(In U.S. dollars unless noted)
OTTAWA, Feb 20 (Reuters) - Fairfax Financial Holdings Ltd (FFH.TO) shares fell about 5 percent on Friday after the insurance holding company reported a 38 percent drop in quarterly profit, partly reflecting thinner investment gains.
Analysts said that jittery investors may also be reacting to weaker operating results squeezed by currency losses.
“Without doing any homework, if you look at the operating numbers, it looks like they had a pretty disastrous quarter,” RBC Capital Markets analyst Mark Dwelle. “(But) the run rate of the businesses, ex-currency, is decent.”
Market declines are “a little bit overdone”, he said. Fairfax shares fell C$16.73 on Friday to C$354.78 on the Toronto Stock Exchange and $15.81 to $283.19 in New York.
The share weakness marks a buying opportunity, said Cormark Securities analyst Jeff Fenwick.
Fairfax is well positioned for any improvement in the insurance sector, he said, because it has used big gains over the last year to reduce debt and pad its cash reserves to $1.5 billion.
“From the insurance side of things, they’re just waiting to see some signs of improved pricing and profitability in the market,” Fenwick said in an interview.
Ratings agencies have upgraded Fairfax operations over the past year, which puts them in a position to charge better prices when conditions improve, he said.
Hurt by tight credit markets and big losses from hurricanes Ike and Gustav, the insurance market “might turn”, Fairfax Chief Executive Prem Watsa said on a conference call.
“All of our companies are well positioned to take advantage of a market turn, if it takes place,” he said. “If it does not take place, our written premiums will continue to shrink in 2009.”
Despite what it calls a “brutal financial storm”, Fairfax recorded C$816.5 million from investment gains in the quarter, down from C$947 million in the same period last year.
The company has profited from prescient bets it made on the ailing U.S. credit market through credit default swaps. These contracts, which shift the bond default risk between two investors, allow investors to bet on the direction of credit markets.
Toronto-based Fairfax sold almost all its U.S. Treasury bonds in the quarter ended Dec. 31 for $5.8 billion, for net gains of $471.5 million.
A big portion of those gains were reinvested in U.S. state, municipal and other tax-exempt bonds. At quarter-end, Fairfax had $4 billion in the bonds, which have an average yield of 5.79 percent. About 87 percent of the bonds are insured by Berkshire Hathaway (BRKa.N) (BRKb.N), Fairfax said.
“At a minimum, it will increase the amount of yield that they earn, which is always attractive,” Dwelle said. “The other thing is the company is and has been a taxpayer, so sheltering some of those earnings with tax-free gains is not a bad idea.”
Fairfax also spent $2.3 billion buying common stock in the fourth quarter, but did not disclose company names.
“As value investors, we are seeing some excellent buying opportunities in common stocks for first time in a long time and we are taking advantage of them,” said Watsa.
“We think there’s a lot of downside protection in common stocks properly selected: good quality companies, good management teams that can navigate these tough times and are financially strong.”
$1=$1.25 Canadian Reporting by Susan Taylor; editing by Rob Wilson