Download - Prem Watsa 2014 AGM Slides
-
Annual Meeting April 09, 2014
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! 5
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4 6 8
11
15 18 19 2
6 31 3
9
63
86
11
2
15
6
14
8
11
8 12
7
16
7
16
7
14
3 15
7
24
0
29
3
39
3
40
9
40
7
431
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9
1985 1989 1993 1997 2001 2005 2009 2013
Book Value
Cumulative Dividend
Fairfax 28 Years
6
Shareholders Book Value per Share plus Dividends $
1.5
2
402 28 Year Compound Annual Growth Rate
22%
339
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Financial Results
(1) Excludes dividends paid
7
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%)
-
8
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%)
Historic Performance vs Peer Group
Compound Growth in Book Value per Share (5 Years ending 2013) (1)
(1) Except for S&P 500 and TSX which are compound index return excluding dividends
-
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%
) (1
2%
)
(13
%)
(14
%)
(14
%)
(14
%)
(15
%)
(16
%)
(17
%)
(18
%)
(18
%)
(19
%)
(19
%)
(19
%)
(22
%)
(24
%)
(31
%)
(32
%)
(37
%)
(37
%)
(43
%)
(48
%)
(65
%)
(10
0%
)
SOURCE: Dowling & Partners, IBNR #12
Fairfax and AIG calculated using the same methodology as Dowling & Partners, based on company data (AIG excludes government financing) 9
2008 Change in Book Value per Share
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Historic Performance vs Peer Group
Compound Growth in Book Value per Share (28 Years: since Fairfaxs inception) (1)
10
(1) Except for S&P 500 and TSX which are compound index return excluding dividends
21.3%
17.0% 16.3%
14.6%
13.3% 13.1%
10.1% 9.0%
8.1%
5.7%
-
Source of Earnings in 2013
11
($ millions)
(1) Includes: Runoff underwriting income, Interest expense and corporate overhead & other
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) (962)
Hedging losses (1,982)
Pre-tax loss (1,001)
Net Loss (565)
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Equity and equity related investments Equity hedges Net equity Bonds CPI-linked Derivatives Other
1,324
29
Realized
Gains
(Losses) ($ millions)
(1,351)
(27) 66 -
(10)
Unrealized
Gains
(Losses) ($ millions)
121 (631)
(510) (995) (127)
39
(1,593)
Net
Gains
(Losses) ($ millions)
1,445 (1,982)
(537) (929) (127)
29
(1,564)
Net Gains on Investments in 2013
12
-
Equity and equity related investments Equity hedges Net equity Bonds CPI-linked Derivatives Other
2,767
2,835
Realized
Gains
(Losses) ($ millions)
(1,344)
1,423 1,622
- (209)
Unrealized
Gains
(Losses) ($ millions)
(91) (2,166)
(2,256) (468) (462) 118
(3,068)
Net
Gains
(Losses) ($ millions)
2,676 (3,510)
(834) 1,154 (462)
(91)
(233)
Net Gains on Investments 2010 2013
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Accident Year Combined Ratios
14
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%
2004-2013
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Average Annual
Reserve
Redundancies
Northbridge 10.3%
Crum & Forster 4.6%
OdysseyRe 11.3%
Fairfax Asia 7.9%
2003-2012
Accident Year Reserve Redundancies
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Net Premiums
Written/
Net Premiums Statutory Statutory
Written Surplus Surplus
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
Strong Operating Companies Capital - 2013
(1) IFRS total equity
16
($ millions) ($ millions)
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Well Positioned for a Turn in the Cycle
17 0
500
1,000
1,500
2,000
2,500
3,000
1999 2000 2001 2002 2003 2004 2005
Gro
ss P
rem
ium
s W
ritt
en
OdysseyRe
Northbridge (Cdn $)
Crum & Forster
Soft Market Hard Market
($ millions)
-
Importance of Float
10 year average cost of float: 0.7%
(2004 2013)
18
Operating Total
Companies (Including Runoff) Per Share
1985 $ 12.5 million $ 12.5 million $ 3
2013 $ 11.9 billion $ 15.6 billion $ 734
Year-End
-
Importance of Float
19
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
-
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 billion$ 10
Pre-Tax Realized and Unrealized Gains
20
-
($ millions)
Pre-Tax Income Runoff Operations
21
2007 188
2008 393
2009 31
2010 165
2011 351
2012 184
2013 (229)
Cumulative (2007-2013) 1,083
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Acquisitions in 2013
American Safety 100% ownership
Hartville 100% ownership
Thomas Cook/IKYA/Sterling
Prime/CARA/Keg
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Investment Performance
Hamblin Watsa Investment Performance
Notes: Bonds do not include returns from credit default swaps.
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
(1-10 year) bond index
8.4% 5.0% 5.7%
5 Years 10 Years 15 Years
As at December 31, 2013
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Fairfaxs Investment Portfolio 2008 vs 2013
Cash/Short-Term31%
Corporate Bonds
6%
Municipal Bonds
25%
Gov't Bonds
12%Common Stocks 22%
(~100% Hedged)
Other
Investments
4%
Cash/Short-Term27%
Corporate Bonds
4%
Common Stocks 16%
(~100% Hedged)
Other
Investments
6%
Government
Bonds 47%
September 30, 2008 (1)
$20.4 billion
(1) Includes holding company cash and marketable securities
December 31, 2013 (1)
$24.9 billion
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At December 31, 2012 n/a $ 378
First quarter $ 7.1 $ 373
Second quarter $ (8.6) $ 362
Third quarter $ (29.0) $ 335
Fourth quarter $ (1.0) $ 339
2013
Earnings
(Loss) per
Share
Book
Value per
Share
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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2012 2013
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%
Total Debt/Total Capital 25.5% 26.1%
($ millions)
-
Investments Not Carried at Market Value
27
Carrying
Value
Fair
Value
Unrealized
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
-
28
Emerging Markets and Asian Footprint
Gross
Premiums
Written Ownership
Fairfax's Share of
Gross Premiums
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
Alltrust Insurance 900 15% 135
Gulf Insurance 533 41% 219
Falcon Insurance (Thailand) 48 41% 20
Other Reinsurance 334 25% 84
3,055 780
Total 3,836 1,561
-
100%
120%
140%
160%
180%
200%
220%
240%
260%
280%
300%
320%
340%
360%
380%
400%
100%
120%
140%
160%
180%
200%
220%
240%
260%
280%
300%
320%
340%
360%
380%
400%
1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
Panic Year 2008
Panic Year 1929
Panic Year 1873
1870-2013 avg. = 180.2%
Current total debt = $58.9 trillion
Debt/GDP of 180.2% would require total debt of $30.8 trillion
30Source: Hoisington Investment Management
U.S. Private and Public Debt as % of GDP
29
-
30
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
-
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
Source: Hoisington Investment Management 32
1918 = 1.95
Avg. 1900 to
present = 1.71
1946 = 1.18
1997 = 2.2
annual
Avg. 1953 to 1983 = 1.74
1.57
31
Velocity of Money 1900-2013
Equation of Exchange: GDP (nominal) = M*V
-
0%
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
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
13.7 years
3. Average level of interest rates 20 years after panic 2.5%
4. Change from low level of interest rates to 20th year 0.5%
Long-Term Government Bond Yields
Historic Panic Years
U.S. 2008
U.S. 1929
Japan 1989
32
-
0%
2%
4%
6%
8%
10%
12%
14%
0%
2%
4%
6%
8%
10%
12%
14%
Source: Hoisington Investment Management
Interest rate avg. = 2.9%
Inflation rate avg. = 1.0%
avg. = 4.3%
Onset of Iron and
Bamboo Curtains
Fall of Berlin Wall
Interest rate avg. = 6%
Inflation rate avg. = 3.9%
Global market Restricted market
Global
market
1871 1891 1911 1931 1951 1971 1991 2011
3433
Long Term Treasury Rate 1871-2013
-
05
10
15
20
25
30
35
40
45
50
0
5
10
15
20
25
30
35
40
45
50
1881 1893 1905 1917 1929 1941 1953 1965 1977 1989 2001 2013
Source: Hoisington Investment Management
Average
Dec. 1999
42
Average at end of
recessions = 13.1
Range = 5.3 to 19.3
Avg. = 16.4
35
Jan. 1966
24
Sept. 1929
32
June 1901
25
34
Shillers Price-Earnings Ratio 1881-2013
-
S&P 500 Index and Profit Margins
0
1
2
3
4
5
6
7
8
9
10
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
Jan 1994 Jan 1998 Jan 2002 Jan 2006 Jan 2010 Jan 2014
Profit Margin Index
Source: Bloomberg35
-
An
nu
al
Cu
mu
lati
ve
37Source: Organization for Economic Cooperation & Development
-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
2013
Annual Deflation Annual Inflation Cumulative
*
* Estimate36
Deflation in Japan
-
7-10 Year US High Yield Debt
(Yield To Maturity)
0
5
10
15
20
25
Source: Bloomberg
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
37
-
Source: Bloomberg 38
High Tech Speculation
Market Cap. P/E Ratio Price to Sales
(US$ Billions)
Social MediaTwitter 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/WebGroupon 6 (loss) 2x
Service Now 10 (loss) 22x
Salesforce.com 38 (loss) 9x
Netsuite 9 (loss) 21x
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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, the existing housing stock has been replicated and is empty
Home ownership rates in China are estimated to be over 100% versus 65% in the United States
Since 2009 the Chinese banks have grown by the equivalent of the entire United States banking system
The shadow banking system in China is estimated by BoA to be $4.7 trillion or 51% of Chinese GDP
Prior to the credit crisis, the U.S. had $4.5 trillion in asset-backed securities (31% of U.S. GDP)
A combination of explosive growth and high interest rates has resulted in a massive carry trade where speculators borrow at low rates across
the world and invest in China when the capital flows reverse, watch out!
39
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CPI-Linked Derivative Contracts
December 31, 2013
40
Notional Weighted
Amount Average Dec 31, 2013
Underlying CPI Index ($ 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
-
41
Fairfax Historic Total Return on
Investment Portfolio
-10%
0%
10%
20%
1986 1989 1992 1995 1998 2001 2004 2007 2010 2013
Total Return on
Portfolio
Average Return on
Portfolio 8.9%
2013
-
Peer 1
Peer 2
Peer 3
Peer 4
Peer 5
Peer 6
Peer 7
Peer 8
Peer 9
Peer 10
Average
Fairfax
4.2%
7.4%
4.2%
4.1%
4.0%
3.8%
3.6%
4.7%
4.6%
4.5%
4.4%
4.3%
Superior Long Term Investment
Track Record
Source: SNL Financial LC; Returns calculated by Fairfax
Return on Average Investments 2004-2013
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Ready for the Next Decade -
Building on Fairfaxs 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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