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Press Release Details


Fairfax Financial Holdings Limited: Third Quarter Financial Results

10/30/2014

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TORONTO, ONTARIO -- (Marketwired) -- 10/30/14 --

(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 $461.2 million in the third quarter of 2014 ($20.68 per diluted share after payment of preferred share dividends) compared to a net loss of $571.7 million in the third quarter of 2013 ($29.02 net loss per diluted share after payment of preferred share dividends), reflecting net gains on its investment portfolio and improved underwriting results. Book value per basic share increased to $403.76 at September 30, 2014 from $339.00 at December 31, 2013 (an increase of 22.1% adjusted for the $10 per common share dividend paid in the first quarter of 2014).

"Our companies had excellent underwriting performance in the third quarter and the first nine months of 2014, with consolidated combined ratios of 91.2% and 92.3% respectively. All of our major insurance companies again had combined ratios less than 100% in the quarter with OdysseyRe at 88.3% and Zenith at 83.8%. We have also realized gains from our equity and equity-related investments of $720 million over the first nine months of 2014," said Prem Watsa , Chairman and Chief Executive Officer of Fairfax. "We are maintaining our defensive equity hedges as we remain concerned about the financial markets and the economic outlook. We continue to be soundly financed, with quarter-end cash and marketable securities in the holding company in excess of $1.4 billion."

Highlights in the third quarter of 2014 (with comparisons to the third quarter of 2013 except as otherwise noted) included the following:

  • The combined ratio of the insurance and reinsurance operations was 91.2% on a consolidated basis, producing an underwriting profit of $136.2 million, compared to a combined ratio and underwriting profit of 93.4% and $104.7 million respectively in 2013.

  • Net premiums written by the insurance and reinsurance operations were essentially unchanged from 2013 after adjusting for the timing of crop insurance premiums written by OdysseyRe (the majority of those premiums were recognized in the second quarter of 2014, whereas such premiums were recognized in the third quarter of 2013).

  • The insurance and reinsurance operations produced operating income (excluding net gains or losses on investments) of $223.1 million compared to $160.1 million in 2013, primarily as a result of improved underwriting profit, higher interest and dividend income, and increased share of profit of associates.

  • Interest and dividend income of $73.8 million increased from $61.2 million in 2013, primarily because of lower total return swap costs and a modest increase in investment income earned. As of September 30, 2014, subsidiary cash and short term investments accounted for 23.1% of the company's portfolio investments. Interest income as reported is unadjusted for the positive tax effect of the company's significant holdings of tax-advantaged debt securities (holdings of $5,188.4 million at September 30, 2014 and $4,818.8 million at September 30, 2013).

  • Net investment gains of $493.7 million in 2014 (net investment losses of $828.6 million in 2013) consisted of the following:

Third quarter of 2014
($ millions)
Realized gains (losses) Unrealized gains
(losses)
Net gains
(losses)
Net gains (losses) on:
Equity and equity-related investments 6.6 (58.2 ) (51.6 )
Equity hedges - 367.2 367.2
Equity and equity-related investments after equity hedges 6.6 309.0 315.6
Bonds 12.6 55.9 68.5
CPI-linked derivatives - (14.1 ) (14.1 )
Other (3.0 ) 126.7 123.7
16.2 477.5 493.7
First nine months of 2014
($ millions)
Realized gains (losses) Unrealized gains
(losses)
Net gains
(losses)
Net gains (losses) on:
Equity and equity-related investments 719.9 210.2 930.1
Equity hedges 13.0 95.0 108.0
Equity and equity-related investments after equity hedges 732.9 305.2 1,038.1
Bonds 13.3 911.7 925.0
CPI-linked derivatives - (98.7 ) (98.7 )
Other (8.7 ) 53.1 44.4
737.5 1,171.3 1,908.8
  • The company held $1,443.2 million of cash, short term investments and marketable securities at the holding company level ($1,438.9 million net of short sale and derivative obligations) at September 30, 2014, compared to $1,296.7 million ($1,241.6 million net of short sale and derivative obligations) at December 31, 2013.

  • The company's total debt to total capital ratio was 25.1% at September 30, 2014, compared to 26.1% at December 31, 2013.

  • On August 13, 2014, the company through its wholly-owned subsidiary, Fairfax (US) Inc., completed a private debt offering of $300 million principal amount of 4.875% senior notes due 2024, for net proceeds of $294.2 million. The company is using $71.5 million of the proceeds in the fourth quarter to redeem debt of OdysseyRe and American Safety and intends to substantially use the remainder of the proceeds to repay debt of Fairfax and OdysseyRe maturing in 2015.

  • On August 29, 2014, the company announced its agreement to acquire 100% of Pethealth Inc. for cash consideration of Cdn$100 million. Pethealth Inc., operating in the United States, Canada and the United Kingdom, is North America's second largest provider of medical insurance for dogs and cats. Closing of this acquisition is anticipated to occur during the fourth quarter.

  • At September 30, 2014, the company owned $108.0 billion notional amount of CPI-linked derivative contracts with an original cost of $638.9 million, a fair value of $110.4 million, and a remaining weighted average life of 7.5 years. The majority of the contracts are based on the underlying United States CPI index (48.8%) or the European Union CPI index (43.0%). Further information is available on page 13 of our quarterly report.

  • At September 30, 2014, common shareholders' equity was $8,553.9 million, or $403.76 per basic share, compared to $7,186.7 million, or $339.00 per basic share, at December 31, 2013.

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, 2014, equity hedges represented 79.2% of the company's equity and equity-related holdings. The hedge ratio decreased from 98.2% at December 31, 2013 because of appreciation, and net purchases, of equity and equity-related securities while the equity hedges remained the same. 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 21.2 million and 20.2 million weighted average shares outstanding during the third quarters of 2014 and 2013 respectively. At September 30, 2014, there were 21,185,399 common shares effectively outstanding.

Summarized (without notes) 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 31, 2014. The call, consisting of a presentation by the company followed by a question period, may be accessed at 1 (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 14, 2014. The replay may be accessed at 1 (866) 497-7579 (Canada or U.S.) or 1 (203) 369-1781 (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 earnings if our loss reserves 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; changes in market variables, including interest rates, foreign exchange rates, equity prices and credit spreads, which could negatively affect our investment portfolio; 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; insufficient reserves for asbestos, environmental and other latent claims; 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; the inability of our subsidiaries to maintain financial or claims paying ability ratings; 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; risks associated with our use of derivative instruments; the failure of our hedging methods to achieve their desired risk management objective; 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 access cash of our subsidiaries; our inability to obtain required levels of capital on favourable terms, if at all; loss of key employees; our inability to obtain reinsurance coverage in sufficient amounts, at reasonable prices or on terms that adequately protect us; 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 and negative publicity 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 legal or regulatory proceedings; failures or security breaches of our computer and data processing systems; 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; and assessments and shared market mechanisms which may adversely affect our U.S. insurance subsidiaries. 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, which is available on SEDAR at www.sedar.com. Fairfax disclaims any intention or obligation to update or revise any forward-looking statements.

CONSOLIDATED BALANCE SHEETS
as at September 30, 2014 and December 31, 2013
(unaudited - US$ millions)
September 30, 2014 December 31, 2013
Assets
Holding company cash and investments (including assets pledged for short sale and derivative obligations - $99.0; December 31, 2013 - $124.4) 1,443.2 1,296.7
Insurance contract receivables 2,251.6 2,017.0
3,694.8 3,313.7
Portfolio investments
Subsidiary cash and short term investments 5,871.5 7,445.7
Bonds (cost $9,908.5; December 31, 2013 - $9,190.0) 11,156.3 9,550.5
Preferred stocks (cost $527.4; December 31, 2013 - $565.1) 450.9 541.8
Common stocks (cost $4,427.2; December 31, 2013 - $3,305.5) 5,146.4 3,835.7
Investments in associates (fair value $2,170.4; December 31, 2013 - $1,815.0) 1,814.1 1,432.5
Derivatives and other invested assets (cost $753.3; December 31, 2013 - $667.8) 473.1 224.2
Assets pledged for short sale and derivative obligations (cost $551.1; December 31, 2013 - $829.3) 634.0 802.9
25,546.3 23,833.3
Deferred premium acquisition costs 500.5 462.4
Recoverable from reinsurers (including recoverables on paid losses - $394.9; December 31, 2013 - $353.3) 4,384.0 4,974.7
Deferred income taxes 460.0 1,015.0
Goodwill and intangible assets 1,468.3 1,311.8
Other assets 1,207.2 1,047.9
37,261.1 35,958.8
Liabilities
Subsidiary indebtedness 52.1 25.8
Accounts payable and accrued liabilities 2,322.1 1,800.4
Income taxes payable 63.4 80.1
Short sale and derivative obligations (including at the holding company - $4.3; December 31, 2013 - $55.1) 50.2 268.4
Funds withheld payable to reinsurers 457.3 461.2
2,945.1 2,635.9
Insurance contract liabilities 21,164.8 21,893.7
Long term debt 3,267.3 2,968.7
24,432.1 24,862.4
Equity
Common shareholders' equity 8,553.9 7,186.7
Preferred stock 1,166.3 1,166.4
Shareholders' equity attributable to shareholders of Fairfax 9,720.2 8,353.1
Non-controlling interests 163.7 107.4
Total equity 9,883.9 8,460.5
37,261.1 35,958.8
CONSOLIDATED STATEMENTS OF EARNINGS
for the three and nine months ended September 30, 2014 and 2013
(unaudited - US$ millions except per share amounts)
Third quarter First nine months
2014 2013 2014 2013
Revenue
Gross premiums written 1,844.4 1,954.1 5,681.3 5,551.5
Net premiums written 1,523.8 1,569.7 4,781.6 4,605.5
Gross premiums earned 1,949.7 1,949.0 5,490.8 5,437.3
Premiums ceded to reinsurers (308.4 ) (354.2 ) (879.6 ) (934.2 )
Net premiums earned 1,641.3 1,594.8 4,611.2 4,503.1
Interest and dividends 73.8 61.2 284.4 272.8
Share of profit of associates 46.6 20.2 90.0 66.3
Net gains (losses) on investments 493.7 (828.6 ) 1,908.8 (1,234.9 )
Other revenue 398.8 273.2 1,049.8 653.9
2,654.2 1,120.8 7,944.2 4,261.2
Expenses
Losses on claims, gross 1,117.9 1,239.5 3,337.2 3,568.7
Losses on claims ceded to reinsurers (87.9 ) (213.8 ) (466.8 ) (729.0 )
Losses on claims, net 1,030.0 1,025.7 2,870.4 2,839.7
Operating expenses 328.1 314.4 929.9 886.1
Commissions, net 235.9 246.0 715.4 721.0
Interest expense 52.5 53.4 153.3 159.9
Other expenses 391.8 261.9 1,016.8 630.2
2,038.3 1,901.4 5,685.8 5,236.9
Earnings (loss) before income taxes 615.9 (780.6 ) 2,258.4 (975.7 )
Provision for (recovery of) income taxes 140.9 (211.5 ) 632.0 (413.0 )
Net earnings (loss) 475.0 (569.1 ) 1,626.4 (562.7 )
Attributable to:
Shareholders of Fairfax 461.2 (571.7 ) 1,609.5 (567.9 )
Non-controlling interests 13.8 2.6 16.9 5.2
475.0 (569.1 ) 1,626.4 (562.7 )
Net earnings (loss) per share $ 21.10 $ (29.02 ) $ 73.92 $ (30.34 )
Net earnings (loss) per diluted share $ 20.68 $ (29.02 ) $ 72.53 $ (30.34 )
Cash dividends paid per share $ - $ - $ 10.00 $ 10.00
Shares outstanding (000) (weighted average) 21,186 20,231 21,188 20,236
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
for the three and nine months ended September 30, 2014 and 2013
(unaudited - US$ millions)
Third quarter First nine months
2014 2013 2014 2013
Net earnings (loss) 475.0 (569.1 ) 1,626.4 (562.7 )
Other comprehensive income (loss), net of income taxes
Items that may be subsequently reclassified to net earnings
Change in unrealized foreign currency translation gains (losses) on foreign operations (131.7 ) 61.9 (85.3 ) (113.9 )
Change in gains (losses) on hedge of net investment in Canadian subsidiaries 67.1 (38.0 ) 70.7 48.6
Share of other comprehensive income (loss) of associates, excluding gains (losses) on defined benefit plans (34.4 ) 2.1 (34.1 ) (17.4 )
(99.0 ) 26.0 (48.7 ) (82.7 )
Items that will not be subsequently reclassified to net earnings
Share of gains (losses) on defined benefit plans of associates 2.8 2.4 66.7 5.0
Change in gains (losses) on defined benefit plans - - (1.3 ) 0.9
2.8 2.4 65.4 5.9
Other comprehensive income (loss), net of income taxes (96.2 ) 28.4 16.7 (76.8 )
Comprehensive income (loss) 378.8 (540.7 ) 1,643.1 (639.5 )
Attributable to:
Shareholders of Fairfax 368.2 (540.7 ) 1,628.5 (638.1 )
Non-controlling interests 10.6 - 14.6 (1.4 )
378.8 (540.7 ) 1,643.1 (639.5 )
SEGMENTED INFORMATION
(unaudited - US$ millions)

Net premiums written and net premiums earned by the insurance and reinsurance operations (excluding Runoff) in the third quarters and first nine months of 2014 and 2013 were:

Net Premiums Written

Third quarter First nine months
2014 2013 2014 2013
Insurance - Canada (Northbridge) 223.1 217.0 708.2 769.0
- U.S. (Crum & Forster and Zenith National) 473.1 468.0 1,598.4 1,486.4
- Asia (Fairfax Asia) 52.8 54.5 225.2 190.9
Reinsurance - OdysseyRe 585.9 730.2 1,832.2 1,835.9
Insurance and Reinsurance - Other 103.1 99.5 321.9 322.8
Insurance and reinsurance operations 1,438.0 1,569.2 4,685.9 4,605.0

Net Premiums Earned

Third quarter First nine months
2014 2013 2014 2013
Insurance - Canada (Northbridge) 246.4 251.3 706.1 740.1
- U.S. (Crum & Forster and Zenith National) 513.8 490.6 1,493.5 1,433.2
- Asia (Fairfax Asia) 64.7 64.8 208.8 182.1
Reinsurance - OdysseyRe 628.3 675.7 1,770.8 1,788.4
Insurance and Reinsurance - Other 98.9 111.3 289.8 326.6
Insurance and reinsurance operations 1,552.1 1,593.7 4,469.0 4,470.4

Combined ratios of the insurance and reinsurance operations (excluding Runoff) in the third quarters and first nine months of 2014 and 2013 were:

Third quarter First nine months
2014 2013 2014 2013
Insurance - Canada (Northbridge) 94.3 % 101.5 % 96.4 % 100.8 %
- U.S. (Crum & Forster and Zenith National) 94.0 % 98.4 % 95.4 % 100.4 %
- Asia (Fairfax Asia) 74.2 % 80.9 % 87.6 % 87.3 %
Reinsurance - OdysseyRe 88.3 % 87.6 % 87.6 % 85.6 %
Insurance and Reinsurance - Other 99.0 % 96.4 % 98.2 % 98.3 %
Insurance and reinsurance operations 91.2 % 93.4 % 92.3 % 93.9 %

Contact Information

Fairfax Financial Holdings Limited
John Varnell
Vice President, Corporate Development
(416) 367-4941