nwoodman Posted May 2, 2025 Posted May 2, 2025 (edited) A short but succinct conference call. I’m sure the quarterly results aren’t lost on those who’ve followed Fairfax over the long term.To absorb a catastrophe like the California wildfires — and still post an underwriting profit — is proof of Fairfax’s evolution and global diversification. Humming along springs to mind. Here’s the best of the call — in their own words: Insurance & Underwriting “Despite the significant catastrophe losses in the quarter, 781 million in total, our insurance and reinsurance operations produced an underwriting profit of 97 million.” “The ability to withstand such a large catastrophe loss in a quarter while still producing an underwriting profit in the quarter demonstrates the strength and scale of our insurance and reinsurance operations.” “We like that [cat] exposure is on the reinsurance side… it’s easier to control. We know what limits [we’re] standing [behind]… the loss we had was well within our risk appetite.” Investments & Volatility “There’s volatility in stock markets, bond markets and the economy. The good news is Fairfax has historically benefited from volatility.” “We think our stock and bond portfolios are in great shape for the environment we’re in.” “The worse it gets, the better we will perform over the long run.” Poseidon & Trade Risk “Poseidon is a financial and operating company in the shipping business with long term contracts backed by financially strong customers with outstanding balance sheets.” “Talking to the management team, they’re quite confident that the tariffs… and economic uncertainty around the world will not have any significant effect on their business.” “Locking in these contracts was a huge plus for them. So we’re very excited about the prospects of Poseidon.” Non-Insurance Operations “Excluding non-cash impairment charges recorded at Boat Rocker… the non-insurance companies reported stronger operating income in the first quarter of 2025 compared to the first quarter of 2024.” “Principally reflecting increased operating income at the restaurants and retail operating segments, primarily related to the consolidation of Sleep Country on October 1, 2024 and higher business volumes at Recipe.” Capital Allocation “We still think our stock price is very good value and we’ll continue to buy back our shares — but not at the expense of our financial strength.” “We do have minority interests in Odyssey and Allied… companies we know really, really well… over time, we’d like to buy back those minority positions.” “We have about 500 million of preferred shares that are coming up at the end of the year… we’re going to look at that.” Quiet, disciplined, and globally diversified — Fairfax doesn’t just endure volatility. It’s built for it. “The worse it gets, the better we will perform over the long run.” Interested in others perspective but this quarter along with my interactions with management and subs at the AGM I am still strongly of the belief that the company is still mis-priced. Long may it stay that way. To get shaken out because of misperception of fair valuation on the shares is my worst nightmare. There is just not that many good ideas that come along. Edited May 2, 2025 by nwoodman
Hoodlum Posted May 2, 2025 Posted May 2, 2025 (edited) CIBC raised their target from $2500 to $2700 today. Unfortunately, I don't have access to their report. National Bank also increased their target to $2600 two days ago. Edited May 2, 2025 by Hoodlum
Parsad Posted May 2, 2025 Posted May 2, 2025 1 hour ago, cwericb said: ....as Brett Horne grits his teeth ... LOL! Cheers!
LC Posted May 2, 2025 Posted May 2, 2025 Great Q- not much to add vs what has been said. Trading around 1.4-15x BV currently? Multiple slowly expanding...
Hoodlum Posted May 2, 2025 Posted May 2, 2025 3 hours ago, cwericb said: ....as Brett Horne grits his teeth ... Brett heard you and he takes exception to that. https://www.morningstar.ca/ca/news/264378/fairfax-earnings-california-wildfires-take-a-bite-but-investment-gains-are-an-offset.aspx The bottom line: We will maintain our CAD 1,540 fair value estimate for the no-moat company. We see shares as materially overvalued, and we think the market is extrapolating favorable market conditions too far into the future. In our view, P&C insurance is a highly competitive and inherently mean-reverting industry, and recent industry returns are unlikely to persist.
LC Posted May 2, 2025 Posted May 2, 2025 If you view Morningstar as a tabloid newspaper, it makes sense. Brett Horn is as much an equity/business analyst as Doug Montero (sorry, Doug) of the National Enquirer is an investigative journalist. Doug's latest piece: https://www.nationalenquirer.com/kims-secret-romance-with-businessman-ends-over-fame-pressure/
cwericb Posted May 2, 2025 Posted May 2, 2025 19 minutes ago, Hoodlum said: The bottom line: We will maintain our CAD 1,540 fair value estimate for the no-moat company. We see shares as materially overvalued, and we think the market is extrapolating favorable market conditions too far into the future. In our view, P&C insurance is a highly competitive and inherently mean-reverting industry, and recent industry returns are unlikely to persist. Yes Brett, the market is wrong! Again, and again. And how many years in a row has the market been wrong now? And the big banks? .... Well they must be complete idiots because they are forecasting share price to be $1,000 per share higher than your guesstimate. Sheesh! Where does Morningstar get these guys?
SafetyinNumbers Posted May 2, 2025 Posted May 2, 2025 1 hour ago, cwericb said: Yes Brett, the market is wrong! Again, and again. And how many years in a row has the market been wrong now? And the big banks? .... Well they must be complete idiots because they are forecasting share price to be $1,000 per share higher than your guesstimate. Sheesh! Where does Morningstar get these guys? Morningstar’s analysis shows FFH doesn’t screen well for quants. It’s partly why the stock trades cheap as a it’s a huge source of demand that doesn’t own the stock.
bluedevil Posted May 2, 2025 Posted May 2, 2025 I really like hearing from Wade Burton on these calls. He is a great communicator. To the point, clear and informative.
cwericb Posted May 2, 2025 Posted May 2, 2025 10 minutes ago, SafetyinNumbers said: Morningstar’s analysis shows FFH doesn’t screen well for quants. It’s partly why the stock trades cheap as a it’s a huge source of demand that doesn’t own the stock. In other words, analysts who are too lazy to actually do some work on the companies they are "analyzing". The sad part of this is that people rely on this type of BS to make investment decisions and Fairfax is a prime example as Horne has been so consistently wrong time after time. And because some rely on these guys it effects the stock price which in turn effects other investors who have actually spent the time to analyze the stock.
SafetyinNumbers Posted May 3, 2025 Posted May 3, 2025 5 hours ago, cwericb said: In other words, analysts who are too lazy to actually do some work on the companies they are "analyzing". The sad part of this is that people rely on this type of BS to make investment decisions and Fairfax is a prime example as Horne has been so consistently wrong time after time. And because some rely on these guys it effects the stock price which in turn effects other investors who have actually spent the time to analyze the stock. To be fair to them, they are playing a different game and it’s worked for a long time. Quant investing is a big data exercise and is not about picking the best idiosyncratic stocks. It does hurt FFH’s valuation as most large asset managers and retail brokers use quant screens so they can’t own FFH and ultimately stock prices are just supply vs demand. The beauty is FFH is taking advantage and scooping up stock.
Viking Posted May 4, 2025 Author Posted May 4, 2025 (edited) Short review of Fairfax's Q1 earnings release. Fairfax delivered another very good quarter of results. Perhaps a little more noise ‘under the hood’ than in recent reports (not a bad thing). Most importantly, the company continues to look very well positioned moving forward. Below are a few items from the Q1 earnings report that got my attention. The list is a little eclectic - things I find interesting. ————— Book value increased from $1,060 (Dec 31, 2024) to $1,080 (March 31, 2025). Dividend payment in January was $15. Including dividend the increase was $35/share = 3.5%. At March 31, 2025 the excess of fair value over carrying value of investments in non-insurance associates and consolidated holdings was $1.4 billion = $66/share pre-tax = @ $50/share after tax. This puts Fairfax’s ‘adjusted’ BV at about $1,130/share (which is still understated). ————— Insurance Insurance was the most important part of the report for me. Lots of analysts describe Fairfax as an investment company masquerading as a P/C insurance company. This might have been a good description of Fairfax pre-2010. However, since 2011 - when Andy Barnard was put into his role overseeing all of Fairfax’s insurance operations - Fairfax has done an amazing job of transforming its P/C insurance business into a high quality operation. At the same time, it has massively expanded its P/C insurance business (first via acquisition and more recently in the hard market). Bottom line, Fairfax now has a large world class P/C insurance business - and this business is the core engine for the entire company. Their investment management business is also very important. But Fairfax is no longer a ‘one trick pony.’ Understanding this change is critically important for investors. Top line In its insurance business, Fairfax delivered top line growth of NPW of 8.4%, which was better than expected (especially given what we saw last year). Crum’s growth of 17.4% was very high. Allied World and Odyssey also posted high growth (high single digits). Ki looks like it might be Fairfax’s next diamond in the rough. It is now being reported as a stand alone company. It could see significant growth in the coming years. (Partnering with Blackstone, Fairfax started Ki from scratch in 2020.) Underwriting profit It was also nice to see that Fairfax was able to earn an underwriting profit given the significant catastrophe losses during the quarter. This was due to above trend net favourable prior year reserve development of $219.1 million or 3.5 combined ratio points (2024 - $29.9 million or 0.5 of a CR point). The pace of favourable reserve development has been increasing over the past year (which makes sense given we have been in a hard market since late 2019). Bottom line, we are learning that Fairfax has a first class P/C insurance business. It is growing nicely. And it is poised to deliver a significant amount of underwriting income to Fairfax in the coming years. Float Float was $37 billion at December 31, 2024. It is growing nicely. And it is costing Fairfax nothing to hold - actually Fairfax is getting paid to hold it (their underwriting profit). In addition to underwriting profit, Fairfax also gets to keep all of the returns it generates from its float. (Fairfax is earning around 7% on its investment portfolio). What a crazy good set-up. Fairfax is double dipping with its float (underwriting income + return). For perspective, common shareholders’ equity at Fairfax was $23.3 billion at March 31, 2025. At Fairfax, float is 1.6 x the size of common shareholders’ equity. That provides an incredible amount of leverage for Fairfax and its earnings. Especially today where Fairfax is generating both a solid underwriting profit and a high total return on its $70 billion investment portfolio (which includes float). ————— Interest and dividends came in at $606.5 million in Q1. In Q4, 2025 it was $610 million (if you net out the Digit payment of $112 million that was made to Fairfax as part of its IPO earlier in the year). It looks to me like interest and dividend income will likely flatline from here. And it is probably mildly skewed to the downside - rates on the short end are dropping in Europe and Canada and the US is likely not far behind. On the Q1 conference call Fairfax said the average duration of the fixed income portfolio was 3.3 years and the yield was 5.1%. Interest and dividend income of around $2.4 billion per year looks locked and loaded for the next 4 years. This is Fairfax’s largest income stream (by far). It provides a large amount of stability to Fairfax’s earnings. And stability = higher certainty. And higher certainty = higher multiple. Because Mr. Market loves certainty. This is another example of how ‘new Fairfax’ (today’s version) is structured very differently from ‘old Fairfax’ (pre-2022 version). ————— Share of profit of associates came in at $128.6 million, which was lower than I expected. Eurobank and Poseidon delivered very good results. Weakness was from ‘other’ - partnerships and other non-insurance associates - Fairfax called out its investment in Waterous Energy on the Q1 call. Some of Fairfax’s holdings are cyclical companies (like Waterous Energy). This will add a little volatility to quarterly results (in both directions). ————— Results from non-insurance consolidated companies disappointed, coming in at a loss of $41.1 million in Q1. I feel like the kid at breakfast in the Charles Dickens book Oliver Twist. When Fairfax reports, when looking at the total results for this bucket of holdings, I find myself saying the same thing ‘Please Prem, I want some more!’ I have been waiting for earnings from this bucket of holdings to turn higher for 2 years now. What is the problem? Continued write-offs from (shitty performing) legacy holdings. This last quarter it was Boat Rocker. Before that it was Farmers Edge. Fairfax is moving in the right direction. Problem children are getting fixed. The overall quality of the holdings in this bucket is improving with each passing quarter. The businesses are well managed with solid prospects. Reported earnings are getting coiled like a spring. They will be shooting higher at some point in the near future. I just needed to vent. Thank you for listening Restaurants and retail (primarily Recipe and Sleep Country) had a solid quarter with operating income increasing from $0.9 million in 2024 to $32.0 million in 2025. This is a good example of the good things that are happening ‘under the hood’ with this group of holdings. Recipe Purchase In Q1, Fairfax increased its ownership in Recipe from 85% to 100% - they took out their minority partner in Recipe, the Phelon family. The Phelon family founded the predecessor company to Recipe well over 100 years ago. The purchase was partially funded by Recipe from an increase in borrowings of $132.1 million (C$190.0). I love this transaction. Recipe is generating solid earnings. Owning 100% now gives Fairfax complete control over the business. Fairfax also owns 100% of Sleep Country and Peak Achievements. This is another sign of how strong Fairfax’s financial condition is today. —————— Investment gains came in higher than expected at $1.056 billion. We knew about the following net gains: Mark to market common stocks = $216.8 million. FFH-TRS = $97.2 million. Mark to market convertible bonds and equity warrants = $216.8 million. This is largely Orla Mining (gold producer). Bonds = $388.4 million We also knew about the following net losses (‘other’): Digit compulsory convertible preferred shares = $149.9 million The (good) surprise was the following realized gain: Sigma Companies International Corp. = $178.7 million “On March 28, 2025 the company sold its equity interest in Sigma Companies International Corp. ("Sigma") for total consideration of $327.1, comprised of cash consideration of $284.1 and a retained ownership interest in Sigma of 16.1% (through a new limited partnership interest) with a fair value of $43.0 at closing of the transaction, which is classified as FVTPL. As a result, the company recorded a realized gain of $178.7 in the consolidated statement of earnings.” Fairfax Q1 Earnings Report What is the key take-away from the Sigma sale/significant realized gain? Sigma was an equity accounted holding for Fairfax. The investment gain for this holding had slowly been building ‘under the hood’ at Fairfax over the past 7 years. It was captured in the ‘excess of FV over CV’ for associate and non-consolidated holdings that Fairfax reports each quarter. The significant investment gains residing in this bucket will get monetized by Fairfax over time. That is what happened with the Sigma holding in Q1. We can expect much more of this (’surprise’ realized gains) in the coming years as Fairfax monetizes the significant value that is building on its balance sheet that is not captured in its book value. Share buybacks in Q1, 2025 Fairfax issued 118,457 shares from treasury for use in the company’s share based payments awards (Prem provided details on this plan in his letter in Fairfax’s 2024AR). Fairfax repurchased a total of 205,610 shares at an aggregate cost of $289.2 million, or $1,407/share. Effective shares outstanding declined by 87,153. At March 31, 2025, effective shares outstanding was 21.58 million. Fairfax bought back an enormous number of shares in 2024. Given the run-up in the share price over the past 2 years, one of my questions as we began 2025 was would this continue? It did continue in Q1. What about moving forward? Here is what Peter Clark had to say on Fairfax’s Q1 conference call: “We still think our stock price is very good value and we’ll continue to buy back our shares — but not at the expense of our financial strength.” Fairfax also continues to hold the FFH-TRS - giving it exposure to 1.7 million Fairfax shares. They hold this position as an investment. The fact they continue to hold this investment means they still view it favourably (from a return perspective). Bottom line, despite the spike in the share price in recent years, Fairfax continues to think their shares are undervalued at current prices. I love it. Edited May 4, 2025 by Viking
SafetyinNumbers Posted May 4, 2025 Posted May 4, 2025 4 hours ago, Viking said: Short review of Fairfax's Q1 earnings release. Fairfax delivered another very good quarter of results. Perhaps a little more noise ‘under the hood’ than in recent reports (not a bad thing). Most importantly, the company continues to look very well positioned moving forward. Below are a few items from the Q1 earnings report that got my attention. The list is a little eclectic - things I find interesting. ————— Book value increased from $1,060 (Dec 31, 2024) to $1,080 (March 31, 2025). Dividend payment in January was $15. Including dividend the increase was $35/share = 3.5%. At March 31, 2025 the excess of fair value over carrying value of investments in non-insurance associates and consolidated holdings was $1,4 billion = $66/share pre-tax = @ $50/share after tax. This puts Fairfax’s ‘adjusted’ BV at about $1,130/share (which is still understated). ————— Insurance Insurance was the most important part of the report for me. Lots of analysts describe Fairfax as an investment company masquerading as a P/C insurance company. This might have been a good description of Fairfax pre-2010. However, since 2011 - when Andy Barnard was put into his role overseeing all of Fairfax’s insurance operations - Fairfax has done an amazing job of transforming its P/C insurance business into a high quality operation. At the same time, it has massively expanded its P/C insurance business (first via acquisition and more recently in the hard market). Bottom line, Fairfax now has a large world class P/C insurance business - and this business is the core engine for the entire company. Their investment management business is also very important. But Fairfax is no longer a ‘one trick pony.’ Understanding this change is critically important for investors. Top line In its insurance business, Fairfax delivered top line growth of NPW of 8.4%, which was better than expected (especially given what we saw last year). Crum’s growth of 17.4% was very high. Allied World and Odyssey also posted high growth (high single digits). Ki looks like it might be Fairfax’s next diamond in the rough. It is now being reported as a stand alone company. It could see significant growth in the coming years. (Partnering with Blackstone, Fairfax started Ki from scratch in 2020.) Underwriting profit It was also nice to see that Fairfax was able to earn an underwriting profit given the significant catastrophe losses during the quarter. This was due to above trend net favourable prior year reserve development of $219.1 million or 3.5 combined ratio points (2024 - $29.9 million or 0.5 of a CR point). The pace of favourable reserve development has been increasing over the past year (which makes sense given we have been in a hard market since late 2019). Bottom line, we are learning that Fairfax has a first class P/C insurance business. It is growing nicely. And it is poised to deliver a significant amount of underwriting income to Fairfax in the coming years. Float Float was $37 billion at December 31, 2024. It is growing nicely. And it is costing Fairfax nothing to hold - actually Fairfax is getting paid to hold it (their underwriting profit). In addition to underwriting profit, Fairfax also gets to keep all of the returns it generates from its float. (Fairfax is earning around 7% on its investment portfolio). What a crazy good set-up. Fairfax is double dipping with its float (underwriting income + return). For perspective, common shareholders’ equity at Fairfax was $23.3 billion at March 31, 2025. At Fairfax, float is 1.6 x the size of common shareholders’ equity. That provides an incredible amount of leverage for Fairfax and its earnings. Especially today where Fairfax is generating both a solid underwriting profit and a high total return on its $70 billion investment portfolio (which includes float). ————— Interest and dividends came in at $606.5 million in Q1. In Q4, 2025 it was $610 million (if you net out the Digit payment of $112 million that was made to Fairfax as part of its IPO earlier in the year). It looks to me like interest and dividend income will likely flatline from here. And it is probably mildly skewed to the downside - rates on the short end are dropping in Europe and Canada and the US is likely not far behind. On the Q1 conference call Fairfax said the average duration of the fixed income portfolio was 3.3 years and the yield was 5.1%. Interest and dividend income of around $2.4 billion per year looks locked and loaded for the next 4 years. This is Fairfax’s largest income stream (by far). It provides a large amount of stability to Fairfax’s earnings. And stability = higher certainty. And higher certainty = higher multiple. Because Mr. Market loves certainty. This is another example of how ‘new Fairfax’ (today’s version) is structured very differently from ‘old Fairfax’ (pre-2022 version). ————— Share of profit of associates came in at $128.6 million, which was lower than I expected. Eurobank and Poseidon delivered very good results. Weakness was from ‘other’ - partnerships and other non-insurance associates - Fairfax called out its investment in Waterous Energy on the Q1 call. Some of Fairfax’s holdings are cyclical companies (like Waterous Energy). This will add a little volatility to quarterly results (in both directions). ————— Results from non-insurance consolidated companies disappointed, coming in at a loss of $41.1 million in Q1. I feel like the kid at breakfast in the Charles Dickens book Oliver Twist. When Fairfax reports, when looking at the total results for this bucket of holdings, I find myself saying the same thing ‘Please Prem, I want some more!’ I have been waiting for earnings from this bucket of holdings to turn higher for 2 years now. What is the problem? Continued write-offs from (shitty performing) legacy holdings. This last quarter it was Boat Rocker. Before that it was Farmers Edge. Fairfax is moving in the right direction. Problem children are getting fixed. The overall quality of the holdings in this bucket is improving with each passing quarter. The businesses are well managed with solid prospects. Reported earnings are getting coiled like a spring. They will be shooting higher at some point in the near future. I just needed to vent. Thank you for listening Restaurants and retail (primarily Recipe and Sleep Country) had a solid quarter with operating income increasing from $0.9 million in 2024 to $32.0 million in 2025. Recipe Purchase In Q1, Fairfax increased its ownership in Recipe from 85% to 100% - they took out their minority partner in Recipe, the Phelon family. The Phelon family founded the predecessor company to Recipe well over 100 years ago. The purchase was partially funded by Recipe from an increase in borrowings of $132.1 million (C$190.0). I love this transaction. Recipe is generating solid earnings. Owning 100% now gives Fairfax complete control over the business. Fairfax also owns 100% of Sleep Country and Peak Achievements. This is another sign of how strong Fairfax’s financial condition is today. —————— Investment gains came in higher than expected at $1.056 billion. We knew about the following net gains: Mark to market common stocks = $216.8 million. FFH-TRS = $97.2 million. Mark to market convertible bonds and equity warrants = $216.8 million. This is largely Orla Mining (gold producer). Bonds = $388.4 million We also knew about the following net losses (‘other’): Digit compulsory convertible preferred shares = $149.9 million The (good) surprise was the following realized gain: Sigma Companies International Corp. = $178.7 million “On March 28, 2025 the company sold its equity interest in Sigma Companies International Corp. ("Sigma") for total consideration of $327.1, comprised of cash consideration of $284.1 and a retained ownership interest in Sigma of 16.1% (through a new limited partnership interest) with a fair value of $43.0 at closing of the transaction, which is classified as FVTPL. As a result, the company recorded a realized gain of $178.7 in the consolidated statement of earnings.” Fairfax Q1 Earnings Report What is the key take-away from the Sigma sale/significant realized gain? Sigma was an equity accounted holding for Fairfax. The investment gain for this holding had slowly been building ‘under the hood’ at Fairfax over the past 7 years. It was captured in the ‘excess of FV over CV’ for associate and non-consolidated holdings that Fairfax reports each quarter. The significant investment gains residing in this bucket will get monetized by Fairfax over time. That is what happened with the Sigma holding in Q1. We can expect much more of this (’surprise’ realized gains) in the coming years as Fairfax monetizes the significant value that is building on its balance sheet that is not captured in its book value. Share buybacks in Q1, 2025 Fairfax issued 118,457 shares from treasury for use in the company’s share based payments awards (Prem provided details on this plan in his letter in Fairfax’s 2024AR). Fairfax repurchased a total of 205,610 shares at an aggregate cost of $289.2 million, or $1,407/share. Effective shares outstanding declined by 87,153. At March 31, 2025, effective shares outstanding was 21.58 million. Fairfax bought back an enormous number of shares in 2024. Given the run-up in the share price over the past 2 years, one of my questions as we began 2025 was would this continue? It did continue in Q1. What about moving forward? Here is what Peter Clark had to say on Fairfax’s Q1 conference call: “We still think our stock price is very good value and we’ll continue to buy back our shares — but not at the expense of our financial strength.” Fairfax also continues to hold the FFH-TRS - giving it exposure to 1.7 million Fairfax shares. They hold this position as an investment. The fact they continue to hold this investment means they still view it favourably (from a return perspective). Bottom line, despite the spike in the share price in recent years, Fairfax continues to think their shares are undervalued at current prices. I love it. Great analysis Viking. I think the reserve releases you pointed out are worth highlighting. Historically, that number has a lot of momentum and premiums were growing fast 4 years ago. It can be a real tailwind to underwriting earnings but delayed one quarter by the unusually high cat losses.
buylowersellhigh Posted May 5, 2025 Posted May 5, 2025 3 hours ago, SafetyinNumbers said: Great analysis Viking. I think the reserve releases you pointed out are worth highlighting. Historically, that number has a lot of momentum and premiums were growing fast 4 years ago. It can be a real tailwind to underwriting earnings but delayed one quarter by the unusually high cat losses. Can you explain how this reserve release is done? Is it done when the reserve that was taken is no longer determined necessary against the insured or the claim is less than the reserve?
nwoodman Posted May 5, 2025 Posted May 5, 2025 6 hours ago, buylowersellhigh said: Can you explain how this reserve release is done? Is it done when the reserve that was taken is no longer determined necessary against the insured or the claim is less than the reserve? The latter. A reserve release occurs when: 1. A claim settles for less than what was reserved, or 2. An expected claim (like an IBNR reserve) no longer appears likely, based on updated data. In both cases, the insurer reduces the reserve, and the excess flows into earnings. It’s a backward-looking adjustment, based on actual claims experience, and reflects that the original estimate is no longer fully needed. Eighteen years of favorable reserve development certainly quiets the old rumours about skeletons in Fairfax’s reserving closet. +1 @Viking great Q1 summary. Like you, I’m still watching to see where normalized earnings land in the NICs. Key to how the windfalls have been recycled, I’m confident they’ll get there. $US2000 IV no longer seems wildly speculative.
dartmonkey Posted May 5, 2025 Posted May 5, 2025 3 hours ago, nwoodman said: A reserve release occurs when: 1. A claim settles for less than what was reserved, or 2. An expected claim (like an IBNR reserve) no longer appears likely, based on updated data. Thanks. Additional question: what this means is that retrospectively, the losses for the year in which the reserve was taken ended up being less than expected, so the combined ratio reported in that previous year (or several previous years) was higher than it would have been, had they not taken so much reserve. Of course the reserves are just a guess, but once they have the benefit of a longer period to assess losses, do they go back and reassess past years’ combined ratios, or does this year’s favourable adjustment make current year’s combined ratio look better?
nwoodman Posted May 5, 2025 Posted May 5, 2025 11 minutes ago, dartmonkey said: Thanks. Additional question: what this means is that retrospectively, the losses for the year in which the reserve was taken ended up being less than expected, so the combined ratio reported in that previous year (or several previous years) was higher than it would have been, had they not taken so much reserve. Of course the reserves are just a guess, but once they have the benefit of a longer period to assess losses, do they go back and reassess past years’ combined ratios, or does this year’s favourable adjustment make current year’s combined ratio look better? Yes, reserve releases reflect that prior years’ losses were overestimated, meaning those years’ combined ratios were actually better than reported. But insurers don’t revise history. The release is recognized in the current year, improving this year’s combined ratio, even though it relates to past underwriting. It’s important to understand: reserves aren’t just a guess, they are the essence of the insurance business. Setting them conservatively, and then seeing favorable development, isn’t just healthy, it’s a hallmark of disciplined underwriting. While reserves are data-driven, they also rely heavily on actuarial and managerial judgment, especially in long-tail lines. That’s why track record matters: it’s not about getting it right once, it’s about doing it consistently. And yes, there’s a smoothing effect to reserve releases but in well-run insurers, that’s a feature, not a bug.
dartmonkey Posted May 5, 2025 Posted May 5, 2025 2 minutes ago, nwoodman said: Yes, reserve releases reflect that prior years’ losses were overestimated, meaning those years’ combined ratios were actually better than reported. But insurers don’t revise history. The release is recognized in the current year, improving this year’s combined ratio, even though it relates to past underwriting. It’s important to understand: reserves aren’t just a guess, they are the essence of the insurance business. ... And yes, there’s a smoothing effect to reserve releases but in well-run insurers, that’s a feature, not a bug. It would only be a bug if they had somehow changed the degree to which their reserving was conservative, and then current years's CR would be reflecting past virtues and not necessarily good underwriting going forward. I'm not at all saying that this is the case with Fairfax (I have no idea), but it would seem helpful to also have a revised version of combined ratio history, where they DID go back and revise history, in the sense of better reflecting what really happened rather than what they thought was true when they wrote the first draft. As I write this, the word 'loss triangle' comes to mind and I vaguely remember they do do this, in their annual report. On p.136, they have a table that indicates that prior year reserve development has been favourable for 2020-2024, with gains of 3.3%, 2.2%, 0.9%, 1.4% and 2.4%, for 2020 to 2024 respectively, although obviously, the most recent years haven't had long to mature. But I can't find the full loss triangle for previous years. I guess the question I would really like to answer is, to what extent do recent favourable CR figures just represent previous over-reserving, as opposed to good current underwriting.
gfp Posted May 5, 2025 Posted May 5, 2025 Fairfax cleaning up the Keg royalty vehicle - https://www.globenewswire.com/news-release/2025/05/05/3074014/0/en/The-Keg-Royalties-Income-Fund-Enters-into-a-Letter-of-Intent-in-Respect-of-a-Proposed-Acquisition-of-All-Issued-and-Outstanding-Units-at-18-60-per-Unit.html
gfp Posted May 5, 2025 Posted May 5, 2025 A few more analyst price target updates this morning FWIW (not much!) Coremark Securities 2250 -> C$2700 BMO 2400 -> C$2500
Intelligent_Investor Posted May 5, 2025 Posted May 5, 2025 I do think with the news this weekend of Buffett's retirement, its a factor that could see more flows into Fairfax in the longer term. Berkshire under Abel will be a different company and Fairfax right now is the closest thing to Berkshire in its earlier years.
buylowersellhigh Posted May 5, 2025 Posted May 5, 2025 4 hours ago, nwoodman said: Yes, reserve releases reflect that prior years’ losses were overestimated, meaning those years’ combined ratios were actually better than reported. But insurers don’t revise history. The release is recognized in the current year, improving this year’s combined ratio, even though it relates to past underwriting. It’s important to understand: reserves aren’t just a guess, they are the essence of the insurance business. Setting them conservatively, and then seeing favorable development, isn’t just healthy, it’s a hallmark of disciplined underwriting. While reserves are data-driven, they also rely heavily on actuarial and managerial judgment, especially in long-tail lines. That’s why track record matters: it’s not about getting it right once, it’s about doing it consistently. And yes, there’s a smoothing effect to reserve releases but in well-run insurers, that’s a feature, not a bug. Thank you nwoodman. I appreciate the insights.
mananainvesting Posted May 5, 2025 Posted May 5, 2025 5 hours ago, nwoodman said: Yes, reserve releases reflect that prior years’ losses were overestimated, meaning those years’ combined ratios were actually better than reported. But insurers don’t revise history. The release is recognized in the current year, improving this year’s combined ratio, even though it relates to past underwriting. It’s important to understand: reserves aren’t just a guess, they are the essence of the insurance business. Setting them conservatively, and then seeing favorable development, isn’t just healthy, it’s a hallmark of disciplined underwriting. While reserves are data-driven, they also rely heavily on actuarial and managerial judgment, especially in long-tail lines. That’s why track record matters: it’s not about getting it right once, it’s about doing it consistently. And yes, there’s a smoothing effect to reserve releases but in well-run insurers, that’s a feature, not a bug. Being conservative and releasing reserves over time also acts as a tax deferral! It is another tool in a good insurer tool kit to compound!
Viking Posted May 5, 2025 Author Posted May 5, 2025 (edited) 3 hours ago, Intelligent_Investor said: I do think with the news this weekend of Buffett's retirement, its a factor that could see more flows into Fairfax in the longer term. Berkshire under Abel will be a different company and Fairfax right now is the closest thing to Berkshire in its earlier years. @Intelligent_Investor I agree. Buffett exploited the P/C insurance model (float) to build great wealth for Berkshire Hathaway shareholders for decades. Berkshire Hathaway is now a massive conglomerate and P/C insurance is one of a couple of engines for the company. Buffett will be stepping down at the end of this year - they are losing their god-like capital allocator. From a return perspective, Berkshire Hathaways best days are behind it. (This was true 20 years ago). This is not to suggest Berkshire Hathaway will be a terrible investment moving forward - it will likely be a solid investment, perhaps delivering a return over time that is in line with the S&P500. Is another company set to take the baton from Buffett/Berkshire? (In terms of being able to deliver better than S&P500 returns moving forward - like over the next decade.) There are only two contenders that I can see: Fairfax and Markel. (Company's trying to exploit the P/C insurance model.) Tom Gaynor/Markel is a sold company. However, it is experiencing some issues in its core insurance business. The performance of the company has lagged in recent years. Their solution to their performance issues was to bring in outside consultants, which seems a little bizarre. Bottom line, Markel looks like it is fumbling the baton. (Gaynor has a good long term track record when picking stocks. But I am not sure he is a good CEO.) Prem Watsa/Fairfax is firing on all cylinders: both insurance and investment management businesses have never been better positioned. And the senior management team has been executing exceptionally well for the past 5 years (capital allocation, succession planning). Bottom line, Fairfax looks like it is just entering its prime as a business. I think Fairfax - in recent years - has taken the baton from Berkshire Hathaway. Fairfax is showing us the next iteration/model of how to exploit the P/C insurance model (float) to build great wealth for shareholders over time. Importantly, the race for Fairfax is not a sprint - it is a marathon. Edited May 5, 2025 by Viking
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