Investment gains drive Fairfax Q3 profits; GWP surge but cat losses bite

Fairfax Financial Holdings increased its third quarter net profits nearly two and a half times over the prior year period as a 24.8 percent upswing in gross written premiums to $5.92 billion tempered big cat losses and the group swung to a notable gain on net investment income.

"Core underwriting performance in the third quarter of 2021 continued to be very strong, with growth in gross premiums written of 24.8 percent," CEO Prem Watsa said.

But group underwriting slipped to a loss of $46.5 million in the third quarter on the back of "significant" catastrophe losses at $604.6 million, chiefly Hurricane Ida and European floods, even after the premium surge.

The consolidated combined ratio of 101.1 percent in Q3, up from a profitable 98.5 percent in the prior year period, included 13.9 percentage points on those natcat losses, focused on the Odyssey Group and Brit, where combined ratios surged to 109.5 percent and 118 percent respectively.

By the bottom line, $462.4 million in Q3 profits were 2.5x the prior year take to bring the 9M tally to $2.47 billion versus a prior year period net loss of $690.7 million.

Adjusted operating income of the non-insurance companies improved by $43.7 million, including developments at Fairfax India and the Restaurants and retail segment, management said.

In full, Watsa said: "Core underwriting performance in the third quarter of 2021 continued to be very strong, with growth in gross premiums written of 24.8 percent. Despite significant catastrophe losses, principally from Hurricane Ida and the European floods, of $604.6 million or 13.9 combined ratio points, our consolidated combined ratio was only marginally above 100 percent at 101.1 percent in the quarter (97.3 percent year to date), reflecting continued strong performance at Northbridge (89.6 percent), Zenith National (92.1 percent) and Allied World (94.4 percent), with the catastrophe losses principally impacting Odyssey Group (109.5 percent) and Brit (118.0 percent). Operating income was stable at $244.7 million, reflecting increased share of profit of associates and reduced COVID-19 losses, partially offset by the catastrophe losses which increased by $386.0 million in the third quarter of 2021 compared to 2020.

"Net gains on investments of $374.6 million primarily reflected net gains of $397.0 million on Digit compulsorily convertible preference shares. Not reflected in our financial statements are mark-to-market movements on our non-insurance investments in associates and consolidated investments, which at the end of the third quarter had an excess of fair value over adjusted carrying value of approximately $483.0 million or a pre-tax gain of $19 per basic share. Upon the closing of Digit Insurance's placement of common shares, now expected to occur in the fourth quarter, and when the company obtains regulatory approvals to increase its equity interest in Digit above 49 percent, we anticipate recording additional gains of approximately $1.1 billion or $37 in book value per basic share.

"We continue to focus on being soundly financed and ended the quarter with approximately $1.5 billion in cash and investments in the holding company, our credit facility fully undrawn, and our debt to total capital ratio reduced to 25.7 percent," said Watsa.

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