Maverick47

I wonder the same thing about the possibility of issuing shares well above book value, and then buying them back at less of a premium to book value later, as Singleton did many times with Teledyne. I would never quarrel with the wisdom of such a transaction from the perspective of one who intends to hold Fairfax shares for the long term, but from the standpoint of the “other parties” to these sorts of transactions, the idea of “Fool me once, shame on you, fool me twice, shame on me” comes to mind. I’m still struggling with understanding the motivation of the counterparties to the current TRS. Is it as simple as finding financial institutions that wanted fixed or floating income instruments and the Fairfax side of the swap promised them a risk margin above the sort of interest rates they would otherwise be able to obtain at the time the swap was entered into? So they used the funds they wanted to invest in fixed income, and used them to buy Fairfax common stock instead, entering into the TRS agreement with Fairfax for them?

Good point. By year end, I imagine the share count reduction over the last 10 years or so will be in the range of 7 million. That’s a net reduction of over $100 million per year in required annual dividend distributions.

Wondering how treasury share purchases appear in these sorts of reports, if at all? Is it possible that some of the shares shown as being purchased by the company could have been set aside in connection with the company’s intended use of them to add to their treasury shares for future incentive compensation purposes? I’m guessing a few hundred thousand shares per year are issued from the corporate Treasury on five year vesting schedules to employees, and I believe the company indicated that they would purchase on the open market each year the number of shares needed for that program.

@Viking, Munger once said that he and Buffett were cautious of investing in financial companies that “were trying to do well”. Banks, for example, can appear to be more profitable than they actually are, if they are trying desperately to report profits, and in so doing, abdicate their responsibility to set prudent loan loss provisions…. An insurer I worked for once separated profit and growth goals by assigning the marketing department incentives based on growth, and the underwriting department incentives based on underwriting profit. You can imagine how these are in conflict. Tough to get a company pulling together when one part wants to write as many new policies as possible, while another part is motivated to restrict writing new business with its attendant new business penalty. Years later, a different company I worked for focused on growth some years and underwriting profit in others. Yet the underwriting and sales marketing departments continued to have individualized goals based on profit and growth separately. In years when the company as a whole emphasized underwriting profits, it became difficult to retain experience marketing reps as their bonus compensation, based on growth incentives, plummeted. And in one case I recall, when incentives were strongest for underwriting profitability, reserving actuaries for a large line of business apparently under-reserved that line significantly for several years in a row. Significant bonuses were paid for a few years in a row until the oversight could no longer be masked, and substantial loss reserve increases were booked instead. A few individuals were blamed and fired, but it was a painful few years thereafter to recover from that mistake. That is one of the reasons why it is so important to monitor reserving practices of an insurer. Fairfax is on the right track by focusing on making sure that reserving practices are conservative, and are more likely to be redundant than inadequate, as evidenced by a long track record of reserve releases from prior accident years. As you have so clearly outlined, Fairfax now has their insurance subsidiaries focused on steady underwriting profitability, prudent risk and catastrophe exposure management, with conservative reserving, at the same time that their investment and capital allocation decisions are virtually unmatched by competitors in the industry. From a value investor/shareholder perspective, their operational results are providing us with “margins of safety” in a number of areas, to say nothing of the excess of market over carrying value of their assets.

Really good topic—incentives do indeed drive behavior, and oddly enough, many companies fail to craft incentives that drive the optimal behavior and financial results they seek. Buffett used to focus on this in his letters back in the 90’s around the time he took control of Geico. He mentioned that incentive plans should be easy to understand, measurable…and Munger would add that they should also not be easily gamed. All great points. Oftentimes companies strive to have both profit and growth (the Holy Grail). But growth can be a challenge since it is so easy to grow if pricing is too low, and thus underwriting profit would suffer…. Buffett’s original GEICO incentive structure was a matrix that produced bonuses based on underwriting profits of policies written more than a year, and number of new policies written, so both growth and profit. He knew that if the underwriting profit goal took into account all policies, that he would be incentivizing employees not to write as many new policies, since in auto insurance, it is almost a given that the newest policies will be the most likely to produce underwriting losses (known as the new business penalty). If he wanted GEICO to grow, he was willing to let the company absorb the new business penalty, and not allow it to adversely affect employees decisions about whether or not to write new business policies. A company I once worked for thought they could motivate insurance agent policy production by granting agents bonus commissions for achieving year end policy count targets set for each agency. They thought that the measurement would be a foolproof way to drive growth, since it would motivate both retention of existing policies and production of new business. However, the incentive system was easily gamed because agents could cancel current auto policies for customers who insured more than one vehicle, and then write separate auto insurance policies for each separate vehicle. Presto! A single policy that previously insured four vehicles owned by a customer could canceled and become four separate new policies, each insuring one of the originally insured four vehicles. Do this for every Inforce customer with multiple vehicles in a household, and an agency’s policy count at year end could easily exceed their assigned growth targets, and the company would pay them a bonus. This could even be the case where the total number of vehicles insured and total premium volume declined for a given agency year over year. The company incurred increased mailing and printing costs to cancel and reissue all of the policies, and employees’ time was wasted. Clearly, in such cases, neither growth nor profit was the result of the agency incentive system. Fairfax appears to be a good deal smarter than the company I worked for. While we don’t have the details of their incentive systems, we are told that it is primarily based upon underwriting profit. That is definitely a good sign.

I think you’re comparing Trump’s $2.2 billion of income in 2025 to the volume of trades made by all the traders in Congress, totalling $665 million? Probably not apples to apples. Highly unlikely that the congressional trades resulted in the same volume of profit on those trades. If they made 20% profit on their trades, that would be $130 million. Trump’s grift alone is more than 15 times that.

Very enlightening. Thanks for sharing!

They did sell their stake in a life insurer they had owned part of with White Mountains, but that is different from selling a wholly owned insurance subsidiary, which Fairfax has been known to do. https://www.wsj.com/articles/BL-MBB-40289

Great point! Hadn’t thought about that before, but it makes great sense.

This (flexible and intelligent capital allocation) is a really important differentiator for top notch insurance companies/conglomerates @Viking. There are plenty of publicly traded insurers who attempt to maintain underwriting discipline through an insurance cycle, but they unnecessarily restrict their capital allocation options. Too many of the insurance CEO’s limit their capital allocation decisions (when underwriting opportunities become less attractive) to share repurchases, dividends and possibly acquisition of other insurance companies. They either don’t appear to be able to think outside those boxes, or perhaps they just don’t have an optimal holding company structure for insurance company subsidiaries that would also allow them to acquire subsidiaries outside of insurance. If they are focused on Return on Equity, when profitable underwriting growth for the numerator is difficult to achieve, they typically will turn towards returning capital to shareholders as a means of reducing the denominator. This can result in a relatively efficient insurer, addressing the issue of “excess capital” if it would otherwise be invested in low return fixed income instruments and damage the Return on Equity measurement. But the problem can be that in their urgency to “return” excess capital to shareholders, they forget to consider whether the price at which they are repurchasing shares is favorable or not. Both Fairfax and Berkshire have been (and are) proving themselves to be adept at rationally scanning a much wider global opportunity set of places to invest any excess capital that can accumulate during softer markets.

Good point!

Thank you both ( @SafetyinNumbers and @djokovic1) for pointing us to these charts (and I will agree that I happen to like the formatting with the green bars better as well)! It appears to me that the actual catastrophe dollars displayed on the charts are not inflation adjusted, and are relatively similar in dollar magnitude for the last 9 years, while the equity base on which the cat tolerance is calculated has been growing significantly. We’re seeing the power of the business model at work I believe. If we look out another decade or two, if we are fortunate enough to escape the big 1-in-250 year or even rarer type year of really bad catastrophe years, I can envision a future where this risk continues to moderate and becomes almost as much of an afterthought as it is currently for Berkshire Hathaway. Berkshire most recently appears to want to retain about $20 billion in cash against the possibility of a mega catastrophe year. That’s less than a half year of their normalized earnings, and much less than 15% of their shareholder equity. Similarly, management of Fairfax seems to have developed sufficient underwriting and risk management discipline to continue to reduce the probability that catastrophic insurance losses might represent a “company killing” event in the future. While the holding company is just over 40 years old, at least one of its subsidiaries (Crum & Forster) has been “alive” since it was incorporated over 200 years ago in 1822. That’s a good example for the holding company to want to emulate, and all indications are that they are on the right track.

This is an important question for any insurer, @Hoodlum. The company has set risk management guidelines for this risk that are disclosed each year in the annual report under note 22. From the 2025 Annual Report: Catastrophe risk Catastropheriskarisesfromexposuretolargelossescausedbyeitherman-madeornaturalcatastrophesthatcould result in significant underwriting losses. Weather-related catastrophe losses are also affected by climate change which increases the unpredictability of both frequency and severity of such losses. As the company does not establish reserves for catastrophes in advance of the occurrence of such events, these events may cause volatility in the levels of incurred losses and reserves,subject to the effects of reinsurance recoveries.This volatility may also be contingent upon political and legal developments after the occurrence of the event. The company evaluates potential catastrophic events and assesses the probability of occurrence and magnitude of these events predominantly through probable maximum loss (“PML”) modeling techniques and through the aggregation of limits exposed. A wide range of events are simulated using the company’s proprietary and commercial models, includingsinglelargeeventsandmultipleeventsspanningthenumerousgeographicregionsinwhichthecompany assumes insurance risk. Each operating company has developed and applies strict underwriting guidelines for the amount of catastrophe exposure it may assume as a standalone entity for any one risk and location, and those guidelines are regularly monitored and updated. Operating companies also manage catastrophe exposure by diversifying risk across geographic regions, catastrophe types and other lines of business, factoring in levels of reinsurance protection, adjusting the amount of business written based on capital levels and adhering to risk tolerance guidelines. The company’s head office aggregates catastrophe exposure company-wide and continually monitors the group’s aggregate exposure. Independent exposure limits for each entity in the group are aggregated to produce an exposure limit for the group as there is presently no model capable of simultaneously projecting the magnitude andprobabilityoflossinallgeographicregionsinwhichthecompanyoperates.Currentlythecompany’sobjective istolimititscompany-widecatastrophelossexposuresuchthatoneyear’saggregatepre-taxnetcatastrophelosses would not exceed one year’s normalized net earnings before income taxes. The company takes a long term view and generally considers a 15% return on common shareholders’ equity, adjusted to a pre-tax basis, to be representative of one year’s normalized net earnings.The modeled probability of aggregate catastrophe losses in any one year exceeding this amount is generally more than once in every 250 years. The bottom line is that the company models the aggregate amount of multiple potential catastrophe events occurring anywhere around the world in a given calendar year and currently estimates that the likelihood that this amount will exceed 15% of common shareholders equity (roughly $3.9 billion on an after tax basis, or about $5 billion on a pre-tax basis, given 12 2025 shareholder equity of $26.3 billion) is less than 0.4%. This risk management guideline then essentially would appear to have the goal of turning aggregate catastrophe losses, those expected to occur more rarely than once every 250 years, or with a probability of less than 0.4% in any calendar year, into an income statement event, not a balance sheet event. We probably should also keep in mind that the company regularly records catastrophe losses around the world which are being charged for in their annual premiums and which cover the average annual level of catastrophe losses expected over the long term. I don’t know what the average number is, but I think 2025 cat losses were $1.2 billion, and the company recorded a combined ratio of 93% with pre tax underwriting profit of $1.8 billion. So a $5 billion pre tax year for catastrophes would appear to be only $3.8 billion pre tax above the actual 2025 result. Since the pre tax earnings in 2025 exceeded $3.8 billion, this appears to indicate to me that if 2025 had been the year with $5 billion in pretax catastrophe losses, the company would still have reported positive earnings of around $1 billion or so. Between cash on hand and short term securities, the company looks to be situated well to handle such a year.

Interesting to see the asymmetry in inexpensive drones for attack versus expensive drone defense. Probably one of the reasons the US is interested in bringing the war with Iran to a close. US air defense missiles are quite expensive and the war has already likely depleted years worth of current production levels needed just to replace what has already been expended.

I don’t have a great understanding of all the different executives at Fairfax, so thanks @Viking for this overview. Just as an aside, I didn’t realize Paul Rivett was such a longtime coworker with Prem. Out of idle curiosity I googled him and turns out he is CEO and president of Western Investments of Canada. They clearly are attempting to follow the Fairfax playbook, with an insurance company base (Fortress) and a value investing framework. Pretty early days, and even an aggressive premium growth target for Fortress to $100M by 2028 makes them small potatoes by comparison with Fairfax. If imitation is the sincerest form of flattery, even the loss of this one executive is a credit to the business model. I don’t know much about Francis Chou’s connection to Fairfax…was he part of Hamblin Watsa? He gets called out in the GFC storyline for being a solid proponent of buying Credit Default swaps. With his purchase of StoneTrust Insurance he would appear to be further down the road to creating a Fairfax-like company than Paul Rivett is with Western Investments. Too bad StoneTrust is not publicly traded, otherwise I’d be happy to consider being a shareholder…. I am also really growing to appreciate the value of decentralized insurance subsidiaries. There is just great value in having more than a dozen insurance subsidiaries with their executives all steeped in the Fairfax culture and focused on disciplined underwriting. With an emphasis on promoting from within, this makes it more likely to be a sustainable model going forward. I worked for an insurance company with everything centralized and succession planning was somewhat hit or miss. It was never clear what executive would make a good CEO when one was needed…they typically came from within from a lower level…such as a specialist in accounting, or finance, or even legal. They each would have been given rotations through divisions where they would get some general management experience for a few years before getting an opportunity to be CEO. A few didn’t seem to be great fits, some were too old to realistically put their stamp on the company since there was a hard age limit of 65, and in other cases, unexpected deaths, exits for personal reasons, or for poor business performance, led to a bit of a revolving door at the top until finally the Board selected an executive from outside the insurance industry altogether. That last choice was the nail in the coffin, and the company was sold in an auction process a few years later. The Fairfax structure strikes me as likely being a much better environment than what I experienced.

Thanks, @Viking. My vote would be for the serial format. Selfishly speaking, sometimes there can be a multi week stretch with not much news of the company available and your posts give me something to look forward to!

Turns out the comment I remembered was from a talk and a q and a session Warren had with University of Florida MBAs back in the late 1990’s. Warren was talking about the Long Term Capital Management debacle and musing about how smart the folks running it were, and yet they still basically went broke. What he said was, “If I ever write a book it will be called Why Smart People Do Dumb Things….my partner says it should be autobiographical.”. Someone else actually did write a book with that title, which is the one I just ordered. I imagine I’d have enjoyed one written by Warren better, but will suspend judgement until I read it.

Interesting @Blake Hampton. I’ve often wondered myself how and why relatives and acquaintances, who I’d generally considered previously to be smart, educated folks, ended up developing massive blind spots in one area or another. That is a bit more nuanced than considering that all folks with such blind spots are necessarily stupid. I think it does have to do somewhat with devotion to one dogma or another, or one particular world view. I think it was either Buffett or Munger who used to call that out as dangerous in an individual. My father-in-law, towards the end of his life, fell down the rabbit hole of emails, early Trump birtherism and scare tactics about Obama necessarily being the start of some sort of socialistic order that would also logically begin to come after his own carefully amassed retirement assets. He believed that folks would start taxing wealth as well as income, and that anyone with money in a savings account would see it taxed away. He was not stupid…he was accepted to medical school at age 19 and graduated before the end of WWII serving in the medical corps as a doctor at age 22. His wife also was bright— graduating with a Ph.D from Stanford at the same age. At any rate, how did he react to the screaming emails about how folks were coming after his savings? He regularly withdrew cash from federally insured savings accounts and deposited them in a safe deposit box at a branch office located in his retirement home instead. As executor of his estate, I did find several hundred thousands in cash in the safe deposit box, which, while they had in fact escaped the potential of taxation, also saw their purchasing power decline with inflation over the ten years they lay there. And there was a risk that he hadn’t considered. One year before he passed away, his retirement community almost burned up in a wildfire in California. He and his wife were evacuated in the middle of the night and couldn’t return for another six months. The building had caught on fire, but didn’t completely burn down. Fortunately, the branch office of the bank on the premises wasn’t affected…otherwise, in an attempt to save a bit of tax, he might have seen his cash burn up completely. Cash in savings accounts is generally held in electronic form, so a fire at one branch office wouldn’t affect the balances held in the accounts, but cash in a safe deposit box is not insured, and would have completely disappeared forever had it burned up. I don’t know how best to protect oneself against the dangers of such blind spots. I think it may involve developing and maintaining a high quality bullshit detector in one’s own mind. I hope I have one, and that as I age, I continue to put it to good use. As an armchair historian, I learned long ago the importance of taking into account the motivations behind the writer of any historical source document. When viewpoints of the same historical event diverge, this can help one determine which ones are more trustworthy and believable than others. The same sort of bullshit detector can be used in a variety of other circumstances, not necessarily historical. When someone tries to sell you an investment, for example, particularly via a cold call or personal visit, what could their motivation possibly be? How could they be paying for their time talking to me? It might have to do with a compensation incentive or commission structure that benefits them, at my expense. At any rate, you’ve sparked my interest. Buffett once mentioned a book called “Why smart people do dumb things.” I think I’ll pick it up and give it a read. I saw another small electronic book called “Why smart people believe dumb things.”. Don’t know if either will be worth the read, but for a few bucks I’m willing to take a chance at learning something that can help me make sense of these conundrums… Thanks again.

Fair enough, @Marco Van Basten! We know that there are points in the history of the company when the company performed admirably on the investment side of the business model and points when their performance was msignificantly subpar. And as was probably the case with Berkshire Hathaway, it may well be the case that the stretches of significant outperformance for the company on a per share book value basis occurred earlier on, when the company was quite a bit smaller so history is not likely to be the best guide to the future. What will really matter to us is how we expect them to perform in the near to intermediate future if we have included them in our own investment portfolios. My simple way of looking at it is that if the company is able to earn 5% on their total investments, which are leveraged bout 3 to 1 for investments to shareholder equity, also earns positive returns from underwriting profits, and doesn’t have too much of a drag from corporate overhead, interest expense and taxes, that a 15% or greater return on equity is eminently achievable. If they earn closer to their long term historical return on total investments of 7.7%, then even if underwriting profits were to completely disappear, we’re still sitting at around the 15% ROE level. Only if interest rates plummet and the total investment return drops well below 5% do we have a situation where a 15% ROE would appear to be out of reach without dramatically higher underwriting profits to act as an offset. I don’t think we need to assume stellar equity performance (or even outperformance relative to the index) to make it likely that the company will produce good results for its shareholders. But if anyone does wish to include in their estimate of intrinsic value the expectation that the current stable of equity investments will match or outperform the index going forward, that would in my opinion lead them to believe that an even greater margin of safety exists at the current market price. My personal rough expectation is that there is a greater than 50% probability that the company will meet or exceed a 15% ROE over the next five years, and I believe the downside probability is quite limited. Sort of a heads I win, tails I win a bit less and almost a zero chance of loss compared to current market price over the next five years.

Excellent point. The prospect of double digit returns without a sizable risk of loss of capital is an ideal investment for me personally. For more than ten years now I have set my personal expectations for investment returns at somewhere in the range of 6 to 8% annually. That’s the level that should allow me to reach my reasonable goals for income in retirement. I would be well satisfied with that result. Finding a candidate for inclusion in my portfolio that has outpaced this target for the last five years, with a realistic prospect of doing so for the future five years as well, is already “icing on the cake” for my personal needs, and as you note, the business model of Fairfax and current store of unrealized gains may well produce results skewed to the upside. Fairfax under Prem’s stewardship for 40 years has produced stellar annualized returns of roughly 19%. I don’t need Fairfax to produce anything like this for the next 40 years in order to achieve my personal wealth goals, and in fact, even the achievement of their current target of 15% would be far in excess of what I would hope for. I am reminded of Charlie Munger’s comment regarding Berkshire Hathaway and Warren Buffett’s stewardship thereof, made sometime near the turn of the century:

God bless AI!

Agreed.

I think you’re directionally on the right track with trying to approximate the equity returns by backing them out of the total investment returns. One caution I would make is to be clear in differentiating between an arithmetic average return and a geometrically compounded return. My guess is that the S&P 500 11.2% return is the CAGR over the period, meaning the geometric average. Meanwhile, the 7.7% Fairfax investment return looks to me as if it might just be the simple arithmetic average of the individual years. The geometric average is what we’d want to have in order to compare with the equity index, but I don’t them we have that here. And generally speaking, when you take into account the possibility of negative return years, which have occurred four times in the Fairfax history, then the geometric return, which is what we want for comparison purposes to the index, is always going to be less than what appears to be an arithmetic average return of 7.7%. My guess is that Fairfax’s equity returns on a geometrically compounded basis probably have still exceeded those of the index over 40 years, but that they likely may not have not been quite as high as 18.2% annually.

I think you are correct in identifying challenges with aging, sclerotic leaders. He’s not going to change for the better, and as he ages, instead of getting lazy, he just loses whatever filters and checks on his bad impulses that he might possibly ever had.

Food for thought, @Blake Hampton! As someone who loves reading, I’d like to think that you’re not altogether wrong in pointing out the challenges with the apparent disinterest in it on the part of either the average American or many of our leaders. And a love of reading and lifelong learning can probably be connected somewhat to an above average level of personal intelligence while not being a reader might be correlated with a below average level of intelligence. But I’m also reminded of Buffett’s comments about what characteristics he looks for in an ideal employee: energy, integrity and intelligence. And if a candidate is missing one characteristic in particular (integrity) he really didn’t want him (or her) to have either of the other two. I guess what I’m saying is, given his lack of personal integrity, I’m not terribly upset that the President lacks an interest in reading. I do wish, however, that our dear leader would spend much more of his time sleeping or playing golf than he already does….