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Press release from Marketwire

Fairfax Financial Holdings Limited: Third Quarter Financial Results

Thursday, October 25, 2012

Fairfax Financial Holdings Limited: Third Quarter Financial Results17:02 EDT Thursday, October 25, 2012TORONTO, ONTARIO--(Marketwire - Oct. 25, 2012) - Fairfax Financial Holdings Limited (TSX:FFH)(TSX:FFH.U)( 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 $34.6 million in the third quarter of 2012 ($0.90 per diluted share) compared to net earnings of $973.9 million in the third quarter of 2011 ($46.73 per diluted share), reflecting the absence of net investment gains and lower interest and dividend income, partially offset by improved underwriting results (with a consolidated combined ratio of 95.4%). Book value per share decreased to $360.49 at September 30, 2012 from $364.55 at December 31, 2011 (an increase of 1.7% adjusted for the $10 per common share dividend paid in the first quarter of 2012). "Our underwriting results continued to improve on increased premiums and we produced a small investment loss due to our unrealized investment losses related to our defensive hedging strategy," said Prem Watsa, Chairman and Chief Executive Officer of Fairfax. "We finished the quarter with cash and marketable securities at the holding company of approximately $1 billion. We continue to maintain our equity hedges and have cash of approximately 33% ($8.1 billion) in our investment portfolios as we are not being adequately paid to take risks with markets at current levels."Highlights in the third quarter (with comparisons to the third quarter of 2011 except as otherwise noted) and following September 30, 2012 included the following:The combined ratio of the insurance and reinsurance operations was 95.4% on a consolidated basis, producing an underwriting profit of $73.7 million, compared to a combined ratio and underwriting loss of 107.5% and $105.3 million respectively in 2011. Net premiums written by the insurance and reinsurance operations increased 5.6% to $1,510.1 million from $1,430.3 million in 2011. Operating income of the insurance and reinsurance operations (excluding net gains or losses on investments) increased to $148.4 million from $39.1 million in 2011, primarily as a result of the improved underwriting results, partially offset by the decrease in interest and dividend income. Interest and dividend income of $100.2 million decreased from $169.6 million in 2011, primarily because of significantly increased holdings of low-yielding cash and short term investments ($8,111.5 million at September 30, 2012, compared to $4,978.0 million at September 30, 2011) resulting from sales of higher-yielding securities, principally government bonds. Interest income as reported is unadjusted for the positive tax effect of the company's significant holdings of tax-advantaged debt securities (holdings of $5,209.3 million at September 30, 2012, compared to $4,883.9 million at December 31, 2011). Net investment losses of $23.6 million in 2012 (net investment gains of $1,588.0 million in 2011) consisted of the following:(US$ millions)Third quarterRealized gains (losses)Unrealized gains (losses)Net gains (losses)Net gains (losses) on:Equity and equity-related investments210.758.9269.6Equity hedges-(431.6)(431.6)Equity and equity-related investments after equity hedges210.7(372.7)(162.0)Bonds144.883.8228.6CPI-linked derivatives-(38.3)(38.3)Other(15.3)(36.6)(51.9)340.2(363.8)(23.6)(US$ millions)First nine monthsRealized gains (losses)Unrealized gains (losses)Net gains (losses)Net gains (losses) on:Equity and equity-related investments317.1206.6523.7Equity hedges(7.2)(857.6)(864.8)Equity and equity-related investments after equity hedges309.9(651.0)(341.1)Bonds390.2153.2543.4CPI-linked derivatives-(99.3)(99.3)Other30.1(126.1)(96.0)730.2(723.2)7.0The company held $966.6 million of cash, short term investments and marketable securities at the holding company level ($921.6 million net of short sale and derivative obligations) at September 30, 2012, compared to $1,026.7 million ($962.8 million net of short sale and derivative obligations) at December 31, 2011. The company's total debt to total capital ratio improved to 26.2% at September 30, 2012 from 26.4% at December 31, 2011. At September 30, 2012, common shareholders' equity was $7,328.3 million, or $360.49 per basic share, compared to $7,427.9 million, or $364.55 per basic share, at December 31, 2011. During the third quarter, the company completed the acquisition of Thomas Cook (India) Limited for $172.7 million, which added goodwill of $135.0 million and subsidiary debt of $41.0 million at September 30, 2012. On October 1, 2012, the company announced an agreement to effectively sell its interest in Cunningham Lindsey for about $260 million, subject to closing adjustments. Fairfax will invest up to approximately $35 million of the proceeds in shares of Cunningham Lindsey on closing to continue to be a minority shareholder. The transaction is expected to close in the fourth quarter of 2012. On October 12, 2012, the company announced it had completed the purchase of the runoff business of Brit Insurance Limited for $332.2 million, which was paid by the company's runoff subsidiaries. At September 30, 2012, Brit Insurance had an investment portfolio of approximately $1.4 billion. On October 12, 2012, the company announced that the purported class action commenced in July 2011 against the company and others had been dismissed, without the possibility of further appeal or amendment. On October 15, 2012, the company completed an offering of Cdn$200.0 million of 5.84% unsecured senior notes due 2022 for net proceeds of Cdn$198.6 million. On October 18, 2012, the company announced that its TIG runoff subsidiary had agreed with the holder of the loan note issued by TIG in connection with its acquisition of General Fidelity in August 2010 to pay $200.0 million in full satisfaction of that note.Fairfax holds significant investments in equity 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. At September 30, 2012, equity hedges represented approximately 102.5% of the company's equity and equity-related holdings. The market value and the liquidity of these hedges 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 20.3 and 20.4 million weighted average shares outstanding during the third quarters of 2012 and 2011 respectively. At September 30, 2012, there were 20,328,521 common shares effectively outstanding.On September 24, 2012, the company renewed its normal course issuer bid which allows it to purchase up to 800,000 subordinate voting shares on the Toronto Stock Exchange.Summarized (without notes) condensed interim 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 third quarter report can be accessed at its website www.fairfax.ca.As previously announced, Fairfax will hold a conference call to discuss its third quarter results at 8:30 a.m. Eastern time on Friday, October 26, 2012. 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, November 9, 2012. The replay may be accessed at (866) 426-1596 (Canada or U.S.) or 1 (203) 369-0883 (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 deferred income tax assets; assessments and shared market mechanisms which may adversely affect our 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 September 30, 2012 and December 31, 2011(unaudited - US$ millions)September 30, 2012December 31, 2011AssetsHolding company cash and investments (including assets pledged for short sale and derivative obligations - $185.8; December 31, 2011 - $249.0)966.61,026.7Insurance contract receivables1,966.11,735.42,932.72,762.1Portfolio investmentsSubsidiary cash and short term investments7,026.86,199.2Bonds (cost $8,591.7; December 31, 2011 - $9,515.4)9,931.410,835.2Preferred stocks (cost $534.4; December 31, 2011 - $555.6)537.8563.3Common stocks (cost $4,349.4; December 31, 2011 - $3,867.3)4,131.03,663.1Investments in associates (fair value $1,422.5; December 31, 2011 - $1,271.8)976.7924.3Derivatives and other invested assets (cost $515.5; December 31, 2011 - $511.4)232.1394.6Assets pledged for short sale and derivative obligations (cost $844.5; December 31, 2011 - $810.1)893.3886.323,729.123,466.0Deferred premium acquisition costs492.4415.9Recoverable from reinsurers (including recoverables on paid losses - $378.1; December 31, 2011 - $313.2)4,369.14,198.1Deferred income taxes663.2628.2Goodwill and intangible assets1,324.31,115.2Other assets980.0821.434,490.833,406.9LiabilitiesSubsidiary indebtedness65.41.0Accounts payable and accrued liabilities1,919.81,656.2Income taxes payable57.221.4Short sale and derivative obligations (including at the holding company - $45.0; December 31, 2011 - $63.9)187.7170.2Funds withheld payable to reinsurers429.8412.62,659.92,261.4Insurance contract liabilities20,304.319,719.5Long term debt2,969.33,017.523,273.622,737.0EquityCommon shareholders' equity7,328.37,427.9Preferred stock1,166.4934.7Shareholders' equity attributable to shareholders of Fairfax8,494.78,362.6Non-controlling interests62.645.9Total equity8,557.38,408.534,490.833,406.9CONSOLIDATED STATEMENTS OF EARNINGSfor the three and nine months ended September 30, 2012 and 2011(unaudited - US$ millions except per share amounts)Third quarterFirst nine months2012201120122011RevenueGross premiums written1,854.71,782.75,507.55,210.0Net premiums written1,510.21,431.24,598.64,320.5Net premiums earned1,602.81,400.14,321.74,031.4Interest and dividends100.2169.6334.7543.2Share of profit (loss) of associates(5.2)7.4(5.0)11.7Net gains (losses) on investments(23.6)1,588.07.01,606.1Other revenue217.6157.8601.2459.01,891.83,322.95,259.66,651.4ExpensesLosses on claims, gross1,291.41,408.93,461.34,026.4Less ceded losses on claims(228.6)(278.5)(584.4)(718.3)Losses on claims, net1,062.81,130.42,876.93,308.1Operating expenses279.6296.1815.0888.1Commissions, net250.1196.9673.8578.0Interest expense51.553.6156.0161.8Other expenses207.7157.0586.3554.61,851.71,834.05,108.05,490.6Earnings before income taxes40.11,488.9151.61,160.8Provision for income taxes3.1514.419.0342.2Net earnings37.0974.5132.6818.6Attributable to:Shareholders of Fairfax34.6973.9128.3816.6Non-controlling interests2.40.64.32.037.0974.5132.6818.6Net earnings per share$0.91$47.17$4.12$38.10Net earnings per diluted share$0.90$46.73$4.07$37.78Cash dividends paid per share$-$-$10.00$10.00Shares outstanding (000) (weighted average)20,33020,38520,34020,414CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOMEfor the three and nine months ended September 30, 2012 and 2011(unaudited - US$ millions except per share amounts)Third quarterFirst nine months2012201120122011Net earnings37.0974.5132.6818.6Other comprehensive income (loss), net of income taxesChange in unrealized foreign currency translation gains (losses) on foreign operations (1)80.8(144.1)84.2(102.5)Change in gains and losses on hedge of net investment in foreign subsidiary (2)(38.1)82.2(36.8)57.3Share of other comprehensive income (loss) of associates (3)1.5(5.5)(13.6)3.1Change in gains and losses on defined benefit plans (4)--(3.5)(0.6)Other comprehensive income (loss), net of income taxes44.2(67.4)30.3(42.7)Comprehensive income81.2907.1162.9775.9Attributable to:Shareholders of Fairfax78.4907.0159.4774.6Non-controlling interests2.80.13.51.381.2907.1162.9775.9(1)Net of income tax recovery of $0.3 (2011 - income tax expense of $8.8) and income tax expense of $0.3 (2011 - income tax recovery of $2.7) for the third quarter and first nine months of 2012, respectively. (2)Net of income tax recovery of nil (2011 - nil) and nil (2011 - nil) for the third quarter and first nine months of 2012, respectively.(3)Net of income tax expense of $1.6 (2011 - income tax recovery of $2.2) and $0.8 (2011 - income tax recovery of $1.6) for the third quarter and first nine months of 2012, respectively.(4)Net of income tax recovery of nil (2011 - $0.1) and $2.3 (2011 - nil) for the third quarter and first nine months of 2012, respectively.SEGMENTED INFORMATION(unaudited - US$millions)Net premiums written and net premiums earned by the insurance and reinsurance operations in the third quarter and first nine months of 2012 and 2011 were:Net Premiums WrittenThird quarterFirst nine months2012201120122011Insurance- Canada (Northbridge)214.8245.6705.7840.8- U.S. (Crum & Forster and Zenith National)446.5366.71,464.71,193.1- Asia (Fairfax Asia)53.849.7181.4163.2Reinsurance - OdysseyRe682.3642.91,828.51,612.5Insurance and Reinsurance - Other112.7125.4418.3391.2Insurance and reinsurance operations1,510.11,430.34,598.64,200.8Net Premiums EarnedThird quarterFirst nine months2012201120122011Insurance- Canada (Northbridge)254.0274.2751.9813.8- U.S. (Crum & Forster and Zenith National)470.5382.81,327.51,089.7- Asia (Fairfax Asia)59.154.1169.2149.1Reinsurance - OdysseyRe693.5557.11,701.71,477.7Insurance and Reinsurance - Other125.6130.1365.6375.7Insurance and reinsurance operations1,602.71,398.34,315.93,906.0Combined ratios of the insurance and reinsurance operations in the third quarter and first nine months of 2012 and 2011 were:Third quarterFirst nine months2012201120122011Insurance- Canada (Northbridge)100.2%101.4%103.2%103.1%- U.S. (Crum & Forster and Zenith National)105.9%109.5%107.3%110.6%- Asia (Fairfax Asia)83.2%73.1%87.9%80.9%Reinsurance - OdysseyRe86.3%103.4%86.3%114.5%Insurance and Reinsurance - Other102.1%146.7%101.6%136.1%Insurance and reinsurance operations95.4%107.5%97.1%111.8%FOR FURTHER INFORMATION PLEASE CONTACT: Contact Information: Fairfax Financial Holdings LimitedJohn VarnellVice President, Corporate Development(416) 367-4941Media Contact:Fairfax Financial Holdings LimitedPaul RivettVice President, Operations(416) 367-4941www.fairfax.ca