SafetyinNumbers Posted March 13, 2025 Posted March 13, 2025 6 hours ago, nwoodman said: Some notes on Amy Sherk, Fairfax’s new CFO attached. Another 20+ year appointee, succession planning at its finest. Amy Sherk- The New Chief Financial Officer of Fairfax Financial Holdings….pdf 40.52 kB · 22 downloads She also has over 8k shares based on her initial sedi filing which is pretty impressive.
Redskin212 Posted March 13, 2025 Posted March 13, 2025 Fairfax's head office operates effectively like a big Accounting or law firm. They bring in talented, ambitious individuals early in their careers and groom them. It is part of their culture and very impressive succession planning. They likely just hired the company's 2040 CFO
backtothebeach Posted March 13, 2025 Posted March 13, 2025 Wow FFH almost back to 1.2x book value, if Q1 book value is around $1100.
NormR Posted March 15, 2025 Posted March 15, 2025 Details for almost all of the Fairfax Week Events 2025 are now available. I look forward to seeing everyone again this year!
FFH COBF Dinner Posted March 20, 2025 Posted March 20, 2025 Registration for the 16th Annual Fairfax Financial Shareholder CoB&F Dinner is now open. We are excited to be back in the Ritz-Carlton Toronto for the first time since Sanjeev organized the dinner at the Ritz in 2019. Best of all its a convenient location for our honored guests and panelists, since most of the Fairfax events will be held in the Ritz-Carlton. For those of you who were there last year, we have a more spacious room than last year and a plated three course dinner that looks delicious. Looking forward to seeing you all there. Last year the dinner sold out in just a few days and there were people on the waiting list that could not get in. Be sure to sign up early! Here's a compilation of Fairfax Week events.
Jaygo Posted March 20, 2025 Posted March 20, 2025 38 minutes ago, FFH COBF Dinner said: Registration for the 16th Annual Fairfax Financial Shareholder CoB&F Dinner is now open. We are excited to be back in the Ritz-Carlton Toronto for the first time since Sanjeev organized the dinner at the Ritz in 2019. Best of all its a convenient location for our honored guests and panelists, since most of the Fairfax events will be held in the Ritz-Carlton. For those of you who were there last year, we have a more spacious room than last year and a plated three course dinner that looks delicious. Looking forward to seeing you all there. Last year the dinner sold out in just a few days and there were people on the waiting list that could not get in. Be sure to sign up early! Here's a compilation of Fairfax Week events. Looking forward to it.
giulio Posted March 20, 2025 Posted March 20, 2025 FWIW, InPractise is publishing a series of interviews about Fairfax, e.g. https://inpractise.com/articles/fairfax-financial-retail-subsidiaries-perspective. You need a subscription, unfortunately. I think they do a great job, focusing on quality/compounders and their research is deep, more curated than Tegus or others. They work with "alligned" fund managers, mostly long only, long term oriented... Best, G 1
mananainvesting Posted March 20, 2025 Posted March 20, 2025 4 hours ago, giulio said: FWIW, InPractise is publishing a series of interviews about Fairfax, e.g. https://inpractise.com/articles/fairfax-financial-retail-subsidiaries-perspective. You need a subscription, unfortunately. I think they do a great job, focusing on quality/compounders and their research is deep, more curated than Tegus or others. They work with "alligned" fund managers, mostly long only, long term oriented... Best, G Thanks for the share, the interviews seem good. If anyone has access and wouldn’t mind sharing the pdf, please email me ([email protected]), appreciate it.
FFH COBF Dinner Posted March 21, 2025 Posted March 21, 2025 (edited) On 3/15/2025 at 2:34 PM, NormR said: Details for almost all of the Fairfax Week Events 2025 are now available. I look forward to seeing everyone again this year! NormR's event page has been complete for a while, but I heard that some people missed that registration is open for The Ben Graham Dinner on Tuesday night. Events Page link here. Wednesday night's Fairfax Financial Shareholder CoB&F dinner is on its way to selling out again with less than a third of tickets remaining after a couple of days of registration. Be sure to register now to get your spot. Registration link here. Edited March 21, 2025 by FFH COBF Dinner
Viking Posted March 23, 2025 Author Posted March 23, 2025 (edited) We have completed an update to our 2025 earnings estimate for Fairfax. To set the table, below is summary of some important points. The updated earnings estimate follows in the next post. Fairfax 2025 Earnings Estimate – An Introduction “What possible assurance do you have that (a stock you own) will go up in price? And if you are buying, how much should you pay? What you’re asking here is what makes a company valuable, and why it will be more valuable tomorrow than it is today. There are many theories, but to me, it always comes down to earnings and assets. Especially earnings.” Peter Lynch - One Up On Wall Street Estimating earnings for a company like Fairfax is difficult: It is a non-traditional P/C insurance company – with significant equity holdings. It has been under-earning for much of the past decade. A great deal of (good) change has been going on ‘under the hood’ for the past 5 years. As a result, the historical numbers for Fairfax are pretty messed up. But this has been changing the past couple of years. The turnaround in operating earnings that started in 2021 gathered steam in 2022 and 2023. And with 2024 results out, we now have 4 years of ‘good/clean’ data/information - results that better reflect the current fundamentals and future earnings power of the company. Bottom line, historical results are becoming a more useful input for investors to use to estimate future results. However, given Fairfax is a non-traditional P/C insurance company, estimating future results still has its challenges. There is no ‘over the counter’ model out there that can be used to estimate earnings for Fairfax. But that difficulty also creates opportunity for those who are prepared to put in the time and do the work. As a result, we have built our own model to estimate the future earnings for Fairfax. And that is what is contained in this chapter. ————— Before we get into the details, we need to first discuss two obvious but important points. Annual volatility “Because our year-to-year results are inherently volatile, we believe a five-year rolling average to be appropriate for judging the historical record.” Warren Buffett – Berkshire Hathaway 1984AR Annual results are important. However, because of their business models, annual results for companies like Fairfax, Berkshire Hathaway and Markel will be volatile. This is the case for two very different reasons: P/C insurance results are volatile, due to catastrophes. Investment results are volatile, due to fluctuations in financial markets. Some years the fluctuations in reported results will be large. As a result, it makes sense for investors to use a 3-year rolling average when evaluating the performance of a company like Fairfax. Accounting results versus economic results Our earnings model for Fairfax is an accounting model. Accounting models calculate earnings per share and book value. However, what really matters to shareholders is what is happening with intrinsic business value over time and the earnings potential of the company. Importantly, accounting results do not capture all of the value creation that is happening at Fairfax each year. As a result, EPS and BV are under-reporting the increase in business value that is happening at Fairfax. In recent years, the gap has been growing. A good example of this is ‘excess of fair value over carrying value’ for Fairfax’s non-insurance associate and consolidated equity holdings. At December 31, 2024 this totaled $1.5 billion, or $68/share (pre-tax). This is value that has been created by Fairfax in recent years that is not showing up in reported results like EPS or BV. This is only one example. Investors need to be aware that Fairfax’s economic results have been coming in ahead of its accounting results and incorporate this fact into how they are assessing the performance of the management team and valuing the company. ————— Overview of our earnings model Fairfax has 5 income streams that drive its reported earnings: Underwriting profit Interest and dividend income Share of profit of associates Non-insurance subsidiaries (consolidated companies) Net gains (losses) on investments If we can get our forecast right for each of these income streams there is a good chance that our earnings estimate for Fairfax as a company will be reasonably accurate. The posts in this chapter will dive into each of the income streams listed above. What is the logic we use to build our forecast? We start with historical numbers. We have them going back to 2016. We then adjust historical numbers to reflect both ‘old news’ and ‘new news’: Internal - company specific announcements/news: reported results, purchases, sales, management commentary; news from the larger equity holdings. External - competition, P/C industry: status of hard market, impact of large catastrophes; economic developments (path of interest rates, state of the economy). We then incorporate any other needed/relevant information/assumptions. Each post in this chapter provides a fair amount of detail which allows the reader to get a basic understanding of the logic used to arrive at the forecasted numbers. This will allow the reader to make adjustments to the forecasted numbers as they see fit. How far out does my crystal ball go? I try and be as fact based as possible. As a result, I generally only go out two years with my forecasts. My focus with this update is to capture 2024 actuals and update our 2025 earnings estimate. We will likely add 2026 to our forecast model in May (spoiler alert – it will likely come in similar to what you see for 2025). What about 2027 and 2028? There are simply too many moving parts to try and do a detailed forecast three years or more into the future. The future path of the hard market in insurance? The level of catastrophes in a given year? The future path of interest rates, the economy and financial markets? Most importantly, how will Fairfax allocate capital? For estimating earnings further out (3 years or more), the quality of the management team is likely the most important factor - especially for P/C insurance companies. Are they good? How good? If they are very good you can have a fairly high confidence level that they will continue to deliver solid results in year 3 and after. You just don’t know the details - yet. For the record, the execution from Fairfax’s management team over the past 5 years has been best-in-class when compared to peers. Forecasting is a very dynamic process The information in this chapter is outdated as soon as it is published. This is because as time passes, we constantly get new information. This newer, more accurate (better) information will cause earnings estimates to change – sometimes materially. As a result, I am constantly updating my forecasts (usually monthly). Sometimes the changes will be small; other times they will be big. Reminder: When I write new posts, I use my current earnings estimate. Old posts contain old earnings estimates. Therefore, when you read a post, it is important to pay attention to the date it was written. It provides you with important context - what I was thinking on that date. Is forecasting a good use of time? Forecasting is a good use of time for me. But the real value is not the actual forecast. It is the thinking and analysis that goes into the building of the forecast that really matters. And when I am wrong, which happens frequently… why? Does my thesis (for that item) need to be updated? Forecasting is simply another tool I use to increase the chances that my investment in Fairfax will work out well. Edited March 23, 2025 by Viking
Viking Posted March 23, 2025 Author Posted March 23, 2025 (edited) Updated Earnings Estimate for Fairfax for 2025 Below is my earnings estimate for Fairfax for 2025. This forecast includes learnings from Fairfax’s 2024 annual report and ‘new news’ from the past couple of months (since the last update). What did I get wrong? I look forward to hearing from board members. Summary My current estimate is diluted EPS at Fairfax will be about $160/share in 2025. I think this estimate has been constructed using mildly conservative assumptions. This does not include the increase in excess of fair value over carrying value for Fairfax’s associate and consolidated holdings. I expect ‘excess of FV over CV’ to deliver another $10/share (after tax) in value in 2025. So, my forecast for the increase in intrinsic value at Fairfax in 2025 is about $170/diluted share. Based on my forecast for 2025, over the 3-year period from 2023 to 2025, diluted EPS at Fairfax will average about $165/share and the increase in ‘excess of FV over CV’ will average about $17/share (after tax). This would put the average increase in intrinsic value at Fairfax from 2023 to 2025 at a little more than $180/diluted share. This amount is likely a good number to use as a baseline (starting point) when trying to estimate the increase in intrinsic value for Fairfax for 2026 and 2027. Will retained earnings be re-invested in a way that builds value for shareholders? Perhaps the hardest piece to forecast with Fairfax today is what they will be doing with the substantial amount of earnings that they are currently generating (about $4 billion per year). And the impact the re-investment of current earnings will have on future earnings. Both the size - how much. And the speed - how fast. When it comes to re-investing earnings, Fairfax has lots of very good options: Grow insurance - Continuation of the hard market? Bolt-on acquisitions? Buy out minority partners in insurance? Buy fixed income securities? Buy equities? Buy back a meaningful amount of Fairfax’s stock? What Fairfax does will determine which of Fairfax’s 5 income streams will grow the most. Because we don’t know what Fairfax will actually do when we build our 2025 forecast, we have to guess which income streams will benefit and by how much. Please keep this in mind when you review our forecast – it is a guess at a point in time. As results come in each quarter, we will update our forecast to reflect the new news. Looking at the last 5 years, the management team at Fairfax has done an outstanding job with capital allocation. My guess is they will continue to make good decisions (on balance) and this will benefit shareholders in the coming years – likely providing a tailwind to my forecasts for 2025 and beyond. What are the key assumptions we have used to build our forecast? To estimate future EPS, BVPS and ROE for Fairfax, an investor needs to think about three things: Combined ratio – How good is the P/C insurance business? Total return on the investment portfolio – How good is the team at Hamblin Watsa? Capital allocation – How good is the senior management team? Note, when calculating the total return for the investment portfolio, I am including the change each year for ‘excess of FV over CV’ for associate and consolidated holdings. As stated earlier, this is value that is being created by Fairfax and it needs to be incorporated into models. Interest rates: I am assuming interest rates remain roughly at current levels (at March 15, 2025). Of course, this will likely not be the case. Given the duration of the fixed income portfolio (about 3.2 years) is now closer to the duration of the insurance liabilities (a little under 4 years?), changes in interest rates will likely roughly balance out (in ‘net gains/losses on investments’ and ‘effects of discounting and risk adjustment- IFRS 17’). Bottom line, changes in interest rates should result in much less volatility in Fairfax’s reported final results moving forward - although they will impact ‘net gains (losses) on investments’ and ‘effects of discounting and risk adjustment (IFRS 17)’. The investment community should like that. Below is a 6-year snapshot of earnings for Fairfax. It communicates in a concise manner the dramatic transformation that has happened at the company, beginning in 2021. There has been a spike in operating income per share – from an average of $39/share from 2016-2020, to $235/share in 2024. This much higher amount has become the new baseline for the company. For 2025, my estimate has operating income coming in at $227/share, which is a 480% increase from the average from 2016-2020. ‘Normalized earnings’ at Fairfax have moved to a much higher level – and, importantly, this higher level looks durable/sustainable. What are current analyst’s earnings estimates for Fairfax? Analysts estimate that Fairfax will earn: US$156/share in 2025 US$174/share in 2026 These estimates do not include changes in the value of ‘excess of FV over CV’ for associate and consolidated holdings. Here are the most important assumptions that went into each line item in our forecast: 1.) Underwriting profit: Estimate = $1.5 billion in 2025. Net premiums written growth of 3% in 2024. This is being driven by continuation of the hard market. Odyssey and Brit could provide upside surprise, if they return to growth in 2025. Combined ratio (CR) of 94% in 2025. Catastrophe losses: 2025 will finish the year slightly higher than 2024. Reserve releases: continuation of the positive trend observed in 2024. 2.) Interest and dividend income: Estimate = $2.4 billion in 2025. Tailwinds: The size of the fixed income portfolio should increase from $47 to $49 billion. Interest income from $835 million investment in Blizzard Vacatia Equity Partners. Headwinds: Lower short-term interest rates. The average yield of the fixed income portfolio was about 5.1% in 2024 and the average duration finished the year at 3.3 years. For 2025 we estimate the average yield will be 4.9% 3.) Share of profit of associates: Estimate = $950 million in 2025. Earnings at Eurobank and Poseidon/Atlas should continue to chug along. Tailwind: EXCO – should benefit from the rise in the price of natural gas. Headwinds: Shift of Peak Achievement to a consolidated holding ($57m). Sale of Stelco ($18m). 4.) Effects of discounting and risk adjustment (IFRS 17): The two key drivers for this bucket are the trend in net written premiums of the insurance business and changes in interest rates. Net written premiums growth of 3% in 2024 should be a small tailwind. Now that the average duration of the fixed income portfolio (3.2 years) is similar to the average duration of the insurance liabilities (a little under 4 years?), changes in interest rates should roughly balance out. This bucket is difficult to model – therefore, my confidence level in my estimates is low. 5.) Life insurance and runoff: Estimate = a loss of $150 million in 2025. Adverse reserve development at runoff should be offset by earnings from the life insurance business in Greece. This estimate is a ‘plug’ number for me. 6.) Non-insurance consolidated operations (Other revenue – expenses): Estimate = $400 million in 2025. This income stream has a number of significant tailwinds for 2025: Acquisitions: Sleep Country (closed Oct 1, 2024). Peak Achievements and Meadow Foods – shift from associate (Q4, 2024). This bucket is poised to grow nicely in the coming years. 7.) Interest expense: Estimate = $700 million in 2025. Q4 2024 interest expense of $172.9 million x 4 (annualized). 8.) Corporate overhead and other: Estimate = $470 million in 2025. An increase from 2024, which was $450 million (and $430 million in 2023). 9.) Net gains on investments: Estimate = $1.1 billion in 2025 FFH-TRS = $250 million ($150/share x 1.76 million shares) Benefit from YTD decline in bond yields (March 15, 2025) = $300 million Remaining mark to market holdings = $550 million ($8 billion x 7%) 10.) Gain on sale/deconsol of insurance sub: Estimate = $300 million in 2025 This is where I put the large asset sales/revaluations. These items are very lumpy and therefore difficult to forecast precisely for any one year. Sometimes these gains show up as a separate line item and other times they show up in investment gains. I like to break them out at the start of the year as a separate line item. Over the past 5 years, large one-time gains from asset sales/revaluations have averaged about $500 million per year – so using an estimate of $300 million for 2024 seems like a reasonable and conservative estimate. Bottom line, this bucket is a wild card. But Fairfax has a long history of surfacing the significant value that is residing/hidden on its balance sheet. When they do, we see significant realized gains (from both insurance and non-insurance holdings). 11.) Income taxes: Estimate = 23.5% for 2025 Fairfax’s tax rate was averaging around 20%. Due to a couple of different factors it increased to 24.4% in 2024. Fairfax guided to a rate between 22% and 25%, so we are using 23.5% for 2024. 12.) Non-controlling interests: Estimate = 8% for 2025 As Fairfax continues to take out its minority P/C insurance partners this number should shrink. In 2024, Fairfax took out its minority partner in Brit. In 2025 it is likely they will increase their ownership in Allied World and/or Odyssey. As minority P/C insurance partners are taken out, the result is a greater share of total earnings at Fairfax will accrue to shareholders. 13.) Effective Shares Outstanding (year-end): Estimate = 21.3 million for 2025 We focus on effective shares outstanding as this is what Fairfax highlights in its reporting. Fairfax finished 2024 with effective shares outstanding = 21.7 million. This was down 1.3 million in 2024 (from 23.0 million at 2023YE). In 2025, we estimate Fairfax will reduce effective shares outstanding by 400,000 which is a slower pace compared to 2024. Additional notes: ‘Underwriting profit’: Includes insurance and reinsurance; does not include runoff or Eurolife’s life insurance business. ‘Interest and dividends’ and ‘share of profit of associates’: Includes insurance, reinsurance and runoff/life insurance. Edited March 24, 2025 by Viking
nwoodman Posted March 23, 2025 Posted March 23, 2025 @Viking impressive work. Its always difficult coming up with a single number for a company with so many moving parts. I like the way you haven’t “counted any chickens before they have hatched”. Some back of the envelope bracketing around your base case • Low Case (20%}: ~$126 (big cat year, equity decline) • Base Case (in line with yours): ~$176 • High Case (20%): ~$245 (bond rally, TRS, 10-15% equities, large one-off gain) The range illustrates just how much torque is now embedded in Fairfax’s earnings power, especially if markets cooperate or if we see continued strength in underwriting. If there’s one area where I think you may be on the conservative side, it’s net gains on investments. With Fairfax’s equities off to a solid start in 2025, and the potential for a drop in yields, there’s a real chance that line comes in materially higher than your $1.1B estimate—particularly if the FFH TRS continues to do its thing. But as always, better to err on the cautious side than bake in too much optimism. I think there’s a high probability we see Fairfax crack $200/share EPS at least once over the next 3 years. A bear market could obviously delay that, but would also likely set the stage for some truly impressive earnings if spreads blow out and they rotate into theopportunity. Still feels a bit surreal that we’re even contemplating earnings at these levels and that the floor might now be north of $100/share.
jbwent63 Posted March 24, 2025 Posted March 24, 2025 Announcement of the RTO of Boat Rocker Media Inc. by Blue Ant Media (both owned by FFH) has not sparked any discussion. Is it too small to worry about? Seems like an elegant way to exit BRMI (albeit there are strings attached). Any thoughts? https://ca.finance.yahoo.com/news/boat-rocker-media-signs-definitive-111800928.html It is interesting that BRMI stock is virtually unchanged at $0.80 where this deal trumpets a value of $1.80. Does the lack of movement indicate the market thinks it will not go ahead, or that the $1.80 is inflated, or both?
SafetyinNumbers Posted March 24, 2025 Posted March 24, 2025 2 hours ago, jbwent63 said: Announcement of the RTO of Boat Rocker Media Inc. by Blue Ant Media (both owned by FFH) has not sparked any discussion. Is it too small to worry about? Seems like an elegant way to exit BRMI (albeit there are strings attached). Any thoughts? https://ca.finance.yahoo.com/news/boat-rocker-media-signs-definitive-111800928.html It is interesting that BRMI stock is virtually unchanged at $0.80 where this deal trumpets a value of $1.80. Does the lack of movement indicate the market thinks it will not go ahead, or that the $1.80 is inflated, or both? I think it’s more about who owns the minority, why they bought it and what they expected on this deal than risk of the deal closing and valuation.
FFH COBF Dinner Posted March 24, 2025 Posted March 24, 2025 (edited) On 3/21/2025 at 4:02 PM, FFH COBF Dinner said: NormR's event page has been complete for a while, but I heard that some people missed that registration is open for The Ben Graham Dinner on Tuesday night. Events Page link here. Wednesday night's Fairfax Financial Shareholder CoB&F dinner is on its way to selling out again with less than a third of tickets remaining after a couple of days of registration. Be sure to register now to get your spot. Registration link here. Only a few tickets left and selling fast for the FFH CoB&F Dinner this year. Get your tickets now before we sell out or the price increases. https://www.eventbrite.com/e/16th-annual-fairfax-financial-shareholder-cobf-dinner-tickets-1287505446449?aff=oddtdtcreator Lots to celebrate this year, including Fairfax's 40th Anniversary! Hope to see you there. Once we sell out, Eventbrite will automatically run a waiting list, so if you're late buying tickets be sure to get on the waitlist. A couple of people were able to come off the waiting list last year. Edited March 24, 2025 by FFH COBF Dinner
Viking Posted March 25, 2025 Author Posted March 25, 2025 On 3/23/2025 at 4:15 PM, nwoodman said: @Viking impressive work. Its always difficult coming up with a single number for a company with so many moving parts. I like the way you haven’t “counted any chickens before they have hatched”. Some back of the envelope bracketing around your base case • Low Case (20%}: ~$126 (big cat year, equity decline) • Base Case (in line with yours): ~$176 • High Case (20%): ~$245 (bond rally, TRS, 10-15% equities, large one-off gain) The range illustrates just how much torque is now embedded in Fairfax’s earnings power, especially if markets cooperate or if we see continued strength in underwriting. If there’s one area where I think you may be on the conservative side, it’s net gains on investments. With Fairfax’s equities off to a solid start in 2025, and the potential for a drop in yields, there’s a real chance that line comes in materially higher than your $1.1B estimate—particularly if the FFH TRS continues to do its thing. But as always, better to err on the cautious side than bake in too much optimism. I think there’s a high probability we see Fairfax crack $200/share EPS at least once over the next 3 years. A bear market could obviously delay that, but would also likely set the stage for some truly impressive earnings if spreads blow out and they rotate into theopportunity. Still feels a bit surreal that we’re even contemplating earnings at these levels and that the floor might now be north of $100/share. @nwoodman , like I said in my post, I think I constructed my forecast using mildly conservative assumptions. We will see. Regarding investment gains: Yes, my forecast for total investment gains will be low if bond yields continue to come down. However, the IFRS bucket will also move in the other way (just not as much). So the net amount - from a total earnings perspective should be a modest gain. The FFH-TRS has done a lot of the heavy lifting for total investment gains over the past couple of years (especially 2024). We need to see the rest of the equity portfolio step up more moving forward. It will be interesting to see where Q1 comes in for the equity portfolio. Regardless, I think a fair bit of value is building in the equity portfolio that is not being captured in reported results (in addition to excess of FV over CV for associate and consolidated holdings). Yes, heightened volatility in financial markets, while likely causing some short term headwinds to reported results, would provide Fairfax with some great opportunities. So I am kind of indifferent to how things play out from here (resumption of the bull market or a shitstorm). Which is kind of an interesting place to be with Fairfax - in a very good way.
adventurer Posted March 25, 2025 Posted March 25, 2025 On 3/23/2025 at 8:52 PM, Viking said: Updated Earnings Estimate for Fairfax for 2025 Below is my earnings estimate for Fairfax for 2025. This forecast includes learnings from Fairfax’s 2024 annual report and ‘new news’ from the past couple of months (since the last update). What did I get wrong? I look forward to hearing from board members. Summary My current estimate is diluted EPS at Fairfax will be about $160/share in 2025. I think this estimate has been constructed using mildly conservative assumptions. This does not include the increase in excess of fair value over carrying value for Fairfax’s associate and consolidated holdings. I expect ‘excess of FV over CV’ to deliver another $10/share (after tax) in value in 2025. So, my forecast for the increase in intrinsic value at Fairfax in 2025 is about $170/diluted share. Based on my forecast for 2025, over the 3-year period from 2023 to 2025, diluted EPS at Fairfax will average about $165/share and the increase in ‘excess of FV over CV’ will average about $17/share (after tax). This would put the average increase in intrinsic value at Fairfax from 2023 to 2025 at a little more than $180/diluted share. This amount is likely a good number to use as a baseline (starting point) when trying to estimate the increase in intrinsic value for Fairfax for 2026 and 2027. Will retained earnings be re-invested in a way that builds value for shareholders? Perhaps the hardest piece to forecast with Fairfax today is what they will be doing with the substantial amount of earnings that they are currently generating (about $4 billion per year). And the impact the re-investment of current earnings will have on future earnings. Both the size - how much. And the speed - how fast. When it comes to re-investing earnings, Fairfax has lots of very good options: Grow insurance - Continuation of the hard market? Bolt-on acquisitions? Buy out minority partners in insurance? Buy fixed income securities? Buy equities? Buy back a meaningful amount of Fairfax’s stock? What Fairfax does will determine which of Fairfax’s 5 income streams will grow the most. Because we don’t know what Fairfax will actually do when we build our 2025 forecast, we have to guess which income streams will benefit and by how much. Please keep this in mind when you review our forecast – it is a guess at a point in time. As results come in each quarter, we will update our forecast to reflect the new news. Looking at the last 5 years, the management team at Fairfax has done an outstanding job with capital allocation. My guess is they will continue to make good decisions (on balance) and this will benefit shareholders in the coming years – likely providing a tailwind to my forecasts for 2025 and beyond. What are the key assumptions we have used to build our forecast? To estimate future EPS, BVPS and ROE for Fairfax, an investor needs to think about three things: Combined ratio – How good is the P/C insurance business? Total return on the investment portfolio – How good is the team at Hamblin Watsa? Capital allocation – How good is the senior management team? Note, when calculating the total return for the investment portfolio, I am including the change each year for ‘excess of FV over CV’ for associate and consolidated holdings. As stated earlier, this is value that is being created by Fairfax and it needs to be incorporated into models. Interest rates: I am assuming interest rates remain roughly at current levels (at March 15, 2025). Of course, this will likely not be the case. Given the duration of the fixed income portfolio (about 3.2 years) is now closer to the duration of the insurance liabilities (a little under 4 years?), changes in interest rates will likely roughly balance out (in ‘net gains/losses on investments’ and ‘effects of discounting and risk adjustment- IFRS 17’). Bottom line, changes in interest rates should result in much less volatility in Fairfax’s reported final results moving forward - although they will impact ‘net gains (losses) on investments’ and ‘effects of discounting and risk adjustment (IFRS 17)’. The investment community should like that. Below is a 6-year snapshot of earnings for Fairfax. It communicates in a concise manner the dramatic transformation that has happened at the company, beginning in 2021. There has been a spike in operating income per share – from an average of $39/share from 2016-2020, to $235/share in 2024. This much higher amount has become the new baseline for the company. For 2025, my estimate has operating income coming in at $227/share, which is a 480% increase from the average from 2016-2020. ‘Normalized earnings’ at Fairfax have moved to a much higher level – and, importantly, this higher level looks durable/sustainable. What are current analyst’s earnings estimates for Fairfax? Analysts estimate that Fairfax will earn: US$156/share in 2025 US$174/share in 2026 These estimates do not include changes in the value of ‘excess of FV over CV’ for associate and consolidated holdings. Here are the most important assumptions that went into each line item in our forecast: 1.) Underwriting profit: Estimate = $1.5 billion in 2025. Net premiums written growth of 3% in 2024. This is being driven by continuation of the hard market. Odyssey and Brit could provide upside surprise, if they return to growth in 2025. Combined ratio (CR) of 94% in 2025. Catastrophe losses: 2025 will finish the year slightly higher than 2024. Reserve releases: continuation of the positive trend observed in 2024. 2.) Interest and dividend income: Estimate = $2.4 billion in 2025. Tailwinds: The size of the fixed income portfolio should increase from $47 to $49 billion. Interest income from $835 million investment in Blizzard Vacatia Equity Partners. Headwinds: Lower short-term interest rates. The average yield of the fixed income portfolio was about 5.1% in 2024 and the average duration finished the year at 3.3 years. For 2025 we estimate the average yield will be 4.9% 3.) Share of profit of associates: Estimate = $950 million in 2025. Earnings at Eurobank and Poseidon/Atlas should continue to chug along. Tailwind: EXCO – should benefit from the rise in the price of natural gas. Headwinds: Shift of Peak Achievement to a consolidated holding ($57m). Sale of Stelco ($18m). 4.) Effects of discounting and risk adjustment (IFRS 17): The two key drivers for this bucket are the trend in net written premiums of the insurance business and changes in interest rates. Net written premiums growth of 3% in 2024 should be a small tailwind. Now that the average duration of the fixed income portfolio (3.2 years) is similar to the average duration of the insurance liabilities (a little under 4 years?), changes in interest rates should roughly balance out. This bucket is difficult to model – therefore, my confidence level in my estimates is low. 5.) Life insurance and runoff: Estimate = a loss of $150 million in 2025. Adverse reserve development at runoff should be offset by earnings from the life insurance business in Greece. This estimate is a ‘plug’ number for me. 6.) Non-insurance consolidated operations (Other revenue – expenses): Estimate = $400 million in 2025. This income stream has a number of significant tailwinds for 2025: Acquisitions: Sleep Country (closed Oct 1, 2024). Peak Achievements and Meadow Foods – shift from associate (Q4, 2024). This bucket is poised to grow nicely in the coming years. 7.) Interest expense: Estimate = $700 million in 2025. Q4 2024 interest expense of $172.9 million x 4 (annualized). 8.) Corporate overhead and other: Estimate = $470 million in 2025. An increase from 2024, which was $450 million (and $430 million in 2023). 9.) Net gains on investments: Estimate = $1.1 billion in 2025 FFH-TRS = $250 million ($150/share x 1.76 million shares) Benefit from YTD decline in bond yields (March 15, 2025) = $300 million Remaining mark to market holdings = $550 million ($8 billion x 7%) 10.) Gain on sale/deconsol of insurance sub: Estimate = $300 million in 2025 This is where I put the large asset sales/revaluations. These items are very lumpy and therefore difficult to forecast precisely for any one year. Sometimes these gains show up as a separate line item and other times they show up in investment gains. I like to break them out at the start of the year as a separate line item. Over the past 5 years, large one-time gains from asset sales/revaluations have averaged about $500 million per year – so using an estimate of $300 million for 2024 seems like a reasonable and conservative estimate. Bottom line, this bucket is a wild card. But Fairfax has a long history of surfacing the significant value that is residing/hidden on its balance sheet. When they do, we see significant realized gains (from both insurance and non-insurance holdings). 11.) Income taxes: Estimate = 23.5% for 2025 Fairfax’s tax rate was averaging around 20%. Due to a couple of different factors it increased to 24.4% in 2024. Fairfax guided to a rate between 22% and 25%, so we are using 23.5% for 2024. 12.) Non-controlling interests: Estimate = 8% for 2025 As Fairfax continues to take out its minority P/C insurance partners this number should shrink. In 2024, Fairfax took out its minority partner in Brit. In 2025 it is likely they will increase their ownership in Allied World and/or Odyssey. As minority P/C insurance partners are taken out, the result is a greater share of total earnings at Fairfax will accrue to shareholders. 13.) Effective Shares Outstanding (year-end): Estimate = 21.3 million for 2025 We focus on effective shares outstanding as this is what Fairfax highlights in its reporting. Fairfax finished 2024 with effective shares outstanding = 21.7 million. This was down 1.3 million in 2024 (from 23.0 million at 2023YE). In 2025, we estimate Fairfax will reduce effective shares outstanding by 400,000 which is a slower pace compared to 2024. Additional notes: ‘Underwriting profit’: Includes insurance and reinsurance; does not include runoff or Eurolife’s life insurance business. ‘Interest and dividends’ and ‘share of profit of associates’: Includes insurance, reinsurance and runoff/life insurance. Thank you. Your work is of invaluable help for my understanding. Many insights that make me understand more and more.
Hoodlum Posted March 25, 2025 Posted March 25, 2025 @Viking Thanks for the detailed writeup as usual. I agree that the gains from the TRS will be much smaller going forward, especially as Fairfax slowly closes this out by purchasing these shares. Currency fluctuations due to current volatilities could be a tailwind for Q1, as the GBP/EUR has bounced back to end of Q3 levels. We could get back some of the $22/share loss from Q4.
SafetyinNumbers Posted March 25, 2025 Posted March 25, 2025 1 hour ago, Hoodlum said: @Viking Thanks for the detailed writeup as usual. I agree that the gains from the TRS will be much smaller going forward, especially as Fairfax slowly closes this out by purchasing these shares. I don’t reach the same conclusion on the TRS as there are fewer shares outstanding than when they first put on and a smaller percentage change in the share price has a much bigger dollar impact. Unlike most, I also continue to expect multiple expansion so the percentage returns might continue to be robust.
Hoodlum Posted March 25, 2025 Posted March 25, 2025 (edited) 1 hour ago, SafetyinNumbers said: I don’t reach the same conclusion on the TRS as there are fewer shares outstanding than when they first put on and a smaller percentage change in the share price has a much bigger dollar impact. Unlike most, I also continue to expect multiple expansion so the percentage returns might continue to be robust. Whether we keep the TRS or buy back the shares, the net impact over the long run will be the same as the earnings/share will increase with share buybacks and eventually that will show up in the share price. The TRS does provide some additional short term fuel to earning as long as the share price increases. But as we have seen this qtr, there are some things outside Fairfax's control that can impact this. Reducing the TRS over time will help reduce earnings volatility, while providing the same net impact to earning/share and conversely share price over the long run. Edited March 25, 2025 by Hoodlum
Viking Posted March 25, 2025 Author Posted March 25, 2025 3 hours ago, Hoodlum said: @Viking Thanks for the detailed writeup as usual. I agree that the gains from the TRS will be much smaller going forward, especially as Fairfax slowly closes this out by purchasing these shares. Currency fluctuations due to current volatilities could be a tailwind for Q1, as the GBP/EUR has bounced back to end of Q3 levels. We could get back some of the $22/share loss from Q4. Great point on currency. Strong GPB/Euro will likely be a strong tailwind when Q1 earnings are reported.
SafetyinNumbers Posted March 25, 2025 Posted March 25, 2025 49 minutes ago, Hoodlum said: Whether we keep the TRS or buy back the shares, the net impact over the long run will be the same as the earnings/share will increase with share buybacks and eventually that will show up in the share price. The TRS does provide some additional short term fuel to earning as long as the share price increases. But as we have seen this qtr, there are some things outside Fairfax's control that can impact this. Reducing the TRS over time will help reduce earnings volatility, while providing the same net impact to earning/share and conversely share price over the long run. I agree the TRS are essentially leverage to fund future buybacks. I just took issue with the assertion that the TRS will contribute less to profits going forward. By the way, have you calculated the quarterly contribution of the TRS since they were put on to measure the earnings volatility you are concerned about?
SafetyinNumbers Posted March 25, 2025 Posted March 25, 2025 25 minutes ago, Viking said: Great point on currency. Strong GPB/Euro will likely be a strong tailwind when Q1 earnings are reported. Currency should be a help to BVPS as the hit in Q4 was through comprehensive income and bypassed the income statement.
Hoodlum Posted March 25, 2025 Posted March 25, 2025 1 hour ago, SafetyinNumbers said: I agree the TRS are essentially leverage to fund future buybacks. I just took issue with the assertion that the TRS will contribute less to profits going forward. By the way, have you calculated the quarterly contribution of the TRS since they were put on to measure the earnings volatility you are concerned about? I haven't done it myself but have seen the reports from Fairfax and Viking here regarding the TRS contributions.
SafetyinNumbers Posted March 25, 2025 Posted March 25, 2025 14 minutes ago, Hoodlum said: I haven't done it myself but have seen the reports from Fairfax and Viking here regarding the TRS contributions. Based on that you think there is too much “earnings volatility” from owning them?
Recommended Posts
Create an account or sign in to comment
You need to be a member in order to leave a comment
Create an account
Sign up for a new account in our community. It's easy!
Register a new accountSign in
Already have an account? Sign in here.
Sign In Now