Fairfax Q4 Net $159 Million; $227 Million Full Year

Toronto-based Fairfax Financial Holdings recorded net earnings in US dollars of $159.1 million for the fourth quarter of 2006 and $227.5 million for the 2006 year ($8.45 and $11.92 per diluted share, respectively).

The figures included “the effects of a $69.7 million pre-tax gain on the secondary offering of OdysseyRe common stock during the fourth quarter and the previously reported $412.6 million pre-tax and after-tax non-cash charge related to the commutation in the third quarter of the Swiss Re corporate insurance cover,” said the bulletin.

Fairfax noted that it had “generated favorable underwriting results in 2006, notwithstanding the anticipated continued broad softening in 2006 in commercial insurance and reinsurance classes and lines of business other than certain catastrophe-exposed commercial property markets.”

The combined ratios for its insurance and reinsurance operations were 88.4 percent and 95.5 percent for the fourth quarter and 2006, respectively, compared to 112.7 percent and 107.7 percent for the fourth quarter and 2005. Excluding the effect of the 2005 hurricanes, 2005 fourth quarter and fiscal year combined ratios would have been 92.0 percent and 93.7 percent, respectively.

Fairfax said its “insurance and reinsurance operations produced an aggregate underwriting profit of $198.2 million in 2006, compared to an aggregate underwriting loss of $333.9 million in 2005.”

“The improved underwriting results and significantly increased investment income, combined with major initiatives including the company’s OdysseyRe secondary offering and the commutation of the Swiss Re corporate insurance cover, allowed Fairfax to strengthen its financial position during 2006.

“Corporate liquidity remained strong, and Fairfax ended 2006 with $767.4 million of cash, short term investments and marketable securities at the holding company level, increased from $559.0 million at the end of 2005. Holding company debt decreased by $210.1 million during the year to $1.3997 billion, and Fairfax’s debt maturity profile remained largely unchanged, with no significant debt maturities until 2012.

Chairman and CEO Prem Watsa commented: “During 2006, our operating insurance and reinsurance subsidiaries performed well and generated significant underwriting profits, while in our runoff units we continued to make solid progress in reducing claims and containing costs. Our investment performance was gratifying given the conservative positioning of our investment portfolio. We successfully undertook several measures to significantly strengthen our balance sheet and to bolster our liquidity. We enter 2007 with improved financial strength, disciplined and underwriting-focused operating teams at our insurance and reinsurance companies, effective and economical management of our runoff units and very conservative investment portfolios.”

Other highlights for 2006 included the following:
– Net premiums written during 2006 at the company’s insurance and reinsurance operations increased modestly to $4.43 billion from $4.35 billion.
– Cash flow from operations at Northbridge, Crum & Forster and OdysseyRe during 2006, even though impacted by the payment of 2005 hurricane claims, increased significantly to $1.024 billion from $752.4 million in 2005.
– Total interest and dividend income increased to $746.5 million in 2006 from $466.1 million in 2005, due primarily to higher short term interest rates and increased investment portfolios arising from positive cash flows from operations and the realization of investment gains.
– Net realized gains on portfolio investments in 2006 increased significantly to $765.6 million (after being reduced by $251.0 million of losses, including mark-to-market adjustments recorded as realized losses, related to derivative securities positions) from $385.7 million in 2005 (after being reduced by $107.8 million of losses, including mark-to-market adjustments recorded as realized losses, related to derivative securities positions).
– During the fourth quarter, the company sold 10.165 million common shares of OdysseyRe in a public secondary offering for net proceeds of $337.6 million and a gain on sale of $69.7 million, reducing the company’s ownership of OdysseyRe to 59.6 percent.
– During the third quarter, the company commuted the Swiss Re corporate insurance cover. As a result of this transaction, reinsurance recoverables declined by $1 billion, funds withheld payable to reinsurers declined by $587.4 million and the company recorded a $412.6 million non-cash charge (pre-tax and after-tax) in its European runoff unit.
– The Runoff and Other segment had a 2006 pre-tax loss of $20.8 million excluding the financial impact of the aforementioned gain on the OdysseyRe common shares sold by U.S. Runoff companies to facilitate the company’s public secondary offering (U.S. Runoff recorded a pre-tax gain on sale of $111.6 million, a portion of which was eliminated on consolidation, resulting in a $69.7 million pre-tax gain on a consolidated basis) and the $412.6 million pre-tax and after-tax charge recorded by European Runoff on the commutation of the Swiss Re corporate insurance cover. Including the above-noted items, the 2006 pre-tax loss for Runoff and Other was $321.8 million.
– During the fourth quarter of 2006, in recognition of progress made to date and the reduced level of resources required going forward, the company announced the closing of three U.S. runoff locations and reduced worldwide runoff staffing levels, incurring a pre-tax charge of $14.7 million.
– Consolidated cash and investments increased to $16.8 billion at December 31, 2006 from $14.9 billion at the end of 2005 (net of $783.3 million and $700.3 million, respectively, of liabilities for economic hedges against a decline in the equity markets).
– The pre-tax net unrealized gain on portfolio investments declined to $310.6 million at December 31, 2006 from $558.4 million at the end of 2005, after realizing $765.6 million in net gains during 2006.
– Total common shareholders’ equity increased to $2.7 billion ($150.16 per basic share) at December 31, 2006 from $2.4 billion ($137.50 per basic share) at December 31, 2005, principally as a result of 2006 earnings.
– Reinsurance recoverables decreased to $5.5 billion at December 31, 2006 from $7.7 billion at December 31, 2005, reflecting the $1 billion Swiss Re commutation, collections on paid claims related to 2005 hurricane ceded losses and continued collections and commutations by the runoff units.
– At December 31, 2006, Crum & Forster’s principal operating subsidiaries remained in a positive earned surplus position, with a combined estimated dividend capacity in 2007 of $138.4 million.

The full report and additional information may be obtained on the Group’s web site at: http://www.fairfax.ca.