What Fairfax’s CEO is saying about interest rates

As Canadian insurers struggle with auto claims and weather-related losses, relief may be in sight in the form of interest rate increases.

“We think interest rates will go up over time because the economy of the U.S. is doing very well,” said Prem Watsa, chairman and CEO of Toronto-based Fairfax Financial Holdings Ltd., the parent firm that owns Northbridge and Odyssey Group (formerly OdysseyRe). Watsa made his remarks on a recent conference call.

The best scenario for P&C insurers is a gradual rise in interest rates, Gore Mutual chief financial officer Andy Taylor told Canadian Underwriter earlier.

The Bank of Canada is scheduled to announced May 30 whether or not it will change the overnight rate target, currently at 1.25%. That rate stood at 0.5% this time last year – a far cry from 4.5% in 2007 and more than 20% in the summer of 1981.

Low interest rates can be troubling for insurers, which rely on investment income to supplement underwriting income, especially in years with heavy losses.

Higher interest rates will give reinsurers “more pricing flexibility,” A.M. Best company Inc. said in a report released Dec. 18 on the global reinsurance market.

Fairfax reported May 5 its net income increased more than 12-fold, from $75.3 million in the first three months of 2017 to $1.038 billion in the latest quarter. All figures are in U.S. dollars.

The earnings increase was due in large part to the improvement in its investment results. Fairfax’s interest income rose about 75%, from $121.1 million in Q1 2017 to $211.4 million in the latest quarter.

The Bank of Canada raised the rate by a quarter of a percentage point three times in the past year – in July, September and then again on Jan. 17, 2018.  The Bank of Canada said April 18 it is maintaining the overnight rate at 1.25% but added “higher interest rates will be warranted over time.”

The Canadian property and casualty insurance industry had investment income of $3.41 billion in 2017, up 15% from $2.97 billion in 2016, MSA Research Inc. noted in its Q4 2017 report released April 26.