The balance sheet management for Fairfax has been impressive, compared to almost any other insurer not named Berkshire. With interest rates rising, many other competitors saw the market value of their bond portfolios fall, in many cases reducing their policyholder surplus/shareholder equity year over year for 2022 over 2021, at the exact same time that inflation in loss costs was requiring dramatic rate increases.
For competitors that were writing (in 2021) almost as much premium as their surplus could support, 2022 was a rude wake-up call. All else being equal, to keep the same level of claims paying ability/AM Best rating in 2022 that they had in 2021 simply while writing the same customers (no growth in policy count) would require an increase in surplus roughly equivalent to the double digit rate increases many of them filed for in 2022.
Since their surplus often dropped year over year at the exact time that they would have desired it to increase, they face some difficult management choices — they can limit their appetite for new business until surplus valuations recover, raise equity or debt, or watch their ratings possibly be put on watch with negative outlooks. Fairfax is in exactly the opposite position (as is Berkshire, and, I believe, Markel).
Reminds me of former Citigroup CEO chuck Prince’s famous quote before the 2008 mortgage disaster: “As long as the music plays you have to keep on dancing. We’re still dancing”. With their refusal to reach for yield on their bonds, Fairfax is now reaping the benefits of taking the long term view for the health of their business over the long run.
Now Fairfax can dance while most of their competitors have had to take a seat.
