Fairfax Financial Holdings Limited has announced net earnings of $325.2 million in the second quarter of 2010 ($15.49 per diluted share) compared to net earnings of $275.4 million in the second quarter of 2009 ($15.56 per diluted share). The year-over-year increase in earnings arose primarily from significant net investment gains in the second quarter of 2010 (net gains of $388.7 million). In the first six months of 2010, net earnings were $614.6 million ($29.52 per diluted share) compared to $215.0 million in the first six months of 2009 ($12.02 per diluted share). Book value per share increased to $382.70 at June 30, 2010 from $369.80 at December 31, 2009, an increase of 6.1% (adjusted for the $10 per share common dividend paid in the first quarter of 2010).
“Despite the challenging insurance industry and investment environment, during the second quarter we recorded good operating results and essentially maintained our common shareholders’ equity and book value per share,” said Prem Watsa, Chairman and Chief Executive Officer of Fairfax, in a press release. “We completed our acquisition of Zenith National Insurance Corp. for cash and still ended the quarter with $1.4 billion in cash and marketable securities at the holding company level. And continuing to be mindful of the considerable risks in these volatile markets and of our upcoming bond maturities in 2012 and 2013, during and subsequent to the quarter we enhanced our financial flexibility by publicly issuing additional 10-year bonds and preferred shares in Canada.”
Highlights in the second quarter included the following:
• The combined ratio of the company’s insurance and reinsurance operations was 101.2% on a consolidated basis, producing an underwriting loss of $13.0 million, compared to a combined ratio and underwriting profit of 98.4% and $17.3 million, respectively, in the second quarter of 2009. Underwriting results in the second quarter of 2010 included $37.3 million (net of reinstatement premiums) of catastrophe losses and $36.4 million (net of reinstatement premiums) related to the Deepwater Horizon loss. The combined ratio for the six months ended June 30, 2010 was 106.3% compared to 98.5% in 2009 and included catastrophe losses of 10.1% and 3.4% respectively.
• Interest and dividend income of $195.7 million increased 6.1% from $184.5 million in the second quarter of 2009. The year-over-year increase was primarily attributable to the larger average investment portfolio. Interest income as reported is unadjusted for the positive tax effect of the company’s significant holdings of tax-advantaged debt securities (holdings of $4,795.4 million at June 30, 2010 compared to $4,358.7 million at June 30, 2009).
• Operating income of the company’s insurance and reinsurance operations (excluding net gains on investments) declined to $142.1 million from $173.8 million in the second quarter of 2009, principally as a result of the above-described underwriting loss.
• Net premiums written were essentially flat at $1,116.0 million compared to $1,115.3 million in the second quarter of 2009, reflecting decreases at OdysseyRe and Crum & Forster offset by increases from the acquisition of Zenith National and currency translation.
• The company held $1,423.0 million of cash, short term investments and marketable securities at the holding company level ($1,379.8 million net of short sale and derivative obligations) at
June 30, 2010, compared to $1,788.1 million ($1,761.4 million net of short sale and derivative obligations) at March 31, 2010 and $1,251.6 million ($1,242.7 million net of short sale and derivative obligations) at December 31, 2009.
• The company’s total debt to total capital ratio was 23.3% at June 30, 2010 compared to 23.0% at December 31, 2009.
• At June 30, 2010, common shareholders’ equity was $7,863.4 million, or $382.70 per basic share, compared to $7,391.8 million, or $369.80 per basic share, at December 31, 2009, an increase of 6.1% adjusted for the $10 per share common dividend paid in the first quarter of 2010.
• On May 20, 2010, Fairfax completed the acquisition of Zenith National.
• On June 11, 2010, TIG Insurance Company (“TIG”), an indirect wholly-owned subsidiary of Fairfax, entered into a purchase agreement pursuant to which TIG agreed to purchase all of the issued and outstanding shares of a property and casualty insurance company based in the United States (the “Transaction”). The purchase price will be determined based on the acquired company’s financial statements for the period ended June 30, 2010 and is expected to be approximately $350 million, which approximates book value, payable by way of a cash payment of $100 million and by a contingent promissory note issued by TIG (the “TIG Note”) for the remainder. The principal amount of the TIG Note will be reduced to the extent that there is adverse development of the acquired company’s loss reserves at the sixth anniversary of the closing of the Transaction. The TIG Note will be due following the sixth anniversary of the closing of the Transaction, and will not bear interest (except interest up to 2% per annum will be payable during periods, if any, when there is a 6% increase in the United States consumer price index). Fairfax has guaranteed TIG’s obligations under the TIG Note. Based on its statutory financial statements filed with insurance regulators, as at March 31, 2010 the acquired company had cash and investment assets of $616 million, gross loss and loss adjustment expenses of $334 million and reinsurance recoverables of $19 million. The acquired company’s insurance business will be run off under the management of Fairfax’s RiverStone subsidiary. The closing of the Transaction, expected to occur in August of 2010, is subject to various conditions, including receipt of all required regulatory approvals.
• On June 22, 2010, the company completed a public offering in Canada of Cdn$275.0 principal amount of 7.25% unsecured senior notes due June 22, 2020 issued at par for net proceeds after commissions and expenses of approximately Cdn$273 million. The company has designated these senior notes as a hedge of a portion of its net investment in Northbridge.
• Holders of Crum & Forster’s 7.75% senior notes due 2017 and, subsequent to quarter-end, holders of OdysseyRe’s 7.65% senior notes due 2013 and 6.875% senior notes due 2015 consented to an amendment of their respective note indentures, to allow note holders to receive certain specified financial information and financial statements in lieu of the reports currently filed with the Securities and Exchange Commission.
Fairfax keeps its books in U.S. dollars.