Fairfax 2025

[dartmonkey]

On 9/26/2025 at 10:30 PM, ValueNation said:

 

https://www.msn.com/en-ca/weather/topstories/major-hurricane-threat-grows-as-two-systems-brew-in-the-atlantic/ar-AA1Nk07g?ocid=socialshare

Looks like Humberto wants to head back east before it gets to the US coast.

 

And then there is tropical depression Nine, which might turn into tropical storm (called Imelda, if it does) pretty soon. To do that, it would need sustained winds averaging 39 mph, and is currently at 35 mph. It too is projected to be pulled east soon, partly by Humberto. So it looks like we are still ok at the end of September, with only 8-20% of the season left (depending on whom you ask). However, the forecasts seem to suggest that we may have more than 8-20% of the risk left, since water temperatures suggest a higher than average risk for the end of the season. 

[SafetyinNumbers]

13 minutes ago, dartmonkey said:

Looks like Humberto wants to head back east before it gets to the US coast.

 

And then there is tropical depression Nine, which might turn into tropical storm (called Imelda, if it does) pretty soon. To do that, it would need sustained winds averaging 39 mph, and is currently at 35 mph. It too is projected to be pulled east soon, partly by Humberto. So it looks like we are still ok at the end of September, with only 8-20% of the season left (depending on whom you ask). However, the forecasts seem to suggest that we may have more than 8-20% of the risk left, since water temperatures suggest a higher than average risk for the end of the season. 

Earnings estimates should be going up over the next few weeks for Q3 which might bring in some quant buying ahead of Q3 reporting. 

[Hoodlum]

40 minutes ago, dartmonkey said:

Looks like Humberto wants to head back east before it gets to the US coast.

 

And then there is tropical depression Nine, which might turn into tropical storm (called Imelda, if it does) pretty soon. To do that, it would need sustained winds averaging 39 mph, and is currently at 35 mph. It too is projected to be pulled east soon, partly by Humberto. So it looks like we are still ok at the end of September, with only 8-20% of the season left (depending on whom you ask). However, the forecasts seem to suggest that we may have more than 8-20% of the risk left, since water temperatures suggest a higher than average risk for the end of the season. 

Water temperatures seemed to have dropped over the past week, well below the temperatures at the end of September compared to the prior 2 years.  
 

https://climatereanalyzer.org/clim/sst_daily/?dm_id=world2

[petec]

On 9/25/2025 at 1:45 PM, TwoCitiesCapital said:

But having liabilities against it that have a certain inflation/growth premium inherent within them means that default positioning isn't zero rate exposure but matching your liabilities'.

 

I would agree if the bonds were inflation-linked so that both inflation and duration were matched. But that isn't practical - the reality is that the bond portfolio will always be mostly nominal while the insurance liabilities they back are inflation-linked.

 

If I have a 10-year bond backing a 10-year insurance liability, and inflation unexpectedly goes to 10%, by the end of 10 years I am going to have a worthless asset and a huge liability - even though I matched my duration.

 

At a time of historically low rates and low inflation, therefore, I don't think it is really a macro bet to say: I don't know what's going to happen or when, but there is a risk that inflation turns out higher than expected and my balance sheet gets impaired, and I am not being paid to take that risk.

 

I think that decision was about price, not macro predictions. If long bond yields had been 15%, all else equal, they'd have gone as long as possible!

Edited September 30, 2025 by petec

[petec]

On 9/25/2025 at 4:09 PM, Hamburg Investor said:

What is the bottom line? I find few arguments in favour of Fairfax achieving an average CAGR of less than 15% over 20 years in terms of ROE

 

I think this is highly dependent on interest rates (which impact float income and combined ratios).

 

At 1% rates, I doubt that FFH will make a 15% ROE.

 

At 5% rates, I would be surprised if they do not.

[Txvestor]

6 hours ago, petec said:

 

I think this is highly dependent on interest rates (which impact float income and combined ratios).

 

At 1% rates, I doubt that FFH will make a 15% ROE.

 

At 5% rates, I would be surprised if they do not.

I agree with this. All the more surprising to me why they lowered their duration exposure to 2.1yrs recently. I know everyone said trust the management team and Bradstreet but their bets on macro have been mixed. And that one was a head scratcher. Interest rates didn't break upwards for 15-16yrs after the GFC. I doubt 10yrs are going to 1% but 2-3% sure; and that would lop off a good 700-800M annually from earnings. 

[Hsmpanl]

19 minutes ago, Txvestor said:

I agree with this. All the more surprising to me why they lowered their duration exposure to 2.1yrs recently. I know everyone said trust the management team and Bradstreet but their bets on macro have been mixed. And that one was a head scratcher. Interest rates didn't break upwards for 15-16yrs after the GFC. I doubt 10yrs are going to 1% but 2-3% sure; and that would lop off a good 700-800M annually from earnings. 

I think they’re concerned about interest rates increasing on longer term notes due to continued deficit spending and inflationary policy decisions in the US. Last few fed cuts have resulted in increases to 10yr treasury rates. I’m not smart enough to have a view one way or the other but I trust what they’re doing at Fairfax to position the portfolio and manage risk.

[Hamburg Investor]

8 hours ago, petec said:

 

I think this is highly dependent on interest rates (which impact float income and combined ratios).

 

At 1% rates, I doubt that FFH will make a 15% ROE.

 

At 5% rates, I would be surprised if they do not.

I totally agree. If extreme things do happen (like a 1% to 3% rate on average over 20 years), CAGR of ROE (of intrinsic value) should be less than within a (in my eyes more lilely scenario of) an average yield of 4%, 5%. Okay, maybe 3% is not extreme, but 2% on average over 20 years would mean e.g. around 1% for nearly 7 years, 2% for 7 years and 3% for 7 years to get. And if interest rates would be above 3% for some time in those 20 years (we‘re at 4% today), then the rest would have to be even lower; in my eyes that’s really extreme (and you might feel it being normal and that’s just fine, we don’t have to agree on this one!)

Interest rates will always act like a gravitational pull on returns. Similarly, there will be other outcomes if the global and US stock markets diverge significantly and deliver negative results, for example. Or if growth outperforms value over 20 years in a meaningful way.

 

The whole idea is based on "between 15% and 20% / 16% and 18%" – i.e. on average – in reasonably normal times. 

 

If interest rates rise to an average of 7% over 20 years, then a result of "only" 15% would certainly be disappointing. Or if the stock market rises by 12% per year and value beats growth by a further 5% per year (and interest rates are relatively normal).

 

The point is: I dare not predict whether the future will be more like the 1970s and 1980s (especially inflation and interest) or 1929 (and what came after) or the great booms.

 

Over 20 years, however, I expect the average to be reasonably normal. That's why I'm looking at 20 years; 10 years can quickly end up being completely different.  
 

If someone knows what the next 20 years will actually look like, then it is certainly possible to find better investments than Fairfax, especially when it comes to extreme outcomes. But if you were in my shoes, it would be speculation to base investments on a scenario in which interest rates stabilise at 1%, 2%, (8%, 9%). 

Edited September 30, 2025 by Hamburg Investor

[TwoCitiesCapital]

1 hour ago, Hsmpanl said:

I think they’re concerned about interest rates increasing on longer term notes due to continued deficit spending and inflationary policy decisions in the US. Last few fed cuts have resulted in increases to 10yr treasury rates. I’m not smart enough to have a view one way or the other but I trust what they’re doing at Fairfax to position the portfolio 

 

 

Have resulted in rising rates *from the local lows*.

 

The path for rates has still been lower. Lower highs and lower lows since the peak was out in late-2023 - before rate cuts started.  The rates just keep reversing trend right after the cuts take place.

 

I think it's partly

1) buy the rumor/sell the news that's occurring

 

2) that all most rate hikes this cycle have clustered in Q4 which is traditionally weak for treasuries in the well documented September effect, AND

 

3) because there are massive fund managers like PIMCO and Double Line that don't want to get caught holding these things for 10-years and prefer to trade duration in temporary interest rates swaps and futures as a result. 

 

Only the last one will be meaningful long term. 

Edited September 30, 2025 by TwoCitiesCapital

[Viking]

1 hour ago, Txvestor said:

I agree with this. All the more surprising to me why they lowered their duration exposure to 2.1yrs recently. I know everyone said trust the management team and Bradstreet but their bets on macro have been mixed. And that one was a head scratcher. Interest rates didn't break upwards for 15-16yrs after the GFC. I doubt 10yrs are going to 1% but 2-3% sure; and that would lop off a good 700-800M annually from earnings. 

 

@Txvestor, when looking at the average duration of Fairfax's fixed income portfolio I think it is important to consider both the potential impact of changes in interest rates on both the income statement and the balance sheet. Fairfax is also a value investor... that is another important overlay.

 

There is a very real possibility that Trump's policies are going to spike inflation in the coming years. After all, financial repression is how you solve a too much debt problem (an emerging problem for the US government). And Trump is very unconventional - he will not hesitate to throw bond holders under the bus if he thinks he can get away with it (remember, he is a real estate guy).  

Edited September 30, 2025 by Viking

[netcash1]

Neptune Insurance shines a spotlight on the valuation potential for Ki Insurance

[vinod1]

13 hours ago, petec said:

 

I would agree if the bonds were inflation-linked so that both inflation and duration were matched. But that isn't practical - the reality is that the bond portfolio will always be mostly nominal while the insurance liabilities they back are inflation-linked.

 

If I have a 10-year bond backing a 10-year insurance liability, and inflation unexpectedly goes to 10%, by the end of 10 years I am going to have a worthless asset and a huge liability - even though I matched my duration.

 

At a time of historically low rates and low inflation, therefore, I don't think it is really a macro bet to say: I don't know what's going to happen or when, but there is a risk that inflation turns out higher than expected and my balance sheet gets impaired, and I am not being paid to take that risk.

 

I think that decision was about price, not macro predictions. If long bond yields had been 15%, all else equal, they'd have gone as long as possible!

 

TIPS are widely traded and available in size. There is no real market constraint if Fairfax wants to hold a portfolio of inflation-linked bonds that match liability duration. The fixed income earnings would then fluctuate with inflation rates, compared to having a very predictable 2-3 year fixed income earnings now.

 

Vinod

[Txvestor]

7 hours ago, Hamburg Investor said:

I totally agree. If extreme things do happen (like a 1% to 3% rate on average over 20 years), CAGR of ROE (of intrinsic value) should be less than within a (in my eyes more lilely scenario of) an average yield of 4%, 5%. Okay, maybe 3% is not extreme, but 2% on average over 20 years would mean e.g. around 1% for nearly 7 years, 2% for 7 years and 3% for 7 years to get. And if interest rates would be above 3% for some time in those 20 years (we‘re at 4% today), then the rest would have to be even lower; in my eyes that’s really extreme (and you might feel it being normal and that’s just fine, we don’t have to agree on this one!)

Interest rates will always act like a gravitational pull on returns. Similarly, there will be other outcomes if the global and US stock markets diverge significantly and deliver negative results, for example. Or if growth outperforms value over 20 years in a meaningful way.

 

The whole idea is based on "between 15% and 20% / 16% and 18%" – i.e. on average – in reasonably normal times. 

 

If interest rates rise to an average of 7% over 20 years, then a result of "only" 15% would certainly be disappointing. Or if the stock market rises by 12% per year and value beats growth by a further 5% per year (and interest rates are relatively normal).

 

The point is: I dare not predict whether the future will be more like the 1970s and 1980s (especially inflation and interest) or 1929 (and what came after) or the great booms.

 

Over 20 years, however, I expect the average to be reasonably normal. That's why I'm looking at 20 years; 10 years can quickly end up being completely different.  
 

If someone knows what the next 20 years will actually look like, then it is certainly possible to find better investments than Fairfax, especially when it comes to extreme outcomes. But if you were in my shoes, it would be speculation to base investments on a scenario in which interest rates stabilise at 1%, 2%, (8%, 9%). 

if treasury interest rates his 7% far less 8% or 9% I think we will have larger issues with US solvency. We are at 37T and climbing at 2T+ a year, 7% of that is 2.8T. We almost certainly will have rate suppression. 

[Txvestor]

19 hours ago, Viking said:

 

@Txvestor, when looking at the average duration of Fairfax's fixed income portfolio I think it is important to consider both the potential impact of changes in interest rates on both the income statement and the balance sheet. Fairfax is also a value investor... that is another important overlay.

 

There is a very real possibility that Trump's policies are going to spike inflation in the coming years. After all, financial repression is how you solve a too much debt problem (an emerging problem for the US government). And Trump is very unconventional - he will not hesitate to throw bond holders under the bus if he thinks he can get away with it (remember, he is a real estate guy).  

No Q there, Trump would and push come to shove the Fed would also. We saw that with not just QE but the long lingering loose money policy coming out of the GFC. 
However bear in mind insurance is a heavily regulated industry and there are requirements for insurers to have large portions of their funds in liquid fixed income instruments irrespective of interest rates. 
Hence they will stay sensitive to this market. 

Edited October 1, 2025 by Txvestor

[TwoCitiesCapital]

15 hours ago, petec said:

 

If I have a 10-year bond backing a 10-year insurance liability, and inflation unexpectedly goes to 10%, by the end of 10 years I am going to have a worthless asset and a huge liability - even though I matched my duration.

 

You'll have underperformed, yes. But in the world of Fairfax, where duration of liabilities is ~3-4 years, also an inaccurate example.

 

If rates go from 0% to 10% over 4-years, you don't go to zero by owning a 4-year Treasury.

 

You also don't go to zero by having a 5-6 year Treasury ladder with an average maturity/duration of 4. 

 

And there are TIPS if you're really concerned  OR you could decide to be under your liability by 1 year, or 2-years.

 

The options aren't 4-year nominal bonds or overnight rates for 6-years waiting for higher rates. It worked out for Fairfax in 2021 only because COVID supply shock plus trillions in direct stimulus - items that were unforeseeable in 2016 during Trump's first presidency and didn't even occur in is first term which was thesis for dumping the bonds right after the election. 

 

15 hours ago, petec said:

 

At a time of historically low rates and low inflation, therefore, I don't think it is really a macro bet to say: I don't know what's going to happen or when, but there is a risk that inflation turns out higher than expected and my balance sheet gets impaired, and I am not being paid to take that risk.

 

There is hardly risk in 1-year bonds. There is little risk in 2-year bonds. Fairfax made a choice, after a presidential election in 2016, to basically move to overnight rates and sit there for years despite their liability remaining unchanged. 

 

It was a macro bet and shouldn't be controversial to label it as such. 

 

15 hours ago, petec said:

 

I think that decision was about price, not macro predictions. If long bond yields had been 15%, all else equal, they'd have gone as long as possible!

 

If it was about price, why was it made in 2016, after an election, when rates were higher than they were in 2015 before the election? The election WAS the catalyst - ergo it was a macro bet. 

Edited October 1, 2025 by TwoCitiesCapital

[Thrifty3000]

On 9/25/2025 at 1:20 PM, dartmonkey said:

BTW, what do you mean by hurricane risk 80% less than at the beginning of the season? Grok says 80% of the risk would be behind us by September 30 (78% of named storms, 80% of hurricanes, 83% of accumulated cyclone energy...) Is this what you mean? 

Yup, you got it. That's what I meant.

[Spooky]

I've been thinking a lot lately about acquiring more shares, it just still seems so cheap to me. I haven't been following the thread that closely, what does the hive mind think these days?

[dartmonkey]

8 minutes ago, Spooky said:

I've been thinking a lot lately about acquiring more shares, it just still seems so cheap to me. I haven't been following the thread that closely, what does the hive mind think these days?

It's hard to speak for the hive mind, but Fairfax continues to perform brilliantly, looks set to have another great quarter of earnings, and its price is actually down about 4% from mid-year, now at about 9x trailing 12 months' earnings, with fairly predictable operating earnings for the next few years. Down from 1.73x book at mid-year to 1.53x book at the end of Q3, which often happens because of fear of hurricanes, but this season is looking calm. Lots of excess of value over carrying value, with unrealized value accumulating in big investments like Eurobank, Digit, and Ki. Improving credit ratings reflect the fact that it is in a much more comfortable position than a few years ago, with accumulating cash at the holding company level, and opportunities to take out minority partners or, at current prices, repurchase a lot of shares.

 

In a market that is generally at nosebleed prices, it seems like a great choice.  

[Spooky]

1 hour ago, dartmonkey said:

It's hard to speak for the hive mind, but Fairfax continues to perform brilliantly, looks set to have another great quarter of earnings, and its price is actually down about 4% from mid-year, now at about 9x trailing 12 months' earnings, with fairly predictable operating earnings for the next few years. Down from 1.73x book at mid-year to 1.53x book at the end of Q3, which often happens because of fear of hurricanes, but this season is looking calm. Lots of excess of value over carrying value, with unrealized value accumulating in big investments like Eurobank, Digit, and Ki. Improving credit ratings reflect the fact that it is in a much more comfortable position than a few years ago, with accumulating cash at the holding company level, and opportunities to take out minority partners or, at current prices, repurchase a lot of shares.

 

In a market that is generally at nosebleed prices, it seems like a great choice.  

 

Thanks for the input. I agree that it looks attractive relative to other choices.

[sholland]

23 hours ago, dartmonkey said:

It's hard to speak for the hive mind, but Fairfax continues to perform brilliantly, looks set to have another great quarter of earnings, and its price is actually down about 4% from mid-year, now at about 9x trailing 12 months' earnings, with fairly predictable operating earnings for the next few years. Down from 1.73x book at mid-year to 1.53x book at the end of Q3, which often happens because of fear of hurricanes, but this season is looking calm. Lots of excess of value over carrying value, with unrealized value accumulating in big investments like Eurobank, Digit, and Ki. Improving credit ratings reflect the fact that it is in a much more comfortable position than a few years ago, with accumulating cash at the holding company level, and opportunities to take out minority partners or, at current prices, repurchase a lot of shares.

 

In a market that is generally at nosebleed prices, it seems like a great choice.  

Not only is FFH trading @ ~9.5x earnings but those earnings have good visibility for the next four years.  In his 2024 annual letter Prem states “We can see sustaining our operating income for the next four years at $5 billion (again no guarantees), consisting of underwriting profit of $1.5 billion or more, interest and dividend income of at least $2.5 billion, and income from associates of $1 billion, or about $150 per share after taxes, interest expense, corporate overhead and other costs.”

Edited October 2, 2025 by sholland
Note: My P/E of 9.5 is using Viking’s 2025E earnings of 182 per share

[hardcorevalue]

Does anybody remember when FFH dropped duration from 4 to 2 years?

 

Bold move by them, hopefully it pays off! 

[Malmqky]

19 minutes ago, hardcorevalue said:

Does anybody remember when FFH dropped duration from 4 to 2 years?

 

Bold move by them, hopefully it pays off! 

 

Yeah I wasn't a huge fan of that, but Bradstreet is fantastic. So I just put my trust in him.

 

Macro bets are still a thing with Fairfax, despite the investment strategy evolving a bit.

[Txvestor]

1 hour ago, hardcorevalue said:

Does anybody remember when FFH dropped duration from 4 to 2 years?

 

Bold move by them, hopefully it pays off! 

Once again, I'm not the expert.

They announced it fairly recently within the last Q or so. 
On the ground, I can sense a significant economic slowdown. If the economy enters a recession and long bond yields plummet, this will be a totally unforced error. Macro betting and occasional own goals seems to be a part of their DNA. 
I'm not even saying they should extend out too far out onto the yield curve. Matching their liabilities would be reasonable.
4yrs was perfect. In case of a recession it would factor in time for a recovery well ahead of the next presidential election cycle. 

Edited October 2, 2025 by Txvestor

[TwoCitiesCapital]

3 minutes ago, Txvestor said:

Once again, I'm not the expert.
However, on the ground, I can sense a significant economic slowdown. If the economy enters a recession and long bond yields plummet, this will be a totally unforced error. Macro betting and occasional own goals seems to be a part of their DNA. 
I'm not even saying they should extend out too far out onto the yield curve. Matching their liabilities would be reasonable.
4yrs was perfect. 

 

I agree. 

 

Everything seems rosy in the recent corporate earnings/GDP figures and etc 

 

But I'm looking at buying small businesses in my local area - and a number of the bars that I've been looking through saw YoY declines of 20+% in 2024 sales. 2025 is tracking similarly for them. 

[hardcorevalue]

It was surprising to me as well. Like how much duration risk are you really taking with 4 years. Too much it seems!, just hard to square with potential recession if oil spikes or AI cools. 

 

I guess they see long bonds rising rapidly as too big a risk or future opportunity. 

 

Either way if interest income falls off a cliff and fairfax heads back to $1500 or something crazy it will be a gift to long term holders like us!