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2009 AGM Slide Presentation
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Transcript of 2009 AGM Slide Presentation
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Annual MeetinApril 15, 2009
1Note: All financial disclosure in this presentation is, unlessotherwise noted, in US$ and, except per share data, in $ millions
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Objectives
We expect to compound our book value per share over thelong term by 15% annually by running Fairfax and itssubsidiaries for the lon term benefit of customers
employees and shareholders at the expense of short term
profits if necessaryur ocus s ong erm grow n oo va ue per s are an
not quarterly earnings. We plan to grow through internalmeans as well as through friendly acquisitions
We always want to be soundly financed
We provide complete disclosure annually to our
3
s are o ers
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Structure
Our companies are decentralized and run by the presidentsexcept for performance evaluation, succession planning,ac uisitions and financin which are done b or withFairfax. Cooperation among companies is encouraged to
the benefit of Fairfax in total omp e e an open commun ca on e ween a r ax an s
subsidiaries is an essential requirement at Fairfax
Share ownershi and lar e incentives are encoura edacross the Group
Fairfax head office will always be a very small holding
4
company an no an opera ng company
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Values
Honesty and integrity are essential in all of our relationshipsand will never be compromised
We are results-oriented not olitical
We are team players no "egos. A confrontational style is
not appropriate. We value loyalty to Fairfax and our
We are hard working but not at the expense of our families
We always look at opportunities but emphasize downside
protect on an oo or ways to m n m ze oss o cap ta We are entrepreneurial. We encourage calculated risk-taking.
It is all right to fail but we should learn from our mistakes
5
We will never bet the company on any project or acquisition
We believe in having fun at work!
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2006 2007 2008
. . .
Growth in Book Value per Share 53% 21%
Investments per Share 1,076$ 1,141$
Earnings per Share (diluted) 58.38$ 79.53$
6
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2008 Change in Book Value per
Share
23
11%
10%
8%
7%
6%
5%
5%
3%
3%
3%
3%%
(1%
)
(3%
)
(3%
)
(3%
)
(4%
)
(5%
)
(
5%
)
(6%
)
(7
%)
(7
%)
(8%
)
(8%
)
(9%
)
(9%
)
2%
)
3%
)
%)
%)
%) ) ) ) )
( (1(1(1(1(15
(16
(17%
(18%
(18%
)
(19%
)
(19%
)
(19%
)
(22%
)
(24%
)
(31%
)
(32%
)
7%
)
7%
)
) ( (
(43%
(48%
)
%)
7
(65
(
100%
)
SOURCE: Dowling & Partners, IBNR #12Fairfax and AIG calculated using the same methodology as Dowling & Partners, based on company data (AIG excludes government financing)
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U.S. P&C Insurance Companies
-5-Year Compound Annual Growth Rate
2003-2008
BVPS Share Price
1 Fairfax(1) 11.2% 11.5%
2 Chubb 11.0% 8.4%
rave ers . .
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 Ca ital 19.8% 45.6%
8
15 AIG (49.5%) (52.7%)
(1) BVPS in U.S. dollars. Share price in Canadian dollars
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Compound Annual Growth Rate to 2008
Book Value Per Share
5 Years 10 Years 15 Years 23 Years
Rankin 1 4 1 1Growth Rate 11.2% 9.5% 17.0% 25.4%
5 Years 10 Years 15 Years 23 Years
Ranking 1 12 2 1
Number of
. . . .
9For Fairfax: BVPS in U.S. dollars. Share price in Canadian dollars
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Combined Net Return onRatio Earnings Avg. Equity
ort r ge 107.3% 46 3.6%
Crum & Forster (US GAAP) 114.6% 333 27.1%OdysseyRe (US GAAP) 101.2% 549 20.5%
10
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Crum &
Northbridge Forster OdysseyRe Consolidated
As Reported
Underwriting Loss (78.7) (177.2) (73.5) (457.7)
om ne a o . . . .
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
- - - .
Adjusted Underwriting Profit (Loss) (0.9) 6.8 109.2 106.0
Adjusted Combined Ratio 100.1% 99.3% 94.7% 97.6%
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Importance of Float
Unlike money management business (royalty on fundsmana ed results ains 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 toshareholders (with 100% or better combined ratios)
Benefit / Avg. Long Term
Underwriting Average (Cost) Canada Treasury
Profit / (Loss) Float of Float Bond Yield
1986 2.5 21.6 11.6% 9.6%
1996 (37) 1,089 (3.4%) 7.6%
2007 281 8,618 3.3% 4.3%
12
2008 (458) 8,918 (5.1%) 4.1%
Weighted Avg. Financing Differential Since Inception 2.3%
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Importance of Float
Unlike money management business (royalty on funds,
Manage money with a long term perspective Underwriting profit (loss) = benefit (cost) of float
Benefit / Av . Lon Term
Float belongs to policy holders but income accrues toshareholders (with 100% or better combined ratios)
Underwriting Average (Cost) Canada Treasury Investment
Profit / (Loss) Float of Float Bond Yield Gains
1986 2.5 21.6 11.6% 9.6% 1
1996 (37) 1,089 (3.4%) 7.6% 91
2007 281 8,618 3.3% 4.3% 976
2008 (458) 8,918 (5.1%) 4.1% 1,559
Weighted Avg. Financing Differential Since Inception 2.3% $5.3B (cumulative)
13
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Hamblin Watsa Investment Performance
5 Years to 10 Years to 15 Years to
Dec. 31 '08 Dec. 31 '08 Dec. 31 '08
Common Stocks with Equity Hedge 12.2% 19.1% 16.1%
Common Stocks 1.5% 13.3% 12.3%. . .
Bonds 9.6% 9.3% 9.4%
Merrill Lynch U.S. Corporate Index 1.6% 4.4% 5.4%
14
Source: Hamblin Watsa Investment Counsel - Annualized Rate of Return (%).
Notes: Bonds do not include returns from credit default swaps.
15 year investment performance includes portfolios managed by Hamblin Watsa which were not owned by Fairfax.
Past performance is no guarantee of future results.
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Other-Than-Temporary Impairment
- -
Crum &ForsterNorthbridge ConsolidatedOdysseyRe
OTTI 274 197 359 996
MTM 103 87 141 504
Total 377 284 500 1,500
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Subsidiary Growth in Book
-
Compound AnnualGrowth Rate
Northbridge 19.2%
Crum & Forster (US GAAP) 18.9%
OdysseyRe (US GAAP) 21.2%
Three excellent companies: Underwriting culture
16
Total return investing
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-
1985 2008
Net Premiums Written 12.2 4,332Net Earnings (0.6) 1,474
Investment Portfolio 23.9 18,395
Common Shareholders' Equity 7.6 4,866
Per Share Growth
Book Value 1.52$ 278.28$ 183x
Share Price (C$) 3.25$ 390.00$ 120x
Investments 4.80$ 1,140.85$ 238x
17
Net Premiums Written 2.44$ 247.74$ 102x
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International Diversification
For the Years Ended March 31
-
2002 2008 AverageGross Premiums Written 6 894
- . .
Net Income (2) 26
Investment Portfolio 23 626
Total Shareholders' Equity 21 264
Customers (millions) 0.0 3.5
Employees 116 5,570Offices 11 340
18
Ownership Interest: 26%
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International Diversification
In USD millions 2002-20082002 2008 Average
ross rem ums r en
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
19
Ownership Interest: 100%
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International Diversification
In USD millions 2002-20082002 2008 Average
Combined Ratio 98.5% 158.9% 110.2%
Net Income 2 (14)
Investment Portfolio 59 88
Total Shareholders' Equity 20 39
Cumulative Investment: $40MM
20
Ownership Interest: 100%
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International Diversification
In USD millions 2002-20082002 2008 Average
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
21
Ownership Interest: 22%
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International Diversification
In USD millions 2002-20082002 2008 Average
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
22
Ownership Interest: 20%
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International Diversification
In USD millions 2002-20082002 2008 Average
ross rem ums r en
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
23
Ownership Interest: 100%
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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 2008Subsidiary Debt 784 933 910Holdco 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
24
Net Debt / Net Total Capital 40.4% 36.9% 6.1%
Total Debt / Total Capital 45.0% 42.8% 23.7%
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The Perfect Storm in the
2) Deleveraging taking place
3) U.S. economy and U.S. stock markets
Pessimism rampant
25
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U.S. Stock Valuations Back
Stock Market Capitalization as a Percentage of Nominal GDPMonthly - 1924 to Present
140%
160%
180%
100%
120%
40%
60%
80%
Average = 60.6%
0%
20%
26Source: Ned Davis Research Inc.
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Can the Japanese Experience Be
Nikkei 225 Index vs. Japanese 10-Year Gov't Bond YieldsMonthly - 1986 to Present
35,000
40,000
7%
8%
9%
25,000
30,000
5%
6%
5Index
nd
Yield
15,000
20,000
2%
3%
4%
Nikkei2
10-YearB
5,000
10,000
0%
1%
27
Bond Yields Nikkei 225
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Dow Jones Industrial Average vs.Long Term U.S. Treasury Yields
350
4005%
geld
200
250
300
3%
4%
us
trialAvera
.TreasuryYi
100
150
2%ow
JonesIn
ongTermU.
0
50
1%
1925 1927 1929 1931 1933 1935 1937 1939
28Source: Bloomberg and Hoisington Investment Management
Long Term U.S. Treasury Yield DJIA
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Long Term U.S. Treasury Rate
-
14%
12%Onset of Iron andBamboo Curtains
Fall of Berlin Wall
8%
4%
6%
Average = 4.24%
2%
GlobalmarketGlobal market Restricted market
29Source: Hoisington Investment Management
1872 1889 1906 1923 1940 1957 1974 1991 2008
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1-10 Year High Yield Spreads
1 600
1,800
2,000
ies
1,200
1,400
U.S.
Treasur
600
800
1,000
ad(bps)ove
200
400Sp
r
30Source: Merrill Lynch
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
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1-10 Year Investment Grade Spreads
700
ies
500
U.S.
Treasur
300
ad(bps)ove
100Sp
r
31Source: Merrill Lynch
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
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Results of Fairfax's CDS Portfolio Since Inception
16.0
18.0
20.0
2,500
3,000
billions
)
andCum
ulativ
($million
s)
12.0
14.02,000
SPortfolio(
ainsonSale
les
Proceeds
6.0
8.0
10.0
1,000
1,500
mountofC
t,Cumulative
eIncluding
S
2.0
4.0500
Notional
umulativeC
os
MarketV
al
.
31-Dec-04 31-Dec-05 31-Dec-06 31-Dec-07 31-Dec-08
C
Notional Amount of CDS Portfolio Market Value Realized Proceeds Cost
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U.S. Real Housing Price Index
-
220
180
200
32% decrease
140
160
100
120
Average = 101.2
124.21979122.1
1894123.9
60
80
33Source: Hoisington Investment Management and Robert Shiller, Yale University
1890 1899 1908 1917 1926 1935 1944 1953 1962 1971 1980 1989 1998 2007
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Fairfax Investment Portfolio
2007 2008
Government Bonds 50% 16%
Corporate Bonds 4% 7%Total Fixed Income 55% 43%
Yield 4.2% 6.9% (1)
Common Stocks 17%(2) 22%
Other Investments 7% 3%
Total 100% 100%
Total Investment Portfolio(3)
$19.1B $20.0B
34
(1) Pre-tax equivalent yield
(2) Approximately 85% hedged(3) Includes holding company cash and marketable securities
C it l E i H P d d
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Capital Erosion Has Preceded
0%
'69 '73 '74 '00 '01 '02 '08P
-10%U.S. P&CSurplus
S&P 500
GAAP
-20%
-30%
Cumulative realpremium growth 16% 30%31%
Sources: Swiss Re, Thomson Financial, A.M. Best, Towers Perrin, Swiss Re Economic Research & Consulting 35-40%
n ree o ow ngyears
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3,000
2,500
Odyssey Re
Crum & Forster
2,000
m
sWritten
1,000
,
rossPremi
500
Soft Market Hard Market
36
0
1999 2000 2001 2002 2003 2004 2005
F i f S h
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Fairfaxs Strengths
1. Operations Disciplined operating management
reserving P&C Insurance Operations
United States large commercial operation across
the country
Asia Hon Kon Sin a ore Thailand and lar estprivate operation in India
Middle East Dubai and Jordan Eastern Euro e Poland
P&C Reinsurance Operations Worldwide To 5 broker reinsurer in the U.S. to
37
20 in the world
F i f St th
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Fairfaxs Strengths
2. InvestmentsLong term, value-oriented philosophy
Worldwide
Stocks
Bonds
Distressed debt
erever va ue preva s
Many large successful investments like Zenith,, , .
38
R d f th N t D d
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Ready for the Next Decade -
Our guiding principles have remained intact
Excellent long term performance
Demonstrated strengths
Strong operating subsidiaries focused onunderwriting profitability and prudent reserving
excellent long term returns
Well ositioned for the future
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