Understanding Fairfax's Business Model

[Viking]

I am in the process of updating the chapter on Fairfax's business model in my book. I keep coming back to this topic because it is important and difficult (this becomes even more apparent to me when I hear others trying to explain Fairfax). Let me know if you think my description below is roughly accurate. What looks right? What is missing? There are 4 articles coming over the next week.

 

Below is the chapter summary and the first article. 

 

Chapter Summary

 

A company's business model determines how it creates value for shareholders. It explains how the company earns money, allocates capital and compounds value over time.

 

This chapter explains how Fairfax's business model works, how it has evolved over the past four decades, why its organizational structure creates a competitive advantage and how the company's various sources of earnings fit together to create a unique capital compounding business.

 

Key topics covered include: 

• A Capital Compounding Machine – Introduces Fairfax's business model using the flywheel framework, explaining how insurance, float, investing and capital allocation work together to create a self-reinforcing cycle of long-term value creation.
• How the Business Model Evolved – A Much Better Business Today – Examines how Fairfax's business model has evolved through four distinct phases—Build, Learn, Optimize and Compound—and explains why today's company is fundamentally stronger than any previous version.
• The Organizational Advantage – Cenralized Capital Allocation and Decentralized Operations – Explains how decentralized operating businesses and centralized capital allocation work together to maximize long-term per-share value, and why Fairfax's ability to execute this organizational model has become an important competitive advantage.
• An Income Stream View of the Business Model – Examines Fairfax's business model through its six income streams, connecting the company's three business engines to its financial statements and illustrating why Fairfax differs fundamentally from a traditional property and casualty insurer.

Together, these articles explain how Fairfax creates value, why its business model has produced exceptional long-term shareholder returns and why the company is best understood as an integrated capital allocation organization built on an insurance foundation.

 

===========

 

Understanding Fairfax’s Business Model

 

A Long-Term Capital Compounding Machine Built on Insurance Float, Investment Leverage, Decentralized Operations and Disciplined Capital Allocation

 

Introduction

 

Fairfax describes itself as follows:

 

 

"Fairfax Financial Holdings Limited is a holding company which, through its subsidiaries, is primarily engaged in property and casualty insurance and reinsurance and the associated investment management. Fairfax's corporate objective is to achieve a 15% growth in book value per share over the long term. Fairfax seeks to differentiate itself by combining disciplined underwriting and investing its assets on a value-oriented total return basis, believing that this approach will provide above-average returns over the long term."

 

 

The description accurately summarizes what Fairfax does and what it is trying to achieve. It does not, however, explain how the company expects to achieve those objectives.

 

The first step to answering that question is understanding Fairfax's business model.

 

Over the past four decades, Fairfax has built an integrated system that combines insurance, investment leverage, disciplined investing and rational capital allocation. Each component reinforces the others, allowing the company to compound capital at an increasing scale over time.

 

One of the best ways to understand that system is through the concept of a flywheel.

---

 

A Business Designed to Compound Capital

 

Great businesses are often easier to understand as systems than as collections of individual parts.

 

Rather than focusing on quarterly earnings or individual investments, it helps to ask a more fundamental question:

 

How does this business create increasing amounts of value over long periods of time?

 

A useful way to think about that process is as a flywheel.

 

The concept comes from a mechanical flywheel: a heavy wheel that requires considerable effort to get moving. Once turning, however, it stores energy and builds momentum. Each rotation makes the next one easier.

 

The same principle applies to business. One successful activity strengthens the next, which strengthens the next, eventually feeding back into the original activity. Rather than simply generating profits, each cycle increases the company's capacity to generate even greater profits in the future.

 

A → strengthens B → strengthens C → feeds back into A

 

A successful business does more than earn money today. It increases its ability to create even more value tomorrow.

---

 

Figure 1: The Fairfax Flywheel

 

Fairfax's flywheel is shown below. The remainder of this chapter examines each component of the flywheel and explains how, together, they have enabled Fairfax to compound capital successfully for more than four decades.

 

---

 

Step 1: Build a High-Quality Insurance Business

 

Insurance is the foundation of Fairfax's business model.

 

A high-quality property and casualty insurance business creates value in two ways.

 

First, it generates underwriting profits by consistently collecting more in premiums than it ultimately pays in claims and operating expenses.

 

Second, it generates insurance float. Premiums are collected today while claims are often paid months or years later. During that period, those funds can be invested.

 

Underwriting profits increase current earnings, while float provides investment capital that generates future earnings. As Fairfax's insurance operations grow, both sources of value expand, allowing the investment portfolio to grow without issuing additional shares.

 

Chart 2: Fairfax's Capital Structure

 

 

The chart above illustrates how Fairfax finances its investment portfolio. At year-end 2025, the company had approximately US$77.5 billion of investment capital funded by three primary sources: common shareholders' equity, debt and insurance float.

 

Insurance float was the largest source of capital, representing 53% of the total. Unlike debt, whose cost is measured by interest expense, the economic cost of float is determined by underwriting performance. Because Fairfax has generated consistent underwriting profits in recent years, its largest source of investment capital has also been profitable.

 

Over the past four decades, Fairfax has built a global insurance franchise while steadily improving underwriting performance. Better underwriting increases current earnings while producing larger, lower-cost float to support the investment portfolio.

 

That combination gives Fairfax a financing advantage that relatively few companies possess. The next question is how Fairfax invests that capital.

---

 

Step 2: Invest the Capital

 

Insurance float is not idle cash. It is invested alongside shareholders' equity and debt in a diversified portfolio of fixed income securities, public equities, private businesses and other investments.

 

As a result, Fairfax controls an investment portfolio that is much larger than shareholders' equity alone could support. If invested successfully, that larger capital base can generate substantially higher earnings than equity alone would allow.

 

Chart 3: Fairfax's Investment Leverage

 

 

At year-end 2025, Fairfax managed approximately US$75 billion of investments—about 2.85 times common shareholders' equity.

 

Investment leverage creates the opportunity. Investment skill determines whether that opportunity is realized.

 

Most property and casualty insurers treat investing as a supporting function, focusing primarily on preserving capital and matching assets to insurance liabilities. Fairfax takes a different approach. It treats investing as a core business, allocating capital across fixed income, public equities, private businesses and other investments wherever expected long-term risk-adjusted returns are most attractive.

 

Fairfax's decentralized philosophy extends beyond insurance. Rather than simply owning securities, it partners with capable entrepreneurs and management teams, giving them significant autonomy to build stronger businesses over time. As those businesses grow their earnings and intrinsic value, Fairfax participates directly in that value creation through its investment portfolio.

 

Chart 4: Fairfax's Investment Portfolio

 

 

The investment portfolio generates multiple streams of earnings, including interest income, dividends, earnings from associates, earnings from consolidated subsidiaries and investment gains. Those earnings increase Fairfax's financial resources, providing management with additional capital to allocate in the third step of the flywheel.

---

 

Step 3: Allocate Capital Rationally

 

Insurance operations generate underwriting profits and float. The investment portfolio generates additional earnings. Together, they create capital available for allocation.

 

The next decision is where that capital should go.

 

Unlike most diversified companies, Fairfax separates operating decisions from capital allocation. Its operating companies are highly decentralized, but capital allocation is centralized. Capital generated anywhere in the organization is not trapped within individual subsidiaries. Instead, management can redeploy it across insurance operations, public equities, private businesses, acquisitions, fixed income securities, share repurchases and other opportunities.

 

This gives Fairfax an important advantage. Capital can continually be redirected toward the opportunities offering the highest expected long-term returns rather than remaining invested where it was originally earned.

 

Decades of relationships with entrepreneurs, management teams, business families and long-term investment partners further expand that opportunity set, giving Fairfax access to investments that may not be available to most public companies.

 

The objective is straightforward: allocate every incremental dollar to the opportunity expected to create the greatest long-term value per share.

 

Successful capital allocation strengthens Fairfax's earnings, intrinsic value and financial position, providing even more capital for the next turn of the flywheel.

---

 

Step 4: Repeat the Process at a Larger Scale

 

Successful underwriting, disciplined investing and rational capital allocation increase Fairfax's earnings, intrinsic value and financial strength.

 

That additional capital strengthens the balance sheet and expands Fairfax's capacity to write insurance, generate float and grow its investment portfolio. The flywheel turns again—but from a larger capital base.

 

Unlike many insurers, Fairfax is not constrained by any single market cycle. When insurance opportunities are attractive, capital can be directed toward expanding the insurance platform. When expected returns are higher elsewhere, capital can be allocated to public equities, private businesses, acquisitions, fixed income securities or share repurchases. This flexibility allows Fairfax to continually direct capital toward the opportunities expected to create the greatest long-term value.

 

Each successful cycle increases Fairfax's financial resources, allowing the company to write more insurance, control a larger investment portfolio and allocate more capital than before. The flywheel doesn't simply repeat—it accelerates.

---

Why the Flywheel Matters

 

The power of Fairfax's business model lies not in any single component, but in how its components reinforce one another.

 

Insurance operations generate underwriting profits and float. Together with shareholders' equity and debt, float provides the financial leverage to support a much larger investment portfolio than equity alone could finance. Disciplined investing generates multiple streams of investment earnings, while rational capital allocation continually directs that capital toward the opportunities expected to create the greatest long-term value.

 

Each successful turn of the flywheel increases Fairfax's earnings, strengthens its balance sheet and expands its capacity to write insurance, invest capital and allocate even greater financial resources. Over time, the system compounds on itself.

 

Viewed through this framework, Fairfax is best understood not simply as a property and casualty insurer, but as a capital allocation organization built on an insurance foundation. Insurance provides the capital. Investment leverage expands the capital base. Disciplined investing compounds that capital, and rational capital allocation continually directs it toward its highest-value use.

 

Understanding this flywheel provides a framework for understanding Fairfax. The articles that follow examine the business model from different perspectives, providing a deeper understanding of how Fairfax creates long-term shareholder value.

 

 

Edited 15 hours ago by Viking

[73 Reds]

2 hours ago, Viking said:

I am in the process of updating the chapter on Fairfax's business model in my book. I keep coming back to this topic because it is important and difficult (this becomes even more apparent to me when I hear others trying to explain Fairfax). Let me know if you think my description below is roughly accurate. What looks right? What is missing? There are 4 articles coming over the next week.

 

Below is the chapter summary and the first article. 

 

Chapter Summary

 

A company's business model determines how it creates value for shareholders. It explains how the company earns money, allocates capital and compounds value over time.

 

This chapter explains how Fairfax's business model works, how it has evolved over the past four decades, why its organizational structure creates a competitive advantage and how the company's various sources of earnings fit together to create a unique capital compounding business.

 

Key topics covered include: 

• A Capital Compounding Machine – Introduces Fairfax's business model using the flywheel framework, explaining how insurance, float, investing and capital allocation work together to create a self-reinforcing cycle of long-term value creation.
• How the Business Model Evolved – A Much Better Business Today – Examines how Fairfax's business model has evolved through four distinct phases—Build, Learn, Optimize and Compound—and explains why today's company is fundamentally stronger than any previous version.
• The Organizational Advantage – Cenralized Capital Allocation and Decentralized Operations – Explains how decentralized operating businesses and centralized capital allocation work together to maximize long-term per-share value, and why Fairfax's ability to execute this organizational model has become an important competitive advantage.
• An Income Stream View of the Business Model – Examines Fairfax's business model through its six income streams, connecting the company's three business engines to its financial statements and illustrating why Fairfax differs fundamentally from a traditional property and casualty insurer.

Together, these articles explain how Fairfax creates value, why its business model has produced exceptional long-term shareholder returns and why the company is best understood as an integrated capital allocation organization built on an insurance foundation.

 

===========

 

Understanding Fairfax’s Business Model

 

A Long-Term Capital Compounding Machine Built on Insurance Float, Investment Leverage, Decentralized Operations and Disciplined Capital Allocation

 

Introduction

 

Fairfax describes itself as follows:

 

 

"Fairfax Financial Holdings Limited is a holding company which, through its subsidiaries, is primarily engaged in property and casualty insurance and reinsurance and the associated investment management. Fairfax's corporate objective is to achieve a 15% growth in book value per share over the long term. Fairfax seeks to differentiate itself by combining disciplined underwriting and investing its assets on a value-oriented total return basis, believing that this approach will provide above-average returns over the long term."

 

 

The description accurately summarizes what Fairfax does and what it is trying to achieve. It does not, however, explain how the company expects to achieve those objectives.

 

The first step to answering that question is understanding Fairfax's business model.

 

Over the past four decades, Fairfax has built an integrated system that combines insurance, investment leverage, disciplined investing and rational capital allocation. Each component reinforces the others, allowing the company to compound capital at an increasing scale over time.

 

One of the best ways to understand that system is through the concept of a flywheel.

---

 

A Business Designed to Compound Capital

 

Great businesses are often easier to understand as systems than as collections of individual parts.

 

Rather than focusing on quarterly earnings or individual investments, it helps to ask a more fundamental question:

 

How does this business create increasing amounts of value over long periods of time?

 

A useful way to think about that process is as a flywheel.

 

The concept comes from a mechanical flywheel: a heavy wheel that requires considerable effort to get moving. Once turning, however, it stores energy and builds momentum. Each rotation makes the next one easier.

 

The same principle applies to business. One successful activity strengthens the next, which strengthens the next, eventually feeding back into the original activity. Rather than simply generating profits, each cycle increases the company's capacity to generate even greater profits in the future.

 

A → strengthens B → strengthens C → feeds back into A

 

A successful business does more than earn money today. It increases its ability to create even more value tomorrow.

---

 

Figure 1: The Fairfax Flywheel

 

Fairfax's flywheel is shown below. The remainder of this chapter examines each component of the flywheel and explains how, together, they have enabled Fairfax to compound capital successfully for more than four decades.

 

---

 

Step 1: Build a High-Quality Insurance Business

 

Insurance is the foundation of Fairfax's business model.

 

A high-quality property and casualty insurance business creates value in two ways.

 

First, it generates underwriting profits by consistently collecting more in premiums than it ultimately pays in claims and operating expenses.

 

Second, it generates insurance float. Premiums are collected today while claims are often paid months or years later. During that period, those funds can be invested.

 

Underwriting profits increase current earnings, while float provides investment capital that generates future earnings. As Fairfax's insurance operations grow, both sources of value expand, allowing the investment portfolio to grow without issuing additional shares.

 

Chart 2: Fairfax's Capital Structure

 

 

The chart above illustrates how Fairfax finances its investment portfolio. At year-end 2025, the company had approximately US$77.5 billion of investment capital funded by three primary sources: common shareholders' equity, debt and insurance float.

 

Insurance float was the largest source of capital, representing 53% of the total. Unlike debt, whose cost is measured by interest expense, the economic cost of float is determined by underwriting performance. Because Fairfax has generated consistent underwriting profits in recent years, its largest source of investment capital has also been profitable.

 

Over the past four decades, Fairfax has built a global insurance franchise while steadily improving underwriting performance. Better underwriting increases current earnings while producing larger, lower-cost float to support the investment portfolio.

 

That combination gives Fairfax a financing advantage that relatively few companies possess. The next question is how Fairfax invests that capital.

---

 

Step 2: Invest the Capital

 

Insurance float is not idle cash. It is invested alongside shareholders' equity and debt in a diversified portfolio of fixed income securities, public equities, private businesses and other investments.

 

As a result, Fairfax controls an investment portfolio that is much larger than shareholders' equity alone could support. If invested successfully, that larger capital base can generate substantially higher earnings than equity alone would allow.

 

Chart 3: Fairfax's Investment Leverage

 

 

At year-end 2025, Fairfax managed approximately US$75 billion of investments—about 2.85 times common shareholders' equity.

 

Investment leverage creates the opportunity. Investment skill determines whether that opportunity is realized.

 

Most property and casualty insurers treat investing as a supporting function, focusing primarily on preserving capital and matching assets to insurance liabilities. Fairfax takes a different approach. It treats investing as a core business, allocating capital across fixed income, public equities, private businesses and other investments wherever expected long-term risk-adjusted returns are most attractive.

 

Fairfax's decentralized philosophy extends beyond insurance. Rather than simply owning securities, it partners with capable entrepreneurs and management teams, giving them significant autonomy to build stronger businesses over time. As those businesses grow their earnings and intrinsic value, Fairfax participates directly in that value creation through its investment portfolio.

 

Chart 4: Fairfax's Investment Portfolio

 

 

The investment portfolio generates multiple streams of earnings, including interest income, dividends, earnings from associates, earnings from consolidated subsidiaries and investment gains. Those earnings increase Fairfax's financial resources, providing management with additional capital to allocate in the third step of the flywheel.

---

 

Step 3: Allocate Capital Rationally

 

Insurance operations generate underwriting profits and float. The investment portfolio generates additional earnings. Together, they create capital available for allocation.

 

The next decision is where that capital should go.

 

Unlike most diversified companies, Fairfax separates operating decisions from capital allocation. Its operating companies are highly decentralized, but capital allocation is centralized. Capital generated anywhere in the organization is not trapped within individual subsidiaries. Instead, management can redeploy it across insurance operations, public equities, private businesses, acquisitions, fixed income securities, share repurchases and other opportunities.

 

This gives Fairfax an important advantage. Capital can continually be redirected toward the opportunities offering the highest expected long-term returns rather than remaining invested where it was originally earned.

 

Decades of relationships with entrepreneurs, management teams, business families and long-term investment partners further expand that opportunity set, giving Fairfax access to investments that may not be available to most public companies.

 

The objective is straightforward: allocate every incremental dollar to the opportunity expected to create the greatest long-term value per share.

 

Successful capital allocation strengthens Fairfax's earnings, intrinsic value and financial position, providing even more capital for the next turn of the flywheel.

---

 

Step 4: Repeat the Process at a Larger Scale

 

Successful underwriting, disciplined investing and rational capital allocation increase Fairfax's earnings, intrinsic value and financial strength.

 

That additional capital strengthens the balance sheet and expands Fairfax's capacity to write insurance, generate float and grow its investment portfolio. The flywheel turns again—but from a larger capital base.

 

Unlike many insurers, Fairfax is not constrained by any single market cycle. When insurance opportunities are attractive, capital can be directed toward expanding the insurance platform. When expected returns are higher elsewhere, capital can be allocated to public equities, private businesses, acquisitions, fixed income securities or share repurchases. This flexibility allows Fairfax to continually direct capital toward the opportunities expected to create the greatest long-term value.

 

Each successful cycle increases Fairfax's financial resources, allowing the company to write more insurance, control a larger investment portfolio and allocate more capital than before. The flywheel doesn't simply repeat—it accelerates.

---

Why the Flywheel Matters

 

The power of Fairfax's business model lies not in any single component, but in how its components reinforce one another.

 

Insurance operations generate underwriting profits and float. Together with shareholders' equity and debt, float provides the financial leverage to support a much larger investment portfolio than equity alone could finance. Disciplined investing generates multiple streams of investment earnings, while rational capital allocation continually directs that capital toward the opportunities expected to create the greatest long-term value.

 

Each successful turn of the flywheel increases Fairfax's earnings, strengthens its balance sheet and expands its capacity to write insurance, invest capital and allocate even greater financial resources. Over time, the system compounds on itself.

 

Viewed through this framework, Fairfax is best understood not simply as a property and casualty insurer, but as a capital allocation organization built on an insurance foundation. Insurance provides the capital. Investment leverage expands the capital base. Disciplined investing compounds that capital, and rational capital allocation continually directs it toward its highest-value use.

 

Understanding this flywheel provides a framework for understanding Fairfax. The articles that follow examine the business model from different perspectives, providing a deeper understanding of how Fairfax creates long-term shareholder value.

 

 

Thanks, Viking.  Do you look at Fairfax's float the same as Berkshire's float?  If not, how do you view them differently?

[Viking]

@73 Reds, I am not sure I understand your question. To me float is important. What is perhaps more important is the amount of leverage. @SafetyinNumbers has been talking about this for years... it is slowly sinking in for me. 

 

Fairfax is about 2.85x leverage (investments to shareholders' equity. What happens to the amount of leverage over time is important to longevity of the business model. 

 

Berkshire Hathaway lost the amount of leverage over time for a bunch of reasons. The end result is BRK's business model has completely changed. Earnings are much lower (still solid).   

 

Fairfax appears laser focussed on keeping the amount of leverage high. Which suggests to me it will continue to be a wonderful business for at least the next decade (likely longer). But that is as far as my crystal ball attempts to look. 

Edited 11 hours ago by Viking

[73 Reds]

19 minutes ago, Viking said:

@73 Reds, I am not sure I understand your question. To me float is important. What is perhaps more important is the amount of leverage. @SafetyinNumbers has been talking about this for years... it is slowly sinking in for me. 

 

Fairfax is about 2.85x leverage (investments to shareholders' equity. What happens to the amount of leverage over time is important to longevity of the business model. 

 

Berkshire Hathaway lost the amount of leverage over time for a bunch of reasons. The end result is BRK's business model has completely changed. Earnings are much lower (still solid).   

 

Fairfax appears laser focussed on keeping the amount of leverage high. Which suggests to me it will continue to be a wonderful business for at least the next decade (likely longer). But that is as far as my crustal ball attempts to look. 

Well, Buffett has said that Berkshire's float is better than equity.  As a shareholder, I've never bought into that (it is a liability) yet it has some of the same characteristics as equity but solely because of Berkshire's underwriting discipline.  In that vein, and with more leverage than Berkshire, do you view Fairfax's float the same or any differently?  When does leverage get excessive?

[SafetyinNumbers]

49 minutes ago, 73 Reds said:

Well, Buffett has said that Berkshire's float is better than equity.  As a shareholder, I've never bought into that (it is a liability) yet it has some of the same characteristics as equity but solely because of Berkshire's underwriting discipline.  In that vein, and with more leverage than Berkshire, do you view Fairfax's float the same or any differently?  When does leverage get excessive?

It’s a bit of a philosophical question. For the benefit of others, the base assumptions are that over the long term for a high quality insurance business, the combined ratio will average below 100 and that premiums will grow. If accepted that means float is always growing albeit on a revolving basis. Under these conditions, the float is the equivalent of owning a growing income stream that never has to be paid back. Those are the characteristics of an asset not a liability. 
 

The insurance subsidiaries themselves are not that levered and in fact carry extra capital. The additional leverage at the holdco and it’s structured very intelligently with no near term maturities and long duration issues. The leverage at the non-insurance subsidiaries is  not relevant as they are non-recourse to the insurance subsidiaries that are mainly the shareholders. 

Slide from @djokovic1

 

[Viking]

1 hour ago, 73 Reds said:

Well, Buffett has said that Berkshire's float is better than equity.  As a shareholder, I've never bought into that (it is a liability) yet it has some of the same characteristics as equity but solely because of Berkshire's underwriting discipline.  In that vein, and with more leverage than Berkshire, do you view Fairfax's float the same or any differently?  When does leverage get excessive?

 

@73 Reds, I think Buffett's view was (is?) that high quality float is better than equity - the key is the quality of the insurance operations.

 

This is one of the reasons I am so happy with what Andy Barnard has done with Fairfax's insurance operations over the past 15 years (they are much higher quality today). This means Fairfax is a much more valuable company today - one of a couple of reasons why it should trade at a higher multiple today than it did 15 years ago.

 

Fairfax's leverage is similar to what is was 15 years ago (if memory serves me correct). It's not like Fairfax has been aggressively levering up the business. Instead, spiking earnings (and shareholders' equity) is not driving leverage lower. At least not right now. (Having a low share price is a big deal - for management teams focussed on per share value creation over the long term). 

----------

Another angle to the leverage discussion is size, sources and diversity of earnings. Fairfax is in a very strong position today - much stronger than at any time in its history.

 

It really is remarkable what Fairfax has accomplished over the past 10 years. And how the stars have aligned - insurance, investments, capital allocation etc.  

 

Edited 11 hours ago by Viking

[dartmonkey]

9 minutes ago, Viking said:

Fairfax's leverage is similar to what is was 15 years ago (if memory serves me correct). It's not like Fairfax has been aggressively levering up the business. Instead, spiking earnings (and shareholders' equity) is not driving leverage lower. At least not right now. (Having a low share price is a big deal - for management teams focussed on per share value creation over the long term). 

Repurchases are good for increasing value per share, but they are even better for maintaining the leverage. It would be interesting to see how the last few years of repurchases have changed the leverage, but without access to the numbers (long drive home) I suspect it will have increased.

 

$1 of repurchasing obviously decreases cash by $1 but at a P/B of 1.4, it decreases book value by only 70c. So the ratio of investments to equity should increase. 

[djokovic1]

@Viking I love the flywheel especially because it's true!

 

A lot of other insurance companies operate at a similar leverage, I would argue thats not what makes Fairfax special. What makes them special is they operate at that leverage with 30% in equities whereas most other insurers only have 5% in equities. So the other insurers have much lower ROE.

 

Markel and Berkshire used to operate at much higher leverage when they had a lower amount of equity investment % in the book, not dissimilar to Fairfax today. So I don't think the leverage is an outlier / risky. What makes today unique is a healthy return on the FI book which allows Fairfax to have an exceptional ROE in most circumstances.

[SafetyinNumbers]

25 minutes ago, dartmonkey said:

$1 of repurchasing obviously decreases cash by $1 but at a P/B of 1.4, it decreases book value by only 70c. So the ratio of investments to equity should increase. 

Doesn’t it reduce book value by the same as a $ of repurchasing? That’s the accounting entry. BVPS doesn’t go down as much because the denominator goes down too. 

[dartmonkey]

52 minutes ago, SafetyinNumbers said:

Doesn’t it reduce book value by the same as a $ of repurchasing? That’s the accounting entry. BVPS doesn’t go down as much because the denominator goes down too. 

Yes you are right. But I still think the leverage increases, not for the reason I said but just because an equal decrease in investments and equity will make the ratio higher. 

 

For instance, with $74.9b invested and $26.3b in equity at the end of 2025, for a 2.85 ratio, buying a million shares this year might cost about $1.6b, bringing the ratio to 73.3/24.7=2.97. Pretty big improvement. 

[Viking]

2 hours ago, djokovic1 said:

@Viking I love the flywheel especially because it's true!

 

A lot of other insurance companies operate at a similar leverage, I would argue thats not what makes Fairfax special. What makes them special is they operate at that leverage with 30% in equities whereas most other insurers only have 5% in equities. So the other insurers have much lower ROE.

 

Markel and Berkshire used to operate at much higher leverage when they had a lower amount of equity investment % in the book, not dissimilar to Fairfax today. So I don't think the leverage is an outlier / risky. What makes today unique is a healthy return on the FI book which allows Fairfax to have an exceptional ROE in most circumstances.

@djokovic1, I think what makes today unique is a number of things have converged:

• Higher interest rates, which you mention.
• Higher quality insurance business
• Higher quality equity holdings
• Better capital allocation (matured?)

The 4 have come together at the same time. Bodes well for future returns. 
 

The good news is that it appears little of that is priced into the stock today. 

Edited 8 hours ago by Viking

[Wanderer]

31 minutes ago, Viking said:

@djokovic1, I think what makes today unique is a number of things have converged:

• Higher interest rates, which you mention.
• Higher quality insurance business
• Higher quality equity holdings
• Better capital allocation (matured?)

The 4 have come together at the same time. Bodes well for future returns. 
 

The good news is little of that is priced into the stock today. 

 

I really hope, bullet point 3 and 4 will last. If they don't do any major blunders, the compounding goal of 15% on the average looks more than achievable. The outcome could be much higher. But then again, it's insurance and there are unknown unknows in the risks they cover.

[SafetyinNumbers]

41 minutes ago, Wanderer said:

 

I really hope, bullet point 3 and 4 will last. If they don't do any major blunders, the compounding goal of 15% on the average looks more than achievable. The outcome could be much higher. But then again, it's insurance and there are unknown unknows in the risks they cover.

The current inefficient market is a great hunting ground for them. When they do acquisitions most investors don’t like them because they don’t screen  well. I think any concerns around insurance are more short term in nature. The longer the outlook the less it matters. In the short term if the market hardens that would accelerate multiple expansion which will otherwise trend towards whatever Fairfax’s limit is on the NCIB for open market purchases. That should more than offset any slow down in BVPS growth from a higher combined ratio in the short term.

[Txvestor]

What timeframe do you guys view as the best to assess Fairfax performance. I agree quarter to quarter or even year to year is difficult. Because for many reasons their earnings are lumpy. I was thinking five years but wanted to see what others think. 
 

On leverage, Fairfax tilts towards the higher side, compared to most insurers. They not only hold float leverage, but also debt leverage and even preferred shares. If you consider minority shareholding and pref equity as a form of leverage, that's additional on top of that. Perhaps as a result of this, they also are the most careful towards how they invest and hedge on interest, rate swings, etc. So they are approached towards leverage is perhaps the most complex one of all P&C insurers. 
 

The role of redundancy in reserves. I think this is like 20 out of the past 21 years or so. And on average it's around 2% of underwritten premiums. I think there's a small tax advantage, and also allows for some flexibility in maintaining a more smooth doubt, Insurance operations. 
 

 

Edited 7 hours ago by Txvestor

[Viking]

1 hour ago, Txvestor said:

What timeframe do you guys view as the best to assess Fairfax performance. I agree quarter to quarter or even year to year is difficult. Because for many reasons their earnings are lumpy. I was thinking five years but wanted to see what others think. 
 

On leverage, Fairfax tilts towards the higher side, compared to most insurers. They not only hold float leverage, but also debt leverage and even preferred shares. If you consider minority shareholding and pref equity as a form of leverage, that's additional on top of that. Perhaps as a result of this, they also are the most careful towards how they invest and hedge on interest, rate swings, etc. So they are approached towards leverage is perhaps the most complex one of all P&C insurers. 
 

The role of redundancy in reserves. I think this is like 20 out of the past 21 years or so. And on average it's around 2% of underwritten premiums. I think there's a small tax advantage, and also allows for some flexibility in maintaining a more smooth doubt, Insurance operations. 

To evaluate Fairfax’s performance today, I like to use 5 years. Because I think we now have 5 years of relatively ‘clean’ results/history. The challenge is a fair bit of stuff is happening under the hood and is not captured in the accounting results. Some of it gets picked up by excess of FV over CV. But there is more than that. 
 

On leverage, I think the preferred shares are mostly gone, replaced with debt. 
 

Their bond portfolio is very conservative… mostly government debt (85%?). No private credit at all. Very different from P/C insurance peers. 

Edited 5 hours ago by Viking