Fairfax 2024

[gfp]

I just noticed there was a 25,000 share trade in FFH yesterday.  Looked to be initiated by the buyer but obviously there was a buyer and a seller.  That's a large single trade for Fairfax -

[villainx]

1 hour ago, gfp said:

I just noticed there was a 25,000 share trade in FFH yesterday.

 

 

I can share that it wasn't me.  Margin don't get that high.

[hasilp89]

2 hours ago, gfp said:

I just noticed there was a 25,000 share trade in FFH yesterday.  Looked to be initiated by the buyer but obviously there was a buyer and a seller.  That's a large single trade for Fairfax -

Buyback?

[Malmqky]

Oh hey, core re/insurance subs upgraded to A+ and FFH upgraded to BBB+ by S&P

Edited May 31 by Malmqky

[nwoodman]

1 hour ago, Malmqky said:

Oh hey, core re/insurance subs upgraded to A+ and FFH upgraded to BBB+ by S&P

Excellent

 

“Fairfax has built a very strong competitive position, through organic growth and strategic acquisitions, based on large and diversified re/insurance operations that are well established in their respective markets.
 

Fairfax is one of the major global P/C re/insurers with $28.9 billion in gross premiums written (GPW) in 2023 (about $31.8 billion on a pro forma basis when including the $2.9 billion of GPW from the Gulf Insurance Group [GIG] acquisition in December 2023). We expect Fairfax's consolidated GPW to increase by about 15% in 2024 mostly driven by the GIG purchase. However, we believe the top line growth will likely moderate to about 5% in 2025-2026, supported by still favorable re/insurance.”

 

https://disclosure.spglobal.com/ratings/pt/regulatory/article/-/view/type/HTML/id/3188808
 

 

 

[Hoodlum]

7 hours ago, gfp said:

I just noticed there was a 25,000 share trade in FFH yesterday.  Looked to be initiated by the buyer but obviously there was a buyer and a seller.  That's a large single trade for Fairfax -

Another 66k block traded at the close today 

[gfp]

14 minutes ago, Hoodlum said:

Another 66k block traded at the close today 

 

I don't see that one - can you provide a screenshot of time and sales for FFH that shows what you are talking about?

 

edit - OK I think I see it now but not in the T&S I have.  I see 74,217 shares traded just after the close at 1534.31

 

I suppose it is possible / likely that these large crosses are just the routine stuff related to the various TRS counterparties.

Edited May 31 by gfp

[Hoodlum]

12 minutes ago, gfp said:

 

I don't see that one - can you provide a screenshot of time and sales for FFH that shows what you are talking about?

 

edit - OK I think I see it now but not in the T&S I have.  I see 74,217 shares traded just after the close at 1534.31

 

I suppose it is possible / likely that these large crosses are just the routine stuff related to the various TRS counterparties.

 

 

[Viking]

Fairfax’s Secret Sauce

 

Fairfax has compounded BVPS at 18.9% over the past 38 years. The share price has compounded at 18.3% over the same time frame. These calculations are in US$ and include dividends.   

 

Importantly, Fairfax’s performance has been very strong over the past 3 years. Fairfax’s outstanding performance is not some numerical/statisitical aberration - some relic of the distant past.

 

 

When compared to the universe of US listed companies since 1985, Fairfax’s compound return (18.3%) puts it in the top 1% of all companies. Fairfax calculates the numeric ranking at #17. That is an amazing stat.

 

 

Note: All slides used in this post are from Prem's presentation at Fairfax's AGM held on April 11, 2024.

• https://www.fairfax.ca/wp-content/uploads/Fairfax-AGM-2024.pdf

This leads to 3 very important questions:

• What caused Fairfax’s significant outperformance over the past 38 years?
• Are the factors/conditions that led to this outperformance still in place?
• What does this mean for the future performance of Fairfax?

Let’s start by exploring the first question.

 

What caused Fairfax’s significant outperformance over the past 38 years?

 

How did Fairfax achieve and sustain such a high level of performance?

 

Was Fairfax’s incredible performance just luck?

 

Did Fairfax’s performance have little to do with ability/skill and effort? Was Fairfax simply in the right place at the right time - a benefactor of good fortune?

 

Timeframe is the key to answering this question.

 

If Fairfax’s strong performance had happened over a short time period (like 5 or 10 years) then perhaps we could attribute it primarily to luck.

 

But +18% for 38 years?

 

That level of outperformance over that timeframe can’t be attributed to luck. The timeframe is too long.

 

Does Fairfax have a moat?

 

A moat refers to sustainable competitive advantages that a company has that allow it to ward off the competition while continuing to grow its business and profitability over time.

 

Most investors would probably say that Fairfax does not have a moat.

 

Why?

 

Well, when it comes to Fairfax most everyone knows 2 things:

• Insurance: Fairfax is not very good at insurance. Average at best.
• Investments: And Fairfax is also not very good at investments. ‘Cowboys’ might be a good way to describe them.

But if it’s not luck and it’s not skill then what explains Fairfax’s exceptional long term performance?

 

We come full circle and back to our original question.

 

How was Fairfax able to achieve and sustain such a high level of outperformance?

 

I think Mark Twain might have the answer.

 

“It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.“ Mark Twain

 

The obvious answer is that Fairfax does indeed have a moat - sustainable competitive advantages.

 

The fact that most investors don’t know what they are doesn’t mean they don’t exist. Instead, it provides great insight into how misunderstood Fairfax continues to be. And if the company is this misunderstood do you think it is fairly valued? Probably not.

 

So as painful as this might be for some, let’s explore this further.

 

What are Fairfax’s sustainable competitive advantages?

 

I have come up with five. Please share your thoughts.

 

1.) Prem Watsa

• Brilliant founder. Fairfax would not exist without Prem.
• Exceptional leader. This was on full display during Covid.
• High integrity (internally and externally).
• Greatest strength? The ability to attract and retain talent (at both insurance and investment operations).
• His age (73) is a concern (he was born in Aug 1950). However, his health (physical and mental) appears good.

Importantly, Prem has started to shed some responsibilities. And Fairfax has a deep bench of talent.

 

Prem has been a sustainable competitive advantage for Fairfax. How ‘sustainable’ is this advantage moving forward? Yes, that is debatable. Prem’s age is not a concern for me today. But it is a risk. So it is something to monitor.

 

2.) Family Control - this facilitates building shareholder value over the long term

 

Most publicly traded companies are slaves to hitting ‘expected’ quarterly results. This can be especially troublesome for P/C insurers.

 

Being family controlled allows Fairfax to focus on building shareholder value over the long term. Having a long term focus is a critical ingredient in the successful operation of both business engines of insurance and investments. It allows Fairfax to accept, ride out and exploit volatility.

 

Long term focus:

• Insurance: allows for the proper management of the insurance cycle. Importantly, it supports the discipline to walk away from unprofitable business in a soft market (that might last for years).
• Investments: allows for the investment in assets that will generate higher returns (like equities). Volatility is something to be exploited.

Most traditional P/C insurers have the bulk of their investment portfolios (+90%) allocated to bonds. Fairfax invests in a wide array of assets (including equities). This gives Fairfax the ability to generate a higher return on its investment portfolio over time. This provides Fairfax with a structural advantage when compared to other traditional P/C insurers who invest primarily only in bonds.

 

Fairfax - Berkshire Hathaway - Markel - WR Berkley

 

P/C insurance has been a wonderful vehicle to use to build great wealth for shareholders over the long term. Fairfax, Berkshire Hathaway, Markel and WR Berkley are four P/C insurance companies that have produced exceptional long term track records. What else do they have in common? They all are family controlled. I don’t think that is a fluke.

 

Fairfax, Berkshire Hathaway and Markel have something else in common: a significant portion of their investment portfolio is invested in equities. For these three companies, this is another important ingredient that has contributed to their exceptional long term performance.

 

3.) Fairfax’s Structure

 

Below are three important parts of Fairfax’s structure:

 

Small corporate head office - low overhead

• This keeps corporate costs low.
• Also, Prem’s annual salary of C$600,000 (with no stock options) is crazy low.

Insurance companies: decentralized and run by their presidents.

• This structure has enabled the long term, successful growth of the P/C insurance operating companies.
• Fairfax’s insurance operations have exploded in size. And over the past 15 years they have also markedly improved in terms of profitability / quality.

Capital allocation (acquisitions/investments): centralized at Fairfax’s head office / Hamblin Watsa.

• Allows Fairfax to allocate capital to the best opportunities (within the entire company) on a tax-efficient basis.
• Successfully utilizes a value investing framework.
• Partner with strong founders/management teams; financially sound organizations.
• Want to be passive investors (not a turn around shop).
• Over the past 6 years the team at Fairfax has been executing exceptionally well.

Capital allocation - external relationships - deal flow

 

Over the past 38 years, Fairfax and Hamblin/Watsa has built and cultivated an extensive (worldwide) and diverse (across sectors) network of relationships with external businesses / capital allocators.

• Fairfax has earned the reputation of being a trusted partner.
• Generates a steady amount of deal flow. Recent examples? In 2023, GIG and PacWest transactions.

Fairfax has built a organizational structure that is similar to the one that Berkshire Hathaway has successfully employed for the past 55 years. It works really well.

 

 

4.) Float / Leverage

 

With its insurance business, Fairfax produces an enormous amount of float - $35 billion at December 31, 2023. Float is technically a liability.

 

What is the cost of this float? Fairfax has well run insurance companies. As a result, they produce a sizeable underwriting profit most years. This means Fairfax actually gets paid a significant amount to hold its float.

 

Is Fairfax able to invest the float? Yes. And keep the investment return generated? Yes. With the spike in interest rates, Fairfax is now earning more than 7% on its total investment portfolio.

 

So Fairfax has a $35 billion liability called float. They actually get paid a significant sum to hold this liability (underwriting profit was $1.5 billion in 2023). And they are able to invest the $35 billion and keep the return they generate (7% = $2.5 billion). Fairfax is generating about $4 billion per year, or $177/share, just from its insurance operations and $35 billion in float.

 

But the story gets even better. Float at Fairfax has been growing like a weed - it has compounded at 18% over the past 38 years. And it should continue to grow in the future.

 

It is important to note that earnings from float are in addition to earnings that Fairfax generates from its equity - funds provided by shareholders and retained earnings.

 

Low cost and growing float is an extremely powerful combination.

 

Just ask Warren Buffett. Float was the engine that propelled Berkshire Hathaway’s phenomenal growth in the 1980’s and 1990’s.

 

 

5.) Culture

 

‘Culture eats strategy for breakfast.’ Peter Drucker

 

What does that mean?

 

“…no matter how great your business strategy is, your plan will fail without a company culture that encourages people to implement it.” Corporate Governance Institute

 

For successful organizations culture and strategy are two sides of the same coin - they are aligned with each other.

 

Fairfax has a very strong culture. And it is aligned with its strategy. It has been carefully honed over the past 38 years. It has been forged in the fires of adversity. Its biggest champion has been Prem.

 

A couple of examples:

• Insurance: What to do in a soft market? Write less business. Even at the expense of short term results (lower top line). Even if it persists for years. Zenith is a great example of this today.
• Investments: What to do when volatility hits? Do the opposite of what Mr. Market is likely doing. Don’t panic. Look for bargains. Get creative. Exploit the situation. In recent years, Fairfax is littered with great examples of this.

The fact that Fairfax has had very little turnover suggests that its culture is aligned with the values/beliefs of its employees.   

 

 

All companies make mistakes. Successful companies embrace and learn from their mistakes. And use them to become stronger companies.

 

Mistakes Made

 

Over its 38 year history, Fairfax has made two big mistakes:

1. Insurance: the acquisitions of Crum & Forster and TIG in 1998/1999.
2. Investments: equity hedge/share positions (2010-2020) + poor equity purchases 2014-2017.

Importantly, the mistakes made were solvable.

 

The poor insurance acquisitions resulted in what Prem called the ‘biblical seven lean years’ for Fairfax from 1999 to 2005. And the poor equity investments resulted in a lost decade for Fairfax shareholders (2010-2020).

 

But here is the silver lining for investors: each mistake drove Fairfax, over time, to make important and meaningful internal changes. These changes make Fairfax a much stronger company today.

 

Insurance: the C&F and TIG fiasco taught Fairfax that they needed to re-think their approach to P/C insurance. Regarding acquisitions, they needed to flip from the Ben Graham ‘cigar butt’ approach to ‘quality at a fair price’ approach. They also needed to improve the quality of their owned P/C insurance businesses. As part of this evolution, in 2011 Andy Barnard was appointed President and COO of Fairfax Insurance Group to oversee all of Fairfax’s insurance operations. Fast forward to 2024. Fairfax’s collection of P/C insurance companies are now high quality. They have never been better positioned.

 

Investments: Fairfax’s string or poor investments from 2010-2020 taught Fairfax that they needed to:

• End the equity hedge / short program. Equity hedges were exited in late 2016. The final short position was exited in late 2020. Fairfax publicly committed that it would no longer short indexes or individual stocks.
• Modify the stock selection framework used at Hamblin Watsa. With its new equity purchases Fairfax put more of a premium on partnering with founders/strong management teams and companies in a strong financial position.

Since 2018, with new equity purchases, the team at Fairfax/Hamblin Watsa has been executing very well. It has also done a great job of exiting/fixing past mistakes. Fast forward to 2024. Fairfax’s equity holdings are lead by strong management teams. They are in strong financial positions and have solid prospects. Fairfax has never been better positioned.

 

Mistakes made summary

 

Each of the mistakes described above that were made by Fairfax were significant. They caused the performance of the company (and its stock) to suffer - for extended periods of time. But the mistakes made also taught Fairfax important lessons that led to substantive internal changes. Those changes have made Fairfax’s two economic engines - insurance and investments - stronger and more resilient. Each time, the mistake made provided the impetus for Fairfax to grow and improve as a company.

 

Are the factors/conditions that led to Fairfax's outperformance over 38 years still in place?

 

In 2023 Fairfax delivered the best year of earnings in its history. Results are being driven primarily by high quality operating income. Its two business units, insurance and investments, have never been better positioned.

 

This suggests the factors/conditions that led to Fairfax’s outperformance in the past are indeed still in place.

 

 

What does this mean for the  future performance of Fairfax?

 

Fairfax has compounded BVPS at 18.9% and the share price at 18.3% (US$ and including dividends) over the past 38 years.

 

What has allowed that to happen over such a long time frame?

 

Fairfax’s ‘secret sauce’ is made with the following ingredients:

1. Prem Watsa - founder led
2. Family control - allows long term focus
3. Structure - small H/O, decentralized insurance subs, centralized capital allocation
4. Float - low cost and growing
5. Strong culture - aligned with strategy; aligned with employees beliefs and values

Importantly, each of Fairfax’s sustainable competitive advantages all complement each other. The total value they deliver is much greater than the sum of the individual parts.

 

The future

 

With some trying years behind it, Fairfax has matured as a company.

• It now has a well run, profitable global P/C insurance business.
• At the same time it has an experienced well run investment operation.

Fairfax’s collection of sustainable competitive advantages has never been stronger. The company looks like it is just entering its prime.

 

The interesting thing is Fairfax is still a small company (relatively speaking). It still has a lot of growth ahead of it. It looks today an awful lot like a much younger Berkshire Hathaway (1980’s/1990’s version?). This bodes well for Fairfax’s future results.

 

—————

 

The P/C insurance model: Why isn’t everyone doing it?

 

Fairfax’s collection of insurance businesses and investments has created a virtuous circle of growth.

• The insurance businesses generates an underwriting profit.
• The investments (significantly augmented by float from insurance) generate more profits.
• The profits are then re-invested to grow insurance (which grows float further) and investments. Importantly, new money goes to best opportunities.
• This results in profits being compounded at high rates of return.
• Executed over many years  - this results in exponential growth.

If the model used by Fairfax, Berkshire Hathaway and Markel is so good (leverage P/C insurance and invest in equities) why isn’t more companies doing it?

 

It is exceptionally difficult. And it takes a long time.

• P/C insurance is, relatively speaking, a small industry.
• P/C insurance is largely a commodity - it is a very competitive industry.
• It takes decades to build out/scale a P/C insurance company.
• Capital allocation (something other than bonds) is very difficult to do well over the long term.
• Volatility is a feature of the insurance industry, not a bug.

Does this sound like a business Wall Street would be interested in?

 

Wall Street hates volatility and thinks only in the very short term. If you are looking to get rich quick you would have to be an idiot to pick P/C insurance as your vehicle. As a result, only a few companies have been able to replicate Warren Buffett’s very successful model. Fairfax is one of them.

 

Edited June 2 by Viking

[UK]

3 hours ago, Viking said:

Fairfax’s Secret Sauce

 

Fairfax has compounded BVPS at 18.9% over the past 38 years. The share price has compounded at 18.3% over the same time frame. These calculations are in US$ and include dividends.   

 

Importantly, Fairfax’s performance has been very strong over the past 3 years. Fairfax’s outstanding performance is not some numerical/statisitical aberration - some relic of the distant past.

 

 

When compared to the universe of US listed companies since 1985, Fairfax’s compound return (18.3%) puts it in the top 1% of all companies. Fairfax calculates the numeric ranking at #17. That is an amazing stat.

 

 

Note: All slides used in this post are from Prem's presentation at Fairfax's AGM held on April 11, 2024.

• https://www.fairfax.ca/wp-content/uploads/Fairfax-AGM-2024.pdf

This leads to 3 very important questions:

• What caused Fairfax’s significant outperformance over the past 38 years?
• Are the factors/conditions that led to this outperformance still in place?
• What does this mean for the future performance of Fairfax?

Let’s start by exploring the first question.

 

What caused Fairfax’s significant outperformance over the past 38 years?

 

How did Fairfax achieve and sustain such a high level of performance?

 

Was Fairfax’s incredible performance just luck?

 

Did Fairfax’s performance have little to do with ability/skill and effort? Was Fairfax simply in the right place at the right time - a benefactor of good fortune?

 

Timeframe is the key to answering this question.

 

If Fairfax’s strong performance had happened over a short time period (like 5 or 10 years) then perhaps we could attribute it primarily to luck.

 

But +18% for 38 years?

 

That level of outperformance over that timeframe can’t be attributed to luck. The timeframe is too long.

 

Does Fairfax have a moat?

 

A moat refers to sustainable competitive advantages that a company has that allow it to ward off the competition while continuing to grow its business and profitability over time.

 

Most investors would probably say that Fairfax does not have a moat.

 

Why?

 

Well, when it comes to Fairfax most everyone knows 2 things:

• Insurance: Fairfax is not very good at insurance. Average at best.
• Investments: And Fairfax is also not very good at investments. ‘Cowboys’ might be a good way to describe them.

But if it’s not luck and it’s not skill then what explains Fairfax’s exceptional long term performance?

 

We come full circle and back to our original question.

 

How was Fairfax able to achieve and sustain such a high level of outperformance?

 

I think Mark Twain might have the answer.

 

“It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.“ Mark Twain

 

The obvious answer is that Fairfax does indeed have moats - sustainable competitive advantages.

 

The fact that most investors don’t know what they are doesn’t mean they don’t exist. Instead, it provides great insight into how misunderstood Fairfax continues to be. And if the company is this misunderstood do you think it is fairly valued? Probably not.

 

So as painful as this might be for some, let’s explore this further.

 

What are Fairfax’s sustainable competitive advantages?

 

I have come up with five.

 

1.) Prem Watsa

• Brilliant founder. Fairfax would not exist without Prem.
• Exceptional leader. This was on full display during Covid.
• High integrity (internally and externally).
• Greatest strength? The ability to attract and retain talent (at both insurance and investment operations).
• His age (73) is a concern (he was born in Aug 1950). However, his health (physical and mental) appears good.

Importantly, Prem has started to shed some responsibilities. And Fairfax has a deep bench of talent.

 

Prem has been a sustainable competitive advantage for Fairfax. How ‘sustainable’ is this advantage moving forward? Yes, that is debatable. Prem’s age is not a concern for me today. But it is a risk. So it is something to monitor moving forward.

 

2.) Family Control - this facilitates building shareholder value over the long term

 

Most publicly traded companies are slaves to hitting ‘expected’ quarterly results. This can be especially troublesome for P/C insurers.

 

Being family controlled allows Fairfax to focus on building shareholder value over the long term. Having a long term focus is a critical ingredient in the successful operation of both business engines of insurance and investments. It allows Fairfax to accept, ride out and exploit volatility.

 

Long term focus:

• Insurance: allows for the proper management of the insurance cycle. Importantly, it supports the discipline to walk away from unprofitable business in a soft market (that might last for years).
• Investments: allows for the investment in assets that will generate higher returns (like equities). Volatility is something to be exploited.

Most traditional P/C insurers have the bulk of their investment portfolios (+90%) allocated to bonds. Fairfax invests in a wide array of assets (including equities). This gives Fairfax the ability to generate a higher return on its investment portfolio over time. This provides Fairfax with a structural advantage when compared to other traditional P/C insurers who invest primarily only in bonds.

 

Fairfax - Berkshire Hathaway - Markel - WR Berkley

 

P/C insurance has been a wonderful vehicle to use to build great wealth for shareholders over the long term. Fairfax, Berkshire Hathaway, Markel and WR Berkley are four P/C insurance companies that have produced exceptional long term track records. What else do they have in common? They all are family controlled. I don’t think that is a fluke.

 

Fairfax, Berkshire Hathaway and Markel have something else in common: a significant portion of their investment portfolio is invested in equities. For these three companies, this is another important ingredient that has contributed to their exceptional long term performance.

 

3.) Fairfax’s Structure

 

Below are three important parts of Fairfax’s structure:

 

Small corporate head office - low overhead

• Also, Prem’s annual salary of C$600,000 (with no stock options) is crazy low.
• This keeps corporate costs low.

Insurance companies: decentralized and run by their presidents.

• This structure has enabled the long term, successful growth of the P/C insurance operating companies.
• Fairfax’s insurance operations have exploded in size. And over the past 15 years they have also markedly improved in terms of profitability / quality.

Capital allocation (acquisitions/investments): centralized at Fairfax’s head office / Hamblin Watsa.

• Successfully utilizes a value investing framework.
• Partner with strong founders/management teams; financially sound organizations.
• Want to be passive investors (not a turn around shop).
• Allows Fairfax to allocate capital to the best opportunities (within the entire company) on a tax-efficient basis.
• Over the past 6 years the team at Fairfax has been executing exceptionally well.

Capital allocation - external relationships - deal flow

 

Over the past 38 years, Fairfax and Hamblin/Watsa has built and cultivated an extensive (worldwide) and diverse (across sectors) network of relationships with external businesses / capital allocators.

• Fairfax has earned the reputation of being a trusted partner.
• Generates a steady amount of deal flow. Recent examples? In 2023, GIG and PacWest transactions.

Fairfax has built a organizational structure that is similar to the one that Berkshire Hathaway has successfully employed for the past 55 years. It works really well.

 

 

4.) Float / Leverage

 

With its insurance business, Fairfax produces an enormous amount of float - $35 billion at December 31, 2023. Float is technically a liability.

 

What is the cost of this float? Fairfax has well run insurance companies. As a result, they produce a sizeable underwriting profit most years. This means Fairfax actually gets paid a significant amount to hold its float.

 

Is Fairfax able to invest the float? Yes. And keep the investment return generated? Yes. With the spike in interest rates, Fairfax is now earning more than 7% on its total investment portfolio.

 

So Fairfax has a $35 billion liability called float. They actually get paid a significant sum to hold this liability (underwriting profit was $1.5 billion in 2023). And they are able to invest the $35 billion and keep the return they generate (7% = $2.5 billion). Fairfax is generating about $4 billion per year, or $177/share, just from its $35 billion in float.

 

But the story gets even better. Float at Fairfax has been growing like a weed - it has compounded at 18% over the past 38 years. And it should continue to grow in the future.

 

It is important to note that earnings from float are in addition to earnings that Fairfax generates from its equity - funds provided by shareholders and retained earnings.

 

Low cost and growing float is an extremely powerful combination.

 

Just ask Warren Buffett. Float was the engine that propelled Berkshire Hathaway’s phenomenal growth in the 1980’s and 1990’s.

 

 

5.) Culture

 

‘Culture eats strategy for breakfast.’ Peter Drucker

 

What does that mean?

 

“…no matter how great your business strategy is, your plan will fail without a company culture that encourages people to implement it.” Corporate Governance Institute

 

For successful organizations culture and strategy are two sides of the same coin - they are aligned with each other.

 

Fairfax has a very strong culture. And it is aligned with its strategy. It has been carefully honed over the past 38 years. It has been forged in the fires of adversity. Its biggest champion has been Prem.

 

A couple of examples:

• Insurance: What to do in a soft market? Write less business. Even at the expense of short term results (lower top line). Even if it persists for years. Zenith is a great example of this today.
• Investments: What to do when volatility hits? Do the opposite of what Mr. Market is likely doing. Don’t panic. Look for bargains. Get creative. Exploit the situation. In recent years, Fairfax is littered with great examples of this.

The fact that Fairfax has had very little turnover suggests that its culture is aligned with the values/beliefs of its employees.   

 

 

All companies make mistakes. Successful companies embrace and learn from their mistakes. And use them to become stronger companies.

 

Mistakes Made

 

Over its 38 year history, Fairfax has made two big mistakes:

1. Insurance: the acquisitions of Crum & Forster and TIG in 1998/1999.
2. Investments: equity hedge/share positions (2010-2020) + poor equity purchases 2014-2017.

Importantly, the mistakes made were solvable.

 

The poor insurance acquisitions resulted in what Prem called the ‘biblical seven lean years’ for Fairfax from 1999 to 2005. And the poor equity investments resulted in a lost decade for Fairfax shareholders (2010-2020).

 

But here is the silver lining for investors: each mistake drove Fairfax, over time, to make important and meaningful internal changes. These changes make Fairfax today a much stronger company.

 

Insurance: the C&F and TIG fiasco taught Fairfax that they needed to re-think their approach to P/C insurance. Regarding acquisitions, they needed to flip from the Ben Graham ‘cigar butt’ approach to ‘quality at a fair price’ approach. They also needed to improve the quality of their owned P/C insurance businesses. As part of this evolution, Andy Barnard was moved into his role in 2011 to oversee all of Fairfax’s insurance operations. Fast forward to 2024. Fairfax’s collection of P/C insurance companies are now high quality. They have never been better positioned.

 

Investments: Fairfax’s string or poor investments from 2010-2020 taught Fairfax that they needed to:

• End the equity hedge / short program. Equity hedges were exited in late 2016. The final short position was exited in late 2020. Fairfax publicly committed that it would no longer short indexes or individual stocks.
• Modify the stock selection framework used at Hamblin Watsa. With its new equity purchases Fairfax put more of a premium on partnering with founders/strong management teams and companies in a strong financial position.

Since 2018, with new equity purchases, the team at Fairfax/Hamblin Watsa has been executing very well. It has also done a great job of exiting/fixing past mistakes. Fast forward to 2024. Fairfax’s equity holdings are lead by strong management teams. They are in strong financial positions and have solid prospects. Fairfax has never been better positioned.

 

Mistakes made summary

 

Each of the mistakes described above that were made by Fairfax were significant. They caused the performance of the company (and its stock) to suffer - for extended periods of time. But the mistakes made also taught Fairfax important lessons that lead to substantive internal changes. Those changes have made Fairfax’s two economic engines - insurance and investments - stronger and more resilient. Each time, the mistake made provided the impetus for Fairfax to grow and improve as a company.

 

Are the factors/conditions that led to Fairfax's outperformance over 38 years still in place?

 

Fairfax just delivered its best year ever in 2023. Results are being driven primarily by high quality operating income. Its two business units, insurance and investments, have never been better positioned.

 

This suggests the factors/conditions that led to Fairfax’s outperformance in the past are indeed still in place.

 

 

What does this mean for the  future performance of Fairfax?

 

Fairfax has compounded BVPS at 18.9% and the share price at 18.3% (US$ and including dividends) over the past 38 years.

 

What has allowed that to happen over such a long time frame?

 

Fairfax’s ‘secret sauce’ is made with the following ingredients:

1. Prem Watsa - founder led
2. Family control - allows long term focus
3. Structure - small H/O, decentralized insurance subs, centralized capital allocation
4. Float - low cost and growing
5. Strong culture - aligned with strategy; aligned with employees beliefs and values

Importantly, each of Fairfax’s sustainable competitive advantages all complement each other. The total value they deliver is much greater than the sum of the individual parts.

 

The future

 

With some trying years behind it, Fairfax has matured as a company.

• It now has a well run, profitable global P/C insurance business.
• At the same time it has an experienced well run investment operation.

Fairfax’s collection of sustainable competitive advantages has never been stronger. The company looks like it is just entering its prime.

 

The interesting thing is Fairfax is still a small company (relatively speaking). It still has a lot of growth ahead of it. It looks today an awful lot like a much younger Berkshire Hathaway (1980’s version?). This bodes well for Fairfax’s future results.

 

—————

 

The P/C insurance model: Why isn’t everyone doing it?

 

Fairfax’s collection of insurance businesses and investments has created a virtuous circle of growth.

• The insurance businesses generates an underwriting profit.
• The investments (significantly augmented by float from insurance) generate more profits.
• The profits are then re-invested to grow insurance (which grows float further) and investments - importantly, new money goes to best opportunities.
• This results in profits being compounded at high rates of return.
• Executed over many years  - this results in exponential growth.

If the model used by Fairfax, Berkshire Hathaway and Markel is so good (leverage P/C insurance) why is everyone not doing it?

 

It is exceptionally difficult. And it takes a long time.

• P/C insurance is, relatively speaking, a small industry.
• P/C insurance is a largely a commodity - it is a very competitive industry.
• It takes decades to build out/scale a P/C insurance company.
• Volatility is a feature of the insurance industry, not a bug.

Does this sound like a business Wall Street would be interested in?

 

Wall Street hates volatility and thinks only in the very short term. If you are looking to get rich quick you would have to be an idiot to pick P/C insurance as your vehicle. As a result, only a few companies have been able to replicate Warren Buffett’s very successful model. Fairfax is one of them.

 

 

Great post!

[Maverick47]

4 hours ago, Viking said:

The P/C insurance model: Why isn’t everyone doing it?

 

Fairfax’s collection of insurance businesses and investments has created a virtuous circle of growth.

• The insurance businesses generates an underwriting profit.
• The investments (significantly augmented by float from insurance) generate more profits.
• The profits are then re-invested to grow insurance (which grows float further) and investments. Importantly, new money goes to best opportunities.
• This results in profits being compounded at high rates of return.
• Executed over many years  - this results in exponential growth.

If the model used by Fairfax, Berkshire Hathaway and Markel is so good (leverage P/C insurance and invest in equities) why isn’t more companies doing it?

 

It is exceptionally difficult. And it takes a long time.

• P/C insurance is, relatively speaking, a small industry.
• P/C insurance is largely a commodity - it is a very competitive industry.
• It takes decades to build out/scale a P/C insurance company.
• Capital allocation (something other than bonds) is very difficult to do well over the long term.
• Volatility is a feature of the insurance industry, not a bug.

Does this sound like a business Wall Street would be interested in?

 

Wall Street hates volatility and thinks only in the very short term. If you are looking to get rich quick you would have to be an idiot to pick P/C insurance as your vehicle. As a result, only a few companies have been able to replicate Warren Buffett’s very successful model. Fairfax is one of them.

Thanks @Viking!  As always, your posts are full of thought provoking observations and  questions.

 

The section highlighted above from the end of your post struck a chord with me.  As a retired actuary who spent 33 years with the same P and C company, who also admired and personally invested in Berkshire, Markel, Fairfax and (before Berkshire acquired it), Alleghany, I spent a good portion of my own time trying to get the company I worked for to copy the business model of these other companies, with no success.

 

Your points about why more competitors don’t copy them are pretty much the same as I eventually concluded.  Exponential compounding connected with long term focused investing in equities really begins to pay off once it’s had a long runway to work its inexorable magic.  Ten years, which is a long time for a typical CEO just isn’t long enough for the associated risk to pay off.  Family run companies like Berkshire, Fairfax, Markel, are able to take the long view and see how powerful a few extra points of returns, albeit lumpy, can pay off once the timeframe approaches and even exceeds 30 years.

 

Charlie Munger was once asked why more companies didn’t follow Berkshire’s approach of focused investing in a few companies.  He responded with “It’s a good question.  More companies should follow us.  Look at our results and the fun we’re having.  But Jack McDonald, the Stanford Business professor who teaches a course based on these value investment principles, says he feels like the Maytag repairman.”

 

I used this same question and answer in a white paper I shared with a new CEO and CFO at the company I worked for.  The CEO responded with a short email basically saying it was interesting, but attributing Berkshire’s success only to great stock picking.  I got a brief audience with the CFO, during which I learned that the company I worked for had decided to outsource the investment function altogether to a company focused on index ETFs for both equities and fixed income.

 

That’s when I gave up trying to advocate for a more intelligent and successful business model from the inside of a company, and now in retirement, I vote with my own assets and invest them only in companies like Fairfax that have a proven track record of managing float, investments and insurance underwriting in an intelligent fashion.  I’ve seen how hard it is to get competitors to change to a similar approach, and am convinced that this holistic long term view of a successful insurance business model is a true moat in and of itself.  Analysts like Brett Horn who don’t think Fairfax has a moat miss exactly what you outlined in your post — the proof in the pudding of a hugely successful long term compounder, one which still has a good amount of runway left ahead of it.

 

[backtothebeach]

1 hour ago, Maverick47 said:

As a retired actuary who spent 33 years with the same P and C company, who also admired and personally invested in Berkshire, Markel, Fairfax and (before Berkshire acquired it), Alleghany, I spent a good portion of my own time trying to get the company I worked for to copy the business model of these other companies, with no success.

 

Your points about why more competitors don’t copy them are pretty much the same as I eventually concluded.

Thank you for your insight, @Maverick47.

[Hektor]

Thanks @Viking for the post and @Maverick47 for your insight.

[gamma78]

I think "Family Control" is really the minimum common denominator. Ultimately @Viking you highlight other factors (1 - Prem Watsa and 5 - Culture) which really are under the heading of family control 

 

There are numerous other family holding companies that have very good returns - Exor in Italy, Bollore in France, Jardine Matheson in HK. I recall a document by Exor showing the long term trends of family owned companies and how high those returns were (well into teens on a very long term basis). Periodically someone will say that nepotism is a risk with a Berkshire and Fairfax - and strictly speaking that is true if you assume the next in line have no merit whatsoever. But to expect a wall street type with a suit and a 10 year timeline to outperform someone who actually thinks about the next generation? Nah. Long term family ownership is a shorthand for "agency", meaning someone who gives a shit for more than 10 years and more than their immediate options package.

 

I would say that PE is trying to fill out this space recently too. The float however is a leverage provider on "Family Control". And a great one - better than what PE can do themselves because it is more stable and less costly. And even the Exors, Bollores and Jardine Matheson don't have that. 

 

So to me.....Family Control + Float is the real moat. 

 

It rhymes too. 

 

 

 

 

Edited June 2 by gamma78

[Dinar]

You don't want family control.  You want between 15-30% insider ownership - big enough to care, but not a blocking position.  For every Arnault pere, Prem, Vincent Bollore, you get Sulzberger (NYT), Tim O'shaughnessy and Don Graham (GHC), MNPP & the Marx family.  

[gamma78]

15-30% is something I would actually characterise often as de-facto control, in particular if vested in one person or family. In particular frequently rights on the shares are slightly distinct from quantity. 

 

I hear your argument, and I would say that family control is not unlike leverage. Cuts both ways. In the right hands it explodes value. In the wrong hands it decimates it. 

 

I am comfortable with Prem, the Google-guys, Buffett, the Agnelli family and Arnault because they have control and a long history of rational decision making. To me control in their hands is a competitive advantage. 

 

 

[Viking]

4 hours ago, gamma78 said:

I hear your argument, and I would say that family control is not unlike leverage. Cuts both ways. In the right hands it explodes value. In the wrong hands it decimates it. 

 

@gamma78 Great point. But I would add a caveat. Sometimes management loses their way - for extended time periods (a decade or longer). And when they do lose their way, it is not a given they will actually get the train back on the tracks. When this happens 'buy and hold' can be a terrible strategy.

 

Therefore, it is important for investors  - when they invest in individual companies - to be rational and do so with their eyes wide open. This applies equally to investments that are family controlled and those that are not family controlled.

 

My strategy with Fairfax over the past 21 years has been to own it when the company is managing its business (insurance and investments) in a way that fits with how I am wired.

 

There have been long periods when what Fairfax was doing was not a good fit for me. So I shifted to other investments that were.

 

I love what Fairfax has been doing the past 5 years. I love how the company is positioned today. And I think the table is set for them to do something special over the next 5 years (perhaps longer). But I will continue to be rational and monitor what they are doing.

 

This strategy has served me very well over the years. It is not Fairfax specific - it is how I manage all of my investments. 

Edited June 2 by Viking

[Viking]

15 hours ago, Maverick47 said:

Thanks @Viking!  As always, your posts are full of thought provoking observations and  questions.

 

The section highlighted above from the end of your post struck a chord with me.  As a retired actuary who spent 33 years with the same P and C company, who also admired and personally invested in Berkshire, Markel, Fairfax and (before Berkshire acquired it), Alleghany, I spent a good portion of my own time trying to get the company I worked for to copy the business model of these other companies, with no success.

 

Your points about why more competitors don’t copy them are pretty much the same as I eventually concluded.  Exponential compounding connected with long term focused investing in equities really begins to pay off once it’s had a long runway to work its inexorable magic.  Ten years, which is a long time for a typical CEO just isn’t long enough for the associated risk to pay off.  Family run companies like Berkshire, Fairfax, Markel, are able to take the long view and see how powerful a few extra points of returns, albeit lumpy, can pay off once the timeframe approaches and even exceeds 30 years.

 

Charlie Munger was once asked why more companies didn’t follow Berkshire’s approach of focused investing in a few companies.  He responded with “It’s a good question.  More companies should follow us.  Look at our results and the fun we’re having.  But Jack McDonald, the Stanford Business professor who teaches a course based on these value investment principles, says he feels like the Maytag repairman.”

 

I used this same question and answer in a white paper I shared with a new CEO and CFO at the company I worked for.  The CEO responded with a short email basically saying it was interesting, but attributing Berkshire’s success only to great stock picking.  I got a brief audience with the CFO, during which I learned that the company I worked for had decided to outsource the investment function altogether to a company focused on index ETFs for both equities and fixed income.

 

That’s when I gave up trying to advocate for a more intelligent and successful business model from the inside of a company, and now in retirement, I vote with my own assets and invest them only in companies like Fairfax that have a proven track record of managing float, investments and insurance underwriting in an intelligent fashion.  I’ve seen how hard it is to get competitors to change to a similar approach, and am convinced that this holistic long term view of a successful insurance business model is a true moat in and of itself.  Analysts like Brett Horn who don’t think Fairfax has a moat miss exactly what you outlined in your post — the proof in the pudding of a hugely successful long term compounder, one which still has a good amount of runway left ahead of it.

 

 

@Maverick47 I really appreciate (and enjoyed reading) your story. Thanks for sharing. 

 

My earlier post took me about 8 months to write (for all the different ideas to come together). Buffett's 'float' model includes so many interesting layers. I am still digesting all of them. (One miss from my write-up is how 'type of insurance written' is likely another important piece of the puzzle).

 

I am an outsider... I have never worked in P/C insurance or in investment management. So this topic does not come naturally / intuitively to me. So I do appreciate when people from inside the P/C insurance world comment. It helps me to understand if I am on to something. And how I need to revisit my thinking.

 

Yes, when I post I do try and be 'thought provoking.' I try and have an opinion. And I like to sometimes exaggerate to make a point. And I try and keep things interesting for the reader.

 

The goal is to develop a thesis on an idea. Stay inquisitive. Keep learning. And course correct over time. This board provides a wonderful platform to do this.

Edited June 2 by Viking

[bluedevil]

@Viking I don’t if you would call it a moat, but one thing that Fairfax has been exceptional at over the past 38 years is knowing the value of its own equity and selling high and buying low.  The latest chapter of that was the 2m shares repurchased in late 2021 and the nearly 2m shares of TRS exposure.  These have generated about $2.5 billion for the company, but they are just the most recent examples of highly opportunistic moves in Fairfax’s own equity that have juiced the returns on the stock.  Many years ago, i sat down and read every shareholder letter up to that point, and one thing that struck me was how much of “the story” this accounted for - including buying scale on the insurance side by issuing stock at 2X or more of book and using it to buy other insurance company’s at below book. 

 

[Viking]

1 hour ago, bluedevil said:

@Viking I don’t if you would call it a moat, but one thing that Fairfax has been exceptional at over the past 38 years is knowing the value of its own equity and selling high and buying low.  The latest chapter of that was the 2m shares repurchased in late 2021 and the nearly 2m shares of TRS exposure.  These have generated about $2.5 billion for the company, but they are just the most recent examples of highly opportunistic moves in Fairfax’s own equity that have juiced the returns on the stock.  Many years ago, i sat down and read every shareholder letter up to that point, and one thing that struck me was how much of “the story” this accounted for - including buying scale on the insurance side by issuing stock at 2X or more of book and using it to buy other insurance company’s at below book. 

@bluedevil I agree. This is another very important piece of the Fairfax puzzle. @SafetyinNumbers has pointed this out to me numerous times in the past. 
 

This topic would make a great future post - there are so many interesting angles to it. 

Here are two angles i find interesting. 

 

The overarching theme to this topic is how Fairfax views financial markets. 

1.) Fairfax aggressively exploits its share price. Issue shares when the stock is at a high valuation. Aggressively buy shares back when the stock is at a low valuation. It this context, high volatility in the stock price has been a very good thing for Fairfax. But what about those investors buying Fairfax stock issued at high valuations?
 

Of course Fairfax is simply doing what Ben Graham teaches: use Mr Market to your advantage. He is there to be exploited - take advantage of his irrationality/extreme mood swings.

 

But at the same time, Prem/Fairfax appears to want to attract long term shareholders. And most investors - even those who expect to hold for the long term - do not appreciate extreme volatility, especially of it is stretched out over many years.
 

Now contrast this with how Berkshire Hathaway operates. 

 

Now as a Fairfax shareholder, i love what Fairfax does. But i wonder if it fits the ‘we want long term shareholders’ mantra.
 

2.) There is a second angle to this. Fairfax takes a similar approach with its equity and insurance holdings. Sell stakes when they can fetch a high valuation. Buy them back when they can be re-purchased at a low valuation. 
 

Minority shareholders need to have their eyes wide open here. 
 

Again, i like what Fairfax does - it tends to build lots of value for Fairfax. 
 

But i wonder as Fairfax gets larger/more visible if it ‘tweaks’ this part of its business model. What do others think?

 

Edited June 3 by Viking

[modiva]

@Viking Thanks for very insightful analysis.  

 

While I agree with all of your points, I think the CAGR since inception is misleading metric to look at.  

 

What do I mean?  If we remove the first 5, 10, 15 years, it is very clear that the numbers don't look stellar but rather average.  The low starting point gives a high boost, but once we normalize it, the numbers look average. 

 

For example, the float/share since 1985 grew at 18.4% compounded, the growth rate reduces dramatically once we exclude the initial years.  The float/share since 1995 grew at 11.4%, and since 2000 grew at just 5.5%. 

 

Disclosure: I have 35% of my portfolio in Fairfax, and 15% in Fairfax India. 

 

[Viking]

1 hour ago, modiva said:

@Viking Thanks for very insightful analysis.  

 

While I agree with all of your points, I think the CAGR since inception is misleading metric to look at.  

 

What do I mean?  If we remove the first 5, 10, 15 years, it is very clear that the numbers don't look stellar but rather average.  The low starting point gives a high boost, but once we normalize it, the numbers look average. 

 

For example, the float/share since 1985 grew at 18.4% compounded, the growth rate reduces dramatically once we exclude the initial years.  The float/share since 1995 grew at 11.4%, and since 2000 grew at just 5.5%. 

 

Disclosure: I have 35% of my portfolio in Fairfax, and 15% in Fairfax India. 

 

@modiva I included the numbers since inception because those are the numbers that Fairfax has actually delivered. Having said that, i did not include those numbers to suggest that is the performance that they will deliver (across all metrics) moving forward. I think Fairfax can deliver mid to high teens growth in BV in the coming years.  Float? No, not that high. 
 

I do think the numbers Fairfax delivered from 2010-2020 are artificially low. If we think it makes sense to throw out the numbers from the early years (because they are artificially high) then i think it might also makes sense to throw out the numbers from 2010-2020. The numbers from 2010-2020 contain so much noise (like $5.4 billion in losses from the equity hedge/short positions that won’t be repeated in the future) that it affects their usefulness as a baseline to project what might happen in the future.

 

But i do get your point.

Edited June 3 by Viking

[petec]

23 hours ago, UK said:

 

Great post!

 

Yes - and one that would have been laughed at on here 5 short years ago!

[petec]

22 hours ago, Maverick47 said:

Thanks @Viking!  As always, your posts are full of thought provoking observations and  questions.

 

The section highlighted above from the end of your post struck a chord with me.  As a retired actuary who spent 33 years with the same P and C company, who also admired and personally invested in Berkshire, Markel, Fairfax and (before Berkshire acquired it), Alleghany, I spent a good portion of my own time trying to get the company I worked for to copy the business model of these other companies, with no success.

 

Your points about why more competitors don’t copy them are pretty much the same as I eventually concluded.  Exponential compounding connected with long term focused investing in equities really begins to pay off once it’s had a long runway to work its inexorable magic.  Ten years, which is a long time for a typical CEO just isn’t long enough for the associated risk to pay off.  Family run companies like Berkshire, Fairfax, Markel, are able to take the long view and see how powerful a few extra points of returns, albeit lumpy, can pay off once the timeframe approaches and even exceeds 30 years.

 

Charlie Munger was once asked why more companies didn’t follow Berkshire’s approach of focused investing in a few companies.  He responded with “It’s a good question.  More companies should follow us.  Look at our results and the fun we’re having.  But Jack McDonald, the Stanford Business professor who teaches a course based on these value investment principles, says he feels like the Maytag repairman.”

 

I used this same question and answer in a white paper I shared with a new CEO and CFO at the company I worked for.  The CEO responded with a short email basically saying it was interesting, but attributing Berkshire’s success only to great stock picking.  I got a brief audience with the CFO, during which I learned that the company I worked for had decided to outsource the investment function altogether to a company focused on index ETFs for both equities and fixed income.

 

That’s when I gave up trying to advocate for a more intelligent and successful business model from the inside of a company, and now in retirement, I vote with my own assets and invest them only in companies like Fairfax that have a proven track record of managing float, investments and insurance underwriting in an intelligent fashion.  I’ve seen how hard it is to get competitors to change to a similar approach, and am convinced that this holistic long term view of a successful insurance business model is a true moat in and of itself.  Analysts like Brett Horn who don’t think Fairfax has a moat miss exactly what you outlined in your post — the proof in the pudding of a hugely successful long term compounder, one which still has a good amount of runway left ahead of it.

 

 

This is fantastic. Thanks.

[petec]

12 hours ago, Dinar said:

You don't want family control.  You want between 15-30% insider ownership - big enough to care, but not a blocking position.  For every Arnault pere, Prem, Vincent Bollore, you get Sulzberger (NYT), Tim O'shaughnessy and Don Graham (GHC), MNPP & the Marx family.  

 

I think what you're saying is you want good family control not bad family control. 

 

In fact, I'm not sure you want *family* control at all. The Watsa family doesn't control Fairfax. Prem does. What you want is control, by someone good. Where it gets *really* interesting is when another good person inherits it and so good control becomes multigenerational.