Fairfax 2025

[Hoodlum]

2 minutes ago, SafetyinNumbers said:

Based on that you think there is too much “earnings volatility” from owning them?

 

Definitely not since we have owned them, but that doesn't mean there won't be more volatility going forward.  I am fine with Fairfax gradually buying backing the shares from the TRS as funds become available.  The initial intent for TRS was to access shares when they were cheap and the market was hardening.  As the market gradually turns to a somewhat softer market, Fairfax is then able to buy these shares with available cash.  

 

[SafetyinNumbers]

39 minutes ago, Hoodlum said:

 

Definitely not since we have owned them, but that doesn't mean there won't be more volatility going forward.  I am fine with Fairfax gradually buying backing the shares from the TRS as funds become available.  The initial intent for TRS was to access shares when they were cheap and the market was hardening.  As the market gradually turns to a somewhat softer market, Fairfax is then able to buy these shares with available cash.  

 

I think people confuse how hard or soft the market impacts near term profitability because they have been trained by quants to focus on the rate of change instead of absolute profitability. It does make sense for the average quality business but insurance and Fairfax in particular doesn’t screen well.
 

A softer insurance market will mean lower float growth as Fairfax slows premium growth to compensate. We already saw some of that last year. However, a significant benefit from the hard market in underwriting profitability is deferred via reserves. We have just started to see reserve releases tick up as we lap 4 years of a hard market. Consequently, the combined ratio might come down just as market participants who don’t appreciate this nuance are expecting it to rise. Last quarter was a good example. 

[Viking]

Fairfax's Investment Portfolio: A Review of Returns From 2016-2024 and Estimate for 2025

 

Two things drive earnings at Fairfax:

• The underwriting profit it earns on its insurance operations.
• The return it earns on its investment portfolio.

In this post we will review the return that Fairfax earns on its investment portfolio – in total dollars and as a percent. We will start by looking at the past (2016-2024). We will then use what we learn as inputs to help us build a forecast for 2025. 

 

What is the value and composition of Fairfax’s investment portfolio?

 

At December 31, 2024, Fairfax had an investment portfolio with a value of about $69 billion:

• Fixed income = $47 billion
• Equities = $22 billion

Methodology

 

The total investment return for Fairfax can be calculated using the following inputs:

 

Income streams:

 

A.    Interest and dividend income

• Interest income earned from the fixed income portfolio.
• Dividend income earned from the mark to market equity holdings.

B.    Share of profit of associates

• Fairfax’s share of pre-tax earnings from its associate holdings: Eurobank, Poseidon, EXCO Resources and Fairfax India (their associate holdings).

C.    Non-insurance consolidated companies

• Pre-tax earnings from Recipe, Sleep Country, Peak Achievement, Grivalia Hospitality, Thomas Cook India, Meadow Foods, AGT Food Ingredients, Dexterra, Sporting Life and Boat Rocker.

D.   Net gains (losses) on investments

• Unrealized gains from the investment portfolio (stocks fixed income).
• Large realized gains from asset sales and revaluations (including insurance).

We also include one more item:

 

E.    The change in ‘excess of fair value over carrying value’ for non-insurance associate and consolidated holdings 

• This is not captured in Fairfax’s reported results (earnings or book value). 
• We include it because this is real economic value that is being created by Fairfax each year. And therefore, it should be included when calculating the total return that Fairfax’s investment portfolio is actually delivering each year. 

Historical returns: 2016-2024

 

For the 9-year period from 2016 to 2024, Fairfax earned an average total return on its investment portfolio of about 5.9% per year. That is a much higher return than I would have expected, given the significant headwinds Fairfax experienced from 2016 to 2024:

• Abnormally low interest income: Interest rates were extremely low from 2016 to 2022.
• Large ‘one time’ losses: Disastrous equity hedge (removed late 2016)/short positions (last position was removed late 2020).
• Poor performance from equity holdings: In 2016/2017, Fairfax’s equity portfolio was littered with low quality/poorly performing holdings (significant users of Fairfax’s cash). 

 

Note: D.) Net investment gains including sales

 

We have grouped three items into this bucket. All realized and unrealized gains, from both investments and insurance. And the losses from pushing out the maturities on long term debt.

 

 

Note: E.) Change in excess of fair value over carrying value for associate and consolidated holdings

 

Equity holdings classified as ‘associates’ and ‘consolidated’ are valued on Fairfax’s balance sheet at their carrying value and not their fair value (market value). In recent years, the fair value of this group of holdings has increased at a much faster pace than it’s carrying value. This is not surprising – for the past 6 years Fairfax has been slowly and methodically improving the quality of its equity holdings. Past years efforts are now showing up in improved results (and valuations).  

 

At December 31, 2024, the excess of fair value over carrying value for this group of investments was $1.48 billion or $64.52/share (pre-tax). Over the past 3 years, the value creation has averaged about $380 million per year. This is economic value that is being created each year. At some point, Fairfax will harvest/monetize this value and it will show up in reported results (EPS and book value) via the net investment gains income stream.

 

 

Historical returns: 2017-2024 – Calculated in 2-Year Averages

 

If we look at Fairfax’s returns from this time period using 2-year averages we can smooth out much of the annual volatility and get a much clearer picture as to what has been going on under the hood. 

 

2017 – 2018

• Average annual return on the investment portfolio was 6.1%.
• In 2017, First Capital and ICICI Lombard were sold; investment gains were $1.5 billion.
• In 2018, there was a bear market in stocks.

2019-2020

• Average annual return declined to 4.0%.
• In 2020, there was a bear market in stocks which hit Fairfax’s holdings especially hard (low quality and skewed to cyclicals).

2021-2022

• Average annual return improved to 7.1%.
• This was an amazing return when we factor in what happened in 2022.
  • Historic bear market in bonds.
  • Viscous bear market in stocks.

2023-2024

• Average annual return improved to 9.0%.
• The higher return is being driven by:
  • Spike in interest and dividend income and share of profit of associated.
  • Increase in quality of the total equity portfolio. 

Summary: When viewed through 2-year averages, it is clear that Fairfax’s total return on its investment portfolio has been moving steadily higher over the past 6 years.

 

 

Looking forward: Estimates for 2025

 

The significant headwinds that were holding down Fairfax’s returns from 2016-2022 are now gone. And significant new tailwinds have emerged.

• Fixed income: The average yield was about 5.1% in 2024 and average duration finished the year at about 3.3 years.
• Equities: The quality/earnings power of the equity portfolio is now shining through.

My estimate is for Fairfax to earn a total return of:

• 2025 = $5.45 billion, or 7.7% on its average investment portfolio of $70.5 billion.

Fairfax is experiencing three big benefits at the same time:

• The total investment portfolio continues to increase in size (2025E = $3,380/share).
• The average yield being earned on the investment portfolio continues at a very high level.
• The increase in the total investment return is being driven by high quality income streams – meaning the high average yield being earned is sustainable in the coming years.

As a result, the investment portfolio is poised to continue delivering a near-record amount to Fairfax’s earnings in the coming years.

 

 

 

Edited March 25, 2025 by Viking

[Hoodlum]

On 3/24/2025 at 1:21 PM, 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?

 

It is likely too small to be much of an impact.   This link provides some additional details surrounding the transaction.

 

https://www.broadcastnow.co.uk/broadcast-international/blue-ant-plots-more-manda-following-boat-rocker-deal/5203321.article

 

Fairfax offered Blue Ant the RTO with Boat Rocker’s senior management already preparing to exit the business via a management buy-out, and MacMillan told Broadcast International the deal immediately appealed.

 

“We think there are opportunities in this disrupted time for us to grow significantly, including via M&A. To do that, we need to have reliable access to permanent capital,” he said, pointing out that Blue Ant has not raised any financing since 2016, with growth instead fuelled wholly organically.

 

“We also think quite firmly that media companies should not be borrowing a lot of money. Leverage is a dreadful thing for companies that need to be nimble and agile, which need to zig and zag. A lot of debt prevents that.”

[Viking]

14 hours ago, adventurer said:

Thank you. Your work is of invaluable help for my understanding. Many insights that make me understand more and more.  

@adventurer , I am happy to hear that you are getting value from my long-form posts. Writing/editing them improves my understanding of the company. And the contributions (ideas/perspectives, links, questions, comments etc) from everyone on this wonderful forum provides me with lots of new material. It has become a virtuous circle   

[Cigarbutt]

9 hours ago, SafetyinNumbers said:

I think people confuse how hard or soft the market impacts near term profitability because they have been trained by quants to focus on the rate of change instead of absolute profitability. It does make sense for the average quality business but insurance and Fairfax in particular doesn’t screen well.
A softer insurance market will mean lower float growth as Fairfax slows premium growth to compensate. We already saw some of that last year. However, a significant benefit from the hard market in underwriting profitability is deferred via reserves. We have just started to see reserve releases tick up as we lap 4 years of a hard market. Consequently, the combined ratio might come down just as market participants who don’t appreciate this nuance are expecting it to rise. Last quarter was a good example. 

What you describe is correct and may help, for a while, to result in incremental 1-3% additional ROE points but what @Hoodlum may refer to is the excess capital that may result (with everything else being equal, no guarantee) from building excess capital at the (re)insurance subs if/when premiums growth slows down or reverses. FFH has often mentioned that they will buyback shares in a value sense but only when excess capital is available. Situation at end of 2024:

[SafetyinNumbers]

8 hours ago, Cigarbutt said:

What you describe is correct and may help, for a while, to result in incremental 1-3% additional ROE points but what @Hoodlum may refer to is the excess capital that may result (with everything else being equal, no guarantee) from building excess capital at the (re)insurance subs if/when premiums growth slows down or reverses. FFH has often mentioned that they will buyback shares in a value sense but only when excess capital is available. Situation at end of 2024:

My understanding is that at 5% premium growth they can return 75% of earnings from the insurance subsidiaries. I think it’s possible we actually see an acceleration in premium growth this year as the cutting of some programs in Q4 2023 is no longer impacting comps but it of course depends on the returns available.

[nwoodman]

Maybe a little OT but I found this article mildly interesting in the context of distressed credit.  Overall spreads are still pretty skinny but the opportunities are growing in niche areas.
 

From Bloomberg(and attached):

 

Khosla Sees One of Best Opportunities in a Decade

 

“Victor Khosla, the founder of Strategic Value Partners LLC, is looking to hire amid one of the most promising environments for opportunistic credit investors in the last 10 years.

“For investors like SVP, if you take out the first six months of Covid, there’s never been such a rich vein of opportunities over the last decade in an economy that’s not in a recession,” Khosla said in an interview.”

 

“Khosla’s Angle:

He’s not talking about the broad market. He’s talking about:

• Distressed opportunities (e.g. German corporate bonds, office real estate, chemicals)

• Off-market or highly negotiated deals (e.g. buying a London office at 60% off)

• Private credit and bespoke financing (especially in illiquid European markets)”

 

While pockets of distressed debt signal underlying vulnerabilities, credit spreads typically don’t widen systemically until markets lose confidence that the stress can be contained. For Fairfax, it’s still early days—but it’s encouraging to see the opportunity set beginning to expand

 

 

 

Khosla Sees One of Best Opportunities in a Decade- Credit Weekly - Bloomberg.pdf

Edited March 30, 2025 by nwoodman

[Viking]

Ok... A question for board members... how many shares of Orla does Fairfax own (or have exposure to) today?

 

We got confirmation that as of Dec 31, 2024, Fairfax owned 56.8 million shares. This is the same number ofshares that Fairfax owned at Sept 30, 2024 (as per Fairfax’s 13F).

 

In November 2024, Fairfax committed to purchase some of the US$200 million in convertible bonds that were part of the Mussellwhite transaction. At the time, we didn’t know how much of the convertible bonds Fairfax committed to. It looks to me like we got confirmation in Prem's letter that Fairfax purchased US$150 million (of the US$200 million).
 

This acquisition was announced in November but just closed in March. It looks to me like Fairfax now has exposure to another 27.1 million Orla shares with a cost basis of C$7.90/share (the conversion price). And another 17.9 million warrants exercisable at C$11.50.

 

With shares closing on Friday at C$13.10/share, it looks to me like the MV of Fairfax's total investment in Orla is up about $323 million:.

• Legacy position = $205 million 
• Convertible bond = $99 million
• Convertible bond warrants = $20 million

Am I interpreting things correctly? 

 

 

----------

 

----------

 

Comments from Prem about Orla Mining from Fairfax’s 2024AR.

 

Orla Mining, run by Jason Simpson and his exceptional team, had a transformative 2024. In November, Orla announced the acquisition of the Musselwhite gold mine in Ontario from Newmont. Fairfax participated via a $150 million investment in convertible bonds (4.5% coupon, Cdn$7.90 conversion price and 0.66 of a warrant with a Cdn$11.50 per share exercise price). Musselwhite is a low-cost, long-life asset in one of the best mining jurisdictions in the world. The addition of Musselwhite will more than double Orla’s annual gold production to approximately 300,000 ounces a year. Orla’s Camino Rojo open pit mine in Mexico continues to perform extremely well, producing approximately 137,000 ounces of gold in 2024. Exploration activity at Camino is indicating the viability of an underground mine at the site with attractive economics. Lastly, progress continues to be made in permitting their South Railroad mine in Nevada.South Railroad is likely to be a low-cost mine with high free-cash flow. Orla generates attractive levels of free cash flow and has ample liquidity to fund its development and exploration activity. Orla is carried at its listed price of $5.47 per share (Cdn$7.87) or $311 million. Prem Watsa – Fairfax 2024AR

 

 

Edited March 30, 2025 by Viking

[nwoodman]

1 hour ago, Viking said:

Ok... A question for board members... how many shares of Orla does Fairfax own (or have exposure to) today?

 

 

 

Something like this if fully converted?

 

[Viking]

29 minutes ago, nwoodman said:

Something like this if fully converted?

 

 

@nwoodman , thank you... my initial numbers were off (I edited my initial post). Will the gains on the convertible bonds and warrants be mark to market each quarter? Assuming they are in the money, like they are now? (I think so...)

 

Pretty crazy that Orla is Fairfax's 5th largest equity holding with a market value today of +US$900 million. (After Eurobank, FFH-TRS, Poseidon and Fairfax India).

 

The torque that resource/commodity holdings get when the price of the underlying commodity spikes is pretty nuts (the price of gold in this case). 

Edited March 30, 2025 by Viking

[nwoodman]

16 minutes ago, Viking said:

 

@nwoodman , thank you... my initial numbers were off (I edited my initial post). Will the gains on the convertible bonds and warrants be mark to market each quarter? Assuming they are in the money, like they are now? (I think so...)

 

Pretty crazy that Orla is Fairfax's 5th largest equity holding with a market value today of +US$900 million. (After Eurobank, FFH-TRS, Poseidon and Fairfax India).

 

The torque that resource/commodity holdings get when the price of the underlying commodity spikes is pretty nuts (the price of gold in this case). 

Yep, that wasn’t on my bingo card for 2025. These guys have more angles than a protractor.

[nwoodman]

On 3/13/2025 at 11:27 PM, Redskin212 said:

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 

Great post! It got me thinking more about Prem's aspirations for the 100-year company. Your post was timely, as I had meant to collate some upper-level thoughts for a family member to this end anyway. Notes attached

Fairfax Financial- Building a 100-Year Company?.pdf

Edited March 30, 2025 by nwoodman

[MMM20]

I'm thinking more about the big picture for FFH these days at what I believe is another new all-time high (at least in USD... and what a ballast). How are folks here thinking about valuation on normalized earnings? Let's assume normalized combined through cycles is closer to 100% than 94%, let's say ~99%. Is that still a reasonable assumption for a high-quality insurance operation through long-term cycles? I guess that assumes nothing has fundamentally/structurally changed about the business, eg fewer new entrants responding to strong prices b/c of higher regulatory burdens or something along those lines. Plugging in reasonable expectations for equity and bond returns from these starting points for valuations, that would put Fairfax at ~14-15x normalized lookthrough P/E, which pencils to ~10-12% per share long term compounding from this point. Agree/disagree?

 

Edited April 3, 2025 by MMM20

[73 Reds]

5 minutes ago, MMM20 said:

I'm thinking more about the big picture for FFH these days at what I believe is another new all-time high (at least in USD... and what a ballast). How are folks here thinking about valuation on normalized earnings? Let's assume normalized combined through cycles is closer to 100% than 94%, let's say ~99%. Is that still a reasonable assumption for a high-quality insurance operation through long-term cycles? Plugging in reasonable expectations for equity and bond returns from these starting points for valuations, that would put Fairfax at ~14-15x normalized lookthrough P/E, which pencils to ~10-12% per share long term compounding from this point. Agree/disagree?

 

I'd defer to Viking, who has not been wrong since he first began posting about Fairfax.  As an aside, simply watching the 2 COBF namesakes one would not know anything at all is going on in the World.  Don't know about anyone else but when I started buying both stocks (decades apart) times like this were a key reason.  No worries whatsoever.

[Parsad]

Viking, what are the gains like on Fairfax's bond portfolio today?  With 10-year US below 4%, I'm guessing it is going to be a good year for Brian!  Cheers!

[dartmonkey]

34 minutes ago, MMM20 said:

I'm inclined to assume a normalized combined ratio through cycles is closer to 100% than 94%, let's say ~99%. Is that still a reasonable assumption for a high-quality insurance operation? I guess that assumes nothing has fundamentally/structurally changed about the business, eg new entrants not responding to strong prices b/c of higher compliance/regulatory burdens or something along those lines. But starting there and plugging in reasonable investment returns from these valuations, Fairfax trades at mid-teens normalized lookthrough P/E, which pencils to something like ~10-12% per share long-term compounding from here. Agree/disagree?

Yeah, roughly. While I think 10% p.a. would be acceptable, I think Fairfax is likely to do a fair bit better, unless the market really plunges, and then the RELATIVE returns will be excellent and no one will worry about hitting 10% or not. 

 

But the more likely scenario, if there is a soft insurance market, is that Fairfax doesn’t fight for market share and lets its float sink a bit, instead of marching up year after year as it has in recent years. If they get 3% of book on underwriting, and 3% on the bond portfolio (after a few years, when the current higher rated bonds have to be rolled over), and say 5% on the equity holdings, that makes about 3%+2*3%+5%=14%, since they have about one times their equity in insurance premiums, 2*equity in bonds, and 1*equity in socks, so 14% on equity, so at price=1.4*book they might hit 10% return on their current price. Add a smidgeon for opportunistic sales like pet insurance, Stelco, etc, and maybe we get 12%, pre-tax, or 10% after tax. 

 

Hard to find something else with a fairly reliable 10% earnings yield even through a soft insurance market and lower bond yields, two things that don’t usually go together anyways. 

[SafetyinNumbers]

I’m more optimistic on underwriting, at least for the next 5 years. I think the premium growth over the past 5 years likely led to operating leverage. I think they have been spending a decent amount of that on technology which hopefully ultimately helps maintain some operating leverage. I think the hard market over the past 4+ years will lead to higher reserve releases over the next 4+ years. I think interest rates are ultimately heading higher within 4 years as this US administration tries to change the world economic order. 

[gfp]

27 minutes ago, SafetyinNumbers said:

I’m more optimistic on underwriting, at least for the next 5 years. I think the premium growth over the past 5 years likely led to operating leverage. I think they have been spending a decent amount of that on technology which hopefully ultimately helps maintain some operating leverage. I think the hard market over the past 4+ years will lead to higher reserve releases over the next 4+ years. I think interest rates are ultimately heading higher within 4 years as this US administration tries to change the world economic order. 

 

I agree with all of that - especially the reserve releases from the hard market years - except I don't think interest rates are headed higher.  But corporate credit spreads could blow out and that could offer a similar opportunity for FFH

[Santayana]

I hope this doesn't cross into the political, but we know that Trump wants lower rates.  I see a very good chance that they could realize some nice gains on the bond portfolio in the next couple years, just in time to pick up some distressed assets on the cheap.

[Munger_Disciple]

Just now, Santayana said:

I hope this doesn't cross into the political, but we know that Trump wants lower rates.  I see a very good chance that they could realize some nice gains on the bond portfolio in the next couple years, just in time to pick up some distressed assets on the cheap.

He got them; 10-yr US treasury bond yield is down huge today

[Munger_Disciple]

1 hour ago, gfp said:

 

I agree with all of that - especially the reserve releases from the hard market years - except I don't think interest rates are headed higher.  But corporate credit spreads could blow out and that could offer a similar opportunity for FFH

 

Very interesting situation we are seeing with treasury yields are down a lot across the curve with dollar getting hammered in FX markets (I suppose foreigners are selling US assets and going home & US investors are heading for the bond hills). 

[Hoodlum]

46 minutes ago, Munger_Disciple said:

 

Very interesting situation we are seeing with treasury yields are down a lot across the curve with dollar getting hammered in FX markets (I suppose foreigners are selling US assets and going home & US investors are heading for the bond hills). 

 

i don’t think we can have treasury rates and $US dollar dropping at the same time if inflation takes off.  Something has to give at some point.  
 

I believe inflation will take hold shortly in the US, and then treasury rates will need to rise to become attractive to foreign bond buyers if the US$ is dropping. I am still leaning towards stagflation with higher interest rates in the coming year.  But I also agree that the spread with some corporate bonds is going to spike. 
 

A lot this will depend on how long the Tariffs stay in place. 

Edited April 3, 2025 by Hoodlum

[TwoCitiesCapital]

45 minutes ago, Hoodlum said:

 

i don’t think we can have treasury rates and $US dollar dropping at the same time if inflation takes off.  Something has to give at some point.  
 

I believe inflation will take hold shortly in the US, and then treasury rates will need to rise to become attractive to foreign bond buyers if the US$ is dropping. I am still leaning towards stagflation with higher interest rates in the coming year.  But I also agree that the spread with some corporate bonds is going to spike. 
 

A lot this will depend on how long the Tariffs stay in place. 

 

The inflation will be what gives in an economic contraction which is seemingly what is beginning  to happen. 

 

We might slap a higher sticker price on things for imported goods, but the moment inventory starts to pile up because cash-strapped consumers are making fewer purchases is the moment those prices start getting cut and corporate profits eat it. 

[Munger_Disciple]

52 minutes ago, Hoodlum said:

 

i don’t think we can have treasury rates and $US dollar dropping at the same time if inflation takes off.  Something has to give at some point.  
 

I believe inflation will take hold shortly in the US, and then treasury rates will need to rise to become attractive to foreign bond buyers if the US$ is dropping. I am still leaning towards stagflation with higher interest rates in the coming year.  But I also agree that the spread with some corporate bonds is going to spike. 
 

A lot this will depend on how long the Tariffs stay in place. 

 

It's very hard to tell right now if we are headed for stagflation or serious global recession resulting in deflation (don't forget that there are a lot of people levered up to the tits right now, just look at private credit & PE). Oil is getting crushed which implies the second scenario is more likely?