Viking

Each year i like to do a ‘Top 10’ for Fairfax. What do i think are the top 10 events driving shareholder value for the past year? I list the items in rank order of importance. I find it is useful at the end of each year to sit back and reflect on the year. This exercise is especially useful looking back a couple of years. Ultimately, it is the cumulative effect over many years that really matters to shareholders. Before sending out the list for 2022, i thought it would be fun to re-post the unedited prior year ‘Top 10’ lists. So over the next few minutes i will dig out and re-post the past few years. And over the next day or two i will also post my 2022 list. I look forward to everyone’s comments.

@Crip1 I agree that BV is generally a pretty good way to value insurance companies. But I think there has been so much happening at Fairfax over the past decade that today BV is not a very good way to value the future earnings power of Fairfax. I continue to think that Fairfax should be able to earn US$100/share (after tax and minority interest) in 2023 and 2024 = 6PE (with shares trading around US$600) and that is wicked cheap. ---------- Does anyone seriously think Fairfax has grown intrinsic value (as measured by BV) by a total of US$218/share = 58% over the past 13 years? Fairfax of 2009 is nothing like Fairfax of 2022. 2009 Sept 30, 2022 Increase Book value/share US$370 US$588 $218 +58% Over the past 13 years (from 2009 to 2022) Fairfax has increased net premiums written by 414%. It has also increased investments by 140%. 2009 2022 Net premiums written $4.3B $22.1B (9 mo ann) +414% Investments $21.2B $51B (Q3) +140% Net debt $1.1B $7B (my est) +540% Share count 20M 23.4M +17% Fairfax's earnings power has increased significantly from 2009 to 2022. Much more than the 58% increase in BV. Yes, the increase in debt has helped. As has the increase in share count. underwriting investments total shares outstanding 2009 $215M $1.3M = $1.515 billion / 20M = $76/share 2022 Est $1,105M $3,060M = $4.165 billion / 23.4M = $178/share = +134% Underwriting = 95%CR Investments = 6% total return (interest & dividends + realized and unrealized gains)

I wondered why Resolute shares were up 5% today. Great news. The sooner Fairfax gets the cash from this deal the better. With stocks aggressively selling off again there are lots of other great opportunities for Fairfax to redeploy the proceeds into other solid equity opportunities that should compound nicely for shareholders in the coming years.

Rooms starting from 1,500 euro per night… pretty spectacular place. Definitely a trophy property. It would be interesting to understand the economics of catering to the ultra-rich.

Happy holidays to all board members. Sanjeev, thank you for starting this board 20? years ago. The insight and advice received over the years has been life changing for me and my family. This board really has been the gift that keeps on giving. Thanks also to all board members for sharing their thoughts, perspectives and knowledge. Thanks also to those who posted in the past… i especially remember bsilly for helping get us through the especially dark days (back in 2003 when Fairfax traded under C$100)… All the best in 2023! Crazy that another year is almost over.

Michael Pettis is one of my favourite China watchers. He has a great perspective of how China has developed the past 40 years and where it is at today. Bottom line, they might be where Japan was in the late 1980’s - in a heap of trouble. China’s fundamental problem is the institutions that drove its growth the past 40 years need to change. And doing so is exceptionally hard to pull off. Local government and a property bubble bigger than the one Japan experienced. This is not to say China will not muddle their way through it. Pettis’ comments are pretty wonky… so you have been warned. ————— Lead-Lag Live: the China shock is coming with Micheal Pettis https://www.youtube.com/live/mX8vyRXHCP8?feature=share

@Sweet i subscribe to @SharperDingaan’s strategy of renting, not owning, oil. The volatility of oil in 2022 has been pretty wicked. I buy on weakness and sell on strength. If we get a nice 10% pop from current levels i will be happy to sell. And i also really like the long term set up for oil so i also do not mind simply holding. Meanwhile, i get paid 5% while i wait. This is my 4th time owning oil this year. Rinse and repeat. After Fairfax, oil has been my second best performer. And i expect this to continue into 2023. It also helps that my oil is in tax free accounts (TFSA, RRSP, LIRA, RESP - Canadians really do have a wonderful suite of vehicles that can grow significantly in size with 20-30 years of tax free compounding).

Oil/energy: what a delicious set up for investors. Tight markets. Major producers, Russia and Saudi Arabia, want higher prices. US needing to re-fill SPR. China reopening. Oil stocks look to be the gift that keeps on giving for investors in 2023. ————— Oil Prices Jump After Russia Says It May Cut Production - https://oilprice.com/Latest-Energy-News/World-News/Oil-Prices-Jump-After-Russia-Says-It-May-Cut-Production.html After two weeks of silence in detailing how it would react to the G7 oil price cap, overnight the Kremlin raised the stakes for the west when state-run Tass news service quoted Deputy Prime Minister Alexander Novak as saying that Russia may reduce output by 500,000 to 700,000 barrels a day in response to the cap.

I agree, using a 0.9-1.1 x BV multiple makes sense. Here some additional catalysts: 1.) buybacks and how aggressive Fairfax is moving forward. Fairfax could take out 150,000 shares a month = US$90 million. If they did this for an extended period the stock would likely pop and likely trade north of the 1.1 x BV range. 2.) the investment community. Fairfax was a hated stock. As the investment community comes to understand the size, consistency and durability of future earnings, Fairfax could exit the penalty box and once again be viewed as an ok stock. This would push the multiple higher. 3.) real and growing earnings. In today's world near term cash type earnings are becoming more highly valued given their scarcity. Earnings at Fairfax will be primarily driven by underwriting profit and interest and dividend income, which is highly prized. ————— With Fairfax today we have the perfect set up for a stock: 1.) cheap valuation 2.) much higher and growing earnings 3.) growing PE multiple 4.) meaningfully lower share count We will see what actually happens in 2023.

SU, CNQ, TRP, GOOG, AMZN, PYPL, DIS. Continued to lighten up on FFH (now below a 30% position).

@allycat18 welcome to the board. Obviously trying to predict a price on any stock 12 months out is pretty much impossible to do with any sort of certainty, especially given the current environment. Having said that, here is how i look at Fairfax. i break things into what Fairfax controls and what Fairfax doesn’t control. What Fairfax’s controls: I think they will earn +$100/year on a normalized basis in 2023 (and 2024). The rub, of course, is ‘normalized’. Because we are not in a normal environment right now (middle of a bear market). We also have no idea how big catastrophe’s will be in 2023… maybe we get ‘the big one’. Assuming the market multiple stays the same, $100 seems like a reasonable increase in the stock price looking out 12 months - on a normalized basis. Now Fairfax’s multiple is low; if we get multiple expansion then that would drive the stock price higher. Three wild cards are: 1.) more large asset monetizations (i.e. something like EXCO, their net gas producer) 2.) successful IPO of Digit 3.) meaningful share buybacks - something close to 8-10% of shares outstanding These would also drive the stock higher. What Fairfax doesn’t control: 1.) the biggest risk that is see is a global recession. All central banks are now tightening (ECB becoming very hawkish). If equities sell off 20% from current levels (as Morgan Stanley expects… and they have been pretty accurate so far this year) my guess is Fairfax’s stock price will also get hit hard. 2.) the risk of a year of even higher catastrophe losses (even higher than record levels of recent years) is real as well. This would hit all insurance stocks hard. 3.) if the hard market in insurance comes to a quick stop in 2023 this might hit market multiples hard and cause a sell off in all insurance stocks. If any of these events happen then Fairfax’s stock price will likely get hit. If they all happen (as anything is possible), well…, look out below. My strategy is two-fold: i have a core position of Fairfax that i plan on holding. And i have an opportunistic position in Fairfax that i will sell down on strength (i have been selling some Fairfax given its 30% move over the last 6 weeks and the renewed sell off we are seeing in the overall market - pretty everything else is getting much cheaper). Bottom line, Fairfax is very well positioned today. It has had an exceptional 2022 and the set up for 2023 looks even better. In the 2020 bear market Fairfax got killed. In the current bear market Fairfax is thriving. Crazy times!

China is a communist country. ALL THE MATTERS IS THAT THE COMMUNIST PARTY STAYS IN POWER. There is no rule of law. There are no property rights. There are no individual rights/freedoms. There is no freedom of the press. There is no capitalism. Everything that exists in China is a mirage. Everything (and everyone) exists to serve the Chinese Communist Party. It is not that complicated to understand. The economic model will change to whatever the CCP feels serves its needs the best. Parts of it might look like a capitalist model today. But that means little. It is built on a foundation of sand. And a storm has been raging for a few years… and as the sands shift it is getting hard to make the old model out…

ING’s latest (Europe focus): Energy Outlook 2023: Oil, gas and power markets to remain tight “…However, the impact of the EU ban on Russian crude oil is still playing out, and we will have to wait until early February for the ban on Russian refined products. The ability of India and China to absorb a still more significant amount of Russian oil is likely limited. As a result, we expect Russian supply to fall in the region of 1.6-1.8MMbbls/d Year-on-Year in the first quarter of 2023.” - https://think.ing.com/articles/hold-energy-outlook-2023-oil-gas-and-power-markets-remain-tight-in-2023/#a1

Good 1 hour discussion on oil and refining from someone knowledgable (Rory Johnston) who is not trying to sell you anything. Lead-Lag Live: Is Oil Set To Collapse With Rory Johnston https://www.youtube.com/live/501WAYFLpmM?feature=share&t=1

It is highly likely that Fairfax will buy back a significant number of shares over the next couple of years. Why? 1.) capital allocation priorities: - The hard market in insurance is drawing to a close. Funding growth of subs will be less of a priority. - While debt levels are elevated, the company is not over leveraged. I also expect earnings to be significant in Q4 and 2023 so this will help. So debt reduction is not necessary. - That leaves share buybacks as the obvious choice. I expect NCIB purchases to be meaningful in Q4. I think Fairfax could take out a million shares quite easily over the next year. It could be much higher. - We could also see Fairfax continue to take out minority shareholders in 2023. Perhaps they buy another slug of Allied. Or perhaps Brit. Or a slug of Odyssey. 2.) cash flow should be robust. Fairfax will be earning record amounts from underwriting and interest and dividend income. An average of $600 million per quarter moving forward (pre-tax and before minority interests). 3.) future asset monetizations - more are likely coming in 2023. Trading at under US$600, stock is still crazy cheap. My guess is Fairfax will utilize the NCIB in 2023. If so, this could just keep powering the shares higher for an extended period.

The world is not short oil reserves. The issue is oil is the devil. The capital is simply not available to develop the reserves. Banks can’t lend to oil. Institutional money can’t own oil equities. ESG is growing as a movement so this will only increase as a constraint. Western governments are also getting increasingly hostile to big oil. This will only get worse over time as climate change becomes more apparent… we will need to blame someone for $150 and likely $200 oil (not to mention the more frequent and more destructive natural catastrophes). Big oil has a bulls eye painted on their backs. Oil executives also know growing production will not get the bulls eye off their back (if anything it will only make the bulls eye bigger). So what isa rational oil executive to do? They will prioritize returning cash to shareholders. As much as possible as fast as possible. Except for shareholders, pretty much everyone else is trying to put you out of business. Does Venezuela have a shit ton of oil? Yup. But who is going to pony up the $ to get it? Especially in a country with maximum political risk? Big oil is desperate to exit operations in countries like Canada. We really are in a brave new world when it comes to not just oil but most commodities. It will really become apparent when we get to the next global expansion (2024?). My read is supply will simply not be able to keep up with demand… at any price. With ESG/government demonizing energy/mining etc, supply will not increase much moving forward. But demand will and by a lot. And guess what spiking commodity prices will do to inflation… Like i said earlier… brave new world.

The key to pricing for any commodity will be demand and supply. Looking out 12-24 months i am quite optimistic oil prices will be higher and probably much higher. Over the next year, absent a severe global recession, i expect oil to do ok ($75) to very good (+$100). So lots of volatility just like 2022. Demand: - China ending zero covid should add +1 million barrels per day, but likely with a delay into Q2 - slowing global economies is a big unknown. Hard landing is only scenario where global demand actually goes down and i don’t think that is in the cards. - US. will need to re-filling SPR at some point. Supply - capex across the globe remains muted so supply will increase but modestly. - US will be ending releases of SPR at some point in 2023 = reduction of 800,000 to 1 million barrels per day. - Russia: given sanctions and much lower capex spend (lower in 2023 than during covid in 2020) i would expect supply from Russia to decline over time. No idea of cadence (how much how fast). - OPEC: appears to want oil in $80-90 range. Given how tight oil market currently is OPEC might get their wish. Ukraine war is a wild card. Weather in Europe is a wild card.

I think China is an important player in the war. China’s support of Russia is already accelerating the West’s move away from China. I am not sure China wants the West to accelerate its pivot even further as it would have more severe economic consequences for China. The chip sanctions were a shot across the bow. If Russia escalates the war into other European/NATO states then China will likely experience collateral damage. US and European hawks will have a field day. And it could be severe for China. 2023 is shaping up to be another very crazy/interesting year. The geopolitical world is shifting. And in a big way. The iron curtain coming down in 1989 was a big deal for global economies and financial markets. China joining the WTO in 2001 was also a big deal. Both developments ushered in decades of global prosperity. As 2022 draws to a close we now know BEYOND A REASONABLE DOUBT that those days are gone for good. A thing of the past. Russia and China have decided it is time for a new global regime. They have decided the global world order needs to be disrupted and at its very core (taking a page from Clayton Christensen’s book The Innovator’s Dilemma). Russia and China feel they have leverage over the West and the time is right to exercise that leverage. Long live authoritarianism. The split of the world into two blocks (authoritarian vs Western democracies) will be equally as impactful and will play out over decades.

Please keep the posts coming… lots to think about.

Bought SU, BAC, GOOG, AMZN, PYPL. Lightened up a little on FFH (still way overweight).

Making money (what we all really care about) for the past 10 years was really all about following the Fed. That was even more true as we began 2022. At the beginning of 2022, the Fed told everyone it was raising interest rates… and what did we get? Worst results in bonds since American independence in 1776 and a bear market in stocks. Ouch! But we all were given fair warning. So what did we learn from the Fed today? They are going to raise the Fed Funds rate to +5% and keep it there for a long time. What did financial markets do? They yawned. Really? So as we close off 2022 we have a really interesting set up for investors. Now i could go off on a tangent and talk about conspiracy theories and UFO sightings and secret meetings… but hey… what is an investor supposed to do with that? Lets get back to reality… So as we close off 2022 we have a really interesting set up for investors. Someone is wrong: the Fed or financial markets. If the Fed increases the Fed Funds rate to over 5% and keeps it there for most of 2023 then stock averages are going to get torched (hello S&P500 at 3,300). Bonds? I’m not sure where yields go across the curve… short term yields rise and perhaps long term stay kind of where they are? Or maybe the bond market is right… inflation comes down aggressively and by mid-2023 the US is in a mild recession (bringing inflation down even faster - perhaps close to 2%)… and the Fed actually cuts rates in 2H 2023. Bonds rock and stocks do ok (setting the table for stocks to rock later in 2023 and 2024). I am wondering in 2023 if we do not get a slowing economy/perhaps even a mild recession with the job market remaining relatively resilient. So what is an investor to do? Short answer: i’m not sure. We still have a few weeks to figure it out… early January is when we usually post our top ideas/themes for 2023

Understanding supply and demand is key to understanding the price of a commodity like oil. What have we learned the past month? 1.) China is officially abandoning its zero covid policy. Which of course will stimulate demand for oil in the coming months. 2.) Russia… i am not sure anyone understands what is going on in Russia today from a supply perspective (other than they appear to be hanging in there). What is clear is upstream investment will be down about 30% in 2023 (below covid levels). This suggests to me Russian production will struggle to remain flat moving forward and will likely fall. 3.) US SPR release: this is set to end any month. 4.) does the US enter a recession in 2023 as predicted by many? Bottom line, driven by China’s reopening, looks to me like oil markets will remain tight. ————— Russian upstream investments set to plunge by $15 billion this year as sanctions obscure production outlook - https://www.rystadenergy.com/news/russian-upstream-investments-set-to-plunge-by-15-billion-this-year-as-sanctions-o The financial impact of Western sanctions and the widescale exodus of foreign partners from the Russian oil and gas sector are beginning to materialize, with upstream investments set to sink to $35 billion in 2022, according to Rystad Energy research. Before Russia’s invasion of Ukraine in late February this year, upstream investments in Russia were expected to approach $50 billion in 2022.

@StubbleJumper thanks for taking a stab at the math. What a crazy (good) year for Fairfax. I hope Fairfax continued to add to the duration of the bond portfolio in Q4. Duration increased from 1.2 years in Q2 to 1.6 years in Q3.

@StubbleJumper great question. When Fairfax reported Q3 I was surprised the net loss from bonds was only $240 million (after hedge). It was $150 million lower than Q2 - even though the absolute interest rate moves in Q3 were larger than Q2 across the curve. So I wonder if we are not now seeing - as bonds held shrink in duration and get closer to maturity - a small unwind each quarter in the unrealized loss bucket. Which is what Fairfax told us would happen (the unrealized $1 billion loss in bonds would reverse as they are held to maturity). After doing more of a deep dive this morning I think my $250 million number for bond gains in Q4 is too high. I was overestimating the gains (further out on the curve) versus the losses (on the shorter end). My new guess is something closer to zero. Fairfax will see gains in Q4 from their longer term bond holdings. In Q3 they were very aggressive adding $4.1 billion with a 3-5 year duration. Their total bond exposure of 3 years and longer went from $2.5 billion to $6.9 billion = + $4.4 billion. My guess is Fairfax likely continued to add bonds of 3 year or more duration in Oct and Nov. Yields on longer term treasuries peaked around Nov 7. If Fairfax continued to be aggressive adding to duration in Q4 then the gains from falling bond yields will be even larger in Q4. Offsetting the gains on longer term bonds will be unrealized losses on shorter duration bonds as short term rates continue to march higher. The bottom line, Fairfax's bond portfolio is in very good shape and they are positioned very well for the current environment (lots of unknowns). My guess is big unrealized bond losses are a thing of the past. And now Fairfax shareholders will enjoy much higher interest and dividend income. So it was 9 months of pain (and $1.1 billion net loss on their bond portfolio). Moving forward, Fairfax shareholders will now reap the gain of higher interest rates.

As of today, it looks to me like Fairfax is set to report Net Gains on Investments of around $2 billion in Q4 = $450 (equities) + $1,300 (pet insurance) + $250 (bonds). Over the first 9 months of 2022, Fairfax had booked a $2.3 billion loss in the 'Net gains (losses) on investments' line item. If Fairfax comes in around $2 billion in Q4 they would reverse most of the YTD loss. That would be amazing, given we have just had bear markets in both bond and stock markets. Importantly, the investment portfolio at Fairfax looks well positioned and should deliver better than average returns moving forward. ---------- As of Dec 9, Fairfax is sitting on about $1.14 billion in gains on its equity holdings (that I track... I attached my Excel spreadsheet below). Here is the split by 'bucket': 1.) mark to market = +$450 million (incudes TRS, warrants etc) 2.) associates = +$500 million 3.) consolidated = +$190 million Big movers? - Eurobank = +$299 - FFH TRS = +$226 - Fairfax India = +$181 - Atlas = +$180 - Quess = - $109 - Stelco = +$105 Fairfax Equity Holdings Dec 9 2022.xlsx