Canadian Underwriter

Fairfax rebounds with record profit in 2002

February 11, 2003   by Canadian Underwriter

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After a disastrous 2001, Toronto-based financial giant Fairfax Financial Holdings Ltd. (NYSE, TSX: FFH) rebounded in 2002 to produce a profit of $415.7 million, the largest in the company’s history.
For the fourth quarter ending December 31, 2002, the company saw total revenue of $2.09 billion, versus the $1.73 billion reported during the last quarter of 2001. Net earnings were $76 million for the latest quarter, against $35.4 million a year earlier, producing earnings per share of $6.06 versus $1.81 year-on-year.
Yearend results put total revenues at $7.96 billion, versus $6.13 billion in 2001. The $415.7 million in net earnings posted in 2002, equal to $28.78 per share, is a vast improvement on a loss of $346 million, or $28.04 per share, in 2001.
The company notes that fourth quarter 2002 results are impacted by reserve strengthening of $314.3 million and restructuring charges of $99.9 million regarding its TIG Insurance Company. The company previously announced plans to discontinue parts of TIG’s business and merge existing operations with International Insurance Company. The company insists its reserves are adequate despite a U.S. analyst report which recently commented that TIG specifically is under-reserved. Fairfax responds, “the research report’s reserve analysis has no validity and provides no basis for concluding that there is any deficiency in the reserves of Fairfax’s U.S. insurance companies.”
The company reports that it sits in a strong investment position, with an 11% return on its investment portfolio last year while “many insurance companies suffered significant losses of their investments”. “The substantial amount of cash and short term investments and the high quality of bonds held in the portfolio enable the company to take advantage of attractive investment opportunities.” As of December 31, 2002, the company’s investment portfolio had a pre-tax unrealized gain of $207.9 million versus an unrealized loss of $223.1 million at the end of 2001.
Perhaps most pleasing to the company is that other than existing TIG operations and U.S. subsidiary Crum & Forster, all insurance and reinsurance operations brought in combined ratios below 100% for 2002. Canadian operations stood at 95.8% last year, versus 116.4% in 2001, while U.S. insurance subsidiaries combined for 103.6%, still a vast improvement on the 125.3% reported a year earlier. Odyssey Re clocked in at 99.1% (2001: 115.4%) to bring the overall combined ratio to 100.1% versus 120.9% in 2001.
The company’s Canadian operations, including Commonwealth, Federated, Lombard and Markel, saw net written premiums grow almost 43% to $1.25 billion last year, compared to $875.1 million in 2001. Earned premiums were $932 million for Canada in 2002, versus $730.2 million a year earlier. Underwriting profit from Canadian operations stood at $39.5 million in 2002, against a loss of $119.5 million the year prior. This compares to an underwriting loss of $65.5 million for U.S. insurance operations in 2002 versus a loss of $637.9 million in 2001. The reinsurance operations saw an underwriting gain of $20.3 million last year, against a loss of $214.7 million in 2001.

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