CIBCHave a $2000.00 target. GLTA
EQUITY RESEARCH
October 11, 2024 Flash Research
FAIRFAX FINANCIAL HOLDINGS LIMITED
Worst-case Loss Scenario Avoided
Our Conclusion
As Fairfax’s share price performance implied yesterday (+4%), the landfall
location of Hurricane Milton (i.e., just south of Tampa Bay near Sarasota)
meant that the prospect of a worst-case loss scenario was narrowly avoided.
Early estimates for insured losses seem to be circling $30 billion to $50
billion, which – if accurate – would make Milton less destructive than
Hurricane Ian, which was a ~$55 billion loss event for the industry. We
crudely estimate that this range of insured industry losses could translate to a ~4.5% to ~8.0% combined ratio impact for Fairfax in the fourth quarter. This represents a much larger impact than Hurricane Helene, but a much less severe loss scenario than it otherwise could have been.
Key Takeaways
Milton made landfall on Florida’s west coast late Wednesday evening.
Milton made landfall near Sarasota as a Category 3 hurricane on the evening
of October 9. The hurricane subsequently crossed the Florida peninsula and
is currently tracking away from Florida in the Atlantic Ocean.
Certain pre-landfall loss estimates were particularly severe. The
prospect of a direct hit on Tampa Bay with Category 5 winds was considered
a potentially significant left-tail event for the P&C insurance industry. The
higher end of the range of loss estimates meant that Milton theoretically had
potential to be the costliest catastrophe loss event ever. However, a
subsequent southern shift in the track of the storm meant that this worst-case
scenario was avoided.
Worst-case loss scenario has been avoided. The landfall location, just
south of Tampa Bay, greatly mitigated the severity of this CAT event. If we
crudely assume that Fairfax incurs ~1.0% of insured industry losses
(consistent with the experience of Hurricane Ian), this implies losses to
Fairfax of $300 million to $500 million or a combined ratio impact of roughly
4.5% to 8.0% in Q4/24 (and approximately one-quarter of that for the full-
year impact). Considering that Fairfax’s combined ratio in the previous
quarter excluding catastrophe losses was 91%, it is conceivable that Fairfax
absorbs these losses in Q4 while maintaining slightly positive underwriting
margins in the quarter (absent any further CATs, of course)