Fairfax Financial Holdings Limited has announced its Q1 2023 financial results, reporting net earnings of $1,250 million in Q1 2023 compared to net earnings of $588.7 million in Q1 2022.
Net premiums written by the property and casualty insurance and reinsurance operations increased for Fairfax, 6.1% to $5,619.4 million in Q1 2022 from $5,297.3 million in Q1 2022. Gross premiums written also increased by 7.2%.
The consolidated combined ratio of the property and casualty insurance and reinsurance operations was 94% compared to the combined ratio of 93.1% in Q1 2022. The company produced an underwriting profit of $313.8 million in Q1 2023, compared to $324.4 million in 2022.
There was also a net insurance revenue increase of 10.6% and prudent expense management, partially offset by increased catastrophe losses of $191.9 million or 3.7 combined ratio points in this quarter.
Adjusted operating income of the property and casualty insurance and reinsurance operations increased by 49.9% to $843.0 million from $562.4 million, principally due to increased interest and dividend income and share of profit of associates.
The company’s net finance expense from insurance contracts and reinsurance contract assets held at $163.4 million reflected interest accretion as a result of the unwinding of the effects of discounting recognized at higher interest rates. This compared to net finance income from insurance contracts and reinsurance contract assets held of $419.0 million in 2022 that benefited from the significant increase in discount rates during the quarter, the effects of which exceeded the interest accretion.
Prem Watsa, the Chairman and Chief Executive Officer said, “On January 1, 2023 we were required to adopt the new accounting standard for insurance contracts (IFRS 17) – with the most significant changes being the discounting of our insurance liabilities and a specific risk margin for uncertainty. As we have stated before, this new reporting requirement will not change the way management evaluates the business and we will continue to be focused on underwriting profit on an undiscounted basis with strong reserving. The effects of discounting and risk adjustment in the quarter resulted in an increase to pre-tax earnings of $309.6 million.”
“Net gains on investments of $771.2 million in the quarter were principally comprised of mark to market gains on common stocks of $410.4 million and bonds of $319.0 million. The pre-tax gain on the sale of Brit’s MGA Ambridge of approximately $255 million was not accounted for in the first quarter as the transaction only closed on May 10, 2023. Also, on closing of the Gulf Insurance transaction, the company expects it will record a pre-tax gain of approximately $300 million when our equity interest increases from 43.7% to a controlling interest of 90.0%.
Consolidated interest and dividends increased significantly from $168.9 million in Q1 2022 to $382.3 million in Q1 2023. At March 31, 2023 the company’s insurance and reinsurance companies held portfolio investments of $54.5 billion (excluding Fairfax India’s portfolio of $2.0 billion), of which approximately $7.5 billion was in cash and short term investments representing approximately 13.7% of those portfolio investments. During the first quarter of 2023 the company used net proceeds from sales and maturities of short dated U.S. treasuries to purchase $5.9 billion of U.S. treasuries with maturities between 3 to 5 years, which will benefit interest and dividend income in the remainder of 2023.
Watsa also mentioned, “As we have previously said, we have increased our interest and dividend annual run-rate to over $1.5 billion and have locked it in at this level for the next three years. Our fixed income portfolio is conservatively positioned with effectively 80% of our fixed income portfolio in government bonds and only 14% in primarily short-dated corporate bonds. We continue to focus on being soundly financed and ended the quarter with approximately $1.0 billion in cash and investments in the holding company, which does not include any proceeds from the sale of Brit’s MGA Ambridge that closed on May 10, 2023.”
