Fairfax Financial Holdings Limited
Q4 2021 Earnings Call Transcript

Published: 11 Feb 2022

[Operator:]

Good morning. And welcome to Fairfax’s 2021 Year End Results Conference Call. Your lines have been placed in a listen-only mode. After the presentation, we will conduct a question-and-answer session. Today’s conference is being recorded, if you have any objections, you may disconnect at this time. Your host for today’s call is Prem Watsa with opening remarks for Mr. Derek Bulas. Mr. Bulas, please begin.

[Derek Bulas:]

Good morning. And welcome to our call to discuss Fairfax’s 2021 year end results. This call may include forward-looking statements. Actual results may differ perhaps materially from those contained in such forward-looking statements as a result of a variety of uncertainties and risk factors, the most foreseeable of which are set out under Risk Factors in our Base Shelf Prospectus, which has been filed with Canadian securities regulators and is available on SEDAR, and which now includes the risk of adverse consequences to Fairfax’s business, investments and personnel resulting from or related to the COVID-19 pandemic. Fairfax disclaims any intention or obligation to update or revise any forward-looking statements except as required by applicable securities law. I will now turn the call over to our Chairman and CEO, Prem Watsa.

[Prem Watsa:]

Hey. Thank you, Derek. Good morning, ladies and gentlemen. Welcome to Fairfax’s 2021 year end conference call. I’d like to give you some of the highlights and then pass the call to Peter Clarke, our President and Chief Operating Officer, to comment on our insurance and reinsurance operations; and Jen Allen, our Chief Financial Officer to provide some additional financial details. I want to begin, first of all, by congratulating Peter Clarke, who was named President and Chief Operating Officer last evening. As I said in our press release, Peter has done an outstanding job for Fairfax in numerous roles over the past two decades and fully deserves his appointment as our President. In many ways, Peter has been the President of Fairfax for some time, I said. It just took us a while to realize it. There is no one who represents Fairfax culture any better, smart, hardworking with no ego. Jen and I look forward to continuing to work very closely with Peter. So, now, over onto the call. We had an outstanding year with record earnings of $3.4 billion, surpassing our previous high of $2 billion in 2019. Book value per share grew by 34%, adjusted for our $10 per share dividend. The 34% growth in book value was a combination of record underwriting profit over $800 million and outstanding investment results. Our combined ratio for the year was 95%, despite another year of high catastrophe losses. Gross written premiums were up 25% in the year, over 30% in the fourth quarter, with a steady rate increases across all our major lines of business, with the exception of workers compensation. Insurance and reinsurance businesses are growing rapidly all over the world. We wrote $23.8 billion in gross premiums in 2021, which is up over $4.8 billion from 2020, essentially all organic. It took us 18 years to reach $4.8 billion. We wrote that in one year in 2021. Congratulations must go to all our presidents who produced this result. A decentralized approach works well. As we have disclosed in our press release Matthew Wilson, our President of Brit to call it late last year. He’s undergoing treatment and we expect him to be back in 2022. Please keep him in your thoughts and prayers. We were fortunate that Martin Thompson, the Former President of RSA Canada joined us and is the Interim CEO of Brit, while Mark Allan was doing an outstanding job is building Ki. More on Ki from Peter. All through 2020 on our conference calls I had highlighted to you that I’d shown on page 188 of our 2019 annual report or page two of the 2001 or page 201 of our 2020 annual report there were only four years out of 34 years when we had a negative investment return. In each case we rebounded significantly in the next year. So for the last time from that table and your -- you have heard this many time from me, 1990 our investment portfolios went down 4.4%, 1991 they went up 14.6%, 1999 down 2.7%, 2000 and the next year up 12.2%, 2013 down 4.3%, 2014 up 8.6% and 2016 down 2.2%, the following year 2017 up 6.8%. But it was only four times that our portfolios went down in 34 years, that’s all mark-to-market. Each time investors worried about our investments and investment results were much better than expected. In the first quarter of 2020, as you know, we had a negative 3.6% return on our investment portfolio. But by the end of the year, our investment returns more than reversed and we ended the year with a positive return of 2.4%. Investment return in 2021 was 9.2%, which resulted in a total investment return of $4.4 billion. Please note, that’s with half the portfolio, earning nothing because it had been cash and short-term securities. Of course, this includes $1.5 billion from Digit where they have completed a significant portion of the announced $200 million capital raise at a valuation of $3.5 billion. Kamesh Goyal have done an outstanding job at Digit and Digit is growing at 30% to 40% per year and it’s profitable. Our history has shown that our returns are very lumpy and this has worked for us over the last 36 years. We have never focused on steady quarterly earnings, even though the stock market loves it currently. But we have increased our book value per share over 36 years at 18% per year and that’s long-term for you, 36 years. Here’s how our major stock -- common stock positions I have done, mark-to-market in our financial statements in 2020. Stelco was up 81%, CIB Bank was 18%, Kennedy Wilson up 33%, IIFL Wealth 42%, BlackBerry up 41%. The top 20 mark-to-market positions, which we have to mark-to-market in our -- on our balance sheet is up 30%. Not included in the above are our associates and consolidated investments, which we have begun showing you in our annual report last year, and again, it will be in this year’s annual report. Here’s how these large positions did in 2020. Eurobank up 53%, Atlas Corp. up 31%, Quess up 58%, Resolute up 134%, Fairfax India up 31%, Recipe up 7%, Thomas Cook up 39% and on average they were up 30%. I have mentioned to you that Greece is the best business-friendly country in Europe. Our Eurobank is now trading yesterday at €1.13 versus €0.89 at year end 2021, that’s up 27%. We just think it has -- still has a long way to go. Our book value per share, as I said, was up 34% in 2021. However, this does not include the increase in our equity accounted investments and our consolidated investments, which are not mark-to-market. If you did mark-to-market, we would add $346 million or $15 a share on a pre-tax basis being the excess of fair value over carrying value as at December 31, 2021. In the quarter, we recorded additional unrealized gains on Digit of $668 million, and upon control and consolidation, which is subject to regulatory approval, we anticipate additional gains of approximately $400 million or $17 per share on a pre-tax basis. If these are added to our book value, of course, it’s arithmetic, our book value will be $6 -- from both -- from $631 per share to $660 a share. As I have said previously, long-term value investing has gone through a very difficult time for about a decade now. Valuations or value-oriented stocks versus growth stocks particularly technology, have never been so extreme in the last few years, exceeding even the extremes of the dot.com era in 2000. As the economy continues to normalize and interest rates continue to rise because of inflation, we expect a reverse to the mean, that value-oriented stocks coming to the fore. We continue to believe our common stock positions are a very undervalued. I remind you that in the three years and I have said this to you before that in the three years 2000 to 2002 downturn, most stock market indexes were down about 30%, but our stock portfolio was up 100%. Towards 2020 and 2021, I have stated publicly that the market price of Fairfax shares was ridiculously cheap. In the fourth quarter, we had the opportunity to complete the substantial issuer bid purchasing and cancelling 2 million shares at $500 per share, for a cash payment of $1 billion. The substantial issuer bid was done in conjunction with a 9.9% sale of Odyssey Group for cash consideration of $900 million, which resulted in a gain of $429 million. Combine the two transactions were essentially capital and cash neutral for us. We were able to buyback 2 billion shares at $500 per share, well below our current book value of $631 per share and the intrinsic value of our company is much higher. Just to give you one example, our gross premiums were up 25% in 2021, but on a per share basis, which is what counts in the long-term, our gross premiums per share were up 38%, because of the fact that we have reduced our shares outstanding by $2 million. At December 31, 2021, the company’s insurance and reinsurance companies held $24.9 billion in cash and short-dated investments, representing 50.3% of the portfolio investment. With every 100 basis point increase in interest rates, they have already gone up 30 basis points this would provide us with additional $250 million of additional investment income. We continue to have approximately $1.5 billion at the holding company, predominantly in cash and short-term securities and a $2 billion bank line custodian undrawn at year end. Please note our cash in the holding company, as I have said to you before, is to meet any and every contingency that Fairfax might face. We are not making any long-term investments with this cash other than to support our insurance and reinsurance operations if needed. I will now pass the call to Peter Clarke, our President and Chief Operating Officer, to comment on our insurance and reinsurance operations. Peter?

[Peter Clarke:]

Thank you, Prem. Our companies continue to produce outstanding underlying results with strong organic growth. Our gross premium was up 32% in the fourth quarter and for the year premium was up 25%, generating gross premiums written of $23.8 billion. We finished the year off strong with a combined ratio in the fourth quarter of 88.1% and a combined ratio of 95% for the year. This produced record underwriting profit of $801 million, up 160% from 2020, despite absorbing over $1.1 billion of catastrophe losses in the year. It is expected that the industry will have in excess of $100 billion of catastrophe losses in 2021, the second highest ever. By comparison, in 2020, we produced an underwriting profit of $309 million, a 97.8% combined ratio, reflecting catastrophe losses of $644 million or 4.7 combined ratio points and COVID-19 losses of $669 million or 4.8 combined ratio points. In 2021, our combined -- our COVID-19 related losses amounted to $129 million. On the underwriting front, Zenith and Northbridge reported the lowest combined ratios for 2021, being 88% and 89%, respectively, while Allied World also had a strong year at 93%. Odyssey Group and Brit had elevated combined ratios, still below 100%, driven by catastrophe losses. As mentioned, our gross premium for the year was up 25%, an increase of approximately $4.8 billion from the previous year. This growth was made possible by favorable market conditions that prevail in many of our markets, particularly in North America. Odyssey Group’s gross premiums were up 29%, with continued expansion in both its insurance and reinsurance segments and ended the year strong with premium up 41% in the fourth quarter. Allied World grew its premiums by 25%, with growth especially strong in directors and officers liability, professional liability and excess casualties segment. Brit premiums were up 34% for the year, including Ki, it’s innovative, follow-on syndicate that started writing business in 2021. It should be noted that under accounting standards, Brit must consolidate 100% of Ki’s results as it has effective control of the company, even though it has less than a 50% economic interest. Excluding Ki, Brit’s gross premiums were up 17%. In Canada, Northbridge increased its premium by 23% in U.S. dollar terms, as it continues to register favorable rate increases, strong retention and a healthy growth in new business. Crum & Forster increased its topline by 20%, driven by its asset in health, commercial lines and surplus and specialty divisions. Growth at Zenith continued to be more modest, as it continues to face the headwinds of the competitive worker’s compensation market in the United States. Our international operations continued its expansion as well, with premium growth of approximately $524 million year-over-year. Fairfax Asia’s premiums were up 20% -- 27% this year and included two quarters from recently consolidated Singapore Re. Our companies in South America, Central and Eastern Europe and in South Africa all registered strong growth in the year. Entering 2022 across most of Fairfax, we see significant opportunity for continued growth, while absolute rate increases will taper in some lines, overall rate level is expected to remain attractive. Our management teams are focused in each of their companies on extending the gains made over the last several years. As previously mentioned, our combined ratio of 95%, included 7.2 points of catastrophe losses. Hurricane Ida, U.S. winter storms and the European floods were the main drivers of the catastrophe losses, which resulted in losses of $408 million, $246 million and $220 million, respectively. Odyssey Group and Brit felt the effects of the catastrophe losses the most, adding 10 points and 17 points on their combined ratio. Brit had a very strong ending to the year, bringing its combined ratio down to 96.8% for the year. As mentioned previously, Ki is consolidated into Brit’s results. For the year excluding Ki, Brit’s combined ratio was 95. Ki’s combined ratio was 113.5 for the year, as its earned premiums catches up with its underwriting expenses and its catastrophe losses. We expect Ki will increase Brit’s underwriting profits over time, and this began in the fourth quarter, with Ki posting an 88% combined ratio for the quarter. Mark Allen and his team have done an outstanding job in their first year of business. Both Brit and Crum & Foster completed loss portfolio transfers of prior year reserves in the quarter. The transfer of the reserves are accounting for as negative premium and reduced net written and earned premium for Crum & Foster and Brit by $358 million and $344 million, respectively. Each company’s combined ratio benefited by approximately half a combined ratio point for the year. For the year, our insurance and reinsurance companies recorded favorable reserve development of $356 million or 2.2 points on our combined ratio. This compares to $455 million or 3 points in 2020. For the full year 2021, our favorable development includes $74 million of unfavorable development relating to changes in our COVID-19 ultimate losses from 2020. As of the end of the year, we hold $417 million in net unpaid claims for COVID-19 losses, of which 71% is IBNR. We believe the reserve position in our operating companies continues to strengthen, as we expand with today’s well-priced business. Our expense ratio continues to benefit from the sharp increase in premium volume. Our overall underwriting expense is 1 point lower year-over-year, helped mainly by Allied World, where the expense ratio dropped 2 points in 2021 versus 2020. All in all, we are very pleased with the performance of our companies in 2021. In the current year, market conditions remain attractive. We expect continued growth and the possibility of improved underwriting results. Our companies are very well-positioned to capitalize on the opportunities within their markets. The decentralized operating system of Fairfax is critical to our success. I will now pass the call to Jen Allen, our Chief Financial Officer to comment on our investment results, our non-insurance companies performance and overall financial position.

[Jen Allen:]

Thank you, Peter. The strong results of the fourth quarter when combined with our first nine months of 2021 resulted in a record year for Fairfax. We reported net earnings attributed to Fairfax shareholders of $931 million and just over $3.4 billion in the fourth quarter and full year 2021, respectively, with book value per basic share at December 31, 2021 of $630.60, which represented a full year growth in book value per basic share of $34.2, which has been adjusted for the $10 per common share dividend that was paid in the first quarter 2021. Peter has already provided detailed commentary on our insurance and reinsurance companies, so I will begin my remarks of the -- on the results of our non-insurance consolidated companies. Looking at the fourth quarter of 2021 compared to 2020, excluding the impact of Fairfax India’s performance fees, operating income of the non-insurance companies improved by $124 million, principally reflecting favorable results from our retail -- restaurant and retail segment, which benefited from reduced COVID-19 related lockdown restrictions, lower operating losses at Thomas Cook India, which also benefited from reduced COVID-19 related lockdown restrictions in India and operating income in the other segment in the fourth quarter of 2021, compared to an operating loss in the fourth quarter of 2020, principally reflecting the deconsolidation of Fairfax Africa and its subsidiaries on December 8, 2020. Turning to the full year 2021 compared to 2020 and excluding the impact of Fairfax India’s performance fees, operating income of the non-insurance company improved by $257 million, principally reflecting improvement of $156 million of operating income from a restaurant and retail segment, which benefited from a reduced COVID-19 lockdown restrictions, strong growth at Gulf count and the strengthening of the Canadian dollar compared to the U.S. dollar, which was partially offset by lower government subsidies received in 2021 compared to 2020. We had higher share profit from Fairfax India’s investments and associates, lower operating loss at Thomas Cook India, which benefited from reduced COVID-19 related lockdown restrictions in India and an improvement of $65 million of operating income in the other segment in 2021, reflecting again the deconsolidation of Fairfax Africa on December 8, 2020, with this segment producing an operating profit for 2021 compared to the operating loss in 2020. As noted in the full year of 2021, Fairfax India recorded a performance fee, which was $85 million, with pre-tax earning attributed to Fairfax shareholders, benefiting by about $60 million as Fairfax India’s non-controlling interest is allocated at 70% of Fairfax India’s expense. At December 31, 2021, the pre-tax excess of fair value over the adjusted carrying value of our non-insurance associates and certain consolidated non-insurance subsidiaries that the company considers to be portfolio investments was $346 million, which compared to a deficiency or an adjusted carrying value that was higher than the fair value at December 31, 2020, of $663 million. A significant improvement in 2021 of just over $1 billion, with the pre-tax excess of $346 million not reflected in our book value per share, but has been regularly reviewed by management as an indicator of the underlying investment performance. Our non-insurance associated accounted for $883 million of that appreciation, principally attributed to Atlas Corp. of $285 million, Eurobank of $278 million, Quess $208 million and Resolute $74 million, and improvements in the certain consolidated non-insurance subsidiaries of $126 million related to Fairfax India of $94 million and Thomas Cook at $59 million. As we have mentioned before, we are focused on our organic growth supported by small SME acquisitions with a commitment to growing long-term shareholder value. With our concerns over inflation at December 31st, we continue to hold a significant portion of the portfolio in cash, short-term investments and other short-dated fixed income securities, that represented $24.9 billion or 50.3% of the insurance and reinsurance companies investment portfolio, which was comprised of $21.8 billion of subsidiaries, cash and short-term investments and $3.1 billion of short-dated U.S. treasuries. This has dampened our interest income in the short-term, but had protected us from the impact of inflation and rising rates. Our interest in dividend income of $641 million in 2021 was down from the $769 million in 2020, primarily reflecting that strategy to invest in a shorter term debt and not reach for yield, which resulted in the lower interest income earned principally due to decreased sovereign bond yields, sales of U.S. Treasury bonds throughout 2020 and net sales of our U.S. corporate bonds in 2021. This was partially offset by higher interest income earned on our fourth -- first mortgage loans that were purchased in 2021 and increased dividend income from our common stock portfolio. We added net purchases of first mortgage loans of $827 million in 2021, which are secured by high quality real estate in the U.S., Ireland and the U.K., and have terms less than five years. These investments will provide some benefit to our interest income in the coming years, along with the benefit for -- from the more recent rate environment. We will be able to take advantage of the rise in the short-term interest rates given the significant portion that we hold in the cash and short-terms in the portfolio. Looking to our consolidated share, a profit of associates of $402 million in 2021, it reflected strong results from our investments in associates and were principally comprised of share profit of $162 million from Eurobank, $76 million from Resolute, $70 million from Atlas Corp. and $56 million from Gulf Insurance. That compared to losses of $112 million from our investments in associates in 2021 that included impairment losses of $240 million and we had no impairment losses recorded in 2021. Net gains on the investments in the fourth quarter of 2021 were $938 million and over $3.4 billion for the full year of 2021. The net gains on investments in the fourth quarter of 2021 and full year 2021 were primarily comprised of the following. The largest component of the net gains were net gains of $368 million and just over $2.3 billion from our equity exposures. That reflected the following, in the fourth quarter our net gains of $171 million on common stock that benefited from the appreciation in holdings such as Commercial International Bank in Stelco and $182 million other equity derivatives, which were mainly our equity total return swaps, including the total return swaps on the Fairfax subordinated shares. For the full year, we had net gains of $1.3 billion on common stock that benefited from the appreciation of holdings such as Stelco, BlackBerry, limited partnerships in the U.S., Canada and Asia and $632 million on other equity derivatives that included our total return swaps again the Fairfax subordinate voting shares and our investment in the Atlas Corp. warrants. Secondly, our net gains on investments included $668 million or just under $1.5 billion in each respective period on our investment in the Digit compulsorily convertible preferred shares, which I will discuss in a moment. These net gains were partially offset by net losses of $116 million and $287 million on the bond portfolio, that primarily related to our U.S. and other corporate bonds. A couple of additional comments on our $668 million and the $1.5 billion unrealized gains that were recorded on our investment in Digit compulsory convertible preferred shares. If you recall from our prior quarter conference calls, we hold a 49% equity interest in the associate Go Digit Infoworks Services or we refer to it as Digit, who entered into the agreements with certain third-party investors whereby it’s underlying insurance subsidiary Digit Insurance to raise $200 million of new equity shares, valuing Digit Insurance at approximately $3.5 billion. In addition to our 49% equity interest in Digit that’s recorded under the equity method of accounting as an investment in associate, we also hold the Digit compulsory convertible preferred shares that are accounted for at fair value through profit and loss. Digit has now successfully completed a substantial portion of that $200 million equity raise, with the remaining tranches expected to close in early 2022, and are subject to regulatory customary closing conditions. These recent transactions value Digit Insurance at approximately at $3.5 billion, which the company supported by an industry accepted discounted cash flow model to incorporate unobservable discount rates and long-term growth rates. As a result, we reported the unrealized gains of $668 million and the $1.5 billion in the respective period. A few key transactions I want to highlight that were completed in the quarter, starting that our insurance and reinsurance companies. On December 15, 2021, Odyssey Group had issued shares representing an aggregate of 9.95 equity interest to subsidiaries of the Canadian Pension Plan Investment Board and OMERS, the Pension Plan for Ontario Municipal Employees for cash consideration of $900 million. That resulted in the company reporting an aggregate increase to common shareholder’s equity of $429 million. And to note, there was no gain recorded on the remaining 90% equity interest retained by the company as Fairfax maintained control and continues to consolidate Odyssey Group. At the holding company, on October 29, Fairfax redeemed its $85 million principal amount of 4.12% -- 4.142% unsecured senior notes that were due on February 7, 2024, at par and then on December 29th, we completed our substantial issuer bid pursuant to which we purchased and cancelled the 2 million subordinate voting shares at a price of $500 per share for the aggregate cash consideration of the $1 billion that was recorded as a reduction to our common shareholder’s equity. Our liquidity position of the company remained strong with our cash and investments at the holding company of approximately $1.5 billion at December 31st and we -- as we have noted before that holding company cash supports the decentralized structure and will enable us to deploy capital to the insurance companies efficiently. We continued to be prudent on our capital deployment strategy with our total debt to total cap ratio, excluding the consolidated non-insurance companies, decreasing by 5.6% to 24.1% at December 31, 2021, from the 29.7% at the prior year end, primarily reflecting the significant increase in our shareholder’s equity that was attributed to the net earnings of just over the $3.4 billion, and a reduction in debt at the holding company and our insurance and reinsurance operations. Before closing, I wanted to provide an update on our commitment to ESG, which has been very meaningful for Fairfax since we began. As we have noted before, in 2020, we published our first ESG report that highlighted the importance and achievements we would made to-date. Recognizing there’s always room to grow and improve we continue to enhance our initiatives throughout 2021, and we are pleased to say that we have recently published an updated ESG report. The 2021 report is available on our website, which now incorporates an extended information on our investment processes, sustainable investments and sustainable investment initiatives. Before I turn the call back over to Prem, just wanted to remind everyone that in addition to the press release that was issued yesterday on the year end results, Fairfax’s 2021 Annual Report will be posted on the company’s website on Friday, March the 4th. Thank you. And I will turn the call now back over to Prem

[Prem Watsa:]

Hey. Thank you, Jen. We look forward now to answering your questions. Please give us your name and your company name and try to limit your questions to only one. So it’s fair to everyone on the call. Okay, Britney, we are ready to -- for any questions that our shareholders might have.

[Operator:]

Thank you. Our first question comes from Jaeme Gloyn from National Bank Financial. Your line is now open.

[Jaeme Gloyn:]

Yeah. Thanks. Good morning. I just wanted to, excuse me, I just wanted to get some clarity on the lost portfolio transfers. Can you just walk us through the strategy thinking then should we expect to see more of this stuff going forward and a little bit more color on that? Thanks.

[Prem Watsa:]

Terrific. No. Thank you. Peter, you want to answer that question.

[Peter Clarke:]

Sure. Sure. Yeah. No. We did two loss portfolio transfers in the fourth quarter. They are really just one-off events, one was at Brit that we did. It’s a third-party transaction, but with Riverstone International, who of course, we know very well. Brit’s done a number of transactions with them over the years. Essentially what it does is, it allows -- it frees up resources for their current claim staff to focus on growth and their ongoing business and it frees up capital as well as you are transferring the reserves to a third-party. In the U.S. Crum & Forster had also entered into a loss portfolio transfer, but that was with our Riverstone, our own internal LPT. And again, they transferred really reserves free up resources. Riverstone had some excess capacity and specialized in construction risks and construction defect, and also through Zenith and a worker’s comp claim. So those were the reserves that were transferred to Riverstone.

[Prem Watsa:]

Thank you, Peter. If we go on to the next question, Britney?

[Operator:]

Our next question comes from Charles Fisher from LF Partners . Your line is now open.

[Unidentified Analyst:]

Good morning, Prem.

[Prem Watsa:]

Good morning, Charles.

[Unidentified Analyst:]

How are you? Warren Buffett has written extensively about the importance of float. He said that even though float is a liability, if the combined ratio is below 100%, it is actually an asset. Berkshire has $130 billion in float against $700 billion in market cap. Our Fairfax has $26 billion in float against $13 billion in market cap. We are running at a 95% combined ratio. Can you tell us how you think about the value of float to Fairfax? It’s remarkable.

[Prem Watsa:]

You are exactly right, Charles, you understand it. $26 billion of float like it’s just a significant number and combined ratio of 95%, our reserving is very strong. It just shows you how undervalued our company is. And that’s why, I have said, we bought back our stock of 2 million shares. We will continue to buy back stock. I mean, we can’t control the price of our stock. I said it’s ridiculously cheap, two years ago, I said it again, and then we bought 2 million shares. We will not do -- we are not looking at expanding again, I said. We are not going to issue any shares to buy anything. Our first consideration is going to buy back shares, not at the expense of our financial position, not at the expense of taking advantage of the property casualty hot market, like we have grown by 25%. Charles, you know, you follow these insurance companies, you compare our growth to anyone else, all internal and you will find that 25% is a very high number. And we have got companies like Allied at $6 billion, ROC at pretty well $6 billion, come at $4 billion, like we have got pretty significant companies, but it’s a decentralized structure and we can take advantage of the opportunity as we see it always looking after our customers, because the price we are getting for our product is a fair price now, we are getting paid to take the risk. So, yeah, Charles, you are exactly right, $26 billion in float, the market will see it over time. Thank you, Charles. Next question, please, Britney.

[Operator:]

Our next question comes from Mark Dwelle from RBC Capital Markets. Your line is now open.

[Mark Dwelle:]

Yeah. Good morning. I mean, I’d be remiss if I…

[Prem Watsa:]

Good morning, Mark.

[Mark Dwelle:]

…don’t comment that this was the best combined ratio I have seen in the 20 years that I have followed the company. So congratulations on that. But I wanted to focus on a couple of other items that were a little less attractive in the quarter. I want to start with the corporate overhead and other income expense line is much elevated compared to what the normal run rate was $183 million expense, is there anything usual or one time in nature within that number?

[Prem Watsa:]

Yeah. Mark, we will add to that. But just for your information, that combined ratio, you will notice that the reserve redundancies were very limited and we have grown by, as I said, very significantly. If you go back in 2001, 2002 and 2003, the last time we have had a hot market like this, we have more than doubled our premium and the reserve redundancies come over a long period of time. And we just think our company is so well-reserved that the redundancies we will see for a long period of time. And the combined ratio is a measure, it’s a good measure, but it doesn’t reflect the underlying value that has been created in 2021 to the growth that we have experienced. Peter on or Jen on the expense question that Mark had.

[Jen Allen:]

Yes. Sure. So in the annual report there will be more details on that corporate overhead. So we will refer you to the MD&A when that comes out. But high level that, that number includes our expense at the holding company and our insurance companies. It also includes things like goodwill and intangible assets that will be amortized through on acquisitions. So on a year-over-year basis really if you are looking at that it’s probably driven mainly by the increase in some of the intangibles that have been amortized in some goodwill numbers that are being modestly impaired going through there in the quarter. On a YTD basis, it’s partly offset by increased management fees that we have been able to obtain, given that we have a stronger investment portfolio that actually offset income. So it’s a bit of a harder number to get, I appreciate that in the press release. But in the MD&A, as I said, there is a lot more details that will be provided.

[Prem Watsa:]

So, Mark, yeah, with the corporate overhead is broken very much, a lot of detail in our annual report and that’s coming soon and you will get all the details that you want. Any further question Mark? Britney, next question.

[Operator:]

Okay. And our next question comes from Craig Companion from Leucadia Investments. Your line is now open.

[Craig Companion:]

Hello, Prem. I had a question now that Dutch auction. Can you hear me okay?

[Prem Watsa:]

Yes. Yeah. I can hear you. Yeah. Thank you.

[Craig Companion:]

Yeah. That was a great idea, but a comment, Computershare, I guess, they act as depository. So we had a problem with them

[Prem Watsa:]

Yeah.

[Craig Companion:]

…and I would suggest maybe changing companies. From what I can tell, they never sent a letter of transmittal to shares held in their accounts in the U.S. I think they did in Canada, but not in the U.S. So, I would just suggest changing companies for a future transaction as a plan provider. The dividend? Yeah, that was great. We got our $10 bucks. I still like to see like maybe a midyear special dividend of $10 for all the people they are holding Fairfax until they go to their golden coffins. But, yeah, it’s great to get to such auction.

[Prem Watsa:]

Okay. That’s a -- thank you for your comment. Would you be kind enough to send us a little note if you don’t mind on your experience so that we can reflect on that and…

[Craig Companion:]

Yeah.

[Prem Watsa:]

Okay. We will check that out for you and make sure it doesn’t happen the next time or see how we can remedy that. But in terms of dividend, our -- well, we paid a $10 dividend. Our focus is on buying our shares. We think it’s like Charles Fisher, the fellow said it previously, we have got $26 billion in float and anytime we can -- you will see all these numbers per share in the annual report, but any time we can buy back that stock. That’s what we should do. But, and in effect, we are doing that for you by buying back stock. So we are giving you a dividend, of course, not in the form of a dividend, but in terms of a buyback. But appreciate your question and we will keep that in mind. Britney, next question, please.

[Operator:]

Absolutely. Our next question comes from Mark Dwelle from RBC Capital Markets. Your line is open.

[Mark Dwelle:]

Hey. Good morning. I think I might have gotten cut off there before I got a chance to ask my second one, so.

[Prem Watsa:]

Yeah. We had…

[Mark Dwelle:]

Can you talk a little…

[Prem Watsa:]

Thank you, Mark.

[Mark Dwelle:]

Yeah. So the second -- I had two other questions, well, actually a third. One is, if you did have any idea of when the annual report was going to come due. But the more important questions, I guess, I wanted to ask on the swaps related to Fairfax’s own shares, I know a lot of those were one-year swaps that were taken out in the fourth quarter a year ago. Were those extended forward with the duration rolled forward or they just opened and rolling?

[Prem Watsa:]

Yes. The annual report did when is that again, Jen?

[Jen Allen:]

This March -- Friday, March the 4th.

[Prem Watsa:]

Friday, March the 4th. Peter on TRS swaps we expect to extend them, but Peter?

[Peter Clarke:]

Yeah. They have been ruled and extended, so they are still out there.

[Prem Watsa:]

So, Mark, any other comments you had?

[Operator:]

I am so sorry. That his line off.

[Prem Watsa:]

Yeah. Yeah. Yeah. No problem. Britney he will come back again if you had a question. But next question, please.

[Operator:]

Okay. Our next question comes from Linnet Gabe from Gabe Family LLP . Your line is now open.

[Unidentified Analyst:]

Yes. Hi. Hi. We…

[Prem Watsa:]

Good morning.

[Unidentified Analyst:]

…are a private charitable 501C3 foundation in the U.S. had a terrible time with the Dutch auction. It’s our opinion that the dividend nature, the Canadian tax nature of the distribution wasn’t really disclosed well in the offering document. We tried to talk to your law firm U.S. counsel for Tory in the U.S.

[Prem Watsa:]

Yes.

[Unidentified Analyst:]

You never returned phone calls or e-mails. We sent notes to Fairfax. No one ever replied to anything. It turned out the Canadian. Our broker withheld 25% of the dividend as a dividend, sorry, Canadian withholding tax, even though we are a U.S. exempt charitable foundation. It’s very, it turns out, it’s a pretty difficult thing to fix. The brokers don’t do it. Accountants don’t know about it. We ended up having to hire a specialist firm in New York to try to get the money back from Canada. It’s going to cost our fund 20% of the dividend withheld our private foundation any way. The other person mentioned about depository trust or whatever. I think the whole thing was done very, very poorly from a legal and a disclosure standpoint. And I will tell you, I have been a member in the New York bar for 52 years, so I have a pretty good…

[Prem Watsa:]

Oh! My…

[Unidentified Analyst:]

… about it.

[Prem Watsa:]

So we are very sorry. First of all, we are very sorry for your experience. We disclosed it in the offering circular, but please send a note to me directly and I will make sure that we examine exactly what happened if you would be kind enough to lay it out for me. We just thought it was -- this was a significant issuer bid. It is something that’s done quite often. We are aware of the concerns problems we are aware of the concerns problems in the United States, but we would, I’d love you to send us a, send me a note and I will make sure we follow-up and try as best as we can not to…

[Unidentified Analyst:]

Right.

[Prem Watsa:]

Not to repeat that.

[Unidentified Analyst:]

You don’t disclose your e-mail or your contact information on the website. So we didn’t have your…

[Prem Watsa:]

It’s -- it’s very simple, that’s p_watsa, [e-mail].

[Unidentified Analyst:]

Okay. But…

[Prem Watsa:]

Okay.

[Unidentified Analyst:]

But one other concern from the company standpoint, doing something without disclosure or whatever you don’t want to open yourself to a class action lawsuit for that and anyway…

[Prem Watsa:]

On that front, we are not worried at all. We gave you full disclosure, total disclosure. I talked about the stock being undervalued for two years, so we are not worried about that. Yeah, I can’t stop anyone from class action lawsuit. But we will firmly sure in our minds that we have disclosed every piece of information before making that substantial issuer bid. But let me respond to your note to me on an email and then we will take that forward. So thank you for your question, and Britney, next question please.

[Operator:]

Okay. Our next question comes from in Aniket Kabari , a private individual. Your line is now open.

[Unidentified Analyst:]

I don’t have any else again on this file here.

[Prem Watsa:]

No. Hi. Hello.

[Unidentified Analyst:]

Yeah. Like, I have Azarga, Lumigan and prednisone. It’s not even prednisone, sorry, just Azarga and Lumigan .

[Prem Watsa:]

Yes. Thank you very much. Brit -- yeah, Britney, next question, please.

[Operator:]

Our next question comes from William Gilmore from Sickel . Your line is now open.

[Unidentified Analyst:]

Hi. It’s good to hear things are going well, Prem. I have been following your stock since, I think, that the housing crisis on -- with a value investment attitude. I would be remiss in my duty and just not doing my job if I didn’t understand the investment that I am in. So it’s too bad that the last caller has some issue about what may or may not have happened. And my only question for you guys is currently in your fixed income portfolio, can you estimate the duration?

[Prem Watsa:]

Yeah. Peter or Jen on that duration question?

[Jen Allen:]

Yeah. Sure. So in the annual report we will provide on the duration on the fixed income portfolio. We are currently looking at probably a one -- less than one year, but $6 billion of the portfolio. You look kind of one year to five years, it is about $7 billion and the rest of it makes up the residual five-year to 10-year position.

[Unidentified Analyst:]

Almost 50%…

[Prem Watsa:]

Yeah. Our bond portfolios are very short-term. That very little risk in terms of term. We think interest rates are going up and we weren’t -- we thought we weren’t getting paid for taking interest rate risk. And so it’s all pretty treasuries and very, very safe bonds, and it’s very short-term. Most of them are less than three years in duration, less than three in term and duration, and so it’s a very short term bond portfolio. We will -- most companies I think in our industry average for yield, I don’t think you will find another company that’s taken 50% of its portfolio in cash and short-term investments. And we have been worried about this for some time and our interest income we think will go up. But our bond portfolios will not go down. Our capital will not be reduced, because of rising interest rates and interest rates have already gone up by 50 basis points this year end.

[Unidentified Analyst:]

Okay. Thank you.

[Prem Watsa:]

Thank you very much. Tiffany , next question, please.

[Operator:]

Okay. And our next question comes from Ashwin Mudaliar from Edward Jones. Your line is now open.

[Ashwin Mudaliar:]

Thank you, and congrats, Mr. Watsa, on the wonderful year, the amazing year. My question is just…

[Prem Watsa:]

Thank you very much.

[Ashwin Mudaliar:]

No problem. My question is just about Fairfax India. We just -- is there a philosophical change in terms of willing to pay up for higher growth or low risk investments or is it just a factor of you having be able to have greater access to those companies, whereas competition in that area may not be as great for those unique assets? I was just wondering if there’s a little bit of a difference in philosophy -- investment philosophy in India. That’s my question.

[Prem Watsa:]

No. No. The -- good question. No. The investment philosophy is the same. What we are trying to buy is good companies with great management who built the company who want to continue to build it and want us as a partner. We are not looking at companies that are run by people who want to sell it in three years or four years. We are not private equity. And we want to be partners with founders and people who have owned a big share of the company and who want to build it and that’s what we have done. If you look at the investments that Chandran and our group in India have done, it’s basically linked to founders. In fact today there’s a company that their press release went out Jan X I think where we bought 70% and with the founder having the 30% and you have got a terrific track record 10 years, 15 years entrepreneur built from scratch wants to continue to build the company and where we would be a good partner for people like that.

[Ashwin Mudaliar:]

Got it. Got it. I guess the…

[Prem Watsa:]

Yes.

[Ashwin Mudaliar:]

…there was a, sorry, go ahead.

[Prem Watsa:]

Go ahead.

[Ashwin Mudaliar:]

I was just in terms of, I guess, a greater willingness to pay up for high ROIC companies over there, just in terms of the evaluation side, basically justifiably paying up for those different types of businesses that have, I guess, greater reinvestment characteristics or growth characteristics?

[Prem Watsa:]

Yeah. No. We look at all of that. We will take that into account, if we can -- in India, the reason we like India is a heavy company tends to grow at 30%, 40%, 50%. India is going to rebound significantly. Thomas Cook, which you know went through a really tough time with tourists to India and domestic pretty well down to zero, that’s going to bounce back tremendously and companies in the restaurant business like in Canada Recipe and companies like that will bounce back huge. Our Fairfax India has a book value close to, net asset value of close to $20, which we think is conservative and the stock is selling at $12 or $13. And as you have seen in the press release, we continue to buy back the stock. So Fairfax India continues to reduce the shares outstanding at these good prices we think. So we are looking at it over the long-term and we have got a very good group of companies that have performed well in the main and that -- but we expect to benefit the shareholders of Fairfax India will benefit over time. India is going to be a terrific place to put money. As we normalize, as everything becomes normal strong economy, inflation, some rising interest rates, countries like India are going to do very, very well. They are going to bounce back in spades, 9% economic growth, 8%, perhaps even 10%. And in that economic, that’s real, not including inflation and that type of economic environment individual companies do very, very well. Tiffany, next question, please.

[Operator:]

Thank you. Our next question comes from Aniket Kabari, your -- private individual. Your line is now open.

[Unidentified Analyst:]

Hello. Can you hear me?

[Prem Watsa:]

Yeah. Yeah. We can hear you. Please go ahead.

[Unidentified Analyst:]

Yeah. Yeah. Yeah. Hi, Prem. I am a new investor with the company for the last two years and not a sophisticated investor at all. So pardon me if the question might sound a little dumb, but I am trying to understand the transaction that Fairfax did with Odyssey and then used the capital to purchase the stock. So am I correct to understand that Fairfax sold 10% of Odyssey for almost $1 billion? And then…

[Prem Watsa:]

Yes.

[Unidentified Analyst:]

…you just proceed to, but does that not means Odyssey worth, say, $10 billion and the whole company Fairfax is trading at around $18 billion?

[Prem Watsa:]

Well, that’s right. FX it’s -- that’s one of the reasons we did the transaction, of course. But you can see how undervalued Fairfax was, just -- Odyssey just one company. And you are very perceptive and your reasoning is right on. That’s how we saw it too.

[Unidentified Analyst:]

So, I mean, I am just -- I am still shocked that that’s possible in today’s market. But thank you for doing that and I think that was a great move. So, yes, are you guys planning to do such transactions in the future, because I personally don’t think that you should be worried about the dividend here at all, if your stock is trading this cheap. So are you guys thinking about such transactions, like, is the management sort of focused on taking advantage of this undervalued stock?

[Prem Watsa:]

Of course that, I told you we would buy back stock, not at the expense of our financial position and not at the expense of capital to take advantage of this -- of the hot market. So really what we are -- we are a very nimble entrepreneurial company. You saw that in our decentralized insurance operations. You saw how we expanded so significantly more than pretty well any company in North America. And you will see us take advantage of opportunity, but not at the expense of our financial position and not at the expense of our ability to take advantage of a good insurance market. Next question, please, Tiffany?

[Operator:]

There are no additional questions at this time.

[Prem Watsa:]

So thank you very much, Tiffany, and thank you all for joining this call. We will look forward to further questions and thank you again for joining this call and we will -- we are having our AGM soon in April. And with a little bit of luck, it’s going to be a in-person AGM and we invite you all if you can to join us. So thank you all for joining and thank you, Tiffany.

[Operator:]

This does conclude today’s conference. All participants may disconnect at this time.