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Fairfax swings to $47mn underwriting loss in Q3 as $605mn in cat losses outweigh top-line growth

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Fairfax Financial Group swung to a $47mn underwriting loss during the third quarter of the year from a $52mn profit a year earlier, as $604.6mn of losses from Hurricane Ida and European floods outweighed top-line growth and lower Covid-19 losses.

Catastrophes in the period took a toll on the Canadian conglomerate’s combined ratio, which weakened to 101.1% from 98.5% in Q3 2020. The firm said Ida and European floods contributed almost 14 points to the deterioration in the consolidated margins.

Despite a weaker underwriting performance, the company booked operating profits per share of $16.44 in the third quarter of 2021, rising from the $4.44 per share posted a year earlier after paying preferred share dividends.

The Toronto-based conglomerate grew year-on-year gross written premiums 26% to almost $6bn from $4.7bn in Q3 2020, while net premiums soared 27% to $4.7bn from $3.7bn a year earlier.

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Underwriting: The deterioration in Fairfax’s margins was mainly driven by its operations in Odyssey Group and Brit. Odyssey’s combined ratio swung to a loss and rose to 109.5% from 99.4% in the prior year, while Brit’s combined ratio climbed to 118% from 114% after it was affected by its Ki Insurance division.

Fairfax said that Brit’s combined ratio in the third quarter excluding Ki operations was 114.2%, as the unit grows to scale following its launch in the fourth quarter of 2020.

However, other businesses from the Canadian conglomerate showed underlying improvements: Crum & Forster’s combined ratio declined to 97.5% from 99.3%, while Fairfax Asia’s dropped to 87.1% from 96% a year earlier.

Growth: Allied World’s top line grew almost 27% to $1.4bn from $1.1bn, and Odyssey Group’s gross written premiums rose 24.2% to $1.3bn from $1bn year-on-year.

Crum & Forster grew premiums by 18.5% to $962mn from $790mn, and Brit posted a 22% increase to $826mn from $597mn a year earlier.

Investments: Gains from interests and dividends at the Canadian conglomerate declined 6.8% to $119mn from $128mn in Q3 2020.

The company said its investments results in Q3 reflected its strategy of investing in shorter term debt and not reaching for yield, sales and maturities of US treasury bonds throughout 2020 and net sales of US corporate bonds in the first nine months of 2021.

Commentary: “Core underwriting performance in the third quarter of 2021 continued to be very strong, with growth in gross premiums written of 24.8%, despite significant catastrophe losses, principally from Hurricane Ida and the European floods,” said Fairfax’s chairman and CEO, Prem Watsa.

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

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