Fairfax 2025

[Viking]

Fairfax continues to be the gift that keeps on giving. Over the past 4.25 years, its stock has significantly outperformed the market averages every year, with more of the same YTD 2025. Its cumulative outperformance has been epic. Their CAGR (in C$) is now greater than the total return for both the S&P500 and the S&P/TSX. Nuts. 

 

To the entire team at $FFH.TO - thank you!

 

Edited April 3, 2025 by Viking

[Hektor]

1 hour ago, Viking said:

To the entire team at $FFH.TO - thank you!

And thanks to you too @Viking

[dartmonkey]

15 hours ago, Viking said:

Their CAGR (in C$) is now greater than the total return for both the S&P500 and the S&P/TSX. Nuts.

What does this mean? Total return for Fairfax or for the indexes should include dividends. Are you just saying Fairfax’s return is better than either index, even ignoring Fairfax’s dividends? At 41% p.a. (in USD), it is WAY ahead of either index (8.9% and 8.2%), but I don’t know if the latter include dividends or not. 

[gfp]

1 minute ago, dartmonkey said:

What does this mean? Total return for Fairfax or for the indexes should include dividends. Are you just saying Fairfax’s return is better than either index, even ignoring Fairfax’s dividends? At 41% p.a. (in USD), it is WAY ahead of either index (8.9% and 8.2%), but I don’t know if the latter include dividends or not. 

 

I think he's saying Fairfax's average ANNUAL return is now higher than the total return over the entire period for those indices.

[Viking]

6 hours ago, gfp said:

 

I think he's saying Fairfax's average ANNUAL return is now higher than the total return over the entire period for those indices.

 

+1. (If my wording is unclear, which it often is... please look at the chart.)

[dartmonkey]

22 hours ago, Viking said:

 

+1. (If my wording is unclear, which it often is... please look at the chart.)

i see now, sorry to be slow: 44.4% p.a. for FaIrfax, 44 and 40% over 4.25y for the indexes. 

 

Probably all these numbers are without considering dividends, right? This wouldn’t change much, as the dividend rates of each are similar, 1.4% for the S&P and about 1% for FFH. 

[Viking]

15 minutes ago, dartmonkey said:

i see now, sorry to be slow: 44.4% p.a. for FaIrfax, 44 and 40% over 4.25y for the indexes. 

 

Probably all these numbers are without considering dividends, right? This wouldn’t change much, as the dividend rates of each are similar, 1.4% for the S&P and about 1% for FFH. 

@dartmonkey , yes, as i put on the chart, the numbers are ex dividends. When I build my charts I am usually in a hurry… so I often use information that is super easy to obtain. There often is a ‘better’ way to look at things. Board members need to keep this in mind when they read my stuff. 

[Viking]

We will see where financial markets go from here. Bottom line, it is probably a good time to review/start to think a little more about Fairfax’s fixed income portfolio. My schedule is going to be busy for the next 10 days so a deep dive will have to wait until after then. Here are some quick thoughts:

What will be the impact of the big drop in treasury yields?

 

Fairfax will see two opposing impacts:

• Large investment gains (driven by the increase in value of bonds).
• Offsetting impact of IFRS 17. 

What will be the size of the investment gains? 

What will be the size of the offsetting impact of IFRS 17? 
 

More on this in a future post. (Short answer: as of today, YTD perhaps a net benefit of $250 million?)

 

Do we get a recession in the US? 
 

Probably not. But the risk is increasing. This means credit risk is becoming more important. 
 

How does this impact Fairfax? 
 

Fairfax’s bond portfolio is heavily skewed to government bonds - it is very conservatively positioned. Especially when compared to other P/C insurance companies (who are heavily weighted to corporate bonds). 
 

Do we see credit spreads blow out? 
 

If this happens, Fairfax will have the opportunity to

• Sell their government bonds - and realize a big investment gain.
• Buy corporate bonds at mouth watering yields.

Bottom line, the fixed income portfolio is getting a little more interesting. 

—————-

 

A review of some of the risks of investing in bonds

• Interest rate risk - rising interest rates cause bond prices to fall. Duration matters a lot with this risk. Spiking interest rates impact long duration bond portfolios much more than short duration portfolios.
• Credit risk - the risk the issuer may default on one or more payments. Market dislocations / recessions matter a lot with this risk - events that cause credit spreads to blow out.
• Inflation risk (purchasing power risk) - the risk that inflation is higher than the total return received on the bond. Unexpected inflation is what matters with this risk. Especially if the inflation is high and persists for years.
• Reinvestment risk - the risk that at maturity, the proceeds will be reinvested at a lower rate than the bond was earning previously.

Edited April 5, 2025 by Viking

[73 Reds]

1 minute ago, Viking said:

We will see where financial markets go from here. Bottom line, it is probably a good time to review/start to think a little more about Fairfax’s fixed income portfolio. My schedule is going to be busy for the next 10 days so a deep dive will have to wait until after then. Here are some quick thoughts:

 

Do we get a recession in the US? 
 

Probably not. But the risk is increasing. This means credit risk is becoming more important. 
 

How does this impact Fairfax? 
 

Fairfax’s bond portfolio is heavily skewed to government bonds - it is vey conservatively positioned. Especially when compared to other P/C insurance companies (who are heavily weighted to corporate bonds). 
 

Do we see credit spreads blow out? 
 

If this happens, Fairfax will have the opportunity to

• Sell their government bonds - and realize a big investment gain.
• Buy corporate bonds at mouth watering yields.

 

Bottom line, the fixed income portfolio is getting a little more interesting. 

—————-

 

A review of some of the risks of investing in bonds

• Interest rate risk - rising interest rates cause bond prices to fall. Duration matters a lot with this risk. Spiking interest rates impact long duration bond portfolios much more than short duration portfolios.
• Credit risk - the risk the issuer may default on one or more payments. Market dislocations / recessions matter a lot with this risk - events that cause credit spreads to blow out.
• Inflation risk (purchasing power risk) - the risk that inflation is higher than the total return received on the bond. Unexpected inflation is what matters with this risk. Especially if the inflation is high and persists for years.
• Reinvestment risk - the risk that at maturity, the proceeds will be reinvested at a lower rate than the bond was earning previously.

 

Viking, if stocks go a lot further south, how much room does Fairfax have to reallocate some of its fixed income proceeds/profits into equities?

[Viking]

5 minutes ago, 73 Reds said:

Viking, if stocks go a lot further south, how much room does Fairfax have to reallocate some of its fixed income proceeds/profits into equities?

@73 Reds , good question. I am going to defer to @SafetyinNumbers. He is much more dialled into this topic than I am. 
 

One thought: what Fairfax does will likely depend on the size of the opportunity. When crazy good opportunities come along, Fairfax can get VERY creative (in terms of how they source capital). 

[Cigarbutt]

1 hour ago, 73 Reds said:

Viking, if stocks go a lot further south, how much room does Fairfax have to reallocate some of its fixed income proceeds/profits into equities?

i'm not @Viking but a member here ( @SafetyinNumbers ) had asked a very similar question in the Q! 2024 conference call.

The answer: 

Peter Clarke: Right. Our fixed income portfolio is very liquid. It’s essentially our bonds are in our U.S. treasuries, and the average duration is about three years. So we have a lot of flexibility there. Investment portfolio as a whole, it’s very defensive. We have the ability to react to the market, and we’re very happy where it is positioned today. So should something happen on the equity side, we would have the ability to pivot if we wanted to.

 

Given the vagueness of the answer, there was some discussion here:

At end of 2024, dividend capacity was 3.16B. 

A lot of moving parts including the TRS on FFH shares which would tend to move with markets, for better or for worse.

One would need to add the unusual degree of financial creativity that FFH has historically been able to deploy in times of 'opportunities'.

So anywhere from 3 to 5B in a typical downturn?

[73 Reds]

24 minutes ago, Cigarbutt said:

i'm not @Viking but a member here ( @SafetyinNumbers ) had asked a very similar question in the Q! 2024 conference call.

The answer: 

Peter Clarke: Right. Our fixed income portfolio is very liquid. It’s essentially our bonds are in our U.S. treasuries, and the average duration is about three years. So we have a lot of flexibility there. Investment portfolio as a whole, it’s very defensive. We have the ability to react to the market, and we’re very happy where it is positioned today. So should something happen on the equity side, we would have the ability to pivot if we wanted to.

 

Given the vagueness of the answer, there was some discussion here:

At end of 2024, dividend capacity was 3.16B. 

A lot of moving parts including the TRS on FFH shares which would tend to move with markets, for better or for worse.

One would need to add the unusual degree of financial creativity that FFH has historically been able to deploy in times of 'opportunities'.

So anywhere from 3 to 5B in a typical downturn?

@Cigarbutt Thanks.  Looking more and more like Berkshire with more prospects all the time. 

[SafetyinNumbers]

1 hour ago, Cigarbutt said:

i'm not @Viking but a member here ( @SafetyinNumbers ) had asked a very similar question in the Q! 2024 conference call.

The answer: 

Peter Clarke: Right. Our fixed income portfolio is very liquid. It’s essentially our bonds are in our U.S. treasuries, and the average duration is about three years. So we have a lot of flexibility there. Investment portfolio as a whole, it’s very defensive. We have the ability to react to the market, and we’re very happy where it is positioned today. So should something happen on the equity side, we would have the ability to pivot if we wanted to.

 

Given the vagueness of the answer, there was some discussion here:

At end of 2024, dividend capacity was 3.16B. 

A lot of moving parts including the TRS on FFH shares which would tend to move with markets, for better or for worse.

One would need to add the unusual degree of financial creativity that FFH has historically been able to deploy in times of 'opportunities'.

So anywhere from 3 to 5B in a typical downturn?

I think $3-5b are the right bookends. It is interesting to speculate when Berkshire and Fairfax will pull the trigger.
 

The TRS shouldn’t have an impact what Fairfax can do in the insurance subsidiaries to reallocate from fixed income to equities because they are held in the holdco. Also, they aren’t that big. For every $100 the shares move it’s only ~$6 in EPS. Book value has a good shot of being $1100 right now and they are generating a significant amount of free cash flow so I assume if the shares get hit they will be be aggressive at book value if not sooner. 

[Gregmal]

So evidently at some point Canada and the US hammer out this whole tariff situation; part of that may actually include some sort of conclusion to Fairfax’s RFP CVR.

[Santayana]

12 minutes ago, Gregmal said:

So evidently at some point Canada and the US hammer out this whole tariff situation; part of that may actually include some sort of conclusion to Fairfax’s RFP CVR.

RFP CVR?

 

[Gregmal]

Wasn’t there $500m of lumber reimbursements attached to that deal with a non transferable CVR?

[Santayana]

Ah, that RFP.  Yes, there was something.

[Santayana]

8 minutes ago, Gregmal said:

Wasn’t there $500m of lumber reimbursements attached to that deal with a non transferable CVR?

Carried out by way of a merger between Resolute and a newly created subsidiary of Domtar, the transaction provided for conversion of each share of Resolute common stock into the right to receive US$20.50 per share, together with one CVR, entitling the holder to a share of future softwood lumber duty deposit refunds. Under the CVR, stockholders would receive any refunds on approximately US$500 million of deposits on estimated softwood lumber duties paid by Resolute through June 30, 2022, including any interest thereon, net of certain expenses and of applicable tax and withholding.

[Hoodlum]

12 hours ago, SafetyinNumbers said:

I think $3-5b are the right bookends. It is interesting to speculate when Berkshire and Fairfax will pull the trigger.
 

The TRS shouldn’t have an impact what Fairfax can do in the insurance subsidiaries to reallocate from fixed income to equities because they are held in the holdco. Also, they aren’t that big. For every $100 the shares move it’s only ~$6 in EPS. Book value has a good shot of being $1100 right now and they are generating a significant amount of free cash flow so I assume if the shares get hit they will be be aggressive at book value if not sooner. 

 

Would convertible notes count toward the equity portion, or would that only occur when the warrants are exercised.  This could be another tool to use as long as Fairfax sells some of their acquired equity before the warrants expire.

[SafetyinNumbers]

2 hours ago, Hoodlum said:

 

Would convertible notes count toward the equity portion, or would that only occur when the warrants are exercised.  This could be another tool to use as long as Fairfax sells some of their acquired equity before the warrants expire.

I don’t know. Does it matter? 

[Cigarbutt]

4 hours ago, Hoodlum said:

 

Would convertible notes count toward the equity portion, or would that only occur when the warrants are exercised.  This could be another tool to use as long as Fairfax sells some of their acquired equity before the warrants expire.

It's an interesting question which likely matters only at the margin.

From a capital-at-risk perspective which is important for a P+C insurer, there is material difference between rated convertible bonds and equity exposure:

The above is from NAIC and not all risk-based matrices are the same and evolving but the table gives relevant perspective. So if a convertible bond becomes equity there is some impact on statutory capital measures.

-----

What is more interesting in terms of stress-testing scenarios on the asset side is what they could do (asset swap-type of changes ie bonds, cash to riskier but better priced opportunities including equity) without taking into account other capital-raise initiatives. In the (distant) past, FFH has shown the intent and ability to hold high equity levels versus underlying statutory capital.

What is different this time is an already quite large allocation to various equity or equity-like positions. The present 'excess' dividend capacity of about 3B is based on an underlying of 65.2B investable assets. The point is: if already owned assets go down in value, this will have an effect on the statutory ability to deploy funds in securities not owned but looking cheap. This will be a dynamic situation but (opinion) i prefer the BRK setup (now).

-----

In reference to the receivables from deposits linked to trade disputes, the chronically evolving softwood lumber situation is both interesting and relevant to the threads 'discussing' the present tariff situation. 

 

Edited April 6, 2025 by Cigarbutt

[Hoodlum]

2 hours ago, SafetyinNumbers said:

I don’t know. Does it matter? 

it may allow Fairfax to acquire future equity based on distressed stock valuations now, outside of the current $3B limitation. 

Edited April 6, 2025 by Hoodlum

[Hoodlum]

23 minutes ago, Cigarbutt said:

It's an interesting question which likely matters only at the margin.

From a capital-at-risk perspective which is important for a P+C insurer, there is material difference between rated convertible bonds and equity exposure:

The above is from NAIC and not all risk-based matrices are the same and evolving but the table gives relevant perspective. So if a convertible bond becomes equity there is some impact on statutory capital measures.

-----

What is more interesting in terms of stress-testing scenarios on the asset side is what they could do (asset swap-type of changes ie bonds, cash to riskier but better priced opportunities including equity) without taking into account other capital-raise initiatives. In the (distant) past, FFH has shown the intent and ability to hold high equity levels versus underlying statutory capital.

What is different this time is an already quite large allocation to various equity or equity-like positions. The present 'excess' dividend capacity of about 3B is based on an underlying of 65.2B investable assets. The point is: if already owned assets go down in value, this will have an effect on the statutory ability to deploy funds in securities not owned but looking cheap. This will be a dynamic situation but (opinion) i prefer the BRK setup (now).

-----

In reference to the receivables from deposits linked to trade disputes, the chronically evolving softwood lumber situation is both interesting and relevant to the threads 'discussing' the present tariff situation. 

 

That is an interesting point regarding the impact of existing Fairfax owned equity getting hit during a market sell off.  These equities did well during q1, but as we saw this week there are very few equities not impacted as the sell off deepens. That would impact Fairfax’s ability to buy significant equities. This is likely why BRK was selling as much of their Apple stake as possible over the past year. 
 

So most of Fairfax’s investing will be done on the corporate bond side with likely some unique setups, including convertible debt to take advantage of this downturn. Fortunately, we have the best bond managers handling this so I will leave it up to them for the appropriate timing and best opportunities . 

[TwoCitiesCapital]

54 minutes ago, Hoodlum said:

That is an interesting point regarding the impact of existing Fairfax owned equity getting hit during a market sell off.  These equities did well during q1, but as we saw this week there are very few equities not impacted as the sell off deepens. That would impact Fairfax’s ability to buy significant equities. This is likely why BRK was selling as much of their Apple stake as possible over the past year. 
 

So most of Fairfax’s investing will be done on the corporate bond side with likely some unique setups, including convertible debt to take advantage of this downturn. Fortunately, we have the best bond managers handling this so I will leave it up to them for the appropriate timing and best opportunities . 

 

While Fairfax may have some opportunity on the equity side, I'd be most excited to see them rolling treasuries into corporates when spreads blow out.

 

That locks in a yield advantage for years where the equities contribute to volatility of earnings in a way that bonds likely won't in the future. 

[djokovic1]

On 4/3/2025 at 3:29 PM, 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? 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?

 

 

@MMM20 I am much more optimistic. With rough assumptions you can confidently get to a 15-20% ROE for the next 4 years, especially with 5% rates locked in. Downside is low. The equity portfolio (+TRS) may create volatility any one year but if you zoom out 3-4 years, it will create a lot of compounding value. I personally also prefer Prem's equity positioning which has a value bent rather than a high multiple 'quality' bent.

 

Additionally, the FFH compounding package is below 9x earnings and well below peer multiples, so you can take it as a margin of safety or potential for significant multiple expansion (20x would still be considered cheap by a lot of investors for a 15-20% compounder). 

 

I personally use a normalised combined ratio of 95% rather than 100% but the CR is not the big driver of ROE, investment returns are. 

 

The biggest risk is pro-longed low rates which would make the normalized earnings power lower (but lot of moving parts, and their current earnings will be reinvested to compound in the meantime). And at the current multiple, its a risk I am very comfortable to take.