annual meeting · annual meeting april 11, 2013 note: all financial disclosure in this presentation...
TRANSCRIPT
Annual Meeting April 11, 2013
Note: All financial disclosure in this presentation is, unless otherwise noted, in US$
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 risks, 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 earnings if our loss reserves are insufficient; underwriting losses on the risks we insure that are higher or lower than expected; the occurrence of catastrophic events with a frequency or severity exceeding our estimates; changes in market variables, including interest rates, foreign exchange rates, equity prices and credit spreads, which could negatively affect our investment portfolio; the cycles of the insurance market and general economic conditions, which can substantially influence our and our competitors' premium rates and capacity to write new business; insufficient reserves for asbestos, environmental and other latent claims; exposure to credit risk in the event our reinsurers fail to make payments to us under our reinsurance arrangements; exposure to credit risk in the event our insureds, insurance producers or reinsurance intermediaries fail to remit premiums that are owed to us or failure by our insureds to reimburse us for deductibles that are paid by us on their behalf; risks associated with implementing our business strategies; the timing of claims payments being sooner or the receipt of reinsurance recoverables being later than anticipated by us; the inability of our subsidiaries to maintain financial or claims paying ability ratings; risks associated with our use of derivative instruments; the failure of our hedging methods to achieve their desired risk management objective; a decrease in the level of demand for insurance or reinsurance products, or increased competition in the insurance industry; the failure of any of the loss limitation methods we employ; the impact of emerging claim and coverage issues; our inability to access cash of our subsidiaries; our inability to obtain required levels of capital on favourable terms, if at all; loss of key employees; our inability to obtain reinsurance coverage in sufficient amounts, at reasonable prices or on terms that adequately protect us; the passage of legislation subjecting our businesses to additional supervision or regulation, including additional tax regulation, in the United States, Canada or other jurisdictions in which we operate; risks associated with government investigations of, and litigation and negative publicity related to, insurance industry practice or any other conduct; risks associated with political and other developments in foreign jurisdictions in which we operate; risks associated with legal or regulatory proceedings; failures or security breaches of our computer and data processing systems; the influence exercisable by our significant shareholder; adverse fluctuations in foreign currency exchange rates; our dependence on independent brokers over whom we exercise little control; an impairment in the carrying value of our goodwill and indefinite-lived intangible assets; our failure to realize deferred income tax assets; and assessments and shared market mechanisms which may adversely affect our U.S. insurance subsidiaries. Additional risks and uncertainties are described in our most recently issued Annual Report which is available at www.fairfax.ca and in our Supplemental and Base Shelf Prospectus (under "Risk Factors") filed with the securities regulatory authorities in Canada, which is available on SEDAR at www.sedar.com. Fairfax disclaims any intention or obligation to update or revise any forward-looking statements.
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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 growth in book value per share and 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
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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 between Fairfax and its subsidiaries is an essential requirement at Fairfax
Share ownership and large incentives are encouraged across the Group
Fairfax head office will always be a very small holding company and not an operating company
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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 hard working but not at the expense of our families We always look at opportunities but emphasize downside
protection and look for ways to minimize loss of capital 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!
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Fairfax – 27 Years
6
4 6 8 11
15
18
19 26
31 39
63 86
112
156
148
118 127
167
167
143 15
7
240
293
393
409
407
1985 1988 1991 1994 1997 2000 2003 2006 2009 2012
Cumulative Dividend
Book Value
Shareholders – Book Value per Share plus Dividends $
1.52
431
27 Year Compound Annual Growth Rate 23.3%
378
Financial Results
(1) Excludes dividends paid
7
Historic Performance vs Peer Group
Compound Growth in Book Value per Share (5 Years ending 2012) (1)
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Historic Performance vs Peer Group Compound Growth in Book Value per Share (27 Years: since Fairfax’s inception) (1)
(1) Except for S&P 500 and TSX (compound index return excluding dividends)
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Source of Earnings in 2012
10
($ millions)
Common Stock Hedges Common Stock after Hedges Bonds CPI-linked Derivatives Other
470
1,065
Realized Gains
(losses) ($ millions)
6 476 566 - 23
Unrealized Gains
(losses) ($ millions)
649 (1,012)
(363) 162
(129) (92)
(422)
Net Gains
(losses) ($ millions)
1,119 (1,006)
113 728
(129) (69) 643
Investment Returns in 2012
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Accident Year Combined Ratios
12
Accident Year Reserve Redundancies
13
Strong Operating Companies’ Capital - 2012
(1) IFRS total equity
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($ millions) ($ millions)
Well Positioned for a Turn in the Cycle
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($ millions)
Growth in Net Premiums Written in 2012
(1) (6.1%) in Canadian dollars prior to the transfer of the US business to Hudson Insurance in 2012 and the effect of the unearned portfolio transfer with Group Re in 2011
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Importance of Float
10 year average cost of float: 1.1% (2003 – 2012)
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Importance of Float
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Pre-Tax Realized and Unrealized Gains
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($ millions)
Pre-Tax Income – Runoff Operations
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Acquisitions in 2012
Prime Restaurants – 82% ownership 149 restaurants (East Side Mario’s, Casey’s and Bier Markt) System wide sales of Cdn $335 million and revenue of Cdn $59 million Purchased for Cdn $58 million (approximately 10x free cash flow)
Brit Insurance – 100% ownership Purchased for $335 million (10% discount to its book value) Added $1.3 billion in invested assets
Thomas Cook India – 77% ownership Premier leisure travel group and foreign exchange company in India Operated in India for the last 132 years 289 travel offices and 154 foreign exchange bureaus Purchased for $150 million 21
Investment Performance
Hamblin Watsa Investment Performance
Notes: Bonds do not include returns from credit default swaps.
Common stocks (with equity hedging) 5.5% 14.5% 13.5% S&P 500 1.7% 7.1% 4.5%
Taxable bonds 14.0% 12.4% 10.8% Merrill Lynch U.S.corporate (1-10 year) bond index
6.9% 5.7% 6.4%
5 Years 10 Years 15 Years As at December 31, 2012
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Fairfax Investment Portfolio Positioned Defensively
(1) Pre-tax equivalent yield (2) Common stock hedged approximately 100%
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Fairfax Focused on the Long Term Earnings and book value volatile on a quarterly basis
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Financial Strength
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Real GDP 1790-2012
Source: Hoisington Investment Management
4
14
7
13
5
8
2
18
3
11 12
10
20
15
22
1
9 6
16 19
17
21
0%
1%
2%
3%
4%
5%
6%
0%
1%
2%
3%
4%
5%
6%
1790 1810 1830 1850 1870 1890 1910 1930 1950 1970 1990 1800 1820 1840 1860 1880 1900 1920 1940 1960 1980 2000
220 year average = 3.8%
Q4 2012 .1%
Q4 2012 Y-o-y = 1.6%
decade average growth
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U.S. Private and Public Debt as % of GDP
27
100%
200%
300%
400%
500%
600%
700%
1979 1983 1987 1991 1995 1999 2003 2007 2011 100%
200%
300%
400%
500%
600%
700%
Canada
Australia
U.S.
Eurozone
U.K.
Japan
Source: Hoisington Investment Management
annual
Total Public and Private Debt as a % of GDP – Major Countries
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Source: Hoisington Investment Management
0 200 400 600 800 1000 1200 1400 1600 1800 2000 2200 2400 2600 2800 3000
3
4
5
6
7
8
9
10
'08 '09 '10 '11 '12 '13
Monetary Base: right scale thick line
M2 money multiplier: left scale thin line
GDP=M2*V M2=Monetary Base*m
3.6
9.3
monthly
M2 Money Multiplier and the Monetary Base
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Source: Hoisington Investment Management
1.00
1.25
1.50
1.75
2.00
2.25
1.00
1.25
1.50
1.75
2.00
2.25
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
1918 = 1.95
Avg. 1900 to present = 1.68
1946 = 1.15
1997 = 2.12
annual
Avg. 1953 to 1983 = 1.69 1.57
Velocity of Money 1900-2012 Equation of Exchange: GDP (nominal) = M*V
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1%
2%
3%
4%
5%
6%
7%
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21
U.S. 2008
U.S. 1929
U.S. panic year 1929 = year 1 Japan panic year 1989 = year 1
Japan 1989
Source: Hoisington Investment Management
Debt Induced Panic Years and 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 of interest rates
13.2 years
3. Average level of interest rates 20 years after panic 2.2%
4. Change from low level of interest rates to 20th year 0.5%
Long-Term Government Bond Yields Historic Panic Years
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Source: Hoisington Investment Management
0%
2%
4%
6%
8%
10%
12%
14%
0%
2%
4%
6%
8%
10%
12%
14%
Secular Forces: Long-Term Treasury Rate
annual average
Interest rate avg. = 2.9% Inflation rate avg. = .9%
avg. = 4.3%
Onset of Iron and Bamboo Curtains
Fall of Berlin Wall
Interest rate avg. = 6% Inflation rate avg. = 4%
Global market Restricted market Global market
1871 1891 1911 1931 1951 1971 1991 2011
Important Investment Decision Parameters
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-15%
-10%
-5%
0%
5%
10%
-3%
-2%
-1%
0%
1%
2%
3%
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Annual Inflation Annual Deflation Cumulative (right axis)
Deflation in Japan
Ann
ual
Cum
ulat
ive
33 Source: Organization for Economic Cooperation & Development
7-10 Year US High Yield Debt (Yield To Maturity)
Source: Bloomberg
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
0%
5%
10%
15%
20%
25%
34
Recent Issuers of 10-year US$ Debt
Bolivia Georgia Honduras Mongolia Nigeria Paraguay Tanzania Zambia
35
CPI-Linked Derivative Contracts December 31, 2012
36
-10%
0%
10%
20%
1986 1991 1996 2001 2006 2011
Fairfax Historic Total Return on Investment Portfolio
Total Return on Portfolio Average Total Return on Portfolio 9.4%
2012
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Superior Long Term Investment Track Record
Source: SNL Financial LC; Returns calculated by Fairfax
* 2004-2012
Return on Average Investments 2003-2012
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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 providing excellent long term returns
Well positioned for the future Fair and friendly Fairfax culture
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