TORONTO (Reuters) - Fairfax Financial Holdings (FFH.TO), which has drawn attention by profiting from the credit crisis, is keeping its investment portfolio very conservative, executives said on Friday,
The holding company, which owns stakes in property and casualty insurers and reinsurance companies, said on Thursday that its 2007 net income of $1.1 billion, or $58.38 per share, was the best showing in its 22-year history.
That was partly due to record gains on investments, including gains on “plain vanilla” credit default swaps, which are contracts that shift default risk between two investors, or allow investors to bet on the direction of credit markets.
The value of CDSs, especially those related to financial companies, soared in the second half of 2007 as the subprime mortgage-inspired credit crunch spread to asset-backed securities and other areas of the credit markets.
Fairfax’s overall investment gains in 2007 more than doubled to $1.64 billion, of which $1.14 billion came from gains on some CDS positions.
The company continued to sell CDSs between January 1 and February 15 this year.
Fairfax Chief Executive Prem Watsa told a conference call on Friday morning that investment results were “outstanding” in 2007, but he cautioned — as he has in the past — that CDS valuations are very volatile, and the company may not replicate the CDS gains posted so far.
Watsa was asked when Fairfax might sell the rest of its CDS portfolio, but said he could not predict when fallout from the credit crunch would abate.
“That is going to take some time to get digested, (and) it will get digested,” Watsa said on the call.
Meanwhile, Fairfax’s $19 billion investment portfolio is positioned to emphasize “quality and safety,” Chief Financial Officer Greg Taylor said.
About $14.5 billion, or 76 percent of the portfolio, is in cash, treasury bills and government bonds, and it holds no asset-backed securities “of any kind,” Taylor said.
In addition, 85 percent of the company’s $3.3 billion in equity investments are hedged to protect against declines.
That is serving Fairfax well, as the S&P500 index has fallen 8.5 percent year-to-date, Taylor said.
Aside from its investments, Fairfax also reported strong quarterly and full-year results from operating subsidiaries, which include Canada’s Northbridge Financial Corp (NB.TO), U.S.-based Crum and Forster, and reinsurer Odyssey Re Holdings ORH.N.
Aggregate underwriting profit at its operations rose to $281.3 million in 2007, up from $212.6 million in 2006.
“We are incredibly focused on maintaining underwriting profitability,” even as the insurance market softens, Watsa said on the call.
Fairfax shares were up C$4.94, or 1.6 percent, at C$317.95 on the Toronto Stock Exchange at midday, and have risen about 11 percent so far in 2008.
Reporting by Lynne Olver; Editing by Rob Wilson