djokovic1

Thank you @gfp for clearing up my ignorance and also showing us the value of AI So the takeaway is the opposite of my initial intuition. I.e you want as little of assets held at book value and rather prefer M2M. (As long as we think Fairfax is good at investing, which I think most of us do)

Agreed. It may be a different perspective of making the same point. I.e the 75bn investment portfolio is understated because it accounts for Eurobank at book value. The true economic value of that portfolio is higher (by the delta of economic value vs book value in total). As a result the true investment leverage is actually higher than what we calculate using accounting numbers. As a thought experiment, if all there investments were held at book value similar to Eurobank, then accounting numbers would look much worse (till they sold those investments). But if you were truly a very long term investor and didn't care about the accounting numbers you would want as large a % of the portfolio held at book value like Eurobank rather than mark to market. Because it allows you to run with a higher economic leverage relative to your equity (assuming those investments trade above book value in aggregate) and hence obtain a higher ROE compared to if all your investments were M2M. I am not 100% sure the above is true, but it is my understanding at the moment. Maybe a good question for the AGM.

Please correct me if I am wrong but isn't there an added hidden advantage of carrying Eurobank at book value vs market value. I.e because you have to hold a certain amount of book equity against your investments. So if Eurobank is accounted for in Fairfax accounts at book value they have to hold less equity against the investment relative to if it had been held at market value. If this is true it's a significant advantage. Because you can use that additional equity towards other investments. And at the same time, the economic value is accumulating and will be realised whenever they sell a portion of their Eurobank stake. In other words the amount of regulatory capital you have to hold is based off accounting book value, and with the Eurobank example they have to hold less capital as its accounted at book value rather than true economic value?

Lagercrantz (pricey but super high quality and amazing track record), Bergman and Beving (B&B), Lifco (too large for my liking), Teqnion bit of a turnaround at the moment but I love this the most at present in Sweden as I really like the guys running it and their capital allocation and its a bit like Fairfax after 2010-2020 period with negative sentiment. Sweden is actually the origin of serial acquisition with B&B and it's quite common there. There are at least 20 more such serial acquirers in Sweden and most more successful than not but I am listing the most interesting ones from my perspective. (Just FYI only have Teqnion in Sweden although the others are worth looking at to get a flavour of how successful this business model has been in shareholder value creation). Separately also KPG does a similar thing, tax accounting buy and build out of Australia.

Really hard to be that precise because it depends on alternatives at the time and confidence in forward ROE at that time (and for how long). But roughly yes selling between 2.5x and 3x+.

that’s a good list! I am a big fan of serial acquirers that are early in their journey. Companies that can reinvest their capital at 20-30% ROIE for a long period of time. So a CSU or Danaher but 100x or 1000x smaller. Terravest, NGTG (Japan), Judges Scientific for example. Lot of great ones in Sweden. i am very skeptical of Danaher though. Last 10 years they have started paying high multiples on M&A and their fundamental returns are very poor.

I think we agree much more than disagree. But at 3x book, I think I will be able to find better risk reward opportunities elsewhere.

Fully accounting for economic book value, at 3x book I would definitely be reducing. At 2x I’m comfortably holding. Also depends on opportunity set wrt other investment options and conviction in them.

@Hamburg Investor You have to be right in your assessment for 10+ years with a high multiple. It's hard enough to be right for 5 years. Software companies that were thought to be the best businesses in the world have arguably been disrupted overnight (or at least have much more uncertainty over terminal value so lower multiple). Unarguably forward returns are lower the higher the multiple of the stock is. If Fairfax hits any road bumps at 3x book, very likely the multiple takes a big hit and you may get a lost decade in terms of returns. In general 3x book doesn't sound egregious for Fairfax's compounding engine, but the risk reward is not in an investor's favour at those multiples. Everything has to go right for it to be a great long term investment from that multiple. I used to like the romanticised view of coffee can investing, buy and hold forever. But for me it doesn't work. Valuation matters. Buffett's best years and highest returns were characterised by high turnover and optimising for price vs value. I am not advocating for actively trading, but one can't ignore valuation in investing.

@Viking I think about 2026 and 2027 similar to you. But I am higher for diluted EPS, $200 for 2026 and $230 for 2027. Similar to you I think operating profit will be flattish and investment gains will be more moderate (relative to 2025), however, if you have no premium growth you can assume all the profits will be funnelled into buybacks. You will get shares outstanding go down by much more than 3-4%, closer to 8-10%. Conversely they could use that capital to do M&A (or buy out minorities), in that case top-pline will not be flat and grow more than we have assumed. Which explains my delta to your numbers. @MMM20 I will let Eigen come to his own conclusions. Personally, we have discussed on the board here, I think Fairfax should trade at ~2x book+ if you expect 15% ROE+. Right now it's closer to 1x book. Of course if it triples tomorrow and gets close to 3x book, most of us will be silly to not think of selling! But if it doubles tomorrow to 2x book I am comfortable holding on and gain from the EPS compounding. We have discussed before, it trades at much lower multiples than peers who have lower ROE's and most of them shorter track records. Bullish or not, I care about being accurate, rather than conservative or optimistic. To me it's pretty clear Fairfax is significantly mispriced relative to peers and on an absolute basis and shareholders will do very well from today with a 5 year + horizon.

I actually use this alternative methodology as a sense check which uses operating earnings as the base. Using rough numbers (in USD): Operating earnings: $5bn * 12x (take your pick on multiple) = $60bn + Investment portfolio ($75) - Float ($40) - LT Debt ($14) - NCI ($4) = $77bn. Add $3bn for excess of FV over carrying value and you get to $80bn of intrinsic value. Divide by 22.4 diluted shares out to get to fair value of $3,571. Current stock price is <50% of that, at ~$1,700. It's quick and rough but if you see anything obviously wrong please let me know.

@jbwent63 It's a good question. A big part of the delta is caused by the line item "Net finance income (expense) from insurance contracts and reinsurance contract assets held". My understanding is that this line item is the change in the balance sheet caused by interest rates and FX moves and technically should not be counted within operating results (Fairfax defines it as such below). If you use Fairfax's definition of operating income, 2025 was roughly on par with 2024 for the full year. Net finance income (expense) from insurance contracts and reinsurance contract assets held – This measure represents the net change in the carrying amounts of the company’s insurance contracts and reinsurance contract assets held arising from the effects of the time value of money, and is calculated as the sum of the respective amounts presented in the consolidated statement of earnings. Operating income (loss) – This measure is used by the company as a pre-tax performance measure of operations that excludes net finance income (expense) from insurance contracts and reinsurance contract assets held, net gains (losses) on investments, interest expense and corporate overhead and other, and that includes interest and dividends and share of profit (loss) of associates, which the company considers to be more predictable sources of investment income.

@73 Reds On moat, I agree with with everything Viking posted, he has written the Bible on Fairfax after all! If you think about it, insurance is a commodity in the sense that any major cat, Fairfax will take a 1-2% hit of the total loss. Of course the underwriting skill (which is similar to the investing skill) of when to grow premiums aggressively vs pulling back is not a commodity. Separately, for me the key additional differentiator is the investing acumen and the long termism / alignment that allows them to invest a significant portion of the book in equities to boost returns and take maximum advantage of the 3:1 leverage. Most insurers don't do that and the ones that do are special, and the ones that do it well are very special. On the 15% target, I was just looking at the last few years of EPS numbers and reviewing my model and barring the last 2-3 years they have been very choppy. If you go into the details the business is actually more complicated than most. If you zoom out the business is easier to understand. When you understand where the 15%+ comes from (underwriting + 3:1 leverage on investment returns + buybacks) it allows you to zoom out. And welcome @civic248

Thanks for the detailed response @Maverick47 Very helpful as others have said to improve my understanding on an arcane but interesting subject!

@Maverick47 why does short tail insurance like auto target a relatively high CR ~95-96 even though you get no float? Is that because it’s more competitive and mostly a volume game?

Love this post. Thank you for your expert view. This has been my intuition too but you laid it out perfectly. I.e you rationally should target higher combined ratios the more float you get from the business and vice versa.

Yes that’s the magic of compounding and investing well. (And a function of investment leverage inherent in the business model). great quarter again!

Has anyone analyzed if buybacks significantly increase after closed period in the past?

Love Matt Levine and his writing: Crypto winter Bitcoin has had a really bad couple of weeks, falling from about $90,000 at the end of January to about $70,000 today. We talked about this on Thursday, and I pointed out that what makes a crypto crash different from a stock-market crash is the lack of fundamentals. “Broadly speaking,” I wrote, “a stock’s price in the short term will reflect things like forced sales by its owners, but its price in the long term should reflect market expectations of the present value of its future cash flows.” With crypto, you have to look elsewhere for explanations. Here’s a Wall Street Journal article titled “A New Crypto Winter Is Here and Even the Biggest Bulls Aren’t Certain Why,” though they wouldn’t be, would they? (The biggest bears are quite certain why.) One theory is boredom: This sort of rhymes with my “Boredom Markets Hypothesis,” which says that the prices of speculative assets vary inversely with how many other fun things there are to do. If your theory of Bitcoin is “it is a thing to speculate on” then, you know, that has no scarcity at all. And here is a Bloomberg News story about the crypto crash in which everyone is similarly confused: “Eventually we’ll figure out why we own this stuff,” okay.

The beauty is I don't need to play games that don't make sense to me. There are lot of fish in the sea. This one makes no sense to me.

I should clarify to be fair to you. What I said is true if you are in the investing game. If you are playing the trading game, then my logic doesn't apply and wish you good luck and fun!

All this is useless unless you have an independent view of what an asset is worth without needing to look at the price.

@TwoCitiesCapital Price tells you nothing about value. Neither does halving cycles or technical analysis.

Yeah 100% agreed. It's just a question of when not if. Waste of time, no value creation, energy sucking. Sooner this ends the better. Wish Buffett gets the joy of seeing it go to 0 in his lifetime.

Yes exactly I was just going to say. I will be surprised given the peers strong reporting if FFH doesn't post an amazing Q4 of $60+ (well above cons. at $52) and more importantly a continued positive outlook. Can never know how the stock will react (and its short term in any case), but the odds are in our favour given my expectation of strong fundamental performance and low valuation.