Why the hard market reminds Fairfax CEO of 2001

Steep price increases that have hit brokers’ commercial clients will not continue for the long term, but the current hard market is reminiscent of the period after Sept. 11, 2001, when two planes destroyed the World Trade Centre in New York, suggests Prem Watsa, chairman and CEO of Fairfax Financial Holdings Ltd.

“The hard market is not going to last long,” Watsa said on a recent conference call discussing Fairfax’s financial results for the three months and six months ending June 30. “It reminds me of 2001. You had price increases in 2000. September 11 [2001] came into play and then prices really took off in 2002 and ‘03 and ’04. In that time period, we increased our premiums by 100% for the whole company.”

Watsa was referencing the aftermath of the Sept. 11, 2001 suicide plane hijacking by Al Qaeda operatives that brought down New York City’s World Trade Center towers and damaged the Pentagon, causing tens of billions of insured losses and killing thousands, many of them trapped in the buildings as well as all occupants of all four airliners and hundreds of first responders.

The catastrophic event caused commercial insurance markets to harden, resulting in steep price increases that are now seen in today’s contemporary commercial insurance market. Regarding today’s commercial insurance rates, “we are seeing price increases of 10% to 30%,” said Watsa, who founded Fairfax in 1985.

Toronto-based Fairfax owns Northbridge Insurance as well as several global P&C carriers, including Brit PLC, Allied World and Odyssey Group.

Fairfax reported July 30 it had net premiums written, across all of its insurance and reinsurance companies, of $3.56 billion in 2020 Q2, up 5.4% from $3.37 billion in 2019 Q2. All figures are in United States dollars. Net earnings in the latest quarter were $435 million.

Fairfax’s Toronto-based Northbridge subsidiary reported net premiums written of US$403.2 million in the latest quarter, up 5.4% from US$382.6 million in 2019 Q2. Northbridge’s premiums were up 11.3% for the first six months of the year, from $639.8 million in 2019 to $712.2 million in 2020. For first six months, Northbridge made premiums of $712.2 million this year, up 11.3% from $639.8 million in 2019.

In Canadian dollar terms, Northbridge’s net premiums written in 2020 Q2 increased by 8.9% over 2019 Q2 – and 13.9% from the first six months of 2019 to the first six months of 2020. This is primarily due to price increases, strong retention of renewal business, and growth in new business, partially offset by returned premium due to reduced exposure (mainly in auto) from the COVID-19 closures, Fairfax said in its management discussion and analysis of its Q2 financials.

At Zug, Switzerland-based Allied World (which Fairfax acquired in 2017), net premiums written increased by 20.4% from $657 million in 2019 Q2 to $791 million in 2020 Q2. This is primarily due to improved pricing and growth across both commercial primary insurance and reinsurance. For Allied World’s primary insurance business, its premiums were up mainly in excess casualty and professional lines.

Company-wide, Fairfax reported a combined ratio of 100.4% in Q2, compared to 96.8% in 2019 Q2.

Northbridge had combined ratio of 94.3% in 2020 Q2, a 4.8-point improvement from 99.1% in 2019 Q2.

Company-wide, Fairfax reported $17.5 billion in gross written premiums in 2019.  The lion’s share of those premiums come from Odyssey Group, New Jersey-based Crum & Forster, Brit, Allied World and Northbridge.  Fairfax also has extensive holdings outside insurance, such as the majority of Recipe Unlimited, whose restaurant brands include Harvey’s, Swiss Chalet, The Keg, Milestone’s, Montana’s, Kelsey’s and New York Fries, among others.

Feature image via iStock.com/rabbit75_ist