Fairfax Financial

2012 Annual Report

Contents

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

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

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

1

2

4

Management’s Responsibility for the Financial

Statements and Management’s Report on

Internal Control over Financial Reporting . . .

22

Independent Auditor’s Report to the

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

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

Fairfax Consolidated Financial Statements . . . .

Notes to Consolidated Financial Statements

. .

23

25

26

33

Management’s Discussion and Analysis of

Financial Condition and Results of

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

112

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

205

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

206

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

207

2012 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

Close

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

2012

2011

2010

2009

8,022.8

7,475.0

5,967.3

6,635.6

532.4

45.1

335.8

856.8

2008

7,825.6

1,473.8

36,941.2

33,406.9

31,448.1

28,452.0

27,305.4

7,654.7

7,427.9

7,697.9

7,391.8

4,866.3

20.2

20.4

20.5

20.0

17.5

3.7%

(3.1)%

1.8%

32.9%

21.0%

22.94

(0.31)

14.82

43.75

79.53

378.10

10.00

364.55

10.00

376.33

10.00

369.80

278.28

8.00

5.00

442.00

335.00

358.55

442.00

346.00

437.01

425.25

356.25

408.99

417.35

272.38

410.00

390.00

221.94

390.00

(1)

IFRS basis for 2012, 2011 and 2010; Canadian GAAP basis for 2009 and 2008.

Please see the Consolidated Financial Summary on page 206, which shows
Fairfax’s financial highlights since inception in 1985.

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

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 2012, Northbridge’s net premiums
written were Cdn$948.3 million. At year-end, the company had statutory equity of Cdn$1,183.1 million and
there were 1,518 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 2012, C&F’s net premiums written were
US$1,253.4 million. At year-end, the company had statutory surplus of US$1,231.0 million and there were
1,524 employees.

Zenith National, based in Woodland Hills, California, is primarily engaged in the workers’ compensation
insurance business in the United States. In 2012, Zenith National’s net premiums written were US$619.4 million.
At year-end, the company had statutory surplus of US$443.7 million and there were 1,466 employees.

Asian insurance

First Capital, based in Singapore, writes property and casualty insurance primarily in Singapore markets. In
2012, First Capital’s net premiums written were SGD 181.4 million (approximately SGD 1.2 = US$1). At year-end,
the company had shareholders’ equity of SGD 396.4 million and there were 134 employees.

Falcon Insurance, based in Hong Kong, writes property and casualty insurance in niche markets in Hong Kong.
In 2012, Falcon’s net premiums written were HK$400.3 million (approximately HK$7.8 = US$1). At year-end, the
company had shareholders’ equity of HK$549.2 million and there were 77 employees.

Pacific Insurance, based in Malaysia, writes all classes of general insurance and medical insurance in Malaysia.
In 2012, Pacific Insurance’s net premiums written were MYR 135.3 million (approximately MYR 3.1 = US$1). At
year-end, the company had shareholders’ equity of MYR 232.7 million and there were 206 employees.

Other insurance

Fairfax Brasil, based in São Paulo, commenced writing insurance in March 2010 in all lines of business in Bra-
zil. In 2012, Fairfax Brasil’s net premiums written were BRL 81.2 million (approximately BRL 1.9 = US$1). At year-
end, the company had shareholders’ equity of BRL 88.0 million and there were 57 employees.

Reinsurance

OdysseyRe, based in Stamford, Connecticut, underwrites treaty and facultative reinsurance as well as specialty
insurance, with principal locations in the United States, Toronto, London, Paris, Singapore and Latin America. In
2012, OdysseyRe’s net premiums written were US$2,402.3 million. At year-end, the company had shareholders’
equity of US$3,780.9 million and there were 750 employees.

2

Advent, based in the U.K., is a reinsurance and insurance company, operating through Syndicate 780 at Lloyd’s,
focused on specialty property reinsurance and insurance risks. In 2012, Advent’s net premiums written were
US$187.3 million. At year-end, the company had shareholders’ equity of US$151.7 million and there were
71 employees.

Polish Re, based in Warsaw, Poland, writes reinsurance in the Central and Eastern European regions. In 2012,
Polish Re’s net premiums written were PLN 309.0 million (approximately PLN 3.3 = US$1). At year-end, the
company had shareholders’ equity of PLN 259.9 million and there were 44 employees.

Group Re primarily constitutes the participation by CRC Re and Wentworth (both based in Barbados) in the
reinsurance of Fairfax’s subsidiaries by quota share or through participation 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 2012, Group Re’s net premiums written were US$206.6 million. At year-end, the Group Re companies
had combined shareholders’ equity of US$532.7 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 of US$1,773.9 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 184 employees in the U.S., located primarily in Man-
chester, New Hampshire, and 103 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 23.2%
interest in Thai Re Public Company Limited, a 27.0% interest in Singapore Re, a 40.5% interest in Falcon Thailand,
and investments in The Brick (33.7%), MEGA Brands (21.9%), Imvescor Restaurant Group (23.6%), Resolute Forest
Products (25.6%), Arbor Memorial
(39.5%), Ridley (73.6%), Prime Restaurants (81.7%), William Ashley
(100.0%), Sporting Life (75.0%) and Thomas Cook India (87.1%). The other companies in the Fairfax corporate
structure, principally investment or intermediate holding companies (including companies located in various juris-
dictions outside North America), are not part of these operating groups; these other companies have no insurance,
reinsurance, runoff or other operations.

3

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 had an excellent year in 2012, even though it was not that obvious in the numbers, as our book value per
share increased by only 6 1⁄ 2% (including the $101 per share dividend paid in 2012) because of our very cautious
view of financial markets. Even though book value per share ended the year at only $378 per share, up from $365
per share at the end of 2011, and common shareholders’ equity ended the year at only about the $7.7 billion level
it first reached two years ago, intrinsic value increased significantly. Our results have always been lumpy. In the
three years 2007 – 2009, we earned $3.4 billion after taxes and book value per share increased by 146%. Since
then, book value per share has increased by only approximately 10% (including dividends) because of our very
cautious view of the financial markets (which has led us to be 100% hedged in our common stock portfolios) and,
of course, the unprecedented catastrophes in 2011. We ended the year with cash and marketable securities at the
holding company in excess of $1 billion.

In the 27 years since we began in 1985, our compound annual growth in book value per share has been 23%,
while our common stock price has compounded at 19% annually.

While until late last year, 2012 looked like a light year for catastrophes, Hurricane Sandy then came, causing
devastation on the northeast coast of the U.S. Total economic damages could well be in excess of $50 billion
while insured damage is expected to be in the range of $25 – $30 billion. And Hurricane Sandy was really only a
tropical storm when it made landfall! A category 3 or above hurricane which follows the path of Sandy and slams
into New York City is the U.S. industry’s big nightmare. Sandy is expected to cost us about $261 million – mostly
from OdysseyRe.

Speaking of OdysseyRe, in spite of Hurricane Sandy, it had the best combined ratio in its history. OdysseyRe had a
record 88.5% combined ratio for 2012, generating $267 million in underwriting profit with conservative reserv-
ing. And premiums grew 15% in 2012! OdysseyRe almost made up in one year for 2011, when unprecedented
catastrophe losses led to a combined ratio of 116.7% and an underwriting loss of $336 million. In fact, if not for
Sandy, OdysseyRe would have recouped all of its 2011 losses. The key in the catastrophe business is to view it over
the long term rather than pulling away after catastrophes have occurred. Brian Young, who runs OdysseyRe, ably
maintained OdysseyRe’s catastrophe writings and increased them where he could, always maintaining total
exposure within our worst case limits. With catastrophe pricing going up very significantly in 2012 for exposures
in Japan, Thailand and other parts of Asia while remaining steady in the U.S., OdysseyRe wrote $1.1 billion of
property premiums in underwriting year 2012 at a combined ratio of 86.2%.

For Fairfax, OdysseyRe is the jewel in the crown, accounting for almost half our business and producing an aver-
age accident year combined ratio in the last ten years (since 2003) of 92.8%. Of the $2.8 billion in premiums writ-
ten by OdysseyRe in 2012, $1.9 billion was in reinsurance worldwide and $916 million in insurance, mainly
through Hudson in the U.S. and Newline in London, England. OdysseyRe is headquartered in New York and
Stamford and operates in over 100 countries with 24 offices worldwide. Almost 33% of its business emanates from
outside North America, generated through its offices in London, England and Paris, France (which writes business
in Europe and Asia, with an office in Singapore since 1990). It has over 30 profit centres worldwide, allowing it to
very quickly “dial up” or “dial down” any of its product lines depending on market conditions. This agility is a
major strength of its organizational structure. Please review OdysseyRe’s website www.odysseyre.com for more
information. Brian Young has worked with Andy Barnard at OdysseyRe since 1996 and we are very excited about
the prospects of the company under his leadership. As I have mentioned to you many times, in the reinsurance
business, a few good men and women can have a dramatic impact!

We had many smooth management transitions in 2012. Stanley Zax, after 36 years building Zenith, decided at 76
it was time to retire. Stanley took Zenith from $63 million in premiums in 1977 to $619 million in 2012 with an
average combined ratio of approximately 98.5% while book value per share (including dividends) compounded at
12% over the same period. More importantly, he built an outstanding customer-focused organization – second to
none in the workers compensation business in the U.S. All our companies benefit, through osmosis, from the
huge strengths of Zenith. We wish Stanley and his wife Barbara good health and a very happy retirement with
their family. Jack Miller, who had worked with Stanley at Zenith for over 15 years, took over without a hitch and
has been ably running Zenith for a year now.

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.

4

There were a number of management transitions at head office during the year. John Varnell passed the CFO title
at Fairfax over to Dave Bonham and continued with us as Vice President, Corporate Development. John has been
with us for over 25 years and has been intimately involved in all our activities at head office. Some of you will
remember, he was the architect of our successful investment in Hub many years ago. Dave Bonham has been
trained by John and has been with us for nine years. Also, Brad Martin moved into the new role of Vice President,
Strategic Investments, where he will provide support and insight as a member of the Boards of Directors of Fair-
fax’s significant investees, such as Ridley, Resolute and Prime Restaurants. Brad was instrumental in supporting
management in the sale of Hub in 2007 and the sale of Cunningham Lindsey in 2012 (more on that later). Paul
Rivett, who is currently Chief Operating Officer of Hamblin Watsa Investment Counsel and a member of the
Investment Committee at Fairfax, will now also oversee internal operations at Fairfax, which is what Brad used to
do. Wade Burton, after nine years at Cundill Value Funds and three years with Hamblin Watsa Investment Coun-
sel, has joined our Investment Committee.

At Advent, Jim Migliorini recruited Nigel Fitzgerald, who headed up the marine division at Crum & Forster, to be
the Chief Operating Officer. Advent’s future is bright under Jim and Nigel’s leadership.

At the request of Alltrust in China, Sam Chan, President of Fairfax Asia, became President of Alltrust. Sam works
closely with Henry Du, the CEO of Alltrust. Sam has been an outstanding Fairfax officer for 24 years, starting early
on as our Chief Actuary, and then being instrumental in building our Asian operations. At Fairfax Asia, Gobi
Athappan, who has been with us for 12 years, has been promoted to Chief Operating Officer – a father and son
team that will be hard to beat! Gobi also runs Falcon Hong Kong. We continue to be very excited about our Asian
operations under the Athappans!

All of these transitions were done in the Fairfax way, fair and friendly, with no egos getting in the way. I am really
excited when I think of the outstanding talent we have at Fairfax – all of whom are, most importantly, team ori-
ented and hardworking with no egos! I have seen over the years how destructive an outsized ego can be to a
company – in the short term and in the long term! As President Ronald Reagan said, anything in the world is
possible if you don’t care who gets the credit. Fairfax is a living demonstration of this principle – and it is very
much ingrained in our culture!

Andy Barnard, as President and Chief Operating Officer of Fairfax Insurance Group, oversees all of our insurance
and reinsurance operations worldwide and continues to do an outstanding job. Working with the Presidents of
our companies, and with Peter Clarke, Jean Cloutier and Paul Rivett, Andy is primarily focused on helping Fairfax
maximize our underwriting performance. Under his chairmanship, the Fairfax Leadership Council has provided a
forum to enhance our group coordination. We have established working groups across our companies to explore
and take advantage of best practices. Of special interest this year, Andy and Paul Rivett have established a Talent
and Culture Development working group, charged with fostering our “fair and friendly” culture, with special
focus on outstanding customer service. Among the hallmarks of a successful company over the long term is an
enduring culture that differentiates itself from the field.

Also of interest in 2012, we held our first Fairfax Leadership Workshop, which brought together 18 of our most
promising managers for a week of training and networking in Toronto. It was a resounding success, and will be an
annual event. If you were to meet these rising stars, you would know the future of Fairfax is in good hands.

In 2012, gross premiums written were $7.2 billion across our group – a far cry from the $17 million we began with
in 1985. Of that $7.2 billion, 57% was derived from North American insurance, 31% from global reinsurance and
12% from international insurance. Over the years, we expect our international insurance segment to increase
significantly. The $7.2 billion does not include our non-consolidated international operations like India, China
and the Middle East which produced $2.5 billion in gross premiums written in 2012, of which our share was $650
million. Including our non-consolidated businesses, international operations accounted for approximately 19% of
our $7.8 billion total gross premiums written in 2012. Our international operations are mainly in the emerging
markets of Asia, Latin America and the Middle East. All of these markets are growing rapidly because of the low
penetration of insurance.

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

The star of our worldwide operations is Mr. Athappan who runs First Capital in Singapore and is also Chairman of
Fairfax Asia. I last discussed his record at First Capital in our 2008 Annual Report. Here’s an update:

Combined ratio (%)

Gross premiums written

Common shareholders’ equity

Simply outstanding!

2002 – 2007 2008 2009 2010 2011 2012
79.0
72.9

65.9

78.6

73.2

186

248

303

348

397

130

187

225

253

324

26.5%

57.8
(average)
10
(2002)
32
(2002)

Compound
Annual
Growth
2002 – 2012
71.8%
(average)
44.9%

Our partnership with Gulf Insurance in the Middle East is working out very well. Gulf celebrated its 50th anniversary
in Kuwait in 2012 – and we were there! Faisal Al-Ayyar, Vice Chairman of KIPCO, Abdel Karim Al-Kabariti, Chair-
man of Jordan Kuwait Bank, and Khaled Saoud Al-Hasan, Chief Executive Officer of Gulf Insurance, are all great
partners. Bijan Khosrowshahi and Jean Cloutier work closely with the team at Gulf Insurance. During the year, Gulf
Insurance purchased our 20% interest in Alliance Insurance in Dubai, so that all our Middle Eastern interests are
consolidated in Gulf Insurance. Here’s Gulf Insurance’s record since we purchased our 41% interest in 2010:

Combined ratio (%)

Gross premiums written

Common shareholders’ equity

2002 – 2009
92.9
(average)
87.8
(2002)
136.3
(2002)

2010
89.5

2011
89.9

2012
92.0

417.6 484.3 519.0

249.8 238.8 259.3

Our Brazilian operation, which we started from scratch in 2010, is on track to achieve a 100% combined ratio or
better in 2013. Led by Jacques Bergman and Bruno Camargo, this operation had $114 million in gross premiums
written in 2012.

Thai Re, in which we acquired a 21% interest last year at 3 baht per share, is recovering well from the devastating
floods in Bangkok in 2011. That company should be back to its historical record of combined ratios in the mid- 80s
in 2013 barring unforeseen catastrophes. Chandran Ratnaswami and Gobi Athappan are helping Surachai Shrivallop
continue to build on his excellent long term record. Thai Re’s stock price has recovered to almost 6 baht per share.

Our RiverStone group, led by Nick Bentley, had another fine year in 2012. The performance of our runoff team
continues to be consistently outstanding. Combined with excellent investment results, the runoff operation has
provided significant profits for the past six years, as shown in the table below:

Pre-tax income

2007
187.6 392.6

2008 2009

2010

2011

31.2 164.8 351.6 184.0

2012 Cumulative
1,311.8

In 2010, Nick and his team acquired General Fidelity for $367.1 million (a discount to its book value of $385.8
million) with a $100 million cash payment (from TIG Insurance Company) and a $267.1 million six year non-
interest bearing contingent note, subject to reserve development. Given our expertise at RiverStone, in two years
Nick and his team settled many of the complicated claims and were sufficiently comfortable with the remaining
claims to settle the contingent note four years ahead of schedule for $200 million. We expect this to be a very
profitable deal for RiverStone. In 2012, after a significant amount of due diligence, RiverStone acquired Brit
Insurance, a U.K. company in runoff, for $335 million, a 10% discount to its book value of $370 million. Fair
value adjustments reduced this negative goodwill of $35 million to approximately $7 million which was included
in our earnings. The purchase excluded certain claims reserves which were reinsured back to the vendor of Brit,
but we retained the right to commute this reinsurance during the 18 months following closing. RiverStone added
$1.3 billion in invested assets in this deal, by far its largest yet. Late in the year, Nick and his team entered into an
agreement to reinsure the runoff portfolio of Eagle Star, part of the Zurich Group, for proceeds of $184 million.
All the deals done by RiverStone in 2012 were predominantly financed internally and did not need any sig-
nificant cash from Fairfax. RiverStone’s success in doing these deals was supported by the fact that over 27 years
Fairfax has had an impeccable reputation of never renegotiating a deal and always completing it. We guard our
reputation very carefully and have never been tempted by short term profits at the expense of fair dealing.

6

In 2012, Stonepoint and we closed the sale of Cunningham Lindsey. This saga began in 1986 when we purchased
Lindsey Morden (forerunner of Cunningham Lindsey) for Cdn$8.9 million – $2 million cash and 578,000 shares
of Fairfax. We took it public the following year at Cdn$10 per share, expanded worldwide through the 1990s and
early 2000s and finally, with Chuck Davis from Stonepoint, took it private in 2007 at Cdn$3.20 per share. At that
price, we were being generous to our public shareholders because, if not for us, the company may not have made
it. While we expanded worldwide and sales grew, profits never materialized in any significant manner. Enter
Chuck Davis and Stonepoint! With a tremendous focus from Stonepoint partners Darran Baird and Jim Carey and
a helping hand from our Brad Martin, Cunningham Lindsey has had a great track record since, doubling its rev-
enue and increasing its EBITDA almost 3 times from approximately $40 million to well over $100 million in 2012.

total net

investment

Our
in Cunningham Lindsey was about Cdn$144 million, beginning with the
Cdn$8.9 million investment in 1986, followed by Cdn$135 million primarily related to Cunningham Lindsey’s
acquisitions of Hambro and Ellis & Buckle in 1998 and the privatization in 2007. For our interest, we received
$270.6 million after repayment of debt and fees, which included $270.6 million in cash of which we reinvested
$34.4 million for a 9% interest in the company. Our total return on this investment over 26 years was very poor –
but for much of that time we did not think we would even get our money back. For the profit we ultimately
made, you have to thank Chuck Davis and Stonepoint. We will be partners with them anytime!

In 2012, we purchased 77% of the publicly-listed Indian operations of Thomas Cook UK. Thomas Cook India has
a storied past, beginning 132 years ago transporting the personnel and cargo of the British East India Company to
and from England. It also transported the Rajahs and Nawabs (Kings of India) to Europe and thus was born a
travel and foreign exchange business. Thomas Cook India is the largest foreign exchange company in India with
154 foreign exchange bureaus in all the major airports and cities and the leading bank note remittance company
in India, handling in excess of $1.7 billion annually. It is also the premier travel company for tourists to India and
Indians touring outside India, with 289 offices across the country. You will understand the great growth potential
of this company when you realize that currently only one million Indians annually travel outside India for holi-
days. This compares to some 40 million outbound tourists in China and hundreds of millions of outbound tou-
rists in the western world. Enormous opportunity indeed! If any of you want a trip of a lifetime travelling to
India, please contact Madhavan Menon (madhavan.menon@in.thomascook.com) at Thomas Cook India. Its
website is www.thomascook.in.

Madhavan has over 33 years of experience in the financial services and travel businesses in India. He joined
Thomas Cook India in 2000 (it has been listed in India since 1983) and has been leading the company as its
Managing Director since 2006. Madhavan is an outstanding CEO and was the main reason for our purchase of the
company. After following Indian securities law regarding public company takeovers, we will have approximately
75% of the company at the end of the day. In 2012, Thomas Cook India had revenue of $80 million. In the last
three years, revenue and pre-tax profit have grown at 17% and 24% respectively. After adjusting for undervalued
real estate assets, we purchased the company at approximately ten times 2012 free cash flow. This purchase was
handled by our team in India (Fairbridge) led by Harsha Raghavan, working closely with our own Chandran
Ratnaswami. We are so high on Madhavan and Thomas Cook India that we expect the company will be our
vehicle for further expansion in India – always focused, as at Fairfax, on building shareholder value in the long
term by treating our employees, our customers and our communities well. We welcome Madhavan, his manage-
ment team and all the Thomas Cook India employees to the Fairfax family.

Early in 2013, Harsha, Madhavan and Chandran identified an excellent Indian company run by a wonderful
entrepreneur, Ajit Isaac. Ajit, with 13 years of experience in the temporary staffing business, began IKYA Human
Capital Solutions in 2008. It is already the third largest company in the Indian human resources services industry,
with approximately 55,000 people on its payroll. Thomas Cook India will own 74% with Ajit and the manage-
ment owning the rest. We are excited to participate in the growth of IKYA’s business with Ajit.

Early in 2012, we got into the restaurant business through the purchase of an 82% interest in Prime Restaurants,
with the remainder held by the management team led by John Rothschild, Nick Perpick and Grant Cobb. John
and Nick have been running Prime Restaurants for the past 20 years, with 149 restaurants, mostly franchised
under such brand names as East Side Mario’s, Casey’s and Bier Markt. In 2012, systemwide sales amounted to
Cdn$335.1 million, while Prime had revenue of Cdn$59.1 million. We purchased Prime at approximately
10 times free cash flow. Again, we purchased Prime because of the excellent reputation of John, Nick and Grant
and their outstanding track record.

7

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 summary of our 2012 investment results is shown in the table below:

Equity and equity-related
Equity hedges

Net equity
Bonds
CPI-linked derivatives
Other

Total

Realized
Gains
470.1
6.3

476.4
566.3
–
22.3

Unrealized
Gains
(losses)
648.6
(1,011.8)

Net
Gains
(losses)
1,118.7
(1,005.5)

(363.2)
161.8
(129.2)
(91.8)

113.2
728.1
(129.2)
(69.5)

1,065.0

(422.4)

642.6

The table above shows the realized gains for the year and, 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 2012, we realized in excess of $1 billion in gains from the sale of common stocks and bonds (as
we did in 2011) and we had unrealized investment losses of $422 million, for a net gain of $643 million. Our
defensive hedges of our common stock portfolio cost us approximately $1 billion in 2012 because of rising mar-
kets – all unrealized of course, in the sense that we continue to be hedged.

In 2012, we earned a total investment return of only 4.5% (versus an average of 8.7% over the past five years and
9.4% over our 27 year history) mainly because of our 100% hedge of our common stock portfolios. If we had not
hedged, our total return would have been 8.5%. We realized significant appreciation on our treasury bonds as we
sold approximately 50% of our position – offset by some losses on our Greek bonds. Our muni portfolio, predom-
inantly guaranteed by Berkshire Hathaway, also did very well.

Our cumulative net realized and unrealized gains since we began in 1985 have amounted to $11.6 billion. As we
said last year, these gains, while unpredictable, are a major source of strength to Fairfax as they add to our capital
base and help finance our expansion. Also, as we have made clear many times, the unpredictable timing of these
gains and mark-to-market accounting make our quarterly (and even annual) earnings and book value very vola-
tile, as we saw again in 2012.

First quarter
Second quarter
Third quarter
Fourth quarter

The long term is where it’s at!

Earnings (loss)
per Share
$ (0.69)
3.85
0.90
18.90

Book Value
per Share
$355
357
360
378

($365 as of December 31, 2011)

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

Our long term equity holdings, disclosed last year, continue to be effectively the same, with some reductions in
our bank positions.

Wells Fargo
Johnson & Johnson
US Bancorp

As of December 31, 2012

Shares Owned
(millions)
12.0
7.4
10.1

Cost per
Share
$25.15
62.06
20.55

Amount
Invested
302
459
207

Market
Value
410
519
322

In 2012, we helped two companies go private – Arbor Memorial and The Brick. Arbor Memorial is a funeral serv-
ices company that was founded by the Scanlan family in 1947 and runs 41 cemeteries and 92 funeral parlours in

8

Canada. Rest assured, this business is not going away! Together with JC Clark Ltd., we helped the Scanlan family
take the company private at Cdn$32 per share – a very fair price for all shareholders. We had purchased 42.1% of
Arbor at Cdn$8.81 per share in 2001 through the recommendation of John Clark. We helped privatize Arbor by
investing Cdn$55 million in Arbor preferred shares (yielding 4%) and Cdn$50 million for a 39.5% interest in the
private company controlled by the Scanlan family. Arbor is run by an outstanding CEO, Brian Snowdon, and is
chaired by David Scanlan. We owe John Clark and JC Clark a big thank you for bringing this idea to us years ago.

The Brick is a wonderful entrepreneurial story of a company begun in Canada in 1975 by Bill Comrie with one
furniture store in Edmonton, Alberta and growing to 230 stores across the country. Bill took the company public
in 2004 and with remarkable generosity gave Cdn$40 million to all his employees from the IPO proceeds – even
though he had no obligation to do so. With Bill moving to the U.S., the company unfortunately hit a pothole in
2008. We were holders of 13% of the company with an average cost base of Cdn$6.92 per share. Fortunately for
The Brick, Bill recommended Bill Gregson as CEO of the company in 2009. With Bill Comrie, we helped refinance
the company with bonds and warrants, reducing our all-in cost to Cdn$2.07 per share. Bill Gregson did an out-
standing job turning around the fortunes of the company. Bill did so well that it caught the attention of Mark
and Terry Leon, the Chairman and CEO of Leon’s Furniture Ltd., who are the fourth generation of the family that
has built its furniture store business over 100 years with great integrity. We helped Leon’s buy The Brick by back-
stopping a convertible bond issue by Leon’s that will be used for part payment of the Cdn$5.40 per share offer
(which is still subject to regulatory approval). This transaction will result in a wonderful furniture and appliance
business in Canada with more than Cdn$2 billion in revenue and 306 stores. This was a friendly deal fully sup-
ported by the Boards of Directors of both The Brick and Leon’s, Bill Comrie, Bill Gregson and the Leon family. We
are looking forward to becoming shareholders of Leon’s. In both the Arbor Memorial and The Brick transactions,
we used no investment bankers, relying on Paul Rivett and our small team at head office who did a great job.

Markets fluctuate – and very often in extreme directions. Remember the tech boom, when companies with no
sales were valued at tens of billions of dollars? In 2000, Northern Telecom accounted for 36.5% of the Toronto
Stock Exchange index and was worth almost Cdn$400 billion; by 2009, it was bankrupt! Well, last year the oppo-
site happened to Research in Motion (now known as BlackBerry). At its low of approximately $6 1⁄ 2 per share, it
sold at 1⁄ 3 of book value per share and a little above cash per share (it has no debt). The stock price had declined
95% from its high! The company produces the BlackBerry which for years was synonymous with the smart phone.
The BlackBerry brand name is perhaps one of the more recognizable brand names in the world and the company
has 79 million subscribers worldwide. Revenues went from essentially zero to $20 billion in about 15 years – and
then it hit an air pocket! The company got complacent, perhaps overconfident, and did not respond quickly
enough to Apple and Android. Mike Lazaridis, the founder and a technological genius – and a good friend – asked
me to join the Board, which I did after meeting Thorsten Heins, whom Mike recommended as the next CEO of
the firm. Thorsten’s 27 years of experience in all types of leadership jobs in small and large divisions at Siemens,
combined with his five years at BlackBerry, were exactly what was needed. Thorsten hired a very capable
management team and then focused on producing a high quality BB10 – the next generation of BlackBerries. The
brand name, a security system second to none, a distribution network across 650 telecom carriers worldwide, a
79 million subscriber base, enterprise customers accounting for 90% of the Fortune 500, almost exclusive usage by
governments in Canada, the U.S. and the U.K., a huge original patent portfolio, an outstanding new operating
system developed by QNX and $2.9 billion in cash with no debt, are all formidable strengths as BlackBerry makes
its comeback! The stock price recently moved as high as $18 per share, a far cry from the $140 per share it sold at
a few years ago. And please note, 1.8 billion cell phones are sold worldwide annually, and of the 6 billion cell
phones in the world, only 1 billion are smart phones. Lots of opportunity for Canada’s greatest technology com-
pany! What is striking, even for a person like me who has seen many bull and bear markets, is that at $6 1⁄ 2 per
share, all the Wall Street and Bay Street analysts were uniformly negative – just as they were uniformly positive
only a few years ago at prices north of $100 per share. John Templeton’s advice to us: “Buy at the point of
maximum pessimism”, still rings in our ears!! We own approximately 10% of the company at an average cost of
$17 per share and we are excited about its prospects under Thorsten’s leadership and Mike’s technical genius.

We continued to purchase commercial real estate investments with Bill McMorrow and his team at Kennedy
Wilson, as discussed in last year’s Annual Report. For example, we purchased, 50/50 with Kennedy Wilson, per-
haps the finest office building in Dublin, built in 2009 and 100% leased to State Street Bank for 25 years, for one-
its construction cost with an unleveraged yield of approximately 8.5%. We also own, with
third of

9

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

Kennedy Wilson, some of the finest apartment buildings in Dublin with similar return characteristics. Rest
assured we return Bill’s calls very promptly!

As I mentioned to you last year, one such call from Bill in 2011 led to our investment (along with W.L. Ross, Fidel-
ity and Capital Research) in Bank of Ireland – the first significant investment in Ireland by foreign investors since
the financial market collapse. Only one year later, Ireland and its economy have made significant strides towards
recovery. Irish government bond rates have dropped from mid-teen yields to approximately 4% today and the €1
billion contingent capital note that the Irish government invested in Bank of Ireland was entirely sold to the
financial markets at a premium. More recently, the Irish government has announced the removal of the Eligible
Liabilities Guarantee and money is flowing strongly back into Ireland. Our hats are off to the Irish government
and the people of Ireland for showing the way forward out of the economic malaise in Europe!

I am amazed at how much trading takes place in the marketplace these days. For example, in 2012 BlackBerry had
0.5 billion shares outstanding and traded 1.49 billion shares – i.e., a turnover of three times. In Fairfax’s case, trad-
ing in our shares in the 7 years before we delisted from the NYSE averaged approximately 129,000 shares per day,
while in the three years since that trading averaged only approximately 47,500 shares per day – over 85% on the
Toronto Stock Exchange. Our share turnover has dropped in this time period from two times to 0.6 times. As our
company is run for long term shareholders, we hope our turnover drops even further. By the way, you can buy or
sell Fairfax shares on the Toronto Stock Exchange in either Canadian or U.S. dollars!

In this frenzied, hyper environment, activist investors and hedge funds have become dominant – all focused on
short term gains. Managements are replaced, employees laid off, divisions sold and companies auctioned off so
that these investors can make a quick gain. Many a good company can be destroyed by these actions. We con-
tinue to take the long view, always friendly and always supportive of management.

Ashley’s, under Jackie Chiesa, and Sporting Life, under the founders Brian McGrath and David and Patti Russell,
continue to operate totally independently. Sporting Life plans to expand by opening a store in Ottawa in 2014.
Whenever you shop at their stores, please mention that you are a Fairfax shareholder – you will get an extra
smile!!

10

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
2012

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
+ 4

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
–
+ 7
-18

1985-2012 (compound annual growth)

+ 22.7%

+ 19.0%

We show you this table often to emphasize that there is no correlation between growth in book value and
increase in stock price in the short term. You will note periods when our book value grew faster than our stock
price and vice versa. More recently, we think the intrinsic value of our company has grown much more than its
underlying book value. However, it is only in the long term that book values and stock prices compound at sim-
ilar rates. Also, please note that in the above table our stock price changes are based on stock prices in Canadian
dollars while our book value changes are based on book values in U.S. dollars.

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

2012

2011

2010
105.7% 102.8% 106.9%
109.3% 107.9% 109.2%
115.6% 127.5% 136.4%
95.0%
88.5% 116.7%
89.3%
83.2%
87.0%
104.3% 140.9% 107.2%

Consolidated

99.8% 114.2% 103.5%

11

2012
(13.6)%
16.4%
18.2%
15.0%
12.6%
9.5%

9.2%

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

Northbridge’s underwriting results reflect Hurricane Sandy (2.5 percentage points on the combined ratio) and
reserve increases because of a recent Ontario Court ruling increasing accident benefits (1.6 percentage points).
Northbridge’s U.S. business (the old Commonwealth) has now been transferred to Hudson and so Northbridge
will be entirely Canadian. The decrease in net premiums written in 2012 was due to the transfer of the U.S. busi-
ness to Hudson and to the non-renewal of certain unprofitable accounts. Silvy Wright has focused on creating
one Northbridge Insurance company, coast to coast, with continued segmentation to provide outstanding service
to our clients. Silvy and her team are focused on delivering an underwriting profit in 2013. As in the past, North-
bridge continued to have favourable reserve development and we expect this to continue in the future.

Crum & Forster’s 2012 underwriting results included 4.4 percentage points of prior year adverse development
(mainly from First Mercury) and 1.7 percentage points of Hurricane Sandy losses. Doug Libby continues to opti-
mize Crum & Forster’s business mix with a focus on more profitable specialty business in an effort to sustain
underwriting profitability through the market cycle. Net premiums written grew by 16%.

Zenith’s 2012 underwriting loss continued to be driven by expenses as its loss experience continues to be favour-
able relative to industry averages. As you know, Zenith’s focus on sound underwriting resulted in a significant
reduction in premium volume from $1.1 billion in 2005 to $426 million in 2010. As the inadequacy of rates
began to impact the industry, our competitors had to increase rates significantly, allowing Zenith to achieve rate
increases and attract new business at adequate rates. Zenith’s premium volume increased by 18.2% with a much
improved combined ratio. Jack Miller is well on his way to returning to underwriting profitability.

Northbridge, Crum & Forster and Zenith are recovering very well from the recent soft markets, showing under-
writing discipline while maintaining good reserving.

At OdysseyRe, Brian Young had outstanding underwriting results in 2012 in spite of catastrophe losses from Hurri-
cane Sandy of $175 million. OdysseyRe continues to benefit from favourable rates on its property business, a
strong brand based on its capabilities to write insurance and reinsurance business globally and continued favour-
able loss development from prior years.

Led by Mr. Athappan, Fairfax Asia in 2012 continued to produce outstanding results, with a combined ratio of
87.0% and premium growth of 12.6%. Reserves continued to develop favourably.

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

As of and for the Year Ended
December 31, 2012

Net
Premiums
Written
948.7
1,253.4
619.4
2,402.3
240.6

Statutory
Surplus
1,188.2
1,231.0
443.7
3,780.9(1)
530.3(1)

Net
Premiums

Written/

Statutory
Surplus
0.8x
1.0x
1.4x
0.6x
0.5x

Northbridge
Crum & Forster
Zenith National
OdysseyRe
Fairfax Asia

(1)

IFRS total equity.

On average we are writing at about 0.7 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 the times of
soft pricing is to be patient and stand ready for the hard markets to come.

12

The accident year combined ratios of our companies from 2003 onwards are shown in the table below:

Northbridge
Crum & Forster
OdysseyRe
Fairfax Asia

Total

2003 – 2012

Cumulative Net
Premiums Written
($ billions)
Cdn 11.1
9.5
21.3
1.1

Average
Combined
Ratio
97.4%
101.5%
92.8%
87.1%

43.0

95.8%

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, with Andy’s
help, continue to focus on developing competitive advantages that will ensure these combined ratios are sustain-
able through the ups and downs of the insurance cycle.

The table below shows the average annual reserve redundancies for our companies for the past 10 years (business
written from 2002 onwards):

Northbridge
Crum & Forster
OdysseyRe
Fairfax Asia

2002 – 2011
Average Annual
Reserve
Redundancies
8.2%
5.8%
9.8%
8.8%

The table shows you how our reserves have developed for the ten accident years prior to 2012. Northbridge has
had an average redundancy of 8.2% – i.e., if reserves had been set at $100 for any year between 2002 and 2011,
they would have come down on average to $91.80, showing redundant reserves of $8.20. On a comparable basis,
Crum & Forster had an average reserve redundancy of 5.8%, OdysseyRe 9.8% and Fairfax Asia 8.8% (First Capital
alone was 12.0%). We are very pleased with this reserving record, but given the inherent uncertainty in setting
reserves in the property casualty business, we continue to be focused on being conservative in our reserving proc-
ess. More on our reserves in the MD&A.

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%

2008
2009
2010
2011
2012
Weighted average since inception
Fairfax weighted average financing differential since inception: 2.0%

(280.9)
7.3

8,917.8
9,429.3
(236.6) 10,430.5
(754.4) 11,315.1
11.6 11,906.0

(3.1)%
0.1%
(2.3)%
(6.7)%
0.1%
(2.5)%

9.6%

4.1%
3.9%
3.8%
3.3%
2.4%
4.5%

13

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

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 5.2% in 2012, at no cost (in fact a small
benefit!). That increase is mainly due to 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:

Insurance

Reinsurance

Northbridge

U.S.

1,739.1 2,125.1
2,052.8 2,084.5
2,191.9 2,949.7
2,223.1 3,207.7
2,314.1 3,509.1

Fairfax
Asia

68.9
125.7
144.1
387.0
470.7

OdysseyRe

4,398.6
4,540.4
4,797.6
4,733.4
4,905.9

Insurance
and
Reinsurance

Other

726.4
997.0
977.3
1,018.4
1,042.6

Total
Insurance
and
Reinsurance

Runoff

Total

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
12,242.4 3,636.8 15,879.2

Year

2008
2009
2010
2011
2012

In the past five years our float has increased very substantially, by 50.5%, due to acquisitions and organic growth
in premiums written. The increase in 2012 was mainly due to internal growth from our insurance and reinsurance
businesses and our runoff acquisitions. We expect continued organic growth of our float in 2013, reflecting the
growth in our business. The Brit acquisition resulted in a 29% increase in Runoff float.

At the end of 2012, we had approximately $784 per share in float. Together with our book value of $378 per share
and $127 per share in net debt, you have approximately $1,289 in investments per share working for your long
term benefit – about 8% higher than at the end of 2011.

14

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 on investments – insurance and reinsurance
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

2012

2011

(57.0)

(30.2)

(206.3)

(215.9)

30.1

34.4

266.6 (336.0)
(206.7)
(21.8)

11.6 (754.4)
517.9

292.4

304.0 (236.5)
204.6
587.3
(104.2)
(40.6)
360.5
231.3
13.3
39.2
(214.0)
(208.2)
(32.4)
(256.2)

656.8
(116.1)

(8.7)
56.5

540.7

47.8

532.4
8.3

45.1
2.7

540.7

47.8

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, Sporting Life, Prime
Restaurants, Thomas Cook India 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 small
underwriting profit in 2012 was due to the outstanding performance at OdysseyRe and Fairfax Asia, and was ach-
ieved notwithstanding $261 million of Hurricane Sandy catastrophe losses. After interest and dividend income,
we had operating income of $304 million. Runoff was profitable again for the sixth year in a row. Corporate
overhead and other includes $164 million of net losses on investments, primarily unrealized. Net earnings in
2012 were impacted by tax expense of $116 million while 2011 benefitted from tax recoveries of $57 million. (See
more detail in the MD&A.)

15

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

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 stock
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 distribution coverage

2012

2011

1,128.0

962.8

2,220.2
670.9
157.5

3,048.6
1,920.6

7,654.7
1,166.4
69.2

2,080.6
623.9
314.0

3,018.5
2,055.7

7,427.9
934.7
45.9

8,890.3

8,408.5

21.6%
17.8%
25.5%
4.2x
3.0x

24.4%
19.6%
26.4%
1.0x
0.7x

We ended 2012 in a strong financial position, holding cash and marketable securities at the holding company of
over $1 billion with no significant debt maturities in the next five years.

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 the stocks and
bonds of our companies managed by it during the past 15 years, 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

10 Years

15 Years

5.5%

1.7%

14.0%

6.9%

14.5%

7.1%

12.4%

5.7%

13.5%

4.5%

10.8%

6.4%

Our common stock gains in 2012 were once again substantially offset or eliminated by our hedging program.
While this is disappointing, we continue to be comfortable maintaining our hedges because of all the
uncertainties we see in front of us. In 2007, a major U.S. bank CEO famously said “as long as the music is playing
you have to get up and dance”. After the Lehman bankruptcy in 2008, this same bank needed $45 billion from
the U.S. government to continue in business. Expensive dance! We prefer to wait for the music to stop and not
depend on the kindness of strangers to be in business.

We continue to fully hedge our common stock portfolios because of the reasons first discussed in our 2010 and
2011 Annual Reports. Those reasons have not changed! Total debt (private and government) as a percentage of
GDP in the U.S., Europe and the U.K. are at very high levels, thus limiting the options available to governments.
Deleveraging in the private sector has only just begun. In spite of the significant deficit spending in the U.S. and
Europe, high levels of unemployment prevail in both areas and economic growth continues to be very tepid. In
fact, Europe and the U.K. appear to be heading for another recession. The markets are ignoring this as they believe
the Fed and the European Central Bank will bail us out – again! Forgotten is the fact that the present Chairman of
the Fed, in July 2008, yes July 2008, said that Fannie Mae and Freddie Mac were “adequately capitalized” and “are
in no danger of failing”. In spite of QE1, QE2 and recently QE3, the economic fundamentals remain weak while
leading Gary Shilling, one of the best
stock markets and bond markets are back to near record levels,

16

economists we know, to call this “the grand disconnect”. This “disconnect” or gap will be closed by either eco-
nomic fundamentals rising to meet the financial markets or the markets coming down to meet the fundamentals.
We think that the latter is likely and that the Fed has simply postponed the inevitable by its QE1, QE2 and QE3
actions.

In our 2010 and 2011 Annual Reports, we discussed the Chinese bubble in real estate. This past Sunday (March 3,
2013), the CBS show “60 Minutes” did a segment on the Chinese residential real estate bubble. They showed vast
empty cities with “new towers with no residents, desolate condos and vacant subdivisions uninhabited for miles
and miles, and miles and miles of empty apartments.” They called it the biggest housing bubble in history. We
agree! The ultimate collapse of this bubble will have major consequences for the world economy.

Unlike in 2008/2009, when we quoted Grant’s Interest Rate Observer, “the return of one’s money, the humblest
investment attribute in good times, is always prized in bad times”, today the “risk on” trade prevails everywhere,
with investors reaching for yield in corporate bonds, high yield bonds and even emerging market debt. Junk
bonds are yielding 6% (compared to 19% in early 2009) and emerging market debt outstanding has increased
almost ten times since 2003. For example, Bolivia’s recent $500 million 10 year bond, issued at 4 7⁄ 8%, was 9 times
oversubscribed even though Bolivia had not issued a bond in 90 years!! Poland did even better, issuing a 10 year
bond at 3 3⁄4%. Russell Napier at CLSA, in a recent issue of his “Solid Ground”, noted that U.S. dollar emerging
market issuance in open ended mutual fund structures is a disaster waiting to happen as these capital flows can go
into reverse! This is particularly negative as external debt in many emerging market countries has increased to
dangerous levels. In the same report, Napier also provides a fascinating historical survey of the pitfalls of reaching
for yield – particularly when government risk-free rates are very low. Indeed, over the last few hundred years,
trying to achieve a 5% – 6% long term yield when U.S. and U.K. government yields were half that led to the
destruction of much capital.

We have had massive fiscal and monetary stimulus since 2008 with interest rates effectively zero – and economic
recovery is still limping along. We continue to believe the 2008/2009 great contraction was not like any other
recession the U.S. has experienced in the past 50 years. We think it has many similarities to the U.S. in the 1930s
and Japan since 1990 – and Japan is still fighting deflation 20 years later.

From the distant past comes the warning of our mentor, Ben Graham, whom I have quoted before: “Only 1 in
100 survived the 1929 – 32 debacle if one was not bearish in 1925”. We continue to be early – and bearish!

Commodity prices have flattened out as shown in the table below:

Oil – $/barrel

Copper – $/lb.

Nickel – $/lb.

Wheat – $/bushel

Corn – $/bushel

Cotton – $/lb.

Gold – $/oz.

2012

2011

2010

92

3.60

7.74

7.80

6.98

0.75

99

3.45

8.49

6.53

6.47

0.92

91

4.35

11.23

7.94

6.29

1.45

1,658

1,531

1,405

While commodity prices have yet to collapse (i.e., complete the down cycle), almost all the major mining com-
pany CEOs have retired, including at Vale, Rio Tinto, BHP Billiton and Anglo-American, reflecting the sin of
making acquisitions at the top of the market. Rio Tinto’s purchase of Alcan is a great case in point. Purchased for
$38 billion in 2007 at the height of the commodity boom, Rio Tinto has already written off $20 billion or half of
the purchase price!

As we said last year, if commodity prices come down after their parabolic increase, Canada will not be spared.
Also, Canadian house prices have gone up significantly, driven by lax policies at CMHC (Canada’s equivalent to
Fannie Mae and Freddie Mac). Canadians have accessed their increasing real estate wealth through lines of credit
easily available from the Canadian banks. This has begun to reverse and we are watching cautiously from the side-
lines. The condo boom in Toronto (you cannot miss it when you drive into the city) continues to slow down and
we believe that prices will fall, as they have in past condo booms.

17

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

While we are concerned about Canada, it is heartening to see how quickly California has solved its budget prob-
lems. In 2013, California is expected to have a surplus – due to significant reductions in government spending
and increases in income taxes. S&P recently upgraded California to an A. Our Brian Bradstreet purchased $1 bil-
lion in California state government bonds in 2009, most of this position directly from the government at a 7.25%
yield when California was considered to be on the verge of being non-investment grade. Those bonds are yielding
4.55% today!! Our muni bond portfolio (tax exempt and taxable) continued to do well in 2012. We have $1,279.5
million in unrealized gains in these bonds (approximately 22.9% on our cost) while earning $310 million annu-
ally in interest.

In 2008/2009, we made four investments in Canada which have turned out very well.

H&R REIT (bond and warrants)
Canadian Western Bank (preferreds and warrants)
Mullen Group (convertible debentures)
GMP Capital (preferreds and warrants)

(1)

Includes $64.9 in preferreds we still hold.

Investments in 2008/2009

Cost at
purchase
190.8
57.2
56.0
12.0

Realized
proceeds Gain % gain
391.2 200.4 105.0%
137.4(1) 80.2 140.2%
74.0 132.2%
130.0
24.9 207.5%
36.9

Our cumulative gains from these investments were $379.5 million. The key to making these investments is to be
liquid, i.e., having lots of cash to take advantage of opportunities. In 2008, we had 70% of our portfolio in cash
and government bonds. Currently, we have 31% in cash and cash equivalents – earning us very little money.
While we suffer from short term pain by having so much cash, it gives us great options for long term gain when-
ever the opportunity becomes available.

The table below provides you with an update on our CPI-linked derivative contracts. As we have said before, for a
small amount of money, we have significantly protected our company from the ravages of potential deflation.

Underlying CPI Index

United States
United Kingdom
European Union
France

Notional Amount
($ billions)
19.6
0.9
26.9
1.0

Weighted Average
Strike Price (CPI)
223.98
216.01
109.74
120.09

December 31, 2012
CPI
229.60
246.80
116.39
125.02

48.4

We have invested a total of $454.1 million in these CPI-linked contracts which are carried on our books at $115.8
million, a 74.5% decline from our cost. The remaining average term on these contracts is 7.7 years. We have
added to our U.S. CPI-linked contracts by exchanging some of the older contracts for newer, more current index
contracts – thus effectively increasing the weighted average strike price (CPI) on these U.S. contracts to 223.98
from 216.95 last year. We did remind you last year but here it is again – cumulative deflation in Japan in the past
ten years and in the U.S. in the 1930s was approximately 14%!! It is amazing to note that including 2012, Japan
has suffered deflation in 17 of the last 18 years – beginning about 5 years after the Nikkei Index and real estate
values peaked.

In 2012, we had net investment gains of $643 million, which consisted principally of net gains on fixed income
securities of $728 million and $113 million of net gains on common stock and equity-related securities (after a
net loss of $1,006 million on our hedges), partially offset by losses on CPI-linked derivatives of $129 million. The
net gains on fixed income securities consisted of net realized gains of $566 million (principally consisting of $315
million on our long treasury bonds and $132 million on our provincial bonds) and net unrealized gains of $162
million (resulting predominantly from the increase in fair value of our tax exempt and taxable U.S. muni bonds).
The net gains from common stock and equity-related securities consisted of realized gains of $470 million
(principally consisting of $167 million from the sale of Cunningham Lindsey, $88 million from the sale of Arbor
Memorial, $82 million from the sale of USG Corporation and $61 million from the sale of Ryanair), net unreal-
ized gains of $649 million (principally consisting of $105 million from Bank of Ireland, $79 million from Level 3,

18

$50 million from Cheung Kong, and $159 million from USG Corporation convertible bonds, partially offset by
$36 million in unrealized losses, mainly on Sandridge convertible preferred stock) and net (almost all unrealized
mark-to-market) losses of $1,006 million on our hedges.

Over the years, we have made very significant realized gains from long U.S. Treasury bonds. We owe a big thank
you to Van Hoisington of Hoisington Investment Management who, with Lacy Hunt, have among the best long
term fixed income track records in the past 20 years – even though they invest only in U.S. Treasuries!! Whenever
we worry about inflation or rising interest rates, we call 1-800-Van-Lacy!!

In the last three years, we have had significant unrealized losses from our hedging program and from our CPI-
linked derivative contracts, as shown below:

Equity hedges
CPI-linked derivative contracts

Total

2010
(936.6)
28.1

2011
413.9
(233.9)

2012
(1,005.5)
(129.2)

Cumulative
(1,528.2)
(335.0)

(908.5)

180.0

(1,134.7)

(1,863.2)

These losses are significant but we consider them unrealized and expect both of them to reverse when the “grand
disconnect” disappears – perhaps sooner than you think! Your company is focused on protecting you on the
downside from permanent capital loss from the many potential unintended consequences that abound in the
world economy. In 2008, we showed you the table below, that quantified our unrealized losses in the 2003 – 2006
period, which then reversed in 2007/2008.

Equity hedges
Credit default swaps

Total

2003 – 2006
(287)
(211)

2007
143
1,145

2008
2,080
1,290

(498)

1,288

3,370

We had to endure years of pain before harvesting the gains of 2007 and 2008. While we hope the world economy
muddles through, we continue to protect our company from the significant unintended consequences that
prevail today.

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

Bonds
Preferred stocks
Common stocks
Investments in associates

2012
1,430.9
(36.3)
332.5
427.1

2011
1,404.4
2.8
(215.2)
347.5

2,154.2

1,539.5

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

1,748.8
1,064.1
1,756.3

4,569.2

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

19

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

Miscellaneous

We maintained our $10 per share dividend in 2012 though we continue to warn you not to extrapolate that
number as each annual dividend is established based on our free cash flow at the holding company as well as our
holding company cash and marketable securities position. The $10 per share dividend is in the range of 2 1⁄ 2 – 3%
of our book value in 2012.

We have been mightily blessed by our donations program that helps the less fortunate among us across all coun-
tries that we operate in. It is a decentralized program run by the management teams and employees in each coun-
try, based on donating 1 – 2% of pre-tax profits in that country to various charitable institutions. We consider
these donations as an investment because, of course, business does not operate in a vacuum. We are very grateful
“to do good by doing well”, but of course we have to “do well” first. In 2012, we donated $12 million: since 1991,
on a cumulative basis, our donations have exceeded $100 million. This, from a company that was worth less than
$2 million when we began 27 years ago. As I have said to you before and is part of our Guiding Principles, when a
company does well, its customers, employees, shareholders – and the communities it operates in – also do well. Of
the $100 million donated since 1991, approximately $55 million was in Canada, $38 million in the U.S. and
$7 million outside North America.

We continue to encourage all our employees to be owners of our company through our employee share owner-
ship plan. It is an excellent plan and employees have had great returns over the long term, as shown below:

Employee Share Ownership Plan

Compound Annual Return

5 Years
13%

10 Years
14%

15 Years
10%

20 Years
11%

Since
inception
15%

If an employee earning Cdn$40,000 had participated fully in this program since its inception, he or she would
have accumulated 3,068 shares of Fairfax worth Cdn$1.1 million at the end of 2012. I am happy to say, we have
many employees who have done exactly that! I remind our employees all over the world that no one washes a
rented car! We want our employees to be owners and to benefit from the performance of their company.

One of the best decisions we have made was buying Federated Insurance (Canada) in 1989. Federated Insurance in
Canada was a branch operation and everything was run from the U.S., so we needed a President to run the com-
pany in Canada. Both the Chairman and CEO and the President of Federated U.S. recommended John Paisley, but
John had never been President, so we were a little nervous about this appointment. However, making John the
President was the best decision we could have made for Federated. In the past 21 years, John has built Federated
into a little gem with outstanding results – perhaps the best long term underwriting results we have had with any
company. Under John’s leadership, Federated has written cumulatively approximately Cdn$1.7 billion in business
at an average combined ratio of 94.3%. More importantly, John has been a delight to work with – always a team
player and always loyal to Federated and Fairfax. John epitomizes the values that Fairfax holds so dearly. As John
plans to retire in 2013, we wish him and his wife Bonnie and his family good health and a happy retirement.

As I have mentioned many times before, Fairfax benefits greatly from our “fair and friendly” culture that we have
developed over the past 27 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. The glue that keeps our company together is trust and a long term focus. From our Board of
Directors through our officers and all our employees, you can count on them to do the right thing, always taking
a long term view. So at Fairfax you will not see a huge holding company that checks every move our companies
make, companies being sold to maximize short term profits, excessive compensation among our management,
mass layoffs, management turnover or promotion of our stock. Our officers almost never sell our stock, and are a
pleasure to work with. We have never lost a President or officer whom we wanted to keep. Our Presidents, officers
and investment principals, who have been with Fairfax for an average of 13 1⁄ 2 years, are ultimately the strength of
our company and the reason I am so excited about our future.

20

We are looking forward to seeing you at our annual meeting in Toronto at 9:30 a.m. (Eastern Time) on April 11,
2013 at Roy Thomson Hall. As in the past few years, we will have booths which provide information on our
insurance companies (OdysseyRe, Northbridge, Crum & Forster, Zenith, ICICI Lombard and Fairfax Asia) as well
as our non-insurance company investments (Ashley’s, Sporting Life, Prime Restaurants, Zoomer Media and
Thomas Cook India). Great opportunity for you to learn more about our companies as well as to get some dis-
counts for shopping at Ashley’s and Sporting Life and dining at Prime Restaurants (Bier Markt). And we will make
it easy for you. This year we will have buses on April 11 at 1:00 p.m. leaving from Roy Thomson Hall and going to
Ashley’s and Sporting Life as well as to Bier Markt. In fact, John Rothschild has even promised to have his chefs
prepare a couple of signature items sold at his restaurants for you to sample at the Prime Restaurants booth.
Madhavan Menon from Thomas Cook India will be there to take your bookings for a trip of a lifetime to India!
Also, we will have booths on some of our major charity partners (The Hospital for Sick Children, Americares and
Bridgepoint Hospital) so you can see where your donations have been invested – and perhaps you will make an
additional contribution! As we have done in the past, highlighted are two excellent programs that we support: the
Ben Graham Centre for Value Investing with George Athanassakos at the Ivey School of Business and the Actua-
rial Program at the University of Waterloo – both among the best in North America! So we look forward to meet-
ing you, our shareholders, and answering all your questions, as well as having some fun!

Once again, I would like to thank the Board and the management and employees of all our companies for their
outstanding efforts during 2012. 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 8, 2013

V. Prem Watsa
Chairman and Chief Executive Officer

21

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 as issued by the International Accounting Standards Board. Financial statements, by nature, are not
precise since they include certain amounts based upon estimates and judgments. When alternative methods exist,
management has chosen those it deems to be the most appropriate in the circumstances.

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, 2012 using criteria established in Internal Control – Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (“COSO”). The scope of this assessment did not
include an evaluation of the internal control over financial reporting of RiverStone Insurance Limited, which was
acquired on October 12, 2012. The operations of RiverStone Insurance Limited represented 0.5% of the company’s
consolidated revenue for the year ended December 31, 2012 and represented 4.0% of the company’s consolidated
net assets as at December 31, 2012. Based on this assessment, management concluded that the company’s
internal control over financial reporting was effective as of December 31, 2012.

The effectiveness of the company’s internal control over financial reporting as of December 31, 2012 has been
audited by PricewaterhouseCoopers LLP, an independent auditor, as stated in its report which appears herein.

March 8, 2013

V. Prem Watsa
Chairman and Chief Executive Officer

David Bonham
Vice President and Chief Financial Officer

22

Independent Auditor’s Report

To the Shareholders of Fairfax Financial Holdings Limited

We have completed integrated audits of Fairfax Financial Holdings Limited (the Company) and its subsidiaries’
2012 and 2011 consolidated financial statements and their internal control over financial reporting as at
December 31, 2012. Our opinions based on our audits are presented 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, 2012 and December 31, 2011 and the consolidated
statements of earnings, comprehensive income, changes in equity and cash flows for each of the two years in the
period ended December 31, 2012, 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) as issued by the International Accounting
Standards Board (IASB) and for such internal control as management determines is necessary to enable the prepa-
ration 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 audit to obtain reasonable assurance about whether the consolidated financial statements are free from
material misstatement. Canadian generally accepted 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. An audit also includes evaluating the appropriateness of
accounting principles and 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, 2012 and 2011 and their financial performance and their
cash flows for each of the two years in the period ended December 31, 2012 in accordance with IFRS as issued by
the IASB.

Report on internal control over financial reporting

We have also audited the Company’s internal control over financial reporting as at December 31, 2012, based on
criteria established in Internal Control – Integrated Framework, issued by the Committee of Sponsoring Orga-
nizations of the Treadway Commission (COSO).

23

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 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 22.

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 audit 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.

As described in Management’s Report on Internal Control over Financial Reporting, management has excluded
RiverStone Insurance Limited (“Riversone Insurance”) from its assessment of internal control over financial
reporting as at December 31, 2012 because it was acquired by the Company during 2012. We have also excluded
Riverstone Insurance from our audit of internal control over financial reporting. Riverstone Insurance is a wholly
owned subsidiary of the Company whose total revenue and net assets represent 0.5% and 4.0%, respectively, of
the related consolidated financial statement amounts as at and for the year ended December 31, 2012.

Opinion
In our opinion, the Company maintained, in all material respects, effective internal control over financial report-
ing as at December 31, 2012, based on criteria established in Internal Control – Integrated Framework issued by
COSO.

Chartered Accountants, Licensed Public Accountants
Toronto, Ontario

March 8, 2013

24

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, 2012 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 8, 2013

25

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, 2012 and December 31, 2011

Assets

Holding company cash and investments (including assets

pledged for short sale and derivative obligations – $140.2;
December 31, 2011 – $249.0)

Insurance contract receivables

Portfolio investments

Subsidiary cash and short term investments

Bonds (cost $9,428.9; December 31, 2011 – $9,515.4)

Preferred stocks (cost $618.7; December 31, 2011 – $555.6)

Common stocks (cost $4,066.3; December 31, 2011 – $3,867.3)

Investments in associates (fair value $1,782.4;

December 31, 2011 – $1,271.8)

Derivatives and other invested assets (cost $524.0;

December 31, 2011 – $511.4)

Assets pledged for short sale and derivative obligations

(cost $791.1; December 31, 2011 – $810.1)

Deferred premium acquisition costs

Recoverable from reinsurers (including recoverables on
paid losses – $311.0; December 31, 2011 – $313.2)

Deferred income taxes

Goodwill and intangible assets

Other assets

Notes

December 31,
2012
(US$ millions)

December 31,
2011

5, 28

10

1,169.2

1,945.4

1,026.7

1,735.4

3,114.6

2,762.1

5, 28

5

5

5

5, 6

5, 7

5, 7

11

9

18

12

13

6,960.1

10,803.6

605.1

4,399.1

1,355.3

181.0

859.0

6,199.2

10,835.2

563.3

3,663.1

924.3

394.6

886.3

25,163.2

23,466.0

463.1

415.9

5,290.8

623.5

1,301.1

984.9

4,198.1

628.2

1,115.2

821.4

36,941.2

33,406.9

See accompanying notes.

Signed on behalf of the Board

Director

Director

26

Liabilities
Subsidiary indebtedness
Accounts payable and accrued liabilities
Income taxes payable
Short sale and derivative obligations (including at the holding

company – $41.2; December 31, 2011 – $63.9)

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,
2012
(US$ millions)

December 31,
2011

15
14
18

5, 7

8
15

16

52.1
1,877.7
70.5

238.2
439.7

1.0
1,656.2
21.4

170.2
412.6

2,678.2

2,261.4

22,376.2
2,996.5

19,719.5
3,017.5

25,372.7

22,737.0

7,654.7
1,166.4

8,821.1
69.2

8,890.3

7,427.9
934.7

8,362.6
45.9

8,408.5

36,941.2

33,406.9

27

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, 2012 and 2011

Revenue

Gross premiums written

Net premiums written

Net premiums earned
Interest and dividends
Share of profit of associates
Net gains on investments
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
Provision for (recovery of) 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.

$

$

$

17

17

16

17

28

Notes

2012

2011
(US$ millions except per
share amounts)

25

25

25
5
5
5
25

8
9

26
26
9
15
26

18

7,398.3

6,743.5

6,194.1

5,607.9

6,084.9
409.3
15.0
642.6
871.0

5,426.9
705.3
1.8
691.2
649.8

8,022.8

7,475.0

5,265.5
(1,022.9)

5,541.4
(956.1)

4,242.6
1,120.3
925.4
208.2
869.5

4,585.3
1,148.3
795.4
214.0
740.7

7,366.0

7,483.7

656.8
116.1

540.7

532.4
8.3

540.7

23.22

22.94

10.00

(8.7)
(56.5)

47.8

45.1
2.7

47.8

$ (0.31)

$ (0.31)

$ 10.00

20,327

20,405

Consolidated Statements of Comprehensive Income
for the years ended December 31, 2012 and 2011

Net earnings

Other comprehensive income (loss), 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 gains and (losses) on defined benefit plans

Other comprehensive income (loss), net of income taxes

Comprehensive income

Attributable to:

Shareholders of Fairfax

Non-controlling interests

See accompanying notes.

Notes

2012
(US$ millions)

2011

540.7

47.8

16

7

59.2

(40.8)

(20.4)

(21.0)

33.2

(7.5)

21

(22.9)

(22.6)

(5.1)

(37.7)

535.6

10.1

527.6

8.0

8.0

2.1

535.6

10.1

29

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

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

–

532.4

–

532.4

–

532.4

8.3

540.7

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, 2012 and 2011
(US$ millions)

Balance as of January 1,

2012

Net earnings (loss) for the year

Other comprehensive income
(loss), 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 gains and (losses)
on defined benefit plans

Issuance of shares

Purchases and amortization

Common share dividends

Preferred share dividends

Net changes in capitalization

(note 23)

Balance as of

Balance as of January 1,

2011

Net earnings (loss) for the year

Other comprehensive income
(loss), 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 gains and (losses)
on defined benefit plans

Issuance of shares

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

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

58.5

58.5

(20.4)

(20.4)

(10.9)

(10.1)

(21.0)

2.2

(50.6)

(2.7)

16.6

–

–

–

–

–

–

(21.9)

–

–

(205.8)

(60.5)

–

–

–

–

–

–

–

(21.9)

(0.5)

231.7

(34.0)

(205.8)

(60.5)

–

–

–

–

–

–

–

–

(22.5)

–

–

5.7

(26.0)

(1.6)

11.3

–

–

–

–

–

–

–

–

(5.8)

(205.9)

(51.5)

–

(40.3)

(40.3)

33.2

33.2

(7.5)

(7.5)

–

–

–

–

–

–

–

(22.5)

4.1

(18.9)

(5.8)

(205.9)

(51.5)

–

–

–

–

–

58.5

0.7

59.2

(20.4)

(21.0)

(21.9)

231.2

(34.0)

(205.8)

(60.5)

–

–

(20.4)

(21.0)

(1.0)

(22.9)

–

–

231.2

(34.0)

(6.7) (212.5)

–

(60.5)

–

22.0

22.0

–

–

–

–

–

–

–

–

–

–

–

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

2.5

December 31, 2012

3,243.3

3.8

(121.1)

26.8 4,387.1

114.8

7,654.7 1,166.4

8,821.1

69.2 8,890.3

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

–

45.1

–

45.1

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

See accompanying notes.

30

Consolidated Statements of Cash Flows
for the years ended December 31, 2012 and 2011

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 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
Changes in operating assets and liabilities

Cash provided by (used in) operating activities

Investing activities

Sales of investments in associates
Purchases of investments in associates
Net purchases of premises and equipment and intangible assets
Net purchase of subsidiaries, net of cash acquired and bank overdraft assumed

Cash provided by (used in) investing activities

Financing activities

Subsidiary indebtedness:

Issuances
Repayment
Long term debt:

Issuances
Issuance costs
Repayment

Subordinate voting shares:

Repurchases
Preferred shares:

Issuances
Issuance costs

Purchase of subordinate voting shares for treasury
Common share dividends
Preferred share dividends
Dividends paid to non-controlling interests

Cash provided by (used in) financing activities

Increase (decrease) in cash, cash equivalents and bank overdrafts

Cash, cash equivalents and bank overdrafts – beginning of year
Foreign currency translation

Notes

2012

2011

(US$ millions)

25

6
18
5
23
15
28
28

6, 23
6, 23

23

15

15

16

16

16
16
16

540.7
71.0
(48.9)
16.6
(15.0)
17.9
(642.6)
(6.8)
40.6
1,105.7
236.5

47.8
59.5
(69.7)
11.3
(1.8)
(128.1)
(691.2)
–
104.2
(1,254.7)
701.2

1,315.7

(1,221.5)

423.0
(308.4)
(71.5)
(334.4)

81.8
(212.3)
(42.2)
276.5

(291.3)

103.8

60.5
(40.4)

10.5
(52.4)

204.3
(1.3)
(296.5)

906.2
(6.7)
(762.3)

–

(10.0)

239.1
(7.4)
(50.6)
(205.8)
(60.5)
(6.7)

–
–
(26.0)
(205.9)
(51.5)
–

(165.3)

(198.1)

859.1
1,910.0
46.2

(1,315.8)
3,275.1
(49.3)

Cash, cash equivalents and bank overdrafts – end of year

28

2,815.3

1,910.0

See accompanying notes.

31

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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3.

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

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

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

6.

7.

8.

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 Benefits Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

28.

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

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

33

33

33

49

50

55

57

60

63

65

65

66

67

68

69

72

75

75

77

78

78

81

81

85

101

107

107

108

109

32

Notes to Consolidated Financial Statements
for the years ended December 31, 2012 and 2011
(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
associated investment management. The holding company is federally incorporated and domiciled in Ontario,
Canada.

2. Basis of Presentation

The consolidated financial statements of the company for the year ended December 31, 2012 are prepared in
accordance with International Financial Reporting Standards (“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, 2012 (except IFRS 9 Financial Instruments which was early adopted). 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 comprehensive body of accounting principles. In these cases, the com-
pany 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 statements 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 the company’s consolidated financial statements 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 con-
solidated 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 sheets are 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.

These consolidated financial statements were approved for issue by the company’s Board of Directors on March 8,
2013.

3. Summary of Significant Accounting Policies

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

Principles of consolidation
Subsidiaries – The company’s consolidated financial statements include the assets, liabilities, equity, revenue,
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

33

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

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, 2012. 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
(26% equity accounted interest) (ICICI Lombard)

Runoff

TIG Insurance Company (TIG)

Fairmont Specialty Group Inc. (Fairmont)

General Fidelity Insurance Company (General Fidelity)

Clearwater Insurance Company (Clearwater)

Valiant Insurance Company (Valiant Insurance)

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

RiverStone Insurance Limited (RiverStone Insurance)

RiverStone Managing Agency Limited

nSpire Re Limited (nSpire Re) (note 25)

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)

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)

Prime Restaurants Inc. (Prime Restaurants)

(a network of casual dining restaurants and pubs)

Thomas Cook (India) Limited (Thomas Cook India)
(provider of integrated travel and travel-related
financial services)

All subsidiaries are wholly-owned except for Ridley, First Capital, Sporting Life, Prime Restaurants and Thomas
Cook India with 73.6%, 97.7%, 75.0%, 81.7% and 87.1% ownership interests respectively (December 31, 2011 –
73.6%, 97.7%, 75.0%, nil and nil respectively). Pursuant to the transactions described in note 23, the company
acquired 81.7% ownership interest in Prime Restaurants during the first quarter of 2012, 87.1% ownership interest
in Thomas Cook India during the third quarter of 2012, 100% ownership interest in RiverStone Insurance during
the fourth quarter of 2012, 100% ownership interests in First Mercury Financial Corporation (“First Mercury”) and
Pacific Insurance during the first quarter of 2011, 100% ownership interest in William Ashley during the third
quarter of 2011, and 75.0% ownership interest in Sporting Life during the fourth quarter of 2011. The company
has a number of wholly-owned subsidiaries not presented in the table above that are intermediate holding
companies of investments in subsidiaries and intercompany balances, all of which are eliminated on con-
solidation.

34

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 as 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 transactions
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 on the
consolidated 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. 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.

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 net fair value of the company’s share of the identifiable assets, liabilities and con-
tingent liabilities at the date of acquisition is recognized as goodwill, and is included in the carrying value of the
associate. To the extent that the cost of acquisition is less than the fair value of the company’s share of the asso-
ciate’s identifiable net assets, the excess is recognized in the consolidated statement of earnings. Any pre-existing
interest in an associate is re-measured to fair value at the date significant influence is obtained and any resulting
gain or loss is recognized in the consolidated statement of earnings. In such instances the cost of the associate is
measured as the sum of the fair value of the pre-existing interest and any additional consideration transferred at
that date.

In determining the fair value of the company’s share of an associate’s identifiable net assets at the acquisition
date, considerable judgment may be required in interpreting market data used to develop such estimates. The
company makes assumptions primarily based on market conditions and applies valuation techniques such as
discounted cash flow analysis, market capitalization and comparable company multiples and other methods
commonly used by market participants to determine fair value. Where the company is only able to identify the
principal factors resulting in divergence between the fair value and reported carrying value of an associate’s net
assets, the use of different assumptions and/or valuation methodologies by the company may have a significant
effect on the estimated fair value.

At each balance sheet date, and more frequently when conditions warrant, management assesses investments in
associates for potential impairment. If management’s assessment indicates that there is objective evidence of
impairment, 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. Gains and losses realized on
dispositions, impairment losses and reversal of impairments are recognized in net gains (losses) on investments in
the consolidated statement of earnings.

35

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 most recent available financial statements of associates are used in applying the equity method. The differ-
ence 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 whereby the consideration
transferred 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 com-
pany 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 company recognizes the identifiable assets
acquired, the liabilities assumed and any non-controlling interest in the acquired business. The identifiable assets
acquired and liabilities assumed are initially recognized at fair value. To the extent that the consideration trans-
ferred is less than the fair value of identifiable net assets acquired, the excess is recognized in the consolidated
statement of earnings.

Any pre-existing equity interest in an acquiree is re-measured to fair value at the date of the business combination
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 calcu-
lated 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 earn-
ings 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.

36

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 on 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. Revenue 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
earnings.

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.

37

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

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
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 on 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 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 valuation 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
vast majority of the company’s investments in bonds are priced by independent pricing service providers
while much of the remainder, along with most derivative contracts (total return swaps and credit default
swaps) and certain warrants are based primarily on non-binding third party broker-dealer quotes that are
prepared using Level 2 inputs. Where third party broker-dealer quotes are used, typically one quote is
obtained from a broker-dealer with particular expertise in the instrument being priced. Preferred stocks are
priced using a combination of independent pricing service providers and internal valuation models that rely
on directly or indirectly observable inputs.

38

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. Manage-
ment 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 compa-
ny’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.

Valuation techniques used by the company’s independent pricing service providers and third party broker-dealers
include comparisons with similar instruments where observable market prices exist, discounted cash flow analy-
sis, option pricing models, and other valuation techniques commonly used by market participants. The company
assesses the reasonableness of pricing received from these third party sources 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 underlying 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 (“short sales”) 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, inflation indexes 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. Fair value for the company’s derivative financial instruments where quoted
market prices in active markets are unavailable is determined in the same manner as other investments described
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

39

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 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 within interest and dividends on 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
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. Subsequent
changes in the unrealized fair value of a contract is 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 credit spreads) will generally decline.

CPI-linked contracts – The initial premium paid for a CPI-linked contract is recorded as a derivative asset.
Subsequent changes in the unrealized fair value of a contract is recorded as net gains (losses) on investments in
the consolidated statement of earnings at each balance sheet date, with a corresponding adjustment to the carry-
ing 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 third party
broker-dealers to recent market transactions where available and values determined using third party pricing
software based on the Black-Scholes option pricing model that incorporates market observable and unobservable
inputs such as the current value of the relevant CPI underlying the derivative, the inflation swap rate, nominal
swap rate and inflation volatility. 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

40

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 establishes these reserves on an undiscounted basis 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 determin-
ing 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 attitudes 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 established 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 company also establishes reserves for IBNR claims on an undiscounted basis 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.

41

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 time required to learn of and settle claims is often referred to as the “tail” and is an important consideration
in establishing the company’s reserves. Short-tail claims are those for which losses are normally reported soon
after the incident and are generally settled within months following the reported incident. This would include,
for example, most property, automobile and marine and aerospace damage. Long-tail claims are considered by the
company to be those that often take three years or more to develop and settle, such as asbestos, workers’ compen-
sation and product liability. In the extreme cases of long tail claims like those involving asbestos, it may take
upwards of 20 years to settle. In addition, information concerning the loss event and ultimate cost of a long-tail
claim may not be readily available. Accordingly, the reserving analysis of long-tail lines of business is generally
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.

Estimation techniques – Provisions for losses and loss adjustment expense and provisions for unearned pre-
miums are determined based upon previous claims experience, knowledge of events, 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 consideration of the development of loss pay-
ment 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)

(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 internal and external 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)

(cid:129)

(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.

42

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, particularly for long-tail lines of business, 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 inter-
pretations and court judgments that broaden policy coverage beyond the intent of the original insurance, legis-
lative 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. Provisioning considerations include: uncertainty around loss trends, claims inflation and underlying
economic conditions; the inherent risk in estimating loss development patterns based on historical data that may
not be representative of future loss payment patterns; assumptions built on industry loss ratios or industry
benchmark development patterns that may not reflect actual experience; and the intrinsic risk as to the homoge-
neity of the underlying data used in carrying out the reserve analyses. Long tail claims are more susceptible to
these uncertainties given the length of time between the issuance of the original policy and ultimate settlement
of any claims. 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 makes 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 long-tail 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 knowledge of both internal and external asbestos and environmental pollution experts and legal advi-
sors.

Factors contributing to this higher degree of uncertainty include:

(cid:129)

(cid:129)

(cid:129)

(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

43

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

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.

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.

44

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 – Revenue from the sale of animal nutrition, hospitality, travel and other non-insurance products are
recognized when the price is fixed or determinable, collection is reasonably assured and the product or service has
been delivered to the customer. The revenue and 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 its cost is estimated to be greater than its anticipated selling price less appli-
cable 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 initial carrying value 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.

45

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

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 issued by the company 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 on the consolidated balance sheet, regardless of the objective of the transaction. The com-
pany acquires its own subordinate voting shares on the open market for its share-based payment awards. No gain
or loss is recognized in the consolidated 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 the company’s equity instruments are recognized directly in
equity.

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, with a corresponding increase in the share-based payments equity
reserve. When a restricted share award vests in instalments over the vesting period (graded vesting), each instal-
ment is accounted for as a separate award and amortized to compensation expense accordingly. At each balance
sheet date, the company reviews 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 such arrangements or plans. 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.

46

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 on 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 for its defined benefit plans:

(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
expectations.

(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 the 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 earnings 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 earnings 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 minimum funding requirements are recorded in other compre-
hensive 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
leased item’s benefit even if the payments are not on that basis.

New accounting pronouncements
There were no new standards or amendments issued by the IASB and effective for the fiscal year beginning Jan-
uary 1, 2012 that had a significant impact on the company.

The following new standards and amendments have been issued by the IASB and are not effective for the fiscal
year beginning January 1, 2012. The company is currently evaluating 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. Adoption of the amended standard will require a presentation change
in the company’s statement of comprehensive income, and is not expected to have any significant impact on the
consolidated financial statements.

Amendment to IAS 19 Employee Benefits (“IAS 19”)
In June 2011, the IASB issued an amendment to IAS 19 that requires changes to the recognition and measurement
of defined benefit pension and post retirement benefit expense and to the disclosures for all employee benefits.

47

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 amendment: eliminates the corridor method; requires that actuarial gains and losses be immediately recog-
nized in other comprehensive income without recycling to the consolidated statement of earnings; 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 consolidated statement of
earnings; and expands the disclosure requirements for benefit plans. This amendment is effective for annual peri-
ods beginning on or after January 1, 2013, is applied retrospectively, with early adoption permitted.

The company’s current accounting policies and disclosures with respect to its defined benefit pension and post
retirement benefit plans are largely consistent with the amended standard, with one key difference: replacing the
expected return on plan assets with a net interest amount will generally increase the amount of pension and post
retirement expense reported in the consolidated statement of earnings, with a corresponding decrease (increase)
in the amount of net actuarial losses (gains) reported in other comprehensive income, all else being equal;
comprehensive income in aggregate will not change. The company does not expect any material retrospective
reclassifications between its consolidated statements of earnings and consolidated statements of comprehensive
income as a result of this amendment to IAS 19. Adoption of the amended standard is not expected to impact the
consolidated balance sheets or consolidated statements of cash flows.

Amendment to IFRS 7 Financial Instruments: Disclosure (“IFRS 7”)
In December 2011, the IASB published an amendment to IFRS 7 entitled Disclosures – Offsetting Financial Assets and
Financial Liabilities. The amendment requires new disclosures about rights of offset and related arrangements for
financial instruments under an enforceable master netting agreement or similar arrangement. The amendment to
IFRS 7 is effective for annual periods beginning on or after January 1, 2013 and is applied retrospectively. Adoption
of the amended standard is not expected to have a significant impact on the consolidated financial statements.

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 applies 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. Adoption of IFRS 13 will require a modest increase in financial
statement disclosures and is not expected to have a significant impact on the consolidated financial statements.

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 stan-
dards considered relevant to the company 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. Adoption of IFRS 10 is not expected to have
a significant impact on the consolidated financial statements as the company’s material subsidiaries are wholly
owned (as described earlier in this note under the heading “Principles of consolidation”), and the company is not
a party to any significant 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

48

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. Adoption of IFRS 11 is not expected to
have a significant impact on the consolidated financial statements.

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 Arrange-
ments and IAS 28 Investments in Associates and Joint Ventures. The enhanced disclosures in IFRS 12 are intended to
help financial statement readers evaluate the nature, risks and financial effects of an entity’s interests in sub-
joint arrangements and unconsolidated structured entities. Entities are permitted to
sidiaries, associates,
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).
Adoption of IFRS 12 will require a modest increase in financial statement disclosures and is not expected to have a
significant impact on the consolidated financial statements.

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. Adoption of the amended stan-
dard is not expected to have a significant impact on the consolidated financial statements.

4. Critical Accounting Estimates and Judgments

In the preparation of the company’s consolidated financial statements, management has made a number of estimates
and judgments, the more critical of which are discussed below, with the exception of the determination of fair value
for financial instruments and associates, fair value disclosures, and contingencies, which are discussed in notes 3, 5
and 20 respectively. Estimates and judgments are continually 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 related claims expenses. The assumptions underlying the valuation of provisions for losses and loss
adjustment expenses are reviewed and updated by the company on an ongoing basis to reflect recent and emerg-
ing 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 com-
pany reviews its deferred income tax assets on a quarterly basis, taking into consideration the availability of sufficient
current and projected taxable profits, reversals of taxable temporary differences and tax planning strategies.

49

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

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 (inclusive of assigned goodwill). 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.

5. Cash and Investments

Holding company cash and investments, portfolio investments and short sale and derivative obligations are classi-
fied 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
Short term investments pledged for short sale and derivative obligations
Bonds
Preferred stocks
Common stocks
Derivatives (note 7)

Short sale and derivative obligations (note 7)

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 (note 7)

December 31,
2012

December 31,
2011

212.9
426.5
140.2
115.9
46.3
170.1
57.3

1,169.2
(41.2)

1,128.0

2,728.6
4,231.5
10,803.6
605.1
4,399.1
1,355.3
149.7
31.3

43.5
244.0
249.0
188.1
45.0
166.4
90.7

1,026.7
(63.9)

962.8

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

24,304.2

22,579.7

51.1
307.1
500.8

859.0

6.2
132.5
747.6

886.3

25,163.2
(197.0)

23,466.0
(106.3)

24,966.2

23,359.7

Common stocks included investments in limited partnerships with a carrying value of $468.6 at December 31,
2012 ($321.2 at December 31, 2011).

50

Restricted cash and cash equivalents at December 31, 2012 of $172.1 ($134.7 at December 31, 2011) were com-
prised 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 on 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 (note 20) and
assets pledged for short sale and derivative obligations) by the nature of the pledge requirement:

Regulatory deposits
Security for reinsurance and other

December 31,
2012
2,695.4
741.0

December 31,
2011
2,171.3
722.4

3,436.4

2,893.7

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, 2012, bonds contain-
ing call and put features represented approximately $6,332.7 and $77.5 respectively ($6,032.3 and $1,069.9 at
December 31, 2011 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, 2012

December 31, 2011

Amortized
cost
849.5
2,625.8
2,828.3
3,685.8

Fair
value
1,008.2
2,984.3
3,409.4
4,018.4

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

9,989.4 11,420.3

10,366.5 11,770.9

Effective interest rate

4.7%

6.2%

The calculation of the effective interest rate of 4.7% (December 31, 2011 – 6.2%) 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 $5.3 billion ($4.9 billion at December 31, 2011) included in U.S. states
and municipalities.

51

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 by type of issuer was as follows:

December 31, 2012

Significant

December 31, 2011

Significant

other

Significant

Total fair

other

Significant

Quoted

observable

unobservable

prices

inputs

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

2,992.6

2,992.6

Short term investments:

Canadian provincials

U.S. treasury

Other government

Corporate and other

1,375.1

1,375.1

3,137.6

3,137.6

508.3

468.3

84.3

–

–

–

–

40.0

84.3

Bonds:

Canadian government

Canadian provincials

U.S. treasury

U.S. states and municipalities

Other government

Corporate and other

5,105.3

4,981.0

124.3

21.1

133.4

1,520.8

6,867.8

1,204.1

1,673.1

–

–

–

–

–

–

21.1

133.4

1,520.8

6,867.8

1,204.1

1,554.0

–

–

–

–

–

–

–

–

–

–

–

2,044.7

2,044.7

408.9

408.9

4,071.0

4,071.0

288.0

267.4

61.8

–

4,829.7

4,747.3

–

–

–

20.6

61.8

82.4

21.1

1,038.7

2,082.3

6,201.5

934.7

119.1

1,492.6

–

–

–

–

–

–

21.1

1,038.7

2,082.3

6,201.5

934.7

1,432.6

Preferred stocks:

Canadian

U.S.

Other

Common stocks:

Canadian

U.S.

Other

11,420.3

– 11,301.2

119.1

11,770.9

– 11,710.9

142.1

461.6

47.7

651.4

–

–

–

–

87.5

426.2

47.7

561.4

54.6

35.4

–

105.5

457.3

45.5

90.0

608.3

–

–

–

–

103.5

451.0

45.5

600.0

1,064.1

1,022.5

1,748.8

1,395.4

16.5

35.3

1,756.3

1,121.7

365.7

25.1

318.1

268.9

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

4,569.2

3,539.6

417.5

612.1

3,829.5

3,067.0

338.1

424.4

Derivatives and other invested assets(1)

215.0

Short sale and derivative obligations

(238.2)

–

–

99.2

115.8

462.3

(238.2)

–

(170.2)

–

–

254.1

208.2

(170.2)

–

Holding company cash and invest-
ments and portfolio investments
measured at fair value

24,715.6 11,513.2 12,265.4

937.0

23,375.2

9,859.0 12,815.3

700.9

100.0% 46.6%

49.6%

3.8% 100.0%

42.2%

54.8%

3.0%

(1) Excluded from these totals are certain real estate investments of $23.3 ($23.0 at December 31, 2011) which are car-

ried at cost less any accumulated amortization and impairment.

52

inputs

(Level 3)

–

–

–

–

–

–

–

–

–

–

–

60.0

60.0

2.0

6.3

–

8.3

There were no significant transfers of financial instruments between Level 1 and Level 2 in the fair value hier-
archy in 2012 or 2011.

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 holding company cash and invest-
ments, or in derivatives and other invested assets in portfolio investments 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 consolidated 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 con-
solidated balance sheets and include common shares of private companies as well as investments in certain pri-
vate equity funds and limited partnerships. These investments are valued by third party fund companies using
observable inputs where available and unobservable inputs, in conjunction with industry accepted valuation
models, where required. In some instances, the private equity funds and limited partnerships may require at least
three months of 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:

2012

2011

Derivatives

and other

Derivatives

and other

Preferred

Common

invested

Preferred

Common

invested

Bonds

stocks

60.0

8.3

stocks

424.4

assets

Total

Bonds

stocks

208.2

700.9

61.9

Balance – January 1

Total net realized and unrealized

gains (losses) included in net gains
(losses) on investments

Purchases

Sales

(2.6)

90.0

(28.3)

(5.1)

86.8

–

68.6

194.8

(75.7)

(126.8)

(65.9)

34.4

406.0

(1.2)

15.0

–

(104.0)

(15.7)

Balance – December 31

119.1

90.0

612.1

115.8

937.0

60.0

stocks

294.6

assets

Total

328.6

685.4

38.5

146.8

(55.5)

(243.0)

(205.7)

122.6

292.4

–

(71.2)

424.4

208.2

700.9

0.3

–

8.0

–

8.3

Purchases of Level 3 investments of $406.0 in 2012 was primarily comprised of private common stocks, limited
partnerships and preferred stocks ($86.8 of purchases of preferred stocks related to preferred shares received pur-
suant to the Arbor Memorial and Cunningham Lindsey transactions described in note 6). Total net realized and
unrealized losses of $65.9 in 2012 were primarily comprised of $126.8 of net unrealized losses recognized on CPI-
linked derivative contracts.

Purchases of Level 3 investments of $292.4 in 2011 were primarily comprised of limited partnerships and CPI-
linked derivative contracts. Total net realized and unrealized losses of $205.7 in 2011 were primarily comprised of
$243.0 of net unrealized losses recognized on CPI-linked derivative contracts.

During 2012 and 2011 there were no transfers of financial instruments in or out of Level 3 in the fair value hier-
archy as a result of changes in the observability of valuation inputs.

53

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

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

Net gains (losses) on investments

Net gains (losses) on investments:

Bonds

Preferred stocks

Common stocks

Derivatives:

2012

2011

40.3
486.7
(200.5)

26.2
714.9
(135.8)

326.5

605.3

37.1
71.9

44.1
75.9

109.0

120.0

(26.2)

(20.0)

409.3

705.3

15.0

1.8

2012

2011

Net
realized
gains
(losses)

Net change
in unreal-
ized gains
(losses)

Net gains
(losses) on
investments

Net
realized
gains
(losses)

Net change
in unreal-
ized gains
(losses)

Net gains
(losses) on
investments

629.0

1.0

133.9

763.9

285.8

(37.5)

563.7

914.8

(36.5)

697.6

467.7

0.9

491.6

834.5

(8.0)

(1,266.4)

1,302.2

(7.1)

(774.8)

812.0

1,575.9

960.2

(439.9)

520.3

Common stock and equity index short positions

(837.6)(1)

(153.9)

(991.5)

293.2(1)

Common stock and equity index long positions

Credit default swaps

Equity warrants

CPI-linked contracts

Other

13.5(1)

(21.6)

–

–

85.3

34.0

(26.7)

12.3

(129.2)

(33.6)

47.5

(48.3)

12.3

(129.2)

(22.6)(1)

21.9

161.9

–

51.7

(11.1)

120.7

(39.2)

(11.8)

(143.4)

(233.9)

50.4

413.9

(61.8)

10.1

18.5

(233.9)

39.3

(760.4)

(297.1)

(1,057.5)

443.3

(257.2)

186.1

Foreign currency gains (losses) on:

Investing activities

Underwriting activities

Foreign currency contracts

Gain on disposition of associate

Other

(70.1)

3.2

22.2

(44.7)

196.8(2)

2.3

10.1

–

(41.6)

(31.5)

–

1.3

(60.0)

3.2

(19.4)

(30.7)

(46.5)

12.7

(76.2)

(64.5)

196.8

3.6

7.0 (3)

13.0

(19.8)

–

49.9

30.1

–

(0.8)

(50.5)

(46.5)

62.6

(34.4)

7.0

12.2

Net gains (losses) on investments

157.9

484.7

642.6

1,359.0

(667.8)

691.2

(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 or monthly reset date notwithstanding that the total
return swap positions remain open subsequent to the cash settlement.

54

(2) On April 13, 2012, the company sold all of its ownership interest in Fibrek Inc. to Resolute Forest Products for net cash
proceeds of $18.5 (Cdn$18.4) and Resolute Forest Products common shares with a fair value of $12.8 (Cdn$12.7) and
recognized a net gain on investment of $29.8 (including amounts previously recorded in accumulated other compre-
hensive income).

On December 10, 2012, the company sold all of its ownership interest in Cunningham Lindsey for net cash proceeds of
$270.6 and recognized a net gain on investment of $167.0 (including amounts previously recorded in accumulated
other comprehensive income).

(3) On December 30, 2011, the company sold all of its interest in Polskie Towarzystwo Ubezpieczen S.A., received cash

proceeds of $10.1 (34.7 million Polish zloty) and recorded a net gain on investment of $7.0.

6.

Investments in Associates

Investments in associates recorded using the equity method of accounting, the company’s ownership interests,
their fair values and carrying values were as follows:

December 31, 2012

December 31, 2011

Ownership
Percentage

Fair
value

Carrying
value

Ownership
Percentage

Fair
value

Carrying
value

Portfolio investments

Investments in associates:

Resolute Forest Products Inc. (“Resolute”)(1)(10)

Gulf Insurance Company (“Gulf Insurance”)

ICICI Lombard General Insurance Company Limited

(“ICICI Lombard”)

The Brick Ltd. (“The Brick”)(2)

Thai Re Public Company Limited (“Thai Re”)(3)(10)

Eurobank Properties REIC (“Eurobank Properties”)(4)(10)

Arbor Memorial Services Inc. (“Arbor Memorial”)(5)(10)

MEGA Brands Inc. (“MEGA Brands”)(6)

Singapore Reinsurance Corporation Limited (“Singapore Re”)

Imvescor Restaurant Group Inc. (“Imvescor”)(7)

Falcon Insurance PLC (“Falcon Thailand”)

Cunningham Lindsey Group Limited

(“Cunningham Lindsey”)(8)

Fibrek Inc. (“Fibrek”)(9)

Partnerships, trusts and other(11)

280.6

217.9

75.3

108.5

59.3

66.6

47.0

43.3

36.3

7.3

7.2

25.6% 326.2

41.4% 258.3

26.0% 223.9

33.7% 220.1

23.2% 132.7

18.0%

39.5%

21.9%

27.0%

23.6%

40.5%

–

–

–

69.8

47.0

34.9

34.7

9.3

7.2

–

–

18.0%

–

–

41.4% 255.1

214.5

26.0% 230.4

33.8% 123.9

67.1

106.9

2.0%

3.7%

–

19.9%

26.8%

13.6%

40.5%

–

–

–

26.3

36.2

4.1

6.0

–

–

–

36.7

33.8

3.1

6.0

104.2

27.4

324.6

–

–

43.2% 230.3

25.8%

32.1

418.3

406.0

–

327.4

1,782.4

1,355.3

1,271.8

924.3

(1)

In December 2012, the company increased its ownership interest in Resolute from 19.5% to 25.6% following
the receipt of common shares distributed pursuant to the bankruptcy proceedings of certain predecessor
companies of Resolute (where the company was a holder of unsecured debt obligations) and through the
purchase of Resolute common shares on the open market.

(2) On November 11, 2012, the company entered into an agreement to sell all of its ownership interest in The
Brick to Leon’s Furniture Limited (a Canadian furniture retailer) for net proceeds of approximately Cdn$221
(Cdn$5.40 per common share). The transaction is expected close in the first quarter of 2013 subject to regu-
latory approval.

(3) On March 19, 2012, the company increased its ownership interest in Thai Re from 2.0% to 23.2% through
participation in a Thai Re rights offering and in a private placement of newly issued common shares for
aggregate cash purchase consideration of $77.0 (2.4 billion Thai Baht).

(4) On August 21, 2012, the company increased its ownership interest in Eurobank Properties from 3.8% to

18.0% through the purchase of common shares of Eurobank Properties for cash consideration of $50.3.

(5) On November 26, 2012, the company (and other third party investors) entered into an arrangement with
Arbor Memorial to exchange the company’s existing non-voting common share investment in Arbor
Memorial for a combination of newly issued voting common shares, preferred shares and cash consideration.
Subsequent to the transaction, the company owned 39.5% of the newly issued Arbor Memorial voting
common shares.

55

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

(6) On September 14, 2012, the company increased its ownership interest in MEGA Brands from 19.9% to 21.9%
through the acquisition of additional common shares of MEGA Brands for cash purchase consideration of
$2.9 (Cdn $2.8).

(7)

In latter half of 2012, the company increased its ownership interest in Imvescor from 13.6% to 23.6%
through the acquisition on the open market of Imvescor common shares for cash purchase consideration of
$3.7 (Cdn$3.5). At December 31, 2012 after considering potential dilution (assuming the company exercised
its Imvescor common share purchase warrants and assuming no other warrants were exercised), the compa-
ny’s ownership of Imvescor was 45.0% (37.8% at December 31, 2011).

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 out-
standing common shares of Imvescor and would own approximately 37.8% after considering potential dilu-
tion. Effective December 29, 2011, the company commenced recording its investment in the common shares
of Imvescor using the equity method of accounting as the potential voting rights which were currently
exercisable by the company permitted it to exercise significant influence over Imvescor.

(8) On December 10, 2012, the company sold all of its ownership interest in Cunningham Lindsey for net cash
proceeds of $270.6 and recognized a net gain on investment of $167.0 (including amounts previously
recorded in accumulated other comprehensive income). Subsequent to the closing of this transaction, the
company invested $34.4 in preferred shares of Cunningham Lindsey to become a 9.1% minority shareholder.
The shares are classified within preferred stocks on the consolidated balance sheet.

(9) On April 13, 2012, the company sold all of its ownership interest in Fibrek to Resolute for net cash proceeds
of $18.5 (Cdn$18.4) and Resolute common shares with a fair value of $12.8 (Cdn$12.7) and recognized a net
gain on investment of $29.8 (including amounts previously recorded in accumulated other comprehensive
income).

(10) During 2012, the company determined that it had obtained significant influence over the following investees
and commenced recording those investments using the equity method of accounting on a prospective basis
(the date significant influence was achieved is identified in parenthesis): Thai Re (March 19, 2012), Eurobank
Properties (August 21, 2012), Resolute (November 7, 2012) and Arbor Memorial (November 26, 2012). At the
respective dates significant influence was obtained for Resolute and Eurobank Properties, the company
determined that for each associate, the fair value of identifiable net assets approximated carrying value.
Goodwill of $31.9 was recognized in the carrying value of Arbor Memorial at the date significant influence
was obtained.

(11) During 2012, the company made net investments of $71.9 (2011 – $155.5) in partnerships, trusts and other.

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

Cunningham Lindsey Group Limited
ICICI Lombard General Insurance Company Limited
Gulf Insurance Company
The Brick Ltd.
MEGA Brands Inc.
Falcon Insurance PLC
Singapore Reinsurance Corporation Limited
Imvescor Restaurant Group Inc.
Polskie Towarzystwo Ubezpieczen S.A.
Fibrek Inc.
Thai Re Public Company Limited
Partnerships, trusts and other

56

2012
14.0
12.9
12.7
3.6
3.1
1.8
1.3
0.3
–
(18.8)
(22.0)
6.1

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

15.0

1.8

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

2012
924.3
15.0
(16.0)
638.0
(204.4)
(1.6)

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

1,355.3

924.3

The company’s strategic investment of $107.9 at December 31, 2012 ($87.9 at December 31, 2011) in 15.0% of
Alltrust Insurance Company of China Ltd. (“Alltrust”) is classified as at FVTPL within common stocks on the
consolidated balance sheets. In 2012, through participation in a rights offering, the company contributed an
additional $18.9 (2011 – nil) to Alltrust.

7. Short Sale and Derivative Transactions

The following table summarizes the notional amount and fair value of the company’s derivative financial instru-
ments:

Equity derivatives:

Equity index total return swaps – short positions

Equity total return swaps – short positions

Equity total return swaps – long positions

Warrants

Credit derivatives:

Credit default swaps

Warrants

CPI-linked derivative contracts

Foreign exchange forward contracts

Other derivative contracts

December 31, 2012

December 31, 2011

Notional
amount

Cost

Fair value

Assets Liabilities Cost

Notional
amount

Fair value

Assets Liabilities

–

–

–

6,235.5

19.6

1,433.0

1,021.8

4.1

3.5

19.3

68.5

36.0

43.2

1,898.7

2.7

90.0

1.7

1.3

136.0

55.1

16.4

–

–

–

–

–

–

5,517.6

1,617.6

1,363.5

11.7

44.6

66.8

24.3

3,059.6

340.2

25.8

68.8

2.4

15.9

49.8

50.0

454.1 48,436.0 115.8

– 421.1 46,518.0

208.2

–

–

–

–

3.8

21.2

20.6

10.1

–

–

–

–

32.9

1.3

59.6

47.7

49.2

–

–

–

–

8.2

5.5

Total

207.0

238.2

455.1

170.2

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 has economically hedged its equity and equity-related holdings (comprised of common stocks,
convertible preferred stocks, convertible bonds, certain investments in associates and equity-related derivatives)
against a potential decline in equity markets by way of short positions effected through equity and equity index
total return swaps as set out in the table below. The company’s economic equity hedges are structured to provide
a return which is inverse to changes in the fair values of the equity indexes and certain individual equities. Dur-
ing 2012, the company closed $394.2 (2011 – $41.4) of original notional amount of short positions in certain
individual equities to reduce its economic equity hedges as a proportion of its equity and equity-related holdings.

57

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 future, the company may manage its net exposure to its equity and equity-related holdings by adjusting
the notional amounts of its equity hedges upwards or downwards. At December 31, 2012, equity hedges with a
net notional amount of $7,668.5 ($7,135.2 at December 31, 2011) represented 100.6% (104.6% at December 31,
2011) of the company’s equity and equity-related holdings of $7,626.5 ($6,822.7 at December 31, 2011). During
2012, the company paid net cash of $837.6 (2011 – received net cash of $293.2) in connection with the reset
provisions of its short equity and equity index total return swaps. Refer to note 24 for a tabular analysis followed
by a discussion of the company’s hedges of equity price risk and the related basis risk.

Underlying short equity and
equity index total return swaps

Russell 2000

S&P 500

S&P/TSX 60

Other equity indices

Individual equities

December 31, 2012

December 31, 2011

Original
notional
amount(1)

Units

Weighted
average
index
value

Index
value at
period
end

Original
notional
amount(1)

Units

Weighted
average
index
value

Index
value at
period
end

52,881,400

3,501.9

662.22

849.35 52,881,400

3,501.9

662.22

740.92

10,532,558

1,117.3

1,060.84 1,426.19 12,120,558

1,299.3

1,071.96 1,257.60

13,044,000

–

–

206.1

140.0

1,231.3

641.12

713.72

–

–

–

–

–

–

–

–

140.0

1,597.3

–

–

–

–

–

–

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

As at December 31, 2012, the company had entered into long equity total return swaps on individual equities for
investment purposes with an original notional amount of $975.8 ($1,280.0 at December 31, 2011). During 2012,
the company received net cash of $13.5 (2011 – paid net cash of $22.6) in connection with the reset provisions of
its long equity total return swaps (excluding the impact of collateral requirements).

At December 31, 2012, the fair value of the collateral deposited for the benefit of derivative counterparties
included in holding company cash and investments, or in assets pledged for short sale and derivative obligations,
was $999.2 ($1,135.3 at December 31, 2011), comprised of collateral of $847.5 ($962.6 at December 31, 2011)
required to be deposited to enter into such derivative contracts (principally related to total return swaps) and net
collateral of $151.7 ($172.7 at December 31, 2011) 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
Canadian companies. At December 31, 2012, the warrants have expiration dates ranging from 2 years to 10 years
(2 years to 5 years at December 31, 2011).

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. The company’s holdings
of credit default swaps declined substantially from 2008 to 2010 through sales and contract expirations, so effec-
tive January 1, 2011, the company no longer considered its credit default swaps to be an economic hedge of its
financial assets. At December 31, 2012, the company’s remaining credit default swaps have a weighted average life
of less than one year (1.3 years at December 31, 2011) and a notional amount and fair value of $1,898.7 ($3,059.6
at December 31, 2011) and $1.7 ($49.8 at December 31, 2011) respectively.

The company previously held various bond warrants which provided the company an option to purchase certain
long dated corporate bonds. During 2012, the company exercised or sold substantially all its bond warrants and
recognized a net realized gain on investment of $60.9 (2011 – $8.4).

58

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, 2012, these contracts have a remaining weighted average
life of 7.7 years (8.6 years at December 31, 2011) 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, 2012

December 31, 2011

Notional Amount

Notional Amount

Underlying CPI Index
United States
United Kingdom
European Union
France

Original
U.S.
currency
dollars
19,625.0 19,625.0
894.1
20,425.0 26,928.1
988.8

750.0

550.0

Weighted
average
strike
price
223.98
216.01
109.74
120.09

Index
value at
period
end
229.60
246.80
116.39
125.02

Original
U.S.
currency
dollars
18,175.0 18,175.0
854.8
20,425.0 26,514.6
973.6

750.0

550.0

Weighted
average
strike
price
216.95
216.01
109.74
120.09

Index
value at
period
end
225.67
239.40
113.91
123.51

48,436.0

46,518.0

During 2012, the company paid additional premiums of $28.3 (2011 – nil) to increase the strike price on certain
of its U.S. CPI-linked derivative contracts. As a result, the weighted average strike price of the U.S. CPI-linked
derivative contracts increased from 216.95 at December 31, 2011 to 223.98 at December 31, 2012. During 2012,
the company purchased $1,450.0 (2011 – $13,596.7) notional amount of CPI-linked derivative contracts at a cost
of $6.1 (2011 – $122.6) and recorded net mark-to-market losses of $129.2 (2011 – $233.9) 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 com-
pany is also exposed to currency rate fluctuations through its equity accounted investments and its net invest-
ment 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 con-
tracts 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, 2012 consisted of cash of $22.1 ($50.5 at December 31, 2011) and government securities of $38.3
($156.8 at December 31, 2011). 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. The
company had not exercised its right to sell or repledge collateral at December 31, 2012. The company’s exposure
to counterparty risk and the manner in which the company manages counterparty risk are discussed further in
note 24.

59

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

Hedge of net investment in Northbridge
The company had designated the carrying value of Cdn$1,275.0 principal amount of its Canadian dollar denomi-
nated unsecured senior notes with a fair value of $1,424.4 (principal amount of Cdn$1,075.0 with a fair value of
$1,114.6 at December 31, 2011) as a hedge of its net investment in Northbridge for financial reporting purposes.
In 2012, the company recognized pre-tax losses of $20.4 (2011 – pre-tax gains of $33.2) 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.

8.

Insurance Contract Liabilities

Gross

Ceded

Net

Provision for unearned premiums
Provision for losses and loss

adjustment expenses

Total insurance contract liabilities

Current
Non-current

December 31, December 31, December 31, December 31, December 31, December 31,
2011
2,099.2

2012
2,300.0

2012
2,727.4

2011
2,487.3

2012
427.4

2011
388.1

19,648.8

22,376.2

7,303.4
15,072.8

22,376.2

17,232.2

19,719.5

6,579.3
13,140.2

19,719.5

4,552.4

4,979.8

2,046.4
2,933.4

4,979.8

3,496.8

3,884.9

1,979.2
1,905.7

3,884.9

15,096.4

17,396.4

5,257.0
12,139.4

17,396.4

13,735.4

15,834.6

4,600.1
11,234.5

15,834.6

At December 31, 2012, the company’s net loss reserves of $15,096.4 ($13,735.4 at December 31, 2011) were com-
prised of case reserves of $8,258.5 ($7,233.5 at December 31, 2011) and IBNR of $6,837.9 ($6,501.9 at
December 31, 2011).

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

2012
2,487.3
7,398.3
(7,294.8)
101.4
35.2

2011
2,120.9
6,743.5
(6,541.4)
206.9
(42.6)

2,727.4

2,487.3

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
Increase (decrease) 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 and reinsurance-to-close transactions
Foreign exchange effect and other

2012
17,232.2

2011
16,049.3

14.0
5,251.5

(52.7)
5,594.1

(1,106.5)
(3,698.1)
1,802.9
152.8

(1,427.5)
(3,539.1)
769.3
(161.2)

Provision for losses and loss adjustment expenses – December 31

19,648.8

17,232.2

60

Provision for losses and loss adjustment expenses include CTR life reserves at December 31, 2012 of $20.6 ($24.2
at December 31, 2011). CTR life business consists primarily of guaranteed minimum death benefit retroces-
sional business written by Compagnie Transcontinentale de Réassurance (“CTR”), a wholly owned subsidiary of
the company that was transferred to Wentworth and placed into runoff in 2002. CTR life business is included in
the results of the Insurance and Reinsurance – Other reporting segment.

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, 2012.

Calendar year

2007

2008

2009

2010

2011

2012

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
Five years later

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

14,843.2 14,467.2 14,504.8 16,049.3 17,232.2 19,648.8
20.6

34.9

24.2

27.6

25.3

21.5

14,821.7 14,432.3 14,477.2 16,024.0 17,208.0 19,628.2

3,167.8
5,130.8
6,784.9
8,124.6
9,079.0

3,136.0
5,336.4
7,070.7
8,318.7

3,126.6
5,307.6
6,846.3

3,355.9
5,441.4

3,627.6

14,420.4 14,746.0 14,616.0 15,893.8 17,316.4
14,493.8 14,844.4 14,726.6 15,959.7
14,579.9 14,912.4 14,921.6
14,679.5 15,127.5
14,908.6

Favourable (unfavourable) development

(86.9)

(695.2)

(444.4)

64.3

(108.4)

Comprised of – favourable (unfavourable):
Effect of foreign currency translation
Loss reserve development

120.4
(207.3)

(480.3)
(214.9)

(138.0)
(306.4)

(86.9)

(695.2)

(444.4)

4.8
59.5

64.3

(86.2)
(22.2)

(108.4)

The effect of foreign currency translation in the table above primarily arose on translation to U.S. dollars of the
loss reserves of subsidiaries with functional currencies other than the U.S. dollar. The company’s exposure to for-
eign currency risk and the manner in which the company manages foreign currency risk is discussed further in
note 24.

Loss reserve development in the table above excludes the loss reserve development of a subsidiary in the year it is
acquired whereas the consolidated statement of earnings includes the loss reserve development of a subsidiary from
its acquisition date. Accordingly, the principal difference between the unfavourable loss reserve development in
calendar year 2011 of $22.2 in the table above and unfavourable loss reserve development of $14.0 as set out in the
preceding table (Provision for losses and loss adjustment expenses) primarily related to the favourable loss reserve
development of subsidiaries acquired in 2012.

Unfavourable loss reserve development in calendar year 2011 of $22.2 in the table above was principally com-
prised of adverse development related to asbestos and workers’ compensation loss reserves in accident years prior
to 2007, partially offset by favourable loss reserve development related to property loss reserves in more recent
accident years.

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

61

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

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.

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, inconsistent precedent, 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 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
Reinsurance transaction 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
Reinsurance transaction during the year(1)

Balance – end of year

(1) Eagle Star reinsurance transaction in 2012.

2012

2011

Gross

Net

Gross

Net

1,307.5 903.3
95.6
(82.3)
59.6

203.1
(113.8)
59.6

1,357.6 934.9
49.3
(80.9)
–

73.8
(123.9)
–

1,456.4 976.2

1,307.5 903.3

183.1 146.9
(7.0)
(20.1)
33.3

18.2
(33.3)
33.3

276.3 180.1
(2.2)
(26.1)
(31.0)
(67.1)
–
–

201.3 153.1

183.1 146.9

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

December 31, 2012

December 31, 2011

Insurance contracts
Ceded reinsurance contracts

Fair
value
22,311.4
4,844.9

Carrying
value

Fair
value
22,376.2 19,902.0
3,775.4

4,979.8

Carrying
value
19,719.5
3,884.9

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. 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 estimated 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 busi-
ness written, quantity of reinsurance purchased, credit quality of reinsurers and a risk margin for future changes
in interest rates.

62

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

9. Reinsurance

December 31, 2012

December 31, 2011

Fair value of
insurance
contracts
21,652.6
23,039.4

Fair value of
reinsurance
contracts
4,702.0
5,002.7

Fair value of
insurance
contracts
19,314.8
20,542.8

Fair value of
reinsurance
contracts
3,660.4
3,900.7

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,
2012
427.4
5,133.3
(269.9)

December 31,
2011
388.1
4,105.5
(295.5)

5,290.8

2,309.7
2,981.1

5,290.8

4,198.1

2,251.8
1,946.3

4,198.1

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 policyholder.

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
recoverables.

63

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 makes specific provisions against reinsurance recoverables from reinsurers considered to be in finan-
cial difficulty. In addition, the company records an allowance based upon its 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, 2012 was $269.9 ($295.5 at December 31, 2011).

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, 2012
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
500.9
837.7
(897.3)
–
–

Unpaid
Losses
3,604.6
(837.7)
–
1,030.3
–

Unearned
Premiums Provision
(295.5)
–
–
–
–

388.1
–
–
(1,211.3)
1,204.2

Net
Recoverable
4,198.1
–
(897.3)
(181.0)
1,204.2

(30.6)

(3.9)

–

26.2

(8.3)

52.6
6.3

838.0
32.4

42.3
4.1

–
(0.6)

932.9
42.2

Balance – December 31, 2012

469.6

4,663.7

427.4

(269.9)

5,290.8

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)
–
–

Unpaid
Losses
3,368.1
(944.4)
–
911.9
–

Unearned
Premiums Provision
(348.9)
–
–
–
–

279.8
–
–
(1,121.4)
1,143.4

Net
Recoverable
3,757.0
–
(902.7)
(209.5)
1,143.4

(25.6)

(5.8)

–

52.7

21.3

29.8
(3.0)

290.6
(15.8)

95.3
(9.0)

–
0.7

415.7
(27.1)

Balance – December 31, 2011

500.9

3,604.6

388.1

(295.5)

4,198.1

Reinsurers’ share of provision for losses and loss adjustment expenses at December 31, 2012 includes $311.0
($313.2 at December 31, 2011) of paid losses net of provisions.

Included in commissions, net is commission income from reinsurance contracts of $239.5 (2011 – $226.1) for the
year ended December 31, 2012.

64

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,
2012
1,151.1
605.3
183.8
32.7
(27.5)

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

1,945.4

1,735.4

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

2012
1,113.3
4,882.3
(4,517.9)
(7.8)
(343.8)
21.3
3.7

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

1,151.1

1,113.3

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
Impairments
Amounts due to brokers and agents
Acquisitions of subsidiaries
Foreign exchange effect and other

Balance – December 31

2012
428.4
2,516.0
(1,973.6)
(6.1)
(484.8)
117.1
8.3

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

605.3

428.4

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

2012
415.9
1,312.9
(1,269.8)
–
4.1

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

463.1

415.9

65

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

12. Goodwill and Intangible Assets

Goodwill and intangible assets are compromised as follows:

Balance – January 1, 2012

Additions
Disposals
Amortization of intangible assets
Foreign exchange effect

Balance – December 31, 2012

Gross carrying amount
Accumulated amortization
Accumulated impairment

Balance – January 1, 2011

Additions
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
271.1
–
–
(18.4)
1.8

Computer
software
67.8
32.1
–
(17.9)
0.5

Other
2.6
1.8
–
(0.2)
–

Brand
names
59.6
64.0
(3.0)
–
1.7

Other

17.8 1,115.2
214.2
(3.0)
(36.5)
11.2

–
–
–
–

254.5

308.1
(53.6)
–

254.5

82.5

4.2

122.3

17.8 1,301.1

168.4
(77.3)
(8.6)

9.6
(5.4)
–

122.3
–
–

17.8 1,449.6
(136.3)
(12.2)

–
–

82.5

4.2

122.3

17.8 1,301.1

696.3
116.3
–
–
7.2

819.8

823.4
–
(3.6)

819.8

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)

7.8
(5.2)
–

67.8

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

Zenith National
Northbridge
OdysseyRe
Crum & Forster
All other

December 31, 2012

December 31, 2011

Goodwill
317.6
109.6
104.2
87.5
200.9

Intangible
assets
155.1
115.8
60.2
62.2
88.0

Total Goodwill
317.6
472.7
107.1
225.4
104.2
164.4
87.5
149.7
79.9
288.9

Intangible
assets
162.8
115.4
54.0
67.8
18.9

Total
480.4
222.5
158.2
155.3
98.8

819.8

481.3 1,301.1

696.3

418.9 1,115.2

66

At December 31, 2012 consolidated goodwill of $819.8 and intangible assets of $481.3 (principally related to the
value of customer and broker relationships and brand names) was comprised primarily of amounts arising on the
acquisitions of Prime Restaurants and Thomas Cook India during 2012, 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 amor-
tization were completed in 2012 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 market prices, where available, or discounted cash flow models. 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 applying 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 or revenue, operating expenses using historical trends,
general geographical market conditions, industry trends and forecasts and other available information. These
assumptions are subject to review by management. The cash flow forecasts are adjusted by applying appropriate
discount rates within a range of 8.2% to 10.7% for insurance business and 12.9% to 19.6% for non-insurance
business. The weighted average growth rate used to extrapolate cash flows beyond five years was 2.5%. A reason-
ably possible change in any key assumption is not expected to cause the carrying value of any CGU to exceed its
recoverable amount.

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

December 31,
2012
259.9
142.2
109.9
51.9
25.1
72.0
72.1
41.2
210.6

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

984.9

535.3
449.6

984.9

821.4

481.8
339.6

821.4

67

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

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
Administrative and other

Current
Non-current

December 31,
2012
640.1
182.0
186.8
90.9
38.7
64.1
88.2
37.2
57.0
64.4
70.1
91.7
266.5

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

1,877.7

1,656.2

1,164.2
713.5

1,877.7

1,008.8
647.4

1,656.2

68

15. Subsidiary Indebtedness, Long Term Debt and Credit Facilities

Subsidiary indebtedness consists of the following balances:
Ridley secured revolving facility at floating rate
Prime Restaurants equipment and other loans

primarily at floating rate

Thomas Cook India short term loan at fixed rate
Thomas Cook India commercial paper at fixed rate
Thomas Cook India bank overdraft at floating rate

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

7.75% due April 15, 2012(1)(2)
8.25% due October 1, 2015(3)
7.75% due June 15, 2017(2)(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)
5.80% due May 15, 2021(2)
6.40% due May 25, 2021 (Cdn$400.0)(2)
5.84% due October 14, 2022 (Cdn$200.0)(1)
8.30% due April 15, 2026(3)
7.75% due July 15, 2037(3)

TIG Note(1)
Trust preferred securities of subsidiaries(10)
Purchase consideration payable(9)

December 31, 2012

December 31, 2011

Principal

Carrying
value(a)

Fair

value(b) Principal

Carrying
value(a)

Fair
value(b)

12.9

2.7
9.9
21.5
5.2

52.2

–
82.4
48.4
144.2
401.7
276.2
500.0
401.7
200.9
91.8
91.3
–
9.1
148.4

12.8

12.8

1.0

1.0

1.0

2.7
9.9
21.5
5.2

52.1

–
82.3
46.8
143.9
398.6
274.3
494.9
398.3
199.5
91.4
90.2
–
9.1
148.4

2.7
9.9
21.5
5.2

52.1

–
94.2
50.4
165.9
461.8
314.5
516.6
437.6
210.5
112.2
101.3
–
9.3
148.4

–
–
–
–

–
–
–
–

–
–
–
–

1.0

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

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

Long term debt – holding company borrowings

2,396.1

2,377.7

2,622.7

2,462.8

2,394.6

2,453.2

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

Crum & Forster unsecured senior notes:

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

First Mercury trust preferred securities:

Trust III, floating rate due December 14, 2036(2)
Trust IV, 8.25% through December 15, 2012,

floating rate thereafter, due September 26, 2037(2)

Zenith National redeemable debentures:

8.55% due August 1, 2028
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

182.9
125.0
50.0
50.0
40.0

182.3
124.1
49.9
49.8
39.9

191.9
136.9
45.1
50.5
36.7

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

–

–

–

6.2

5.6

6.5

25.8

15.6

25.8

25.8

15.6

15.6

25.8

15.6

25.8

25.8

15.6

15.6

38.4

38.1

38.1

38.4

38.0

38.0

34.0
15.8

26.0
20.0

0.5

33.0
15.3

25.1
19.4

29.3
13.5

26.0
20.0

0.5

0.5

34.0
15.6

26.0
20.0

0.6

33.0
15.1

25.1
19.4

28.1
12.9

26.0
19.3

0.5

0.5

Long term debt - subsidiary company borrowings

624.0

618.8

629.9

630.1

622.9

628.2

3,020.1

2,996.5

3,252.6

3,092.9

3,017.5

3,081.4

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

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

69

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,
2012
235.8
2,784.3

December 31,
2011
90.6
3,002.3

3,020.1

3,092.9

Consolidated interest expense on long term debt amounted to $206.0 (2011 – $213.9). Interest expense on sub-
sidiary indebtedness amounted to $2.2 (2011 – $0.1).

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

2013
2014
2015
2016
2017
Thereafter

235.8
5.0
212.8
56.0
1.7
2,508.8

(1) During 2012, the company or one of its subsidiaries completed the following transactions with respect to its

debt:

(a) On October 19, 2012, the company’s runoff subsidiary, TIG repaid for $200.0 of cash the $160.2 carrying
value of its loan note issued in connection with its acquisition of General Fidelity in August 2010. Other
expenses included a charge of $39.8 related to this transaction (which was accounted for as an
extinguishment of debt), principally related to the release of $41.3 of unamortized issue costs and
discounts.

(b) On October 15, 2012, the company completed a public debt offering of Cdn$200.0 principal amount of
5.84% unsecured senior notes due October 14, 2022 at an issue price of $99.963 for net proceeds after
discount, commissions and expenses of $203.0 (Cdn$198.6). Commissions and expenses of $1.3
(Cdn$1.3) 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 par and a
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 October 14, 2022. The company has designated these senior
notes as a hedge of a portion of its net investment in Northbridge.

(c) On May 15, 2012, Crum & Forster redeemed for $6.4 of cash the $6.2 principal amount of its unsecured

senior notes due 2017.

(d) On April 26, 2012, the company repaid the $86.3 principal amount of its unsecured senior notes upon

maturity.

(2) 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.

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 2037 for cash consideration of $4.9.

70

(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 & Forster 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

657.9

Cash
consideration
75.6
252.9
357.8

40.8

727.1

Unsecured senior notes repurchased in connection with the Amended Tender Offer were accounted for
as an extinguishment of debt. Accordingly, other expenses in 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).

(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, 2012
is $24.7 ($26.6 at December 31, 2011).

(4) 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.

(5) 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.

(6) 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 a specified spread, plus, in each case,
accrued interest thereon to the date of redemption. The specified spreads over the treasury rate are 50 basis
points and 40 basis points for the unsecured senior notes due 2013 and 2015 respectively.

(7)

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%.

71

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

(8)

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.

(9) 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.

(10) 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.

Subsequent to December 31, 2012

On January 21, 2013, the company completed a public debt offering of Cdn$250.0 principal amount of a re-
opening of its unsecured senior notes due 2022 at an issue price of $103.854 (an effective yield of 5.33%) for net
proceeds after discount, commissions and expenses of $259.9 (Cdn$258.1). Commissions and expenses of $1.5
(Cdn$1.5) will be included as part of the carrying value of the debt. Subsequent to this offering, an aggregate
principal amount of Cdn$450.0 of such senior notes were outstanding. The company has designated these senior
notes as a hedge of a portion of its net investment in Northbridge.

On January 22, 2013, the company repurchased for cash $12.2 principal amount of its unsecured senior notes due
2017 for cash consideration of $12.6. On March 11, 2013, the company will redeem the remaining $36.2 out-
standing principal amount of its unsecured senior notes due 2017.

Credit Facilities

On December 18, 2012, Fairfax extended the term of its $300.0 unsecured revolving credit facility (the “credit
facility”) with a syndicate of lenders. Based on the revised term of four years, the credit facility will expire on
December 31, 2016. As of December 31, 2012, no amounts had been drawn on the credit facility.

On July 13, 2012, OdysseyRe’s $100.0 credit facility with a syndicate of lenders expired and was not renewed. No
obligations or balances remained outstanding under the expired credit facility as at December 31, 2012.

On January 31, 2012, Ridley entered into a three-year revolving credit agreement replacing its previous 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.

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
series, an unlimited number of multiple voting shares carrying ten votes per share and an unlimited number of
subordinate voting shares carrying one vote per share.

Issued capital

Issued capital at December 31, 2012 included 1,548,000 (1,548,000 at December 31, 2011) multiple voting shares
and 19,865,689 (19,865,689 at December 31, 2011) subordinate voting shares without par value (prior to deduct-
ing 369,048 (238,663 at December 31, 2011) subordinate voting shares reserved in treasury for share-based pay-
ment awards). The multiple voting shares are not publicly traded.

72

Common stock

The number of shares outstanding was as follows:

Subordinate voting shares – January 1
Purchases for cancellation
Net treasury shares 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

2012
19,627,026
–
(130,385)

2011
19,706,477
(25,700)
(53,751)

19,496,641
1,548,000

19,627,026
1,548,000

(799,230)

(799,230)

Common stock effectively outstanding – December 31

20,245,411

20,375,796

Preferred Stock

The number of preferred shares outstanding was as follows:

Series C

Series E

Series G

Series I

Series K

Total

Balance – January 1 and
December 31, 2011
Issuances during 2012

10,000,000 8,000,000 10,000,000 12,000,000
–

–

–

–

9,500,000

– 40,000,000
9,500,000

Balance – December 31, 2012

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

9,500,000 49,500,000

The carrying value of preferred shares outstanding was as follows:

Balance – January 1 and
December 31, 2011
Issuances during 2012

Balance – December 31, 2012

Series C

Series E

Series G

Series I

Series K

Total

227.2
–

227.2

183.1
–

183.1

235.9
–

235.9

288.5
–

288.5

–
231.7

231.7

934.7
231.7

1,166.4

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)
Series K(2)

Initial
redemption date
December 31, 2014
March 31, 2015
September 30, 2015
December 31, 2015
March 31, 2017

Number of
shares issued
10,000,000
8,000,000
10,000,000
12,000,000
9,500,000

Stated capital
Cdn $250.0
Cdn $200.0
Cdn $250.0
Cdn $300.0
Cdn $237.5

Liquidation
preference
per share
Cdn $25.00
Cdn $25.00
Cdn $25.00
Cdn $25.00
Cdn $25.00

Fixed
dividend rate
per annum
5.75%
4.75%
5.00%
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
subsequent 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 pre-
ferred 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, Series I and Series K 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, Series I and Series K 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), Series J (on December 31, 2015) and Series L (on March 31, 2017) respectively and on
each subsequent five-year anniversary date. The Series F, Series H, Series J and Series L 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, December 31, 2015 and March 31, 2017,
or any subsequent five-year anniversary plus 2.16%, 2.56%, 2.85% and 3.51% respectively.

73

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

Capital transactions

Year ended December 31, 2012

On March 21, 2012, the company issued 9,500,000 cumulative five-year rate reset preferred shares, Series K for
Cdn$25.00 per share, resulting in net proceeds after commissions and expenses of $231.7 (Cdn$230.1). Commis-
sions and expenses of $7.4 were charged to preferred stock. The terms of the Series K preferred shares are set out in
footnote 2 to the table immediately preceding this paragraph.

Repurchase of shares

During 2012, the company did not repurchase for cancellation any subordinate voting shares under the terms of
normal course issuer bids. During 2011, the company repurchased for cancellation 25,700 subordinate voting
shares for a net cost of $10.0, of which $5.8 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 for its share-based payment awards at December 31, 2012 was 369,048 (238,663 at December 31,
2011).

Dividends

Dividends paid by the company on its outstanding multiple voting and subordinate voting shares were as follows:

Date of declaration
January 4, 2013
January 4, 2012
January 5, 2011

Date of record
January 22, 2013
January 19, 2012
January 19, 2011

Date of payment
January 29, 2013
January 26, 2012
January 26, 2011

Dividend
per share
$10.00
$10.00
$10.00

Total cash
payment
$205.5
$205.8
$205.9

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:

Share of accumulated other comprehensive

income (loss) of associates
Currency translation account

December 31, 2012

December 31, 2011

Pre-tax
amount

Income tax
(expense)
recovery

After-tax
amount

Pre-tax
amount

Income tax
(expense)
recovery

After-tax
amount

(0.5)
136.6

136.1

(4.3)
(17.0)

(4.8)
119.6

7.2
101.9

(21.3)

114.8

109.1

(1.9)
(20.4)

(22.3)

5.3
81.5

86.8

Other comprehensive income (loss)

The balances related to each component of consolidated other comprehensive income (loss) for the years ended
December 31 were as follows:

2012

Income tax
(expense)
recovery

Pre-tax
amount

After-tax
amount

Pre-tax
amount

2011

Income tax
(expense)
recovery

After-tax
amount

Change in unrealized foreign currency trans-
lation 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 gains and (losses) on defined

benefit plans

55.8

(20.4)

(19.3)

(29.8)

(13.7)

74

59.2

(31.8)

(9.0)

(40.8)

3.4

—

(20.4)

33.2

(1.7)

(21.0)

(8.3)

6.9

8.6

(22.9)

(31.6)

(5.1)

(38.5)

—

0.8

9.0

0.8

33.2

(7.5)

(22.6)

(37.7)

Non-controlling interests

Year ended December 31, 2012

In 2012, the company acquired 87.1% and 81.7% of the outstanding common shares of Thomas Cook India and
Prime Restaurants respectively, pursuant to the transactions described in note 23, and recorded the non-
controlling interests in Thomas Cook India ($8.6) and Prime Restaurants ($12.7 (Cdn$12.9)) on its consolidated
balance sheet which represented the 12.9% and 18.3% respectively, of the proportionate share of the identifiable
net assets of those companies which were not acquired.

Year ended December 31, 2011

On December 22, 2011, the company acquired 75.0% of the outstanding common shares of Sporting Life, pur-
suant to the transaction described in note 23, 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 was not acquired.

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
Share-based payment awards

Weighted average common shares outstanding – diluted

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

2012
532.4
(60.5)

2011
45.1
(51.5)

471.9

(6.4)

20,326,688
240,178

20,405,427
–

20,566,866

20,405,427

$
$

23.22
22.94

$
$

(0.31)
(0.31)

Share-based payment awards of 175,299 were not included in the calculation of net loss per diluted common
share in 2011, as the inclusion of the awards would be anti-dilutive.

18. Income Taxes

The company’s provision for (recovery of) 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

Provision for (recovery of) income taxes

2012

90.9
7.3

98.2

(2.5)
7.9
12.5

17.9

116.1

2011

63.1
8.5

71.6

(123.3)
(6.4)
1.6

(128.1)

(56.5)

75

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 income tax calculated at the Canadian statutory income tax rate to the income tax provision
(recovery) at the effective tax rate in the consolidated financial statements in 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
Change in unrecorded tax benefit of losses
Foreign exchange
Change in tax rate for deferred income taxes
Provision (recovery) relating to prior years
Non-deductible loss on extinguishment of long-term debt
Other including permanent differences

Provision for (recovery of) income taxes

2012
174.0
(96.1)
(73.3)
65.6
1.5
(2.8)
15.3
17.6
14.3

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

116.1

(56.5)

The effective income tax rate in 2012 of 17.7% differed from the company’s Canadian statutory income tax rate
of 26.5% primarily as a result of non-taxable investment income (including dividend income, interest on bond
investments in U.S. states and municipalities and capital gains only 50% taxable in Canada) and income or losses
earned or incurred in jurisdictions where the corporate income tax rate is different from the company’s Canadian
statutory income tax rate, partially offset by unrecorded accumulated income tax losses. During the year, the
company recorded a loss related to the repayment of the TIG Note which is not deductible for tax purposes.

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) and 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 Canadian statutory income tax rate.

Income taxes refundable and payable are as follows:

Income taxes refundable
Income taxes payable

Net income taxes refundable

December 31,
2012
109.9
(70.5)

December 31,
2011
85.2
(21.4)

39.4

63.8

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 year
Acquisition of subsidiaries (note 23)
Foreign exchange effect and other

Balance – December 31

2012
63.8
(98.2)
69.2
(1.4)
6.0

2011
185.5
(71.6)
(82.4)
25.2
7.1

39.4

63.8

76

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

Balance – January 1, 2012

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, 2012

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

Operating
and
capital
losses
122.6

Provision
for losses
and loss
adjustment
expenses
354.5

Provision
for
unearned
premiums
79.6

Deferred
premium
acquisition
costs
(64.9)

Intan-
gibles
(123.4)

Invest-
ments
1.2

Tax
credits
163.3

Other
95.3

Total
628.2

262.7
–
11.0
0.9

397.2

(18.1)
–
6.8
0.9

14.0
–
(10.6)
(0.2)

(16.1)
–
12.0
0.5

6.1
–
(4.3)
(0.5)

(242.7)
1.1
–
0.6

(4.7)
–
–
–

(19.1)
7.5
(7.4)
(5.1)

(17.9)
8.6
7.5
(2.9)

344.1

82.8

(68.5)

(122.1)

(239.8)

158.6

71.2

623.5

Operating
and
capital
losses
54.3

Provision
for losses
and loss
adjustment
expenses
328.6

Provision
for
unearned
premiums
63.0

Deferred
premium
acquisition
costs
(52.3)

Intan-
gibles
(105.3)

Invest-
ments
(39.7)

Tax
credits
145.5

Other
96.4

Total
490.5

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)

17.8
–
–
–

(12.2)
9.0
0.8
1.3

128.1
0.8
9.4
(0.6)

(64.9)

(123.4)

1.2

163.3

95.3

628.2

Balance – December 31, 2011

122.6

354.5

Management expects that the recorded deferred income tax asset will be realized in the normal course of oper-
ations. The most significant temporary differences included in the deferred income tax asset at December 31,
2012 related to operating and capital losses and provision for losses and loss adjustment expenses. The provision
for losses and loss adjustment expenses 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, 2012, management has not recorded deferred
income tax assets of $271.4 ($217.6 at December 31, 2011) related primarily to operating and capital losses. The
losses for which deferred income tax assets have not been recorded are comprised of $412.9 of losses in Canada
($49.4 at December 31, 2011), $473.2 of losses in Europe ($655.0 at December 31, 2011) and $44.3 of losses in the
U.S ($46.3 at December 31, 2011). The losses in Canada expire between 2014 and 2032. The losses in the U.S.
expire between 2024 and 2027. The losses in Europe do not have an expiry date.

Deferred income tax has not been recognized for the withholding tax and other taxes that could be payable on the
unremitted earnings of certain subsidiaries. Unremitted earnings amounted to approximately $1.8 billion at
December 31, 2012 ($1.8 billion at December 31, 2011) and are not likely to be repatriated in the foreseeable future.

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 2012 by the subsidiaries which are eliminated on consolidation was $859.7
(2011 – $265.7). At December 31, 2012, the company has access to dividend capacity for dividend payment in
2013 at each of its primary operating companies as follows:

Northbridge(1)
Crum & Forster
Zenith National
OdysseyRe

(1) Subject to prior regulatory approval.

77

December 31,
2012
103.5
91.2
44.4
315.5

554.6

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

20. Contingencies and Commitments

Lawsuits

(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, Odys-
seyRe and Fairfax’s auditors. The plaintiff sought 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
alleged 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 defendants’ motions to dismiss the lawsuit
were granted by the Court, with prejudice (“with prejudice” means that the plaintiff does not have the right to
file a further amended complaint). Although the plaintiff initially appealed the dismissal of its lawsuit to the
United States Court of Appeals, it subsequently agreed to its voluntary dismissal of the appeal with prejudice
(“with prejudice” means that the plaintiff cannot revive that appeal in the future), and the Appeals Court
consequently made an order confirming that dismissal. As a result, this lawsuit has been finally dismissed.

(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. On September 12, 2012, before trial, and consequently without having
heard or made any determination on the facts, the Court dismissed the lawsuit on legal grounds. In October
2012, Fairfax filed an appeal of this dismissal, as it believes that the legal basis for the dismissal is incorrect.
The ultimate outcome of any litigation is uncertain. The financial effects, if any, of this lawsuit cannot be
practicably determined at this time, and the company’s consolidated financial statements include no antici-
pated recovery from the lawsuit.

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.

OdysseyRe, Advent and RiverStone (UK) (“the Lloyd’s participants”) participate in Lloyd’s through their 100% owner-
ship of certain Lloyd’s syndicates. The Lloyd’s participants have pledged securities and cash, with a fair value of
$604.3 and $24.2 respectively as at December 31, 2012, 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 maintain 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 2012.

78

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, 2012 and 2011 were invested principally in high quality equities.

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, 2012

December 31, 2011

Total
fair
value
of plan
assets
236.7
136.4
129.3

Quoted
prices
(Level 1)
227.5
73.3
118.2

Significant
other
observable
inputs
(Level 2)
3.5
63.1
0.3

Significant
unobservable
inputs
(Level 3)
5.7
–
10.8

Total
fair
value
of plan
assets
220.5
189.1
26.7

Quoted
prices
(Level 1)
215.8
79.0
15.7

Significant
other
observable
inputs
(Level 2)
4.7
110.1
2.2

Significant
unobservable
inputs
(Level 3)
–
–
8.8

502.4

419.0

66.9

16.5

436.3

310.5

117.0

8.8

Equities
Fixed income securities
Cash and short term

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
Plan amendments
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

2012

2011

2012

2011

493.9
19.1
23.5
51.8
(18.7)
–
–
10.4

439.9
16.5
23.4
36.2
(15.0)
–
–
(7.1)

76.4
4.7
3.2
3.6
(2.6)
(4.2)
(2.3)
0.5

73.1
3.7
3.5
4.3
(2.9)
–
(4.9)
(0.4)

580.0

493.9

79.3

76.4

436.3
27.0
25.6
22.2
–
(18.7)
10.0

408.5
25.3
8.9
15.2
–
(15.0)
(6.6)

–
–
–
2.5
0.1
(2.6)
–

–
–
–
2.8
0.1
(2.9)
–

502.4

436.3

–

–

Funded status of plans – surplus (deficit)

(77.6)

(57.6)

(79.3)

(76.4)

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

79

25.1
(102.7)

20.1
(77.7)

–
(79.3)

–
(76.4)

(77.6)

(57.6)

(79.3)

(76.4)

4.3%
3.6%
–

4.8%
3.8%
–

4.1%
3.3%
7.8%

4.5%
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
following:

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
Plan amendments
Curtailment
Foreign exchange effect and other

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

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

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

Balance – December 31

Defined benefit
pension plans

Post retirement
benefit plans

2012

2011

2012

2011

19.1
23.5
(27.0)
–
–
–

15.6
19.3

16.5
23.4
(25.3)
–
–
0.1

14.7
15.3

34.9

30.0

4.6
3.2
–
(4.2)
(2.3)
–

1.3
–

1.3

3.6
3.5
–
–
(4.9)
–

2.2
–

2.2

4.9%
6.2%
3.8%

5.6%
6.5%
4.5%

4.4%
–
3.3%

5.3%
–
4.0%

Defined benefit
pension plans

Post retirement
benefit plans

2012

2011

2012

2011

(9.8)

(37.1)

5.8

1.5

51.8
(25.6)

36.2
(8.9)

26.2

27.3

16.4

(9.8)

3.6
–

3.6

9.4

4.3
–

4.3

5.8

The assumed annual rate of increase in the per capita cost of covered benefits (i.e. health care cost trend rate) is
7.8% in 2013, decreasing to 4.7% by 2024 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 an expected return on plan assets of
$27.0 (2011 – $25.3) based on an expected rate of return of 6.2% for 2012 (2011 – 6.5%). The actual return on
assets for the year ended December 31, 2012 was a gain of $52.6 (2011 – $34.2).

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, 2012 by $12.0, and increase the aggregate of the serv-
ice and interest cost components of net periodic post retirement benefit expense for 2012 by $1.5. 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, 2012 by $9.0, and decrease the aggregate of the service
and interest cost components of net periodic post retirement benefit expense for 2012 by $1.2.

80

During 2012, the company contributed $24.7 (2011 – $18.0) to its defined benefit pension and post retirement
benefit plans. Based on the company’s current expectations, the 2013 contribution to its defined benefit pension
plans and its post retirement benefit plans should be approximately $22.8 and $2.6 respectively.

22. Operating Leases

Aggregate future minimum commitments at December 31, 2012 under operating leases relating to premises,
automobiles and equipment for various terms up to ten years were as follows:

2013
2014
2015
2016
2017
Thereafter

68.4
59.0
50.3
39.5
31.9
128.3

23. Acquisitions and Divestitures

Subsequent to December 31, 2012

Acquisition of IKYA Human Capital Solutions Private Limited

On February 5, 2013, Thomas Cook (India) Limited (“Thomas Cook India”) entered into an agreement to acquire
a 74% interest in IKYA Human Capital Solutions Private Limited (“IKYA”) for purchase consideration of approx-
imately $47 (2,560 million Indian rupees). Thomas Cook India will finance the purchase consideration through a
private placement of its common shares to qualified institutional buyers (other than existing shareholders of
Thomas Cook India). These transactions are expected to close in the second quarter of 2013, subject to approval
by Thomas Cook India shareholders, customary closing conditions and regulatory approvals as required. The
assets and liabilities and results of operations of IKYA will be consolidated in the Other reporting segment. IKYA
provides specialized human resources services to leading corporate clients in India.

Year ended December 31, 2012

Disposition of Cunningham Lindsay Group Limited

On December 10, 2012, the company sold all of its ownership interest in Cunningham Lindsey for net cash pro-
ceeds of $270.6 and recognized a net gain on investment of $167.0 (including amounts previously recorded in
accumulated other comprehensive income). Subsequent to the closing of this transaction, the company invested
$34.4 in preferred shares of Cunningham Lindsey to become a 9.1% minority shareholder.

Acquisition of Brit Insurance Limited

On October 12, 2012, the company’s UK runoff subsidiary, RiverStone Holdings Limited, completed the acquis-
ition of a 100% interest in Brit Insurance Limited (renamed RiverStone Insurance Limited (“RiverStone
Insurance”) on October 15, 2012) for cash purchase consideration of $335.1 (208.3 British pound sterling). The
purchase consideration for this acquisition was primarily financed internally by the company’s runoff sub-
sidiaries. The assets and liabilities and results of operations of RiverStone Insurance were consolidated within the
company’s financial reporting in the Runoff reporting segment. RiverStone Insurance is located in London, Eng-
land and wrote U.K. domestic and international insurance and reinsurance business prior to being placed into
runoff early in 2012. The preliminary determination of the identifiable assets acquired and liabilities assumed in
connection with the acquisition of RiverStone Insurance is summarized in the table following the next three
paragraphs.

81

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 Thomas Cook (India) Limited

In 2012, the company acquired an 87.1% interest in Thomas Cook India for cash purchase consideration of
$172.7 (9,626 million Indian rupees) pursuant to the following transactions: On August 14, 2012, the company
acquired 76.7% of the common shares of Thomas Cook India from its U.K. based parent company Thomas Cook
Group plc, for cash purchase consideration of $146.6. The company acquired an additional 10.4% of the common
shares of Thomas Cook India for cash purchase consideration of $26.1 pursuant to a tender offer to purchase the
shares of the minority shareholders of Thomas Cook India as stipulated by securities regulations in India. Those
securities regulations also require the company to reduce its interest in Thomas Cook India to less than 75% by
August 2013. Subject to the closing of the private placement of common shares by Thomas Cook India in con-
nection with the acquisition of IKYA, the company is expected to own approximately 75% of Thomas Cook India.
The assets and liabilities and results of operations of Thomas Cook India were consolidated within the company’s
financial reporting in the Other reporting segment. Thomas Cook India is the largest integrated travel and travel
related financial services company in India, offering a broad range of services that include foreign exchange,
corporate and leisure travel and insurance. The preliminary determination of the identifiable assets acquired and
liabilities assumed in connection with the acquisition of Thomas Cook India is summarized in the table following
the next two paragraphs.

Additional investment in Thai Reinsurance Public Company Limited

In 2012, the company increased its ownership interest in Thai Reinsurance Public Company Limited (“Thai Re”),
from 2.0% to 23.2% through participation in a Thai Re rights offering and a private placement of newly issued
common shares for cash purchase consideration of $77.0 (2.4 billion Thai Baht). Accordingly, on March 19, 2012,
the company determined that it had obtained significant influence over Thai Re and commenced recording its
investment in the common shares of Thai Re using the equity method of accounting on a prospective basis. Thai
Re is headquartered in Bangkok, Thailand and provides reinsurance coverage for property, casualty, engineering,
marine and life customers primarily in Thailand.

Acquisition of Prime Restaurants Inc.

to its common shareholders),

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 payment of Cdn$0.08 per share made by Prime
Restaurants
representing aggregate cash purchase consideration of $68.5
(Cdn$69.6). 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)) into common shares of
Prime Restaurants, reducing Fairfax’s net cash outflow to $56.7 (Cdn$57.7) and its ownership interest from 100%
to 81.7%. The assets and liabilities and results of operations of Prime Restaurants are 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.

82

The identifiable assets acquired and liabilities assumed in connection with the acquisitions described above are
summarized in the table below.

Acquisition date
Percentage of common shares acquired
Assets:

Insurance contract receivables
Portfolio investments(1)
Recoverable from reinsurers
Deferred income taxes
Goodwill and intangible assets
Other assets

Liabilities:
Subsidiary indebtedness(2)

Accounts payable and accrued liabilities
Income taxes payable
Insurance contract liabilities
Deferred income taxes

Non-controlling interests
Purchase consideration

Excess of fair value of net assets acquired over

purchase consideration

RiverStone
Insurance
October 12, 2012

Thomas
Cook India
August 14, 2012

Prime
Restaurants
January 10, 2012

100.0%

87.1%

81.7%

140.6
1,308.2
883.4
8.3
—
29.2

2,369.7

—
194.1
—
1,833.7
—

2,027.8
—
335.1

2,362.9

6.8

—
40.8
—
—
118.2
138.3

297.3

28.8
78.4
1.4
—
7.4

116.0
8.6
172.7

297.3

—

—
5.3
—
6.6
64.0
8.7

84.6

3.1
12.1
—
—
—

15.2
12.7
56.7

84.6

—

(1)

(2)

Included in the carrying value of the acquired portfolio investments of RiverStone Insurance, Thomas Cook India and
Prime Restaurants were $195.8, $38.3 and $5.3 respectively, of subsidiary cash and cash equivalents.

Included in the carrying value of the assumed subsidiary indebtedness of Thomas Cook India was $5.7 of bank over-
draft.

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.

The consolidated statement of earnings in 2012 included the revenue and net earnings of RiverStone Insurance of
$36.9 and $11.1 respectively, since its acquisition date of October 12, 2012.

Year ended December 31, 2011

Acquisition of Sporting Life Inc.

On December 22, 2011, the company completed the acquisition of 75.0% of the outstanding common shares of
Sporting Life Inc. (“Sporting Life”) for cash purchase consideration of $30.8 (Cdn$31.5). Sporting Life is a Cana-
dian retailer of sporting goods and sports apparel. Identifiable assets acquired and liabilities assumed in con-
nection with the acquisition of Sporting Life are summarized in the table following the next three paragraphs.

83

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 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 of William Ashley China Corporation (“William Ashley”). William Ashley is a pres-
tige retailer of exclusive tableware and gifts in Canada. Identifiable assets acquired and liabilities assumed in con-
nection with the acquisition of William Ashley are summarized in the table following the next two paragraphs.

Acquisition of The Pacific Insurance Berhad

On March 24, 2011, the company completed the acquisition of all of the outstanding common shares of The
Pacific Insurance Berhad (“Pacific Insurance”) for cash purchase 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. Identifiable assets acquired and liabilities assumed in con-
nection with the acquisition of Pacific Insurance are summarized in the table following the next paragraph.

Acquisition of First Mercury Financial Corporation

On February 9, 2011, the company completed the acquisition of all of the outstanding common shares of First
Mercury Financial Corporation (“First Mercury”) for $16.50 per common share in cash, representing 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 under-
writes insurance products and services primarily to specialty commercial insurance markets, focusing on niche
and underserved segments. The identifiable assets acquired and liabilities assumed are 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
Purchase consideration

Pacific Insurance

First Mercury
March 24, 2011 February 9, 2011
100%

100%

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

Other(1)
–
–

–
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.

84

The consolidated statement of earnings in 2011 included the revenue and net earnings of First Mercury of $217.0
and $1.5 respectively, since its acquisition date of February 9, 2011.

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
(which necessarily factors in climate change considerations), credit risk, liquidity risk and various market risks.
Balancing risk and reward is achieved through identifying risk appropriately, aligning risk tolerances with busi-
ness strategy, diversifying risk, pricing appropriately for risk, mitigating risk through preventive controls and
transferring risk to third parties. There were no significant changes in the types of the company’s risk exposures or
the processes used by the company for managing those risk exposures at December 31, 2012 compared to those
identified at December 31, 2011, 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 and its investment management sub-
sidiary combined with the analysis of the company-wide aggregation and accumulation of risks at the holding
company level. In addition, although the company and its operating subsidiaries have designated Chief Risk Offi-
cers, the company regards each Chief Executive Officer as the chief risk officer of his or her company: each Chief
Executive Officer is the individual ultimately responsible for risk management for his or her company and its
subsidiaries.

The company’s designated Chief Risk Officer reports on risk considerations to Fairfax’s Executive Committee and
provides a quarterly report to the Board of Directors on the key risk exposures. Management of Fairfax in con-
sultation with the designated Chief Risk Officer 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. A discussion of the risks of the business
(the risk factors and the management of those risks) is an agenda item for every regularly scheduled meeting of
the Board of Directors.

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, 2012 compared to
December 31, 2011.

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
underwriting and actuarial staff, pricing models and price adequacy monitoring tools.

85

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
predominantly through probable maximum loss (“PML”) modeling techniques and through the aggregation of
limits exposed. A wide range of events are simulated using the company’s proprietary and commercial models,
including single large events and multiple events spanning the numerous geographic regions in which the com-
pany operates.

Each of the operating companies has developed and applies strict underwriting guidelines for the amount of catas-
trophe exposure it may assume as a standalone entity for any one risk and location. Those guidelines are regularly
monitored and updated by the operating companies. Each of the operating companies also manages catastrophe
exposure by diversifying risk across geographic regions, catastrophe types and other lines of business, factoring in
levels of reinsurance protection, adjusting the amount of business written based on capital levels and adhering to
risk tolerances. The company’s head office aggregates catastrophe exposure company-wide and continually mon-
itors the group exposure. The independent exposure limits for each entity in the group are aggregated to produce
an exposure limit for the group as there is currently no model capable of simultaneously projecting the magni-
tude and probability of loss in all geographic regions in which the company operates. Currently the company’s
objective is to limit its company-wide catastrophe loss exposure such that one year’s aggregate pre-tax net catas-
trophe losses would not exceed one year’s normalized net earnings before income taxes. The company takes a
long term view and generally considers a 15% return on common shareholders’ equity, adjusted to a pre-tax basis,
to be representative of one year’s normalized net earnings. The modeled probability of aggregate catastrophe
losses in any one year exceeding this amount is generally less than once in every 250 years.

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. The company purchases reinsurance protection for risks assumed when it is considered prudent and cost
effective to do so, at the operating company level for specific exposures and, if needed, at the holding company
level for aggregate exposures. The company also actively takes steps to reduce the volume of insurance and
reinsurance underwritten on particular types of risks when it desires to reduce its direct exposure due to
inadequate pricing.

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.

86

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), terrorism 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) by line of business amounted to $497.0 for property (2011 – $289.6), $508.8 for casualty
(2011 – $608.3) and $198.4 for specialty (2011 – $237.7) for the year ended December 31, 2012.

For the years ended
December 31

Property

Casualty

Specialty

Total

Insurance

Reinsurance

Canada

United States

Asia(1)

International(2)

Total

2012

544.3

592.4

136.9

2011

2012

2011

2012

2011

557.6

1,236.7

845.2

335.2

273.7

616.7

2,431.4

2,281.8

218.5

170.3

133.0

175.4

209.3

257.4

214.4

2012

571.1

457.4

441.6

2011

2012

2011

618.5

2,687.3

2,295.0

479.2

3,699.7

3,548.0

343.8

1,011.3

900.5

1,273.6

1,307.3

3,843.5

3,336.3

811.1

658.4

1,470.1

1,441.5

7,398.3

6,743.5

1,174.2

1,231.5

2,914.9

2,614.3

383.0

350.5

410.2

392.4

4,882.3

4,588.7

99.4

75.8

928.6

722.0

428.1

307.9

1,059.9

1,049.1

2,516.0

2,154.8

1,273.6

1,307.3

3,843.5

3,336.3

811.1

658.4

1,470.1

1,441.5

7,398.3

6,743.5

(1) The Asia geographic segment comprises countries located throughout Asia including China, India, the Middle East,

Malaysia, Singapore and Thailand.

(2) The International geographic segment comprises Australia and countries located in Africa, Europe and South America.

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 an additional 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.

Insurance

Reinsurance

Insurance and
Reinsurance

Northbridge

U.S.

Fairfax Asia

OdysseyRe

Other

For the years ended December 31

2012

2011

2012

2011

2012

2011

2012

2011

2012

2011

Impact of +1% increase in loss ratio on:

Earnings from operations before income taxes

Total equity

9.9

7.3

10.7

7.6

18.1

11.8

15.0

9.8

2.3

2.0

2.0

1.8

23.2

15.1

20.1

13.1

5.1

4.4

5.0

4.0

87

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 Risk

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). There were no 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, 2012 compared to December 31, 2011.

The aggregate gross credit risk exposure at December 31, 2012 (without taking into account amounts held by the
company as collateral) was $27,430.8 ($25,382.2 at December 31, 2011) 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 derivative contracts

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

Total gross credit risk exposure

December 31,
2012

December 31,
2011

2,746.0
133.4
6,867.8
1,673.1

169.7
1,945.4
5,290.8
506.7
8,097.9

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

27,430.8

25,382.2

At December 31, 2012, the company had income taxes refundable of $109.9 ($85.2 at December 31, 2011).

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 credit ratings, it also carries out its own analysis and does not delegate the credit
decision to rating agencies. The company endeavours to limit credit exposure by monitoring fixed income portfo-
lio limits on individual corporate issuers and limits based on credit quality and may, from time to time, initiate
positions in certain types of derivatives to further mitigate credit risk exposure.

As at December 31, 2012, the company had investments with a fair value of $9,071.2 ($9,148.5 at December 31,
2011) in bonds exposed to credit risk representing in the aggregate 34.8% (37.6% at December 31, 2011) of the
total investment portfolio (all bonds included in Canadian provincials, U.S. states and municipalities and corpo-
rate and other, and $396.9 ($415.7 at December 31, 2011) of sovereign government bonds, including $173.5
($244.2 at December 31, 2011) of Greek bonds (purchased at deep discounts to par) and $124.4 ($82.8 at
December 31, 2011) of Polish bonds (purchased to match claims liabilities of Polish Re)). As at December 31, 2012
and 2011, the company did not have any investments in bonds issued by Ireland, Italy, Portugal or Spain. The
company considers its investment at December 31, 2012 in $2,349.1 ($2,622.4 at December 31, 2011) of sovereign
government bonds not referred to in the first sentence of this paragraph (including $1,520.8 ($2,082.3 at
December 31, 2011) of U.S. treasury bonds), representing 9.0% (10.8% at December 31, 2011) of the total invest-
ment portfolio, to present only a nominal risk of default.

The company’s exposure to credit risk from its investment in debt securities remained substantially unchanged at
December 31, 2012 compared to December 31, 2011, notwithstanding that since December 31, 2011, the com-
pany sold a portion of its long-dated government bonds (principally U.S. treasury and Canadian provincial
bonds) where the proceeds were retained in cash or reinvested into short term investments with minimal
exposure to credit risk. Effective January 1, 2011, the company no longer considered 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, 2012 compared to December 31, 2011 with respect to the company’s investments in debt securities.

88

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, 2012 December 31, 2011

Carrying
value
2,711.5
5,069.6
2,266.0
282.7
53.3
448.8
588.4

%
23.7
44.4
19.8
2.5
0.5
3.9
5.2

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

11,420.3

100.0

11,770.9

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, 2012 com-
pared to December 31, 2011, notwithstanding the decrease in the category rated lower than B/B and unrated
which reflected an upgrade to the credit rating of the company’s Greek sovereign bonds, the conversion to equity
of certain convertible bonds and the redemption of other corporate bonds. At December 31, 2012, 90.4% (89.5%
at December 31, 2011) of the fixed income portfolio carrying value was rated investment grade, with 68.1%
(71.0% at December 31, 2011) being rated AA or better (primarily consisting of government obligations). At
December 31, 2012, holdings of fixed income securities in the ten issuers (excluding U.S., Canadian, U.K. and
German sovereign government bonds) to which the company had the greatest exposure totaled $3,562.6
($3,862.0 at December 31, 2011), which represented approximately 13.7% (15.9% at December 31, 2011) of the
total investment portfolio. The exposure to the largest single issuer of corporate bonds held at December 31, 2012
was $254.9, which represented approximately 1.0% of the total investment portfolio.

The consolidated investment portfolio included $6.9 billion ($6.2 billion at December 31, 2011) of U.S. state and
municipal bonds (approximately $5.3 billion tax-exempt, $1.6 billion taxable), almost all of which were pur-
chased during 2008 and are owned in the subsidiary investment portfolios. A significant portion of the company’s
investment in U.S. state and municipal bonds, approximately $4.0 billion at December 31, 2012 ($3.8 billion at
December 31, 2011), are 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 asso-
ciated 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.

89

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(1)
Impact of net settlement arrangements
Fair value of collateral deposited for the benefit of the company(2)
Excess collateral pledged by the company in favour of counterparties
Initial margin not held in segregated third party custodian accounts

December 31,
2012
169.7
(79.2)
(56.5)
38.5
93.1

December 31,
2011
389.2
(101.0)
(141.6)
129.7
80.6

Net derivative counterparty exposure after net settlement and

collateral arrangements

165.6

356.9

(1) Excludes exchange traded instruments comprised principally of equity and credit warrants which are not subject to

counterparty risk.

(2) Net of $3.9 ($65.7 at December 31, 2011) of excess collateral pledged by counterparties.

The fair value of the collateral deposited for the benefit of the company at December 31, 2012, consisted of cash
of $22.1 ($50.5 at December 31, 2011) and government securities of $38.3 ($156.8 at December 31, 2011). The
company had not exercised its right to sell or repledge collateral at December 31, 2012.

Recoverable from Reinsurers

Credit exposure on the company’s recoverable from reinsurers balance existed at December 31, 2012 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 when amounts 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 5.5% (6.2% at December 31, 2011) of
shareholders’ equity attributable to shareholders of Fairfax and is rated A+ by A.M. Best.

The company’s gross exposure to credit risk from counterparties to its reinsurance contracts increased during 2012
principally as a result of the consolidation of the of the recoverable from reinsurers balance of RiverStone
Insurance ($891.5 at December 31, 2012), a significant portion of which is fully secured. Changes that occurred in
the provision for uncollectible reinsurance during the period are disclosed in note 9.

90

The following table presents the $5,290.8 ($4,198.1 at December 31, 2011) 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.

December 31, 2012

December 31, 2011

Gross
recoverable
from
reinsurers

Outstanding
balances
for which
security
is held

Net
unsecured
recoverable
from
reinsurers

Gross
recoverable
from
reinsurers

Outstanding
balances
for which
security
is held

Net
unsecured
recoverable
from
reinsurers

217.6

1,706.2

1,531.4

475.3

34.3

29.5

52.6

1,362.0

151.8

5,560.7
(269.9)

5,290.8

31.8

413.0

216.4

223.1

18.2

0.1

52.0

761.7

82.2

1,798.5

185.8

1,293.2

1,315.0

252.2

16.1

29.4

0.6

600.3

69.6

170.5

1,443.0

1,371.9

457.8

37.3

92.5

1.8

766.3

152.5

3,762.2
(269.9)

4,493.6
(295.5)

3,492.3

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)

2,985.1

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

Cash and Short Term Investments

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, 2012, the majority of these
balances were held in Canadian and U.S. financial institutions (94.5% (95.4% at December 31, 2011)) with the
remainder held in European financial institutions (2.4% (2.2% at December 31, 2011)) and other foreign national
financial institutions (3.1% (2.4% at December 31, 2011)). 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 heightened credit risk 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 2013 consist of the payment of the $205.5 dividend
on common shares ($10.00 per share paid January 2013), interest and corporate overhead expenses, preferred
share dividends, income tax payments and potential cash outflows related to derivative contracts (described
below). On January 21, 2013, the company received net proceeds of $259.9 (Cdn$258.1) from the issuance of
Cdn$250.0 principal amount of its unsecured senior notes due 2022 pursuant to a re-opening of those notes. The
company intends to use these proceeds to fund the repayment upon maturity of $182.9 principal amount of
OdysseyRe’s unsecured senior notes due November 1, 2013, repurchase $12.2 principal amount of its unsecured
senior notes due 2017 and redeem on March 11, 2013 the remaining $36.2 outstanding principal amount of its
unsecured senior notes due 2017.

91

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 believes that holding company cash and investments, net of holding company short sale and
derivative obligations, provide adequate liquidity to meet the holding company’s known obligations in 2013. 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 can draw upon its $300.0 unsecured revolving credit facility.

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, 2012, total insurance and reinsurance portfolio investments net of short sale and
derivative obligations was $25.0 billion. These portfolio investments may include investments in inactively traded
corporate debentures, preferred stocks, common stocks and limited partnership interests that are relatively illi-
quid. At December 31, 2012, these asset classes represented approximately 7.5% (6.4% at December 31, 2011) of
the carrying 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 2012, the insurance and reinsurance subsidiaries and the holding company paid net cash of
$603.6 (received net cash of $173.3 in 2011) and $220.5 (received net cash of $97.3 in 2011) respectively, in
connection with 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 such obligations
from cash provided by operating activities (and may fund such obligations from sales of equity-related invest-
ments, the market value of which will generally vary inversely with the market value of short equity and equity
index total return swaps). The holding company typically funds any such obligations from holding company cash
and investments and its additional sources of liquidity as discussed above.

92

The following table sets out the 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, 2012

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

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
29.3
615.4
3.7
1,009.1
49.5
27.0

3 months
to 1 year
22.1
506.7
97.9
3,566.9
186.3
171.2

1 - 3 years
1.2
313.3
14.0
5,099.1
217.8
361.3

3 - 5 years
1.1
91.4
11.0
3,172.1
57.7
330.7

More than
5 years
–
73.9
11.7
6,801.6
2,508.8
706.6

Total
53.7
1,600.7
138.3
19,648.8
3,020.1
1,596.8

1,734.0

4,551.1

6,006.7

3,664.0

10,102.6

26,058.4

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 pension and post retirement liabilities, ceded deferred premium acquisition costs and accrued interest. Operat-

ing lease commitments are described in note 22.

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, 2012, the company had
income taxes payable of $70.5 ($21.4 at December 31, 2011).

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, 2012

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, 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

Less than
3 months

3 months
to 1 year

1 - 3 years

136.0

55.1

16.4

9.5

7.7

224.7

–

–

–

11.1

2.4

13.5

–

–

–

–

–

–

Total

136.0

55.1

16.4

20.6

10.1

238.2

Less than
3 months

3 months
to 1 year

1 - 3 years

Total

59.6

47.7

49.2

–

1.1

157.6

–

–

–

8.2

–

8.2

–

–

–

–

4.4

4.4

59.6

47.7

49.2

8.2

5.5

170.2

93

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

Market Risk

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.

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, 2012, the company’s invest-
ment portfolio included $11.4 billion of fixed income securities (measured at fair value) which are subject to
interest rate risk. Since December 31, 2011, the company’s exposure to interest rate risk has decreased, following
the sale of a portion of its long-dated government bonds (principally U.S. treasury and Canadian provincial
bonds) where the proceeds were retained in cash or reinvested into short term investments with minimal
exposure to interest rate risk. Although the acquisition of RiverStone Insurance increased the company’s year-
over-year holdings of fixed income investments, the company’s exposure to interest rate risk was not significantly
affected as RiverStone Insurance’s fixed income portfolio was primarily comprised of high quality, short-dated
bonds. There were no significant changes to the company’s framework used to monitor, evaluate and manage
interest rate risk at December 31, 2012 compared to December 31, 2011.

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 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, with the hypothetical effect on net earnings calculated on an after-tax basis.

December 31, 2012

December 31, 2011

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

Change in Interest Rates

200 basis point increase

100 basis point increase

No change

100 basis point decrease

200 basis point decrease

9,766.7

10,522.5

11,420.3

12,493.2

13,803.7

(14.5)

(7.6)

–

9.4

20.9

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

(1,132.0)

(595.1)

–

735.7

1,635.3

94

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 other factors
affecting all similar financial instruments in the market. Changes to the company’s exposure to equity price risk
through its equity and equity-related holdings at December 31, 2012, compared to December 31, 2011 are
described below.

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. The company has economically
hedged its equity and equity-related holdings (comprised of common stocks, convertible preferred stocks, con-
vertible bonds, certain investments in associates and equity-related derivatives) 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 individual equities and the Russell 2000 index, the S&P 500 index, the S&P/TSX
60 index and other equity indexes (the “indexes”). The company’s economic equity hedges are structured to pro-
vide a return which is inverse to changes in the fair values of the indexes and certain individual equities. In 2012,
the company’s equity and equity-related holdings after equity hedges produced a net gain of $113.2 compared to
a net loss of $378.9 in 2011. At December 31, 2012, equity hedges with a notional amount of $7,668.5 ($7,135.2
at December 31, 2011) represented 100.6% (104.6% at December 31, 2011) of the company’s equity and equity-
related holdings of $7,626.5 ($6,822.7 at December 31, 2011).

During 2012, the company closed $394.2 (2011 – $41.4) of original notional amount of short positions in certain
individual equities to reduce its economic equity hedges as a proportion of its equity and equity-related holdings.
In the future, the company may manage its net exposure to its equity and equity-related holdings by adjusting
the notional amounts of its equity hedges upwards or downwards. The company expects that there may be peri-
ods when the notional amount of the equity hedges may exceed or be deficient relative to the company’s equity
price risk exposure. This situation may arise due to the timing of opportunities for the company to exit and enter
hedges at attractive prices, as a result of a decision by the company to hedge an amount less than the company’s
full equity exposure or as a result of any non-correlated performance of the equity hedges relative to the equity
and equity-related holdings.

One risk of a hedging strategy (sometimes referred to as basis risk) is the risk that the fair value or cash flows of
derivative instruments designated as economic hedges will not experience changes in exactly the opposite direc-
tions from those of the underlying hedged exposure. This imperfect correlation between the derivative instrument
and underlying hedged exposure creates the potential for excess gains or losses in a hedging strategy. The compa-
ny’s risk management objective 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 periods of
market turbulence. The company regularly monitors the effectiveness of its equity hedging program on a pro-
spective and retrospective basis. 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 hedging program related to equity risk.

95

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 net effect of the equity hedges and the equity and equity-related holdings on
the company’s financial position and results of operations as at and for the years ended December 31, 2012 and
2011:

December 31, 2012

Year ended
December 31,
2012

December 31, 2011

Year ended
December 31,
2011

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:

Equity total return swaps – long positions

Equity warrants

4,569.2

4,569.2

415.0

426.4

1,125.6

1,021.8

68.5

415.0

426.4

959.3

(12.9)

36.0

3,829.5

3,829.5

(774.8)

697.6

(36.2)

186.7

196.8

450.9

384.1

750.1

450.9

384.1

608.9

61.5

12.3

1,363.5

44.6

(46.8)

15.9

(5.2)

23.5

7.0

(61.8)

18.5

Total equity and equity related holdings

7,626.5

6,393.0

1,118.7

6,822.7

5,242.5

(792.8)

Hedging instruments:

Derivatives and other invested assets:

Equity total return swaps – short positions

(1,433.0)

(51.0)

(192.1)

(1,617.6)

21.1

Equity index total return swaps –

short positions

Equity index total return swaps –
long positions (Russell 2000)

(6,235.5)

(116.4)

(799.4)

(5,517.6)

(33.8)

–

–

(14.0)

–

–

(7,668.5)

(167.4)

(1,005.5)

(7,135.2)

(12.7)

Net (short) exposure and financial effects

(42.0)

113.2

(312.5)

153.2

260.7

–

413.9

(378.9)

(1) Excludes the company’s investments in Gulf Insurance, ICICI Lombard, Singapore Re, Thai Re and Falcon Thailand

which the company considers to be long term strategic holdings.

The tables that follow illustrate the potential impact on net earnings of various combinations of changes in fair
value of the company’s equity and equity-related holdings and simultaneous changes in global equity markets at
December 31, 2012 and 2011. The analysis assumes variations ranging from 5% to 10% which the company
believes to be reasonably possible based on an analysis of the 15-year return on various equity indexes and the
company’s knowledge of global equity markets.

Scenarios 1 and 2 illustrate the potential impact of a 10% change in the fair value of the company’s equity and
equity-related holdings while global equity markets also change by 10%. Scenarios 3 and 4 illustrate the potential
impact of imperfect correlation between the company’s equity and equity-related holdings and global equity
markets (hedging basis risk) whereby the company’s equity and equity-related holdings decrease by 10% and 5%
respectively, while global equity markets remain unchanged. Scenarios 5 and 6 further illustrate hedging basis risk
whereby global equity markets increase by 5% and 10% respectively, while the fair value of the company’s equity
and equity-related holdings remain unchanged. Certain shortcomings are inherent in the method of analysis
presented as the analysis assumes that all variables, with the exception of those described in each scenario, are
held constant.

96

December 31, 2012

Scenario
Change in the company’s equity and equity-related holdings
Change in global equity markets
Equity and equity-related holdings
Equity hedges

1

2

3
+10% -10% -10%
–
+10% -10%
(624.7)
626.1 (624.7)
–
(783.6) 783.6

4
-5%
–
(312.5)
–

5
–

6
–
+5% +10%
–
(783.6)

–
(391.8)

Pre-tax impact on net earnings

(157.5) 158.9 (624.7)

(312.5)

(391.8)

(783.6)

After-tax impact on net earnings

(123.4) 124.5 (449.7)

(225.0)

(287.1)

(574.2)

December 31, 2011

Scenario
Change in the company’s equity and equity-related holdings
Change in global equity markets
Equity and equity-related holdings
Equity hedges

1

2

3
+10% -10% -10%
–
+10% -10%
(576.6)
577.8 (576.6)
–
(714.8) 714.8

4
-5%
–
(288.5)
–

5
–

6
–
+5% +10%
–
(714.8)

–
(357.4)

Pre-tax impact on net earnings

(137.0) 138.2 (576.6)

(288.5)

(357.4)

(714.8)

After-tax impact on net earnings

(90.0)

90.9 (404.1)

(202.0)

(247.5)

(495.0)

In each of the scenarios shown in the tables above, the change in the fair value of the company’s equity and
equity-related holdings (excluding investments in associates as discussed below) and equity hedges will be
reflected in the company’s net earnings as the majority of the company’s equity investment holdings are classi-
fied as at FVTPL. From an economic perspective, the company believes it would be appropriate to include the fair
value of certain of its investments in associates (those that are comprised of publicly traded companies, other
than long-term strategic holdings (see note 6)) as a component of its total equity and equity-related holdings
when measuring the effectiveness of its equity hedges. However, any unrealized change in the fair value of an
investment in associate is generally recognized in the company’s consolidated financial reporting only upon
ultimate disposition of the associate. Accordingly, such changes in fair value have been excluded from each of the
scenarios presented above consistent with the company’s financial reporting.

At December 31, 2012, the company’s exposure to the ten largest issuers of common stock owned in the invest-
ment portfolio was $3,492.1, which represented 13.4% of the total investment portfolio. The exposure to the
largest single issuer of common stock held at December 31, 2012 was $604.7, 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. At December 31, 2012, these contracts have a remaining weighted average life of 7.7 years (8.6
years at December 31, 2011), a notional amount of $48,436.0 ($46,518.0 at December 31, 2011) and a fair value of
$115.8 ($208.2 at December 31, 2011). 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.

97

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

During 2012, the company paid additional premiums of $28.3 to increase the strike price on certain of its U.S.
CPI-linked derivative contracts. As a result, the weighted average strike price of the U.S. CPI-linked derivative
contracts increased from 216.95 at December 31, 2011 to 223.98 at December 31, 2012. During 2012, the com-
pany purchased $1,450.0 (2011 – $13,596.7) notional amount of CPI-linked derivative contracts at a cost of $6.1
(2011 – $122.6) and recorded net mark-to-market losses of $129.2 (2011 – $233.9) 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 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 increased following the acquisition of the British pound sterling denominated
net assets of RiverStone Insurance (net assets equivalent to $335.1 U.S. dollars) and Indian rupee denominated net
assets of Thomas Cook India (net assets equivalent to $172.7 U.S. dollars). The company’s exposure to the Cana-
dian dollar decreased following the issuance on October 15, 2012 of Cdn$200.0 principal amount of its 5.84%
unsecured notes due 2022 that the company designated as a hedge of a portion of its net investment in
Northbridge (described below). Notwithstanding the foregoing, the company’s exposure to foreign currency risk
was not significantly different at December 31, 2012, compared to December 31, 2011.

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.

At December 31, 2012, the company had designated the carrying value of Cdn$1,275.0 principal amount of its
Canadian dollar denominated unsecured senior notes with a fair value of $1,424.4 (principal amount of
Cdn$1,075.0 with a fair value of $1,114.6 at December 31, 2011) as a hedge of its net investment in Northbridge
for financial reporting purposes. In 2012, the company recognized a pre-tax loss of $20.4 (2011 – pre-tax gain of
$33.2) 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 statement of comprehensive income.

98

At December 31, 2012, the company had outstanding Cdn$1,237.5 (Cdn$1,000.0 at December 31, 2011) 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 portion of the stated capital of these preferred shares as an
additional economic hedge of its net investment in Northbridge, as described in note 7.

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

2012

2011

(60.0)
3.2
(19.4)

(50.5)
(46.5)
62.6

(76.2)

(34.4)

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).

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)

2012

2011

(3.5)
(6.4)
(33.5)
(29.8)

(20.9)
(15.5)
23.5
14.6

6.3
4.0
(35.1)
(29.0)

62.3
47.1
(48.5)
(47.5)

44.2
29.2
(93.6)
(91.7)

4.1
1.7
(35.1)
(30.5)

(5.9)
(3.6)
22.9
14.9

2.4
1.3
(18.4)
(11.9)

52.5
36.8
(34.2)
(34.0)

53.1
36.2
(64.8)
(61.5)

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.

99

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

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, 2012, comprising total debt,
shareholders’ equity attributable to shareholders of Fairfax and non-controlling interests was $11,938.9 compared
to $11,427.0 at December 31, 2011. The company manages its capital based on the following financial measure-
ments 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 stock
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,
2012
1,128.0

December 31,
2011
962.8

2,220.2
670.9
157.5

3,048.6

1,920.6

7,654.7
1,166.4
69.2

8,890.3

21.6%
17.8%
25.5%
4.2x
3.0x

2,080.6
623.9
314.0

3,018.5

2,055.7

7,427.9
934.7
45.9

8,408.5

24.4%
19.6%
26.4%
1.0x
0.7x

(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 income tax rate.

During 2012, the company issued Cdn$200.0 principal amount of its unsecured senior notes due 2022 and
Cdn$237.5 par value of cumulative five-year rate reset preferred shares, Series K, the proceeds from which were
used to repurchase $86.3 principal amount of Fairfax’s unsecured senior notes upon maturity. The excess net
proceeds was retained to augment holding company cash and investments and to retire outstanding debt and
other corporate obligations from time to time. On October 19, 2012, TIG repaid for $200.0 of cash the $160.2
carrying value of its loan note issued in connection with its acquisition of General Fidelity in August 2010.

During 2011, the company used the proceeds received from the issuance of $500.0 and Cdn$400.0 principal amounts
of its unsecured senior notes due 2021 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 net proceeds 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.

On January 21, 2013, the company received net proceeds of $259.9 (Cdn$258.1) from the issuance of Cdn$250.0
principal amount of its unsecured senior noted due 2022 pursuant to a re-opening of those notes. The company
intends to use these proceeds during 2013 to fund the repayment upon maturity of $182.9 principal amount of
OdysseyRe’s unsecured senior notes due November 1, 2013, repurchase $12.2 principal amount of its unsecured

100

senior notes due 2017 and redeem on March 11, 2013 the remaining $36.2 outstanding principal amount of its
unsecured senior notes due 2017.

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. Accordingly, the company monitors its interest and preferred share dividend distribution
coverage ratio calculated as described in footnote 4 in the table above.

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,
2012, 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 3.6 times (3.7 times at December 31, 2011) the authorized control level, except for TIG which had
2.3 times (2.3 times at December 31, 2011).

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, 2012, Northbridge’s subsidiaries had a weighted average MCT ratio of 196% of the minimum statutory
capital required, compared to 212% at December 31, 2011, 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, 2012.

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 account-
ing 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.

Insurance

Northbridge – Northbridge is a national commercial property and casualty insurer in Canada providing property
and casualty insurance products through its Northbridge Insurance and Federated subsidiaries, primarily in the
Canadian market. Effective January 1, 2012, Northbridge combined three of its subsidiaries, Lombard Insurance,
Markel Insurance and Commonwealth Insurance, to operate under a single brand, Northbridge Insurance.

U.S. Insurance – U.S. Insurance 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. Zenith National is primarily engaged in the workers’ compensation
insurance business in the United States.

Fairfax Asia – Fairfax Asia includes 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
equity accounted interest in Mumbai-based ICICI Lombard (26.0%) and Thailand-based Falcon Thailand (40.5%).

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.

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

Insurance and Reinsurance – Other

Insurance and Reinsurance – Other is comprised of Group Re, Advent, Polish Re and Fairfax Brasil. Group Re
primarily constitutes the participation of CRC Re and Wentworth (both based in Barbados) in the reinsurance of
Fairfax’s subsidiaries by quota share or through participation in those subsidiaries’ third party reinsurance pro-
grams on the same terms as third party reinsurers. 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. Effective January 1, 2012, the company’s runoff Syndicate 3500
(managed by RiverStone Managing Agency Limited (UK)) accepted the reinsurance-to-close of all of the net
insurance liabilities of Advent’s runoff Syndicate 3330. The description of the Runoff reporting segment which
follows, describes the impact of this transaction on the company’s reporting segments. Polish Re is a Polish
reinsurance company. Fairfax Brasil writes commercial property and casualty insurance in Brazil.

Runoff

The Runoff reporting segment comprises RiverStone (UK), RiverStone Insurance (since October 12, 2012), nSpire
Re and the U.S. runoff company formed on the merger of TIG and International Insurance Company combined
with Old Lyme, Fairmont, General Fidelity and Clearwater.

The U.K. and international runoff operations of RiverStone (UK) had reinsured their reinsurance portfolios to
nSpire Re to provide consolidated investment and liquidity management services. Effective January 1, 2012, these
reinsurance arrangements were commuted following the significant progress made by RiverStone in managing
and reducing the claims reserves of RiverStone (UK). Subsequently, the remaining reinsurance contracts between
nSpire Re and other Fairfax affiliates were novated to Group Re (Wentworth). These commutations and novations,
culminating in the voluntary liquidation of nSpire Re (substantially complete at December 31, 2012), did not
affect the consolidated financial reporting of the company and had no significant impact on the Runoff and
Group Re reporting segments.

Effective January 1, 2012, Runoff accepted the reinsurance-to-close of all of the net insurance liabilities of
Advent’s runoff Syndicate 3330. Syndicate 3330 transferred $62.2 of cash, investments and other net assets to
Syndicate 3500 and Syndicate 3500 assumed $62.2 of the net loss reserves from Syndicate 3300. In its assessment
of the operating results of the Advent and Runoff reporting segments, the company’s management does not con-
sider the initial effects of this intercompany transaction, and accordingly, the tables which set out the operating
results of Advent and Runoff do not give effect to the reinsurance-to-close premiums and incurred losses which
would have been ceded by Advent and assumed by Runoff and reflected in their respective standalone statements
of earnings.

On October 12, 2012, RiverStone Holdings Limited (RiverStone (UK)’s parent company) acquired a 100% interest
in RiverStone Insurance for cash purchase consideration of $335.1 (208.3 British pound sterling), pursuant to the
transaction described in note 23. RiverStone Insurance is located in London, England and wrote U.K. domestic
and international insurance and reinsurance business prior to being placed into runoff early in 2012.

Other

The Other reporting segment is comprised of Ridley, William Ashley, Sporting Life, Prime Restaurants and Tho-
mas Cook India. 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 on December 22, 2011) is a Canadian retailer of sporting goods and sports apparel. Prime Restaurants
(acquired on January 10, 2012) franchises, owns and operates a network of casual dining restaurants and pubs in
Canada. Thomas Cook India (acquired on August 14, 2012) is an integrated travel and travel related financial
services company in India offering a broad range of services that include foreign exchange, corporate and leisure
travel and insurance. The acquisitions made in 2012 and 2011 are described in further detail 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
company.

102

Pre-tax Income (Loss) by Reporting Segment

An analysis of pre-tax income (loss) by reporting segment for the years ended December 31 is presented below:

Insurance

Reinsurance

Insurance
and
Reinsurance

Northbridge

U.S.

Asia OdysseyRe

Other

operations Runoff Other

Fairfax

Ongoing

Corporate
and Other

Eliminations
and
adjustments

Consolidated

2012

Gross premiums written(1)

External

Intercompany

1,192.6 2,159.4
3.8

1.7

515.5
(0.3)

2,760.9
12.3

548.7
102.9

7,177.1
120.4

1,194.3 2,163.2

515.2

2,773.2

651.6

7,297.5

Net premiums written(1)

948.7 1,872.8

240.6

2,402.3

530.6

5,995.0

Net premiums earned(1)

External

Intercompany

Underwriting expenses

1,078.5 1,811.1
0.5

(86.3)

244.5
(13.1)

2,306.9
8.4

417.7
96.6

5,858.7
6.1

992.2 1,811.6
(1,049.2) (2,017.9)

231.4
(201.3)

2,315.3
(2,048.7)

514.3
(536.1)

5,864.8
(5,853.2)

Underwriting profit (loss)

(57.0)

(206.3)

30.1

266.6

(21.8)

11.6

–
–

–

–

–
–

–
–

–

–
–

–

–

–
–

–
–

–

–
–
–

–

–
–

–

–

–
–

–
–

–

(30.7)
9.4
(2.7)

(24.0)

Interest income

Dividends

Investment expenses

36.2
19.1
(13.5)

54.7
24.0
(20.8)

18.3
5.4
(2.5)

146.1
31.0
(35.2)

Interest and dividends

41.8

57.9

21.2

141.9

Share of profit (loss) of associates

(0.3)

(8.3)

15.0

(14.4)

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

(15.5)
(63.1)
–
–
(17.2)

(156.7)
147.3
(0.8)
(5.7)
(23.2)

–
–

–

66.3
0.3
–
–
–

–
–

–

394.1
267.2
–
(27.7)
(23.1)

27.9
7.1
(14.0)

21.0

16.6

–
–

–

15.8
235.6
–
(4.5)
(0.4)

283.2
86.6
(86.0)

74.0
13.0
(14.3)

283.8

72.7

8.6

(7.6)

0.2

13.8

–
–

–

226.9 864.2
(276.5) (828.9)

(49.6)

35.3

304.0
587.3
(0.8)
(37.9)
(63.9)

15.5
215.8
(39.8)
(7.5)
–

35.5
3.7
–
(2.2)
–

76.8
–

76.8

66.6
(164.2)
–
(160.6)
(94.7)

(95.8)

(39.1)

66.6

610.5

246.5

788.7

184.0

37.0

(352.9)

Pre-tax income (loss)

Income taxes

Net earnings

Attributable to:

Shareholders of Fairfax

Non-controlling interests

–
(120.4)

7,177.1
–

(120.4)

7,177.1

–

–
–

–
–

–

–
–
76.8

76.8

–

5,995.0

5,858.7
6.1

5,864.8
(5,853.2)

11.6

326.5
109.0
(26.2)

409.3

15.0

(76.8)
–

1,091.1
(1,105.4)

(76.8)

(14.3)

–
–
–
–
–

–

421.6
642.6
(40.6)
(208.2)
(158.6)

656.8
(116.1)

540.7

532.4
8.3

540.7

(1) Excludes $221.2, $199.1 and $220.1 of Runoff’s gross premiums written, net premiums written and net premiums

earned respectively.

(2) The Runoff segment revenue included $6.8 of the excess of net assets acquired over the purchase price related to the
acquisition of RiverStone Insurance (included in other revenue in the consolidated statements of earnings) as described
in note 23.

(3) Loss on repurchase of long term debt of $40.6 related to the repurchase by Crum & Forster of its unsecured senior notes
($0.8) and the repayment by Runoff of the loan note issued by TIG in connection with its acquisition of General
Fidelity ($39.8). These amounts are reflected in other expenses in the consolidated statement of earnings.

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

2011

Gross premiums written(1)

External

Intercompany

Insurance

Reinsurance

Insurance
and
Reinsurance

Northbridge

U.S.

Asia OdysseyRe

Other

operations Runoff Other

Fairfax

Ongoing

Corporate
and Other

Eliminations
and
adjustments

Consolidated

1,320.6 1,859.0
5.1

2.1

451.2
0.5

2,405.6
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

Underwriting expenses

1,160.2 1,502.0
2.6

(88.0)

213.7
(9.6)

2,001.0
13.7

412.4
92.5

5,289.3
11.2

1,072.2 1,504.6
(1,102.4) (1,720.5)

204.1
(169.7)

2,014.7
(2,350.7)

504.9
(711.6)

5,300.5
(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
(11.4)

113.4
27.3
(19.9)

18.0
5.8
(1.9)

245.5
35.8
(33.6)

49.1
3.6
(7.3)

509.2
98.1
(74.1)

109.4
12.0
(14.9)

Interest and dividends

97.4

120.8

21.9

247.7

45.4

533.2

106.5

Share of profit (loss) of associates

2.8

4.1

(35.6)

11.4

2.0

(15.3)

3.4

Other

Revenue

Expenses

–
–

–

–
–

–

–
–

–

Operating income (loss) before:

Net gains (losses) on investments

Loss on repurchase of long term debt(2)

Interest expense

Corporate overhead and other

70.0
(162.0)
–
–
(38.4)

(91.0)
218.1
(56.5)
(18.3)
(27.9)

20.7
(15.6)
–
–
(5.6)

–
–

–

(76.9)
142.0
(6.1)
(28.9)
(18.4)

–
–

–

–
–

–

126.4 649.8
(263.9) (636.5)

(137.5)

13.3

(159.3)
22.1
–
(4.5)
(4.7)

(236.5)
204.6
(62.6)
(51.7)
(95.0)

(27.6)
388.1
–
(8.9)
–

13.3
–
–
(0.7)
–

–
–

–

–

–
–

–
–

–

–
–

–

–

–
–

–
–

–

–
–
–

–

–

–
–

–

–

–
–

–
–

–

(13.3)
9.9
(4.0)

(7.4)

13.7

73.0
–

73.0

79.3
98.5
(41.6)
(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

–
(84.0)

6,621.0
0.5

(84.0)

6,621.5

–

–
–

–
–

–

–
–
73.0

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

(73.0)
–

776.2
(900.4)

(73.0)

(124.2)

–
–
–
–
–

–

(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 related to the repurchase by Crum & Forster, OdysseyRe and Fairfax of
their unsecured senior notes. This amount is reflected in other expenses in the consolidated statement of earnings.

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 on investments
Other revenue per reportable segment

Total consolidated revenue

104

2012

2011

5,864.8 5,300.5
705.3
1.8
691.2
776.2

409.3
15.0
642.6
1,091.1

8,022.8 7,475.0

Significant Non-cash Items

An analysis of significant non-cash items by reporting segment for the years ended December 31 is shown below:

Share of profit (loss) of associates

Depreciation and impairment loss
of premises & equipment &
amortization of intangible assets

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

2012
(0.3)
(8.3)
15.0
(14.4)
16.6

8.6
(7.6)
0.2
13.8

15.0

2011
2.8
4.1
(35.6)
11.4
2.0

(15.3)
3.4
–
13.7

1.8

2012
10.8
31.2
0.4
9.9
1.6

53.9
1.4
12.2
3.5

71.0

2011
11.0
25.1
0.4
7.7
1.3

45.5
0.9
8.6
4.5

59.5

During 2012, the company acquired a 100% interest in RiverStone Insurance and recorded $6.8 of excess of fair
value of net assets acquired over purchase price, 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

2012

2011

2012

2011

2012

2011

2012

2011

Insurance

– Canada (Northbridge)

153.2

– U.S. (Crum & Forster and Zenith National) 109.3

– Asia (Fairfax Asia)

109.7

76.8

82.2

96.8

–

–

–

–

–

–

–

–

5,436.6

5,324.1

3,882.4

3,769.7

79.5

25.5

8,445.2

8,256.2

6,064.7

5,746.5

1,676.7

1,371.4

1,146.4

913.0

– 11,380.6 10,781.6

7,599.7

7,328.0

–

2,428.2

2,197.2

1,654.8

1,649.1

105.0 29,367.3 27,930.5 20,348.0 19,406.3

–

8,000.5

6,086.6

6,226.6

4,407.8

400.2

173.1

132.8

49.5

905.2

478.4

201.8

123.1

Reinsurance – OdysseyRe

Insurance and Reinsurance – Other

Ongoing operations

Runoff

Other

17.6

–

116.3

24.1

662.2

267.0

261.8

118.4

Corporate and other and eliminations and adjustments

230.7

322.8

–

–

(1,088.8)

(877.2) 1,214.5

1,065.9

Consolidated

1,355.3

924.3

116.3

129.1 36,941.2 33,406.9 28,050.9 24,998.4

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

Product Line

An analysis of revenue by product line for the years ended December 31 is presented below:

Net premiums earned

Insurance

– Canada (Northbridge)

415.4

447.6

481.8

520.0

95.0 104.6

992.2 1,072.2

Property

Casualty

Specialty

Total

2012

2011

2012

2011

2012

2011

2012

2011

– U.S. (Crum & Forster and Zenith National) 150.4

135.9 1,609.3 1,331.5

– Asia (Fairfax Asia)

Reinsurance – OdysseyRe

Insurance and Reinsurance – Other

19.1

1,204.6

282.6

18.1

969.4

237.3

152.3

838.5

166.4

51.9

60.0

37.2 1,811.6 1,504.6

59.8

231.4

204.1

126.2

801.8 272.2 243.5 2,315.3 2,014.7

182.1

65.3

85.5

514.3

504.9

Ongoing operations

Runoff

Total net premiums earned

Interest and dividends

Share of profit of associates

Net gains on investments

Other

Total consolidated revenue

Geographic Region

2,072.1 1,808.3 3,248.3 2,961.6 544.4 530.6 5,864.8 5,300.5

–

–

0.2

1.2 219.9 125.2

220.1

126.4

2,072.1 1,808.3 3,248.5 2,962.8 764.3 655.8 6,084.9 5,426.9

409.3

705.3

15.0

642.6

871.0

1.8

691.2

649.8

8,022.8 7,475.0

An analysis of revenue by geographic region for the years ended December 31 is shown below:

Canada

United States

Asia(1)

International(2)

Total

2012

2011

2012

2011 2012 2011

2012

2011

2012

2011

Net premiums earned

Insurance

– Canada (Northbridge)

969.6

1,031.6

22.5

40.2

– 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 on investments

Other

Total consolidated revenue

–

–

–

0.2

–

–

104.1

85.3

1,811.4

1,504.2

–

–

–

–

231.4

204.1

62.0

1,204.5

965.8

233.9

149.3

95.2

101.1

105.0

54.3

30.2

0.1

0.2

–

772.8

273.6

0.4

0.2

–

992.2

1,072.2

1,811.6

1,504.6

231.4

204.1

837.6

2,315.3

2,014.7

274.5

514.3

504.9

1,159.0

1,188.8

3,139.5

2,615.2

519.6

383.8

1,046.7

1,112.7

5,864.8

5,300.5

–

–

2.9

7.2

–

–

217.2

119.2

220.1

126.4

1,159.0

1,188.8

3,142.4

2,622.4

519.6

383.8

1,263.9

1,231.9

6,084.9

5,426.9

409.3

705.3

15.0

642.6

871.0

1.8

691.2

649.8

8,022.8

7,475.0

Allocation of revenue

19.0% 21.9% 51.6% 48.3% 8.5% 7.1% 20.9% 22.7%

(1) The Asia geographic segment comprises countries located throughout Asia including China, India, the Middle East,

Malaysia, Singapore and Thailand.

(2) The International geographic segment comprises Australia and countries located in Africa, Europe and South America.

106

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 benefits expense (note 27)
Other reporting segment cost of inventories
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)
Information technology costs
Administrative expense and other

2012

2011
4,050.4 4,387.8
895.5
499.6
135.6
93.4
29.2
59.5
57.4
104.2
67.5
144.6

935.8
580.3
135.5
100.9
12.4
71.0
65.5
40.6
65.9
174.1

27. Salaries and Employee Benefits Expense

Salaries and employee benefits expense for the years ended December 31 are comprised of the following:

6,232.4 6,474.3

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)

2012
733.4
138.7
27.5
19.3
15.6
1.3

2011
707.8
130.4
25.1
15.3
14.7
2.2

935.8

895.5

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

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

Subsidiary assets pledged for short sale and derivative obligations:

Cash and balances with banks
Treasury bills and other eligible bills

Deduct: Subsidiary indebtedness - bank overdrafts

December 31,
2012

December 31,
2011

99.9
113.0

212.9

1,381.4
1,175.1

39.6
3.9

43.5

908.3
952.0

2,556.5

1,860.3

4.8
46.3

51.1

(5.2)

6.2
–

6.2

–

Cash, cash equivalents and bank overdrafts included in the consolidated

statements of cash flows

2,815.3

1,910.0

Subsidiary cash and cash equivalents – restricted(1)

Cash and balances with banks
Treasury bills and other eligible bills

Add: Subsidiary indebtedness – bank overdrafts

50.6
121.5

172.1

5.2

48.3
86.4

134.7

–

Cash and cash equivalents included in the consolidated balance sheets

2,992.6

2,044.7

(1) Cash and cash equivalents as presented in the consolidated statements of cash flows excludes balances that are

restricted.

108

Details of certain cash flows included in the consolidated statements of cash flows for the years ended
December 31 are as follows:

(a) Net (purchases) sales of securities classified as at FVTPL

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

(b) Changes in operating assets and liabilities

Net increase in restricted cash and cash equivalents
Provision for losses and loss adjustment expenses
Provision for unearned premiums
Insurance contract receivables
Recoverable from reinsurers
Other receivables
Funds withheld payable to reinsurers
Accounts payable and accrued liabilities
Income taxes payable
Other

(c) Net interest and dividends received

Interest and dividends received
Interest paid

(d) Net income taxes (paid) refund received

(e) Dividends paid

Common share dividends paid
Preferred share dividends paid
Dividends paid to non-controlling interests

2012

2011

(232.7)
2,536.2
(28.9)
(367.6)
(801.3)

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

1,105.7 (1,254.7)

(34.6)
256.2
102.3
130.1
(92.5)
(19.9)
20.8
(170.4)
57.2
(12.7)

(36.0)
347.6
197.8
(220.7)
5.9
(13.6)
(13.8)
260.3
(11.8)
185.5

236.5

701.2

621.0
(187.8)

843.1
(194.4)

433.2

648.7

(69.2)

82.4

(205.8)
(60.5)
(6.7)

(205.9)
(51.5)
–

(273.0)

(257.4)

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

2012
7.6
0.9

8.5

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

2012
0.9
0.3

1.2

2011
5.4
0.9

6.3

2011
0.9
0.2

1.1

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.

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

(This page is intentionally left blank)

110

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 . . . . . . . . . 112
Overview of Consolidated Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113
Business Developments and Operating Environment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113
Sources of Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115
Sources of Net Earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120
Net Earnings by Reporting Segment
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123
Balance Sheets by Reporting Segment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124
Components of Net Earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127
Underwriting and Operating Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127
Interest and Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 148
Net Gains on Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 148
Interest Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149
Corporate Overhead and Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149
Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150
Non-controlling Interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150
Components of Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150
Consolidated Balance Sheet Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150
Provision for Losses and Loss Adjustment Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153
Asbestos and Pollution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 166
Recoverable from Reinsurers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 174
Interest and Dividend Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175
Net Gains (Losses) on Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 177
Total Return on the Investment Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 178
Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180
Common Stocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 181
Derivatives and Derivative Counterparties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 182
Float . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 183
Financial Condition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185
Capital Resources and Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185
Book Value per Share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 187
Liquidity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 188
Contractual Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 190
Lawsuit Seeking Class Action Status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 190
Accounting and Disclosure Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 191
Management’s Evaluation of Disclosure Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 191
Management’s Report on Internal Control Over Financial Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 191
Critical Accounting Estimates and Judgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 192
Significant Accounting Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 192
Future Accounting Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 192
Risk Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 194
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 194
Issues and Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 194
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 203
Quarterly Data (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 203
Stock Prices and Share Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 203
Compliance with Corporate Governance Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 204
Forward-Looking Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 204

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

Management’s Discussion and Analysis of Financial Condition and Results of Operations

(as of March 8, 2013)

(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. Addi-
tional 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) 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, descrip-
tions have been provided in the commentary as to the nature of the adjustments made.

(3)

(4)

(5)

The combined ratio is the traditional measure of underwriting results of property and casualty compa-
nies. 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 expressed 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 acci-
dent years).

“Interest and dividends” in this MD&A is derived from the consolidated statement of earnings prepared
in accordance with IFRS as issued by the IASB and is comprised of the sum of interest and dividends and
share of profit (loss) of associates. “Consolidated interest and dividend income” in this MD&A refers to
interest and dividends as presented in the consolidated statement of earnings.

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 “total return swap expense” refers to the net divi-
dends and interest paid or received related to the company’s long and short equity and equity index
total return swaps.

(6) Additional 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.

(7) 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.

(8)

Intercompany shareholdings are presented as ‘Investments in Fairfax affiliates’ on the segmented bal-
ance sheets and carried at cost.

(9) References in this MD&A to the company’s insurance and reinsurance operations do not include its

runoff operations.

112

Overview of Consolidated Performance

The combined ratio of the insurance and reinsurance operations in 2012 was 99.8% producing an underwriting
profit of $11.6, compared to a combined ratio of 114.2% producing an underwriting loss of $754.4 in 2011. In
2012, the underwriting results benefited from increased net favourable development of prior years’ reserves.
Underwriting results in 2011 were negatively affected by over $1 billion of catastrophe losses (19.3 combined ratio
points). Net premiums written by the insurance and reinsurance operations increased by 9.2% to $5,995.0 in 2012
compared to $5,487.6 in 2011 (an increase of 7.4% excluding the acquisitions of First Mercury and Pacific
Insurance). Operating income of the insurance and reinsurance operations (excluding net gains on investments)
was $304.0 in 2012 compared to an operating loss of $236.5 in 2011 primarily as a result of lower underwriting
losses as described above.

Consolidated interest and dividend income decreased to $409.3 in 2012 from $705.3 in 2011. The decrease primar-
ily reflected sales during 2011 and 2012 of higher yielding government bonds (principally U.S. treasury and
Canadian government bonds), the proceeds of which were reinvested into lower yielding cash and short term
investments and common stocks and higher total return swap expense of $204.9 in 2012 compared to $140.3 in
2011. As of December 31, 2012, subsidiary cash and short term investments accounted for 29.3% of the compa-
ny’s portfolio investments. Net gains on investments in 2012 of $642.6 were primarily comprised of $728.1 of net
gains on bonds and $113.2 of net gains related to equity and equity-related holdings after equity hedges, partially
offset by $129.2 of unrealized losses on CPI-linked derivatives.

The company held $1,169.2 of cash and investments at the holding company level ($1,128.0 net of $41.2 of hold-
ing company short sale and derivative obligations) at December 31, 2012 compared to $1,026.7 ($962.8 net of
$63.9 of holding company short sale and derivative obligations) at December 31, 2011. The company’s con-
solidated total debt to total capital ratio decreased to 25.5% at December 31, 2012 from 26.4% at December 31,
2011. At December 31, 2012, common shareholders’ equity was $7,654.7 or $378.10 per basic share compared to
$7,427.9 or $364.55 per basic share, at December 31, 2011 (an increase of 6.5% (adjusted for the $10 per common
share dividend paid in the first quarter of 2012)).

Business Developments

Acquisitions and divestitures

Subsequent to December 31, 2012

On February 5, 2013, Thomas Cook (India) Limited (“Thomas Cook India”) entered into an agreement to acquire
a 74% interest in IKYA Human Capital Solutions Private Limited (“IKYA”) for purchase consideration of approx-
imately $47 (2,560 million Indian rupees). Thomas Cook India will finance the purchase consideration through a
private placement of its common shares to qualified institutional buyers (other than existing shareholders of
Thomas Cook India). These transactions are expected to close in the second quarter of 2013, subject to approval
by Thomas Cook India shareholders, customary closing conditions and regulatory approvals as required. The
assets and liabilities and results of operations of IKYA will be consolidated in the Other reporting segment. IKYA
provides specialized human resources services to leading corporate clients in India.

Year ended December 31, 2012

On December 10, 2012, the company sold all of its ownership interest in Cunningham Lindsey for net cash pro-
ceeds of $270.6 and recognized a net gain on investment of $167.0 (including amounts previously recorded in
accumulated other comprehensive income). Subsequent to the closing of this transaction, the company invested
$34.4 in preferred shares of Cunningham Lindsey to become a 9.1% minority shareholder.

On November 28, 2012, Ridley Inc. (“Ridley”) acquired the assets and certain liabilities of Stockade Brands Inc. (a
manufacturer of animal feed products) for $5.7. On November 30, 2012, Ridley and Masterfeeds Inc. contributed
the net assets of their respective Canadian feed businesses to a newly formed limited partnership (Masterfeeds
LP). The net assets contributed by Ridley were valued at $25.4 for which Ridley received a 30% interest in Master-
feeds LP. The company records its investment in Masterfeeds LP using the equity method of accounting.

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

On October 12, 2012, the company’s UK runoff subsidiary, RiverStone Holdings Limited, completed the acquis-
ition of a 100% interest in Brit Insurance Limited (renamed RiverStone Insurance Limited (“RiverStone
Insurance”) on October 15, 2012) for cash purchase consideration of $335.1 (208.3 British pound sterling). At the
date of acquisition, the fair values of the portfolio investments (including cash and short term investments),
insurance contract liabilities and recoverable from reinsurers of RiverStone Insurance were $1,308.2, $1,833.7 and
$883.4 respectively. The assets and liabilities and results of operations of RiverStone Insurance were consolidated
within the company’s financial reporting in the Runoff reporting segment. RiverStone Insurance is located in
London, England and wrote U.K. domestic and international insurance and reinsurance business prior to being
placed into runoff early in 2012.

On August 14, 2012, the company acquired an 87.1% interest in Thomas Cook India for cash purchase consid-
eration of $172.7 (9,626 million Indian rupees). The assets and liabilities and results of operations of Thomas
Cook India were consolidated within the company’s financial reporting in the Other reporting segment. Thomas
Cook India is the largest integrated travel and travel related financial services company in India, offering a broad
range of services that include foreign exchange, corporate and leisure travel and insurance.

On March 19, 2012, the company completed the acquisition of 21.2% of the issued and outstanding shares of
Thai Reinsurance Public Company Limited (“Thai Re”), for cash consideration of approximately $77.0, increasing
the company’s ownership interest to 23.2%. Subsequent to making its investment, the company determined that
it had obtained significant influence over Thai Re and commenced recording its investment in the common
shares of Thai Re using the equity method of accounting on a prospective basis. Thai Re is headquartered in
Bangkok, Thailand and provides reinsurance coverage for property, casualty, engineering, marine and life
customers primarily in Thailand.

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 aggregate net cash consideration of $56.7 (Cdn$57.7).
The assets and liabilities and results of operations of Prime Restaurants since acquisition were consolidated within
the company’s financial reporting in the Other reporting segment. Prime Restaurants franchises, owns and oper-
ates a network of casual dining restaurants and pubs in Canada.

Year ended December 31, 2011

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 16, 2011, the company completed the acquisition of all of the assets and assumed certain liabilities
associated with the businesses of William Ashley China Corporation (“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 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 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 commercial insurance products,
principally on an excess and surplus lines basis, focusing on niche and underserved segments. The results of oper-
ations 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 $33.1 at
December 31, 2012) in the Runoff reporting segment following the transfer of ownership of Valiant Insurance
from Crum & Forster to TIG Group.

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.

114

Operating Environment

Insurance Environment

The improvement in the underwriting results of the property and casualty insurance and reinsurance industry in
2012 was largely driven by lower catastrophe losses throughout most of the year, offset by the effect of Hurricane
Sandy in the fourth quarter - potentially the second largest insured catastrophe loss in U.S. history. Insurers and
reinsurers continued to benefit from favourable reserve development while current accident year loss ratios are
expected to improve slightly relative to 2011 after adjusting for catastrophe losses. Overall results continue to be
negatively impacted by underwriting losses, historically low interest rates and a challenging macroeconomic envi-
ronment with diminishing growth in both developed and developing economies. The stock market rebound in
2012 in the U.S. and Canada and modestly lower interest rates have provided some opportunity for capital gains
on stocks and bonds. Insurance pricing continued to improve in 2012, broadening across more lines of business
and compounding on price increases that began in 2011. Earned rate increases throughout 2013 are expected to
exceed loss trends and should result in improved accident year combined ratios in 2013. Pricing appears to be
primarily driven by the historically low interest rate environment and the expectation that favourable reserve
development will diminish in the future combined with the ongoing excess capacity in the insurance industry.
Workers’ compensation and other loss-affected lines of business continued to show significant pricing improve-
ments in 2012. The combined effect of underwriting losses, lower favourable reserve development and historically
low interest rates will likely continue to put pressure on rates to rise in 2013. 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
economic environment.

The underwriting performance of the global reinsurance industry in 2012 improved significantly compared to the
catastrophe driven underwriting losses incurred in 2011. Above average catastrophe losses combined with decreas-
ing favourable reserve development and pressure on investment returns lead to marginal price increases in 2012
with pricing varying by region and by line of business based on the extent of catastrophe exposure. Reinsurance
pricing is expected to remain competitive in 2013 reflecting strong insurer and reinsurer capital levels, increased
retentions by insurers and alternate forms of reinsurance provided by the capital markets.

Sources of Revenue

Revenue for the most recent three years ended December 31, are shown in the table that follows. Other revenue
comprises the revenue earned by Ridley, William Ashley, Sporting Life, Prime Restaurants and Thomas Cook India
since their respective acquisition dates.

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
Other revenue

2012

2011

2010

992.2
1,811.6
231.4
2,315.3
514.3
220.1

6,084.9
424.3
642.6
871.0

1,072.2
1,504.6
204.1
2,014.7
504.9
126.4

5,426.9
707.1
691.2
649.8

996.6
1,000.1
155.0
1,885.5
536.0
7.4

4,580.6
757.5
(3.0)
632.2

8,022.8

7,475.0

5,967.3

Revenue of $8,022.8 in 2012 increased significantly from revenue of $7,475.0 in 2011 reflecting growth in net
premiums earned and increased other revenue, partially offset by lower interest and dividend income and a
decrease in net gains on investments. Revenue in 2012 also included the benefit of the $6.8 excess of the fair
value of net assets acquired over the purchase price recorded by Runoff related to the acquisition of RiverStone
Insurance (presented in Other revenue in the table above).

115

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 growth in consolidated net premiums earned of 12.1% in 2012 ($6,084.9 in 2012 compared to $5,426.9 in
2011) principally reflected the consolidation of the net premiums earned by First Mercury and Pacific Insurance
(year-over-year increases of $122.8 and $13.6 respectively) and the year-over-year increases in net premiums
earned by OdysseyRe ($300.6, 14.9%), Zenith National ($101.2, 20.4%), Crum & Forster ($83.0, 10.3% excluding
the impact of the consolidation of First Mercury), Fairfax Asia ($13.7, 7.9% excluding the impact of the con-
solidation of Pacific Insurance) and Insurance and Reinsurance – Other ($9.4, 1.9%), partially offset by a decrease
at Northbridge ($80.0, 7.5% including the unfavourable effect of foreign currency translation). In 2012, the Eagle
Star reinsurance transaction and the consolidation of RiverStone Insurance increased the net premiums earned by
Runoff by $183.5 and $30.1 respectively, compared to the reinsurance-to-close of Syndicate 376 which added
$119.6 to the net premiums earned by Runoff in 2011. These transactions (which are not expected to impact net
premiums earned in future periods) are described in greater detail in the Runoff section of this MD&A.

Revenue of $7,475.0 in 2011 increased from revenue of $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 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 General Fidel-
ity Insurance Company (“General Fidelity”) (presented in Other revenue in the table above). The growth in con-
solidated net premiums earned in 2011 of 18.5% ($5,426.9 in 2011 compared to $4,580.6 in 2010) principally
reflected the consolidation of the net premiums earned by Zenith National (net year-over-year increase 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), 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 pre-
miums earned by Insurance and Reinsurance – Other ($1.0, 0.2% excluding $30.1 of reinsurance-to-close pre-
miums received by Advent in 2010).

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 economy on
insured customers, the company’s insurance and reinsurance operations achieved growth in gross premiums writ-
ten and net premiums written in 2012 as shown in the following table. Prior to giving effect to the acquisitions of
First Mercury and Pacific Insurance, gross premiums written and net premiums written by the company’s
insurance and reinsurance operations increased by 7.5% and 7.4% respectively, in 2012 compared to 2011.

Insurance and reinsurance
operations – as reported

First Mercury
Pacific Insurance

Insurance and reinsurance
operations – as adjusted

2012

2011

Gross
premiums
written

Net
premiums
written

Net
premiums
earned

Gross
premiums
written

Net
premiums
written

Net
premiums
earned

7,297.5
(407.8)
(67.9)

5,995.0
(351.2)
(43.8)

5,864.8
(328.2)
(44.0)

6,705.5
(306.0)
(51.9)

5,487.6
(237.8)
(34.9)

5,300.5
(205.4)
(30.4)

6,821.8

5,600.0

5,492.6

6,347.6

5,214.9

5,064.7

Percentage change (year-over-year)

7.5%

7.4%

8.4%

The tables which follow present net premiums written by the company’s insurance and reinsurance operations in
2012 and 2011 (“as reported”) and, in order to better compare the results of 2012 and 2011, the same excluding
First Mercury and Pacific Insurance which were acquired during the first quarter of 2011, Northbridge after giving
effect as of January 1, 2011, to the sale of the renewal rights to its U.S. property business to OdysseyRe, OdysseyRe
after giving effect as of January 1, 2011, to the purchase of the renewal rights to Northbridge’s U.S. property busi-
ness and the portfolio transfer of unearned premium from Group Re to Northbridge ($42.3) in the first quarter of
2011 (“as adjusted”). The intercompany transfer of the renewal rights to Northbridge’s U.S. property business is
described in the Northbridge section of this MD&A. The portfolio transfer of unearned premium from Group Re

116

to Northbridge decreased premiums ceded to reinsurers at Northbridge, decreased net premiums written at Group
Re and had no impact on consolidated net premiums written. The “as adjusted” table shows year-over-year
increases in net premiums written of 7.4% in 2012.

Net premiums written – as reported

Insurance

– Canada (Northbridge)
– U.S. (Crum & Forster and Zenith National)
– Asia (Fairfax Asia)

Reinsurance – OdysseyRe
Insurance and Reinsurance – Other

2012
948.7
1,872.8
240.6
2,402.3
530.6

2011
1,098.5
1,601.1
213.7
2,089.7
484.6

% change
year-over-
year
(13.6)
17.0
12.6
15.0
9.5

Insurance and reinsurance operations

5,995.0

5,487.6

9.2

Net premiums written – as adjusted

Insurance

– Canada (Northbridge)
– U.S. (Crum & Forster and Zenith National)
– Asia (Fairfax Asia)

Reinsurance – OdysseyRe
Insurance and Reinsurance – Other

2012
940.9
1,521.6
196.8
2,410.1
530.6

2011
1,013.4
1,363.3
178.8
2,132.5
526.9

% change
year-over-
year
(7.2)
11.6
10.1
13.0
0.7

Insurance and reinsurance operations

5,600.0

5,214.9

7.4

Northbridge’s net premiums written decreased 7.2% (6.1% in Canadian dollar terms) primarily as a result of lower
retentions of existing business and the unfavourable effect of foreign currency translation, partially offset by
modest increases in pricing and new business in certain segments. Net premiums written by U.S. Insurance
increased by 11.6% in 2012 compared to 2011, comprised of increases of 7.5% and 18.2% at Crum & Forster and
Zenith National respectively. The increase in net premiums written by Crum & Forster principally reflected
growth in specialty lines of business. The increase in net premiums written by Zenith National reflected premium
rate increases, strong renewal retention and the ability to write new business. Net premiums written by Fairfax
Asia increased by 10.1% primarily as a result of increased writings of property and engineering lines of business at
First Capital. OdysseyRe’s net premiums written increased 13.0% primarily as a result of two new quota share
reinsurance contracts (related to property risks in Florida and multiline risks in Brazil), growth in U.S. crop and
umbrella lines of business, partially offset by planned decreases in writings of U.S. healthcare and casualty lines of
business and lower reinstatement premiums received on a year-over-year basis. Net premiums written by the
Insurance and Reinsurance – Other reporting segment increased by 0.7% comprised of increased net premiums
written by Fairfax Brasil and Polish Re, partially offset by lower net premiums written by Advent and Group Re.

Consolidated interest and dividend income decreased from $705.3 in 2011 to $409.3 in 2012 primarily as a result
of the combined effects of sales during 2011 and 2012 of higher yielding government bonds (principally U.S.
treasury and Canadian government bonds), the proceeds of which were reinvested into lower yielding cash and
short term investments and common stocks. Total return swap expense (a component of interest and dividend
income) was higher in 2012 compared to 2011 ($204.9 in 2012 compared to $140.3 in 2011) due to increased
dividends payable (primarily the dividend payable on the Russell 2000 exchange traded fund) and higher average
notional amounts of short positions effected through total return swaps on a year-over-year basis.

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

The share of profit of associates increased from $1.8 in 2011 to $15.0 in 2012. The share of profit of associates in
2012 included an $18.8 share of the net loss of Fibrek (principally comprised of an impairment charge), a $22.0
share of the net loss of Thai Re (principally comprised of net reserve strengthening related to the Thailand floods)
and a $12.9 share of the profit of ICICI Lombard. The share of profit of associates in 2011 included a $36.1 share
of the net loss of ICICI Lombard. The net earnings of ICICI Lombard in 2011 were adversely affected by reserve
strengthening related to its mandatory pro-rata participation in the Indian commercial vehicle insurance pool,
partially offset by net mark-to-market gains on the ICICI Lombard investment portfolio.

Net gains on investments in 2012 and 2011 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

Equity hedges

Equity and equity-related holdings after equity hedges

Bonds
Preferred stocks
CPI-linked derivatives
Other derivatives
Foreign currency
Other

Net gains on investments

Net gains (losses) on bonds is comprised as follows:

Government bonds
U.S. states and municipalities
Corporate and other

2012
697.6
(36.2)
186.7
196.8
73.8

2011
(774.8)
(5.2)
23.5
7.0
(43.3)

1,118.7
(1,005.5)

(792.8)
413.9

113.2
(378.9)
728.1 1,278.7
(1.9)
(233.9)
49.4
(34.4)
12.2

(0.3)
(129.2)
3.4
(76.2)
3.6

642.6

691.2

92.7
552.7
82.7

753.1
642.7
(117.1)

728.1 1,278.7

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. The company’s economic equity hedges are structured to pro-
vide a return which is inverse to changes in the fair values of the Russell 2000 index, the S&P 500 index, the S&P/
TSX 60 index, other equity indexes and certain individual equity securities. The company’s equity and equity-
related holdings after hedges produced a net gain of $113.2 in 2012 compared to a net loss of $378.9 in 2011. At
December 31, 2012, equity hedges with a notional amount of $7,668.5 ($7,135.2 at December 31, 2011) repre-
sented 100.6% (104.6% at December 31, 2011) of the company’s equity and equity-related holdings of $7,626.5
($6,822.7 at December 31, 2011). Refer to “Market Price Fluctuations” in note 24 (Financial Risk Management) to
the company’s consolidated financial statements for the year ended December 31, 2012, for a tabular analysis
followed by a discussion of the company’s hedges of equity price risk and the related basis risk and to the tabular
analysis in the Investments section of this MD&A for further details about the components of net gains (losses) on
investments. The gain on disposition of associate of $196.8 in 2012 reflected gains of $167.0 and $29.8 recognized
on the sale of the company’s investments in Cunningham Lindsey and Fibrek respectively.

Net gains on bonds of $728.1 in 2012 (2011 – $1,278.7) were primarily comprised of a combination of realized
and net mark-to-market gains on U.S. state and municipal government bonds, realized gains on U.S. government
bonds and net mark-to-market gains on other government bonds.

118

The company’s CPI-linked derivative contracts produced unrealized losses of $129.2 in 2012 (2011 - $233.9). The
unrealized losses on the CPI-linked derivative contracts were primarily 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).

Other revenue increased from $649.8 in 2011 to $871.0 in 2012. Other revenue attributable to Ridley was $670.8
in 2012 ($635.0 in 2011) with the balance comprised of the revenue of William Ashley, Sporting Life, Prime
Restaurants and Thomas Cook India since their respective acquisition dates and also included the $6.8 excess of
fair value of net assets acquired over purchase price related to the acquisition of RiverStone Insurance.

Net premiums earned by geographic region

As presented in note 25 (Segmented Information) to the consolidated financial statements for the year ended
December 31, 2012, on the basis of geographic regions, the United States, International, Canada and Asia
accounted for 51.6%, 20.9%, 19.0% and 8.5% respectively, of net premiums earned in 2012 compared to 48.3%,
22.7%, 21.9% and 7.1% respectively, of net premiums earned in 2011. Net premiums earned in 2012 increased in
the Asia (35.4%), United States (19.8%) and International (2.6%) geographic regions, partially offset by a decrease
in the Canada geographic region (2.5% – measured in U.S. dollars) compared with 2011.

Canada

Net premiums earned in the Canada geographic region decreased by 2.5% from $1,188.8 in 2011 to $1,159.0 in
2012 primarily as a result of lower retentions of existing business (Northbridge) and the unfavourable effect of the
strengthening of the U.S. dollar relative to the Canadian dollar as measured by average annual rates of exchange
(Northbridge and OdysseyRe), partially offset by increased net premiums earned in commercial property
reinsurance (OdysseyRe) and modest increases in pricing and new business in certain segments (Northbridge).

United States

Net premiums earned in the United States geographic region increased by 19.8% from $2,622.4 in 2011 to
$3,142.4 in 2012 reflecting a significant new property quota share reinsurance contract and growth in U.S. crop
and umbrella lines of business (OdysseyRe), growth in specialty lines of business (Crum & Forster) and workers’
compensation lines of business (Zenith National). A significant portion of Crum & Forster’s growth related to the
year-over-year impact of the consolidation of the net premiums earned by First Mercury, including premiums
produced by First Mercury’s managing general agency business which were retained by Crum & Forster in 2012
(in the prior year this business was primarily produced on behalf of insurance carriers outside of the Fairfax
group). Zenith National’s growth reflected premium rate increases, strong renewal retention and the ability to
write new business.

Asia

Net premiums earned in the Asia geographic region increased by 35.4% from $383.8 in 2011 to $519.6 in 2012
primarily reflecting increases at OdysseyRe’s Singapore Branch related to renewal price increases on Japanese
property catastrophe reinsurance and organic growth in China and increased writings of property and engineer-
ing lines of business at First Capital.

International

Net premiums earned in the International geographic region increased by 2.6% from $1,231.9 in 2011 to $1,263.9
in 2012 primarily as a result of the year-over-year increase in net premiums earned at Runoff and growth across
most lines of business at Fairfax Brasil, partially offset by decreases at OdysseyRe in automobile insurance in its
London Market division and planned reductions in casualty reinsurance in Europe and Latin America. At Runoff,
the Eagle Star reinsurance transaction and the acquisition of RiverStone Insurance added $183.5 and $30.1 to net
premiums earned in 2012 compared to the reinsurance-to-close of Syndicate 376 in 2011 which added $119.6 to
net premiums earned.

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

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 runoff operations, as well as the earnings contributions from
the Other reporting segment for the years ended December 31, 2012, 2011 and 2010. In that table, interest and
dividends and net gains (losses) on investments in the consolidated statements of earnings are broken out sepa-
rately as they relate to the insurance and reinsurance operating results, and included in Runoff, Corporate over-
head and other and Other as they relate to those 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 on repurchase of long term debt
Runoff(1)
Other
Interest expense
Corporate overhead and other

Pre-tax income (loss)
Income taxes

Net earnings

Attributable to:

Shareholders of Fairfax
Non-controlling interests

2012

2011

2010

105.7%
111.4%
87.0%
88.5%
104.3%

102.8%
114.3%
83.2%
116.7%
140.9%

106.9%
116.5%
89.3%
95.0%
107.2%

99.8%

114.2%

103.5%

(57.0)
(206.3)
30.1
266.6
(21.8)

11.6
292.4

304.0
587.3
(40.6)
231.3
39.2
(208.2)
(256.2)

656.8
(116.1)

540.7

532.4
8.3

540.7

(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

Net earnings (loss) per share
Net earnings (loss) per diluted share
Cash dividends paid per share

$ 23.22
$ 22.94
$ 10.00

$ (0.31)
$ (0.31)
$ 10.00

$ 14.90
$ 14.82
$ 10.00

(1) The Runoff segment in 2012 and 2010 includes $6.8 and $83.1 of the excess of the fair value of net assets acquired

over the purchase price related to the acquisitions of RiverStone Insurance and General Fidelity respectively.

120

The company’s insurance and reinsurance operations reported an underwriting profit of $11.6 and combined
ratio of 99.8% in 2012 respectively, compared to an underwriting loss of $754.4 and combined ratio of 114.2% in
2011 respectively. The following table presents the components of the company’s combined ratios for the years
ended December 31, 2012 and 2011:

Underwriting profit (loss)

Loss & LAE – accident year
Commissions
Underwriting expense

Combined ratio – accident year
Net favourable development

Combined ratio – calendar year

2012
11.6

72.2%
15.6%
15.0%

2011
(754.4)

84.8%
15.0%
16.1%

102.8%
(3.0)%

115.9%
(1.7)%

99.8%

114.2%

The substantial reduction in catastrophe losses and increased net favourable development of prior years’ reserves
contributed to the significant improvement in the underwriting performance of the company’s insurance and
reinsurance operations in 2012 compared to 2011. Current period catastrophe losses (net of reinstatement pre-
miums) reflected in the underwriting profit (loss) of the company in the years ended December 31, 2012 and
2011, were comprised as follows:

2012

2011

Catastrophe
losses(1)
261.2
–
–
–
–
–
148.6

Combined
ratio impact
4.5
–
–
–
–
–
2.5

Catastrophe
losses(1)
–
470.2
201.7
62.8
70.0
31.3
184.8

Combined
ratio impact
–
8.8
3.8
1.2
1.3
0.6
3.6

409.8

7.0 points

1,020.8

19.3 points

Hurricane Sandy
Japan earthquake and tsunami
Thailand floods
New Zealand (Christchurch) earthquake
U.S. tornadoes
Hurricane Irene
Other

(1) Net of reinstatement premiums.

The underwriting results of the company’s insurance and reinsurance operations in 2012 included 3.0 combined
ratio points ($177.4) of net favourable development of prior years’ reserves primarily at OdysseyRe ($152.0),
Northbridge ($60.8), Advent ($24.5) and Fairfax Asia ($16.4), partially offset by net adverse development at
Crum & Forster ($54.0) and Polish Re ($18.8). The underwriting results of the company’s insurance and
reinsurance operations in 2011 included 1.7 combined ratio points ($89.4) of net favourable development of prior
years’ reserves principally at OdysseyRe ($51.4), Northbridge ($39.6), Advent ($38.9) and Fairfax Asia ($20.4),
partially offset by net adverse development at Crum & Forster ($37.3) and Zenith National ($24.5).

The company’s insurance and reinsurance operations reported an expense ratio of 15.0% in 2012 compared to an
expense ratio of 16.1% in 2011. The expense ratio in 2012 benefited from a 10.6% increase in net premiums
earned, partially offset by a 3.1% increase in operating expenses. Increased operating expenses of the insurance
and reinsurance operations in 2012 primarily reflected a sales tax adjustment (Northbridge), increased operating
expenses at First Capital commensurate with its growth (Fairfax Asia) and increased personnel and infrastructure-
related expenses (OdysseyRe). Operating expenses in 2012 also reflected a year-over-year increase resulting from
the consolidation of the operating expenses of First Mercury and Pacific Insurance and the benefit recognized in
2011 from the curtailment of certain post retirement benefits (Northbridge), partially offset by lower IT and other
miscellaneous expenses (Northbridge). The commission expense ratio of 15.6% in 2012, increased modestly rela-
tive to the commission expense ratio of 15.0% in 2011, primarily due to a shift in the mix of premiums written
towards business carrying higher commissions (principally at Northbridge, Crum & Forster and OdysseyRe).

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

Operating expenses in the consolidated statements of earnings include only the operating expenses of the compa-
ny’s insurance and reinsurance and runoff operations and corporate overhead. Operating expenses of $1,120.3 in
2012 decreased from $1,148.3 in 2011 primarily as a result of decreased holding company and subsidiary holding
companies corporate overhead (refer to the Corporate Overhead and Other section of this MD&A for further
details related to corporate overhead) and decreased operating expenses at Runoff (primarily related to the release
of a provision following the favourable resolution of a dispute with a taxation authority related to value added
tax), partially offset by the factors described in the preceding paragraph which increased the operating expenses
of the insurance and reinsurance operations in 2012.

Other expenses of $869.5 and $740.7 in 2012 and 2011 respectively, comprise the operating and other costs of
Ridley, William Ashley, Sporting Life, Prime Restaurants and Thomas Cook India since their respective acquisition
dates. Other expenses in 2012 also included net losses related to the repayment of the TIG Note ($39.8) and the
repurchase of Crum & Forster unsecured senior notes ($0.8). Other expenses in 2011 included a net loss related to
the repurchase of Fairfax, Crum & Forster and OdysseyRe unsecured senior notes ($104.2). The aforementioned
TIG Note and unsecured senior notes are described in note 15 (Subsidiary Indebtedness, Long Term Debt and
Credit Facilities) to the consolidated financial statements for the year ended December 31, 2012.

Net earnings attributable to shareholders of Fairfax increased to $532.4 ($23.22 per basic and $22.94 per diluted
share) in 2012, from $45.1 ($0.31 net loss per basic and diluted share) in 2011. The year-over-year increase in net
earnings attributable to shareholders of Fairfax was primarily due improved underwriting results (reflecting lower
current period catastrophe losses and increased net favourable development of prior years’ reserves), lower hold-
ing company and subsidiary company corporate overhead expenses and decreased losses on repurchase of long
term debt, partially offset by lower net gains on investments, decreased interest and dividend income and the
year-over-year increase in provision for income taxes.

Common shareholders’ equity at December 31, 2012 of $7,654.7 or $378.10 per basic share increased from
$7,427.9 or $364.55 per basic share at December 31, 2011, representing an increase per basic share of 3.7%
(without adjustment for the $10.00 per common share dividend paid in the first quarter of 2012, or an increase of
6.5% adjusted to include that dividend). The increase in common shareholders’ equity in 2012, primarily
reflected net earnings attributable to shareholders of Fairfax ($532.4) and the effect of increased accumulated
other comprehensive income (an increase of $28.0 primarily related to foreign currency translation), partially
offset by payments of common and preferred share dividends ($266.3), the recognition of actuarial losses on
defined benefit plans (including those of its associates) in retained earnings ($32.8) and net repurchases of sub-
ordinate voting shares for treasury ($48.4).

122

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, 2012 and 2011. The intercompany adjustment for gross premiums written eliminates premiums on
reinsurance ceded within the group, primarily to OdysseyRe and Group Re.

Year ended December 31, 2012

Insurance

Reinsurance

Insurance
and
Reinsurance

Northbridge

U.S.

Fairfax
Asia

OdysseyRe

Other

operations Runoff Other

Ongoing

Inter-
company

Corporate
and other Consolidated

Gross premiums written

1,194.3 2,163.2

515.2

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

Runoff

Other

Interest expense

948.7 1,872.8

240.6

992.2 1,811.6

231.4

(57.0)

(206.3)

41.5

49.6

(15.5)

(156.7)

(63.1)

147.3

30.1

36.2

66.3

0.3

–

–

–

–

(0.8)

–

–

(5.7)

–

–

–

–

–

7,297.5

221.2

5,995.0

199.1

5,864.8

220.1

11.6

292.4

304.0

587.3

–

–

–

215.8

(0.8)

(39.8)

2,773.2

2,402.3

2,315.3

266.6

127.5

394.1

267.2

–

–

–

(27.7)

(23.1)

610.5

651.6

530.6

514.3

(21.8)

37.6

15.8

235.6

–

–

–

(4.5)

(0.4)

–

–

(37.9)

(63.9)

15.5

–

39.2

(7.5)

(2.2)

–

–

246.5

788.7

184.0

37.0

Corporate overhead and other

(17.2)

(23.2)

(95.8)

(39.1)

66.6

Pre-tax income (loss)

Income taxes

Net earnings

Attributable to:

Shareholders of Fairfax

Non-controlling interests

Year ended December 31, 2011

Insurance

Reinsurance

Insurance
and
Reinsurance

Northbridge

U.S.

Fairfax
Asia

OdysseyRe

Other

operations Runoff Other

Ongoing

Inter-
company

Corporate
and other Consolidated

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

Runoff

Other

Interest expense

1,322.7 1,864.1

451.7

1,098.5 1,601.1

213.7

1,072.2 1,504.6

204.1

(30.2)

(215.9)

34.4

100.2

124.9

(13.7)

70.0

(91.0)

20.7

(162.0)

218.1

(15.6)

–

–

–

–

(56.5)

–

–

(18.3)

(27.9)

–

–

–

–

(5.6)

2,420.7

2,089.7

2,014.7

(336.0)

259.1

(76.9)

142.0

(6.1)

–

–

(28.9)

(18.4)

646.3

484.6

504.9

(206.7)

47.4

6,705.5

122.0

5,487.6

120.3

5,300.5

126.4

(754.4)

517.9

–

–

–

(159.3)

(236.5)

22.1

204.6

388.1

–

–

–

(4.5)

(4.7)

(62.6)

–

–

(51.7)

(95.0)

–

(27.6)

–

13.3

(8.9)

(0.7)

–

–

Corporate overhead and other

(38.4)

(130.4)

24.4

(0.5)

11.7

(146.4)

(241.2)

351.6

12.6

Pre-tax income (loss)

Income taxes

Net earnings

Attributable to:

Shareholders of Fairfax

Non-controlling interests

123

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

(120.4)

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

(160.6)

(192.3)

(352.9)

7,398.3

6,194.1

6,084.9

11.6

292.4

304.0

803.1

(40.6)

15.5

39.2

(208.2)

(256.2)

656.8

(116.1)

540.7

532.4

8.3

540.7

(84.0)

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

(41.6)

–

–

(152.7)

62.6

(131.7)

6,743.5

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

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, 2012 and 2011 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 and
is prepared in accordance with IFRS and Fairfax’s accounting policies and include, where applicable,
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 Odys-
seyRe 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 $2,377.7 as at
December 31, 2012 ($2,241.9 at December 31, 2011) consisted of Fairfax debt of $2,220.2 ($2,080.6 at
December 31, 2011) and other long term obligations, comprised of the purchase consideration payable
of $148.4 ($152.2 at December 31, 2011) related to the TRG acquisition and TIG trust preferred securities
of $9.1 ($9.1 at December 31, 2011).

124

Segmented Balance Sheet as at December 31, 2012

Insurance

Reinsurance

Insurance
and
Reinsurance

Northbridge

U.S.

Fairfax
Asia

OdysseyRe

Other

Operating
Companies Runoff Other

Corporate
and Other Consolidated

Assets

Holding company cash and investments

43.2

16.8

–

Insurance contract receivables

292.2

396.1

101.4

310.1

741.6

–

370.1

–

177.2

1,708.5

244.9

–

–

Portfolio investments

3,378.3 5,214.2

972.8

8,569.8

1,870.7

20,005.8 4,938.3

105.8

Deferred premium acquisition costs

104.4

101.4

23.8

Recoverable from reinsurers

982.5 1,630.5

507.2

799.1

(8.0)

113.3

(14.6)

1,169.2

1,945.4

25,163.2

463.1

(1,172.8)

5,290.8

66.7

157.3

225.4

622.4

129.7

0.4

179.5

209.0

34.7

97.1

–

30.8

5.9

34.8

–

201.6

984.9

93.5

164.4

2.0

131.3

181.4

46.5

203.6

20.4

18.5

7.7

55.2

28.4

477.7

–

4,308.7 2,154.9

337.9

1,061.5

6.8

5.3

–

–

–

235.2

278.8

(0.9)

145.7

297.9

–

(443.6)

609.8

68.1

321.2

(14.2)

341.6

284.3

–

(625.9)

623.5

1,301.1

–

984.9

–

5,436.6 8,445.2

1,676.7

11,380.6

2,428.2

29,367.3 8,000.5

662.2

(1,088.8)

36,941.2

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

214.3

253.2

191.8

Income taxes payable

Short sale and derivative obligations

Due to affiliates

Funds withheld payable to reinsurers

Provision for losses and loss adjustment

1.0

45.0

1.3

5.8

–

28.0

42.3

8.6

3.9

0.8

322.5

94.1

expenses

2,971.4 4,582.9

610.4

Provision for unearned premiums

643.6

756.3

227.8

Deferred income taxes

Long term debt

–

–

–

79.5

9.0

–

–

526.3

25.9

88.2

16.8

5.8

5,656.3

834.4

–

446.0

–

–

–

52.1

–

52.1

110.9

1,296.5

296.4

170.7

114.1

1,877.7

0.1

7.4

5.4

0.5

35.6

172.5

66.6

428.7

31.3

27.6

15.3

23.7

1,190.7

15,011.7 5,757.5

245.6

2,707.7

74.8

–

–

–

1.4

92.8

10.4

618.3

–

–

14.0

0.5

4.1

–

(0.5)

38.1

20.4

(102.3)

(12.7)

70.5

238.2

–

439.7

(1,120.4)

19,648.8

(55.1)

(24.4)

2,727.4

–

2,377.7

2,996.5

Total liabilities

3,882.4 6,064.7 1,146.4

7,599.7

1,654.8

20,348.0 6,226.6

261.8

1,214.5

28,050.9

Equity

Shareholders’ equity attributable to

shareholders of Fairfax

Non-controlling interests

1,554.2 2,380.5

523.2

3,780.9

773.4

9,012.2 1,773.9

400.1

(2,365.1)

8,821.1

–

–

7.1

–

–

7.1

–

0.3

61.8

69.2

Total equity

1,554.2 2,380.5

530.3

3,780.9

773.4

9,019.3 1,773.9

400.4

(2,303.3)

8,890.3

Total liabilities and total equity

5,436.6 8,445.2

1,676.7

11,380.6

2,428.2

29,367.3 8,000.5

662.2

(1,088.8)

36,941.2

Capital

Debt

Investments in Fairfax affiliates

Shareholders’ equity attributable to

shareholders of Fairfax

Non-controlling interests

Total capital

% of total capital

–

34.7

79.5

97.1

–

–

446.0

181.4

92.8

28.4

618.3

–

52.6

2,377.7

3,048.6

341.6

284.3

–

(625.9)

–

1,519.5 2,283.4

523.2

3,599.5

745.0

8,670.6 1,489.6

400.1

(1,739.2)

8,821.1

–

–

7.1

–

–

7.1

–

62.1

–

69.2

1,554.2 2,460.0

530.3

4,226.9

866.2

9,637.6 1,773.9

514.8

12.6

11,938.9

13.0% 20.6%

4.4%

35.4%

7.3%

80.7% 14.9% 4.3%

0.1%

100.0%

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

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
and 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

Deferred premium acquisition costs

110.2

97.3

21.9

Recoverable from reinsurers

957.4 1,628.1

387.7

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

62.2

165.1

222.5

635.7

208.2

19.0

153.9

189.4

34.0

104.5

–

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

34.0

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

353.9

286.8

–

(640.7)

628.2

1,115.2

–

821.4

–

5,324.1 8,256.2

1,371.4

10,781.6

2,197.2

27,930.5 6,086.6

267.0

(877.2)

33,406.9

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

expenses

2,820.8 4,301.4

470.3

Provision for unearned premiums

686.0

692.7

187.3

Deferred income taxes

Long term debt

–

–

26.1

85.0

1.9

–

–

471.7

3.2

81.9

0.7

29.0

5,557.2

739.5

–

444.8

–

–

–

1.0

–

1.0

119.6

1,314.8

145.3

84.6

111.5

1,656.2

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

–

–

–

–

1,214.5

14,364.2 4,051.3

216.2

2,521.7

25.6

28.6

–

14.2

0.1

2.0

3.4

0.1

0.6

92.6

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 2,509.7

452.9

3,453.6

548.1

8,518.7 1,678.8

148.6

(1,983.5)

8,362.6

–

–

5.5

–

–

5.5

–

–

40.4

45.9

Total equity

1,554.4 2,509.7

458.4

3,453.6

548.1

8,524.2 1,678.8

148.6

(1,943.1)

8,408.5

Total liabilities and total equity

5,324.1 8,256.2

1,371.4

10,781.6

2,197.2

27,930.5 6,086.6

267.0

(877.2)

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

104.5

–

–

444.8

181.4

92.6

34.0

622.4

152.7

353.9

286.8

1.5

–

2,241.9

3,018.5

(640.7)

–

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 2,594.7

458.4

3,898.4

640.7

9,146.6 1,831.5

190.5

258.4

11,427.0

13.6% 22.7%

4.0%

34.1%

5.6%

80.0% 16.0% 1.7%

2.3%

100.0%

126

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, 2012 and 2011.

Canadian Insurance – Northbridge(1)

Underwriting 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 loss
Interest and dividends

Operating income (loss)
Net losses on investments

Pre-tax loss before interest and other

Net loss

2012
(57.0 )

2011
(30.2 )

76.1%
15.0%
20.7%

72.3%
14.5%
19.7%

111.8%
(6.1)%

106.5%
(3.7)%

105.7%

102.8%

1,194.3

1,322.7

948.7

1,098.5

992.2

1,072.2

(57.0)
41.5

(15.5)
(63.1)

(30.2)
100.2

70.0
(162.0)

(78.6)

(92.0)

(34.6)

(86.8)

(1) The results differ from the standalone results of Northbridge primarily due to purchase accounting adjustments related

to the privatization of Northbridge in 2009.

Effective January 1, 2012, Northbridge combined three of its subsidiaries, Lombard Insurance, Markel Insurance
and Commonwealth Insurance, to operate under a single brand, Northbridge Insurance. Effective March 1, 2012,
these subsidiaries changed their names to Northbridge General, Northbridge Commercial and Northbridge
Indemnity respectively. This new brand is comprised of Northbridge’s broker small-to-medium account, trans-
portation and large account segments and is intended to leverage the scale and diversity of its operations as one
company. Federated Insurance continues to operate as the company’s captive agency distribution arm and Zenith
continues to operate its direct personal lines business.

To sharpen its focus on its core Canadian lines of business, effective May 1, 2012, Northbridge transferred the
renewal rights to its U.S. property business from its U.S. subsidiary, Commonwealth Insurance Company of Amer-
ica (“CICA”) to Hudson Insurance Company (“Hudson Insurance”), a wholly-owned subsidiary of OdysseyRe (the
“renewal rights transfer”). Northbridge entered into a service agreement with Hudson Insurance to provide certain
operational resources in support of that business and Northbridge continued to service insurance policies that
were in-force at the date of transfer. Effective January 1, 2013, Northbridge sold CICA (principally comprised of
residual U.S. property claims liabilities related to policies written prior to May 1, 2012 and retained by North-
bridge subsequent to the renewal rights transfer) to TIG Insurance Company.

Corporate overhead and other in the Northbridge reporting segment included restructuring charges incurred in
connection with the activities described in the preceding two paragraphs of $9.5 and $18.4 in 2012 and 2011
respectively, and also included additional expense related to personnel costs in 2011.

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

Northbridge’s underwriting results in 2012 reflected an increase in current period non-catastrophe related large
losses, increased current period catastrophe losses, an unfavourable Ontario court decision involving one of
Northbridge’s competitors which is expected to affect the broader industry and the competitive conditions within
the Canadian commercial lines insurance market which remain challenging, partially offset by increased net
favourable development of prior years’ reserves and reduced underwriting expenses. Northbridge reported an
underwriting loss of $57.0 and combined ratio of 105.7% in 2012 compared to an underwriting loss of $30.2 and
a combined ratio of 102.8% in 2011. Current period catastrophe losses added 4.0 combined ratio points ($39.0
inclusive of $4.1 of reinstatement premiums payable) to the combined ratio in 2012, primarily related to the
impact of Hurricane Sandy on the remaining U.S. property exposure of Northbridge Indemnity and storms in
Alberta, Ontario and Quebec, compared to 2.6 combined ratio points ($28.2) of current period catastrophe losses
included in the combined ratio in 2011, primarily related to the Slave Lake fire in Alberta, U.S. weather-related
events and various Ontario and Quebec storms. Net favourable development of prior years’ reserves of $60.8 (6.1
combined ratio points) and $39.6 (3.7 combined ratio points) in 2012 and 2011 respectively, reflected net favour-
able development across various accident years at Northbridge Indemnity, Northbridge Commercial and Fed-
erated, largely offset by net adverse development of prior years’ reserves at Northbridge General.

Northbridge’s expense ratio (excluding commissions) increased from 19.7% in 2011 to 20.7% in 2012 primarily as
a result of lower net premiums earned and the impact of a harmonized sales tax (“HST”) applied to reinsurance
premiums ceded to foreign affiliated reinsurers (the industry generally considered such premiums to be exempt
from HST in prior years), partially offset by a 2.0% decrease in operating expenses (in Canadian dollar terms).
Operating expenses were lower in 2012 largely due to decreased IT and other miscellaneous expenses, partially
offset by the benefit recognized in 2011 from the curtailment of certain post retirement benefits. Northbridge’s
commission expense ratio increased from 14.5% in 2011 to 15.0% in 2012 primarily as a result of a shift in the
mix of business written to business carrying higher commissions, partially offset by the impact of an adjustment
to deferred policy acquisition costs in 2011 (the “DPAC adjustment”).

Prior to giving effect to the impacts of Hurricane Sandy (which affected Northbridge’s recently exited U.S. prop-
erty business), the unfavourable Ontario court decision and the portion of the HST applicable to prior periods,
Northbridge would have reported a combined ratio of 101.3% in 2012.

In order to better compare Northbridge’s gross premiums written, net premiums written and net premiums earned
in 2012 and 2011, the premiums presented in the following table are expressed in Canadian dollars, give effect to
the renewal rights transfer as of January 1, 2011 and exclude the effects of the unearned premium portfolio trans-
fer in 2011 (effective January 1, 2011, Northbridge reduced its participation on a quota share reinsurance contract
with Group Re from 20% to 10% which resulted in the return to Northbridge of $42.3 of unearned premium
which had previously been ceded to Group Re).

Gross premiums written
Net premiums written
Net premiums earned

Cdn$

2012

2011
1,172.3 1,218.3
940.5 1,001.3
971.7 1,022.8

Northbridge’s gross premiums written decreased by 3.8% from Cdn$1,218.3 in 2011 to Cdn$1,172.3 in 2012
primarily as a result of lower retentions of existing business, partially mitigated by modest increases in pricing and
new business in certain segments. Competitive pressures were especially evident in Northbridge’s transportation
and logistics and large accounts segments, while its retail personal lines segment declined due to decisions by
Northbridge to exit from certain unprofitable segments. Net premiums written by Northbridge decreased by 6.1%
from Cdn$1,001.3 in 2011 to Cdn$940.5 in 2012 consistent with the decrease in gross premiums written and also
reflecting a small increase in premiums ceded to reinsurers, principally related to fronted risks.

The significant improvement in net gains on investments (as set out in the table below), partially offset by lower
underwriting profitability and decreased interest and dividend income (principally related to sales during 2011
and the first quarter of 2012 of higher yielding government and corporate bonds and preferred stocks where the
proceeds were reinvested into lower yielding cash and short term investments and common stocks), produced a
pre-tax loss before interest and other of $78.6 in 2012 compared to a pre-tax loss before interest and other of
$92.0 in 2011.

128

Common stocks and equity derivatives (excluding equity hedges)
Equity hedges
Bonds
Preferred stocks
CPI-linked derivatives
Foreign currency
Other

Net losses on investments

2012
60.1
(137.3)
73.9
(11.7)
(35.1)
(20.3)
7.3

2011
(215.6)
41.7
50.8
(5.9)
(50.0)
20.4
(3.4)

(63.1)

(162.0)

Northbridge’s cash resources, excluding the impact of foreign currency translation, increased by $45.6 in 2012
compared to an increase of $230.5 in 2011. Cash provided by operating activities of $23.4 in 2012 compared to
cash provided by operating activities of $139.2 in 2011 (excluding operating cash flow activity related to securities
recorded as at FVTPL) with the year-over-year decrease primarily attributable to a receipt of $42.3 of cash in con-
nection with the unearned premium portfolio transfer in the first quarter of 2011 and lower net premium collec-
tions, partially offset by lower net paid losses.

Northbridge’s average annual return on average equity over the past 27 years since inception in 1985 was 14.0%
at December 31, 2012 (14.6% at December 31, 2011) (expressed in Canadian dollars).

Set out below are the balance sheets (in U.S. dollars) for Northbridge as at December 31, 2012 and 2011.

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
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

Total liabilities

Total equity

Total liabilities and total equity

2012(1)

2011(1)

43.2
292.2
3,378.3
104.4
982.5
66.7
225.4
129.7
179.5
34.7

14.3
311.3
3,250.1
110.2
957.4
62.2
222.5
208.2
153.9
34.0

5,436.6

5,324.1

214.3
1.0
45.0
1.3
5.8
2,971.4
643.6

239.7
–
15.1
0.1
8.0
2,820.8
686.0

3,882.4

3,769.7

1,554.2

1,554.4

5,436.6

5,324.1

(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 $1,389.5 at December 31, 2012 ($1,386.2 at
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

Northbridge’s Canadian dollar balance sheets (inclusive of Fairfax-level purchase accounting adjustments) are
translated into U.S. dollars in Fairfax’s consolidated financial reporting and reflect the currency translation effect
in 2012 of the appreciation of the Canadian dollar relative to the U.S. dollar (appreciation of 2.3% on a year-over-
year basis). In addition to the currency translation effect, which was the principal factor causing year-over-year
increases in portfolio investments, recoverable from reinsurers and provision for losses and loss adjustment
expenses, the following factors also impacted Northbridge’s balance sheet in 2012: Portfolio investments
increased principally as a result of net appreciation of U.S. state and municipal bonds and common stocks and
cash provided by operating activities, partially offset by net unrealized depreciation related to derivatives
(principally short equity index total return swaps). Recoverable from reinsurers increased reflecting higher ceded
losses largely related to Hurricane Sandy. Provision for losses and loss adjustment expenses increased reflecting
higher loss experience, including Hurricane Sandy and reserve strengthening related to the unfavourable Ontario
court decision, but was partially offset by net favourable development of prior years’ reserves. Due from affiliates
principally related to a loan receivable from Fairfax that decreased as a result of payments received in 2012. Total
equity decreased $0.2 in 2012 compared to 2011 primarily reflecting the net loss of $34.6, offset by increased
accumulated other comprehensive income (principally as a result of the currency translation effect described
above).

Northbridge’s investment in Fairfax affiliates as at December 31, 2012, consisted of:

Affiliate
Ridley

% interest
31.8%

U.S. Insurance — Crum & Forster and Zenith National(1)

Underwriting loss

Loss & LAE – accident year
Commissions
Underwriting expenses

2012

2011

Crum &
Forster
(113.2)

Zenith
National
(93.1)

Total
(206.3)

Crum &
Forster
(79.7)

Zenith
National
(136.2)

Total
(215.9)

73.1%
13.0%
18.8%

77.9%
9.8%
28.2%

74.7%
11.9%
21.9%

71.6%
12.3%
20.3%

78.0%
10.1%
34.5%

73.7%
11.5%
25.0%

Combined ratio – accident year

Net adverse (favourable) development

104.9% 115.9%
(0.3)%

4.4%

108.5%
2.9%

104.2% 122.6%
4.9%

3.7%

110.2%
4.1%

Combined ratio – calendar year

109.3% 115.6%

111.4%

107.9% 127.5%

114.3%

Gross premiums written

1,529.7

633.5

2,163.2

1,327.7

536.4

1,864.1

Net premiums written

Net premiums earned

Underwriting loss
Interest and dividends

Operating loss
Net gains on investments
Loss on repurchase of long term debt

Pre-tax income (loss) before interest and other

Net earnings (loss)

1,253.4

619.4

1,872.8

1,076.9

524.2

1,601.1

1,214.6

597.0

1,811.6

1,008.8

495.8

1,504.6

(113.2)
28.1

(85.1)
126.2
(0.8)

40.3

29.3

(93.1)
21.5

(71.6)
21.1
–

(206.3)
49.6

(156.7)
147.3
(0.8)

(79.7)
76.8

(2.9)
40.5
(56.5)

(50.5)

(10.2)

(18.9)

(35.2)

(5.9)

(1.8)

(136.2)
48.1

(88.1)
177.6
–

89.5

54.3

(215.9)
124.9

(91.0)
218.1
(56.5)

70.6

52.5

(1) These results differ from those published by Zenith National primarily due to differences between IFRS and U.S. GAAP,
intercompany investment transactions and acquisition accounting adjustments recorded by Fairfax related to the
acquisition of Zenith National in 2010.

130

On December 31, 2011, Crum & Forster reinsured 100% of its net latent exposures through the cession to Runoff
(Clearwater Insurance) of substantially all of its liabilities for asbestos, environmental and other latent claims aris-
ing from policies with effective dates on or prior to December 31, 1998, exclusive of workers’ compensation and
surety related liabilities. Pursuant to this transaction, 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. The transfer of these latent claims to Runoff is expected to significantly reduce the volatility of
the operating income of Crum & Forster and may reduce interest and dividend income earned as a result of the
transfer of cash and investments to Runoff.

On February 9, 2011, the company completed the acquisition of all of the outstanding common shares of First
Mercury and commenced consolidating the assets, liabilities and results of operations of First Mercury since
acquisition within the Crum & Forster operating segment. First Mercury underwrites specialty commercial
insurance products, principally on an excess and surplus lines basis, focusing on niche and underserved segments.
Following the acquisition, the respective businesses of Crum & Forster and First Mercury were integrated as fol-
lows: The excess and surplus lines casualty and professional liability lines of each company were combined; First
Mercury’s property business was merged into Crum & Forster’s Seneca division; and the AMC/Fairmont Insurance
Services brand was launched as a single brand under which First Mercury’s specialty petroleum business was
integrated with Fairmont Specialty. Following the integration, 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.

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 subsidiary 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.

Crum & Forster

Crum & Forster reported an underwriting loss of $113.2 and a combined ratio of 109.3% in 2012 compared to an
underwriting loss of $79.7 and a combined ratio of 107.9% in 2011. Crum & Forster’s underwriting results in 2012
included 4.4 combined ratio points ($54.0) of net adverse development of prior years’ reserves, primarily due to
net unfavourable development of workers’ compensation loss reserves at Crum & Forster and general liability loss
reserves at First Mercury, partially offset by net favourable emergence in the loss reserves of other lines of busi-
ness. Crum & Forster’s underwriting results in 2011 included 3.7 combined ratio points ($37.3) of net adverse
development of prior years’ reserves, primarily due to net unfavourable development of workers’ compensation
and latent liability loss reserves, partially offset by a reduction in the provision for uncollectible reinsurance.
Current period catastrophe losses of $28.7 (2.4 combined ratio points) in 2012, primarily related to the impact of
Hurricane Sandy and tornadoes and flooding in the midwest, central and southeast U.S., compared to current
period catastrophe losses of $9.9 (0.9 of a combined ratio point) in 2011, primarily related to the impact of the
U.S. tornadoes 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.

Crum & Forster’s expense ratio (excluding commissions) improved from 20.3% in 2011 to 18.8% in 2012 primar-
ily as a result of a 20.4% year-over-year increase in net premiums earned. Crum & Forster’s commission expense
ratio increased from 12.3% in 2011 to 13.0% in 2012 reflecting increased writings of other specialty lines of busi-
ness where commission rates are higher than on standard lines of business.

Gross premiums written by Crum & Forster increased by 15.2% from $1,327.7 in 2011 to $1,529.7 in 2012, princi-
pally as a result of growth of $188.5 in specialty lines of business, including the benefit of approximately $61 of
gross premiums written produced by First Mercury’s managing general agency business (in the prior year this
business was primarily produced on behalf of insurance carriers outside of the Fairfax group) and also reflected
increased writings of excess and surplus casualty lines of business (CoverXSpecialty division), property lines of
business (Seneca division) and accident and health lines of business (Fairmont Specialty division). The increase in
net premiums written in 2012 by 16.4% was consistent with the increase in gross premiums written. Net pre-

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

miums earned increased by 20.4% in 2012 reflecting the growth in net premiums written in prior periods.
Crum & Forster’s gross premiums written in 2012 and 2011 included $407.8 and $306.0 respectively, of
incremental gross premiums written related to the acquisition of First Mercury.

Interest and dividend income of $28.1 in 2012 decreased from $76.8 in 2011 primarily due to sales during 2012 of
higher yielding bonds (municipal bonds were sold to affiliates of Fairfax and government and corporate bonds
were sold to third parties) and common stocks where the proceeds were reinvested into lower yielding cash and
short term investments, the lower average investment portfolio year-over-year following the transfer of invest-
ments to Runoff pursuant to the reinsurance transaction discussed above, increased total return swap expense and
Crum & Forster’s share of an impairment charge of an associate. The combination of higher net gains on invest-
ments (as set out in the table below) and the decreased loss on the repurchase of long term debt (described
below), partially offset by lower interest and dividend income and the increased underwriting loss, produced pre-
tax income before interest and other of $40.3 in 2012 compared to a pre-tax loss before interest and other of
$18.9 in 2011.

Common stocks and equity derivatives (excluding equity hedges)
Equity hedges
Bonds
Preferred stocks
CPI-linked derivatives
Credit default swaps
Other

Net gains on investments

2012
161.2
(177.5)
169.9
(0.8)
(18.3)
(8.0)
(0.3)

2011
(196.6)
69.7
195.5
(0.1)
(39.0)
9.5
1.5

126.2

40.5

Crum & Forster’s cash resources, excluding the impact of foreign currency translation, decreased by $48.5 in 2012
compared to a decrease of $152.6 in 2011. Cash provided by operating activities of $116.7 in 2012 compared to
cash used in operating activities of $15.4 in 2011 (excluding operating cash flow activity related to securities
recorded as at FVTPL) with the year-over-year improvement primarily attributable to higher net premium collec-
tions, partially offset by lower net investment income received, higher net paid losses and higher operating
expenses.

In 2012, Crum & Forster recorded a loss on repurchase of long term debt of $0.8 ($56.5 in 2011) following the
redemption of the remaining $6.2 aggregate principal amount of its unsecured senior notes due 2017. During
2011, Fairfax contributed capital to Crum & Forster comprised of its investment in First Mercury ($294.3 in-kind),
cash to fund the repayment of First Mercury’s short term debt ($31.3) and to fund the repurchase by Crum &
Forster of $323.8 aggregate principal amount of its unsecured senior notes due 2017 ($359.3).

Crum & Forster’s net earnings for the year ended December 31, 2012 produced a return on average equity of 2.0%
(0.2% loss on average equity for the year ended December 31, 2011). Crum & Forster’s cumulative net earnings
since acquisition on August 13, 1998 have been $1,602.5, and its annual return on average equity since acquis-
ition has been 10.7% (11.4% at December 31, 2011).

Zenith National

Zenith National reported an underwriting loss of $93.1 and a combined ratio of 115.6% in 2012 compared to an
underwriting loss of $136.2 and a combined ratio 127.5% in 2011. Net premiums earned increased from $495.8 in
2011 to $597.0 in 2012 reflecting premium rate increases, strong renewal retention and the ability to write new
business. The improvement in Zenith National’s combined ratio in 2012 reflected a 6.3 percentage point decrease
in Zenith National’s expense ratio (excluding commissions) as a result of a 20.4% year-over-year increase in net
premiums earned and the absence of any net adverse development of prior years’ loss reserves in 2012 which
added 4.9 percentage point points ($24.5) to the combined ratio in 2011.

Interest and dividend income decreased from $48.1 in 2011 to $21.5 in 2012 reflecting the sale of higher-yielding
long-term U.S. government bonds in the fourth quarter of 2011 and the second quarter of 2012 with reinvest-
ment in lower-yielding short-term investments and equity securities. In addition, losses incurred in connection
with a limited partnership investment and total return swap expense (acquired as an economic hedge of equity
investments) further reduced investment income in 2012. The combination of the significant decrease in net

132

gains on investments (as set out in the table below) and decreased interest and dividend income, partially offset
by the lower underwriting loss year-over-year, produced a pre-tax loss before interest and other of $50.5 in 2012
compared to pre-tax income before interest and other of $89.5 in 2011.

Common stocks, limited partnerships and equity derivatives (excluding equity hedges)
Equity hedges
Bonds
Preferred stocks
CPI-linked derivatives
Other

Net gains on investments

2012
15.5
(26.2)
34.7
6.5
(11.2)
1.8

2011
(35.4)
9.7
206.0
(2.8)
(0.5)
0.6

21.1

177.6

At December 31, 2012, Zenith National had cash and cash equivalents of $28.8 ($16.7 at December 31, 2011).
Cash provided by operating activities (excluding operating cash flow activity related to securities recorded as at
FVTPL) increased from $5.0 in 2011 to $36.7 in 2012 primarily as a result of increased premium collections, which
more than offset the reduced investment income received. Zenith National received $24.0 from the commutation
of a reinsurance agreement, recorded as cash provided by operating activities in 2011.

Set out below are the balance sheets for U.S. Insurance as at December 31, 2012 and 2011.

2012

2011

Crum &
Forster

Zenith
National(1)

Inter-
company

Crum &
Forster

Zenith
National(1)

Inter-
company

Total

Total

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
Investments in Fairfax affiliates

2.0
214.1
3,552.7
94.5
1,454.1
156.3
149.7
0.3
140.0
126.5

14.8
182.0
1,661.5
6.9
176.4
1.0
472.7
0.1
69.0
–

101.4

16.8
396.1

1.6
–
–
226.7
– 5,214.2 3,303.4
93.2
–
– 1,630.5 1,430.2
165.1
–
155.3
–
19.0
116.1
133.9

157.3
622.4
0.4
209.0
97.1

–
(29.4)

19.5
164.6
1,701.3
4.1
197.9
–
480.4
–
73.3
–

21.1
–
–
391.3
– 5,004.7
97.3
–
– 1,628.1
165.1
–
635.7
–
19.0
189.4
104.5

–
(29.4)

Total assets

5,890.2

2,584.4

(29.4) 8,445.2 5,644.5

2,641.1

(29.4) 8,256.2

Liabilities
Accounts payable and accrued liabilities 194.4
18.4
Short sale and derivative obligations
42.3
Due to affiliates
Funds withheld payable to reinsurers
322.5
Provision for losses and loss adjust-

ment expenses

Provision for unearned premiums
Deferred income taxes
Long term debt

3,290.6
542.3
–
41.4

58.8
9.6
–
–

1,292.3
214.0
–
38.1

–
–
–
–

253.2
28.0
42.3
322.5

234.3
4.3
26.8
318.0

55.7
2.1
–
0.1

– 4,582.9 3,079.2
501.7
–
–
–
47.0
–

756.3
–
79.5

1,222.2
191.0
26.1
38.0

–
–
–
–

290.0
6.4
26.8
318.1

– 4,301.4
692.7
–
26.1
–
85.0
–

Total liabilities

Total equity

4,451.9

1,612.8

– 6,064.7 4,211.3

1,535.2

– 5,746.5

1,438.3

971.6

(29.4) 2,380.5 1,433.2

1,105.9

(29.4) 2,509.7

Total liabilities and total equity

5,890.2

2,584.4

(29.4) 8,445.2 5,644.5

2,641.1

(29.4) 8,256.2

(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 $578.0 at December 31, 2012 ($707.5 at December 31, 2011).

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

Significant changes to the balance sheet of U.S. Insurance at December 31, 2012 compared to December 31, 2011
primarily reflected growth in the year-over-year business volumes at Crum & Forster and Zenith National
(described above) which increased the provisions for losses and loss adjustment expenses and unearned premiums
in 2012. The increase in provision for losses and loss adjustment expenses at Crum & Forster also reflected net
strengthening of prior years’ reserves (described above). Portfolio investments increased principally as a result of
net appreciation of U.S. state and municipal bonds and common stocks and cash provided by operating activities,
partially offset by net unrealized depreciation related to derivatives (principally short equity index total return
swaps and CPI-linked derivatives) and dividends paid to Fairfax. In 2012, Zenith National recognized a net
deferred income tax asset of $1.0 compared to a net deferred income tax liability of $26.1 in 2011, with the
change principally related to increased operating loss carryovers recognized during 2012. Long term debt
decreased in 2012 following the repurchase by Crum & Forster of $6.2 aggregate principal amount of its
unsecured senior notes due 2017. Total equity of U.S. Insurance decreased by $129.2 in 2012 reflecting dividends
paid to Fairfax and affiliates by Zenith National and Crum & Forster of $100.0 (2011 – $40.0) and $63.0 (2011 –
$104.0) respectively, and the net loss of Zenith National of $35.2 (2011 – net earnings of $54.3), partially offset by
the net earnings of Crum & Forster of $29.3 (2011 – net loss of $1.8). Crum & Forster’s total equity also reflected
an increase of $37.6 in 2012 in connection with the redemption by OdysseyRe of a portion of its common stock
which was owned by Crum & Forster and carried at cost of $7.4 as an investment in Fairfax affiliate on the bal-
ance sheet of U.S. Insurance. The difference between the cash redemption proceeds of $45.0 received from Odys-
seyRe and the carrying value was recognized as a direct increase to Crum & Forster’s total equity.

Crum & Forster’s investments in Fairfax affiliates as at December 31, 2012, 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)

% interest
1.4%
13.8%
8.5%
2.0%

2012
30.1

78.8%
2.5%
12.8%

2011
34.4

81.6%
2.3%
9.3%

93.2%
94.1%
(7.1)% (10.0)%

87.0%

83.2%

515.2

240.6

231.4

30.1
36.2

66.3
0.3

66.6

53.8

451.7

213.7

204.1

34.4
(13.7)

20.7
(15.6)

5.1

(6.9)

Fairfax Asia comprises the company’s Asian holdings and operations: Singapore-based First Capital Insurance
Limited, Hong Kong-based Falcon Insurance Limited, Malaysian-based The Pacific Insurance Berhad, 40.5%-
owned Bangkok-based Falcon Insurance Public Company Limited (“Falcon Thailand”) and 26%-owned Mumbai-
based ICICI Lombard General Insurance Company Limited (“ICICI Lombard”), India’s largest (by market share)
private general insurer (the remaining 74% interest is held by ICICI Bank, India’s second largest commercial
bank). Falcon Thailand and ICICI Lombard are reported under the equity method of accounting.

134

On March 24, 2011, the company completed the acquisition of all of the outstanding common shares of Pacific
Insurance and commenced consolidating the assets, liabilities and results of operations of Pacific Insurance since
acquisition within the Insurance – Fairfax Asia reporting segment. Pacific Insurance underwrites all classes of
general insurance and medical insurance in Malaysia.

Underwriting results for Fairfax Asia in 2012 featured an underwriting profit of $30.1 and a combined ratio of
87.0% compared to an underwriting profit of $34.4 and a combined ratio of 83.2% in 2011. The combined ratios
in 2012 for First Capital, Falcon and Pacific Insurance were 79.0%, 98.4% and 90.8% (2011 – 73.2%, 99.7% and
95.3%) respectively. The underwriting results in 2012, included 7.1 combined ratio points ($16.4) of net favour-
able development of prior years’ reserves (primarily at First Capital attributable to commercial automobile, marine
hull and workers’ compensation loss reserves, partially offset by net adverse development on property loss
reserves related to the Thailand floods) compared to 10.0 combined ratio points ($20.4) of net favourable
development of prior years’ reserves in 2011 (primarily at First Capital attributable to commercial automobile,
marine hull and workers’ compensation loss reserves). During 2012, gross premiums written, net premiums writ-
ten and net premiums earned increased by 14.1%, 12.6% and 13.4% respectively, primarily as a result of increased
writings of property and engineering lines of business at First Capital and the year-over-year impact of the con-
solidation of Pacific Insurance. Fairfax Asia’s expense ratio (excluding commissions) increased from 9.3% in 2011
to 12.8% in 2012 primarily due to increased compensation expense at First Capital consistent with its growth,
partially offset by a 13.4% increase in net premiums earned in 2012.

Interest and dividend income increased from an expense of $13.7 in 2011 to income of $36.2 in 2012. Interest
and dividend income in 2012 included Fairfax Asia’s share of the profit of ICICI Lombard of $12.9 compared to
the share of the loss of ICICI Lombard of $36.1 in 2011. The profit of ICICI Lombard in 2011 was adversely
affected by reserve strengthening related to its mandatory pro-rata participation in the Indian commercial vehicle
insurance pool, partially offset by net mark-to-market gains on the ICICI Lombard investment portfolio. Fairfax
Asia’s interest and dividend income, excluding its share of the profit and loss of associates, decreased modestly
from $21.9 in 2011 to $21.2 in 2012 reflecting increases in total return swap expense and investment manage-
ment and administration fees, partially offset by higher interest and dividends earned on a larger average invest-
ment portfolio as a result of the consolidation of Pacific Insurance.

The year-over-year improvement in the performance of investments (as set out in the table below) and increased
interest and dividend income, partially offset by lower underwriting profit, produced pre-tax income before inter-
est and other of $66.6 in 2012 compared to pre-tax income of $5.1 in 2011.

Common stocks and equity derivatives (excluding equity hedges)
Equity hedges
Bonds
Preferred stocks
Foreign currency
Other

Net gains (losses) on investments

2012
12.9
(16.4)
17.3
(2.5)
(10.9)
(0.1)

2011
(16.2)
8.3
(12.9)
1.2
3.8
0.2

0.3

(15.6)

As at December 31, 2012, the company had invested a total of $107.9 to acquire and maintain its 26% interest in
ICICI Lombard and carried this investment at $75.3 under the equity method of accounting (fair value of $223.9
as disclosed in note 6 (Investments in Associates) to the consolidated financial statements for the year ended
December 31, 2012). The company’s investment in ICICI Lombard is included in portfolio investments in the
Fairfax Asia balance sheet that follows.

During the twelve month period ended September 30, 2012, ICICI Lombard’s gross premiums written increased in
Indian rupees by 17.9% over the comparable 2011 period, with a combined ratio of 108.2% (excluding the impact
of reserve strengthening related to ICICI Lombard’s mandatory pro-rata participation in the Indian commercial
vehicle insurance pool). The Indian property and casualty insurance industry experienced increasingly com-
petitive market conditions in 2012 as recent new entrants continue to increase their market share. With a 9.8%
market share, 4,377 employees and 309 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.

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

Set out below are the balance sheets for Fairfax Asia as at December 31, 2012 and 2011:

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

2012

2011

101.4
972.8
23.8
507.2
30.8
5.9
34.8

84.7
809.2
21.9
387.7
29.9
5.1
32.9

1,676.7

1,371.4

191.8
8.6
3.9
0.8
94.1
610.4
227.8
9.0

193.8
10.8
4.8
0.4
43.7
470.3
187.3
1.9

1,146.4

913.0

530.3

458.4

1,676.7

1,371.4

The Fairfax Asia balance sheet in 2012 reflected the currency translation effect of the appreciation of the Singa-
pore dollar relative to the U.S. dollar (appreciation of 6.2% on a year-over-year basis). In addition to this currency
translation effect, which caused year-over-year increases in portfolio investments, recoverable from reinsurers,
provision for losses and loss adjustment expenses and reserve for unearned premiums, the following factors also
impacted Fairfax Asia’s balance sheet in 2012: Insurance contracts receivable, provision for losses and loss adjust-
ment expenses and provision for unearned premiums increased reflecting growth in year-over-year business
volumes, principally at First Capital (described above). Funds withheld payable to reinsurers increased as a result
of additional reinsurance purchased during the year by First Capital commensurate with its growth in business
volumes. Total equity at Fairfax Asia increased by $71.9 in 2012 primarily reflecting net earnings of $53.8 and
increased accumulated other comprehensive income (principally as a result of the currency translation effect
described above, partially offset by unrealized foreign currency translation losses related to the appreciation of the
U.S. dollar relative to the Indian Rupee at ICICI Lombard).

136

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 on investments
Loss on repurchase of long term debt

Pre-tax income before interest and other

Net earnings

2012
266.6

2011
(336.0)

67.7%
19.0%
8.4%

92.6%
17.4%
9.3%

95.1%
(6.6)%

119.3%
(2.6)%

88.5%

116.7%

2,773.2

2,420.7

2,402.3

2,089.7

2,315.3

2,014.7

266.6
127.5

394.1
267.2
–

661.3

394.9

(336.0)
259.1

(76.9)
142.0
(6.1)

59.0

14.3

(1) These results differ from those published by Odyssey Re Holdings Corp. primarily due to differences between IFRS and
U.S. GAAP and purchase accounting adjustments (principally goodwill and intangible assets) recorded by Fairfax
related to the privatization of OdysseyRe in 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. Clearwater Insurance is an insurance company which has been in runoff since 1999.

The substantial reduction in catastrophe losses (as set out in the table below) and increased net favourable devel-
opment of prior years’ reserves contributed to the significant improvement in the underwriting performance of
OdysseyRe, producing an underwriting profit of $266.6 and a combined ratio of 88.5% in 2012 compared to an
underwriting loss of $336.0 and a combined ratio of 116.7% in 2011. OdysseyRe’s combined ratios in 2012 bene-
fited from 6.6 combined ratio points ($152.0) of net favourable development of prior years’ reserves, primarily
related to net favourable emergence on prior years’ catastrophe loss reserves (principally the Japan earthquake and
tsunami, Chilean earthquake, Thailand floods and Hurricane Irene) and casualty and property loss reserves in the
U.S. and Europe. OdysseyRe’s combined ratio in 2011 included 2.6 combined ratio points ($51.4) of net favour-
able development of prior years’ reserves, principally related to net favourable emergence on prior years’ catas-
trophe, healthcare and financial products loss reserves.

OdysseyRe’s commission expense ratio increased from 17.4% in 2011 to 19.0% in 2012 primarily as a result of a
new property quota share reinsurance contract that carried a higher commission rate and decreased reinstatement
premiums earned during 2012 (which do not attract commissions). OdysseyRe’s expense ratio (excluding
commissions) decreased from 9.3% in 2011 to 8.4% in 2012 primarily as a result of a 14.9% year-over-year
increase in net premiums earned, partially offset by higher personnel costs and infrastructure-related expenses.

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

Current period catastrophe losses (net of reinstatement premiums) reflected in the underwriting results of Odys-
seyRe in the years ended December 31, 2012 and 2011 respectively, were comprised as follows:

Hurricane Sandy
Hurricane Isaac
Italy earthquake
Japan earthquake and tsunami
Thailand floods
New Zealand (Christchurch) earthquake
U.S. tornadoes
Hurricane Irene
Other

(1) Net of reinstatement premiums.

2012

2011

Catastrophe
losses(1)
175.0
10.0
10.3
–
–
–
–
–
87.9

Combined
ratio impact
7.7
0.4
0.4
–
–
–
–
–
3.9

Catastrophe
losses(1)
–
–
–
381.1
150.0
28.1
26.3
17.9
131.4

Combined
ratio impact
–
–
–
18.9
7.4
1.4
1.3
0.9
6.8

283.2

12.4 points

734.8

36.7 points

Gross premiums written in 2012 increased by 14.6% from $2,420.7 in 2011 to $2,773.2 in 2012 primarily as a
result of two new quota share reinsurance contracts, growth in U.S. crop and umbrella lines of business and
increased writings by Hudson Insurance of U.S. property business formerly underwritten by Northbridge prior to
May 1, 2012 (this renewal rights transfer is described in the Northbridge section of this MD&A), partially offset by
planned decreases in writings of U.S. healthcare and casualty lines of business and lower reinstatement premiums
received on a year-over-year basis. The two new quota share reinsurance contracts relate to property risks in
Florida and multiline risks in Brazil and contributed $308.9 to gross premiums written in 2012. Net premiums
written increased by 15.0% from $2,089.7 in 2011 to $2,402.3 in 2012, consistent with the growth in gross pre-
miums written. Net premiums earned in 2012 included an adjustment of $49.5 to reflect the earning into income
of certain U.S. Insurance lines of business to the end of the period (previously, these lines of business were earned
into income on a two month lag). The effect of this adjustment on underwriting profit was not significant.
Excluding this adjustment, net premiums earned in 2012 increased by 12.5%, reflecting the growth in net pre-
miums earned on the Florida quota share reinsurance contract of $136.9, growth in the crop line of business of
$21.0 and increased writings of property catastrophe reinsurance.

Interest and dividend income decreased from $259.1 in 2011 to $127.5 in 2012 primarily reflecting lower invest-
ment income earned as a result of sales in late 2011 and early 2012 of higher yielding government and corporate
bonds, where the proceeds were reinvested into lower yielding cash and short term investments and common
stocks, increased total return swap expense and OdysseyRe’s share of an impairment charge recorded by an
associate. In 2011, OdysseyRe recorded a loss on repurchase of long term debt of $6.1 following the repurchase of
$42.1 aggregate principal amount of its unsecured senior notes due 2013.

The substantial year-over-year improvement in underwriting profitability, the significant increase in net gains on
investments (as set out in the table below) and the absence of loss on repurchase of long term debt in 2012, parti-
ally offset by lower interest and dividend income, produced pre-tax income before interest and other of $661.3 in
2012 compared to pre-tax income before interest and other of $59.0 in 2011.

Common stocks and equity derivatives (excluding equity hedges)
Equity hedges
Bonds
Preferred stocks
CPI-linked derivatives
Foreign currency
Other

Net gains on investments

138

2012
306.5
(298.1)
362.4
(9.5)
(56.9)
(31.5)
(5.7)

2011
(251.1)
151.2
416.7
(0.6)
(120.0)
(52.7)
(1.5)

267.2

142.0

OdysseyRe’s cash resources, excluding the impact of foreign currency translation, increased by $202.9 in 2012
compared to a decrease of $559.1 in 2011. Cash provided by operating activities (excluding operating cash flow
activity related to securities recorded as at FVTPL) increased to $263.8 in 2012 from $163.8 in 2011 primarily as a
result of increased net premiums collected and lower net catastrophe losses paid, partially offset by lower inv-
estment income received.

Set out below are the balance sheets for OdysseyRe as at December 31, 2012 and 2011:

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
Investments in Fairfax affiliates

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
Long term debt

Total liabilities

Total equity

Total liabilities and total equity

2012(1)

2011(1)

310.1
741.6
8,569.8
201.6
984.9
93.5
164.4
2.0
131.3
181.4

167.0
701.1
8,099.8
159.5
969.1
230.1
158.2
6.5
108.9
181.4

11,380.6 10,781.6

526.3
25.9
88.2
16.8
5.8
5,656.3
834.4
446.0

471.7
3.2
81.9
0.7
29.0
5,557.2
739.5
444.8

7,599.7

7,328.0

3,780.9

3,453.6

11,380.6 10,781.6

(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
$3,673.1 at December 31, 2012 ($3,344.6 at December 31, 2011).

The OdysseyRe balance sheet at December 31, 2012 reflected the currency translation effect of the appreciation of
the principal currencies in which OdysseyRe’s divisions conduct significant business (the euro, the Canadian dol-
lar and the British pound sterling) relative to the U.S. dollar. In addition to this currency translation effect, which
caused year-over-year increases in insurance contracts receivable, portfolio investments, recoverable from
reinsurers, provision for losses and loss adjustment expenses and reserve for unearned premiums, the following
factors also impacted OdysseyRe’s balance sheet in 2012: Portfolio investments increased principally as a result of
net appreciation of U.S. state and municipal bonds and common stocks and cash provided by operating activities,
partially offset by net unrealized depreciation related to derivatives (principally short equity index total return
swaps and CPI-linked derivatives) and dividends remitted by OdysseyRe’s operating companies. Deferred pre-
mium acquisition costs and the provision for unearned premiums increased primarily as a result of the two new
quota share reinsurance contracts (described above). Deferred income taxes decreased primarily as a result of
increased net unrealized gains on investments. The increase in accounts payable and accrued liabilities primarily
related to OdysseyRe’s obligation to reimburse the government agency responsible for managing crop insurance

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

in the U.S. for losses paid on behalf of OdysseyRe associated with its growing crop insurance line of business.
Provision for losses and loss adjustment expenses increased as a result of the loss reserves related to the current
accident year (including Hurricane Sandy), partially offset by settlements of prior years’ claims (largely related to
catastrophe claims) and net favourable development of prior years’ reserves (described above). Total equity at
OdysseyRe increased $327.3 in 2012 primarily as a result of net earnings of $394.9, partially offset by a decrease of
$45.0 following the redemption of a portion of OdysseyRe’s common stock (which was owned by a subsidiary of
Crum & Forster).

OdysseyRe’s investments in Fairfax affiliates as at December 31, 2012, consisted of:

Affiliate
Fairfax Asia
Advent
Zenith National

Insurance and Reinsurance – Other

% interest
17.4%
17.0%
6.2%

Group Re

Advent

Polish Re

Fairfax
Brasil

Inter-
company

2012

Underwriting profit (loss)

11.2

(3.1)

(14.0)

(15.9)

Loss & LAE – accident year

Commissions

Underwriting expenses

Combined ratio – accident year

Net adverse (favourable) development

68.2%

23.0%

1.4%

76.7%

23.3%

15.2%

92.6%

115.2%

2.1%

(13.5)%

77.4%

12.2%

5.1%

94.7%

20.6%

86.4%

2.0%

56.8%

145.2%

2.2%

Combined ratio – calendar year

94.7%

101.7%

115.3%

147.4%

–

–

–

–

–

–

–

Total

(21.8)

74.0%

19.8%

10.6%

104.4%

(0.1)%

104.3%

Gross premiums written

Net premiums written

Net premiums earned

Underwriting profit (loss)

Interest and dividends

Operating income (loss)

Net gains on investments

Pre-tax income (loss) before interest and other

Net earnings (loss)

210.6

250.4

115.5

113.8

(38.7)

651.6

206.6

187.3

207.6

181.8

11.2

21.6

32.8

197.5

230.3

236.9

(3.1)

10.2

7.1

18.7

25.8

0.1

95.0

91.3

(14.0)

7.2

(6.8)

10.3

3.5

2.6

41.7

33.6

(15.9)

(1.4)

(17.3)

9.1

(8.2)

(8.2)

–

–

–

–

–

–

–

–

530.6

514.3

(21.8)

37.6

15.8

235.6

251.4

231.4

140

Group Re

Advent

Polish Re

Fairfax
Brasil

Inter-
company

2011

Underwriting 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 adverse (favourable) 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

184.5

326.1

105.2

102.8

(72.3)

646.3

Net premiums written

Net premiums earned

Underwriting loss

Interest and dividends

Operating loss

Net gains (losses) on investments

180.7

193.9

221.7

189.3

(88.2)

23.4

(64.8)

(45.9)

(100.7)

18.1

(82.6)

55.8

Pre-tax income (loss) before interest and other

(110.7)

(26.8)

Net earnings (loss)

(111.6)

(31.0)

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)

Effective January 1, 2012, the company’s runoff Syndicate 3500 (managed by RiverStone Managing Agency Lim-
ited (UK)) accepted the reinsurance-to-close of all of the net insurance liabilities of Advent’s runoff Syndicate
3330. This transaction has not been reflected in the table above for the reason set out in the Runoff section of this
MD&A. Had that reinsurance-to-close transaction been reflected in the table above, net premiums written and net
premiums earned would have decreased by $62.2 and ceded losses on claims would have increased by $62.2 with
the result that Advent’s underwriting profit would be unchanged in 2012. The transfer of the net insurance
liabilities of Syndicate 3330 to Runoff is consistent with the company’s strategy of gradually consolidating all of
its runoff operations under the supervision of RiverStone management.

The underwriting loss produced by Insurance and Reinsurance – Other in 2012 of $21.8 (combined ratio of
104.3%) decreased significantly from the underwriting loss of $206.7 (combined ratio of 140.9%) in 2011 as a
result of lower current period catastrophe losses, partially offset by the decrease in net favourable development of
prior years’ reserves. The combined ratio in 2012 included 11.5 combined ratio points ($58.9) of current period
catastrophe losses (net of reinstatement premiums), principally related to Hurricane Sandy (7.9 combined ratio
points ($40.7)). The combined ratio in 2011 included 49.1 combined ratio points ($247.7) of current period catas-
trophe losses (net of reinstatement premiums) primarily related to the Japan earthquake and tsunami (16.9 com-
bined ratio points ($87.1)), Thailand floods (10.0 combined ratio points ($51.5)), New Zealand (Christchurch)
earthquake (6.9 combined ratio points ($34.5)) and the U.S. tornadoes (5.7 combined ratio points ($32.5)).

The underwriting results in 2012 included 0.1 of a combined ratio point ($0.6) of net favourable development of
prior years’ reserves (principally comprised of net favourable development on discontinued commercial property
binder and open market property insurance loss reserves at Advent, partially offset by net adverse development on
commercial automobile loss reserves at Polish Re) compared to 7.9 combined ratio points ($39.7) of net favour-
able development of prior years’ reserves in 2011 (principally comprised of net favourable development across
most lines of business at Advent and reserve releases across a number of cedants at Group Re, partially offset by
net adverse development on commercial automobile loss reserves at Polish Re).

Gross premiums written increased by 0.8% from $646.3 in 2011 to $651.6 in 2012. Excluding the unearned pre-
mium portfolio transfer which suppressed gross premiums written (and net premiums written) by Group Re in
2011 by $42.3 (described in the Northbridge section of this MD&A), gross premiums written deceased by 5.4%
from $688.6 in 2011 to $651.6 in 2012, primarily reflecting the non-renewal of certain classes of business where
terms and conditions were considered inadequate (Advent), lower reinstatement premiums received year-over-

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

year as a result of reduced catastrophe losses in 2012 (Advent) and the unfavourable effect of foreign currency
translation (Fairfax Brasil), partially offset by growth across most lines of business (Fairfax Brasil) and growth in
third party catastrophe reinsurance and retrocessional business reflecting improving terms and conditions (Group
Re).

Excluding the impact of the unearned premium portfolio transfer, net premiums written increased by 0.7% from
$526.9 in 2011 to $530.6 in 2012 reflecting many of the same factors which affected gross premiums written and
also included a reduction in third party excess of loss reinsurance purchased (Advent), decreased usage of
reinsurance (Fairfax Brasil) and lower reinstatement premiums paid year-over-year as a result of reduced catas-
trophe losses in 2012 (Advent). Net premiums earned increased by 1.9% in 2012, consistent with the increase in
net premiums written.

Interest and dividend income decreased from $47.4 in 2011 to $37.6 in 2012 principally reflecting decreased hold-
ings on a year-over-year basis of higher yielding government bonds where the proceeds from sales were reinvested
into lower yielding cash and short term investments, higher investment management and administration fees
and increased total return swap expense, partially offset by Group Re’s share of the profit of an associate. Gain on
disposition of associate in the table below reflects the net gain of $167.0 on the sale of the company’s investment
in Cunningham Lindsey.

The significant increase in net gains on investments (as set out in the table below) and the improvement in under-
writing profitability, partially offset by lower interest and dividend income, produced pre-tax income before
interest and other of $251.4 in 2012 compared to a pre-tax loss before interest and other of $137.2 in 2011.

Common stocks and equity derivatives (excluding equity hedges)
Equity hedges
Bonds
Preferred stocks
CPI-linked derivatives
Gain on disposition of associate
Other

Net gains on investments

2012
37.3
(21.9)
61.4
1.3
(3.8)
167.0
(5.7)

2011
(60.7)
1.9
79.9
(0.8)
(9.8)
7.0
4.6

235.6

22.1

142

Set out below are the balance sheets for Insurance and Reinsurance – Other as at December 31, 2012 and 2011.

2012

2011

Group

Re Advent

Polish
Re

Fairfax
Brasil

Inter-
company

Group

Total

Re Advent

Polish
Re

Fairfax
Brasil

Inter-
company

Total

Assets

Insurance contract receivables

32.7

86.2

28.6

Portfolio investments

1,025.2

576.8

181.1

56.8

87.6

(27.1)

177.2

39.9

118.4

14.9

– 1,870.7

828.7

584.2

134.2

18.0

1.4

14.0

152.9

–

–

7.7

17.9

66.4

20.4

4.3

–

12.4

–

6.6

28.1

–

14.0

–

8.2

–

9.2

(1.3)

46.5

122.4

(101.2)

203.6

16.9

0.2

12.2

247.7

–

0.2

–

16.7

–

–

–

–

–

(38.0)

20.4

18.5

7.7

55.2

28.4

–

–

10.6

8.7

71.1

28.6

4.3

11.0

12.6

–

6.4

20.1

–

12.1

–

7.1

–

57.4

62.5

7.1

77.9

–

0.3

–

1.1

–

(38.8)

191.8

– 1,609.6

(1.6)

41.0

(121.5)

224.4

–

–

–

–

(37.1)

28.6

16.7

21.6

29.5

34.0

1,169.3

867.0

266.6

292.9

(167.6) 2,428.2

976.1 1,019.0

194.8

206.3

(199.0) 2,197.2

0.8

–

5.2

3.7

34.0

4.2

–

2.2

1.7

–

–

–

72.8

0.1

–

–

(0.9)

110.9

0.8

44.2

2.7

1.5

119.6

–

2.0

0.1

–

–

0.6

70.4

0.1

–

2.7

–

–

–

0.1

7.4

5.4

0.5

–

–

–

–

–

–

–

0.1

2.0

3.4

0.1

–

20.7

7.9

0.4

(28.5)

34.2

2.2

–

(36.3)

556.5

493.7

136.0

93.6

(89.1) 1,190.7

567.5

634.3

90.4

32.1

(109.8) 1,214.5

70.4

70.2

–

–

–

92.8

33.1

1.4

–

83.0

(11.1)

245.6

70.3

69.6

–

–

–

–

1.4

92.8

–

–

–

92.6

25.0

0.6

–

68.6

(17.3)

216.2

–

–

–

–

0.6

92.6

636.6

715.3

182.6

249.9

(129.6) 1,654.8

638.6

877.0

121.5

173.9

(161.9) 1,649.1

532.7

151.7

84.0

43.0

(38.0)

773.4

337.5

142.0

73.3

32.4

(37.1)

548.1

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

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

Long term debt

Total liabilities

Total equity

Total liabilities and total equity

1,169.3

867.0

266.6

292.9

(167.6) 2,428.2

976.1 1,019.0

194.8

206.3

(199.0) 2,197.2

Significant changes to the balance sheet of Insurance and Reinsurance – Other at December 31, 2012 compared to
December 31, 2011 primarily reflected lower catastrophe losses at Advent which decreased recoverable from
reinsurers and provision for losses and loss adjustment expenses, partially offset by the continued expansion of
Fairfax Brasil which increased portfolio investments, recoverable from reinsurers, provision for losses and loss
adjustment expenses and unearned premiums. The following factors also impacted the Insurance and Reinsurance
– Other balance sheet in 2012: Portfolio investments increased principally as a result of the realized gain on the
sale of the company’s investment in Cunningham Lindsey, net appreciation of U.S. state and municipal bonds,
other government bonds and common stocks and capital contributions received from Fairfax, partially offset by
net unrealized depreciation principally related to short equity index total return swaps and dividends paid to Fair-
fax. Total equity of the Insurance and Reinsurance – Other segment increased $225.3 in 2012 primarily as a result
of net earnings of $231.4 and capital contributions from Fairfax of $177.3 to support capital adequacy and fund
growth, partially offset by $197.1 of dividends paid to Fairfax.

Insurance and Reinsurance – Other’s investments in Fairfax affiliates as at December 31, 2012, consisted of:

Affiliate
Ridley

% interest
26.0%

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

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, General Fidelity since August 17, 2010, Clearwater Insurance
since January 1, 2011 and Valiant Insurance since July 1, 2011, and the European Runoff group, consisting of
RiverStone Insurance (UK), Syndicate 3500, RiverStone Insurance (since October 12, 2012) and nSpire Re (prior to
its voluntary liquidation which was substantially complete as at December 31, 2012). Both groups are managed by
the dedicated RiverStone runoff management operation which has 287 employees in the U.S. and the U.K.

On December 21, 2012, RiverStone (UK) agreed to reinsure the runoff portfolio of the Eagle Star group of compa-
nies currently owned by the Zurich group and comprised primarily of London market and U.S. casualty business
related to accident years 1990 and prior (the “Eagle Star reinsurance transaction”). In 2013, the company expects
to complete a Part VII transfer of this business pursuant to the Financial Services and Markets Act 2000 of the
United Kingdom which will formally transfer these net loss reserves to RiverStone (UK) by way of a court sanc-
tioned novation. RiverStone (UK) received a premium of $183.5 ($149.3 in cash with the balance receivable prior
to the completion of the Part VII transfer) as consideration for the assumption of $130.9 of net loss reserves and
recognized a gain of $52.6 in operating income. The value of the net loss reserves assumed reflected the best esti-
mate of RiverStone (UK) based on its in-depth review which formed part of its due diligence.

On October 12, 2012, the company’s UK runoff subsidiary, RiverStone Holdings Limited, completed the acquis-
ition of a 100% interest in Brit Insurance Limited (renamed RiverStone Insurance Limited (“RiverStone
Insurance”) on October 15, 2012) for cash purchase consideration of $335.1 (208.3 British pound sterling). The
purchase consideration for this acquisition was primarily financed internally by the company’s runoff sub-
sidiaries. At the date of acquisition, the fair values of the portfolio investments (including cash and short term
investments), insurance contract liabilities and recoverable from reinsurers of RiverStone Insurance were $1,308.2,
$1,833.7 and $883.4 respectively. The assets and liabilities and results of operations of RiverStone Insurance were
consolidated within the company’s financial reporting in the Runoff reporting segment. RiverStone Insurance is
located in London, England and wrote U.K. domestic and international insurance and reinsurance business prior
to being placed into runoff early in 2012. In 2012, the Runoff reporting segment included the impact of the poli-
cies in-force at RiverStone Insurance on the date of acquisition which will runoff under the supervision of River-
Stone (UK) which increased net premiums earned, losses on claims and operating expenses by $30.1, $18.1 and
$10.5 respectively (a net increase of $1.5 to Runoff’s operating income in 2012).

As a result of the progress made by European Runoff in managing and reducing the claims reserves of RiverStone
(UK), a plan was implemented in early 2012 to wind up the operations of nSpire Re (the “voluntary liquidation”).
Accordingly, all of the reinsurance contracts between nSpire Re and RiverStone (UK) were commuted (with no
impact on the Runoff segment or the company’s consolidated financial reporting) and the remaining reinsurance
contracts between nSpire Re and other Fairfax affiliates were novated to Group Re (Wentworth Insurance). As part
the novation, Group Re received cash and investments of $17.7 as consideration for the assumption of net loss
reserves of $17.7. The company’s consolidated financial reporting was unaffected by the novation, however, in its
segmented financial reporting, the company recorded this transaction as a loss portfolio transfer where the assets
acquired and liabilities assumed by Group Re were recognized as direct increases to the assets and liabilities of the
Group Re segment balance sheet. The statements of earnings of the Group Re and Runoff segments were
unaffected by these novations.

Effective January 1, 2012, the company’s runoff Syndicate 3500 (managed by RiverStone Managing Agency Lim-
ited (UK)) accepted the reinsurance-to-close of all of the net insurance liabilities of Advent’s runoff Syndicate
3330. Accordingly, Syndicate 3500 received cash and investments and other net assets of $62.2 as consideration
for the assumption of net loss reserves of $62.2. The company’s management does not consider the initial effects
of this reinsurance-to-close transaction between affiliates in its assessment of the performance of Advent and
Runoff and as a result, the tables in this MD&A which set out the operating results of Advent and Runoff do not
give effect to this transaction. Had this reinsurance-to-close transaction been reflected in the operating results of
the Runoff segment, gross premiums written, net premiums written and net premiums earned would have
increased by $62.2 and losses on claims would have increased by $62.2 with Runoff’s operating income remaining
unchanged in 2012.

144

Effective January 1, 2012, all of the net insurance liabilities of Syndicate 535 and Syndicate 1204 were novated to
Syndicate 3500 resulting in the receipt by Syndicate 3500 of $14.6 of cash and investments and other net assets as
consideration for the assumption of net loss reserves of $14.6. Syndicate 535 and Syndicate 1204 are Lloyd’s
syndicates that were unrelated to Fairfax and its affiliates prior to this transaction. In its consolidated financial
reporting, the company recorded this transaction as a loss portfolio transfer with the assets acquired and liabilities
assumed recognized as direct increases to the assets and liabilities of the Runoff segment balance sheet (and the
consolidated balance sheet). The statement of earnings of the Runoff segment (and the consolidated statement of
earnings) was unaffected by this transaction.

On December 31, 2011, Crum & Forster reinsured 100% of its net latent exposures through the cession to Runoff
(Clearwater Insurance) of substantially all of its liabilities for asbestos, environmental and other latent claims aris-
ing from policies with effective dates on or prior to December 31, 1998, exclusive of workers’ compensation and
surety related liabilities. Pursuant to this transaction, 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. The company accounted for this transaction in its consolidated financial reporting in the same
manner as the reinsurance-to-close of the net insurance liabilities of Advent’s runoff Syndicate 3330.

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. Clearwater Insurance is an
insurance company which has been in runoff since 1999.

On January 1, 2011, Syndicate 3500 accepted the reinsurance-to-close of all of the net insurance liabilities of
Syndicate 376. Syndicate 3500 received a premium of $119.6 comprised of cash and investments and other assets
as consideration for the assumption of net loss reserves of $119.6 (reported as losses on claims). Prior to January 1,
2011, Syndicate 376 was unrelated to Fairfax and its affiliates.

Set out below is a summary of the operating results of Runoff for the years ended December 31, 2012 and 2011.

Gross premiums written
Net premiums written
Net premiums earned
Losses on claims
Operating expenses
Interest and dividends
Operating income (loss)
Net gains on investments
Loss on repurchase of long term debt

Excess of fair value of net assets acquired over purchase price
Pre-tax income before interest and other

2012
221.2
199.1
220.1
(181.4)
(95.1)
65.1
8.7
215.8
(39.8)
184.7
6.8
191.5

2011
122.0
120.3
126.4
(178.0)
(85.9)
109.9
(27.6)
388.1
–
360.5
–
360.5

The Runoff segment pre-tax income before interest and other decreased from $360.5 in 2011 to $191.5 in 2012
primarily as a result of lower net gains on investments (as set out in the table below) and the loss on repurchase of
long term debt (described below), partially offset by the year-over-year improvement in operating profitability
(operating income of $8.7 in 2012 compared to an operating loss of $27.6 in 2011) and the $6.8 excess of fair
value of net assets acquired over purchase price related to the acquisition of RiverStone Insurance. Excluding the
impact of the Eagle Star reinsurance transaction and the runoff of the insurance policies of RiverStone Insurance
(each described above), the Runoff segment would have reported an operating loss of $45.4 in 2012 compared to
an operating loss of $27.6 in 2011, with the year-over-year decrease in profitability primarily due to lower interest
and dividends and decreased net premiums earned, partially offset by decreased losses on claims and operating
expenses.

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

In order to better compare the net premiums earned, losses on claims and operating expenses of Runoff’s under-
lying business, the discussion that follows excludes from 2012 the impact of the Eagle Star reinsurance transaction
and the runoff of the insurance policies of RiverStone Insurance and excludes from 2011 the initial impact of the
reinsurance-to-close of Syndicate 376.

Losses on claims of $32.4 in 2012 principally reflected net strengthening of prior years’ loss reserves in U.S. Run-
off, primarily at TIG ($96.1 principally related to workers’ compensation and asbestos loss reserves) and Clear-
water Insurance ($88.8 principally related to asbestos and environmental loss reserves and other latent claims
assumed from Crum & Forster and asbestos loss reserves in its legacy portfolio), partially offset by net favourable
emergence at General Fidelity ($70.4 principally related to construction defect and marine loss reserves) and at
European Runoff ($81.1 primarily related to net favourable emergence across all lines of business). Losses on
claims of $58.4 in 2011 primarily reflected net adverse development of prior years’ loss reserves of $126.2 in U.S.
Runoff (principally related to workers’ compensation and asbestos loss reserves), partially offset by net favourable
development of $67.8 of prior years’ loss reserves in European Runoff (primarily related to net favourable emer-
gence of $59.0 across all lines of business and an $8.8 decrease in the provision for uncollectible reinsurance). The
decrease in operating expenses ($84.6 in 2012 compared to $85.9 in 2011) primarily reflected the release of a
provision following the resolution in favour of the company of a dispute with a European taxation authority
related to value added taxes and lower operating expenses at nSpire Re as a result of its voluntary liquidation,
partially offset by incremental operating costs related to certain of the acquisition and reinsurance transactions
undertaken by Runoff during 2011 and 2012.

Interest and dividend income decreased from $109.9 in 2011 to $65.1 in 2012 primarily reflecting Runoff’s
increased share of losses of associates, increased total return swap expense and lower investment income earned
in 2012 as a result of sales during 2011 of higher yielding bonds (primarily U.S. treasury bonds) where the pro-
ceeds were reinvested into lower yielding cash and short term investments and common stocks, partially offset by
increased interest and dividends earned on a higher average investment portfolio on a year-over-year basis as a
result of the acquisition and reinsurance transactions undertaken by Runoff during 2011 and 2012.

Common stocks and equity derivatives (excluding equity hedges)
Equity hedges
Bonds
Preferred stocks
Gain on disposition of associate
Other

Net gains on investments

2012
165.1
(88.5)
158.6
(5.9)
3.6
(17.1)

2011
(3.6)
12.9
393.8
0.3
–
(15.3)

215.8

388.1

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.

146

Set out below are the balance sheets for Runoff as at December 31, 2012 and 2011.

2012

2011

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

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
Long term debt

Total liabilities

Total equity

Total liabilities and total equity

244.9

62.2
4,938.3 4,299.3
2,154.9 1,271.8
16.9
0.2
80.8
68.6
286.8

6.8
5.3
297.9
68.1
284.3

8,000.5 6,086.6

296.4
31.3
27.6
15.3
23.7

145.3
3.3
1.3
4.3
24.0
5,757.5 4,051.3
25.6
152.7

74.8
–

6,226.6 4,407.8

1,773.9 1,678.8

8,000.5 6,086.6

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. Historically, the European Runoff
balance sheet excluded the capital of nSpire Re related to the acquisition financing of the U.S. insurance and
reinsurance companies (approximately $0.9 billion at December 31, 2011). Subsequent to the voluntary liqui-
dation of nSpire Re, the majority of this capital was repatriated to Fairfax except for $171.1 which has been
permanently invested in Runoff. Significant changes to the 2012 balance sheet of the Runoff segment compared
to 2011 primarily reflected the impact of the acquisition of RiverStone Insurance which increased portfolio
investments, recoverable from reinsurers, accounts payable and accrued liabilities and provision for losses and loss
adjustment expenses by $1,236.3, $891.5, $155.6 and $1,726.5 respectively, at December 31, 2012. Prior to giving
effect to the acquisition of RiverStone Insurance, portfolio investments decreased by $597.3 in 2012 primarily as a
result of cash used in operating activities, cash used to acquire RiverStone Insurance, the repayment of the TIG
Note, unrealized depreciation related to short equity index total return swaps and dividends paid to Fairfax, parti-
ally offset by net appreciation of bonds (principally bonds issued by U.S. states and municipalities and corporate
and other bonds) and common stocks. At December 31, 2012, Runoff’s portfolio investments of $4,938.3 included
$971.4 and $257.9 of investments pledged by U.S. Runoff and European Runoff respectively, to support insurance
and reinsurance obligations in the ordinary course of carrying on their business. Prior to giving effect to the
acquisition of RiverStone Insurance, recoverable from reinsurers decreased by $8.4 in 2012 primarily as a result of
the continued progress by Runoff in collecting and commuting its remaining reinsurance recoverable balances. At
December 31, 2012, recoverable from reinsurers included recoverables related to asbestos and pollution claims of
$519.2 primarily at TIG and Clearwater Insurance. Amounts due from affiliates (principally amounts due from
Fairfax) increased primarily as a result of funds advanced to Fairfax of $74.9 and changes arising out of the volun-
tary liquidation of nSpire Re. Prior to giving effect to the acquisition of RiverStone Insurance, the provision for
loss and loss adjustment expenses decreased by $20.3 in 2012 reflecting the continued progress by Runoff in set-
tling its remaining claims, partially offset by an increase of $130.9 related to the loss reserves assumed in respect
of the Eagle Star reinsurance transaction. On October 19, 2012, TIG Insurance repaid for $200.0 of cash the

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

$160.2 carrying value of a loan note issued by TIG Insurance in connection with its acquisition of General Fidelity
in August 2010 and recognized a charge of $39.8 in other expense. Total equity of the Runoff segment increased
by $95.1 in 2012 primarily as a result of the capital permanently invested in Runoff following the voluntary
liquidation of nSpire Re ($171.1) and net earnings, partially offset by $303.8 of dividends paid to Fairfax.

Runoff’s investments in Fairfax affiliates as at December 31, 2012, consist of:

Affiliate
OdysseyRe
Advent
TRG Holdings

Other(1)

Revenue(2)
Expenses

Pre-tax income before interest and other
Interest expense

Pre-tax income

% interest
21.2%
15.0%
21.0%

2012
868.1
(828.9)

2011
649.8
(636.5)

39.2
(2.2)

13.3
(0.7)

37.0

12.6

(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, Sporting Life, Prime Restaurants
and Thomas Cook India.

(2) Revenue includes the interest and dividend income and net gains on investments of the Other reporting segment.

The Other reporting segment is comprised of the results of operations of Ridley, William Ashley, Sporting Life,
Prime Restaurants and Thomas Cook India. Ridley is one of North America’s leading animal nutrition companies
and operates in the U.S. and Canada. William Ashley (a prestige retailer of exclusive tableware and gifts in
Canada), Sporting Life (a Canadian retailer of sporting goods and sports apparel), Prime Restaurants (franchises,
owns and operates a network of casual dining restaurants and pubs in Canada) and Thomas Cook India (an
integrated travel and travel related financial services company in India) were included in the Other reporting
segment since their respective acquisition dates of August 16, 2011, December 22, 2011, January 10, 2012 and
August 14, 2012 pursuant to the transactions described in note 23 (Acquisitions and Divestitures) to the con-
solidated financial statements for the year ended December 31, 2012.

On November 28, 2012, Ridley acquired the assets and certain liabilities of Stockade Brands Inc. (a manufacturer
of animal feed products) for $5.7. On November 30, 2012, Ridley and Masterfeeds Inc. contributed the net assets
of their respective Canadian feed businesses to a newly formed limited partnership (Masterfeeds LP). The net
assets contributed by Ridley were valued at $25.4 for which Ridley received a 30% interest in Masterfeeds LP.

Ridley’s revenue and expenses fluctuate with changes in raw material prices. Ridley’s revenue increased from
$635.0 in 2011 to $670.8 in 2012 primarily as a result of higher raw material prices. The remaining revenue and
expenses included in the Other reporting segment were comprised of the revenue and expenses of William Ash-
ley, Sporting Life, Prime Restaurants and Thomas Cook India.

Interest and Dividends

Information related to consolidated interest and dividend income is provided in the Investments section in this
MD&A.

Net Gains on Investments

Information related to consolidated net gains on investments is provided in the Investments section in this
MD&A.

148

Interest Expense

Consolidated interest expense decreased from $214.0 in 2011 to $208.2 in 2012 reflecting lower interest expense
following the repayment on maturity of $86.3 principal amount of Fairfax unsecured senior notes due April 26,
2012 and the early repayment of $200.0 principal amount of the TIG Note in connection with TIG’s acquisition
of General Fidelity in August 2010, partially offset by interest expense incurred following the issuance on
October 15, 2012 of Cdn$200.0 principal amount of Fairfax unsecured senior notes due 2022. Lower interest
expense in 2012 also reflected the repurchases during 2011 of $298.2, $323.8 and $35.9 principal amounts of Fair-
fax, Crum & Forster and OdysseyRe unsecured senior notes respectively, partially offset by the issuances during
2011 of $500.0 and Cdn$400.0 principal amounts of Fairfax unsecured senior notes.

Consolidated interest expense was comprised of the following:

Fairfax
Crum & Forster
Zenith National
OdysseyRe
Advent
Runoff (TIG)
Other

2012
160.6
2.4
3.3
27.7
4.5
7.5
2.2

2011
152.7
15.0
3.3
28.9
4.5
8.9
0.7

208.2

214.0

Corporate Overhead and Other

Corporate overhead and other consists of the expenses of all of the group holding companies, net of the compa-
ny’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

2012
94.7
63.9
10.2
164.2
(76.8)

2011
115.2
95.0
(6.3)
(98.5)
(73.0)

256.2

32.4

Fairfax corporate overhead expense decreased from $115.2 in 2011 to $94.7 in 2012 primarily reflecting lower
legal expenses. Subsidiary holding companies’ corporate overhead expense decreased from $95.0 in 2011 to $63.9
in 2012 primarily reflecting the following items recorded in 2011: additional personnel costs incurred at North-
bridge, Zenith National and Advent; restructuring costs at Northbridge related in part to the rebranding of three
of its operating subsidiaries under Northbridge Insurance; and restructuring costs at Crum & Forster related to the
integration of First Mercury.

Total return swap expense is reported as a component of interest and dividend income. Prior to giving effect to
the impact of total return swap expense ($38.3 in 2012 compared to $39.0 in 2011), interest and dividends earned
on holding company cash and investments decreased from $45.3 in 2011 to $28.1 in 2012 primarily as a result of
decreased holdings year-over-year of a high-yielding corporate debt security and long term U.S. treasury bonds
and decreased share of profit of associates. Total return swap expense was lower in 2012 as a result of a year-over-
year decrease in the average notional amount of short equity and equity index total return swaps at the holding
company, partially offset by increases in dividends payable by Fairfax on certain reference securities underlying
several of the holding company’s short equity and equity index total return swaps.

Net gains and losses on investments at the holding company were comprised as shown in the table below. Invest-
ment management and administration fees increased from $73.0 in 2011 to $76.8 in 2012 primarily as a result of
management fees earned on higher year-over-year realized gains and adjustments to the fees payable in respect of
the prior year.

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

Common stocks and equity derivatives (excluding equity hedges)
Equity hedges
Bonds
Preferred stocks
Foreign currency
Other

Net gains (losses) on investments

Income Taxes

2012
12.8
(239.6)
70.3
(13.9)
(4.4)
10.6

2011
(38.9)
118.5
16.5
1.7
(0.9)
1.6

(164.2)

98.5

The effective income tax rate in 2012 of 17.7% differed from the company’s Canadian statutory income tax rate
of 26.5% primarily as a result of non-taxable investment income (including dividend income, interest on bond
investments in U.S. states and municipalities and capital gains only 50% taxable in Canada) and income or losses
earned or incurred in jurisdictions where the corporate income tax rate is different from the company’s Canadian
statutory income tax rate, partially offset by unrecorded accumulated income tax losses. During the year, the
company recorded a loss related to the repayment of the TIG Note which is not deductible for tax purposes.

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) and 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 Canadian statutory income tax rate.

Non-controlling Interests

The attribution of net earnings to the non-controlling interests is comprised of the following:

Ridley
Fairfax Asia
Prime Restaurants
Sporting Life
Thomas Cook India

2012
4.2
1.7
1.3
0.8
0.3

2011
2.1
0.6
–
–
–

8.3

2.7

Non-controlling interest of $8.3 in 2012 increased from $2.7 in 2011 primarily due to the acquisition of Prime
Restaurants, Sporting Life and Thomas Cook India, as described in note 23 (Acquisitions and Divestitures) to the
consolidated financial statements for the year ended December 31, 2012.

Components of Consolidated Balance Sheets

Consolidated Balance Sheet Summary

The assets and liabilities reflected on the company’s consolidated balance sheet increased significantly following
the acquisition of RiverStone Insurance by Runoff on October 12, 2012. The acquisitions of Thomas Cook India
(acquired August 14, 2012) and Prime Restaurants (acquired January 10, 2012) had nominal impacts on the con-
solidated balance sheet. Please refer to note 23 (Acquisitions and Divestitures) to the consolidated financial state-
ments for the year ended December 31, 2012 for additional details related to these acquisitions. Refer to the
Runoff section of this MD&A for additional information related to the Eagle Star reinsurance transaction and the
Syndicate 535 and Syndicate 1204 novation transactions referred to in the discussion which follows.

Holding company cash and investments increased to $1,169.2 ($1,128.0 net of $41.2 of holding company
short sale and derivative obligations) at December 31, 2012 compared to $1,026.7 at December 31, 2011 ($962.8
net of $63.9 of holding company short sale and derivative obligations). Significant cash movements at the Fairfax
holding company level during 2012 were as set out in the Financial Condition section of this MD&A under the
heading of Liquidity.

150

Insurance contract receivables increased by $210.0 to $1,945.4 at December 31, 2012 from $1,735.4 at
December 31, 2011 primarily as a result of larger year-over-year premiums receivable balances at Runoff and
OdysseyRe, partially offset by lower year-over-year premium receivable balances at Advent and Northbridge.
Increased premiums receivable at Runoff primarily related to the consolidation of RiverStone Insurance and the
Eagle Star reinsurance transaction. Movements in the premium receivable balances at the remainder of the operat-
ing companies were generally consistent with changes in those operating companies’ premium volumes.

Portfolio investments comprise investments carried at fair value and equity accounted investments (at
December 31, 2012 the latter primarily included the company’s investments in Resolute, Gulf Insurance, ICICI
Lombard, The Brick, Thai Re and other partnerships and trusts), the aggregate carrying value of which was
$25,163.2 at December 31, 2012 ($24,966.2 net of subsidiary short sale and derivative obligations) compared to
$23,466.0 at December 31, 2011 ($23,359.7 net of subsidiary short sale and derivative obligations). The net
$1,606.5 increase in the aggregate carrying value of portfolio investments at December 31, 2012 compared to
December 31, 2011 (net of subsidiary short sale and derivative obligations) primarily reflected the consolidation
of the portfolio investments of RiverStone Insurance ($1,236.3 at December 31, 2012), net appreciation of bonds
(principally bonds issued by U.S. states and municipalities and corporate and other bonds) and common stocks,
the net favourable impact of foreign currency translation, the cumulative appreciation related to the company’s
investment in Cunningham Lindsey which was realized following its sale and net cash provided by operating
activities, partially offset by net mark-to-market losses related to the company’s long and short equity and equity
index total return swap derivative contracts and the payment of dividends to Fairfax.

Subsidiary cash and short term investments (including cash and short term investments pledged for short sale and
derivative obligations) increased by $980.4 from $6,337.9 at December 31, 2011 to $7,318.3 at December 31,
2012. Significant net increases included the following – the consolidation of the cash and short term investments
of RiverStone Insurance ($223.5 at December 31, 2012), the reinvestment of the proceeds received from the sale of
government bonds into cash and short term investments, the proceeds received on the sale of Cunningham Lind-
sey and cash provided by operating activities. Significant net decreases during 2012 included the following – cash
of $603.6 paid in connection with the reset provisions of the company’s long and short equity and equity index
total return swaps, the payment of cash dividends of $733.5 to Fairfax, cash used to acquire common stock and
certain limited partnership investments, cash used to acquire RiverStone Insurance, the repayment of the TIG
Note and cash used to acquire Thomas Cook India.

Bonds (including bonds pledged for short sale and derivative obligations) decreased by $278.4 from $11,582.8 at
December 31, 2011 to $11,304.4 at December 31, 2012 primarily reflecting the sale of U.S. treasury and Canadian
government bonds, partially offset by net unrealized appreciation (principally related to bonds issued by U.S.
states and municipalities and corporate and other bonds) and the consolidation of the bond portfolio of River-
Stone Insurance ($835.7 at December 31, 2012).

Common stocks increased by $736.0 from $3,663.1 at December 31, 2011 to $4,399.1 at December 31, 2012
primarily reflecting net unrealized appreciation, net purchases of common stocks and limited partnerships and
the consolidation of the common stock portfolio of RiverStone Insurance ($153.3 at December 31, 2012), partially
offset by the reclassification of Resolute and Arbor Memorial from common stocks to investments in associates.

Investments in associates increased $431.0 from $924.3 at December 31, 2011 to $1,355.3 at December 31, 2012
primarily reflecting the reclassification of Resolute and Arbor Memorial from common stocks to investment in
associates following the determination that such investments were subject to significant influence, the acquis-
itions of Eurobank Properties and Thai Re and additional net investments in limited partnerships, partially offset
by the sale of Cunningham Lindsey and Fibrek as described in note 6 (Investments in Associates) to the con-
solidated financial statements for the year ended December 31, 2012.

Derivatives and other invested assets net of short sale and derivative obligations decreased by $304.3 principally
as a result of net unrealized depreciation related to CPI-linked derivatives, decreased investment in credit related
warrants (such warrants were exercised during 2012) and increased net liabilities payable to counterparties to the
company’s long and short equity and equity index total return swaps.

Recoverable from reinsurers increased by $1,092.7 to $5,290.8 at December 31, 2012 from $4,198.1 at
December 31, 2011 reflecting the impact of certain transactions at Runoff (principally the consolidation of River-
Stone Insurance and the Syndicate 535 and Syndicate 1204 novation transactions) and increased business vol-

151

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

umes at Fairfax Asia, Crum & Forster and Fairfax Brasil, partially offset by collections in 2012 of the significant
catastrophe losses ceded in 2011 and the continued progress by Runoff as a result of normal cession and collec-
tion activity. Additional detail is provided in the Recoverable from Reinsurers section of this MD&A.

Deferred income taxes represent amounts expected to be recovered in future years. The deferred income tax
asset decreased by $4.7 to $623.5 at December 31, 2012 from $628.2 at December 31, 2011 primarily as a result of
increased temporary differences related to net unrealized appreciation of investments during 2012, largely offset
by increased operating loss carryovers in the U.S. Additional detail is provided in note 18 (Income Taxes) to the
consolidated financial statements for the year ended December 31, 2012.

Goodwill and intangible assets increased by $185.9 to $1,301.1 at December 31, 2012 from $1,115.2 at
December 31, 2011 primarily as a result of the acquisitions of Prime Restaurants and Thomas Cook India which
increased goodwill and intangible assets by $64.0 and $118.2 respectively. At December 31, 2012, consolidated
goodwill of $819.8 ($696.3 at December 31, 2011) and intangible assets of $481.3 ($418.9 at December 31, 2011)
were comprised primarily of goodwill and the value of customer and broker relationships and brand names which
arose on the acquisitions of Prime Restaurants and Thomas Cook India during 2012, First Mercury and Pacific
Insurance during 2011, Zenith National during 2010 and Polish Re during 2009 and the privatization of North-
bridge 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 impair-
ment. Impairment tests for goodwill and intangible assets not subject to amortization were completed in 2012
and it was concluded that no impairment had occurred.

Other assets increased by $163.5 to $984.9 at December 31, 2012 from $821.4 at December 31, 2011 primarily
as a result of increased income taxes refundable, the consolidation of the other assets of Prime Restaurants and
Thomas Cook India and increased receivables for securities sold but not yet settled, partially offset by decreased
accrued interest and dividends. Income taxes refundable increased by $24.7 to $109.9 at December 31, 2012 from
$85.2 at December 31, 2011 primarily as a result of operating losses incurred in 2012, principally at Northbridge.

Provision for losses and loss adjustment expenses increased by $2,416.6 to $19,648.8 at December 31,
2012 from $17,232.2 at December 31, 2011 reflecting the impact of certain transactions at Runoff (principally the
consolidation of RiverStone Insurance, the Eagle Star reinsurance transaction and the Syndicate 535 and Syndi-
cate 1204 novation transactions), increased provision for losses and loss adjustment expenses at Crum & Forster,
Zenith National, OdysseyRe, Fairfax Asia and Fairfax Brasil (commensurate with increased business volumes at
those respective operating companies) and the strengthening of the Canadian dollar relative to the U.S. dollar
which increased the provision for losses and loss adjustment expenses at Northbridge, partially offset by pay-
ments made in 2012 related to the significant catastrophe losses incurred in 2011 and the continued progress by
Runoff in settling its remaining claims. Additional detail is provided in the Provision for Losses and Loss Adjust-
ment Expenses section of this MD&A.

Non-controlling interests increased by $23.3 to $69.2 at December 31, 2012 from $45.9 at December 31, 2011
principally as a result of the acquisition of Prime Restaurants and Thomas Cook India. The non-controlling inter-
ests balance at December 31, 2012 and December 31, 2011 primarily related to Ridley.

Comparison of 2011 to 2010 – Total assets at December 31, 2011 increased to $33,406.9 from $31,448.1 at
December 31, 2010 primarily reflecting the consolidation of First Mercury, Pacific Insurance, Sporting Life and
William Ashley pursuant to the acquisition transactions described in note 23 (Acquisitions and Divestitures) to
the consolidated financial statements for the year ended December 31, 2012. Holding company debt (including
other long term obligations) at December 31, 2011 increased to $2,394.6 from $1,809.6 at December 31, 2010
primarily reflecting the issuances in 2011 of $500.0 and Cdn$400.0 principal amount of Fairfax unsecured senior
notes due 2021, partially offset by the repurchase of $298.2 principal amount of Fairfax unsecured senior notes
due 2012 and 2017, 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 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 First Mercury’s trust preferred securities. The company’s 2011 holding company debt and sub-
sidiary debt transactions are described in note 15 (Subsidiary Indebtedness, Long Term Debt and Credit Facilities)
to the consolidated financial statements for the year ended December 31, 2012.

152

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
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.

The tables below present the company’s gross provision for losses and loss adjustment expenses by reporting
segment and line of business for the years ended December 31:

2012

Property
Casualty
Specialty

Insurance

Reinsurance

Insurance
and
Reinsurance

Northbridge
283.9

U.S.
132.6
2,634.9 4,215.1
183.9

50.5

Fairfax
Asia
189.5
209.4
211.5

OdysseyRe
1,389.9
3,859.3
334.6

Other Runoff
430.0
443.3
228.4 3,631.9
135.7 1,084.4

Corporate
and Other Consolidated
2,869.2
14,779.0
2,000.6

–
–
–

2,969.3 4,531.6

610.4

5,583.8

794.1 5,159.6

–

19,648.8

Intercompany

2.1

51.3

–

72.5

396.6

597.9

(1,120.4)

–

Provision

for losses
and LAE

2011

Property
Casualty
Specialty

2,971.4 4,582.9

610.4

5,656.3

1,190.7 5,757.5

(1,120.4)

19,648.8

Insurance

Reinsurance

Insurance
and
Reinsurance

Northbridge
233.2

U.S.
127.8
2,539.5 3,957.7
179.4

45.9

Fairfax
Asia
121.2
179.3
169.2

OdysseyRe
1,266.7
3,806.5
336.1

Other Runoff
482.9
289.6
155.4 2,714.3
450.7
176.8

Corporate
and Other Consolidated
2,521.4
13,352.7
1,358.1

–
–
–

2,818.6 4,264.9

469.7

5,409.3

815.1 3,454.6

–

17,232.2

Intercompany

2.2

36.5

0.6

147.9

399.4

596.7

(1,183.3)

–

Provision

for losses
and LAE

2,820.8 4,301.4

470.3

5,557.2

1,214.5 4,051.3

(1,183.3)

17,232.2

In the ordinary course of carrying on 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. Circumstances where assets may be so pledged (either directly or to support letters of credit issued for
the following purposes) include: 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 by 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 $3.4 billion of cash and invest-
ments pledged by the company’s subsidiaries at December 31, 2012, as described in note 5 (Cash and Invest-

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

ments) to the consolidated financial statements for the year ended December 31, 2012, represented the aggregate
amount as at that date that had been pledged in the ordinary course of business to support each pledging sub-
sidiary’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 various elements of estimation 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 often measured as 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 $136.1 and $29.8 in 2012
and 2011 respectively, 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 reserve development

Favourable/(Unfavourable)

2012
60.8
(52.4)
16.4
152.0
0.6

177.4
(41.3)

136.1

2011
39.6
(61.8)
17.6
51.4
39.7

86.5
(56.7)

29.8

154

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

2011(1)

2012(1)

2010(1)
2008(1)
13,711.2 12,794.1 11,448.6(2) 11,008.5 10,624.8
(580.3)

(122.3)

2009(1)

101.0

167.4

393.3

4,385.6
(136.1)

4,297.2
(29.8)

3,154.5
14.7

3,091.8
30.3

3,405.4
55.4

(946.5)
(2,964.4)

(1,221.3)
(2,639.5)

(736.9)
(2,612.9)

(729.9)
(2,424.9)

(835.5)
(2,034.2)

Provision for claims of companies acquired during the year

at December 31

925.0

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

15,075.8 13,711.2 12,794.1 11,437.5(2) 11,008.5
34.9

20.6

27.6

25.3

24.2

15,096.4 13,735.4 12,819.4 11,465.1 11,043.4
3,685.0
3,229.9

4,552.4

3,301.6

3,496.8

Provision for claims – end of year – gross

19,648.8 17,232.2 16,049.3 14,766.7 14,728.4

(1)

IFRS basis for 2012, 2011 and 2010; Canadian GAAP basis for 2009 and 2008.

(2) Provision for claims at January 1, 2010, reflected 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 related to the impact in 2012 of the
strengthening of the Canadian dollar and the euro relative to the U.S. dollar. 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.

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

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
2002, with the re-estimated amount of each accident year’s reserve development shown in subsequent years up to
December 31, 2012. 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 2008 through 2012. 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

2012

2011

2010

2009

2008

(In Cdn$ except as indicated)
2,030.7 1,994.3 1,973.3 1,931.8 1,696.0

Provision for current accident year’s claims
Foreign exchange effect on claims
Increase (decrease) in provision for prior accident years’ claims

756.1
(3.0)
(60.8)

766.8
3.2
(39.2)

769.2
(7.9)
(1.3)

849.4
(36.6)
(16.0)

925.3
59.2
(67.1)

Total incurred losses on claims and LAE

692.3

730.8

760.0

796.8

917.4

Payments for losses on claims and LAE

Payments on current accident year’s claims
Payments on prior accident years’ claims

(262.6)
(383.2)

(280.9)
(413.5)

(266.3)
(472.7)

(272.3)
(483.0)

(298.6)
(383.0)

Total payments for losses on claims and LAE

(645.8)

(694.4)

(739.0)

(755.3)

(681.6)

Provision for claims and LAE at December 31
Exchange rate

2,077.2 2,030.7 1,994.3 1,973.3 1,931.8
0.8100
1.0064
1.0043

0.9821

0.9539

Provision for claims and LAE at December 31 converted to U.S.

dollars

2,086.1 1,994.3 2,007.0 1,882.3 1,564.8

(1)

IFRS basis for 2012, 2011 and 2010; Canadian GAAP basis for 2009 and 2008.

156

The following table shows for Northbridge the original provision for losses and LAE at each calendar year-end
commencing in 2002, 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

2002

2003

2004

2005

Calendar year

2006

2007
(In Cdn$)

2008

2009

2010

2011

2012

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

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 2,077.2

273.7
396.9
500.1
577.1
632.3
687.0
722.3
753.3
773.3
784.6

724.8
792.1
812.2
826.9
836.6
857.9
862.7
876.1
878.5
880.3
(151.4)

383.2

413.5
670.7

472.7
759.9
965.9

376.4
619.5
835.4

483.0
383.0
353.1
656.0
796.8
594.2
777.3
887.0 1,027.6
937.7 1,000.9 1,056.8 1,183.1

279.1
441.8
576.0
707.7
803.4 1,055.5 1,115.1 1,156.2
878.5 1,129.0 1,181.7
923.3 1,170.7
953.4

1,114.6 1,461.7 1,564.3 1,674.0 1,883.8 1,965.8 1,957.1 1,967.1
1,094.0 1,418.1 1,545.4 1,635.1 1,901.2 1,962.0 1,914.4
1,096.7 1,412.5 1,510.3 1,635.1 1,901.5 1,917.7
1,107.2 1,400.2 1,507.9 1,634.3 1,865.8
1,117.7 1,398.4 1,513.5 1,612.1
1,124.7 1,403.1 1,495.1
1,123.7 1,383.6
1,112.3

233.4
377.9
493.3
585.1
671.0
729.7
778.9
804.2
823.6

864.8
880.8
890.1
903.2
924.4
935.0
945.3
947.4
946.7

(91.3)

41.6

25.1

145.1

83.9

66.0

55.6

79.9

63.6

Northbridge experienced net favourable development of prior years’ reserves of Cdn$63.6 in 2012, comprised of
net favourable reserve development of Cdn$60.8 and favourable foreign currency movements of Cdn$2.8 related
to the translation of the U.S. dollar-denominated claims reserves of Northbridge Indemnity and Northbridge
Commercial. The net favourable reserve development of prior years’ reserves of Cdn$60.8 primarily reflected net
favourable development across various accident years at Northbridge Indemnity, Northbridge Commercial and
Federated, largely offset by net adverse development of prior years’ reserves at Northbridge General. The total
favourable impact of the effect of foreign currency translation on claims reserves of Cdn$3.0 in 2012 was princi-
pally related to the strengthening of the Canadian dollar relative to the U.S. dollar in 2012 and comprised
Cdn$2.8 related to prior years’ reserves and Cdn$0.2 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

2003

2004

2005

2006

2007
(In Cdn$)

2008

2009

2010

2011

2012

493.3

487.1

466.2

501.2

467.9

469.4

572.4

547.6

543.4

534.9

640.8

631.7

649.1

650.3

636.8

508.1

505.1

501.3

503.5

497.1

493.4

531.6

499.2

485.9

463.2

462.5

463.5

464.5

573.1

646.8

600.5

584.4

561.6

552.8

558.5

550.4

522.4

467.2

437.2

426.9

416.2

416.1

412.8

409.6

398.9

404.2

346.4

342.3

336.9

340.3

340.2

346.0

342.9

342.6

340.1

2002 &
Prior

728.9

724.8

792.1

812.2

826.9

836.6

857.9

862.7

876.1

878.5

880.3

Favourable (unfavourable) development

(20.8)% 15.9% 23.6% 4.0% 12.6% 2.9% 0.6% 6.6% 6.3% 4.3%

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

Accident year 2011 experienced net favourable development reflecting better than expected emergence across all
segments. Accident year 2010 experienced net favourable development due to better than expected emergence
across most segments, except for its broker small-to-medium segment which reported net adverse development
due to an unfavourable Ontario court decision which is expected to affect the broader automobile insurance
industry. Accident year 2009 experienced net favourable development reflecting better than expected emergence
on commercial property and commercial liability claims reserves and in Northbridge’s large account segment.
Accident year 2008 experienced net favourable development due to better than expected emergence across all
segments. Accident years 2003 to 2007 reflected net favourable development due to better than expected emer-
gence on commercial automobile and property claims reserves. Reserves for the 2002 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 2008 through 2012. 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
Fairmont (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

Provision for current accident year’s claims
Increase (decrease) in provision for prior

accident years’ claims

2012
2,776.5

2011

2008
2,588.5 1,774.3(2) 2,038.3 1,668.9

2009

2010

1,353.0

966.7

532.3

566.0

802.8

52.4

61.8

11.3

(25.0)

59.0

Total incurred losses on claims and LAE

1,405.4

1,028.5

543.6

541.0

861.8

Payments for losses on claims and LAE

Payments on current accident year’s claims
Payments on prior accident years’ claims(3)

(292.4)
(831.2)

(259.1)
(750.0)

(143.1)
(550.6)

(157.0)
(632.9)

(228.3)
(264.1)

Total payments for losses on claims and LAE

(1,123.6)

(1,009.1)

(693.7)

(789.9)

(492.4)

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)

3,058.3

2,607.9 1,624.2 1,789.4 (2) 2,038.3

–

–

(334.5)

–

503.1

964.3

–

–

–

–

Provision for claims and LAE at December 31

3,058.3

2,776.5 2,588.5

1,789.4 2,038.3

(1)

IFRS basis for 2012, 2011 and 2010; Canadian GAAP basis for 2009 and 2008.

(2) Provision for claims at January 1, 2010 reflected 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 Cana-
dian GAAP.

(3) Reduced by $302.5 of proceeds from a significant reinsurance commutation in 2008.

(4) Runoff assumed liability for substantially all of Crum & Forster’s asbestos and environmental claims reserves effective

December 31, 2011.

(5) First Mercury was acquired and integrated with Crum & Forster in 2011 and Zenith National was acquired in 2010.

158

The following table shows for Crum & Forster (and Zenith National since 2010) the original provision for losses
and LAE at each calendar year-end commencing in 2002, 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 National since 2010)

As at December 31

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Provision for claims including LAE

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 2,776.5 3,058.3

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

161.3

514.5

460.0

792.2

466.0

796.7

478.9

848.7

780.0 1,045.1 1,066.1

804.7

571.0

629.2

904.3

264.1

632.9

565.4 1,084.5

831.2

649.0 1,048.7 1,258.8 1,537.0

971.2 1,670.9 1,492.4

970.2 1,257.1

959.6 1,013.8 1,153.9 1,524.3 1,847.5

1,144.6 1,111.5 1,118.3 1,209.9 1,661.7 1,647.2

960.8 1,241.7 1,280.2 1,693.5 1,746.4

1,064.1 1,385.6 1,745.4 1,759.7

1,182.6 1,841.8 1,800.4

1,617.7 1,890.9

1,647.7

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 2,828.9

1,285.9 1,536.0 1,509.2 1,525.3 1,716.5 1,692.4 2,015.5 1,833.4 2,664.6

1,308.2 1,513.3 1,499.7 1,640.4 1,700.3 1,711.8 2,063.1 1,836.7

1,296.8 1,545.5 1,616.7 1,653.0 1,732.0 1,754.7 2,062.4

1,330.0 1,674.8 1,658.2 1,688.5 1,774.6 1,755.5

1,457.2 1,719.4 1,687.3 1,737.3 1,777.8

1,472.9 1,746.8 1,729.8 1,738.0

1,488.8 1,789.3 1,733.3

1,521.5 1,795.3

1,527.6

Favourable (unfavourable) development

(289.2)

(257.1)

(155.1)

(127.4)

(90.9)

(86.6)

(24.1)

(47.3)

(76.1)

(52.4)

U.S. Insurance experienced net adverse development of prior years’ reserves of $52.4 in 2012 principally com-
prised of $54.0 of net adverse development of workers’ compensation claims reserves (Crum & Forster) and gen-
eral liability claims reserves (First Mercury), partially offset by $1.6 of net favourable development of prior years’
reserves primarily as a result of commuting certain assumed reinsurance contracts (Zenith National).

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

2002 &
Prior

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

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

1,414.0

454.1

574.5

613.8

701.0

723.4

748.8

659.6

743.1

838.0

1,060.5

1,454.1

416.6

515.3

602.7

690.7

706.4

759.4

668.8

746.8

855.1

1,461.5

422.2

500.3

575.7

651.8

686.9

742.1

670.7

762.6

1,483.8

410.9

458.6

573.9

623.1

674.8

755.3

691.1

1,472.4

409.9

446.3

545.0

619.2

676.9

764.4

1,505.6

412.0

443.2

551.3

609.0

679.9

1,632.8

440.9

444.9

556.2

606.4

1,648.5

452.5

446.8

545.6

1,664.4

464.5

444.7

1,696.5

465.0

1,698.3

Favourable (unfavourable) development

(20.1)% (2.4)% 22.6% 11.1% 13.5% 6.0% (2.1)% (4.8)% (2.6)% (2.0)%

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

Accident years 2008 to 2011 experienced net adverse development principally related to unfavourable trends on
workers’ compensation claims reserves. Accident years 2004 to 2007 experienced net favourable development
principally attributable to favourable emergence on general liability and commercial multi-peril claims reserves
and workers’ compensation claims reserves in accident year 2004. Accident year 2003 experienced net adverse
development related to a single large general liability claim. Net adverse development in the 2002 and prior acci-
dent years reflected the impact of increased frequency and severity on casualty claims reserves, the effects of
increased competitive conditions during the 2002 and prior periods and included strengthening of asbestos, envi-
ronmental 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 2008 through 2012. 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

Provision for current accident year’s claims
Foreign exchange effect on claims
Increase (decrease) in provision for prior accident years’ claims

2011

2012
2009
266.0 203.0 138.7 113.2

2010

2008
91.0

182.4 144.6 130.2
12.7
(10.0)

(3.1)
(17.6)

13.0
(16.4)

92.8
2.5
(8.1)

65.5
0.1
3.4

Total incurred losses on claims and LAE

179.0 123.9 132.9

87.2

69.0

Payments for losses on claims and LAE

Payments on current accident year’s claims
Payments on prior accident years’ claims

(44.1)
(82.1)

(24.5)
(62.2)

(24.0)
(44.6)

(20.7)
(41.0)

(15.9)
(30.9)

Total payments for losses on claims and LAE

(126.2)

(86.7)

(68.6)

(61.7)

(46.8)

Insurance subsidiaries acquired during the year(2)

–

25.8

–

–

–

Provision for claims and LAE at December 31

318.8 266.0 203.0 138.7 113.2

(1)

IFRS basis for 2012, 2011 and 2010; Canadian GAAP basis for 2009 and 2008.

(2) Pacific Insurance was acquired in 2011.

The following table shows for Fairfax Asia the original provision for losses and LAE at each calendar year-end
commencing in 2002, 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

160

Fairfax Asia’s Calendar Year Claims Reserve Development

As at December 31

2002

2003

2004

2005

Calendar year
2007

2006

2008 2009 2010

2011 2012

Provision for claims including LAE

23.1

25.1

54.7

74.7

87.6

91.0

113.2 138.7 203.0

266.0 318.8

Cumulative payments as of:

One year later

Two years later

Three years later

Four years later

Five years later

Six years later

Seven years later

Eight years later

Nine years later

Ten years later

Reserves re-estimated as of:

One year later

Two years later

Three years later

Four years later

Five years later

Six years later

Seven years later

Eight years later

Nine years later

Ten years later

Favourable (unfavourable) development

10.1

14.1

16.5

17.8

18.2

18.5

18.7

18.8

18.8

18.8

22.4

22.2

21.3

20.5

19.6

19.8

19.6

19.7

19.8

19.8

3.3

82.1

62.2

92.4

44.6

65.2

75.7

41.0

56.5

62.8

66.2

30.9

49.8

55.8

58.0

59.1

94.9

106.0 136.3 185.0

260.2

84.7

100.2 124.5 177.9

93.2 118.4

89.2

79.5

75.4

71.8

26.5

45.2

56.3

58.8

59.9

60.1

84.5

84.1

75.0

72.2

69.4

67.4

15.6

32.6

44.6

50.3

51.1

51.5

51.5

79.6

72.2

71.8

64.7

63.4

60.7

58.6

13.3

21.9

29.1

32.6

33.8

34.2

34.3

34.4

59.6

58.2

49.9

48.3

43.5

42.9

41.3

40.0

7.9

13.1

15.9

17.3

17.9

18.2

18.3

18.2

18.1

24.9

23.1

21.2

20.0

20.0

19.2

19.2

19.4

19.2

5.9

14.7

16.1

20.2

19.2

24.0

20.3

25.1

5.8

Fairfax Asia experienced net favourable development of prior years’ reserves of $5.8 in 2012 as a result of net
favourable development of $16.4 and net unfavourable foreign currency movements of $10.6 related to the trans-
lation of claims reserves denominated in foreign currencies. The net favourable development of prior years’
reserves was primarily attributable to commercial automobile, marine hull and workers’ compensation claims
reserves, partially offset by net adverse development on property claims reserves related to the Thailand floods.
The total unfavourable impact of the effect of foreign currency translation on claims reserves of $13.0 was princi-
pally related to the strengthening of the Singapore dollar relative to the U.S. dollar and comprised $10.6 related to
prior years’ reserves and $2.4 related to the current year’s reserves.

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

Reinsurance – OdysseyRe

The following table shows for OdysseyRe the provision for losses and LAE as originally and as currently estimated
for the years 2008 through 2012. 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

2012
4,789.5

2011
4,857.2

2010
4,666.3

2009
4,560.3

2008
4,475.6

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

1,566.5
20.4

1,863.7
(38.0)

1,320.6
46.5

1,313.3
58.8

1,518.8
(143.2)

(152.0)

(51.4)

(3.6)

(11.3)

(10.1)

Total incurred losses on claims and LAE

1,434.9

1,774.3

1,363.5

1,360.8

1,365.5

Payments for losses on claims and LAE

Payments on current accident year’s claims
Payments on prior accident years’ claims

(249.3)
(1,132.4)

(439.0)
(918.8)

(184.4)
(988.2)

(230.6)
(1,024.2)

(264.8)
(1,016.0)

Total payments for losses on claims and LAE

(1,381.7)

(1,357.8)

(1,172.6)

(1,254.8)

(1,280.8)

Provision for claims and LAE at December 31

4,842.7

4,789.5

4,857.2

4,666.3

4,560.3

(1)

IFRS basis for 2012, 2011 and 2010; Canadian GAAP basis for 2009 and 2008.

(2) Clearwater Insurance was transferred to Runoff effective January 1, 2011.

162

The following table shows for OdysseyRe the original provision for losses and LAE at each calendar year-end
commencing in 2002, 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

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Provision for claims including LAE

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 4,842.7

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

601.8

632.4

913.7

787.3 1,111.1 1,016.0 1,024.2

988.2 1,403.0 1,132.4

998.8 1,212.9 1,298.5 1,614.0 1,808.2 1,646.5 1,676.1 2,006.8 2,053.7

1,423.6 1,455.7 1,835.7 2,160.9 2,273.0 2,123.5 2,567.1 2,484.3

1,562.6 1,898.4 2,221.0 2,520.9 2,661.8 2,887.8 2,942.5

1,932.4 2,206.1 2,490.5 2,831.1 3,347.6 3,164.1

2,188.1 2,426.5 2,734.3 3,463.2 3,572.9

2,373.8 2,625.8 3,323.4 3,653.1

2,546.2 3,179.9 3,476.2

3,078.9 3,307.7

3,196.3

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 4,637.5

2,201.0 2,782.1 3,537.0 4,143.5 4,481.5 4,499.0 4,567.7 4,650.4 4,726.6

2,527.7 3,049.6 3,736.1 4,221.3 4,564.3 4,537.8 4,561.3 4,606.6

2,827.3 3,293.8 3,837.5 4,320.5 4,623.1 4,534.5 4,548.7

3,076.8 3,414.1 3,950.1 4,393.0 4,628.3 4,522.9

3,202.2 3,534.4 4,023.3 4,406.7 4,630.5

3,324.8 3,606.0 4,046.7 4,426.1

3,396.0 3,637.8 4,073.1

3,429.2 3,670.8

3,463.2

Favourable (unfavourable) development

(1,618.6) (1,329.9)

(940.6)

(560.7)

(227.4)

(47.3)

11.6

59.7

130.6

152.0

(1) The table above reflects the transfer of Clearwater Insurance to Runoff effective January 1, 2011.

OdysseyRe experienced net favourable development of prior years’ reserves of $152.0 in 2012, attributable to net
favourable development in its Americas ($91.2), EuroAsia ($37.2), U.S. Insurance ($13.5) and London Market
($10.1) divisions primarily related to net favourable emergence on prior years’ catastrophe claims reserves and
casualty and property claims reserves in the U.S. and Europe.

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

2002 &
Prior

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

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

1,844.6

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 1,337.6

1,961.5

923.8 1,149.3 1,427.6 1,087.4 1,095.2 1,066.1 1,119.2 1,143.6 1,313.9

2,200.8

856.4 1,119.7 1,321.2 1,047.5 1,045.7 1,045.9 1,113.3 1,108.2

2,527.4

824.1 1,074.6 1,297.5 1,031.1 1,025.8 1,042.8 1,082.1

2,827.3

818.8 1,055.9 1,284.1 1,017.4 1,017.3 1,041.8

3,076.8

813.7 1,048.1 1,283.4 1,008.9 1,003.5

3,202.2

811.4 1,049.7 1,273.7

991.8

3,324.8

811.7 1,041.3 1,266.6

3,396.0

810.4 1,034.7

3,429.2

809.4

3,463.2

Favourable (unfavourable) development

(87.7)% 17.5% 16.7% 14.4% 13.0% 12.2%

6.2%

5.2%

6.3%

5.2%

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

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 2011. Initial loss estimates for these
more recent accident years did not fully anticipate the improvements in market and economic conditions ach-
ieved since the early 2000s. Reserves for the 2002 and prior accident years increased principally as a result of
unfavourable loss emergence on asbestos and environmental pollution claim reserves and casualty claims reserves
in the U.S.

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 2008 through 2012. The favour-
able 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

Transfer to Runoff(2)

Incurred losses on claims and LAE

2012

2010
1,057.3 1,024.4 1,004.1

2011

2009
742.0

2008
554.4

(61.8)

–

–

–

(97.9)

Provision for current accident year’s claims
Foreign exchange effect on claims
Increase (decrease) in provision for prior accident years’ claims

392.0
22.3
(0.6)

578.0
(25.6)
(39.7)

429.3
20.1
(32.4)

371.4
69.0
31.2

132.4
(86.7)
2.3

Total incurred losses on claims and LAE

413.7

512.7

417.0

471.6

48.0

Payments for losses on claims and LAE

Payments on current accident year’s claims
Payments on prior accident years’ claims

(101.0)
(261.7)

(201.0)
(278.8)

(126.4)
(270.3)

(81.5)
(196.4)

(42.4)
(93.0)

Total payments for losses on claims and LAE

(362.7)

(479.8)

(396.7)

(277.9)

(135.4)

Insurance subsidiaries acquired during the year(3)

–

–

–

68.4

372.9

Provision for claims and LAE at December 31 excluding CTR Life
CTR Life

1,046.5 1,057.3 1,024.4 1,004.1
27.6

25.3

20.6

24.2

742.0
34.9

Provision for claims and LAE at December 31

1,067.1 1,081.5 1,049.7 1,031.7

776.9

(1)

IFRS basis for 2012, 2011 and 2010; Canadian GAAP basis for 2009 and 2008.

(2) Runoff assumed liability for the claims reserves of Advent’s Syndicate 3330 effective January 1, 2012 and nSpire Re’s

Group Re business was transferred to Runoff in 2008.

(3) Polish Re and Advent were acquired in 2009 and 2008 respectively.

164

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 2002,
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)

As at December 31

Provisions 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

2002

226.1

78.2

175.5

206.0

209.0

243.4

276.7

299.5

320.6

334.7

349.3

268.2

295.2

310.1

323.4

348.1

343.5

374.6

380.3

377.9

387.0

Calendar Year

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

263.3

267.6

315.6

373.5

456.5

742.0

1,004.1

1,024.4

995.5

1,046.5

115.8

152.8

54.3

74.6

40.3

85.9

93.0

197.7

104.3

151.9

160.5

262.5

164.9

128.8

160.5

209.4

238.7

401.0

240.5

421.8

503.7

278.8

395.6

261.7

210.0

179.2

206.6

267.3

304.3

461.2

251.8

216.2

252.7

318.0

331.0

280.8

252.5

290.5

334.3

309.6

280.3

301.4

328.9

289.3

336.7

286.3

279.6

319.4

429.4

383.8

833.5

302.9

288.2

361.9

375.8

454.1

833.0

317.3

326.7

322.9

436.9

484.2

787.6

989.2

939.8

959.0

966.2

1,016.9

993.1

348.4

302.8

377.6

458.0

477.6

801.9

338.0

351.7

393.3

452.5

492.8

375.2

364.5

387.1

465.1

384.7

359.4

392.3

381.3

366.2

389.9

Favourable (unfavourable) development

(160.9)

(126.6)

(98.6)

(76.7)

(91.6)

(36.3)

(59.9)

45.1

31.3

(21.4)

(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 unfavourable development of prior
years’ reserves of $21.4 in 2012 as a result of net favourable development of $0.6 (principally comprised of net
favourable development at Advent across most lines of business, partially offset by net adverse development at
Polish Re related to commercial automobile claims reserves) which was offset by the effect of net unfavourable
foreign currency movements of $22.0 (principally related to the translation of the Canadian dollar-denominated
claims reserves of CRC Re). The total unfavourable impact of the effect of foreign currency translation on claims
reserves of $22.3 was principally related to the strengthening of the Canadian dollar relative to the U.S. dollar and
comprised $22.0 related to prior years’ reserves and $0.3 related to the current year’s reserves.

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

Runoff

The following table shows for the Runoff operations the provision for losses and LAE as originally and as currently
estimated for the years 2008 through 2012. 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

2012

2008
2,860.6 2,095.0 1,956.7 1,989.9 2,116.5

2011

2010

2009

Transfers to Runoff(2)

61.8

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

133.8
3.3
41.3

178.4

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

47.3

(7.4)
(273.8)

(1.8)
(211.4)

(0.1)
(300.0)

–

(2.6)
(105.1) (3) (269.2)

Total payments for losses on claims and LAE

(281.2)

(213.2)

(300.1)

(105.1)

(271.8)

Provision for claims and LAE at December 31 before the

undernoted

2,819.6 2,422.2 1,700.6 1,956.7 1,989.9

A&E reserves transferred from Crum & Forster(4)

–

334.5

–

Runoff subsidiaries acquired during the year(5)

925.0

103.9

394.4

–

–

–

–

Provision for claims and LAE at December 31

3,744.6 2,860.6 2,095.0 1,956.7 1,989.9

(1)

IFRS basis for 2012, 2011 and 2010; Canadian GAAP basis for 2009 and 2008.

(2) Transfer to Runoff of Advent’s Syndicate 3330 in 2012, OdysseyRe’s Clearwater Insurance business in 2011 and

nSpire Re’s Group Re business in 2008.

(3) Reduced by $136.2 of proceeds from the commutation of several reinsurance treaties.

(4) Runoff assumed liability for substantially all of Crum & Forster’s asbestos and environmental claims reserves effective

December 31, 2011.

(5) RiverStone Insurance and Syndicates 535 and 1204 in 2012, Syndicate 376 in 2011, General Fidelity and Syndicate

2112 in 2010.

Runoff experienced net adverse development of prior years’ reserves in 2012 of $41.3. U.S. Runoff experienced
$109.9 of net adverse development of prior years’ reserves (primarily related to net strengthening of workers’
compensation, asbestos and environmental loss reserves and other latent claims reserves), partially offset by $68.6
of net favourable development of prior years’ reserves in European Runoff (related to net favourable emergence
across all lines at European Runoff). Provision for current accident year’s claims of $133.8 in 2012 increased from
$8.8 in 2011 primarily as a result of the impact of the Eagle Star reinsurance transaction.

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.

166

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
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, mold, and welding fumes. As a result of its historical underwriting 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 sig-
nificant actual exposure to date. Methyl tertiary butyl ether (“MTBE”) was a significant potential health hazard
exposure facing the company, but Runoff has resolved the latest MTBE exposures. 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. We continue to monitor Hepatitis
C claims and have had some policyholders present coverage demands. While exposure to the insurance industry
for Hepatitis C claims may be significant, exposure in the Runoff portfolio is minimal. Similarly, we are monitor-
ing claims alleging breast cancer as a result of in utero exposure to diethylstilbestrol (“DES”), a synthetic estrogen
supplement prescribed to prevent miscarriages or premature births. Historically, DES exposure cases involved
alleged injuries to the reproductive tract. More recently filed cases are now alleging a link between DES exposure
and breast cancer. Few policyholders have presented alleged DES breast cancer claims for coverage. Accordingly,
exposure to Runoff for this claim type is limited.

Following the transfer of Clearwater Insurance to Runoff effective from January 1, 2011 and the assumption by
Runoff of substantially all of Crum and Forster’s liabilities for asbestos, environmental and other latent claims
effective from December 31, 2011, substantially all of Fairfax’s exposure to asbestos and pollution losses are now
under the management of Runoff (these transactions are further described in the Runoff section of this MD&A).
Following is an analysis of the company’s gross and net loss and ALAE reserves from A&E exposures as at
December 31, 2012 and 2011, and the movement in gross and net reserves for those years:

2012

2011

Gross

Net

Gross

Net

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
Reinsurance transaction during the year(1)

1,490.6 1,050.2 1,633.9 1,115.0
47.1
(111.9)
–

88.6
(102.4)
92.9

221.3
(147.1)
92.9

47.7
(191.0)
–

Provision for A&E claims and ALAE at December 31

1,657.7 1,129.3 1,490.6 1,050.2

(1) Runoff assumed the runoff portfolio of Eagle Star in 2012.

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 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 settle-
ment value of asbestos cases involving malignancies, the company has not seen this concern present. Asbestos
litigation has seen mixed results, with both plaintiff and defense verdicts having been rendered in courts
throughout the United States. The sharp decrease in the number of non-malignant and unimpaired injury cases

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

in the tort system in recent years has allowed for the litigation to be dealt with more effectively than in the past.
Expense has increased as a result of this trend, however, due to the fact that the malignancy cases are often more
heavily litigated than the non-malignancy cases were.

Following is an analysis of Fairfax’s gross and net loss and ALAE reserves from asbestos exposures as at
December 31, 2012 and 2011, and the movement in gross and net reserves for those years:

2012

2011

Gross

Net

Gross

Net

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
Reinsurance transaction during the year(1)

1,307.5 903.3 1,357.6 934.9
49.3
(80.9)
–

203.1
(113.8)
59.6

73.8
(123.9)
–

95.6
(82.3)
59.6

Provision for asbestos claims and ALAE at December 31

1,456.4 976.2 1,307.5 903.3

(1) Runoff assumed the runoff portfolio of Eagle Star in 2012.

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
still 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, 2012 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, includ-
ing 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 eco-
nomic environments and their impact on future asbestos claim development.

168

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. Today, in the United
States, approximately 1,312 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.

Following is an analysis of the company’s gross and net loss and ALAE reserves from pollution exposures as at
December 31, 2012 and 2011, and the movement in gross and net reserves for those years:

2012

2011

Gross

Net Gross

Net

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
Reinsurance transaction during the year(1)

183.1 146.9 276.3 180.1
(2.2)
(31.0)
–

(26.1)
(67.1)
–

(7.0)
(20.1)
33.3

18.2
(33.3)
33.3

Provision for pollution claims and ALAE at December 31

201.3 153.1 183.1 146.9

(1) Runoff assumed the runoff portfolio of Eagle Star in 2012.

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’s subsidiaries 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.

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

Summary

Management believes that the A&E reserves reported at December 31, 2012 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 reinsurance to reduce their exposure on the insurance and reinsurance risks 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 Fairfax on
acquisition of a subsidiary.

Recoverable from reinsurers on the consolidated balance sheet ($5,290.8 at December 31, 2012) consists of future
recoverables from reinsurers on unpaid claims ($4,663.7), reinsurance receivable on paid losses ($469.6) and the
unearned portion of premiums ceded to reinsurers ($427.4), net of provision for uncollectible balances ($269.9).
Recoverables from reinsurers on unpaid claims increased by $1,059.1 to $4,663.7 at December 31, 2012 from
$3,604.6 at December 31, 2011 with the increase related primarily reflecting the impact of certain transactions at
Runoff (principally the consolidation of RiverStone Insurance and the Syndicate 535 and Syndicate 1204 novation
transactions) and increased business volumes at Fairfax Asia, Crum & Forster and Fairfax Brasil, partially offset by
collections in 2012 of the significant catastrophe losses ceded in 2011 and the continued progress by Runoff as a
result of normal cession and collection activity.

170

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, 2012. These 25 reinsurance groups represented 70.4%
(68.2% at December 31, 2011) of Fairfax’s total recoverable from reinsurers at December 31, 2012.

A.M. Best
rating (or S&P
equivalent)(1)

Gross
recoverable
from
reinsurers(2)

Net unsecured
recoverable(3)
from reinsurers

Group

Swiss Re

Brit

Lloyd’s

Munich

Everest

ACE

Alleghany

GIC

HDI

Principal reinsurers

Swiss Re America Corp.

Brit Gibraltar

Lloyd’s

Munich Reinsurance Co. of Canada

Everest Re (Bermuda) Ltd.

ACE Property & Casualty Insurance Co.

Transatlantic Re

General Insurance Corp. of India

Hannover Rueckversicherung

Berkshire Hathaway

General Reinsurance Corp.

Aegon

SCOR

Alterra

QBE

CNA

Arden

Nationwide

Enstar

Singapore Re

DE Shaw

Platinum

Liberty Mutual

Ullico

Axis

Partner Re

Sub-total

Other reinsurers

Arc Re

SCOR Canada Reinsurance Co.

Alterra Bermuda Ltd.

QBE Reinsurance Corp.

Continental Casualty

Arden Reinsurance Ltd.

Nationwide Mutual Insurance Co.

Unionamerica Insurance

Singapore Re Corp

D.E. Shaw (Bermuda) Ltd.

Platinum Underwriters Re Inc.

Liberty Mutual Ins. Co.

Ullico Casualty Co.

Axis Reinsurance Co.

Partner Re Company of US

Total recoverable from reinsurers

Provision for uncollectible reinsurance

Recoverable from reinsurers

A+

A

A

A+

A+

A+

A

A–

A+

A++

(4)

A

A

A

A

A–

A+

NR

A–

NR

A

A

NR

A

A+

642.2

546.0

380.9

280.4

200.7

175.1

168.3

160.5

152.5

146.4

104.9

103.5

89.9

88.5

81.6

77.5

75.2

65.9

65.2

56.2

54.6

52.3

51.9

48.7

48.2

341.0

–

340.2

265.1

166.7

131.3

73.5

153.3

139.0

129.9

3.9

98.2

74.8

71.6

64.7

10.1

74.6

55.8

36.0

14.7

50.5

51.0

–

31.5

41.0

3,917.1

1,643.6

5,560.7

(269.9)

5,290.8

2,418.4

1,343.8

3,762.2

(269.9)

3,492.3

(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 AA- by S&P; Arc Re is not rated.

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

The following table presents the classification of the $5,290.8 gross recoverable from reinsurers according to the
financial strength rating of the responsible reinsurers at December 31, 2012. Pools and associations, shown sepa-
rately, are generally government or similar insurance funds carrying limited credit risk.

Consolidated Recoverable from Reinsurers

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

Provision for uncollectible reinsurance

217.6
1,706.2
1,531.4
475.3
34.3
29.5
52.6
1,362.0
151.8

5,560.7
(269.9)

31.8
413.0
216.4
223.1
18.2
0.1
52.0
761.7
82.2

1,798.5

Recoverable from reinsurers

5,290.8

185.8
1,293.2
1,315.0
252.2
16.1
29.4
0.6
600.3
69.6

3,762.2
(269.9)

3,492.3

To support gross recoverable from reinsurers balances, Fairfax had the benefit of letters of credit, trust funds or
offsetting balances payable totaling $1,798.5 as at December 31, 2012 as follows:

(cid:129)

(cid:129)

(cid:129)

(cid:129)

for reinsurers rated A- or better, Fairfax had security of $884.3 against outstanding reinsurance recover-
able of $3,930.5;

for reinsurers rated B++ or lower, Fairfax had security of $70.3 against outstanding reinsurance recover-
able of $116.4;

for unrated reinsurers, Fairfax had security of $761.7 against outstanding reinsurance recoverable of
$1,362.0; and

for pools and associations, Fairfax had security of $82.2 against outstanding reinsurance recoverable of
$151.8.

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 $269.9 provision for uncollectible reinsurance related to the $646.4 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 39.2% of the con-
solidated recoverable from reinsurers related to runoff operations as at December 31, 2012 (compared to 26.9% at
December 31, 2011) with the increase year-over-year primarily related to the acquisition of RiverStone Insurance
by Runoff. Prior to giving effect to this transaction, recoverable from reinsurers at Runoff increased by $53.0 in
2012 compared to 2011 primarily as a result of net strengthening of workers’ compensation, asbestos and
environmental loss reserves and other latent claims reserves.

172

Recoverable from Reinsurers – Insurance and Reinsurance Operating Companies and
Runoff Operations

Insurance and Reinsurance
Operating Companies

Runoff Operations

A.M. Best
rating
(or S&P
equivalent)
A++
A+
A
A-
B++
B+
B or lower
Not rated
Pools and associations

Gross
recoverable
from
reinsurers
176.0
1,190.1
1,152.3
371.7
22.3
1.7
52.1
164.1
141.4

Outstanding
balances
for which
security
is held
31.2
382.9
186.8
151.9
12.9
—
52.0
56.1
82.2

Net
unsecured
recoverable
from
reinsurers
144.8
807.2
965.5
219.8
9.4
1.7
0.1
108.0
59.2

Gross
recoverable
from
reinsurers
41.6
516.1
379.1
103.6
12.0
27.8
0.5
1,197.9
10.4

Provision for uncollectible reinsurance

3,271.7
(55.5)

956.0

2,315.7
(55.5)

2,289.0
(214.4)

Recoverable from reinsurers

3,216.2

2,260.2

2,074.6

Outstanding
balances
for which
security
is held
0.6
30.1
29.6
71.2
5.3
0.1
—
705.6
—

842.5

Net
unsecured
recoverable
from
reinsurers
41.0
486.0
349.5
32.4
6.7
27.7
0.5
492.3
10.4

1,446.5
(214.4)

1,232.1

Based on the preceding analysis of the company’s recoverable from reinsurers and on the credit risk analysis per-
formed by the company’s reinsurance security department as described below, Fairfax believes that its provision
for uncollectible reinsurance has provided for all
likely losses arising from uncollectible reinsurance at
December 31, 2012.

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 2012 of $50.2 (2011 – $57.6) 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)

2012
(1,211.3)
239.5
1,030.3
(8.3)

2011
(1,121.4)
226.1
931.6
21.3

50.2

57.6

Reinsurers’ share of premiums earned increased to $1,211.3 in 2012 from $1,121.4 in 2011 primarily at OdysseyRe
as a result of a new quota share reinsurance contract covering multiline risks in Brazil and growth in its U.S.
insurance lines of business. OdysseyRe’s respective purchases of retrocession and reinsurance coverage for these
risks tends to be higher than the average across the other operating companies. Commissions earned on
reinsurers’ share of premiums earned increased to $239.5 in 2012 from $226.1 in 2011 with the increase commen-
surate with the increase in reinsurers’ share of premiums earned as described above. Reinsurers’ share of losses on
claims increased to $1,030.3 in 2012 from $931.6 in 2011 primarily as a result of losses ceded to reinsurers by
Northbridge in connection with Hurricane Sandy, the effect on reinsurers’ share of losses on claims related to

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

reserve strengthening at Runoff and increased losses ceded to reinsurers by First Capital consistent with its
growth. In 2012, the company recorded a net provision for uncollectible reinsurance of $8.3 compared to a net
release of provision for uncollectible reinsurance of $21.3.

The use of reinsurance decreased cash provided by operating activities by approximately $56 in 2012 (2011 –
decreased cash used in operating activities by approximately $8) primarily as a result of a 5.3% ($60.8) increase in
premiums paid to reinsurers, with collections of ceded losses and commissions on reinsurer’ share of premiums
written remaining relatively stable on a year-over-year basis. Ceded premiums paid to reinsurers increased to
$1,204.2 in 2012 from $1,143.4 in 2011 primarily as a result of the same factors set out in the preceding para-
graph related to the increase in reinsurers’ share of premiums earned. The decrease in collection of ceded losses
from $902.7 in 2011 to $897.3 in 2012 primarily related to lower collections of ceded losses by Runoff, partially
offset by higher collections of ceded losses by OdysseyRe consistent with its growth.

Investments

Hamblin Watsa Investment Counsel Ltd.

Hamblin Watsa Investment Counsel Ltd. (“Hamblin Watsa”) is a wholly owned subsidiary of the company that
serves as the investment manager for Fairfax and all of its subsidiaries. Hamblin Watsa follows a long-term value-
oriented investment philosophy with a primary emphasis on the preservation of invested capital. Hamblin Watsa
looks for a margin of safety in its investments by: applying thorough proprietary analysis of investment oppor-
tunities and markets to assess the financial strength of issuers; identifying attractively priced securities selling at
discounts to intrinsic value; and hedging risk where appropriate. Hamblin Watsa is opportunistic in seeking
undervalued securities in the market, often investing in out-of-favour securities when sentiment is negative, and
willing to keep a large portion of its investment portfolio in cash and cash equivalents when markets are per-
ceived to be over-valued.

Hamblin Watsa generally operates as a separate investment management entity, with Fairfax’s CEO and one other
corporate officer being members of Hamblin Watsa’s investment committee. Hamblin Watsa’s investment com-
mittee is responsible for making all investment decisions, subject to relevant regulatory guidelines and con-
straints. The investment process is overseen by management of Hamblin Watsa. The Fairfax Board of Directors
and each of the insurance and reinsurance subsidiaries are kept apprised of significant investment decisions
through the financial reporting process as well as periodic presentations by Hamblin Watsa management.

Overview of Investment Performance

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

2003
2004
2005
2006
2007
2008
2009
2010
2011
2012

Cash and
short term
investments

6.4

Bonds

14.1

Preferred
stocks

Common
stocks

Real
estate

1.0

2.5

–

Total(2)

24.0

Per share
($)

4.80

4,705.2
6,120.8
7,260.9
4,075.0
8,127.4
4,385.0
5,188.9
9,017.2
3,965.7 11,669.1
9,069.6
6,343.5
3,658.8 11,550.7
4,073.4 13,353.5
6,899.1 12,074.7
8,085.4 11,545.9

142.3
135.8
15.8
16.4
19.9
50.3
357.6
627.3
608.3
651.4

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
5,788.2

12.2 12,491.2
28.0 13,460.6
17.2 14,869.4
18.0 16,819.7

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
23.3 26,094.2 1,288.89

(1)

IFRS basis for 2012, 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.

174

The increase in total investments per share of $95.19 from $1,193.70 at December 31, 2011 to $1,288.89 at
December 31, 2012 primarily reflected the consolidation of the portfolio investments of RiverStone Insurance
($1,236.3 at December 31, 2012), net appreciation of bonds (principally bonds issued by U.S. states and
municipalities and corporate and other bonds) and common stocks and decreased Fairfax common shares effec-
tively outstanding (20,245,411 at December 31, 2012 compared to 20,375,796 at December 31, 2011), partially
offset by net mark-to-market losses related to the company’s long and short equity and equity index total return
swap derivative contracts. Since 1985, investments per share have compounded at a rate of 24.0% per year.

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 on holding company cash and investments was $28.1 in 2012 (2011 – $45.3) prior to
giving effect to total return swap expense of $38.3 (2011 – $39.0). Interest and dividend income earned in Fair-
fax’s first year and for the past ten years is presented in the following table.

Year(1)

1986

2003
2004
2005
2006
2007
2008
2009
2010
2011
2012

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

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
25,185.2

331.9
375.7
466.1
746.5
761.0
626.4
712.7
711.5
705.3
409.3

2.88
2.90
3.30
4.72
4.25
3.22
3.46
3.20
2.97
1.63

23.78
27.17
28.34
42.03
42.99
34.73
38.94
34.82
34.56
19.90

215.8
244.3
303.0
485.3
494.7
416.6
477.5
490.9
505.7
300.8

1.87
1.89
2.14
3.07
2.76
2.14
2.32
2.20
2.13
1.19

15.46
17.66
18.42
27.32
27.95
23.10
26.09
24.02
24.78
14.63

(1)

IFRS basis for 2012, 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 decreased from $705.3 in 2011 to $409.3 in 2012 primarily as a result
of the combined effects of sales during 2011 and 2012 of higher yielding government bonds (principally U.S.
treasury and Canadian government bonds), the proceeds of which were reinvested into lower yielding cash and
short term investments and common stocks. Total return swap expense (a component of interest and dividend
income) was higher in 2012 compared to 2011 ($204.9 in 2012 compared to $140.3 in 2011) due to increased
dividends payable (primarily the dividend payable on the Russell 2000 exchange traded fund) and higher average
notional amounts of short positions effected through total return swaps on a year-over-year basis. Primarily as a
result of these factors, the company’s pre-tax interest and dividend income yield in 2012 of 1.63% decreased from
2.97% in 2011. The company’s after-tax interest and dividend yield in 2012 of 1.19% (compared to 2.13% in
2011) reflected the benefit of the decrease in the company’s Canadian statutory income tax rate from 28.3% in
2011 to 26.5% in 2012.

Prior to giving effect to the interest expense which accrued to reinsurers on funds withheld and total return swap
expense (described in the two subsequent paragraphs), interest and dividend income in 2012 of $634.4 (2011 –
$861.9) produced a pre-tax gross portfolio yield of 2.52% (2011 – 3.62%). The company’s pre-tax gross portfolio
yield decreased on a year-over-year basis primarily reflecting the combined effects of sales during 2011 and 2012
of higher yield government bonds (principally U.S. treasury and Canadian government bonds), the proceeds of
which were reinvested into lower yielding cash and short term investments and common stocks.

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

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, 2012,
funds withheld payable to reinsurers shown on the consolidated balance sheet of $439.7 ($412.6 at December 31,
2011) principally related to Crum & Forster of $322.4 ($318.0 at December 31, 2011) and First Capital of $94.7
($46.5 at December 31, 2011). The year-over-year increase in funds withheld payable to reinsurers at First Capital
primarily reflected increased reinsurance purchased during the year commensurate with the growth in gross pre-
miums written. Interest expense which accrued to reinsurers on funds withheld totaled $20.2 in 2012 (2011 –
$16.3). The company’s consolidated interest and dividend income in 2012 and 2011 is shown net of these
amounts.

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
“total return swap expense” 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 which totaled $204.9 in 2012 (2011 – $140.3). The company’s
consolidated interest and dividend income in 2012 and 2011 is shown net of these amounts.

The share of profit of associates increased from $1.8 in 2011 to $15.0 in 2012. The share of profit of associates in
2012 included an $18.8 share of the net loss of Fibrek (principally comprised of an impairment charge), a $22.0
share of the net loss of Thai Re (principally comprised of net reserve strengthening related to the Thailand floods)
and a $12.9 share of the profit of ICICI Lombard. The share of profit of associates in 2011 included a $36.1 share
of the net loss of ICICI Lombard. The net earnings of ICICI Lombard in 2011 were adversely affected by reserve
strengthening related to its mandatory pro-rata participation in the Indian commercial vehicle insurance pool,
partially offset by net mark-to-market gains on the ICICI Lombard investment portfolio.

176

Net Gains (Losses) on Investments

Net gains on investments of $642.6 in 2012 (2011 – $691.2) were comprised as shown in the following table:

2012

2011

Net

Net change in

Net gains

Net

Net change in

Net gains

realized gains

unrealized

(losses) on

realized gains

unrealized

(losses) on

(losses)

gains (losses)

investments

(losses)

gains (losses)

investments

Common stocks

Preferred stocks – convertible

Bonds – convertible

Gain on disposition of associate(1)

Other equity derivatives(2) (3)

Equity and equity-related holdings

Equity hedges(3)

Equity and equity-related holdings after equity

hedges

Bonds

Preferred stocks

CPI-linked derivatives

Other derivatives

Foreign currency

Other

133.9

–

62.7

196.8

76.7

470.1

6.3

476.4

566.3

1.0

–

63.7

(44.7)

2.3

563.7

(36.2)

124.0

–

(2.9)

697.6

(36.2)

186.7

196.8

73.8

491.6

(1,266.4)

(774.8)

–

43.1

7.0

(5.2)

(19.6)

–

161.9

(205.2)

648.6

1,118.7

703.6

(1,496.4)

(1,011.8)

(1,005.5)

–

413.9

(5.2)

23.5

7.0

(43.3)

(792.8)

413.9

(363.2)

161.8

(1.3)

113.2

728.1

(0.3)

(129.2)

(129.2)

(60.3)

(31.5)

1.3

3.4

(76.2)

3.6

703.6

424.6

0.9

–

10.8

(64.5)

13.0

(1,082.5)

(378.9)

854.1

1,278.7

(2.8)

(1.9)

(233.9)

(233.9)

38.6

30.1

(0.8)

49.4

(34.4)

12.2

Net gains (losses) on investments

1,065.0

(422.4)

642.6

1,088.4

(397.2)

691.2

Net gains (losses) on bonds is comprised as follows:

Government bonds

U.S. states and municipalities

Corporate and other

421.3

149.7

(4.7)

(328.6)

403.0

87.4

92.7

552.7

82.7

354.6

(2.0)

72.0

398.5

644.7

753.1

642.7

(189.1)

(117.1)

566.3

161.8

728.1

424.6

854.1

1,278.7

(1) On December 10, 2012, the company sold all of its ownership interest in Cunningham Lindsey for net cash proceeds of
$270.6 and recognized a net gain on investment of $167.0 (including amounts previously recorded in accumulated
other comprehensive income).

On April 13, 2012, the company sold all of its ownership interest in Fibrek Inc. to Resolute Forest Products for net cash
proceeds of $18.5 (Cdn$18.4) and Resolute Forest Products common shares with a fair value of $12.8 (Cdn$12.7) and
recognized a net gain on investment of $29.8 (including amounts previously recorded in accumulated other compre-
hensive income).

On December 30, 2011, Polish Re, a wholly owned subsidiary of the company sold all of its interest in Polskie Towar-
zystwo Ubezpiezen S.A. (PTU) and received cash proceeds of $10.1 (34.7 million Polish zloty) and recorded a net gain
on investments of $7.0.

(2) Other equity derivatives include long equity total return swaps and equity warrants.

(3) Gains and losses on equity and equity index total return swaps that are regularly renewed as part of the company’s

long term risk management objectives are presented within net change in unrealized gains (losses).

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

Equity and equity related holdings: The company has economically hedged its equity and equity-related
holdings (comprised of common stocks, convertible preferred stocks, convertible bonds, certain investments in
associates and equity-related derivatives) against a potential decline in equity markets by way of short positions
effected through equity and equity index total return swaps. The company’s economic equity hedges are struc-
tured to provide a return which is inverse to changes in the fair values of the equity indexes and certain
individual equities. In 2012, the three principle indexes underlying the company’s hedges performed as follows:
the Russell 2000 index increased 14.6.%, the S&P 500 index increased 13.4% and the S&P/TSX 60 index increased
4.8%. In 2012, the company’s equity and equity-related holdings after equity hedges produced a net gain of
$113.2 compared to a net loss of $378.9 in 2011. At December 31, 2012, equity hedges with a notional amount of
$7,668.5 ($7,135.2 at December 31, 2011) represented 100.6% (104.6% at December 31, 2011) of the company’s
equity and equity-related holdings of $7,626.5 ($6,822.7 at December 31, 2011). In 2011, the impact of basis risk
was somewhat more evident (more so than in 2012 or in periods prior to 2011) and reflected a lag in the perform-
ance of the company’s equity and equity-related holdings relative to the performance of the economic equity
hedges used to protect those holdings. The company’s expectation over the long term, and consistent with its
historical investment performance, is that its equity and equity-related holdings will outperform the broader
equity indexes and any net losses related to the company’s equity and equity-related holdings after equity hedges
are temporary and will be recouped in future periods.

During 2012, the company closed $394.2 (2011 – $41.4) of original notional amount of short positions in certain
individual equities to reduce its economic equity hedges as a proportion of its equity and equity-related holdings.
In the future, the company may manage its net exposure to its equity and equity-related holdings by adjusting
the notional amounts of its equity hedges upwards or downwards. The company expects that there may be peri-
ods when the notional amount of the equity hedges may exceed or be deficient relative to the company’s equity
price risk exposure. This situation may arise due to the timing of opportunities for the company to exit and enter
hedges at attractive prices, as a result of a decision by the company to hedge an amount less than the company’s
full equity exposure or as a result of any non-correlated performance of the equity hedges relative to the equity
and equity-related holdings. The company’s risk management objective is for the equity hedges to 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. 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 hedging program related to equity risk. Refer to “Market Price Fluctua-
tions” in note 24 (Financial Risk Management) to the company’s consolidated financial statements for the year
ended December 31, 2012 for a tabular analysis followed by a discussion of the company’s hedges of equity price
risk and the related basis risk.

Bonds: Net gains on bonds of $728.1 in 2012 (2011 – $1,278.7) were primarily comprised of a combination of
realized and net mark-to-market gains on U.S. state and municipal government bonds, realized gains on U.S.
government bonds and net mark-to-market gains on other government bonds.

CPI-linked derivatives: The company has purchased derivative contracts referenced to consumer price indexes
(“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, 2012, these contracts have a
remaining weighted average life of 7.7 years (8.6 years at December 31, 2011), a notional amount of $48.4 billion
($46.5 billion at December 31, 2011) and fair value of $115.8 ($208.2 at December 31, 2011). The company’s CPI-
linked derivative contracts produced unrealized losses of $129.2 in 2012 (2011 – $233.9). The unrealized losses on
the CPI-linked derivative contracts were primarily 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). Refer to the analysis in “CPI-linked derivatives” in note 7 (Short Sale and Derivative Transactions) to the
company’s consolidated financial statements for the year ended December 31, 2012 for a discussion of the
company’s economic hedge against the potential adverse financial impact of decreasing price levels.

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

178

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, 2011 and 2012 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.

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
investments in
associates
–

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
25,185.2

331.9
375.7
466.1
746.5
761.0
626.4
712.7
711.5
705.3
409.3

826.1
300.5(4)
385.7
789.4(5)

–
–
–
–
–

142.4
165.6
73.0
(247.8)
–
–
–
–

–
–
–
–
1,639.5
2,718.6
904.3
28.7
737.7
639.4

6,668.2

–
–
–
–
304.5
(426.7)
1,076.7
–
–

–
–
–
–
(131.2)
278.3
(185.2)
98.2
78.5
79.6

Total return
on average
investments

(%)
8.4

3.9

1,300.4 11.3
6.5
841.8
6.5
924.8
1,288.1
8.1
2,573.8 14.4
3,196.6 16.4
2,508.5 12.2
3.8
6.4
4.5

838.4
1,521.5
1,128.3

9.4(6)

Year(1)
1986

2003
2004
2005
2006
2007
2008
2009
2010
2011
2012

Cumulative from inception

8,597.9

3,887.8

(1)

IFRS basis for 2012, 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 gain in 2012 of $3.2 (2011 – net loss 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 27 years.

Investment gains have been an important component of Fairfax’s financial results since 1985, having contributed
an aggregate $11,614.7 (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 varia-
tions in amount from period to period have no practical analytical value. From inception in 1985 to 2012, total
return on average investments has averaged 9.4%.

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.

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

Bonds

A summary of the composition of the company’s fixed income portfolio as at December 31, 2012 and 2011, classi-
fied 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, 2012 December 31, 2011

Carrying
value
2,711.5
5,069.6
2,266.0
282.7
53.3
448.8
588.4

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

%
23.7
44.4
19.8
2.5
0.5
3.9
5.2

%
25.1
45.9
15.5
3.0
0.6
1.1
8.8

11,420.3 100.0

11,770.9 100.0

The majority of the securities within the company’s fixed income portfolio are rated investment grade or higher
with 68.1% (71.0% at December 31, 2011) being rated AA or higher (primarily consisting of government
obligations). Bonds rated lower than B/B and unrated comprised 8.8% of the fixed income portfolio at
December 31, 2011 compared to 5.2% at December 31, 2012 with the decrease primarily reflecting an upgrade to
the credit rating of the company’s Greek sovereign bonds, the conversion to equity of certain convertible bonds
and the redemption of other corporate bonds. Notwithstanding the foregoing, there were no significant changes
to the credit quality of the company’s fixed income portfolio at December 31, 2012 compared to December 31,
2011. At December 31, 2012, holdings of fixed income securities in the ten issuers (excluding U.S., Canadian, U.K.
and German sovereign government bonds) to which the company had the greatest exposure totaled $3,562.6
($3,862.0 at December 31, 2011), which represented approximately 13.7% (15.9% at December 31, 2011) of the
total investment portfolio. The exposure to the largest single issuer of corporate bonds held at December 31, 2012
was $254.9, which represented approximately 1.0% (0.9% at December 31, 2011) of the total investment portfo-
lio.

As at December 31, 2012, the company had investments with a fair value of $396.9 ($415.7 at December 31, 2011)
in sovereign government bonds rated A/A or lower including $173.5 ($244.2 at December 31, 2011) of Greek
bonds (originally purchased at deep discounts to par) and $124.4 ($82.8 at December 31, 2011) of Polish bonds
(purchased to match claims liabilities of Polish Re), representing in the aggregate 1.5% (1.7% at December 31,
2011) of the total investment portfolio. As at December 31, 2012 and 2011, the company did not have any
investments in bonds issued by Ireland, Italy, Portugal or Spain.

The consolidated investment portfolio included $6.9 billion ($6.2 billion at December 31, 2011) of U.S. state and
municipal bonds (approximately $5.3 billion tax-exempt, $1.6 billion taxable), almost all of which were pur-
chased during 2008 and are owned in the subsidiary investment portfolios. A significant portion of the company’s
investment in U.S. state and municipal bonds, approximately $4.0 billion at December 31, 2012 ($3.8 billion at
December 31, 2011), are 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 asso-
ciated with these bonds.

180

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, 2012

Fair value of
fixed income
portfolio
9,766.7
10,522.5
11,420.3
12,493.2
13,803.7

Hypothetical $
change effect on
net earnings
(1,132.0)
(595.1)
–
735.7
1,635.3

Hypothetical
% change in
fair value
(14.5)
(7.6)
–
9.4
20.9

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.

The company’s exposure to credit risk and interest rate risk is discussed further in note 24 (Financial Risk Manage-
ment) to the consolidated financial statements for the year ended December 31, 2012.

Common Stocks

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, 2012, the company had aggregate equity and
equity-related holdings of $7,626.5 (comprised of common stocks, convertible preferred stocks, convertible bonds,
certain investments in associates and equity-related derivatives) compared to aggregate equity and equity-related
holdings at December 31, 2011 of $6,822.7. 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. As a result of volatility in the equity markets and international credit
concerns, the company economically hedged 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 as set out in
the table below. 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; 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.

Underlying short equity and
equity index total return swaps

Russell 2000

S&P 500

S&P/TSX 60

Other equity indices

Individual equities

December 31, 2012

December 31, 2011

Original
notional
amount(1)

Units

Weighted
average
index
value

Index
value at
period
end

Original
notional
amount(1)

Units

Weighted
average
index
value

Index
value at
period
end

52,881,400

3,501.9

662.22

849.35 52,881,400

3,501.9

662.22

740.92

10,532,558

1,117.3

1,060.84 1,426.19 12,120,558

1,299.3

1,071.96 1,257.60

13,044,000

–

–

206.1

140.0

1,231.3

641.12

713.72

–

–

–

–

–

–

–

–

140.0

1,597.3

–

–

–

–

–

–

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

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

The company’s common stock holdings and long positions in equity total return swaps as at December 31, 2012
and 2011 are summarized by the issuer’s primary industry in the table below.

Financials and investment funds

Commercial and industrial

Consumer products and other

December 31, December 31,
2011

2012

2,670.3

1,632.5

1,288.2

2,488.8

1,698.6

1,005.6

5,591.0

5,193.0

The company’s common stock holdings and long positions in equity total return swaps as at December 31, 2012
and 2011 are summarized by the issuer’s country of domicile in the table below.

United States

Canada

Ireland

Hong Kong

China

All other

December 31, December 31,
2011

2012

2,820.9

1,067.4

413.3

249.2

108.9

931.3

2,857.2

1,048.0

410.4

213.2

89.5

574.7

5,591.0

5,193.0

Derivatives and Derivative Counterparties

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.

182

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(1)

Impact of net settlement arrangements

Fair value of collateral deposited for the benefit of the company(2)

Excess collateral pledged by the company in favour of counterparties

Initial margin not held in segregated third party custodian accounts

Net derivative counterparty exposure after net settlement and

collateral arrangements

December 31,
2012

December 31,
2011

169.7

(79.2)

(56.5)

38.5

93.1

389.2

(101.0)

(141.6)

129.7

80.6

165.6

356.9

(1) Excludes exchange traded instruments comprised principally of equity and credit warrants which are not subject to

counterparty risk.

(2) Net of $3.9 ($65.7 at December 31, 2011) of excess collateral pledged by counterparties.

The fair value of the collateral deposited for the benefit of the company at December 31, 2012, consisted of cash
of $22.1 ($50.5 at December 31, 2011) and government securities of $38.3 ($156.8 at December 31, 2011). The
company had not exercised its right to sell or repledge collateral at December 31, 2012.

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 presents the accumulated float and the cost of generating that float for Fairfax’s insurance
and reinsurance operations. The average float from those operations increased by 5.2% in 2012 to $11,906.0, at
no cost.

Year

1986

2008

2009

2010

2011

2012

Weighted average since inception

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%

(280.9)

7.3

(236.6)

(754.4)

11.6

8,917.8

9,429.3

10,430.5

11,315.1

11,906.0

(3.1)%

0.1%

(2.3)%

(6.7)%

0.1%

(2.5)%

4.1%

3.9%

3.8%

3.3%

2.4%

4.5%

Fairfax weighted average financing differential since inception: 2.0%

(1)

IFRS basis for 2012 and 2011; Canadian GAAP basis for 2010 and prior without reclassifications to conform with the
IFRS presentation adopted in 2011.

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

The following table presents a breakdown of total year-end float for the most recent five years.

Insurance

Reinsurance

Northbridge(1)
1,739.1
2,052.8
2,191.9
2,223.1
2,314.1

U.S.(2)
2,125.1
2,084.5
2,949.7
3,207.7
3,509.1

Fairfax

Asia(3) OdysseyRe(4)
4,398.6
4,540.4
4,797.6
4,733.4
4,905.9

68.9
125.7
144.1
387.0
470.7

Insurance
and
Reinsurance

Other(5)
726.4
997.0
977.3
1,018.4
1,042.6

Total
Insurance
and
Reinsurance
9,058.1
9,800.4
11,060.6
11,569.6
12,242.4

Runoff(6)
1,783.8
1,737.0
2,048.9
2,829.4
3,636.8

Total
10,841.9
11,537.4
13,109.5
14,399.0
15,879.2

Year
2008
2009
2010
2011
2012

During 2012, the company’s aggregate float increased by $1,480.2 to $15,879.2.

(1) Northbridge’s float increased by 4.1% (at a cost of 2.5%) primarily due to increased loss reserves (including the effect
on loss reserves of the strengthening of the Canadian dollar relative to the U.S. dollar), partially offset by an increase in
reinsurance recoverables.

(2) U.S. Insurance’s float increased by 9.4% (at a cost of 6.1%) due to increased loss reserves and unearned premium
reserves as a result of increased premium volume, partially offset by increased reinsurance recoverables at Crum &
Forster.

(3) Fairfax Asia’s float increased by 21.6% (at no cost) due to increased loss reserves, unearned premium reserves and
reinsurance funds withheld balances, primarily from increased premium volume, partially offset by increased
reinsurance recoverables.

(4) OdysseyRe’s float increased by 3.6% (at no cost) primarily due to increased loss reserves as a result of increased pre-

mium volume.

(5)

Insurance and Reinsurance – Other’s float increased by 2.4% (at a cost of 2.1%) primarily due to increased loss
reserves recorded by Polish Re and Fairfax Brasil and decreased reinsurance recoverables at Advent resulting from the
transfer of Syndicate 3330 to Runoff, partially offset by decreased loss reserves at Advent resulting from the afore-
mentioned transfer and increased reinsurance recoverables at Fairfax Brasil.

(6) Runoff’s float increased by 28.5% primarily due to the acquisition of RiverStone Insurance, the Eagle Star reinsurance

transaction and the assumption of liability for claims reserves of Syndicate 3330 from Advent.

184

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

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)

2012

2011

2010

2009

2008

1,128.0

962.8

1,474.2

1,242.7

1,555.0

2,220.2

2,080.6

1,498.1

1,236.9

670.9

157.5

623.9

314.0

919.5

311.5

903.4

173.5

869.6

910.2

187.7

3,048.6

3,018.5

2,729.1

2,313.8

1,967.5

1,920.6

2,055.7

1,254.9

1,071.1

412.5

7,654.7

7,427.9

7,697.9

7,391.8

4,866.3

1,166.4

69.2

934.7

45.9

934.7

41.3

227.2

117.6

102.5

1,382.8

8,890.3

8,408.5

8,673.9

7,736.6

6,351.6

21.6%

17.8%

25.5%

4.2x

3.0x

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

(1)

IFRS basis for 2012, 2011 and 2010, and Canadian GAAP basis for 2009 and 2008.

(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 income tax rate.

Holding company debt (including other long term obligations) decreased by $16.9 to $2,377.7 at December 31,
2012 from $2,394.6 at December 31, 2011 primarily reflecting the repayment of the TIG Note and the repayment
on maturity of $86.3 principal amount of Fairfax unsecured senior notes, partially offset by the issuance of
Cdn$200.0 principal amount of Fairfax unsecured senior notes due 2022 and the foreign currency translation
effect of the strengthening of the Canadian dollar relative to the U.S. dollar.

Subsidiary debt increased by $47.0 to $670.9 at December 31, 2012 from $623.9 at December 31, 2011 primarily
reflecting the consolidation of the subsidiary indebtedness of Thomas Cook India ($36.6) and Prime Restaurants
($2.7) and increased subsidiary indebtedness of Ridley ($11.8), partially offset by the redemption by Crum & For-
ster of $6.2 principal amount of its unsecured senior notes due 2017.

Common shareholders’ equity increased by $226.8 to $7,654.7 at December 31, 2012 from $7,427.9 at
December 31, 2011 primarily as a result of net earnings attributable to shareholders of Fairfax ($532.4) and the
effect of increased accumulated other comprehensive income (an increase of $28.0 primarily related to foreign
currency translation), partially offset by the company’s payments of dividends on its common and preferred
shares ($266.3), the recognition of actuarial losses on its defined benefit plans (including those of its associates) in
retained earnings ($32.8) and the net repurchase of subordinate voting shares for treasury ($48.4).

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 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 decreased to 17.8% at December 31,
2012 from 19.6% at December 31, 2011 primarily as a result of a decrease in net debt and an increase in net total
capital. The decrease in net debt was due to an increase in holding company cash and investments and a modest
increase in total debt. The increase in net total capital was due to the issuance of Series K preferred shares on
March 21, 2012, increased non-controlling interests and increased common shareholders’ equity, partially offset
by decreased net debt. The consolidated total debt/total capital ratio decreased to 25.5% at December 31, 2012
from 26.4% at December 31, 2011 primarily as a result of increased total capital due to the issuance of Series K
preferred shares on March 21, 2012, increased non-controlling interests, increased common shareholders’ equity
and a modest increase in total debt.

The company believes that cash and investments net of short sale and derivative obligations at December 31,
2012 of $1,128.0 ($962.8 at December 31, 2011) provide adequate liquidity to meet the holding company’s
known obligations in 2013. Refer to the second paragraph of the Liquidity section of this MD&A for a discussion
of the sources of liquidity available to the holding company and the holding company’s known significant
commitments for 2013.

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)

2012

2011

2010

2009

2008

0.8

1.0

1.4

0.5

0.6

0.7

1.0

0.8

1.0

0.9

0.8

0.5

0.6

0.8

1.1

0.8

0.8

0.6

0.6

0.4

0.5

0.8

1.1

0.7

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

1.0

(1)

IFRS basis for 2012, 2011 and 2010; Canadian GAAP basis for 2009 and 2008.

(2) First Mercury was acquired February 9, 2011, pursuant to the acquisition transaction described in note 23

(Acquisitions and Divestitures) to the consolidated financial statements for the year ended December 31, 2012.

(3) Zenith National was acquired May 20, 2010. 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, 2012, 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 3.6 times (3.7 times at December 31, 2011) the authorized control level, except for TIG which
had 2.3 times (2.3 times at December 31, 2011).

186

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, 2012, Northbridge’s subsidiaries had a weighted average MCT ratio of 196% of the minimum stat-
utory capital required, compared to 212% at December 31, 2011, 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, 2012.

The issuer credit ratings and financial strength ratings of Fairfax and its insurance and reinsurance operating
companies were as follows as at December 31, 2012:

Issuer Credit Ratings

Fairfax Financial Holdings Limited

Financial Strength Ratings

Crum & Forster Holdings Corp.(1)

Zenith National Insurance Corp.

Odyssey Re Holdings Corp.(1)

Northbridge Commercial Insurance Corp.

Northbridge General Insurance Corp.

Northbridge Indemnity Insurance Corp.

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(2)

Polish Re

Standard

A.M. Best & Poor’s Moody’s DBRS

bbb

BBB-

Baa3

BBB

A

A

A

A

A

A

A

A-

A-

A

–

A

A-

A-

BBB+

A-

A-

A-

A-

A-

–

–

–

A-

A+

BBB+

Baa1

A3

A3

–

A3

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

(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 2012, A.M. Best downgraded CRC Reinsurance Limited from an “A” at December 31, 2011 to an “A-” at
December 31, 2012.

Book Value Per Share

Common shareholders’ equity at December 31, 2012 of $7,654.7 or $378.10 per basic share (excluding the unre-
corded $427.1 excess of fair value over the carrying value of investments in associates) increased from $7,427.9 or
$364.55 per basic share (excluding the unrecorded $347.5 excess of fair value over the carrying value of invest-
ments in associates) at December 31, 2011, representing an increase per basic share of 3.7% (without adjustment
for the $10.00 per common share dividend paid in the first quarter of 2012, or an increase of 6.5% adjusted to
include that dividend). During 2012, the number of basic shares decreased as a result of the repurchase of 130,385
subordinate voting shares for treasury (for use in the company’s share-based payment awards). At December 31,
2012, there were 20,245,411 common shares effectively outstanding.

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 has issued and repurchased common shares in the most recent five years as follows:

Date

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

2012 – repurchase of shares

Number of
subordinate
voting shares

Average
issue/repurchase
price per share

Net proceeds/
(repurchase cost)

886,888

(1,066,601)

2,881,844

(360,100)

563,381

(43,900)

(25,700)

–

216.83

264.39

343.29

341.29

354.64

382.69

389.11

–

192.3

(282.0)

989.3

(122.9)

199.8

(16.8)

(10.0)

–

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

Holding company cash and investments at December 31, 2012 totaled $1,169.2 ($1,128.0 net of $41.2 of holding
company short sale and derivative obligations) compared to $1,026.7 at December 31, 2011 ($962.8 net of $63.9
of holding company short sale and derivative obligations). Significant cash movements at the Fairfax holding
company level in 2012 (excluding $233.0 of intra-group repayments and capital contributions) included the fol-
lowing outflows – the payment of $266.3 of common and preferred share dividends, the payment of $220.5 of net
cash with respect to the reset provisions of long and short equity and equity index total return swaps (excluding
the impact of collateral requirements), the payment of $144.8 of interest on long term debt, the repayment upon
maturity of $86.3 principal amount of Fairfax unsecured senior notes, the net payment of $56.7 (Cdn$57.7) in
respect of the company’s acquisition of Prime Restaurants and the participation in the rights offering of Alltrust
Insurance of $18.9. Significant inflows during 2012 included the following – net proceeds of $203.0 (Cdn$198.6)
from the issuance of Cdn$200.0 principal amount of 5.84% unsecured senior notes due 2022, the net proceeds of
$231.7 (Cdn$230.1) from the issuance of Cdn$237.5 par value Series K preferred shares, $859.7 of dividends from
subsidiaries (Runoff ($303.8), OdysseyRe ($200.0), Wentworth ($120.0), Zenith National ($91.8), CRC Re ($77.1),
Crum & Forster ($63.0) and Ridley ($4.0)) and a $20.9 corporate income tax refund. The carrying values of hold-
ing company investments vary with changes in the fair values of those securities.

The company believes that holding company cash and investments, net of holding company short sale and
derivative obligations at December 31, 2012 of $1,128.0 ($962.8 at December 31, 2011) provide adequate liquidity
to meet the holding company’s known obligations in 2013. 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 can draw upon its $300.0 unsecured revolving credit
facility (for further details related to the credit facility, refer to note 15 (Subsidiary Indebtedness, Long Term Debt
and Credit Facilities) to the consolidated financial statements for the year ended December 31, 2012). The hold-
ing company’s known significant commitments for 2013 consist of the payment of the $205.5 dividend on
common shares ($10.00 per share paid January 2013), interest and corporate overhead expenses, preferred share
dividends, income tax payments and potential cash outflows related to derivative contracts (described below). On
January 21, 2013, the company received net proceeds of $259.9 (Cdn$258.1) from the issuance of Cdn$250.0
principal amount of its unsecured senior notes due 2022 pursuant to a re-opening of those notes. The company
intends to use these proceeds to fund the repayment upon maturity of $182.9 principal amount of OdysseyRe’s
unsecured senior notes due November 1, 2013, repurchase $12.2 principal amount of its unsecured senior notes
due 2017 and redeem on March 11, 2013 the remaining $36.2 outstanding principal amount of its unsecured
senior notes due 2017.

188

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 2012, the holding company paid net
cash of $220.5 (received net cash of $97.3 in 2011) with respect to long and short equity and equity index total
return swaps (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 discussed above.

During 2012, subsidiary cash and short term investments (including cash and short term investments pledged for
short sale and derivative obligations) increased by $980.4 from $6,337.9 at December 31, 2011 to $7,318.3 at
December 31, 2012. Significant net increases included the following – the consolidation of the cash and short
term investments of RiverStone Insurance ($223.5 at December 31, 2012), the reinvestment of the proceeds
received from the sale of government bonds into cash and short term investments, the proceeds received on the
sale of Cunningham Lindsey and cash provided by operating activities. Significant net decreases during 2012
included the following – cash of $603.6 paid in connection with the reset provisions of the company’s long and
short equity and equity index total return swaps, the payment of cash dividends of $733.5 to Fairfax, cash used to
acquire common stock and certain limited partnership investments, cash used to acquire RiverStone Insurance,
the repayment of the TIG Note and cash used to acquire Thomas Cook India.

The insurance and reinsurance subsidiaries 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 2012, the
insurance and reinsurance subsidiaries paid net cash of $603.6 (received net cash of $173.3 in 2011) with respect
to long and short equity and equity index total return swaps (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 swaps 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, 2012 and 2011:

Operating activities

Cash provided by operating activities before the undernoted

Net (purchases) sales of securities classified as at FVTPL

Investing activities

Net (purchases) sales of investments in associates

Net purchase of subsidiaries, net of cash acquired and bank overdraft assumed

Net purchases of premises and equipment and intangible assets

Financing activities

Net (repayment) issuances of subsidiary indebtedness

Issuance of holding company debt

Repurchase of holding company and subsidiary debt and securities

Issuance of preferred shares

Common and preferred share dividends paid

Dividends paid to non-controlling interests

Other cash used in financing activities

Increase (decrease) in cash, cash equivalents and bank overdrafts

during the year

2012

2011

210.0

33.2

1,105.7 (1,254.7)

114.6

(130.5)

(334.4)

276.5

(71.5)

(42.2)

20.1

203.0

(41.9)

899.5

(296.5)

(762.3)

231.7

–

(266.3)

(257.4)

(6.7)

(50.6)

–

(36.0)

859.1 (1,315.8)

Cash provided by operating activities excluding cash used to purchase securities classified as at FVTPL increased to
$210.0 in 2012 from $33.2 in 2011 primarily as a result of higher premium collections, partially offset by lower
interest and dividend income received and increased income taxes paid. Net sales of securities classified as at
FVTPL of $1,105.7 in 2012 mainly reflected net sales of U.S. treasury and Canadian government bonds, partially
offset by net cash paid with respect to the reset provisions of total return swaps and net purchases of common

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

stocks and short term investments. Net purchases of securities classified as at FVTPL of $1,254.7 in 2011 primarily
reflected net purchases of short term investments, partially offset by net sales of bonds and net cash received with
respect to the reset provisions of total return swaps.

Net sales of investments in associates in 2012 of $114.6 primarily reflected the proceeds received on the sale of
Cunningham Lindsey and Fibrek, partially offset by purchases of minority shareholdings in Thai Re and Eurobank
Properties and net purchases of limited partnerships. Net purchases of associates in 2011 of $130.5 primarily
related to the participation in an ICICI Lombard rights offering and net purchases of limited partnerships. Net
purchases of subsidiaries, net of cash acquired and bank overdraft assumed of $334.4 in 2012, primarily related to
net cash of $140.1, $139.3 and $51.4 used to acquire an 87.1% interest in Thomas Cook India, a 100% interest in
RiverStone Insurance and an 81.7% interest in Prime Restaurants respectively. Net purchases of subsidiaries, net of
cash acquired in 2011 of $276.5 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 a 100% interest in Pacific Insurance and a
75.0% interest in Sporting Life respectively.

Net issuances of subsidiary indebtedness of $20.1 in 2012, primarily related to the increased indebtedness of Rid-
ley and Thomas Cook India. Issuance of holding company debt of $203.0 (Cdn$198.6) in 2012 reflected net pro-
ceeds from the issuance of Cdn$200.0 principal amount of 5.84% unsecured senior notes due 2022. Repurchase of
holding company and subsidiary debt and securities of $296.5 primarily reflected the repayment of the TIG Note
($200.0), the repayment on maturity of Fairfax unsecured senior notes ($86.3) and the redemption by Crum &
Forster of its unsecured senior notes due 2017 ($6.4). In 2012, the company issued Cdn$237.5 par value of Series
K preferred shares for net proceeds of $231.7, paid common share dividends of $205.8 (2011 – $205.9), paid pre-
ferred share dividends of $60.5 (2011 – $51.5) and paid dividends to non-controlling interests of $6.7
(2011 – nil). Other cash used in financing activities of $50.6 in 2012 related to subordinate voting shares pur-
chased for treasury. Net repayment of subsidiary indebtedness of $41.9 in 2011 principally related to subsidiary
indebtedness repaid by First Mercury ($29.7). Issuance of holding company debt of $899.5 in 2011 reflected the
issuance of $500.0 principal amount of 5.80% unsecured senior notes due 2021 for net proceeds of $493.9 and the
issuance of Cdn$400.0 principal amount of 6.40% unsecured senior notes due 2021 for net proceeds of $405.6
(Cdn$396.0). Repurchase of holding company and subsidiary debt and securities of $762.3 in 2011 primarily
reflected the payment to repurchase Fairfax, Crum & Forster and OdysseyRe unsecured senior notes ($727.1) and
cash consideration to redeem First Mercury’s trust preferred securities ($26.7). Other cash used in financing activ-
ities of $36.0 in 2011 principally related to subordinate voting shares purchased for treasury ($26.0) and the
repurchase for cancellation of subordinate voting shares ($10.0).

Contractual Obligations

The following table sets out a payment schedule of the company’s significant current and future obligations
(holding company and subsidiaries) as at December 31, 2012:

Provision for losses and loss adjustment expenses
Long term debt obligations – principal
Long term debt obligations – interest
Operating leases – obligations

Less than

1 year 1-3 years 3-5 years
3,172.1
5,099.1
57.7
217.8
330.7
361.3
71.4
109.3

4,576.0
235.8
198.2
68.4

More than
5 years
Total
6,801.6 19,648.8
3,020.1
2,508.8
1,596.8
706.6
377.4
128.3

5,078.4

5,787.5

3,631.9

10,145.3 24,643.1

For further detail on the maturity profile of the company’s financial liabilities, please see “Liquidity Risk” in
note 24 (Financial Risk Management) to the consolidated financial statements for the year ended December 31,
2012.

Lawsuit Seeking Class Action Status

The purported lawsuit seeking class action status against Fairfax and others described in earlier MD&As has been
dismissed, with no payment and without the possibility of further appeal or amendment. For a full description of
this dismissal, please see section (a) of “Lawsuits” in note 20 (Contingencies and Commitments) to the con-
solidated financial statements for the year ended December 31, 2012.

190

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, 2012, 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 appro-
priate, 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, 2012, 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 International Financial Reporting Standards as issued by the International Account-
ing Standards Board. 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 trans-
actions 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 reasonable assurance regard-
ing 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.

Subject to the limitations described below under “Limitation on scope of evaluation”, the company’s manage-
ment assessed the effectiveness of the company’s internal control over financial reporting as of December 31,
2012. 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, 2012, the company’s
internal control over financial reporting was effective based on the criteria in Internal Control – Integrated Frame-
work issued by COSO.

The effectiveness of the company’s internal control over financial reporting as of December 31, 2012, has been
audited by PricewaterhouseCoopers LLP, an independent auditor, as stated in its report which appears within this
Annual Report.

Limitation on scope of design and evaluation

On October 12, 2012, the company completed the acquisition of Brit Insurance Limited, which was subsequently
renamed RiverStone Insurance Limited (“RiverStone Insurance”). Management has limited the scope of the design
and evaluation of internal controls over financial reporting to exclude the controls, policies and procedures of
RiverStone Insurance, the results of which are included in the consolidated financial statements of the company
for the year ended December 31, 2012. The scope limitation is in accordance with Section 3.3 of National Instru-
ment 52-109, Certification of Disclosure in Issuer’s Annual and Interim Filings, which allows an issuer to limit its
design and evaluation of internal controls over financial reporting to exclude the controls, policies and proce-
dures of a company acquired not more than 365 days before the end of the financial period to which the certifi-
cate relates. The operations of RiverStone Insurance represented 0.5% of the company’s consolidated revenue for
the year ended December 31, 2012 and represented 4.0% of the company’s consolidated net assets as at
December 31, 2012. In addition, the table that follows presents a summary of financial information for RiverStone
Insurance.

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

Revenue

Net earnings

Assets
Insurance contract receivables
Portfolio investments
Recoverable from reinsurers
Deferred income taxes
Other assets

Liabilities
Accounts payable and accrued liabilities
Income taxes payable
Short sale and derivative obligations
Insurance contract liabilities

Equity

As at and for the year ended December 31, 2012
(US$ millions)
36.9

11.1

151.0
1,236.3
891.5
6.9
10.6

2,296.3

155.6
0.3
1.4
1,788.9

1,946.2

350.1

2,296.3

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, 2012.

Significant Accounting Changes

There were no significant accounting changes during 2012. Please refer to note 3 (Summary of Significant
Accounting Policies) to the consolidated financial statements for the year ended December 31, 2012 for a detailed
discussion of the company’s accounting policies.

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
standards and amendments that have been issued but are not yet effective are described in note 3 (Summary of
Significant Accounting Policies) to the consolidated financial statements for the year ended December 31, 2012.

Financial Instruments

The International Accounting Standards Board (“IASB”) is undertaking a limited review of IFRS 9 Financial Instru-
ments (“IFRS 9”) to address certain application issues, to consider the interaction of IFRS 9 with the proposed
insurance contracts standard (discussed below) and to seek to reduce differences with the proposed financial
instruments model of the U.S. Financial Accounting Standards Board (“FASB”).

The Exposure Draft – Classification and Measurement: Limited Amendments to IFRS 9 was published in the fourth
quarter of 2012, with the most significant proposal being the introduction of a mandatory third measurement
category for simple debt instruments. Under current IFRS 9, simple debt instruments are measured at amortized
cost if held within a business model that focuses on collecting the contractual cash flows; otherwise simple debt
instruments are measured at fair value through profit and loss (“FVTPL”). The new measurement category would
require simple debt instruments to be measured at fair value through other comprehensive income (“FVTOCI”) if
held within a business model to both collect contractual cash flows and for sale. The FVTOCI category provides

192

the same measurement outcome as the existing available for sale category under IAS 39 Financial Instruments:
Recognition and Measurement (“IAS 39”) when applied to debt instruments, with the important exception that
impairment would be measured under the forthcoming expected loss model in IFRS 9 rather than the incurred
loss model in IAS 39.

The company’s business model of managing its investments in debt instruments to both collect contractual cash
flows and for sale currently requires its entire portfolio of debt instruments to be measured at FVTPL. Under the
proposed amendments to IFRS 9, a significant portion of the company’s portfolio of debt instruments may have
to be measured at FVTOCI.

The exposure draft is currently being re-deliberated by the IASB and final modifications will be effective no earlier
than January 1, 2015.

Insurance contracts

The Exposure Draft – Insurance Contracts was issued by the IASB on July 30, 2010 and a revised exposure draft is
expected in the second quarter of 2013. The exposure draft is a comprehensive standard that addresses recog-
nition, 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 fulfills 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 con-
tract. 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 publication of the final standard is anticipated to be in 2014, with an effective date expected to be no 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 presentation requirements significantly alter
the disclosure of profit and loss from insurance contracts in the consolidated 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 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. A ‘review
draft’ of the standard was published on September 7, 2012, while the final standard is expected to be issued in the
second quarter of 2013 with mandatory adoption expected to be no earlier than 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 consolidated financial statements, but may present opportunities for expanded application of hedge
accounting in the future.

Leases

The IASB together with the 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 largely eliminate the dis-
tinction between operating and capital leases. A revised exposure draft is expected in the second quarter of 2013.
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 this exposure draft on its lease
commitments.

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

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
(which necessarily factors in climate change considerations), credit risk, liquidity risk and various market risks.
Balancing risk and reward is achieved through identifying risk appropriately, aligning risk tolerances with busi-
ness strategy, diversifying risk, pricing appropriately for risk, mitigating risk through preventive controls and
transferring risk to third parties.

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 and its investment management sub-
sidiary combined with the analysis of the company-wide aggregation and accumulation of risks at the holding
company level. In addition, although the company and its operating subsidiaries have designated Chief Risk Offi-
cers, the company regards each Chief Executive Officer as the chief risk officer of his or her company: each Chief
Executive Officer is the individual ultimately responsible for risk management for his or her company and its
subsidiaries.

The company’s designated Chief Risk Officer reports on risk considerations to Fairfax’s Executive Committee and
provides a quarterly report to the Board of Directors on the key risk exposures. Management of Fairfax in con-
sultation with the designated Chief Risk Officer 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. A discussion of the risks of the business
(the risk factors and the management of those risks) is an agenda item for every regularly scheduled meeting of
the Board of Directors.

Issues and Risks

The following issues and risks, among others, should be considered in evaluating the outlook of the company. For
further detail about the 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 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 earnings 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, 2012. 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, 2012.

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. The extent of losses from a catastrophe is a function of both the total amount of insured exposure in

194

the area affected by the event and the severity of the event. 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 con-
dition. 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, 2012.

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
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, 2012.

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, 2012.

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.

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

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.

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, 2012.

Economic Hedging Strategies

The company may use derivative instruments to manage or reduce its exposure to credit risk and various market
risks, including interest rate risk, equity market risk, inflation/deflation risk and foreign currency risk. Hedging
strategies may be implemented by the company to hedge risks associated with a specific financial instrument,
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 on its operations and the value of its financial assets. 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, 2012.

The company’s derivative instruments may expose it to basis risk, counterparty risk, credit risk and liquidity risk,
notwithstanding that the company’s principal use of derivative instruments is to hedge exposures to various risks.
Basis risk is the risk that the fair value or cash flows of derivative instruments designated as economic hedges will
not experience changes in exactly the opposite directions from those of the underlying hedged exposure. This
imperfect correlation between the derivative instrument and underlying hedged exposure creates the potential for
excess gains or losses in a hedging strategy which may adversely impact the net effectiveness of the hedge and
may diminish the financial viability of maintaining the hedging strategy and therefore adversely impact the
company’s financial condition and results of operations.

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 reasonably 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, 2012.

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.

As a result of tort reform, both legislative and judicial, there has been a decrease in mass asbestos plaintiff screen-
ing efforts over the past few years and a decline in the number of unimpaired plaintiffs filing claims. The majority
of claims now being filed and litigated continues to relate to mesothelioma, lung cancer or impaired asbestosis
cases. This reduction in new filings has focused the litigants on the more seriously injured plaintiffs. While ini-
tially there was a concern that such a focus would exponentially increase the settlement value of asbestos cases
involving malignancies, this has not been the case. Expense has increased somewhat as a result of this trend,
however, primarily due to the fact that the malignancy cases are often more heavily litigated than the non-
malignancy cases.

Similarly, as a result of various regulatory efforts aimed at environmental remediation, the company, and its peers
in the insurance industry, continue to be involved in litigation involving policy coverage and liability issues with

196

respect to environmental claims. In addition to regulatory pressures, the results of court decisions affecting the
industry’s coverage positions continue to be inconsistent and have expanded coverage beyond its original intent.
Accordingly, the ultimate responsibility and liability for environmental remediation costs remains uncertain. In
addition to asbestos and environmental pollution, the company faces exposure to other types of mass tort or
health hazard claims, including claims related to exposure to potentially harmful products or substances, such as
breast implants, pharmaceutical products, chemical products, lead-based pigments, noise-induced hearing loss,
tobacco, mold, coal mining, welding fumes, methyl tertiary butyl ether (a fuel component in engine gasoline),
and more recently claims involving Chinese drywall in the United States.

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, 2012
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
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, 2012 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.

Acquisitions and Divestitures

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, and the alignment of those strategies throughout the
organization, are regularly assessed and discussed through various processes involving senior management and
the company’s Board of Directors.

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

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

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 insurance subsidiaries while in recent years, capital market
participants have also created alternative products that are intended to compete with reinsurance products.

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, 2012.

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.
As a result, the full extent of the company’s liability under its coverages, and in particular its casualty insurance
policies and reinsurance contracts, may not be known for many years after a policy or contract is issued. The
company’s exposure to this uncertainty is greatest in its “long-tail” casualty businesses, because in these lines of
business claims can typically be made for many years, making them more susceptible to these trends than in the
property insurance business, which is more typically “short-tail”.

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, 2012 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

198

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 insurance and
reinsurance operating companies, each of which must comply with applicable insurance regulations of the juris-
dictions 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, the United Kingdom, Poland, Hong
Kong, Singapore, Malaysia and Brazil and is affected by the subsidiaries’ credit agreements, indentures, rating
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, 2012 and
in the Liquidity section of this MD&A.

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, 2012. 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, 2012 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.

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

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. For example, regulatory capital guidelines may change for
the company’s European operations due to Solvency II; the Dodd-Frank Act creates a new framework for regu-
lation of over-the-counter derivatives in the United States which could increase the cost of the company’s use of
derivatives for investment and hedging purposes; and the activities of the International Association of Insurance
Supervisors may lead to additional regulatory oversight of the company as a financial services holding company.
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 manage-
ment 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, 2012 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
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.

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 45.1% 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 adopt-
ing amendments to articles of incorporation and by-laws.

200

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, 2012.

Reliance on Distribution Channels

The company uses brokers to distribute its business and in some instances will distribute through agents or
directly to the customer. The company may also conduct business through third parties such as managing general
agents where it is cost effective to do so and where the company can control the underwriting process to ensure
its risk management criteria are met. Each of these channels has its own distinct distribution characteristics and
customers. A large majority of the company’s business is generated by brokers (including international
reinsurance brokers with respect to the Reinsurance reporting segment), with the remainder split among the other
distribution channels. This is substantially consistent across the company’s insurance and reinsurance reporting
segments.

The company’s insurance operations have relationships with many different types of brokers including
independent retail brokers, wholesale brokers and national brokers depending on the particular jurisdiction, while
the company’s reinsurance operations are dependent primarily on a limited number of international reinsurance
brokers. The company transacts business with these 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 requirements and prefer-
ences 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 con-
dition 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
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.

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

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 trans-
actions and events and undertaking the appropriate tax planning. The company also utilizes external tax pro-
fessionals 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 subsidiaries contribute 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 con-
tingency plans of the company and those of its third party service providers, failure of these systems could inter-
rupt 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.

The company has highly trained staff that are committed to the continual development and maintenance of its
systems. 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

2012

Revenue
Net earnings
Net earnings (loss) attributable to shareholders of Fairfax
Net earnings (loss) per share
Net earnings (loss) per diluted share

2011

Revenue
Net earnings (loss)
Net earnings (loss) attributable to shareholders of Fairfax
Net earnings (loss) per share
Net earnings (loss) per diluted share

First
Quarter

Second
Quarter

Third
Quarter

Fourth
Quarter

Full
Year

1,624.5
0.1
(1.3)
$ (0.69) $
$ (0.69) $

1,742.5
95.5
95.0
3.90 $
3.85 $

8,022.8
2,764.2
1,891.6
540.7
408.1
37.0
34.6
532.4
404.1
0.91 $ 19.14 $ 23.22
0.90 $ 18.90 $ 22.94

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)

Net earnings of $408.1 in the fourth quarter of 2012 arose principally as a result of net gains on investments
(primarily related to equity and equity-related holdings after equity hedges, and bonds) compared to a net loss of
$770.8 in the fourth quarter of 2011 which reflected net losses on investments of $914.9 (primarily as a result of non-
correlation between the performance of the company’s equities and its equity-related hedges). The company incurred
total catastrophe losses of $409.8 in 2012 (inclusive of $261.2 of Hurricane Sandy losses in the fourth quarter) com-
pared to $1,020.8 of catastrophe losses in 2011 ($359.9 in the fourth quarter). The company’s improved underwriting
results, partially offset by lower net gains on investments, generated net earnings of $540.7 in 2012 (2011 - $47.8) and
were the principal factors leading to a 3.7% increase in book value per share in 2012.

Operating results at the company’s insurance and reinsurance operations continue to be affected by a difficult
competitive environment. Individual quarterly results have been (and may in the future be) affected by losses
from significant natural or other catastrophes as in 2011, by reserve releases and strengthenings and by settle-
ments or commutations, the occurrence of which are not predictable, and have been (and are expected to con-
tinue 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 8, 2013, Fairfax had 19,496,209 subordinate voting shares and 1,548,000 multiple voting shares out-
standing (an aggregate of 20,244,979 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.

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 2012, 2011 and 2010.

2012

High
Low
Close

2011

High
Low
Close

First
Quarter

Second
Quarter

Third
Quarter

Fourth
Quarter

(Cdn$)

442.00
384.96
402.59

416.48
346.00
366.50

420.00
375.00
403.14

399.75
359.70
386.00

404.45
356.46
379.73

407.00
360.02
401.79

382.88
335.00
358.55

442.00
386.00
437.01

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

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 earnings if our loss reserves are insufficient; under-
writing losses on the risks we insure that are higher or lower than expected; the occurrence of catastrophic events
with a frequency or severity exceeding our estimates; changes in market variables, including interest rates, foreign
exchange rates, equity prices and credit spreads, which could negatively affect our investment portfolio; the cycles
of the insurance market and general economic conditions, which can substantially influence our and our com-
petitors’ premium rates and capacity to write new business; insufficient reserves for asbestos, environmental and
other latent claims; exposure to credit risk in the event our reinsurers fail to make payments to us under our
reinsurance arrangements; exposure to credit risk in the event our insureds, insurance producers or reinsurance
intermediaries fail to remit premiums that are owed to us or failure by our insureds to reimburse us for deduc-
tibles that are paid by us on their behalf; risks associated with implementing our business strategies; the timing of
claims payments being sooner or the receipt of reinsurance recoverables being later than anticipated by us; the
inability of our subsidiaries to maintain financial or claims paying ability ratings; risks associated with our use of
derivative instruments; the failure of our hedging methods to achieve their desired risk management objective; a
decrease in the level of demand for insurance or reinsurance products, or increased competition in the insurance
industry; the failure of any of the loss limitation methods we employ; the impact of emerging claim and coverage
issues; our inability to access cash of our subsidiaries; our inability to obtain required levels of capital on favour-
able terms, if at all; loss of key employees; our inability to obtain reinsurance coverage in sufficient amounts, at
reasonable prices or on terms that adequately protect us; the passage of legislation subjecting our businesses to
additional supervision or regulation, including additional tax regulation, in the United States, Canada or other
jurisdictions in which we operate; risks associated with government investigations of, and litigation and negative
publicity related to, insurance industry practice or any other conduct; risks associated with political and other
developments in foreign jurisdictions in which we operate; risks associated with legal or regulatory proceedings;
failures or security breaches of our computer and data processing systems; the influence exercisable by our sig-
nificant shareholder; adverse fluctuations in foreign currency exchange rates; our dependence on independent
brokers over whom we exercise little control; an impairment in the carrying value of our goodwill and indefinite-
lived intangible assets; our failure to realize deferred income tax assets; and assessments and shared market
mechanisms which may adversely affect our U.S. insurance subsidiaries. Additional risks and uncertainties are
described in our most recently issued Annual Report which is available at www.fairfax.ca and in our Supplemental
and Base Shelf Prospectus (under “Risk Factors”) filed with the securities regulatory authorities in Canada, which
is available on SEDAR at www.sedar.com. Fairfax disclaims any intention or obligation to update or revise any
forward-looking statements.

204

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.

3)

Share ownership and large incentives are encouraged across the Group.

4)

Fairfax will always be a very small holding company and not an operating company.

VALUES:

1) Honesty and integrity are essential in all our relationships and will never be compromised.

2) We are results oriented – not political.

3) We are team players – no “egos”. A confrontational style is not appropriate. We value loyalty – to Fairfax and

our colleagues.

4) We are hard working but not at the expense of our families.

5) We always look at opportunities but emphasize downside protection and look for ways to minimize loss of

capital.

6) We are entrepreneurial. We encourage calculated risk taking. It is all right to fail but we should learn from our

mistakes.

7) We will never bet the company on any project or acquisition.

8) We believe in having fun – at work!

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

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(3):

Net
earnings

Total
assets

Invest-
ments

Net
debt

Common
share-
holders’
equity

Shares
outstanding

Closing
share
price(2)

1985

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

2012

–

179.6%

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%

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)

(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

7.3

7.3

5.5

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

(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

3.7%

378.10

22.94 8,022.8

656.8

532.4 36,941.2 26,094.2 1,920.6 7,654.7

20.2

358.55

(1) All share references are to common shares; shares outstanding are in millions.

(2) Quoted in Canadian dollars.

(3)

IFRS basis for 2012, 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.

(4) When current management took over in September 1985.

206

Officers of the Company

David Bonham
Vice President and Chief Financial Officer
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, Operations

Eric Salsberg
Vice President, Corporate Affairs and Corporate Secretary
Ronald Schokking
Vice President and Treasurer
John Varnell
Vice President, Corporate Development

V. Prem Watsa
Chairman and Chief Executive Officer

Jane Williamson
Vice President

Head Office

95 Wellington Street West
Suite 800
Toronto, Ontario, 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 the shareholders of
Fairfax Financial Holdings Limited will be
held on Thursday, April 11, 2013 at 9:30 a.m.
(Toronto time) at Roy Thomson Hall,
60 Simcoe Street, Toronto, Canada

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
Chairman, Toronto Leadership Centre
Timothy R. Price
Chairman, Brookfield Funds,
Brookfield Asset Management
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 Atthappan, Chairman and CEO
Fairfax Asia

Chief Executive Officer
First Capital Insurance Limited

Sammy Y. Chan, President
Fairfax Asia

Gobinath Athappan, COO Fairfax Asia
President Falcon Insurance Company (Hong Kong)

Other Insurance

Jacques Bergman, President
Fairfax Brasil

Reinsurance - OdysseyRe

Brian D. Young, President
Odyssey Re Holdings Corp.

Other Reinsurance

Jim Migliorini, Chief Executive Officer
Nigel Fitzgerald, Chief Operating Officer
Trevor Ambridge, Managing Director
Advent Capital (Holdings) PLC

Jim Migliorini, Acting Chief Executive Officer
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.

207