Hoodlum Posted August 29, 2025 Posted August 29, 2025 This was to be expected. Fairfax has announced that they will be redeeming cumulative Preferred share series G/H on Sep 30th. https://www.fairfax.ca/press-releases/fairfax-announces-intention-to-redeem-cumulative-preferred-shares-series-g-h/
Viking Posted August 31, 2025 Author Posted August 31, 2025 Investment Portfolio: Review of Returns From 2017-2024 and Estimates for 2025 and 2026 In this post we will dig into the returns Fairfax has been able earn on its investment portfolio to see what we can learn about the company. Our analysis has been broken into 7 parts: Part 1: Introduction Part 2: How does Fairfax invest? Part 3: What methodology should be used? Part 4: The past - 4-year snapshots (2017 to 2020 and 2021 to 2024) Part 5: The future - Estimates for 2025 and 2026 Part 6: Can we come up with a normalized rate of return? Part 7: Conclusion Appendix: 10-year summary (2017 to 2026E) ———— Part 1: Introduction Fairfax has a wonderful business model Is this hyperbole? No. It is fact. Fairfax was established in 1985 – it has been in business for 39 years. In 1985 there were about 6,000 listed companies in the US. At the end of 2024, only 600 of these companies remained. Of the survivors, which companies have performed the best? Over the past 39 years, the per share market value of Fairfax (US$) has grown at a rate of 19.2% compounded annually. Of the 6,000 listed companies from 1985, Fairfax has been the 8th best performer. That is an amazing result. (Source: Fairfax’s AGM – April 2025) Two questions jump out: How was Fairfax able to deliver such outstanding returns for long term shareholders? How is the company positioned today? The fact that most investors can’t answer either question is informative. IMHO, Fairfax continues to be underfollowed and misunderstood. Of course, this impacts how the stock is being valued today (it usually means the stock is being undervalued). Let’s try and understand how Fairfax has been able to deliver such outstanding results over such a long time frame. A good place to start is by looking at Fairfax’s two business engines and their impact on the earnings of the company: The underwriting profit it earns from its P/C insurance business. This can be measured by looking at the combined ratio (CR). This is pretty straight forward. The total investment return it earns from its investment management business. This can be measured by summing a number of different items. This is a little more complex. In this post we will review the total return Fairfax earns on its investment portfolio – in total dollars and as a percent. We will start by looking at the past (2017-2024). We follow this up with forecasts for 2025 and 2026. We finish with what this teaches us about Fairfax and its business model. ———— Part 2: How does Fairfax invest? Before we get into the numbers, we need to zoom out and start by looking at the big picture. How big is Fairfax’s total investment portfolio? At December 31, 2024, Fairfax had an investment portfolio with a value of about $69 billion. How does Fairfax invest its investment portfolio? At December 31, 2024, Fairfax had about $47 billion of its total investment portfolio invested in fixed income securities, which was 68% of the total. About $22 billion was invested in equities (broadly defined), which was 32% of the total. How does this split compare to other P/C insurance companies? This is important. Most P/C insurance companies invest exclusively in fixed income instruments – fixed income usually represents about 95% of their total investment portfolio. The remaining 5% is invested in a variety of non-fixed income instruments. With a significant allocation to equities, Fairfax invests its investment portfolio in a very different way than traditional P/C insurance companies. The model used by Fairfax today to invest its investment portfolio is unique in the P/C insurance industry. The model Fairfax employs today is similar to the one used by Berkshire Hathaway when it was a much younger company (Berkshire Hathaway has morphed in recent decades into a large conglomerate). Why does Fairfax invest in equities? Equities deliver a much higher return than fixed income over time. This is a fact. Fairfax invests in equities because it will allow the company to deliver a higher return on its investment portfolio over time (compared to a 100% allocation to fixed income). In turn, this will result in higher earnings for the company. And higher earnings mean a higher stock price. In short, investing in equities is good for long term shareholders. Why don’t all P/C insurance companies invest a large part of their investment portfolio in equities? That is a great question. It seems like such a no brainer. My guess is it has something to do with their inability to handle short term volatility. We have discussed this topic in other posts, so we will not go into further detail here. Ok. To summarize, Fairfax has a very large investment portfolio ($69 billion). And they invest a large part of it in equities (32%), which is very different compared to P/C insurance peers. In theory, this should allow Fairfax to earn outsized returns on its investment portfolio (compared to P/C insurance peers). Is this what is happening in the real world? What do the historical numbers tell us? ———— Part 3: What methodology should be used? Before we can do our historical calculations, we first need to decide on the methodology we will use. To do this we need to answer the following three questions: Are we calculating the economic or accounting return? What inputs should be used? What time frame should be used? What return should be calculated - economic or accounting? Most investors and analysts focus on the accounting return. It is easy to calculate. And it is safe. Warren Buffett (at Berkshire Hathaway) suggests investors focus on economic return. It is a little more difficult to calculate. And it requires some additional explanation. Of course, economic return is a bridge too far for most investors and analysts – they ignore it. With our post today, we will focus on the economic return. Because economic return is what really matters to long term shareholders. What inputs should be used to calculate the economic return? The total economic return earned by Fairfax on its investment portfolio will be calculated using the following 5 inputs. All are reported each quarter by Fairfax: Income streams: Interest and dividend income Interest income earned from the fixed income portfolio. Dividend income earned from the mark to market equity holdings. Share of profit of associates Fairfax’s share of pre-tax earnings from its associate holdings: Eurobank, Poseidon, EXCO Resources and Fairfax India (their associate holdings). Non-insurance consolidated companies Pre-tax earnings from Recipe, Sleep Country, Peak Achievement, Grivalia Hospitality, TC India, Meadow Foods, AGT Food Ingredients and Dexterra. Net gains (losses) on investments Unrealized gains from the investment portfolio (stocks and fixed income). Large realized gains from asset sales and revaluations (including insurance). The 4 income streams above are part of Fairfax’s accounting results - they flow through to earnings and book value. We also include one more item in our calculation: The annual change in ‘excess of fair value over carrying value’ for non-insurance associate and consolidated holdings This item is not captured in Fairfax’s accounting results (earnings or book value). So why include it? Because it is real economic value that is being created by Fairfax each year (i.e. if they owned less than 20% of these equities these numbers would be included in their accounting results.) Fairfax regularly reports this number because they think it is an important piece of information. Here is how Fairfax describes this item: “Those amounts (excess of FV over CV), while not included in the calculation of book value per basic share, are regularly reviewed by management as an indicator of investment performance.” Fairfax 2024AR Important: I think my calculation of total economic return is conservative (even including excess of FV over CV). And that is because it is likely understating the results being delivered over time by some large associate and consolidated equity holdings. A good example is BIAL (the third largest airport in India) where Fairfax has a 74% interest. I don’t want to get sidetracked - this is just something to keep in mind. Ok. We have the 5 inputs we will use in our model. Before we get into the calculations, we need to answer one more question. What time frame should we use? This is a critically important question. And the answer is not obvious. To calculate returns To calculate Fairfax’s investment returns using a 1-year time frame makes the most sense. And this is because publicly traded companies report results on an annual basis. This makes it very easy to get the needed numbers. To analyze returns What is the best time frame to use to analyze Fairfax’s return on its investment portfolio? Your answer to this question will depend on the type of investor you are. Are you a speculator or an investor? If you are a speculator – the best time frame to use in your analysis might be one year (and quarterly might be even better). Easy peasy. If you are an investor – your analysis will be longer term. Warren Buffett suggests 5 years is a good time frame to use to evaluate the results and the performance of a management team. Of course, we are coming at this from the perspective of an investor. Not a speculator. Therefore, we want to use a time frame that will give us the best information and that will also provide the best insights into this important part of Fairfax’s business. We decided to use a 4-year time frame. Ok. The focus is on economic. A 4-year time frame will be used to analyze results. ———— Part 4: The past - 4-year snapshots (2017 to 2020 and 2021 to 2024) We will start with a look into Fairfax’s past. With our analysis we will go back 8 years, which gives us two 4-year time frames: 2017 to 2020 2021 to 2024 4-Year Average - 2017 to 2020 From 2017 to 2020, Fairfax earned an average return on its investment portfolio of 5.0% per year. This return makes sense. During this time frame, Fairfax experienced a number of headwinds which impeded the return it was able to generate: Fixed income: Global central banks were executing a zero interest rate policy. Crazy low interest rates resulted in crazy low bond yields/interest income. Equities: Fairfax’s equity portfolio was underperforming. The last short position was removed in late 2020. Fairfax’s equity portfolio was stuffed with underperformers/cyclicals. Importantly, the largest driver of investment returns – by far - was investment gains, at 62%. Bottom line, a messed up investment framework (hedges/shorts and equities) was causing Fairfax’s investment portfolio to underperform. Given the force of the headwinds, it is surprising that Fairfax was still able to deliver an average return as high as 5.0% per year from 2017 to 2020. 4-Year Average - 2021 to 2024 From 2021 to 2024, Fairfax earned an average return on its investment portfolio of 8.2% per year. This return also makes sense. During this time frame, all of the headwinds from 2017 to 2020 had flipped to tailwinds, which enhanced the return Fairfax was able to generate: Fixed income: Global central banks abandoned their zero interest rate policy. The inflation genie got out of the bottle. Higher interest rates resulted in higher bond yields/interest income. Fairfax was positioned exceptionally well for higher interest rates – at the end of 2021, the average duration of their fixed income portfolio was 1.2 years. Equities: Fairfax began fixing their investment framework beginning in about 2018. It was a slow process. Underperforming equity holdings (bought before 2018) were fixed/dealt with. New equity purchases since 2018 have performed very well. Fairfax has diversified the sources of its investment returns - it is not so reliant on investment gains. Capital allocation at Fairfax over the past 5 years has been best-in-class among P/C insurance companies. As a result, Fairfax has been able to generate an exceptional average total return of 8.2% per year on its investment portfolio. What did we learn? From 2017 to 2020, despite facing significant headwinds, Fairfax was still able to earn a respectable average total return on its investment portfolio of 5.0%. From 2021 to 2024, with headwinds reversing to tailwinds, Fairfax was able to earn a much higher average total return on its investment portfolio of 8.2%. Importantly, the sources of earnings are nicely diversified (not so reliant on one item – investment gains). ———— Part 5: The future - Estimates for 2025 and 2026 For 2025, my current estimate is Fairfax will earn a total return on its investment portfolio of 9.9%. We already have 6 months of reported results (which have been very strong). Fixed income: The average yield is currently about 5.1%. Equities: The quality/earnings power of the equity portfolio continues to shine through. 2025 is shaping up to be another exceptional year for Fairfax. For 2026, my current estimate is Fairfax will earn a total return on its investment portfolio of 7.7%. Given the size of the return expected in 2025, we are being conservative with our estimate for 2026 (specifically with the investment gains bucket). Fairfax is generating very good returns on its investment portfolio. The sources of returns are diversified – and becoming more so. ———— Part 6: Can we calculate a 'normalized' rate of return? What is a ‘normalized’ rate of return to use moving forward? This might be the most important part of the analysis. By ‘normalized’ we mean in a normal (or average) type of year. A number that can be used as an input in a model. My view is 8% is likely a good mildly conservative ‘normalized’ estimate to use of what Fairfax will be able to earn on its investment portfolio moving forward. As a reminder, this is economic return – not accounting return. What is the single biggest reason why I think 8% is the right number? It is because of the management team at Fairfax. Over the past 5 years, their capital allocation decisions have been best-in-class among P/C insurance companies. This bodes well for the returns Fairfax will be able to generate on its investment portfolio moving forward. ———— How does that compare to P/C insurance peers? Fairfax is earning a much higher return in its investment portfolio than P/C insurance peers. Fairfax is earnings about 8% per year. P/C insurance peers are earnings about 5.5% per year (or lower). This gives Fairfax a return advantage of about 2.5% per year. Leverage Investments to common shareholders’ equity = 2.8x Leverage gives Fairfax a 7% advantage over peers (2.5% x 2.8x). Fairfax’s return advantage versus peers is magnified due to investment leverage. ———— Part 7: Conclusion Fairfax has a large investment portfolio ($69 billion at December 31, 2024). Unlike most other P/C insurance peers, they invest a big chunk of it in equities (32%). Fairfax is very good at how they invest – over the 4-year period from 2021 to 2024, Fairfax has earned an average rate of return of 8.2%. My estimate for 2025 is 9.9%. My guess is Fairfax is positioned today to deliver an average ‘normalized’ annual return on its investment portfolio of about 8% moving forward. This is considerably higher return than P/C insurance peers who only invest in fixed income instruments (perhaps with an average normalized return of around 5.5%). Fairfax been able to deliver CAGR on 19.2% over the past 39 years. At the beginning of this post, we asked two questions: How was Fairfax able to deliver such outstanding returns for long term shareholders? How is the company positioned today? I think we have found some answers. Fairfax has been able to deliver outstanding returns for long term shareholders because of how it invests its investment portfolio. This allows the company to earn a much higher average return than P/C insurance peers. This advantage is magnified due to its investment leverage and the power of compounding. Of course, this is just one important part of the answer. There is much more driving Fairfax’s success: Culture. Structure. Family control. High quality P/C insurance business. Capital allocation. External relationships. Fairfax has a wonderful business model. It has spent the past 39 years fine-tuning it. How is the company positioned today? In short, it has never been positioned better. That is a great set-up for long term shareholders. ———— Appendix: 10-year summary (2017 to 2026E) Below is a summary of the economic returns that Fairfax has earned on its investment portfolio for the 8-year period (2017 to 2024). Also included are estimates for 2025 and 2026. This provides a 10-year view. We also provide the build for each year – the 5 inputs we use to come up with the economic return for each year.
djokovic1 Posted August 31, 2025 Posted August 31, 2025 (edited) @Viking this is another great piece of analysis thank you. and in the short to medium term something that is completely missed by sell side analysts and in my view the market. Because they assume reversion to the mean and worse still ignore the impact of compounding of great equity returns. You alluded to this but to drive home the point, most other insurers dont invest this way because they are not long term and dont have true alignment (or skill) at the top to invest an adequate amount in equities. The only ones who do it this way are Berkshire, Fairfax and Markel who have the alignment and incentives to take a long term view and not be worried about short term fluctuations. And as we have seen recently FFH >> Markel w.r.t investments and FFH > Berkshire due to its ability to invest smaller i.e the opportunity set is much larger. Edited August 31, 2025 by djokovic1
SafetyinNumbers Posted August 31, 2025 Posted August 31, 2025 1 hour ago, djokovic1 said: @Viking this is another great piece of analysis thank you. and in the short to medium term something that is completely missed by sell side analysts and in my view the market. Because they assume reversion to the mean and worse still ignore the impact of compounding of great equity returns. You alluded to this but to drive home the point, most other insurers dont invest this way because they are not long term and dont have true alignment (or skill) at the top to invest an adequate amount in equities. The only ones who do it this way are Berkshire, Fairfax and Markel who have the alignment and incentives to take a long term view and not be worried about short term fluctuations. And as we have seen recently FFH >> Markel w.r.t investments and FFH > Berkshire due to its ability to invest smaller i.e the opportunity set is much larger. I agree other insurance companies don’t do it because their incentives are short term and also because with equities there are going to be mistakes. Look at how many people still avoid Fairfax because of its mistakes over the years. It follows that it is still impacting the multiple. Most management teams want to give the market what they want (steady predictable growth on an adjusted earnings basis) which leads to a high multiple. It is ideal for raising capital to do accretive deals. Fairfax is the opposite. They don’t do anything to get a higher multiple but the quality of the shareholder base is improving over time which might lead to an appropriate multiple at some point.
Hamburg Investor Posted September 1, 2025 Posted September 1, 2025 18 hours ago, Viking said: Over the past 39 years, the per share market value of Fairfax (US$) has grown at a rate of 19.2% compounded annually. Of the 6,000 listed companies from 1985, Fairfax has been the 8th best performer. That is an amazing result. (Source: Fairfax’s AGM – April 2025) Well, what could I say again, but a big „thank you, @Viking!“ I like resdibg all that stuff and by thinking about Fairfax from a lot pf different angles, different perspectives, reading theough rhe „1st 25 years of Fairfax“ the colour of the picture gets richer, one finds more and more small additional details, and it gets more like a movie. So having written that, just one small remark: Of the best invesents I also own Danaher and it’s one of my favorites non-insurers, after the insurers like BRK, MKL, FFH and some others. As United Health even is before FFH, and as it has lost nearly 50 per cent in market value recently, and ss somewhere I read, that BRK started a position, I just thought about taking a closer look. But it’s crazy: United Health has fallen from a pb ratio of 6 to 3. So it’s still around double FFHs valuation. And there’s trouble ahead for them, ROE is shrinking and at 14 per cent now, politics seem not being a tailwind for them at present… So that was enough for me to just stop analyzing… This is not saying, United Health being a bad investment; I just don’t feel it beating FFHs ROE within the next years by miles. So why dig deeper - at double the price of FFH it won’t be the better investment, at least for me.
ValueMaven Posted September 1, 2025 Posted September 1, 2025 Could the worsening relations between the US and India be a net-negative for Fairfax and keep a cap on valuation expansion from here? Just a thought ...
thowed Posted September 1, 2025 Posted September 1, 2025 Thanks, @ValueMaven, I am a FFH fan, but like to worry, so am always keen for more pushback on this thread! My instinct is that US and India relations is a temporary thing - it feels like it's not a big enough priority for the US. And I also don't think it would be a huge impact on FFH overall. However I also believe in the long-term future of India, there is a lot to like.
Viking Posted September 1, 2025 Author Posted September 1, 2025 (edited) Are Fairfax’s investment returns volatile? This post is a sister post to the one I wrote yesterday... some of the material is in both. So I apologize in advance for being a little repetative. I like to lean out a little with some of my posts. I hope this one gets board members thinking and stimulates lots of discussion - because that is how we all learn and become better investors. “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.“ Mark Twain Are you a speculator or an investor? Ask most people if they are a speculator or an investor... probably 90% will answer that (of course!) they are an investor and not a speculator. They probably even get annoyed that you would even ask the question - the answer being so obvious. What is interesting is if you look around what these same people actually do... most (better than 50%) likely think and act like a speculator, not an investor. The fundamental problem is much of what is taught by Wall Street encourages casino/speculative behaviour - and it is disguised as investing. So speculators think they are investors. (Please note, some days, what I reflect on some of my decisions, I wonder what I am.) Warren Buffett and Charlie Munger have been taking about this paradox for decades. With this as important context, let's explore a topic that most everyone has a firm opinion on. Are Fairfax’s investment returns volatile? That is the question we will explore in our post today. And no, this is not a trick question. This post might be a bit of a mind bender for some of you. Or perhaps I am a complete nut job. Anyways, you can decide which it is. From the gospel of Wall Street: Volatility = risk. Wall Street logic: The higher the volatility, the higher the risk. The lower the volatility, the lower the risk. Low volatility is equated with high quality. High quality gets a higher multiple. Investing is easy peasy. Below are Fairfax’s investment results for each of the past 8 years. Are the annual returns volatile? Yup. They look like a roller coaster ride - up and down. In 2017, the annual return was 12.4% (up big). In 2018, it was 0.5% (down big). In 2019, it was 7.6% (up big). In 2020, it was 0.7% (down big) Anyways, I think you get the picture. And this makes sense. We had bear markets in stocks in 2018, 2020 and 2022. And a historic bear market in bonds in 2022. Not surprisingly, the investment returns from 2018, 2020 and 2022 were lower for Fairfax. But guess what? The following year, the investment returns rebounded and were very good. This also makes sense. Summary: calculated using a 1-year time frame, Fairfax’s investment returns have been very volatile. Therefore, using Wall Street logic, Fairfax’s investment returns are low quality. And the stock deserves a low multiple. You can’t argue with the numbers and logic! Is our analysis done? Maybe not. Sorry, but I do have one more question. Why are we using one year as the time frame for our analysis? Now I understand that all publicly traded companies report results using a 1-year time frame. So using 1-year (annual) numbers is a great time frame to use when collecting the data to be used in the analysis. It is very easy and convenient. But does that make 12 months the right time frame to use to analyze and evaluate investment performance? Are you a speculator or an investor? Speculators have very short time-frames. 12 months is perhaps a good number to use for this group. It might even be too long. This post is not being written for speculators. So we can ignore them. This post is being written for investors. What is an appropriate time frame for an investor to use when they invest? Is it one year? No of course not. That is much too short. It would be idiotic for an investor to use a 1-year time frame. Most investors are likely using at least a 3 to 5 year time horizon when they invest in a stock. Their analysis will use a similar 3 to 5 year time frame. Perhaps even longer. And that is because a stock is worth the total of all future cash flows (from today to eternity) discounted to the present value using an appropriate discount rate. Is the next year what matters? No. What matters is from today to eternity - that is a much longer time frame than one year. Not complicated. What does this have to do with Fairfax? For an investor, using a one year time frame to analyze and evaluate investment returns is obviously a really stupid thing to do. This time frame is too short (ridiculously so). What happens if we use a 2-year timeframe to calculate Fairfax’s investment results? For an investor, this is also too short of a time frame to use. But for fun, let’s use it and see what happens. We grouped Fairfax’s investment results into the following 2-year periods: 2017 and 2018 2019 and 2020 2021 and 2022 2023 and 2024 If we use a 2-year average, are Fairfax’s investment results volatile? Nope. Compared to the 1-year time frame, Fairfax’s results have largely smoothed out. In 2017/2018, the average annual return was 6.1%. In 2019/2020, it was 4.0% (down a little). In 2021/2022, it was 7.1% (up a little). In 2023/2024, it was 9.0% (up a little more). Bear markets in equities in 2018, 2020 and 2022 and a historic bear market in bonds in 2022… looking at 2-year returns these events magically disappear from view. I think that tells us something… really important. Something Buffett has always understood. When we use an appropriate time frame, we learn that investing in equities is not nearly as volatile for investment returns as generally thought. And the volatility seen in Fairfax's 2-year returns is likely similar to that of P/C insurance peers (who invest in primarily in fixed income). Summary: calculated using a 2-year time frame, Fairfax’s investment returns have been relatively smooth. Therefore, using Wall Street logic, Fairfax’s investment returns are high(er) quality. And the stock deserves a high(er) multiple. Now let’s get crazy. What happens if we use a 4-year timeframe to calculate Fairfax’s investment results? We grouped Fairfax’s investment results into the following 4-year periods: 2017 to 2020 2021 to 2024 If we use a 4-year average, are Fairfax’s investment results volatile? The volatility is completely gone. This time frame also makes it very easy for us to understand Fairfax’s investment results. This is critically important when it comes to understanding the business and evaluating the management team. From 2017 to 2020, Fairfax generated an average annual return on its investment portfolio of 5.0%. This return makes sense given all the headwinds the company was experiencing back then: Central banks were executing a zero interest rate policy. As a result, bond yields were historically low. Fairfax’s equity portfolio was also underperforming: The last short was removed at the end of 2020. Fairfax’s equity portfolio was stuffed full of under performers. Given all the headwinds Fairfax was facing in the 2017 to 2020 time period, it is amazing that Fairfax was still able to generate an annual average total return of 5% on its investment portfolio. From 2021 to 2024, Fairfax generated an average annual return on its investment portfolio of 8.2%. This return makes sense given the changes that have happened in recent years: Central banks ended their zero interest rate policy. As a result, bond yields have normalized to a much higher rate. Interest income has spiked. Fairfax fixed its investment framework. Underperforming equity holdings were fixed/dealt with. New purchases have performed very well. Capital allocation at Fairfax over the past 5 years has been best-in-class among P/C insurance companies. As a result, Fairfax has been able to generate an exceptional annual average total return of 8.2% on its investment portfolio. My guess is Fairfax is now earning a ‘normalized’ return on its investment portfolio of about 8%. This is likely a good run-rate to use moving forward. Summary Are Fairfax’s investment returns volatile? How you answer this question will provide some keen insight into whether you are a speculator or an investor. The answer depends on what time frame you use to analyze the numbers. For speculators, using a time frame of one year or less, Fairfax’s investment returns will look very volatile. For investors, using a time from of two or more years, Fairfax’s investment returns look relatively smooth. This has important implications. Using a 2-year time horizon, Fairfax's investment returns are high quality. They deserve a high multiple. Of course, this is not how Wall Street thinks or works. Lots of people are speculators masquerading as investors. Is that you? But here is the best part. If you ask ‘investors’ if Fairfax’s investment results are volatile most of them will say ‘yes’. And likely add ‘very.’ Even those who have read this post. And that is because wrong lessons (once learned) are very hard to unlearn. Mark Twain sure was one smart dude. Warren Buffett has been talking about this topic for decades. The fact his thinking has gotten very little traction is very informative. It shows you how hard it is to change the dominant narrative - even when it is obviously wrong. Edited September 1, 2025 by Viking
Hoodlum Posted September 4, 2025 Posted September 4, 2025 This could be an interesting development as it could help Fairfax shift more of their bond investments to Canadian corporate bonds. While the below mentioned changes for Canadian banks and Life insurance companies, I would think that this would also apply to Fairfax. https://www.theglobeandmail.com/business/article-regulator-business-lending-by-banks-support-economy/#comments Canada’s banking regulator is working to change the way it treats some business loans, in an effort to make it more appealing for banks to lend to companies that are key to Ottawa’s plans to reshape the country’s economy. The head of the Office of the Superintendent of Financial Institutions (OSFI), Peter Routledge, said Wednesday that the regulator is consulting with banks and life insurers “to help them help the country,” at a conference in Toronto held by Bank of Nova Scotia. The forthcoming changes are intended to “rebalance” a highly technical set of rules by which the regulator assigns different levels of risk – known as “risk weightings” – to different types of bank loans. Those weightings help determine how much capital a bank has to hold in reserve against its loan portfolio, which in turn shapes decisions about who gets loans and how much banks lend.
Hoodlum Posted September 4, 2025 Posted September 4, 2025 1 hour ago, Hoodlum said: This could be an interesting development as it could help Fairfax shift more of their bond investments to Canadian corporate bonds. While the below mentioned changes for Canadian banks and Life insurance companies, I would think that this would also apply to Fairfax. https://www.theglobeandmail.com/business/article-regulator-business-lending-by-banks-support-economy/#comments Canada’s banking regulator is working to change the way it treats some business loans, in an effort to make it more appealing for banks to lend to companies that are key to Ottawa’s plans to reshape the country’s economy. The head of the Office of the Superintendent of Financial Institutions (OSFI), Peter Routledge, said Wednesday that the regulator is consulting with banks and life insurers “to help them help the country,” at a conference in Toronto held by Bank of Nova Scotia. The forthcoming changes are intended to “rebalance” a highly technical set of rules by which the regulator assigns different levels of risk – known as “risk weightings” – to different types of bank loans. Those weightings help determine how much capital a bank has to hold in reserve against its loan portfolio, which in turn shapes decisions about who gets loans and how much banks lend. P&C insurance companies are included in the “risk weighing” review of corporate bonds. https://www.investmentexecutive.com/news/from-the-regulators/osfi-launches-series-of-reform-consultations/ Finally, OSFI is also consulting on proposed changes to the capital rules for insurers — specifically, the minimum capital test that aims to ensure that property and casualty insurers have enough capital to cover potential losses.
dartmonkey Posted September 4, 2025 Posted September 4, 2025 On 8/31/2025 at 1:53 PM, Viking said: Important: I think my calculation of total economic return is conservative (even including excess of FV over CV). And that is because it is likely understating the results being delivered over time by some large associate and consolidated equity holdings. A good example is BIAL (the third largest airport in India) where Fairfax has a 74% interest. I don’t want to get sidetracked - this is just something to keep in mind. Very nice analysis, thanks. And BIAL is indeed a nice example, along with Eurobank I think, of an asset whose true value is significantly higher than even 'fair value' (FV), which is itself higher than carrying value (CV). One quibble here, even though it wasn't included in your overall analysis, is that BIAL is 74% owned by Fairfax India, not Fairfax. Fairfax owns about 43% of Fairfax India, so Fairfax owns about 32% of BIAL, not 74%.
SafetyinNumbers Posted September 4, 2025 Posted September 4, 2025 3 hours ago, dartmonkey said: Very nice analysis, thanks. And BIAL is indeed a nice example, along with Eurobank I think, of an asset whose true value is significantly higher than even 'fair value' (FV), which is itself higher than carrying value (CV). One quibble here, even though it wasn't included in your overall analysis, is that BIAL is 74% owned by Fairfax India, not Fairfax. Fairfax owns about 43% of Fairfax India, so Fairfax owns about 32% of BIAL, not 74%. Poseidon and Ki (which is not in the investment portfolio) are two others that really stack the deck for ROE to exceed 15% over the next 5 years. For BIAL probably need to add in the 20% performance fee which they get on 69% of the gain (5% is held by OMERS via Anchorage).
Marco Van Basten Posted September 4, 2025 Posted September 4, 2025 3 hours ago, dartmonkey said: Very nice analysis, thanks. And BIAL is indeed a nice example, along with Eurobank I think, of an asset whose true value is significantly higher than even 'fair value' (FV), which is itself higher than carrying value (CV). One quibble here, even though it wasn't included in your overall analysis, is that BIAL is 74% owned by Fairfax India, not Fairfax. Fairfax owns about 43% of Fairfax India, so Fairfax owns about 32% of BIAL, not 74%. Keep in mind that fairfax also has a 20% promote in fairfax india
Viking Posted September 4, 2025 Author Posted September 4, 2025 (edited) 4 hours ago, dartmonkey said: Very nice analysis, thanks. And BIAL is indeed a nice example, along with Eurobank I think, of an asset whose true value is significantly higher than even 'fair value' (FV), which is itself higher than carrying value (CV). One quibble here, even though it wasn't included in your overall analysis, is that BIAL is 74% owned by Fairfax India, not Fairfax. Fairfax owns about 43% of Fairfax India, so Fairfax owns about 32% of BIAL, not 74%. Yes, the economic impact of BIAL on Fairfax is much less than for Fairfax India. Bottom line, it is a big number. The bigger point is Fairfax has ‘fixed’ its equity portfolio. It is now stuffed with very well run/profitable/quality companies. Many of these companies are compounding at a high rate of return. Some of this value is captured in the accounting results. Lots is not. The gap between economic result and accounting results is growing each year. The ‘hidden value’ is materially growing in size. The hidden value is compounding each year - this is important. There are a bunch of ways to look at this excess value that has built to date/will be built in the future. Increases the margin of safety of current stick price. Will materially boost future EPS and ROE. Most investors continue to largely ignore it. It really is a super interesting situation. This topic reminds me of the philosophical question/debate: “"If a tree falls in a forest and no one is around to hear it, does it make a sound?" Does the economic value that is being created by Fairfax (in excess of accounting value) matter to an investor? I.E. Is it only accounting results that matter? Wall Street answers yes to this question. Getting this wrong is one of the things that caused most ‘investors’ to miss out on making the big money with Berkshire Hathaway back in the 1980’s and 1990’s - I was one of those investors. Back then, I got four things wrong. I didn’t understand: Berkshire Hathaway's business model. How good management (Buffett) was at capital allocation. The difference/importance between economic and accounting earnings/results. How compounding works. As a result, I continually materially underestimated what Berkshire Hathaway would earn (economic earnings). And this caused me to materially mis-value the company (undervalue it). This caused two important problems for me: First, did I want to own the stock? Second, and more importantly, how big of a position should it be? The second was (with hindsight) the much better problem of the two. This was because Berkshire Hathaway was in my circle of competence. My problem was my investment framework/logic was completely wrong (immature?). I wasn’t being ‘conservative’ with my analysis back then. Rather, I was using a faulty investment framework/logic. Not being rational is not the same thing as being conservative. I suspect more than a few investors are making this same mistake with Fairfax today. Edited September 4, 2025 by Viking
dartmonkey Posted September 4, 2025 Posted September 4, 2025 11 minutes ago, Marco Van Basten said: Keep in mind that fairfax also has a 20% promote in fairfax india Yes. Check my logic, but the performance fee is good for Fairfax, not bad. For instance, a $2b gain in BIAL’s value means FIH has 74% of that, or $1.48b. Fairfax essentially gets all of its 43% share of this gain (80% accrual in value of FIH, plus 20% directly as a performance fee), PLUS 20% of the gain in value of the 57% of FIH shares held by other, non-FFH shareholders. In this example, that would be a pre-tax gain of 43%*$1.48b + 56%*20%*$1.48b boosting FFH’s gain from $636m to $802m.
dartmonkey Posted September 4, 2025 Posted September 4, 2025 11 minutes ago, Viking said: If a tree falls in a forest and no one is around to hear it, does it make a sound?" Good analogy. It depends on how you define ’sound’. But the trees falling in Fairfax’s forest are adding to the accumulated biomass, whether someone heard them or not. So when lightning eventually strikes, as it always does, sooner or later…
Maverick47 Posted September 4, 2025 Posted September 4, 2025 1 hour ago, Viking said: The bigger point is Fairfax has ‘fixed’ its equity portfolio. It is now stuffed with very well run/profitable/quality companies. Many of these companies are compounding at a high rate of return. Some of this value is captured in the accounting results. Lots is not. The gap between economic result and accounting results is growing each year. The ‘hidden value’ is materially growing in size. The hidden value is compounding each year - this is important. There are a bunch of ways to look at this excess value that has built to date/will be built in the future. Increases the margin of safety of current stick price. Will materially boost future EPS and ROE. Most investors continue to largely ignore it. It really is a super interesting situation. This topic reminds me of the philosophical question/debate: “"If a tree falls in a forest and no one is around to hear it, does it make a sound?" Does the economic value that is being created by Fairfax (in excess of accounting value) matter to an investor? I.E. Is it only accounting results that matter? Wall Street answers yes to this question. @Viking Thanks as always for pointing out the difference between economic and accounting measurements of the intrinsic value of Fairfax! Historically, there have been differences between the two measurements for companies in general that equity analysts would want to take into account, but often they were in the opposite direction….analysts might want to give accounting measurements of book value a haircut for liabilities that were hidden (pension liabilities might rely on optimistic return assumptions, and thus be understated, stock options were a hidden form of compensation, and thus the accounting income might appear to be overstated….and of course there were the Enron type obfuscations surrounding off balance sheet entities/liabilities). With Fairfax, though management clearly discloses the difference between market and accounting values of assets on their balance sheet, even this simple adjustment seems to either elude or simply be ignored by the handful of Wall Street analysts who purport to follow the stock, and there can also be assets that just don’t readily appear in either measure, as, for example, with a previously unknown business held within a consolidated entity such as the Pet Insurance subsidiary of Crum and Forster…or with assets such as BIAL held by Fairfax India. And some of the international assets are a bit outside the circle of competence of armchair private investors who don’t belong to COBF…and thus miss out on the education about these assets that is available here. I agree with both of your points about how to look at this excess value…both of which bode well for those willing to hold this compounding business.
Viking Posted September 4, 2025 Author Posted September 4, 2025 (edited) 1 hour ago, Maverick47 said: @Viking Thanks as always for pointing out the difference between economic and accounting measurements of the intrinsic value of Fairfax! Historically, there have been differences between the two measurements for companies in general that equity analysts would want to take into account, but often they were in the opposite direction….analysts might want to give accounting measurements of book value a haircut for liabilities that were hidden (pension liabilities might rely on optimistic return assumptions, and thus be understated, stock options were a hidden form of compensation, and thus the accounting income might appear to be overstated….and of course there were the Enron type obfuscations surrounding off balance sheet entities/liabilities). With Fairfax, though management clearly discloses the difference between market and accounting values of assets on their balance sheet, even this simple adjustment seems to either elude or simply be ignored by the handful of Wall Street analysts who purport to follow the stock, and there can also be assets that just don’t readily appear in either measure, as, for example, with a previously unknown business held within a consolidated entity such as the Pet Insurance subsidiary of Crum and Forster…or with assets such as BIAL held by Fairfax India. And some of the international assets are a bit outside the circle of competence of armchair private investors who don’t belong to COBF…and thus miss out on the education about these assets that is available here. I agree with both of your points about how to look at this excess value…both of which bode well for those willing to hold this compounding business. @Maverick47, I kind of keep saying the same thing over and over. One of the reasons for this is my understanding of the topic continues to evolve - it sometimes takes me 4 or 5 attempts (usually coming at the topic from a different angle) to fine-tune my thinking/point. And even then it is often incomplete (because Fairfax continues to tweak its business model). Much of what is happening today with Fairfax is still an emerging story - we have much to learn about the company. One of the questions investors are asking today is what has changed at Fairfax? This is a critically important question because it impacts how the company should be valued moving forward. One of the most significant differences at Fairfax today (compared to the Fairfax of 7 or 8 years ago) is the change in the quality (which I define as management/earnings power) of their equity portfolio (this included mark to market, associate and consolidated holdings). There really is no comparison in what Fairfax is doing today (and what they own today) to what they were doing back in 2014-2017 (and what they owned then). The results the equity portfolio is delivering is much higher today. On both a % and total $ basis. More importantly, this also suggests the results the equity portfolio will deliver in the future will also be much higher (than in the past) on a % and total $ basis. And then we need to include the benefits of compounding and time. (Compounding equities at 15% is much better than compounding bonds at 5%.) It really is an interesting set up. The parallel to this is what has been going on under the hood in the P/C insurance business. You have a much better handle on this than I do. But my guess is, similar to what we have seen with the equity portfolio, Fairfax has also been able to improve the quality of its P/C insurance business. What has changed at Fairfax? Everything. Equities. P/C insurance. Capital allocation. What does all of this mean? We are kind of in uncharted territory for Fairfax. They have had 5 very good years - so we know the current iteration of the company is very good. The question we will all learn in the coming years is are they back to being elite. If they can sustain their very good performance for a decade - well, that will get them to elite in my books. Edited September 4, 2025 by Viking
Viking Posted September 5, 2025 Author Posted September 5, 2025 (edited) 17 hours ago, Haryana said: 1. If we use a 4-year average, are Fairfax’s investment results volatile? The volatility is completely gone. How is that when obviously there is huge difference between 5% and 8%? (valid reasons behind each but we do comparison whatever be the cause) 2. I have been looking if there is a way to compare for BRK and FFH each, the average return of only the equity part of the portfolio vs the SP500. (over a period of 5/10/20 years) They might be have done better by a few % points which is awesome. However, public may be unaware that leverage is the real weight lifter. @Haryana, you caught me When I do my posts, I like to work on the edges to help make my point. Having said that, I don’t think my comment is far off the mark. Perhaps I should have said… ‘The volatility is largely gone’. Absolute returns: Bottom line, using a 1-year time frame, it was common to see a 10% swing. That was my baseline. Using a 4-year average, the swing was 3%. Compared to the 1-year, that is a pretty small change. From my perspective. Relative returns: I also layered in one more factor to my thinking. And that is how Fairfax compares to P/C insurance peers (who have bond heavy portfolios). If I measured P/C insurance peers the same way, my guess is their swing was likely in the 2% range. Not that much different from Fairfax. Bottom line, Fairfax’s investment returns are not nearly as volatile as most investors think. When viewed through a 4-year or longer time frame. And when compared to peers. Edited September 5, 2025 by Viking
Viking Posted September 5, 2025 Author Posted September 5, 2025 (edited) 17 hours ago, Haryana said: 2. I have been looking if there is a way to compare for BRK and FFH each, the average return of only the equity part of the portfolio vs the SP500. (over a period of 5/10/20 years) They might be have done better by a few % points which is awesome. However, public may be unaware that leverage is the real weight lifter. It would be interesting to know how Fairfax’s investment portfolio performed from 2010 to 2020 (total return). But I am not sure how helpful it would be for an investor in Fairfax today. The company, investment portfolio, and how they invest are all quite different today (yes, I am doing it again ). It is like studying Berkshire Hathaway’s investment in Dexter Shoes… what does it tell you about Berkshire Hathaway today? Buffett makes mistakes. He learns from them. As a result, Berkshire is a stronger company today. (Same with the Solomon Brothers purchase. The purchase of General Re. We could start with the purchase of that Textile Mill at the very beginning, if we wanted more examples.) My view is this is the same takeaway from how Fairfax invested from 2010 to 2020. Lots of mistakes. Lots of lessons learned. As a result, Fairfax is a stronger company today. And for Fairfax, given their mistakes were more recent, it is probably important to monitor what they are doing to ensure the lessons indeed were learned (I am talking about the big capital allocation decisions… not to nitpick every smaller decision they make). Edited September 5, 2025 by Viking
SafetyinNumbers Posted September 5, 2025 Posted September 5, 2025 4 minutes ago, Haryana said: Thanks, I wanted to look only at the equity part of their portfolios vs SP500 to compare their equity/stock picking skills. Most people think that Mr. Buffett has been the best stock picker ever. Mr. Watsa could also get that recognition later on. However if we able to make that comparison, I want to find their performance is less about picking and more about leverage. Ultimately, it’s the leverage that is important for FFH going forward but I don’t think it’s so high that we have sweat at night. Historically, FFH did have some moments where shareholders were sweating at night but I think it’s in a much better position now. @Haryana if you are doing the analysis on leverage, I would look at the insurance float to equity ratio and debt to equity ratio. For the latter, I think the holdco debt matters more as some businesses like a utility might run with high leverage given the nature of the industry. Another way to do it would be to analyze investments to equity annually which in effect captures both the insurance float and any other debt. 3:1 investments to equity ratio can yield really amazing returns in a high nominal yield world. Seems like very good protection against inflation. Twenty years ago the street would have figured it out already but the market structure now makes money management a very different game.
Santayana Posted September 5, 2025 Posted September 5, 2025 Crum & Forster Upgraded to A+ (Superior) Financial Strength Rating and "aa-" (Superior) Credit Rating by AM Best 11:32:00 AM ET, 09/04/2025 - PR Newswire MORRISTOWN, N.J., Sept. 4, 2025 /PRNewswire/ -- AM Best has upgraded the Financial Strength Rating (FSR) of the members of Crum & Forster Insurance Group (C&F) to A+ (Superior) from A (Excellent), and the Long-Term Issuer Credit Ratings (Long-Term ICRs) to "aa-" (Superior) from "a+" (Excellent). The outlook for these ratings is stable. This upgrade reflects C&F's very strong balance sheet, solid operating performance, favorable business profile, and robust enterprise risk management. AM Best highlighted C&F's significant growth and diversification in recent years, achieved through organic expansion while maintaining strong underwriting results and reduced volatility. The ratings also reflect the benefits the group derives from its role within the larger Fairfax Financial Holdings Limited enterprise. "We are honored by AM Best's recognition of our continued financial strength and disciplined growth. This upgrade to A+ (Superior) reflects the dedication and teamwork of our employees, who go the extra mile every day for our clients and partners," said Arleen Paladino, Chief Financial Officer of Crum & Forster. "It's a testament not only to the dedication and expertise of our employees, but also to the culture of teamwork and commitment that defines C&F. Together, we remain committed to delivering innovative insurance solutions with integrity and excellence to our clients."
Hoodlum Posted September 7, 2025 Posted September 7, 2025 During an interview, Odyssey Re CEO Carl Overy commented on one of the benefits of the recent rating upgrades. https://www.theinsurer.com/ti/viewpoint/stronger-than-ever-odysseys-overy-on-the-journey-ahead-2025-09-06/
Txvestor Posted September 8, 2025 Posted September 8, 2025 @Viking Great analysis and perspective on accounting value v economic value. I think your analysis of the investment returns and their volatility smoothed out over 4yr time frames is very helpful to think about. I know Prem has tried in his own way to explain this by saying they would always prefer a lumpy 15% to a smooth 10%. Which is perhaps the same thing you are saying a lot more eloquently. Another aspect that bears recognition in this value creation machine Fairfax is building is its global diversification and growth of their insurance engine. Yes it’s cyclical(hard and soft cycles), yes it’s at times acquisition based(Allied world, Gulf etc) yes at times it’s even start up and innovation based(ICICI Lombard, GoDigit and Ki) but through it all, they have grown it significantly and profitably. If we look back at the same 4yr cycles, we would likely find that the underwritten premium growth as well as underwriting profitability has been quite a lot more consistent of late. I believe this to be an additional positive for overall investment/share price returns outside of your investment returns analysis. I think net written premiums has probably also grown at 7-8% PA averaged across cycles and if you averaged the CR (over say the recent decade) for any reasonable time frame 95% seems a good ballpark of where it lands. and we've tested this with Covid, the Cali wildfires and a few other Cats. to which they had exposure. Now, with their size and increasingly global footprint of underwritten premiums. That alone, aside from investments represents a significant value driver in my opinion. And if that growth ever slows it will represent a powerful source of equity capital to further augment the investment engine.
SafetyinNumbers Posted September 10, 2025 Posted September 10, 2025 FFH cancelled 152k shares in August 2025 which is more in August than in the last three years combined.
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