Subject: Re: Buying opportunity?
Is PE a good valuation metric for an insurance / diversified financial like FFX?

Ultimately, any company is as valuable as its future earnings, so I would say yes. The problem is a lot of the sources of earnings are pretty variable, so you have to be careful. In Fairfax (FFH)'s case, the major sources or earnings are underwriting, fixed income, public equities and wholly owned companies, very similar to Berkshire. So if any of these is atypical in a given year, of course you can't extropolate to future years. In Fairfax's case, underwriting has been quite good for several years, partly because of better underwriting maybe, and partly because they have not had a lot of mega-cats. Last year, the CR was about 95%, and the average of the last 10 ears was (from memory) about 96%, so it's not a big difference. For fixed income, rates have come down a bit in the last year or two, but their average duration is about 3 years, so that shouldn't be much of a headwind. There are some one-time equity gains on sale every year, but I don't think 2024 or 2025 were particularly exceptional. And earnings from wholly owned businesses are climbing, but should continue to climb.


Do GAAP earnings vary a lot based on unrealized gains/losses on portfolio holdings?

As a canadian company, Fairfax reports using IFRS, not GAAP, but the treatment of unrealized gains is similar. But yes, they can vary from year to year, for sure,, see below.

For similar companies like BRK and MKL, we don’t usually see GAAP PE used for valuation. More often we see operational earnings, adjusted normalized earnings or book value used for valuation.

Using price book is an alternative, and is often used for insurance companies, but in the end, a company that is more profitable deserves a higher P:B, so it is not clear to me that there is anything to be gained from book. Buffett has of course used this measure in the past, but Fairfax has so much more float per equity, I think it makes less sense. For the record, they both trade at about the same 1.4x multiple at the moment. Also, Fairfax's book value is materially understated by virtue of the fact that it has a lot of equity holdings that are not marked to market, and for whom the market valuation is much higher than the carrying value that is considered by IFRS book value.

As you suggest, using operational earnings is probably better, and comparing these to the capitalization of the firm without the equity holdings. In 2024, Fairfax had $4.8b in operating earnings, and the 2025 number is likely to be higher. This means that at a market cap of $38.5b, they are at about 8x (pre-tax) operating earnings, and this is without counting the much more volatile equity gains that have been $1.9b, $1.2b, -$244m, $2.3b and -$750m in the last 5 years.