Fairfax Financial Holdings Limited: Financial Results For The Year Ended December 31, 2005.TORONTO Toronto (tərŏn`tō), city (1998 est pop. 2,400,000), provincial capital, S Ont., Canada, on Lake Ontario. Toronto is the largest city in Canada and since the 1970s has been one of the fastest-changing cities in North America, experiencing -- (Note: All dollar amounts in this press release are expressed in U.S. dollars, except as otherwise indicated.) Fairfax Financial Holdings Fairfax Financial Holdings Limited TSX: FFH.SV NYSE: FFH is a Toronto, Ontario based financial services holding company which, through its subsidiaries, is engaged in property, casualty and life insurance and reinsurance, investment management and insurance claims Limited (TSX TSX Toronto Stock Exchange (TSE before April, 2002) TSX Transfer from Stack Pointer to Index TSX True Space Extension :FFH FFH Far From Home (band) FFH Fast Frequency Hopping FFH Frigate Helicopter FFH Final Fantasy High (gaming) FFH Fauji Foundation Hospital (Pakistan) FFH Falling for Her .SV)(NYSE NYSE See: New York Stock Exchange :FFH) announces that it had a net loss of $318.1 million in the fourth quarter of 2005 and $497.9 million for the 2005 year, after absorbing ab·sorb tr.v. ab·sorbed, ab·sorb·ing, ab·sorbs 1. To take (something) in through or as through pores or interstices. 2. To occupy the full attention, interest, or time of; engross. losses from Hurricanes Katrina KATRINA Keeping All the Resources in New Orleans Alive KATRINA Krewe Aiding Trash Removal In the New Orleans Area , Rita and Wilma during the fourth quarter and the 2005 year of $249.5 million and $715.5 million, respectively, and after recording pre-tax pre-tax adj → anterior al impuesto pre-tax adj → avant impôt(s) pre-tax adj → al lordo d'imposta charges resulting from actions taken in runoff Runoff The procedure of printing the end-of-day prices for every stock on an exchange onto ticker tape. Notes: If the "tape is late" then it can take a long time to print off all the closing prices. during the fourth quarter and the 2005 year aggregating $249.9 million and $465.5 million, respectively. Fairfax's insurance and reinsurance The contract made between an insurance company and a third party to protect the insurance company from losses. The contract provides for the third party to pay for the loss sustained by the insurance company when the company makes a payment on the original contract. operations continued to generate strong underwriting Underwriting 1. The process by which investment bankers raise investment capital from investors on behalf of corporations and governments that are issuing securities (both equity and debt). 2. The process of issuing insurance policies. results prior to giving effect to these hurricane hurricane, tropical cyclone in which winds attain speeds greater than 74 mi (119 km) per hr. Wind speeds reach over 190 mi (289 km) per hr in some hurricanes. losses. The combined ratios of Fairfax's ongoing insurance and reinsurance operations were 112.7% and 107.6% for the fourth quarter and full year of 2005, respectively, and prior to giving effect to the hurricane losses were 92.0% and 93.7%, respectively. Notwithstanding some general softening softening /sof·ten·ing/ (sof´en-ing) malacia. softening a change of consistency, with loss of firmness or hardness. in the insurance and reinsurance markets, as anticipated for 2005, which caused combined ratios excluding hurricane losses to deteriorate de·te·ri·o·rate v. 1. To grow worse in function or condition. 2. To weaken or disintegrate. modestly relative to combined ratios excluding hurricane losses achieved in 2004, each Fairfax Fairfax, city (1990 pop. 19,622), historic seat of Fairfax co., NE Va., a residential suburb of Washington, D.C.; inc. 1892, as a city 1961 (at which time it became independent and no longer included in a county). There is some light manufacturing. operating company operating company A business that engages in transactions with outsiders. produced a combined ratio excluding hurricane losses below (and in most cases well below) 100%. Fairfax's ongoing insurance and reinsurance operations incurred an underwriting loss of $330.6 million in 2005, and prior to giving effect to the hurricane losses would have generated an underwriting profit Underwriting profit is a term used in the insurance industry. It consists of the earned premium remaining after losses have been paid and administrative expenses have been deducted. It does not include any investment income earned on held premiums. of $279.3 million. The strength of Fairfax's underlying underwriting results, coupled with increased investment income and the company's $300 million equity issue completed in October October: see month. 2005, allowed Fairfax, despite the hurricane losses, to maintain its strong financial position. Holding company liquidity remained strong, as Fairfax ended 2005 with $559.0 million of cash and marketable securities Marketable Securities Very liquid securities that can be converted into cash quickly at a reasonable price. Notes: Marketable securities are very liquid as they tend to have maturities less than one year, and the rate at which these securities can be bought or sold has , virtually unchanged from $566.8 million at the end of 2004. Holding company debt decreased slightly during the year, and Fairfax's debt maturity profile remained unchanged, with no significant debt maturities until 2012. Prem PREM Partnership for Research and Education in Materials PREM Preliminary Reference Earth Model PREM Partial Reminder Watsa, Chairman and CEO (1) (Chief Executive Officer) The highest individual in command of an organization. Typically the president of the company, the CEO reports to the Chairman of the Board. , commented, "During 2005, the insurance industry experienced the largest catastrophe Catastrophe, from the Greek Καταστροφή (katastrephein), literally means "to turn" (strephein) "downwards" (kata-). losses in its history, including from Hurricanes Katrina, Rita and Wilma. Our results were significantly affected by these losses, but our financial strength and the capital base of our insurance and reinsurance companies permitted us to absorb absorb To offset sell orders or a new security offering with buy orders. them. It is very encouraging to note that if the effect of the hurricane losses were removed, we would have produced excellent combined ratios in 2005. We enter 2006 with very sound operations at our ongoing insurance and reinsurance companies and with a good prospect of approaching breakeven breakeven 1. The level of output or sales necessary to cover fixed expenses. Companies in industries that have high fixed costs and, consequently, high breakevens, such as automobile and steel manufacturing, are likely to exhibit large fluctuations at our runoff operation." Other highlights for 2005 were as follows: - Net premiums written during 2005 at the company's ongoing insurance and reinsurance operations remained stable relative to 2004 at $4.4 billion. - Cash flow from operations Cash flow from operations A firm's net cash inflow resulting directly from its regular operations (disregarding extraordinary items such as the sale of fixed assets or transaction costs associated with issuing securities), calculated as the sum of net income plus noncash expenses at Northbridge Northbridge, town (1990 pop. 13,371), Worcester co., S Mass., on the Blackstone River; settled 1704, set off from Uxbridge and inc. 1772. Wood furniture, paper products, and stereo components are manufactured. , Crum Crum may refer to: Crum is a slang term amongst some Orthodox Jews which refers to Jews who, while they appear to follow the Halachah, do so in a very lenient way (and sometimes ignore certain laws). Frum, means pious, while Crum, means crooked. & Forster For·ster , E(dward) M(organ) 1879-1970. British writer whose novels, such as A Room with a View (1908) and Howards End (1910), explore the emotional and moral shortcomings of England's upper classes. and OdysseyRe, while adversely affected by the 2004 and 2005 hurricanes, remained strong at $752.4 million in 2005 compared to $948.4 million in 2004. - Total interest and dividends increased to $466.1 million in 2005 from $366.7 million in 2004, due primarily to higher short term interest rates and increased investment portfolios reflecting positive cash flow from continuing operations continuing operations Parts of a business that are expected to be maintained as an ongoing segment of an overall business operation. Income and losses from continuing operations are reported separately if any segments have been discontinued during the . - Realized gains Realized Gain A gain resulting from selling an asset at a price higher than the original purchase price. Notes: There may be tax consequences for a realized profit. on investments in 2005 totalled $352.1 million (after being reduced by $107.8 million of non-trading losses), compared to $288.3 million in 2004 (after being reduced by $77.1 million of non-trading losses). The $107.8 million of non-trading losses consisted of $53.1 of mark to market adjustments, recorded as realized losses Realized Loss A loss recognized when assets are sold for a price lower than the original purchase price. Notes: A portion of the realized loss may be applied against a capital gain or realized profit to reduce taxes. , related to the economic hedges put in place by the company against a decline in the equity markets and $54.7 of mark to market adjustments, recorded as realized losses, arising from other derivatives derivatives In finance, contracts whose value is derived from another asset, which can include stocks, bonds, currencies, interest rates, commodities, and related indexes. Purchasers of derivatives are essentially wagering on the future performance of that asset. in the company's investment portfolio, primarily credit default swaps Credit Default Swap A swap designed to transfer the credit exposure of fixed income products between parties. Notes: The buyer of a credit swap receives credit protection, whereas the seller of the swap guarantees the credit worthiness of the product. and put bond warrants. - Cash and investments (net of $700.3 of liabilities for economic hedges against a decline in the equity markets) increased to $14.9 billion at December December: see month. 31, 2005 from $13.5 billion at the end of 2004. - The pre-tax unrealized gain Unrealized Gain A profit that results from holding on to an asset rather than cashing it in and using the funds. Notes: Let's say you own a stock that has doubled, but you haven't sold it yet. This is said to be an unrealized gain. on portfolio investments increased $108.9 million during 2005 to $537.2 million (subsequent to year-end year-end also year·end n. The end of a year. adj. Occurring or done at the end of the year: a year-end audit. Noun 1. , the company realized a pre-tax gain of $119.4 million upon the sale of its remaining shares of Zenith zenith, in astronomy, the point in the sky directly overhead; more precisely, it is the point at which the celestial sphere is intersected by an upward extension of a plumb line from the observer's location. National Insurance Corp.). - Total common shareholders' equity Shareholders' Equity A firms' total assets minus its total liabilities. Equivalently, it is share capital plus retained earnings minus treasury shares. Shareholders' equity is the amount by which a company is financed through common and preferred shares. decreased to $2.7 billion ($151.52 per basic share) at December 31, 2005 from $3.0 billion ($184.86 per basic share) at December 31, 2004, principally as a result of the losses arising from the 2005 hurricanes and the charges resulting from actions taken in runoff. - Reinsurance recoverables decreased to $7.7 billion at December 31, 2005 from $8.1 billion at December 31, 2004, notwithstanding an increase in reinsurance recoverables in 2005 due to ceded losses from the 2005 hurricanes. - At December 31, 2005, Crum & Forster's two principal operating subsidiaries An operating subsidiary is a business term frequently used within the United States railroad industry. In the case of a railroad, it refers to a company that is a subsidiary but operates with its own identity and rolling stock. remained in a positive earned surplus Earned surplus See: Retained earnings earned surplus See retained earnings. position, with a dividend capacity in 2006 of approximately ap·prox·i·mate adj. 1. Almost exact or correct: the approximate time of the accident. 2. $119 million. Following is a summary of Fairfax's unaudited fourth quarter and full year financial results:
Fourth Quarter Year
------------------ -------------------
($ millions except per share amounts)
2005 2004 2005 2004
---- ---- ---- ----
Total revenue 1,361.0 1,454.3 5,878.2 5,792.6
Earnings (loss) before
income taxes and
non-controlling interests (414.6) 38.0 (517.6) 137.1
Net earnings (loss) (318.1) 5.1 (497.9) (19.8)
Net earnings (loss) per
share and per diluted
share $(18.00) $0.16 $(30.72) $(2.16)
The results for the fourth quarter of 2005 were impacted by $249.5 million of losses arising from the 2005 hurricanes, particularly Hurricane Wilma Hurricane Wilma was the most intense hurricane ever recorded in the Atlantic basin. Exceeding the 21 storms of the 1933 season, Wilma was the twenty-second storm (including the subtropical storm discovered in reanalysis), thirteenth hurricane, sixth major hurricane, and fourth , and $249.9 million of charges resulting from actions taken in runoff. Combined ratios of the company's ongoing insurance and reinsurance operations were as follows:
Including Hurricane Losses
-----------------------------------
Fourth Quarter Year
---------------- ---------------
2005 2004 2005 2004
------- ------ ------ ------
Insurance- Canada (Northbridge) 97.8% 78.9% 92.9% 87.7%
- U.S. 96.2% 90.9% 100.9% 105.4%
- Asia (Fairfax Asia) 99.4% 93.7% 93.0% 91.9%
Reinsurance (OdysseyRe) 127.9% 95.2% 117.2% 98.1%
------- ------ ------ ------
Consolidated 112.7% 90.6% 107.6% 97.5%
------- ------ ------ ------
------- ------ ------ ------
Excluding Hurricane Losses
-----------------------------------
Fourth Quarter Year
---------------- ---------------
2005 2004 2005 2004
------- ------ ------ ------
Insurance- Canada (Northbridge) 86.2% 77.8% 85.0% 84.8%
- U.S. 82.8% 91.0% 92.0% 96.0%
- Asia (Fairfax Asia) 99.4% 93.7% 93.0% 91.9%
Reinsurance (OdysseyRe) 98.8% 93.4% 98.2% 93.9%
------- ------ ------ ------
Consolidated 92.0% 89.3% 93.7% 92.4%
------- ------ ------ ------
------- ------ ------ ------
There were 16.5 and 13.9 million weighted average shares outstanding during 2005 and 2004 respectively (17.8 and 14.1 million during the fourth quarters of 2005 and 2004 respectively). At the end of 2005, there were 17,885,047 shares effectively outstanding. The consolidated balance sheets consolidated balance sheet A balance sheet in which assets and liabilities of a parent company and its controlled subsidiaries are combined, thereby presenting balance sheet items for the parent and its subsidiaries as if they were a single firm. and consolidated con·sol·i·date v. con·sol·i·dat·ed, con·sol·i·dat·ing, con·sol·i·dates v.tr. 1. To unite into one system or whole; combine: statements of earnings, shareholders' equity and cash flows for 2005 and 2004 are set out below, followed by management's discussion and analysis Management's discussion and analysis (MD&A) A report from management to shareholders that accompanies the firm's financial statements in the annual report. It explains the period's financial results and enables management to discuss topics that may not be apparent in the financial .
Consolidated Balance Sheets
as at December 31, 2005 and 2004
(unaudited - US$ millions)
2005 2004(1)
Assets
Cash, short term investments and marketable
securities 559.0 566.8
Accounts receivable and other 2,380.4 2,346.0
Recoverable from reinsurers
(including recoverables on paid
losses - $535.3; 2004 - $630.2) 7,655.6 8,135.5
--------- ---------
10,595.0 11,048.3
--------- ---------
Portfolio investments
Subsidiary cash and short term
investments (market value
- $4,526.3; 2004 - $4,047.7) 4,526.3 4,047.7
Bonds (market value - $8,038.4;
2004 - $7,292.7) 8,127.4 7,288.8
Preferred stocks (market value -
$16.6; 2004 - $136.4) 15.8 135.8
Common stocks (market value -
$2,533.0; 2004 - $1,957.9) 2,099.7 1,678.6
Investments in Hub, Zenith National
and Advent (market value
- $439.1; 2004 - $450.5) 247.8 311.5
Real estate (market value - $18.0;
2004 - $33.5) 17.2 28.0
--------- ---------
Total (market value - $15,571.4;
2004 - $13,918.7) 15,034.2 13,490.4
--------- ---------
Deferred premium acquisition costs 391.5 378.8
Future income taxes 1,134.3 973.6
Premises and equipment 95.7 99.8
Goodwill 210.8 228.1
Other assets 104.2 112.3
--------- ---------
27,565.7 26,331.3
--------- ---------
--------- ---------
Liabilities
Lindsey Morden indebtedness 63.9 89.2
Accounts payable and accrued liabilities 1,150.0 1,122.4
Securities sold but not yet purchased 700.3 539.5
Funds withheld payable to reinsurers 1,054.4 1,033.2
--------- ---------
2,968.6 2,784.3
--------- ---------
Provision for claims 16,029.2 14,983.5
Unearned premiums 2,429.0 2,368.3
Long term debt - holding company borrowings 1,365.3 1,420.9
Long term debt - subsidiary company
borrowings 869.3 773.0
Purchase consideration payable 192.1 195.2
Trust preferred securities of subsidiaries 52.4 52.4
--------- ---------
20,937.3 19,793.3
--------- ---------
Non-controlling interests 753.9 583.0
--------- ---------
Shareholders' Equity
Common stock 2,074.5 1,781.8
Other paid in capital 59.4 59.4
Preferred stock 136.6 136.6
Retained earnings 531.4 1,061.9
Currency translation account 104.0 131.0
--------- ---------
2,905.9 3,170.7
--------- ---------
27,565.7 26,331.3
--------- ---------
--------- ---------
(1) Retroactively restated pursuant to the change in accounting
policy described in note 1.
See accompanying notes.
Consolidated Statements of Earnings
for the years ended December 31, 2005 and 2004
(unaudited - US$ millions except per share amounts)
2005 2004(1)
Revenue
Gross premiums written 5,572.0 5,608.8
--------- ---------
Net premiums written 4,705.4 4,786.5
--------- ---------
Net premiums earned 4,703.8 4,801.5
Interest and dividends 466.1 366.7
Realized gains on investments 352.1 248.2
Realized gain on Northbridge
secondary offering - 40.1
Claims fees 356.2 336.1
--------- ---------
5,878.2 5,792.6
--------- ---------
Expenses
Losses on claims 4,387.1 3,610.6
Operating expenses 1,071.2 1,037.6
Commissions, net 736.0 827.3
Interest expense 201.5 166.6
Other Lindsey Morden TPA
disposition costs - 13.4
--------- ---------
6,395.8 5,655.5
--------- ---------
Earnings (loss) from operations
before income taxes (517.6) 137.1
Provision for (recovery of) income taxes (66.8) 83.0
--------- ---------
Net earnings (loss) before
non-controlling interests (450.8) 54.1
Non-controlling interests (47.1) (73.9)
--------- ---------
Net earnings (loss) (497.9) (19.8)
--------- ---------
--------- ---------
Net earnings (loss) per share $ (30.72) $ (2.16)
Net earnings (loss) per diluted share $ (30.72) $ (2.16)
Cash dividends paid per share $ 1.40 $ 1.40
(1) Retroactively restated pursuant to the change in accounting
policy described in note 1.
See accompanying notes.
Consolidated Statements of Shareholders' Equity
for the years ended December 31, 2005 and 2004
(unaudited - US$ millions)
2005 2004(1)
Common stock -
Subordinate voting shares - beginning
of year 1,778.0 1,506.2
Issuances during the year 299.8 299.7
Purchases during the year (7.1) (27.9)
----------- -----------
Subordinate voting shares - end of year 2,070.7 1,778.0
----------- -----------
Multiple voting shares - beginning
and end of year 3.8 3.8
----------- -----------
Common stock 2,074.5 1,781.8
----------- -----------
Other paid in capital - beginning of year 59.4 62.7
Purchases of convertible senior debenture - (3.3)
----------- -----------
Other paid in capital - end of year 59.4 59.4
----------- -----------
Preferred stock -
Series A - beginning of year 51.2 136.6
Conversion to Series B preferred shares - (85.4)
----------- -----------
Series A - end of year 51.2 51.2
----------- -----------
Series B - beginning of year 85.4 -
Conversion from Series A preferred shares - 85.4
----------- -----------
Series B - end of year 85.4 85.4
----------- -----------
Preferred stock 136.6 136.6
----------- -----------
Retained earnings - beginning of year 1,061.9 1,114.9
Net earnings (loss) for the year (497.9) (19.8)
Excess over stated value of shares
purchased for cancellation (0.3) (3.6)
Common share dividends (22.5) (19.5)
Preferred share dividends (9.8) (10.1)
----------- -----------
Retained earnings - end of year 531.4 1,061.9
----------- -----------
Currency translation account -
beginning of year 131.0 55.1
Foreign exchange impact from
foreign denominated net assets (27.0) 75.9
----------- -----------
Currency translation account - end of year 104.0 131.0
----------- -----------
Total shareholders' equity 2,905.9 3,170.7
----------- -----------
----------- -----------
Number of shares outstanding
----------------------------
Common stock -
Subordinate voting shares -
beginning of year 15,342,759 13,151,218
Issuances during the year 1,843,318 2,406,741
Purchases during the year (49,800) (215,200)
----------- -----------
Subordinate voting shares - end of year 17,136,277 15,342,759
Multiple voting shares - beginning
and end of year 1,548,000 1,548,000
Interest in shares held t hrough
ownership interest in shareholder (799,230) (799,230)
----------- -----------
Common stock effectively
outstanding - end of year 17,885,047 16,091,529
----------- -----------
Preferred stock -
Series A - beginning of year 3,000,000 8,000,000
Conversion to Series B preferred shares - (5,000,000)
----------- -----------
Series A - end of year 3,000,000 3,000,000
----------- -----------
Series B - beginning of year 5,000,000 -
Conversion from Series A preferred shares - 5,000,000
----------- -----------
Series B - end of year 5,000,000 5,000,000
----------- -----------
(1) Retroactively restated pursuant to the change in accounting
policy described in note 1.
See accompanying notes.
Consolidated Statements of Cash Flows
for the years ended December 31, 2005 and 2004
(unaudited - US$ millions)
2005 2004(1)
Operating activities
Earnings (loss) before
non-controlling interests (450.8) 54.1
Amortization 25.2 42.6
Future income taxes (152.3) 5.6
Realized gains on investments (352.1) (288.3)
----------- -----------
(930.0) (186.0)
Changes in:
Provision for claims 951.5 333.2
Unearned premiums 17.7 (122.4)
Accounts receivable and other 4.8 (182.3)
Recoverable from reinsurers 533.3 565.7
Funds withheld payable to reinsurers 18.6 (76.5)
Accounts payable and accrued liabilities 23.2 (319.2)
Other 8.4 98.1
----------- -----------
Cash provided by operating activities 627.5 110.6
----------- -----------
Investing activities
Investments - purchases (6,198.2) (6,883.2)
- sales 5,503.7 4,610.9
Sale (purchase) of marketable securities (263.4) 1.4
Sale of Zenith National shares 218.5 127.6
Purchase of Advent shares (34.1) -
Purchase of capital assets (20.5) (37.0)
Purchase of subsidiaries, net of cash (52.0) (33.7)
Net proceeds on Northbridge secondary
offering - 104.8
Disposition of Lindsey Morden TPA business - (22.2)
----------- -----------
Cash provided by (used in)
investing activities (846.0) (2,131.4)
----------- -----------
Financing activities
Subordinate voting shares issued 299.8 299.7
Subordinate voting shares repurchased (7.4) (31.5)
Trust preferred securities of
subsidiary repurchased - (27.4)
Non-controlling interests 112.4 -
Issue of OdysseyRe debt 125.0 -
Long term debt - repayment (84.9) (240.2)
Long term debt - issuances - 308.6
Purchase consideration payable (20.0) (21.9)
Lindsey Morden indebtedness (25.3) 71.5
Common share dividends (22.5) (19.5)
Preferred share dividends (9.8) (10.1)
----------- -----------
Cash provided by financing activities 367.3 329.2
----------- -----------
Foreign currency translation 11.9 17.0
----------- -----------
Increase (decrease) in cash resources 160.7 (1,674.6)
Cash resources - beginning of year 4,429.7 6,104.3
----------- -----------
Cash resources - end of year 4,590.4 4,429.7
----------- -----------
----------- -----------
(1) Retroactively restated pursuant to the change in accounting
policy described in note 1.
See accompanying notes.
Cash resources consist of cash and short term investments, including subsidiary cash and short term investments, and excludes $216.4 ($169.7 at December 31, 2004) of subsidiary cash and short term investments pledged pledge n. 1. A solemn binding promise to do, give, or refrain from doing something: signed a pledge never to reveal the secret; a pledge of money to a charity. 2. a. for securities sold but not yet purchased, which is restricted. Short term investments are readily convertible into cash and have maturities of three months or less. Notes to Consolidated Financial Statements Consolidated Financial Statements The combined financial statements of a parent company and its subsidiaries. Notes: Because consolidated financial statements present an aggregated look at the financial position of a parent and its subsidiaries, they enable you to gauge for the years ended December 31, 2005 and 2004 (unaudited - in US$ millions except per share amounts and as otherwise indicated) 1. Basis of Presentation These consolidated financial statements should be read in conjunction conjunction, in astronomy conjunction, in astronomy, alignment of two celestial bodies as seen from the earth. Conjunction of the moon and the planets is often determined by reference to the sun. with the company's consolidated financial statements for the year ended December 31, 2004 as set out on pages 20 to 44 of the company's 2004 Annual Report. These consolidated financial statements have been prepared in accordance Accordance is Bible Study Software for Macintosh developed by OakTree Software, Inc.[] As well as a standalone program, it is the base software packaged by Zondervan in their Bible Study suites for Macintosh. with Canadian Canadian (kənā`dēən), river, 906 mi (1,458 km) long, rising in NE New Mexico. and flowing E across N Texas and central Oklahoma into the Arkansas River in E Oklahoma. generally accepted accounting principles The standard accounting rules, regulations, and procedures used by companies in maintaining their financial records. Generally accepted accounting principles (GAAP) provide companies and accountants with a consistent set of guidelines that cover both broad accounting ("GAAP GAAP See: Generally Accepted Accounting Principles GAAP See generally accepted accounting principles (GAAP). ") using the same accounting policies as were used for the company's consolidated financial statements for the year ended December 31, 2004, except as noted below, and although they do not include all disclosures required by Canadian GAAP for annual financial statements, in management's opinion they include all disclosures necessary for the fair presentation of the company's year-end results. Change in accounting policy Effective January January: see month. 1, 2005, the company retroactively ret·ro·ac·tive adj. Influencing or applying to a period prior to enactment: a retroactive pay increase. [French rétroactif, from Latin adopted a new pronouncement issued by the Canadian Institute of Chartered Accountants The Canadian Institute of Chartered Accountants (CICA) is the umbrella body for the Chartered Accountant profession in Canada and Bermuda. Membership of the CICA totals 70,000 Chartered Accountants and 8,500 students. ("CICA CICA Competition In Contracting Act of 1984 (USA) CICA Canadian Institute of Chartered Accountants CICA Competition In Contracting Act CICA Criminal Injuries Compensation Authority (UK) ") amending the accounting for certain financial instruments that have the characteristics of both a liability and equity. This pronouncement requires that those instruments which can be settled at the issuer's option by issuing a variable number of the issuer's own equity instruments be presented partially as liabilities rather than solely as equity. This affected the company's 5% convertible senior debentures due July July: see month. 15, 2023. The portion of these debentures which was formerly classified as other paid in capital in shareholders' equity (other than the $59.4 which represents the value of the holders' option to convert the debentures into subordinate voting shares Voting Shares Shares that give the stockholder the right to vote on matters of corporate policy making as well as who will compose the members of the board of directors. Notes: Different classes of shares, such as preferred stock, sometimes don't allow for voting rights. ) was reclassified to long term debt. Consequently, a disbursement DISBURSEMENT. Literally, to take money out of a purse. Figuratively, to pay out money; to expend money; and sometimes it signifies to advance money. 2. of $2.0 associated with this instrument was recorded as interest expense, whereas prior to the accounting policy change, that disbursement would have directly reduced retained earnings Retained Earnings The percentage of net earnings not paid out in dividends, but retained by the company to be reinvested in its core business or to pay debt. It is recorded under shareholders equity on the balance sheet. as a cost of the convertible debentures Convertible Debenture Any type of debenture that can be converted into some other security. Notes: For example, a convertible bond can be converted into stock. . The amount currently recorded as long term debt will accrete to the $193.5 face value of the debt over the remaining term to maturity ending in 2023. The impact of restating the consolidated balance sheet previously reported is to both increase long term debt and decrease other paid in capital by $38.4 at December 31, 2004. The impact of restating the consolidated statement of earnings previously reported is to both increase interest expense and decrease net earnings by $2.0 for the year ended December 31, 2004. There was no change to earnings per share or earnings per diluted di·lute tr.v. di·lut·ed, di·lut·ing, di·lutes 1. To make thinner or less concentrated by adding a liquid such as water. 2. To lessen the force, strength, purity, or brilliance of, especially by admixture. share. 2. Cash, Short Term Investments and Marketable Securities Cash, short term investments and marketable securities are as follows:
2005 2004
Cash and short term investments 278.8 534.6
Cash held in Crum & Forster (including $nil
(2004 - $16.3) in interest escrow account) 1.7 17.1
Marketable securities 278.5 15.1
----- -----
559.0 566.8
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Marketable securities include corporate bonds and equities, with a fair value of $284.5 (2004 - $15.1). 3. Portfolio Investments At December 31, 2005, as an economic hedge against a decline in the equity markets, the company had short sales of approximately $500.0 notional amount The notional amount (or notional principal amount or notional value) on a financial instrument is the nominal or face amount that is used to calculate payments made on that instrument. This amount generally does not change hands and is thus referred to as notional. of Standard & Poor's Depository Receipts Depository Receipt A negotiable financial instrument issued by a bank to represents a foreign company's publicly traded securities. The depository receipt trades on a local stock exchange. ("SPDRs SPDRs SPDRs (Spiders) are designed to track the value of the Standard & Poor's 500 Composite Price Index. Stands for Standard & Poor's Depositary Receipt. They trade on the American Stock Exchange under the symbol SPY. ") and $60.3 of common stocks as well as a Total Return Swap Total Return Swap Any swap in which the non-floating rate side is based on the total return of an equity or fixed income instrument with a life longer than the swap. Notes: Total return swaps are most common in equity or physical commodity markets. (a "swap See HomeRF. (operating system) swap - To move a program from fast-access memory to a slow-access memory ("swap out"), or vice versa ("swap in"). The term often refers specifically to the use of a hard disk (or a swap file) as virtual memory or "swap space". ") with a notional value Notional Value The total value of a leveraged position's assets. This term is commonly used in the options, futures and currency markets because in them a very little amount of invested money can control a large position (have a large consequence for the trader). of approximately $550.0 (constituting together hedges with an aggregate notional value of approximately $1,110.3), as described in the two following paragraphs. At December 31, 2005, common stocks in the company's portfolio aggregated $2,099.7, with a market value of $2,533.0. Simultaneously si·mul·ta·ne·ous adj. 1. Happening, existing, or done at the same time. See Synonyms at contemporary. 2. Mathematics with short sales of approximately $500.0 ($400.0 at December 31, 2004) notional amount of SPDRs and $60.3 ($50.0 at December 31, 2004) of common stocks, the company entered into two-year call options ("options") to limit the potential loss on the future purchase of the SPDRs and the common stocks to $112.1 ($90.0 at December 31, 2004). The company is required to provide collateral collateral (kəlăt`ərəl), something of value given or pledged as security for payment of a loan. Collateral consists usually of financial instruments, such as stocks, bonds, and negotiable paper, rather than physical goods, although for the obligation to purchase the SPDRs, which amounted to $521.0 ($401.7 at December 31, 2004) of cash and short term securities and $271.9 ($162.5 at December 31, 2004) of bonds at market value. The collateral provided for the purchase of common stocks sold short is $112.3 ($70.5 at December 31, 2004) of cash. Both the obligation to purchase the securities sold short and options are carried at fair value in the consolidated financial statements. The fair value of the obligation to purchase the SPDRs and common stocks is included in securities sold but not yet purchased and the fair value of the options is included in common stocks on the consolidated balance sheet. The company also has a swap with a notional value of approximately $550.0 ($450.0 at December 31, 2004). The company receives floating payments based on the notional value multiplied mul·ti·ply 1 v. mul·ti·plied, mul·ti·ply·ing, mul·ti·plies v.tr. 1. To increase the amount, number, or degree of. 2. Mathematics To perform multiplication on. by LIBOR LIBOR See: London Interbank Offered Rate LIBOR See London interbank offered rate (LIBOR). . The company pays or receives a fixed rate based on the change of the SPDRs which are the underlying security multiplied by the notional value of the swap. Simultaneously, the company entered into an option to limit the potential loss on the swap to $110.0 ($90.0 at December 31, 2004). Short term securities have been pledged as collateral for the swap in the amount of $104.1 ($99.2 at December 31, 2004). The fair value of the swap is a liability of $60.5 ($44.9 at December 31, 2004) and is included in securities sold but not yet purchased on the consolidated balance sheet. The company also has purchased credit default swaps and bond put warrants which are carried at fair value of $142.2 ($52.5 at December 31, 2004) and classified as bonds on the consolidated balance sheet. Changes in the fair value for the transactions described above and other derivatives have been included in realized gains on investments in the consolidated statement of earnings as follows:
2005 2004
SPDRs, common stocks and related options (23.6) (43.3)
Swap and related option (29.5) (38.2)
Credit default swaps and put bond warrants (61.5) 4.4
Other 6.8 -
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Gains (losses) (107.8) (77.1)
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4. Investments Year ended December 31, 2005 On October 21, 2005, OdysseyRe issued 2.0 million 8.125% Series A preferred shares Preferred shares Preferred shares give investors a fixed dividend from the company's earnings and entitle them to be paid before common shareholders. See: Preferred stock. and 2.0 million floating rate Series B preferred shares for net proceeds Net Proceeds The amount received after all costs are deducted from the sale of a piece of property or security. Notes: In the case of an investor selling a security, net proceeds represent the proceeds from the sale minus any trading costs (i.e. commissions). of $97.5. The Series A and Series B preferred shares each have a liquidation The collection of assets belonging to a debtor to be applied to the discharge of his or her outstanding debts. A type of proceeding pursuant to federal Bankruptcy preference of $25.00 per share. A subsidiary of the company subscribed Subscribed Newly issued securities that an investor has agree to, or stated his intent to, buy in a public offering prior to the issue date. When an investor uses rights, he expects to own the designated number of shares they have subscribed to once the offering is completed. for 530,000 Series A preferred shares and 70,000 Series B preferred shares. As at December 31, 2005, 200,000 of the Series A preferred shares had been sold at no gain or loss. On October 6, 2005, OdysseyRe, through an underwritten public offering, raised net proceeds of $102.1 through the issuance of 4.1 million shares of common stock at an offering price of $24.96 per share. The company purchased 3.1 million of the shares issued, which decreased its percentage ownership of OdysseyRe from 80.4% to 80.1%. This share offering closed on October 12, 2005. For each of the OdysseyRe transactions described above, the financing raised from external parties has been recorded in non-controlling interests on the balance sheet. On August 2, 2005, subsidiaries of the company sold 2.0 million shares of Zenith National Insurance Corp. ("Zenith National") common stock at $66.00 per share. Net proceeds from the transaction were $132.0, resulting in a realized pre-tax gain of $79.1. On September September: see month. 23, 2005, subsidiaries of the company sold an additional 157,524 shares of Zenith National common stock at $63.70 per share and $30.0 par value of debentures convertible into the common stock of Zenith National for net proceeds of $86.5, resulting in a pre-tax realized gain of $52.3. These two transactions reduced the company's ownership of Zenith National from 24.4% to 11.2%. Subsequent to year-end, subsidiaries of the company sold the remaining 3.8 million shares (adjusted for a three-for-two stock split) of Zenith National common stock at $50.38 per share for net proceeds of $193.8, resulting in a realized pre-tax gain of $119.4. On June June: see month. 3, 2005, Advent Capital (Holdings) PLC ("Advent"), through an underwritten public offering, raised gross proceeds of $118.4 (Pounds Sterling 65.0): $72.9 (Pounds Sterling 40.0) of equity at $0.64 (35 pence pence n. Chiefly British A plural of penny. pence Noun a plural of penny USAGE: Since the decimalization of British currency and the introduction of the abbreviation p, ) per share and $45.5 (Pounds Sterling 25.0) of debt. Concurrent At the same time. It implies that multiple processes are taking place simultaneously. See concurrent operation. with the equity issue, the shares were listed on the Alternative Investments Market of the London Stock Exchange London Stock Exchange London marketplace for securities. It was formed in 1773 by a group of stockbrokers who had been doing business informally in local coffeehouses. . The company maintained its 46.8% interest in Advent by purchasing its pro rata [Latin, Proportionately.] A phrase that describes a division made according to a certain rate, percentage, or share. In a Bankruptcy case, when the debtor is insolvent, creditors generally agree to accept a pro rata share of what is owed to them. share of this equity at a total cost of $34.1 (Pounds Sterling 18.7). Subsequent to year end, Advent raised an additional $51.5 (Pounds Sterling 30.0) of equity at $0.34 (20 pence) per share with the company purchasing its pro rata share at a cost of $24.0 (Pounds Sterling 14.0), thereby maintaining its 46.8% interest in Advent. On December 29, 2004, the company agreed to acquire 100% of the issued and outstanding common shares of Compagnie de Reassurance REASSURANCE. When an insurer is desirous of lessening his liability, he may procure some other insurer to insure him from loss, for the insurance he has made this is called reassurance. d'Ile de France ("Corifrance"), a French reinsurance company, for $59.8 (EUR EUR In currencies, this is the abbreviation for the Euro. Notes: The currency market, also known as the Foreign Exchange market, is the largest financial market in the world, with a daily average volume of over US $1 trillion. 44.0) payable on April 7, 2005. As at January 11, 2005 (the date of acquisition), the fair value of assets and liabilities acquired was $122.2 (EUR 89.9) and $62.4 (EUR 45.9) respectively, resulting in no goodwill. In addition, the seller has agreed to indemnify To compensate for loss or damage; to provide security for financial reimbursement to an individual in case of a specified loss incurred by the person. Insurance companies indemnify their policyholders against damage caused by such things as fire, theft, and flooding, which the company, up to the purchase price, for any adverse development on acquired net reserves. Year ended December 31, 2004 On November November: see month. 15, 2004, OdysseyRe acquired Overseas Partners U.S. Reinsurance Company, a reinsurance company domiciled dom·i·cile n. 1. A residence; a home. 2. One's legal residence. v. dom·i·ciled, dom·i·cil·ing, dom·i·ciles v.tr. 1. in the state of Delaware Delaware, state, United States Delaware (dĕl`əwâr, –wər), one of the Middle Atlantic states of the United States, the country's second smallest state (after Rhode Island). , for $43.0. The fair value of assets and liabilities acquired was $237.8 and $194.8 respectively, resulting in no goodwill. Subsidiaries of the company sold 3.1 million shares of common stock of Zenith National at $43 per share, in an underwritten public offering which closed on July 30, 2004, resulting in a realized pre-tax gain after expenses of $40.9. On May 18, 2004, the company recorded a realized pre-tax gain of $40.1 (Cdn$53.5) on the sale of 6.0 million common shares of its Northbridge subsidiary in an underwritten secondary offering at a price of Cdn$25.60 per share, generating net proceeds of $104.8 (Cdn$146.0) and reducing the company's ownership of Northbridge from 71.0% to 59.2%. On March 14, 2004, Lindsey Morden Morden, town (1991 pop. 5,273), S Man., Canada, SW of Winnipeg. Located in an agricultural region, it has farm machinery and food- and fiber-processing plants. There is a government experimental farm in the town. completed the sale of its U.S. third party claims administration business for a cash payment by Lindsey Morden of $22.0. The disposition Act of disposing; transferring to the care or possession of another. The parting with, alienation of, or giving up of property. The final settlement of a matter and, with reference to decisions announced by a court, a judge's ruling is commonly referred to as disposition, regardless of of this business resulted in a charge to earnings of $13.4, consisting of a $3.6 loss on the sale of the business and other related accruals Accruals Accounts on a balance sheet that represent liabilities and non-cash-based assets used in accrual-based accounting. These accounts include, among many others, accounts payable, accounts receivable, goodwill, future tax liability and future interest expense. , including lease termination The point where a line, channel or circuit ends. See SCSI termination and hybrid. costs, of $9.8. 5. Capital, Long Term Debt and Trust Preferred Securities Year ended December 31, 2005 During 2005, the company purchased $7.0 of its notes due in 2006, $0.6 of its notes due in 2008, $6.0 of its notes due in 2018 and $14.2 of its notes due in 2037 and repaid the $27.3 of TIG n. 1. A game among children. See Tag. 2. A capacious, flat-bottomed drinking cup, generally with four handles, formerly used for passing around the table at convivial entertainment. senior notes which matured, for cash payments aggregating $50.7. Also during 2005, OdysseyRe issued $125.0 principal amount of 6.875% senior notes due in 2015, and repurchased $30.4 principal amount of its 4.375% convertible senior debentures due 2022 for cash payments of $34.2. On October 5, 2005, the company issued 1,843,318 subordinate voting shares at $162.75 per share for net proceeds after issue costs (net of tax) of $299.8. Under the terms of normal course issuer bids approved by the Toronto Stock Exchange Toronto Stock Exchange (TSE) Canada's largest stock exchange, trading approximately 1,200 company stocks and 33 options. , during 2005 the company purchased and cancelled can·cel v. can·celed also can·celled, can·cel·ing also can·cel·ling, can·cels also can·cels v.tr. 1. To cross out with lines or other markings. See Synonyms at erase. 2. 49,800 (2004 - 215,200) subordinate voting shares for an aggregate cost of $7.4 (2004 - $31.5), of which $0.3 (2004 - $3.6) was charged to retained earnings. Year ended December 31, 2004 On December 21, 2004, the company issued $200.0 of its 7.75% notes due 2012. On December 21, 2004, the company completed a debt tender offer. A total of $114.6 principal amount of debt was tendered and purchased as follows: $11.1 principal amount of TIG's 8.125% notes due 2005, $62.6 principal amount of 7.375% notes due 2006, $36.5 principal amount of 6.875% notes due 2008, and $4.4 principal amount of TIG's trust preferred securities due 2027. On December 16, 2004, the company issued 2,406,741 subordinate voting shares at $124.65 per share for net proceeds after issue costs (net of tax) of $299.7. On November 19, 2004, the company, through one of its subsidiaries, purchased its $78.0 principal amount of 3.15% exchangeable debentures due 2010 in a private transaction. As consideration, the subsidiary issued $101.0 principal amount of new 3.15% exchangeable debentures due 2009 which are collectively exchangeable into an aggregate of 4,300,000 OdysseyRe common shares in August 2006 (with respect to $32.9 principal amount of new debentures) and November 2006 (with respect to $68.1 principal amount of new debentures). From October 29 to November 3, 2004, the company repurchased $23.0 of TIG's trust preferred securities due in 2027. On November 16 and 17, 2004, the company repurchased $6.5 of its convertible debentures due in 2023. On November 1, 2004, the company repurchased $5.0 of its notes due in 2026. On August 27, 2004, the company issued an additional $95.0 (before issue expenses of approximately $3.5) of its 7.75% notes due in 2012. By September 30, 2004, $65.1 of the proceeds were used to repurchase re·pur·chase tr.v. re·pur·chased, re·pur·chas·ing, re·pur·chas·es To buy (something) again. n. The act of buying something that one previously sold or owned. Noun 1. (including the payment of accrued interest Accrued Interest The interest that has accumulated on a bond since the last interest payment up to but not including the settlement date. There are two methods for calculating accrued interest: 1) 360-day year method, used for corporate and municipal bonds. of $2.1) $40.3 of its notes due in 2006 and $20.0 of its notes due in 2005. On April 29, 2004, the company closed its note exchange offers (which were accounted for as a modification A change or alteration in existing materials. Modification generally has the same meaning in the law as it does in common parlance. The term has special significance in the law of contracts and the law of sales. of debt), under which $204.6 of outstanding notes due in 2005 through 2008 were exchanged for a cash payment of $59.4 (including accrued interest) and the issue of $160.4 of new 7.75% notes due in 2012. On June 29, 2004, an additional $10.0 of the company's notes due in 2006 were exchanged for the issue of $11.0 of new 7.75% notes due in 2012. 6. Other On August 31, 2005, Lindsey Morden completed a rights offering, issuing a total of 7,791,712 subordinate voting shares at Cdn$4.25 per share for net proceeds, after offering expenses, of $27.1 (Cdn$32.2). The net proceeds of the offering were used to partially repay the Cdn$105.0 million of borrowings by a subsidiary of Lindsey Morden under an unsecured Unsecured A loan or equity interest that is given without any guarantee of payment, performance, satisfaction or opportunity for return from the recipient. No property, interest or security is used as collateral in either a guarantee or a pledge. non-revolving term credit facility due March 31, 2006. The company exercised all rights issued to it, purchasing 7,154,628 subordinate voting shares at a cost of $25.6 (Cdn$30.4), which increased its percentage ownership of Lindsey Morden from 75.0% to 81.0%. Included in Lindsey Morden indebtedness INDEBTEDNESS. The state, of being in debt, without regard to the ability or inability of the party to pay the same. See 1 Story, Eq. 343; 2 Hill. Ab. 421. 2. is $62.3 (Cdn$72.8) (2004 - $78.3 (Cdn$105.0)) owed by a subsidiary of Lindsey Morden under the above unsecured non-revolving term credit facility. Fairfax has extended its letter of support of Lindsey Morden to apply to a two-year extension of this credit facility. On March 14, 2004, Lindsey Morden completed the sale of its U.S. third party claims administration business for a cash payment by Lindsey Morden of $22.0. The disposition of this business resulted in a charge to earnings of $13.4, consisting of a $3.6 loss on the sale of the business and other related accruals, including lease termination costs, of $9.8. 7. Segmented Information The company is a financial services The examples and perspective in this article or section may not represent a worldwide view of the subject. Please [ improve this article] or discuss the issue on the talk page. holding company which, through its subsidiaries, is engaged in property and casualty insurance conducted on a direct and reinsurance basis, runoff operations and insurance claims management. In Management's Discussion and Analysis of Financial Condition and Results of Operations, the company shows the net premiums earned, combined ratios, and underwriting and operating results for each of its insurance and reinsurance groups, and as applicable, for its runoff operations as well as the earnings contributions from its claims management services. In the table showing the sources of net earnings, interest and dividends on the consolidated statements of earnings are included in the insurance and reinsurance group operating results and in the runoff and other operations and realized gains on investments related to the runoff group are included in the runoff and other operations. There were no significant changes in the identifiable assets by operating group as at December 31, 2005 compared to December 31, 2004. 8. U.S. GAAP Reconciliation The consolidated financial statements of the company have been prepared in accordance with Canadian GAAP which are different in some respects from those applicable in the United States United States, officially United States of America, republic (2005 est. pop. 295,734,000), 3,539,227 sq mi (9,166,598 sq km), North America. The United States is the world's third largest country in population and the fourth largest country in area. , as described in note 19 on pages 41 to 44 of the company's 2004 Annual Report. The following shows the net earnings in accordance with US GAAP:
2005 2004
Net earnings (loss), Canadian GAAP (497.9) (19.8)
Recoveries on retroactive reinsurance 163.8 25.3
Other than temporary declines 27.7 28.1
Other differences (2.0) (14.4)
Tax effect (62.4) (13.1)
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Net earnings (loss), US GAAP (370.8) 6.1
Other comprehensive income (loss)(1) (3.0) 171.0
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Comprehensive income (loss), US GAAP (373.8) 177.1
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Net earnings (loss) per share, US GAAP $ (23.03) $ (0.29)
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Net earnings (loss) per diluted share,
US GAAP $ (23.03) $ (0.29)
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(1) Consists of the after-tax af·ter-tax also af·ter·tax adj. Relating to or being that which remains after payment, especially of income taxes: after-tax profits. change in the mark-to-market Mark-to-market Adjustment of the book value or collateral value of a security to reflect current market value. valuation of investments of $24.0 (2004 - $95.1) and the change in the currency translation adjustment amount of $(27.0) (2004 - $75.9). Consolidated Balance Sheets The following shows the balance sheet amounts in accordance with US GAAP, setting out individual amounts where different from the amounts reported under Canadian GAAP:
2005 2004
Assets
Portfolio investments
Subsidiary cash and short term investments 3,788.9 3,476.3
Bonds 7,766.4 7,130.2
Preferred stocks 16.6 136.4
Common stocks 2,533.0 1,957.9
Strategic investments 351.0 412.2
Investments pledged for securities
sold but not yet purchased 1,009.3 733.9
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Total portfolio investments 15,465.2 13,846.9
Future income taxes 1,150.2 1,066.3
Goodwill 263.0 280.2
All other assets 11,203.7 11,667.2
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Total assets 28,082.1 26,860.6
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Liabilities
Accounts payable and accrued liabilities 1,749.7 1,884.3
Securities sold but not yet purchased 700.3 539.5
Long term debt - holding company
borrowings 1,424.7 1,480.3
Long term debt - subsidiary company
borrowings 869.3 773.0
All other liabilities 19,628.9 18,526.8
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Total liabilities 24,372.9 23,203.9
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Mandatorily redeemable shares of TRG 192.1 195.2
Non-controlling interests 752.3 583.0
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944.4 778.2
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Shareholders' Equity 2,764.8 2,878.5
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28,082.1 26,860.6
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The difference in consolidated shareholders' equity is as follows:
2005 2004
Shareholders' equity based on Canadian GAAP 2,905.9 3,170.7
Accumulated other comprehensive income 306.5 282.5
Reduction of other paid in capital (59.4) (59.4)
Cumulative reduction in net earnings under
US GAAP (388.2) (515.3)
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Shareholders' equity based on US GAAP 2,764.8 2,878.5
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The cumulative reduction in net earnings under US GAAP of $388.2 at December 31, 2005 relates primarily to the deferred gain on retroactive Having reference to things that happened in the past, prior to the occurrence of the act in question. A retroactive or retrospective law is one that takes away or impairs vested rights acquired under existing laws, creates new obligations, imposes new duties, or attaches a reinsurance ($425.5 after tax) which is amortized into income as the underlying claims are paid. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (as of February February: see month. 9, 2006) (in US$ millions except per share amounts and as otherwise indicated) This management's discussion and analysis should be read in conjunction with note 1 to the consolidated financial statements and with the notes to the management's discussion and analysis for the year ended December 31, 2004 as set out on page 45 of the company's 2004 Annual Report. The company's ongoing insurance and reinsurance operations incurred an underwriting loss of $330.6, reflecting the impact of $609.9 of net losses from Hurricanes Katrina, Rita and Wilma ("the 2005 hurricanes"). Prior to giving effect to these losses, those operations would have generated an underwriting profit of $279.3. The consolidated combined ratio of the company's ongoing insurance and reinsurance operations was 107.6%. Prior to giving effect to the 2005 hurricane losses, those operations would have had a consolidated combined ratio of 93.7%, reflecting continued strong underwriting performance prior to the impact of the hurricane losses. By comparison, the company's ongoing insurance and reinsurance operations had a net underwriting profit of $108.4 in 2004 (an underwriting profit of $330.5 prior to giving effect to the losses during the third quarter of 2004 from Hurricanes Charley Charley elderly poodle that accompanied Steinbeck on trip across U.S. [Am. Lit.: John Steinbeck Travels with Charley in Weiss, 471] See : Dogs , Frances, Ivan Ivan - A Diana-like language making up part of VHDL. ["VHDL - The Designer Environment", A. Gilman, IEEE Design & Test 3, (Apr 1986)]. and Jean ("the 2004 third quarter hurricanes")). The company's 2004 consolidated combined ratio was 97.5% (92.4% prior to giving effect to the 2004 third quarter hurricane losses). The net loss increased to $497.9 ($30.72 per share and per diluted share) in 2005 from a net loss of $19.8 ($2.16 per share and per diluted share) in 2004, primarily due to the 2005 hurricanes, partially offset by increased investment income and net realized gains (described under "Interest and Dividends and Realized Gains" below) and a recovery of income taxes. Prior to the impact of $715.5 of consolidated losses resulting from the 2005 hurricanes and $465.5 of charges resulting from actions taken in runoff, earnings from operations before income taxes in 2005 would have been $663.4, compared to $389.8 in 2004 prior to giving effect to $252.7 in losses resulting from the 2004 third quarter hurricanes. Revenue in 2005 increased to $5,878.2 from $5,792.6 in 2004, principally as a result of increased investment income and net realized gains, offset by lower earned premiums Earned premium is the portion of an insurance written premium which is considered "earned" by the insurer, based on the part of the policy period that the insurance has been in effect, and during which the insurer has been exposed to loss. . During 2005, net premiums written by Northbridge, Crum & Forster and OdysseyRe, expressed in local currency, decreased 5.0%, 0.3% and 1.5% respectively from 2004. Consolidated net premiums written in 2005 decreased by 1.7% to $4,705.4 from $4,786.5 in 2004. Of the $1,071.2 of consolidated operating expenses Operating expenses The amount paid for asset maintenance or the cost of doing business, excluding depreciation. Earnings are distributed after operating expenses are deducted. in 2005 ($1,037.6 in 2004), $737.9 ($715.9 in 2004) related to insurance, reinsurance, runoff and other operations (including $22.7 in restructuring charges restructuring charge The expense of reorganizing a company's operations. A restructuring charge is an infrequent expense that generally results from asset writedowns or facility closings. ) and corporate overhead, while the balance of $333.3 ($321.7 in 2004) related to Lindsey Morden. Cash flow from operations for the year ended December 31, 2005 amounted to $346.0 for Northbridge ($250.5 in 2004), $9.1 for Crum & Forster ($94.7 in 2004) and $397.3 for OdysseyRe ($603.2 in 2004). Increased cash flows at Northbridge were primarily increases occurring in the normal course of operations. Decreased cash flows at Crum & Forster were primarily a result of lower proceeds from commutations and higher catastrophe and asbestos asbestos, mineral asbestos, common name for any of a variety of silicate minerals within the amphibole and serpentine groups that are fibrous in structure and more or less resistant to acid and fire. loss payments, partially offset by a reduction in all other claims payments. Decreased cash flows at OdysseyRe reflect an increase in paid losses related to 2004 and 2005 catastrophes, principally the 2005 hurricanes. Reinsurance recoverables decreased to $7,655.6 from $8,135.5 in 2004, notwithstanding an increase in reinsurance recoverables in 2005 due to ceded losses from the 2005 hurricanes. On September 7, 2005, the company received a subpoena subpoena (səpē`nə) [Lat.,=under penalty], in law, an order to a witness to appear before a court. A subpoena ad testificandum [Lat. from the U.S. Securities and Exchange Commission (the "SEC") requesting documents regarding any non-traditional insurance or reinsurance product transaction entered into by the entities in the consolidated group and any non-traditional insurance or reinsurance products offered by the entities in that group. On September 26, 2005, the company received a further subpoena from the SEC as part of its investigation into such loss mitigation MITIGATION. To make less rigorous or penal. 2. Crimes are frequently committed under circumstances which are not justifiable nor excusable, yet they show that the offender has been greatly tempted; as, for example, when a starving man steals bread to satisfy products, requesting documents regarding any transactions in the company's securities, the compensation for such transactions and the trading volume Trading volume The number of shares transacted every day. As there is a seller for every buyer, one can think of the trading volume as half of the number of shares transacted. That is, if A sells 100 shares to B, the volume is 100 shares. or share price of such securities. The company understands that the U.S. Attorney's CERTIFICATE, ATTORNEY'S, Practice, English law. By statute 37 Geo. III., c. 90, s. 26, 28, attorneys are required to deliver to the commissioners of stamp duties, a paper or note in writing, containing the name and usual place of residence of such person, and thereupon, on paying certain office for the Southern District of New York New York, state, United States New York, Middle Atlantic state of the United States. It is bordered by Vermont, Massachusetts, Connecticut, and the Atlantic Ocean (E), New Jersey and Pennsylvania (S), Lakes Erie and Ontario and the Canadian province of is reviewing information that the company provides to the SEC in response to SEC subpoenas. Previously, on June 24, 2005, the company's Fairmont Fairmont, city (1990 pop. 20,210), seat of Marion co., N central W.Va., where the West Fork and Tygart rivers form the Monongahela; settled 1793 around Prickett's Fort (1774), inc. as Fairmont 1843. subsidiary had received a subpoena from the SEC requesting documents regarding any non-traditional insurance product transactions entered into by Fairmont with General Re Corporation or affiliates thereof. The company is cooperating fully with these requests. OdysseyRe announced today that, as a result of its internal review of contracts with finite finite - compact characteristics, it is restating its financial results for the years 2001 through 2004, as well as its results for the nine months ended September 30, 2005. The primary purpose of the restatement Restatement A revision in a company's earlier financial statements. Notes: The need for restating financial figures can result from fraud, misrepresentation, or a simple clerical error. is to correct the accounting treatment (relating primarily to the timing of recognition of income) for certain contract features of seven ceded reinsurance contracts and the accounting treatment of ceding cede tr.v. ced·ed, ced·ing, cedes 1. To surrender possession of, especially by treaty. See Synonyms at relinquish. 2. commissions relating to relating to relate prep → concernant relating to relate prep → bezüglich +gen, mit Bezug auf +acc three ceded aggregate excess of loss contracts. Fairfax has assessed the individual and aggregate components of the restatements announced by OdysseyRe and has concluded that they are not individually or in the aggregate material at the consolidated Fairfax level and consequently that it will not be restating its financial results for any period. Net Earnings The combined ratios by segment and the sources of net earnings (with Lindsey Morden equity accounted) were as follows for the years ended December 31, 2005 and 2004:
2005 2004
Combined ratios
Insurance - Canada (Northbridge) 92.9%(1) 87.7%(2)
- U.S. 100.9%(1) 105.4%(2)
- Asia (Fairfax Asia) 93.0% 91.9%
Reinsurance (OdysseyRe) 117.2%(1) 98.1%(2)
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Consolidated 107.6%(1) 97.5%(2)
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---------- ----------
Sources of net earnings
Underwriting
Insurance - Canada (Northbridge) 68.2 115.5
- U.S. (9.1) (55.0)
- Asia (Fairfax Asia) 4.8 4.7
Reinsurance (OdysseyRe) (394.5) 43.2
---------- ----------
Underwriting income (loss) (330.6) 108.4
Interest and dividends 345.4 301.4
---------- ----------
Operating income 14.8 409.8
Realized gains 294.3 162.7
Runoff and other (641.5) (193.6)
Claims adjusting (Fairfax portion) 5.4 (15.4)
Interest expense (185.7) (153.3)
Corporate overhead and other (8.8) (76.3)
---------- ----------
Pre-tax income (521.5) 133.9
Taxes 69.4 (74.6)
Non-controlling interests (45.8) (79.1)
---------- ----------
Net earnings (loss) (497.9) (19.8)
---------- ----------
---------- ----------
(1) The combined ratios include 7.9 combined ratio points for Canadian insurance, 8.9 combined ratio points for U.S. insurance, 19.0 combined ratio points for reinsurance and 13.9 combined ratio points for consolidated, arising from the 2005 hurricane losses. (2) The combined ratios include 2.9 combined ratio points for Canadian insurance, 9.4 combined ratio points for U.S. insurance, 4.2 combined ratio points for reinsurance and 5.1 combined ratio points for consolidated, arising from the 2004 third quarter hurricanes. The above sources of net earnings (with Lindsey Morden equity accounted) shown by business segments were as follows for the years ended December 31, 2005 and 2004. The intercompany adjustment for gross premiums written When a non-life insurance company closes a contract to provide insurance against loss, the revenues (premiums) expected to be received over the life of the contract are called gross premiums written. eliminates premiums on reinsurance ceded within the group, primarily to OdysseyRe, nSpire Re and Group Re. The intercompany adjustment for net realized gains eliminates gains or losses on purchase and sale transactions within the group.
Year ended December 31, 2005
U.S. Fairfax Ongoing
Northbridge Insurance Asia OdysseyRe Operations
Gross premiums
written 1,545.2 1,303.6 76.6 2,641.4 5,566.8
----------- --------- ------ --------- -----------
Net premiums
written 978.8 1,026.0 46.5 2,314.1 4,365.4
----------- --------- ------ --------- -----------
Net premiums earned 959.2 1,053.1 68.2 2,287.2 4,367.7
----------- --------- ------ --------- -----------
Underwriting profit
(loss) 68.2 (9.1) 4.8 (394.5) (330.6)
Interest and
dividends 65.7 105.0 7.5 167.2 345.4
----------- --------- ------ ---------- ----------
Operating income
before: 133.9 95.9 12.3 (227.3) 14.8
Realized gains 104.0 106.9 1.0 104.4 316.3
Runoff and other
operating income
(loss) - - - - -
Claims adjusting - - - - -
Interest expense - (32.9) - (30.0) (62.9)
Corporate overhead
and other (14.6) (2.5) (2.4) (25.0) (44.5)
------------ --------- ------ --------- ----------
Pre-tax income
(loss) 223.3 167.4 10.9 (177.9) 223.7
Runoff & Corporate &
Other Intercompany Other Consolidated
Gross premiums
written 377.6 (372.4) - 5,572.0
-------- ------------ ---------- -------------
Net premiums written 340.0 - - 4,705.4
-------- ------------ ---------- -------------
Net premiums earned 336.1 - - 4,703.8
-------- ------------ ---------- -------------
Underwriting profit
(loss) - - - (330.6)
Interest and dividends - - - 345.4
-------- ------------ ---------- -------------
Operating income
before: - - - 14.8
Realized gains 55.4 (24.7) 2.7 349.7
Runoff and other
operating income
(loss) (696.9) - - (696.9)
Claims adjusting - - 5.4 5.4
Interest expense - - (122.8) (185.7)
Corporate overhead
and other - - 35.7 (8.8)
-------- ------------ ---------- -------------
Pre-tax income (loss) (641.5) (24.7) (79.0) (521.5)
Taxes 69.4
Non-controlling
interests (45.8)
-------------
Net earnings (loss) (497.9)
-------------
Year ended December 31, 2004
U.S. Fairfax Ongoing
Northbridge Insurance Asia OdysseyRe Operations
Gross premiums
written 1,483.1 1,345.1 86.7 2,631.6 5,546.5
----------- --------- ------ --------- ----------
Net premiums
written 957.6 1,036.0 59.6 2,349.6 4,402.8
----------- --------- ------ --------- ----------
Net premiums earned 939.0 1,027.6 57.8 2,320.8 4,345.2
----------- --------- ------ --------- ----------
Underwriting profit
(loss) 115.5 (55.0) 4.7 43.2 108.4
Interest and
dividends 60.9 81.3 2.9 156.3 301.4
----------- --------- ------ --------- ----------
Operating income
before: 176.4 26.3 7.6 199.5 409.8
Realized gains 22.6 85.0 - 74.6 182.2
Runoff and other
operating income
(loss) - - - - -
Claims adjusting - - - - -
Interest expense - (33.2) - (25.6) (58.8)
Corporate overhead
and other (8.3) (8.4) (2.8) (12.4) (31.9)
----------- --------- ------ --------- ----------
Pre-tax income
(loss) 190.7 69.7 4.8 236.1 501.3
Runoff & Corporate &
Other Intercompany Other Consolidated
Gross premiums
written 584.2 (521.9) - 5,608.8
-------- ------------ ---------- ------------
Net premiums written 383.7 - - 4,786.5
-------- ------------ ---------- ------------
Net premiums earned 456.3 - - 4,801.5
-------- ------------ ---------- ------------
Underwriting profit
(loss) - - - 108.4
Interest and
dividends - - - 301.4
-------- ------------ ---------- ------------
Operating income
before: - - - 409.8
Realized gains 125.6 (43.8) 24.3 288.3
Runoff and other
operating income
(loss) (319.2) - - (319.2)
Claims adjusting - - (15.4) (15.4)
Interest expense - - (94.5) (153.3)
Corporate overhead
and other - - (44.4) (76.3)
-------- ------------ ---------- ------------
Pre-tax income (loss) (193.6) (43.8) (130.0) 133.9
Taxes (74.6)
Non-controlling
interests (79.1)
------------
Net earnings (loss) (19.8)
------------
Set out and discussed below are the underwriting results and operating results of Fairfax's ongoing insurance and reinsurance operations on a company by company basis for the years ended December 31, 2005 and 2004, followed by a discussion of the principal other elements of net earnings.
Canadian Insurance - Northbridge
2005 2004
Underwriting profit 68.2 115.5
------- -------
------- -------
Combined ratio:
Loss & LAE 67.9% 62.2%
Commissions 6.3% 7.3%
Underwriting expense 18.7% 18.2%
------- -------
92.9% 87.7%
------- -------
------- -------
Gross premiums written 1,545.2 1,483.1
------- -------
Net premiums written 978.8 957.6
------- -------
Net premiums earned 959.2 939.0
------- -------
Underwriting profit 68.2 115.5
Interest and dividends 65.7 60.9
------- -------
Operating income 133.9 176.4
Realized gains 104.0 22.6
------- -------
Pre-tax income before interest and
other 237.9 199.0
------- -------
------- -------
Net income after taxes 163.4 124.3
------- -------
------- -------
In 2005, Northbridge earned underwriting profit of $68.2, a 41.0% decline relative to underwriting profit of $115.5 earned in 2004. Although underwriting profit increased at three of Northbridge's four operating subsidiaries, the underwriting year was affected by the unprecedented storm season in the Gulf of Mexico Noun 1. Gulf of Mexico - an arm of the Atlantic to the south of the United States and to the east of Mexico Golfo de Mexico Atlantic, Atlantic Ocean - the 2nd largest ocean; separates North and South America on the west from Europe and Africa on the east and coastal U.S. states A U.S. state is any one of the fifty subnational entities of the United States, although four states use the official title "commonwealth". The separate state governments and the federal government share sovereignty, in that an American is a citizen both of the federal entity and . Despite an adverse underwriting impact aggregating 7.9 combined ratio points from Hurricanes Katrina, Rita and Wilma, Northbridge produced a combined ratio of 92.9% in 2005, up from 87.7% in 2004 (97.8% in the fourth quarter of 2005, compared to 78.9% in the fourth quarter of 2004). Net premiums written and net premiums earned at Northbridge declined (measured in Canadian dollars Noun 1. Canadian dollar - the basic unit of money in Canada; "the Canadian dollar has the image of loon on one side of the coin" loonie dollar - the basic monetary unit in many countries; equal to 100 cents ) 5.0% in 2005 relative to 2004 as a result of a restructuring restructuring - The transformation from one representation form to another at the same relative abstraction level, while preserving the subject system's external behaviour (functionality and semantics). in its personal lines segment, the sale of Federated Connected and treated as one. See federated database and federated directories. Life Insurance Company of Canada Canada (kăn`ədə), independent nation (2001 pop. 30,007,094), 3,851,787 sq mi (9,976,128 sq km), N North America. Canada occupies all of North America N of the United States (and E of Alaska) except for Greenland and the French islands of , reinstatement Reinstatement The restoration of an insurance policy after it has lapsed for nonpayment of premiums. premiums triggered under certain reinsurance treaties Reinsurance Treaty (June 18, 1887) Secret agreement between Germany and Russia. Arranged by Otto von Bismarck after the collapse of the Three Emperors' League, it provided that each party would remain neutral if either became involved in a war with a third nation, and that and the impact of the non-renewal of a Federated quota share For This article is about quota shares (shares of the quota). For other usages of quota, see, see . A quota share is a specified number or percentage of the allotment as a whole (quota), that is prescribed to each individual entity (see Non-tariff barriers to trade). treaty. Northbridge's operating income Operating Income The profit realized from a business' own operations. Notes: This would not include income from things such as investments in other firms. Also referred to as operating profit or recurring profit. declined to $133.9 million in 2005 from $176.4 in 2004, largely as a result of the catastrophe-impacted underwriting profit in 2005. However, net income after taxes for 2005 was $163.4, up 31.5% from $124.3 in 2004, primarily as a result of significant net realized gains on portfolio investments and a reduced effective tax rate. This increase in net income after taxes in 2005 produced a return on average equity, while remaining debt free, of 21.0% (expressed in Canadian dollars). Northbridge's average annual return on average equity over the past 20 years since inception INCEPTION. The commencement; the beginning. In making a will, for example, the writing is its inception. 3 Co. 31 b; Plowd. 343. Vide Consummation; Progression. in 1985 is 16.5% (expressed in Canadian dollars). For more information on Northbridge's results, please see its 2005 year-end press release posted on its website www.norfin.com.
U.S. Insurance
Year ended December 31, 2005
Crum & Forster(1) Fairmont Total
Underwriting profit (loss) (12.6) 3.5 (9.1)
----------------- -------- --------
----------------- -------- --------
Combined ratio:
Loss & LAE 73.2% 63.2% 71.7%
Commissions 10.3% 11.7% 10.5%
Underwriting expense 17.9% 22.9% 18.7%
----------------- -------- --------
101.4% 97.8 100.9%
----------------- -------- --------
----------------- -------- --------
Gross premiums written 1,097.8 205.8 1,303.6
----------------- -------- --------
Net premiums written 866.9 159.1 1,026.0
----------------- -------- --------
Net premiums earned 892.1 161.0 1,053.1
----------------- -------- --------
Underwriting profit (loss) (12.6) 3.5 (9.1)
Interest and dividends 100.4 4.6 105.0
----------------- -------- --------
Operating income 87.8 8.1 95.9
Realized gains 96.9 10.0 106.9
----------------- -------- --------
Pre-tax income before interest
and other 184.7 18.1 202.8
----------------- -------- --------
----------------- -------- --------
Net income after taxes 106.3 11.8 118.1
----------------- -------- --------
----------------- -------- --------
Year ended December 31, 2004
Crum & Forster(1) Fairmont Total
Underwriting profit (loss) (56.2) 1.2 (55.0)
----------------- -------- ---------
----------------- -------- ---------
Combined ratio:
Loss & LAE 77.1% 64.4% 75.0%
Commissions 10.5% 13.8% 11.2%
Underwriting expense 18.9% 21.1% 19.2%
----------------- -------- ---------
106.5% 99.3% 105.4%
----------------- -------- ---------
----------------- -------- ---------
Gross premiums written 1,139.0 206.1 1,345.1
----------------- -------- ---------
Net premiums written 869.6 166.4 1,036.0
----------------- -------- ---------
Net premiums earned 859.0 168.6 1,027.6
----------------- -------- ---------
Underwriting profit (loss) (56.2) 1.2 (55.0)
Interest and dividends 73.0 8.3 81.3
----------------- -------- ---------
Operating income 16.8 9.5 26.3
Realized gains 77.8 7.2 85.0
----------------- -------- ---------
Pre-tax income before
interest and other 94.6 16.7 111.3
----------------- -------- ---------
----------------- -------- ---------
Net income after taxes 38.3 11.2 49.5
----------------- -------- ---------
----------------- -------- ---------
(1) These results differ from those published by Crum & Forster Holdings Corp. primarily due to differences between Canadian and US GAAP. Crum & Forster's combined ratio of 101.4% in 2005 included 10.4 combined ratio points arising from the 2005 hurricanes. Underwriting results also reflected a net benefit of $31.7 or 3.4 combined ratio points related to favorable fa·vor·a·ble adj. 1. Advantageous; helpful: favorable winds. 2. Encouraging; propitious: a favorable diagnosis. 3. development of prior years' loss reserves, primarily with respect to the 2004 third quarter hurricanes. The 2005 combined ratio of 101.4% is 5.1 combined ratio points lower than the 2004 combined ratio of 106.5%. Excluding the 2005 hurricanes and the 2004 third quarter hurricanes, the combined ratio improved to 91.0% in 2005 from 95.4% in 2004, reflecting the aforementioned a·fore·men·tioned adj. Mentioned previously. n. The one or ones mentioned previously. aforementioned Adjective mentioned before Adj. 1. favorable reserve development in 2005 and management's strict underwriting discipline and expense focus. Crum & Forster's net premiums written of $866.9 remained relatively stable compared to 2004, reflecting intense competition for both new and renewal business. United States Fire Insurance, Crum & Forster's principal operating subsidiary, paid an $88.5 dividend in 2005 to its parent holding company. Its 2006 dividend capacity is approximately $94. North River Insurance, Crum & Forster's New Jersey-domiciled operating subsidiary, paid a $4.9 dividend in 2005 and has 2006 dividend capacity of approximately $25. Cash flow from operations at Crum & Forster was $9.1 in 2005 compared to 2004 operating cash flow Operating cash flow Earnings before depreciation minus taxes. Measures the cash generated from operations, not counting capital spending or working capital requirements. of $94.7. The significant decline from 2004 is attributable attributable emanating from or pertaining to attribute. attributable proportion see attributable risk (below). attributable risk to numerous factors, particularly lower proceeds from reinsurance commutations and higher catastrophe losses and asbestos payments, partially offset by a reduction in excess of 20% in all other claim payments. For more information on Crum & Forster, please see its website www.cfins.com, where its 10K for 2005 is expected to be posted by the end of February. Fairmont's combined ratio of 97.8% reflects its continued focus on underwriting profitability. Fairmont's disciplined response to competitive pressure resulted in a decrease in net premiums written to $159.1 in 2005 from $166.4 in 2004.
Fairfax Asia
2005 2004
Underwriting profit 4.8 4.7
------- -------
------- -------
Combined ratio:
Loss & LAE 65.5% 55.9%
Commissions 12.3% 18.0%
Underwriting expense 15.2% 18.0%
------- -------
93.0% 91.9%
------- -------
------- -------
Gross premiums written 76.6 86.7
------- -------
Net premiums written 46.5 59.6
------- -------
Net premiums earned 68.2 57.8
------- -------
Underwriting profit 4.8 4.7
Interest and dividends 7.5 2.9
------- -------
Operating income 12.3 7.6
Realized gains 1.0 -
------- -------
Pre-tax income before interest and other 13.3 7.6
------- -------
------- -------
Net income after taxes 7.3 4.1
------- -------
------- -------
The increase in Fairfax Asia's combined ratio to 93.0% in 2005 from 91.9% in 2004 reflects an increase in Falcon's combined ratio to 98.7% in 2005 from 95.0% in 2004, principally as a result of its employer construction line of business, partially offset by First Capital's consistent combined ratio of 82.0% on substantially increased net premiums earned. The decrease in gross and net premiums written reflects Falcon's response to further rate softening in the Hong Kong Hong Kong (hŏng kŏng), Mandarin Xianggang, special administrative region of China, formerly a British crown colony (2005 est. pop. 6,899,000), land area 422 sq mi (1,092 sq km), adjacent to Guangdong prov. market. The increase in investment income relates mainly to an increased equity pickup Pickup A gain in yield made by selling one bond and buying another. Also referred to as "yield pickup." Notes: When the present yield is relatively low compared to the longer-term yields, pickups will be done by investors trying to increase the yield and duration of their from Fairfax Asia's 26.0% interest in the ICICI/Lombard joint venture.
Reinsurance - OdysseyRe(1)
2005 2004
Underwriting profit (394.5) 43.2
------- -------
------- -------
Combined ratio:
Loss & LAE 90.3% 70.0%
Commissions 20.7% 22.6%
Underwriting expense 6.2% 5.5%
------- -------
117.2% 98.1%
------- -------
------- -------
Gross premiums written 2,641.4 2,631.6
------- -------
Net premiums written 2,314.1 2,349.6
------- -------
Net premiums earned 2,287.2 2,320.8
------- -------
Underwriting profit (394.5) 43.2
Interest and dividends 167.2 156.3
------- -------
Operating income (227.3) 199.5
Realized gains 104.4 74.6
------- -------
Pre-tax income before interest and
other (122.9) 274.1
------- -------
------- -------
Net income (loss) after taxes (107.4) 160.1
------- -------
------- -------
(1) These results differ from those published by Odyssey Odyssey (ŏd`ĭsē): see Homer. Odyssey Homer’s long, narrative poem centered on Odysseus. [Gk. Lit.: Odyssey] See : Epic Odyssey Re Holdings Corp. primarily due to differences between Canadian and US GAAP and the exclusion exclusion /ex·clu·sion/ (eks-kloo´zhun) 1. a shutting out or elimination. 2. surgical isolation of a part, as of a segment of intestine, without removal from the body. from the 2004 results of First Capital (First Capital's results are included in Fairfax Asia above). In addition, these results do not reflect a change by Odyssey Re Holdings Corp. in the accounting treatment of or relating to certain reinsurance contracts, which is not material to Fairfax. In 2005, a year of unprecedented catastrophes, OdysseyRe's combined ratio was 117.2%, which included 19.0 combined ratio points ($436.0 of pre-tax losses, net of applicable reinstatement premiums and reinsurance) arising from Hurricanes Katrina, Rita and Wilma. This compares to a combined ratio of 98.1% in 2004, which included 4.2 points arising from the 2004 third quarter hurricanes. OdysseyRe's combined ratio in 2005 also included 8.2 combined ratio points ($189.0 of net pre-tax losses) in adverse loss development from prior period losses (7.4 combined ratio points in 2004). Gross premiums written were virtually unchanged in 2005, following an average annual increase of 34.0% from 2002 to 2004. For 2005, gross premiums written in the United States represented 55% of the total, with non-U non-U adj. Chiefly British Not characteristic of the upper class, especially in language usage. [non- + U2. .S. premiums representing 45%. In 2005, OdysseyRe produced a net loss of $107.4 as compared to net income of $160.1 in 2004, primarily driven by hurricane losses in 2005. OdysseyRe deploys an opportunistic opportunistic /op·por·tu·nis·tic/ (op?er-tldbomacn-is´tik) 1. denoting a microorganism which does not ordinarily cause disease but becomes pathogenic under certain circumstances. 2. underwriting approach designed to maximize In a graphical environment, to enlarge a window to the full size of the screen. See Win Maximize windows. underwriting margins and remains well positioned to benefit from a changing global reinsurance landscape, with a diversified diversified (di·verˑ·s U.S. business and a well established international franchise. For more information on OdysseyRe's results, please see its year-end press release posted on its website www.odysseyre.com. Interest and Dividends and Realized Gains Interest and dividend income earned by the company's ongoing insurance and reinsurance operations in 2005 increased to $345.4 from $301.4 in 2004, due primarily to higher short term interest rates and increased investment portfolios reflecting positive cash flow from ongoing operations, partially offset by the company's share of Advent's hurricane-affected results. Net realized gains earned by the company's ongoing insurance and reinsurance operations increased in 2005 to $294.3 (despite $64.0 of non-trading losses resulting from mark to market adjustments) from $162.7 in 2004. Consolidated net realized gains of $352.1 included realized gains of $55.4 in the runoff segment and realized gains at Lindsey Morden. The $107.8 of non-trading losses included in consolidated net realized gains consisted of $53.1 of mark to market adjustments, recorded as realized losses, related to the economic hedges put in place by the company against a decline in the equity markets and $54.7 of mark to market adjustments, recorded as realized losses, arising from other derivatives in the company's investment portfolio, primarily credit default swaps and put bond warrants. Included in net realized gains for 2005 was a provision of $46.2 (2004 - $31.6) for other than temporary losses and writedowns of certain bonds and common stocks.
Runoff and Other
Year ended December 31, 2005
U.S. Europe Group Re Total
Gross premiums written 14.8 28.6 334.2 377.6
------- -------- ------- --------
Net premiums written (15.2) 28.7 326.5 340.0
------- -------- ------- --------
Net premiums earned (20.1) 41.3 314.9 336.1
Losses on claims
(excluding the reinsurance
commutation below) (143.3) (296.5) (337.9) (777.7)
Operating expenses (18.5) (95.7) (80.6) (194.8)
Interest and dividends 49.0 (16.3) 9.9 42.6
------- -------- ------- --------
Operating income (loss) (132.9) (367.2) (93.7) (593.8)
Realized gains (0.1) 41.8 13.7 55.4
------- -------- ------- --------
(133.0) (325.4) (80.0) (538.4)
Loss on reinsurance
commutation (103.1) - - (103.1)
------- -------- ------- --------
Pre-tax income (loss)
before interest and other (236.1) (325.4) (80.0) (641.5)
------- -------- ------- --------
------- -------- ------- --------
Year ended December 31, 2004
U.S. Europe Group Re Total
Gross premiums written 67.8 117.1 399.3 584.2
------- -------- ------- --------
Net premiums written 17.1 25.2 341.4 383.7
------- -------- ------- --------
Net premiums earned 68.1 45.2 343.0 456.3
Losses on claims (excluding
the reinsurance
commutation below) (95.8) (176.2) (254.2) (526.2)
Operating expenses (57.1) (71.7) (78.4) (207.2)
Interest and dividends 27.1 (17.9) 23.1 32.3
------- -------- ------- --------
Operating income (loss) (57.7) (220.6) 33.5 (244.8)
Realized gains (except as
noted below) 54.1 5.2 15.0 74.3
------- -------- ------- --------
(3.6) (215.4) 48.5 (170.5)
Loss on reinsurance
commutation (31.9) (42.5) - (74.4)
Realized gains (losses)
on intra-group sales 61.6 (10.3) - 51.3
------- -------- ------- --------
Pre-tax income (loss)
before interest and other 26.1 (268.2) 48.5 (193.6)
------- -------- ------- --------
------- -------- ------- --------
The runoff and other pre-tax loss of $641.5 for the year ended December 31, 2005 included the following charges totaling $571.1: - $105.6 of Group Re losses from Hurricanes Katrina, Rita and Wilma; -$78.0 of reserve strengthening on certain U.S. runoff discontinued dis·con·tin·ue v. dis·con·tin·ued, dis·con·tin·u·ing, dis·con·tin·ues v.tr. 1. To stop doing or providing (something); end or abandon: program business; - $43.8 of mark to market adjustments on runoff derivatives investments; - $181.8 of reserve strengthening (including as a result of foreign currency losses) in European European emanating from or pertaining to Europe. European bat lyssavirus see lyssavirus. European beech tree fagussylvaticus. European blastomycosis see cryptococcosis. runoff; - $139.2 as the result of reinsurance commutations and the settlement of reinsurance disputes; and - $22.7 in connection with the closure and consolidation of claims processing locations. The remaining amount of pre-tax loss resulted from the continuing effect of operating and internal claims handling costs in excess of net investment income, partially offset by realized gains on securities sold. Prior to giving effect to the bulleted bul·let·ed adj. Printing Highlighted or set off with bullets: a bulleted list. items above, the runoff and other pre-tax loss for 2005 was $70.4, below the company's expectation of a runoff and other pre-tax loss of $100 for 2005. As a result of actions taken in 2005 and planned for 2006, the company hopes to achieve a pre-tax operating result (excluding unusual items) approaching breakeven for the runoff and other segment in 2006. Runoff cash flow is volatile With regard to computer memory, it means "temporary" and not "highly changeable," which is the usual meaning of the word. See volatile memory. 1. (programming) volatile - volatile variable. 2. (storage) volatile - See non-volatile storage. and ensuring its sufficiency requires constant focus. This situation stems principally from the requirement to pay gross claims initially while third party reinsurance is only collected subsequently in accordance with its terms and from the delay, until some time after claims are paid, of the release of assets pledged to secure the payment of those claims. Commutations effected during 2005 increased the U.S. runoff group's unencumbered Unencumbered Property that is not subject to any creditor claims or liens. Notes: For example, if a house is owned free and clear (meaning the owner owes no mortgage to anyone), it is unencumbered. asset base, with the result that cash flow at the U.S. runoff operations appears adequate in 2006. The European runoff group is anticipated to require cash flow funding from Fairfax of $150 to $200 in 2006, prior to any management actions which would improve European runoff cash flow. Other Elements of Net Earnings Interest expense increased to $185.7 for the year ended December 31, 2005 compared to $153.3 in 2004, reflecting interest expense on the net additional debt issued by Fairfax during 2004 and the OdysseyRe debt issued in the second quarter of 2005. Prior year interest expense was reduced as a result of favourable swap income and the release of deferred swap gains on the buyback Buyback The buying back of outstanding shares (repurchase) by a company in order to reduce the number of shares on the market. Companies will buyback shares either to increase the value of shares still available (reducing supply), or to eliminate any threats by shareholders who may of debt discussed in note 5 to the consolidated financial statements. The interest expense is comp comp See comparison. rised of the following:
2005 2004
Fairfax 122.8 94.5
Crum & Forster. 32.9 33.2
OdysseyRe 30.0 25.6
----- -----
185.7 153.3
----- -----
----- -----
Corporate overhead and other consists of the expenses of all of the group holding companies net of the company's investment management and administration fees and interest income on Fairfax's cash balances, and is comprised of the following:
2005 2004
Fairfax corporate overhead 24.8 56.8
Investment management and administration fees (55.8) (32.7)
Corporate overhead of subsidiary holding companies 44.5 31.9
Internet and technology costs 4.0 11.9
Other (8.7) 8.4
------ -----
8.8 76.3
------ -----
------ -----
Corporate overhead in 2005 decreased at Fairfax from the prior year due to increased investment income, and increased at the subsidiary holding companies due primarily to additional professional fees, including Sarbanes-Oxley work, and personnel retirement costs . Investment management and administration fees increased due to improved performance fees for investment management. Internet Internet Publicly accessible computer network connecting many smaller networks from around the world. It grew out of a U.S. Defense Department program called ARPANET (Advanced Research Projects Agency Network), established in 1969 with connections between computers at the and technology costs decreased in 2005 as over one-third of the revenues of MFX MFX Metzler Fund Xchange MFX Multi Effects MFX Midi Effects , the company's technology subsidiary, were derived de·rive v. de·rived, de·riv·ing, de·rives v.tr. 1. To obtain or receive from a source. 2. from a significant number of third party clients. The company recorded an income tax benefit of $66.8 on its consolidated statement of earnings in 2005 due to the significant losses in the year. This income tax benefit is lower than might be expected principally due to runoff losses incurred in jurisdictions with lower income tax rates, certain expenses which are not deductible That which may be taken away or subtracted. In taxation, an item that may be subtracted from gross income or adjusted gross income in determining taxable income (e.g., interest expenses, charitable contributions, certain taxes). for tax and certain runoff losses on which no tax benefits have been recognized. The company's non-controlling interests in its consolidated statements of earnings derived from the following subsidiaries:
2005 2004
Northbridge 66.7 46.1
OdysseyRe (20.9) 32.9
Lindsey Morden 1.3 (5.1)
------ -----
47.1 73.9
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Investments At December 31, 2005 the investment portfolio had a pre-tax unrealized gain of $537.2 (consisting of unrealized losses Unrealized Loss A loss that results from holding onto an asset rather than cashing it in and officially taking the loss. Notes: Let's say you own a stock that is down 50%, but you haven't sold it to realize the loss yet. This is said to be an unrealized loss. on bonds of $89.0 offset by unrealized gains on equities and other of $626.2), an increase of $108.9 from net unrealized gains of $428.3 at December 31, 2004. Because of the company's continuing concern over the possibility of a decline in equity markets, during 2004 it implemented an economic hedge which is intended to protect its equity investments in the event of such a decline but which would result in a limited loss were equity markets to appreciate. Details are set out in note 3 to the consolidated financial statements. Goodwill Goodwill relates primarily to Lindsey Morden's U.K. subsidiary. The decrease in goodwill to $210.8 at December 31, 2005 from $228.1 at December 31, 2004 was principally attributable to the weakening weak·en tr. & intr.v. weak·ened, weak·en·ing, weak·ens To make or become weak or weaker. weak  en·er n. of the pound sterling against the U.S. dollar during 2005.
Capital Structure and Liquidity
The company's capital structure (with Lindsey Morden equity
accounted) and financial ratios were as follows:
December 31, December 31,
2005 2004(1)
Cash, short term investments
and marketable securities 559.0 566.8
Long term debt - holding company 1,365.3 1,420.9
Long term debt - subsidiaries 769.5 674.9
Purchase consideration payable 192.1 195.2
Net debt 1,767.9 1,724.2
Common shareholders' equity 2,769.3 3,034.1
Preferred shares and trust preferred
securities of subsidiaries 189.0 189.0
OdysseyRe non-controlling interest 374.0 281.0
Total equity 3,332.3 3,504.1
Net debt/equity 53% 49%
Net debt/total capital 35% 33%
Interest coverage N/A 1.9x
(1) Retroactively restated pursuant to the change in accounting policy described in note 1 to the consolidated financial statements. At December 31, 2005, Fairfax had $559.0 of cash, short term investments and marketable securities at the holding company level. Net debt increased to $1,767.9 at December 31, 2005 from $1,724.2 at December 31, 2004, and the net debt to equity and net debt to total capital ratios increased slightly, due to the net loss for the year and the $125.0 of additional long term debt issued by OdysseyRe during the second quarter, offset somewhat by the proceeds received on an offering by the company of its subordinate voting shares, offerings by OdysseyRe of its preferred shares and common shares (which increased the OdysseyRe non-controlling interest), and the repayment Repayment The act of paying back a debt. Notes: Everyone has to repay their debts eventually. See also: Debt, Defeasance, Loan of the TIG senior notes upon maturity, and other opportunistic debt repurchases made, during 2005. The company believes that its cash position alone provides adequate liquidity to meet all of the company's obligations in 2006. Besides this cash, the holding company expects to continue to receive management fees, interest on its holdings of cash, short term investments and marketable securities, tax sharing payments and dividends from its insurance and reinsurance subsidiaries, with a reduction in the tax sharing payments as a result of the 2005 hurricanes. For 2006, the holding company's obligations (other than interest and overhead expenses) consist of the continuing obligation to fund negative cash flow at its European runoff operations (anticipated to be between $150 and $200 in 2006, prior to any management actions which would improve that cash flow). Common shareholders' equity at December 31, 2005 was $2.7 billion or $151.52 per basic share (excluding the $59.4 of capital arising from the company's issue of convertible debentures in the 2003 third quarter). During 2005, the company repurchased 49,800 subordinate voting shares for cash of $7.4. Fairfax's 2005 Annual Report is scheduled to be posted on its website www.fairfax.ca after the close of markets on Friday Friday: see Sabbath; week. Friday young Indian rescued by Crusoe and kept as servant and companion. [Br. Lit.: Robinson Crusoe] See : Servant , March 3, 2006 and will be mailed shortly thereafter to shareholders. As previously announced, Fairfax will hold a conference call to discuss its year-end results provided in this announcement at 8:30 a.m. Eastern time on Friday, February 10, 2006. The call, consisting of a presentation by the company followed by a question period, may be accessed at (888) 769-8514 (Canada or U.S.) or 1 (210) 234-0000 (International) with the passcode "Fairfax". A replay of the call will be available from shortly after the termination of the call until 5:00 p.m. Eastern time on Friday, February 26, 2006. The replay may be accessed at (866) 513-9957 (Canada and U.S.) or 1 (203) 369-1994 (International). Fairfax Financial Holdings Limited is a financial services holding company which, through its subsidiaries, is engaged in property and casualty insurance and reinsurance, investment management and insurance claims management. Certain statements contained herein may constitute forward-looking statements forward-looking statement A projected financial statement based on management expectations. A forward-looking statement involves risks with regard to the accuracy of assumptions underlying the projections. and are made pursuant to the "safe harbor Safe Harbor 1. A legal provision to reduce or eliminate liability as long as good faith is demonstrated. 2. A form of shark repellent implemented by a target company acquiring a business that is so poorly regulated that the target itself is less attractive. " provisions of the United States Private Securities Litigation Reform Act The Private Securities Litigation Reform Act of 1995 (PSLRA) implemented several significant substantive changes affecting certain cases brought under the federal securities laws, including changes related to pleading, discovery, liability, class representation and awards fees and of 1995. Such forward-looking statements are subject to known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of Fairfax to be materially different from any future results, performance or achievements expressed or implied Inferred from circumstances; known indirectly. In its legal application, the term implied is used in contrast with express, where the intention regarding the subject matter is explicitly and directly indicated. by such forward-looking statements. Such factors include, but are not limited to: a reduction in net income if the reserves of our subsidiaries (including reserves for asbestos, environmental and other latent Hidden; concealed; that which does not appear upon the face of an item. For example, a latent defect in the title to a parcel of real property is one that is not discoverable by an inspection of the title made with ordinary care. claims) are insufficient in·suf·fi·cient adj. 1. Not sufficient. 2. Incapable of proper functioning. ; underwriting losses on the risks our subsidiaries insure Insure can mean:
When a person begins a civil lawsuit, the person enters into a process called litigation. related to, insurance industry practice; the passage of new legislation; and the failure to realize future income tax assets. Additional risks and uncertainties are described on pages 110 to 112 of our 2004 Annual Report which is available at www.fairfax.ca and in our Supplemental and Base Shelf Prospectus A document, notice, circular, advertisement, letter, or communication in written form or by radio or television that offers any security for sale, or confirms the sale of any security. (under "Risk Factors") filed September 28, 2005 with the securities regulatory authorities Noun 1. regulatory authority - a governmental agency that regulates businesses in the public interest regulatory agency administrative body, administrative unit - a unit with administrative responsibilities in Canada and the United States The United States and Canada share a unique legal relationship. U.S. law looks northward with a mixture of optimism and cooperation, viewing Canada as an integral part of U.S. economic and environmental policy. , which is available on SEDAR SEDAR System for Electronic Document Analysis and Retrieval SEDAR Southeast Data, Assessment, and Review and EDGAR Edgar or Eadgar (both: ĕd`gər), 943?–975, king of the English (959–75), son of Edmund, king of Wessex. In 957 the Mercians and Northumbrians rebelled against Edgar's brother Edwy and chose Edgar as their king. . Fairfax disclaims any intention or obligation to update or revise any forward-looking statements. Fairfax Financial Holdings Limited (TSX:FFH.SV) (NYSE:FFH) |
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