Fairfax 2025

[Daphne]

10 hours ago, jfan said:

Carney’s Checkmate: How Canada's Quiet Bond Play Forced Trump to Drop Tariffs

 

I'm not an expert in these matters. But will this not cause a mark-to-market drop in Fairfax's short treasury bond portfolio, reducing some of their financial flexibility?

You do realize that this is just political posturing during a highly contested election.

[SafetyinNumbers]

11 hours ago, villainx said:

I was thinking about the hedges that stalled Fairfax, was Prem right but just the wrong term?

 

If the hedges were on, would effect be dramatic?

 

 

I don’t think most investors appreciate the context of the hedges at the time. The threat of negative interest rates was real and Fairfax has above average float so I believe it was defensive in nature. It was a bad idea but in context I can see how they rationally came to that conclusion. Today’s environment is very different. Hedging now would be speculative.

[jfan]

Thanks @gfp @Cigarbutt @Daphne for clarifying. I was initially thinking of the logistics of selling their short-term treasuries as they redeploy capital to corporate bonds or where ever else they think has a better risk-reward ratio, but the point on underwriting capacity as reflected by their statutory surplus was a good one, in terms, of how their investment portfolio can affect their underwriting abilities. 

 

There is some talk about why US bond yields spiked recently. Not being in the know, the first-order media explanations included the basis trade deleveraging, general flight to cash (and to Germany bonds?), and a broad conspiracy of countries selling off their US treasuries (eg China et al) to pressure the tariff decisions. Understanding these macro impacts, capital flows, and how to position yourself safely is a why I defer it to Prem, Brad and company to manage it for me. 

 

With this trade war business and swell of nationalism, it does call into question if the US treasuries continue to remain the go-to flight-to-safety parking spot and that geopolitical risks can undermine what hasn't changed in many decades. Certainly, it would take a significant amount of time to unwind, but these monetary systems seem more emotion-based and perhaps less subject to mean reversion than what my feeble short-term memory assumes. 

 

Wrt to political posturing, I have very little love for the direction that recent politicians have taken and their focus on re-distribution. The upcoming elections are mostly about how much credit one can take for their achievements. I'm general suspicious of most politicians. Prem worded it the best at the AGM, that having a strong economic outcome (from company-specific to a nation), is the best way to optimize charity. 

 

 

Edited April 12, 2025 by jfan

[gfp]

12 minutes ago, SafetyinNumbers said:

I don’t think most investors appreciate the context of the hedges at the time. The threat of negative interest rates was real and Fairfax has above average float so I believe it was defensive in nature. It was a bad idea but in context I can see how they rationally came to that conclusion. Today’s environment is very different. Hedging now would be speculative.

 

Yeah I agree on this.  Plus Fairfax has just graduated quickly to a much higher level of net worth and did not want to give it back.  A big part of the global financial system basically broke in 2008-2009 and by some accounts has still not recovered.   They were correct that a global step-change had occurred and we all got lucky that everything was basically fine - if below prior potential - in the next period.

 

Who wants to do it again?!  Maybe we can break this thing further

[djokovic1]

3 hours ago, SafetyinNumbers said:

I don’t think most investors appreciate the context of the hedges at the time. The threat of negative interest rates was real and Fairfax has above average float so I believe it was defensive in nature. It was a bad idea but in context I can see how they rationally came to that conclusion. Today’s environment is very different. Hedging now would be speculative.

 

I have a different take than yours on this.

 

After getting a huge payoff on the CDS trades during GFC, I think Prem may have concluded there is benefit (and an ability?) to make significant macro calls.

 

His view through the hedging period was the markets were overvalued. Prem was market timing and making a significant macro call on the direction of equity markets.

 

2010 letter 

"Our view was twofold: our capital had benefitted greatly from our common stock portfolio and we wanted to protect our gains, and we worried about the unintended consequences of too much debt in the system – worldwide! "

2012 letter:

"We are comfortable maintaining our hedges because of all the uncertainties we see in front of us..."

2015 letter:

"Hedging our equity exposure has been very costly for us. .....However, ....we see a great disconnect between the market and economic fundamentals"

 

Throughout this period he made a macro call that equity markets were overvalued, which was very costly for shareholders. My personal view is that long term equity investing and hedging don't go together. 

 

To be clear, to manage Fairfax's bond portfolio there will always be a macro element to it -> which they did beautifully by lessening duration in 2021 but hedging the equity book is an exercise in futility.

 

 

 

[gfp]

If you are nervous about giving back the gains on your equity portfolio, it's usually better to shrink your equity portfolio than it is to get fancy.  Maybe there was a tax deferral angle there, but as I've grown older cash makes me a better investor than if I have short index hedges on.  And I don't care about every little movement in the "stock market" nearly as much.

[Munger_Disciple]

36 minutes ago, gfp said:

If you are nervous about giving back the gains on your equity portfolio, it's usually better to shrink your equity portfolio than it is to get fancy.  Maybe there was a tax deferral angle there, but as I've grown older cash makes me a better investor than if I have short index hedges on.  And I don't care about every little movement in the "stock market" nearly as much.

 

[Cigarbutt]

16 hours ago, gfp said:

If you are nervous about giving back the gains on your equity portfolio, it's usually better to shrink your equity portfolio than it is to get fancy.  Maybe there was a tax deferral angle there, but as I've grown older cash makes me a better investor than if I have short index hedges on.  And I don't care about every little movement in the "stock market" nearly as much.

This post is not to suggest that the above statements are incorrect. It's just a 1999 reminiscence coming across the word "nervous". Offsprings in my house suggest such type of historical recollections are so "Y2K" and may not be terribly relevant to our new era. That's fine.

i remember listening to a presentation given by FFH executives around 1999 (their communications with the outside world was very limited then but it looks like they needed to open up a little as their underwriting results were becoming visibly terrible, they had developed a HUGE unrrealized bond loss position and they had a significant growing loss position on their large put against the S&P. When asked by an analyst about such put (the unconventionality of it etc), Roger Lace (maybe it was Brian Bradstreet) answered that, to the contrary, such puts were not only an option but a necessity (something like that) in such environment. This was an unusual comment (my perspective, unconventional but not necessarily wrong) because then (from AR 1999), they had only an 8% allocation to stocks, most of their stock allocation was in Korea and Japan and their put position was quite large, all that because they had growing "concerns" since the growing "speculation" starting in late 1996..

Then, they showed that they were right (eventually) and they were lucky in their timing. Eventually, it seems, they continued to be right but the timing became trickier. Also, they used standard valuations tools then, tools that have become even less reliable for timing purposes or perhaps it's different this time?

[Viking]

“Everyone has a plan until they get punched in the face.” Mike Tyson (philosopher)

 

President Trump has just punched financial markets in the face. In the process he has created unprecedented uncertainty - and that is now driving historic volatility. We have 3.6 years to go.

 

What is an investor to do?

 

Look for two things:

 

1.) Play defence: Find certainty.

 

What does this mean? Find stocks that are:

• Not impacted by tariffs (like P/C insurance)
• Not impacted by a slowing economy (like P/C insurance).

Certainty has always been a super important part of the valuation process (just ask some guy named Warren Buffett). Stocks with a high degree of certainty get a premium valuation. In the current environment, these stocks will be even more highly valued - as a result, due to their scarcity, valuations/multiples for these stocks will likely expand in the coming years.

 

2.) Play offence: Find stocks that will benefit from high/extreme volatility.

 

The current extremely volatility environment is an active managers wet dream. A value investors Super Bowl. It is almost the exact opposite set-up to the 'zero interest rate' regime that we had for +10 years. Except active management/value investing is dead. Who does that anymore?

 

Are there any stocks that check both boxes?

 

Very few stocks have the ability to play both ends of the court (defence and offence) in Trump’s new reality game show. The few that can will have the opportunity to deliver spectacular outperformance over the market averages in the coming years.

 

Got any names?

 

Yes. Fairfax Financial.

 

P/C Insurance stock. Not impacted by tariffs. Only mildly impacted by a slowing economy. As a result, earnings are largely locked and loaded for the next couple of years (the certainty part). But here is the kicker… When it comes to capital allocation, the execution from the senior management team at Fairfax has been best-in-class over the past 5 years (they are active managers/value investors). And the stock is cheap. So you get certainty on sale. And if you place your order today you will also get a call option on volatility for free.

[SafetyinNumbers]

An update on the long FFH / short XFN idea and some other thoughts post AGM

 

https://open.substack.com/pub/berczyparkcapital/p/update-on-ffh-xfn-trade-idea-and?utm_source=app-post-stats-page&r=ecc87&utm_medium=ios

[Viking]

Prem’s presentation from Fairfax’s recently held AGM is now available. If you want to get a good overview of the company, this is a great place to start. It clearly demonstrates how well the company is managed and how well it is positioned today. 
 

https://www.fairfax.ca/wp-content/uploads/2025/04/Fairfax_AGM_2025.pdf

[Viking]

What did I learn from attending Fairfax’s AGM this year? I still have a lot to learn. Guess how much analysts write about Fairfax’s culture in their reports? They don't (other than perhaps a passing mention). Guess how much I have written about culture in my 650 page book on Fairfax? Very little. Yes, I am an idiot.

----------

Looking at all US listed companies, the performance of Fairfax’s share price since 1985 (over the last 39 years) puts it at #8 on the list. Amazing. How did it do it? Because of its culture. Its culture is shining today as brightly as ever. Its culture is its moat - and it is getting wider and stronger with each passing year.

-----------

‘You can lead a horse to water, but you can’t make it drink.’ Fairfax is doing their best to help investors better understand its culture. Below is one example: the comments made at the AGM by Andy Barnard, who is Chairman of Fairfax’s insurance operations:

 

“So of course, we had a fantastic year in 2024, $1.8 billion of underwriting profit. 7 of our companies achieved record underwriting profits during 2024, which we're very pleased and happy and proud to see.

 

“(W)hat I'd like to focus on… is the reasons that we've been able to achieve this success. And I'd like to go back to that slide that Prem shows every year… that shows the tenure of our CEOs across Fairfax because I really don't think there is any more important factor behind our success than what that slide reveals.

 

“Continuity of management is just so vitally important in our industry as it is in many businesses. (B)ut I think it's especially important in the insurance business. It allows us, over time, to build, to grow, to improve our operations. And we do so without the distractions and the disruptions that come from changes at the top.

 

“Now for those of you that might follow the trade press in our industry, you would see amongst many of our competitors, and I'm sort of referring to the global commercial, property and casualty market, which is really the main theatre that we operate in. But for so many of these companies, it's just a revolving door. And it's not just… the CEO. (B)ut it is also many of their key executives. And this creates circumstances that make it very hard for companies to have the stability that enables them to thrive and improve and build and grow over time.

 

“At Fairfax, our decentralized operating philosophy, whereby we keep our company separate and autonomous creates a much more favourable, much more rewarding environment for our CEOs and for their management teams. And it is that environment that allows them to continue to build and grow and improve their operations. And that's what you're seeing in the results that we've been able to achieve at Fairfax.

 

“And so -- we've said this many times. We may say it every one of these meetings, we are so blessed. And this gets better and better every year because of that continuity, but we are so blessed with the remarkable collection of CEOs and leaders that we have running our companies. And again, I don't think there is any more important explanation for the underwriting success that we've been able to achieve.

 

“Prem referred to our moat, the culture of Fairfax being our moat. This retention of employees is really something that is attributable to the unique culture that we've had at Fairfax: supportive, rewarding, empowering. And that's what's enabled us to have this remarkable duration. I would say if you compare us to any of the major companies in that global P&C world. I don't, think you would find anyone with close to the duration of tenure at the top. And not just at the top, at the very top, but also amongst their senior management teams that you find at Fairfax.”

Edited April 19, 2025 by Viking

[jfan]

@Viking

 

Buffett and Munger spoke about 3 categories of companies:

1) Great businesses with deep moats that a monkey could run

2) Good businesses that are dependent on stellar management that can keep costs low and manage the cycles

3) Crap business that can't realize a profit

 

Insurance itself is a commodity business with cycles, it can be a good (not great) business if management is long-term focused, keeps costs low and able to be counter-cyclical. As you stated, talent is the key. The ability to retain talent is all about its culture.

 

I had a discussion with a fellow shareholder about the difference between the culture at Fairfax vs Constellation Software. Both stocks have great returns but the culture is vastly different, where talent retention is very different (eg people get let go if not performing, people sell their business to CSU but don't really want to stay there). I guess for a business to really work for the long-term, it really depends on the context and can vary quite substantially how they get there.

 

The other thing that isn't discussed is the culture of the shareholder base. Having a set of shareholders that view it as a part ownership probably also has an advantage as well. I've never been to a CSU meeting (apparently they are all online). But having coming to some of the other FFH events this year for the first time, it is revealing the like-minded-ness among all its owners.  These events seem to be an opportunity for Fairfax to spread its own culture beyond its employees. 

 

 

[jfan]

On a side note, I was chatting with a retired nuclear engineering professor yesterday. He was telling about how companies used to issue stock certificates, and that Disney had one of the most beautiful ones. Then he told me a story of a childless couple that lived in a middle-class apartment in the US. The gentleman sold his small business for $50K, and put everything into a security that he liked. He got issued the stock certificates to which he put in his safe. The couple gets old, his wife passes away, and then he dies in his 90s. Being childless, the government comes to sort out their assets. They find these stock certificates, contact the company to verify that this couple are indeed shareholders. The company says yes. 

 

The security: Berkshire Hathaway

The value: $800 million

 

Talk about the value of long-term ownership.

 

 

[Viking]

The last time financial markets were in turmoil was during the US regional banking crisis in spring of 2023. Fairfax & Kennedy Wilson were opportunistic. The initial investment in PacWest loans has performed very well. More importantly they used the crisis to build a new business/income stream - making both companies stronger in the process.

 

There are many really important lessons that come from this investment.

• Relationships matter. Fairfax has built an extensive network of external relationships/partnerships across industries and geographies.
  • This capability leads to deal flow. Fairfax's phone is starting to ring again.
• This is a great example of how extreme volatility in financial markets has been a good thing for Fairfax and its shareholders. Something to keep in mind in the current environment.

----------

 

In June of 2023, Kennedy Wilson and Fairfax purchased a $4.5 billion construction loan portfolio from PacWest. PacWest was caught in the regional bank crisis and they were forced to sell their best assets at a discount. At Fairfax’s AGM in April 2025, Bill McMorrow from Kennedy Wilson provided an update. How has the investment performed? Was it a good decision?

 

There are to angles to this transaction:

1. Initial transaction – purchase of the $4.5 billion construction loan portfolio.
   • 27 of those 65 loans have been paid off at par (they were bought at a discount). 
   • Since inception, the loans have generated almost $500 million of interest income.
   • The current portfolio is generating roughly $350 million a year in interest income. 
2. Building the business
   • One of the conditions of the original deal with PacWest was the 40 people who were running the loan portfolio would also move over the Kennedy Wilson. 
   • At the same time, the regional banks backed away from the multifamily and student housing market. 
   • Over the past 18 months, the new team at Kennedy Wilson has generated about $5.5 billion of new loan originations. 
   • As a result, interest income of $350 million is expected to grow significantly in the coming years.  

“It was another one of these success stories that really turned out well for both our companies.” Bill McMorrow

 

-----------

 

Comments from Prem about Kennedy Wilson in Fairfax 2024AR.

 

“Since we met Bill McMorrow and Kennedy Wilson in 2010, we have invested $1.3 billion alongside them in real estate, have received cash proceeds of $1.1 billion and still have real estate worth about $650 million. Our average annual realized return on completed projects is approximately 22%. We also own 10% of the company. More recently, we have been investing with Kennedy Wilson and the team from Pacific Western Bank that joined them, in first mortgage loans secured by high-quality apartment buildings predominantly in the western parts of the United States, with a loan-to-valuation of 52%. At the end of 2024, we had invested in $4.4 billion of first mortgage loans in the U.S. at an average yield of 7.8% and an average maturity of 1.7 years with two, one-year renewal rights, and in $440 million of first mortgage loans in the U.K. and Ireland at an average yield of 6.9% and an average maturity of 1.6 years.”

Edited April 20, 2025 by Viking

[anshulp]

For those interested WRB just reported Q1

Call is in 20 mins. I always find what they say very useful on it for the industry as a whole. 

[MMM20]

Top performer for the past 20 years. And still the statistically cheapest of the bunch.

 

 

 

 

 

 

Edited April 22, 2025 by MMM20

[SafetyinNumbers]

55 minutes ago, MMM20 said:

Top performer for the past 20 years. And still the statistically cheapest of the bunch.

 

 

 

 

 

 

It’s even cheaper than it looks as charting software defaults to adjusted earnings as opposed to IFRS earnings(which is also on the low end of expectations as very little is expected from the non-fixed income portfolio.

 

[mananainvesting]

One of the things that I ponder is, How/why did Mohnish Pabrai miss $FFH.TO over the last few years. I think it is a reasonable assumption that he is aware of what Fairfax does, its management etc and yet why doesn't he invest in $FFH.TO? 

 

I wonder why he doesn't see $FFH.TO as a high compounding machines (15%)? or is his return expectation higher than 15%? 

[Whensthepaintdry?]

I’m not sure, but I’m glad he didn’t . He would have talked about it non stop. 

Edited April 22, 2025 by Whensthepaintdry?

[Munger_Disciple]

1 hour ago, Whensthepaintdry? said:

I’m not sure, but I’m glad he didn’t . He would have talked about it non stop. 

 

[Hektor]

1 hour ago, mananainvesting said:

One of the things that I ponder is, How/why did Mohnish Pabrai miss $FFH.TO over the last few years.

Ego, may be.

[Hektor]

1 hour ago, Whensthepaintdry? said:

I’m not sure, but I’m glad he didn’t . He would have talked about it non stop. 

[mananainvesting]

Fairfax Financial mentioned in Globe and Mail: https://www.theglobeandmail.com/business/rob-magazine/article-guardian-capitals-sam-baldwin-outperforms-by-pursuing-asymmetric/

[SafetyinNumbers]

1 hour ago, Haryana said:

https://calgaryherald.com/news/us-trade-war-tariffs-auto-insurance-impact

The higher costs incurred by tariffs places more pressure on insurers in excess of the prices they can charge customers, according to Sutherland.

“The Alberta government has already confirmed that insurers are losing 15 cents on the dollar for every policy they sell,” he said. “What that means is you’re seeing insurers unable to continue selling coverage in that province.”

The last couple of years saw several auto insurance companies close their door on the province, citing claim costs that exceed profits and lack of profit growth.

Zenith Insurance was among the first to leave in the summer of 2023, followed by Sonnet Insurance Company and Aviva subsidiary S&Y in 2024.

I’m glad Fairfax doesn’t do a lot of personal lines..