Fairfax Financial Holdings Limited · TSX:FFH
Fairfax Financial — Shareholder Meeting (May 2006)
35 slides from Fairfax Financial's shareholder meeting presentation, May 11, 2006
Slide 1: Annual General Meeting
Annual General Meeting May 11, 2006
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 involve known and unknown risks, uncer
Slide 3: Guiding Principles: Objectives
Guiding Principles Objectives We expect to earn long term returns on shareholders' equity in excess of 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 te
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: Financial Results
Financial Results 2005 2004 Earnings per Share $ (30.72) $ (2.16) Book Value per Share $ 151.52 $ 184.86 Return on Equity (17.90%) (1.0%) Investments per Share $ 832.70 $ 840.05 Note: All financial disclosure in this presentation is in US$ millions except per share data or unless otherwise noted Pag
Slide 7: Financial Results
Financial Results Q1 '06 2005 2004 2003 2002 Earnings per Share $ 9.47 $ (30.72) $ (2.16) $ 18.23 $ 18.20 Book Value per Share $ 159.94 $ 151.52 $ 184.86 $ 192.81 $ 149.31 Return on Equity 24.2% (17.9%) (1.0%) 10.9% 13.0% Investments per Share $ 858.42 $ 832.70 $ 840.05 $ 904.04 $ 752.60 Page 7
Slide 8: Underwriting Performance
Underwriting Performance Combined Ratio by Segment Q1 '06 2005 2004 2003 2002 Insurance — Northbridge 91.0% 92.9% 87.7% 92.6% 97.4% — U.S. Insurance 98.4% 100.9% 105.4% 102.7% 107.5% — Fairfax Asia 95.7% 93.0% 91.9% 96.0% 99.8% OdysseyRe 97.3% 117.2% 98.1% 96.9% 99.1% Consolidated (1) 96.0% 107.6% 9
Slide 9: Performance in the Hard Market – Build up of Intrinsic Value
Performance in the Hard Market – Build up of Intrinsic Value % Increase 2001 to 2005 Net Premiums Investment Shareholders' Written Portfolio Equity Northbridge (C$) 71% 115% 115% Crum & Forster 67% 31% 41% (1) OdysseyRe 135% 108% 76% Canadian Industry 40% 54% U.S. Industry 33% 44% (1) Before dividen
Slide 10: Catastrophe Risk Management
Catastrophe Risk Management Fairfax companies manage risk capacity by class, zone and peril Capitalized to withstand the financial impact of catastrophe losses 2005 2004 2001 KRW Hurricanes 4 Hurricanes WTC Pre-tax Net Cat Losses 716 253 187 Combined Ratio Impact 15.2% 5.3% 6.0% Pre-tax Impact a
Slide 11: Catastrophe Risk Management
Catastrophe Risk Management Quarterly review by Fairfax of group-wide exposure by critical cat exposure zones ¾ Catastrophe exposure managed centrally ¾ Blend of modelled losses and aggregate exposed limits by zone and across zones More detailed analysis performed at subsidiary level ¾ Exposure
Slide 12: Reserve Breakdown at Dec. 31, 2005
Reserve Breakdown at Dec. 31, 2005 Fairfax Reserves Operating Companies Breakdown by Segment Breakdown by Accident Year 74% 79% 21% 26% 2001 & Prior 2002 - 2005 Runoff Operating Companies Runoff share of Fairfax net reserves has declined to 26% from 45% in 2002 79% of net reserves of operating c
Slide 13: Operating Companies’ Reserves
Operating Companies’ Reserves Northbridge ¾ Redundancies in 2005 ¾ Cumulative 4.8% redundancy over past 10 accident years Crum & Forster ¾ Redundancies in 2005 ¾ Favourable development across most lines and AYs, offset by strengthening of APH and Surety Lines Odyssey Re ¾ Experienced adverse d
Slide 14: 2005 Reserve Strengthening
2005 Reserve Strengthening Canadian and U.S. insurance operations experienced favourable development Odyssey’s development principally related to 2001 & prior U.S. casualty, and included $40.3 million related to asbestos and environmental losses Runoff development related primarily to European
Slide 15: U.S. P&C Industry Combined Ratio and Interest Rates
U.S. P&C Industry Combined Ratio and Interest Rates U.S. Property & Casualty Industry Combined Ratio vs. 10 Yr Treasury Rates 120% 16% 14% 110% 12% 10% 100% 8% 6% 90% 4% 2% 80% 0% 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 Sources: 10-Year Treasury Constant Maturity Rate. U.S. Feder
Slide 16: Runoff Overview
Runoff Overview U.S. runoff showing improved stability ¾ Capital and liquidity exist to fund the runoff of claims ¾ TIG surplus of $597 million at December 31, 2005 European runoff is a top management priority ¾ Timing mismatch creates near term funding shortfall ¾ Potential 2006 cash requiremen
Slide 17: U.S. Runoff Progress
U.S. Runoff Progress Statutory Values Net Net Loss ORH Shares Claim Statutory "Old TIG" Premium and LAE Held by TIG Count Surplus Head Count Earned Reserves (millions) 31-Dec-02 816 1,512 55,000 536 726 48.0 31-Dec-03 315 1,113 30,000 696 309 18.8 31-Dec-04 66 1,101 20,000 742 213 18.8 31-Dec-05 (20
Slide 18: European Runoff Progress
European Runoff Progress GAAP Values Net Net Loss Premium and LAE Claim Shareholders' RIUK Earned Reserves (1) Count Equity (2) Head Count 31-Dec-2003 71 937 75,000 698 233 31-Dec-2004 45 705 54,000 543 219 31-Dec-2005 41 272 41,000 275 201 (1) Includes nSpire Re portion of Group Re but excludes CRC
Slide 19: Runoff and Other Q1 2006 Results
Runoff and Other Q1 2006 Results U.S. Europe Group Re Total Gross Premiums Written 50 (2) 78 126 Net Premiums Written 14 (2) 78 90 Net Premiums Earned 44 (1) 77 120 Losses on Claims (48) 2 (49) (96) Operating Expenses (13) (14) (24) (50) Interest and Dividends 17 (1) 4 20 Operating Income (Loss) 0 (
Slide 20: Capital Structure
Capital Structure 2005 2004 2003 2002 2001 2000 1999 Holdco Cash & Marketable Securities $559 $567 $410 $328 $522 $363 $491 31-Mar-06 31-Dec-05 31-Dec-04 Holding Company Debt 1,306 1,365 1,421 Subsidiary Debt 1,037 933 862 Purchase Consideration Payable 191 192 195 TIG Trust Preferred Securities 52
Slide 21: High Quality Investment Portfolio
High Quality Investment Portfolio Conservative investment position emphasizes capital protection z Large cash reserves Total Market Value of $15.2 billion as of March 31, 2006(1) z High quality bond portfolio Common Strategic $1.1 billion ¾ Government bonds dominate Stocks hedge Investments ¾ 91% ra
Slide 22: Superior Long Term Track Record of Investment Performance
Superior Long Term Track Record of Investment Performance Performance as at December 31, 2005 5 Years 10 Years 15 Years Managed for U.S. Companies Common Stocks 20.0% 18.6% 19.8% S&P 500 0.5% 9.1% 11.5% Bonds 10.4% 8.4% 9.7% Merrill Lynch Corporate Index 6.6% 6.3% 7.3% Managed for Canadian Companies
Slide 23: Outperformance Relative to Peers
Outperformance Relative to Peers Fairfax competitive advantage: consistent outperformance of the indices and industry peers Fairfax U.S. Property & Casualty Industry Total Return on Total Return / Total Return on Total Return / Avg Investments NPE Avg Investments NPE 1986 - '99 10% 27% 8% 20% 2000
Slide 24: 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 = 58.7% 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 25: 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 26: Long Term Treasury Rate 1871-2005
Long Term Treasury Rate 1871-2005 Source: Hoisington Investment Management Page 26
Slide 27: Emerging Market Credit Spreads at Record Lows
Emerging Market Credit Spreads at Record Lows Page 27
Slide 28: The Fairfax Model
The Fairfax Model Fairfax Financial •Strategic, financial and capital allocation, performance measurement and evaluation Investment Operating Management Companies • Centralized investment management • Decentralized operating management • Long term, value-oriented, total return • Undistracted focus o
Slide 29: 20 Year Performance
20 Year Performance Strong long term growth in BVPS over 20 years YE 1985 YE 2005 CAGR Net Premiums Written 12.4 4,705 35% Investment Portfolio 23.9 14,334 38% Shareholders' Equity 7.6 2,710 34% Shares O/S (mm) 5.0 17.9 7% Investments per Share 4.80 832.70 29% Book Value per Share 1.52 151.52 26%
Slide 30: The First 13 Years
The First 13 Years Strong growth in the first 13 years YE 1985 YE 1998 CAGR Net Premiums Written 12.4 1,567 45% Investment Portfolio 23.9 7,673 56% Shareholders' Equity 7.6 1,456 50% Shares O/S (mm) 5.0 12.1 7% Investments per Share 4.80 648.83 46% Book Value per Share 1.52 120.29 40% Page 30
Slide 31: The 7 Lean Years
The 7 Lean Years YE 1998 YE 2005 CAGR Net Premiums Written 1,567 4,705 17% Investment Portfolio 7,673 14,334 9% Shareholders' Equity 1,456 2,710 9% Shares O/S (mm) 12.1 17.9 6% Investments per Share 648.83 832.70 4% Book Value per Share 120.29 151.52 3% Page 31
Slide 32: 7 Year Financial Performance
7 Year Financial Performance 1999 - 2005 ($ billions) Cumulative Underwriting Losses Insurance and Reinsurance (1) 1.3 Runoff (2) 3.1 Total Underwriting Losses 4.4 Corporate Overhead, Interest and Other 1.1 Total Losses and Expenses 5.5 Interest and Dividends 2.9 Realized Gains 2.4 Total Investment
Slide 33: Fairfax Overview
Fairfax Overview $4.7 Billion in Net Premiums Written (2005) Fairfax Fairfax Asia Asia $1.0 b $1.0 b $0.1 b $2.3 b $0.3 b Largest Cdn Major U.S. Growing Top 5 US Manager of commercial commercial commercial broker market Fairfax P&C insurer P&C insurer P&C insurer and Top 20 global runoff in Asi
Slide 34: Twenty Years of Creating Value for Fairfax Shareholders
Twenty Years of Creating Value for Fairfax Shareholders We have created: The leading commercial lines carrier in Canada, with 20-year ROE of 16.5% A major U.S. commercial lines company focused on underwriting discipline and profitability A top 20 global reinsurer A strong foothold in the gro
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