Fairfax 2025

[nwoodman]

Timely article from Mauboussin at MS entitled Probabilities and Payoffs: The Practicalities and Psychology of Expected Value (attached).  Nothing new for the value investors here, but it did get me thinking about why I am happy with concentrated positions in Berkshire and Fairfax.  Everyone’s risk tolerance is different but for me the key touch points in the article are:

 

Fairfax Thinks in Expected Value Terms

• Investing success is about payoffs, not just probabilities—Fairfax inherently applies this through its insurance and investment approach.

• They take asymmetric bets—protecting the downside while positioning for large potential gains.

Internally Diversified, Reducing Risk (the big one for me)

• Insurance float provides stable capital for investing.

• Investment portfolio spans equities, fixed income, and alternative assets.

• Global presence and non-insurance subsidiaries offer further diversification.

 

Aligned with Kelly Criterion & Position Sizing

• If an investment has an edge, capital should be allocated accordingly—but not overbet.

• Fairfax’s focus on capital preservation ensures it avoids wipeout while allowing compounding.

 

Embracing Volatility While Managing Drawdowns

• Hedging and contrarian investing have helped them profit in downturns (e.g., 2008). Sometimes this has come with opportunity cost but overall no significant capital loss.

• Low correlated leverage prevents forced asset sales during stress periods.  Even when seemingly cash strapped they have a remarkable ability to pull a deal together via their extensive and ever growing network.

Final Thoughts

• Risk management is their business, making them an ideal concentrated bet.

• Their ability to capitalize on market inefficiencies aligns with a long-term compounding strategy.

• Tax is a consideration for me, so an acceptable return while leveraging an unrealised tax liability works well for me.

 

 I think Prem’s aspiration to build the 100 year company along with the tenure of key personnel and the resultant culture are key factors for me.  The article is worth a read, just to reinforce probabilisitic reasoning.

Authors:

Michael J. Mauboussin – Head of Consilient Research at Counterpoint Global, Morgan Stanley

Dan Callahan, CFA – Member of the research team at Counterpoint Global, Morgan Stanley

 

Mauboussin is well-known for his work on decision-making, behavioral finance, and the application of probability and expected value in investing. His background makes this report particularly relevant for investors who focus on risk management, capital allocation, and probabilistic thinking.

 

article_probabilitiesandpayoffs.pdf

[djokovic1]

On 2/19/2025 at 6:30 PM, Viking said:

 

@djokovic1, nice analysis. Another thing to keep in mind is book value at a traditional insurance company will capture the value of the investment portfolio pretty accurately. Because most insurance companies are 90% bonds/fixed income and these are pretty easy to value. 

 

Fairfax has a big equity portfolio. Over the past 5 years, excess of fair value over carrying value for associate and consolidated companies has increased in value by about $2 billion (from a negative number to a big positive number today). My guess is none of this significant value creation is captured in Fairfax's L5Y ROE of 17.3% that you posted above.

 

And there is even more. The 'fair value' for holdings like BIAL also look materially low. My guess is there are other examples (like what is phantom holding AGT Food Ingredients worth these days?).

 

Bottom line, Fairfax's performance over the past 5 years has been much better than people realize. 'Best in class' is not an exaggeration.  

 

Thanks @Viking and completely agreed. That’s why I expect 15-20 % EPS compounding and not just 15% over the next few years.

[SafetyinNumbers]

13 hours ago, This2ShallPass said:

Both these methods give the same IV ($56-58B). Much higher than the $33B market cap. Do you believe Fairfax is still that undervalued? 

Yes, I do. I wouldn’t have been buying up to last week and have 49% of my net assets in it if I didn’t think so. As I tried to explain in the substack, I use a 10% hurdle rate which means there are an abundance of opportunities in the current market that meet my hurdle.
 

What makes FFH special enough to demand half my capital is twofold. To start, the hurdle rate seems likely to be exceeded over the next 5 years by a wide margin. I consider the chances average ROE exceeds 15% over that period to be 90%+ so the odds of exceeding 10% are even higher. I think the odds of 25% are higher than 10% by a wide margin. 
 

As a probabilistic investor, that’s a very special set up on fundamentals alone but on top of that the odds for multiple expansion seem very high and are open ended. There is lots of support for the multiple to expand including index add potential, potentially 10 years averaging >15% ROE (4 down, 6 to go) which leads to holders less likely to sell, 7m shares already repurchased or under TRS leaving less supply. 
 

I think people selling this week are playing a relative return game and not an absolute return game with a reasonable hurdle. I think the latter is most of the shareholder base but there will always be marginal holders. The less marginal shares available though means the higher the share price will go when passive and Canadian active PMs have to buy without regard for value. 
 

 

 

[This2ShallPass]

10 hours ago, SafetyinNumbers said:

To start, the hurdle rate seems likely to be exceeded over the next 5 years by a wide margin. I consider the chances average ROE exceeds 15% over that period to be 90%+ so the odds of exceeding 10% are even higher. I think the odds of 25% are higher than 10% by a wide margin. 

I don't share the same level of confidence that Fairfax is 40% undervalued, but I really hope you're right.

 

What else needs to go right to get to the 25% ROE scenario? Even in these hard market years we could only get to 15%. Do you see them significantly increasing interest income (maybe w corporate spreads widening)?

[SafetyinNumbers]

7 hours ago, This2ShallPass said:

I don't share the same level of confidence that Fairfax is 40% undervalued, but I really hope you're right.

 

What else needs to go right to get to the 25% ROE scenario? Even in these hard market years we could only get to 15%. Do you see them significantly increasing interest income (maybe w corporate spreads widening)?

It’s in the substack I linked above. The short story is that expectations for underwriting, the equity portfolio, insurance gains like Ki and optionality of the fixed income portfolio are too low. We don’t know exactly where the gains will come from or how big they will be but given the 3:1 investment:equity leverage, it doesn’t take that much to get over a 20% ROE especially. 
 

Your comment “only get to 15%” ROE in the hard market years is misleading because it’s been better than 15% for the past 4 years. Also, the substack explains how conservative reserving delays some of the profit of a hard market until years later while the float growth is enjoyed contemporaneously. 
 

Edited 1 hour ago by SafetyinNumbers

[Viking]

How Does Fairfax’s Valuation Compare to Other P/C Insurance Co’s

 

There are lots of methods an investor can use to value a company and its share price. In this post, we are going to use a method called ‘relative valuation.’ We are going to compare Fairfax to other P/C insurance peers to see what we can learn. How have they performed? How are they being valued today? When compared to some of the best P/C insurance companies in North America.

 

Which companies are we going to include?

 

Below is the list of the seven P/C insurers we will compare (listed in alphabetical order):

• Berkshire Hathaway: historically, the gold standard; now more of a conglomerate than P/C insurer. We include it for fun.
• Chubb: Large, traditional insurer; international in scope.
• Fairfax Financial: An up-and-comer; about 30% of investments are in equities; international in scope.
• Intact Financial: Largest P/C insurer in Canada; expanding globally.
• Markel: ‘Baby Berk’; US focus
• Travelers: Large, traditional insurer; US focus. Part of DJIA.
• WR Berkley: Traditional insurer; US focus

To state the obvious, all P/C insurance companies have unique business models.  As a result, we will keep our analysis very high level. Buffett suggests 5 years is a good time frame to use to measure/evaluate the performance of a company - so that is what we will use.

 

Berkshire Hathaway has not released Q4, 2024 results yet. So for them I have used an estimate for 2024YE book value and 2024 EPS.

 

—————

 

“In other words, the percentage change in book value in any given year is likely to be reasonably close to that year’s change in intrinsic value.” Warren Buffett

 

The most important metric used by investors and analysts to assess the performance of a P/C insurance company is change in book value. Yes, it has its flaws. However, it is a good place to start.

 

5-Year Change in Book Value

 

We are going to look at the change in book value from December 31, 2019 to December 31, 2024. We have sorted the results in the table below from the best to the worst performers.

 

So, which company has increased BVPS the most?

 

Fairfax Financial.

 

Fairfax has grown book value by 118% over the past 5 years, a CAGR of 16.8%. Wow!

 

The second surprise is the size of Fairfax’s outperformance - it is much higher than #2 Intact Financial and way, way higher (+10% per year) than #6 Chubb and #7 Travelers. I think it is safe to say that Fairfax’s performance has trounced that of its peer group. That is pretty impressive. There are a lot of many quality P/C insurance companies on this list.

 

Were you expecting that? I bet you weren’t expecting that.

 

 

Looking at accounting results is only the start

 

An added wrinkle

 

The investment portfolio of most P/C insurance companies contain mostly bonds. These are easy to value. As  result the value of the investment portfolio captured in book value for most P/C insurance companies is pretty accurate.

 

Fairfax owns lots of equities (about 30% of the total investment portfolio). And over the past 5 years, the ‘excess of fair value over carrying value’ for associate and consolidated companies has increased and sits at $1.48 billion pre-tax ($68/share) at December 31, 2024. This is economic business value that has been created by Fairfax over the past 5 years that has not been captured in its accounting (book) value. When we include this additional value creation, Fairfax’s outperformance versus peers is even better than what we see looking only at the change in BVPS.

 

In recent years Buffett has soured on using book value to measure the performance of Berkshire Hathaway (it is now a conglomerate). His new preferred measure for Berkshire Hathaway? The change in the stock price over time.

 

So let’s now compare the performance of the same group of insurance companies using this measure.

 

Some of our companies pay a dividend. So to be fair, we are going to look at total shareholder return (total increase in share price + dividend paid).

 

5-Year Total Shareholder Return

 

We are going to look at the total shareholder return for the 5-year period from December 31, 2019 to December 31, 2024. Once again, we have sorted the results in the table below from the best to the worst performers.

 

So, which company has seen the biggest increase in their share price?

 

Fairfax Financial. It has delivered a total return of 208% = CAGR of 25.2%

 

That is an outstanding level of performance - especially over a 5 year time frame.

 

A second surprise is the size of Fairfax’s outperformance compared to peers… it has been much better - more than 10% more per year than the #2 WR Berkley and more than 15% higher than #7 Markel. Wow!

 

Markel has been the clear laggard of the group, with a CAGR of 8.6%. The remaining 5 companies all have a very respectable CAGR in the mid to low teens, which is good. The P/C insurance sector has been a pretty good place to invest over the past 5 years.

 

 

Let’s move from measures of past performance. Let’s now look at some measures of valuation and how our 7 companies compare.

 

Let’s start by comparing the stock price with the all important measure of book value.

 

Price to Book Value (P/BV)

 

We are going to use the share price for each company today (Feb 19, 2025). And their book value at December 31, 2024. This will give us a trailing P/BV multiple. We have sorted the results in the table below from the company with the highest multiple (most expensive) to the lowest (cheapest).

 

Does anything in the chart below jump out?

 

Fairfax’s valuation is the cheapest. And compared to the most expensive companies (Intact Financial and WR Berkley), Fairfax’s valuation is much, much cheaper.

 

Fairfax’s valuation is even cheaper than it looks - when we include ‘excess of FV over CV for associate and consolidated holdings’ (we discussed that earlier in this post so we won’t repeat it here).

 

 

 

Let’s look at another valuation measure and see what it tells us.

 

Yes, P/E is frowned upon as an measure to use when analyzing P/C insurance companies. But it can be useful as a tool to compare companies in the same industry. And that is what we are doing here.

 

Price to Earnings Ratio (PE)

 

We are going to use the share price for each company today (Feb 19, 2025). And their reported earnings per share for 2024. This will give us a trailing P/E ratio. We have sorted the results in the table below from the company with the highest ratio (most expensive) to the lowest (cheapest).

 

Does anything in the chart below jump out?

 

Fairfax’s valuation is the cheapest. Again. And compared to the most expensive companies (Berkshire Hathaway and Intact Financial), Fairfax’s valuation is much, much cheaper.

 

 

 

Conclusion

 

5-Year Performance

 

When looking at a large group of high quality P/C insurance companies, Fairfax has delivered the best performance over the past 5 years - both in terms of increase in BVPS and total shareholder return (share price + dividends).

 

The second key take-away is Fairfax’s outperformance of peers - across both measures - has been significant. It has been much, much better.

 

What this demonstrates is the outstanding job that Fairfax has done of building per share value for shareholders over the past 5 years. It has a high quality P/C insurance business. Its investment management business is once again performing at a very high level. And the execution from its senior management team has been best-in-class.

 

Current Valuation

 

When looking at the same large group of high quality P/C insurance companies, Fairfax’s share price today is trading at the cheapest valuation across both P/BV multiple and PE ratio measures.

 

The second key take-away is how much more cheaper Fairfax than many peers - the gap is very large.

 

What does this mean?

 

An investor today is able to buy the top performing P/C insurance company - with among the best future prospects - at the cheapest valuation.

 

Does that make any sense? No, of course not.

 

"The way of the successful investor is normally to do nothing -- not until you see money lying there, somewhere over in the corner, and all that is left for you to do is go over and pick it up." Jim Rogers

 

—————

 

What is really going on with Fairfax today?

 

Investors have apparently forgotten the incredible power of the P/C insurance (float) model.

 

Buffett leveraged the P/C insurance (float) model to deliver staggeringly high returns for Berkshire Hathaway shareholders. But even more impressive was how long he was able to sustain that performance - it went on for decades.

 

Yes, Fairfax has had 5 very good years. But they are still a small company. It looks to me like they are just getting started.

 

(Hint: There are many ways to use the P/C insurance (float) model to drive incredible returns for shareholders over the long term. Shelby Davis. Henry Singleton/Teledyne. Larry Tisch/Loews. And yes, Warren Buffett/Berkshire Hathaway. The really important point is they all did it in very different ways. Today Fairfax is providing us with the next iteration of how to capitalize on this very powerful model to drive enormous value for shareholders over the long term. Lots of investors just don’t see it yet. And that succinctly explains how the top performer can trade at the cheapest valuation.)

 

Still not sure what to do?

 

If so, you might want to read my last long-form post (it is the sister post to the one above):

 

Is Fairfax ‘the big fish that got away?’ Musings on mistakes that investors keep making.

• https://thecobf.com/forum/topic/21117-fairfax-2025/page/16/#findComment-601599

 

 

Edited 1 hour ago by Viking