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Press release from Marketwire

Fairfax Financial Holdings Limited: Second Quarter Financial Results

Thursday, July 28, 2011

Fairfax Financial Holdings Limited: Second Quarter Financial Results17:02 EDT Thursday, July 28, 2011TORONTO, ONTARIO--(Marketwire - July 28, 2011) -(Note: All dollar amounts in this news release are expressed in U.S. dollars, except as otherwise noted. The financial results are reported under International Financial Reporting Standards, except as otherwise noted.)Fairfax Financial Holdings Limited (TSX:FFH)(TSX:FFH.U) announces net earnings of $83.3 million in the second quarter of 2011 ($3.40 per diluted share) compared to net earnings of $23.7 million in the second quarter of 2010 ($0.87 per diluted share). The increase in earnings arose primarily from net gains on investments of $119.6 million compared to net losses on investments of $29.3 million last year. Book value per share decreased to $358.60 at June 30, 2011 from $376.33 at December 31, 2010, a decrease of 2.0% (adjusted for the $10.00 per share common dividend paid in the first quarter of 2011)."Despite the challenging insurance industry and investment environment, during the second quarter we recorded good operating results and essentially maintained our common shareholders' equity and book value per share," said Prem Watsa, Chairman and Chief Executive Officer of Fairfax. "Excluding acquisitions, our consolidated premiums grew by 10% during the second quarter. Also, during the quarter, we retired $694 million U.S. of outstanding Fairfax, Crum & Forster and OdysseyRe notes and financed this by issuing ten year Fairfax bonds in the U.S. and Canada at record low interest rates. The company continues to be soundly financed with cash and marketable securities at the holding company level in excess of $1 billion."Highlights in the second quarter included the following:The combined ratio of the company's insurance and reinsurance operations was 100.5% on a consolidated basis, producing an underwriting loss of $6.1 million, in the second quarter of 2011 compared to a combined ratio and underwriting profit of 99.2% and $8.7 million, respectively, in the second quarter of 2010. Underwriting results in the second quarter of 2011 were negatively affected by $88.1 million of pre-tax catastrophe losses (net of reinsurance and reinstatement premiums) primarily related to U.S. tornado losses which increased the combined ratio by 6.9 points. Net premiums written by the company in the second quarter of 2011 increased 24.3% (10% excluding acquisitions) to $1,370.1 million from $1,102.4 million in the second quarter of 2010 due primarily to the acquisitions of Zenith National and First Mercury. Operating income of the company's insurance and reinsurance operations in the second quarter of 2011 decreased to $146.2 million compared to $152.9 million in the second quarter of 2010, primarily as a result of the slightly higher combined ratio. Interest and dividend income of $195.1 million in the second quarter of 2011 increased 4.6% from $186.6 million in the second quarter of 2010. The year-over-year increase was attributable to the larger average investment portfolio which resulted primarily from the acquisitions of Zenith National, First Mercury, General Fidelity and Pacific Insurance partially offset by increased investment expenses incurred in connection with the company's equity hedges. Interest income as reported is unadjusted for the positive tax effect of the company's significant holdings of tax-advantaged debt securities (holdings of $4,593.3 million at June 30, 2011 compared to $4,795.4 million at June 30, 2010). Net investment gains of $119.6 million in the second quarter of 2011 consisted of the following: Second quarterRealized gains (losses) on costEliminate mark-to- market (gains) losses already recognizedUnrealized gains (losses) arising during the periodNet gains (losses) on investmentsNet gains (losses) on:Equities and equity-related investments389.4(316.1)(192.6)(119.3)Equity hedges——119.0119.0Equities and equity-related investments after equity hedges389.4(316.1)(73.6)(0.3)Bonds53.7(37.4)244.0260.3CPI-linked derivatives——(118.0)(118.0)Other(16.0)(33.6)27.2(22.4)427.1(387.1)79.6119.6First six monthsRealized gains (losses) on costEliminate mark- to- market (gains) losses already recognizedUnrealized gains (losses) arising during the periodNet gains (losses) on investmentsNet gains (losses) on:Equities and equity-related investments475.3(287.1)314.9503.1Equity hedges——(309.4)(309.4)Equities and equity-related investments after equity hedges475.3(287.1)5.5193.7Bonds74.3(60.3)106.0120.0CPI-linked derivatives——(285.2)(285.2)Other(59.4)56.0(7.0)(10.4)490.2(291.4)(180.7)18.1The company held $1,140.7 million of cash, short term investments and marketable securities at the holding company level ($1,109.1 million net of short sale and derivative obligations) at June 30, 2011, compared to $1,540.7 million ($1,474.2 million net of short sale and derivative obligations) at December 31, 2010. The company's total debt to total capital ratio increased to 27.1% at June 30, 2011 from 23.9% at December 31, 2010, as a result of increased holding company debt (primarily reflecting the company's second quarter 2011 issuances of $500 and Cdn$400 of senior unsecured notes) the net loss, dividends paid and the consolidation of the debt of First Mercury in the first quarter of 2011, partially offset by decreased subsidiary debt, (primarily reflecting the repurchase of Crum & Forster and OdysseyRe senior unsecured notes and First Mercury trust preferred securities during the second quarter of 2011). At June 30, 2011, common shareholders' equity was $7,310.2 million, or $358.60 per basic share, compared to $7,697.9 million, or $376.33 per basic share, at December 31, 2010. On May 9, 2011 the company completed a private offering of $500 million of 5.80% Senior Notes due 2021 for net proceeds after discount, commissions and expenses of $493.9. On May 25, 2011 the company completed an offering of Cdn$400 million of 6.40% Senior Notes due 2021 for net proceeds after discount, commissions and expenses of $405.6 of (Cdn$396.0 million). On June 6, 2011 the company completed a tender offer for $694.4 million ($657.9 net of Zenith National's ownership) of Fairfax, Crum & Forster and Odyssey Re Senior Notes. The company recorded a one time charge of $104.2 million in connection with the debt repurchase. Fairfax holds significant investments in equities and equity-related securities. In response to the significant appreciation in equity market valuations and uncertainty in the economy, the company has hedged its equity investment exposure by entering into total return swaps referenced to the Russell 2000 index (at an average Russell 2000 index value of 662.22) in addition to its existing swap contracts referenced to the S&P 500 index (at an average S&P 500 index value of 1,071.96). At June 30, 2011, equity hedges represented 86.5% of the company's equity and equity-related holdings. The market value and the liquidity of these investments are volatile and may vary dramatically either up or down in short periods, and their ultimate value will therefore only be known over the long term.There were 20.4 and 20.5 million weighted average shares outstanding during the second quarters of 2011 and 2010, respectively. At June 30, 2011 there were 20,385,646 common shares effectively outstanding.Summarized (without notes) consolidated balance sheets and statements of earnings and comprehensive income, along with segmented premium and combined ratio information, follow and form part of this news release. Fairfax's detailed second quarter report can be accessed at its website www.fairfax.ca.As previously announced, Fairfax will hold a conference call to discuss its second quarter results at 8:30 a.m. Eastern time on Friday, July 29, 2011. The call, consisting of a presentation by the company followed by a question period, may be accessed at (800) 857-9641 (Canada or U.S.) or 1 (517) 308-9408 (International) with the passcode "Fairfax". A replay of the call will be available from shortly after the termination of the call until 5:00 p.m. Eastern time on Friday, August 12, 2011. The replay may be accessed at (800) 839-1173 (Canada and U.S.) or 1 (203) 369-3020 (International).Fairfax Financial Holdings Limited is a financial services holding company which, through its subsidiaries, is engaged in property and casualty insurance and reinsurance and investment management.Certain statements contained herein may constitute forward-looking statementsand are made pursuant to the "safe harbour" provisions of the United States PrivateSecurities Litigation Reform Act of 1995. Such forward-looking statements are subjectto known and unknown risks, uncertainties and other factors which may cause theactual results, performance or achievements of Fairfax to be materially differentfrom any future results, performance or achievements expressed or implied by suchforward-looking statements. Such factors include, but are not limited to: a reductionin net income if our loss reserves (including reserves for asbestos,environmental and other latent claims) are insufficient; underwriting losses on therisks we insure that are higher or lower than expected; the occurrence of catastrophic events with a frequency or severity exceeding our estimates; the cycles of the insurance market and general economic conditions, which can substantially influence our and our competitors' premium rates and capacity to write new business; changes in market variables, including interest rates, foreign exchange rates, equity prices and credit spreads, which could negatively affect our investment portfolio; risks associated with our use of derivative instruments; the failure of our hedging methods to achieve their desired risk management objective; exposure to credit risk in the eventour reinsurers fail to make payments to us under our reinsurance arrangements; exposure to credit risk in the event our insureds, insurance producers or reinsurance intermediaries fail to remit premiums that are owed to us or failure by our insureds to reimburse us for deductibles that are paid by us on their behalf; risks associated with implementing our business strategies; the timing of claims payments being sooner or the receipt of reinsurance recoverables being later than anticipated by us; the inability of our subsidiaries to maintain financial or claims paying ability ratings; a decrease in thelevel of demand for insurance or reinsurance products, or increased competition in the insurance industry; the failure of any of the loss limitation methods we employ; the impact of emerging claim and coverage issues; ourinability to obtain reinsurance coverage in sufficient amounts, at reasonable prices or on terms thatadequately protect us; our inability to access cash of our subsidiaries; our inability to obtain required levels of capital on favorable terms, if at all; loss of key employees; the passage of legislation subjecting our businesses to additional supervision or regulation, including additional tax regulation, in the United States, Canada or other jurisdictions in which we operate; risks associated with government investigations of, andlitigation related to, insurance industry practice or any other conduct; risks associated with political and other developments in foreign jurisdictions in which we operate; risks associated with the current purported class action litigation; risks associated with our pending civil litigation; the influence exercisable by our significant shareholder; adverse fluctuations in foreign currency exchange rates; our dependence on independent brokers over whom we exercise little control; an impairment in the carrying value of our goodwill and indefinite-lived intangible assets; our failure to realize future income tax assets; assessments and shared market mechanisms which may adversely affect our U.S. insurance subsidiaries; and failures or security breaches of our computer and data processing systems. Additional risks and uncertainties are described in our most recently issued AnnualReport which is available at www.fairfax.ca and in our Supplementaland Base Shelf Prospectus (under "Risk Factors") filed with the securitiesregulatory authorities in Canada and the United States, which is available on SEDARand EDGAR. Fairfax disclaims any intention or obligation to update or revise anyforward-looking statements.CONSOLIDATED BALANCE SHEETSas at June 30, 2011, December 31, 2010 and January 1, 2010(unaudited – US$ millions)June 30, 2011December 31, 2010January 1, 2010AssetsHolding company cash and investments (including assets pledged for short sale and derivative obligations – $120.5; December 31, 2010 – $137.4; January 1, 2010 – $78.9)1,140.7 1,540.7 1,251.6Insurance contract receivables1,797.61,476.61,376.82,938.33,017.32,628.4Portfolio investmentsSubsidiary cash and short term investments3,466.83,513.93,244.8Bonds (cost $12,013.2; December 31, 2010 – $11,456.9; January 1, 2010 – $10,516.2)12,415.411,748.210,918.3Preferred stocks (cost $563.7; December 31, 2010 – $567.6; January 1, 2010 – $273.0)669.4583.9292.8Common stocks (cost $3,582.6; December 31, 2010 – $3,198.0; January 1, 2010 – $4,081.1)4,529.84,133.34,893.2Investments in associates (fair value $1,163.8; December 31, 2010 – $976.9; January 1, 2010 – $604.3)867.3 707.9 423.7Derivatives and other invested assets (cost $523.5; December 31, 2010 – $403.9; January 1, 2010 – $122.5)351.9 579.4 142.7Assets pledged for short sale and derivative obligations (cost $718.0; December 31, 2010 – $698.3; January 1, 2010 – $138.3)744.2 709.6 151.523,044.821,976.220,067.0Deferred premium acquisition costs420.7357.0372.0Recoverable from reinsurers (including recoverables on paid losses – $278.7; December 31, 2010 – $247.3; January 1, 2010 – $262.8)4,322.4 3,757.0 3,571.1Deferred income taxes669.5490.5299.5Goodwill and intangible assets1,107.8949.1438.8Other assets987.2901.0771.633,490.731,448.128,148.4LiabilitiesSubsidiary indebtedness0.92.212.1Accounts payable and accrued liabilities1,465.81,263.11,290.8Income taxes payable9.531.777.6Short sale and derivative obligations (including at the holding company – $31.6; December 31, 2010 – $66.5; January 1, 2010 – $8.9)183.3 216.9 57.2Funds withheld payable to reinsurers450.0363.2354.92,109.51,877.11,792.6Insurance contract liabilities20,019.818,170.216,418.6Long term debt3,073.92,726.92,301.223,093.720,897.118,719.8EquityCommon shareholders' equity7,310.27,697.97,295.2Preferred stock934.7934.7227.2Shareholders' equity attributable to shareholders of Fairfax8,244.98,632.67,522.4Non-controlling interests42.641.3113.6Total equity8,287.58,673.97,636.033,490.731,448.128,148.4CONSOLIDATED STATEMENTS OF EARNINGSfor the three and six months ended June 30, 2011 and 2010(unaudited – US$ millions except per share amounts)Second quarterFirst six months2011201020112010RevenueGross premiums written1,616.91,327.03,427.32,659.1Net premiums written1,370.11,102.42,889.32,197.1Net premiums earned1,282.61,107.02,631.32,171.3Interest and dividends195.1186.6373.6360.2Share of profit (loss) of associates10.99.54.317.1Net gains (losses) on investments119.6(29.3)18.1568.5Other revenue146.8120.3301.2262.11,755.01,394.13,328.53,379.2ExpensesLosses on claims, gross1,017.51,082.82,626.42,177.0Less ceded losses on claims(140.9)(318.1)(448.7)(540.3)Losses on claims, net876.6764.72,177.71,636.7Operating expenses312.1238.4592.0458.3Commissions, net194.3178.9381.1344.7Interest expense55.046.1108.291.6Other expenses249.0125.4397.6262.41,687.01,353.53,656.62,793.7Earnings (loss) before income taxes68.040.6(328.1)585.5Provision for (recovery of) income taxes(15.6)17.7(172.2)143.3Net earnings (loss)83.622.9(155.9)442.2Attributable to:Shareholders of Fairfax83.323.7(157.3)442.1Non-controlling interests0.3(0.8)1.40.183.622.9(155.9)442.2Net earnings (loss) per share$3.43$0.88$(9.00)$21.17Net earnings (loss) per diluted share$3.40$0.87$(9.00)$21.09Cash dividends paid per share$—$—$10.00$10.00Shares outstanding (000) (weighted average)20,41620,54720,42820,374CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOMEfor the three and six months ended June 30, 2011 and 2010(unaudited – US$ millions)Second quarterFirst six months2011201020112010Net earnings (loss)83.622.9(155.9)442.2Other comprehensive income (loss), net of income taxesChange in unrealized foreign currency translation gains (losses) on foreign operations(1)16.0(60.1)41.625.6Change in gains and losses on hedge of net investment in foreign subsidiary(2)(10.3)28.6(24.9)15.9Share of other comprehensive income (loss) of associates(3)3.0(3.4)8.67.7Change in gains and losses on defined benefit plans(4)(0.6)(3.1)(0.6)(4.8)Other comprehensive income (loss), net of income taxes8.1(38.0)24.744.4Comprehensive income (loss)91.7(15.1)(131.2)486.6Attributable to:Shareholders of Fairfax91.5(13.8)(132.4)487.0Non-controlling interests0.2(1.3)1.2(0.4)91.7(15.1)(131.2)486.6(1)Net of income tax recovery of $3.2 (2010 – income tax expense of $14.7) and $11.5 (2010 – income tax expense of $32.7) for the second quarter and first six months of 2011, respectively.(2)Net of income tax recovery of nil (2010 – nil) and nil (2010 – nil) for the second quarter and first six months of 2011, respectively.(3)Net of income tax expense of $0.2 (2010 – nil) and $0.6 (2010 – nil) for the second quarter and first six months of 2011, respectively.(4)Net of income tax expense of $0.1 (2010 – income tax recovery of $1.8) and $0.1 (2010 – income tax recovery of $2.4) for the second quarter and first six months of 2011, respectively.SEGMENTED INFORMATION(unaudited – US$ millions)Net premiums written and net premiums earned by the insurance and reinsurance operations in the second quarter and first six months of 2011 and 2010 were:Net Premiums WrittenSecond quarterFirst six months2011201020112010Insurance - Canada (Northbridge)336.8 311.6595.2 509.4- U.S. (Crum & Forster and Zenith National)375.7218.7826.4405.5- Asia (Fairfax Asia)52.237.4113.588.0Reinsurance - OdysseyRe459.7421.4969.6894.6Reinsurance and Insurance - Other 146.4113.1265.8298.0Insurance and Reinsurance Operating Companies 1,370.81,102.22,770.52,195.5Net Premiums EarnedSecond quarterFirst six months2011201020112010Insurance- Canada (Northbridge)271.6246.1539.6492.0- U.S. (Crum & Forster and Zenith National)367.3225.1706.9407.7- Asia (Fairfax Asia)53.838.295.073.2Reinsurance - OdysseyRe468.7470.3920.6927.4Reinsurance and Insurance - Other119.5127.1245.6269.4Insurance and Reinsurance Operating Companies1,280.91,106.82,507.72,169.7Combined ratios of the insurance and reinsurance operations in the second quarter and first six months of 2011 and 2010 were:Second quarterFirst six months2011201020112010Insurance- Canada (Northbridge)104.3%106.6%103.9%105.6%- U.S. (Crum & Forster and Zenith National)111.8%109.4%111.2%108.5%- Asia (Fairfax Asia)85.0%94.5%85.4%95.4%Reinsurance - OdysseyRe93.1%92.8%121.2%102.7%Reinsurance and Insurance - Other92.7%91.8%130.5%110.5%Insurance and Reinsurance Operating Companies100.5%99.2%114.2%105.2%FOR FURTHER INFORMATION PLEASE CONTACT: John VarnellFairfax Financial Holdings LimitedChief Financial Officer(416) 367-4941ORFairfax Financial Holdings LimitedMedia Contact:Paul RivettChief Legal Officer(416) 367-4941