Understanding Fairfax's Business Model

[Txvestor]

8 hours ago, Viking said:

I have a follow up question for the board. How many business engines do you think Fairfax has? 

 

Is it two:

• Insurance
• Investments

Or is it three:

• Insurance
• Investments: fixed income + mark to market equities
• Non-insurance associate + consolidated companies 

Or is it some other number?

 

I keep going back and forth on the question (between 2 and 3). 

 

We know Fairfax has no desire to become a full-blown conglomerate like Berkshire Hathaway. 
My guess is Fairfax views non-insurance associate + consolidated companies primarily as investments - not permanent holdings. They will likely be monetized one day (like the recent sale of 50% of Poseidon). 

 

So on a practical basis my current view is Fairfax has two basic business engines: insurance and investments.

 

However, in terms of understanding the business, I think it is helpful to use three business engines, and split investments into two buckets.

 

How do you analyze Fairfax? 

I would skew to the 3 engines. the latter 2 should be separate as they have different control over operational decisions.

Then I would ask the following question, how do you see their use of at various times and to varying amounts:

 

1) holdco debt. 

2) pref equity 

3) minority outstanding insurance subs. stakes 

4) TRS/Index shorts/CDSs

5) Share buybacks 

 

I guess technically you could call them all leverage on investments but it's more akin to what trading desks that investment banks do but over the longer term. 
I've said this before but I think it's all about giving them 360 optionality in capital allocation.