bluedevil

Agree - this was a point I made earlier that I think is important to understand about Fairfax. Markel, for example, doesn’t speculate with its bond holdings. It forecasts its insurance liabilities, then finds bonds that will come due when the cash is needed for customers (with a margin of safety) and keeps reinvesting the new cash - with an avg 3 year duration. The portfolio is not positioned long or short interest rates. There is exposure to changing rates, but it’s manageable - if rates go up 100 basis points, the bond holdings get marked down (BUT cash remains same bc they hold to maturity) and they reinvest new cash at higher rates. fairfax on other hand often has macro views about the future of interest rates and makes big bets on it, often amplified with options/contracts. At times they have made boat loads of money on these trades, at others they lost boatloads. personally, I don’t think it makes sense to believe that you have an “edge” over the long run betting on the future of interest rates. Fairfax has taken some important steps to reduce risks and let its strengths shine, but I would love for Fairfax to also stop with the macro interest rate calls and reduce overall leverage. that said I do think the current situation is asymmetric. Interest rates have much more room to go up than down, so protecting against a rise is very understandable. But I don’t think this should be how the company operates in the long run. It doesn’t need to do these types of “trades” to make a lot of money.

Question I have (as a shareholder of both the parent and Fairfax India) is why didn't Fairfax India have the opportunity to repurchase these shares, rather than the parent? Fairfax India is buying stock and recently paid $15 a share. Seems that Fairfax India would want to buy back more at $12.

My favorite part: We wrote $23.8 billion in gross premiums in 2021, which is up over $4.8 billion from 2020, essentially all organic. It took us 18 years to reach $4.8 billion. We wrote that in one year in 2021. Congratulations must go to all our presidents who produced this result.

Pretty amazing that GWP increased by $5 billion in 2021. Fairfax Financial paid $4.9 billion for Allied World, at a time when it had GWP of $3 billion per year.

I think on the duration of the bond investing, it is not really about lumpiness. I think it boils down to whether you think you can beat the market on a very macro topic - the future of interest rates. Both the Fairfax and Markel teams share a view that interest rates are too low and that bonds are probably not a great bet here. But Markel chooses not to speculate about when and how they may change. Instead, it tries to underwrite profitably, and takes the most spread it can get by picking and choosing bonds without incurring meaningful credit risk. I believe their view is that determining the future of interest rates is very hard and a field they would rather not play in -- instead they match the duration to when they need the money to pay policyholders. More broadly, i think this greater humility -- for lack of a better word - extends into Markel's thinking on other subjects. FFH over time has gone big in and out of stock positions. Markel is much more of a start small, dollar cost average in over time as you learn more type of style, and if you find something good just stick with it. Fairfax has hit many home runs in their past; but they strike out a lot too. We had "the seven lean years" and then the lost decade. I think FFH's insurance operations are excellent, and they have structurally built an investment program [unconstrained; long-term; permanent capital] that has inherent advantages over the average mutual fund that *should* lead to strong results. The key is to avoid losses that interrupt the progress. I think that can be done by focusing on organic growth [check] and really sharpening the investment program so it plays to FFH's institutional strengths. Being able to invest in private companies in India is a strength; being a permanent home to family-owned businesses in Canada that have businesses that dominate small niches is a potential strength; being able to predict the future of interest rates is not. I think they need to eliminate the bets on things where they don't have a clear edge.

The more years I follow Markel and Fairfax, there more I think some of the way Markel does many things is superior and would hope Fairfax would adopt it as well. One is bond investing. Markel doesn’t try to predict future interest rates. Instead it matches its bond duration to its insurance liabilities, and is careful as it can be not to incur credit risk by careful investing in top tier debt. Fairfax can hit more home runs by trying to time big moves in and out of cash versus the bond market, but that’s a very hard game for anyone - even a legend like Brian. Almost like shorting. Similarly, with private investments, Markel looks for very specific, clearly defined targets: firms that are market leaders in very niche fields: truck flooring; artificial plants; heavy cranes; and so on. It’s a field where they have specific competitive advantages. Far better defined than FFH’s strategy, and it has been very successful. I think FFH has already made some critical pivots that have made the business a stronger more durable one - for example, end to shorting, focus on organic growth in insurance. I think it could benefit from a couple more…

There is a very good gaming company available for cheap these days — Tencent

There is a lot of speculation and frenzy around the various crypto tokens. But as to Bitcoin - I think Miller and Saylor have very well reasoned arguments why it is a digital and far more advantageous replacement for gold.

I was thinking today about Prem Watsa's comment on the 3Q 2020 earnings call. Since then, Root insurance is down 90%, while Fairfax has almost doubled. Zoom has lost 62%, and Exxon has doubled. I hope this continues, versus the "confidence termites" taking out every one! * * * Let me just tell you, I've been in the business for 45 years. And I have rarely seen a time period where there's such a divergence from growth-oriented stocks like technology and value-oriented stocks. So, I gave you a few examples in our own portfolio. But let me just give you one that I just came across today. I just looked it up. I looked at it again. Zoom, which we all use Zoom Technology, Zoom video. It's got a market cap of $139 billion. At the end of July, for the first six months, it had a revenue base of approximately $1 billion and a net profit of $200 million. $139 billion that by the way, is about the same size as Exxon. So, we have this situation him where if you're growth oriented and it's growing significantly. And that you have market capitalizations that we haven't seen. And it can only be justified for a short period of time in the stock market. In the insurance business, and I don't follow this too much. And just know that insurance was a few days ago. Root went public, company called Root $7 billion. It's got $500 million of the premium. And it's $7 billion market cap is almost as big as Fairfax, which has $20 billion of approximately $20 billion of premium. Like exceptional divergence. And I've seen this over long periods of time. And it reminds me really of the late 60s and the early 70s when you had the Nifty 50.

Ki is a bit of a sad chapter to me. The massive money injection from Blackstone was seemingly necessitated because Fairfax couldn’t fund it during pandemic and liquidity issues, so now Blackstone has most of the upside. But hopefully the real upside is doing similar things that Ki and Digit are doing across all of Fairfax’s insurance subsidiaries.

+1!

Atlas is in a cyclical industry, but it is not a cyclical. It has the equivalent of 12 years of 2021 revenue contractually locked in!

I agree that it is likely 8-9% There is a reason that OMERS jumps at all of these deals!

Yes - I think this deal must be viewed as a form of secured financing (secured with a stake in ORH) / preferred equity. I don't think the valuation of Odyssey is real and wouldn't get excited about that.

FFH's premiums written are on pace to hit about 23.5 billion this year. Compare this to 15.5 billion in 2018. That means 8 billion in premium growth (growth of 50%) has occurred in 3 years, organically and profitably. Very exciting potential in the insurance operations -- and loads of potential organic growth remaining in India; middle east; latin america; eastern europe, and asia.

Wow!

The free book celebrating the 25th anniversary of Odyssey Re is a good read. https://odysseygroup.com/book/

Indian government (including both Houses of Parliament) have approved going to FDI of 74% rules still need to be finalized then Fairfaxs specific application to go to 74 needs to be approved both steps should happen at this point. not entirely clear but I don’t think FFH has to put in new cash I think the point of the converts was to allow FFH to go to 74% without new cash but has never been explicitly spelled out I think all this was a lesson learned from ICICI lombard when FFH helped build that for many years and then when ownership limits went up, their partner played hardball on how much they increased stake and cost

Thanks for the perspectives Sanjeev and BP. I suppose that is the concern I have -- that they will continue to be distressed value investors without reflecting on where that has gone wrong. I have grown skeptical that this approach will work the way it has in the past for a very large multi-billion dollar portfolio. There is a school of thought that given increased access to information and disintermediation of many industries the economy will be much more "winner takes most" going forward. There will be less cycles. We have seen that in search, in smartphones, in ecommerce, and may see it in many other areas. Companies that appeared cheap at the time were actually not cheap enough because they are losing to the company that is best of breed and is getting stronger with size, not weaker. That's I think one of the themes of FFH's investments over the past decade (GM and fiat over Tesla; BB over apple; torstar over Google, Toys R Us over Amazon, and so on.) There are good arguments that competitive dynamics in an internet connected world have changed, and HWIC doesn't seem to be grappling with that, at least at the surface. I think there are examples of hard-core value investors that have been more open to these ideas and profited from them, such as Tom Gaynor and Chris Davis. The new economic and industrial reality, as we see it, is shaped by winner-take-all dynamics. Informally, we call this the “One Room Hypothesis.” When everyone is connected, there is little reason for 2nd, 3rd or 4th place finishers. There are no intermediaries. Everyone is linked. There are quick responses. Less cycles. And most importantly: winner takes the goods. We have seen elements of this play out across the Search landscape (i.e. Google) and across the smartphone segment (i.e. Apple).

Not trying to debate the current valuation of Tesla. There are very thoughtful analyses that value the company far higher than its current market cap (see Baillie Gifford's writings). I don't know who is right, and I am not suggesting at all that Fairfax should be chasing these stocks at these prices. But it seems pretty clear to me that Tesla was--with the benefit of hindsight--dirt cheap at 30 some odd billion. Maybe the market is wrong today, but you could cut $300 billion in market cap off and it wouldn't change that assessment. At that time, it was Prem's assessment that it was wildly overvalued, not cheap. I think understanding why that assessment was wrong (and why Baillie Gifford was very much right) is important. Same with the other companies, like Amazon (where Baillie was also right). You can also debate how much Whatsapp is worth. But it seems clear to me that an asset with 2 billion users - !!! - it was acquired at a very favorable price; it was not a poster child of excess. It could be sold today for far, far more. Looking at P/E ratios in isolation has missed out on the most successful companies of the past decade. Not just successful stocks, successful companies. Many things that appeared "expensive" proved with the benefit of hindsight to be dirt cheap. It seems to me it is important to understand why that was so, rather than pointing to the past decade being a tough one for value investors.

My biggest concern with Fairfax -- one that has been bugging me a lot -- is whether the investment team has learned the lessons of the past decade and the underperformance. Clearly, some lessons have been learned -- for example, no more shorting. But a great degree of the underperformance had to do with fundamentally misevaluating the potential of disruptive companies and the damage they could do to others. Prem scoffed at Amazon's valuation at $167B (10x since then) and bought Toys R Us, scoffed at Tesla's market cap at $31B (20x times since then) and touted Fiat, and called Facebook's acquisition of WhatsApp at 19B "the poster child for the excesses that prevail in the tech world". These were MONSTROUSLY wrong calls. That's fine, Prem's position was a reasoned one. But what concerns me is that there appears to be little reflection on why the view was wrong and how the investment approach may need to change to adjust for it. His most common refrain is that it has been a tough decade for value investing. And he was on record at the end of this year as saying Shopify's valuation was insane. But what he pointed to was only p/e, which is the same lens that missed Amazon and Tesla and WhatsApp. Even when Fairfax bought Google recently, the rationale was that the P/E got low enough, and then it was sold when the multiple expanded. Again, seems like a very simple lens that may not work as it has in the past. I am bullish about the prospects of Fairfax going forward, as I think the company has a lot going for it. But I would love to see evidence of more reflection and adjustment on the individual stock assessment over the past decade.

Agree. When you have a better mousetrap + great execution + a huge addressable market, you have the opportunity for explosive growth. Who knows what the future holds and whether Digit continues to win with customers and gain market share in the manner it has through its strategy (simplicity + tech enabled ease for customers) but the runway here is wide and very long. One more thing. FFH has operations around the world. What is TRULY exciting is the potential to replicate this model around the world where we already have tentacles. Fairfax should be trying to copy Digit around the world as fast as it can, particularly in developing economies where it has more consumer facing businesses in auto and health —— or others will!!

At this rate, Digit will be worth more than the rest of Fairfax in the not too distant future. I say that tongue in cheek, but it actually wouldn't surprise me. Digit is winning with customers; it is built on highly scalable technology; and it has a huge potential market. Prem's pivot from ICICI Lombard to Digit was a masterstroke, and may bear great fruit in the future.

To FFH's credit, they have been very clear that the believe Fairfax India is undervalued, so if they are able to unlock value down the road, i think hard to say shareholders have not been warned. For example, Prem has been pretty clear that he thinks BIAL is worth significantly more than what they have it marked for and that it will be reflected when it IPOs. I do not think a FFH takeover is in the cards any time soon, even if they wanted to do it. Fairfax India was started for a simple reason -- FFH is limited in how much equity it can put to work in India by regulators and rating agencies, so this was a way to leverage the large opportunity set they saw -- part ownership, and earn fees from rest. One question I have. The entire premise of FFH's step up in investment in India was Modi, who they believed would have a long tenure. But the COVID delta outbreak seems to have really hurt him. If he is not re-elected or his party is diminished, not sure where that leaves the global thesis.

Lightning strikes twice! It particularly makes sense because they hold the debenture. They can still keep big upside exposure if BB is acquired, but have no real risk of losing money. I think that has been the plan since the original debenture was put in place but prices never got high enough to sell off the common equity position.