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Executives

Eric Salsberg - Vice President, Corporate Affairs and Corporate Secretary

Prem Watsa - Chairman and CEO

Dave Bonham - Chief Financial Officer

Analysts

Jeff Fenwick - Cormark Securities

Paul Holden - CIBC

Tom MacKinnon - BMO Capital

Mark Dwelle - RBC Capital Markets

Howard Flinker - Flinker & Co.

Fairfax Financial Holdings Ltd. (OTCQB:FRFHF) Q4 2013 Results Earnings Conference Call February 14, 2014 8:30 AM ET

Operator

Good morning. And welcome to Fairfax 2013 Year End Results Conference Call. Your lines have been placed in a listen-only mode. After the presentation we will conduct a question-and-answer session. (Operator Instructions)

Today's conference is being recorded. If you have any objections, you may disconnect at this time. Your host for today's call is Prem Watsa, with opening remarks from Eric Salsberg. Mr. Salsberg, please begin.

Eric Salsberg

Good morning. And welcome to our call to discuss Fairfax's 2013 year end results. The call may include forward-looking statements. Actual results may differ, perhaps materially, from those contained in such forward-looking statements. As a result of a variety of uncertainties and risk factors, the most foreseeable which are set out under Risk Factors in our base shelf prospectus, which has been filed with Canadian Securities Regulators and is available on SEDAR.

I'll now turn the call over to our Chairman and CEO, Prem Watsa.

Prem Watsa

Thank you, Eric. Good morning, ladies and gentlemen. Welcome to Fairfax's year end conference call. I’d like to give you some of the highlights and then pass it on to Dave Bonham, our CFO, for additional financial details.

Insurance companies had an outstanding year in 2013, with the combined ratio of 92.7% with excellent reserving and record underwriting profits. OdysseyRe had a record low combined ratio of 84%, while Zenith made an underwriting profit for the first time since we purchased them in 2010.

We have realized gains from our common stock portfolios of $1.3 billion in 2013. Excluding all hedging losses and before mark-to-market fluctuations in our investment portfolio, we earned $1.9 billion in pre-tax income. Including all hedging losses and mark-to-market fluctuations in our investment portfolio, we reported a $0.6 billion after-tax loss for 2013.

We expect the unrealized mark-to-market losses to reverse in the future. In fact, as of February 11th, two days ago, we had an unrealized mark-to-market gain in 2014 of approximately $900 million. After-tax, this would have laminated our loss in 2013.

In the past, we had two years, 1990 and 1991 that we had a negative total return. In both cases we rebounded significantly in the following years. I caution you, we don’t pay too much attention to short-term fluctuations in market prices. Our common stock portfolios continue to be fully hedged and we continue to be soundly financed with year end cash and marketable securities in the holding company of $1.3 billion.

Moving on to our insurance and reinsurance businesses, our insurance and reinsurance businesses premium volume remained flat in 2013 after a number of years of growth. The combined ratio for our insurance and reinsurance operations in 2013 was 89.1% for the fourth quarter and 92.7% for the whole year.

At the subsidiary level, the increase in net premium written in the year 2013 and combined ratios were as follows: OdysseyRe, increase in premium in 2013 were flat, combined ratio of 84%, Crum & Forster, increase in premiums flat, 101.9% combined ratio, Northbridge had a 4.6% increase in premium, 98.2% combined ratio, Zenith, 13.1% increase in premium, 97.1% combined ratio for the whole year and Fairfax Asia had a 7% increase in premiums with an 87.5% combined ratio.

As we have said before, very low interest rates and reduced reserve redundancies means there is no place to hide for the industry. Combined ratios overtime will have to drop well below 100% for the industry to make a single-digit return on equity with these low interest rates. While the short-term is always have to predict fundamentals we think will eventually play out.

Net investment losses of $1.56 billion in 2013 consisted of the following. Please refer again to page two of our press release. Net losses on equity and equity-related investments of $537 million, resulted from net gains of $1.4 billion from the table and $2 billion net loss on our equity hedge, principally reflecting the temporary mismatch between the Russell index and our equity portfolio. This is predominately because of the Russell 2000 significantly outperforming the S&P 500 in 2013.

We have realized gains of $1.3 billion on our equity portfolio in the year 2013. The realize loss of $1.4 billion on our equity hedges was due to the sale of common stocks and consequently a permanent reduction in our hedges.

Also, we had unrealized losses of $1 billion in our municipal and treasury bond portfolio because of the impact of rising interest rates. We expect the mark-to-market losses to reverse, as I said earlier overtime and we have seen some of that already.

As we have mentioned in our annual meetings, annual reports and quarterly calls, with IFRS accounting where stocks and bonds are recorded at market and subject to mark-to-market gains and losses, quarterly and annual income will fluctuate widely and investment results will only make sense over the long-term.

Core inflation continues to be at or below 1% in the United States and Europe, levels not seen since the 1950s. In spite of QE1, QE2 and QE3, our CPI-linked derivatives with a nominal value of $83 billion are down 76% from our cost and are carried on our balance sheet at $131.7 million, even though they have seven and half years to run. As I have said to you before, our CDS experience comes to mind.

When you review our statements, please remember that we own more than 20% -- that when we own more than 20% of our company, we equity account and when we own about 30%, we consolidate, so that mark-to-market gains in these companies are not reflected in our results.

Let me mention some of these gains. As you can see on Page 14 of our quarterly report, the fair values of our investment in associates is $1.815 billion versus a carrying value of $1.433 billion and unrealized gain of $382 million that’s not on our balance sheet.

Also, as we own 75% of Thomas Cook and 74% of Ridley, which are consolidated in our statements, unrealized gains on market values, as of December 31, 2013 on both these positions, is approximately $152 million. That’s total unrealized gain, not reflected on our balance sheet, is $534 million.

On top of this, Europe properties are investment in an exceptional Greek REIT with outstanding management that we have increased our investment to the rights issue as another unrealized appreciation of $105 million -- $109 million, not included in our balance sheet for a grant total of $643 million, all not on our balance sheet.

Of course, all this works out in the long term to take these mark-to-market fluctuation as just that, fluctuations that have no impact over time. As I’ve said before, the company held $1.3 billion of cash, short-term investments and marketable securities as the holding company and is in a -- as in a very sound financial position.

We have reduced our equity holdings because of increasing markets by approximately 20%. And we continue to be approximately 100% hedged in relationship to our equity and equity-related securities which include convertible bonds and convertible preferred stocks.

We continue to be very concerned about the prospects of the financial markets and the economies of North America and Western Europe accentuated as we have said many times before by potential weakness in China and emerging markets. We continue to feel that there is a big disconnect between the financial markets and the underlying economic fundamentals.

As of December 31, 2013, we have over 32% or $8 billion in cash and short-term investments in our portfolios to take advantage of opportunities that come our way. As a result, in the short term, our investment income will continue to be reduced.

Now, I would like to turn it over to Dave Bonham, our CFO, so he could give you some information on the underlying financials. Dave?

Dave Bonham

Thank you, Prem. First I’ll focus on Fairfax’s consolidated results for the fourth quarter of 2013. Then I’ll move onto the operating company results and finish with the consolidated financial position.

For the first quarter of 2013, Fairfax reported a net loss of $6 million that’s a net loss of $0.98 per share on a fully diluted basis and that compares to the fourth quarter of 2012 when we reported a net profit of $402 million at earnings of $18.82 per share. On a year-to-date basis, the company reported a net loss of $573 million translating into a net loss of $31 per diluted share and that compared to net earnings last year of $527 million, or about $23 per diluted share.

Fairfax’s underwriting results have shown significant improvement in the fourth quarter and full year of 2013 with our insurance and reinsurance operations reporting combined ratios of 89% and 93% and underwriting profits to $165 million and $440 million during those respective periods. That’s a year-over-year increase in our underwriting profit of $280 million in the fourth quarter and $434 million in the full year of 2013.

By way of comparison, in the fourth quarter of 2012, we reported a combined ratio of 107% and an underwriting loss of $150 million, a combined ratio of 99.9% and underwriting profit of $6 million in the full year of 2012. So that improvement representing about 18 combined ratio points quarter-over-quarter and seven combined ratio points year-over-year, principally reflected higher catastrophe losses in 2012, mainly reflecting the impact of Hurricane Sandy and the continuation in the 2013 of higher net favorable prior year reserve development.

In terms of reserve development, we experienced $212 million and $440 million of net favorable prior year reserve development in the fourth quarter and full year of 2013 and that benefited our combined ration by 14 combined ratio points in the fourth quarter, seven combined ratio points for the full year. That’s a little bit more than double the amount of net favorable development we experienced in the fourth quarter and full-year of 2012.

Current period catastrophe losses were significantly lower in 2013 relative to 2012, totaling $71 million or about five combined ratio points in the fourth quarter and $289 million or also about five combined ratio points in the full year of 2013. The fourth quarter of 2012 included current period catastrophe losses of $277 million, 18 combined ratio points mostly related to Hurricane Sandy.

Current period catastrophe losses amounted to about $410 million or seven combined ratio points in the full year of 2012. The year-to-date underwriting results in 2013 reflected the impacts of the Alberta floods, Toronto floods, Germany hailstorms, central European floods and Typhoon Fitow with Typhon Fitow being the most significant catastrophe loss reported during the fourth quarter of 2013.

As Prem mentioned already, net premiums written by our insurance and reinsurance operations increased in the fourth quarter and full year of 2013 by 0.2% and 2.9%, respectively prior to giving the fact to significant unearned premium portfolio transfers at OdysseyRe related to a specific quarter share reinsurance contract. And I want to know for you at Page 43 of our fourth quarter interim report contains a detailed discussion of these transactions including their impact on OdysseyRe in Fairfax.

So let’s turn to our operating income results starting with OdysseyRe. In the fourth quarter and full year of 2013, Odyssey reported an underwriting profit of $122 million and $380 million and combined ratios of 79% and 84%. Underwriting profit increased year-over-year by $88 million and $114 million in the fourth quarter and full year of 2013 and that reflecting lower current periods of catastrophe losses and higher net favorable prior year reserve development.

Catastrophe losses in the fourth quarter and full year of 2013 of $65 million and $203 million translated into 11 combined ratio points and nine combined ratio points in those respective periods and were principally comprised of Typhoon Fitow to Windstorm Christian in the fourth quarter and the Alberta floods, Germany hailstorms, Toronto floods and Central European floods during the rest of 2013.

Current period catastrophe losses in 2012 principally reflected the impact of Hurricane Sandy with total losses of $175 million in the fourth quarter and full year of 2012. OdyseyRe’s combined ratio in the fourth quarter and full year included the benefit of $134 million or 23 combined ratio points and $215 million or nine combined ratio points of net favorable prior year reserve development principally relating to net favorable emergence on prior years catastrophe losses.

OdysseyRe wrote 400 or rather $541 million of net premiums in the fourth quarter of 2013 and that’s a decrease of 6% from the net premiums written of $574 million in the fourth quarter of 2012, the decrease principally reflecting lower ratings of property catastrophe and casualty business, which was partially offset by increases in most lines of business in their U.S. insurance division.

In addition to these factors, OdysseyRe’s net premiums written in the full year of 2013 also reflected increased ratings of U.S. crop insurance and higher year-over-year recurring net premiums related to a significant property quota share reinsurance contract, which had incepted midway through the last year.

Turning to Crum & Foster, Crum & Foster’s underwriting results improved in the fourth quarter and full year of 2013, reflecting lower net adverse prior year reserve development and lower current period catastrophe losses. Crum & Forster reported an underwriting loss of $21 million in the fourth quarter, $24 million in the full year of 2013 and that’s a significant improvement over the underwriting losses of $87 million and $113 million in the fourth quarter and full year of 2012.

Net adverse prior year reserve development was lower year-over-year and totaled $8 million in the fourth quarter and full year of 2013, reflecting net favorable emergence on general liability loss reserves at First Mercury, partially offset by net favorable emergence on large liability -- on one single large liability claim at Crum & Forster, that contrast the net adverse prior year reserve development of $49 million or 15 combined ratio points and $54 million or 4 combined ratio points in the fourth quarter and full year of 2012.

Current period catastrophe losses had a nominal impact on Crum & Forster's combined ratios in 2013. Those combined ratios were 107% in the fourth quarter and 102% in the full year of 2012 versus the combined ratios of 127% and 109% in the fourth quarter and full year of 2012, included 6.5 and 2.4 combined ratio points respectively with current period catastrophe losses mostly related to Hurricane Sandy.

Net premiums written by Crum and Forster increased by 7.8% in the fourth quarter of 2013 and that primarily reflected increases in specialty lines of business, primarily accident and health, partially offset by lower standard lines of business and that was due to the re-underwriting of the workers’ compensation business, which is now complete.

Crum and Forster's net premiums written decreased 1.6% in the full year of 2013, reflecting decreased standard lines of business, which was more pronounced through the first three quarters of 2013 and changes in the mix of the specialty lines of business. Net premiums written in the full year of 2013 also included the incremental premiums from the acquisition of Hartville and American Safety of $14 million and $13 million respectively.

Zenith reported significant improvements in its combined ratio, which decreased to 80% and 97% in the fourth quarter and full year of 2013 from 114% and 116% in those periods last year. The improvements reflected the following. Year-over-year increases of 15 and 10 percentage points, also a year-over-year decreases of 15 and 10 percentage points in the accident year loss ratios in the fourth quarter and full-year of 2013, that’s reflecting earned price increases that exceeded estimates of loss trends.

Secondly, increased net favorable development of prior year's reserves representing 10 and 5 percentage points on the fourth quarter and full year of 2013 and finally, decreases in the expense ratio including commissions of two and three percentage points in the fourth quarter and full year of 2013, and that was as a result of 14% and 13% increases in net premiums earned year-over-year.

Net premiums written by Zenith of $126 million and $700 million in the fourth quarter and full year of 2013 increased by 14% and 13%, reflecting premium rate increases. Stock purchase combined ratio improved from 114% in the fourth quarter of 2012 to 90% in the fourth quarter of 2013, and from 106% in the full year of 2012 to 98% in the full year of 2013.

In both the fourth quarter and full year, Northbridge's underwriting results reflected increased net favorable development of prior year’s reserves coupled with lower current period catastrophe losses quarter-over-quarter but higher current period catastrophe losses year-over-year.

Northbridge's combined ratio included the benefit of a net favorable reserve development across most accident years in the lines of business of $46 million or 19 combined ratio points in the fourth quarter, and $154 million or 16 combined ratio points in the full year of 2013. And that compared to net favorable development of $10 million or 4 combined ratio points in the fourth quarter, $61 million or 6 combined ratio points in the full year of 2012.

Catastrophe losses of $5 million in the fourth quarter of 2013 primarily related to the Toronto ice storms whereas catastrophe losses of $61 million in the full year of 2013, principally related to flooding in Alberta and Toronto. These two events together added approximately 5 percentage points to the combined ratio in the full year of 2013.

Combined ratio -- sorry, catastrophe losses in the fourth quarter and full year of 2012 of $24 million and $39 million added 10 percentage points and 4 percentage points to the combined ratios in those respective periods and primarily reflecting the impact of Hurricane Sandy.

Adjusting for the one-time impact of the intercompany unearned premium portfolio transfer between Northbridge and Group Re that we described on Page 51 of our fourth-quarter report, net premiums written by Northbridge increased in the fourth quarter and full year by 17.8% and 8.8% percent expressed in Canadian dollars and that reflects increased premium retention following the termination of the intercompany quota share arrangement and modest growth in writings at Federated Insurance.

Turning to Fairfax Asia, Fairfax Asia’s combined ratio increased from 84% and 87% in the fourth quarter and full year of 2012 to 88% in each of the fourth quarter and full year of 2013.

On a year-over-year basis, net premiums written by Fairfax Asia increased by 12%, and 7% in the fourth quarter and full year of 2013, principally reflecting increased writings of commercial auto business in the fourth quarter of 2013 and increased engineering, and liability business, partially offset by lower writings of marine hull business in the full year of 2013.

At Insurance and Reinsurance Other, the combined ratios of this division improved from 110% in the fourth quarter of 2012 to 92% in the fourth quarter of 2013, and improved from 104% in the full year of 2012 to 97% in the full year of 2013. Net premiums written decreased by 27% and 23% in the fourth quarter and full year of 2013.

The unearned premium portfolio transfer that we mentioned in our discussion in Northbridge suppressed to the net premiums written by Group Re in the full year of 2013 by $39 million.

If we exclude the initial one-time impact of this transfer, net premiums written decreased by 15.9% in the full year of 2013, reflecting the decrease in Group Re’s quota share participation on that intercompany reinsurance contract from 10% last year to 0% this year and also reflected the reunderwriting of certain classes of business at Advent, Polish Re, combined with decrease usage of reinsurance at Advent and that was partially offset by growth in Fairfax Brazil.

Runoff report an operating income of $91 million and $77 million in the fourth quarter and full year of 2013, that’s an increase over the operating income of $13 million and $8 million reported in the same periods last year. The improvement in operating profitability primarily reflected net overall favorable prior year reserve developments in 2013 compared to net overall adverse reserve development and runoff in 2012, and also reflected a gain on significant commutation in the full year of 2013.

Moving on to some of our consolidated results, our consolidated interest and dividend income increased from $73 million in the fourth quarter of 2012 to $104 million in the fourth quarter of 2013, decreased $409 million in the full year of 2012 to $377 million in the full year of 2013. Both periods reflected lower investment income due to sales of higher yield in government and corporate bonds in 2012 and 2013 and sales of dividend paying equities in 2013. The proceeds of which were reinvested into lower yielding bonds, cash and short-term investments.

The fourth quarter and full year of 2013 also reflected lower total return swap expense period over period, the decrease even more pronounced in the fourth quarter reflecting terminations of equity index total return swaps and certain short positions during 2013. The company recorded a recovery of income taxes of $24 million and $437 million in the fourth quarter and full year of 2013, representing effective tax rates of 93% and 44% respectively.

The higher effective tax rate in the fourth quarter and full year of 2013, primarily related to significant pre-tax losses in the U.S., which increases our effective tax rate when we’re in a loss position, as tax may be recovered at the U.S. tax rate of 35% and that’s substantially higher than the Canadian statutory income tax rate of 26.5%.

Moving to our financial position, we issues 1 million subordinate voting shares on November 15, 2013 for net proceeds after commissions and expenses of $400 million and we repaid the $183 million in principal amount of OdysseyRe unsecured notes when they matured on November 1, 2013.

Our total debt to total capital ratio increased to 26.1% from 25.5% at December 31, 2012, due primarily to the decrease in our common shareholders equity during the year 2013.

And now, I pass it back to you, Prem

Prem Watsa

Thank you, Dave. Now we are happy to answer your questions, please give us your name, your company name and try to limit your questions to only one so that is fair to everyone on the call. Okay, Carolyn, we are ready for the questions?

Question-and-Answer Session

Operator

(Operator Instructions) Our first question or comment comes from Jeff Fenwick from Cormark Securities.

Jeff Fenwick - Cormark Securities

Good morning.

Prem Watsa

Hi, Jeff.

Jeff Fenwick - Cormark Securities

So Prem a little bit of movement in the investment portfolio through the quarter here. As you mentioned, you sold some of your positions and closed out your S&P 500 swap there as well. How are you feeling in terms of the mix today and where you would like to position portfolio here going forward in 2014?

Prem Watsa

Yes, Jeff, we are quite happy with the way we positioned it. Jeff, we are 100% hedged in our common stock portfolios, large cash positions as you know and we have our muni bonds predominantly protected by Berkshire Hathaway guaranty and we have some U.S. government bonds, but very little corporate bonds. So we have basically risk averse you would say and concerned about what’s happening in the financial markets.

Jeff Fenwick - Cormark Securities

And just in terms of that waiting on the muni bonds, obviously, you talked, served you well from a yield perspective, but it’s obviously a pretty heavy component of your fixed incomes. Are you still comfortable with that size of the muni position in the portfolio?

Prem Watsa

Yes, we are very comfortable with our muni positions. We don’t think there is any credit risk at the muni bond portfolios. They do have fluctuations yes in terms of interest rates going up and down. And so when I talked about that $900 million gain from the end of 2013, I thought of that was from bond portfolios going up because long rates are coming down and the rest was basically from the common stock portfolios and market is going up, of course the hedge benefited.\\

So there is volatility because the markets are volatile and you are into mark to market positions on a regular basis. But there is a lot of concern as you know in terms of which we’ve talked about in the past and the U.S. economy is still tepid in our minds and Europe. We’ve talked about China and of course emerging markets are causing some problems as we speak. So there is many unintended consequences and we continue to be very cautious given that markets have gone up so much and spreads are so narrow.

Jeff Fenwick - Cormark Securities

And I guess just one follow-up excuse me on the S&P 500 total return swap. As you know, it’s not gong to help you a little bit on the dividend and interest income line there. You had a bit of an expense associated with those swaps. Does that a correct way to think about it?

Prem Watsa

Dave, do you want to add to that Dave?

Dave Bonham

Yes, that’s absolutely correct. So we saw a little bit of that already in the fourth quarter where our dividends that we pay at in respect to those total return swaps is coming in lower and that’s going to continue into next year.

Jeff Fenwick - Cormark Securities

Okay. Thank you very much.

Prem Watsa

Thank you, Jeff. Next question Carolyn.

Operator

Next question is from Paul Holden from CIBC. Your line is open.

Paul Holden - CIBC

Thank you. Good morning.

Prem Watsa

Good morning, Paul.

Paul Holden - CIBC

I have two questions for you. First is related to the insurance operations. I am hoping you can provide us with a little more color around the favorable reserve development this quarter, mainly at Northbridge and OdysseyRe since we haven’t had a chance to see the reserves tables yet, which I know they included in the annual report but haven’t had a chance to look at it yet. So maybe help us out there.

Prem Watsa

Yes, so I will pass it on to Dave but perhaps just to make the point that we always reserve conservatively on the accident year for instance and then of course we watch how the Brasil developed and so we’ve been very conservative on an accident year basis for all our companies. But Dave specific to OdysseyRe, would you add a few comments?

Dave Bonham

Sure. OdysseyRe reported favorable developments of $140 million in the year and $134 million in the fourth quarter and that was principally related to prior year’s catastrophe loss reserves developing favorably and also related to casualty reserves developing more favorably in this year.

Paul Holden - CIBC

Okay. And then, sorry, at Northbridge is there anything in particular?

Dave Bonham

Nothing specific at that Northbridge, favorable development across all of the lines of business and all of the reserves, and that was about $154 million on the year, $46 million on the quarter.

Paul Holden - CIBC

Okay. And then my second question is related to the investment portfolio, so Prem, you’ve been warning about the potential for a hard landing in China for sometime now and reiterated that a bit again today? And certainly, we’re starting to see some cracks in the financial system there. So my question is, have you contemplated more direct investment vehicles to actually profit from a hard landing in China?

Prem Watsa

So, Paul, that’s a very good question. We haven’t identified anything specific. What we are more interested in, China is a very large economy as you know and anything happening in China will impact the world.

China takes almost 50% -- 40% to 50 of every commodity, so of course, China will have an impact on Canada and will have an impact on many of the commodity producing countries like Australia and Brazil, other countries in the world.

So we are focused on protecting ourselves first and foremost, and not making as much. Again, we’ve -- some of you will say we are hedged and 100% hedged on the upside and 100% hedged on the downside, so Paul, how are we going to make any money? And what happens, we’ve realized a lot significant amount of gain, $1.3 million from our billion from the common stock portfolios and we’ve reinvested it in things that we like which are significantly down from where they were.

And we are protecting our portfolios, equity portfolios from significant drops, not a 5% and 10% drop, but like 30% plus drops. That’s what we are worried about Paul. And that environment, the fact that we’ve sold our common shares that have done very well and but things that haven’t done as well, means that we’ll be protecting on the downside, we don’t expect to go down as much as the indices.

And that’s happen in the past, it happened more recently in 2008, that we came down significantly less and made a lot of money on our hedges and we think that yet to happen. But its fascinating to me that here we have a huge monstrous bubble in real estate in China. And here you’re talking, you’re asking me the question that’s written about in the press, a year ago there was a CDS documentary on it and it seems to me that almost no one worries about.

Reminds me what happened in the housing prices in 2003, ‘04, ‘05, the boom in housing reminds me of going takes me back to the tech boom where companies -- big companies like Northern Telecom and others were buying companies -- small little companies for $10 billion and $20 billion with no sales, no revenues, nothing then a few engineers together.

And then take me back to the 1980s, when you have the same type of experience in the oil industry. And the problem would be booms or bubbles is that they lack for sometime and you can never tell when it will change.

And our experience over 35, 40 years is stay away from them and have the fortitude to continue to stay away even when you look very look very wrong. Like last year, for example, if we were really smart, we wouldn’t have hedged our common stock portfolio and perhaps began to hedge late in the year or now. Well, we’ve never done that over 28 years. We’ve always taken a long term view. When we recognized problems, we’ve reacted to it and quite often we’ve been wrong or too early.

And then as a friend of mine said, wrong, wrong, wrong and then right, perhaps better than the other away around. And so Paul, we continue to be worried about all of these things, in spite of the fact that 2013 wasn’t the year to have acquisition.

Paul Holden - CIBC

Thank you.

Prem Watsa

The big one to the next question, Carolyn.

Operator

Our next question is Tom MacKinnon from BMO Capital. Your line is open.

Tom MacKinnon - BMO Capital

Thanks very much. Good morning everyone.

Dave Bonham

Hey, good morning Tom.

Tom MacKinnon - BMO Capital

Question from about the -- I think part of the reason for the cash, the higher cash position which provide the flexibility. In case, you really wanted to -- in case, the insurance markets where we started to firm. And if we look net premiums written were up 23% in 2011, 10% in 2012 and now they’re flat.

So do you think that you’ve missed this opportunity to take advantage of firming markets, insurance markets, particularly the reinsurance market. And maybe little bit more on some diseases for that sizable cash position?

Dave Bonham

Yeah. That’s a good question, Tom, but remember that wasn’t a wholesale HUD market. The HUD market in the cat area after 2011, we took full advantage of that. OdysseyRe we took full advantage of that. And -- but in the other areas, in the workers’ comp area, our -- Zenith has gone from $400 million to $450 million in premium, when bought it to $700 million last year. So it’s done very well. But other than that you had 5%, 10% increases over these last few years and so it’s not been a full-fledged HUD market. But we've taken as much advantage as we can.

More recently, the cat prices are down 15% to 20%. There hasn’t been a cat event last year, likely that drop will continue and likely up premiums will drop in that segment, just reflecting the fact that prices are coming down but similar or additional exposures. We’ve had losses in Calgary, of course, and with the flood losses and in Toronto. So that would be a little bit of a plus for our Canadian markets.

But the markets happen to have been the -- insurance markets haven't had a full a full-fledged HUD markets like we've had after 2001. And the financial markets have been very good so most people have made good money in the investment portfolios. But you can see a possibility where spreads widen and perhaps common stock prices come down where there’s a squeeze on capital.

Ultimately, that’s what happens, you need a squeeze on capital. It happened -- it's happened in the past, can happen again or of course a very significant catastrophe. But yeah, the cash positions though it would be fair to say, we should have had very low cash positions and put it all in -- put a significant amount in the stock market or in bonds and corporate bonds spreads have come down further and perhaps not hedged stock -- common stock. So our strategy, our longer term strategy was definitely wrong in 2013.

Tom MacKinnon - BMO Capital

So, what would be the things you would look for before you would want to redeploy the cash? And I don’t know if investors really want to have a one-third of the portfolio earning hardly anything, or maybe you can just elaborate if it's not necessarily affirming?

Prem Watsa

Yes. We've a long-term in orientation. And so our investors, the ones that we've had for a long period of time understand the views that we have. But many investors will not and they want to be fully invested and so we wouldn’t be the company that they would invest in.

We've just taken a long-term view in all our activities and the fact that you have cash, remember in 2008, 2009, one of the reasons we had benefited so significantly was the fact that we had government bonds and cash to take advantage of opportunity. You can't take the advantage of opportunity if you don’t have cash. We think this is a good time to have a significant amount of cash in your portfolios.

Tom MacKinnon - BMO Capital

Okay. Thanks for that, Prem.

Prem Watsa

Thanks again, Tom. Carolyn, next question please.

Operator

Thank you. Our next question is from [Art Charpentier] from (inaudible) Research. Your line is open.

Unidentified Analyst

Good morning.

Prem Watsa

Good morning, Art.

Unidentified Analyst

In your introductory comments, you mentioned that the very low rates available for investment are going to require some more discipline on underwriting, so as to earn underwriting profits because you can't rely on investment profits going forward. Obviously, the combined ratios improved dramatically in this last year. But at the same time to a good degree, it was a much less, a much lower catastrophic event year.

So, my question really is are you implementing -- how much of this improved combined ratio is a result of implementing what you might call a different and maybe more demanding underwriting approach, and how much of this is a result of essentially being a, maybe lighter than normal catastrophe year?

Prem Watsa

Well, that's a very good question. And we have benefited from the fact that there has been few catastrophes last year, no question. But I said last year at our annual meeting that our company has benefited very significantly from the fact that a few years ago we put Andy Barnard who built OdysseyRe, in charge of all our insurance operations. And the effects of Andy working with our officers like Peter Clarke and Paul Rivett has been very significant and those continued to be significant.

In fact, Andy mentioned last year at our AGM and by the way you are welcome to attend our AGM. Andy said that he would like Fairfax to be known for its underwriting as much as it is known for its investment record over a long period of time. And I think that’s gradually coming into play and there has been significant improvements in each of our companies and they will continue to take place. So we have benefited from the lack of catastrophes, but there is many, many improvements taking place across all that companies.

Unidentified Analyst

Thank you.

Prem Watsa

Thank you. Next question Carolyn?

Operator

Thank you. Our next question is from Mark Dwelle from RBC Capital Markets. Your line is open.

Mark Dwelle - RBC Capital Markets

Good morning.

Prem Watsa

Good morning, Mark.

Mark Dwelle - RBC Capital Markets

Couple of questions. First on the reserves, there was probably the best quarter for reserve releases, maybe ever, but certainly as long as if I am able to remember. You had itemized some of the details on it earlier, what I was wondering, I mean, I am sure this was part of the normal year-end detailed review with your outside actuaries, etcetera. I was wondering if there was any particular maybe change in assumption or anything like that, that might have led to the favorable result, I mean, I don’t doubt what to came up, and it’s more a matter of whether it’s something that we might expect to see more of in the future?

Prem Watsa

No. So we're first of all very conservative, but a few years ago, Mark, you might have remember we have tightened up our reserving at Northbridge in terms of paying clams quickly and reserving to ultimate. And this was few years ago and perhaps focused on Lombard. And that's coming through last year and this year. But broadly speaking, we put our accident year loss ratios, combined ratios at a high level and we expect the redundancy to come in over time. But, Dave, would you want to add to that, Dave?

Dave Bonham

Yeah, I would echo your comments, Prem. And no real changes in assumptions driving this. Maybe one extra point to my Northbridge comments we are seeing favorable case reserve development coming through there which is positive. And as Prem said, reflects conservatism that we may have had few years ago. And in general, just reaction to the favorable claims emergence that we are seeing at many of our companies, specifically Northbridge and OdysseyRe.

Mark Dwelle - RBC Capital Markets

Okay. Terrific. That’s keeps up. Second question I had related to, there is an unacceptance at the end of the year, the acquisition of Keg Restaurants. I just wanted to check whether that was going to be, maybe a little bit of background on that as well as whether that's going to be a consolidated subsidiary or an affiliate held investment?

Prem Watsa

Yes, that will be a consolidated subsidiary. So, that will be in our other reporting segment in the first quarter of 2014.

Mark Dwelle - RBC Capital Markets

Okay. That's all my questions then.

Prem Watsa

Hey, thank you, Mark. Next question Carolyn?

Operator

Thank you. Our next question is from Howard Flinker from Flinker & Co. Your line is open.

Howard Flinker - Flinker & Co.

Hello everybody.

Prem Watsa

Good morning, Howard.

Howard Flinker - Flinker & Co.

Hi, Prem. Just a minor question and then a comments on, did you seller preferred and replaced preferred or is that a new preferred, I was confused about that?

Prem Watsa

Which preferred are you talking about, Howard?

Howard Flinker - Flinker & Co.

You did the preferred offering, was it in the fourth quarter straight preferred?

Prem Watsa

We did that, sorry Howard that was a common stock issue that we did. We did 1 million shares at $431 a share.

Howard Flinker - Flinker & Co.

It was comment. Oh, I miss read it, that's why error.

Prem Watsa

Yeah, not a problem.

Howard Flinker - Flinker & Co.

Yeah, because I still saw the preferred on the books and I saw it alone, maybe I have some other misunderstanding. That was my mistake. There is another way which I mentioned to John in the separate call. How you could possibly capitalize on the deflationary pressures and I'm sure you guys…

Prem Watsa

Well, we would love to hear that from you Howard when you give John a call.

Howard Flinker - Flinker & Co.

Yeah, I'll give him a call in the afternoon if he is free, otherwise next week. Thanks. That's it.

Prem Watsa

Yeah, thank you, Howard.

Howard Flinker - Flinker & Co.

You are welcome.

Prem Watsa

Carolyn, any more questions, Carolyn?

Operator

I'm currently showing no further questions or comments.

Prem Watsa

Well, if there are no more questions, then thank you all for joining us on this call. We look forward to seeing you at our AGM in April and of course presenting to you again after the next quarter. Thank you, Carolyn.

Operator

That concludes today’s conference call. Thank you for your participation. You may disconnect at this time.

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