Fairfax Posts Loss, Ups 9-month Earnings

By Michael Ha

NU Online News Service, Nov. 3, 3:00 p.m.EST?Fairfax Financial Holdings posted a $15.2 million lossfor its third quarter, reversing net profit of $213.2 recorded oneyear ago.

The Toronto-based insurer's revenue for the quarter also fell to$1.24 billion, from $1.7 billion reported during the year-agoperiod. Its net premiums written for the quarter were $1.1 billion,down from $1.3 billion one year ago.

The company blamed the loss on several factors, including lowinterest and dividends, reduced realized gains, and higher runoffcosts.

But on a brighter note, Fairfax showed an improvement infinancial results for the first nine months of 2003, recording$288.5 million in net profit, compared to $257.3 million in incomeposted last year. (Canadian dollars were converted to U.S. dollarsusing an exchange rate of C$1.32=U.S. $1.)

"In the third quarter, we had a small loss of C$20 million($15.2 million). However, we had a record net income of C$381million ($288.5 million) for the first nine months of 2003," notedPrem Watsa, chief executive officer at Fairfax, during a conferencecall today with analysts. "Overall, we are very pleased with ournine-month results?we continue to deliver on fundamentals and itshows in our financials," he said.

Commenting on runoff costs, Mr. Watsa noted that DennisGibbs?chairman of TRG Holding, Fairfax's jointly owned businesswith Xerox Corp., who is also in charge of overseeing the runoffbusiness?"has done an outstanding job."

He continued that Mr. Gibbs' team has done even better thanexpected, but that there is a lag in the cost of running theoperation. "As Dennis and his team continue to settle all theclaims, we expect there to be a decreasing drag on our results fromrunoff, but it will likely last right through 2004," he said.

Mr. Watsa added, "Let me just say we are not happy about theloss."

In the past year, Fairfax has restructured its money-losing U.S.unit, TIG Specialty Insurance in Dallas, by placing most of itsoperations into a runoff division, boosting loss reserves by $200million and purchasing a $300 million adverse loss developmentcover. Fairfax has since merged TIG with its TRG Holding'sInternational Insurance Co. subsidiary.

Mr. Watsa emphasized that Fairfax's ongoing insurance andreinsurance operations continue to show solid results.

"Combined ratios for all our operations were below 100percent?Northbridge, 92.7 percent; Crum & Forster, 98.1percent; OdysseyRe, 96.4 percent," he said. "Total combined ratiofor the third quarter was 97 percent. The combined ratio for thenine months was 97.8 percent."

Fairfax's realized gains on investments dropped sharply to $33.4million, from $352.9 million one year ago. The insurer's revenuefrom interest and dividends also fell, to $84.3 million from $124.2million posted during the year-ago period.

But Mr. Watsa said his company currently has nearly $6 billionin cash and T-bills, with 48 percent of its investment portfolio incash.

He noted that if Fairfax were to invest its cash in longer-termtreasuries, the company could immediately boost its investmentincome by more than $230 million annually, $56 million per quarter.He added: "We are tempted, but we don't believe the risk ofprincipal loss justifies the added income. We are waiting forbetter opportunities patiently. With almost 50 percent in cash, weare well-positioned to take advantage of opportunities in thefuture."

Fairfax Financial Holdings, through its subsidiaries, offersvarious lines of insurance products, with a focus onproperty-casualty insurance. Its products include trucking, oil andgas insurance. The insurer also provides investment management,claims adjusting and risk management services.