Fairfax 2025

[Pellom]

If you get the management and incentives right, you just have to be in the ballpark on specific numbers. 

[Hamburg Investor]

On 7/26/2025 at 6:26 AM, Viking said:

@Hamburg Investor, yes, I agree. My view is an enormous amount of economic value has been building in the equity holdings over the past 5 years that is not being captured in the accounting results. 
1.) Excess of FV over CV is the obvious example. It was -$660 million at Dec 31, 2020. At March 31, 2025, it was $1.4 billion. My guess is it could increase $1 billion in Q2 to $2.4 billion ($110/share), or an increase of $3.06 billion in 4.5 years = an increase of $680 million per year.

 

The really interesting thing is this is a bunch of value that has already been created. And it will recognized in the coming years - Fairfax has a long history of finding ways to surface/communicate hidden value. It is like Fairfax has an off balance sheet item with $3.5 or $4 billion sitting in it today. It is growing each year.

 

We just don’t know when they will harvest the gains. When they do it will come as a surprise (to most observers). Who could have known? This will boost ROE as it gets harvested (analysts don’t generally build it into their estimates).
 

Two good recent examples are Sigma (in Q1) and Prakiter (in July). With Sigma, Fairfax booked a $179 million gain. My guess is Praktiker might deliver a realized gain in the $100 million range in Q3… and I am not sure it was very profitable (from an accounting perspective) while Fairfax owed it. 

The 800 pound gorilla is Eurobank. The excess of FV over CV is going to balloon in size in Q2. It could easily keep growing by $500 to $750 million each of the next couple of years. 

 

Well, as always, you are way more versed on the details than me. I have a vivid memory to the pet insurance surprise some years ago.

In fact, that's why I voted for the "above $100" in your survey. Say they might trim the TRS or Eurobank or whatever; we know a lot, and we know, that we don't know everything. So there's more than we know: It's just so much value everywhere and although I think there's good reason to just let a lot of things roll, maybe not everywhere.

 

One weakness of hidden value is, that it doesn't increase your price (which would be good for the TRS) nor your credibility. In other words: Isn't it easier to borrow money on the cheap, when your equity is visible? And as we learned from you, FFH has done a fortune with leverage again and again. So if they'd found really big investment opportunities again, then they might need to make that hidden values (partially) visible. Of course, they'll get a lot of cash these days, but still; if somethings really big...

 

Let's just imagine for a moment, there were a financial number established called "FHAPS" (financially hidden assets per share). That would have increased dramatically at FFH within the last years and it's definitely hard to find another company with that much hidden value. Than FHAPS would be correlated positively to earnings surprises - both the probability and the magnitude. On the other hand FHAPS masks the financial health and true economic value. So the bigger FHAPS, the harder to access borrowing and leverage.
 

[SafetyinNumbers]

22 minutes ago, Hamburg Investor said:

 

 

Let's just imagine for a moment, there were a financial number established called "FHAPS" (financially hidden assets per share). That would have increased dramatically at FFH within the last years and it's definitely hard to find another company with that much hidden value. Than FHAPS would be correlated positively to earnings surprises - both the probability and the magnitude. On the other hand FHAPS masks the financial health and true economic value. So the bigger FHAPS, the harder to access borrowing and leverage.
 

I think that’s a good way of framing the upside surprises we continue to see. While I agree FHAPS makes harder for an investor to see the true economic value any borrowing would be done at the asset level so it shouldn’t hinder access to leverage. 

[Viking]

1 hour ago, Hamburg Investor said:

 

Well, as always, you are way more versed on the details than me. I have a vivid memory to the pet insurance surprise some years ago.

In fact, that's why I voted for the "above $100" in your survey. Say they might trim the TRS or Eurobank or whatever; we know a lot, and we know, that we don't know everything. So there's more than we know: It's just so much value everywhere and although I think there's good reason to just let a lot of things roll, maybe not everywhere.

 

One weakness of hidden value is, that it doesn't increase your price (which would be good for the TRS) nor your credibility. In other words: Isn't it easier to borrow money on the cheap, when your equity is visible? And as we learned from you, FFH has done a fortune with leverage again and again. So if they'd found really big investment opportunities again, then they might need to make that hidden values (partially) visible. Of course, they'll get a lot of cash these days, but still; if somethings really big...

 

Let's just imagine for a moment, there were a financial number established called "FHAPS" (financially hidden assets per share). That would have increased dramatically at FFH within the last years and it's definitely hard to find another company with that much hidden value. Than FHAPS would be correlated positively to earnings surprises - both the probability and the magnitude. On the other hand FHAPS masks the financial health and true economic value. So the bigger FHAPS, the harder to access borrowing and leverage.

@Hamburg Investor, I think the key to FHAPS is patience. (Patience is one of my weaknesses as an investor. I have to constantly beat back my impatient/impetuous inclinations with a big stick.)

 

Unlike BRK, Fairfax actively looks to monetize assets. But they are opportunistic when they do this - it will happen at the right time. Eurobank is the 800lb gorilla. But it is poised to deliver mid to high teens ROTBV the next couple of years. It would be silly today to sell it down to below 20% ownership to be able to mark the position to current MV. Bottom line, the value that is building will get surfaced by Fairfax. 
 

There is a big benefit to Fairfax’s equity book being so skewed to associate and private holdings. For fun, let’s remove two items from the mark-to-market bucket:

• Private equity/parnership holdings like BDT and Shaw Kwei = $2.2 billion
• FFH TRS = $3.2 billion

This reduces the mark-to-market bucket from $12.4 to $7 billion.

 

At June 30, the value of Fairfax’s equity portfolio was about $25 billion. This means only about 28% of Fairfax’s total equity portfolio is driven by quarterly changes in equity markets (Mr. Market). This should make changes in MV much less volatile moving forward. As investors come to understand this, perhaps they reward Fairfax with a slightly higher multiple. 
 

—————

 

I think it is reasonable to remove the FFH-TRS from the calculation because Fairfax has some control over this - via stock buybacks. If we got a large drawdown in Fairfax’s share price (of 15 to 20%) I would expect Fairfax to count their lucky stars and be very aggressive with share buy backs. Today, a selloff in Fairfax’s share price would likely be a gift. 

 

 

Edited July 30, 2025 by Viking

[73 Reds]

7 minutes ago, Viking said:

@Hamburg Investor, I think the key to FHAPS is patience. (Patience is one of my weaknesses as an investor. I have to constantly beat back my impatient/impetuous inclinations with a big stick.)

 

Unlike BRK, Fairfax actively looks to monetize assets. But they are opportunistic when they do this - it will happen at the right time. Eurobank is the 800lb gorilla. But it is poised to deliver mid to high teens ROTBV the next couple of years. It would be silly today to sell it down to below 20% ownership to be able to mark the position to current MV. Bottom line, the value that is building will get surfaced by Fairfax. 
 

There is a big benefit to Fairfax’s equity book being so skewed to associate and private holdings. For fun, let’s remove two items from the mark-to-market bucket:

• Private equity/parnership holdings like BDT and Shaw Kwei = $2.2 billion
• FFH TRS = $3.2 billion

This reduces the mark-to-market bucket from $12.4 to $7 billion.

 

At June 30, the value of Fairfax’s equity portfolio was about $25 billion. This means only about 28% of Fairfax’s total equity portfolio is driven by quarterly changes in equity markets (Mr. Market). This should make changes in MV much less volatile moving forward. As investors come to understand this, perhaps they reward Fairfax with a slightly higher multiple. 
 

—————

 

I think it is reasonable to remove the FFH-TRS from the calculation because Fairfax has some control over this - via stock buybacks. If we got a large drawdown in Fairfax’s share price (of 15 to 20%) I would expect Fairfax to count their lucky stars and be very aggressive with share buy backs. Today, a selloff in Fairfax’s share price would likely be a gift. 

 

 

@Viking Share buybacks reduce or eliminate TRS losses.  Funny how that works.  BTW, I don't think you're giving BRK enough credit.   IMO you're going to start to see a lot more activity in coming months and years.  Greg Abel & Co. are not going to rest on their laurels.  I've started buying shares again after a long hiatus of sitting on existing holdings.  I'll even go out on a limb and suggest that if BRK gets cheap, it will initiate its own TRS.  

[Viking]

2 hours ago, 73 Reds said:

@Viking Share buybacks reduce or eliminate TRS losses.  Funny how that works.  BTW, I don't think you're giving BRK enough credit.   IMO you're going to start to see a lot more activity in coming months and years.  Greg Abel & Co. are not going to rest on their laurels.  I've started buying shares again after a long hiatus of sitting on existing holdings.  I'll even go out on a limb and suggest that if BRK gets cheap, it will initiate its own TRS.  

@73 Reds, I have recently initiated a starter position in BRK, given the sell off with Buffett announcing his retirement. I think @Gregmal said recently that BRK might do better post Buffett (with Abel not constrained like Buffett was). I think that logic makes some sense. I also initiated a small position in Chubb. Channelling Shelby Davis and happy to own P/C insurers… (Of course, Fairfax continues to be a monster position for me).

 

On BRK, I think one of the keys moving forward is for Abel to find a way to shrink the size of the company (over time). And to pay a dividend - if Buffett wasn’t able to find anything good and really big to invest in for years… well, Abel probably won’t either.

Edited July 31, 2025 by Viking

[SafetyinNumbers]

49 minutes ago, Viking said:

@73 Reds, I have recently initiated a starter position in BRK, given the sell off with Buffett announcing his retirement. I think @Gregmal said recently that BRK might do better post Buffett (with Abel not constrained like Buffett was). I think that logic makes some sense. I also initiated a small position in Chubb. Channelling Shelby Davis and happy to own P/C insurers… (Of course, Fairfax continues to be a monster position for me).

 

On BRK, I think one of the keys moving forward is for Abel to find a way to shrink the size of the company (over time). And to pay a dividend - if Buffett wasn’t able to find anything good and really big to invest in for years… well, Abel probably won’t either.

I struggle with considering buying BRK until they start buybacks themselves. They certainly have the cash for it and unlike FFH don’t have obvious choices to deploy it like buying in the minority interests.

[Hamburg Investor]

9 hours ago, Viking said:

@73 Reds, I have recently initiated a starter position in BRK, given the sell off with Buffett announcing his retirement. I think @Gregmal said recently that BRK might do better post Buffett (with Abel not constrained like Buffett was). I think that logic makes some sense. I also initiated a small position in Chubb. Channelling Shelby Davis and happy to own P/C insurers… (Of course, Fairfax continues to be a monster position for me).

BRK is my longest holding since 2007; I trimmed it over the years and shifted a lot into FFH, but not only. 

As you mention Davis and I am a big fan of the Shelby Davis story and have read that with multiple times; do you think there's a cluster risk, if investing 76 per cent of ones portfolio into Insurance? That's were I stand.

Sometimes I am asking myself, what the world might bring. There are whole sectors getting blown away by progress from time to time. Or there ROE was materially affected by progress. Think of Kodak etc.

And today especially AI is a topic, that from my point of view is very hard to predict. My gut feeling is, that AI will change the world in a way we haven't seen since the industrialization; it will just be in a shorter time frame.

So a lot of sectors should change in a way, that is not easy to anticipate. AI just changes the world at so many aspects and really deep, that you not only need first and second level thinking, but need to dig into the third and fourth level; there's simply too many variables changing at the same time and in-depth to be really sure to get approximately right. A typical human bias is to think things are safer than they really are. And I think this danger exists now more than ever.

Concrete: Let's say you are a niche insurer having a lot of data. Today AI helps you, as you might be able to drive the cr down. But maybe the moat shrinks at the same time, as it might be easier to get the risk analysis approximately right for competitors with less data? From a pr and Marketing standpoint, being found over Chat GPT, perplexity etc. might get more and more important for companies (in contrast to today, where a good sales team, that's incentivized longterm cr focussed). And for the customer it should get easier to find good value for money, when looking for the right insurance policy; transparency wins in an ai world and that might help customers more than companies. So price competition might get up. And there might get new players on board that today no-one is aware of. Maybe ai will be used to put together a portfolio of risk, communities organizing themselves and writing out insurance together, so insurers might have to bid on portfolios of individual risks rather than how it's done today. New Software is just so easy to be build, so the effort is really low starting such a thing.

Don't get me wrong: I think the chances are below 5 percent, that exactly this will happen; it's just there might be so many possibilities, how AI could change the insurance sector as a whole and although each idea has a probability of only 1, 2, 3 percent happening, putting that together the outcome might be high, that something materially could change. The whole process might change and at different points and at the same time.

I mean: Who would have thought in 1999, that Amazon would get like a postal service itself or that they might get into cloud getting a competitor of the it giants back than? The probability might have seemed like 1 percent back than to investors; and now we're here. And that was "only" the internet revolution, which was smaller and needed more time to change the world. 

I started with cluster risk, now I end here.  Any thoughts anybody?

[nwoodman]

8 minutes ago, Hamburg Investor said:

I started with cluster risk, now I end here.  Any thoughts anybody?

Access to high-quality data is going to be a differentiator IMHO. Berkshire has a real edge here, decades of accumulated underwriting data across geographies and verticals, coupled with the cultural discipline to use it well. Fairfax is on their way, especially with Digit and Ki building tech-forward platforms. They’re vulnerable, yes,  every incumbent is,  but their edge isn’t just data, it’s also capital flexibility, underwriting culture, and time-tested risk frameworks. Oh and that intangible of all attributes, trust. Balance sheet helps too

[73 Reds]

11 hours ago, SafetyinNumbers said:

I struggle with considering buying BRK until they start buybacks themselves. They certainly have the cash for it and unlike FFH don’t have obvious choices to deploy it like buying in the minority interests.

Fair point.  Yet there are multi-trillion dollar companies and surely more to come - Berkshire's investment universe is actually expanding.  Of course what one chooses to invest in always depends on where you are in life.  At this juncture, my number one priority is no investment that may risk overnight permanent impairment of capital (hint:  BTC).  With BRK, there is always a floor underneath too much selling because the company will opportunistically repurchase its own shares.     And share repurchases are a minimum threshold for the company's investments.  I prefer that the company continue to grow and not shrink just for the sake of needle moving investments.  The optionality of a huge balance sheet will allow BRK to take advantage of those rare opportunities when they finally do come - and they will.  The fact that BRK has been able to more than hold its own in recent times even with a lack of significant investments is a testament to the company's discipline, patience and staying power.  Those qualities alone are good enough for me.    

[SafetyinNumbers]

16 minutes ago, 73 Reds said:

Fair point.  Yet there are multi-trillion dollar companies and surely more to come - Berkshire's investment universe is actually expanding.  Of course what one chooses to invest in always depends on where you are in life.  At this juncture, my number one priority is no investment that may risk overnight permanent impairment of capital (hint:  BTC).  With BRK, there is always a floor underneath too much selling because the company will opportunistically repurchase its own shares.     And share repurchases are a minimum threshold for the company's investments.  I prefer that the company continue to grow and not shrink just for the sake of needle moving investments.  The optionality of a huge balance sheet will allow BRK to take advantage of those rare opportunities when they finally do come - and they will.  The fact that BRK has been able to more than hold its own in recent times even with a lack of significant investments is a testament to the company's discipline, patience and staying power.  Those qualities alone are good enough for me.    

I have a bias for fat right tails given the current market structure and I struggle seeing BRK have multiple expansion and grow faster than 10% (my hurdle rate) but I hope I’m wrong. Fairfax might grow 2x that and can expand its multiple.

[73 Reds]

4 minutes ago, SafetyinNumbers said:

I have a bias for fat right tails given the current market structure and I struggle seeing BRK have multiple expansion and grow faster than 10% (my hurdle rate) but I hope I’m wrong. Fairfax might grow 2x that and can expand its multiple.

Indeed.   Fairfax has more immediate upside and the trajectory for its growth should be much more consistent than BRK.  But when size and liquidity matter, along with the ability to pull the trigger, there is no second to BRK.  

[Viking]

54 minutes ago, SafetyinNumbers said:

I have a bias for fat right tails given the current market structure and I struggle seeing BRK have multiple expansion and grow faster than 10% (my hurdle rate) but I hope I’m wrong. Fairfax might grow 2x that and can expand its multiple.

I have always viewed BRK as kind of like a bond substitute. 

[buylowersellhigh]

13 hours ago, Viking said:

@73 Reds, I have recently initiated a starter position in BRK, given the sell off with Buffett announcing his retirement. I think @Gregmal said recently that BRK might do better post Buffett (with Abel not constrained like Buffett was). I think that logic makes some sense. I also initiated a small position in Chubb. Channelling Shelby Davis and happy to own P/C insurers… (Of course, Fairfax continues to be a monster position for me).

 

On BRK, I think one of the keys moving forward is for Abel to find a way to shrink the size of the company (over time). And to pay a dividend - if Buffett wasn’t able to find anything good and really big to invest in for years… well, Abel probably won’t either.

any reason you started a position in Chubb?  Doesn't seem like the upside of your usual choices....

[73 Reds]

13 minutes ago, Viking said:

I have always viewed BRK as kind of like a bond substitute. 

LOL, find me a bond with BRK's returns!

[Viking]

4 hours ago, Hamburg Investor said:

BRK is my longest holding since 2007; I trimmed it over the years and shifted a lot into FFH, but not only. 

As you mention Davis and I am a big fan of the Shelby Davis story and have read that with multiple times; do you think there's a cluster risk, if investing 76 per cent of ones portfolio into Insurance? That's were I stand.

Sometimes I am asking myself, what the world might bring. There are whole sectors getting blown away by progress from time to time. Or there ROE was materially affected by progress. Think of Kodak etc.

And today especially AI is a topic, that from my point of view is very hard to predict. My gut feeling is, that AI will change the world in a way we haven't seen since the industrialization; it will just be in a shorter time frame.

So a lot of sectors should change in a way, that is not easy to anticipate. AI just changes the world at so many aspects and really deep, that you not only need first and second level thinking, but need to dig into the third and fourth level; there's simply too many variables changing at the same time and in-depth to be really sure to get approximately right. A typical human bias is to think things are safer than they really are. And I think this danger exists now more than ever.

Concrete: Let's say you are a niche insurer having a lot of data. Today AI helps you, as you might be able to drive the cr down. But maybe the moat shrinks at the same time, as it might be easier to get the risk analysis approximately right for competitors with less data? From a pr and Marketing standpoint, being found over Chat GPT, perplexity etc. might get more and more important for companies (in contrast to today, where a good sales team, that's incentivized longterm cr focussed). And for the customer it should get easier to find good value for money, when looking for the right insurance policy; transparency wins in an ai world and that might help customers more than companies. So price competition might get up. And there might get new players on board that today no-one is aware of. Maybe ai will be used to put together a portfolio of risk, communities organizing themselves and writing out insurance together, so insurers might have to bid on portfolios of individual risks rather than how it's done today. New Software is just so easy to be build, so the effort is really low starting such a thing.

Don't get me wrong: I think the chances are below 5 percent, that exactly this will happen; it's just there might be so many possibilities, how AI could change the insurance sector as a whole and although each idea has a probability of only 1, 2, 3 percent happening, putting that together the outcome might be high, that something materially could change. The whole process might change and at different points and at the same time.

I mean: Who would have thought in 1999, that Amazon would get like a postal service itself or that they might get into cloud getting a competitor of the it giants back than? The probability might have seemed like 1 percent back than to investors; and now we're here. And that was "only" the internet revolution, which was smaller and needed more time to change the world. 

I started with cluster risk, now I end here.  Any thoughts anybody?

@Hamburg Investor, I agree AI is a big deal. It is going to boost margins for a lot of companies. This could lead to a stock market melt-up. And it is going to disrupt a lot of industries - so it will be important to monitor.

 

I think it might really impact the generation just graduating (and younger). Lots of occupations are going to shrink in size (i.e. computer programmers). It is going to require lots of flexibility/toggling/retraining on the part of many younger people. I have started talking to my three kids about AI and the importance of embracing it at work (and home). It is going to be more important that ever that young people build a good sized emergency fund (to be able to absorb an unexpected job change/retraining). I was also going to wind down the kids group RESP when my youngest graduated… and have since decided to keep it open and to start grow its value again (so if they decide to go back to school they can pull $ out of the RESP and it is taxed in their hands - at a low level if they are not working full time). Interesting times - as usual!

Edited July 31, 2025 by Viking

[Viking]

5 minutes ago, 73 Reds said:

LOL, find me a bond with BRK's returns!

@73 Reds, Sorry, I was not clear. I have held BRK at different times over the years as kind of a bond substitute. I like the stability of the company… and, to your point, I also like the much higher return (over time). 

[73 Reds]

Just now, Viking said:

@73 Reds, Sorry, I was not clear. I have held BRK at different times over the years as kind of a bond substitute. I like the stability of the company… and, to your point, I also like the much higher return (over time). 

Yeah, it would be hard to beat BRK's returns when looking at stocks, let alone bonds.  As an aside, the tobacco industry has in fact been a great bond substitute and should continue to be for those who don't have alternatives (personally, I've never invested in a bond and don't plan to start now).  Not to jump around but a small counterpoint on AI:  Aside from possibly the medical field, AI does not [yet] create or generate anything new or better than the human mind.  It aids in efficiency which is clearly vital to production and profitability, but my guess is the overall end result of AI will not live up to some very lofty expectations.  The scary thing of course is if AI ever did become capable of effectively overriding the human mind, we'd all be in a lot of trouble.

[Viking]

1 hour ago, 73 Reds said:

Yeah, it would be hard to beat BRK's returns when looking at stocks, let alone bonds.  As an aside, the tobacco industry has in fact been a great bond substitute and should continue to be for those who don't have alternatives (personally, I've never invested in a bond and don't plan to start now).  Not to jump around but a small counterpoint on AI:  Aside from possibly the medical field, AI does not [yet] create or generate anything new or better than the human mind.  It aids in efficiency which is clearly vital to production and profitability, but my guess is the overall end result of AI will not live up to some very lofty expectations.  The scary thing of course is if AI ever did become capable of effectively overriding the human mind, we'd all be in a lot of trouble.

 

@73 Reds, I think AI is going to be revolutionary. I think the next 20 years is going to be wild. Look at Microsoft... revenue growth high teens and employee count is shrinking. In another couple of years, that is going to be the story at many mid-size companies. I am very optimistic - society will be much better off. But there will be big winners and losers. Let's hope we learned something when all the manufacturing jobs went to Mexico, China and ROW (in terms of helping workers transition to new jobs).

[73 Reds]

6 minutes ago, Viking said:

 

@73 Reds, I think AI is going to be revolutionary. I think the next 20 years is going to be wild. Look at Microsoft... revenue growth high teens and employee count is shrinking. In another couple of years, that is going to be the story at many mid-size companies. I am very optimistic - society will be much better off. But there will be big winners and losers. Let's hope we learned something when all the manufacturing jobs went to Mexico, China and ROW (in terms of helping workers transition to new jobs).

I know we're getting off topic here (sorry) but AI has to be properly managed and controlled.  This creates inherent risks which are impossible to predict, and consequent limitations which hopefully are widely recognized.  In my very narrow scope of using and observing AI I have seen it go awry and certain users who relied on it are paying a price.  Today's version of AI has to be checked and verified by humans using their judgment and discretion.  I hope this standard continues.   

[bluedevil]

Viking, definitely on AI being revolutionary.  I think many companies will be nuked and many will thrive. 

 

It is one of my worry points for Fairfax - not because of anything unique about Fairfax specifically, but because my investment has grown into a large share (about a third) of my portfolio.  While i think it is a highly resilient/diversified company generally, if it is one of the companies that does not adapt well to AI, then that would be bad 

 

I thought the CEO of Capital One, Richard Fairbanks, gave a good summary what companies need to do to stay on the right side of things in AI in his last SH letter.  He talked about how big players like Microsoft are creating "horizontal" AI tools that cut across all industries.  But:  "The AI revolution will also drive a vertical revolution, transforming individual industries. But this revolution is unlikely to be driven by the big tech companies and tech suppliers. It will be driven by companies in specific industries that are able to embed AI in their business model and that have deep, proprietary data. This means building AI solutions that are deeply connected to how the company works—its products, customer experience, technology stack, data ecosystem, processes, and the way decisions are made. The winners in the vertical revolution will be companies that are built with modern technology, led by world-class tech and analytical talent, and powered by boundless proprietary data from a huge customer base in the vertical." 

 

Companies like Kinsale and Capital One have been working for years to develop the right tech stack and talent, and are seeing fruits and likely we see it at a highly accelerating rate.  I have no idea what Fairfax is doing on this front, other than Ki and Digit.  If they are not moving with grave urgency, that is going to catch up with them.  I wish there was more discussion from Fairfax about this challenge and how they plan to meet it. 

 

One other item to flag.  One of the reasons i love Fairfax is its ethical and humane behavior, and (for example) that it has never done a layoff.  Prem has criticized successful tech companies for laying off employees.  Query if insurance companies start to shed high numbers of employees and costs because of AI (probably not far off if you look at Ki's success), then how does Fairfax respond?

 

[Viking]

39 minutes ago, bluedevil said:

Viking, definitely on AI being revolutionary.  I think many companies will be nuked and many will thrive. 

 

It is one of my worry points for Fairfax - not because of anything unique about Fairfax specifically, but because my investment has grown into a large share (about a third) of my portfolio.  While i think it is a highly resilient/diversified company generally, if it is one of the companies that does not adapt well to AI, then that would be bad 

 

I thought the CEO of Capital One, Richard Fairbanks, gave a good summary what companies need to do to stay on the right side of things in AI in his last SH letter.  He talked about how big players like Microsoft are creating "horizontal" AI tools that cut across all industries.  But:  "The AI revolution will also drive a vertical revolution, transforming individual industries. But this revolution is unlikely to be driven by the big tech companies and tech suppliers. It will be driven by companies in specific industries that are able to embed AI in their business model and that have deep, proprietary data. This means building AI solutions that are deeply connected to how the company works—its products, customer experience, technology stack, data ecosystem, processes, and the way decisions are made. The winners in the vertical revolution will be companies that are built with modern technology, led by world-class tech and analytical talent, and powered by boundless proprietary data from a huge customer base in the vertical." 

 

Companies like Kinsale and Capital One have been working for years to develop the right tech stack and talent, and are seeing fruits and likely we see it at a highly accelerating rate.  I have no idea what Fairfax is doing on this front, other than Ki and Digit.  If they are not moving with grave urgency, that is going to catch up with them.  I wish there was more discussion from Fairfax about this challenge and how they plan to meet it. 

 

One other item to flag.  One of the reasons i love Fairfax is its ethical and humane behavior, and (for example) that it has never done a layoff.  Prem has criticized successful tech companies for laying off employees.  Query if insurance companies start to shed high numbers of employees and costs because of AI (probably not far off if you look at Ki's success), then how does Fairfax respond?

 

@bluedevil, great post. I think private companies are going to have a big advantage over public companies in navigating the disruption that is coming from AI. In this regard, I view Fairfax as a private company (given Prem has control). Fairfax is being run for the long term - so they should be all over AI (and focussed on doing whatever it takes to be one of the winners). What they are doing with Digit (they completely disrupted their P/C insurance business in India back in 2017) and more recent Ki (at Lloyds) are perhaps informative in this regard.

 

Public companies that need to hit quarterly earnings are likely going to have a much harder time making the necessary investments - that likely will not pay off for years.

 

Fairfax has also been aggressively growing out their non-insurance consolidated businesses in recent years (Recipe, Grivalia Hospitality, Sleep Country, Meadow Foods, Peak Achievement). My guess is the primary reason for this is because the hard market is slowing so capital is being shifted to investments. This is also has the effect of diversifying the company away from P/C insurance (diversifying its income streams). It will be interesting to see if this continues.  

 

Regardless, Fairfax has two businesses: P/C insurance and investment management. They can pivot more to investment management if P/C insurance gets nuts (i.e. shift capital). P/C competitors don't have this option. 

 

I also think the fact they are slowly transitioning to a younger leadership group will help (i.e. Peter Clarke, Wade Burton, Amy Sherk, Brian Young, Ben Watsa etc).  

 

And on the employee thing... keeping your stars is the name of the game for any company/industry. One of Fairfax's big strengths is employee retention. And you see it playing out in recent years with succession planning (the next generation is slowly getting more responsibility). AI may make this strength of Fairfax's even stronger (the result being they become even more of a magnet for those who want to build a career in the P/C industry). 

 

Super interesting topic!

Edited July 31, 2025 by Viking

[Hoodlum]

I wonder if Fairfax Digital Services will help to drive these AI initiatives within Fairfax.  
 

https://www.businesswire.com/news/home/20240220139123/en/LTIMindtree-and-Eurolife-FFH-Sign-MoU-to-Setup-Gen-AI-and-Digital-Hubs-in-Europe-and-India

LTIMindtree, a global technology consulting and digital solutions company, today signed a Memorandum of Understanding (MoU) with Eurolife FFH, a leading insurance company in Athens, Greece powered by Fairfax Digital Services, to establish first-of-its-kind Gen AI and Digital Hub in Athens and dedicated facilities in Poland, Europe and Mumbai, India

 

As a part of this association, Eurolife FFH will set up Generative AI and Digital Hub in Athens to develop innovative solutions for insurance businesses in Greece and LTIMindtree will provide deep domain expertise and support from its dedicated facilities in Poland and Mumbai. Professionals from both the companies will jointly undergo specialized training in Generative AI and Digital Transformation to develop cutting edge products and services that will enhance customer experience and operational efficiency for businesses across insurance, banking, shipping, and manufacturing industries.

 

Alexandros Sarrigeorgiou, CEO of Eurolife FFH, said, "This partnership is aligned with our ambition of leveraging the power of advanced technology to deliver innovation for our customers and partners. Our goal is to innovate; specifically in the insurance space, and push boundaries to create solutions that meet evolving needs of customers across various other industries. This collaboration is a step towards a future where Gen AI and digital innovation will drive business success and enhance customers’ experience.”

[Viking]

On 5/2/2025 at 6:39 AM, nwoodman said:

A short but succinct conference call. I’m sure the quarterly results aren’t lost on those who’ve followed Fairfax over the long term.To absorb a catastrophe like the California wildfires — and still post an underwriting profit — is proof of Fairfax’s evolution and global diversification. Humming along springs to mind.

 

Here’s the best of the call — in their own words:

 

Insurance & Underwriting

 

“Despite the significant catastrophe losses in the quarter, 781 million in total, our insurance and reinsurance operations produced an underwriting profit of 97 million.”

 

“The ability to withstand such a large catastrophe loss in a quarter while still producing an underwriting profit in the quarter demonstrates the strength and scale of our insurance and reinsurance operations.”

 

“We like that [cat] exposure is on the reinsurance side… it’s easier to control. We know what limits [we’re] standing [behind]… the loss we had was well within our risk appetite.”

 

Investments & Volatility

 

“There’s volatility in stock markets, bond markets and the economy. The good news is Fairfax has historically benefited from volatility.”

 

“We think our stock and bond portfolios are in great shape for the environment we’re in.”

 

“The worse it gets, the better we will perform over the long run.”

 

Poseidon & Trade Risk

 

“Poseidon is a financial and operating company in the shipping business with long term contracts backed by financially strong customers with outstanding balance sheets.”

 

“Talking to the management team, they’re quite confident that the tariffs… and economic uncertainty around the world will not have any significant effect on their business.”

 

“Locking in these contracts was a huge plus for them. So we’re very excited about the prospects of Poseidon.”

 

Non-Insurance Operations

 

“Excluding non-cash impairment charges recorded at Boat Rocker… the non-insurance companies reported stronger operating income in the first quarter of 2025 compared to the first quarter of 2024.”

 

“Principally reflecting increased operating income at the restaurants and retail operating segments, primarily related to the consolidation of Sleep Country on October 1, 2024 and higher business volumes at Recipe.”

 

Capital Allocation

 

“We still think our stock price is very good value and we’ll continue to buy back our shares — but not at the expense of our financial strength.”

 

“We do have minority interests in Odyssey and Allied… companies we know really, really well… over time, we’d like to buy back those minority positions.”

 

“We have about 500 million of preferred shares that are coming up at the end of the year… we’re going to look at that.”

 

Quiet, disciplined, and globally diversified — Fairfax doesn’t just endure volatility. It’s built for it.

 

“The worse it gets, the better we will perform over the long run.”

 

Interested in others perspective but this quarter along with my interactions with management and subs at the AGM I am still strongly of the belief that the company is still mis-priced.  Long may it stay that way. To get shaken out because of misperception of fair valuation on the shares is my worst nightmare.  There is just not that many good ideas that come along.

As we wait for Q2 results, here is @nwoodman’s excellent summary from the Q1 earnings call.

[Viking]

On 5/4/2025 at 10:06 AM, Viking said:

Short review of Fairfax's Q1 earnings release. 

 

Fairfax delivered another very good quarter of results. Perhaps a little more noise ‘under the hood’ than in recent reports (not a bad thing). Most importantly, the company continues to look very well positioned moving forward.

 

Below are a few items from the Q1 earnings report that got my attention. The list is a little eclectic - things I find interesting.

 

—————

 

Book value increased from $1,060 (Dec 31, 2024) to $1,080 (March 31, 2025). Dividend payment in January was $15. Including dividend the increase was $35/share = 3.5%.

 

At March 31, 2025 the excess of fair value over carrying value of investments in non-insurance associates and consolidated holdings was $1.4 billion = $66/share pre-tax = @ $50/share after tax. This puts Fairfax’s ‘adjusted’ BV at about $1,130/share (which is still understated).

 

—————

 

Insurance

 

Insurance was the most important part of the  report for me.

 

Lots of analysts describe Fairfax as an investment company masquerading as a P/C insurance company. This might have been a good description of Fairfax pre-2010. However, since 2011 - when Andy Barnard was put into his role overseeing all of Fairfax’s insurance operations - Fairfax has done an amazing job of transforming its P/C insurance business into a high quality operation. At the same time, it has massively expanded its P/C insurance business (first via acquisition and more recently in the hard market). Bottom line, Fairfax now has a large world class P/C insurance business - and this business is the core engine for the entire company. Their investment management business is also very important. But Fairfax is no longer a ‘one trick pony.’ Understanding this change is critically important for investors.

 

Top line

 

In its insurance business, Fairfax delivered top line growth of NPW of 8.4%, which was better than expected (especially given what we saw last year). Crum’s growth of 17.4% was very high. Allied World and Odyssey also posted high growth (high single digits).

 

Ki looks like it might be Fairfax’s next diamond in the rough. It is now being reported as a stand alone company. It could see significant growth in the coming years. (Partnering with Blackstone, Fairfax started Ki from scratch in 2020.)

 

 

Underwriting profit

 

It was also nice to see that Fairfax was able to earn an underwriting profit given the significant catastrophe losses during the quarter. This was due to above trend net favourable prior year reserve development of $219.1 million or 3.5 combined ratio points (2024 - $29.9 million or 0.5 of a CR point). The pace of favourable reserve development has been increasing over the past year (which makes sense given we have been in a hard market since late 2019).

 

Bottom line, we are learning that Fairfax has a first class P/C insurance business.  It is growing nicely. And it is poised to deliver a significant amount of underwriting income to Fairfax in the coming years.

 

Float

 

Float was $37 billion at December 31, 2024. It is growing nicely. And it is costing Fairfax nothing to hold - actually Fairfax is getting paid to hold it (their underwriting profit). In addition to underwriting profit, Fairfax also gets to keep all of the returns it generates from its float. (Fairfax is earning around 7% on its investment portfolio). What a crazy good set-up. Fairfax is double dipping with its float (underwriting income + return).

For perspective, common shareholders’ equity at Fairfax was $23.3 billion at March 31, 2025. At Fairfax, float is 1.6 x the size of common shareholders’ equity. That provides an incredible amount of leverage for Fairfax and its earnings. Especially today where Fairfax is generating both a solid underwriting profit and a high total return on its $70 billion investment portfolio (which includes float). 

 

—————

 

Interest and dividends came in at $606.5 million in Q1.

 

In Q4, 2025 it was $610 million (if you net out the Digit payment of $112 million that was made to Fairfax as part of its IPO earlier in the year). It looks to me like interest and dividend income will likely flatline from here. And it is probably mildly skewed to the downside - rates on the short end are dropping in Europe and Canada and the US is likely not far behind.

 

On the Q1 conference call Fairfax said the average duration of the fixed income portfolio was 3.3 years and the yield was 5.1%. Interest and dividend income of around $2.4 billion per year looks locked and loaded for the next 4 years.

 

This is Fairfax’s largest income stream (by far). It provides a large amount of stability to Fairfax’s earnings. And stability = higher certainty. And higher certainty = higher multiple. Because Mr. Market loves certainty. This is another example of how ‘new Fairfax’ (today’s version) is structured very differently from ‘old Fairfax’ (pre-2022 version).

 

—————

 

Share of profit of associates came in at $128.6 million, which was lower than I expected. Eurobank and Poseidon delivered very good results. Weakness was from ‘other’ - partnerships and other non-insurance associates - Fairfax called out its investment in Waterous Energy on the Q1 call.

 

Some of Fairfax’s holdings are cyclical companies (like Waterous Energy). This will add a little volatility to quarterly results (in both directions).

 

 

—————

 

Results from non-insurance consolidated companies disappointed, coming in at a loss of $41.1 million in Q1.

 

I feel like the kid at breakfast in the Charles Dickens book Oliver Twist. When Fairfax reports, when looking at the total results for this bucket of holdings, I find myself saying the same thing ‘Please Prem, I want some more!’

 

I have been waiting for earnings from this bucket of holdings to turn higher for 2 years now. What is the problem? Continued write-offs from (shitty performing) legacy holdings. This last quarter it was Boat Rocker. Before that it was Farmers Edge.

 

Fairfax is moving in the right direction. Problem children are getting fixed. The overall quality of the holdings in this bucket is improving with each passing quarter. The businesses are well managed with solid prospects. Reported earnings are getting coiled like a spring. They will be shooting higher at some point in the near future. I just needed to vent. Thank you for listening

 

Restaurants and retail (primarily Recipe and Sleep Country) had a solid quarter with operating income increasing from $0.9 million in 2024 to $32.0 million in 2025. This is a good example of the good things that are happening ‘under the hood’ with this group of holdings.

 

 

Recipe Purchase

 

In Q1, Fairfax increased its ownership in Recipe from 85% to 100% - they took out their minority partner in Recipe, the Phelon family. The Phelon family founded the predecessor company to Recipe well over 100 years ago.   

 

The purchase was partially funded by Recipe from an increase in borrowings of $132.1 million (C$190.0).

 

I love this transaction. Recipe is generating solid earnings. Owning 100% now gives Fairfax complete control over the business. Fairfax also owns 100% of Sleep Country and Peak Achievements. This is another sign of how strong Fairfax’s financial condition is today.

 

——————

 

Investment gains came in higher than expected at $1.056 billion.

 

We knew about the following net gains:

• Mark to market common stocks = $216.8 million.
• FFH-TRS = $97.2 million.
• Mark to market convertible bonds and equity warrants = $216.8 million. This is largely Orla Mining (gold producer).
• Bonds = $388.4 million

We also knew about the following net losses (‘other’):

• Digit compulsory convertible preferred shares = $149.9 million

The (good) surprise was the following realized gain:

• Sigma Companies International Corp. = $178.7 million

“On March 28, 2025 the company sold its equity interest in Sigma Companies International Corp. ("Sigma") for total consideration of $327.1, comprised of cash consideration of $284.1 and a retained ownership interest in Sigma of 16.1% (through a new limited partnership interest) with a fair value of $43.0 at closing of the transaction, which is classified as FVTPL. As a result, the company recorded a realized gain of $178.7 in the consolidated statement of earnings.” Fairfax Q1 Earnings Report

 

 

What is the key take-away from the Sigma sale/significant realized gain?

 

Sigma was an equity accounted holding for Fairfax. The investment gain for this holding had slowly been building ‘under the hood’ at Fairfax over the past 7 years. It was captured in the ‘excess of FV over CV’ for associate and non-consolidated holdings that Fairfax reports each quarter. The significant investment gains residing in this bucket will get monetized by Fairfax over time. That is what happened with the Sigma holding in Q1.

 

We can expect much more of this (’surprise’ realized gains) in the coming years as Fairfax monetizes the significant value that is building on its balance sheet that is not captured in its book value.

 

Share buybacks in Q1, 2025

• Fairfax issued 118,457 shares from treasury for use in the company’s share based payments awards (Prem provided details on this plan in his letter in Fairfax’s 2024AR).
• Fairfax repurchased a total of 205,610 shares at an aggregate cost of $289.2 million, or $1,407/share.
• Effective shares outstanding declined by 87,153.

At March 31, 2025, effective shares outstanding was 21.58 million.

 

Fairfax bought back an enormous number of shares in 2024. Given the run-up in the share price over the past 2 years, one of my questions as we began 2025 was would this continue?

 

It did continue in Q1.

 

What about moving forward?

 

Here is what Peter Clark had to say on Fairfax’s Q1 conference call:

 

“We still think our stock price is very good value and we’ll continue to buy back our shares — but not at the expense of our financial strength.”

 

Fairfax also continues to hold the FFH-TRS - giving it exposure to 1.7 million Fairfax shares. They hold this position as an investment. The fact they continue to hold this investment means they still view it favourably (from a return perspective).

 

Bottom line, despite the spike in the share price in recent years, Fairfax continues to think their shares are undervalued at current prices. I love it.

Below is a primer on a few of the things i will be watching for when Fairfax reports Q2 earnings. I think it will be a good quarter. The question is how good. We should also get an additional kicker to the growth in BV from the weak US$ (via comprehensive income).

 

Anything missing from my list?

 

1.) P/C Insurance

• What is growth in net premiums written? (In Q1, 2025, GPW grew 5% and NPW grew 8.4%)
• What is CR? (93.9% in Q2 2024)
• What is level of net favourable PY reserve development? (Was 2.2% in Q2, 2024 and 3.4% in Q1, 2025)
• Commentary on hard market?
• Update on Ki? Growth? First year as stand alone company. 
• What is the 6 month CR? (Was 93.7% in 2024)

2.) Interest and dividend income

• How does it compare to Q1? ($606.5 million in Q1, 2025)
• What is average yield of fixed income portfolio? (5.1% on Q1 call)
• What is average duration? (3.3 years on Q1 call)

3.) What is share of profit of associates?

• Eurobank?
• Poseidon?

4.) Non-insurance consolidated holdings? (Was -$41 million in Q1, 2025)

$100 million in Q2?

 

5.) Investment gains (realized and unrealized)?

• Equities? (How close is my $784 million estimate?)
• My estimate does not include Digit (the piece that is mark to market) and IIFL Finance (a mark to market holding in Fairfax India), both pf which were up significantly in Q2 (Digit +20% and IIFL Finance +45%). 
• Fixed income? (Bond yields were a little lower so there will likely be a small unrealized gain here.)
• Any changes to construction of bond portfolio? 

 

Rough estimate of change in value of equity portfolio in Q2

 

 

Q2 change in US Treasury rates

 

6.) IFRS 17 impact of change in interest rates

• How big is unrealized gain in bond portfolio
• How big is unrealized loss in insurance liabilities driven by IFRS 17? 
• What is net impact? (My guess is a small gain).

 

7.) Tax rate?

• Guidance for year? (I am using 24% in my earnings model)

8.) Share buybacks (21.58 million at March 31, 2025)

• My guess is little in the way of buybacks in Q2.

9.) Diluted earnings per share? (My back of the napkin number is US$65/share)

 

10.) Book value per share? ($1,080.38 at March 31, 2025)

• What was impact of weak US$?

11.) Excess of FV over CV for associate and consolidated holdings?

• This was $1.4 billion at March 31, 2025 ($65/FFH share pre-tax).
• My estimate an increase of $1 billion ($46/share) to $2.4 billion. ($1.2 billion from above less adjustments for share of profit of associates and earnings of consolidated holdings and dividends paid to Fairfax.)
• Eurobank is the 800 pound gorilla. Does Fairfax have any plans to monetize the significant value that is building?

Adding diluted EPS ($65) and change in excess of FV over CV ($35 after tax) and we could see economic value increasing by +$100/share in Q2. 

 

12.) Miscellaneous items:

• Size of investment portfolio? ($65.2 billion at March 31, 2025) 
• Any adverse reserve development in runoff?
• Any change to FFH-TRS position size?
• Any commentary on Praktiker sale? Size of investment gain to come in Q3?
• Any commentary on Recipe? (Takeout of minority partner in Q1, takeout of Keg Royalties Income Fund (pending) and purchase of Olive Garden Canada in Q3.) Big holding… lots going on.

Capital allocation:

• Any change to priorities moving forward?
• Fairfax raised $900 million in debt in May. What was it used for?
• Update on buying back some of the outstanding minority interest at Allied World and Odyssey?