Fairfax Financial Holdings Limited (FRFHF.PK)

Q2 2011 Earnings Call

July 29, 2011 8:30 am ET

Executives

John Varnell - Chief Financial Officer and Vice President

Bradley Martin - Chief Operating Officer, Vice President and Corporate Secretary

V. Watsa - Chairman and Chief Executive Officer

Analysts

Tom MacKinnon - BMO Capital Markets Canada

Mark Dwelle - RBC Capital Markets, LLC

Paul Holden - CIBC World Markets Inc.

Jeff Fenwick - Cormark Securities Inc.

James Findlay

Robert Alpert

Unknown Analyst -

Presentation

Operator

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» Fairfax Financial Holdings Ltd. Q2 2010 Earnings Call Transcript

Good morning, and welcome to Fairfax's 2011 Second Quarter Results Conference Call. [Operator Instructions] Today's conference is being recorded. If you have any objections, you may disconnect at this time. Your host for today's conference call is Mr. Prem Watsa, with opening remarks from Brad Martin. Mr. Martin, please begin, sir.

Bradley Martin

Good morning. Welcome to the conference call to discuss Fairfax's second quarter 2011 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 risks factors, the most foreseeable of which are listed in Fairfax's Annual Report, which is available on our website at fairfax.ca, or set out under Risk Factors in Fairfax's base shelf prospectus, filed with the securities regulatory authorities in Canada, which is available on SEDAR.

I will now turn the call over to our Chairman and CEO, Prem Watsa.

V. Watsa

Thank you, Brad. Good morning, ladies and gentlemen. Welcome to Fairfax's Second Quarter Conference Call. I plan to give you some of the highlights, and then pass it on to John Varnell, our Chief Financial Officer for additional financial details. In the first half of 2011, book value per share decreased by 2%, adjusted for the $10 per share common dividend paid in the first quarter of 2011. The book value decreased to $339 per share. In the second quarter, book value increased by $4 per share, or 1.1%. This is our second quarter reporting under the International Financial Reporting Standards, IFRS. Our investments are now shown at market value at the end of the quarter, and the fluctuation in market values flows through the income statement.

Highlights during the quarter include, we had a net profit of $83.3 million in the second quarter of 2011, approximately $3.40 per share, mainly because of good operating results, 119.6, approximately $120 million in net gains and investments, offset by a $104 million loss on the premium paid for tendered box. The combined ratio of the company's insurance and reinsurance operations is 100.5% on a consolidated basis. Underwriting results in the second quarter were negatively impacted by the $88.1 million of pretax catastrophe losses, primarily related to U.S. tornado losses, which increased the combined ratio by 6.9 percentage points.

Net investment gains of $120 million in the second quarter of 2011 consisted of the following. Please note the table on Page 2 of our press release shows you the breakdown of these gains. In the table, you can see net gains on bonds of $260 million predominantly unrealized, and were largely offset by net unrealized losses of $118 million on our CPI, consumer price index derivatives. Losses on equity and equity-related investments of $119 million gain largely unrealized were offset by gains on our equity hedges. However, we had large realized gains on cost of $389 million, which includes International Coal. Net premiums written by the company's insurance and reinsurance operations in the second quarter of 2011 increased by 24.4% to $1.3708 million. Excluding acquisitions, our consolidated premium grew by 10% in the second quarter, which included some foreign exchange gains.

Also, during the quarter, we retired $694 million U.S. of outstanding Fairfax Crum & Forster and OdysseyRe notes, and refinanced it by issuing any of Fairfax bonds in the United States and Canada at record low interest rates for us. The company held $1.14 billion of cash, short-term investments and marketable securities at the holding company level, approximately $1.11 billion net of the short sale and derivative obligations. Now this is all at June 30, 2011. Finally, we continue to be approximately 86% hedged in relationship to our equity and equity-related securities, which includes convertible bonds and convertible preferred stock.

Now I would like to turn it over to John, so he can give you some more information on the underlying financials. John?

John Varnell

Thanks, Prem. First, I'll talk about investment income, then operating company results and finally, our financial position. On investment income, interest in dividend income in the second quarter of 2011 increased by 4.6% to $195.1 million from the second quarter of 2010 of $186.6 million. On a pretax equivalent basis, we own about $4.6 billion of tax advantage municipal bonds and therefore, the interest in dividend income related to that should be grossed up for the tax advantage. The average portfolio size during the second quarter of 2011 for investments was almost $24.1 billion compared to $22.4 billion in the second quarter of 2010. Our annualized portfolio yield in the second quarter was 3.42% compared to a yield of 3.5% in the second quarter of 2010.

Turning to operating company results, starting with Odyssey. In the second quarter of 2011, Odyssey had a combined ratio of 93.1, and an underwriting profit of $32.2 million. In the second quarter of 2010, Odyssey had a combined ratio of 92.8, and an underwriting profit of about $33.7 million. The second quarter of 2011 combined ratio included about 10 combined ratio points or $47 million net of reinsurance and reinstatement premiums related to cat losses compared to about $17 million or about 3.6 combined ratio points last year. In the second quarter of 2010, just for comparison, Odyssey also had $30 million or 6.6 combined ratio points related to the Deepwater Horizon loss.

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