Fairfax Financial Annual Report 2003

FY2003 Annual Report · Fairfax Financial
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2003 Annual Report

Contents

Five Year Financial Highlights**********************
Corporate Proﬁle **********************************
Chairman’s Letter to Shareholders******************
Management’s Responsibility for the Financial

Statements**************************************
Auditors’ Report to the Shareholders ***************
Comment by Auditors for U.S. Readers *************
Valuation Actuary’s Report ************************
Fairfax Consolidated Financial Statements **********
Notes to Consolidated Financial Statements*********
Management’s Discussion and Analysis of Financial

1

2

5

20

21

21

21

22

27

Condition and Results of Operations *************

49
Supplementary Financial Information ************** 119

Fairfax Insurance and Reinsurance Companies –

Combined Financial Statements **************** 120

Fairfax with Equity Accounting of Lindsey

Morden – Consolidated Financial Statements *** 122
Fairfax – Unconsolidated Financial Statements **** 124
Appendix A – Fairfax Guiding Principles ************ 126
Consolidated Financial Summary******************* 127
Corporate Information **************************** 128

2003 Annual Report

Five Year Financial Highlights

(in US$ millions except share and per share data or as otherwise indicated)
1999(1)
2001(1)

2000(1)

2003(1)

2002(1)

Revenue ***************
Net earnings (loss) *****
Total assets ************
Common shareholders’

equity ***************

Common shares

outstanding – year-
end (millions) ********

Return on average

equity ***************

Per share

Diluted net earnings

(loss) **************

Common

5,713.9

271.1

5,067.4

263.0

3,962.0

(223.8)

4,170.4

3,894.8

92.6

83.6

25,018.3

22,224.5

22,200.5

21,193.9

22,034.8

2,680.0

2,111.4

1,894.8

2,113.9

2,148.2

13.9

14.1

14.4

13.1

13.4

10.9%

13.0%

(12.0%)

3.9%

4.6%

18.23

18.20

(18.13)

6.34

6.27

shareholders’ equity

192.81

149.31

132.03

161.35

160.00

Market prices

TSX–Cdn$
High **************
Low ***************
Close **************
NYSE–US$
High **************
Low ***************
Close **************

248.55

57.00

226.11

178.50

46.71

174.51

195.00

104.99

121.11

289.00

160.00

164.00

246.00

146.75

228.50

610.00

180.00

245.50

90.20(2)
77.00(2)
77.01(2)

–

–

–

–

–

–

–

–

–

(1) Converted to U.S. dollars as described on page 49.
(2) Since listing on December 18, 2002.

1

FAIRFAX  FINANCIAL  HOLDINGS  LIMITED

Corporate Proﬁle

Fairfax  Financial  Holdings  Limited  is  a  ﬁnancial  services  holding  company  whose

corporate objective is to achieve a high rate of return on invested capital and build long term

shareholder value. The company has been under present management since September 1985.

Canadian insurance — Northbridge

Northbridge  Financial,  based  in  Toronto,  provides  property  and  casualty  insurance

products through its Commonwealth, Federated, Lombard and Markel subsidiaries, primarily

in the Canadian market as well as in selected U.S. and international markets. It is one of the

largest commercial property and casualty insurers in Canada based on gross premiums written.

In  2003,  Northbridge’s  net  premiums  written  were  Cdn$1,132.8  million.  At  year-end,  the

company had capital and surplus of Cdn$734.4 million and there were 1,453 employees.

U.S. insurance

Crum & Forster (C&F), based in Morristown, New Jersey, is a national commercial property

and  casualty  insurance  company  in  the  United  States  writing  a  broad  range  of  commercial

coverages.  Its  subsidiary  Seneca  Insurance  provides  property  and  casualty  insurance  to  small

businesses and certain specialty coverages. The company has been in business since 1824. In

2003,  C&F’s  net  premiums  written  were  US$857.3  million.  At  year-end,  the  company  had

capital and surplus of US$989.9 million and there were 1,079 employees.

Fairmont  Insurance, based  in  Houston, writes  specialty  niche  property  and  casualty  and

accident  and  health 

insurance.  In  2003,  Fairmont’s  net  premiums  written  were

US$185.4  million.  At  the  beginning  of  2004,  Fairmont  had  combined  capital  and  surplus  of

US$156.1 million and there were 239 employees.

Falcon  Insurance,  based  in  Hong  Kong,  writes  property  and  casualty  insurance  to  niche

markets  in  Hong  Kong.  In  2003,  Falcon’s  net  premiums  written  were  HK$480.2  million

(approximately  HK$8  =  US$1).  At  year-end,  the  company  had  capital  and  surplus  of

HK$222.7 million and there were 116 employees.

The  Napa  Managing  General  Underwriter,  established  in  2003  and  based  in  Napa,

California  with  ﬁve  regional  underwriting  and  production  ofﬁces,  underwrites  specialty

casualty  and  specialty  property  business,  principally  on  an  excess  basis,  for  the  account  of

unafﬁliated insurers. In 2003, it underwrote US$154.0 million of premiums.

Reinsurance — OdysseyRe

OdysseyRe, based in Stamford, Connecticut, underwrites treaty and facultative reinsurance as

well as certain insurance business, with principal locations in the United States, London, Paris,

Singapore  and  Latin  America.  In  2003,  OdysseyRe’s  net  premiums  written  were

US$2,153.6 million. At year-end, the company had capital and surplus of US$1,297.3 million

and there were 515 employees.

2

Runoff and Group Re

The U.S. runoff group consists of the company resulting from the December 2002 merger of

TIG and International Insurance. At year-end, the merged company had statutory capital and

surplus of US$695.9 million.

The  European  runoff  group  consists  of  Sphere  Drake,  RiverStone  Insurance  (UK)  and

Dublin,  Ireland-based  nSpire  Re  (formerly  named  ORC  Re).  At  year-end,  this  group  had

combined capital and surplus (excluding amounts related to ﬁnancing Fairfax’s U.S. insurance

and reinsurance companies) of US$596.9 million.

The  Resolution  Group  (TRG)  and  the  RiverStone  Group  (run  by  TRG  management)

manage  the  U.S.  and  the  European  runoff  groups.  At  year-end,  TRG/RiverStone  had

561  employees  in  the  U.S.,  located  in  Manchester,  New  Hampshire  and  Dallas,  and  230

employees in its ofﬁces in London, Brighton, Paris and Stockholm.

Group Re  constitutes  the  participation  by  CRC  (Bermuda), Wentworth  (based  in  Barbados)

and nSpire Re in the reinsurance programs of Fairfax’s subsidiaries with third party reinsurers,

on the same terms, including pricing, as the third party reinsurers. In 2003, its net premiums

written were US$268.8 million.

Other

Lindsey  Morden  Group  provides  claims  adjusting,  appraisal  and  claims  and  risk

management services to a wide variety of insurance companies and self-insured organizations

in  Canada,  the  United  States,  the  United  Kingdom,  continental  Europe,  the  Far  East,  Latin

America and the Middle East. In 2003, revenue totalled Cdn$461.5 million. The company was

established in 1923, and at year-end the group had 3,794 employees located in 302 ofﬁces.

Hub International is an insurance brokerage company selling a broad range of commercial,

personal and life insurance products. The company was established in 1998, and at year-end

had 986 employees in Canada and the United States. In 2003, the company had total revenue

of US$286.4 million.

MFXchange, established in 2002 and based in Parsippany, New Jersey with ofﬁces in Toronto,

Dallas  and  Ireland,  designs,  creates  and  markets  a  full  range  of  state  of  the  art  technology

products  and  services  for  the  insurance  industry,  including  the  insurance,  reinsurance  and

runoff subsidiaries of Fairfax.

Hamblin  Watsa  Investment  Counsel  was  founded  in  1984  and  provides  investment

management to the insurance, reinsurance and runoff subsidiaries of Fairfax.

Notes:

(1) All companies are wholly owned except Northbridge Financial, a public company of which Fairfax

owns 71.0%; OdysseyRe, a public company of which Fairfax owns 80.6%; Lindsey Morden Group,

a public company of which Fairfax owns 75.0% of the equity and 89.5% of the votes; and Hub

International, a public company of which Fairfax owns 26.1%.

3

FAIRFAX  FINANCIAL  HOLDINGS  LIMITED

(2) The  foregoing  lists  all  of  Fairfax’s  operating  companies.  The  Fairfax  corporate  structure  (i.e.

excluding  investments  in  Hub,  Zenith  National  and  Advent)  includes  a  number  of  companies,

principally investment or intermediate holding companies (including companies located in various

jurisdictions outside North America), which are not part of these operating groups. These companies

had no insurance, reinsurance, runoff or other operations.

(3) Throughout this Annual Report, certain common non-GAAP measures are provided with a view to

furnishing more comprehensive disclosure.

4

To Our Shareholders:

2003 was a very gratifying year as we earned the highest proﬁt in our history and achieved a

combined  ratio  of  97.6%  at  our  ongoing  insurance  and  reinsurance  operations,  in  spite  of

some  external  pressures.  We  made  a  10.9%  return  on  average  shareholders’  equity  in  2003

(compared to about 11.2% for the S&P/TSX and about 12.8% for the S&P 500). In 2003, our

ﬁrst year of U.S. dollar reporting, we earned $271.1 million or $18.55 per share compared to

$263.0  million  or  $18.20  per  share  in  2002  (all  dollar  amounts  in  this  letter  are  U.S.  dollars

unless noted otherwise). Book value per share increased 29.1% to $192.81 (aided signiﬁcantly

by the strong Canadian dollar) while our share price increased 127% to $174.51 from $77.01 at

year-end 2002. And we accomplished all this while not deviating from our guiding principles,

which we have again reproduced in Appendix A.

Our  record  results  in  2003  again  came  from  excellent  underwriting  and  investment

performance. Let me highlight each of these items for you.

Underwriting Performance

Year ended December 31

Combined
Ratio(1)

Net Premiums
Written

2003

2002

2003

2002

(%)

(% change)

Canadian Insurance – Northbridge

92.6

97.4

50

U.S. Insurance

Crum & Forster

Fairmont

Falcon

Old Lyme

Total

Reinsurance – OdysseyRe

Total Fairfax

104.4(2)
99.2

96.0

92.7
102.5(2)
96.9

97.6

108.3

107.0

99.8

92.9

107.1

99.1

101.5

18

(18)

48

28

11

32

28

19

40

54

250

N/A

56

66

58

(1) Please see the commentary commencing on page 51 in the MD&A regarding the presentation of

segmented information.

(2) 99.7%  for  Crum  &  Forster,  and  99.1%  Total,  excluding  the  effect  of  Crum  &  Forster’s  net

strengthening of asbestos reserves.

As  you  can  see  from  the  table,  our  ongoing  insurance  and  reinsurance  operations  grew

signiﬁcantly  again  in  2003  while  achieving  combined  ratios  on  a  current  basis  of  less  than

100%.  In  the  past  two  years,  total  net  premiums  written  from  our  ongoing  operations  have

increased by 91% from $2.3 billion in 2001 to $4.4 billion in 2003.

The management teams at all of our ongoing insurance and reinsurance operations deserve a

standing ovation from you for their outstanding performance in 2003, and I have listed the

presidents  and  their  senior  managers  below.  Mindful  of  the  atrocious  results  from  1999  to

2001, they all share our unwavering focus on underwriting performance.

5

FAIRFAX  FINANCIAL  HOLDINGS  LIMITED

Northbridge ************************* Byron  Messier,  Greg  Taylor;  Ron  Schwab
(Commonwealth),  John  Paisley  (Federated),  Rick

Patina (Lombard), Mark Ram (Markel)

Crum & Forster ********************** Bruce  Esselborn,  Nick  Antonopoulos,  Mary  Jane

Robertson; Doug Libby (Seneca)

Fairmont **************************** Wayne Ashenberg, Marc Adee

Falcon******************************* Kenneth Kwok

Napa MGU **************************

Steve Brett

OdysseyRe *************************** Andy  Barnard,  Charlie  Troiano;  Mike  Wacek  (The
Americas),  Brian  Young  (London  Operations),

Lucien  Pietropoli  (Euro  Asia),  Jim  Migliorini

(Hudson)

Backing our insurance, reinsurance and runoff operations and performing the key head ofﬁce

functions,  including  ﬁnancings,  in  2003 was  our  small  team  at  Fairfax.  With  no  egos  and  a

huge sense of urgency, that small team has demonstrated innumerable times that we can take

advantage  of  opportunity.  In  2003,  we  demonstrated  we  could  handle  adversity  as  well.  No

small thanks are due to Trevor Ambridge, Sam Chan, Francis Chou, Jean Cloutier, Paul Fink,

Jonathan Godown, Brad Martin, Rick Salsberg, Ronald Schokking and Jane Williamson and to

Jim Dowd, John Cassil, Hank Edmiston, Scott Galiardo and Roland Jackson at Fairfax Inc.

Investment Performance

The  performance  of  the  Hamblin Watsa  investment  management  team  in  2003  was,  for  the

second consecutive year, exceptional. Congratulations again to Brian Bradstreet, Frances Burke,

Tony Hamblin, Roger Lace, Enza La Selva and Chandran Ratnaswami. Fairfax began the year

with $131.7 million in unrealized gains, realized $845.9 million in gains during the year and

ended the year with $244.9 million in unrealized gains. It just doesn’t get any better! The total

return  on  our  investment  portfolios  (including  all  interest  and  dividend  income,  gains  and

losses on disposal of securities and the change in unrealized gains and losses during the year)

was  11.1% –  even  though  we  had  very  large  cash  positions  during  most  of  the  year

(approximately  half  throughout  the  second  half  of  2003).  The  large  cash  positions  provide

your company with tremendous ﬂexibility even though they currently reduce our investment

income  by  over  $200  million  a  year.  Please  note  our  investment  assets  were  up  18%  to

$12.6 billion in 2003, with the result that they are now approximately $900 per share.

Fairfax achieved its record results in 2003 in spite of three signiﬁcant reserving actions that we

took in the fourth quarter:

1. We increased Crum & Forster’s asbestos reserves by $150 million which, after other

redundancies and stop loss reinsurance, cost us $39 million pre-tax.

2. We increased TIG’s loss reserves by $258 million, of which $190 million was ceded to

Chubb  Re.  Including  the  cost  of  the  additional  premium  on  the  Chubb  Re  treaty,

TIG’s reserve increase cost us $118 million pre-tax.

6

3.

At  nSpire  Re,  we  took  a  reserve  charge  of  $176  million  which,  after  stop  loss

reinsurance, cost us $67 million pre-tax.

The  reserving  actions  mentioned  in  2. and  3.  above  generally  related  to  business,  now  in

runoff,  written  during  the  extremely  soft  markets  of  the  late  1990s,  which  have  resulted  in

reserve inadequacies for that period throughout the property and casualty insurance industry

generally.

Our acquisition of TRG (a 271/2% interest in 1999 and the remaining 721/2% interest in 2002)

was one of the best acquisitions we have made, giving us the strength of highly talented runoff

professionals  to  focus  on  settling  APH  and  other  complex  claims  and  on  analyzing  and

collecting reinsurance recoverables. Dennis Gibbs and his TRG team did an outstanding job in

2003  in  taking  control  of  the  TIG  runoff,  headed  by  Scott  Donovan,  while  continuing  the

controlled runoff of the European operations. In the process, they played an integral part in

the following events in 2003:

1.

You will remember that upon the merger of TIG and TRG’s International Insurance

subsidiary in 2002, a Fairfax subsidiary provided TIG with an adverse development

cover and the California Department of Insurance allowed the distribution of about

$800  million  of  securities  into  a  Trust  for  the  beneﬁt  of  TIG.  Subject  to  California

approval, part of the Trust assets would be released if the internal cover was replaced

with  an  external  cover,  and  substantially  all  of  the  remainder  of  the  Trust  assets

would be released if three ﬁnancial tests were met at the end of 2003.

a. We  arranged  an  adverse  development  cover  from  Chubb  Re  which  replaced

most  of  the  internal  cover  from  a  Fairfax  subsidiary.  As  a  result,  all  of  the

Northbridge  shares  in  the  Trust,  with  a  market  value  of  approximately

$191 million, were released from the Trust.

b.

TIG  met  the  three  ﬁnancial  tests  at  the  end  of  2003,  thereby  permitting  the

release  of  substantially  all  of  the  remaining  assets  in  the  Trust (comprised

primarily of 28.4 million shares of OdysseyRe), subject to California regulatory

approval. We expect to receive that approval in the second quarter. The release

of  OdysseyRe  shares  from  the  Trust  would  simplify  our  capital  structure

signiﬁcantly and would also strengthen our ﬁnancial ﬂexibility.

2.

By the end of the year, TIG was effectively writing no business and 58% of the claims

outstanding at the beginning of the year had been closed.

3.

Fairmont  (Ranger,  Hawaii  and  A&H  business)  was  effectively  extracted  from  the

runoff group, and Napa operated as an MGU.

4.

As  reported  in  note  12  to  our  consolidated  ﬁnancial  statements,  the  judge  in  the

proceedings  which  we  commenced  in  the  Commercial  Court  in  London,  England

found in our favor – a great tribute to the ability and the determination of the TRG

team. We believe that this judgment should have the beneﬁcial effect in the London

market  of  limiting  ‘‘spirals’’  where  loss  making  business  is  passed  along  to  market

participants in a manner not unlike the game of musical chairs where the loser is the

participant without a chair when the music stops.

7

FAIRFAX  FINANCIAL  HOLDINGS  LIMITED

Taking OdysseyRe public in 2001 resulted in a separate listed company with enhanced focus

and  ﬁnancial  ﬂexibility.  Encouraged  by  our  positive  experience  with  OdysseyRe,  in  2003  we

created Northbridge Financial, a holding company for all our Canadian insurance operations

(Commonwealth, Federated, Lombard and Markel). The IPO, led by Tom Flynn at BMO Nesbitt

Burns  and  John  Sherrington  at  Scotia  Capital,  was  completed  in  June  through  the  sale  of

14.7  million  shares  at  Cdn$15  per  share.  After  the  offering,  Fairfax  held  36.1  million  shares

(71%) of Northbridge. Northbridge is one of the largest commercial lines insurance companies

in Canada, and we think it has excellent growth prospects.

Below we update the table on intrinsic value and stock price that we ﬁrst presented four years

ago. As you can see from the table, book value per share increased signiﬁcantly in 2003 and our

stock price increased dramatically. The intrinsic value of Northbridge, OdysseyRe and Crum &

Forster increased signiﬁcantly again in 2003, more than offsetting the decrease in the runoff

segment.

INTRINSIC VALUE

STOCK PRICE

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

ROE
%

25.2

32.5

22.8

21.0

23.0

21.5

7.7

15.9

11.4

20.4

21.9

20.5

23.0

4.6

3.9

(12.0)

13.0

10.9

% Change in
Book Value*
per Share

% Change in
Stock Price

+ 180

+ 48

+ 31

+ 27

+ 41

+ 24

+

1

+ 42

+ 18

+ 25

+ 63

+ 39

+ 37

+ 33

+

1

– 18

+ 14

+ 29

+ 287

+

2

+ 31

+ 30

– 40

+ 94

+

7

+ 135

+

3

+ 50

+ 195

+

6

+ 57

– 52

– 10

– 32

– 25

+ 127

1986-2003

16.0%

+ 31%

+ 27%

* First measure of intrinsic value, as discussed in our 1997 Annual Report.

If not for the reserve increase in the fourth quarter for Crum & Forster’s asbestos and for the

runoff, Fairfax would have achieved its 15% ROE goals. Book value per share has now increased

signiﬁcantly from its previous high of $161 in 2000. We continue to be focused on achieving a

sustainable 15% ROE over the long term.

8

The table below shows the sources of our net earnings with Lindsey Morden equity accounted.

This table, like various others below, is set out in a format which we have consistently used and

which we believe assists you to understand Fairfax.

Underwriting

Insurance – Canada (Northbridge)

 – U.S.

Reinsurance (OdysseyRe)

Underwriting income (loss)

Interest and dividends

Operating income

Realized gains

Runoff and other

TIG restructuring costs

Claims adjusting (Fairfax portion)

Interest expense
Swiss Re premium(2)
Corporate overhead and other

Other costs and charges

Pre-tax income

Taxes

Negative goodwill on TRG purchase

Non-controlling interests

Net earnings

2003(1)

2002(1)

($ millions)

52.3

(25.6)

61.0

87.7

220.3

308.0

534.6

(110.0)

–

(16.6)

(138.6)

–

(48.7)

–

12.4

(68.1)

12.9

(42.8)

266.1

223.3

285.9

(64.3)

(63.6)

(6.7)

(79.6)

(2.7)

(5.9)

(9.0)

528.7

277.4

(187.6)

(149.3)

–

(70.0)

188.4

(53.5)

271.1

263.0

(1) Please see the commentary commencing on page 51 in the MD&A regarding the presentation of

segmented information.

(2) Please see the last paragraph of Swiss Re premium on page 68 in the MD&A.

The  table  shows  the  results  from  our  insurance  and  reinsurance  (underwriting  and

investments),  runoff  and  other  and  non-insurance  operations.  Runoff  and  other  operations

include the U.S. runoff group (the merged TIG and IIC), the European runoff group (Sphere

Drake, RiverStone (UK) and nSpire Re (formerly ORC Re)) and our participation in third party

reinsurance programs of our subsidiaries (referred to as ‘‘Group Re’’). Claims adjusting shows

our share of Lindsey Morden’s after-tax income. Also shown separately are realized gains at our

continuing  operations  so  that  you  can  better  understand  our  earnings  from  our  operating

companies. Also, please note the unaudited ﬁnancial statements of our combined continuing

insurance and reinsurance operations and of Fairfax with Lindsey Morden equity accounted,

shown on pages 120 to 123.

Operating  income  (ongoing  insurance  and  reinsurance  underwriting  and  interest  and

dividends) increased signiﬁcantly from $223.3 million in 2002 to $308.0 million in 2003 as we

9

FAIRFAX  FINANCIAL  HOLDINGS  LIMITED

made a signiﬁcant underwriting proﬁt in 2003 for the ﬁrst time since 1993. As mentioned last

year,  we  are  currently  experiencing  the  ‘‘virtuous’’  part  of  the  insurance  cycle  when

underwriting income, investment income and realized gains are all additive. While this part of

the cycle may last a while, we have to perform through the ups and downs of the insurance

cycle. Interest and dividend income dropped 17% to $220.3 million in 2003 reﬂecting lower

investment yields since almost half the investment portfolio has been held in cash and short

term investments since the second quarter of 2003. Realized gains at our ongoing operations

increased dramatically again in 2003 to $534.6 million.

Runoff losses were signiﬁcant in 2003 because of the reserve charges discussed earlier as well as

operating costs in excess of investment income. Realized gains helped mitigate runoff losses in

2003.  Please  see  the  MD&A  commencing  on  page  61  for  a  more  detailed  discussion  of  our

runoff operations. We expect our runoff operations to be a decreasing drag on our income in

2004.

The increased interest expense in 2003 resulted partly from new interest costs and partly from

the company’s decision to maintain ﬁxed rather than ﬂoating interest costs (please see page 67

in the MD&A). Our focus on reducing ﬁnancial leverage will result in a reduction in these costs

over time. Corporate overhead and other increased signiﬁcantly in 2003 as detailed on page 68

in the MD&A. We expect these costs to come back to more normal levels in the future.

Insurance and Reinsurance Operations

Our  ongoing  insurance  and  reinsurance  operations  had  an  excellent  year  in  2003  with  a

consolidated  combined  ratio  of  97.6%. Every  operating  company,  including  Northbridge,

Crum & Forster (ex-asbestos) and OdysseyRe, had a combined ratio below 100%. Net premiums

written  by  these  operations  expanded  by  28%.  This  resulted  in  record  positive  cash  ﬂows  at

Northbridge, Crum & Forster and OdysseyRe of $1.1 billion, up from $236 million in 2002.

Signiﬁcant  underwriting  proﬁts,  combined  with  record  realized  gains,  contributed  to  very

signiﬁcant growth in statutory (or regulatory) capital in 2003, with the result that each of our

major underwriting companies has capital adequacy well in excess of its rating level.

The  table  below  shows  the  outstanding  growth  and  results  of  our  major  underwriting

companies:

Northbridge

Gross premiums written

Net premiums written

Net income

Shareholders’ equity

Combined ratio

Return on equity

($ millions)

2003

1,319

802

108

568

92.6%

23.6%

2002

1,133

533

34

356

97.4%

10.3%

2001

768

449

(10)

299

115.0%

(3.5%)

10

Crum & Forster

Gross premiums written

Net premiums written

Net income

Shareholders’ equity

Combined ratio

Return on equity

2003

1,104

857

177
990(1)
104.4%(2)
17.4%(3)

2002

2001

964

729

78

1,039

843

519

(29)

958

108.3%

131.7%

7.8%

(3.0%)

(1) $1,208 before paying dividends of $218 from the proceeds of $300 of notes issued in June 2003.

(2) 99.7% excluding the effect of the net strengthening of asbestos reserves.

(3) 18.5% before paying interest on the above-mentioned $300 of notes.

OdysseyRe

Gross premiums written

Net premiums written

Net income

Shareholders’ equity

Combined ratio

Return on equity

2003

2002

2001

2,558

2,154

276

1,894

1,631

151

1,297

1,021

1,154

985

(22)

872

96.9%

99.1%

115.4%

23.8%

16.0%

(2.3%)

11

Year

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

FAIRFAX  FINANCIAL  HOLDINGS  LIMITED

In  the  table  below,  we  show  the  ﬂoat  that  Fairfax’s  ongoing  insurance  and  reinsurance

operations have generated and the cost of that ﬂoat.

Underwriting
proﬁt (loss)
($ millions)

Average ﬂoat
($ millions)

Beneﬁt
(Cost)
of ﬂoat

Average long
term Canada
treasury bond
yield

2.5

0.8

0.3

(11.5)

(10.7)

4.6

(14.0)

1.6

(12.4)

(29.9)

(37.1)

(40.6)

(214.3)

(407.6)

(481.7)

(579.8)

(42.8)

87.7

21.6

40.6

56.6

67.0

117.5

156.2

151.2

244.9

496.8

655.0

1,089.5

1,961.2

3,847.7

5,440.8

5,202.5

4,690.4

4,355.2

4,405.5

11.6%

2.0%

0.5%

(17.2%)

(9.1%)

2.9%

(9.3%)

0.7%

(2.5%)

(4.6%)

(3.4%)

(2.1%)

(5.6%)

(7.5%)

(9.3%)

(12.4%)

(1.0%)

2.0%

(5.4%)

9.6%

10.0%

10.2%

9.9%

10.8%

9.7%

8.8%

7.8%

8.7%

8.3%

7.6%

6.5%

5.5%

5.7%

5.9%

5.8%

5.7%

5.4%

6.0%

Weighted average

Fairfax weighted average ﬁnancing differential: 0.6%

As the table shows, our ﬂoat (which is deﬁned in our 2001 Annual Report) increased in 2003

with no cost. This is the closest thing to ‘‘nirvana’’ in the property and casualty business. The

table below shows you the breakdown of our year-end ﬂoat for the past ﬁve years.

Canadian
Insurance

U.S.
Insurance

Reinsurance

Total
Insurance
and
Reinsurance

Runoff

Total

1999

2000

2001

2002

2003

394.5

533.2

384.0

811.7

1,021.1

2,657.3

2,572.6

2,677.4

1,611.8

1,634.9

($ millions)

2,530.4

1,717.0

1,496.6

1,728.8

2,002.7

5,582.2

4,822.8

561.4

789.5

4,558.0

1,049.0

4,152.3

1,579.9

4,658.7

1,502.8

6,143.6

5,612.3

5,607.0

5,732.2

6,161.5

In 2003, the Canadian insurance ﬂoat increased by 25.8% (at no cost), the U.S. insurance ﬂoat

increased by 1.4% (at a cost of 1.6%) and the reinsurance ﬂoat increased by 15.8% (at no cost).

The  runoff  ﬂoat  decreased  due  to  the  payment  of  claims.  Taking  all  these  components

together, total ﬂoat increased by 7.5% to $6.2 billion at the end of 2003.

12

For additional information on Northbridge, Crum & Forster and OdysseyRe, please see those

companies’ websites.

Reserving

As previously discussed, we took considerable reserve strengthening in 2003.  The action we

took  dealt  primarily  with  reserves  related  to  runoff,  latent  asbestos  claims  and  reinsurance

business written during 1997 to 2000 and we do not believe it is reﬂective of the strength of

our current book of business.  Our reserving record in Canada has been excellent (an average

reserve redundancy of 2.4% over the past ten accident years — see page 76 in the MD&A) and

our  intent  is  to  replicate  this  at  all  our  ongoing  insurance  and  reinsurance  companies.  No

complacency, though, as we continue to have external actuaries review our reserves, including

an  annual  certiﬁcation  of  our  consolidated  reserves  by  PricewaterhouseCoopers  LLP  (the

Valuation Actuary’s Report is on page 21).

Claims Adjusting

Lindsey Morden had a signiﬁcant loss in 2003 of Cdn$30 million due to operating losses in its

U.S.  operations  (Cdn$22  million)  as  well  as  Cdn$12  million  of  goodwill  and  deferred  tax

writeoffs.  Unfortunately,  your  Chairman  accelerated  the  losses  in  2003  by  strongly

recommending  the  purchase  of  RSKCo,  which  magniﬁed  the  losses  in  the  U.S.  operations.

With reduced costs in the U.S. claims management operations, the losses in the U.S. will be

reduced but will still be signiﬁcant in 2004. The other operating units (Canada, U.K., Europe

and  International)  continue  to  show  strong  operating  results.  We  are  working  diligently  to

help Karen Murphy and her management team to restore proﬁtability at Lindsey Morden. In

the  meantime,  we  are  providing  ﬁnancial  support  as  and  when  needed.  For  a  more  detailed

discussion of Lindsey Morden’s results, please review its annual report, including its MD&A,

which is on its website www.lindseymordengroupinc.com).

13

FAIRFAX  FINANCIAL  HOLDINGS  LIMITED

Financial Position

As mentioned in previous Annual Reports, we feel our unaudited balance sheet with Lindsey

Morden equity accounted is the best way to understand our ﬁnancial position. Below we show

our year-end ﬁnancial position compared to the end of 2002.

Cash, short term investments and marketable

securities

Long term debt (including OdysseyRe debt)

TRG purchase consideration payable

RHINOS due February 2003

Net debt

Common shareholders’ equity

Preferred shares and trust preferred securities of

subsidiaries

OdysseyRe non-controlling interest

Total equity

Net debt/equity

Net debt/total capital

Interest coverage

December 31, December 31,
2002

2003

($ millions)

410.2

1,942.7

200.6

–

1,733.1

2,781.4

216.4

250.6

3,248.4

53%

35%

4.8x

327.7

1,406.0

205.5

136.0

1,419.8

2,111.4

216.4

268.5

2,596.3

55%

35%

4.6x

During  the  year,  Fairfax  brought  OdysseyRe  into  the  U.S.  consolidated  tax  group,  took

Northbridge public and issued $300 million of Crum & Forster 10-year notes and $200 million

of Fairfax convertible debentures. As a result, we satisﬁed all of our obligations which matured

during the year and we ended the year with in excess of $400 million of cash and marketable

securities in the holding company. Also, Fairfax established a new separate $300 million letter

of credit facility; as a result, our $260 million of syndicated bank lines are currently unused.

The net effect of our signiﬁcant increase in common shareholders’ equity (aided by the strong

Canadian  dollar)  and  our  ﬁnancings  was  that  we  maintained  our  net  debt/equity  and  net

debt/capital ratios during the year. We have a high priority to reduce these ﬁnancial leverage

ratios meaningfully in the next three years.

Our experience in 2003 has highlighted again the importance of a strong balance sheet and

signiﬁcant cash positions in the holding company. Our policy will always be to maintain large

cash  and  marketable  security  positions  in  the  holding  company.  Of  course,  now  that

OdysseyRe and Northbridge are public companies, they have access to the public markets for

ﬁnancing (i.e. they don’t need Fairfax!) and Fairfax has the ability to raise cash by selling shares

of those companies in the public markets. This is a very important source of ﬁnancial ﬂexibility

even though we have no current plans to use it. You will note also that Crum & Forster now

has positive earned surplus of about $146 million and a dividend capacity for 2004 of about

$80 million.

14

Investments

The  equity  markets  worldwide  rebounded  signiﬁcantly  in  2003  as  shown  in  the  table  below

(the  indices  reﬂect  local  currencies),  while  long  U.S.  treasury  yields  increased  from  4.77%  at

year-end 2002 to 5.08% by year-end 2003.

S&P 500

NASDAQ

S&P/TSX

FTSE (London)

CAC (France)

DAX (Germany)

Fairfax (Equities)

Cumulative %
Change from
December 31, 1999
to December 31, 2003

2003
% Change

+26.4

+50.0

+24.3

+13.6

+16.1

+37.1

+43.0

–24.3

–50.8

–2.3

–35.4

–40.3

–43.0

+186.6

Our equities return (realized gains and losses and the change in unrealized gains and losses,

excluding dividends) was 43% in 2003 and a cumulative 187% for the four-year period ended

December 31, 2003. We hope we do as well when we are positive about the markets!!

In 2003, we realized a record $846 million in investment gains compared to $470 million in

2002  –  as  a  percentage  of  the  investment  portfolio,  though,  it  was  the  third  highest  in  our

history. On page 110 in the MD&A, we show a record of our realized gains since inception. You

can see it has been an important source of earnings for our company. Unfortunately, it is not

predictable and so most market participants do not give us much credit for these gains even

though, since inception, they have amounted to $2.4 billion. You can see why we will always

opt for a high but ‘‘irregular’’ return over a lower but ‘‘consistent’’ return.

Gross  realized  gains  in  2003  totalled  $970  million. After  realized  losses  of  $92  million  and

provisions of $32 million, net realized gains were $846 million. Net gains from ﬁxed income

securities  were  $686  million  while  net  gains  from  common  stocks  were  $189  million.  The

principal contributors to the stock realized gains were ICICI Bank ($93 million) and Everest Re

($25 million).

Given  the  high  stock  valuation  levels,  low  treasury  yields,  unattractive  credit  spreads  and

continued risks that we have discussed in previous Annual Reports (a possible run on mutual

funds,  bonds  collateralized  with  consumer  debt,  unfunded  pension  liabilities  and  the  huge

increase in the use of derivatives), we have almost half of our investment portfolio in cash and

short term investments and the majority of our bond portfolio in government bonds. We have

no exposure to asset-backed securities, including mortgage-backed securities, and our common

stock holdings, including our strategic investments, amount to only 13% of the portfolio. The

unprecedented conservatism in our portfolio reﬂects the uncertain times that we live in and

also positions us to take advantage of attractive investment opportunities.

We  have  been  concerned  for  some  time  about  the  risks  in  asset-backed  bonds,  particularly

bonds that are backed by home equity loans, automobile loans or credit card debt (we own no

15

FAIRFAX  FINANCIAL  HOLDINGS  LIMITED

asset-backed  bonds).  It  seems  to  us  that  securitization  (or  the  creation  of  these  asset-backed

bonds) eliminates the incentive for the originator of the loan to be credit sensitive. Take the

case of an automobile dealer. Prior to securitization, the dealer would be very concerned about

who was given credit to buy an automobile. With securitization, the dealer (almost) does not

care as these loans can be laid off through securitization. Thus, the loss experienced on these

loans  after  securitization  will  no  longer  be  comparable  to  that  experienced  prior  to

securitization (called a ‘‘moral’’ hazard). And here’s the rub! These asset-backed bonds are rated

based  on  their  historical  loss  experience  record  which  will  likely  be  very  different  in  the

future – particularly if we experience difﬁcult economic times. Also, in the main, these asset-

backed  bonds  are  a  creation  of  the  1990s,  a  period  when  the  U.S.  experienced  one  of  the

longest economic expansions in its history, followed by one of the shortest recessions.

This  is  not  a  small  problem.  There  is  $1.0  trillion  in  asset-backed  bonds  outstanding  as  of

December 31, 2003 in the U.S. (excluding ﬁrst mortgage-backed bonds). At the end of 2002,

more than 65% of these bonds were rated A or above. In fact, as of December 31, 2002, there

were  more  than  2,500  asset-backed  issues  rated  AAA  –  signiﬁcantly  more  than  the  13  U.S.

corporate  issuers  currently  rated  as  AAA.  Who  is  buying  these  bonds?  Insurance  companies,

money managers and banks – in the main – all reaching for yield given the excellent ratings for

these  bonds.  What  happens  if  we  hit  an  air  pocket?  Unlike  active  companies,  the  vehicles

issuing these bonds have no management organization and are dependent on the goodwill of

the originating company. I can go on and on. Sufﬁce it to say that the principals at Hamblin

Watsa are quite concerned about the inherent risks in these types of bonds.

 Our unrealized gains (losses) as of year-end are as follows:

Bonds

Preferred stocks

Common stocks

Strategic investments*

Real estate

2003

2002

($ millions)

(84.5)

119.0

1.6

254.6

68.4

4.8

(2.1)

32.8

(21.7)

3.7

244.9

131.7

* Hub, Zenith National and Advent

Notwithstanding our general views on markets and stock valuation levels, we did come across

some common stocks in 2003 that ﬁt our long term value-oriented philosophy. Here are our

common stock investments broken down by country:

U.S.

Canada

Japan

Other

Carrying Value

Market Value

($ millions)

333.3

192.1

106.3

542.2

380.6

251.5

153.1

643.3

1,173.9

1,428.5

16

Miscellaneous

Please review page 124 which is an unaudited unconsolidated balance sheet showing where your

money is invested. Based on that statement, on which our subsidiaries are carried on the equity

basis (as described on page 119), at December 31, 2003 the carrying value of our subsidiaries was as

follows:  $412  million  (Cdn$14.74  per  share)  for  Northbridge,  $1.0  billion  for  Crum  &  Forster,

$1.0 billion ($20.44 per share) for OdysseyRe, and $1.0 billion for our runoff companies.

We  paid  a  modest  $1.40  per  share  dividend  in  2003  for  the  reasons  discussed  in  the  2000

Annual Report.

Although  we  were  very  much  against  quarterly  conference  calls  in  the  past,  we  have  found

them  to  be  an  efﬁcient  way  to  communicate  with  our  shareholders.  Our  annual  investor

meeting in New York in the fall has also worked out well. However, please don’t expect any

guidance!

With so much in the media about corporate governance, it is appropriate to give you an update

on our policies. We have a small, independent Board of Directors with only one person from

management on the board – myself. Robbert Hartog, the Chair of our Audit Committee, has

been  Chair  of  that  Committee  since  we  began  in  1985.  You  have  beneﬁted  greatly  from

Robbert’s  wisdom  over  the  years.  Our  Audit  Committee  is  composed  of  all  independent

directors.  Our  statements  are  now  reviewed  quarterly  by  our  auditors  and  our  reserves  have

always been certiﬁed annually. As the controlling shareholder and CEO of the company, I have

ﬁxed my compensation since 2000 at Cdn$600,000 with no additional bonuses and no options

or other stock incentives. I get Cdn$600,000, period – and, I have to say, I have not earned it in

the  past  few  years!  I  have  no  transactions  with  the  company  and  have  over  95%  of  my  net

worth in Fairfax. We have never issued options or other stock incentives from treasury – all of

our stock incentives are granted on secondary stock purchased in the market – and all of these

grants are long term and provided to any one individual only once or at least infrequently. In

fact,  since  we  began  in  1985,  our  shares  outstanding  have  only  increased  from  5  million  to

14  million  even  though  revenue  has  gone  from  about  $12  million  to  almost  $6  billion.  As

discussed  more  fully  in  the  proxy  circular,  we  have  instituted  all  of  these  policies  to  protect

your interests and in recognition of the higher responsibility a controlling shareholder has to

the other shareholders. While there have been many abuses of the dual voting share structures,

may I say, not totally unbiased, that this share structure has been a big plus as far as the best

interests of Fairfax and all its shareholders are concerned.

While  discussing  our  Board  composition,  it  is  with  great  pleasure  that  I  welcome  Brandon

Sweitzer  to  the  Fairfax  Board.  Brandon  has  long  experience  in  the  property  and  casualty

insurance industry and has served on the OdysseyRe Board since 2002. He is currently Senior

Advisor to the President of the U.S. Chamber of Commerce, after 22 years at Marsh, Inc. where

he served as President from 1999 to 2001.

This  is  probably  a  good  time  to  remind  you  that  we  have  listed  the  risks  in  our  business  as

simply  as  we  could  (beginning  on  page  115).  They  continue  to  be  many  and  very  real.  As  I

emphasized last year, your management team is constantly focusing on these risks and trying

to minimize them. Similar to the last few years, I want to highlight the ones on reinsurance

recoverables,  the  future  income  tax  asset  and  ratings  as  well  as  claims  reserves,  including

17

FAIRFAX  FINANCIAL  HOLDINGS  LIMITED

asbestos and pollution reserves. We have extensive disclosure and discussion on each of these

risks in the MD&A. Although there are no guarantees, we feel a lot more comfortable about

these risks today than when I wrote to you last year.

Our  company  has  been  hugely  tested  in  the  last  few  years  and  has  not  only  survived  but

prospered.  This  experience  has  strengthened  our  management  teams  at  Fairfax  and  our

subsidiaries and will serve us well as we build our company over the long term.

We will very much look forward to seeing you at the annual meeting in Toronto at 9:30 a.m.

on  Wednesday,  April  14,  2004  in  Room  106  at  the  Metro  Toronto  Convention  Centre,

255 Front Street West. Perhaps I will be smiling!!

I want to again highlight our website for you (www.fairfax.ca) and remind you that all of our

Annual Reports since 1985 are available there, as well as links to the informative websites of

our  various  individual  companies.  Our  press  releases  and  published  ﬁnancial  statements  are

posted to our website immediately upon issuance. Our quarterly reports for 2004 will be posted

to  our  website  on  the  following  days  after  the  market  close:  ﬁrst  quarter – April  29,  second

quarter – July 29 and third quarter – October 28. Our 2004 Annual Report will be posted after

market close on March 4, 2005.

I would like to thank the Board and the management and employees of all our companies for

the outstanding results achieved in 2003. We look forward to continuing to produce excellent

results in 2004 and beyond.

March 1, 2004

V. Prem Watsa

Chairman and

Chief Executive Ofﬁcer

18

(This page intentionally left blank)

19

FAIRFAX  FINANCIAL  HOLDINGS  LIMITED

Management’s Responsibility for the Financial Statements

The accompanying consolidated ﬁnancial statements and all ﬁnancial information in this Annual
Report are the responsibility of management and have been approved by the Board of Directors.

The  consolidated  ﬁnancial  statements  have  been  prepared  by  management  in  accordance  with
Canadian generally accepted accounting principles. Financial statements are not precise since they
include  certain  amounts  based  upon  estimates  and  judgments.  When  alternative  methods  exist,
management  has  chosen  those  it  deems  to  be  the  most  appropriate  in  the  circumstances.  The
ﬁnancial  information  presented  elsewhere  in  this  Annual  Report  is  consistent  with  that  in  the
ﬁnancial statements.

Management  is  responsible  for  establishing  and  maintaining  adequate  internal  controls.
Management  believes  that  Fairfax  maintains  effective  internal  controls  over  ﬁnancial  reporting,
which  are  designed  to  permit  the  accurate  and  timely  preparation  of  ﬁnancial  statements  in
accordance with generally accepted accounting principles in Canada.

We,  as  Fairfax’s  Chief  Executive  Ofﬁcer  and  Chief  Financial  Ofﬁcer,  will  certify  Fairfax’s  annual
disclosure document ﬁled with the SEC (Form 40-F) as required by the United States Sarbanes-Oxley
Act.

The  Board  of  Directors  is  responsible  for  ensuring  that  management  fulﬁlls  its  responsibilities  for
ﬁnancial  reporting  and  is  ultimately  responsible  for  reviewing  and  approving  the  consolidated
ﬁnancial  statements.  The  Board  carries  out  this  responsibility  principally  through  its  Audit
Committee. No Fairfax ofﬁcer or employee is a member of the Audit Committee.

The Audit Committee is appointed by the Board of Directors and reviews the consolidated ﬁnancial
statements and management’s discussion and analysis; considers the report of the external auditors;
assesses the adequacy of the internal controls of the Company; examines the fees and expenses for
audit  services;  and  recommends  to  the  Board  the  independent  auditors  for  appointment  by  the
shareholders. The independent auditors have full and free access to the Audit Committee and meet
with it to discuss their audit work, Fairfax’s internal controls and ﬁnancial reporting matters. The
Audit  Committee  reports  its  ﬁndings  to  the  Board  for  consideration  when  approving  the
consolidated ﬁnancial statements for issuance to the shareholders.

March 1, 2004

V. Prem Watsa
Chairman and Chief Executive Ofﬁcer

Trevor Ambridge
Vice President and Chief Financial Ofﬁcer

20

Auditors’ Report to the Shareholders
We  have  audited  the  consolidated  balance  sheets  of  Fairfax  Financial  Holdings  Limited  as  at
December  31,  2003  and  2002  and  the  consolidated  statements  of  earnings,  retained  earnings  and
cash ﬂows for each of the years in the three year period ended December 31, 2003. These ﬁnancial
statements are the responsibility of the company’s management. Our responsibility is to express an
opinion on these ﬁnancial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted auditing standards. Those
standards  require  that  we  plan  and  perform  an  audit  to  obtain  reasonable  assurance  whether  the
ﬁnancial statements are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the ﬁnancial statements. An audit also includes
assessing the accounting principles used and signiﬁcant estimates made by management, as well as
evaluating the overall ﬁnancial statement presentation.
In our opinion, these consolidated ﬁnancial statements present fairly, in all material respects, the
ﬁnancial position of the company as at December 31, 2003 and 2002 and the results of its operations
and  its  cash  ﬂows  for  each  of  the  years  in  the  three  year  period  ended  December  31,  2003  in
accordance with Canadian generally accepted accounting principles.

Chartered Accountants
Toronto, Canada
February 5, 2004

Comment by Auditors for U.S. Readers on Canada-U.S. Reporting Difference
In  the  United  States,  reporting  standards  for  auditors  require  the  addition  of  an  explanatory
paragraph (following the opinion paragraph) when there is a change in accounting principles that
has a material effect on the comparability of the company’s ﬁnancial statements, such as the change
described in note 3 to the ﬁnancial statements relating to goodwill. Our report to the shareholders
dated February 5, 2004 is expressed in accordance with Canadian reporting standards which do not
require  a  reference  to  such  a  change  in  accounting  principles  in  the  auditors’  report  when  the
change is properly accounted for and adequately disclosed in the ﬁnancial statements.

Chartered Accountants
Toronto, Canada
February 5, 2004

Valuation Actuary’s Report
I  have  reviewed  management’s  valuation,  including  management’s  selection  of  appropriate
assumptions  and  methods,  of  the  policy  liabilities  of  the  subsidiary  insurance  and  reinsurance
companies of Fairfax Financial Holdings Limited in its consolidated balance sheet as at December 31,
2003 and their change as reﬂected in its consolidated statement of earnings for the year then ended,
in accordance with Canadian accepted actuarial practice.
In my opinion, management’s valuation is appropriate, except as noted in the following paragraph,
and the consolidated ﬁnancial statements fairly present its results.
Under Canadian accepted actuarial practice, the valuation of policy liabilities reﬂects the time value
of money. Management has chosen not to reﬂect the time value of money in its valuation of the
policy liabilities.

Richard Gauthier, FCIA, FCAS
PricewaterhouseCoopers LLP
Toronto, Canada
February 5, 2004

21

FAIRFAX  FINANCIAL  HOLDINGS  LIMITED

Consolidated Financial Statements

Consolidated Balance Sheets
as at December 31, 2003 and 2002

Assets
Cash and short term investments *******************************
Cash held in Crum & Forster interest escrow account ************
Marketable securities *******************************************
Accounts receivable and other **********************************
Recoverable from reinsurers (including recoverables on paid

2003

2002

(US$ millions)

346.4

47.3

16.5

304.6

—

23.1

2,112.3

2,271.9

losses – $654.2; 2002 – $623.2) *******************************

8,542.6

7,591.4

Portfolio investments

Subsidiary cash and short term investments (market value –

$5,710.6; 2002 – $1,705.5) ***********************************
Bonds (market value – $4,644.8; 2002 – $7,513.5)****************
Preferred stocks (market value – $143.9; 2002 – $158.0) **********
Common stocks (market value – $1,428.5; 2002 – $712.4) ********
Investments in Hub, Zenith National and Advent (market value –
$456.0; 2002 – $332.6) ***************************************
Real estate (market value – $17.0; 2002 – $24.2) *****************

11,065.1

10,191.0

5,710.6

4,729.3

142.3

1,173.9

387.6

12.2

1,705.5

7,394.5

160.1

679.6

354.3

20.5

Total (market value – $12,400.8; 2002 – $10,446.2) **************

12,155.9

10,314.5

Deferred premium acquisition costs *****************************
Future income taxes *******************************************
Premises and equipment ***************************************
Goodwill ******************************************************
Other assets ***************************************************

412.0

968.3

98.7

214.3

104.0

375.6

977.3

111.7

185.3

69.1

25,018.3

22,224.5

See accompanying notes.

Signed on behalf of the Board

Director

Director

22

Liabilities
Lindsey Morden bank indebtedness ******************************
Accounts payable and accrued liabilities **************************
Funds withheld payable to reinsurers ****************************

Provision for claims*********************************************
Unearned premiums ********************************************
Long term debt *************************************************
Purchase consideration payable **********************************
Trust preferred securities of subsidiaries **************************

2003
(US$ millions)

2002

17.7

1,413.0

1,104.6

26.5

1,278.3

959.7

2,535.3

2,264.5

14,368.1

13,397.3

2,441.9

2,033.8

200.6

79.8

2,089.1

1,482.7

205.5

215.8

19,124.2

17,390.4

Non-controlling interests ****************************************

440.8

321.6

Shareholders’ Equity
Common stock *************************************************
Other paid in capital********************************************
Preferred stock**************************************************
Retained earnings***********************************************
Currency translation account ************************************

1,510.0

1,535.7

101.4

136.6

1,114.9

—

136.6

873.5

55.1

(297.8)

2,918.0

2,248.0

25,018.3

22,224.5

See accompanying notes.

23

FAIRFAX  FINANCIAL  HOLDINGS  LIMITED

Consolidated Statements of Earnings
for the years ended December 31, 2003, 2002 and 2001

2003

2002

2001

(US$ millions – except
per share amounts)

Revenue

Gross premiums written ****************************

5,518.6

5,173.2

4,422.7

Net premiums written ******************************

4,448.1

4,033.9

3,263.1

Net premiums earned*******************************
Interest and dividends ******************************
Realized gains on investments***********************
Realized gain on Northbridge IPO *******************
Realized gain on OdysseyRe IPO*********************
Claims fees ****************************************

Expenses

Losses on claims ***********************************
Operating expenses *********************************
Commissions, net **********************************
Interest expense ************************************
Other costs and restructuring charges ****************
Swiss Re premiums *********************************
Kingsmead losses ***********************************
Negative goodwill **********************************

Earnings (loss) from operations before income

taxes *********************************************
Provision for (recovery of) income taxes ***************

Earnings (loss) from operations before

extraordinary item ******************************
Negative goodwill ************************************

Net earnings (loss) before non-controlling

interests ******************************************
Non-controlling interests *****************************

4,209.0
330.1
840.2
5.7
–
328.9

3,888.6
418.6
469.5
–
–
290.7

3,108.9
440.3
105.0
–
33.1
274.7

5,713.9

5,067.4

3,962.0

3,240.6
1,023.4
776.1
146.3
–
–
–
–

2,998.7
927.5
706.2
87.0
70.0
2.7
–
–

2,627.8
878.3
673.6
109.0
31.8
92.9
75.5
(50.8)

5,186.4

4,792.1

4,438.1

527.5
191.9

335.6
–

275.3
150.0

125.3
188.4

(476.1)
(250.0)

(226.1)
–

335.6
(64.5)

313.7
(50.7)

(226.1)
2.3

Net earnings (loss) *********************************

271.1

263.0

(223.8)

Net earnings (loss) per share before

extraordinary item and after non-controlling
interests ******************************************
Net earnings (loss) per share **********************
Net earnings (loss) per diluted share**************
Cash dividends paid per share ********************

See accompanying notes.

$ 18.55
$ 18.55
$ 18.23
0.98
$

5.01
$
$ 18.20
$ 18.20
0.63
$

$ (18.13)
$ (18.13)
$ (18.13)
–

24

Consolidated Statements of Retained Earnings
for the years ended December 31, 2003, 2002 and 2001

Retained earnings – beginning of year ***********
Change in accounting for negative goodwill *********

Retained earnings as restated – beginning of

year **********************************************
Net earnings (loss) for the year **********************
Excess over stated value of shares purchased for

cancellation**************************************
Common share dividends ***************************
Preferred share dividends ***************************
Cost of convertible debentures, net of tax************
(Dividend tax) recovery *****************************

2003

2002

2001

(US$ millions)

873.5
–

873.5
271.1

(4.9)
(13.9)
(9.8)
(1.1)
–

590.3
32.2

622.5
263.0

–
(9.0)
(8.3)
–
5.3

830.4
–

830.4
(223.8)

–
–
(8.4)
–
(7.9)

Retained earnings – end of year ******************

1,114.9

873.5

590.3

See accompanying notes.

25

FAIRFAX  FINANCIAL  HOLDINGS  LIMITED

Consolidated Statements of Cash Flows
for the years ended December 31, 2003, 2002 and 2001

Operating activities

Earnings (loss) before non-controlling interests
Amortization ********************************
Future income taxes *************************
Negative goodwill ***************************
Gains on investments ************************

Increase (decrease) in:

Provision for claims**************************
Unearned premiums *************************
Accounts receivable and other ****************
Recoverable from reinsurers ******************
Funds withheld payable to reinsurers *********
Accounts payable and accrued liabilities*******
Other ***************************************
Cash provided by (used in) operating activities **

Investing activities

Investments – purchases *********************
– sales **************************
Sale of marketable securities ******************
Purchase of capital assets *********************
Investments in Hub, Zenith National and

Advent************************************
Purchase of subsidiaries, net of cash acquired **
Net proceeds on Northbridge IPO*************
Net proceeds on OdysseyRe IPO **************
Non-controlling interests *********************
Cash provided by investing activities ***********

Financing activities

Subordinate voting shares issued (repurchased)
Trust preferred securities of subsidiary

repurchased *******************************
Issue of OdysseyRe debt **********************
Issue of Crum & Forster debt *****************
Issue of convertible debentures ***************
Long term debt – repayment *****************
Purchase consideration***********************
Bank indebtedness ***************************
Common share dividends ********************
Preferred share dividends*********************
Cash provided by (used in) ﬁnancing activities **
Foreign currency translation********************
Increase in cash resources ******************
Cash resources – beginning of year*********
Cash resources – end of year ****************

See accompanying notes.

2003

2002

2001

(US$ millions)

335.6
52.1
127.0
–
(845.9)

(331.2)

759.5
235.7
257.4
(793.5)
141.6
59.8
62.4

391.7

313.7
42.9
114.8
(188.4)
(469.5)

(186.5)

(492.5)
415.6
(135.6)
450.6
(164.6)
122.5
119.3

128.8

(226.1)
45.5
(248.9)
(50.8)
(138.1)

(618.4)

427.7
227.1
(213.8)
(664.0)
238.5
193.1
(179.2)

(589.0)

(11,280.6)
14,483.6
6.6
(29.9)

(5,354.5)
5,498.4
28.8
(23.9)

(1,165.7)
1,624.2
8.6
(42.8)

–
18.7
148.9
–
–

3,347.3

(29.1)
(53.0)
–
–
(6.9)

59.8

(59.9)
26.1
–
284.8
–

675.3

(30.6)

(16.7)

156.0

(136.0)
225.0
300.0
200.0
(179.3)
(23.3)
(8.8)
(13.9)
(9.8)

323.3

31.9

4,094.2
2,010.1

6,104.3

(4.1)
110.0
–
–
(88.5)
–
(0.8)
(9.0)
(8.3)

(17.4)

(44.1)

(35.0)
150.0
–
–
(7.5)
–
0.6
–
(8.4)

255.7

(60.7)

127.1
1,883.0

2,010.1

281.3
1,601.7

1,883.0

Cash resources consist of cash and short term investments, including subsidiary cash and short term

investments.  Short  term  investments  are  readily  convertible  into  cash  and  have  maturities  of  three

months or less.

26

Notes to Consolidated Financial Statements
for the years ended December 31, 2003, 2002 and 2001

(in US$ millions except per share amounts and as otherwise indicated)

1.

Business Operations

The  company  is  a  ﬁnancial  services  holding  company  which,  through  its  subsidiaries,  is

principally engaged in property and casualty insurance conducted on a direct and reinsurance

basis, investment management and insurance claims management.

2.

Change in Reporting Currency and Functional Currency

As  the  majority  of  the  company’s  operations  are  in  the  United  States  or  conducted  in  U.S.

dollars,  effective  December  31,  2003,  the  company  is  reporting  its  consolidated  ﬁnancial

statements  in  U.S.  dollars,  in  order  to  provide  more  meaningful  information  to  its  ﬁnancial

statement  users.  To  effect  this  conversion,  the  consolidated  ﬁnancial  statements  have  been

translated into U.S. dollars using the current rate method, pursuant to which the consolidated

statements of earnings and cash ﬂows have been translated using the average rate of exchange

for the relevant year, all assets and liabilities have been translated using the relevant year end

rate of exchange and both common stock and preferred stock have been translated using the

rates of exchange in effect as of the dates of the various capital transactions. Foreign exchange

differences arising from the translation as described above have been recorded in the currency

translation  account  which  is  included  as  a  separate  component  of  shareholders’  equity.  All

comparative ﬁnancial information has been restated to reﬂect the company’s results as if they

had been historically reported in U.S. dollars.

Currency Translation Account

Balance – beginning of year

2003

2002

2001

(297.8)

(237.7)

(111.9)

Foreign exchange impact from foreign denominated net assets

61.5

(4.9)

131.5

Foreign exchange impact from hedges (U.S. denominated debt

and forward contracts, net of tax of $25.7 in 2003)

291.4

(55.2)

(257.3)

Balance – end of year

55.1

(297.8)

(237.7)

The company (i.e. the holding company) has also determined, effective January 1, 2004, that

its  functional  currency  is  U.S.  dollars.  This  change  from  Canadian  dollars,  which  will  be

accounted for on a prospective basis, is based primarily on the fact that with the termination of

the U.S. forward contracts and the repayment of the Canadian dollar denominated debt, the

holding company balance sheet will be fully exposed to the U.S. dollar. In addition, based on

analysis of the underlying cash ﬂows, management has determined that these cash ﬂows will

be  primarily  denominated  in  U.S.  dollars  and  that  future  dividend  payments  will  likely  be

denominated in U.S. dollars.

3.

Summary of Signiﬁcant Accounting Policies

The  preparation  of  ﬁnancial  statements  in  accordance  with  Canadian  generally  accepted

accounting principles (‘‘GAAP’’) requires management to make estimates and assumptions that

affect  reported  amounts  of  assets  and  liabilities  and  disclosures  of  contingent  assets  and

liabilities as at the date of the ﬁnancial statements and the reported amounts of revenue and

27

FAIRFAX  FINANCIAL  HOLDINGS  LIMITED

expenses  during  the  periods  covered  by  the  ﬁnancial  statements.  The  principal  ﬁnancial

statement  components  subject  to  measurement  uncertainty  include  the  provision  for  claims

(note 5), other-than-temporary declines in the value of investments (note 4), the allowance for

unrecoverable  reinsurance  (note  9),  the  carrying  value  of  future  tax  assets  (note  10)  and  the

valuation of goodwill (note 3). Actual results could differ from those estimates.

Principles of consolidation

The  consolidated  ﬁnancial  statements  include  the  accounts  of  the  company  and  all  of  its

subsidiaries:

Canadian Insurance

Reinsurance

Northbridge Financial Corporation

Odyssey Re Holdings Corp. (OdysseyRe)

(Northbridge)

U.S. Insurance

Runoff and Other

U.S. runoff consists of:

Crum & Forster Holdings, Inc. (C&F)

TIG Insurance Company (TIG)

Falcon Insurance Company Limited

European runoff consists of:

Fairmont Specialty Group

nSpire Re Limited (formerly ORC Re Limited)

(Fairmont)

Sphere Drake Insurance Limited (Sphere

Old Lyme Insurance Company of Rhode

Drake)

Island, Inc. (transferred to runoff effective

RiverStone Insurance (UK) Limited

January 1, 2004)

Group Re consists of:

CRC (Bermuda) Reinsurance Limited

Wentworth Insurance Company Ltd.

Retention of U.S. business in nSpire Re

Other

Hamblin Watsa Investment Counsel Ltd. (Hamblin Watsa) (investment management)

Lindsey Morden Group Inc. (Lindsey Morden) (insurance claims management)

All  subsidiaries  are  wholly-owned  except  for  OdysseyRe  with  a  voting  and  equity  interest  of

80.6% (2002 – 73.8%), Northbridge with a voting and equity interest of 71.0% (2002 – 100.0%)

and Lindsey Morden with a 75.0% equity and 89.5% voting interest (2002 – 75.0% and 89.5%).

The  company  has  investments  in  Hub  International  Limited  with  a  26.1%  (2002 –  28.7%)

interest and Advent Capital (Holdings) PLC with a 46.8% interest (2002 – 46.8%), which are

accounted  for  on  the  equity  basis.  The  company  also  has  an  investment  in  Zenith  National

Insurance Corp. (‘‘Zenith’’) with a 42.0% (2002 – 42.0%) equity interest which is accounted for

on  the  cost  basis,  as  the  company  does  not  currently  have  the  ability  to  exercise  signiﬁcant

inﬂuence over Zenith. In 1999, at the time of the company’s initial investment in Zenith, it

entered into a Standstill Agreement with Zenith whereby the company would have no Board of

Directors  representation  and  is  precluded  from,  directly  or  indirectly,  acting,  alone  or  with

others, to seek to acquire or affect control or inﬂuence the management, Board of Directors or

policies of Zenith. This agreement will remain in effect until the earlier of December 31, 2006

and the date on which the current President and Chairman of Zenith no longer holds those

positions.  Further,  Fairfax  entered  into  a  Proxy  Agreement  dated  March  28,  2002,  giving  an

independent trustee the proxy to vote the company’s shares of Zenith in the same proportion

28

as  the  votes  cast  by  all  other  voting  shareholders  of  Zenith  (except  in  the  event  of  a  hostile

proxy contest, when the trustee will vote as recommended by the management of Zenith).

Acquisitions  are  accounted  for  by  the  purchase  method,  whereby  the  results  of  acquired

companies are included only from the date of acquisition. Divestitures are included up to the

date of disposal.

Premiums

Insurance  and  reinsurance  premiums  are  taken  into  income  evenly  throughout  the  terms  of

the related policies.

Deferred premium acquisition costs

Certain costs, consisting of brokers’ commissions and premium taxes, of acquiring insurance

premiums  are  deferred,  to  the  extent  that  they  are  considered  recoverable,  and  charged  to

income  as  the  premiums  are  earned.  The  ultimate  recoverability  of  deferred  premium

acquisition costs is determined without regard to investment income.

Investments

Bonds are carried at amortized cost providing for the amortization of the discount or premium

on  a  yield  to  maturity  basis.  Preferred  and  common  stocks  are  carried  at  cost.  Real  estate  is

carried  at  cost.  When  there  has  been  a  loss  in  value  of  an  investment  that  is  other  than

temporary,  the  investment  is  written  down  to  its  estimated  net  realizable  value.  Such

writedowns are reﬂected in realized gains (losses) on investments.

The  company  purchases  foreign  currency  ﬁnancial  instruments  to  hedge  its  foreign  equity

portfolio.  At  December  31,  2003,  the  company  held  a  Yen/U.S.  cross  currency  swap  of  Yen

16.5 billion with a fair value of $1.5 maturing April 2, 2004 which was designated as a hedge of

the  foreign  exchange  exposure  of  various  Japanese  equities.  In  2002  the  company  had  Yen

10.2 billion of forward contracts which matured in 2003 and which had been designated as

hedges. Once the securities are sold, the contracts are closed out and any gain or loss is then

included  in  realized  gains  (losses)  on  investments.  Gains  or  losses  on  contracts  in  excess  of

hedging requirements are recorded in earnings as they arise.

Provision for claims

Claim provisions are established by the case method as claims are reported. For reinsurance,

the provision for claims is based on reports and individual case estimates received from ceding

companies. The estimates are regularly reviewed and updated as additional information on the

estimated claims becomes known and any resulting adjustments are included in earnings. A

provision  is  also  made  for  management’s  calculation  of  factors  affecting  the  future

development of claims including claims incurred but not reported (IBNR) based on the volume

of business currently in force and the historical experience on claims.

Translation of foreign currencies

Until  the  holding  company  changes  its  functional  currency  to  U.S.  dollars  (see  note  2),  the

accounting records are maintained in Canadian dollars and are then converted to U.S. dollars

for reporting purposes using the current rate method as disclosed in note 2.

29

FAIRFAX  FINANCIAL  HOLDINGS  LIMITED

Assets  and  liabilities  in  foreign  currencies  are  translated  into  Canadian  dollars  at  year-end

exchange rates. Revenues and expenses are translated at the exchange rates in effect at the date

incurred.  Realized  gains  and  losses  on  foreign  exchange  transactions  are  recognized  in  the

statements of earnings.

The operations of the company’s subsidiaries (principally in the United States and the United

Kingdom) are self-sustaining. As a result, the assets and liabilities of the non Canadian dollar

denominated  subsidiaries  are  translated  at  the  year-end  rates  of  exchange.  Revenue  and

expenses are translated at the average rate of exchange for the year. Historically, the company

had entered into foreign currency contracts from time to time to hedge the foreign currency

exposure related to its net investments in self-sustaining U.S. operations. Such contracts were

translated at the year-end rates of exchange. The remaining contracts were terminated during

the year.

Goodwill

Prior  to  January  1,  2002,  the  excess  of  purchase  cost  over  the  fair  value  of  the  net  assets  of

acquired businesses was amortized on the straight line basis over their estimated useful lives

which ranged from ten years for Hamblin Watsa and insurance company acquisitions to forty

years for Lindsey Morden.

Effective  January  1,  2002,  in  accordance  with  changes  to  Canadian  GAAP,  goodwill  is  no

longer being amortized to earnings over its estimated useful life. The carrying value of goodwill

will be charged to earnings if and to the extent that it is determined that an impairment in

value  exists.  The  company  assesses  the  carrying  value  of  goodwill  based  on  the  underlying

discounted cash ﬂows and operating results of its subsidiaries. Management has compared the

carrying value of goodwill balances as at December 31, 2003 and the estimated fair values of

the  underlying  operations  and  concluded  that  there  was  no  impairment  in  the  value  of

goodwill except for $4.7 at Lindsey Morden. The estimated fair values are sensitive to the cash

ﬂow projections and discount rates used in the valuation.

In addition, effective January 1, 2002, the excess of the fair value of net assets acquired over the

purchase  price  paid  for  acquired  businesses  (negative  goodwill)  is  no  longer  amortized  to

earnings. Consequently, effective January 1, 2002, the company’s negative goodwill balance of

$32.2  was  added  to  shareholders’  equity  as  an  adjustment  to  opening  retained  earnings.

Negative  goodwill  arising  on  acquisitions  during  the  year  is  recognized  as  an  extraordinary

item.

Had  the  above-mentioned  changes  in  accounting  policy  been  adopted  retroactively,  their

impact on the prior periods would have been as follows:

(a) negative  goodwill  amortization  would  have  reduced  net  earnings  by  $50.8  for  the

year ended December 31, 2001; and

(b)

goodwill amortization would have increased net earnings by $10.5 for the year ended

December 31, 2001.

These changes would have resulted in a reduction of net earnings of $40.3 and in a reduction

of previously reported earnings per share and earnings per share before extraordinary item and

30

after  non-controlling  interests  of  $3.04,  resulting  in  adjusted  earnings  (loss)  per  share  and

adjusted  earnings  per  share  before  extraordinary  item  and  after  non-controlling  interests  of

$(21.17)  for  the  year  ended  December  31,  2001.  The  net  impact  on  shareholders’  equity  at

December  31,  2002  after  these  changes  in  accounting  policies  was  an  increase  of  $32.2,  as

described above.

Reinsurance

The company reﬂects third party reinsurance balances on the balance sheet on a gross basis to

indicate  the  extent  of  credit  risk  related  to  third  party  reinsurance  and  its  obligations  to

policyholders  and  on  a  net  basis  in  the  statement  of  earnings  to  indicate  the  results  of  its

retention of premiums written.

In order to control the company’s exposure to loss from adverse development of reserves or

reinsurance  recoverables  on  pre-acquisition  reserves  of  companies  acquired  or  from  future

adverse  development  on  long  tail  latent  or  other  potentially  volatile  claims,  and  to  protect

capital,  the  company  obtains  vendor  indemnities  or  purchases  excess  of  loss  reinsurance

protection  from  reinsurers.  For  excess  of  loss  reinsurance  treaties  (other  than  vendor

indemnities),  the  company  generally  pays  the  reinsurer  a  premium  as  losses  from  adverse

development are ceded under the treaty. The company records both the premium charge and

the  related  reinsurance  recovery  in  its  consolidated  statement  of  earnings  in  the  period  in

which the adverse development is ceded to the reinsurer.

Income taxes

Income taxes reﬂect the expected future tax consequences of temporary differences between

the carrying amounts of assets and liabilities and their tax bases based on tax rates which are

expected to be in effect when the asset or liability is settled.

31

FAIRFAX  FINANCIAL  HOLDINGS  LIMITED

4.

Investment Information

Portfolio investments comprise:

2003

Gross

Gross

2002

Gross

Gross

Carrying Unrealized Unrealized Estimated
Losses Fair Value

Value

Gains

Carrying Unrealized Unrealized Estimated
Losses Fair Value

Value

Gains

Subsidiary cash and short

term investments

5,710.6

–

–

5,710.6

1,705.5

–

–

1,705.5

Bonds

Canadian – government

– corporate

U.S. – government

– corporate

Other – government

– corporate

Preferred stocks

Canadian

U.S.

Common stocks

Canadian

U.S.

Other

Hub, Zenith National and

Advent

Real estate

663.0

425.6

2,397.3

811.4

242.4

189.6

142.3

–

192.1

333.3

648.5

387.6

12.2

49.9

22.9

6.4

63.9

18.8

7.6

1.6

–

59.7

49.1

155.1

68.4

4.8

(5.1)

–

707.8

448.5

448.5

322.7

(185.1)

2,218.6

4,196.2

25.0

20.6

8.5

(1.5)

(8.5)

472.0

334.8

(25.1)

4,179.6

(10.0)

865.3

2,077.7

160.5

(60.2)

2,178.0

–

(53.8)

–

–

(0.3)

(1.8)

(7.2)

–

–

261.2

143.4

143.9

–

251.5

380.6

796.4

456.0

17.0

338.1

11.3

129.7

30.4

137.5

141.0

401.1

354.3

20.5

2.7

5.0

0.1

–

7.4

29.9

23.9

–

3.7

(8.0)

–

–

(2.2)

(3.5)

(14.0)

(10.9)

(21.7)

–

332.8

16.3

129.8

28.2

141.4

156.9

414.1

332.6

24.2

12,155.9

508.2

(263.3)

12,400.8

10,314.5

287.3

(155.6)

10,446.2

The estimated fair values of debt securities and preferred and common stocks in the table above

are based on quoted market values.

Management has reviewed currently available information regarding those investments whose

estimated  fair  value  is  less  than  carrying  value  at  December  31,  2003.  Debt  securities  whose

carrying  value  exceeds  market  value  can  be  held  until  maturity.  All  investments  have  been

reviewed to ensure that corporate performance expectations have not changed signiﬁcantly to

adversely  affect  the  market  value  of  these  securities  other  than  on  a  temporary  basis.  The

company  has  made  investments  in  certain  high  yield  debt  securities  for  which  the  market

value of the investments is below the cost to the company. The company has written down the

carrying value of these investments to reﬂect an other than temporary decline in value. The

carrying  values  have  been  written  down  to  the  company’s  assessment  of  the  underlying  fair

value of the investments. The company may not view the current quoted market value as being

reﬂective of the underlying value of the investments. At December 31, 2003, the company had

total  bonds  rated  less  than  investment  grade  with  an  aggregate  carrying  value  of  $444.6,

aggregate quoted market value of $371.6, gross unrealized gains of $10.1 and gross unrealized

losses of $83.1.

32

The company’s subsidiaries have pledged cash and investments of $2.0 billion as security for

their own obligations to pay claims or make premium payments (these pledges are either direct

or  to  support  letters  of  credit).  These  pledges  are  in  the  normal  course  of  business  and  are

generally released when the payment obligation is fulﬁlled.

Liquidity and Interest Rate Risk

Maturity proﬁle as at December 31, 2003 and 2002:

Within 1
Year

1 to 5
Years

6 to 10
Years

Over 10
Years

2003
Total

Bonds (carrying value)

$

780.3

$1,120.8

$ 472.9

$2,355.3

$4,729.3

Effective interest rate

Within 1
Year

1 to 5
Years

6 to 10
Years

Over 10
Years

4.9%

2002
Total

Bonds (carrying value)

$

495.4

$2,003.9

$1,072.2

$3,823.0

$7,394.5

Effective interest rate

5.5%

Bonds are classiﬁed at the earliest of the available maturity dates.

Investment Income

Interest and dividends:

Cash and short term investments

Bonds

Preferred stocks

Common stocks

Expenses

Realized gains on investments:

Bonds

Preferred stocks

Common stocks

Repurchase of notes and trust preferred securities

Northbridge IPO

OdysseyRe IPO

Other

Provision for losses and writedowns

2003

2002

2001

51.4

36.0

55.0

216.2

347.4

349.7

7.3

70.7

4.2

38.1

2.3

38.7

345.6

425.7

445.7

(15.5)

(7.1)

(5.4)

330.1

418.6

440.3

686.3

322.9

0.1

7.6

18.4

0.4

188.6

158.0

111.6

–

5.7

–

20.2

–

–

(2.8)

(5.5)

–

–

33.1

(1.2)

(32.0)

(33.7)

(24.2)

845.9

469.5

138.1

Net investment income

1,176.0

888.1

578.4

33

FAIRFAX  FINANCIAL  HOLDINGS  LIMITED

5.

Provision for Claims

The provisions for unpaid claims and adjustment expenses and for the third party reinsurers’

share thereof are estimates subject to variability, and the variability could be material in the

near term. The variability arises because all events affecting the ultimate settlement of claims

have not taken place and may not take place for some time. Variability can be caused by receipt

of  additional  claim  information,  changes  in  judicial  interpretation  of  contracts  or  liability,

signiﬁcant  changes  in  severity  or  frequency  of  claims  from  historical  trends,  expansion  of

coverage to include unanticipated exposures, or a variety of other reasons. The estimates are

principally  based  on  the  company’s  historical  experience.  Methods  of  estimation  have  been

used which the company believes produce reasonable results given current information.

Changes in claim liabilities recorded on the balance sheet for the years ended December 31,

2003 and 2002 and their impact on unpaid claims and allocated loss adjustment expenses for

these two years are as shown in the following table:

Unpaid claim liabilities – beginning of year – net

Foreign exchange effect of change in claim liabilities

Increase in estimated losses and expenses for losses occurring in

prior years

Recovery under Swiss Re cover

Provision for losses and expenses on claims occurring in the

current year

Paid on claims occurring during:

the current year

prior years

Unpaid claim liabilities at December 31 of:

First Capital

Old Lyme

Unpaid claim liabilities – end of year – net

Unpaid claim liabilities at December 31 of Federated Life

Unpaid claim liabilities – end of year – net

Reinsurance gross-up

2003

2002

6,917.6

6,706.4

173.0

11.8

456.3

(263.6)

336.6

(5.2)

2,834.4

2,617.2

(597.0)

(689.0)

(2,615.8)

(2,111.0)

–

–

10.3

40.5

6,904.9

6,917.6

24.1

18.3

6,929.0

7,439.1

6,935.9

6,461.4

Unpaid claim liabilities – end of year – gross

14,368.1

13,397.3

The  foreign  exchange  effect  of  change  in  claim  liabilities  results  from  the  ﬂuctuation  of  the

value of the U.S. dollar in relation to the Canadian dollar and European currencies. With the

assignment of the Swiss Re cover to nSpire Re effective December 31, 2002, the $147.8 cost of

the  related  cessions  have  been  charged  to  net  premiums  earned  for  the  year  ended

December 31, 2003 and had been charged to expenses in 2002 and 2001.

The basic assumptions made in establishing actuarial liabilities are best estimates of possible

outcomes. The company presents its claims on an undiscounted basis.

34

6.

Long Term Debt

The long term debt at December 31 consists of the following balances:

Fairfax unsecured senior notes at 7.75% due December 15, 2003(1)
Fairfax unsecured senior note of Cdn$25 at 7.75% due December 15,

2003(1)

Fairfax unsecured senior notes at 73/8% due March 15, 2006
Fairfax 445.7 secured debt at 21/2% due February 27, 2007 (effectively

a 430.5 debt at 8%)(4)

Fairfax unsecured senior notes at 6.875% due April 15, 2008(1)(2)
Fairfax unsecured senior notes at 8.25% due October 1, 2015(2)
Fairfax unsecured senior notes at 7.375% due April 15, 2018(1)(2)(3)
Fairfax unsecured senior notes at 8.30% due April 15, 2026(1)(2)
Fairfax unsecured senior notes at 7.75% due July 15, 2037(1)(2)
Fairfax 5% convertible senior debentures due July 15, 2023(5)
Fairfax Inc. 3.15% exchangeable debenture due March 3, 2010(6)
TIG senior unsecured non-callable notes at 8.125% due April 15,

2005

Other long term debt of TIG

OdysseyRe senior unsecured non-callable notes at 7.49% due

November 30, 2006

OdysseyRe convertible senior debentures at 4.375% due June 22,

2022(9)

OdysseyRe unsecured senior notes at 7.65% due November 1, 2013(7)
Crum & Forster unsecured senior notes at 103/8% due June 15, 2013(8)
Lindsey Morden unsecured Series B debentures of Cdn$125 at 7%

due June 16, 2008

Other long term debt of Lindsey Morden

Less: Lindsey Morden debentures held by Fairfax

2003

–

–

275.0

49.7

170.0

100.0

190.2

102.6

105.5

99.0

78.0

97.7

–

2002

100.0

15.8

275.0

39.6

170.0

100.0

190.2

102.6

105.5

–

–

99.7

7.6

40.0

90.0

110.0

225.0

300.0

96.7

0.8

110.0

–

–

79.1

2.8

2,040.2

1,487.9

(6.4)

(5.2)

2,033.8

1,482.7

(1) During 2003, the company purchased for cancellation $44.5 (2002 – $25.6) of its notes at a cost

of $44.5 (2002 – $13.4). The notes purchased in 2003 were notes maturing primarily in 2003.

(2) During 2002, the company closed out the swaps for this debt and deferred the resulting gain of

approximately $59.4 which will be amortized to earnings over the remaining term to maturity.

(3) During 1998, the company swapped $125 of its debt at 7.375% due April 15, 2018 for Japanese

yen denominated debt of the same maturity, with ﬁxed interest at 3.48% per annum. Effective

January  1,  2002,  in  accordance  with  changes  to  Canadian  GAAP,  foreign  exchange  gains  and

losses on long term debt are recognized immediately in earnings. As at December 31, 2002, the

unrealized loss from the foreign exchange component of the yen debt swap was $8.5. Previously,

this  amount  would  have  been  amortized  to  earnings  over  the  term  to  maturity.  In  2003,  the

foreign exchange exposure on the yen debt swap is hedged as described in note 3.

35

FAIRFAX  FINANCIAL  HOLDINGS  LIMITED

(4) Secured  by  LOCs  issued  under  a  separate  banking  facility  from  the  company’s  syndicated  bank

facility.

(5) Each  $1,000  principal  amount  of  debentures  is  convertible  under  certain  circumstances  into

4.7057 subordinate voting shares ($212.51 per share). Prior to July 15, 2008, the company may

redeem  the  debentures  (effectively  forcing  conversion)  if  the  share  price  exceeds  $293.12  for

20 trading days in any 30-day trading period. The company may redeem the debentures at any

time  commencing  July  15,  2008,  and  the  debenture  holders  can  put  their  debentures  to  the

company for repayment on July 15, 2008, 2013 and 2018. The company has the option to repay

the debentures in cash, subordinate voting shares or a combination thereof. In accordance with

Canadian GAAP, these convertible debentures are recorded as components of debt and equity. The

present value of the interest cost associated with these debentures, discounted at 8% per annum, is

presented  as  debt  of  $99.0.  The  value  of  the  conversion  option  and  the  present  value  of  the

principal  amount  of  the  debentures  on  maturity,  discounted  at  8%  per  annum,  aggregating

$101.4, is included in other paid in capital. The paid in capital amount is net of issue costs of

$1.8 after tax. The amortization of the net present value of the principal amount of the debentures

is charged to retained earnings ($1.1 in 2003).

(6) Exchangeable at the holder’s option in November 2004 and February 2005 into an aggregate of

4,300,000 OdysseyRe common shares.

(7) Redeemable at OdysseyRe’s option at any time.

(8) $63.1  of  the  proceeds  was  placed  in  an  interest  escrow  account,  to  fund  the  ﬁrst  four  interest

payments. At December 31, 2003, the balance in the interest escrow account was $47.3 after one

semi-annual interest payment.

(9) Redeemable  at  OdysseyRe’s  option  beginning  June  22,  2005.  Each  holder  may,  at  its  option,

require  OdysseyRe  to  repurchase  all  or  a  portion  of  this  debt  (for  cash  or  OdysseyRe  common

shares, at OdysseyRe’s option) on June 22, 2005, 2007, 2009, 2012 and 2017. Convertible at the

holder’s  option,  under  certain  circumstances,  into  OdysseyRe  common  shares  in  the  ratio  of

46.9925 OdysseyRe shares for every $1,000 principal amount of this debt.

Interest expense on long term debt amounted to $144.8 (2002 – $85.3; 2001 – $106.3). Interest

expense on Lindsey Morden’s bank indebtedness amounted to $1.5 (2002 – $1.7; 2001 – $2.7).

Principal repayments are due as follows:

2004

2005

2006

2007

2008

Thereafter

0.6

97.8

315.1

49.7

260.3

1,310.3

7.

Trust Preferred Securities of Subsidiaries

TIG Holdings has issued $125 of 8.597% junior subordinated debentures to TIG Capital Trust

(a  statutory  business  trust  subsidiary  of  TIG  Holdings)  which,  in  turn,  has  issued  $125  of

8.597% mandatory redeemable capital securities, maturing in 2027. During 2002, the company

acquired $10.2 of these trust preferred securities for approximately $4.1.

36

In February 2003, the company redeemed its $136 of Redeemable Hybrid Income Overnight

Shares (RHINOS) (136,000 trust preferred securities) for $136.

8.

Capital Stock

Authorized capital

The  authorized  share  capital  of  the  company  consists  of  an  unlimited  number  of  preferred

shares issuable in series, an unlimited number of multiple voting shares carrying ten votes per

share and an unlimited number of subordinate voting shares carrying one vote per share.

Issued capital

Multiple voting shares

1,548,000

3.8

1,548,000

3.8

1,548,000

2003

number

2002

2001

$

number

$

number

$

3.8

Subordinate voting shares

13,151,218 1,519.3 13,391,918 1,545.0 13,602,118 1,561.6

14,699,218 1,523.1 14,939,918 1,548.8 15,150,118 1,565.4

Interest in shares held

through ownership

interest in shareholder

(799,230)

(13.1)

(799,230)

(13.1)

(799,230)

(13.1)

Net shares effectively

outstanding

13,899,988 1,510.0 14,140,688 1,535.7 14,350,888 1,552.3

Fixed/floating cumulative

redeemable (at the

company’s option)

preferred shares, Series A,

with a fixed dividend of

6.5% per annum until

November 30, 2004 and

stated capital of Cdn$25

per share

8,000,000

136.6

8,000,000

136.6

8,000,000

136.6

Under the terms of normal course issuer bids approved by the Toronto Stock Exchange, during

2003  the  company  purchased  and  cancelled  240,700  (2002  –  210,200)  subordinate  voting

shares for an aggregate cost of $30.6 (2002 – $16.7), of which $4.9 (2002 – nil) was charged to

retained earnings.

On November 20, 2001, the company issued 1,250,000 subordinate voting shares at Cdn$200

(US$125.53) per share for net proceeds of $156.0.

9.

Reinsurance

The  company  follows  the  policy  of  underwriting  and  reinsuring  contracts  of  insurance  and

reinsurance  which,  depending  on  the  type  of  contract,  generally  limits  the  liability  of  the

individual insurance and reinsurance subsidiaries to a maximum amount on any one loss of

$10. Reinsurance is generally placed on an excess of loss basis in several layers. The company’s

37

FAIRFAX  FINANCIAL  HOLDINGS  LIMITED

reinsurance  does  not,  however,  relieve  the  company  of  its  primary  obligation  to  the

policyholders.

The company has guidelines and a review process in place to assess the creditworthiness of the

companies to which it cedes.

The  company  makes  speciﬁc  provisions  against  reinsurance  recoverable  from  companies

considered to be in ﬁnancial difﬁculty. In addition, the company records a general allowance

based  upon  analysis  of  historical  recoveries,  the  level  of  allowance  already  in  place  and

management’s judgment on future collectibility. The allocation of the allowance for loss is as

follows:

Speciﬁc

General

Total

2003

382.0

109.9

491.9

2002

462.3

152.5

614.8

During  the  year,  the  company  ceded  premiums  earned  of  $1,350.4  (2002  –  $903.2;  2001  –

$1,234.5) and claims incurred of $1,614.3 (2002 – $826.3; 2001 – $2,323.0).

10.

Income Taxes

The company’s provision for (recovery of) income taxes is as follows:

Current

Future

2003

64.9

127.0

2002

35.2

2001

(1.2)

114.8

(248.8)

191.9

150.0

(250.0)

The provision for income taxes differs from the statutory tax rate as certain sources of income

are exempt from tax or are taxed at other than the statutory rate. A reconciliation of income

tax calculated at the statutory tax rate with the income tax provision at the effective tax rate in

the ﬁnancial statements is summarized in the following table:

2003

2002

2001

Provision for (recovery of) income taxes at

statutory income tax rate

Non-taxable investment income

193.2

(18.8)

106.2

(200.0)

(10.5)

(36.4)

Tax rate differential on income earned outside

Canada

Negative goodwill amortization

(6.2)

(69.9)

7.2

–

–

(21.3)

Change in tax rate for future income taxes

(14.2)

(8.0)

0.9

Unrecorded tax beneﬁt of losses and

utilization of prior years’ losses

37.9

132.2

(0.4)

Provision for (recovery of) income taxes

191.9

150.0

(250.0)

38

Future income taxes of the company are as follows:

Operating and capital losses

Claims discount

Unearned premium reserve

2003

613.5

251.9

84.6

2002

653.7

240.2

79.8

Deferred premium acquisition cost

(92.5)

(89.4)

Investments

Allowance for doubtful accounts

Other

Valuation allowance

Future income taxes

–

21.2

89.6

–

8.1

25.8

76.9

(17.8)

968.3

977.3

The  company  has  loss  carryforwards  in  the  U.S.  of  approximately  $1.5  billion  of  which  the

bulk expire in 2020 through 2023.

Management reviews the valuation of the future income taxes on an ongoing basis and adjusts

the  valuation  allowance,  as  necessary,  to  reﬂect  its  anticipated  realization.  Management

expects that these future income taxes will be realized in the normal course of operations.

11.

Statutory Requirements

The company’s insurance and reinsurance subsidiaries are subject to certain requirements and

restrictions  under  their  respective  insurance  company  Acts  including  minimum  capital

requirements and dividend restrictions.

At December 31, 2003, statutory surplus, determined in accordance with the various insurance

regulations,  amounted  to  $1.9  billion  (2002  –  $1.3  billion)  for  the  insurance  subsidiaries,

$1.6  billion  (2002  –  $1.0  billion)  for  the  reinsurance  subsidiaries  and  $1.1  billion  (2002  –

$1.6  billion)  for  the  runoff  subsidiaries.  $0.3  billion  (2002  –  $0.6  billion)  of  OdysseyRe’s

statutory  surplus  is  also  included  in  TIG’s  statutory  surplus  which  is  included  in  the  runoff

subsidiaries.

12.

Contingencies and Commitments

In 2000, the legal proceedings commenced by Sphere Drake in 1999 against a group of agents

and intermediaries whom it alleged fraudulently obtained and utilized a binding authority to

write  reinsurance  contracts  which  expose  Sphere  Drake  to  signiﬁcantly  under-priced

U.S. workers’ compensation business, which was ﬁled in New York, was dismissed as to most

defendants primarily on the ground that London, England was a more convenient forum in

which the dispute should be resolved. Sphere Drake subsequently commenced proceedings in

the  Commercial  Court  in  London,  England  against  its  agent  and  the  agent  of  the  cedants,

alleging  fraud  and  breach  of  duty.  Sphere  Drake  had  rescinded  the  majority  of  the  inward

reinsurance  contracts  placed  under  the  binding  authority  and  is  defending  arbitration

proceedings  initiated  by  the  cedants  of  a  number  of  those  contracts.  On  July  8,  2003,  the

Commercial Court released a judgment ﬁnding in Sphere Drake’s favour. The judgment upheld

Sphere  Drake’s  allegation  that  in  accepting  business,  the  underwriting  agents  acted  in

dishonest breach of ﬁduciary duties owed to Sphere Drake, that the brokers dishonestly assisted

39

FAIRFAX  FINANCIAL  HOLDINGS  LIMITED

in  committing  those  breaches,  and  that  the  underwriting  agents  and  the  brokers  were  both

dishonest  and  collusive.  The  judge  has  therefore  found  for  Sphere  Drake  on  all  material

grounds on which Sphere Drake contends that it is entitled to avoid paying losses under the

inward reinsurance contracts purportedly placed on its behalf under the binding authority.

This judgment conﬁrms the company’s belief that the likely ultimate net liability which might

arise in respect of this business will not be material to Sphere Drake’s ﬁnancial position.

Subsidiaries of the company are also defendants in several damage suits and have been named

as third party in other suits. The uninsured exposure to the company is not considered to be

material to the company’s ﬁnancial position.

In addition to the secured letters of credit referred to in note 4, at December 31, 2003 letters of

credit  aggregating  $301.9,  secured  under  the  company’s  syndicated  bank  loan  facility  or  as

described  subsequently  in  this  note,  had  been  issued  upon  the  company’s  application  and

pledged  as  security  for  subsidiaries’  reinsurance  balances,  all  relating  to  intercompany

reinsurance between subsidiaries. Since December 31, 2003, $19.9 of those letters of credit were

returned  for  cancellation.  The  remaining  letters  of  credit  aggregating  $282.0  are  currently

effectively  secured  by  the  assets  held  in  trust  derived  from  the  premiums  on  the  company’s

corporate  insurance  cover  ultimately  reinsured  with  a  Swiss  Re  subsidiary,  and  the  interest

thereon. The lenders have the ability, in the event of a default, to cause the commutation of

this cover, thereby gaining access to the above-mentioned assets.

The company under certain circumstances may be obligated to purchase loans to ofﬁcers and

directors  of  the  company  and  its  subsidiaries  from  Canadian  chartered  banks  totalling  $8.9

(2002 – $11.5) for which 204,986 (2002 – 252,911) subordinate voting shares of the company

with a year-end market value of $35.8 (2002 – $19.4) have been pledged as security.

The company also has a restricted stock plan for management of the holding company and the

management of its subsidiaries with vesting periods of up to ten years from the date of grant.

At  December  31,  2003,  210,464  (2002  –  197,381)  subordinate  voting  shares  had  been

purchased for the plan at a cost of $44.1 (2002 – $43.5).

Shares for the above-mentioned plans are purchased on the open market. The costs of these

plans are amortized to compensation expense over the vesting period. Amortization expense

for the year for these plans amounted to $7.7 (2002 – $7.1; 2001 – $5.1).

13.

Operating Leases

Aggregate  future  minimum  commitments  at  December  31,  2003  under  operating  leases

relating  to  premises,  automobiles  and  equipment  for  various  terms  up  to  ten  years  are  as

follows:

2004

2005

2006

2007

2008

Thereafter

69.6

61.6

48.2

36.6

27.2

98.5

40

14.

Earnings per Share

Earnings per share are calculated after providing for dividends and dividend tax on the Series A

ﬁxed/ﬂoating cumulative redeemable preferred shares.

The weighted average number of shares for 2003 was 14,024,338 (2002 – 14,283,735; 2001 –

13,241,299).

15.

Acquisitions and Divestitures

Year ended December 31, 2003

On  May  28  and  June  10,  2003,  Northbridge,  the  Canadian  holding  company  for  Lombard

Canada Ltd., Commonwealth Insurance Company, Markel Insurance Company of Canada and

Federated  Holdings  of  Canada  Ltd.  and  their  respective  subsidiaries,  issued  an  aggregate  of

14,740,000 common shares in an initial public offering at Cdn $15 (US$10.82) per share. Net

proceeds  (after  expenses  of  issue)  were  $148.9  (Cdn  $206.4).  After  the  offering,  Fairfax  held

36.1 million (71.0%) of Northbridge’s common shares. Fairfax recorded a $5.7 (Cdn $8.0) gain

on its effective sale of a 29.0% interest in Northbridge which is included in realized gains on

investments in the consolidated statement of earnings.

On May 30, 2003, Lindsey Morden acquired all of the outstanding common shares of RSKCo

Services, Inc. (‘‘RSKCo’’), a claims management service provider in the U.S. The purchase price

payable is estimated to be $10.1 and the fair value of the assets acquired including goodwill of

approximately $4.7 and liabilities assumed would both be $37.7.

On  March  3,  2003,  the  company  purchased  an  additional  4,300,000  outstanding  common

shares of OdysseyRe for $18.15 per share, increasing its interest in OdysseyRe from 73.8% to

80.6%.  As  consideration,  the  company  issued  seven-year  3.15%  notes  exchangeable  in

November 2004 and February 2005 into the same number of OdysseyRe shares purchased.

Year ended December 31, 2002

On  September  10,  2002,  OdysseyRe  acquired  56.0%  of  First  Capital  Insurance  Limited,  a

Singapore insurance company, for $17.8. At the date of acquisition, the acquired company had

$48.8 in total assets and $17.8 in total liabilities.

On  August  28,  2002,  the  company  invested  an  additional  $29.3  (£19.4)  in  Advent  Capital

(Holdings) PLC of the U.K., thereby increasing its ownership to 46.8% from 22.0%.

Effective May 30, 2002, the company acquired Old Lyme Insurance Company of Rhode Island,

Inc.  and  Old  Lyme  Insurance  Company  Ltd.  from  its  equity  investee,  Hub  International

Limited, for cash consideration of $43.5, which approximated the fair value of the net assets

acquired.  At  the  date  of  acquisition,  the  acquired  companies  had  $108.2  in  total  assets  and

$64.7 in total liabilities.

Year ended December 31, 2001 and prior

On  June  14,  2001,  OdysseyRe,  the  U.S.  holding  company  for  Odyssey  America  Re  and  its

subsidiaries, issued 17,142,857 common shares, in an initial public offering, at $18 per share

for net proceeds (after expenses of issue) of $284.8. Fairfax and its wholly-owned subsidiary,

TIG,  received  $233.5  in  cash  from  these  proceeds.  After  the  offering,  Fairfax  and  TIG  held

41

FAIRFAX  FINANCIAL  HOLDINGS  LIMITED

48  million  (73.7%)  of  OdysseyRe’s  common  shares  and  a  $200  ORH  three  year  term  note

bearing interest at the rate of 2.25% over LIBOR and repayable in annual principal payments of

$66.7 beginning June 30, 2002. The company recorded a gain of $33.1 on its effective sale of a

26.3% interest in ORH.

As part of the acquisition of TIG on April 13, 1999, the company acquired a 90% ownership in

Kingsmead  Managing  Agency,  a  managing  agent  for  three  Lloyd’s  syndicates  for  which  TIG

provided underwriting capacity. On June 29, 2000, the company entered into an agreement to

sell Kingsmead to Advent Capital (Holdings) PLC for a 22% interest in Advent, which closed on

November 16, 2000. There was no gain or loss on the sale. The company recorded operating

losses  from  the  Kingsmead-managed  syndicates  of  $33.0  for  the  year  ended  December  31,

2000. For the year ended December 31, 2001, the company recorded a loss of $75.5 from its

liability for 2000 and prior underwriting years of those syndicates. The losses reﬂect losses on

unexpired policies from the 2000 underwriting year (including World Trade Center losses of

$40.4) and adverse development from the open underwriting years.

16.

Acquisition and Reorganization

On December 16, 2002, the company acquired Xerox’s 72.5% economic interest in TRG, the

holding  company  of  International  Insurance  Company,  in  exchange  for  payments  over  the

next 15 years of $425 ($204 at current value using a discount rate of 9% per annum), payable

approximately $5 a quarter from 2003 to 2017 and approximately $128 on December 16, 2017.

Upon  this  acquisition,  Xerox’s  non-voting  shares  were  amended  to  make  them  mandatorily

redeemable at a capped price and to eliminate Xerox’s participation in the operations of IIC,

and a direct contractual obligation was effectively created from the company to Xerox. The fair

value  of  assets  acquired  was  $1,442.9  and  of  liabilities  assumed  was  $1,050.5,  resulting  in

negative goodwill of $188.4. On December 16, 2002, TIG merged with International Insurance

and  discontinued  its  MGA-controlled  program  business,  which  resulted  in  the  company

recognizing a pre-tax charge to income in 2002 of $200 for reserve strengthening and $63.6 for

restructuring  and  other  related  costs  which  include  severance,  lease  termination  costs,

writedowns of long-lived assets and premiums for certain long term catastrophe covers.

17.

Segmented Information

The  company  is  a  ﬁnancial  services  holding  company  which,  through  its  subsidiaries,  is

primarily engaged in property and casualty insurance conducted on a direct and reinsurance

basis. The runoff business segment comprises nSpire Re (which fully reinsures the U.K. runoff

entities,  Sphere  Drake  and  RiverStone  (UK))  and  the  U.S.  runoff  company  formed  on  the

merger of TIG and IIC. The international runoff operations have reinsured their reinsurance

portfolios to nSpire Re to provide consolidated investment and liquidity management services,

with  the  RiverStone  Group  retaining  full  responsibility  for  all  other  aspects  of  the  runoff.

Included  in  the  runoff  and  other  business  segment  is  Group  Re  which  writes  and  retains

insurance  business  written  by  other  Fairfax  subsidiaries  consisting  of  CRC  (Bermuda)

(Canadian  business),  Wentworth  (international  business)  and  nSpire  Re  (U.S.  business).

Accordingly,  for  segmented  information,  nSpire  Re  is  classiﬁed  in  the  Runoff  segment.  The

company also provides claims adjusting, appraisal and loss management services.

42

Commencing with the ﬁrst quarter of 2003 (and reﬂected in the comparatives), the company

reﬁned its operating segment disclosure basis as follows:

(a)

Realized  gains  (losses)  on  investments  are  allocated  to  each  operating  segment,  in

aggregate,  based  on  the  realized  gains  (losses)  on  investments  reported  by  each

segment.  Realized  gains  (losses)  on  the  consolidated  statements  of  earnings  also

include  realized  gains  (losses)  on  the  holding  company  marketable  securities,

elimination of intersegment gains (losses) and purchase price adjustments resulting

from recording investments at fair value on acquisition of subsidiaries.

(b)

Fairfax  and  Hamblin  Watsa  investment  administration  and  management  fees  are

now included in each operating segment’s interest and dividends and in corporate

overhead and other.

Canada
2002

2003

2001

2003

United States
2002

2001

Europe and Far East
2002

2001

2003

Corporate and other
2001
2002
2003

2003

Total
2002

2001

Revenue
Net premiums earned
Insurance – Canada

– US

Reinsurance
Runoff and Group Re

Interest and dividends
Realized gains
Claims fees

Earnings (loss) before

income taxes
Underwriting results

Insurance – Canada
Insurance – US
Reinsurance

Interest and dividends

Operating income (loss)
Realized gains

Runoff and Group Re
Claims adjusting
Interest expense
Swiss Re premium
Kingsmead losses
Restructuring charges
Negative goodwill
amortization

Corporate and other

Identiﬁable assets
Insurance
Reinsurance
Runoff and Group Re
Claims adjusting
Corporate

–
–
–
–

–

–
–
–

–
–

–
–
–
–

–

–
–
–

–
–

625.0
–
40.5
173.5

413.7
–
28.6
126.9

346.3
–
–
81.2

55.2
991.9
1,221.6
86.2

43.7
912.4
988.1
872.6

29.9
1,582.7
682.1
41.4

23.0
37.0
703.0
252.1

25.5
41.6
415.9
19.6

14.8
10.9
218.4
101.2

839.0

569.2

427.5

2,354.9

2,816.8

2,336.1 1,015.1

502.6

345.3

19.9% 14.6% 13.8%

56.0%

72.5%

75.1% 24.1% 12.9% 11.1%

–
–
–
–

–

703.2
1,028.9
1,965.1
511.8

482.9
954.0
1,432.6
1,019.1

391.0
1,593.6
900.5
223.8

4,209.0

3,888.6

3,108.9

330.1
845.9
328.9

418.6
469.5
290.7

440.3
138.1
274.7

5,713.9

5,067.4

3,962.0

40.3
–
3.4

43.7
57.1

100.8
67.2

168.0
–
(17.4)
–
–
–
–

1.9
–
0.2

2.1
19.3

21.4
13.3

34.7
–
(23.1)
–
–
–
–

(30.6)
–
–

(30.6)
28.0

(2.6)
25.2

22.6
–
(16.2)
–
(5.1)
–
–

2.4
(27.1)
17.3

(7.4)
146.4

139.0
312.7

451.7
(136.2)
(28.1)
(31.4)
–
–
–

3.4
(68.2)
12.1

(52.7)
244.2

191.5
182.3

373.8
(106.0)
(2.4)
(7.7)
(1.5)
–
(72.6)

(18.9)
(488.1)
(96.1)

(603.1)
261.9

(341.2)
(4.2)

(345.4)
(14.2)
0.1
–
(43.3)
–
(31.8)

–
–

–
–

–
–

–
–

–
–

–
–

9.6
1.5
40.3

51.4
16.8

68.2
284.1

352.3
26.2
27.7
–
–
–
–

–
–

7.1
0.1
0.6

7.8
2.6

10.4
0.6

11.0
41.8
16.6
–
(1.2)
–
–

–
–

(9.2)
(2.6)
(42.4)

(54.2)
0.7

11.3
96.8
–

108.1
–

108.1
83.8

52.3
(25.6)
61.0

87.7
220.3

308.0
534.6

842.6
(110.0)
(17.8)
(138.6)
–
–
–

12.4
(68.1)
12.9

(42.8)
266.1

223.3
285.9

509.2
(64.2)
(8.9)
(79.6)
(2.7)
–
(72.6)

(47.4)
(393.9)
(138.5)

(579.8)
290.6

(289.2)
104.9

(184.3)
(21.2)
(6.4)
(100.4)
(92.9)
(75.5)
(31.8)

(53.5)

–
0.1 (129.4)

–
89.7

(53.4) (129.4)
–
–
(107.2)
–
–
–

(7.0)
9.7
–
(44.5)
(75.5)
–

89.7
–
–

191.9
–
–
(71.9) (100.4)
–
–
–

–
–
–

–
–

–
(48.7)

–
(5.9)

50.8
(14.4)

–
(48.7)

–
(5.9)

50.8
(14.4)

150.6

11.6

1.3

256.0

183.6

(434.6)

406.2

68.2

(170.7) (285.3)

11.9

127.9

527.5

275.3

(476.1)

2,373.8 1,944.5 1,620.6
4.1
–
34.8
–

135.3
516.6
27.3
–

79.0
36.0
20.1
–

6,293.6
5,266.5
5,605.0
53.2
–

234.0
960.6

153.5
7,930.6 10,048.1
4,647.7
4,562.0
–
2,087.5 2,705.2 1,933.0 2,596.7
3,816.1
207.8
43.8
–
–

224.2
–

219.4
628.6

270.7
–

44.4
–

–
–
–
–

–
–
–
–
576.5 787.2

–
–
–
–
755.3

8,901.4 10,094.5 11,822.2
4,651.8
5,269.6
6,362.4
4,684.2
5,785.1
8,826.8
287.0
288.1
351.2
755.3
787.2
576.5

3,053.0 2,079.6 1,659.5 17,218.3 16,352.5 16,827.7 4,170.5 3,005.2 2,958.0

576.5 787.2

755.3 25,018.3 22,224.5 22,200.5

Amortization

12.2%
16.4

9.4%
9.4

7.5%
5.0

68.8%
26.2

73.6%
19.2

75.8% 16.7% 13.5% 13.3% 2.3% 3.5% 3.4%
–

23.8

14.3

16.7

9.5

–

–

52.1

42.9

45.5

43

FAIRFAX  FINANCIAL  HOLDINGS  LIMITED

Interest and dividend income for the Canadian Insurance, the U.S. Insurance and Reinsurance

segments  is  $50.8,  $76.8  and  $92.7  respectively  (2002  –  $31.2,  $127.9  and  $107.0)  (2001  –

$28.9, $154.2 and $107.5).

Realized  gains/(losses)  for  the  Canadian  Insurance,  the  U.S.  Insurance  and  Reinsurance

segments are $67.2, $312.6 and $284.1 respectively (2002 – $13.4, $62.5, and $118.6) (2001 –

$16.8, $(5.9), and $2.1).

Interest expense for the Canadian Insurance, the U.S. Insurance and Reinsurance segments is

nil, $18.7 and $12.7 respectively (2002 – nil, nil and $7.7) (2001 – nil, nil and nil)

Geographic  premiums  are  determined  based  on  the  domicile  of  the  various  subsidiaries  and

where the primary underlying risk of the business resides.

Corporate  and  other  includes  the  company’s  interest  expense  and  corporate  overhead.

Corporate assets include cash and short term investments and miscellaneous other assets in the

holding company.

18.

Fair Value

Information on the fair values of ﬁnancial instruments of the company, including where those

values  differ  from  their  carrying  values  in  the  ﬁnancial  statements  at  December  31,  2003,

include:

Marketable securities

Portfolio investments

Long term debt

Trust preferred securities of subsidiaries

Purchase consideration payable

Note
Reference

Carrying
Value

Estimated
Fair Value

16.5

16.5

12,155.9

12,400.8

2,033.8

2,074.2

79.8

200.6

60.6

213.6

4

6

7

16

The  amounts  above  do  not  include  the  fair  value  of  underlying  lines  of  business. While  fair

value amounts are designed to represent estimates of the amounts at which instruments could

be  exchanged  in  current  transactions  between  willing  parties,  certain  of  the  company’s

ﬁnancial instruments lack an available trading market. Therefore, these instruments have been

valued  on  a  going  concern  basis.  Fair  value  information  on  the  provision  for  claims  is  not

determinable.

These fair values have not been reﬂected in the ﬁnancial statements.

19.

US GAAP Reconciliation

The consolidated ﬁnancial statements of the company have been prepared in accordance with

Canadian  GAAP  which  are  different  in  some  respects  from  those  applicable  in  the  United

States, as described below.

44

Consolidated Statements of Earnings

For  the  years  ended  December  31,  2003,  2002  and  2001,  signiﬁcant  differences  between

consolidated  net  earnings  under  Canadian  GAAP  and  consolidated  net  earnings  under  US

GAAP were as follows:

(a) Under  Canadian  GAAP  prior  to  January  1,  2002,  the  unrealized  loss  on  the

translation  of  the  foreign  exchange  component  of  the  yen  debt  swap  was  deferred

and  amortized  to  income  over  the  remaining  term  to  maturity.  In  the  U.S.,  the

unrealized  foreign  exchange  gain  or  loss  is  recognized  in  income  in  the  year,

although there is no intention to settle the swap prior to maturity.

(b)

In Canada, recoveries on certain stop loss reinsurance treaties (including with Swiss

Re) protecting Fairfax, Crum & Foster and TIG are recorded at the same time as the

claims incurred are ceded. In the U.S., these recoveries, which are considered to be

retroactive reinsurance, are recorded up to the amount of the premium paid with the

excess of the ceded liabilities over the premium paid recorded as a deferred gain. The

deferred  gain  is  amortized  to  income  over  the  estimated  settlement  period  over

which  the  company  expects  to  receive  the  recoveries  and  is  recorded  in  accounts

payable and accrued liabilities.

(c)

In Canada prior to January 1, 2002, the amortization period of negative goodwill was

periodically reviewed to determine whether the remaining useful life continued to be

appropriate  or  whether  the  amortization  period  should  be  adjusted,  based  on  the

facts and circumstances giving rise to the negative goodwill at the date of acquisition.

In the U.S., in the case of ﬁnancial institutions, the SEC staff generally took exception

to a negative goodwill amortization period of less than 10 years. Effective January 1,

2002,  the  company  adopted  for  United  States  reporting  purposes  Statement  of

Financial  Accounting  Standards  No.  142,  ‘‘Goodwill  and  Other  Intangible  Assets’’.

Under  this  standard,  goodwill  is  no  longer  amortized  over  its  estimated  useful  life,

however  it  is  assessed  on  an  annual  basis  for  impairment  requiring  writedowns.

Similarly, the excess of net assets over purchase price paid, in respect of acquisitions

prior to January 1, 2002, is no longer amortized to earnings but is added to earnings

through a cumulative catchup adjustment. The impact of the goodwill amortization

decreased net earnings by $18.2 in the year ended December 31, 2001. The impact of

the  negative  goodwill  amortization  increased  net  earnings  by  $22.4  in  2001.

Together, these amortizations resulted in a net increase in net earnings of $4.2 and

an  increase  in  all  earnings  per  share  calculations  of  $0.32  for  the  year  ended

December 31, 2001. In addition, there is an increase in earnings for the cumulative

catchup adjustment of $112.6 for the year ended December 31, 2002.

(d)

For United States reporting purposes, the company adopted Statement of Financial

Accounting Standards No. 133, ‘‘Accounting for Derivative Instruments and Hedging

Activities’’, for the year ended December 31, 2001.

Under this standard, all derivatives are recognized at fair value in the balance sheet. If

the derivative is a hedge, depending on the nature of the hedge, changes in the fair

value of the derivative will either be offset in earnings against the change in the fair

45

FAIRFAX  FINANCIAL  HOLDINGS  LIMITED

value of the hedged item or will be recognized in other comprehensive income until

the  hedged  item  is  recognized  in  earnings.  If  the  change  in  the  fair  value  of  the

derivative  is  not  completely  offset  by  the  change  in  the  value  of  the  item  it  is

hedging, the difference will be recognized immediately in earnings.

The company’s forward contracts were hedges of net investments in subsidiaries and

therefore  there  was  no  impact  as  a  result  of  this  Standard.  These  contracts  were

terminated during the year as disclosed in note 2.

(e) Declines  in  the  fair  value  of  available-for-sale  securities  to  market  value  are

recognized  in  the  US  GAAP  balance  sheet.  Other  than  temporary  declines  are

recorded  in  income  with  temporary  declines  recorded  in  Other  Comprehensive

Income. Declines in fair values are generally presumed to be other than temporary if

they  have  persisted  over  a  period  of  time  and  factors  indicate  that  recovery  is

uncertain.  Under  Canadian  GAAP,  other-than-temporary  declines  in  the  value  of

investment securities to fair value are recorded in earnings.

The following shows the net earnings in accordance with US GAAP:

Net earnings (loss), Canadian GAAP

Recoveries (deferred gains) on retroactive

reinsurance (b)

Other than temporary declines (e)

Cumulative catchup adjustment on

changes in accounting for negative

goodwill (c)

Amortization of negative goodwill (c)

Other differences including (a)

Tax effect

2003

271.1

2002

2001

263.0

(223.8)

(209.4)

(49.9)

33.2

(13.8)

–

–

1.5

91.0

112.6

–

–

(8.0)

(425.3)

–

–

(31.8)

10.3

154.7

Net earnings (loss), US GAAP

104.3

387.0

(515.9)

Net earnings (loss) per share, US GAAP

before cumulative catchup adjustment

and extraordinary item

$ 6.66

$ 5.81

$(40.19)

Net earnings (loss) per share, US GAAP

before cumulative catchup adjustment

$ 6.66

$ 19.00

$(40.19)

Net earnings (loss) per share, US GAAP

$ 6.66

$ 26.88

$(40.19)

Net earnings (loss) per diluted share, US

GAAP

$ 6.66

$ 26.88

$(40.19)

Consolidated Balance Sheets

In  Canada,  portfolio  investments  are  carried  at  cost  or  amortized  cost  with  a  provision  for

declines  in  value  which  are  considered  to  be  other  than  temporary.  In  the  U.S.,  such

46

investments  are  classiﬁed  as  available  for  sale  and  recorded  at  market  values  through

shareholders’ equity.

In Canada, trust preferred securities of subsidiaries (including RHINOS) are included in total

liabilities.  In  the  U.S.,  trust  preferred  securities  are  shown  as  a  separate  caption  after  total

liabilities, in a manner similar to non-controlling interests.

As  described  in  footnote  (5)  in  note  6,  under  Canadian  GAAP  the  value  of  the  conversion

option and the present value of the principal amount of the company’s 5% convertible senior

debentures are included in paid in capital. Under US GAAP the full principal amount of the

debentures is included in debt.

The  following  shows  the  balance  sheet  amounts  in  accordance  with  US  GAAP,  setting  out

individual amounts where different from the amounts reported under Canadian GAAP:

2003

2002

4,644.8

7,513.5

Assets
Portfolio investments Bonds ***************************************
Preferred stocks *************************************************
Common stocks ************************************************
Strategic investments *******************************************

143.9

1,428.5

423.3

Total portfolio investments****************************************
Future income taxes **********************************************
Goodwill *********************************************************
266.6
All other assets *************************************************** 17,402.6

1,229.9

6,640.5

158.0

712.4

323.7

8,707.6

1,193.5

237.4

12,473.4

Total assets ******************************************************* 25,539.6

22,611.9

Liabilities
Accounts payable and accrued liabilities ****************************
Long term debt ***************************************************
2,135.2
All other liabilities ************************************************ 17,932.3

2,288.0

1,945.3

1,482.7

16,472.6

Total liabilities *************************************************** 22,355.5

19,900.6

Trust preferred securities of subsidiaries ****************************
Mandatorily redeemable shares of TRG *****************************
Non-controlling interests ******************************************

Shareholders’ Equity

79.8

200.6

440.8

721.2

215.8

205.5

321.6

742.9

2,462.9

1,968.4

25,539.6

22,611.9

47

FAIRFAX  FINANCIAL  HOLDINGS  LIMITED

The difference in consolidated shareholders’ equity is as follows:

Shareholders’ equity based on Canadian GAAP *********************
Other comprehensive income *************************************
Reduction of other paid in capital *********************************
Cumulative reduction in net earnings under US GAAP **************

2003

2002

2,918.0

2,248.0

187.5

(101.4)

(541.2)

94.8

–

(374.4)

Shareholders’ equity based on US GAAP ****************************

2,462.9

1,968.4

Statement  of  Financial  Accounting  Standards  No.  130,  ‘‘Reporting  Comprehensive  Income’’,

requires  the  company  to  disclose  items  of  other  comprehensive  income  in  a  ﬁnancial

statement and to disclose accumulated balances of other comprehensive income in the equity

section  of  ﬁnancial  statements.  Other  comprehensive  income  includes  (besides  the  currency

translation account, which is disclosed under Canadian GAAP) unrealized gains and losses on

investments, as follows:

Unrealized gain (loss) on investments available for sale******************* 271.1
Related deferred income taxes ******************************************
(97.7)
Other *****************************************************************

14.1

187.5

133.4

(52.7)

14.1

94.8

2003

2002

Total  comprehensive  income  for  purposes  of  US  GAAP  in  2003  is  $549.9  and  for  2002  was

$514.9.

The  cumulative  reduction  in  net  earnings  under  US  GAAP  of  $541.2  at  December  31,  2003

relates  primarily  to  the  deferred  gain  on  retroactive  reinsurance  ($551.6  after  tax)  which  is

amortized into income as the underlying claims are paid.

Disclosure of Interest and Income Taxes Paid

The aggregate amount of interest paid for the years ended December 31, 2003, 2002 and 2001

was $140.9, $122.3 and $105.6 respectively. The aggregate amount of income taxes paid for the

years ended December 31, 2003, 2002 and 2001 was $42.9, $20.4 and $3.0, respectively.

48

Management’s Discussion and Analysis of Financial Condition and
Results of Operations
(Figures and amounts are in US$ and $ millions except per share amounts and as otherwise

indicated. Figures may not add due to rounding.)

Notes: (1) Readers of the Management’s Discussion and Analysis of Financial Condition and

Results  of  Operations  should  review  the  entire  Annual  Report  for  additional

commentary and information.

(2) Management  analyzes  and  assesses  the  underlying  insurance,  reinsurance  and

runoff operations and the ﬁnancial position of the consolidated group in various

ways. Certain of these measures provided in this Annual Report, which have been

used  historically  and  disclosed  regularly  in  Fairfax’s  Annual  Reports  and  interim

ﬁnancial  reporting,  are  non-GAAP  measures;  these  measures  include  tables

showing  the  company’s  sources  of  net  earnings  with  Lindsey  Morden  equity

accounted  and  the  company’s  capital  structure  with  Lindsey  Morden  equity

accounted.  Where  non-GAAP  measures  are  provided,  descriptions  are  clearly

provided in the commentary as to the nature of the adjustments made.

(3) The combined ratio – which may be calculated differently by different companies

and is calculated by the company as the sum of the loss ratio (claims losses and loss

adjustment expenses expressed as a percentage of net premiums earned) and the

expense  ratio  (commissions,  premium  acquisition  costs  and  other  underwriting

expenses as a percentage of net premiums earned) – is the traditional measure of

underwriting  results  of  property  and  casualty  companies,  but  is  regarded  as  a

non-GAAP measure.

(4) References  to  other  documents  or  certain  websites  does  not  constitute

incorporation for reference in this MD&A of all or any portion of those documents

or websites.

As  the  majority  of  the  company’s  operations  are  in  the  United  States  or  conducted  in  U.S.

dollars,  effective  December  31,  2003,  the  company  is  reporting  its  consolidated  ﬁnancial

statements  in  U.S.  dollars,  in  order  to  provide  more  meaningful  information  to  its  ﬁnancial

statement  users.  To  effect  this  conversion,  the  consolidated  ﬁnancial  statements  have  been

translated into U.S. dollars using the current rate method, pursuant to which the consolidated

statements of earnings and cash ﬂows have been translated using the average rate of exchange

for the relevant year, all assets and liabilities have been translated using the relevant year-end

rate of exchange and both common stock and preferred stock have been translated using the

rates of exchange in effect as of the dates of the various capital transactions. Foreign exchange

differences arising from the translation as described above have been recorded in the currency

translation  account  which  is  included  as  a  separate  component  of  shareholders’  equity.  All

comparative  ﬁnancial  information  and  all  ﬁnancial  data  in  this Annual  Report  has  been

restated to reﬂect the company’s results as if they had been historically reported in U.S. dollars.

The company (i.e. the holding company) has also determined, effective January 1, 2004, that

its  functional  currency  is  U.S.  dollars.  This  change  from  Canadian  dollars,  which  will  be

49

FAIRFAX  FINANCIAL  HOLDINGS  LIMITED

accounted for on a prospective basis, is based primarily on the fact that with the termination of

the U.S. forward contracts and the repayment of the Canadian dollar denominated debt, the

holding company balance sheet will be fully exposed to the U.S. dollar. In addition, based on

analysis of the underlying cash ﬂows, management has determined that these cash ﬂows will

be  primarily  denominated  in  U.S.  dollars  and  that  future  dividend  payments  will  likely  be

denominated in U.S. dollars.

Sources of Revenue

Revenue reﬂected in the consolidated ﬁnancial statements for the past three years, as shown in

the  table  below,  includes  net  premiums  earned,  interest  and  dividend  income  and  realized

gains  on  the  sale  of  investments  of  the  insurance,  reinsurance  and  runoff  operations,  and

claims adjusting fees of Lindsey Morden.

Net premiums earned

Insurance – Canada (Northbridge)

Insurance – U.S.

Reinsurance (OdysseyRe)

Runoff and other

Interest and dividends

Realized gains

Claims fees

2003

2002

2001

703.2

1,028.9

1,965.1

511.8

482.9

954.0

1,432.6

1,019.1

391.0

1,593.6

900.5

223.8

4,209.0

3,888.6

3,108.9

330.1

845.9

328.9

418.6

469.5

290.7

440.3

138.1

274.7

5,713.9

5,067.4

3,962.0

Net  premiums  earned  from  the  insurance  and  reinsurance  operations  increased  by  28.8%  to

$3,697.2 in 2003 from $2,869.5 in 2002 and $2,885.1 in 2001. In 2002, the reduction in net

premiums earned for the U.S. insurance group and the increase in net premiums earned by the

runoff  group  reﬂect  inclusion  of  premiums  on  TIG’s  discontinued  MGA-controlled  program

business of $686.5 in the U.S. runoff group retroactive to January 1, 2002.

Claims  fees  for  2003  increased  by  $38.2  or  13.1%  over  2002,  principally  reﬂecting  the

strengthening of the Canadian dollar against the U.S. dollar.

As shown in note 17 to the consolidated ﬁnancial statements, on a geographic basis, United

States, Canadian, and Europe and Far East operations accounted for 56.0%, 19.9% and 24.1%,

respectively,  of  net  premiums  earned  in  2003  compared  with  72.5%,  14.6%  and  12.9%,

respectively, in 2002.

The change in geographic concentration of net premiums earned for 2003 compared with 2002

was caused by the following factors:

(a)

The  reduction  in  U.S.  net  premiums  earned  from  $2,816.8  in  2002  to  $2,354.9  in

2003  was  principally  due  to  the  termination  of  TIG’s  MGA-controlled  program

business  effective  December  16,  2002  resulting  in  a  reduction  in  U.S.  runoff

premiums  from  $872.6  in  2002  to  $86.2  in  2003,  partially  offset  by  growth  in  the

continuing insurance and reinsurance operations.

50

(b) The  increase  in  Europe  and  Far  East  net  premiums  earned  from  $502.6  in  2002  to

$1,015.1 in 2003 was due to signiﬁcant growth in OdysseyRe’s London market and

Euro Asia divisions with net premiums earned of $703.0 in 2003 (2002 – $415.9) and

an increase in the net premiums earned by runoff and Group Re to $252.1 in 2003

(2002 – $19.6) resulting from an increase in Group Re business retained in nSpire Re

and  receipt  of  the  third  party  risk  premium  upon  the  formation  of  a  new  runoff

syndicate at Lloyd’s described on page 64.

(c)

The strong growth in Canadian net premiums earned from $569.2 in 2002 to $839.0

in 2003 was due to volume and price increases at Northbridge and the strengthening

of the Canadian dollar against the U.S. dollar.

Net Earnings

Combined ratios and sources of net earnings (with Lindsey Morden equity accounted) for the

past three years are as set out beginning on page 53. Fuller commentary on combined ratios

and on operating income on a segment by segment basis is provided under Underwriting and

Operating Income beginning on page 57.

The  company  shows  the  net  premiums  earned,  combined  ratios,  and  underwriting  and

operating  results  for  each  of  its  continuing insurance  and  reinsurance  groups  and,  as

applicable,  for  its  runoff  and  other  operations  as  well  as  the  earnings  contributions  from  its

claims adjusting, appraisal and loss management services. In the table showing the sources of

net earnings, interest and dividends on the consolidated statements of earnings are included in

the insurance and reinsurance group operating results and in the runoff and other operations

and realized gains on investments related to the runoff group are included in the runoff and

other operations.

During  2003  (and  reﬂected  in  the  2002  comparatives),  the  company  reﬁned  its  operating

segment  disclosure  to  present  results  on  a  legal  entity  basis  consistent  with  the  information

presented by its publicly traded subsidiaries, as discussed in more detail below:

(a)

Realized  gains  (losses) on  investments  are  allocated  to  each  operating  segment,  in

aggregate, based on the realized gains (losses) on investments reported by each legal

entity. Realized gains (losses) on the consolidated statements of earnings also include

realized gains (losses) on the holding company marketable securities, elimination of

intersegment gains (losses) and purchase price adjustments resulting from recording

investments at fair value on acquisition of subsidiaries.

(b)

Fairfax  and  Hamblin  Watsa  investment  administration  and  management  fees  are

included  in  each  operating  segment’s  interest  and  dividends  and  in  corporate

overhead and other.

The  above-described  change  in  presenting  segmented  information  resulted  in  the  following

changes to information presented in the 2002 Annual Report to reﬂect that information on a

comparable basis:

(a)

For the Canadian insurance segment, the results presented are those for Northbridge

which became a separate public company in 2003. In 2002 and prior years, business

51

FAIRFAX  FINANCIAL  HOLDINGS  LIMITED

ceded by Lombard to CRC (Bermuda) was included in Lombard’s results for purposes

of the Canadian insurance segment. As a result of the change in basis of presentation,

the business ceded to CRC (Bermuda) is now included in Group Re in the runoff and

other segment. As a result, the 2002 and 2001 combined ratios of 95.8% and 116.4%,

respectively, previously reported for the Canadian insurance segment are now shown

as Northbridge’s 2002 and 2001 combined ratios of 97.4% and 112.1%, respectively.

(b)

For  the  U.S.  insurance  segment,  the  revised  presentation  resulted  in  the  following

changes to amounts previously reported in 2002 and prior years:

(i)

In 2002, Crum & Forster ceded premiums of $32.1 (and no losses) under a stop

loss treaty with nSpire Re (2001 – ceded premiums of $31.8 and ceded losses of

$39.1).  In  2002  and  prior  years,  Crum  &  Forster’s  combined  ratio  was  shown

prior to the effect of this intercompany stop loss treaty. Commencing in 2003,

Crum & Forster’s combined ratio is shown after the effect of this intercompany

stop  loss  treaty.  Consequently,  Crum  &  Forster’s  2002  and  2001  combined

ratios previously reported of 103.3% and 131.1%, respectively, are now shown

as 108.3% and 131.7%, respectively.

(ii)

In the 2002 Annual Report, TIG’s results were presented for continuing business

which was expected to be underwritten by Fairmont and the business written

by Napa MGU resulting in a combined ratio of 106.0%. In 2003, the Fairmont

results  for  2002  only  include  business  actually  underwritten  by  Fairmont  in

2003, resulting in a combined ratio of 107.0% for 2002, on a comparable basis.

The Napa MGU results are included in runoff and other since it was a subsidiary

of TIG in 2003.

(iii) As  a  result  of  the  above,  the  2002  and  2001  combined  ratios  of  103.6%  and

125.3%,  respectively,  previously  reported  for  the  U.S.  insurance  segment are

now shown as 107.1% and 124.7%, respectively.

(c) Crum  &  Forster’s  2003  combined  ratio  of  104.4%  reﬂects  the  offset  of  an  existing

purchase price accrual against a commutation loss of $26.8 on a stop loss reinsurance

treaty with an afﬁliated company.

(d)

Fairmont includes Ranger’s results and the ongoing operations of TIG’s Hawaii and

Accident  and  Health  business  on  a  retroactive  basis  consistent  with  the  basis  of

presentation effective January 1, 2002. Effective January 1, 2004, Fairmont received

formal  approvals  of  its  structure  and  capitalization  from  all  relevant  insurance

regulatory authorities.

The  effect  of  this  change  in  presenting  segmented  information  is  that  the  2002  and  2001

consolidated combined ratios of 100.1% and 120.9%, respectively, previously reported are now

shown as 101.5% and 120.1%, respectively.

52

Combined ratios

Insurance – Canada (Northbridge)

– U.S.

Reinsurance (OdysseyRe)

Consolidated

Sources of net earnings

Underwriting

Insurance – Canada (Northbridge)

– U.S.

Reinsurance (OdysseyRe)

Underwriting income (loss)

Interest and dividends

Operating income (loss)

Realized gains

Runoff and other

TIG restructuring costs

Kingsmead losses

Claims adjusting (Fairfax portion)

Interest expense

Swiss Re premium

Corporate overhead and other

Other costs and charges

Goodwill and other amortization

Negative goodwill amortization

Pre-tax income (loss)

Taxes

Negative goodwill on TRG purchase

Non-controlling interests

2003

2002

2001

92.6%
102.5%(2)
96.9%

97.4%

107.1%

99.1%

112.1%(1)
124.7%(1)
115.4%

97.6%

101.5%

120.1%

52.3

(25.6)

61.0

87.7

220.3

308.0

534.6

(110.0)

–

–

(16.6)

(138.6)

–

(48.7)

–

–

–

528.7

(187.6)

–

(70.0)

12.4

(68.1)

12.9

(42.8)

266.1

223.3

285.9

(64.3)

(63.6)

–

(6.7)

(79.6)

(2.7)

(5.9)

(9.0)

–

–

277.4

(149.3)

188.4

(53.5)

(47.4)(1)
(393.9)(1)
(138.5)

(579.8)

290.6

(289.2)

104.9
(21.2)(1)
–

(75.5)

(2.5)

(100.4)

(92.9)

(9.9)

(31.8)

(4.5)

50.8

(472.2)

247.4

–

1.0

Net earnings (loss)

271.1

263.0

(223.8)

(1)

Includes the recovery under the Swiss Re Cover described in footnote (1) on page 56.

(2) 99.1% excluding the effect of Crum & Forster’s net strengthening of asbestos reserves.

Pre-tax  earnings  in  2003  were  $528.7  compared  with  $277.4  in  2002  reﬂecting  signiﬁcantly

improved underwriting results at each of the continuing insurance and reinsurance operations

and signiﬁcant realized gains, offset by lower interest and dividends (reﬂecting almost half of

the  investment  portfolio  in  the  second  half  of  2003  being  held  in  cash  and  short  term

investments)  as  well  as  increased  interest,  runoff  and  corporate  overhead  costs  (each

subsequently  explained).  Net  earnings  in  2003  increased  to  $271.1  from  $263.0  in  2002;

included in 2002 earnings was the beneﬁt of $188.4 of negative goodwill on the purchase of

the remaining 72.5% interest in TRG.

53

FAIRFAX  FINANCIAL  HOLDINGS  LIMITED

The above sources of net earnings (with Lindsey Morden equity accounted) shown by business

segments were as set out below for the years ended December 31, 2003, 2002 and 2001. The

intercompany  adjustment  for  gross  premiums  written  eliminates  premiums  on  reinsurance

ceded within the group, primarily to OdysseyRe, nSpire Re and Group Re. The intercompany

adjustment  for  realized  gains  eliminates  gains  or  losses  on  purchase  and  sale  transactions

within the group.

Year ended December 31, 2003

Northbridge Insurance OdysseyRe Sub-total

Other

Intercompany

Other Consolidated

U.S.

Runoff &

Corporate &

Gross premiums written

1,318.6

1,477.8

2,558.2

5,354.6

582.2

(418.2)

Net premiums written

802.3

1,153.7

2,153.6

4,109.6

338.5

Net premiums earned

703.2

1,028.9

1,965.1

3,697.2

511.8

Underwriting proﬁt (loss)

Interest and dividends

Operating income before:

Realized gains

Runoff and other

operating income (loss)

Claims adjusting

Interest expense

Corporate overhead and

other

52.3

50.8

103.1

67.2

–

–

–

–

(25.6)

76.8

51.2

312.6

–

–

61.0

92.7

153.7

284.1

–

–

87.7

220.3

308.0

663.9

–

–

(18.7)

(12.7)

(31.4)

–

–

–

–

–

–

311.3

(132.4)

(421.3)

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

3.1

–

(16.6)

(107.2)

5,518.6

4,448.1

4,209.0

87.7

220.3

308.0

845.9

(421.3)

(16.6)

(138.6)

(48.7)

(48.7)

Pre-tax income (loss)

170.3

345.1

425.1

940.5

(110.0)

(132.4)

(169.4)

Taxes

Non-controlling interests

Net earnings

528.7

(187.6)

(70.0)

271.1

54

Year ended December 31, 2002

Northbridge Insurance OdysseyRe Sub-total

Other

Intercompany

Other Consolidated

U.S.

Runoff &

Corporate &

Gross premiums written

1,132.9

1,371.7

1,894.5

4,399.1

1,205.3

(431.2)

Net premiums written

533.2

1,036.5

1,631.2

3,200.9

833.0

Net premiums earned

482.9

954.0

1,432.6

2,869.5

1,019.1

183.7

(17.5)

108.9

–

–

–

–

–

–

–

–

(248.0)

(63.6)

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

(6.7)

(71.9)

(2.7)

(5.9)

–

21.7

5,173.2

4,033.9

3,888.6

(42.8)

266.1

223.3

469.5

(248.0)

(63.6)

(6.7)

(79.6)

(2.7)

(5.9)

(9.0)

277.4

(149.3)

188.4

(53.5)

263.0

Underwriting proﬁt (loss)

Interest and dividends

Operating income before:

Realized gains

Runoff and other

operating income (loss)

TIG restructuring costs

Claims adjusting

Interest expense

Swiss Re premium

Corporate overhead and

other

Other costs and charges

12.4

31.2

43.6

13.4

–

–

–

–

–

–

–

(68.1)

127.9

59.8

62.5

–

–

–

–

–

–

(9.0)

12.9

107.0

119.9

118.6

–

–

–

(42.8)

266.1

223.3

194.5

–

–

–

(7.7)

(7.7)

–

–

–

–

–

(9.0)

Pre-tax income (loss)

57.0

113.3

230.8

401.1

(127.9)

(17.5)

Taxes

Negative goodwill on TRG

purchase

Non-controlling interests

Net earnings

55

FAIRFAX  FINANCIAL  HOLDINGS  LIMITED

Year ended December 31, 2001

Northbridge Insurance OdysseyRe Sub-total

Other

Intercompany

Other Consolidated

U.S.

Runoff &

Corporate &

Gross premiums written

768.1

2,409.9

1,153.6

4,331.6

502.6

(411.5)

Net premiums written

448.8

1,626.9

984.7

3,060.4

202.7

Net premiums earned

391.0

1,593.6

900.5

2,885.1

223.8

Underwriting proﬁt (loss)

(58.7)

(490.7)

(138.5)

(687.9)

Interest and dividends

28.9

154.2

107.5

290.6

Operating income (loss)

before:

(29.8)

(336.5)

(31.0)

(397.3)

–

–

–

–

–

–

–

–

Realized gains (losses)

16.8

(5.9)

2.1

13.0

33.3

37.7

Runoff and other

operating income (loss)

Kingsmead losses

Claims adjusting

Interest expense

Swiss Re premium

Corporate overhead and

other

Other costs and charges

Goodwill and other

amortization

Negative goodwill

amortization

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

(31.8)

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

(31.8)

–

–

(70.3)(2)

(93.0)

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

Pre-tax income (loss)

(13.0)

(374.2)

(28.9)

(416.1)

(130.0)

37.7

Taxes

Non-controlling interests

Net earnings (loss)

–

–

–

108.1(1)

–

108.1

54.1

15.8(1)

17.5(3)

(2.5)

(100.4)

(92.9)

(9.9)

–

4,422.7

3,263.1

3,108.9

(579.8)

290.6

(289.2)

138.1

(54.5)

(75.5)

(2.5)

(100.4)

(92.9)

(9.9)

(31.8)

(4.5)

(4.5)

50.8

36.1

50.8

(472.2)

247.4

1.0

(223.8)

(1) Recovery under the Swiss Re Cover of 1998 and prior losses: Northbridge – $11.3, U.S. Insurance –

$96.8, Runoff and Other – $15.8.

(2)

Includes  direct  assignment  of  the  $62.5  recovery  under  the  Swiss  Re  Cover  of  1998  and  prior

losses.

(3) Recovery under the Swiss Re Cover of 1998 and prior losses of Kingsmead.

56

Underwriting and Operating Income

Set out and discussed below are the 2003, 2002 and 2001 underwriting and operating results of

Fairfax’s  continuing insurance  and  reinsurance operations  on  a  summarized  company  by

company  basis.  (Throughout  this  Annual  Report,  for  convenience,  Falcon  is  included  in  the

U.S. insurance operations.)

Canadian Insurance – Northbridge

Underwriting proﬁt (loss)

52.3

12.4

(58.7)

2003(1)

2002(1)

2001(1)

Combined ratio:
Loss & LAE
Commissions
Underwriting expense

65.5% 71.6%
5.7%
20.4% 20.1%

6.7%

81.4%
12.3%
21.3%

92.6% 97.4%

115.0%

Gross premiums written

1,318.6

1,132.9

768.1

Net premiums written

Net premiums earned

Underwriting proﬁt (loss)
Interest and dividends

Operating income (loss)
Realized gains

Pre-tax income (loss) before

interest and other

802.3

703.2

52.3
50.8

103.1
67.2

533.2

448.8

482.9

391.0

12.4
31.2

43.6
13.4

(58.7)
28.9

(29.8)
16.8

170.3

57.0

(13.0)

(1) See the commentary commencing on page 51 regarding the presentation of segmented information.

Northbridge’s  combined  ratio  improved  to  92.6%  in  2003  from  97.4%  last  year  and  from

115.0% (112.1% with the $11.3 beneﬁt of the Swiss Re Cover) in 2001 when it was adversely

affected by the impact of the soft insurance market and natural catastrophes. The outstanding

underwriting  results  in  2003  reﬂect  continued  price  increases  achieved  by  all  Northbridge

subsidiaries  in  2002  and  continuing  into  2003  without  compromising  their  stringent

underwriting standards, considerable new business volumes written in 2003, and, as a result of

Northbridge’s IPO, changes in terms of the reinsurance treaties with CRC (Bermuda) effective

January  1,  2003.  Net  premiums  written  by  Northbridge  (in  Canadian  dollars)  increased  by

35.2% in 2003 compared with 2002 due to price increases achieved in continuing favourable

market conditions, increased volumes and increased retentions. Cash ﬂow from operations at

Northbridge  improved  to  $165.9  in  2003  from  $132.6  in  2002.  For  more  information  on

Northbridge’s  results,  please  see 

its  2003  annual  report  posted  on 

its  website

www.northbridgeﬁnancial.com.

57

FAIRFAX  FINANCIAL  HOLDINGS  LIMITED

U.S. Insurance

Year ended December 31, 2003

Underwriting proﬁt (loss)

(32.7)

1.7

1.5

3.9

(25.6)

Crum &
Forster(1)(2)

Fairmont(1)

Falcon(3)

Old Lyme(4)

Total(1)

Combined ratio:

Loss & LAE

Commissions

Underwriting expense

74.5%

9.9%

20.0%

64.6%

14.5%

20.1%

53.5%

22.3%

20.2%

58.2%

28.2%

6.3%

70.9%

12.2%

19.4%

104.4%*

99.2%

96.0%

92.7% 102.5%*

Gross premiums written

1,104.2

Net premiums written

Net premiums earned

Underwriting proﬁt (loss)

Interest and dividends

Operating income

Realized gains

857.3

735.3

(32.7)

59.2

26.5

294.8

Pre-tax income before interest and other

321.3

242.3

185.4

203.3

1.7

14.4

16.1

13.8

29.9

81.8

61.6

37.2

1.5

0.7

2.2

3.8

6.0

49.5

1,477.8

49.4

1,153.7

53.1

1,028.9

3.9

2.5

6.4

0.2

6.6

(25.6)

76.8

51.2

312.6

363.8

* 99.7%  for  Crum  &  Forster,  and  99.1%  Total,  excluding  the  effect  of  Crum  &  Forster’s  net

strengthening of asbestos reserves.

Year ended December 31, 2002

Underwriting proﬁt (loss)

(55.2)

(15.0)

0.1

2.0

(68.1)

Crum &
Forster(1)(2)

Fairmont(1)

Falcon(3)

Old Lyme(4)

Total(1)

Combined ratio:

Loss & LAE

Commissions

Underwriting expense

Gross premiums written

Net premiums written

Net premiums earned

Underwriting proﬁt (loss)

Interest and dividends

Operating income

Realized gains

76.2%

11.3%

20.8%

69.9%

15.4%

21.7%

56.0%

21.1%

22.7%

56.7%

29.0%

7.2%

73.3%

12.3%

21.5%

108.3%

107.0%

99.8%

92.9% 107.1%

963.5

729.0

669.0

(55.2)

105.5

50.3

51.4

313.0

227.2

214.9

(15.0)

19.4

4.4

10.4

14.8

56.6

41.7

41.6

0.1

1.3

1.4

0.7

2.1

38.6

1,371.7

38.6

1,036.5

28.5

954.0

2.0

1.7

3.7

—

3.7

(68.1)

127.9

59.8

62.5

122.3

Pre-tax income before interest and other

101.7

58

Year ended December 31, 2001

Underwriting proﬁt (loss)

(151.2)

(336.9)

(2.6)

(490.7)

Crum &
Forster(1)(2)

TIG(1)(5)

Falcon(3)

Total(1)

Combined ratio:

Loss & LAE

Commissions

Underwriting expense

Gross premiums written

Net premiums written

Net premiums earned

Underwriting proﬁt (loss)

Interest and dividends

Operating income (loss)

Realized gains (losses)

Pre-tax income (loss) before interest and other

86.4%

14.9%

30.4%

91.8%

22.5%

16.2%

76.5%

12.7%

36.3%

90.1%

20.2%

20.5%

131.7%

130.5%

125.5%

130.8%

843.2

518.7

477.4

(151.2)

114.7

(36.5)

(5.3)

(41.8)

1,544.9

1,096.3

1,106.0

(336.9)

38.8

(298.1)

(0.7)

(298.8)

21.8

11.9

10.2

(2.6)

0.7

(1.9)

0.1

(1.8)

2,409.9

1,626.9

1,593.6

(490.7)

154.2

(336.5)

(5.9)

(342.4)

(1) See the commentary commencing on page 51 regarding the presentation of segmented information.

(2) These  results  differ  from  those  published  by  Crum  &  Forster  Holdings  Corp.  due  to  differences

between Canadian and U.S. GAAP.

(3) Included in U.S. operations for convenience.

(4) Transferred to runoff effective January 1, 2004.

(5) In 2001, Ranger was a subsidiary of TIG and its results were included in TIG’s results.

The U.S. insurance combined ratio for the year ended December 31, 2003 improved to 102.5%

(99.1% excluding the effect of Crum & Forster’s net strengthening of asbestos reserves) from

107.1%  last  year  (after  giving  effect  to  the  discontinued  TIG  business  which  was  moved  to

runoff effective January 1, 2002) and from 130.8% in 2001 (124.7% with the $96.8 beneﬁt of

the Swiss Re Cover).

Crum & Forster’s combined ratio improved to 104.4% for 2003 (99.7%, excluding the effect of

the  net  strengthening  of  asbestos  reserves)  from  108.3%  in  2002  and 131.7%  in  2001 (2001

results did not yet show the impact of the signiﬁcant turnaround achieved since the arrival of

the  current  management  team  in  the  latter  part  of  1999),  reﬂecting  the  impact  of  price

increases in excess of 10% for 2003, improved retention of existing business, growth in new

business  and  the  company’s  continued  focus  on  expenses.  Crum  &  Forster’s  net  premiums

written in 2003 increased by 28.0% over 2002 (prior to the negative impact of Seneca recording

its  bail  bonds  on  a  net  basis  commencing  January  1,  2003  and  the  effect  of  the  net

strengthening  of  asbestos  reserves),  reﬂecting  new  business  and  price  increases  on  renewal

business.  United  States  Fire  Insurance,  Crum  &  Forster’s  principal  operating  subsidiary,  was

redomiciled from New York to Delaware at December 31, 2003 and moved to a positive earned

surplus position of approximately $146 at December 31, 2003, a signiﬁcant improvement from

59

FAIRFAX  FINANCIAL  HOLDINGS  LIMITED

its  negative  earned  surplus  position  of  $255  at  December  31,  2002.  As  a  result,  U.S.  Fire  has

2004 dividend capacity of approximately $80. North River Insurance, Crum & Forster’s New

Jersey-domiciled  operating  subsidiary,  reduced  its  negative  earned  surplus  position  to  $6  at

December  31,  2003  from  $38  at  December  31,  2002.  Cash  ﬂow  from  operations  at  Crum  &

Forster improved to $379.2 in 2003 from a negative $110.7 in 2002. For more information on

Crum  &  Forster,  please  see  its  website  www.cﬁns.com,  where  the  publication  of  ﬁnancial

information is expected to commence in March 2004.

Fairmont’s combined ratio of 99.2% for 2003 and its decrease in net premiums written in the

year reﬂect its continuing strict focus on underwriting proﬁtability.

Falcon’s underwriting proﬁt improved to $1.5 in 2003 from $0.1 in 2002 and an underwriting

loss of $2.6 in 2001, and its combined ratio improved to 96.0% in 2003 from 99.8% in 2002

and 125.5% in 2001. Falcon’s net premiums written in 2003 increased by 47.7% to $61.6 from

$41.7 in 2002.

Reinsurance – OdysseyRe(1)

Underwriting proﬁt (loss)

Combined ratio:

Loss & LAE

Commissions

Underwriting expense

Gross premiums written

Net premiums written

Net premiums earned

Underwriting proﬁt (loss)

Interest and dividends

Operating income (loss)

Realized gains

Pre-tax income (loss) before interest and other

2003

61.0

2002

12.9

2001

(138.5)

67.5%

24.2%

5.2%

68.9%

25.3%

4.9%

80.6%

27.6%

7.2%

96.9%

99.1%

115.4%

2,558.2

1,894.5

1,153.6

2,153.6

1,631.2

1,965.1

1,432.6

61.0

92.7

153.7

284.1

437.8

12.9

107.0

119.9

118.6

238.5

984.7

900.5

(138.5)

107.5

(31.0)

2.1

(28.9)

(1) These results differ from those published by Odyssey Re Holdings Corp. due to differences between

Canadian and U.S. GAAP.

OdysseyRe  produced  an  excellent  underwriting  proﬁt  in  2003.  Its  combined  ratio  in  2003

improved  to  96.9%,  compared  to  99.1%  last  year  and  115.4%  in  2001.  The  company

demonstrated  a  continued  disciplined  commitment  to  underwriting  proﬁtability  and

opportunistic portfolio growth. Net premiums written in 2003 increased by 32.0% over 2002 as

insurance and reinsurance market conditions continued to improve on a global basis. Premium

growth in North America was due to increased pricing both at the insurance and reinsurance

levels, while premium growth in the Euro Asia division reﬂected increased opportunities due to

60

catastrophe losses, competitor withdrawals and asset impairments, particularly in Europe. Cash

ﬂow from operations at OdysseyRe improved to $554.1 in 2003 from $214.2 in 2002. For more

information  on  OdysseyRe’s  results,  please  see  its  2003  annual  report  posted  on  its  website

www.odysseyre.com.

Interest and Dividends

Interest and dividends declined by 17.2% to $220.3 in 2003 from $266.1 in 2002. The amount

of interest and dividends reﬂected primarily:

)

lower investment yields (a consolidated average of 2.85% in 2003 compared to 4.01%

in 2002) as a result of the liquidation during the second quarter of a substantial portion

of the bond portfolio and retaining the proceeds in cash and short term investments

(47%  of  portfolio  investments  were  held  in  cash  and  short  term  investments  at

December  31,  2003  pending  the  company  identifying  suitable  opportunities  for

reinvestment in line with its long term value-oriented investment philosophy); and

) a $1.2 billion increase in the  average consolidated investment portfolio in 2003 due to
strong operating cash ﬂows at OdysseyRe, Crum & Forster and Northbridge as a result

of  their  signiﬁcant  premium  growth  and  improved  underwriting  results,  and  to

OdysseyRe’s retention of proceeds from its issue of notes in the fourth quarter, partially

offset by negative cash ﬂow at the runoff operations, particularly TIG’s negative cash

ﬂow following the discontinuance of its MGA-controlled program business.

Other Components of Net Earnings

Realized gains. Net  realized  gains  increased  in  2003  to  $534.6  from  $285.9  in  2002.  The

2003 realized gains resulted principally from the sale of bonds and common stocks consisting

of $667.0 of realized gains reduced by adjustments of $132.4 for intersegment gains, primarily

on the sales between group companies of certain Hub, Northbridge and OdysseyRe shares and

the sale of Napa’s medical malpractice book of business to OdysseyRe. Consolidated realized

gains of $845.9 include $311.3 of realized gains in the runoff segment as well. Included in net

realized gains for the year ended December 31, 2003 is $32.0 (2002 – $33.7) of losses on the

other-than-temporary writedown of certain bonds and equities. Fairfax’s investment portfolio

is managed on a total return basis which views realized gains, although their timing may be

unpredictable,  as  an  important  and  recurring  component  of  the  return  on  investments  and

consequently of income.

Runoff  and  other. The  runoff  business  segment  was  formed  with  the  acquisition  on

August  11,  1999  of  the  company’s  interest  in  The  Resolution  Group  (TRG),  which  was

comprised of the outstanding runoff management expertise and experienced, highly respected

personnel of TRG, and a wholly-owned insurance subsidiary in runoff, International Insurance

Company (IIC). The runoff segment currently consists of three groups: the U.S. runoff group

(the merged TIG and IIC, as described below), the European runoff group (Sphere Drake and

RiverStone Insurance (UK), as well as nSpire Re, also as described below) and Group Re, which

constitutes  the  participation  by  CRC  (Bermuda),  Wentworth  and  (commencing  in  2002)

nSpire  Re  in  the  reinsurance  programs  of  the  company’s  subsidiaries  with  third  party

61

FAIRFAX  FINANCIAL  HOLDINGS  LIMITED

reinsurers.  The  U.S.  and  European  runoff  groups  are  managed  by  the  dedicated  TRG  runoff

management  operation,  now  usually  identiﬁed  under  the  RiverStone  name,  which  has

substantial  personnel  in  both  the  U.S.  and  Europe.  Group  Re’s  activities  are  managed  by

Fairfax.

U.S. runoff group

On August 11, 1999, Fairfax paid $97 to purchase 100% of TRG’s voting common shares which

represented an effective 27.5% economic interest in TRG’s results of operations and net assets.

Xerox  retained  all  of  TRG’s  participating  non-voting  shares,  resulting  in  an  effective  72.5%

economic  interest  in  TRG’s  results  of  operations  and  net  assets.  Xerox’s  wholly-owned

subsidiary, Ridge Re, also provides IIC (formerly TRG’s wholly-owned runoff subsidiary, now

merged with TIG) with the vendor indemnity (unutilized coverage of $99.0 at December 31,

2003) referred to under Additional Reinsurance Protection on page 104. IIC’s cessions to Ridge

Re are fully collateralized by trust funds in the same amount as the cessions.

On December 16, 2002, Fairfax acquired Xerox’s 72.5% economic interest in TRG, the holding

company of IIC, in exchange for payments over 15 years of $425 ($204 at current value, using a

discount rate of 9% per annum), payable approximately $5 a quarter from 2003 to 2017 and

approximately $128 at the end of 2017. Upon this acquisition, Xerox’s non-voting shares were

amended  to  make  them  mandatorily  redeemable  at  a  capped  price  and  to  eliminate  Xerox’s

participation  in  the  operations  of  IIC,  and  a  direct  contractual  obligation  was  effectively

created from Fairfax to Xerox. IIC then merged with TIG to form the U.S. runoff group. This

group,  currently  operating  under  the  TIG  name,  consists  of  the  IIC  operations  and  the

discontinued  MGA-controlled  program  business  of  TIG  and  is  under  the  management  of

RiverStone.

On  January  6,  2003,  TIG  distributed  to  its  holding  company  approximately  $800  of  assets,

including 33.2 million of TIG’s 47.8 million shares of NYSE-listed Odyssey Re Holdings Corp.

and all of the outstanding shares of Commonwealth (subsequently converted to 14.4 million

Northbridge shares) and Ranger. The distributed securities were held in trust for TIG’s beneﬁt,

principally  pending  TIG’s  satisfaction  of  certain  ﬁnancial  tests  at  the  end  of  2003.  Fairfax

guaranteed that TIG would maintain at least $500 of statutory surplus at the end of 2003, a

risk-based capital of at least 200% at each year-end, and a continuing net reserves to surplus

ratio  not  exceeding  3  to  1.  At  December  31,  2003,  TIG  had  statutory  surplus  of  $695.9,  net

reserves to statutory surplus of 1.6:1 and a risk-based capital ratio of 212.7%. TIG has therefore

achieved the three ﬁnancial tests which it was required to meet as of December 31, 2003 in

order to permit the release from trust of the securities remaining in the above-mentioned trust,

subject to approval by the California Department of Insurance.

During 2003, the 14.4 million Northbridge shares (with a market value of approximately $191)

were  released  from  the  trust,  and  4.8  million  shares  of  OdysseyRe  (with  a  market  value  of

approximately $101) were contributed by the trust to TIG, as a result of the placement of the

Chubb Re Cover described on page 66. Effective January 1, 2004, the California Department of

Insurance  approved  the  distribution  from  TIG  to  the  trust  of  two  licensed  insurance

subsidiaries of TIG, with aggregate statutory capital of $38.8. These two companies and Ranger

have  been  consolidated  under  a  holding  company  to  form  Fairmont  Specialty  Group.  The

62

assets in the trust currently consist of 28.4 million shares of OdysseyRe (with a market value of

approximately $756 at March 1, 2004) and all of the shares of Fairmont Specialty Group and its

subsidiaries  (GAAP  and  statutory  capital  of  $156.1  and  $122.8  respectively  at  December  31,

2003).

European runoff group, including nSpire Re

The European runoff group consists of three wholly-owned entities: RiverStone Insurance (UK)

and  Sphere  Drake  Insurance,  as  well  as  nSpire  Re  (formerly  named  ORC  Re).  RiverStone

Insurance (UK) resulted from the amalgamation during 2002 of RiverStone Stockholm, Sphere

Drake Bermuda and CTR’s non-life operations. Management is continuing the consolidation of

the  European  runoff  operations  and  expects  to  eventually  merge  RiverStone  Insurance

(UK)  and  Sphere  Drake  Insurance  into  one  runoff  insurance  company.  nSpire  Re  is

headquartered  in  Ireland,  which  is  an  attractive  entry  point  to  the  European  market  and

provides investment and regulatory ﬂexibility.

nSpire Re reinsures the reinsurance portfolios of RiverStone Insurance (UK) and Sphere Drake

Insurance and beneﬁts from the protection provided by the Swiss Re Cover (described below)

from  aggregate  adverse  development  on  claims  and  uncollectible  reinsurance  on  1998  and

prior net reserves. RiverStone Management (UK), with 230 employees and ofﬁces in London,

Brighton,  Paris  and  Stockholm,  provides  the  management  (including  claims  handling)  of

nSpire  Re’s  insurance  and  reinsurance  liabilities  and  the  collection  and  management  of  its

reinsurance assets. nSpire Re also provides consolidated investment and liquidity management

services  to  the  European  runoff  group.  In  addition  to  its  role  in  the  consolidation  of  the

European  runoff  companies,  nSpire  Re  also  has  two  other  mandates,  described  in  the  two

following paragraphs.

It serves as the entity through which Fairfax primarily provided ﬁnancing for the acquisition of

the  U.S.  insurance  and  reinsurance  companies.  nSpire  Re’s  capital  and  surplus  includes

$1.7 billion of equity and debt ﬁnancing to Fairfax’s U.S. holding company resulting from the

acquisitions of Ranger, OdysseyRe, Crum & Forster and TIG. For each of its U.S. acquisitions,

Fairfax  ﬁnanced  the  acquisition,  at  the  Canadian  holding  company,  with  an  issue  of

subordinate voting shares and long term debt. The proceeds of this long term ﬁnancing were

invested in nSpire Re’s capital which then provided the acquisition ﬁnancing to Fairfax’s U.S.

holding company to complete the acquisition. At December 31, 2003, nSpire Re’s capital and

surplus of $2.0 billion included $1.7 billion related to equity, debt and other ﬁnancing for the

acquisition of the U.S. insurance and reinsurance companies. The combined equity of nSpire

Re and the other European runoff entities (excluding amounts related to equity, debt and other

ﬁnancing for the acquisition of the U.S. insurance and reinsurance companies) amounted to

$596.9 at December 31, 2003.

nSpire  Re  reinsures  the  U.S.  insurance  companies,  including  by  participating  in  their

reinsurance  programs  with  third  party  reinsurers,  provides  TIG  and  the  European  runoff

companies with beneﬁts of Fairfax’s corporate insurance policy which is ultimately reinsured

with  a  Swiss  Re  subsidiary  (the  Swiss  Re  Cover),  and  provided  post-acquisition  reinsurance

protection for Crum & Forster and TIG.

63

FAIRFAX  FINANCIAL  HOLDINGS  LIMITED

As discussed in the 1999 Annual Report, the major reason for the Swiss Re Cover was to protect

Fairfax from development on pre-acquisition claims and related uncollectible reinsurance on

its April 13, 1999 acquisition of TIG. nSpire Re has provided TIG with beneﬁts of the Swiss Re

Cover through an underlying reinsurance policy in favour of TIG. As of December 31, 2002,

Fairfax  assigned  the  full  beneﬁt  of  the  Swiss  Re  Cover  to  nSpire  Re  which  had  previously

provided the indirect beneﬁt of the Swiss Re Cover to TIG and the European runoff companies.

Although Fairfax remains legally liable for its original obligations with respect to the Swiss Re

Cover, under the terms of the assignment agreement nSpire Re is responsible to Fairfax for all

premium payments after 2002, including for any additional losses ceded to the Swiss Re Cover.

At  December  31,  2003,  there  remained  $3.9  of  unused  protection  under  the  Swiss  Re  Cover

($267.5 at December 31, 2002).

In December 2003, an afﬁliate of nSpire Re entered into a $300 revolving letter of credit facility

with 11 banks which is used to provide letters of credit for reinsurance contracts of nSpire Re

provided for the beneﬁt of other Fairfax subsidiaries. The facility is effectively secured by the

assets held in trust derived from the premiums on the Swiss Re Cover and the interest thereon.

The lenders have the ability, in the event of a default, to cause the commutation of this Cover,

thereby gaining access to the trust fund assets. The aggregate amount of letters of credit issued

from time to time under this facility may not exceed the agreed margined value of the assets in

the  trust  account.  Currently,  there  are  $300  of  letters  of  credit  issued  under  this  facility,

including  those  replacing  the  letters  of  credit  previously  issued  under  Fairfax’s  syndicated

credit facility.

Every related party transaction of nSpire Re, including its provision of reinsurance to afﬁliates,

is effected on market terms and at market prices, and requires approval by nSpire Re’s board of

directors,  two  of  whose  three  members  are  unrelated  to  Fairfax.  nSpire  Re’s  accounts  are

audited  annually  by  PricewaterhouseCoopers  LLP,  and  its  reserves  are  certiﬁed  annually  by

Milliman USA and are included in the consolidated reserves on which PricewaterhouseCoopers

LLP provides an annual valuation actuary’s report, which is included in the Annual Report.

Consistent  with  the  company’s  objective  of  retaining  more  business  for  its  own  account  in

favourable market conditions, CRC (Bermuda), Wentworth and (commencing in 2002) nSpire

Re  participate  in  the  reinsurance  programs  of  the  company’s  subsidiaries  with  third  party

reinsurers.  This  participation,  on  the  same  terms,  including  pricing,  as  the  third  party

reinsurers, varies by program and by subsidiary, and is shown separately below as ‘‘Group Re’’.

In November 2003, RiverStone Management (UK) formed a new runoff syndicate at Lloyd’s to

provide reinsurance to close for the 2000 and prior underwriting years of Kingsmead syndicates

271  and  506  for  which  TIG  had  provided  underwriting  capacity  for  2000  and  prior

underwriting  years  along  with  third  party  capital  providers.  The  transaction  involved  the

assumption of gross and net provisions for claims of $670.1 and $147.6 respectively, of which

$514.0 and $113.2 were in respect of TIG’s interests, including a risk premium of $123.5 that

was  charged  to  all  capital  providers,  including  TIG.  This  transaction  allows  Riverstone  to

integrate  direct  management  of  these  liabilities  into  the  European  runoff  group. Against  the

total reinsurance recoverables assumed of $566.0, the syndicate held security of $128.9, had a

legal right of offset in respect of $173.7 payable to reinsurers and had provisions for bad debt of

$16.1,  resulting  in  net  unsecured  reinsurance  recoverables  of  $247.3.  Of  the  net  unsecured

64

reinsurance recoverables, 82% were recoverable from reinsurers rated A- or better by A.M. Best

or S&P, 12% from reinsurers rated B+ or lower and 6% from not rated reinsurers.

The  combined  capital  and  surplus  of  the  European  runoff  group  using  Canadian  GAAP,

excluding nSpire Re’s investment in Fairfax Inc., amounted to $596.9 at December 31, 2003.

Set out below is a summary of the  operating results  of runoff and other for the years ended

December 31, 2003, 2002 and 2001:

Year ended December 31, 2003

Gross premiums written

325.8

(1.1)

257.5

582.2

U.S.

Europe

Group Re

Total

Net premiums written

Net premiums earned

Losses on claims

Operating expenses

Interest and dividends

Operating income (loss)

Realized gains

Net premiums written

Net premiums earned

Losses on claims

Operating expenses

Interest and dividends

Operating income (loss)

Realized gains (losses)

Pre-tax income (loss) before interest and other

(136.2)

Year ended December 31, 2002

Gross premiums written

795.8

224.5

185.0

1,205.3

U.S.*

Europe

Group Re

Total

(1.4)

196.1

71.1

71.3

268.8

338.5

244.4

511.8

(429.0)

(119.3)

(177.9)

(726.2)

(153.9)

(54.0)

(71.4)

(279.3)

36.8

20.0

15.6

72.4

(350.0)

(82.0)

10.7

(421.3)

213.8

91.6

9.6

5.9

311.3

16.6

(110.0)

495.4

153.3

184.3

833.0

679.3

187.8

152.0

1,019.1

(693.4)

(234.7)

(87.0)

(1,015.1)

(240.5)

(103.7)

(47.1)

(391.3)

74.1

47.0

18.2

139.3

(180.5)

(103.6)

108.1

76.7

36.1

(1.1)

35.0

(248.0)

183.7

(64.3)

Pre-tax income (loss) before interest and other

(72.4)

(26.9)

* Gives effect to the TIG/IIC merger throughout 2002.

65

FAIRFAX  FINANCIAL  HOLDINGS  LIMITED

Year ended December 31, 2001

Gross premiums written

Net premiums written

Net premiums earned

Losses on claims

Operating expenses

Interest and dividends

Operating income (loss)

Realized gains

U.S.

Europe

Group Re

Total

0.2

0.2

0.2

(10.1)

(13.7)

38.7

15.1

2.3

387.9

91.7

121.0

(232.5)

(79.2)

60.3

(130.4)

17.6

114.5

502.6

110.8

202.7

102.6

223.8

(58.1)

(300.7)

(19.6)

(112.5)

20.1

119.1

45.0

13.4

(70.3)

33.3

Pre-tax income (loss) before interest and other

17.4

(112.8)

58.4

(37.0)

For  the  year  ended  December  31,  2003,  the  U.S.  runoff  group  had  a  pre-tax  loss  of  $136.2,

primarily  attributable  to  the  $98.5  net  additional  cost  in  2003  of  the  $300  adverse

development  cover  provided  by  Chubb  Re  (Bermuda)  Ltd.  (the  ‘‘Chubb  Re  Cover’’)  (under

which  TIG  had  ceded  $290  of  losses  as  of  December  31,  2003,  leaving  $10  of  remaining

coverage),  reserve  strengthening  of  $68  on  lines  not  covered  by  the  Chubb  Re  Cover,  low

interest and dividends reﬂecting the signiﬁcant cash position since the second quarter of 2003,

and operating costs in excess of net investment income as a result of the continuing effects of

winding down TIG’s MGA-controlled program business as premiums earned reduce faster than

infrastructure  costs.  Net  premiums  written  for  the  U.S.  runoff  group  of  negative  1.4  in  2003

reﬂect cessions to third party reinsurers and premiums ceded to the Chubb Re Cover and the

adverse  development  cover  with  nSpire  Re.  The  U.S.  runoff  group’s  pre-tax  loss  of  $72.4  in

2002  reﬂects  the  $200  reserve  strengthening  recorded  on  the  merger  of  TIG  and  IIC  on

December 16, 2002, but does not include related restructuring costs of $63.6.

For the year ended December 31, 2003, the European runoff group had pre-tax income of $9.6

compared to a pre-tax loss of $26.9 for 2002, primarily attributable to a reduction in expenses

offset by a reduction in interest and dividends.

The 2003 runoff loss includes premiums payable of $147.8 upon the cession of an additional

$263.6  of  losses  under  the  Swiss  Re  Cover  (of  which  $62  relates  to  European  runoff,  $107

relates to U.S. runoff and $86 relates to Crum & Forster). At December 31, 2003, ceded losses

under this Cover (the beneﬁts of which were assigned to nSpire Re as of December 31, 2002, as

noted  earlier)  totalled  $996.1  (December  31,  2002  –  $732.5),  leaving  unutilized  coverage  of

$3.9.

For the year ended December 31, 2003, Group Re had pre-tax income of $16.6 compared to

$35.0 in 2002, the decrease relating primarily to the change, upon the IPO of Northbridge, in

the terms of CRC (Bermuda)’s participation in reinsuring Lombard programs.

Claims adjusting. Fairfax’s $16.6 share of Lindsey Morden’s loss in 2003, compared with a

$6.7  share  of  the  loss  in  2002,  reﬂects  Lindsey  Morden’s  poor  results  from  its  U.S.-based

operations,  the  impairment  of  $4.7  of  goodwill  arising  from  the  RSKCo  acquisition  and  the

66

write  off  of  certain  U.S.  deferred  tax  assets,  partially  offset  by  improved  operating  earnings

from its Canadian, U.K., European and International operations.

Interest expense.

Interest expense increased to $138.6 for 2003 compared to $79.6 for 2002

as summarized below:

Fairfax

OdysseyRe

Crum & Forster

2003

2002

2001

107.2

12.7

18.7

71.9

7.7

–

100.4

–

–

138.6

79.6

100.4

The increased interest expense in 2003 resulted partly from new interest costs (the interest cost

of the Crum & Forster notes issued in June 2003, the Fairfax convertible debentures issued in

July  2003,  the  OdysseyRe  notes  issued  in  the  fourth  quarter  and  the  company’s  purchase

consideration  contracted  in  December  2002  for  the  acquisition  of  the  remaining  721/2%

economic interest in TRG), and partly from the company’s decision to maintain ﬁxed rather

than ﬂoating interest costs (the effect of the company’s closing out its ﬁxed rate to ﬂoating rate

interest  rate  swaps  in  the  third  quarter  of  2002  was  a  $34.2  beneﬁt  in  2002,  compared  to  a

$14.6 beneﬁt in 2003 as a result of the gain on the aforementioned closing out of swaps being

deferred and amortized against future interest expense).

Swiss  Re  premium. As  part  of  its  acquisition  of  TIG  effective  April  13,  1999,  Fairfax

purchased the Swiss Re Cover, a $1 billion corporate insurance cover ultimately reinsured with

a Swiss Re subsidiary, protecting it on an aggregate basis from adverse development in claims

and  unrecoverable  reinsurance  above  the  aggregate  reserves  set  up  by  all  of  its  subsidiaries

(including  TIG  Specialty  Insurance  and  Odyssey  America  Re  (formerly  TIG  Re)  but  not

including other subsidiaries acquired after 1998) at December 31, 1998. With the OdysseyRe

IPO,  effective  June  14,  2001  Odyssey  America  Re’s  and  Odyssey  Reinsurance  Corporation’s

claims  and  unrecoverable  reinsurance  were  no  longer  protected  by  the  Swiss  Re  Cover  from

further adverse development. Similarly, effective May 28, 2003 with the Northbridge IPO, the

subsidiaries  of  Northbridge  were  no  longer  protected  by  the  Swiss  Re  Cover  from  further

adverse development.

In 2003, Fairfax strengthened 1998 and prior reserves and ceded these losses of $263.6 to the

Swiss Re Cover for which an additional premium of $147.8 is payable to a funds withheld trust

account for the beneﬁt of the Swiss Re subsidiary providing the cover (of which $50.0 was paid

on February 25 and the balance is payable on April 15). For the year ended December 31, 2003,

investment income (including realized gains) from the assets in the trust account of $15.0 was

less than the contractual 7% interest credit to the funds withheld account by $7.4, reﬂecting

the large cash position in the trust account since the second quarter of 2003. Since inception of

the trust account, the cumulative investment income (including realized gains) has exceeded

the cumulative contractual interest credit by $26.8. The cessions to the Swiss Re Cover since

67

FAIRFAX  FINANCIAL  HOLDINGS  LIMITED

inception  have  resulted  from  adverse  development  in  the  various  operating  segments  as

follows:

Canadian insurance

U.S. insurance

Reinsurance

Runoff

Kingsmead

Total

2003

2002

2001

2000

1999

Cumulative

0.9

85.8

–

176.9

–

263.6

(0.1)

2.9

–

2.3

–

5.1

11.3

94.9

–

79.6

18.0

(9.7)

(3.2)

166.6

186.1

22.6

89.0

4.0

53.3

14.9

–

203.8

272.5

251.1

(0.8)

536.3

75.9

362.7

22.0

996.1

The  majority  of  the  cumulative  cessions  to  the  Swiss  Re  Cover  resulted  from  reserve

deﬁciencies of $438.3 for TIG, $189.2 for Crum & Forster and $232.7 for the European runoff

group.

Effective  December  31,  2002,  the  beneﬁts  of  the  Swiss  Re  Cover  were  assigned  to  nSpire  Re

which  had  provided  reinsurance  protection  to  the  other  Fairfax  companies  similar  to  that

provided to Fairfax by the Swiss Re Cover. For the year ended December 31, 2003, the premium

cost and loss cessions related to the Swiss Re Cover are reﬂected in the European runoff group,

consistent with the legal entity basis of presentation. For 2002 and prior years, the premium

cost of the Swiss Re Cover was shown as an expense in the company’s statement of earnings

since the Cover was held at the corporate level.

Corporate  overhead  and  other. Corporate  overhead  and  other  includes  Fairfax,

OdysseyRe, Crum & Forster and Northbridge holding company expenses net of the company’s

investment  management  and  administration  fees  and  interest  income  on  Fairfax’s  cash

balances and is broken down as follows:

2003

2002

2001

Fairfax corporate overhead (net of interest on

cash balances)

35.3

22.8

24.6

Investment management and administration

fees

(36.5)

(36.9)

(23.6)

Corporate overhead of OdysseyRe, Crum &

Forster and Northbridge

Technology expenses and amortization

Other

18.2

15.6

16.1

48.7

5.0

15.0

–

5.9

5.0

3.9

–

9.9

The  increase  in  the  Fairfax  corporate  overhead  charge  in  2003  relates  primarily  to  increased

insurance  and  professional  services  costs.  The  ‘‘Other’’  item  relates  to  one-time  service

expenses  and  writeoffs.  Fairfax  has  continued  to  invest  in  technology  to  better  support  its

businesses.  The  company’s  technology  subsidiary,  MFXchange,  is  also  marketing  its

technology products and services for the insurance industry to third parties, resulting in net

selling and administration costs over the near term until it generates more third party revenue.

68

These costs are shown separately in the above corporate overhead costs. The company expects

that over time, third party revenue will cover these costs.

Taxes. The  company  recorded  an  income  tax  expense  of  $187.6  for  2003  (compared  to

$149.3 in 2002 and a recovery of $247.4 in 2001), principally due to taxable income, as well as

losses not recognized for accounting purposes. The decrease in the deferred tax asset for the

year ended December 31, 2003 was $9.0 which reﬂected a decrease of $135.1 from utilization

of  the  U.S.  net  operating  tax  losses  as  a  result  of  the  proﬁtability  of  the  U.S.  insurance  and

reinsurance  companies,  partially  offset  by  increases  in  the  non-U.S.  components  of  the

deferred  tax  asset  and  increases  resulting  in  the  ordinary  course  from  increased  business

volumes.

Non-controlling interests. The non-controlling interests on the company’s consolidated

statements of earnings represent the 19.4% public minority interest in OdysseyRe, the 29.0%

public  minority  interest  in  Northbridge  effective  May  28,  2003,  Xerox’s  72.5%  economic

interest  in  TRG  to  December  16,  2002  and  the  25.0%  public  minority  interest  in  Lindsey

Morden, as summarized in the table below.

OdysseyRe

Northbridge

TRG

Lindsey Morden

2003

2002

2001

55.2

14.8

–

(5.5)

39.7

(15.0)

–

13.8

(2.8)

–

14.0

(1.3)

64.5

50.7

(2.3)

Balance Sheet Analysis

Cash  and  short  term  investments,  Cash  held  in  Crum  &  Forster  interest  escrow

account and  Marketable securities consist  of  the  holding  company’s  cash  deposits  and

short term investments which it maintains as a safety net to ensure that it can cover its debt

service  and  operating  requirements  for  some  years  even  if  its  insurance  subsidiaries  pay  no

dividends  (see  the  discussion  on  page 113).  Cash  and  short  term  investments  consist  of  the

company’s  bank  operating  account,  overnight  bank  deposits  and  investments  in  short  term

government treasury bills. Cash of $47.3 at December 31, 2003 was held in an interest escrow

account  to  cover  the  next  three  semi-annual  interest  payments  on  the  Crum  &  Forster  debt

which was issued June 15, 2003. Marketable securities include the company’s investments in

various equities.

Accounts  receivable  and  other  consists  of  premiums  receivable  (net  of  provisions  for

uncollectible  amounts)  of  $1.4  billion,  funds  withheld  receivables  from  cedants  and  other

reinsurance  balances  of  $199.3,  receivables  for  securities  sold  of  $53.9,  accrued  interest  of

$65.1, prepaid expenses of $60.5 and other accounts receivable of $289.8 including $103.5 of

Lindsey Morden receivables.

Recoverable from reinsurers consists of future recoveries on unpaid claims ($7.6 billion),

reinsurance  receivable  on  paid  losses  ($654.2)  and  unearned  premiums  from  reinsurers

($297.0).  Excluding  current  receivables,  the  company’s  insurance,  reinsurance  and  runoff

companies, with a combined statutory surplus of $4.6 billion, had an aggregate of $7.6 billion

69

FAIRFAX  FINANCIAL  HOLDINGS  LIMITED

of future recoveries from reinsurers on unpaid claims, a ratio of recoveries to surplus which is

within  industry  norms.  Please  see  Reinsurance  Recoverables  beginning  on  page 101  for  a

detailed  discussion  of  amounts  recoverable  from  reinsurers.  As  explained  in  that  discussion,

excluding increases in Recoverable from reinsurers in 2003 resulting from cessions to reinsurers

as  a  result  of  reserve  strengthenings  and  from  the  formation  of  a  new  runoff  syndicate  at

Lloyd’s  described  on  page  64,  Recoverable  from  reinsurers  decreased  by  $336.7  during  2003.

Also as disclosed in that discussion, reinsurance bad debts continued to be insigniﬁcant ($15.1

in 2003).

Investments  in  Hub,  Zenith  National  and  Advent  represent  Fairfax’s  investment  in

26.1%-owned  Hub  International  Limited  ($102.5)  and  42.0%-owned  Zenith  National

Insurance  Corp.  ($216.5),  both  of  which  are  publicly  listed  companies,  and  46.8%-owned

Advent Capital Holdings PLC ($68.6).

Deferred  premium  acquisition  costs  (DPAC)  consist  of  brokers’  commissions  and

premium taxes. These are deferred, together with the related unearned premiums (UPR), and

amortized  to  income  over  the  term  of  the  underlying  insurance  policies.  Unlike  many

companies in the insurance industry, the company does not defer internal underwriting costs

as  part  of  DPAC  and  the  recoverability  of  DPAC  is  determined  without  giving  credit  to

investment income. The ratio of DPAC to UPR (16.9% at December 31, 2003) varies from time

to  time  depending  on  the  mix  of  business  being  written  and  the  estimated  recoverability  of

DPAC given expected loss ratios on the UPR.

Future  income  taxes  represent  amounts  expected  to  be  recovered  in  future  years.  At

December  31,  2003  future  income  taxes  of  $968.3  (of  which  $676.4  related  to  Fairfax  Inc.,

Fairfax’s U.S. holding company, and subsidiaries in its U.S. consolidated tax group) consisted

of $613.5 of capitalized operating and capital losses (with no valuation allowance), and timing

differences of $354.8 which represent expenses recorded in the ﬁnancial statements but not yet

deducted for income tax purposes. The capitalized operating losses relate primarily to Fairfax

Inc.  and  its  U.S.  subsidiaries  ($524.0,  including  $272.2  arising  on  the  acquisition  of  TIG  in

1999), where 90% of the losses expire between 2019 and 2022 (none expire before 2010), the

Canadian holding company ($32.8) and Sphere Drake ($35.5).

Following the acquisition of TIG in 1999, the U.S. consolidated tax group had net operating

losses until 2002. In order to more quickly use its future income tax asset and for the cash ﬂow

beneﬁt  of  receiving  tax  sharing  payments  from  OdysseyRe,  the  company  determined  that  it

would be in its best interests to increase its approximately 73.8% interest in OdysseyRe to in

excess of 80%, so that OdysseyRe would be included in Fairfax’s U.S. consolidated tax group.

Consequently,  on  March  3,  2003,  pursuant  to  a  private  agreement,  Fairfax  Inc.  purchased

4,300,000 outstanding common shares of OdysseyRe.

With  the  discontinuance  of  TIG’s  MGA-controlled  program  business  and  the  proﬁtability  of

Crum & Forster and OdysseyRe, 2003 taxable income of Fairfax’s U.S. consolidated tax group

was in excess of $375. As a result, the portion of Fairfax’s future income tax asset related to its

U.S. consolidated tax group decreased $135.1 in 2003 from utilization of net operating losses of

that  group  (before  increasing  in  the  ordinary  course  for  timing  differences  as  a  result  of

increased business volumes).

70

Fairfax has determined that no valuation allowance is required on its future income tax asset as

at December 31, 2003 ($17.8 at December 31, 2002). Differences between expected and actual

future  operating  results  could  adversely  impact  the  company’s  ability  to  realize  the  future

income  tax  asset  within  a  reasonable  period  of  time  given  the  inherent  uncertainty  in

projecting operating company earnings and industry conditions beyond a three to four year

period.  The  company  expects  to  realize  the  beneﬁt  of  these  capitalized  losses  from  future

proﬁtable operations during the loss carryforward period.

In determining the need for a valuation allowance, management considers primarily current

and  expected  proﬁtability  of  the  companies. Management  reviews  the  recoverability  of  the

future  tax  asset  and  the  valuation  allowance  on  a  quarterly  basis.  The  timing  differences

principally  relate  to  insurance-related  balances  such  as  claims,  DPAC  and  UPR;  such  timing

differences  are  expected  to  continue  for  the  foreseeable  future  in  light  of  the  company’s

ongoing operations.

Goodwill arises on the acquisition of companies where the purchase price paid exceeds the

fair value of the underlying net tangible assets acquired. Of the goodwill at December 31, 2003,

$180.4    arises  from  Lindsey  Morden,  and    the  balance  relates  to  Lombard’s  acquisition  of

brokers ($17.2), Crum & Forster’s acquisition of Seneca and Transnational ($7.3), Falcon ($4.4),

OdysseyRe ($4.0) and First Capital ($1.0).

In  accordance  with  changes  in  Canadian  accounting  standards,  effective  January  1,  2002

goodwill  is  no  longer  amortized  to  earnings,  but  if  and  when  it  is  determined  that  an

impairment in its value exists, the value of the goodwill is required to be written down to its

fair  value.  The  company  assesses  the  carrying  value  of  goodwill  based  on  the  underlying

discounted cash ﬂows and operating results of its subsidiaries. Management has compared the

carrying value of goodwill balances as at December 31, 2003 and the estimated fair values of

the  underlying  operations  and  concluded  that  there  was  no  impairment  in  the  value  of

goodwill  except  for  $4.7  at  Lindsey  Morden  arising  from  the  RSKCo  acquisition.  Of  Lindsey

Morden’s goodwill of $180.4 at December 31, 2003, $137.7 was related to its U.K. operations.

The recoverability of this goodwill is sensitive to the ability of the U.K. operations to meet their

proﬁt and cash ﬂow forecasts for 2004 and future years. Failure to meet those forecasts could

result in a writedown of its goodwill.

The increase in goodwill to $214.3 at December 31, 2003 from $185.3 at December 31, 2002 is

principally  attributable  to  the  strengthening  of  the  pound  sterling  against  the  U.S.  dollar

during 2003.

Other assets include loans receivable, deferred ﬁnancing costs and shares held in connection

with  the  company’s  management  restricted  stock  grant  and  similar  programs  and

miscellaneous other balances.

Accounts payable and accrued liabilities include  employee  related  liabilities,  amounts

due to brokers and agents including commissions, liabilities for operating expenses incurred in

the  normal  course  of  business,  dividends  payable  to  policyholders,  salvage  and  subrogation

payable and other similar balances.

71

FAIRFAX  FINANCIAL  HOLDINGS  LIMITED

Funds  withheld  payable  to  reinsurers  represent  premiums  and  accumulated  accrued

interest  (at  an  average  interest  crediting  rate  of  approximately  7%  per  annum)  on  aggregate

stop  loss  reinsurance  treaties,  principally  relating  to  the  Swiss  Re  Cover  ($490.4),  OdysseyRe

($214.3), Crum & Forster ($225.6) and TIG ($142.1). In 2003, $84.3 of interest expense accrued

to  reinsurers  on  these  funds  withheld;  the  company’s  total  interest  and  dividend  income  of

$330.1 in 2003 was net of this interest expense. The impact of the interest crediting rate on

funds  withheld  payable  to  reinsurers  on  the  gross  investment  yield  from  the  investment

portfolio is discussed on page 106. Claims payable under such treaties are paid ﬁrst out of the

funds withheld balances.

Provision for claims consists of the gross amount of individual case reserves established by

the insurance and runoff companies, individual case estimates reported by ceding companies

to the reinsurance (or runoff) companies and management’s estimate of claims incurred but

not  reported  (IBNR)  based  on  the  volume  of  business  currently  in  force  and  the  historical

experience  on  claims.  Please  see  Provision  for  Claims  beginning  below  on  this  page  for  a

detailed discussion of the company’s provision for claims.

Unearned premiums are described above under Deferred premium acquisition costs.

Purchase consideration payable is the discounted amount payable over the next 14 years

for acquiring an additional interest in TRG, as described on page 62.

Non-controlling  interests  represent  the  minority  shareholders’  19.4%  share  of  the

underlying  net  assets  of  OdysseyRe  ($250.5),  25.0%  share  of  the  underlying  net  assets  of

Lindsey Morden ($25.4) and 29.0% share of the underlying net assets of Northbridge ($164.9).

All of the assets and liabilities, including long term debt, of these companies are included in

the company’s consolidated balance sheet.

Provision for Claims

Since 1985, in order to ensure so far as possible that the company’s provision for claims (often

called ‘‘reserves’’) is adequate, management has established procedures so that the provision

for claims at the company’s insurance, reinsurance and runoff operations are subject to several

reviews, including by one or more independent actuaries. The reserves are reviewed separately

by, and must be acceptable to, internal actuaries at each operating company, the chief actuary

at  Fairfax’s  head  ofﬁce,  and  one  or  more  independent  actuaries,  including  an  independent

valuation actuary whose report appears in each Annual Report.

As noted in the Valuation Actuary’s Report on page 21, Fairfax records the provision for claims

on an undiscounted basis. Except in cases where the discount is offset by a credit in Fairfax’s

acquisition accounting, Fairfax’s property and casualty insurance, reinsurance and runoff and

other reserves are recorded on an undiscounted basis, in accordance with Fairfax’s accounting

policy, and consequently none of these subsidiaries generate earnings by virtue of discounting

reserves.

In the ordinary course of carrying on their business, Fairfax’s insurance, reinsurance and runoff

companies  pledge  their  own  assets  as  security  for  their  own  obligations  to  pay  claims  or  to

make  premium  (and  accrued  interest)  payments.  Common  situations  where  assets  are  so

pledged,  either  directly,  or  to  support  letters  of  credit  issued  for  the  following  purposes,  are

72

regulatory deposits (such as with states for workers compensation business), deposits of funds

at Lloyd’s in support of London market underwriting, and the provision of security as a non-

admitted company, as security for claims assumed or to support funds withheld obligations.

Generally, the pledged assets are released as the underlying payment obligation is fulﬁlled. The

$2.0 billion of cash and investments pledged by the company’s subsidiaries, referred to in note

4 to the consolidated ﬁnancial statements, has been pledged in the ordinary course of business

to  support  the  pledging  subsidiary’s  own  obligations,  as  described  in  this  paragraph  (these

pledges  do  not  involve  the  cross-collateralization  by  one  group  company  of  another  group

company’s obligations).

Claim provisions are established by the case method as claims are reported. The provisions are

subsequently adjusted as additional information on the estimated amount of a claim becomes

known  during  the  course  of  its  settlement.  A  provision  is  also  made  for  management’s

calculation of factors affecting the future development of claims including IBNR based on the

volume of business currently in force and the historical experience on claims.

As time passes, more information about the claims becomes known and provision estimates are

consequently adjusted upward or downward. Because of the estimation elements encompassed

in this process, and the time it takes to settle many of the more substantial claims, several years

are required before a meaningful comparison of actual losses to the original provisions can be

developed.

The development of the provision for claims is shown by the difference between estimates of

reserves as of the initial year-end and the re-estimated liability at each subsequent year-end.

This is based on actual payments in full or partial settlement of claims, plus re-estimates of the

reserves  required  for  claims  still  open  or  claims  still  unreported.  Unfavourable  development

means that the original reserve estimates were lower than subsequently indicated. The $456.3

aggregate  unfavourable  development  in  2003 (before  recovery  under  the  Swiss  Re  Cover)  is

comprised as shown in the following table:

Northbridge

U.S. insurance

OdysseyRe

Runoff and other

13.5

39.8

116.9

286.1

456.3

The following table presents a reconciliation of the provision for claims and loss adjustment

expense (LAE) for the insurance, reinsurance and runoff and other lines of business for the past

ﬁve  years.  As  shown  in  the  table,  the  sum  of  the  provision  for  claims  for  all  of  Fairfax’s

73

FAIRFAX  FINANCIAL  HOLDINGS  LIMITED

insurance, reinsurance and runoff and other operations is $14,368.1 as at December 31, 2003 –

the amount shown as Provision for claims on Fairfax’s consolidated balance sheet on page 23.

Reconciliation of Provision for Claims and LAE as at December 31

2003

2002

2001

2000

1999

Insurance subsidiaries owned

throughout the year – net of

indemniﬁcation

2,356.7

1,932.1

1,938.6

2,299.4

2,736.3

Insurance subsidiaries acquired

during the year

–

–

16.1

47.5

–

Total insurance subsidiaries

2,356.7

1,932.1

1,954.7

2,346.9

2,736.3

Reinsurance subsidiaries owned

throughout the year

2,341.7

1,834.3

1,674.4

1,666.8

870.4

Reinsurance subsidiaries acquired

during the year

–

10.3

–

–

961.1

Total reinsurance subsidiaries

2,341.7

1,844.6

1,674.4

1,666.8

1,831.5

Runoff and other subsidiaries

owned throughout the year

2,206.5

3,100.4

3,077.4

3,412.9

2,404.6

Runoff and other subsidiaries

acquired during the year

–

40.5

–

–

1,419.8

Total runoff and other subsidiaries

2,206.5

3,140.9

3,077.4

3,412.9

3,824.4

Federated Life

24.1

18.3

18.4

20.6

19.6

Total provision for claims and LAE

Reinsurance gross-up

6,929.0

7,439.1

6,935.9

6,461.4

6,724.9

7,110.8

7,447.2

6,018.8

8,411.8

5,673.7

Total including gross-up

14,368.1

13,397.3

13,835.7

13,466.0

14,085.5

The  seven  tables  that  follow  show  the  reconciliation  and  the  reserve  development  of

Northbridge  (Canadian  insurance),  U.S.  insurance,  OdysseyRe  (reinsurance)  and  runoff  and

other’s net provision for claims. Cessions to the Swiss Re Cover by group for 2003 and prior

years are set out under Swiss Re premium on page 68. Because business is written in various

locations, there will necessarily be some distortions caused by foreign exchange ﬂuctuations.

The insurance operations’ tables are presented in Canadian dollars for Northbridge (Canadian

insurance) and in U.S. dollars for U.S. insurance. The OdysseyRe (reinsurance) and runoff and

other  tables  are  presented  in  U.S.  dollars  as  the  reinsurance  and  runoff  businesses  are

substantially transacted in that currency.

Canadian Insurance – Northbridge

The following table shows for Northbridge (excluding Federated Life) the provision for claims

liability for unpaid losses and LAE as originally and as currently estimated for the years 1999

74

through  2003.  The  favourable  or  unfavourable  development  from  prior  years  is  credited  or

charged to each year’s earnings.

Reconciliation of Provision for Claims –

Northbridge

Provision for claims and LAE at January 1

728.9

621.9

585.5

603.3

593.3

2003

2002

2001

2000

1999

(in Cdn $)

Incurred losses on claims and LAE

Provision for current accident year’s

claims

619.6

525.5

456.0

405.5

437.8

Foreign exchange effect on claims

(27.2)

(1.5)

–

–

–

Increase (decrease) in provision for prior

accident years’ claims

19.2

8.2

32.4

(6.7)

(19.4)

Total incurred losses on claims and LAE

611.6

532.2

488.4

398.8

418.4

Payments for losses on claims and LAE

Payments on current accident year’s

claims

(211.4)

(224.5)

(228.3)

(197.7)

(211.6)

Payments on prior accident years’ claims

(273.7)

(200.7)

(223.7)

(218.9)

(196.8)

Total payments for losses on claims and LAE

(485.1)

(425.2)

(452.0)

(416.6)

(408.4)

Provision for claims and LAE at

December 31

Exchange rate

Provision for claims and LAE at

855.4

728.9

621.9

585.5

603.3

0.7738

0.6330

0.6264

0.6658

0.6890

December 31 converted to U.S. dollars

661.9

461.4

389.6

389.8

415.7

The company strives to establish adequate provisions at the original valuation date. It is the

company’s objective to have favourable development from the past. The reserves will always be

subject to upward or downward development in the future.

The following table shows for Northbridge (excluding Federated Life) the original provision for

claims  reserves  including  LAE  at  each  calendar  year-end  commencing  in  1993 (Lombard  is

included  commencing  in  1994,  the  year  of  its  acquisition)  with  the  subsequent  cumulative

payments made from these years and the subsequent re-estimated amount of these reserves.

75

FAIRFAX  FINANCIAL  HOLDINGS  LIMITED

Provision for Northbridge’s Claims Reserve Development

As at
December 31

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
(in Cdn $)

Provision for claims including LAE

185.0 521.4 532.7 552.8 569.0 593.3 603.3 585.5 621.9 728.9 855.4

Cumulative payments as of:

One year later

Two years later

Three years later

Four years later

Five years later

Six years later

Seven years later

Eight years later

Nine years later

Ten years later

Reserves re-estimated as of:

One year later

Two years later

Three years later

Four years later

Five years later

Six years later

Seven years later

Eight years later

Nine years later

Ten years later

Favourable (unfavourable)

56.7 194.3 178.8 195.0 193.5 196.8 218.9 223.7 200.7 273.7

99.3 282.4 280.4 298.2 294.4 315.9 334.4 333.8 366.6

121.1 360.7 348.1 369.6 377.0 393.3 417.8 458.2

141.0 410.6 400.8 428.6 441.1 455.4 516.9

153.2 447.6 437.5 470.3 487.2 533.1

159.7 473.0 468.5 498.4 545.6

164.7 496.9 487.2 547.0

168.7 510.0 528.3

170.8 545.1

193.3

181.5 516.9 516.1 550.3 561.5 573.9 596.7 617.9 630.1 724.8

185.1 520.3 526.2 551.2 556.6 574.1 621.6 634.3 672.3

191.6 529.8 528.7 552.2 561.0 593.3 638.0 673.9

192.4 532.1 529.0 556.6 580.7 607.3 674.9

193.0 537.0 528.5 567.2 592.3 644.6

193.1 538.1 537.3 579.3 624.8

192.5 547.9 547.6 607.5

192.5 557.5 574.9

201.9 582.5

215.7

development

(30.7)

(61.1)

(42.2)

(54.7)

(55.8)

(51.3)

(71.6)

(88.4)

(50.4)

4.1

–

Note that when in any year there is a reserve strengthening or redundancy for a prior year, the

amount  of  the  change  in  favourable  (unfavourable) development  thereby  reﬂected  for  that

prior  year  is  also  reﬂected  in  the  favourable  (unfavourable) development  for  each  year

thereafter.

In  2003,  Northbridge  had  unfavorable  development  of  Cdn$19.2  before  foreign  exchange

gains on prior years of Cdn$23.3 (it also had foreign exchange gains of Cdn$3.9 on the current

accident  year  in  2003).  The  development  consisted  of  Cdn$5.5  related  to the  Facility

Association  and Cdn$13.7  relating  to  various  casualty  and  liability  classes  of  business  in  a

number of accident years prior to 2002.

As  shown  in  Northbridge’s  annual  report,  on  an  accident  year  basis  (under  which  all  claims

attribute  back  to  the  year  of  loss,  regardless  of  when  they  are  reported  or  adjusted),

Northbridge’s average reserve development during the last ten years has been favourable (i.e.

redundant) by 2.4%.

Future  development  could  be  signiﬁcantly  different  from  the  past  due  to  many  unknown

factors.

U.S. Insurance

The following table shows for Fairfax’s U.S. insurance operations (excluding Old Lyme, which

is included in the comparable table for Runoff and other) the provision for claims liability for

76

unpaid losses and LAE as originally and as currently estimated for the years 1999 through 2003.

The favourable or unfavourable development from prior years is credited or charged to each

year’s earnings.

Reconciliation of Provision for Claims –

U.S. Insurance

Provision for claims and LAE at January 1

1,470.7

1,565.1

1,957.1

2,320.6

2,693.9

2003

2002

2001

2000

1999

Incurred losses on claims and LAE

Provision for current accident year’s

claims

606.0

537.5

552.5

468.2

624.7

Increase (decrease) in provision for prior

accident years’ claims

39.8

24.0

(10.6)

44.8

29.8

Total incurred losses on claims and LAE

645.8

561.5

541.9

513.0

654.5

Payments for losses on claims and LAE

Payments on current accident year’s

claims

(131.5)

(158.8)

(181.7)

(138.8)

(272.5)

Payments on prior accident years’ claims

(290.2)

(497.1)

(768.3)

(785.2)

(755.3)

Total payments for losses on claims and

LAE

(421.7)

(655.9)

(950.0)

(924.0)

(1,027.8)

Provision for claims and LAE at

December 31 before the undernoted

1,694.8

1,470.7

1,549.0

1,909.6

2,320.6

Provision for claims and LAE for

Winterthur (Asia) at December 31

Provision for claims and LAE for Seneca at

December 31

Provision for claims and LAE at

–

–

–

–

16.1

–

–

47.5

–

–

December 31

1,694.8

1,470.7

1,565.1

1,957.1

2,320.6

The company strives to establish adequate provisions at the original valuation date. It is the

company’s objective to have favourable development from the past. The reserves will always be

subject to upward or downward development in the future.

The following table shows for Fairfax’s U.S. insurance operations (as noted above, excluding

Old Lyme) the original provision for claims reserves including LAE at each calendar year-end

commencing in 1993 with the subsequent cumulative payments made from these years and

the  subsequent  re-estimated  amounts  of  these  reserves.  The  following  U.S.  insurance

77

FAIRFAX  FINANCIAL  HOLDINGS  LIMITED

subsidiaries’  reserves  are  included  from  the  respective  years  in  which  such  subsidiaries  were

acquired:

Fairmont (Ranger)
Crum & Forster
Falcon
Seneca
Winterthur (Asia) (acquired by Falcon)

Year Acquired

1993
1998
1998
2000
2001

Provision for U.S. Insurance Operations’ Claims Reserve Development

As at
December 31

1993 1994 1995 1996 1997

1998

1999

2000

2001

2002

2003

Provision for claims including LAE

173.9 154.9 157.8 187.6 184.0 2,693.9 2,320.6 1,957.1 1,565.1 1,470.7 1,694.8

Cumulative payments as of:

One year later

Two years later

Three years later

Four years later

Five years later

Six years later

Seven years later

Eight years later

Nine years later

Ten years later

Reserves re-estimated as of:

One year later

Two years later

Three years later

Four years later

Five years later

Six years later

Seven years later

Eight years later

Nine years later

Ten years later

78.5

59.1

69.4

79.8

70.1

755.3

785.2

768.3

141.7 130.0 119.9 125.3 128.0 1,363.2 1,402.0 1,135.7

169.3 158.7 135.2 157.5 168.9 1,822.7 1,670.0 1,269.3

290.2

497.1

716.9

185.8 166.9 155.2 184.1 212.8 2,096.1 1,735.2

188.3 179.9 171.8 204.6 222.7 2,119.4

194.4 193.9 174.8 209.3 259.1

197.7 193.3 175.3 244.5

196.5 192.7 204.9

195.3 221.9

224.1

171.4 191.0 183.2 196.3 227.8 2,723.7 2,365.4 1,946.5 1,589.1 1,510.5

199.6 206.9 190.9 229.1 236.3 2,715.8 2,421.1 1,965.0 1,662.3

214.5 216.8 210.8 236.3 251.9 2,765.8 2,434.7 1,984.9

222.2 226.0 212.9 246.7 279.0 2,781.0 2,450.2

227.6 229.8 216.2 261.1 279.0 2,795.3

229.4 232.0 220.6 261.1 279.7

232.9 235.7 220.6 261.4

236.8 235.7 220.0

236.8 235.9

237.7

Favourable (unfavourable) development

(63.8) (81.0) (62.2) (73.8) (95.7)

(101.4)

(129.6)

(27.8)

(97.2)

(39.8)

–

Note that when in any year there is a reserve strengthening or redundancy for a prior year, the

amount  of  the  change  in  favourable  (unfavourable)  development  thereby  reﬂected  for  that

prior  year  is  also  reﬂected  in  the  favourable  (unfavourable)  development  for  each  year

thereafter.

The U.S. insurance operations had unfavourable development of $39.8 in 2003, resulting from

asbestos development of $149.9 offset by $98.5 aggregate reinsurance coverage and $50.0 of

favourable  development  in  non-latent  lines,  strengthening  for  accident  year  2001  by  $53.3

partially  offset  by  redundancies  of  $33.4  in  accident  year  2002,  and  other  items  aggregating

$18.5 (including uncollectible reinsurance, involuntary pools and unallocated loss adjustment

expenses).  The  Crum  &  Forster  numbers  included  in  the  above  table  and  this  commentary

78

(which constitute the major portion of those numbers) differ from those published by Crum &

Forster Holdings Corp. due to differences between Canadian and U.S. GAAP.

Future  development  could  be  signiﬁcantly  different  from  the  past  due  to  many  unknown

factors.

Reinsurance – OdysseyRe

The following table shows for OdysseyRe the provision for claims liability for unpaid losses and

LAE as originally and as currently estimated for the years 1999 through 2003. The favourable or

unfavourable development from prior years is credited or charged to each year’s earnings.

Reconciliation of Provision for Claims –

OdysseyRe

Provision for claims and LAE at January 1

1,844.6

1,674.4

1,666.8

1,831.5

819.9

2003

2002

2001

2000

1999

Incurred losses on claims and LAE

Provision for current accident year’s

claims

1,208.8

920.0

702.7

487.5

220.2

Foreign exchange effect on claims

14.8

5.1

(0.4)

(1.1)

–

Increase in provision for prior accident

years’ claims

116.9

66.0

23.0

15.9

6.3

Total incurred losses on claims and LAE

1,340.5

991.1

725.3

502.3

226.5

Payments for losses on claims and LAE

Payments on current accident year’s

claims

(241.6)

(215.0)

(121.5)

(58.7)

(30.3)

Payments on prior accident years’ claims

(601.8)

(616.2)

(596.2)

(608.3)

(145.7)

Total payments for losses on claims and LAE

(843.4)

(831.2)

(717.7)

(667.0)

(176.0)

Provision for claims and LAE at

December 31 before the undernoted

2,341.7

1,834.3

1,674.4

1,666.8

870.4

Provision for claims and LAE for First

Capital at December 31

Provision for claims and LAE for TIG Re at

December 31

Provision for claims and LAE at

–

–

10.3

–

–

–

–

–

–

961.1

December 31

2,341.7

1,844.6

1,674.4

1,666.8

1,831.5

The company strives to establish adequate provisions at the original valuation date. It is the

company’s objective to have favourable development from the past. The reserves will always be

subject to upward or downward development in the future.

The following table shows for OdysseyRe the original provision for claims reserves including

LAE  at  each  calendar  year-end  commencing  in  1996  (the  date  of  Odyssey  Reinsurance  (New

York)’s acquisition) with the subsequent cumulative payments made from these years and the

79

FAIRFAX  FINANCIAL  HOLDINGS  LIMITED

subsequent  re-estimated  amount  of  these  reserves.  This  table  is  the  same  as  the  comparable

table published by Odyssey Re Holdings Corp.

Provision for OdysseyRe Claims Reserve Development

As at December 31

1996

1997

1998

1999

2000

2001

2002

2003

Provision for claims including

LAE

1,991.8 2,134.3 1,987.6 1,831.5 1,666.8 1,674.4 1,844.6 2,341.7

Cumulative payments as of:

One year later

Two years later

Three years later

Four years later

Five years later

Six years later

Seven years later

Reserves re-estimated as of:

One year later

Two years later

Three years later

Four years later

Five years later

Six years later

Seven years later

Favourable (unfavourable)

456.8

837.2

546.1

594.1

608.5

596.2

993.7 1,054.6 1,041.3 1,009.9

601.8

616.2

985.4

1,142.1 1,341.5 1,352.9 1,332.8 1,276.4

1,349.2 1,517.6 1,546.2 1,505.5

1,475.0 1,648.3 1,675.4

1,586.2 1,754.9

1,680.3

2,106.7 2,113.0 2,033.8 1,846.2 1,689.9 1,740.4 1,961.5

2,121.0 2,151.3 2,043.0 1,862.2 1,768.1 1,904.2

2,105.0 2,130.9 2,043.7 1,931.4 1,987.9

2,073.6 2,128.2 2,084.8 2,113.2

2,065.8 2,150.3 2,215.6

2,065.6 2,207.1

2,067.9

development

(76.1)

(72.8)

(228.0)

(281.7)

(321.1)

(229.8)

(116.9)

–

Note that when in any year there is a reserve strengthening or redundancy for a prior year, the

amount  of  the  change  in  favourable  (unfavourable)  development  thereby  reﬂected  for  that

prior  year  is  also  reﬂected  in  the  favourable  (unfavourable)  development  for  each  year

thereafter.

The  unfavourable  development  of  $116.9  in  2003  was  mainly  due  to  reserve  strengthening

related to OdysseyRe’s U.S. casualty business written from 1997 to 2000.

Future  development  could  be  signiﬁcantly  different  from  the  past  due  to  many  unknown

factors.

80

Runoff and Other

The  following  table  shows  for  Fairfax’s  runoff  and  other  operations  the  provision  for  claims

liability for unpaid losses and LAE as originally and as currently estimated for the years 1999

through  2003.  The  favourable  or  unfavourable  development  from  prior  years  is  credited  or

charged to each year’s earnings.

Reconciliation of Provision for Claims –

Runoff and Other

Provision for claims and LAE at January 1 3,140.9

3,077.4

3,412.9

3,824.4

2,159.9

2003

2002

2001

2000

1999

Incurred losses on claims and LAE

Provision for current accident year’s

claims

Foreign exchange effect on claims

Increase in provision for prior accident

580.7

66.6

826.1

1,031.8

1,106.3

3.0

38.3

2.5

674.2

35.2

years’ claims

286.1

241.3

290.2

402.2

33.0

Recovery under Swiss Re Cover

(263.6)

(5.2)

(210.5)

(272.3)

(60.4)

Total incurred losses on claims and LAE

669.8

1,065.2

1,149.8

1,238.7

682.0

Payments for losses on claims and LAE

Payments on current accident year’s

claims

(74.2)

(172.3)

(264.3)

(332.3)

(88.8)

Payments on prior accident years’

claims

(1,530.0)

(869.9)

(1,221.0)

(1,317.9)

(348.5)

Total payments for losses on claims and

LAE

(1,604.2)

(1,042.2)

(1,485.3)

(1,650.2)

(437.3)

Provision for claims and LAE at

December 31 before the undernoted

2,206.5

3,100.4

3,077.4

3,412.9

2,404.6

Provision for claims and LAE for Old

Lyme at December 31

Provision for claims and LAE for TRG at

December 31

Provision for claims and LAE for TIG

Specialty Insurance at December 31

Provision for claims and LAE at

–

–

–

40.5

–

–

–

–

–

–

–

–

–

601.7

818.1

December 31

2,206.5

3,140.9

3,077.4

3,412.9

3,824.4

The  unfavorable  development  of  $286.1  in  2003  resulted  from  additional  development  of

TIG’s reserves of $68.3 on lines not covered by the Chubb Re Cover, construction defect claims

of $79.9 and additional development of European runoff reserves of $137.9, mainly relating to

North American casualty business written in the late 1990s.

81

FAIRFAX  FINANCIAL  HOLDINGS  LIMITED

The company strives to establish adequate provisions at the original valuation date. It is the

company’s objective to have favourable development from the past. The reserves will always be

subject to upward or downward development in the future.

Asbestos, Pollution and Other Hazards

Note:

In this Asbestos, Pollution and Other Hazards section, certain tables have used groupings into

continuing  and  runoff  operations,  replacing  less  meaningful  groupings  into  U.S.  and  European

companies shown in the 2002 Annual Report.

General APH Discussion

A number of Fairfax’s subsidiaries, prior to their acquisition by Fairfax, wrote general liability

policies and reinsurance under which policyholders continue to present asbestos-related injury

claims, claims alleging injury, damage or clean up costs arising from environmental pollution,

and other health hazard related claims (APH). The vast majority of these claims are presented

under policies written many years ago.

There  is  a  great  deal  of  uncertainty  surrounding  these  claims.  This  uncertainty  impacts  the

ability of insurers and reinsurers to estimate the ultimate amount of unpaid claims and related

settlement  expenses.  The  majority  of  these  claims  differ  from  any  other  type  of  contractual

claim because there is little consistent precedent to determine what, if any, coverage exists or

which,  if  any,  policy  years  and  insurers/reinsurers  may  be  liable.  These  uncertainties  are

exacerbated  by  inconsistent  court  decisions  and  judicial  and  legislative  interpretations  of

coverage  that  in  some  cases  have  eroded  the  clear  and  express  intent  of  the  parties  to  the

insurance contracts and in others have expanded theories of liability. The industry as a whole

is  engaged  in  extensive  litigation  over  these  coverages  and  liability  issues  and  is  thus

confronted with continuing uncertainty in its efforts to quantify APH exposures. As a result,

conventional  actuarial  reserving  techniques  cannot  be  used  to  estimate  the  ultimate  cost  of

such  claims  because  of  inadequate  development  patterns  and  inconsistent  emerging  legal

doctrine.

Since  Fairfax’s  acquisition  of  TRG  in  1999,  RiverStone  has  managed  the  group’s  direct  APH

claims.  In  light  of  the  intensive  claim  settlement  process  for  these  claims,  which  involves

comprehensive fact gathering and subject matter expertise, management believes it is prudent

to have a centralized claim facility to handle these claims on behalf of all the Fairfax groups.

RiverStone’s APH claim staff focuses on defending Fairfax’s groups against unwarranted claims,

pursuing aggressive claim handling and proactive resolution strategies, and minimizing costs.

A  substantial  number  of  the  professional  members  of  this  staff  are  attorneys  experienced  in

asbestos  and  environmental  pollution  liabilities.  At  OdysseyRe  a  dedicated  claim  unit  also

manages  its  APH  exposure.  This  unit  performs  audits  of  company  policyholders  with

signiﬁcant asbestos and environmental pollution exposure to assess their potential liabilities.

This unit also monitors developments within the insurance industry having a potential impact

on their reserves.

82

Following is an analysis of Fairfax’s gross and net loss and ALAE reserves from APH exposures at

year-end 2003, 2002, and 2001 and the movement in gross and net reserves for those years:

2003

2002

2001

Gross

Net

Gross

Net

Gross

Net

Runoff Operations

Provision for APH claims and ALAE at January 1

1,402.7

419.5

1,487.4

392.1

1,646.1

APH losses and ALAE incurred during the year

APH losses and ALAE paid during the year

300.1

242.8

61.8(1)

55.2

146.9

231.6

45.4

18.0

193.4

352.1

Provision for APH claims and ALAE at December 31

1,460.0

426.1

1,402.7

419.5

1,487.4

Continuing Operations

Provision for APH claims and ALAE at January 1

APH losses and ALAE incurred during the year

APH losses and ALAE paid during the year

Provision for APH claims and ALAE at December 31

Fairfax Total

723.0

235.4

119.9

838.5

565.7

173.2

84.9

654.0

711.7

110.2

98.9

723.0

535.6

87.8

57.7

565.7

717.2

126.4

131.9

711.7

Provision for APH claims and ALAE at January 1

2,125.7

985.2

2,199.1

927.7

2,363.3

APH losses and ALAE incurred during the year

APH losses and ALAE paid during the year

535.5

362.7

235.0

140.1

257.1

330.5

133.2

75.7

319.8

484.0

Provision for APH claims and ALAE at December 31

2,298.5

1,080.1

2,125.7

985.2

2,199.1

(1)

Includes a $24.7 one-time reclassiﬁcation of reserves from non-latent classes into asbestos.

In 2001, the Fairfax groups commuted their assumed liabilities and reinsurance recoverables

(excluding  certain  facultative  contracts)  balances  with  Equitas,  and  settled  another

commutation  involving  substantial  APH  exposure  which  impacted  the  reported  paid  results

and  reduced  the  outstanding  APH  exposures  for  the  European  runoff  subsidiaries  by  almost

half. These commutations were beneﬁcial to the company. However, because a commutation

(which  includes,  for  this  purpose,  a  buyback  and  cancellation  of  the  reinsurance  contract)

constitutes a prepayment of the commuted claims, the effect of these commutations on the

preceding  table  is  to  create  an  unrepresentative  amount  of  paid  claims  in  the  year

509.2

48.6

165.7

392.1

485.0

94.1

43.5

535.6

994.2

142.7

209.2

927.7

of commutation.

Asbestos Claim Discussion

Asbestos continues to be the most signiﬁcant and difﬁcult mass tort for the insurance industry

in  terms  of  claims  volume  and  dollar  exposure.  The  company  believes  that  the  insurance

industry  has  been  adversely  affected  by  judicial  interpretations  that  have  had  the  effect  of

maximizing  insurance  recoveries  for  asbestos  claims,  from  both  a  coverage  and  liability

perspective.  Generally  speaking,  only  policies  written  prior  to  1986  have  potential  asbestos

exposure, since most policies written after that time contained an absolute asbestos exclusion.

Over the past few years the industry has experienced an increase over prior years in the number

of asbestos claimants, including claims by individuals who do not appear to be impaired by

asbestos  exposure.  It  is  generally  expected  throughout  the  industry  that  this  trend  will

continue. The reasons for this increase are many: more intensive advertising by lawyers seeking

additional  claimants,  increased  focus  by  plaintiffs  on  new  and  previously  peripheral

83

FAIRFAX  FINANCIAL  HOLDINGS  LIMITED

defendants, and an increase in the number of entities seeking bankruptcy protection. To date,

this  continued  ﬂow  of  claims  has  forced  approximately  69  manufacturers,  distributors  and

users of asbestos products into bankruptcy. These bankruptcies have, in turn, aggravated both

the volume and the value of claims against viable asbestos defendants. Accordingly, there is a

high  degree  of  uncertainty  with  respect  to  future  exposure  from  asbestos  claims,  both  in

identifying  which  insureds  may  become  targets  in  the  future  and  in  predicting  the  total

number of asbestos claimants.

Many coverage disputes with insureds are resolved only through aggressive settlement efforts.

Settlements involving bankrupt insureds may include extensive releases which are favorable to

the  company’s  subsidiaries,  but  which  could  result  in  settlements  for  larger  amounts  than

originally expected. As it has done in the past, RiverStone will continue to aggressively pursue

settlement opportunities.

Early  asbestos  claims  focused  on  manufacturers  and  distributors  of  asbestos-containing

products. Thus, the claims at issue largely arose out of the products hazard and typically fell

within the policies’ aggregate limits of liability for such coverage. Increasingly, insureds have

been asserting both that their asbestos claims are not subject to these aggregate limits and that

each  individual  bodily  injury  claim  should  be  treated  as  a  separate  occurrence,  potentially

creating  even  greater  exposure  for  primary  insurers.  Generally,  insureds  who  assert  these

positions are installers of asbestos products or property owners who allegedly had asbestos on

their premises. In addition, in an effort to seek additional insurance coverage, some insureds

that have eroded their aggregate limits are submitting new asbestos claims as ‘‘non-products’’

or  attempting  to  reclassify  previously  resolved  claims  as  non-products  claims.  The  extent  to

which  insureds  will  be  successful  in  obtaining  coverage  on  this  basis  is  uncertain,  and,

accordingly, it is difﬁcult to predict the ultimate volume or amount of the claims for coverage

not subject to aggregate limits.

Since 2001, several states have proposed, and in some cases enacted, tort reform statutes that

impact  asbestos  litigation  in  various  manners,  such  as  making  it  more  difﬁcult  for  a  diverse

group of plaintiffs to jointly ﬁle a single case, reducing ‘‘forum-shopping’’ by requiring that a

potential  plaintiff  have  been  exposed  to  asbestos  in  the  state  in  which  the  plaintiff  ﬁles  a

lawsuit, or permitting consolidation of discovery. These statutes typically apply to suits ﬁled

after a stated date. When a statute is proposed or enacted, asbestos defendants often experience

a marked increase in new lawsuits, as plaintiffs’ attorneys rush to ﬁle before the effective date

of the legislation. Some of this increased claim volume likely represents an acceleration of valid

claims that would have been brought in the future, while some claims will likely prove to have

little or no merit. At this point, it is too early to tell what portion of the increased number of

suits  represents  valid  claims.  Also,  the  acceleration  of  claims  increases  the  uncertainty

surrounding projections of future claims in the affected jurisdictions. The company’s carried

reserves  include  a  provision  which  the  company  believes  is  prudent  for  the  ultimate  cost  of

claims ﬁled in these jurisdictions.

84

Following  is  an  analysis  of  Fairfax’s  gross  and  net  loss  and  ALAE  reserves  from  asbestos

exposures at year-end 2003, 2002, and 2001 and the movement in gross and net reserves for

those years:

2003

2002

2001

Gross

Net

Gross

Net

Gross

Net

Runoff Operations

Provision for asbestos claims and ALAE at January 1

Asbestos losses and ALAE incurred during the year

Asbestos losses and ALAE paid during the year

Provision for asbestos claims and ALAE at December 31

Continuing Operations

Provision for asbestos claims and ALAE at January 1

Asbestos losses and ALAE incurred during the year

Asbestos losses and ALAE paid during the year

Provision for asbestos claims and ALAE at December 31

Fairfax Total

804.0

260.7

163.2

901.5

527.7

242.6

95.4

674.9

218.1

807.2

169.7

77.1(1)

17.2

278.1

383.2

168.3

57.4

494.1

90.0

93.2

59.3

10.9

804.0

218.1

461.8

125.1

59.2

527.7

335.6

79.6

32.0

383.2

948.5

122.2

263.5

807.2

448.8

115.9

102.9

461.8

Provision for asbestos claims and ALAE at January 1

1,331.7

601.3

1,269.0

505.4

1,397.4

Asbestos losses and ALAE incurred during the year

Asbestos losses and ALAE paid during the year

503.3

258.6

245.4

74.6

215.1

152.4

138.9

42.9

238.1

366.4

Provision for asbestos claims and ALAE at December 31

1,576.4

772.2

1,331.7

601.3

1,269.0

275.9

30.7

136.9

169.7

263.4

84.9

12.7

335.6

539.3

115.6

149.5

505.4

(1)

Includes a $24.7 one-time reclassiﬁcation of reserves from non-latent classes into asbestos, and a $16.0 one-time

reclassiﬁcation of reserves from environmental pollution into asbestos.

85

FAIRFAX  FINANCIAL  HOLDINGS  LIMITED

Following  is  an  analysis  of  Fairfax’s  U.S.-based  subsidiaries’  gross  and  net  loss  and  ALAE

reserves for asbestos exposures at year-end 2003, 2002, and 2001 and the movement in gross

and  net  reserves  for  those  years  (throughout  this  Asbestos,  Pollution  and  Other  Hazards

section, in the interests of clarity, TIG and IIC are presented separately, notwithstanding their

merger in December 2002):

2003

2002

2001

Gross

Net

Gross

Net

Gross

Net

IIC

Provision for asbestos claims and ALAE at January 1

640.3

140.3

674.6

104.3

661.0

100.7

Asbestos losses and ALAE incurred during the year

Asbestos losses and ALAE paid during the year

Provision for asbestos claims and ALAE at December 31

Crum & Forster (C&F)

Provision for asbestos claims and ALAE at January 1

Asbestos losses and ALAE incurred during the year

Asbestos losses and ALAE paid during the year

87.9

142.1

586.1

333.5

195.7

71.1

2.0

10.1

49.5

83.7

40.9

4.9

93.2

79.7

8.9

5.3

132.2

640.3

140.3

674.6

104.3

264.8

149.8

48.2

261.5

103.7

31.7

228.1

236.2

174.1

67.5

30.9

75.9

50.6

69.3

15.2

Provision for asbestos claims and ALAE at December 31

458.1

366.4

333.5

264.8

261.5

228.1

OdysseyRe(1)

Provision for asbestos claims and ALAE at January 1

189.7

118.0

193.8

107.4

205.6

Asbestos losses and ALAE incurred during the year

Asbestos losses and ALAE paid during the year

46.4

20.4

18.3

9.0

20.8

24.9

11.7

1.1

39.6

51.4

Provision for asbestos claims and ALAE at December 31

215.7

127.3

189.7

118.0

193.8

TIG

Provision for asbestos claims and ALAE at January 1

Asbestos losses and ALAE incurred during the year

Asbestos losses and ALAE paid during the year

36.0

75.3

8.6

12.3

2.6

3.1

Provision for asbestos claims and ALAE at December 31

102.7

11.8

Ranger

Provision for asbestos claims and ALAE at January 1

Asbestos losses and ALAE incurred during the year

Asbestos losses and ALAE paid during the year

Provision for asbestos claims and ALAE at December 31

4.5

0.4

3.8

1.1

0.3

0.2

0.1

0.4

36.0

6.2

6.2

36.0

6.6

0.5

2.6

4.5

5.3

6.2

(0.8)

12.3

0.1

0.2

0.0

0.3

41.1

0.7

5.8

36.0

7.0

0.4

0.8

6.6

89.2

15.7

(2.5)

107.4

9.3

0.1

4.1

5.3

0.1

0.0

0.0

0.1

(1) Net reserves presented for OdysseyRe exclude cessions under a stop loss agreement with nSpire Re, a wholly-owned

subsidiary of Fairfax. In its ﬁnancial disclosures OdysseyRe reports net reserves inclusive of cessions under this

reinsurance protection.

The  most  signiﬁcant  individual  policyholders  with  asbestos  exposures  are  traditional

defendants  who  manufactured,  distributed  or  installed  asbestos  products  on  a  nationwide

basis. IIC, which underwrote insurance generally for Fortune 500 type risks between 1971 and

1986  with  mostly  high  layer  excess  liability  coverages  (as  opposed  to  primary  or  umbrella

policies),  is  exposed  to  these  risks  and  has  the  bulk  of  the  direct  asbestos  exposure  within

Fairfax.  While  these  insureds  are  relatively  small  in  number,  asbestos  exposures  for  such

entities have increased recently due to the rising volume of claims, the erosion of much of the

86

underlying  limits  and  the  bankruptcies  of  target  defendants.  As  reﬂected  above,  these  direct

liabilities are very highly reinsured.

Fairfax’s  other  U.S.-based  insurers  have  asbestos  exposure  related  mostly  to  less  prominent

insureds  that  are  peripheral  defendants,  including  a  mix  of  manufacturers,  distributors  and

installers of asbestos-containing products as well as premises owners. For the most part, these

insureds  are  defendants  on  a  regional  rather  than  a  nationwide  basis.  As  the  ﬁnancial  assets

and insurance recoveries of traditional asbestos defendants have been depleted, plaintiffs are

increasingly  focusing  on  these  peripheral  defendants.  C&F  is  experiencing  an  increase  in

asbestos  claims  on  ﬁrst  layer  umbrella  policies;  compared  to  IIC,  these  tend  to  be  smaller

insureds with lower amounts of limits exposed. OdysseyRe has asbestos exposure arising from

reinsurance  contracts  entered  into  before  1984  under  which  liabilities,  on  an  indemnity  or

assumption basis, were assumed from ceding companies primarily in connection with general

liability  insurance  policies  issued  by  such  cedants.  OdysseyRe  was  part  of  the  Fairfax-wide

commutation  with  Equitas  in  2001  and  recorded  the  proceeds  received  from  Equitas  as

negative paid losses. This served to depress losses paid during that year. TIG has both direct

and reinsurance assumed asbestos exposures. Like C&F, the direct exposure is characterized by

smaller,  regional  businesses.  Asbestos  claims  presented  to  TIG  have  been,  for  the  most  part,

primary  general  liability.  TIG’s  net  retention  on  its  direct  exposure  is  protected  by  an

$89  asbestos  and  environmental  (A&E)  reinsurance  cover  provided  by  Pyramid  Insurance

Company  (owned  by  Aegon)  which  is  fully  collateralized  and  reﬂected  in  the  above  table.

Additionally, TIG’s assumed exposure is reinsured by ARC Reinsurance Corp. (also owned by

Aegon) and the current ceded balance of $152.5, for all claim types, is fully collateralized.

Illustrating  the  above  discussion,  the  following  tables  present  analyses  of  the  underwriting

proﬁles of IIC, C&F and TIG. The ﬁrst table is an analysis of the estimated distribution of all

policies, listed by attachment point, against which asbestos claims have been presented:

Attachment Point

$0 to $1

$1 to $10

$10 to $20

$20 to $50

Above $50

Estimated % of Total
Policies – By Count

IIC

10%

26%

28%

18%

18%

C&F

70%

21%

3%

2%

4%

TIG

70%

10%

3%

6%

11%

100%

100%

100%

87

FAIRFAX  FINANCIAL  HOLDINGS  LIMITED

The next table is similar, showing the distribution of these same policies by the total amount of

limits, as opposed to the total number of policies:

Attachment Point

$0 to $1

$1 to $10

$10 to $20

$20 to $50

Above $50

Estimated % of Total
Policies – By Limits

IIC

5%

20%

26%

21%

28%

C&F

36%

45%

6%

4%

9%

TIG

11%

24%

7%

17%

41%

100%

100%

100%

Reserves for asbestos cannot be estimated with traditional loss reserving techniques that rely

on historical accident year loss development factors. Because each insured presents different

liability and coverage issues, IIC and C&F, which have the bulk of Fairfax’s asbestos liabilities,

evaluate  their  asbestos  exposure  on  an  insured-by-insured  basis.  Since  the  mid-1990s  these

entities have utilized a sophisticated, non-traditional methodology that draws upon company

experience  and  supplemental  databases  to  assess  asbestos  liabilities  on  reported  claims.  This

methodology  utilizes  a  comprehensive  ground-up,  exposure-based  analysis  that  constitutes

industry  ‘‘best  practice’’  approach  for  asbestos  reserving.  The  methodology  was  initially

critiqued by outside legal and actuarial consultants and the results are annually reviewed by

independent actuaries, all of whom have consistently found the methodology comprehensive

and the results reasonable.

In  the  course  of  the  insured-by-insured  evaluation,  the  following  factors  are  considered:

available insurance coverage, including any umbrella or excess insurance that has been issued

to  the  insured;  limits,  deductibles  and  self-insured  retentions;  an  analysis  of  each  insured’s

potential liability; the jurisdictions involved; past and anticipated future asbestos claim ﬁlings

against  the  insured;  loss  development  on  pending  claims;  past  settlement  values  of  similar

claims;  allocated  claim  adjustment  expenses;  and  applicable  coverage  defenses.  The

evaluations  are  based  on  current  trends  without  any  consideration  of  potential  asbestos

legislation in the future (see Asbestos Legislative Reform Discussion commencing on page 94).

In addition to estimating liabilities for reported asbestos claims, IIC and C&F estimate reserves

for additional claims to be reported in the future as well the reopening of any claim closed in

the  past.  This  component  of  the  total  incurred  but  not  reported  (IBNR)  reserve  is  estimated

using information as to the reporting patterns of known insureds, historical settlement costs

per insured and characteristics of insureds such as limits exposed, attachment points and the

number of coverage years.

Once  the  gross  ultimate  exposure  for  indemnity  and  allocated  loss  adjustment  expense  is

determined  for  each  insured  and  policy  year,  IIC  and  C&F  estimate  the  amount  ceded  to

reinsurers by reviewing the applicable facultative and treaty reinsurance and examining past

ceded claim experience.

88

Given  the  maturity  of  their  asbestos  reserving  methodology  and  the  favorable  comments

received  from  outside  parties,  IIC  and  C&F  believe  that  their  approach  is  reasonable  and

comprehensive.

Since their asbestos exposure is considerably less than that of IIC and C&F, OdysseyRe, TIG,

and Ranger do not use the above methodology to establish asbestos reserves. Case reserves are

established where sufﬁcient information has been developed to indicate the involvement of a

speciﬁc insurance policy, and, at OdysseyRe, may include an additional amount as determined

by that company’s dedicated asbestos and environmental pollution claims unit based on the

claims audits of cedants. In addition, bulk IBNR reserves based on various methods such as loss

development,  market  share  and  frequency  and  severity  utilizing  industry  benchmarks  of

ultimate liability are established to cover additional exposures on both reported and unasserted

claims as well as for allocated claim adjustment costs.

The following table presents the carried gross reserves at IIC and C&F by insured category:

IIC

Number of % of Total
2003 Paid

Accounts

Accounts with Settlement Agreements

Total % of Total

Average
Reserve
Reserves per Account

Reserves

Structured Settlements

Coverage in Place

Total

Other Open Accounts

Active(1)

Not Active

Total

1

12

13

11

173

184

0.0%

91.8%

47.6

290.6

8.1%

49.6%

91.8%

338.2

57.7%

5.1%

1.1%

17.7

83.3

3.0%

14.2%

6.2%

101.0

17.2%

47.6

24.2

26.0

1.6

0.5

0.5

Additional Unallocated IBNR

104.6

17.9%

Total Direct

197

98.0%

543.8

92.8%

Assumed Reinsurance

2.0%

42.3

7.2%

Total

100.0%

586.1

100.0%

89

FAIRFAX  FINANCIAL  HOLDINGS  LIMITED

C&F

Number of % of Total
2003 Paid

Accounts

Accounts with Settlement Agreements

Total % of Total

Average
Reserve
Reserves per Account

Reserves

Structured Settlements

Coverage in Place

Total

Other Open Accounts

Active(1)

Not Active

Total

1

3

4

146

261

407

0.0%

0.6%

0.6%

1.9

30.9

32.8

0.4%

6.7%

7.2%

99.0%

0.4%

222.8

92.3

48.6%

20.1%

99.4%

315.1

68.7%

1.9

10.3

8.2

1.5

0.4

0.8

Additional Unallocated IBNR

110.2

24.1%

Total Direct

411

100.0%

458.1

100.0%

(1) Accounts with any prior indemnity payment

As  shown,  the  majority  of  the  direct  asbestos  exposure  at  IIC  is  from  insureds  with  current

settlement agreements in place. The one listed structured settlement is an agreement to a ﬁxed

amount to be paid over a ﬁve-year period beginning in 2010. The carried reserves support the

ultimate  stream  of  these  payments  without  any  discounting.  The  twelve  coverage-in-place

agreements provide speciﬁc amounts of insurance coverage and may include annual caps on

payments. Reserves are established based on the evaluation of the various previously discussed

exposure  factors  affecting  asbestos  claims,  and  are  set  equal  to  the  undiscounted  expected

payout  under  each  agreement.  Of  all  the  other  open  accounts,  only  eleven  are  considered

active,  i.e.,  an  account  with  a  prior  indemnity  payment.  These  other  open  accounts  are  not

deemed  to  be  as  signiﬁcant  and  arise  mostly  from  ‘‘third  tier’’  or  smaller  exposures,  as  the

average  expected  gross  loss  for  the  active  accounts  is  $1.6  as  compared  to  an  average  of

$26.0  for  those  accounts  with  settlement  agreements.  Reserves  for  each  of  these  other  open

accounts  are  established  based  on  a  similar  exposure  analyses.  As  previously  discussed,

additional  unallocated  IBNR  represents  a  loss  reserve  provision  for  additional  claims  to  be

reported  in  the  future  as  well  the  reopening  of  any  claim  closed  in  the  past.  Reﬂecting  its

historical underwriting proﬁle, C&F has only a handful of settlement agreements in place as

the  vast  majority  of  its  asbestos  claims  arises  from  peripheral  defendants  who  tend  to  be

smaller  insureds  with  a  lower  amount  of  limits  exposed,  as  evidenced  by  C&F’s  low  average

gross  reserve  amount  per  account.  C&F  is  the  lead  insurer  (i.e.  the  insurer  with  the  largest

amount of limits exposed) on fewer than 10% of its reported asbestos claims.

90

Recently,  there  have  been  a  number  of  bankruptcies  stemming  from  an  increase  in  asbestos

claimants,  and  asbestos  related  bankruptcies  now  total  approximately  69  companies.  The

following table presents an analysis of IIC’s and C&F’s exposure to these entities and shows the

potential future exposure:

IIC

C&F

Number of
Bankrupt
Defendants

Remaining
Gross
Policy Limits

Number of
Bankrupt
Defendants

Remaining
Gross
Policy Limits

No insurance issued to defendant

Accounts resolved

No exposure due to asbestos

exclusions

Potential future exposure

Total

45

11

2

11

69

–

–

–

201

201

49

15

–

5

69

–

–

–

31

31

As part of the overall review of its asbestos exposure, Fairfax compares its level of reserves to

various industry benchmarks. The most widely reported benchmark is the survival ratio, which

represents the outstanding loss and ALAE reserves (including IBNR) at December 31 divided by

the  average  paid  loss  and  ALAE  expenses  for  the  past  three  years.  The  three  year  historical

period  is  consistent  with  the  period  used  by  A.M.  Best  for  this  purpose.  Two  adjustments

should  be  made  to  make  this  statistic  meaningful.  First,  because  there  is  a  high  degree  of

certainty regarding the ultimate liabilities for those claims subject to settlement agreements, it

is appropriate to exclude those outstanding loss reserves and historical loss payments. Second,

additional  reinsurance  coverage  that  will  protect  any  adverse  development  of  the  reported

91

FAIRFAX  FINANCIAL  HOLDINGS  LIMITED

reserves needs to be considered. The following table presents both the unadjusted and adjusted

asbestos survival ratios for IIC, C&F and OdysseyRe:

Amounts
Subject to
Settlements
Agreements

Net of
Settlements
Agreements

Reported

IIC

Net Loss and ALAE Reserves

3-year average net paid losses and ALAE

3-year Survival Ratios (before reinsurance

protection)

3-year Survival Ratios (after reinsurance

protection)

C&F

Net Loss and ALAE Reserves

3-year average net paid losses and ALAE

3-year Survival Ratios (before reinsurance

protection)

3-year Survival Ratios (after reinsurance

protection)

OdysseyRe

Net Loss and ALAE Reserves

3-year average net paid losses and ALAE

3-year Survival Ratios

Adjusted 3-year Survival Ratios

(adjusted for the Equitas commutation in 2001)

132.2

6.8

19.5

23.2

366.4

31.4

11.7

15.2

127.3

2.5

49.9

11.2

11.9

2.6

9.9

1.2

–

–

120.3

4.2

28.9

34.9

356.5

30.2

11.8

15.5

127.3

2.5

49.9

11.2

The survival ratio after reinsurance protection includes the remaining indemniﬁcation at IIC of

$25  net  from  Ridge  Re  (this  is  the  estimated  portion  of  the  remaining  $99  indemniﬁcation

attributable  to  adverse  net  loss  reserve  development  on  asbestos  accounts),  while  the  C&F

survival  ratio  after  reinsurance  protection  includes  the  remaining  indemniﬁcation  of  $100

from Swiss Re and $11.9 from Inter-Ocean ($100 limit less $88.1 ceded to date).

92

Another industry benchmark reviewed by Fairfax is the relationship of asbestos reserves to the

estimated  ultimate  asbestos  loss  –  i.e.  the  sum  of  cumulative  paid  losses  and  the  year-end

outstanding loss reserves. These comparisons are presented in the following table:

IIC (at December 31, 2003)

Paid Loss and ALAE(1)
Reserves (case and IBNR)

Gross

Net

% of Total

% of Total

546.1

586.1

48.2%

51.8%

49.3

132.2

27.2%

72.8%

Ultimate Loss and ALAE

1,132.2

100.0%

181.5

100.0%

C&F (at December 31, 2003)

Paid Loss and ALAE

Reserves (case and IBNR)

Ultimate Loss and ALAE

OdysseyRe (at December 31, 2003)

Paid Loss and ALAE

Reserves (case and IBNR)

Ultimate Loss and ALAE

A. M. Best (at December 31, 2002)(2)

Paid Loss and ALAE

Indicated Reserves (case and IBNR)

Ultimate Loss and ALAE

504.1

458.1

962.2

342.5

215.7

558.2

52.3%

47.7%

256.6

366.4

41.2%

58.8%

100.0%

623.0

100.0%

61.4%

38.6%

116.9

127.3

47.9%

52.1%

100.0%

244.2

100.0%

26,100

38,900

65,000

40.2%

59.8%

100.0%

(1) Paid Loss and ALAE at December 31, 2003 excludes payments of $1,345 and $24, on a gross and

net  basis  respectively,  from  a  settlement  with  one  large  manufacturer  of  asbestos-containing

products.

(2) From an A.M. Best Special Report dated October 6, 2003.

In October 2003, A.M. Best reafﬁrmed its earlier estimate of ultimate asbestos loss plus ALAE for

the  U.S.  property/casualty  industry  of  $65.0  billion.  The  industry  had  paid  $26.1  billion

through December 31, 2002; therefore, according to A.M. Best’s estimate, the industry had a

paid-to-ultimate ratio of 40%. The comparable ﬁgure based on the industry’s carried reserves

was 58%. (According to the A.M. Best report, the industry’s carried reserves were $18.9 billion;

adding in the paid amount gives a carried ultimate loss ﬁgure of $45.0 billion.)

As  a  result  of  the  processes,  procedures  and  analyses  described  above,  management  believes

that the reserves carried for asbestos claims at December 31, 2003 are appropriate based upon

known  facts,  current  law  and  management’s  judgment.  However,  there  are  a  number  of

uncertainties  surrounding  the  ultimate  value  of  these  claims  that  may  result  in  changes  in

these estimates as new information emerges. Among these are the unpredictability inherent in

litigation,  impacts  from  the  bankruptcy  protection  sought  by  asbestos  producers  and

defendants, an unanticipated increase in the number of asbestos claimants, the resolution of

disputes  pertaining  to  the  amount  of  coverage  for  ‘‘non-products’’  claims  asserted  under

premises/operations general liability policies, and future developments regarding the ability to

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FAIRFAX  FINANCIAL  HOLDINGS  LIMITED

recover reinsurance for asbestos claims. It is also not possible to predict, nor has management

assumed,  any  changes  in  the  legal,  social  or  economic  environments  and  their  impact  on

future asbestos claim development. The carried asbestos reserves also do not reﬂect any impact

from potential asbestos legislation in the future (discussed below).

Asbestos Legislative Reform Discussion

There  have  been  unsuccessful  efforts  for  many  years  to  create  a  federal  solution  addressing

asbestos litigation and associated corporate bankruptcies. In 2003, with the increasing number

of bankruptcies that affected asbestos defendants, the U.S. Congress made more progress than

ever before, and the effort to enact asbestos reform legislation will continue in 2004.

There  are  two  major  competing  plans  for  asbestos  reform:  medical  criteria  reform  and  a

trust fund.

Medical  criteria  reform  would  establish  uniform,  tighter  medical  standards  that  asbestos

claimants would be required to satisfy in order to succeed in an asbestos lawsuit. Advocates of

this  approach  contend  that  such  criteria  would  eliminate  the  vast  numbers  of  claims  from

‘‘unimpaired’’ plaintiffs, who can recover damages under existing tort law in most states. (An

‘‘unimpaired’’ claimant is generally deﬁned to be a person who demonstrates some physical

change  that  is  consistent  with  asbestos  caused  injuries,  but  is  not  physically  impaired  as  a

result of that change.) The medical criteria approach leaves claims in the tort system, and also

does  not  impact  the  relatively  limited  number  of  very  expensive  mesothelioma  claims  seen

each year (mesothelioma is a cancer that is generally associated with asbestos exposure).

The  trust  fund  approach  is  more  sweeping.  It  would  replace  the  present  state  law-based  tort

system with a federal administrative system to pay asbestos claimants. Using medical criteria

and pre-scheduled payment amounts or ranges, the trust fund would pay asbestos claimants

and all tort remedies would be eliminated.

The  trust  fund  approach  was  endorsed  by  Senator  Orrin  Hatch,  Chairman  of  the  Senate

Judiciary  Committee.  In  July  2003,  that  Committee,  on  a  sharply  divided,  largely  party  line

vote (Republicans in support, Democrats in opposition), reported out the Fairness in Asbestos

Injury Resolution Act of 2003 (commonly known as the ‘‘FAIR Act’’).

The  FAIR  Act  would  have  created  a  trust  fund  of  up  to  approximately  $153  billion  to  pay

asbestos  injury  claimants.  The  insurance  industry’s  contribution  to  the  fund  was  to  be,  at  a

minimum,  $52  billion,  with  further  contingency  funding  requirements  also  possible.

Allocation  of  the  industry’s  contribution  among  individual  companies  was  left  to  a

legislatively  created  commission  that  was  directed  to  consider  a  variety  of  factors,  including

but not limited to, historic payments, carried reserves, and ‘‘asbestos premium market share’’

to establish a company’s required contribution to the fund.

Due,  in  part,  to  a  series  of  controversial  last  minute  amendments  that  were  viewed  as

eliminating the ability of the fund plan in the bill to bring ﬁnality to the asbestos question, the

FAIR Act generated substantial opposition from signiﬁcant components of both the insurance

industry and asbestos defendant groups. Representatives of organized labor, on the other hand,

asserted that the Act did not provide sufﬁcient funding for claimants.

94

After the FAIR Act was reported out of Committee, the Senate leadership deferred bringing it to

the ﬂoor, while seeking to work with interested constituencies to build support for a modiﬁed

FAIR Act. Negotiations involving various groups were widely reported to have taken place in

the ensuing months.

In October 2003, it was reported that groups of insurers and defendants had informally agreed

with the Senate leadership to support a plan that would be funded at $115 billion (nominal

value), divided in a manner that would allocate a somewhat larger portion of the burden to the

asbestos defendants in comparison to the insurers. It is the Senate leadership’s position that

this level of funding would provide substantially more money to asbestos claimants than the

existing tort system, largely through the elimination of transactional costs and attorney fees.

Since  October,  there  have  been  informal  negotiations  among  direct  insurers  and  reinsurers

regarding methods to fund the insurer contribution to the trust fund as proposed by the Senate

leadership.  One  basic  approach  is  to  allocate  contributions  by  reference  to  booked  reserves.

Another  approach  is  to  undertake  some  form  of  ‘‘ground-up’’  analysis  of  asbestos  liabilities.

There are also various combinations and iterations that have been discussed.

Senate Majority Leader Frist has stated his intention to bring a modiﬁed FAIR Act to the Senate

ﬂoor for a vote in March 2004. It cannot be predicted what the ﬁnal form of such bill would be,

or  whether  the  legislative  calendar  will  ultimately  allow  the  bill  time  to  be  introduced  and

debated,  or  what  levels  of  support  and  opposition  will  emerge.  Similarly,  it  cannot  be

reasonably  predicted  what  effect,  if  any,  the  enactment  of  some  form  of  asbestos  legislation

would have on the consolidated ﬁnancial statements of Fairfax. As stated above, the company’s

carried asbestos reserves do not reﬂect any impact from potential future legislative reforms.

Environmental Pollution Discussion

Hazardous waste sites present another signiﬁcant potential exposure. The federal ‘‘Superfund’’

law and comparable state statutes govern the cleanup and restoration of toxic waste sites and

formalize the concept of legal liability for cleanup and restoration by ‘‘potentially responsible

parties’’ (PRPs). These laws establish the means to pay for cleanup of waste site if PRPs fail to do

so,  and  to  assign  liabilities  to  PRPs.  Most  PRPs  named  to  date  are  parties  who  have  been

generators, transporters, past or present land owners or past or present site operators. Most sites

have multiple PRPs. Most insurance policies issued to PRPs were not intended to cover the costs

of pollution cleanup for a variety of reasons. Over time judicial interpretations in many cases

have expanded the scope of coverage and liability beyond the original intent of the policies.

While  most  general  liability  policies  issued  after  1985  exclude  coverage  for  such  exposures,

some courts have found ways to work around those exclusions.

There is great uncertainty involved in estimating liabilities related to these exposures. First, the

number of waste sites subject to cleanup is unknown. To date, approximately 1,500 cleanup

sites have been identiﬁed by the Environmental Protection Agency (EPA) and included in its

National Priorities List (NPL). State authorities have identiﬁed many additional sites. Second,

the  liabilities  of  the  insureds  themselves  are  difﬁcult  to  estimate.  At  any  given  site,  the

allocation  of  remediation  cost  among  the  PRPs  varies  greatly  depending  upon  a  variety  of

factors. Third, different courts have been presented with liability and coverage issues regarding

95

FAIRFAX  FINANCIAL  HOLDINGS  LIMITED

pollution claims and have reached inconsistent decisions. These uncertainties are unlikely to

be resolved in the near future.

Uncertainties  also  remain  as  to  the  Superfund  law  itself.  The  excise  tax  imposed  to  fund

Superfund lapsed at the end of 1995 and has not been renewed. While a number of proposals

to reform Superfund have been put forward, no reforms have been enacted by Congress since

then. It is unclear what position Congress or the Administration will take and what legislation,

if any, will be enacted in the future. At this time, it is not possible to predict what form any

reforms  might  take  and  the  effect  on  the  insurance  industry.  In  the  absence  of  federal

movement  on  Superfund,  though,  the  enforcement  of  Superfund  liability  is  shifting  to  the

states who are reconsidering state-level cleanup statutes and regulations. As individual states

move  forward,  the  potential  for  conﬂicts  among  states’  laws  becomes  greater,  increasing  the

uncertainty of the cost to remediate state sites.

Within Fairfax, environmental pollution losses have been developing as expected over the past

few  years  as  a  result  of  stable  claim  trends.  Claims  against  Fortune  500  companies  are

declining, and while insureds with single-site exposures are still active, RiverStone has resolved

the majority of disputes with insureds with a large number of sites. In many cases, claims are

being  settled  for  less  than  initially  anticipated  due  to  improved  site  remediation  technology

and effective policy buybacks.

Following  is  an  analysis  of  Fairfax’s  gross  and  net  loss  and  ALAE  reserves  from  pollution

exposures at year-end 2003, 2002, and 2001 and the movement in gross and net reserves for

those years:

Runoff Operations

2003

2002

2001

Gross

Net

Gross

Net

Gross

Net

Provision for pollution claims and ALAE at January 1

447.9

152.7

Pollution losses and ALAE incurred during the year

Pollution losses and ALAE paid during the year

Provision for pollution claims and ALAE at December 31

34.1

38.6

443.4

(23.7)(1)

14.8

114.2

Continuing Operations

Provision for pollution claims and ALAE at January 1

164.8

154.2

Pollution losses and ALAE incurred during the year

Pollution losses and ALAE paid during the year

(8.2)

21.1

3.0

24.0

Provision for pollution claims and ALAE at December 31

135.5

133.2

Fairfax Total

Provision for pollution claims and ALAE at January 1

Pollution losses and ALAE incurred during the year

Pollution losses and ALAE paid during the year

Provision for pollution claims and ALAE at December 31

612.6

25.9

59.7

578.8

306.9

(20.7)

38.8

247.4

502.7

49.0

103.8

447.9

212.9

(10.6)

37.5

164.8

715.6

38.3

141.3

612.6

175.7

(14.5)

8.6

152.7

508.8

201.8

39.5

45.5

(4.4)

21.7

502.7

175.7

172.7

230.4

190.5

5.0

23.4

8.5

26.0

6.0

23.8

154.2

212.9

172.7

348.4

739.2

392.3

(9.5)

32.0

48.0

71.5

1.6

45.5

306.9

715.6

348.4

(1)

Includes a ($16.0) one-time reclassiﬁcation of reserves from environmental pollution into asbestos.

96

Following  is  an  analysis  of  Fairfax’s  U.S.-based  subsidiaries’  gross  and  net  loss  and  ALAE

reserves  from  pollution  exposures  at  year-end  2003,  2002,  and  2001  and  the  movement  in

gross and net reserves for those years:

2003

2002

2001

Gross

Net

Gross

Net

Gross

Net

IIC

Provision for pollution claims and ALAE at January 1

Pollution losses and ALAE incurred during the year

Pollution losses and ALAE paid during the year

Provision for pollution claims and ALAE at December 31

303.1

6.7

18.6

291.2

81.1

(6.1)

2.0

73.0

C&F

Provision for pollution claims and ALAE at January 1

114.1

105.8

Pollution losses and ALAE incurred during the year

Pollution losses and ALAE paid during the year

Provision for pollution claims and ALAE at December 31

OdysseyRe(1)

Provision for pollution claims and ALAE at January 1

Pollution losses and ALAE incurred during the year

Pollution losses and ALAE paid during the year

Provision for pollution claims and ALAE at December 31

TIG

Provision for pollution claims and ALAE at January 1

Pollution losses and ALAE incurred during the year

Pollution losses and ALAE paid during the year

(6.7)

9.2

98.2

45.7

(3.4)

9.1

33.2

88.2

46.5

18.7

Provision for pollution claims and ALAE at December 31

116.0

Ranger

Provision for pollution claims and ALAE at January 1

Pollution losses and ALAE incurred during the year

Pollution losses and ALAE paid during the year

Provision for pollution claims and ALAE at December 31

5.0

1.9

2.9

4.0

2.0

8.9

98.9

46.2

(0.8)

12.4

33.0

28.5

1.6

12.7

17.4

2.3

1.9

2.7

1.5

335.0

34.3

66.2

303.1

151.7

(22.0)

15.7

114.1

55.5

8.0

17.8

45.7

110.0

10.1

31.9

88.2

5.7

3.3

4.0

5.0

103.5

(27.4)

(5.0)

81.1

320.9

114.5

35.1

21.0

(8.7)

2.2

335.0

103.5

124.8

170.6

145.4

(3.0)

15.9

1.0

19.9

2.0

22.7

105.8

151.7

124.8

46.9

5.8

6.5

46.2

29.9

8.0

9.4

28.5

1.0

2.3

1.0

2.3

53.4

6.7

4.6

55.5

113.6

1.9

5.5

110.0

6.4

0.8

1.5

5.7

44.3

3.3

0.7

46.9

28.8

2.5

1.4

29.9

0.8

0.6

0.4

1.0

(1) Net reserves presented for OdysseyRe exclude cessions under a stop loss agreement with nSpire Re, a wholly-owned

subsidiary of Fairfax. In its ﬁnancial disclosures OdysseyRe reports net reserves inclusive of cessions under this

reinsurance protection.

Many  insureds  have  presented  claims  against  Fairfax  subsidiaries  for  defense  costs  and  for

indemniﬁcation  in  connection  with  environmental  pollution  matters.  As  with  asbestos

reserves, exposure for pollution cannot be estimated with traditional loss reserving techniques

that rely on historical accident year loss development factors. Because each insured presents

different  liability  and  coverage  issues,  the  methodology  used  by  the  subsidiaries  to  establish

pollution  reserves  is  similar  to  that  used  for  asbestos  liabilities.  IIC  and  C&F  evaluate  the

exposure presented by each insured and the anticipated cost of resolution utilizing ground-up,

exposure-based  analysis  that  constitutes  industry  ‘‘best  practice’’  approach  for  pollution

reserving. As with asbestos reserving, this methodology was initially critiqued by outside legal

and actuarial consultants and the results are annually reviewed by independent actuaries, all of

whom have consistently found the methodology comprehensive and the results reasonable.

97

FAIRFAX  FINANCIAL  HOLDINGS  LIMITED

In  the  course  of  performing  these  individualized  assessments,  the  following  factors  are

considered:  the  insured’s  probable  liability  and  available  coverage,  relevant  judicial

interpretations,  the  nature  of  the  alleged  pollution  activities  of  the  insured  at  each  site,  the

number of sites, the total number of PRPs at each site, the nature of environmental harm and

the  corresponding  remedy  at  each  site,  the  ownership  and  general  use  of  each  site,  the

involvement  of  other  insurers  and  the  potential  for  other  available  coverage,  and  the

applicable  law  in  each  jurisdiction.  A  provision  for  IBNR  is  developed,  again  using

methodology  similar  to  that  for  asbestos  liabilities,  and  an  estimate  of  ceded  reinsurance

recoveries is calculated. OdysseyRe employs substantially the same methodology as described

above for its asbestos exposure. At TIG and Ranger a bulk reserving approach is employed based

on  industry  benchmarks  of  ultimate  liability  to  establish  reserves  for  both  reported  and

unasserted claims as well as for allocated claim adjustment costs.

The following table presents the pollution survival ratios based on net loss and ALAE reserves

for IIC, C&F and OdysseyRe:

Net Loss and ALAE Reserves
3-year average net paid losses and ALAE(1)
3-year Survival Ratios

73.1

2.1

34.4

98.8

15.9

6.2

32.9

6.5

5.0

IIC

C&F

OdysseyRe

(1) The ﬁgure shown for IIC is the average of payments made in 2001 and 2003 only. The three-year

average (2001,2002 and 2003) was ($0.3), which would not produce a meaningful survival ratio.

To the extent that the reinsurance protection discussed in the last paragraph on page 92 is not

used by IIC or C&F for asbestos claims, it would be available for pollution claims and would

increase these survival ratios.

Other Mass Tort/Health Hazards Discussion

In addition to asbestos and pollution, Fairfax subsidiaries face exposure to other types of mass

tort  claims.  These  ‘‘health  hazards’’  include  breast  implants,  pharmaceutical  products,  lead

paint, noise-induced hearing loss, tobacco, mold and chemical products. Management believes

that as a result of IIC’s historical underwriting proﬁle and its focus of excess liability coverage

on  Fortune  500  type  entities,  IIC  has  the  bulk  of  these  potential  exposures  within  Fairfax.

Currently, management believes that tobacco, silica and to a lesser extent lead paint and mold

are the most signiﬁcant future health hazard exposures facing Fairfax subsidiaries.

Tobacco companies have still not aggressively pursued insurance coverage for tobacco bodily

injury claims. One notable exception is a Delaware state court coverage action, Liggett Group,

Inc. v. Admiral Ins. Co., in which the Supreme Court of Delaware held in favor of the insurers on

four issues: 1) tobacco health hazard exclusions, 2) products hazard exclusions, 3) advertising

liability, and 4) named insured provision.

There  are  no  active  claims  submitted  by  tobacco  manufacturers  to  IIC.  One  tobacco

manufacturer and its parent company have submitted notices of tobacco-related claims to TIG.

One smokeless tobacco manufacturer has submitted notices of tobacco-related claims to C&F

and has brought a declaratory judgment action that is proceeding. In addition, a small number

98

of notices from distributors/retailers have been submitted to TIG and C&F. In most instances

these  distributors/retailers  have  reported  that  they  have  secured  indemniﬁcation  agreements

from  tobacco  manufacturers.  RiverStone  continues  to  monitor  developments  in  tobacco

litigation throughout the country.

Fairfax subsidiaries, particularly C&F, IIC and TIG, are experiencing an increase in the number

of lung injury silica claims being presented. They received silica claims on 75 new accounts in

2003 and reopened 5 accounts as a result of additional silica claims being ﬁled.

Insurers generally believe that silica claims may afford insureds more defenses than asbestos

claims because employers are likely to have known the dangers of silica since the early 1900s.

Under the ‘‘sophisticated user’’ doctrine, if an employer knows those risks but does not take

action to protect its employees, then the silica supplier may be exonerated from liability. If an

employer is ultimately found to be solely liable, recovery is limited to workers’ compensation

beneﬁts in most jurisdictions.

In addition, the pool of potential silica claimants is likely much smaller than the claimant pool

for asbestos, and in the majority of situations, companies with potential silica exposure only

conducted business regionally, as opposed to the more national asbestos defendants.

RiverStone  is  also  monitoring  developments  in  lead  paint  litigation  in  the  U.S.  While  there

have been substantial lead poisoning verdicts against property owners, the manufacturers of

lead-based  paint  have  been  largely  successful  in  defending  against  such  suits,  although

substantial  defense  expenses  have  been  incurred.  In  2003,  there  were  no  reported  verdicts

against or settlements by the paint manufacturers in these cases. Accordingly, no indemnity

payments were made on behalf of manufacturers under any excess insurance policy issued by

Fairfax subsidiaries. The main roadblock to success in pursuing paint manufacturers has been

the inability to satisfy the burden of identifying the producer(s) of the lead paint to which the

claimant was allegedly exposed. Should the plaintiffs succeed on a market share theory or in

scientiﬁcally  demonstrating  which  company  manufactured  which  paint  product,  the  lead

paint  industry  will  likely  suffer  adverse  verdicts  and  seek  coverage  for  their  losses.  To  date,

Fairfax  subsidiaries  have  received  notices  of  governmental,  individual  and  class  actions  ﬁled

against  the  paint  industry.  The  case  brought  by  the  State  of  Rhode  Island  against  the

manufacturers of lead paint on a public nuisance theory ended in a mistrial in November 2002,

and is scheduled to be re-tried in April 2004. Rhode Island is the ﬁrst state in the country to

attempt to hold the companies liable for making and marketing lead-based paint.

Fairfax subsidiaries have seen an increase in the number of new mold illness claims presented

in 2003, but those claims still have not presented a signiﬁcant exposure to Fairfax companies.

This  is  largely  because  of  the  failure  of  plaintiffs  to  prove  a  causal  relationship  between  the

bodily injuries claims and exposure to mold.

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FAIRFAX  FINANCIAL  HOLDINGS  LIMITED

Following is an analysis of IIC’s and C&F’s gross and net loss and ALAE reserves from health

hazard  exposures  at  year-end  2003,  2002,  and  2001  and  the  movement  in  gross  and  net

reserves for those years:

2003

2002

2001

Gross

Net

Gross

Net

Gross

Net

IIC

Provision for health hazards claims and ALAE at January 1

Health hazards losses and ALAE incurred during the year

Health hazards losses and ALAE paid during the year

150.8

5.3

40.9

Provision for health hazards claims and ALAE at December 31

115.2

48.7

8.5

23.3

33.9

C&F

Provision for health hazards claims and ALAE at January 1

30.5

28.3

Health hazards losses and ALAE incurred during the year

Health hazards losses and ALAE paid during the year

1.1

3.4

1.8

3.5

Provision for health hazards claims and ALAE at December 31

28.2

26.6

177.5

7.8

34.4

150.8

37.0

(4.2)

2.3

30.5

46.6

0.6

(1.5)

48.7

27.3

3.3

2.3

28.3

188.8

31.7

43.0

177.5

31.5

22.2

7.2

46.6

38.1

31.1

2.1

3.2

3.2

7.0

37.0

27.3

Similar to asbestos and pollution, traditional actuarial techniques cannot be used to estimate

ultimate liability for these exposures. Some claim types were ﬁrst identiﬁed ten or more years

ago, for example, breast implants and speciﬁc pharmaceutical products. For these exposures,

the reserve estimation methodology at IIC is similar to that for asbestos and pollution – i.e. an

exposure-based  approach  based  on  all  known,  pertinent  facts  underlying  the  claim.  This

methodology  cannot  at  the  present  time  be  applied  to  other  claim  types  such  as  tobacco  or

silica as there are a number of signiﬁcant legal issues yet to be resolved, both with respect to

policyholder liability and the application of insurance coverage. For these claim types, a bulk

IBNR  reserve  is  developed  based  on  benchmarking  methods  utilizing  the  ultimate  cost

estimates of more mature health hazard claims. The bulk reserve also considers the possibility

of entirely new classes of health hazard claims emerging in the future. C&F sets gross reserves

at  a  selected  survival  ratio  (currently  10  years)  and  selects  a  net-to-gross  ratio  based  on

historical claims experience.

Summary

Management  believes  that  the  APH  reserves  reported  at  December  31,  2003  are  reasonable

estimates of the ultimate remaining liability for these claims based on facts currently known,

the  present  state  of  the  law  and  coverage  litigation,  current  assumptions  and  the  reserving

methodologies employed. These APH reserves are continually monitored by management and

reviewed extensively by independent consulting actuaries. New reserving methodologies and

developments will continue to be evaluated as they arise in order to supplement the ongoing

analysis  and  reviews  of  the  APH  exposures.  However,  to  the  extent  that  future  social,

economic,  legal  or  legislative  developments  alter  the  volume  of  claims,  the  liabilities  of

policyholders or the original intent of the policies and scope of coverage, particularly as they

relate  to  asbestos  and  pollution  claims,  additional  increases  in  loss  reserves  may  emerge  in

future periods. It should be noted that the reinsurance protection discussed under Additional

Reinsurance Protection on page 104 would apply to any adverse development of APH reserves.

100

Reinsurance Recoverables

Fairfax’s subsidiaries purchase certain reinsurance so as to reduce their liability on the insurance

and reinsurance risks which they write. Fairfax strives to minimize the credit risk of purchasing

reinsurance through adherence to its internal reinsurance guidelines. To be an ongoing reinsurer

of Fairfax, a company must have high A.M. Best and/or Standard & Poor’s ratings and maintain

capital and surplus exceeding $500. Most of the reinsurance balances for reinsurers rated B++ and

lower or which are not rated were inherited by Fairfax on acquisition of a subsidiary, including

IIC.  The  risk  of  uncollectible  reinsurance  has  been  mitigated  by  the  additional  reinsurance

protection outlined under Additional Reinsurance Protection on page 104.

Excluding increases in reinsurance recoverable in 2003 resulting from cessions to reinsurers as

a result of reserve strengthenings (all of these reinsurers were rated A– or better by A.M. Best or

S&P) and from the formation of a new runoff syndicate at Lloyd’s described on page 64 (82% of

the net unsecured reinsurance recoverable resulting therefrom being from reinsurers rated A–

or better by A.M. Best or S&P), reinsurance recoverable decreased by $336.7 during 2003.

The  following  table  shows  Fairfax’s  top  50  reinsurance  groups  (based  on  gross  reinsurance

recoverable  net  of  speciﬁc  provisions  for  uncollectible  reinsurance)  at  December  31,  2003.

These 50 reinsurance groups represent 86.1% of Fairfax’s total reinsurance recoverable.

A.M. Best
Rating
(or S&P

Net
Gross
Reinsurance
Reinsurance
equivalent)(1) Recoverable(2) Recoverable(3)

A+

A+

A–

NR

A++

A

A
(4)

A++

B

A++

A

A

NR

A

A

A–

B++

A+

A–

1,809.7

1,089.8

888.6

510.5

479.4

447.2

372.2

323.2

246.7

377.1

471.9

–

302.2

1.6

274.0

9.9

237.6

226.8

172.2

167.3

164.5

158.0

137.3

124.8

124.4

103.4

87.9

80.4

75.8

178.8

160.0

159.8

103.9

39.6

114.4

83.4

82.9

70.7

75.9

23.1

Group

Principal Reinsurer

Swiss Re

Munich Re

Lloyd’s

Xerox

Chubb

European Reinsurance Co. of Zurich

American Reinsurance

Lloyd’s of London Underwriters

Ridge Reinsurance Ltd.

Federal Insurance Co.

Great West Life

London Life & Casualty Re

General Electric

Employers Reinsurance Company

Aegon

Berkshire

ARC Re

Hathaway

General Reinsurance Corp.

Royal & Sun

Alliance

Security Ins. Co. of Hartford

AIG

Ace

HDI

Transatlantic Re

Insurance Co. of North America

Hannover Ruckversicherungs

Gerling Global

Gerling Global International Re

CNA

St. Paul

AXA

SCOR

Everest

Continental Casualty

St. Paul Fire & Marine Insurance Co.

AXA Reinsurance

SCOR

Everest Reinsurance Co.

Arch Capital

Arch Reinsurance Ltd.

101

FAIRFAX  FINANCIAL  HOLDINGS  LIMITED

Group

Zurich Re

Aioi

Hartford

XL

Principal Reinsurer

Zurich Specialties London Ltd.

Aioi Insurance Co. Ltd.

Hartford Fire Insurance Co.

XL Reinsurance America Inc.

PartnerRe

Partner Reinsurance Co. of US

Sompo

Tawa

Converium

Aon

White Mountains

Allstate

PMA

American

Sompo Japan Insurance Inc.

CX Reinsurance

Converium Reins. North America Inc.
Aon Indemnity(5)
Folksamerica Reinsurance Co.

Allstate

PMA Capital Insurance Co.

Financial

Great American Assurance Co.

Travelers

Travelers Indemnity Co.

Unum/Provident

Unum Life Insurance of America

Liberty Mutual

Employers Insurance of Wausau

Bay Care Hospital

System

Folksam

BD Cook

Trenwick

PXRE

WR Berkley

FM Global

Allianz

KKR

Nationwide

Duke’s Place

Wustenrot

Toa Re

HCC

BCHS Insurance Co.

Folksam International Insurance Co. (UK) Ltd.

Stronghold Insurance Co. Ltd.

Trenwick America Reinsurance Co.

PXRE Reinsurance Co.

Berkley Insurance Co.

Factory Mutual Insurance Co.

AGF Insurance Ltd.

Alea North America Reinsurance

Nationwide Mutual Insurance

Seaton Insurance Co.

Wurttembergische Versicherung

Toa Reinsurance Co. America

Houston Casualty Co.

Other reinsurers

Total reinsurance recoverable

Provisions for uncollectible reinsurance

Net reinsurance recoverable

A.M. Best
Rating
(or S&P

Net
Gross
Reinsurance
Reinsurance
equivalent)(1) Recoverable(2) Recoverable(3)

A

A

A+

A+

A+

A+

NR

A
A–(5)
A

A+

B++

A

A++

A–

A

NR

NR

NR

NR

A

A

A+

A+

A–

A+

NR

NR

A+

A+

72.9

72.0

61.5

61.3

52.4

50.4

49.9

48.0

47.3

41.3

36.7

35.2

32.4

29.9

29.8

29.1

28.2

27.1

26.1

25.6

24.7

24.4

23.9

23.8

23.0

20.3

19.9

17.7

16.3

16.1

54.2

54.3

60.0

53.6

39.1

41.8

45.7

35.1

47.3

37.2

36.9

28.5

33.3

29.8

29.8

28.2

–

24.9

25.2

23.9

24.2

23.1

24.0

22.1

21.6

20.1

19.2

15.2

13.9

14.6

1,256.2

9,034.5

 491.9

8,542.6

1,136.9

5,909.5

491.9

5,417.6

(1) Of principal reinsurer (or, if principal reinsurer is not rated, of group)

(2) Before speciﬁc provisions for uncollectible reinsurance

(3) Net of outstanding balances for which security is held, but before speciﬁc provisions for uncollectible reinsurance

(4) Aegon is rated A+ by S&P; ARC Re is not rated

(5)

Indemnitor; rating is S&P credit rating of group

102

The  reduction  in  the  provisions  for  uncollectible  reinsurance  from  those  provisions  at

December  31,  2002  relate  principally  to  a  $77  writeoff  in  2003  of  an  amount  previously

provided  for  and  a  $53  cession  in  2003  by  the  runoff  operations  to  nSpire  Re,  under  a

reinsurance  contract  provided  by  nSpire  Re,  of  an  amount  previously  provided  for  (this

amount is included in nSpire Re’s provision for claims at December 31, 2003).

The  following  table  shows  the  classiﬁcation  of  the  $8,542.6  total  reinsurance  recoverable

shown  above  by  credit  rating  of  the  responsible  reinsurers.  Pools  and  associations,  shown

separately, are generally government or similar insurance funds carrying very little credit risk.

A.M. Best
Rating
(or S&P
equivalent)

Gross
Reinsurance
Recoverable

Outstanding
Balances
for which

Speciﬁc
Provisions
for

Net
Unsecured
Security Uncollectible Reinsurance
Reinsurance Recoverable

is Held

A++

A+

A

A–

B++

B+

B

Lower than B

Not rated

Pools &

915.5

2,738.9

2,152.6

703.8

212.2

82.8

193.0

145.0

171.7

808.1

1,032.6

120.0

32.0

13.3

—

8.8

1,793.2

938.5

1.3

13.2

6.2

1.3

1.3

1.7

4.5

61.6

290.9

742.5

1,917.6

1,113.8

582.5

178.9

67.8

188.5

74.6

563.8

associations

97.5

–

–

97.5

9,034.5

3,125.0

382.0

5,527.5

Provisions for uncollectible

reinsurance

– speciﬁc

– general

Net reinsurance recoverable

382.0

109.9

8,542.6

To support gross reinsurance recoverable balances, Fairfax has the beneﬁt of letters of credit,

trust funds or offsetting balances payable totalling $3,125.0, as follows:

for  reinsurers  rated  A–  or  better,  Fairfax  has  security  of  $2,132.4  against  outstanding

reinsurance recoverable of $6,510.8;

for  reinsurers  rated  B++  or  lower,  Fairfax  has  security  of  $54.1  against  outstanding

reinsurance recoverable of $633.0; and

for  unrated  reinsurers,  Fairfax  has  security  of  $938.5  against  outstanding  reinsurance

recoverable of $1,793.2.

Lloyd’s  is  also  required  to  maintain  funds  in  Canada  and  the  United  States  which  are

monitored by the applicable regulatory authorities.

As  shown  above,  excluding  pools  &  associations,  Fairfax  has  gross  outstanding  reinsurance

balances for reinsurers which are rated B++ or lower or which are unrated of $2,426.2 for which

103

FAIRFAX  FINANCIAL  HOLDINGS  LIMITED

it  holds  security  of  $992.6  and  has  an  aggregate  provision  for  uncollectible  reinsurance  of

$469.9 (32.8% of the net exposure prior to such provision), leaving a net exposure of $963.7.

Based  on  the  above  analysis  and  on  the  work  done  by  RiverStone  as  described  in  the  next

paragraph, Fairfax believes that its provision for uncollectible reinsurance provides for all likely

losses arising from uncollectible reinsurance at December 31, 2003. In addition, the company

has purchased credit default swaps to reduce the exposure to certain reinsurers.

RiverStone,  with  its  dedicated,  specialized  personnel  in  this  area,  is  responsible  for  the

following with respect to recoverables from reinsurers: evaluating the creditworthiness of all

reinsurers  and  recommending  to  the  group  management’s  reinsurance  committee  those

reinsurers which should be included on the list of approved reinsurers; monitoring reinsurance

recoverable  by  reinsurer  and  by  company,  in  aggregate,  on  a  quarterly  basis  and

recommending  the  appropriate  provision  for  uncollectible  reinsurance;  and  pursuing

collections from, and global commutations with, reinsurers which are impaired or considered

to be ﬁnancially challenged.

For the last three years, Fairfax has had reinsurance bad debts of $15.1 for 2003, $7.9 for 2002

and $41.3 for 2001 prior to cessions of 1998 and prior reinsurance bad debts to the Swiss Re

Cover of $1.7, $1.5, and $7.6 respectively.

The  reinsurance  protection  discussed  under  Additional  Reinsurance  Protection  beginning

below on this page would apply to adverse development of unrecoverable reinsurance.

Additional Reinsurance Protection

Shown  below  are  the  continuing  reinsurance  protections  from  adverse  development  in  the

respective  companies’  claims  reserves  and  unrecoverable  reinsurance  as  at  the  end  of  the

respective  years  shown.  The  net  reserves  subject  to  protection  represent  the  respective

companies’ carried reserves, net of reinsurance recoverable, at December 31, 2003, which are

subject to the related protection.

Year

Company

1992

1998

International Insurance

Crum & Forster, TIG (except

International Insurance) and

runoff subsidiaries owned

on December 31, 1998

(Swiss Re Cover)

2001

Crum & Forster

Net Reserves
Subject to
Unused
Protections at
Protection at
December 31, December 31,
2003

2003

99.0

3.9

315.0

1,798.0

Amount

578(1)
1,000(2)

500(2)

181.0

283.9

586.0

(1) After 15% coinsurance

(2) Additional premium is payable as additional losses are ceded to this cover.

104

Insurance Environment

Since  the  tragedy  of  September  11,  2001,  the  property  and  casualty  insurance  market  has

experienced considerable improvement in rate adequacy as well as terms and conditions. As a

result, combined ratios have improved considerably although reported calendar year results are

not yet running at an underwriting proﬁt in some markets. Combined ratios for Canada, for

U.S.  commercial  lines  and  for  U.S.  reinsurance  are  expected  to  be  approximately  101.0%,

103.6% and 98.1% respectively in 2003, a considerable improvement over prior years. Adverse

reserve  development  for  prior  accident  years  (including  some  signiﬁcant  numbers  related  to

asbestos),  declining  interest  rates  and  considerable  stock  market  uncertainty  have  all

contributed  to  perpetuating  this  rate  adequacy.  However,  competitive  pressures,  driven  to

some extent by new capital and new entrants, have begun to take their toll and rates stabilized

and even declined in selected markets during 2003, although remaining at adequate levels in

most cases.

Investments

The  majority  of  interest  and  dividend  income  is  earned  by  the  insurance,  reinsurance  and

runoff companies. Upon the acquisitions noted below, the respective amounts shown below

were added to the company’s portfolio investments.

Acquisition Date

March 21, 1990

November 14, 1990

December 31, 1993

November 30, 1994

May 31, 1996

February 27, 1997

December 3, 1997

August 13, 1998

September 4, 1998

April 13, 1999

August 11, 1999

Company Acquired

Federated

Commonwealth

Ranger

Lombard (including CRC (Bermuda))

Odyssey Reinsurance (New York)

CTR

Sphere Drake

Crum & Forster

RiverStone Stockholm

TIG

TRG

Portfolio
Investments

85.6

111.7

302.1

496.6

1,087.4

558.7

753.3

3,265.9

544.7

3,756.1

1,120.3

105

FAIRFAX  FINANCIAL  HOLDINGS  LIMITED

Interest  and  dividend  income  for  the  past  eighteen  years  (the  period  since  current

management acquired control) is shown in the following table.

Average
Investments at
Carrying Value

Amount

Interest and Dividend Income

Pre-Tax

Yield
(%)

Per Share

Amount

After Tax

Yield
(%)

Per Share

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

46.3

81.2

102.6

112.4

201.2

292.3

301.8

473.1

871.5

1,163.4

1,861.5

3,258.6

5,912.9

10,024.2

11,315.9

10,315.2

10,429.2

11,587.8

3.4

6.2

7.5

10.0

17.7

22.7

19.8

18.1

42.6

65.3

111.0

183.8

305.4

506.7

551.3

440.3

418.6

330.1

7.34

7.64

7.31

8.90

8.80

7.77

6.56

3.83

4.89

5.61

5.96

5.64

5.16

5.05

4.87

4.27

4.01

2.85

0.70

0.85

1.02

1.30

2.35

3.86

3.45

2.93

5.21

7.31

11.31

17.07

25.72

38.00

41.85

33.25

29.30

23.54

1.8

4.2

5.5

7.3

12.0

15.4

14.7

14.0

29.0

53.9

81.8

125.9

232.3

331.0

389.8

299.4

280.5

214.57

3.89

5.17

5.36

6.49

5.96

5.27

4.87

2.96

3.33

4.63

4.39

3.86

3.93

3.30

3.44

2.90

2.69

1.85

0.38

0.59

0.75

0.96

1.59

2.63

2.55

2.26

3.55

6.03

8.32

11.69

19.56

24.84

29.59

22.61

19.63

15.30

Interest  and  dividend  income  decreased  in  2003  due  to  the  decrease  in  the  consolidated

average  net  portfolio  yield  from  4.01%  in  2002  to  2.85%  in  2003,  partially  offset  by  a

$1.2 billion increase in the average consolidated investment portfolio, which is explained after

the following table. The gross portfolio yield, before interest on funds withheld of $84.3, was

3.58%  for  2003  compared  to  the  gross  portfolio  yield,  before  interest  on  funds  withheld  of

$76.9, of 4.75% for 2002. As shown, the pre-tax and after tax income yields decreased in 2003

due  to  lower  interest  rates  and  the  maintenance  of  very  signiﬁcant  cash  positions  since  the

second  quarter  of  2003.  Since  1985,  pre-tax  interest  and  dividend  income  per  share  has

compounded at 23.0% per year.

106

Investments  since  1985  (when  current  management  acquired  control)  are  shown  in  the

following table, the ﬁrst ﬁve columns of which show them at their average carrying values for

each year, and the ﬁnal two columns of which show them at their year-end carrying values.

Cash and
Short Term
Investments

Bonds

Preferred
Stocks

Common
Stocks

Total Investments

Average

Year-End

Per Share

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

7.5

12.0

20.7

23.3

16.9

26.2

51.9

64.2

141.6

205.3

216.4

343.9

584.7

751.2

11.0

17.8

19.3

18.5

23.7

85.2

121.0

90.1

155.9

398.0

575.5

1,067.9

2,122.8

4,552.6

1,272.4

7,789.3

1,714.3

8,498.7

1,799.7

7,593.2

1,983.7

7,376.2

4,077.0

6,061.9

0.6

5.8

12.2

19.9

26.7

39.1

65.4

82.2

92.5

107.2

113.4

123.1

161.5

145.3

96.5

69.5

63.1

119.8

151.2

1.7

10.7

29.0

40.9

45.1

50.7

54.0

65.3

83.1

161.0

258.1

326.6

389.6

463.8

866.0

20.8

46.3

81.2

102.6

112.4

201.2

292.3

301.8

473.1

871.5

1,163.4

1,861.5

3,258.6

5,912.9

24.0

68.8

93.5

111.8

113.1

289.3

295.3

311.7

641.7

1,105.9

1,222.3

2,520.4

4,054.1

7,871.8

10,024.2

12,293.9

1,033.4

11,315.9

10,444.2

859.2

949.5

10,315.2

10,258.8

10,429.2

10,642.2

1,297.7

11,587.8

12,566.1

4.80

9.82

12.75

15.27

15.45

52.83

54.12

51.48

80.59

123.50

137.81

240.82

364.17

648.83

915.66

797.22

716.73

752.60

904.04

Total  investments  and  total  investments  per  share  increased  at  year-end  2003  due  to  strong

operating  cash  ﬂows  at OdysseyRe,  Crum  &  Forster and Northbridge,  and  to  OdysseyRe’s

retention of proceeds from its issue of notes in the fourth quarter, partially offset by negative

cash  ﬂow  at  the  runoff  operations,  particularly    TIG’s  negative  cash  ﬂow  following  the

discontinuance  of  its  MGA-controlled  program  business.  Since  1985,  investments  per  share

have compounded at 33.8% per year.

Management  performs  its  own  fundamental  analysis  of  each  proposed  investment,  and

subsequent to investing, reviews at least quarterly the carrying value of each investment whose

market value has been consistently below its carrying value for some time, to assess whether a

provision for other than temporary decline is appropriate. In making this assessment, careful

analysis  is  made  comparing  the  intrinsic  value  of  the  investment  as  initially  assessed  to  the

current  intrinsic  value  based  on  current  outlook  and  all  other  relevant  investment  criteria.

Other considerations in this assessment include the length of time the investment has been

held, the size of the difference between carrying value and market value and the company’s

intent with respect to continuing to hold the investment.

Various  investments  are  pledged  by  the  company’s  subsidiaries  in  the  ordinary  course  of

carrying on their business. This pledging is referred to in note 4 to the consolidated ﬁnancial

statements and is explained in more detail in the third paragraph of Provision for Claims on

107

FAIRFAX  FINANCIAL  HOLDINGS  LIMITED

page 72.  As  noted  there,  this  pledging  does  not  involve  any  cross-collateralization  by  one

group company of another group company’s obligations.

The breakdown of the bond portfolio as at December 31, 2003 was as follows (where S&P or

Moody’s credit ratings are available, the higher one is used if they are different):

Credit
Rating

AAA

AA

A

BBB

BB

B

Lower than B and unrated

Total

Carrying Market
Value

Value

Unrealized
Gain (Loss)

3,528.0

3,460.3

468.2

227.0

61.5

6.2

148.5

289.9

506.3

246.2

60.4

7.9

157.0

206.7

4,729.3

4,644.8

(67.7)

38.1

19.2

(1.1)

1.7

8.5

(83.2)

(84.5)

90.6% of the ﬁxed income portfolio at carrying value is rated investment grade, with 84.5%

(primarily consisting of full faith and credit government obligations) being rated AA or better.

Interest Rate Risk

The company’s ﬁxed income securities portfolio is exposed to interest rate risk. Fluctuations in

interest rates have a direct impact on the market valuation of these securities. As interest rates

rise, market values of ﬁxed income securities portfolios fall and vice versa.

The table below displays the potential impact of market value ﬂuctuations on the ﬁxed income

securities  portfolio  as  of  December  31,  2003  and  December  31,  2002,  based  on  parallel  200

basis point shifts in interest rates up and down in 100 basis point increments. This analysis was

performed by individual security.

As of December 31, 2003

As of December 31, 2002

Fair
Value of
Fixed

Fair
Value of
Fixed

Change in Interest Rates

200 basis point rise

100 basis point rise

No change

100 basis point decline

200 basis point decline

Income Hypothetical Hypothetical
% Change
$ Change
Portfolio

Income Hypothetical Hypothetical
% Change
$ Change
Portfolio

4,013.1

4,287.2

4,644.8

5,100.0

5,643.4

(631.7)

(357.6)

–

455.2

998.6

(13.6%)

6,213.7

(1,299.8)

(7.7%)

6,762.2

(751.3)

–

7,513.5

9.8% 8,392.6

21.5% 9,534.6

–

879.1

2,021.1

(17.3%)

(10.0%)

–

11.7%

26.9%

The preceding table indicates an asymmetric market value response to equivalent basis point

shifts,  up  and  down  in  interest  rates.  This  partly  reﬂects  exposure  to  ﬁxed  income  securities

containing a put feature. In total these securities represent approximately 15.4% and 26.7% of

the  fair  market  value  of  the  total  ﬁxed  income  portfolio  as  of  December  31,  2003  and

December 31, 2002, respectively. The asymmetric market value response reﬂects the company’s

ability  to  put  these  bonds  back  to  the  issuer  for  early  maturity  in  a  rising  interest  rate

environment (thereby limiting market value loss) or to hold these bonds to their much longer

108

full maturity dates in a falling interest rate environment (thereby maximizing the full beneﬁt

of higher market values in that environment).

Disclosure about Limitations of Interest Rate Sensitivity Analysis

Computations  of  the  prospective  effects  of  hypothetical  interest  rate  changes  are  based  on

numerous assumptions, including the maintenance of the existing level and composition of

ﬁxed income security assets, and should not be relied on as indicative of future results.

Certain shortcomings are inherent in the method of analysis presented in the computation of

the fair value of ﬁxed rate instruments. Actual values may differ from the projections presented

should market conditions vary from assumptions used in the calculation of the fair value of

individual securities; such variations include non-parallel shifts in the term structure of interest

rates and a change in individual issuer credit spreads.

109

FAIRFAX  FINANCIAL  HOLDINGS  LIMITED

Return on the Investment Portfolio

The following table shows the performance of the investment portfolio for the past eighteen

years  (the  period  since  current  management  acquired  control).  The  total  return  includes  all

interest and dividend income, gains (losses) on the disposal of securities and the change in the

unrealized gains (losses) during the year.

Realized

Average
Investments at

Interest
and
Carrying Dividends

Gains Change in
(Losses) Unrealized
Gains
(Losses)

after
Earned Provisions

Total
Return on

Average % of Average
Investments
(%)

Investments
(%)

Realized Gains

Value

46.3

81.2

102.6

112.4

201.2

292.3

301.8

473.1

871.5

1,163.4

1,861.5

3,258.6

5,912.9

10,024.2

11,315.9

10,315.2

10,429.2

11,587.8

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

3.4

6.2

7.5

10.0

17.7

22.7

19.8

18.1

42.6

65.3

111.0

183.8

305.4

506.7

551.3

440.3

418.6

330.1

0.7

7.1

6.5

13.4

2.0

(3.9)

2.8

21.6

14.6

52.5

96.3

149.3

303.4

81.8

258.0

105.0

469.5

840.2

(0.2)

(6.1)

9.5

(5.1)

3.9

7.2

8.4

8.9

23.5 22.9

18.3 16.3

(28.5)

(8.8)

(4.4)

24.0

(8.3)

22.2

42.8 14.6

14.3

4.7

61.9 13.1

(30.7)

26.5

3.0

32.7

82.1

150.5 12.9

289.4 15.5

(6.9)

326.2 10.0

(82.3)

526.5

8.9

(875.0)

(286.5)

(2.9)

549.1 1,358.4 12.0

182.5

727.8

7.1

271.4 1,159.5 11.1

113.2 1,283.5 11.1

1.5

8.7

6.3

11.9

1.0

(1.3)

0.9

4.6

1.7

4.5

5.2

4.6

5.1

0.8

2.3

1.0

4.5

7.3

% of Interest and
Dividends and
Realized Gains
(%)

17.1

53.4

46.4

57.3

10.2

N/A

12.4

54.4

25.5

44.6

46.5

44.8

49.8

13.9

31.9

19.3

52.9

71.8

Cumulative

3,060.5

2,420.8

3.9%*

44.2%

* Simple average of the % of average investments in each of the eighteen years.

Investment gains (losses) have been an important component of Fairfax’s net earnings since

1985,  amounting  to  an  aggregate  of  $2,420.8.  The  amount  has  ﬂuctuated  signiﬁcantly  from

period to period, and the amount of investment gains (losses) for any period has no predictive

value and variations in amount from period to period have no practical analytic value. Since

1985,  realized  gains  have  averaged  3.9%  of  Fairfax’s  average  investment  portfolio  and  have

accounted  for  44.2%  of  Fairfax’s  combined  interest  and  dividends  and  realized  gains.  At

December  31,  2003  the  Fairfax  investment  portfolio  had  an  unrealized  gain  of  $244.9

compared to an unrealized gain at December 31, 2002 of $131.7.

The company has a long term value-oriented investment philosophy. It continues to expect

ﬂuctuations in the stock market.

Capital Resources

At  December  31,  2003,  total  capital,  comprising  shareholders’  equity  and  non-controlling

(minority) interests, was $3,358.8, compared to $2,569.6 at December 31, 2002.

110

The following table shows the level of capital as at December 31 for the past ﬁve years.

2003

2002

2001

2000

1999

Non-controlling interests

440.8

321.6

653.6

429.6

414.5

Common shareholders’ equity

2,680.0

2,111.4

1,894.8

2,113.9

2,148.2

Preferred stock

Other paid in capital*

136.6

101.4

136.6

136.6

136.6

136.6

–

–

–

–

3,358.8

2,569.6

2,685.0

2,680.1

2,699.3

*

See footnote (5) to note 6 to the consolidated ﬁnancial statements.

Non-controlling interests increased in 2003 due to the Northbridge IPO on May 28, 2003 in

which  29.0%  of  Northbridge  was  sold  to  the  public,  partially  offset  by  the  purchase  of  an

additional 6.8% of OdysseyRe’s outstanding shares on March 3, 2003.

Fairfax’s  consolidated  balance  sheet  as  at  December  31,  2003  continues  to  reﬂect  signiﬁcant

ﬁnancial  strength.  Fairfax’s  common  shareholders’  equity  increased  from  $2,111.4  at

December  31,  2002  to  $2,680.0  at  December  31,  2003  principally  as  a  result  of  the  2003

earnings of $271.1 less dividends for 2003 of $23.7 and the change in the cumulative currency

translation account of $352.9 at December 31, 2003,  primarily relating to the weakening of

the  U.S.  dollar  against  the  Canadian  dollar  at  December  31,  2003  ($1.2923)  compared  to

December 31, 2002 ($1.5798).

The company has issued and repurchased common shares over the last ﬁve years as follows:
Number of
subordinate
voting shares

Average
issue/repurchase
price per share

Net proceeds/
repurchase cost

Date

1999 – issue of shares

– repurchase of shares

2000 – repurchase of shares

2001 – issue of shares

2002 – repurchase of shares

2003 – repurchase of shares

2,000,000

(706,103)

(325,309)

1,250,000

(210,200)

(240,700)

325.06

197.07

123.64

125.52

79.32

127.13

623.9

(139.1)

(36.0)

156.0

(16.7)

(30.6)

Fairfax’s  indirect  ownership  of  its  own  shares  through  The  Sixty  Two  Investment  Company

Limited results in an effective reduction of shares outstanding by 799,230, and this reduction

has been reﬂected in the earnings per share and book value per share ﬁgures.

111

FAIRFAX  FINANCIAL  HOLDINGS  LIMITED

A common measure of capital adequacy in the property and casualty industry is the premiums

to surplus (or common shareholders’ equity) ratio. This is shown for the continuing insurance

and reinsurance subsidiaries of Fairfax for the past ﬁve years in the following table:

Insurance

Crum & Forster
Fairmont(1)
Falcon

Northbridge

Reinsurance

OdysseyRe

Canadian insurance industry

U.S. insurance industry

(1) Fairmont for 2003, only Ranger for prior years.

Net Premiums Written to Surplus
(Common Shareholders’ Equity)

2003

2002

2001

2000

1999

0.8

1.5

2.2

1.5

1.7

1.6

1.3

0.7

1.1

2.1

1.5

1.6

1.4

1.3

0.5

0.9

0.4

1.5

1.0

1.4

1.1

0.5

0.4

0.3

1.3

0.7

1.3

0.9

0.6

0.8

0.3

1.2

0.6

1.2

0.9

In Canada, property and casualty companies are regulated by the Ofﬁce of the Superintendent

of Financial Institutions on the basis of a minimum supervisory target of 150% of a minimum

capital test (MCT) formula. Fairfax does not anticipate any adverse effects of such regulation.

At December 31, 2003, each of Northbridge’s property and casualty insurance subsidiaries had

capital  and  surplus  in  excess  of  190%  of  the  MCT,  and  these  subsidiaries  together  had

combined  capital  and  surplus  approximately  $201  in  excess  of  the  minimum  supervisory

target.

In  the  U.S.,  the  National  Association  of  Insurance  Commissioners  (NAIC)  has  developed  a

model law and risk-based capital (RBC) formula designed to help regulators identify property

and casualty insurers that may be inadequately capitalized. Under the NAIC’s requirements, an

insurer  must  maintain  total  capital  and  surplus  above  a  calculated  threshold  or  face  varying

levels of regulatory action. The threshold is based on a formula that attempts to quantify the

risk  of  a  company’s  insurance,  investment  and  other  business  activities.  Fairfax  does  not

anticipate any adverse effects of such requirements. At December 31, 2003, the U.S. insurance,

reinsurance  and  runoff  subsidiaries  had  capital  and  surplus  in  excess  of  the  regulatory

minimum  requirement  of  two  times  the  authorized  control  level –  except  for  TIG,  each

subsidiary had capital and surplus in excess of 3.5 times the authorized control level. As part of

the TIG reorganization described on page 62, Fairfax has guaranteed that TIG will have capital

and surplus of at least two times the authorized control level at each year-end.

112

Fairfax  and  its  insurance  and  reinsurance  subsidiaries  are  rated  as  follows  by  the  respective

rating agencies: 

Fairfax

Commonwealth

Crum & Forster

Falcon

Federated

Lombard

Markel

Ranger

TIG Specialty Insurance

OdysseyRe

Liquidity

A.M. Best

Standard
& Poor’s DBRS Moody’s

bb+

A–

A–

–

A–

A–

A–

B++

B+

A

BB

BBB

BBB

A–

BBB

BBB

BBB

–

BB

A–

BB+

–

–

–

–

–

–

–

–

–

Ba3

–

Baa3

–

–

–

–

–

–

Baa1

The  purpose  of  liquidity  management  is  to  ensure  that  there  is  sufﬁcient  cash  to  meet  all

ﬁnancial commitments and obligations as they fall due.

Fairfax’s unaudited combined holding company earnings statement is set out on page 125, and

its composition is explained on page 119. As shown, the holding companies had revenue of

$161.0  in  2003,  consisting  of  dividends  from  their  insurance  and  reinsurance  subsidiaries

($115.3),  interest  income  ($5.5),  management  fees  ($35.0)  and  realized  gains  ($5.2).  After

interest expense ($89.1) and operating and other expenses ($37.4), the holding companies had

pre-tax  earnings  of  $34.5.  The  operating  expenses  include,  besides  administration  expenses,

other  costs  of  insurance  subsidiaries  reimbursed  by  the  holding  companies.  This  income

statement  shows  that  in  2003,  Fairfax  very  comfortably  met  all  its  interest  and  operating

expenses from internal sources.

During 2004, Fairfax expects to receive dividends on its shares of publicly traded Northbridge

and OdysseyRe, as well as dividends of about $100 from Crum & Forster and other subsidiaries.

It determines the amount of dividends that any non-public subsidiary will pay during a year

based on its capital requirements and the current year’s operating performance. Fairfax’s public

subsidiaries and, in general, its non-public subsidiaries do not pay dividends to the full extent

of available dividend capacity.

At  the  end  of  2003,  Fairfax  had  a  large  cash  and  marketable  securities  holding  of  $410.2

(including $47.3 held in Crum & Forster’s interest escrow account to meet the next three semi-

annual  interest  payments  on  its  $300  notes)  available  to  meet  upcoming  obligations  and

unexpected requirements absent any other source of funds. If not used for these purposes, the

cash in the holding company, after the receipt of contractual management fees, would permit

Fairfax  to  meet  its  net  interest,  preferred  dividend  and  other  overhead  expenses  for  three  to

four years, without access to any dividends from its insurance and reinsurance subsidiaries.

The company has a syndicated facility with ten banks extending to December 31, 2005 which

provides  aggregate  revolving  credit  facilities  of  Cdn$337  (declining  to  Cdn$269  on

113

FAIRFAX  FINANCIAL  HOLDINGS  LIMITED

September  30,  2004).  This  facility,  which  is  currently  unutilized,  is  secured  by  the  assets  of

Fairfax, including Fairfax’s shares of its holding company subsidiaries Northbridge, OdysseyRe

and  Crum  &  Forster,  and  contains  various  covenants  including  covenants  to  maintain  a

maximum net debt to equity ratio of 0.9 to 1 (0.8 to 1 from June 30, 2004 and 0.7 to 1 from

June 30, 2005) and to maintain minimum common shareholders’ equity of Cdn$2.75 billion

(Cdn$3.25 billion from June 30, 2004 and Cdn$3.75 billion from June 30, 2005). The facility

allows for borrowing by Northbridge and OdysseyRe.

In addition, in 2004 the company expects to receive management fees, interest on its holdings

of cash, short term investments and marketable securities, and tax sharing payments in excess

of $150 from Crum & Forster and OdysseyRe.

Subsequent  to  December  31,  2003  Fairfax  paid  a  common  share  dividend  of  $19.5 and  paid

$50.0 of the $147.8 additional premium payable with respect to the $263.6 of losses ceded to

the Swiss Re Cover in 2003 (the balance of this additional premium is payable on April 15). In

addition to its interest, operating and preferred share dividend expense, expected to aggregate

approximately $180, the holding company’s remaining obligations in 2004 consist of the ﬁnal

note instalment of $100 due to TIG and obligations of the runoff subsidiaries, including TIG-

related  indemnities  on  adverse  development  not  covered  by  the  Chubb  Re  Cover  and  the

normal volatility of runoff cash ﬂows. There are no external debt maturities in 2004.

The company believes that the resources described in the four paragraphs preceding the above

paragraph  provide  adequate  liquidity  to  meet  all  of  the  company’s  obligations  in  2004,  as

described above. As usual, cash use will be heavier in the ﬁrst quarter and ﬁrst half of the year.

The  company  manages  its  debt  levels  based  on  the  following  ﬁnancial  measurements  and

ratios (with Lindsey Morden equity accounted):

2003

2002

2001

2000

1999

Cash, short term investments and

marketable securities

410.2

327.7

522.1

363.1

491.1

Long term debt (including OdysseyRe

debt)

TRG purchase consideration payable

RHINOS due February 2003

Net debt

1,942.7

1,406.0

1,381.8

1,232.6

1,349.8

200.6

–

205.5

136.0

1,733.1

1,419.8

–

136.0

995.7

–

136.0

1,005.5

–

136.0

994.7

Common shareholders’ equity

2,781.4

2,111.4

1,894.8

2,113.9

2,148.2

Preferred shares and trust preferred

securities of subsidiaries

OdysseyRe non-controlling interest

216.4

250.6

216.4

268.5

215.4

226.6

261.6

261.6

–

–

Total equity

3,248.4

2,596.3

2,336.8

2,375.5

2,409.8

Net debt/equity

Net debt/total capital

Net debt/earnings

Interest coverage

53%

35%

6.4x

4.8x

55%

35%

5.4x

4.6x

43%

30%

N/A

N/A

42%

30%

11.0x

0.9x

41%

29%

11.6x

0.7x

114

Net  debt  increased  in  2003  due  to  $300  of  notes  issued  by  Crum  &  Forster  in  the  second

quarter, $200 of convertible debentures issued by Fairfax in the third quarter (of which $99 is

included in long term debt and $101 is included in paid in capital) and $175 (net) of notes

issued by OdysseyRe in the fourth quarter, partially offset by repayment of the RHINOS of $136

and of notes which matured in 2003 of $118. The long term debt and net debt at December 31,

2003 include external debt issued by OdysseyRe of $375.0. Total equity includes OdysseyRe’s

non-controlling interest (19.4% in 2003, 26.2% in 2002 and 2001) which supports repayment

of OdysseyRe’s debt. The slight improvement in the net debt to equity and net debt to total

capital ratios primarily reﬂects the increase in common shareholders’ equity.

Based  on  the  deﬁnitions  contained  in  its  syndicated  bank  facility  agreement  (which  include

OdysseyRe’s  debt  and  the  trust  preferred  securities  of  subsidiaries  as  debt  and  exclude

OdysseyRe’s non-controlling interest as equity), at December 31, 2003 the company’s net debt

to equity ratio was 65%.

The  2003  net  debt  to earnings  and  interest  coverage  ratios  reﬂect  the  company’s  continued

strong proﬁtability in the year.

Issues and Risks

The  following  issues  and  risks,  among  others,  should  also  be  considered  in  evaluating  the

outlook  of  the  company.  For  a  fuller  detailing  of  issues  and  risks  relating  to  the  company,

please see Risk Factors in Fairfax’s base shelf prospectus dated August 11, 2003 ﬁled with the

Ontario  Securities  Commission,  which  is  available  on  SEDAR,  and  in  Fairfax’s  registration

statement ﬁled with the U.S. Securities and Exchange Commission on the same date, which is

available on EDGAR.

Claims Reserves

The major risk that all property and casualty insurance and reinsurance companies face is that

the  provision  for  claims  is  an  estimate  and  may  be  found  to  be  deﬁcient,  perhaps  very

signiﬁcantly, in the future as a result of unanticipated frequency or severity of claims or for a

variety of other reasons including unpredictable jury verdicts, expansion of insurance coverage

to  include  exposures  not  contemplated  at  the  time  of  policy  issue  (e.g.  asbestos,  pollution,

breast  implants),  and  poor  weather.  Fairfax’s  gross  provision  for  claims  was  $14,368.1  at

December 31, 2003.

Reinsurance Recoverables

Most insurance and reinsurance companies reduce their liability for any individual claim by

reinsuring  amounts  in  excess  of  the  maximum  they  want  to  retain.  This  third  party

reinsurance does not relieve the company of its primary obligation to the insured. Reinsurance

recoverables can become an issue mainly due to solvency credit concerns, given the long time

period over which claims are paid and the resulting recoveries are received from the reinsurers,

or policy disputes. Fairfax had $8,542.6 recoverable from reinsurers as at December 31, 2003.

115

FAIRFAX  FINANCIAL  HOLDINGS  LIMITED

Catastrophe Exposure

Insurance and reinsurance companies are subject to losses from catastrophes like earthquakes,

windstorms,  hailstorms  or  terrorist  attacks,  which  are  unpredictable  and  can  be  very

signiﬁcant.

Prices

Prices  in  the  insurance  and  reinsurance  industry  are  cyclical  and  can  ﬂuctuate  quite

dramatically.  With  underreserving,  competitors  can  price  below  underlying  costs  for  many

years and still survive. The property and casualty insurance and reinsurance industry is highly

competitive.

Foreign Exchange

The company has assets, liabilities, revenue and costs that are subject to currency ﬂuctuations.

These currency ﬂuctuations have been and can be very signiﬁcant and can affect the statement

of earnings or shareholders’ equity, through its currency translation account.

Cost of Revenue

Unlike most businesses, the insurance and reinsurance business can have enormous costs that

can  signiﬁcantly  exceed  the  premiums  received  on  the  underlying  policies.  Similar  to  short

selling in the stock market (selling shares not owned), there is no limit to the losses that can

arise from most insurance policies, even though most contracts have policy limits.

Regulation

Insurance  and  reinsurance  companies  are  regulated  businesses  which  means  that  except  as

permitted  by  applicable  regulation,  Fairfax  does  not  have  access  to  its  insurance  and

reinsurance subsidiaries’ net income and shareholders’ capital without the requisite approval

of applicable insurance regulatory authorities.

Taxation

Realization of the future income tax asset is dependent upon the generation of taxable income

in  those  jurisdictions  where  the  relevant  tax  losses  and  other  timing  differences  exist.  The

major component of the company’s future income tax asset of $968.3 at December 31, 2003 is

$676.4  relating  to  the  company’s  U.S.  consolidated  tax  group.  Failure  to  achieve  projected

levels of proﬁtability in the U.S. in 2004 could lead to a writedown in this future tax asset if the

expected recovery period becomes longer than three to four years.

Common Stock Holdings

The  company  has  common  stocks  in  its  portfolio,  the  market  value  of  which  is  exposed  to

ﬂuctuations in the stock market.

116

Goodwill

Most  of  the  goodwill  on  the  balance  sheet  comes  from  Lindsey  Morden,  particularly  its

U.K.  operations.  Continued  proﬁtability  is  essential  for  there  to  be  no  deterioration  in  the

carrying value of the goodwill.

Ratings

The  company  has  claims  paying  and  debt  ratings  by  the  major  rating  agencies  in  North

America. As ﬁnancial stability is very important to its customers, the company is vulnerable to

downgrades by the rating agencies.

Holding Company

Being a small holding company, Fairfax is very dependent on strong operating management,

which makes it vulnerable to management turnover.

Financial Strength

Fairfax strives to be soundly ﬁnanced. If the company requires additional capital or liquidity

but cannot obtain it at all or on reasonable terms, its business, operating results and ﬁnancial

condition would be materially adversely affected.

Quarterly Data (unaudited)

Years ended December 31

First
Quarter

Second
Quarter

Third
Quarter

Fourth
Quarter

Full
Year

2003

Revenue ***********************
Net earnings (loss) **************
Net earnings (loss) per share*****

1,334.8

1,628.5

1,175.2

1,575.4

5,713.9

101.5

6.97

173.7

12.09

(10.7)

(1.02)

6.6

0.51

271.1

18.55

2002

Revenue ***********************
Net earnings *******************
Net earnings per share **********

2001

Revenue ***********************
Net earnings (loss) **************
Net earnings (loss) per share*****

1,092.5

1,191.6

1,419.7

1,363.6

5,067.4

7.1

0.29

980.7

19.8

1.35

29.6

1.86

990.7

29.7

2.11

178.0

12.21

48.3

3.84

263.0

18.20

866.5

1,124.1

3,962.0

(297.1)

(22.82)

23.8

1.23

(223.8)

(18.13)

117

FAIRFAX  FINANCIAL  HOLDINGS  LIMITED

Stock Prices

Below  are  the  Toronto  Stock  Exchange  high,  low  and  closing  prices  of  subordinate  voting

shares of Fairfax for each quarter of 2003, 2002 and 2001.

First
Quarter

Second
Quarter

Third
Quarter

Fourth
Quarter

(Cdn $)

2003

High **************************************
Low **************************************
Close *************************************

2002

High **************************************
Low **************************************
Close *************************************

2001

High **************************************
Low **************************************
Close *************************************

126.00

57.00

75.00

195.00

156.00

164.75

289.00

185.00

199.50

220.85

76.00

205.00

190.50

145.05

152.00

234.00

171.50

227.90

248.55

200.00

210.51

162.00

104.99

118.50

242.50

174.00

202.31

230.04

185.06

226.11

164.00

107.00

121.11

227.00

160.00

164.00

Below  are  the  New  York  Stock  Exchange  high,  low  and  closing  prices  of  subordinate  voting

shares of Fairfax for each quarter of 2003 and in 2002 since listing on December 18, 2002.

First
Quarter

Second
Quarter

Third
Quarter

Fourth
Quarter

2003

High **************************************
Low **************************************
Close *************************************

79.55

46.71

50.95

162.80

51.50

153.90

178.50

146.50

156.70

2002

High **************************************
Low **************************************
Close *************************************

—

—

—

—

—

—

—

—

—

177.98

141.50

174.51

90.20

77.00

77.01

118

Supplementary Financial Information
The  following  unaudited  ﬁnancial  information  is  prepared  as  supplementary  information  to

the company’s consolidated ﬁnancial statements as at and for the years ended December 31,

2003 and 2002. The purpose of each supplementary statement and its basis of preparation are

discussed below. Note (2) on page 49 is applicable also to these supplementary statements.

The  combined  balance  sheets  and  statements  of  earnings  for  Fairfax’s  continuing  insurance

and  reinsurance  companies  are  intended  to  provide  more  detailed  information  on  the

underlying core operations. The individual balance sheets and statements of earnings of each

of  the  underlying  insurance  and  reinsurance  operations  have  been  added  together  without

adjustment  for  items  such  as  intersegment  transactions  and  purchase  price  adjustments.  For

2002,  TIG  Insurance  has  been  excluded  from  the  combined  balance  sheet  following  the

decision to place the company in runoff on December 16, 2002.

The consolidated ﬁnancial statements of Fairfax with equity accounting of Lindsey Morden are

intended  to  present  Fairfax’s  ﬁnancial  position  in  a  manner  which  recognizes,  as  is

appropriate,  that  Lindsey  Morden  is  not  part  of  Fairfax’s  primary  operating  segment  of

insurance and reinsurance.

The  unconsolidated  balance  sheets  of  Fairfax  are  intended  to  provide  a  summary  of  the

holding  company’s  investments  in  its  subsidiaries  by  operating  segment  and  its  other  assets

and  liabilities  including  long  term  debt.  The  investments  in  subsidiaries  are  carried  on  the

equity  basis  whereby  the  investment  reﬂects  the  cost  of  acquisition  and  post-acquisition

earnings (including the effect of purchase price adjustments) less dividends received.

The unconsolidated statements of earnings of Fairfax provide supplementary information on

the  holding  company’s  sources  of  revenue  and  interest  and  overhead  requirements,  both  of

which are discussed in more detail under Liquidity beginning on page 113 in the MD&A. These

combined  holding  company  statements  of  earnings  include  the  unconsolidated  earnings

statements of Fairfax Financial Holdings Limited, the Canadian holding company, and the U.S.

holding companies which have issued long term debt or trust preferred securities and which

carry  out  certain  of  Fairfax’s  parent  company  corporate  functions.  These  statements  exclude

intercompany  arrangements  other  than  dividends  from  subsidiaries,  and  exclude  the

combined  holding  company’s  premium  payments  and  recoveries  under  the  Swiss  Re  Cover.

None  of  the  holding  companies  pays  tax  currently,  and  accordingly  these  statements  are

presented on a pre-tax basis.

119

FAIRFAX  FINANCIAL  HOLDINGS  LIMITED

Fairfax Insurance and Reinsurance Companies

Combined Balance Sheets
as at December 31, 2003 and 2002

(unaudited – US$ millions)

Assets

Cash held in Crum & Forster interest escrow account *************
Accounts receivable and other ***********************************
Recoverable from reinsurers *************************************

Portfolio investments (at carrying value)
Cash and short term investments ********************************
Bonds**********************************************************
Preferred stocks *************************************************
Common stocks ************************************************
Investments in Hub, Zenith National and Advent *****************
Real estate******************************************************

Investment in afﬁliates ******************************************
Deferred premium acquisition costs ******************************
Future income taxes ********************************************
Capital assets ***************************************************
Goodwill *******************************************************
Other assets ****************************************************

Liabilities

Accounts payable and accrued liabilities **************************
Funds withheld payable to reinsurers ****************************

2003

2002(1)

47.3
1,411.2
3,892.6

–
1,429.0
4,171.4

5,351.1

5,600.4

4,481.8
3,034.5
136.1
1,013.5
260.2
9.5

1,146.0
4,574.0
155.1
518.4
236.5
8.1

8,935.6

6,638.1

149.8
357.2
294.8
48.0
36.9
28.7

51.7
273.8
325.9
49.6
21.6
8.8

15,202.1

12,969.9

492.9
505.3

913.7
503.4

998.2

1,417.1

Provision for claims*********************************************
Unearned premiums ********************************************
Long term debt *************************************************

8,049.1
2,232.9
675.0

7,329.0
1,702.0
200.0

Shareholders’ Equity

Capital stock ***************************************************
Contributed surplus*********************************************
Retained earnings***********************************************
Currency translation account ************************************

10,957.0

9,231.0

1,997.2
40.7
1,132.0
77.0

1,997.2
40.7
524.5
(240.6)

3,246.9

2,321.8

15,202.1

12,969.9

(1) Excluding TIG

120

Fairfax Insurance and Reinsurance Companies

Combined Statements of Earnings
for the years ended December 31, 2003 and 2002

(unaudited – US$ millions)

2003

2002

Revenue

Gross premiums written ******************************************* 5,354.6

4,399.1

Net premiums written ********************************************* 4,109.6

3,200.9

Net premiums earned ********************************************* 3,697.2

2,869.5

Expenses

Losses on claims ************************************************** 2,516.3
Operating expenses ***********************************************
444.3
Commissions, net *************************************************

648.9

1,994.5

374.7

543.1

Underwriting proﬁt (loss) ***************************************

87.7

(42.8)

3,609.5

2,912.3

Investment and other income

Interest and dividends*********************************************
Realized gains on investments *************************************

Interest expense***************************************************
Corporate overhead of Odyssey Re, Crum & Forster and Northbridge
Other costs and restructuring charges ******************************

Earnings before income taxes************************************
Provision for income taxes*****************************************

Earnings from operations****************************************

220.3

663.9

884.2

31.4

18.2

0.7

833.9

921.6

307.2

614.4

266.1

194.5

460.6

7.7

5.0

22.6

425.3

382.5

61.6

320.9

Loss ratio *********************************************************
Expense ratio *****************************************************

68.1%

29.5%

69.5%

32.0%

Combined ratio***************************************************

97.6%

101.5%

121

FAIRFAX  FINANCIAL  HOLDINGS  LIMITED

Fairfax with Equity Accounting of Lindsey Morden

Consolidated Balance Sheets
as at December 31, 2003 and 2002

(unaudited – US$ millions)

Assets

Cash and short term investments **************************
Cash held in Crum & Forster interest escrow account********
Marketable securities **************************************
Accounts receivable and other *****************************
Recoverable from reinsurers ********************************

Portfolio investments
Subsidiary cash and short term investments (market value –

$5,696.2; 2002 – $1,704.9) *******************************
Bonds (market value – $4,644.8; 2002 – $7,513.5) ***********
Preferred stocks (market value – $143.9; 2002 – $158.0) ******
Common stocks (market value – $1,428.5; 2002 – $712.4) ***
Investments in Hub, Zenith National and Advent (market

value – $456.0; 2002 – $332.6) ***************************
Real estate (market value – $17.0; 2002 – $24.2) *************
Total (market value – $12,386.4; 2002 – $10,445.6) ************
Investment in Lindsey Morden *****************************
Deferred premium acquisition costs ************************
Future income taxes ***************************************
Premises and equipment ***********************************
Goodwill *************************************************
Other assets***********************************************

Liabilities

Accounts payable and accrued liabilities ********************
Funds withheld payable to reinsurers ***********************

Provision for claims ***************************************
Unearned premiums***************************************
Long term debt *******************************************
Purchase consideration payable ****************************
Trust preferred securities of subsidiaries *********************

2003

2002

346.4
47.3
16.5
2,002.3
8,542.6

304.6
–
23.1
2,167.9
7,591.4

10,955.1

10,087.0

5,696.2
4,729.3
142.3
1,173.9

387.6
12.2

1,704.9
7,394.5
160.1
679.6

354.3
20.5

12,141.5

10,313.9

42.8
412.0
963.8
85.1
33.9
83.5

55.4
375.6
970.3
96.8
26.0
57.6

24,717.7

21,982.6

1,246.5
1,104.6

2,351.1

14,368.1
2,441.9
1,942.7
200.6
79.8

1,184.3
959.7

2,144.0

13,397.3
2,089.1
1,406.0
205.5
215.8

19,033.1

17,313.7

Non-controlling interests **********************************

415.5

276.9

Shareholders’ Equity

Common stock *******************************************
Other paid in capital **************************************
Preferred stock ********************************************
Retained earnings *****************************************
Currency translation account ******************************

1,510.0
101.4
136.6
1,114.9
55.1

2,918.0

1,535.7
–
136.6
873.5
(297.8)

2,248.0

24,717.7

21,982.6

122

Fairfax with Equity Accounting of Lindsey Morden

Consolidated Statements of Earnings
for the years ended December 31, 2003 and 2002

(unaudited – US$ millions except per share amounts)

Revenue

Gross premiums written ***********************************

5,518.6

5,173.2

Net premiums written *************************************

4,448.1

4,033.9

2003

2002

Net premiums earned**************************************
Interest and dividends *************************************
Realized gains on investments******************************
Realized gains on Northbridge IPO *************************
Equity earnings (loss) of Lindsey Morden *******************

Expenses

Losses on claims ******************************************
Operating expenses****************************************
Commissions, net *****************************************
Interest expense *******************************************
Restructuring and other costs ******************************
Swiss Re premiums ****************************************

Earnings before income taxes ****************************
Provision for income taxes *********************************

Earnings from operations and before extraordinary

item *****************************************************
Negative goodwill *****************************************

Net earnings before non-controlling interests***********
Non-controlling interests **********************************

Net earnings **********************************************

4,209.0

3,888.6

330.1

840.2

5.7

(16.6)

418.6

469.5

–

(6.7)

5,368.4

4,770.0

3,240.6

2,998.7

684.4

776.1

138.6

–

–

648.2

706.2

79.6

57.2

2.7

4,839.7

4,492.6

528.7

187.6

341.1

–

341.1

70.0

271.1

277.4

149.3

128.1

188.4

316.5

(53.5)

263.0

Net earnings per share before extraordinary item and

after non-controlling interests*************************
Net earnings per share ***********************************
Net earnings per diluted share ***************************

$ 18.55

$ 18.55

$ 18.23

$

5.01

$ 18.20

$ 18.20

123

FAIRFAX  FINANCIAL  HOLDINGS  LIMITED

Fairfax Financial Holdings Limited

Unconsolidated Balance Sheets
as at December 31, 2003 and 2002

(unaudited – US$ millions)

Assets

Subsidiary companies

Insurance – Canada(1)********************************************
Insurance – U.S.(2) ***********************************************
Reinsurance ****************************************************
Runoff and other(1)(2) ********************************************
Other investments ************************************************

Cash and short term investments **********************************
Cash held in Crum & Forster interest escrow account ***************
Marketable securities **********************************************
Other assets ******************************************************

2003

2002(1)

411.9

299.0

1,086.7

1,038.6

982.6

765.3

1,007.4

1,002.5

28.4

42.5

3,517.0

3,147.9

346.4

304.6

47.3

16.5

99.9

–

23.1

36.9

4,027.1

3,512.5

Liabilities

Accounts payable and other liabilities ******************************
Long term debt ***************************************************

17.2

165.8

1,091.9

1,098.7

Shareholders’ Equity

Common stock ***************************************************
Other paid in capital **********************************************
Preferred stock ****************************************************
Retained earnings *************************************************
Currency translation account **************************************

1,109.1

1,264.5

1,510.0

1,535.7

101.4

136.6

1,114.9

–

136.6

873.5

55.1

(297.8)

2,918.0

2,248.0

4,027.1

3,512.5

(1) The  investment  in  CRC  (Bermuda)  for  2002  has  been  reclassiﬁed  to  Runoff  and  other  to  conform  with  the

current year’s presentation.

(2) TIG is included in runoff as a result of its merger with International Insurance on December 16, 2002.

Note: These unconsolidated balance sheets do not include debt issued by Fairfax’s subsidiary companies (TIG –
$97.7; 2002 – $107.3; OdysseyRe – $375.0; 2002 – $200.0; Crum & Forster – $300.0; 2002 – nil and
Lindsey Morden – $97.5; 2002 – $81.9).

124

Fairfax Financial Holdings Limited

Unconsolidated Statements of Earnings
(combined holding company earnings statements)

for the years ended December 31, 2003 and 2002

(unaudited – US$ millions)

Revenue

Dividend income *****************************************************
Interest income ******************************************************
Management fees *****************************************************
Realized gains ********************************************************

Expenses

Interest expense ******************************************************
Operating expenses ***************************************************
Other ****************************************************************

2003

2002

115.3

5.5

35.0

92.9

8.8

20.0

5.2

138.2

161.0

259.9

89.1

31.7

5.7

78.1

32.8

12.6

126.5

123.5

Earnings before income taxes ***************************************

34.5

136.4

125

FAIRFAX  FINANCIAL  HOLDINGS  LIMITED

APPENDIX A

GUIDING PRINCIPLES FOR FAIRFAX FINANCIAL HOLDINGS LIMITED

OBJECTIVES:

1) We expect to earn long term returns on shareholders’ equity in excess of 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.

2) We always want to be soundly ﬁnanced.

3) We provide complete disclosure annually to our shareholders.

STRUCTURE:

1) 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.

2) Complete  and  open  communication  between  Fairfax  and  subsidiaries  is  an  essential

requirement at Fairfax.

3)

Share ownership and large incentives are encouraged across the Group.

4)

Fairfax will always be a very small holding company and not an operating company.

VALUES:

1) Honesty and integrity are essential in all our relationships and will never be compromised.

2) We are results oriented – not political.

3) We  are  team  players –  no  ‘‘egos’’.  A  confrontational  style  is  not  appropriate.  We  value

loyalty – to Fairfax and our colleagues.

4) We are hard working but not at the expense of our families.

5) We always look at opportunities but emphasize downside protection and look for ways to

minimize loss of capital.

6) We are entrepreneurial. We encourage calculated risk taking. It is all right to fail but we

should learn from our mistakes.

7) We will never bet the company on any project or acquisition.

8) We believe in having fun – at work!

126

Total
assets(2)

Invest-
ments

Net
debt(3)

Share-
holders’

Shares
equity outstanding

Closing
share
price(4)

Consolidated Financial Summary
(in US$ millions except share and per share data and as otherwise indicated)(1)

Return on
average

Net
shareholders’ holders’ earnings –

Share-

Per Share

equity

equity

diluted Revenue

As at and for the years ended December 31:

—

25.2%

32.5%

22.8%

1.52

4.25

6.30

8.26

21.0% 10.50

23.0% 14.84

21.5% 18.38

7.7% 18.55

15.9% 26.39

11.4% 31.06

20.4% 38.89

(1.35)

0.98

1.72

1.63

1.87

2.42

3.34

1.44

4.19

3.41

7.15

12.2

38.9

86.9

112.0

108.6

167.0

217.4

237.0

266.7

464.8

837.0

Earnings
before
income

Net
taxes earnings

(0.6)

(0.6)

6.6

14.0

17.9

16.6

19.8

28.3

5.8

36.2

33.7

70.1

4.7

12.3

12.1

14.4

18.2

19.6

8.3

25.8

27.9

63.9

110.6

167.9

30.4

93.4

139.8

200.6

209.5

461.9

447.0

464.6

906.6

23.9

68.8

93.5

111.7

113.1

289.3

295.3

311.7

641.1

1,549.3

1,105.9

2,104.8

1,221.9

4,216.0

2,520.4

7,140.0

4,054.1

–

2.0

2.1

22.9

18.6

56.8

44.4

53.7

100.0

155.4

166.8

269.5

357.7

7.6

29.7

46.0

60.3

76.7

81.6

101.1

113.1

211.1

279.6

346.1

664.7

976.3

21.9% 63.31

11.26 1,082.3

20.5% 87.95

15.59 1,507.7

23.0% 120.29

22.45 2,459.8

4.6% 160.00

6.27 3,894.8

3.9% 161.35

6.34 4,170.4

137.4

242.6

333.6

(11.6)

(22.2)

266.7 13,578.7

7,871.8

740.5

1,455.5

83.6 22,034.8 12,293.9

994.7

2,148.2

92.6 21,193.9 10,444.2

1,005.5

2,113.9

(12.0%) 132.03

(18.13) 3,962.0

(476.1)

(223.8) 22,200.5 10,285.8

995.7

1,894.8

13.0% 149.31

18.20 5,067.4

10.9% 192.81

18.23 5,713.9

275.3

527.5

263.0 22,224.5 10,642.2

1,419.8

2,111.4

271.1 25,018.3 12,566.1

1,733.1

2,680.0

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

5.0

7.0

7.3

7.3

7.3

5.5

5.5

6.1

8.0

9.0

8.9

10.5

11.1

12.1

13.4

13.1

14.4

14.1

13.9

3.25(5)
12.75

12.37

15.00

18.75

11.00

21.25

25.00

61.25

67.00

98.00

290.00

320.00

540.00

245.50

228.50

164.00

121.11

226.11

(1) All share references are to common shares; shares outstanding are in millions

(2) Commencing in 1995, reﬂects a change in accounting policy for reinsurance recoverables

(3) Total debt (beginning in 1994, net of cash in the holding company) with Lindsey Morden equity accounted

(4) Quoted in Canadian dollars

(5) When current management took over in September 1985

127

FAIRFAX  FINANCIAL  HOLDINGS  LIMITED

Directors of the Company
* Frank B. Bennett

President, Artesian Management, Inc.

* Anthony F. Grifﬁths
Corporate Director

* Robbert Hartog

President, Robhar Investments Ltd.
Brandon W. Sweitzer (as of April 2004)
Senior Advisor to the President
of the U.S. Chamber of Commerce
V. Prem Watsa
Chairman and Chief Executive Ofﬁcer

* Audit Committee Member

Operating Management
Ronald Schwab, President
Commonwealth Insurance Company

Bruce Esselborn, Chairman
Crum & Forster Holdings, Inc.

Wayne Ashenberg, CEO
Marc Adee, President
Fairmont Specialty Group, Inc.

Kenneth Kwok, President
Falcon Insurance Company (Hong Kong)
Limited

John M. Paisley, President
Federated Insurance Company of Canada

Anthony F. Hamblin, President
Hamblin Watsa Investment Counsel Ltd.

Martin P. Hughes, Chairman
Richard A. Gulliver, President
Hub International Limited

Karen Murphy, President
Lindsey Morden Group Inc.

Richard Patina, President
Lombard General Insurance Company of
Canada

Mark J. Ram, President
Markel Insurance Company of Canada

Steve Brett, President
Napa MGU

Byron G. Messier, President
Northbridge Financial Corporation

Andrew A. Barnard, President
Odyssey Re Holdings Corp.

Dennis C. Gibbs, Chairman
TRG Holding Corporation

Ofﬁcers of the Company
Trevor J. Ambridge
Vice President and Chief Financial Ofﬁcer
Sam Chan
Vice President
Francis Chou
Vice President
Jean Cloutier
Vice President and Chief Actuary
J. Paul T. Fink
Vice President

Jonathan Godown
Vice President
Bradley P. Martin
Vice President and Corporate Secretary
Eric P. Salsberg
Vice President, Corporate Affairs
Ronald Schokking
Vice President, Finance
V. Prem Watsa
Chairman and Chief Executive Ofﬁcer
M. Jane Williamson
Vice President

Ofﬁcers of Fairfax Inc.
John Cassil, Vice President
James F. Dowd, President
Hank Edmiston, Vice President, Regulatory
Affairs
Scott Galiardo, Vice President
Roland Jackson, Vice President

Head Ofﬁce
95 Wellington Street West
Suite 800
Toronto, Canada M5J 2N7
Telephone (416) 367-4941
Website www.fairfax.ca

Auditors
PricewaterhouseCoopers LLP

General Counsel
Torys

Transfer Agents and Registrars
CIBC Mellon Trust Company, Toronto
Mellon Investor Services LLC, New York

Share Listings
Toronto and New York Stock Exchanges
Stock Symbol FFH

Annual Meeting
The annual meeting of shareholders of
Fairfax Financial Holdings Limited will be
held on Wednesday, April 14, 2004 at
9:30 a.m. (Toronto time) in Room 106 at the
Metro Toronto Convention Centre, 255
Front Street West, Toronto, Canada.

128