yesman182 Posted February 22 Posted February 22 Having the US men’s and woman’s hockey team win Olympic gold has to be good for Bauer. Anybody know what percentage of current sales are in US? Seems like it will tick up a little, definitely can’t hurt.
djokovic1 Posted February 23 Posted February 23 Thanks for the detailed response @Maverick47 Very helpful as others have said to improve my understanding on an arcane but interesting subject!
Viking Posted February 23 Posted February 23 A Review of Fairfax’s Annual Results: 2025 - Part 1 “Skate to where the puck is going, not where it has been.” - Wayne Gretzky Introduction: The Market Is Turning The P/C insurance hard market is drawing to a close. For traditional insurers, that means: Softer pricing Margin compression Lower earnings power For Fairfax, it means something different. Fairfax is not a traditional insurer. Analyzing it through that lens leads to flawed conclusions. The key question is: What happens next? Time Horizon Determines Insight Fairfax is managed with a long-term orientation. That is visible in: Underwriting discipline Capital allocation decisions Share repurchases Balance sheet management If management operates on a multi-year horizon, investors must evaluate results the same way. Quarterly results matter. They contain valuable information. But they are fragments of a much larger mosaic that unfolds over years. Obsessing over quarterly results risks missing the forest for the trees — and that mistake is particularly costly with Fairfax. The Multi-Engine Model Most P/C insurers rely on two income streams: Underwriting income Fixed-income investment income When underwriting margins compress, earnings compress. Fairfax has built something broader. It has six income streams - five that flow into reported earnings and a sixth that flows into economic earnings: Reported Earnings Streams Underwriting income Interest and dividend income Share of profit of associates Operating income from non-insurance subsidiaries Investment gains Economic Earnings (Not Reflected in Reported Earnings) Excess of fair value over carrying value (hidden value) Each fluctuates quarter to quarter — and sometimes year to year. There is lots of noise in quarterly results. There is lots of signal in one and two-year results. Of course, Wall Street focusses on the noise (short term results). The key is to not let Wall Street trip you up. What matters is: The multi-year trajectory of each stream How they interact collectively How capital allocation decisions reshape their contribution This flexibility is the structural difference. 2025: Record Year 2025 was the best year in Fairfax’s history. Accounting earnings: $214 per diluted share Economic earnings (conservative): $271 per diluted share Execution has been strong across insurance, investments, and capital allocation — for five consecutive years. Segment Review 1. Insurance: Discipline Over Growth Fairfax delivered record underwriting profit while intentionally moderating growth. NPW growth: +3.9% (vs +11.6% in 2024) Combined Ratio: 93.0% (vs 92.7%) Underwriting profit: $1.82B (vs $1.79B) Additional details: Favourable development: 2.9% ($751.5M) vs 2.6% ($593.6M) in 2024 Catastrophe losses: 4.8% ($1.24B) vs 4.5% ($1.10B) in 2024 Float: $39.3B (up 11.2% from $35.4B) Runoff adverse development: $298.5M (vs $221.1M in 2024) Standout performers: Northbridge 88.7% CR Allied World 89.3% CR Key point: Fairfax produced a record $1.8B of underwriting profit while maintaining discipline into a softening cycle. Float remains the foundation of the model – and Fairfax continues to be paid well to hold it. 2. Interest and Dividend Income: Stability $2.57B (vs $2.51B in 2024) Q4: $645.8M (vs $698.2M in 2024) Importantly, Q4 2024 included a one-time dividend of $112.3M from Digit. Adjusted for this amount, Q4-2025 saw a solid YOY increase. Q3 2025 $655.4M Interest and dividend income did fall slightly quarter over quarter. The fixed income portfolio remains conservatively positioned: 75% government bonds 14% high-quality corporates (short duration) 11% first mortgage loans Average yield ~5% Despite lower short-term rates, this income stream grew due to: Larger invested balances Shift into higher-yielding opportunities (e.g., KW mortgage loans, private investments like Blizzard Vacatia) Key point: Record income achieved without reaching for yield. 3. Share of Profit of Associates: Transitional Dip Total: $815.1M (vs $956.3 in 2024) Q4: $251.8M Decline driven by: Sales of Sigma ($34M impact) and Stelco (18M) Consolidation of Peak Achievement ($57M) Losses at Waterous ($64.7M) and Sanmar ($45M) Major contributors: Eurobank: $474.1 (vs $515) Poseidon: $286.9M (vs $213M) Poseidon delivered exceptional results. A ~$250M quarterly run-rate appears achievable going forward. Key point: The dip to $815 million in 2025 appears transitional, not structural. 4. Non-Insurance Consolidated Companies: Scaling Platform Operating income: $397.4M (vs $241.4M in 2024) Excluding the Boat Rocker write-down ($108.6M), income exceeded $500M Recent acquisitions (Sleep Country, Peak, Meadow Foods) are contributing meaningfully. Key point: This segment is becoming a larger and more stable contributor — further diversifying Fairfax beyond insurance. Continue to next post below for Part 2
Viking Posted February 23 Posted February 23 A Review of Fairfax’s Annual Results: 2025 - Part 2 5. Investment Gains: Expanding Contribution Total: $3.15B (vs $1,067.2B in 2024) Breakdown: Equities: $3.05B Common stock gains: $1.49B FFH-TRS: $840.6M Bonds: $385.4M, primarily US treasuries Other (currency): ($284.1M) Fairfax now holds approximately $26B in equities. Important dynamic: Equity portfolio is growing Hidden value (FV over CV) is expanding Monetization opportunities are increasing Example: Sale of Eurolife to Eurobank (~$350M pre-tax gain expected Q2 2026) Key point: Investment gains are becoming a more meaningful contributor to overall earnings power. FFH – Total Return Swaps Fairfax continues to have exposure to 1.76M Fairfax shares. Here is what Peter Clarke (President and COO) had to say on the Q4-2025 conference call: “On the Fairfax TRS, we’ve always said that that’s an investment. We continue to believe it’s a very good investment, so it we continue to hold that.” 6. Hidden Value: The Underappreciated Income Stream Fairfax’s equity holdings have had an outstanding year in 2025. A large portion of the increase in value did not show up in the accounting results, with excess of FV over CV for non-insurance associate and consolidated holdings being the best example: Total: $3.1B (vs $1.5B in 2024) Increase of $1.6B (~$57 after-tax per share) Eurobank — Fairfax’s largest equity holding — delivered an 82% TSR in 2025. Much of that appreciation has not flowed through accounting earnings. Hidden value will be an increasingly important source of investment gains in the future as they get monetized by Fairfax. Capital Structure Optimization Redeemed $876.5M preferred shares for $689.4M $187M gain Replaced non-deductible preferred capital with tax-deductible senior notes Debt-to-total-capital (ex-insurance subs): 26.2% (vs 24.8% in 2024) With operating earnings > $5B, coverage remains strong. Rational, value-enhancing capital structure management. Share Repurchases: Compounding Per Share Metrics 2025: 1.0M shares repurchased for $1.6B ($1,616 per share) ~3.7% reduction in effective shares outstanding to 20.86M (vs 21.67M in 2024) 2026 Q1: 130,573 shares repurchased for $220M ($1,685 per share) ~ 0.6% reduction in effective shares outstanding: 20.726M Over eight years, shares outstanding have been reduced by 25% (from 27.75M to 20.86M). Shares were purchase at very attractive prices, delivering outstanding value to long term shareholders. Repurchases continue at prices that appear materially below intrinsic value. Per-share metrics — NPW, float, EPS, BVPS — are compounding much faster than total figures. This matters. The Structural Difference Fairfax has spent 40 years building a broader capital allocation platform. Insurance remains foundational, but it is not the sole driver of compounding. The pending take-private of Kennedy-Wilson illustrates this evolution. Real estate underwriting expertise is now brought in-house. The platform continues to expand. As the hard market slows, Fairfax can shift capital from insurance to non-insurance opportunities where it will continue to compound at above average rates of return. Yes, the growth of underwriting income will slow. But other income streams will grow more quickly. Total earnings should continue to grow nicely. That flexibility is not common among P/C insurers. A Historical Parallel Fairfax today resembles a younger Berkshire Hathaway in the 1980s–1990s: Large float Meaningful investment leverage Multiple income streams Disciplined capital allocation Were there soft markets during that period? Yes — severe ones. Did Berkshire stop compounding? No. The lesson: Underwriting discipline matters more than premium growth Capital allocation matters more than insurance cycles Investors who avoided Berkshire Hathaway due to insurance cycle concerns missed out on being invested in one of the greatest compounding machines in history. What Actually Matters Now As the hard market slows, investors should focus on three questions: Is underwriting disciplined? Is capital being allocated rationally? Are per-share economics improving? Current evidence suggests a strong “yes.” Bottom Line 2025 was an exceptional year. But the investment case is not about peak underwriting. It is about: $39B of float $75B investment portfolio $26B equity exposure Expanding private platforms Growing hidden value Aggressive share repurchases Increasing capital flexibility Fairfax is not a traditional insurer. It is a capital allocation platform built on insurance float. The cycle may be turning. The compounding machine is entering its next phase.
73 Reds Posted February 23 Posted February 23 4 minutes ago, Viking said: A Review of Fairfax’s Annual Results: 2025 - Part 2 5. Investment Gains: Expanding Contribution Total: $3.15B (vs $1,067.2B in 2024) Breakdown: Equities: $3.05B Common stock gains: $1.49B FFH-TRS: $840.6M Bonds: $385.4M, primarily US treasuries Other (currency): ($284.1M) Fairfax now holds approximately $26B in equities. Important dynamic: Equity portfolio is growing Hidden value (FV over CV) is expanding Monetization opportunities are increasing Example: Sale of Eurolife to Eurobank (~$350M pre-tax gain expected Q2 2026) Key point: Investment gains are becoming a more meaningful contributor to overall earnings power. FFH – Total Return Swaps Fairfax continues to have exposure to 1.76M Fairfax shares. Here is what Peter Clarke (President and COO) had to say on the Q4-2025 conference call: “On the Fairfax TRS, we’ve always said that that’s an investment. We continue to believe it’s a very good investment, so it we continue to hold that.” 6. Hidden Value: The Underappreciated Income Stream Fairfax’s equity holdings have had an outstanding year in 2025. A large portion of the increase in value did not show up in the accounting results, with excess of FV over CV for non-insurance associate and consolidated holdings being the best example: Total: $3.1B (vs $1.5B in 2024) Increase of $1.6B (~$57 after-tax per share) Eurobank — Fairfax’s largest equity holding — delivered an 82% TSR in 2025. Much of that appreciation has not flowed through accounting earnings. Hidden value will be an increasingly important source of investment gains in the future as they get monetized by Fairfax. Capital Structure Optimization Redeemed $876.5M preferred shares for $689.4M $187M gain Replaced non-deductible preferred capital with tax-deductible senior notes Debt-to-total-capital (ex-insurance subs): 26.2% (vs 24.8% in 2024) With operating earnings > $5B, coverage remains strong. Rational, value-enhancing capital structure management. Share Repurchases: Compounding Per Share Metrics 2025: 1.0M shares repurchased for $1.6B ($1,616 per share) ~3.7% reduction in effective shares outstanding to 20.86M (vs 21.67M in 2024) 2026 Q1: 130,573 shares repurchased for $220M ($1,685 per share) ~ 0.6% reduction in effective shares outstanding: 20.726M Over eight years, shares outstanding have been reduced by 25% (from 27.75M to 20.86M). Shares were purchase at very attractive prices, delivering outstanding value to long term shareholders. Repurchases continue at prices that appear materially below intrinsic value. Per-share metrics — NPW, float, EPS, BVPS — are compounding much faster than total figures. This matters. The Structural Difference Fairfax has spent 40 years building a broader capital allocation platform. Insurance remains foundational, but it is not the sole driver of compounding. The pending take-private of Kennedy-Wilson illustrates this evolution. Real estate underwriting expertise is now brought in-house. The platform continues to expand. As the hard market slows, Fairfax can shift capital from insurance to non-insurance opportunities where it will continue to compound at above average rates of return. Yes, the growth of underwriting income will slow. But other income streams will grow more quickly. Total earnings should continue to grow nicely. That flexibility is not common among P/C insurers. A Historical Parallel Fairfax today resembles a younger Berkshire Hathaway in the 1980s–1990s: Large float Meaningful investment leverage Multiple income streams Disciplined capital allocation Were there soft markets during that period? Yes — severe ones. Did Berkshire stop compounding? No. The lesson: Underwriting discipline matters more than premium growth Capital allocation matters more than insurance cycles Investors who avoided Berkshire Hathaway due to insurance cycle concerns missed out on being invested in one of the greatest compounding machines in history. What Actually Matters Now As the hard market slows, investors should focus on three questions: Is underwriting disciplined? Is capital being allocated rationally? Are per-share economics improving? Current evidence suggests a strong “yes.” Bottom Line 2025 was an exceptional year. But the investment case is not about peak underwriting. It is about: $39B of float $75B investment portfolio $26B equity exposure Expanding private platforms Growing hidden value Aggressive share repurchases Increasing capital flexibility Fairfax is not a traditional insurer. It is a capital allocation platform built on insurance float. The cycle may be turning. The compounding machine is entering its next phase. @Viking, if you or anyone knows, how many direct competitors does Fairfax have in the insurance/reinsurance market? And with so much global liquidity, how strong are the barriers to entry for potential new competitors? Not to give any credence to our favorite Morningstar analyst, but he got me to thinking more about what Moat(s) Fairfax actually has and how strong they might be.
Viking Posted February 23 Posted February 23 @73 Reds, here is a post on moat that might help... What is Fairfax’s Secret Sauce? Does it Have a Moat? - Part 1 December 10, 2025 Fairfax has compounded book value per share (BVPS) at 18.7% annually for 39 years. Its share price has compounded at 19.2% (in US$, including dividends). Importantly, Fairfax’s results over the past four years have also been excellent. It is not a statistical anomaly or a relic of the distant past. Relative to all U.S.-listed companies since 1985, Fairfax’s compound return places it in the top 1%. According to Fairfax, the numeric ranking is #8—a remarkable fact by any standard. Bottom line, Fairfax’s performance over the past 39 years has been epic. All slides referenced are from Prem Watsa’s AGM presentation on April 10, 2025: https://www.fairfax.ca/wp-content/uploads/2025/04/Fairfax_AGM_2025.pdf This track record raises 3 important questions: What drove Fairfax’s exceptional performance over 39 years? Are the drivers still in place today? What does this imply for Fairfax’s future performance? Let’s start with question one. What Caused Fairfax’s Long-Term Outperformance? Was it skill? Luck? Being in the right place at the right time? Timeframe is the key to answering this question. If Fairfax’s strong performance had happened over a short time period (like 5 or 10 years) then perhaps we could attribute it primarily to luck. But a CAGR of more than 19% for 39 years? That level of outperformance over that timeframe can’t be attributed to luck. The timeframe is too long. Does Fairfax have a moat? (A moat refers to sustainable competitive advantages that a company has that allows it to ward off the competition while continuing to grow its business and profitability over time.) Most investors would quickly answer “no.” Why? Well, when it comes to Fairfax most everyone knows 2 things: Insurance is a commodity. And Fairfax is not very good at insurance. Average at best. And Fairfax is not very good at investments. They keep messing up. ‘Cowboys’ might be a good way to describe them. But if it’s not luck and it’s not skill, how did Fairfax produce one of the best compounding records in the world? I think Mark Twain might have the answer: “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.” Mark Twain The obvious answer is that Fairfax does indeed have a number of competitive advantages. And like the pieces of a puzzle, when put together these competitive advantages provide investors with a picture of Fairfax’s moat. Importantly, in recent years, Fairfax’s competitive advantages have been getting stronger – the moat has been growing deeper and wider. The fact that most investors don’t know what Fairfax’s competitive advantages are doesn’t mean they don’t exist. Instead, it provides great insight into how misunderstood Fairfax continues to be. And if the company is this misunderstood, do you think it is fairly valued? No, probably not. So, as painful as this might be for some, let’s explore this further. The Six Ingredients of Fairfax’s “Secret Sauce” I group them into six categories: 1. Founder-Led Company – Prem Watsa 2. Family Control Enables Long-Term Focus 3. Organizational Structure: Centralized Capital Allocation, Decentralized Operations 4. P/C Insurance Model – Low-Cost, Growing Float 5. Investment Management – Unconstrained Capital Allocation 6. Culture – The Invisible Hand That Guides – The Straw That Stirs the Drink 1. Founder-Led Leadership: Prem Watsa Prem founded Fairfax in 1985 and has led it ever since. From scratch, he has built Fairfax into. One of Canada’s largest and most profitable public companies. A giant global insurance company. It really is a remarkable achievement. Importantly, he is still at the helm, guiding the company. He is (still) an exceptional leader. This was on full display during Covid. He is high integrity – with both internal and external stakeholders. What are his greatest strengths? I see two: The ability to attract and retain talent (at both insurance and investment operations). That was true 39 years ago when he started the company. It is equally true today. And temperament – the ability to think clearly when others are losing their heads. This is especially valuable with the investment management side of the business (and being able to exploit volatility). His age (75) is a concern (he was born in August of 1950). However, his health (physical and mental) appears very good. Prem is a competitive advantage for Fairfax. Yes, Prem’s health is something to monitor. But it is not something I worry about today. Importantly, Prem has started to transfer some responsibilities to the next generation of leaders. Fairfax takes succession planning very seriously – the company has a deep bench of talent. 2. Family Control Enables Long-Term Thinking Prem owns/controls ~2 million shares (9.5% economic interest) and exercises control over ~43.3% of the company through multiple-voting shares. Bottom line, Prem is firmly in control of Fairfax. What about when Prem is no longer around? Prem’s control position will pass to the Watsa family, with instructions that it not be sold. Prem’s son Ben will become Chairman. This provides certainty for Fairfax and its shareholders – Fairfax will remain a family-controlled business after Prem has passed. This is important for reasons we will explore next. Comments from Prem about family control from Fairfax’s 2024AR. “As I said last year, Fairfax is being built to last for the next 100 years, long after I have gone. For the last 39 years, I have mentioned to you many times that you have a major negative; Fairfax is not for sale at any price! So there will be no takeover bonanza! I consider myself and my family as stewards not owners. So I have set up my affairs so that my control position will not be sold even after I pass, but will remain with my family and not be sold. Fairfax will also be professionally run, with succession always being internal! My son, Ben, will become Chairman after me.” Prem Watsa – Fairfax 2024AR Why does this matter? Because long-term control drives long term behavior. Insurance: allows for the optimal management of the insurance cycle. Importantly, it supports the discipline to walk away from unprofitable business in a soft market (that might last for years). Investments: allows for the investment in assets that will deliver the highest total return over the long term (like equities) – despite the higher volatility this will cause in the short term. This provides Fairfax with a structural return advantage with its investment portfolio when compared to traditional P/C insurers who invest primarily in bonds. Volatility: allows Fairfax to be opportunistic with both insurance and investments – to accept, ride out and exploit short term volatility – which enhances returns over time. Being family controlled allows Fairfax to be laser focussed on building per share value for shareholders over the long term. This is an enormous structural advantage. Keep reading for Part 2
Viking Posted February 23 Posted February 23 What is Fairfax’s Secret Sauce? Does it Have a Moat? - Part 2 3. Organizational Structure: Centralized Capital Allocation, Decentralized Operations Fairfax operates with: A Lean Head Office Handles capital allocation and succession planning Low overhead Of note, Prem’s annual salary of C$600,000 (with no stock options) is crazy low. Decentralized Operations Insurance subsidiaries are run by their own presidents Non-insurance companies are run by their CEOs Adapted to their own circumstances, Fairfax has built an organizational structure that is similar to the one used by Berkshire Hathaway. It is very entrepreneurial. With excess capital going to the best available opportunity across the entire company. Insurance – Think and Act Like an Owner Below are comments from Prem’s letter from Fairfax’s 2024AR. “We have over 250 profit centres across our group. Each profit centre is focused on a unique set of customers, geographies or products that benefit from market leadership, product knowledge and the ability to provide excellent customer service. These profit centres facilitate transparency, enabling Andy Barnard, Brian Young and Peter Clarke to effectively monitor the insurance operations. Empowerment thrives at Fairfax. We are always working on making our companies more indispensable to our customers.” Prem Watsa – Fairfax 2024AR The two slides below summarize Fairfax’s structure and the benefits of its decentralized operating structure. 4. The Insurance Engine: Low-Cost, Growing Float What is P/C insurance float? Float is the money (premiums) that has been collected that has not been paid out in claims. Float is technically a liability. So, it is leverage – it is a way for a company to boost returns for shareholders. Warren Buffett has said repeatedly that P/C insurance (float) is the engine that fuelled Berkshire Hathaway’s incredible growth in the 1980’s and 1990’s. Size At year-end 2024, Fairfax had float of $36.9 billion. For perspective, common shareholders’ equity was $22.96 billion. Float is much larger than shareholders’ equity (1.6 x the size). Cost The cost of float is determined by the combined ratio (CR). A CR of 100% means the cost of float is at breakeven – it has no cost. A CR of 105% means the float has a cost of about 5%. A CR of 95% means the float has a benefit of about 5% (negative-cost). Over the past 5 years, Fairfax’s average CR has been 96%. Their “cost” of float has been an average benefit of 4.0% per year (they have been paid 4% per year to hold their float). Yes, that is crazy. Growth Float per share has grown at a CAGR of 18% over the past 39 years. Of course, growth will not continue at this rate. But float should grow at an above average rate in the coming years. Rate of Return Fairfax is able to invest its float and keep the return they generate. In 2024, Fairfax generated a total return on its investment portfolio of about 7.8%. It is tracking to earn about 10.5% in 2025. Moving forward, a reasonable “normalized” estimate is probably 8%. Summary Fairfax has a very large, low cost (negative) and growing pile of money (float) that is also generating a return of about 8% from. Yes, Warren Buffett is a very smart guy. (So is Fairfax.) The slide below summarizes the importance of float. 5. The Investment Engine: Unconstrained Capital Allocation Most insurance companies invest almost entirely in bonds. That keeps volatility low—but returns low as well. Fairfax is much more open minded with how it invests. Over the past 39 years, they have built out a diverse set of internal capabilities and external partnerships which allows them to capitalize on a vast array of opportunities: Credit (public and private) Equities (public and private) Private companies Venture capital (startups) Distressed opportunities Special situations Global reach That flexibility is unusual. It requires the freedom to accept short-term volatility in exchange for long-term gain. Fairfax has that freedom. And it uses it. Compared to peers, this approach allows the company to earn a higher return on its investment portfolio. Compounding and time magnify the benefit. This is a structural advantage for Fairfax. The slide below provides an overview of the investment team at Fairfax – note the long-tenure of most of the people. 6. Culture – The Invisible Hand That Guides – The Straw That Stirs the Drink ‘Culture eats strategy for breakfast.’ Peter Drucker What does this mean? “…no matter how great your business strategy is, your plan will fail without a company culture that encourages people to implement it.” Corporate Governance Institute For successful organizations culture and strategy are two sides of the same coin - they are aligned with each other. Fairfax has a very strong culture. And it is aligned with its strategy. It has been carefully honed over the past 39 years. It has been forged in the fires of adversity. Its biggest champion has been Prem. A couple of examples: Insurance: What to do in a soft market? Write less business. Even at the expense of short-term results (lower top line). Even if it persists for years. Zenith is a good example of this today. Investments: What to do when volatility hits? Do the opposite of what Mr. Market is likely doing. Don’t panic. Look for bargains. Get creative. Exploit the situation. In recent years, Fairfax is littered with great examples of doing exactly this. The fact that Fairfax has had very little turnover suggests that its culture is aligned with the values/beliefs of its employees. Conclusion: Fairfax’s Moat—A Company Built to Endure Fairfax’s extraordinary 39-year record—18.7% annual growth in BVPS and 19.2% annual growth in share price—is the product of a system built deliberately, refined continuously, and reinforced through multiple decades of disciplined execution. Fairfax’s “secret sauce” is made from the following six ingredients: 1. Founder-Led Company – Prem Watsa 2. Family Control Enables Long-Term Focus 3. Organizational Structure: Centralized Capital Allocation, Decentralized Operations 4. P/C Insurance Model – Low-Cost, Growing Float 5. Investment Management – Unconstrained Capital Allocation 6. Culture – The Invisible Hand That Guides – The Straw That Stirs the Drink The real genius of Fairfax lies not in any single advantage, but in how these advantages interlock. Over decades, the company has refined each component and woven them into a moat that is both deep and wide—one that protects the company and compounds its strength over time. Importantly, Fairfax continues to improve – the moat is growing in size. This can be seen in the exceptional results the company has delivered over the past 5 years. And its prospects have never looked better. Fairfax today is stronger, more focused, and more resilient than ever. Its competitive advantages are deepening, not narrowing. And that is why it will be exceedingly difficult for any competitor to replicate what Fairfax has built.
cwericb Posted February 23 Posted February 23 3 minutes ago, Viking said: What is Fairfax’s Secret Sauce? Does it Have a Moat? - Part 2 3. Organizational Structure: Centralized Capital Allocation, Decentralized Operations Fairfax operates with: A Lean Head Office Handles capital allocation and succession planning Low overhead Of note, Prem’s annual salary of C$600,000 (with no stock options) is crazy low. Decentralized Operations Insurance subsidiaries are run by their own presidents Non-insurance companies are run by their CEOs Adapted to their own circumstances, Fairfax has built an organizational structure that is similar to the one used by Berkshire Hathaway. It is very entrepreneurial. With excess capital going to the best available opportunity across the entire company. Insurance – Think and Act Like an Owner Below are comments from Prem’s letter from Fairfax’s 2024AR. “We have over 250 profit centres across our group. Each profit centre is focused on a unique set of customers, geographies or products that benefit from market leadership, product knowledge and the ability to provide excellent customer service. These profit centres facilitate transparency, enabling Andy Barnard, Brian Young and Peter Clarke to effectively monitor the insurance operations. Empowerment thrives at Fairfax. We are always working on making our companies more indispensable to our customers.” Prem Watsa – Fairfax 2024AR The two slides below summarize Fairfax’s structure and the benefits of its decentralized operating structure. 4. The Insurance Engine: Low-Cost, Growing Float What is P/C insurance float? Float is the money (premiums) that has been collected that has not been paid out in claims. Float is technically a liability. So, it is leverage – it is a way for a company to boost returns for shareholders. Warren Buffett has said repeatedly that P/C insurance (float) is the engine that fuelled Berkshire Hathaway’s incredible growth in the 1980’s and 1990’s. Size At year-end 2024, Fairfax had float of $36.9 billion. For perspective, common shareholders’ equity was $22.96 billion. Float is much larger than shareholders’ equity (1.6 x the size). Cost The cost of float is determined by the combined ratio (CR). A CR of 100% means the cost of float is at breakeven – it has no cost. A CR of 105% means the float has a cost of about 5%. A CR of 95% means the float has a benefit of about 5% (negative-cost). Over the past 5 years, Fairfax’s average CR has been 96%. Their “cost” of float has been an average benefit of 4.0% per year (they have been paid 4% per year to hold their float). Yes, that is crazy. Growth Float per share has grown at a CAGR of 18% over the past 39 years. Of course, growth will not continue at this rate. But float should grow at an above average rate in the coming years. Rate of Return Fairfax is able to invest its float and keep the return they generate. In 2024, Fairfax generated a total return on its investment portfolio of about 7.8%. It is tracking to earn about 10.5% in 2025. Moving forward, a reasonable “normalized” estimate is probably 8%. Summary Fairfax has a very large, low cost (negative) and growing pile of money (float) that is also generating a return of about 8% from. Yes, Warren Buffett is a very smart guy. (So is Fairfax.) The slide below summarizes the importance of float. 5. The Investment Engine: Unconstrained Capital Allocation Most insurance companies invest almost entirely in bonds. That keeps volatility low—but returns low as well. Fairfax is much more open minded with how it invests. Over the past 39 years, they have built out a diverse set of internal capabilities and external partnerships which allows them to capitalize on a vast array of opportunities: Credit (public and private) Equities (public and private) Private companies Venture capital (startups) Distressed opportunities Special situations Global reach That flexibility is unusual. It requires the freedom to accept short-term volatility in exchange for long-term gain. Fairfax has that freedom. And it uses it. Compared to peers, this approach allows the company to earn a higher return on its investment portfolio. Compounding and time magnify the benefit. This is a structural advantage for Fairfax. The slide below provides an overview of the investment team at Fairfax – note the long-tenure of most of the people. 6. Culture – The Invisible Hand That Guides – The Straw That Stirs the Drink ‘Culture eats strategy for breakfast.’ Peter Drucker What does this mean? “…no matter how great your business strategy is, your plan will fail without a company culture that encourages people to implement it.” Corporate Governance Institute For successful organizations culture and strategy are two sides of the same coin - they are aligned with each other. Fairfax has a very strong culture. And it is aligned with its strategy. It has been carefully honed over the past 39 years. It has been forged in the fires of adversity. Its biggest champion has been Prem. A couple of examples: Insurance: What to do in a soft market? Write less business. Even at the expense of short-term results (lower top line). Even if it persists for years. Zenith is a good example of this today. Investments: What to do when volatility hits? Do the opposite of what Mr. Market is likely doing. Don’t panic. Look for bargains. Get creative. Exploit the situation. In recent years, Fairfax is littered with great examples of doing exactly this. The fact that Fairfax has had very little turnover suggests that its culture is aligned with the values/beliefs of its employees. Conclusion: Fairfax’s Moat—A Company Built to Endure Fairfax’s extraordinary 39-year record—18.7% annual growth in BVPS and 19.2% annual growth in share price—is the product of a system built deliberately, refined continuously, and reinforced through multiple decades of disciplined execution. Fairfax’s “secret sauce” is made from the following six ingredients: 1. Founder-Led Company – Prem Watsa 2. Family Control Enables Long-Term Focus 3. Organizational Structure: Centralized Capital Allocation, Decentralized Operations 4. P/C Insurance Model – Low-Cost, Growing Float 5. Investment Management – Unconstrained Capital Allocation 6. Culture – The Invisible Hand That Guides – The Straw That Stirs the Drink The real genius of Fairfax lies not in any single advantage, but in how these advantages interlock. Over decades, the company has refined each component and woven them into a moat that is both deep and wide—one that protects the company and compounds its strength over time. Importantly, Fairfax continues to improve – the moat is growing in size. This can be seen in the exceptional results the company has delivered over the past 5 years. And its prospects have never looked better. Fairfax today is stronger, more focused, and more resilient than ever. Its competitive advantages are deepening, not narrowing. And that is why it will be exceedingly difficult for any competitor to replicate what Fairfax has built. #7 Fixed income for CEO of $600,000 Cdn.
73 Reds Posted February 23 Posted February 23 3 minutes ago, Viking said: What is Fairfax’s Secret Sauce? Does it Have a Moat? - Part 2 3. Organizational Structure: Centralized Capital Allocation, Decentralized Operations Fairfax operates with: A Lean Head Office Handles capital allocation and succession planning Low overhead Of note, Prem’s annual salary of C$600,000 (with no stock options) is crazy low. Decentralized Operations Insurance subsidiaries are run by their own presidents Non-insurance companies are run by their CEOs Adapted to their own circumstances, Fairfax has built an organizational structure that is similar to the one used by Berkshire Hathaway. It is very entrepreneurial. With excess capital going to the best available opportunity across the entire company. Insurance – Think and Act Like an Owner Below are comments from Prem’s letter from Fairfax’s 2024AR. “We have over 250 profit centres across our group. Each profit centre is focused on a unique set of customers, geographies or products that benefit from market leadership, product knowledge and the ability to provide excellent customer service. These profit centres facilitate transparency, enabling Andy Barnard, Brian Young and Peter Clarke to effectively monitor the insurance operations. Empowerment thrives at Fairfax. We are always working on making our companies more indispensable to our customers.” Prem Watsa – Fairfax 2024AR The two slides below summarize Fairfax’s structure and the benefits of its decentralized operating structure. 4. The Insurance Engine: Low-Cost, Growing Float What is P/C insurance float? Float is the money (premiums) that has been collected that has not been paid out in claims. Float is technically a liability. So, it is leverage – it is a way for a company to boost returns for shareholders. Warren Buffett has said repeatedly that P/C insurance (float) is the engine that fuelled Berkshire Hathaway’s incredible growth in the 1980’s and 1990’s. Size At year-end 2024, Fairfax had float of $36.9 billion. For perspective, common shareholders’ equity was $22.96 billion. Float is much larger than shareholders’ equity (1.6 x the size). Cost The cost of float is determined by the combined ratio (CR). A CR of 100% means the cost of float is at breakeven – it has no cost. A CR of 105% means the float has a cost of about 5%. A CR of 95% means the float has a benefit of about 5% (negative-cost). Over the past 5 years, Fairfax’s average CR has been 96%. Their “cost” of float has been an average benefit of 4.0% per year (they have been paid 4% per year to hold their float). Yes, that is crazy. Growth Float per share has grown at a CAGR of 18% over the past 39 years. Of course, growth will not continue at this rate. But float should grow at an above average rate in the coming years. Rate of Return Fairfax is able to invest its float and keep the return they generate. In 2024, Fairfax generated a total return on its investment portfolio of about 7.8%. It is tracking to earn about 10.5% in 2025. Moving forward, a reasonable “normalized” estimate is probably 8%. Summary Fairfax has a very large, low cost (negative) and growing pile of money (float) that is also generating a return of about 8% from. Yes, Warren Buffett is a very smart guy. (So is Fairfax.) The slide below summarizes the importance of float. 5. The Investment Engine: Unconstrained Capital Allocation Most insurance companies invest almost entirely in bonds. That keeps volatility low—but returns low as well. Fairfax is much more open minded with how it invests. Over the past 39 years, they have built out a diverse set of internal capabilities and external partnerships which allows them to capitalize on a vast array of opportunities: Credit (public and private) Equities (public and private) Private companies Venture capital (startups) Distressed opportunities Special situations Global reach That flexibility is unusual. It requires the freedom to accept short-term volatility in exchange for long-term gain. Fairfax has that freedom. And it uses it. Compared to peers, this approach allows the company to earn a higher return on its investment portfolio. Compounding and time magnify the benefit. This is a structural advantage for Fairfax. The slide below provides an overview of the investment team at Fairfax – note the long-tenure of most of the people. 6. Culture – The Invisible Hand That Guides – The Straw That Stirs the Drink ‘Culture eats strategy for breakfast.’ Peter Drucker What does this mean? “…no matter how great your business strategy is, your plan will fail without a company culture that encourages people to implement it.” Corporate Governance Institute For successful organizations culture and strategy are two sides of the same coin - they are aligned with each other. Fairfax has a very strong culture. And it is aligned with its strategy. It has been carefully honed over the past 39 years. It has been forged in the fires of adversity. Its biggest champion has been Prem. A couple of examples: Insurance: What to do in a soft market? Write less business. Even at the expense of short-term results (lower top line). Even if it persists for years. Zenith is a good example of this today. Investments: What to do when volatility hits? Do the opposite of what Mr. Market is likely doing. Don’t panic. Look for bargains. Get creative. Exploit the situation. In recent years, Fairfax is littered with great examples of doing exactly this. The fact that Fairfax has had very little turnover suggests that its culture is aligned with the values/beliefs of its employees. Conclusion: Fairfax’s Moat—A Company Built to Endure Fairfax’s extraordinary 39-year record—18.7% annual growth in BVPS and 19.2% annual growth in share price—is the product of a system built deliberately, refined continuously, and reinforced through multiple decades of disciplined execution. Fairfax’s “secret sauce” is made from the following six ingredients: 1. Founder-Led Company – Prem Watsa 2. Family Control Enables Long-Term Focus 3. Organizational Structure: Centralized Capital Allocation, Decentralized Operations 4. P/C Insurance Model – Low-Cost, Growing Float 5. Investment Management – Unconstrained Capital Allocation 6. Culture – The Invisible Hand That Guides – The Straw That Stirs the Drink The real genius of Fairfax lies not in any single advantage, but in how these advantages interlock. Over decades, the company has refined each component and woven them into a moat that is both deep and wide—one that protects the company and compounds its strength over time. Importantly, Fairfax continues to improve – the moat is growing in size. This can be seen in the exceptional results the company has delivered over the past 5 years. And its prospects have never looked better. Fairfax today is stronger, more focused, and more resilient than ever. Its competitive advantages are deepening, not narrowing. And that is why it will be exceedingly difficult for any competitor to replicate what Fairfax has built. Thanks Viking. It always comes down to superior management possessing the right discipline and integrity. My favorite element is unconstrained capital allocation, an issue I asked Maverick47 about just yesterday. The only thing in the slides you presented that I don't care for is their 15% LT annual BV CAGR. Just never liked arbitrary growth aspirations; let the OPs take care of growth. But what about potential new competition?
civic248 Posted February 23 Posted February 23 New here and just joined today but have been reading this forum for awhile now after investing in fairfax after attending the Berk meeting in 2022 where i had learned about the Canadian WB. I did a few research and found the company to be amazing and just what I was looking for. Then I discover this community and it was even better. I have been in the commercial insurance industry for 20+ years and just quit last year as I didn't find it very challenging. I am looking forward to contributing and also corresponding with you all. I love all of the members analysis and have read vikings pieces and found incredible details and analysis that goes beyond the typical analyst coverage. What a time to be alive! 1
SafetyinNumbers Posted February 23 Posted February 23 3 hours ago, 73 Reds said: The only thing in the slides you presented that I don't care for is their 15% LT annual BV CAGR. Just never liked arbitrary growth aspirations; let the OPs take care of growth It’s not arbitrary. It’s based on the leverage on the balance sheet and reasonable return expectations for bonds and equities. 1
gfp Posted February 23 Posted February 23 1 hour ago, civic248 said: New here and just joined today but have been reading this forum for awhile now after investing in fairfax after attending the Berk meeting in 2022 where i had learned about the Canadian WB. I did a few research and found the company to be amazing and just what I was looking for. Then I discover this community and it was even better. I have been in the commercial insurance industry for 20+ years and just quit last year as I didn't find it very challenging. I am looking forward to contributing and also corresponding with you all. I love all of the members analysis and have read vikings pieces and found incredible details and analysis that goes beyond the typical analyst coverage. What a time to be alive! Welcome to the forum civic248! We're happy to have you here
hasilp89 Posted February 23 Posted February 23 @Maverick47 appreciate the informative posts on triangulating between equity reserves, premiums written and CR. This may be a dumb question but why is the $ premium written the baseline for how much equity needs to be in reserve (as you say 5/1 for auto, 2/1 for casualty)? As an operator or a regulator wouldn't you want to know the max payout for a policy and then use some sort of actuarial odds on probability of that loss - i assume that is what goes into the premium $ quoting decision but for a regulator they have no clue if a company is writing terrible policies that even with industry standard equity reserves they would not be able to pay out on. Not sure if that makes sense but put another way - if i was running my own insurance company i'd want in the back of my mind the sum total of payouts I could have to make based on the policies i have outstanding multiplied by their actuarial probability - i'd then want to ensure that in even in a worst case scenario - maybe 20% worse than the actuarial probability I'd be able to pay claims.
73 Reds Posted February 23 Posted February 23 34 minutes ago, SafetyinNumbers said: It’s not arbitrary. It’s based on the leverage on the balance sheet and reasonable return expectations for bonds and equities. @SafetyinNumbers didn't mean "arbitrary" as in willy-nilly or picking a number out of the air. Same as price targets, I'd wish they'd remain silent and let results speak for themselves. I mean if nearly 40 years of high teens BV growth doesn't mean anything.......
John Hjorth Posted February 23 Posted February 23 2 hours ago, civic248 said: New here and just joined today but have been reading this forum for awhile now after investing in fairfax after attending the Berk meeting in 2022 where i had learned about the Canadian WB. I did a few research and found the company to be amazing and just what I was looking for. Then I discover this community and it was even better. I have been in the commercial insurance industry for 20+ years and just quit last year as I didn't find it very challenging. I am looking forward to contributing and also corresponding with you all. I love all of the members analysis and have read vikings pieces and found incredible details and analysis that goes beyond the typical analyst coverage. What a time to be alive! 25 minutes ago, gfp said: Welcome to the forum civic248! We're happy to have you here Welcome to CofB&F, @civic248, And please don't be a stranger -Your board handle is somewhat binding!
Parsad Posted February 23 Posted February 23 5 hours ago, 73 Reds said: @Viking, if you or anyone knows, how many direct competitors does Fairfax have in the insurance/reinsurance market? And with so much global liquidity, how strong are the barriers to entry for potential new competitors? Not to give any credence to our favorite Morningstar analyst, but he got me to thinking more about what Moat(s) Fairfax actually has and how strong they might be. In insurance, your moat is the type of business you write and the premium pricing you accept for contracts. In that way, Fairfax (especially since Andy Barnard took over insurance) has built an excellent underwriting culture. You can see that in the combined ratios and reserve redundancies. They won't underwrite policies unless there is adequate return for the risk. So if premium pricing softens, they will underwrite less of their traditional reinsurance business. The fact that their insurance businesses are much more diverse outside of just reinsurance and on a global scale, means they can write more policies in regions where premium pricing is good...insurance pricing is reflexive regionally...pricing pressure is not identical across the globe. So if premium pricing weakens in North America or Europe, they can expand Asia and South America for example. The other advantage (moat) is the investment team. You have three main lines of income (Insurance, Fixed Income, Equity Positions)...each with their own other lines. The income stream is becoming a diversified grouping with 2/3rds being very consistent and 1/3rd being more opportunistic. For example, insurance income carries more broad general insurance steady income than the past...rather than just a huge reinsurance business. It is very diversified globally...essentially in every major market. Fixed Income is now generating a steady stream of income from the mortgage business...bond portfolio is diversified...they are constantly seeking smart ways to generating yield without added risk. Equity positions include public equity, associates and wholly owned companies...that third pile will grow and grow adding that steady stream of income Berkshire has enjoyed for so long. So I don't worry about competition at Fairfax. I worry about culture. In those terms, the moat is there! Cheers!
Duke In Shadows Posted February 23 Posted February 23 5 hours ago, Viking said: Major contributors: Eurobank: $474.1 (vs $515) Poseidon: $286.9M (vs $213M) Poseidon delivered exceptional results. @Viking do you know what the ownership breakdown is for Poseidon currently. obv it's between 20-50%. Perplexity gives me this but unsure on detail. Just was trying to understand the various entities. somewhat complex.
Viking Posted February 23 Posted February 23 (edited) 7 minutes ago, Duke In Shadows said: @Viking do you know what the ownership breakdown is for Poseidon currently. obv it's between 20-50%. Perplexity gives me this but unsure on detail. Just was trying to understand the various entities. somewhat complex. Fairfax’s 2024AR has ownership stake in Poseidon at 43%. Edited February 23 by Viking
gfp Posted February 23 Posted February 23 They were 43.9% at 9/30/2025. We'll see what it is when the annual comes out
djokovic1 Posted February 23 Posted February 23 @73 Reds On moat, I agree with with everything Viking posted, he has written the Bible on Fairfax after all! If you think about it, insurance is a commodity in the sense that any major cat, Fairfax will take a 1-2% hit of the total loss. Of course the underwriting skill (which is similar to the investing skill) of when to grow premiums aggressively vs pulling back is not a commodity. Separately, for me the key additional differentiator is the investing acumen and the long termism / alignment that allows them to invest a significant portion of the book in equities to boost returns and take maximum advantage of the 3:1 leverage. Most insurers don't do that and the ones that do are special, and the ones that do it well are very special. On the 15% target, I was just looking at the last few years of EPS numbers and reviewing my model and barring the last 2-3 years they have been very choppy. If you go into the details the business is actually more complicated than most. If you zoom out the business is easier to understand. When you understand where the 15%+ comes from (underwriting + 3:1 leverage on investment returns + buybacks) it allows you to zoom out. And welcome @civic248
73 Reds Posted February 23 Posted February 23 1 hour ago, Parsad said: In insurance, your moat is the type of business you write and the premium pricing you accept for contracts. In that way, Fairfax (especially since Andy Barnard took over insurance) has built an excellent underwriting culture. You can see that in the combined ratios and reserve redundancies. They won't underwrite policies unless there is adequate return for the risk. So if premium pricing softens, they will underwrite less of their traditional reinsurance business. The fact that their insurance businesses are much more diverse outside of just reinsurance and on a global scale, means they can write more policies in regions where premium pricing is good...insurance pricing is reflexive regionally...pricing pressure is not identical across the globe. So if premium pricing weakens in North America or Europe, they can expand Asia and South America for example. The other advantage (moat) is the investment team. You have three main lines of income (Insurance, Fixed Income, Equity Positions)...each with their own other lines. The income stream is becoming a diversified grouping with 2/3rds being very consistent and 1/3rd being more opportunistic. For example, insurance income carries more broad general insurance steady income than the past...rather than just a huge reinsurance business. It is very diversified globally...essentially in every major market. Fixed Income is now generating a steady stream of income from the mortgage business...bond portfolio is diversified...they are constantly seeking smart ways to generating yield without added risk. Equity positions include public equity, associates and wholly owned companies...that third pile will grow and grow adding that steady stream of income Berkshire has enjoyed for so long. So I don't worry about competition at Fairfax. I worry about culture. In those terms, the moat is there! Cheers! Sanjeev, one would think that it is hard enough to successfully invest globally; writing diversified global insurance goes much further with regard to properly reading the tea leaves. Any worries that overconfidence in the global insurance arena shows up sooner or later?
73 Reds Posted February 23 Posted February 23 28 minutes ago, djokovic1 said: @73 Reds On moat, I agree with with everything Viking posted, he has written the Bible on Fairfax after all! If you think about it, insurance is a commodity in the sense that any major cat, Fairfax will take a 1-2% hit of the total loss. Of course the underwriting skill (which is similar to the investing skill) of when to grow premiums aggressively vs pulling back is not a commodity. Separately, for me the key additional differentiator is the investing acumen and the long termism / alignment that allows them to invest a significant portion of the book in equities to boost returns and take maximum advantage of the 3:1 leverage. Most insurers don't do that and the ones that do are special, and the ones that do it well are very special. On the 15% target, I was just looking at the last few years of EPS numbers and reviewing my model and barring the last 2-3 years they have been very choppy. If you go into the details the business is actually more complicated than most. If you zoom out the business is easier to understand. When you understand where the 15%+ comes from (underwriting + 3:1 leverage on investment returns + buybacks) it allows you to zoom out. And welcome @civic248 @djokovic1 No argument with Viking at all! Its more of a personal dilema, observing Fairfax for a lot of years before finally making an initial investment when the Pandemic began. Now just pondering whether, and to what extent to trust Prem & Co. the way I have trusted Buffett since the early 1980s. What still gives me pause is I *sort of* understood Buffett's "mistakes" and they never really bothered me. Trying hard to get to that same place with Fairfax, while admittedly they've made no mistakes since my initial investment.
Maverick47 Posted February 23 Posted February 23 2 hours ago, hasilp89 said: @Maverick47 appreciate the informative posts on triangulating between equity reserves, premiums written and CR. This may be a dumb question but why is the $ premium written the baseline for how much equity needs to be in reserve (as you say 5/1 for auto, 2/1 for casualty)? As an operator or a regulator wouldn't you want to know the max payout for a policy and then use some sort of actuarial odds on probability of that loss - i assume that is what goes into the premium $ quoting decision but for a regulator they have no clue if a company is writing terrible policies that even with industry standard equity reserves they would not be able to pay out on. Not sure if that makes sense but put another way - if i was running my own insurance company i'd want in the back of my mind the sum total of payouts I could have to make based on the policies i have outstanding multiplied by their actuarial probability - i'd then want to ensure that in even in a worst case scenario - maybe 20% worse than the actuarial probability I'd be able to pay claims. @hasilp89 This is actually quite a sophisticated question, and makes perfect sense! Using a simplistic ratio of premium to equity is a shortcut approximation, and not a true measure of the underlying risk. As you note, if a company has underpriced their business, then the ratio will not only be misleading as a measure of risk, but will also work in a perverse manner to give incorrect guidance to how much equity a company should hold. When a company’s business is underpriced, they will hold insufficient amounts of equity to handle the risk of underwriting losses. Then as they reduce their risk of loss by raising rates, their premium will grow and their indicated equity will increase in tandem, at the very time their risk of underwriting losses is actually being reduced. And sometimes, in the case of old policies that expired decades ago, loss reserves continue to develop upwards, such as the asbestos and environmental loss reserves for which Fairfax increased loss reserves at year end 2025 by over $200 million from the value at year end 2024, without any associated current or future premium at all. Clearly the amount of equity needed to support these old loss reserves is not zero, even though the associated premiums are zero… Companies are going to have their own capital adequacy models that will look at all the risks a company faces — which can include the risk that underpriced policies will generate underwriting losses, the risk that loss reserves will develop adversely, the catastrophe risk as modeled against the actual inforce exposures, locations, coverage amounts and deductibles of a company’s book of business, as well as interest rate and liquidity risks for various assets, etc. Companies will provide their own risk and solvency assessment reports to their regulators, and regulators also have a number of early warning financial ratios they monitor to let them know whether a company they regulate appears to be deserving of further scrutiny and review. They will review the reinsurance agreements a company has in place, paying attention to the financial stability ratings of the reinsurers the company is partnered with. Companies in turn will want to organize their affairs both so that they can withstand worst case claims paying events, and also to avoid regulatory scrutiny or restrictions after such events. They want to have a high likelihood that regulators would consider them financially solvent and able to support their insurance business as a going concern even after paying out claims associated with a worst case event, or a worst case event plus 20% as you noted. That’s one of the main reasons that companies purchase catastrophe reinsurance policies from reinsurers… so that they can get claims paying support from their reinsurers after a large catastrophe event, and still retain enough of their own equity to be a viable insurer after the catastrophe.
Txvestor Posted February 24 Posted February 24 9 hours ago, 73 Reds said: Thanks Viking. It always comes down to superior management possessing the right discipline and integrity. My favorite element is unconstrained capital allocation, an issue I asked Maverick47 about just yesterday. The only thing in the slides you presented that I don't care for is their 15% LT annual BV CAGR. Just never liked arbitrary growth aspirations; let the OPs take care of growth. But what about potential new competition? I think this was explored in the book the Fairfax way. Prem believes in putting that out there as a target to measure themselves against. I don't think they see it as a must hit or anything. But looking back over longer periods I think he prefers to set a goal and work towards it. You might want to look at that section to gain a better understanding of why they do that.
Txvestor Posted February 24 Posted February 24 (edited) 4 hours ago, djokovic1 said: @73 Reds On moat, I agree with with everything Viking posted, he has written the Bible on Fairfax after all! If you think about it, insurance is a commodity in the sense that any major cat, Fairfax will take a 1-2% hit of the total loss. Of course the underwriting skill (which is similar to the investing skill) of when to grow premiums aggressively vs pulling back is not a commodity. Separately, for me the key additional differentiator is the investing acumen and the long termism / alignment that allows them to invest a significant portion of the book in equities to boost returns and take maximum advantage of the 3:1 leverage. Most insurers don't do that and the ones that do are special, and the ones that do it well are very special. On the 15% target, I was just looking at the last few years of EPS numbers and reviewing my model and barring the last 2-3 years they have been very choppy. If you go into the details the business is actually more complicated than most. If you zoom out the business is easier to understand. When you understand where the 15%+ comes from (underwriting + 3:1 leverage on investment returns + buybacks) it allows you to zoom out. And welcome @civic248 In the lean years when 15% was mentioned most people(including me) laughed. I was like Prem, walk before you talk about running, get me 10! Back then insurance underwriting was uneven, bond yields were paltry and their equity investing was in the doldrums, and what little they made off those two were seemingly being burned up by the equity hedges. When he said in 2017 they had made the pivot, credibility was low and the stock price reflected it, UNTIL, the results started to roll in, and even that took a while. First the insurance results started to get more even. I think Vikings post said 10yr average was 97.1 CR), then the equity portfolio started perking up and unconstrained by the hedges actually showed up in the results. Then we all know how expertly they navigated the rise in yields by staying at the short end of the yield curve and piling into the long dated bonds at the bottom. Then their long held investments and venture projects like Digit and Ki and RFP, Pethealth and so on started to surface. And now 15% looks like a fait accompli. Could this 15% ROE machine collapse tomorrow? Doubtful. Because in 2025 they hit 9.3% on their massive blended investment portfolio. Even if that were to sink to 6% they would exceed the 15% hurdle with the leverage they have. If interest rates fell to 2%(highly unlikely given today's inflationary and geo political environment) they would likely make 3-4% on their fixed income segment(they made 5% last year), and the returns on their equity investment(augmented by low rates) will pull them up to the 6%. That's how I see it. And remember it's quite likely they'll have a negative cost on float($39B of it) averaged out over a longer period of time. Going back, I wish I saw the turn more clearly, and in fairness it was in bits and pieces a little at a time, which is what tends to happen. However, they obviously knew it, that's why they put on those aggressive total return swaps (and still hold them today). Which is why keeping a running tracker like Viking is doing is so helpful. It allows one to see the developing painting in more clear detail in one place. FWIW I think those on this board are actually ahead of the market and analysts, who I would argue still have not fully realized the turn and its impact for future prospects for the company. But hey, that's what makes a market. Edited February 24 by Txvestor
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