Fairfax Financial Holdings Ltd. FFH-T finished last year with strong fourth-quarter profit and underwriting results, helping prop up full-year earnings that sagged as soaring interest rates compelled the company to mark down the value of its bond portfolio.
The Toronto-based insurer and asset manager reported quarterly profit of US$1.98-billion, or US$78.33 a share, compared with US$931-million, or US$33.64 a share, in the prior year. Results were better than analysts expected, and boosted by an anticipated US$1.2-billion gain on the sale of its pet insurance business to the German private investment company JAB Holding last October.
Fairfax’s core insurance and reinsurance business showed good gains, with fourth-quarter profit of US$496-million up 5.4 per cent from a year earlier. Fairfax is able to charge higher premiums with the insurance industry in what is known as a “hard market” – a period of high demand for insurance but weaker supply of affordable coverage because of outside factors that put pressure on insurers such as low investment returns or high claims.
After Fairfax increased prices by about 7 per cent on average last year, the company’s leaders expect those hard-market conditions could continue through 2023 or longer, with interest rates still running high and risks for insurers elevated.
“Broadly speaking, rate increases will exceed loss costs,” said Prem Watsa, Fairfax’s chairman and chief executive officer, on a Friday conference call.
The company’s full-year profit from underwriting was its best ever at US$1.1-billion, despite recording high losses from catastrophes of US$1.3-billion, a large share of which was from Hurricane Ian, which battered Florida.
Gross premiums written rose 15.8 per cent to US$27.6-billion, and the company’s book value per basic share increased, ending the year at US$657.68, compared with US$630.60 a year earlier.
In 2022, however, Fairfax’s profit fell by two thirds to US$1.15-billion, from US$3.4-billion in 2021, as it marked down the value of its bonds. Surging interest rates drove net losses on investments of US$1.7-billion, most of which were the result mark-to-market changes in the value of the company’s bond portfolio. But those losses are largely unrealized.
“We expect much of this will reverse over the short term,” Mr. Watsa said.
Mark Dwelle, an analyst at RBC Dominion Securities Inc., said Fairfax “delivered a strong fourth quarter to cap off a fairly lumpy 2022,” in a note to clients. “Overall a decidedly good result and the company heads into 2023 with a very strong financial position and a nice investment tailwind on top of favourable insurance underwriting conditions.”
Mr. Watsa said Fairfax, which controls an Indian subsidiary, Fairfax India Holdings Corp., has no exposure to the Adani Group, the empire controlled by billionaire Gautam Adani that saw its stock price plunge after a short-seller alleged it had engaged in stock-price manipulation and fraud.
“I think India will continue to do extremely well,” Mr. Watsa said, “notwithstanding the Adani events that took place recently.”
After Fairfax repurchased about US$348-million of shares in 2022, on top of nearly US$1.2-billion in 2021, Mr. Watsa said he expects further stock buybacks will be “the right way to go forward for our shareholders,” he said on Friday’s conference call. With the company’s stock trading at about 6.5 times earnings, be believes “the intrinsic value’s much, much higher than where the book value is.”
Fairfax’s share price was up nearly 7 per cent to $929.50 on the Toronto Stock-Exchange late Friday morning.