Fairfax Financial Holdings Limited · TSX:FFH
Fairfax Financial — Shareholder Meeting (May 2003)
29 slides from Fairfax Financial's shareholder meeting presentation, May 2003
Slide 1: Fairfax Financial Holdings Limited
FAIRFAX FINANCIAL HOLDINGS LIMITED
Slide 2: Fairfax Highlights
FAIRFAX HIGHLIGHTS • Focus on long term shareholder value • 17 year record of excellent performance • Strong operating companies well positioned for profitable growth with a focus on underwriting profitability • Excellent investment team with a proven track record and total return philosophy • Sound
Slide 3: Guiding Principles: Objectives
GUIDING PRINCIPLES OBJECTIVES: 1. 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: 1. 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. 2. Complete a
Slide 5: Guiding Principles: Values
GUIDING PRINCIPLES VALUES: 1. Honesty and integrity are essential in all our relationships and will never be compromised. 2. We are results oriented — not political. 3. We are team players — no "egos". A confrontational style is not appropriate. We value loyalty — to Fairfax and our colleagues. 4. W
Slide 6: 2002 Results (vs 2001)
2002 RESULTS (vs 2001) 2002 2001 ROE 12.8% (11.9%) Book value per share $ 237.01 $ 213.06 EPS $ 28.78 $ (28.04) Investments per share $ 1,189 $ 1,144
Slide 7: Long Term Performance for the Fairfax Shareholder
LONG TERM PERFORMANCE FOR THE FAIRFAX SHAREHOLDER ROE Book Value Investments Stock Price % per Share per Share 1985 $ 2 $ 7 3¼ 1986 25 1987 31 1988 21 1989 20 1990 23 1991 21 1992 8 1993 20 1994 12 1995 20 1996 21 1997 20 125 521 320 1998 20 185 998 540 1999 4 232 1,329 245 2000 4 243 1,197 228 20
Slide 8: Policies to Attract the Long Term Shareholder
POLICIES TO ATTRACT THE LONG TERM SHAREHOLDER 1. Full disclosure 2. Focused on long term ROE - not quarterly earnings 3. No promotion 4. No dividends (modest!) 5. No stock splits
Slide 9: Share Price vs Book Value
Value Book Price/ SHARE PRICE VS BOOK VALUE 0 1 2 3 4 5 6 7 1985 1986 1987 1988 1989 1990 18 months 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 45 months 2002 2003
Slide 10: Sources of Earnings
SOURCES OF EARNINGS (Cdn$ millions) 2002 2001 Underwriting Insurance Canada 40 (119) U.S. (66) (638) Reinsurance 20 (215) Underwriting income (loss) (6) (972) Interest and dividends 460 492 Operating income (loss) 454 (480) Realized gains 738 213 Interest expense (125) (155) Corporate overhead and o
Slide 11: 2002 Operating Company Highlights
2002 OPERATING COMPANY HIGHLIGHTS • Combined ratio for on-going operations at 100% • Significant growth in profitable areas • TIG Dallas program business placed into runoff • Operating companies are well positioned for profitable growth – Excellent management delivering on fundamentals – Solid balan
Slide 12: Underwriting Performance
UNDERWRITING PERFORMANCE 2002 2002 Net Combined Premiums Ratio Written (%) (% change) Canadian Insurance Companies Commonwealth 84.1 +95 Federated 94.0 +15 Lombard 98.6 +26 Markel 96.3 +69 Total 95.8 +43 U.S. Insurance Companies Crum & Forster 103.3 +53* TIG (continuing operations) 106.0 +54 Falcon
Slide 13: TIG Restructuring
TIG RESTRUCTURING 1. Issues • Significant runoff book • Stacked capital structure • Good books trapped in runoff company 2. Opportunity • IIC offers unparalleled runoff expertise • Restructuring puts TIG behind Fairfax • De-stack capital 3. Structure • MGA-controlled business put in runoff • Restruc
Slide 14: Hard Market in U.S. Property & Casualty Is Sustainable
HARD MARKET IN U.S. PROPERTY & CASUALTY IS SUSTAINABLE • Overall industry returns remain low with a 4% ROE in 2002 • Adverse reserve development and investment losses offset much of current improvement • Interest rates remain at 40-year lows • Insurer operating capital declines for the third consecu
Slide 15: Changes to Surplus in the U.S. Property and Casualty Industry
CHANGES TO SURPLUS IN THE U.S. PROPERTY AND CASUALTY INDUSTRY Three year decline in capital signals a hard market sustainable for several years In USD bn 60 Start of hard market 50 Start of hard market 40 Start of hard 30 market 20 Start of hard market 10 0 -4.9 -2.0 -2.4 -5.1 -1.8 -10 -17.0 -20 -27
Slide 16: Solve for ROE – US Property & Casualty Industry
SOLVE FOR ROE – US PROPERTY & CASUALTY INDUSTRY Combined Ratio Investment 90% 95% 100% 105% Return 3.0% 14% 10% 5% 1% 4.0% 16% 11% 7% 3% 5.0% 17% 13% 9% 5% 6.0% 19% 15% 11% 7%
Slide 17: Investment Highlights
INVESTMENT HIGHLIGHTS • Protected capital on the downside • Realized significant capital gains • Did not reach for yield • Significant cash and treasury bond positions
Slide 18: Return on Investment Portfolio
RETURN ON INVESTMENT PORTFOLIO Total Return (Cdn. $ millions) on Average Investments (%) 1986 5 8 1987 9 8 1988 29 22 1989 21 15 1990 (10) (4) 1991 49 15 1992 16 4 1993 80 19 1994 36 4 1995 207 13 1996 395 16 1997 457 10 1998 767 9 1999 (358) (2) 2000 1,938 12 2001 1,055 7 2002 1,826 11
Slide 19: Stock Market Capitalization as a Percentage of Nominal GDP
STOCK MARKET CAPITALIZATION AS A PERCENTAGE OF NOMINAL GDP 12/31/1924 – 3/31/2003 Source: Ned Davis Research Inc.
Slide 20: S&P 500 Price/Operating Earnings
S&P 500 PRICE/OPERATING EARNINGS (EXCLUDES WRITE OFFS) 12/31/1924 – 3/31/2003 Source: Ned Davis Research Inc.
Slide 21: Fairfax Has Outperformed the Market
FAIRFAX HAS OUTPERFORMED THE MARKET Cumulative % Change from 2002 December 31, 1999 % Change to December 31, 2002 S&P 500 -23.3 -40.1 NASDAQ -31.5 -67.2 S&P/TSX -14.0 -21.4 FTSE (London) -24.5 -43.1 CAC (France) -33.8 -48.6 DAX (Germany) -43.9 -58.4 Fairfax (Equities) +25.0 +100.5
Slide 22: Cash Position and Financial Ratios at December 31
CASH POSITION AND FINANCIAL RATIOS AT DECEMBER 31 (Cdn$ millions) 1993 2001 2002 Holding company cash and marketable securities 4 833 518 Net debt/equity 47% 42% 55% Long term bank lines 75 915 740 Unused reinsurance protection 26 415 602 Swiss Re cover remaining - 435 423
Slide 23: Holding Company Cash - 2003
HOLDING COMPANY CASH - 2003 (Cdn$ millions) Estimated Receipts Management fees 65 U.S. tax sharing payments 100 165 Estimated Expenses Holding company costs (45) Net interest expense (122) Common and preferred dividends (33) (200) Net operating (35)
Slide 24: Holding Company Cash - 2003: Financial Requirements
HOLDING COMPANY CASH - 2003 (Cdn$ millions) Financial Requirements RHINOS (204) Lombard capital (30) Maturing foreign exchange contracts (85) TRG purchase consideration (35) TIG note (June 30, 2003) (146) December 2003 note maturities (170) Total requirements (670) Total cash requirement (705) Avail
Slide 25: Risk Management Highlights
RISK MANAGEMENT HIGHLIGHTS • Reinsurance recoverables • Deferred tax asset • Loss reserves
Slide 26: Loss Reserves Independently Verified
LOSS RESERVES INDEPENDENTLY VERIFIED • Actuarial sign-off on 2002 with no significant actions beyond the TIG restructuring - ORC Re included in review • Fairfax reserves reviewed by multiple parties: – Operating company actuarial departments – Fairfax corporate actuarial – External consulting actuar
Slide 27: First Quarter 2003 Highlights
FIRST QUARTER 2003 HIGHLIGHTS • Operating companies continue profitable growth trends – Rates continue to harden – Continued improvement in underwriting results with a combined ratio below 100% • Realized gains in excess of $140 million. Unrealized gains in excess of $125 million • Holding company c
Slide 28: Why Fairfax Could Achieve 15% ROE in the Long Term
WHY FAIRFAX COULD ACHIEVE 15% ROE IN THE LONG TERM 1. Well established operating subsidiaries with excellent management positioned for profitable growth 2. Investment team with a proven track record 3. Lean head office team 4. Track record of creating wealth for shareholders 5. Track record of treat
Slide 29: Fairfax Financial Holdings Limited
FAIRFAX FINANCIAL HOLDINGS LIMITED
Fairfax Financial Holdings — Shareholder Meeting (May 2003) on 6ix