Professional Documents
Culture Documents
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 forwardlooking 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.
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!
Fairfax 28 Years
Shareholders Book Value per Share plus Dividends $
28 Year Compound Annual Growth Rate 22%
431 409 240 293 393 407 157
148
1.52
11
1985
1989
15
18
19
1993
26
31
39
63
1997
86
112
2001
118
127
2005
143
2009
2013
339
339
6
402
Financial Results
Book Value per Share (1) 2006 2007 2008 2009 2010 2011 2012 2013 $ 150 $ 230 $ 278 $ 369 $ 376 $ 365 $ 378 $ 339
% Change
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
(65%) (100%)
9
17.0%
9.0%
8.1% 5.7%
10
(1) Except for S&P 500 and TSX which are compound index return excluding dividends
11
(1) Includes: Runoff underwriting income, Interest expense and corporate overhead & other
Equity and equity related investments Equity hedges Net equity Bonds CPI-linked Derivatives Other
(10) 29
Equity and equity related investments Equity hedges Net equity Bonds CPI-linked Derivatives Other
(209) 2,835
15
Statutory Surplus
($ millions)
Net Premiums Written/ Statutory Surplus 0.9x 1.1x 1.4x 0.6x 0.4x
(1) (1)
16
(1) IFRS total equity
2,500
2,000
1,500
1,000
500
Soft Market
0
1999 2000 2001 2002
Hard Market
2003 2004 2005
17
Importance of Float
Year-End
Operating Companies 1985 2013 $ 12.5 million $ 11.9 billion Total (Including Runoff) $ 12.5 million $ 15.6 billion Per Share $ 3 $ 734
Importance of Float
Year-End 2013 ($ millions) Total Float Common Shareholders' Equity Net Liabilities Total Investment Portfolio 15,551 7,187 2,124 24,862 Per Share $ 734 $ 339 $ 100 $ 1,173
24
$5
19
Acquisitions in 2013
American Safety 100% ownership Hartville 100% ownership
Investment Performance
Hamblin Watsa Investment Performance
As at December 31, 2013 5 Years 10 Years 15 Years Common stocks (with equity hedging) S&P 500 Taxable bonds Merrill Lynch U.S.corporate (1-10 year) bond index 3.2% 17.9% 11.2% 8.4% 7.6% 7.4% 10.3% 5.0% 13.5% 4.7% 9.9% 5.7%
Notes:
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Gov't Bonds Common Stocks 22% 12% (~100% Hedged) Cash/ShortTerm 31%
Corporate Bonds 6%
Other Investments 4%
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Financial Strength
2012 2013
($ millions) Holding Company Obligations Subsidiary Debt Total Debt Holding Company Cash and Marketable Securities Net Debt 2,378 671 3,049 1,128 1,921 2,491 504 2,995 1,242 1,753
Total Equity & Non-controlling Interests Net Debt/Net Total Capital Total Debt/Total Capital
Carrying Value
($ millions)
Fair Value
($ millions) 1,815 253 131
Unrealized Gain
($ millions) 382 91 61 109 643
Investments in Associates Thomas Cook India Ridley Eurobank Properties (Rights Offering) Total
1,433 162 70
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First Capital Fairfax Brasil Polish Re Pacific Insurance Falcon Insurance (Hong Kong)
ICICI Lombard Alltrust Insurance Gulf Insurance Falcon Insurance (Thailand) Other Reinsurance Total
400%
Current total debt = $58.9 trillion Debt/GDP of 180.2% would require total debt of $30.8 trillion
380%
Panic Year 2008
360% 340% 320% 300% 280% 260% 240% 220% 200% 180% 160% 140% 120%
100% 100% 1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
Source: Hoisington Investment Management
29 30
annual
600%
Japan
600%
U.K.
500%
Eurozone
500%
400%
U.S.
400%
300%
Australia Canada
300%
200%
200%
100% 1979
100%
1983
1987
1991
1995
1999
2003
2007
2011
30
2.25
2.00
1918 = 1.95
2.00
Avg. 1900 to present = 1.71
1.75
1.75
Avg. 1953 to 1983 = 1.74
1.50
1.57
1.50
1.25
1946 = 1.18
1.25
1.00 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
Source: Hoisington Investment Management
1.00
31 32
6%
5% 4% 3% 2% 1% 0% 1 2 3 4 5 6 7 8 9
2.
U.S. 2008
3. 4.
13.7 years
2.5% 0.5%
U.S. 1929
10 11 12 13 14 15 16 17 18 19 20 21
32
14%
12%
Onset of Iron and Bamboo Curtains
12%
10%
Interest rate avg. = 6% Inflation rate avg. = 3.9% Interest rate avg. = 2.9% Inflation rate avg. = 1.0%
10% 8% 6%
avg. = 4.3%
8% 6% 4% 2%
4% 2% 0% 1871 1891
Global market
Restricted market
Global market
1911
50 45 40 35
30 25
20
Average June 1901 25 Jan. 1966 24
30 25
20
Avg. = 16.4
15 10 5 0
1965
1977
1989
2001
2013
34 35
8
7 6
1,200
5 1,000
4
800 600 400 200 Jan 1994
Source: Bloomberg
Jan 2006
Index
Jan 2010
0 Jan 2014
35
Deflation in Japan
3% 10%
2%
5%
1%
-2%
-3%
2002
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Annual Deflation
* Estimate Source: Organization for Economic Cooperation & Development
Annual Inflation
Cumulative
36 37
2013
-15%
Cumulative
0%
Annual
20
15
10
0
2003
Source: Bloomberg
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
37
P/E Ratio
Price to Sales
Social Media
Twitter Netflix Facebook LinkedIn Yelp Yandex Tencent Holdings 39 27 174 24 7 12 150 (loss) 186x 116x 887x (loss) 33x 59x 38x 6x 21x 15x 27x 11x 16x
Other Tech/Web
Groupon Service Now Salesforce.com Netsuite 6 10 38 9 (loss) (loss) (loss) (loss) 2x 22x 9x 21x
Source: Bloomberg
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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!
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20%
10%
0% 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013
-10%
Peer 1 Peer 2 Peer 3 Peer 4 Peer 5 Peer 6 Peer 7 Peer 8 Peer 9 Peer 10
4.7% 4.6% 4.5% 4.4% 4.3% 4.2% 4.1% 4.0% 3.8% 3.6%
Average Fairfax
Source: SNL Financial LC; Returns calculated by Fairfax
4.2% 7.4%
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