Munger_Disciple Posted May 5, 2025 Posted May 5, 2025 8 minutes ago, mananainvesting said: 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! This is a very perceptive comment. 1
nwoodman Posted May 5, 2025 Posted May 5, 2025 5 hours ago, mananainvesting said: 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! At the margin (which is your point), there is a natural timing deferral: reserves are expensed upfront and may be released in later years. But there’s little room to game the system — reserve levels require actuarial justification, not management discretion. Both IFRS 17 and the Canadian Income Tax Act (s. 1407) explicitly limit over-reserving as a tax deferral strategy, and regulators like OSFI provide independent oversight. That said, your broader point stands — there is deferred gratification in running a conservative book. The payoff comes in the form of modest tax deferral, smoother earnings, stronger market credibility, and the ability to allocate capital with confidence. 1
LC Posted May 6, 2025 Posted May 6, 2025 1 hour ago, nwoodman said: But there’s little room to game the system — reserve levels require actuarial justification, not management discretion. Both IFRS 17 and the Canadian Income Tax Act (s. 1407) explicitly limit over-reserving as a tax deferral strategy, and regulators like OSFI provide independent oversight. I wonder if some enterprising (re)insurers can 'game the system' by finding some obscure/boutique risks to insure that allow taking large reserves up front. Perhaps even doing so in a vehicle which can be sold off with the attached tax credits?
nwoodman Posted May 6, 2025 Posted May 6, 2025 (edited) 40 minutes ago, LC said: I wonder if some enterprising (re)insurers can 'game the system' by finding some obscure/boutique risks to insure that allow taking large reserves up front. Perhaps even doing so in a vehicle which can be sold off with the attached tax credits? It’s funny, my mind started down this path as well. Long-tail specialty definitely springs to mind. The longer the development horizon, the wider the reserving band, and that’s where some creative structuring could, in theory, create optionality. Not saying it’s common, but the ingredients are there. That said, this isn’t my area of expertise, just thinking out loud. Would be curious to hear from someone with regulatory or tax structuring experience. Edited May 6, 2025 by nwoodman
SafetyinNumbers Posted May 6, 2025 Posted May 6, 2025 22 minutes ago, nwoodman said: It’s funny, my mind started down this path as well. Long-tail specialty definitely springs to mind. The longer the development horizon, the wider the reserving band, and that’s where some creative structuring could, in theory, create optionality. Not saying it’s common, but the ingredients are there. That said, this isn’t my area of expertise, just thinking out loud. Would be curious to hear from someone with regulatory or tax structuring experience. I think most executives are actually incentivized to have higher short term profits so the incentives are usually against the best interest of long term shareholders but arguably to the benefit of short term shareholders. I think it’s probably pretty easy to “pad” reserves in a hard market because the market is usually hard for a fundamental reason like high claims. It’s a very complicated process but I think about it as FFH trying to lock in business at the same margin in a soft or hard market. Effectively they assume markets are efficient and that’s probably easy to clear with auditors and regulators.
nwoodman Posted May 6, 2025 Posted May 6, 2025 30 minutes ago, SafetyinNumbers said: I think most executives are actually incentivized to have higher short term profits so the incentives are usually against the best interest of long term shareholders but arguably to the benefit of short term shareholders. I think it’s probably pretty easy to “pad” reserves in a hard market because the market is usually hard for a fundamental reason like high claims. It’s a very complicated process but I think about it as FFH trying to lock in business at the same margin in a soft or hard market. Effectively they assume markets are efficient and that’s probably easy to clear with auditors and regulators. I think that’s a very rational take. Incentives often drive short-termism, but Fairfax seems to have bucked that trend, 18 straight years of favourable reserve development suggests a consistent, long-term mindset. That deferred gratification thing. I also agree that a hard market creates the opportunity to build in margin, especially in long-tail lines. Setting reserves conservatively, when pricing is strong, can create future release capacity — not as a scheme, but as a strategic buffer. As we all know, it’s part of how insurers build resilience into the cycle. That said, it’s a fine line, and it only works if the reserving is grounded in sound actuarial judgment and continues to pass auditor scrutiny. It’s fun to go back and read the threads from 2010 when everyone was talking about Fairfax and their “crappy insurance businesses.” Wasn’t fun at the time but a good reminder of just how far they have come.
SafetyinNumbers Posted May 6, 2025 Posted May 6, 2025 13 minutes ago, nwoodman said: I think that’s a very rational take. Incentives often drive short-termism, but Fairfax seems to have bucked that trend, 18 straight years of favourable reserve development suggests a consistent, long-term mindset. That deferred gratification thing. I also agree that a hard market creates the opportunity to build in margin, especially in long-tail lines. Setting reserves conservatively, when pricing is strong, can create future release capacity — not as a scheme, but as a strategic buffer. As we all know, it’s part of how insurers build resilience into the cycle. That said, it’s a fine line, and it only works if the reserving is grounded in sound actuarial judgment and continues to pass auditor scrutiny. It’s fun to go back and read the threads from 2010 when everyone was talking about Fairfax and their “crappy insurance businesses.” Wasn’t fun at the time but a good reminder of just how far they have come. Look what happened a few years after 2010. I wonder if the last three quarters are like 2012 in the chart and reserve releases could really accelerate over the next 36 months. FFH was growing premiums really fast so I think the odds are decent.
nwoodman Posted May 6, 2025 Posted May 6, 2025 31 minutes ago, SafetyinNumbers said: Look what happened a few years after 2010. I wonder if the last three quarters are like 2012 in the chart and reserve releases could really accelerate over the next 36 months. FFH was growing premiums really fast so I think the odds are decent. Good observation and great graph. History rhyming makes sense. “In the first quarter, our insurance and reinsurance companies recorded favorable reserve development of $219 million, for a benefit of 3.5 points on our combined ratio. Each of our major segments recorded favorable reserve development, with releases primarily coming on short-tail property business.” — Fairfax Q1 2025 Conference Call “Net favourable prior year reserve development, on an undiscounted basis, of $219.1M in Q1 reflected favourable emergence within each of the reporting segments, primarily at the Global Insurers and Reinsurers reporting segment (non-cat and cat losses at Odyssey, cat at Brit), and International (notably Gulf Insurance and Singapore Re).” — Q1 2025 Interim Report, page 30 “We are focused on setting our ongoing reserves at conservative levels, especially on long-tail lines.” — Fairfax Q1 2025 Conference Call “Fairfax’s reserve-to-premium ratio is approximately 1.27× based on Q1 2025 figures. That means for every $1 of earned premium, Fairfax holds about $1.27 in insurance reserves — a level consistent with conservatively reserved, well-capitalized insurers, particularly those with a mix of long-tail and short-tail business.” Quarterly is a bit clunky but gives a flavour.
sholland Posted May 6, 2025 Posted May 6, 2025 I am trying to recreate Viking’s chart, but for YE2024. Where are the YE2024 minority interests specified? I can’t find it in the annual report.
nwoodman Posted May 6, 2025 Posted May 6, 2025 18 minutes ago, sholland said: I am trying to recreate Viking’s chart, but for YE2024. Where are the YE2024 minority interests specified? I can’t find it in the annual report. I will defer to Viking, but I am not sure they state this anymore. I think the math looks something like this: For 2024: Odyssey Group – 9.99% non-controlling interest Allied World – 16.6% non-controlling interest Brit – Reduced to 0% (acquired remaining interest in 2024) Gulf Insurance – 2.9% non-controlling interest after tender offer The total carrying value of non-controlling interests for insurance and reinsurance companies was $2.74 billion at YE2024, down from $3.12 billion in 2023 Subsidiary Ownership Minority Interest Float Contribution Estimate Deducted Float Odyssey Group 90.0% 10.0% $9.2B -$0.92B Allied World 83.4% 16.6% $8.8B -$1.46B Gulf Insurance 97.1% 2.9% $3.1B -$0.09B Total -$2.47B Interested to see what the answer is myself
Viking Posted May 6, 2025 Author Posted May 6, 2025 (edited) What is Fairfax’s Secret Sauce? Does it Have a Moat? Fairfax has compounded BVPS at 18.7% over the past 39 years. The share price has compounded at 19.2% over the same time frame (in US$ and including dividends). Importantly, Fairfax’s performance has also been very strong over the past 4 years. Fairfax’s outstanding performance is not some numerical/statistical aberration - some relic of the distant past. When compared to the universe of US listed companies since 1985, Fairfax’s compound return (19.1%) puts it in the top 1% of all companies. Fairfax calculates the numeric ranking at #8. That is an amazing stat. Bottom line, Fairfax’s performance over the past 39 years has been epic. ---------- All slides used in this post are from Prem's presentation at Fairfax's AGM held on April 10, 2025. https://www.fairfax.ca/wp-content/uploads/2025/04/Fairfax_AGM_2025.pdf ---------- This leads to 3 very important questions: What caused Fairfax’s significant outperformance over the past 39 years? Are the factors/conditions that led to this outperformance still in place? What does this mean for the future performance of Fairfax? Let’s start by exploring the first question. What caused Fairfax’s significant outperformance over the past 39 years? How did Fairfax achieve and sustain such a high level of performance? Was Fairfax’s incredible performance just luck? Did Fairfax’s performance have little to do with ability/skill and effort? Was Fairfax simply in the right place at the right time - the benefactor of good fortune? Timeframe is the key to answering this question. If Fairfax’s strong performance had happened over a short time period (like 5 or 10 years) then perhaps we could attribute it primarily to luck. But a CAGR of more than 19% for 39 years? That level of outperformance over that timeframe can’t be attributed to luck. The timeframe is too long. Does Fairfax have a moat? A moat refers to a sustainable competitive advantage(s) that a company has that allows it to ward off the competition while continuing to grow its business and profitability over time. Most investors would probably say that Fairfax does not have a moat. Why? Well, when it comes to Fairfax most everyone knows 2 things: Insurance: Insurance is a commodity. And regardless, Fairfax is not very good at insurance. Average at best. Investments: And Fairfax is also not very good at investments. ‘Cowboys’ might be a good way to describe them. But if it’s not luck and it’s not skill then what explains Fairfax’s exceptional long-term performance? We come full circle and back to our original question. How was Fairfax able to achieve and sustain such a high level of outperformance? I think Mark Twain might have the answer. “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.” Mark Twain The obvious answer is that Fairfax does indeed have a number of competitive advantages. And like the pieces of a puzzle, when put together these competitive advantages provide investors with a picture of Fairfax’s moat. Importantly, in recent years, Fairfax’s competitive advantages have been getting stronger – the picture for investors is becoming clearer – and Fairfax’s moat has been growing in size. The fact that a lot of investors don’t know what Fairfax’s competitive advantages are doesn’t mean they don’t exist. Instead, it provides great insight into how misunderstood Fairfax continues to be. And if the company is this misunderstood, do you think it is fairly valued? No, probably not. So as painful as this might be for some, let’s explore this further. What are Fairfax’s competitive advantages? I have come up with five: Founder led company – Prem Watsa Family controlled – allows a long-term focus Corporate structure: Centralized capital allocation / succession planning Decentralized operating structure P/C Insurance model – exploit the significant benefits of float Culture – carefully cultivated and honed for 39 years Let’s review each of these in more detail. 1.) Fairfax is a founder led company – Prem Watsa Prem founded Fairfax in 1985. From scratch, he has built Fairfax into: Based on market cap - the 24th largest publicly traded company in Canada (at May 1, 2025). Based on profitability - the 8th largest publicly traded company in Canada (for 2024). What Prem (and the team at Fairfax) has accomplished over the past 39 years has been remarkable. Simply brilliant. He is (still) an exceptional leader. This was on full display during Covid. He is high integrity – with both internal and external stakeholders. What is his greatest strength? The ability to attract and retain talent (at both insurance and investment operations). That was true 39 years ago when he started the company. It is equally true today. His age (74) is a concern (he was born in August of 1950). However, his health (physical and mental) appears good. Prem is a competitive advantage for Fairfax. Yes, Prem’s health is something to monitor. But it is not something I worry about today. Importantly, Prem has started to shed some responsibilities. Fairfax takes succession planning very seriously. And Fairfax has a deep bench of talent. 2.) Family Control - this allows the company to think long-term Prem Watsa owns a little more than 2 million shares of Fairfax. This gives him an economic interest in Fairfax of about 9.2%. Most of the shares Prem owns are multiple voting shares. This gives him a voting interest in Fairfax of around 41.6%. Bottom line, Prem is firmly in control of Fairfax. What about when Prem is no longer around? Prem’s control position will pass to the Watsa family, with instructions that it not be sold. This provides certainty for Fairfax and its shareholders – Fairfax will remain a family-controlled business after Prem has passed. This is important for reasons we will explore next. Comments from Prem about family control from Fairfax’s 2024AR: “As I said last year, Fairfax is being built to last for the next 100 years, long after I have gone. For the last 39 years, I have mentioned to you many times that you have a major negative; Fairfax is not for sale at any price! So there will be no takeover bonanza! I consider myself and my family as stewards not owners. So I have set up my affairs so that my control position will not be sold even after I pass, but will remain with my family and not be sold. Fairfax will also be professionally run, with succession always being internal! My son, Ben, will become Chairman after me.” Prem Watsa – Fairfax 2024AR Thinking long term Most publicly traded companies are slaves to hitting the ‘expected’ quarterly numbers. This can cause them to make short term decisions that may not be optimal over the long term. This can be especially troublesome for P/C insurance companies. The benefits of having a long-term focus: Insurance: Allows for the optimal management of the insurance cycle. Importantly, it supports the discipline to walk away from unprofitable business in a soft market (that might last for years). Investments: Allows for the investment in assets that will deliver the highest total return over the long term (like equities) – despite the higher volatility this may cause in the short term. This provides Fairfax with a structural return advantage with its investment portfolio when compared to other traditional P/C insurers who invest primarily only in bonds. Being family controlled allows Fairfax to be laser focussed on building per share value for shareholders over the long term. Having a long-term focus is a critical ingredient in the successful operation of both business engines of insurance and investments. It allows Fairfax to be opportunistic – to accept, ride out and exploit short term volatility – which results in higher returns over time. And, not surprisingly, this is what has happened at Fairfax over the past 39 years. 3.) Fairfax’s organizational structure Fairfax’s organizational structure can be broken down into two pieces: Small/lean corporate head office: Handles capital allocation and succession planning. Allows Fairfax to allocate capital to the best opportunities (within the entire company) on a tax-efficient basis. This keeps corporate costs low. Of note, Prem’s annual salary of C$600,000 (with no stock options) is crazy low. Decentralized operating structure: Insurance companies: Run by their presidents. Equity investments: Run by company CEO’s. Fairfax has built an organizational structure that is similar to the one that Berkshire Hathaway has successfully employed for the past 56 years. Insurance – think and act like an owner Below are comments from Prem’s letter from Fairfax’s 2024AR. They describe how Fairfax’s insurance business is set up – Fairfax wants its employees to think and act like owners. “We have over 250 profit centres across our group. Each profit centre is focused on a unique set of customers, geographies or products that benefit from market leadership, product knowledge and the ability to provide excellent customer service. These profit centres facilitate transparency, enabling Andy Barnard, Brian Young and Peter Clarke to effectively monitor the insurance operations. Empowerment thrives at Fairfax. We are always working on making our companies more indispensable to our customers.” Prem Watsa – Fairfax 2024AR The two slides below summarize Fairfax’s structure and the benefits of its decentralized operating structure. 4.) P/C insurance model: Float/Leverage What is P/C insurance float? Float is the money that has been collected by an insurance company from customers that has not yet been paid out in claims. Float is technically a liability. So, it is leverage – it is a way for a company to boost returns for shareholders. Warren Buffett has said repeatedly that P/C insurance (float) is the engine that fuelled Berkshire Hathaway’s incredible growth in the 1980’s and 1990’s. Size of float At December 31, 2024, Fairfax had float of $36.9 billion. For perspective, at December 31, 2024, Fairfax had common shareholders’ equity of $22.96 billion. Float is much larger than shareholders’ equity (1.6 x the size). Cost of float The cost of float for a P/C insurance company can be determined by looking at its combined ratio (CR). The CR indicates how good a P/C insurance company is at underwriting. A CR of 100% means the cost of float is at breakeven – it has no cost. A CR of 105% means the float has a cost of about 5%. Some insurance companies are able to produce a CR of less than 100%. A CR of 95% means the float has a benefit of about 5% - the company is getting paid to hold the float. Over the past 5 years, Fairfax’s ‘cost’ of float has been an average benefit of 4.0% per year (i.e they have been paid 4% per year to hold their float). Yes, that is crazy. Growth of float Fairfax has been able to grow float at a CAGR of 18% over the past 39 years. Of course, the growth of float will not continue at this rate. The important thing is Fairfax should be able to continue to grow their float at an above average rate in the coming years. Investing the float Fairfax is able to invest its float and keep the return they generate. In 2024, Fairfax generated a total return on its average total investment portfolio of 6.7%. Summary Fairfax has a very large float = $36.9 billion at December 31, 2024. Its cost is better than free - Fairfax is getting paid to hold it. (An average of about 4% per year over the past 5 years). Its size has been growing nicely – its prospects are solid. Its return has popped higher in recent years as bond yields have normalized (the return of the total investment portfolio, which includes float, is about 7% per year). Low cost and growing float is an extremely powerful combination – just ask Warren Buffett. 5.) Culture ‘Culture eats strategy for breakfast.’ Peter Drucker What does this mean? “…no matter how great your business strategy is, your plan will fail without a company culture that encourages people to implement it.” Corporate Governance Institute For successful organizations culture and strategy are two sides of the same coin - they are aligned with each other. Fairfax has a very strong culture. And it is aligned with its strategy. It has been carefully honed over the past 39 years. It has been forged in the fires of adversity. Its biggest champion has been Prem. A couple of examples: Insurance: What to do in a soft market? Write less business. Even at the expense of short-term results (lower top line). Even if it persists for years. Zenith is a great example of this today. Investments: What to do when volatility hits? Do the opposite of what Mr. Market is likely doing. Don’t panic. Look for bargains. Get creative. Exploit the situation. In recent years, Fairfax is littered with great examples of doing exactly this. The fact that Fairfax has had very little turnover suggests that its culture is aligned with the values/beliefs of its employees. Summary Fairfax has compounded BVPS at 18.7% and the share price at 19.2% (US$ and including dividends) over the past 39 years. What has allowed such an exceptional level of performance to happen over such a long time-frame? Fairfax’s ‘secret sauce’ is made with the following 5 ingredients: Prem Watsa - founder led Family control - allows long term focus Structure - small head office with centralized capital allocation / decentralized operations P/C insurance model - low cost and growing float Strong culture - aligned with strategy; aligned with beliefs and values of employees Each of the 5 items listed above are competitive advantages for Fairfax. The genius of Fairfax today is how they have all been carefully woven together. Together, they now form an unbreakable rope. The total value they deliver is much greater than the sum of the individual parts. Fairfax has created a strong moat around the company/business. It has been a 39-year journey/effort. Importantly, the moat has been growing in size in recent years. Fairfax’s competitive advantages are getting stronger. The execution of Fairfax’s senior team has been best-in-class. Its insurance and investment management businesses have never been better positioned. Fairfax is delivering record results. And its prospects have never looked better. It will be very difficult for another company to duplicate what Fairfax has built. Edited May 6, 2025 by Viking
73 Reds Posted May 6, 2025 Posted May 6, 2025 7 minutes ago, Viking said: What is Fairfax’s Secret Sauce? Does it Have a Moat? Fairfax has compounded BVPS at 18.7% over the past 39 years. The share price has compounded at 19.1% over the same time frame (in US$ and including dividends). Importantly, Fairfax’s performance has also been very strong over the past 4 years. Fairfax’s outstanding performance is not some numerical/statistical aberration - some relic of the distant past. When compared to the universe of US listed companies since 1985, Fairfax’s compound return (19.1%) puts it in the top 1% of all companies. Fairfax calculates the numeric ranking at #8. That is an amazing stat. Bottom line, Fairfax’s performance over the past 39 years has been epic. ---------- All slides used in this post are from Prem's presentation at Fairfax's AGM held on April 10, 2025. https://www.fairfax.ca/wp-content/uploads/2025/04/Fairfax_AGM_2025.pdf ---------- This leads to 3 very important questions: What caused Fairfax’s significant outperformance over the past 39 years? Are the factors/conditions that led to this outperformance still in place? What does this mean for the future performance of Fairfax? Let’s start by exploring the first question. What caused Fairfax’s significant outperformance over the past 39 years? How did Fairfax achieve and sustain such a high level of performance? Was Fairfax’s incredible performance just luck? Did Fairfax’s performance have little to do with ability/skill and effort? Was Fairfax simply in the right place at the right time - the benefactor of good fortune? Timeframe is the key to answering this question. If Fairfax’s strong performance had happened over a short time period (like 5 or 10 years) then perhaps we could attribute it primarily to luck. But a CAGR of more than 19% for 39 years? That level of outperformance over that timeframe can’t be attributed to luck. The timeframe is too long. Does Fairfax have a moat? A moat refers to a sustainable competitive advantage(s) that a company has that allows it to ward off the competition while continuing to grow its business and profitability over time. Most investors would probably say that Fairfax does not have a moat. Why? Well, when it comes to Fairfax most everyone knows 2 things: Insurance: Insurance is a commodity. And regardless, Fairfax is not very good at insurance. Average at best. Investments: And Fairfax is also not very good at investments. ‘Cowboys’ might be a good way to describe them. But if it’s not luck and it’s not skill then what explains Fairfax’s exceptional long-term performance? We come full circle and back to our original question. How was Fairfax able to achieve and sustain such a high level of outperformance? I think Mark Twain might have the answer. “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.” Mark Twain The obvious answer is that Fairfax does indeed have a number of competitive advantages. And like the pieces of a puzzle, when put together these competitive advantages provide investors with a picture of Fairfax’s moat. Importantly, in recent years, Fairfax’s competitive advantages have been getting stronger – the picture for investors is becoming clearer – and Fairfax’s moat has been growing in size. The fact that a lot of investors don’t know what Fairfax’s competitive advantages are doesn’t mean they don’t exist. Instead, it provides great insight into how misunderstood Fairfax continues to be. And if the company is this misunderstood, do you think it is fairly valued? No, probably not. So as painful as this might be for some, let’s explore this further. What are Fairfax’s competitive advantages? I have come up with five: Founder led company – Prem Watsa Family controlled – allows a long-term focus Corporate structure: Centralized capital allocation / succession planning Decentralized operating structure P/C Insurance model – exploit the significant benefits of float Culture – carefully cultivated and honed for 39 years Let’s review each of these in more detail. 1.) Fairfax is a founder led company – Prem Watsa Prem founded Fairfax in 1985. From scratch, he has built Fairfax into: Based on market cap - the 24th largest publicly traded company in Canada (at May 1, 2025). Based on profitability - the 8th largest publicly traded company in Canada (for 2024). What Prem (and the team at Fairfax) has accomplished over the past 39 years has been remarkable. Simply brilliant. He is (still) an exceptional leader. This was on full display during Covid. He is high integrity – with both internal and external stakeholders. What is his greatest strength? The ability to attract and retain talent (at both insurance and investment operations). That was true 39 years ago when he started the company. It is equally true today. His age (74) is a concern (he was born in August of 1950). However, his health (physical and mental) appears good. Prem is a competitive advantage for Fairfax. Yes, Prem’s health is something to monitor. But it is not something I worry about today. Importantly, Prem has started to shed some responsibilities. Fairfax takes succession planning very seriously. And Fairfax has a deep bench of talent. 2.) Family Control - this allows the company to think long-term Prem Watsa owns a little more than 2 million shares of Fairfax. This gives him an economic interest in Fairfax of about 9.2%. Most of the shares Prem owns are multiple voting shares. This gives him a voting interest in Fairfax of around 41.6%. Bottom line, Prem is firmly in control of Fairfax. What about when Prem is no longer around? Prem’s control position will pass to the Watsa family, with instructions that it not be sold. This provides certainty for Fairfax and its shareholders – Fairfax will remain a family-controlled business after Prem has passed. This is important for reasons we will explore next. Comments from Prem about family control from Fairfax’s 2024AR: “As I said last year, Fairfax is being built to last for the next 100 years, long after I have gone. For the last 39 years, I have mentioned to you many times that you have a major negative; Fairfax is not for sale at any price! So there will be no takeover bonanza! I consider myself and my family as stewards not owners. So I have set up my affairs so that my control position will not be sold even after I pass, but will remain with my family and not be sold. Fairfax will also be professionally run, with succession always being internal! My son, Ben, will become Chairman after me.” Prem Watsa – Fairfax 2024AR Thinking long term Most publicly traded companies are slaves to hitting the ‘expected’ quarterly numbers. This can cause them to make short term decisions that may not be optimal over the long term. This can be especially troublesome for P/C insurance companies. The benefits of having a long-term focus: Insurance: Allows for the optimal management of the insurance cycle. Importantly, it supports the discipline to walk away from unprofitable business in a soft market (that might last for years). Investments: Allows for the investment in assets that will deliver the highest total return over the long term (like equities) – despite the higher volatility this may cause in the short term. This provides Fairfax with a structural return advantage with its investment portfolio when compared to other traditional P/C insurers who invest primarily only in bonds. Being family controlled allows Fairfax to be laser focussed on building per share value for shareholders over the long term. Having a long-term focus is a critical ingredient in the successful operation of both business engines of insurance and investments. It allows Fairfax to be opportunistic – to accept, ride out and exploit short term volatility – which results in higher returns over time. And, not surprisingly, this is what has happened at Fairfax over the past 39 years. 3.) Fairfax’s organizational structure Fairfax’s organizational structure can be broken down into two pieces: Small/lean corporate head office: Handles capital allocation and succession planning. Allows Fairfax to allocate capital to the best opportunities (within the entire company) on a tax-efficient basis. This keeps corporate costs low. Of note, Prem’s annual salary of C$600,000 (with no stock options) is crazy low. Decentralized operating structure: Insurance companies: Run by their presidents. Equity investments: Run by company CEO’s. Fairfax has built an organizational structure that is similar to the one that Berkshire Hathaway has successfully employed for the past 56 years. Insurance – think and act like an owner Below are comments from Prem’s letter from Fairfax’s 2024AR. They describe how Fairfax’s insurance business is set up – Fairfax wants its employees to think and act like owners. “We have over 250 profit centres across our group. Each profit centre is focused on a unique set of customers, geographies or products that benefit from market leadership, product knowledge and the ability to provide excellent customer service. These profit centres facilitate transparency, enabling Andy Barnard, Brian Young and Peter Clarke to effectively monitor the insurance operations. Empowerment thrives at Fairfax. We are always working on making our companies more indispensable to our customers.” Prem Watsa – Fairfax 2024AR The two slides below summarize Fairfax’s structure and the benefits of its decentralized operating structure. 4.) P/C insurance model: Float/Leverage What is P/C insurance float? Float is the money that has been collected by an insurance company from customers that has not yet been paid out in claims. Float is technically a liability. So, it is leverage – it is a way for a company to boost returns for shareholders. Warren Buffett has said repeatedly that P/C insurance (float) is the engine that fuelled Berkshire Hathaway’s incredible growth in the 1980’s and 1990’s. Size of float At December 31, 2024, Fairfax had float of $36.9 billion. For perspective, at December 31, 2024, Fairfax had common shareholders’ equity of $22.96 billion. Float is much larger than shareholders’ equity (1.6 x the size). Cost of float The cost of float for a P/C insurance company can be determined by looking at its combined ratio (CR). The CR indicates how good a P/C insurance company is at underwriting. A CR of 100% means the cost of float is at breakeven – it has no cost. A CR of 105% means the float has a cost of about 5%. Some insurance companies are able to produce a CR of less than 100%. A CR of 95% means the float has a benefit of about 5% - the company is getting paid to hold the float. Over the past 5 years, Fairfax’s ‘cost’ of float has been an average benefit of 4.0% per year (i.e they have been paid 4% per year to hold their float). Yes, that is crazy. Growth of float Fairfax has been able to grow float at a CAGR of 18% over the past 39 years. Of course, the growth of float will not continue at this rate. The important thing is Fairfax should be able to continue to grow their float at an above average rate in the coming years. Investing the float Fairfax is able to invest its float and keep the return they generate. In 2024, Fairfax generated a total return on its average total investment portfolio of 6.7%. Summary Fairfax has a very large float = $36.9 billion at December 31, 2024. Its cost is better than free - Fairfax is getting paid to hold it. (An average of about 4% per year over the past 5 years). Its size has been growing nicely – its prospects are solid. Its return has popped higher in recent years as bond yields have normalized (the return of the total investment portfolio, which includes float, is about 7% per year). Low cost and growing float is an extremely powerful combination – just ask Warren Buffett. 5.) Culture ‘Culture eats strategy for breakfast.’ Peter Drucker What does this mean? “…no matter how great your business strategy is, your plan will fail without a company culture that encourages people to implement it.” Corporate Governance Institute For successful organizations culture and strategy are two sides of the same coin - they are aligned with each other. Fairfax has a very strong culture. And it is aligned with its strategy. It has been carefully honed over the past 39 years. It has been forged in the fires of adversity. Its biggest champion has been Prem. A couple of examples: Insurance: What to do in a soft market? Write less business. Even at the expense of short-term results (lower top line). Even if it persists for years. Zenith is a great example of this today. Investments: What to do when volatility hits? Do the opposite of what Mr. Market is likely doing. Don’t panic. Look for bargains. Get creative. Exploit the situation. In recent years, Fairfax is littered with great examples of doing exactly this. The fact that Fairfax has had very little turnover suggests that its culture is aligned with the values/beliefs of its employees. Summary Fairfax has compounded BVPS at 18.7% and the share price at 19.2% (US$ and including dividends) over the past 39 years. What has allowed such an exceptional level of performance to happen over such a long time-frame? Fairfax’s ‘secret sauce’ is made with the following 5 ingredients: Prem Watsa - founder led Family control - allows long term focus Structure - small head office with centralized capital allocation / decentralized operations P/C insurance model - low cost and growing float Strong culture - aligned with strategy; aligned with beliefs and values of employees Each of the 5 items listed above are competitive advantages for Fairfax. The genius of Fairfax today is how they have all been carefully woven together. Together, they now form an unbreakable rope. The total value they deliver is much greater than the sum of the individual parts. Fairfax has created a strong moat around the company/business. It has been a 39-year journey/effort. Importantly, the moat has been growing in size in recent years. Fairfax’s competitive advantages are getting stronger. The execution of Fairfax’s senior team has been best-in-class. Its insurance and investment management businesses have never been better positioned. Fairfax is delivering record results. And its prospects have never looked better. It will be very difficult for another company to duplicate what Fairfax has built. @Viking keep pounding the table. Young investors here would be wise to start accumulating shares of Fairfax and simply refrain from selling unless the company materially violates anything that got it to where it is now.
Viking Posted May 6, 2025 Author Posted May 6, 2025 (edited) 15 minutes ago, 73 Reds said: @Viking keep pounding the table. Young investors here would be wise to start accumulating shares of Fairfax and simply refrain from selling unless the company materially violates anything that got it to where it is now. @73 Reds , I think the set-up for Fairfax today resembles a much younger Berkshire Hathaway (1990's version) - in terms of the leverage (float) and the future return potential. Of course, how Fairfax does it will differ greatly from how Berkshire Hathaway did it. Today, Fairfax is ploughing new ground. To your point, back in 1990 the smart thing to do was to simply buy Berkshire Hathaway and sit back and let Buffett work his magic. It is deceptively simple. And incredibly difficult to actually do - that is why so many (like me) missed making the big money with Berkshire Hathaway. I find my understanding on many investing topics is still lacking - things like culture and moats. So I keep trying to learn a little more - sometimes this results in me updating an old post (like the one above). It is a constant process of continuous learning - and that is one of the things I really like about investing. Edited May 6, 2025 by Viking
Dinar Posted May 6, 2025 Posted May 6, 2025 53 minutes ago, Viking said: @73 Reds , I think the set-up for Fairfax today resembles a much younger Berkshire Hathaway (1990's version) - in terms of the leverage (float) and the future return potential. Of course, how Fairfax does it will differ greatly from how Berkshire Hathaway did it. Today, Fairfax is ploughing new ground. To your point, back in 1990 the smart thing to do was to simply buy Berkshire Hathaway and sit back and let Buffett work his magic. It is deceptively simple. And incredibly difficult to actually do - that is why so many (like me) missed making the big money with Berkshire Hathaway. I find my understanding on many investing topics is still lacking - things like culture and moats. So I keep trying to learn a little more - sometimes this results in me updating an old post (like the one above). It is a constant process of continuous learning - and that is one of the things I really like about investing. Yes, thank you. I finally listened to you and bought stock in December of 2023 in size, after buying a token position in 2022. It was tough though paying 50% more for the major lot vs my first lot.
dartmonkey Posted May 6, 2025 Posted May 6, 2025 1 hour ago, Viking said: I think the set-up for Fairfax today resembles a much younger Berkshire Hathaway (1990's version) - in terms of the leverage (float) and the future return potential. Of course, how Fairfax does it will differ greatly from how Berkshire Hathaway did it. What are the major differences and similarities? For me, the biggest difference is the importance of float: crucial for Fairfax, useful but not necessary for Berkshire. My take is that the 5 biggest similarities are: 1 ) Run by people with a long-term focus and who have been with the company for a long time 2) Insurance company focus with float (from the beginning with Fairfax, only gradually with Berkshire as it got bigger) 3) Value investors, capital and float invested in companies with good long-term return prospects, both have about 19-20% annual returns, Berkshire over 60 years (October 1964-2024) Fairfax over about 39 years (September 1985-2024). 4) CEO and top managers: Low pay, no stock options, honesty and integrity, good communicators, no guidance 5) Circle of competence, not interested in tech (exceptions being the Apple homerun and the Blackberry strikeout) The 5 biggest differences: 1) Fairfax is mainly an insurer, with some big equity investments; Berkshire is mainly an investor, with some big insurers. So Fairfax has much more float leverage: float represents 160% of Fairfax's book value, 26% of Berkshire's book value 2) Fairfax buys and sells, Berkshire only buys, and holds forever; I think this is an advantage for Fairfax; it may have been an advantage for Buffett acquiring private assets, but doesn't seem to be any more. 3) Fairfax makes more macro calls, has shorted, in general swings at pitches that Berkshire would not swing at (Resolute, Blackberry, Farmer's Edge...). On the other hand, Fairfax has a much larger percentage of its assets invested in bonds, because of the size of its float and the need to meet insurance regulation requirements. 4) Fairfax is much smaller, $35b instead of $1106b, i.e. Berkshire's size about 20 years ago. 5) Berkshire is transitioning to a new CEO, Blackberry may have another 10-20 years with Watsa I would be curious to see how others feel about the Fairfax/Berkshire comparison, and whether their lists are different.
gfp Posted May 6, 2025 Posted May 6, 2025 1 minute ago, dartmonkey said: Blackberry may have another 10-20 years with Watsa Freudian slip?!
MMM20 Posted May 6, 2025 Posted May 6, 2025 (edited) 15 minutes ago, dartmonkey said: Blackberry may have another 10-20 years with Watsa So you're telling me two decades from now the "but he did Blackberry" guy will still be out there telling me to sell Fairfax at $25,000 because Prem's really just a shitco investor / macro punter? Did this sort of guy ever exist with Berkshire? "but he did Salomon Brothers, he's senile now" in 1995 Edited May 6, 2025 by MMM20
gfp Posted May 6, 2025 Posted May 6, 2025 6 minutes ago, MMM20 said: Did this sort of guy ever exist with Berkshire? "but he did Salomon Brothers, he's senile now" in 1995 This guy existed at Berkshire but it was Dexter shoe every year since '93...
Hektor Posted May 6, 2025 Posted May 6, 2025 39 minutes ago, dartmonkey said: 5) Berkshire is transitioning to a new CEO, Blackberry may have another 10-20 years with Watsa I am sure @dartmonkey meant Fairfax
SafetyinNumbers Posted May 7, 2025 Posted May 7, 2025 6 hours ago, dartmonkey said: What are the major differences and similarities? For me, the biggest difference is the importance of float: crucial for Fairfax, useful but not necessary for Berkshire. My take is that the 5 biggest similarities are: 1 ) Run by people with a long-term focus and who have been with the company for a long time 2) Insurance company focus with float (from the beginning with Fairfax, only gradually with Berkshire as it got bigger) 3) Value investors, capital and float invested in companies with good long-term return prospects, both have about 19-20% annual returns, Berkshire over 60 years (October 1964-2024) Fairfax over about 39 years (September 1985-2024). 4) CEO and top managers: Low pay, no stock options, honesty and integrity, good communicators, no guidance 5) Circle of competence, not interested in tech (exceptions being the Apple homerun and the Blackberry strikeout) The 5 biggest differences: 1) Fairfax is mainly an insurer, with some big equity investments; Berkshire is mainly an investor, with some big insurers. So Fairfax has much more float leverage: float represents 160% of Fairfax's book value, 26% of Berkshire's book value 2) Fairfax buys and sells, Berkshire only buys, and holds forever; I think this is an advantage for Fairfax; it may have been an advantage for Buffett acquiring private assets, but doesn't seem to be any more. 3) Fairfax makes more macro calls, has shorted, in general swings at pitches that Berkshire would not swing at (Resolute, Blackberry, Farmer's Edge...). On the other hand, Fairfax has a much larger percentage of its assets invested in bonds, because of the size of its float and the need to meet insurance regulation requirements. 4) Fairfax is much smaller, $35b instead of $1106b, i.e. Berkshire's size about 20 years ago. 5) Berkshire is transitioning to a new CEO, Blackberry may have another 10-20 years with Watsa I would be curious to see how others feel about the Fairfax/Berkshire comparison, and whether their lists are different. I think FFH is an expected value investor while BRK is a quality value investor. Expected value investors do everything but I suspect they will look a lot more like BRK going forward for the vast majority of the non-fixed income portion of the portfolio. That being said they can still do deals like Dgit, Ki and Blizzard Vacatia which risk small amounts of capital with potential for VC type returns. Ultimately, FFH has a better mouse trap. Partially this is because of the higher leverage to the insurance business. Part of that is because FFH hasn’t been as profitable on the non-fixed income investments but also because they have been able to use so much of the excess capital to buyback stock instead of building equity investments on the balance sheet over the past 8 years.
TwoCitiesCapital Posted May 7, 2025 Posted May 7, 2025 Even Buffett acknowledged the move the quality was likely to lower returns AND increase risk. It was done for scalability - not because it was a better system of investment. For a company of Berkshires size to constantly flip Graham-like cigar butts, they'd have to 1) hire a hole team of analysts to turn over every stone to find these tiny-ass companies to invest this capital into AND 2) be open to investing internationally which would also require a team of analysts AND 3) be willing to take the tax but from constantly flipping those investments to the next batch of cheap decile integrate AND 4) have the willingness, ability, and shareholder base to accept the massive drawdowns such strategies being a long the way. Berkshire didn't have the team of analysts, didn't have the willingness to do much abroad, and didn't want to pay the taxes or have the drawdowns. But Fairfax is better suited in all those regards. They already have a team that is very involved overseas, already have a team willing to pay some small tax to move to new opportunities, and have a demonstrated ability at being willing to tolerate/survive large drawdowns (Blackberry, CDX initially, TRS, equity shorts, etc). Fairfax are better suited for a global, diversified, Graham-like value investment system. And I expect, over time, the returns from that system to provide greater returns than any system that has a quality bias.....which is basically supported by the research in the field. Quality screens DETRACT from the performance of outright cheap. Perhaps Fairfax outgrows that system like Berkshire has. But, markets are larger today, Fairfax has a smaller % of its portfolio in public equities, and taking these companies private comes with certain advantages/scale as well - so I think the runway is quite a bit larger for Fairfax before they're forced to take a "quality for scale" approach.
SafetyinNumbers Posted May 7, 2025 Posted May 7, 2025 8 hours ago, TwoCitiesCapital said: Even Buffett acknowledged the move the quality was likely to lower returns AND increase risk. It was done for scalability - not because it was a better system of investment. For a company of Berkshires size to constantly flip Graham-like cigar butts, they'd have to 1) hire a hole team of analysts to turn over every stone to find these tiny-ass companies to invest this capital into AND 2) be open to investing internationally which would also require a team of analysts AND 3) be willing to take the tax but from constantly flipping those investments to the next batch of cheap decile integrate AND 4) have the willingness, ability, and shareholder base to accept the massive drawdowns such strategies being a long the way. Berkshire didn't have the team of analysts, didn't have the willingness to do much abroad, and didn't want to pay the taxes or have the drawdowns. But Fairfax is better suited in all those regards. They already have a team that is very involved overseas, already have a team willing to pay some small tax to move to new opportunities, and have a demonstrated ability at being willing to tolerate/survive large drawdowns (Blackberry, CDX initially, TRS, equity shorts, etc). Fairfax are better suited for a global, diversified, Graham-like value investment system. And I expect, over time, the returns from that system to provide greater returns than any system that has a quality bias.....which is basically supported by the research in the field. Quality screens DETRACT from the performance of outright cheap. Perhaps Fairfax outgrows that system like Berkshire has. But, markets are larger today, Fairfax has a smaller % of its portfolio in public equities, and taking these companies private comes with certain advantages/scale as well - so I think the runway is quite a bit larger for Fairfax before they're forced to take a "quality for scale" approach. What would you say are the last 5 low quality positions they have purchased?
giulio Posted May 7, 2025 Posted May 7, 2025 The Fih AR has an interesting section on the criteria for investments selection. There is nothing Graham-like or cigar butts-like in them (apart from reasonable valuation and margin of safety). It's a short, simple list. My guess is that the same strategy will be (and has been more recently) followed at ffh. Maybe it's because of size, maybe the younger investment managers see the world differently (my personal take). No matter the cause, I am hugely in favor of it.
Hektor Posted May 7, 2025 Posted May 7, 2025 My understanding is that Prem/Fairfax follow the Templeton style of value investing, not the Graham/Fisher/Buffett/Munger style.
bluedevil Posted May 7, 2025 Posted May 7, 2025 I think this comment from Wade Burton in the q3 earnings call gives you a good sense of the current investment approach, at least in private securities, Fairfax will be taking: invest in "dominant" players in niche areas, particularly areas that don't face a significant risk of technological disruption. This is exactly the Tom Gayner playbook for private investments. "Looking back over the last two years, we’ve made three significant long term equity investments, one in Meadow Dairy, a dominant milk ingredients company in the U.K. that is doing very well; another in Sleep Country, a dominant mattress distributor and retailer in Canada; and now a third, Peak, a dominant sporting goods company focused on hockey and lacrosse. All immediately are or will contribute to our earnings, and we believe all will continue to contribute more and more as their businesses progress." A key benefit of this approach, Tom Gayner would tell you, is the predictability of future earnings, because these niches are small enough that whiz kids in Silicon Valley are not trying to dream up how to disrupt milk ingredient manufacturing or hockey and lacrosse gear.
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