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Fairfax Q2-2025 Earning Results - 7 High-Level Thoughts I thought this would be a good time to get out of the weeds. Instead, with our review of Q2 results at Fairfax, we are going to zoom out today and look at the big picture. What did we learn about Fairfax from their Q2, 2025 results? Let me know if you agree/disagree with my list. What did I miss? 1.) Fairfax has a very good P/C insurance business Combined ratio = 93.3% Underwriting profit = $427 million Net premiums written growth = 4.8% Yes, the hard market is slowing. Top line growth in insurance is slowing. Nice to see that Fairfax is being disciplined (although Mr. Market will probably not like it). However, Fairfax will be able to continue to grow their P/C insurance business at above average rates - in addition to growth of NPW - by taking out their minority partners (see comment 5 below). 2.) Fairfax’s most important income stream spiked higher in Q2 Interest and dividend income = $666 million (was $606.5 million in Q1) Increasing by 10% in one quarter is a big deal. This puts the annual number at about $2.6 billion. It increased because the total investment portfolio continues to grow in size. And Fairfax continues to invest it very well. Yield of fixed income portfolio = 5.1% (same as Q1) Average duration of fixed income portfolio = 2.4 years (down from 3.3 in Q1) Fairfax also reduced the average duration of its fixed income portfolio from 3.3 to 2.4 years. They sold U.S. treasury bonds with maturities principally between 28 to 30 years for net proceeds of $1,129.2. Why? Probably because investors are not being compensated appropriately for the inflation risk on long dated US Treasuries. This is prudent risk management on the part of Fairfax - protect the balance sheet. Will analysts hate this move - because it reduces ‘visibility’? Probably. But analysts are focussed on the short term. Fairfax is running the business for the long term - and shareholders should applaud that. 3.) A new income stream is breaking out for Fairfax Fairfax already has 4 large income streams: underwriting profit, interest and dividend income, share of profit of associates and investment gains. The fifth income stream is non-insurance consolidated equity holdings. In recent years Fairfax has been investing heavily in this bucket of equity holdings. Since 2022, it has added Recipe, Grivalia Hospitality, Sleep Country, Meadow Foods and Peak Achievements. To go with legacy holdings AGT Food Ingredients, Dexterra and Sporting Life. I have been (impatiently) waiting 2 years for this bucket of equities to start delivering bottom line results that are in line with its potential - and it appears we might be there. Q2 = $126 million This puts the annual number at about $500 million. This is an important emerging income stream for Fairfax. My guess is it will be Fairfax’s fastest growing income stream moving forward - especially with the hard market in insurance slowing (capital will go to where it earns the best return). And yes, results for this group will have some volatility. 4.) Fairfax (and the team at Hamblin Watsa) continues to invest exceptionally well We got two important updates on the conference call today regarding a couple of Fairfax’s largest investments in recent years. PacWest construction loan portfolio In June of 2023, Kennedy Wilson and Fairfax purchased a $4 billion construction loan portfolio from PacWest. PacWest was caught in the regional bank crisis and they were forced to sell their best assets at a discount. (Of note, Kennedy Wilson also got the loan platform from Pac West - the 40 people who were running the loan portfolio also moved over the Kennedy Wilson.) We got an update today on how this investment has been performing for Fairfax over the past three years. Wade Burton, CIO and VP of Hamblin Watsa on the Fairfax conference call today: “Within the fixed income portfolio, our mortgages continue to perform well. We have been repaid on $1.8 of mortgages from the Pacific Western Bank transaction, where we purchased approximately $4 billion in commitments at 95% of par in 2023. The IRR on the loans repaid thus far is 14.7%. Thanks to the outstanding work of Bill McMorrow, Matt Windisch and their team at Kennedy Wilson, these mortgages are proving to be a fantastic investment for Fairfax.” Blizzard Vacatia (Berkley Group) One of Fairfax’s largest investments in 2025 (January) was the purchase of the Berkley Group, one of the largest independent timeshare companies in the US. With this deal, Fairfax partnered with Caroline Shin and her team at Vacatia. The partnership is called Blizzard Vacatia. Fairfax invested $810 million in various fixed income instruments (with an average yield of 8.6%) and $25 million in equity (50% ownership position). We got an update today on how this investment has been performing for Fairfax YTD. Wade Burton, CIO and VP of Hamblin Watsa on the Fairfax conference call today: “It’s early days in the timeshare investment, Berkeley, run by Caroline Shin, but so far, it has exceeded expectations. Berkeley has approximately 125,000 available room nights per month. They started the year at virtually nil occupancy for overnight stays. In month one, Caroline brought that number to 10%, the next month 20%, and the third month 35%. I’m happy to report year to date operating income has already reached our full year expectations. Again, outstanding and capable partners doing an excellent job for Fairfax shareholders.” 5.) Fairfax telegraphed how it will continue to grow its P/C insurance business - even as the hard market slows Minority interests own stakes in Fairfax’s two largest P/C insurance companies: Allied World = 16.6% Odyssey Re = 9.9% As a result, not all of the earnings from these two companies are accruing to Fairfax common shareholders. Taking out the minority shareholders will be an easy way for Fairfax to grow its P/C insurance business - it will boost the total amount of earnings that accrue to its common shareholders. On the Q2 conference call Fairfax confirmed that it would like to take out its minority partners in its two insurance businesses. They will likely to this in two steps: Allied World later this year (my best guess) and Odyssey in 2026 (or perhaps 2027). The timing will likely be determined by the opportunity set that exists in financial markets in general. If a better capital allocation opportunity comes along, perhaps they will delay taking out minority partners. Because of the call option feature (put in place when the deals were initially struck), Fairfax is able to buy out the minority partners at a very favourable price. As a result, these transactions are high certainty, solid return uses of capital for Fairfax. Taking out minority partners will be a way for Fairfax to grow its bottom line (the part that accrues to its common shareholders) even if the hard market slows further in the coming years. Brilliant planning and execution on the part of Fairfax. 6.) Economic results are much better than accounting results Excess of fair value over carrying value for associate and consolidated holdings increased from $1.4 billion to $2.4 billion, or $111/FFH share (pre-tax). The increase in the quarter was $1 billion, or $46/share pre-tax. This amount is not captured in Fairfax’s reported results (EPS, BV or ROE). This puts the economic value created by Fairfax in Q2 at about $97 share (EPS of $62 plus excess of FV over CV of $35). 7.) Fairfax is exceptionally well positioned today With $3 billion in cash to the holding company, Fairfax is all cashed up. The insurance subs are also overcapitalized (by about $3 billion) - with the hard market slowing, this is another chunk of money that could be sent as a dividend to Fairfax to be redeployed elsewhere. Fairfax is also generating about $1 billion in earnings each quarter. Fairfax has built an earnings juggernaut. Importantly, it is just getting started. Compounding is just starting to kick in… This is resulting in exponential growth. This is very hard for investors to grasp (humans think linearly). This will likely cause investors to underestimate future earnings - and that is what we have seen in each of the past 4 years (like a dog chasing its tail, earnings estimates for Fairfax have consistently been too low and subsequently keep getting revised higher). Fairfax has spent the last 39 years building out its investment management business. It has an amazing range of internal capabilities. This will allow the company to be very nimble and opportunistic moving forward. At the same time, Fairfax has developed a large number of relationships with external capital allocators. Fairfax is viewed as being trustworthy and desirable partner. This is resulting in deal flow - Fairfax’s phone is ringing. Volatility is back. Interest rates have normalized. The macro environment is highly uncertain (tariffs being just one factor). Volatility is a wonderful thing for a value investor like Fairfax - it gives them the opportunity to deploy capital at very attractive rates of return. And Fairfax is on a ‘hot streak’ (a reference to Stanley Druckenmiller). For the past 5 years the team at Fairfax has been executing exceptionally well. ‘They are seeing the ball really well…’