Fairfax Financial Holdings Limited (
Q3 2010 Earnings Call Transcript
October 29, 2010 8:30 am ET
Brad Martin – VP, COO and Corporate Secretary
Prem Watsa – Chairman and CEO
John Varnell – VP and CFO
Tom MacKinnon – BMO Capital
Jeff Fenwick – Cormark Securities
Mark Dwelle – RBC Capital Markets
Judy Delgado – Alpine Associates
Previous Statements by FRFHF.PK
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Good morning, and welcome to Fairfax’s 2010 third quarter results conference call. Your lines have been placed on listen-only mode. After the presentation, we will conduct a question-and-answer session. We would kindly ask that you limit yourself to one question each. (Operator instructions) Today’s conference is being recorded. If you have any objections, you may disconnect at this time. Your host for today’s call is Prem Watsa, but Brad Martin will make a brief statement first. Please go ahead, Mr. Martin.
Good morning. Welcome to the conference call to discuss Fairfax’s 2010 third quarter results. The comments we make during this conference call may contain forward-looking statements. Actual results may differ perhaps materially from those contained in such forward-looking statements as a result of a large variety of uncertainties and risk factors, the most foreseeable, which are vested in Fairfax’s Annual Report, which is available on our website at fairfax.ca or as set out under Risk Factors in Fairfax’s Base Shelf Prospectus filed with the securities and regulatory authorities in Canada and the United States, which is available on SEDAR and EDGAR.
I will now turn the call over to our Chairman and CEO, Prem Watsa.
Thank you, Brad. Good morning, ladies and gentlemen. Welcome to Fairfax’s third quarter conference call. I plan to give you some of the highlights and then pass it on to John Varnell, our CFO, for additional financial results.
In the first nine months of 2010, book value per share increased by 11.2% adjusted for the $10 per share common dividend paid in the first quarter of 2010. Book value in increased to $401.32 a share, and in the third quarter, book value increased by 4.9%.
As of September 30, 2010, common shareholders’ equity increased to $8.2 billion from $7.4 billion as at December 31, 2009, an increase of about $800 million after we paid $200 million in dividends and issued $200 million of common stock in the first quarter.
Highlights during the quarter, consolidated combined ratio for the third quarter was 102.6% with good reserving and our company has continued to be well capitalized. OdysseyRe had a combined ratio of 92.2%, Crum & Forster had a combined ratio of 106.4%, and Northbridge had a combined ratio of 105.4%.
Crum & Forster and Northbridge are operating in continued weak commercial lines markets, while OdysseyRe benefited from no major hurricanes in Florida and the Gulf Coast. At all of our companies, we continue to be cautious and avoid unprofitable business. However, that causes expense ratios and combined ratios to be higher. More on the combined ratios from John Varnell.
In the third quarter of 2010, interest and dividend income increased by 10% over the third quarter of 2009 to $203 million. We hold significant amounts of tax-free municipal bonds. And expressed on a pretax equivalent basis, the interest and dividend income would be $230 million. Net gains on investments in the third quarter of 2010 of $68.1 million was after $388 million of net losses on common stocks mainly because of our hedges.
The acquisition of 41% of Gulf Insurance was completed in the third quarter and will be equity accounted. Gulf Insurance operates in seven countries in the Middle East, and we are excited to be partners with KIPCO and this company. KIPCO and GIC, Gulf Insurance Company, are both world-class organizations that share our long-term corporate supports of integrity and professionalism. We are very excited about the long-term prospects of this acquisition.
Our holding company cash and marketable securities at the end of the quarter was $1.35 billion. On July 20, 2010, we raised $230 million Canadian and a 5% five-year reset of a preferred, and on October 1, 2010, we raised another $300 million Canadian in the same preferred. We’ve continued to maintain a very strong financial position and have effectively pre-refinanced $157 million Fairfax bonds due in 2012 and $218 million OdysseyRe bonds due in 2013.
In August, we completed our first runoff acquisition of General Fidelity Insurance Company in over five years at approximately book value. We paid $100 million in cash from our TIG runoff of subsidiary and a remainder of a non-interest bearing contingent note due in six years, which generated a gain of $83.5 million on the excess of the fair value of net asset acquired over the purchase prices. The investment portfolio of GFIC was about $661 million.
Last night we issued a press release that we entered into a merger agreement to acquire all of the outstanding shares of First Mercury Financial common stock for cash of $16.50 per share. This price is a 45% premium to First Mercury’s closing price of $11.36. First Mercury is a specialty commercial lines excess in surplus underwriter focused on niche markets, which began its operations 37 years ago.
First Mercury has a very good long-term underwriting track record with a combined ratio in the low 80s over the past ten years. Gross premiums written in 2009 were $344 million in niche lines such as security guards, and First Mercury is rated A-minus positive by A.M. Best. As of September 30, 2010, the investment portfolio of First Mercury was $772 million, gross losses of $567 million, net $350 million, and stockholders’ equity was $302 million, with 17.5 million shares outstanding.