10/31/2013 05:59 EDT | Updated 12/31/2013 05:12 EST

Fairfax books half a billion loss in third quarter on weaker investments

TORONTO - Fairfax Financial Holdings Ltd. (TSX:FFH) booked a big loss for the third-quarter after it suffered claims losses and big deficits in its stock hedges.

The insurance and investment company, which has made a conditional takeover offer for smartphone maker BlackBerry, said Thursday its losses ballooned to US$569.1 million, compared with a profit of US$35.7 million a year earlier.

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.

On a per share basis, the company, which keeps its books in U.S. dollars, said the loss amounted to US$29.02 per share versus or 85 cents per share in the comparable period. Revenue fell to US$1.12 billion from US$1.89 billion.

The loss came as the company saw its underwriting profits grow to US$104.7 million due to an improved performance from its insurance operations compared with US$72 million a year ago.

"We were affected in the quarter with mark-to-market losses from bonds, because of rising interest rates in the quarter, and a mismatch in our equity portfolios between our common stocks and our hedges," said Fairfax chief executive Prem Watsa in a release.

Mark-to-market is a bookkeeping term used when a company values assets and liabilities at their current worth, even though they might not be drawn upon for years down the road.

"We continue to believe that the mark-to-market losses will reverse in the future," Watsa added.

"We are maintaining our defensive equity hedges due to our concern about the financial markets and the economic outlook."

Fairfax, BlackBerry's largest shareholder, made a conditional takeover bid in September that values the company at US$4.7 billion or US$9 per share.

The Fairfax consortium is expected to complete its due diligence by Nov. 4. Until then, BlackBerry is allowed to actively solicit and evaluate rival offers.

Last year, Fairfax doubled its stake in BlackBerry (TSX:BB) when the company, then known as Research In Motion, revamped its leadership with a new chief executive and new members on its board of directors.

Watsa also took a seat on its board, and increased his own holdings in the smartphone maker to 9.9 per cent — representing 51.9 million shares — a filing with the U.S. Securities and Exchange Commission showed.

The Fairfax executive has since stepped down from the position, citing a conflict of interests.

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