Fairfax Financial Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
November 1, 2024

There are 11 speakers on the call.

Operator

Good morning, and welcome to Fairfax's 2024 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. Today's conference is being recorded. If you have any objections, you may disconnect at this time.

Operator

Your host for today's call is Peter Clark with opening remarks from Mr. Derek Bulas. Mr. Bulas, please begin.

Speaker 1

Good morning and welcome to our call to discuss Fairfax's 2024 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 laws. I'll now turn the call over to our President and COO, Peter Clark.

Speaker 1

Thank you, Derek.

Speaker 2

Good morning and welcome to Fairfax's 2024 Q3 conference call. I plan to give you some highlights and then pass the call to Wade Burton, our President and Chief Investment Officer of Ambla Watsa to comment on investments and Jen Allen, our Chief Financial Officer to provide some additional financial details. We had another strong quarter with net earnings of over $1,000,000,000 This included operating income from our insurance and reinsurance operations of $1,100,000,000 Operating income is up 18% or approximately $170,000,000 from the Q3 of 2023. Driving this result was underwriting income from our property and casualty insurance and reinsurance companies of $390,000,000 with a combined ratio of 93.9. Consolidated interest and dividend income was $610,000,000 up from $513,000,000 in the Q3 of 2023.

Speaker 2

Benefiting from an increased investment portfolio, which is now approximately $69,000,000,000 increasing rates over the last number of years and from our mortgage portfolio. Consolidated share of profits of associates in the 3rd quarter was $260,000,000 and remains a significant contributor to operating income. Our 2 largest associate investments, Eurobank and Poseidon, continue to perform very well and make up a significant amount of our associate earnings. Net gains on investments were $1,300,000,000 in the quarter comprised net gains on equity exposures of $323,000,000 and net gains on bonds of $829,000,000 due to decreasing interest rates and other gains of $136,000,000 dollars primarily preferred shares. Net gains on investments does not include the expected pre tax gain of $366,000,000 on the sale of Stelco that was announced in July.

Speaker 2

Stelco received shareholder approval in September and is now only subject to regulatory approvals and other customary closing conditions. We expect it will close in early November. As we have said in the past, net gains or losses on investments only make sense over the long term and will fluctuate quarter to quarter or for that matter year to year. As mentioned in previous quarters, our book value per share does not include unrealized gains or losses in our associate and consolidated non insurance 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 $1,900,000,000 an unrealized gain position or $87 per share on a pre tax basis.

Speaker 2

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 2024, our net earnings were affected negatively by 732,000,000 dollars pretax from the effects of discounting losses occurring in the 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'll see positive or negative effects on net earnings from discounting. The loss in the quarter on discounting includes a loss of $765,000,000 from the effect of changes in interest rates, reflecting these decreasing rates.

Speaker 2

This partially offsets the mark to market gain on our bond portfolio of 829,000,000 dollars which is included in our net gains on investments. Our book value per share at September 30 was $10.33 compared to $9.40 per share at December 31, 2023, an increase of 11.7 percent adjusted for the $15 dividend paid in the Q1. We continue to benefit from a stable base of annual operating income of $4,000,000,000 and we expect, of course, no guarantees, it is sustainable for the next 3 to 4 years. The $4,000,000,000 of operating income consists of $2,000,000,000 plus from interest and dividend income, dollars 1,250,000,000 plus from underwriting profit, that's with normalized catastrophe losses, and $750,000,000 from associates and non insurance companies. Fluctuations in the stock and bond prices will be on top of that, but this really only matters over the long term.

Speaker 2

In the Q3, we announced Bob Samson will be appointed CEO of Riverstone effective January 1, 2025. Bob has been with Riverstone for 28 years and his deep understanding of the culture, operations and strategy of our runoff operations provides great continuity and will ensure Riverstone continues to thrive. Nick Bentley, who has done an outstanding job leading Riverstone over the last 16 years, will remain as Chairman of Riverstone and will continue to contribute to the group in this capacity. This has been another wonderful internal succession at Fairfax. Moving on to our insurance and reinsurance operations results.

Speaker 2

Our insurance and reinsurance businesses wrote $8,200,000,000 of gross premiums in the Q3 of 2024, up 13.9% versus the Q3 of 2023. The growth was driven by the consolidation of Golf Insurance, whose operating results were consolidated into our results beginning January 1, 2024. Excluding Golf's premium of $778,000,000 gross premium was up 3.2%. Our North American Insurance segment increased gross premiums by $213,000,000 in the 3rd quarter or 9.6%. From Forster grew 12.7 percent with the majority of the increase in its Specialty and Surplus segment and the Accident and Health division.

Speaker 2

Northbridge was up 6.9% in Canadian dollars, while Zenith's gross premiums were slightly down in the Q3 compared to the Q3 of 2023 due to the continued competitive workers' compensation market. Our global insurer and reinsurer segment decreased modestly with gross premiums written of $4,100,000,000 in the quarter, down 1.5% versus the Q3 of 2023. Odyssey's gross premiums written were down 4.7% due to the previously disclosed non renewal of a large quota share in the Q4 of 2023. Excluding the quota share contract, Odyssey's business was up 7.2% in the 3rd quarter driven by its reinsurance operations. Brit's gross premium was down 3.8% or $34,000,000 in the quarter, primarily property business at Key and the trimming of cyber and casualty business, while their net premiums were up 3% ceding less business year over year.

Speaker 2

Allied World was up $50,000,000 or 3% in the quarter with approximately half coming from its reinsurance segment. Our international insurance and reinsurance operations gross premium increased significantly in the Q3 of 2024 versus the Q3 of 2023 with gross written premium of $1,700,000,000 up over 100 percent or 857,000,000 dollars The growth was primarily the result of the consolidation of golf insurance that added $778,000,000 of gross premium in our international operations. Excluding golf insurance, our international operations had strong growth with gross premiums up 9%. We continue to be very excited about the long term prospects of our international operations and we expect it will be a significant source of growth over time. We have excellent management teams with a strong footprint in Asia, the Middle East, Eastern Europe, South Africa and Latin America.

Speaker 2

On a consolidated basis, our combined ratio was 93.9% in the Q3 of 2024, producing underwriting profit of 390,000,000 dollars The combined ratio included catastrophe losses of $434,000,000 adding 6.8 combined ratio points. The main drivers of the catastrophe losses were Hurricane Helene costing $105,000,000 and flooding and hailstorms in Canada of $114,000,000 with the remaining primarily from attritional catastrophe losses. This compares to a combined ratio of 95% in the Q3 of 2023, which included catastrophe losses of 6.7 points. Historically, the 3rd quarter is generally the quarter we experienced the largest catastrophe losses, mostly driven by U. S.

Speaker 2

Hurricane. Our global insurers and reinsurers posted a combined ratio of $92,000,000 and underwriting profit of $288,000,000 in the 3rd quarter. Allied had another excellent quarter with a combined ratio of 88.5 with both its insurance and reinsurance segments producing combined ratios below 100. Odyssey posted a solid combined ratio at 93.8 despite 9.6 points of catastrophes. And Brit continues to produce sub-ninety 5 combined ratios at 94.2.

Speaker 2

Our North American insurers had a combined ratio of 95.3 in the Q3 of 2024 and underwriting profit of $87,000,000 Northbridge had a strong quarter with underwriting income of $34,000,000 and a combined ratio of $94,000,000 notwithstanding $67,000,000 of catastrophe losses. The insurance industry in Canada had one of its worst quarters of catastrophe losses in history with losses of over $7,000,000,000 From Forster had a combined ratio of $95,700,000 and underwriting profit of $47,000,000 while Zenith had a combined ratio of $96,600,000 with the benefit of favorable reserve development and juggling a different a difficult pricing environment in the workers' compensation market. Our international operations delivered a combined ratio of 98.5% in the Q3 of 2024 and underwriting profit of $15,000,000 Excluding the effects of the purchase price adjustments on our acquisition of Golf Insurance, underwriting income was $31,000,000 Our LatAm operations continue to post strong underwriting results with a combined ratio of 94.4 and have consistently produced underwriting profit for the last 5 years, benefiting greatly from underwriting actions taken after our acquisition in 2017. Our business in Eastern Europe consisting of Colonnade Insurance, Polish Re and our businesses in Ukraine had another solid quarter with a combined ratio of 97.5, all companies producing underwriting profit despite Colonnade and Polish Re dealing with significant storm losses in the region.

Speaker 2

Fairfax Asia and Bright also contributed to our underwriting profit with a combined ratio of 95.1percent93.9percent

Speaker 1

respectively.

Speaker 2

Gulf's combined ratio in the quarter was 102.4%, reflecting purchase price adjustments on the acquisition. Excluding the purchase price adjustments, Gulf combined ratio was 98.3%. 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 Q3, the discounted combined ratio was 83.9 compared to the undiscounted combined ratio of 93.9.

Speaker 2

In the quarter, our insurance and reinsurance companies had prior year favorable development of $130,000,000 or a benefit of 2 points on our combined ratio. This compares to $56,000,000 in the Q3 of 2023 or 1 point on our combined ratio. Our company has performed full actuarial reserves reviews in the Q4 and are in the process of that now. Our overall reserves remain strong. The performance of our insurance and reinsurance operations have not gone unnoticed by the rating agencies.

Speaker 2

This year, our financial strength ratings and debt ratings were upgraded to A plus and BBB plus by S and P with a positive outlook. Allied World's A Financial Strength rating and Fairfax's BBB plus debt rating were put on positive outlook by AM Best and Fitch revised the outlook on their BBB rating for Fairfax's debt to positive. 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. As a group, we benefit from our size and scale, writing approximately $33,000,000,000 of gross premium worldwide across a diversified book of business, both by product and geography.

Speaker 2

I will now pass the call to Wade Burton to provide some additional comments on our investments.

Speaker 3

Thank you, Peter, and good morning, everyone. The investment results in the quarter were strong with interest and dividend income of $610,000,000 profits of associates of $260,000,000 and net gains on investments of $1,300,000,000 With that said, there was not a lot of activity in the quarter on the investment side. Fairfax total investment portfolio now stands at $69,000,000,000 to end the quarter, with $49,000,000,000 in fixed income and $20,000,000,000 in equities. Of the $49,000,000,000 in fixed income, dollars 35,000,000,000 are in U. S.

Speaker 3

Treasuries, other government bonds and cash. There are another $5,000,000,000 in mortgages and $9,000,000,000 in short dated investment grade corporates. Including cash, average maturity is 3.7 years and the yield is 4.7%. With inflation steadying at or around the Fed's target, the Fed cut rates 50 basis points in September with an eye to getting to a neutral stance. So many variables, including a very close U.

Speaker 3

S. Election with widely differing policies between the two candidates. We're studying it all and watching it closely. For now, we continue to have a defensively positioned fixed income portfolio while still making very healthy, very robust interest income. For the $20,000,000,000 in equities, not much changed.

Speaker 3

Our core holdings and investments continue to perform well, all making good income against invested capital. Our experienced investment team is constantly searching for new opportunities, but as managers of insurance float, we have the very great benefit of taking a long term approach to investing. It means we can wait for prices to come to us and we won't invest unless we see a margin of safety. We did make one significant announcement in the quarter. We bought out our main partners in Peak Achievement, an athletic wear and equipment company focused on hockey and lacrosse.

Speaker 3

It is an outstanding business operating in a highly consolidated industry, well run by Ed Kinley and his team, incredible track record, and we paid a fair price. We think we will make a very good return over the long run for our shareholders. And importantly, Ed runs the company very much in tune with the Fairfax culture. Looking back over the last 2 years, we've made 3 significant long term equity investments. 1 in Meadow Dairy, a dominant milk ingredients company in the UK that is doing very well another in Sleep Country, a dominant mattress distributor and retailer in Canada and now a third, Peak, a dominant sporting goods company focused on hockey and lacrosse.

Speaker 3

All immediately are or will contribute to our earnings and we believe all will continue to contribute more and more as their businesses progress. I will now pass it to Jen Allen, our CFO.

Speaker 4

Thank you, Wade. Our net earnings in the Q3 of 2024 of just over $1,000,000,000 included a pretax expense of $732,000,000 related to our IFRS accounting for insurance and reinsurance contracts. That net expense of $732,000,000 from discounting insurance and reinsurance contracts was comprised of a net finance expense from our insurance contracts held of about $1,100,000,000 which reflected interest accretion from unwinding the effects of discounting associated with the net losses on the claims of $348,000,000 and the unfavorable effect of decrease in discount rates during the period on net loss on claims of $765,000,000 This was partially offset by a net benefit of $381,000,000 from discounting losses and ceded loss on claims incurred in the period, net of changes in our risk adjustment. As reflected in our Q3 of 2024, generally a decrease in interest rates will result in an increase to the carrying value of both the company's fixed income portfolio and the net liability incurred for claims for insurance contracts. While the change to the carrying value of each of these will not necessarily be equal in magnitude when there's a movement in interest rates, the impact on the company's net earnings is mitigated.

Speaker 4

I'll refer you to Page 38 in the MD and A of the company's interim consolidated financial statements for the 9, 3 9 months ended September 30, 2024 for a table that presents the company's total effects of discounting and risk adjustment on our net insurance liabilities and the effects of changes in interest rates on the company's bond portfolio. We set this out in a format that the company believes assists in understanding the company's net exposure to the interest rate environment. In the Q3 of 2024, the decrease in discount rates during the period produced net gains on our bond portfolio of $829,000,000 that exceeded the net finance expense of $765,000,000 related to the effects of the decrease in the discount rates on our net loss on claims, which resulted in a net benefit of $64,000,000 in the quarter. In the Q3 of 2023, we reported a net benefit of $459,000,000 from discounting insurance and reinsurance contracts, principally related to the net benefit of discounting losses and ceded loss on claims of $387,000,000 which is recognized in our insurance service result as a reduction to losses and ceded losses, which was partially offset by net finance expense from insurance contracts and reinsurance contracts held of $8,000,000 That net finance expense of $8,000,000 consisted of interest accretion from the unwinding the effects of discounted associated with our net claims payments made during the period of $369,000,000 partially offset by the effective increase in discount rates in the same period of $362,000,000 Unlike the Q3 of 2024, in the Q3 of 'twenty three, we saw increase in the interest rates during the period, which resulted in a net finance benefit of $362,000,000 related to the effects of increases in discount rates on the company's prior year net loss on claims that exceeded the net loss on the company bond portfolio of $197,000,000 which resulted in the net benefit of $165,000,000 in 2023.

Speaker 4

A few comments on our non insurance companies in the quarter. The operating income of our non insurance companies reporting segment decreased to $49,000,000 in the Q3 of 'twenty four from $126,000,000 in the Q3 of 'twenty three, which primarily reflected lower operating income in the other segment that was driven by lower margins at AGT and lower business volumes at Boat Rocker, and we also saw lower operating income at Fairfax India that was driven by lower share profit from its investments and associates. This was partially offset by higher operating income in the Reinsurance and Retail segment. As Wade noted, with our recently announced Sleep Country and Peak Achievement transactions, we expect the operating income from our non insurance companies reporting segment will grow in the future periods, reflecting the operating income diversity these investments will add to the segment. Our share profit from investments in associates.

Speaker 4

In the quarter, we reported consolidated share profits of 260,000,000 dollars principally reflecting the share profit of $138,000,000 from Eurobank $62,000,000 from Poseidon. That reflected in the 9 months of 2023 consolidated share profit of associates of $609,000,000 dollars principally reflecting share of profits of $344,000,000 from Eurobank, dollars 163,000,000 from Poseidon and $52,000,000 from peak achievements that reflected its sale of Rolling Sporting Goods that was partially offset by share of loss of $60,000,000 from Fairfax India's investment in Sanmar Chemical Group. On July 31, 2024, Eurobank paid a dividend of $370,000,000 of which the company's share was $128,000,000 and was recorded in the Q3 of 2024 as a reduction to our Eurobank carrying value under the equity method of accounting. A few comments on transactions and updates in the quarter. As mentioned in prior quarter, on May 23, 2024, Digit Insurance, which is the general insurance subsidiary of the company's investments in our associate Digit, completed its IPO.

Speaker 4

Digit Insurance common shares are now traded on the BSE and NSE in India and closed at INR3.73 per share at September 30, 2024. The company's investment in Digit compulsory convertible shares is mark to market on a quarterly basis, reflecting changes in Digit Insurance's traded share price. That resulted in a net gain on investments of $184,000,000 in the Q3 of 2024. On October 1, 2024, the company through our insurance and reinsurance subsidiaries acquired all of the issued and outstanding common shares of Sleep Country Canada for purchase consideration of US881 million dollars That total purchase consideration was comprised of cash of US563 $1,000,000 and new non recourse borrowings to the holding company of US318 $1,000,000 by a newly formed purchasing entity, which amalgamated with Sleep Country upon close. The company will commence consolidating Sleep Country in its non insurance company reporting segment in our Q4 of 2024.

Speaker 4

I'll close with a few comments on our financial condition. At September 30, 2024, our cash and investments at the holding company was $2,000,000,000 with access to our fully undrawn $2,000,000,000 revolving credit facility that was amended in July to extend the expiry from July 14, 2028 to July 17, 2029. And we also have an additional $2,100,000,000 at fair value of investments in associates and consolidated non insurance companies owned by the holding company and no long term debt maturities until 2026. On July 19, 2024, pursuant to an agreement and in exchange for cash received from the holding company of $597,000,000 Allied World became the primary co obligor on the company's 6.1% unsecured senior notes that are due in 2,055. On July 24, 2024, Allied World used the majority of those proceeds to redeem its $500,000,000 principal amount of 4.35 senior notes that were due on October 29, 2025.

Speaker 4

In the 1st 9 months of 'twenty four, we purchased for cancellation a little over 1,000,000 subordinate voting shares, principally under our normal course issuer bid at a cost of $1,100,000,000 or US1113 dollars per share, of which 159,000 subordinate,000 shares at a cost of 181,000,000 were completed in the Q3 of 2024. At September 30, 2024, our excess of fair value over carrying value of our investments in the non insurance associates and market traded consolidated non insurance subsidiaries was $1,900,000,000 compared to the $1,000,000,000 at December 31, 2023. That pretax excess of $1,900,000,000 or $87 per share is not reflected in our book value per share, but is regularly reviewed by management as an indicator of the underlying investments performances. And included in that $1,900,000,000 is approximately $366,000,000 gain anticipated to be recognized by the company in the Q4 of 2024 relating to our sale of Stelco's common shares. The company's total debt to total capital ratio excluding our non insurance companies increased modestly to 24.2 at September 30, 2024 compared to 23.1 at December 31, 23, reflecting increase in total debt that was offset by our increased shareholder equity, principally reflecting the strong net earnings in the quarter in the 2024 9 months, reduced by purchases of our Sabonet boarding shares for cancellation I mentioned previously.

Speaker 4

Our book value per share was over $1,000 or $10.33 at September 30, 'twenty four, compared to the $9.40 at December 31, 'twenty 3, representing an increase in our book value per share in the 9 months of 11.7 percent adjusted for our Q1 dividend. And in closing, our common shareholder equity increased by just over 1,100,000,000 dollars to $22,700,000,000 at September 30, 'twenty four, up from the $21,600,000,000 at year end 'twenty three, reflecting the strong net earnings in the 1st 9 months of 'twenty four, attributable to Fairfax shareholders of $2,700,000,000 which was partially offset by the purchase of the 1,000,000 subordinate voting shares for cancellation for the cash consideration of the $1,100,000,000 at the US11.13 dollars per share and payments that we made on our common and preferred share dividends of $400,000,000 That concludes my remarks for the Q3 of 2024. I'll turn this call back over to Peter.

Speaker 3

Thank you, Jen. We now

Speaker 2

look forward to answering your questions. Please give us your name and company name and try to limit your questions to only one so that it's fair to all on the call. Cedric, we are now ready for questions.

Operator

Thank you. Okay. And our first question comes from Nik Prie with CIBC Capital Markets. Your line is open.

Speaker 5

Okay, thanks. So interest in dividend income was sort of flattish in the quarter sequentially. Just in light of market yields retracing higher here, what's your internal view on how the new money rate today might compare to existing book yield? Just trying to get a sense of whether you see with maturity rollovers or whether that looks fully balanced today?

Speaker 2

Hi, Nick. It's Peter here. Yes, I think as we said, we have we think we've locked up at $2,000,000,000 plus of interest and dividend income for the next 3 to 4 years. And even with rates coming down somewhat, we're able to invest still at fairly good yields. And it's currently running more at close to $2,500,000,000 So again, we think that $2,000,000,000 is a good proxy for the next 3 to 4 years.

Speaker 2

Okay. Thank you. Next question please.

Operator

Thank you. Our next question comes from Tom MacKinnon with BMO Capital. Your line is open.

Speaker 6

Yes, thanks. Good morning. Just with respect to we've heard other companies talk about Hurricane Milton loss estimates. Are you able to share anything with us with respect to what the impact of Milton could be for your Q4?

Speaker 2

Sure. I can't give you an exact number, but we can point you in the right direction. We're still collecting the information. We had our model losses, but it's been slow, the reported losses coming in. So we really think that it will easily come within the cat margin for the 4th quarter, and so should not have a significant effect on the combined ratio.

Speaker 2

With that said, we've had a number of hurricanes in the Q3 and fortunately, they haven't hit some of the larger centers in Florida. And Hurricane Milton was a big hurricane. And if it would have hit Tampa, we would have had much different a different outcome. For us, we're benefiting though from our size and scale. And we modeled that loss, even a direct hit into Tampa, Category 4.

Speaker 2

And we think that we still would have had underwriting profit for the year even under a significant event like that.

Speaker 6

Can you share the cap question please? Can you share the cap question please? Say it's within?

Speaker 2

The cat margin, we don't really disclose that. If you look at it currently, we've been absorbing over $1,000,000,000 of catastrophes the last number of years. So that should give you some sense of where our combined ratio is coming in and the cat load. Typically, it's about 5% to 6% in the combined ratio. Next question please.

Operator

Next question comes from Jaeme Gloyn with National Bank Financial. Your line is open.

Speaker 1

Yes, thanks. Just wanted to maybe touch on the growth outlook and what you're seeing in the markets. Growth kind of run around the low single digits on an organic basis. Are you positive? Are you maybe more cautious on the markets where you're operating?

Speaker 1

Can you give us a little bit more color as to where you see that trending over the next year?

Speaker 2

It's difficult to predict, but in the Q3, our premium was up it was up 14%, but as I said, that included the addition of the Culp premium. Excluding that, it was about 3%, which it has been running the last number of quarters, give or take. But what we benefit from is if you look if you go across all our companies, we had Krumforster up 13%, Northbridge up 5%, Allied up 3%. Our international operations, excluding Gulf, are growing quite nicely as well. They are up 9%.

Speaker 2

And then you have Odyssey that were down 5%. But as I mentioned, that includes that one off quota share treaty that the effects of that will unwind in the 4th quarter. So it will be more normalized growth going forward. And Brit then was down 4% in the 3rd quarter. And I think you'll see that turnaround as well as they've been really focusing on the margins in their business and cutting back and reallocating capital to more profitable lines.

Speaker 2

So I would expect that you'll see Brett on the positive sign of premium growth going forward. But really, the companies are number 1, they're focused on underwriting profit and that's the goal and growth is secondary. The other thing I'll mention though is if you go back over the last 5 years, we've grown our premium base by about 12% per year and really grew during the 2,000 to 2023 time period right in the hard market where we grew about 18.5% per year. So the company has done an outstanding job of taking advantage of the market and that's what we want them to do. And so we'll keep looking for opportunities and we'll see what comes.

Speaker 2

Next question please.

Operator

Okay. Thank you. Our next question comes from Scott Heleniak with RBC Capital Markets. Your line is open.

Speaker 7

Thanks. Good morning. Hi. The accident year loss ratio in Q3, excluding catastrophes and reserve development, it definitely tracked better than what you saw in the first half of the year. And is there anything

Speaker 2

you can call out

Speaker 7

on that, any seasonal benefits or mix or any different product areas where you saw improvement on that core loss ratio compared to where it had been tracking?

Speaker 2

Anything you can expand on that? On a quarter basis, it's difficult as there's lots of fluctuations in the numbers and because you can have not only development on prior years, but you can have development in the quarter on previous quarters of the same year. So I wouldn't off the top of my mind, I wouldn't say there's anything unusual in there. It's just quarter to quarter, you can see fluctuations in the ex cat, ex prior year development combined ratio. Jen, anything to add to that?

Speaker 4

Yes. No, I think it's just a volatility within the quarter. I would look at it more on a consistent basis within the 9 months. If you're looking at 2023, Scott, versus 2024, we're relatively in line. Excluding the cats, we're at the 61% on a loss ratio basis, which is consistent period over period.

Speaker 2

Next question?

Operator

Thank you. Our next question comes from Akshay Thalakal, Private Investor. Your line is open.

Speaker 8

Good morning, team. I've been an investor for over 4 years and it's been a happy investment so far. I want to congratulate on the fantastic quarter. I had a question on the investment of an insurance subsidiary. So in the report you mentioned about $100,000,000 investment in Marvell Guru Fund.

Speaker 8

So I wanted to ask if you could please expand on that. And also you mentioned about a $50,000,000 investment in the same fund in 2017. So I was curious to know how has that performed since then from an annualized perspective? Thank you so much. Sure.

Speaker 2

Yes, Marvell Fund, it's an investment fund and we initially invested a number of years ago. And simply put, the results have been outstanding over the time period. Over the last 5 years, the fund has produced a return of over 22%. And it is a related party transaction, so that's why we disclosed it. And for related party transactions, we have policies and procedures in place that must be followed.

Speaker 2

And one of those is the disclosure, and that's why it was in our interim report. Next question please.

Operator

Our next question comes from Michael Kain with Davenport and Company. Your line is open.

Speaker 2

Good morning. Considering the current discount to book value, could you please comment on the lack of share buybacks at Fairfax India over the last couple of quarters? Thank you. Thanks, Michael. Thanks for your question.

Speaker 2

The Fairfax India, yes, it continues to trade below book value. We think over time that will reverse. And there's not a lot of liquidity, but we continue to keep that option or Fairfax India does. And they'll be looking at over time buying back their own shares and not a lot more to say on that. Next question please.

Speaker 2

Cedric, do we have any more questions?

Operator

Yes. I believe the name is Ruby with Enova. Your line is open.

Speaker 9

Hello. Thank you very much for the excellent presentation. Well done, Peter. I just want to look forward a little bit. I'm glad that you guys are focusing on underwriting profit as the goal versus growth.

Speaker 9

But when we look around the world, lots of uncertainty, lots of growth in India, but what about your LatAm operations, in particular Argentina, which is very small right now, but a more business friendly climate with the new change in leadership and potential for growth, so both growth and profitability is sort of wondering what your comments would be. Growth similar to India, but much more much less exposure right now. I'd appreciate some input on that.

Speaker 2

Thanks, Ruby. Yes, that's as I said in our opening remarks, our international operations, we're quite excited about. And we have those opportunities all around the world. A lot of the companies we have, like you said, in Argentina are small today. But over time, there's potential for significant growth.

Speaker 2

And you look at Fairfax, it started as a $10,000,000 company almost 40 years ago. And we have a lot of those companies situated around the world. And the prospects not only in Argentina, but India, Asia, it's really we're excited about that. But we take the long term approach. We're not looking even 5 years, but 10 years, 20 years.

Speaker 2

And we do see that some of these companies could be a significant part of the overall portfolio.

Operator

Our next question comes from James Coyne, a follow-up. Your line is open.

Speaker 1

Yes, thanks. And since we're on round 2, maybe I can sneak a couple in here. First one is just around the duration of the fixed income portfolio. I don't think it was disclosed in the results or the report. If you could just give us an update on how that duration sits and compared to the liabilities?

Speaker 1

And maybe thinking about the strategy here around fixed income, is it a little bit of wait and see on the election? Or do you have some strategies maybe you're thinking about deploying more capital into longer dated maturities, shifting more into corporate bonds? Maybe you can sort of talk through how you're thinking about the world on fixed income?

Speaker 2

Sure. The duration on our bond liabilities are around 3.5 years. So it's a little longer than it was last quarter. And if you look at our liabilities, it's relatively close. We don't match on purpose, but where we sit today, our liability duration is close to our asset duration.

Speaker 2

And you can sort of see that in the IFRS 17 numbers that we had a big loss on the discounting, about 750,000,000 dollars that was offset almost very closely with the $800,000,000 plus of gains on our bond portfolio. So we're pretty much matched where we are today. As far as going forward, I think all that we could say on that is we're very happy that the fixed income portfolio is very liquid. And with the duration of 3.5 years, it gives us lots of flexibility for opportunities in the future. We don't have any significant exposure on the corporate side.

Speaker 2

Our corporate bonds are 1 to 2 years, very short dated. So that is an opportunity if credit spreads should widen in the future.

Operator

Our next question comes from a follow-up with Tom McKenna with BMO Capital.

Speaker 2

A question with respect to

Speaker 6

the tax rate. It used to track kind of in the low 20s maybe and now it's been sort of closer to 25%. I mean, how should we be thinking about that going forward is what we're seeing in the quarter, that 25%? Is that what you would expect going forward? Does that kind of reflect some PMT or any other issues that may have happened in 2024?

Speaker 2

Thanks for the question, Tom. Yes, the tax rate is elevated in the quarter and there's a lot of things going on, as you might know, on the tax side. But why don't I pass it to Jen, who

Speaker 6

can give us a little more detail?

Speaker 4

Yes. Thanks, Tom. So, yes, Peter indicated, there is a lot of moving parts within the global tax regime. So, as you indicated, our effective tax rate is seen at 25.1 percent elevated over 2023. Couple of things driving that.

Speaker 4

So in 2024, we now are under the global minimum tax where there is a 15% mandated tax in certain jurisdictions that we didn't have prior, primarily being in Bermuda. So on a YTD basis, included in that number is about $107,000,000 about $30,000,000 expense in the quarter. We also have a change in the tax rate legislation in India, where they changed their long term capital gains rates that also cost us another about $50,000,000 in the quarter. There's a couple of other things we're still closely watching, which is the interest limitation tax rule that's in place. Currently, no impact materially on our financials, but there could be that's where the 30% limitation rule could come into play at the holding company, and then we're still tracking quite closely the capital gains rate, the inclusion rate change that's coming in Canada as well.

Speaker 4

So, as Peter indicated, a lot of moving parts on tax. I think trying to normalize what that effective tax rate would be is a little difficult, but I would say it is going to be elevated from prior year if you kind of put in a maybe a 22% to a 25%, you're probably going to be in the ballpark where we'll land.

Speaker 2

Next question, please.

Operator

Yes. Another follow-up from Jaeme Gloyn with National Bank. Your line is open.

Speaker 3

Yes. Thanks.

Speaker 1

Granted you're doing a bigger review on reserves this quarter, but just given a little bit more attention paid to this on some U. S. Insurers and on casualty reserving, is there anything you were seeing in Q3 specifically or maybe you've even gotten a little bit of a head start on the reserving review for the end of the year. Is there some extra color you can provide around that and how Fairfax has been performing from a reserve standpoint specifically on casualty?

Speaker 2

Thanks, Jamie. Yes. As you said and I said in my opening remarks, we're just going through the full actuarial reviews at all our companies in the Q4. And we'll have more to report on our year end call and in our annual report. But for the year, we've had $300,000,000 of favorable developments, so our reserves continue to run off well.

Speaker 2

130 of that was in the Q3. And we really believe we have a great process in place instilled within the companies for conservative reserving. It's very important. And this is last year was our 17th year in a row that we've had favorable development. And for the 1st 9 months, we've had $300,000,000 But in regards to the U.

Speaker 2

S. Casualty, it's an industry the industry is feeling the effects of these social inflation and nuclear verdicts. And our companies are seeing it as well, as I said in the past, mainly Crum Forster and Allied. And they have been strengthening some of these accident years 2014 to 2018 in particular, but more or less have had IBNR up or offsetting redundancies in other lines of business. So in total, we've our reserving has been quite strong.

Speaker 2

In the Q3, there was no on these years, there's been no significant strengthening

Speaker 10

on

Speaker 2

the U. S. Casualty reserves. So overall, we think our reserves are in really good shape. Next question, please.

Operator

Yes. And our next question comes from Marco Pesteros, a private investor. Your line is open.

Speaker 10

Good morning. Could you please provide a little bit more color on Fairfax India actions and results, please?

Speaker 4

Yes. Oh, Marco, I was just going to say Fairfax India is a public company. Similar to Fairfax, they released their Q1 interim report yesterday at 5 p. M. You can get that report off their website.

Speaker 4

If you have any additional questions, you could reach out to the investor line.

Speaker 10

Yes. Okay. Thank you. Just wanted to have your comments like you commented on the Fairfax Financial Holdings. I mean,

Operator

it's possible.

Speaker 2

Fairfax Financial Holding. Yes, we typically we don't comment on Fairfax India's underlying results. Next question, please.

Operator

No further questions. Peter, back to you.

Speaker 2

Well, if there are no further questions, thank you for joining us on this call. And thank you, Cedric.

Operator

You're welcome. Thank you. And that concludes today's conference. You may all disconnect at this time.

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Earnings Conference Call
Fairfax Financial Q3 2024
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