Insurance - The Engine That Drives Fairfax

[Viking]

Insurance is the foundation upon which Fairfax Financial is built. The company's insurance operations generate underwriting profits and float, which provide the capital that supports Fairfax's investment activities and long-term value creation.

 

I the coming days I will be publishing a series of posts on Fairfax's insurance business: why float is so important, how insurance cycles create opportunity, how Fairfax built its global insurance platform, and why the company appears well positioned for the future.

 

Together, these articles explain how Fairfax built its insurance franchise and why it has been such an important driver of shareholder returns.

 

We will start with two articles on float.

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Float: The Engine that Drove Berkshire Hathaway’s Growth

 

For more than fifty years, Warren Buffett has described insurance as one of the greatest business models ever created. The reason is not underwriting profit. The reason is float.

 

Float is a little like compound interest as an investing concept. It is easy to define but much harder to fully appreciate. Yet understanding float is essential for understanding companies built on the Berkshire Hathaway and Fairfax business models.

 

Back in the 1990s, property and casualty insurance was the primary engine driving Berkshire Hathaway's growth. GEICO was acquired in 1996 and General Re followed in 1998. Given the increasing importance of insurance to Berkshire's future, Buffett used his 1998 annual letter to explain what investors should focus on when evaluating an insurance company.

 

He wrote:

 

 

"With the acquisition of General Re — and with GEICO's business mushrooming — it becomes more important than ever that you understand how to evaluate an insurance company. The key determinants are:

 

1.) the amount of float that the business generates;

2.) its cost; and

3.) most important of all, the long-term outlook for both of these factors."

 

 

Notice what Buffett is saying. 

 

The most important factor in evaluating an insurance company is not earnings, premium growth, or even underwriting results viewed in isolation. It is float—how much the company has, what it costs, and whether both are likely to improve over time.

 

That is a remarkable statement given how little attention float receives today from analysts and investors.

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What Is Float?

 

Buffett's definition is straightforward:

 

 

"To begin with, float is money we hold but don't own. In an insurance operation, float arises because premiums are received before losses are paid, an interval that sometimes extends over many years."

 

 

When an insurer writes a policy, it collects cash immediately. Claims, however, are usually paid later—sometimes months later and sometimes years later. During that period, the insurer holds the money and can invest it.

 

That money is called float.

 

Consider a simple example. An insurer collects $1 billion in premiums today and expects to pay claims gradually over the next several years. Until those claims are paid, the insurer can invest that $1 billion in bonds, stocks, private businesses, or other assets, subject to regulatory and liquidity requirements designed to ensure claims can be paid when due.

 

The money does not belong to shareholders. Eventually it will be used to pay claims. But until then, it is available for investment.

 

This is what makes insurance different from most businesses. Manufacturers must build products before they can sell them. Retailers must purchase inventory before customers walk through the door. Insurance works in reverse. Customers pay first and the service is provided later. The result is a large pool of investable funds.

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Why Float Matters

 

Float creates a second source of earnings.

 

The first source comes from underwriting. If premiums exceed claims and expenses, the insurer earns an underwriting profit.

 

The second source comes from investing float.

 

As a result, a well-run insurer can earn money both from writing insurance policies and from investing the funds generated by those policies. A growing insurance operation can therefore produce an ever-expanding pool of capital that management can deploy into attractive investments.

 

Over long periods of time, this can become a powerful compounding engine.

---

 

The Cost of Float

 

Not all float is valuable.

 

To understand why, investors need to understand what Buffett calls the cost of float.

 

An insurer receives premiums today but eventually must pay claims and operating expenses. If claims and expenses exceed premiums, the insurer records an underwriting loss. Buffett views that underwriting loss as the cost of obtaining float.

 

He explained it this way:

 

 

"Typically, this pleasant activity carries with it a downside: The premiums that an insurer takes in usually do not cover the losses and expenses it eventually must pay. That leaves it running an underwriting loss, which is the cost of float. An insurance business has value if its cost of float over time is less than the cost the company would otherwise incur to obtain funds. But the business is a lemon if its cost of float is higher than market rates for money."

 

 

This point is critical. Float is not automatically valuable.

 

An insurer that consistently loses money underwriting may be paying too much for its float. In that case, the benefits of investing float can be overwhelmed by poor underwriting results. The insurer has effectively borrowed money at an unattractive rate.

 

The best insurers achieve the opposite outcome. They generate underwriting profits while simultaneously investing their float.

 

Better Than Free

 

This is where insurance becomes truly interesting.

 

If an insurer consistently earns underwriting profits, the cost of float becomes negative. Instead of paying for its float, the insurer is actually being paid to hold it.

         

Buffett often described this as one of Berkshire Hathaway's greatest advantages. For decades, Berkshire generated billions of dollars of float while also reporting underwriting profits. The result was a rapidly growing pool of investment capital that cost nothing—and often less than nothing—to hold. 

 

This combination helped fuel Berkshire Hathaway's extraordinary long-term success.

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The Three Questions Every Investor Should Ask

 

Buffett's framework remains remarkably simple.

 

When evaluating an insurance company, investors should ask three questions:

 

1. How much float does the company have?

 

A larger float base provides more capital to invest.

 

2. What does the float cost?

 

Consistent underwriting profits suggest the company is obtaining float on attractive terms.

 

3. What is the long-term trend?

 

Is float growing? Is underwriting disciplined? Has management demonstrated skill over many years and across multiple insurance cycles?

 

The answers to these questions often reveal far more about an insurer's long-term economics than short-term earnings results.

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Why Float Is So Important

 

For Buffett, float became one of the primary engines that powered Berkshire Hathaway's success. 

 

Understanding float is therefore not simply a lesson about insurance. It is the first step toward understanding the model Buffett helped popularize: using insurance float as investment capital. 

 

Berkshire Hathaway perfected this approach, and Fairfax later adapted it. 

 

In both cases, float became much more than an insurance liability. It became a source of low-cost investment capital that could be compounded for the benefit of shareholders over many decades.

 

In the next article, we will apply Buffett's framework to Fairfax and examine the size, cost and growth of its float.

 

[Viking]

Article 2 in our series on Fairfax's insurance business

 

Applying Buffett’s Float Framework to Fairfax

 

In the previous article, Warren Buffett explained that investors should focus on three factors when evaluating an insurance company: 

1. The amount of float the company generates.
2. The cost of that float.
3. The long-term outlook for both.

Let's apply Buffett's framework to Fairfax.

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Size: Fairfax Has Significant Float

 

Warren Buffett's first test is simple: how much float does an insurer have?

 

At December 31, 2025, Fairfax had total float of approximately $40.8 billion. For the purposes of this analysis, two adjustments have been made.

 

First, runoff operations have been excluded. Runoff float has different economic characteristics than float generated by Fairfax's ongoing insurance and reinsurance businesses and is best analyzed separately. Second, Fairfax does not own 100% of certain subsidiaries, including Allied World and Odyssey. As a result, a portion of the float generated by those companies is attributable to minority shareholders rather than Fairfax shareholders. To keep the analysis simple and consistent with Fairfax's reported figures, no adjustment has been made for minority interests.

 

After excluding runoff operations, Fairfax's insurance and reinsurance businesses generated approximately $39.3 billion of float, or about $1,882 per share.

 

Exhibit 1: Insurance & Reinsurance Float Breakdown (2025)

 

 

Fairfax has built a substantial float base. Before considering shareholders' equity, the company controls nearly $40 billion of investment capital generated by its insurance operations.

 

Economic Significance: Float Exceeds Shareholders' Equity

 

The size of float is important, but its significance becomes clearer when compared to shareholders' equity.

At year-end 2025, Fairfax's common shareholders' equity was approximately $26.3 billion. Compared to insurance and reinsurance float of $39.3 billion, Fairfax's float-to-equity ratio was approximately 1.5x.

 

Exhibit 2: Float Relative to Shareholders' Equity (2025)

 

 

This means Fairfax had approximately $1.50 of float supporting every $1.00 of shareholder capital. Put differently, float was 50% larger than the equity supplied by shareholders.

 

This is what makes float so valuable. When managed properly, it allows an insurer to control a substantially larger investment portfolio than shareholders' capital alone would support. Fairfax's investment portfolio is therefore funded not only by shareholders' equity, but also by a large pool of insurance float that has been built over decades of underwriting operations.

 

Buffett's first test is therefore easily met. Fairfax has built a large and economically significant float base.

---

 

Cost: Better Than Free

 

Buffett's second test is the cost of float.

 

Exhibit 3: Fairfax's Cost of Float (2025)

 

 

In 2025, Fairfax reported a combined ratio of 93.0%. The company generated underwriting profits of approximately $1.8 billion while holding $39.3 billion of float.

 

Viewed through Buffett's framework, Fairfax's float was better than free. Instead of paying to access this capital, Fairfax was paid to hold it.

---

 

Trend: Growing Float

 

Buffett believed the long-term trend was the most important factor of all.

 

A large amount of float is valuable. A growing amount of float is even more valuable.

 

Exhibit 4: Fairfax Insurance & Reinsurance Float Growth (2014–2025)

 

 

From 2014 to 2025, Fairfax's float grew from approximately $11.6 billion to $39.3 billion. On a per-share basis, float increased from $547 to $1,886. This represents compound annual growth of approximately 12% over the past eleven years.

 

Growth alone, however, is not enough. Buffett's third test also considers the long-term cost of float.

 

Exhibit 5: Fairfax Combined Ratio (2015–2025)

 

 

 

Fairfax delivered an average combined ratio of 95.4% from 2015 to 2025. The record includes years with elevated catastrophe losses. More importantly, underwriting performance has improved in recent years, with the average combined ratio declining from 97% in 2015–2020 to 94% in 2021–2025.

 

Many insurers can grow float by sacrificing underwriting profitability. Others maintain underwriting discipline but struggle to grow. Fairfax accomplished both. Over the past eleven years, float increased by 245% while underwriting remained consistently profitable. Growing float is valuable. Growing float at a negative cost is even more valuable.

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A Fourth Question

                

Buffett's three questions provide an excellent framework for evaluating an insurance company. I would add a fourth:

How important is float to the business model?

 

The answer depends on the relationship between float and shareholders' equity. The larger the float relative to equity, the greater its potential impact on shareholder returns.

 

At year-end 2025, Fairfax's insurance and reinsurance float was approximately $39.3 billion compared to common shareholders' equity of $26.3 billion. Float was about 1.5 times larger than equity.

 

Exhibit 6: Float Relative to Equity (2014 vs. 2025)

 

 

What makes this particularly noteworthy is that the relationship has remained remarkably consistent over time. In 2014, float represented approximately 1.39 times shareholders' equity. By 2025, the ratio had increased modestly to 1.50 times.

 

This means Fairfax has not only grown its float; it has preserved its importance within the business model. Despite substantial growth over the past decade, float remains larger than shareholders' equity and continues to provide meaningful leverage to shareholder capital.

 

This distinguishes Fairfax from Berkshire Hathaway's evolution. As Berkshire grew into one of the world's largest companies, shareholders' equity expanded much faster than float, reducing float's relative importance over time.

 

Fairfax has followed a different path. Insurance remains the foundation of the business, and float remains one of its most important competitive advantages.

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Buffett's Scorecard

 

Viewed through Buffett's framework—and the additional question regarding the importance of float—Fairfax performs well across every measure.

• Float is large.
• Float has grown consistently over time.
• Float has been obtained at a negative cost.
• Float remains a significant contributor to shareholder returns.

Individually, each characteristic is impressive. Together, they describe a valuable insurance franchise.

 

Over the past eleven years, Fairfax has grown float from $11.6 billion to $39.3 billion, maintained profitable underwriting throughout that growth, and preserved the importance of float to its business model. Few insurers have accomplished all three simultaneously.

 

Buffett's framework was designed to identify insurers with durable economics.

 

By that standard, Fairfax appears to possess one of the strongest float franchises in the property and casualty insurance industry.

[Hoodlum]

Thanks @Viking for these great write ups on float and the impact on growth. I am sure you will include this in a future article but a larger float also  increases risk during very large Cat events.  
 

Fairfax’s international and multi-line growth will certainly help to mitigate this better than in the past but I am curious how a 1 in 100 or 400 year hurricane event would impact Fairfax.  How much cash should the US insurance subs and Fairfax keep on hand for such an event. 

[Maverick47]

1 hour ago, Hoodlum said:

Thanks @Viking for these great write ups on float and the impact on growth. I am sure you will include this in a future article but a larger float also  increases risk during very large Cat events.  
 

Fairfax’s international and multi-line growth will certainly help to mitigate this better than in the past but I am curious how a 1 in 100 or 400 year hurricane event would impact Fairfax.  How much cash should the US insurance subs and Fairfax keep on hand for such an event. 

This is an important question for any insurer, @Hoodlum.

The company has set risk management guidelines for this risk that are disclosed each year in the annual report under note 22.  
 

From the 2025 Annual Report:

 

Catastrophe risk

 

Catastropheriskarisesfromexposuretolargelossescausedbyeitherman-madeornaturalcatastrophesthatcould

result in significant underwriting losses. Weather-related catastrophe losses are also affected by climate change

which increases the unpredictability of both frequency and severity of such losses. As the company does not

establish reserves for catastrophes in advance of the occurrence of such events, these events may cause volatility

in the levels of incurred losses and reserves,subject to the effects of reinsurance recoveries.This volatility may also

be contingent upon political and legal developments after the occurrence of the event. The company evaluates

potential catastrophic events and assesses the probability of occurrence and magnitude of these events

predominantly through probable maximum loss (“PML”) modeling techniques and through the aggregation of

limits exposed. A wide range of events are simulated using the company’s proprietary and commercial models,

includingsinglelargeeventsandmultipleeventsspanningthenumerousgeographicregionsinwhichthecompany

assumes insurance risk.

Each operating company has developed and applies strict underwriting guidelines for the amount of catastrophe

exposure it may assume as a standalone entity for any one risk and location, and those guidelines are regularly

monitored and updated. Operating companies also manage catastrophe exposure by diversifying risk across

geographic regions, catastrophe types and other lines of business, factoring in levels of reinsurance protection,

adjusting the amount of business written based on capital levels and adhering to risk tolerance guidelines. The

company’s head office aggregates catastrophe exposure company-wide and continually monitors the group’s

aggregate exposure. Independent exposure limits for each entity in the group are aggregated to produce an

exposure limit for the group as there is presently no model capable of simultaneously projecting the magnitude

andprobabilityoflossinallgeographicregionsinwhichthecompanyoperates.Currentlythecompany’sobjective

istolimititscompany-widecatastrophelossexposuresuchthatoneyear’saggregatepre-taxnetcatastrophelosses

would not exceed one year’s normalized net earnings before income taxes. The company takes a long term view

and generally considers a 15% return on common shareholders’ equity, adjusted to a pre-tax basis, to be

representative of one year’s normalized net earnings.The modeled probability of aggregate catastrophe losses in

any one year exceeding this amount is generally more than once in every 250 years.

 

The bottom line is that the company models the aggregate amount of multiple potential catastrophe events occurring anywhere around the world in a given calendar year and currently estimates that the likelihood that this amount will exceed 15% of common shareholders equity (roughly $3.9 billion on an after tax basis, or about $5 billion on a pre-tax basis, given 12 2025 shareholder equity of $26.3 billion) is less than 0.4%.  
 

This risk management guideline then essentially would appear to have the goal of turning aggregate catastrophe losses, those expected to occur more rarely than once every 250 years, or with a probability of less than 0.4% in any calendar year, into an income statement event, not a balance sheet event.

We probably should also keep in mind that the company regularly records catastrophe losses around the world which are being charged for in their annual premiums and which cover the average annual level of catastrophe losses expected over the long term.  I don’t know what the average number is, but I think 2025 cat losses were $1.2 billion, and the company recorded a combined ratio of 93% with pre tax underwriting profit of $1.8 billion.

 

So a $5 billion pre tax year for catastrophes would appear to be only $3.8 billion pre tax above the actual 2025 result.  Since the pre tax earnings in 2025 exceeded $3.8 billion, this appears to indicate to me that if 2025 had been the year with $5 billion in pretax  catastrophe losses, the company would still have reported positive earnings of around $1 billion or so.

Between cash on hand and short term securities, the company looks to be situated well to handle such a year.
 

 

 

 

 

[Hoodlum]

Thanks @Maverick47 for going back to the annual report for the catastrophe risk. Reading it again I can how complex it would be to come up with a framework for each insurance company to sustain such of an event. 

[SafetyinNumbers]

3 hours ago, Hoodlum said:

Thanks @Viking for these great write ups on float and the impact on growth. I am sure you will include this in a future article but a larger float also  increases risk during very large Cat events.  
 

Fairfax’s international and multi-line growth will certainly help to mitigate this better than in the past but I am curious how a 1 in 100 or 400 year hurricane event would impact Fairfax.  How much cash should the US insurance subs and Fairfax keep on hand for such an event. 

A large cat would hurt near term BVPS growth but probably result in multiple expansion that would more than offset it. Long term they will get it back anyway, 

[Viking]

3 hours ago, Hoodlum said:

Thanks @Viking for these great write ups on float and the impact on growth. I am sure you will include this in a future article but a larger float also  increases risk during very large Cat events.  
 

Fairfax’s international and multi-line growth will certainly help to mitigate this better than in the past but I am curious how a 1 in 100 or 400 year hurricane event would impact Fairfax.  How much cash should the US insurance subs and Fairfax keep on hand for such an event. 

Fairfax’s insurance business is much larger. In recent years, its exposure to catastrophes has come down a little. 
 

More resilient: At the same time, the dramatic increase in Fairfax’s earnings (and sources) is important. Additionally, Fairfax has been building additional resilience into their business model: the significant increase in non-insurance consolidated holdings in recent years.
 

I think looking to the ratings agencies (specifically AM Best) can  provide another helpful take… they have increased Fairfax’s ratings twice in recent years. Lots of positive developments. It is encouraging. 

Edited Sunday at 09:35 PM by Viking

[SafetyinNumbers]

3 hours ago, Viking said:

Fairfax’s insurance business is much larger. In recent years, its exposure to catastrophes has come down a little. 
 

More resilient: At the same time, the dramatic increase in Fairfax’s earnings (and sources) is important. Additionally, Fairfax has been building additional resilience into their business model: the significant increase in non-insurance consolidated holdings in recent years.
 

I think looking to the ratings agencies (specifically AM Best) can  provide another helpful take… they have increased Fairfax’s ratings twice in recent years. Lots of positive developments. It is encouraging. 

The way it was described to me is they took the pricing but didn’t expand coverage so cat has shrunk as a percentage of total premiums.

 

This chart in the 2024 Climate report shows how far away cat losses are from 15% shareholder’s equity and that the gap is getting wider. This means if there is a really bad cat, we’ll be able to write a lot of business at great prices and premium growth will accelerate. I think this will lead to multiple expansion as quant buyers will show up. This is another “free” option in the Fairfax story that investors assign a discount to and not.a premium which would be more appropriate. 

 

[djokovic1]

@SafetyinNumbers I love this chart. It shows how much more resilient Fairfax is today relative to its history to Cats.

 

Shareholder equity has grown faster than premiums over the past 20 years. Since 2005:

 

Shareholder equity 10x: $2.4bn -> $26bn

Premiums 6x: $5bn -> $30bn. Same for float $6.6 ->$40.

 

This is an additional reason that explains the widening gap and buffer i.e shareholder equity has grown faster than premiums/float. (interestingly buybacks will have the effect of reducing this buffer but of course increase per share value).

 

The other aspect is that Fairfax will have 1-2% exposure to any Global catastrophe based on its size. There isn't idiosyncratic exposure as cat risk is shared across insurers. 

 

This is the latest one (a bit hazy) from the 2025 sustainability report.

 

Edited yesterday at 08:26 AM by djokovic1

[SafetyinNumbers]

9 hours ago, djokovic1 said:

@SafetyinNumbers I love this chart. It shows how much more resilient Fairfax is today relative to its history to Cats.

 

Shareholder equity has grown faster than premiums over the past 20 years. Since 2005:

 

Shareholder equity 10x: $2.4bn -> $26bn

Premiums 6x: $5bn -> $30bn. Same for float $6.6 ->$40.

 

This is an additional reason that explains the widening gap and buffer i.e shareholder equity has grown faster than premiums/float. (interestingly buybacks will have the effect of reducing this buffer but of course increase per share value).

 

The other aspect is that Fairfax will have 1-2% exposure to any Global catastrophe based on its size. There isn't idiosyncratic exposure as cat risk is shared across insurers. 

 

This is the latest one (a bit hazy) from the 2025 sustainability report.

 

Thanks. I missed that the updated report came out. I like the green better!

[Maverick47]

39 minutes ago, SafetyinNumbers said:

Thanks. I missed that the updated report came out. I like the green better!

Thank you both ( @SafetyinNumbers and @djokovic1) for pointing us to these charts (and I will agree that I happen to like the formatting with the green bars better as well)!

It appears to me that the actual catastrophe dollars displayed on the charts are not inflation adjusted, and are relatively similar in dollar magnitude for the last 9 years, while the equity base on which the cat tolerance is calculated has been growing significantly.

We’re seeing the power of the business model at work I believe.  If we look out another decade or two, if we are fortunate enough to escape the big 1-in-250 year  or even rarer type year of really bad catastrophe years, I can envision a future where this risk continues to moderate and becomes almost as much of an afterthought as it is currently for Berkshire Hathaway.

 

Berkshire most recently appears to want to retain about $20 billion in cash against the possibility of a mega catastrophe year.  That’s less than a half year of their normalized earnings, and much less than 15% of their shareholder equity.

 

Similarly, management of Fairfax seems to have developed  sufficient underwriting and risk management discipline to continue to reduce the probability that catastrophic insurance losses might represent a “company killing” event in the future.  
 

While the holding company is just over 40 years old, at least one of its subsidiaries (Crum & Forster) has been “alive” since it was incorporated over 200 years ago in 1822.  That’s a good example for the holding company to want to emulate, and all indications are that they are on the right track.

[SafetyinNumbers]

2 hours ago, Maverick47 said:

It appears to me that the actual catastrophe dollars displayed on the charts are not inflation adjusted, and are relatively similar in dollar magnitude for the last 9 years, while the equity base on which the cat tolerance is calculated has been growing significantly.

 

It helps that equity is probably understated by a third as well!

[Maverick47]

1 hour ago, SafetyinNumbers said:

It helps that equity is probably understated by a third as well!

Good point!  

[Viking]

Article 3 in our deep dive into Fairfax's insurance business.

 

The Insurance Cycle: How Great Insurers Exploit Opportunity

 

The P/C Insurance Cycle

 

Understanding Hard Markets, Soft Markets, and Why They Matter

 

Before investors can understand Fairfax's growth history, they first need to understand the property and casualty (P/C) insurance cycle.

 

Unlike most industries, insurance pricing moves through long periods of expansion and contraction. These cycles influence growth, profitability, capital allocation, and ultimately shareholder returns. They also help explain many of Fairfax's most important strategic decisions over the past forty years.

 

Understanding the insurance cycle is therefore essential to understanding Fairfax.

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What Is the Insurance Cycle?

 

The property and casualty insurance industry moves through recurring periods of strong and weak pricing.

 

These two phases are commonly known as hard markets and soft markets.

 

Hard Markets

• Premium rates rise.
• Underwriting standards tighten.
• Capacity becomes scarce.
• Profitability improves.

Soft Markets

• Premium rates fall.
• Competition intensifies.
• Capacity becomes abundant.
• Profitability deteriorates.

These cycles often last for many years and can swing to extremes. Successful insurers therefore manage their businesses with a long-term perspective rather than reacting to short-term conditions.

 

Understanding where the industry sits in the cycle is important because it affects an insurer's growth opportunities, profitability, and ability to create long-term shareholder value.

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Why Does the Cycle Exist?

 

The insurance cycle exists for much the same reason financial markets experience booms and busts: human behavior.

 

When profits are strong, insurers become increasingly willing to compete for business. New capital enters the market, underwriting standards loosen, and pricing gradually weakens. Eventually, profitability deteriorates.

 

As returns decline, the process reverses. Capital leaves the industry, underwriting standards tighten, and pricing improves.

 

The result is a repeating cycle driven by greed and fear.

 

Like Benjamin Graham's Mr. Market, the insurance cycle provides investors with a useful mental model. Markets are not always rational, and neither are insurance companies.

 

Reinsurance executive Paul Ingrey captured this process in his well-known Underwriting Cycle Clock, which illustrates how insurers repeatedly move through periods of discipline, optimism, overexpansion, deteriorating profitability, and recovery. The cycle persists because industry participants repeatedly make the same behavioral mistakes.

---

 

Exhibit: Paul Ingrey's Insurance Underwriting Cycle Clock

 

Reinsurance executive Paul Ingrey developed the "Underwriting Cycle Clock" to illustrate how strong underwriting profits attract capital and competition, eventually leading to weaker pricing and deteriorating underwriting results. As losses mount, capacity leaves the market, discipline returns, and the cycle begins again.

 

The lesson is straightforward: the cycle is driven by human behavior. Companies that remain disciplined while competitors chase growth are often the long-term winners.

 

Source: Arch Capital Group Limited

 

 

 

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Why the Cycle Matters

 

The insurance cycle creates opportunities for disciplined insurers.

 

During soft markets, the best companies focus on underwriting profitability and preserving capital. Growth becomes secondary to maintaining discipline. During hard markets, those same companies can deploy capital aggressively, write more business, and earn attractive returns.

 

Many insurers struggle because they do the opposite. They pursue growth aggressively when pricing is weak and profitability is poor. By the time a hard market arrives, they often lack the capital needed to take full advantage of the opportunity.

 

The most successful insurers are therefore not those that grow the fastest. They are the ones that remain disciplined throughout the cycle.

 

For investors, the key lesson is simple: the insurance cycle itself is not the risk. The real risk is owning an insurer that cannot navigate it effectively.

---

 

The Berkshire Hathaway Model

 

No company has exploited the insurance cycle more successfully than Berkshire Hathaway.

Warren Buffett understood that insurance companies possess a unique advantage. They collect premiums today while many claims are not paid until years later, creating float that can be invested until it is needed to pay future claims.

 

Most insurers invest this float conservatively, primarily in bonds. Buffett combined disciplined underwriting with superior capital allocation.

 

Because insurance cycles unfold over many years, Berkshire never felt compelled to chase premium growth simply to satisfy quarterly expectations. When pricing became unattractive, Buffett was willing to let business shrink and patiently wait for better opportunities.

 

That flexibility became one of Berkshire's greatest competitive advantages. During hard markets, capital flowed into insurance. During soft markets, it could be allocated to stocks, wholly owned businesses, acquisitions, or share repurchases.

 

A soft market therefore changed where Berkshire invested capital—not its ability to create value.

---

 

Fairfax and the Insurance Cycle

 

Fairfax has followed a remarkably similar approach.

 

During the prolonged soft market from roughly 2014 through 2019, Fairfax expanded primarily through acquisitions. Purchases such as Brit and Allied World significantly increased the company's insurance platform while industry valuations remained depressed. Fairfax was effectively buying insurance assets when they were on sale.

When the market turned in 2020, management shifted its emphasis toward organic growth. Strong pricing allowed Fairfax to expand premiums while maintaining underwriting discipline.

 

As a result, Fairfax grew successfully during both phases of the cycle.

• Acquisitions drove growth during the soft market.
• Organic underwriting drove growth during the hard market.

Equally important, the company improved the quality of its insurance operations throughout the process.

 

Like Berkshire Hathaway, Fairfax is more than an insurance company. It is also an investment company and a capital allocator.

 

Prem Watsa's significant ownership stake and voting control have allowed Fairfax to manage the business with a long-term perspective. That has helped the company remain disciplined through multiple insurance cycles while allocating capital wherever opportunities have been most attractive.

 

When underwriting opportunities become less attractive, Fairfax can redirect capital toward acquisitions, public equities, private investments, debt reduction, or share repurchases.

 

A soft market may slow premium growth, but it also creates opportunities elsewhere.

---

 

What It Means for Investors

 

As the insurance market begins to soften, investors often assume the industry's best years are over.

 

For many insurers, that concern may be justified. But Fairfax is not a traditional insurance company.

Like Berkshire Hathaway, Fairfax combines disciplined underwriting with investing and capital allocation. Changes in the insurance cycle influence where capital is deployed, but they do not determine whether value can be created.

 

Poor insurers become victims of the cycle. Great insurers use the cycle to their advantage.

 

Fairfax's forty-year record suggests it belongs in the latter group. Throughout multiple insurance cycles, management has followed a consistent approach: remain disciplined when opportunities are scarce, act decisively when opportunities are abundant, and allocate capital with a long-term perspective.

 

[Viking]

Article 4 into our deep dive into Fairfax's insurance business. What did they do in the last soft market? 

 

Fairfax's Insurance Transformation (2014–2025)

 

One Insurance Cycle. One Management Team. One Remarkable Transformation.

 

One of the best ways to evaluate management is to examine what it accomplishes over an entire business cycle.

 

The eleven years from 2014 to 2025 provide an excellent test for Fairfax. During this period, the company navigated both a prolonged soft insurance market and one of the strongest hard markets in decades. The result was one of the most significant transformations in Fairfax's history.

 

 

 

Several observations stand out.

 

First, Fairfax dramatically expanded its insurance franchise. Net premiums written increased from $6.1 billion to $26.3 billion, while float grew from $11.6 billion to $39.3 billion.

 

Second, shareholders ultimately participated in that growth on a per-share basis. This outcome was far from inevitable. Fairfax issued shares and partnered with outside investors to help finance several acquisitions. Over time, however, strong organic growth, improved underwriting profitability, rising investment income, share repurchases, and the purchase of minority interests largely offset that dilution.

 

Finally, Fairfax created value under two very different insurance market conditions. During the soft market, management focused on expanding the business. During the hard market, it harvested the benefits of those earlier decisions.

 

The transformation can be divided into two distinct phases.

 

Setting the Stage

 

In 2011, Andy Barnard was appointed Chief Operating Officer of Fairfax's insurance operations.

 

His priority was not rapid growth. Instead, management concentrated on strengthening underwriting discipline, reinforcing Fairfax's decentralized operating model, recruiting talented leaders, and building a stronger insurance culture across the organization.

 

These efforts attracted little attention from investors at the time. In hindsight, they laid the foundation for everything that followed.

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Phase One: Growing Through a Soft Market (2014–2019)

 

 

“Someone’s sitting in the shade today because someone planted a tree a long time ago.” Warren Buffett

 

 

Much of the period from 2014 to 2019 was characterized by a soft insurance market. Pricing was generally weak, competition was intense, and attractive underwriting opportunities were limited.

 

Many insurers responded by chasing premium growth.

 

Fairfax took a different approach.

 

Rather than competing aggressively for underpriced business, management used the soft market to expand through acquisitions while maintaining underwriting discipline.

 

 

Despite operating in a difficult insurance environment, Fairfax more than doubled net premiums written during the soft market. Premiums increased from $6.1 billion to $13.3 billion, representing compound annual growth of 16.8%.

 

Most of that growth came from acquisitions rather than increasingly aggressive underwriting. Fairfax was deliberately expanding its insurance franchise while many competitors focused primarily on writing more business.

 

The most significant acquisitions included:

• Brit (2015): $1.7B
• Various international insurance businesses (2015–2016): ~$1.0B
• Allied World (2017): $4.9B

Between 2015 and 2017, Fairfax invested approximately $7.6 billion to acquire eleven insurance businesses. These acquisitions significantly expanded the company's geographic reach, product offerings, and underwriting capacity.

 

The timing proved important.

 

Late in a soft market, attractive underwriting opportunities are often scarce, but acquisition opportunities can be plentiful. Weak industry profitability frequently depresses valuations, allowing disciplined buyers to acquire high-quality insurance businesses at attractive prices. In effect, Fairfax was buying insurance assets when they were on sale.

 

This strategy required significant capital. Fairfax issued shares and brought in minority partners to help finance several acquisitions, accepting short-term dilution in exchange for the opportunity to build a much larger insurance franchise.

 

Whether that trade-off would create long-term value remained an open question.

By the end of 2019, Fairfax had assembled a much larger and more diversified insurance business. Investors now had to wait for the next phase of the insurance cycle to see whether management's strategy would pay off.

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Phase Two: Growing Through a Hard Market (2019–2025)

 

The insurance market began to harden at the end of 2019. Premium rates increased, underwriting conditions improved, and attractive growth opportunities emerged across much of the industry.

 

Fairfax entered this environment with a significant competitive advantage. Years of acquisitions had created a much larger insurance franchise through which to deploy capital. Rather than pursuing additional acquisitions, management shifted its focus to organic growth.

 

 

The results were exceptional.

 

Between 2019 and 2025, net premiums written increased from $13.3 billion to $26.3 billion, representing compound annual growth of 12.1%. Unlike the previous phase, this growth was driven primarily by improved market conditions and disciplined underwriting rather than acquisitions.

 

The hard market validated decisions that had been made years earlier during the soft market. Fairfax entered the cycle with a much larger insurance franchise and was well positioned to capitalize as pricing and underwriting conditions improved.

 

The result was strong premium growth, improved underwriting profitability, and significantly higher float. Just as importantly, it answered the question investors had been asking since the acquisition program began. The larger insurance franchise was creating real shareholder value.

 

By 2025, growth on a per-share basis closely matched the growth of the underlying business. Much of the dilution incurred while building the insurance franchise had been offset through organic growth, improved profitability, share repurchases, and the purchase of minority interests.

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What Was the Impact?

 

Viewed as a whole, the results are striking.

 

Between 2014 and 2025:

• Net premiums written increased from $6.1 billion to $26.3 billion.
• Total investments increased from $26.2 billion to $74.9 billion.
• Float increased from $11.6 billion to $39.3 billion.
• Book value per share increased from $395 to $1,260.

Shareholders fully participated in the growth, with per-share results slightly exceeding the growth of the underlying business.

 

More importantly, Fairfax successfully adapted its strategy as the insurance cycle evolved. During the soft market, management expanded the insurance franchise through acquisitions. During the hard market, it used that larger franchise to drive strong organic growth, improve underwriting profitability, and generate significantly more investment income.

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What Have We Learned?

 

The transformation of Fairfax's insurance operations was not the product of a single acquisition or a favourable insurance market. It was the result of disciplined capital allocation across an entire insurance cycle.

 

As the insurance industry begins to soften again, many investors assume growth opportunities will disappear. Fairfax's experience suggests otherwise. The opportunities change, but they do not disappear.

 

Successful management teams adapt. They allocate capital differently as conditions evolve, but they remain focused on the same objective: creating long-term shareholder value.

 

Over the past eleven years, Fairfax demonstrated exactly that.

 

Edited 1 hour ago by Viking

[Maverick47]

53 minutes ago, Viking said:

Like Berkshire Hathaway, Fairfax is more than an insurance company. It is also an investment company and a capital allocator.

 

Prem Watsa's significant ownership stake and voting control have allowed Fairfax to manage the business with a long-term perspective. That has helped the company remain disciplined through multiple insurance cycles while allocating capital wherever opportunities have been most attractive.

 

When underwriting opportunities become less attractive, Fairfax can redirect capital toward acquisitions, public equities, private investments, debt reduction, or share repurchases.

 

This (flexible and intelligent capital allocation) is a really important differentiator for top notch insurance companies/conglomerates @Viking.

 

There are plenty of publicly traded insurers who attempt to maintain underwriting discipline through an insurance cycle, but they unnecessarily restrict their capital allocation options.  Too many of the insurance CEO’s limit their capital allocation decisions (when underwriting opportunities become less attractive) to share repurchases, dividends and possibly acquisition of other insurance companies.  They either don’t appear to be able to think outside those boxes, or perhaps they just don’t have an optimal holding company structure for insurance company subsidiaries that would also allow them to acquire subsidiaries outside of insurance.

 

If they are focused on Return on Equity, when profitable underwriting growth for the numerator is difficult to achieve, they typically will turn towards returning capital to shareholders as a means of reducing the denominator.

 

This can result in a relatively efficient insurer, addressing the issue of “excess capital” if it would otherwise be invested in low return fixed income instruments and damage the Return on Equity measurement.  But the problem can be that in their urgency to “return” excess capital to shareholders, they forget to consider whether the price at which they are repurchasing shares is favorable or not.

 

Both Fairfax and Berkshire have been (and are) proving themselves to be adept at rationally scanning a much wider global opportunity set of places to invest any excess capital that can accumulate during softer markets.