gfp Posted June 10, 2025 Posted June 10, 2025 8 minutes ago, 73 Reds said: @gfp was more debt rather than stock an option for Buffett in 2009? I don't know about "more debt" but he would have been perfectly happy to use all cash and had plenty of securities to sell to raise the cash. The sellers wanted a stock component and probably knew they weren't selling at a particularly fancy valuation. All-in, Berkshire paid less than $34 Billion for the railroad, although the final sale was at a higher valuation for the whole. He said in the 2009 annual report that BNSF would be like BHE and retain and reinvest earnings, becoming a home to soak up large amounts of capital. And then he wasted no time at all starting the multi-billion dollar dividend distributions out of BNSF while steadily increasing BNSF's low cost fixed rate debt. I think he did the right thing - I'm not criticizing it. But he took his entire purchase price out in cash dividends relatively quickly. KKR-envy or something LOL
gfp Posted June 10, 2025 Posted June 10, 2025 On Fairfax, I just want to post my 5 share purchase this morning. Low tick of the day! Back on the bid
Hsmpanl Posted June 10, 2025 Posted June 10, 2025 22 minutes ago, gfp said: On Fairfax, I just want to post my 5 share purchase this morning. Low tick of the day! Back on the bid Good stuff, nibbling some myself as well. Have you changed your range on FIH or still selling in 16s/17s?
gfp Posted June 10, 2025 Posted June 10, 2025 Just now, Hsmpanl said: Good stuff, nibbling some myself as well. Have you changed your range on FIH or still selling in 16s/17s? I've been a buyer of FIH.U as high as $17.75. The days of buying it in the 14's and 15's appear to be behind us unfortunately.
Hsmpanl Posted June 10, 2025 Posted June 10, 2025 2 minutes ago, gfp said: I've been a buyer of FIH.U as high as $17.75. The days of buying it in the 14's and 15's appear to be behind us unfortunately. As long as intrinsic value is increasing it is what it is. Really enjoyed those BIAL interviews you guys posted.
Viking Posted June 11, 2025 Author Posted June 11, 2025 This is the fourth in a series of posts we are doing on leverage at Fairfax. Links to the first three posts are provided below: The first post introduced the topic and reviewed debt (holding company) and float. https://thecobf.com/forum/topic/21117-fairfax-2025/page/38/#findComment-622326 The second post reviewed 3 tactical ways that Fairfax uses leverage. https://thecobf.com/forum/topic/21117-fairfax-2025/page/39/#findComment-622725 The third post reviewed debt at non-insurance consolidated companies. https://thecobf.com/forum/topic/21117-fairfax-2025/page/39/#findComment-623255 With our post today we are going to look at leverage in a different way. Up to now we have looked only at types of financial leverage. But there are also types of non-financial leverage. Our focus is going to shift from looking at financial capital to looking at human capital. As a reminder, we have a very broad definition of leverage: Using other people and/or their money to boost returns and/or improve the quality of the company. ---------- Leverage - 7 - Non-financial leverage - human capital Human capital and the investment portfolio P/C insurance companies have two basic options when it comes to how they invest their investment portfolio: they can buy bonds or they can buy stocks, or some combination of the two. What do most P/C insurance companies do? Most insurance companies invest primarily in bonds (about 90% of their total investment portfolio). The remainder is invested in a variety of holdings, including stocks (about 10% of the total). Why do P/C insurance companies overwhelmingly prefer bonds? Bonds are considered a much safer investment than equities. Bonds are also less volatile. And bonds are easy (to purchase, and hold to maturity). Stocks, on the other hand, are considered to be a much more risky investment than bonds. Stocks are much more volatile. And stocks are difficult (stock picking). As a result, regulators and ratings agencies love bonds. So why doesn’t everyone (not just P/C insurance companies) own only bonds? Sounds like bonds is a no brainer. Why bother with stocks? Rate of return. The return on bonds is capped at the interest rate paid (let’s assume the bonds are owned to maturity, which most P/C insurance companies tend to do). Conversely, the return on stocks is unlimited. At least that is the theory. What can history teach us about returns? Comparing average historical returns: stocks and bonds What asset class tends to perform the best over the long term? Since 1928, stocks (CAGR = 9.94%) have outperformed bonds (CAGR = 6.62%) by a wide margin. Chart source: https://barbarafriedbergpersonalfinance.com/historical-stock-and-bond-returns/ Why do stocks outperform bonds by such a wide margin? Thanks for hanging in there with this post. We are getting to the good stuff… Stocks outperform bonds because they allow you to fully reap the rewards of human capital. That is the advantage of being the owner of a business. Being a lender does not allow you to benefit from human capital. And guess what the limits to human capital are? There are none. That is why owning stocks can be so good - and why you have unlimited upside. When you own stocks you are leveraging human capital. The genius of Warren Buffett Warren Buffett is using leverage at Berkshire Hathaway in two ways: Financial capital: Float from the P/C insurance business Human capital: Investing heavily in stocks. Yes, Buffett loves leverage. And he has been exploiting it brilliantly for 55 years. The genius of Charlie Munger Charlie Munger took Buffett’s model and made it even better. Stocks are good. But high quality stocks are even better. Why? Because the upside for high quality stocks is much, much higher than the upside for average stocks. Average stocks give you leverage to human capital. High quality stocks give you even more upside leverage to human capital. Buffett’s pivot to Munger’s way of thinking was monumental for Berkshire Hathaway shareholders. The pivot started in 1972 with the purchase of See’s Candy. From 1974 to 1984 Berkshire Hathaway posted a 10-year CAGR of 41.4%, its best performance. From 1984 to 1994 it posted a 10-year CAGR of 32%. That 20-year span was a magical time for Berkshire Hathaway shareholders. The company was still small. And in mid-1970 it was just beginning its shift to high quality equities. As Buffett telegraphed repeatedly, the law of large numbers eventually caught up to Berkshire Hathaway. And returns have come down to earth. There are three key learnings here: The P/C insurance model works - float. Investing in high quality equities works - leverage human capital. Size (eventually) negates the power of the first two (in terms of being able to generate outsized returns). This is not to suggest that Berkshire Hathaway is not a wonderful company today. It is. But it is now an aging elephant. It is no longer the predator that was back in 1975 - just entering its prime - and roaming a savannah that was teeming with game. What does all of this have to do with Fairfax? Like Berkshire Hathaway, Fairfax is using leverage in the same two ways: Financial capital: Float from the P/C insurance business. Human capital: Investing heavily in stocks. The pivot to quality at Fairfax And like Berkshire Hathaway, it looks like Fairfax has made the pivot to quality. It looks like the pivot happened around 2018 (I am guessing). Since then 2 very important things have been happening: Since 2018, new equity purchases have been very good. Holdings in their legacy equity portfolio (holdings purchased before 2018) have been fixed. It has been an 8 year journey for the company. And today, Fairfax now has a high quality equity portfolio. And we are seeing it in the results that Fairfax has been posting in recent years. The contributions from the equity portfolio have been very good. Importantly, an enormous amount of value has been created (economic results) that has not yet been reported in accounting results. This will be a tailwind to earnings in the coming years. But more important is the future. Fairfax is still a small company. And with its equity portfolio, it is just at the beginning of its ‘quality’ journey. ————— Of interest, Fairfax made a similar shift to quality in its P/C insurance portfolio in 2011 when it appointed Andy Barnard to president and chief operating officer of Fairfax Insurance Group. Under Andy, it has been a 14 year journey. And today Fairfax now has a top-tier P/C insurance business. ————— Reaping the rewards of human capital - founders/entrepreneurs/CEO’s Leveraging human capital is a powerful way for Fairfax to improve returns. But this time, instead of leveraging other people’s money, they tap into/exploit/leverage other people’s time, talent and experience. Fairfax’s shift to quality has been a little different than Berkshire Hathaway’s. That shouldn’t be a surprise… they are very different companies and external environment had changed a great deal from 1975. One of the tweaks that Fairfax made to their investing framework in 2018 was to put an emphasis on partnering with outstanding founders/entrepreneurs/CEO’s/capital allocators. Eight years later we can see the results of their efforts. The list of people that Fairfax is partnered with today with their equity holdings is impressive. Fokion Karavalis - Eurobank David Sokol/Bing Chen - Poseidon/Atlas/Seaspan Hari Marar - Bangalore International Airport (BIAL) Kamesh Goyal - Digit Insurance Pierre Lassonde/John Graham/Jason Simpson - Orla Mining (gold) Pierre Lassonde/Dan Myerson - Foran Mining (copper) Adam Waterous - Waterous Funds/Strathcona (oil) Harold Hickey - EXCO Reources (US natural gas) Byron Trott - BDT Capital Partners (private equity) Kyle Shaw - Shaw Kwei (private equity) Bill McMorrow - Kennedy Wilson (real estate) Evangelos Mytilineos - Metlen Energy and Metals Madhaven Menon/Mahesh Iyer - Thomas Cook India Frank Hennessy - Recipe Unlimited Christine Magee/Stewart Schaefer - Sleep Country Ed Kinnaly - Peak Achievement George Chryssikos - Grivalia Hospitality Raj Tugnait - Meadow Foods Krishan Balendra - John Keells Murad Al-Katib - AGT Food Ingredients Ajit Isaac - Quess companies Nirmal Jain - IIFL companies Outstanding people provide 2 benefits: Downside protection: They find a way to deal with adversity/view it as opportunity. Unlimited upside: They are constantly delivering surprises - upside surprises, the good kind. Of course, not every investment is going to work out. But by continually upgrading their portfolio of holdings/partnerships over time they keep increasing the probabilities that good outcomes will happen. ————— Let’s pivot in our analysis from theory to practice Theory is good and interesting. But we live in the real world. Let’s review three examples of what has actually been happening at Fairfax’s equity holdings in recent years. New equity purchase - Stelco. Legacy equity purchase - Eurobank Deal flow - Kennedy Wilson - getting an investment idea from a partner. Case study 1: Stelco (a Canadian steelmaker) In November 2018, Fairfax paid $193 million for 14.7% of Stelco (13 million shares at C$20.50/share). On July 15, 2024, Stelco announced that the company had been sold to Cleveland-Cliffs for about C$70/share (consisting of C$60.00 in cash and 0.454 of a share of Cliffs common stock). Over its 6-year holding period, Fairfax earned a total return of about US$544 million (+282%) on its $193 million investment in Stelco. The 6-year CAGR was 25%. That is an outstanding return. Bottom line, the team at Fairfax/Hamblin Watsa absolutely crushed their investment in Stelco. What made Stelco such a good investment for Fairfax? It was the CEO of Stelco, Alan Kestenbaum. Since buying Stelco out of bankruptcy in 2017 (via Bedrock Industries) Kestenbaum's capital allocation decisions were exceptional: Invested smartly in the business. Minntac iron ore supply agreement struck with US Steel in 2020 (during Covid) was brilliant. Sold non-core assets at a premium price (Stelco lands in Hamilton). Bought back 38% of the company’s stock and did not overpay. And the final act? Selling the entire company for C$70.00 in July 2024. This investment provides a wonderful real world example of the incredible returns that can be generated by partnering with outstanding entrepreneurs/CEO’s. This was a new investment for Fairfax. What about the legacy holdings? Those bought pre-2018 and still owned by Fairfax. ————— Case study 2: Eurobank (financial services - with operations in Greece, Cypress and Bulgaria) When Fairfax was culling its legacy equity holdings (those purchased before 2018), it made the call to keep Eurobank. This was a great decision. Fairfax first invested in Eurobank in December 2014. Over a couple of years they invested a total of $1.19 billion. To June 10, 2025, the investment has delivered a total return of about $3.06 billion. What happened? Four things: 1.) Exceptional management. Over the past 7 years, the management team at Eurobank has been putting on a clinic. Their most recent great decision was the purchase of Hellenic Bank (and paying 4 x earnings). 2.) Strong economic performance. The depression in Greece ended. For two elections in a row, Greece has elected a pro-business government. Animal spirits have been unleased. And Greece has had one of Europe’s best performing economies. 3.) Increase in interest rates Central banks around the world ended their disastrous zero interest rate policies. Higher interest rates has spiked earnings for banks. 4.) Patient controlling shareholder. Eurobank was given time to work through their issues. This also allowed them to think strategically and manage the business for the long-term. 2 lessons: When adversity hits, outstanding people will usually figure out a way to get through it. And then when they get to the other side, they will thrive. Example 3: Kennedy Wilson and Pac West Deal flow is a very important driver of investment returns. That is what we will review with this example. Financial markets were in turmoil during the US regional banking crisis in spring of 2023. Kennedy Wilson and Fairfax were opportunistic. Their initial investment in PacWest loans has performed very well. More importantly they used the crisis to build a new business/income stream - making both companies stronger in the process. In June of 2023, Kennedy Wilson and Fairfax purchased a $4.5 billion construction loan portfolio from PacWest. PacWest was caught in the regional bank crisis and they were forced to sell their best assets at a discount. At Fairfax's AGM in April 2025, Bill McMorrow from Kennedy Wilson provided an update. How has the investment performed? Was it a good decision? There are two angles to this transaction: 1.) Initial transaction - purchase of the $4.5 billion construction loan portfolio. 27 of those 65 loans have been paid off at par (they were bought at a discount). Since inception, the loans have generated almost $500 million of interest income. The current portfolio is generating roughly $350 million a year in interest income. 2.) Building the business One of the conditions of the original deal with PacWest was the 40 people who were running the loan portfolio would also move over the Kennedy Wilson. At the same time, the regional banks backed away from the multifamily and student housing market. Over the past 18 months, the new team at Kennedy Wilson has generated about $5.5 billion of new loan originations. As a result, interest income of $350 million is expected to grow significantly in the coming years. “It was another one of these success stories that really turned out well for both our companies." Bill McMorrow, Kennedy Wilson The idea to buy the PacWest construction loan portfolio came from Bill McMorrow at Kennedy Wilson (he also gave Fairfax the idea to invest in Bank of Ireland in 2011 - an investment that delivered +$1 billion realized gain to Fairfax and its shareholders when it was exited in 2017). There are a couple of really important lessons that come from this investment: Relationships matter. Fairfax has built an extensive network of external relationships/partnerships across industries and geographies. This capability leads to deal flow. Fairfax's phone is ringing. This is a great example of how extreme volatility in financial markets has been a good thing for Fairfax and its shareholders. Something to keep in mind in the current environment. What did we learn from our three examples? Exceptional people can make a huge difference. Alan Kestenbaum - Stelco Fokion Karavalis - Eurobank Bill McMorrow - Kennedy Wilson Earlier in this post I provided a list of more than 20 people/companies that Fairfax is partnered with. Here is the crazy thing. I could have provided many more examples (like the three above) of the outstanding work they are all doing for Fairfax. They are generating enormous economic value for Fairfax and its shareholders. We are seeing the power of human capital getting fully unleashed at Fairfax’s $24 billion equity portfolio. ————— Conclusion Human capital is more powerful than financial capital. Fairfax has gotten much better at leveraging human capital within its equity portfolio. The benefits of this pivot to high quality equities are just starting to show up in reported results. Fairfax has been reporting exceptional total results in recent years and one of the drivers has been large gains from its equity portfolio. Interestingly, Fairfax’s stock is still cheap (yes, even after its big run). Investors do not understand/appreciate the amount of leverage that Fairfax has embedded within its equity portfolio (human and financial). And the significant impact that leverage is going to have on business results (including earnings) moving forward. The benefits of this transition to high quality equity holdings are just emerging. Fairfax is a small company. And it is just getting started on this part of its journey. Fairfax is a like a lion that is just entering its prime and the savannah is once again teeming with game (volatility). Float + equities + quality = exceptional returns Add time + compounding = enormous value creation for long term shareholders = magic
dartmonkey Posted June 11, 2025 Posted June 11, 2025 (edited) 45 minutes ago, Viking said: Case study 1: Stelco (a Canadian steelmaker) In November 2018, Fairfax paid $193 million for 14.7% of Stelco (13 million shares at C$20.50/share). On July 15, 2024, Stelco announced that the company had been sold to Cleveland-Cliffs for about C$70/share (consisting of C$60.00 in cash and 0.454 of a share of Cliffs common stock). Over its 6-year holding period, Fairfax earned a total return of about US$544 million (+282%) on its $193 million investment in Stelco. The 6-year CAGR was 25%. That is an outstanding return. Bottom line, the team at Fairfax/Hamblin Watsa absolutely crushed their investment in Stelco. What made Stelco such a good investment for Fairfax? It was the CEO of Stelco, Alan Kestenbaum. Since buying Stelco out of bankruptcy in 2017 (via Bedrock Industries) Kestenbaum's capital allocation decisions were exceptional: Invested smartly in the business. Minntac iron ore supply agreement struck with US Steel in 2020 (during Covid) was brilliant. Sold non-core assets at a premium price (Stelco lands in Hamilton). Bought back 38% of the company’s stock and did not overpay. And the final act? Selling the entire company for C$70.00 in July 2024. Maybe this was not quite the final act, since $10/sh of the $70/sh price of the sale to Cleveland Cliffs was in CLF shares, for a total of 5.9m shares, and Fairfax bought another 9m shares of CLF last quarter. The current price of CLF shares is $7.35, down from the $9.26 price when the sale went through, so in your table, I think you could say that that 282% return was the return as of July 2024. The total return is surely lower now, as almost another year has gone by, the 5.9m CLF shares are down from $9.26 to $7.35, and the 9m additional shares were acquired last quarter when prices were consistently higher than today's price. Edited June 11, 2025 by dartmonkey
Marco Van Basten Posted June 11, 2025 Posted June 11, 2025 @Viking, why do you think relationship with BDT is valuable? I don't think the returns have been any good? Have you seen any data that indicates high returns, assuming money was invested on commitment date? Thank you.
gfp Posted June 11, 2025 Posted June 11, 2025 (edited) 12 minutes ago, Marco Van Basten said: @Viking, why do you think relationship with BDT is valuable? I don't think the returns have been any good? Have you seen any data that indicates high returns, assuming money was invested on commitment date? Thank you. In the 2022 annual letter, Prem characterized it this way: " We continue to invest with Byron Trott through various BDT Capital funds. Since 2009, we have invested $772 million,have received $960 million in distributions and still have investments with a year-end market value of $508 million. Byron and his team have generated fantastic long-term returns for Fairfax, and we very much look forward to our continued partnership." In the 2024 annual letter, Prem said this: " We continue to invest with Byron Trott through various BDT Capital Funds. Since 2009, we have invested $1.1 billion, have received $1.1 billion in distributions and still have investments with a year-end market value of $729 million. Byron and his team have generated fantastic long-term returns for Fairfax, and we very much look forward to our continued partnership." edit: Berkshire Hathaway also has at least one long term investment in at least one of BDT's vehicles. It shows up in the insurance filings and was converted to a single member LLC at some point. Not sure what it is invested in, but probably some type of merchant banker relationship with private companies. Edited June 11, 2025 by gfp
Marco Van Basten Posted June 11, 2025 Posted June 11, 2025 31 minutes ago, gfp said: In the 2022 annual letter, Prem characterized it this way: " We continue to invest with Byron Trott through various BDT Capital funds. Since 2009, we have invested $772 million,have received $960 million in distributions and still have investments with a year-end market value of $508 million. Byron and his team have generated fantastic long-term returns for Fairfax, and we very much look forward to our continued partnership." In the 2024 annual letter, Prem said this: " We continue to invest with Byron Trott through various BDT Capital Funds. Since 2009, we have invested $1.1 billion, have received $1.1 billion in distributions and still have investments with a year-end market value of $729 million. Byron and his team have generated fantastic long-term returns for Fairfax, and we very much look forward to our continued partnership." edit: Berkshire Hathaway also has at least one long term investment in at least one of BDT's vehicles. It shows up in the insurance filings and was converted to a single member LLC at some point. Not sure what it is invested in, but probably some type of merchant banker relationship with private companies. Thank you, but this does not answer the question. How have these investments performed versus say S&P 500 from the time of commitment?
gfp Posted June 11, 2025 Posted June 11, 2025 2 minutes ago, Marco Van Basten said: Thank you, but this does not answer the question. How have these investments performed versus say S&P 500 from the time of commitment? I guess you should ask on the next conference call. We don't even know if the investments are primarily financing or primarily equity. It could be that the relationship with BDT is more valuable than the actual returns on capital.
Munger_Disciple Posted June 11, 2025 Posted June 11, 2025 (edited) MOM multiple of 1.66X of capital invested (since 2009) doesn't scream like a great return to me regardless of whether it's an equity or debt investment. Edited June 11, 2025 by Munger_Disciple
Viking Posted June 11, 2025 Author Posted June 11, 2025 (edited) 1 hour ago, Marco Van Basten said: @Viking, why do you think relationship with BDT is valuable? I don't think the returns have been any good? Have you seen any data that indicates high returns, assuming money was invested on commitment date? Thank you. @Marco Van Basten, I think the relationship with BDT is valuable because Fairfax thinks it is. Today BDT is one of Fairfax’s largest investments. The small amount of research I have done on Byron Trott suggests he is a quality individual. You state you think returns have not been very good. This sounds important to you - otherwise why ask your question. Why don’t you spend a few minutes and try and get an answer? And share your findings. That way we can all learn something. That is what I do. I generate a thesis. Do my research. And post what I find. And everyone on the board benefits. I am not wedded to any of my thoughts about Fairfax. As new facts emerge I will update my thinking on the company. Edited June 11, 2025 by Viking
gfp Posted June 11, 2025 Posted June 11, 2025 24 minutes ago, Munger_Disciple said: MOM multiple of 1.66X of capital invested (since 2009) doesn't scream like a great return to me regardless of whether it's an equity or debt investment. It really depends on the timing of investments and distributions, which were then followed by additional investments. If Prem says repeatedly that BDT has provided "fantastic" returns to Fairfax over the long term and they keep booking realized gains associated with the BDT investments, I am inclined to believe him. Why lie about it?
Munger_Disciple Posted June 11, 2025 Posted June 11, 2025 12 minutes ago, gfp said: It really depends on the timing of investments and distributions, which were then followed by additional investments. If Prem says repeatedly that BDT has provided "fantastic" returns to Fairfax over the long term and they keep booking realized gains associated with the BDT investments, I am inclined to believe him. Why lie about it? I agree we don't know the details of these investments. Just making a general observation based on the financial information disclosed. Perhaps Prem values the IB relationship with BDT whereby FFH gets access to potential private deals in addition to financial returns from participating in their funds.
Viking Posted June 11, 2025 Author Posted June 11, 2025 (edited) Both BDT and ShawKwei are private equity firms. BDT specializes in investments in family-owned and founder-led businesses. Another important input is how the value of each of the funds is calculated at quarter and year end (that Fairfax uses in its reporting). And how representative is that mark to the actual intrinsic value of the holdings in the fund (which is what Fairfax really cares about). Clearly, Fairfax is very happy with how its investment in BDT is performing (given length of time and size). Part of valuing private equity holdings like BDT and ShawKwei is 'do you trust management.' By management I mean Fairfax. I do trust the management team at Fairfax. My level of trust has been increasing each of the past 4 years - based on how they have been executing and how they are communicating (IMHO, it has been very good). Edited June 11, 2025 by Viking
Marco Van Basten Posted June 11, 2025 Posted June 11, 2025 https://www.wallstreetoasis.com/forum/private-equity/bdt-msd-updated-views For whatever it's worth...
Hoodlum Posted June 12, 2025 Posted June 12, 2025 (edited) I believe there was a previous question post a while back, on what the impact would be of US Bill 899 on Fairfax. While the following article discusses the impact on EU insurance companies, much of it could relate to Fairfax. I also found one comment that was interesting. https://www.reinsurancene.ws/impact-of-section-899-of-us-tax-bill-to-be-relatively-manageable-for-re-insurers-berenberg/ Berenberg believes reinsurers have the greatest flexibility to restructure operations and mitigate the risk of additional taxation. For example, Munich Re could potentially reallocate its US reinsurance treaties to Munich Re AG in Munich, which serves as both the group’s holding company and its main reinsurance unit. Berenberg concluded that while Section 899 presents a potential risk to earnings, the impact is either relatively manageable or can be significantly mitigated through management actions. Edited June 12, 2025 by Hoodlum
SafetyinNumbers Posted June 12, 2025 Posted June 12, 2025 4 hours ago, Marco Van Basten said: Thank you, but this does not answer the question. How have these investments performed versus say S&P 500 from the time of commitment? I don’t think the S&P 500 is the benchmark for equity returns. I believe they use a 15% hurdle rate for equity investments but at 3:1 leverage if they get a 5% return it still contributes to pre-tax ROE at 15%.
Hamburg Investor Posted June 13, 2025 Posted June 13, 2025 (edited) On 6/11/2025 at 9:12 PM, Viking said: Conclusion Human capital is more powerful than financial capital. Fairfax has gotten much better at leveraging human capital within its equity portfolio. The benefits of this pivot to high quality equities are just starting to show up in reported results. Fairfax has been reporting exceptional total results in recent years and one of the drivers has been large gains from its equity portfolio. Interestingly, Fairfax’s stock is still cheap (yes, even after its big run). Investors do not understand/appreciate the amount of leverage that Fairfax has embedded within its equity portfolio (human and financial). And the significant impact that leverage is going to have on business results (including earnings) moving forward. The benefits of this transition to high quality equity holdings are just emerging. Fairfax is a small company. And it is just getting started on this part of its journey. Fairfax is a like a lion that is just entering its prime and the savannah is once again teeming with game (volatility). Float + equities + quality = exceptional returns Add time + compounding = enormous value creation for long term shareholders = magic Wow, what a post! Thank you, @Viking, that resonated a lot with me. As Float, and bonds are a topic, let me add a question I haven't come up with yet: What do you think is the relationship between inflation and insurance companies performance? I have a feeling, but can't bring it all up together. Maybe an example helps: 1. Bond rates are mirroring inflation plus giving 2% real return (that sentence is not totally correct, but directionally okay, I think). Let's have that in mind for the following 2. Let's assume having a company "A" having equity with a roe of 10%, equity "B" having the same like A but the same amount of float than equity and the whole float being in bonds and company "C" having two times the amount of float/bonds than equity So what's the roe, assuming 0% inflation in a given year? A = roe of 10% (on equity) => roe = 10% B = roe of 10% (on equity) plus 2% on float => roe = 12% C = roe of 10% (on equity) plus 2 times 2% on float (that's 4%) => roe = 14% Conclusion: Assuming no inflation, Company C outperforms B with 2% and B outperforms A with 2% Another example: So what's the roe, assuming 5% inflation in a given year? A = roe of 10% (on equity) => roe = 10% B = roe of 10% (on equity) plus 7% on float (5% inflation plus 2% real return => roe = 17% C = roe of 10% (on equity) plus two times 7% on float (5% inflation plus 2% real return) => roe = 24% Conclusion: Assuming 5% inflation, Company C outperforms B with 7% and B outperforms A with 7%. Cs roe is 14% higher than As, when inflation hits 5%, but Cs roe is only 4% higher than As, when inflation is zero. Wow, what a difference! It is perfectly clear that this example is very theoretical and oversimplifies many things. Of course, depending on the company, inflation would also have an impact on profits, i.e. on ROEs (if it's a good company, its roe will stay good - if not, well...). And of course, an insurance company is not simply “Company A” plus float. Of course, insurers do not normally have a 10% ROE on their equity alone. But the example is only intended to show that higher higher inflation are good for insurers – unlike most other companies, which suffer from inflation. And I think for this purpose it's okay. It should be generally clear that higher float means higher returns (and possibly more risk) - that has been discussed very often. It has also been discussed at length that higher bond yields improve ROE of insurance companies. But I have seen little discussion of the fact that with a particularly high float (for example, twice as high as equity), insurance companies ROE is effectively leveraged on inflation. So with higher inflation (so higher bond rates) roe of „good“ insurance companies (those, that are able to hold their cr in higher inflation regimes) with more float than equity goes up with a rate that’s higher than inflation (as soon as new bonds with higher returns get bought with the float). And what does that mean? Why is that important? If you think this through, it creates a particularly attractive situation for value investors investing equity and float of insurance companies. Why? Well, high inflation usually means low stock prices (since bonds offer higher yields and thus become more attractive compared to the “uncertain” stock market, resulting in a shift from stocks to bonds). And it is precisely in this situation, why stocks get burned, that insurers benefit from particularly high cash flows (as the new bonds give higher returns), which they can use when the markets are dirt cheap. (of course that high cash flows only come over time, as first the bond portfolio held by the insurer gets a hit, when inflation and bonds spike - but over time, insurers cash flows go up). And the insurer itself? Well, the market might get attracted a lot by it, as its roe spikes (in the example above the roe of Company C wents up from 14% at zero inflation to 24% at 5% inflation. I haven't analyzed it very deep (one would have to analyze the float leverage, the concrete investments etc. over the years, the pb ratio of the stocks etc), but it is striking that Buffett generated such incredibly high returns in the 1970s and 1980s – in other words, at a time when interest rates were reaching extreme highs, and stocks were beaten down. Until the 1990s, BRK, MKL, and FFH all outperformed the market by a wide margin (treasuries yielded above 5% - like 6%, 7% etc.). Conversely, Berkshire, Markel, and Fairfax have all performed worse than ever against the S&P 500 until a few years ago. So is it a coincidence that this worse-than-ever-returns of the three companies happened during the low-interest-rate phase of the past decade (where the stock market valuations spiked?) I mean: All of them exist since 4 (Markel, Fairfax) or 6 (Berkshire) decades. And apart from the general "value+float" model they are all very different in terms of their concrete investment style. And yet the outperformance of all three (and the valuation) falls to almost zero at almost the same time. Does that make any sense? Edited June 14, 2025 by Hamburg Investor
Viking Posted June 14, 2025 Author Posted June 14, 2025 (edited) 10 hours ago, Hamburg Investor said: Wow, what a post! Thank you, @Viking, that resonated a lot with me. As Float, and bonds are a topic, let me add a question I haven't come up with yet: What do you think is the relationship between inflation and insurance companies performance? I have a feeling, but can't bring it all up together. Maybe an example helps: 1. Bond rates are mirroring inflation plus giving 2% real return (that sentence is not totally correct, but directionally okay, I think). Let's have that in mind for the following 2. Let's assume having a company "A" having equity with a roe of 10%, equity "B" having the same like A but the same amount of float than equity and the whole float being in bonds and company "C" having two times the amount of float/bonds than equity So what's the roe, assuming 0% inflation in a given year? A = roe of 10% (on equity) => roe = 10% B = roe of 10% (on equity) plus 2% on float => roe = 12% C = roe of 10% (on equity) plus 2 times 2% on float (that's 4%) => roe = 14% Conclusion: Assuming no inflation, Company C outperforms B with 2% and B outperforms A with 2% Another example: So what's the roe, assuming 5% inflation in a given year? A = roe of 10% (on equity) => roe = 10% B = roe of 10% (on equity) plus 7% on float (5% inflation plus 2% real return => roe = 17% C = roe of 10% (on equity) plus two times 7% on float (5% inflation plus 2% real return) => roe = 24% Conclusion: Assuming 5% inflation, Company C outperforms B with 7% and B outperforms A with 7%. Cs roe is 14% higher than As, when inflation hits 5%, but Cs roe is only 4% higher than As, when inflation is zero. Wow, what a difference! It is perfectly clear that this example is very theoretical and oversimplifies many things. Of course, depending on the company, inflation would also have an impact on profits, i.e. on ROEs (if it's a good company, its roe will stay good - if not, well...). And of course, an insurance company is not simply “Company A” plus float. Of course, insurers do not normally have a 10% ROE on their equity alone. But the example is only intended to show that higher higher inflation are good for insurers – unlike most other companies, which suffer from inflation. And I think for this purpose it's okay. It should be generally clear that higher float means higher returns (and possibly more risk) - that has been discussed very often. It has also been discussed at length that higher bond yields improve ROE of insurance companies. But I have seen little discussion of the fact that with a particularly high float (for example, twice as high as equity), insurance companies ROE is effectively leveraged on inflation. So with higher inflation (so higher bond rates) roe of „good“ insurance companies (those, that are able to hold their cr in higher inflation regimes) with more float than equity goes up with a rate that’s higher than inflation (as soon as new bonds with higher returns get bought with the float). And what does that mean? Why is that important? If you think this through, it creates a particularly attractive situation for value investors investing equity and float of insurance companies. Why? Well, high inflation usually means low stock prices (since bonds offer higher yields and thus become more attractive compared to the “uncertain” stock market, resulting in a shift from stocks to bonds). And it is precisely in this situation, why stocks get burned, that insurers benefit from particularly high cash flows (as the new bonds give higher returns), which they can use when the markets are dirt cheap. (of course that high cash flows only come over time, as first the bond portfolio held by the insurer gets a hit, when inflation and bonds spike - but over time, insurers cash flows go up). And the insurer itself? Well, the market might get attracted a lot by it, as its roe spikes (in the example above the roe of Company C wents up from 14% at zero inflation to 24% at 5% inflation. I haven't analyzed it very deep (one would have to analyze the float leverage, the concrete investments etc. over the years, the pb ratio of the stocks etc), but it is striking that Buffett generated such incredibly high returns in the 1970s and 1980s – in other words, at a time when interest rates were reaching extreme highs, and stocks were beaten down. Until the 1990s, BRK, MKL, and FFH all outperformed the market by a wide margin (treasuries yielded above 5% - like 6%, 7% etc.). Conversely, Berkshire, Markel, and Fairfax have all performed worse than ever against the S&P 500 until a few years ago. So is it a coincidence that this worse-than-ever-returns of the three companies happened during the low-interest-rate phase of the past decade (where the stock market valuations spiked?) I mean: All of them exist since 4 (Markel, Fairfax) or 6 (Berkshire) decades. And apart from the general "value+float" model they are all very different in terms of their concrete investment style. And yet the outperformance of all three (and the valuation) falls to almost zero at almost the same time. Does that make any sense? @Hamburg Investor, there is lots to chew on with you post. I haven’t thought deeply about how higher than expected inflation (like 3 to 5% per year for an extended period) might affect Fairfax. There are lots of puts and takes to consider. Here are a few: - Fixed income - tailwind to earnings - should sustain/lead to higher interest income. Average duration of fixed income portfolio is 3.3 years so earn through would be slower (than when average duration was at 1.2 years). - Insurance liabilities (long tail casualty lines) - headwind to earnings - likely see higher than modelled losses due to elevated costs/social inflation. - Equities - neutral? - equities are viewed as being an inflation hedge. But we could see the market multiple come down. But commodities might rip higher. In terms of Fairfax’s underperformance from 2010 to 2020, the big problem was the equity hedge/shorts. It cost them an average of $494 million per year for 11 years. Another problem was a bunch of their equity holdings were terrible (EXCO Resources, Fairfax Africa, APR Energy, Farmers Edge etc). And a number of other equity holdings were dead money for many years (Eurobank, Resolute Forest Products, AGT Food Ingredients etc). And yes, crazy low interest rates was also a problem. But my view is most of Fairfax’s issues when they were underperforming were self inflicted. I don't think this is a consensus view. There were two viscous bear markets in the early 1970’s. From mid-1975 to 2000 you had one of the greatest bull markets in history. The S&P500 went from 90 in 1975 to 1,500 in 1999, a 25-year CAGR of 11.9%. That was an incredible tailwind for equities. Its not surprising that Buffett’s best two 10-year stretches were 1975-1985 and 1985 to 1995. I do think experience matters when it comes to investment management. And Fiarfax has lots of people in their investment committee who were cutting their teeth in the late 1970’s/early 1980’s. This is a big advantage for them in today’s environment. Anyways, just some random thoughts. Edited June 14, 2025 by Viking
Hamburg Investor Posted June 14, 2025 Posted June 14, 2025 (edited) 4 hours ago, Viking said: @Hamburg Investor, there is lots to chew on with you post. I haven’t thought deeply about how higher than expected inflation (like 3 to 5% per year for an extended period) might affect Fairfax. There are lots of puts and takes to consider. Here are a few: - Fixed income - tailwind to earnings - should sustain/lead to higher interest income. Average duration of fixed income portfolio is 3.3 years so earn through would be slower (than when average duration was at 1.2 years). - Insurance liabilities (long tail casualty lines) - headwind to earnings - likely see higher than modelled losses due to elevated costs/social inflation. - Equities - neutral? - equities are viewed as being an inflation hedge. But we could see the market multiple come down. But commodities might rip higher. In terms of Fairfax’s underperformance from 2010 to 2020, the big problem was the equity hedge/shorts. It cost them an average of $494 million per year for 11 years. Another problem was a bunch of their equity holdings were terrible (EXCO Resources, Fairfax Africa, APR Energy, Farmers Edge etc). And a number of other equity holdings were dead money for many years (Eurobank, Resolute Forest Products, AGT Food Ingredients etc). And yes, crazy low interest rates was also a problem. But my view is most of Fairfax’s issues when they were underperforming were self inflicted. I don't think this is a consensus view. There were two viscous bear markets in the early 1970’s. From mid-1975 to 2000 you had one of the greatest bull markets in history. The S&P500 went from 90 in 1975 to 1,500 in 1999, a 25-year CAGR of 11.9%. That was an incredible tailwind for equities. Its not surprising that Buffett’s best two 10-year stretches were 1975-1985 and 1985 to 1995. I do think experience matters when it comes to investment management. And Fiarfax has lots of people in their investment committee who were cutting their teeth in the late 1970’s/early 1980’s. This is a big advantage for them in today’s environment. Anyways, just some random thoughts. @Viking: Thank you; though I think I wasn‘t able to make my point clear. That post was not meant to Fairfax alone (and to be cristall clear: everything you write about FFH in your answer makes totally sense, the hedges etc. We agree on that point 100%). it was more like asking, if there might be a general timeless principle regarding inflation applying to all the value investors from Graham and Doddsville leading insurance companies. One could turn my discussion point to another question: Is the roe outlook for the Berkalikes a. negative correlated to inflation, b. inflation agnostic or c. gives inflation a tailwind? Looking at the results over the decades, at least my impression is, that all Berkalikes were having a tailwind when inflation was high. Edited June 14, 2025 by Hamburg Investor
SafetyinNumbers Posted June 14, 2025 Posted June 14, 2025 7 hours ago, Hamburg Investor said: @Viking: Thank you; though I think I wasn‘t able to make my point clear. That post was not meant to Fairfax alone (and to be cristall clear: everything you write about FFH in your answer makes totally sense, the hedges etc. We agree on that point 100%). it was more like asking, if there might be a general timeless principle regarding inflation applying to all the value investors from Graham and Doddsville leading insurance companies. One could turn my discussion point to another question: Is the roe outlook for the Berkalikes a. negative correlated to inflation, b. inflation agnostic or c. gives inflation a tailwind? Looking at the results over the decades, at least my impression is, that all Berkalikes were having a tailwind when inflation was high. The P&C holdco model seems well designed for an inflationary environment because premiums are able to be increased relatively quickly for inflation expectations. Interest rates tend to go up and term premium also increases to reflect inflation expectations which increases returns given the leverage to float. These companies also own real assets via equities. For FFH if one includes the TRS, their equity book is of similar size to their shareholders equity. Real assets are more likely to outperform in inflationary environments.
Viking Posted June 14, 2025 Author Posted June 14, 2025 (edited) 7 hours ago, Hamburg Investor said: @Viking: Thank you; though I think I wasn‘t able to make my point clear. That post was not meant to Fairfax alone (and to be cristall clear: everything you write about FFH in your answer makes totally sense, the hedges etc. We agree on that point 100%). it was more like asking, if there might be a general timeless principle regarding inflation applying to all the value investors from Graham and Doddsville leading insurance companies. One could turn my discussion point to another question: Is the roe outlook for the Berkalikes a. negative correlated to inflation, b. inflation agnostic or c. gives inflation a tailwind? Looking at the results over the decades, at least my impression is, that all Berkalikes were having a tailwind when inflation was high. @Hamburg Investor, thank you for clarifying your thoughts for me. Today I don't have a strong opinion on inflation and the impact on the results of the 'Berkalites.' Past, present or future. Where inflation goes over the next 5 years is one of the big macro questions out there today. It will be interesting to see what happens moving forward. Sorry, I don't have much to add. It's just a topic I haven't thought much about. Edited June 14, 2025 by Viking
Hoodlum Posted June 16, 2025 Posted June 16, 2025 (edited) I see we hit $2400cdn this morning. The gains on the TRS are going to look great for this qtr. Sing Re (Fairfax Asia) is now licensed to sell reinsurance in India. I guess the regulator had no concerns with Fairfax owning both Go Digit and Sing Re? https://www.lifeinsuranceinternational.com/news/sing-re-reinsurance-licence-india/ The regulatory approval enables the company to establish an IFSC Insurance Office (IIO) in Gujarat International Finance Tec-City (GIFT City). The move authorises Sing Re to conduct property & casualty (P&C) reinsurance as a Category – 2 reinsurer within the Order of Preference framework. The new IIO is expected to facilitate Sing Re’s access to the Indian reinsurance market. Edited June 16, 2025 by Hoodlum 1
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