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Fairfax Financial CEO says company poised to benefit from conservative strategy

Hugh McKenna, The Canadian Press

TORONTO - The head of Fairfax Financial Holdings Ltd. (TSX:FFH) is defending the company's conservative investment strategy, even though it was a major factor in sharply pulling down third-quarter results.

"We fell very good where we are in terms of our underwriting and, I must say, in our investment positions even though we are not (currently) making money for our shareholders," chairman and CEO Prem Watsa told a conference call Friday.

"Our company is poised to reap the benefits of being conservative so we like where we are."

Watsa was replying to concerns raised by analysts and investors that the company's fully hedged and heavy cash position were hurting the bottom line.

In results issued Thursday, the Toronto-based insurance and investment giant said net earnings fell to $34.6 million, or 90 cents per share, versus $973.9 million, or $46.73 per share, in the comparable year-earlier period — a more than 96 per cent drop.

The decline was mostly from a lack of net investment gains from hedging, as well as lower interest and dividend income.

Companies buy hedges — contracts that protect the future value of investments and other assets — during volatile stock markets. However, unexpected share price swings can lead to paper losses on the balance sheet, which must be accounted for.

This year the TSX has moved higher, which led to a net loss on investments of $23.6 million in the quarter.

However, the underwriting business at the casualty and property insurer was profitable this quarter, delivering $73.7 million in gains compared to a loss of $105.3 million in the comparable period.

Watsa pointed out Friday that the investment reversal largely represented a paper loss.

"More than two thirds of our investment is now in an unrealized loss position," he said.

"It's just mark to market and that's what the accounting is these days. So it flows through our statements as losses but we haven't sold anything yet."

Meanwhile, Watsa said he sees no reason to change the company's focus on the long term, including on the investment front where he continues to see a "disconnect" between economic fundamentals and markets.

"Stock and bond markets are high. The fundamentals we think are quite different, meaning on the low side, so you'll either have the fundamentals go up over time to catch up with stock prices, catch up with very low spreads, or you'll have the markets come down."

Watsa called the current climate a "one-in-50, one-in-100-year event" that means "we just think you have to be very, very careful."

"The fact that we've got cash in our portfolios... is a big advantage," he said. "When opportunities come... the only people who can take advantage of it are the people who have cash."

Fairfax, through its subsidiaries, is involved in property and casualty insurance and reinsurance and investment management.

On the Toronto Stock Exchange, Fairfax shares were down $4.27, or 1.15 per cent at $365.50 in midmorning trading Friday.