Fairfax 3-Q Earnings Hit by Investment Declines

Third quarter net taxed earnings of Fairfax Financial Holdings Ltd. (TSX: FFH) dropped into the red this year with a loss of $20 million, which amounts to $1.67 a share. This compares with a net taxed profit of $281.4 million ($19.31 a share) posted for the third quarter of last year. This year’s third quarter loss largely arose from significantly reduced investment income and realized gains, higher finance charges, currency exchange rate fluctuations, and group operational runoff costs, a company statement says.

Despite the latest quarter’s drop in earnings, Fairfax notes that it experienced “record earnings” over the first nine months of this year, with net taxed earnings clocking in at $380.8 million ($26.08 a share) compared with the $339.7 million ($22.72 a share) posted for the same period last year. This, however, largely resulted from a $258.6 million year-on-year increase in realized gains to $850.4 million for the first three quarters of this year (first three quarters 2002: $591.8 million), while the third quarter shows a marked decline in this source of earnings of only $44.1 million (3-Q 2002: $465.8 million).

The company’s gross written premiums for the third quarter of this year fell by 14% to $1.861 billion versus the $2.170 billion posted for the same period in 2002. While net earned premiums for this year’s third quarter dropped by a more moderate 9% to $1.367 billion (3-Q 2002: $1.498 billion), net written premiums for the latest quarterly reporting period show significant decline of 15% year-on-year at $1.465 billion (3-Q 2002: $1.723 billion). Fairfax’s nine month results for this year also reveal a drop in underwriting revenue with gross written premiums of $5.785 billion (first nine months 2002: $6.100 billion), and net earned premiums of $4.370 billion (first nine months 2002: $4.463 billion) with net written premiums amounting to $4.657 billion (first nine months 2002: $4.859 billion).

The company incurred an underwriting cost of $944 million for the third quarter of this year compared with a claims loss of $1.118 billion shown for the same period in 2002. Fairfax’s finance charges for the latest quarter almost doubled to $58 million versus the $29.8 million paid during the third quarter of last year. The company’s underwriting cost for the first nine months of this year came in at $3.153 billion against the $3.282 billion reported for the same period in 2002. As a result, the company’s consolidated combined ratio (reflecting the average ratio of operations) for the third quarter of this year shows moderate improvement at 97% (3-Q 2002: 101.3%) with a combined ratio of 97.8% for the latest nine months (first nine months 2002: 100.6%).

Investment income for the third quarter of this year dropped to $111.3 million compared with $164 million reported for the same period in 2002. Investment income for the first nine months of this year clocked in at $393.3 million against the $485.2 million posted for the first three quarters of 2002. The year-on-year decline in investment income for both the latest quarter and the nine month period arose mostly due to the lower interest rate environment and the fact that almost half of the company’s investment portfolio currently consists of cash and short-term investments. Weakness in the U.S. dollar over the past nine months, which saw the value of the Canadian dollar increase by 14.6%, also had an adverse impact on both the balance-sheet and the income statement, Fairfax says. Notably, about 73% of the company’s consolidated assets are denominated in U.S. dollars while over 72% of revenue is generated from the U.S. market.