FFH | Gauging Sensitivity Of ROE To Underwriting Margins And Portfolio Yield Event: In light of volatile fixed income markets, we are presenting a very crude illustrative form of analysis to gauge the sensitivity of Fairfax’s ROE to portfolio
yield and underwriting margins. It is important to stress that this analysis is meant to be interpreted as an illustration, not as a projection. These assumptions are
oversimplified and arguably too conservative as they imply: 1) zero growth in written premiums versus LTM levels; 2) zero growth in the size of the investment
portfolio; and 3) zero expansion of portfolio yield from Q3/23 levels. The purpose here is to gauge the sensitivity of ROE rather than identify a specific point
estimate for earnings and ROE.
Our Take: There are four takeaways we would highlight from this analysis: 1) every ~50 bps change in portfolio yield translates to a ~100 bps impact on ROE;
2) every ~100 bps change in the combined ratio translates to an ~80 bps impact on ROE; 3) the current portfolio yield of 3.5% (i.e., interest and dividend income in
Q3/23 as a percentage of the investment portfolio) remains below risk-free market yields, which implies potential for further expansion of portfolio yield despite the
recent repricing of fixed income markets; and 4) Fairfax should be capable of delivering a mid-teens ROE, which is comparable to the broader peer group, despite trading at the low end of the peer group range on a P/B basis