Fairfax Financial Holdings Limited: Financial Results for the Year Ended December 31, 2012

Thu Feb 14, 2013 5:02pm EST

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Marketwire

Fairfax Financial Holdings Limited

February 14, 2013 - 05:02:00 PM

Fairfax Financial Holdings Limited: Financial Results for the Year Ended
December 31, 2012

TORONTO, ONTARIO--(Marketwire - Feb. 14, 2013) - 

(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 fiscal year
2012 net earnings of $532.4 million ($22.94 per diluted share after payment of
preferred share dividends) compared to $45.1 million ($0.31 net loss per
diluted share after payment of preferred share dividends) in 2011, reflecting
a return to profitable underwriting results after the large catastrophe losses
of 2011. Book value per basic share increased to $378.10 at December 31, 2012
from $364.55 at December 31, 2011 (an increase of 6.5% adjusted for the $10
per common share dividend paid in the first quarter of 2012). 

"We returned to profitable underwriting results in 2012, notwithstanding $261
million in losses resulting from Hurricane Sandy," said Prem Watsa, Chairman
and Chief Executive Officer of Fairfax. "We are maintaining our defensive
equity hedges as we remain concerned about the economic outlook. We continue
to be soundly financed, with year-end cash and marketable securities at the
holding company in excess of $1 billion."

In the fourth quarter of 2012, Fairfax had net earnings of $404.1 million
($18.90 per diluted share after payment of preferred share dividends) compared
to a net loss of $771.5 million in the fourth quarter of 2011 ($38.47 per
diluted share after payment of preferred share dividends). The profit in the
fourth quarter of 2012 arose principally from net mark-to-market investment
gains (net gains on investments of $635.6 million, compared to net losses on
investments of $914.9 million in the fourth quarter of 2011) and from reduced
underwriting losses ($113.1 million, including Hurricane Sandy losses of
$261.2 million, compared to $292.8 million in the fourth quarter of 2011).



Highlights in 2012 included the following:                                  
                                                                            

--  The combined ratio of the insurance and reinsurance operations was 99.8%
    on a consolidated basis, producing an underwriting profit of $11.6
    million, compared to a combined ratio and underwriting losses of 114.2%
    and $754.4 million respectively in 2011. Underwriting results in 2011
    were negatively affected by over $1 billion of catastrophe losses. 
    
--  Net premiums written by the insurance and reinsurance operations
    increased by 9.2% to $5,995.0 million compared to $5,487.6 million in
    2011. 
    
--  The insurance and reinsurance operations produced an operating income
    (excluding net gains on investments) of $304.0 million in 2012, compared
    to an operating loss of $236.5 million in 2011, primarily as a result of
    the lower underwriting losses. 
    
--  Interest and dividend income of $409.3 million decreased from $705.3
    million in 2011, primarily because of significantly increased holdings
    of low-yielding cash and short term investments ($8,097.9 million at
    December 31, 2012, compared to $6,874.4 million at December 31, 2011)
    resulting from sales of higher-yielding securities, principally
    government bonds. As of December 31, 2012, subsidiary cash and short
    term investments accounted for 29.3% 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 $5,292.5 million at December 31, 2012 and
    $4,883.9 million at December 31, 2011). 
    
--  Net investment gains of $642.6 million in 2012 ($691.2 million in 2011)
    consisted of the following: 
    

                                             Year ended December 31, 2012   
                                          ----------------------------------
                                                     ($ millions)           
                                                                            
                                                     Unrealized             
                                            Realized      gains   Net gains 
                                               gains   (losses)    (losses) 
                                          ---------- ----------- -----------
Net gains (losses) on:                                                      
  Equity and equity-related investments       470.1       648.6     1,118.7 
  Equity hedges                                 6.3    (1,011.8)   (1,005.5)
                                          ---------- ----------- -----------
  Equity and equity-related investments                                     
   after equity hedges                        476.4      (363.2)      113.2 
  Bonds                                       566.3       161.8       728.1 
  CPI-linked derivatives                          -      (129.2)     (129.2)
  Other                                        22.3       (91.8)      (69.5)
                                          ---------- ----------- -----------
                                            1,065.0      (422.4)      642.6 
                                          ---------- ----------- -----------
                                          ---------- ----------- -----------
                                                                            
                                                Fourth quarter of 2012      
                                          ----------------------------------
                                                     ($ millions)           
                                                                            
                                           Realized  Unrealized             
                                              gains      gains   Net gains  
                                           (losses)    (losses)    (losses) 
                                          ---------- ----------- -----------
Net gains (losses) on:                                                      
  Equity and equity-related investments       153.0       442.0       595.0 
  Equity hedges                                13.5      (154.2)     (140.7)
                                          ---------- ----------- -----------
  Equity and equity-related investments                                     
   after equity hedges                        166.5       287.8       454.3 
  Bonds                                       176.1         8.6       184.7 
  CPI-linked derivatives                          -       (29.9)      (29.9)
  Other                                        (7.8)       34.3        26.5 
                                          ---------- ----------- -----------
                                              334.8       300.8       635.6 
                                          ---------- ----------- -----------
                                          ---------- ----------- -----------
                                                                            

--  The company held $1,169.2 million of cash, short term investments and
    marketable securities at the holding company level ($1,128.0 million net
    of short sale and derivative obligations) at December 31, 2012, compared
    to $1,026.7 million ($962.8 million net of short sale and derivative
    obligations) at December 31, 2011. 
    
--  The company's total debt to total capital ratio improved to 25.5% at
    December 31, 2012 from 26.4% at December 31, 2011. 
    
--  At December 31, 2012, common shareholders' equity was $7,654.7 million,
    or $378.10 per basic share, compared to $7,427.9 million, or $364.55 per
    basic share, at December 31, 2011. 
    

Highlights subsequent to the third quarter of 2012 included the following:  
                                                                            

--  On October 12, 2012, the company completed the purchase of the runoff
    business of Brit Insurance Limited for $335.1 million, which was paid by
    the company's runoff subsidiaries. At December 31, 2012, Brit Insurance
    had an investment portfolio of $1.2 billion. 
    
--  In October 2012, the purported class action commenced in July 2011
    against the company and others was dismissed, with no payment and
    without the possibility of further appeal or amendment. 
    
--  On October 15, 2012, the company completed an offering at par of
    Cdn$200.0 million of 5.84% unsecured senior notes due 2022, for net
    proceeds of Cdn$198.6 million. 
    
--  In October 2012, the company's TIG runoff subsidiary paid $200.0 million
    in full satisfaction of the loan note issued by TIG in connection with
    its acquisition of General Fidelity in August 2010. 
    
--  On December 10, 2012, the company completed the sale of its interest in
    Cunningham Lindsey for cash proceeds of $270.6 million. Fairfax invested
    $34.4 million of the proceeds in shares of Cunningham Lindsey on closing
    to continue to be a 9.1% minority shareholder. 
    
--  On December 10, 2012, the company filed a final short form prospectus
    with Canadian securities regulatory authorities to offer up to Cdn$2.0
    billion of debt, equity or other securities over a 25 month period. 
    
--  On January 21, 2013, the company completed an additional Cdn$250.0
    million offering of its 5.84% unsecured senior notes due 2022, for net
    proceeds of Cdn$258.1 million. These notes were priced at $103.854 per
    $100 principal amount, for an effective yield of 5.326%. 



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 December 31, 2012, equity hedges represented approximately 100.6%
of the company's equity and equity-related holdings. 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 20.3 and 20.4 million weighted average shares outstanding during
the fourth quarters of 2012 and 2011 respectively. At December 31, 2012, there
were 20,245,411 common shares effectively outstanding.

Summarized (without notes) condensed 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 fourth quarter report can be accessed at its website
www.fairfax.ca.

As previously announced, Fairfax will hold a conference call to discuss its
annual and fourth quarter results at 8:30 a.m. Eastern time on Friday,
February 15, 2013. 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, March 1, 2013. The replay may be
accessed at 1 (866) 505-6450 (Canada or U.S.) or 1 (203) 369-1871
(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;
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; 
the inability of our subsidiaries to maintain financial or claims paying
ability ratings; 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 December 31, 2012 and December 31, 2011                               
(unaudited - US$millions)                                                   
                                                                            
                                                          December  December
                                                          31, 2012  31, 2011
Assets                                                                      
Holding company cash and investments (including assets                      
 pledged for short sale and derivative obligations -                        
 $140.2; December 31, 2011 - $249.0)                       1,169.2   1,026.7
Insurance contract receivables                             1,945.4   1,735.4
                                                          --------  --------
                                                           3,114.6   2,762.1
                                                          --------  --------
Portfolio investments                                                       
Subsidiary cash and short term investments                 6,960.1   6,199.2
Bonds (cost $9,428.9; December 31, 2011 - $9,515.4)       10,803.6  10,835.2
Preferred stocks (cost $618.7; December 31, 2011 -                          
 $555.6)                                                     605.1     563.3
Common stocks (cost $4,066.3; December 31, 2011 -                           
 $3,867.3)                                                 4,399.1   3,663.1
Investments in associates (fair value $1,782.4; December                    
 31, 2011 - $1,271.8)                                      1,355.3     924.3
Derivatives and other invested assets (cost $524.0;                         
 December 31, 2011 - $511.4)                                 181.0     394.6
Assets pledged for short sale and derivative obligations                    
 (cost $791.1; December 31, 2011 - $810.1)                   859.0     886.3
                                                          --------  --------
                                                          25,163.2  23,466.0
                                                          --------  --------
                                                                            
Deferred premium acquisition costs                           463.1     415.9
Recoverable from reinsurers (including recoverables on                      
 paid losses - $311.0; December 31, 2011 - $313.2)         5,290.8   4,198.1
Deferred income taxes                                        623.5     628.2
Goodwill and intangible assets                             1,301.1   1,115.2
Other assets                                                 984.9     821.4
                                                          --------  --------
                                                          36,941.2  33,406.9
                                                          --------  --------
                                                          --------  --------
                                                                            
Liabilities                                                                 
Subsidiary indebtedness                                       52.1       1.0
Accounts payable and accrued liabilities                   1,877.7   1,656.2
Income taxes payable                                          70.5      21.4
Short sale and derivative obligations (including at the                     
 holding company - $41.2; December 31, 2011 - $63.9)         238.2     170.2
Funds withheld payable to reinsurers                         439.7     412.6
                                                          --------  --------
                                                           2,678.2   2,261.4
                                                          --------  --------
Insurance contract liabilities                            22,376.2  19,719.5
Long term debt                                             2,996.5   3,017.5
                                                          --------  --------
                                                          25,372.7  22,737.0
                                                          --------  --------
                                                                            
Equity                                                                      
Common shareholders' equity                                7,654.7   7,427.9
Preferred stock                                            1,166.4     934.7
                                                          --------  --------
Shareholders' equity attributable to shareholders of                        
 Fairfax                                                   8,821.1   8,362.6
Non-controlling interests                                     69.2      45.9
                                                          --------  --------
Total equity                                               8,890.3   8,408.5
                                                          --------  --------
                                                          36,941.2  33,406.9
                                                          --------  --------
                                                          --------  --------
                                                                            
                                                                            
CONSOLIDATED STATEMENTS OF EARNINGS                                         
for the three and twelve months ended December 31, 2012 and 2011            
(unaudited - US$millions except per share amounts)                          
                                                                            
                                                       Year ended December  
                                 Fourth quarter                31,          
                                   2012        2011        2012        2011 
                             ----------- ----------- ----------- -----------
Revenue                                                                     
  Gross premiums written        1,899.9     1,533.5     7,398.3     6,743.5 
                             ----------- ----------- ----------- -----------
  Net premiums written          1,597.8     1,287.4     6,194.1     5,607.9 
                             ----------- ----------- ----------- -----------
  Net premiums earned           1,765.5     1,395.5     6,084.9     5,426.9 
  Interest and dividends           73.3       162.1       409.3       705.3 
  Share of profit (loss) of                                                 
   associates                      20.0        (9.9)       15.0         1.8 
  Net gains (losses) on                                                     
   investments                    635.6      (914.9)      642.6       691.2 
  Other revenue                   269.8       190.8       871.0       649.8 
                             ----------- ----------- ----------- -----------
                                2,764.2       823.6     8,022.8     7,475.0 
                             ----------- ----------- ----------- -----------
Expenses                                                                    
  Losses on claims, gross       1,806.5     1,515.0     5,265.5     5,541.4 
  Less ceded losses on                                                      
   claims                        (443.5)     (237.8)   (1,022.9)     (956.1)
                             ----------- ----------- ----------- -----------
  Losses on claims, net         1,363.0     1,277.2     4,242.6     4,585.3 
  Operating expenses              305.3       260.2     1,120.3     1,148.3 
  Commissions, net                255.3       217.4       925.4       795.4 
  Interest expense                 52.2        52.2       208.2       214.0 
  Other expenses                  283.2       186.1       869.5       740.7 
                             ----------- ----------- ----------- -----------
                                2,259.0     1,993.1     7,366.0     7,483.7 
                             ----------- ----------- ----------- -----------
Earnings (loss) before                                                      
 income taxes                     505.2    (1,169.5)      656.8        (8.7)
Provision for (recovery of)                                                 
 income taxes                      97.1      (398.7)      116.1       (56.5)
                             ----------- ----------- ----------- -----------
Net earnings (loss)               408.1      (770.8)      540.7        47.8 
                             ----------- ----------- ----------- -----------
                             ----------- ----------- ----------- -----------
                                                                            
Attributable to:                                                            
Shareholders of Fairfax           404.1      (771.5)      532.4        45.1 
Non-controlling interests           4.0         0.7         8.3         2.7 
                             ----------- ----------- ----------- -----------
                                  408.1      (770.8)      540.7        47.8 
                             ----------- ----------- ----------- -----------
                             ----------- ----------- ----------- -----------
                                                                            
Net earnings (loss) per                                                     
 share                       $    19.14  $   (38.47) $    23.22  $    (0.31)
Net earnings (loss) per                                                     
 diluted share               $    18.90  $   (38.47) $    22.94  $    (0.31)
Cash dividends paid per                                                     
 share                       $        -  $        -  $    10.00  $    10.00 
Shares outstanding (000)                                                    
 (weighted average)              20,287      20,381      20,327      20,405 
                                                                            
                                                                            
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME                             
for the three and twelve months ended December 31, 2012 and 2011            
(unaudited - US$millions)                                                   
                                                                            
                                                               Year ended   
                                           Fourth quarter     December 31,  
                                            2012     2011     2012     2011 
                                         -------- -------- -------- --------
Net earnings (loss)                        408.1  (770.8)    540.7     47.8 
                                         -------- -------- -------- --------
Other comprehensive income (loss), net                                      
 of income taxes                                                            
  Change in unrealized foreign currency                                     
   translation gains (losses) on foreign                                    
   operations (1)                          (25.0)    61.7     59.2    (40.8)
  Change in gains and losses on hedge of                                    
   net investment in foreign subsidiary                                     
   (2)                                      16.4    (24.1)   (20.4)    33.2 
  Share of other comprehensive income                                       
   (loss) of associates (3)                 (7.4)   (10.6)   (21.0)    (7.5)
  Change in gains and losses on defined                                     
   benefit plans (4)                       (19.4)   (22.0)   (22.9)   (22.6)
                                         -------- -------- -------- --------
Other comprehensive income (loss), net                                      
 of income taxes                           (35.4)     5.0     (5.1)   (37.7)
                                         -------- -------- -------- --------
Comprehensive income (loss)                372.7   (765.8)   535.6     10.1 
                                         -------- -------- -------- --------
                                         -------- -------- -------- --------
                                                                            
Attributable to:                                                            
Shareholders of Fairfax                    368.2   (766.6)   527.6      8.0 
Non-controlling interests                    4.5      0.8      8.0      2.1 
                                         -------- -------- -------- --------
                                           372.7   (765.8)   535.6     10.1 
                                         -------- -------- -------- --------
                                         -------- -------- -------- --------
(1) Net of income tax recovery of $3.7 (2011 - income tax expense of $11.7) 
    and $3.4 (2011 - income tax expense of $9.0) for the fourth quarter and 
    year ended December 31, 2012, respectively.                             
(2) Net of income tax recovery of nil (2011 - nil) and nil (2011 - nil) for 
    the fourth quarter and year ended December 31, 2012, respectively.      
(3) Net of income tax expense of $0.9 (2011 - $0.8) and $1.7 (2011 - income 
    tax recovery of $0.8) for the fourth quarter and year ended December 31,
    2012, respectively.                                                     
(4) Net of income tax recovery of $4.6 (2011 - $9.0) and $6.9 (2011 - $9.0) 
    for the fourth quarter and year ended December 31, 2012, respectively.  



SEGMENTED INFORMATION

(unaudited - US$ millions)

Net premiums written and net premiums earned by the insurance and reinsurance
operations in the fourth quarters and years ended December 31, 2012 and 2011
were:



Net Premiums Written                                                        
                                                                            
                                                               Year ended   
                                           Fourth quarter     December 31,  
                                         ----------------- -----------------
                                             2012     2011     2012     2011
                                         -------- -------- -------- --------
Insurance - Canada (Northbridge)            243.0    257.7    948.7  1,098.5
- U.S. (Crum & Forster and Zenith                                           
 National)                                  408.1    408.0  1,872.8  1,601.1
  - Asia (Fairfax Asia)                      59.2     50.5    240.6    213.7
Reinsurance - OdysseyRe                     573.8    477.2  2,402.3  2,089.7
Insurance and Reinsurance - Other           114.6     93.4    530.6    484.6
                                         -------- -------- -------- --------
Insurance and reinsurance operations      1,398.7  1,286.8  5,995.0  5,487.6
                                         -------- -------- -------- --------
                                         -------- -------- -------- --------
                                                                            
                                                                            
Net Premiums Earned                                                         
                                                                            
                                                               Year ended   
                                           Fourth quarter     December 31,  
                                         ----------------- -----------------
                                             2012     2011     2012     2011
                                         -------- -------- -------- --------
Insurance - Canada (Northbridge)            240.3    258.4    992.2  1,072.2
- U.S. (Crum & Forster and Zenith                                           
 National)                                  484.1    414.9  1,811.6  1,504.6
  - Asia (Fairfax Asia)                      62.2     55.0    231.4    204.1
Reinsurance - OdysseyRe                     613.6    537.0  2,315.3  2,014.7
Insurance and Reinsurance - Other           151.0    129.2    514.3    504.9
                                         -------- -------- -------- --------
Insurance and reinsurance operations      1,551.2  1,394.5  5,864.8  5,300.5
                                         -------- -------- -------- --------
                                         -------- -------- -------- --------



Combined ratios of the insurance and reinsurance operations in the fourth
quarters and years ended December 31, 2012 and 2011 were:



                                                              Year ended    
                                          Fourth quarter     December 31,   
                                         ----------------- -----------------
                                           2012     2011     2012     2011  
                                         -------- -------- -------- --------
Insurance - Canada (Northbridge)           113.7%   101.9%   105.7%   102.8%
- U.S. (Crum & Forster and Zenith                                           
 National)                                 122.6%   124.2%   111.4%   114.3%
  - Asia (Fairfax Asia)                     84.4%    89.2%    87.0%    83.2%
Reinsurance - OdysseyRe                     94.4%   122.7%    88.5%   116.7%
Insurance and Reinsurance - Other          109.8%   155.1%   104.3%   140.9%
                                         -------- -------- -------- --------
Insurance and reinsurance operations       107.3%   121.0%    99.8%   114.2%
                                         -------- -------- -------- --------
                                         -------- -------- -------- --------



FOR FURTHER INFORMATION PLEASE CONTACT: 
Fairfax Financial Holdings Limited
John Varnell
Vice President, Corporate Development
(416) 367-4941


Media Contact
Fairfax Financial Holdings Limited
Paul Rivett
Vice President, Operations
(416) 367-4941
www.fairfax.ca
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