Fairfax expects $500mn-$750mn net loss from LA wildfires

By Michael Loney

Feb 14 - (The Insurer) - Fairfax Financial expects $500mn to $750mn of net losses from the Los Angeles wildfires, which will primarily come from reinsurance exposure at Odyssey, Brit and Allied World.

During an investor call on Friday, Fairfax president and chief operating officer Peter Clarke said that the losses from January's wildfires in Southern California will primarily be a reinsurance event for the company because it has “very little” direct insurance exposure to the fires.

“Our main exposure is through the reinsurance business at Odyssey, Brit and Allied World. Insured industry losses are estimated to be in the $35bn to $45bn range, and we typically take on 1 percent to 1.5 percent of the industry losses,” Clarke said.

“This could be a little higher given this is a reinsurance event for us. But at a high level, our early estimate of the net losses would be in the $500mn to $750mn range on a pre-tax basis.”

When asked by an analyst whether the wildfires would change how Toronto-based Fairfax thinks about its catastrophe exposure, Clarke said: “I think the simple answer is no. We're very comfortable where our exposure is on the cat side. Through the hard market, we grew significantly. We didn't grow as much on catastrophe exposure but where we are today we're very comfortable.”

Clarke suggested that “rates might firm up after such a large loss such as this”. He added that Fairfax’s losses are within its expectations and manageable within its underwriting profit.

Fairfax announced on Thursday that its adjusted operating income from P&C insurance and reinsurance operations increased from $1.21bn to $1.53bn in the fourth quarter, and from $3.94bn to $4.76bn for the year.

Gross premiums written at the group level increased by 14 percent in Q4 to $7.55bn. Net premiums written rose 15 percent to $5.92bn.

For the full year, GPW was up 13 percent to $32.83bn, while NPW increased 12 percent to $25.61bn.

Fairfax’s overall P&C (re)insurance combined ratio improved moderately in Q4 from 89.9 percent to 89.5 percent on an undiscounted basis.

The quarter included $399.2mn of cat losses, or 6.4 points on the combined ratio, with Hurricane Milton the largest contributor at $235.4mn, or 3.8 points. This was partially offset by favourable prior year reserve development of $301.4mn, up from $151.7mn in Q4 2023.

On the investor call, Clarke noted that Fairfax’s combined ratio was 92.7 percent for the year and that the company produced record underwriting profit of $1.8bn in 2024.

“The combined ratio included catastrophe losses of $1.1bn, adding 4.5 combined ratio points, primarily from hurricanes Milton and Helene in the United States, the significant catastrophe events in Canada and the floods in Dubai. This compares to a combined ratio of 93.2 percent and catastrophe losses of 4 points in 2023,” he said.

Clarke added: “As our premium base has expanded and with the benefits of diversification, we expect to be able to absorb significant catastrophe losses within our underlying underwriting profit.”

Allied World improved its combined ratio from 86.1 percent in Q4 2023 to 83.4 percent in the final quarter of 2024.

Odyssey Group’s combined ratio improved from 88.1 percent to 85.3 percent in the quarter while Crum & Forster’s dropped from 95.9 percent to 92.6 percent and Northbridge’s improved from 91.5 percent to 83.3 percent.

Brit's Q4 combined ratio deteriorated from 88.3 percent to 97.2 percent. The metric also increased at Zenith National from 87.0 percent to 101.8 percent, and in the firm’s international insurers and reinsurers division, from 93.4 percent to 95.5 percent.