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 quarter
-----------------------------------
Realized Unrealized
gains gains Net gains
(losses) (losses) (losses)
----------- ----------- -----------
Net gains (losses) on:
Equity and equity-related investments 210.7 58.9 269.6
Equity hedges - (431.6) (431.6)
----------- ----------- -----------
Equity and equity-related investments
after equity hedges 210.7 (372.7) (162.0)
Bonds 144.8 83.8 228.6
CPI-linked derivatives - (38.3) (38.3)
Other (15.3) (36.6) (51.9)
----------- ----------- -----------
340.2 (363.8) (23.6)
----------- ----------- -----------
----------- ----------- -----------
(US$ millions)
-----------------------------------
First nine months
-----------------------------------
Realized Unrealized
gains gains Net gains
(losses) (losses) (losses)
----------- ----------- -----------
Net gains (losses) on:
Equity and equity-related investments 317.1 206.6 523.7
Equity hedges (7.2) (857.6) (864.8)
----------- ----------- -----------
Equity and equity-related investments
after equity hedges 309.9 (651.0) (341.1)
Bonds 390.2 153.2 543.4
CPI-linked derivatives - (99.3) (99.3)
Other 30.1 (126.1) (96.0)
----------- ----------- -----------
730.2 (723.2) 7.0
----------- ----------- -----------
----------- ----------- -----------
-- The 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 statements and are made pursuant to the "safe
harbour" provisions of the United States Private Securities
Litigation Reform Act of 1995. Such forward-looking statements are
subject to known and unknown risks, uncertainties and other factors
which may cause the actual results, performance or achievements of
Fairfax to be materially different from any future results,
performance or achievements expressed or implied by such
forward-looking statements. Such factors include, but are not
limited to: a reduction in net income if our loss reserves
(including reserves for asbestos, environmental and other latent
claims) are insufficient; underwriting losses on the risks 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 event our 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 the level 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; our inability to obtain reinsurance coverage in sufficient
amounts, at reasonable prices or on terms that adequately 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, and litigation 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 Annual Report which is available at www.fairfax.ca
and in our Supplemental and Base Shelf Prospectus (under "Risk
Factors") filed with the securities regulatory authorities in
Canada and the United States, which is available on SEDAR and
EDGAR. Fairfax disclaims any intention or obligation to update or
revise any forward-looking statements.
CONSOLIDATED BALANCE SHEETS
as at September 30, 2012 and December 31, 2011
(unaudited - US$ millions)
September December
30, 2012 31, 2011
----------- -----------
Assets
Holding company cash and investments (including
assets pledged for short sale and derivative
obligations - $185.8; December 31, 2011 - $249.0) 966.6 1,026.7
Insurance contract receivables 1,966.1 1,735.4
----------- -----------
2,932.7 2,762.1
----------- -----------
Portfolio investments
Subsidiary cash and short term investments 7,026.8 6,199.2
Bonds (cost $8,591.7; December 31, 2011 - $9,515.4) 9,931.4 10,835.2
Preferred stocks (cost $534.4; December 31, 2011 -
$555.6) 537.8 563.3
Common stocks (cost $4,349.4; December 31, 2011 -
$3,867.3) 4,131.0 3,663.1
Investments in associates (fair value $1,422.5;
December 31, 2011 - $1,271.8) 976.7 924.3
Derivatives and other invested assets (cost $515.5;
December 31, 2011 - $511.4) 232.1 394.6
Assets pledged for short sale and derivative
obligations (cost $844.5; December 31, 2011 -
$810.1) 893.3 886.3
----------- -----------
23,729.1 23,466.0
----------- -----------
Deferred premium acquisition costs 492.4 415.9
Recoverable from reinsurers (including recoverables
on paid losses - $378.1; December 31, 2011 -
$313.2) 4,369.1 4,198.1
Deferred income taxes 663.2 628.2
Goodwill and intangible assets 1,324.3 1,115.2
Other assets 980.0 821.4
----------- -----------
34,490.8 33,406.9
----------- -----------
----------- -----------
Liabilities
Subsidiary indebtedness 65.4 1.0
Accounts payable and accrued liabilities 1,919.8 1,656.2
Income taxes payable 57.2 21.4
Short sale and derivative obligations (including at
the holding company - $45.0; December 31, 2011 -
$63.9) 187.7 170.2
Funds withheld payable to reinsurers 429.8 412.6
----------- -----------
2,659.9 2,261.4
----------- -----------
Insurance contract liabilities 20,304.3 19,719.5
Long term debt 2,969.3 3,017.5
----------- -----------
23,273.6 22,737.0
----------- -----------
Equity
Common shareholders' equity 7,328.3 7,427.9
Preferred stock 1,166.4 934.7
----------- -----------
Shareholders' equity attributable to shareholders of
Fairfax 8,494.7 8,362.6
Non-controlling interests 62.6 45.9
----------- -----------
Total equity 8,557.3 8,408.5
----------- -----------
34,490.8 33,406.9
----------- -----------
----------- -----------
CONSOLIDATED STATEMENTS OF EARNINGS
for the three and nine months ended September 30, 2012 and 2011
(unaudited - US$ millions except per share amounts)
Third quarter First nine months
----------------------- -----------------------
2012 2011 2012 2011
----------- ----------- ----------- -----------
Revenue
Gross premiums written 1,854.7 1,782.7 5,507.5 5,210.0
----------- ----------- ----------- -----------
Net premiums written 1,510.2 1,431.2 4,598.6 4,320.5
----------- ----------- ----------- -----------
Net premiums earned 1,602.8 1,400.1 4,321.7 4,031.4
Interest and dividends 100.2 169.6 334.7 543.2
Share of profit (loss) of
associates (5.2) 7.4 (5.0) 11.7
Net gains (losses) on
investments (23.6) 1,588.0 7.0 1,606.1
Other revenue 217.6 157.8 601.2 459.0
----------- ----------- ----------- -----------
1,891.8 3,322.9 5,259.6 6,651.4
----------- ----------- ----------- -----------
Expenses
Losses on claims, gross 1,291.4 1,408.9 3,461.3 4,026.4
Less ceded losses on
claims (228.6) (278.5) (584.4) (718.3)
----------- ----------- ----------- -----------
Losses on claims, net 1,062.8 1,130.4 2,876.9 3,308.1
Operating expenses 279.6 296.1 815.0 888.1
Commissions, net 250.1 196.9 673.8 578.0
Interest expense 51.5 53.6 156.0 161.8
Other expenses 207.7 157.0 586.3 554.6
----------- ----------- ----------- -----------
1,851.7 1,834.0 5,108.0 5,490.6
----------- ----------- ----------- -----------
Earnings before income taxes 40.1 1,488.9 151.6 1,160.8
Provision for income taxes 3.1 514.4 19.0 342.2
----------- ----------- ----------- -----------
Net earnings 37.0 974.5 132.6 818.6
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Attributable to:
Shareholders of Fairfax 34.6 973.9 128.3 816.6
Non-controlling interests 2.4 0.6 4.3 2.0
----------- ----------- ----------- -----------
37.0 974.5 132.6 818.6
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Net earnings per share $ 0.91 $ 47.17 $ 4.12 $ 38.10
Net earnings per diluted
share $ 0.90 $ 46.73 $ 4.07 $ 37.78
Cash dividends paid per
share $ - $ - $ 10.00 $ 10.00
Shares outstanding (000)
(weighted average) 20,330 20,385 20,340 20,414
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
for the three and nine months ended September 30, 2012 and 2011
(unaudited - US$ millions except per share amounts)
Third quarter First nine months
----------------- -----------------
2012 2011 2012 2011
-------- -------- -------- --------
Net earnings 37.0 974.5 132.6 818.6
-------- -------- -------- --------
Other comprehensive income (loss), net
of income taxes
Change 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) 57.3
Share of other comprehensive income
(loss) of associates (3) 1.5 (5.5) (13.6) 3.1
Change in gains and losses on defined
benefit plans (4) - - (3.5) (0.6)
-------- -------- -------- --------
Other comprehensive income (loss), net
of income taxes 44.2 (67.4) 30.3 (42.7)
-------- -------- -------- --------
Comprehensive income 81.2 907.1 162.9 775.9
-------- -------- -------- --------
-------- -------- -------- --------
Attributable to:
Shareholders of Fairfax 78.4 907.0 159.4 774.6
Non-controlling interests 2.8 0.1 3.5 1.3
-------- -------- -------- --------
81.2 907.1 162.9 775.9
-------- -------- -------- --------
-------- -------- -------- --------
--------------------
(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 Written
Third quarter First nine months
------------------- -------------------
2012 2011 2012 2011
--------- --------- --------- ---------
Insurance
- Canada (Northbridge) 214.8 245.6 705.7 840.8
- U.S. (Crum & Forster and Zenith
National) 446.5 366.7 1,464.7 1,193.1
- Asia (Fairfax Asia) 53.8 49.7 181.4 163.2
Reinsurance - OdysseyRe 682.3 642.9 1,828.5 1,612.5
Insurance and Reinsurance - Other 112.7 125.4 418.3 391.2
--------- --------- --------- ---------
Insurance and reinsurance operations 1,510.1 1,430.3 4,598.6 4,200.8
--------- --------- --------- ---------
--------- --------- --------- ---------
Net Premiums Earned
Third quarter First nine months
-------------------- -------------------
2012 2011 2012 2011
---------- --------- --------- ---------
Insurance
- Canada (Northbridge) 254.0 274.2 751.9 813.8
- U.S. (Crum & Forster and Zenith
National) 470.5 382.8 1,327.5 1,089.7
- Asia (Fairfax Asia) 59.1 54.1 169.2 149.1
Reinsurance - OdysseyRe 693.5 557.1 1,701.7 1,477.7
Insurance and Reinsurance - Other 125.6 130.1 365.6 375.7
---------- --------- --------- ---------
Insurance and reinsurance operations 1,602.7 1,398.3 4,315.9 3,906.0
---------- --------- --------- ---------
---------- --------- --------- ---------
Combined ratios of the insurance and reinsurance operations in the third
quarter and first nine months of 2012 and 2011 were:
Third quarter First nine months
------------------- -------------------
2012 2011 2012 2011
--------- --------- --------- ---------
Insurance
- 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 - OdysseyRe 86.3% 103.4% 86.3% 114.5%
Insurance and Reinsurance - Other 102.1% 146.7% 101.6% 136.1%
--------- --------- --------- ---------
Insurance and reinsurance operations 95.4% 107.5% 97.1% 111.8%
--------- --------- --------- ---------
--------- --------- --------- ---------
Contacts: Fairfax Financial Holdings Limited John Varnell Vice
President, Corporate Development (416) 367-4941 Media Contact:
Fairfax Financial Holdings Limited Paul Rivett Vice President,
Operations (416) 367-4941 www.fairfax.ca
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