Disposals boost Fairfax in Q3, lift 2017 expectations

Income from disposals has helped Canada-based property/casualty re/insurer Fairfax Financial Holdings to weather the impact of nat cat events in the third quarter of 2017.

Fairfax reported net earnings of $476.9 million in the third quarter of 2017 compared to net earnings of $1.3 million in the same period a year ago. The results included significant losses from Hurricanes Harvey, Irma and Maria of $929.5 million pre-tax, and $791.0 million after tax.

"The third quarter of 2017 reminded us yet again that ours is a risk business,” said Fairfax CEO Prem Watsa.

“During the third quarter of 2017, the insurance industry experienced some of the largest catastrophe losses in its history as a result of Hurricanes Harvey, Irma and Maria and earthquakes in Mexico. Losses for the property and casualty insurance industry from these catastrophes are estimated to be perhaps $100 billion plus.”

Net premiums written by the insurance and reinsurance operations increased by 41.4 percent year on year to $2,78 billion (8.3 percent excluding the acquisitions of Allied World, Bryte Insurance, AMAG, Fairfirst Insurance and AIG branches in Latin America and Central and Eastern Europe, all of which were acquired after the third quarter of 2016).

The combined ratio of Fairfax’s insurance and reinsurance operations was 130.2 percent on a consolidated basis in the third quarter compared to 91.3 percent in the same period of 2016.

The insurance and reinsurance operations produced an operating loss (excluding investment results) of $680.4 million, compared to operating income of $284.6 million in 2016, reflecting the hurricane losses.

Allied World, which Fairfax acquired in July 2017 registered a combined ratio of 182.2 percent in the third quarter. Similarly, nat cat losses resulted in a combined ratio of 158.3 percent at Brit.

“Fortunately, the reduction of our shareholding in ICICI Lombard to about 10 percent resulted in cash and marketable shares of $1.4 billion and a net after tax gain of $930 million, and our strategic alliance with Mitsui Sumitomo Insurance Company will on closing result in a net after tax gain of about $900 million,” Watsa noted.

Fairfax registered net investment gains of $1.10 billion in the third quarter of 2017 compared with net investment losses of $199.5 million in the same period of 2016.

The third quarter results include a net after tax gain of $930.1 million on the sale of about two-thirds of the company's equity interest in ICICI Lombard.

Not included are gains on the sale of the company's 97.7 percent equity interest in First Capital for $1.6 billion, whose sale is expected to occur in late 2017 or early 2018. The First Capital sale would result in a net after tax gain of approximately $900 million.

“In a year of extreme catastrophe losses, we expect to break even but will not suffer any significant loss of capital,” Watsa noted.

"Fairfax expects to have an excellent year in 2017 in spite of the catastrophe losses, with cash and marketable securities at record levels - and we are prepared if a hard market develops in 2018."

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