Fairfax 2025

[petec]

10 hours ago, TwoCitiesCapital said:

 

Yes - in a "technical" sense. I would argue it depends on how we look at/measure it. 

 

Technically, if it matches the liability, the liability is also fluctuating with the rates and no real impairment occurs if perfectly matched. Now, there's risks to this because you're never perfectly matched and until recently the liability fluctuation wasn't captured on the balance sheet so you only had the asset side swinging wildly. 

 

But now that the liability impact also flows through, from a reporting standard little impairment would occur as you'd expect movement in the assets and liabilities to largely offset on another. 

 

There might be some debate on impacts to liquidity and the ability to sell the bonds vs realize a loss and etc. but from an asset/liability view (i.e. balance sheet), you should have little impairment matching your liability. The impairment comes for mismatches and being wrong which is where Fairfax was playing from 2016 - 2021 until 2022 - 2024 turned it around. 

 

This is correct in terms of short term reporting. As discussed above, I don't think it is correct when actually looking at whether claims are sufficiently covered, taking into account what usually drives interest rates - i.e., inflation.

[petec]

5 hours ago, Santayana said:

What exactly is the macro bet you think they are making?  I don't believe they are trying to make any prediction about future rates, and think they are trying to position themselves in a way that reflects that they don't know what rates will do in the future.  To me this is the opposite of a macro bet.

 

This is also my take. Mostly.

[djokovic1]

10 hours ago, Santayana said:

What exactly is the macro bet you think they are making?

 

They explicitly say this in the Q2 earnings call: "We continue to stay on the shorter side of duration as we watch inflation and the Fed actions."

 

They are explicitly making a call to be on the shorter side of duration as they think probability that rates will go higher is greater than what the market is expecting. 

 

The reality is, as they do not explicitly try match asset and liability duration, they always have to take a macro view on rates.

 

5 hours ago, petec said:

+1.  And in the case of Fairfax, that impaired balance sheet would lead to a smaller insurance business right at the time when high yields would make that business even more profitable.

 

And what if the exact opposite happens, that rates fall much more than expected and you take a loss on your equity / balance sheet due to being short duration (i.e value of liabilities increases more than your assets)?

 

Tomorrow if rates fall much more than expected, Fairfax's equity and balance sheet will take a hit because of their macro positioning of being short duration.

 

Hope that helps explain where I am coming from?

[Hsmpanl]

3 hours ago, djokovic1 said:

 

They explicitly say this in the Q2 earnings call: "We continue to stay on the shorter side of duration as we watch inflation and the Fed actions."

 

They are explicitly making a call to be on the shorter side of duration as they think probability that rates will go higher is greater than what the market is expecting. 

 

The reality is, as they do not explicitly try match asset and liability duration, they always have to take a macro view on rates.

 

 

And what if the exact opposite happens, that rates fall much more than expected and you take a loss on your equity / balance sheet due to being short duration (i.e value of liabilities increases more than your assets)?

 

Tomorrow if rates fall much more than expected, Fairfax's equity and balance sheet will take a hit because of their macro positioning of being short duration.

 

Hope that helps explain where I am coming from?

How do you view the equity portfolio in this context? Because its value weighted is it shorter duration? I think FFH is well positioned for any eventuality and has a superior model to most insurers which makes the duration of their bond portfolio not matter to the overall investment case.

[Txvestor]

15 hours ago, Santayana said:

What exactly is the macro bet you think they are making?  I don't believe they are trying to make any prediction about future rates, and think they are trying to position themselves in a way that reflects that they don't know what rates will do in the future.  To me this is the opposite of a macro bet.

Interest rates! 
Duration of bond portfolio does not matter to investment case? 
Last Q they reported about $625M of earnings from interest income. Of course it's material to the investment case and worthy of discussion. 

Edited October 8, 2025 by Txvestor

[cwericb]

As one living on the East coast, one tends to keep a close eye on the daily hurricane situation in the mid Atlantic.

 

But It seems that during this time of year, if you want to see the hurricane forecast all you have to do is check out Fairfax's daily share price. Or vice versa. 

[Santayana]

7 hours ago, djokovic1 said:

Tomorrow if rates fall much more than expected, Fairfax's equity and balance sheet will take a hit because of their macro positioning of being short duration.

I don't see how rates dropping would negatively impact the equity and balance sheet.  That would be caused by rising rates, especially if they were longer in duration.  What am I missing?   

[Marco Van Basten]

27 minutes ago, Santayana said:

I don't see how rates dropping would negatively impact the equity and balance sheet.  That would be caused by rising rates, especially if they were longer in duration.  What am I missing?   

 

27 minutes ago, Santayana said:

I don't see how rates dropping would negatively impact the equity and balance sheet.  That would be caused by rising rates, especially if they were longer in duration.  What am I missing?   

If you carry liabilities on a discounted basis, and duration of your bond book is less than the duration of your liabilities, then the value of liabilities will rise by more than the value of the bond portfolio (assuming bond portfolio = amount of discounted liabilities.)

[SafetyinNumbers]

44 minutes ago, Marco Van Basten said:

 

If you carry liabilities on a discounted basis, and duration of your bond book is less than the duration of your liabilities, then the value of liabilities will rise by more than the value of the bond portfolio (assuming bond portfolio = amount of discounted liabilities.)

That’s just an accounting hit, it doesn’t have an impact on actual claims. 

[djokovic1]

10 minutes ago, SafetyinNumbers said:

That’s just an accounting hit, it doesn’t have an impact on actual claims. 

 

Its an accounting hit in either case if interest rates went significantly up or down, so it doesn't affect cashflows but it does affect book value of equity and impact how much premium you can underwrite?

 

4 hours ago, Hsmpanl said:

which makes the duration of their bond portfolio not matter to the overall investment case.

 

I think it is super important. Just like the fact that they decided to be very short duration in 2021 was a pivotal decision that has led to the next few years of outperformance.

[Munger_Disciple]

12 minutes ago, SafetyinNumbers said:

That’s just an accounting hit, it doesn’t have an impact on actual claims. 

 

 

In this sense, GAAP accounting better reflects insurance liabilities. 

[djokovic1]

1 hour ago, SafetyinNumbers said:

That’s just an accounting hit, it doesn’t have an impact on actual claims. 

Additionally this accounting hit can have significant real world implications in extreme cases. Eg Silicon Valley bank. Where they were long duration at low rates and interest rates rose fast , impairing equity, causing a bank run and very quickly bankruptcy

Edited October 8, 2025 by djokovic1

[SafetyinNumbers]

6 minutes ago, djokovic1 said:

Additionally this accounting hit can have significant real world implications in extreme cases. Eg Silicon Valley bank. Where they were long duration at low rates and interest rates rose fast and equity was wiped out

Definitely but it’s the opposite situation here. Less risk by being shorter duration and padded reserves which should be released over time.

 

[Munger_Disciple]

37 minutes ago, SafetyinNumbers said:

Definitely but it’s the opposite situation here. Less risk by being shorter duration and padded reserves which should be released over time.

 

 

Yeah, in the end what matter is how good their u/w is, whether they have sufficient liquidity and whether the reserving is conservative; not whether their liabilities are discounted or not.  

[djokovic1]

Yes agreed. My main point / question is that it is a macro call to have a 2 year asset duration at the moment where intuitively I would prefer a higher duration given where interest rates are, which provide a more than healthy ROE and a steady earnings stream for longer. Of course their judgment would be vindicated if we see a significant rise in interest rates (and vice versa if rates go down). Let's see where they land in Q3.

[Viking]

On 10/3/2025 at 4:30 PM, Hamburg Investor said:

The Combined Ratios of Fairfax Insurance Business over time: From bad to good!

I finally managed to use AI to turn some tables into graphs (don't ask!). I gathered all the data for Fairfax, Markel from annual reports (no guarantee that it is always correct) and the rest from an extended internet research. Here are the graphs and the most important findings:

1. Combined ratio of Fairfax vs. Markel over the years

First, let's take a look at the CR comparison:

 

What stands out? Markel was significantly better than Fairfax for a long time, but that has changed over the years. Since around 2013, both lines have been very close to each other, and in recent years Fairfax has even become slightly more profitable than Markel. I bought both companies around 2011 first; my expectation was, that Markel would stay the winner maybe even as long as forever. So for me, this is spectacular, looking back 14 years later and watching such results. The overall trend is even more evident in the 5-year average:

 

Fine. So Fairfax has been about as good as Markel since around 2012 or 2015, after being about 5 percentage points worse than Markel in many years. The only convergence of the lines around 2001 (slightly later in the 5-year chart) is related to 11 September; so we can safely dismiss that as a one-off event. 

 

What does this tell us? Could it be that Fairfax has become significantly more profitable overall in structural terms? After all, we are not comparing Fairfax CRs with average longterm CR figures here; rather, we are comparing with another company, that is exposed to the same trends (e. g. soft market, hard market).

2. Let's take it one step further: Let's compare Fairfax with the P&C US industry

 

 

Here, too, we see that Fairfax only briefly outperformed the market after 11 September 2001; apart from that, Fairfax rarely matched the market's CR until 2011; often, the CR was much worse, sometimes even 7 percentage points. This changed around 2011. From 2011 to around 2016, Fairfax was significantly better in some cases, and has been since 2021 as well. In between, Fairfax roughly mirrors the market. This is even more evident when you add up how Fairfax has performed relative to the market over the years:

 

To explain the red dotted line: the right X-axis shows Fairfax's cumulative overserving over time in percentage points of the combined ratio.

So the red dots show, that Fairfax had underperformed the P&C US Market by a total of almost 30 percentage points between 2000 and 2011 (i.e. slightly more than 2.5% per year). Since then, the red dotted line has risen steeply, with a pause only between 2016 and 2020, ending at around 20 percentage points of outperformance. In the 13 years since 2011, Fairfax has thus made up a total of 50 percentage points (from minus 30 to plus 20), or just under 4% per year.
 

Bottom Line: What a difference! Until 2011, Fairfax lost 2.5% percentage points per year against the average US P&C company, but since then Fairfax has gained 4%. In other words, Fairfax's insurance business (which is not only US) has become about 6.5% percentage points more profitable in relation to the market after 2011 (compared with the timeframe 2000 until 2011 ).
 

Why? It has already been mentioned here many times: Andy Barnard has been president of Fairfax's insurance business since 2011. We can only be grateful to him!!!
 

Are Fairfax's good CRs here to stay? Compared to the market, I would say: it looks that way. Is Fairfax's insurance business independent of general market movements, of soft and hard markets? Absolutely not – the curves do not show this.

 

One more note: this comparison is flawed! Fairfax has (increasingly) insurance business outside the US. And yet I am comparing it with the P&C US market – which is methodologically completely inaccurate.

 

In my view, however, it is still the best comparison (after all, the US market is still the largest for Fairfax) if you don't want to go to enormous effort. My only goal is to gain a rough initial overview – I consider this approach to be legitimate for that (and only that!) purpose.

@Hamburg Investor, great long term analysis of Fairfax’s insurance business. I agree with your finding - Fairfax’s insurance business has improved in profitability over the past 15 years or so. Andy getting put in charge of the group in 2011 was likely a catalyst. 
 

There is a lag from writing good business to when it actually shows up on the bottom line - depending on the line, it can be many years. (The opposite is also true.) It will be interesting to see what CR Fairfax is able to deliver in the coming years. 

 

I continue to think Fairfax’s insurance business is better than most investors think. And i also think future reserve releases could be robust (and not built into the stock price today). We will see. 
 

Of course why this matters so much is two things drive value creation at Fairfax - the return it earns on its:

• Insurance business
• Investment management business

Both have NEVER been doing well at the same time. Except for the past couple of years. Not surprisingly, the value creation has been very strong. 

Edited October 8, 2025 by Viking

[Santayana]

22 hours ago, Marco Van Basten said:

If you carry liabilities on a discounted basis, and duration of your bond book is less than the duration of your liabilities, then the value of liabilities will rise by more than the value of the bond portfolio (assuming bond portfolio = amount of discounted liabilities.)

Thanks for the explanation.   It still seems like that net downside is rather small compared the potential losses to the value of the bond portfolio if they were longer in duration and rates spiked.  

[Viking]

The yield on the US 10 year treasury is 4.15% today. When it comes to 10 year US bonds… are you getting paid an appropriate amount to take duration? The 2 year has a yield of 3.6%.

 

Is a premium of 0.55% high enough? I don’t think it is… by a lot. 
 

It is pretty clear that the US has a big spending/debt problem. How does this problem always get resolved? High inflation. It’s not complicated. 

• Tariffs? Inflationary. Not complicated. 
• Deglobalization? Inflationary. Not complicated.
• The US can no longer be trusted. This did not start with Trump, although he is removing any doubts (it really got going with the confiscating of Russian assets/holdings/reserves). That means, all things being equal, the US should pay a higher interest rate on its treasuries to compensate for this risk. 
• Fed? It WILL be stacked with Trump lackeys over the next year. Maybe they get it right. But maybe they don’t. (Remember ‘right’ will be whatever Trump wants them to do.)
• Trump cannot be trusted. Trump would not hesitate to throw the bond market under the bus if it furthered his personal aims. Trump is the master at doing unconventional stuff. 

I don’t think the 4 points above are debatable. Why would you want to own a 10 year US treasury yielding 4.15%, given all the significant risks outlined above? Because you want to blindly match duration with your insurance liabilities? That seems incredibly shortsighted to me. especially when you can get a 3.6% return with a 2 year treasury. 

Personally, I love how Fairfax is positioned with their fixed income portfolio. It seems really rational to me. 
 

Over time, we will get clarity on each of the 4 issues I highlighted above. As more information becomes available, my guess is Fairfax will act accordingly. Sounds good to me. 
 

PS: Gold just went through US$4,000. Why is gold in a bull market? Things that make you go hymmm…

Edited October 9, 2025 by Viking

[LC]

1 minute ago, Viking said:

I don’t think the 4 points above are debatable. Why would you want to own a 10 year US treasury yielding 4.15%, given all the significant risks outlined above? Because you want to blindly match duration with your insurance liabilities? That seems incredibly shortsighted to me. especially when you can get a 3.6% return with a 2 year treasury. 

 

That's a very fair point. Thanks, @Viking

[Viking]

People who want Fairfax to lengthen the duration of their fixed income portfolio appear to be looking primarily at one thing - interest income. They want it to be big today and stay that way. It is very seductive to think this way (it sounds good/makes sense). I think it is really simplistic. 
 

But they do not talk about the risks of executing that strategy (going with a higher duration bond portfolio). Higher return often means taking on higher risks. Are you being compensated appropriately for taking the higher risk?

Edited October 9, 2025 by Viking

[LC]

Well, the problem with 2 year treasuries is your reinvestment risk in 2 years. I think this is partly why the 2 vs 10 year spread is tighter than we may prefer, particularly considering Trump’s signaling on where he wants rates to be (lower).

[djokovic1]

@Viking All your points make intuitive sense but the 2 year, 5 year and 10 year have all gone the other way the last 6months even though all your points ring true especially over the last 6 months. Who would have thought? What I think we can agree on is that macro is very very hard to predict.

 

What would be your major worry if Fairfax had added 5 year treasuries at 4-4.5% yield a few months ago to increase duration to 3 - 3.5 years (in lieu of the 30 year)? And I say this in conjunction with noting their liability duration is ~ 4 years.

 

 

 

 

[djokovic1]

2 hours ago, Viking said:

That seems incredibly shortsighted to me. especially when you can get a 3.6% return with a 2 year treasury. 

To be a little edgy, I will say, it seems a little silly to not lock in 4.5% on 5 year treasuries especially when your duration is well below liabilities

[vinod1]

2 hours ago, Viking said:

People who want Fairfax to lengthen the duration of their fixed income portfolio appear to be looking primarily at one thing - interest income. They want it to be big today and stay that way. It is very seductive to think this way (it sounds good/makes sense). I think it is really simplistic. 
 

But they do not talk about the risks of executing that strategy (going with a higher duration bond portfolio). Higher return often means taking on higher risks. Are you being compensated appropriately for taking the higher risk?

 

The argument is they can build a ladder of 1 year to 5/6 year ladder that roughly matches liabilities. That is it. If interest rates are say, below 2%, it is fine to say, no that is too low and I am not taking any risk. 

 

You are just balancing reinvestment risk with this approach. 

 

Vinod

[TwoCitiesCapital]

5 hours ago, LC said:

Well, the problem with 2 year treasuries is your reinvestment risk in 2 years. I think this is partly why the 2 vs 10 year spread is tighter than we may prefer, particularly considering Trump’s signaling on where he wants rates to be (lower).

 

+1

 

6 hours ago, Viking said:

People who want Fairfax to lengthen the duration of their fixed income portfolio appear to be looking primarily at one thing - interest income. They want it to be big today and stay that way. It is very seductive to think this way (it sounds good/makes sense). I think it is really simplistic. 
 

But they do not talk about the risks of executing that strategy (going with a higher duration bond portfolio). Higher return often means taking on higher risks. Are you being compensated appropriately for taking the higher risk?

 

What were the risks of going to 0 in 2016 and staying there until 2022? 

 

It's no coincidence Fairfax stock did terribly over this period and was very slow to recover post-covid. 

 

Which provided the opportunity for me to re-enter in size, but I don't want that opportunity to come by again because of 6-years of going back to zero. 

 

We can all debate the next decade will be different, that rates will be secularly higher, etc. I'm sympathetic to that view, but people were making that argument in 2010...and took a decade to maybe be right. I'd rather them drop swinging for the fences with the duration calls - match their liabilities (maybe +/- 0.5 years based on their view for rates), and provide some stability to interest income. They can always make the spread on credit when the opportunities present themselves for the alpha. 

Edited October 10, 2025 by TwoCitiesCapital