PG - Fairfax Financial (Prem Watsa) 2023 Letter To Shareholders

2024-03-13 13:15:00 ET

Summary

• Fairfax posted a record underwriting profit of $1.5B and record net earnings of $4.4B, or $173 per share.
• Book value per share increased 25% to $940 a share.
• The Magnificent Seven have outstanding track records as I said in our 2019 annual report, but for them to grow at 10% – 20% in the future on revenue bases of $200 billion to $500 billion – means $20 to $100 billion additional revenue each year – only 170 companies in the S&P 500 had revenues of more than $20 billion in 2023.
• In 2022/2023, credit has tightened significantly but we have yet to experience the after effects – particularly incommercial real estate and private credit – i.e. non-bank credit.
• After not increasing our dividend of $10 per share for 14 years, we increased it by 50% to $15 per share.

To Our Shareholders:

We had, by far, the best year in our history. Fairfax ( FRFHF ) has transformed itself to become one of the largest property and casualty companies in the world with $32 billion ¹ in gross written premium, including the acquisition of Gulf Insurance. We posted a record underwriting profit of $1.5 billion and record net earnings of $4.4 billion, or $173 per share. Book value per share increased 25% to $940 a share. In the last three years, our book value per share has doubled and our stock price has almost tripled. More importantly, our adjusted operating income (undiscounted underwriting profit, interest and dividends plus income from associates) of $3.9 billion may continue at these levels for the next four years (more on this later).

Since we began in 1985, 38 years ago, our book value per share has compounded by 18.9% per year (including dividends) while our common stock price has compounded at 18.2% (including dividends) annually. Our success throughout our history, and again in 2023, has come under a decentralized structure with outstanding management executing a disciplined approach to underwriting.

The table below shows our growth since 2017, after we purchased Allied World. We have benefited greatly from a hard market in insurance that began in 2019.

We have more than doubled our premium since 2017 - and almost all the growth has been organic! We paid $4.2 billion for Allied World in 2017 (which had $3.1 billion in gross premiums at the time) and $1.6 billion for Brit in 2015 (with $2.0 billion in gross premiums at the time). That's $5.8 billion spent for $5.1 billion in gross premiums. But those assets have been instrumental in helping to drive $15.1 billion in added gross premiums in the last six years - at no cost. The build-up of intrinsic value, or the ability of our assets to drive future top-line and bottom-line growth is very significant, as shown in the table below:

As you can see, as a result of a more than doubling of gross premiums since 2017, our float has increased 53% and the investment portfolio is up 65%. Underwriting profit improved from a loss to $1.5 billion in profit, interest and dividend income has seen a threefold increase, profit from associates is up fivefold and adjusted operating income managed to swing from a loss to $3.9 billion profit. This is what I mean by the very significant increase in intrinsic value!

Of course, this has been magnified on a per-share basis as shares outstanding have decreased by 17% since 2017....

For further details see: