Farifax Financial 2008-2009 Presentation
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Farifax Financial 2008-2009 Presentation Presentation Transcript

  • 1. Annual Meeting g April 15, 2009 1 Note: All financial disclosure in this presentation is, unless otherwise noted, in US$ and, except per share data, in $ millions
  • 2. Forward Looking 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, forward looking uncertainties and other factors which may cause the actual results, performance or achievements of Fairfax to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, but are not limited to: a reduction in net income if our loss reserves are insufficient; underwriting losses on the risks our subsidiaries insure that are higher or lower than expected; the occurrence of catastrophic events with a frequency or severity exceeding our estimates; the cycles of the insurance market market, which can substantially influence our and our competitors’ premium rates and capacity to write new business; changes in economic conditions, including interest rates and the securities markets, which could negatively affect our investment portfolio; insufficient reserves for asbestos, environmental and other latent claims; the inability of our subsidiaries to maintain favourable financial or claims-paying ability ratings; an inability to realize our investment objectives; exposure to credit risk in the e ent o r s bsidiaries’ reins rers or ins reds fail to make pa ments a event our subsidiaries’ reinsurers insureds payments; decrease in the level of demand for our subsidiaries’ products, or increased competition; an inability to obtain reinsurance coverage at reasonable prices or on terms that adequately protect our subsidiaries; an inability to obtain required levels of capital; an inability to access cash of our subsidiaries; risks associated with requests for information from government authorities; risks associated with current government investigations of, and class action litigation related to, g g g insurance industry practice; the passage of new legislation; and the failure to realize future income tax assets. Additional risks and uncertainties are described on pages 150 – 153 in our 2008 Annual Report which is available at www.fairfax.ca. For a fuller detailing of issues and risks relating to the company, please see Risk Factors in Fairfax’s most recent Supplemental and Base Shelf Prospectus filed with the securities regulatory authorities in Canada and the United States, which is available on SEDAR and EDGAR. Fairfax disclaims any intention or obligation to update or revise any forward-looking statements. 2
  • 3. 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 f O focus is long term growth in book value per share and il t th i b k l h d not quarterly earnings. We plan to grow through internal means as well as through friendly acquisitions We always want to be soundly financed We provide complete disclosure annually to our shareholders h h ld 3
  • 4. 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 open communication b t C lt d i ti between F i f and it Fairfax d its subsidiaries is an essential requirement at Fairfax Share ownership and large incentives are encouraged p g g across the Group Fairfax head office will always be a very small holding company and not an operating company dt ti 4
  • 5. Guiding Principles Values Honesty and integrity are essential in all of our relationships and will never be compromised We are results-oriented — not political p We are team players — no quot;egos”. A confrontational style is not appropriate. We value loyalty — to Fairfax and our colleagues We are hard working but not at the expense of our families We always look at opportunities but emphasize downside protection and l k f ways t minimize l t ti d look for to i i i loss of capital f it l We are entrepreneurial. We encourage calculated risk-taking. It is all right to fail but we should learn from our mistakes We will never bet the company on any project or acquisition We believe in having fun — at work! 5
  • 6. Financial Results 2006 2007 2008 $ 150 16 150.16 $ 230 01 230.01 $ 278 28 278.28 Book Value per Share 53% 21% Growth in Book Value per Share $ 1,076 $ 1,141 Investments per Share $ 58.38 $ 79.53 Earnings per Share (diluted) 6
  • 7. 23% % 11% 10% 8% 7% 6% 5% Share 5% 3% 3% 3% 3% 2 2% SOURCE: Dowling & Partners, IBNR #12 (1%) (3%) (3%) (3%) (4%) (5%) (5%) (6%) (7%) (7%) (8%) (8%) (9%) (9%) (1 12%) (133%) (144%) (144%) (144%) (15% %) (16% %) (17% %) 2008 Change in Book Value per (18% %) (18%) (19%) (19%) (19%) (22%) (24%) (31%) (32%) (3 37%) Fairfax and AIG calculated using the same methodology as Dowling & Partners, based on company data (AIG excludes government financing) (3 37%) (43%) ) (48%) (65%) (100%) 7
  • 8. U.S. P&C Insurance Companies 5 Year 5-Year BVPS and Share Price 5-Year Compound Annual Growth Rate 2003-2008 BVPS Share Price Fairfax (1) 11.2% 11.5% 1 2 Chubb 11.0% 8.4% 3 Travelers T l 9.9% 9 9% 2.7% 2 7% 4 Markel Corp. 9.6% 3.4% 5 PartnerRe 8.7% 4.2% 6 Loews 8.2% 11.4% 7 ACE Ltd. 8.0% 5.0% 8 Berkshire Hathaway 6.9% 2.8% 9 RenaissanceRe 5.5% 1.0% 10 White Mountains 3.9% (10.3%) 11 Leucadia National 2.2% 5.2% 12 IPC Re 0.4% (5.1%) 13 Hartford (5.6%) (22.6%) 14 XL Capital p (19.8%) ( ) ( (45.6%) ) 15 AIG (49.5%) (52.7%) (1) BVPS in U.S. dollars. Share price in Canadian dollars 8
  • 9. Fairfax Long Term Performance Compound Annual Growth Rate to 2008 Book Value Per Share 5 Years 10 Years 15 Years 23 Years Ranking g 1 4 1 1 Growth Rate 11.2% 9.5% 17.0% 25.4% Share Price 5 Years 10 Years 15 Years 23 Years Ranking 1 12 2 1 Growth Rate 11.5% 11 5% (3.2%) (3 2%) 13.1% 13 1% 23.1% 23 1% Number of Companies 15 15 12 8 For Fairfax: BVPS in U.S. dollars. Share price in Canadian dollars 9
  • 10. 2008 Subsidiary Financial Results Combined Net Return on Ratio Earnings Avg. Equity Northbridge N thb id 107.3% 107 3% 46 3.6% 3 6% Crum & Forster (US GAAP) 114.6% 333 27.1% OdysseyRe (US GAAP) 101.2% 549 20.5% 10
  • 11. 2008 Underwriting Results Crum & Northbridge Forster OdysseyRe Consolidated As Reported Underwriting Loss (78.7) (177.2) (73.5) (457.7) Combined Ratio 107.3% 107 3% 117.6% 117 6% 103.5% 103 5% 110.1% 110 1% Adjustments - Foreign Currency Impact 52.8 45.8 99.1 Crum & Forster Reinsurance Commutation and Lawsuit Settlement - 109.7 - 109.7 Hurricanes Ike and Gustav Losses 25.0 74.3 136.9 242.5 - Advent Underwriting Loss - - 112.4 112 4 Adjusted Underwriting Profit (Loss) (0.9) 6.8 109.2 106.0 Adjusted Combined Ratio 100.1% 99.3% 94.7% 97.6% 11
  • 12. Importance of Float – Operating Companies Unlike money management business (royalty on funds managed), results (g g ), (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 shareholders (with 100% or better combined ratios) Benefit / Avg. Long Term Underwriting Average (Cost) Canada Treasury Profit / (Loss) Float of Float Bond Yield 21.6 11.6% 1986 2.5 9.6% 1,089 (3.4%) 1996 (37) 7.6% 8,618 , 3.3% 2007 281 4.3% 8,918 (5.1%) 2008 (458) 4.1% Weighted Avg. Financing Differential Since Inception 2.3% 12
  • 13. Importance of Float – Operating Companies Unlike money management business (royalty on funds managed), 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 shareholders (with 100% or better combined ratios) Benefit / Avg. Long Term g g Underwriting Average (Cost) Canada Treasury Investment Profit / (Loss) Float of Float Bond Yield Gains 1 1986 2.5 21.6 11.6% 9.6% 91 1996 (37) 1,089 (3.4%) 7.6% 976 2007 281 8,618 3.3% 4.3% 1,559 2008 (458) 8,918 (5.1%) 4.1% $5.3B (cumulative) Weighted Avg. Financing Differential Since Inception 2.3% 13
  • 14. Investment Performance Hamblin Watsa Investment Performance 5 Years to 10 Years to 15 Years to Dec. 31 '08 Dec. 31 '08 Dec. 31 '08 Common Stocks with Equity Hedge 12.2% 19.1% 16.1% Common Stocks 1.5% 13.3% 12.3% S&P 500 (2.2%) (2 2%) (1.4%) (1 4%) 6.5% 6 5% Bonds 9.6% 9.3% 9.4% Merrill Lynch U.S. Corporate Index 1.6% 4.4% 5.4% Source: Hamblin Watsa Investment Counsel - Annualized Rate of Return (%). Notes: Bonds do not include returns from credit default swaps. 15 year investment performance includes portfolios managed by Hamblin Watsa which were not owned by Fairfax. Past performance is no guarantee of future results. 14
  • 15. Other-Than-Temporary Impairment and Mark-to-Market Losses in 2008 Mark to Market Crum & Forster Northbridge OdysseyRe Consolidated OTTI 274 197 359 996 MTM 103 87 141 504 Total 377 284 500 1,500 15
  • 16. Subsidiary Growth in Book Value Per Share 2001-2008 Compound Annual Growth Rate Northbridge 19.2% Crum & Forster (US GAAP) 18.9% OdysseyRe (US GAAP) 21.2% Three excellent companies: Underwriting culture Conservative reserving Total return investing 16
  • 17. Fairfax - Yesterday and Today 1985 2008 Net Premiums Written 12.2 4,332 Net Earnings (0.6) 1,474 Investment Portfolio 23.9 18,395 Common Shareholders' Equity 7.6 4,866 Per Share Growth 183x Book Value $ 1.52 $ 278.28 120x Share Price (C$) $ 3.25 $ 390.00 238x Investments $ 4.80 $ 1,140.85 102x Net Premiums Written $ 2.44 $ 247.74 17
  • 18. International Diversification India – ICICI Lombard General Insurance For the Years Ended March 31 2002-2008 2002 2008 In USD millions 2002 2008 Average Gross Premiums Written 6 894 - Combined Ratio 105.7% 105 7% 105.8% 105 8% Net Income (2) 26 Investment Portfolio 23 626 Total Shareholders' Equity 21 264 Customers (millions) 0.0 3.5 Employees 116 5,570 Offices 11 340 Cumulative Investment: $88MM ($30MM after March 2008) Ownership Interest: 26% 18
  • 19. International Diversification Singapore – First Capital Insurance For the Years Ended December 31 In USD millions 2002-2008 2002 2008 Average Gross Premiums Written 10 195 Combined Ratio 101.8% 65.9% 71.2% Net Income (0) 27 Investment Portfolio 33 255 Total Shareholders' Equity 32 130 Initial Investment: $32MM in 2001, no additional investment Ownership Interest: 100% 19
  • 20. International Diversification Hong Kong – Falcon Insurance For the Years Ended December 31 In USD millions 2002-2008 2002 2008 Average Gross Premiums Written 57 28 Combined Ratio 98.5% 158.9% 110.2% Net Income 2 (14) Investment Portfolio 59 88 Total Shareholders' Equity 20 39 Cumulative Investment: $40MM Ownership Interest: 100% 20
  • 21. International Diversification Jordan – Arab Orient Insurance For the Years Ended December 31 In USD millions 2002-2008 2002 2008 Average Gross Premiums Written 9 45 Combined Ratio 79.7% 79.3% 85.6% Net Income 1 3 Investment Portfolio 6 25 Total Shareholders' Equity 4 20 Initial Investment: $11MM in 2008 Ownership Interest: 22% 21
  • 22. International Diversification Dubai – Alliance Insurance For the Years Ended December 31 In USD millions 2002-2008 2002 2008 Average Gross Premiums Written 17 32 Combined Ratio 74.7% 68.4% 68.9% Net Income 5 12 Investment Portfolio 62 74 Total Shareholders' Equity 18 65 Initial Investment: $22MM in 2008 Ownership Interest: 20% 22
  • 23. International Diversification Poland – Polish Re For the Years Ended December 31 In USD millions 2002-2008 2002 2008 Average Gross Premiums Written 37 95 Combined Ratio 96.0% 106.1% 100.0% Net Income 1 (11) Investment Portfolio 52 103 Total Shareholders' Equity 27 39 Initial Investment: $57MM in 2009 Ownership Interest: 100% 23
  • 24. Financial Strength 2003 2004 2005 2006 2007 2008 Holdco Cash and Marketable Securities $410 $567 $559 $767 $972 $1,564 Year End Year End Year End 2003 2005 2008 Subsidiary Debt 784 933 910 Holdco Obligations 1,587 1,610 1,058 Total Debt 2,371 2,543 1,968 Holdco Cash and Marketable Securities 410 559 1,555 , Net Debt 1,961 1,984 413 Total Equity & Minority Interests 2,896 3,396 6,352 Net Debt / Net Total Capital 40.4% 36.9% 6.1% Total Debt / Total Capital 45.0% 42.8% 23.7% 24
  • 25. The Perfect Storm in the U.S. Economy Subsiding 1) Risk repriced 2) Deleveraging taking place 3) U.S. economy and U.S. stock markets have declined significantly Pessimism rampant 25
  • 26. U.S. Stock Valuations Back To Normal Stock Market Capitalization as a Percentage of Nominal GDP Monthly - 1924 to Present 180% 160% 140% 120% 100% 80% Average = 60.6% 60% 40% 20% 0% Source: Ned Davis Research Inc. 26
  • 27. 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 40,000 9% 8% 35,000 7% 30,000 6% ond Yield Nikkei 22 Index 25,000 5% 25 10-Year Bo 4% 20,000 3% 15,000 2% 10,000 1% 5,000 0% 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 Bond Yields Nikkei 225 27
  • 28. Stock Market Crash of 1929 Dow Jones Industrial Average vs. Long Term U.S. Treasury Yields 1925 to 1939 5% 400 350 eld ge dustrial Averag Long Term U.S Treasury Yie 4% 300 250 3% 200 00 S. Dow Jones Ind 150 2% 100 D L 50 1% 0 1925 1927 1929 1931 1933 1935 1937 1939 Long Term U.S. Treasury Yield DJIA Source: Bloomberg and Hoisington Investment Management 28
  • 29. Long Term U.S. Treasury Rate 1872 2008 1872-2008 14% Fall of Berlin Wall 12% Onset of Iron and Bamboo Curtains 10% 8% 6% Average = 4.24% 4% 2% Global Global market Restricted market market 0% 1872 1889 1906 1923 1940 1957 1974 1991 2008 Source: Hoisington Investment Management 29
  • 30. High Yield Spreads 1-10 Year High Yield Spreads 2,000 1,800 ries 1,600 , Spre (bps) over U.S. Treasur 1,400 1,200 r 1,000 800 600 ead 400 200 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Source: Merrill Lynch 30
  • 31. Investment Grade Spreads 1-10 Year Investment Grade Spreads 800 700 ies 600 Spre (bps) over U.S. Treasuri 500 400 r 300 ead 200 100 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Source: Merrill Lynch 31
  • 32. Fairfax s Fairfax’s CDS Portfolio Results of Fairfax's CDS Portfolio Since Inception Cumulative Cos Cumulative Gains on Sale and Cumulative e 3,000 20.0 ales Proceeds ($ millions) Notional Amount of CD Portfolio ($ billions) 18.0 2,500 16.0 a $ 14.0 2,000 12.0 DS G Market Valu Including Sa 1,500 10.0 8.0 1,000 6.0 ue st, A 4.0 500 2.0 0 0.0 00 C 31-Dec-04 31-Dec-05 31-Dec-06 31-Dec-07 31-Dec-08 Notional Amount of CDS Portfolio Market Value Realized Proceeds Cost
  • 33. U.S. Real Housing Price Index 1890 2008 1890-2008 220 200 32% decrease 180 160 140 1989 1894 1979 124.2 123.9 122.1 120 Average = 101.2 100 80 60 1890 1899 1908 1917 1926 1935 1944 1953 1962 1971 1980 1989 1998 2007 Source: Hoisington Investment Management and Robert Shiller, Yale University 33
  • 34. Fairfax Investment Portfolio Positioned For Income & Capital Gains 2007 2008 Cash and Short Term 21% 32% 50% 16% Government Bonds 1% 20% Municipal Bonds Corporate Bonds 4% 7% Total Fixed Income 55% 43% (1) 4.2% 6.9% Yield (2) 17% 22% Common Stocks Other Investments 7% 3% Total 100% 100% (3) Total Investment Portfolio $19.1B $20.0B (1) Pre-tax equivalent yield (2) Approximately 85% hedged (3) Includes holding company cash and marketable securities 34
  • 35. Capital Erosion Has Preceded Several Past Cycle Turns '69 '73 '74 '00 '01 '02 '08P 0% -10% 0% U.S. U S P&C Surplus GAAP S&P 500 -20% -30% Cumulative real premium growth 16% 31% 30% in th i three following f ll i years -40% 35 Sources: Swiss Re, Thomson Financial, A.M. Best, Towers Perrin, Swiss Re Economic Research & Consulting
  • 36. Well Positioned for a Turn in the Cycle 3,000 Northbridge (C$) Odyssey Re Crum & Forster 2,500 ums Written 2,000 1,500 1 500 Gross Premiu 1,000 G 500 Hard Market Soft Market 0 1999 2000 2001 2002 2003 2004 2005 36
  • 37. Fairfax’s Strengths Demonstrated Over 23 Years 1. Operations – Disciplined operating management focused on underwriting profitability and prudent reserving P&C Insurance Operations • Canada – leading commercial insurance operation • United States – large commercial operation across the country • Asia – Hong Kong, Singapore, Thailand and largest private operation in India • Middle East – Dubai and Jordan • Eastern Europe – Poland p P&C Reinsurance Operations • Worldwide – Top 5 broker reinsurer in the U.S., top p ,p 20 in the world 37
  • 38. Fairfax’s Strengths Demonstrated Over 23 Years 2. Investments – Long term, value-oriented philosophy Worldwide • Stocks • Bonds • Distressed debt • Wh Wherever “value” prevails “l” il Many large successful investments like Zenith, Russel Metals Hub etc Metals, Hub, etc. 38
  • 39. Ready for the Next Decade - Building on Fairfax’s Strengths Fairfax s 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 providing excellent long term returns Well positioned for the future 39
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