Maverick47

I think the reason the US would care is that the ROW will indeed be affected. With a huge trade deficit to the ROW, the US will naturally import the increased costs (and hence inflation) from the ROW via higher product and transportation prices required to merely obtain the current products we import. The only simple lever that can be pulled to offset those higher costs could be to remove the tariffs levied on the imports, but that would mean Trump would have to admit they were a mistake, and we all know he can never admit he’s done anything wrong. Seems like a Catch 22 (thank you Joseph Heller). But at least no one will be talking about the Trump/Epstein files in the meantime.

Good point! I think I had some basic thought years ago that with all the growing trade interdependences across the globe, wars would be less likely in the future. The lesson I’m drawing now is not to underestimate the ability of the human race to find ways to extend conflicts and wars regardless of how intertwined their commercial transactions have become. This may be somewhat akin to the dictum PT Barnum shared that “No one ever lost money by underestimating the intelligence of the American public.” His exhibitions often included signs such as “This way to the egress” as a means of encouraging visitors to exit…and thus to have to pay a second entrance fee if they wanted to continue seeing the remaining attractions.

I love it! Thanks for sharing, @MMM20! A good reminder that wisdom never goes out of style.

In an uncertain world, one would expect that a company such as Fairfax, with shorter term fixed instruments, cash (dry powder), positive income and a variety of attractive uses for income (stock buybacks, minority partner buyouts, etc) will navigate the volatility ahead well. Unlike @Parsad, my own ability or willingness to maintain a reserve of cash (dry powder) for myself has been extremely limited. So I’m trying to console myself with the fact that over 90% of my invested assets are split between Fairfax and Berkshire, both of which have dry powder of their own to put to work…

Trump dropped sanctions on Iran’s exports of oil, right? This has got to be one of the strangest wars when one party encourages the other to keep selling their products to the rest of the world. What signal is that giving to Iran about their bargaining position?

One thing I will be looking out for in regards to any administration guidance regarding a potential end of the war is any usage of the timeframe “two weeks”. That is Trump’s go to phrase whenever he wants questioners to feel satisfied an answer is coming, while it is long enough for most folks’ attention to wonder and forget about a promise. Time and time again since 2016 the American people were promised a healthcare plan or an infrastructure bill, with the big announcement or the disclosure of the plan expected to be shared “in two weeks”. If that phrase ever gets used in regards to the war with Iran, it would not bode well…

@roundball100 I think this is a great observation. I’m trying to think of other investors who tried to merge insurance and investing, and failed to produce decent results. Saul Steinberg with the Reliance companies, David Einhorn with GL Re, Hallmark Insurance, and we now have Bill Ackman trying to do the same thing. The insurance side of things is tough to do well.

Agreed. While he will never admit it due to his malignant narcissistic personality disorder, POTUS is being taught a hard lesson between transactional tactics and strategy. He thinks the former is all he needs to be concerned about, and clearly lacks the ability to consider second and third order effects of his actions.

Unfortunately, the charitable interpretation is more likely to be correct in my opinion. I worked for a large insurer based in the US…and a little over a decade ago, I recall three straight years where the asbestos and environmental loss reserves were re-estimated upwards by roughly $400 million each year, so a cumulative $1.2 billion in only 3 years. Each year, the actuarial review was presumed to have been conservative enough to “finally” estimate the reserves once and for all, and each year it was “wrong”. Management finally gave up in disgust and transferred the applicable reserves at the time of about $3.6 billion to a runoff reinsurer…but total losses to the primary insurer were still capped at about twice that amount, or $7.2 billion, after which losses would again come back to the primary insurer. it’s been over ten years now, and the paid losses on the reserves held by the reinsurer have still not totaled the original $3.6 billion they received and had available to invest. I guess what I’m saying is that all things considered, the primary insurer, if they had been confident in their ability to invest those reserves, probably would have been better off retaining them, even doing so would have produced another ten years of upward reserve re-estimations. I’m comfortable enough with Fairfax’s investment and capital allocation talents that I expect we, as shareholders, will be better off with them retaining these reserves, and investing them until they are finally paid out, than paying what is likely to be an expensive price to transfer them to a runoff reinsurer.

“He who thinks he is a leader, but has no one following him, is merely taking a walk.”

I agree wholeheartedly that Fairfax appears to have cracked the code of encouraging all employees to be owners, and hence encourages them to act like owners. Their management incentive plan grants shares, not options, to top management, with a five year vesting period. Unlike options that can be cashed out, this encourages managers to steadily build their Fairfax stake as they progress in their career. The stock ownership plan extends this to roughly 60% of employees who choose to participate in it. This is an intelligent way to transition from a controlling shareholder/founder situation to a future state where ownership is more broadly spread through the employees who will continue to drive the success of the company. I don’t think I’ve heard about anything this intelligent being done at Markel or Berkshire….

I appreciated the comment that Standard and Poor’s financial strength and debt ratings are at an all time high, and that the company looks forward to improving their ratings over time.

Really gratifying to seem them taking advantage of current prices.

I used to back into it the value the opposite way, giving 100% credit to the cash and securities, and then using a conservative 12x multiplier for operational earnings. But I like your approach better, since I also wouldn’t choose to buy and hold some of their equity holdings at current market valuations.

Really appreciate this, @Crip1! I retired a few years ago myself, and will adopt this look-through earnings view for the Maverick family. As you note, it should minimize the emotional impact of day-to-day market fluctuations. While this hasn’t been much of a concern for me personally, I do manage the retirement accounts of other family members as well who require handholding when market values drop. I will encourage them to frame their own retirement accounts using this approach also.

Thanks @Duke In Shadows! With all the focus on AI and LLMs, this is something that never occurred to me. Really appreciate your work on the Wikipedia page!

The only observation I have on this is that retribution is indeed satisfying, but at least in this area of the world, is unlikely to be the end of the matter. For millennia, groups in this area of the world have held onto grudges from past harms, either real or perceived. Whenever one “side” or the other gains some level of power or the ability to attack the other, they are tempted to use it against their enemies, and afterwards, to say, in effect, that “okay, now we’re even”. This far, the history of the regional conflicts appears to indicate that the party last attacked doesn’t appear to have agreed with that thought, and instead will nurse hatred for years, decades, centuries or even millennia before responding with retribution of their own that they either feel or believe will finally settle the matter once and for all. Cycles of violence are extremely difficult to break. Probably the best we can hope for is that when a response occurs, it will be long after we ourselves are no longer here.

Agreed! It was quite a while before I learned that Carol Loomis had been editing Buffett’s letters for years. We all benefited from having a business journalist polish things up. At 96, she is not in a position to do the same for Greg. As time passes, he may find someone like her to assist him, but I also am much happier getting unvarnished Greg writing to us than pure management and investment relations meaningless drivel.

I think that AI missed the fact that under statutory accounting, regulators mark equities to market. So Scenario B wouldn’t be applicable for statutory accounting, since the Eurobank stake is common equity.

As Mae West once said: ”Too much of a good thing can be wonderful.”

I hadn’t thought of that before, but now that you mention it, the company certainly should be in a financial position to do this. Since the letter mentioned that the sale of Warren’s remaining holdings would likely be spread out over ten years after his death, it would only require repurchase of a few percent of the market cap per year for ten years to absorb such a stake.

Helpful observations, @dealraker! I would agree that things get dangerous when management is encouraged to focus primarily or even solely on a single measurable ratio to the exclusion of the myriad other ways that the quality and sustainability of a business can be measured. As you note above, when obsessing over a railroad’s operating ratio, it’s too easy to value expense reduction above all else, even to the extent of harming future business prospects of the business one is presumably trying to maintain and “improve”. Just as bad is when management is also responsible for estimating and reporting the value of either the numerator or denominator of a given ratio or metric. I think Munger had a comment at an Annual Meeting years ago when he mentioned something long the lines of being nervous about investing in any financial company that was “trying” too hard to produce “good” results….

Overall the letter worked to assuage fears that things would change dramatically under Greg. He did a fine job of emphasizing the continuing importance of culture and the emphasis on integrity and reputation. As a lover of history (business or otherwise) I’m going to miss the additional 35 years or so of lifespan, experience and wisdom that Warren has over Greg. As someone who enjoys math and appreciates precision and accuracy in language as well as numbers, I did find one sentence in the BNSF sanction that rang a little false to me: “We view operating margin (the inverse of the industry’s operating ratio) as the best measure of performance.” Personally, when I think about the inverse of a ratio, I take that to mean finding the reciprocal, or 1/(ratio in question). But that’s clearly not the case here. I think that a clearer statement could have been something such as: ”We view operating margin (the complement of the industry’s operating ratio, since together they equal 100% of revenue) as the best measure of performance.” Just a minor nitpick….

@gfp I agree with you 100% that we don’t want to be partnered with any insurer that would adjust reserving practices in an effort to meet or not disappoint analyst expectations, and I’m also certain that this is not something we have to worry about with Fairfax. They have a history of reserving appropriately, that is to say, edging more towards redundancy than inadequacy. I’m also not surprised that run-off reserves might need to be strengthened when they get re-estimated after the passage of each year. These are the most difficult losses to estimate since they are not amenable to any sort of traditional loss data analysis techniques. Asbestos and environmental claims, which tend to comprise much of commercial insurance run-off reserves, often require sizable amounts of judgment in order to estimate them, because even 40, 50 or 60 years have elapsed since the exposure occurred that leads to the bodily injury claims (think mesothelioma for example) new claims can still arise from unexpected sources. Insurers cannot assume that the only claims they will ever pay out are on those that have already been reported to them. And there can be continuing inflation in the size of jury verdicts or medical expenses for example, which might be assumed to continue even for the remaining lives of claimants that the insurer is already aware of. I recall learning about this sort of problem in an insurance textbook I once read that was published in the late 1980’s ( in regards to workers compensation insurance claims). The author stated that the very first workers compensation claim reported in 1914 under a New York State workers compensation was still open as of the publication of the textbook, because the claimant was still alive. All of us would like any bad news about reserves to be reported and recorded as soon as it is known. It’s just that getting a “once and done” answer for asbestos and environmental runoff reserves is not likely to ever happen in the near term, given all the assumptions that go into making such an estimate. I’ve seen a lot of insurers (including one I worked for) base their runoff asbestos and environmental reserve estimate mostly on how much of the previously held runoff reserves they had paid out over the latest year, with some sort of goal of keeping the reserves set at a significant and hopefully conservative multiple of that annual payout rate. At some point, when runoff payouts slow down as potential claimants simply aren’t alive anymore, this sort of estimation approach will overestimate the reserves that should be held, and any reserves that prove to be unneeded will be released into earnings. Until that time, I’m not terribly concerned about an addition to runoff reserves of a few hundred million, even if it were to happen again and again in the future. First, these reserves are years away from actually being paid out, so Fairfax will be able to invest them as part of their float on behalf both of us as shareholders, and on behalf of the claimants. Secondly, compared to a current float level of $39 billion, this 2025 addition to loss reserves is a good amount less than a single percent of the overall float. Pretty much on the order of a rounding error.

@hasilp89 This is actually quite a sophisticated question, and makes perfect sense! Using a simplistic ratio of premium to equity is a shortcut approximation, and not a true measure of the underlying risk. As you note, if a company has underpriced their business, then the ratio will not only be misleading as a measure of risk, but will also work in a perverse manner to give incorrect guidance to how much equity a company should hold. When a company’s business is underpriced, they will hold insufficient amounts of equity to handle the risk of underwriting losses. Then as they reduce their risk of loss by raising rates, their premium will grow and their indicated equity will increase in tandem, at the very time their risk of underwriting losses is actually being reduced. And sometimes, in the case of old policies that expired decades ago, loss reserves continue to develop upwards, such as the asbestos and environmental loss reserves for which Fairfax increased loss reserves at year end 2025 by over $200 million from the value at year end 2024, without any associated current or future premium at all. Clearly the amount of equity needed to support these old loss reserves is not zero, even though the associated premiums are zero… Companies are going to have their own capital adequacy models that will look at all the risks a company faces — which can include the risk that underpriced policies will generate underwriting losses, the risk that loss reserves will develop adversely, the catastrophe risk as modeled against the actual inforce exposures, locations, coverage amounts and deductibles of a company’s book of business, as well as interest rate and liquidity risks for various assets, etc. Companies will provide their own risk and solvency assessment reports to their regulators, and regulators also have a number of early warning financial ratios they monitor to let them know whether a company they regulate appears to be deserving of further scrutiny and review. They will review the reinsurance agreements a company has in place, paying attention to the financial stability ratings of the reinsurers the company is partnered with. Companies in turn will want to organize their affairs both so that they can withstand worst case claims paying events, and also to avoid regulatory scrutiny or restrictions after such events. They want to have a high likelihood that regulators would consider them financially solvent and able to support their insurance business as a going concern even after paying out claims associated with a worst case event, or a worst case event plus 20% as you noted. That’s one of the main reasons that companies purchase catastrophe reinsurance policies from reinsurers… so that they can get claims paying support from their reinsurers after a large catastrophe event, and still retain enough of their own equity to be a viable insurer after the catastrophe.