Fairfax 2025

[Viking]

48 minutes ago, Maverick47 said:

@Viking Great thought provoking review and analysis!

 

I like this question and your answers, and am thinking that a similar question and answers could be applied to individual investors and their investment decisions.   Individual investors also have to pay attention to sizing their positions, with an eye towards minimizing risk, which ought best to be defined, as you do here, not in terms of price volatility, but the prospect of permanent loss of capital.

 

Individual investors do not have to risk losing their jobs as personal capital allocators if they happen to miss quarterly targets, so, just as the ownership structure of Fairfax and Berkshire confers upon them a significant source of immunity to the perils of short-termism thinking in capital allocation, so too the individual ownership of one’s own investment assets may well provide each of us as investors with a very real advantage over professional portfolio managers.  
 

Perhaps we can apply some of the lessons gleaned from Fairfax’s sizing of their capital allocation decisions and apply them to a certain extent to the sizing of our own capital allocations.  I think it’s fair to say that none of these individual capital allocations would have killed Fairfax as a company had they turned out less favorably than they did, so avoiding making a personal investment allocation in a company such as Fairfax that could “kill” one’s own investment portfolio if things don’t turn out the way we expect is also going to be a valuable consideration in our own sizing decisions.  

 

@Maverick47, yes, there are many interesting angles to position size and investing.

 

My guess is most investors (small and institutional) are a mirror image of Mr. Market (in terms of what they do). There are lots of things an individual investor can do to get an edge. Two obvious things are time frame and position sizing.

 

What probably surprised me the most with the 6 capital allocation 'decisions' that I reviewed was how skewed the relationship of risk to return was. Of course, a finance textbook would say low risk = low return. And high risk = high return. But most of Fairfax's big decisions were low risk = high return. They were able to do this because in each instance they had an edge that they were able to exploit.

 

I am also REALLY surprised how limited the business models of most P/C insurance companies are (the investment management part). And how they don't have a choice (their ownership structure is the underlying reason why they do things the way they do). What that means is the big advantage Fairfax has today when it comes to capital allocation is a sustainable competitive advantage. It is an important part of Fairfax's moat. As Fairfax continues to execute well this strength will get more understood / appreciated in the coming years (like it has been in recent years). But just like with Berkshire Hathaway (in general) it probably will never get fully reflected in the stock price.    

Edited September 22, 2025 by Viking

[73 Reds]

2 hours ago, Viking said:

Part 4: Fairfax - Six examples of capital allocation decisions

 

Ok. Let’s pivot from theory to the real world. Let’s look at an actual company.

 

Fairfax Financial

 

How good is the management team at Fairfax at sizing their capital allocation decisions?

 

To help us answer this question we will look at six of Fairfax’s capital allocation decisions from the past 5 years:

1. P/C insurance - Aggressively grow P/C insurance business in hard market.
2. Fixed Income - Profit from greatest bond bull market in history / Avoid carnage of greatest bond bear market in history.
3. Share buybacks - Aggressively buy back shares when they are trading at their cheapest valuation in history.
4. Fairfax total return swaps - Get creative to exploit a wonderful opportunity.
5. Eurobank - Exercising patience and letting a large legacy holding run.
6. Asset sales - Capitalizing on volatility / Exploiting Mr. Market.

—————

 

1.) P/C insurance - Aggressively grow P/C insurance business in hard market.

 

A hard market is the best of times for a P/C insurance company. Prices are high. And terms and conditions are favourable. Because of this one-two punch, business written in a hard market tends to be very profitable.

 

But hard markets are created by fear. Well run P/C insurance companies are able to exploit this fear and significantly grow their business in a hard market.

 

Fairfax’s top priority from a capital allocation perspective over the past 5 years has been to capitalize on the hard market in P/C insurance.

 

Net premiums written at Fairfax have increased from $13.3 billion in 2019 to $25.3 billion in 2024, an increase of $12 billion or 91%. The 5-year CAGR has been 13.7%.

 

Fairfax has been able to almost double the size of its P/C insurance business over the past 5 years (from a total $ perspective). That is a significant amount of organic (and highly profitable) growth when market conditions were at their best. Fairfax, and the P/C insurance team, has sized this capital allocation decision exceptionally well.

 

 

—————

 

2.) Fixed Income - Profit from greatest bond bull market in history / Avoid carnage of greatest bond bear market in history.

 

In 2021, the 40-year historic bubble in bonds reached its blow-off top. Bond prices reached all-time highs and conversely bond yields reached all-time lows. Mr. Market was feeling positively euphoric when it came to fixed income investments - especially those that were long dated. 10-year US treasuries were trading at a yield of less than 1% for much of 2020 and 2021.

 

Long duration bonds, with crazy low yields in 2020 and 2021, provided no margin of safety. Especially later in 2021, when it was clear that the economy was expanding and inflation was quickly becoming a big problem.

 

What did Fairfax do in late 2021?

 

1.) They sold their large portfolio of corporate bonds that were yielding about 1%, locking in large, realized gains:

 

“During 2021, we sold $5.2 billion in corporate bonds, mainly acquired in March/April of 2020, at a yield of approximately 1%, for a gain of $253 million.” Fairfax 2021AR

 

2.) They shortened the average duration of their fixed income portfolio ($37 billion in size at the time) to 1.2 years. And shifted the composition of the portfolio to higher quality holdings, mostly treasuries:

 

“At the end of 2021, our fixed income portfolio, inclusive of cash and short-term treasuries, which effectively comprised 72% of our investment portfolio, had a very short duration of approximately 1.2 years and an average rating of AA-.” Fairfax 2021AR

 

The team at Fairfax made these moves just months before the Fed (and other global central banks) unleashed hell on fixed income markets by spiking short interest rates. With hindsight, Fairfax's timing was close to perfect.

 

Having a very short duration portfolio at the end of 2021 had two key benefits:

• It protected Fairfax’s balance sheet from interest rate risk - a rapid increase in interest rates would cause the value of bonds to plummet. This would then cause book value to fall. Long duration bonds were especially vulnerable.
• It provided valuable optionality - this would allow Fairfax to quickly take advantage of rising interest rates and dislocations in credit markets.

What happened?

 

When interest rates spiked in 2022 and 2023, Fairfax avoided taking billions in unrealized losses on their bond portfolio. And the earn through from higher rates was immediate - spiking interest income. With their strong financial position, Fairfax was able to fully and aggressively exploit the hard market in P/C insurance. The ratings agencies also upgraded Fairfax’s credit ratings.

 

What about P/C insurance peers?

 

When the bond bubble was raging, they were busy dancing to the music (Chuck Prince would have been proud of them). They kept blindly matching the average duration of fixed income portfolio with the average duration of their insurance liabilities. When interest rates spiked in 2022 and 2023, many P/C insurance companies  got their heads handed to them - book value fell at many companies from 15 to 30%.

 

Yes, it was not a solvency issue for these companies (although it could have been if losses from insurance had spiked at the same time). But the significant hit to their balance sheets was real. The earn through from higher rates was slow. And it hampered their ability to fully capitalize on the hard market in P/C insurance.

 

Summary

 

Fairfax was able to profit from the biggest bond bubble in history. And deftly largely side-step the biggest bond bear market in history. The financial benefits to Fairfax of these actions can be measured in the billions (the money made and then the losses avoided). Fairfax, and the fixed income team, sized this capital allocation decision exceptionally well (first selling $5.2 billion in corporate bonds and then shifting a $37 billion bond portfolio to 1.2 years average duration).

 

PS: One other P/C insurance company had a very low average duration with their fixed income portfolio in late 2021. Who was it? Berkshire Hathaway. Why? At that time, holding duration was a very low return and very high risk strategy. Therefore, it made no sense. Of course Buffett understood this - and he acted accordingly.

 

—————

 

3.) Share buybacks - Aggressively buy back shares when they are trading at their cheapest valuation in history.

 

Share buybacks are one of the capital allocation options available to management. They can be very beneficial for shareholders if they are done in a responsible manner (purchased at attractive prices) and sustained over many years.

 

Share buybacks are such a good decision because of the certainty factor – of all the capital allocation options available to management, share buybacks carry the highest degree of certainty.

 

“When companies with outstanding businesses and comfortable financial positions find their shares selling far below intrinsic value in the marketplace, no alternative action can benefit shareholders as surely as repurchases.” Warren Buffett – Berkshire Hathaway 1984AR 

 

Why are share buybacks so good?

 

Warren Buffett highlights two benefits for shareholders:

1. Higher per share intrinsic value – ‘Basic arithmetic’, according to Buffett.
2. Higher multiple - Communicates to existing and prospective shareholders that management is rational and running the business in a manner that is friendly to/aligned with shareholders.

It is counterintuitive, but for long term shareholders a low share price can be a big benefit - if the company is buying back shares and in a significant quantity. Especially if it persists for years.

 

What did Fairfax do?

 

Effective shares outstanding have been reduced from 26.8 million at December 31, 2019, to 21.7 million at December 31, 2024. This has been a decrease of 19.2% over the past 5 years.

 

Fairfax spent a total of $3.4 billion - this was a significant amount of capital. Fairfax paid an average price of $663/share. At June 30, 2025, Fairfax’s book value was $1,058/share. Fairfax’s intrinsic value is much higher than its book value. Over the past 5 years (2020 to 2024), Fairfax was able to buy back a significant number of shares (19.2%) at an average price far below their intrinsic value. The value creation over the past 5 years has been enormous (in the $ billions). The management team at Fairfax has sized this capital allocation decision exceptionally well.

 

 

To reinforce the sigificant benefit of Fairfax’s share buybacks, let’s go back to our first point.

 

Total amounts (like net premiums written) matter to shareholders. However, what matters much more are the per share amounts (net premiums written per share).

 

Net premiums written per share have increased from $495 per share in 2019 to $1,166 in 2024, an increase of $671/share or 136%. Per share, the 5-year CAGR has been 18.7%. This is much better than the 5-year CAGR for total net premiums written of 13.7%.

 

 

—————-

 

4.) Fairfax total return swaps - Get creative to exploit a wonderful opportunity.

 

In late 2020/early 2021, Fairfax purchased total return swaps giving it exposure to 1.96 million Fairfax shares at an average price of $373/share.

 

In short, this was an investment for Fairfax. In itself.

 

At the end of 2020, Fairfax had 26.2 million effective shares outstanding - so this position gave it exposure to 7.5% of shares outstanding. This was a significant investment (in terms of exposure).

 

How has the investment performed?

 

Since inception (over the past 4.7 years), the investment has delivered to Fairfax a total return of about $2.6 billion (before carrying costs). The FFH-TRS has become one of Fairfax’s best-ever investments.

 

Fairfax has begun to unwind the position. In late 2024, the position was reduced from 1.96 million to 1.76 million shares. (Of interest, Fairfax bought back the 204,000 shares from the counterparty and retired them.)

 

This investment is a great example of how creative Fairfax can be when it comes to capital allocation. At $2.6 billion, the financial benefit from investment this has been significant. The management team at Fairfax has sized this capital allocation decision exceptionally well.

 

 

—————

 

5.) Eurobank - Exercising patience and letting a large legacy holding run.

 

Over the past 5.7 years, Fairfax’s investment in Eurobank has increased in value by $3.6 billion, a CAGR of 26.4%. Eurobank has quietly grown into Fairfax’s largest equity investment. Has Eurobank become Fairfax’s best-ever equity investment?

 

What happened?

• Exceptional management - Over the past 7 years, the management team at Eurobank has been putting on a clinic. Their most recent great decision was the purchase of Hellenic Bank (at a price of 4 x earnings). 
• Strong economic performance: The depression in Greece ended. For two elections in a row, Greece has elected a pro-business government to a majority. Animal spirits have been unleashed. And Greece has had one of Europe’s best performing economies.
• Increase in interest rates: Central banks around the world ended their disastrous zero interest rate policies. Higher interest rates have spiked earnings for banks. 
• Patient controlling shareholder (Fairfax): Eurobank was given time to work through their issues. This also allowed them to think strategically and manage the business for the long-term.

This investment is a great example of the benefits of doing nothing (in terms of position size). Fairfax has exercised great patience with this investment. This patience has allowed the position to mushroom in size from $1.3 billion at December 31, 2019, to $4.5 billion at September 17, 2025. The management team at Fairfax has sized this capital allocation decision exceptionally well.

 

 

Excess of fair value over carrying value

 

At September 17, 2025, the market value (MV) of Fairfax’s position in Eurobank was $4.5 billion. At June 30, 2025, the carrying value (CV) of Fairfax’s position in Eurobank was $2.5 billion. The excess of MV over CV is about $2 billion or $90 per Fairfax share (pre-tax). This is economic value that has been created by Fairfax in recent years that has not been captured/reflected in its accounting results (EPS, BV and ROE).

 

—————

 

6.) Asset sales - Capitalizing on volatility / Exploiting Mr. Market

 

Why sell an asset?

 

There are a number of good reasons to sell an asset. Perhaps another company - who is willing to pay up - values an asset at a much higher value than you do. There also can be important strategic reasons to sell an asset.

 

Asset sales have been a very important part of Fairfax’s capital allocation framework over its entire existence, realizing significant value for Fairfax and its shareholders. Fairfax is unique among P/C insurance companies in how active it has been in using this important tool in the capital allocation toolbox.

 

Below we will review three asset sales that Fairfax has executed in recent years:

 

Pet insurance (2022) - Capitalizing on the mania in cats and dogs

 

Pets have been a rapidly growing business segment in North America for the past 30 years. Covid took this growth to a higher level. Especially the services part of the business (veterinary services, pet insurance, supplies etc). On the service side, the business model was shifting to a ‘one stop shop’ model for pet owners – get all your pet needs taken care by one provider. The big players in the industry (like JAB Holding) were in a race to consolidate (to get scale) and the price for good assets went through the roof – reaching mania/bubble proportions.

 

In June 2022, Fairfax announced that it had sold its pet insurance business (which resided in Crum & Forster) to JAB Holding for $1.4 billion. With the sale, Fairfax realized a gain of $1.2 billion pre-tax and $934 million after-tax.

 

For a little background, Fairfax purchased Hartville Group for $34 million in 2013 and Pet Health for $89 million in 2014 and then sold the combined entity in 2022 for $1.4 billion. That is nuts. Fairfax has a long history of buying small insurance businesses and patiently incubating/growing them over a decade or more and then selling them for very large gains: First Capital, ICICI Lombard, Riverstone UK and now C&F pet insurance. Very impressive.

 

Resolute Forest Products (2022) - Exiting a big mistake and capitalizing on the bubble in lumber

 

In July 2022, Fairfax sold Resolute Forest Products (RFP) to Paper Excellence Group (a global diversified manufacturer of pulp and specialty, printing, writing and packaging papers) for total consideration of $665.6 million ($20.50/share).

 

Fairfax got a premium price for the asset - Fairfax sold it for $20.50/share at the peak of the bull market in lumber. For perspective, back in March 2020, RFP shares traded as low as $1.20/share. Fairfax owned 30.5 million shares, so RFP’s market cap in March of 2020 was a total of $37 million. Two short years later Fairfax sold it for total proceeds of $665.6 million. Wow! Pre-pandemic, RFP’s shares traded at an average of about $6/share. In the historic lumber bull market of 2021, RFP’s shares traded at an average of about $12/share. Bottom line, at $20.50, Fairfax got an outstanding price for this company.

 

With the sale, Fairfax also exited a big mistake - Fairfax got one of their worst ever equity purchases off their books. RFP also owned some pretty crappy businesses: newsprint, paper and tissue. And the ‘good’ business, lumber, was getting hit by higher mortgage rates. Bottom line, Fairfax sold what was overall (still) a very challenged business. 

 

Like with pet insurance, this is a great example of the significant benefits that can come from active management - sell an asset at a bubble high price and flip the proceeds into other assets selling at bear market low prices.

 

 

Stelco (2024) - Capitalizing on the consolidation wave happening in the North American steel market

 

Taking advantage of the consolidation happening in the North American steel industry, Stelco was sold to Cleveland-Cliffs in Q4, 2024, at a nosebleed-high price. The timing of the sale was perfect - in 2025, President Trump has imposed steep tariffs on Canadian steel, which severely hurts the business of a Canadian steel producer like Stelco.

 

What kind of a return did Fairfax generate on its 6-year investment in Stelco?

 

In November 2018, Fairfax invested $193 million in Stelco. Over the past 6 years, Fairfax earned a total return of $544 million on its investment in Stelco, or 282% = 6-year CAGR of 25%.

 

 

Summary of asset sales

 

With the three assets sales profiled above, we can clearly see the benefits of active management. In each example, Fairfax was able to exploit volatility / Mr. Market.

 

Fairfax was able to execute both the pet insurance and RFP sales in 2022 in the middle of a bear market (in both stocks and bonds). Fairfax was then able to reinvest the significant proceeds into other assets that were selling at steep discounts and support the growth of the P/C insurance subsidiaries in the hard market. The sale of Stelco was also timed perfectly.

 

In each the three examples, the management team at Fairfax got a premium valuation for the asset being sold. The management team at Fairfax sized each of these capital allocation decision exceptionally well.

 

—————

 

Part 5: Summary of capital allocation and position size

 

What are the key take aways/learnings from our 6 examples?

 

1.) Large size - Each example involved a significant amount of capital. Fairfax bet big.

 

2.) High return - Each example has delivered a minimum of $1 billion in value creation. Most delivered $2 billion. Some have delivered $3 billion. Each capital allocation decision has delivered an outstanding result/return.

 

3.) High frequency - Fairfax has been right a lot.

 

Context matters. At the end of 2019, common shareholders’ equity at Fairfax was $13 billion. One exceptional capital allocation decision moves the needle for the company - is very impactful. But being right 6 different times? When you stack them up - one on top of the other - the impact on Fairfax and its business results has been magic.

 

But there is much more to this story.

 

4.) Breadth - All parts of the organization are very good at sizing their capital allocation decisions.

• Head office
• Across P/C insurance and investment management businesses.
• Within investment management - across fixed income and equities.

5.) Complementary nature - Fairfax’s structure and business model allows the benefits from one decision to be leveraged with another.

• Example: Sell assets at a premium valuation and use the proceeds to grow P/C insurance in the hard market and buy back stock when it is trading at a very low valuation.

6.) Low risk - Each of the 6 decisions were very low risk / high return decisions for Fairfax. That demonstrated exceptional risk management. (Risk is defined as permanent loss of capital and not short term price volatility.)

• Fairfax is a P/C insurance company. Aggressively growing its P/C insurance business in a generational hard market was a very low risk decision.
• Taking the average duration of the bond portfolio to 1.2 years in late 2021 was exceptional risk management. Conversely, buying/holding long duration bonds in late 2021 was a very high risk thing to do (and is what most other P/C insurance companies were doing).
• When done well (like Fairfax has), share buybacks are an extremely low risk capital allocation activity - the company has a big informational advantage over Mr. Market (in terms of the business fundamentals, prospects and valuation).
• Fairfax total return swaps - Like with buybacks, Fairfax had a big informational advantage over Mr. Market when they entered into this position at a crazy low price of $373/share.
• Eurobank - Greece electing a pro-business government to a majority, an improving economy and rising interest rates de-risked this investment greatly.
• Selling assets at a nosebleed/bubble high prices is a very low risk capital allocation decision.

7.) Simple - Each of the 6 decisions that Fairfax made was a simple one. They were 1-foot hurdles for the company. Capital allocation is hard. Keeping it as simple as possible is important.

 

8.) Fairfax has been doing much more on the capital allocation / position sizing front than what has been covered in our 6 examples. We could have included another 10 or 15 examples in our analysis. And while they were not as large/impactful as the 6 we profiled they all have been impactful to Fairfax and its business results.

 

What did we learn?

 

In the words of the prophet Mae West: “Too much of a good thing can be wonderful." Warren Buffett - Berkshire Hathaway 1993AR

 

Fairfax is very skilled at position sizing. Across the entire organization. And it looks like they are getting better. As a result, I think we can conclude that they are very good/skilled at capital allocation.

• They have the knowledge - They know what to do.
• They have the skill - They know how to do it.
• They have the desire - It is part of the company’s culture. They want and are rewarded for doing it.

In short, how to do capital allocation well has become a habit at Fairfax.

 

How good are they at capital allocation?

 

Based on what we have seen over the past 5 years, I would give Fairfax a rating of 9 out of 10.

 

Not a 10?

 

No.

 

Who would get a 10?

 

The pre-2000 version of Warren Buffett/Berkshire Hathaway.

 

——————

 

Summary - Fairfax and properly sizing a capital allocation decision:

 

“Sizing is 70% to 80% of the equation. Part of the equation is seeing the investment, part of the investment is seeing myself in a good trading rhythm. It’s not whether you’re right or wrong, it’s how much you make when you’re right and how much you lose when you’re wrong…” Stanley Druckenmiller

 

Over the 5-year period from 2019 to 2024, Fairfax has delivered:

• BVPS CAGR = 16.9%
• Share price CAGR = 25.2%

This performance has been significantly better than other P/C insurance peers.

 

This performance has happened because Fairfax is very good at capital allocation. One of the reasons is Fairfax is very skilled at sizing its decisions.

 

Fairfax is like a star athlete that is just entering their prime.

 

Is that how the stock is valued?

 

No. the stock is valued at the low end of P/C insurance peers. That is a great set-up for a long term investor.

 

Growing earnings + expanding multiple + lower share count = usually results in good to very good returns over time

 

——————

 

Why do most P/C insurance companies fail at position sizing?

 

1.) Lack of skill.

 

2.) Structure.

• Timeframe - Wall Street works very short term. Quarterly. This makes it impossible to size positions properly.
• Ownership structure is also an impediment. Make what looks like a short term dumb decision and you could be out of a job. This is too risky for most management teams of publicly traded companies. Better to fail traditionally than to succeed unconventionally.

Of the two, structure is the more important. It doesn’t allow it (or reward it). In short, the structure ensures the skill will never be developed.

 

The 2 exceptions are Berkshire Hathaway and Fairfax. Both have a controlling shareholder. So structure is not an impediment - it is an enabler. The focus is on per share value creation for shareholders over the long term. Position size is recognized as an important and critical piece in the capital allocation puzzle - a valued skill that needs to be appreciated, developed and used properly.

@Viking great posts as always.  On minor quibble:  I'd give Buffett a 9.5 out of 10 pre 2000.  (He refused to do any share buybacks).

[Christopher Ferguson]

Just looking into the name, but why was bvps growth so low from early 2010s to 2019ish?

[SafetyinNumbers]

7 minutes ago, Christopher Ferguson said:

Just looking into the name, but why was bvps growth so low from early 2010s to 2019ish?

TLDR: Equity hedges and low interest rates.

[Christopher Ferguson]

8 minutes ago, SafetyinNumbers said:

TLDR: Equity hedges and low interest rates.

Appreciate it! 

[Viking]

6 hours ago, 73 Reds said:

@Viking great posts as always.  On minor quibble:  I'd give Buffett a 9.5 out of 10 pre 2000.  (He refused to do any share buybacks).

@73 Reds, one of Berkshire Hathaway’s big problems in recent decades is size. If Buffett had been more aggressive/opportunistic with buybacks over the years it likely would have helped in this regard. 
 

Size wise, Fairfax is in a very good spot - big enough but not too big. One of the reasons I like their aggressive buybacks is they will keep the company in this sweet spot longer. 

Edited September 23, 2025 by Viking

[73 Reds]

8 hours ago, Viking said:

@73 Reds, one of Berkshire Hathaway’s big problems in recent decades is size. If Buffett had been more aggressive/opportunistic with buybacks over the years it likely would have helped in this regard. 
 

Size wise, Fairfax is in a very good spot - big enough but not too big. One of the reasons I like their aggressive buybacks is they will keep the company in this sweet spot longer. 

Yeah, Buffett has always been obsessed with the insurance model and when it comes to insurance and balance sheets, the bigger the better, particularly when you hold yourself out as a company that will consider insuring any risk at the right price.  

[dartmonkey]

14 hours ago, Christopher Ferguson said:

Just looking into the name, but why was bvps growth so low from early 2010s to 2019ish?

You are only allowed to look at 2019 to 2024. The period you referred to (although you should not have) is like Voldemort. Please never do this again.

 

No seriously, Fairfax has a very good long-term return, even when you include the Voldemort period. Like myself, Fairfax probably had to get the shorting bug out of its system, and hopefully there will be no back-sliding for either of us.

[Hamburg Investor]

23 minutes ago, dartmonkey said:

You are only allowed to look at 2019 to 2024. The period you referred to (although you should not have) is like Voldemort. Please never do this again.

 

No seriously, Fairfax has a very good long-term return, even when you include the Voldemort period. Like myself, Fairfax probably had to get the shorting bug out of its system, and hopefully there will be no back-sliding for either of us.

"Voldemort period"  

Makes my day!

[petec]

21 hours ago, Hamburg Investor said:

"Voldemort period"  

Makes my day!

 

+1

 

The decade that must not be named.

[petec]

On 9/16/2025 at 12:20 PM, Viking said:

 

@petec, 4 years ago (Sept of 2021) Fairfax was still (largely) a hated company. The stock was trading under US$450/share. It was trading below where it was trading pre-covid. Its price reflected investors views of the company at the time:

• Below average P/C insurance business.
• Below average at investment management.
• Below average management team.

Looking back, of course this view was wrong.

 

What changed? Everything.

 

Is this a company with largely the same assets and management team using the same philosophy? Yes. And no.

 

Anyways, I do really appreciate our debates.   

 

 

 

Likewise, Viking, and for the record I think your work is superb.

 

However I don't think your post here is quite accurate.

 

I don't think anyone thought the P&C business was bad - in fact, there was clear evidence that Fairfax were very good at improving insurance assets over time. The issue was that insurance was in a loooooong soft market.

 

In addition, the fixed income float was earning nothing and the market didn't value Fairfax's refusal to reach for yield.

 

In addition, the portfolio was viewed as low-quality crap: Eurobank wasn't earning anything at the NIM level let alone after bad debts, Resolute and Blackberry were clearly mistakes, management kept pouring money into stuff the market perceived to be low quality, like Stelco and Seaspan and Dexterra. And the hedges - dear God, the hedges...

 

What changed? The vast majority of what changed was that the earnings power of the assets improved for cyclical reasons beyond management's control.

• insurance went into a hard market, allowing for higher CR's and much more float.
• interest rates rose, transforming float earnings and Eurobank's NIM.
• brief post-covid commodity price spikes allowed Resolute and Stelco to delever, buy back shares, and sell themselves.

Did management change their approach? Somewhat. The hedges are the best example, and I think they realised you can't just sit in value names and wait - you have to actively work to realise that value. But are they really doing anything different? Not much. Have they changed their underwriting philosophy? Not a jot. Are they still value investors? Absolutely. Would they buy 2011 Eurobank or 2019 Stelco again? Absolutely.

 

I think this matters becase I think it is important not to capitalise cyclical earnings too far into the future. That doesn't mean I think earnings will collapse back to 2020 levels, because I don't think rates will go back to 0. 

 

[TwoCitiesCapital]

45 minutes ago, petec said:

 

 

Likewise, Viking, and for the record I think your work is superb.

 

However I don't think your post here is quite accurate.

 

I don't think anyone thought the P&C business was bad - in fact, there was clear evidence that Fairfax were very good at improving insurance assets over time. The issue was that insurance was in a loooooong soft market.

 

In addition, the fixed income float was earning nothing and the market didn't value Fairfax's refusal to reach for yield.

 

In addition, the portfolio was viewed as low-quality crap: Eurobank wasn't earning anything at the NIM level let alone after bad debts, Resolute and Blackberry were clearly mistakes, management kept pouring money into stuff the market perceived to be low quality, like Stelco and Seaspan and Dexterra. And the hedges - dear God, the hedges...

 

What changed? The vast majority of what changed was that the earnings power of the assets improved for cyclical reasons beyond management's control.

• insurance went into a hard market, allowing for higher CR's and much more float.
• interest rates rose, transforming float earnings and Eurobank's NIM.
• brief post-covid commodity price spikes allowed Resolute and Stelco to delever, buy back shares, and sell themselves.

Did management change their approach? Somewhat. The hedges are the best example, and I think they realised you can't just sit in value names and wait - you have to actively work to realise that value. But are they really doing anything different? Not much. Have they changed their underwriting philosophy? Not a jot. Are they still value investors? Absolutely. Would they buy 2011 Eurobank or 2019 Stelco again? Absolutely.

 

I think this matters becase I think it is important not to capitalise cyclical earnings too far into the future. That doesn't mean I think earnings will collapse back to 2020 levels, because I don't think rates will go back to 0. 

 

 

+1 these are my thoughts as well. While they may not short again, they're still willing to take large macro bets as demonstrated by the bond portfolio from 2016 to 2023. 

 

I like it. I own it. I sold in 2018/2019 on prospects of little foreseeable improvements to earnings and repurchased at nearly half those prices in 2021 when it was clear EVERYTHING would be improving and they were unearthing hidden gems left and right. 

 

But it's the same company with the same approach and I envision there will be more lean periods in the future. 

[Munger_Disciple]

3 hours ago, petec said:

I think this matters becase I think it is important not to capitalise cyclical earnings too far into the future. That doesn't mean I think earnings will collapse back to 2020 levels, because I don't think rates will go back to 0. 

 

 

 

This is the most important thing anyone has said on this thread. It's also the reason I don't like the argument: "Since the current ROE is so high, it should trade at a (big) X times book."

 

Edited September 24, 2025 by Munger_Disciple

[Hsmpanl]

7 minutes ago, Munger_Disciple said:

 

 

This is the most important thing anyone has said on this thread. It's also the reason I don't like the argument: "Since the current ROE is so high, it should trade at a (big) X times book."

 

For sure, it depends on a mid-cycle or long term average ROE, but the game is trying to figure out if that is 5%, 10%, or 15%. Either way I don't think the current valuation is too demanding, and I think fairfax management has proven adept at generating returns in varying market environments. As long as you can deal with periodic 5-10 year "periods that shall not be named" the ultimate long term compounded return is very attractive.

[73 Reds]

3 minutes ago, Hsmpanl said:

For sure, it depends on a mid-cycle or long term average ROE, but the game is trying to figure out if that is 5%, 10%, or 15%. Either way I don't think the current valuation is too demanding, and I think fairfax management has proven adept at generating returns in varying market environments. As long as you can deal with periodic 5-10 year "periods that shall not be named" the ultimate long term compounded return is very attractive.

+1  If management continues doing what they are doing and the stock price stagnates or drops all the better as an opportunity to buy more.  The issue is when the stock price drops BECAUSE OF what management is doing.  If your holding period is long enough and if you account for both hard and soft markets and periods of low and higher interest rates, you can project a desired ROE.  Unless management starts taking unnecessary underwriting risks or reverts back to making some of the errors made in the 2010s, this is not a difficult company to handicap.

[Viking]

3 hours ago, petec said:

 

 

Likewise, Viking, and for the record I think your work is superb.

 

However I don't think your post here is quite accurate.

 

I don't think anyone thought the P&C business was bad - in fact, there was clear evidence that Fairfax were very good at improving insurance assets over time. The issue was that insurance was in a loooooong soft market.

 

In addition, the fixed income float was earning nothing and the market didn't value Fairfax's refusal to reach for yield.

 

In addition, the portfolio was viewed as low-quality crap: Eurobank wasn't earning anything at the NIM level let alone after bad debts, Resolute and Blackberry were clearly mistakes, management kept pouring money into stuff the market perceived to be low quality, like Stelco and Seaspan and Dexterra. And the hedges - dear God, the hedges...

 

What changed? The vast majority of what changed was that the earnings power of the assets improved for cyclical reasons beyond management's control.

• insurance went into a hard market, allowing for higher CR's and much more float.
• interest rates rose, transforming float earnings and Eurobank's NIM.
• brief post-covid commodity price spikes allowed Resolute and Stelco to delever, buy back shares, and sell themselves.

Did management change their approach? Somewhat. The hedges are the best example, and I think they realised you can't just sit in value names and wait - you have to actively work to realise that value. But are they really doing anything different? Not much. Have they changed their underwriting philosophy? Not a jot. Are they still value investors? Absolutely. Would they buy 2011 Eurobank or 2019 Stelco again? Absolutely.

 

I think this matters becase I think it is important not to capitalise cyclical earnings too far into the future. That doesn't mean I think earnings will collapse back to 2020 levels, because I don't think rates will go back to 0. 

 

 

@petec, I love it when others disagree with me. I have moved more in your general direction. But I continue to think that Fairfax is a very different company today than it was in 2018. All three parts of the business/organization are making better decisions and as a result the performance of the company is much better:

• Senior management
• P/C insurance
• Investment management

On the investment management front, here is a post that I wrote a while back reviewing many of their large investments from 2014-2017. Boat Rocker could be added to this list. (I didn't discuss large legacy investments like Blackberry and Resolute Forest Products).

 

This list is how Fairfax was thinking and executing on the capital allocation front from 2014 to 2017. It is a shit show. Many of these companies had terrible management. Many had terrible balance sheets (they needed bailouts from Fairfax to keep the lights on). Other large shitty investments like Blackberry and Resolute Forest Products I did not include on my list because they were legacy investments.

 

Now look at Fairfax's collection of equity holdings today. Most of these companies have good/great management. And they have strong balance sheets (the exceptions in recent years were Farmers Edge and Boat Rocker... investments from the 2014 to 2017 vintage). Fairfax has spent the past 7 years fixing all of the problem children. And the new investments made since 2018 have been good to outstanding. 

 

Their hit rate from 2014 to 2017 was terrible (Fairfax India being a notable exception). And Eurobank has transformed into a wonderful investment. Their hit rate on investments made from 2018 to today has been stellar.

 

My view is something changed at around late 2017/early 2018 at Fairfax. They recognized they were not staffed to be a turn around shop. They changed their investment framework. They put a premium on:

• Management quality
• Fiscal responsibility (Fairfax would no longer be a piggy bank for bad businesses).

It has taken Fairfax 7 years of hard work to clean up all of the messes (the Boat Rocker clean-up just happened).

 

My view is there has also been changes in the P/C insurance business. Not as much as what has happened in investment management. A big part of run-off was sold (the good part). Fairfax has reduced its exposure to catastrophes. Reading the book Once and Future C&F I was struck by how long it takes to change an insurance business (more than 5 years). My thesis is Fairfax's insurance business is better today than it was in 2017... I just don't know how to explain it (yet). (And I don't know how much better...)

 

This is really important because - if I am right - we have not seen this version of Fairfax before. 

 

===========

 

A Review of 2014 to 2017: Old Fairfax – too many ‘chronically-leaking boats’

 

April 14, 2023

 

 

“My conclusion from my own experiences and from much observation of other businesses is that a good managerial record (measured by economic returns) is far more a function of what business boat you get into than it is of how effectively you row (though intelligence and effort help considerably, of course, in any business, good or bad). Some years ago I wrote: “When a management with a reputation for brilliance tackles a business with a reputation for poor fundamental economics, it is the reputation of the business that remains intact.” Nothing has since changed my point of view on that matter. Should you find yourself in a chronically-leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks.” Warren Buffett – Berkshire Hathaway 1985AR

 

 

Fairfax’s equity portfolio looks very well positioned today. Most of the equity holdings purchased since 2018 have been performing well. And, after years of hard work, the poor performing equity holdings (many purchased from 2014-2017) have largely been fixed and are now performing well. In fact, the equity portfolio looks better positioned today than at any other time in Fairfax’s recent history. We are increasingly seeing the benefits in improved reported results. A good recent example is ‘share of profit of associates,’ which spiked to more than $1 billion in 2022; the previous high was $402 million in 2021.

 

What happened?

 

Three things:

 

1.) Fairfax learned a few important lessons from the poor purchases they made from 2014-2017. It looks me like Fairfax has tweaked the methodologies used when allocating capital.

 

·       They are putting a premium on management. Hamblin Watsa has decided it is not a turn-around shop - looking to actively run poorly lead/challenged businesses. 

·       They are also looking to invest in better balance sheets. Fairfax is no longer a piggy bank for poorly run companies in search of cash. Others on this board have pointed this out.

 

2.) The Fed and the ending of easy money (zero interest rates/QE) is likely a driver of the stronger performance the past two years of Fairfax’s equity holdings. Value investing is back.

 

3.) The timing of the cycle is finally working in Fairfax’s favour and is driving stronger performance of the equity holdings. Value, resource, and commodity stocks appear to be in a secular bull market.

 

At the end of the day, all the above is likely partly responsible for the improvement we have seen in Fairfax's equity holdings in recent years.

 

—————

It can be instructive to look into the past so we can learn. This helps us understand what has been baked into past results. In turn, this can help us understand what might happen in the future.

 

What happened with the purchases from 2014-2017?

 

A total of 10 investments are reviewed below. Fairfax invested a total of about $3.5 billion in these investments over the years. Over the past 8 years my math says Fairfax booked losses of about $1.5 billion on these holdings. That is almost $200 million, on average, each year. For example, in 2022, Fairfax wrote down its investment in Farmers Edge by $133 million. Stuff like that.

 

The bigger cost to shareholders has been the opportunity cost. Prem tells us that Fairfax expects its equity investments to deliver returns of 15% per year. Applying a more modest 10% target, the $3.5 billion in investments (made 2014-2017) should have doubled in value by now to $7 billion. The opportunity cost of the poor investments made from 2014-2017 is likely an additional $2 billion.

 

This is actually a good news post. The good news is:

 

1.     The equity purchases made from 2018 to April 2023, as a group, look very good and are performing well. 

2.     As I will review below, the problem investments from 2014-2017 look like they are not only fixed - they are also poised to deliver solid returns for Fairfax shareholders moving forward. An 8 year-long headwind has now become a tailwind. 

 

As a result, I expect Fairfax’s $16 billion equity portfolio to generate a higher total return (percent and absolute) in the coming years than it has delivered over the last decade. Given its current construction, it could well compound at 12% over the next couple of years = $1.9 billion/year:

• dividends = $120 million
• share of profit of associates = $900 million
• consolidated earnings = $240 million
• mark-to-market investment gains = $650 million (not including fixed income)

—————-

 

Below is a short review of 10 large investments made over the 4 years from 2014-2017.

 

1.) EXCO Resources (2015): Fairfax’s initial investment was $300 million in 2015. We have since learned that shale was a bubble and it eviscerated something like $5 billion in capital up until 2020. Fairfax reported cumulative realized losses of $296 million on EXCO in 2019 (as per the AR).

• Learning: the old economic model for shale was a sham.
• The good news: energy looks like it is in a structural bull market; the new economic model for shale looks good - focussed on shareholder return.

2.) APR (2016): Fairfax invested a total of $462 million in APR in 2016 and 2017. In 2018 they sold it to Atlas for $200 million (in Atlas stock). The first thing Atlas did was replace the CEO.

• Learning: Terrible business. Poorly managed.
• The good news: APR is now Atlas’ problem.

3.) Fairfax Africa (2017): launched with much fanfare in 2017, Fairfax invested a total $476 million. Two short years later Fairfax exited its management of the business and moved the assets to a fund managed by Helios. The value of the Helios fund today is about $100 million. I am not sure what the total financial loss was for Fairfax on this investment, but it was significant. The damage to Fairfax’s reputation was also significant.

• Learning: Hubris on steroids? Terrible idea. Worse execution.
• The good news: Fairfax is partnered with Helios and looks well positioned moving forward in Africa. This is now a small investment for Fairfax.

4.) Farmers Edge (2017): Fairfax invested $159 million in Farmers Edge in 2017. Farmers Edge completed its IPO in 2021 and in the 2021 AR Fairfax said their total investment in Farmers Edge to that point was $376 million. The CEO ‘stepped down’ in April of 2022. In the 2022 AR, Fairfax said Farmer’s Edge had a carrying value of $71 million, after taking a $133 million write down in 2022. The market value of Fairfax stake was $5 million at Dec 31, 2022. My guess is this investment, because it performed so terribly post-IPO, has caused Fairfax some damage to its reputation (given Fairfax was the majority shareholder).

• Learning: Yup, SPAC’s were a bubble.
• The good news: carrying value is $71 million. This is now a small investment for Fairfax.

5.) Eurobank (2014): Fairfax invested $444 million in Eurobank in 2014. This initial investment went to close to zero later that year when the ECB mandated a 1-for-100 reverse share split. What was the problem? Greece was in the midst of a depression. What did Fairfax do? It doubled down and invested another $389 million in Eurobank in 2015. In 2019, Eurobank did a capital raise/merger with Grivalia. Greece elected a pro-business government in 2018. Eurobank fixed its balance sheet.

• Learning: Because the strategy worked in Ireland doesn’t mean it would work in Greece.
• The good news: Greece’s economy is well positioned. Eurobank, always well managed, is executing well and earnings are spiking. Share of profit of associates was $263 million in 2022, up from $162 million in 2021. Prem estimated Eurobank could earn €0.20/share in 2023; if so, Fairfax’s share of profits for Eurobank could be +$300 million in 2023. This investment is turning into a home run for Fairfax - a Greek tragedy turns to a triumph!

6.) AGT (2017): Fairfax invested $148 million in AGT in 2017. In 2019, as AGT was experiencing financial difficulties, Fairfax took AGT private, spending another $227 million (I think).

• Learning: It takes much more than a dynamic Canadian founder to succeed.
• The good news: from 2022 Fairfax AR: “AGT, run by founder and CEO Murad Al-Katib, had a record year in 2022, with EBITDA of over Cdn$150 million. This is a dramatic improvement from the time of the take-private transaction almost four years ago when the business was generating slightly over Cdn$60 million in EBITDA… Fairfax has an approximate 60% stake in AGT.”

7.) Commercial Industrial Bank (CIB) Egypt (2014): Fairfax invested $330 million in CIB in 2014. Today the position is worth about $240 million. Great company. Solid management. What is the problem? Egypt’s economy has been a slow-moving train wreck for decades - with constant currency devaluations.

• Learning: Constant currency devaluations (like 50% in the last year) hurt equity values.
• The good news: the bank is well managed.

8.) Mosaic Capital (2017): Fairfax invested $116 million in Mosaic in 2017. In 2021, Mosaic was taken private (not by Fairfax) with Fairfax owning 20% of the new investment. This investment went sideways for many years (that opportunity cost thing).

• Learning: not every investment you make is going to work out.
• The good news: Fairfax found a partner where Mosaic will hopefully be a better fit. 

9.) Recipe/CARA (2014 & 2016): Fairfax made a couple of restaurant investments from 2014-2017: $77 million in the Keg in 2014 (merged with CARA in 2018) and $100 million in the CARA capital raise in $2016. Recipe/CARA was a poor investment for minority shareholders over its lifetime.

• Learning: the restaurant business in Canada is a tough business. Consolidating it proved to be even tougher.
• The good news: In the take private deal in 2022, Fairfax purchased Recipe at a Covid-low price. Recipe has a solid collection of assets that should be able to produce a solid amount of free cash flow for Fairfax moving forward.

10.) Astarta (2017): Fairfax invested $104 million in Astarta in 2017. Today that investment is worth around $45 million. I know very little about this investment. I wonder if it is not a similar situation to CIB, with opportunity cost being the big issue.

 

Honorable mention: Torstar was initiated as a position before 2014 so I did not include it. However, Fairfax added to its position in 2014, 2016 and 2017 (yes, small amounts). In 2020 it sold the business and booked a $52 million loss.

 

I see lots of self-inflicted wounds in the investments listed above – reading the list reminds me of the Monty Python skit “tis but a scratch".

 

 

 

[Viking]

 

 

This line of thinking sounds smart... but I think it is missing the point.

 

I have a simple question. Think back to 1980 and 1990's version of Berkshire Hathaway. Was the right way to think about BRK back then to 'not capitalize cyclical earnings too far into the future.'

 

And I don't think anyone on this board is saying 'since the current ROE is so high, it should trade at a (big) x times book.'

 

People have been calling for earnings at Fairfax to 'normalize' (at a much lower level) for each of the past 4 years. And they have been dead wrong. What are they missing? IMHO, they are missing the essence of what is really going on at Fairfax today.

 

What has me excited about Fairfax today are three things;

• The significant amount of free cash flow they are current generating.
• The significant number of opportunities they have to reinvest this cash flow at high rates of return (the platform they have built, the skills they have developed and how well they are executing).
• The power of compounding. 

My view continues to be that 'the story' at Fairfax keeps shifting in important ways - it continues to get better. I think we are just entering the 'compounding' phase of the story. As we learned with BRK back in the 1980's and 1990's, that is the most exciting phase for an investor. 

 

And the best part is the stock is cheap. At $1,725, it is trading at 1.45 x Sept 30 BV (my guess is $1,200). But this does not include excess of FV over CV = $100 after tax. Including this Fairfax is trading at 1.33 x Sept 30 adjusted BV ($1,300). Intrinsic value is higher than my adjust BV number. This puts Fairfax's valuation well below other P/C insurance peers. So you get the best performing / best positioned company at the lowest valuation. What not to like? 

Edited September 24, 2025 by Viking

[Munger_Disciple]

@Viking Since you love when people push back, I thought you loved it when I agreed with @petec ! Perhaps may be not. 

 

This line of thinking sounds smart... but I think it is missing the point.

 

I doubt it. Whether it is smart or not I don't know but I don't think one should extrapolate cyclically high earnings into the future. That's all I was saying and agreeing with @petec. 

 

Think back to 1980 and 1990's version of Berkshire Hathaway. 

BRK in 1980 was a bet on Buffett, not on its earnings in 1980. Anyhow let's keep the discussion to FFH.

 

At $1,725, it is trading at 1.45 x Sept 30 BV (my guess is $1,200).

 

I own FFH and plan to hold for several years. I think it's fairly valued at these prices. I think @petec made a good summary of some headwinds like lower interest rates. I probably don't think it's as cheap as you think. But that's fine. 

 

 

 

 

 

Edited September 24, 2025 by Munger_Disciple

[Viking]

5 minutes ago, Munger_Disciple said:

@Viking Since you love when people push back, I thought you loved it when I agreed with @petec ! Perhaps may be not. 

 

This line of thinking sounds smart... but I think it is missing the point.

 

I doubt it. Whether it is smart or not I don't know but I don't think one should extrapolate cyclically high earnings into the future. That's all I was saying and agreeing with @petec. 

 

Think back to 1980 and 1990's version of Berkshire Hathaway. 

BRK in 1980 was a bet on Buffett, not on its earnings in 1980. Anyhow let's keep the discussion to FFH.

 

At $1,725, it is trading at 1.45 x Sept 30 BV (my guess is $1,200).

 

I own FFH and plan to hold for several years. I think it's fairly valued at these prices. I think @petec made a good summary of some headwinds like lower interest rates. I probably don't think it's as cheap as you think. But that's fine. 

@Munger_Disciple, I do appreciate the push back. At the end of the day, we are all trying to better understand our investment in Fairfax. Having the opportunity to debate with others is a big help. 
 

i have a question, how do you define ‘cyclically high earnings’? 

[Munger_Disciple]

22 minutes ago, Viking said:

@Munger_Disciple, I do appreciate the push back. At the end of the day, we are all trying to better understand our investment in Fairfax. Having the opportunity to debate with others is a big help. 
 

i have a question, how do you define ‘cyclically high earnings’? 

 

I agree  with your sentiment @Viking. Yes we are all just trying to understand the company better at the end of the day.

At the risk of repeating what @petec already pointed out so well, FFH earnings are probably at a cyclical high at present mainly due to:

 

1. Interest Rates: Fed just reduced the ST rate this month and we are almost certain to have lower ST rates during the next 12-24 months, given the current "dot plot" and the fact that the next Fed Chairman & other future Trump appointees to the Fed are almost certain to be a lot more dovish. FFH generates high income currently from ST treasury bills and notes it holds and this income is almost certain to diminish going forward.  

 

2. U/W Cycle: It's likely that we are entering a softer insurance u/w cycle. If so, u/w income will be lower going forward.

 

3. Reinvestment Opportunities: This is a bet on Prem & HW and I am fine going with the flow on this. They will make some mistakes of course as they had in the past but I suspect overall record will be fine. They can also buyback stock if there are no other opportunities. 

FFH has just begun diversifying its earnings stream in recent years by acquiring wholly owned non-insurance businesses following the Berkshire model, and I like it because it will make the company not as reliant in the future on items 1, and 2. But it will take them awhile to get to critical mass in this area. 

 

 

 

Edited September 24, 2025 by Munger_Disciple

[TwoCitiesCapital]

18 minutes ago, Munger_Disciple said:

 

I agree  with your sentiment @Viking. Yes we are all just trying to understand the company better at the end of the day.

At the risk of repeating what @petec already pointed out so well, FFH earnings are probably at a cyclical high at present mainly due to:

 

1. Interest Rates: Fed just reduced the ST rate this month and we are almost certain to have lower ST rates during the next 12-24 months, given the current "dot plot" and the fact that the next Fed Chairman & other future Trump appointees to the Fed are almost certain to be a lot more dovish. FFH generates high income currently from ST treasury bills and notes it holds and this income is almost certain to diminish going forward.  

 

Yes, but with an average maturity of 3ish years, we shouldn't assume dramatic reductions in the next 12-18 months. Particularly with additions to float growing the portfolio even as rates move modestly lower. 

 

18 minutes ago, Munger_Disciple said:

 

2. U/W Cycle: It's likely that we are entering a softer insurance u/w cycle. If so, u/w income will be lower going forward.

 

I'm less certain about this. I don't understand what drives the insurance cycle TBH. I was skeptical when people were projecting a multi-year hard market when the world was awash in liquidity - but a few cats and the fastest rate hikes in 50-years blew capital holes in insurer balance sheets and forced prices to rise as policies competed for balance sheet capacity. 

 

There's nothing to say something similar can't happen again in the next 2-3 years if there is another recession, more stimulus, and exploding inflation expectations again with rates once again rising to new local highs.

 

 

18 minutes ago, Munger_Disciple said:

 

3. Reinvestment Opportunities: This is a bet on Prem & HW and I am fine going with the flow on this. They will make some mistakes of course as they had in the past but I suspect overall record will be fine. They can also buyback stock if there are no other opportunities. 

 

I tend to think any environment of low rates will also probably provide opportunities in equity and credit. But as we've seen, these opportunities can take years to play out. Not sure how to handicap that into an earnings number other than to say equities will be lumpy and we will NOT see equity returns as consistently as we have in the last 3-years going forward. Fixed income may be able to remain at a similar run rate today in $ terms as the pile grows and as Fairfax adds credit exposure when spreads are more attractive. 

 

 

18 minutes ago, Munger_Disciple said:

FFH has just begun diversifying its earnings stream in recent years by acquiring wholly owned non-insurance businesses following the Berkshire model, and I like it because it will make the company not as reliant in the future on items 1, and 2. But it will take them awhile to get to critical mass in this area. 

 

+1 Not sure how this plays out, but am looking forward to watching it. 

 

TL;DR

 

Fairfax is probably over earnings today, but I don't think it's by a large margin and is at a very reasonable multiple to those earnings that I don't expect much downside even if earnings contract. 

 

Any downside that does occur is an opportunity for further SharePoint reduction at reasonable prices. 

Edited September 24, 2025 by TwoCitiesCapital

[Munger_Disciple]

1 hour ago, TwoCitiesCapital said:

 

Yes, but with an average maturity of 3ish years, we shouldn't assume dramatic reductions in the next 12-18 months. Particularly with additions to float growing the portfolio even as rates move modestly lower. 

 

I agree there won't be a dramatic reduction in the next couple of quarters but eventually (in roughly 2-3 years) the higher yielding treasuries mature and will be replaced by lower yielding treasuries. 

 

if the insurance market softens and assuming their u/w really improved (which means they will write less business, perhaps significantly so), the float may not grow that much. 

Edited September 24, 2025 by Munger_Disciple

[Viking]

2 hours ago, Munger_Disciple said:

 

I agree  with your sentiment @Viking. Yes we are all just trying to understand the company better at the end of the day.

At the risk of repeating what @petec already pointed out so well, FFH earnings are probably at a cyclical high at present mainly due to:

 

1. Interest Rates: Fed just reduced the ST rate this month and we are almost certain to have lower ST rates during the next 12-24 months, given the current "dot plot" and the fact that the next Fed Chairman & other future Trump appointees to the Fed are almost certain to be a lot more dovish. FFH generates high income currently from ST treasury bills and notes it holds and this income is almost certain to diminish going forward.  

 

2. U/W Cycle: It's likely that we are entering a softer insurance u/w cycle. If so, u/w income will be lower going forward.

 

3. Reinvestment Opportunities: This is a bet on Prem & HW and I am fine going with the flow on this. They will make some mistakes of course as they had in the past but I suspect overall record will be fine. They can also buyback stock if there are no other opportunities. 

FFH has just begun diversifying its earnings stream in recent years by acquiring wholly owned non-insurance businesses following the Berkshire model, and I like it because it will make the company not as reliant in the future on items 1, and 2. But it will take them awhile to get to critical mass in this area. 

@Munger_Disciple, thanks for answering my question. 
 

1.) I am more optimistic on the underwriting front. Clearly, the hard market is slowing. But a slowing market is still a pretty good market. Having said that, there also is no one ‘insurance market’ - rather there are many insurance markets (by line of business and geography). Fairfax’s global, diversified footprint will allow them to find profitable niches to grow in. Also importantly, I think there is a good chance reserve releases could surprise to the upside in the coming years. If so, we could see Fairfax’s reported CR not only remain around 95 but actually go lower. 
 

2.) On interest rates, I am in the higher for longer camp. Trump will do everything he can to lower short term rates. But there is a good chance his actions may spook the bond market and send longer term rates higher, giving Fairfax an opportunity to extend their average duration.
 

Regardless, short term rates are coming down because of economic weakness… when the economy picks up my guess is short term rates will move higher again. And if inflation picks up, short term rates could move much higher. 
 

In terms of interest income, two things matter: average interest rate and size of fixed income portfolio. The fixed income portfolio is growing in size by more than 5% per year. At the same time, Fairfax is very conservatively positioned (mostly government bonds). As we learned with the KW/PacWest and Blizzard investments, Fairfax has options to shift part of the portfolio to higher yielding investments. 
 

Bottom line, there will be puts and takes to interest income moving forward. I am not expecting a big move in either direction (down or up) from current levels. 

3.) The non-insurance consolidated bucket of equity holdings is poised to grow in size. Yes, I have been saying this for years. And it is the smallest income stream. But all big things start small.

 

4.) Reinvestment opportunities. There are so many things they can do here to drive incremental earnings/economic value.
 

My guess is they buy out their minority partners in Allied World later in 2025. That will be a significant investment ($1 billion?) at a low price in a great business. Perhaps they take out their minority partner in Odyssey in 2026 ($900 million?). These investments boost the share of net earnings that accrue to Fairfax shareholders. 

5.) Hidden value. I am also of the opinion that Fairfax has been building an enormous amount of hidden value since 2018 in many of their equity holdings. This is a big benefit of all the improvements they have driven into their equity portfolio (dramatically improving its overall quality). Quality equities are compounding machines - but it takes 5 or more years to really notice. We are there (in terms of lots of value already having been created).
 

Excess of FV over CV for non-insurance associate and consolidated holdings is a large and obvious bucket - and it has been growing nicely each year since 2020 and is blowing out in 2025 (due to Eurobank). But there is more examples of hidden value creation at Fairfax than just this bucket of holdings.

 

Fairfax will have a steady flow of large realized gains as it surfaces value from its equity holdings in the coming years. These will boost EPS, BVPS and ROE. When they happen, most investors will be surprised. 
 

Sigma is a good example of this in 2025. My guess is Praktiker will be a small but solid gain - we will find out when Fairfax reports Q3 results. There are many more of these coming in the future… and some really big ones (Eurobank). 

 

6.) Exploiting volatility is in Fairfax’s DNA. My guess is volatility is not dead. And Fairfax will get many opportunities to exploit Mr. Market in the coming years. And now they are all cashed up. Look what they did in 2020/2021/2022 when they were cash poor? 
 

Do I know exactly what they are going to do? No. Do I need to know? No. But when they happen these investments will be needle movers. They are not baked into analysts estimates/expectations of investors. So they are not built into the stock price. Its like getting a really valuable call option for free. 
 

Summary

 

For all the reasons listed above, I do not buy into the ‘cyclically high earnings’ argument. Again, it sounds right/kind of makes sense - and might apply to most P/C insurance companies. I just don’t think it applies to Fairfax today. 

Edited September 24, 2025 by Viking

[Viking]

3 hours ago, Viking said:

This line of thinking sounds smart... but I think it is missing the point.

I do want to applogize to @petec and @Munger_Disciple for my comment. I like to be edgy… but I think this one crossed the line  

[Thrifty3000]

On 9/11/2025 at 2:43 PM, Viking said:

I would be interested to learn how other board members are valuing Fairfax’s stock today. 
 

It looks like Fairfax paid about US$1,700 for the shares they bought back in August. So let’s use that as our ‘price’. My guess is BV today is about US$1,200. That puts the trailing P/BV at 1.4. That is cheap. Especially for a company consistently delivering an average ROE in the high teens. 
 

But what about excess of FV over CV? That is about $100/share (after tax). That puts ‘adjusted’ BV at US$1,300. That puts the trailing P/BV at 1.3x BV. That is very cheap. 
 

What about if we use expected BV at Dec 31, 2026. Let’s look ahead 16 months. My guess is ‘adjusted’ BV will be about $1,520. That puts the 1-year forward P/BV at 1.1 x. Well that is crazy cheap. 
 

Importantly, the intrinsic value of Fairfax shares is much higher than my ‘adjusted’ BV estimates used above, providing a nice margin of safety. And Fairfax’s management team is best-in-class - looks like we are getting this for free.

 

My guess is Fairfax can do basic math. And that likely explains why they are still buying back stock at a pretty good clip at US$1,700/ share. But I can also understand why looking a year into the future is too complicated for most ‘investors’ - 12 months is a freaking eternity!

 

PS: We could also do a similar analysis using PE (my guess is economic earnings for Fairfax will come in around US$220/share in 2025). It says pretty much the same thing. Which probably tells us something…

I love speculating, so here’s my 2 cents:

 

Mr. Market loves momentum.

 

If/when FFH reports blowout earnings this year of $175+ thanks to what is looking like a mild year of cat expense, etc (at the end of this week hurricane risk will be about 80% less than it was at the beginning of the season.)

AND

 

If FFH aggressively buys back shares at the current price 
 

OR

 

Raises the dividend (unlikely)

 

OR

 

Prem starts going on CNBC at least quarterly to pump FFH (when hell freezes over)

 

THEN 

 

FFH will see an earnings multiple expansion to 12x to 14x. Call it a share price of $2,275 USD in 2026.

 

——-

 

If we see the scenarios above play out in 2025 and then again in 2026 then the earnings multiple will almost certainly surpass 15x (at least for a while).
 

#momentum

Edited September 25, 2025 by Thrifty3000