Viking

It looks to me like higher inflation in the coming months is now being confirmed by the data. As a result bond yields are once again moving higher. There are three key buckets to understanding Fairfax and its ability to grow BV: 1.) insurance: we are in the middle of a hard market 2.) equity holdings: have been on fire the past 6 months 3.) bond portfolio: this is the bucket that has been the biggest question mark the past 6 months. Fairfax is positioned very conservatively (with very low duration). They have positioned their portfolio to benefit from higher interest rates, which we are now starting to see. The question is now how fast will interest rates move higher and how high will they go? Higher rates will also impact the insurance and equity buckets. Higher rates will hit earnings and book value of insurance companies (as they take losses on their bond portfolio) and this likely will extend the hard market. I think the key for equity markets is the speed with which rates move higher: if rates (10 year US treasury) move quickly to 2% then equity markets could sell off aggressively. So my take is higher rates will benefit Fairfax in two buckets (insurance and bonds) and be a headwind for their stock portfolio.

Pedro, Fairfax’s long equity investments have been purchased with the objective to earn Fairfax a better return than bonds over time. These long equity investments will do well if they go up in price over time. The equity investments are volatile: as we learned last year, they can go way way down, and as we learned the past 6 months, they can go way up. I view the TRS as another equity type investment; and yes, it will be volatile. Shorting, either individual names or indexes, are a very different animal. Fairfax has proven to be spectacularly bad at shorting over the past 8 years; it is THE biggest driver of their underperformance. Fairfax has committed to no longer short individual companies or indexes moving forward. Given their track record the past 8 years or so i like this decision.

Right now Fairfax continues to be ‘cash poor’ (example: selling 14% of Brit to further delever balance sheet). Nothing that is a concern. They will have lots of good options in the future as more cash becomes available. 1.) deleveraging 2.) FFH buybacks - with stock trading below .95 x BV 3.) buy back minority stakes in insurance subs (Allied and Brit) My assumption is the insurance subs do not need cash to grow in current hard market (given positive earnings and their equity portfolio rising significantly)

The Covid situation in India is looking like Italy back in March of 2020 (a tragedy). I have sold my Fairfax India and purchased more Fairfax. For Fairfax, the Covid situation in India (and its impact on the economy in the short term) is the one negative i see right now.

On Friday RBC released its Q1 report on Fairfax RBC and raised its target price for Fairfax to US $550 (from $500). Fairfax has a very strong presence in specialty insurance and large account. These are the segments of the market that are experiencing the best rate increases and there is little sign that rates won’t continue higher throughout 2021 and likely into 2022. Equally, there is ample evidence that the rate increases achieved over the last 12-18 months are finding their way into accident year margins. For the quarter the accident year combined ratio was 90.9% we don’t the company has ever posted an accident year combined ratio that low... Bottom line, the P&C businesses have he best earnings visibility they have ever had and we don’t see any signs this will let up near-term.

If Fairfax had a strategic reason for taking Fairfax India private then i think they could worry less about the optics of purchase below BV. The immediate problem for Fairfax is where do they find the cash? They are selling 14% of Brit because they need cash to delever. And if they have some extra cash why not buy back FFH stock trading at 0.9XBV.

What Fairfax does with Resolute and Stelco will really depend on their assessment of whether we are beginning a commodity super cycle. If lumber and steel prices stay elevated for the year (as futures prices currently forecast) both stocks should trade much higher later in the year. And likely pay large special dividends. Resolute has a carrying value of US $134 million. The current run up in the stock price is not impacting BV. A sale would drive a nice increase both EPS and BV in the quarter it is booked. Stelco is mark to market so the impact on FFH EPS and BV is updated each quarter.

Below are some notes from Q1 conference call. The key take away for me is deleveraging (debt reduction) is the near term priority. $1 billion in debt reduction in Q2 and ‘further over time’. Smart to do this when times are good. Fairfax needs to re-build management credibility and this is another step in the right direction. This also perhaps explains why they increased the number of FFH shares owned via TRSwap (and why they did not just buy back more shares outright). The insurance side of Fairfax is performing well (thank you hard market). bond portfolio is positioned for higher rates. The stock portfolio is positioned for a rebound in economic activity (and higher stock prices for cyclicals). Stock is trading at 0.92 X BV which does not look expensive. If economic growth is strong in 2021 Fairfax’s stock price should continue to increase nicely. —————————— - virtuous circle: hard market resulting in strong growth and improving underwriting results. At same time value investing is coming back and delivering strong returns. Should continue. - mentioned BAC as equity holding? - deleveraging appears to be a priority. Will be reducing debt from $7 billion to $6 billion in Q2 and further over time. - total return swaps (ex Fairfax position). ‘Lots bought have already been sold’ (i think this is what Prem). Short term in nature. - significant holdings in cash and ST investments: will benefit if rates rise further. Bonds today offer no margin of safety. - insurance companies today are very well capitalized. Benefitting both from underwriting earnings and strong investment gains. - expense ratio improving as growth in premiums is being driven primarily by rate increases. - Riverstone UK and Brit transactions are linked. Riverstone UK transaction is expected to close in Q2. Hold up is CVC and their discussion with regulators. Once this deal closes, OMERS will be using part of their proceeds to complete their purchase of $375 million of Brit. - why increase size of TRS on FFH and not simply buy more stock on open market? Think stock at current prices offers very good value for long term investors. - priorities: 1.) strong financial position 2.) take advantage of hard market 3.) take advantage of stock price

Results were pretty much in line with what was pre-announced; my guess was earnings would hopefully come in around $30/share and that is pretty much what we got. BV was up nicely to US $497 despite US $10 dividend payment. Great quarter. Bottom line, Fairfax needs to continue to execute and deliver results (under promise and over deliver). - hard market is benefitting insurance companies - rebound in equity markets is benefitting investment portfolio (understatement) Interesting to see the increase in the number of FFH shares held via TRSwap (including April). I wonder what the exit strategy is for these? Some of their equity holdings continue to suffer from Covid; this will slowly become more of a tailwind as vaccinations increase and economies open back up. The interest and dividend bucket continues to fall; this might be a big deal for analysts (who tend to look only at operating income and ignore investment gains). Refinanced a bunch of debt in Q1 (lower interest rate and much longer 10 year term) at a cost in Q1 of $46 million. Great long term move despite hit to Q1 EPS. In Q2 FFH will be receiving $375 million from OMERS for 14% of Brit. Also $730 million from CVC for Riverstone. = $1,105. From this $500 million will repay the credit facility. What will the remaining $600 million be used for? I wonder if we see more share repurchases (they really seem to like that insurance company called Fairfax). And it put a smile on my face to read that they held NO short equity total return swaps

Castanza, very impressive. You are an artist... the finished product looks great! i am ok painting and simple jobs. The rental we are moving into i am completely repainting (including kitchen cabinets), new flooring in kitchen, upgrading some light fixtures and lots of other small improvements. And, yes, youtube is an amazing resource (i have tried to explain to my kids what life was like before the internet existed...)

What a crazy year it has been. Given the great news on the vaccine front the fog is starting to lift in terms of the economy and its future prospects. What are investors estimates for what Fairfax should earn in 2021, 2022 and 2023 (the next 3 years)? To get the discussion going i think the estimate put forward by Chris Mayer of Woodlock House Family Capital is a good place to start: 95% CR + 5% return on investments = stock trading at BV. (His comments are from Sept 2019 when the stock was trading in the US $440 range). If Fairfax delivers (especially on the investment side of the ledger) and investor sentiment (confidence in management) improves we may see the multiple expand to 1.1 or even 1.2 of BV. Bottom line, Fairfax continues to look cheap trading at US $458 and BV at $478. Q1 earnings should boost BV to around $500 ($10 dividend payment was paid in Q1 so my guess is BV could increase $30). Looking ahead a couple of years, Fairfax looks as well positioned to hit 95% CR as it ever has given the hard market. And its equity investments do not look overvalued at current price levels (when taken as a whole) so a 5% average return on the investment portfolio also looks doable moving forward. —————————- “Moreover, I think the assets collectively could generate a ~10%-type ROE. Watsa has made a public goal of hitting 15%... He says a 95% combined ratio and a 7% return on FFH’s investments gets to a 15% ROE. But in a low-interest rate environment, and given a large bond portfolio, a 7% return seems unlikely. But possible. Sustaining a double-digit ROE is key. (FFH can reach 10% by following a number of roads. For example, one road requires a ~95% combined ratio and ~5% return on its portfolio. That seems do-able.) Anyway, a consistent 10% would grow book value at a decent clip and then you’d likely get an additional lift from the valuation even if the stock moved just to 1.2x book. As RayJay reports, a comparable set of North American insurers with an 11% ROE trades for 1.7x book value per share.” https://www.woodlockhousefamilycapital.com/post/the-horse-story

One key will be wages. If the increase in prices results in workers demanding higher wages that will be a game changer (Inflation expectations). My guess is if we start to see wage inflation (not likely until 2022) the Fed will react. A second key will be commodities. Are we at the start of a super cycle? A third key will be how long it takes for the global supply chain to get back to normal once covid is in the rear view mirror (if that actually happens). A fourth key will be how much production moves out of China/Asia and back to the US (semiconductors is one example) and what that means for costs moving forward.

Privi Specialty had a cost of US$40 million and it sold for $163 which is a 4 bagger in Peter Lynch lingo. Not too shabby. On Dec 31 it was trading at 549. In March the stock was trading at 640 (exactly where it sold one month later). It is also a very thinly traded stock (74% of shares outstanding were owned by Fairfax India and ‘Mahesh’). I do not have any strong views on the discount paid to the current market price given the size of the position sold (48.8%), how much the stock had run up recently and how thinly traded it is.

Insurance companies have started reporting Q1 results. I like listening to WR Berkley to get a general sense of what is going on in the insurance business. The hard market is well into year 2 and will soon enter year three with no signs of slowing down yet (getting rate on rate increases and will soon be getting rate on rate on rate). Pricing in many lines is VERY good with focus shifting in those lines from rate to exposure. Economic growth (economy opening up) will drive further top line growth. Bottom line: well run insurance companies are making lots of money with the business they are writing today; top line growth is also very strong. This should be very good for earnings not just this year but also many years into the future. ——————————- Notes from WR Berkley Q1 call: - premium growth was a little over 11%; workers comp only area down and it may bottom late ‘21 or early ‘22 - re-insurance (+18%) now growing faster than insurance (+10%) - continue to see above average cat losses in the quarter - see ‘fair amount of runway’ for growth not just the next few quarters but the next few years - economic growth (as economy opens up) will result in growing top line - see opportunity to push rate higher (13%) - some lines rate is now good; will shift focus to grow exposure - are now getting rate on rate increases in excess of loss cost trend; soon this will be rate on rate on rate (3 years of this happening); ‘encouraging’ for margins - renewal retention is 80% (customers are taking rate) - watchout: covid may be masking loss cost trend severity / frequency - investments: focus is on total return with emphasis on alternatives; fixed income has 2.4 year avg duration and is rated AA- and is well positioned for rising rate environment - rates are so attractive in some lines (several hundered basis points in excess of adequacy) no longer trying for more rate; shifting focus to exposure - balance sheet / capital front: last 18 months refinanced a large chunk of debt (took out higher cost maturities); pushed out average maturity; lowered cost of capital 100 basis points; reduced interest expense +$20 million per year beginning in 2022.

Well, that certainly happened quicker than expected. Is this just the beginning of central banks moving forward their projection for higher rates or is Canada an outlier... ———————- Bank of Canada hikes growth forecast, could raise rates in second half of next year “The central bank said Wednesday that it will reduce its pace of Government of Canada bond purchases, known as quantitative easing, to $3-billion a week from $4-billion. The bank kept its overnight policy rate at 0.25 per cent, but shifted its forward guidance for a potential rate hike to the second half of 2022 from 2023. The bank now expects the Canadian economy to grow 6.5 per cent this year, up from 4 per cent it forecast in January, and notably higher than the 5.8 per cent GDP growth projection the federal government used in its budget on Monday. This revision is driven in large part by stronger-than-expected growth in the first quarter of 2021. GDP is expected to have grown by around 7 per cent in the first three months of the year despite a second wave of COVID-19 infections and heightened lockdown measures – a stunning 9.5 percentage points higher than the bank forecast in January. https://www.theglobeandmail.com/business/economy/article-bank-of-canada-hikes-growth-forecast-could-raise-rates-in-second-half/

Or the market does not believe prices will stay high for long enough to warrant a higher valuation. Is this a regular cycle (like a couple years ago) or a super cycle (much higher prices last years) or something in between. Stelco’s near term ‘issue’ is the hedge they took out in Q4; it will lower their profitability in Q1. But come Q2 they should be off to the races and profitability should spike (should prices remain at current levels). Resolute’s business is pretty diversified (lumber, pulp, paper, newsprint). Lumber prices are crazy; not sure about everything else.

I am a recent seller. Will be renting a 4 bedroom house. Moving from the burbs (walking distance to great schools and parks) to the city (walking distance to the beach and great restaurants). Both houses are located in great neighbourhoods (quiet, established, beautiful, good neighbours, lots of recreational opportunities). Proceeds from sale will be re-invested into stocks. Where I live (Vancouver) house prices in the burbs are through the roof and rentals in the urban parts of the city are somewhat plentiful in supply and rental prices are down about 8% year over year. All 3 of our kids will be gone in Sept at university and my wife and i are getting on with the next stage of our life: we are looking forward to playing tourist in a really fun part of Vancouver (especially with covid likely hampering international travel into 2022); and we will be much close to the kids which is what sold my wife on the whole plan (and explains the 4 bedroom rental... my wife was adamant the kids have a place to come home to when they want).

Reading all of the posts on this thread and it looks to me like we are seeing the initial result of all the Central bank easing/cheap money/liquiity/no recession (unprecedented) and government deficit spending (unprecedented except in war time). And people are sick of covid (and want to spend and enjoy life like rarely before). I am liking the whole ‘roaring ‘20’s’ analogy more and more. I wonder if we do not see the mother of all asset bubbles where everything goes straight up for the next couple of years. Like +50% (stocks) to 100% (US housing) from current levels. It looks like the stars are all aligned right now...

Canada is out with a new budget today (Federal Government). And the amount of spending we will see over the next 12 to 24 months is breathtaking. Please note, i did not put this post in the politics section because i am not looking to debate ‘good’ or ‘bad’ about what the Liberals are doing. It is what it is. What i would like to understand is how will this budget impact the Canadian economy (and Canadian businesses) over the next 12 to 24 months? My initial read is the amount of government spending will likely result in a short term boost to the Canadian economy over the next 12-24 months. Higher GDP growth in the near term (than otherwise would be the case). Much of the spending looks like it will be driven by deficit spending (not higher taxes). This in turn should be good for businesses and their profitability (and stock prices) in the near term. And Canada is not alone. Lots of governments are also running massive budget deficits in 2021 and 2022 (fearful of a disinflation/deflation downward spiral). When Jamie Dimon talks about an economy that rips higher for years is this not a big reason why? What is the negative in the short term? https://www.cbc.ca/news/politics/federal-budget-2021-freeland-zimonjic-1.5991021

Xerxes, I am not sure if the lower reported share count for RFP is due to an outright sale or if they were perhaps part of the Riverstone sale. We should know more in a few weeks when they report Q1 results and when the new 13F comes out. This is from page 11 of Prem’s letter in AR: “We began equity accounting RiverStone Barbados in 2020, so its investment portfolio is no longer consolidated. Within its investment portfolio are positions of many of the common stocks listed in the common stock holdings table above. For example, RiverStone Barbados owns 9.7 million shares of Fairfax India that are not included in the 41.9 million shares of Fairfax India we show in the common stock holdings table (combining both would give us 51.6 million shares or 34.5% ownership). The same can be said for a number of other holdings such as Atlas, BlackBerry, Commercial International Bank and Recipe. As part of the sale of RiverStone Barbados to CVC, we have the opportunity to purchase these securities over the next two years, at December 31, 2019 prices.”

I have completed another update of my spreadsheet that captures Fairfax equity positions (attached below). I matched the individual positions to the three buckets Prem outlined in his annual letter to shareholders in the annual report (page 10) and updated the share ownership amounts. a.) mark to market b.) associates: equity accounted c.) consolidated equities I also created a 4th bucket (other) to capture the FFH total return swaps, Blackberry debs and Atlas warrants. Does anyone know if these securities were perhaps captured in Prem's 'mark to market' bucket? There is $1 billion in bucket a.) that I cannot identify I will add Farmers Edge and Boat Rocket after we get Q1 results; there is too much noise to try and bridge what they were valued at Dec 31 and where they are valued today. Prem did say during the annual meeting Q&A that their values were marked up post IPO (there was a gain booked for Fairfax). Positions that are not disclosed or positions that are not traded on the stock exchanges (like other common stocks, limited partnerships, EXCO, Peak, KW Partnerships, AGT, other positions etc) are carried at last known value. This will understate values when markets are moving higher and the opposite when markets are moving lower. Please let me know if you see any errors or omissions (equity positions disclosed that I have missed). The goal of the spreadsheet is to capture, as best as possible, what is going on in real time to Fairfax's equity holdings. It is not meant to be exact; rather a rough approximation of what we can expect each quarter from Fairfax and their equity holdings when they report results. ---------------------- The key take away for me with the added disclosure from the AR is how large the market value of their various equity positions is: +$9 billion at Dec 31 and +$10 billion at March 31. It is also very diversified by business type and geography. It is also informative to look at the key changes in the equity portfolio over the past 2, 3 and 4 years (not in my spreadsheet). My key take away is the overall quality of the portfolio looks like it is improving. This is due to a couple of different things: 1.) problem companies are slowly being dealt with. Two recent examples: APR Energy (sold to Atlas), Fairfax Africa merged with Helios. 2.) largest recent acquisitions are performing very well: Atlas/Seaspan and Stelco 3.) portfolio managed by new blood (W Burton and L Chin) is performing very well. (Will be increased from $1.5 billion to $3.) 4.) companies are taking advantage of current hot IPO market: Farmers Edge & Boat Rocker. In the works (via Fairfax India): Seven Islands, Sanmar and Anchorage. 5.) strength in cyclicals is benefiting Fairfax. Resolute and Stelco are the two best examples here. Eurobank is also starting to move higher. 6.) strength in emerging markets is benefitting Fairfax. Their significant holdings in Indian equities has done very well and looks well positioned moving forward. Should the equity holdings continue to move higher in Q2 it will be interesting to see if Fairfax starts to monetize some of the positions that have increased significantly over the previous 9 months. Perhaps it is too early to be thinking about this given the significant economic growth expected in the coming quarters as the world economies start to open up post covid. Fairfax Equity Holdings Apr 1 2021.xlsx

It is crazy what is happening to lumber and steel prices. RFP closed Friday at US$14.79. March 31 its share price closed at $10.95. Fairfax owns about 30.5 million shares so its position is up close to $90 million in the last 17 days. Even though Fairfax equity positions were up significantly in Q4 and Q1 it appears Q2 is off to a nice start. Total position in RFP is now worth about $450 million. Its carrying value is $166 million; it is an associate/consolidated holding so gains in stock price are not mark to market. i wonder what the end game is with the cyclical holdings like RFP and Stelco. Long term hold? Or if share prices increase further from here do they look to monetize? As has been mentioned by Petec, both Resolute and Stelco will be significantly increasing their dividend in 2021 as they return some of their spiking free cash flow to shareholders.

I wonder if the analyst community will wait for the official release from Fairfax in May to update their reports to reflect Q1 results. RBC recently updated all their estimates for P&C insurers for Q1. Given the very strong results in the pre-release from Fairfax my guess is we will see some increases in price targets at some point in the next few weeks. For Fairfax here is what RBC was forecasting for Q1: - CR = 99% (actual = 96%) - net written premium growth = 3.6% (gross actual = 17%) - eps = $7.56/share (my guess is eps will be closer to $30-$35/share, given $875 in mark to market investment gains and 96% CR)

Prem did not name specific companies. I was referencing comments Prem made later in the Q&A when asked a question about non-insurance acquisitions. He said they had ‘deviated’ in the past. He was talking about the importance of management and went on to use Atlas and Stelco as recent examples of where they had gotten the management thing right. They had a run of a few years where they bought poor businesses with poor/questionable management and often kept throwing more money at them: Blackberry, Resolute Forest Products, and Recipe are a few that come quickly to mind that they still own. APR and Fairfax Africa had complete management overhauls in the past 12 months. I compare these past purchases to the more recent Atlas and Stelco purchases. Perhaps i am just hearing what i want to hear. But it looks to me like Fairfax has tweaked their value investing methodology and are placing a higher weighting on management when making their very large equity purchases. I think Fairfax has also learned over the past 7 or 8 years that they are not turnaround experts (at their investment office). Prem talks about how they run a lean head office.

The big takeaway for me from listing to the annual meeting Q&A: we can offially put a pitchfork in the 7 bad year stretch. There were 2 key drivers of the underperformance the past 7 years: 1.) terrible use of derivatives 2.) poor purchase decisions on a bunch of equity positions Moving forward, no more shorting of indexes or individual names. Prem also admitted they had made mistakes in the recent past on some of the equity purchases (poor management); less likely this will be repeated in the future (with quality management being a more important part of the purchase decision).