Viking

Here is RBC’s current thinking on non-life insurance companies: 1.) We are confident that rate increases in excess of loss cost trends will persist throughout 2021. 2.) We are confident that companies will experience accident year margin improvement in 2021. 3.) We think it’s highly unlikely that 2021 loss events will exceed 2020s Catastrophe/Covid-19 totals 4.) In light of all of the above, ROEs should improve in 2021, which should drive multiple expansion. Mechanics of a hard market support our conviction More and more managements are calling the current pricing environment a “hard market” which means that capacity suppliers have the upper hand in price setting and capacity remains constrained. We would say the last hard market ran from roughly the end of 2000 through late 2006 with the strongest part running from 2002-2004. Historically hard markets play out in three stages: Initial phase: Rate increases begin to emerge. Margins are pressured by losses. Multiples start to reflect pricing cues. Typically lasts about 1 year. We see this as having occurred from 3Q19 to 3Q20. Middle phase: Companies begin achieving “rate on rate” pricing increases. Initial increases begin to earn into margins. Accident year margins improve. Visibility to ROE improvement and earnings growth improves. Multiples begin to expand to reflect both top- line and bottom line growth. Historically this phase can be as short as one year and as long as three years (2002-2004 for example). Late phase: Pricing power begins to abate, but it’s still favorable. Earnings growth begins to peak. Multiples remain firm but at an elevated level and become vulnerable to the cycle fading. This normally lasts about one year. We believe P&C insurers are near the end of the initial phase and moving into the middle phase. This is historically the best time to own the group.

My guess is if this scenario plays out we will simply see the hard market last longer. Insurers have been seeing inflation happen already for years on the cost side (social inflation). For non-life insurance companies the big question for 2021 is where does the current hard market go? Does it last all year and into 2022? What average rate increase do we see each quarter? Looks like Q4 2020 will see strong price increases with no end in sight. Yes other pieces are important: 1.) where does covid reserving go from here? 2.) how strong is the economic recovery? 3.) where do interest rates go? 4.) how bad is catastrophe season?

Is this supposed to be supportive of the bull case? Doesn't look that way to me. 12% ROE gives you a $70 per share net profit...that's today...gives you a 10 times multiple of around $700 per share or 1.2 times book. If they compound at 12-15% ROE for the next 15 years...what would you say is fair value for that business on a per share basis? From a price of $430 CDN today. Cheers! So what do investors think is a reasonable ‘normalized’ annual earnings number for Fairfax? Fairfax targets compounding ROE at 15% which, as an average, is clearly much too high (with bond yields crazy low). Sanj suggests ROE compounding at 12% (CAN $70/share) which I think that is also too high as a long term average. I think Fairfax will be able to compound ROE at closer to 8% with 10% being ‘aspirational’. So is earnings per share of US$40/year a realistic number starting from Sept 30, 2020? Last year Woodlock House capital estimated that Fairfax could hit a 10% ROE = 95% CR + 5% return on portfolio 10% ROE growth looks achievable as an aspirational target: 1.) CR: insurance hard market should see Fairfax able to post a lower CR in the coming years with 95 a reasonable target looking out 2 years. It will depend on the length of the hard market. Tailwind. 2.) return on portfolio: if we see an economic rebound in 2H 2021 and into 2022 then Fairfax’s equity portfolio should perform well. Tailwind. There is also a wild card with Fairfax: future asset monetizations. As the economy strengthens this will become another tailwind (realized gains and supply much needed cash). Fairfax share price US $335. Normalized earnings = $40/share = 8.4PE Dividend = $10 = 3% yield BV/share = $442 (Q3 2020) Below is Woodlock House’s valuation summary from Sept 2019 - https://www.woodlockhousefamilycapital.com/post/the-horse-story —————————————- Moreover, I think the assets collectively could generate a ~10%-type ROE. Watsa has made a public goal of hitting 15%. (FFH’s ROE was 15% in the second quarter, thanks to investment gains). 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.

To put it simply, Fairfax is a ‘hairy’ type of investment. The primary reason is ‘do you trust management?’ Too many times Prem has said one thing and something else has happened at the company. As result investors have to take everything Prem says with a grain of salt. The most recent example? The recent Globe & Mail article: “In the past, Fairfax has successfully positioned portfolios to take profit from market selloffs, using derivative-based investment strategies. However, Mr. Watsa said the company is not making bets against any stock or sector at this time. His focus is on finding underpriced, established companies that growth-focused investors overlook.” Does this mean the mystery short (that resulted in a couple hundred million in losses in Q3) is no longer is on Fairfax’s books? Or is Prem simply saying that no new positions have been entered into? The ‘at this time’ is also interesting... is this Prem’s attempt to flag this alternative is back on the table? Or is this simply the Globe saying a bunch of stuff out of context and Prem is the ‘victim’ here. My Christmas wish is Prem gets off the quarterly conference calls and stops doing interviews. The less he says in public the better. The problem is what he says, what he thinks he says and what investors hear are three different things. And this is not helpful for Prem, Fairfax or investors. Now does this flaw in Fairfax stop me from investing? No. That is because i think Fairfax 1.) is dirt cheap 2.) has lots of near term (next year) catalysts 3.) is slowly improving as a company Will Fairfax be a buy and forget type stock for me? Not right now. Too ‘hairy’.

The simple answer is you will put your money where it will give you the best returns. Bond yields have cratered. Why will we not see yields from other asset classes follow suit? As an example is this not what Flatt at Brookfield exxpects to happen with real estate (much higher prices and much lower yields)?

LC, i agree with you. My post above is done partly tongue in cheek - sort of :-) to stimulate discussion and thinking. I have been trying to wrap my head around what central banks have been doing (QE etc) for the past 8 years, watching governments everywhere take on crazy amounts of debt, watching real estate in Metropolitan Canada go through the roof etc. We seem to be on this borrowing binge and rates just keep going lower (which leads to more borrowing). Maybe it all does make sense. Low rates. Massive debt. Super high prices for financial assets. The new normal.

Central bank policy of absurdly low interest rates, which are here for years, are likely driving a big chunk of the increase in equity prices. And there is lots of room for stocks to go higher and perhaps much higher. Here is a parallel example. My guess is it costs about CAN$2,500/month to rent a 2,400 square foot house where i live in greater Vancouver (this is the suburbs) = $30,000 per year (this might be low). If you have a $1 million mortgage your interest costs are less than $20,000 per year (mortgages can be had under 2%; 5 year fixed rate). Property taxes are $4,500 per year. So it is very rational for people who are renting to buy single family homes right now even though they are at historic high prices - when viewed through a ‘monthly payment’ lense... kind of just like car payments, which is how most people think. That is what absurdly low interest rates do... they make $1 million mortgage homes ‘rational’ decisions for people who are thinking in terms of monthly payments. Factor in quality of life and it makes even more ‘sense’. So my guess is even though my house has gone from being worth $600,000 in 2010 (which i thought was very high at the time) to being worth about $1.25 million today, i see a scenario where it could easily go to $1.4 this spring and to $1.5 million next year. All driven by crazy low interest rates. And ‘monthly payment’ logic. I call it Monopoly money because that is what it feels like. I remember starting out in my first job and barely being able to save $200/month. Now my house is going up $60-$70,000 per year (and this is all tax free in Canada if it is your principal residence) for 10 years with no end in sight... ————————— My guess is the exact same thing is starting to happening in the stock market. With government bond yields below 1% and likely to stay this low for many years the multiple that is ‘rational’ for Mr Market to pay is much, much higher than we have ever seen before. Our brains are ill equipped to understand things we have never actually experienced before (‘impossible’ we say, only to see it sometimes actually happen). What if an average PE multiple of 40 is ‘rational’ for the stock market moving forward. Some years it goes higher and some years it goes lower than 40? Crazy low interest rates are here to stay. Maybe people better adjust their thinking about what this means for prices of financial assets like house prices, equities and bonds. —————————- And the really crazy thing is bond yields could easily be much lower in another year or two. What if the US sees negative government bond yields in 2021 or 2022? What if banks in North America offer negative mortgage rates in the next couple of years? Impossible you say? And if rates go lower what does that do to prices of financial assets? Another rung higher? ————————— I do expect an economic recovery to happen over the next year but how strong and how long? How much/fast does unemployment come down? Where do interest rates go 1year and 2 years out? Does disinflation grab hold again (30 year trend)? Or do we see higher inflation (if so, is it a short term jump or multi year?). —————————- Right now i am trying to stay inquisitive and open minded (my favourite Druckenmiller line) as i try to make sense of all the crazy things going on in the economy and financial markets :-)

If i had to identify a big risk (something to stop the bull market in its tracks) i would say the virus mutating into a more lethal version that the current vaccine’s are not effective on. (Not that i am trying to depress everyone :-) I think people are way underestimating the Fed and its commitment to higher asset prices in 2021. No way they allow a big stock market correction (which could leach through to consumer confidence and spending and the larger economy etc).

In terms of where the market is going to trade in the next month or two i really have no idea. However, when i look out 3-6 months i see lots that tells me stocks will be higher, especially economic sensitive stuff: 1.) vaccine is now in arm 2.) lots more vaccine news from other manufacturers is coming over next month or two and there is a good chance more vaccines will have good results/efficacy and be quickly approved 3.) US stimulus: looks like something will be approved. Most other governments continue massive fiscal spending and this will continue in the coming months. 3.) the fed will remain highly accommodative for all of 2021 and perhaps longer - this may be the single most important driver of stock prices the next couple of years 4.) the more people stay at home the more they seem to want to trade stocks; lockdowns might be bullish for stocks as people need to do something to keep busy 5.) asset allocation tailwinds: more portfolios will continue reducing bond % allocation and increasing equity % allocation 6.) businesses investment: businesses can now see the light at the end of the tunnel. They will start to spend to be in position to take advantage of the improving economy. This will be largely unseen but could be a significant tailwing starting soon. 7.) housing is on fire with no end in sight (thank you historically low interest rates): this is a big part of all economies and will be an engine of economic growth, especially in the US where they under-built for years 8.) lots of sectors in the stock market remain cheap (most are economically sensitive areas) and should outperform averages in 2021 - do people really think energy, resource, financials, pipelines, tel co’s are expensive right now? 9.) economic recovery will be global in nature; not one or two countries/regions (as is usually the case) but every country at the same time. Could be large. (In the near term China’s economy already looks to be performing well and may well lead the global recover this time around.) 10.) likely record pent up demand with consumers: economic recovery could be historic in size. People want out of the cage. In every country across the globe. My guess today is people are way underestimating the speed and strength of the economic recovery we are going to see in 2021 :-) Now will markets fall in the coming weeks/months? Sure. A 20% decline would not shock me. However, i do expect economically sensitive stocks to do very well over the next year. Perhaps we see a rotation from Zoom type stocks to resource/financials with the averages up single digits but big moves in different sectors. Just like in the late ‘90’s we might see year after year of higher stock market completely catching investors off guard (that is the risk of moving to cash to buy the dip). Back then it was .com stocks - they kept going up year after year after year. Made no sense but it happened. What happens when global banks keep interest rates crazy low for years? Everyone wants to know the answer to this question. Perhaps we get historically high prices in financial assets: stocks real estate etc. And perhaps we are no where near ‘high’ yet... now let that thought blow your mind :-) History does not repeat but it often rhymes :-) PS: in terms of the near term challenges with the virus, my guess is we get people slowly changing behaviour and it would not surprise me if we are at or close to peak numbers. People know the routine: wear a mask; socially distance. The holidays will just extend the peak; not result in catastrophic numbers like we saw in South Korea, Iran or Northern Italy in March/April. With every week that passes we are one week closer to recovery... soon we should see case count and then deaths fall and vaccinations shoot higher... this spring could be the inflection point when seasonality becomes a tailwind in the pandemic fight.

Thrifty3000, Fairfax should see a nice uptick in operating earnings Q4 and in each subsequent quarter moving forward (slow and steady is my guess). I think it was Q4 of last year where we first started to hear about a hard market and i think it takes about a year for written premiums to become earned (please correct me if i am wrong). So my guess is we start to see small improvements in underwriting results starting in Q4 of this year. One offset will be interest and dividend income which has been trending lower and likely will not bottom until the economy is stronger. Earnings from associates should also become a tailwind as we get further into the recovery. Any estimates here? Lots of tailwinds to earnings moving forward: 1.) underwriting - hard market 2.) dividend income - improving economy 3.) earnings from associates - improving economy 4.) investment gains - from mark to market portfolio 5.) realized investment gains - as further monetizations happen Headwinds? 1.) interest income from bond portfolio - if interest rates stay low what does Fairfax do with sizeable short term bond portfolio? 2.) need to buy out minority partner in Eurolife - versus better use of funds right now 3.) mystery short position that reared its ugly head in Q3 - ??? RBC just raised its outlook for entire non-life insurance sector. They feel hard market = improved profitability = improved ROE = higher multiple. Higher earnings combined with rising multiple is a strong combination for stock price appreciation :-)

Here is a link to the story that is not password protected. It is certainly encouraging to read about Fairfax investments that have the wing at their back. Most financials are still trading well below their year end 2019 stock price; CSB Bank is flat which shows nice outperformance. - https://www.rediff.com/business/special/how-kerala-based-csb-bank-made-a-dramatic-turnaround/20201127.htm

I’d listen to every call going back to the IPO in 2017 and maybe read the financials. Prem has no obligation to explain his investments in detail, and there is plenty of public information if you want to research it yourself. I don’t differentiate between an X% IRR achieved by traditional compounding or an X% IRR achieved by (say) special dividends coming out of a cyclical. I think we will do well from Stelco over the long term because of the relationship between the going in price and long term cash flows, and the quality of capital allocation. Time will tell. I was also thinking today... ‘what is Fairfax’s strategy with cyclicals’. And do they have an exit strategy? Is it total return? Stock goes up 75% or 100% sell for large gain? Or is it to own it long term and get paid via dividend and increasing stock price? We do know Fairfax is not buy and hold forever. And given their need for cash i would expect them to be opportunistic should stocks like Stelco and Resolute continue to rocket higher in 2021.

They have been injecting capital in their insurance before the pandemic started and ever since. Prem will have his "slug" of FFH shares, funded by some of the asset sales from the company's balance sheets. We just wont know when it will happen, but it will be sooner than we think (IMHO), for the simple fact that going-forward, as the recovery unfolds (while 2nd wave is playing 2 steps forward 1 step back), FFH's book value will pull the market value up in an absolute sense (simply said taking more investment $ for buyback), even if on a relative sense the discount remains there say 6 months from now. I’m sure Prem would love to buy back shares at this price. And he will. But I wouldn’t bet on it being big. The only way to sort out the holdco’s sources and uses issue is to increase dividend capacity from the subs, and the smartest way to do that is to put capital into them at the start of a hard market. I can’t really be bothered to debate this but I’ve seen people on here make buyback predictions based on relatively little information before, and then get annoyed with Prem when those predictions didn’t come to pass. The fact is that without insider info on the opportunities the subs have to write premia, you can’t know what Prem will do with the cash. I would be very surprised if they did a large stock buyback in the near term. Now if they sold an asset for a premium valuation (like Blackberry) then perhaps. But this is not likely in the near term. In terms of near term priorities for cash: 1.) funding subs in hard market 2.) funding likely January dividend 3.) take out Eurolife partner (OMERS) 4.) pay down debt (elevated since pandemic started) 5.) take out Allied partners (OMERS) 6.) large stock buybacks Fairfax may make a smaller stock buyback (couple hundred million). Once the economy gets going and they sell off some businesses for large gains and cash starts to build on the balance sheet (also driven by operating earnings) then perhaps meaningful stock buybacks will happen. My guess is we are 6 months away from this becoming a more likely reality.

Lots of love for Stelco; 2021 is shaping up to be a stellar year. Due partly to steel pricing and also the investments (capacity expansion) the company recently made coming online at the perfect time. Lucky and smart is a good combination... As a reminder Fairfax owns 14% of Stelco = 13 million shares. Shares were trading at CAN$11.36 on Sept 30. So shares are up over CAN $100 million in the last 10 weeks; this increase will flow though BV. Stelco has stated that earnings will largely be returned to shareholders moving forward. Their investment phase is largely completed. As Stelco earnings shoot higher we should see some combination of dividend, stock buyback or special dividend (or all three) at some point in 1H 2021. This would be good for Fairfax’s interest and dividend income. ——————————— Small cap to watch: This steelmaker’s shares have doubled since September and analysts are racing to hike price targets - https://www.theglobeandmail.com/investing/markets/inside-the-market/article-stelco-shares-are-trading-at-a-two-year-high-heres-why/#comments Shares of Canadian steelmaker Stelco Holdings Inc. are surging amid the rising price of its main commodity, supply shortages and the so-called “recovery trade” as investors start focusing on life after the pandemic. The Hamilton-based company’s shares are up 13 per cent in the past five days and have risen by about 120 per cent in the past three months. The stock traded as high as $20.52 in early trading on Friday, its highest point in about two years. Its all-time low since going public at $17 in Nov. 2017 was $3.24, reached in March amid the pandemic-induced market meltdown. Stelco produces and sells steel products including hot-rolled coil (HRC) and cold-rolled coil (CRC) to customers in the steel service center, appliance, automotive, energy, construction, pipe and tube industries in North America. The price of HRC, the company’s main commodity, has doubled since August to about US$900 a ton, which is helping to drive the stock higher, says Maxim Sytchev, an analyst and managing director of industrial products at National Bank Financial. Mr. Sytchev says the HRC price increase is driven by supply curtailments and a shortage of scrap metal during the pandemic “as it impacts the input pricing for electric arc furnace players.” He says the consensus is that HRC pricing isn’t sustainable at the current level, with average prices for 2021 forecast at about US$700 per ton. Mr. Sytchev has a “sector perform” (similar to hold) on the stock and a target price of $16, which he increased from $12 in mid-November “to account for better commodity pricing.” David Ocampo, an analyst with Cormark Securities, increased his target price on Stelco stock to $33 from $24 this week, after hosting the company’s executives for a day of marketing. “While there were no material updates during our day with management, we did come away with more confidence that Stelco is realizing the cost benefits and increased capacity from its recent blast furnace upgrade,” Mr. Ocampo said in a Dec. 11 note. He has a “buy” rating on the stock. Since emerging from bankruptcy protection in 2017, he said Stelco has “evolved from a producer bogged down by legacy costs to the lowest-cost integrated producer in the industry. With long-term contracts in place for many of its inputs, Stelco has a fairly sticky cost base relative to its competitors. In turn, this allows Stelco to generate superior returns at peak steel prices while still producing income at the bottom of the cycle.” Jennifer Radman, head of investments and senior portfolio manager at Caldwell Investment Management Ltd. says her firm bought Stelco shares in its Caldwell Canadian Value Momentum Fund in October, as part of a strategy “to run a concentrated portfolio of stocks we believe have strong catalysts to drive share prices higher.” Ms. Radman says steel prices are strong and keep moving higher, “but we also see company-specific catalysts with the recent completion of the blast furnace project which is expected to drive margin and volume upside, and allow Stelco to fully capitalize on the strength in steel prices.”

My read is Fairfax shares sold off so aggressively due to a number of reasons: 1.) fear of covid direct impact to insurance subs results 2.) fear of economic recession and subsequent hit to equity portfolio (comprised of mostly cyclical stocks) 3.) fear of active catastrophe season impact on insurance subs 4.) fear of bond yields cratering and impact on bond portfolio in future years 5.) capitulation in sentiment - shareholders throwing in the towel So we had shares trading below 0.6xBV in May. And then falling back to almost the same low in October - the stock was trading down 45% from January. I think sentiment is the key reason for the bloodbath - who wanted to own Fairfax? Despite the big gain in shares in November the stock is still very cheap. The question is who wants to own this company moving forward? Not many current board-members. I am happy to own it today primarily because i have not been scarred from having owned it the past 7 or 8 years. Shakespeare himself could not have written a more tragic story of woe. My focus is what is going on under the hood at Fairfax. My current view is there is much to like. As long as that continues i am not too fussed about the current valuation. What i have learned is eventually Mr Market figures things out. PS: or perhaps as Xerxes suggests, Prem will pull another rabbit out of his hat and find a creative way to buy back a slug of stock... something he has done in the past. That would be ok too :-)

Yes, i was thinking the same thing. Steel prices continue to increase. Stelco is positioned very well. Earnings should be very strong moving forward and management has said capital return is their focus. Gotta love cyclicals and the volatility. So Fairfax continues to trade 25% below where it was trading in January. Under the hood, many of their equity holdings are now trading higher than where they were trading in January. Their insurance businesses are in a hard market. Runoff was sold (will close in Q1) so liquidity is not a concern. At some point in time Mr Market will figure it out :-)

The Fairfax Africa transaction with Helios looks like a positive move for Fairfax. Time, of course, will tell. Clearly, unlike India, Africa was a bridge too far for Fairfax. This is another example of Fairfax (finally) recognizing a mistake and finding a creative solution. It took Fairfax many years to get their insurance businesses performing to an acceptable level. It looks to me like Fairfax is slowly making improvements on the investing side of the business. The overall quality of the equity portfolio they have looks to be slowly improving (looking from a multi-year perspective). —————————————- Fairfax Financial reboots its African investments with Nigerian-born entrepreneurs from Helios - https://www.theglobeandmail.com/business/article-fairfax-financial-reboots-its-african-investments-with-nigerian-born/ A pair of Nigerian-born entrepreneurs are out to duplicate in Africa what some of the world’s most successful asset managers have done in North America, with a helping hand from Prem Watsa, chairman and chief executive officer of Fairfax Financial Holdings Ltd FFH-T +0.03%increase . Tope Lawani and Babatunde Soyoye, co-founders of US$3.6-billion fund manager Helios Holdings Ltd., will close a merger on Wednesday with Toronto Stock Exchange-listed Fairfax Africa Holdings Corp. FAH-U-T +3.59%increase , which Mr. Watsa took public in 2017. The new company, called Helios Fairfax Partners Corp., ranks among the largest Africa-focused private-equity investors. “This is a new era for Fairfax,” Mr. Watsa said in an interview. He said the partnership with Mr. Lawani and Mr. Soyoye, a year in the making, is an example of Toronto-based Fairfax joining forces with proven local investors as the company expands globally. Fairfax also has a TSX-listed subsidiary that invests in India; Prime Minister Narendra Modi recently spoke at its investor event. For Mr. Lawani and Mr. Soyoye, marrying their 16-year-old firm with TSX-listed Fairfax Africa means gaining access to permanent capital for their investments, rather than constantly raising a fund, investing and then handing the money back to institutional investors. Trailblazing North American platforms such as Blackstone Group Inc., Brookfield Asset Management Inc. and Onex Corp. use the approach that Helios Fairfax Partners is adopting, with a public company parent overseeing a series of private funds. While Mr. Lawani and Mr. Soyoye are proudly Nigerian, they learned the investment business at a leading U.S. private-equity firm, Texas-based TPG Capital. Mr. Lawani, who holds an engineering degree from the Massachusetts Institute of Technology and a law degree and MBA from Harvard, worked on TPG buyouts of Burger King and brewer Scottish & Newcastle’s chain of 1,450 pubs in Britain. Mr. Soyoye, a British-educated engineer who also has an MBA, covered telecom and media companies at TPG. The two formed London-based Helios with backing from investors such as the World Bank, and raised three funds. A new, US$1.25-billion fund is currently being marketed. In a press release, Mr. Lawani said joining forces with Fairfax “will strengthen our ability to deliver on our mission to generate globally competitive investment returns and create positive socioeconomic development outcomes for Africa by building profitable, value-creating and socially responsible businesses.” For Fairfax, merging with Helios brings new leadership to an African division that has performed poorly of late, after making its debut on the TSX three years ago at US$10 a share. Over the past year, Fairfax Africa lost money on investments in several regional banks and its stock closed Tuesday at $4.04. Helios invests in a number of sectors, including financial services, energy services, telecom, media and technology. The fund manager owns businesses in 30 countries, including South Africa’s largest outdoor sign company, a Nigerian cellphone tower operator, insurers and pension fund managers. The merger will see Helios’s principals own 45.9 per cent of the combined public company, while Fairfax Financial will retain voting control. Helios’s founders are sharing 25 per cent of the carried interest – the profit the manager makes on its share of investments – in their first three funds with shareholders in the new company. It is common for founders to keep all the carried interest on older funds when selling private-equity businesses. Helios will evenly split the carried interest on current and future funds.

Good interview. Seems like a pretty bright guy. Lots going on with this company. Thanks fo posting the 10 minute interview.

Ok... another week another +$500 million increase in the equity portfolio :-) I added the BB debentures ( to provide directional valuation) and also added a bunch of the smaller positions that are on their 13F (Crescent Capital, Micron, Mastercraft, Lumen, Franklin, Alphabet, Fitbit and Gildan). US$ weakness is now starting to become a tailwind for non-US equities. My math says Farifax's equity portfolio is now up US $1.6 billion (+40%) since Sept 30. Crazy. - mark to market = $457 + $63 (ATCO warrants) = $520 million (= almost $20/share) For reference, FFH market cap is US$9.75 billion (Dec 4). BV = US$422/share (Sept 30). My rough estimate is Fairfax's equity portfolio is now a little < $1 billion from its value at Dec 31, 2019. (The stock is trading down 24% compared to Dec 31 2019.) What stocks are down the most compared to Dec 31 2019? 1.) Eurobank - $490 million 2.) Atlas - $315 million A number of equities share price is now higher than where it closed Dec 31, 2019 (BB, Stelco, Resolute, Quess). The interesting thing with the equity portfolio is nothing looks nosebleed (crazy high) value. This bodes well for continued gradual increases :-) Fairfax_Equity_Holdings_Dec_4_2020.xlsx

Stock market capitalization is closing in on 185% of GDP...long-term interest rates are near zero...you have bubbles in other assets classes...tech stocks are frothing at the mouth with Tesla leading the way at a 1,000+ P/E...government debt as a percent of GDP is hovering over 100%+ for most developed countries...consumers while paying down debt in 2020, still live hand to mouth for the most part...what happens when stimulus stops...I'd say the short position this time may have some legs going forward compared to after the tech wreck when they didn't invest heavily and held short positions. Cheers! After posting my last comment and thought about it a little more I also wondered if shorting Tesla right now actually makes some sense (not that we know that is the name FFH was short at end of Q3). So, yes, I agree with you :-)

Fairfax definitely has its flaws. The 800lb gorilla is the last short position they had at end of Q3 where they took a big hit. Q4? Who knows. So Fairfax for me is not a ‘hold forever; highly concentrated’ type of investment. However, there are many times when Fairfax has rewarded shareholders very well. Hopefully this develops into another good stretch for investors :-)

Yes, Fairfax has been a terrible investment for long term shareholders over the past 10 years. Yes, it HAS been a turd. However, what i really care about with an investment is where it is going in the future. Starting from today, the future looks very promising for Fairfax shareholders. You have the 3 key factors all coming together at the same time: 1.) insurance hard market: these happen very infrequently and are usually very profitable developments; Fairfax is taking advantage as their insurance businesses are solid. 2.) investments: bond portfolio is positioned ok; equity holdings are on fire (up about US $1.5 billion since Sept 30) and should do well in recovery trade expected over next year (their equity portfolio is loaded with cyclicals and emerging market companies) 3.) valuation: shares are trading a close to low historic valuation (Price to BV < 0.75) We are at the start of what should be a period of good to very good growth in BV for Fairfax. Increasing earnings + higher multiple = much higher share price. Druckenmiller says two key traits he looks for in new hires is being inquisitive and being open minded. Today Fairfax does not look like a turd to me.

What is the benefit to Fairfax of keeping a business like this private? I get taking it private at a low price; let the company mend itself and get it profitable. If the business is a high moat, predictable, growing cash machine i understand keeping it private (like a Sees Candy). However, will AGT ever be a predictable business? How profitable will a commodity business be over time? Growing profits over time? If they monetize core businesses like Riverstone my guess is AGT would be sold if the right price could be had. Fairfax has done a few deals where they marry a holding with a larger player to better position the company (and take shares in the larger entity). Lots of interesting options. For the past couple of years most of the equity transactions at Fairfax have been focussed on getting existing holdings positioned better to be successful in the future. Sometimes the solution is a split of the ‘conglomerate’ type business. Sometimes its a merger with another Fairfax company or an outside company. Sometimes it is a reverse takeover of an outside company. A few examples (there are others): - demerger of Quess from Thomas Cook India - split of IIFL into three companies: Finance, Wealth and Securities - Eurobank merger with Grivalia - AGT take private - Dexterra reverse takeover of Horizon North - APR spin into Atlas - Fairfax Africa spin into Helios These are not small transactions. And they take years to play out. Lots to be learned from these moves. The bottom line, Fairfax is being creative, learning from mistakes, trying to get companies positioned to be successful and taking a long term view. Their equity focus today appears to be on getting current businesses performing at a higher level and not new acquisitions. We have a long history with Fairfax of how they ‘fixed’ many insurance businesses over the years. Lots of steps backwards on the journey but they eventually got it right. It looks like they are using a similar playbook with their now substantial stable of non-insurance equity holdings. In aggregate i like the moves they are making and i think they will, over time, benefit Fairfax shareholders.

Globe and Mail handed out some awards a couple of weeks ago. AGT is owned by Fairfax and North Point Capital. IPO candidate? It is long article, mostly historical. I copied a couple of parts below. Innovator of the Year: How AGT Food’s Murad Al-Katib elevated Canada’s agriculture brand around the world The Regina-based CEO’s focus on plant-based proteins has opened Canada up to a $10.8-billion market - https://www.theglobeandmail.com/business/rob-magazine/article-innovator-of-the-year-how-agt-foods-murad-al-katib-elevated-canadas/ In the early days of the pandemic, when toilet paper and hand sanitizer were hastily hoarded and meat suddenly in short supply, grocery store shelves continued, nonetheless, to groan with bags of lentils, cans of chickpeas, and jars of black beans. Cheap, versatile and shelf-stable, beans were the perfect food for our emergency moment, and there seemed to be no shortage of them. At my house, our COVID cooking went in a related but somewhat different direction. We started regularly experimenting with Beyond Beef crumbles, a veggie ground meat that, it turns out, is a fine replacement for hamburger in tacos, bolognese and shepherd’s pie. Its chief ingredients? Yet more legumes—peas and mung beans, to be precise. Watching all this with interest, from his perch in the Prairies, was Murad Al-Katib, the CEO of AGT Food and Ingredients. Regina-based AGT is one of the world’s largest suppliers of pulses in the world, with 2,000 employees and manufacturing facilities in Western Canada and Quebec, the U.S., Turkey, South Africa and Australia. It supplies the peas that go into the popular Beyond Meat burger, as well as the products that make up Taman, Loblaws’s large line of Middle Eastern foods. But like everyone, Al-Katib was horrified by the loss and devastation wrought by the pandemic, and he was particularly concerned about what it meant for the global food supply. Suddenly, supply chains—rail, shipping—were gripped by delays. Where it would normally take a courier an hour to get payment to a bank, with everyone abruptly working from home, those payments now took days. Imminent product launches were shelved. Al-Katib had to temporarily lay off 75 employees at his head office. COVID-19 cases popped up at AGT plants in Alberta and Quebec. Especially in the confusing, ever-shifting spring, the future was uncertain. But since founding AGT in 2007, Al-Katib has made it his mission to make Canadian agriculture more resilient, nimble and sustainable. And, it turns out, even in the face of an unprecedented health crisis, it more or less was. The feds deemed agriculture essential and, after some initial hiccups, food kept moving. Restaurant orders dried up during the lockdown, but AGT had spent the past four years strengthening its ties to retailers, and global retail demand for those products boomed. “We essentially sold out the crop this year,” Al-Katib says. “The pandemic soaked up our available pulses, durum wheat, milling wheat and canola.” AGT was able to meet that demand in the spring, but by summer’s end, things started to get very tight. It was, for Al-Katib, a good problem to have. “What we’re seeing now,” he says, “is very good performance for the agriculture sector in Western Canada this fall. When supply depletes, prices go up and farmers plant more. And, ultimately, markets re-regulate. That’s the way the world works.” —————————— Like any startup, however, AGT encountered its share of setbacks. The company went public in 2007, just in time for the Great Recession. The convulsions of the Arab Spring made, for a couple of years, some of AGT’s key territories—the Middle East and North Africa—extremely challenging markets to do business in. In the wake of Trump’s election, there was, in Al-Katib’s words, a “whole nationalist, protectionist sentiment going on around the world.” India, with a protein-deficient market that AGT had really started to target, increased its import duties on pulses. In May 2016, AGT stock was trading at $42.05, but by the following year, it had plummeted, and its third-quarter earnings in 2017 were its worst in five years. That same quarter, however, the company’s balance sheet received a noteworthy shot in the arm: Fairfax Financial purchased $190 million of preferred shares in the company. “You don’t have to be a genius to know that when someone’s created a $2-billion company from scratch, there’s something special there,” says Prem Watsa, Fairfax’s founder and CEO. “When you examine his track record, you see that he thinks outside the box.” Watsa was similarly enthusiastic about Al-Katib’s successful bid in 2019 to reprivatize, with Fairfax and Point North Capital, another substantial investor, retaining their equity positions in the company. “The big advantage of being private is you don’t have to worry about short-term consequences,” Watsa says. “You’re building a company for the long term.”

Cardboard, my experience with Fairfax is it usually trades with lags on ‘news’ and sometimes considerable lags. And its moves (up and down) are often violent and can happen in weeks or a couple of months. This makes timing this stock week to week or month to month very difficult. My view continues to be that the shares are very undervalued. In the near term, Q4 is shaping up very well with equity portfolio performing very well and sale of Riverstone possibly bringing in almost $1 billion. If the vaccine news continues to be positive then my guess is Fairfax could grow BV nicely over the next 12 months (that 15% goal should be attainable) which would put BV over US $500. As BV grows this should also help sentiment and it is not crazy to think shares could trade at BV = close to 50% gain from here. My strategy is to sit and be patient especially when ‘the story’ is getting better... eventually Mr Market figures it out and Fairfax pops. PS: I remember back in the Great Financial Crisis when we all knew Fairfax was sitting on massive credit default swap gains and the shares were doing nothing... Mr Market eventually figured it out and when it did shares went up fast.