Q1 2024 Earnings Summary
- Fairfax Financial is experiencing strong premium growth, achieving double-digit net premium growth when including Gulf Insurance, reflecting robust business expansion.
- Management demonstrates confidence in the company's fundamentals, actively investing in their own shares through total return swaps and share buybacks, signaling belief in the company's value.
- Subsidiaries are generating increased dividend capacity, with the ability to remit up to $3 billion to the holding company in 2024, enhancing financial flexibility and potential for increased shareholder returns.
- Slowing Premium Growth Excluding Gulf Insurance: Without the consolidation of Gulf Insurance, Fairfax's gross premiums grew by only 5% on a gross basis and about 7% on a net basis in the quarter, significantly lower than the 15% annual growth from 2019 to 2023. This slowdown could indicate challenges in organic growth across their insurance operations.
- Rate Decreases in Key Lines of Business: The company is experiencing rate decreases in important lines such as cyber, directors and officers (D&O), and workers' compensation insurance, with pricing down in excess of 10% in some areas. This could pressure profitability in these segments and impact overall underwriting margins.
- Increased Expense Ratio Due to Gulf Insurance: Fairfax's overall expense ratio has increased by over 1 percentage point, rising from around 30% to 31.5%, influenced by the inclusion of Gulf Insurance, which operates with a higher expense ratio. Higher expenses could negatively affect the company's combined ratio and profitability.
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Dividend Capacity from Subsidiaries
Q: Can you increase dividends from subsidiaries to the holding company?
A: Management confirmed that with interest income rising and premium growth leveling off, they have increased capacity to upstream dividends. They have the ability to extract $3 billion from insurance subsidiaries in 2024 based on statutory requirements. In Q1 2024, they received $451 million in dividends already. -
Share Buybacks and Total Return Swaps
Q: Why continue holding total return swaps on own shares and buy back stock?
A: They consider holding total return swaps (TRS) on Fairfax shares a great investment and plan to maintain them, with contracts expiring in 2025 and 2026, extendable anytime. About half reset quarterly. They also continue share buybacks, viewing shares as fairly valued, but balance repurchases with financial strength and ratings, monitoring continually. -
Premium Growth Outlook
Q: How are you thinking about premium growth and the rate environment?
A: After growing premiums by nearly 15% annually from 2019 to 2023 due to a hard market , they note rate decreases over 10% in lines like cyber, D&O, and workers' comp. However, strong pricing persists in many areas, with pricing exceeding loss costs. Excluding Gulf Insurance, gross premiums grew about 5%, net premiums close to 7%. They see continued growth opportunities due to scale and diversification. -
Investment Portfolio Flexibility
Q: Can you reallocate fixed income to equities if markets dislocate?
A: With a very liquid fixed income portfolio, primarily in U.S. treasuries with an average duration of 3 years, they have significant flexibility. Positioned defensively, they can react to market opportunities and pivot to equities if desired. -
Expense Ratio Trends
Q: Why did the expense ratio increase, and what is the outlook?
A: The expense ratio rose over 1 percentage point to nearly 31.5%, influenced by including Gulf Insurance, which has a higher expense ratio but lower loss ratio. Investments in technology and personnel also contributed. Management suggests ongoing investments may keep the ratio slightly elevated. -
Reinsurance Market Conditions
Q: What is Odyssey's view on the reinsurance market?
A: The reinsurance market remains strong but less so than in 2023. Odyssey grew significantly from 2019 to 2022, starting from a higher base than peers. They continue to see opportunities and expect growth, excluding a one-off quota share transaction. -
Premiums Including Gulf Insurance
Q: Does the 7% net premium growth include Gulf Insurance?
A: The 7% net premium growth figure excludes Gulf Insurance. Including Gulf, net premium growth was in the double digits.