How much COVID business interruption claims could cost Fairfax

Business interruption claims arising from the COVID-19 pandemic are expected to cost Fairfax Financial Holdings Ltd. nearly Cdn$300 million.

Toronto-based Fairfax released Feb. 11 its financial results for 2020, reporting US$669 million in COVID-19 losses across all of its insurers. Of that US$669 million, 35% is from business interruption, Fairfax CEO Prem Watsa said during a conference call with investment banking analysts. The American dollar closed at Cdn$1.27 Tuesday.

Fairfax’s insurance carriers include Toronto-based Northbridge Financial, from which Fairfax gets about 10% of its premiums. About 75% of Fairfax’s US$14.86 billion in net premiums written in 2020 was from its four largest non-Canadian insurers: Stamford, Conn.-based Odyssey Group, Switzerland-based Allied World, London-based Brit PLC and New Jersey-based Crum and Forster.

Of the US$669 million Fairfax recorded in COVID-19 pandemic losses in 2020, 51% is for losses incurred but not reported. Assuming that 35% of Fairfax’s US$669 million COVID-19 claims are from business interruption, those BI claims would cost Fairfax US$234 million, or Cdn$297 million.

“There is still considerable uncertainty as to the ultimate cost of the virus,” Watsa said during the earnings call Feb. 12.

Asked by an analyst to elaborate on the business interruption claims, Watsa said the loss provision is primarily from Fairfax’s insurance operations outside North America and Fairfax is “conservative” when setting aside reserves in case there are claims.

“We think, all in all, right now, we are well-reserved [for COVID-19 related BI claims],” said Watsa.

About 34% of the US$669 million in COVID-19 losses booked in 2020 are from event cancellation claims outside of Canada. In addition to business interruption and event cancellation, Fairfax is also expecting COVID-19 related claims in liability, surety and travel.

“2020 was an unprecedented year. I am not sure that many of us would believe when we left our offices last March, and almost a year later, we would still be dealing with this pandemic to this degree but we can see the light at the end of the tunnel as multiple vaccines exist and testing has improved significantly,” said Watsa.

Separately, Brit plc alluded to the United Kingdom Supreme Court decision released Jan. 15 in the Financial Conduct Authority’s business interruption test case. Brit was not party in the FCA test case and the outcome has no material impact on Brit, the insurer reported. Fairfax acquired a majority stake in Brit in 2015.

In 2020, the FCA took eight insurers to the High Court of England and Wales over more than 21 specific policy wordings. The aim was to settle BI coverage disputes from COVID-19 in Britain more quickly than if every client took every individual insurer to court in separate lawsuits.

There were two broad categories of wordings in the FCA test case: Prevention of access as a result of action or advice on the part of a government or civil authority; and BI resulting from a disease outbreak within a certain distance from the premises. For the most part, the 21 policy wordings in the test case cover BI arising from COVID, the U.K. Supreme Court ruled.

The COVID-19 pandemic was one reason Brit PLC had a combined ratio of 114% in 2020, compared to 96.9% in 2019.

Every other insurer owned by Fairfax had combined ratios in 2020 of less than 100%. Fairfax’s overall combined ratio deteriorated 1.1 point, from 96.9% in 2019 to 97.8% in 2020.

Across all of its insurers, Fairfax recorded catastrophe losses of US$644 million in 2020 (not including the COVID-19 losses), due in large part to multiple hurricanes affecting the United States in the summer and fall of 2020.

Northbridge’s catastrophe losses were Cdn$39 million, primarily relating to two catastrophes in Alberta, said chief financial officer Jen Allen. One was the spring flood in Fort McMurray and the other was the June 13 hail storm affecting mainly northeast Calgary.

Company-wide, Fairfax Financial’s net income dropped from US$2 billion in 2019 to US$218 million in 2020. This was mainly because the net gain on investments dropped from US$1.7 billion in 2019 to US$313 million in 2020.

During the first quarter of 2020, the value of Fairfax’s stocks and bonds dropped by about $1.5 billion, but this loss was more than offset as stock prices rose throughout the subsequent quarters of 2020.

“In 35 years, we have never experienced swings of stock prices like we did in 2020,” said Watsa, who founded Fairfax in 1985.

 

Feature image courtesy of iStock.com/matejmo