Fairfax Financial Holdings Ltd. (FRFHF.PK)

Q2 2010 Earnings Call Transcript

July 30, 2010 8:30 am ET


Bradley Martin – VP, COO & Corporate Secretary

Prem Watsa – Chairman and CEO

John Varnell – VP and CFO


Jeff Fenwick – Cormark

Mark Dwelle – RBC Capital Markets



Good morning and welcome to Fairfax’s 2010 second 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.

Today’s conference is being recorded, if you have any objectives, you may disconnect at this time. Your host for today’s call is Prem Watsa and Brad Martin will make a brief statement first. Please go ahead Mr. Martin.

Bradley Martin

Thank you, Shirley. Good morning, welcome to the conference call to discuss Fairfax’s 2010 second 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 and most foreseeable which are vested in Fairfax’s Annual Report, which is available on our Website at fairfax.ca or are set out under Risk Factors in Fairfax’s Base Shelf Prospectus filed with the securities and regulatory authorities in Canada and United States which is available on SEDAR and EDGAR.

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

Prem Watsa

Thank you, Brad and good morning, ladies and gentleman. Welcome to Fairfax’s second quarter conference call. I plan to give you some of the highlights and then passing on to John Varnell, our CFO for additional financial details.

Before I do I wanted to take this opportunity to thank Greg Taylor for doing an outstanding job for us as CFO for the last five years.

In the first half of 2010, book value per share increased by 6% adjusted for $10 per share common dividend paid in the first quarter of 2010. Book value in the first half increased to $383 a share. In quarter two book value decreased by 0.3%.

As of June 30, 2010, common shareholders’ equity increased to $7.9 billion from $7.4 billion as of December 31, 2009, an increase of almost $472 million after repay $200 million in dividends and issued $200 million of common stocks.

Highlights during the quarter include our consolidated combined ratio for the second quarter was 101.2% with good reserving and our company has continued to be well capitalized. OdysseyRe had a combined ratio of 97.1%, Crum & Forster had a combined ratio of 106% and Northbridge had a combined ratio of 107.3%.

Crum & Forster and Northbridge are operating in continued weak commercial lines markets. As with all of our companies that disciplined approach to walking away from unprofitable business, caused our net premium down to decline in the second quarter, and as a result the expense ratio to increase. More on the combined ratios from John Varnell.

In the second quarter of 2010 interest and dividend income increased by 6.1% over the second quarter of 2009 to $196 million. On a pre-tax equivalent basis interest and dividend income was $222 million.

The acquisition of Zenith was completed on May 20, 2010, so our second quarter statements show the impact of Zenith for 41 days. We are very excited about the long-term prospects of this acquisition under Stanley Zax’s leadership.

Our holding company cash after the $1.4 billion acquisitions of Zenith for cash was $1.4 billion as of June 30, 2010. Since the end of the quarter we raised 230 million Canadian in a 5% five year resalable preferred.

We continue to maintain a very strong financial position and have effectively refinanced 136 million bonds due in 2012 and $218 million OdysseyRe bond due in 2013.

Our first runoff acquisition in over five years is now subject to regulatory approval which is expected in August 2010. We are buying General Fidelity Insurance Company, a Bank of America subsidiary for approximately 350 million, which approximates book value, payable 100 million in cash from TIG, and approximately 250 million remainder by a non-interest bearing contingent note due in six years.

As of March 31, 2010, the investment portfolio of the acquired company was 616 million gross reserves were $334 million and reinsurance recoverable to a $19 million.

The acquisition is being made and paid for by our TIG runoff subsidiary. Our runoff group lead by Nick Bentley and his management team did almost six months of due diligence therefore we agreed to the purchase of General Fidelity.

Dennis Gibbs who led our runoff group before Nick reviewed this deal and blessed it. You will notice that we have very significant downside discussion on this runoff purchase and with some good fortune we will make a good return on the investment portfolios. We have looked at dozens of runoff opportunities in the past five years, and this is the first one that met our stringent criteria.

We have received the consent from the bondholders of the Crum & Forster and OdysseyRe to amend their indentures to provide certain financial estimation and financial statements in lieu of the reports they currently filed with the SEC. In both cases, we had to pay $10 for $1000 of principal to the bondholders’ consent. We continued to be focused on simplifying our operations.

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