Fairfax Financial Holdings Limited · TSX:FFH
Fairfax Financial — Shareholder Meeting (April 2007)
33 slides from Fairfax Financial's shareholder meeting presentation, Apr 18, 2007
Slide 1: Annual Meeting
Annual Meeting April 18, 2007 Note: All financial disclosure in this presentation is, unless otherwise noted, in US$ and, except per share data, in $ millions
Slide 2: Forward-Looking Statements
Forward-Looking Statements Certain statements contained herein may constitute forward-looking statements and are made pursuant to the “safe harbor” provisions of the United States Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to known and unknown risks
Slide 3: The First 21 Years in Perspective
The First 21 Years in Perspective “The Past as Prologue” Where we began - why property & casualty insurance? The perfect storm - 1999-2005 2006 and the next decade Page 3
Slide 4: Why P&C Insurance - 1985
Why P&C Insurance - 1985 Positives Essential product – premiums of the many pay the claims of the few Premiums paid up front in cash – claims paid over years Cannot have a “run on the bank” like other financial institutions Assets are predominantly marketable investments (unlike manufacturin
Slide 5: Why P&C Insurance - 1985 (Risks)
Why P&C Insurance - 1985 Risks Underwriting risk ¾ Pricing ¾ Reserving ¾ Catastrophes ¾ Losses can be multiples of premiums Credit risk ¾ Reinsurance recoverables Investment risk Page 5
Slide 6: Beginnings - 1985
Beginnings - 1985 One Operation – Markel Insurance Company of Canada (Markel) Net Premiums Written $12 Net Earnings Never made $1 Investment Portfolio $24 Common Shareholders' Equity $8 Page 6
Slide 7: Guiding Principles: Objectives
Guiding Principles Objectives We expect to compound our mark-to-market book value per share over the long term by 15% annually by running Fairfax and its subsidiaries for the long term benefit of customers, employees and shareholders – at the expense of short term profits if necessary Our focus is
Slide 8: Guiding Principles: Structure
Guiding Principles Structure Our companies are decentralized and run by the presidents except for performance evaluation, succession planning, acquisitions and financing, which are done by or with Fairfax. Cooperation among companies is encouraged to the benefit of Fairfax in total Complete and
Slide 9: Guiding Principles: Values
Guiding Principles Values Honesty and integrity are essential in all of our relationships and will never be compromised We are results-oriented — not political We are team players — no "egos”. A confrontational style is not appropriate. We value loyalty — to Fairfax and our colleagues We are
Slide 10: Track Record of Markel: Premiums and Combined Ratio
Track Record of Markel 250 200 Net Premiums Written (C$) 150 Net Premiums Written 100 50 0 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 1 150% Combined Ratio 125% Average Combined Ratio = Combined 100% 102.2% Ratio 75% -- 50% 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 Page 10
Slide 11: Track Record of Markel: Return on Equity
Track Record of Markel 250 200 Net Premiums Written (C$) 150 Net Premiums Written 100 50 0 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 Return on Equity 1 Return on 45% Average Return Equity 30% on Equity = 15% 16.6% -- 0% 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 Page 11
Slide 12: Importance of Float - Operating Companies
Importance of Float – Operating Companies Unlike money management business (royalty on funds managed), results (gains) accrue to owners Manage money with a long term perspective Underwriting profit (loss) = benefit (cost) of float Float belongs to policy holders but income accrues to shareho
Slide 13: Importance of Float - Operating Companies
Importance of Float – Operating Companies Unlike money management business (royalty on funds managed), results (gains) accrue to owners Manage money with a long term perspective Underwriting profit (loss) = benefit (cost) of float Float belongs to policy holders but income accrues to shareho
Slide 14: Investment Performance
Investment Performance Hamblin Watsa Investment Performance 5 Years to 10 Years to 15 Years to Dec. 31 '06 Dec. 31 '06 Dec. 31 '06 Common Stocks 24.6% 17.7% 17.2% S&P 500 6.2% 8.4% 10.6% Bonds 11.6% 9.0% 9.1% Merrill Lynch U.S. Corporate Index 5.5% 6.5% 6.7% Source: Hamblin Watsa Investment Counsel
Slide 15: Acquisition Strategy
Acquisition Strategy Rate of return oriented – good prices Reserve / reinsurance recoverable protection Avoid auctions Did not take financing risk Always completed deal – never hostile Can you buy mediocre companies and make them excellent companies? ¾ Difficult but absolutely YES Page 1
Slide 16: Acquisition Strategy: Track Record of Acquisitions
Acquisition Strategy Track Record of Acquisitions Winners Losers Markel, Federated, Canada Commonwealth, None Lombard Crum & Forster, Ranger, United States Seneca, Fairmont TIG Insurance Skandia, Reinsurance CTR, TIG Re Sphere Drake Winterthur Hong Kong, FFH Asia Winterthur Singapore, None First Cap
Slide 17: The Perfect Storm – with Hindsight
The Perfect Storm – with Hindsight Purchase of C&F/TIG Perfect Storm Fairfax 1998/99 1999-2005 2006 Owned: Internal: Owned: 100% of Canadian - C&F took longer to turn around than expected 59% of Northbridge companies - TIG much worse than expected 100% of C&F 100% of C&F - Insurance put into runoff
Slide 18: Fairfax's Strengths: Operations
Fairfax’s Strengths Demonstrated Over 21 Years 1. Operations – Disciplined operating management focused on underwriting profitability and prudent reserving ¾ P&C Insurance Operations • Canada – leading commercial insurance operation • United States – large commercial operation across the country • A
Slide 19: Fairfax's Strengths: Investments
Fairfax’s Strengths Demonstrated Over 21 Years 2. Investments – Long term, value-oriented philosophy ¾ Worldwide • Stocks • Bonds • Distressed debt • Wherever “value” prevails ¾ Many large successful investments like Zenith, Russel Metals, Hub, etc. Page 19
Slide 20: Fairfax - Yesterday and Today
Fairfax - Yesterday and Today 1985 2006 Net Premiums Written 12.2 4,764 Net Earnings (0.6) 228 Investment Portfolio 23.9 16,820 Common Shareholders' Equity 7.6 2,662 Per Share Growth Book Value 1.52 150.16 99x Stock Price (C$) 3.25 231.67 71x Investments 4.80 948.62 198x Net Premiums Written 2.44 26
Slide 21: Fairfax Today: 2006 Subsidiary Financial Results
Fairfax Today 2006 Subsidiary Financial Results Combined Return on Ratio Net Earnings Avg. Equity Northbridge 98.0% 147 15.3% Crum & Forster (US GAAP) 90.5% 312 30.4% OdysseyRe (US GAAP) 94.4% 508 28.3% Page 21
Slide 22: Fairfax Today: Subsidiary Growth in Book Value Per Share
Fairfax Today Subsidiary Growth in Book Value Per Share 2001-2006 Compound Annual Growth Rate Northbridge 21.3% Crum & Forster (US GAAP) 17.5% OdysseyRe (US GAAP) 18.7% Page 22
Slide 23: Ready for the Next Decade
Ready for the Next Decade - Building on Fairfax’s Strengths Further expansion of our insurance operations in different countries Further expansion of our investment capability Tremendous worldwide potential in insurance and investments BUT – will keep our options open in terms of further diver
Slide 24: The Perfect Storm in the U.S. Economy?
The Perfect Storm in the U.S. Economy? U.S. stock market, corporate bond market and real estate market ¾ No premium for risk assumed ¾ No place to hide Structured products – “structure eliminates risk” Hedge funds / private equity – “can do no wrong” Worldwide stock markets ¾ Almost all at r
Slide 25: U.S. Stock Valuations Remain Elevated
U.S. Stock Valuations Remain Elevated Stock Market Capitalization as a Percentage of Nominal GDP Monthly - 1924 to Present 180% 160% 140% 120% 100% 80% Average = 59.6% 60% 40% 20% 0% 24 29 34 39 44 49 54 59 64 69 74 79 84 89 94 99 04 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 20 Source: Ned Dav
Slide 26: Can the Japanese Experience Be Repeated in the U.S.?
Can the Japanese Experience Be Repeated in the U.S.? Nikkei 225 Index vs. Japanese 10-Year Gov't Bond Yields Monthly - 1986 to Present 9% 40,000 8% 35,000 7% 30,000 10-Year Bond Yield 6% Nikkei 225 Index 5% 25,000 4% 20,000 3% 15,000 2% 10,000 1% 0% 5,000 1986 1988 1990 1992 1994 1996 1998 2000 2002
Slide 27: Long Term U.S. Treasury Rate
Long Term U.S. Treasury Rate 1871-2006 14% Fall of Berlin Wall 12% Onset of Iron and Bamboo Curtains 10% 8% 6% Average = 4.2% 4% 2% Global Global market Restricted market market 0% 1871 1881 1891 1901 1911 1921 1931 1941 1951 1961 1971 1981 1991 2001 Source: Hoisington Investment Management Page 27
Slide 28: Emerging Market Credit Spreads at Record Lows
Emerging Market Credit Spreads at Record Lows Global Emerging Markets Sovereign Bond Index 1,200 1,000 Spread (bps) over U.S. Treasuries 800 600 400 200 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Source: Citibank Page 28
Slide 29: High Yield Spreads
High Yield Spreads 1-10 Year High Yield Spreads 1,200 1,000 Spread (bps) over U.S. Treasuries 800 600 400 200 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Source: Merrill Lynch Page 29
Slide 30: Subprime Credit Default Spreads
Subprime Credit Default Spreads Countrywide Financial 5 Year Credit Default Spreads 200 Spread (bps) over U.S. Treasuries 150 100 50 0 2002 2003 2004 2005 2006 Source: Bloomberg Page 30
Slide 31: High Quality Investment Portfolio
High Quality Investment Portfolio Conservative Investment Position Emphasizes Capital Protection Cash and short term investments – 28% of portfolio Government bonds – 47% of portfolio Modest exposure to corporate bonds No Agency/MBS/ABS bonds Equities approximately 50% hedged against a mar
Slide 32: Wrap Up
Wrap Up Our guiding principles have remained intact Excellent long term performance – in spite of the “Perfect Storm” of 1999 – 2005 Demonstrated strengths ¾ Strong operating subsidiaries focused on underwriting profitability and prudent reserving ¾ Conservative investment management providing
Slide 33: Fairfax Financial Holdings Limited
FAIRFAX FINANCIAL HOLDINGS LIMITED
Fairfax Financial Holdings — Shareholder Meeting (April 2007) on 6ix