Giant Canadian marine insurance and shipping player Fairfax Financial Holdings is expecting a huge loss in the first three months as coronavirus took its toll on investments.
The Toronto-listed fund is estimating a net deficit of $1.4bn — a 12% decrease in book value.
"These are unprecedented turbulent times and we wanted to provide our shareholders with preliminary indications of some key developments for Fairfax’s first quarter," said founder and chief executive Prem Watsa.
The fund is a big player in the Lloyd's of London insurance market. It is also the biggest shareholder in Canadian boxship owner Seaspan and Greek shipping lender Eurobank, and it is a major investor in Indian tanker owner Seven Islands Shipping.
"Our insurance companies continued to have strong underwriting performance in the first quarter of 2020 with a consolidated combined ratio below 100%, favourable reserve development and strong growth in gross premiums written of approximately 12%," Watsa said.
"Net losses on investments currently estimated at $1.5bn primarily reflects unrealised losses in the fair value of our common stock and bond portfolio from the sudden shock of Covid-19 and reverses a significant amount of the $1.7bn net gains on investments we reported in 2019."
He added that the company remains focused on staying "soundly financed" and has drawn down from its credit facility to have liquid assets in uncertain times.
The group had $2.5bn in cash and marketable securities as of 31 March.
Since mid-March this year, Fairfax has been reinvesting its cash and short-term investments in higher-yielding investment-grade US corporate bonds with an average maturity date of four years and average interest rates of 4.25%.
This will benefit interest income in the future, it said.
To date, taking advantage of the increase in corporate spreads, Fairfax has purchased about $2.9bn of such bonds.
Extra security
Fairfax said it has drawn, solely as extra security, $1.8bn from its credit facility for liquidity purposes to support its insurance and reinsurance operations if "these unprecedented turbulent times" continue for an extended period.
During the first quarter, it used $400m and $300m of its cash and marketable securities to provide capital support to its insurance and reinsurance operations and to pay common and preferred share dividends, respectively.
Watsa is an Indo-Canadian billionaire. Born in 1950 in Hyderabad, India, he is also the chairman of Fairfax. He has been called the "Canadian Warren Buffett".
In 2015, Fairfax won support for its $1.88bn bid for insurer Brit from the target company's private equity backers Apollo Global and CVC Capital Partners, only a year after floating on the London Stock Exchange.
Fairfax thus became one of the larger players in the Lloyd's of London market.
It has a policy of operating its portfolio of insurance and reinsurance companies on a decentralised basis, so Brit was kept separate from its existing Lloyd’s operations, Advent and Newline, as well as Odyssey Re, which also has marine underwriting operations in London.
