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I have long been interested in where, how and why companies display deferred taxes on their balance sheets. For example, some companies, such as Fairfax, display both their prepaid taxes on their balance sheet in the form of a deferred tax asset ($325 million at year end 2024) and the taxes they will eventually have to pay but are currently deferring, as a deferred tax liability ($1,714 million at year end 2024 for Fairfax). Since taxing authorities generally don’t charge or pay interest on these amounts, I think of the deferred tax asset as an interest free loan from Fairfax to the tax collectors, and the deferred tax liability as an interest free loan from the tax collectors to Fairfax. On a net basis then, Fairfax has a net interest free loan outstanding from the tax authorities of $1.389 billion (1.714 billion - 0.325 billion). What other insurance companies can we find that are in a similar situation, having, on a net basis, borrowed money at zero percent interest from taxing authorities? Berkshire is one, Markel is another. But many otherwise respected insurers are in the opposite situation, having made net interest free loans to the taxing authorities…companies such as Chubb, Travelers, Progressive, Intact Financial, Hartford. Now this source of funding for Fairfax is nowhere near as large as the float of their subsidiary insurance companies. But it is also not exposed to the possibility of having its cost suddenly become significant, which could happen to the cost of float if a large catastrophe or two were to occur. And given that the net interest free loan for Fairfax is currently greater than $1 billion, it seems reasonable to pay some attention to it…after all, as a US senator during a budget hearing said years ago…”a billion here, a billion there….pretty soon you’re talking about real money”. In future posts, I plan to provide some mathematical thought experiments that can help us understand how valuable this liability can be to Fairfax in the long run. And since many other competitors are not taking advantage of this possibility for themselves, perhaps it is one form of a financial moat that folks such as Brett Horn are missing….