Fairfax Financial Holdings Limited (FFH) Earnings Call Transcript

Good morning, and welcome to Fairfax's 2026 Third Quarter Results Conference Call. [Operator Instructions] Today's conference is being recorded. If you have any objections, you may disconnect at this time. Your host for today's call is Peter Clark's with opening remarks from Mr. Derek Bulas. Sir, please begin.

Good morning, and welcome to our call to discuss Fairfax's 2026 third quarter results. This call may include forward-looking statements -- actual results may differ perhaps materially is contained in such forward-looking statements as a result of a variety of uncertainties and risk factors, the most foreseeable of which are set under Risk Factors in our base shelf prospectus, which has been filed with Canadian securities regulators and is available on SEDAR. Fairfax disclaims any intention or obligation to update or revise any forward-looking statements except as required by applicable securities law. I'll now turn the call over to our President and CEO, Peter Clark.

Thank you, Derek. Good morning, and welcome to next third quarter conference call. I plan to give you some highlights and then pass the call to Wade Burton, our President and Chief Investment Officer, Hamblin Watsa to comment on investments; and Amy Sherk, our Chief Financial Officer, to provide some additional details. We had another strong quarter with operating income from our reinsurance companies, adjusted to an undiscounted basis and for risk margin of $1.4 billion, up from $1.3 billion in the third quarter of 2025. Consolidated interest and dividend income of $669 million was up from $655 million in the third quarter of 2025. Our profits associates were $378 million, up from $305 million, and our underwriting income was very strong at $524 million slightly down from the $540 million in the third quarter of 2025. In the quarter, our net losses on investments were $859 million, driven by mark-to-market unrealized losses on our bond portfolio, principally due to increasing interest rates. In the third quarter of 2025, we had net investment gains of $426 million. As we have always said, we expected investment changes to perform well over the long term that they will fluctuate quarter-to-quarter. Our net earnings for the third quarter were $930 million and $3 billion for the first 9 months. All in, I booked value per share at the end of the third quarter was $1,349 per share, up 8.4% from year-end 2025 adjusted for $15 dividend. During the third quarter, we closed 2 acquisitions. Sleep Country created its acquisition of Sleep Number for purchase consideration of $523 million, all financed internally, and we closed the previously announced acquisition of an 80% equity interest in and pillar for purchase consideration of $239 million. Subsequent to September 30, in October, we completed the sale of our Eurolife operations to Euro Bank for $906 million for a pretax gain of approximately $20 million. The gain will be included in our results in the fourth quarter. Also in October, Fairfax was selected by the Government of India as the strategic buyer for 60.7% equity interest in IDBI Bank for approximately $5.6 billion. We are very excited to be selected by the government in India to be the purchaser. On October 9, Recipe interpreted to a share purchase agreement to acquire great a food service business in Greece, which again will be fully funded by Recipe. Closing is subject to regulatory approvals and customary closing conditions. October 7, we have a great partner with Wittington to acquire certain operations of the Boots Group the leading pharmacy and health beauty retailer in the U.K. and Ireland. For approximately $8.9 billion, inclusive assumed that Fairfax has committed to provide up to approximately $2.3 billion of the purchase price. Following the closing of the transaction, we expect to own 50% of the equity of boots and Waddington will have operational control. Closing of the transaction is subject to customary conditions and is expected to be in the first quarter of 2027. With the conflict in in brand, members of the Fairfax family are once again and unfortunately facing difficult and dangerous circumstances. GIG's management is ensuring that all employees in the Gulf region have the support they need to stay safe, which remains our first priority. While the duration of the conflict remains uncertain, Gulf continues to operate as usual under very challenging conditions and related losses have been minimal. We are also thinking about all our employees in Ukraine as that conflict is escalating. And as winter is approaching it makes for some very difficult conditions. Our thoughts compares with all our employees at Gulf parks, Universal and Ukraine. I will now give you some additional detail on the components of our net earnings for the quarter. Our consolidated investment return was 0.2% for the quarter, driven by interest and dividend income, strong profits from our associates, offset the net losses on investments. Consolidated interest and dividend income of $669 million, was up 2% year-over-year benefiting from a growing investment portfolio and an increase in government yields. Profits of associates of $378 million in the quarter, increased by $73 million from a year ago, led by the Water Energy Fund and Eurobank, ,offset by profits from the side as we sold half our position last quarter. We continue to be very excited about the long-term prospects of our associated companies. Net losses on investments of $859 million, were driven by unrealized losses on bonds, primarily from U.S. treasuries to the increase in interest rates in the third quarter, unrealized losses on our preferred shares in digit in 258 million offsetting that of $177 million on equity orders. Primarily due to mark-to-market gains on Matan Energy, Eldorado Gold, IIFL Finance and Equinox fold. -- offsetting necessary losses on names and our Fairfax TRS. Our noninsurance consolidated companies continued to perform well with operating income of $254 million in the quarter, up from $211 million in the third quarter of 2020. More on the investments from Wade. As mentioned in previous quarters, our book value per share of $1,349 does not include unrealized gains or losses in our equity accounting investments and our consolidated investments which are not mark-to-market. At the end of the third quarter, the fair value of these securities is in excess of carrying value by $5.1 billion, an unrealized gain position or $256 per share on a pretax basis, a significant increase from year-end 2025 at $151 per share. In the third quarter, net earnings included $148 million unrealized loss due to increasing interest rates in the quarter. This consisted of the unrealized losses on our bond of $828 million, offset by the increase in discount under IFRS 17 on our insurance and reinsurance reserves held of $679 million. For the third quarter of 2025, this number was a net loss of $308 million. Our insurance and reinsurance businesses were $8.8 billion of gross premium in the third quarter of 2026, up 9.3% versus the third quarter of 2025. Our North American Insurance segment's gross premium was up 5.1%, or $124 million. Posters premium was up 6.6% to $1.8 billion in the quarter. Crum continues to see profitable growth opportunities in its accident and health division, while premium was down across most other segments due to the softening market conditions in those lines of business. Zenith premiums increased $23 million or 13.3% and primarily from strong retention, expanding its large account workers' compensation segment and earned price increases. While Northbridge gross premium was relatively flat in Canadian dollars, reflecting a competitive market place. Our global insurer and reinsurer setting was up 5.3% with gross premium of [indiscernible] in the third quarter of 2026. It's gross premium was $837 million, up 16% in the third quarter of 2026 versus the third quarter of 2025. With the majority of the growth from the recent expansion of it, replatform in Bermuda and its specialty business benefiting from improved pricing. Odyssey Group's premiums were $1.6 billion, down 1% in the third quarter of 2026 with both its reinsurance and insurance business initiatives showing small declines. Reinsurance was down primarily from the U.S. property treaty business, driven by softening markets, especially on catastrophe business. insurance premiums decreased primarily in an agriculture business. Allied World's premium was up 5.9%, with gross premiums of $1.8 billion, with growth in their Global Markets division and North American insurance division, primarily in construction, casualty and A&H, while its reinsurance segment was down 3.1% to competitive pricing. The gross premium was up 10% in the third quarter of 2026, driven by casualty treaty offset by lower open margin property business in the United States. Our international insurance and reinsurance operations, gross premiums was $1.9 billion in the quarter, up 27.1% or $409 million in the third quarter of 2026 versus the third quarter of 2025. I driving the increase with salt insurance, primarily due to the significant rate increases on Marine business as a result of the conflict with Iran, the majority of this business was not retained by the company, so it only affected gross premiums and not that. Excluding this premium, our international operations were up 13%, with strong underlying growth across most of our international operations. Fairfax APJ was up 14.5%. Latin America, 13%, benefiting from some foreign exchange right was up 9% and colonnade insurance was about 5.3%. On a net written premium basis, premium was about 13.2% versus 27.1% on a gross basis, again reflecting the Marine business at Gulf. And Fairfax Asia was up 37% on a net basis, reflecting growth and also higher reactions on the seed business. International operations currently get account for approximately 21% of our overall gross pregame. Looking ahead, these operations offer strong long-term potential for sustained growth, thanks to the skilled management teams, emerging insurance markets and robust Google economies. Our combined ratio was 92.5% in the third quarter with underwriting income of $524 million compared to a 92 combined ratio and underwriting income of $540 million in the third quarter of 2025. All our major insurance and reinsurance segments continued both strong results with good underlying margins while remaining disciplined in a softening insurance market, especially in North America. Our comparable purposes, our IFRS 17 combined ratio was 81.7% compared to 81.5% a year ago. Our global insurers and reinsurers posted a combined ratio of 90.9% and underwriting profit of $344 million. Allied World led the way with a combined ratio of 88.2% for it had a combined ratio of 89.6%, had a combined ratio of 91.7% and audit sets combined ratio was 93.6%. Our North American insurers had a combined ratio of 95.1% in the third quarter. Bridge had a combined issue of 94.5 in the quarter that included over 10 points of catastrophe losses due to the above-average cap losses in Canada in the quarter. Force had underwriting income of $66 million or a combined ratio of 94.8%, while Zena, our workers' compensation specialist, after a couple of years of above 100 combined ratios posted another quarter of underwriting profits. Our international operations delivered a combined ratio of 93.1 for the quarter with very strong underwriting income of $82 million. All in Asia and Eastern Europe led the way with an excellent combined ratio of 86.9, GIG also had an excellent quarter at 90.4 and contributed almost half the underwriting profit. Freight continues to produce strong results with a combined ratio of 93.4 and Fairfax Asia had a combined ratio of 95, led by Singapore REIT at 88. 1. Eurolife in Greece, Falk in Thailand and Fairfirst in Sri Lanka, a combined ratio was above 100 in the quarter, resulting in underwriting losses of approximately $5 million due to the large losses in Srilanka, catastrophes in Thailand and motor results in Greece. The companies are focused on bringing these combined ratios back below 100. In the third quarter, our insurance and reinsurance company recorded favorable reserve development of $156 million or a benefit of 2.2 points on our combined ratio. Each of our major segments record favorable reserve development. In the fourth quarter, our companies will perform full actuarial reserve reviews, and we are in that process right now. Through our decentralized operations, our insurance and reinsurance companies continue to produce strong results right in annualized gross premium of almost $35 billion with underlying margins remaining attractive in the main in spite of softening rates. In many lines, it is becoming more competitive, but we benefit from our size and scale and more importantly, we have exceptional long-term management team all focused on the bottom line and the experience comment specifically on nature of the insurance business. long-term approach and enable comp needs to be disciplined, patient and full profitability rather than top line growth targets. I will now pass the call to Wade Burton, our President and Chief Investment Officer of Hamblin Watsa to comment on our investment.

Thank you, Peter, and good morning. Our investment portfolio ended the third quarter at $78.8 billion. Fixed income ended the quarter at $53.1 billion. Common and preferred stock, including our TRS and real estate to $13.1 billion and associates and consolidated investments like Eurobank, Renato, Sleep Country and peak achievement, ended the quarter at [indiscernible]. In the fixed income portfolio, we are still short duration with enormous liquidity over $8.3 billion in cash and short-term bonds and a little over 2 years deviation. It is a volatile path fixed income, particularly rates. Crisa spreads are still narrow, so the volatility has been in rate and primarily outport which is good fair effect. Interest income has gone from $500 million in 2021 to $2.7 billion and a rate in the past quarter. While inflation is persistent above 3%, the spread between inflation and the U.S. treasury curve is a good healthy would be good to be in this entire rate environment for some time, which we are well positioned to benefit from. However, if there's a lapse in inflation rates, we've looked at a sizable amount of interest to come for the next few years in our term structure. Our portfolio has little credit risk mostly U.S. treasuries has locked in animal interest income and retain flexibility. All this is to our fixed income portfolio is in a good position given the impact. Over many years, our fixed income efforts have made money and the secular decline of rates from 1980 to 2015, has avoided the great financial crisis to [indiscernible] and in fact, made a good amount of profit from CDS and was perfectly positioned leading into the post-cold inflationary environment. Fixed income is very much a core strength of Fairfax and will be 3 years to come. The equity portfolio as mentioned, we ended the quarter with a comment preferred stock, including our TRS and real estate $13.1 billion and post and consolidated investments was $12.6 billion. The underlying free cash flow and the management teams of our holdings has never been stronger. From key tariffed at Eurobank gave circle of Bank Channel, Craft Himes, and Kevin Plank, Under Armour to the namely a few companies are very well run, and we are optimistic about the long-term growth in their underlying earnings. The vast majority of our investments are financially sound, and we are carrying them at values where we believe we can earn our 15% return over time. Permanent capital is a huge advantage on the investment side because it gives us and the management team's time to reach their true earnings potential. We are long-term value investors. This is how we've tried to compound the equity and equity the portfolio fair effect. Over 40 years, this approach has worked well, and we are aimed at trying to make it work even better for you over the next 40 years. With that, I'll pass the call over to Amy Sherk, CFO.

Thank you. I'll begin my comments by providing some additional details on our key transactions. On July 31, 2026, sequentially completed the acquisition of the assets and certain liabilities of Sleep -- number Corporation for a purchase consideration of $523 million as determined through a Chapter 11, court supervised bidding process. The assets acquired and liabilities assumed of lead November were consolidated by speeded into the company's noninsurance companies reporting segment and included goodwill and intangible assets of $445 million, practically goodwill of $177 million and brand names of $171 million. Safe number is the U.S. manufacturer and retailer of premium adjustable mattresses. On August 1, 2026, the company acquired an 80% controlling interest and Andrew color limited with the remaining 20% interest retained by Japan Edwards and prices in for consideration of $239 million or [indiscernible] in comprising of cash of $191 million or CAD 265 million and for the $8 million or nonrecourse for borrowings incurred by. acquired and by the industry color were consolidated into the company's noninsurance company's reporting segment and includes other assets of $415 million, principally premises and equipment of $246 million and in inventory of $150 million. Subsequent to September 30, 2026, on October 9, 2026, Recipe entered into a share purchase agreement to acquire 100% of the ever-good single member Spa. The Food Services business of Green State Bar holding SMSA for estimated growth consideration of approximately $350 million or $313 million. which includes the assumption of borrowings of approximately $113 million or BRL 11 million. This transaction will be entirely funded by Recipe and closing is subject to regulatory approval and customary conditions expected to happen in late 2026 over early 2027. On October 27, 2026, the company completed the sale of its euro Life Life operations to Eurobank for approximately $906 million for a pre-tax gain of approximately $200 million that will be included in the company's consolidated financial results in the fourth quarter of 2026. During the period from the announcement of the proposed sale of Euro Life operations in October of 2025 and to closing, the company consolidated net earnings of approximately $113 million or $97 million or life-life operations. The company had classified assets of $3.5 billion and viabilities of $3.6 billion related to the Life life operation as held for sale at September 30, 2026 on the consolidated balance sheet. Peter has covered the boots in the IDBI as have approximately EUR 200 million that will be included in the company's consolidated financial results in the fourth quarter of 2026. The -- during the period from the announcement of the proposed sale of Euro Life Life operations in October of 2025 and to closing, the company consolidated net earnings of approximately $113 million or EUR 97 million of or life-life operations. The company had classified assets of $3.5 billion and viabilities of $3.6 billion related to our life life operation as held for sale at September 30, 2026 on the consolidated balance sheet. Peter has covered the boots in the IDBI as have approximately EUR 200 million that will be included in the company's consolidated financial results in the fourth quarter of 2026. During the period from the announcement of the proposed sale of Euro Life Life operation in October of 2025 and to closing, the company consolidated net earnings of approximately $113 million or EUR 97 million or life-life operations. The company had classified assets of $3.5 billion and viabilities of $3.6 billion related to Life life operation as held for sale at September 30, 2026 on the consolidated balance sheet. Peter has covered the boots in the IDBI, so I will just add that we expect to account for both on the equity and stating. A few comments on our noninsurance company results in the third quarter and first 9 months of 2026. Noninsurance complained operating income of $254 million in the third quarter of 2026 compared to $211 million in the third quarter of 2025. Operating income in the third quarter of 2025 was primarily from the other operating segments of $122 million, principally from Peak Achievement and Andrew Peller and from the restaurant and retail operating segment of $79 million, principally from Fleet Country and Recipe. Noninsurance companies reported operating income of $484 million in the first 9 months of 2026 compared to $296 million in the first 9 months of 2025. Operating income in the first 9 months of 2026 was primarily from the other operating segments of $199 million, driven by peak achievements and from the restaurants and tail segment of $150 million, principally from recipe and Fleet Country. Looking at our share of profit from investments in associates in the third quarter and first 9 months of 2026 consolidated share of profit of associates of $378 million in the third quarter, principally reflected share of profit of $158 million from EuroBank, $53 million from Energy Fund III, $35 million from the company produced shares provided a $35 million from Mexico. Consolidated share of profit and associates of $792 million in the first 9 months of 2026, sensibly reflected share of profit of $395 million from Euro Bank. $14 million from Casita, $124 million from Moderat Energy Fund III and $63 million from CO partially offset by a noncash impairment charge related to other noninsurance associates of $92 million. I will close with a few comments on our financial condition, maintaining an emphasis on financial at September 30, 2026, the company held $1.9 billion of cash and investments for the living company has access to our $2 billion unsecured revolving credit facility, which was undrawn and an additional $2.4 billion at fair value of investments in associates and market-traded consolidated noninsured companies. At September 30, 2026, we expect the fair value of recurring value of investments in noninterest associates and market-traded consolidated noninsurance subsidiaries was $5.1 billion compared to $3.1 billion at December 31, 2025. With $3.6 million of expense related to publicly-traded Eurobank and $0.8 million related to the guidance. The pretax excess of $5.1 billion is not reflected in the company's book value per share, but is regularly reviewed by management as an indicator of investment performance. The company's total debt to total capital ratio, excluding noninsurance companies, decreased to 27.3% at September 30, 2026, from 28% at June 30, 2026, principally reflecting common shareholders' equity primarily from net earnings attributable to shareholders of Fairfax of $930 million. The company's total debt to total capital ratio, excluding noninsurance companies, increased to 27.3% at December 30, 2026 compared to 26.2% at December 31, 2025, reflecting increased total debt partially offset by increased common shareholders' equity. Common shareholders' equity increased by $629 million to $26.9 billion at September 30, 2026, from JPY 26.3 billion at December 31, 2025 primarily reflecting net earnings attributable to shareholders defeat of $3 billion, partially offset by purchases of [indiscernible] subordinate voting shares for cancellation for cash consideration of $1.8 billion or $1,637 per share. Payments of common share dividends of $329 million and other comprehensive loss of $338 million, primarily related to unrealized foreign currency translation losses at hedges due to the strengthening of the U.S. dollar and in various currencies. The company views these unrealized foreign currency movements and market fluctuations, similar unrealized gains or losses on its equity and fixed income portfolios. In closing, book value per share was $1,345 at September 30, 2026 compared to $12.69 at December 31, 2025 representing an increase for data share in the first 9 months of 2026 of 8.4% adjusted to include the $15 per common share dividend paid in the first quarter of 2026. That concludes my remarks, and I'll now turn the call back over to Peter.

Thank you, Amy. We're now happy to take on any questions that anyone might have.

[Operator Instructions] Our first question is from Stephen Boland with Raymond James.

Peter. There's a number of growing cross articles of have mentioned this in opening for works, dismissed the first few minutes. And this IDBI Union seems to be against the takeover so the question is how incredible this threat? Is it just noise and what you have to do with it?

Well, thanks for your question. And for IDBI editing call, as the transaction has not yet closed, and we're still waiting for regulatory approval. So there's really not much more that we can say that we've not already provided. So what I would recommend is that you review our press release dated October 14 and looking to the special conference call we had on October 15. But other than that on IDBI bank, there's not much more we can say at this time. But thank you for your question.

Bart Dziarski with RBC Capital.

I wanted to ask around maybe a couple of allocation question within the operating sub. So just given the softer pricing environment and assurance that the underlying operations are all well capitalized. Like at what point do you think about upstreaming some of that excess capital to the holding company just given the pricing environment.