SafetyinNumbers Posted May 16 Posted May 16 5 minutes ago, gfp said: I know you like to think of it as "they have already locked in the price" but that's not how I think about it at all. I believe there is evidence to support my view. 6 minutes ago, gfp said: choosing to repurchase the block of counterparty shares hedging the TRS tranche they have closed in the past, This is some pretty good evidence. 6 minutes ago, gfp said: The company has been consistent about framing it as an investment - for the gains - and not framing it as "locking in the price of a future share buyback." It makes sense to frame it as an investment for a lot of reasons. One, there is no reason to forego the flexibility to exit and not do a buyback. Two, the accounting treatment is likely better than if it was considered a deferred buyback. Three, it signals to shareholders they think the stock is cheap. 9 minutes ago, gfp said: I think they would be happy to exit the TRS at a price so high they were not interested in buying the underlying block... The sense I got from the questions asked about the TRS on conference calls and the AGMs over the years was that valuation is the trigger for taking off the TRS. It makes sense to me that it’s the outlet for buybacks when the stock gets above 1.5x BV. I think maintaining the investments to equity leverage is important to them. We’ll see what happens.
Txvestor Posted May 17 Posted May 17 7 hours ago, gfp said: I've thought about that also but despite them choosing to repurchase the block of counterparty shares hedging the TRS tranche they have closed in the past, there is no reason to assume they will repurchase the share blocks when they choose to close out all or part of the TRS position in the future. I know you like to think of it as "they have already locked in the price" but that's not how I think about it at all. The decision to buy the counterparty's shares at the same time you are choosing to exit the swap is a completely separate decision and the price will be very different. The company has been consistent about framing it as an investment - for the gains - and not framing it as "locking in the price of a future share buyback." I think they would be happy to exit the TRS at a price so high they were not interested in buying the underlying block... As with so many things that Fairfax does, I think they like keeping optionality. I think the default would be to buy back the shares. However, the unlikely event that the market goes down significantly and Fairfax shares do well. They may choose to take it out as cash pay the capital gains tax and then use that money to buy some really beaten down equities. That's one scenario where it may make sense. But giving themselves that flexibility is something Fairfax seems to do everywhere.
Spekulatius Posted May 17 Posted May 17 (edited) On 5/10/2026 at 10:46 AM, gfp said: The one thing Prem would never have done with those same slides at the AGM was compare Fairfax to Berkshire and suggest a similar outcome to Berkshire from an earlier point in time. As shareholders, we can do that comparison, but a board member should not be doing that "here's your chance to own the next Berkshire" sales pitch and I think its just as shady when Ackman does it with his "modern-day Berkshire" while he feverishly reads "Ajit Jain for dummies" and buys an insurance company. Buy insurance company... Invest surplus in equities... PROFIT! Graveyard is full of hedge funds who had that game plan. Showing the results of the past is fine - they should be proud of their track record. Lauren's presentation was fine, just not appropriate for a board member of the company. If she were just a fund manager that had a long term position in the stock it's totally fair game to talk her book / pitch her favorite holdings - that's what all those people do at conferences. Raise money for Cancer? Pump a new undisclosed holding.. Again, Ackman figured out the playbook many years ago at Sohn and similar hedge fund events. I agree with this, especially regarding the comparison of FFH with Berkshire . It feels inappropriate to me for a board member. There is also a long standing curse that afflicts those comparing with Berkshire or WEB. Edited May 17 by Spekulatius
netcash1 Posted May 17 Posted May 17 Bharti Life deal places Digit Life around $100M valuation. Keep gaining share and executing and deliver operational excellence.
djokovic1 Posted May 17 Posted May 17 I find the current share price super attractive. The stock price has been flat for a year while the business keeps compounding. And the future returns for the next 3-4 years are locked in except the equity gains/losses. But that too will keep compounding with a long term view. Downside risk is low at <8x EPS. I also think the next 3 year consensus estimates are obnoxiously wrong <US $ 200! as they don't factor in compounding over time. My biggest worry was rates going down but it seems more likely than not that rates are flat at best and likely go higher. It's hard for me to create a concrete bear case with a 5 year horizon.
Viking Posted May 18 Posted May 18 (edited) 11 hours ago, djokovic1 said: I find the current share price super attractive. The stock price has been flat for a year while the business keeps compounding. And the future returns for the next 3-4 years are locked in except the equity gains/losses. But that too will keep compounding with a long term view. Downside risk is low at <8x EPS. I also think the next 3 year consensus estimates are obnoxiously wrong <US $ 200! as they don't factor in compounding over time. My biggest worry was rates going down but it seems more likely than not that rates are flat at best and likely go higher. It's hard for me to create a concrete bear case with a 5 year horizon. @djokovic1, I agree - time frame is key. I also use a 5 year time frame when I look at Fairfax. Through that lens there is lots to like about the stock price/valuation today. But I do think investors will get tested (even from the low current valuation level). When the next bear market hits my guess is Fairfax will get hit (and likely harder than the market averages). At some point, +$100 oil is going to matter to financial markets - so the next bear market might be right around the next corner. Of course, exploiting volatility is one of Fairfax's superpowers. Investors won't care (if history is any guide). In fact, it will be the opposite (most investors view volatility as a terrible thing - especially for Fairfax). Fairfax is such an interesting investment because the gap between perception (narrative) and reality (fundamentals/actual business model) is so large. During times of market weakness (when fear grips markets) the gap widens. This has been largely true for Fairfax through most of the company's history. The reality is Fairfax makes many of their great (needle moving) investments in bear markets. My guess is that will continue... and most "investors" won't care. It is so counterintuitive. Edited May 18 by Viking
SafetyinNumbers Posted May 23 Posted May 23 Has anyone built a model for Fairfax using RBC’s ROE framework? Is this something AI could build? It would allow for sensitivity analysis on combined ratio, investment yield (could be broken out between fixed income and equities) and tax rate. Everything else is pretty static.
yesman182 Posted May 23 Posted May 23 1 hour ago, SafetyinNumbers said: Has anyone built a model for Fairfax using RBC’s ROE framework? Is this something AI could build? It would allow for sensitivity analysis on combined ratio, investment yield (could be broken out between fixed income and equities) and tax rate. Everything else is pretty static. If you upload that image to Claud you can tell it to change whatever you want and it wioo make you a new chart. Or you can have it rebuild that chart with more recent data if you want. I just did that and asked it to add progressive into the chart for comparison. If you like the leverage at FFH, you will really like progressive. I know they aren’t really comparable, but it seems to me that progressive is undervalued too. I think the ROE at progressive can stay elevated, even with a boring bond portfolio somewhat similar to FFH.
gfp Posted May 23 Posted May 23 (edited) I was having a long conversation with an AI model about Fairfax's 10 year history of reserve redundancy / positive development of prior years reserves and how Fairfax has been very good at over-reserving up front, which has the effect of over-stating "float" and understating "shareholders equity" - since a fairly predictable chunk of "liabilities" is actually equity that just hasn't been released yet. This also has the effect of lowering the coveted leverage ratio (2.5-3x) we receive because equity is actually probably higher than stated. A similar lowering of the leverage ratio results from the under-marked assets we know are worth a few billion more than the accounting books say ("excess of fair value over carrying value"). Either way, Fairfax is working hard to shrink their equity through repurchases and maintain their leverage and they have a higher leverage ratio than Markel. Berkshire lost its leverage a while ago. Sad. The conversation moved into a discussion of the behavior of these prior years reserve releases (mostly in Q4s) in the 3-6 year period after a "hard market" and it became pretty clear that a whole lot of the past several years of hard market benefit has not actually been reflected yet on the books. A major counter-cyclical earnings buffer that makes those softer years a lot more enjoyable (another added bonus is growth slows, freeing up capital to be distributed down to the holdco). Because Fairfax grew so damn much during the hard market years, the annual contribution from reserve releases / positive development will likely be much higher than the $500m annual "typical" release and 2025's $751.5m. If you believe Fairfax has maintained the same over-reserved conservatism - and I don't know any reason to assume otherwise - then they already have a higher shareholders equity and lower liabilities than their accounting book indicates. Edited May 23 by gfp 1
SafetyinNumbers Posted May 24 Posted May 24 (edited) 6 hours ago, gfp said: I was having a long conversation with an AI model about Fairfax's 10 year history of reserve redundancy / positive development of prior years reserves and how Fairfax has been very good at over-reserving up front, which has the effect of over-stating "float" and understating "shareholders equity" - since a fairly predictable chunk of "liabilities" is actually equity that just hasn't been released yet. This also has the effect of lowering the coveted leverage ratio (2.5-3x) we receive because equity is actually probably higher than stated. A similar lowering of the leverage ratio results from the under-marked assets we know are worth a few billion more than the accounting books say ("excess of fair value over carrying value"). Either way, Fairfax is working hard to shrink their equity through repurchases and maintain their leverage and they have a higher leverage ratio than Markel. Berkshire lost its leverage a while ago. Sad. The conversation moved into a discussion of the behavior of these prior years reserve releases (mostly in Q4s) in the 3-6 year period after a "hard market" and it became pretty clear that a whole lot of the past several years of hard market benefit has not actually been reflected yet on the books. A major counter-cyclical earnings buffer that makes those softer years a lot more enjoyable (another added bonus is growth slows, freeing up capital to be distributed down to the holdco). Because Fairfax grew so damn much during the hard market years, the annual contribution from reserve releases / positive development will likely be much higher than the $500m annual "typical" release and 2025's $751.5m. If you believe Fairfax has maintained the same over-reserved conservatism - and I don't know any reason to assume otherwise - then they already have a higher shareholders equity and lower liabilities than their accounting book indicates. I agree with this analysis 100%. If we were to adjust everything to fair value including the reserves, we’re probably trading below book value. I think the last cycle showed us how many reserves they could release when motivated. I think they were very motivated in 2013-2019 period to release reserves because hedging, low interest rates and the change in market structure impacted ROE dramatically. Currently, there is no reason to release reserves unless forced by the auditors. They can easily beat their 15% BVPS growth target over a FTM basis so there is no reason to pay taxes and reduce leverage. Meanwhile, they also use excess capital to reduce BVPS and increase forward ROE all else being equal. That should mean a higher terminal multiple. It also means it’s less risky than people think. The quants think the extra reserves is extra debt. i also think they are set up great if there is a big cat. People will sell FFH during hurricane season to avoid being long in case there is a bad one because of the hit to book value. Meanwhile, they not only have the reserves without the combined going over 100 but they will also be able to aggressively grow premiums. Strong premium growth will bring the momentum investors back and the multiple will start to increase again on accounting book value. Higher interest rates might do that too. Based on the low end of consensus Q226E EPS which seems very low given the Poseidon gain, the stock is trading below 1.25x accounting book value. How low can the multiple go? Given how quickly book value is going then how low can the stock go? Edited May 24 by SafetyinNumbers
Viking Posted May 24 Posted May 24 (edited) 18 hours ago, gfp said: I was having a long conversation with an AI model about Fairfax's 10 year history of reserve redundancy / positive development of prior years reserves and how Fairfax has been very good at over-reserving up front, which has the effect of over-stating "float" and understating "shareholders equity" - since a fairly predictable chunk of "liabilities" is actually equity that just hasn't been released yet. This also has the effect of lowering the coveted leverage ratio (2.5-3x) we receive because equity is actually probably higher than stated. A similar lowering of the leverage ratio results from the under-marked assets we know are worth a few billion more than the accounting books say ("excess of fair value over carrying value"). Either way, Fairfax is working hard to shrink their equity through repurchases and maintain their leverage and they have a higher leverage ratio than Markel. Berkshire lost its leverage a while ago. Sad. The conversation moved into a discussion of the behavior of these prior years reserve releases (mostly in Q4s) in the 3-6 year period after a "hard market" and it became pretty clear that a whole lot of the past several years of hard market benefit has not actually been reflected yet on the books. A major counter-cyclical earnings buffer that makes those softer years a lot more enjoyable (another added bonus is growth slows, freeing up capital to be distributed down to the holdco). Because Fairfax grew so damn much during the hard market years, the annual contribution from reserve releases / positive development will likely be much higher than the $500m annual "typical" release and 2025's $751.5m. If you believe Fairfax has maintained the same over-reserved conservatism - and I don't know any reason to assume otherwise - then they already have a higher shareholders equity and lower liabilities than their accounting book indicates. @gfp, this is an important topic for Fairfax shareholders/investors. As you have laid out above, conservative reserving practices is another example of hidden value. Fairfax’s insurance business is also much larger today than it was 10 years ago. As the reserves are released in the coming years it will likely be a large and important tailwind to underwriting profit and earnings. My guess is Mr Market will not factor conservative reserving practices into their valuation models. It does provide shareholders with an additional margin of safety. I am still thinking about how to incorporate all the different (and substantial) sources of hidden value into how I model/understand and value Fairfax. Currently, I like to think of them primarily as ‘locked and loaded’ future income streams (in addition to all the regular ones). Some, like conservative reserving, will boost underwriting profit. Others, like excess of FV over CV will boost investment gains. The amount and the timing can be estimated - using a two or three year rolling average. Which shouldn’t be a problem for an investor. Lots of analysts will struggle (as it will be impossible to estimate the exact amount each quarter or year). What has happened with hidden value (the sources and amounts/growth) - both in insurance and investments - is another really good example of how much Fairfax has been transformed over the past 5 years. BVPS is losing its relevance as a valuation and performance measure. Edited May 24 by Viking
SafetyinNumbers Posted May 24 Posted May 24 1 hour ago, Viking said: BVPS is losing its relevance as a valuation and performance measure. I think when Buffett says BVPS is not as relevant, I think he means that it’s not an indicator of intrinsic value on its own. It has to be taken in conjunction with ROE to determine a fair P/B multiple all else being equal. Fairfax has the benefit of turning over its equity portfolio which along with reserve releases means that BVPS lags IVPS. It’s why an investor should be willing to pay a premium as Fairfax is when it buys stock back.
Hoodlum Posted May 24 Posted May 24 56 minutes ago, SafetyinNumbers said: I think when Buffett says BVPS is not as relevant, I think he means that it’s not an indicator of intrinsic value on its own. It has to be taken in conjunction with ROE to determine a fair P/B multiple all else being equal. Fairfax has the benefit of turning over its equity portfolio which along with reserve releases means that BVPS lags IVPS. It’s why an investor should be willing to pay a premium as Fairfax is when it buys stock back. Prem hinted at this again in the latest shareholders letter, when discussing Allied World.
SafetyinNumbers Posted May 24 Posted May 24 17 minutes ago, Hoodlum said: Prem hinted at this again in the latest shareholders letter, when discussing Allied World. Allied World is marked at 6.4x P/E. With FFH’s P/B multiple of ~1.25x its 8x earnings which is about the same as Fairfax as a whole.
gfp Posted May 25 Posted May 25 (edited) Has anyone spent any time looking at what appears to be the absolute worst possible timing of Sokol / Fairfax selling off the crown jewel assets of the old APR Energy business to Fortress Investment Group just before the value of, and demand for, 2nd hand, immediately deployable mobile aero-derivative gas turbine generation assets skyrocketed? I was looking into Anthropic's expansion from xAI's Colossus I to also include part of their Colossus II data center and drilling down on the containerized Caterpillar natural gas gensets xAI is using in Mississippi and it really sounded like APR's 20x GE TM2500 & 10x Pratt & Whitney FT8 would have shot up in value immediately after Sokol decided to divest. After years of nursing a dud with APR's emerging markets leasing business they threw in the towel at the worst possible moment. (and to add insult to injury, Fairfax made several payments to Atlas / Poseidon to indemnify them for losses on their purchase of APR energy from Fairfax in the first place...) https://www.aprenergy.com/apr-energy-expands-power-generation-capacity-to-over-1-1-gw-as-data-center-power-demand-soars/ Edited May 25 by gfp
Hoodlum Posted May 25 Posted May 25 I noticed that Prem visited the Indian consulate in Toronto a couple days ago, but didn’t think much of it. Now I see that India’s trade minister along with 150 Indian business delegates arrived in Canada for the next few days. Prem is going to be busy. https://www.reuters.com/world/india/indias-goyal-visit-canada-with-150-business-leaders-boost-trade-ties-2026-05-23/
Viking Posted May 26 Posted May 26 (edited) Hidden Value Fairfax has been transformed over the past five years. The accounting results clearly show it: record EPS, high-teen ROE, and best-in-class growth in BVPS among P/C insurance peers. But the accounting results tell only part of the story. Much more has been happening under the hood at Fairfax that has not been captured in reported earnings or book value. As a result, the increase in Fairfax’s economic/intrinsic value over the past five years has been far greater than the accounting results suggest. We refer to this growing gap between economic value and accounting value as hidden value. That is the focus of this post. Hidden Value Hidden value exists throughout Fairfax — across both its insurance operations and investment holdings. This leads to two important questions: How big is it? What is the trend? Is it growing? The answers help investors better understand Fairfax’s past performance, current positioning, and future prospects. The challenge is that hidden value is a broad and complicated topic. Some sources are relatively easy to identify and measure; others are much more nuanced. So, it makes sense to break the analysis into smaller pieces and begin with the easier ones. Today, we will focus on one important component of hidden value: Excess of FV over CV Fairfax provides investors with valuable disclosure regarding one of its most important sources of hidden value: the excess of fair value (FV) over carrying value (CV) for non-insurance associates and market-traded consolidated holdings. Associate Holdings These are investments where Fairfax typically owns 20%–50% and exercises significant influence, but not control. Examples include: Eurobank Poseidon (Atlas/Seaspan) EXCO Resources Waterous Energy Fund III Market Traded Consolidated Holdings These are holdings where Fairfax owns more than 50% and controls the business. Examples include: Fairfax India Thomas Cook India Dexterra AGT Food & Ingredients How the Accounting Works Associate Holdings Associate investments are generally accounted for using the equity method under IFRS (IAS 28). This differs significantly from ordinary public equity holdings. At acquisition — or when ownership rises above 20% — the investment is initially recorded at purchase price. After that, carrying value changes based on: Share of earnings → increases carrying value Dividends received → reduce carrying value OCI adjustments → FX, pensions, etc. Impairments → permanent write-downs Importantly, associates are not marked to market each quarter. As a result, carrying value largely reflects: Original cost Plus retained earnings over time Minus dividends This differs sharply from ordinary public equities, where balance sheet values are regularly adjusted to current market prices. For public equities: Fair value ≈ carrying value For associates: Fair value can become materially higher than carrying value Especially when: Earnings quality improves Valuation multiples expand Businesses compound over long periods of time This is one reason companies like Fairfax Financial Holdings and Berkshire Hathaway can develop substantial hidden value over time. Market-Traded Consolidated Holdings Market-traded consolidated holdings create similar economic dynamics, although the accounting treatment differs. When Fairfax controls a business, it consolidates 100% of the subsidiary’s assets, liabilities, revenue, and expenses onto its financial statements. At acquisition: Assets and liabilities are recorded at fair value Excess purchase price becomes goodwill Over time, carrying value changes through: Retained earnings Dividends OCI adjustments FX movements Impairments Like associates, these businesses are not marked to market each quarter simply because they are publicly traded. As a result: Accounting values remain largely historical Internally generated intangible value is often not recognized Goodwill generally remains static unless impaired Over time, market value can diverge materially from carrying value. Calculating Hidden Value For associate and market-traded consolidated holdings, hidden value can be estimated by comparing fair value to carrying value. Importantly, Fairfax does this work for investors each quarter. Excess of FV over CV: Size and Growth At March 31, 2026, Fairfax’s associate and market-traded consolidated holdings had a fair value of approximately $12.8 billion. This represented about 45% of Fairfax’s total equity portfolio of ~$29 billion — a very significant portion of the company’s equity investments. Here is where the story gets interesting. The carrying value of these holdings was only $8.9 billion — the amount reflected in shareholders’ equity. The difference was approximately: $3.9 billion Or about $176 per diluted share (pre-tax) That is hidden value. Growth This bucket of holdings has grown dramatically over the past 5.25 years. Carrying value increased 79% Fair value increased 197% As a result, the excess of FV over CV surged: From negative $663 million at December 31, 2020 To positive $3.9 billion at March 31, 2026 That is an increase of approximately $4.6 billion, or an average of $873 million per year. This represents a significant amount of value creation that has not been captured in reported EPS, ROE, or BVPS. The key takeaway: Fairfax’s economic performance over the past five years has been materially better than the accounting results indicate. Book value today understates economic value by a meaningful amount. Summary Excess of FV over CV for associate and market-traded consolidated holdings is an important and rapidly growing source of hidden value at Fairfax. How big is it? Approximately $3.9 billion What is the trend? Growing at roughly $873 million per year over the past 5.25 years Fairfax itself highlights the importance of this metric. From the company’s quarterly disclosure: “Excess (deficiency) of fair value over carrying value – These pre-tax amounts, while not included in the calculation of book value per basic share, are regularly reviewed by management as an indicator of investment performance for the company's non-insurance associates and market traded consolidated non-insurance subsidiaries that are considered to be portfolio investments…” Fairfax effectively provides investors with a roadmap. The message is clear: book value and reported earnings alone are no longer sufficient to fully understand Fairfax’s economic performance. And this is only one example of hidden value. Additional sources remain embedded throughout Fairfax’s insurance operations, investment holdings, and capital allocation activities. Investors who ignore them risk materially understating the company’s intrinsic value. Future topics to explore include: What is driving the rapid growth in hidden value? Will this value eventually be realized? Or will it remain hidden? How should investors think about hidden value when valuing Fairfax? Edited May 26 by Viking
dartmonkey Posted May 26 Posted May 26 1 hour ago, Viking said: Growth This bucket of holdings has grown dramatically over the past 5.25 years. Carrying value increased 79% Fair value increased 197% As a result, the excess of FV over CV surged: From negative $663 million at December 31, 2020 To positive $3.9 billion at March 31, 2026 That is an increase of approximately $4.6 billion, or an average of $873 million per year. This represents a significant amount of value creation that has not been captured in reported EPS, ROE, or BVPS. Thanks for reviewing this. I think the last sentence I quoted is not quite right. The main point, I believe, is that accounting rules require the company to count towards book value only the historical cost of associate and consolidated interests, plus retained earnings and minus dividends and some other adjustments, as you pointed out. This is a good reason to distrust book value as a measure of value. However, earnings of associate and consolidated holdings are fully reflected in Fairfax's total earnings. This means that book value is off, but EPS and ROE are not affected in the same way. To take an example, Eurobank, which is responsible for almost half the difference between carrying value and fair value, is currently carried at $2.790b, whereas Fairfax's stake has a market value of $4.579b, as per your table. From Dec 31, 2021 to March 31, 2026, Fairfax's stake has gone up 6 times, from $800m to $4.6b, and this understates the rise since Fairfax has been selling shares to keep its stake below 33%. However, in the same time, total Eurobank earnings have gone from €328 to €1.35b, so Fairfax's share has gone from roughly €109m to €445m, a fourfold increase. If you are valuing Fairfax by taking some multiple of earnings (the current price is 8x last year's earnings), then your valuation of Eurobank's contribution has gone up by 4x using earnings, as opposed to 5x using market value or 2.4x using IFRS-mandated carrying value. Just one more reason to prefer using earnings (appropriately smoothed for underwriting and realized investment gains) rather than putting too much weight on book value. But my main point is that we should not be adding that $873m/year in FV-CV to the earnings of Fairfax, which would be double counting.
SafetyinNumbers Posted May 26 Posted May 26 23 minutes ago, dartmonkey said: Thanks for reviewing this. I think the last sentence I quoted is not quite right. The main point, I believe, is that accounting rules require the company to count towards book value only the historical cost of associate and consolidated interests, plus retained earnings and minus dividends and some other adjustments, as you pointed out. This is a good reason to distrust book value as a measure of value. However, earnings of associate and consolidated holdings are fully reflected in Fairfax's total earnings. This means that book value is off, but EPS and ROE are not affected in the same way. To take an example, Eurobank, which is responsible for almost half the difference between carrying value and fair value, is currently carried at $2.790b, whereas Fairfax's stake has a market value of $4.579b, as per your table. From Dec 31, 2021 to March 31, 2026, Fairfax's stake has gone up 6 times, from $800m to $4.6b, and this understates the rise since Fairfax has been selling shares to keep its stake below 33%. However, in the same time, total Eurobank earnings have gone from €328 to €1.35b, so Fairfax's share has gone from roughly €109m to €445m, a fourfold increase. If you are valuing Fairfax by taking some multiple of earnings (the current price is 8x last year's earnings), then your valuation of Eurobank's contribution has gone up by 4x using earnings, as opposed to 5x using market value or 2.4x using IFRS-mandated carrying value. Just one more reason to prefer using earnings (appropriately smoothed for underwriting and realized investment gains) rather than putting too much weight on book value. But my main point is that we should not be adding that $873m/year in FV-CV to the earnings of Fairfax, which would be double counting. I prefer using the earnings and book value together. If all of Fairfax’s assets were marked at fair value, post adjustment forward ROE would be materially lower. That’s why a high ROE should fetch a higher P/B multiple. The relationship is exponential because of the compounding. I have four different methods to calculate intrinsic value. Two of them use book value. P/B (I use a conservative 2.5x) and the Buffett method, BV + insurance float.
Maverick47 Posted May 26 Posted May 26 3 hours ago, Viking said: Hidden Value Fairfax has been transformed over the past five years. The accounting results clearly show it: record EPS, high-teen ROE, and best-in-class growth in BVPS among P/C insurance peers. But the accounting results tell only part of the story. Much more has been happening under the hood at Fairfax that has not been captured in reported earnings or book value. As a result, the increase in Fairfax’s economic/intrinsic value over the past five years has been far greater than the accounting results suggest. We refer to this growing gap between economic value and accounting value as hidden value. That is the focus of this post. Hidden Value Hidden value exists throughout Fairfax — across both its insurance operations and investment holdings. This leads to two important questions: How big is it? What is the trend? Is it growing? The answers help investors better understand Fairfax’s past performance, current positioning, and future prospects. The challenge is that hidden value is a broad and complicated topic. Some sources are relatively easy to identify and measure; others are much more nuanced. So, it makes sense to break the analysis into smaller pieces and begin with the easier ones. Today, we will focus on one important component of hidden value: Excess of FV over CV Fairfax provides investors with valuable disclosure regarding one of its most important sources of hidden value: the excess of fair value (FV) over carrying value (CV) for non-insurance associates and market-traded consolidated holdings. Associate Holdings These are investments where Fairfax typically owns 20%–50% and exercises significant influence, but not control. Examples include: Eurobank Poseidon (Atlas/Seaspan) EXCO Resources Waterous Energy Fund III Market Traded Consolidated Holdings These are holdings where Fairfax owns more than 50% and controls the business. Examples include: Fairfax India Thomas Cook India Dexterra AGT Food & Ingredients How the Accounting Works Associate Holdings Associate investments are generally accounted for using the equity method under IFRS (IAS 28). This differs significantly from ordinary public equity holdings. At acquisition — or when ownership rises above 20% — the investment is initially recorded at purchase price. After that, carrying value changes based on: Share of earnings → increases carrying value Dividends received → reduce carrying value OCI adjustments → FX, pensions, etc. Impairments → permanent write-downs Importantly, associates are not marked to market each quarter. As a result, carrying value largely reflects: Original cost Plus retained earnings over time Minus dividends This differs sharply from ordinary public equities, where balance sheet values are regularly adjusted to current market prices. For public equities: Fair value ≈ carrying value For associates: Fair value can become materially higher than carrying value Especially when: Earnings quality improves Valuation multiples expand Businesses compound over long periods of time This is one reason companies like Fairfax Financial Holdings and Berkshire Hathaway can develop substantial hidden value over time. Market-Traded Consolidated Holdings Market-traded consolidated holdings create similar economic dynamics, although the accounting treatment differs. When Fairfax controls a business, it consolidates 100% of the subsidiary’s assets, liabilities, revenue, and expenses onto its financial statements. At acquisition: Assets and liabilities are recorded at fair value Excess purchase price becomes goodwill Over time, carrying value changes through: Retained earnings Dividends OCI adjustments FX movements Impairments Like associates, these businesses are not marked to market each quarter simply because they are publicly traded. As a result: Accounting values remain largely historical Internally generated intangible value is often not recognized Goodwill generally remains static unless impaired Over time, market value can diverge materially from carrying value. Calculating Hidden Value For associate and market-traded consolidated holdings, hidden value can be estimated by comparing fair value to carrying value. Importantly, Fairfax does this work for investors each quarter. Excess of FV over CV: Size and Growth At March 31, 2026, Fairfax’s associate and market-traded consolidated holdings had a fair value of approximately $12.8 billion. This represented about 45% of Fairfax’s total equity portfolio of ~$29 billion — a very significant portion of the company’s equity investments. Here is where the story gets interesting. The carrying value of these holdings was only $8.9 billion — the amount reflected in shareholders’ equity. The difference was approximately: $3.9 billion Or about $176 per diluted share (pre-tax) That is hidden value. Growth This bucket of holdings has grown dramatically over the past 5.25 years. Carrying value increased 79% Fair value increased 197% As a result, the excess of FV over CV surged: From negative $663 million at December 31, 2020 To positive $3.9 billion at March 31, 2026 That is an increase of approximately $4.6 billion, or an average of $873 million per year. This represents a significant amount of value creation that has not been captured in reported EPS, ROE, or BVPS. The key takeaway: Fairfax’s economic performance over the past five years has been materially better than the accounting results indicate. Book value today understates economic value by a meaningful amount. Summary Excess of FV over CV for associate and market-traded consolidated holdings is an important and rapidly growing source of hidden value at Fairfax. How big is it? Approximately $3.9 billion What is the trend? Growing at roughly $873 million per year over the past 5.25 years Fairfax itself highlights the importance of this metric. From the company’s quarterly disclosure: “Excess (deficiency) of fair value over carrying value – These pre-tax amounts, while not included in the calculation of book value per basic share, are regularly reviewed by management as an indicator of investment performance for the company's non-insurance associates and market traded consolidated non-insurance subsidiaries that are considered to be portfolio investments…” Fairfax effectively provides investors with a roadmap. The message is clear: book value and reported earnings alone are no longer sufficient to fully understand Fairfax’s economic performance. And this is only one example of hidden value. Additional sources remain embedded throughout Fairfax’s insurance operations, investment holdings, and capital allocation activities. Investors who ignore them risk materially understating the company’s intrinsic value. Future topics to explore include: What is driving the rapid growth in hidden value? Will this value eventually be realized? Or will it remain hidden? How should investors think about hidden value when valuing Fairfax? Excellent overview, as always, @Viking. Thank you! Is it “fair” to say that management’s estimates of the Fair Value of their holdings which are recorded at generally lower carrying values in the accounting statements are themselves often just estimates of the actual intrinsic values, and that final values realized if and when they are sold can be higher or lower than these…and that much as with loss reserves, management may have a bit of a tendency not to overstate them?
Intelligent_Investor Posted May 26 Posted May 26 Hopefully they're buying back truckloads of stock at current prices
dartmonkey Posted May 26 Posted May 26 On 5/25/2026 at 10:19 AM, gfp said: Has anyone spent any time looking at what appears to be the absolute worst possible timing of Sokol / Fairfax selling off the crown jewel assets of the old APR Energy business to Fortress Investment Group just before the value of, and demand for, 2nd hand, immediately deployable mobile aero-derivative gas turbine generation assets skyrocketed? I see your APR and raise Micron - they sold off their remaining shares at <$100 a year ago and the shares are now over $900. In Q1 2024, they had 3.9m shares, worth about $260m. Those shares would now be worth about $3.5b ...
gfp Posted May 26 Posted May 26 19 minutes ago, dartmonkey said: I see your APR and raise Micron - they sold off their remaining shares at <$100 a year ago and the shares are now over $900. In Q1 2024, they had 3.9m shares, worth about $260m. Those shares would now be worth about $3.5b ... Oh yeah! I forgot that one. Hang it on the hall of shame next to Buffett building a $4.1 billion TSM position in 2022 and then completely bailing a few months later
Parsad Posted May 26 Posted May 26 On 5/25/2026 at 7:19 AM, gfp said: Has anyone spent any time looking at what appears to be the absolute worst possible timing of Sokol / Fairfax selling off the crown jewel assets of the old APR Energy business to Fortress Investment Group just before the value of, and demand for, 2nd hand, immediately deployable mobile aero-derivative gas turbine generation assets skyrocketed? I was looking into Anthropic's expansion from xAI's Colossus I to also include part of their Colossus II data center and drilling down on the containerized Caterpillar natural gas gensets xAI is using in Mississippi and it really sounded like APR's 20x GE TM2500 & 10x Pratt & Whitney FT8 would have shot up in value immediately after Sokol decided to divest. After years of nursing a dud with APR's emerging markets leasing business they threw in the towel at the worst possible moment. (and to add insult to injury, Fairfax made several payments to Atlas / Poseidon to indemnify them for losses on their purchase of APR energy from Fairfax in the first place...) https://www.aprenergy.com/apr-energy-expands-power-generation-capacity-to-over-1-1-gw-as-data-center-power-demand-soars/ There were a whole lot of people on here bitching about APR back then as well and suggesting Atlas sell it. They got what they wished for! Cheers!
dartmonkey Posted May 26 Posted May 26 1 hour ago, gfp said: Hang it on the hall of shame next to Buffett building a $4.1 billion TSM position in 2022 and then completely bailing a few months later It hasn't been a great few years for value investors, that's for sure, and the odd time they took a stake in something that could have been brilliant, they have been quick to take small profits. But I wouldn't hang it in the hall of shame until the fat lady sings. A lot of investors sitting on huge unrealized gains may see them dissolve away in the next few years. Or not. But anyways, I'm quite happy with Fairfax if they can keep up anything like the recent pace, misses like APR and MU and INTC notwithstanding. I currently have FFH at 9x this year's earnings, assuming what I think is a very pessimistic 6% return on their non-fixed income portfolio, or about $1.5b, which would be half the average non-fixed income return (12%) of the last 6 years. With the Poseidon and Eurolife sales already in the can for about $1.2b, I think their chances are good of clearing that low bar.
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