Fairfax Financial Holdings Limited · TSX:FFH

Fairfax Financial — Shareholder Meeting (April 2014)

43 slides from Fairfax Financial's shareholder meeting presentation, Apr 9, 2014

  1. Slide 1: Annual Meeting

    Annual Meeting April 09, 2014 Note: All financial disclosure in this presentation is, unless otherwise noted, in US$

  2. 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

  3. 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

  4. 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

  5. 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

  6. Slide 6: Fairfax – 28 Years

    Fairfax – 28 Years Shareholders – Book Value per Share plus Dividends $ 431 28 Year Compound Annual Growth Rate 402 409 407 22% 393 293 240 Book Value 339 Cumulative Dividend 167 167 157 339 156 143 148 127 118 112 86 63 39 31 1.52 26 19 18 11 15 8 4 6 1985 1989 1993 1997 2001 2005 2009 2013 6

  7. Slide 7: Financial Results

    Financial Results Book Value per Share (1) % Change 2006 $ 150 2007 $ 230 53% 2008 $ 278 21% 2009 $ 369 33% 2010 $ 376 2% 2011 $ 365 (3%) 2012 $ 378 4% 2013 $ 339 (10%) 7 (1) Excludes dividends paid

  8. Slide 8: Historic Performance vs Peer Group

    Historic Performance vs Peer Group Compound Growth in Book Value per Share (5 Years ending 2013) (1) 19.8% 16.5% 15.4% 14.4% 13.9% 12.7% 11.7% 11.2% 10.8% 10.7% 10.2% 9.1% 8.7% 4.0% (1.2%) 8 (1) Except for S&P 500 and TSX which are compound index return excluding dividends

  9. 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

  10. Slide 10: Historic Performance vs Peer Group

    Historic Performance vs Peer Group Compound Growth in Book Value per Share (28 Years: since Fairfax’s inception) (1) 21.3% 17.0% 16.3% 14.6% 13.3% 13.1% 10.1% 9.0% 8.1% 5.7% 10 (1) Except for S&P 500 and TSX which are compound index return excluding dividends

  11. Slide 11: Source of Earnings in 2013

    Source of Earnings in 2013 ($ millions) Underwriting profit – (Combined Ratio of 92.7%) 440 Investment income and other 382 Operating Income 822 Other (1) (259) Realized investment gains 1,380 Pre-tax income including realized investment gains 1,943 Unrealized investment losses (mostly from bonds) (

  12. Slide 12: Net Gains on Investments in 2013

    Net Gains on Investments in 2013 Realized Unrealized Net Gains Gains Gains (Losses) (Losses) (Losses) ($ millions) ($ millions) ($ millions) Equity and equity related investments 1,324 121 1,445 Equity hedges (1,351) (631) (1,982) Net equity (27) (510) (537) Bonds 66 (995) (929) CPI-linked Derivativ

  13. Slide 13: Net Gains on Investments 2010 – 2013

    Net Gains on Investments 2010 – 2013 Realized Unrealized Net Gains Gains Gains (Losses) (Losses) (Losses) ($ millions) ($ millions) ($ millions) Equity and equity related investments 2,767 (91) 2,676 Equity hedges (1,344) (2,166) (3,510) Net equity 1,423 (2,256) (834) Bonds 1,622 (468) 1,154 CPI-lin

  14. Slide 14: Accident Year Combined Ratios

    Accident Year Combined Ratios 2004-2013 Cumulative Net Premiums Average Written Combined Ratio ($ billions) Northbridge Cdn 11.0 98.4% Crum & Forster 9.9 101.8% OdysseyRe 21.6 92.6% Fairfax Asia 1.3 86.7% 43.8 96.0% 14

  15. Slide 15: Accident Year Reserve Redundancies

    Accident Year Reserve Redundancies Average Annual Reserve Redundancies 2003-2012 Northbridge 10.3% Crum & Forster 4.6% OdysseyRe 11.3% Fairfax Asia 7.9% 15

  16. Slide 16: Strong Operating Companies' Capital - 2013

    Strong Operating Companies’ Capital - 2013 Net Premiums Written/ Net Premiums Statutory Statutory Written Surplus Surplus ($ millions) ($ millions) Northbridge 1,031 1,172 0.9x Crum & Forster 1,233 1,142 1.1x Zenith National 700 516 1.4x OdysseyRe 2,377 3,809 (1) 0.6x Fairfax Asia 257 610 (1) 0.4x 1

  17. Slide 17: Well Positioned for a Turn in the Cycle

    Well Positioned for a Turn in the Cycle ($ millions) 3,000 OdysseyRe Northbridge (Cdn $) Crum & Forster 2,500 Gross Premiums Written 2,000 1,500 1,000 500 Soft Market Hard Market 0 17 1999 2000 2001 2002 2003 2004 2005

  18. Slide 18: Importance of Float

    Importance of Float Year-End Operating Total Companies (Including Runoff) Per Share 1985 $ 12.5 million $ 12.5 million $ 3 2013 $ 11.9 billion $ 15.6 billion $ 734 10 year average cost of float: 0.7% (2004 – 2013) 18

  19. Slide 19: Importance of Float

    Importance of Float Year-End 2013 ($ millions) Per Share Total Float 15,551 $ 734 Common Shareholders' Equity 7,187 $ 339 Net Liabilities 2,124 $ 100 Total Investment Portfolio 24,862 $ 1,173 Investment Portfolio in 1985 24 $5 19

  20. Slide 20: Pre-Tax Realized and Unrealized Gains

    Pre-Tax Realized and Unrealized Gains Gains 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) Cumulative Gains $ 10 billion 20

  21. Slide 21: 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) Cumulative (2007-2013) 1,083 21

  22. Slide 22: Acquisitions in 2013

    Acquisitions in 2013  American Safety – 100% ownership  Hartville – 100% ownership  Thomas Cook/IKYA/Sterling  Prime/CARA/Keg 22

  23. Slide 23: Investment Performance

    Investment Performance Hamblin Watsa Investment Performance As at December 31, 2013 5 Years 10 Years 15 Years Common stocks (with equity hedging) 3.2% 7.6% 13.5% S&P 500 17.9% 7.4% 4.7% Taxable bonds 11.2% 10.3% 9.9% Merrill Lynch U.S.corporate 8.4% 5.0% 5.7% (1-10 year) bond index Notes: Bonds do n

  24. Slide 24: Fairfax's Investment Portfolio 2008 vs 2013

    Fairfax’s Investment Portfolio 2008 vs 2013 September 30, 2008 (1) December 31, 2013 (1) $20.4 billion $24.9 billion Gov't Government Common Stocks 16% Bonds Common Stocks 22% Bonds 47% (~100% Hedged) Municipal 12% (~100% Hedged) Bonds Cash/Short 25% -Term Cash/Short- 27% Term 31% Corporate Corporat

  25. Slide 25: Fairfax Focused on the Long Term

    Fairfax Focused on the Long Term Earnings and book value volatile on a quarterly basis 2013 Earnings Book (Loss) per Value per Share Share At December 31, 2012 n/a $ 378 First quarter $ 7.1 $ 373 Second quarter $ (8.6) $ 362 Third quarter $ (29.0) $ 335 25 Fourth quarter $ (1.0) $ 339

  26. Slide 26: Financial Strength

    Financial Strength 2012 2013 ($ millions) Holding Company Obligations 2,378 2,491 Subsidiary Debt 671 504 Total Debt 3,049 2,995 Holding Company Cash and Marketable Securities 1,128 1,242 Net Debt 1,921 1,753 Total Equity & Non-controlling Interests 8,890 8,461 Net Debt/Net Total Capital 17.8% 17.2%

  27. Slide 27: Investments Not Carried at Market Value

    Investments Not Carried at Market Value Carrying Fair Unrealized Value Value Gain ($ millions) ($ millions) ($ millions) Investments in Associates 1,433 1,815 382 Thomas Cook India 162 253 91 Ridley 70 131 61 Eurobank Properties (Rights Offering) 109 Total 643 27

  28. Slide 28: Emerging Markets and Asian Footprint

    Emerging Markets and Asian Footprint Gross Fairfax's Share of Premiums Gross Premiums Written Ownership Written First Capital 399 100% 399 Fairfax Brasil 151 100% 151 Polish Re 100 100% 100 Pacific Insurance 73 100% 73 Falcon Insurance (Hong Kong) 58 100% 58 781 781 ICICI Lombard 1,240 26% 322 Alltr

  29. Slide 29: U.S. Private and Public Debt as % of GDP

    U.S. Private and Public Debt as % of GDP 400% 400% 380% Current total debt = $58.9 trillion 380% Debt/GDP of 180.2% would require total debt of $30.8 trillion 360% Panic Year 2008 360% 340% 340% 320% 320% 300% 300% 280% 280% 260% 260% 240% 240% 220% 220% 200% Panic Year 1929 200% 1870-2013 avg. = 18

  30. Slide 30: 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 1983 1987 1991 1995 1999 2003 2007 2011 30 Source: Hoisington Investment Management

  31. Slide 31: Velocity of Money 1900-2013

    Velocity of Money 1900-2013 Equation of Exchange: GDP (nominal) = M*V annual 2.25 2.25 1997 = 2.2 2.00 1918 = 1.95 2.00 Avg. 1900 to present = 1.71 1.75 1.75 Avg. 1953 to 1983 = 1.74 1.57 1.50 1.50 1.25 1.25 1946 = 1.18 1.00 1.00 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 Source: Ho

  32. Slide 32: Long-Term Government Bond Yields Historic Panic Years

    Long-Term Government Bond Yields Historic Panic Years 7% Japan 1989 Debt Induced Panic Years and 6% Long-Term Government Bond Yields 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 3. Average lev

  33. Slide 33: Long Term Treasury Rate 1871-2013

    Long Term Treasury Rate 1871-2013 14% 14% Fall of Berlin Wall 12% 12% Onset of Iron and 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. = 4.3% 4% 4% 2% 2% Global Global market Restricted market market 0%

  34. Slide 34: Shiller's Price-Earnings Ratio 1881-2013

    Shiller’s Price-Earnings Ratio 1881-2013 50 50 45 Dec. 1999 45 42 40 40 35 Sept. 1929 35 32 30 30 June 1901 Jan. 1966 25 25 24 25 20 20 Average 15 Avg. = 16.4 15 10 10 Average at end of 5 recessions = 13.1 5 Range = 5.3 to 19.3 0 0 1881 1893 1905 1917 1929 1941 1953 1965 1977 1989 2001 2013 Source:

  35. Slide 35: S&P 500 Index and Profit Margins

    S&P 500 Index and Profit Margins 2,000 10 1,800 9 1,600 8 7 1,400 6 1,200 5 1,000 4 800 3 600 2 400 1 200 0 Jan 1994 Jan 1998 Jan 2002 Jan 2006 Jan 2010 Jan 2014 Profit Margin Index Source: Bloomberg 35

  36. Slide 36: Deflation in Japan

    Deflation in Japan 3% 10% 2% 5% 1% 0% Cumulative Annual 0% -5% -1% -10% -2% -3% -15% * 2002 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Annual Deflation Annual Inflation Cumulative * Estimate Source: Organization for Economic Coo

  37. Slide 37: 7-10 Year US High Yield Debt (Yield To Maturity)

    7-10 Year US High Yield Debt (Yield To Maturity) 25 20 15 10 5 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: Bloomberg 37

  38. Slide 38: High Tech Speculation

    High Tech Speculation Market Cap. P/E Ratio Price to Sales (US$ Billions) Social Media Twitter 39 (loss) 38x Netflix 27 186x 6x Facebook 174 116x 21x LinkedIn 24 887x 15x Yelp 7 (loss) 27x Yandex 12 33x 11x Tencent Holdings 150 59x 16x Other Tech/Web Groupon 6 (loss) 2x Service Now 10 (loss) 22x Sal

  39. Slide 39: Monstrous Real Estate & Construction Bubble in China

    Monstrous Real Estate & Construction Bubble in China  China built 50 Manhattans between 2008 and 2012  China built 20 million housing units in 2012 compared to 2 million in the United States at its peak  At the end of 2013 China had 60 million units under construction  In many Chinese cities, th

  40. Slide 40: CPI-Linked Derivative Contracts December 31, 2013

    CPI-Linked Derivative Contracts December 31, 2013 Notional Weighted Amount Average Dec 31, 2013 Underlying CPI Index ($ billions) Strike Price (CPI) CPI U.S. 34 230 233 European Union 39 110 117 U.K. 6 244 253 France 4 125 126 83 ($ millions) Total Cost 546 Total Market Value 132 40

  41. Slide 41: Fairfax Historic Total Return on Investment Portfolio

    Fairfax Historic Total Return on Investment Portfolio 20% 10% 0% 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 -10% Total Return on Average Return on Portfolio Portfolio 8.9% 41

  42. Slide 42: Superior Long Term Investment Track Record

    Superior Long Term Investment Track Record Return on Average Investments 2004-2013 Peer 1 4.7% Peer 2 4.6% Peer 3 4.5% Peer 4 4.4% Peer 5 4.3% Peer 6 4.2% Peer 7 4.1% Peer 8 4.0% Peer 9 3.8% Peer 10 3.6% Average 4.2% Fairfax 7.4% 42 Source: SNL Financial LC; Returns calculated by Fairfax

  43. Slide 43: 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

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