Good morning, and welcome to Fairfax's twenty twenty First Quarter Results Conference Call. 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 from Mr. Derek Bulas. Mr. Bulas, please begin.
Good morning, and welcome to our call to discuss Fairfax's twenty twenty first quarter 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-nineteen pandemic. 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 Chair and CEO, Prem Wattel.
Thank you, Derek, and good morning, ladies and gentlemen. Welcome to Fairfax's first quarter twenty twenty conference call. As always, I plan to give you some of the highlights and then pass the call to Jen Allen, our Chief Financial Officer, for additional financial and accounting details. But before I do, in these unprecedented times, I wanted to begin by thanking the people on the front lines, our doctors, nurses in our hospitals, our grocery stores, our policemen, our utilities, and many, many, many other essential services in our lives that we take for granted and who have put themselves in harm's way. I want also wanted to thank our employees all over the world who are almost 100% working from home, not missing a beat in in our business of providing outstanding service to our customers.
I am very, very grateful to all of them. Coming now to our results of the first quarter. Fairfax's net loss in the first quarter was $1,260,000,000 compared to net earnings of $769,000,000 in the 2019, primarily reflecting net unrealized losses on investments, a little better than our estimated net loss announced on April 14. This equates to a net loss of $47.38 versus net earnings per share of $26.98 in 2019. Fairfax's book value per share decreased by 11.1% adjusted for the 10 per share common dividend paid in the 2020.
It's, our book value dropped to $422 per share. Our insurance and reinsurance companies continue to have very good results with a strong combined ratio of 96.8% across the consolidated group, strong reserves, and producing an underwriting profit of 103,000,000 in the first quarter. All of our major insurance companies generated combined ratios of less than 100%. Zenith at 88%, Allied World at about 94%, Northbridge at 96.5, Brit 99.2, Odyssey 98.5, and Crum and Foster at 97.4. Our combined ratio includes about 84,000,000 or 2.6 combined ratio points of COVID nineteen losses.
The majority of our losses remain in IBNR as our companies have not seen a significant amount of reported claims to date. Each of our companies continue to monitor the situation closely. There is a lot of uncertainty around the effects of COVID nineteen and the effect that it could have on our losses driven by the fact that the lockdown continues to exist, and no one's completely sure how long this could last. Only time will tell, but we are comfortable that with $17,000,000,000 of well diversified book of business, strong reserving and a strong pricing environment, we will manage well through this unprecedented event. For the quarter, operating income was strong at $226,000,000 and we continue to grow by increasing underwriting profits and increasing our interest and dividend income.
Net losses and investments were 1,500,000,000.0 primarily resulting from the significant fall in equity markets in March 2020 due to the global economic disruption caused by the COVID nineteen pandemic, and it reverses a significant amount of the 1,700,000,000.0 net gains on investments we reported in 2019. Net losses on equities of 1,200,000,000.0 included unrealized losses on CIB, Kennedy Wilson, Atlas, and BlackBerry. Net losses on other of 262,000,000 included unrealized foreign currency losses. As we have mentioned many, many times in our annual meetings, in our annual reports, and quarterly calls with IFRS accounting where stocks and bonds are recorded at market and subject to mark to market gains or losses, quarterly and annual income will fluctuate, and investment results will only make sense over the long term. In the 2020, we had a negative 3.6% return on our investment portfolio.
Now if you take a minute to look at Page 188 of our annual report, That's page one eight eight of our annual report. Last column, it shows the annual total return on our investment portfolios for the last thirty four years. There were four years when we had a negative return. In each case, we rebounded significantly in the next year. So from that table, you can see in 1990, we had a negative 4.4% return.
1991, plus 14.6%. In 1999, negative 2.7%. In February, plus 12.2%. In 02/2013, negative 4.3%. 02/2014, 8.6%, plus 8.6%.
In 02/2016, negative 2.2%. In 02/2017, plus 6.8%. Each time, people worried about our investments. Each time, they were proven wrong. In April 2020, we have already begun to recoup the unrealized losses of the first quarter.
Our underwriting income continues to increase with a lower consolidated combined ratio and strong organic growth continuing at our companies. Insurance and reinsurance business, net written premium increased year over year by approximately 10%. 12% gross, 10% net, primarily due to growth in Northbridge, Odyssey, Current Forester, Allied World. CNET is our only company not seeing premium increases as workers' compensation rates in The United States continue to decrease. At the subsidiary level, very quickly, the change in net premiums written for the first quarter were as follows.
Odyssey v Odyssey Group, plus 8%. Common Processor, plus 21%. Northbridge, plus 20%. Zenith, down 7%. Brit, plus 3%, and Allied World, plus 10%.
We expect this trend to continue once we get past COVID nineteen and the economy opens up. Now we continue to look look to put more of our cash to work in our insurance operation portfolios without reaching for yield or taking duration risk. The significant opening up in investment grade spreads has allowed us to sell some of our treasuries and short dated bonds and buy $2,900,000,000 in high quality U. S. Corporate bonds with an average yield of 4.25% and an average term of four years.
We now have an annual run rate of approximately $900,000,000 in interest and dividend income and continue to focus on redeploying cash and increasing investment income from that base level. On 03/31/2020, we contributed our wholly owned European runoff group to Riverstone Barbados, a near a newly created entity jointly owned with Omerz. We received cash proceeds of 600,000,000 and a 60% equity interest in Riverstone Barbados with a fair value of 605,000,000. And so we recorded a pretax gain of 117,000,000 and deconsolidated the assets and liabilities of European runoff that were classified as held for sale at 12/31/2019. Now at 03/31/2020, as discussed in our AGM, we had drawn solely for safety reasons approximately 1,280,000,000.00 from our four year credit facility to protect our company to protect our company in these if if these unprecedented turbulent times continued for an extended period.
During the 2020, the company provided 420,000,000 of cash and marketable securities in capital support primarily to our insurance and reinsurance operations. Subsequent to 03/31/2020, on 04/29/2020, so about a month later, we completed a bond offering of 650,000,000, principal amounts of 4.625, 458% unsecured notes due 04/29/2030, which is, like, a 10 note. With this additional liquidity in this company, we now have repaid $500,000,000 on our credit facility. So we continue to have approximately 2 and a half billion predominantly in cash and short term securities in the holding company. This cash is invested in commercial paper, one to three months.
We are not making any long term investments with this cash. Some have mistakenly suggested we have. We have drawn on this line only for safety and expect to pay it back as the world gets back to normalcy. All our large investments like Fairfax India, Fairfax Africa, Recipe, and Thomas Cook are all well financed and do not any do not need any cash from Fairfax. They either have significant cash themselves or have large lines to comfortably take them through this period of uncertainty.
Our cash is the holding company. It's a meet any and every contingency that Fairfax might face in this an uncertain time period. You will remember we continue to hold CPR linked deflation for contracts with an notional amount of 87,000,000,000, average remaining term to maturity of two point nine years. We carry these contracts at only 55,000,000, and they do provide us with downside protection in the event of a catastrophic turn of world events. As of 03/31/2020, we have over 9,000,000,000 in subsidiary cash and short term investments in our insurance portfolio, which is about 25 of our portfolio investments to take take advantage of opportunities that come our way.
So we have not reached for yields over all these years, and so we've got significant amounts of liquidity in our, in insurance company portfolios, in our subsidiaries. With a run rate of over 17,000,000,000 in gross premium, a huge focus on underwriting discipline, a portfolio of approximately $37,000,000,000 not including the Riverstone UK portfolio, which we will continue to manage, and our investment team operating in a stock pickers market, all grounded on our fair and friendly culture that we have built over thirty four years, we expect to generate a 15% return for our shareholders over time. The best is yet to come. I will now pass this call to Jen Allen, our Chief Financial Officer. Jen?
Thank you, Prem. Before I discuss the first quarter twenty twenty results, I would like to begin by providing some context on the quarter from the perspective of the procedures performed to ensure we had addressed the global uncertainty created from the COVID-nineteen pandemic. On March 11, the World Health Organization declared COVID-nineteen a pandemic and globally, governments and businesses began to react. On March 24, the government of Ontario mandated the closure of all nonessential businesses in the province effective at midnight. Fairfax's head office team had already started to work from home, and we've been well prepared to continue to operate effectively.
But given the increase in global lockdowns, we look to supplement our quarterly processes and procedures to address the uncertainty created by the current environment. Our standard quarterly processes were expanded to ensure we had a good understanding around the known impacts, if any, on our subsidiaries operations and our investment portfolio, as well as ensuring all of our subsidiaries were able to meet the reporting timelines and deliverables to Fairfax. Through questionnaires, supplemental data submissions and various discussions with management of our operating companies, we were well prepared for the quarter. These early initiatives allowed Fairfax on April 14 to issue a press release on our preliminary unaudited financial information and address questions on the company's first quarter results at our AGM on April 16. Along with Fairfax's head office, all of our insurance and reinsurance companies and some of our non insurance operations have been able to continue to operate at a 100%.
And we have benefited from our decentralized structure during these challenging times. COVID-nineteen significantly impacted the global financial markets and these macro events can be seen in Fairfax's financial first quarter results. Now looking specifically at the first quarter results, In first quarter twenty twenty, Fairfax reported a net loss of $1,260,000,000 or a net loss of $47.38 per share on a fully diluted basis. That compared to the 2019 when we reported net earnings of $769,000,000 or 26.98 per share on a fully diluted basis, with the decrease primarily related to net unrealized losses investments resulting from a significant decline in equity markets in March 2020, reflecting the global economic disruption caused by the COVID-nineteen pandemic. Despite the decline in the global financial markets, we reported an increase of $15,000,000 in underwriting profit by our insurance and reinsurance operations to $103,000,000 or 96.8 combined ratio points from an underwriting profit of $88,000,000 or 97% combined ratio in the 2019.
The improved underwriting results reflected growth in net premiums earned of 11.5% and higher net favorable prior year reserve development, which increased to $96,000,000 or three combined ratio points in the 2020 from 50,000,000 or 1.7 combined ratio points in the 2019. The combined of $6,800,000 in the 2020 included COVID-nineteen losses of $84,000,000 or 2.6 combined ratio points and higher attritional current period catastrophe losses of $106,000,000 or 3.2 combined ratio points, which compared to $48,000,000 or 1.6 combined ratio points current period cat losses in the 2019. Looking to our operating company results and starting with Northbridge. Northbridge's underwriting profit of $12,000,000 and a combined ratio of 96.5% in the 2020 improved relative to its underwriting profit of $1,000,000 and a combined ratio of 99.8% in the same period 2019. The increase in underwriting profit principally reflected lower non catastrophe loss experience related to current accident year across most lines of business, partially offset by net adverse prior year reserve development of $3,000,000 or one combined ratio point, reflecting Northbridge's share of emergence from Canadian Automobile Insurance Industries Faculty Association in the 2020.
And that compared to net favorable prior year reserve development of $23,000,000 or 8.3 combined ratio points in the 2019. In Canadian dollar terms, net premiums written by Northbridge increased by 21% in the 2020, reflecting price increases across the group, strong retention of renewal business and growth in new business. Odyssey Group, in the 2020, Odyssey Group reported an underwriting profit of $13,000,000 and a combined ratio of 98.5%. That compared to an underwriting profit of $41,000,000 and a combined ratio of 94.3% in the same period last year. The decrease in underwriting profit principally reflected COVID-nineteen losses of $50,000,000 or 6.1 combined ratio points in the 2020 and an increase in attritional current period catastrophe losses, partially offset by decreased commission expense ratio and increased favorable prior year reserve development.
Additional current period catastrophe losses in the 2020 totaling 52,000,000 that translated into 6.4 combined ratio points or higher than attritional catastrophe losses of $36,000,000 or five combined ratio points in the 2019. Net favorable prior year reserve development of $42,000,000 or 5.2 combined ratio points in the 2020, principally related to better than expected emergence in U. S. Insurance and reinsurance property catastrophe loss reserves. That compared to net favorable prior year reserve development of $36,000,000 or five combined ratio points in the 2019, which primarily reflected better than expected emergence related to casualty and property catastrophe loss experience.
Auditory Group's net premiums written increased by 8.2% to $864,000,000 in the 2020 from $799,000,000 in the 2019, with the increase principally reflecting growth in North America, Euro Asia and the London market, partially offset by a decrease in The U. S. Reinsurance segment, primarily relating to timing of premium recognition in The U. S. Cough insurance business.
Moving on to Crum and Forester. Crum and Forster's underwriting profit increased to $16,000,000 with a combined ratio of 97,400,000.0 in the 2020 from an underwriting profit of $11,000,000 and a combined ratio of 97,800,000.0 in the 2019. The increase in underwriting profit in the 2020 principally reflected increased business volume, partially offset by increased commission expense reflecting growth in the accident and health specialty business unit student book and property catastrophe programs, which attract higher commissions. Current period catastrophe losses were marginally higher at $12,000,000 in the 2020 and added 1.9 points to Carbon Forester's combined ratio that compared to the 2019 when current period catastrophe losses were $5,000,000 and added just under one combined ratio point. Credit Forester's net premium written increased by 21% year over year, principally reflecting strong price increases across the group and growth in accident and health, surety, credit programs and surplus specialty lines of business.
Venus National reported an underwriting profit of $20,000,000 and a combined ratio of 87.9 in the 2020. That compared to an underwriting profit of $39,000,000 and a combined ratio of 78.3% in the 2019. The year over year decline in underwriting profit mainly reflected price decreases and lower net favorable prior year reserve development of $28,000,000 or 16.8 combined ratio points in the 2020 compared to $37,000,000 or 20.5 combined ratio points in the same period 2019. Net premiums written by Zenith of $254,000,000 in the 2020 decreased by 7% year over year compared to net premiums written of $273,000,000 in the 2019, principally reflecting price decreases due to continuing favorable loss trends. Brit reported an underwriting profit of $3,000,000 and a combined ratio of 99.2% in the 2020, and that compared to an underwriting profit of $12,000,000 and a combined ratio of 97% in the 2019.
A modest decrease in underwriting profit in the 2020 principally reflected COVID-nineteen losses of $25,000,000 or 6.2 combined ratio points and an increase in attritional current period catastrophe losses. That was partially offset by net favorable prior year reserve development and a decrease in attritional loss ratio. Attritional current period catastrophe losses in the 2020 totaling $12,000,000 and translating into a three combined ratio point were higher than attritional catastrophe losses of $1,000,000 that translated into 0.3 of a combined ratio point in the 2019. Net favorable prior year reserve development of $14,000,000 or 3.6 combined ratio points in the 2020 primarily reflected better than emergent claims experienced in property liability, marine liability and a number of classes written by Brits U. S.
Operations. Net premiums written of $448,000,000 in the 2020 increased by 3% year over year from $434,000,000 in the 2019, reflecting the positive impact of underwriting initiatives in prior years, growth in the existing core business, book of business and price increases. Moving on to Allied World. Allied World reported an underwriting profit of $34,000,000 and a combined ratio of 94,300,000 in the 2020. That compared to an underwriting loss of $13,000,000 and a combined ratio of 102.38% in the 2019.
The improvement in underwriting profitability in the 2020 principally reflected no net prior year reserve development that compared to net adverse prior year reserve development of $55,000,000 or 9.7 combined ratio points in the 2020, partially offset by current period catastrophe losses in the 2020. Catastrophe losses in the 2020 totaled 26,000,000 and translated into 4.4 combined ratio points, primarily related to the Nashville tornadoes and Australia wildfires. Net premiums written of $8.00 $1,000,000 in the 2020 increased by 10% year over year, reflecting the impact of improved pricing and growth across both the insurance, primarily North American global market platforms, relating to excess casualty, professional lines and general property, and the reinsurance segment, primarily related to casualty and professional liability treaty. Looking at Fairfax Asia. Fairfax Asia reported an underwriting loss of $2,000,000 and a combined ratio of 102,700,000 in the 2020.
And compare that to the 2019 underwriting profit of $1,000,000 and a combined ratio of 98.8%. Net premiums written by Fairfax Asia increased by 15% in the 2020, reflecting growth at Falcon on its 25% quarter share reinsurance participation on First Capital's net underwriting results. Insurance and Reinsurance Other segment produced an underwriting profit of $7,000,000 and a combined ratio of 97,400,000 in the 2020. That compared to an underwriting loss of $3,000,000 and a combined ratio of 101,300,000 in the same period 19. The improvement in underwriting profitability principally reflected higher net favorable prior year reserve development of 9,000,000 or 3.2 combined ratio points in the 2020 and compare that to $3,000,000 or 1.1 combined ratio points in the 2019 and a lower underwriting expense ratio.
Excluding the impact of the 2019 acquisitions of ARX Insurance and Universalna, net premiums increased by 5% year over year. And finally, looking to runoff. As Prem noted on 03/31/2020, the company contributed its wholly owned European Runoff Group to a newly created joint venture entity, Riverstone Barbados Limited, for cash proceeds of $600,000,000 and a 60% equity interest in Riverstone Barbados with a fair value of $6.00 5,000,000 OMERS jointly manages Riverstone Barbados and has contemporaneously subscribed for a 40% equity interest for cash consideration of $600,000,000 based on the fair value of European run off at December 3139. At 03/31/2020, the closing date of the transaction, Fairfax deconsolidated the assets and liabilities of European Runoff from its assets held for sale on the consolidated balance sheet and commenced deploying the equity method of accounting to its joint venture interest in Riverstone Barbados. The company recorded a pretax gain on deconsolidation of European runoff of 117,000,000 Excluding the first quarter twenty twenty Part seven transfer and a reinsurance transaction in the 2019 and a reinsurance transaction runoff reported an underwriting loss of $32,000,000 in the 2020, which was higher when compared to the operating loss of $23,000,000 in the same period 2019.
The increase in operating loss reflected decreases in net premiums earned in interest and dividend income. That was partially offset by net favorable prior year reserve development in the 2020 compared to net adverse prior year reserve development in the 2019 and lower operating expenses. And now looking at the consolidated results of Fairfax. Our consolidated interest and dividend modestly decreased from $236,000,000 in the 2019 to $218,000,000 in the 2020, reflecting lower dividend income earned on common stocks and lower interest income earned due to sales and maturities of U. S.
Treasury bonds in the 2019, partially offset by the reinvestment of the U. S. Treasury bond proceeds into higher yielding, high quality U. S. Corporate bonds and short term investments.
Consolidated share of loss of associates of $2.00 $5,000,000 in the 2020 compared to share of profit of associates of $122,000,000 in the 2019, with the 2020 reflecting a noncash impairment charges of $192,000,000 primarily on the company's investments in Quest, Resolute and Astarta, and that compared to a significant share of the company's gain on Atlas Corp, formerly known as Seaspan of $227,000,000 in the 2019. Consolidated net losses on investments of $1,500,000,000 in the 2020 principally reflected the company's net equity exposures that were negatively impacted by the decline in global financial markets caused by COVID-nineteen and produced net losses of $1,100,000,000 primarily comprised of net losses on common stock of $840,000,000 equity warrants and call options of $145,000,000 and long equity total return swaps of 72,000,000 Fairfax recorded an income tax recovery of $232,000,000 at an effective tax rate of 14.3% in the 2020 compared to an income tax provision of $183,000,000 at an effective tax rate of 18.4 in the 2019. The effective tax rate difference from the CAD 26.5 statutory rate in the 2020 primarily reflected the impact of tax rate differential and income and losses outside of Canada, the change in unrecorded tax benefit losses and temporary differences, and that was partially offset by nontaxable investment income.
Finishing off with our financial position, our total debt to total cap ratio, excluding the consolidated noninsurance companies, increased to 32.5 at March 31 from 24.5 at December 31, primarily reflecting the short term borrowings on the company's credit facility of $1,800,000,000 and decreased common shareholders' equity due to the net loss reported in the quarter. We ended the 2020 with an investment portfolio that includes holding company cash and investments of just under $40,000,000,000 which increased from the $39,000,000,000 at December 3139. We had drawn 1,800,000,000 on the company's credit facility solely as precaution to support the insurance and reinsurance companies should it be needed as a result of the effects of the COVID-nineteen pandemic and to allow them to continue to grow in the strong market. Also, non insurance companies have an increased focus on liquidity during these uncertain times and have either drawn or have access to credit facilities, which are nonrecourse to the holding company. On 04/29/2020, we completed an offering of 650,000,000 principal amount of 4.625 unsecured notes that are due on 04/29/2030 for net proceeds after commission expenses of 645,000,000.
Also on 04/29/2020, the company repaid 500,000,000 of the amount drawn on its credit facility. And that concludes my remarks. And, Prem, I'll pass it back over to you.
Thank you very much, Jen. We now look forward to answering your questions. Please give us your name, your company name, and try to limit your questions. So it'll be one so that it's fair to all in the call. Okay, Eunice.
We are ready for the questions.
Thank you. We will now begin the question and answer session. To ask a question, please press star one. Please unmute your phone and record your name clearly once prompted. Your name is needed to introduce your question.
Our first question came from the line of Jeff Fenwick of Cormark. Your line is now open.
Hi there. Good morning, Prem.
Hey, good morning, Jeff.
So my first question had to do with the balance sheet. Taking into account the debt issue that you just completed, you still have, I would guess, about $1,200,000,000 drawn on the credit facility. And I noticed in your disclosures there that on the covenant related to the maximum debt to capital, you're getting pretty close to that maximum level. Is there something there that we should be thinking about that you may need to do to another step here to shift around that liquidity? Or do you need to make some amendments to the covenants on that facility?
Yeah. So, Jeff, just the way to look at it is, we had, 2,500,000,000.0 at the March. We do 1,800,000,000.0. So there was 700,000,000. If we paid the if we paid all of that line back, we'd have had 700,000,000.
Since that time, we've issued $650,000,000 of debt. So we've gone over a billion dollars that we like to keep in our holding company in cash. And so if we take that line to zero after the debt issue, we'd be through, you know, 1,300,000,000.0, something like that. And so the credit line, when we drew it, of course, the bond markets were all closed. And and as as I said, for safety, we wanted to draw that.
We paid 36 basis points, as I said, at the AGM, and it's for unexpected events like what we went through in March. And, as I said in our prepared remarks, over time, we want to as as the economies of the world, that being so, you know, The United States is restarting up. We'll restart in a few weeks perhaps. I think next week, India restarts. And so as the economies of the world restart and we get back to normal, we would expect to pay our our lines down significantly.
So as you said, it's $1.21300000000.0 dollars right now. But over time, they'll take it down to stable as it was prior to COVID-nineteen.
And your lenders are comfortable with your position having drawn that and versus where your balance sheet is today?
Yeah. Very much. Because all we have to do is just pay off a little bit off the line. Mean, we don't need $2,500,000,000 in cash in the holding company. So so all we have to do is take the cash and pay off the it's really net cash, right, Jeff?
Because we've borrowed the money and we've got it in cash. And when I say cash, it's a commercial paper, like one month, two months, three months. So it's very short. Our liability is short. The lines are, like, LiPo plus, and the and the investments is LiPo plus.
And so we could turn around and pay off those lines anytime we want. But we keep 2 and a half billion because as as we get to normalcy and, as I said, already in process of doing that, our lines will come down. If you look at it on a net basis, meaning net debt to Total Capital on our insurance businesses, you know, we're running at 23, 24%, which is perhaps the way to look at it because this cash is not gonna be used for anything other than safety. Sitting in our holding company, and we're not gonna make acquisitions. We're not, you know, we're not gonna buy back any significant amounts of shares or do anything that's out of the ordinary.
It's for safety. We're in a storm, going through the storm, and we wanna have a lot of cash in the holding company. That's really all it is.
Okay. And then one question here on the COVID nineteen exposures. I'm just wondering if you should be thinking about or how we should be thinking about regulatory risk here. And in your disclosures, you do say that some U. S.
State insurance commissioners are taking some action to protect consumers. So are there changes here that could, in the near term, make the exposure maybe bigger than you might expect, because of the regulatory change?
Yeah. So so there's a the COVID nineteen is still there, right, because the economy hasn't totally opened up. Small business hasn't opened up. But it's very, you know, it's very clear. Our in The United States, they're very clear that you have to have a property loss before you have business interruption.
Now in The US, there's some governors who want to, you know, retroactively make a coverage for the COVID nineteen. There'll be a lot of lawsuits based on legal expenses for our companies, but but the whole US industry will defend that right to the supreme court. And contracts sacred in The United States, as I said, at our AGM. So we look at our exposures in our company, and we have not much. We have only Britain in London and Asia and all of these other places where we have insurance operations, we think our exposure is very limited.
And, Brett, we have some cancellation insurance, and we have some exposure there. But when you look at our company, Jeff, 17,000,000,000 in gross premium, $13.14 in net premium, you know, operating at 96, 97% combined, our underwriting profit itself is so significant that we think not only will we come through this, handling our COVID nineteen claims, well, but we'll, we'll be one of the strong companies on the other side of it. Okay. Thanks for
that color. I'll wait to you.
Thank you. Thank you, Jeff. Next question, Eunice.
Next question is from the line of Junior Ra, private investor. Your line is now open.
Good morning, Graham. How's going? Hey. Very good, Junior. How are you doing?
Pretty good. Thanks. So I have two two questions. One question is about the short exposure on the balance sheet. What is that composed of?
And then the second question would be the stock price right now is under book value. What what do you guys plan on doing to bring that back up? It seems like there's an in in investor confluence issue. So, yeah, so, you know, we've gone through periods in the past, Junior, where we've sold below book value. I know that said that, you know, our stock prices are very, very cheap.
And so, you know, it it won't be that long. How do you your answer to your second question is this performance. They're gonna perform. We had a fluctuation in the first quarter. We had coronavirus.
You had the price of oil come down. You had a shutdown, unexpected shutdown in the world's economy. So you had great uncertainty, and extreme uncertainty creates panic. And stock prices have come down dramatically, not only of Fairfax, but stock prices in The Canada, stock prices in The United States. I've gone through individual stock prices, and I'm really surprised.
We're taking advantage of some of that. All over the world, by the way, the stock prices have gone down. And because the economies have shut down. And so, you know, we've we've been increasing our interest and dividend income. It's running at 900,000,000, I told you.
We're taking it higher than that as time goes by. Got lots of cash and marketable securities on our on our insurance company portfolios. And and as I mentioned, if history is any guide, whenever we've had a decline in our investment portfolios, and in the first quarter, it's 3.6%, the next year, we've been, you know, significantly above. And so so these are fluctuations we face over thirty five years, and we expect to do well over time. In terms of the try the short division of this, you know, small remnants that we've decided not to short, and this is the last remnant that'll be gone soon.
Okay. Thanks. Thank you. Thank you, Julian. Next question, Eunice.
Next question is from the line of Tom MacKinnon of BMO Capital. Your line is now open.
Yeah. Thanks. Good morning, Prem.
Hey. Good morning, Tom. Yeah. A question with respect to the 84,000,000 in COVID losses in the quarter. I was wondering if you might be able to give us a little bit more color as to what they were.
Were they actually paid claims? Was it IBNR Is it related to you know, you said mentioned some cancellation stuff, I think, at Brit, but were there it was in some of the other divisions as well, and what was that related to and maybe the jurisdiction that was related to. And then what
So so, Tom, good question. It's it's basically IBNR, Tom, and it's too early to get the claims. But IBNR, we look through our book. All our companies go through the book of insurance, reinsurance. And and, you know, we put some in.
Brett put decided to put some, and Odyssey decided to put some, and and, basically, IBNR. But we when we look at cancellation insurance is one. You know, where where does COVID nineteen hit you? Cancellate cancellation insurance, credit insurance, travel insurance. We look through our exposures.
We we do have some cancellation insurance mainly through Brett. But at the total perspective of our business, it's it's small. And and when you look at, you know, Europe where they don't have these they have don't have specific language against virus and pandemics, there's more exposure there. We're we'd be very small on that. And and you you you know, you're you're gonna get some claims through because of the market volatility for d and o.
You'll get some directors and officers losses, and it'll depend on how long these these markets stay down and how they rebound and and what the effects are. So there'll be some there'll be some losses on that. There'll be some litigation expenses. But in the main, I mean, we've had a quarter the first quarter, we've done up 12%. In the AGM, I said, you know, well, as we look no crystal ball.
We're just looking at what the possibilities are. Second and third quarter will likely be down, and the fourth quarter will likely be up. But we look at it, and and it's different for each of our companies. But over over the year, we think, you know, we have our best guess right now is flat even though we're up 12%. And in the end, likely, we'd be up 10% perhaps.
And because rates are still strong, and after this COVID nineteen, on the other side of it, rates will go up again because lots of companies have losses. And, you know, we we had a 11% drop in book value. You look at any company in The United States that has equity exposures, and you'll see decreases of 16% because we did. We went and looked. 16% down to seven and a half, 8%.
So we're in the range in terms of our drop in upper value per share. And as I said, Tom, in the past and the past is no guarantee, of course, as you know. But in the past, our stock positions have all come back pretty handsomely in in in the in the year to follow. So so we think these COVID nineteen losses for us will be quite limited. The risk on the on the property side in The United States, business interruption, you know, through the governors that I talked about earlier, there is that risk.
We think it's minimal, but there is that risk that the governors will take it and try to change it. It's it's minimized by the fact that the US government, CARES Act, the Federal Reserve have come and put so much of money into The US economy, you know, more than 30% of GDP. And then more recently, the Fed came and said they were going to back $2,000,000,000,000 in terms of all sorts of bonds they they were gonna buy, including some temp funds. That the and the small business is getting money, and so it's not like they need the money from business interruption. They've got other sources.
And so so we'll we just have to wait and see. If if the US government did not respond, then perhaps it would be a little more serious. But but we feel comfortable at the moment, Tom, watching it very carefully. And the industry feels very comfortable. They're part of The US industry, of course.
The industry association feels very comfortable.
And just as a follow-up, COVID-nineteen had some impact on insurance, but when you look at some of your noninsurance holdings, like the restaurants and retail, I'm thinking like Recipe or Thomas Cook, You may have felt a little bit of that in the first quarter, but you're certainly feeling the pain of COVID-nineteen in those investments in the second quarter and likely in the third as well. Do you have any comments with respect to what you're seeing there?
Yeah. They we've done that's very good question. So that's why I addressed it because some of you are concerned that we'll need monies for, you know, Thomas Cook or Fairfax India or Africa, you know, or Recipe or any other all of them, at the moment, all of them you know, Fairfax India has got, like, couple of $100,000,000 of cash and marketable securities. Fairfax Africa has got, you know, 130,000,000 and lines on to draw on. And and and on and on and on.
Thomas Cook is basically net cash. So they they are, of course, very much impacted or perhaps impacted for the rest of the year. But the fellow who runs it, Madhavan, is, you know, prepared for it and reacted very significantly. And so he if the book pressure me, you know, he'll come he'll be there on the other side. And and our recipe as all of the restaurants are closed, And very soon, in the next few weeks, they should start opening up.
And and then the question is, will customers come back? And so you have to remember, people said the same thing in February, you know, September 11. After that, airlines were empty for some time, and and we were all worried about security, and stadiums got securities, and convention halls got security, and and buildings in New York and Toronto ultimately got tons of security. And so here, we think it's testing. And the the the big amount of testing will be which everyone's working on is, you know, like a pregnancy test.
Get a test that's, immediate, that you and I can take and know if you've got it or not. And, and remember, for more in Canada, the number just came out. Seventy nine percent of the deaths in Canada from COVID nineteen, seventy nine percent Canada, all of Canada, these are Health Canada statistics, were from long term nursing homes. So, you know, most of us are, you know, not only gonna survive, but, you know, we'll be able to handle this. So so you've got testing that's improving.
You're seeing it all over the place. You've you've you've seen Gilead. The treatment of this disease is improving. You know? So they've got all these medicines that are coming through.
And and remember, this is only a month now, month and a half. And and and we've got vaccines. So most people take vaccines a year, eighteen months out. Well, Oxford University and AstraZeneca have said they're coming out in September to work on monkeys. Their human trials will be all over in June, July, and that, you know, they're ramping production up immediately.
There's another, I think, advisor that came out and said that their human trials will be done in June. And so the vaccines are coming in. If you had a vaccine tomorrow, you'd feel very comfortable. Right, Tom? And and the same thing with the test.
If you had a pregnancy type test that we could all use, you'd feel very comfortable. Well, the whole world is working on that. I know Abbott's working on it. Johnson Johnson's working on it. All of the companies are working on it, and some of the brightest minds in the world.
And with the incentives, particularly in The United States. So so the the this will change, and it will change significantly when it happens. The only problem is you can't say when it'll happen, and that's just something we have to live with.
Okay. Thanks for that, friend.
Thank you. Thank you, Tom. Next question, Eunice.
Thank you. The next question is from the line of Paul Holden of CIBC. Your line is now open, Paul.
Hi. Thank you. Good morning.
Good morning, morning,
questions, both sort of related to balance sheetregulatory capital. So the first one would be around your target. Maybe you can remind us what your long term target is for financial leverage. And given that you just recently raised $650,000,000,000 of bonds, sort of what's the plan to get back to that target leverage ratio?
So yes, so the way we look at it is, you know, net cash. I told you if it's a net debt to total capital, and that's about we've always maintained cash in the holding company. We've had a billion dollars for the past ten years. Most rating agencies don't give us credit for that, but that's how we look at it. People look at it on a gross basis.
A gross basis is about 34%, and we expect that to come down and significantly. And on a net basis, as I said, it's more like 24%. And and so so, you know, debt equity ratio, debt to total capital will come down significantly as we pay that as we pay that line down. And so that's that's what we plan to do over time. Once normalcy retire we we don't need 2 and a million half dollars in our holding company.
We just have it because it's for safety, for the uncertainty. We can we can take it down significantly. We've already paid 500,000,000 as you know.
Understand. So what you're saying is that you get it back to that, say, in the tight net basis, but on a gross basis of 24,000,000 you're comfortable operating at that level?
Yes, very much. And we expect it to come down over time.
Got it. Okay. Second question. You provided some capital to your insurance subs in Q1, as you've already highlighted. A question I frequently get is around the regulatory statutory ratios for those subs and capital adequacy there?
Are there any sort of quantifiable measures you can provide us to give investors comfort that your insurance subs are indeed well capitalized?
Yeah. So we monitor each of them at different you know, if you're in if you're in Brit, it's different from The United States and Canada. We have we always wanna keep extra capital in each of our companies. And so when we needed to put some money as we as you mentioned, 400,000,000. I talked about that in the AGM.
We put that money in. And and if any money is needed over the next year or so, we put some money in to make sure they have that excess capital in in relationship to the insurance companies. And so, you know, statutory, I think they will report at the May, so you'll you'll be able to look at those statutory reports when they come out. But so our insurance companies, we always want them to be well capitalized, particularly in this time period when rates are increasing and the environment's good for our insurance business. And we have, probably fair to say, and I'm biased, so take this with a tell us all.
But, probably fair to say that we have the best group of insurance companies ever in thirty five years and and a really, really good group of residents running it who've been with our company for the longest time. I mentioned that at the AGM. We've got, you know, 17,000,000,000 with the equity accounted interest in our Middle Eastern operations called GIC, our Greek operation, which is called Eurolife, our Indian operation called Digit. They're pretty close to $20,000,000,000. And 20 u 20,000,000,000 US all over the world, diversified, run by terrific management presidents, a very decentralized structure that we have.
And, you know, you know, great reserving. We're reserved well. And so we expect to come out on the other side very strong. And like we have in the past, take advantage of the high rates and, like, find our business.
Great. Thank you.
Thank you very much. Eunice, next question.
Next question is from the line of Mark Dwelley of RBC Capital Markets. Your line is now open.
Yes. Good morning. Got a couple of questions. The first question maybe for Jennifer, I suppose. There were impairments in the quarter related to investments in associates.
Can you talk through the process of how those were calculated and derived? When I look at the exhibit and think it's Note six in financials, I mean, I see quite a number of companies that are trading that are have a fair value below carrying value, but you only seem to have taken an impairment related to two or three of these. So could you talk through that process a little bit?
Yes. So Jen, I'll take a quick collect and then pass it on to you. But, you know, what I mentioned first of all, Mark, when you have a 35% drop in the stock market in in March, twenty one days, Biggest drop in, you know, since 1929, I think it was. A huge drop. And and it doesn't actually you have to go through individual stock prices to see how significantly the drop was.
And, you know, sort of scattered, like, it didn't make a difference what stock it was, what company it was. The stock prices were came down in a panic because of that extreme uncertainty. So we expect a lot of that to come back. And I look at these situations myself where we have a big difference between where what we carry it at and if it's an associate, what we carry to and what the stock price is. You know, for example, right now, you know, just to use one example, Seaspan.
Stock prices come down about 50% from the end of the year, which if you look at the company and examine it, other than the COVID nineteen pandemic worry and the effect on the economy and all of that, that's very, very stable, run by terrific management. And as much as we're talking here in this call, within a year, perhaps a little longer, it'll be back at that price and and higher than that because you've got some terrific management team running it. But some of those impairments that we took, we look at each one of them separately, and and I'm involved in looking at it. Feel very comfortable. But let me pass it on to Jen to give you the process as to how we went through it.
Jen?
Sure. Thanks, Prem. So, Mark, as you indicated on note six, we do give quite extensive disclosure around our investments in the associates. And, particularly, if we if we look at the chart on table six, you can see that most of the drivers on that impairment really did relate to the discount rates that we had to change based off of current environment. So I'm looking at the underlying cash flows.
Our process for COVID nineteen was probably more robust than we would normally do on any given quarter. From the ones that Prem indicated that had just gone underwater, I would say mid March, they were very strong performers up until the last couple of weeks. It didn't indicate that there was any long term impairment on those investments. You know, as you take Seaspan, for example, very strong company with well above our carrying value at year end. So we go through a very robust process on a quarter to look at, those underlying.
It's not a fair value concept. We do disclose fair value, but it's a value in use, which is a longer term view and looking at cash flow, speaking with management, understanding the operations and implications. And at that time, we knew there was no underlying impairments that we needed to recognize in the quarter on some of those other positions. We did focus on the ones that we have disclosed in the past, being the chart on in note six. And as we indicated, we did take an impairment of $192,000,000 in the quarter.
Thank you for that. I appreciate the
Thank you. Extra Thank you, Mark. Any other question, Mark?
One other question. Just you already covered a number of topics related to the COVID-nineteen provision. But I wanted to ask additionally, with respect to workers' compensation exposures, I guess I noticed that none of the neither Crum or Zenith set up any type of reserves at this point. Is there any color that you can give in terms of any exposure that those businesses might have to frontline workers or people involved in healthcare or things of that nature to give a sense of of perhaps what, you know, what might be in the pipeline eventually, you know, the as the virus progresses?
So we have a very limited exposure to employees providing direct patient care and really no exposure for first to first responders, workers' compensation. This is at Zenith. And Zenith, Mark, as you know, is really well deserved and very, conservative. So prices are going down. Rates are going down.
So that's why the business is going down. But the combined ratio, as you saw in the first quarter, was very good. They won't be responsive to their customers in terms of deferring payments or some requirements by California from the California government. But I must say, we have a a really good management team there that will manage through this as as we go through it. But we have limited exposure at the moment, but we can we monitor it all the time, though.
Okay. Thank you. Thank you
for the answers, and good luck in the upcoming quarter.
Thank you very much. Eunice, next question.
Next question is from the line of Jamie Gloyn of National Bank Financial. Your line is now open.
Good morning, Jamie. Thank you.
Good morning. First
question, I just
want to get a maybe quantify some of the commentary that you provided around the exposure outside of The U. S. To business interruption and then against the workers' compensation, where you're saying it's limited or minimal. Should I should I interpret that as being, less than 5% of the individual company's exposure or, the consolidate exposure? How should I think about that in terms of quantifying the commentary?
It's tough to tough to quantify, but the way we look at it is individually, you know, if you look at workers' compensation and seeing it, We we really do think it'll be manageable in the at their level. Then we put it at Fairfax and, you know, it you know, if I can use the word, gets lost in the rounding. Right? Because it's, you know, it's still right about 700,000,000,000 in premium. We write 17,000,000,000 in premium in total gross premium.
So so that's that's what I meant, Jamie. Yeah. So maybe if I ask it a little bit differently.
When we think about catastrophes, generally speaking, the rule of thumb is around 1.5% of the global catastrophe is going to be Fairfax's share. You can look at COVID as being a global catastrophe. Would Fairfax's share of those estimates land at that one and a half percent, or would it be something significantly below that based on some of the commentary?
Yes. Yeah. From all that we know, Jimmy, right now, significantly below. Yeah. First of all, people have all sorts of numbers.
You know? It's always because it's it's ongoing. The economy is still not totally opened up. So, yeah, I've been just looking at Marshmack, I think, came out with, you know, 10,000,000,000 on the low side, a 140,000,000,000 on the high side. That's all guesstimates.
And, well, catastrophe so, you know, when you get a hurricane, you can really put some models on, and and you can figure out the the way it's gone, and you can get a pretty good sense for what the insured values are. But here, it's you know, you're stabbing in the in the dark. But but our thinking is from all the work we've done, we'll have some losses. Don't get me wrong. We'll get we'll have some losses, but we don't think it'll affect our underwriting profit.
Let's put it that way. We expect to make an underwriting profit in 02/2020.
Okay. Great. And the and the losses taken to date and your estimates to date, how far out did you look in terms of assessing event cancellation and travel cancellation? Is a three month, six month, twelve month outlook that you took to arrive at those estimates?
For the for the rest of the year, I think, is the way to look at it. 2020. And we'll have some cancellation losses, particularly at Brett. No question. We'll have some losses there because it's a Lloyd's business.
Right? It's a a lot of it is done. Lloyd's will they might get a little from Allied and a little from a little from Odyssey, but but small. The one that we'd we'll get some more is in in Brit. But, again, as I said, you know, well within our ability to handle it as a company as at Fairfax.
Yeah. Thanks. And one one more just around the investment portfolio. You talked about this at the AGM investing in some higher yielding bonds. I'm seeing some increases in BB in particular, small on the grand scheme, but still an increase in BB and then also in the BBB space.
Can you talk about some of the industries that you were investing in on the fixed income side? And then also given your commentary around what seems to be a bullish outlook for the markets in general, why not be more aggressive in terms of utilizing some of that credit line and holding company cash to pick up some assets here maybe at distressed levels?
Yeah. So the whole first of the holding company cash that we'll never use. We are we you know, that's just for safety. It's very, very inexpensive. I said the last time I said, I think we paid, like, two and a half percent, and we put in commercial paper, and we get, you know, a little more than that, maybe a 100 basis points.
But it's you know, some people, when we did the bond issue, they thought we were using that money to buy bonds. They're not buying bonds. They're buying commercial papers. So there's no it's literally cash. The way to look at it is we can take that money and pay it off tomorrow.
So there's no risk on that at all. In our in our insurance company portfolio, Jamie, the spreads widened significantly in March. They've all come down now, as you know. But when they widened, we bought we didn't go down in quality. We were buying, like, minimum would be, like, triple b plus and but lots of a's and where the spreads were so you know, Disney was borrowing money at 50 basis points about five year treasuries.
They had to pay 250 basis points when they came in. And, you know, Berkshire Hathaway, the the energy company came out, and they paid 350 basis points, I think, above for five year bonds. 350 basis points above five year treasuries. So we got four and a quarter percent, but they were all very high quality in our minds, and we don't take rating agencies. We would do a risk analysis ourselves.
And very high quality, good good because we we we didn't reach for yield. And so now we are seeing good opportunity. There's some secondary stuff here. If you ask Brian Brassi to lease the charge, he said half of that $2,930,000,000 in bond purchases in the insurance company insurance company portfolios, half of it was secondary and half of it was brand new new issues. And we still have a lot of cash and trucked up loans, as I mentioned, and we're gonna be looking at opportunity.
There's lots of opportunity, and we bought, you know, debt plus warrants. And companies are comfortable giving us 25, 30%, 40% of the company because they know we are not hostile. They're friendly, and we have a long term view. So this is a good time for us. We're selective, of course.
And but but our investment team led by Wade Burton is looking at opportunities. And if you have any, anyone on the call, if you think we could be helpful, please let us know. But, Jamie, thank you for that question, Eunice. Next one.
Next question is from the line of Mikhail Abasolo of Solo Capital Management. Your line is now open.
Yes. Thank you. Thank you for taking my call. Mr. Watsang, good morning.
Good morning, Mikhail. You're welcome. Yes. Thank you. Now I I just wanted to ask you two quick ones.
One is looking at your airport in India, you marked up the you're holding in there last year with the with the incorrect transaction. But this year, you you have not marked down tomorrow other than for the for the foreign exchange exposure, and I wanted to ask you about that. And my second question, if I may, is that I was wondering and taking a bit of a higher view and see how well it has worked for Fairfax, your position in bonds where you haven't reached for yield. I was wondering if your stated goal of 15% annual rate of return isn't being counterproductive on the equity exposure of Fairfax where perhaps you have been, I would say, perhaps guilty of what Ben Graham described at fair weather investing where you have purchased perhaps low quality securities at times of favorable business conditions because because of that urge to to reach that 15% per year. Is that a correct assessment?
Or So
so, Mikhail, they're they're both very good questions. On Bangalore International Airport, you know, you've an airport that has going from 30,000,000, 60,000,000 in a few years, and then ultimately to 90,000,000. And you have a a purchaser buying 10% from us of our holding company for $2,700,000,000. You know, to to when you look and have an asset like that to worry about COVID nineteen or the fact that the Indian economy shut down, does it do you think that affects the long term value of Bangalore International Airport, the third third largest airport in The India with that type of growth when Shanghai Airport might be at 20,000,000,000 and other airports would be, like, multiples of $3,000,000,000. So so we don't think it has any impact at all, Mikhail.
And the second point you make is a good point. It's, you know, we're very careful. We're not that's why we are quite optimistic because stock prices are dirty. The markets might be high because of Microsoft and Amazon and all of these, but I'm looking at stock prices, actual stock prices of companies that I know. And there's a ton of them that are that are very cheap.
That doesn't mean it won't go lower. It might go lower. Who knows? But but we think there's enough there that meets our Ben Graham, as you said, the near buying below intrinsic value and taking a long term approach. And as I began our prepared remarks, every year we've gone down, Mikhail.
We've the next year, we've gone up. And there's no guarantee that will happen, but we're hoping that'll be the case. So, Mikhail, thank you for the question. Eunice, yeah, Eunice, next question. Thank you.
Thank you. The next question is from the line of Mooji Kuya of Talis. Your line is now open.
Good morning. I have two questions. I just want to know, given the cash that you took for the from the credit line, what kind of doomsday scenario are you can we can we assume you're forecasting that you think you might need that cash?
So, yeah, very simply, when we took that cash, the bond markets weren't open. Nobody could do a bond issue. Well, by the end of the April, we did a bond issue, 650,000,000. Right? But in March, if you were trying to do a there was, like, ten or fifteen days.
There was no bond issue. No one could do a bond issue. The AAA company couldn't do a bond issue. Well, the bond market opened up. It's opened up.
Federal Reserve has been fantastic. You know, the CARES Act has been huge. All of these things have the unprecedented COVID nineteen that took place and an unprecedented shutting down, lockdown of the world's economy changed when there was unprecedented activity by the US government, the Federal Reserve. Never before have they done this. So so we were able to the bond issue, 650,000,000, and and, of course, the conditions now are much, much better.
But we just wanted to look and see how everything worked out, Moojit. And and we think over time, we'll, you know, we'll pay the line out down significantly. But at that time, there was a a major amount of uncertainty as I'm sure you you you noticed. Noticed. You.
Any other question? Yeah. Thank you, Yuris.
And our fine our final question is from the line of Iniyah Shinde, individual investor. Your line is now open.
Thank you. Good morning, Pareem. I was just wondering with the stock price being at, know, know, if you call it 65¢ on a dollar on a P2B and, you know, if you're if you're expecting the dollar to grow at 15% in the long run rate, are you looking at churning some of your investment portfolio cash into this opportunity, which obviously sounds like a very good opportunity to kind of go into? So I'm just trying to get your views on that. Thank you.
Yeah. No. Thank you. That's a very good question. And I've said publicly at the AGM and elsewhere that first order of priority, a company that's being built over the long term, long after I've gone.
So number one is financial soundness. Number two is to make sure that because our insurance companies are in that growth mode right now to make sure we have enough resources to support them. And then finally, we always look at our stock price. We bought over, you know, thirty five years that we there was a time in the past where we bought 25% of our shares outstanding. So we look at all of that, but not at the expense of the first two items, financial soundness and the ability of our insurance reinsurance companies to take advantage of the opportunity.
So thank you again for your questions. And, Eunice, if there are no further questions, thank you all for joining us on this call. We look forward to the next one, And thank you, Eunice, for your work. Thank you very much.
You're welcome. Thank you, speakers. And this does conclude today's conference call. Thank you all for participating. You may disconnect now.