Fairfax Financial Annual Report 2011

← All annual reports

FY2011 Annual Report · Fairfax Financial

Loading PDF…

2011 Annual Report

Contents

Five Year Financial Highlights . . . . . . . . . . . . . . .

Corporate Profile . . . . . . . . . . . . . . . . . . . . . . . . . .

Chairman’s Letter to Shareholders . . . . . . . . . . .

Management’s Responsibility for the Financial

Statements and Management’s Report on

Internal Control over Financial Reporting . . .

Independent Auditor’s Report to the

Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . .

Valuation Actuary’s Report . . . . . . . . . . . . . . . . .

Fairfax Consolidated Financial Statements . . . .

Notes to Consolidated Financial Statements

. .

Management’s Discussion and Analysis of

Financial Condition and Results of

Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

118

Appendix – Fairfax Guiding Principles . . . . . . . .

206

Consolidated Financial Summary . . . . . . . . . . . .

207

Corporate Information . . . . . . . . . . . . . . . . . . . . .

208

2011 Annual Report

Five Year Financial Highlights(1)

Revenue

Net earnings

Total assets

Common shareholders’

equity

Common shares

outstanding – year-
end (millions)

Increase (decrease) in

book value
per share

Per share

Net earnings (loss)
per diluted share

Common

shareholders’ equity

Dividends paid

Market prices

(TSX –Cdn$)

High

Low

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

2011

2010

2009

7,475.0

5,967.3

6,635.6

45.1

335.8

856.8

2008

7,825.6

1,473.8

2007

7,510.2

1,095.8

33,406.9

31,448.1

28,452.0

27,305.4

27,941.8

7,427.9

7,697.9

7,391.8

4,866.3

4,063.5

20.4

20.5

20.0

17.5

17.7

(3.1)%

1.8%

32.9%

21.0%

53.2%

(0.31)

14.82

43.75

79.53

58.38

364.55

10.00

376.33

10.00

369.80

278.28

230.01

8.00

5.00

2.75

442.00

346.00

437.01

425.25

356.25

408.99

417.35

272.38

410.00

390.00

221.94

390.00

311.87

195.25

287.00

(1)

IFRS basis for 2011 and 2010; Canadian GAAP basis for 2009 and prior.

Please see the Consolidated Financial Summary on page 207, which shows
Fairfax’s financial highlights since inception in 1985.

F A I R F A X F I N A N C I A L H O L D I N G S L I M I T E D

Corporate Profile

Fairfax Financial Holdings Limited is a financial services holding company whose corporate objective is to
build long term shareholder value by achieving a high rate of compound growth in book value per share over the
long term. The company has been under present management since September 1985.

Canadian insurance

Northbridge Financial, based in Toronto, provides property and casualty insurance products through its
Northbridge Insurance and Federated subsidiaries, primarily in the Canadian market (Northbridge Insurance is the
combination of the former Commonwealth, Lombard and Markel subsidiaries). It is one of the largest commercial
property and casualty insurers in Canada based on gross premiums written. In 2011, Northbridge’s net premiums
written were Cdn$1,085.9 million. At year-end, the company had statutory equity of Cdn $1,158.9 million and
there were 1,504 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. Since
January 1, 2006, the specialty niche property and casualty and accident and health insurance business formerly
carried on by Fairmont Insurance is being carried on as the Fairmont Specialty division of C&F. In February 2011,
C&F acquired First Mercury, which offers insurance products and services primarily related to specialty commer-
cial insurance markets, focusing on niche and underserved segments. In 2011, C&F’s net premiums written were
US$1,076.9 million. At year-end, the company had statutory surplus of US$1,245.3 million and there were
1,575 employees.

Zenith National, based in Woodland Hills, California, is primarily engaged in the workers’ compensation
insurance business in the United States. In 2011, Zenith National’s net premiums written were US$524.2 million.
At year-end, the company had statutory surplus of US$620.4 million and there were 1,428 employees.

Asian insurance

First Capital, based in Singapore, writes property and casualty insurance primarily in Singapore markets. In
2011, First Capital’s net premiums written were SGD 157.0 million (approximately SGD 1.3 = US$1). At year-end,
the company had shareholders’ equity of SGD 327.7 million and there were 116 employees.

Falcon Insurance, based in Hong Kong, writes property and casualty insurance in niche markets in Hong Kong.
In 2011, Falcon’s net premiums written were HK$419.4 million (approximately HK$7.8 = US$1). At year-end, the
company had shareholders’ equity of HK$448.9 million and there were 79 employees.

Pacific Insurance, based in Malaysia, writes all classes of general insurance and medical insurance in Malaysia.
In 2011, Pacific Insurance’s net premiums written were MYR 106.8 million (approximately MYR 3.1 = US$1). At
year-end, the company had shareholders’ equity of MYR 213.2 million and there were 217 employees.

Other insurance

Fairfax Brasil, based in São Paulo, commenced writing insurance in March 2010 in all lines of business in Bra-
zil. In 2011, Fairfax Brasil’s net premiums written were BRL 37.2 million (approximately BRL 1.7 = US$1). At year-
end, the company had shareholders’ equity of BRL 60.4 million and there were 44 employees.

Reinsurance

OdysseyRe, based in Stamford, Connecticut, underwrites treaty and facultative reinsurance as well as specialty
insurance business, with principal locations in the United States, Toronto, London, Paris, Singapore and Latin
America. In 2011, OdysseyRe’s net premiums written were US$2,089.7 million. At year-end, the company had
shareholders’ equity of US$3,453.6 million and there were 761 employees.

Advent, based in the U.K., is a reinsurance and insurance company, operating through Syndicates 780 and 3330
at Lloyd’s, focused on specialty property reinsurance and insurance risks. In 2011, Advent’s net premiums written
were US$193.9 million. At year-end, the company had shareholders’ equity of US$142.0 million and there were
73 employees.

Polish Re, based in Warsaw, Poland, writes reinsurance business in the Central and Eastern European regions. In
2011, Polish Re’s net premiums written were PLN 258.5 million (approximately PLN 2.9 = US$1). At year-end, the
company had shareholders’ equity of PLN 251.6 million and there were 45 employees.

Group Re primarily constitutes the participation by CRC Re (now based in Barbados, formerly based in Bermu-
da) and Wentworth (based in Barbados) in the reinsurance of Fairfax’s subsidiaries by quota share or through par-
ticipation in those subsidiaries’ third party reinsurance programs on the same terms and pricing as the third party
reinsurers. Group Re also writes third party business.
In 2011, Group Re’s net premiums written were
US$180.7 million. At year-end, the Group Re companies had combined shareholders’ equity of US$337.5 million.

Runoff

The runoff business comprises the U.S. and the European runoff groups. At year-end, the runoff group had com-
bined shareholders’ equity (including amounts related to nSpire Re’s financing of Fairfax’s U.S. insurance and
reinsurance companies) of US$2,591.1 million.

The Resolution Group (TRG) and the RiverStone Group (run by TRG management) manage runoff under
the RiverStone name. At year-end, TRG/RiverStone had 166 employees in the U.S., located primarily in Man-
chester, New Hampshire, and 71 employees in its offices in the United Kingdom.

Other

Hamblin Watsa Investment Counsel, founded in 1984 and based in Toronto, provides investment manage-
ment to the insurance, reinsurance and runoff subsidiaries of Fairfax.

Notes:

(1) All of the above companies are wholly owned (except for 98%-owned First Capital).

(2) The foregoing lists all of Fairfax’s operating subsidiaries. The Fairfax corporate structure also includes a
41.4% interest in Gulf Insurance (a Kuwait insurance company), a 26.0% interest in ICICI Lombard (an
Indian property and casualty insurance company), a 15.0% interest in Alltrust (a Chinese property and
casualty insurance company), a 26.8% interest in Singapore Re, an approximate 20.0% interest in
Alliance Insurance (a Dubai, U. A. E. company), a 40.5% interest in Falcon Thailand, and investments in
Cunningham Lindsey (43.2%), The Brick (33.8%), Fibrek (25.8%), MEGA Brands (19.9%), Imvescor
Restaurant Group (13.6%), Prime Restaurants (81.7%, acquired in January 2012), Ridley (73.6%),
William Ashley (100.0%) and Sporting Life (75.0%). The other companies in the Fairfax corporate
structure, principally investment or intermediate holding companies (including companies located in
various jurisdictions outside North America), are not part of these operating groups; these other companies
have no insurance, reinsurance, runoff or other operations.

F A I R F A X F I N A N C I A L H O L D I N G S L I M I T E D

To Our Shareholders:

We marked time in 2011 as our book value per share was essentially flat (including the $101 per common share
dividend paid in 2011), mainly because of a record level of catastrophe claims. Book value ended the year at $365
per share, down from $376 per share at the end of 2010. Common shareholders’ equity was $7.4 billion, down
from $7.7 billion. We ended the year with approximately $1 billion in cash and marketable securities at the hold-
ing company level. Our results have always been lumpy but our long term results, measured by the increase in our
book value per share, have been excellent, as shown in the table below:

Compound Annual Growth in Book Value

As of December 31, 2011

5 years
19.4%

10 years
12.0%

15 years
12.4%

20 years
16.1%

From
Inception
23.5%

In 2011, our operating companies coped with losses from unprecedented natural disasters and continuing soft
market conditions. Catastrophe claims for the industry exceeded $105 billion, the most ever with the exception
of 2005 when Hurricanes Katrina, Rita and Wilma struck the United States. The year began with floods in
Australia ($2.3 billion) and a devastating earthquake in Christchurch, New Zealand ($12 billion). It continued in
March with the Tohoku earthquake and tsunami in Japan ($35 billion), followed in the spring with a series of
deadly tornadoes in the south and midwest regions of the United States ($14 billion). Hurricane Irene ($5 billion)
hit the eastern seaboard at the end of the summer, and finally, near year-end, unprecedented flooding ravaged
Thailand ($15 billion). All told, these events cost Fairfax approximately $1 billion, our largest catastrophe loss
year ever.

We have always sought to manage our exposure to catastrophe loss so that we don’t lose more than our expected
income for the year. Fortunately, in spite of the frequency and severity of the major natural disaster losses in
2011, we achieved that result, both at the individual companies and on a consolidated basis. We continue to
monitor our catastrophe exposure very carefully.

In our industry, catastrophes happen, they are unpredictable and they can destroy companies. Years ago (in our
2005 Annual Report), we discussed the plight of 20th Century Insurance which, in the Northridge earthquake,
basically lost the capital it had accumulated over 30 years. In 2011, Thai Re, which had had an outstanding track
record for over 20 years, suffered the same fate with the Thai floods (more on this later).

Our major catastrophe losses in 2011 are shown in the table below:

Japan Tohoku earthquake and tsunami
Thailand floods
U.S. tornadoes
New Zealand earthquake
Hurricane Irene
Australian floods
Other

Total

470
202
70
63
31
27
158

1,021

The $1 billion in catastrophe claims in 2011 cost us 19.3 percentage points on our combined ratio versus an
anticipated cost of approximately six percentage points in an average year. In 2005, Hurricanes Katrina, Rita and
Wilma cost us 15.3 combined ratio points. So why, you may ask, do we take on this business? Well, here is the

1 Amounts in this letter are in U.S. dollars unless specified otherwise. Numbers in the tables in this letter are in

U.S. dollars and $ millions except as otherwise indicated.

track record at OdysseyRe, the largest source of our catastrophe exposure, for all of its property business written
since 2000. This table shows the results for each underwriting year since 2000, and in total for all twelve years.

Gross premiums written
Combined ratio

2001
353

2000
136
78.9% 103.4% 75.3% 70.0% 101.5% 151.4% 63.1% 81.7% 90.5% 87.2% 127.5% 97.5% 96.7%

2011 Total
6,957

2002
491

2003
580

2004
629

2006
584

2008
637

2005
716

2007
616

2009
662

2010
755

798

As you can see, over the past twelve years OdysseyRe has written approximately $7 billion of property premium at
a cumulative combined ratio of 96.7%, notwithstanding the losses from the World Trade Center in 2001, the
Florida hurricanes in 2004, Hurrricanes Katrina, Rita and Wilma in 2005, Hurricanes Ike and Gustav in 2009, the
Chilean earthquake in 2010 and, of course, the string of disasters in 2011.

OdysseyRe is continually fine tuning its underwriting of this business, and is poised to benefit handsomely from a
much improved pricing environment for catastrophe risk. Nevertheless, be aware that whenever a major disaster
strikes, Fairfax will likely be affected.

Out of adversity, opportunity arises. In addition to the benefits of a rising rate environment, we have made an
important investment in the aforementioned Thai Re. From 1991 to 2010, Thai Re was run admirably by Surachai
Sirivallop. Over those years, Surachai averaged a combined ratio in the mid 80s. Following the 2011 flood losses
suffered by Thai Re, we have participated in a recapitalization, investing $70 million at 3 baht per share for a 25%
stake in the company. With two Board seats and an ability to help in the investment area, we are excited to be
Surachai’s partner for the long term.

We are very pleased that the Fairfax team throughout the organization continued to work very well together in
2011, with several smooth internal transitions and operational evolutions. Under Silvy Wright, a 16-year veteran
who became CEO of our Canadian operations after many years of excellent leadership by Mark Ram, Northbridge
Insurance was formed from the merger of our Canadian insurance companies, under the established Northbridge
name, to better serve our clients and brokers. Stanley Zax, with an outstanding record over more than 30 years,
moved to Chairman of Zenith National and passed the CEO title to Jack Miller, who has worked with Stanley for
14 years. At Crum & Forster, Doug Libby, along with Marc Adee, Richard Smith and Steve Strange Sr., successfully
integrated the operations of First Mercury and its AMC subsidiary. Jim Migliorini, who helped build Hudson
Insurance and was critical to many other projects at Fairfax before retiring three years ago, came back to run
Advent. Scott Donovan, who recently retired as CFO of OdysseyRe, returned to support our investment in China,
where Sam Chan has recently become President of Alltrust at Chairman Henry Du’s request. And Andy Barnard,
in the first year of his new role overseeing all of Fairfax’s insurance and reinsurance operations and working with
our presidents on strategy and coordination, has created a Fairfax Leadership Council, under his Chairmanship, of
Fairfax presidents and officers. I am excited about the possibilities in our insurance and reinsurance business
under Andy’s leadership.

The results of our major operating subsidiaries in 2011 are shown in the table below:

Northbridge
Crum & Forster
Zenith National
OdysseyRe
Fairfax Asia

Net
Earnings
(loss)
(86.8)
(1.8)
54.3
14.3
(6.9)

Return on
Average
Shareholders’
Equity
(5.3)%
(0.2)%
4.9%
0.4%
(1.6)%

Combined
Ratio
102.8%
107.9%
127.5%
116.7%
83.2%

On a consolidated basis, Fairfax posted a combined ratio of 114.2% in 2011, including a 19.3% charge for catas-
trophe claims. Various of our companies have faced continuing challenges from the prolonged soft market and in
2011 earnings were also affected by mark to market accounting. That’s the bad news. On the positive side, we see
signs of improvement ahead. Rates in most classes are either stabilizing or going up – and we are growing again!
Net premiums written were up 23.4% – 10.9% excluding acquisitions. Crum & Forster, excluding First Mercury,
was up 14.4% and Zenith National (acquired in May 2010) was up 27.4% in the second half of 2011. Fairfax Asia
(excluding Malaysia) was up 13.6%. As business becomes more attractive, we have the ability across our group of

F A I R F A X F I N A N C I A L H O L D I N G S L I M I T E D

companies to materially expand our writings. Our companies are currently writing business at a rate of only 0.67
times policyholders’ surplus, versus a capacity of 1.5 times or higher. The costs of the unprecedented catastrophes
of 2011, record low interest rates and the dwindling reservoir of reserve redundancies from the hard market, will
force pricing to improve. We may still be a year or two away from a genuine broad based hard market, but that
time is drawing nearer.

In spite of 2011, all four of our operating subsidiaries which we have owned for some time (we only acquired
Zenith in 2010) have compounded book value over the past 10 years (adjusted by including distributions to
shareholders) at attractive rates, as shown in the table below:

Northbridge
Crum & Forster
OdysseyRe
Fairfax Asia(2)

2001 – 2011
Compound Annual
Growth Rate(1)
14.7%
14.4%
18.3%
22.0%

(1) Based on IFRS or U.S. GAAP, except Crum & Forster, which is based on statutory surplus.

(2) 2002 – 2011, as Fairfax Asia began in 2002 with the purchase of First Capital.

The table below shows you how our international operations have grown since we began with Falcon in Hong
Kong in 1998:

Fairfax International Operations as of and for the Year Ended December 31, 2011

Shareholders’
Equity

Gross
Premiums
Written

Investment
Portfolio

Fairfax
Ownership

Shareholders’
Equity

Gross Premiums
Written

Fairfax Share

Fairfax Asia

Falcon Insurance (Hong Kong)

Pacific Insurance (Malaysia)

First Capital (Singapore)

Falcon Thailand(1)

ICICI Lombard (India)(1)(2)

Insurance – Other

Fairfax Brasil

Alliance Insurance (Dubai)

Gulf Insurance (Kuwait)(1)

Alltrust Insurance (China)(2)(3)
Reinsurance – Other

Advent Capital (United Kingdom)

Polish Re

57.8

42.9

252.7

8.7

66.8

51.9

347.6

21.3

131.4

81.2

521.8

25.0

258.1

1,168.1

1,170.5

32.4

87.9

238.8
250.2

142.0

57.8

102.8

76.3

484.3
817.1

326.1

105.2

62.5

246.0

490.0
717.9

584.2

129.9

100%

98%

41%

26%

100%

20%

41%
15%

100%

Total International Operations

1,429.3

3,567.5

4,160.4

(1) These associated companies are carried on an equity accounted basis.

(2) All dollar amounts are as at or for the 12 months ended September 30, 2011.

(3) Alltrust is carried at fair value.

57.8

42.9

247.6

3.6

67.1

32.4

17.6

97.9
37.5

142.0

57.8

804.2

66.8

51.9

340.6

8.7

303.7

102.8

15.3

198.6
122.6

326.1

105.2

1,642.3

As you will note, our international operations have $1.4 billion in shareholders’ equity (of which Fairfax’s share is
$0.8 billion), gross premiums written of $3.6 billion (of which Fairfax’s share is $1.6 billion) and an investment
portfolio of $4.2 billion. The majority of these operations are in emerging market countries with huge long term
potential because of very low insurance penetration and significant GDP growth potential. Particular praise is
owed our Mr. Athappan, who runs First Capital Insurance in Singapore, as well as overseeing all of our interests in
the Asian markets through Fairfax Asia. Mr. Athappan’s underwriting acumen is truly extraordinary, as he has

successfully dodged the major market losses and posted large underwriting profits year after year. Bijan Khosrow-
shahi and Jacques Bergman have also distinguished themselves overseeing our activities in the Middle East and
Brazil respectively. Working closely with Jean Cloutier and Andy Barnard, these three gentlemen are actively
developing an exciting future for us outside of North America.

A summary of our 2011 investment results is shown in the table below:

Equity and equity-related
Equity hedges

Net equity
Bonds
CPI-linked derivatives
Other

Total

Realized
Gains
(losses)
703
–

Unrealized
Gains
(losses)
(1,496)
414

703
425
–
(40)

(1,082)
854
(234)
65

Net
Gains
(losses)
(793)
414

(379)
1,279
(234)
25

1,088

(397)

691

We have isolated the realized gains for the year and shown separately the unrealized fluctuations in common
stock, bond and CPI-linked derivative prices. With IFRS accounting, these fluctuations, although unrealized, flow
into the income statement and balance sheet, necessarily producing lumpy results (the real results can only be
seen over the long term). This table is updated for you in every quarterly report and we discuss it every year in our
Annual Report.

In 2011, we earned a total investment return of only 6.4% (versus an average of 10.6% over the past five years and
9.6% over our 26-year history), because our common stock portfolios performed poorly – particularly at RIM (I am
trying to help!), Resolute (the former AbitibiBowater), Bank of Ireland and Level 3. Also on a mark to market basis,
our deflation hedges dropped by 50%, but they have another nine years to go! As we review our common stock
portfolios, we believe these stock price declines are predominantly fluctuations and will be reversed over time –
but with IFRS requiring mark to market accounting, these fluctuations make our results very volatile. Let me illus-
trate this with our Bank of Ireland stock: we purchased it in 2011 for 10¢ per share, the stock was valued at
8.3¢ per share on December 31, 2011, and in early 2012 it traded up to 15¢ per share.

Our fixed income results were extraordinary, with the unrealized losses from our municipal bond portfolio revers-
ing in 2011 and our long treasury bond portfolio performing very well – in spite of our purchase of some Greek
bonds!! We sold half our long treasury bond portfolio in 2011, realizing a gain of $271 million.

Our cumulative net realized and unrealized gains since we began in 1985 have amounted to $11 billion. These
gains, while unpredictable, are a major source of strength to Fairfax as they add to our capital base and have
financed our expansion. As we have explained many times before, the unpredictable timing of these gains makes
our quarterly (or even annual) earnings and book value quite volatile, as we saw again in 2011:

First quarter
Second quarter
Third quarter
Fourth quarter

Earnings (loss)
per Share
$(12.42)
3.40
46.73
(38.47)

Book Value
per Share

$355 ($376 as of December 31, 2010)

359
403
365

No quarterly (or yearly) guidance from us!

The investment section in the MD&A gives you a lot more detail on our long term investment record.

F A I R F A X F I N A N C I A L H O L D I N G S L I M I T E D

Our long term equity holdings, disclosed last year, continue to be effectively the same, with the exception of Kraft
which we sold:

Wells Fargo
Johnson & Johnson
US Bancorp

As of December 31, 2011

Shares Owned
(millions)
20.0
7.4
15.9

Cost per
Share
$19.36
61.37
16.27

Amount
Invested
388
454
259

Market
Value
552
485
428

As we discussed with you in the past, these are three of the finest companies in the world, and we continue to be
very optimistic on the long term prospects for these companies.

As an example of our long term value investing approach and the need to be patient and calm through adverse
market fluctuations, in the table below we show you the results of our purchase and sale of shares of International
Coal. This is a company of which Wilbur Ross was Chairman and owned 16%. Our Sam Mitchell, who originated
this purchase idea, joined the Board in 2008, after we had acquired 13.8% of the shares.

Purchases of International Coal

Sales of International Coal

Number
of Shares
(millions)
1.4
19.7
9.1
15.0

Cost
per
Share
$4.58
4.39
1.81
2.87

Total
Cost
6.4
86.3
16.5
43.1

45.2

$3.37

152.3

Number
of Shares
(millions)

Proceeds
per
Share

Total
Proceeds

22.6
22.6

45.2

$ 7.26
14.60

$10.93

163.9
329.6

493.5

2006
2007
2008
2009
2010
2011

Total

Total realized gain:

341.2

The table shows how we averaged down from our initial cost of $4.58 per share to an average cost of $3.37 per
share. We sold half our position at $7.26 per share (a 115% gain) and only five months later, there was a takeover
offer for the whole company at double that price. In spite of not buying only at the low and not selling only at
the high, we earned $341.2 million by selling at over three times our cost. Our experience with International Coal
is exactly what we have done over 35 years of investing – average down when buying and average up when sell-
ing! An added advantage in this case – we got to know Wilbur and he is an excellent partner.

I have attended the Berkshire Hathaway shareholders’ meeting since there were only 200 shareholders in attend-
ance about 30 years ago. I still find I learn something each year from Warren and Charlie. At the meeting in 2010,
I met Bill McMorrow through Alan Parsow, who is a money manager based in Omaha and a great friend. Bill
founded Kennedy Wilson, a real estate services and investment company, in 1988, and he now owns 26% of the
company. As a result of this meeting, we invested $100 million in a Kennedy Wilson 6% preferred convertible at
$12.41 per share, and later purchased $32.5 million of a 6.45% preferred convertible at $10.70 per share and
400,000 common shares at $10.70 per share. Fully diluted we own 18.5% of the company. In 2010 and 2011, we
also invested $290 million in several real estate deals with Kennedy Wilson in California, Japan and the U.K. –
deals at significant discounts to replacement cost and with excellent unlevered cash on cash returns, in which
Kennedy Wilson is the managing partner and a minority investor. We are thrilled to be partners with Bill and his
team, who always focus on the downside and have the expertise to manage these investments and finally harvest
them. You never know what you will find at a Berkshire meeting!!

And there is more to the McMorrow story. While Bill was negotiating the purchase of some real estate loans from
Bank of Ireland, he was really impressed with Ritchie Boucher, the Bank’s CEO. Bill introduced Ritchie to us, and

we too were very impressed. With the help of our friends at Canadian Western Bank, one of the best banks in
Canada, we thoroughly reviewed the opportunity and then quickly formed an investment group with Wilbur
Ross, Mark Denning from Capital Research and Will Danoff at Fidelity, which purchased $1.6 billion of Bank of
Ireland shares on a rights issue (Fairfax’s share was $387 million). This issue reduced the Irish government’s stake
in Bank of Ireland from 36% to 15%. In spite of having hundreds of years of history and the strongest credit cul-
ture in the country, Bank of Ireland barely survived the real estate crisis in Ireland, where both house prices and
commercial real estate prices dropped by approximately 50% from their highs. It is the only major Irish bank to
survive that crisis – the rest of the Irish banking industry is now government owned. The rights issue plus other
capital generated by Bank of Ireland has resulted in the Bank having capital to withstand an even further drop in
Irish commercial real estate prices and Irish house prices. Bank of Ireland is very strongly capitalized, led by an
excellent banker, Ritchie Boucher, and its shares were available at a significant discount to book value. We look
forward to being long term shareholders of Bank of Ireland and hope to make more investments in that country
as it continues under strong leadership diligently remedying its economic problems. Ireland by the way is a lead-
ing location of choice for foreign direct investment because of its talent, tax regime and technology capabilities
together with its unique pro-business environment. Our nSpire Re subsidiary has been in Dublin since 1990 and
was a great help in making our decision to invest in Bank of Ireland.

One more story about an extraordinary entrepreneur that Sam Mitchell identified for us: Tom Ward. Tom spent
more than 23 years helping build Chesapeake Energy to become one of the largest natural gas producers in the
U.S. In 2006, Tom took his gains from Chesapeake and reinvested them in a new company which ultimately
became SandRidge Energy. After a few acquisitions, that company became a sizeable natural gas producer. In
2008, in an extraordinary move, Tom decided that because of the huge discoveries of shale gas, he would hedge
all of SandRidge’s natural gas at over $8/mcf through 2010 and would shift to oil by making two oil company
acquisitions. Today, SandRidge Energy is predominantly an oil producer with natural gas production capability
when the price of natural gas rises. More recently, Tom made another very accretive offshore oil acquisition at a
very good price and immediately financed it. We have a total investment of $329 million in SandRidge, including
just under $300 million in convertible preferreds. We particularly like the fact that Tom has hedged most of
SandRidge’s oil production for the next three to four years at about $100 per barrel. I don’t think there is any
other company in the oil and gas industry that has done that. We are very excited to be Tom’s partner.

In our 2010 Annual Report, I mentioned that given our normalized annual holding company free cash flow of
$0.5 to $1.0 billion, we would be open to opportunities to invest any excess above our dividend payout and our
expansions in the insurance/reinsurance business worldwide in excellent companies which generate strong free
cash flows, with a commitment to the founders that their companies would always be part of the Fairfax family
and would never be sold. Well, to our surprise, we found two such companies in 2011: William Ashley and Sport-
ing Life.

William Ashley, with its flagship store in Toronto, is North America’s leading retailer of fine china, crystal, silver
and giftware. Founded 64 years ago by Tillie Abrams (who passed away at the age of 98 in 2010) and known for its
outstanding customer service, great prices and wide selection, the original 700 square foot store has expanded to
the current 24,000 square foot Bloor Street location. For 36 years, William Ashley has also been known for its
annual public warehouse sale, the biggest and best in Toronto. We bought William Ashley from the Stark family,
who are the children and grandchildren of the founder. Jackie Chiesa, hired by the founder in 1981 and trained
by her in all aspects of the business, has been running William Ashley for the past ten years. We welcome Jackie
and all the employees of William Ashley to the Fairfax family and encourage all our shareholders to experience
the outstanding service and excellent prices at William Ashley, which is located at 55 Bloor Street West, Toronto
(www.williamashley.com).

Sporting Life is another of Toronto’s great success stories. Founded by Brian McGrath and David and Patti Russell
over 32 years ago, Sporting Life sells high end sporting goods with top quality service. The story goes that years
ago, a customer came to Sporting Life for a refund on a defective toaster they said they had purchased at the store.
Unable to convince the customer that the store had never sold toasters, Sporting Life gave the customer a refund!
The customer is always right at Sporting Life!! The company has grown from a single small outlet in 1979 to four
stores with more than 600 employees. We purchased 75% of the company, with 25% remaining with the founders
who continue to run the company with no interference from us. So if you want to be treated like kings and queens
of the outdoors, please visit Sporting Life, which is located at 2665 Yonge Street, Toronto (www.sportinglife.ca). We
welcome Brian, David and Patti and all the employees of Sporting Life to the Fairfax family.

F A I R F A X F I N A N C I A L H O L D I N G S L I M I T E D

Below we update the table on our intrinsic value and stock price. As discussed in previous Annual Reports, we use
book value as a first measure of intrinsic value.

1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011

INTRINSIC VALUE
% Change in US$
Book Value per Share
+ 180
+ 48
+ 31
+ 27
+ 41
+ 24
+ 1
+ 42
+ 18
+ 25
+ 63
+ 36
+ 30
+ 38
-5
-21
+ 7
+ 31
-1
-16
+ 9
+ 53
+ 21
+ 33
+ 2
-3

STOCK PRICE
% Change in
Cdn$ Price per Share
+ 292
-3
+ 21
+ 25
-41
+ 93
+ 18
+ 145
+ 9
+ 46
+ 196
+ 10
+ 69
-55
-7
-28
-26
+ 87
-11
-17
+ 38
+ 24
+ 36
+ 5
0
+ 7

1985-2011(compound annual growth)

+ 23.5%

+ 20.7%

You will note from the table that on an annual basis there is no correlation between growth in book value and
increase in stock price. However on a long term basis, our common stock price has compounded at approximately
the same rate as our book value per share has compounded (as you know, our book value is in U.S. dollars as our
financial statements are in U.S. dollars, and our common stock price is in Canadian dollars as our shares trade
predominantly in Canadian dollars on the Toronto Stock Exchange). Stock price compound rates are higher or
lower than book value growth rates because of the year-ending price to book value ratio, and the year-ending
value of the Canadian dollar in relation to the U.S. dollar, being higher or lower than when we began in 1985.
When we began, our Canadian dollar stock price was $3 1⁄4 and our U.S. dollar book value per share was $1.52.
The Canadian dollar exchange rate was US 75¢ at that time, and the price to book value ratio in U.S. dollars was
1.6 times. Today the Canadian dollar is at par with the U.S. dollar and the price to book value ratio in U.S. dollars
is 1.1 times. If the Canadian dollar exchange rate was still US 75¢ and the price to book value ratio in U.S. dollars
still 1.6 times, then the compound growth in book value per share and in our common stock price would be the
same (also our stock price would be $778!!).

Our stock price is currently reflecting the short term volatility of earnings rather than the buildup of long term
intrinsic value. We think you will see the long term intrinsic value being reflected in time (we hope!!).

Insurance and Reinsurance Operations

The table below shows the combined ratios and the recent growth of our insurance and reinsurance operations:

Combined Ratio
Year Ended December 31,

Net Premiums Written
% Change in

Northbridge
Crum & Forster
Zenith National
OdysseyRe
Fairfax Asia
Other insurance and reinsurance

2011

2010

2009
102.8% 106.9% 105.9%
107.9% 109.2% 104.1%
–
127.5% 136.4%
96.7%
95.0%
116.7%
82.6%
89.3%
83.2%
98.1%
140.9% 107.2%

Consolidated

114.2% 103.5%

99.8%

(1) Reflects a reduced internal quota share from CRC Bermuda.

(2) Second half of 2011 versus second half of 2010, as Zenith National was acquired in May 2010.

All of our companies are well capitalized, as shown in the table below:

2011
11.5%(1)
46.8%
27.4%(2)
12.7%
35.8%
(8.7)%

23.4%

Northbridge
Crum & Forster
Zenith National
OdysseyRe
Fairfax Asia

(1) IFRS total equity.

As of and for the Year Ended
December 31, 2011

Net
Premiums
Written
1,098.5
1,076.9
524.2
2,089.7
213.7

Statutory
Surplus
1,138.2
1,245.3
620.4
3,453.6(1)
458.4(1)

Net
Premiums
Written/
Statutory
Surplus
1.0x
0.9x
0.8x
0.6x
0.5x

As mentioned previously, on average we are writing at about 0.67 times net premiums written to surplus. In the
hard markets of 2002-2005 we wrote, on average, at 1.5 times. We have huge unused capacity currently and our
strategy during times of soft pricing is to be patient and be ready for the hard markets to come.

The accident year combined ratios of our companies from 2002 onwards is shown in the table below:

Northbridge
Crum & Forster
OdysseyRe
Fairfax Asia

2002 – 2011

Cumulative Net
Premiums Written
($ billions)
Cdn 11.0
9.0
20.6
0.9

Average
Combined
Ratio
96.4%
100.3%
93.6%
87.4%

The table, comprising a full decade with a hard and soft market and the unprecedented catastrophe losses in 2005
and 2011, demonstrates the quality of our insurance and reinsurance companies. It shows you the cumulative
business each company has written in the past ten years and each company’s average accident year combined
ratio during those ten years. The results are excellent – but there is no complacency as our presidents continue to
focus on developing competitive advantages that will ensure these combined ratios are sustainable through the
ups and downs of the insurance cycle.

F A I R F A X F I N A N C I A L H O L D I N G S L I M I T E D

The table below shows the average annual reserve redundancies for our companies for business written from 2002
onwards:

Northbridge
Crum & Forster
OdysseyRe
Fairfax Asia

2002 – 2010
Average Annual
Reserve
Redundancies
7.6%
8.0%
9.3%
6.2%

The table shows you how our reserves have developed for the nine accident years prior to 2011. Northbridge has
had an average redundancy of 7.6% – i.e., if reserves had been set at $100 for any year between 2002 and 2010,
they would have come down on average to $92.40, showing redundant reserves of $7.60. On a comparable basis,
Crum & Forster had an average reserve redundancy of 8.0%, OdysseyRe, 9.3% and Fairfax Asia, 6.2% (First Capital
alone was 9.6%). We are very pleased with this reserving record, but given the inherent uncertainty in setting
reserves in the property and casualty industry, we continue to be very focused on being conservative in our
reserving process. More on our reserves in the MD&A.

Runoff

We had another excellent year in our runoff operations, as shown in the table below:

Pre-tax income – runoff operations

2007
187.6

2008
392.6

2009
31.2

2010
164.8

2011
351.6

We earned $351.6 million of pre-tax income in our runoff operations in 2011, the fifth consecutive year of profit-
ability. On a cumulative basis, we earned $1.1 billion of pre-tax income in those operations over the last five
years. Those operations, including acquisitions, are running off well under the fine leadership of Nick Bentley and
his team. You can see why we are big fans of our runoff operations.

We have updated the float table that we show you each year for our insurance and reinsurance companies:

Underwriting
Profit (loss)

Average
Float

Benefit
(cost)
of Float

Average Long
Term Canada
Treasury Bond
Yield

1986

2.5

21.6

11.6%

2007
2008
2009
2010
2011
Weighted average since inception
Fairfax weighted average financing differential since inception: 1.9%

238.9
(280.9)
7.3

8,617.7
8,917.8
9,429.3
(236.6) 10,430.5
(754.4) 11,315.1

2.8%
(3.1)%
0.1%
(2.3)%
(6.7)%
(2.8)%

9.6%

4.3%
4.1%
3.9%
3.8%
3.3%
4.7%

Float is essentially the sum of loss reserves, including loss adjustment expense reserves, and unearned premium
reserves, less accounts receivable, reinsurance recoverables and deferred premium acquisition costs. As the table
shows, the average float from our operating companies increased 8.5% in 2011 at a cost of 6.7%. That increase is
mainly due to the acquisitions in 2011 and internal growth. Our long term goal is to increase the float at no cost,
by achieving combined ratios consistently at or below 100%. This, combined with our ability to invest the float
well over the long term, is why we feel we can achieve our long term objective of compounding book value per
share by 15% per annum over the long term.

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

Canadian
Insurance
1,887.4
1,739.1
2,052.8
2,191.9
2,223.1

U.S.
Insurance
1,812.8
2,125.1
2,084.5
2,949.7
3,207.7

Asian
Insurance
86.9
68.9
125.7
144.1
387.0

Reinsurance –
OdysseyRe
4,412.6
4,398.6
4,540.4
4,797.6
4,733.4

2007
2008
2009
2010
2011

Insurance
and
Reinsurance –
Other
577.8
726.4
997.0
977.3
1,018.4

Total
Insurance
and
Reinsurance Runoff

Total
8,777.5 1,770.5 10,548.0
9,058.1 1,783.8 10,841.9
9,800.4 1,737.0 11,537.4
11,060.6 2,048.9 13,109.5
11,569.6 2,829.4 14,399.0

In the past five years our float has increased very substantially, by 36.9%, due to acquisitions and increases in
premiums. The increase in U.S. Insurance and Asian Insurance floats reflects the First Mercury and the Pacific
Capital acquisitions respectively. We expect internal growth of our float in 2012, reflecting the growth in our
business.

At the end of 2011, we had approximately $707 per share in float. Together with our book value of $365 per share
and $122 per share in net debt, you have approximately $1,194 in investments per share working for your long
term benefit – about 5% higher than at the end of 2010.

The table below shows the sources of our net earnings. This table, like various others in this letter, is set out in a
format which we have consistently used and we believe assists you in understanding Fairfax.

Underwriting
Insurance

– Canada (Northbridge)

– U.S. (Crum & Forster and Zenith National)

– Asia (Fairfax Asia)

Reinsurance – OdysseyRe
Insurance and Reinsurance – Other

Underwriting profit (loss)
Interest and dividends – insurance and reinsurance

Operating income (loss)
Net gains (losses) on investments – insurance and reinsurance
Loss on repurchase of long term debt
Runoff
Other
Interest expense
Corporate overhead and other

Pre-tax income
Income taxes

Net earnings

Attributable to:

Shareholders of Fairfax
Non-controlling interests

2011

2010

(30.2)

(215.9)

34.4
(336.0)
(206.7)

(754.4)
517.9

(236.5)
204.6
(104.2)
360.5
13.3
(214.0)
(32.4)

(8.7)
56.5

47.8

(68.3)

(165.5)

16.6
95.1
(38.4)

(160.5)
559.4

398.9
(8.3)
(2.3)
135.5
10.4
(195.5)
(187.6)

151.1
186.9

338.0

45.1
2.7

47.8

335.8
2.2

338.0

The table shows the results from our insurance and reinsurance (underwriting and interest and dividends), runoff
and non-insurance operations (Other shows the pre-tax income before interest of Ridley and William Ashley). Net
gains on investments other than at runoff and the holding company are shown separately to help you understand
the composition of our earnings. The underwriting loss in 2011 was significantly impacted by catastrophe losses
of $1,021 million. After interest and dividend income, we had an operating loss of $236.5 million because of the

F A I R F A X F I N A N C I A L H O L D I N G S L I M I T E D

large losses from catastrophes. Runoff was profitable again for the fifth year in a row. Corporate overhead and
other includes $98.5 million of net gains on investments. Net earnings in 2011 and 2010 benefitted from tax
recoveries of $56.5 million and $186.9 million respectively. (See more detail in the MD&A.)

Financial Position

Holding company cash, short term investments and marketable securities, net of

short sale and derivative obligations

Holding company debt
Subsidiary debt
Other long term obligations – holding company

Total debt

Net debt

Common shareholders’ equity
Preferred equity
Non-controlling interests

Total equity

Net debt/total equity
Net debt/net total capital
Total debt/total capital
Interest coverage
Interest and preferred share dividend coverage

As of December 31,

2011

2010

962.8

1,474.2

2,080.6
623.9
314.0

1,498.1
919.5
311.5

3,018.5

2,729.1

2,055.7

1,254.9

7,427.9
934.7
45.9

7,697.9
934.7
41.3

8,408.5

8,673.9

24.4%
19.6%
26.4%
1.0x
0.7x

14.5%
12.6%
23.9%
1.8x
1.4x

We ended 2011 in a very strong financial position. We held cash and marketable securities at the holding com-
pany of approximately $1 billion. During the year, we successfully tendered for $658 million of our subsidiary
and holding company debt and refinanced the repurchased debt with proceeds from two less costly, longer
maturing debt issues at the holding company: $500 million at 5.80% due 2021 and Cdn$400 million at 6.40%
due 2021. The coupons we paid were the lowest in our history. We have minimal near term bond maturities.

Investments

The table below shows the time-weighted compound annual returns (including equity hedging) achieved by
Hamblin Watsa Investment Counsel (HWIC), Fairfax’s wholly-owned investment manager, on stocks and bonds
managed by it during the past 15 years for our companies, compared to the benchmark index in each case:

Common stocks (with equity hedging)

S&P 500
Taxable bonds

Merrill Lynch U.S. corporate (1-10 year) bond index

5 Years
8.7 %
(0.2)%
13.3 %
6.0 %

10 Years
15.8%
2.9%
12.5%
5.8%

15 Years
14.2%
5.5%
10.4%
6.3%

2011 was a disappointing year for HWIC’s investment results, as discussed earlier, because of the poor perform-
ance of our common stock portfolio. Some stock prices declined by more than 50% from our initial purchase
price, but as the table earlier in this letter on our purchase of International Coal illustrates, we use such declines
to average down since we believe the intrinsic values of the stocks that we own continue to hold up very well.
While 2010 was also a poor year, in the last five years HWIC averaged a 10.6% total return on our investment
portfolio.

We continue to fully hedge our common stock portfolios as our concerns about the United States discussed in our
2010 Annual Report persist, and have been magnified by the financial crisis in Europe, including the underlying
austerity programs, and the recent bursting of the Chinese real estate bubble.

As for the United States, as we have discussed many times before, if we thought the 2008/2009 great contraction was
like any other recession the U.S. has experienced in the past 50 years, we would not be hedging today. However, we
continue to worry that the North American economy may experience a time period like the U.S. in the 1930s and
Japan since 1990, during which nominal GDP remains flat for ten plus years with many bouts of deflation. To
combat the great contraction of 2008/2009, the U.S., as well as Europe and most countries in the world, went “all
in” with huge stimulus programs. They have no ammunition left now and austerity is the slogan of the day,
worldwide! While the Fed continues its many quantitative easing programs and the ECB and others follow suit, the
key question in our minds is whether the central banks can get consumers and businesses to stop deleveraging and
perhaps releverage again – given the very high leverage they begin with. Total private debt as a percentage of GDP
in the U.S. has just begun to come down from levels even higher than the 1930s.

As for Europe, 2011 laid bare the leverage there, with the assets of its banking system being 2.6 times its GDP.
France’s top five banks, for example, have assets of $9 trillion versus a GDP of $2.7 trillion for France. Much of the
assets of the French banking system (and other countries in Europe) are financed by “wholesale” funds as opposed
to stable retail deposits. Today, while we think this is very unlikely, there is the possibility of the Euro breaking
apart, with disastrous consequences to the world economy.

All of this reminds us of the late 1980s in Japan, when it was reported that Japanese housewives were buying
stocks with grocery money. For the last ten years, after the Nikkei Dow Jones came down by 75% from its high,
the Japanese housewives have been keeping their money in Japanese government bonds or in bank deposits yield-
ing less than 1%. The point is, the psychology changed in Japan, and the question today is whether the same
thing has happened in the U.S. and Europe after the great contraction in 2008/2009. With house prices down by
almost half and lots of concern over unemployment and the economy, the question is, has the psychology
changed in the U.S. towards saving and away from spending. Only time will tell but it is an area we continue to
monitor closely.

As for China, late in 2011 the Chinese bubble in real estate burst. Developers have reduced prices by 25%+ to sell
apartments in Shanghai – causing riots by angry buyers who paid full price. Expect apartment prices in China to
come down significantly in the next few years. This may result in a hard landing in China, again with major
consequences for the world economy. As the table below shows, the parabolic increase in commodity prices has
stalled in 2011 and many commodities like copper have begun to decline:

Oil – $/barrel
Copper – $/lb.
Nickel – $/lb.
Wheat – $/bushel
Corn – $/bushel
Cotton – $/lb.
Gold – $/oz.

2010
91
4.35
11.23
7.94
6.29
1.45
1,405

2011
99
3.45
8.49
6.53
6.47
0.92
1,531

Cotton is down 37% and may be a harbinger of what is to come!

Of course if commodities, particularly oil and metals, come down, Canada will not be spared. Canada has benefit-
ted greatly from the commodity boom and our housing sector, particularly in Toronto and Vancouver, has gone
up very significantly. As George Athanassakos, Chair of the Ben Graham Centre for Value Investing at the Richard
Ivey School of Business, said in his recent article in the Globe and Mail, this time is not different for Canada’s
housing bubble. There are more condos in construction in Toronto than in the 12 major cities in the U.S. com-
bined, including New York and Los Angeles!! Caveat emptor if you own many houses or condos in Canada.

F A I R F A X F I N A N C I A L H O L D I N G S L I M I T E D

Yet optimism continues to prevail in the financial markets as corporate spreads are back to levels prior to the great
contraction in 2008 and stock markets are rallying on hopes of repeating the increases from the 2008/2009 bot-
toms. Record high profit margins on the S&P 500 are being extrapolated into the future, but they may well regress
to the mean. We have a mini-tech bubble in progress similar to the one we witnessed in 1999/2000, as shown in
the table below:

Facebook (estimated)
Groupon
Zynga
LinkedIn
Renren
Pandora Media
Demand Media
Zillow

Market Cap
at IPO Price
($ billions)
75
13
7
7
5
2.5
1.4
0.5

Price/
Revenue
23.6x
9.9x
6.8x
15.9x
71.7x
15.3x
5.9x
14.8x

Price/
Earnings
72.4x
64.3x
46.3x
120.7x
Loss
Loss
54.1x
69.2x

Given interest rates at close to absolute zero and no fiscal stimulus bullets available in the western world, we con-
tinue to maintain our 100% equity hedge. Ben Graham’s observation that “only 1 in 100 survived the 1929-1932
debacle if one was not bearish in 1925” continues to ring in our ears!

Our Muni bond portfolio, predominantly guaranteed by Berkshire Hathaway, had an excellent year in 2011,
reversing the declines of 2010, as shown in the table below:

Cost of U.S. tax exempt Muni bond portfolio
Market value
Unrealized gain

Cost of U.S. taxable Muni bond portfolio
Market value
Unrealized gain (loss)

As of December 31,

2009
3,991.5
4,550.2
558.7

1,014.6
947.4
(67.2)

2010
4,118.5
4,358.9
240.4

1,072.9
1,066.6
(6.3)

2011
4,194.5
4,883.9
689.4

1,123.8
1,317.6
193.8

2008
3,966.8
4,104.6
137.9

–
–
–

The cumulative unrealized gain on our Muni bond portfolio at December 31, 2011 was $883.2 million, after we
received during the year tax-free interest of $240.0 million and taxable interest of $80.6 million. Our Muni bond
portfolio continued to appreciate in early 2012.

While we are concerned about the next few years as we digest the excesses of the past 20 years, we are very bullish
on common stocks for the long term, as shown in the table below:

Annualized Compound Return

One Year

Five Year

Ten Year

Fifteen Year

Twenty Year

Barclays Capital 30yr Bellwether
S&P 500

35.6%
2.1%

11.2 %
(0.3)%

8.8%
2.9%

8.3%
5.5%

8.0%
7.8%

Long treasuries have outperformed common stocks over the last 20 years as rates have declined from 7.4% in
1991 to 2.9% in 2011. This will not be repeated in the next ten years. The game is over for long treasuries
(almost!). Even if the rates go to zero, long treasuries can provide a compound annual return of only 6% in the
next ten years compared to twice that by stocks, if we assume no change in P/E multiples and historical earnings
growth. If P/E ratios revert back to their mean, shares of companies like Johnson & Johnson can provide com-
pound growth rates of 20%+ in the next decade. We have already sold half our long treasury position at a yield to
maturity of 3.0% (realizing a gain of $271 million) and we expect to sell the remaining soon. In time, we will
remove our equity hedges as the risks that we see get discounted in common stock prices. The major risks we see
are in the next three years, as we expect common stocks to do very well in the next decade.

In our 2010 Annual Report, we described to you our CPI-linked derivative contracts. As we said there, for a small
amount of money we have significantly protected our company from the ravages of potential deflation. The fact
that our $421 million investment in these contracts is down 50% on a mark to market basis reminds us of our
CDS experience, which started (and we think might end) the same way.

Here’s an update on our CPI-linked derivatives position:

Underlying CPI Index

U.S.
European Union
U.K.
France

Notional Amount
($ billions)
18.2
26.5
0.8
1.0

Weighted Average
Strike Price (CPI)
216.95
109.74
216.01
120.09

December 31, 2011
CPI
225.67
113.91
239.40
123.51

46.5

The remaining average term on these contracts is 8.6 years. We will only benefit if deflation causes the CPI indices
to go below our strike prices. Low-cost insurance again! As we reminded you last year, cumulative deflation in
Japan in the past 10 years and in the United States in the 1930s was approximately 14%.

In 2011, we had net investment gains of $691 million, which consisted principally of net gains on fixed income
securities of $1,279 million, partially offset by net losses of $379 million on common stocks and equity-related
investments (after a gain of $414 million on our hedges) and net losses on CPI-linked derivatives of $234 million.
The net gains on fixed income securities consisted of net realized gains of $425 million (including $271 million
from the sale of half of our long treasury bond positions and $46 million from Canadian provincial bonds) and
net unrealized mark to market gains of $854 million (predominantly $718 million from long U.S. treasury bonds,
$449 million from tax exempt U.S. Muni bonds and $195 million from taxable U.S. Muni bonds, partially offset
by a net unrealized mark to market loss of $319 million from other governments and $189 million from
corporates). The net losses from equities consisted of realized gains of $703 million (the largest being $244 mil-
lion, or a 283% gain, from International Coal) and unrealized mark to market losses of $1.5 billion from our
common stock portfolios, partially offset by a gain on our equity-related hedges of $414 million.

Our net unrealized gains (losses) over cost by asset class at year-end were as follows:

Bonds
Preferred stocks
Common stocks
Investments in associates

2011
1,404.4
2.8
(215.2)
347.5

2010
316.6
9.8
1,037.2
269.0

1,539.5

1,632.6

Our common stock portfolio, which reflects our long term value-oriented investment philosophy, is broken down
by country as follows (at market value at year-end):

United States
Canada
Other

1,785.0
711.8
1,332.7

3,829.5

F A I R F A X F I N A N C I A L H O L D I N G S L I M I T E D

We continue to like the long term prospects of our common stock holdings, while our hedges protect us against
our near term economic concerns.

Miscellaneous

In early 2012 we paid our annual dividend, again in the amount of $10 per share, reflecting the free cash flow
from our insurance and reinsurance companies and our significant holding company cash and marketable secu-
rities position. Please don’t extrapolate that amount as our dividend will reflect the prevailing circumstances. The
$10 per share dividend is in the range of 2 to 2 1⁄ 2% of our book value in 2011.

Our decentralized charitable donations program continues to flourish in all the countries where we operate. We
donate between 1% and 2% of pre-tax profits every year, largely done by the company presidents and the
employees in each country. We are very grateful to be able “to do good by doing well” but we never forget we
have to “do well” first. In 2011 we donated (or invested as we prefer to say) approximately $7 million in the
countries where we do business. Since we began the program in 1991 with a $200,000 donation, we have made
cumulative donations of over $80 million.

We are very much committed to making all our employees owners of our company – like the presidents and offi-
cers of our companies (and yours truly!). We have had an employee share purchase plan since 1987 under which
all contributions are used to purchase Fairfax shares in the market. In past Annual Reports, I have extolled the
virtues of this plan to you. Under the plan, our employees can contribute from each paycheque up to 10% of their
salary. The company automatically contributes an additional 30% of the employee contribution and at the end of
each year, if Fairfax has achieved its 15% growth in book value per share objective, the company contributes an
additional 20% of the employee contribution. Over the last 5, 10, 15 and 20 years, the compound annual return
on this program has been 22%, 18%, 12% and 14% respectively. If an employee earning Cdn$40,000 had partici-
pated fully in this program since its inception, she or he would have accumulated 2,975 shares of Fairfax worth
Cdn$1.3 million at the end of 2011. We like our employees to be owners of Fairfax and to benefit from its long
term success.

I have said many times that our strategic plan was waiting for the phone to ring. Late in 1995, that was exactly
what happened when Jim Dowd called about the sale of Skandia Re’s Canadian subsidiary. This resulted in the
purchase of our most successful company, OdysseyRe (formerly Skandia Re U.S.), and together we brought Andy
Barnard into the fold. Since then, Jim has helped build Fairfax Asia from a blank piece of paper to a well-
developed network that now encompasses India, China, Singapore, Malaysia, Hong Kong and Thailand. Jim was
also our ambassador in London, the Middle East, Poland, the United States and, of course, Asia. Jim embodies the
Fairfax values and did all of this with no ego and a great sense of humour. In September 2011, Jim retired and we
will miss him. We wish Jim, Lynn and their family great health and happiness during their retirement years.

While there are great uncertainties in the economic outlook ahead, I continue to be very excited about the long
term prospects of our company because of its “fair and friendly” culture we have developed over the past 26 years
(the culture is embedded in our Guiding Principles, again reproduced for you in the Appendix). Our small holding
company team, with great integrity, team spirit and no egos, keeps the whole company going forward, protecting
us from unexpected downside risks and taking advantage of opportunities when they arise. A big thank you to
David Bonham, Peter Clarke, Jean Cloutier, Brad Martin, Paul Rivett, Rick Salsberg, Ronald Schokking, John Var-
nell and Jane Williamson, and to John Cassil and Hank Edmiston in Dallas.

Looking forward to seeing you at our annual meeting in Toronto at 9:30 a.m. on April 26, 2012 at Roy Thomson
Hall. As always, our presidents, the Fairfax officers and the Hamblin Watsa principals will be there to answer any
and all of your questions. Like last year, we will have booths with information on the products we offer as well as
on the major community investments we have made on your behalf, and who knows, you might also get a deal
from William Ashley or Sporting Life!

Once again, I would like to thank the Board and the management and employees of all our companies for their
outstanding efforts during 2011. We would also like to thank you, our long term shareholders, who have sup-
ported us loyally for many, many years. It is our privilege to continue to build shareholder value for you over the
long term.

March 9, 2012

V. Prem Watsa
Chairman and Chief Executive Officer

F A I R F A X F I N A N C I A L H O L D I N G S L I M I T E D

Management’s Responsibility for the Financial Statements

The preparation and presentation of the accompanying consolidated financial statements, Management’s Dis-
cussion and Analysis (“MD&A”) and all financial information are the responsibility of management and have
been approved by the Board of Directors.

The consolidated financial statements have been prepared in accordance with International Financial Reporting
Standards. Financial statements, by nature, are not precise since they include certain amounts based upon esti-
mates and judgments. When alternative methods exist, management has chosen those it deems to be the most
appropriate in the circumstances.

We, as Fairfax’s Chief Executive Officer and Chief Financial Officer, have certified Fairfax’s annual disclosure
documents filed with the OSC and the SEC (Form 40-F) in accordance with Canadian securities legislation and the
United States Sarbanes-Oxley Act of 2002, respectively.

The Board of Directors is responsible for ensuring that management fulfills its responsibilities for financial report-
ing and is ultimately responsible for reviewing and approving the consolidated financial statements. The Board
carries out this responsibility principally through its Audit Committee which is independent from management.

The Audit Committee is appointed by the Board of Directors and reviews the consolidated financial statements
and MD&A; considers the report of the external auditors; assesses the adequacy of the internal controls of the
company, including management’s assessment described below; 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 control over financial reporting 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 share-
holders and management’s assessment of the internal control over financial reporting.

Management’s Report on Internal Control over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting.

Management has assessed the effectiveness of the company’s internal control over financial reporting as of
December 31, 2011 using criteria established in Internal Control – Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this evaluation, management
concluded that the company’s internal control over financial reporting was effective as of December 31, 2011.

The effectiveness of the company’s internal control over financial reporting as of December 31, 2011 has been
audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in its report
which appears herein.

March 9, 2012

V. Prem Watsa
Chairman and Chief Executive Officer

John Varnell
Vice President and Chief Financial Officer

Independent Auditor’s Report

To the Shareholders of Fairfax Financial Holdings Limited

We have completed an integrated audit of Fairfax Financial Holdings Limited (the Company) and its subsidiaries’
2011 consolidated financial statements and their internal control over financial reporting as at December 31,
2011 and an audit of their 2010 consolidated financial statements. Our opinions, based on our audits, are pre-
sented below.

Report on the consolidated financial statements

We have audited the accompanying consolidated financial statements of the Company and its subsidiaries, which
comprise the consolidated balance sheets as at December 31, 2011 and 2010 and January 1, 2010 and the con-
solidated statements of earnings, comprehensive income, changes in equity and cash flows for the years ended
December 31, 2011 and 2010, and the related notes, which comprise a summary of significant accounting policies
and other explanatory information.

Management’s responsibility for the consolidated financial statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in
accordance with International Financial Reporting Standards (IFRS), and for such internal control as management
determines is necessary to enable the preparation of consolidated financial statements that are free from material
misstatement, whether due to fraud or error.

Auditor’s responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We
conducted our audits in accordance with Canadian generally accepted auditing standards and the standards of the
Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform
the audits to obtain reasonable assurance about whether the consolidated financial statements are free from mate-
rial misstatement. Canadian generally accepting auditing standards also require that we comply with ethical
requirements.

An audit involves performing procedures to obtain audit evidence, on a test basis, about the amounts and dis-
closures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment,
including the assessment of the risks of material misstatement of the consolidated financial statements, whether
due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the
Company’s preparation and fair presentation of the consolidated financial statements in order to design audit
procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Company’s internal control. An audit also includes evaluating the appropriateness of account-
ing policies used and the reasonableness of accounting estimates made by management, as well as evaluating the
overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis
for our audit opinion on the consolidated financial statements.

Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position
of the Company and its subsidiaries as at December 31, 2011 and 2010 and January 1, 2010 and their financial
performance and their cash flows for the years ended December 31, 2011 and 2010 in accordance with IFRS.

F A I R F A X F I N A N C I A L H O L D I N G S L I M I T E D

Report on internal control over financial reporting

We have also audited the Company’s internal control over financial reporting as at December 31, 2011, based on
criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Orga-
nizations of the Treadway Commission (COSO).

Management’s responsibility for internal control over financial reporting
Management is responsible for maintaining effective internal control over financial reporting and for its assess-
ment of the effectiveness of internal control over financial reporting, included in Management’s Report on
Internal Control over Financial Reporting on page 20.

Auditor’s responsibility
Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on
our audit. We conducted our audit of internal control over financial reporting in accordance with the standards
of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting
was maintained in all material respects.

An audit of internal control over financial reporting includes obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we
consider necessary in the circumstances.

We believe that our audit provides a reasonable basis for our opinion on the Company’s internal control over
financial reporting.

Definition of internal control over financial reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regard-
ing the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (iii) provide reason-
able assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the financial statements.

Inherent limitations
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstate-
ments. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls
may become inadequate because of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.

Opinion
In our opinion, the Company maintained, in all material respects, effective internal control over financial report-
ing as at December 31, 2011 based on criteria established in Internal Control — Integrated Framework issued by
COSO.

Chartered Accountants, Licensed Public Accountants
Toronto, Ontario

March 9, 2012

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 Hold-
ings Limited in its consolidated balance sheet as at December 31, 2011 and their change as reflected in its con-
solidated 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
March 9, 2012

F A I R F A X F I N A N C I A L H O L D I N G S L I M I T E D

Consolidated Financial Statements

Consolidated Balance Sheets
as at December 31, 2011, December 31, 2010 and January 1, 2010

Assets

Holding company cash and investments (including assets

pledged for short sale and derivative obligations – $249.0;
December 31, 2010 – $137.4; January 1, 2010 – $78.9)

Insurance contract receivables

Notes

December 31,
2011

December 31,
2010

January 1,
2010

(US$ millions)

5, 28

1,026.7

1,735.4

1,540.7

1,476.6

1,251.6

1,376.8

2,762.1

3,017.3

2,628.4

Portfolio investments

Subsidiary cash and short term investments

5, 28

6,199.2

3,513.9

3,244.8

Bonds (cost $9,515.4; December 31, 2010 – $11,456.9;

January 1, 2010 – $10,516.2)

Preferred stocks (cost $555.6; December 31, 2010 – $567.6;

January 1, 2010 – $273.0)

Common stocks (cost $3,867.3; December 31, 2010 –

$3,198.0; January 1, 2010 – $4,081.1)

Investments in associates (fair value $1,271.8; December 31,

2010 – $976.9; January 1, 2010 – $604.3)

Derivatives and other invested assets (cost $511.4; December

31, 2010 – $403.9; January 1, 2010 – $122.5)

Assets pledged for short sale and derivative obligations (cost
$810.1; December 31, 2010 – $698.3; January 1, 2010 –
$138.3)

Deferred premium acquisition costs

Recoverable from reinsurers (including recoverables on paid
losses – $313.2; December 31, 2010 – $247.2; January 1,
2010 – $262.8)

Deferred income taxes

Goodwill and intangible assets

Other assets

5, 6

5, 7

10,835.2

11,748.2

10,918.3

563.3

583.9

292.8

3,663.1

4,133.3

4,893.2

924.3

394.6

707.9

423.7

579.4

142.7

5, 7

886.3

709.6

151.5

23,466.0

21,976.2

20,067.0

415.9

357.0

372.0

4,198.1

628.2

1,115.2

821.4

3,757.0

3,571.1

490.5

949.1

901.0

299.5

438.8

771.6

33,406.9

31,448.1

28,148.4

See accompanying notes.

Signed on behalf of the Board

Director

Liabilities

Subsidiary indebtedness

Accounts payable and accrued liabilities

Income taxes payable

Short sale and derivative obligations (including at the

holding company – $63.9; December 31, 2010 – $66.5;
January 1, 2010 – $8.9)

Funds withheld payable to reinsurers

Insurance contract liabilities

Long term debt

Equity

Common shareholders’ equity

Preferred stock

Shareholders’ equity attributable to shareholders of Fairfax

Non-controlling interests

Total equity

See accompanying notes.

Notes

December 31,
2011

December 31,
2010

January 1,
2010

(US$ millions)

5, 7

1.0

1,656.2

21.4

170.2

412.6

2.2

12.1

1,263.1

1,290.8

31.7

77.6

216.9

363.2

57.2

354.9

2,261.4

1,877.1

1,792.6

19,719.5

3,017.5

18,170.2

16,418.6

2,726.9

2,301.2

22,737.0

20,897.1

18,719.8

7,427.9

934.7

8,362.6

45.9

7,697.9

7,295.2

934.7

227.2

8,632.6

7,522.4

41.3

113.6

8,408.5

8,673.9

7,636.0

33,406.9

31,448.1

28,148.4

F A I R F A X F I N A N C I A L H O L D I N G S L I M I T E D

Consolidated Statements of Earnings
for the years ended December 31, 2011 and 2010

Revenue

Gross premiums written

Net premiums written

Net premiums earned
Interest and dividends
Share of profit of associates
Net gains (losses) on investments
Excess of fair value of net assets acquired over purchase price
Other revenue

Expenses

Losses on claims, gross
Less ceded losses on claims

Losses on claims, net
Operating expenses
Commissions, net
Interest expense
Other expenses

Earnings (loss) before income taxes
Income taxes

Net earnings

Attributable to:

Shareholders of Fairfax
Non-controlling interests

Net earnings (loss) per share

Net earnings (loss) per diluted share

Cash dividends paid per share

Shares outstanding (000) (weighted average)

See accompanying notes.

Notes

2011

2010
(US$ millions except per
share amounts)

25
5
5
5

8
9

26
9

6,743.5

5,362.9

5,607.9

4,449.0

5,426.9
705.3
1.8
691.2
–
649.8

4,580.6
711.5
46.0
(3.0)
83.1
549.1

7,475.0

5,967.3

5,541.4
(956.1)

4,238.0
(839.3)

4,585.3
1,148.3
795.4
214.0
740.7

3,398.7
973.5
707.5
195.5
541.0

7,483.7

5,816.2

(8.7)
(56.5)

151.1
(186.9)

47.8

338.0

45.1
2.7

47.8

335.8
2.2

338.0

$ (0.31)

$ 14.90

$ (0.31)

$ 14.82

$ 10.00

20,405

20,436

Consolidated Statements of Comprehensive Income
for the years ended December 31, 2011 and 2010

Net earnings

Other comprehensive income (loss), net of income taxes

Change in unrealized foreign currency translation gains (losses) on foreign

operations(1)

Change in gains and losses on hedge of net investment in foreign subsidiary(2)

Share of other comprehensive income (loss) of associates(3)

Change in actuarial gains and losses on defined benefit plans(4)

Other comprehensive income (loss), net of income taxes

Comprehensive income

Attributable to:

Shareholders of Fairfax

Non-controlling interests

(1) Net of income tax expense of $9.0 (2010 – $11.5).
(2) Net of income tax recovery of nil (2010 – nil).
(3) Net of income tax recovery of $0.8 (2010 – income tax expense of $2.7).
(4) Net of income tax recovery of $9.0 (2010 – income tax expense of $5.0).

See accompanying notes.

Notes

2011
(US$ millions)

2010

47.8

338.0

(40.8)

121.0

33.2

(28.2)

(7.5)

(22.6)

12.8

30.6

(37.7)

136.2

10.1

474.2

8.0

2.1

472.4

1.8

10.1

474.2

F A I R F A X F I N A N C I A L H O L D I N G S L I M I T E D

Consolidated Statements of Changes in Equity
for the years ended December 31, 2011 and 2010
(US$ millions)

Subordinate
voting shares

Multiple
voting
shares

Treasury
shares
(at cost)

Share-
based
payments

Retained
earnings

Accumulated
other
comprehensive
income

Common
shareholders’
equity

Preferred
shares

Equity
attributable
to
shareholders
of Fairfax

Non-
controlling
interests

Total
equity

(52.4)

3.2 4,394.4

101.4

7,697.9

934.7

8,632.6

41.3 8,673.9

–

45.1

–

45.1

–

(28.7)

–

3.1

Balance as of January 1,

2011

Net earnings (loss) for the year

Other comprehensive income,

net of income taxes:

Change in unrealized
foreign currency
translation gains (losses)
on foreign operations

Change in gains and losses

on hedge of net
investment in foreign
subsidiary

Share of other

comprehensive income
(loss) of associates

Change in actuarial gains
and losses on defined
benefit plans

Issuance of shares

3,247.5

–

Purchases and amortization

(4.2)

Excess over stated value of

common shares purchased
for cancellation

Common share dividends

Preferred share dividends

Net changes in capitalization

Balance as of

–

3.8

–

Balance as of January 1,

2010

Net earnings (loss) for the year

Other comprehensive income,

net of income taxes:

Change in unrealized
foreign currency
translation gains (losses)
on foreign operations

Change in gains and losses

on hedge of net
investment in foreign
subsidiary

Share of other

comprehensive income
(loss) of associates

Change in actuarial gains
and losses on defined
benefit plans

Issuance of shares

Purchases and amortization

Excess over stated value of

common shares purchased
for cancellation

Common share dividends

Preferred share dividends

Net changes in capitalization

Other

Balance as of

3,054.8

–

199.8

(7.1)

–

3.8

–

5.7

(26.0)

(1.6)

11.3

–

(5.8)

(205.9)

(51.5)

–

(22.5)

–

31.1

–

(26.8)

3.2

–

(9.7)

(200.8)

(31.4)

–

45.1

2.7

47.8

(40.3)

(0.5)

(40.8)

33.2

(7.5)

(22.5)

4.1

(18.9)

(5.8)

(205.9)

(51.5)

–

33.2

(7.5)

(0.1)

(22.6)

–

4.1

(18.9)

(5.8)

– (205.9)

–

(51.5)

–

2.5

(40.3)

33.2

(7.5)

–

(22.5)

4.1

(18.9)

(5.8)

(205.9)

(51.5)

–

120.9

(28.2)

12.8

–

31.1

202.9

707.5

(30.7)

(9.7)

(200.8)

(31.4)

–

120.9

0.1

121.0

(28.2)

12.8

31.1

910.4

(30.7)

(9.7)

(200.8)

(31.4)

–

(28.2)

12.8

(0.5)

30.6

–

910.4

(30.7)

(9.7)

– (200.8)

–

(31.4)

–

(4.8)

(69.3)

December 31, 2011

3,243.3

3.8

(72.7)

12.9 4,153.8

86.8

7,427.9

934.7

8,362.6

45.9 8,408.5

– 4,269.4

–

335.8

(4.1)

7,295.2

227.2

7,522.4

113.6 7,636.0

–

335.8

–

335.8

2.2

338.0

December 31, 2010

3,247.5

3.8

(52.4)

3.2 4,394.4

101.4

7,697.9

934.7

8,632.6

41.3 8,673.9

See accompanying notes.

Consolidated Statements of Cash Flows
for the years ended December 31, 2011 and 2010

Operating activities

Net earnings
Amortization of premises and equipment and intangible assets
Net bond discount amortization
Amortization of share-based payment awards
Share of profit of associates
Deferred income taxes
Net (gains) losses on investments
Excess of fair value of net assets acquired over purchase price
Loss on repurchase of long term debt
Net (purchases) sales of securities classified as at FVTPL:

Short term investments
Bonds
Preferred stocks
Common stocks
Net derivatives and short sales

Changes in operating assets and liabilities

Cash provided by (used in) operating activities

Investing activities

Net purchases of investments in associates
Net purchases of premises and equipment and intangible assets
Net purchase of subsidiaries, net of cash acquired

Cash provided by (used in) investing activities

Financing activities

Subsidiary indebtedness:

Issuances
Repayment
Long term debt:

Issuances
Issuance and consent solicitation costs
Repayment

Net repurchases of subsidiary securities
Subordinate voting shares:

Issuances
Issuance costs
Repurchases
Preferred shares:

Issuances
Issuance costs

Purchase of subordinate voting shares for treasury
Common share dividends
Preferred share dividends

Cash provided by (used in) financing activities

Increase (decrease) in cash and cash equivalents

Cash and cash equivalents – beginning of year
Foreign currency translation

Notes

2011
(US$ millions)

2010

18
5
23

47.8
59.5
(69.7)
11.3
(1.8)
(128.1)
(691.2)
–
104.2

338.0
48.5
(36.9)
3.2
(46.0)
(203.5)
3.0
(83.1)
2.3

(4,098.7)
2,574.6
6.4
(2.6)
265.6

720.8
(92.0)
(234.4)
1,619.9
(985.9)

(1,922.7)

1,053.9

701.2

(14.4)

(1,221.5)

1,039.5

6, 23

16
16
16

(130.5)
(42.2)
276.5

(214.8)
(38.6)
(454.9)

103.8

(708.3)

10.5
(52.4)

906.2
(6.7)
(762.3)
–

–
–
(10.0)

–
–
(26.0)
(205.9)
(51.5)

20.5
(31.0)

269.6
(7.8)
(27.7)
(75.0)

200.0
(0.3)
(16.8)

724.0
(22.8)
(26.8)
(200.8)
(31.4)

(198.1)

773.7

(1,315.8)
3,275.1
(49.3)

1,104.9
2,156.9
13.3

Cash and cash equivalents – end of year

1,910.0

3,275.1

See accompanying notes.

F A I R F A X F I N A N C I A L H O L D I N G S L I M I T E D

Index to Notes to Consolidated Financial Statements

1. Business Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2. Basis of Presentation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Summary of Significant Accounting Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4. Critical Accounting Estimates and Judgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5. Cash and Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Investments in Associates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Short Sale and Derivative Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Insurance Contract Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

9. Reinsurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

10.

Insurance Contract Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

11. Deferred Premium Acquisition Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

12. Goodwill and Intangible Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

13. Other Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

14. Accounts Payable and Accrued Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

15.

Subsidiary Indebtedness, Long Term Debt and Credit Facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

16. Total Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

17. Earnings per Share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

18.

Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

19.

Statutory Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

20. Contingencies and Commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

21. Pensions and Post Retirement Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

22. Operating Leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

23. Acquisitions and Divestitures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

24.

Financial Risk Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

25.

Segmented Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

26. Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

27.

Salaries and Employee Benefit Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

28.

Supplementary Cash Flow Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

29. Related Party Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

30. Transition from Canadian GAAP to International Financial Reporting Standards . . . . . . . . . . . . . . . . . .

104

105

106

107

Notes to Consolidated Financial Statements
for the years ended December 31, 2011 and 2010
(in US$ and $ millions except per share amounts and as otherwise indicated)

1. Business Operations

Fairfax Financial Holdings Limited (“the company” or “Fairfax”) is a financial services holding company which,
through its subsidiaries, is principally engaged in property and casualty insurance and reinsurance and the asso-
ciated investment management. The holding company is federally incorporated and domiciled in Ontario, Cana-
da.

These consolidated financial statements were approved for issue by the company’s Board of Directors on March 9,
2012.

2. Basis of Presentation

The consolidated financial statements of the company for the year ended December 31, 2011 represent the first
annual financial statements of the company prepared in accordance with International Financial Reporting Stan-
dards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). The accounting policies used
to prepare the consolidated financial statements comply with IFRS effective as at December 31, 2011 (except IFRS
9 which was early adopted as described in note 30). Where IFRS does not contain clear guidance governing the
accounting treatment of certain transactions including those that are specific to insurance products, IFRS requires
judgment in developing and applying an accounting policy, which may include reference to another compre-
hensive body of accounting principles. In these cases, the company considers the hierarchy of guidance in
International Accounting Standard 8 Accounting Policies, Changes in Accounting Estimates and Errors and may refer
to accounting principles generally accepted in the United States (“US GAAP”). The consolidated financial state-
ments have been prepared on a historical cost basis, except for derivative financial instruments and as at fair value
through profit and loss (“FVTPL”) financial assets and liabilities that have been measured at fair value.

The preparation of consolidated financial statements in accordance with IFRS requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated
financial statements, the reported amounts of revenue and expenses during the reporting periods covered by the
consolidated financial statements and the related disclosures. Critical accounting estimates and judgments are
described in note 4.

As a financial services holding company, the consolidated balance sheet is presented on a non-classified basis.
Assets expected to be realized and liabilities expected to be settled within the company’s normal operating cycle
of one year would typically be considered as current, including the following balances: cash, short term invest-
ments, insurance contract receivables, deferred premium acquisition costs, subsidiary indebtedness, income taxes
payable, and short sale and derivative obligations.

The following balances are generally considered as non-current: deferred income taxes and goodwill and
intangible assets.

The following balances are generally comprised of current and non-current amounts: bonds, preferred and
common stocks, derivatives and other invested assets, recoverable from reinsurers, other assets, accounts payable
and accrued liabilities, funds withheld payable to reinsurers, insurance contract liabilities and long term debt.

The company adopted IFRS in accordance with International Financial Reporting Standard 1 First-time Adoption of
International Financial Reporting Standards. Reconciliations and explanations of the impact of the transition from
Canadian Generally Accepted Accounting Principles (“Canadian GAAP”) to IFRS as at January 1, 2010 on the
financial position and financial results of the company for the year ended December 31, 2010 are provided in
note 30. In these consolidated financial statements the term ‘Canadian GAAP’ refers to Canadian GAAP before the
adoption of IFRS.

3. Summary of Significant Accounting Policies

The principal accounting policies applied to the presentation of these consolidated financial statements are set
out below. These policies have been consistently applied to all periods presented unless otherwise stated.

F A I R F A X F I N A N C I A L H O L D I N G S L I M I T E D

Principles of consolidation
Subsidiaries – The company’s consolidated financial statements include the assets, liabilities, equity, revenues,
expenses and cash flows of the holding company and its subsidiaries. A subsidiary is an entity which is controlled,
directly or indirectly, through ownership of more than 50% of the outstanding voting rights, or where Fairfax
otherwise has the power to govern the financial and operating policies of the entity so as to obtain benefits from
its activities. Assessment of control is based on the substance of the relationship between the company and the
entity and includes consideration of both existing voting rights and, if applicable, potential voting rights that are
currently exercisable and convertible. The operating results of subsidiaries acquired are included in the con-
solidated financial statements from the date of acquisition. The operating results of subsidiaries that have been
divested during the year are included up to the date control ceased and any difference between the fair value of
the consideration received and the carrying value of the subsidiary are recognized in the consolidated statement
of earnings. All intercompany balances, profits and transactions are eliminated in full.

The consolidated financial statements are prepared as of December 31, based on individual company financial
statements at the same date. Accounting policies of subsidiaries have been aligned where necessary to ensure
consistency with those of Fairfax. The consolidated financial statements include the accounts of the company and
all of its subsidiaries at December 31, 2011. The principal subsidiaries are:

Canadian Insurance

Reinsurance and Insurance

Northbridge Financial Corporation (Northbridge)

Odyssey Re Holdings Corp. (OdysseyRe)

U.S. Insurance

Crum & Forster Holdings Corp. (Crum & Forster)

Zenith National Insurance Corp. (Zenith National)

Asian Insurance

Fairfax Asia consists of:

Falcon Insurance Company Limited (Falcon)

First Capital Insurance Limited (First Capital)

The Pacific Insurance Berhad (Pacific Insurance)

ICICI Lombard General Insurance Company Limited

Advent Capital (Holdings) PLC (Advent)

Polskie Towarzystwo Reasekuracji Spólka Akcyjna
(Polish Re)

Fairfax Brasil Seguros Corporativos S.A. (Fairfax Brasil)

Group Re, which underwrites business in:

CRC Reinsurance Limited (CRC Re)

Wentworth Insurance Company Ltd. (Wentworth)

Other

Hamblin Watsa Investment Counsel Ltd.

(Hamblin Watsa) (investment management)

(26% equity accounted interest) (ICICI Lombard)

Ridley Inc. (Ridley) (animal nutrition)

William Ashley China Corporation (William Ashley)

(retailer of tableware and gifts)

Sporting Life Inc. (Sporting Life)

(retailer of sporting goods and sports apparel)

Runoff

TIG Insurance Company (TIG)

Fairmont Specialty Group Inc. (Fairmont)

General Fidelity Insurance Company (GFIC)

Clearwater Insurance Company (Clearwater)

Valiant Insurance Company (Valiant Insurance)

RiverStone Insurance (UK) Limited (RiverStone (UK))

RiverStone Managing Agency Limited

nSpire Re Limited (nSpire Re)

All subsidiaries are wholly-owned except for Ridley, First Capital and Sporting Life with 73.6%, 97.7% and 75.0%
ownership interests, respectively (December 31, 2010 – 73.5%, 97.7% and nil, respectively). Pursuant to the trans-
actions described in note 23, the company acquired 100% ownership interests in First Mercury Financial Corpo-
ration (“First Mercury”) and Pacific Insurance during the first quarter of 2011, 100% ownership interest in
William Ashley during the third quarter of 2011, 75.0% ownership interest in Sporting Life during the fourth
quarter of 2011, and 100% ownership interests in Zenith National and GFIC during 2010.

The holding company is a financial services holding company with significant liquid resources that are generally
not restricted by insurance regulators. The operating subsidiaries are primarily insurers and reinsurers that are

often subject to a wide variety of insurance and other laws and regulations that vary by jurisdiction and are
intended to protect policyholders rather than investors. These laws and regulations may limit the ability of
operating subsidiaries to pay dividends or make distributions to parent companies. The company’s consolidated
balance sheet and consolidated statement of cash flows therefore make a distinction in classification between the
holding company and the operating subsidiaries for cash and short term investments to provide additional
insight into the company’s liquidity, financial leverage and capital structure.

Non-controlling interests – A non-controlling interest is initially recognized at the proportionate share of the
identifiable net assets of the subsidiary on the date of its acquisition and is subsequently adjusted for the
non-controlling interest’s share in changes of the acquired subsidiary’s earnings and capital. Effects of trans-
actions with non-controlling interests are recorded in equity if there is no change in control.

Investments in associates – Investments in associates are accounted for using the equity method and are
comprised of investments in corporations, limited partnerships and trusts where the company has the ability to
exercise significant influence but not control. Significant influence is generally presumed to exist when the
company owns, directly or indirectly, between 20% and 50% of the outstanding voting rights of the investee.
Assessment of significant influence is based on the substance of the relationship between the company and the
investee and includes consideration of both existing voting rights and, if applicable, potential voting rights that
are currently exercisable and convertible. These investments are reported in investments in associates in the con-
solidated balance sheets, with the company’s share of profit (loss) and other comprehensive income (loss) of the
associate reported in the corresponding line in the consolidated statement of earnings and consolidated statement
of comprehensive income, respectively. Gains and losses realized on dispositions and charges to reflect impair-
ment in the value of associates are included in net gains (losses) on investments. Under the equity method of
accounting, an investment in associate is initially recognized at cost and adjusted thereafter for the post-
acquisition change in the company’s share of net assets of the associate. Any excess of the cost of acquisition over
the company’s share of the net fair value of the identifiable assets, liabilities and contingent liabilities at the date
of acquisition is recognized as goodwill, and is included in the carrying value of the associate. Foreign associates
are translated in the same manner as foreign subsidiaries. When the company’s share of losses in an associate
equals or exceeds its investment in the associate, the company does not record further losses unless it has
incurred obligations on behalf of the associate.

At each reporting date, and more frequently when conditions warrant, management assesses investments in asso-
ciates for potential impairment. If management’s assessment indicates that there is objective evidence of impair-
ment, the associate is written down to its recoverable amount, which is determined as the higher of its fair value
less costs to sell and its value in use. Previously recognized impairment losses are reversed when there is evidence
that there has been a change in the estimates used to determine the associate’s recoverable amount since the
recognition of the last impairment loss. The reversal is recognized in the consolidated statement of earnings to
the extent that the carrying value of the associate after reversal does not exceed the carrying value that would
have been determined had no impairment loss been recognized in previous periods. Impairment losses and
reversal of impairments are recognized in net gains (losses) on investments in the consolidated statement of earn-
ings.

The most recent available financial statements of associates are used in applying the equity method. The difference
between the end of the reporting period of the associates and that of the company is generally no more than three
months. Adjustments are made for the effects of significant transactions or events that occur between the dates of
the associates’ financial statements and the date of the company’s financial statements.

Business combinations
Business combinations are accounted for using the acquisition method of accounting. Under the acquisition
method of accounting, the consideration transferred in a business combination is measured at fair value at the
date of acquisition. This consideration includes any cash paid plus the fair value at the date of exchange of assets
given, liabilities incurred and equity instruments issued by the company or its subsidiaries. The consideration
transferred also includes contingent consideration arrangements recorded at fair value. Directly attributable
acquisition-related costs are expensed in the current period and reported within operating expenses. At the date of
acquisition,
the liabilities assumed and any
non-controlling interest in the acquired business. The identifiable assets acquired and liabilities assumed are ini-
tially recognized at fair value. To the extent that the consideration transferred is less than the fair value of
identifiable net assets acquired, the excess is recognized in the consolidated statement of earnings.

the identifiable assets acquired,

the company recognizes

F A I R F A X F I N A N C I A L H O L D I N G S L I M I T E D

Any pre-existing equity interests in an acquiree are re-measured to fair value at the date of the business combina-
tion and any resulting gain or loss is recognized in the consolidated statement of earnings.

Goodwill and intangible assets
Goodwill – Goodwill is recorded as the excess of consideration transferred over the fair value of the identifiable
net assets acquired in a business combination, less accumulated impairment charges, and is allocated to the cash-
generating units expected to benefit from the acquisition for the purpose of impairment testing. These cash-
generating units represent the lowest level at which goodwill is monitored for internal management purposes. On
an annual basis or more frequently if there are potential indicators of impairment, the carrying value of a cash-
generating unit, including its allocated goodwill, is compared to its recoverable amount, which is the higher of its
fair value less costs to sell and its value in use. Goodwill impairment is measured as the excess of the carrying
amount over the recoverable amount of a cash-generating unit, and is charged to operating expenses in the con-
solidated statement of earnings. Impairment charges cannot be reversed for subsequent increases in a cash-
generating unit’s recoverable amount. The estimated recoverable amounts are sensitive to the assumptions used
in the valuations.

Goodwill is derecognized on disposal of a cash-generating unit to which goodwill was previously allocated, with
the difference between the proceeds and carrying value of the cash-generating unit (inclusive of goodwill and
unrealized balances recorded in accumulated other comprehensive income) recorded in the consolidated state-
ment of earnings.

Intangible assets – Intangible assets are comprised primarily of customer and broker relationships, brand
names, computer software (including enterprise systems) and other acquired identifiable non-monetary assets
without physical form.

Intangible assets are initially recognized at cost (fair value when acquired through a business combination) and are
subsequently measured at cost less accumulated amortization and impairment, where amortization is calculated using
the straight-line method based on the estimated useful life of those intangible assets with a finite life. The intended
use, expected life and economic benefit to be derived from intangible assets with a finite life are re-evaluated by the
company when there are potential indicators of impairment. Indefinite-lived intangible assets are not subject to
amortization but are assessed for impairment on an annual basis or more frequently if there are potential indicators of
impairment. If events or changes in circumstances indicate that a previously recognized impairment loss has
decreased or no longer exists, a reversal is recognized in the consolidated statement of earnings to the extent that the
carrying amount of the intangible asset after reversal does not exceed the carrying amount that would have been had
no impairment taken place.

The estimated useful lives of the company’s intangible assets are as follows:

Customer and broker relationships
Brand names
Computer software

8 to 20 years
Indefinite
3 to 15 years

Brand names are considered to be indefinite-lived based on their strength, history and expected future use.

Foreign currency translation
Functional and presentation currency – The consolidated financial statements are presented in U.S. dollars
which is the holding company’s functional currency and the presentation currency of the consolidated group.

Transactions and items in the consolidated balance sheet in foreign currencies – Foreign currency
transactions are translated into the functional currencies of the holding company and its subsidiaries using the
exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the
settlement of such transactions and from the translation at year-end exchange rates of monetary assets and
liabilities denominated in foreign currencies are recognized in the consolidated statement of earnings.
Non-monetary items carried at cost are translated using the exchange rate at the date of the transaction.
Non-monetary items carried at fair value are translated at the date the fair value is determined.

Translation of foreign subsidiaries – The functional currencies of some of the company’s subsidiaries
(principally in Canada, the United Kingdom and Asia) differ from the consolidated group U.S. dollar presentation
currency. As a result, the assets and liabilities of these subsidiaries are translated on consolidation at the rates of
exchange prevailing at the balance sheet date. Revenues and expenses are translated at the average rate of
exchange for the period. The net unrealized gain or loss resulting from this translation is recognized in accumu-
lated other comprehensive income.

On consolidation, translation gains and losses arising from the translation of a monetary item that forms part of
the net investment in a foreign subsidiary are recognized in accumulated other comprehensive income. Upon
disposal of an investment in a foreign subsidiary, the related net translation gain or loss is reclassified from accu-
mulated other comprehensive income to the consolidated statement of earnings as a component of the net gain
or loss on disposition.

Goodwill and fair value adjustments arising on the acquisition of a foreign subsidiary are treated as assets and
liabilities of that foreign subsidiary and translated at the rates of exchange prevailing at the balance sheet date
and translation gains and losses are recognized in accumulated other comprehensive income.

Net investment hedge – In a net investment hedging relationship, the gains and losses relating to the effective
portion of the hedge are recorded in other comprehensive income. The gains and losses relating to the ineffective
portion of the hedge are recorded in net gains (losses) on investments in the consolidated statement of earnings.
Gains and losses in accumulated other comprehensive income are recognized in net earnings when the hedged
net investment in a foreign subsidiary is reduced.

Comprehensive income (loss)
Comprehensive income (loss) consists of net earnings (loss) and other comprehensive income (loss) and includes
all changes in total equity during a period, except for those resulting from investments by owners and dis-
tributions to owners. Unrealized foreign currency translation amounts arising from foreign subsidiaries and asso-
ciates that do not have U.S. dollar functional currencies and changes in the fair value of the effective portion of
cash flow hedging instruments on hedges of net investments in foreign subsidiaries are recorded in the con-
solidated statement of comprehensive income (loss) and included in accumulated other comprehensive income
(loss) until recognized in the consolidated statement of earnings. Accumulated other comprehensive income (loss)
(net of income taxes) is included on the consolidated balance sheet as a component of common shareholders’
equity. Actuarial gains and losses and changes in asset limitation amounts on defined benefit pension and post
retirement plans are recorded in other comprehensive income (loss) and subsequently included in retained earn-
ings.

Consolidated statement of cash flows
The company’s consolidated statements of cash flows are prepared in accordance with the indirect method, classi-
fying cash flows as cash flows from operating, investing and financing activities.

Cash and cash equivalents – Cash and cash equivalents consist of holding company and subsidiary cash and
short term highly liquid investments that are readily convertible into cash and have maturities of three months or
less when purchased and exclude cash and short term highly liquid investments that are restricted. Cash and cash
equivalents includes cash on hand, demand deposits with banks and other short term highly liquid investments
with maturities of three months or less when purchased. The carrying value of cash and cash equivalents approx-
imates fair value.

Investments
Investments include cash and cash equivalents, short
term investments, non-derivative financial assets,
derivatives, real estate held for investment and investments in associates. Management determines the appro-
priate classifications of investments in fixed income and equity securities at their acquisition date.

Classification of non-derivative financial assets – Investments in equity instruments and those debt
instruments that do not meet the criteria for amortized cost (see below) are classified as at fair value through
profit or loss (“FVTPL”). Financial assets classified as at FVTPL are carried at fair value on the consolidated balance
sheet with realized and unrealized gains and losses recorded in net gains (losses) on investments in the con-
solidated statement of earnings and as an operating activity in the consolidated statement of cash flows. Divi-
dends and interest earned, net of interest incurred are included in the consolidated statement of earnings in
interest and dividends and as an operating activity in the consolidated statement of cash flows except for interest
income from mortgage backed securities. Interest income from mortgage backed securities is included in net gains
(losses) on investments in the consolidated statement of earnings and as an operating activity in the consolidated
statement of cash flows.

A debt instrument is measured at amortized cost if (i) the objective of the company’s business model is to hold
the instrument in order to collect contractual cash flows and (ii) the contractual terms of the instrument give rise

F A I R F A X F I N A N C I A L H O L D I N G S L I M I T E D

on specified dates to cash flows that are solely payments of principal and interest on the principal amount out-
standing. Alternatively, debt instruments that meet the criteria for amortized cost may be designated as at FVTPL
on initial recognition if doing so eliminates or significantly reduces an accounting mismatch. The company’s
business model currently does not permit any of its investments in debt instruments to be measured at amortized
cost.

Investments in equity instruments that are not held for trading may be irrevocably designated at fair value
through other comprehensive income (“FVTOCI”) on initial recognition. The company has not designated any of
its equity instruments at FVTOCI.

Recognition and measurement of non-derivative financial assets – The company recognizes purchases
and sales of financial assets on the trade date, which is the date on which the company commits to purchase or
sell the asset. Transactions pending settlement are reflected in the consolidated balance sheet in other assets or in
accounts payable and accrued liabilities.

Transaction costs related to financial assets classified or designated as at FVTPL are expensed as incurred.

A financial asset is derecognized when the rights to receive cash flows from the investment have expired or have been
transferred and when the company has transferred substantially the risks and rewards of ownership of the asset.

Determination of fair value – Fair values for substantially all of the company’s financial instruments are
measured using market or income approaches. Considerable judgment may be required in interpreting market
data used to develop the estimates of fair value. Accordingly, actual values realized in future market transactions
may differ from the estimates presented in these consolidated financial statements. The use of different market
assumptions and/or estimation methodologies may have a material effect on the estimated fair values. The fair
values of financial instruments are based on bid prices for financial assets and ask prices for financial liabilities.
The company categorizes its fair value measurements according to a three level hierarchy described below:

Level 1 – Inputs represent unadjusted quoted prices for identical instruments exchanged in active markets.
The fair values of the majority of the company’s common stocks, equity call options and certain warrants are
based on published quotes in active markets.

Level 2 – Inputs include directly or indirectly observable inputs (other than Level 1 inputs) such as quoted
prices for similar financial instruments exchanged in active markets, quoted prices for identical or similar
financial instruments exchanged in inactive markets and other market observable inputs. The fair value of the
majority of the company’s investments in bonds, derivative contracts (total return swaps and credit default
swaps) and certain warrants are based on third party broker-dealer quotes.

The fair values of investments in certain limited partnerships classified as common stocks on the consolidated
balance sheet are based on the net asset values received from the general partner, adjusted for liquidity as
required and are classified as Level 2 when they may be liquidated or redeemed within three months or less of
providing notice to the general partner. Otherwise, investments in limited partnerships are classified as
Level 3 within the fair value hierarchy.

Level 3 – Inputs include unobservable inputs used in the measurement of financial instruments. Management
is required to use its own assumptions regarding unobservable inputs as there is little, if any, market activity
in these instruments or related observable inputs that can be corroborated at the measurement date.
Investments in consumer price indices (“CPI”) linked derivatives are classified as Level 3 within the
company’s fair value hierarchy.

Transfers between fair value hierarchy categories are considered effective from the beginning of the reporting
period in which the transfer is identified.

The reasonableness of pricing received from third party broker-dealers and independent pricing service providers
is assessed by comparing the fair values received to recent transaction prices for similar assets where available, to
industry accepted discounted cash flow models (that incorporate estimates of the amount and timing of future
cash flows and market observable inputs such as credit spreads and discount rates) and to option pricing models
(that incorporate market observable inputs including the quoted price, volatility and dividend yield of the under-
lying security and the risk free rate).

Short term investments – Short term investments are investments with maturity dates between three months
and twelve months when purchased. Short term investments are classified as at FVTPL and their carrying values
approximate fair value.

Accounts receivable and accounts payable
Accounts receivable and accounts payable are recognized initially at fair value. Due to their short-term nature,
carrying value is considered to approximate fair value.

Securities sold short and derivative financial instruments
Securities sold short – Securities sold short represent obligations to deliver securities which were not owned at
the time of the sale. These obligations are carried at fair value with changes in fair value recorded in net gains
(losses) on investments where fair value is determined based on Level 1 inputs (described above).

Derivative financial instruments – Derivative financial instruments may include interest rate, credit default,
currency and total return swaps, CPI-linked, futures, forwards, warrants and option contracts all of which derive
their value mainly from changes in underlying interest rates, foreign exchange rates, credit ratings, commodity
values or equity instruments. A derivative contract may be traded on an exchange or over-the-counter (“OTC”).
Exchange-traded derivatives are standardized and include futures and certain warrants and option contracts. OTC
derivative contracts are individually negotiated between contracting parties and may include the company’s
forwards, CPI-linked derivatives and swaps.

The company uses derivatives principally to mitigate financial risks arising from its investment holdings and
reinsurance recoverables. Derivatives that are not specifically designated or that do not meet the requirements for
hedge accounting are carried at fair value on the consolidated balance sheet with changes in fair value recorded in
net gains (losses) on investments in the consolidated statement of earnings and as an operating activity in the
consolidated statement of cash flows. Derivatives are monitored by the company for effectiveness in achieving
their risk management objectives. The determination of fair value for the company’s derivative financial instru-
ments where quoted market prices in active markets are unavailable is described in the “Investments” section
above. The company has not designated any financial assets or liabilities (including derivatives) as accounting
hedges except for the hedge of its net investment in Northbridge as described in note 7.

The fair value of derivatives in a gain position is presented on the consolidated balance sheet in derivatives and
other invested assets in portfolio investments and in cash and investments of the holding company. The fair
value of derivatives in a loss position and obligations to purchase securities sold short, if any, are presented on the
consolidated balance sheet in short sale and derivative obligations. The initial premium paid for a derivative con-
tract, if any, would be recorded as a derivative asset and subsequently adjusted for changes in the market value of
the contract at each balance sheet date. Changes in the market value of a contract are recorded as net gains
(losses) on investments in the consolidated statement of earnings at each balance sheet date, with a correspond-
ing adjustment to the carrying value of the derivative asset or liability.

The fair value of the majority of the company’s equity call options and certain warrants are based on published
quotes in an active market considered to be Level 1 inputs. The fair value of the majority of the company’s
derivative contracts and certain warrants are based on third party broker-dealer quotes considered to be Level 2
inputs. Included in Level 3 are investments in CPI-linked derivatives that are valued using broker-dealer quotes
which management has determined utilize market observable inputs except for the inflation volatility input
which is not market observable.

Cash collateral received from or paid to counterparties as security for derivative contract assets or liabilities
respectively is included in liabilities or assets on the consolidated balance sheet. Securities received from counter-
parties as collateral are not recorded as assets. Securities delivered to counterparties as collateral continue to be
reflected as assets on the consolidated balance sheet as assets pledged for short sale and derivative obligations.

Equity contracts – The company’s long equity total return swaps allow the company to receive the total return
on a notional amount of an equity index or individual equity security (including dividends and capital gains or
losses) in exchange for the payment of a floating rate of interest on the notional amount. Conversely, short
equity total return swaps allow the company to pay the total return on a notional amount of an equity index or
individual equity security in exchange for the receipt of a floating rate of interest on the notional amount. The
company classifies dividends and interest paid or received related to its long and short equity total return swaps
on a net basis as derivatives and other in interest and dividends in the consolidated statement of earnings. The
company’s equity and equity index total return swaps contain contractual reset provisions requiring counter-
parties to cash-settle on a monthly or quarterly basis any market value movements arising subsequent to the prior
settlement. Any cash amounts paid to settle unfavourable market value changes and, conversely, any cash

F A I R F A X F I N A N C I A L H O L D I N G S L I M I T E D

amounts received in settlement of favourable market value changes, are recorded as net gains (losses) on invest-
ments in the consolidated statement of earnings. To the extent that a contractual reset date of a contract does not
correspond to the balance sheet date, the company records net gains (losses) on investments in the consolidated
statement of earnings to adjust the carrying value of the derivative asset or liability associated with each total
return swap contract to reflect its fair value at the balance sheet date. Final cash settlements of total return swaps
are recognized as net gains (losses) on investments net of any previously recorded unrealized market value
changes since the last quarterly reset date. Total return swaps require no initial net investment and at inception,
their fair value is zero.

Credit contracts – The initial premium paid for a credit contract is recorded as a derivative asset and is sub-
sequently adjusted for changes in the unrealized fair value of the contract at each balance sheet date. Changes in
the unrealized fair value of a contract are recorded as net gains (losses) on investments in the consolidated state-
ment of earnings at each balance sheet date, with a corresponding adjustment to the carrying value of the
derivative asset. As the average remaining life of a contract declines, the fair value of the contract (excluding the
impact of credit spreads) will generally decline.

CPI-linked contracts – The initial premium paid for a CPI-linked contract is recorded as a derivative asset and
is subsequently adjusted for changes in the unrealized fair value of the contract at each balance sheet date.
Changes in the unrealized fair value of a contract are recorded as net gains (losses) on investments in the con-
solidated statement of earnings at each balance sheet date, with a corresponding adjustment to the carrying value
of the derivative asset. As the average remaining life of a contract declines, the fair value of the contract
(excluding the impact of changes in the underlying CPI) will generally decline. The reasonableness of the fair
values of CPI-linked derivative contracts are assessed by comparing the fair values received from broker-dealers to
values determined using option pricing models that incorporate market observable and unobservable inputs such
as the current value of the relevant CPI index underlying the derivative, the inflation swap rate, nominal swap
rate and inflation volatility and by comparing to recent market transactions where available. The fair values of
CPI-linked derivative contracts are sensitive to assumptions such as market expectations of future rates of
inflation and related inflation volatilities.

Insurance contracts
Insurance contracts are those contracts that have significant insurance risk at the inception of the contract.
Insurance risk arises when the company agrees to compensate a policyholder if a specified uncertain future event
adversely affects the policyholder. It is defined as the possibility of paying (including variability in timing of
payments) significantly more in a scenario where the insured event occurs than when it does not occur. Scenarios
considered include only those which have commercial substance. Any contracts not meeting the definition of an
insurance contract under IFRS are classified as investment contracts, derivative contracts or service contracts, as
appropriate.

Revenue recognition – Premiums written are deferred as unearned premiums and recognized as revenue, net of
premiums ceded, on a pro rata basis over the terms of the underlying policies. Net premiums earned are reported
gross of premium taxes which are included in operating expenses as the related premiums are earned. Certain
reinsurance premiums are estimated at the individual contract level, based on historical patterns and experience
from the ceding companies for contracts where reports from ceding companies for the period are not con-
tractually due until after the balance sheet date. The cost of reinsurance purchased by the company (premiums
ceded) is included in recoverable from reinsurers and is amortized over the contract period in proportion to the
amount of insurance protection provided. Unearned premium represents the portion of the premiums written
relating to periods of insurance and reinsurance coverage subsequent to the balance sheet date. Impairment losses
on insurance premiums receivable are included in operating expenses in the consolidated statement of earnings.

Deferred premium acquisition costs – Certain costs of acquiring insurance contracts, consisting of brokers’
commissions and premium taxes are deferred and charged to earnings as the related premiums are earned.
Deferred premium acquisition costs are limited to their estimated realizable value based on the related unearned
premium, which considers anticipated losses and loss adjustment expenses and estimated remaining costs of serv-
icing the business based on historical experience. The ultimate recoverability of deferred premium acquisition
costs is determined without regard to investment income. Impairment losses on deferred premium acquisition
costs are included in operating expenses in the consolidated statement of earnings.

Provision for losses and loss adjustment expenses – The company is required by applicable insurance laws,
regulations and Canadian accepted actuarial practice to establish reserves for payment of losses and loss adjust-
ment expenses that arise from the company’s general insurance products and the runoff of its former insurance
operations. These reserves represent the expected ultimate cost to settle claims occurring prior to, but still out-
standing as of, the balance sheet date. The company establishes its reserves by product line, type and extent of
coverage and year of occurrence. Loss reserves fall into two categories: reserves for reported losses (case reserves)
and reserves for incurred but not yet reported (“IBNR”) losses. Additionally, reserves are held for loss adjustment
expenses, which include the estimated legal and other expenses expected to be incurred to finalize the settlement
of the losses. Losses and loss adjustment expenses are charged to earnings as incurred.

The company’s reserves for reported losses and loss adjustment expenses are based on estimates of future pay-
ments to settle reported general insurance claims and claims from the run-off of its former insurance operations.
The company bases case reserve estimates on the facts available at the time the reserves are established and for
reinsurance, based on reports and individual case reserve estimates received from ceding companies. The com-
pany generally establishes these reserves on an undiscounted basis (except that amounts arising from certain
workers’ compensation business are discounted as discussed below) to recognize the estimated costs of bringing
pending claims to final settlement, taking into account inflation, as well as other factors that can influence the
amount of reserves required, some of which are subjective and some of which are dependent on future events. In
determining the level of reserves, the company considers historical trends and patterns of loss payments, pending
levels of unpaid claims and types of coverage. In addition, court decisions, economic conditions and public atti-
tudes may affect the ultimate cost of settlement and, as a result, the company’s estimation of reserves. Between
the reporting and final settlement of a claim, circumstances may change, which would result in changes to estab-
lished reserves. Items such as changes in law and interpretations of relevant case law, results of litigation, changes
in medical costs, as well as costs of vehicle and building repair materials and labour rates can substantially impact
ultimate settlement costs. Accordingly, the company reviews and re-evaluates case reserves on a regular basis. Any
resulting adjustments are included in the consolidated statement of earnings in the period the adjustment is
made. Amounts ultimately paid for losses and loss adjustment expenses can vary significantly from the level of
reserves originally set or currently recorded.

The estimated liabilities for workers’ compensation indemnity lifetime benefit claims are carried in the con-
solidated balance sheet at discounted amounts. The company uses tabular reserving for the indemnity lifetime
benefit liabilities with standard mortality assumptions, and discounts such reserves using interest rates ranging
from 3.5% to 5.0%. The periodic discount accretion is included in the consolidated statement of earnings as a
component of losses on claims, gross.

The company also establishes reserves for IBNR claims on an undiscounted basis (except for workers’ compensa-
tion indemnity lifetime benefit claims) to recognize the estimated cost of losses for events which have already
occurred but which have not yet been reported. These reserves are established to recognize the estimated costs
required to bring claims for these not yet reported losses to final settlement. As these losses have not yet been
reported, the company relies upon historical information and statistical models, based on product line, type and
extent of coverage, to estimate its IBNR liability. The company also uses reported claim trends, claim severities,
exposure growth, and other factors in estimating its IBNR reserves. The company revises its estimates of IBNR
reserves as additional information becomes available and as claims are actually reported.

The time required to learn of and settle claims is an important consideration in establishing the company’s
reserves. Short-tail claims, such as for property damage, are normally reported soon after the incident and are
generally settled within months following the reported incident. Long-tail claims, such as pollution, asbestos and
product liability, can take years to develop and additional time to settle. For long-tail claims, information
concerning the event, such as the required medical treatments and the measures and costs required to clean up
pollution, may not be readily available. Accordingly, the reserving analysis of long-tail lines of business is gen-
erally more difficult and subject to greater uncertainties than for short-tail lines of business.

Since the company does not establish reserves for catastrophes in advance of the occurrence of such events, these
events may cause volatility in the levels of incurred losses and reserves, subject to the effects of reinsurance recov-
eries. This volatility may also be contingent upon political and legal developments after the occurrence of the
event.

F A I R F A X F I N A N C I A L H O L D I N G S L I M I T E D

Estimation techniques – Provisions for losses and loss adjustment expense and provisions for unearned pre-
miums are determined based upon previous claims experience, knowledge or events and the terms and conditions
of the relevant policies and on interpretation of circumstances. Particularly relevant is experience with similar
cases and historical claims payment trends. The approach also includes the consideration of the development of
loss payment trends, the potential longer term significance of large events, the levels of unpaid claims, legislative
changes, judicial decisions and economic and political conditions.

Where possible the company applies multiple techniques in estimating required provisions. This gives greater
understanding of the trends inherent in the data being projected. The company’s estimates of losses and loss
adjustment expenses are reached after a review of several commonly accepted actuarial projection methodologies
and a number of different bases to determine these provisions. These include methods based upon the following:

(cid:129)

the development of previously settled claims, where payments to date are extrapolated for each prior year;

estimates based upon a projection of numbers of claims and average cost;

(cid:129) notified claims development, where notified claims to date for each year are extrapolated based upon

observed development of earlier years; and,

(cid:129)

expected loss ratios.

In addition, the company uses other techniques such as aggregate benchmarking methods for specialist classes of
business. In selecting its best estimate, the company considers the appropriateness of the methods and bases to
the individual circumstances of the line of business and underwriting year. The process is designed to select the
most appropriate best estimate.

Large claims impacting each relevant line of business are generally assessed separately, being measured either at
the face value of the loss adjusters’ estimates or projected separately in order to allow for the future development
of large claims.

Provisions are calculated gross of any reinsurance recoveries. A separate estimate is made of the amounts that will
be recoverable from reinsurers based upon the gross provisions and having due regard to collectability.

The provisions for losses and loss adjustment expenses are subject to review at the subsidiary level, the corporate
level by the company’s Chief Risk Officer and by independent third party actuaries. In addition, for major classes
where the risks and uncertainties inherent in the provisions are greatest, ad hoc detailed reviews are undertaken
by advisers who are able to draw upon their specialist expertise and a broader knowledge of current industry
trends in claims development. The results of these reviews are considered when establishing the appropriate levels
of provisions for losses and loss adjustment expenses and unexpired risks.

Uncertainties – The uncertainty arising under insurance contracts may be characterized under a number of
specific headings, such as uncertainty relating to:

(cid:129) whether an event has occurred which would give rise to a policyholder suffering an insured loss;

(cid:129)

the extent of policy coverage and limits applicable;

the amount of insured loss suffered by a policyholder as a result of the event occurring; and,

the timing of a settlement to a policyholder for a loss suffered.

The degree of uncertainty will vary by line of business according to the characteristics of the insured risks and the
cost of a claim will be determined by the actual loss suffered by the policyholder.

There may be significant reporting lags between the occurrence of an insured event and the time it is actually
reported to the company. Following the identification and notification of an insured loss, there may still be
uncertainty as to the magnitude and timing of the settlement of the claim. There are many factors that will
determine the level of uncertainty such as inflation, inconsistent judicial interpretations and court judgments
that broaden policy coverage beyond the intent of the original insurance, legislative changes and claims handling
procedures.

The establishment of provisions for losses and loss adjustment expenses is an inherently uncertain process and, as
a consequence of this uncertainty, the eventual cost of settlement of outstanding claims and unexpired risks can
vary substantially from the initial estimates in the short term, particularly for the company’s long-tail lines of

business. The company seeks to provide appropriate levels of provisions for losses and loss adjustment expenses
and provisions for unexpired risks taking the known facts and experience into account.

The company has exposures to risks in each line of business that may develop adversely and that could have a
material impact upon the company’s financial position. The insurance risk diversity within the company’s portfo-
lio of issued policies make it impossible to predict whether material development will occur and, if it does occur,
the location and the timing of such an occurrence. The estimation of insurance liabilities involves the use of
judgments and assumptions that are specific to the insurance risks within each territory and the particular type of
insurance risk covered. The diversity of the insurance risks results in it being difficult to identify individual judg-
ments and assumptions that are more likely than others to have a material impact on the future development of
the insurance liabilities.

Asbestos and environmental claims are examples of specific risks which may develop materially. The estimation
of the provisions for the ultimate cost of claims for asbestos and environmental pollution is subject to a range of
uncertainties that is generally greater than those encountered for other classes of insurance business. As a result, it
is not possible to determine the future development of asbestos and environmental claims with the same degree
of reliability as with other types of claims, particularly in periods when theories of law are in flux. Consequently,
traditional techniques for estimating provisions for losses and loss adjustment expenses cannot be wholly relied
upon and the company employs specialized techniques to determine such provisions using the extensive knowl-
edge of both internal and external asbestos and environmental pollution experts and legal advisors.

Factors contributing to this higher degree of uncertainty include:

(cid:129)

long delays in reporting claims from the date of exposure (for example, cases of mesothelioma can have a
latent period of up to 40 years) making estimation of the ultimate number of claims expected to be
received particularly difficult;

issues of allocation of responsibility among potentially responsible parties and insurers;

emerging court decisions increasing or decreasing insurer liability;

tendencies for social trends and factors to influence court awards;

(cid:129) developments pertaining to the company’s ability to recover reinsurance for claims of this nature; and,

(cid:129) developments in the tactics of plaintiff lawyers and court decisions and awards.

Reinsurance
Reinsurance does not relieve the originating insurer of its liability and is reflected on the consolidated balance
sheet on a gross basis to indicate the extent of credit risk related to reinsurance and the obligations of the insurer
to its policyholders. Reinsurance assets include balances due from reinsurance companies for paid and unpaid
losses and loss adjustment expenses and ceded unearned premiums. Amounts recoverable from reinsurers are
estimated in a manner consistent with the claim liability associated with the reinsured policy. Reinsurance is
recorded gross on the consolidated balance sheet unless a legal right to offset against a liability owing to the same
reinsurer exists.

Ceded premiums and losses are recorded in the consolidated statement of earnings in net premiums earned and
ceded losses on claims, respectively and in recoverable from reinsurers on the consolidated balance sheet.
Unearned premiums are reported before reduction for premiums ceded to reinsurers and the reinsurers’ portion is
classified with recoverable from reinsurers on the consolidated balance sheet along with the estimates of the
reinsurers’ shares of provision for claims determined on a basis consistent with the related claims liabilities.

In order to protect capital and 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, the company has for certain acquisitions obtained vendor
indemnities or purchased excess of loss reinsurance protection from reinsurers.

Impairment – Reinsurance assets are assessed on a regular basis for any events that may trigger impairment.
Triggering events may include legal disputes with third parties, changes in capital, surplus levels and in credit
ratings of a counterparty, and historic experience regarding collectability from specific reinsurers.

F A I R F A X F I N A N C I A L H O L D I N G S L I M I T E D

If there is objective evidence that a reinsurance asset is impaired, the carrying amount of the asset is reduced to its
recoverable amount. Impairment is considered to have taken place if it is probable that the company will not be
able to collect the amounts due from reinsurers. The carrying amount of a reinsurance asset is reduced through
the use of an allowance account. Provisions for previously impaired reinsurance assets may be reversed in sub-
sequent financial reporting periods, provided there is objective evidence that the conditions leading to the initial
impairment have changed or no longer exist. On reversal of any such provisions, the carrying value of the
reinsurance asset may not exceed its previously reported carrying value.

Provisions for uncollectible reinsurance are recorded in the consolidated statement of earnings in the period in
which the company determines that it is unlikely that the full amount or disputed amounts due from reinsurers
will be collectible. When the probability of collection is remote either through liquidation of the reinsurer or set-
tlement of the reinsurance balance, the uncollectible balance is written off from the provision account against the
reinsurance balance.

Risk transfer – Reinsurance contracts are assessed to ensure that insurance risk is transferred by the ceding or
assuming company to the reinsurer. Those contracts that do not transfer insurance risk are accounted for using
the deposit method whereby a deposit asset or liability is recognized based on the consideration paid or received
less any explicitly identified premiums or fees to be retained by the ceding company.

Premiums – Premiums payable in respect of reinsurance ceded are recognized on the consolidated balance sheet
in the period in which the reinsurance contract is entered into and include estimates for contracts in force which
have not yet been finalized. Premiums ceded are recognized in the consolidated statement of earnings over the
period of the reinsurance contract.

Uncertainties – The company is exposed to disputes on, and defects in, contracts with its reinsurers and the
possibility of default by its reinsurers. The company is also exposed to the credit risk assumed in fronting
arrangements and to potential reinsurance capacity constraints.

The company’s credit risk on reinsurance recoverables is analyzed by its reinsurance security department which is
responsible for setting appropriate provisions for reinsurers suffering financial difficulties. The process for
determining the provision involves quantitative and qualitative assessments using current and historical credit
information and current market information. The process inherently requires the use of certain assumptions and
judgments including: (i) assessing the probability of impairment; (ii) estimating ultimate recovery rates of
impaired reinsurers; and (iii) determining the effects from potential offsets or collateral arrangements. Changes to
these assumptions or using other reasonable judgments can materially affect the provision level and the compa-
ny’s net earnings.

Income taxes
The provision for income taxes for the period comprises current and deferred income tax. Income taxes are recog-
nized in the consolidated statement of earnings, except to the extent that they relate to items recognized in other
comprehensive income or directly in equity. In those cases, the related taxes are also recognized in other compre-
hensive income or directly in equity, respectively.

Current income tax is calculated on the basis of the tax laws enacted or substantively enacted at the end of the
reporting period in the countries where the company’s subsidiaries and associates operate and generate taxable
income.

Deferred income tax is calculated under the liability method whereby deferred income tax assets and liabilities are
recognized for temporary differences between the financial statement carrying amounts of assets and liabilities
and their respective income tax bases at the current substantively enacted tax rates. With the exception of initial
recognition of deferred income tax arising from business combinations, changes in deferred income tax associated
with components of other comprehensive income are recognized directly in other comprehensive income while
all other changes in deferred income tax are included in the provision for income taxes in the consolidated
statement of earnings.

Deferred income tax assets are recognized to the extent that it is probable that future taxable profit will be avail-
able against which the temporary differences can be utilized. The tax effects of carry-forwards of unused losses or
unused tax credits are recognized as deferred tax assets when it is probable that future taxable profits will be avail-
able against which these losses can be utilized.

Current and deferred income tax assets and liabilities are offset when the income taxes are levied by the same
taxation authority and there is a legally enforceable right of offset.

Other assets
Other assets consist of premises and equipment, inventories and receivables of subsidiaries included in the other
reporting segment, accrued interest and dividends, income taxes refundable, receivables for securities sold, pen-
sion and post retirement assets and other miscellaneous receivable and prepaid expense balances.

Premises and equipment – Premises and equipment is recorded at historical cost less accumulated amor-
tization and any accumulated impairment losses. Historical cost includes expenditures that are directly attribut-
able to the acquisition of the asset. The company reviews premises and equipment for impairment when events or
changes in circumstances indicate that the carrying value may not be recoverable. The recoverable amount is
determined as the higher of an asset’s fair value less costs to sell and value in use. If an asset is impaired, the carry-
ing amount is reduced to the asset’s recoverable amount with an offsetting charge recorded in the consolidated
statement of earnings. The cost of premises and equipment is depreciated on a straight-line basis over the asset’s
estimated useful life. If events or changes in circumstances indicate that a previously recognized impairment loss
has decreased or no longer exists, the reversal is recognized in the consolidated statement of earnings to the
extent that the carrying amount of the asset after reversal does not exceed the carrying amount that would have
been had no impairment taken place.

Depreciation expense is recorded in operating expenses within the consolidated statement of earnings. All repairs
and maintenance costs are charged to operating expenses in the period incurred. The cost of a major renovation is
included in the carrying amount of the asset when it is probable that future economic benefits will flow to the
company, and is depreciated over the remaining useful life of the asset.

Other – Revenues from the sale of animal nutrition and other non-insurance products are recognized when the
price is fixed or determinable, collection is reasonably assured and the product has been delivered to the customer
from the plant or store. These revenues and the related cost of inventories sold are recorded in other revenue and
other expenses respectively, in the consolidated statement of earnings.

The consolidated balance sheet includes inventories of the other reporting segment recorded in other assets which
are measured at the lower of cost or net realizable value on a first-in, first-out basis. Inventories are written down
to net realizable value when the cost of inventories is estimated to be greater than the anticipated selling price less
applicable selling costs.

Long term debt
Borrowings (debt issued) are recognized initially at fair value, net of transaction costs incurred, and subsequently
stated at amortized cost; any difference between the proceeds (net of transaction costs) and the redemption value
is recognized in the consolidated statement of earnings over the period of the borrowings using the effective
interest rate method.

Interest expense on borrowings is recognized in the consolidated statement of earnings using the effective interest
rate method.

Contingencies and commitments
A provision is recognized for a contingent liability, commitment or financial guarantee when the company has a
present legal or constructive obligation as a result of a past event, it is probable that an outflow of resources
embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the
amount of the obligation. Provisions are discounted when the effect of the time value of money is considered
significant.

Equity
Common stock is classified as equity when there is no contractual obligation to transfer cash or other financial
assets to the holder of the shares. Incremental costs directly attributable to the issue or repurchase for cancellation
of equity instruments are recognized in equity, net of tax.

Treasury shares are equity instruments reacquired by the company which have not been cancelled and are
deducted from equity, regardless of the objective of the transaction. The company acquires its own subordinate

F A I R F A X F I N A N C I A L H O L D I N G S L I M I T E D

voting shares on the open market for its share-based payment awards. No gain or loss is recognized in the con-
solidated statement of earnings on the purchase, sale, issue or cancellation of treasury shares. Consideration paid
or received is recognized directly in equity.

Dividends and other distributions to holders of equity instruments are recognized directly in equity, net of tax.

Share-based payments
The company has restricted share plans or equivalent for management of the holding company and its sub-
sidiaries with vesting periods of up to ten years from the date of grant. The fair value of restricted share awards is
estimated on the date of grant based on the market price of the company’s stock and is amortized to compensa-
tion expense over the related vesting periods. When a restricted share award vests in instalments over the vesting
period (graded vesting), each instalment is accounted for as a separate arrangement. At each balance sheet date,
the company revises its estimates of the number of restricted share awards expected to vest.

Net earnings per share attributable to shareholders of Fairfax
Net earnings (loss) per share – Basic net earnings (loss) per share is calculated by dividing the net earnings
(loss) attributable to shareholders of Fairfax, after the deduction of preferred share dividends declared and the
excess over stated value of preferred shares purchased for cancellation, by the weighted average number of sub-
ordinate and multiple voting shares issued and outstanding during the period, excluding subordinate voting
shares purchased by the company and held as treasury shares.

Net earnings (loss) per diluted share – Diluted earnings (loss) per share is calculated by adjusting the
weighted average number of subordinate and multiple voting shares outstanding during the period for the dilu-
tive effect of share-based payments.

Pensions and post retirement benefits
The company’s subsidiaries have a number of arrangements in Canada, the United States and the United King-
dom that provide pension and post retirement benefits to retired and current employees. The holding company
has no arrangements or plans that provide defined benefit pension or post retirement benefits to retired or cur-
rent employees. Pension arrangements of the subsidiaries include defined benefit statutory pension plans, as well
as supplemental arrangements that provide pension benefits in excess of statutory limits. These plans are a
combination of defined benefit plans and defined contribution plans. The assets of these plans are held separately
from the company’s general assets in separate pension funds.

Defined contribution plan – A defined contribution plan is a pension plan under which the company pays
fixed contributions. Contributions to defined contribution pension plans are charged to operating expenses in the
period in which the employment services qualifying for the benefit are provided. The company has no further
payment obligations once the contributions have been paid.

Defined benefit plan – A defined benefit plan is a plan that defines an amount of pension or other post
retirement benefit that an employee will receive on retirement, usually dependent on one or more factors such as
age, years of service and salary.

For defined benefit pension and post retirement benefit plans, the benefit obligations, net of the fair value of plan
assets, and adjusted for unrecognized prior service costs and pension asset limitations, if any, are accrued in the
consolidated balance sheet in accounts payable and accrued liabilities (note 14). Plans in a net asset position are
recognized in other assets (note 13). The company has adopted the following policies:

(i)

Actuarial valuations of benefit liabilities for the majority of pension and post retirement benefit plans
are performed each year using the projected benefit method prorated on service, based on manage-
ment’s assumptions of the discount rate, rate of compensation increase, retirement age, mortality and
the trend in the health care cost rate. The discount rate is determined by management with reference to
market conditions at year end. Other assumptions are determined with reference to long-term expect-
ations.

(ii)

Expected return on plan assets is calculated based on the fair value of those assets.

(iii) Actuarial gains and losses arise from the difference between the actual rate of return and the expected
long term rate of return on plan assets for that period or from changes in actuarial assumptions used to
determine the benefit obligation. Actuarial gains and losses are recorded in other comprehensive income
and subsequently included in retained earnings.

(iv) Prior service costs arising from plan amendments are amortized to income on a straight line basis over
the remaining period of service until such benefits vest. The cost of providing additional benefits that
vest on their introduction are charged to income immediately.

(v) When a restructuring of a benefit plan gives rise to both a curtailment and a settlement of obligations,

the curtailment is accounted for prior to the settlement.

(vi) Defined benefit plans in a surplus position recognize an asset, subject to meeting any minimum funding
requirements. Asset limitations due to such requirements are recorded in other comprehensive income
and subsequently included in retained earnings.

Certain of the company’s post retirement benefit plans covering medical care and life insurance are funded internally.

Operating leases
The company and its subsidiaries are lessees under various operating leases relating to premises, automobiles and
equipment. The leased assets are not recognized on the consolidated balance sheet. Payments made under operat-
ing leases (net of any incentives received from the lessor) are recorded in operating expenses on a straight-line
basis over the period of the lease, unless another systematic basis is representative of the time pattern of the user’s
benefit even if the payments are not on that basis.

New accounting pronouncements
The following new standards and amendments have been issued by the IASB and are not effective for the fiscal
year beginning January 1, 2011. The company has not early adopted any of the new standards or amendments,
and is currently evaluating the timing of adoption and their impact on its consolidated financial statements.

Amendment to IAS 1 Presentation of Financial Statements (“IAS 1”)
In June 2011, the IASB issued an amendment to IAS 1 that changes the presentation of items in the consolidated
statement of comprehensive income. This amendment requires the components of other comprehensive income
to be presented in two separate groups, based on whether or not the components may be recycled to the con-
solidated statement of earnings in the future. Companies will continue to have a choice of whether to present
components of other comprehensive income before or after tax. Those that present components of other
comprehensive income before tax will be required to disclose the amount of tax related to the two groups sepa-
rately. This amendment is effective for annual periods beginning on or after July 1, 2012, is applied retro-
spectively, with early adoption permitted.

Amendment to IAS 19 Employee Benefits (“IAS 19”)
In June 2011, the IASB issued an amendment to IAS 19 that requires significant changes to the recognition and
measurement of defined benefit pension and post retirement benefit expense and to the disclosures for all
employee benefits. This amendment: eliminates the corridor method; requires that actuarial gains and losses be
immediately recognized in other comprehensive income without recycling to the consolidated statement of earn-
ings; replaces the expected return on plan assets with a net interest amount; requires all past service costs to be
recognized in the period of a plan amendment; reduces flexibility in the method of presentation in the con-
solidated statement of earnings; and expands the disclosure requirements for benefit plans. This amendment is
effective for annual periods beginning on or after January 1, 2013, is applied retrospectively, with early adoption
permitted.

IFRS 13 Fair Value Measurement (“IFRS 13”)
In May 2011, the IASB published IFRS 13, a comprehensive standard on how to measure and disclose fair values.
IFRS 13 applies to IFRSs that require or permit fair value measurement, but does not address when to measure fair
value or require additional use of fair value. The new standard requires disclosures similar to those in IFRS 7
Financial Instruments: Disclosures (“IFRS 7”), but applies to all assets and liabilities measured at fair value, whereas
IFRS 7 applied only to financial assets and liabilities measured at fair value. IFRS 13 is effective for annual periods
beginning on or after January 1, 2013, is applied prospectively as of the beginning of the annual period in which
it is adopted, with early adoption permitted.

F A I R F A X F I N A N C I A L H O L D I N G S L I M I T E D

New and revised Reporting Entity standards
In May 2011 the IASB published a package of five new and revised standards that address the scope of the report-
ing entity. The new standards in the package are IFRS 10 Consolidated Financial Statements, IFRS 11 Joint Arrange-
ments and IFRS 12 Disclosure of Interests in Other Entities. The revised standards are IAS 28 Investments in Associates
and Joint Ventures and IAS 27 Separate Financial Statements.

The requirements contained in the package of five standards are effective for annual periods beginning on or after
January 1, 2013, with early adoption permitted so long as the entire package is early adopted together. The five
standards are described below.

IFRS 10 Consolidated Financial Statements (“IFRS 10”)
IFRS 10 introduces a single consolidation model that uses the same criteria to determine control for entities of all
types, irrespective of whether the investee is controlled by voting rights or other contractual arrangements. The
principle that a consolidated entity presents a parent and its subsidiaries as a single entity remains unchanged, as
do the mechanics of consolidation. IFRS 10 supersedes existing guidance under IAS 27 Consolidated and Separate
Financial Statements and SIC–12 Consolidation – Special Purpose Entities.

IFRS 11 Joint Arrangements (“IFRS 11”)
IFRS 11 establishes principles for financial reporting by parties to a joint arrangement, and only differentiates
between joint operations and joint ventures. The option to apply proportionate consolidation when accounting
for joint ventures has been removed and equity accounting is now applied in accordance with IAS 28 Investments
in Associates and Joint Ventures. IFRS 11 supersedes existing guidance under IAS 31 Interests in Joint Ventures and
SIC–13 Jointly Controlled Entities – Non Monetary Contributions by Venturers.

IFRS 12 Disclosure of Interests in Other Entities (“IFRS 12”)
IFRS 12 sets out the disclosure requirements under IFRS 10 Consolidated Financial Statements, IFRS 11 Joint
Arrangements and IAS 28 Investments in Associates and Joint Ventures. The enhanced disclosures in the new
standard are intended to help financial statement readers evaluate the nature, risks and financial effects of an entity’s
interests in subsidiaries, associates, joint arrangements and unconsolidated structured entities. Entities are permitted
to incorporate any of the disclosure requirements in IFRS 12 into their financial statements without early adopting
IFRS 12 (which would trigger the requirement to also early adopt the other four standards in the package).

IAS 28 Investments in Associates and Joint Ventures (“IAS 28”)
IAS 28 has been amended in line with the changes to accounting for joint arrangements in IFRS 11. The amended
standard prescribes the accounting for investments in associates and provides guidance on the application of the
equity method when accounting for investments in associates and joint ventures.

IAS 27 Separate Financial Statements (“IAS 27”)
IAS 27 has been amended to provide guidance on the accounting and disclosure requirements for investments in
subsidiaries, associates and joint ventures when an entity prepares separate financial statements. The amended
standard requires an entity preparing separate financial statements to account for investments at cost or in
accordance with IFRS 9 Financial Instruments.

4. Critical Accounting Estimates and Judgments

In the preparation of the company’s consolidated financial statements, management has made a number of esti-
mates and judgments, the more critical of which are discussed below, with the exception of fair value disclosures
and contingencies which are discussed in note 5 and note 19, respectively. Estimates and judgments are con-
tinually evaluated and are based on historical experience and other factors, including expectations of future
events that are believed to be reasonable under the circumstances.

Provision for losses and loss adjustment expenses
Provisions for losses and loss adjustment expenses are valued based on Canadian accepted actuarial practices,
which are designed to ensure the company establishes an appropriate reserve on the consolidated balance sheet to
cover insured losses with respect to reported and unreported claims incurred as of the end of each accounting
period and claims expenses. The assumptions underlying the valuation of provisions for losses and loss adjust-
ment expenses are reviewed and updated by the company on an ongoing basis to reflect recent and emerging
trends in experience and changes in risk profile of the business. The estimation techniques employed by the
company in determining provisions for losses and loss adjustment expenses and the inherent uncertainties asso-
ciated with insurance contracts are described in the “Insurance Contracts” section of note 3 and the
“Underwriting Risk” section of note 24.

Provision for uncollectible reinsurance recoverables
The company establishes provisions for uncollectible reinsurance recoverables centrally, based on a detailed
review of the credit risk of each underlying reinsurer. Considerations involved in establishing these provisions
include the balance sheet strength of the reinsurer, its liquidity (or ability to pay), its desire to pay (based on prior
history), financial strength ratings as determined by external rating agencies and specific disputed amounts based
on contract interpretations which occur from time to time. The company monitors these provisions and reas-
sesses them on a quarterly basis, or more frequently if necessary, updating them as new information becomes
available. Uncertainties associated with the company’s reinsurance recoverables are discussed further in the
“Reinsurance” section of note 3.

Recoverability of deferred income tax assets
In determining the recoverability of deferred income tax assets, the company primarily considers current and
expected profitability of applicable operating companies and their ability to utilize any recorded tax assets. The
company reviews its deferred income tax assets on a quarterly basis, taking into consideration the underlying
operations’ performance as compared to plan, the outlook for the business going forward, the impact of enacted
and proposed changes to tax law, the availability of tax planning strategies and the expiry date of the tax losses.

Assessment of goodwill for potential impairment
Goodwill is assessed annually for impairment or more frequently if there are potential indicators of impairment.
Management estimates the recoverable amount of each of the company’s cash-generating units using one or more
generally accepted valuation techniques, which requires the making of a number of assumptions, including
assumptions about future revenue, net earnings, corporate overhead costs, capital expenditures, cost of capital,
and the growth rate of the various operations. The recoverable amount of each cash-generating unit to which
goodwill has been assigned is compared to its carrying value. If the recoverable amount of a cash-generating unit
is determined to be less than its carrying value, the excess is recognized as a goodwill impairment loss. Given the
variability of future-oriented financial information, goodwill impairment tests are subjected to sensitivity analysis.

F A I R F A X F I N A N C I A L H O L D I N G S L I M I T E D

5. Cash and Investments

Cash and short term investments, portfolio investments and short sale and derivative obligations are classified as
at FVTPL, except for investments in associates and other invested assets which are classified as other, and are
shown in the table below:

Holding company:
Cash and cash equivalents (note 28)
Short term investments
Cash and cash equivalents pledged for short sale and derivative obligations
Short term investments pledged for short sale and derivative obligations
Bonds
Preferred stocks
Common stocks
Derivatives (note 7)

Short sale and derivative obligations

Portfolio investments:
Cash and cash equivalents (note 28)
Short term investments
Bonds
Preferred stocks
Common stocks
Investments in associates (note 6)
Derivatives (note 7)
Other invested assets

Assets pledged for short sale and derivative obligations:
Cash and cash equivalents (note 28)
Short term investments
Bonds

Short sale and derivative obligations

December 31,
2011

December 31,
2010

January 1,
2010

43.5
244.0
–
249.0
188.1
45.0
166.4
90.7

337.3
111.3
–
137.4
513.5
43.4
343.2
54.6

115.4
256.0
24.5
54.4
403.2
64.8
235.8
97.5

1,026.7
(63.9)

1,540.7
(66.5)

1,251.6
(8.9)

962.8

1,474.2

1,242.7

1,995.0
4,204.2
10,835.2
563.3
3,663.1
924.3
364.4
30.2

3,022.1
491.8
11,748.2
583.9
4,133.3
707.9
547.8
31.6

2,093.3
1,151.5
10,918.3
292.8
4,893.2
423.7
127.7
15.0

22,579.7

21,266.6

19,915.5

6.2
132.5
747.6

886.3

14.6
–
695.0

709.6

–
4.6
146.9

151.5

23,466.0
(106.3)

21,976.2
(150.4)

20,067.0
(48.3)

23,359.7

21,825.8

20,018.7

Common stocks include investments in certain limited partnerships with a carrying value of $321.2 at
December 31, 2011 ($265.3 at December 31, 2010, $134.0 at January 1, 2010).

Restricted cash and cash equivalents at December 31, 2011 of $134.7 ($98.9 at December 31, 2010, $76.3 at Jan-
uary 1, 2010) was comprised primarily of amounts required to be maintained on deposit with various regulatory
authorities to support the subsidiaries’ insurance and reinsurance operations. Restricted cash and cash equivalents
are included in the consolidated balance sheets in holding company cash and investments, or in subsidiary cash
and short term investments and assets pledged for short sale and derivative obligations in portfolio investments.

The company’s subsidiaries have pledged cash and investments, inclusive of trust funds and regulatory deposits,
as security for their own obligations to pay claims or make premium payments (these pledges are either direct or
to support letters of credit). In order to write insurance business in certain jurisdictions (primarily U.S. states) the
company’s subsidiaries must deposit funds with local insurance regulatory authorities to provide security for
future claims payments as ultimate protection for the policyholder. Additionally, some of the company’s sub-
sidiaries provide reinsurance to primary insurers, for which funds must be posted as security for losses that have
been incurred but not yet paid. These pledges are in the normal course of business and are generally released
when the payment obligation is fulfilled.

The table that follows summarizes pledged assets (excluding assets pledged in favour of Lloyd’s) by the nature of
the pledge requirement:

Regulatory deposits
Security for reinsurance and other

December 31,
2011
2,171.3
722.4

December 31,
2010
1,779.5
889.4

January 1,
2010
1,424.9
794.3

2,893.7

2,668.9

2,219.2

Fixed Income Maturity Profile
Bonds are summarized by the earliest contractual maturity date in the table below. Actual maturities may differ
from maturities shown below due to the existence of call and put features. At December 31, 2011, securities con-
taining call and put features represented approximately $6,032.3 and $1,069.9 respectively ($5,444.0 and $1,286.0
at December 31, 2010 respectively) of the total fair value of bonds in the table below.

Due in 1 year or less
Due after 1 year through 5 years
Due after 5 years through 10 years
Due after 10 years

December 31, 2011

December 31, 2010

Amortized
cost
442.5
2,288.5
3,884.5
3,751.0

Fair
value
413.7
2,505.0
4,446.4
4,405.8

Amortized
cost
555.4
1,618.0
4,870.1
5,596.6

Fair
value
525.1
1,809.3
5,223.6
5,398.7

10,366.5

11,770.9

12,640.1

12,956.7

Effective interest rate

6.2%

5.7%

The calculation of the effective interest rate of 6.2% (December 31, 2010 – 5.7%) is on a pre-tax basis and does not
give effect to the favourable tax treatment which the company expects to receive with respect to its tax advan-
taged bond investments of approximately $4.9 billion ($4.4 billion at December 31, 2010) included in U.S. states
and municipalities.

F A I R F A X F I N A N C I A L H O L D I N G S L I M I T E D

Fair Value Disclosures
The company’s use of quoted market prices (Level 1), valuation models using observable market information as
inputs (Level 2) and valuation models without observable market information as inputs (Level 3) in the valuation
of securities and derivative contracts were by type of issuers as follows:

December 31, 2011

Significant

December 31, 2010

Significant

other

Significant

Total fair

other

Significant

Quoted

observable

unobservable

prices

inputs

value

asset

Quoted

observable

unobservable

prices

inputs

Total fair

value

asset

(liability)

(Level 1)

(Level 2)

(Level 3)

(liability)

(Level 1)

(Level 2)

Cash and cash equivalents

2,044.7

Short term investments:

Canadian provincials

U.S. treasury

Other government

Corporate and other

408.9

4,071.0

288.0

267.4

61.8

–

4,829.7

4,747.3

–

20.6

61.8

82.4

Bonds:

Canadian government

Canadian provincials

U.S. treasury

U.S. states and municipalities

Other government

Corporate and other

21.1

1,038.7

2,082.3

6,201.5

934.7

1,492.6

–

21.1

1,038.7

2,082.3

6,201.5

934.7

1,432.6

3,374.0

88.6

364.2

252.2

35.5

88.6

364.2

248.6

6.3

740.5

707.7

–

3.6

29.2

32.8

–

393.5

1,251.3

2,824.7

5,425.6

954.6

60.0

2,107.0

–

393.5

1,251.3

2,824.7

5,425.6

954.6

2,045.1

12,894.8

134.6

450.7

41.7

627.0

inputs

(Level 3)

–

61.9

–

0.3

–

0.3

11,770.9

– 11,710.9

60.0

12,956.7

105.5

457.3

45.5

608.3

–

103.5

451.0

45.5

600.0

2.0

6.3

–

8.3

134.6

451.0

41.7

627.3

Preferred stocks:

Canadian

U.S.

Other

Common stocks:

Canadian

U.S.

Other

711.8

673.3

1,785.0

1,507.6

13.7

33.8

1,332.7

886.1

290.6

24.8

243.6

156.0

814.8

784.3

2,539.4

2,345.0

14.6

47.4

1,122.3

665.9

324.7

15.9

147.0

131.7

3,829.5

3,067.0

338.1

424.4

4,476.5

3,795.2

386.7

294.6

Derivatives and other invested assets(1)

462.3

Short sale and derivative obligations

(170.2)

–

254.1

208.2

609.4

(170.2)

–

(216.9)

–

280.8

328.6

(216.9)

–

Holding company cash and
investments and portfolio
investments measured at fair value

23,375.2

9,859.0 12,815.3

700.9

22,567.5

7,876.9

14,005.2

685.4

100.0% 42.2%

54.8%

3.0% 100.0% 34.9%

62.1%

3.0%

(1) Excluded from these totals are real estate investments of $23.0 ($24.6 at December 31, 2010) which are carried at cost

less any accumulated amortization and impairment.

Included in Level 3 are investments in CPI-linked derivatives, certain private placement debt securities and
common and preferred shares. CPI-linked derivatives are classified within derivatives and other invested assets on
the consolidated balance sheets and are valued using broker-dealer quotes which management has determined
utilize market observable inputs except for the inflation volatility input which is not market observable. Private
placement debt securities are classified within holding company cash and investments and bonds on the con-
solidated balance sheets and are valued using industry accepted discounted cash flow and option pricing models
that incorporate certain inputs that are not market observable; specifically share price volatility (for convertible
securities) and credit spreads of the issuer. Common shares are classified within holding company cash and
investments and common stocks on the consolidated balance sheets and include common shares of private
companies as well as investments in certain private equity funds and limited partnerships. These investments are
valued by third party fund companies using observable inputs where available and unobservable inputs, in con-
junction with industry accepted valuation models, where required. In some instances the private equity funds and
limited partnerships may require at least three months’ notice to liquidate.

A summary of changes in the fair values of Level 3 financial assets measured at fair value on a recurring basis for
the years ended December 31 follows:

2011

2010

Derivatives

and other

Derivatives

and other

Common

Preferred

invested

Common

Preferred

invested

Bonds

stocks

assets Total

Bonds

stocks

assets Total

Balance – January 1

Total net realized and unrealized gains (losses) included

in net gains (losses) on investments

Purchases

Acquisition of Zenith National

Sales

Transfer in (out) of category

61.9

294.6

(1.2)

15.0

–

38.5

146.8

–

(15.7)

(55.5)

–

0.3

–

8.0

–

328.6

685.4

47.2

146.2

–

193.4

(243.0) (205.7)

122.6

292.4

–

32.3

63.9

1.0

–

(71.2)

(82.5)

–

13.0

72.5

78.2

(30.3)

15.0

4.6

100.0

0.3

–

(64.6)

(14.7)

37.1

273.5

–

79.5

– (112.8)

(104.6)

356.1

266.5

Balance – December 31

60.0

424.4

8.3

208.2

700.9

61.9

294.6

0.3

328.6

685.4

Purchases of $292.4 of investments classified as Level 3 within the fair value hierarchy during 2011 were primarily
comprised of certain limited partnerships and CPI-linked derivative contracts. Total net realized and unrealized
losses of $205.7 during 2011 were primarily comprised of $233.9 of unrealized losses (excluding the effect of for-
eign exchange) recognized on CPI-linked derivative contracts.

Investment Income
An analysis of investment income for the years ended December 31 follows:

Interest and dividends and share of profit of associates

Interest income:

Cash and short term investments
Bonds
Derivatives and other

Dividends:

Preferred stocks
Common stocks

Investment expenses

Interest and dividends

Share of profit of associates

2011

2010

26.2
714.9
(135.8)

21.3
662.3
(80.4)

605.3

603.2

44.1
75.9

24.8
104.0

120.0

128.8

(20.0)

(20.5)

705.3

711.5

1.8

46.0

F A I R F A X F I N A N C I A L H O L D I N G S L I M I T E D

Net gains (losses) on investments

2011

Mark-to-market

2010

Mark-to-market

Inception-to-date
realized gains
(losses) on
positions
closed or sold
in the year

(Gains) losses
recognized in
prior periods
on positions
closed or sold
in the year

Gains (losses)
arising on
positions
remaining
open at

end of year Other

Inception-to-date
realized gains
(losses) on
positions
closed or sold
in the year

(Gains) losses
recognized in
prior periods
on positions
closed or sold
in the year

Net gains
(losses) on
invest-
ments

Gains (losses)
arising on
positions
remaining
open at end

of year Other

Net gains
(losses) on
invest-
ments

64.4

(1.1)

770.1

(6.9)

(240.9)

(1,025.5)

(177.6)

(262.3)

Net gains (losses) on investments:

Bonds

Preferred stocks

Common stocks

Financial instruments:

Common stock and equity index short positions

Common stock long positions

Credit default swaps

Equity warrants and call options

CPI-linked contracts

Other

Foreign currency gains (losses) on:

Investing activities

Underwriting activities

Foreign currency contracts

Gain on disposition of associate(2)
Other

467.7

0.9

491.6

960.2

293.2(1)

(22.6)(1)

21.9

161.9

–

(11.1)

443.3

(28.9)

–

12.7

(16.2)

–
0.6

134.0

7.6

(9.0)

(140.4)

–

22.0

14.2

24.2

–

25.1

49.3

–
–

–

1,302.2

(7.1)

(774.8)

520.3

413.9

(61.8)

10.1

18.5

(233.9)

39.3

186.1

(13.3)

(46.8)

(2.8)

(3.0)

(233.9)

28.4

(271.4)

(44.0)

(1.8)

– (46.5)

24.8

–

(50.5)

(46.5)

62.6

(19.2) (48.3)

(34.4)

–

7.0
(0.8) 12.4

7.0
12.2

297.6

1.6

444.7

743.9

(797.0)(1)

91.9(1)

(31.6)

13.7

–

10.6

(712.4)

(103.7)

–

(53.9)

(157.6)

–
(4.3)

151.4

(0.3)

(347.4)

(196.3)

(7.8)

(1.1)

42.0

0.2

–

(5.2)

28.1

54.5

–

46.4

100.9

–
5.0

(285.2)

(13.1)

480.0

181.7

(131.8)

(7.6)

5.4

83.6

28.1

(18.3)

(40.6)

–

163.8

(11.8)

577.3

729.3

(936.6)

83.2

15.8

97.5

28.1

(12.9)

(724.9)

(4.5) 10.3

– (31.7)

(25.1)

–

(43.4)

(31.7)

(32.6)

(29.6) (21.4)

(107.7)

– 77.9
– 21.7

77.9
22.4

Net gains (losses) on investments

1,387.9

(114.1)

(553.7) (28.9)

691.2

(130.4)

(62.3)

111.5 78.2

(3.0)

(1) Amounts include net gains (losses) on total return swaps where the counterparties are required to cash-settle on a quar-
terly basis the market value movement since the previous quarterly reset date notwithstanding that the total return
swap positions remain open subsequent to the cash settlement.

(2) On December 30, 2011, the company sold all of its interest in Polskie Towarzystwo Ubezpieczen S.A. (“PTU”) and
received cash consideration of $10.1 (34.7 million Polish zloty) and recorded net gains on investments of $7.0. On
December 17, 2010, the company decreased its ownership of International Coal Group, Inc. (“ICG”) from 22.2% to
11.1% and received cash consideration of $163.9, recorded net gains of $77.9 on its partial disposition and ceased
equity accounting for this investment.

Investments in Associates

Investments in associates recorded on the equity method of accounting, the company’s ownership interest, their
fair value and carrying value were as follows:

Portfolio investments
Investments in associates:

Gulf Insurance Company (“Gulf Insurance”)
ICICI Lombard General Insurance Company Limited

(“ICICI Lombard”)

Cunningham Lindsey Group Limited (“CLGL”)
The Brick Ltd. (“The Brick”)(1)
Singapore Reinsurance Corporation Limited

(“Singapore Re”)
Fibrek Inc. (“Fibrek”)(2)
MEGA Brands Inc. (“MEGA”)(3)
Falcon Insurance PLC (“Falcon Thailand”)
Imvescor Restaurant Group Inc. (“Imvescor”)(4)
Polskie Towarzystwo Ubezpieczen S.A. (“PTU”)(5)
International Coal Group, Inc. (“ICG”)(6)
Partnerships, trusts and other

December 31, 2011

December 31, 2010

January 1, 2010

Ownership

Fair

Carrying

Ownership

Fair

Carrying

Ownership

Fair

Carrying

percentage

value

percentage

value

percentage

value

41.4% 255.1

214.5

41.3% 219.9

219.9

–

26.0% 230.4
43.2% 230.3
33.8% 123.9

26.8%
25.8%
19.9%
40.5%
13.6%
–
–
–

36.2
32.1
26.3
6.0
4.1
–
–
327.4

67.1
104.2
106.9

33.8
27.4
36.7
6.0
3.1
–
–
324.6

26.0% 266.5
43.6% 186.1
26.8
17.3%

22.2%
25.8%
16.5%
40.5%
–
22.7%
–
–

30.3
37.1
34.8
6.6
–
3.9
–
164.9

94.2
121.3
15.7

28.7
27.1
29.7
6.6
–
3.9
–
160.8

26.0% 204.4
43.6% 159.5
8.9
12.8%

22.9
20.0%
–
19.2%
–
–
5.5
40.5%
–
–
22.7%
5.2
27.7% 173.9
24.0

–

75.9
125.0
4.2

20.9
–
–
5.5
–
5.2
163.0
24.0

1,271.8

924.3

976.9

707.9

604.3

423.7

(1) On June 29, 2011, the company participated in The Brick’s offer to exchange 48.3 million warrants for 31.3 million common
shares of The Brick as part of a cashless exercise of warrants. The receipt of The Brick common shares increased investments
in associates and decreased derivatives and other invested assets by $88.2 respectively (the fair value of the warrants
immediately prior to the cashless exercise) and increased the company’s ownership of The Brick from 17.3% to 33.6%. The
company determined that the effective purchase price of $88.2 to acquire the additional 16.3% of The Brick included $21.3 of
goodwill. As at December 31, 2011, the company has investments of $40.7 ($43.2 at December 31, 2010, $33.8 at
January 1, 2010) and nil ($81.3 at December 31, 2010, $22.9 at January 1, 2010) in debt instruments and warrants issued
by The Brick respectively. The debt instruments and the warrants (prior to June 29, 2011) are recorded in bonds and
derivatives and other invested assets respectively, in the consolidated balance sheets.

(2) On July 15, 2010, the company purchased additional common shares of Fibrek for cash consideration of $15.7, that when
aggregated with the common shares already owned by the company and its affiliates represents 25.8% of the total common
shares of Fibrek outstanding. Accordingly, the company commenced recording its investment in Fibrek using the equity method
of accounting.

(3) On March 31, 2010, in connection with its participation in the recapitalization of MEGA, the company received newly issued
common shares, warrants and debentures of MEGA, as consideration for an additional investment in MEGA and for the
cancellation of a convertible debenture which the company had acquired in August 2008. Immediately following the receipt of
the recapitalization proceeds, the company sold a portion of the newly issued common shares, warrants and debentures of
MEGA to a third party and determined that its remaining 16.5% interest in MEGA combined with its ability pursuant to the
recapitalization agreement to represent the holders of the newly issued debentures through the nomination of three members to
MEGA’s board of directors, effectively resulted in the company being deemed to exercise significant influence over MEGA.
Accordingly, on March 31, 2010, the company commenced recording its investment in the common shares of MEGA using the
equity method of accounting on a prospective basis. As at December 31, 2011, the company has investments of $15.8 ($27.9 at
December 31, 2010, $19.7 at January 1, 2010) and $8.2 ($14.1 at December 31, 2010, nil at January 1, 2010) in debt
instruments and warrants issued by MEGA respectively. The debt instruments and warrants are recorded in bonds and
derivatives and other invested assets respectively, in the consolidated balance sheets.

(4) On December 29, 2011, the company participated in the refinancing and recapitalization of Imvescor through a private
placement wherein it paid $9.8 (Cdn$10.0 million) to acquire $9.8 (Cdn$10.0 million) principal amount of Imvescor’s senior
unsecured debentures bearing interest at 10% per annum and due in five years and warrants to purchase 16.3 million
common shares of Imvescor at an exercise price of $0.64 (Cdn$0.65) per common share expiring in five years and paid $3.1
(Cdn$3.2 million) to acquire 5.7 million common shares of Imvescor at a price of $0.56 per common share. Subsequent to
these transactions, the company owned in the investment portfolios of its insurance subsidiaries, approximately 13.6% of the
outstanding common shares of Imvescor and would own approximately 37.8% assuming full exercise of the warrants.
Accordingly, on the acquisition date, the company commenced recording its investment in the common shares of Imvescor
using the equity method of accounting as the potential voting rights which are currently excercisable by the company permit it
to exercise significant influence over Imvescor.

(5) On December 30, 2011, the company sold all of its interest in PTU and received cash consideration of $10.1 (34.7 million

Polish zloty) and recorded net gains on investments of $7.0.

(6) On December 17, 2010, the company decreased its ownership of ICG from 22.2% to 11.1% and received cash consideration

of $163.9, recorded net gains of $77.9 on its partial disposition and ceased equity accounting for this investment.

F A I R F A X F I N A N C I A L H O L D I N G S L I M I T E D

Share of profit (loss) of associates for the years ended December 31 were as follows:

Gulf Insurance Company
ICICI Lombard General Insurance Company Limited
Cunningham Lindsey Group Limited
The Brick Ltd.
Singapore Reinsurance Corporation Limited
Fibrek Inc.
MEGA Brands Inc.
Falcon Insurance PLC
Polskie Towarzystwo Ubezpieczen S.A.
International Coal Group, Inc.(1)
Partnerships, trusts and other

2011
(0.9)
(36.1)
14.9
9.1
1.5
2.0
3.3
(0.5)
(1.0)
–
9.5

2010
–
19.5
6.9
5.9
3.4
0.4
2.9
0.8
(1.2)
4.6
2.8

1.8

46.0

(1) On December 17, 2010, the company decreased its ownership of International Coal Group, Inc. from 22.2% to 11.1%

and ceased equity accounting for this investment.

The following changes have occurred in the investments in associates balances for the years ended December 31:

Balance – January 1
Share of profit
Dividends received
Acquisitions
Divestitures
Foreign exchange effect and other

Balance – December 31

2011
707.9
1.8
(46.2)
300.7
(27.0)
(12.9)

2010
423.7
46.0
(21.5)
426.3
(187.5)
20.9

924.3

707.9

The company’s strategic investment of $87.9 at December 31, 2011 ($68.7 at December 31, 2010) in 15.0% of
Alltrust Insurance Company of China Ltd. is classified as at FVTPL within common stocks on the consolidated
balance sheets.

7. Short Sale and Derivative Transactions

The following table summarizes the notional amount and fair value of the company’s derivative instruments:

December 31, 2011

December 31, 2010

January 1, 2010

Notional

Fair value

Notional

Fair value

Notional

Fair value

Cost

amount

Assets Liabilities

Cost

amount

Assets Liabilities

Cost

amount

Assets Liabilities

Equity derivatives:

Equity index total return swaps –

short positions

Equity total return swaps –

short positions

Equity total return swaps – long positions
Equity call options
Warrants

Credit derivatives:

Credit default swaps
Warrants

CPI-linked derivative contracts
Foreign exchange forward contracts
Other derivative contracts

– 5,517.6

25.8

59.6

– 5,463.3 10.3

133.7

– 1,582.7

9.2

– 1,617.6
– 1,363.5
–
–
44.6
11.7

68.8
2.4
–
15.9

47.7
49.2
–
–

624.5 18.0
–
0.7
– 1,244.3
–
–
–
158.8 171.1
21.6

28.3
8.3
–
–

–
–
46.2
10.1

232.2
214.6

–
8.7
79.3 46.0
127.5 71.6

49.8
66.8 3,059.6
340.2
50.0
24.3
421.1 46,518.0 208.2
32.9
1.3

–
–

70.8 3,499.3 67.2
–
–
6.5
340.2
16.6
– 302.3 34,182.3 328.6
–
–

–
–

8.2
5.5

15.8

– 114.8 5,926.2 71.6
2.8
–
8.2
–
1.6
25.5
5.5
21.1

340.2
8.8 1,490.7
–
–

–
–

Total

455.1

170.2

602.4

216.9

225.2

–

1.2
7.7
–
–

–
–
–
48.0
0.3

57.2

The company is exposed to significant market risk through its investing activities. Market risk is the risk that the
fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. Market
risk is comprised of currency risk, interest rate risk and other price risk. The company’s derivative contracts, with
limited exceptions, are used for the purpose of managing these risks. Derivative contracts entered into by the
company are considered economic hedges and are not designated as hedges for financial reporting purposes.

Equity contracts
The company holds significant investments in equities and equity-related securities. The market value and the
liquidity of these investments are volatile and may vary dramatically either up or down in short periods, and their
ultimate value will therefore only be known over the long term or on disposition. Short positions in equity and
equity index total return swaps are held primarily to provide protection against significant declines in the value of
the company’s equities and equity-related securities. As a result of volatility in the equity markets and interna-
tional credit concerns, the company protected its equity and equity-related holdings against a potential decline in
equity markets by way of short positions effected through equity and equity index total return swaps including
short positions in certain equities, the Russell 2000 index and the S&P 500 index as set out in the table below.
During 2011, the company increased the net original notional amount of its short equity and equity index total
return swaps by $1,332.7. At December 31, 2011, equity hedges represented 104.6% of the company’s equity and
equity-related holdings (80.2% at December 31, 2010). The excess of the equity hedges over the company’s equity
and equity-related holdings at December 31, 2011 arose principally as a result of the company’s decision in the
third quarter of 2011 to fully hedge its equity and equity-related holdings by adding to the notional amount of its
short positions in certain equities effected through equity total
return swaps and also reflected some
non-correlated performance of the company’s equity and equity-related holdings in 2011 relative to the perform-
ance of the economic equity hedges used to protect those holdings. The company’s exposure to basis risk is dis-
cussed further in note 24. The company’s objective is that the equity hedges be reasonably effective in protecting
that proportion of the company’s equity and equity-related holdings to which the hedges relate should a sig-
nificant correction in the market occur; however, due to the lack of a perfect correlation between the hedged
items and the hedging items, combined with other market uncertainties, it is not possible to predict the future
impact of the company’s economic hedging programs related to equity risk. During 2011, the company received
net cash of $293.2 (2010 – paid net cash of $797.0) in connection with the reset provisions of its short equity and
equity index total return swaps. During 2011, the company paid net cash of $22.6 (2010 – received net cash of
$91.9) to counterparties in connection with the reset provisions of the company’s long equity total return swaps.

Underlying Equity Index
Russell 2000
S&P 500

December 31, 2011

December 31, 2010

Original
notional
amount(1)
3,501.9
1,299.3

Units
52,881,400
12,120,558

Weighted
average
index
value

Units
662.22 51,355,500
1,071.96 12,120,558

Original
notional
amount(1)
3,377.1
1,299.3

Weighted
average
index
value
657.60
1,071.96

(1) The aggregate notional amounts on the dates that the short positions were first initiated.

As at December 31, 2011, the company had entered into long equity total return swaps on individual equity secu-
rities for investment purposes with an original notional amount of $1,280.0 ($1,114.3 at December 31, 2010).

At December 31, 2011, the fair value of the collateral deposited for the benefit of derivative counterparties
included in assets pledged for short sale and derivative obligations was $1,135.3 ($847.0 at December 31, 2010),
comprised of collateral of $962.6 ($733.2 at December 31, 2010) required to be deposited to enter into such
derivative contracts (principally related to total return swaps) and net collateral of $172.7 ($113.8 at December 31,
2010) securing amounts owed to counterparties to the company’s derivative contracts arising in respect of
changes in the fair values of those derivative contracts since the most recent reset date.

Equity warrants were acquired in conjunction with the company’s investment in debt securities of various Cana-
dian companies. At December 31, 2011, the warrants have expiration dates ranging from 2 years to 5 years
(2 years to 4 years at December 31, 2010).

F A I R F A X F I N A N C I A L H O L D I N G S L I M I T E D

Credit contracts
Since 2003, the company’s investments have included credit default swaps referenced to various issuers in the
financial services industry as an economic hedge of certain financial and systemic risks. Effective January 1, 2011,
the company no longer considers credit default swaps to be an economic hedge of its financial assets. At
December 31, 2011, the company’s remaining credit default swaps have a weighted average life of 1.3 years
(2.4 years at December 31, 2010) and a notional amount and fair value of $3,059.6 ($3,499.3 at December 31,
2010) and $49.8 ($67.2 at December 31, 2010) respectively.

The company holds, for investment purposes, various bond warrants that give the company an option to pur-
chase certain long dated corporate bonds. At December 31, 2011, the warrants have expiration dates averaging
35.1 years (35.8 years at December 31, 2010).

CPI-linked derivative contracts
The company has purchased derivative contracts referenced to consumer price indices (“CPI”) in the geographic
regions in which it operates, which serve as an economic hedge against the potential adverse financial impact on
the company of decreasing price levels. At December 31, 2011, these contracts have a remaining weighted average
life of 8.6 years (9.4 years at December 31, 2010) and a notional amount and fair value as shown in the table
below. In the event of a sale, expiration or early settlement of any of these contracts, the company would receive
the fair value of that contract on the date of the transaction. The company’s maximum potential loss on any
contract is limited to the original cost of that contract. The following table summarizes the notional amounts and
weighted average strike prices of CPI indices underlying the company’s CPI-linked derivative contracts:

December 31, 2011

December 31, 2010

Notional Amount

Underlying CPI Index
United States
United Kingdom
European Union
France

Weighted
average
strike
price
216.95
216.01
109.74
120.09

Original
currency
18,175.0
550.0
20,425.0
750.0

U.S. dol-
lars
18,175.0
854.8
26,514.6
973.6

46,518.0

Original
U.S.
currency
dollars
16,250.0 16,250.0
861.1
12,725.0 17,071.2
–

550.0

–

34,182.3

Weighted
average
strike
price
216.58
216.01
108.83
–

During 2011, the company purchased $13,596.7 (2010 – $32,670.2) notional amount of CPI-linked derivative
contracts at a cost of $122.6 (2010 – $291.4) and recorded net mark-to-market losses of $233.9 (2010 –
mark-to-market gains of $28.1) on positions remaining open at the end of the year.

The CPI-linked derivative contracts are extremely volatile, with the result that their market value and their liquid-
ity may vary dramatically either up or down in short periods, and their ultimate value will therefore only be
known upon their disposition or settlement. The company’s purchase of these derivative contracts is consistent
with its capital management framework designed to protect its capital in the long term. Due to the uncertainty of
the market conditions which may exist many years into the future, it is not possible to predict the future impact
of this aspect of the company’s risk management program.

Foreign exchange forward contracts
A significant portion of the company’s business is conducted in currencies other than the U.S. dollar. The company
is also exposed to currency rate fluctuations through its equity accounted investments and its net investment in
subsidiaries that have a functional currency other than the U.S. dollar. Long and short foreign exchange forward
contracts primarily denominated in the Euro, the British pound sterling and the Canadian dollar are used to
manage certain foreign currency exposures arising from foreign currency denominated transactions. The contracts
have an average term to maturity of less than one year and may be renewed at market rates.

Counterparty risk
The company endeavours to limit counterparty risk through the terms of agreements negotiated with the counter-
parties to its derivative contracts. The fair value of the collateral deposited for the benefit of the company

at December 31, 2011 consisted of cash of $50.5 ($26.1 at December 31, 2010) and government securities of
$156.8 ($94.4 at December 31, 2010) that may be sold or repledged by the company. The company has recog-
nized the cash collateral within subsidiary cash and short term investments and recognized a corresponding
liability within accounts payable and accrued liabilities. The company had not exercised its right to sell or
repledge collateral at December 31, 2011. The company’s exposure to counterparty risk and the manner in which
the company manages counterparty risk are discussed further in note 24.

Hedge of net investment in Northbridge
The company has designated the carrying value of Cdn$1,075.0 principal amount of its Canadian dollar denomi-
nated unsecured senior notes with a fair value of $1,114.6 (principal amount of Cdn$675.0 with a fair value of
$736.2 at December 31, 2010) as a hedge of its net investment in Northbridge for financial reporting purposes. In
2011, the company recognized pre-tax gains of $33.2 (2010 – pre-tax losses of $28.2) related to foreign currency
movements on the unsecured senior notes in change in gains and losses on hedge of net investment in foreign
subsidiary in the consolidated statements of comprehensive income.

Insurance Contract Liabilities

Provision for unearned premiums
Provision for losses and loss

Gross

Ceded

Net

December 31,
2011
2,487.3

December 31,
2010
2,120.9

January 1,
2010
1,913.9

December 31,
2011
388.1

December 31,
2010
279.8

January 1,
2010
252.2

December 31,
2011
2,099.2

December 31,
2010
1,841.1

January 1,
2010
1,661.7

adjustment expenses

17,232.2

16,049.3 14,504.7

3,496.8

3,229.9

3,056.1

13,735.4

12,819.4 11,448.6

Total insurance contract liabilities

19,719.5

18,170.2 16,418.6

3,884.9

3,509.7

3,308.3

15,834.6

14,660.5 13,110.3

Current
Non-current

6,579.3
13,140.2

5,884.9

5,269.6
12,285.3 11,149.0

1,979.2
1,905.7

1,756.8
1,752.9

1,650.9
1,657.4

4,600.1
11,234.5

4,128.1
10,532.4

3,618.7
9,491.6

19,719.5

18,170.2 16,418.6

3,884.9

3,509.7

3,308.3

15,834.6

14,660.5 13,110.3

Provision for unearned premiums
The following changes have occurred in the provision for unearned premiums for the years ended December 31:

Provision for unearned premiums – January 1

Gross premiums written
Less: premiums earned
Acquisitions of subsidiaries
Foreign exchange effect and other

Provision for unearned premiums – December 31

2011

2010

2,120.9
6,743.5
(6,541.4)
206.9
(42.6)

1,913.9
5,362.9
(5,510.4)
279.4
75.1

2,487.3

2,120.9

Provision for losses and loss adjustment expenses
The following changes have occurred in the provision for losses and loss adjustment expenses for the years ended
December 31:

Provision for losses and loss adjustment expenses – January 1
Foreign exchange effect and other
(Decrease) increase in estimated losses and expenses for claims occurring in the prior years
Losses and expense for claims occurring in the current year
Paid on claims occurring during:

the current year
the prior years

Acquisitions of subsidiaries

Provision for losses and loss adjustment expenses – December 31

2011

2010

16,049.3
(161.2)
(52.7)
5,594.1

14,504.7
198.4
(38.6)
4,276.6

(1,427.5)
(3,539.1)
769.3

(1,102.5)
(3,354.3)
1,565.0

17,232.2

16,049.3

Provision for losses and loss adjustment expenses include CTR life reserves at December 31, 2011 of $24.2 ($25.3
at December 31, 2010).

F A I R F A X F I N A N C I A L H O L D I N G S L I M I T E D

Assumptions
The basic assumptions made in establishing actuarial liabilities are best estimates of possible outcomes. The
company uses tabular reserving for the indemnity lifetime benefit liabilities with standard mortality assumptions,
and discounts such reserves using interest rates ranging from 3.5% to 5.0%.

Development of insurance losses, gross
The development of insurance liabilities provides a measure of the company’s ability to estimate the ultimate
value of claims. The loss development table which follows shows the provision for claims and loss adjustment
expenses at the end of each calendar year, the cumulative payments made in respect of those reserves in sub-
sequent years and the re-estimated amount of each calendar years’ provision for claims and loss adjustment
expenses as at December 31, 2011.

Calendar year

Provision for claims and loss adjustment expenses
Less: CTR Life

Cumulative payments as of:
One year later
Two years later
Three years later
Four years later

Reserves re-estimated as of:
One year later
Two years later
Three years later
Four years later

2007

2008

2011
14,843.2 14,467.2 14,504.8 16,049.3 17,232.2
24.2

21.5

27.6

34.9

25.3

2009

2010

14,821.7 14,432.3 14,477.2 16,024.0 17,208.0

3,167.8
5,130.8
6,784.9
8,124.6

3,136.0
5,336.4
7,070.7

3,126.6
5,307.6

3,355.9

14,420.4 14,746.0 14,616.0 15,893.8
14,493.8 14,844.4 14,726.6
14,579.9 14,912.4
14,679.5

Favourable (unfavourable) development

142.2

(480.1)

(249.4)

130.2

Gross favourable development of prior years’ reserves in 2011 of $130.2 was as a result of favourable development
of $69.3 related to subsidiaries which were owned throughout 2011 and also included the favourable effect of
foreign currency translation on prior years’ reserves of $60.9. The loss reserve development table above reflects
subsidiaries purchased during the year as though they were acquired on December 31 of the year in which they
were acquired whereas losses on claims, gross in the consolidated income statements includes loss reserve
development of newly acquired subsidiaries from their date of acquisition. Accordingly, the difference in 2011
between favourable development of $52.7 recorded in losses on claims, net in the consolidated income statement
and favourable development of $69.3 reflected in the loss reserve development table above relates to $16.6 of
unfavourable development on the prior years’ reserves of subsidiaries acquired in 2011. The gross unfavourable
development of prior years’ reserves of $249.4 and $480.1 was primarily as a result of the unfavourable effect of
foreign currency translation of prior accident years’ reserves of subsidiaries with functional currencies other than
the U.S. dollar ($93.2 and $450.1 respectively). The gross favourable development of prior years’ reserves of
$142.2 was also affected by foreign currency translation in a similar manner except that effect was favourable
($139.9). The company’s exposure to foreign currency risk and the manner in which the company manages for-
eign currency risk is discussed further in note 24.

Development of losses and loss adjustment expenses for asbestos and pollution
A number of the company’s subsidiaries wrote general insurance policies and reinsurance prior to their acquis-
ition by the company under which policyholders continue to present asbestos-related injury claims and claims
alleging injury, damage or clean up costs arising from environmental pollution claims. The vast majority of these
claims are presented under policies written many years ago and reside primarily within the runoff group.

exacerbated by 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 following is an analysis of the changes which have occurred in the company’s provision for losses and loss
adjustment expenses related to asbestos and pollution exposure on a gross and net basis for the years ended
December 31:

Asbestos
Balance – beginning of year

Loss and loss adjustment expenses incurred
Losses and loss adjustment expenses paid
Insurance subsidiaries acquired during the year(1)

Balance – end of year

Pollution
Balance – beginning of year

Loss and loss adjustment expenses incurred
Losses and loss adjustment expenses paid
Insurance subsidiaries acquired during the year(1)

Balance – end of year

(1) Zenith National in 2010.

2011

2010

Gross

Net

Gross

Net

1,357.6
73.8
(123.9)
–

934.9
49.3
(80.9)
–

1,369.1
141.4
(159.5)
6.6

953.4
75.7
(100.8)
6.6

1,307.5

903.3

1,357.6

934.9

276.3
(26.1)
(67.1)
–

180.1
(2.2)
(31.0)
–

342.0
(23.9)
(43.8)
2.0

202.4
(9.5)
(14.8)
2.0

183.1

146.9

276.3

180.1

Fair Value
The fair value of insurance and reinsurance contracts is estimated as follows:

December 31, 2011

December 31, 2010

January 1, 2010

Insurance contracts
Ceded reinsurance contracts

Fair
value
19,902.0
3,775.4

Carrying
value

Fair
value
19,719.5 17,739.6
3,253.9

3,884.9

Carrying
value
18,170.2
3,509.7

Fair
value
15,873.9
3,042.5

Carrying
value
16,418.6
3,308.3

The fair value of insurance contracts is comprised of the fair value of unpaid claim liabilities and the fair value of
the unearned premiums. The fair value of ceded reinsurance contracts is comprised of the fair value of reinsurers’
share of unpaid claim liabilities and the unearned premium. Both reflect the time value of money whereas the
carrying values (including the reinsurers’ share thereof) do not reflect discounting, except for workers’ compensa-
tion lines of business as described above. The calculation of the fair value of the unearned premium includes
acquisition expenses to reflect the deferral of these expenses at the inception of the insurance contract. The esti-
mated value of insurance and ceded reinsurance contracts is determined by projecting the expected future cash
flows of the contracts, selecting the appropriate interest rates, and applying the resulting discount factors to
expected future cash flows. The difference between the sum of the undiscounted expected future cash flows and
discounted future cash flows represent the time value of money. A margin for risk and uncertainty is added to the
discounted cash flows to reflect the volatility of the lines of business written, quantity of reinsurance purchased,
credit quality of reinsurers and a risk margin for future changes in interest rates.

The table that follows shows the potential impact of interest rate fluctuations on the fair value of insurance and
reinsurance contracts:

Change in Interest Rates
100 basis point rise
100 basis point decline

December 31, 2011

December 31, 2010

Fair value of
insurance
contracts
19,314.8
20,542.8

Fair value of
reinsurance
contracts
3,660.4
3,900.7

Fair value of
insurance
contracts
17,194.0
18,334.5

Fair value of
reinsurance
contracts
3,153.2
3,364.6

F A I R F A X F I N A N C I A L H O L D I N G S L I M I T E D

9. Reinsurance

Reinsurers’ share of insurance contract liabilities is comprised as follows:

Reinsurers’ share of unearned premiums
Reinsurers’ share of provision for losses and loss adjustment expenses
Provision for uncollectible reinsurance

Current
Non-current

December 31,
2011
388.1
4,105.5
(295.5)

December 31,
2010
279.8
3,826.1
(348.9)

January 1,
2010
252.2
3,675.6
(356.7)

4,198.1

3,757.0

3,571.1

2,251.8
1,946.3

4,198.1

1,970.2
1,786.8

1,877.9
1,693.2

3,757.0

3,571.1

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 sub-
sidiaries on any policy to a maximum amount on any one loss. Reinsurance decisions are made by the sub-
sidiaries to reduce and spread the risk of loss on insurance and reinsurance written, to limit multiple claims
arising from a single occurrence and to protect capital resources. The amount of reinsurance purchased can vary
among subsidiaries depending on the lines of business written, their respective capital resources and prevailing or
expected market conditions. Reinsurance is generally placed on an excess of loss basis and written in several lay-
ers, the purpose of which is to limit the amount of one risk to a maximum amount acceptable to the company
and to protect from losses on multiple risks arising from a single occurrence. This type of reinsurance includes
what is generally referred to as catastrophe reinsurance. The company’s reinsurance does not, however, relieve the
company of its primary obligation to the policy holder.

The majority of reinsurance contracts purchased by the company provide coverage for a one year term and are
negotiated annually. The ability of the company to obtain reinsurance on terms and prices consistent with histor-
ical results reflects, among other factors, recent loss experience of the company and of the industry in general. As
a result of the number of significant catastrophic events in the past several years the price for catastrophe
reinsurance has increased, and if another major loss were to occur the cost of reinsurance could change sig-
nificantly. If that were to occur, each subsidiary would evaluate the relative costs and benefits of accepting more
risk on a net basis, reducing exposure on a direct basis or paying additional premiums for reinsurance.

Historically the company has purchased, or has negotiated as part of the purchase of a subsidiary, adverse
development covers as protection from adverse development of prior years’ reserves. In the past, significant
amounts of reserve development have been ceded to these reinsurance treaties. The majority of these treaties have
been commuted, are at limit, or are nearing limit, so that in the future, if further adverse reserve development
originally protected by these covers were to occur, little if any would be ceded to reinsurers.

The company has guidelines and a review process in place to assess the creditworthiness of the reinsurers to
which it cedes. Note 24 discusses the company’s management of credit risk associated with reinsurance recover-
ables.

The company makes specific provisions against reinsurance recoverables from reinsurers considered to be in finan-
cial difficulty. In addition, the company records an allowance based upon analysis of historical recoveries, the
level of allowance already in place and management’s judgment on future collectability. The provision for
uncollectible reinsurance at December 31, 2011 was $295.5 ($348.9 at December 31, 2010).

Changes in the reinsurers’ share of paid losses, unpaid losses, unearned premiums and provision for uncollectible
balances for the years ended December 31 were as follows:

Balance – January 1, 2011
Reinsurers’ share of losses paid to insureds
Reinsurance recoveries received
Reinsurers’ share of losses or premiums earned
Premiums ceded to reinsurers
Change in provision, recovery or write-off of impaired balances
Acquisitions of subsidiaries and reinsurance-to-close transactions
Foreign exchange effect and other

Paid
losses
458.0
944.4
(902.7)
–
–
(25.6)
29.8
(3.0)

Unpaid
losses
3,368.1
(944.4)
–
911.9
–
(5.8)
290.6
(15.8)

Unearned
premiums Provision
(348.9)
–
–
–
–
52.7
–
0.7

279.8
–
–
(1,121.4)
1,143.4
–
95.3
(9.0)

Net
recoverable
3,757.0
–
(902.7)
(209.5)
1,143.4
21.3
415.7
(27.1)

Balance – December 31, 2011

500.9

3,604.6

388.1

(295.5)

4,198.1

Balance – January 1, 2010
Reinsurers’ share of losses paid to insureds
Reinsurance recoveries received
Reinsurers’ share of losses or premiums earned
Premiums ceded to reinsurers
Change in provision, recovery or write-off of impaired balances
Acquisitions of subsidiaries
Foreign exchange effect and other

Paid
losses
486.1
886.7
(917.2)
–
–
(23.1)
13.8
11.7

Unpaid
losses
3,189.5
(886.7)
–
854.6
–
(10.4)
210.7
10.4

Unearned
premiums Provision
(356.7)
–
–
–
–
8.3
–
(0.5)

252.2
–
–
(914.4)
904.6
–
9.4
28.0

Net
recoverable
3,571.1
–
(917.2)
(59.8)
904.6
(25.2)
233.9
49.6

Balance – December 31, 2010

458.0

3,368.1

279.8

(348.9)

3,757.0

Reinsurers’ share of provision for losses and loss adjustment expenses at December 31, 2011 includes $313.2
($247.2 at December 31, 2010) of paid losses net of provisions.

Included in commissions, net is commission income from reinsurance contracts of $226.1 (2010 – $166.9) for the
year ended December 31, 2011.

10. Insurance Contract Receivables

Insurance contract receivables are comprised as follows:

Insurance premiums receivable
Reinsurance premiums receivable
Funds withheld receivable
Other
Provision for doubtful balances

December 31,
2011
1,113.3
428.4
195.3
32.1
(33.7)

December 31,
2010
866.6
388.7
209.9
40.5
(29.1)

January 1,
2010
753.9
435.9
187.5
27.2
(27.7)

1,735.4

1,476.6

1,376.8

F A I R F A X F I N A N C I A L H O L D I N G S L I M I T E D

The following changes have occurred in the insurance premiums receivable balance for the years ended
December 31:

Balance – January 1

Gross premiums written
Premiums collected
Impairments
Amounts due to brokers and agents
Acquisitions of subsidiaries
Foreign exchange effect and other

Balance – December 31

2011
866.6
4,588.7
(4,088.4)
(0.7)
(289.2)
54.2
(17.9)

2010
753.9
3,507.9
(3,511.7)
(2.6)
(121.2)
219.6
20.7

1,113.3

866.6

The following changes have occurred in the reinsurance premiums receivable balance for the years ended
December 31:

Balance – January 1

Gross premiums written
Premiums collected
Amounts due to brokers and agents
Acquisitions of subsidiaries
Foreign exchange effect and other

Balance – December 31

2011
388.7
2,154.8
(1,706.5)
(403.4)
3.3
(8.5)

2010
435.9
1,855.0
(1,538.5)
(357.7)
0.5
(6.5)

428.4

388.7

11. Deferred Premium Acquisition Costs

The following changes have occurred in the deferred premium acquisition costs for the years ended December 31:

Balance – January 1

Acquisition costs deferred
Amortization of deferred costs
Acquisitions of subsidiaries
Foreign exchange effect and other

Balance – December 31

12. Goodwill and Intangible Assets

Goodwill and intangible assets are compromised as follows:

2011
357.0
1,147.2
(1,109.5)
26.1
(4.9)

2010
372.0
929.2
(959.6)
8.1
7.3

415.9

357.0

Balance – January 1, 2011

Additions
Disposals
Amortization of intangible assets
Foreign exchange effect

Balance – December 31, 2011

Gross carrying amount
Accumulated amortization
Accumulated impairment

Goodwill

Intangible assets subject
to amortization

Intangible
assets not
subject to
amortization

Total

Customer
and broker
relationships
256.6
34.6
–
(18.2)
(1.9)

Computer
software
60.4
19.7
–
(11.5)
(0.8)

Other
2.9
–
–
(0.3)
–

Brand
names
47.0
13.0
–
–
(0.4)

Other
10.1
7.7
–
–
–

949.1
204.1
–
(30.0)
(8.0)

271.1

306.3
(35.2)
–

271.1

67.8

2.6

135.8
(59.4)
(8.6)

67.8

7.8
(5.2)
–

2.6

59.6

59.6
–
–

59.6

17.8 1,115.2

17.8 1,227.2
(99.8)
(12.2)

–
–

17.8 1,115.2

572.1
129.1
–
–
(4.9)

696.3

699.9
–
(3.6)

696.3

Goodwill

Intangible assets subject to
amortization

Intangible
assets not
subject to
amortization

Total

Customer
and broker
relationships
115.6
147.5
–
(11.1)
4.6

Computer
software
34.2
33.4
–
(8.4)
1.2

Other
3.6
–
(0.2)
(0.5)
–

Brand
names
26.0
20.2
–
–
0.8

Other
10.1
–
–
–
–

438.8
518.7
(0.2)
(20.0)
11.8

256.6

274.1
(17.5)
–

256.6

60.4

2.9

117.4
(48.4)
(8.6)

7.8
(4.9)
–

60.4

2.9

47.0

47.0
–
–

47.0

10.1

949.1

10.1 1,032.1
(70.8)
(12.2)

–
–

10.1

949.1

249.3
317.6
–
–
5.2

572.1

575.7
–
(3.6)

572.1

Balance – January 1, 2010

Additions
Disposals
Amortization of intangible assets
Foreign exchange effect

Balance – December 31, 2010

Gross carrying amount
Accumulated amortization
Accumulated impairment

Goodwill and intangible assets are allocated to the respective cash-generating units (“CGUs”) as follows:

Zenith National
Northbridge
OdysseyRe
Crum & Forster
All other

December 31, 2011

December 31, 2010

January 1, 2010

Goodwill
317.6
107.1
104.2
87.5
79.9

Intangible
assets
162.8
115.4
54.0
67.8
18.9

Total Goodwill
317.6
480.4
109.8
222.5
104.2
158.2
7.3
155.3
33.2
98.8

Intangible
assets
170.7 488.3
123.9 233.7
51.8 156.0
22.8
15.5
48.3
15.1

Total Goodwill
–
104.0
104.2
7.3
33.8

Intangible
assets
–

Total
–
115.8 219.8
48.2 152.4
20.9
13.6
45.7
11.9

696.3

418.9 1,115.2

572.1

377.0 949.1

249.3

189.5 438.8

At December 31, 2011, consolidated goodwill of $696.3 and intangible assets of $418.9 (principally related to the
value of customer and broker relationships and brand names) was comprised primarily of amounts arising on the
acquisitions of First Mercury, Pacific Insurance and Sporting Life during 2011, the acquisition of Zenith National
during 2010 and the privatizations of Northbridge and OdysseyRe during 2009. Impairment tests for goodwill and
intangible assets not subject to amortization were completed in 2011 and it was concluded that no impairment
had occurred.

When testing for impairment, the recoverable amount of a CGU is determined based on the higher of value in use
and fair value less costs to sell calculations. The recoverable amount of each CGU was based on fair value less cost
to sell, using a discounted cash flow model. Cash flow projections covering a five year period were derived from
financial budgets approved by management. Cash flows beyond the five year period were extrapolated using
estimated growth rates which do not exceed the long term average past growth rate for the insurance business in
which each CGU operates.

A number of other assumptions and estimates were involved in the application of discounted cash flow models to
forecast operating cash flows, premium volumes, expenses and working capital requirements. Forecasts of future
cash flows are based on the best estimates of future premiums, operating expenses using historical trends, general
geographical market conditions, industry trends and forecasts and other available information. These assump-
tions are subject to review by management. The cash flow forecasts are adjusted by applying appropriate discount
rates within a range of 9.5% to 11.0%. The weighted average growth rate used to extrapolate cash flows beyond
five years was 2.5%. A reasonably possible change in any key assumption is not expected to cause the carrying
value of any CGU to exceed its recoverable amount.

F A I R F A X F I N A N C I A L H O L D I N G S L I M I T E D

13. Other Assets

Other assets are comprised as follows:

Premises and equipment
Accrued interest and dividends
Income taxes refundable
Receivables for securities sold but not yet settled
Pension assets
Other reporting segment receivables
Other reporting segment inventories
Prepaid expenses
Other

Current
Non-current

14. Accounts Payable and Accrued Liabilities

Accounts payable and accrued liabilities are comprised as follows:

Payable to reinsurers
Pension and post retirement liabilities
Salaries and employee benefit liabilities
Ceded deferred premium acquisition costs
Accrued legal and professional fees
Accounts payable for securities purchased but not yet settled
Amounts withheld and accrued taxes
Accrued interest expense
Amounts payable to agents and brokers
Accrued commissions
Accrued premium taxes
Other reporting segment payables
Other

Current
Non-current

December 31,
2011
210.8
166.6
85.2
17.3
20.1
35.4
89.3
34.9
161.8

December 31,
2010
184.8
187.3
217.2
13.2
34.9
34.8
47.1
30.2
151.5

821.4

481.8
339.6

821.4

901.0

529.8
371.2

901.0

December 31,
2011
409.8
154.1
209.8
79.0
39.4
23.5
64.7
35.8
41.2
55.2
66.1
63.7
413.9

December 31,
2010
359.1
139.4
185.2
47.4
39.4
45.4
57.9
36.4
38.0
42.8
56.8
40.4
174.9

January 1,
2010
155.9
172.3
50.4
43.5
–
35.4
49.8
22.7
241.6

771.6

374.1
397.5

771.6

January 1,
2010
290.7
138.9
187.5
63.7
46.0
39.0
52.0
34.0
44.6
40.0
39.5
37.8
277.1

1,656.2

1,263.1

1,290.8

1,008.8
647.4

1,656.2

646.0
617.1

755.1
535.7

1,263.1

1,290.8

15. Subsidiary Indebtedness, Long Term Debt and Credit Facilities

Subsidiary indebtedness consists of the following balances:
Ridley secured revolving term facility:

Cdn $30.0 or U.S. dollar equivalent at floating rate
U.S. $20.0 at floating rate

Long term debt consists of the following balances:
Fairfax unsecured notes:

7.75% due April 15, 2012(1)
8.25% due October 1, 2015(3)
7.75% due June 15, 2017(1)(4)
7.375% due April 15, 2018(3)
7.50% due August 19, 2019 (Cdn$400.0)(5)
7.25% due June 22, 2020 (Cdn$275.0)(2)
5.80% due May 15, 2021(1)
6.40% due May 25, 2021 (Cdn$400.0)(1)
8.30% due April 15, 2026(3)
7.75% due July 15, 2037(3)

TIG Note(2)
Trust preferred securities of subsidiaries(12)
Purchase consideration payable(11)

December 31, 2011

December 31, 2010

Principal

Carrying
value(a)

Fair

value(b) Principal

Carrying
value(a)

Fair
value(b)

–
1.0

1.0

86.3
82.4
48.4
144.2
392.8
270.1
500.0
392.8
91.8
91.3
201.4
9.1
152.2

–
1.0

1.0

–
1.0

1.0

86.1
82.2
46.4
143.9
389.2
268.0
494.3
389.0
91.4
90.1
152.7
9.1
152.2

87.4
89.4
52.5
154.3
427.7
289.7
467.5
397.2
90.9
83.6
152.7
8.1
152.2

1.0
1.3

2.3

157.3
82.4
275.6
144.2
402.6
276.8
–
–
91.8
91.3
201.4
9.1
158.6

0.9
1.3

2.2

0.9
1.3

2.2

156.1
82.2
261.7
143.8
398.5
274.4
–
–
91.4
90.0
143.8
9.1
158.6

165.2
89.0
289.4
151.4
441.1
295.1
–
–
91.8
91.1
143.8
7.0
158.6

Long term debt – holding company borrowings

2,462.8

2,394.6 2,453.2

1,891.1

1,809.6 1,923.5

OdysseyRe unsecured senior notes:

7.65% due November 1, 2013(1)(2)(6)
6.875% due May 1, 2015(2)(7)
Series A, floating rate due March 15, 2021(8)
Series B, floating rate due March 15, 2016(8)
Series C, floating rate due December 15, 2021(9)

Crum & Forster unsecured senior notes:

7.75% due May 1, 2017(1)(2)(10)

First Mercury trust preferred securities:

Trust III, floating rate due December 14, 2036(1)
Trust IV, 8.25% through December 15, 2012, floating rate

thereafter, due September 26, 2037(1)
Zenith National redeemable debentures:

8.55% due August 1, 2028(2)

Advent subordinated notes:

floating rate due June 3, 2035
€12.0 million, floating rate due June 3, 2035

Advent unsecured senior notes:

floating rate due January 15, 2026
floating rate due December 15, 2026

Ridley economic development loan at 1% due August 10, 2019
MFXchange, equipment loans at 7.3% due April 1, 2011

182.9
125.0
50.0
50.0
40.0

181.7
123.7
49.8
49.8
39.8

200.2
131.3
42.2
47.5
34.3

218.8
125.0
50.0
50.0
40.0

216.4
123.3
49.8
49.7
39.8

239.9
134.4
47.3
48.7
38.7

6.2

5.6

6.5

330.0

306.4

346.5

25.8

15.6

–

38.4

38.0

38.4

38.0

34.0
15.6

26.0
20.0
0.6
–

33.0
15.1

25.1
19.4
0.5
–

28.1
12.9

26.0
19.3
0.5
–

34.0
16.0

26.0
20.0
0.7
0.3

33.0
15.5

25.1
19.4
0.6
0.3

32.2
15.1

26.1
20.1
0.6
0.3

Long term debt – subsidiary company borrowings

630.1

622.9

628.2

949.2

917.3

987.9

3,092.9

3,017.5 3,081.4

2,840.3

2,726.9 2,911.4

(a) Principal net of unamortized issue costs and discounts.

(b) Based principally on market prices, where available, or discounted cash flow models.

F A I R F A X F I N A N C I A L H O L D I N G S L I M I T E D

Current and non-current portions of long term debt principal are comprised as follows:

Current
Non-current

December 31,
2011
90.6
3,002.3

December 31,
2010
7.1
2,833.2

3,092.9

2,840.3

(1) During 2011, the company or one of its subsidiaries completed the following transactions with respect to its debt:

(a)

First Mercury

The company acquired First Mercury on February 9, 2011, pursuant to the transaction described in note 23. At
the acquisition date, the company’s consolidated balance sheet included the $67.0 carrying value of trust
preferred securities issued by First Mercury Capital Trust I, II, III and IV (statutory business trust subsidiaries of
First Mercury) in long term debt. These securities are redeemable at First Mercury’s option at 100% of the
principal amount together with accrued and unpaid interest on any interest payment date on or after the
redemption dates as set out in the table below. First Mercury fully and unconditionally guarantees the
distributions and redemptions of these trust preferred securities.

Issuer

Issue date

Interest

Redemption date

First Mercury Capital Trust I

April 29, 2004

First Mercury Capital Trust II May 24, 2004

First Mercury Capital Trust III December 14, 2006

Payable quarterly at three month
LIBOR plus 3.75%

Payable quarterly at three month
LIBOR plus 4.00%

Payable quarterly at three month
LIBOR plus 3.00%

First Mercury Capital Trust IV September 26, 2007 Payable quarterly at 8.25% fixed

through December 15, 2012; three
month LIBOR plus 3.30% thereafter

On or after
April 29, 2009

On or after
May 24, 2009

On or after
December 14, 2011

On or after
December 15, 2012

On May 15, 2011, First Mercury redeemed for cash all $8.2 principal amount of its outstanding Trust I trust
preferred securities due April 2034 for cash consideration of $8.7.

On May 24, 2011, First Mercury redeemed for cash all $12.4 principal amount of its outstanding Trust II trust
preferred securities due May 2034 for cash consideration of $13.1.

On May 27, 2011, First Mercury repurchased for cash $5.0 principal amount of its outstanding Trust IV trust
preferred securities due September 2037 for cash consideration of $4.9.

(b) Debt and Tender Offerings

On May 9, 2011, the company completed a private placement debt offering of $500.0 principal amount of 5.80%
unsecured senior notes due May 15, 2021 at an issue price of $99.646 for net proceeds after discount,
commissions and expenses of $493.9. Commissions and expenses of $4.3 were included as part of the carrying
value of the debt. The notes are redeemable at the company’s option, in whole or in part, at any time at a price
equal to the greater of (a) 100% of the principal amount to be redeemed or (b) the sum of the present values of
the remaining scheduled payments of principal and interest thereon (exclusive of interest accrued to the date of
redemption) discounted to the redemption date on a semi-annual basis at the treasury rate plus 50 basis points,
together, in each case, with accrued interest thereon to the date of redemption.

On May 25, 2011, the company completed a public debt offering of Cdn$400.0 principal amount of 6.40%
unsecured senior notes due May 25, 2021 at an issue price of $99.592 for net proceeds after discount,
commissions and expenses of $405.6 (Cdn$396.0). Commissions and expenses of $2.4 (Cdn$2.4) were included
as part of the carrying value of the debt. The notes are redeemable at the company’s option, in whole or in part,
at any time at the greater of a specified redemption price based upon the then current yield of a Government of
Canada bond with a term to maturity equal to the remaining term to May 25, 2021 and par, together, in each
case, with accrued and unpaid interest to the date fixed for redemption. The company has designated these senior
notes as a hedge of a portion of its net investment in Northbridge.

Pursuant to the tender offer as amended on May 20, 2011 (the “Amended Tender Offer”), the net proceeds of the
debt offerings described above were used to purchase for cash the following debt during May and June of 2011:

Fairfax unsecured senior notes due 2012 (“Fairfax 2012 notes”)
Fairfax unsecured senior notes due 2017 (“Fairfax 2017 notes”)
Crum & Foster unsecured senior notes due 2017
OdysseyRe unsecured senior notes due 2013 (“OdysseyRe 2013 notes”)

Total

Principal
amount
71.0
227.2
323.8
35.9

Cash
consideration
75.6
252.9
357.8
40.8

657.9

727.1

Unsecured senior notes repurchased in connection with the Amended Tender Offer were accounted for as an
extinguishment of debt. Accordingly, other expenses during 2011 included a charge of $104.2 recognized on the
repurchase of long term debt (including the release of $35.0 of unamortized issue costs and discounts and other
transaction costs incurred in connection with the Amended Tender Offer). The principal amount of $657.9 in the
table above is net of $7.0, $23.3 and $6.2 aggregate principal amounts of Fairfax 2017, Fairfax 2012, and
OdysseyRe 2013 notes respectively, which were owned in Zenith National’s investment portfolio prior to being
acquired by Fairfax and tendered to the Amended Tender Offer by Zenith National. Similarly, the $727.1 of cash
consideration in the table above is net of $39.7 of total consideration paid to Zenith National in connection with
the Amended Tender Offer. The notes tendered by Zenith National were eliminated within Fairfax’s consolidated
financial reporting since the acquisition date of Zenith National.

(2) During 2010, the company or one of its subsidiaries completed the following transactions with respect to its debt:

(a) During 2010, holders of OdysseyRe’s 7.65% senior notes due 2013 and 6.875% senior notes due 2015 and
Crum & Forster’s 7.75% senior notes due 2017 provided their consent to amend the indentures governing those
senior notes to allow OdysseyRe and Crum & Forster to make available to senior note holders certain specified
financial information and financial statements in lieu of the reports OdysseyRe and Crum & Forster previously
filed with the Securities and Exchange Commission (“SEC”). In exchange for their consent to amend the
indentures, OdysseyRe and Crum & Forster paid cash participation payments of $2.7 and $3.3 respectively to the
senior note holders which were recorded as a reduction of the carrying value of the senior notes and will be
amortized as an adjustment to the effective interest rate on the senior notes through interest expense in the
consolidated statements of earnings. Transaction costs of $1.2, comprised of legal and agency fees incurred in
connection with the consent solicitations, were recognized as an expense in the consolidated statements of
earnings.

(b) On August 17, 2010, in connection with the acquisition of GFIC as described in note 23, TIG issued a
non-interest bearing contingent promissory note with an acquisition date fair value of $140.6. The TIG Note is
non-interest bearing (except interest of 2% per annum will be payable during periods, if any, when there is an
increase in the United States consumer price index of six percentage points or more) and is due following the sixth
anniversary of the closing of the GFIC Transaction. The principal amount of the TIG Note will be reduced based
on the cumulative adverse development, if any, of GFIC’s loss reserves at the sixth anniversary of the closing of
the GFIC Transaction. The principal amount will be reduced by 75% of any adverse development up to $100,
and by 90% of any adverse development in excess of $100 until the principal amount is nil. The fair value of the
TIG Note was determined as the present value of the expected payment at maturity using a discount rate of
6.17% per annum due to the long term nature of this financial instrument. Fairfax has guaranteed TIG’s
obligations under the TIG Note. Amortization of the discount on the TIG Note is recognized as interest expense in
the consolidated statement of earnings.

(c) On June 22, 2010, the company completed a public debt offering of Cdn$275.0 principal amount of 7.25%
unsecured senior notes due June 22, 2020, issued at par for net proceeds after commissions and expenses of
$267.1 (Cdn$272.5). Commissions and expenses of $2.5 (Cdn$2.5) were included as part of the carrying value
of the debt. The notes are redeemable at the company’s option, in whole or in part, at any time at the greater of a
specified redemption price based on the then current yield of a Government of Canada bond with a term to
maturity equal to the remaining term to June 22, 2020 and par. The company has designated these senior notes
as a hedge of a portion of its net investment in Northbridge.

(d) Effective May 20, 2010, the company consolidated the assets and liabilities of Zenith National, pursuant to the
transaction described in note 23. As a result, the carrying value of $38.0 of redeemable securities issued by a
statutory business trust subsidiary of Zenith National, was included in long term debt. These securities mature on
August 1, 2028, pay semi-annual cumulative cash distributions at an annual rate of 8.55% of the $1,000

F A I R F A X F I N A N C I A L H O L D I N G S L I M I T E D

liquidation amount per security and are redeemable at Zenith National’s option at any time prior to their stated
maturity date at a redemption price of 100% plus the excess of the then present value of the remaining scheduled
payments of principal and interest over 100% of the principal amount together with the accrued and unpaid
interest. Zenith National fully and unconditionally guarantees the distributions and redemptions of these
redeemable securities. On May 26, 2010, holders of the redeemable securities provided their consent to amend
the indenture governing these securities to allow Zenith National to make available to the security holders certain
specified financial information and financial statements in lieu of the reports Zenith National previously filed
with the SEC.

The acquisition of Zenith National resulted in the consolidation of aggregate principal amount of $38.7 and
$6.3 of debt securities issued by Fairfax and OdysseyRe respectively, which were recorded in Zenith National’s
investment portfolio as at FVTPL on the acquisition date. Accordingly, the $47.5 fair value of these debt
securities was eliminated against long term debt. As a result, the carrying value of long term debt – holding
company borrowings and long term debt – subsidiary company borrowings decreased by $38.0 and $6.3
respectively and the company recorded a pre-tax loss of $3.2 in net gains (losses) on investments in the
consolidated statement of earnings.

On September 17, 2010, Zenith National purchased $7.0 principal amount of its redeemable debentures due 2028
for cash consideration of $7.0. On June 9, 2010, Zenith National purchased $13.0 principal amount of its
redeemable debentures due 2028 for cash consideration of $13.0.

(3) During 2002, the company closed out the swaps for this debt and deferred the resulting gain which is amortized to
earnings over the remaining term to maturity. The unamortized balance at December 31, 2011 is $26.6 ($28.5 at
December 31, 2010).

(4)

(5)

(6)

(7)

Redeemable at Fairfax’s option at any time on or after June 15, 2012, June 15, 2013, June 15, 2014 and June 15,
2015 at $103.9, $102.6, $101.3 and $100.0 per bond, respectively.

Redeemable at Fairfax’s option, at any time at the greater of a specified redemption price based upon the then current
yield of a Government of Canada bond with a term to maturity equal to the remaining term to August 19, 2019 and
par.

Redeemable at OdysseyRe’s option at any time at a price equal to the greater of (a) 100% of the principal amount to
be redeemed or (b) the sum of the present values of the remaining scheduled payments of principal and interest
thereon (exclusive of interest accrued to the date of redemption) discounted to the redemption date on a semi-annual
basis at the treasury rate plus 50 basis points, plus, in each case, accrued interest thereon to the date of redemption.

Redeemable at OdysseyRe’s option at any time at a price equal to the greater of (a) 100% of the principal amount to
be redeemed or (b) the sum of the present values of the remaining scheduled payments of principal and interest
thereon (exclusive of interest accrued to the date of redemption) discounted to the redemption date on a semi-annual
basis at the treasury rate plus 40 basis points, plus, in each case, accrued interest thereon to the date of redemption.

(8) The Series A and Series B notes are callable by OdysseyRe on any interest payment date on or after March 15, 2011
and March 15, 2009 respectively, at their par value plus accrued and unpaid interest. The interest rate on each series
of debenture is equal to three month LIBOR, which is calculated on a quarterly basis, plus 2.20%.

(9) The Series C notes are due in 2021 and are callable by OdysseyRe on any interest payment date on or after
December 15, 2011 at their par value plus accrued and unpaid interest. The interest rate is equal to three month
LIBOR plus 2.50% and is reset after every payment date.

(10) Redeemable at Crum & Forster’s option at any time beginning May 1, 2012 at specified redemption prices.

(11) On December 16, 2002, the company acquired Xerox’s 72.5% economic interest in TRG, the holding company of
International Insurance Company (“IIC”), in exchange for payments over the next 15 years of $424.4 ($203.9 at
December 16, 2002 using a discount rate of 9.0% per annum), payable approximately $5.0 a quarter from 2003 to
2017 and approximately $128.2 on December 16, 2017.

(12) TIG Holdings had issued 8.597% junior subordinated debentures to TIG Capital Trust (a statutory business trust
subsidiary of TIG Holdings) which, in turn, has issued 8.597% mandatory redeemable capital securities, maturing in
2027.

Consolidated interest expense on long term debt amounted to $213.9 (2010 – $195.3). Interest expense on
Ridley’s indebtedness amounted to $0.1 (2010 – $0.2).

Principal repayments on long term debt-holding company borrowings and long term debt-subsidiary company
borrowings are due as follows:

2012
2013
2014
2015
2016
Thereafter

Credit facilities

90.6
187.4
5.0
212.8
257.4
2,339.7

On January 31, 2012, Ridley entered into a three-year revolving credit agreement replacing its recently expired
credit facility. Ridley may borrow the lesser of $50.0 or a calculated amount based on the level of eligible trade
accounts receivable and inventory. The credit agreement is secured by first-ranking general security agreements
covering substantially all of Ridley’s assets.

On November 10, 2010, Fairfax entered into a three year $300.0 unsecured revolving credit facility (the “credit
facility”) with a syndicate of lenders to enhance its financial flexibility. On December 16, 2011, Fairfax extended
the term of the credit facility until December 31, 2015. As of December 31, 2011, no amounts had been drawn on
the credit facility. In accordance with the terms of the credit facility agreement, Northbridge terminated its five-
year unsecured revolving credit facility with a Canadian chartered bank on November 10, 2010.

As at December 31, 2009 and until February 23, 2010, OdysseyRe maintained a five-year $200.0 credit facility with
a syndicate of lenders maturing in 2012. As at February 24, 2010, the size of this credit facility was reduced to
$100.0 with an option to increase the size of the facility by an amount up to $50.0, to a maximum facility size of
$150.0. Following such a request, each lender has the right, but not the obligation, to commit to all or a portion
of the proposed increase. As at December 31, 2011, there was $34.3 utilized under this credit facility, all of which
was in support of letters of credit.

16. Total Equity

Equity attributable to shareholders of Fairfax

Authorized capital

The authorized share capital of the company consists of an unlimited number of preferred shares issuable in ser-
ies, 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

Issued capital at December 31, 2011 included 1,548,000 multiple voting shares and 19,865,689 (19,891,389 at
December 31, 2010) subordinate voting shares without par value (inclusive of subordinate voting shares held in
treasury). The multiple voting shares are not publicly traded.

Common Stock

The number of shares outstanding was as follows:

Subordinate voting shares – January 1
Issuances during the year
Purchases for cancellation
Net treasury shares reissued (acquired)

Subordinate voting shares – December 31
Multiple voting shares – beginning and end of year
Interest in shares held through ownership interest in

shareholder – beginning and end of year

2011
19,706,477
–
(25,700)
(53,751)

2010
19,240,100
563,381
(43,900)
(53,104)

19,627,026
1,548,000

19,706,477
1,548,000

(799,230)

Common stock effectively outstanding – December 31

20,375,796

20,455,247

F A I R F A X F I N A N C I A L H O L D I N G S L I M I T E D

Preferred Stock

The number of preferred shares outstanding was as follows:

Balance – January 1, 2010
Issuances during 2010

Series C
10,000,000

Series E
–

Series G
Total
– 10,000,000
–
– 8,000,000 10,000,000 12,000,000 30,000,000

Series I

Balance – December 31, 2010 and 2011

10,000,000 8,000,000 10,000,000 12,000,000 40,000,000

The carrying value of preferred shares outstanding was as follows:

Balance – January 1, 2010
Issuances during 2010

Series C
227.2
–

Series E
–
183.1

Series G
–
235.9

Series I
–
288.5

Balance – December 31, 2010 and 2011

227.2

183.1

235.9

288.5

The terms of the company’s cumulative five-year rate reset preferred shares are as follows:

Series C(1)
Series E(2)
Series G(2)
Series I(2)

Initial
redemption date
December 31, 2014
March 31, 2015
September 30, 2015
December 31, 2015

Number of
shares issued

Stated
capital

Liquidation
preference
per share
10,000,000 Cdn $250.0 Cdn $25.00
8,000,000 Cdn $200.0 Cdn $25.00
10,000,000 Cdn $250.0 Cdn $25.00
12,000,000 Cdn $300.0 Cdn $25.00

Total
227.2
707.5

934.7

Fixed
dividend
rate per
annum
5.75%
4.75%
5.00%
5.00%

(1) Series C preferred shares are redeemable by the company on the date specified in the table above and on each sub-
sequent five-year anniversary date at Cdn$25.00 per share. Holders of unredeemed Series C preferred shares will have
the right, at their option, to convert their shares into floating rate cumulative preferred shares Series D on December 31,
2014 and on each subsequent five-year anniversary date. The Series D preferred shares (of which none are currently
issued) will have a dividend rate equal to the three-month Government of Canada Treasury Bill yield current on
December 31, 2014 or any subsequent five-year anniversary plus 3.15%.

(2) Series E, Series G and Series I preferred shares are redeemable by the company on the dates specified in the table above
and on each subsequent five-year anniversary date at Cdn$25.00 per share. Holders of unredeemed Series E, Series G
and Series I preferred shares will have the right, at their option, to convert their shares into floating rate cumulative
preferred shares Series F (on March 31, 2015), Series H (on September 30, 2015) and Series J (on December 31,
2015) respectively and on each subsequent five-year anniversary date. The Series F, Series H and Series J preferred
shares (of which none are currently issued) will have a dividend rate equal to the three-month Government of Canada
Treasury Bill yield current on March 31, 2015, September 30, 2015 and December 31, 2015 or any subsequent five-
year anniversary plus 2.16%, 2.56% and 2.85% respectively.

Capital transactions

Year ended December 31, 2010

On October 5, 2010, the company issued 12,000,000 cumulative five-year rate reset preferred shares, Series I for
Cdn$25.00 per share, resulting in net proceeds after commissions and expenses of $286.0 (Cdn$290.8). Commis-
sions and expenses of $9.0 were charged to preferred stock and recorded net of $2.5 of deferred income tax recov-
ery.

On July 28, 2010, the company issued 10,000,000 cumulative five-year rate reset preferred shares, Series G for
Cdn$25.00 per share, resulting in net proceeds after commissions and expenses of $233.8 (Cdn$242.2). Commis-
sions and expenses of $7.6 were charged to preferred stock and recorded net of $2.1 of deferred income tax recov-
ery.

On February 26, 2010, the company completed a public equity offering and issued 563,381 subordinate voting
shares at $355.00 per share, for net proceeds after expenses (net of tax) of $199.8.

On February 1, 2010, the company issued 8,000,000 cumulative five-year rate reset preferred shares, Series E for
Cdn$25.00 per share, resulting in net proceeds after commissions and expenses of $181.4 (Cdn$193.5). Commis-
sions and expenses of $6.2 were charged to preferred stock and recorded net of $1.7 of deferred income tax recov-
ery.

Repurchase of Shares

During 2011, under the terms of normal course issuer bids, the company repurchased for cancellation 25,700
(2010 – 43,900) subordinate voting shares for a net cost of $10.0 (2010 – $16.8), of which $5.8 (2010 – $9.7) was
charged to retained earnings. The company also acquires its own subordinate voting shares on the open market
for its share-based payment awards. The number of shares reserved in treasury at December 31, 2011 was 238,663
(184,912 at December 31, 2010).

Dividends

Dividends paid by the company on its outstanding multiple voting and subordinate voting shares during the
most recent three years were as follows:

Date of declaration
January 4, 2012
January 5, 2011
January 5, 2010

Date of record
January 19, 2012
January 19, 2011
January 19, 2010

Date of payment
January 26, 2012
January 26, 2011
January 26, 2010

Dividend
per share
$10.00
$10.00
$10.00

Total cash
payment
$205.8
$205.9
$200.8

Accumulated other comprehensive income (loss)

The balances related to each component of accumulated other comprehensive income (loss) attributable to share-
holders of Fairfax were as follows:

December 31, 2011

December 31, 2010

Pre-tax
amount

Income tax
(expense)
recovery

After-tax
amount

Pre-tax
amount

Income tax
(expense)
recovery

After-tax
amount

7.2
101.9

109.1

(1.9)
(20.4)

5.3
81.5

15.5
100.0

(2.7)
(11.4)

12.8
88.6

(22.3)

86.8

115.5

(14.1)

101.4

Share of accumulated other comprehensive

income (loss) of associates
Currency translation account

Non-controlling interests

Year ended December 31, 2011

On December 22, 2011, the company acquired 75.0% of the outstanding common shares of Sporting Life and
recorded $2.3 (Cdn$2.3) of non-controlling interests related to the 25.0% proportionate share of the identifiable
net assets of Sporting Life which were acquired, pursuant to the transaction described in note 23.

Year ended December 31, 2010

On September 15, 2010, OdysseyRe called for redemption all of the outstanding shares of its 8.125% non-
cumulative Series A preferred shares and its floating rate noncumulative Series B preferred shares not owned by it
or by other subsidiaries of the company. On the redemption date of October 20, 2010, OdysseyRe paid $43.6 to
repurchase $42.4 of the stated capital of the Series A preferred shares and $27.0 to repurchase $26.1 of the stated
capital of the Series B preferred shares. These transactions decreased non-controlling interests by $68.5 and a
pre-tax loss of $2.1 was recognized in other expenses in the consolidated statement of earnings.

F A I R F A X F I N A N C I A L H O L D I N G S L I M I T E D

17. Earnings per Share

Net earnings (loss) per share is calculated in the following table based upon the weighted average common shares
outstanding:

Net earnings attributable to shareholders of Fairfax
Preferred share dividends

Net earnings (loss) attributable to common shareholders – basic and diluted

Weighted average common shares outstanding – basic
Restricted share awards

Weighted average common shares outstanding – diluted

Net earnings (loss) per common share – basic
Net earnings (loss) per common share – diluted

2011
45.1
(51.5)

(6.4)

2010
335.8
(31.4)

304.4

20,405,427
–

20,436,346
98,226

20,405,427

20,534,572

$
$

(0.31)
(0.31)

$
$

14.90
14.82

Options to purchase treasury stock acquired of 175,299 were not included in the calculation of net loss per diluted
common share in 2011, as the inclusion of the options would be anti-dilutive.

18. Income Taxes

The company’s provision for income taxes for the years ended December 31 is as follows:

Current income tax:

Current year expense
Adjustments to prior years’ income taxes

Deferred income tax:

Origination and reversal of temporary differences
Adjustments to prior years’ deferred income taxes
Other

Recovery of income taxes

2011

63.1
8.5

71.6

(123.3)
(6.4)
1.6

(128.1)

(56.5)

2010

44.6
(28.0)

16.6

(217.5)
17.6
(3.6)

(203.5)

(186.9)

A reconciliation of income tax calculated at the Canadian statutory tax rate to the income tax provision at the
effective tax rate in the consolidated financial statements for the years ended December 31 is summarized in the
following table:

Provision for (recovery of) income taxes at the Canadian statutory income tax rate
Non-taxable investment income
Tax rate differential on income and losses incurred outside Canada
Withholding tax
Foreign exchange
Change in tax rate for deferred income taxes
Provision (recovery) relating to prior years
Change in unrecorded tax benefit of losses
Other including permanent differences

Recovery of income taxes

2011
(2.4)
(79.7)
22.6
–
5.8
4.8
2.5
(24.3)
14.2

(56.5)

2010
46.8
(95.8)
(99.3)
35.6
2.5
(12.6)
(1.7)
(34.5)
(27.9)

(186.9)

The $56.5 recovery of income taxes in 2011 differed from the income tax recovery that would be determined by
applying the company’s Canadian statutory income tax rate of 28.3% to the loss before income taxes of $8.7
primarily as a result of the effect of non-taxable investment income in the U.S. tax group (including dividend
income and interest on bond investments in U.S. states and municipalities), the recognition of the benefit of
previously unrecorded accumulated income tax losses, partially offset by the effect of income earned in juris-
dictions where the corporate income tax rate differed from the company’s statutory income tax rate.

The $186.9 recovery of income taxes in 2010 differed from the income tax provision that would be determined by
applying the company’s Canadian statutory income tax rate of 31.0% to the earnings before income taxes of
$151.1 primarily as a result of income earned in jurisdictions where the corporate income tax rate is lower than
the company’s statutory income tax rate, the effect of non-taxable investment income (including dividend
income and interest on bond investments in U.S. states and municipalities, and capital gains in Canada which are
only 50.0% taxable), the recognition of the benefit of previously unrecorded accumulated income tax losses and
the excess of the fair value of net assets acquired over the purchase price in respect of the GFIC acquisition which
is not taxable ($28.5 included in other including permanent differences), partially offset by withholding taxes
paid on an intercompany dividend from the U.S. to Canada.

Income taxes refundable and payable are as follows:

Income taxes refundable
Income taxes payable

Net income taxes refundable

December 31,
2011
85.2
(21.4)

December 31,
2010
217.2
(31.7)

63.8

185.5

The following changes have occurred in net income taxes refundable (payable) during the years ended
December 31:

Balance – January 1
Amounts recorded in the consolidated statements of earnings
Payments made (refunds received) during the period
Acquisition of subsidiaries (note 23)
Foreign exchange effect and other

Balance – December 31

2011
185.5
(71.6)
(82.4)
25.2
7.1

2010
(27.2)
(16.6)
218.7
5.8
4.8

63.8

185.5

The following is the gross movement in the net deferred income tax asset during the years ended December 31:

Balance – December 31, 2011

122.6

354.5

(64.9)

(123.4)

1.2

163.3

95.3

628.2

Balance – January 1, 2011

Amounts recorded in the consolidated

statements of earnings

Amounts recorded in total equity
Acquisition of subsidiary (note 23)
Foreign exchange effect and other

Balance – January 1, 2010

Amounts recorded in the consolidated

statements of earnings

Amounts recorded in total equity
Acquisition of subsidiary (note 23)
Foreign exchange effect and other

Balance – December 31, 2010

10.6
–
–
0.9

54.3

Provision

Operating

for losses

Provision

Deferred

and

and loss

for

premium

capital

adjustment

unearned

acquisition

Intan-

Invest-

losses
54.3

expenses
328.6

premiums
63.0

costs
(52.3)

gibles
(105.3)

ments
(39.7)

61.1
–
6.1
1.1

8.1
–
18.2
(0.4)

10.3
–
6.4
(0.1)

79.6

(9.9)
–
(4.2)
1.5

0.7
–
(19.3)
0.5

52.2
(8.2)
1.4
(4.5)

Provision

Operating

for losses

Provision

Deferred

and

and loss

for

premium

capital

adjustment

unearned

acquisition

Intan-

Invest-

losses
42.8

expenses
298.6

premiums
58.2

costs
(50.0)

gibles
(53.2)

ments
(65.9)

(46.4)
–
74.3
2.1

(4.6)
–
9.4
–

0.2
–
(2.8)
0.3

8.0
–
(58.7)
(1.4)

65.9
(14.1)
(27.6)
2.0

Tax

credits
145.5

17.8
–
–
–

Other
96.4

Total
490.5

(12.2)
9.0
0.8
1.3

128.1
0.8
9.4
(0.6)

Tax

credits
51.5

94.0
–
–
–

Other
17.5

Total
299.5

75.8
1.2
3.4
(1.5)

203.5
(12.9)
(2.0)
2.4

328.6

63.0

(52.3)

(105.3)

(39.7)

145.5

96.4

490.5

F A I R F A X F I N A N C I A L H O L D I N G S L I M I T E D

Management expects that the recorded deferred income tax asset will be realized in the normal course of oper-
ations. The most significant temporary difference included in the deferred income tax asset at December 31, 2011
related to provision for losses and loss adjustment expenses which is recorded substantially on an undiscounted
basis in these consolidated financial statements but is recorded on a discounted basis in certain jurisdictions for
tax purposes.

Management reviews the recoverability of the deferred income tax asset on an ongoing basis and adjusts, as neces-
sary, to reflect its anticipated realization. As at December 31, 2011, management has not recorded deferred
income tax assets of $217.6 related primarily to operating losses. The operating losses for which deferred income
tax assets have not been recorded are comprised of $49.4 of operating losses in Canada, mostly of the former
Cunningham Lindsey companies, $655.0 of operating losses in Europe (excluding Advent), and $46.3 of operating
losses in the U.S., mostly of the former Cunningham Lindsey companies. References to the former Cunningham
Lindsey companies in Canada and in the U.S. are to certain companies which were retained by Fairfax following
the disposition of its controlling interest in the operating companies of Cunningham Lindsey Group Inc. in 2007.
The operating losses in Canada expire in 2014, 2015, 2026 and 2027. The operating losses in the U.S. expire in
2024 and 2025. The operating losses in Europe do not have an expiry date.

Deferred income tax has not been recognized for the withholding tax and other taxes that would be payable on
the unremitted earnings of certain subsidiaries. Such amounts are not likely to become payable in the foreseeable
future. Unremitted earnings amounted to approximately $1.8 billion at December 31, 2011.

19. Statutory Requirements

The retained earnings of the company are largely represented by retained earnings at the insurance and
reinsurance subsidiaries. The insurance and reinsurance subsidiaries are subject to certain requirements and
restrictions under their respective insurance company Acts including minimum capital requirements and divi-
dend restrictions. The company’s capital requirements and management thereof are discussed in note 24. The
company’s share of dividends paid in 2011 by the subsidiaries which are eliminated on consolidation was $265.7
(2010 – $745.6). At December 31, 2011, the company has access to dividend capacity for dividend payment in
2012 at each of its primary operating companies as follows:

Northbridge(1)
Crum & Forster
Zenith National
OdysseyRe

(1) Subject to prior regulatory approval.

20. Contingencies and Commitments

Lawsuits

December 31, 2011
166.2
122.3
62.0
302.5

653.0

(a) On July 25, 2011, a lawsuit seeking class action status was filed in the United States District Court for the
Southern District of New York against Fairfax, certain of its current and former directors and officers,
OdysseyRe and Fairfax’s auditors. The plaintiff seeks to represent a class of all purchasers of securities of
Fairfax listed or registered on a U.S. exchange between May 21, 2003 and March 22, 2006 inclusive. The
complaint alleges that the defendants violated U.S. federal securities laws by making material misstatements
or failing to disclose certain material information regarding, among other things, Fairfax’s and OdysseyRe’s
assets, earnings, losses, financial condition, and internal financial controls. The complaint seeks, among
other things, certification of the putative class; unspecified compensatory damages (including interest);
unspecified monetary restitution; unspecified extraordinary, equitable and/or injunctive relief; and costs
is
fees). The content of the complaint,
(including reasonable attorneys’
substantially identical to the content of the complaint in a lawsuit filed in 2006 which has been finally
dismissed, except that the purported class has been modified so as to avoid the defect which resulted in the
dismissal of the earlier lawsuit. The current lawsuit is at a very preliminary stage. The plaintiff in the lawsuit
was appointed lead plaintiff, its motion for such appointment being unopposed by any other aspiring lead

including the relief sought,

plaintiff; the defendants have filed motions to dismiss the lawsuit; and the plaintiff has filed its opposition to
those motions. The ultimate outcome of any litigation is uncertain, and should this lawsuit be successful, the
defendants may be subject to an award of significant damages, which could have a material adverse effect on
Fairfax’s business, results of operation and financial condition. The lawsuit may require significant
management attention, which could divert management’s attention away from the company’s business. In
addition, the company could be materially adversely affected by negative publicity related to this lawsuit.
Any of the possible consequences noted above, or the perception that any of them could occur, could have
an adverse effect upon the market price for the company’s securities. If their motion to dismiss the lawsuit is
not successful, Fairfax, OdysseyRe and the named directors and officers intend to vigorously defend against
the lawsuit (as they did in the prior lawsuit mentioned above) and the company’s financial statements
include no provision for loss in this matter.

(b) On July 26, 2006, Fairfax filed a lawsuit seeking $6 billion in damages from a number of defendants who, the
complaint (as subsequently amended) alleges, participated in a stock market manipulation scheme involving
Fairfax shares. The complaint, filed in Superior Court, Morris County, New Jersey, alleges violations of various
state laws, including the New Jersey Racketeer Influenced and Corrupt Organizations Act, pursuant to which
treble damages may be available. The defendants removed this lawsuit to the District Court for the District of
New Jersey but pursuant to a motion filed by Fairfax, the lawsuit was remanded to Superior Court, Morris
County, New Jersey. Most of the defendants filed motions to dismiss the lawsuit, all of which were denied
during a Court hearing in September 2007. In October 2007, defendants filed a motion for leave to appeal to
the Appellate Division from the denial of their motions to dismiss. In December 2007, that motion for leave
was denied. Subsequently, two of the defendants filed a motion seeking leave to appeal certain limited issues
to the New Jersey Supreme Court. That motion for leave was denied in February 2008. In December 2007, two
defendants who were added to the action after its initial filing filed motions to dismiss the claims against
them. Those motions were granted in February 2008, with leave being granted to Fairfax to replead the claims
against those two defendants. Fairfax filed an amended complaint in March 2008, which again asserted
claims against those defendants. Those defendants filed a motion to dismiss the amended complaint, which
motion was denied in August 2008. In September 2008, those two defendants also filed a counterclaim
against Fairfax, as well as third-party claims against certain Fairfax executives, OdysseyRe, Fairfax’s outside
legal counsel and PricewaterhouseCoopers, which counterclaim was voluntarily dismissed by those
defendants. In December 2007, an individual defendant filed a counterclaim against Fairfax. Fairfax’s motion
to dismiss that counterclaim was denied in August 2008. That defendant is now deceased; however, to the
extent necessary, Fairfax intends to vigorously defend against that counterclaim. In September 2008, the
Court granted motions for summary judgment brought by several defendants, and dismissed Fairfax’s claims
against those defendants. In September 2011, the Court granted the motion for summary judgment brought
by S.A.C. Capital and related defendants. In December 2011, the Court granted motions for summary
judgment and dismissed claims against Third Point, Kynikos, Institutional Credit Partners and related
defendants for lack of personal jurisdiction over those parties in New Jersey. Discovery in this action is
ongoing and the remaining defendants have filed motions for summary judgment, which are pending. The
ultimate outcome of any litigation is uncertain and the company’s financial statements include no provision
for loss on the counterclaim.

Financial guarantee

On February 24, 2010, the company issued a Cdn$4.0 standby letter of credit on behalf of an investee for a term
of six months. In connection with the standby letter of credit, the company had pledged short term investments
in the amount of Cdn$4.2 representing the company’s maximum loss under the standby letter of credit assuming
failure of any right of recourse the company may have against the investee. On August 24, 2010, the standby let-
ter of credit expired undrawn which was followed by the release of the company’s collateral.

Other

Subsidiaries of the company are 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 posi-
tion.

F A I R F A X F I N A N C I A L H O L D I N G S L I M I T E D

OdysseyRe, Advent and RiverStone (UK) (“the Lloyd’s participants”) participate in Lloyd’s through their 100%
ownership of certain Lloyd’s syndicates. The Lloyd’s participants have pledged securities and cash, with a fair
value of $760.5 and $35.2 respectively as at December 31, 2011, in deposit trust accounts in favour of Lloyd’s
based on certain minimum amounts required to support the liabilities of the syndicates as determined under the
risk-based capital models and on approval by Lloyd’s. The Lloyd’s participants have the ability to substitute these
securities with other securities subject to certain admissibility criteria. These pledged assets effectively secure the
contingent obligations of the Lloyd’s syndicates should they not meet their obligations. The Lloyd’s participants
contingent liability to Lloyd’s is limited to the aggregate amount of the pledged assets and their obligation to
support these liabilities will continue until such liabilities are settled or are reinsured by a third party approved by
Lloyd’s. The company believes that the syndicates for which the Lloyd’s participants are capital providers main-
tain sufficient liquidity and financial resources to support their ultimate liabilities and does not anticipate that
the pledged assets will be utilized.

21. Pensions and Post Retirement Benefits

The company’s subsidiaries have a number of arrangements in Canada, the United States and the United King-
dom that provide pension and post retirement benefits to retired and current employees. The holding company
has no arrangements or plans that provide defined benefit pension or post retirement benefits to retired or cur-
rent employees. Pension arrangements of the subsidiaries include defined benefit statutory pension plans, as well
as supplemental arrangements that provide pension benefits in excess of statutory limits. These plans are a
combination of defined benefit plans and defined contribution plans.

In addition to actuarial valuations for accounting purposes, subsidiaries of the company are required to prepare
funding valuations for determination of their pension contributions. All of the defined benefit pension plans had
their most recent funding valuation performed on various dates during 2011.

The investment policy for the defined benefit pension plans is to invest prudently in order to preserve the invest-
ment asset value of the plans while seeking to maximize the return on those invested assets. The plans’ assets as
of December 31, 2011 and 2010 were invested principally in highly rated equity securities.

Defined benefit pension plan assets at December 31, and the company’s use of Level 1, Level 2 and Level 3 inputs
(as described in note 3) in the valuation of those assets, were as follows:

December 31, 2011

December 31, 2010

Fixed income securities

Equity securities

Other

Total
fair
value
of assets

189.1

220.5

26.7

Quoted
prices
(Level 1)

79.0

215.8

15.7

Significant
other
observable
inputs
(Level 2)

110.1

4.7

2.2

436.3

310.5

117.0

Significant
unobservable
inputs
(Level 3)

Total
fair
value
of assets

Quoted
prices
(Level 1)

47.2

220.9

17.1

138.4

230.6

39.5

Significant
other
observable
inputs
(Level 2)

Significant
unobservable
inputs
(Level 3)

91.2

9.7

10.5

–

11.9

408.5

285.2

111.4

–

8.8

The following tables set forth the funded status of the company’s benefit plans along with amounts recognized in
the company’s consolidated financial statements for both defined benefit pension plans and post retirement
benefit plans as at and for the years ended December 31.

Change in benefit obligation

Balance – January 1

Cost of benefits earned in the year
Interest cost on benefit obligation
Actuarial (gains) losses
Benefits paid
Curtailment
Change in foreign currency exchange rates

Balance – December 31

Change in fair value of plan assets

Balance – January 1

Expected return on plan assets
Actuarial gains (losses)
Company contributions
Plan participant contributions
Benefits paid
Change in foreign currency exchange rates

Balance – December 31

Defined benefit
pension plans

Post retirement
benefit plans

2011

2010

2011

2010

439.9
16.5
23.4
36.2
(15.0)
–
(7.1)

385.8
14.2
22.6
21.9
(12.9)
–
8.3

73.1
3.7
3.5
4.3
(2.9)
(4.9)
(0.4)

65.3
3.9
3.7
1.5
(2.5)
–
1.2

493.9

439.9

76.4

73.1

408.5
25.3
8.9
15.2
–
(15.0)
(6.6)

341.2
21.6
27.1
22.2
–
(12.9)
9.3

–
–
–
2.8
0.1
(2.9)
–

–
–
–
2.4
0.1
(2.5)
–

436.3

408.5

–

Funded status of plans – surplus (deficit)

(57.6)

(31.4)

(76.4)

(73.1)

Amounts recognized in the consolidated balance sheet at

December 31
Other assets
Accounts payable and accrued liabilities

Net accrued liability

Weighted average assumptions used to determine

benefit obligations
Discount rate
Rate of compensation increase
Assumed overall health care cost trend

20.1
(77.7)

34.9
(66.3)

–
(76.4)

–
(73.1)

(57.6)

(31.4)

(76.4)

(73.1)

4.8%
3.8%
–

5.5%
4.4%
–

4.5%
4.0%
8.1%

5.4%
4.0%
8.1%

F A I R F A X F I N A N C I A L H O L D I N G S L I M I T E D

The company’s pension and post retirement expense for the years ended December 31 is comprised of the follow-
ing:

Defined benefit pension and post retirement expense:

Cost of benefits earned in the year, net of employee contributions
Interest cost on benefit obligation
Expected return on plan assets
Curtailment
Foreign exchange effect and other

Total benefit expense recognized in the consolidated statement of earnings
Defined contribution benefit expense

Defined benefit
pension plans

Post retirement
benefit plans

2011

2010

2011

2010

16.5
23.4
(25.3)
–
0.1

14.7
15.3

14.2
22.6
(21.6)
–
(0.7)

14.5
16.3

30.0

30.8

3.6
3.5
–
(4.9)
–

2.2
–

2.2

3.8
3.7
–
–
–

7.5
–

7.5

Weighted average assumptions used to determine benefit expense
Discount rate
Expected long-term rate of return on plan assets
Rate of compensation increase

5.6%
6.5%
4.5%

6.0%
6.3%
4.4%

5.3%
–
4.0%

5.8%
–
4.0%

Cumulative actuarial (gain) loss recognized in other

comprehensive income

Balance – January 1

Gains and losses recognized in other comprehensive income during the year:

Actuarial loss on benefit obligation
Actual returns over expected returns on plan assets
Pension asset limitation and other

Balance – December 31

Defined benefit
pension plans

Post retirement
benefit plans

2011

2010

2011

2010

(37.1)

–

1.5

–

36.2
(8.9)
–

21.9
(27.1)
(31.9)

27.3

(37.1)

(9.8)

(37.1)

4.3
–
–

4.3

5.8

1.5
–
–

1.5

The assumed annual rate of increase in the per capita cost of covered benefits (i.e. health care cost trend rate) is
8.1% in 2012, decreasing to 4.7% by 2023 calculated on a weighted average basis.

The assumed expected rate of return on assets is a forward-looking estimate of the plan’s return, determined by
considering expectations for inflation, long-term expected return on bonds and a reasonable assumption for an
equity risk premium. The expected long-term return for each asset class is then weighted based on the target asset
allocation to develop the expected long-term rate of return. This resulted in the selection of an assumed expected
rate of return of 6.5% for 2011 (2010 – 6.3%). The actual return on assets for the year ended December 31, 2011
was a gain of $34.2 (2010 – gain of $48.7).

Increasing the assumed health care cost trend rates by one percentage point in each year would increase the
accrued post retirement benefit obligation at December 31, 2011 by $9.0, and increase the aggregate of the service
and interest cost components of net periodic post retirement benefit expense for 2011 by $1.2. Conversely,
decreasing the assumed health care cost trend rates by one percentage point in each year would decrease the
accrued post retirement benefit obligation at December 31, 2011 by $7.3, and decrease the aggregate of the service
and interest cost components of net periodic post retirement benefit expense for 2011 by $1.0.

During 2011, the company contributed $18.0 (2010 – $24.6) to its defined benefit pension and post retirement benefit
plans. Based on the company’s current expectations, the 2012 contribution to its defined benefit pension plans and
its post retirement benefit plans should be approximately $21.3 and $2.8, respectively.

22. Operating Leases

Aggregate future minimum commitments at December 31, 2011 under operating leases relating to premises,
automobiles and equipment for various terms up to ten years were as follows:

2012
2013
2014
2015
2016
Thereafter

63.3
49.9
53.7
32.6
37.8
129.5

23. Acquisitions and Divestitures

Subsequent to December 31, 2011

Acquisition of Thai Reinsurance Public Company Limited

On January 19, 2012, the company announced that it had entered into an agreement to acquire approximately
25% of the issued and outstanding shares of Thai Reinsurance Public Company Limited (“Thai Re”), for aggregate
cash consideration of approximately $70.0. The transaction is expected to close in March of 2012, subject to the
successful conclusion of Thai Re’s previously announced rights offering and the receipt of customary regulatory
approvals. Thai Re is headquartered in Bangkok, Thailand and provides reinsurance coverage for property, casu-
alty, engineering, marine, and life customers primarily in Thailand.

Acquisition of Prime Restaurants Inc.

On January 10, 2012, the company completed the acquisition of 100% of the issued and outstanding common
shares of Prime Restaurants Inc. (“Prime Restaurants”) for a cash payment per share of $7.46 (Cdn$7.50 per
common and restricted share plus funding of a special dividend of Cdn$0.08 payment made by Prime Restaurants
to its common shareholders), representing an aggregate purchase consideration of $68.5 (Cdn$69.6 million).
Subsequent to the acquisition, certain key executives of Prime Restaurants invested a portion of the proceeds each
received from the transaction (an aggregate amount of $11.8 (Cdn$11.9 million)) into common shares of that
company, reducing Fairfax’s net cash outflow to $56.7 (Cdn$57.7 million) and its ownership from 100% to
81.7%. The assets and liabilities and results of operations of Prime Restaurants will be included in the company’s
financial reporting in the Other reporting segment. Prime Restaurants franchises, owns and operates a network
of casual dining restaurants and pubs in Canada. Fair value and other measurement adjustments to the carry-
ing value of Prime Restaurants’ estimated assets of $57.0 (Cdn$57.9 million) and liabilities of $15.1 (Cdn$15.4
million) at January 10, 2012 and the recognition of non-controlling interests will be prepared in 2012 subsequent
to the completion of the formal valuation of Prime Restaurants’ assets and liabilities acquired.

Year ended December 31, 2011

Acquisition of Sporting Life Inc.

On December 22, 2011, the company completed the acquisition of 75% of the outstanding common shares of
Sporting Life Inc. (“Sporting Life”) for total cash consideration of $30.8 (Cdn$31.5 million) and recorded assets
acquired of $53.1 (including goodwill of $24.1), liabilities assumed of $20.0 and $2.3 of non-controlling interests.
Sporting Life is a Canadian retailer of sporting goods and sports apparel. The preliminary determination of the
identifiable assets acquired and liabilities assumed is summarized in the table below.

Acquisition of William Ashley China Corporation

On August 16, 2011, the company completed the acquisition of all of the assets and assumed certain liabilities
associated with the businesses currently carried on by William Ashley China Corporation (“William Ashley”).
William Ashley is a prestige retailer of exclusive tableware and gifts in Canada. The preliminary determination of
the identifiable assets acquired and liabilities assumed is summarized in the table below.

F A I R F A X F I N A N C I A L H O L D I N G S L I M I T E D

Acquisition of The Pacific Insurance Berhad

On March 24, 2011, an indirect wholly-owned subsidiary of Fairfax completed the acquisition of all of the out-
standing common shares of The Pacific Insurance Berhad (“Pacific Insurance”) for cash consideration of $71.5
(216.5 million Malaysian ringgit). The assets and liabilities and results of operations of Pacific Insurance are
included in the company’s financial reporting in the Insurance – Fairfax Asia reporting segment. Pacific Insurance
underwrites all classes of general insurance and medical insurance in Malaysia. The preliminary determination of
the identifiable assets acquired and liabilities assumed in connection with the acquisition of Pacific Insurance is
summarized in the table below.

Acquisition of First Mercury Financial Corporation

On February 9, 2011, an indirect wholly-owned subsidiary of Fairfax completed the acquisition of all of the out-
standing common shares of First Mercury Financial Corporation (“First Mercury”) for $16.50 per share in cash,
representing an aggregate purchase consideration of $294.3. The assets and liabilities and results of operations of
First Mercury have been included in the company’s financial reporting in the Insurance – U.S. reporting segment.
First Mercury underwrites insurance products and services primarily to specialty commercial insurance markets,
focusing on niche and underserved segments. The preliminary determination of the identifiable assets acquired
and liabilities assumed is summarized in the table below.

Acquisition date
Percentage of common shares acquired
Assets:

Insurance contract receivables
Portfolio investments(2)
Recoverable from reinsurers
Deferred income taxes
Intangible assets
Goodwill
Other assets

Liabilities:

Subsidiary indebtedness(3)
Accounts payable and accrued liabilities
Income taxes payable
Short sale and derivative obligations
Funds withheld payable to reinsurers
Insurance contract liabilities
Long term debt

Non-controlling interests
Net assets acquired

Pacific Insurance
March 24, 2011
100%

First Mercury
February 9, 2011
100%

Other(1)
–
–

7.3
80.2
26.1
0.1
–
25.5
10.9

46.9
822.3
377.4
9.2
54.7
79.5
68.9

150.1

1,458.9

–
9.5
–
–
–
69.1
–

78.6
–
71.5

150.1

29.7
73.8
–
2.9
83.8
907.4
67.0

1,164.6
–
294.3

1,458.9

–
1.0
–
0.1
0.4
24.1
52.1

77.7

–
43.0
1.6
–
–
–
–

44.6
2.3
30.8

77.7

(1)

Includes the acquisition on December 22, 2011 of 75% of the outstanding common shares of Sporting Life and the
assumption on August 16, 2011 of all of the assets and certain of the liabilities associated with the businesses of Wil-
liam Ashley. The assets and liabilities and results of operations of Sporting Life and William Ashley are included in
the company’s financial reporting in the Other reporting segment.

(2)

Included in the carrying value of the acquired portfolio investments of Pacific Insurance, First Mercury and Sporting
Life were $22.0, $650.1 and $1.0 respectively of subsidiary cash and cash equivalents.

(3) Subsequent to the acquisition, First Mercury repaid its subsidiary indebtedness for cash consideration of $29.7.

The determinations of the fair value of assets and liabilities summarized in the preceding table are preliminary
and may be revised when estimates and assumptions and the valuations of assets and liabilities are finalized
within twelve months of the acquisition date.

In 2011, the company’s consolidated statement of earnings included First Mercury’s revenue of $217.0 and net
earnings of $1.5 since the acquisition date of February 9, 2011.

Cunningham Lindsey Group Limited

On January 4, 2011, the company’s associate CLGL acquired the U.S. operations of GAB Robins North America,
Inc., a provider of loss adjusting and claims management services.

Year ended December 31, 2010

Acquisition of General Fidelity Insurance Company

On August 17, 2010, TIG Insurance Company (“TIG”), an indirect wholly-owned subsidiary of Fairfax, completed
the acquisition of all of the issued and outstanding shares of General Fidelity Insurance Company (“GFIC”), for
total consideration of $240.6 comprised of a cash payment of $100.0 and a contingent promissory note issued by
TIG (the “TIG Note”) with an acquisition date fair value of $140.6 (the “GFIC Transaction”). The TIG Note is
non-interest bearing (except interest of 2% per annum will be payable during periods, if any, when there is an
increase in the United States consumer price index of six percentage points or more) and is due following the
sixth anniversary of the closing of the GFIC Transaction. The principal amount of the TIG Note will be reduced
based on the cumulative adverse development, if any, of GFIC’s loss reserves at the sixth anniversary of the clos-
ing of the GFIC Transaction. The principal amount will be reduced by 75% of any adverse development up to
$100, and by 90% of any adverse development in excess of $100 until the principal amount is nil. The fair value
of the TIG Note was determined as the present value of the expected payment at maturity using a discount rate of
6.17% per annum due to the long term nature of this financial instrument. Fairfax has guaranteed TIG’s obliga-
tions under the TIG Note. Following this transaction, the assets and liabilities and results of operations of GFIC
have been included in the company’s consolidated financial reporting in the Runoff reporting segment. The
purchase price of $240.6 was comprised of net assets acquired of $323.7 less the excess of the fair value of net
assets acquired over the purchase price of $83.1 which was recorded in the year ended December 31, 2010 in the
consolidated statement of earnings. GFIC is a property and casualty insurance company based in the United
States whose insurance business will be run off under the management of Fairfax’s RiverStone subsidiary. In
connection with the purchase of GFIC, the company also acquired 100% ownership of BA International Under-
writers Limited (subsequently renamed RiverStone Corporate Capital 2 Limited), the only interest of Lloyd’s
Syndicate 2112 (“Syndicate 2112”) for nominal cash consideration. Following this transaction, the assets and
liabilities and results of operations of Syndicate 2112 have been included in the company’s consolidated financial
reporting in the Runoff reporting segment.

Acquisition of Zenith National Insurance Corp.

On May 20, 2010, the company completed the acquisition of all of the outstanding common shares of Zenith
National Insurance Corp. (“Zenith National”), other than those common shares already owned by Fairfax and its
affiliates, for $38.00 per share in cash, representing aggregate purchase consideration of $1.3 billion. Prior to
May 20, 2010, the company classified its $90.0 investment (original cost) in 8.2% of the outstanding common
shares of Zenith National as at FVTPL. Following this transaction, the assets and liabilities and results of oper-
ations of Zenith National have been included in the company’s consolidated financial reporting in the
Insurance – U.S. reporting segment. The $1.4 billion purchase consideration includes the fair value of the pre-
viously owned common shares of Zenith National and Zenith National’s assets and liabilities acquired as summar-
ized in the table below. Zenith National is engaged, through its wholly owned subsidiaries, in the workers’
compensation insurance business throughout the United States.

F A I R F A X F I N A N C I A L H O L D I N G S L I M I T E D

Acquisition date
Percentage of common shares acquired
Assets:

Holding company cash and investments(1)
Insurance contract receivables
Portfolio investments(2)
Recoverable from reinsurers
Deferred income taxes
Intangible assets(3)
Goodwill
Other assets

Liabilities:

Accounts payable and accrued liabilities
Deferred income taxes(4)
Insurance contract liabilities
Long term debt

Net assets acquired

Excess of fair value of net assets acquired over purchase price

Syndicate 2112
GFIC
October 1, 2010 August 17, 2010
100%

100%

Zenith National
May 20, 2010
100%

–
–
29.1
0.7
–
–
–
1.5

31.3

0.7
–
30.6
–

31.3
–

31.3

–

–
47.7
661.1
10.5
42.2
–
–
0.1

761.6

10.4
–
427.5
–

437.9
323.7

761.6

83.1

50.6
216.2
1,746.6
235.1
–
175.5
317.6
424.8

3,166.4

206.2
44.2
1,416.9
57.7

1,725.0
1,441.4

3,166.4

–

(1)

(2)

Included in the carrying value of Zenith National’s holding company cash and investments acquired was $40.6 of
holding company cash and cash equivalents.

Included in the carrying value of the acquired portfolio investments of Syndicate 2112 and GFIC were $29.1 and
$650.0 respectively of subsidiary cash and cash equivalents. Included in the carrying value of Zenith National’s
portfolio investments acquired was $231.5 of subsidiary cash and cash equivalents and $47.5 of debt securities issued
by Fairfax and OdysseyRe. The $47.5 of debt securities acquired was eliminated against long term debt on the
consolidated balance sheet.

(3) Zenith National’s intangible assets were comprised of broker relationships of $147.5, brand names of $20.2 and

computer software of $7.8.

(4)

Included in Zenith National’s deferred income taxes was a deferred income tax liability of $58.7 associated with the
recognition of broker relationships and brand names as described in footnote 3.

The financial statements of Syndicate 2112, GFIC and Zenith National are included in the company’s con-
solidated financial statements as of their respective acquisition dates. Goodwill in the amount of $317.6 recorded
on the acquisition of Zenith National is primarily attributable to intangible assets that do not qualify for separate
recognition. The excess of the fair value of net assets acquired over the purchase price in the amount of $83.1
recorded in the year ended December 31, 2010 on the acquisition of GFIC is primarily attributable to the TIG
Note being non-interest bearing except in periods, if any, when there is significant inflation in the United States.
In 2010, the company’s consolidated statement of earnings included Zenith National’s revenue of $275.6 and net
loss of $58.5 since the acquisition date of May 20, 2010.

Sale of TIG Indemnity

On July 1, 2010, TIG sold its wholly-owned inactive subsidiary TIG Indemnity Company (“TIC”) to a third party
purchaser, resulting in the recognition of a net gain on investment before income taxes of $7.5. TIG will continue
to reinsure 100% of the insurance liabilities of TIC existing at June 30, 2010 and has entered into an admin-
istrative agreement with the purchaser whereby TIG will provide claims handling services on those liabilities.

Other

Investment in Gulf Insurance Company

On September 28, 2010, the company completed the acquisition of a 41.3% interest in Gulf Insurance Company
(“Gulf Insurance”) for cash consideration of $217.1 (61.9 million Kuwaiti dinar) inclusive of a 2.1% interest in
Gulf Insurance which the company had previously acquired for cash consideration of $8.5 (2.0 million Kuwaiti
dinar). Subsequent to making its investment, the company determined that it had obtained significant influence
over Gulf Insurance and commenced recording its 41.3% interest in Gulf Insurance using the equity method of
accounting. The equity accounted investment in Gulf Insurance was reported in the Corporate and Other report-
ing segment within investments in associates on the consolidated balance sheets. Following the closing of this
transaction, the company sold its ownership interest in Arab Orient Insurance Company to Gulf Insurance for
proceeds equal to the original cost paid to acquire this investment. Gulf Insurance is headquartered in Kuwait and
underwrites a full range of primary property and casualty and life and health insurance products in the Middle
East and North Africa.

24. Financial Risk Management

Overview

The primary goals of the company’s financial risk management are to ensure that the outcomes of activities
involving elements of risk are consistent with the company’s objectives and risk tolerance, while maintaining an
appropriate balance between risk and reward and protecting the company’s consolidated balance sheet from
events that have the potential to materially impair its financial strength. The company’s exposure to potential
loss from its insurance and reinsurance operations and investment activities primarily relates to underwriting risk,
credit risk, liquidity risk and various market risks. Balancing risk and reward is achieved through identifying risk
appropriately, aligning risk tolerances with business strategy, diversifying risk, pricing appropriately for risk, miti-
gating risk through preventive controls and transferring risk to third parties. There were no significant changes in
the types of the company’s risk exposures and processes for managing those risks during 2011 compared to those
identified in 2010 except as discussed below.

Financial risk management objectives are achieved through a two tiered system, with detailed risk management
processes and procedures at the company’s primary operating subsidiaries combined with the analysis of the
company-wide aggregation and accumulation of risks at the holding company level. The company’s Chief Risk
Officer reports quarterly to Fairfax’s Executive Committee and the Board of Directors on the key risk exposures.
The Executive Committee approves certain policies for overall risk management, as well as policies addressing
specific areas such as investments, underwriting, catastrophe risk and reinsurance. The Investment Committee
approves policies for the management of market risk (including currency risk, interest rate risk and other price
risk) and the use of derivative and non-derivative financial instruments, and monitors to ensure compliance with
relevant regulatory guidelines and requirements. All risk management policies are submitted to the Board of
Directors for approval.

Underwriting Risk

Underwriting risk is the risk that the total cost of claims, claims adjustment expenses and premium acquisition
expenses will exceed premiums received and can arise as a result of numerous factors, including pricing risk,
reserving risk and catastrophe risk. There were no significant changes to the company’s exposure to underwriting
risk or the framework used to monitor, evaluate and manage underwriting risk at December 31, 2011 compared to
December 31, 2010.

Pricing risk arises because actual claims experience can differ adversely from the assumptions included in pricing
calculations. Historically the underwriting results of the property and casualty industry have fluctuated sig-
nificantly due to the cyclicality of the insurance market. The market cycle is affected by the frequency and
severity of losses, levels of capacity and demand, general economic conditions and competition on rates and
terms of coverage. The operating companies focus on profitable underwriting using a combination of experienced
commercial underwriting staff, pricing models and price adequacy monitoring tools.

F A I R F A X F I N A N C I A L H O L D I N G S L I M I T E D

Reserving risk arises because actual claims experience can differ adversely from the assumptions included in set-
ting reserves, in large part due to the length of time between the occurrences of a loss, the reporting of the loss to
the insurer and the ultimate resolution of the claim. Claims provisions reflect expectations of the ultimate cost of
resolution and administration of claims based on an assessment of facts and circumstances then known, a review
of historical settlement patterns, estimates of trends in claims severity and frequency, legal theories of liability
and other factors.

Variables in the reserve estimation process can be affected by both internal and external factors, such as trends
relating to jury awards, economic inflation, medical inflation, worldwide economic conditions, tort reforms, court
interpretations of coverage, the regulatory environment, underlying policy pricing, claims handling procedures,
inclusion of exposures not contemplated at the time of policy inception and significant changes in severity or
frequency of losses relative to historical trends. Due to the amount of time between the occurrence of a loss, the
actual reporting of the loss and the ultimate payment for the loss, provisions may ultimately develop differently
from the actuarial assumptions made when initially estimating the provision for claims. The company’s provision
for claims is reviewed separately by, and must be acceptable to, internal actuaries at each operating company, the
Chief Risk Officer at Fairfax and one or more independent actuaries.

Catastrophe risk arises because property and casualty insurance companies may be exposed to large losses arising
from man-made or natural catastrophes that could result in significant underwriting losses. The company eval-
uates potential catastrophic events and assesses the probability of occurrence and magnitude of these events
through various modeling techniques and through the aggregation of limits exposed. Each of the operating
companies has strict underwriting guidelines for the amount of catastrophe exposure it may assume for any one
risk and location. Each of the operating companies manages catastrophe exposure by factoring in levels of
reinsurance protection, capital levels and risk tolerances. The company’s head office aggregates catastrophe
exposure company-wide and continually monitors the group exposure. Currently the company’s objective is to
limit its company-wide catastrophe loss exposure such that one year’s aggregate pre-tax net catastrophe losses
would not exceed one year’s normalized earnings before income taxes.

To manage its exposure to underwriting risk, and the pricing, reserving and catastrophe risks contained therein,
the company’s operating companies have established limits for underwriting authority and the requirement for
specific approvals for transactions involving new products or for transactions involving existing products which
exceed certain limits of size or complexity. The company’s objective of operating with a prudent and stable
underwriting philosophy with sound reserving is also achieved through establishment of goals, delegation of
authorities, financial monitoring, underwriting reviews and remedial actions to facilitate continuous improve-
ment.

As part of its overall risk management strategy, the company cedes insurance risk through proportional,
non-proportional and facultative reinsurance treaties. With proportional reinsurance, the reinsurer shares a pro
rata portion of the company’s losses and premium, whereas with non-proportional reinsurance, the reinsurer
assumes payment of the company’s loss above a specified retention, subject to a limit. Facultative reinsurance is
the reinsurance of individual risks as agreed by the company and the reinsurer.

The following summarizes the company’s principal lines of business and the significant insurance risks inherent
therein:

(cid:129) Property, which insures against losses to property from (among other things) fire, explosion, natural perils
(for example earthquake, windstorm and flood) and engineering problems (for example, boiler explosion,
machinery breakdown and construction defects). Specific types of property risks underwritten by the
company include automobile, marine and aerospace;

(cid:129) Casualty, which insures against accidents, including workers’ compensation and employers’ liability, acci-

dent and health, medical malpractice, and umbrella coverage;

(cid:129)

Specialty, which insures against other miscellaneous risks and liabilities that are not identified above; and

(cid:129) Reinsurance which includes, but is not limited to, property, casualty and liability exposures.

An analysis of revenue by line of business is included in note 25.

The table below shows the company’s concentration of risk by region and line of business based on gross pre-
miums written prior to giving effect to ceded reinsurance premiums. The company’s exposure to general
insurance risk varies by geographic region and may change over time. Premiums ceded to reinsurers (including
retrocessions) amounted to $1,135.6 (2010 – $913.9) for the year ended December 31, 2011.

Canada

United States

Far East

International

Total

For the years ended
December 31

Property

Casualty

Specialty

Total

Insurance

Reinsurance

2011

557.6

616.7

133.0

2010

529.6

2011

845.2

2010

2011

2010

772.5

273.7

202.5

625.9

2,281.8

1,603.5

170.3

118.4

131.4

209.3

160.9

214.4

187.5

2011

618.5

479.2

343.8

2010

2011

2010

522.4

2,295.0

2,027.0

370.7

3,548.0

2,718.5

137.6

900.5

617.4

1,307.3

1,286.9

3,336.3

2,536.9

658.4

508.4

1,441.5

1,030.7

6,743.5

5,362.9

1,231.5

1,220.9

2,614.3

1,747.3

350.5

277.3

392.4

262.4

4,588.7

3,507.9

75.8

66.0

722.0

789.6

307.9

231.1

1,049.1

768.3

2,154.8

1,855.0

1,307.3

1,286.9

3,336.3

2,536.9

658.4

508.4

1,441.5

1,030.7

6,743.5

5,362.9

The table below shows the sensitivity of earnings from operations before income taxes and total equity after giv-
ing effect to a one percentage point increase in the loss ratio. The loss ratio is regarded as a non-GAAP measure
and is calculated by the company with respect to its ongoing insurance and reinsurance operations as losses on
claims (including losses and loss adjustment expenses) expressed as a percentage of net premiums earned. Such an
increase could arise from higher frequency of losses, increased severity of losses, or from a combination of both.
The sensitivity analysis presented below does not consider the probability of such changes to loss frequency or
severity occurring or any non-linear effects of reinsurance and as a result, each additional percentage point
increase in the loss ratio would result in a linear impact on earnings from operations before income taxes and
total equity. In practice, the company monitors insurance risk by evaluating extreme scenarios with models
which consider the non-linear effects of reinsurance.

For the years ended December 31

2011

2010

2011

2010

2011

2010

2011

2010

2011

2010

Northbridge

U.S.

Fairfax Asia

OdysseyRe

Other

Insurance

Reinsurance

Insurance and
Reinsurance

Impact of +1% increase in loss ratio on:

Earnings from operations before

income taxes

Total equity

Credit Risk

10.7

7.6

10.0

7.0

15.0

9.8

10.0

6.5

2.0

1.8

1.6

1.4

20.1

13.1

18.9

12.3

5.0

4.0

5.4

4.1

Credit risk is the risk of loss resulting from the failure of a counterparty to honour its financial obligations to the
company. Credit risk arises predominantly with respect to cash and short-term investments, investments in debt
instruments, insurance contract receivables, recoverable from reinsurers and receivable from counterparties to
derivative contracts (primarily total return swaps and CPI-linked derivatives). Effective January 1, 2011, the
company no longer considers credit default swaps to be an economic hedge of its financial assets (refer to note 7
under the heading Credit contracts). There were no other significant changes to the company’s exposure to credit
risk (except as set out in the discussion which follows) or the framework used to monitor, evaluate and manage
credit risk at December 31, 2011 compared to December 31, 2010.

F A I R F A X F I N A N C I A L H O L D I N G S L I M I T E D

The aggregate gross credit risk exposure at December 31, 2011 (without taking into account amounts held by the
company as collateral) was $25,382.2 ($23,138.9 at December 31, 2010) and was comprised as follows:

Bonds:

U.S., U.K., German, Canadian and other sovereign government
Canadian provincials
U.S. states and municipalities
Corporate and other

Derivatives and other invested assets:

Receivable from counterparties to derivatives

Insurance contract receivables
Recoverable from reinsurers
Other assets
Cash and short term investments

Total gross credit risk exposure

December 31,
2011

December 31,
2010

3,038.1
1,038.7
6,201.5
1,492.6

389.2
1,735.4
4,198.1
414.2
6,874.4

4,172.8
1,251.3
5,425.6
2,107.0

424.8
1,476.6
3,757.0
409.3
4,114.5

25,382.2

23,138.9

At December 31, 2011, the company had income taxes refundable of $85.2 ($217.2 at December 31, 2010).

Investments in Debt Instruments

The company’s risk management strategy for debt instruments is to invest primarily in debt instruments of high
credit quality issuers and to limit the amount of credit exposure with respect to any one corporate issuer. While
the company reviews third party ratings, it also carries out its own analysis and does not delegate the credit deci-
sion to rating agencies. The company endeavours to limit credit exposure by imposing fixed income portfolio
limits on individual corporate issuers and limits based on credit quality and may, from time to time, initiate posi-
tions in certain types of derivatives to further mitigate credit risk exposure.

As at December 31, 2011, the company had investments with a fair value of $9,148.5 ($9,206.7 at December 31,
2010) in bonds exposed to credit risk representing in the aggregate 37.6% (39.5% at December 31, 2010) of the
total investment portfolio (all bonds included in Canadian provincials, U.S. states and municipalities and corpo-
rate and other, and $415.7 ($422.8 at December 31, 2010) of sovereign government bonds, including $244.2
($268.5 at December 31, 2010) of Greek bonds (purchased at deep discounts to par) and $82.8 ($89.0 at
December 31, 2010) of Polish bonds (purchased to match claims liabilities of Polish Re)). As at December 31, 2011
and 2010, the company did not have any investments in bonds issued by Ireland, Italy, Portugal or Spain. The
company considers its investment at December 31, 2011 in the $2,622.4 ($3,750.0 at December 31, 2010) of
sovereign government bonds not referred to in the first sentence of this paragraph (including $2,082.3 ($2,824.7
at December 31, 2010) of U.S. treasury bonds), representing 10.8% (16.1% at December 31, 2010) of the total
investment portfolio, to present only a nominal risk of default.

The company’s exposure to credit risk remained substantially unchanged at December 31, 2011 compared to
December 31, 2010, notwithstanding that in 2011 the company sold approximately 53.9% of its holdings of U.S.
treasury bonds and retained the proceeds of $1,898.0 in cash or reinvested those proceeds into short term invest-
ments with minimal exposure to credit risk. Effective January 1, 2011, the company no longer considers credit
default swaps to be an economic hedge of its financial assets (refer to note 7 under the heading Credit contracts).
There were no other significant changes to the company’s framework used to monitor, evaluate and manage
credit risk at December 31, 2011 compared to December 31, 2010 with respect to the company’s investments in
debt securities.

The composition of the company’s fixed income portfolio classified according to the higher of each security’s
respective S&P and Moody’s issuer credit rating is presented in the table that follows:

Issuer Credit Rating
AAA/Aaa
AA/Aa
A/A
BBB/Baa
BB/Ba
B/B
Lower than B/B and unrated

Total

December 31, 2011 December 31, 2010

Carrying
value
2,955.5
5,408.0
1,822.6
349.3
75.5
125.6
1,034.4

%
25.1
45.9
15.5
3.0
0.6
1.1
8.8

Carrying
value
4,220.2
5,291.0
1,432.7
558.4
324.4
215.1
914.9

%
32.5
40.8
11.1
4.3
2.5
1.7
7.1

11,770.9

100.0

12,956.7

100.0

There were no significant changes to the composition of the company’s fixed income portfolio classified accord-
ing to the higher of each security’s respective S&P and Moody’s issuer credit rating at December 31, 2011 com-
pared to December 31, 2010 except in respect to the sale of U.S. treasury bonds discussed above which reduced
the proportion of the company’s fixed income portfolio invested in securities rated AAA/Aaa. At December 31,
2011, 89.5% (88.7% at December 31, 2010) of the fixed income portfolio carrying value was rated investment
grade, with 71.0% (73.3% at December 31, 2010) being rated AA or better (primarily consisting of government
obligations). At December 31, 2011, holdings of fixed income securities in the ten issuers (excluding U.S., Cana-
dian and U.K. sovereign government bonds) to which the company had the greatest exposure totaled $3,862.0,
which represented approximately 15.9% of the total investment portfolio. The exposure to the largest single
issuer of corporate bonds held at December 31, 2011, was $228.9, which represented approximately 0.9% of the
total investment portfolio.

The consolidated investment portfolio included $6.2 billion ($5.4 billion at December 31, 2010) of U.S. state and
municipal bonds (approximately $4.9 billion tax-exempt, $1.3 billion taxable), almost all of which were pur-
chased during 2008. Of the $6.2 billion ($5.4 billion at December 31, 2010) held in the subsidiary investment
portfolios at December 31, 2011, approximately $3.8 billion ($3.5 billion at December 31, 2010) were insured by
Berkshire Hathaway Assurance Corp. for the payment of interest and principal in the event of issuer default; the
company believes that this insurance significantly mitigates the credit risk associated with these bonds.

Counterparties to Derivative Contracts

Counterparty risk arises from the company’s derivative contracts primarily in three ways: first, a counterparty may
be unable to honour its obligation under a derivative contract and there may not be sufficient collateral pledged
in favour of the company to support that obligation; second, collateral deposited by the company to a counter-
party as a prerequisite for entering into certain derivative contracts (also known as initial margin) may be at risk
should the counterparty face financial difficulty; and third, excess collateral pledged in favour of a counterparty
may be at risk should the counterparty face financial difficulty (counterparties may hold excess collateral as a
result of the timing of the settlement of the amount of collateral required to be pledged based on the fair value of
a derivative contract).

The company endeavours to limit counterparty risk through the terms of agreements negotiated with the counter-
parties to its derivative contracts. Pursuant to these agreements, counterparties are contractually required to
deposit eligible collateral in collateral accounts (subject to certain minimum thresholds) for the benefit of the
company depending on the then current fair value of the derivative contracts, calculated on a daily basis. The
company’s exposure to risk associated with providing initial margin is mitigated where possible through the use
of segregated third party custodian accounts whereby counterparties are permitted to take control of the collateral
only in the event of default by the company.

F A I R F A X F I N A N C I A L H O L D I N G S L I M I T E D

Agreements negotiated with counterparties provide for a single net settlement of all financial instruments covered
by the agreement in the event of default by the counterparty, thereby permitting obligations owed by the com-
pany to a counterparty to be offset to the extent of the aggregate amount receivable by the company from that
counterparty (the “net settlement arrangements”). The following table sets out the company’s exposure to credit
risk related to the counterparties to its derivative contracts:

Total derivative assets (excluding exchange traded instruments

principally comprised of equity and credit warrants which are not
subject to counterparty risk)

Impact of net settlement arrangements (described above)

Fair value of collateral deposited for the benefit of the company net
of $65.7 (nil at December 31, 2010) of excess collateral pledged by
counterparties

Excess collateral pledged by the company in favour of counterparties

Initial margin not held in segregated third party custodian accounts

December 31,
2011

December 31,
2010

389.2

(101.0)

(141.6)

129.7

80.6

424.8

(119.0)

(120.5)

41.1

67.7

Net derivative counterparty exposure after net settlement and

collateral arrangements

356.9

294.1

The fair value of the collateral deposited for the benefit of the company at December 31, 2011 consisted of $50.5
cash ($26.1 at December 31, 2010) and government securities of $156.8 ($94.4 at December 31, 2010) that may be
sold or repledged by the company. The company has recognized the cash collateral within subsidiary cash and
short term investments and recognized a corresponding liability within accounts payable and accrued liabilities
on the consolidated balance sheets. The company had not exercised its right to sell or repledge collateral at
December 31, 2011. The net derivative counterparty exposure after net settlement and collateral arrangements,
related principally to the aggregation of balances due from counterparties that were lower than certain minimum
thresholds which would require that collateral be deposited for the benefit of the company.

Recoverable from Reinsurers

Credit exposure on the company’s recoverable from reinsurers balance existed at December 31, 2011 to the extent
that any reinsurer may not be able or willing to reimburse the company under the terms of the relevant
reinsurance arrangements. The company has a process to regularly assess the creditworthiness of reinsurers with
whom it transacts business. Internal guidelines generally require reinsurers to have strong A.M. Best ratings and
maintain capital and surplus exceeding $500.0. Where contractually provided for, the company has collateral for
outstanding balances in the form of cash, letters of credit, guarantees or assets held in trust accounts. This
collateral may be drawn on for amounts that remain unpaid beyond contractually specified time periods on an
individual reinsurer basis.

The company’s reinsurance security department conducts ongoing detailed assessments of current and potential
reinsurers and annual
reviews on impaired reinsurers, and provides recommendations for uncollectible
reinsurance provisions for the group. The reinsurance security department also collects and maintains individual
and group reinsurance exposures aggregated across the group. Most of the reinsurance balances for reinsurers
rated B++ and lower or which are not rated were inherited by the company on acquisition of a subsidiary. The
company’s largest single reinsurer (Swiss Re America Corp.) represents 6.2% (6.3% at December 31, 2010) of
shareholders’ equity attributable to shareholders of Fairfax and is rated A+ by A.M. Best.

Changes that occurred in the provision for uncollectible reinsurance during the period are disclosed in note 9.

The following table presents the $4,198.1 ($3,757.0 at December 31, 2010) gross recoverable from reinsurers classi-
fied according to the financial strength rating of the reinsurers. Pools and associations, shown separately, are
generally government or similar insurance funds carrying limited credit risk.

A.M. Best Rating

from reinsurers

held

from reinsurers

held

from reinsurers

December 31, 2011

Outstanding

December 31, 2010

Outstanding

Gross

balances for

Net unsecured

Gross

balances for

Net unsecured

recoverable

which security is

recoverable

which security is

recoverable

A++

A+

A-

B++

B+

B or lower

Not rated

Pools and associations

Provision for uncollectible reinsurance

Recoverable from reinsurers

Cash and Short Term Investments

170.5

1,443.0

1,371.9

457.8

37.3

92.5

1.8

766.3

152.5

4,493.6

(295.5)

4,198.1

14.0

377.8

212.3

233.8

12.3

76.5

0.2

239.8

46.3

1,213.0

156.5

1,065.2

1,159.6

224.0

25.0

16.0

1.6

526.5

106.2

3,280.6

(295.5)

168.6

760.9

1,945.4

262.3

36.8

74.4

2.2

773.8

81.5

4,105.9

(348.9)

2,985.1

3,757.0

8.5

72.0

473.2

123.7

13.0

55.8

–

244.3

46.6

1,037.1

160.1

688.9

1,472.2

138.6

23.8

18.6

2.2

529.5

34.9

3,068.8

(348.9)

2,719.9

The company’s cash and short term investments (including at the holding company) are held at major financial
institutions in the jurisdictions in which the operations are located. At December 31, 2011, the majority of these
balances were held in Canadian and U.S. financial institutions (95.4% (94.4% at December 31, 2010)) with the
remainder held in European financial institutions (2.2% (2.5% at December 31, 2010)) and other foreign national
financial institutions (2.4% (3.1% at December 31, 2010)). The company monitors risks associated with cash and
short term investments by regularly reviewing the financial strength and creditworthiness of these financial
institutions and more frequently during periods of economic volatility. As a result of these reviews, the company
may transfer balances from financial institutions where it perceives credit concerns to exist to other institutions
considered by management to be more stable.

Liquidity Risk

Liquidity risk is the potential for loss if the company is unable to meet financial commitments in a timely manner
at reasonable costs as they fall due. It is the company’s policy to ensure that sufficient liquid assets are available to
meet financial commitments, including liabilities to policyholders and debt holders, dividends on preferred
shares and investment commitments. Cash flow analysis is performed on an ongoing basis at both the holding
company and subsidiary company level to ensure that future cash needs are met or exceeded by cash flows gen-
erated from the ongoing operations.

The liquidity requirements of the holding company principally relate to interest and corporate overhead
expenses, preferred share dividends, income tax payments and certain derivative obligations (described below).
The holding company’s known significant commitments for 2012 consist of the net amount of $56.7 (Cdn$57.7
million) (paid January 2012) in respect of the company’s acquisition of Prime Restaurants, as described in note 23,
the $205.8 dividend on common shares ($10.00 per share, paid January 2012), the repayment on maturity of
$86.3 principal amount of the company’s unsecured senior notes due April 15, 2012, interest and corporate over-
head expenses, preferred share dividends and income tax payments.

The company believes that holding company cash and investments provide adequate liquidity to meet the hold-
ing company’s obligations in 2012. In addition to these resources, the holding company expects to continue to
receive investment management and administration fees from its insurance and reinsurance subsidiaries, invest-
ment income on its holdings of cash and investments, and dividends from its insurance and reinsurance sub-
sidiaries. To further augment its liquidity, the holding company may draw upon its $300.0 unsecured revolving
credit facility (for further details related to the credit facility, refer to note 15). The company’s long term liquidity
risk exposure decreased modestly during the second quarter of 2011 when it lengthened the maturity of certain of
its long term debt with the issuances of $500.0 and Cdn$400.0 principal amounts of its unsecured senior notes

F A I R F A X F I N A N C I A L H O L D I N G S L I M I T E D

due 2021, the proceeds from which were used to repurchase $298.2 principal amount of the company’s unsecured
senior notes due 2012 and 2017 and to fund the repurchase of $323.8 of Crum & Forster’s unsecured senior notes
due 2017, $35.9 of OdysseyRe’s unsecured senior notes due 2013 and $25.6 principal amount of First
Mercury’s trust preferred securities with the remainder retained to augment holding company cash and invest-
ments.

The liquidity requirements of the insurance and reinsurance subsidiaries principally relate to the liabilities asso-
ciated with underwriting, operating costs and expenses, the payment of dividends to the holding company, con-
tributions to their subsidiaries, payment of principal and interest on their outstanding debt obligations, income
tax payments and certain derivative obligations (described below). Liabilities associated with underwriting include
the payment of claims and direct commissions. Historically, the insurance and reinsurance subsidiaries have used
cash inflows from operating activities (primarily the collection of premiums and reinsurance commissions) and
investment activities (primarily repayments of principal, sales of investment securities and investment income) to
fund their liquidity requirements. The insurance and reinsurance subsidiaries may also receive cash inflows from
financing activities (primarily distributions received from their subsidiaries).

The company’s insurance and reinsurance subsidiaries (and the holding company on a consolidated basis) focus
on the stress that could be placed on liquidity requirements as a result of severe disruption or volatility in the
capital markets or extreme catastrophe activity or the combination of both. The insurance and reinsurance sub-
sidiaries maintain investment strategies intended to provide adequate funds to pay claims or withstand disruption
or volatility in the capital markets without forced sales of investments. The insurance and reinsurance subsidiaries
hold highly liquid, high quality short-term investment securities and other liquid investment grade fixed
maturity securities to fund anticipated claim payments, operating expenses and commitments related to invest-
ments. At December 31, 2011, total insurance and reinsurance portfolio investments net of short sale and
derivative obligations was $23.4 billion. These portfolio investments may include investments in inactively traded
corporate debentures, preferred stocks, and limited partnership interests that are relatively illiquid. At
December 31, 2011, these asset classes represented approximately 6.4% (6.7% at December 31, 2010) of the carry-
ing value of the insurance and reinsurance subsidiaries’ portfolio investments.

The insurance and reinsurance subsidiaries and the holding company may experience cash inflows or outflows
(which at times could be significant) related to their derivative contracts, including collateral requirements and
cash settlements of market value movements of total return swaps which have occurred since the most recent
reset date. During 2011, the insurance and reinsurance subsidiaries received net cash of $173.3 (2010 – paid net
cash of $541.9) with respect to long and short equity and equity index total return swap derivative contracts
(excluding the impact of collateral requirements). The insurance and reinsurance subsidiaries typically fund any
such obligations from cash provided by operating activities. In addition, obligations incurred on short equity and
equity index total return swap derivative contracts may be funded from sales of equity-related investments, the
market value of which will generally vary inversely with the market value of short equity and equity index total
return swaps. During 2011, the holding company received net cash of $97.3 (2010 – paid net cash of $163.2) with
respect to long and short equity and equity index total return swap derivative contracts (excluding the impact of
collateral requirements). The holding company typically funds any such obligations from holding company cash
and investments and its additional sources of liquidity as discussed above.

The following table provides a maturity profile of the company’s financial liabilities based on the expected undis-
counted cash flows from the end of the year to the contractual maturity date or the settlement date:

December 31, 2011

Subsidiary indebtedness – principal and interest
Accounts payable and accrued liabilities(1)
Funds withheld payable to reinsurers
Provision for losses and loss adjustment expenses
Long term debt – principal
Long term debt – interest

Less than
3 months
1.0
649.4
1.3
1,033.8
1.0
26.6

3 months
to 1 year
–
281.2
47.6
3,058.2
89.6
168.0

1 - 3 years
–
309.4
51.4
4,897.4
192.4
367.4

3 - 5 years
–
41.5
6.6
2,911.0
470.2
330.9

More than
5 years
–
83.6
3.1
5,331.8
2,339.7
843.2

Total
1.0
1,365.1
110.0
17,232.2
3,092.9
1,736.1

1,713.1

3,644.6

5,818.0

3,760.2

8,601.4

23,537.3

(1) Excludes accrued interest, deferred revenue, deferred costs and defined benefit pension and post retirement benefit

plans. Operating lease commitments are described in note 22.

December 31, 2010

Less than
3 months
1.3
460.5
2.4
1,039.6
1.9
26.2

3 months
to 1 year
1.0
182.8
37.3
2,717.3
5.2
166.3

1 - 3 years
–
261.5
28.0
4,172.4
384.9
365.5

3 - 5 years
–
36.6
15.2
2,721.0
217.9
319.9

More than
5 years
–
98.3
27.5
5,399.0
2,230.4
697.7

Total
2.3
1,039.7
110.4
16,049.3
2,840.3
1,575.6

1,531.9

3,109.9

5,212.3

3,310.6

8,452.9

21,617.6

(1) Excludes accrued interest, deferred revenue, deferred costs and defined benefit pension and post retirement benefit

plans.

The timing of loss payments is not fixed and represents the company’s best estimate. The payment obligations
which are due beyond one year in accounts payable and accrued liabilities primarily relate to certain payables to
brokers and reinsurers not expected to be settled in the short term. At December 31, 2011 the company had
income taxes payable of $21.4 ($31.7 at December 31, 2010).

The following table provides a maturity profile of the company’s short sale and derivative obligations based on
the expected undiscounted cash flows from the end of the year to the contractual maturity date or the settlement
date:

December 31, 2011

Equity index total return swaps – short positions
Equity total return swaps – short positions
Equity total return swaps – long positions
Foreign exchange forward contracts
Other derivative contracts

December 31, 2010

Market Risk

Less than
3 months
59.6
47.7
49.2
–
1.1

3 months
to 1 year
–
–
–
8.2
–

1 - 3 years
–
–
–
–
4.4

3 - 5 years
–
–
–
–
–

More than
5 years
–
–
–
–
–

Total
59.6
47.7
49.2
8.2
5.5

157.6

8.2

4.4

–

170.2

Less than
3 months
133.7
27.8
8.3
15.4
15.6

3 months
to 1 year
–
–
–
10.1
–

1 - 3 years
–
–
–
–
5.5

3 - 5 years
–
–
–
–
–

More than
5 years
–
0.5
–
–
–

Total
133.7
28.3
8.3
25.5
21.1

200.8

10.1

5.5

–

0.5

216.9

Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of
changes in market prices. Market risk is comprised of currency risk, interest rate risk and other price risk. The
company is exposed to market risk principally in its investing activities but also in its underwriting activities to
the extent that those activities expose the company to foreign currency risk. The company’s investment portfolios
are managed with a long term, value-oriented investment philosophy emphasizing downside protection. The
company has policies to limit and monitor its individual issuer exposures and aggregate equity exposure.
Aggregate exposure to single issuers and total equity positions are monitored at the subsidiary level and in
aggregate at the company level. The following is a discussion of the company’s primary market risk exposures and
how those exposures are currently managed.

F A I R F A X F I N A N C I A L H O L D I N G S L I M I T E D

Interest Rate Risk

Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because
of changes in market interest rates. As interest rates rise, the fair value of fixed income investments decline and,
conversely, as interest rates decline, the fair value of fixed income investments rise. In each case, the longer the
maturity of the financial instrument, the greater the consequence of the change in interest rates. The company’s
interest rate risk management strategy is to position its fixed income securities portfolio based on its view of
future interest rates and the yield curve, balanced with liquidity requirements. The company may reposition the
portfolio in response to changes in the interest rate environment. At December 31, 2011, the company’s invest-
ment portfolio included $11.8 billion of fixed income securities (measured at fair value) which are subject to
interest rate risk. The carrying value of the fixed income portfolio decreased by 9.2% year-over-year primarily as a
result of the sale of approximately 53.9% of the company’s holdings of U.S. treasury bonds with the proceeds of
$1,898.0 retained in cash or reinvested into short term investments with minimal exposure to interest rate risk.
Accordingly, the company’s exposure to interest rate risk decreased year-over-year, notwithstanding that the
company benefited from the effect of the decline of interest rates on government bonds (principally U.S. state and
municipal bonds and U.S. treasury bonds) which resulted in a significant increase to the valuation of these inter-
est rate sensitive securities. The company may opportunistically divest a portion of its remaining holdings of U.S.
treasury bonds. There were no significant changes to the company’s exposure to interest rate risk (except as dis-
cussed above) or the framework used to monitor, evaluate and manage interest rate risk at December 31, 2011
compared to December 31, 2010.

Movements in the term structure of interest rates affect the level and timing of recognition in earnings of gains
and losses on fixed income securities held. Generally, the company’s investment income may be reduced during
sustained periods of lower interest rates as higher yielding fixed income securities are called, mature, or are sold
and the proceeds are reinvested at lower rates. During periods of rising interest rates, the market value of the
company’s existing fixed income securities will generally decrease and gains on fixed income securities will likely
be reduced. Losses are likely to be incurred following significant increases in interest rates. General economic
conditions, political conditions and many other factors can also adversely affect the bond markets and, con-
sequently, the value of the fixed income securities held. These risks are monitored by the company’s senior
portfolio managers along with the company’s CEO and are considered when managing the consolidated bond
portfolio and yield. The table below displays the potential impact of changes in interest rates on the company’s
fixed income portfolio based on parallel 200 basis point shifts up and down, in 100 basis point increments. This
analysis was performed on each individual security.

Change in Interest Rates

200 basis point increase

100 basis point increase

No change

100 basis point decrease

200 basis point decrease

December 31, 2011

December 31, 2010

Fair value of
fixed income
portfolio

Hypothetical
$ change effect
on net earnings

Hypothetical
% change
in fair value

Fair value of
fixed income
portfolio

Hypothetical
$ change effect
on net earnings

Hypothetical
% change
in fair value

9,492.1

10,597.7

11,770.9

13,127.7

14,769.9

(1,536.0)

(794.0)

–

922.8

2,039.6

(19.4)

(10.0)

–

11.5

25.5

10,285.5

11,473.9

12,956.7

14,593.3

16,461.7

(1,801.4)

(1,009.0)

–

1,117.1

2,397.4

(20.6)

(11.4)

–

12.6

27.1

Computations of the prospective effects of hypothetical interest rate changes are based on numerous assump-
tions, including the maintenance of the level and composition of fixed income security assets at the indicated
date, 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 prospective 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.

Market Price Fluctuations

Market price fluctuation is the risk that the fair value or future cash flows of a financial instrument will fluctuate
because of changes in market prices (other than those arising from interest rate risk or currency risk), whether
those changes are caused by factors specific to the individual financial instrument or its issuer, or factors affecting
all similar financial instruments traded in the market. The changes to the company’s exposure to equity price risk
through its equity and equity-related holdings at December 31, 2011 compared to December 31, 2010 are
described below.

The company holds significant investments in equities and equity-related securities, which the company believes
will significantly appreciate in value over time. At December 31, 2011, the company had aggregate equity and
equity-related holdings of $6,822.7 (comprised of common stocks, convertible preferred stocks, convertible bonds,
certain investments in associates and equity-related derivatives as shown in the table below) compared to
aggregate equity and equity-related holdings at December 31, 2010 of $7,589.4. The market value and the liquid-
ity of these investments are volatile and may vary dramatically either up or down in short periods, and their
ultimate value will therefore only be known over the long term or on disposition. As a result of volatility in the
equity markets and international credit concerns, the company protected its equity and equity-related holdings
against a potential decline in equity markets by way of short positions effected through equity and equity index
total return swaps, including short positions in certain equities, the Russell 2000 index and the S&P 500 index. At
December 31, 2011, equity hedges with a notional amount of $7,135.2 represented 104.6% of the company’s
equity and equity-related holdings (80.2% at December 31, 2010). The excess of the equity hedges over the
company’s equity and equity-related holdings at December 31, 2011 arose principally as a result of the company’s
decision in the third quarter of 2011 to fully hedge its equity and equity-related holdings by adding to the
notional amount of its short positions in certain equities effected through equity total return swaps and also
reflected some non-correlated performance of the company’s equity and equity-related holdings in 2011 relative
to the performance of the economic equity hedges used to protect those holdings.

One risk of a hedging strategy (sometimes referred to as basis risk) is the risk that offsetting investments in a hedg-
ing strategy will not experience perfectly correlated opposite changes in fair value, creating the potential for gains
or losses. The objective of the company when selecting a hedging instrument (including its equity index total
return swaps) is to economically protect capital over potentially long periods of time and especially during peri-
ods of market turbulence. In the normal course of effecting its economic hedging strategy with respect to equity
risk, the company expects that there may be periods where the notional value of the hedging instruments may
exceed or be deficient relative to the company’s exposure to the items being hedged. This situation may arise
when management compensates for imperfect correlations between the hedging item and the hedged item or due
to the timing of opportunities related to the company’s ability to exit and enter hedges at attractive prices or
during the transition period when the company is adding a new hedging program or discontinuing an existing
hedging program. In 2011, the impact of basis risk was pronounced compared to prior periods, as the perform-
ance of the company’s equity and equity-related holdings lagged the performance of the economic equity hedges
used to protect those holdings, as set out in the table below. The company’s economic equity hedges are struc-
tured to provide a return which is inverse to changes in the fair values of the Russell 2000 index (decreased 5.5%
in 2011), the S&P 500 index (decreased nominally in 2011) and a portfolio of common stocks (decreased by
12.6% on a weighted average basis in 2011). The company regularly monitors the effectiveness of its equity hedg-
ing program on a prospective and retrospective basis and based on its historical observation, the company
believes that its hedges of its equity and equity-related holdings will be effective in the medium to long term and
especially in the event of a significant market correction. However, due to the lack of a perfect correlation
between the hedged items and the hedging items, combined with other market uncertainties, it is not possible to
predict the future impact of the company’s economic hedging programs related to equity risk.

F A I R F A X F I N A N C I A L H O L D I N G S L I M I T E D

The following table summarizes the effect of equity risk hedging instruments and related hedged items on the
company’s historical financial position and results of operations as of and for the years ended December 31:

December 31, 2011

Year ended
December 31,
2011

December 31, 2010

Year ended
December 31,
2010

Exposure/
Notional
amount

Carrying
value

Net earnings
(pre-tax)

Exposure/
Notional
amount

Carrying
value

Net earnings
(pre-tax)

Equity exposures:

Common stocks

Preferred stocks – convertible

Bonds – convertible

Investments in associates(1)

Derivatives and other invested assets:

3,829.5

(774.8)

4,476.5

450.9

384.1

750.1

450.9

384.1

608.9

(5.2)

23.5

7.0

448.5

801.1

460.2

448.5

801.1

365.1

Equity total return swaps – long positions

1,363.5

(46.8)

(61.8)

1,244.3

Equity call options

Equity warrants

–

44.6

–

15.9

–

18.5

(7.6)

–

158.8

171.1

577.3

(18.6)

88.1

77.9

83.2

13.9

83.6

Total equity and equity-related holdings

6,822.7

5,242.5

(792.8)

7,589.4

6,254.7

905.4

Hedging instruments:

Derivatives and other invested assets:

Equity total return swaps – short positions

Equity index total return swaps – short positions

(1,617.6)

(5,517.6)

21.1

(33.8)

153.2

260.7

(624.5)

(10.3)

(5,463.3)

(123.4)

Net exposure (short) and financial effects

(312.5)

(378.9)

1,501.6

(7,135.2)

(12.7)

413.9

(6,087.8)

(133.7)

(93.0)

(843.6)

(936.6)

(31.2)

(1) Excludes the company’s investments in Gulf Insurance, ICICI Lombard and Singapore Re which the company considers

to be long term strategic holdings.

The table that follows summarizes the potential impact of a 10% change in the company’s year-end holdings of
equity and equity-related investments (including equity hedges where appropriate) on the company’s net earn-
ings for the years ended December 31, 2011 and 2010. Based on an analysis of the 15-year return on various
equity indices and the company’s knowledge of global equity markets, a 10% variation is considered reasonably
possible. Certain shortcomings are inherent in the method of analysis presented, as the analysis is based on the
assumptions that the equity and equity-related holdings had increased/decreased by 10% with all other variables
held constant and that all the company’s equity and equity-related holdings move according to a one-to-one
correlation with global equity markets.

Change in global equity markets
10% increase
10% decrease

2011

2010

(90.0)
90.9

47.7
(45.3)

Generally, a 10% decline in global equity markets would decrease the value of the company’s equity and equity-
related holdings resulting in decreases, in the company’s net earnings as the company’s equity investment hold-
ings are classified as at FVTPL. Conversely, a 10% increase in global equity markets would generally increase the
value of the company’s equity and equity-related holdings resulting in increases in the company’s net earnings.

At December 31, 2011, the company’s exposure to the ten largest issuers of common stock owned in the invest-
ment portfolio was $3,336.4, which represented 13.7% of the total investment portfolio. The exposure to the
largest single issuer of common stock held at December 31, 2011 was $551.8, which represented 2.3% of the total
investment portfolio.

Risk of Decreasing Price Levels

The risk of decreases in the general price level of goods and services is the potential for a negative impact on the
consolidated balance sheet (including the company’s equity and equity-related holdings and fixed income
investments in non-sovereign debt) and/or consolidated statement of earnings. Among their effects on the
economy, decreasing price levels typically result in decreased consumption, restriction of credit, shrinking output
and investment and numerous bankruptcies.

The company has purchased derivative contracts referenced to the CPI in the geographic regions in which it oper-
ates, which serve as an economic hedge against the potential adverse financial impact on the company of decreas-
ing price levels. These contracts have a remaining weighted average life of 8.6 years (9.4 years at December 31,
2010), a notional amount of $46,518.0 ($34,182.3 at December 31, 2010) and fair value at December 31, 2011 of
$208.2 ($328.6 at December 31, 2010). As the average remaining life of a contract declines, the fair value of the
contract (excluding the impact of CPI changes) will generally decline. The company’s maximum potential loss on
any contract is limited to the original cost of that contract.

During 2011, the company purchased $13,596.7 (2010 – $32,670.2) notional amount of CPI-linked derivative
contracts at a cost of $122.6 (2010 – $291.4) and recorded net mark-to-market losses of $233.9 (2010 –
mark-to-market gains of $28.1) for positions remaining open at the end of the year.

Foreign Currency Risk

Foreign currency risk is the risk that the fair value or cash flows of a financial instrument or another asset will
fluctuate because of changes in exchange rates and as a result, could produce an adverse effect on earnings and
equity when measured in a company’s functional currency. The company is exposed to foreign currency risk
through transactions conducted in currencies other than the U.S. dollar, and also through its investments in asso-
ciates and net investment in subsidiaries that have a functional currency other than the U.S. dollar. Long and
short foreign exchange forward contracts primarily denominated in the Euro, the British pound sterling and the
Canadian dollar are used to manage foreign currency exposure on foreign currency denominated transactions.
Foreign currency denominated liabilities may be used to manage the company’s foreign currency exposures to net
investments in foreign operations having a functional currency other than the U.S. dollar. The company’s
exposure to foreign currency risk was not significantly different at December 31, 2011 compared to December 31,
2010, except that on May 25, 2011, the company designated the Cdn$400.0 principal amount of its 6.40%
unsecured senior notes due 2021 as a hedge of a portion of its net investment in Northbridge (described below).

The company’s foreign currency risk management objective is to mitigate the net earnings impact of foreign cur-
rency rate fluctuations. The company has a process to accumulate, on a consolidated basis, all significant asset
and liability exposures relating to foreign currencies. These exposures are matched and any net unmatched posi-
tions, whether long or short, are identified. The company may then take action to cure an unmatched position
through the acquisition of a derivative contract or the purchase or sale of investment assets denominated in the
exposed currency. Rarely does the company maintain an unmatched position for extended periods of time.

A portion of the company’s premiums are written in foreign currencies and a portion of the company’s loss
reserves are denominated in foreign currencies. Moreover, a portion of the company’s cash and investments are
held in currencies other than the U.S. dollar. In general, the company manages foreign currency risk on liabilities
by investing in financial instruments and other assets denominated in the same currency as the liabilities to
which they relate. The company also monitors the exposure of invested assets to foreign currency risk and limits
these amounts as deemed necessary. The company may nevertheless, from time to time, experience gains or losses
resulting from fluctuations in the values of these foreign currencies, which may favourably or adversely affect
operating results.

F A I R F A X F I N A N C I A L H O L D I N G S L I M I T E D

At December 31, 2011, the company has designated the carrying value of Cdn$1,075.0 principal amount of its
Canadian dollar denominated senior notes with a fair value of $1,114.6 (principal amount of Cdn$675.0 with a
fair value of $736.2 at December 31, 2010) as a hedge of its net investment in Northbridge for financial reporting
purposes. Gains and losses related to foreign currency movement on the senior notes are recognized in change in
gains and losses on hedge of net investment in foreign subsidiary in the consolidated statements of compre-
hensive income.

The company had also issued Cdn$1,000.0 of stated capital of cumulative five-year rate reset preferred shares.
Although not eligible to be designated as a hedge for financial reporting purposes, the company considers a por-
tion of this Cdn$1,000.0 as an additional economic hedge of its net investment in Northbridge.

The pre-tax foreign exchange effect on certain line items in the company’s consolidated financial statements for
the years ended December 31 follows:

Net gains (losses) on investments

Investing activities
Underwriting activities
Foreign currency contracts

Foreign currency gains (losses) included in pre-tax net earnings

2011

2010

(50.5)
(46.5)
62.6

(43.4)
(31.7)
(32.6)

(34.4)

(107.7)

The table below shows the approximate effect of the appreciation of the U.S. dollar compared with the Canadian
dollar, the Euro, the British pound sterling and all other currencies, respectively, by 5% on pre-tax earnings (loss),
net earnings (loss), pre-tax other comprehensive income (loss) and other comprehensive income (loss).

2011

2010

Canadian dollar
Impact on pre-tax earnings (loss)
Impact on net earnings (loss)
Impact on pre-tax other comprehensive income (loss)
Impact on other comprehensive income (loss)

Euro
Impact on pre-tax earnings (loss)
Impact on net earnings (loss)
Impact on pre-tax other comprehensive income (loss)
Impact on other comprehensive income (loss)

British pound sterling
Impact on pre-tax earnings (loss)
Impact on net earnings (loss)
Impact on pre-tax other comprehensive income (loss)
Impact on other comprehensive income (loss)

All other currencies
Impact on pre-tax earnings (loss)
Impact on net earnings (loss)
Impact on pre-tax other comprehensive income (loss)
Impact on other comprehensive income (loss)

Total
Impact on pre-tax earnings (loss)
Impact on net earnings (loss)
Impact on pre-tax other comprehensive income (loss)
Impact on other comprehensive income (loss)

4.1
1.7
(35.1)
(30.5)

(5.9)
(3.6)
22.9
14.9

2.4
1.3
(18.4)
(11.9)

57.1
40.8
(23.5)
(22.3)

57.7
40.2
(54.1)
(49.8)

(21.7)
(15.6)
(43.4)
(45.1)

(35.1)
(25.4)
36.8
23.9

(13.5)
(9.5)
34.3
22.3

21.8
17.1
(21.5)
(18.8)

(48.5)
(33.4)
6.2
(17.7)

In the preceding scenarios, certain shortcomings are inherent in the method of analysis presented, as the analysis
is based on the assumption that the 5% appreciation of the U.S. dollar occurred with all other variables held
constant.

Capital Management

The company’s capital management framework is designed to protect, in the following order, its policyholders, its
bondholders and its preferred shareholders and then finally to optimize returns to common shareholders. Effec-
tive capital management includes measures designed to maintain capital above minimum regulatory levels, above
levels required to satisfy issuer credit ratings and financial strength ratings requirements, and above internally
determined and calculated risk management levels. Total capital at December 31, 2011, comprising total debt,
shareholders’ equity attributable to shareholders of Fairfax and non-controlling interests, was $11,427.0, com-
pared to $11,403.0 at December 31, 2010. The company manages its capital based on the following financial
measurements and ratios:

Holding company cash and investments (net of short sale and derivative

obligations)

Holding company debt
Subsidiary debt
Other long term obligations – holding company

Total debt

Net debt

Common shareholders’ equity
Preferred equity
Non-controlling interests

Total equity

Net debt/total equity
Net debt/net total capital(1)
Total debt/total capital(2)
Interest coverage(3)
Interest and preferred share dividend distribution coverage(4)

December 31,
2011

December 31,
2010

962.8

2,080.6
623.9
314.0

3,018.5

1,474.2

1,498.1
919.5
311.5

2,729.1

2,055.7

1,254.9

7,427.9
934.7
45.9

8,408.5

24.4%
19.6%
26.4%
1.0x
0.7x

7,697.9
934.7
41.3

8,673.9

14.5%
12.6%
23.9%
1.8x
1.4x

(1) Net total capital is calculated by the company as the sum of total equity and net debt.

(2) Total capital is calculated by the company as the sum of total equity and total debt.

(3)

(4)

Interest coverage is calculated by the company as the sum of earnings (loss) before income taxes and interest expense
divided by interest expense.

Interest and preferred share dividend distribution coverage is calculated by the company as the sum of earnings (loss)
before income taxes and interest expense divided by interest expense and preferred share dividend distributions adjusted
to a before tax equivalent at the company’s Canadian statutory tax rate.

During 2011, the company issued $500.0 and Cdn$400.0 principal amounts of its unsecured senior notes due
2021, the proceeds from which were used to repurchase $298.2 principal amount of Fairfax’s unsecured senior
notes due 2012 and 2017, $323.8 of Crum & Forster’s unsecured senior notes due 2017 and 35.9 of OdysseyRe’s
unsecured senior notes due 2013. The excess of the net proceeds on the issuance of unsecured senior notes over
the cost of debt repurchased at the holding company and the funding made available by the holding company to
its operating companies to fund their debt repurchases was used to fund the repurchase of $25.6 principal amount
of First Mercury’s trust preferred securities with the remainder retained to augment holding company cash and
investments.

During 2009 and 2010, the company issued Cdn$1,000.0 of stated capital of cumulative five-year rate reset pre-
ferred shares. Accordingly, the company commenced monitoring its interest and preferred share dividend dis-
tribution coverage ratio calculated as described in footnote 4 in the table above. The company’s capital
management objectives includes maintaining sufficient liquid resources at the holding company to be able to pay
interest on its debt, dividends to its preferred shareholders and all other holding company obligations.

F A I R F A X F I N A N C I A L H O L D I N G S L I M I T E D

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. At December 31,
2011, 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 – each subsidiary had capital and surplus in
excess of 3.7 times (4.7 times at December 31, 2010) the authorized control level, except for TIG which had 2.3
times (2.7 times at December 31, 2010).

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. At
December 31, 2011, Northbridge’s subsidiaries had a weighted average MCT ratio of 212% of the minimum stat-
utory capital required, compared to 222% at December 31, 2010, well in excess of the 150% minimum supervisory
target.

In countries other than the U.S. and Canada where the company operates (the United Kingdom, France, Mexico,
Singapore, Hong Kong, Ireland, Poland, Brazil, Malaysia and other jurisdictions), the company met or exceeded
the applicable regulatory capital requirements at December 31, 2011.

25. Segmented Information

The company is a financial services holding company which, through its subsidiaries, is engaged in property and
casualty insurance, conducted on a primary and reinsurance basis, and runoff operations. The company identifies its
operating segments by operating company consistent with its management structure. The company has aggregated
certain of these operating segments into reporting segments as subsequently described. The accounting policies of the
reporting segments are the same as those described in note 3. Transfer prices for inter-segment transactions are set at
arm’s length. Geographic premiums are determined based on the domicile of the various subsidiaries and where the
primary underlying risk of the business resides.

Effective January 1, 2011, the company changed the manner in which it classifies amortization expense related to
its customer and broker relationships in its segmented information. Previously, such amortization expense was
classified within other underwriting expenses as a component of underwriting profit (loss). Effective January 1,
2011, amortization expense related to customer and broker relationships was included in subsidiary corporate
overhead. Management believes this change in expense classification will better reflect the results of operations of
its operating companies on a standalone basis. In addition, management does not consider acquisition account-
ing adjustments when assessing the performance of its reporting segments. Prior period comparative figures have
been presented on a consistent basis to give effect to the reclassifications as of January 1, 2010. In 2010, customer
and broker relationship amortization expense was included in corporate overhead within the Insurance – North-
bridge ($6.0), U.S. Insurance ($3.7) and Reinsurance – OdysseyRe ($1.4) reporting segments.

Insurance

Northbridge – Northbridge is a national commercial property and casualty insurer in Canada providing property
and casualty insurance products through its Commonwealth, Federated, Lombard and Markel subsidiaries,
primarily in the Canadian market and in selected United States and international markets.

U.S. Insurance (formerly known as Crum & Forster prior to May 20, 2010) – This reporting segment is comprised
of Crum & Forster and Zenith National. Crum & Forster is a national commercial property and casualty insurance
company in the United States writing a broad range of commercial coverages. Its subsidiaries, Seneca Insurance
and First Mercury, provide property and casualty insurance to small businesses and certain specialty coverages.
First Mercury was acquired on February 9, 2011, pursuant to the transaction described in note 23. As of July 1,
2011, the company has presented the assets, liabilities and results of operations of Valiant, a wholly-owned sub-
sidiary of First Mercury, in the Runoff reporting segment following the transfer of ownership of Valiant from
Crum & Forster to the TIG Group. Periods prior to July 1, 2011 have not been restated as the impact was not sig-
nificant. Zenith National is included in the U.S. Insurance segment effective from its acquisition by the company
on May 20, 2010 and is primarily engaged in the workers’ compensation insurance business in the United States.

Fairfax Asia – Included in the Fairfax Asia reporting segment are the company’s operations that underwrite
insurance and reinsurance coverages in Singapore (First Capital), Hong Kong (Falcon), and in Malaysia since
March 24, 2011 following the acquisition of Pacific Insurance pursuant to the transaction described in note 23.
Fairfax Asia also includes the company’s 26.0% equity accounted interest in Mumbai-based ICICI Lombard and its
40.5% equity accounted interest in Thailand-based Falcon Thailand.

Reinsurance

OdysseyRe – OdysseyRe underwrites reinsurance, providing a full range of property and casualty products on a
worldwide basis, and underwrites specialty insurance, primarily in the United States and in the United Kingdom,
both directly and through the Lloyd’s of London marketplace. As of January 1, 2011, the company has presented
the assets, liabilities and results of operations of Clearwater in the Runoff reporting segment following the transfer
of ownership of Clearwater from OdysseyRe to the TIG Group. Prior period comparative figures have been pre-
sented on a consistent basis to give effect to the transfer as of January 1, 2010. Clearwater is an insurance com-
pany which has been in runoff since 1999.

Insurance and Reinsurance – Other

This reporting segment is comprised of Group Re, Advent, Polish Re and Fairfax Brasil. Group Re participates in
the reinsurance of Fairfax’s subsidiaries by quota share or through participation in those subsidiaries’ third party
reinsurance programs on the same terms as third party reinsurers through CRC Re (Canadian business) and
Wentworth (international business). Group Re also writes third party business. Advent is a reinsurance and
insurance company, operating through Syndicate 780 at Lloyd’s, focused on specialty property reinsurance and
insurance risks. Polish Re is a Polish reinsurance company. Fairfax Brasil is included in this segment since it
commenced insurance underwriting activities in March 2010.

Runoff

The Runoff reporting segment comprises nSpire Re (including the runoff of nSpire Re’s Group Re participation),
RiverStone (UK) and the U.S. runoff company formed on the merger of TIG and International Insurance Com-
pany combined with Old Lyme and Fairmont. The U.K. and international runoff operations of RiverStone (UK)
have reinsured their reinsurance portfolios to nSpire Re to provide consolidated investment and liquidity
management services, with the RiverStone group of companies retaining full responsibility for all other aspects of
the business. GFIC was included in the Runoff reporting segment effective from its acquisition by the company
on August 17, 2010 and is a property and casualty insurance company based in the United States whose business
will run off under the supervision of RiverStone management.

As described above, Clearwater was included in the Runoff reporting segment as of January 1, 2011 and Valiant
was included in the Runoff reporting segment as of July 1, 2011. On January 1, 2011, the company’s runoff
Syndicate 3500 (managed by RiverStone (UK)) accepted the reinsurance-to-close of all of the liabilities of Syndi-
cate 376. This reinsurance-to-close transaction resulted in the receipt by Syndicate 3500 of $114.8 of cash and
investments and $4.8 in other assets (primarily consisting of net insurance contract receivables) as consideration
for the assumption of net loss reserves of $119.6.

Other

The Other reporting segment is comprised of Ridley, William Ashley and Sporting Life. Ridley is engaged in the
animal nutrition business and operates in the U.S. and Canada. William Ashley (acquired on August 16, 2011) is a
prestige retailer of exclusive tableware and gifts in Canada. Sporting Life (acquired December 22, 2011) is a Cana-
dian retailer of sporting goods and sports apparel. The acquisitions of William Ashley and Sporting Life are
described in note 23.

Corporate and Other

Corporate and Other includes the parent entity (Fairfax Financial Holdings Limited), its subsidiary intermediate
holding companies, Hamblin Watsa, an investment management company and MFXchange, a technology com-
pany.

F A I R F A X F I N A N C I A L H O L D I N G S L I M I T E D

Pre-tax Income (Loss) by Reporting Segment

An analysis of pre-tax income (loss) by reporting segment for the years ended December 31 are presented below:

2011

Gross premiums written(1)

External

Intercompany

Insurance

Reinsurance

Insurance
and
Reinsurance

Northbridge

U.S.

Fairfax
Asia

OdysseyRe

Other

operations Runoff Other

Ongoing

Corporate
and Other

Eliminations
and
adjustments

Consolidated

1,320.6

1,859.0

451.2

2,405.6

2.1

5.1

0.5

15.1

584.6

61.7

6,621.0

84.5

1,322.7

1,864.1

451.7

2,420.7

646.3

6,705.5

Net premiums written(1)

1,098.5

1,601.1

213.7

2,089.7

484.6

5,487.6

Net premiums earned(1)

External

Intercompany

1,160.2

1,502.0

213.7

2,001.0

(88.0)

2.6

(9.6)

13.7

412.4

92.5

5,289.3

11.2

1,072.2

1,504.6

204.1

2,014.7

504.9

5,300.5

Underwriting expenses

(1,102.4)

(1,720.5) (169.7)

(2,350.7)

(711.6)

(6,054.9)

Underwriting profit (loss)

(30.2)

(215.9)

34.4

(336.0)

(206.7)

(754.4)

Interest income

Dividends

Investment expenses

83.2

25.6

113.4

27.3

18.0

5.8

(11.4)

(19.9)

(1.9)

245.5

35.8

(33.6)

Interest and dividends

97.4

120.8

21.9

247.7

Share of profit (loss) of associates

2.8

4.1

(35.6)

11.4

Other

Revenue

Expenses

–

Operating income (loss) before:

70.0

(91.0)

20.7

Net gains (losses) on investments

(162.0)

218.1

(15.6)

Loss on repurchase of long term debt(2)

Interest expense

Corporate overhead and other

–

(38.4)

(56.5)

(18.3)

(27.9)

–

(5.6)

–

(76.9)

142.0

(6.1)

(28.9)

(18.4)

49.1

3.6

(7.3)

45.4

2.0

–

22.1

–

(4.5)

(4.7)

–

(13.3)

9.9

(4.0)

(7.4)

13.7

–

(84.0)

6,621.0

0.5

(84.0)

6,621.5

–

73.0

–

5,487.6

5,289.3

11.2

5,300.5

(6,054.9)

(754.4)

605.3

120.0

(20.0)

705.3

1.8

509.2

109.4

98.1

12.0

(74.1)

(14.9)

533.2

106.5

(15.3)

3.4

–

126.4

649.8

73.0

(73.0)

(263.9) (636.5)

–

776.2

(900.4)

(137.5)

13.3

73.0

(73.0)

(124.2)

(159.3)

(236.5)

(27.6)

13.3

79.3

98.5

(41.6)

204.6

388.1

–

(62.6)

(51.7)

(95.0)

(8.9)

(0.7)

(152.7)

–

(115.2)

Pre-tax income (loss)

(130.4)

24.4

(0.5)

11.7

(146.4)

(241.2)

351.6

12.6

(131.7)

Income taxes

Net earnings

Attributable to:

Shareholders of Fairfax

Non-controlling interests

–

(171.5)

691.2

(104.2)

(214.0)

(210.2)

(8.7)

56.5

47.8

45.1

2.7

47.8

(1) Excludes $122.0, $120.3 and $126.4 of Runoff’s gross premiums written, net premiums written and net premiums

earned respectively.

(2) Loss on repurchase of long term debt of $104.2 relating to the repurchase of Crum & Forster, OdysseyRe and Fairfax

unsecured senior notes is included in other expenses in the consolidated statement of earnings.

100

2010

Gross premiums written(1)

External

Intercompany

Insurance

Reinsurance

Insurance
and
Reinsurance

Northbridge

U.S.

Fairfax
Asia

OdysseyRe

Other

operations Runoff

Ongoing

Other
(animal
nutrition)

Corporate
and
Other

Eliminations
and

adjustments Consolidated

1,298.4

1,078.3

353.2

2,154.6

1.5

–

13.0

476.4

151.6

5,360.9

166.1

1,299.9

1,078.3

353.2

2,167.6

628.0

5,527.0

Net premiums written(1)

985.0

919.5

157.4

1,853.6

530.5

4,446.0

Net premiums earned(1)

External

Intercompany

1,162.7

1,010.8

161.7

1,874.8

(166.1)

(10.7)

(6.7)

10.7

363.2

172.8

4,573.2

–

996.6

1,000.1

155.0

1,885.5

536.0

4,573.2

Underwriting expenses

(1,064.9)

(1,165.6) (138.4)

(1,790.4)

(574.4)

(4,733.7)

Underwriting profit (loss)

(68.3)

(165.5)

16.6

95.1

(38.4)

(160.5)

Interest income

Dividends

Investment expenses

106.9

24.9

91.1

27.1

13.2

5.0

(11.0)

(17.6)

(1.6)

238.1

38.0

(29.9)

52.0

0.7

(6.3)

501.3

95.7

96.3

26.7

(66.4)

(16.6)

Interest and dividends

120.8

100.6

16.6

246.2

46.4

530.6

106.4

Share of profit (loss) of associates

5.4

0.3

22.2

2.3

(1.4)

28.8

8.9

Other

Revenue(2)

Expenses

Operating income (loss) before:

Net gains (losses) on investments

Loss on repurchase of long term debt(3)

Interest expense

Corporate overhead and other

–

57.9

94.0

–

(21.4)

–

(64.6)

55.4

343.6

(49.2)

(14.2)

(109.7)

–

(30.8)

(11.4)

–

(2.4)

–

(30.5)

(32.7)

–

6.6

70.8

–

(4.5)

(3.1)

–

90.5

549.1

(190.8)

(538.7)

(100.3)

10.4

398.9

15.0

10.4

(8.3)

120.5

–

(115.2)

(2.3)

(3.2)

(0.6)

(125.9)

–

(84.2)

–

(65.8)

(71.0)

Pre-tax income (loss)

130.5

(156.0)

38.8

170.7

69.8

253.8

132.3

9.8

(244.8)

Income taxes

Net earnings

Attributable to:

Shareholders of Fairfax

Non-controlling interests

–

5.6

6.4

(3.2)

8.8

8.3

65.7

–

65.7

82.8

–

5,360.9

(166.6)

(0.5)

(166.6)

5,360.4

–

65.7

–

(65.7)

–

(65.7)

–

4,446.0

4,573.2

–

4,573.2

(4,733.7)

(160.5)

603.2

128.8

(20.5)

711.5

46.0

639.6

(729.5)

(89.9)

507.1

(3.0)

(2.3)

(195.5)

(155.2)

151.1

186.9

338.0

335.8

2.2

338.0

(1) Excludes $2.5, $3.0 and $7.4 of Runoff’s gross premiums written, net premiums written and net premiums earned

respectively.

(2) The Runoff segment revenue includes $83.1 of the excess of the fair value of net assets acquired over the purchase price

related to the acquisition of GFIC, as described in note 23.

(3) Loss on repurchase of long term debt of $2.3 primarily relating to the repurchase of OdysseyRe noncumulative Series A

and Series B preferred shares is included in other expenses in the consolidated statement of earnings.

101

F A I R F A X F I N A N C I A L H O L D I N G S L I M I T E D

A reconciliation of total revenue of the reporting segments to the company’s consolidated revenue for the years
ended December 31 is shown below:

Revenue of reporting segments:

Net premiums earned
Interest and dividends
Share of profit of associates
Net gains (losses) on investments
Other revenue per reportable segment

Total consolidated revenues

Significant Non-cash Items

2011

2010

5,300.5
705.3
1.8
691.2
776.2

4,573.2
711.5
46.0
(3.0)
639.6

7,475.0

5,967.3

An analysis of significant non-cash items by reporting segment for the years ended December 31 is shown below:

Insurance

– Canada (Northbridge)
– U.S. (Crum & Forster and Zenith National)
– Asia (Fairfax Asia)

Reinsurance – OdysseyRe
Insurance and Reinsurance – Other

Ongoing operations
Runoff
Other
Corporate and other

Consolidated

Share of profit (loss) of associates

amortization of intangible assets

Depreciation and impairment loss

of premises & equipment &

2011
2.8
4.1
(35.6)
11.4
2.0

(15.3)
3.4
–
13.7

1.8

2010
5.4
0.3
22.2
2.3
(1.4)

28.8
8.9
–
8.3

46.0

2011
11.0
25.1
0.4
7.7
1.3

45.5
0.9
8.6
4.5

59.5

2010
10.5
12.4
0.5
6.9
0.8

31.1
0.9
10.8
5.7

48.5

During 2010, TIG acquired all of the issued and outstanding shares of GFIC and recorded an excess of fair value of
net assets acquired over purchase price of $83.1, as described in note 23.

Investments in Associates, Additions to Goodwill, Segment Assets and Segment Liabilities

An analysis of investments in associates, additions to goodwill, segment assets and segment liabilities by reporting
segment for the years ended December 31 are shown below:

Investments in

associates

Additions to goodwill

Segment assets

Segment liabilities

Insurance

2011
– Canada (Northbridge)
76.8
– U.S. (Crum & Forster and Zenith National) 82.2
– Asia (Fairfax Asia)

Reinsurance – OdysseyRe
Insurance and Reinsurance – Other

2010
35.4
52.9
96.8 118.6
173.1 114.5
3.9

49.5

Ongoing operations
Runoff
Other
Corporate and other and eliminations and adjustments

478.4 325.3
41.2
123.1
–
–
322.8 341.4

2011
–
79.5
25.5
–
–

105.0
–
24.1
–

2010

2010
2011
5,636.8
– 5,324.1
6,788.6
317.6 8,285.6
1,089.8
– 1,371.4
– 10,781.6 10,089.8
2,214.2
– 2,234.3

2011
3,769.7
5,746.5
913.0
7,328.0
1,649.1

2010
3,939.6
4,840.0
692.6
6,665.7
1,514.0

317.6 27,997.0 25,819.2 19,406.3 17,651.9
4,172.7
81.9
867.7

4,407.8
5,549.4
118.4
191.5
(112.0) 1,065.9

– 6,086.6
267.0
–
(943.7)
–

Consolidated

924.3 707.9

129.1

317.6 33,406.9 31,448.1 24,998.4 22,774.2

102

Product Line

An analysis of revenue by product line for the years ended December 31 is presented below:

Property

Casualty

Specialty

Total

2011

2010

2011

2010

2011

2010

2011

2010

Net premiums earned
Insurance

– Canada (Northbridge)
– U.S. (Crum & Forster and Zenith National)
– Asia (Fairfax Asia)

Reinsurance – OdysseyRe
Insurance and Reinsurance – Other

Ongoing operations
Runoff

Total net premiums earned
Interest and dividends
Share of profit of associates
Net gains (losses) on investments
Excess of fair value of net assets acquired over purchase price
Other

Total consolidated revenues

Geographic Region

447.6
135.9
18.1
969.4
237.3

399.3
520.0
111.8 1,331.5
126.2
801.8
182.1

13.7
816.3
303.4

503.6
857.3
87.2
861.5
198.3

1,808.3 1,644.5 2,961.6 2,507.9
3.6

1.0

1.2

–

104.6
37.2
59.8
243.5
85.5

530.6
125.2

93.7 1,072.2
996.6
31.0 1,504.6 1,000.1
204.1
155.0
54.1
207.7 2,014.7 1,885.5
536.0
504.9

34.3

420.8 5,300.5 4,573.2
7.4
126.4

2.8

1,808.3 1,645.5 2,962.8 2,511.5

655.8

423.6 5,426.9 4,580.6
711.5
705.3
46.0
1.8
(3.0)
691.2
83.1
–
549.1
649.8

7,475.0 5,967.3

An analysis of revenue by geographic region for the years ended December 31 is shown below:

Canada

United States

Far East

International

Total

2011

2010

2011

2010

2011

2010

2011

2010

2011

2010

Net premiums earned

Insurance

– Canada (Northbridge)

1,031.6

957.9

40.2

38.2

– U.S. (Crum & Forster and Zenith National)

– Asia (Fairfax Asia)

Reinsurance – OdysseyRe

Insurance and Reinsurance – Other

Ongoing operations

Runoff

Interest and dividends

Share of profit of associates

Net gains (losses) on investments

Excess of fair value of net assets acquired over purchase price

Other

Total consolidated revenues

– 1,504.2 1,000.1

–

204.1

155.0

–

0.2

–

0.4

0.2

–

0.5 1,072.2

996.6

– 1,504.6

1,000.1

–

204.1

155.0

54.9

965.8 1,017.4

149.3

109.7

837.6

703.5 2,014.7

1,885.5

159.4

105.0

158.2

30.2

21.3

274.5

197.1

504.9

536.0

–

62.0

95.2

1,188.8 1,172.2 2,615.2 2,213.9

383.8

286.0

1,112.7 901.1 5,300.5

4,573.2

–

0.4

7.2

7.0

–

119.2

–

126.4

7.4

1,188.8 1,172.6 2,622.4 2,220.9

383.8

286.0

1,231.9 901.1 5,426.9

4,580.6

705.3

711.5

1.8

691.2

–

46.0

(3.0)

83.1

649.8

549.1

7,475.0

5,967.3

Allocation of revenue

21.9% 25.6% 48.3% 48.5%

7.1%

6.2%

22.7% 19.7%

103

F A I R F A X F I N A N C I A L H O L D I N G S L I M I T E D

26. Expenses

Losses on claims, net, operating expenses and other expenses for the years ended December 31 are comprised of
the following:

Losses and loss adjustment expenses
Salaries and employee benefit expenses (note 27)
Other reporting segment cost of sales
Audit, legal and tax professional fees
Premium taxes
Restructuring costs
Depreciation, amortization and impairment charges
Operating lease costs
Loss on repurchase of long term debt (note 15)
IT costs
Other

2011
4,387.8
895.5
499.6
135.6
93.4
29.2
59.5
57.4
104.2
67.5
144.6

2010
3,232.8
789.6
406.8
113.3
76.9
3.2
48.5
56.5
2.3
41.4
141.9

6,474.3

4,913.2

27. Salaries and Employee Benefit Expenses

Salaries and employee benefit expenses for the years ended December 31 are comprised of the following:

Wages and salaries
Employee benefits
Share-based payments to directors and employees
Defined contribution pension plan expense (note 21)
Defined benefit pension plan expense (note 21)
Defined benefit post retirement expense (note 21)

2011
707.8
130.4
25.1
15.3
14.7
2.2

2010
609.5
118.8
23.0
16.3
14.5
7.5

895.5

789.6

104

28. Supplementary Cash Flow Information

Cash and cash equivalents are included in the consolidated balance sheets as follows:

Holding company cash and investments:

Cash and balances with banks
Treasury bills and other eligible bills

Subsidiary cash and short term investments:

Cash and balances with banks
Treasury bills and other eligible bills

Cash and balances with banks – restricted(1)
Treasury bills and other eligible bills – restricted(1)

Subsidiary assets pledged for short sale and derivative obligations:

Cash and balances with banks
Treasury bills and other eligible bills

December 31,
2011

December 31,
2010

39.6
3.9

43.5

908.3
952.0

1,860.3

48.3
86.4

134.7

73.5
263.8

337.3

805.9
2,117.3

2,923.2

45.3
53.6

98.9

1,995.0

3,022.1

6.2
–

6.2

11.4
3.2

14.6

2,044.7

3,374.0

(1) Cash and cash equivalents as presented in the consolidated statements of cash flows excludes restricted balances of

$134.7 at December 31, 2011 and $98.9 at December 31, 2010.

105

F A I R F A X F I N A N C I A L H O L D I N G S L I M I T E D

Details of certain cash flows included in the consolidated statements of cash flows for the years ended
December 31, are as follows:

(a) Changes in operating assets and liabilities

Net decrease (increase) in restricted cash and cash equivalents
Provision for losses and loss adjustment expenses
Provision for unearned premiums
Insurance contract receivables
Recoverable from reinsurers
Accounts receivable
Funds withheld payable to reinsurers
Accounts payable and accrued liabilities
Income taxes payable
Other

(b) Net interest received

Interest received
Interest paid

(d) Dividends received

(e) Dividends paid

Common share dividends paid
Preferred share dividends paid

2011

2010

(36.0)
347.6
197.8
(220.7)
5.9
(13.6)
(13.8)
260.3
(11.8)
185.5

(22.4)
(222.5)
(125.3)
182.9
142.4
464.6
8.3
(303.6)
(46.6)
(92.2)

701.2

(14.4)

644.7
(194.4)

672.8
(186.3)

450.3

486.5

82.4

(218.7)

95.6

75.4

(205.9)
(51.5)

(200.8)
(31.4)

(257.4)

(232.2)

29. Related Party Transactions

Compensation for the company’s key management team for the years ended December 31 are as set out below:

Salaries and other short-term employee benefits
Share-based payments

2011
5.4
0.9

2010
12.8
1.9

6.3

14.7

Compensation for the company’s Board of Directors for the years ended December 31 are as set out below:

Retainers and fees
Share-based payments

2011
0.9
0.2

2010
1.1
0.4

1.1

1.5

The compensation presented above is determined in accordance with the company’s IFRS accounting policies and
will differ from the compensation presented in the company’s Management Proxy Circular.

106

30. Transition from Canadian GAAP to International Financial Reporting Standards

Adjustments upon adoption of IFRS

IFRS permits exemptions from full retrospective application of certain standards. In preparing these consolidated
financial statements in accordance with IFRS, the company has applied the mandatory exceptions and certain of
the optional exemptions to full retrospective application of IFRS as at the transition date of January 1, 2010.

IFRS mandatory exceptions

The company has applied the following mandatory exceptions to retrospective application of IFRS:

Estimates

Hindsight was not used to create or revise estimates. The estimates previously made by the company under Cana-
dian GAAP were not revised for application of IFRS except where necessary to reflect any difference in accounting
policies. Estimates under IFRS at January 1, 2010 are consistent with estimates made for that same date under
Canadian GAAP.

Hedge accounting

Hedge accounting can only be applied prospectively from the IFRS transition date to transactions that satisfy the
hedge accounting criteria in IAS 39 Financial Instruments: Recognition and Measurement. Hedging relationships
cannot be designated and the supporting documentation cannot be created retrospectively.

The company’s existing hedge of its net investment in Northbridge under Canadian GAAP complies with IAS 39.
No adjustment upon adoption of IFRS was required.

Non-controlling interests

The requirements of IAS 27 Consolidated and Separate Financial Statements were applied prospectively from Jan-
uary 1, 2010 with respect to the attribution of total comprehensive income to the shareholders of the company
and to the non-controlling interests, and for transactions involving a change in the level of the company’s
ownership in a subsidiary. These requirements were adopted under Canadian GAAP on January 1, 2010, and
accordingly no adjustment upon adoption of IFRS was required.

IFRS optional exemptions

The company has elected to apply the following optional exemptions from full retrospective application of IFRS:

(1) Business combinations
IFRS 1 provides the option to apply IFRS 3 Business Combinations retrospectively or prospectively from the tran-
sition date. Full retrospective application of IFRS 3 would require restatement of all business combinations that
occurred prior to the transition date.

The company has applied the business combinations exemption in IFRS 1 and as a result has not retrospectively
applied IFRS 3 to any business combinations that took place prior to the transition date of January 1, 2010. No
changes to assets or liabilities recognized in those business combinations were required as a result of adopting
IFRS. Goodwill arising on business combinations prior to the transition date was not adjusted from the carrying
value previously determined under Canadian GAAP.

(2) Employee benefits
IFRS 1 provides the option to apply IAS 19 Employee Benefits retrospectively for the recognition of actuarial gains
and losses, or to recognize all actuarial gains and losses deferred under Canadian GAAP in opening retained earn-
ings at the transition date.

107

F A I R F A X F I N A N C I A L H O L D I N G S L I M I T E D

The company has elected to recognize all unamortized actuarial gains and losses from its pension and post retire-
ment benefit plans in opening retained earnings as at January 1, 2010. The impact on individual financial state-
ment lines is as follows:

Financial Statement Line
Investments in associates
Deferred income taxes
Pension assets (other assets)
Pension and post retirement liabilities (accounts payable and

accrued liabilities)

Retained earnings
Non-controlling interests

As at January 1, 2010
increase (decrease)
(9.8)
3.9
(4.8)

As at December 31, 2010
increase (decrease)
(7.6)
6.8
(11.1)

22.3
(31.3)
(1.7)

12.7
(22.4)
(2.2)

Share of profit (loss) of associates
Operating expenses
Other expenses
Provision for (recovery of) income taxes
Other comprehensive income, net of income taxes

For the year ended
December 31, 2010
increase (decrease)
0.3
1.8
(0.5)
(0.4)
9.0

(3) Currency translation differences
Retrospective application of IFRS would require the company to determine cumulative currency translation differ-
ences in accordance with IAS 21 The Effects of Changes in Foreign Exchange Rates from the date a subsidiary or
equity method investee was formed or acquired. IFRS 1 provides the option to recognize all cumulative currency
translation gains and losses deferred under Canadian GAAP in opening retained earnings at the transition date.

The company has elected to recognize all cumulative currency translation gains and losses in opening retained
earnings as at January 1, 2010. The impact on individual financial statement lines is as follows:

Financial Statement Line
Retained earnings
Accumulated other comprehensive income

As at January 1, 2010
increase (decrease)
150.1
(150.1)

As at December 31, 2010
increase (decrease)
150.1
(150.1)

Other Measurement Adjustments between Canadian GAAP and IFRS

(4) Adoption of IFRS 9 Financial Instruments: Classification and Measurement
As permitted by the transition rules for first-time adopters of IFRS, the company has early adopted IFRS 9 Financial
Instruments: Classification and Measurement (“IFRS 9”) effective January 1, 2010. This standard replaces the guid-
ance in IAS 39 Financial Instruments: Recognition and Measurement for the classification and measurement of finan-
cial assets and liabilities. IFRS 9 eliminates the available for sale and held to maturity categories, and the
requirement to bifurcate embedded derivatives with respect to hybrid contracts. Under IFRS 9 hybrid contracts are
measured as a whole as at FVTPL. Equity instruments are measured as at FVTPL by default. Fixed income invest-
ments are measured at amortized cost if both of the following criteria are met: (i) the financial asset is held within
a business model whose objective is to hold financial assets in order to collect contractual cash flows; and (ii) the
contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of
principal and interest on the principal outstanding, otherwise fixed income investments are measured as at
FVTPL. Under this standard, the company’s business model requires that its investment portfolio be primarily
measured as at FVTPL.

108

The effect of adopting IFRS 9 as at January 1, 2010 is to recognize all unrealized gains and losses on financial
instruments in accumulated other comprehensive income to retained earnings. The impact on individual finan-
cial statement lines is as follows:

Financial Statement Line
Retained earnings
Accumulated other comprehensive income

As at January 1, 2010
increase (decrease)
747.1
(747.1)

As at December 31, 2010
increase (decrease)
611.1
(611.1)

Share of profit (loss) of associates
Net gains (losses) on investments
Provision for (recovery of) income taxes
Other comprehensive income, net of income taxes

For the year ended
December 31, 2010
increase (decrease)
1.8
(204.9)
(67.1)
136.0

(5) Structured settlements
Structured settlements occur when an insurer has settled a claim and purchased an annuity from a life insurance
company to cover the payment stream agreed to in the settlement with the claimant. The payments are usually
for a set amount over the claimant’s life, or a series of fixed payments for a specified period of time.

Under IFRS, the company accounts for structured settlements by derecognizing the original claims liability and
recording any secondary obligation arising as a financial guarantee where: (i) an annuity is purchased and there is
an irrevocable direction from the company to the annuity underwriter to make all payments directly to the
claimant, (ii) the annuity is non-commutable, non-assignable and non-transferable, the company is not entitled
to any annuity payments and there are no rights under the contractual arrangement that would provide any cur-
rent or future benefit to the company, (iii) the company is released by the claimant to evidence settlement of the
claim amount, and (iv) the company remains liable to make payments to the claimant in the event and to the
extent the annuity underwriter fails to make payments under the terms and conditions of the annuity and the
irrevocable direction given.

Under Canadian GAAP where it was not virtually assured that a secondary obligation did not exist, the company
accounted for structured settlements by applying reinsurance accounting whereby the reinsurance recoverable
(i.e. the value of the life annuity) and the claim obligation remained on the consolidated balance sheet. The effect
of this adjustment on individual financial statement lines is as follows:

Financial Statement Line
Recoverable from reinsurers
Accounts payable and accrued liabilities
Insurance contract liabilities

As at January 1, 2010
increase (decrease)
(245.7)
15.1
(260.8)

As at December 31, 2010
increase (decrease)
(236.9)
14.8
(251.7)

(6) Derecognition of deferred tax assets
Under IFRS, certain income tax payments related to the transfer of assets between group companies may no lon-
ger be deferred on consolidation, as was permitted under Canadian GAAP. Historically the company had recorded
prepaid taxes related to intercompany transfers within future income taxes and income taxes payable. The effect
of this adjustment on individual financial statement lines is as follows:

Financial Statement Line
Deferred income taxes
Income taxes payable
Retained earnings

As at January 1, 2010
increase (decrease)
(27.0)
5.8
(32.8)

As at December 31, 2010
increase (decrease)
(27.0)
5.8
(32.8)

109

F A I R F A X F I N A N C I A L H O L D I N G S L I M I T E D

(7) Impairment of premises and equipment
Under IFRS, the carrying amount of an asset is reduced to its recoverable amount when the asset’s carrying
amount exceeds its recoverable amount which is defined as the higher of value in use or fair value less costs to
sell. Fair value less costs to sell is the amount obtainable from the sale of an asset in an arm’s length transaction
between knowledgeable and willing parties, less the cost of disposal, and value in use is the present value of the
future cash flows expected to be derived from the use of the asset.

Under Canadian GAAP, the carrying amount of an asset was not recoverable when it exceeded the sum of the
undiscounted cash flows expected to result from the asset’s use and eventual disposition. The impairment loss was
then measured as the amount by which the carrying amount exceeded the asset’s fair value.

An impairment charge was recorded under IFRS related to certain of Ridley’s manufacturing plants resulting pri-
marily from the use of undiscounted cash flows under Canadian GAAP and discounted cash flows under IFRS in
the methodology for assessing impairment. The effect of this adjustment on individual financial statement lines is
as follows:

Financial Statement Line
Deferred income taxes
Premises and equipment (other assets)
Retained earnings
Non-controlling interests

Other expenses
Provision for (recovery of) income taxes

As at January 1, 2010
increase (decrease)
3.8
(12.7)
(6.3)
(2.6)

As at December 31, 2010
increase (decrease)
3.7
(12.3)
(6.0)
(2.6)

For the year ended
December 31, 2010
increase (decrease)
(0.4)
0.1

(8) Pension asset limitation
IFRS limits the measurement of a defined benefit pension plan asset to the present value of economic benefits
available in the form of refunds from the plan or reductions in future contributions to the plan plus unrecognized
gains and losses. Based on the statutory minimum funding requirements and expected future service costs of a
subsidiary defined benefit pension plan, a pension asset previously recorded under Canadian GAAP no longer
qualified for recognition under IFRS. The effect of this adjustment on individual financial statement lines is as
follows:

Financial Statement Line
Deferred income taxes
Pension assets (other assets)
Pension and post retirement liabilities (accounts payable and

accrued liabilities)

Retained earnings

Other comprehensive income, net of income taxes

As at January 1, 2010
increase (decrease)
7.4
(8.5)

As at December 31, 2010
increase (decrease)
–
–

20.5
(21.6)

–
–

For the year ended
December 31, 2010
increase (decrease)
21.6

110

(9) Employee benefits
IFRS permits only the unvested portion of past service costs (i.e., costs related to prior periods from the
introduction of or a change to certain types of employee benefit plans) to be deferred and recognized as an
expense on a straight line basis over the average period until the benefits become vested. All vested past service
costs are expensed immediately under IFRS, whereas under Canadian GAAP, vested past service costs were gen-
erally recognized as an expense over the expected average remaining service period of eligible employees. The
effect of recognizing all vested past service costs on individual financial statement lines is as follows:

Financial Statement Line
Deferred income taxes
Pension assets (other assets)
Pension and post retirement liabilities (accounts payable and

accrued liabilities)

Retained earnings
Non-controlling interests

Operating expenses
Other expenses
Provision for (recovery of) income taxes

As at January 1, 2010
increase (decrease)
(1.3)
(1.1)

As at December 31, 2010
increase (decrease)
(1.1)
(1.1)

(4.4)
1.7
0.3

(3.9)
1.4
0.3

For the year ended
December 31, 2010
increase (decrease)
0.1
0.4
(0.2)

(10) Other
Other adjustments are individually insignificant and their impact on individual financial statement lines are as
follows:

Financial Statement Line
Insurance contract receivables
Common stocks
Recoverable from reinsurers
Deferred income taxes
Other assets
Accounts payable and accrued liabilities
Income taxes payable
Insurance contract liabilities
Long term debt
Retained earnings
Accumulated other comprehensive income

Share of profit (loss) of associates
Net gains (losses) on investments
Interest expense
Other expenses
Provision for (recovery of) income taxes
Other comprehensive income, net of income taxes

As at January 1, 2010
increase (decrease)
3.2
(1.8)
(1.8)
(6.0)
(1.4)
(0.8)
0.9
(1.1)
(0.5)
(6.3)
–

As at December 31, 2010
increase (decrease)
1.9
2.0
0.1
(6.3)
(1.2)
–
0.5
0.6
(0.4)
(2.9)
(1.3)

For the year ended
December 31, 2010
increase (decrease)
(0.2)
4.3
0.1
0.4
0.2
(1.3)

111

F A I R F A X F I N A N C I A L H O L D I N G S L I M I T E D

Reclassifications to conform with the company’s IFRS financial statement presentation

(a) Other assets include premises and equipment and income taxes receivable which were disclosed as separate

lines under Canadian GAAP;

(b)

Insurance contract liabilities include provisions for claims and unearned premiums which were disclosed as
separate lines under Canadian GAAP;

obligations of the holding company which were disclosed as separate lines under Canadian GAAP;

(d) Presentation of equity for Canadian GAAP as at January 1, 2010, reflects the adoption of the Canadian
Institute of Chartered Accountants Handbook Section 1582 Business Combinations, Section 1601 Consolidated
Financial Statements and Section 1602 Non-Controlling Interests;

(e) Reclassification of miscellaneous balances receivable (primarily accrued interest and dividends) to other assets

in order to separately present insurance contract receivables; and,

(f) Reclassification of ceded losses to a separate line.

Consolidated Statements of Cash Flows

The company’s consolidated statements of cash flows are presented in accordance with IAS 7 Statement of Cash
Flows. The statements present substantially the same information as that previously required under Canadian
GAAP with limited differences in classification of certain items as discussed below.

Under Canadian GAAP, the company previously classified trading securities as an investing activity, whereas IFRS
includes them as an operating activity. IFRS permits cash flows from interest and dividends received and paid to
be classified as operating, investing or financing activities. Consistent with the nature of the cash flows and with
previous Canadian GAAP, the company has classified interest received and paid, and dividends received, as
operating activities while dividends paid are classified as a financing activity.

112

Consolidated Balance Sheet
as at January 1, 2010
(US$ millions)

Canadian GAAP
Assets
Holding company cash and investments
Accounts receivable and other

Portfolio investments
Subsidiary cash and short term

investments

Bonds
Preferred stocks
Common stocks
Investments, at equity
Derivatives and other invested assets
Assets pledged for short sale and

derivative obligations

Deferred premium acquisition costs

Recoverable from reinsurers

1,251.6
1,805.0

3,056.6

3,244.8
10,918.3
292.8
4,895.0
433.5
142.7

151.5

20,078.6

372.0

3,818.6

Future income taxes
Goodwill and intangible assets

318.7
438.8

Other assets(a)

Liabilities
Subsidiary indebtedness

368.7

28,452.0

12.1

Accounts payable and accrued liabilities

1,238.1

Income taxes payable
Short sale and derivative obligations
Funds withheld payable to reinsurers

Insurance contract liabilities(b)
Long term debt(c)

Equity(d)
Common stock
Treasury shares (at cost)

Retained earnings

Accumulated other comprehensive income

Common shareholders’ equity
Preferred stock

Shareholders’ equity attributable to

shareholders of Fairfax

Non-controlling interests

Total equity

70.9
57.2
354.9

1,733.2

16,680.5
2,301.7

18,982.2

3,058.6
(28.7)

3,468.8

893.1

7,391.8
227.2

7,619.0

117.6

7,736.6

28,452.0

Canadian

Adjustments

upon adoption

GAAP Reclassifications

Reclassified

of IFRS

IFRS IFRS

–

(431.4)(e)

(431.4)

1,251.6
1,373.6

2,625.2

Assets

–

1,251.6 Holding company cash and investments

3.2(10) 1,376.8 Insurance contract receivables

3.2

2,628.4

–
–
–
–
–
–

–

–
–

3,244.8
10,918.3
292.8
4,895.0
433.5
142.7

151.5

20,078.6

372.0

3,818.6

318.7
438.8

431.4(e)

800.1

Portfolio investments
Subsidiary cash and short term

3,244.8

investments

10,918.3 Bonds

–
–
–

292.8 Preferred stocks
(1.8)(10) 4,893.2 Common stocks
(9.8)(2)
–

423.7 Investments in associates
142.7 Derivatives and other invested assets

Assets pledged for short sale and

–

151.5

derivative obligations

(11.6)

20,067.0

–

372.0 Deferred premium acquisition costs

(245.7)(5)

(1.8)(10) 3,571.1 Recoverable from reinsurers
3.9(2)
(27.0)(6)
3.8(7)
7.4(8)
(1.3)(9)
(6.0)(10)
–
(4.8)(2)
(12.7)(7)
(8.5)(8)
(1.1)(9)
(1.4)(10)

299.5 Deferred income taxes
438.8 Goodwill and intangible assets

771.6 Other assets

–

–
–
–

–

–
–

–

–
–

–

–
–

–

28,452.0

(303.6)

28,148.4

Liabilities

12.1

1,238.1

70.9
57.2
354.9

1,733.2

16,680.5
2,301.7

18,982.2

3,058.6
(28.7)

3,468.8

893.1

7,391.8
227.2

12.1 Subsidiary indebtedness

–
22.3(2)
15.1(5)
20.5(8)
(4.4)(9)
(0.8)(10) 1,290.8 Accounts payable and accrued liabilities
5.8(6)
0.9(10)
–
–

77.6 Income taxes payable
57.2 Short sale and derivative obligations
354.9 Funds withheld payable to reinsurers

59.4

1,792.6

(260.8)(5)

(1.1)(10) 16,418.6 Insurance contract liabilities
(0.5)(10) 2,301.2 Long term debt

(262.4)

18,719.8

(28.7) Treasury shares (at cost)

Equity
3,058.6 Common stock

–
–
(31.3)(2)
150.1(3)
747.1(4)
(32.8)(6)
(6.3)(7)
(21.6)(8)
1.7(9)
(6.3)(10) 4,269.4 Retained earnings

(150.1)(3)
(747.1)(4)

(96.6)
–

(4.1) Accumulated other comprehensive income

7,295.2 Common shareholders’ equity

227.2 Preferred stock

Shareholders’ equity attributable to

7,619.0

(96.6)

7,522.4

shareholders of Fairfax

117.6

7,736.6

28,452.0

(1.7)(2)
(2.6)(7)
0.3(9)

113.6 Non-controlling interests

(100.6)

7,636.0 Total equity

(303.6)

28,148.4

113

F A I R F A X F I N A N C I A L H O L D I N G S L I M I T E D

Consolidated Balance Sheet
as at December 31, 2010
(US$ millions)

Canadian GAAP
Assets
Holding company cash and investments
Accounts receivable and other

Portfolio investments
Subsidiary cash and short term

investments

Bonds
Preferred stocks
Common stocks
Investments, at equity
Derivatives and other invested assets
Assets pledged for short sale and

derivative obligations

Deferred premium acquisition costs

Recoverable from reinsurers

Future income taxes
Goodwill and intangible assets

Other assets(a)

Liabilities
Subsidiary indebtedness

1,540.7
1,802.3

3,343.0

3,513.9
11,748.2
583.9
4,131.3
715.5
579.4

709.6

21,981.8

357.0

3,993.8

514.4
949.1

599.1

31,738.2

2.2

Accounts payable and accrued liabilities

1,239.5

Income taxes payable
Short sale and derivative obligations
Funds withheld payable to reinsurers

Insurance contract liabilities(b)
Long term debt(c)

Equity
Common stock
Treasury shares (at cost)
Share-based compensation

Retained earnings

Accumulated other comprehensive income

Common shareholders’ equity
Preferred stock

Shareholders’ equity attributable to

shareholders of Fairfax

Non-controlling interests

Total equity

25.4
216.9
363.2

1,847.2

18,421.3
2,727.3

21,148.6

3,251.3
(52.4)
3.2

3,695.9

863.9

7,761.9
934.7

8,696.6

45.8

8,742.4

31,738.2

Canadian

Adjustments

upon adoption

GAAP Reclassifications Reclassified

of IFRS

IFRS IFRS

–

(327.6)(e)

(327.6)

1,540.7
1,474.7

3,015.4

Assets

–

1,540.7 Holding company cash and investments

1.9(10) 1,476.6 Insurance contract receivables

1.9

3,017.3

–
–
–
–
–
–

–

–
–

3,513.9
11,748.2
583.9
4,131.3
715.5
579.4

709.6

21,981.8

357.0

3,993.8

514.4
949.1

327.6(e)

926.7

Portfolio investments
Subsidiary cash and short term

3,513.9

investments

11,748.2 Bonds

–
–
–

583.9 Preferred stocks
2.0(10) 4,133.3 Common stocks
(7.6)(2)
–

707.9 Investments in associates
579.4 Derivatives and other invested assets

Assets pledged for short sale and

–

709.6

derivative obligations

(5.6)

21,976.2

–

357.0 Deferred premium acquisition costs

(236.9)(5)

0.1(10) 3,757.0 Recoverable from reinsurers
6.8(2)
(27.0)(6)
3.7(7)
(1.1)(9)
(6.3)(10)
–
(11.1)(2)
(12.3)(7)
(1.1)(9)
(1.2)(10)

490.5 Deferred income taxes
949.1 Goodwill and intangible assets

901.0 Other assets

–

–
–
–

–

–
–

–

–
–
–

–

–
–

–

31,738.2

(290.1)

31,448.1

Liabilities

2.2

1,239.5

25.4
216.9
363.2

1,847.2

18,421.3
2,727.3

21,148.6

3,251.3
(52.4)
3.2

3,695.9

863.9

7,761.9
934.7

2.2 Subsidiary indebtedness

–
12.7(2)
14.8(5)
(3.9)(9) 1,263.1 Accounts payable and accrued liabilities
5.8(6)
0.5(10)
–
–

216.9 Short sale and derivative obligations
363.2 Funds withheld payable to reinsurers

31.7 Income taxes payable

29.9

1,877.1

(251.7)(5)

0.6(10) 18,170.2 Insurance contract liabilities
(0.4)(10) 2,726.9 Long term debt

(251.5)

20,897.1

(52.4) Treasury shares (at cost)
3.2 Share-based payments

Equity
3,251.3 Common stock

–
–
–
(22.4)(2)
150.1(3)
611.1(4)
(32.8)(6)
(6.0)(7)
1.4(9)
(2.9)(10) 4,394.4 Retained earnings

(150.1)(3)
(611.1)(4)
(1.3)(10)

(64.0)
–

101.4 Accumulated other comprehensive income

7,697.9 Common shareholders’ equity

934.7 Preferred stock

Shareholders’ equity attributable to

8,696.6

(64.0)

8,632.6

shareholders of Fairfax

45.8

8,742.4

31,738.2

(2.2)(2)
(2.6)(7)
0.3(9)

41.3 Non-controlling interests

(68.5)

8,673.9 Total equity

(290.1)

31,448.1

114

Consolidated Statement of Earnings
for the year ended December 31, 2010
(US$ millions)

Canadian GAAP
Revenue
Gross premiums written

Net premiums written

Net premiums earned
Interest and dividends

Earnings (losses) from investments, at

equity

Net gains on investments
Excess of fair value of net assets
acquired over purchase price

Other revenue

Expenses
Losses on claims, net
–

Losses on claims, net

Operating expenses
Commissions, net
Interest expense

Other expenses

Earnings before income taxes

Income taxes

Net earnings

Attributable to:
Shareholders of Fairfax
Non-controlling interests

Canadian

Adjustments

upon adoption

IFRS for the

GAAP Reclassifications Reclassified

of IFRS

year ended IFRS

5,362.9

4,449.0

4,580.6
711.5

44.1

197.6

83.1
549.1

6,166.0

3,398.7
–

3,398.7

971.6
707.5
195.4

541.1

5,814.3

351.7

(119.5)

471.2

469.0
2.2

471.2

–

–
–

–

–
–

–

839.3(f)
(839.3)(f)

–

–
–
–

–

–
–

–

5,362.9

4,449.0

4,580.6
711.5

44.1

197.6

83.1
549.1

–

–
–
0.3(2)
1.8(4)
(0.2)(10)
(204.9)(4)
4.3(10)

–
–

Revenue

5,362.9 Gross premiums written

4,449.0 Net premiums written

4,580.6 Net premiums earned
Interest and dividends

711.5

46.0

Share of profit (loss) of associates

(3.0) Net gains (losses) on investments

83.1

Excess of fair value of net assets
acquired over purchase price

549.1 Other revenue

6,166.0

(198.7)

5,967.3

4,238.0
(839.3)

3,398.7

971.6
707.5
195.4

541.1

5,814.3

351.7

(119.5)

471.2

469.0
2.2

471.2

–
–

–
1.8(2)
0.1(9)
–
0.1(10)
(0.5)(2)
(0.4)(7)
0.4(9)
0.4(10)

1.9

(200.6)

(0.4)(2)
(67.1)(4)
0.1(7)
(0.2)(9)
0.2(10)

(133.2)

(133.2)
–

(133.2)

4,238.0

Expenses
Losses on claims, gross

(839.3) Less ceded losses on claims

3,398.7

Losses on claims, net

973.5 Operating expenses
707.5 Commissions, net
195.5

Interest expense

541.0 Other expenses

5,816.2

151.1 Earnings before income taxes

(186.9) Provision for (recovery of) income taxes

338.0 Net earnings

335.8

Attributable to:
Shareholders of Fairfax

2.2 Non-controlling interests

338.0

Consolidated Statement of Comprehensive Income
for the year ended December 31, 2010
(US$ millions)

Canadian GAAP
Application of equity method of

accounting

Net earnings

Other comprehensive income

(loss), net of income taxes

Change in net unrealized gains and

losses on available for sale securities

Reclassification of net realized (gains)

losses to net earnings

Change in unrealized foreign currency

translation gains (losses)

Change in gains and losses on hedge

of net investment in foreign
subsidiary

Share of other comprehensive income

of investments, at equity

–

Other comprehensive income

(loss), net of income taxes

Comprehensive income

Attributable to:
Shareholders of Fairfax
Non-controlling interests

Canadian

Adjustments

upon adoption

IFRS for the

GAAP

Reclassifications

Reclassified

of IFRS

year ended IFRS

(7.9)

471.2

363.1

(492.9)

122.3

(28.2)

14.5

–

(21.2)

450.0

447.7
2.3

450.0

–

–
–

–

(7.9)

471.2

363.1

(492.9)

122.3

(28.2)

14.5

–

(21.2)

450.0

447.7
2.3

450.0

115

7.9(4)

(133.2)

– –

338.0 Net earnings

Other comprehensive income,

net of income taxes

(363.1)(4)

492.9(4)

– –

(1.3)(10)

121.0

currency translation gains (losses)

Change in unrealized foreign

–

(28.2)

Change in gains and losses on hedge

of net investment in foreign
subsidiary

(1.7)(4)

9.0(2)
21.6(8)

157.4

24.2

24.7
(0.5)

24.2

Share of other comprehensive

12.8

income of associates

Change in actuarial gains and losses

30.6

on defined benefit plans

Other comprehensive income,

136.2

net of income taxes

474.2 Comprehensive income

Attributable to:

472.4 Shareholders of Fairfax

1.8 Non-controlling interests

474.2

F A I R F A X F I N A N C I A L H O L D I N G S L I M I T E D

(This page intentionally left blank)

116

Index to Management’s Discussion and Analysis of Financial Condition and Results of Operations

Notes to Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . 118
Overview of Consolidated Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119
Business Developments and Operating Environment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119
Sources of Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122
Sources of Net Earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126
Net Earnings by Reporting Segment
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129
Balance Sheets by Reporting Segment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130
Components of Net Earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133
Underwriting and Operating Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133
Interest and Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154
Net Gains on Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154
Interest Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154
Corporate Overhead and Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154
Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 155
Non-controlling Interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 156
Components of Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 156
Consolidated Balance Sheet Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 156
Provision for Losses and Loss Adjustment Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 158
Asbestos and Pollution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 171
Recoverable from Reinsurers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 174
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 178
Interest and Dividend Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 179
Net Gains (Losses) on Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180
Total Return on the Investment Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 181
Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 182
Common Stocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 183
Derivatives and Derivative Counterparties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 184
Float . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185
Financial Condition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 186
Capital Resources and Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 186
Liquidity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 190
Contractual Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 192
Lawsuit Seeking Class Action Status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 192
Accounting and Disclosure Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 192
Management’s Evaluation of Disclosure Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 192
Management’s Report on Internal Control Over Financial Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 192
Critical Accounting Estimates and Judgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 193
Significant Accounting Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 193
Future Accounting Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 193
Risk Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 194
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 194
Issues and Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 195
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 203
Quarterly Data (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 203
Stock Prices and Share Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 203
Compliance with Corporate Governance Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 204
Forward-Looking Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 204

117

F A I R F A X F I N A N C I A L H O L D I N G S L I M I T E D

Management’s Discussion and Analysis of Financial Condition and Results of Operations

(as of March 9, 2012)

(Figures and amounts are in US$ and $ millions except per share amounts and as otherwise indicated. Figures may not add
due to rounding.)

Notes to Management’s Discussion and Analysis of Financial Condition and Results of Operations

(1) Readers of the Management’s Discussion and Analysis of Financial Condition and Results of Operations
(“MD&A”) should review the entire Annual Report for additional commentary and information.
Additional information relating to the company, including its annual information form, can be found
on SEDAR at www.sedar.com. Additional information can also be accessed from the company’s website
www.fairfax.ca.

(2)

This MD&A and the accompanying consolidated financial statements for the year ended December 31,
2011 have been prepared to reflect the adoption of International Financial Reporting Standards (“IFRS”)
by the company, with effect from January 1, 2010. Periods prior to January 1, 2010 have not been
restated. Note 30 to the consolidated financial statements for the year ended December 31, 2011
including a line-by-line
contains a detailed description of
reconciliation of its consolidated financial statements previously prepared under Canadian GAAP to
those prepared under IFRS for the year ended December 31, 2010. In this MD&A the term ‘Canadian
GAAP’ refers to Canadian GAAP before the adoption of IFRS.

the company’s conversion to IFRS,

(3) Management analyzes and assesses the underlying insurance, reinsurance and runoff operations and the
financial position of the consolidated group in various ways. Certain of the 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. Where non-GAAP measures are used,
descriptions have been provided in the commentary as to the nature of the adjustments made.

(4)

(5)

(6)

The combined ratio is the traditional measure of underwriting results of property and casualty
companies, but is regarded as a non-GAAP measure. The combined ratio 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). Other non-GAAP measures used by the
company include the commission expense ratio (commissions expressed as a percentage of net
premiums earned) and the accident year combined ratio (calculated in the same manner as the
combined ratio but excluding the net favourable or adverse development of reserves established for
claims that occurred in previous accident years).

Interest and dividends in this MD&A is derived from the consolidated statement of earnings prepared in
accordance with IFRS and is comprised of the sum of interest and dividends and share of profit (loss) of
associates.

The company’s long equity total return swaps allow the company to receive the total return on a
notional amount of an equity index or individual equity security (including dividends and capital gains
or losses) in exchange for the payment of a floating rate of interest on the notional amount. Conversely,
short equity total return swaps allow the company to pay the total return on a notional amount of an
equity index or individual equity security in exchange for the receipt of a floating rate of interest on the
notional amount. Throughout this MD&A, the term “investment expenses incurred in connection with
total return swaps” refers to the net dividends and interest paid or received related to the company’s
long and short equity and equity index total return swaps.

(7) Additional non-GAAP measures included in the Capital Resources and Management section of this
MD&A include: net debt divided by total equity, net debt divided by net total capital and total debt
divided by total capital. The company also calculates an interest coverage ratio and an interest and
preferred share dividend distribution coverage ratio as a measure of its ability to service its debt and pay
dividends to its preferred shareholders.

118

(8) Average annual return on average equity, a non-GAAP measure, is derived from segment balance sheets
and segment operating results. It is calculated for a reporting segment as the cumulative net earnings for
a specified period of time expressed as a percentage of average equity over the same period.

(9)

Intercompany shareholdings are presented as ‘Investments in Fairfax affiliates’ on the segmented
balance sheets and carried at cost.

(10) References in this MD&A to Fairfax’s insurance and reinsurance operations do not include Fairfax’s

runoff operations.

(11) Effective January 1, 2011, the company changed the manner in which it classifies amortization expense
related to its customer and broker relationships in this MD&A. Previously, such amortization expense
was classified within other underwriting expenses as a component of underwriting profit. Effective
January 1, 2011, amortization expense related to customer and broker relationships was included in
subsidiary corporate overhead. Management believes this change in expense classification will better
reflect the results of operations of its operating companies on a standalone basis. In addition,
management does not consider acquisition accounting adjustments when assessing the performance of
its reporting segments. Prior period comparative figures have been presented on a consistent basis to
give effect to the reclassifications as of January 1, 2010. For the year ended December 31, 2010, customer
and broker amortization expense was included in corporate overhead within the Insurance –
Northbridge ($6.0), U.S. Insurance ($3.7) and Reinsurance – OdysseyRe ($1.4) reporting segments.

Overview of Consolidated Performance

The combined ratio of the insurance and reinsurance operations was 114.2% on a consolidated basis, producing
an underwriting loss of $754.4, compared to a combined ratio and underwriting loss of 103.5% and $160.5
respectively in 2010. Underwriting results in 2011 were negatively affected by $1,020.8 of pre-tax catastrophe
losses (net of reinstatement premiums) which increased the combined ratio by 19.3 combined ratio points,
primarily related to losses from the Japanese earthquake and tsunami, the Thailand floods, the U.S. tornadoes, the
New Zealand (Christchurch) earthquake and Hurricane Irene. In 2010, pre-tax catastrophe losses (net of
reinstatement premiums) totaled $331.4 which increased the combined ratio by 7.3 combined ratio points. Net
premiums written by the insurance and reinsurance operations increased by 23.4% to $5,487.6 in 2011 compared
to $4,446.0 in 2010 (an increase of 10.9% excluding the acquisitions of Zenith National, First Mercury and Pacific
Insurance). Operating income of the insurance and reinsurance operations (excluding net gains on investments)
declined from $398.9 in 2010 to an operating loss of $236.5 in 2011, primarily as a result of the higher
underwriting losses.

Consolidated interest and dividend income of $705.3 decreased 0.9% from $711.5 in 2010. The year-over-year
decrease was attributable to lower yields due to increased investment expenses incurred in connection with the
company’s equity hedges, partially offset by a larger average investment portfolio resulting from the acquisitions
completed in 2011 and 2010. Net investment gains in 2011 of $691.2 were primarily comprised of $1,278.7 of net
gains on bonds, partially offset by $378.9 of net losses (primarily unrealized) related to equity and equity-related
holdings after equity hedges and $233.9 of unrealized losses related to CPI-linked derivatives.

The company held $1,026.7 of cash and investments at the holding company level ($962.8 net of $63.9 of
holding company short sale and derivative obligations) at December 31, 2011, compared to $1,540.7 ($1,474.2
net of $66.5 of holding company short sale and derivative obligations) at December 31, 2010. The company’s
consolidated total debt to total capital ratio increased to 26.4% at December 31, 2011 from 23.9% at
December 31, 2010. At December 31, 2011, common shareholders’ equity was $7,427.9 or $364.55 per basic share
compared to $7,697.9, or $376.33 per basic share, at December 31, 2010 (a decrease of 0.4% (adjusted for the $10
per common share dividend paid in the first quarter of 2011)).

Business Developments and Operating Environment

Acquisitions and changes to reporting structure

On January 10, 2012, the company completed the acquisition of 81.7% of the issued and outstanding common
shares of Prime Restaurants Inc. (“Prime Restaurants”) for net consideration of $56.7 (Cdn$57.7 million). The
assets and liablities and results of operations of Prime Restaurants will be included in the company’s financial

119

F A I R F A X F I N A N C I A L H O L D I N G S L I M I T E D

reporting in the Other reporting segment. Prime Restaurants franchises, owns and operates a network of casual
dining restaurants and pubs in Canada.

On January 19, 2012, the company announced that it had entered into an agreement to acquire approximately
25% of the issued and outstanding shares of Thai Reinsurance Public Company Limited (“Thai Re”), for aggregate
cash consideration of approximately $70.0. The transaction is expected to close in March of 2012, subject to the
successful conclusion of Thai Re’s previously announced rights offering and the receipt of customary regulatory
approvals. Thai Re is headquartered in Bangkok, Thailand and provides reinsurance coverage for property,
casualty, engineering, marine, and life customers primarily in Thailand.

As of January 1, 2011, the company has presented the results of operations of Clearwater Insurance Company
(“Clearwater Insurance”) in the Runoff reporting segment following the transfer of ownership of Clearwater
Insurance from OdysseyRe to TIG Insurance Group, Inc. (“TIG Group”). Prior period comparative figures have
been presented on a consistent basis to give effect to the transfer as of January 1, 2010. Clearwater Insurance is an
insurance company which has been in runoff since 1999.

On January 1, 2011, the company’s runoff Syndicate 3500 (managed by RiverStone (UK)) accepted the
reinsurance-to-close of all of the liabilities ($119.6) of Syndicate 376. The results of operations of Syndicate 376
are included in the Runoff reporting segment.

On February 9, 2011, the company completed the acquisition of all of the outstanding common shares of First
Mercury Financial Corporation (“First Mercury”) including Valiant Insurance Group (“Valiant Insurance”), a
wholly-owned subsidiary of First Mercury. First Mercury underwrites specialty insurance products, principally on
an excess and surplus lines basis, focusing on niche and underserved segments. The results of operations of First
Mercury since acquisition were consolidated within the Crum & Forster operating segment. As of July 1, 2011, the
company has presented the results of operations of Valiant Insurance (total equity of $37.8 at December 31, 2011)
in the Runoff reporting segment following the transfer of ownership of Valiant Insurance from Crum & Forster to
TIG Group.

On March 24, 2011, the company completed the acquisition of The Pacific Insurance Berhad (“Pacific
Insurance”). Pacific Insurance underwrites all classes of general insurance and medical insurance in Malaysia. The
results of operations of Pacific Insurance since acquisition are included in the Insurance – Fairfax Asia reporting
segment.

On August 16, 2011, the company completed the acquisition of all of the assets and assumed certain liabilities
associated with the businesses currently carried on by William Ashley China Corporation and its affiliates
(“William Ashley”). William Ashley is a prestige retailer of exclusive tableware and gifts in Canada. The results of
operations of William Ashley since acquisition are included in the Other reporting segment.

On December 22, 2011, the company completed the acquisition of 75.0% of the outstanding common shares of
Sporting Life Inc. (“Sporting Life”). Sporting Life is a Canadian retailer of sporting goods and sports apparel. The
results of operations of Sporting Life since acquisition are included in the Other reporting segment.

On August 17, 2010, TIG Insurance Company (“TIG”) completed the acquisition of all of the outstanding com-
mon shares of General Fidelity Insurance Company (“GFIC”), a property and casualty insurance company based
in the United States. In connection with the purchase of GFIC, the company also acquired 100% ownership of BA
International Underwriters Limited (subsequently renamed RiverStone Corporate Capital 2 Limited), the only
interest of Lloyd’s Syndicate 2112 (“Syndicate 2112”). The results of operations of GFIC and Syndicate 2112 since
acquisition are included in the Runoff reporting segment.

On May 20, 2010, the company completed the acquisition of all of the outstanding common shares of Zenith
National Insurance Corp. (“Zenith National”) other than those common shares already owned by Fairfax and its
affiliates. The results of operations of Zenith National since acquisition are included in the Insurance –
U.S. reporting segment (formerly known as the U.S. Insurance – Crum & Forster reporting segment prior to
May 20, 2010).

In March 2010, the company’s wholly-owned insurance company Fairfax Brasil Seguros Corporativos S.A.
(“Fairfax Brasil”) commenced writing commercial property and casualty insurance in Brazil following the receipt
of approvals from Brazilian insurance regulatory authorities. The results of operations of Fairfax Brasil are
included in the Insurance and Reinsurance – Other reporting segment (formerly known as the Reinsurance –
Other reporting segment prior to January 1, 2010).

120

Tender offer

On June 6, 2011, the company completed a tender offer for $694.4 ($657.9 net of Zenith National’s ownership) of
Fairfax, Crum & Forster and OdysseyRe unsecured senior notes. The company recorded a charge of $104.2 in
connection with the debt repurchases. On May 9, 2011, the company completed a private offering of $500.0
principal amount of 5.80% unsecured senior notes due 2021 for net proceeds after discount, commissions and
expenses of $493.9. On May 25, 2011, the company completed an offering of Cdn$400.0 principal amount of
6.40% unsecured senior notes due 2021 for net proceeds after discount, commissions and expenses of $405.6
(Cdn$396.0).

Operating Environment

Insurance Environment

The property and casualty insurance and reinsurance industry experienced a very challenging year in 2011 as
underwriting results deteriorated sharply, investment income suffered from historically low interest rates and
stock markets in the U.S. and Canada were flat to down, partially offset by opportunities in 2011 to recognize
capital gains on bonds as interest rates declined. The underwriting results of the insurance industry in the U.S.
and Canada reflected the increased frequency of catastrophe losses in North America and a number of significant
catastrophes outside of North America (including the Japanese earthquake and tsunami, the New Zealand earth-
quake and Thailand flooding). Competition in the U.S. and Canada as a result of ongoing excess capacity in the
insurance industry has resulted in rates remaining competitive, with rate increases for many lines of business not
keeping pace with claim trends. Increased current accident year loss ratios combined with the diminishing bene-
fits related to the recognition of favourable development on prior years’ reserves placed significant pressure on
underwriting profitability in 2011, notwithstanding that in the second half of 2011, commercial property and
workers’ compensation lines of business showed signs of pricing improvements. As a result of all of these factors,
the 2011 industry combined ratios for commercial lines in the U.S. and Canada are expected to be approximately
108.2% and 100.0% respectively compared to 102.7% and 99.4% in 2010 respectively. The combined effect of the
2011 underwriting losses, the recognition of lower favourable development on prior years’ reserves and histor-
ically low interest rates will put significant pressure on rates to increase in 2012. The strength of the global
economy will be an important driver in achieving increased rates, as rate increases are more difficult to achieve in
a weak economy.

Although slightly less competitive than the direct insurance industry, the global reinsurance industry in 2011
suffered from what is expected to be the second highest year in history for insured catastrophe losses. Catastrophe
losses combined with lower favourable development on prior years’ reserves and pressure on investment returns
lead to an overall decline in the profitability of the global reinsurance industry in 2011. The combined ratio for
the U.S. and Bermuda-based reinsurance market is expected to be approximately 104.6% in 2011 up from 92.7%
in 2010. In 2012, the global reinsurance industry may be poised to benefit from insurers that, after a number of
years of increasing retentions, may seek to purchase additional reinsurance for protection from significant cata-
strophes losses similar to those experienced in 2011 and to alleviate pressure on solvency margins which have
recently been the subject of increased regulatory scrutiny.

121

F A I R F A X F I N A N C I A L H O L D I N G S L I M I T E D

Sources of Revenue

Revenues reflected in the consolidated financial statements for the most recent three years ended December 31,
are shown in the table that follows (Other revenue comprises the revenue earned by Ridley Inc. (“Ridley”), Wil-
liam Ashley and Sporting Life).

2011

2010

Canadian
GAAP
2009

Net premiums earned

Insurance

– Canada (Northbridge)
– U.S. (Crum & Forster and Zenith National)
– Asia (Fairfax Asia)

Reinsurance – OdysseyRe
Insurance and Reinsurance – Other
Runoff

Interest and dividends
Net gains (losses) on investments
Excess of fair value of net assets acquired over purchase price
Other revenue

204.1

1,072.2
996.6
1,504.6 1,000.1
155.0
2,014.7 1,885.5
536.0
7.4

504.9
126.4

5,426.9 4,580.6
757.5
(3.0)
83.1
549.1

707.1
691.2
–
649.8

969.2
781.3
116.0
1,926.9
628.1
0.5

4,422.0
712.7
944.5
–
556.4

7,475.0 5,967.3

6,635.6

Revenue in 2011 increased to $7,475.0 from $5,967.3 in 2010, reflecting growth in net premiums earned,
increased net gains on investments and increased other revenue (principally at Ridley), partially offset by lower
interest and dividend income. Revenue in 2010 also included the non-recurring benefit of the $83.1 excess of the
fair value of net assets acquired over the purchase price recorded by Runoff related to the acquisition of GFIC. The
growth in consolidated net premiums earned in 2011 of 18.5% to $5,426.9 from $4,580.6 in 2010 principally
reflected the consolidation of the net premiums earned by Zenith National (net increase year-over-year of $226.9),
First Mercury ($205.4) and Pacific Insurance ($30.4), the year-over-year increases in net premiums earned by
OdysseyRe ($129.2, 6.9%), Northbridge ($75.6, 7.6% including the favourable effect of
foreign currency
translation), Crum & Forster ($72.2, 9.9% excluding the impact of the consolidation of First Mercury) and Fairfax
Asia ($18.7, 12.1% excluding the impact of the consolidation of Pacific Insurance), and $119.6 of net premiums
earned by Runoff in connection with the reinsurance-to-close of Syndicate 376, partially offset by decreased net
premiums earned by Insurance and Reinsurance – Other ($1.0, 0.2% excluding Advent’s non-recurring
reinsurance-to-close premiums ($30.1) received in 2010).

Revenue in 2010 decreased to $5,967.3 from $6,635.6 under Canadian GAAP in 2009, principally as a result of the
significant year-over-year decrease in net gains on investments and a decline in other revenue related to Ridley,
partially offset by increased net premiums earned, the benefit of the $83.1 excess of the fair value of net assets
acquired over the purchase price recorded in 2010 by Runoff related to the acquisition of GFIC and increased
interest and dividend income. The increase in consolidated net premiums earned in 2010 of 3.6% to $ 4,580.6
from $4,422.0 under Canadian GAAP in 2009 reflected the consolidation of the net premiums earned by Zenith
National and increased net premiums earned by Fairfax Asia and Northbridge, partially offset by declines in net
premiums earned by Insurance and Reinsurance – Other (principally Advent and Polish Re), Crum & Forster and
OdysseyRe.

Despite the ongoing challenging market conditions within the global insurance and reinsurance industry, includ-
ing continued price competition (especially in casualty lines), excess capacity and the impact of the weak
economy on insured customers, the company’s insurance and reinsurance operations achieved modest growth in
gross premiums written and net premiums written in 2011 as shown in the following table. Prior to giving effect
to the acquisitions of Zenith National, First Mercury and Pacific Insurance and after excluding Advent’s non-
recurring reinsurance-to-close premiums ($30.1) received in 2010, gross premiums written and net premiums
written by the company’s insurance and reinsurance operations increased by 9.6% and 10.9% respectively in 2011
compared to 2010.

122

Insurance and reinsurance oper-

ations – as reported

Zenith National
First Mercury
Pacific Insurance
Advent reinsurance-to-close premiums

Insurance and reinsurance oper-

ations – as adjusted

2011

2010

Gross
premiums
written

Net
premiums
written

Net
premiums
earned

Gross
premiums
written

Net
premiums
written

Net
premiums
earned

6,705.5
(536.4)
(306.0)
(51.9)
—

5,487.6
(524.2)
(237.8)
(34.9)
—

5,300.5
(495.8)
(205.4)
(30.4)
—

5,527.0
(192.3)
—
—
(30.1)

4,446.0
(186.1)
—
—
(30.1)

4,573.2
(268.9)
—
—
(30.1)

5,811.2

4,690.7

4,568.9

5,304.6

4,229.8

4,274.2

Percentage change (year-over-year)

9.6%

10.9%

6.9%

The tables which follow present net premiums written by the company’s insurance and reinsurance operations in
2011 and 2010 (“as reported”) and, in order to better compare 2011 and 2010, the same excluding companies
acquired in 2011 and 2010 (First Mercury, Pacific Insurance and Zenith National) and Advent’s non-recurring $30.1
reinsurance-to-close premiums received in 2010 (“as adjusted”). The “as adjusted” table shows year-over-year increases
of net premiums written of 10.9% in 2011.

Net premiums written – as reported

Insurance

– Canada (Northbridge)
– U.S. (Crum & Forster and Zenith National)
– Asia (Fairfax Asia)

Reinsurance – OdysseyRe
Insurance and Reinsurance – Other

% change
year-over-
year
11.5%
74.1%
35.8%
12.7%
(8.7)%

2010
985.0
919.5
157.4
1,853.6
530.5

2011
1,098.5
1,601.1
213.7
2,089.7
484.6

Insurance and reinsurance operations

5,487.6

4,446.0

23.4%

Net premiums written – as adjusted

Insurance

– Canada (Northbridge)
– U.S. (Crum & Forster)
– Asia (Fairfax Asia)

Reinsurance – OdysseyRe
Insurance and Reinsurance – Other

% change
year-over-
year
11.5%
14.4%
13.6%
12.7%
(3.2)%

2010
985.0
733.4
157.4
1,853.6
500.4

2011
1,098.5
839.1
178.8
2,089.7
484.6

Insurance and reinsurance operations

4,690.7

4,229.8

10.9%

The increase in Northbridge’s net premiums written of 11.5% (7.1% in Canadian dollar terms) in 2011 compared to
2010 primarily reflected a reduction in its participation on an inter-group quota share reinsurance contract with
Group Re and also reflected nominal improvements in levels of new business, retentions of existing business and
pricing. Net premiums written by U.S. Insurance (excluding First Mercury) increased by 14.4% on a year-over-year
basis in 2011 comprised of growth of 14.4% and 22.3% at Crum & Forster and Zenith National respectively. The
calculation of the year-over-year growth in net premiums written of 22.3% in 2011 by Zenith National includes the
portion of the period in 2010 prior to its acquisition by Fairfax which is not reflected in the table above. The
increase in net premiums written by Crum & Forster reflected growth in its specialty lines of business, primarily at
its Seneca and AMC/Fairmont divisions including in its accident and health line of business. The increase in net
premiums written by Zenith National reflected its ability to write new business and retain existing customers at

123

F A I R F A X F I N A N C I A L H O L D I N G S L I M I T E D

higher prices as the economic and competitive environment continues to change for workers’ compensation
business. Net premiums written by Fairfax Asia (excluding Pacific Insurance) increased by 13.6% in 2011 compared
to 2010, primarily as a result of increased writings of property and commercial automobile business, the favourable
effect of foreign currency translation at First Capital and increased retentions of gross premiums written.
OdysseyRe’s net premiums written increased by 12.7% in 2011 compared to 2010, primarily reflecting increased
writings across many of OdysseyRe’s lines of business (including property, crop, marine and tribal lines of
business), reinstatement premiums related to the Japan earthquake and tsunami and the impact of the timing of
the renewal of certain professional liability policies. Net premiums written by the Insurance and Reinsurance –
Other reporting segment decreased by 3.2% in 2011 compared to 2010 primarily as a result of the reduction in
participation by Group Re on the inter-group quota share reinsurance contract discussed above in connection with
Northbridge, reinstatement premiums paid by Advent related to certain of the 2011 catastrophe losses and the cost
of purchasing excess of loss reinsurance for the start-up operations of Fairfax Brasil, partially offset by growth in net
premiums written by Polish Re and Fairfax Brasil. Consolidated gross premiums written, net premiums written and
net premiums earned in 2011 also included $119.6 of premiums received by Runoff in connection with the
reinsurance-to-close of Syndicate 376.

Consolidated interest and dividend income of $705.3 decreased 0.9% from $711.5 in 2010. Prior to giving effect to
the year-over-year impact of the consolidation of Zenith National, GFIC, First Mercury and Pacific Insurance,
consolidated interest and dividend income of $628.9 in 2011 decreased by 6.9% from $675.5 in 2010 with the
decrease primarily attributable to lower yields due to increased investment expenses incurred in connection with
total return swaps (total return swap investment expense was $140.3 in 2011 compared to $86.1 in 2010), partially
offset by a modest increase in interest and dividend income earned. The consolidated share of profit of associates
was $1.8 in 2011 compared to $46.0 in 2010, with the decrease principally related to the year-over-year increase of
$55.6 in the company’s share of the losses of ICICI Lombard which was primarily as a result of reserve
strengthening related to ICICI Lombard’s mandatory pro-rata participation in the Indian commercial vehicle
insurance pool.

Net gains on investments of $691.2 in 2011 (net losses on investments of $3.0 in 2010) were comprised as shown in
the following table:

Common stocks

Preferred stocks – convertible

Bonds – convertible

Gain on disposition of associate

Other equity derivatives

Equity and equity-related holdings

Economic equity hedges

Equity and equity-related holdings after equity hedges

Bonds

Preferred stocks

CPI-linked derivatives

Other derivatives

Foreign currency

Other

Net gains (losses) on investments

Net gains (losses) on bonds is comprised as follows:

Government bonds

U.S. states and municipalities

Corporate and other

124

2011

(774.8)

(5.2)

23.5

7.0

2010

577.3

(18.6)

88.1

77.9

(43.3)

180.7

(792.8)

413.9

(378.9)

1,278.7

(1.9)

(233.9)

49.4

(34.4)

12.2

905.4

(936.6)

(31.2)

75.7

6.8

28.1

2.9

(107.7)

22.4

691.2

(3.0)

753.1

642.7

(117.1)

(14.7)

(199.3)

289.7

1,278.7

75.7

The company uses short equity and equity index total return swaps to economically hedge equity price risk
associated with its equity and equity-related holdings. In 2011, the company’s equity and equity-related holdings
after equity hedges produced a net loss of $378.9 (2010 – $31.2) despite the notional amount of the company’s
economic equity hedges being closely matched to the fair value of the company’s equity and equity-related
holdings (economic equity hedges represented 104.6% of the company’s equity and equity-related holdings
($6,822.7) at December 31, 2011). In 2011, the impact of basis risk was pronounced compared to prior periods as
the performance of the company’s equity and equity-related holdings lagged the performance of the economic
equity hedges used to protect those holdings. The company’s economic equity hedges are structured to provide a
return which is inverse to changes in the fair values of the Russell 2000 index (decreased 5.5% in 2011), the S&P
500 index (decreased nominally in 2011) and certain individual equity securities (decreased by 12.6% on a
weighted average basis in 2011). The majority of the net loss in 2011 of $378.9 related to the company’s equity and
equity-related holdings after equity hedges is unrealized and it is the company’s expectation that over the long
term and consistent with its historical investment performance, the company’s equity and equity-related holdings
will outperform the broader equity indexes, with the result that the net loss related to the company’s and equity-
related holdings after equity hedges recorded in 2011 (or a portion thereof) will reverse in future periods. Refer to
the analysis in note 24 (Financial Risk Management) under the heading of Market Price Fluctuations in the
company’s consolidated financial statements for the year ended December 31, 2011 for a discussion of the
company’s economic hedge of equity price risk and related basis risk and to the tabular analysis in the Investment
section in this MD&A for further details about the components of net gains (losses) on investments.

Net gains on bonds in 2011 of $1,278.7 (2010 – $75.7) included net realized gains of $270.9 (2010 – $71.2) on
U.S. treasury bonds with the remainder primarily comprised of net mark-to-market gains on U.S. treasury and U.S.
state and municipal bonds, reflecting the impact of declining interest rates during 2011 on the company’s fixed
income portfolio. The company’s investment in CPI-linked derivative contracts produced an unrealized loss of
$233.9 in 2011 (2010 – $28.1 unrealized gain) primarily as a result of increases in the values of the CPI indexes
underlying those contracts (those contracts are structured to benefit the company during periods of decreasing
CPI index values).

As presented in note 25 to the consolidated financial statements for the year ended December 31, 2011, on the
basis of geographic segments, the United States, International, Canada and Far East accounted for 48.3%, 22.7%,
21.9% and 7.1% respectively of net premiums earned in 2011 compared with 48.5%, 19.7%, 25.6%, and 6.2%
respectively in 2010. Net premiums earned in 2011 compared with 2010 increased in the International (36.7%), Far
East (34.2%), United States (18.1%) and Canada (1.4% – measured in U.S. dollars) geographical segments.
International net premiums earned in 2011 increased by $330.8 on a year-over-year basis, primarily reflecting
increases at Insurance and Reinsurance – Other (primarily as a result of growth in the casualty and property lines of
business at Polish Re and Fairfax Brasil and growth in the specialty lines of business at Group Re and Advent),
$119.6 of net premiums earned by Runoff related to the reinsurance-to-close of Syndicate 376 and growth in
OdysseyRe’s property reinsurance business. Net premiums earned in 2011 in the Far East increased by $97.8 on a
year-over-year basis, primarily reflecting growth in OdysseyRe’s property and marine lines of business and
increased writings of property and commercial automobile lines of business and the consolidation of the net
premiums earned by Pacific Insurance at Fairfax Asia. Net premiums earned in the United States in 2011 increased
by $401.5 on a year-over-year basis, primarily reflecting the consolidation of the net premiums earned by First
Mercury in 2011 and the year-over-year impact of the consolidation of the net premiums earned by Zenith
National combined with modest growth in specialty lines of business at Crum and Forster and workers’
compensation business at Zenith National and Crum & Forster, partially offset by decreased net premiums earned
by OdysseyRe’s casualty reinsurance business and by Advent (related to the reinsurance-to-close premiums ($30.1)
received in 2010 which did not recur in 2011 and the non-renewal of certain insurance business where rates were
considered inadequate). Net premiums earned in Canada in 2011 increased by $16.2 on a year-over-year basis,
reflecting the favourable impact of foreign currency translation at Northbridge and Group Re (CRC Re) and a
reduction in Northbridge’s participation on an inter-group quota share reinsurance contract with Group Re. As a
consequence of Northbridge’s reduction in its participation on this inter-group quota share reinsurance contract,
net premiums earned by Group Re in Canada decreased significantly.

Other revenue of $649.8 (2010 –$549.1) in 2011 principally represented the revenue of Ridley of $635.0 (2010 –
$549.1). The remaining other revenue related to William Ashley and Sporting Life.

125

F A I R F A X F I N A N C I A L H O L D I N G S L I M I T E D

Sources of Net Earnings

The following table presents the combined ratios and underwriting and operating results for each of the insurance
and reinsurance operations and, as applicable, for its runoff operations, as well as the earnings contributions from
the Other reporting segment for the years ended December 31, 2011, 2010 and 2009. In that table, interest and
dividends and net gains (losses) on investments in the consolidated statements of earnings are broken out so that
these items are shown separately as they relate to the insurance and reinsurance operating results, and are
included in Runoff and Corporate overhead and other as they relate to these segments.

Combined
ratios
Insurance

– Canada (Northbridge)
– U.S. (Crum & Forster and Zenith National)
– Asia (Fairfax Asia)

Reinsurance – OdysseyRe
Insurance and Reinsurance – Other

Consolidated

Sources of net earnings
Underwriting
Insurance

– Canada (Northbridge)
– U.S. (Crum & Forster and Zenith National)
– Asia (Fairfax Asia)

Reinsurance – OdysseyRe
Insurance and Reinsurance – Other

Underwriting profit (loss)
Interest and dividends – insurance and reinsurance

Operating income (loss)
Net gains (losses) on investments – insurance and reinsurance
(Loss) gain on repurchase of long term debt
Runoff(2)
Other
Interest expense
Corporate overhead and other

Pre-tax income (loss)
Income taxes

Net earnings

Attributable to:

Shareholders of Fairfax
Non-controlling interests

2011

2010

Canadian
GAAP
2009(1)

102.8%
114.3%
83.2%
116.7%
140.9%

106.9%
116.5%
89.3%
95.0%
107.2%

105.3%
104.1%
82.6%
93.6%
98.1%

114.2%

103.5%

98.4%

(30.2)
(215.9)
34.4
(336.0)
(206.7)

(754.4)
517.9

(236.5)
204.6
(104.2)
360.5
13.3
(214.0)
(32.4)

(8.7)
56.5

47.8

45.1
2.7

47.8

(68.3)
(165.5)
16.6
95.1
(38.4)

(160.5)
559.4

398.9
(8.3)
(2.3)
135.5
10.4
(195.5)
(187.6)

151.1
186.9

338.0

335.8
2.2

338.0

(51.7)
(32.0)
20.2
122.7
11.9

71.1
516.7

587.8
599.0
9.0
82.1
12.4
(166.3)
81.6

1,205.6
(214.9)

990.7

856.8
133.9

990.7

Net earnings (loss) per share
Net earnings (loss) per diluted share
Cash dividends paid per share

$ (0.31)
$ (0.31)
$ 10.00

$ 14.90
$ 14.82
$ 10.00

$ 43.99
$ 43.75
8.00
$

(1) The underwriting and operating results as presented in 2009 under Canadian GAAP were reclassified to conform with

the current year’s presentation.

(2) The Runoff segment in 2010 includes $83.1 of the excess of the fair value of net assets acquired over the purchase price
related to the acquisition of GFIC, as described in note 23 to the company’s consolidated financial statements for the
year ended December 31, 2011.

126

In 2011, the company’s insurance and reinsurance operations reported an underwriting loss of $754.4 and a
combined ratio of 114.2% compared to an underwriting loss of $160.5 and a combined ratio of 103.5% in 2010.
The following table presents the components of the company’s combined ratios for the years ended December 31,
2011 and 2010:

Underwriting profit (loss)

Loss & LAE – accident year
Commissions
Underwriting expense

Combined ratio – accident year
Net favourable development

Combined ratio – calendar year

2011
(754.4)

2010
(160.5)

84.8%
15.0%
16.1%

73.6%
15.4%
16.2%

115.9% 105.2%
(1.7)%

(1.7)%

114.2% 103.5%

The underwriting results of the company’s insurance and reinsurance operations in 2011 included 19.3 combined
ratio points ($1,020.8 net of reinstatement premiums) of current period catastrophe losses which primarily
impacted the underwriting results of OdysseyRe ($734.8 in 2011 compared to $217.8 in 2010) and the Insurance
and Reinsurance – Other ($247.7 in 2011 compared to $89.4 in 2010) reporting segment. The underwriting results
in 2010 also included 0.8 of a combined ratio point ($36.8 net of reinstatement premiums) related to the impact
of the Deepwater Horizon loss. Current period catastrophe losses (net of reinstatement premiums) reflected in the
underwriting profit (loss) of the company for the years ended December 31, 2011 and 2010 were comprised as
follows:

2011

2010

Catastrophe
losses(1)
201.7
470.2
62.8
70.0
26.9
26.5
31.3
—
—
131.4

Combined
ratio impact
3.8
8.8
1.2
1.3
0.5
0.5
0.6
—
—
2.6

Catastrophe
losses(1)
—
—
—
—
—
—
—
19.9
137.2
174.3

Combined
ratio impact
—
—
—
—
—
—
—
0.4
3.0
3.9

1,020.8

19.3 points

331.4

7.3 points

Thailand floods
Japan earthquake and tsunami
New Zealand (Christchurch) earthquake
U.S. tornados
Denmark floods
Australian storms and Cyclone Yasi
Hurricane Irene
New Zealand earthquake
Chilean earthquake
Other

(1) Net of reinstatement premiums.

The underwriting results of the company’s insurance and reinsurance operations included 1.7 combined ratio
points ($89.4) of net favourable development of prior years’ reserves in 2011 primarily related to net favourable
development of prior years’ reserves at OdysseyRe, Northbridge, Advent and Fairfax Asia, partially offset by net
adverse development of prior years’ reserves at Crum & Forster and Zenith National. The underwriting results of
the company’s insurance and reinsurance operations included 1.7 combined ratio points ($76.0) of net favourable
development of prior years’ reserves in 2010, primarily related to net favourable development of prior years’
reserves at OdysseyRe, Advent, Fairfax Asia and Northbridge, partially offset by net adverse development of prior
years’ reserves at Zenith National, Crum & Forster and Group Re.

Operating expenses in the consolidated statements of earnings include only the operating expenses of the compa-
ny’s insurance, reinsurance and runoff operations and corporate overhead. The $42.5 increase in 2011 operating
expenses compared to 2010 (after excluding the year-over-year impact of the consolidation of the operating
expenses of Zenith National, First Mercury, Pacific Insurance and GFIC of $85.7, $39.4, $6.4 and $0.8 respectively)
primarily related to non-recurring personnel costs in 2011 at Northbridge, Zenith National and Advent, increased

127

F A I R F A X F I N A N C I A L H O L D I N G S L I M I T E D

Fairfax corporate overhead (principally legal expenses, partially offset by a non-recurring recovery of a corporate
reinsurance recoverable in 2010 which was fully provided for in a prior period), restructuring costs at Northbridge
in connection with its recent announcement to combine three of its operating subsidiaries under a single brand
(Northbridge Insurance) and restructuring costs at Crum & Forster related to the integration of First Mercury,
partially offset by decreased compensation costs at OdysseyRe (consistent with decreased underwriting profit-
ability year-over-year) and at Northbridge (including the year-over-year impact of lower headcount and the
curtailment of certain post retirement benefits) and decreased provisions for uncollectible reinsurance recoverable
balances on paid losses at Runoff.

Other expenses of $740.7 (2010 – $541.0) in 2011 included the operating and other costs of Ridley of $619.7
(2010 – $538.7) and net losses related to repurchases of long term debt of $104.2 (2010 – $2.3). The remaining
other expenses related to William Ashley and Sporting Life.

In 2011, the company reported net earnings attributable to shareholders of Fairfax of $45.1 ($0.31 net loss per
basic and diluted share) compared to net earnings attributable to shareholders of Fairfax of $335.8 ($14.90 per
basic share, $14.82 per diluted share) in 2010. The decrease in net earnings attributable to shareholders of Fairfax
in 2011 compared to 2010 primarily reflected the significant catastrophe losses incurred in 2011 which con-
tributed to the increased underwriting loss year-over-year, the decreased recovery of income taxes, the loss of
$104.2 in 2011 related to the repurchase of Fairfax, Crum & Forster and OdysseyRe unsecured senior notes,
decreased interest and dividend income, increased holding company and subsidiary company corporate overhead
expenses and increased interest expense, partially offset by a significant year-over-year increase in net gains on
investments and an improvement in the operating loss included in the Runoff reporting segment. Net earnings
attributable to shareholders of Fairfax in 2010 also included the non-recurring benefit of the $83.1 excess of the
fair value of net assets acquired over the purchase price recorded by Runoff in 2010 related to the acquisition of
GFIC.

In 2010, the company reported net earnings attributable to shareholders of Fairfax of $335.8 ($14.90 per basic
share, $14.82 per diluted share) compared to $856.8 ($43.99 per basic share, $43.75 per diluted share) under
Canadian GAAP in 2009. The year-over-year decrease in net earnings primarily reflected decreased net gains on
investments, the significant underwriting losses resulting from the Chilean earthquake, the Deepwater Horizon
loss and other attritional catastrophes and increased interest expense, partially offset by the benefit attributable to
the corporate income tax recovery in 2010, the reduction in net earnings attributable to non-controlling interests
following the privatization of Northbridge and OdysseyRe during 2009, the benefit of the $83.1 excess of the fair
value of net assets acquired over the purchase price recorded by Runoff in 2010 related to the acquisition of GFIC,
increased interest and dividend income and the reduced Runoff operating loss.

Common shareholders’ equity decreased in 2011 primarily as a result of the company’s payments of dividends on
its common and preferred shares ($257.4), the actuarial losses on defined benefit plans ($22.5) recognized in
retained earnings and the effect of decreased accumulated other comprehensive income (a decrease of $14.6 in
2011, primarily reflecting a net decrease in foreign currency translation), partially offset by net earnings attribut-
able to shareholders of Fairfax ($45.1). Common shareholders’ equity at December 31, 2011 was $7,427.9 or
$364.55 per basic share compared to $376.33 per basic share at December 31, 2010, representing a decrease per
basic share in 2011 of 3.1% (without adjustment for the $10.00 per common share dividend paid in the first quar-
ter of 2011, or a decrease of 0.4% adjusted to include that dividend). The adoption of IFRS reduced book value per
basic share at December 31, 2010 by $3.13 from book value per basic share of $379.46 previously reported under
Canadian GAAP to $376.33 reported in accordance with IFRS.

128

Net Earnings by Reporting Segment

The company’s sources of net earnings shown by reporting segment are set out below for the years ended
December 31, 2011 and 2010. The intercompany adjustment for gross premiums written eliminates premiums on
reinsurance ceded within the group, primarily to OdysseyRe, nSpire Re and Group Re.

Year ended December 31, 2011

Gross premiums written

Net premiums written

Net premiums earned

Underwriting profit (loss)
Interest and dividends

Operating income (loss) before:
Net gains (losses) on investments
Loss on repurchase of long term debt
Runoff
Other
Interest expense
Corporate overhead and other

Pre-tax income (loss)
Income taxes

Net earnings

Attributable to:

Shareholders of Fairfax
Non-controlling interests

Year ended December 31, 2010

Gross premiums written

Net premiums written

Net premiums earned

Underwriting profit (loss)
Interest and dividends

Operating income (loss) before:
Net gains (losses) on investments
Loss on repurchase of long term debt
Runoff(1)
Other (animal nutrition)
Interest expense
Corporate overhead and other

Pre-tax income (loss)
Income taxes

Net earnings

Attributable to:

Shareholders of Fairfax
Non-controlling interests

Insurance

Reinsurance

Insurance
and
Reinsurance

Northbridge

U.S.
1,322.7 1,864.1

Fairfax
Asia
451.7

OdysseyRe
2,420.7

Ongoing

Other
646.3

Operations Runoff
122.0

6,705.5

Other
–

Inter-
company
(84.0)

Corporate

& Other Consolidated
6,743.5

–

1,098.5 1,601.1

213.7

1,072.2 1,504.6

204.1

(30.2)
100.2

(215.9)
124.9

70.0
(162.0)
–
–
–
–
(38.4)

(91.0)
218.1
(56.5)
–
–
(18.3)
(27.9)

34.4
(13.7)

20.7
(15.6)
–
–
–
–
(5.6)

(130.4)

24.4

(0.5)

2,089.7

2,014.7

(336.0)
259.1

(76.9)
142.0
(6.1)
–
–
(28.9)
(18.4)

11.7

484.6

504.9

(206.7)
47.4

(159.3)
22.1
–
–
–
(4.5)
(4.7)

(146.4)

5,487.6

120.3

5,300.5

126.4

(754.4)
517.9

(236.5)
204.6
(62.6)
–
–
(51.7)
(95.0)

–
–

–
388.1
–
(27.6)
–
(8.9)
–

(241.2)

351.6

–

–
–

–
–
–
–
13.3
(0.7)
–

12.6

–

–
–

–
–
–
–
–
–
–

–

–
–

–
–
(41.6)
–
–
(152.7)
62.6

(131.7)

5,607.9

5,426.9

(754.4)
517.9

(236.5)
592.7
(104.2)
(27.6)
13.3
(214.0)
(32.4)

(8.7)
56.5

47.8

45.1
2.7

47.8

Insurance

Reinsurance

Insurance
and
Reinsurance

Northbridge

U.S.
1,299.9 1,078.3

Fairfax
Asia
353.2

985.0

919.5

157.4

996.6 1,000.1

155.0

(68.3)
126.2

(165.5)
100.9

57.9
94.0
–
–
–
–
(21.4)

(64.6)
(49.2)
–
–
–
(30.8)
(11.4)

16.6
38.8

55.4
(14.2)
–
–
–
–
(2.4)

130.5

(156.0)

38.8

OdysseyRe
2,167.6

1,853.6

1,885.5

95.1
248.5

343.6
(109.7)
–
–
–
(30.5)
(32.7)

170.7

Ongoing

Other
628.0

Operations Runoff
2.5

5,527.0

530.5

536.0

(38.4)
45.0

6.6
70.8
–
–
–
(4.5)
(3.1)

69.8

4,446.0

4,573.2

(160.5)
559.4

398.9
(8.3)
–
–
–
(65.8)
(71.0)

3.0

7.4

–
–

–
120.5
–
15.0
–
(3.2)
–

253.8

132.3

Other
(animal
nutrition)
–

Inter-
company
(166.6)

Corporate

& Other Consolidated
5,362.9

–

–
–

–
–
–
–
10.4
(0.6)
–

9.8

–

–
–

–
–
–
–
–
–
–

–

–
–

–
–
(2.3)
–
–
(125.9)
(116.6)

(244.8)

4,449.0

4,580.6

(160.5)
559.4

398.9
112.2
(2.3)
15.0
10.4
(195.5)
(187.6)

151.1
186.9

338.0

335.8
2.2

338.0

(1) The Runoff segment includes $83.1 of the excess of the fair value of net assets acquired over the purchase price related
to the acquisition of GFIC, as described in note 23 to the company’s consolidated financial statements for the year
ended December 31, 2011.

129

F A I R F A X F I N A N C I A L H O L D I N G S L I M I T E D

Balance Sheets by Reporting Segment

The company’s segmented balance sheets as at December 31, 2011 and 2010 present the assets and liabilities of,
and the capital invested by the company in, each of the company’s major reporting segments. The segmented
balance sheets have been prepared on the following basis:

(a)

(b)

The balance sheet for each segment is on a legal entity basis for the subsidiaries within the segment
(except for nSpire Re in Runoff, which excludes intercompany balances related to U.S. acquisition
financing) and is prepared in accordance with IFRS and Fairfax’s accounting policies. Accordingly, these
segmented balance sheets differ from those published by Crum & Forster, Zenith National and
OdysseyRe primarily due to differences between IFRS and US GAAP. The segmented balance sheets of
Northbridge, Crum & Forster, Zenith National, Fairfax Asia, OdysseyRe, Advent, Polish Re, Runoff and
Other (Ridley) also include purchase accounting adjustments principally related to goodwill and
intangible assets which arose on their initial acquisition or on a subsequent step acquisition by the
company.

Investments in Fairfax affiliates, which are carried at cost, are disclosed in the financial information
accompanying the discussion of the company’s reporting segments. Affiliated insurance and reinsurance
balances, including premiums receivable (included in insurance contracts receivable), deferred premium
acquisition costs, recoverable from reinsurers, funds withheld payable to reinsurers, provision for losses
and loss adjustment expenses and provision for unearned premiums, are not shown separately but are
eliminated in Corporate and Other.

(c) Corporate and Other includes the Fairfax entity and its subsidiary intermediate holding companies as
well as the consolidating and eliminating entries required under IFRS to prepare consolidated financial
statements. The most significant of those entries are derived from the elimination of intercompany
reinsurance (primarily consisting of reinsurance provided by Group Re and reinsurance between
OdysseyRe and the primary insurers), which affects recoverable from reinsurers, provision for losses and
loss adjustment expenses and unearned premiums. Corporate and Other long term debt of $2,241.9 as
at December 31, 2011 ($1,659.9 at December 31, 2010) consisted of Fairfax debt of $2,080.6 ($1,498.1 at
December 31, 2010) and other long term obligations, comprised of the purchase consideration payable
of $152.2 ($158.6 at December 31, 2010) related to the TRG acquisition, TIG trust preferred securities of
$9.1 ($9.1 at December 31, 2010) and includes the elimination of nil ($5.9 at December 31, 2010)
primarily related to the OdysseyRe unsecured senior notes which were owned in Zenith National’s
investment portfolio prior to being acquired by Fairfax (refer to note 15 to the consolidated financial
statements for the year ended December 31, 2011).

130

Segmented Balance Sheet as at December 31, 2011

Insurance

Reinsurance

Insurance
and
Reinsurance

Northbridge

U.S.

Fairfax
Asia

OdysseyRe

Other

Operating
Companies Runoff Other

Corporate

& Other Consolidated

Assets

Holding company cash and investments

14.3

21.1

–

Insurance contract receivables

311.3

391.3

84.7

167.0

701.1

–

202.4

–

191.8

1,680.2

62.2

–

Portfolio investments

3,250.1 5,004.7

809.2

8,099.8

1,609.6

18,773.4 4,299.3

6.6

824.3

(7.0)

386.7

(14.0)

1,026.7

1,735.4

23,466.0

415.9

(1,240.4)

4,198.1

110.2

97.3

21.9

957.4 1,628.1

387.7

62.2

165.1

222.5

635.7

208.2

19.0

153.9

189.4

34.0

133.9

–

29.9

5.1

32.9

–

159.5

969.1

230.1

158.2

6.5

108.9

181.4

41.0

224.4

28.6

16.7

21.6

29.5

71.1

429.9

–

4,166.7 1,271.8

486.0

16.9

–

1,063.0

0.2

46.3

125.3

5.7

260.4

514.6

80.8

–

(341.2)

68.6

214.1

24.1

420.4

286.8

–

(707.2)

628.2

1,115.2

–

821.4

–

5,324.1 8,285.6 1,371.4

10,781.6

2,234.3

27,997.0 6,086.6

267.0

(943.7)

33,406.9

Deferred premium acquisition costs

Recoverable from reinsurers

Deferred income taxes

Goodwill and intangible assets

Due from affiliates

Other assets

Investments in Fairfax affiliates

Total assets

Liabilities

Subsidiary indebtedness

–

Accounts payable and accrued liabilities

239.7

290.0

193.8

Income taxes payable

Short sale and derivative obligations

Due to affiliates

Funds withheld payable to reinsurers

Provision for losses and loss adjustment

–

15.1

0.1

8.0

–

6.4

26.8

10.8

4.8

0.4

318.1

43.7

–

471.7

3.2

81.9

0.7

29.0

–

1.0

–

1.0

119.6

1,314.8

145.3

84.6

111.5

1,656.2

0.1

2.0

3.4

0.1

0.6

92.6

14.1

110.2

31.4

3.3

1.3

4.3

1.6

–

16.5

398.9

24.0

2.4

58.7

(52.2)

(10.3)

21.4

170.2

–

412.6

(1,183.3)

17,232.2

(60.0)

(42.8)

2,487.3

–

expenses

2,820.8 4,301.4

470.3

5,557.2

1,214.5

14,364.2 4,051.3

Provision for unearned premiums

686.0

692.7

187.3

Deferred income taxes

Long term debt

–

26.1

85.0

1.9

–

739.5

–

444.8

216.2

2,521.7

25.6

28.6

–

14.2

622.4

152.7

0.5

2,241.9

3,017.5

Total liabilities

3,769.7 5,746.5

913.0

7,328.0

1,649.1

19,406.3 4,407.8

118.4

1,065.9

24,998.4

Equity

Shareholders’ equity attributable to

shareholders of Fairfax

Non-controlling interests

1,554.4 2,539.1

452.9

3,453.6

585.2

8,585.2 1,678.8

148.6

(2,050.0)

8,362.6

–

5.5

–

5.5

–

40.4

45.9

Total equity

1,554.4 2,539.1

458.4

3,453.6

585.2

8,590.7 1,678.8

148.6

(2,009.6)

8,408.5

Total liabilities and total equity

5,324.1 8,285.6 1,371.4

10,781.6

2,234.3

27,997.0 6,086.6

267.0

(943.7)

33,406.9

Capital

Debt

Investments in Fairfax affiliates

Shareholders’ equity attributable to

shareholders of Fairfax

Non-controlling interests

Total capital

% of total capital

–

85.0

34.0

133.9

–

444.8

181.4

92.6

71.1

622.4

152.7

420.4

286.8

1.5

–

2,241.9

3,018.5

(707.2)

–

1,520.4 2,405.2

452.9

3,272.2

514.1

8,164.8 1,392.0

148.6

(1,342.8)

8,362.6

–

5.5

–

5.5

–

40.4

–

45.9

1,554.4 2,624.1

458.4

3,898.4

677.8

9,213.1 1,831.5

190.5

191.9

11,427.0

13.6% 23.0%

4.0%

34.1%

5.9%

80.6% 16.0% 1.7%

1.7%

100.0%

131

F A I R F A X F I N A N C I A L H O L D I N G S L I M I T E D

Segmented Balance Sheet as at December 31, 2010

Insurance

Reinsurance

Insurance
and
Reinsurance

Northbridge

U.S.

Fairfax
Asia

OdysseyRe

Other

Operating
Companies Runoff

Other
(animal
nutrition)

Corporate

& Other Consolidated

Assets

Holding company cash and investments

36.6

13.5

–

Insurance contract receivables

335.4

294.8

66.8

39.9

571.1

–

90.0

–

131.0

1,399.1

78.9

Portfolio investments

3,301.6 4,491.4

693.2

7,671.4

1,742.1

17,899.7 3,729.4

Deferred premium acquisition costs

125.0

53.9

16.1

Recoverable from reinsurers

1,118.7 1,024.1

278.5

Deferred income taxes

Goodwill and intangible assets

Due from affiliates

Other assets

Investments in Fairfax affiliates

27.0

91.6

233.7

511.1

235.5

–

5.5

1.7

188.5

174.3

28.0

34.8

133.9

–

136.3

808.9

163.3

156.0

192.5

169.0

181.4

50.8

137.3

35.0

18.4

0.1

26.6

72.9

382.1

–

3,367.5 1,285.2

316.9

924.7

429.8

586.4

423.0

71.0

–

17.7

80.4

286.8

–

1.1

–

10.0

21.9

–

158.5

1,450.7

(1.4)

346.0

(25.1)

(895.7)

92.6

2.5

(447.5)

75.7

–

(709.8)

1,540.7

1,476.6

21,976.2

357.0

3,757.0

490.5

949.1

–

901.0

–

Total assets

5,636.8 6,788.6 1,089.8

10,089.8

2,214.2

25,819.2 5,549.4

191.5

(112.0)

31,448.1

Liabilities

Subsidiary indebtedness

–

Accounts payable and accrued liabilities

230.3

193.1

148.2

Income taxes payable

Short sale and derivative obligations

Due to affiliates

–

41.5

–

4.1

3.9

8.6

10.1

–

Funds withheld payable to reinsurers

12.6

266.1

37.9

Provision for losses and loss adjustment

expenses

Provision for unearned premiums

Deferred income taxes

Long term debt

2,936.5 3,562.5

718.7

457.5

–

8.4

344.4

347.6

137.6

2.6

–

318.1

21.5

99.8

–

38.3

5,040.0

662.8

–

485.2

–

72.8

0.4

–

0.5

–

962.5

195.4

30.5

155.5

4.4

2.0

–

354.9

25.3

1,134.9

13,021.5 3,779.2

212.1

2,188.7

27.0

2.2

56.2

0.3

0.2

–

0.3

93.0

11.3

–

922.6

143.8

22.4

0.6

–

49.0

(1.1)

61.2

(4.4)

(17.0)

2.2

1,263.1

31.7

216.9

–

363.2

(751.4)

16,049.3

(94.8)

(33.7)

2,120.9

–

1,659.9

2,726.9

Total liabilities

3,939.6 4,840.0

692.6

6,665.7

1,514.0

17,651.9 4,172.7

81.9

867.7

22,774.2

Equity

Shareholders’ equity attributable

to shareholders of Fairfax

Non-controlling interests

1,697.2 1,948.6

392.4

3,424.1

700.2

8,162.5 1,376.7

109.6

(1,016.2)

8,632.6

–

4.8

–

4.8

–

36.5

41.3

Total equity

1,697.2 1,948.6

397.2

3,424.1

700.2

8,167.3 1,376.7

109.6

(979.7)

8,673.9

Total liabilities and total equity

5,636.8 6,788.6 1,089.8

10,089.8

2,214.2

25,819.2 5,549.4

191.5

(112.0)

31,448.1

Capital

Debt

Investments in Fairfax affiliates

Shareholders’ equity attributable

to shareholders of Fairfax

Non-controlling interests

Total capital

% of total capital

–

344.4

34.8

133.9

–

485.2

181.4

93.0

72.9

922.6

423.0

143.8

286.8

2.8

–

1,659.9

(709.8)

2,729.1

–

1,662.4 1,814.7

392.4

3,242.7

627.3

7,739.5 1,089.9

–

4.8

–

4.8

–

109.6

36.5

(306.4)

8,632.6

–

41.3

1,697.2 2,293.0

397.2

3,909.3

793.2

9,089.9 1,520.5

148.9

643.7

11,403.0

14.9% 20.1%

3.5%

34.3%

7.0%

79.8% 13.3%

1.3%

5.6%

100.0%

132

Components of Net Earnings

Underwriting and Operating Income

Set out and discussed below are the underwriting and operating results of Fairfax’s insurance and reinsurance
operations, Runoff and Other by reporting segment for the years ended December 31, 2011 and 2010.

Canadian Insurance – Northbridge(1)

Underwriting profit (loss)

Loss & LAE – accident year
Commissions
Underwriting expenses

Combined ratio – accident year

Net favourable development

Combined ratio – calendar year

Gross premiums written

Net premiums written

Net premiums earned

Underwriting profit (loss)
Interest and dividends

Operating income
Net gains (losses) on investments

Pre-tax income (loss) before interest and other

Net earnings (loss)

2011
(30.2)

2010
(68.3)

72.3%
14.5%
19.7%

73.8%
11.9%
21.3%

106.5%
(3.7)%

107.0%
(0.1)%

102.8%

106.9%

1,322.7

1,299.9

1,098.5

1,072.2

(30.2)
100.2

70.0
(162.0)

985.0

996.6

(68.3)
126.2

57.9
94.0

(92.0)

151.9

(86.8)

106.1

(1) The results differ from the standalone results of Northbridge primarily due to purchase accounting adjustments related

to the privatization of Northbridge in 2009.

Underwriting results in 2011 improved relative to the underwriting results in 2010, with Northbridge reporting an
underwriting loss of $30.2 and a combined ratio of 102.8% in 2011 compared to an underwriting loss of $68.3
and a combined ratio of 106.9% in 2010. Underwriting results in 2011 generally reflected the continuation of
intense price competition within the Canadian commercial
lines market where Northbridge competes,
moderately higher levels of catastrophe losses comparable with those experienced in 2010 and increased net
commission expenses, partially offset by lower operating expenses. Northbridge’s underwriting results in 2011
included 3.7 combined ratio points ($39.6) of net favourable development of prior years’ reserves in its large
account, direct agent small-to-mid market and transportation segments, partially offset by net adverse
development of prior years’ reserves in its broker small-to-mid market segment. The 2010 underwriting results
included 0.1 of a combined ratio point ($1.2) of net favourable development of prior years’ reserves, primarily
attributable to net favourable development in Northbridge’s large account, direct agent small-to-mid market and
transportation segments, partially offset by net adverse development of prior years’ reserves in its broker
small-to-mid market segment primarily attributable to pre-1990 liability claims reserves and increased provisions
for uncollectable reinsurance recoverable and increased claims reserves on certain discontinued business.
Northbridge’s underwriting results in 2011 included 2.6 combined ratio points ($28.2) of current year catastrophe
losses primarily related to the Slave Lake fire in Alberta, U.S. weather-related events and various Ontario and
Quebec storms. Underwriting results in 2010 included 2.1 combined ratio points ($21.0) of current year
catastrophe losses primarily related to the effects of the Goderich, Ontario tornado, flooding in the south and
central United States, hailstorms in western Canada and the effects of Hurricane Igor. Northbridge’s expense ratio
(excluding commissions) in 2011 improved year-over-year (19.7% in 2011, compared to 21.3% in 2010), largely
due to lower general and administrative expenses and reduced employee compensation costs (including the year-
over-year impact of lower headcount) and the curtailment of certain post retirement benefits. Northbridge’s

133

F A I R F A X F I N A N C I A L H O L D I N G S L I M I T E D

commission expense ratio of 14.5% in 2011 increased from 11.9% in 2010 primarily due to a non-recurring
adjustment related to deferred policy acquisition costs, and the reduction in ceding commissions which resulted
from the unearned premium portfolio transfer discussed below.

The full year impact in 2011 of underwriting actions undertaken by Northbridge including rate increases on
renewal business and the non-renewal of unprofitable business, coupled with competitive pressures and industry-
wide excess capacity within the Canadian commercial lines market, contributed to a year-over-year decline in
gross premiums written of 2.3% (in Canadian dollar terms), despite nominal improvements in levels of new busi-
ness, retentions of existing business and pricing experienced in the latter part of the year. Net premiums written
increased by 7.1% (in Canadian dollar terms) in 2011 primarily as a result of an unearned premium portfolio
transfer to reflect a reduction in participation by Group Re on a quota share reinsurance contract (participation
decreased from 20% to 10% effective January 1, 2011) that resulted in the return to Northbridge of $42.3 of
unearned premium which had previously been ceded to Group Re. Excluding the effect of the unearned premium
portfolio transfer, Northbridge’s net premiums written increased by 3.0% (in Canadian dollar terms) relative to
2010, principally as a result of the reduced quota share cessions to Group Re, partially offset by the challenging
industry conditions described above. In 2011, net premiums earned increased by 3.3% (in Canadian dollar terms)
relative to 2010, primarily due to reduced ongoing participation on the Group Re quota share reinsurance con-
tract and the earning of premiums from the unearned premium portfolio transfer, partially offset by the challeng-
ing industry conditions described above.

In June 2011, Northbridge announced the planned combination of three of its subsidiaries, Lombard Insurance,
Markel Insurance and Commonwealth Insurance, to operate under a single brand, Northbridge Insurance. This
new brand will be comprised of Northbridge’s broker small-to-medium account, transportation, and large account
segments, and is intended to leverage the scale and diversity of its operations as one company. Federated
Insurance will continue to operate as the company’s captive agency distribution arm and Zenith will continue to
operate its direct personal lines business. In 2011, Northbridge incurred $18.4 in non-recurring restructuring
charges, which were recorded in subsidiary corporate overhead and other expenses. Also included in subsidiary
corporate overhead and other expenses for 2011 was a non-recurring expense related to personnel costs.

The impact of the significant year-over-year decrease in net gains on investments (as set out in the table below)
and decreased interest and dividend income (principally related to increased year-over-year holdings of cash and
short term investments and lower yielding common stocks and increased investment expenses incurred in con-
nection with total return swaps), partially offset by the decreased underwriting loss year-over-year produced a
pre-tax loss before interest and other of $92.0 in 2011 compared to pre-tax income before interest and other of
$151.9 in 2010.

Common stocks and equity derivatives (excluding equity hedges)
Equity hedges
Bonds
Preferred stocks
CPI-linked derivatives
Foreign currency
Other

Net gains (losses) on investments

2011

2010
(215.6) 126.5
41.7 (129.5)
133.6
50.8
4.1
(5.9)
(4.7)
(50.0)
(35.6)
20.4
(0.4)
(3.4)

(162.0)

94.0

Northbridge’s cash resources, excluding the impact of foreign currency translation, increased by $230.5 in 2011
compared to a decrease of $1.4 in 2010. Cash provided by operating activities was $139.2 in 2011, compared to
$42.9 of net cash used in operating activities in 2010 (excluding operating cash flow activity related to securities
recorded as at FVTPL), with the year-over-year improvement primarily attributable to lower income tax payments
and amounts received from the aforementioned change in quota share reinsurance contract.

Northbridge’s average annual return on average equity over the past 26 years since inception in 1985 was 14.6%
at December 31, 2011 (15.4% at December 31, 2010) (expressed in Canadian dollars).

134

Set out below are the balance sheets (in U.S. dollars) for Northbridge as at December 31, 2011 and 2010.

2011(1)

2010(1)

Assets
Holding company cash and investments
Insurance contract receivables
Portfolio investments
Deferred premium acquisition costs
Recoverable from reinsurers
Deferred income taxes
Goodwill and intangible assets
Due from affiliates
Other assets
Investment in Fairfax affiliates

Total assets

Liabilities
Accounts payable and accrued liabilities
Short sale and derivative obligations
Due to affiliates
Funds withheld payable to reinsurers
Provision for losses and loss adjustment expenses
Provision for unearned premiums

Total liabilities

Total equity

Total liabilities and total equity

14.3
311.3

36.6
335.4
3,250.1 3,301.6
110.2
125.0
957.4 1,118.7
27.0
233.7
235.5
188.5
34.8

62.2
222.5
208.2
153.9
34.0

5,324.1 5,636.8

239.7
15.1
0.1
8.0

230.3
41.5
–
12.6
2,820.8 2,936.5
718.7

686.0

3,769.7 3,939.6

1,554.4 1,697.2

5,324.1 5,636.8

(1) These balance sheets differ from the standalone balance sheets of Northbridge primarily due to purchase accounting
adjustments (principally goodwill and intangible assets) related to the privatization of Northbridge in 2009. Excluding
these purchase accounting adjustments, Northbridge’s total equity was $1,386.2 at December 31, 2011 ($1,520.2 at
December 31, 2010).

Northbridge’s balance sheet in U.S. dollars (including Fairfax-level purchase accounting adjustments) as at
December 31, 2011 compared to December 31, 2010 reflected the currency translation effect of the appreciation
of the U.S. dollar relative to the Canadian dollar (2011 year-end exchange rate of 0.9821 compared to 1.0064 at
the end of 2010). Portfolio investments decreased in 2011 relative to 2010 principally as a result of net unrealized
depreciation of investments (primarily common stocks) and the effect of foreign currency translation (portfolio
investments in Canadian dollars increased slightly year-over-year), partially offset by cash provided by operating
activities. Recoverable from reinsurers decreased in 2011 on a year-over-year basis primarily as a result of a reduc-
tion in participation by Group Re on a quota share reinsurance contract and the effect of foreign currency trans-
lation. The provision for losses and loss adjustment expenses decreased in 2011 relative to 2010 primarily as a
result of the effect of foreign currency translation, the effect of net favourable development of prior years’
reserves, and the reduced year-over-year business volumes following underwriting actions taken by Northbridge
including rate increases on renewal business and the non-renewal of unprofitable business, coupled with com-
petitive pressures within the Canadian commercial lines market. Total equity decreased in 2011 by $142.8 com-
pared to 2010, primarily reflecting the net loss of $86.8, decreased accumulated other comprehensive income
(primarily as a result of unrealized foreign currency translation losses due to the appreciation of the U.S. dollar
relative to the Canadian dollar) and the reduction of retained earnings due to actuarial losses arising during the
year on pension and post retirement benefit plans.

135

F A I R F A X F I N A N C I A L H O L D I N G S L I M I T E D

Northbridge’s investment in Fairfax affiliates as at December 31, 2011 consisted of:

Affiliate
Ridley

U.S. Insurance

% interest
31.8

Underwriting profit (loss)

Loss & LAE – accident year
Commissions
Underwriting expenses

Combined ratio – accident year

Net adverse development

2011

2010

Crum &
Forster
(79.7)

Zenith
National(1)
(136.2)

Total
(215.9)

Crum &
Forster
(67.5)

Zenith
National(1)
(98.0)

Total
(165.5)

71.6%
12.3%
20.3%

104.2%
3.7%

78.0%
10.1%
34.5%

73.7%
11.5%
25.0%

72.8%
12.1%
22.8%

80.2%
9.9%
37.2%

74.7%
11.5%
26.7%

122.6% 110.2%
4.1%

4.9%

107.7%
1.5%

127.3% 112.9%
3.6%

9.1%

Combined ratio – calendar year

107.9%

127.5% 114.3%

109.2%

136.4% 116.5%

Gross premiums written

1,327.7

536.4

1,864.1

Net premiums written

1,076.9

524.2

1,601.1

Net premiums earned

1,008.8

495.8

1,504.6

Underwriting profit (loss)
Interest and dividends

Operating income (loss)
Net gains (losses) on investments
Loss on repurchase of long term debt

Pre-tax income (loss) before interest

and other

Net earnings (loss)

(79.7)
76.8

(2.9)
40.5
(56.5)

(18.9)

(1.8)

(136.2)
48.1

(215.9)
124.9

(88.1)
177.6
–

(91.0)
218.1
(56.5)

89.5

54.3

70.6

52.5

886.0

733.4

731.2

(67.5)
71.1

3.6
(26.1)
–

(22.5)

(15.6)

192.3

1,078.3

186.1

919.5

268.9

1,000.1

(98.0)
29.8

(68.2)
(23.1)
–

(165.5)
100.9

(64.6)
(49.2)
–

(91.3)

(113.8)

(58.5)

(74.1)

(1) These results differ from those published by Zenith National primarily due to differences between IFRS and US GAAP,
intercompany investment transactions and acquisition accounting adjustments recorded by Fairfax related to the
acquisition of Zenith National in 2010.

On December 31, 2011, Crum & Forster entered into a reinsurance agreement (the “Reinsurance Agreement”)
pursuant to which Runoff (Clearwater Insurance) effectively reinsured 100% of Crum & Forster’s net latent
exposures through the cession to US Runoff of substantially all of Crum & Forster’s liabilities for asbestos,
environmental and other latent claims arising from policies with effective dates on or prior to December 31, 1998
exclusive of workers’ compensation and surety related liabilities. Pursuant to the Reinsurance Agreement, Crum &
Forster transferred net insurance liabilities of $334.5 to Runoff and Runoff received $334.5 of cash and invest-
ments as consideration from Crum & Forster for assuming those liabilities. In its assessment of the 2011 perform-
ance of Crum & Forster and Runoff, the company’s management does not consider the initial effects of the
Reinsurance Agreement and accordingly, the tables above which set out the operating results of Crum & Forster
do not give effect to this transaction. Had the Reinsurance Agreement been reflected in the tables above, net
premiums written and net premiums earned would have decreased by $334.5 and ceded losses on claims would
have increased by $334.5 with the result that Crum & Forster’s underwriting profit would be unchanged in 2011.
The 2011 balance sheet for Crum & Forster includes a decrease in portfolio investments of $334.5 and an increase
in recoverable from reinsurers of $334.5 in connection with this transaction. The transfer of these latent claims to
Runoff is expected to significantly reduce the volatility of the operating income of Crum & Forster in future peri-
ods and may reduce interest and dividend income earned as a result of the transfer of cash and investments to
Runoff.

136

On February 9, 2011, the company completed the acquisition of First Mercury. First Mercury underwrites specialty
commercial insurance products, principally on an excess and surplus lines basis, focusing on niche and under-
served segments. The assets, liabilities and results of operations of First Mercury since acquisition were con-
solidated within the Crum & Forster operating segment. As of July 1, 2011, the company has presented the assets,
liabilities and results of operations of Valiant Insurance Company (“Valiant Insurance”), a wholly-owned sub-
sidiary of First Mercury, in the Runoff reporting segment following the transfer of ownership of Valiant Insurance
from Crum & Forster to TIG Group. Subsequent to July 1, 2011, the insurance business of Valiant Insurance was
carried on by Crum & Forster with the pre-July 1, 2011 business written by Valiant Insurance placed into runoff
under the supervision of RiverStone management. Periods prior to July 1, 2011 have not been restated as the
impact was not significant. On May 20, 2010, the company completed the acquisition of Zenith National. The
assets, liabilities and results of operations of Zenith National since acquisition were included in the Insurance –
U.S. reporting segment (formerly known as the U.S. Insurance – Crum & Forster reporting segment prior to
May 20, 2010). For each of the acquisitions described above, the company acquired all of the outstanding com-
mon shares of the acquiree other than those common shares already owned by Fairfax and its affiliates.

The integration of Crum & Forster and First Mercury is proceeding on schedule including the combination of the
excess and surplus lines casualty and professional liability lines of each company. First Mercury’s property busi-
ness has been merged into Crum & Forster’s Seneca division. During the third quarter of 2011, Crum & Forster
launched AMC/Fairmont Insurance Services – a single brand under which First Mercury’s specialty petroleum
business was integrated with Fairmont Specialty. Subsequent to the acquisition of First Mercury, Crum & Forster’s
businesses include standard lines which is primarily comprised of workers’ compensation, commercial auto and
general liability coverages written on an admitted basis through Crum & Forster’s branch network and specialty
lines which primarily includes the First Mercury excess and surplus lines casualty business, Fairmont Specialty
businesses referenced above as well as accident and health, niche business written by Seneca, professional liability,
and other specialty products.

Crum & Forster

Crum & Forster’s underwriting loss of $79.7 and combined ratio of 107.9% in 2011, compared to an underwriting
loss of $67.5 and a combined ratio of 109.2% in 2010, generally reflected the continuation in 2011 of the impact
of the weak U.S. economy and the continuing challenging conditions in commercial lines markets. The under-
writing results of Crum & Forster in 2011 included 3.7 combined ratio points ($37.3) of net adverse development
of prior years’ reserves, primarily related to workers’ compensation and latent liability reserves, partially offset by
a reduction in the provision for uncollectible reinsurance recoverables, compared to the underwriting results in
2010 which included 1.5 combined ratio points ($11.3) of net adverse development of prior years’ reserves,
principally related to general liability and workers’ compensation lines for recent accident years and reserve
strengthening related to two large prior year claims in general liability and surety lines, partially offset by net
favourable emergence in umbrella lines and a reduction in unallocated loss adjustment expense reserves. Crum &
Forster’s underwriting results in 2011 also included the underwriting profit of First Mercury of $1.9 (combined
ratio of 99.1%) since its acquisition on February 9, 2011. Catastrophe losses of $9.9 (primarily related to the
impact of the U.S. tornados and Hurricane Irene on the U.S. northeast and the impact of the Japan earthquake
and tsunami and second New Zealand (Christchurch) earthquake on First Mercury) added 0.9 of a combined ratio
point to the underwriting results in 2011 compared to $3.2 of catastrophe losses (0.4 of a combined ratio point)
included in the 2010 underwriting results (primarily related to winter storm activity in the U.S. northeast).
Crum & Forster’s expense ratio (excluding commissions and the impact related to the consolidation of First Mer-
cury) improved to 21.2% in 2011 compared to 22.8% in 2010, primarily as a result of a 9.9% increase in net pre-
miums earned relative to a marginal increase in underwriting operating expenses.

First Mercury’s underwriting profit of $1.9 and combined ratio of 99.1% for the period of February 9, 2011 to
December 31, 2011 included $3.8 of catastrophe losses, primarily related to the Japan earthquake and tsunami.
Excluding catastrophe losses, First Mercury would have reported an underwriting profit of $5.7 and a combined
ratio of 97.2%.

U.S. commercial lines market conditions continued to reflect industry-wide excess capacity and pricing weakness in
property and casualty lines affecting both renewals and new business. Despite challenging market conditions,
Crum & Forster’s focus on growing its specialty businesses resulted in year-over-year increases of 15.3% and 14.4%
in gross premiums written and net premiums written respectively in 2011 (excluding $306.0 and $237.8 of gross
premiums written and net premiums written by First Mercury in 2011 respectively). Growth in Crum & Forster’s

137

F A I R F A X F I N A N C I A L H O L D I N G S L I M I T E D

specialty lines of business (primarily at its Seneca and AMC/Fairmont divisions including its accident and health
line of business) increased gross premiums written by $135.1 or 24.8% in 2011 (excluding gross premiums written
by First Mercury) compared to 2010. Gross premiums written in 2011 in Crum & Forster’s standard lines business
also increased by $18.2 or 6.1% year-over-year, principally as a result of an improvement in opportunities to write
and retain business at higher rates within its commercial lines and risk management profit centres (principally
workers’ compensation). Net premiums earned increased by 9.9% in 2011 (excluding net premiums earned by First
Mercury of $205.4) compared to 2010, consistent with the growth in net premiums written experienced in 2011.

Interest and dividend income increased in 2011 to $76.8 from $71.1 in 2010 (primarily as a result of decreased
interest expense on funds withheld payable to reinsurers and increased interest and dividends earned on a larger
average investment portfolio on a year-over-year basis as a result of the consolidation of First Mercury). The
combination of the loss incurred on the repurchase of a portion of Crum & Forster’s unsecured senior notes
(discussed below) and the increased underwriting loss, partially offset by the year-over-year increase in net gains
on investments (as set out in the table below) and increased interest and dividend income produced a pre-tax loss
before interest and other of $18.9 in 2011 compared to a pre-tax loss before interest and other of $22.5 in 2010.

Common stocks and equity derivatives (excluding equity hedges)
Equity hedges
Bonds
Preferred stocks
CPI-linked derivatives
Credit default swaps
Gain on disposition of associate
Other

2011

2010
(196.6) 133.9
69.7 (258.6)
52.5
(4.7)
7.8
3.1
39.2
0.7

195.5
(0.1)
(39.0)
9.5
–
1.5

Net gains (losses) on investments

40.5

(26.1)

Crum & Forster’s cash resources, excluding the impact of foreign currency translation, decreased by $152.6 in
2011 compared to an increase of $196.1 in 2010. Cash used in operating activities was $15.4 in 2011, compared to
$183.5 in 2010 (excluding operating cash flow activity related to securities recorded as at FVTPL), with the year-
over-year improvement primarily attributable to lower net paid losses and higher premium collections.

Crum & Forster paid dividends to Fairfax of $104.0 and $486.0 (including an extraordinary dividend of $350.0) in
2011 and 2010, respectively.

Crum & Forster’s net loss for the year ended December 31, 2011 produced a loss on average equity of 0.2% (1.4%
loss on average equity for the year ended December 31, 2010). Crum & Forster’s cumulative net earnings since
acquisition on August 13, 1998 have been $1,573.2, and its annual return on average equity since acquisition has
been 11.4% (12.3% at December 31, 2010).

Zenith National

Zenith National reported an underwriting loss of $136.2 and a combined ratio of 127.5% in 2011, compared to an
underwriting loss of $98.0 and a combined ratio of 136.4% in the period from May 21 (date of acquisition) through
December 31 of 2010. The underwriting results in 2011 included $24.5 (4.9 combined ratio points) of net adverse
development of prior years’ reserves, primarily as a result of increased paid loss cost trends for recent accident years
(moderated to some extent by an increased number of claim settlements) and increased frequency of late reported
indemnity claims related to the 2010 accident year. The underwriting results in the period from May 21 through
December 31 of 2010 included $24.4 (9.1 combined ratio points) of net adverse development of prior years’ reserves,
primarily reflecting the increased severity in claims cost trends experienced during 2010. Net premiums earned during
2011 increased year-over-year by 15.8%, reflecting Zenith National’s ability to write new business and retain existing
customers at higher prices as the economic and competitive environment continues to change for workers’
compensation business. The calculation of the year-over-year growth in net premiums earned of 15.8% in 2011
includes the portion of the period in 2010 prior to the acquisition by Fairfax which is not reflected in the tables
above. Underwriting losses are primarily the result of fixed operating expenses in relation to Zenith National’s
premium volume. The expense ratio in 2011 has decreased year-over-year reflecting the increase in net premiums
earned in 2011 compared to 2010.

138

Net gains on investments of $177.6 (as set out in the table below) and interest and dividend income of $48.1,
partially offset by the underwriting loss of $136.2, produced pre-tax income before interest and other of $89.5 in
2011. During the period from May 21 through December 31 of 2010, net losses on investments of $23.1 (as set
out in the table below) and interest and dividend income of $29.8, partially offset the underwriting loss of $98.0
which produced a pre-tax loss before interest and other of $91.3.

Common stocks, limited partnerships and equity derivatives (excluding equity hedges)
Equity hedges
Bonds
Preferred stocks
Other

2011
(35.4)
9.7

2010
5.9
–
206.0 (35.4)
4.1
2.3

(2.8)
0.1

Net gains (losses) on investments

177.6 (23.1)

At December 31, 2011, Zenith National had cash and cash equivalents of $16.7. Cash provided by operating activ-
ities was $5.0 in 2011, compared to cash used in operating activities of $61.4 for the period May 21 through
December 31 of 2010 (excluding cash flow activity related to securities recorded as at FVTPL).

Zenith National paid dividends to Fairfax and its affiliates of $40.0 and $282.9 in 2011 and 2010, respectively.

Set out below are the balance sheets for U.S. Insurance as at December 31, 2011 and 2010.

2011

2010

Crum &
Forster

Zenith
National(1)

Crum &
Forster

Zenith
National(1)

Total

1.6
226.7
3,303.4
93.2
1,430.2
165.1
155.3
19.0
116.1
133.9

4.1

19.5
164.6

21.1
391.3
1,701.3 5,004.7
97.3
197.9 1,628.1
165.1
635.7
19.0
189.4
133.9

–
480.4
–
73.3
–

1.4
158.0
2,920.3
49.6
803.2
91.6
22.8
–
76.7
133.9

4.3

12.1
136.8

13.5
294.8
1,571.1 4,491.4
53.9
220.9 1,024.1
91.6
511.1
–
174.3
133.9

–
488.3
–
97.6
–

Total assets

5,644.5

2,641.1 8,285.6

4,257.5

2,531.1 6,788.6

234.3
4.3
26.8
318.0
3,079.2
501.7
–
47.0

55.7
2.1
–
0.1

290.0
6.4
26.8
318.1
1,222.2 4,301.4
692.7
26.1
85.0

191.0
26.1
38.0

135.2
4.1
2.6
266.1
2,389.1
295.8
–
306.4

57.9
–
1.3
–

193.1
4.1
3.9
266.1
1,173.4 3,562.5
457.5
8.4
344.4

161.7
8.4
38.0

Total liabilities

Total equity

4,211.3

1,535.2 5,746.5

3,399.3

1,440.7 4,840.0

1,433.2

1,105.9 2,539.1

858.2

1,090.4 1,948.6

Total liabilities and total equity

5,644.5

2,641.1 8,285.6

4,257.5

2,531.1 6,788.6

(1) These balance sheets differ from those published by Zenith National, primarily due to differences between IFRS and
US GAAP and acquisition accounting adjustments (principally goodwill and intangible assets) which arose on the
acquisition of Zenith National in 2010. Excluding these acquisition accounting adjustments, Zenith National’s IFRS
total equity was $707.5 at December 31, 2011 ($687.2 at December 31, 2010).

139

F A I R F A X F I N A N C I A L H O L D I N G S L I M I T E D

Significant changes to the U.S. Insurance balance sheet as at December 31, 2011 as compared to December 31, 2010
primarily reflected the acquisition of First Mercury by Fairfax which was subsequently contributed to Crum &
Forster and the impact of the Reinsurance Agreement with Runoff (Clearwater Insurance). Portfolio investments at
Crum & Forster increased in 2011 relative to 2010 principally as a result of the consolidation of First Mercury’s
portfolio investments of $822.3 and net realized and unrealized appreciation of bonds (principally U.S. treasury
and U.S. state and municipal bonds), partially offset by $334.5 of consideration paid to Runoff related to the
transfer of Crum & Forster’s net latent exposures pursuant to the Reinsurance Agreement, net unrealized
depreciation of common stocks and $104.0 of dividends paid to Fairfax. The increase in recoverable from reinsurers
at Crum & Forster in 2011 on a year-over-year basis primarily related to the impact of the Reinsurance Agreement
($334.5) and the consolidation of First Mercury’s recoverable from reinsurers ($252.3). The increase in goodwill and
intangible assets in 2011 compared to 2010 primarily reflected $79.5 and $54.7 of goodwill and intangible assets
respectively acquired in connection with First Mercury. The consolidation of First Mercury by Crum & Forster was
the principal factor which caused funds withheld payable to reinsurers, provision for losses and loss adjustment
expenses and provision for unearned premiums to increase in 2011 relative to 2010. Total equity at Crum & Forster
increased by $575.0 in 2011 compared to 2010 primarily reflecting the contribution by Fairfax of First Mercury to
Crum & Forster ($294.3) and capital contributions from Fairfax to fund the repayment of First Mercury’s short term
debt ($31.3) and to fund the repurchase of $323.8 aggregate principal amount of Crum & Forster’s unsecured senior
notes due 2017 ($359.3), partially offset by the aforementioned dividends paid of $104.0. Long term debt decreased
in 2011 relative to 2010 following the repurchase by Crum & Forster of $323.8 aggregate principal amount of its
unsecured senior notes due 2017, partially offset by the consolidation of First Mercury’s trust preferred securities
net of subsequent redemptions and repurchases of those securities.

Portfolio investments at Zenith National increased in 2011 relative to 2010 principally as a result of net realized
and unrealized appreciation of bonds (principally U.S. treasury and U.S. state and municipal bonds), partially offset
by net unrealized depreciation of common stocks. The increase in provision for losses and loss adjustment expenses
at Zenith National in 2011 compared to 2010 reflected higher year-over-year business volumes as a result of growth
in new business and increased retention rates at higher prices. Total equity at Zenith National increased by $15.5 in
2011 compared to 2010 primarily as a result of net earnings of $54.3, partially offset by dividends paid to Fairfax
and its affiliates of $40.0.

Crum & Forster’s investments in Fairfax affiliates as at December 31, 2011 consisted of:

Affiliate
TRG Holdings
Advent
OdysseyRe
Zenith National

Asian Insurance – Fairfax Asia

Underwriting profit

Loss & LAE – accident year
Commissions
Underwriting expenses

Combined ratio – accident year

Net favourable development

Combined ratio – calendar year

Gross premiums written

Net premiums written

Net premiums earned

Underwriting profit
Interest and dividends

Operating income
Net gains (losses) on investments

Pre-tax income before interest and other

Net earnings (loss)

140

% interest
1.4
14.8
9.8
2.0

2011
34.4

2010
16.6

81.6%
2.3%
9.3%

84.0%
1.4%
10.3%

93.2%
95.7%
(10.0)% (6.4)%

83.2%

89.3%

451.7

213.7

204.1

34.4
(13.7)

20.7
(15.6)

5.1

(6.9)

353.2

157.4

155.0

16.6
38.8

55.4
(14.2)

41.2

34.8

Fairfax Asia comprises the company’s Asian holdings and operations: Singapore-based First Capital Insurance
Limited, Hong Kong-based Falcon Insurance Limited, 40.5%-owned Bangkok-based Falcon Insurance Public
Company Limited and a 26% equity-accounted interest in Mumbai-based ICICI Lombard General Insurance
Company Limited, India’s largest (by market share) private general insurer (the remaining 74% interest is held by
ICICI Bank, India’s second largest commercial bank). On March 24, 2011, the company completed the acquisition
of Pacific Insurance. Pacific Insurance underwrites all classes of general insurance and medical insurance in
Malaysia. The assets, liabilities and results of operations of Pacific Insurance since acquisition were included in the
Insurance – Fairfax Asia reporting segment.

Underwriting results for Fairfax Asia in 2011 featured an underwriting profit of $34.4 and a combined ratio of
83.2%, compared to an underwriting profit of $16.6 and a combined ratio of 89.3% in 2010, with 2011 reflecting
combined ratios of 73.2%, 99.7% and 95.3% for First Capital, Falcon and Pacific Insurance respectively. Gross
premiums written, net premiums written and net premiums earned increased by 13.2% 13.6% and 12.1% during
2011 respectively (excluding gross premiums written, net premiums written and net premiums earned by Pacific
Insurance of $51.9, $34.9 and $30.4 respectively) primarily as a result of increased writings of professional
indemnity, commercial automobile and property business and the favourable effect of foreign currency trans-
lation at First Capital and increased business volume in commercial automobile and general liability lines of
business at Falcon. The 2011 underwriting results included 10.0 combined ratio points ($20.4) of net favourable
development of prior years’ reserves primarily attributable to net favourable emergence related to commercial
automobile, marine hull and workers’ compensation claims (compared to 6.4 combined ratio points ($10.0) of net
favourable development of prior years’ reserves in 2010, primarily related to net favourable emergence related to
workers’ compensation claims).

Interest and dividend income in 2011 included the company’s share of the loss of ICICI Lombard of $36.1
(compared to the company’s share of the profit of ICICI Lombard of $19.5 in 2010). The company’s share of the
loss of ICICI Lombard in 2011 primarily resulted from reserve strengthening related to ICICI Lombard’s man-
datory pro-rata participation in the Indian commercial vehicle insurance pool. Fairfax Asia’s interest and dividend
income excluding its share of the profit and loss of associates increased to $21.9 in 2011 from $16.6 in 2010
primarily as a result of increased interest and dividends earned on a larger average investment portfolio as a result
of the consolidation of Pacific Insurance. The year-over-year decrease in interest and dividend income and the
increased net losses on investments (as set out in the table below), partially offset by increased underwriting prof-
it, produced pre-tax income before interest and other of $5.1 in 2011 compared to pre-tax income before interest
and other of $41.2 in 2010.

Common stocks and equity derivatives (excluding equity hedges)
Equity hedges
Bonds
Preferred stocks
Foreign currency
Other

Net gains (losses) on investments

2011
(16.2)

2010
3.8
8.3 (12.6)
4.6
(12.9)
1.2
1.7
3.8 (11.7)
–
0.2

(15.6)

(14.2)

As at December 31, 2011, the company had invested a total of $107.9 to acquire and maintain its 26% interest in
ICICI Lombard and carried this investment at $67.1 using the equity method of accounting (fair value of $230.4
as disclosed in note 6 to the consolidated financial statements for the year ended December 31, 2011). The
company’s investment in ICICI Lombard is included in portfolio investments in the Fairfax Asia balance sheet
that follows.

During the nine month period ended December 31, 2011, ICICI Lombard’s gross premiums written increased in
Indian rupees by 25.2% over the comparable 2010 period, with a combined ratio of 101.0% on an Indian GAAP
basis. The Indian property and casualty insurance industry experienced increasingly competitive market con-
ditions in 2011 as recent new entrants continue to increase their market share. With a 9.7% market share,
4,140 employees and 308 offices across India, ICICI Lombard is India’s largest (by market share) private general
insurer. Please see its website (www.icicilombard.com) for further details of its operations.

141

F A I R F A X F I N A N C I A L H O L D I N G S L I M I T E D

Set out below are the balance sheets for Fairfax Asia as at December 31, 2011 and 2010:

Assets
Insurance contract receivables
Portfolio investments
Deferred premium acquisition costs
Recoverable from reinsurers
Goodwill and intangible assets
Due from affiliates
Other assets

Total assets

Liabilities
Accounts payable and accrued liabilities
Income taxes payable
Short sale and derivative obligations
Due to affiliates
Funds withheld payable to reinsurers
Provision for losses and loss adjustment expenses
Provision for unearned premiums
Deferred income taxes

Total liabilities

Total equity

Total liabilities and total equity

2011

2010

84.7
809.2
21.9
387.7
29.9
5.1
32.9

66.8
693.2
16.1
278.5
5.5
1.7
28.0

1,371.4 1,089.8

193.8
10.8
4.8
0.4
43.7
470.3
187.3
1.9

148.2
8.6
10.1
–
37.9
347.6
137.6
2.6

913.0

692.6

458.4

397.2

1,371.4 1,089.8

Significant changes to the Fairfax Asia balance sheet as at December 31, 2011 compared to December 31, 2010,
primarily reflected the acquisition of 100% of Pacific Insurance which added $81.2, $43.6, $53.0 and $38.0 to
portfolio investments, recoverable from reinsurers, provision for losses and loss adjustment expenses and provi-
sion for unearned premiums respectively with the remainder of the increases in those balances primarily related
to growth in year-over-year business volumes in commercial automobile, professional indemnity, property and
general liability lines of business, partially offset by the modest effect of foreign currency translation at First Capi-
tal reflecting the appreciation of the U.S. dollar relative to the Singapore dollar. The increase in goodwill and
intangible assets in 2011 compared to 2010 primarily reflected $25.5 of goodwill acquired in connection with
Pacific Insurance. Total equity at Fairfax Asia increased by $61.2 in 2011 compared to 2010 primarily reflecting
capital contributions from Fairfax to fund the acquisition of Pacific Insurance ($71.5) and the participation in an
ICICI Lombard rights offering ($19.8), partially offset by decreased accumulated other comprehensive income
(primarily as a result of unrealized foreign currency translation losses related to ICICI Lombard and First Capital
due to the appreciation of the U.S. dollar relative to the Indian Rupee and Singapore dollar respectively) and the
net loss of $6.9.

142

Reinsurance – OdysseyRe(1)

Underwriting profit (loss)

Loss & LAE – accident year
Commissions
Underwriting expenses

Combined ratio – accident year

Net favourable development

Combined ratio – calendar year

Gross premiums written

Net premiums written

Net premiums earned

Underwriting profit (loss)
Interest and dividends

Operating income (loss)
Net gains (losses) on investments
Loss on repurchase of long term debt

Pre-tax income before interest and other

Net earnings

2011
(336.0)

92.6%
17.4%
9.3%

119.3%
(2.6)%

2010
95.1

70.0%
18.4%
10.2%

98.6%
(3.6)%

116.7%

95.0%

2,420.7

2,167.6

2,089.7

1,853.6

2,014.7

1,885.5

(336.0)
259.1

(76.9)
142.0
(6.1)

59.0

14.3

95.1
248.5

343.6
(109.7)
–

233.9

171.1

(1) These results differ from those published by Odyssey Re Holdings Corp. primarily due to differences between IFRS and
US GAAP and purchase accounting adjustments (principally goodwill and intangible assets) recorded by Fairfax related
to the privatization of OdysseyRe on October 27, 2009.

As of January 1, 2011, the company has presented the assets, liabilities and results of operations of Clearwater
Insurance in the Runoff reporting segment following the transfer of ownership of Clearwater Insurance from
OdysseyRe to TIG Group. Prior period comparative figures have been presented on a consistent basis to give effect
to the transfer as of January 1, 2010. Clearwater Insurance is an insurance company which has been in runoff
since 1999.

OdysseyRe reported an underwriting loss of $336.0 and a combined ratio of 116.7% in 2011, compared to an
underwriting profit of $95.1 and a combined ratio of 95.0% in 2010. The underwriting loss primarily resulted
from the significant levels of current period catastrophe losses experienced in 2011 which added 36.7 combined
ratio points ($734.8 net of reinstatement premiums) compared to current period catastrophe losses incurred in
2010 which added 11.6 combined ratio points ($217.8 net of reinstatement premiums) as set out in the table
below. The combined ratio in 2010 also included 1.6 combined ratio points ($30.7 net of reinstatement pre-
miums) related to the Deepwater Horizon loss. The 2011 underwriting results included 2.6 combined ratio points
($51.4) attributable to net favourable development of prior years’ reserves at each of OdysseyRe’s divisions,
particularly in the Americas division which reported net favourable emergence on prior years’ catastrophe loss
reserves and in the U.S. Insurance division which reported net favourable emergence on the loss reserves of its
healthcare and financial products lines of business. The 2010 underwriting results included 3.6 combined ratio
points ($68.0) attributable to net favourable development of prior years’ reserves at each of OdysseyRe’s divisions,
particularly in the U.S. Insurance division which reported net favourable emergence on the loss reserves of its
healthcare line of business and in the London Market division which reported net favourable development on its
casualty line of business. OdysseyRe’s expense ratio (excluding commissions) decreased modestly (9.3% in 2011
compared to 10.2% in 2010) primarily as a result of reduced compensation expenses (consistent with decreased
underwriting profitability year-over-year) and lower legal expenses in 2011 compared to 2010 and also reflected
the benefit of the year-over-year increase of 6.9% in net premiums earned. OdysseyRe’s commission expense ratio
of 17.4% in 2011 (compared to 18.4% in 2010), reflected decreased commission rates paid on the crop insurance

143

F A I R F A X F I N A N C I A L H O L D I N G S L I M I T E D

business and the benefit of $27.7 ($4.4 in 2010) of reinstatement premiums earned which do not attract commis-
sions.

Japan earthquake and tsunami
Thailand floods
New Zealand (Christchurch) earthquake
U.S. tornados
Denmark floods
Hurricane Irene
Australian storms and Cyclone Yasi
New Zealand earthquake
Chilean earthquake
Windstorm Xynthia
Other

(1) Net of reinstatement premiums.

2011

2010

Catastrophe
losses(1)
381.1
150.0
28.1
26.3
16.5
17.9
7.0
–
–
–
107.9

Combined
ratio impact
18.9
7.4
1.4
1.3
0.8
0.9
0.3
–
–
–
5.7

Catastrophe
losses(1)
–
–
–
–
–
–
–
15.4
86.5
14.4
101.5

Combined
ratio impact
–
–
–
–
–
–
–
0.8
4.6
0.8
5.4

734.8

36.7 points

217.8

11.6 points

Gross premiums written in 2011 increased by 11.7% to $2,420.7 from $2,167.6 in 2010 and included increases of
21.7%, 12.8% (10.7% excluding the favourable impact of foreign currency translation), 6.0%, and 6.3% in the US
Insurance, EuroAsia, Americas and London Market divisions, respectively. Net premiums written of $2,089.7 in
2011 increased 12.7% from $1,853.6 in 2010 reflecting increased writings year-over-year across many of Odys-
seyRe’s lines of business (including property, crop, marine and tribal lines of business), reinstatement premiums
related to the Japan earthquake and tsunami and the impact of the timing of the renewal of certain professional
liability policies, partially offset by the cancellation of certain insurance business where rates were considered
inadequate and planned reductions in writings of casualty treaty lines of business. Net premiums earned during
2011 increased year-over-year by 6.9% as a result of the timing of the earnings of net premiums written during
2011.

Interest and dividend income in 2011 increased by $10.6 or 4.3% in 2011 compared to 2010, primarily as a result
of increased interest and dividends earned on a larger average investment portfolio year-over-year and increased
share of profit of associates, partially offset by increased investment expenses incurred in connection with total
return swaps. The year-over-year deterioration in underwriting profitability and the loss of $6.1 related to the
repurchase of a portion of OdysseyRe’s unsecured senior notes (described below), partially offset by increased net
gains on investments (as set out in the table below) and a modest year-over-year increase in interest and dividend
income, produced pre-tax income before interest and other of $59.0 in 2011 compared to pre-tax income before
interest and other of $233.9 in 2010.

Common stocks and equity derivatives (excluding equity hedges)
Equity hedges
Bonds
Preferred stocks
CPI-linked derivatives
Foreign currency
Gain on disposition of associate
Other

Net gains (losses) on investments

144

2011

2010
(251.1) 253.0
151.2 (327.9)
1.1
416.7
(6.4)
(0.6)
19.8
(120.0)
(63.9)
(52.7)
18.7
–
(4.1)
(1.5)

142.0 (109.7)

OdysseyRe’s cash resources, excluding the impact of foreign currency translation, decreased by $559.1 in 2011
compared to an increase of $147.9 in 2010. Cash provided by operating activities was $163.8 in 2011, compared
to $92.2 in 2010 (excluding operating cash flow activity related to securities recorded as at FVTPL), with the year-
over-year change primarily attributable to increased premium writings and a decrease in taxes paid in 2011.

Set out below are the balance sheets for OdysseyRe as at December 31, 2011 and 2010:

Total assets

Total liabilities

Total equity

Total liabilities and total equity

2011(1)

2010(1)

167.0
701.1
8,099.8
159.5
969.1
230.1
158.2
6.5
108.9
181.4

39.9
571.1
7,671.4
136.3
808.9
163.3
156.0
192.5
169.0
181.4

10,781.6 10,089.8

471.7
3.2
81.9
0.7
29.0
5,557.2
739.5
444.8

318.1
21.5
99.8
–
38.3
5,040.0
662.8
485.2

7,328.0

6,665.7

3,453.6

3,424.1

10,781.6 10,089.8

(1) These balance sheets differ from those published by Odyssey Re Holdings Corp. primarily due to differences between
IFRS and US GAAP and purchase accounting adjustments (principally goodwill and intangible assets) which arose on
the privatization of OdysseyRe. Excluding these purchase accounting adjustments, OdysseyRe’s IFRS total equity was
$3,344.6 at December 31, 2011 ($3,315.2 at December 31, 2010).

Changes to the balance sheet of OdysseyRe as at December 31, 2011 compared to December 31, 2010 reflected the
effect of the appreciation of the U.S. dollar relative to the principal currencies in which OdysseyRe’s divisions
conduct significant business (the Euro, the Canadian dollar and the British pound sterling). The increases to
insurance contract receivables (primarily related to premiums receivable), recoverable from reinsurers, provision
for losses and loss adjustment expenses and provision for unearned premiums in 2011 relative to 2010 principally
related to increased year-over-year business volumes resulting from growth across many of OdysseyRe’s lines of
business including property, crop, marine and tribal lines of business. Portfolio investments increased in 2011
relative to 2010 principally as a result of net unrealized appreciation of bonds (principally U.S. treasury and U.S.
state and municipal bonds) and cash provided by operating activities, partially offset by net unrealized deprecia-
tion of common stocks. The increase in recoverable from reinsurers in 2011 on a year-over-year basis reflects
losses ceded to reinsurers principally related to the Japan earthquake and tsunami. Deferred income taxes
increased in 2011 on a year-over-year basis primarily as a result of foreign tax credits which are available to reduce
U.S. income taxes payable in future periods and increased net unrealized losses on investments. Due from affili-
ates of $6.5 in 2011 decreased from $192.5 in 2010 primarily as a result of repayments made by Fairfax on an
intercompany revolving line of credit with OdysseyRe including cash repaid to OdysseyRe to fund its repurchase

145

F A I R F A X F I N A N C I A L H O L D I N G S L I M I T E D

of $42.1 aggregate principal amount of its unsecured senior notes due 2013. The increase in accounts payable and
accrued liabilities in 2011 compared to 2010 reflects OdysseyRe’s obligation to reimburse the government agency
responsible for managing crop insurance in the U.S. for crop losses it paid on behalf of OdysseyRe. The provision
for loss and loss adjustment expenses increased in 2011 relative to 2010 principally as a result of the significant
catastrophe losses incurred by OdysseyRe during 2011, primarily related to the Japan earthquake and tsunami, the
Thailand floods and the New Zealand (Christchurch) earthquake, partially offset by the effects of foreign currency
translation (principally related to claims liabilities denominated in the British pound sterling and the Euro). Long
term debt decreased in 2011 relative to 2010 following the repurchase by OdysseyRe of $42.1 aggregate principal
amount (inclusive of $6.2 principal amount owned by Zenith National) of its unsecured senior notes due 2013.
Total equity at OdysseyRe increased by $29.5 in 2011 compared to 2010 primarily as a result of increased accumu-
lated other comprehensive income (primarily as a result of $16.6 of unrealized foreign currency translation gains
arising on OdysseyRe’s non-U.S. dollar functional currency foreign operations) and net earnings of $14.3.

OdysseyRe’s investments in Fairfax affiliates as at December 31, 2011 consisted of:

Affiliate
Fairfax Asia
Advent
Zenith National

Insurance and Reinsurance – Other

% interest
17.4
18.3
6.2

Group Re

Advent

Polish Re

Fairfax
Brasil

Inter-
company

2011

Underwriting profit (loss)

(88.2)

(100.7)

(7.3)

(10.5)

Loss & LAE – accident year

Commissions

Underwriting expenses

118.7%

131.3%

23.2%

1.6%

23.4%

19.0%

73.3%

19.2%

82.8%

(7.9)%

7.9%

120.1%

Combined ratio – accident year

143.5%

173.7%

100.4%

195.0%

Net (favourable) adverse development

(3.7)% (20.5)%

8.4%

2.6%

Combined ratio – calendar year

139.8%

153.2%

108.8%

197.6%

–

Total

(206.7)

115.2%

21.9%

11.7%

148.8%

(7.9)%

140.9%

Gross premiums written

Net premiums written

Net premiums earned

Underwriting profit (loss)

Interest and dividends

Operating income (loss)

Net gains (losses) on investments

184.5

326.1

105.2

102.8

(72.3)

646.3

180.7

193.9

221.7

189.3

(88.2)

23.4

(64.8)

(45.9)

(100.7)

18.1

(82.6)

55.8

87.7

83.1

(7.3)

4.0

(3.3)

9.3

6.0

4.6

22.3

10.8

(10.5)

1.9

(8.6)

2.9

(5.7)

(7.2)

–

484.6

504.9

(206.7)

47.4

(159.3)

22.1

(137.2)

(145.2)

Pre-tax income (loss) before interest and other

(110.7)

(26.8)

Net earnings (loss)

(111.6)

(31.0)

146

Group Re

Advent(1)

Polish Re

Fairfax
Brasil

Inter-
company

2010

Underwriting profit (loss)

(8.2)

(18.0)

(3.0)

(9.2)

Loss & LAE – accident year

Commissions

Underwriting expenses

Combined ratio – accident year

Net (favourable) adverse development

72.8%

24.8%

1.6%

99.2%

4.1%

89.7%

22.9%

15.5%

79.7%

17.0%

8.1%

128.1%

(19.7)%

104.8%

(0.4)%

Combined ratio – calendar year

103.3%

108.4%

104.4%

–

Total

(38.4)

80.6%

23.0%

9.6%

113.2%

(6.0)%

107.2%

Gross premiums written

Net premiums written

Net premiums earned

Underwriting profit (loss)

Interest and dividends

Operating income (loss)

Net gains (losses) on investments

Pre-tax income (loss) before interest and other

Net earnings (loss)

243.3

250.8

(8.2)

24.4

16.2

72.4

88.6

88.3

318.9

214.3

214.8

(18.0)

16.7

(1.3)

(6.7)

(8.0)

(10.7)

81.7

68.2

69.6

(3.0)

3.0

–

0.2

1.4

35.0

(50.9)

628.0

4.7

0.8

(9.2)

0.9

(8.3)

4.9

(3.4)

(4.6)

–

530.5

536.0

(38.4)

45.0

6.6

70.8

77.4

74.4

In March 2010, the company’s, wholly-owned insurer, Fairfax Brasil commenced writing commercial property
and casualty insurance in Brazil. CRC Re (formerly CRC (Bermuda) prior to its redomestication to Barbados effec-
tive January 4, 2011) and Wentworth may participate in certain of the reinsurance programs of Fairfax’s sub-
sidiaries, by quota share or through participation in those subsidiaries’ third party reinsurance programs on the
same terms and pricing as the third party reinsurers, consistent with the company’s objective of retaining more
business for its own account during periods of favourable market conditions. That participation and, since 2004,
certain third party business of CRC Re and Wentworth is reported as “Group Re”. Group Re’s activities are man-
aged by Fairfax. Group Re’s cumulative pre-tax income, since its inception in 2002 to 2011 inclusive and includ-
ing business derived from Fairfax subsidiaries and third party insurers and reinsurers, was $129.0.

In 2011, the Insurance and Reinsurance – Other segment produced a combined ratio of 140.9% and an under-
writing loss of $206.7, compared to a combined ratio of 107.2% and an underwriting loss of $38.4 in 2010. Cur-
rent period catastrophe losses totaled 49.1 combined ratio points ($247.7) in 2011 compared to 16.7 combined
ratio points ($89.4) in 2010 as set out in the table below. The 2010 underwriting results also included 1.1 com-
bined ratio points ($6.1) related to the Deepwater Horizon loss. The 2011 underwriting results included 7.9 com-
bined ratio points ($39.7) of net favourable development of prior years’ reserves, principally at Advent ($38.9)
related to net favourable development across most lines of business and at Group Re ($8.2) related to reserve
releases across a number of cedants, partially offset by net adverse development of prior years’ reserves at Polish
Re ($7.0) in its commercial automobile line of business. The 2010 underwriting results included 6.0 combined
ratio points ($32.4) of net favourable development of prior years’ reserves, comprising net favourable develop-
ment at Advent ($42.4 – principally related to the World Trade Center claims) and at Polish Re, partially offset by
net adverse development at Group Re.

147

F A I R F A X F I N A N C I A L H O L D I N G S L I M I T E D

The following table sets out the impact of current period catastrophe losses on the underwriting results of the
Insurance and Reinsurance – Other segment, which principally affected the property catastrophe businesses of
Advent and Group Re for the years ended December 31, 2011 and 2010:

Thailand floods
Japan earthquake and tsunami
New Zealand (Christchurch) earthquake
U.S. tornados
Australian storms and Cyclone Yasi
Denmark floods
Hurricane Irene
New Zealand earthquake
Chilean earthquake
Other

(1) Net of reinstatement premiums.

2011

2010

Catastrophe
losses(1)
51.5
87.1
34.5
32.5
19.5
10.4
6.7
–
–
5.5

Combined
ratio impact
10.0
16.9
6.9
5.7
3.8
2.0
1.2
–
–
2.6

Catastrophe
losses(1)
–
–
–
–
–
–
–
4.6
50.7
34.1

Combined
ratio impact
–
–
–
–
–
–
–
0.8
9.4
6.5

247.7

49.1 points

89.4

16.7 points

Gross premiums written by the Insurance and Reinsurance – Other segment increased by $18.3 or 2.9% in 2011
compared to 2010 with increases reported at Fairfax Brasil, Polish Re and Advent, partially offset by decreased
gross premiums written by Group Re. Increased gross premiums written by Fairfax Brasil remained consistent with
its business plan. Gross premiums written in 2011 by Polish Re increased by $23.5 or 28.8% on a year-over-year
basis as a result of increased premium volumes in the central and eastern European regions primarily in property
and commercial automobile lines of business. Gross premiums written by Group Re decreased by $58.8 or 24.2%
in 2011 primarily as a result of an unearned premium portfolio transfer due to a reduction in participation by
Group Re on a quota share reinsurance contract (from 20% to 10% effective from January 1, 2011) that resulted in
the return to Northbridge of $42.3 of unearned premium which had previously been ceded to Group Re. Advent’s
gross premiums written in 2011 increased by $37.3 or 12.9% on a year-over-year basis (after adjusting for the
reinsurance-to-close premiums ($30.1) received in 2010 which did not recur in 2011) primarily as a result of
reinstatement premiums received in connection with certain of the catastrophe losses experienced in 2011, parti-
ally offset by the non-renewal of certain insurance business where rates were considered inadequate. In addition
to the factors which affected gross premiums written as discussed above, net premiums written and net premiums
earned by the Insurance and Reinsurance – Other segment in 2011 reflected reinstatement premiums paid by
Advent in connection with certain of the catastrophe losses experienced in 2011 and the cost of purchasing excess
of loss reinsurance protection for the start-up operations of Fairfax Brasil.

The year-over-year deterioration in underwriting profitability, decreased net gains on investments (as set out in
the table below) and stable interest and dividend income, produced a pre-tax loss before interest and other of
$137.2 in 2011 compared to pre-tax income before interest and other of $77.4 in 2010.

Common stocks and equity derivatives (excluding equity hedges)
Equity hedges
Bonds
Preferred stocks
CPI-linked derivatives
Foreign currency
Gain on disposition of associate
Other

Net gains (losses) on investments

148

2011 2010
(60.7) 52.0
(2.4)
24.2
0.9
(3.1)
(3.5)
2.1
0.6

1.9
79.9
(0.8)
(9.8)
(0.5)
7.0
5.1

22.1

70.8

Set out below are the balance sheets for Insurance and Reinsurance – Other as at December 31, 2011 and 2010.

Assets

Insurance contract receivables

Portfolio investments

Deferred premium acquisition costs

Recoverable from reinsurers

Deferred income taxes

Goodwill and intangible assets

Due from affiliates

Other assets

Investments in Fairfax affiliates

Total assets

Liabilities

2011

2010

Group Re Advent Polish Re

Fairfax
Brasil

Inter-
company

Total

Group Re Advent Polish Re

Fairfax
Brasil

Inter-
company

Total

39.9

118.4

14.9

828.7

584.2

134.2

16.9

12.2

6.4

57.4

62.5

7.1

(38.8)

191.8

19.8

93.6

12.0

– 1,609.6

967.5 582.5

139.3

(1.6)

41.0

30.5

12.7

5.9

18.1

52.8

2.1

(12.5)

131.0

– 1,742.1

(0.4)

50.8

0.2

247.7

20.1

77.9 (121.5)

224.4

0.4 149.7

18.0

29.8

(60.6)

137.3

–

10.6

8.7

71.1

28.6

4.3

11.0

12.6

–

12.1

–

7.1

–

0.3

–

1.1

–

28.6

16.7

21.6

29.5

71.1

–

34.8

4.3

–

5.8

16.5

72.9

–

0.1

13.9

0.1

3.8

–

0.1

0.2

–

0.5

–

35.0

18.4

0.1

26.6

72.9

976.1 1,019.0

194.8 206.3 (161.9) 2,234.3

1,096.9 894.1

193.1 103.6

(73.5) 2,214.2

Accounts payable and accrued liabilities

0.8

44.2

2.7

70.4

1.5

119.6

Income taxes payable

Short sale and derivative obligations

Due to affiliates

Funds withheld payable to reinsurers

Provision for losses and loss adjustment

expenses

Provision for unearned premiums

Deferred income taxes

Long term debt

Total liabilities

Total equity

–

2.0

0.1

34.2

567.5

634.3

70.3

69.6

–

92.6

–

0.6

2.2

90.4

25.0

0.6

–

0.1

–

2.7

–

(36.3)

0.1

2.0

3.4

0.1

0.3

0.2

–

0.5

37.1

–

18.4

32.1 (109.8) 1,214.5

550.1 535.2

68.6

(17.3)

216.2

112.4

60.7

–

0.6

92.6

–

93.0

2.5

0.2

–

86.2

23.3

0.3

–

31.6

1.3

–

(18.4)

72.8

0.4

–

0.5

–

8.8

(45.4) 1,134.9

26.7

(11.0)

212.1

–

0.3

93.0

638.6

877.0

121.5 173.9 (161.9) 1,649.1

663.5 744.4

112.5

67.1

(73.5) 1,514.0

337.5

142.0

73.3

32.4

–

585.2

433.4 149.7

80.6

36.5

–

700.2

Total liabilities and total equity

976.1 1,019.0

194.8 206.3 (161.9) 2,234.3

1,096.9 894.1

193.1 103.6

(73.5) 2,214.2

Significant changes to the Insurance and Reinsurance – Other balance sheet as at December 31, 2011 compared to
December 31, 2010 primarily reflected the planned growth of the assets and liabilities of Fairfax Brasil. Portfolio
investments at Group Re decreased and remained relatively flat at Advent in 2011 relative to 2010 as a result of
cash used in operating activities primarily to fund payments related to the significant catastrophes losses incurred
and net unrealized depreciation related to common stocks, partially offset by net unrealized appreciation related
to bonds (primarily U.S. treasury and U.S. state bonds at Advent). The year-over-year increase in recoverable from
reinsurers in 2011 primarily reflected losses ceded to reinsurers by Advent principally related to the Japan
earthquake and tsunami and the New Zealand (Christchurch) earthquake. The effects in 2011 on the provision for
losses and loss adjustment expenses of net favourable development of prior years’ reserves (principally at Advent
and Group Re) were more than offset by the increase to the provision for losses and loss adjustment expenses
related to the significant catastrophe losses incurred by Advent and Wentworth during 2011, primarily related to
the Japan earthquake and tsunami, the New Zealand (Christchurch) earthquake and the Thailand floods and also
included losses recoverable from CRC Re under a quota share contract and consequently, CRC Re’s provision for
losses and loss adjustment expenses also increased. Total equity of the Insurance and Reinsurance – Other
segment decreased by $115.0 in 2011 compared to 2010 primarily as a result of the net loss of $145.2, partially
offset by capital contributions from Fairfax to support the capital adequacy of Advent ($24.0) and Wentworth
($20.0) and to fund growth at Fairfax Brasil ($10.0).

Insurance and Reinsurance – Other’s investments in Fairfax affiliates as at December 31, 2011 consisted of:

Affiliate
Northbridge
Advent
Ridley

% interest
1.5
15.9
26.0

149

F A I R F A X F I N A N C I A L H O L D I N G S L I M I T E D

Runoff

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 runoff management expertise and experienced per-
sonnel of TRG and TRG’s wholly-owned insurance subsidiary in runoff, International Insurance Company (“IIC”).
The Runoff segment currently consists of two groups: the U.S. Runoff group, consisting of TIG Insurance Com-
pany (the company resulting from the December 2002 merger of TIG Insurance Company and IIC), the Fairmont
legal entities placed in runoff on January 1, 2006, GFIC since August 17, 2010, Clearwater Insurance since Jan-
uary 1, 2011 and Valiant Insurance since July 1, 2011, and the European Runoff group, consisting of RiverStone
Insurance (UK), nSpire Re, Syndicate 3500 and Syndicate 2112 (since October 1, 2010). Both groups are managed
by the dedicated RiverStone runoff management operation which has 237 employees in the U.S. and the U.K.

On July 1, 2011, the company reclassified the assets, liabilities and results of operations of Valiant Insurance, a
wholly-owned subsidiary of First Mercury, from the U.S. Insurance reporting segment to the Runoff reporting
segment following the transfer of ownership of Valiant Insurance from Crum & Forster to the TIG Group. Periods
prior to July 1, 2011 have not been restated as the impact was not significant.

On January 1, 2011, the company reclassified the assets, liabilities and results of operations of Clearwater Insurance
from the Reinsurance – OdysseyRe reporting segment to the Runoff reporting segment following the transfer of
ownership of Clearwater Insurance from OdysseyRe to the TIG Group. Prior period comparative figures were
restated to give effect to this transfer as of January 1, 2010. Clearwater Insurance is an insurance company which
has been in runoff since 1999.

On January 1, 2011, the company’s runoff Syndicate 3500 (managed by RiverStone (UK)) accepted the
reinsurance-to-close of all of the liabilities of Syndicate 376. This reinsurance-to-close transaction (effectively a loss
reserve portfolio transfer) resulted in the receipt by Syndicate 3500 of $114.8 of cash and investments and $4.8 of
other assets (primarily consisting of net insurance contract receivables) as consideration (reported as premiums in
the table below) for the assumption of net loss reserves of $119.6 (reported as losses on claims in the table below).
Prior to January 1, 2011, Syndicate 376 was unrelated to Fairfax and its affiliates.

On August 17, 2010, the company commenced consolidating the assets, liabilities and results of operations of GFIC
within the Runoff reporting segment following the completion of the acquisition of all of the outstanding
common shares of GFIC.

On December 31, 2011, Crum & Forster entered into a reinsurance agreement (the “Reinsurance Agreement”)
pursuant to which Runoff (Clearwater Insurance) effectively reinsured 100% of Crum & Forster’s net latent
exposures through the cession to US Runoff of substantially all of Crum & Forster’s liabilities for asbestos,
environmental and other latent claims arising from policies with effective dates on or prior to December 31, 1998
exclusive of workers’ compensation and surety related liabilities. Pursuant to the Reinsurance Agreement, Crum &
Forster transferred net insurance liabilities of $334.5 to Runoff and Runoff received $334.5 of cash and
investments as consideration from Crum & Forster for assuming those liabilities. In its assessment of the 2011
performance of Crum & Forster and Runoff, the company’s management does not consider the initial effects of
the Reinsurance Agreement and accordingly, the accompanying tables which set out the operating results of
Runoff do not give effect to this transaction. Had the Reinsurance Agreement been reflected in the tables below,
gross premiums written, net premiums written and net premiums earned would have increased by $334.5 and
losses on claims would have increased by $334.5 with the result that Runoff’s operating loss would be unchanged
in the year ended December 31, 2011. The 2011 balance sheet for Runoff at December 31, 2011 includes increased
portfolio investments of $334.5 and increased losses and loss adjustment expense of $334.5 in connection with
this transaction.

150

Set out below is a summary of the operating results of Runoff for the years ended December 31, 2011 and 2010.

Gross premiums written
Net premiums written
Net premiums earned
Losses on claims
Operating expenses
Interest and dividends
Operating loss
Net gains (losses) on investments

Excess of fair value of net assets acquired over purchase price
Pre-tax income before interest and other

2011
122.0
120.3
126.4
(178.0)
(85.9)
109.9
(27.6)
388.1
360.5
–
360.5

2010
2.5
3.0
7.4
(109.2)
(81.6)
115.3
(68.1)
120.5
52.4
83.1
135.5

The Runoff segment pre-tax income before interest of $360.5 in 2011 (compared to pre-tax income before interest
of $135.5 in 2010), primarily reflected a year-over-year increase in net gains on investments and a decreased oper-
ating loss of $27.6 (compared to an operating loss of $68.1 in 2010), partially offset by the benefit of the $83.1
excess of the fair value of net assets acquired over the purchase price recorded by Runoff in 2010 related to the
acquisition of GFIC. The decreased year-over-year operating loss in 2011 principally reflected lower losses on
claims (after adjusting for $119.6 of losses on claims related to the reinsurance-to-close of Syndicate 376 as
described above), partially offset by a modest increase in operating expenses and decreased interest and dividends.
The increase in operating expenses ($85.9 in 2011 compared to $81.6 in 2010) primarily reflected the inclusion of
the operating expenses of Valiant Insurance, Clearwater Insurance and Syndicate 376 in the Runoff reporting
segment (as described above) and the year-over-year impact of the consolidation of the operating costs of GFIC,
partially offset by a release of provisions for uncollectible reinsurance recoverable balances on paid losses ($7.7).
Losses on claims of $178.0 in 2011 primarily reflected incurred losses of $126.2 in US Runoff (principally related
to net strengthening of workers’ compensation and asbestos reserves), $119.6 of net loss reserves assumed by
European Runoff in connection with the reinsurance-to-close of Syndicate 376, partially offset by net favourable
development of $67.8 of prior years’ reserves in European Runoff (primarily related to net favourable emergence
of $59.0 across all lines at European Runoff and an $8.8 decrease in provisions for uncollectible reinsurance
recoverable balances). Losses on claims of $109.2 in 2010 was primarily impacted by incurred losses of $141.7 in
US Runoff (principally related to net strengthening of workers’ compensation and asbestos reserves), partially
offset by net favourable development of $32.5 of prior years’ reserves in European Runoff (principally related to
$29.8 of net favourable development across all lines and net releases of unallocated loss adjustment expense
reserves of $9.7, partially offset by $13.3 of increases to provisions for uncollectible reinsurance recoverable
balances). Interest and dividends decreased to $109.9 in 2011 from $115.3 in 2010 primarily as a result of the
receipt of a non-recurring dividend on a common stock in 2010, the year-over-year decrease in Runoff’s share of
profit of associates and increased expenses incurred in connection with total return swaps (the equity hedges were
included as a hedge of US Runoff’s equity exposure effective from June 2011), partially offset by interest and divi-
dends earned on the larger year-over-year average investment portfolio as a result of the Runoff acquisitions and
reinsurance-to-close transactions discussed above. Net gains on investments in 2011 and 2010 were comprised as
set out in the table below.

Common stocks and equity derivatives (excluding equity hedges)
Equity hedges
Bonds
CPI-linked and other derivatives
Foreign currency
Gains on sale of TIG Indemnity Company (described in note 23)
Gain on disposition of associate
Other

Net gains (losses) on investments

151

Year ended December 31,

2011
(3.6)
12.9
393.8
(14.6)
(4.5)
–
–
4.1

388.1

2010
117.9
(11.3)
(38.4)
27.8
(1.6)
7.5
19.5
(0.9)

120.5

F A I R F A X F I N A N C I A L H O L D I N G S L I M I T E D

Runoff cash flow may be volatile as to timing and amounts, with potential variability arising principally from the
requirement to pay gross claims initially while third party reinsurance is only collected subsequently in accord-
ance with its terms and from the delay, until some time after claims are paid, of the release of assets pledged to
secure the payment of those claims. During 2011 and 2010, Runoff did not require cash flow funding from Fair-
fax. Based upon Runoff’s projected plans and absent adverse developments, it is expected that in the future Run-
off will not require any cash flow funding from Fairfax that would be significant in relation to holding company
cash resources. Runoff paid dividends to Fairfax of $125.0 (2010 – nil) during 2011.

Set out below are the balance sheets for Runoff as at December 31, 2011 and 2010.

2011

2010

Assets
Insurance contract receivables
Portfolio investments
Recoverable from reinsurers
Deferred income taxes
Goodwill and intangible assets
Due from affiliates
Other assets
Investments in Fairfax affiliates

Total assets

Total liabilities

Total equity

Total liabilities and total equity

62.2
4,299.3
1,271.8
16.9
0.2
80.8
68.6
286.8

6,086.6

145.3
3.3
1.3
4.3
24.0
4,051.3
25.6
152.7

4,407.8

1,678.8

6,086.6

78.9
3,729.4
1,285.2
71.0
–
17.7
80.4
286.8

5,549.4

195.4
2.0
–
–
25.3
3,779.2
27.0
143.8

4,172.7

1,376.7

5,549.4

The balance sheet for the Runoff segment represents the sum of individual entity balance sheets even though the
individual entities are not necessarily a part of the same ownership structure. The European Runoff balance sheet
excludes approximately $0.9 billion of capital of nSpire Re related to the acquisition financing of the U.S.
insurance and reinsurance companies. At December 31, 2011, the presentation of the Runoff deferred tax asset
changed to present only the operating losses and temporary differences where it is probable that they will be uti-
lized in the future by the runoff operations. In prior years, the Runoff deferred tax asset included operating losses
of U.S. Runoff which had been used by other Fairfax subsidiaries within the U.S. consolidated tax group (these tax
losses are eliminated in the preparation of the company’s consolidated balance sheet). Management believes that
the presentation adopted in 2011 better reflects the total equity of Runoff. The 2010 comparative Runoff balance
sheet has been revised to reflect this change in presentation. Significant changes to the 2011 balance sheet of the
Runoff segment compared to 2010 primarily reflected the impact of the Reinsurance Agreement wherein Clear-
water Insurance agreed to reinsure substantially all of Crum & Forster’s net latent exposures, the acquisition of
Valiant Insurance from Crum & Forster and the reinsurance-to-close of Syndicate 376 (collectively “the
acquisitions”). The acquisitions increased portfolio investments, provision for losses and loss adjustment expenses
and recoverable from reinsurers by $486.4, $602.7 and $217.0 respectively at December 31, 2011 compared to
December 31, 2010.

152

Prior to giving effect to the acquisitions, portfolio investments increased by $83.5 in 2011 compared to 2010
primarily as a result of net realized and unrealized appreciation of bonds (primarily U.S. treasury and U.S. state
and municipal bonds), partially offset by cash used in operating activities. Approximately $634.3 and $264.6 of
the total $4,299.3 of portfolio investments held at December 31, 2011 by U.S. Runoff and European Runoff,
respectively, were pledged in the ordinary course of carrying on their business, to support insurance and
reinsurance obligations. Prior to giving effect to the acquisitions, recoverable from reinsurers decreased by $230.4
in 2011 compared to 2010, primarily as a result of the continued progress by Runoff in collecting and commuting
its remaining reinsurance recoverable balances. At December 31, 2011, recoverable from reinsurers included
recoverables related to asbestos and pollution claims of $440.4 primarily at TIG and Clearwater Insurance. The
deferred income tax asset decreased by $54.1 in 2011 compared to 2010 primarily as a result of increased net
unrealized investment gains and changes in other temporary differences. Prior to giving effect to the acquisitions,
the provision for loss and loss adjustment expenses decreased by $330.6 in 2011 compared to 2010 reflecting the
continued progress by Runoff in settling its remaining claims. The long term debt of $152.7 relates to TIG’s
acquisition of GFIC as described in note 23 to the consolidated financial statements for the year ended
December 31, 2011. Total equity of the Runoff segment increased by $302.1 in 2011 compared to 2010 primarily
as a result of net earnings and a capital contribution of $50.0 from Fairfax in the form of a promissory note made
to U.S. Runoff to support the capital adequacy of Clearwater Insurance, partially offset by $125.0 of dividends
paid to Fairfax.

Runoff’s investments in Fairfax affiliates as at December 31, 2011 consist of:

Affiliate
OdysseyRe
Advent
TRG Holdings

Other(1)

Revenue
Expenses

Pre-tax income before interest
Interest expense

Pre-tax income

% interest
21.2
17.5
21.0

2011
649.8
(636.5)

2010
549.1
(538.7)

13.3
(0.7)

12.6

10.4
(0.6)

9.8

(1) These results differ from those published by Ridley Inc. primarily due to purchase accounting adjustments related to the
acquisition of Ridley and the inclusion of the results of operations of William Ashley and Sporting Life since their
respective acquisition dates of August 16, 2011 and December 22, 2011.

The Other reporting segment is comprised of the results of operations of Ridley, William Ashley and Sporting Life.
Ridley is one of North America’s leading animal nutrition companies and operates in the U.S. and Canada. Wil-
liam Ashley (a prestige retailer of exclusive tableware and gifts in Canada) and Sporting Life (a Canadian retailer
of sporting goods and sports apparel) were included in the Other reporting segment since their respective acquis-
ition dates of August 16, 2011 and December 22, 2011, pursuant to the transactions described in note 23 to the
consolidated financial statements for the year ended December 31, 2011.

Ridley’s sales and expenses fluctuate with changes in raw materials prices. Ridley’s revenues in 2011 of $635.0
compared with revenues of $549.1 in 2010. The year-over-year increase in revenues is primarily the result of
higher raw material prices. Ridley’s expenses in 2011 increased to $619.7 compared to expenses of $538.7 in 2010.
As with sales, the increase in expenses is primarily the result of higher raw material prices in 2011. The remaining
revenue and expenses included in the Other reporting segment were comprised of the revenue and expenses of
William Ashley and Sporting Life.

153

F A I R F A X F I N A N C I A L H O L D I N G S L I M I T E D

Interest and Dividends

Consolidated interest and dividend income of $705.3 decreased 0.9% from $711.5 in 2010. The year-over-year
decrease was attributable to lower yields due to increased investment expenses incurred in connection with total
return swaps, partially offset by a larger average investment portfolio resulting from the acquisitions completed in
2011 and 2010. The consolidated share of profit of associates was $1.8 in 2011 compared to $46.0 in 2010, with
the decrease principally related to the year-over-year increase of $55.6 in the company’s share of the losses of
ICICI Lombard which was primarily as a result of reserve strengthening related to ICICI Lombard’s mandatory
pro-rata participation in the Indian commercial vehicle insurance pool. Additional
information related to
consolidated interest and dividend income is provided in the Investments section in this MD&A.

Net Gains on Investments

Consolidated net investment gains in 2011 of $691.2 were primarily comprised of $1,278.7 of net gains on bonds,
partially offset by $378.9 of net losses (primarily unrealized) related to equity and equity-related holdings after
equity hedges and $233.9 of unrealized losses related to CPI-linked derivatives. Additional information related to
consolidated net gains on investments is provided in the Investments section in this MD&A.

Interest Expense

Consolidated interest expense increased 9.5% to $214.0 in 2011 from $195.5 in 2010, primarily as a result of the
company’s issuances during 2011 of $500.0 and Cdn$400.0 of its unsecured senior notes, interest expense on First
Mercury’s trust preferred securities (assumed on February 9, 2011) net of subsequent redemptions and repurchases
of those securities, the year-over-year increase to interest expense following the company’s issuance in 2010 of
Cdn$275.0 of its senior unsecured notes, the year-over-year increase in interest expense on the TIG Note issued in
connection with the acquisition of GFIC on August 17, 2010 and on the redeemable debentures of Zenith
National (assumed on May 20, 2010) net of subsequent repurchases of those securities, partially offset by the
repurchases during 2011 of $298.2, $323.8 and $35.9 principal amounts of Fairfax, Crum & Forster and Odys-
seyRe unsecured senior notes respectively. Transactions in the long term debt of the company are more fully
described in note 15 to the consolidated financial statements for the year ended December 31, 2011. Consolidated
interest expense was comprised of the following:

Fairfax
Crum & Forster (including $3.8 in 2011 related to First Mercury)
Zenith National
OdysseyRe
Advent
Runoff (TIG)
Ridley

2011
2010
152.7 125.9
28.3
2.5
30.5
4.5
3.2
0.6

15.0
3.3
28.9
4.5
8.9
0.7

214.0 195.5

Corporate Overhead and Other

Corporate overhead and other consists of the expenses of all of the group holding companies, net of the company’s
investment management and administration fees and the investment income, including net investment gains and
losses, earned on holding company cash and investments, and is comprised of the following:

Fairfax corporate overhead
Subsidiary holding companies’ corporate overhead
Holding company interest and dividends
Holding company net (gains) losses on investments
Investment management and administration fees

154

2011
115.2
95.0
(6.3)

2010
84.2
71.0
(17.1)
(98.5) 115.2
(65.7)
(73.0)

32.4 187.6

Fairfax corporate overhead expense in 2011 increased to $115.2 from $84.2 in 2010, primarily as a result of
increased legal expenses in 2011 and a non-recurring recovery of a corporate reinsurance recoverable in 2010 which
was fully provided for in a prior period. Subsidiary holding companies’ corporate overhead expense in 2011
increased to $95.0 from $71.0 in 2010, primarily as a result of non-recurring personnel costs at Northbridge, Zenith
National and Advent, restructuring charges incurred at Northbridge ($18.4) in connection with its recent
announcement to combine three of its operating subsidiaries under a single brand (Northbridge Insurance) and
restructuring charges incurred at Crum & Forster ($6.2) related to the integration of First Mercury, partially offset
by lower charitable donations made by the operating companies (the amount of charitable donations of operating
companies is principally determined as a percentage of each operating companies’ earnings before income taxes).
Interest and dividends earned on holding company cash and investments of $6.3 decreased in 2011 compared to
2010 as a result of increased expenses incurred in connection with total return swaps partially offset by increased
interest income earned on fixed income investments and increased share of profit of associates. Net gains and
losses on investments at the holding company were comprised as shown in the table below. Investment
management and administration fees increased to $73.0 in 2011 from $65.7 in 2010 primarily as a result of the
incremental management fees earned as a result of the consolidation of Zenith National and GFIC. In addition, the
corporate and other reporting segment included a $41.6 net loss related to the repurchase of $298.2 principal
amount of Fairfax unsecured senior notes pursuant to the transaction described in note 15 to the company’s
consolidated financial statements for the year ended December 31, 2011.

Common stocks and equity derivatives (excluding equity hedges)
Equity hedges
Bonds
Preferred stocks
Foreign currency
Other

Net gains (losses) on investments

Income Taxes

2010
2011
(38.9)
65.0
118.5 (194.3)
26.3
(11.8)
6.6
(7.0)

16.5
1.7
(0.9)
1.6

98.5 (115.2)

The $186.9 recovery of income taxes in 2010 differed from the income tax provision that would be determined by
applying the company’s Canadian statutory income tax rate of 31.0% to the earnings before income taxes of
$151.1 primarily as a result of income earned in jurisdictions where the corporate income tax rate is lower than
the company’s statutory income tax rate, the effect of non-taxable investment income (including dividend
income and interest on bond investments in U.S. states and municipalities, and capital gains in Canada which are
only 50.0% taxable), the recognition of the benefit of previously unrecorded accumulated income tax losses and
the excess of the fair value of net assets acquired over the purchase price in respect of the GFIC acquisition which
is not taxable, partially offset by withholding taxes paid on an intercompany dividend from the U.S. to Canada.

155

F A I R F A X F I N A N C I A L H O L D I N G S L I M I T E D

Non-controlling Interests

The attribution of net earnings to the non-controlling interests in the consolidated statements of earnings for the
years ended December 31 is comprised as follows:

Ridley
Fairfax Asia

2011 2010
1.3
0.9

2.1
0.6

2.7

2.2

Components of Consolidated Balance Sheets

Consolidated Balance Sheet Summary

Holding company cash and investments decreased to $1,026.7 ($962.8 net of $63.9 of holding company
short sale and derivative obligations) at December 31, 2011, compared to $1,540.7 at December 31, 2010
($1,474.2 net of $66.5 of holding company short sale and derivative obligations). Significant cash movements at
the Fairfax holding company level during 2011 included the following outflows – the payment of $766.8
(inclusive of $39.7 paid to Zenith National) to repurchase Fairfax, Crum & Forster and OdysseyRe unsecured
senior notes as described in note 15 to the consolidated financial statements for the year ended December 31,
2011 (funding from the holding company was provided to Crum & Forster through a capital contribution
($359.3) and to OdysseyRe through a reduction of an outstanding balance on an intercompany revolving line of
credit ($47.9)), the payment of $294.3 in respect of the company’s acquisition of First Mercury (the holding
company contributed to Crum & Forster its investment in First Mercury of $294.3 plus additional cash of $31.3 to
fund the repayment of First Mercury’s short term debt), the capital contribution of $85.0 made to Fairfax Asia to
facilitate the acquisition of 100% of Pacific Insurance ($71.5) and to fund the participation in an ICICI Lombard
rights offering ($19.8), the payment of $30.8 (Cdn$31.5) in respect of the company’s acquisition of Sporting Life
and the payment of $257.4 of common and preferred share dividends; and the following inflows – the receipt of
$493.9 of net proceeds on the issuance of $500.0 principal amount of 5.80% unsecured senior notes due 2021, the
receipt of $405.6 (Cdn$396.0) of net proceeds on the issuance of Cdn$400 principal amount of 6.40% unsecured
senior notes due 2021, $309.1 of dividends (received from Crum & Forster ($104.0), Runoff ($125.0), Zenith
National ($36.7) and associates ($43.4, primarily $37.1 received from Cunningham Lindsey Group)), the receipt of
$112.4 of holding company corporate income tax refunds and $97.3 of net cash received with respect to long and
short equity and equity index total return swaps. The carrying values of holding company investments vary with
changes in the fair values of those securities.

Insurance contract receivables increased by $258.8 to $1,735.4 at December 31, 2011 from $1,476.6 at
December 31, 2010 primarily as a result of increased year-over-year premiums receivable balances at OdysseyRe
($141.4), Advent ($21.0), Zenith National ($29.0) and Fairfax Brasil ($36.7) principally as a result of growth in
premium volumes, the consolidation of the insurance contract receivables of First Mercury ($26.7) and Pacific
Insurance ($10.5) and insurance contract receivables acquired in connection with the reinsurance-to-close of
Syndicate 376 ($3.6).

Portfolio investments comprise investments carried at fair value and equity accounted investments (at
December 31, 2011, the latter primarily included the company’s investments in Gulf Insurance, ICICI Lombard,
Cunningham Lindsey Group, The Brick and other partnerships and trusts), the aggregate carrying value of which
was $23,466.0 at December 31, 2011 ($23,359.7 net of subsidiary short sale and derivative obligations), compared
to an aggregate carrying value at December 31, 2010 of $21,976.2 ($21,825.8 net of subsidiary short sale and
derivative obligations). The net $1,533.9 increase in the aggregate carrying value of portfolio investments (net of
subsidiary short sale and derivative obligations) at December 31, 2011 compared to December 31, 2010 primarily
reflected net unrealized appreciation of bonds (principally U.S. treasury and U.S. state and municipal bonds), net
unrealized appreciation related to the company’s equity hedges, the consolidation of the investment portfolios of
First Mercury, Pacific Insurance and Syndicate 376 ($822.3, $80.2 and $114.8 respectively) and net cash provided
by the operating activities of the company’s insurance and reinsurance operations, partially offset by net unreal-
ized depreciation related to the company’s equity and equity-related holdings, the payment of dividends to Fair-
fax, net cash used by the operating activities of the runoff operations and the unfavourable impact of foreign
currency translation.

156

Major movements in portfolio investments in 2011 included the following: subsidiary cash and short term invest-
ments including cash and short term investments pledged for short sale and derivative obligations increased by
$2,809.4, primarily reflecting the sale of approximately 51.4% of the company’s holdings of U.S. treasury bonds
with the $1,673.7 of proceeds from the sales retained in cash or reinvested into short term investments, net cash
received in connection with the reset provisions of the company’s long and short equity and equity index total
return swap derivative contracts and the consolidation of the cash and short term investments of First Mercury
and Pacific Insurance. Bonds decreased by $860.4, primarily reflecting the sale of U.S. treasury bonds (discussed
above), partially offset by net unrealized appreciation principally related to U.S. treasury and U.S. state and
municipal bonds and the consolidation of the bond portfolios of First Mercury and Pacific Insurance. Common
stocks decreased by $470.2, primarily reflecting net unrealized depreciation of common stocks, partially offset by
purchases of certain limited partnerships. The increase of $216.4 related to investments in associates primarily
reflected investments made in certain limited partnerships and the cashless exercise of The Brick warrants as
described in note 6 to the consolidated financial statements for the year ended December 31, 2011. Derivatives
and other invested assets net of short sale and derivative obligations decreased $140.7 principally as a result of net
unrealized depreciation related to CPI-linked derivatives and the effect of the cashless exercise of The Brick war-
rants (referred to above), partially offset by decreased net liabilities payable to counterparties to the company’s
long and short equity and equity index total return swap and foreign exchange forward derivative contracts and
the purchase of additional CPI-linked derivatives in the early part of 2011.

Recoverable from reinsurers increased by $441.1 to $4,198.1 at December 31, 2011 from $3,757.0 at
December 31, 2010 with the increase primarily related to the consolidation of the recoverable from reinsurers of
First Mercury ($330.5) and Pacific Insurance ($43.6), the recoverable from reinsurers acquired in connection with
the reinsurance-to-close of Syndicate 376 ($81.7), the effects of losses ceded to reinsurers by OdysseyRe, Advent
and Group Re principally related to the Japan earthquake and tsunami and increased business volume at Fairfax
Asia and Fairfax Brasil, partially offset by the continued progress by Runoff in collecting and commuting its
remaining reinsurance recoverable balances. Additional detail related to the company’s recoverable from
reinsurers appear later in this section of this MD&A.

Deferred income taxes represent amounts expected to be recovered in future years. The deferred income tax
asset increased during the year by $137.7 to $628.2 at December 31, 2011 from $490.5 at December 31, 2010,
with the change primarily attributable to increased operating loss carryovers in the U.S. and Canada, increased
unrealized investment losses and increased discounting on claims reserves.

At December 31, 2011, the deferred income tax asset of $628.2 consisted of $122.6 related to operating and capi-
tal losses and $505.6 of temporary differences (which primarily represent income and expenses recorded in the
consolidated financial statements but not yet included or deducted for income tax purposes). The operating and
capital losses (with the capitalized amount of those operating and capital losses shown in parentheses) relate to
losses in Canada of $148.2 ($38.0), losses in the U.S. of $158.9 ($56.0) and losses in Europe (related to Advent) of
$114.6 ($28.6). In addition to these capitalized losses, management has not recorded deferred tax assets in respect
of operating losses of $655.0, $49.4 and $46.3 in Europe, Canada and in the U.S respectively.

At December 31, 2010, the deferred income tax asset of $490.5 consisted of $54.3 related to operating and capital
losses and $436.2 of temporary differences. The operating and capital losses (with the capitalized amount of those
operating and capital losses in parentheses) relate to losses in Canada of $60.2 ($15.5), losses in the U.S. of $18.9
($7.2) and losses in Europe (related to Advent) of $130.6 ($31.6). In addition to these capitalized losses, manage-
ment has not recorded deferred tax assets in respect of operating losses of $891.9, $49.6 and $46.3 in Europe,
Canada and in the U.S respectively.

Management reviews the recoverability of the deferred income tax asset on a quarterly basis. The net temporary
differences principally relate to insurance-related balances such as provision for losses and loss adjustment
expenses, provision for unearned premiums and deferred premium acquisition costs, foreign tax credits at Odys-
seyRe, intangibles assets which arose on privatization and acquisition transactions and investment-related balan-
ces such as realized and unrealized gains and losses. Such temporary differences are expected to continue for the
foreseeable future in light of the company’s ongoing operations. Management expects that the recorded deferred
income tax asset will be realized in the normal course of operations.

157

F A I R F A X F I N A N C I A L H O L D I N G S L I M I T E D

Goodwill and intangible assets of $1,115.2 at December 31, 2011 increased by $166.1 from $949.1 at
December 31, 2010 primarily as a result of the acquisitions of First Mercury, Pacific Insurance and Sporting Life
which increased goodwill and intangible assets by $134.2, $25.5 and $24.5 respectively (as described in note 23 to
the consolidated financial statements for the year ended December 31, 2011), partially offset by the effect of for-
eign currency translation on the goodwill and intangible assets of Northbridge and Polish Re. Consolidated
goodwill of $696.3 ($572.1 at December 31, 2010) and intangible assets of $418.9 ($377.0 at December 31, 2010)
are comprised primarily of goodwill and the value of customer and broker relationships and brand names which
arose on the acquisitions of First Mercury and Pacific Insurance during 2011, Zenith National during 2010 and
Polish Re during 2009, and the privatization of Northbridge and OdysseyRe during 2009. The customer and
broker relationships intangible assets are being amortized to net earnings over periods ranging from 8 to 20 years.
The intended use, expected life and economic benefit to be derived from intangible assets are re-evaluated by the
company when there are potential indicators of impairment. Impairment tests for goodwill and intangible assets
not subject to amortization were completed in 2011 and it was concluded that no impairment had occurred.

Other assets decreased by $79.6 to $821.4 at December 31, 2011 from $901.0 at December 31, 2010 primarily as
a result of decreased income taxes refundable balances, partially offset by the consolidation of the other assets of
First Mercury, Pacific Insurance, William Ashley and Sporting Life. Income taxes refundable decreased by $132.0
to $85.2 at December 31, 2011 from $217.2 at December 31, 2010 as a result of the collection of income tax
refunds during 2011.

Provision for losses and loss adjustment expenses increased by $1,182.9 to $17,232.2 at December 31,
2011 from $16,049.3 at December 31, 2010 with the increase primarily reflecting the consolidation of the provi-
sion for losses and loss adjustment expenses of First Mercury ($789.4) and Pacific Insurance ($53.0), the provision
for losses and loss adjustment expenses assumed in connection with the reinsurance-to-close of Syndicate 376
($160.5), the effects of significant catastrophe losses incurred by OdysseyRe, Advent and Group Re related to the
Japan earthquake and tsunami, the Thailand floods and the New Zealand (Christchurch) earthquake and
increased business volume at Fairfax Asia, partially offset by the continued progress by Runoff in settling claims
and the effects of the soft underwriting cycle and competitive market conditions at Crum & Forster. Additional
detail related to the company’s provision for losses and loss adjustment expenses appear later in this section of
this MD&A.

Non-controlling interests increased by $4.6 to $45.9 at December 31, 2011 from $41.3 at December 31,2010,
principally as a result of the acquisition of Sporting Life, as described in note 23 to the consolidated financial
statements for the year ended December 31, 2011 and net earnings attributable to non-controlling interests. The
non-controlling interests balance at December 31, 2011 and December 31, 2010 primarily related to Ridley.

Comparison of 2010 to 2009 – Total assets at December 31, 2010 increased to $31,448.1 from $28,148.4 at
December 31, 2009, primarily reflecting the consolidation of Zenith National and GFIC pursuant to the acquis-
ition transactions described in note 23 to the consolidated financial statements for the year ended December 31,
2011. Holding company debt (including other long term obligations) at December 31, 2010 increased to $1,809.6
from $1,410.4 at December 31, 2009, primarily reflecting the issuance of Cdn$275.0 principal amount of 7.25%
unsecured notes due 2020 for net proceeds of $267.1 (Cdn$272.5), the issuance of the contingent note in con-
nection with the acquisition of GFIC as described in note 23 to the consolidated financial statements for the year
ended December 31, 2011, and the foreign currency translation effect during 2010 of the strengthening of the
Canadian dollar relative to the U.S. dollar, partially offset by the elimination on consolidation of Zenith Natio-
nal’s holdings of Fairfax’s debt securities as described in note 15 to the consolidated financial statements for the
year ended December 31, 2011. Subsidiary debt at December 31, 2010 increased to $919.5 from $902.9 at
December 31, 2009, primarily reflecting the consolidation of Zenith National’s redeemable securities pursuant to
the acquisition transaction described in note 23 to the consolidated financial statements for the year ended
December 31, 2011, partially offset by the elimination on consolidation of Zenith National’s holdings of Odys-
seyRe’s debt securities as described in note 15 to the consolidated financial statements for the year ended
December 31, 2011.

Provision for Losses and Loss Adjustment Expenses

Since 1985, in order to ensure so far as possible that the company’s provision for losses and loss adjustment
expenses (“LAE”) (often called “reserves” or “provision for claims”) is adequate, management has established
procedures so that the provision for losses and loss adjustment expenses at the company’s insurance, reinsurance

158

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
Risk Officer at Fairfax, and one or more independent actuaries, including an independent actuary whose report
appears in each Annual Report.

In the ordinary course of carrying on their business, Fairfax’s insurance, reinsurance and runoff companies may
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 regulatory deposits (such as with U.S. 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 under U.S. insurance regulations, 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 $2.9 billion of cash and investments pledged by the company’s subsidiaries at December 31, 2011, as
described in note 5 to the consolidated financial statements for the year ended December 31, 2011, represented
the aggregate amount as at that date that had been pledged in the ordinary course of business to support each
pledging subsidiary’s respective obligations, as previously described in this paragraph (these pledges do not
involve the cross-collateralization by one group company of another group company’s obligations).

Claims provisions are established by our primary insurance companies by the case method as claims are initially
reported. The provisions are subsequently adjusted as additional information on the estimated ultimate amount
of a claim becomes known during the course of its settlement. The company’s reinsurance companies rely on ini-
tial and subsequent claims reports received from ceding companies to establish estimates of provision for claims.
In determining the provision to cover the estimated ultimate liability for all of the company’s insurance and
reinsurance obligations, a provision is also made for management’s calculation of factors affecting the future
development of claims including incurred but not reported claims based on the volume of business currently in
force, the historical experience on claims and potential changes, such as changes in the underlying book of busi-
ness, in law and in cost factors.

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 may be required before a meaningful comparison
of actual losses to the original estimates of provision for claims 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. Favourable development (or redundancies) means that subsequent reserve estimates are lower than
originally indicated, while unfavourable development (or deficiencies) means that the original reserve estimates
were lower than subsequently indicated. The aggregate net favourable development of $29.8 in 2011 and net
unfavourable development of $14.7 in 2010 were comprised as shown in the following table:

Insurance

– Canada (Northbridge)
– U.S. (Crum & Forster and Zenith National)
– Asia (Fairfax Asia)

Reinsurance – OdysseyRe
Insurance and Reinsurance – Other

Insurance and reinsurance operating companies
Runoff

Net favourable (unfavourable) reserve development

Favourable/(Unfavourable)

2011
39.6
(61.8)
17.6
51.4
39.7

86.5
(56.7)

29.8

2010
1.2
(11.3)
10.0
3.6
32.4

35.9
(50.6)

(14.7)

159

F A I R F A X F I N A N C I A L H O L D I N G S L I M I T E D

Changes in provision for losses and loss adjustment expenses recorded on the consolidated balance sheets and the
related impact on unpaid claims and allocated loss adjustment expenses for the years ended December 31 were as
shown in the following table:

Provision for claims – beginning of year – net
Foreign exchange effect of change in provision for claims
Provision for claims occurring:

In the current year
In the prior years

Paid on claims during the year related to:

The current year
The prior years

2010(1)

2011(1)

2009(1)
2007(1)
12,794.1 11,448.6(2) 11,008.5 10,624.8 10,633.8
328.8

(122.3)

(580.3)

2008(1)

167.4

393.3

4,297.2
(29.8)

3,154.5
14.7

3,091.8
30.3

3,405.4
55.4

3,122.5
22.8

(1,221.3)
(2,639.5)

(736.9)
(2,612.9)

(729.9)
(2,424.9)

(835.5)
(2,034.2)

(786.3)
(2,696.8)

Provision for claims of companies acquired during the year

at December 31

632.8

1,358.7

68.4

372.9

—

Provision for claims at December 31 before the undernoted
CTR Life

Provision for claims – end of year – net
Reinsurers’ share of provision for claims

13,711.2 12,794.1 11,437.5(2) 11,008.5 10,624.8
21.5

24.2

27.6

34.9

25.3

13,735.4 12,819.4 11,465.1 11,043.4 10,646.3
4,401.8
3,301.6

3,496.8

3,685.0

3,229.9

Provision for claims – end of year – gross

17,232.2 16,049.3 14,766.7 14,728.4 15,048.1

(1)

IFRS basis for 2011 and 2010; Canadian GAAP basis for 2009 and prior.

(2) Provision for claims at January 1, 2010 reflects certain reclassifications recorded upon adoption of IFRS (principally
related to structured settlements) which were not reflected in provision for claims at December 31, 2009 under
Canadian GAAP.

The foreign exchange effect of change in provision for claims principally relates to the impact in 2011 of the
strengthening of the U.S. dollar relative to the Canadian dollar and the Euro. The company generally mitigates
the impact of foreign currency movements on its foreign currency denominated claims liabilities by holding for-
eign currency denominated investment assets. As a result, realized and unrealized foreign currency translation
gains and losses arising from claims settlement activities and the revaluation of the provision for claims (recorded
in net gains (losses) on investments in the consolidated statement of earnings) are generally partially or wholly
mitigated by realized and unrealized foreign currency translation gains and losses on investments classified as at
FVTPL (also recorded in net gains (losses) on investments in the consolidated statement of earnings).

The tables that follow show the reserve reconciliation and the reserve development of Canadian Insurance
(Northbridge), U.S. Insurance (Crum & Forster and Zenith National), Asian Insurance (Fairfax Asia), Reinsurance
(OdysseyRe) and Insurance and Reinsurance – Other (Group Re, Advent, Polish Re and Fairfax Brasil) and Runoff’s
net provision for claims. Because business is written in multiple geographic locations and currencies, there will
necessarily be some distortions caused by foreign currency fluctuations. Northbridge (Canadian Insurance) tables
are presented in Canadian dollars and Crum & Forster and Zenith National (U.S. Insurance), Fairfax Asia, Odys-
seyRe, Insurance and Reinsurance – Other and Runoff tables are presented in U.S. dollars.

The company endeavours to establish adequate provisions for losses and loss adjustment expenses at the original
valuation date, with the objective of achieving net favourable prior period reserve development at subsequent
valuation dates. The reserves will always be subject to upward or downward development in the future, and future
development could be significantly different from the past due to many unknown factors.

With regard to the tables that follow which show the calendar year claims reserve development, note that when
in any year there is a redundancy or reserve strengthening related to 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.

160

The accident year claims reserve development tables that follow for Northbridge, U.S. Insurance and OdysseyRe show
the development of the provision for losses and loss adjustment expenses by accident year commencing in 2001, with
the re-estimated amount of each accident year’s reserve development shown in subsequent years up to December 31,
2011. All claims are attributed back to the year of loss, regardless of when they were reported or adjusted. For example,
Accident Year 2005 represents all claims with a date of loss between January 1, 2005 and December 31, 2005. The
initial reserves set up at the end of the year are re-evaluated over time to determine their redundancy or deficiency
based on actual payments in full or partial settlements of claims plus current estimates of the reserves for claims still
open or claims still unreported.

Canadian Insurance – Northbridge

The following table shows for Northbridge the provision for losses and LAE as originally and as currently esti-
mated for the years 2007 through 2011. The favourable or unfavourable development from prior years has been
credited or charged to each year’s earnings.

Reconciliation of Provision for Claims – Northbridge(1)

Provision for claims and LAE at January 1

Incurred losses on claims and LAE

2011

2010

2009

2008

2007

(In Cdn$ except as indicated)
1,994.3 1,973.3 1,931.8 1,696.0 1,640.2

Provision for current accident year’s claims
Foreign exchange effect on claims
Increase (decrease) in provision for prior accident years’ claims

766.8
3.2
(39.2)

769.2
(7.9)
(1.3)

849.4
(36.6)
(16.0)

925.3
59.2
(67.1)

778.4
(46.8)
(31.5)

Total incurred losses on claims and LAE

730.8

760.0

796.8

917.4

700.1

Payments for losses on claims and LAE

Payments on current accident year’s claims
Payments on prior accident years’ claims

(280.9)
(413.5)

(266.3)
(472.7)

(272.3)
(483.0)

(298.6)
(383.0)

(267.9)
(376.4)

Total payments for losses on claims and LAE

(694.4)

(739.0)

(755.3)

(681.6)

(644.3)

Provision for claims and LAE at December 31
Exchange rate
Provision for claims and LAE at December 31 converted to U.S.

2,030.7 1,994.3 1,973.3 1,931.8 1,696.0
1.0132
0.9539
0.9821

1.0064

0.8100

dollars

1,994.3 2,007.0 1,882.3 1,564.8 1,718.4

(1)

IFRS basis for 2011 and 2010; Canadian GAAP basis for 2009 and prior.

161

F A I R F A X F I N A N C I A L H O L D I N G S L I M I T E D

The following table shows for Northbridge the original provision for losses and LAE at each calendar year-end
commencing in 2001, the subsequent cumulative payments made on account of these years and the subsequent
re-estimated amount of these reserves.

Northbridge’s Calendar Year Claims Reserve Development

As at December 31

2001

2002

2003

2004

2005

2006
(In Cdn$)

2007

2008

2009

2010

2011

Calendar year

Provision for claims including LAE
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) development

621.9

728.9

855.4 1,153.9 1,408.7 1,640.2 1,696.0 1,931.8 1,973.3 1,994.3 2,030.7

200.7
366.6
451.4
527.2
580.6
616.3
654.4
677.3
701.5
718.2

630.1
672.3
721.8
741.6
752.2
762.1
780.4
784.7
803.0
806.7
(184.8)

413.5

472.7
759.9

383.0
483.0
796.8
656.0
887.0 1,027.6

376.4
353.1
619.5
594.2
777.3
835.4
937.7 1,000.9 1,056.8

279.1
441.8
576.0
707.7
803.4 1,055.5 1,115.1
878.5 1,129.0
923.3

233.4
377.9
493.3
585.1
671.0
729.7
778.9
804.2

864.8 1,114.6 1,461.7 1,564.3 1,674.0 1,883.8 1,965.8 1,957.1
880.8 1,094.0 1,418.1 1,545.4 1,635.1 1,901.2 1,962.0
890.1 1,096.7 1,412.5 1,510.3 1,635.1 1,901.5
903.2 1,107.2 1,400.2 1,507.9 1,634.3
924.4 1,117.7 1,398.4 1,513.5
935.0 1,124.7 1,403.1
945.3 1,123.7
947.4

273.7
396.9
500.1
577.1
632.3
687.0
722.3
753.3
773.3

724.8
792.1
812.2
826.9
836.6
857.9
862.7
876.1
878.5

(149.6)

(92.0)

30.2

5.6

126.7

61.7

30.3

11.3

37.2

Northbridge experienced net favourable development of prior years’ reserves of Cdn$37.2 during 2011 as a result
of net favourable development of Cdn$39.2, partially offset by the effect of net unfavourable foreign currency
movements of Cdn$2.0 related to the translation of the U.S. dollar-denominated claims reserves of Common-
wealth and Markel. The net favourable reserve development of prior years’ reserves of Cdn$39.2 primarily
reflected net favourable development in Northbridge’s large account, direct agent small-to-mid market segment
and transportation segments, partially offset by net adverse development in its broker small-to-mid market seg-
ment. The total unfavourable impact of the effect of foreign currency translation on claims reserves of Cdn$3.2
was principally related to the strengthening of the U.S. dollar relative to the Canadian dollar in 2011 and com-
prised Cdn$2.0 related to prior years’ reserves and Cdn$1.2 related to the current year’s reserves.

The following table is derived from the “Northbridge’s Calendar Year Claims Reserve Development” table above.
It summarizes the effect of re-estimating prior year loss reserves by accident year.

Northbridge’s Accident Year Claims Reserve Development

As at December 31

End of first year

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

Accident year

2002

2003

2004

2005

2006
(In Cdn$)

2007

2008

2009

2010

2011

487.1

501.2

467.9

572.4

547.6

543.4

640.8

631.7

649.1

650.3

508.1

505.1

501.3

503.5

497.1

531.6

499.2

485.9

463.2

462.5

463.5

573.1

646.8

600.5

584.4

561.6

552.8

558.5

522.4

467.2

437.2

426.9

416.2

416.1

412.8

409.6

404.2

346.4

342.3

336.9

340.3

340.2

346.0

342.9

342.6

299.5

253.3

271.0

271.3

275.4

275.2

278.3

278.6

273.9

272.5

2001 &
Prior

621.9

630.1

672.3

721.8

741.6

752.2

762.1

780.4

784.8

803.0

806.7

Favourable (unfavourable) development

(29.7)% 9.0% 15.2% 21.6% 2.5% 12.8% 2.2% (1.5)% 5.1% 6.6%

162

Accident year 2010 experienced net favourable development due to better than expected emergence across all
lines and all segments. Accident year 2009 reflected net favourable development due to better than expected
emergence on commercial property and commercial liability claims reserves and in Northbridge’s large account
segment. Accident year 2008 reflected net adverse development due to worse than expected emergence on com-
mercial liability and commercial automobile claims reserves. Accident years 2002 to 2007 reflected net favourable
development due to better than expected emergence on commercial automobile and property claims reserves.
Reserves for the 2001 and prior accident years were impacted by pre-1990 general liability claims reserves.

U.S. Insurance

The following table shows for the U.S. insurance operations the provision for losses and LAE as originally and as
currently estimated for the years 2007 through 2011. First Mercury and Zenith National were included in the
U.S. Insurance reporting segment beginning in 2011 and 2010 respectively. Between 2010 and 2006, the
U.S. Insurance reporting segment consisted of Crum & Forster only with the years prior to 2006 including Fair-
mont (the business of which was assumed by Crum & Forster effective January 1, 2006 while the Fairmont entities
were transferred to U.S. Runoff). The favourable or unfavourable development from prior years has been credited
or charged to each year’s earnings.

Reconciliation of Provision for Claims – U.S. Insurance(1)

Provision for claims and LAE at January 1

Incurred losses on claims and LAE

2011

2007
2,588.5 1,774.3(2) 2,038.3 1,668.9 1,686.9

2010

2009

2008

Provision for current accident year’s claims
Increase (decrease) in provision for prior accident years’ claims

966.7
61.8

532.3
11.3

566.0
(25.0)

802.8
59.0

816.8
(46.6)

Total incurred losses on claims and LAE

1,028.5

543.6

541.0

861.8

770.2

Payments for losses on claims and LAE

Payments on current accident year’s claims
Payments on prior accident years’ claims(3)

(259.1)
(750.0)

(143.1)
(550.6)

(157.0)
(632.9)

(228.3)
(264.1)

(217.2)
(571.0)

Total payments for losses on claims and LAE

(1,009.1)

(693.7)

(789.9)

(492.4)

(788.2)

Provision for claims and LAE at December 31 before the

undernoted

A&E reserves transferred to Runoff(4)

Insurance subsidiaries acquired during the year(5)

2,607.9 1,624.2 1,789.4(2) 2,038.3 1,668.9

(334.5)

–

503.1

964.3

–

Provision for claims and LAE at December 31

2,776.5 2,588.5 1,789.4 2,038.3 1,668.9

(1)

IFRS basis for 2011 and 2010; Canadian GAAP basis for 2009 and prior.

(3) Reduced by $302.5 of proceeds from a significant reinsurance commutation in 2008.

(4) U.S. Runoff assumed substantially all of Crum & Forster’s liabilities for asbestos and environmental claims reserves in

December 2011.

(5) First Mercury inclusive of the Valiant Insurance business, in 2011 and Zenith National in 2010.

163

F A I R F A X F I N A N C I A L H O L D I N G S L I M I T E D

The following table shows for Crum & Forster (and Zenith since 2010) the original provision for losses and LAE at
each calendar year-end commencing in 2001, the subsequent cumulative payments made on account of these
years and the subsequent re-estimated amounts of these reserves.

U.S. Insurance Calendar Year Claims Reserve Development (including Zenith since 2010)

As at December 31

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Provision for claims including LAE

1,318.2 1,238.4 1,538.2 1,578.2 1,610.6 1,686.9 1,668.9 2,038.3 1,789.4 2,588.5 2,273.4

Calendar year

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

447.0

161.3

460.0

466.0

478.9

571.0

264.1

632.9

565.4 1,084.5

525.0

514.5

792.2

796.7

848.7

629.2

649.0 1,048.7 1,258.8

812.4

780.0 1,045.1 1,066.1

804.7

904.3

971.2 1,670.9

1,029.8

970.2 1,257.1

959.6 1,013.8 1,153.9 1,524.3

1,185.5 1,144.6 1,111.5 1,118.3 1,209.9 1,661.7

1,337.6

960.8 1,241.7 1,280.2 1,693.5

1,137.6 1,064.1 1,385.6 1,745.4

1,232.6 1,182.6 1,841.8

1,344.5 1,617.7

1,772.6

1,337.7 1,278.6 1,508.1 1,546.9 1,561.7 1,640.3 1,727.9 2,013.3 1,800.7 2,650.3

1,411.7 1,285.9 1,536.0 1,509.2 1,525.3 1,716.5 1,692.4 2,015.5 1,833.4

1,420.7 1,308.2 1,513.3 1,499.7 1,640.4 1,700.3 1,711.8 2,063.1

1,438.6 1,296.8 1,545.5 1,616.7 1,653.0 1,732.0 1,754.7

1,437.0 1,330.0 1,674.8 1,658.2 1,688.5 1,774.6

1,469.0 1,457.2 1,719.4 1,687.3 1,737.3

1,592.4 1,472.9 1,746.8 1,729.8

1,607.5 1,488.8 1,789.3

1,623.9 1,521.5

1,657.0

Favourable (unfavourable) development

(338.8)

(283.1)

(251.1)

(151.6)

(126.7)

(87.7)

(85.8)

(24.8)

(44.0)

(61.8)

In 2011, U.S. Insurance experienced net adverse development of prior years’ reserves of $61.8. Crum & Forster
experienced $37.3 of net adverse development of prior years’ reserves, primarily related to workers’ compensation and
latent liability claims reserves, partially offset by a reduction in its provision for uncollectible reinsurance recoverables.
Zenith National experienced $24.5 of net adverse development of prior years’ reserves in 2011 primarily as a result of
increased paid loss costs trends for recent accident years (moderated to some extent by an increased number of claim
settlements) and increased frequency of late reported indemnity claims reserves related to the 2010 accident year.

The following table is derived from the “U.S. Insurance Calendar Year Claims Reserve Development” table above.
It summarizes the effect of re-estimating prior year loss reserves by accident year.

U.S. Insurance Accident Year Claims Reserve Development

As at December 31

2001 &
Prior

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Accident year

End of first year

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

1,459.0

378.2

452.4

568.0

599.4

678.1

682.9

681.2

553.7

634.1

707.6

1,478.5

344.4

415.0

508.8

588.2

667.9

665.8

691.8

562.8

637.9

1,552.5

342.7

420.6

493.8

561.3

628.9

646.3

674.5

564.8

1,561.5

347.1

409.3

452.2

559.4

600.2

634.2

687.7

1,579.3

337.3

408.3

439.8

530.6

596.3

636.3

1,577.8

338.5

410.4

436.8

536.9

586.1

1,609.8

342.3

439.3

438.4

541.7

1,733.2

342.9

450.9

440.3

1,748.3

342.4

462.9

1,764.7

337.6

1,801.6

Favourable (unfavourable) development

(23.5)% 10.7% (2.3)% 22.5% 9.6% 13.6% 6.8% (1.0)% (2.0)% (0.6)%

164

Accident years 2008 to 2010 experienced net adverse development principally related to unfavourable trends on
workers’ compensation claims reserves. Accident year 2002 and accident years 2004 to 2007, experienced net
favourable development principally attributable to favourable emergence resulting from decreased loss activity
primarily on workers’ compensation, general liability and commercial multi-peril claims reserves. Accident year
2003 experienced net adverse development related to a single large general liability claim with significant allo-
cated loss adjustment expenses. Net adverse development in the 2001 and prior accident years reflected the
impact of increased frequency and severity on casualty claims reserves, the effects of increased competitive con-
ditions during the 2001 and prior period, and included strengthening of asbestos, environmental and latent
claims reserves.

Asian Insurance – Fairfax Asia

The following table shows for Fairfax Asia the provision for losses and LAE as originally and as currently estimated
for the years 2007 through 2011. Pacific Insurance was included in the Fairfax Asia reporting segment beginning
in 2011. The favourable or unfavourable development from prior years has been credited or charged to each year’s
earnings.

Reconciliation of Provision for Claims – Fairfax Asia(1)

Provision for claims and LAE at January 1

Incurred losses on claims and LAE

2011
2010
2009
203.0 138.7 113.2

2008
91.0

2007
87.6

Provision for current accident year’s claims
Foreign exchange effect on claims
Increase (decrease) in provision for prior accident years’ claims

144.6 130.2
12.7
(10.0)

(3.1)
(17.6)

92.8
2.5
(8.1)

65.5
0.1
3.4

43.1
2.2
(4.4)

Total incurred losses on claims and LAE

123.9 132.9

87.2

69.0

40.9

Payments for losses on claims and LAE

Payments on current accident year’s claims
Payments on prior accident years’ claims

(24.5)
(62.2)

(24.0)
(44.6)

(20.7)
(41.0)

(15.9)
(30.9)

(11.0)
(26.5)

Total payments for losses on claims and LAE

(86.7)

(68.6)

(61.7)

(46.8)

(37.5)

Insurance subsidiaries acquired during the year(2)

25.8

–

Provision for claims and LAE at December 31

266.0 203.0 138.7 113.2

91.0

(1)

IFRS basis for 2011 and 2010; Canadian GAAP basis for 2009 and prior.

(2) Pacific Insurance in 2011.

The following table shows for Fairfax Asia the original provision for losses and LAE at each calendar year-end
commencing in 2001, the subsequent cumulative payments made on account of these years and the subsequent
re-estimated amount of these reserves. The following Asian Insurance subsidiaries’ reserves are included from the
respective years in which such subsidiaries were acquired:

Falcon Insurance
Winterthur (Asia) (now part of First Capital Insurance)
First Capital Insurance
Pacific Insurance

Year acquired
1998
2001
2004
2011

165

F A I R F A X F I N A N C I A L H O L D I N G S L I M I T E D

Fairfax Asia’s Calendar Year Claims Reserve Development

As at December 31

2001

2002

2003

2004

2005

2006

2007 2008 2009

2010

2011

Provision for claims including LAE

29.6

23.1

25.1

54.7

74.7

87.6

91.0 113.2 138.7

203.0 266.0

Calendar year

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

62.2

44.6

65.2

41.0

56.5

62.8

30.9

49.8

55.8

58.0

94.9 106.0 136.3

185.0

84.7 100.2 124.5

93.2

79.5

75.4

26.5

45.2

56.3

58.8

59.9

84.5

84.1

75.0

72.2

69.4

15.6

32.6

44.6

50.3

51.1

51.5

79.6

72.2

71.8

64.7

63.4

60.7

13.3

21.9

29.1

32.6

33.8

34.2

34.3

59.6

58.2

49.9

48.3

43.5

42.9

41.3

7.9

13.1

15.9

17.3

17.9

18.2

18.3

18.2

24.9

23.1

21.2

20.0

19.2

19.4

10.1

14.1

16.5

17.8

18.2

18.5

18.7

18.8

22.4

22.2

21.3

20.5

19.6

19.8

19.6

19.7

19.8

19.0

26.1

27.9

29.1

29.5

29.7

29.8

30.0

32.8

32.3

32.2

31.5

30.8

30.2

30.4

Favourable (unfavourable) development

(0.8)

3.3

5.7

13.4

14.0

18.2

15.6

20.0

14.2

18.0

Fairfax Asia experienced net favourable development of prior years’ reserves of $18.0 during 2011 as a result of net
favourable development of $17.6 and net favourable foreign currency movements of $0.4 related to the trans-
lation of prior accident years’ claims reserves denominated in foreign currencies. The net favourable development
of prior years’ reserves primarily related to net favourable emergence related to commercial automobile, marine
hull and workers’ compensation claims reserves. The total favourable impact of the effect of foreign currency
translation on claims reserves of $3.1 was principally related to the strengthening of the U.S. dollar relative to the
Singapore dollar in 2011 and was comprised of net favourable development of $0.4 on prior accident years’
reserves and net favourable development of $2.7 on the current accident year’s reserves.

166

Reinsurance – OdysseyRe

The following table shows for OdysseyRe the provision for losses and LAE as originally and as currently estimated
for the years 2007 through 2011. Clearwater Insurance was transferred to the U.S. Runoff reporting segment on
January 1, 2011. The favourable or unfavourable development from prior years has been credited or charged to
each year’s earnings.

Reconciliation of Provision for Claims – OdysseyRe(1)

Provision for claims and LAE at January 1

2011
4,857.2

2010
4,666.3

2009
4,560.3

2008
4,475.6

2007
4,403.1

Transfer of Clearwater Insurance to U.S. Runoff(2)

(484.2)

–

Incurred losses on claims and LAE

Provision for current accident year’s claims
Foreign exchange effect on claims
Increase (decrease) in provision for prior accident years’

claims

1,863.7
(38.0)

1,320.6
46.5

1,313.3
58.8

1,518.8
(143.2)

1,367.9
26.6

(51.4)

(3.6)

(11.3)

(10.1)

40.5

Total incurred losses on claims and LAE

1,774.3

1,363.5

1,360.8

1,365.5

1,435.0

Payments for losses on claims and LAE

Payments on current accident year’s claims
Payments on prior accident years’ claims

(439.0)
(918.8)

(184.4)
(988.2)

(230.6)
(1,024.2)

(264.8)
(1,016.0)

(251.4)
(1,111.1)

Total payments for losses on claims and LAE

(1,357.8)

(1,172.6)

(1,254.8)

(1,280.8)

(1,362.5)

Provision for claims and LAE at December 31

4,789.5

4,857.2

4,666.3

4,560.3

4,475.6

(1)

IFRS basis for 2011 and 2010; Canadian GAAP basis for 2009 and prior.

(2) OdysseyRe transferred Clearwater Insurance to U.S. Runoff in 2011.

167

F A I R F A X F I N A N C I A L H O L D I N G S L I M I T E D

The following table shows for OdysseyRe the original provision for losses and LAE at each calendar year-end
commencing in 2001, the subsequent cumulative payments made on account of these years and the subsequent
re-estimated amount of these reserves.

OdysseyRe’s Calendar Year Claims Reserve Development(1)

As at December 31

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Provision for claims including LAE

1,674.4 1,844.6 2,340.9 3,132.5 3,865.4 4,403.1 4,475.6 4,560.3 4,666.3 4,857.2 4,789.5

Calendar year

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

616.2

601.8

632.4

913.7

787.3 1,111.1 1,016.0 1,024.2

988.2 1,403.0

985.4

998.8 1,212.9 1,298.5 1,614.0 1,808.2 1,646.5 1,676.1 2,006.8

1,295.5 1,423.6 1,455.7 1,835.7 2,160.9 2,273.0 2,123.5 2,567.1

1,601.6 1,562.6 1,898.4 2,221.0 2,520.9 2,661.8 2,887.8

1,665.8 1,932.4 2,206.1 2,490.5 2,831.1 3,347.6

1,968.7 2,188.1 2,426.5 2,734.3 3,463.2

2,173.5 2,373.8 2,625.8 3,323.4

2,327.9 2,546.2 3,179.9

2,476.7 3,078.9

2,987.9

1,740.4 1,961.5 2,522.1 3,299.0 4,050.8 4,443.6 4,465.5 4,549.0 4,662.7 4,805.8

1,904.2 2,201.0 2,782.1 3,537.0 4,143.5 4,481.5 4,499.0 4,567.7 4,650.4

2,155.2 2,527.7 3,049.6 3,736.1 4,221.3 4,564.3 4,537.8 4,561.3

2,468.0 2,827.3 3,293.8 3,837.5 4,320.5 4,623.1 4,534.5

2,725.8 3,076.8 3,414.1 3,950.1 4,393.0 4,628.3

2,973.6 3,202.2 3,534.4 4,023.3 4,406.7

3,079.3 3,324.8 3,606.0 4,046.7

3,193.7 3,396.0 3,637.8

3,269.3 3,429.2

3,302.4

Favourable (unfavourable) development

(1,628.0) (1,584.6) (1,296.9)

(914.2)

(541.3)

(225.2)

(58.9)

(1.0)

15.9

51.4

(1) The table above reflects the transfer of the business of Clearwater Insurance to U.S. Runoff effective January 1, 2011.

OdysseyRe experienced net favourable development of prior years’ reserves of $51.4 in 2011, attributable to net
favourable development in its Americas ($27.0), EuroAsia ($12.2), U.S. Insurance ($6.2) and London Market ($6.0)
divisions primarily related to favourable emergence on prior years’ catastrophe loss reserves and its healthcare and
financial products lines of business.

168

The following table is derived from the “OdysseyRe’s Calendar Year Claims Reserve Development” table above. It
summarizes the effect of re-estimating prior year loss reserves by accident year.

OdysseyRe’s Accident Year Claims Reserve Development

As at December 31

2001 &
Prior

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Accident Year

End of first year

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

1,674.4

720.6

981.3 1,242.1 1,480.2 1,139.6 1,143.1 1,110.8 1,141.5 1,182.7 1,386.7

1,740.2

673.5

923.8 1,149.3 1,427.6 1,087.4 1,095.2 1,066.1 1,119.2 1,143.6

1,904.2

661.6

856.4 1,119.7 1,321.2 1,047.5 1,045.7 1,045.9 1,113.3

2,155.4

675.4

824.1 1,074.6 1,297.5 1,031.1 1,025.8 1,042.8

2,468.2

717.7

818.8 1,055.9 1,284.1 1,017.4 1,017.3

2,725.8

719.4

813.7 1,048.1 1,283.4 1,008.9

2,973.6

739.1

811.4 1,049.7 1,273.7

3,079.3

747.3

811.7 1,041.3

3,193.7

742.9

810.4

3,269.3

743.0

3,302.4

Favourable (unfavourable) development

(97.2)% (3.1)% 17.4% 16.2% 14.0% 11.5% 11.0% 6.1% 2.5% 3.3%

Improvements in competitive conditions and in the economic environment beginning in 2001 resulted in a gen-
eral downward trend on re-estimated reserves for accident years 2003 through 2010. Initial loss estimates for these
more recent accident years did not fully anticipate the improvements in competitive and economic conditions
achieved since the early 2000s. Reserves for the 2001 and prior accident years increased principally as a result of
unfavourable emergence on asbestos and environmental pollution claim reserves and casualty claim reserves in
the Americas division.

Insurance and Reinsurance – Other (Group Re, Advent, Polish Re and Fairfax Brasil)

The following table shows for Insurance and Reinsurance – Other (comprised only of Group Re prior to 2008) the
provision for losses and LAE as originally and as currently estimated for the years 2007 through 2011. The
favourable or unfavourable development from prior years has been credited or charged to each year’s earnings.

Reconciliation of Provision for Claims – Insurance and Reinsurance – Other(1)

Provision for claims and LAE at January 1

2011

2010
1,024.4 1,004.1

2009
742.0

2008
554.4

2007
558.8

Transfer of nSpire Re to European Runoff(2)

–

(97.9)

–

Incurred losses on claims and LAE

Provision for current accident year’s claims
Foreign exchange effect on claims
Increase (decrease) in provision for prior accident years’ claims

578.0
(25.6)
(39.7)

429.3
20.1
(32.4)

371.4
69.0
31.2

132.4
(86.7)
2.3

168.6
65.0
(28.4)

Total incurred losses on claims and LAE

512.7

417.0

471.6

48.0

205.2

Payments for losses on claims and LAE

Payments on current accident year’s claims
Payments on prior accident years’ claims

(201.0)
(278.8)

(126.4)
(270.3)

(81.5)
(196.4)

(42.4)
(93.0)

(54.4)
(155.2)

Total payments for losses on claims and LAE

(479.8)

(396.7)

(277.9)

(135.4)

(209.6)

Insurance subsidiaries acquired during the year(3)

–

68.4

372.9

–

Provision for claims and LAE at December 31 excluding CTR Life
CTR Life

1,057.3 1,024.4 1,004.1
27.6

24.2

25.3

742.0
34.9

554.4
21.5

Provision for claims and LAE at December 31

1,081.5 1,049.7 1,031.7

776.9

575.9

IFRS basis for 2011 and 2010; Canadian GAAP basis for 2009 and prior.

(1)
(2) Group Re transferred nSpire Re to European Runoff in 2008.
(3) Polish Re in 2009 and Advent in 2008.

169

F A I R F A X F I N A N C I A L H O L D I N G S L I M I T E D

The following table shows for the Insurance and Reinsurance – Other reporting segment (comprised only of Group Re
prior to 2008) the original provision for losses and LAE at each calendar year-end commencing in 2001, the subsequent
cumulative payments made on account of these years and the subsequent re-estimated amount of these reserves.

Insurance and Reinsurance – Other’s Calendar Year Claims Reserve Development(1)

Calendar Year

As at December 31

2001 2002 2003 2004 2005 2006 2007

2008

2009

2010

2011

Provisions for claims including LAE

232.4 226.1 263.3 267.6 315.6 373.5 456.5

742.0 1,004.1 1,024.4 1,057.3

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

66.6

78.2 115.8

54.3

40.3

85.9

93.0

197.7

129.7 175.5 152.8

74.6 104.3 151.9 160.5

262.5

215.0 206.0 164.9 128.8 160.5 209.4 238.7

401.0

278.8

240.5

421.8

232.0 209.0 210.0 179.2 206.6 267.3 304.3

222.5 243.4 251.8 216.2 252.7 318.0

243.7 276.7 280.8 252.5 290.5

265.2 299.5 309.6 280.3

279.7 320.6 328.9

293.8 334.7

304.6

229.5 268.2 286.3 279.6 319.4 429.4 383.8

833.5

258.5 295.2 302.9 288.2 361.9 375.8 454.1

833.0

277.5 310.1 317.3 326.7 322.9 436.9 484.2

787.6

966.2

989.2

939.8

283.2 323.4 348.4 302.8 377.6 458.0 477.6

291.1 348.1 338.0 351.7 393.3 452.5

307.9 343.5 375.2 364.5 387.1

305.8 374.6 384.7 359.4

327.1 380.3 381.3

334.7 377.9

335.0

Favourable (unfavourable) development

(102.6) (151.8) (118.0) (91.8) (71.5) (79.0) (21.1)

(45.6)

64.3

58.2

(1) The table above has been restated to reflect the transfer of nSpire Re’s Group Re business to Runoff effective January 1, 2008.

The Insurance and Reinsurance – Other reporting segment experienced net favourable development of prior years’
reserves in 2011 of $58.2 as a result of net favourable development of $39.7 (principally comprised of net
favourable development at Advent across most lines of business and reserve releases across a number of cedants at
Group Re, partially offset by net adverse development at Polish Re related to commercial automobile claims
reserves) and the effect of net favourable foreign currency movements of $18.5 (principally related to the
translation of the Canadian dollar-denominated claims reserves of CRC Re). The total favourable impact of the
effect of foreign currency translation on claims reserves of $25.6 was principally related to the strengthening of the
U.S. dollar relative to the Canadian dollar in 2011 and comprised $18.5 related to prior years’ reserves and $7.1
related to the current year’s reserves.

170

Runoff

The following table shows for the Runoff operations the provision for losses and LAE as originally and as currently
estimated for the years 2007 through 2011. The favourable or unfavourable development from prior years has
been credited or charged to each year’s earnings.

Reconciliation of Provision for Claims – Runoff(1)

Provision for claims and LAE at January 1

2011
2,095.0

2010
1,956.7

2009
1,989.9

2008
2,116.5

2007
2,487.9

Transfers to Runoff(2)

484.2

–

97.9

–

Incurred losses on claims and LAE

Provision for current accident year’s claims
Foreign exchange effect on claims
Increase in provision for prior accident years’ claims

Total incurred losses on claims and LAE

Payments for losses on claims and LAE

Payments on current accident year’s claims
Payments on prior accident years’ claims

8.8
(9.3)
56.7

56.2

1.8
(8.4)
50.6

44.0

–
14.3
57.6

71.9

13.7
(30.5)
64.1

5.3
21.0
90.9

47.3

117.2

(1.8)
(211.4)

(0.1)
(300.0)

–

(105.1)(3)

(2.6)
(269.2)

(4.1)
(484.5)

Total payments for losses on claims and LAE

(213.2)

(300.1)

(105.1)

(271.8)

(488.6)

Provision for claims and LAE at December 31 before the

undernoted

2,422.2

1,700.6

1,956.7

1,989.9

2,116.5

A&E reserves transferred from Crum & Forster(4)

Runoff subsidiaries acquired during the year(5)

334.5

103.9

–

394.4

–

Provision for claims and LAE at December 31

2,860.6

2,095.0

1,956.7

1,989.9

2,116.5

(1)

IFRS basis for 2011 and 2010; Canadian GAAP basis for 2009 and prior.

(2) Transfer to Runoff of OdysseyRe’s Clearwater Insurance business in 2011 and nSpire Re’s Group Re business in 2008.

(3) Reduced by $136.2 of proceeds received from the commutation of several reinsurance treaties.

(4) U.S. Runoff assumed substantially all of Crum & Forster’s liabilities for asbestos and environmental claims reserves in

December 2011.

(5) Syndicate 376 in 2011, GFIC and Syndicate 2112 in 2010.

Runoff experienced net adverse development of prior years’ reserves in 2011 of $56.7. U.S. Runoff experienced
$117.5 of net adverse development of prior years’ reserves (primarily related to net strengthening of workers’
compensation and asbestos claims reserves), partially offset by $60.8 of net favourable development of prior years’
reserves in European Runoff (primarily related to net favourable emergence of $52.0 across all lines at European
Runoff and an $8.8 decrease in the provision for uncollectible reinsurance).

Asbestos and Pollution

General A&E Discussion

A number of the company’s subsidiaries wrote general liability policies and reinsurance prior to their acquisition
by Fairfax under which policyholders continue to present asbestos-related injury claims and claims alleging
injury, damage or clean up costs arising from environmental pollution (collectively “A&E”) claims. The vast
majority of these claims are presented under policies written many years ago.

There is a great deal of uncertainty surrounding these types of claims, which 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 most other types of claims because there is, across the United States, inconsistent prece-
dent, if any at all, to determine what, if any, coverage exists or which, if any, policy years and insurers/reinsurers
may be liable. These uncertainties are exacerbated by 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 insurance industry as a whole is engaged in extensive litigation over these

171

F A I R F A X F I N A N C I A L H O L D I N G S L I M I T E D

coverage and liability issues and is thus confronted with continuing uncertainty in its efforts to quantify A&E
exposures. Conventional actuarial reserving techniques cannot be used to estimate the ultimate cost of such
claims, due to inadequate loss development patterns and inconsistent and yet-emerging legal doctrine.

In addition to asbestos and pollution, the company faces exposure to other types of mass tort or health hazard
claims. Such claims include breast implants, pharmaceutical products, chemical products, lead-based pigments,
noise-induced hearing loss, tobacco, Hepatitis C, mold, and welding fumes. As a result of its historical under-
writing profile and its focus on excess liability coverage for Fortune 500 type entities, Runoff faces the bulk of
these potential exposures within Fairfax. Tobacco, although a significant potential risk to the company, has not
presented significant actual exposure to date. Methyl tertiary butyl ether (“MTBE”) was a significant potential
health hazard exposure facing the company, however, the most significant MTBE exposures have been resolved.
The remaining MTBE exposures appear to be minimal at this time. Although still a risk, lead pigment has had
some favorable underlying litigation developments resulting in this hazard presenting less of a risk to the
company. Exposure to the insurance industry for Hepatitis C claims may be significant and while the company
continues to monitor these claims and have had some policyholders present coverage demands, management
believes the company’s exposure is minimal.

Following the transfer of Clearwater Insurance to Runoff effective from January 1, 2011 and the assumption by
Runoff of substantially all of Crum & Forster’s liabilities for asbestos, environmental and other latent claims effec-
tive from December 31, 2011, substantially all of Fairfax’s exposure to asbestos and pollution losses are now under
the management of Runoff (refer to the Runoff section of this MD&A for additional details related to those
transactions). Accordingly, the following analysis of the company’s gross and net loss and ALAE reserves from
A&E exposures as at December 31, 2011 and 2010, and the movement in gross and net reserves for those years is
presented below:

A&E
Provision for A&E claims and ALAE at January 1
A&E losses and ALAE incurred during the year
A&E losses and ALAE paid during the year
Insurance subsidiaries acquired during the year

2011

2010

Gross

Net

Gross

Net

1,633.9
47.7
(191.0)
–

1,115.0
47.1
(111.9)
–

1,711.1
117.5
(203.3)
8.6

1,155.8
66.2
(115.6)
8.6

Provision for A&E claims and ALAE at December 31

1,490.6

1,050.2

1,633.9

1,115.0

Asbestos Claim Discussion

As previously reported, tort reform, both legislative and judicial, has had a significant impact on the asbestos liti-
gation landscape. The majority of claims now being filed and litigated continues to be mesothelioma, lung can-
cer, or impaired asbestosis cases. This resulting reduction in new filings has focused the litigants on the more
seriously injured plaintiffs. While initially there was a concern that such a focus would exponentially increase the
settlement value of asbestos cases involving malignancies, the company has not had this experience. Expense has
increased as a result of the focus on these types of claims, as the malignancy cases are often more heavily litigated
than were the non-malignancy cases.

The following is an analysis of Fairfax’s gross and net loss and ALAE reserves from asbestos exposures as at
December 31, 2011 and 2010, and the movement in gross and net reserves for those years:

Asbestos
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
Insurance subsidiaries acquired during the year

2011

2010

Gross

Net

Gross

Net

1,357.6
73.8
(123.9)
–

934.9
49.3
(80.9)
–

1,369.1
141.4
(159.5)
6.6

953.4
75.7
(100.8)
6.6

Provision for asbestos claims and ALAE at December 31

1,307.5

903.3

1,357.6

934.9

172

The policyholders with the most significant asbestos exposure continue to be traditional defendants who manu-
factured, distributed or installed asbestos products on a nationwide basis in the United States. While these
insureds are relatively small in number, asbestos exposures for such entities have increased over the past decade
due to the rising volume of claims, the erosion of underlying limits, and the bankruptcies of target defendants. In
addition, less prominent or “peripheral” defendants, including a mix of manufacturers, distributors, and installers
of asbestos-containing products, as well as premises owners continue to present with new reports. For the most
part, these insureds are defendants on a regional rather than nationwide basis in the United States. The nature of
these insureds and the claimant population associated with them, however, result in far less total exposure to the
company than the historical traditional asbestos defendants. Reinsurance contracts entered into before 1984 also
continue to present exposure to asbestos.

Reserves for asbestos cannot be estimated using traditional loss reserving techniques that rely on historical acci-
dent year loss development factors. Because each insured presents different liability and coverage issues, the
company evaluates its asbestos exposure on an insured-by-insured basis. Since the mid-1990’s Fairfax has utilized
a sophisticated, non-traditional methodology that draws upon company experience and supplemental databases
to assess asbestos liabilities on reported claims. The methodology utilizes a ground-up, exposure-based analysis
that constitutes the industry “best practice” approach for asbestos reserving. The methodology was initially cri-
tiqued 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 cover-
age, 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.

As a result of the processes, procedures, and analyses described above, management believes that the reserves car-
ried for asbestos claims at December 31, 2011 are appropriate based upon known facts and current law. 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
(including the legal uncertainties described above), the added uncertainty brought upon by recent changes in the
asbestos litigation landscape, and possible future developments regarding the ability to 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.

Environmental Pollution Discussion

Environmental pollution claims represent another significant exposure for Fairfax. However, new reports of envi-
ronmental pollution claims continue to remain low. While insureds with single-site exposures are still active, Fair-
fax has resolved the majority of known claims from 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.

Despite the stability of recent trends, there remains great uncertainty in estimating liabilities arising from these
exposures. First, the number of hazardous materials sites subject to cleanup is unknown. In the U.S., approximately
1,295 sites are included on the National Priorities List of the Environmental Protection Agency. Second, the
liabilities of the insureds themselves are difficult to estimate. At any given site, the allocation of remediation cost
among the potentially responsible parties varies greatly depending upon a variety of factors. Third, different courts
have been presented with liability and coverage issues regarding pollution claims and have reached inconsistent
decisions. There is also uncertainty about claims for damages to natural resources. These claims seek compensation
for the harm caused by the loss of natural resources beyond clean up costs and fines. Natural resources are generally
defined as land, air, water, fish, wildlife, biota, and other such resources. Funds recovered in these actions are
generally to be used for ecological restoration projects and replacement of the lost natural resources.

At this point in time, natural resource damages claims have not developed into significant risks for the company’s
insureds.

173

F A I R F A X F I N A N C I A L H O L D I N G S L I M I T E D

The following is an analysis of the company’s gross and net loss and ALAE reserves from pollution exposures as at
December 31, 2011 and 2010, and the movement in gross and net reserves for those years:

Pollution
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
Insurance subsidiaries acquired during the year

2011

2010

Gross

Net

Gross

Net

276.3
(26.1)
(67.1)
–

180.1
(2.2)
(31.0)
–

342.0
(23.9)
(43.8)
2.0

202.4
(9.5)
(14.8)
2.0

Provision for pollution claims and ALAE at December 31

183.1

146.9

276.3

180.1

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 company to establish pollution reserves is similar to that used for
asbestos liabilities: the exposure presented by each insured and the anticipated cost of resolution using
ground-up, exposure-based analysis that constitutes industry “best practice” 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.

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 potentially responsible parties at
each site, the nature of environmental harm and the corresponding remedy at each site, the ownership and gen-
eral use of each site, the involvement of other insurers and the potential for other available coverage, and the
applicable law in each jurisdiction.

Summary

Management believes that the A&E reserves reported at December 31, 2011 are reasonable estimates of the ulti-
mate remaining liability for these claims based on facts currently known, the present state of the law and cover-
age litigation, current assumptions, and the reserving methodologies employed. These A&E reserves are
continually monitored by management and reviewed extensively by independent actuaries. New reserving meth-
odologies and developments will continue to be evaluated as they arise in order to supplement the ongoing
analysis of A&E exposures. However, to the extent that future social, scientific, 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, increases in loss reserves may emerge in future periods.

Recoverable from Reinsurers

Fairfax’s subsidiaries purchase certain reinsurance to reduce their exposure on the insurance and reinsurance risks
that 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, generally a company must have high
A.M. Best and/or Standard & Poor’s financial strength ratings and maintain capital and surplus exceeding $500.0.
Most of the reinsurance balances for reinsurers rated B++ and lower or which are not rated were inherited by Fair-
fax on acquisition of a subsidiary.

Recoverable from reinsurers on the consolidated balance sheet ($4,198.1 at December 31, 2011) consists of future
recoverables from reinsurers on unpaid claims ($3,604.6), reinsurance receivable on paid losses ($500.9) and
unearned premiums from reinsurers ($388.1), net of provision for uncollectible balances ($295.5). Recoverables
from reinsurers on unpaid claims increased by $236.5 to $3,604.6 at December 31, 2011 from $3,368.1 at
December 31, 2010 with the increase related primarily to the consolidation of the recoverable from reinsurers of
the recoverable from reinsurers acquired in connection with the
First Mercury and Pacific Insurance,
reinsurance-to-close of Syndicate 376, the effects of losses ceded to reinsurers by OdysseyRe, Advent and Group Re
principally related to the Japan earthquake and tsunami and increased business volume at Fairfax Asia and Fairfax
Brasil, partially offset by the continued progress by Runoff in collecting and commuting its remaining reinsurance
recoverable balances.

174

The following table presents Fairfax’s top 25 reinsurance groups (ranked by gross recoverable from reinsurers net
of provisions for uncollectible reinsurance) at December 31, 2011. These 25 reinsurance groups represented 68.2%
(66.6% at December 31, 2010) of Fairfax’s total recoverable from reinsurers at December 31, 2011.

Group

Swiss Re

Lloyd’s

Munich

Everest

Berkshire Hathaway

GIC

ACE

Transatlantic

HDI

Aegon

Nationwide

Alterra

SCOR

Ariel

QBE

Ullico

Enstar

CNA

Platinum

Liberty Mutual

Axis

AXA

Achilles

Travelers

Singapore Re

Sub-total

Other reinsurers

Principal reinsurers

Swiss Re America Corp.

Lloyd’s

Munich Reinsurance America, Inc.

Everest Re (Bermuda) Ltd.

General Reinsurance Corp.

General Insurance Corp. of India

ACE Property & Casualty Insurance Co.

Transatlantic Re

Hannover Rueckversicherung

Arc Re

Nationwide Mutual Insurance Co.

Alterra Bermuda Ltd.

SCOR Canada Reinsurance Co.

Ariel Reinsurance Ltd.

QBE Reinsurance Corp.

Ullico Casualty Co.

Unionamerica Insurance

Continental Casualty

Platinum Underwriters Bermuda Ltd.

Liberty Mutual Ins. Co.

Axis Reinsurance Co.

Colisee Re, CAB

Brit Insurance Ltd.

Travelers Indemnity Co.

Singapore Re Corp

A.M. Best
rating (or S&P
equivalent)(1)

Gross
recoverable
from
reinsurers(2)

Net unsecured
recoverable(3)
from reinsurers

A+

A++

A–

A+

(4)

A+

A–

B+

A+

A–

678.7

312.6

233.3

156.7

144.2

133.4

129.0

127.1

121.4

110.5

85.1

84.7

84.5

79.1

73.7

67.7

66.1

59.0

56.9

49.7

45.0

42.5

41.6

41.4

41.0

363.4

278.1

212.1

141.9

34.8

119.0

118.1

104.2

5.9

85.0

62.1

77.0

4.9

60.0

–

55.8

39.8

52.4

49.0

24.1

38.6

40.2

41.1

18.1

3,064.9

1,428.7

4,493.6

(295.5)

2,167.5

1,113.1

3,280.6

(295.5)

4,198.1

2,985.1

Total recoverable from reinsurers

Provision for uncollectible reinsurance

Recoverable from reinsurers

(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 was held, but before specific provisions for uncollectible reinsurance.
(4) Aegon is rated A- by S&P; Arc Re is not rated.

175

F A I R F A X F I N A N C I A L H O L D I N G S L I M I T E D

The following table presents the classification of the $4,198.1 gross recoverable from reinsurers according to the
financial strength rating of the responsible reinsurers at December 31, 2011. Pools and associations, shown sepa-
rately, are generally government or similar insurance funds carrying limited credit risk.

Consolidated Recoverable from Reinsurers

A.M. Best
rating
(or S&P
equivalent)

Gross
recoverable
from reinsurers

Outstanding
balances
for which
security
is held

Net
unsecured
recoverable
from reinsurers

A++
A+
A
A-
B++
B+
B or lower
Not rated
Pools and associations

14.0
377.8
212.3
233.8
12.3
76.5
0.2
239.8
46.3

1,213.0

170.5
1,443.0
1,371.9
457.8
37.3
92.5
1.8
766.3
152.5

4,493.6
(295.5)

4,198.1

156.5
1,065.2
1,159.6
224.0
25.0
16.0
1.6
526.5
106.2

3,280.6
(295.5)

2,985.1

Provision for uncollectible reinsurance

Recoverable from reinsurers

To support gross recoverable from reinsurers balances, Fairfax had the benefit of letters of credit, trust funds or
offsetting balances payable totaling $1,213.0 as at December 31, 2011 as follows:

(cid:129)

for reinsurers rated A- or better, Fairfax had security of $837.9 against outstanding reinsurance
recoverable of $3,443.2;

for reinsurers rated B++ or lower, Fairfax had security of $89.0 against outstanding reinsurance
recoverable of $131.6;

for unrated reinsurers, Fairfax had security of $239.8 against outstanding reinsurance recoverable of
$766.3; and

for pools and associations, Fairfax had security of $46.3 against outstanding reinsurance recoverable of
$152.5.

In addition to the above security arrangements, Lloyd’s is also required to maintain funds in Canada and the
United States that are monitored by the applicable regulatory authorities.

Substantially all of the $295.5 provision for uncollectible reinsurance related to the $569.1 of net unsecured
reinsurance recoverable from reinsurers rated B++ or lower or which are unrated (excludes pools and associations).

The following tables separately break out the consolidated recoverable from reinsurers for the insurance and
reinsurance operations and for the runoff operations. As shown in those tables, approximately 26.9% of the
consolidated recoverable from reinsurers related to runoff operations as at December 31, 2011 (compared to
23.5% at December 31, 2010) with the increase year-over-year primarily related to the transfer of Clearwater
Insurance to Runoff, the assumption by Runoff of substantially all of Crum & Forster’s liabilities for asbestos,
environmental and latent claims, the acquisition of Valiant Insurance from Crum & Forster and the reinsurance-
to-close of Syndicate 376. Prior to giving effect to these transactions, recoverable from reinsurers at Runoff
decreased by $230.4 in 2011 compared to 2010 primarily as a result of the continued progress by Runoff in
collecting and commuting its remaining reinsurance recoverable balances.

176

Recoverable from Reinsurers – Insurance and Reinsurance Operating Companies and
Runoff Operations

A.M. Best
rating
(or S&P
equivalent)
A++
A+
A
A-
B++
B+
B or lower
Not rated
Pools and associations

Provision for uncollectible reinsurance

Recoverable from reinsurers

Insurance and Reinsurance
Operating Companies

Runoff Operations

Outstanding
balances
for which
security
is held
13.4
356.6
179.0
153.4
11.1
72.5
—
79.6
46.3

911.9

Gross
recoverable
from
reinsurers
145.2
1,064.4
1,127.2
342.8
23.7
80.5
0.7
199.1
139.2

3,122.8
(54.8)

3,068.0

Net
unsecured
recoverable
from
reinsurers
131.8
707.8
948.2
189.4
12.6
8.0
0.7
119.5
92.9

Gross
recoverable
from
reinsurers
25.3
378.6
244.7
115.0
13.6
12.0
1.1
567.2
13.3

2,210.9
(54.8)

1,370.8
(240.7)

2,156.1

1,130.1

Outstanding
balances
for which
security
is held
0.6
21.2
33.3
80.4
1.2
4.0
0.2
160.2
—

301.1

Net
unsecured
recoverable
from
reinsurers
24.7
357.4
211.4
34.6
12.4
8.0
0.9
407.0
13.3

1,069.7
(240.7)

829.0

Based on the results of the preceding analysis of the company’s recoverable from reinsurers and on the credit risk
analysis performed by the company’s reinsurance security department as described below, Fairfax believes that its
provision for uncollectible reinsurance provided for all likely losses arising from uncollectible reinsurance at
December 31, 2011.

The company’s reinsurance security department, with its dedicated specialized personnel and expertise in analyz-
ing and managing credit risk, is responsible for the following with respect to recoverable from reinsurers: evaluat-
ing 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; on a quarterly basis, monitoring
reinsurance recoverable by reinsurer and by company, in aggregate, and recommending the appropriate provision
for uncollectible reinsurance; and pursuing collections from, and global commutations with, reinsurers which are
either impaired or considered to be financially challenged.

The insurance and reinsurance operating companies purchase reinsurance to achieve various objectives including
protection from catastrophic financial loss resulting from a single event, such as the total fire loss of a large
manufacturing plant, protection against the aggregation of many smaller claims resulting from a single event,
such as an earthquake or major hurricane, that may affect many policyholders simultaneously and generally to
protect capital by limiting loss exposure to acceptable levels. Ceded reinsurance transactions had a net favourable
pre-tax impact in 2011 of $37.9 (2010 – $81.9) comprised as set out in the table that follows:

Reinsurers’ share of premiums earned
Commissions earned on reinsurers’ share of premiums earned
Reinsurers’ share of losses on claims
Release (provision) for uncollectible reinsurance

Net impact of ceded reinsurance (pre-tax)

2011
(1,121.4)
226.1
911.9
21.3

2010
(914.4)
166.9
854.6
(25.2)

37.9

81.9

Reinsurers’ share of premiums earned increased to $1,121.4 in 2011 compared to $914.4 in 2010 with the increase
primarily attributable to lower net retentions at Crum and Forster, the year-over-year increase in premiums ceded
to reinsurers by companies acquired in 2011 and 2010 (principally First Mercury) and increased year-over-year
business growth at Fairfax Brasil and Fairfax Asia. Commissions earned on reinsurers’ share of premiums earned in
2011 increased to $226.1 compared to $166.9 in 2010 with the increase commensurate with the increase in
reinsurers’ share of premiums earned as described above. Reinsurers’ share of losses on claims of $911.9 in 2011
compared to $854.6 in 2010 with the increase primarily attributable to the strengthening of workers’ compensa-
tion reserves at Runoff and increased reinsurance utilization as a result of catastrophe losses at Advent, partially
offset by decreased losses on claims ceded to reinsurers by First Capital (First Capital ceded a significant loss
related to the Aban Pearl oil rig in 2010). In 2011, the company recorded a net release of $21.3 of provision for
uncollectible reinsurance as a result of recovery of certain reinsurance recoverables in 2011 which were provided

177

F A I R F A X F I N A N C I A L H O L D I N G S L I M I T E D

for in prior periods and a reduction in 2011 of certain specific provisions for uncollectible reinsurance compared
to a net provision for uncollectible reinsurance of $25.2 recorded in 2010.

Ceded reinsurance contributed marginally to cash provided by operating activities in 2011 and to a much lesser
extent relative to 2010 with the decrease principally related to a 26.4% increase in written premium ceded to
reinsurers (on a cash basis the company ceded written premium to reinsurers of $1,143.4 and $904.6 in 2011 and
2010 respectively) relative to a 1.6% decrease in collections of ceded losses (on a cash basis the company collected
$902.7 and $917.2 from reinsurers in 2011 and 2010 respectively related to ceded losses). The increase in ceded
written premiums of 26.4% exceeded the change in ceded losses (a decrease of 1.6%) primarily as a result of
increased reinstatement premiums paid year-over-year (the company paid reinstatement premiums of $46.8 and
$13.0 in 2011 and 2010 respectively) which are payable to reinsurers immediately to restore coverage limits that
have been exhausted as a result of reinsured catastrophe losses under certain excess of loss reinsurance treaties,
whereas the collections from reinsurers related to those catastrophe losses will occur in the future (for example in
2012 and beyond in relation to the Japanese earthquake and tsunami). In 2011, commissions collected on
reinsurer’ share of premiums earned increased compared to 2010 with the increase commensurate with the
increase in written premiums ceded to reinsurers as described above. In addition, the cost of purchasing excess of
loss reinsurance protection for the start-up operations of Fairfax Brasil in 2011 continued to be disproportionate
relative to the size of Fairfax Brasil but was necessary to provide Fairfax Brasil with the ability to offer the capacity
necessary to grow its business in the Brazilian market.

Investments

Investments at their year-end carrying values (including at the holding company) in Fairfax’s first year and for the
past ten years are presented in the following table. Included in bonds are credit and CPI-linked derivatives and
common stocks includes investments in associates and equity derivatives.

Year(1)

1985
↑

2002
2003
2004
2005
2006
2007
2008
2009
2010
2011

Cash and
short term
investments(2)

6.4

Bonds

14.1

Preferred
stocks

Common
stocks

Real
estate

1.0

2.5

–

Total(2)

24.0

Per share
($)(2)

4.80

7,390.6
2,033.2
4,705.2
6,120.8
7,260.9
4,075.0
8,127.4
4,385.0
9,017.2
5,188.9
3,965.7 11,669.1
6,343.5
9,069.6
3,658.8 11,550.7
4,073.4 13,353.5
6,899.1 12,074.7

160.1
142.3
135.8
15.8
16.4
19.9
50.3
357.6
627.3
608.3

992.1
1,510.7
1,960.9
2,324.0
2,579.2
3,339.5
4,480.0
5,697.9
5,221.2
4,717.4

20.5 10,596.5
12.2 12,491.2
28.0 13,460.6
17.2 14,869.4
18.0 16,819.7

753.90
901.35
840.80
835.11
948.62
6.5 19,000.7 1,075.50
6.4 19,949.8 1,140.85
8.0 21,273.0 1,064.24
24.6 23,300.0 1,139.07
23.0 24,322.5 1,193.70

(1)

IFRS basis for 2011 and 2010; Canadian GAAP basis for 2009 and prior. Under Canadian GAAP, investments were
generally carried at cost or amortized cost in 2006 and prior.

(2) Net of short sale and derivative obligations of the holding company and the subsidiary companies commencing in 2004.

The increase in total investments per share of $54.63 from $1,139.07 at December 31, 2010 to $1,193.70 at
December 31, 2011 primarily reflected increased net realized and unrealized appreciation related to bonds
(principally U.S. treasury and U.S. state and municipal bonds), the net unrealized appreciation of the company’s
equity hedges, the consolidation of the investment portfolios of First Mercury and Pacific Insurance ($163.8 and
$81.2 respectively at December 31, 2011) and decreased Fairfax common shares effectively outstanding
(20,375,796 at December 31, 2011 compared to 20,455,247 at December 31, 2010), partially offset by net unreal-
ized depreciation related to the company’s equity and equity-related holdings and the unfavourable impact of
foreign currency translation. Since 1985, investments per share have compounded at a rate of 24.7% per year.

178

Interest and Dividend Income

The majority of interest and dividend income is earned by the insurance, reinsurance and runoff companies. Inter-
est and dividend income earned on holding company cash and investments was $6.3 in 2011 (2010 – $17.1).
Interest and dividend income earned in Fairfax’s first year and for the past ten years is presented in the following
table.

Year(1)

1986
↑

2002
2003
2004
2005
2006
2007
2008
2009
2010
2011

Interest and dividend income

Average

investments at

carrying value(2) Amount
3.4
46.3

Pre-tax

Yield
(%)

7.34

After tax

Per share

($) Amount

0.70

1.8

Yield
(%)

3.89

Per share
($)

0.38

10,377.9
11,527.5
12,955.8
14,142.5
15,827.0
17,898.0
19,468.8
20,604.2
22,270.2
23,787.5

436.1
331.9
375.7
466.1
746.5
761.0
626.4
712.7
711.5
705.3

4.20
2.88
2.90
3.30
4.72
4.25
3.22
3.46
3.20
2.97

30.53
23.78
27.17
28.34
42.03
42.99
34.73
38.94
34.82
34.56

292.2
215.8
244.3
303.0
485.3
494.7
416.6
477.5
490.9
505.7

2.82
1.87
1.89
2.14
3.07
2.76
2.14
2.32
2.20
2.13

20.46
15.46
17.66
18.42
27.32
27.95
23.10
26.09
24.02
24.78

(1)

IFRS basis for 2011 and 2010; Canadian GAAP basis for 2009 and prior. Under Canadian GAAP, investments were
generally carried at cost or amortized cost in 2006 and prior.

(2) Net of short sale and derivative obligations of the holding company and the subsidiary companies commencing in 2004.

Consolidated interest and dividend income of $705.3 in 2011 decreased by 0.9% from $711.5 in 2010. Prior to
giving effect to the year-over-year impact of the consolidation of Zenith National, GFIC, First Mercury and Pacific
Insurance, consolidated interest and dividend income of $628.9 in 2011 decreased by 6.9% from $675.5 in 2010
with the decrease primarily attributable to lower yields due to increased investment expenses incurred in con-
nection with total return swaps (discussed below), partially offset by a modest increase in interest and dividend
income earned. Primarily as a result of these factors, the company’s pre-tax interest and dividend income yield in
2011 of 2.97% decreased from 3.20% in 2010. The company’s after-tax interest and dividend yield in 2011 of
2.13% (compared to 2.20% in 2010) reflected the benefit of the decrease in the company’s Canadian statutory
income tax rate from 31.0% in 2010 to 28.3% in 2011.

Prior to giving effect to the interest expense which accrued to reinsurers on funds withheld and expenses incurred
in connection with total return swaps (described in the two subsequent paragraphs), interest and dividend
income in 2011 of $861.9 (2010 – $814.9) produced a pre-tax gross portfolio yield of 3.62% (2010 – 3.66%). The
company’s pre-tax gross portfolio yield remained relatively stable on a year-over-year basis despite the decrease in
interest rates in 2011 on the company’s principal fixed income holdings (U.S. treasury bonds and U.S. state and
municipal bonds), primarily as a result of purchases during the year of certain higher yielding other government
and U.S. state and municipal bonds partially offset by the shift to lower yielding shorter dated U.S. treasury bills
late in 2011.

Funds withheld payable to reinsurers shown on the consolidated balance sheets represents funds to which the
company’s reinsurers are entitled (principally premiums and accumulated accrued interest on aggregate stop loss
reinsurance treaties) but which Fairfax retains as collateral for future obligations of those reinsurers. Claims pay-
able under such reinsurance treaties are paid first out of the funds withheld balances. At December 31, 2011,
funds withheld payable to reinsurers shown on the consolidated balance sheet of $412.6 ($363.2 as at
December 31, 2010) principally related to Crum & Forster of $318.0 ($266.1 at December 31, 2010), First Capital

179

F A I R F A X F I N A N C I A L H O L D I N G S L I M I T E D

of $46.5 ($44.0 at December 31, 2010) and OdysseyRe of $29.0 ($38.3 at December 31, 2010). The year-over-year
increase in funds withheld payable to reinsurers at Crum & Forster primarily related to the acquisition of First
Mercury. The company’s consolidated interest and dividend income in 2011 of $705.3 (2010 – $711.5) is shown
net of $16.3 (2010 – $17.3) of interest expense which accrued to reinsurers on funds withheld.

The company’s long equity total return swaps allow the company to receive the total return on a notional
amount of an equity index or individual equity security (including dividends and capital gains or losses) in
exchange for the payment of a floating rate of interest on the notional amount. Conversely, short equity total
return swaps allow the company to pay the total return on a notional amount of an equity index or individual
equity security in exchange for the receipt of a floating rate of interest on the notional amount. Throughout this
MD&A, the term “investment expenses incurred in connection with total return swaps” refers to the net divi-
dends and interest paid or received related to the company’s long and short equity total return swaps which
totaled $140.3 in 2011 compared to $86.1 in 2010. The company’s consolidated interest and dividend income in
2011 and 2010 is shown net of these amounts.

The consolidated share of profit of associates was $1.8 in 2011 compared to $46.0 in 2010, with the decrease prin-
cipally related to the year-over-year increase of $55.6 in the company’s share of the losses of ICICI Lombard
which was primarily as a result of reserve strengthening related to ICICI Lombard’s mandatory pro-rata
participation in the Indian commercial vehicle insurance pool.

Net Gains (Losses) on Investments

Net gains on investments of $691.2 in 2011 (net losses on investments of $3.0 in 2010) were comprised as shown
in the following table:

2011

Mark-to-market

2010

Mark-to-market

Inception-to-date
realized gains
(losses) on
positions
closed or sold
in the period

(Gains) losses
recognized
in prior periods
on positions
closed or sold in
the period

Gains (losses)
arising on
positions
remaining
open at end of
period

Inception-to-date
realized gains
(losses) on
positions closed
or sold in the
period

(Gains) losses
recognized in
prior periods on
positions closed
or sold
in the period

Gains (losses)
arising on
positions
remaining
open at end of
period

Net gains
(losses) on
investment

Common stocks
Preferred stocks – convertible
Bonds – convertible
Gain on disposition of associate(1)
Other equity derivatives(2)

Equity and equity-related

holdings

Economic equity hedges

Equity and equity-related

holdings after equity-hedges
Bonds
Preferred stocks
CPI-linked derivatives
Other derivatives
Foreign currency
Other

491.6
–
43.1
7.0
161.9

703.6
–

703.6
424.6
0.9
–
10.8
(64.5)
13.0

Net gains (losses) on investments

1,088.4

Net gains (losses) on bonds is

comprised as follows:

Government bonds
U.S. states and municipalities
Corporate and other

354.6
(2.0)
72.0

424.6

(240.9)
–
16.3
–
(140.4)

(1,025.5)
(5.2)
(35.9)
–
(64.8)

(774.8)
(5.2)
23.5
7.0
(43.3)

(365.0)
–

(1,131.4)
413.9

(792.8)
413.9

(365.0)
48.1
(1.1)
–
13.0
49.3
–

(255.7)

100.8
0.4
(53.1)

48.1

(717.5)
806.0
(1.7)
(233.9)
25.6
(19.2)
(0.8)

(378.9)
1,278.7
(1.9)
(233.9)
49.4
(34.4)
12.2

(141.5)

691.2

297.7
644.3
(136.0)

753.1
642.7
(117.1)

806.0

1,278.7

444.7
–
(266.7)
77.9
13.7

269.6
–

269.6
564.3
1.6
–
(21.0)
(179.0)
17.4

652.9

202.8
58.1
303.4

564.3

(347.4)
–
337.0
–
0.2

(10.2)
–

(10.2)
(185.6)
(0.3)
–
36.8
100.9
5.0

480.0
(18.6)
17.8
–
166.8

577.3
(18.6)
88.1
77.9
180.7

646.0
(936.6)

905.4
(936.6)

(290.6)
(303.0)
5.5
28.1
(12.9)
(29.6)
–

(31.2)
75.7
6.8
28.1
2.9
(107.7)
22.4

(53.4)

(602.5)

(3.0)

(75.0)
(45.4)
(65.2)

(142.5)
(212.0)
51.5

(14.7)
(199.3)
289.7

(185.6)

(303.0)

75.7

(1) On December 30, 2011, Polish Re, a wholly owned subsidiary of the company sold all of its interest in Polskie
Towarzystwo Ubezpiezen S.A. (“PTU”) and received cash consideration of $10.1 (34.7 million Polish zloty) and
recorded net gains on investments of $7.0. On December 17, 2010, the company decreased its ownership of
International Coal Group, Inc. (“ICG”) from 22.2% to 11.1% and received cash consideration of $163.9 and recorded
net gains on investments of $77.9, pursuant to the transaction described in note 6 to the consolidated financial
statements for the year ended December 31, 2011.

(2) Other equity derivatives include equity total return swaps-long positions, equity call options and warrants.

180

The company uses short equity and equity index total return swaps to economically hedge equity price risk asso-
ciated with its equity and equity-related holdings. In 2011, the company’s equity and equity-related holdings
after equity hedges produced a net loss of $378.9 (2010 – $31.2) despite the notional amount of the company’s
economic equity hedges being closely matched to the fair value of the company’s equity and equity-related hold-
ings (economic equity hedges represented 104.6% of the company’s equity and equity-related holdings ($6,822.7)
at December 31, 2011). In 2011, the impact of basis risk was pronounced compared to prior periods as the per-
formance of the company’s equity and equity-related holdings lagged the performance of the economic equity
hedges used to protect those holdings. The company’s economic equity hedges are structured to provide a return
which is inverse to changes in the fair values of the Russell 2000 index (decreased 5.5% in 2011), the S&P 500
index (decreased nominally in 2011) and certain individual equity securities (decreased by 12.6% on a weighted
average basis in 2011). The majority of the net loss in 2011 of $378.9 related to the company’s equity and equity-
related holdings after equity hedges is unrealized and it is the company’s expectation that over the long term and
consistent with its historical investment performance, the company’s equity and equity-related holdings will
outperform the broader equity indexes, with the result that the net loss related to the company’s equity and
equity-related holdings after equity hedges recorded in 2011 (or a portion thereof) will reverse in future periods.
Refer to the analysis in note 24 (Financial Risk Management) under the heading of Market Price Fluctuations in
the company’s consolidated financial statements for the year ended December 31, 2011 for a discussion of the
company’s economic hedge of equity price risk and related basis risk.

Total Return on the Investment Portfolio

The following table presents the performance of the investment portfolio in Fairfax’s first year and for the most
recent ten years. For the years 1986 to 2006, the calculation of total return on average investments included
interest and dividends, net realized gains (losses) and changes in net unrealized gains (losses) as the majority of
the company’s investment portfolio was carried at cost or amortized cost. For the years 2007 to 2009, Canadian
GAAP required the company to carry most of its investments at fair value and as a result, the calculation of total
return on average investments during this period included interest and dividends, net investment gains (losses)
recorded in net earnings, net unrealized gains (losses) recorded in other comprehensive income and changes in
net unrealized gains (losses) on equity accounted investments. Effective January 1, 2010, the company adopted
IFRS and was required to carry the majority of its investments as at FVTPL and as a result, the calculation of total
return on average investments in 2010 and 2011 includes interest and dividends, net investment gains (losses)
recorded in net earnings and changes in net unrealized gains (losses) on equity accounted investments. All of the
above noted amounts are included in the calculation of total return on average investments on a pre-tax basis.

181

F A I R F A X F I N A N C I A L H O L D I N G S L I M I T E D

Year(1)
1986
↑

2002
2003
2004
2005
2006
2007
2008
2009
2010
2011

Average
investments
at carrying
value(2)
46.3

Interest
and
dividends
3.4

Net
realized
gains
0.7

Change in
unrealized
gains
(losses)
(0.2)

Net gains (losses)
recorded in:

Net
earnings(3)
–

Other
comprehensive
income
–

Change in
unrealized
gains
(losses)
on equity accounted
investments
–

Total return
on average
investments

(%)
8.4

3.9

10,377.9
11,527.5
12,955.8
14,142.5
15,827.0
17,898.0
19,468.8
20,604.2
22,270.2
23,787.5

436.1
331.9
375.7
466.1
746.5
761.0
626.4
712.7
711.5
705.3

465.0
826.1
300.5(4)
385.7
789.4(5)

–
–
–
–
–

263.2
142.4
165.6
73.0
(247.8)
–
–
–
–

–
–
–
–
–
304.5
(426.7)
1,076.7
–
–

–
–
–
–
–
1,639.5
2,718.6
904.3
28.7
737.7

6,028.8

– 1,164.3 11.2
– 1,300.4 11.3
6.5
841.8
–
6.5
924.8
–
– 1,288.1
8.1
(131.2) 2,573.8 14.4
278.3 3,196.6 16.4
(185.2) 2,508.5 12.2
3.8
6.4

838.4
98.2
78.5 1,521.5

9.6(6)

Cumulative from

inception

8,188.6 3,887.8

(1)

IFRS basis for 2011 and 2010; Canadian GAAP for 2009 and prior. Under Canadian GAAP, investments were
generally carried at cost or amortized cost in 2006 and prior.

(2) Net of short sale and derivative obligations of the holding company and the subsidiary companies commencing in 2004.

(3) Excludes a net loss in 2011 of $46.5 (2010 – net loss of $31.7; 2009 – net gain of $14.3; 2008 – net loss of $147.9;
2007 – net gain of $26.4) recognized on the company’s underwriting activities related to foreign currency. Net gains on
investments in 2009 also excluded $25.9 of gains recognized on transactions in the common and preferred shares of
the company’s consolidated subsidiaries.

(4) Excludes the $40.1 gain on the company’s 2004 secondary offering of Northbridge and the $27.0 loss in connection

with the company’s repurchase of outstanding debt at a premium to par.

(5) Excludes the $69.7 gain on the company’s 2006 secondary offering of OdysseyRe, the $15.7 loss on the company’s
repurchase of outstanding debt at a premium to par and the $8.1 dilution loss on conversions during 2006 of the
OdysseyRe convertible senior debenture.

(6) Simple average of the total return on average investments for each of the 26 years.

Investment gains have been an important component of Fairfax’s financial results since 1985, having contributed
an aggregate $10,975.3 (pre-tax) to total equity since inception. The contribution has fluctuated significantly
from period to period: the amount of investment gains (losses) for any period has no predictive value and
variations in amount from period to period have no practical analytical value. From inception in 1985 to 2011,
total return on average investments has averaged 9.6%.

The company has a long term, value-oriented investment philosophy. It continues to expect fluctuations in the
global financial markets for common stocks, bonds and derivative and other securities.

Bonds

A summary of the composition of the company’s fixed income portfolio as at December 31, 2011 and 2010, classified
according to the higher of each security’s respective S&P and Moody’s issuer credit ratings, is presented in the table
that follows:

Issuer Credit Rating
AAA/Aaa
AA/Aa
A/A
BBB/Baa
BB/Ba
B/B
Lower than B/B and unrated

Total

December 31, 2011 December 31, 2010

Carrying
value
2,955.5
5,408.0
1,822.6
349.3
75.5
125.6
1,034.4

%
25.1
45.9
15.5
3.0
0.6
1.1
8.8

Carrying
value
4,220.2
5,291.0
1,432.7
558.4
324.4
215.1
914.9

%
32.5
40.8
11.1
4.3
2.5
1.7
7.1

11,770.9 100.0

12,956.7 100.0

182

The majority of the securities within the company’s fixed income portfolio are rated investment grade or higher
with 71.0% (73.3% at December 31, 2010) being rated AA or higher (primarily consisting of government
obligations). There were no significant changes to the credit quality of the company’s fixed income portfolio at
December 31, 2011 compared to December 31, 2010 except in respect to the sale of approximately 53.9% of the
company’s holdings of U.S. treasury bonds, the proceeds from which were retained in cash or reinvested into
short term investments with minimal exposure to credit risk. At December 31, 2011, holdings of fixed income
securities in the ten issuers (excluding U.S., Canadian and U.K. sovereign government bonds) to which the com-
pany had the greatest exposure totaled $3,862.0, which represented approximately 15.9% of the total investment
portfolio. The exposure to the largest single issuer of corporate bonds held at December 31, 2011 was $228.9,
which represented approximately 0.9% of the total investment portfolio.

As at December 31, 2011 the company had investments with a fair value of $415.7 ($422.8 at December 31, 2010)
in sovereign government bonds rated A/A or lower including $244.2 ($268.5 at December 31, 2010) of Greek
bonds (purchased at deep discounts to par) and $82.8 ($89.0 at December 31, 2010) of Polish bonds (purchased to
match claims liabilities of Polish Re), representing in the aggregate 1.7% (1.8% at December 31, 2010) of the total
investment portfolio. As at December 31, 2011 and 2010, the company did not have any investments in bonds
issued by Ireland, Italy, Portugal or Spain.

The table below displays the potential impact of changes in interest rates on the company’s fixed income portfo-
lio based on parallel 200 basis point shifts up and down, in 100 basis point increments. This analysis was per-
formed on each individual security.

Change in Interest Rates
200 basis point increase
100 basis point increase
No change
100 basis point decrease
200 basis point decrease

December 31, 2011

Fair value of
fixed income
portfolio
9,492.1
10,597.7
11,770.9
13,127.7
14,769.9

Hypothetical $
change effect on
net earnings
(1,536.0)
(794.0)
–
922.8
2,039.6

Hypothetical
% change in
fair value
(19.4)
(10.0)
–
11.5
25.5

The company’s exposure to credit risk and interest rate risk is discussed further in note 24 to the consolidated
financial statements for the year ended December 31, 2011.

Common Stocks

183

F A I R F A X F I N A N C I A L H O L D I N G S L I M I T E D

and may vary dramatically either up or down in short periods, and their ultimate value will therefore only be
known over the long term or on disposition. As a result of volatility in the equity markets and international credit
concerns, the company protected its equity and equity-related holdings against a potential decline in equity
markets by way of short positions effected through equity index total return swaps, including short positions in
certain equities, the Russell 2000 index and the S&P 500 index as set out in the table below. At December 31,
2011, equity hedges with a notional amount of $7,135.2 represented 104.6% of the company’s equity and equity-
related holdings (80.2% at December 31, 2010). The excess of the equity hedges over the company’s equity and
equity-related holdings at December 31, 2011 arose principally as a result of the company’s decision in the third
quarter of 2011 to fully hedge its equity and equity-related holdings by adding to the notional amount of its short
positions in certain equities effected through equity total return swaps and also reflected some non-correlated
performance of the company’s equity and equity-related holdings in 2011 relative to the performance of the
economic equity hedges used to protect those holdings. The company’s exposure to basis risk is discussed further
in note 24 to the consolidated financial statements for the year ended December 31, 2011. The company’s
objective is that the equity hedges be reasonably effective in protecting that proportion of the company’s equity
and equity-related holdings to which the hedges relate should a significant correction in the market occur; how-
ever, due to the lack of a perfect correlation between the hedged items and the hedging items, combined with
other market uncertainties, it is not possible to predict the future impact of the company’s economic hedging
programs related to equity risk.

December 31, 2011

December 31, 2010

Underlying Equity Index

Units

Original
notional
amount(1)

Weighted
average
index
value

Original
notional
amount(1)

Units

Weighted
average
index
value

Russell 2000

S&P 500

52,881,400

3,501.9

662.22 51,355,500

3,377.1

657.60

12,120,558

1,299.3

1,071.96 12,120,558

1,299.3

1,071.96

(1) The aggregate notional amounts on the dates that the short positions were first initiated.

Derivatives and Derivative Counterparties

184

Total derivative assets (excluding exchange traded instruments principally

comprised of equity and credit warrants which are not subject to counterparty
risk)

Impact of net settlement arrangements (described above)

Fair value of collateral deposited for the benefit of the company net of $65.7
(nil at December 31, 2010) of excess collateral pledged by counterparties

Excess collateral pledged by the company in favour of counterparties

Initial margin not held in segregated third party custodian accounts

December 31,
2011

December 31,
2010

389.2

(101.0)

(141.6)

129.7

80.6

424.8

(119.0)

(120.5)

41.1

67.7

Net derivative counterparty exposure after net settlement and collateral

arrangements

356.9

294.1

The fair value of the collateral deposited for the benefit of the company at December 31, 2011 consisted of $50.5
cash ($26.1 at December 31, 2010) and government securities of $156.8 ($94.4 at December 31, 2010). The net
derivative counterparty exposure after net settlement and collateral arrangements, related principally to the
aggregation of balances due from counterparties that were lower than certain minimum thresholds which would
require that collateral be deposited for the benefit of the company.

Float

Fairfax’s float (a non-GAAP measure) is the sum of its loss reserves, including loss adjustment expense reserves,
unearned premium reserves and other insurance contract liabilities, less insurance contract receivables, recover-
able from reinsurers and deferred premium acquisition costs. The annual benefit (cost) of float is calculated by
dividing the underwriting profit (loss) by the average float in that year. Float arises as an insurance or reinsurance
business receives premiums in advance of the payment of claims.

The following table shows the float that Fairfax’s insurance and reinsurance operations have generated and the
cost of generating that float. As the table shows, the average float from those operations increased in 2011 to
$11.3 billion, at a cost of 6.7%.

Year

1986
↑

2007

2008

2009

2010

2011

Underwriting
profit
(loss)(1)

Average
float

Benefit
(cost)
of float

Average long
term Canada
treasury
bond yield

2.5

21.6

11.6%

9.6%

238.9

8,617.7

2.8%

(280.9)

8,917.8

(3.1)%

7.3

9,429.3

0.1%

(236.6)

10,430.5

(2.3)%

(754.4)

11,315.1

(6.7)%

(2.8)%

4.3%

4.1%

3.9%

3.8%

3.3%

4.7%

Weighted average since inception

Fairfax weighted average financing differential since inception: 1.9%

(1)

IFRS basis for 2011; Canadian GAAP basis for 2010 and prior without reclassifications to conform with the
presentation adopted in 2011.

185

F A I R F A X F I N A N C I A L H O L D I N G S L I M I T E D

The following table presents the breakdown of total year-end float for the most recent five years.

Insurance

Reinsurance

Northbridge
1,887.4
1,739.1
2,052.8
2,191.9
2,223.1

U.S.
1,812.8
2,125.1
2,084.5
2,949.7
3,207.7

Fairfax
Asia
86.9
68.9
125.7
144.1
387.0

OdysseyRe
4,412.6
4,398.6
4,540.4
4,797.6
4,733.4

Insurance
and
Reinsurance

Total
Insurance

and
Other Reinsurance
8,777.5
577.8
9,058.1
726.4
9,800.4
997.0
11,060.6
977.3
11,569.6
1,018.4

Runoff
1,770.5
1,783.8
1,737.0
2,048.9
2,829.4

Total
10,548.0
10,841.9
11,537.4
13,109.5
14,399.0

Year
2007
2008
2009
2010
2011

In 2011, the Northbridge float increased by 1.4% (at a cost of 1.4%) primarily due to lower recoverable from
reinsurers, partially offset by a decline in loss and loss adjustment expense reserves and the effect of the
strengthening of the U.S. dollar relative to the Canadian dollar. The U.S. Insurance float increased by 8.7% (at a
cost of 7.0%) as a result of the acquisition of First Mercury, partially offset by the transfer by way of reinsurance of
substantially all of Crum & Forster’s liabilities for asbestos, environmental and other latent claims reserves to the
Runoff reporting segment. The Fairfax Asia float increased by 168.6% (at no cost) primarily due to the acquisition
of Pacific Insurance and increases in premiums payable to reinsurers. The Reinsurance – OdysseyRe float decreased
by 1.3% (at a cost of 7.1%) due to the transfer of Clearwater Insurance to the Runoff reporting segment, partially
offset by increased loss and loss adjustment expense reserves. The Insurance and Reinsurance – Other float
increased by 4.2% (at a cost of 20.7%) primarily as a result of increased loss and loss adjustment expense reserves
recorded by Advent and Group Re. The Runoff float increased by 38.1% primarily as a result of the assumption
by Runoff of the loss and loss adjustment expense reserves of Crum & Forster (related to asbestos, environmental
and other latent claims), OdysseyRe (related to the transfer of Clearwater Insurance) as discussed above and
Syndicate 376. In the aggregate, the float increased by $1.3 to $14.4 at the end of 2011.

Financial Condition

Capital Resources and Management

The company manages its capital based on the following financial measurements and ratios(1):

Holding company cash and investments (net of short sale and

derivative obligations)

Holding company debt
Subsidiary debt
Other long term obligations – holding company

Total debt

Net debt

Common shareholders’ equity
Preferred stock
Non-controlling interests

Total equity

2011

2010

2009

2008

2007

962.8

1,474.2

1,242.7

1,555.0

963.4

2,080.6
623.9
314.0

1,498.1
919.5
311.5

1,236.9
903.4
173.5

869.6
910.2
187.7

1,063.2
915.0
192.6

3,018.5

2,729.1

2,313.8

1,967.5

2,170.8

2,055.7

1,254.9

1,071.1

412.5

1,207.4

7,427.9
934.7
45.9

7,697.9
934.7
41.3

7,391.8
227.2
117.6

4,866.3
102.5
1,382.8

4,121.4
136.6
1,585.0

8,408.5

8,673.9

7,736.6

6,351.6

5,843.0

Net debt/total equity
Net debt/net total capital(2)
Total debt/total capital(3)
Interest coverage(4)
Interest and preferred share dividend distribution coverage(5)

24.4%
19.6%
26.4%
1.0x
0.7x

14.5%
12.6%
23.9%
1.8x
1.4x

13.8%
12.2%
23.0%
8.2x
7.5x

6.5%
6.1%
23.7%
16.4x
15.0x

20.7%
17.1%
27.1%
11.3x
10.3x

IFRS basis for 2011 and 2010, and Canadian GAAP basis for 2009 and prior.

(1)
(2) Net total capital is calculated by the company as the sum of total equity and net debt.
(3) Total capital is calculated by the company as the sum of total equity and total debt.
(4)

(5)

Interest coverage is calculated by the company as the sum of earnings (loss) before income taxes and interest expense
divided by interest expense.
Interest and preferred share dividend distribution coverage is calculated by the company as the sum of earnings (loss)
before income taxes and interest expense divided by interest expense and preferred share dividend distributions adjusted
to a before tax equivalent at the company’s Canadian statutory tax rate.

186

Holding company debt (including other long term obligations) at December 31, 2011 increased by $585.0 to
$2,394.6 from $1,809.6 at December 31, 2010, primarily reflecting the company’s issuances of $500.0 and
Cdn$400.0 principal amount of its unsecured senior notes due 2021, partially offset by the repurchase of $298.2
principal amount of Fairfax unsecured senior notes due 2012 (as described in note 15 to the consolidated finan-
cial statements for the year ended December 31, 2011) and the foreign currency translation effect during 2011 of
the strengthening of the U.S. dollar relative to the Canadian dollar.

Subsidiary debt at December 31, 2011 decreased by $295.6 to $623.9 from $919.5 at December 31, 2010, primarily
reflecting the repurchases of $323.8 and $35.9 principal amounts of Crum & Forster and OdysseyRe unsecured
senior notes respectively, partially offset by the consolidation of First Mercury’s trust preferred securities following
its acquisition by the company on February 9, 2011 net of subsequent redemptions and repurchases of its trust
preferred securities. Transactions in the subsidiary debt of the company are described in note 15 to the con-
solidated financial statements for the year ended December 31, 2011.

Common shareholders’ equity at December 31, 2011 decreased by $270.0 to $7,427.9 from $7,697.9 at
December 31, 2010, primarily as a result of the company’s payments of dividends on its common shares and pre-
ferred shares ($257.4), the actuarial losses on defined benefit plans ($22.5) recognized directly in retained earnings
and the effect of decreased accumulated other comprehensive income (a decrease of $14.6 in 2011 primarily
reflecting a net decrease in foreign currency translation), partially offset by net earnings attributable to share-
holders of Fairfax ($45.1).

The changes in holding company debt, subsidiary debt and common shareholders’ equity affected the company’s
leverage ratios as follows: the consolidated net debt/net total capital ratio increased to 19.6% at December 31,
2011 from 12.6% at December 31, 2010 as a result of increased holding company debt, decreased holding com-
pany cash and investments (discussed in the Liquidity section of this MD&A) and decreased common share-
holders’ equity, partially offset by decreased subsidiary debt. The consolidated total debt/total capital ratio
increased to 26.4% at December 31, 2011 from 23.9% at December 31, 2010 as a result of increased holding
company debt and decreased common shareholders’ equity, partially offset by decreased subsidiary debt.

The company believes that cash and investments net of short sale and derivative obligations at December 31,
2011 of $962.8 ($1,474.2 at December 31, 2010) provide adequate liquidity to meet the holding company’s
known obligations in 2012 and for the foreseeable future. In addition to these resources, the holding company
expects to continue to receive investment management and administration fees from its insurance and
reinsurance subsidiaries, investment income on its holdings of cash and investments, and dividends from its
insurance and reinsurance subsidiaries. To further augment its liquidity, the holding company may draw upon its
$300.0 unsecured revolving credit facility (for further details related to the credit facility, refer to note 15 to the
consolidated financial statements for the year ended December 31, 2011). The holding company’s known sig-
nificant commitments for 2012 consist of the net amount of $56.7 (Cdn$57.7) (paid January 2012) in respect of
the company’s acquisition of Prime Restaurants (as described in note 23 to the consolidated financial statements
for the year ended December 31, 2011), the $205.8 dividend on common shares ($10.00 per share, paid January
2012), the repayment on maturity of $86.3 principal amount of the company’s unsecured senior notes due
April 15, 2012, interest and corporate overhead expenses, preferred share dividends, income tax payments and
potential cash outflows related to derivative contracts.

187

F A I R F A X F I N A N C I A L H O L D I N G S L I M I T E D

The company’s operating companies continue to maintain capital above minimum regulatory levels, at adequate
levels required to support their issuer credit and financial strength ratings, and above internally calculated risk
management levels as discussed below. A common non-GAAP measure of capital adequacy in the property and
casualty industry is the ratio of premiums to statutory surplus (or total equity). These ratios are shown for the
insurance and reinsurance operating companies of Fairfax for the most recent five years in the following table:

Insurance

Northbridge (Canada)

Crum & Forster (U.S.)(2)

Zenith National (U.S.)(3)

Fairfax Asia

Reinsurance – OdysseyRe

Insurance and Reinsurance – Other(4)

Canadian insurance industry

U.S. insurance industry

Net premiums written to statutory
surplus (total equity)(1)

2011

2010

2009

2008

2007

1.0

0.9

0.8

0.5

0.6

0.8

1.1

0.8

0.6

0.4

0.5

0.8

1.1

0.7

0.5

n/a

0.4

0.5

1.1

1.0

0.8

1.0

0.8

n/a

0.3

0.7

0.6

1.0

0.7

0.8

n/a

0.3

0.8

0.6

1.0

0.9

(1)

IFRS basis for 2011 and 2010; Canadian GAAP basis for 2009 and prior.

(2) First Mercury was acquired February 9, 2011, pursuant to the acquisition transaction described in note 23 to the con-

solidated financial statements for the year ended December 31, 2011.

(3) Zenith National was acquired May 20, 2010, pursuant to the acquisition transaction described in note 23 to the con-
solidated financial statements for the year ended December 31, 2011. Zenith National’s net premiums written in 2010
includes the portion of that year prior to the acquisition by Fairfax.

(4) Other includes Group Re (all years), Advent (effective September 2008), Polish Re (effective January 2009) and Fairfax

Brasil (effective March 2010).

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 and reinsurance, investment and other business activities.
At December 31, 2011, 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 – each subsidiary had capital and
surplus in excess of 3.7 times (4.7 times at December 31, 2010) the authorized control level, except for TIG which
had 2.3 times (2.7 times at December 31, 2010).

188

The issuer credit ratings and financial strength ratings of Fairfax and its insurance and reinsurance operating
companies were as follows as at December 31, 2011:

Issuer Credit Ratings

Fairfax Financial Holdings Limited

Financial Strength Ratings

Crum & Forster Holdings Corp.(1)

Zenith National Insurance Corp.

Odyssey Re Holdings Corp.(1)

Lombard General Insurance Company of Canada

Commonwealth Insurance Company

Markel Insurance Company of Canada

Federated Insurance Company of Canada

CRC Reinsurance Limited

Wentworth Insurance Company Ltd.

First Capital Insurance Limited

Falcon Insurance Company (Hong Kong) Limited

Advent Capital (Holdings) PLC

Polish Re

Standard

A.M. Best & Poor’s Moody’s DBRS

bbb

BBB-

Baa3

BBB

A-

–

A(2)

A-

BBB+

A-

–

A-

A+(2)

BBB+

Baa1

–

(1) Financial strength ratings apply to the operating companies.

(2) Advent’s ratings are the A.M. Best and Standard & Poor’s ratings assigned to Lloyd’s.

During 2011, Moody’s upgraded the senior unsecured debt rating of Fairfax from a “Ba1” at December 31, 2010 to
a “Baa3” at December 31, 2011; Standard & Poor’s revised the outlook for Fairfax and all operating companies
financial strength ratings to positive while downgrading the stand alone financial strength rating of Zenith
National to a “BBB+”.

Book Value Per Share

Common shareholders’ equity at December 31, 2011 was $7,427.9 or $364.55 per basic share (excluding the unre-
corded $347.5 excess of fair value over the carrying value of equity accounted investments) compared to $376.33
per basic share (excluding the unrecorded $269.0 excess of fair value over the carrying value of equity accounted
investments) at December 31, 2010, representing a decrease per basic share in 2011 of 3.1% (without adjustment
for the $10.00 per common share dividend paid in the first quarter of 2011, or a decrease of 0.4% adjusted to
include that dividend). During 2011, the number of basic shares decreased primarily as a result of the repurchase
of 53,751 subordinate voting shares for treasury (for use in the company’s senior share plans) and the repurchase
of 25,700 subordinate voting shares for cancellation. At December 31, 2011, there were 20,375,796 common
shares effectively outstanding.

The company has issued and repurchased common shares in the most recent five years as follows:

Date

2007 – repurchase of shares

2008 – issue of shares

2008 – repurchase of shares

2009 – issue of shares

2009 – repurchase of shares

2010 – issue of shares

2010 – repurchase of shares
2011 – repurchase of shares

Number of
subordinate
voting shares

Average
issue/repurchase
price per share

Net proceeds/
(repurchase cost)

(38,600)

886,888

(1,066,601)

2,881,844

(360,100)

563,381

(43,900)
(25,700)

181.35

216.83

264.39

343.29

341.29

354.64

382.69
389.11

(7.0)

192.3

(282.0)

989.3

(122.9)

199.8

(16.8)
(10.0)

189

F A I R F A X F I N A N C I A L H O L D I N G S L I M I T E D

Share issuances in 2009 and 2010 were pursuant to public offerings. Shares issued in 2008 related to the con-
version of the company’s 5.0% convertible senior debentures due July 15, 2023.

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.

Liquidity

The purpose of liquidity management is to ensure that there will be sufficient cash to meet all financial commit-
ments and obligations as they become due.

Holding company cash and investments at December 31, 2011 totaled $1,026.7 ($962.8 net of $63.9 of holding
company short sale and derivative obligations), compared to $1,540.7 at December 31, 2010 ($1,474.2 net of
$66.5 of holding company short sale and derivative obligations). Significant cash movements at the Fairfax hold-
ing company level during 2011 included the following outflows – the payment of $766.8 (inclusive of $39.7 paid
to Zenith National) to repurchase Fairfax, Crum & Forster and OdysseyRe unsecured senior notes (funding from
the holding company was provided to Crum & Forster through a second quarter capital contribution ($359.3) and
to OdysseyRe through a reduction of an outstanding balance on an intercompany revolving line of credit
($47.9)), the payment of $294.3 in respect of the company’s acquisition of First Mercury (the holding company
contributed to Crum & Forster its investment in First Mercury of $294.3 plus additional cash of $31.3 to fund the
repayment of First Mercury’s short-term debt), the capital contribution of $85.0 made to Fairfax Asia to facilitate
the acquisition of 100% of Pacific Insurance ($71.5) and to fund the participation in an ICICI Lombard rights
offering ($19.8), the payment of $30.8 (Cdn$31.5) in respect of the company’s acquisition of Sporting Life and
the payment of $257.4 of common and preferred share dividends; and the following inflows – the receipt of
$493.9 of net proceeds on the issuance of $500.0 principal amount of 5.80% unsecured senior notes due 2021, the
receipt of $405.6 (Cdn$396.0) of net proceeds on the issuance of Cdn$400 million principal amount of 6.40%
unsecured senior notes due 2021, $309.1 of dividends (received from Crum & Forster ($104.0), Runoff ($125.0),
Zenith National ($36.7) and associates ($43.4, primarily $37.1 received from Cunningham Lindsey Group)), the
receipt of $112.4 of holding company corporate income tax refunds and the $97.3 of net cash received with
respect to long and short equity and equity index total return swaps. The carrying values of holding company
investments vary with changes in the fair values of those securities.

The company believes that cash and investments, net of holding company short sale and derivative obligations,
at December 31, 2011 of $962.8 ($1,474.2 at December 31, 2010) provide adequate liquidity to meet the holding
company’s known obligations in 2012 and for the foreseeable future. In addition to these resources, the holding
company expects to continue to receive investment management and administration fees from its insurance and
reinsurance subsidiaries, investment income on its holdings of cash and investments, and dividends from its
insurance and reinsurance subsidiaries. To further augment its liquidity, the holding company may draw upon its
$300.0 unsecured revolving credit facility (for further details related to the credit facility, refer to note 15 to the
consolidated financial statements for the year ended December 31, 2011). The holding company may experience
cash inflows or outflows (which at times could be significant) related to its derivative contracts, including
collateral requirements and cash settlements of market value movements of total return swaps which have
occurred since the most recent reset date. During 2011, the holding company received net cash of $97.3 (2010 –
paid net cash of $163.2) with respect to long and short equity and equity index total return swap derivative con-
tracts (excluding the impact of collateral requirements). The holding company typically funds any such obliga-
tions from holding company cash and investments and its additional sources of liquidity discussed above. The
holding company’s known significant commitments for 2012 consist of the net amount of $56.7 (Cdn$57.7)
(paid January 2012) in respect of the company’s acquisition of Prime Restaurants (as described in note 23 to the
consolidated financial statements for the year ended December 31, 2011), the $205.8 dividend on common shares
($10.00 per share, paid January 2012), the repayment on maturity of $86.3 principal amount of the company’s
unsecured senior notes due April 15, 2012, interest and corporate overhead expenses, preferred share dividends,
income tax payments and potential cash outflows related to derivative contracts.

Subsidiary cash and short term investments increased by $2,685.3 to $6,199.2 at December 31, 2011 from
$3,513.9 at December 31, 2010, with the increase primarily attributable to the reinvestment into cash and short
term investments of the majority of proceeds of $1,673.7 received on the sales of U.S. treasury bonds, cash
received in connection with the quarterly reset provisions of short equity and equity index total return swaps, the

190

consolidation of the cash and short term investments of First Mercury ($148.4) and Pacific Insurance ($23.2) and
net cash provided by operating activities, partially offset by the payment of dividends to Fairfax of $265.7 and the
payment of $30.0 of subsidiary corporate income taxes. The insurance and reinsurance subsidiaries may experi-
ence cash inflows or outflows (which at times could be significant) related to their derivative contracts, including
collateral requirements and cash settlements of market value movements of total return swaps which have
occurred since the most recent reset date. During 2011, the insurance and reinsurance subsidiaries received net
cash of $173.3 (2010 – paid net cash of $541.9) with respect to long and short equity and equity index total
return swap derivative contracts (excluding the impact of collateral requirements). The insurance and reinsurance
subsidiaries typically fund any such obligations from cash provided by operating activities. In addition, obliga-
tions incurred on short equity and equity index total return swap derivative contracts may be funded from sales
of equity-related investments, the market values of which will generally vary inversely with the market values of
the short equity and equity index total return swaps.

The following table presents major components of cash flow for the years ended December 31, 2011 and 2010:

Operating activities

Cash provided by operating activities before the undernoted

Net (purchases) sales of securities classified as at FVTPL

Investing activities

Net purchases of investments in associates

Net purchase of subsidiaries, net of cash acquired

Net purchases of premises and equipment and intangible assets

Financing activities

Issuance of holding company debt

Repurchase of subsidiary debt and securities

Issuance of subordinate voting shares

Issuance of preferred shares

Common and preferred share dividends paid

Other cash used in financing activities

2011

2010

33.2

11.1

(1,254.7) 1,028.4

(130.5)

(214.8)

276.5

(454.9)

(42.2)

(38.6)

899.5

261.8

(762.3)

(102.7)

–

199.7

701.2

(257.4)

(232.2)

(77.9)

(54.1)

Increase (decrease) in cash and cash equivalents during the year

(1,315.8) 1,104.9

Cash provided by operating activities excluding cash used to purchase securities classified as at FVTPL increased to
$33.2 in 2011 from $11.1 in 2010 primarily as a result of increased premium collections and decreased taxes paid,
partially offset by higher net paid losses. Net purchases of securities classified as at FVTPL of $1,254.7 in 2011
primarily reflected the purchases of short term investments, partially offset by the sale of U.S. treasury bonds and
net cash received with respect to total return swap derivative contracts. Net sales of securities classified as at
FVTPL of $1,028.4 in 2010 primarily reflected the sales of common stocks and short term investments, partially
offset by net cash paid with respect to total return swap derivative contracts.

Net purchases of investments in associates of $130.5 in 2011 (primarily investments in certain limited partner-
ships and participation in an ICICI Lombard rights offering) compared to $214.8 in 2010 (principally the invest-
ment in 41.3% of Gulf Insurance). Net purchases of subsidiaries, net of cash acquired in 2011 included net cash
acquired of $355.8 with respect to the acquisition of First Mercury, partially offset by net cash of $49.5 and $29.8
used to acquire Pacific Insurance and a 75.0% interest in Sporting Life respectively. Net purchases of subsidiaries,
net of cash acquired in 2010 included cash used to acquire Zenith National and GFIC. Notes 6 and 23 to the
company’s consolidated financial statements for the year ended December 31, 2011 describe the company’s
investments in associates and acquisitions during the periods discussed above.

In 2011, the company received net proceeds of $899.5 on the issuances of $500.0 principal amount of 5.80%
unsecured senior notes due 2021 (net proceeds of $493.9) and Cdn$400.0 principal amount of 6.40% unsecured
senior notes due 2021 (net proceeds of $405.6 (Cdn$396.0)). In 2010, issuance of holding company debt primarily
related to the issuance of Cdn$275.0 par value of 7.25% unsecured notes due 2020 (net proceeds of $267.1
(Cdn$272.5)). In 2011, the company used $762.3 of cash to repurchase debt and securities of subsidiaries
(primarily the repurchase of Fairfax, Crum & Forster and OdysseyRe unsecured senior notes ($727.1) and the

191

F A I R F A X F I N A N C I A L H O L D I N G S L I M I T E D

redemption of a portion of First Mercury’s trust preferred securities ($26.7)) compared with cash used to
repurchase subsidiary debt and securities in 2010 of $102.7 (primarily the redemption of OdysseyRe’s Series A and
Series B preferred shares ($70.6) and the purchase of a portion of Zenith National’s redeemable debentures
($20.0)). In 2010, the company received net proceeds of $199.8 related to the issuance of subordinate voting
shares and $701.2 of net proceeds related to the issuance of Series I (par value Cdn$300), Series G (par value
Cdn$250.0) and Series E (par value Cdn$200) preferred shares. In 2011, the company paid common share divi-
dends of $205.9 (2010 —$200.8) and preferred share dividends of $51.5 (2010 — $31.4). Other cash used in
financing activities of $77.9 in 2011 principally related to subordinate voting shares purchased for treasury
($26.0), the net repayment of subsidiary indebtedness (primarily related to First Mercury) ($41.9) and subordinate
voting shares repurchased for cancellation ($10.0). Other cash used in financing activities of $54.1 in 2010
principally related to subordinate voting shares purchased for treasury ($26.8), subordinate voting shares purchase
for cancellation ($16.8) and the net repayment of subsidiary indebtedness ($10.5).

Contractual Obligations

The following table provides a payment schedule of the company’s material current and future obligations
(holding company and subsidiaries) as at December 31, 2011:

Provision for losses and loss adjustment expenses

4,092.0

4,897.4

2,911.0

5,331.8 17,232.2

Less than

1 year 1 - 3 years 3 - 5 years

More than
5 years

Total

Long term debt obligations – principal

Long term debt obligations – interest

Operating leases – obligations

90.6

194.6

63.3

192.4

367.4

103.6

470.2

330.9

70.4

2,339.7

3,092.9

843.2

129.5

1,736.1

366.8

4,440.5

5,560.8

3,782.5

8,644.2 22,428.0

For further detail on the maturity profile of the company’s financial liabilities, please see “Liquidity Risk” in
note 24 to the consolidated financial statements for the year ended December 31, 2011.

Lawsuit Seeking Class Action Status

For a full description of this matter, please see section (a) of “Lawsuits” in note 20 (Contingencies and Commit-
ments) to the consolidated financial statements for the year ended December 31, 2011.

Accounting and Disclosure Matters

Management’s Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including the company’s CEO and CFO,
the company conducted an evaluation of the effectiveness of its disclosure controls and procedures as of
December 31, 2011 as required by Canadian securities legislation. Disclosure controls and procedures are designed
to ensure that the information required to be disclosed by the company in the reports it files or submits under
securities legislation is recorded, processed, summarized and reported on a timely basis and that such information
is accumulated and reported to management, including the company’s CEO and CFO, as appropriate, to allow
required disclosures to be made in a timely fashion. Based on their evaluation, the CEO and CFO have concluded
that as of December 31, 2011, the company’s disclosure controls and procedures were effective.

Management’s Report on Internal Control Over Financial Reporting

The company’s management is responsible for establishing and maintaining adequate internal control over finan-
cial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934 and under National Instru-
ment 52-109). The company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. A company’s internal control over finan-
cial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;

192

(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of management and directors of the company;
and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use,
or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstate-
ments. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls
may become inadequate because of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.

The company’s management assessed the effectiveness of the company’s internal control over financial reporting
as of December 31, 2011. In making this assessment, the company’s management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated
Framework. The company’s management, including the CEO and CFO, concluded that, as of December 31, 2011,
the company’s internal control over financial reporting was effective based on the criteria in Internal Control –
Integrated Framework issued by COSO.

Critical Accounting Estimates and Judgments

Please refer to note 4 (Critical Accounting Estimates and Judgments) to the consolidated financial statements for
the year ended December 31, 2011.

Significant Accounting Changes

In February 2008, the Canadian Accounting Standards Board confirmed that Canadian GAAP for publicly account-
able enterprises would be converged with IFRS effective for fiscal years beginning on or after January 1, 2011.
Accordingly, the company adopted IFRS effective January 1, 2011 and prepared its annual consolidated financial
statements for the year ended December 31, 2011, including 2010 comparative information, using IFRS account-
ing policies. The company’s consolidated financial statements for the year ended December 31, 2011 are its first
annual financial statements that comply with IFRS. IFRS uses a conceptual framework similar to Canadian GAAP,
but there are significant differences in recognition, measurement and disclosures.

The company’s transition to IFRS was most affected by the measurement of financial assets, insurance contracts,
employee benefits, and income taxes. With the exception of these items, and future changes to IFRS as discussed
below, the company’s IFRS accounting policies do not differ significantly from those previously applied under
Canadian GAAP. The 2010 IFRS comparative financial statements used the same estimates in their preparation as
those previously used in the consolidated financial statements for the year ended December 31, 2010 prepared
under Canadian GAAP.

In concert with its transition to IFRS, the company early adopted the issued phases of IFRS 9 Financial Instruments
as currently written (IFRS 9 is not mandatory until January 1, 2015) for the classification and measurement of
financial assets and liabilities to simplify its accounting for financial instruments and streamline its conversion
process. Under this standard, the company’s business model requires its investment portfolio to primarily be
measured as at fair value through profit and loss (“FVTPL”), including for those investments previously classified
as available for sale under Canadian GAAP. Retrospective application of IFRS 9 at the company’s transition date of
January 1, 2010 resulted in $747.1 of net unrealized gains being transferred from accumulated other compre-
hensive income to retained earnings as described in note 30 to the consolidated financial statements for the year
ended December 31, 2011. An exposure draft of limited modifications to IFRS 9 is expected in the second half of
2012.

Future Accounting Changes

Many IFRS are currently undergoing modification or are yet to be issued for the first time. Future standards
expected to have a significant impact on the company’s consolidated financial reporting are discussed below. New

193

F A I R F A X F I N A N C I A L H O L D I N G S L I M I T E D

standards and amendments that have been issued but are not yet effective are described in note 3 to the con-
solidated financial statements for the year ended December 31, 2011.

Insurance contracts

The Exposure Draft – Insurance Contracts was issued by the IASB on July 30, 2010 and the publication date of a
final standard remains to be determined. A revised exposure draft is expected in the second half of 2012. The
exposure draft is a comprehensive standard that addresses recognition, measurement, presentation and disclosure
for insurance contracts. The measurement approach is based on the following building blocks: (i) a current,
unbiased and probability-weighted average of future cash flows expected to arise as the insurer fulfils the contract;
(ii) the effect of time value of money; (iii) an explicit risk adjustment; and (iv) a residual margin calibrated to
ensure that no profit is recognized on inception of the contract. Estimates are required to be re-measured each
reporting period. In addition, a simplified measurement approach is required for short-duration contracts in
which the coverage period is approximately one year or less. The effective date of the proposed standard remains
to be determined, but is not expected to be earlier than January 1, 2015. Retrospective application will be required
with some practical expedients available on adoption. The company has commenced evaluating the impact of the
exposure draft on its financial reporting, and potentially, its business activities. The building block approach and
the need for current estimates could add significant operational complexity compared to existing practice. The
use of different measurement models depending on whether an insurance contract is considered short-duration or
long-duration under the exposure draft presents certain implementation challenges and the proposed pre-
sentation requirements significantly alter the disclosure of profit and loss from insurance contracts in the con-
solidated financial statements.

Hedge accounting

The IASB issued an Exposure Draft – Hedge Accounting on December 9, 2010 with a proposed model that is
intended to more closely align hedge accounting with risk management activities undertaken by companies when
hedging their financial and non-financial risk exposures. Existing hedge accounting under IAS 39 Financial
Instruments: Recognition and Measurement is complex and primarily rules driven; the proposed model is principles
based and permits, for instance, hedging of components of non-financial items and the hedging of net positions,
two areas that are prohibited under IAS 39. The final standard is expected to be issued in the second half of 2012
with mandatory adoption expected to be January 1, 2015. The proposed hedge accounting model under IFRS 9, as
currently drafted, is not expected to have a significant impact on the company’s equity, but may present oppor-
tunities for expanded application of hedge accounting in the future.

Leases

The IASB together with the U.S. FASB is developing a new accounting standard for leases, impacting both lessees
and lessors. On August 17, 2010, the IASB issued an Exposure Draft – Leases that proposes to eliminate the dis-
tinction between operating and capital leases. A revised exposure draft is expected in the second quarter of 2012.
Lessees would be required to recognize a right-of-use asset and a liability for its obligation to make lease pay-
ments. Lessors would derecognize the underlying asset and replace it with a lease receivable and residual asset.
The publication date of the final standard is yet to be determined, with mandatory adoption expected to be no
earlier than January 1, 2015. However, the proposed standard would apply to all leases in force at the effective
date. The company has commenced a preliminary assessment of the impact of the exposure draft on its lease
commitments.

Risk Management

Overview

194

appropriately, aligning risk tolerances with business strategy, diversifying risk, pricing appropriately for risk, miti-
gating risk through preventive controls and transferring risk to third parties.

Issues and Risks

The following issues and risks, among others, should 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 most recent Short
Form Base Shelf Prospectus and Supplements filed with the securities regulatory authorities in Canada, which are
available on SEDAR.

Claims Reserves

Reserves are maintained to cover the estimated ultimate unpaid liability for losses and loss adjustment expenses
with respect to reported and unreported claims incurred as of the end of each accounting period. The company’s
success is dependent upon its ability to accurately assess the risks associated with the businesses being insured or
reinsured. Failure to accurately assess the risks assumed may lead to the setting of inappropriate premium rates
and establishing reserves that are inadequate to cover losses. This could adversely affect the company’s net earn-
ings and financial condition.

Reserves do not represent an exact calculation of liability, but instead represent estimates at a given point in time
involving actuarial and statistical projections of the company’s expectations of the ultimate settlement and
administration costs of claims incurred. Establishing an appropriate level of claims reserves is an inherently
uncertain process. Both proprietary and commercially available actuarial models, as well as historical insurance
industry loss development patterns, are utilized in the establishment of appropriate claims reserves. The compa-
ny’s management of pricing risk is discussed in note 24 (Financial Risk Management) to the consolidated financial
statements for the year ended December 31, 2011. The company’s management of claims reserves is discussed in
note 4 (Critical Accounting Estimates and Judgments) and in note 8 (Insurance Contract Liabilities) to the con-
solidated financial statements for the year ended December 31, 2011.

Catastrophe Exposure

The company’s insurance and reinsurance operations are exposed to claims arising out of catastrophes. Cata-
strophes can be caused by various events, including natural events such as hurricanes, windstorms, earthquakes,
hailstorms, severe winter weather and fires, and unnatural events such as terrorist attacks and riots. The incidence
and severity of catastrophes are inherently unpredictable and can cause losses in a variety of property and casu-
alty lines. It is possible that a catastrophic event or multiple catastrophic events could have a material adverse
effect upon the company’s net earnings and financial condition. The company’s management of catastrophe risk
is discussed in note 24 (Financial Risk Management) to the consolidated financial statements for the year ended
December 31, 2011.

Cyclical Nature of the Property & Casualty Business

The financial performance of the insurance and reinsurance industries has historically tended to fluctuate due to
competition, frequency of occurrence or severity of catastrophic events, levels of capacity, general economic
conditions and other factors. Demand for insurance and reinsurance is influenced significantly by underwriting
results of primary insurers and prevailing general economic conditions. Factors such as changes in the level of
employment, wages, consumer spending, business investment and government spending, the volatility and

195

F A I R F A X F I N A N C I A L H O L D I N G S L I M I T E D

strength of the global capital markets and inflation or deflation all affect the business and economic environment
and, ultimately, the demand for insurance and reinsurance products, and therefore may affect the company’s net
earnings, financial position and cash flows.

The property and casualty insurance business historically has been characterized by periods of intense price
competition due to excess underwriting capacity, as well as periods when shortages of underwriting capacity have
permitted attractive premium levels. The company expects to continue to experience the effects of this cyclicality,
which, during down periods, could harm its financial position, profitability or cash flows.

In the reinsurance industry, the supply of reinsurance is related to prevailing prices and levels of surplus capacity
that, in turn, may fluctuate as a result of changes in reinsurers’ profitability. It is possible that premium rates or
other terms and conditions of trade could vary in the future, that the present level of demand will not continue
because the larger insurers created by industry consolidation may require less reinsurance or that the present level
of supply of reinsurance could increase as a result of capital provided by recent or future market entrants or by
existing reinsurers. If any of these events transpire, the company’s results of operations in its reinsurance business
could be adversely affected.

The company actively manages its operations to withstand the cyclical nature of the property and casualty busi-
ness by maintaining sound liquidity and strong capital management as discussed in note 24 (Financial Risk
Management) to the consolidated financial statements for the year ended December 31, 2011.

Investment Portfolio

Investment returns are an important part of the company’s overall profitability. The company’s investment portfo-
lio includes bonds and other debt instruments, common stocks, preferred stocks, equity-related securities and
derivative instruments. Accordingly, fluctuations in the fixed income or equity markets could impair profitability,
financial condition or cash flows. Investment income is derived from interest and dividends, together with net
gains on investments. The portion derived from net gains on investments generally fluctuates from year to year
and is typically a less predictable source of investment income than interest and dividends, particularly in the
short term. The return on the portfolio and the risks associated with the investments are affected by the asset mix,
which can change materially depending on market conditions.

The ability of the company to achieve its investment objectives is affected by general economic conditions that
are beyond its control. General economic conditions can adversely affect the markets for interest-rate-sensitive
securities, including the extent and timing of investor participation in such markets, the level and volatility of
interest rates and, consequently, the value of fixed income securities. Interest rates are highly sensitive to many
factors, including governmental monetary policies, domestic and international economic and political conditions
and other factors beyond the company’s control. General economic conditions, stock market conditions and
many other factors can also adversely affect the equity markets and, consequently, the value of the equity secu-
rities owned. The company’s management of credit risk, liquidity risk, market risk and interest rate risk is dis-
cussed in note 24 (Financial Risk Management) to the consolidated financial statements for the year ended
December 31, 2011.

Derivative Instruments

The company may hold significant investments in derivative instruments, primarily for general protection against
declines in the fair value of the company’s financial assets. Derivative instruments may be used to manage or
reduce risks or as a cost-effective way to synthetically replicate the investment characteristics of an otherwise
permitted investment. The market value and liquidity of these investments are extremely volatile and may vary
dramatically up or down in short periods, and their ultimate value will therefore only be known upon their dis-
position.

Use of derivative instruments is governed by the company’s investment policies and exposes the company to a
number of risks, including credit risk, interest rate risk, liquidity risk, inflation risk, market risk and counterparty
risk. The company endeavors to limit counterparty risk through the terms of agreements negotiated with
counterparties. Pursuant to these agreements, both parties are required to deposit eligible collateral in collateral
accounts for either the benefit of the company or the counterparty depending on the then current fair value or
change in the fair value of the derivative contract.

196

The company may not be able to realize its investment objectives with respect to derivative instruments, which
could reduce net earnings significantly and adversely affect the company’s business, financial position or results
of operations. The company’s use of derivatives is discussed in note 7 (Short Sale and Derivative Transactions) and
management of credit risk, liquidity risk, market risk and interest rate risk is discussed in note 24 (Financial Risk
Management) to the consolidated financial statements for the year ended December 31, 2011.

Economic Hedging Strategies

Hedging strategies may be implemented by the company to hedge risks associated with a specific financial instru-
ment, asset or liability or at a macro level to hedge systemic financial risk and the impact of potential future
economic crisis and credit related problems. Credit default swaps, total return swaps and consumer price index-
linked derivative instruments have typically been used to hedge macro level risks. The company’s use of
derivatives is discussed in note 7 (Short Sale and Derivative Transactions) to the consolidated financial statements
for the year ended December 31, 2011.

The company regularly monitors the effectiveness of its hedging program on a prospective and retrospective basis
and based on its historical observation, the company believes that its hedges will be effective in the medium to
long term and especially in the event of a significant market correction. The management of basis risk is also
discussed in note 24 (Financial Risk Management) to the consolidated financial statements for the year ended
December 31, 2011.

Latent Claims

The company has established loss reserves for asbestos, environmental and other latent claims that represent its
best estimate of ultimate claims and claims adjustment expenses based upon known facts and current law. As a
result of significant issues surrounding liabilities of insurers, risks inherent in major litigation and diverging legal
interpretations and judgments in different jurisdictions, actual liability for these types of claims could exceed the
loss reserves set by the company by an amount that could be material to its operating results and financial con-
dition in future periods. The company’s management of reserving risk is discussed in note 24 (Financial Risk
Management) and in note 8 (Insurance Contract Liabilities) to the consolidated financial statements for the year
ended December 31, 2011 and in the Asbestos and Pollution section of this MD&A.

Recoverable from Reinsurers and Insureds

Most insurance and reinsurance companies reduce their exposure to any individual claim by reinsuring amounts
in excess of their maximum desired retention. Reinsurance is an arrangement in which an insurance company,
called the ceding company, transfers insurance risk to another insurer, called the reinsurer, which accepts the risk
in return for a premium payment. This third party reinsurance does not relieve the company of its primary
obligation to the insured. Recoverable from reinsurers balances may become an issue mainly due to reinsurer
solvency and credit concerns, due to the potentially long time period over which claims may be paid and the
resulting recoveries are received from the reinsurers, or due to policy disputes. If reinsurers are unwilling or unable
to pay amounts due under reinsurance contracts, the company will incur unexpected losses and its cash flow will
be adversely affected.

Although the magnitude of the company’s recoverable from reinsurers balance is significant, a portion of the
balance arose as a result of past acquisitions of companies that had relied heavily on reinsurance and of the

197

F A I R F A X F I N A N C I A L H O L D I N G S L I M I T E D

company’s greater reliance on reinsurance in prior years, and is not necessarily indicative of the extent that the
company has utilized reinsurance more recently. The credit risk associated with these older reinsurance recover-
able balances is addressed in note 24 (Financial Risk Management) to the consolidated financial statements for
the year ended December 31, 2011 and in the Recoverable from Reinsurers section of this MD&A.

The company’s insurance and reinsurance companies write certain insurance policies, such as large deductible
policies (policies where the insured retains a specific amount of any potential loss), in which the insured must
reimburse the company’s insurance and reinsurance companies for certain losses. Accordingly, the company’s
insurance and reinsurance companies bear credit risk on these policies as there is no assurance that the insureds
will provide reimbursement on a timely basis or at all.

Strategic Initiatives

The company may periodically and opportunistically acquire other insurance and reinsurance companies or
execute other strategic initiatives developed by management. Although the company undertakes thorough due
diligence prior to the completion of an acquisition, it is possible that unanticipated factors could arise and there is
no assurance that the anticipated financial or strategic objectives following an integration effort or the
implementation of a strategic initiative will be achieved which could adversely affect the company’s net earnings
and financial condition.

The strategies and performance of operating companies are regularly assessed by the company’s CEO, Board of
Directors and senior management. An annual strategic planning process is conducted where key strategic
initiatives at the operating companies are determined, including the alignment of those strategies throughout the
organization.

Ratings

Financial strength and credit ratings by the major North American rating agencies are important factors in estab-
lishing competitive position for insurance and reinsurance companies. Financial strength ratings measure a
company’s ability to meet its obligations to contract holders. A downgrade in these ratings could lead to a sig-
nificant reduction in the number of insurance policies the company’s insurance subsidiaries write and could cause
early termination of contracts written by the company’s reinsurance subsidiaries or a requirement for them to
post collateral at the direction of their counterparts. In addition, a downgrade of the company’s credit rating may
affect the cost and availability of unsecured financing. Ratings are subject to periodic review at the discretion of
each respective rating agency and may be revised downward or revoked at their sole discretion. Rating agencies
may also increase their scrutiny of rated companies, revise their rating standards or take other action. The com-
pany has dedicated personnel that manage the company’s relationships with its various rating agencies.

Competition

The property and casualty insurance industry and the reinsurance industry are both highly competitive, and will
likely remain highly competitive in the foreseeable future. Competition in these industries is based on many fac-
tors, including premiums charged and other terms and conditions offered, products and services provided, com-
mission structure, financial ratings assigned by independent rating agencies, speed of claims payment, reputation,
selling effort, perceived financial strength and the experience of the insurer or reinsurer in the line of insurance or
reinsurance to be written. The company competes with a large number of Canadian, U.S. and foreign insurers and
reinsurers, as well as certain underwriting syndicates, some of which have greater financial, marketing and man-
agement resources than the company. In addition, some financial institutions, such as banks, are now able to
offer services similar to those offered by the company’s reinsurance subsidiaries while in recent years, capital
market participants have also created alternative products that are intended to compete with reinsurance prod-
ucts.

Consolidation within the insurance industry could result in insurance and reinsurance market participants using
their market power to implement price reductions. If competitive pressures compel the company to reduce prices,
the company’s operating margins could decrease. As the insurance industry consolidates, competition for
customers could become more intense and the importance of acquiring and properly servicing each customer
could become greater, causing the company to incur greater expenses relating to customer acquisition and
retention, further reducing operating margins. The company’s management of pricing risk is discussed in note 24
(Financial Risk Management) to the consolidated financial statements for the year ended December 31, 2011.

198

Emerging Claim and Coverage Issues

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 (as was the case with asbestos and pollution exposures) and extreme weather events. Unanticipated
developments in the law as well as changes in social and environmental conditions could result in unexpected
claims for coverage under insurance and reinsurance contracts. With respect to casualty businesses, these legal,
social and environmental changes may not become apparent until some time after their occurrence. The full
effects of these and other unforeseen emerging claim and coverage issues are extremely hard to predict.

The company seeks to limit its loss exposure by employing a variety of policy limits and other terms and con-
ditions and through prudent underwriting of each program written. Loss exposure is also limited by geographic
diversification. The company’s management of reserving risk is discussed in note 24 (Financial Risk Management)
and in note 8 (Insurance Contract Liabilities) to the consolidated financial statements for the year ended
December 31, 2011 and in the Asbestos and Pollution section of this MD&A.

Cost of Reinsurance and Adequate Protection

The availability of reinsurance and the rates charged by reinsurers are subject to prevailing market conditions,
both in terms of price and available capacity, which can affect the company’s business volume and profitability.
Many reinsurance companies have begun to exclude certain coverages from, or alter terms in, the policies they
offer. Reinsurers are also imposing terms, such as lower per occurrence and aggregate limits, on primary insurers
that are inconsistent with corresponding terms in the policies written by these primary insurers. In the future,
alleviation of risk through reinsurance arrangements may become increasingly difficult.

The rates charged by reinsurers and the availability of reinsurance to the company’s subsidiaries will generally
reflect the recent loss experience of the company and of the industry in general. For example, the significant
hurricane losses in 2004 and 2005 caused the prices for catastrophe reinsurance protection in Florida to increase
significantly in 2006. In 2011, the insurance industry experienced the second highest number of insured losses in
history, primarily due to numerous catastrophes. The significant catastrophe losses incurred by reinsurers world-
wide has resulted in higher costs for reinsurance protection in 2012, particularly for those risks exposed to cata-
strophes, and this trend is expected to continue in the future. The company also expects the significant losses
sustained by reinsurers may also increase the cost of reinsurance protection on non-property risks. Each of the
company’s subsidiaries continues to evaluate the relative costs and benefits of accepting more risk on a net basis,
reducing exposure on a direct basis, and paying additional premiums for reinsurance.

Holding Company Liquidity

Fairfax is a financial services holding company that conducts substantially all of its business through its sub-
sidiaries and receives substantially all of its earnings from them. The holding company controls the operating
insurance and reinsurance companies, each of which must comply with applicable insurance regulations of the
jurisdictions in which it operates. Each operating company must maintain reserves for losses and loss adjustment
expenses to cover the risks it has underwritten.

Although substantially all of the holding company’s operations are conducted through its subsidiaries, none of
the subsidiaries are obligated to make funds available to the holding company for payment of its outstanding
debt. Accordingly, the holding company’s ability to meet financial obligations, including the ability to make
payments on outstanding debt, is dependent on the distribution of earnings from its subsidiaries. The ability of
subsidiaries to pay dividends in the future will depend on their statutory surplus, on earnings and on regulatory
restrictions. Dividends, distributions or returns of capital to the holding company are subject to restrictions set
forth in the insurance laws and regulations of Canada, the United States, Ireland, the United Kingdom, Poland,
Hong Kong, Singapore, Malaysia and Brazil and is affected by the subsidiaries’ credit agreements, indentures, rat-
ing agencies, the discretion of insurance regulatory authorities and capital support agreements with subsidiaries.
The holding company strives to be soundly financed and maintains high levels of liquid assets as discussed in
note 24 (Financial Risk Management) to the consolidated financial statements for the year ended December 31,
2011 and in the Liquidity section of this MD&A.

199

F A I R F A X F I N A N C I A L H O L D I N G S L I M I T E D

Access to Capital

The company’s future capital requirements depend on many factors, including its ability to successfully write new
business and to establish premium rates and reserves at levels sufficient to cover losses. To the extent that the
funds generated by the company’s business are insufficient to fund future operations, additional funds may need
to be raised through equity or debt financings. 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.

The company’s ability and/or the ability of its subsidiaries to obtain additional financing for working capital,
capital expenditures or acquisitions in the future may also be limited under the terms of its credit facility dis-
cussed in note 15 (Subsidiary Indebtedness, Long Term Debt and Credit Facilities) to the consolidated financial
statements for the year ended December 31, 2011. The credit facility contains various covenants that place
restrictions on, among other things, the company’s ability or the ability of its subsidiaries to incur additional
indebtedness, to create liens or other encumbrances and to sell or otherwise dispose of assets and merge or con-
solidate with another entity. This risk is mitigated by maintaining high levels of liquid assets at the holding
company. The company’s management of liquidity risk is discussed further in note 24 (Financial Risk Manage-
ment) to the consolidated financial statements for the year ended December 31, 2011 and in the Liquidity section
of this MD&A.

Key Employees

The company is substantially dependent on a small number of key employees, including its Chairman and sig-
nificant shareholder, Mr. Prem Watsa, and the senior management of its operating subsidiaries. The industry
experience and reputations of these individuals are important factors in the company’s ability to attract new
business. The company’s success has been, and will continue to be, dependent on its ability to retain the services
of existing key employees and to attract and retain additional qualified personnel in the future. At the operating
subsidiaries, employment agreements have been entered into with key employees. The company does not cur-
rently maintain key employee insurance with respect to any of its employees.

Regulatory, Political and other Influences

The insurance and reinsurance industries are highly regulated and are subject to changing political, economic and
regulatory influences. These factors affect the practices and operation of insurance and reinsurance organizations.
Federal, state and provincial governments in the United States and Canada, as well as governments in foreign
jurisdictions in which the company operates, have periodically considered programs to reform or amend the
insurance systems at both the federal and local levels. Such changes could adversely affect the financial results of
the company’s subsidiaries, including their ability to pay dividends, cause unplanned modifications of products
or services, or result in delays or cancellations of sales of products and services. As industry practices and legal,
judicial, social and other environmental conditions change, unexpected and unintended issues related to claims
and coverage may emerge. The company’s management of the risks associated with the management of its capital
within the various regulatory regimes in which it operates (Capital Management) is discussed in note 24
(Financial Risk Management) to the consolidated financial statements for the year ended December 31, 2011 and
in the Capital Resources and Management section of this MD&A.

Information Requests or Proceedings by Government Authorities

Each of the company’s insurance and reinsurance companies is subject to insurance legislation in the jurisdiction
in which it operates. From time to time, the insurance industry has been subject to investigations, litigation and
regulatory activity by various insurance, governmental and enforcement authorities, concerning certain practices
within the industry. The existence of information requests or proceedings by government authorities could have
various adverse effects. The company’s internal and external legal counsels coordinate with operating companies
in responding to information requests and government proceedings.

Regional or Geographical Limitations and Risks

The company’s international operations are regulated in various jurisdictions with respect to licensing require-
ments, currency, amount and type of security deposits, amount and type of reserves, amount and type of local
investment and other matters. International operations and assets held abroad may be adversely affected by

200

political and other developments in foreign countries, including possibilities of tax changes, nationalization and
changes in regulatory policy, as well as by consequences of hostilities and unrest. The risks of such occurrences
and their overall effect upon the company vary from country to country and cannot easily be predicted.

The company regularly monitors for political and other changes in each country where it operates. The decentral-
ized nature of the company’s operations permits quick adaptation to, or mitigation of, evolving regional risks.
Furthermore, the company’s international operations are widespread and therefore not dependent on the
economic stability of one particular region.

Lawsuits

The existence of lawsuits against the company or its affiliates, directors or officers could have various adverse
effects. For a full description of the current state of such lawsuits, please see section (a) of “Lawsuits” in note 20
(Contingencies and Commitments) to the consolidated financial statements for the year ended December 31,
2011.

Operating companies manage day-to-day regulatory and legal risk primarily by implementing appropriate poli-
cies, procedures and controls. Internal and external legal counsels also work closely with the operating companies
to identify and mitigate areas of potential regulatory and legal risk.

Significant Shareholder

The company’s Chairman and Chief Executive Officer, Mr. Prem Watsa, owns, directly or indirectly, or exercises
control or direction over shares representing 45.0% of the voting power of outstanding shares. Mr. Watsa has the
ability to substantially influence certain actions requiring shareholder approval, including approving a business
combination or consolidation, liquidation or sale of assets, electing members of the Board of Directors and
adopting amendments to articles of incorporation and by-laws.

Foreign Exchange

The company’s presentation currency is the U.S. dollar. A portion of the company’s premiums and expenses are
denominated in foreign currencies and a portion of assets (including investments) and loss reserves are also
denominated in foreign currencies. The company may, from time to time, experience losses resulting from
fluctuations in the values of foreign currencies (including when certain foreign currency assets and liabilities are
hedged) which could adversely affect the company’s operating results. The company’s management of foreign
currency risk is discussed in note 24 (Financial Risk Management) to the consolidated financial statements for the
year ended December 31, 2011.

Reliance on Distribution Channels

The company transacts business with a large number of independent brokers on a non-exclusive basis. These
independent brokers also transact the business of the company’s competitors and there can be no assurance as to
their continuing commitment to distribute the company’s insurance and reinsurance products. The continued
profitability of the company depends, in part, on the marketing efforts of independent brokers and the ability of
the company to offer insurance and reinsurance products and maintain financial ratings that meet the require-
ments and preferences of such brokers and their policyholders.

Because the majority of the company’s brokers are independent, there is limited ability to exercise control over
them. In the event that an independent broker exceeds its authority by binding the company on a risk which does
not comply with the company’s underwriting guidelines, the company may be at risk for that policy until the
application is received and a cancellation effected. Although to date the company has not experienced a material
loss from improper use of binding authority by its brokers, any improper use of such authority may result in losses
that could have a material adverse effect on the business, results of operations and financial condition of the
company. The company’s insurance and reinsurance subsidiaries closely manage and monitor broker relationships
and regularly audit broker compliance with the company’s established underwriting guidelines.

Goodwill and Intangible Assets

The goodwill and intangible assets on the consolidated balance sheets originated from various acquisitions made
by the company or from acquisitions made by the company’s operating subsidiaries. It is essential that the fair

201

F A I R F A X F I N A N C I A L H O L D I N G S L I M I T E D

value of the acquired entity continue to exceed its carrying value for there to be no impairment in the carrying
value of the goodwill. An intangible asset may be impaired if the economic benefit to be derived from its use is
unexpectedly diminished.

Management regularly reviews the current and expected profitability of the operating companies relative to plan
in assessing the carrying value of goodwill. The intended use, expected life, and economic benefit to be derived
from intangible assets are evaluated by the company when there are potential indicators of impairment. The
carrying values of goodwill and indefinite-lived intangible assets are tested for impairment at least annually or
more often if events or circumstances indicate there may be potential impairment.

Taxation

Realization of deferred income tax assets is dependent upon the generation of taxable income in those juris-
dictions where the relevant tax losses and temporary differences exist. Failure to achieve projected levels of profit-
ability could lead to a writedown in the company’s deferred income tax asset if it is no longer probable that the
amount of the asset will be realized.

The company is subject to income taxes in Canada, the U.S. and many foreign jurisdictions where it operates, and
the company’s determination of its tax liability is subject to review by applicable domestic and foreign tax
authorities. While the company believes its tax positions to be reasonable, where the company’s interpretations
differ from those of tax authorities or the timing of realization is not as expected, the provision for income taxes
may increase or decrease in future periods to reflect actual experience.

The company has specialist tax personnel responsible for assessing the income tax consequences of planned
transactions and events and undertaking the appropriate tax planning. The company also utilizes external tax
professionals as it deems necessary. Tax legislation for each jurisdiction in which the company operates is
interpreted to determine the provision for income taxes and expected timing of the reversal of deferred income
tax assets and liabilities.

Guaranty Funds and Shared Markets

Virtually all U.S. states require insurers licensed to do business in their state to bear a portion of the loss suffered
by some insureds as the result of impaired or insolvent insurance companies. Many states also have laws that
establish second-injury funds to provide compensation to injured employees for aggravation of a prior condition
or injury, which are funded by either assessments based on paid losses or premium surcharge mechanisms. In
addition, as a condition to the ability to conduct business in various jurisdictions, the company’s U.S. insurance
subsidiaries are required to participate in mandatory property and casualty shared market mechanisms or pooling
arrangements, which provide various types of insurance coverage to individuals or other entities that otherwise
are unable to purchase that coverage from private insurers. The effect of these assessments and mandatory shared-
market mechanisms or changes in them could reduce the profitability of the company’s U.S. insurance sub-
sidiaries in any given period or limit their ability to grow their business. Similarly, the company’s Canadian
insurance subsidiary contributes to a mandatory guaranty fund that protects insureds in the event of a Canadian
property and casualty insurer becoming insolvent.

Technology

Third parties provide certain of the key components of the company’s business infrastructure such as voice and data
communications and network access. Given the high volume of transactions processed daily, the company is reliant
on such third party provided services to successfully deliver its products and services. Despite the contingency plans of
the company and those of its third party service providers, failure of these systems could interrupt the company’s
operations and impact its ability to rapidly evaluate and commit to new business opportunities.

In addition, a security breach of the company’s computer systems could damage its reputation or result in
liability. The company retains confidential information regarding its business dealings in its computer systems,
including, in some cases, confidential personal information regarding insureds. Therefore, it is critical that the
company’s facilities and infrastructure remain secure and are perceived by the marketplace to be secure.

Operational availability, integrity and security of the company’s information, systems and infrastructure are
actively managed through threat and vulnerability assessments, strict security policies and disciplined change
management practices.

202

Other

Quarterly Data (unaudited)

Years ended December 31

2011(1)

Revenue
Net earnings (loss)
Net earnings (loss) attributable to shareholders of Fairfax
Net earnings (loss) per share
Net earnings (loss) per diluted share

2010(1)

Revenue
Net earnings
Net earnings (loss) attributable to shareholders of Fairfax
Net earnings (loss) per share
Net earnings (loss) per diluted share

2009(2)

Revenue
Net earnings (loss)
Net earnings (loss) attributable to shareholders of Fairfax
Net earnings (loss) per share
Net earnings (loss) per diluted share

IFRS basis.

(1)
(2) Canadian GAAP basis.

First

Fourth
Quarter Quarter Quarter Quarter

Second

Third

Full
Year

1,573.5
(239.5)
(240.6)
$ (12.42) $
$ (12.42) $

3,322.9
974.5
973.9

7,475.0
1,755.0
47.8
83.6
83.3
45.1
3.43 $ 47.17 $ (38.47) $ (0.31)
3.40 $ 46.73 $ (38.47) $ (0.31)

823.6
(770.8)
(771.5)

1,985.1
419.3
418.4
$ 20.47 $
$ 20.38 $

1,926.6
388.9
388.1

5,967.3
1,394.1
338.0
22.9
23.7
335.8
0.88 $ 18.53 $ (24.77) $ 14.90
0.87 $ 18.44 $ (24.77) $ 14.82

661.5
(493.1)
(494.4)

1,279.4
(39.6)
(60.4)

1,735.5
321.5
275.4
$ (3.55) $ 15.65 $ 31.04 $
$ (3.55) $ 15.56 $ 30.88 $

2,213.4
625.6
562.4

6,635.6
1,407.3
990.7
83.2
856.8
79.4
1.66 $ 43.99
1.65 $ 43.75

Notwithstanding catastrophe losses of $1,020.8 in one of the worst catastrophe years on record (compared to
catastrophe losses of $331.4 in 2010), the company’s investment results allowed it to basically break even in 2011
with its book value being essentially unchanged. The loss in the fourth quarter of 2011 arose principally from
underwriting losses of $292.8 (relative to underwriting losses of $35.3 in 2010), primarily as a result of large catas-
trophe claims and from net mark-to-market investment losses, included in net losses on investments of $914.9
(compared to net investment losses of $887.9 in the fourth quarter of 2010), primarily as a result of
non-correlation between the performance of the company’s equities and its equity-related hedges, which the
company believes will reverse in future periods.

Operating results at the insurance and reinsurance operations continue to be affected by difficult competitive
environment. Individual quarterly results have been (and may in the future be) affected by losses from significant
natural or other catastrophes, by reserve releases and strengthenings and by settlements or commutations, the
occurrence of which are not predictable, and have been (and are expected to continue to be) significantly
impacted by net gains or losses on investments, the timing of which are not predictable.

Stock Prices and Share Information

As at March 9, 2012 Fairfax had 19,603,073 subordinate voting shares and 1,548,000 multiple voting shares out-
standing (an aggregate of 20,351,843 shares effectively outstanding after an intercompany holding). Each sub-
ordinate voting share carries one vote per share at all meetings of shareholders except for separate meetings of
holders of another class of shares. Each multiple voting share carries ten votes per share at all meetings of share-
holders except in certain circumstances (which have not occurred) and except for separate meetings of holders of
another class of shares. The multiple voting shares are not publicly traded.

203

F A I R F A X F I N A N C I A L H O L D I N G S L I M I T E D

The table that follows presents the Toronto Stock Exchange high, low and closing Canadian dollar prices of sub-
ordinate voting shares of Fairfax for each quarter of 2011, 2010 and 2009.

2011

High
Low
Close

2010

High
Low
Close

2009

High
Low
Close

First
Quarter

Second
Quarter

Third
Quarter

Fourth
Quarter

(Cdn$)

416.48
346.00
366.50

410.32
356.25
381.90

404.00
272.38
326.00

399.75
359.70
386.00

409.57
362.80
389.88

329.99
275.95
292.00

407.00
360.02
401.79

425.25
389.00
419.00

416.40
281.79
397.73

442.00
386.00
437.01

420.97
395.00
408.99

417.35
364.00
410.00

The table that follows presents the New York Stock Exchange high, low and closing U.S. dollar prices of sub-
ordinate voting shares of Fairfax for each quarter of 2009.

2009
High
Low
Close

First
Quarter

Second
Quarter

Third
Quarter

Fourth
Quarter(1)

(US$)

328.76
211.01
260.50

280.49
237.16
249.49

382.38
241.50
370.73

377.14
343.00
354.50

(1) On December 10, 2009, Fairfax’s subordinate voting shares were voluntarily delisted from the New York Stock

Exchange.

Compliance with Corporate Governance Rules

Fairfax is a Canadian reporting issuer with securities listed on the Toronto Stock Exchange and trading in Cana-
dian dollars under the symbol FFH and in U.S. dollars under the symbol FFH.U. It has in place corporate gover-
nance practices that comply with all applicable rules and substantially comply with all applicable guidelines and
policies of the Canadian Securities Administrators and the practices set out therein.

The company’s Board of Directors has adopted a set of Corporate Governance Guidelines (which include a written
mandate of the Board), established an Audit Committee, a Governance and Nominating Committee and a Com-
pensation Committee, approved written charters for all of its committees, approved a Code of Business Conduct
and Ethics applicable to all directors, officers and employees of the company and established, in conjunction with
the Audit Committee, a Whistleblower Policy. The company continues to monitor developments in the area of
corporate governance as well as its own procedures.

Forward-Looking Statements

Certain statements contained herein may constitute forward-looking statements and are made pursuant to the
“safe harbour” provisions of the United States Private Securities Litigation Reform Act of 1995. Such forward-
looking statements are subject to known and unknown risks, uncertainties and other factors which may cause the
actual results, performance or achievements of Fairfax to be materially different from any future results, perform-
ance or achievements expressed or implied by such forward-looking statements.

Such factors include, but are not limited to: a reduction in net income if our loss reserves (including reserves for
asbestos, environmental and other latent claims) are insufficient; underwriting losses on the risks we insure that
are higher or lower than expected; the occurrence of catastrophic events with a frequency or severity exceeding

204

our estimates; the cycles of the insurance market and general economic conditions, which can substantially influ-
ence our and our competitors’ premium rates and capacity to write new business; changes in market variables,
including interest rates, foreign exchange rates, equity prices and credit spreads, which could negatively affect our
investment portfolio; risks associated with our use of derivative instruments; the failure of our hedging methods
to achieve their desired risk management objective; exposure to credit risk in the event our reinsurers fail to make
payments to us under our reinsurance arrangements; exposure to credit risk in the event our insureds, insurance
producers or reinsurance intermediaries fail to remit premiums that are owed to us or failure by our insureds to
reimburse us for deductibles that are paid by us on their behalf; risks associated with implementing our business
strategies; the timing of claims payments being sooner or the receipt of reinsurance recoverables being later than
anticipated by us; the inability of our subsidiaries to maintain financial or claims paying ability ratings; a decrease
in the level of demand for insurance or reinsurance products, or increased competition in the insurance industry;
the failure of any of the loss limitation methods we employ; the impact of emerging claim and coverage issues;
our inability to obtain reinsurance coverage in sufficient amounts, at reasonable prices or on terms that
adequately protect us; our inability to access cash of our subsidiaries; our inability to obtain required levels of
capital on favorable terms, if at all; loss of key employees; the passage of legislation subjecting our businesses to
additional supervision or regulation, including additional tax regulation, in the United States, Canada or other
jurisdictions in which we operate; risks associated with government investigations of, and litigation related to,
insurance industry practice or any other conduct; risks associated with political and other developments in for-
eign jurisdictions in which we operate; risks associated with the current purported class action litigation; risks
associated with our pending civil litigation; the influence exercisable by our significant shareholder; adverse fluc-
tuations in foreign currency exchange rates; our dependence on independent brokers over whom we exercise little
control; an impairment in the carrying value of our goodwill and indefinite-lived intangible assets; our failure to
realize deferred income tax assets; assessments and shared market mechanisms which may adversely affect our
insurance subsidiaries; and failures or security breaches of our computer and data processing systems. Additional
risks and uncertainties are described in our most recently issued Annual Report which is available at
www.fairfax.ca and in our Short Form Base Shelf Prospectus dated December 10, 2010 (under “Risk Factors”) filed
with the securities regulatory authorities in Canada, which is available on SEDAR at www.sedar.com. Fairfax dis-
claims any intention or obligation to update or revise any forward-looking statements.

205

F A I R F A X F I N A N C I A L H O L D I N G S L I M I T E D

APPENDIX
GUIDING PRINCIPLES FOR FAIRFAX FINANCIAL HOLDINGS LIMITED

OBJECTIVES:

1) We expect to compound our book value per share over the long term by 15% annually by running Fairfax
and its subsidiaries for the long term benefit of customers, employees and shareholders – at the expense of
short term profits if necessary.

Our focus is long term growth in book value per share and not quarterly earnings. We plan to grow through
internal means as well as through friendly acquisitions.

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.

Share ownership and large incentives are encouraged across the Group.

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!

206

Consolidated Financial Summary

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

Per Share

Increase in
book value
per share

Common
share-
holders’
equity

Net
earnings

Revenue

Earnings
before
income
taxes

As at and for the years ended December 31(2):

Net
earnings

Total
assets

Invest-
ments(2)

Net
debt

Common
share-
holders’
equity

Common
shares
outstanding

Closing
share
price(3)

1985

—

1986

179.6%

1.52

4.25

6.30

8.26

10.50

14.84

18.38

18.55

26.39

31.06

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

(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

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

—

3.7

4.9

27.3

21.9

83.3

58.0

69.4

641.1

118.7

1,549.3

1,105.9

166.3

2,104.8

1,221.9

175.7

63.31 11.26 1,082.3

137.4 110.6

4,216.0

2,520.4

281.6

86.28 14.12 1,507.7

218.0 152.1

7,148.9

4,054.1

369.7

7.6

29.7

46.0

60.3

76.7

81.6

101.1

113.1

211.1

279.6

346.1

664.7

960.5

5.0

7.0

7.3

5.5

6.1

8.0

9.0

8.9

3.25(4)

12.75

12.37

15.00

18.75

11.00

21.25

25.00

61.25

67.00

98.00

10.5 290.00

11.1 320.00

112.49 23.60 2,469.0

358.9 280.3 13,640.1

7,867.8

830.0 1,364.8

12.1 540.00

155.55

3.20 3,905.9

(72.2)

42.6 22,229.3 12,289.7 1,248.5 2,088.5

13.4 245.50

48.2%

31.1%

27.1%

41.3%

23.9%

0.9%

42.3%

17.7%

25.2%

62.8%

36.3%

30.4%

38.3%

(4.8)% 148.14

5.04 4,157.2

(66.7)

75.5 21,667.8 10,399.6 1,251.5 1,940.8

13.1 228.50

(21.0)% 117.03 (31.93) 3,953.2 (695.1) (406.5) 22,183.8 10,228.8 1,194.1 1,679.5

14.4 164.00

7.0%

125.25 17.49 5,104.7

294.7 252.8 22,173.2 10,596.5 1,602.8 1,760.4

14.1 121.11

30.7%

163.70 19.51 5,731.2

537.1 288.6 24,877.1 12,491.2 1,961.1 2,264.6

13.8 226.11

(0.6)% 162.76

3.11 5,829.7

287.6

53.1 26,271.2 13,460.6 1,965.9 2,605.7

16.0 202.24

(15.5)% 137.50 (27.75) 5,900.5 (466.5) (446.6) 27,542.0 14,869.4 1,984.0 2,448.2

17.8 168.00

9.2%

150.16 11.92 6,803.7

878.6 227.5 26,576.5 16,819.7 1,613.6 2,662.4

17.7 231.67

53.2%

21.0%

32.9%

230.01 58.38 7,510.2 2,160.4 1,095.8 27,941.8 19,000.7 1,207.4 4,063.5

17.7 287.00

278.28 79.53 7,825.6 2,444.3 1,473.8 27,305.4 19,949.8

412.5 4,866.3

17.5 390.00

369.80 43.75 6,635.6 1,205.6 856.8 28,452.0 21,273.0 1,071.1 7,391.8

20.0 410.00

1.8%

376.33 14.82 5,967.3

151.1 335.8 31,448.1 23,300.0 1,254.9 7,697.9

20.5 408.99

(3.1)% 364.55

(0.31) 7,475.0

(8.7)

45.1 33,406.9 24,322.5 2,055.7 7,427.9

20.4 437.01

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

(1) All share references are to common shares; shares outstanding are in millions.

(2)

IFRS basis for 2011 and 2010; Canadian GAAP basis for 2009 and prior. Under Canadian GAAP, investments were
generally carried at cost or amortized cost in 2006 and prior.

(3) Quoted in Canadian dollars.

(4) When current management took over in September 1985.

207

F A I R F A X F I N A N C I A L H O L D I N G S L I M I T E D

Directors of the Company
Anthony F. Griffiths
Corporate Director

Robert J. Gunn
Corporate Director

Alan D. Horn
President and Chief Executive Officer,
Rogers Telecommunications Limited
John R.V. Palmer (as of April 2012)
Chairman, Toronto Leadership Centre

Timothy R. Price
Chairman, Brookfield Funds,
Brookfield Asset Management Inc.
Brandon W. Sweitzer
Dean, School of Risk Management, St. John’s University

V. Prem Watsa
Chairman and Chief Executive Officer of the Company

Operating Management

Fairfax Insurance Group

Andrew A. Barnard, President and Chief

Operating Officer

Canadian Insurance

Silvy Wright, President
Northbridge Financial Corporation

U.S. Insurance

Douglas M. Libby, President
Crum & Forster Holdings Corp.
Jack Miller, President
Zenith National Insurance Corp.

Asian Insurance

Ramaswamy Athappan, Chairman and CEO
Fairfax Asia

Chief Executive Officer
First Capital Insurance Limited
Sammy Y. Chan, President
Fairfax Asia
Gobinath Athappan, President
Falcon Insurance Company (Hong Kong) Limited

Other Insurance

Jacques Bergman, President
Fairfax Brasil

Reinsurance – OdysseyRe

Brian D. Young, President
Odyssey Re Holdings Corp.

Other Reinsurance

Jim Migliorini, Chief Executive Officer
Trevor Ambridge, Managing Director
Advent Capital (Holdings) PLC
Marek Czerski, President
Polish Re

Runoff

Nicholas C. Bentley, President
RiverStone Group LLC

Other

Bijan Khosrowshahi, President
Fairfax International
Roger Lace, President
Hamblin Watsa Investment Counsel Ltd.
Ray Roy, President
MFXchange Holdings Inc.

208

Officers of the Company

David Bonham
Vice President, Financial Reporting

John Cassil
Vice President, Taxation

Peter Clarke
Vice President and Chief Risk Officer

Jean Cloutier
Vice President, International Operations

Hank Edmiston
Vice President, Regulatory Affairs

Bradley Martin
Vice President, Strategic Investments

Paul Rivett
Vice President

Eric Salsberg
Vice President, Corporate Affairs

Ronald Schokking
Vice President and Treasurer

John Varnell
Vice President and Chief Financial Officer

V. Prem Watsa
Chairman and Chief Executive Officer

Jane Williamson
Vice President

Head Office

95 Wellington Street West
Suit 800
Toronto, Canada M5J 2N7
Telephone (416) 367-4941
website www.fairfax.ca

Auditors

PricewaterhouseCoopers LLP

General Counsel

Torys LLP

Transfer Agents and Registrars

Valiant Trust Company, Toronto
Registrar and Transfer Company, Cranford, New Jersey

Share Listing

Toronto Stock Exchange
Stock Symbol: FFH and FFH.U

Annual Meeting

The annual meeting of shareholders of
Fairfax Financial Holdings Limited will be
held on Thursday, April 26, 2012 at 9:30 a.m.
(Toronto time) at Roy Thomson Hall,
60 Simcoe Street, Toronto, Canada