Fairfax fourth quarter income drops

Fairfax Financial Holdings, which this week batted back claims from an investment firm that it was manipulating asset values, today reported its fourth quarter net income had dropped 32% to $1.67 billion from $2.48 billion.

For the full year, Fairfax, which owns a number of re/insurers including Bermuda-based Allied World and Brit Insurance, reported earnings rose 33.6% to $5.09 billion from $3.81 billion.

Fourth quarter gross written premiums dropped to $6.64 billion from $7.02 billion in the same period in 2022. For the year, gross written premiums rose to $29.09 billion from $27.91 billion.

For Fairfax’s re/insurance companies, operating income edged up to $1.47 billion from $1.39 billion in the quarter but this was offset by a $187 million loss from life insurance and run-off companies and an operating loss from non-insurance companies of $40 million.

The company also recorded a $1.01 billion loss on net finance expenses from insurance contracts and reinsurance contract assets held.

The company saw net gains on investments jump to $1.46 billion from $496 million and from a loss of $1.57 billion for the full 2022 year to a profit of $1.949 billion in 2023.

Fairfax chairman and chief executive officer Prem Watsa said: "2023 was the best year in our history with net earnings of $4.4 billion, producing record adjusted operating income of $3.9 billion (or operating income of $5.7 billion including the benefit of discounting, net of a risk adjustment on claims) from our property and casualty insurance and reinsurance operations, reflecting records achieved in our core underwriting performance, interest and dividends of $1.7 billion and increased favourable results from profit of associates.

“All of our major insurance and reinsurance companies achieved combined ratios below 100% for a consolidated combined ratio of 93.2% and underwriting profit of $1.5 billion, on an undiscounted basis.“

Allied World recorded gross written premiums of $1.46 billion in the fourth quarter, up 2.6% from $1.42 billion in 2022 while GWP rose 5.4% to $6.84 billion from $6.49 billion for the year.

Net written premiums increased 2.8% to $960.8 million for the quarter and 8.6% to $4.84 billion for the year and its combined ration improved to 86.1% from 88.7% for the quarter and to 89.5% from 90.7% for the year.

Fairfax also said it had made a provision for income taxes of $813.4 million which included the benefit of a gain from the sale of Ambridge by Brit, the tax rate differential on income and losses outside Canada primarily related to income taxed at lower rates in the US, Bermuda and Mauritius, and the change in tax rate for deferred income taxes related to deferred tax assets recognised as a result of new tax laws in Bermuda during the fourth quarter of 2023 including the introduction of a 15% corporate income tax effective January 1, 2025.

Watsa said Fairfax acquired an additional 46.3% of Gulf Insurance in December, increasing its holding to 90%. He said this would add about $2.7 billion of gross premiums written to the company’s results in 2024.

"We have increased our annual interest and dividend income run-rate to approximately $2.0 billion and we anticipate it will remain at this level for approximately the next four years,” he said. “Our fixed income portfolio continues to be conservatively positioned with effectively 69% of the fixed income portfolio invested in government bonds, 20% in high quality corporate bonds, primarily short-dated, and 11% in first mortgage loans.

"Our net gains on investments of $1.9 billion were principally comprised of net gains on common stocks of $1.2 billion and bonds of $0.7 billion.”

He added: "We remain focused on being soundly financed and ended 2023 in a strong financial position with $1.8 billion in cash and investments in the holding company, our debt to capital ratio at 23.1%."

Fairfax on Monday denied allegations by Muddy Waters Research that the Canadian insurer was manipulating asset values, saying the short-seller's report was "false and misleading".

Muddy Waters had accused Fairfax of often engaging in "value destructive transactions" to produce accounting gains.

"They have woefully misjudged the strength of Fairfax's financials and prospects and we are confident the marketplace will reflect our strong fundamentals," Fairfax said.

Short sellers make money by betting that the price of a stock will decrease. Shares of Fairfax slipped 11.9% after the report was released last Thursday, but recouped some of their losses a day later.