Fairfax Financial Q3 2023 Earnings Call Transcript

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Provided by Quartr
November 3, 2023

There are 6 speakers on the call.

Operator

Good morning and welcome to Fairfax's 2023 Third Quarter Results Conference Call. Your lines have been placed in a listen only mode. After the presentation, we will conduct a question and answer session. Now for time's sake, we do ask that you limit your question to 1. Today's conference is being recorded.

Operator

If you have any objections, you may disconnect at this time. Your host for today's call is Param Watsa with opening remarks from Mr. Derek Bulas. And Mr. Bulas, Please begin.

Speaker 1

Good morning, and welcome to our call to discuss Fairfax's 2023 Third Quarter Results. This call may include forward looking statements. Actual results may differ perhaps materially from those contained in such forward looking statements as a result of a variety of uncertainties and risk Factors, the most foreseeable of which are set out under Risk Factors in our base shelf prospectus, which has been filed with Canadian securities regulators and is available on SEDAR. Fairfax disclaims any intention or obligation to update or revise any forward looking statements, except as required by applicable securities law. I'll now turn the call over to our Chairman and CEO, Prem Watsa.

Speaker 2

Thank you, Derek. Good morning, ladies and gentlemen. Welcome to Fairfax's 2023 Third Quarter Conference Call. I plan to give you a couple of highlights and then pass the call on to Peter Clark, Our President and Chief Operating Officer to comment on the quarter and Jen Allen, our Chief Financial Officer to provide some additional financial details. As I said for the last number of quarters, the most important point I can make for you is to repeat what I've said in the past.

Speaker 2

For the first time in our 37 year history, almost 38 years now, I can say to you, we expect, Of course, no guarantees. Our operating income to be more than $3,000,000,000 annually for the next 3 years. Operating income consisting of $1,500,000,000 plus from interest and dividend income. We earned $1,400,000,000 year to date, dollars 1,000,000,000 from underwriting profit. We made $943,000,000 year to date $500,000,000 from associates and non insurance companies versus $1,000,000,000 year to date.

Speaker 2

This works out to be over $100 per share after interest expenses overhead and taxes. We continue to exceed our expectations of the year for the year, with the year to date operating income already at $3,100,000,000 excluding the effects of discounting and risk margin.

Speaker 3

Fluctuations in stock and bond prices will

Speaker 2

be on top of that, Situations in stock and bond prices will be on top of that. And this only really matters, as I've said many times, over the long term. Recently in October, during the spike in treasury yields, we have extended our duration to 3.1 years with an average maturity of approximately 4 years and a yield of 4.9%. In the next 4 years, we are likely to have a recession in the United Our fixed income portfolio remains conservatively positioned with approximately 70% in government securities and 19% primarily in short dated high quality corporate bonds. Insurance and reinsurance operations continue to perform exceptionally well with gross premiums written for the 9 months of 22,000,000,000 Up 7.5 percent, a combined ratio of 94%, resulting in an underwriting profit of $943,000,000 for the 1st 9 months.

Speaker 2

I will now pass the call to Peter Clark, our President and Chief Operating Officer for further updates.

Speaker 3

Thank you, Prem. We had an outstanding Q3 of 2023 with net earnings of almost $1,100,000,000 and our book value increased to $8.77 per share, an increase of 16.4 percent from year end. That's adjusted for our $10 dividend. And earnings per share in the quarter was $42 The strong performance in the quarter was driven by adjusted Operating income of $967,000,000 from our insurance and reinsurance operations generated through underwriting income of $292,000,000 interest and dividend income of $454,000,000 and our share of profit of associates of $222,000,000 Our investment return for the quarter was 1.5 driven by continuing increased interest and dividend income, strong share of profits of associates, while net gains in the quarter were relatively flat. Consolidated interest and dividend income of $513,000,000 Doubled from the Q3 of 2022, benefiting from a very low duration of our fixed income portfolio coming into 2022 and then reinvesting at higher rates, primarily in government bonds.

Speaker 3

Net gains on investments of 56,000,000 were driven by gains on our equity exposures of $273,000,000 offset by losses on our bond from U. S. Treasuries due to increased interest rates in the quarter. Our fixed income duration at the end of the Quarter continued to be relatively short at 2.3 years. And as Prem mentioned earlier, In the Q4, we have increased our duration to over 3 years.

Speaker 3

Net gains on our equity and equity related holdings were $273,000,000 in the quarter, driven by unrealized mark to market gains on our Fairfax TRS, Commercial International Bank and John Keels, offset by unrealized losses on As mentioned in previous quarters, our book value per share of 8.77 does not include unrealized gains or losses in our equity accounted investments and our consolidated investments, which are not mark to market. At the end of the Q3, the fair value of these securities is in excess of carrying value by Under IFRS 17, our net earnings are affected by the discounting of our insurance liabilities and the application of a risk adjustment. In the Q3 of 2023, our net earnings benefited by $459,000,000 pretax from the effects of discounting losses occurring in the current quarter, changes in the risk margin, the unwinding of the discount from previous years and changes in the discount rate on prior year insurance liabilities. As interest rates move up and down, we will see positive or negative effects on earnings from discounting. Our insurance and reinsurance businesses continue to grow less than previous quarters, although we still see positive momentum as we wrote $7,200,000,000 of gross premium in the Q3 of 2023.

Speaker 3

Our gross premiums were up 5% this quarter versus the Q3 of 2022, an increase of $350,000,000 The growth is driven by continued rate and strong margins that prevail in many of our markets, driven by increased pricing in our reinsurance business and international markets. Our North American Insurance segment Increased gross premiums by $196,000,000 or 9.7 percent. Crum and Forster had double digit growth at 13%, driven by its surplus and specialty lines, accident and health business and Seneca Insurance. Northbridge was up almost 10% in Canadian dollars, reflecting excellent customer retention and rate increases and the premiums were offset by Zenith's premiums that were down 5% year over year, driven by the competitive workers' compensation market. Our Global Insurer and Reinsurer segment was relatively flat with gross premiums increasing $65,000,000 up 1.6% in the Q3 versus the Q3 of 2022.

Speaker 3

Allied World was up 6.5% in the quarter led by its Reinsurance segment, which had double digit growth, while its Insurance segment was flat. Odyssey Group was up approximately 0.5 point with reinsurance up over 10%, primarily in North American property, while its insurance business was down 12%, principally from Hudson Insurance in its financial and crop lines of business. Brits premium was down 4%, largely due to reductions in its casualty and FinPro business, while key premium was down a similar amount. The premium of our international operations again posted double digit growth at 11.2% in the Q3 versus the Q3 of 2022 with gross premium of $848,000,000 Growth was exceptionally strong at Polish Re, Colonnade and Euro Life's non life operations, while Fairfax Asia was down on a gross basis due to timing differences, while maintaining strong growth in net premiums written. On closing of our acquisition of an additional 46 percent of golf insurance, which we expect to occur in the Q4 of 2023, we will begin consolidating the results, adding an approximate $2,700,000,000 in gross premium annually to our international business.

Speaker 3

The long term prospects of our international operations are excellent and will be a significant source of growth over time, driven by excellent management teams, underpenetrated insurance markets and strong local economies. Our companies continue to grow into Favorable market conditions, while we see rate increases moderating or rates reducing in some lines, public D and O, workers' compensation And cyber, for example, overall margins remain attractive. The reinsurance market continues to harden, especially for property business, and we expect that will continue into 2024. Our combined ratio was 95 in the Q3 of 2023, producing an underwriting profit of 292,000,000 The combined ratio included catastrophe losses of $389,000,000 adding 6.7 combined ratio points, primarily from the Hawaii fires, Hurricane Adavia and attritional catastrophe losses. This compares to a combined ratio of 100.3 and catastrophe losses of 15 points in the Q3 of 2022.

Speaker 3

As our premium base has expanded significantly and with the benefits of diversification, we expect to be able to absorb significant catastrophe losses within our underlying underwriting profit. Our global insurers and reinsurers posted a combined ratio of 92.7 led by Allied World who had another great quarter with a combined ratio of 89.3. With its Global Insurance segment producing an 88.3% combined ratio, while its Reinsurance segment was at 91.4%. Odyssey Group had a solid combined ratio of 94.7%, while Brit produced another strong quarter with a combined ratio of 94. Our North American insurers had a combined ratio of 98.3 led by Northbridge We had another strong quarter with a combined ratio of 88.7.

Speaker 3

Brum and Forster had a combined ratio of 105 for the quarter, which included catastrophe losses of 9.4 points, principally from losses from the fires in Hawaii. Chroma and Forster has had a strong presence in Hawaii and have been in the market for many years. Our international operations delivered a combined ratio for the quarter of 98.5 with all but one segment producing an underwriting profit. Fairfax Asia had a combined ratio of 93.7 and our Latin American operations came in at 94.2. Euro Life's non life operations had a difficult quarter as they were hit hard by catastrophe losses, which amounted to $18,000,000 from the wildfires in Greece and storm Daniel.

Speaker 3

Excluding catastrophe losses, our international operations posted a combined ratio of 93.7. For the quarter, our insurance and reinsurance companies recorded favorable reserve development of 56,000,000 or a benefit of 1 point on our combined ratio. This is compared to $48,000,000 or the benefit of 0.9 points in 2022. Our companies are in the process of doing their extensive annual actuarial reviews, which will be reflected in the Q4. Our underwriting expense ratio was up Approximately 1.2 combined ratio points in the Q3 of 2023 versus the Q3 of 2022, partially due to the effect of inflation on salaries and investments in people and technology and the timing differences at Bread, offset by increased earned premiums.

Speaker 3

Through the 1st 9 months of the year, our underwriting income is approaching 1,000,000,000 while continuing to grow profitably. We are led by exceptional management teams and our companies are positioned very well to capitalize on their opportunities in their respective markets. I will now pass the call to Jen Allen, our Chief Financial Officer, to comment on our non insurance company's performance, Overall financial position and recent transactions.

Speaker 4

Thank you, Peter. As we disclosed in our first Quarter 2023 Interim Report on January 1, 'twenty three, the company adopted the new accounting standard for insurance contracts, IFRS 17. Within our Q3 2023 interim report, please refer to Note 3 and sections within the MD and A under the heading Adoption of IFRS 17 Insurance Contracts on January 1, 2023 and the heading Accounting and The comparative periods in the company's Q3 2023 interim report have all been restated and presented under the IFRS 17 measurement standard. So all the comparatives now presented in our Q3 interim report are on the same measurement basis. In our Q3 2023 press release, please refer to Page 2 and in the MD and A Page 43, where we disclose tables that reconcile the insurance service result under IFRS 17 for our property and casualty insurance and reinsurance operations to underwriting profit.

Speaker 4

The key performance measures that the company uses and the property and casualty insurance industry uses in which we operate to evaluate and manage the business. As a reminder, the primary reconciling adjustments Presented in these tables are: 1st, we adjust to include other insurance operating expenses, which are presented in the consolidated statement of earnings outside of the Insurance Service results. And second, we adjust for the effects of discounting on net loss on claims and changes in the risk adjustment that are included within the Insurance Services results in the consolidated statement of earnings. Our traditional performance measures of underwriting profit and combined ratios were on an undiscounted basis as discussed by Peter. So I'll begin my comments for the Q3 of 'twenty three on the impact of IFRS 17 within our results.

Speaker 4

In the Q3 of 2023, net earnings of just under the $1,100,000,000 and for the 9 months, just under 3,100,000,000 included a pre tax net benefit of $459,000,000 $991,000,000 respectively, related to IFRS 17. These pre tax benefits are reported within 2 financial statement lines in our consolidated statement of earnings. First, included within our insurance service result line was the benefit of discounting losses and ceded loss on claims, net of changes in risk adjustment that were recorded in the Q3 of $467,000,000 $1,600,000,000 in the 1st 9 months. This was partially offset by the second component that we present on separate line in our financial statements and the net finance expense from insurance and reinsurance contracts of $8,000,000 in the quarter $595,000,000 in the 1st 9 months. This was comprised of interest accretion or an expense of $369,000,000 in the quarter and approximately $1,000,000,000 in the 1st 9 months, resulting from the unwinding of the effects from discounting associated with net claim payments made during the period.

Speaker 4

And that was partially offset by the effective increase in discount rates during the Q3 and 1st 9 months of 'twenty 3, which was a benefit of $362,000,000 $452,000,000 respectively. This compared to a pretax Net benefit in the Q3 of 2022 of $772,000,000 and approximately $2,500,000,000 in the 1st 9 months of 2022, which was comprised of the same components I just commented on for 2023, which was namely the insurance service result benefiting from discounting on loss and ceded loss on claims, net of our risk adjustment of $349,000,000 for the quarter 'twenty two $916,000,000 for the 9 months of 2022. But in light 2023, 2022 also benefited from net finance income versus the expense in 2023 of $423,000,000 and just under $1,600,000,000 for the 1st 9 months. In 'twenty two, it reflected a benefit from the increase in the discount rates in the respective periods of $563,000,000 and approximately $1,800,000,000 as a result of the interest rate environment being more pronounced in 2022 compared to 2023. And this was offset by the interest accretion or the expense $140,000,000 $232,000,000 in the 1st 9 months of 2022 related to the unwinding of those discounts associated with net claim payments made in the period.

Speaker 4

A final comment on the rising interest rate environment that continued in the 1st 9 months for 2023 and how it impacted our results. The company's asset and liability duration is not matched And as a result, earnings before income taxes included a net benefit of $165,000,000 in the 3rd quarter and $169,000,000 in the 9 months of 2023 that reflected the longer duration in our net insurance contract liabilities compared to the fixed In this rising interest rate environment, as I noted previously, the company reported net finance income from insurance

Speaker 1

Contracts

Speaker 4

held as a net benefit of $362,000,000 in the 3rd quarter and 4.50 $2,000,000 in the 1st 9 months of 'twenty 3 that related to the effect of the increase in the discount rates on the net insurance contract liabilities that have an average duration of approximately 4 years. This exceeded the net loss on the bonds of $197,000,000 in the Q3 of 2023 $283,000,000 in the 1st 9 months of 2023 recorded on our shorter duration fixed income portfolio.

Speaker 3

Please refer

Speaker 4

to Note 4 in our Q3 2023 interim report for additional details on the discount rates applied on the losses and ceded loss on claims recorded within the period. Moving on to a few comments on our non insurance companies results in the quarter. The operating income of the non insurance companies in the Q3 of 2023 were comparable to 2022 with strong results of 126,000,000 Excluding the impact of Fairfax India's performance fees to Fairfax, which was an accrual of $20,000,000 $5,000,000 in the 3rd quarters of 2023 2022, respectively, which are offset upon consolidation. The operating income for the non insurance Company's reporting segment increased to $146,000,000 in the Q3 of 'twenty three from $130,000,000 in the prior period, principally reflecting higher business volumes and continued stable results produced by our Restaurant and Retail Operating segment. The operating income of the non insurance companies reporting segment marginally increased to $162,000,000 in the 9 months of 'twenty 3 from $160,000,000 in the 9 months of 'twenty two.

Speaker 4

If you exclude the impact of Fairfax India's performance fees Fairfax, which was an accrual of $42,000,000 in the 1st 9 months of 2023 and a reversal of a performance fee payable of $45,000,000 in the 1st 9 months of 'twenty 2. The operating income increased to $204,000,000 in the 1st 9 months of 'twenty 3 from $115,000,000 in the 1st 9 months of 'twenty 2. With that increase of $89,000,000 reflecting lower losses from our other reporting segment of $60,000,000 that reflected a non cash impairment charge related to the company's investment in Farmers Edge that was recorded in the 1st 9 months of 2022, which was partially offset by higher business volumes at AGT. We also saw higher operating income at Fairfax India of $25,000,000 primarily due to the increase in share profit of associates and higher operating income at Thomas Cook of $22,000,000 reflecting higher business volumes in all segments, resulting from increased domestic and international travel as the hospitality industry has continued to show significant recovery in 2023. Turning to our share of profit from investment in associates.

Speaker 4

In our Q3, investments in associates modestly decreased in the Q3 of 'twenty 3, with share of profits of associates of $292,000,000 compared to $318,000,000 in $22,000,000 reflecting no share profit from Resolute, Reduced share of profits from Exco, partially offset by increased share of profit from Eurobank at $119,000,000 compared to $80,000,000 in the prior year and Stelco at $21,000,000 compared to no share profit in the prior year due to the commencement of equity method of accounting in Q3 2022. Our share of profit from investments in associates increased in the 9 months of 'twenty 3 to $895,000,000 compared to $764,000,000 in 2022, reflecting increased share profits at Eurobank of about $344,000,000 compared to $230,000,000 in the prior year Exco Resources $130,000,000 compared to $43,000,000 which was partially offset by no share of profit from Resolute as a result of our disposition of that investment and also reduced share profits of Poseidon, formerly known as Atlas, of $102,000,000 compared to $180,000,000 in the prior period, reflecting higher interest rate expenses in transaction costs that related to the Q1 2023 privatization of Poseidon. And the company expects As there were no significant acquisitions or divestitures that I'll close with a few comments on our financial condition.

Speaker 4

The liquidity position of The company remains strong with our cash and investments at the holding company at $1,200,000,000 at September 30, 2023, which was principally held in cash and short dated investments and access to our fully undrawn $2,000,000,000 unsecured revolving credit At September 30, 2023, the excess of fair value over carrying value of investments in non insurance associates and market traded consolidated non insurance subsidiaries was $601,000,000 compared to $310,000,000 at December 31, 2022. That pretax excess of $601,000,000 is not reflected in our book value per share, but is regularly reviewed by management as an indicator of investment performance. Please refer to the MD and A on Page 67 for additional details. The holding company has no significant holding company debt maturities until August 2024 and our total debt Total cap ratio, excluding the non insurance companies, improved to 21.6% at September 30, 2023, compared to 23.7 percent at December 31, 2022, principally as a result of very strong net earnings reported in the 1st 9 months of 2023 of just under the $3,100,000,000 that reflected the underwriting profit of $943,000,000 interest and dividends of just under $1,400,000,000 and a share of profit of associates of 895,000,000 And lastly, our common shareholders' equity increased by $2,500,000,000 to 20 point at September 30, 2023, up from the $17,800,000,000 at December 31, 2022, and that was principally as a result of our net earnings in the 1st 9 months of 'twenty 3 of the $3,100,000,000 that was partially offset by payments on our common and preferred share dividends of $282,000,000 and we purchased approximately 258,000 subordinate voting shares for cancellation for cash consideration of 180,000,000 approximately $698,000 per share with $78,000 purchased in the Q3 of 2020 3 for cash consideration of $65,000,000 That concludes my remarks for the Q3 of 2023, and I'll pass the call back over to

Speaker 2

Thank you, Jan. We now look forward to answering your questions. Please give us your name and your company name and try to limit your questions to only So that it's fair to all on the call. Okay, Fran, we are ready for the questions.

Operator

Thank you so much for those instructions, sir. So our first question now is from Mr. Tom MacKinnon with BMO Capital. Sir, your line is open.

Speaker 5

Yes, thanks very much. Good morning. Just a question here about the top line growth Or the gross premium growth. And you talk about some pretty good growth in your North American insurance operations, but then we get into reinsurance, While you're getting good top line growth in their reinsurance business per se in that category. The growth in their insurance business, I.

Speaker 5

E. At Allied World and at RC Re and at Brit for that matter have been are declining. So why is it that you're able to get some growth in your North American Insurance business, but then if we look at your reinsurance companies, What's categorized as insurance in those is not growing. So maybe a little if you can help us understand that and and

Speaker 3

what you see is growth

Speaker 2

going forward. Tom, that's a good question. The reinsurance markets continue to be hard. But Peter, why don't you give 12% for what's happening in the market?

Speaker 3

Yes, sure. And yes, so in the quarter, our premium was up about 5% Tom and about 7.5% through the 1st 9 months. And just to remind everyone that that's on the back of 3 very strong years where we averaged about 16% growth per year. But as you mentioned, For ODiSI, Allied and Brit, on the insurance side, their premium relatively flat for the year and in the quarter. And but those are the lines of business where they grew significantly the last number of years, specifically cyber, D and O, etcetera.

Speaker 3

And so in the insurance segment, We have a CrommForster and Northbridge. So Northbridge is Canadian, so that's a little different than what Allied and Odyssey is writing on the direct book. And Krum Forster is really more specialty business. And they're again seeing a lot of growth in A and H, which isn't which Odyssey and Allied don't write a lot of. For Brit, I I should mention that we talked about this a little bit in the past that Brit has really taken some underwriting actions over the last 12 months and you see that in their premium.

Speaker 3

Their premium was down about 3% or 4% in the quarter. But maybe more importantly was their combined ratio was also down. So we're seeing those actions come through on the bottom line And obviously, that's what's most important for us.

Speaker 5

Okay, thanks. And if I could just squeeze one more in here. Just With respect to more of a stable interest rate environment, now that you are kind of more matched with respect to your liabilities and your assets. The $459,000,000 kind of net benefit that we saw, at least as it relates If we take out the changes in the risk adjustment impact, that was still in the area of 380 or 370. Wouldn't we find that overall that the combination of the finance expense, this discounting and changes in market value of the bonds, Now that you're more matched, would there be kind of less noise in this net benefit item going forward?

Speaker 2

Yes. So, Tom, first of all, what we're going to do in our annual report as laid out, I'm going to make sure that everyone understands all the Ins and outs, okay. So we'll take some time to disclose in enough detail, but so that you can understand the ins and outs of discounting. But having said that, Peter, you want to add to you want to reply to Tom's question?

Speaker 3

Yes, sure. I'll make a couple comments and then maybe Jen can add if she wants. But I think generally speaking, Tom, you're right That if interest rates are flat, premium is flat, more or less the discount you put on the current year is more or less offset on the unwinding of the discount from the previous years. And then, If by chance the bond maturity is very similar to the duration on our liabilities, that matches as well. When those relationships change, you're going to see movements.

Speaker 3

But generally speaking, yes, I think As things remain stable, you'll see less noise around the discount. Jen, anything?

Speaker 4

Yes. No, I think that's a fair statement. Tom, the way we think about it is how I commented in the my comments in the earlier part of the call, which is if you kind of look at that net financing, look at the change in rates compared to your bond portfolio, You saw a benefit of net 165 in the quarter. That would go away if the interest rate environment was static. So the Last two pieces you're looking at is the new change in discount rates and the unwind.

Speaker 4

And as Peter said, it's still a net Benefit because we are unwinding at a longer rate than the new claims are coming on. But over time, it's not a Huge impact and over time you should start to see that kind of net to almost nominal impact.

Speaker 5

Thanks.

Speaker 2

Thank you, Tom. Fran, next question please.

Operator

Thank you, sir. At this time, I have no further questions in queue.

Speaker 2

Okay. That's terrific. We are the only guy who asked the question. We thank you all for joining our conference call, and we look forward to our year end call in February. Thank you.

Speaker 2

Thanks again. Thank you, Fran.

Operator

You're most welcome. Thank you everyone for your participation. As we are concluded, please disconnect at this time. Thank you very much.

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Key Takeaways

  • For the first time in its history, Fairfax expects its annual operating income to exceed US$3 billion for each of the next three years, having already generated US$3.1 billion year-to-date (excluding discounting and risk margin effects).
  • Q3 2023 net earnings were approximately US$1.1 billion, driving book value per share to US$8.77 (up 16.4% year-to-date) and earnings per share of US$42.
  • Insurance and reinsurance operations wrote US$22 billion of gross premiums in the first nine months (up 7.5%), with a combined ratio of 94% and an underwriting profit of US$943 million year-to-date; Q3’s combined ratio was 95%, producing US$292 million in underwriting profit.
  • Fixed-income portfolio duration was extended to 3.1 years in October (average maturity ~4 years) with a yield of 4.9%, and assets remain conservatively positioned (70% government securities, 19% high-quality corporates).
  • Fairfax’s balance sheet remains robust, with US$1.2 billion of holding-company cash and short-dated investments, a fully undrawn US$2 billion credit facility, common shareholders’ equity up to US$20.3 billion, and a debt-to-capital ratio of 21.6%.
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Earnings Conference Call
Fairfax Financial Q3 2023
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