(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 a net loss of $157.8 million in the second quarter of
2013 ($8.55 net loss per diluted share after payment of preferred
share dividends) compared to net earnings of $93.7 million in the
second quarter of 2012 ($3.79 net earnings per diluted share after
payment of preferred share dividends), primarily reflecting
unrealized losses on its bond portfolio, partially offset by strong
underwriting results. Book value per basic share decreased to
$361.87 at June 30, 2013 from $378.10 at December 31, 2012 (a
decrease of 1.6% adjusted for the $10 per common share dividend
paid in the first quarter of 2013).
"We had strong and much improved underwriting performance in the
second quarter and first half of 2013. Our net loss in the second
quarter was only due to net mark-to-market bond losses of $500
million as a result of higher interest rates, including $400
million on our state and muni bond portfolio, a majority of which
is insured by Berkshire Hathaway. Our muni bond portfolio was
mainly acquired in the last quarter of 2008 at an after-tax yield
of 5.79%," said Prem Watsa, Chairman and Chief Executive Officer of
Fairfax, who further commented, "we are maintaining our defensive
equity hedges due to our concern about the financial markets and
the economic outlook. We continue to be soundly financed, with
quarter-end cash and marketable securities at the holding company
in excess of $1.2 billion."
Highlights in the second quarter of 2013 (with comparisons to
the second quarter of 2012, except as otherwise noted) included the
following:
-- The combined ratio of the insurance and reinsurance operations was 94.2%
on a consolidated basis, producing an underwriting profit of $83.9
million, compared to a combined ratio and an underwriting profit of
97.6% and $32.7 million respectively in 2012.
-- Net premiums written by the insurance and reinsurance operations
decreased by 8.6% to $1,430.0 million compared to $1,565.2 million in
2012 due primarily to the accounting effect of unearned premium
portfolio transfers related to OdysseyRe's participation in June 2012
and June 2013 in a significant property quota share reinsurance
contract, but increased by 1.6% to $1,467.9 million compared to $1,445.4
million in 2012 after removing that accounting effect.
-- The insurance and reinsurance operations produced operating income
(excluding net gains or losses on investments) of $187.5 million in
2013, compared to $116.1 million in 2012, primarily as a result of the
improved underwriting profit.
-- Interest and dividend income of $112.1 million increased from $105.8
million in 2012, primarily because of lower total return swap costs,
partially offset by lower investment income earned on significant
holdings of low-yielding cash and short term investments ($7,533.1
million at June 30, 2013, compared to $7,917.8 million at June 30,
2012). As of June 30, 2013, subsidiary cash and short term investments
accounted for 29.9% 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 $4,942.2 million at June 30, 2013).
-- Net investment losses of $415.7 million in the second quarter of 2013
(net investment gains of $71.5 million in 2012) consisted of the
following:
Second quarter of 2013
-----------------------------------------
($ millions)
Realized Unrealized
gains gains Net gains
(losses) (losses) (losses)
------------- ------------- -------------
Net gains (losses) on:
Equity and equity-related
investments 134.5 (63.8) 70.7
Equity hedges (34.5) 34.3 (0.2)
------------- ------------- -------------
Equity and equity-related
investments after equity hedges 100.0 (29.5) 70.5
Bonds 62.9 (558.7) (495.8)
CPI-linked derivatives - (16.4) (16.4)
Other 8.5 17.5 26.0
------------- ------------- -------------
171.4 (587.1) (415.7)
------------- ------------- -------------
------------- ------------- -------------
First six months of 2013
-----------------------------------------
($ millions)
Realized Unrealized
gains gains Net gains
(losses) (losses) (losses)
------------- ------------- -------------
Net gains (losses) on:
Equity and equity-related
investments 322.4 446.7 769.1
Equity hedges (34.5) (558.5) (593.0)
------------- ------------- -------------
Equity and equity-related
investments after equity hedges 287.9 (111.8) 176.1
Bonds 60.5 (675.3) (614.8)
CPI-linked derivatives - (48.8) (48.8)
Other (11.7) 92.9 81.2
------------- ------------- -------------
336.7 (743.0) (406.3)
------------- ------------- -------------
------------- ------------- -------------
-- The company held $1,209.6 million of cash, short term investments and
marketable securities at the holding company level ($1,191.6 million net
of short sale and derivative obligations) at June 30, 2013, compared to
$1,169.2 million ($1,128.0 million net of short sale and derivative
obligations) at December 31, 2012.
-- The company's total debt to total capital ratio was 27.0% at June 30,
2013, compared to 25.5% at December 31, 2012.
-- At June 30, 2013, common shareholders' equity was $7,319.2 million, or
$361.87 per basic share, after the payment of a $10.00 per common share
dividend in the first quarter, compared to $7,654.7 million, or $378.10
per basic share, at December 31, 2012.
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
June 30, 2013, equity hedges temporarily represented approximately
109.2% of the company's equity and equity-related holdings (in
excess of the company's target ratio of 100%) because of
quarter-end equity fluctuations. 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 20.2 and 20.3 million weighted average shares
outstanding during the second quarters of 2013 and 2012
respectively. At June 30, 2013, there were 20,225,785 common shares
effectively outstanding.
Summarized (without notes) interim 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 second quarter report
can be accessed at its website www.fairfax.ca.
As previously announced, Fairfax will hold a conference call to
discuss its second quarter results at 8:30 a.m. Eastern time on
Friday, August 2, 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, August 16, 2013. The replay may be accessed
at 1 (866) 470-7047 (Canada or U.S.) or 1 (203) 369-1481
(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 June 30, 2013 and December 31, 2012
(unaudited - US$ millions)
June 30, December
2013 31, 2012
---------------------
Assets
Holding company cash and investments (including assets
pledged for short sale and derivative obligations -
$117.4; December 31, 2012 - $140.2) 1,209.6 1,169.2
Insurance contract receivables 2,105.7 1,945.4
---------- ----------
3,315.3 3,114.6
---------- ----------
Portfolio investments
Subsidiary cash and short term investments 6,696.9 6,960.1
Bonds (cost $8,673.3; December 31, 2012 - $9,428.9) 9,419.7 10,803.6
Preferred stocks (cost $612.3; December 31, 2012 -
$618.7) 583.7 605.1
Common stocks (cost $4,051.6; December 31, 2012 -
$4,066.3) 4,704.2 4,399.1
Investments in associates (fair value $1,767.9;
December 31, 2012 - $1,782.4) 1,400.2 1,355.3
Derivatives and other invested assets (cost $627.1;
December 31, 2012 - $524.0) 388.8 181.0
Assets pledged for short sale and derivative
obligations (cost $875.9; December 31, 2012 - $791.1) 905.3 859.0
---------- ----------
24,098.8 25,163.2
---------- ----------
Deferred premium acquisition costs 472.1 463.1
Recoverable from reinsurers (including recoverables on
paid losses - $410.9; December 31, 2012 - $311.0) 5,081.5 5,290.8
Deferred income taxes 823.0 623.5
Goodwill and intangible assets 1,302.1 1,301.1
Other assets 1,028.9 984.9
---------- ----------
36,121.7 36,941.2
---------- ----------
---------- ----------
Liabilities
Subsidiary indebtedness 36.5 52.1
Accounts payable and accrued liabilities 2,001.7 1,877.7
Income taxes payable 56.2 70.5
Short sale and derivative obligations (including at the
holding company - $18.0; December 31, 2012 - $41.2) 132.1 238.2
Funds withheld payable to reinsurers 433.9 439.7
---------- ----------
2,660.4 2,678.2
---------- ----------
Insurance contract liabilities 21,736.2 22,376.2
Long term debt 3,138.2 2,996.5
---------- ----------
24,874.4 25,372.7
---------- ----------
Equity
Common shareholders' equity 7,319.2 7,654.7
Preferred stock 1,166.4 1,166.4
---------- ----------
Shareholders' equity attributable to shareholders of
Fairfax 8,485.6 8,821.1
Non-controlling interests 101.3 69.2
---------- ----------
Total equity 8,586.9 8,890.3
---------- ----------
36,121.7 36,941.2
---------- ----------
---------- ----------
CONSOLIDATED STATEMENTS OF EARNINGS
for the three and six months ended June 30, 2013 and 2012
(unaudited - US$ millions except per share amounts)
Second quarter First six months
2013 2012 2013 2012
---------- ---------- ---------- ----------
Revenue
Gross premiums written 1,705.6 1,839.1 3,597.4 3,646.7
---------- ---------- ---------- ----------
Net premiums written 1,430.1 1,565.1 3,035.8 3,086.7
---------- ---------- ---------- ----------
Gross premiums earned 1,727.1 1,649.0 3,488.3 3,239.7
Premiums ceded to reinsurers (281.6) (271.3) (580.0) (522.5)
---------- ---------- ---------- ----------
Net premiums earned 1,445.5 1,377.7 2,908.3 2,717.2
Interest and dividends 112.1 105.8 211.6 235.4
Share of profit of associates 27.4 8.9 46.1 0.2
Net gains (losses) on
investments (415.7) 71.5 (406.3) 30.6
Other revenue 186.5 178.6 380.7 383.6
---------- ---------- ---------- ----------
1,355.8 1,742.5 3,140.4 3,367.0
---------- ---------- ---------- ----------
Expenses
Losses on claims, gross 1,156.1 1,066.5 2,329.2 2,168.5
Less ceded losses on claims (245.6) (149.7) (515.2) (352.9)
---------- ---------- ---------- ----------
Losses on claims, net 910.5 916.8 1,814.0 1,815.6
Operating expenses 287.3 267.1 571.7 538.4
Commissions, net 234.8 215.3 475.0 421.4
Interest expense 53.2 51.6 106.5 104.5
Other expenses 177.2 179.7 368.3 379.3
---------- ---------- ---------- ----------
1,663.0 1,630.5 3,335.5 3,259.2
---------- ---------- ---------- ----------
Earnings (loss) before income
taxes (307.2) 112.0 (195.1) 107.8
Provision for (recovery of)
income taxes (150.3) 17.8 (201.5) 14.9
---------- ---------- ---------- ----------
Net earnings (loss) (156.9) 94.2 6.4 92.9
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Attributable to:
Shareholders of Fairfax (157.8) 93.7 3.8 91.1
Non-controlling interests 0.9 0.5 2.6 1.8
---------- ---------- ---------- ----------
(156.9) 94.2 6.4 92.9
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Net earnings (loss) per share $ (8.55) $ 3.84 $ (1.32) $ 3.08
Net earnings (loss) per diluted
share $ (8.55) $ 3.79 $ (1.32) $ 3.04
Cash dividends paid per share $ - $ - $ 10.00 $ 10.00
Shares outstanding (000)
(weighted average) 20,234 20,334 20,239 20,345
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
for the three and six months ended June 30, 2013 and 2012
(unaudited - US$ millions)
Second quarter First six months
2013 2012 2013 2012
--------- --------- --------- ---------
Net earnings (loss) (156.9) 94.2 6.4 92.9
--------- --------- --------- ---------
Other comprehensive income (loss),
net of income taxes
Items that may be subsequently
reclassified to net earnings
Change in unrealized foreign
currency translation gains
(losses) on foreign operations (105.3) (42.4) (175.8) 3.4
Change in gains (losses) on hedge
of net investment in Canadian
subsidiaries 55.5 21.2 86.6 1.3
Share of other comprehensive income
(loss) of associates, excluding
gains (losses) on defined benefit
plans (10.9) (10.5) (19.5) (4.3)
--------- --------- --------- ---------
(60.7) (31.7) (108.7) 0.4
--------- --------- --------- ---------
Items that will not be subsequently
reclassified to net earnings
Share of gains (losses) on defined
benefit plans of associates 0.4 0.2 2.6 (10.8)
Change in gains (losses) on defined
benefit plans 0.9 (3.5) 0.9 (3.5)
--------- --------- --------- ---------
1.3 (3.3) 3.5 (14.3)
--------- --------- --------- ---------
Other comprehensive income (loss),
net of income taxes (59.4) (35.0) (105.2) (13.9)
--------- --------- --------- ---------
Comprehensive income (loss) (216.3) 59.2 (98.8) 79.0
--------- --------- --------- ---------
--------- --------- --------- ---------
Attributable to:
Shareholders of Fairfax (213.7) 60.1 (97.4) 78.4
Non-controlling interests (2.6) (0.9) (1.4) 0.6
--------- --------- --------- ---------
(216.3) 59.2 (98.8) 79.0
--------- --------- --------- ---------
--------- --------- --------- ---------
SEGMENTED INFORMATION
(unaudited - US$ millions)
Net premiums written and net premiums earned by the insurance
and reinsurance operations in the second quarters and first six
months of 2013 and 2012 were:
Net Premiums Written
Second quarter First six months
----------------- -----------------
2013 2012 2013 2012
-------- -------- -------- --------
Insurance - Canada (Northbridge) 304.4 289.3 552.0 490.9
- U.S. (Crum & Forster and Zenith
National) 441.2 454.2 1,018.4 1,018.2
- Asia (Fairfax Asia) 60.3 54.8 136.4 127.6
Reinsurance - OdysseyRe 501.7 620.3 1,105.7 1,146.2
Insurance and Reinsurance - Other 122.4 146.6 223.3 303.9
-------- -------- -------- --------
Insurance and reinsurance operations 1,430.0 1,565.2 3,035.8 3,086.8
-------- -------- -------- --------
-------- -------- -------- --------
Net Premiums Earned
First six
Second quarter months
--------------- ---------------
2013 2012 2013 2012
------- ------- ------- -------
Insurance - Canada (Northbridge) 243.1 245.9 488.8 497.9
- U.S. (Crum & Forster and Zenith National) 473.8 438.5 942.6 857.0
- Asia (Fairfax Asia) 62.4 56.7 117.3 110.1
Reinsurance - OdysseyRe 556.2 521.2 1,112.7 1,008.2
Insurance and Reinsurance - Other 109.0 111.0 215.3 238.3
------- ------- ------- -------
Insurance and reinsurance operations 1,444.5 1,373.3 2,876.7 2,711.5
------- ------- ------- -------
------- ------- ------- -------
Combined ratios of the insurance and reinsurance operations in
the second quarters and first six months of 2013 and 2012 were:
Second quarter First six months
----------------- -----------------
2013 2012 2013 2012
-------- -------- -------- --------
Insurance - Canada (Northbridge) 100.4% 106.0% 100.4% 105.2%
- U.S. (Crum & Forster and Zenith
National) 99.8% 107.0% 101.5% 108.1%
- Asia (Fairfax Asia) 90.7% 88.8% 90.9% 90.4%
Reinsurance - OdysseyRe 85.9% 85.8% 84.4% 86.4%
Insurance and Reinsurance - Other 100.2% 101.7% 99.3% 101.7%
-------- -------- -------- --------
Insurance and reinsurance operations 94.2% 97.6% 94.1% 98.2%
-------- -------- -------- --------
-------- -------- -------- --------
Contacts: Fairfax Financial Holdings Limited John Varnell Vice
President, Corporate Development (416) 367-4941 www.fairfax.ca
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