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There does exist a downside that we can't just wish away. Effectively, duration is the sensitivity of the value of your bond port to a change in interest rates. So, if you have a duration of 1.6 and there was an overnight 100 bps upward shift in the yield curve, the value of your bond port would decrease by about 160 bps. In the case of FFH's $28 billion bond port, that type of situation would give you an overnight haircut on your bond port of about $450m. Okay, that's not the end of the world. Now, Prem has signalled that FFH intends to shift to a duration of 2-ish during 2023. So, once again, taking a hypothetical 100 bps increase across the term structure of interest, FFH's $28B bond port would be haircut by about 200 bps, or $560m. TwoCities has expressed a preference for a duration of about 3, so the hypothetical 100 bps increase in rates would haircut the $28B bond port by about $840m. It's worth noting that if you hold your fixed income instruments to maturity as FFH usually does, there is no economic significance to those valuation changes as they will reverse themselves as the instruments progressively approach maturity. Where it does matter is for the insurance subs' underwriting capacity. Even if you plan to hold that fixed income port to maturity, you still need to mark those bonds to market which flows through the subs' balance sheets. Their underwriting capacity is a direct function of their capital level. For some of them, this is of no consequence while for others, like C&F, capital has been tight for a few years and hair-cutting the bond port could result in an actual underwriting constraint. To compound matters, if you get an interest rate increase, what else is happening at the same time? So, the type of scenario that Jen Allen should be concerned about is the situation where the Fed engages in an evangelical fight against inflation and elects to continue the aggressive tightening during 2023. Should that occur, what happens to equity prices? We've seen a recent stock market rally that might be attributable to investors believing that the Fed's tightening process is largely complete, that we will soon see a pause, and then maybe even a modest cut late in 2023. But, what happens if that's not what the fed does? Equity prices likely drop in that scenario which once again results in marking those $5B of securities to market and reducing the subs' capital levels. If you are thinking about Prem's 1-in-50 year scenario, it's not too hard to imagine the Fed going all out into Volker mode, interest rates rising another 200 bps during 2023 and the stock market plummeting 10-20% as a result. That type of scenario would be a pretty significant hit to the subs' statutory capital levels and underwriting capacity. When it comes to risks to the subs' capitalisation, the principal risk management tools that Prem and Jen Allen have are essentially portfolio allocation (ie, $5b of equities vs $28b of fixed income) and duration. While many of us think that duration should have been pushed out a bit more during Q4, we shouldn't pretend that there's no risk or no downside. SJ

I made this a big position at $360 in Jan 2021 after doing a deep dive for the first time b/c of Blackberry becoming a meme stock, of all things. I still have the crazy $BB $100 scenario in my model but realized it was screaming cheap even if BB went to 0. And made it 50%+ of net worth for a week or so in Dec 2021 from US$460 -> $500 into the auction buyback. Hindsight 20/20 but should’ve kept more of it. I got a lot of pushback at the time for suggesting IV then was easily US$800+ if you marked their assets to market and thought hard about intrinsic value. I was called naive but I was convinced a fresh pair of eyes for a deep dive was an advantage and stuck to my guns b/c this was squarely in my circle of competence, having spent many years focused on asset managers / fund investing professionally. I think I am just doing the same now and getting to $1500+ as IV has arguably doubled over the past two years with great capital allocation decisions, mainly short duration fixed income protecting capital and expanding aggressively into the hard market, putting them in a huge position of strength now imho. Amazingly, the valuation on earnings (which don’t seem to be at a cyclical peak, but structurally higher as they’ve protected capital and intelligently taken insurance share by competition weakened by big bond losses) hasn’t really changed as the stock has roughly doubled. I take your point that sentiment has shifted (from depths of hell levels imho) and there is a lot of risk and uncertainty in the business. But as far as I can tell, Fairfax is still such an outlier that I would be surprised if that 50-100% valuation gap persists as more eyes take a fresh look and see the turnaround and great setup. Respectfully, those that have lived and breathed all the ups and downs might still be underestimating how much has changed and what this is worth going forward after some major structural changes. It is looking to me like a potential lollapalooza scenario with earnings growth + multiple expansion from insanely cheap to just fair value at 1.5-2x BV. With setbacks and lumpiness in returns along the way, inevitably. That said, still open to the idea that I’m way too bullish as there was a lot of good luck involved with how rates played out, and no one went broke taking some chips off the table after a stock rerated from 0.6x to 1x BV. I am still inclined to add and held back only by epistemic humility and "sleep well" risk management. Anyway, I am grateful for all the knowledge and wisdom of all the long time FFH followers here.