Fairfax Financial Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 3, 2024

There are 10 speakers on the call.

Operator

Good morning and welcome to Fairfax's 2024 First 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. If you have any objections, you may disconnect at this time. Your host for today's call is Peter Clark with opening remarks from Mr.

Operator

Derek Bulas. Mr. Bulas, please begin.

Speaker 1

Good morning, and welcome to our call to discuss Fairfax's 2024 First 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 perspective, 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 President and COO, Peter Clark.

Speaker 1

Thank you, Derek. Good morning, everyone, and welcome to Fairfax's 2024 Q1 conference call. I plan to give you some highlights and then pass the call to Wade Burton, our President and Chief Investment Officer of Hambla Wasser to comment on investments and Jen Allen, our Chief Financial Officer to provide some additional financial details. We had a strong start to 2024 with net earnings of $777,000,000 in the Q1 of 2024 and strong operating income from our insurance and reinsurance operations adjusted to an on discounted basis and before risk margin of $977,000,000 This is up from $843,000,000 in the Q1 of 2023. Driving this result was underwriting income from our property and casualty insurance and reinsurance companies of $373,000,000 in the quarter with a combined ratio of 93.6.

Speaker 1

I will speak more on the underwriting results later. Consolidated interest and dividend income was $590,000,000 in the quarter, up from $382,000,000 in the Q1 of 2023, benefiting from an increased investment portfolio, now approximately $65,000,000,000 and actions taken last year locking in higher rates on our fixed income portfolio. As we said at our annual meeting, we can see this base of interest and dividend income for the next 3 to 4 years. Consolidated share of profits of associates in the Q1 was 128 $4,000,000 in the Q1 of 2023, primarily relating to associated income of golf insurance, which is now consolidated and IFL Finance, which is now mark to market accounting and other one off items. The 2 most significant associate investments, Eurobank and of our associate earnings.

Speaker 1

Our consolidated investment return for the Q1 was 1%. Investment income was driven by interest and dividend income, as I said, of $590,000,000 our share of profits of associates of $128,000,000 offset by $59,000,000 of net losses on investments. The net losses on investments of $59,000,000 comprised mark to mark losses on bonds of $319,000,000 due to increasing interest rates, offset by mark to market gains on common stocks of $275,000,000 We have said many times in the past, net gains or losses on investments only make sense over the long term and will fluctuate quarter to quarter and for that matter, many times a year to year. Also mentioned in previous quarters, our book value per share of $9.45 does not include unrealized gains or losses in our associate investments and our consolidated investments, which are not mark to market. At the end of the Q1, the fair value of these securities is in excess of carrying value by 1,200,000,000 dollars and unrealized gain position for approximately $52 per share on a pre tax basis.

Speaker 1

Under IFRS 17, our net earnings are affected by the discounting of our insurance liabilities and the application of a risk adjustment. In the Q1 of 2024, our net earnings benefited by $273,000,000 pretax from the effects of discounting losses occurring in the year, changes in the risk margin, the unwinding of 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 net earnings from discounting. The gain in the Q1 of 2024 on discounting includes a gain of 190 $2,000,000 from the effect of changes in interest rates benefiting from increasing rates. This partially offsets the mark to market losses on our bond portfolio of 319,000,000 dollars Our book value per share at March 31, 2024 was 9.45 at December 31, 2023, an increase of 2.3% adjusted for the $15 dividend paid in the Q1.

Speaker 1

As we said for the last number of quarters, the most important point we can make for you is to repeat what has been said in the past. For the first time in our 38 year history, we can say to you we expect, of course, no guarantees, sustainable operating income of $4,000,000,000 operating income consisting of $2,000,000,000 plus from our interest and dividend income, dollars 1,250,000,000 plus from underwriting profit with normalized cat losses and $750,000,000 from associates and non insurance companies. Fluctuations in stock and bond prices will be on top of that, and this only really matters over the long term. Yesterday, we were very excited to announce some leadership changes that further builds on Odyssey Group succession plans that were first put in place in February 2023. Karl Overy, who is currently the CEO of Odyssey Reinsurance Company, will succeed Brian Young as CEO of Odyssey Group effective January 1, 2025.

Speaker 1

Karl will be responsible for Odyssey Group's global operations, overseeing its 3 franchises Odyssey Re, Hudson Insurance and New Line Group. Karl has been with Odyssey Group for over 20 years, most recently as CEO of Odyssey Re and prior to that 15 years as CEO of Odyssey Group's London Market Division. Karl has had an outstanding track record. With this appointment, Brian Young, beginning January 1, 2025, will join Fairfax on a full time basis as President of Fairfax Insurance Group and work alongside Andy Bernard, will assume the role of Chairman. We are very happy with this seamless internal succession within Odyssey Group and having Brian with his extensive knowledge and experience of the insurance industry join Fairfax.

Speaker 1

Moving on to our insurance and reinsurance operations results. Our insurance and reinsurance businesses wrote $8,000,000,000 of gross premium in the Q1 of 2024, up 12.8% versus the Q1 of 2023. The growth was driven by the consolidation of Golf Insurance, which was consolidated into our results for the first time this quarter. Excluding Golf's premium of $649,000,000 gross premium was up approximately 3.6%. Our North American Insurance segment increased gross premiums by $152,000,000 in the quarter or 7.9%.

Speaker 1

Crum and Forster had double digit growth at 12%, driven by its accident and health business, surplus and specialty lines and Seneca Insurance. Northbridge was up 4% in Canadian dollars, reflecting excellent customer retention, rate increases offset by decrease in new business. D and S gross premiums were down 2.6% in the Q1 of 2024 compared to the Q1 of 2023 due to the continued competitive workers' compensation market. Our global insurer and reinsurer segment increased modestly with gross premiums written of $4,300,000,000 in the quarter, up 1.4% versus the Q1 of 2023. Allied World was up 6.4% in the quarter, led by its Reinsurance segment, which had double digit growth, while its Insurance segment was up approximately 3%.

Speaker 1

Brits premium was up 2% to $913,000,000 in the quarter with growth in its direct book, primarily property, largely offset by contractions in reinsurance and discontinued lines, while Key continued to grow and was up approximately 5%. Odyssey's gross premiums written were down 5.2% with its insurance business up 4.8%, principally at Hudson and in their London market division, offset by a decrease in their reinsurance business, which was down 10.7%. The reinsurance business was impacted by the previously disclosed non renewal of a large quota share in the Q4 of 2023. Excluding the quota share contract, Odyssey's reinsurance business was up 3% in the Q1 of 2024. Our international operations gross premium was up significantly in the Q1 of 2024 versus the Q1 of 2023 with gross written premium of $1,600,000,000 up 78% or $694,000,000 The growth was primarily the result of the consolidation of golf insurance that added $649,000,000 of gross premium in our international operations.

Speaker 1

Excluding golf, our international operations gross premiums were up 5%. Growth was strong at Colonnade Insurance, Polish Re, Euro Life and our Ukrainian operations offset by Fairfax Asia. With the closing in the 4th quarter of 2023 of our acquisition of an additional 46% interest in golf insurance and an additional 7% in April 2024, approximately 20% of our consolidated gross premium is now coming from our international operations. With the addition of Golf Insurance, our consolidated results, it provides further diversification and scale within our insurance and reinsurance operations. As we said in the past, 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.

Speaker 1

Our combined ratio was 93.6% in the Q1 of 2024, producing an underwriting profit of 373,000,000 dollars The combined ratio included catastrophe losses of $101,000,000 adding 1.7 combined ratio points, primarily from attritional catastrophe losses. This compares to a combined ratio of 94% in catastrophe losses of 3.7 points in the Q1 of 2023. Our global insurers and reinsurers posted a combined ratio of 91.6% in the Q1. Brit had a great start to the year with a combined ratio of 89.7 $75,000,000 of underwriting profit, reflecting the positive underwriting actions taken in the last number of years. Allied World produced the largest underwriting income in the group at $100,000,000 and a combined ratio of 91.5 with strong results in both its Global Insurance segment and Reinsurance segments.

Speaker 1

Odyssey Group produced a combined ratio of 92.8%, including a 87.3% combined ratio in its Reinsurance business. Our North American insurers had a combined ratio of 94.7 in the Q1 of 2024 and an underwriting profit of $90,000,000 led by Northbridge with another strong quarter at a 91 combined ratio, Cromwell Forster at a combined ratio of 95.9, while Zenith had a combined ratio of 99.1 with the benefit of favorable reserve development. Our international operations delivered a combined ratio of 98.5 in the first quarter. Fairfax Asia had another good quarter with a combined ratio of 93.8 and our Latin American operations came in at 94.2 with our Central and Eastern European operations producing a solid 94.8. Golf Insurance had an elevated combined ratio in the quarter of 103.4 compared to the past that reflected seasonality in its medical book and losses in Turkey and purchase price adjustments on the acquisition.

Speaker 1

We expect over the course of the year, Gulf will continue to boast combined ratios similar to previous years. On a consolidated basis, our international operations produced underwriting profit of $14,000,000 or $27,000,000 excluding golf insurance. Our insurance and reinsurance companies continue to manage their business and performance continues to be measured on underwriting profit on an undiscounted basis. For disclosure purposes, we have provided in our press release and interim report the discounted combined ratio. For the Q1, the discounted combined ratio was 82.9 compared to the undiscounted combined ratio of 93.6.

Speaker 1

For the quarter, our insurance and reinsurance companies' prior year development was relatively flat with reserve development of $30,000,000 with favorable reserve development of $30,000,000 or a benefit of 0.5 This is the same as the Q1 of 2023 with a slightly higher benefit on the combined ratio of 0.6 combined ratio points due to lower premium volume. Typically, there is not a lot of movement on reserves in the Q1 as full actuarial reserve reviews are done in the Q4 of the year. Our reserves remain strong. Through our decentralized operations, our insurance and reinsurance companies continue to thrive, consistently producing solid underwriting profit and led by exceptional management teams, our companies are positioned very well to continue capitalizing on their opportunities in their respective markets in 2024. I will now pass the call to Wade Burton to provide some additional comments on our investments.

Speaker 2

Thank you, Peter. Good morning. I'll give a rundown of the investment portfolio at the end of the quarter. It stands at around $65,000,000,000 including $9,300,000,000 cash and short term treasuries, the fixed income portfolio is $46,000,000,000 and the rest of the $19,000,000,000 is in equities in the form of associated investments, limited partnerships, preferred and common stocks. The fixed income portfolio is built for safety.

Speaker 2

Government bonds make up the vast majority with some smaller investments in short term investment grade corporates and first mortgages. Including cash and short term treasuries, the duration on the fixed income portfolio was 2.8 years and the yield is 5%. The mortgage book stands at $4,800,000,000 all our first mortgages and the duration is under 2 years. These mortgages provide us with excellent income, yielding over 8.25 percent, and they're monitored closely by us and by Kennedy Wilson, our long term partners in real estate. Prem, Brian Bradstreet, Lawrence Chin and I and the rest of the HVAC team continue to watch the inflation data very closely.

Speaker 2

We think it will be difficult for the Fed to drop rates if inflation stays above 3%. We might be in a higher rate environment for longer than many expect, and our view is the higher interest costs will likely take a bite out of growth as they pass through the system. The point is, it's unsure whether rates are going to settle up higher or lower, but our portfolios are well structured to handle it either way. And as I said, we're watching it very closely. As for the $19,000,000,000 in equity and equity like investments, the associate investments make up the bulk.

Speaker 2

These are the companies where we have a strategic or significant stake, investments like Poseidon and Eurobank. They are, on the whole, doing well and we believe cheap against carrying value. Of the key investments, only 2 had negative net income in 2023. 1 is Farmers Edge, which we've written to 0, and the other is Grevillea Hospitality. Our CEO there, George Krysikos, estimates that once it's fully matured, the one and only resort in Athens alone is perhaps worth more than the entire carrying value of Grivalia Hospitality on our books.

Speaker 2

I would also add 2 things. 1, front end losses is the nature of high end resort development. So these early year losses are to be expected. And 2, Grivalia is tracking to plan. With George in charge and given the outstanding set of assets that we have, we are confident about a good outcome here.

Speaker 2

Common stocks make up a small percentage of the equity portfolio at less than $5,000,000,000 not including LP Investments. North American stock markets are high and as you'd expect, we aren't seeing a ton of opportunities here. So to summarize, the portfolio is built to be safe first. We manage the investments the way Prem, Peter, Andy, Brian and all of our presidents manage their insurance businesses. Protecting our downside, being opportunistic and not too concerned or focused on quarter by quarter fluctuations.

Speaker 2

For now, we've locked in good interest income, taken very little credit risk, and we haven't extended duration too far given worries about inflation. And in the main, our equity investments are cheap, soundly financed and doing well. I'll now turn it over to Jen Allen.

Speaker 3

Thank you, Wade. I'll begin my comments on the net benefit IFRS 17 had within our consolidated statement of earnings in the Q1 of 2024. In the Q1 of 2024, net earnings of $777,000,000 included a pre tax net benefit of $273,000,000 related to IFRS 17. This pretax benefit was reported within 2 financial statement lines in our consolidated statement of earnings. 1st, included with insurance service result line was the benefit from dollars which was partially offset by the second component that we present in the separate line in the financial statements.

Speaker 3

Net finance expense from insurance and reinsurance contracts of $166,000,000 in the quarter, which was comprised of interest accretion or an expense of $358,000,000 reflecting the unwinding of the effects from discounting associated with net claims paid made during the period, which was partially offset by the benefit of the effect of increased discount rates during the period on prior year net losses on claims of $192,000,000 As Peter noted, the benefit of the effect of increases in discount rates on prior year net losses on claims of $192,000,000 partially offset our net losses recorded on the company's bond portfolio of $319,000,000 in the period. This compared to a pretax net benefit in the Q1 of 2023 of $310,000,000 that was comprised of the same components I just commented on for 2020 4. Namely, it included the insurance service result line with the benefit from discounting of losses in ceded loss on claims, net of changes in the risk adjustment of $474,000,000 which was partially offset by the net finance expense from insurance and reinsurance contracts of $163,000,000 that reflected interest accretion or an expense of $331,000,000 in the quarter related to the unwinding of the effects from discounting, and it was respective periods of 168,000,000 A few comments on our non insurance company results in the quarter.

Speaker 3

Our non insurance company reported operating income in the Q1 of 2024 of $17,000,000 compared to an operating loss of just under $1,000,000 in the Q1 of 2023. Excluding the impact of Fairfax India's performance fee to Fairfax, an accrual of nil and a reversal of an accrual of 14 $500,000 in the 1st quarters of 2024 and 'twenty three, respectively, and the impact of a non cash goodwill impairment charge on our non insurance companies recorded during the Q1 of 2023, the operating income of our non insurance company increased to $17,300,000 in the Q1 of 'twenty four, up from $8,500,000 in the Q1 of 2023. The increase primarily reflected lower operating expenses in our other segment and increased operating income at AGT. This was partially offset by lower operating income at Fairfax India, primarily related to its share profit and associates. Turning to our consolidated share profit of associates of $127,000,000 in the Q1 of 2024.

Speaker 3

It principally reflected a share profit of $79,300,000 from Eurobank, dollars 36,000,000 from Exco, dollars 35,000,000 from Poseidon, which was partially offset by a share of loss of $29,000,000 from Helios Fairfax Partners and no share of profit from golf insurance in the Q1 of 'twenty four as golf insurance as of December 26, 2023 is now consolidated into our results, where the Q1 of 2023 included a share of profit of $29,000,000 from Golf Insurance. A note the share of profit of $79,300,000 from Eurobank. This also included approximately $45,000,000 of recycling or reclassification of foreign currency losses from other comprehensive income to the statement of earnings as a result of their sale of a subsidiary. These foreign currency losses had no impact on our carrying value of our investment in Eurobank and share of profit from Eurobank in the first quarter of 2024, adjusted for this reclassification, was $124,000,000 up $30,000,000 from the Q1 of 2023. We had one key transaction closed subsequent to March 31, 'twenty four, where the company completed a mandatory tender offer for the non controlling interest in golf insurance that increased our equity interest from 90% to 97.1% for cash consideration of $127,000,000 I'll close with a few comments on our financial condition.

Speaker 3

During the Q1 of 2024, we completed 4 debt transactions. On January 12, 24, we completed the reopening of our $400,000,000 principal amount of 6% notes that were due in 2,033 for an additional $200,000,000 principal. Then on January 29, 2024, we used a portion of the net proceeds from those 2,033 offerings to redeem our $279,000,000 principal amount of 4.875 notes that were due in 2024. And then on March 15, 2024, we issued the we used the remainder of the net proceeds from the 2,033 offering to redeem our CAD349,000,000 principal amount of our CAD 4.95 notes that were due in 2025. And lastly, on March 22, 2024, we completed an offering for $1,000,000,000 principal amount of 6.35 unsecured notes that are due in 2,054, a 30 year issuance.

Speaker 3

The result of those off brings is reflected in our liquidity position of the company. At March 31, 2024, our cash and investments at the holding company was $2,500,000,000 an increase from December 31, 2023, at $1,800,000,000 principally reflecting our recent $1,000,000,000 30 year debt issuance. Additional significant transactions in the Q1 of 'twenty four included dividends received from our insurance and reinsurance companies of $451,000,000 receipt of Fairfax India's performance fee of $110,000,000 and it was partially offset by net distributions for our payments made on our common and preferred share dividends of 3 76,000,000 dollars purchases for cancellation of 240,700,000 subordinate voting shares at a cost of 260,000,000 dollars and a capital contribution to our insurance operations of $140,000,000 The holding company also has access to our fully undrawn $2,000,000,000 unsecured revolving credit facility. We also own investments in associates and consolidated non insurance companies of $1,700,000,000 That's not included within our holding company cash and investments balance, and we now have no long term debt maturities until April 2026. At March 31, 2024, the excess of our fair value over carrying value of the investments in our non insurance associates and market traded consolidated non insurance subsidiaries was $1,200,000,000 compared to the 1,000,000,000 dollars at December 31, 2023.

Speaker 3

And as Peter noted, the pretax excess of $1,200,000,000 is not reflected in our book value per share, but is regularly reviewed by management as an indicator of the investment performance. The company's total debt to total cap ratio, excluding our non insurance companies, increased to 24.4% at March 31, 2024, compared to 23.1% at December 31, 2023, and it principally reflected the issuance of our senior notes due in 2,050 4. Book value per basic share of $945.44 at March 31, 'twenty four, compared to $939.65 at December 31, 'twenty three, representing an increase in per basic share in the Q1 of 2.3 percent adjusted to include the $15 per common share dividend that we paid in the Q1 of 2024. And lastly, our common shareholders' equity modestly decreased by $29,500,000 to just under 21,600,000,000 dollars just over $21,600,000,000 at December 31, 2023. This primarily reflected the payments of our common and prefs dividends of $376,000,000 our purchases of 240,700,000 subordinated shares for cancellation for cash consideration of $260,000,000 or $10.81 per share and other comprehensive income loss of $149,000,000 related to unrealized foreign currency losses, net of hedges.

Speaker 3

And of course, this was partially offset by our strong net earnings in the quarter of $777,000,000 That concludes my remarks for the Q1 2024. And I'll now turn the call back over to Peter.

Speaker 1

Thank you, Jan. And before we go on to questions, I would just like to pass it to Prem to make one quick comment.

Speaker 4

Thank you very much, Peter. I really am heartbroken to let you know that I heard from Rick Salzberg's daughter yesterday morning that he had passed away in his sleep. Rick was our partner, trusted friend and ancillary for almost 4 decades. He loved Fairfax and we would not be here without him. And everybody loved Ricky, all of us at Fairfax, his family, friends, neighbors and just about anyone he met on the subway.

Speaker 4

Fairfax will never be the same. In honor of Ricky and in remembrance of him, Fairfax will close its head office on Monday, May 6. Please keep his wife, Lynn, his daughter, Lee, his son, Aaron, and all the family in your prayers, and God bless Ricky's family. I just wanted to end by thanking the good Lord for giving us Ricky for almost 4 decades and taking him away to heaven when we were at our strongest position. I will now pass it on to Peter for the Q and A.

Speaker 4

Peter?

Speaker 1

Thank you, Prem. We are now happy to take any questions you might have.

Operator

Thank you, And that will be from Tom MacKinnon with BMO Capital. Your line is open.

Speaker 5

Yes, thanks very much. This question is for Wade or Peter. Just with respect to the total return swaps you have on your own shares, can you talk about why you continue to hold them the duration of them? Are they kind of settled in cash quarterly? What's involved in perhaps not renewing them?

Speaker 5

And as a follow on, if you can tie that, you're still buying back stock as well. So you have 2 approaches here, maybe the strategy with respect to using those two approaches and how you continue will you continue to buy back your stock? You seem to have accelerated that a little bit as well. So a bit of a mouthful there, but hopefully you can take that on. Thanks.

Speaker 1

Thanks, Tom. This is Peter here. Yes, we continue to hold our TRS position on Fairfax. We think it's a great investment position to have. The contracts, there's an expiry period at the end of 20252026, but they can always be extended anytime.

Speaker 1

So just with the fundamentals of Fairfax, we continue to think it's a really good investment and we will hold on to that. Essentially, the mechanics behind them are different with different credit parties, but they reset approximately half of them reset on a quarterly basis. And again, on our share buybacks, we like the Fairfax and we think the share price is at a fair value, but we always balance that with our financial strength and our financial rating. So we'll continue to monitor that on an ongoing basis.

Operator

Our next question is from Scott Heleniak with RBC Capital Markets. Your line is now open. One moment for that. Mr. Heleniak, your line is open.

Speaker 6

Hello.

Speaker 1

Hello, can you hear me?

Operator

Yes, sir. Please go ahead.

Speaker 6

Okay. Yes, just wondering if you how are you thinking about premium growth across the different units? It seems like it's still a pretty attractive environment and rates are up from what I hear. It looks like you're scaling back maybe in a few areas, Odyssey Re or maybe property a little bit. But just wondering if you can just talk about how you're thinking about growth, where you're seeing the opportunities and just kind of generally comment on the rate environment and whether anything's changed really across all your businesses?

Speaker 1

Sure, Scott. Over the last the 2019 to 20 23 period, the market was extremely hard and we took advantage of that and we grew almost by 15% annually over that time period. Now rates have come off somewhat, more in certain lines of business, in particular on the cyber book and on the D and O, where we're seeing rate decreases, including workers' comp. And on those other lines, pricing can be down in excess of 10%. But on many of the other lines, we're still seeing strong pricing.

Speaker 1

We're seeing our pricing in excess of our loss costs. And there's many opportunities to continue to grow the book. Excluding golf, which inflated our premium number in the quarter, we grew on a gross basis about 5% and net probably closer to 7%, especially when you exclude a one off transaction at Odysee that we mentioned in the Q4 last year, that was a large quarter share that they didn't renew. So our company still see opportunities and looking to take forward take advantage of that. And just with our scale and diversification, both by product and by geography, we have a lot of ability to still continue to grow.

Speaker 1

Next question, Fran?

Operator

From Daniel Baldini with Oberon. Your line is open.

Speaker 7

Hi, thanks for taking my question. Now I'll preface it by saying that I don't follow a lot of insurance companies, but my impression is that the reinsurance market, I guess, globally remains pretty strong. And I noted Arch's results the other day. They have a big reinsurance operation and they had net premiums written up 31% with a 77% combined ratio. So I realized there was something unusual a year ago at Odyssey, but the net premiums written are down 2.7%.

Speaker 7

So I'm just curious what Odyssey's opinion is about the reinsurance market?

Speaker 1

Yes. The reinsurance market, it still continues to be strong, not as strong as it was in 2020 3. But I think what you have to look at a lot is mix of business. And mix of business and then Odyssey took advantage of the market 2019, 2022, as I said before, and grew a lot. So they're starting at a higher base than many others.

Speaker 1

And so I think our reinsurance we have reinsurance at Allied World, at Brit and Odyssey is our largest writer. But they continue to see opportunities. And excluding that one quarter share, they'll continue to grow.

Speaker 7

All right. Thank you. Next question. Next question, Fran.

Operator

Certainly. Andrew Gough with Gough Holdings. Your line is open now.

Speaker 8

Hi. Thanks for taking the question. I just had a question regarding the free cash from the insurance subs. I mean, as the interest income has gone up a lot, are you now in a position where you can dividend more up to the corporate level? And if so, how much could you dividend up?

Speaker 1

No, that's right. And in the past, again, as the companies were growing, a lot of the earnings from the subsidiaries were used to fund that growth in the capital within the companies. With the premium leveling off, it is producing additional dividend capacity. And that gives us a lot of options to bring the cash up to the holding company. We usually look at that on a quarterly basis.

Speaker 1

We're happy to keep holding company. But you're exactly right. With the premium volume coming down and the strong and stable earnings we see going forward, it is providing additional dividend capacity to the holding company.

Speaker 8

Do you have any can you give us a sense of like how much over the next couple of years you might dividend up to the corporate level?

Speaker 1

Jen, do you have anything to add on that?

Speaker 3

Yes, sure. Andrew, maybe I'm going to reference you to our annual report in statutory note number 19. So in 2024, we have the ability to get $3,000,000,000 out of the underlying insurance companies based off of a statutory requirement level. We give quite a bit of detail in there which company we can get those dividends from between our North American Global and International segment. And in the conference call script, we did receive 4 $51,000,000 of dividends from our subsidiaries in the Q1 already.

Speaker 8

Okay. Thanks.

Speaker 1

Thank you, Andrew. Next question, Fran?

Operator

Tom MacKinnon with BMO Capital. Your line is open again.

Speaker 5

Yes. Thanks very much. A question just with respect to the overall expense ratio, trended a little higher this quarter. I think we were kind of running around 30 ish range and now we're 31 almost 31.5. I think there was some additional spends to be able to handle some uptick in volumes, but I assume there's got to be some scale benefits as well.

Speaker 5

So how should we be thinking about the expense ratio going forward as yes, thanks.

Speaker 1

Right, Tom. And yes, we were up about a point or a little more point on the expense ratio. One thing that influenced that ratio was the inclusion of golf insurance. It had a higher expense ratio than our operations, runs at a little lower loss ratio, higher expense ratio. And then on the commission side, it really just is mix of business.

Speaker 1

So, I think that and as we said, we continue to invest in technology and in our people and you can see a little bit of uptick from that as well. Thank you, Tom. And Fran. Next question?

Operator

That will be from Howard Flinker with Flinker and Company. Your line is open.

Speaker 7

Hello, everybody. In that net gain of 7% a gain of 7% in net premiums, does that include the increment from Gulf or if we adjust it, should we roughly cut it in half?

Speaker 1

Yes, that's Howard, that excludes golf. Well, you exclude golf. I think that's a good growth if you include golf insurance.

Speaker 7

Say that again, please?

Speaker 1

That excludes the 7% would exclude the golf premium. If you include the golf premium, we were in double digit.

Speaker 7

Okay, thanks.

Speaker 1

Thank you. Next question, Fran?

Operator

That is from Ashish Lalwani with Capital.

Speaker 9

The question is with respect to there is a dislocation in equity markets and you have an opportunity to reallocate from fixed income to equities. What kind of size is available that the company would be comfortable with?

Speaker 1

Sorry, can you repeat your question?

Speaker 9

Sorry, I'm running an airport, hope it's not too loud. So my question was, we're sitting on a large amount of fixed income securities and seemingly some surplus capital. So if we did have an opportunity where there was a dislocation in equity markets, how much could we reallocate from the fixed income portfolio to quality equities at a fair price? Right.

Speaker 1

Our fixed income portfolio is very liquid. It's essentially our bonds are in our U. S. Treasuries and the average duration is about 3 years. So, we have a lot of flexibility there.

Speaker 1

In the investment portfolio as a whole, it's very defensive. We have the ability to react to the markets and we're very happy where it is positioned today. So should something happen on the equity side, we would have the ability to pivot if we wanted to.

Speaker 9

Can you give any idea if I Question, Brent? $4,000,000,000

Operator

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

Speaker 1

Well, thank you, Fran. And if there are no further questions, thank you for joining us on our Q1 conference call.

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Key Takeaways

  • Strong Q1 results: Net earnings of $777 M and operating income of $977 M (up from $843 M a year ago), driven by $373 M underwriting income (93.6 combined ratio) and $590 M of interest and dividend income.
  • Sustainable operating income targets: For the first time, Fairfax expects $4 B in annual operating income—$2 B+ from interest and dividends, $1.25 B+ from underwriting profit and $0.75 B from associates—plus market gains over the long term.
  • High‐quality investment portfolio: Approximately $65 B of assets, primarily short‐duration government bonds (5% yield) and first mortgages (8.25% yield), alongside equity and associate stakes deemed inexpensive relative to carrying value.
  • Diversified insurance growth: Q1 gross premiums rose 12.8% to $8 B (3.6% ex-Golf Insurance), with international operations now ~20% of premiums and combined ratios ranging from 91.6% (global) to 98.5% (international).
  • Prudent capital and debt management: Holding company cash increased to $2.5 B, completed a $1 B 30-year note issue, no long-term debt until 2026, ongoing share buybacks and TRS positions, and book value per share of $945.44.
AI Generated. May Contain Errors.
Earnings Conference Call
Fairfax Financial Q1 2024
00:00 / 00:00