Fairfax Financial Holdings Limited · TSX:FFH
Fairfax Financial — Shareholder Meeting (April 2015)
45 slides from Fairfax Financial's shareholder meeting presentation, Apr 16, 2015
Slide 1: Annual Meeting
Annual Meeting April 16, 2015 Note: All financial disclosure in this presentation is, unless otherwise noted, in US$
Slide 2: Forward-Looking Statements
Forward-Looking Statements Certain statements contained herein may constitute forward-looking statements and are made pursuant to the "safe harbour" provisions of the United States Private Securities Litigation Reform Act of 1995. Such forward- looking statements are subject to known and unknown ris
Slide 3: Guiding Principles: Objectives
Guiding Principles Objectives We expect to compound our 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 long term grow
Slide 4: 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 5: 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 6: Fairfax – 29 Years
Fairfax – 29 Years Book Value per Share plus Dividends ($) Net Premiums Written – $6.1 billion* Investment Portfolio – $26.2 billion Common Shareholders’ Equity – $8.4 billion 29 Year Compound Annual Growth Rate 468 22% 431 Cumulative Dividend 409 407 402 393 Book Value 293 240 Net Premiums Written
Slide 7: Financial Results
Financial Results Book Value per Share (1) % Change 2007 $ 230 2008 $ 278 21% 2009 $ 370 33% 2010 $ 376 2% 2011 $ 365 (3%) 2012 $ 378 4% 2013 $ 339 (10%) 2014 $ 395 16% 7 (1) Excludes dividends paid
Slide 8: Historic Performance vs. Peer Group
Historic Performance vs. Peer Group Compound Growth in Book Value per Share (5 Years ending 2014) (1) 19.1% 14.0% 13.0% 11.6% 9.8% 9.5% 9.3% 9.0% 8.4% 8.3% 8.0% 6.6% 5.4% 4.5% 1.3% 8 (1) Except for S&P 500 and TSX which are compound index return excluding dividends
Slide 9: 2008 Change in Book Value per Share
2008 Change in Book Value per Share 23% 11% 10% 8% 7% 6% 5% 5% 3% 3% 3% 3% 2% (1%) (3%) (3%) (3%) (4%) (5%) (5%) (6%) (7%) (7%) (8%) (8%) (9%) (9%) (12%) (13%) (14%) (14%) (14%) (15%) (16%) (17%) (18%) (18%) (19%) (19%) (19%) (22%) (24%) (32%) (31%) (37%) (37%) (43%) (48%) (65%) (100%) SOURCE: Dowli
Slide 10: Historic Performance vs. Peer Group
Historic Performance vs. Peer Group Compound Growth in Book Value per Share (29 Years: since Fairfax’s inception) (1) 21.1% 16.7% 16.2% 14.4% 12.8% 12.8% 10.0% 9.0% 8.2% 5.7% 10 (1) Except for S&P 500 and TSX which are compound index return excluding dividends
Slide 11: Sources of Net Earnings in 2014
Sources of Net Earnings in 2014 ($ millions) Underwriting profit – (combined ratio of 90.8%) 552 Investment income and other 441 Operating income 993 Other (1) (391) Realized investment gains 778 Pre-tax income including realized investment gains 1,379 Unrealized investment gains (mostly from bonds)
Slide 12: Underwriting Results in 2014
Underwriting Results in 2014 Combined Underwriting Ratio Profit ($ millions) Northbridge 95.5% 43 Crum & Forster 99.8% 2 Zenith 87.5% 90 OdysseyRe 84.7% 360 Fairfax Asia 86.7% 36 Other Insurance and Reinsurance 94.7% 21 Consolidated 90.8% 552 12
Slide 13: Net Gains on Investments in 2014
Net Gains on Investments in 2014 Realized Unrealized Net Gains Gains Gains (Losses) (Losses) (Losses) ($ millions) ($ millions) ($ millions) Equity and equity related investments 597 (55) 542 Equity hedges 13 (208) (195) Net equity 610 (263) 347 Bonds 103 1,134 1,237 CPI-linked derivatives - 18 18 O
Slide 14: Net Gains on Investments 2010 – 2014
Net Gains on Investments 2010 – 2014 Realized Unrealized Net Gains Gains Gains (Losses) (Losses) (Losses) ($ millions) ($ millions) ($ millions) Equity and equity related investments 3,364 (146) 3,218 Equity hedges (1,331) (2,374) (3,705) Net equity 2,033 (2,520) (487) Bonds 1,724 667 2,391 CPI-link
Slide 15: Accident Year Combined Ratios
Accident Year Combined Ratios 2005-2014 Cumulative Net Premiums Average Written Combined Ratio ($ billions) Northbridge Cdn 10.8 100.3% Crum & Forster 10.4 102.2% OdysseyRe 21.6 93.2% Fairfax Asia 1.5 87.3% 44.3 96.8% 15
Slide 16: Accident Year Reserve Redundancies
Accident Year Reserve Redundancies Average Annual Reserve Redundancies 2004-2013 Northbridge 11.7% Crum & Forster 3.9% OdysseyRe 11.1% Fairfax Asia 6.7% 16
Slide 17: Importance of Float
Importance of Float Year-End Operating Total Companies (including Runoff) Per Share 1985 $ 12.5 million $ 12.5 million $ 3 2014 $ 11.6 billion $ 15.1 billion $ 711 10 year average cost of float: 0.3% (2005 – 2014) 17
Slide 18: Importance of Float
Importance of Float Year-End 2014 Year-End 2014 ($ millions) ($ millions) Per Share Per Share Total Float 15,065 $ 711 Common Shareholders' Equity 8,361 $ 395 Net Liabilities 2,767 $ 131 Total Investment Portfolio 26,193 $ 1,237 Investment Portfolio including Brit 30,229 $ 1,354 Investment Portfolio
Slide 19: Pre-Tax Income – Runoff Operations
Pre-Tax Income – Runoff Operations ($ millions) 2007 188 2008 393 2009 31 2010 165 2011 351 2012 184 2013 (229) 2014 273 Cumulative (2007-2014) 1,356 19
Slide 20: Pre-Tax Realized and Unrealized Gains
Pre-Tax Realized and Unrealized Gains Gains (Losses) Per Share ($ millions) 1985 0.5 10¢ 2008 2,144 $ 118 2009 1,981 $ 108 2010 (3) - 2011 691 $ 34 2012 643 $ 31 2013 (1,564) $ (77) 2014 1,736 $ 80 Cumulative Gains $11.7 billion 20
Slide 21: Acquisitions in 2014 / 2015
Acquisitions in 2014 / 2015 Brit PLC Pethealth – 100% ownership Fairfax Indonesia – 80% ownership MCIS Insurance Berhad (Malaysia) Union Assurance (Sri Lanka) – 78% ownership Fairfax Eastern Europe (Slovakia/Hungary/Czech Republic/Ukraine) Insurance bolt-on acquisitions Runoff acquis
Slide 22: Investment Performance
Investment Performance Hamblin Watsa Investment Performance As at December 31, 2014 5 Years 10 Years 15 Years Common stocks (with equity hedging) (2.7)% 6.5% 11.6% S&P 500 15.5% 7.7% 4.2% Taxable bonds 10.2% 11.1% 11.5% Merrill Lynch U.S.corporate 5.5% 5.0% 6.1% (1-10 year) bond index Note: Bonds do
Slide 23: Investment Performance
Investment Performance Hamblin Watsa Investment Performance Compound Annual Returns 5 Years 10 Years 15 Years December 31, 2014 Common stocks (with equity hedging) (2.7%) 6.5% 11.6% S&P 500 15.5% 7.7% 4.2% December 31, 2013 Common stocks (with equity hedging) 3.2% 7.6% 13.5% S&P 500 17.9% 7.4% 4.7%
Slide 24: Fairfax's Investment Portfolio Remains Defensive
Fairfax’s Investment Portfolio Remains Defensive Fairfax Investment Portfolio Investment Portfolio Well Positioned $26.2 billion at December 31, 2014(1) • No focus on short term earnings • Capital preservation a priority Gov't Bonds 15% Municipal Common • Positioned to take advantage of Bonds Stocks
Slide 25: Investments not Carried at Market Value
Investments not Carried at Market Value Carrying Fair Unrealized Value Value Gain ($ millions) ($ millions) ($ millions) Insurance and reinsurance associates 440 673 234 Non-insurance associates 1,178 1,397 219 Thomas Cook India 270 473 203 Ridley 71 246 174 Total 831 25
Slide 26: Emerging Markets and Asian Footprint
Emerging Markets and Asian Footprint Gross Fairfax's Share of Premiums Gross Premiums Written Ownership Written ($ millions) ($ millions) First Capital (Singapore) 420 98% 411 Fairfax Brasil 158 100% 158 Polish Re 54 100% 54 Pacific Insurance (Malaysia) 75 100% 75 Falcon Insurance (Hong Kong) 82 100
Slide 27: U.S. Private and Public Debt as % of GDP
U.S. Private and Public Debt as % of GDP 400% 400% 380% Current total debt = $59 trillion 380% Debt/GDP of 180.4% would require total debt of $32 trillion 360% 360% 340% Panic Year 2008 340% 320% 320% 300% 300% 280% 280% 260% 260% 240% 240% 220% 220% 200% Panic Year 1929 200% 1870-2014 avg.=180.4% 1
Slide 28: Total Public and Private Debt as a % of GDP – Major Countries
Total Public and Private Debt as a % of GDP – Major Countries 700% 700% annual Japan 600% 600% U.K. 500% 500% Eurozone 400% 400% U.S. 300% Australia 300% Canada 200% 200% 100% 100% 1979 1984 1989 1994 1999 2004 2009 2014* *Through Q2 2014, except U.S. which is through Q4 2014 28 Source: Hoisington I
Slide 29: Velocity of Money 1900-2014
Velocity of Money 1900-2014 Equation of Exchange: GDP (nominal) = M*V annual 2.25 2.25 1997 = 2.2 1918 = 2.0 2.00 2.00 Avg. 1900 to present = 1.73 1.75 1.75 Avg. 1953 to 1983 = 1.75 1.50 1.53 1.50 1.25 1.25 1946 = 1.2 1.00 1.00 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 29 Source: H
Slide 30: Long Term Government Bond Yields: Historic Panic Years
Long Term Government Bond Yields Historic Panic Years 7% 7% Japan 1989 Debt Induced Panic Years and Long-Term Government Bond Yields 6% 6% 1. Average low level of interest rates after panic 2.0% 2. Average number of years after panic to lowest level 13.7 years 5% U.S. 2008 of interest rates 5% 3. Av
Slide 31: Long Term Treasury Rate 1871 - Q1 2015
Long Term Treasury Rate 1871- Q1 2015 14% 14% Fall of Berlin Wall 12% Onset of Iron and 12% Bamboo Curtains 10% 10% Interest rate avg. = 6% Inflation rate avg. = 3.9% 8% 8% Interest rate avg. = 2.9% Inflation rate avg. = 1.0% 6% 6% avg. = 4.2% 4% 4% 2% 2% Global market Restricted Market Global marke
Slide 32: U.S. and German 30 Year Sovereign Yields
U.S. and German 30 Year Sovereign Yields Quarterly, through Q1 2015 9% 9% 8% 8% 7% 7% 6% 6% U.S. 5% 2.5% 5% 4% 4% 3% 3% 2% 2% German 1% 0.6% 1% 0% 0% 1994 1997 2000 2003 2006 2009 2012 2015 GER 30 YR UST 30 YR Source: Bloomberg 32 Source: Bloomberg
Slide 33: U.S. and German 30 Year Sovereign Yield Spread
U.S. and German 30 Year Sovereign Yield Spread Quarterly, through Q1 2015 250 250 200 200 150 150 100 100 50 50 0 0 -50 -50 -100 -100 -150 -150 1994 1997 2000 2003 2006 2009 2012 2015 33 Source: Source: Bloomberg Bloomberg
Slide 34: Netherlands 10 Year Sovereign Yield
Netherlands 10 Year Sovereign Yield 34 Source: Bank of America Merrill Lynch
Slide 35: Cyclically Adjusted P/E Ratio (S&P 500)
Cyclically Adjusted P/E Ratio (S&P 500) 50 50 The CAPE Ratio is currently 28x Dec. 1999 Since 1881, it has been higher only twice. CAPE Ratio 44 45 Both episodes ended badly: Above February 2015 45 June - Oct '29 when it peaked at 33x 40 Jan '97 - May '02 when it peaked at 44x 40 Sept. 1929 35 33 35
Slide 36: S&P 500 Index and Profit Margins
S&P 500 Index and Profit Margins 2,200 10 2,000 9 1,800 8 1,600 7 1,400 6 1,200 5 1,000 4 800 3 600 400 2 200 1 0 0 Jan 1994 Jan 1999 Jan 2004 Jan 2009 Jan 2014 Profit Margin Index Source: Bloomberg 36 Source: Bloomberg
Slide 37: Commodity Price Declines
Commodity Price Declines S&P GSCI Commodity Index, monthly 1000 1000 900 900 800 800 700 700 600 600 500 500 400 400 300 300 200 200 100 100 0 0 '85 '89 '93 '97 '01 '05 '09 '13 Source: Hoisington Investment Management 37 Source: Hoisington Investment Management
Slide 38: Upward Pressure on the Dollar
Upward Pressure on the Dollar US Dollar Index, monthly 170 170 160 160 150 150 140 140 130 130 120 120 110 110 100 100 QE ends 90 90 80 80 70 70 1971 1975 1979 1983 1987 1991 1995 1999 2003 2007 2011 2015 Source: Hoisington Investment Management 38 Source: Hoisington Investment Management
Slide 39: Deflation in Japan
Deflation in Japan 3% 10% 2% 5% 1% Cumulative 0% Annual 0% -5% -1% -10% -2% -3% -15% * 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Annual Inflation Annual Deflation * In April 2014 Japan raised its consumption tax from
Slide 40: U.S. and Euro Area Consumer Prices
U.S. and Euro Area Consumer Prices 7% 7% y-o-y percent change, monthly 6% 6% 5% 5% 4% 4% U.S. (-.03%) 3% 3% 2% 2% 1% 1% 0% 0% -1% -1% Euro Area (-.1%) -2% -2% -3% -3% 1990 1994 1998 2002 2006 2010 2015 Through February 2015 Source: Hoisington Investment Management 40 Source: Hoisington Investment Ma
Slide 41: Public High Tech Speculation
Public High Tech Speculation Market Cap. P/E Ratio Price to Sales ($ billions) Social Media Twitter 31 (loss) 21x Netflix 29 111x 5x Facebook 223 73x 17x LinkedIn 33 89x 15x Yelp 3 358x 9x Yandex 9 19x 6x Tencent Holdings 164 46x 14x Other Tech/Web Groupon 6 (loss) 2x Service Now 12 (loss) 17x Sales
Slide 42: CPI-Linked Derivative Contracts December 31, 2014
CPI-Linked Derivative Contracts December 31, 2014 Notional Market Unrealized Amount Cost Value Gain (Loss) Underlying CPI Index ($ billions) ($ millions) ($ millions) ($ millions) United States 59 327 151 (175) European Union 45 286 70 (215) United Kingdom 5 24 5 (20) France 3 18 12 (7) 112 655 238
Slide 43: Fairfax Historic Total Return on Investment Portfolio
Fairfax Historic Total Return on Investment Portfolio 20% 10% 0% 1986 1990 1994 1998 2002 2006 2010 2014 -10% Total Return on Average Return on Portfolio Portfolio 8.9% 43
Slide 44: Ready for the Next Decade - Building on Fairfax's Strengths
Ready for the Next Decade - Building on Fairfax’s Strengths Our guiding principles have remained intact Excellent long term performance Demonstrated strengths Strong operating subsidiaries focused on underwriting profitability and prudent reserving Conservative investment management provid
Slide 45: Annual Meeting
Annual Meeting April 16, 2015
Fairfax Financial Holdings — Shareholder Meeting (April 2015) on 6ix