Viking

@Jaygo, I agree... I think Fairfax will continue to be very aggressive on the share buyback front. At current prices/valuation I think a reduction of ~1 million shares per year is likely. I also think Fairfax will stay undervalued. Perhaps not 1.25xBV undervalued. But undervalued enough that Fairfax will be happy to keep buying back shares in volume. It certainly will be interesting to see where the share count is in 5 years time.

I like to use Berkshire Hathaway’s performance in the 1980’s and 1990’s as the best comparable for Fairfax today. Not for the exact rate of return that Buffett delivered - although I think Fairfax will be able to compound at a more than acceptable 15% over the next 5 years (as far as my crystal ball looks). But for the fact that he was able to compound at a very high rate of return even in pretty brutal soft insurance markets. Why was he able to do this? As others have mentioned - business model and capital allocation is the key. Another important factor that is new for Fairfax is how they have been optimizing operations: Insurance - under Andy Equities/wholly owned companies The result is Fairfax’s operations are now generating much more free cash flow than they have historically. Just look at Eurobank today and compare it to 5 years ago… This is a big deal. I don't think it is well understood. Greater free cash flow + exceptional capital allocation = strong future returns. The flywheel is spinning very fast right now… Much of the analysis I see on Fairfax is very narrow. It is focussed on a specific factor like insurance market cycle or interest rates or equity markets or historical factors. It is missing the forest for the trees. It probably gets to Fairfax’s fundamental problem: it is not well understood. If people on this board don’t get it - the larger investment community certainly will not. PS: Fairfax keeps morphing… a lot has been going on under the hood over the past 5 years. Accounting results are understating economic results. To be fair, we all still have lots to learn.

@Eldad, Recipe is a really interesting holding. Here are some thoughts: I really like the spinout of the Keg last year. I wish there was more disclosure of what they did and the financial impacts. I am not convinced that a roll-up (centralization) strategy actually works all that well in this industry with the types of restaurants Recipe has. I think decentralization works much better - hence why I like the Keg spinoff. Given Fairfax’s extreme decentralized structure I am not sure why they did what they did with Recipe beginning in 2010. Rate of return is important. How much equity did Fairfax put in when they took Recipe private in 2022? How much did Fairfax then spend to buy out minority partners and KRIF last year? How much is Fairfax earning (cash flow) each year on equity? The Keg spinout becomes important. I think depreciation is large each year for Recipe - so cash flow is more important than reported earnings. Recipe’s model is two-fold: franchising and operating restaurants (some are corporate). Franchising is an asset lite business model. Owning and running restaurants is not. Sorry, I have more questions than answers today… A lot has been going on at Recipe over the past 18 months: Takeout of minority partner Take-private of Keg Royalties Income Fund Spin out of the Keg - now being run by Joffrey Purchase of rights/restaurants of Olive Garden Canada I wonder if it doesn’t make sense for Recipe to split even further: Quick serve: Harveys, NY Fries Casual dining: St Huber, Swiss Chalet, Montanas, Kelseys etc Small niche concepts The restaurant business is very entrepreneurial. Recipe likely has an opportunity to boost returns by getting smaller. Having said all that, my guess is Recipe is currently delivering very good returns to Fairfax. And that is because Fairfax was able to take it private at a very low price and a modest amount of cash from the mothership (Recipe took on some debt to pay for part of the take-out). I think the restaurant business in Canada had been doing very well in recent years - part of the reason is Canadians are travelling to the US less and eating out more (with the money saved from not travelling).

@LC, Fairfax’s best performing long-term investments are made during times of extreme volatility. My guess is that is going to continue in the future. Looking at ‘downside risk’ and Fairfax is much more nuanced than for traditional P/C insurance companies. For Fairfax what is perceived as risk is in reality opportunity. It is very counterintuitive.

@bearprowler6, you bring up many important topics. Here are a couple of thoughts: High level: The P/C insurance cycle is very long (with each one often lasting decades?). The hard market part is usually a few short years of the total. Most of the time, P/C insurance is in some version of a soft market. Fairfax specific: In the last soft market Fairfax’s P/C insurance business performed pretty well. Performance was very strong at Odyssey. More importantly, the soft market gave Fairfax the opportunity to aggressively expand by acquisition - which they did from 2015 to 2017. The Allied World acquisition has been a home run. Fairfax’s lost decade (2010 to 2020) was caused primarily by mis-steps with the investment management side of the business - not a soft P/C insurance market. The equity hedges/shorts were the big problem (causing an average loss of almost $600 million per year for 11 years straight). Too many poorly performing/very low quality equity holdings were a smaller (although important) issue. Importantly, both of these things were clear to shareholders at the time (there were not hypothetical problems - they were obvious). Fast forward to today. My assessment is Fairfax’s: P/C insurance business is the strongest it has ever been. Its investment management business is the strongest it has ever been (the problems from 2010 to 2020 have largely been fixed). Capital allocation has been best in class over the past 5 years. Bottom line, Fairfax looks exceptionally well positioned. They will do what they have always done - exploit market cycles (P/C insurance and/or financial markets) - and grow per share value for long term shareholders.

@bearprowler6, can you provide a little more detail? (I don’t want to assume your reasons/logic.)

One of Fairfax’s great strengths is they are very opportunistic. Their stock is - once again - wicked cheap. They know it. What to do? Back up the truck with buybacks. Time for another dutch auction? Or do they simply max out the NCIB. It is fun to speculate… This quote from Buffett comes to mind: "Big opportunities come infrequently. When it rains gold, reach for a bucket, not a thimble."

@Crip1, I agree... fundamentals continue to improve (on balance) and the stock is getting cheaper = significant multiple contraction. One example of the fundamentals improving is what is happening with the fixed income portfolio and the increase in bond yields over the past 3 months. Fairfax is very short duration. This positioning limits the hit to book value from rising bond yields (and falling prices). It allows them to reinvest maturing bonds at high rates of return. And it also gives them the opportunity to extend duration. Lots to like about how Fairfax's $50B fixed income portfolio is positioned in today's rising inflation environment. A second example is the sale of Poseidon. It surfaced $1.7B in value (including a $837M investment gain in Q2). That is a significant development. A third example is the opportunity to repurchase a significant amount of stock at prices under $1,600. Very accretive and shareholder friendly. Yes, the hard market is slowing. As a result top line growth is slowing. However, margins are still quite good, meaning underwriting profit is still solid. Chug, chug, chug...

@Hektor, from my perspective the FFH-TRS is a completely different animal than the equity hedge/short positions. I don’t think they are comparable.

@KPO, is your concern the amount of cash Fairfax has to come up with at quarter end to cover any decline in the share price? Pre-2020, I might have shared that concern. Today, I am not concerned - Fairfax had many sources of cash (should they need it). It is normal for a stock to decline 25% to 35% off its highs each year. Fairfax is down ~20% from its 52 week high (at YE) - at the low end of what usually happens with most stocks every year. My guess is Fairfax is well prepared with the FFH-TRS position to handle the volatility we are seeing (and any cash needs). I don’t think the decline in the FFH-TRS position is causing the weakness in the share price (I could be wrong) - i.e. the negative feedback loop you are referencing. Importantly, the fundamentals of the company are very good - economic/intrinsic value continues to grow each quarter. The stock is approaching a valuation of 1.2x book value - it is very cheap. As a result, my guess is Fairfax will be very aggressive with share buybacks in 2026 (just not sure which months). IMHO, a lower share price will simply result in Fairfax buying back more stock.

For those who are interested, another update of my book/collection of posts on Fairfax is available. Along with my companion Excel workbook with models. To download the files expand the link above or go to the first post in page 1 of this thread (it will always have the most recent version of my PDF/book and companion Excel workbook with models). New posts have been added. I don't re-read the entire document when I post updated versions. If you see any big errors please let me know.

@Maverick47, as per usual, I appreciate the comments/discussion. I find hidden value is a hard concept to grasp. The forest/stream concept provides a good way to think about the stock (balance sheet) and flow (income statement) aspect - and how both are growing at the same time. An oil field was another example I toyed with. Perhaps the best way to think about hidden value is simply as deferred earnings. Which will generate higher earnings in the future and higher ROE. That should support a higher valuation multiple. Yet Fairfax continues to trade at the lowest valuation in its peer group. What this is tells me is Fairfax continues to be under-followed and misunderstood as a company and mis-priced as a stock. I don't expect this to change anytime soon. As a result, Fairfax will be able to buy back all the stock they want at a low valuation likely for an extended period of time - making the investment all the more appealing for long term shareholders.

Hidden Value at Fairfax: When Accounting Value and Economic Value Diverge - Part 3 - Appendices Appendix A: Framework for Understanding Hidden Value – The Forest and the Stream Investors often struggle to understand hidden value because it does not fit neatly into traditional accounting measures. One way to think about it is through the lens of stock and flow. The stock is represented by a forest. The flow is represented by a stream. Together, they provide a useful framework for understanding how hidden value is created, accumulated, and ultimately monetized. The Forest: Hidden Value on the Balance Sheet Think of Fairfax's hidden value as a growing forest. Each tree represents a source of value that is not fully reflected in reported book value: Associates whose fair value exceeds carrying value Market-traded consolidated holdings whose economic value exceeds book value Wholly owned private businesses As these businesses grow and compound, the forest becomes larger and more valuable. The result is a widening gap between Fairfax's accounting value and its economic value. The forest is a balance sheet concept. It represents the stock of accumulated hidden value at a point in time. Importantly, the forest has been growing rapidly in recent years. The Stream: Hidden Value Flowing Through the Income Statement Now imagine a stream flowing out of the forest. The stream represents hidden value that Fairfax monetizes through: Asset sales IPOs Revaluations Other capital allocation decisions When Fairfax monetizes an asset such as pet insurance, Resolute Forest Products, Digit, Stelco or a part of Poseidon, value that was previously embedded in the forest becomes visible in reported earnings and cash flows. The stream is an income statement concept. It represents the flow of value being realized over time. Why Both Matter Many investors focus on the stream because it is visible in reported earnings. But the stream is only part of the story. The more important question is whether the forest is growing. At Fairfax, it has been growing rapidly since 2018. As the forest expands, the stream naturally grows with it. A larger collection of valuable businesses creates more opportunities to surface value through asset sales, IPOs, and other transactions. What This Means for Investors The hidden value story at Fairfax is about both a growing forest and a growing stream. The forest represents the stock of hidden value accumulating on the balance sheet. The stream represents the flow of hidden value being realized through the income statement. Today, both are growing rapidly. Fairfax is accumulating value faster than it is realizing it—and realizing more value than ever before. -------------- Appendix B: Excess of Fair Value over Carrying Value – How the Accounting Works Associate Holdings Associate investments are generally accounted for using the equity method under IFRS (IAS 28). This differs significantly from ordinary public equity holdings. At acquisition — or when ownership rises above roughly 20% — the investment is initially recorded at cost. After that, carrying value changes based on: Share of earnings → increases carrying value Dividends received → reduce carrying value OCI adjustments → foreign exchange, pensions, and other items Impairments → permanent write-downs Importantly, associates are not marked to market each quarter. As a result, carrying value largely reflects: Original cost Plus retained earnings over time Minus dividends This differs sharply from ordinary public equities, where carrying value is regularly adjusted to current market prices. For public equities: Fair value ≈ carrying value For associates: Fair value can become materially higher than carrying value Especially when: Earnings quality improves Valuation multiples expand Businesses compound over long periods This is one reason companies like Fairfax and Berkshire Hathaway can accumulate substantial hidden value over time. Market-Traded Consolidated Holdings Market-traded consolidated holdings create similar economic dynamics, although the accounting treatment differs. When Fairfax controls a business, it consolidates 100% of the subsidiary’s assets, liabilities, revenue, and expenses onto its financial statements. Fairfax calculates: Fair value using its ownership share of the subsidiary's market capitalization Carrying value using its ownership share of the subsidiary's consolidated equity Like associates, these holdings are not revalued each quarter based on market prices. As a result, market value can diverge materially from accounting value over time. Although the accounting treatments differ, the conclusion is the same: both associate holdings and market-traded consolidated holdings can accumulate substantial hidden value because market value can grow much faster than the carrying value reflected in Fairfax's financial statements. -------------- Appendix C: Buffett's Evolution on Book Value For more than 50 years, Warren Buffett was book value’s biggest champion. He taught generations of shareholders to use book value as the primary tool to: Roughly value Berkshire Hathaway Evaluate management performance through growth in book value per share (BVPS) To understand how important book value was to Buffett, investors only had to read the opening paragraph of Berkshire’s annual letters. For decades, he repeated essentially the same message. From Berkshire’s 2017 annual report: “Berkshire’s gain in net worth during 2017 was $65.3 billion, which increased the per-share book value of both our Class A and Class B stock by 23%. Over the last 53 years... per-share book value has grown from $19 to $211,750, a rate of 19.1% compounded annually.” Then, in early 2019, Buffett abruptly changed course. In Berkshire Hathaway’s 2018 annual report, Buffett declared that book value had lost much of its usefulness as a metric for Berkshire shareholders. Given how central BVPS had been to Berkshire’s story for more than half a century, this was a seismic shift. Buffett stated it directly: “The annual change in Berkshire’s book value... is a metric that has lost the relevance it once had.” He then explained why. 1. Berkshire Hathaway Had Changed Buffett’s first point was straightforward: Berkshire itself had evolved. When Buffett acquired Berkshire in 1965, it was a struggling textile company. The 1967 purchase of National Indemnity introduced the P/C insurance model and, more importantly, insurance float. Initially, much of that float was invested in publicly traded equities. Public equities were not the problem. Because they are marked to market, their fair value is generally reflected in book value. The issue was Berkshire’s growing collection of wholly owned operating businesses. As Berkshire increasingly redeployed capital into acquiring entire companies, a larger share of its economic value became tied to assets carried on the balance sheet at accounting values far below intrinsic value. Unlike publicly traded holdings, these businesses were not periodically revalued. As Buffett explained: “Berkshire has gradually morphed from a company whose assets are concentrated in marketable stocks into one whose major value resides in operating businesses.” And: “Accounting rules require our collection of operating companies to be included in book value at an amount far below their current value.” The issue was compounded by Buffett’s long-standing practice of rarely selling wholly owned businesses. Much of the appreciation would never be surfaced through sale transactions. Over time, the gap between Berkshire’s accounting value and intrinsic value widened materially. Eventually, Buffett concluded that book value no longer adequately captured Berkshire’s economic reality. 2. Share Buybacks Distorted BVPS The second issue was Berkshire’s growing use of share repurchases. Buffett made clear that Berkshire would repurchase shares only when they traded below intrinsic value. Economically, those buybacks benefited long-term shareholders. But there was an accounting complication. If Berkshire repurchased shares above book value — say at 1.2x book or higher — BVPS would decline even as intrinsic value per share increased. Over time, large buybacks executed above book value would make BVPS increasingly disconnected from economic reality. Buffett summarized the issue succinctly: “Each transaction makes per-share intrinsic value go up, while per-share book value goes down.” That is a difficult concept for many investors to fully grasp. Buffett’s Solution So, what did Buffett do? He effectively abandoned book value and BVPS as Berkshire’s primary performance metrics. Instead, he argued that Berkshire’s stock price would become the best long-term measure of business performance: “Over time, however, Berkshire’s stock price will provide the best measure of business performance.” That was a remarkable statement from someone who had spent decades warning investors about the irrationality and volatility of markets. Book value still mattered. Buffett simply believed it no longer captured Berkshire’s economic reality well enough to remain the company’s primary scorecard. For long-time Berkshire shareholders, it was like getting hit with a bucket of ice water. Accounting Numbers Are the Beginning — Not the End Buffett had actually laid the intellectual foundation for this shift decades earlier: “Managers and investors alike must understand that accounting numbers are the beginning, not the end, of business valuation.” — Warren Buffett, Berkshire Hathaway 1982AR Successful investing is centred on properly estimating intrinsic value. Reported accounting measures such as EPS and BVPS are useful starting points, but for companies like Berkshire Hathaway, Markel, and Fairfax, they can materially understate economic performance. Investors therefore need to supplement accounting measures with additional analysis, particularly when: A growing portion of value resides in associates and consolidated operating companies Carrying values materially understate economic value Share buybacks are executed above book value but below intrinsic value Long-duration capital allocation decisions create value that accounting statements only partially capture This is increasingly the framework investors need when evaluating Fairfax today. Buffett’s Full 2018 Commentary on Book Value Given its importance, Buffett’s full explanation from Berkshire Hathaway’s 2018 annual report is reproduced below: “Long-time readers of our annual reports will have spotted the different way in which I opened this letter. For nearly three decades, the initial paragraph featured the percentage change in Berkshire’s per-share book value. It’s now time to abandon that practice. The fact is that the annual change in Berkshire’s book value – which makes its farewell appearance on page 2 – is a metric that has lost the relevance it once had. Three circumstances have made that so. First, Berkshire has gradually morphed from a company whose assets are concentrated in marketable stocks into one whose major value resides in operating businesses. Second, while our equity holdings are valued at market prices, accounting rules require our collection of operating companies to be included in book value at an amount far below their current value. Third, it is likely that – over time – Berkshire will be a significant repurchaser of its shares at prices above book value but below intrinsic value. Each transaction makes per-share intrinsic value go up, while per-share book value goes down. That combination causes the book-value scorecard to become increasingly out of touch with economic reality. In future tabulations of our financial results, we expect to focus on Berkshire’s market price... Over time, however, Berkshire’s stock price will provide the best measure of business performance.”

Hidden Value at Fairfax: When Accounting Value and Economic Value Diverge - Part 2 Eurobank: A Case Study in Hidden Value Eurobank is an especially important investment for three reasons: It is Fairfax’s largest holding - by far. It is Fairfax’s best-ever performing equity investment. It has become an enormous — and growing — source of hidden value. It provides a clear example of how economic value can compound rapidly while accounting value lags behind. Fairfax first invested in Eurobank in 2014. Beginning in 2020, the investment was classified as an associate afterregulatory restrictions on Fairfax’s voting rights were removed. At the end of 2019: Greece was still recovering from a severe depression Eurobank was still cleaning up its balance sheet (non-performing loans) interest rates were near zero investor sentiment toward Greek banks remained extremely poor As a result, Fairfax's carrying value was established at a depressed valuation (€0.92/share or ~$1.16 billion). That low starting point proved critically important. Over the following six years fundamentals dramatically improved: Greece elected a pro-business government The economy strengthened materially Eurobank repaired its balance sheet Interest rates increased The acquisition of Hellenic Bank strengthened its competitive position At the same time, the share price increased sharply as: Earnings grew Valuation multiple expanded Compounding and time began to work its magic Eurobank's share price rose from €0.92 at year-end 2019 to €3.97 on May 27, 2026. Because Fairfax uses equity accounting, much of the enormous value creation did not flow through reported EPS or BVPS. Instead, it accumulated quietly as hidden value. At May 27, 2026: Estimated market value: ~$5.4 billion Estimated carrying value: ~$2.9 billion Hidden value: ~$2.5 billion, or $112 per diluted Fairfax share, pre-tax When Fairfax eventually sells its stake in Eurobank—or its ownership falls below 20%—it will recognize a massive investment gain based on the difference between market value and carrying value. And Eurobank is only one investment. Hidden Value Eventually Gets Monetized Berkshire Hathaway rarely sells businesses. Fairfax is different. At Fairfax, monetizing investments is an important part of the business model. Capital is recycled from mature or fully valued holdings into new opportunities capable of generating above-average returns. Why? Two reasons: To earn attractive long-term returns To continually improve the quality of the company and investment portfolio Over time, Fairfax has surfaced hidden value through: Asset sales IPOs Spinouts Partial sales Revaluations Recent large examples include pet insurance, Digit, Resolute Forest Products, Stelco, Peak Achievement and Poseidon. There are many more small examples. Poseidon: A Recent Example The March 2026 Poseidon transaction was particularly instructive (Fairfax sold ~50%). Poseidon is Fairfax’s third-largest equity investment. Sale price: $28.30/share Carrying value: $15.50/share Market value: $20.00/share The sale price was almost double the carrying value. The sale valued Fairfax's full stake at approximately: $1.7 billion above carrying value $1.1 billion above prior market value The sale will generate a pre-tax investment gain in Q2 of ~$837 million, or ~$38 per diluted share. Just as important, it also establishes a more accurate valuation reference point for Fairfax’s remaining ownership interest. From Fairfax’s Q1-2026 Interim Report: “On March 10, 2026 the company entered into agreements to sell approximately half of its equity interest in Poseidon for cash consideration of $28.30 per share for aggregate proceeds of approximately $1.9 billion. Following the sales, the company will retain an equity ownership of approximately 22.2% of Poseidon. The pre-tax gain on closing is approximately $837.” The transaction reinforced three key points: Hidden value exists - it is not some abstract concept. It is large and growing. Book value materially understates economic value. Importantly, this was not a one-off event. Fairfax has been monetizing hidden value for decades. One mistake many investors continue to make is treating Fairfax’s investment gains as unusual or non-recurring. They are neither. Monetizing investments is a normal part of Fairfax’s business model. Looking Beyond Quarterly Volatility Will gains be lumpy from quarter to quarter or year to year? Of course. But over two-, three-, or five-year periods, the pattern becomes easier to understand. Fairfax’s investment gains should not be viewed as random windfalls. They are better understood as the periodic monetization of value that has been building for years. That distinction matters. What Does Hidden Value Mean for Investors? Hidden value changes how Fairfax should be valued. One approach is to restate historical performance by adjusting reported results to better reflect economic value creation. That would produce higher past results - economic EPS, economic BVPS, and economic ROE. The second approach — and the one I prefer — is to incorporate hidden value into future earnings power. Over time, Fairfax will continue monetizing portions of these holdings. When that happens, hidden value will increasingly flow through the financial statements as realized investment gains. Hidden value is therefore not simply dormant balance sheet value. It is also a future earnings stream. Fairfax already has multiple earnings engines: Underwriting profit Interest and dividend income Share of profit of associates Consolidated non-insurance earnings Mark-to-market investment gains Increasingly, there is another: Large asset monetizations As the equity portfolio continues to compound, this earnings stream should become more important. Stock Buybacks Are a Tell Management's willingness to aggressively repurchase shares at prices well above book value provides an important clue. The people with the best understanding of Fairfax's hidden value clearly believe intrinsic value is materially higher than book value. Fairfax’s Current Valuation An Unusual Opportunity Fairfax has been one of the best-performing P/C insurers of the past five years, yet it continues to trade at the lowest valuation in its peer group. Past performance When evaluating insurance companies, I prefer to use BVPS Total Return (growth in book value per share plus dividends paid). It is simple to calculate, captures both US GAAP and Canadian IFRS reporting differences, and serves as a useful proxy for long-term ROE. It also allows for more meaningful comparisons across insurers, which often use different methods for calculating reported ROE. Using this measure, Fairfax has generated a five-year CAGR of 22.5%, ranking among the best performers in the industry. Current Valuation Today, Fairfax trades at: 1.25x book value 8.5x earnings (using average EPS of $183 over the past three years) By both measures, Fairfax trades at the lowest valuation of its major P/C insurance peers. Investors can purchase one of the best-performing P/C insurers of the past five years at the lowest valuation in the group. Hidden Value The valuation case becomes even more compelling when hidden value is considered. The metrics above are based entirely on reported accounting results and do not reflect the substantial amount of hidden value created over the past five years. Fairfax's reported results alone suggest the shares are attractively valued. When the company's growing hidden value is also considered, the valuation appears even more compelling. The Fairfax story is even better than it looks. Conclusion Book value still matters at Fairfax. But far less than many investors realize. Over the past five years, Fairfax has evolved into the type of company where accounting value increasingly understates economic value. The company now owns: More associates and consolidated holdings Higher-quality businesses A much larger equity portfolio At the same time, compounding and time are beginning to amplify those advantages. For traditional P/C insurers, accounting value and economic value are usually reasonably close. At Fairfax, the gap is large and growing. Excess FV over CV provides investors with one useful window into that reality, but it captures only part of the story. Additional hidden value exists within wholly owned businesses, private holdings, and parts of the insurance operations that are not reflected in book value. The central idea is straightforward: Accounting numbers are the starting point, not the destination. For Fairfax investors, the key question is no longer simply how fast book value per share is growing. The more important question is how much intrinsic value Fairfax is creating that accounting rules do not yet capture. Keep reading for Part 3: Appendices

Hidden Value at Fairfax: When Accounting Value and Economic Value Diverge This is a timely and important topic. The article is long - it will be posted it three sections. Fairfax has been transformed over the past five years. Record earnings, high-teen ROEs, and strong growth in book value per share tell part of the story. But an increasingly important portion of Fairfax's value creation is not fully captured in EPS, ROE, or BVPS. The gap between accounting value and economic value — what I call hidden value — has become one of the most important drivers of Fairfax's future earnings power and intrinsic value growth. And the gap is widening. Hidden value is not new at Fairfax. Historically, much of it resided within the insurance operations. What has changed since 2018 is that hidden value is increasingly being created within Fairfax's equity investment portfolio and operating businesses. That shift has important implications for investors because it affects how Fairfax should be analyzed, valued, and compared with traditional P/C insurers. Valuation Basics: Why Book Value Matters For traditional P/C insurers, valuation is relatively straightforward. The relationship between book value, ROE, and the price-to-book multiple forms the foundation of the framework. Book value represents the capital supporting underwriting and investment activity. ROE measures how effectively management compounds that capital. The P/BV multiple reflects the market's assessment of the quality, durability, and riskiness of future returns. The relationship is simple: Higher sustainable ROE generally deserves a higher P/BV multiple. Lower ROE generally deserves a lower multiple. This framework works well because traditional insurers are primarily invested in bonds and other liquid mark-to-market securities. Over time, accounting value and economic value remain reasonably close. The framework becomes less effective, however, for companies like Berkshire Hathaway, Markel, and increasingly, Fairfax. When Accounting Value and Economic Value Diverge The issue is not publicly traded equities. Mark-to-market accounting generally captures their value over time. The issue is associate holdings, consolidated operating companies, and wholly owned businesses. Because of accounting rules, the carrying values of these holdings can diverge materially from their economic value. Over long periods, the gap can become substantial. As a result: Reported EPS can understate economic earnings BVPS can understate intrinsic value ROE can understate economic returns When this happens, book value becomes a less useful valuation anchor. That is exactly what happened at Berkshire Hathaway. Buffett's Public Break with Book Value For more than 50 years, Warren Buffett taught investors to focus on growth in book value per share as Berkshire Hathaway's primary performance metric. Then, in Berkshire's 2018 annual report, Buffett changed course: "The annual change in Berkshire's book value... is a metric that has lost the relevance it once had." Buffett explained that Berkshire had evolved. The company increasingly owned operating businesses rather than publicly traded securities. Public equities were not the problem because they were marked to market. The problem was Berkshire's growing collection of operating businesses, whose accounting values increasingly understated their economic value. Share repurchases created a second distortion. Buying back stock above book value but below intrinsic value could reduce BVPS while increasing intrinsic value per share. Buffett's conclusion was straightforward: "Accounting numbers are the beginning, not the end, of business valuation." That framework increasingly applies to Fairfax today. What Changed at Fairfax? Three developments accelerated after 2018. First, Fairfax increasingly shifted capital toward associates, consolidated holdings, and operating businesses. Second, the quality of the equity portfolio improved dramatically. Third, (since 2024) management began aggressively repurchasing shares at prices above book value but below intrinsic value. Together, these developments widened the gap between accounting value and economic value. Historically, much of Fairfax's hidden value resided within its insurance operations. Today, a growing portion resides within its equity portfolio and operating businesses. Understanding that shift is critical because accounting results are becoming less representative of Fairfax's underlying economic performance. The Equity Portfolio Transformation Much of Fairfax's transformation since 2018 can be traced to the equity portfolio. Three developments worked together simultaneously. 1. More Associate and Consolidated Holdings Over the past eight years, Fairfax has shifted a meaningful portion of its equity portfolio away from traditional mark-to-market securities and toward associate and consolidated holdings. Unlike ordinary public equities, these investments can compound value for years without that value being fully reflected in book value. As their importance increased, the gap between accounting value and economic value widened. 2. A Dramatic Improvement in Quality Around 2018, Fairfax appears to have refined its investment framework. Strong management teams, stronger balance sheets, and durable business economics became increasingly important. Valuation discounts still mattered, but quality moved higher up the priority list. Investments such as Seaspan (now Poseidon) and Stelco signaled the shift. At the same time, Fairfax steadily upgraded the portfolio: • APR Energy and Resolute Forest Products were sold. • Fairfax Africa was wound down and merged into a stronger entity. • Blackberry exposure was significantly reduced. • Eurobank was retained and strengthened. • More recently, Farmers Edge was wound down and Boat Rocker was merged into a stronger entity. Capital was steadily reallocated away from chronic underperformers toward higher-quality compounders. The portfolio evolved from being a significant user of capital to becoming a meaningful source of earnings and cash flow. 3. The Portfolio Became Much Larger The insurance hard market significantly increased Fairfax's earnings and float, allowing much larger amounts of capital to be allocated to equities. As a result, successful investments began contributing much more meaningfully to intrinsic value growth. Compounding and Time Are Now Working Together Fairfax's repositioning began around 2018. As the quality of the portfolio improved, compounding and time began working increasingly in Fairfax's favour. Early signs emerged in 2021. The results strengthened in 2022 and have continued improving since. The benefits of owning larger positions in higher-quality businesses are now becoming increasingly visible. The Optimization Journey Fairfax has been optimizing its insurance operations since 2011, when Andy Barnard was put in charge. A similar optimization process has been underway within the investment portfolio since roughly 2018. This is a significant development because, for perhaps the first time in Fairfax's history, both the insurance operations and investment portfolio are performing at a high level simultaneously. Five forces are now working together: Higher quality Better performance Larger size Compounding Time The result is significant value creation that is increasingly not being captured in EPS, ROE, or BVPS. Measuring Hidden Value: Excess of FV over CV This leads to two important questions: How big is it? What is the trend? Is it growing? The challenge is that hidden value is a broad and complicated topic. Some sources are relatively easy to identify and measure; others are much more nuanced. So, it makes sense to break the analysis into smaller pieces and begin with the easier ones. Excess of FV over CV One of the few sources of hidden value that investors can quantify with reasonable precision is Fairfax's disclosure of excess fair value over carrying value (FV over CV) for non-insurance associates and market-traded consolidated holdings. Examples include: Associates (typically 20%-50% ownership; significant influence) Eurobank Poseidon EXCO Resources Waterous Energy Fund III (Greenfire) Market-Traded Consolidated Holdings (typically >50% ownership; control) Fairfax India Thomas Cook India Dexterra AGT Food & Ingredients Although the accounting treatment differs, both categories can develop substantial gaps between market value and carrying value over time. As a result, accounting value can materially understate economic value. (See Appendix B for how the accounting works.) At March 31, 2026: Fair value was ~$12.8 billion Carrying value was ~$8.9 billion Excess FV over CV was ~$3.9 billion That equates to roughly $176 per diluted Fairfax share, pre-tax. More important than the size is the trend: Negative $663 million at December 31, 2020 Positive $3.9 billion at March 31, 2026 That represents approximately $4.6 billion of value creation over 5.25 years—about $873 million annually—that is not captured in EPS, ROE, or BVPS. Fairfax itself highlights the importance of this metric and reviews it regularly as an indicator of investment performance. “Excess (deficiency) of fair value over carrying value – These pre-tax amounts, while not included in the calculation of book value per basic share, are regularly reviewed by management as an indicator of investment performance for the company's non-insurance associates and market traded consolidated non-insurance subsidiaries that are considered to be portfolio investments…” And this is only one source of hidden value. Keep reading for Part 2

A key question is what is included in book value? A couple of things are happening under the hood in 2026 that are important; Interest rates are moving higher Fairfax's stock price is selling off Both are a headwind to book value: Higher interest rates cause the value of Fairfax's fixed income portfolio to fall (yes, there is a partial offset from IFRS accounting on the insurance liabilities) A lower share price causes the value of the FFH-TRS position to fall The result is Fairfax's BVPS is getting more conservative (compared to Dec 31, 2025) - providing a larger margin of safety. @Maverick47, I agree with you. My guess is Fairfax is going to be very aggressive with buying back stock in 2026. Just not sure on the exact timing (they have lots of things to balance in the short term). Patience will be important (not one of my strongest attributes). The crazy thing is it would not surprise me to see Fairfax's stock go lower from here. Like if we get a big sell off in the stock market. I expect Fairfax to respond accordingly (and be even more aggressive with buybacks).

How have Fairfax's equity holdings performed so far in Q2? Collectively, they are up ~$1 billion, or $45 per Fairfax share, pre-tax. Solid performance in aggregate. Two stories stand out to me: 1. Eurobank is the big mover, up ~840m. Excess of FV over CV for non-insurance associate and market-traded consolidated holdings was $3.9B at March 31. The sale of ~50% of Poseidon will reduce this by about $840M. The increase in Eurobank in Q2 is tracking to offset the Poseidon sale - meaning excess of FV over CV could finish Q2 around $3.9B. Over time, hidden value being created > hidden value being monetized. 2. Fairfax's weak share price is hitting the FFH-TRS position hard. After a steep decline in Q1, it is down another ~$255M so far in Q2. Importantly, this decline is being offset by gains in a broad range on other holdings - as a result, mark to market holdings are up modestly. With a value of $2.7B, FFH-TRS is - by far - Fairfax's second largest equity investment. Fairfax's stock is trading at $1,560 - dirt cheap. This means FFH-TRS position is dirt cheap - and this is how it is now being reflected/valued in Fairfax's book value. FFH-TRS is a coiled spring. It now provides significant upside potential for Fairfax moving forward.

Very insightful speech and Q&A with Mark Carney. He is increasingly looking like a man of the times for Canada. There is a question at the beginning of the Q&A about elevated inflation (19:39 minute mark). Carney said it is a necessary price to pay for what needs to be done - he didn’t even try and deny or downplay it. I am liking Fairfax’s views on inflation (higher highs and higher lows) and the positioning of their bond portfolio (low average duration) more and more. Great quote from Carney: “…comment from Finish president Alex Stubb (13:16 minute mark): “…people consistently do three things: over rationalize the past over dramatize the present, and underestimate the future” Implication from Carney: “The right response to the rupture happening today is clearer than it feels.” The quote from the Finish President applies equally to investors and investing…

We continue our series of posts on "Hidden Value." Today we hear what Warren Buffett has to say on the subject. Buffett’s Very Public Split From Book Value: Accounting Numbers Are a Start… For more than 50 years, Warren Buffett was book value’s biggest champion. He taught generations of shareholders to use book value as the primary tool to: Roughly value Berkshire Hathaway Evaluate management performance through growth in book value per share (BVPS) To understand how important book value was to Buffett, investors only had to read the opening paragraph of Berkshire’s annual letters. For decades, he repeated essentially the same message. From Berkshire’s 2017 annual report: “Berkshire’s gain in net worth during 2017 was $65.3 billion, which increased the per-share book value of both our Class A and Class B stock by 23%. Over the last 53 years... per-share book value has grown from $19 to $211,750, a rate of 19.1% compounded annually.” — Warren Buffett, Berkshire Hathaway 2017AR Then, in early 2019, Buffett abruptly changed course. In Berkshire Hathaway’s 2018 annual report, Buffett declared that book value had lost much of its usefulness as a metric for Berkshire shareholders. Given how central BVPS had been to Berkshire’s story for more than half a century, this was a seismic shift. Buffett stated it directly: “The annual change in Berkshire’s book value... is a metric that has lost the relevance it once had.” He then explained why. 1. Berkshire Hathaway Had Changed Buffett’s first point was straightforward: Berkshire itself had evolved. When Buffett acquired Berkshire in 1965, it was a struggling textile business. The 1967 purchase of National Indemnity introduced the P/C insurance model and, more importantly, insurance float. Initially, much of that float was invested in publicly traded equities. That was not the problem. Public equities are marked to market each quarter, meaning their fair value is generally reflected in book value over time. The issue was Berkshire’s growing collection of wholly owned operating businesses. As Berkshire increasingly redeployed capital into acquiring entire companies, a larger portion of its economic value became tied to assets carried on the balance sheet at accounting values far below their intrinsic worth. Unlike publicly traded holdings, these businesses were not periodically marked to fair value. This is what Buffett meant when he wrote: “Berkshire has gradually morphed from a company whose assets are concentrated in marketable stocks into one whose major value resides in operating businesses.” And: “Accounting rules require our collection of operating companies to be included in book value at an amount far below their current value.” The issue was compounded by Buffett’s long-standing philosophy of rarely selling wholly owned businesses. Much of the underlying appreciation would therefore never be surfaced through sale transactions. Over time, the gap between Berkshire’s accounting value and intrinsic value widened materially. Eventually, Buffett concluded that book value no longer adequately captured Berkshire’s economic reality. 2. Share Buybacks Distorted BVPS The second issue was Berkshire’s growing use of share repurchases. Buffett made clear that Berkshire would repurchase shares only when they traded below intrinsic value. Economically, those buybacks benefited long-term shareholders. But there was an accounting complication. If Berkshire repurchased shares above book value — for example at 1.2x book or higher — BVPS would decline even as intrinsic value per share increased. Over time, large buybacks executed above book value would make BVPS increasingly disconnected from economic reality. Buffett summarized the issue clearly: “Each transaction makes per-share intrinsic value go up, while per-share book value goes down.” That is a difficult concept for many investors to fully grasp. Buffett’s Solution So what did Buffett do? He effectively abandoned book value and BVPS as Berkshire’s primary performance metrics. Instead, Buffett argued that Berkshire’s stock price would become the best long-term measure of business performance: “Over time, however, Berkshire’s stock price will provide the best measure of business performance.” That was a remarkable statement from someone who had spent decades warning investors about the irrationality and volatility of markets. Book value still mattered. Buffett simply believed it no longer captured Berkshire’s economic reality well enough to remain the company’s primary scorecard. For long-time Berkshire shareholders, it was like getting hit with a bucket of ice water. Accounting Numbers Are the Beginning — Not the End Buffett had actually laid the intellectual foundation for this shift decades earlier: “Managers and investors alike must understand that accounting numbers are the beginning, not the end, of business valuation.” — Warren Buffett, Berkshire Hathaway 1982AR Successful investing is centred on properly estimating intrinsic value. Reported accounting results — EPS and BVPS — are a good starting point. But for companies like Berkshire Hathaway, Markel, and Fairfax Financial Holdings, accounting results can materially understate economic performance. Investors therefore need to supplement accounting measures with additional analysis to properly understand intrinsic value. That is especially true when: A growing portion of value resides in associates and consolidated operating companies Carrying values materially understate economic value Share buybacks are executed above book value but below intrinsic value Long-duration capital allocation decisions create value that accounting statements only partially capture This is the framework investors increasingly need to apply when evaluating Fairfax today. Buffett’s Full 2018 Commentary on Book Value Given its importance, Buffett’s full explanation from Berkshire Hathaway’s 2018 annual report is reproduced below: “Long-time readers of our annual reports will have spotted the different way in which I opened this letter. For nearly three decades, the initial paragraph featured the percentage change in Berkshire’s per-share book value. It’s now time to abandon that practice. The fact is that the annual change in Berkshire’s book value – which makes its farewell appearance on page 2 – is a metric that has lost the relevance it once had. Three circumstances have made that so. First, Berkshire has gradually morphed from a company whose assets are concentrated in marketable stocks into one whose major value resides in operating businesses. Second, while our equity holdings are valued at market prices, accounting rules require our collection of operating companies to be included in book value at an amount far below their current value. Third, it is likely that – over time – Berkshire will be a significant repurchaser of its shares at prices above book value but below intrinsic value. Each transaction makes per-share intrinsic value go up, while per-share book value goes down. That combination causes the book-value scorecard to become increasingly out of touch with economic reality. In future tabulations of our financial results, we expect to focus on Berkshire’s market price... Over time, however, Berkshire’s stock price will provide the best measure of business performance.” — Warren Buffett, Berkshire Hathaway 2018AR

One easy way to quantify how big associate and consolidated holdings were in the past is to look at earnings. From 2016 to 2020: Share of profit of associates averaged ~$100M per year Consolidated holdings averaged about ~$120M per year. Today Share of profit of associates ~$1B (this will change when Poseidon sale closes) Consolidated holdings ~$450M Share of profit of associates is much larger today than it was pre-2018 (10X). And this is even with sales of Resolute, Stelco and Peak flipping to consolidated etc. Consolidated holdings is also quite a bit larger. Bottom line, these two ‘buckets’ of holdings are much than they were compared to pre-2018.

@Milu, you ask another great question. Fairfax is pretty aggressive surfacing hidden value. This makes hidden value another income stream for Fairfax. Poseidon is a great recent example. I view hidden value like a funnel (perhaps a dam is better mental model?). Each year a bunch is ‘poured’ into the top. When Fairfax surfaces hidden value (boosting investment gains) some of it ‘flows’ out of the bottom. Over the past 5 years, much more has been poured into the top than has been flowing out of the bottom. Importantly, Fairfax controls how much flows out of the bottom (when they monetize an asset). As a result, hidden economic value will be converted to accounting value. This will boost BVPS. This will help keep BVPS more relevant than it would otherwise be.

@Milu, that is a great question. This is a largely a new development for Fairfax. This is important… it is largely not baked in to historical results. And its impact on future results will largely be new/incremental. A couple of important things are happening at the same time: In its equity portfolio, Fairfax is shifting from mark to market holdings to associate and consolidated. That is new (since about 2018… which I consider ‘new’). The quality of the holdings has dramatically improved since 2018. It got started in 2018 and has been slowly playing out. This means the equity holdings will deliver a higher return (as a group). This higher return has been compounding over time. The net result of these two points is hidden value has been growing rapidly since 2018. And this will continue moving forward. The sale of 50% of Poseidon provides a great recent example - confirmation of my thesis. The really interesting thing is it is not well understood or appreciated. But that doesn’t mean it doesn’t exist

Hidden Value – A Real Life Example: Eurobank Eurobank is one of the best real-world examples of the hidden value problem we discussed in yesterday’s article. It shows how accounting value and economic value can diverge dramatically over time when a high-quality associate holding compounds for many years. Eurobank: A Case Study in Hidden Value Eurobank is such an interesting investment for a number of reasons: It is Fairfax’s largest holding by far. It is Fairfax’s best-ever performing equity investment. It has become an enormous — and growing — store of hidden value. This third point is what matters most for investors trying to understand Fairfax today. Accounting Treatment Matters Fairfax first invested in Eurobank in 2014. Initially, the holding was accounted for as a mark-to-market investment. That changed at the end of 2019 when regulatory restrictions on Fairfax’s voting rights were removed. Beginning in 2020, Eurobank was classified as an associate holding. And for associate holdings, the starting point matters enormously. At the end of 2019: Greece was still recovering from a deep economic depression. Eurobank was still cleaning up non-performing loans. Central banks were pursuing zero interest rate policies. Investor sentiment toward Greek banks remained extremely poor. As a result, Eurobank traded at a depressed valuation (€0.92/share). Fairfax’s carrying value for its investment was established at just $1.164 billion. That low starting valuation became critically important. Fundamentals Improved Dramatically Over the next six years, the fundamentals changed completely: Greece elected a pro-business government. The economy improved materially. Interest rates moved sharply higher, boosting bank profitability. Eurobank repaired its balance sheet. The acquisition of Hellenic Bank strengthened its competitive position. Management executed exceptionally well. At the same time, the stock price compounded higher year after year. Earnings increased. The valuation multiple increased. Time and compounding worked their magic. Eurobank’s share price rose from €0.92 at December 31, 2019 to €3.97 at May 27, 2026 — an increase of 528%. Investors might assume this created a massive gain in Fairfax’s reported accounting results. Not really. Carrying Value vs. Market Value Because Eurobank is an associate holding, Fairfax uses equity accounting. The carrying value changes primarily through: Fairfax’s share of Eurobank’s earnings Dividends received Currency adjustments Importantly, changes in Eurobank’s stock price do not flow through Fairfax’s accounting results. As a result, Eurobank’s carrying value increased from $1.164 billion at year-end 2019 to an estimated $2.9 billion at May 27, 2026 — an increase of about $1.7 billion, or 149%. Solid. But it badly understates what actually happened economically. Over the same period, the market value of Fairfax’s stake increased from $1.164 billion to approximately $5.4 billion — an increase of $4.23 billion, or 530%. That difference is hidden value. Hidden Value Hidden value = market value – carrying value Market value: approximately $5.4 billion Carrying value: approximately $2.9 billion Hidden value: approximately $2.5 billion, or about $112 per diluted Fairfax share (pre-tax) And this is only one investment. That is the key point investors need to understand. Why This Matters Eurobank demonstrates why book value and reported earnings are becoming less useful as stand-alone valuation tools for Fairfax. The investment performed extraordinarily well economically. But because the holding is classified as an associate, much of the value creation never flowed through EPS or BVPS. Instead, the value accumulated quietly as hidden value. Importantly, the gap between market value and carrying value could continue to widen over time if: Eurobank continues compounding earnings, Greece continues improving economically, Interest rates remain structurally higher than the prior decade, and Fairfax continues to hold the investment long term. This is exactly the dynamic we discussed in yesterday’s article. For traditional P/C insurers, accounting value and economic value are usually reasonably close. But for companies like Fairfax — with large associate and consolidated holdings that compound over long periods — the gap between the two can become enormous.

I think "hidden value" is important. The question is how to incorporate it into how one analyzes and values the company. I don't think there is a correct answer. It really is a fascinating topic (i.e. Does it really even exist?). Importantly, the amount of "hidden value" has increased dramatically over the past 5 years. It is growing rapidly in size. I suspect this will continue (and could accelerate) in the coming years. Bottom line, this topic will grow in importance. The kicker: Unlike Berkshire Hathaway, Fairfax is not "buy and hold forever." Fairfax surfaces hidden value (sometimes creatively). It is like shareholders are being given a "delayed gratification" test.

My view is there are two types of earnings: Accounting Economic To calculate economic you need to start with accounting. And then make adjustments like adding the change in hidden value (adjusted for taxes). Economic earnings gives a more accurate picture of the growth in economic/intrinsic value for the year. This also provides a better benchmark to evaluate the performance of the management team.