valuation and sign on the right like-minded partners with deep pockets and a long term view (like OMERS). If they are successful obtaining more infrastructure assets they should be able to find more partners and fund their contributions from further sales of Anchorage. So they use BIAL as a way to flip into a growing collection of infrastructure assets; and collect some nice recurring management fees along the way. But this will likely be a slow process as approvals can take longer than expected.

Nice to see Anchorage progressing... As Fairfax India sells off chunks they will get much needed cash and this will also validate the BV of airport which Mr Market is currently discounting heavily (in the share price of Fairfax India). It would be nice to the OMERS transaction close. And if they are able to bring in a couple more partners like OMERS over time the growth could be meaningful. -----------------Scanning railway station re-development and port opportunities Fairfax Financial Holdings Ltd, Toronto, Ontario-based financial holding company owned by Indian-born businessman Prem Watsa, is prepping up for a bigger play in Indian infrastructure sector beyond airports such as railway station re-development and port development and operation. Multiple people familiar with the plan said that Fairfax through its newly created wholly-owned Indian unit, Anchorage Infrastructure Investments Holdings Limited (Anchorage), has applied on nine railway station re-development tenders for New Delhi, Chhatrapati Shivaji Maharaj Terminus, Gwalior, Nagpur, Tirupathi, among others. “Anchorage will be the flagship company and platform for investing in companies and businesses and for bidding on all infrastructure tenders including the next round of airports to be auctioned,” one of the persons, a banker with the knowledge of the matter, said. Fairfax has also started consolidating all its India infrastructure investments under Anchorage. As the first step in this direction, it is in the process of transferring the entire stake in Bangalore International Airport Ltd to Anchorage. The stake transfer has received approval from regulators and existing shareholders of BIAL, an official with the Airports Authority of India said.

Added to Fairfax India.

And it is not a given that the current bull market in bonds is even over :-) Yes, we likely will see inflationary pressures in 2021 as the economy recovers. But in 2022 as the economy normalizes we may see disinflationary forces that were in place pre-covid re-established. No idea which way we go the next 10 years (mild inflation or disinflation / mild deflation). Lacy Hunt would likely say the core issue continues to be total debt. And more debt = more disinflation or even mild deflation over time.

I am wondering about how the US economy will develop each month as we progress through 2021. In terms of inflation pressures i wonder what will be one time (supply or demand shock) and what will be ongoing/secular. We also likely will see lots of crazy developments (like we are seeing in the shipping container market) and it will likely be difficult to separate short term impacts from those that last for years. 2021 could be a year where we see lots of noise given covid, government stimulus spending, historically low interest rates, people going stir crazy etc. Residential housing has the potential to be a big deal. Likely a secular economic driver given the under-building that happened for years post GFC. Historically low interest rates could over the next couple of years create another housing bubble in the US (happening everywhere else so this is my no brainer forecast). Housing is a big employer and driver of GDP so a residential housing boom would be very good for the US economy. The service sector of the US economy should also outperform big time as the economy slowly opens up. And this is a massive employer of people. And pent up demand should be especially strong here which would be very supportive for employment. I wonder how mall type retailers will do; how much purchasing has shifted to online. Makes sense parts of commercial real estate will face headwinds. When i weave it all together i think we are living through the grand experiment: does all the government spending result in a rapid recovery allowing the economy to return to close to full employment in 2022 or 2023. If this happens they will need to re-write economic text books (regarding what governments should do to combat severe recessions). In the short term the key stat i will be following is the 10 year US treasury; if trouble is brewing with inflation this is where we should see the first indications. Looking into 2022 and 2023 we will also start to learn if total debt levels matter (if Japan can be used as an example the early answer is likely ‘no’).

Stelco on Thursday announced it will be re-instating its $0.10/share dividend (suspended in 2020 due to pandemic. Fairfax owns 12.2 million Stelco shares so this will result in dividend income of CAN $1.22/ quarter or $4.88 million per year. Stelco also will likely be paying special dividends at some point in 2021 due to the spike in steel prices; during the last spike in prices in 2018 Stelco paid out $2.70/share in special dividends. Bottom line, the ‘interest and dividend’ bucket has been dropping like a stone for Fairfax the past 4 quarters. Q1 will also be challenged. However, as 2021 progresses and the economy picks up steam we should see this trend bottom and then actually start to grow again. Stelco is not a big deal on its own (large special dividend would be); however, when combined with other Fairfax equities the increases for 2021 should add up to a meaningful number. My guess is the ‘interest and dividend income ‘ bucket will be a headwind for Fairfax for 1H and a tailwind in 2H.

Not the start to 2021 that insurance companies were hoping for. Early days in terms of understanding actual costs but if this estimate is in the ball park... ouch! Anyone know what Fairfax’s exposure is to Texas? The silver lining for insurers is this will likely prolong the hard market for pricing, Biden declares major disaster in Texas as focus shifts to who is responsible for the winter weather crisis - https://www.washingtonpost.com/nation/2021/02/20/winter-storms-texas-weather-updates/ The catastrophic winter storm was expected to become the “largest insurance claim event in [Texas] history,” said the Insurance Council of Texas, a trade group, which estimated the damage would far outpace the $19 billion in claims from Hurricane Harvey in 2017.