Premium revenue increases, profits plummet at Fairfax Financial

Toronto-based insurance and investment firm Fairfax Financial Holdings Ltd. has released financial results for the period ending Sept. 30, recording a 43% drop year-over-year in third-quarter revenue, a 96% drop in net earnings and a 5.6% increase in net premiums written by the insurance and reinsurance operations.

Though premiums increased, the third-quarter results were affected by unrealized losses on equity hedges.

In Canada, the firm’s subsidiary Northbridge Financial provides property and casualty insurance under the Northbridge and Federated brands while other subsidiaries provide insurance, reinsurance and investment management.

In a press release issued after trading closed Oct. 25, Fairfax reported that total revenue for the three months ending Sept 30, 2012 was $1.8918 billion, down nearly $1.44 billion, or 43%, from $3.3229 billion during the same period in 2011. All figures are in U.S. currency.

Net earnings for the quarter were $34.6 million in 2012, down 96% from $973.9 million in the third quarter of 2011, though in a press release the firm noted that operating income for the third quarter of the insurance and reinsurance operations (excluding net gains or losses on investments) increased to $148.4 million from $39.1 million in 2011.

Net premiums written for the third quarter increased year-over-year from $1.431 billion in 2011 to $1.5102 billion this year. Net premiums earned for the period increased, from $1.4 billion in 2011 to $1.6028 billion this year.

Insurance subsidiaries in North America include Woodland Hills, Calif.-based Zenith National Insurance Corp. (which is mainly in the American workers’ compensation business) and Morristown, N.J.-based Crum & Forster, while reinsurance subsidiaries include Advent, Group Re, Odyssey Re, Polish Re and Singapore Re.

Revenues for Fairfax Financial were affected by a change in value of investments. During the third quarter of 2011 the firm recorded a net gain of $1.588 billion while the net loss on investments for the quarter ending Sept 30, 2012 was $23.6 million.

“Our underwriting results continued to improve on increased premiums and we produced a small investment loss due to our unrealized investment losses related to our defensive hedging strategy,” chairman and CEO Prem Watsa stated in the press release.

The unrealized loss on equity hedges for the third quarter was $431.6 million. Total realized gains on investments were $340.2 million while unrealized losses were $363.8 million, for a net investment loss of $23.6 million for the quarter. For the first nine months of 2012, Fairfax Financial reported unrealized losses on equity hedges of $857.6 million. Net investment gains for the first nine months were $7 million.

Long term debt as of Sept 30 was $2.969 billion. Total liabilities were $23.27 billion, of which $20.3 billion was in insurance contract liabilities. Total assets as of Sept. 30 were $34.49 billion, of which $1.32 billion was in goodwill and intangible assets while $4.369 billion was recoverable from reinsurers. Fairfax also reported on its balance sheet that as of Sept. 30 it held $4.131 billion in common stocks, $9.93 billion in bonds, $7.027 billion in subsidiary cash and short-term investments and nearly $2 billion in insurance contract receivables. The holding firm itself held $966.6 million in cash and investments.

Two weeks before it released its third-quarter financials, Fairfax Financial announced that Riverstone, its Manchester, N.H.-based runoff subsidiary, completed the acquisition of all outstanding shares of London-based Brit Insurance Ltd. from Brit Group.

The Brit acquisition was announced about a week after Fairfax said it would “effectively sell its interest in Cunningham Lindsey for proceeds of approximately $260 million.” Fairfax will continue to be a minority shareholder in Cunningham Lindsey, a claims adjuster in which CVC Capital Partners is acquiring majority ownership and in which Stone Point Capital has had a majority ownership.