Fairfax Financial Holdings Limited (FRFHF.PK)

Q3 2011 Earnings Call

October 28, 2011 8:30 am ET


V. Prem Watsa - Chairman and Chief Executive Officer

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

John C. Varnell - Chief Financial Officer and Vice President


Tom MacKinnon - BMO Capital Markets Canada

Mark A. Dwelle - RBC Capital Markets, LLC, Research Division

Paul Holden - CIBC World Markets Inc., Research Division

Jeff Fenwick - Cormark Securities Inc., Research Division



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Good morning, and welcome to Fairfax 2011 Third 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 call is Prem Watsa, with opening remarks from Brad Martin. Mr. Martin, please begin.

Bradley P. Martin

Good morning. Welcome to the conference call to discuss Fairfax's third 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 is are 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. 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 onto John Varnell, our CFO for additional financial details.

Our results have always been lumpy, and our third quarter earnings in a certain point [ph]. We earned almost $1 billion in spite of significant catastrophe activity in the quarter because of almost $1.6 billion in net gains on our investment portfolio.

Our book value per share increased by 9.7% at the 9 months to approximately $403 per share, after adjusting for the $10 per share dividend paid in the first quarter. Excluding acquisitions, our consolidated net premiums written in the quarter grew by 16%, including acquisitions that grew by 21%. The company continues to be soundly financed with cash and marketable securities at the holding company level in excess of $1 billion.

This is our third quarter reporting under International Financial Reporting Standards, IFRS. Our investments are now shown at market value at the end of the quarter, and the fluctuations in market values flow through the income statement.

Some highlights during the quarter. The combined ratio of the company's insurance and reinsurance operations on a consolidated basis was 107.5% in the third quarter of 2011, reducing an underwriting loss of $105.3 million. Underwriting losses were negatively impacted by $171.7 million of pretax catastrophe losses related to Hurricane Irene, the Denmark floods and the development on the Japanese earthquake losses, which increased the combined ratio during the quarter by 12.3 points.

Catastrophe losses in the first 9 months were $661.2 million or 17 percentage points on our combined ratio. Net investment gains of $1.6 billion in the third quarter and $1.6 billion approximately in the first 9 months of 2011 consisted of the following.

If you well please note Page 2 of our press release. You'll see there that net losses on equity and equity-related investments of $1.34 billion are predominantly unrealized and were largely neutralized by net unrealized gains of $1.5 billion on our equity hedges.

Unrealize bond gains of $1.2 billion and $51 million in unrealized CPI-linked derivatives and other unrealized gains of $114 million -- $118 million resulted in a net gain of $1.6 billion in the quarter, most of it unrealized. The unrealized bond gains were largely due to our long U.S. Treasury bond portfolio which benefited from declining interest rates in the third quarter.

As of September 30, 2011, the company held $1.22 billion of cash, short-term investments and marketable securities at a holding company level.

Finally, we continue to be approximately fully hedged in relationship to our equity and equity-related securities, which includes convertible bonds and convertible preferred stock, with some variation in the hedge ratio due to fluctuating markets.

We continue to be very concern about the prospects of the financial markets and the economies of North America and Western Europe, with the possibility -- with the possibilities of developing problems in China.

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

John C. Varnell

Thank you, Prem. So starting with our third quarter financial results, consolidated. The net earnings for Fairfax shoulders were $973.9 million in the 2011 third quarter. That compares to earnings of $388 million in the 2010 third quarter. The third quarter fully diluted EPS was $46.73 compared to fully diluted EPS of $18.44 in the quarter last year. Nine-month earnings were $816.6 million this year or $37.78 per diluted share compared to $830.2 million or $39.56 per diluted share last year.

The third quarter earnings were influenced by accumulating [ph] items and the first is the underwriting result. We had a one-off $105.3 million underwriting loss in the quarter compared to a $13.3 million underwriting loss last year. Contributing to this year -- this quarter's underwriting loss were the catastrophe losses, as Prem mentioned, of $171.1 million or 12.3 combined ratio points.

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