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Just to point out that Fairfax has dropped back to a price very close to the level it had at market close on Dec 5, the day that S&P announced that FFH would be included in the S&P/TSX60, the index of 60 of the biggest companies based in Canada. The Canadian $ share price closed at $2321 that day, and closed at $2431 on the next trading day, and has been as high as $2700 since then, but for some reason it has plunged back down to $2410 in the last few days.

I think they will have blowout earnings when they report in mid-February (probably on Feb 12). At $2410, they are at 1.51x book and at 8.4x trailing earnings, which seems an attractive price.

Regards, DTB

I think they will have blowout earnings when they report in mid-February (probably on Feb 12). At $2410, they are at 1.51x book and at 8.4x trailing earnings, which seems an attractive price.


Correction: it now seems likely that the Q4 (FY) earnings report will come out on Feb 19, not Feb 12, since they generally announce their earnings release at least 6 days prior.

In the meantime, the 'attractive price' of C$2410 (or US$1734) has now become slightly more attractive in the last few weeks, at C$2324 (US$1717 for the FRFHF shares traded OTC in the US). The USD has lost about 3% of its value against its peers in the last month, so this really is a substantially lower price.)

Last 12 months' earnings are $222/share, and I think Q4 2025 is likely to be very strong, like Q4 2024, so $222/share is a plausible full year earnings number for 2025. Fairfax reports in USD, so the current price represents 1717/222= 8x trailing earnings, and I expect earnings will be steadily growing in 2026 and beyond; at this price, earnings per share can be substantially influenced by share repurchases which the company has indicated are a priority.

Of course strong expected earnings may already be discounted by the market, so there's no guarantee that a great earnings report will make an immediate impact on the share price, but this seems like a good setup, with as good a price as we've had for Fairfax for a long time.

Regards, DTB

Is PE a good valuation metric for an insurance / diversified financial like FFX?

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

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.

I do have limit buy orders at $1600, hoping to buy in an AI induced panic that seems to have hit many sectors recently, including insurance brokers.

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.

I worked for one of the Fairfax companies from late 17 through mid 21. Just FYI, one of the methods Prem Watsa uses to make their profitability / net income numbers better, is "ship" the toxic / money losing insurance policies to that company to get them off the books of say, a Crum-Forster. This is "runoff". The effect is similar to having an internal, internally funded hedge fund where the objective of the fund is to minimize losses (payments) by negotiating settlements with plaintiffs and reduce exposure from claims-mill law firms. I suppose most large insurers do this, but Watsa has shown mastery at large bets.

Of course, I wish I'd stayed invested in the vested shares I got because...look at a chart since late '22 (a triple).

I worked for one of the Fairfax companies from late 17 through mid 21. Just FYI, one of the methods Prem Watsa uses to make their profitability / net income numbers better, is "ship" the toxic / money losing insurance policies to that company to get them off the books of say, a Crum-Forster. This is "runoff". The effect is similar to having an internal, internally funded hedge fund where the objective of the fund is to minimize losses (payments) by negotiating settlements with plaintiffs and reduce exposure from claims-mill law firms. I suppose most large insurers do this, but Watsa has shown mastery at large bets.



Thanks for the insight. I have a pretty limited understandiing of the notion of 'runoff', with every insurance company seeming to have this kind of operation. In Berkshire, it is largely in National Insurance Co. (NICO), and in Fairfax, it is RiverStone, which expanded significantly in 2012 when it bought Brit Insurance Limited (BIL) which was the runoff part of Brit PLC which they also acquired, but only in 2015. Maybe partly because there had been no bad surprises with BIL in the intervening 3 years?

But are you suggesting that there is something wrong with what Fairfax is doing, or different in nature from other runoff operations, where there is a known future liability that has to be managed in a different way from regular insurance policies? Obviously there are accounting considerations, but RiverStone's loss is counted in Fairfax results, so if Crumk-Forster dumps a bad policy onto RiverStone, I guess Crum-Forster looks better but it doesn't improve Fairfax's results, does it? If you have any further thoughts on this, I would be very interested to hear them.

Regards, DTB

Belatedly, But are you suggesting that there is something wrong with what Fairfax is doing, or different in nature from other runoff operations, where there is a known future liability that has to be managed in a different way from regular insurance policies?

The effect of what Fairfax does by using Riverstone is, they take 6 or 7 of THEIR companies' worth of "bad"/catastrophic loss policies off of the books of those companies and dump them into an account (RS) where they can under-estimate the loss provisions in total by many percent. The 6 or 7 companies combined ratios drop substantially - "cleaned" so their capitalization & profitability looks much better.

The trick is with these guys, because its internal, they can declare whatever future liabilities they want and provide an operating budget refreshed annually to manage expenses, payouts and (mostly) settlements. An entity like Riverstone, like any runoff, is incentivized to settle aggressively and cheaply to close down the future liabilities. But, they can use the prospect of future underwriting from the other FFXHF as an incentive to settle quickly. They also centralize or virtually organize the legal fraud-fighting units from the satellite companies into one entity to countersue the endless paid-expert witness frauds and re-litigating "ambulance chasing" law firms that take most of whatever they win from the plaintiffs. Oh, and manage reinsurance as well.

So, it's not wrong, it's just business. But several years ago, at least one of the satellites (Zenith? Odyssey?) was able to grow its premium book by something like 100% over 3 or 5 years once its toxic policies were extracted, making the regulators happy and their new underwriting pricing very attractive. And Fairfax didn't have to pay a dime to anyone else to take the toxic stuff on.

FC

The trick is with these guys, because its internal, they can declare whatever future liabilities they want and provide an operating budget refreshed annually to manage expenses, payouts and (mostly) settlements. An entity like Riverstone, like any runoff, is incentivized to settle aggressively and cheaply to close down the future liabilities. But, they can use the prospect of future underwriting from the other FFXHF as an incentive to settle quickly. They also centralize or virtually organize the legal fraud-fighting units from the satellite companies into one entity to countersue the endless paid-expert witness frauds and re-litigating "ambulance chasing" law firms that take most of whatever they win from the plaintiffs. Oh, and manage reinsurance as well.

So, it's not wrong, it's just business. But several years ago, at least one of the satellites (Zenith? Odyssey?) was able to grow its premium book by something like 100% over 3 or 5 years once its toxic policies were extracted, making the regulators happy and their new underwriting pricing very attractive. And Fairfax didn't have to pay a dime to anyone else to take the toxic stuff on.


I'm still not seeing the problem. If they can make regulators happier by removing the problem claims from firms like Zenith and Odyssey, improving those companies' books, while obviously making Riverstone's books worse, I guess that makes sense. Riverstone is just another Fairfax subsidiary, and its losses affect Fairfax's financial results just as much as if they took place within Zenith and Odyssey, so it's not as if they escape the liability or disguise it any way. And centralizing these problem accounts to a group that is specialized in the legal aspects obviously makes sense. It seems to be standard operating procedure for lots of insurance firms, not just Fairfax, but do you see anything objectionable about how Fairfax is handling runoffs, compared to other insurance firms?

One potential concern would be if Riverstone had been underreserving, although this is a concern for any insurance operation, and can only be verified over the long term. Obviously Fairfax has to make regular capital contributions to Run-off to augment its capital, and an additional capital contribution of $115.0m subsequent to December 31, 2025. In 2024 this was $340.0m, in 2023 it was $185.0m, in 2022 it was $240m, in 2021 it was m, and in 2020 it was $131.9m. There doesn't seem to be a clear pattern; obviously Riverstone needs to constantly receive capital from the holding company in exchange for taking off other subsidiaries' problematic policies, and they have to reserve for this, but reserves seem ok.

Year    Insurance     Net adverse       Capital
         service       prior year        contribution
         result        reserve dev't     
2025    $321.0          $298.5          $170.0
2024    $239.0          $221.1          $340.0
2023    $320.6          $259.4          $185.0
2022    $150.8          $147.2          $240.0
2021    $285.4          $212.0          $ 93.6
2020    $204.2          $125.6          $131.9  

Maybe I'm barking up the wrong tree? How would you assess whether there is anything sinister lurking under the Riverstone business?

Repeating: So, it's not wrong, it's just business. If you inferred I was saying that was a problem, then I wasn't clear.

You have a great handle on runoff.

My only point was to comment on your detailed commentary about the variability of Fairfax' profits and some of the obscurity with an explanation of what they do. Using an internal company as a toxic waste dump lets the cleaned subsidiaries grow profitably at a much faster rate than they would if they had a pile of bad policies in their books. As you have seen in their results the last four-five years.

And the runoff can be left to operate as quietly or aggressively as the parent feels like, meaning level of investment in legal and operational staff. 'Nuff said.

FC

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