Fairfax sale of credit default swaps leads to increased 2008 Q1 earnings

Fairfax Financial Holdings Limited (TSX and NYSE: FFH) reported net earnings of US$631.8million in 2008 Q1, based largely on the strength of the sale of credit default swaps.
In comparison, the company’s net earnings were US$110.9 million in 2007 Q1.
Fairfax reported net gains on investments in 2008 Q1 of US$1.09 billion, compared to only US$98.8 million in 2007 Q1.
“During the first quarter of 2008, the company sold [US]$3.8 billionnotional amount of credit default swaps for proceeds of $885.0 million and recorded net gains on sales of [US]$230.7 million and net mark-to-market gains of [US]$467.4 million,” Fairfax reported in a press release.
Credit default swaps are credit derivatives, in which one party makes periodic payments to another in exchange for a payout if a third party defaults on a loan.
The combined ratio of the company’s insurance and reinsurance operations for 2008 Q1 was 100.7% on a consolidated basis.
On an individual company basis, the combined ratios were as follows:
Northbridge: 98.9%
Crum & Forster: 108.3%
Fairfax Asia: 82.1%
OdysseyRe: 98.5% and
Group Re: 96.9%.
Included in the 2008 Q1 underwriting results is a US$25.5-million, pre-tax charge associated with the settlement of an asbestos lawsuit by Crum & Forster, representing 9.4 COR points for Crum & Forster and 2.3 COR points for Fairfax.
“This charge led to an underwriting loss at the company’s insurance and reinsurance operations for the first quarter of 2008 of [US]$7.7 million compared to underwriting profit of [US]$49.5 million for the first quarter of 2007,” the company reported.
Net premiums written during 2008 Q1 were more or less static, declining by 0.5% to US$1.064 billion from US$1.069 billion in 2007 Q1.