Q3 2023 Fairfax Financial Holdings Ltd Earnings Call
Good morning, and welcome to Fairfax is 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 at that time to ask a question. Please press star one on your phone keypad.
Now for time sake, we do ask that you limit your questions to one today's conference is being recorded.
Have any objections you may disconnect at this time your host for today's call is Prem whatsoever with opening remarks from Mr. Derek <unk> and Mr. <unk>. Please begin.
Good morning, and welcome to our call to discuss Fairfax is 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.
<unk> disclaims any intention or obligation to update or revise any forward looking statements, except as required by applicable Securities law I will now turn the call over to our chairman and CEO from Whatsapp.
Okay. Thank you Derek good morning, ladies and gentlemen, welcome to Fairfax is 2023 third quarter conference call I plan to give you a couple of highlights and then pass the call on the breeder flock, our president and Chief operating officer to comment on the quarter and Jen Allen, our Chief financial officer to provide some additional.
The financial details.
As I've said for the last number of quarters. The most important point that can make for you is to repeat what I've said in the past.
For the first time in our 37 year history.
Most study eight years now I can say to you we expect of course no guarantees.
Operating income to be more than $3 billion annually for the next three years.
Operating income consisting of one 5 billion, plus 515 billion plus from interest and dividend income.
One 4 billion year to date.
1 billion from underwriting profit.
$943 million year to date, and 0.5 billion from associates and non insurance companies versus 1 billion year to date.
This works out to be $100 per share after interest expenses overhead and taxes.
We continue to exceed our expectations of the <unk>.
For the with the year to date operating income already at $3 1 billion, excluding the effects of discounting and risk margin.
Fluctuations in stock and bond prices will be on top of that and its 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 three one.
With an average maturity of approximately four years at a yield of four 9%.
And the next four years.
Like me to have a recession in the United States, resulting in corporate spreads widening, allowing us to extend maturities Florida.
Our fixed income portfolio.
Portfolio remains conservatively positioned with approximately 70% in government securities and 19% Brian.
In short dated high quality corporate bonds.
Sean and reinsurance operations continue to perform exceptionally well.
Gross premiums written for the nine months of 22 billion up seven 5%, a combined ratio of 94%, resulting in an underwriting profit of $943 million for the first nine months I will now pass the call to Peter Clark, Our President and Chief operating officer for the updates.
Yeah.
Sure.
Thank you Pam.
We had an outstanding third quarter of 2023 with net earnings of almost $1 1 billion and our book value increased to $877 per share.
An increase of 16, 4% from year end.
Thats adjusted for $10 dividend.
And earnings per share in the quarter was $42.
The strong performance in the quarter was driven by adjusted operating income up $967 million from our insurance and reinsurance operations.
Generation through underwriting income up $292 million.
Interest and dividend income of $454 million and our share of profit of associates up $222 million.
Our investment return for the quarter was one point.
One 5% driven.
Driven by continually increased interest and dividend income.
Strong share of profits of associates, while net gains in the quarter were relatively flat.
<unk> interest and dividend income of 513 million doubled from the third quarter of 2022 benefiting.
Benefiting from a very low duration of our fixed income portfolio coming into 2022, and then reinvesting at higher rates primarily in government bonds.
Net gains on investments of $56 million were driven by gains on our equity exposures up $273 million.
Offset by losses on our bond portfolio of 197 million in the third quarter.
These losses consistent consisted primarily of losses 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 two three years.
As Prem mentioned earlier in the fourth quarter, we have increased our duration to over three years.
Net.
<unk> on our equity and equity related holdings were $273 million in the quarter driven by unrealized mark to market gain on our Fairfax Trs commercial International Bank and John <unk>.
Offset by unrealized losses on Blackberry and Kennedy Wilson.
As mentioned in previous quarters, our book value per share of 877 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 third quarter. The fair value of these securities is in excess of carrying value by 601 million, an unrealized gain position or approximately $26 per share on a pre tax basis.
Under <unk> 17, our net earnings are affected by the discounting of our insurance liabilities and the application of our risk adjustment.
In the third quarter of 2023, our net earnings benefited by $459 million pretax from the effects of discounting losses occurring in the current quarter change.
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 2 billion of gross premium in the third quarter of 2023.
Our gross premiums were up 5% this quarter versus the third quarter of 2022, an increase of $350 million.
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 in international markets.
Yes.
Our North American insurance segment increased gross premiums by $196 million or nine 7%.
Crum <unk> Forster had double digit growth at 13% driven.
Driven by its surplus in specialty lines accident, and health business and Seneca insurance.
North bridge was up almost 10% in Canadian dollars.
Selecting excellent customer retention and rate increases.
And the premiums were offset by Z net 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 million up one 6% in the third quarter versus the third quarter of 2022.
Allied World was up six 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 half a 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.
For its premium was down 4% largely due to reductions in excess casualty and thin pro business, while key premium was down a similar amount.
The premium of our international operations again posted double digit growth at 11, 2%.
Okay.
In the in the third quarter versus the third quarter of 2022 with gross premium of $848 million.
Growth was exceptionally strong at polar free call in eight and Euro life non life operations, while Fairfax Asia was down on a great gross basis due to timing differences.
While maintaining strong growth in net premiums written.
On closing of our acquisition of an additional 46% of golf insurance.
Which we expect to occur in the fourth quarter of 2023, we will begin consolidating their results, adding an approximate $2 7 billion in gross premium annually to our international business.
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 company has continued to grow into favorable market conditions, while we see rate increases moderating or rates, reducing in some lines public D&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.
Bind ratio with 95 in the third quarter of 2023, producing an underwriting profit of $292 million.
The combined ratio included catastrophe losses of 389 million, adding six seven combined ratio points.
Primarily from Hawaiian the Hawaii fires.
Hurricane of diarrhea, and Attritional catastrophe losses.
This compares to a combined ratio of 103 and catastrophe losses of 15 points in the third quarter of 2022.
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 seven led by Allied World, who had another great quarter with a combined ratio of 89 three.
With its global insurance segment, producing an $88 three combined ratio while its reinsurance segment was at 91 four.
Odyssey Group had a solid combined ratio of $94 seven 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 North Bridge, who had another strong quarter with a combined ratio of $88 seven.
From enforced or had a combined ratio of 105 for the quarter.
Which included catastrophe losses of nine four points principally from losses from the fires in Hawaii.
Crum <unk> Forster has had a strong presence in Hawaii and have been in the market for many years.
<unk> had a combined ratio of 92.8, producing an underwriting profit in the quarter, while benefiting from favorable reserve development.
Our international operations delivered a combined ratio for the quarter of 98, five with all but one segment producing an underwriting profit.
Fairfax Asia had a combined ratio of $93 seven and our Latin American operations came in at $94 two.
Euro life non life operations had a difficult quarter as they were hit hard by catastrophe losses, which amounted to $18 million from the wildfires in Greece and storm Daniel.
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 million or a benefit of one point on our combined ratio.
This is compared to $48 million or the benefit of <unk> nine points in 2022.
Our companies are in the process of doing their extensive annual actuarial reviews, which will be reflected in the fourth quarter.
Our underwriting expense ratio was up approximately 1.2 combined ratio points in the third quarter of 2023 versus the third quarter of 2022.
Partially due to the effect of inflation on salaries and investments in people and technology and the timing differences at Brad.
Offset by increased earned premiums.
Through the first nine months of the year, our underwriting income is approaching $1 billion, 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 noninterest companies' performance overall financial position and recent transactions.
Peter.
Closed in our first quarter 2023 interim report on January one 'twenty three the company adopted the new accounting standard.
For insurance contracts <unk> 17.
Within our Q3 2023 interim report please refer to note three and sections within the MD&A under the heading adoption of <unk> 17 insurance contracts on January one 2023.
And the heading accounting and disclosure matters for details on the adoption and the impact on our consolidated financial statements for this new standard.
Consistent with our Q1 and Q2 2023 interim reports.
Comparative periods in the company's Q3 2023 interim report have all been restated and presented under the <unk> 17 measurement standard.
So all of the comparator is now presented in our Q3 interim report are on the same measurement basis.
In our Q3 2023 press release, please refer to page two and in the MD&A page 43, where we disclosed tables that reconcile the insurance service result, under Ifr 17 for our property and casualty insurance and reinsurance operations to underwriting profit.
Key performance measure that the company uses in 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 first we have gas to include our their insurance operating expenses, which are presented in the consolidated statement of earnings.
Tied to the insurance service results.
And second readjust for the effects of discounting on net loss on claims.
And changes in the risk adjustment that are included within the insurance service result in the consolidated statement of earnings.
Our traditional performance measures of underwriting profit combined ratios were on and I'm discounting basis as discussed by Peter So I'll begin my comments for the third quarter of 'twenty three on the impact of ire for 17 within our results.
In the third quarter of 2023 net earnings of just under the $1 1 billion and for the nine months just under $3 1 billion.
<unk> had a pre tax net benefit of $459 million and 991 million respectively related to <unk> 17.
These pre tax benefits are reported within key 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 third quarter of 2023 of $467 million and $1 6 billion in the first nine months.
This was partially offset by the second component that we present on a separate line in our financial statements.
The net finance expense from insurance and reinsurance contracts at $8 million in the quarter and $595 million in the first nine months.
This was comprised of interest accretion or an expense of $369 million in the quarter and approximately 1 billion in the first nine months, resulting from the unwinding of the effects from discounting associated with net claim payments made during the period.
And that was partially offset by the effective increase in discount rates during the third quarter and first nine months of 'twenty, three which was a benefit of $362 million and $452 million respectively.
This compared to a pre tax net benefit in the third quarter of 2022 at $772 million and approximately $2 5 billion in the first nine months of 2022, which was comprised of the same components I. Just commented on for 2023, which was mainly the insurance service result.
Benefiting from discounting of loss and ceded loss on claims net of our risk adjustment of 349 million for the quarter 22, and 916 16 million for the nine months of 2022.
But in late 2023 22 also benefited from net finance income versus the expense in 'twenty three.
$423 million and just under $1 6 billion for the first nine months in.
In 'twenty two it reflected a benefit from the increase in the discount rates in their respective periods at 563 million and approximately one 8 billion as.
As a result of an interest rate environment being more pronounced in 2022 compared to 23.
And this was offset by the interest accretion or the expense of $140 million and $232 million in the first nine months of 2022 related to the unwinding of those discounts associated with net claim payments made in the period.
A final comment on the rising interest rate environment that continued in the first nine months of 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 million in the third quarter and 169 million in the nine months of 2023 that reflected the longer duration in our net insurance contract liabilities compared to the fixed income portfolio assets.
In this rising interest rate environment as I noted previously the company reported net finance income from insurance contracts.
Held as a net benefit of $362 million in the third quarter and $452 million in the first nine months of 'twenty three that related to the effect of the increase in the discount rate on the net insurance contract liabilities that have an average duration of approximately four years.
This exceeded the net loss on the bonds of $197 million in the third quarter of 2023 and $293 million in the first nine months of 2023 recorded on our shorter duration fixed income portfolio.
Please refer to note four in our Q3 2023 interim report traditional details on the discount rates applied on the losses and ceded loss on claims recorded within the period.
Moving onto a few comments on our non insurance company's results in the quarter.
Operating income of nine shirts companies in the third quarter of 2023 were comparable with 2022 with strong results of $126 million excluding.
Excluding the impact of Fairfax, India is performance fees to Fairfax, which was an accrual of $20 million and $5 million in the third quarters of 2023, and 2022, respectively, which are offset upon consolidation.
The operating income for the non insurance companies reporting segment increased to $146 million in the third quarter of 23 from $130 million 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 million in the nine months of 'twenty three from $160 million in the nine months of 'twenty two.
If you exclude the impact of Fairfax, India performance fees to Fairfax, which was a new call it $42 million in the first nine months of 2023.
And a reversal of a performance fee payable of $45 million in the first nine months of 'twenty two.
The operating income increased to $204 million in the first nine months of 23 from $115 million in the first nine months of 'twenty two.
With that increase of $89 million, reflecting lower losses from our other reporting segment of $60 million that reflected a noncash impairment charge related to the company's investment in farmers edge that was recorded in the first nine months of 2022, which was partially offset by higher business volume at HGTV.
We also saw higher operating income at Fairfax, India, a $25 million primarily duty do.
Due to the increase in share profit of associates.
And higher operating income at Thomas Cook of $22 million, 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.
And our third quarter.
<unk> and associates modest modestly decreased in the third quarter of 'twenty three.
Share of profits of associates of $292 million compared to $318 million in 'twenty two.
Reflecting no share of profit.
From resolute.
Reduced share of profits from exco, partially offset by increased share of profit from eurobank at $119 million compared to $80 million in the prior year and stelco at 21 million compared to no share profit in the prior year due to the commencement of equity method of accounting in Q2, sorry Q3.
2022.
Our share of profit from investments and associates increased in the nine months of 'twenty three two.
$895 million compared to $764 million in 2020 to.
Reflecting increased share profits at eurobank about $344 million compared to 230 in the prior year.
Exco resources $130 million compared to $43 million, which was partially offset by no share of profit from resolute as a result of our disposition of that investment.
And also reduce share profits of Poseidon, formerly known as Atlas of $102 million compared to $180 million in the prior period, reflecting higher interest rate expenses and transaction costs that were related to the first quarter 2023 privatization of Poseidon and the company expects Besides earnings will start to normal.
<unk> continued to increase throughout the year.
As there are no significant acquisitions or divestitures that closed during the third quarter I'll close with a few comments on our financial condition.
The liquidity position of the company remained strong with our cash and investments at the holding company at $1 2 billion at September 30th 2023.
Which was principally held in cash and short dated investments and access to our fully Undrawn 2 billion unsecured revolving credit facility.
At September 30th 2023, the excess of fair value over carrying value of investments in non insurance associates and market traded consolidated non insurance subsidiaries was $601 million compared to $310 million at December 31, 2022.
That pretax excess of $601 million is not reflected in our book value per share, but is regularly reviewed by management as an indicator of an investment performance.
Please refer to the MD&A on page 67 for additional details.
The holding company has no significant holding company debt maturities until August 2024, and our total debt to total cap ratio, excluding the non insurance companies improved to 21, 6% at September 30th 2023, compared to 23, 7% at December.
31, 2022, principally as a result of very strong net earnings reported in the first nine months of 2023 of just under the $3 1 billion.
That reflected the underwriting profit of 943 million interest and dividends of just under one 4 billion and a share of profit of associates of $895 million.
And lastly, our common shareholders' equity increased by two and a half billion to 23 billion at September 30th 2023 up from the $17 8 billion at December 31, 2022, and that was principally as a result of our net earnings in the first nine months of 'twenty three.
The $3 1 billion that was partially offset by payments on our common and preferred share dividends of $282 million and.
And we purchased approximately 258000 subordinate voting shares for cancellation.
For cash consideration of $180 million approximately $698 per share.
With 78000 purchased in the third quarter of 2023 for cash consideration of $65 million.
That concludes my remarks for the third quarter of 2023, and I'll pass the call back over to Prem. Thank you.
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 one so that it's fair to all of our call. Okay, Brad we're ready for the questions.
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.
Yeah. Thanks, very much good morning, just a question here about the the topline growth or the gross premium growth and you talked about some pretty good growth in your North American insurance operations, but then when we get into reinsurance, while you're getting good top line growth in there.
Reinsurance business per se and that are in that category are the growths in their insurance business I at Allied World and that Odyssey re and at Brit for that matter have been are declining. So why is it that you're able to get some grow.
<unk> in your North American insurance business, but then if we look at it.
Your reinsurance companies.
Which categorize as insurance and though this is not growing so.
Maybe a little bit if you can help us understand that and you know what.
You see us growing forward that's a good.
That's a good question the reinsurance markets continue to be hard but.
Why would you give us a 12 a sense for what's happening in the market.
Yeah sure sure and yeah. So for the in the quarter, our premium was up about 5%, Tom and about seven 5% for the first nine months and just to remind everyone that you know that's on the back of three very strong years, where we averaged about 16% growth.
Per year.
But as you mentioned for Odyssey Allied and Brett.
On the insurance side, they're premium relatively flat for the year and in the quarter.
But those are the lines of business, where they grew significantly the last number of years specifically cyber.
D&O.
And so.
So in the insurance segment, we have a crum <unk> Forster and northbridge, So north bridges Canadian so that's a little different than the than what Allied and the Odyssey is writing on the direct book and Chrome Foerster as really a more specialty business and there again seeing a lot of growth in our A&H, which.
Isn't.
Which odyssey and al I don't like.
A lot of.
For Brett I should mention we talked about this a little bit in the past that Britt has really.
<unk> taken some underwriting actions over the last 12 months and.
See that in their premium they are premium was down about three or 4%.
In the quarter.
But maybe more importantly was there combined with Schuh 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.
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 in your assets the the $4 59 kind of net benefit that we saw at least as it relate to if we take out the changes in the risk adjustment impact.
You know 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.
Yeah. So Tom first of all what were going to do it in our annual report is made though.
Make sure that everyone understands all living.
Enzo notes, okay. So it will take some time to.
Disclose.
And enough detail so that you can understand into note.
Discounting.
But having said that Peter you want to you want out of line to Tom's question.
Yeah sure I'll make a couple.
And then maybe Jan can add if she wants but.
Think generally speaking Tom you're right that you know if if interest rates are flat premium is flat more or less the discount you put on the current year is is more or less offset on.
The unwinding of the discount from the previous years and then.
If if if by chance the bond maturity is very similar to the duration on our liabilities that's matches as well.
When those relationships change, so you're going to see see movements, but.
But generally speaking yes I.
I think.
As things remain stable.
You'll see that you'll see less noise around the discount agenda anything yeah, no I think that's fair.
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 and look at the changing rates compared to your bond portfolio. You saw a benefit of $1 65 in the quarter that would go away if the interest rate environment with static. So the last two pieces you're looking at is the new change in gift.
Right and the unwind and as Peter said, it's still a net benefit because we are unwinding handle longer right. Then the new claims are coming on but over time, if it's not a.
The huge impact and over time, you should start to see that kind of net to almost a nominal impact.
Thanks.
Thank you Tom or Brian next question. Please.
Thank you Sir at this time I have no further questions in queue.
Okay. That's that's like them, we are the only guy who asked the question. We thank you all for joining.
Joining our conference call and we look forward to our year end call in February.
Thanks again, thank you Brent.
You're most welcome and thank you everyone for your participation as we are concluded. Please disconnect at this time, thank you very much.